Weekly RoundUp
September 16, 2020

SEC Stays Busy With Amendments And Extensions To Various Rules, Definitions And Disclosures

In the News. The Securities and Exchange Commission (SEC) adopted final rules to update and expand the statistical disclosures that bank and savings and loan registrants must provide to investors for the first time in 30 years, amended the definitions of “accredited investor” and “qualified institutional buyer,” announced decreased filing fees for fiscal year 2021, amended and extended the temporary final rules adopted earlier this year, and updated its confidential treatment application guidance; the Consumer Financial Protection Bureau (CFPB) released its Outline of Proposals Under Consideration and Alternatives Considered for Section 1071 of the Dodd-Frank Act governing small business lending data collection and reporting; the Financial Crimes Enforcement Network (FinCEN) issued a final rule that requires minimum standards for anti-money laundering programs for banks lacking a federal functional regulator; and the Federal Deposit Insurance Corporation (FDIC) adopted a Restoration Plan to restore the Deposit Insurance Fund (DIF) reserve ratio to at least 1.35% within eight years. These and other developments are discussed in more detail below.

We also invite you to visit Goodwin’s Coronavirus Knowledge Center and Consumer Financial Services Industry COVID-19 Hub, which are updated regularly, to learn how cross-industry teams at Goodwin are helping clients to fully understand and assess the ramifications of COVID-19,  navigate the potential effects of the outbreak on their businesses and evaluate whether and how to safely reopen.

Regulatory Developments

SEC Modernizes Disclosures for Banking Registrants

On September 11, the SEC announced that it has adopted final rules to update and expand the statistical disclosures that bank and savings and loan registrants provide to investors, in light of changes in this sector over the past 30 years. The rules also eliminate certain disclosure items that are duplicative of other SEC rules and requirements of U.S. GAAP or IFRS. The rules replace Industry Guide 3, Statistical Disclosure by Bank Holding Companies, with updated disclosure requirements in a new subpart of Regulation S-K. The rules will be effective 30 days after publication in the Federal Register and will apply to fiscal years ending on or after December 15, 2021. However, voluntary compliance with the new rules will be accepted in advance of the mandatory compliance date. The press release announcing adoption of the final rules, which includes a fact sheet summarizing the highlights of the final rules, can be found here.

CFPB Releases Outline of Proposals Under Consideration to Implement Small Business Lending Data Collection Requirements

On September 15, the CFPB released its Outline of Proposals Under Consideration and Alternatives Considered (the Outline) for Section 1071 of the Dodd-Frank Act governing small business lending data collection and reporting. Section 1071 requires financial institutions to collect certain data regarding credit applications for women-owned, minority-owned, and small businesses, and to report that data to the CFPB on an annual basis. The Outline describes proposals that the CFPB is considering to implement Section 1071 along with the relevant law, the regulatory process and an economic analysis of the potential impacts of the proposals on directly affected small entities. The Outline is available here, along with a high-level summary here.

FinCEN Issues Final Rule to Require Anti-Money Laundering Program for Banks Lacking a Federal Functional Regulator

On September 14, FinCEN issued a final rule that requires minimum standards for anti-money laundering programs for banks lacking a federal functional regulator, including state chartered non-depository trust companies, private banks and non-federally insured credit unions. Under the final rule, these institutions will be required to establish and implement anti-money laundering programs, which must include policies and procedures, a dedicated compliance officer, employee training and an independent audit function. The final rule also extends customer identification program and beneficial ownership requirements to those banks. Banks without a federal functional regulator are currently required to comply with certain Bank Secrecy Act obligations, including filing suspicious activity and currency transaction reports. The final rule becomes effective 60 days after publication in the Federal Register and affected institutions will have 180 days from such publication date to be in compliance. 

FDIC Adopts DIF Restoration Plan

On September 15, the FDIC adopted a Restoration Plan to restore the DIF reserve ratio to at least 1.35% within eight years, as required by the Federal Deposit Insurance Act. As of June 30, 2020, the DIF reserve ratio, calculated by dividing the DIF balance by the dollar amount of insured deposits in the banking system, fell to 1.30% from its recent peak of 1.41% as of December 31, 2019. During the first half of 2020, the DIF balance grew significantly due to an unprecedented inflow of more than $1 trillion in estimated insured deposits, resulting mainly from the COVID-19 pandemic and specifically, monetary policy actions, direct government assistance to consumers and businesses, and an overall reduction in spending. Although the DIF has not experienced any material losses, the increase in insured deposits in the banking system caused the reserve ratio to fall below the 1.35% statutory minimum. Based on a range of reasonable estimates of future losses and assuming a return to normal insured deposit growth rates, the FDIC projects that the reserve ratio would return to 1.35% without further action by the FDIC before the end of the eight-year period. As a result, under the Restoration Plan, the FDIC will maintain the current schedule of assessment rates for all insured depository institutions. However, the FDIC will monitor deposit balance trends, potential losses and other factors that affect the reserve ratio and provide updates to its loss and income projections at least semi-annually. 

SEC Amends Definitions of “Accredited Investor” and “Qualified Institutional Buyer”

On August 26, the SEC adopted amendments to the definition of “accredited investor” under Rules 501(a) and 215 of the Securities Act of 1933 (Securities Act) and adopted amendments to the “qualified institutional buyer” (QIB) definition under Rule 144A of the Securities Act.  Historically, individual investors who do not meet specific income or net worth tests, regardless of their financial sophistication, have been denied the opportunity to invest in private capital markets.  The amendments are part of the SEC’s efforts to expand investor access to private capital markets by adding new categories of natural persons and entities that may qualify as accredited investors or QIBs.

The existing Rule 501(a) states that natural persons would qualify as an accredited investor if they had a net worth of $1 million excluding the value of a primary residence; or an income of at least $200,000 each year for the last two years (or $300,000 of joint income for married persons).  The revised definition of accredited investor maintains these thresholds, but also expands the definitions of individuals and married investors.  It also provides eligibility for investors who don’t pass the existing  income or net worth threshold test but who meet the defined measures of professional knowledge, experience or certifications, such as holders of SEC Series 7, Series 65 and Series 82 licenses to qualify as an accredited investor.  The revised definition of accredited investors adds to the types of entities that qualify as accredited investors.  The amendments revise the definition of QIB in Rule 144A of the Securities Act to include (i) LLCs and RBICs that meet the current threshold of $100 million in securities owned and invested of issuers not affiliated with such entity; and (ii) a “catch-all” category that would permit any institutional investor included in the definition of “accredited investor” (as defined in Rule 501(a)) that is not otherwise enumerated as one of the categories of entities in the definition of QIB to qualify as  a QIB provided it satisfies the $100 million threshold. The amendments will become effective 60 days after publication in the Federal Register.

SEC Announces Decreased Filing Fees for Fiscal Year 2021

On August 26, the SEC announced that the fees public companies and other issuers (including mutual funds) pay to register their securities with the SEC will decrease nearly 16% from $129.80 per million dollars to $109.10 per million dollars. The change will be effective this year on October 1. The fee rate change will apply not only to registration fees payable under Section 6(b) of the Securities Act of 1933, but also to fees payable under Section 13(e) and Section 14(g) of the Securities Exchange Act of 1934, in connection with securities repurchases and certain proxy solicitations and statements in corporate control transactions, respectively. The Section 6(b) rate is also used to calculate fees payable with an Annual Notice of Securities Sold Pursuant to Rule 24f-2 under the Investment Company Act of 1940. Because a mutual fund is required to pay its annual registration fee within 90 days after its fiscal year end, funds with fiscal years ending July 31 or August 31 have the flexibility to pay such fees after the lower fee rate takes effect. Any such fund that ordinarily would make its annual fee filing after October 1 may be able to achieve meaningful cost savings by choosing to do so after 5:30 p.m. EDT on September 30, 2020 (i.e., the last business day under the current rate). The SEC filing fee estimator is available here

SEC Amends and Extends Temporary Regulation Crowdfunding Relief

On August 28, the SEC amended and extended the temporary final rules adopted earlier this year that were intended to facilitate capital formation for small businesses impacted by the coronavirus pandemic. The temporary final rules will continue to provide limited, conditional relief from certain Regulation Crowdfunding requirements that relate to the timing of the offering and the availability of financial statements required to be included in offering materials. Prior to this action, the temporary final rules applied to offerings initiated under Regulation Crowdfunding between May 4, 2020, and August 31, 2020. The temporary final rules, as extended, will apply to offerings initiated under Regulation Crowdfunding through February 28, 2021 and will be effective until September 1, 2021.

SEC Updates Confidential Treatment Application Guidance

On September 9, the SEC staff published an update to its December 2019 guidance that outlines the available options for filers that previously obtained an order for confidential treatment that is schedule to expire. As stated in the update, filers have three options: (1) refile the exhibit in its unredacted form if confidential treatment is no longer required; (2) extend the CTR using the appropriate procedure described in the guidance; or (3) if applicable, use the amended procedures under Regulation S-K Item 601(b)(10)(iv)(11) and related rules.  As the guidance notes, most filers that wish to extend the CTR would probably choose alternative (3) because it requires action by the SEC staff only if the staff requests that the filer substantiate its confidentiality request.

SEC Issues FINRA Proposal to Amend Membership Forms CMA and NMA

The Financial Industry Regulatory Authority (FINRA) has filed a proposed amendment to the standardized membership application forms, Form NMA (New Membership Application Form) and Form CMA (Continuing Membership Application Form). The proposed amendments are non-substantive and technical changes that are intended to conform with the amended Membership Application Program rules that create further incentives for the timely payment of arbitration awards. As such, FINRA is proposing to (i) amend the description of standards for admission that FINRA must consider in determining whether to approve an NMA or CMA; (ii) amend the description of the rebuttable presumption to deny an application; and (iii) incorporate the arbitration-related questions and documentation options that are in Form CMA into Form NMA. A copy of the full filing with proposed amended forms can be found here. Comments have been requested and are due 21 days after the proposal is published in the Federal Register. The proposal is FINRA file number SR-FINRA-2020-028.

Rule Change Extends the Deadline for Passing the Examination for Certain Categories of Broker Professionals

On August 28, FINRA filed with the SEC a notice of proposed rule change that would extend the 120-day period that certain individuals can function as a principal or Operations Professional without having successfully passed an appropriate qualification examination through December 31, 2020. Earlier this year, in response to COVID-19, FINRA provided temporary relief to member firms from FINRA rules and requirements addressing disruptions to the administration of FINRA qualification examinations caused by the pandemic that have significantly limited the ability of individuals to sit for these examinations. The proposed rule change would apply only to those individuals who were designated to function as a principal or Operations Professional prior to September 3, 2020. Any individuals designated to function as a principal or Operations Professional on or after September 3 would need to successfully pass an appropriate qualification examination within 120 days.

Federal Banking Agencies Finalize COVID-19 Response Rules

On August 26, the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Federal Reserve), and FDIC issued three final rules that are identical or substantially similar to interim final rules issued earlier this year in response to the effects of the COVID-19 pandemic to enhance banking organizations’ flexibility and encourage lending. One final rule, effective as of October 1, 2020, temporarily lowers the community bank leverage ratio threshold to 8% for the rest of 2020, to 8.5% for 2021, and restores it to 9% for 2022. Another final rule, effective January 1, 2021, revises the definition of “eligible retained income” under the agencies’ capital rule in order to make automatic limitations on capital distributions more gradual if a banking organization’s capital levels decline below certain levels. The last final rule, effective immediately upon publication in the Federal Register, allows eligible banking organizations to mitigate the effects in their regulatory capital of the “current expected credit loss” (CECL) accounting standard for two years, followed by a three-year transition period. In a change from the relevant interim rule, this last final rule expands the pool of eligible institutions to include any institution adopting CECL in 2020.

Agencies Extend Comment Period on Proposed Revisions to Interagency Questions and Answers Regarding Flood Insurance

The OCC, Federal Reserve, Farm Credit Association and National Credit Union Administration (Agencies) have extended the end of the comment period on their proposal to revise the Interagency Questions and Answers Regarding Flood Insurance (the Revised Q&A) from September 4  to November 3. On July 6, the Agencies published a notice requesting comments on the Revised Q&A. The Agencies are proposing the Revised Q&A to provide updated guidance on the most frequently asked questions and answers about flood insurance to help lenders meet their responsibilities under federal flood insurance law and to increase public understanding of these requirements.

HUD Finalizes Rule to Align ‘Disparate Impact’ Rule with Court Ruling

On September 4, the Department of Housing and Urban Development (HUD) finalized its revised standard for bringing “disparate impact” claims under the Fair Housing Act (FHA). Proposed last summer, the final rule conforms HUD’s 2013 disparate impact rule with the Supreme Court’s 2015 decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, which recognized disparate impact analysis to demonstrate discrimination claims under the FHA but added five key limitations to ensure the burden of proof in disparate impact cases is with the plaintiffs.

FTC Seeks Comments on Proposed Changes to Rules Implementing the Fair Credit Reporting Act

On August 24, the Federal Trade Commission (FTC) issued a press release announcing five Notices of Proposed Rulemaking and requesting public comment on their proposed changes to the rules that implement the Fair Credit Reporting Act (FCRA). The proposed changes correspond to the changes made to the FCRA by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Comments on the proposed rules will be due 75 days from the date the notices are published in the Federal Register. Read the LenderLaw Watch blog to learn more about the changes to the existing FCRA rules.

Litigation and Enforcement

States Challenge FDIC “Valid When Made” Rule With New Lawsuit

As previously reported in the August 26 edition of the Roundup, on August 20, seven states – California, Illinois, Massachusetts, Minnesota, New Jersey, New York, and North Carolina – and the District of Columbia (together, the States) filed suit against the Federal Deposit Insurance Corporation (FDIC) in the U.S. District Court for the Northern District of California. The lawsuit, captioned People of the State of California, et al. v. FDIC, Case No. 20-CV-5860, challenges the FDIC’s Rule on the “valid when made” doctrine and alleges that it violates the Administrative Procedures Act (APA). While the latest FDIC lawsuit differs from the July 2020 OCC lawsuit in that it asserts that the FDIC rule is contrary to the plain language and statutory scheme of 12 U.S.C. § 1831 (Section 27 of the Federal Deposit Insurance Act), the States echo many of the OCC arguments, indicating that confusion persists with ambiguities surrounding the “valid when made” principle. Read the LenderLaw Watch blog to learn more.

Goodwin News

Get a Sneak Peak of Goodwin’s 2020 Fintech Survey

The results are in! Check out the top 5 highlights from Goodwin’s inaugural Global Survey on the State of Financial Technology, which sheds light on some of the most pressing issues facing this vibrant sector at the intersection of capital and innovation. While the fintech sector continues to grow steadily, the results of our global survey suggest that much disruption is still to come. From data and analytics to cybersecurity and evolving regulatory frameworks, there are significant opportunities and challenges for both investors and innovators around the world as the digital transformation of financial markets continues to accelerate. The full survey report will be included in a subsequent edition of the Roundup.

Financial Services Forward Focus Webinar Series

Goodwin’s latest webinar series “Financial Services Forward Focus,” presented by a cross-discipline team of Goodwin lawyers, explores the topics that are most relevant for the financial services industry in a challenging market. From changing regulatory guidelines to fintech, mergers and acquisitions and corporate social responsibility, Goodwin will take attendees through these topics and provide guidance to help you navigate the current market conditions. Please visit the web page for more information and to access recordings and resources from previous sessions.

This week’s Roundup contributors: Geoffrey Anghelone, Alex Callen, William McCurdy, and Angelica Rankins.