Weekly RoundUp
December 10, 2020

Nasdaq Pushes Board Diversity; SEC Modernizes Framework For Fund Valuation Practices

In this Weekly Roundup Issue. The Nasdaq Stock Market LLC (Nasdaq) submitted a proposed rule to the U.S. Securities and Exchange Commission (SEC) seeking approval of new listing requirements for board diversity; the SEC modernized its framework for fund valuation practices; the SEC granted a variable annuity and life substitution application after a rare contested hearing; the ICE Benchmark Administration and financial regulators in the United States and United Kingdom issued statements laying out a path forward in which banks should stop writing new USD LIBOR contracts by the end of 2021; the Consumer Financial Protection Bureau (CFPB) finalized its Advisory Opinions Policy, published two new advisory opinions, and granted a no-action letter to an online loan marketplace company for its artificial intelligence loan origination and underwriting platform; and the Board of Governors of the Federal Reserve System (Federal Reserve) extended several of its emergency lending facilities through March 31, 2021. 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

Nasdaq Proposes New Listing Requirements for Board Diversity

On December 1, Nasdaq submitted a proposed rule to the SEC seeking approval of new listing requirements for board diversity. The proposed listing rule would require all companies listed on Nasdaq’s U.S. exchange to publicly disclose consistent, transparent diversity statistics regarding their board of directors. Additionally, the rule would require most Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors by a certain date based on their listing tier, including one who self-identifies as female and one who self-identifies as either an underrepresented minority (defined as an individual who self-identifies in one or more of the following groups: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander or Two or More Races or Ethnicities) or LGBTQ+. Smaller reporting companies may satisfy the proposed board diversity requirement by having two female directors. Foreign companies can also satisfy this requirement by having two female directors, or one female and one underrepresented individual in the company’s home country jurisdiction.

Nasdaq-listed companies would be required to publicly disclose board-level diversity statistics through Nasdaq’s proposed disclosure framework within one year of the SEC’s approval of the listing rule. The timeframe set forth in the proposal to meet the minimum board composition expectations will be based on the listed company’s listing tier. Nasdaq-listed companies that are not in a position to meet the board composition objectives within the required timeframes will not be subject to delisting if they provide a public explanation of their reasons for not meeting the objectives.

SEC Modernizes Framework for Fund Valuation Practices

On December 3, the SEC voted to adopt new rule 2a-5 under the Investment Company Act of 1940 (1940 Act) that addresses the valuation practices of registered investment companies and business development companies (funds). The new rule 2a-5 establishes a framework and a standard of baseline practices across funds to determine fair value in good faith for purposes of the 1940 Act.

Under the rule, determining the fair value of a fund’s investments in good faith requires periodically assessing and managing material risk associated with fair value determinations, selecting, applying, and testing fair value methodologies, and overseeing and evaluating any pricing services used in the fair valuation process. The rule allows a fund’s board to make fair value determinations itself or to designate fair value determinations to a “valuation designee.” The designee may be the fund’s investment adviser (but not the fund’s sub-adviser) or, in the case of an internally-managed fund, an officer of the fund. If the board designates the determination of fair value, the designation is subject to board oversight and certain reporting and other requirements designed to facilitate the board’s ability to effectively oversee the valuation designee’s fair value determinations.

The new rule also provides that a market quotation for a security is “readily available” — the threshold for determining whether a fund must fair value the security — when the security has a quoted price in active markets for identical investments that the fund can access. Under the rule, a quoted price is not considered readily available if it is not reliable.

In connection with the new rule 2a-5, the SEC also adopted new rule 31a-4, which establishes recordkeeping requirements associated with fair valuation and rescinded other previously issued guidance relating to fair value and valuation, including the board’s role in determining fair value and the accounting and auditing of a fund’s investments.

The rule and the related recordkeeping rule will become effective 60 days after publication in the Federal Register and allow for an 18-month transition period beginning from the effective date. The new rules and changes from the proposed rules will be discussed in an upcoming Goodwin client alert.

After Rare Contested Hearing, SEC Grants Variable Annuity and Life Substitution Application

On December 4, after a rare hearing based on written objections and responses, the SEC granted an application permitting Allianz Life Insurance Company of North America and related parties to substitute certain mutual fund investment options under variable annuity and variable life insurance contracts. Hearings on contested applications under the Investment Company Act of 1940 are rare, and we are not aware of any previous hearings on variable contract substitution applications under Section 26(c). The hearing had been requested by advisers to existing mutual fund options that would be removed under the substitution.

The SEC approved the Allianz application confirming the terms and conditions “that have been developed over several decades of the [SEC’s] administration” of the substitution provision of Section 26(c). Therefore, companies seeking substitutions should continue to follow the standard conditions in preparing applications.

The Order includes important insights that will guide SEC staff consideration of future applications. The SEC confirmed that “the purpose of Section 26(c) is to protect investors in a single-security [unit investment trust] from the cost of redeeming and then reinvesting if they are dissatisfied with the substitution of the underlying security.” The SEC stated that the “purpose of the statute is not to protect investors from any negative impact on the value of their contract guarantees or any potential loss of economies of scale.” Notably, “Section 26(c) includes no requirement that the Applicants or the [SEC] analyze alternative actions to a substitution.” Substitutions are not limited to “exceptional or exigent circumstances,” and applications may include “multiple substitutions for strategic business reasons.” Although applications commonly analyze similarities of the current and proposed funds (as did the Allianz application), the statute does not require any specific findings concerning similarities or differences, and does “not prevent the sponsor from changing investment options.”

ISDA Makes Statement on IBA, UK FCA and Federal Reserve Announcements on U.S. Dollar LIBOR Consultation

On November 30, the International Swaps and Derivatives Association, Inc. (ISDA) published a statement in response to announcements by ICE Benchmark Administration (IBA), the administrator of LIBOR, the UK Financial Conduct Authority (FCA) and the Federal Reserve. The announcements by regulators in the United States and United Kingdom and by the benchmark administrator for LIBOR together present a path forward in which banks should stop writing new USD LIBOR contracts by the end of 2021, while most legacy contracts will be able to mature before LIBOR stops. Under the proposal from LIBOR's administrator, IBA will consult in early December on its intention to cease the publication of the one-week and two-month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the remaining USD LIBOR settings immediately following the LIBOR publication on June 30, 2023. Concurrently, the Federal Reserve, Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation released a statement explaining that the June 30, 2023 cessation date for which IBA is consulting would allow time for "legacy contracts" — USD LIBOR transactions executed before January 1, 2022 — to mature. The guidance further notes that entering into new USD-LIBOR-based contracts creates safety and soundness risks. Given that, the banking agencies encourage banks to stop entering into those new contracts by the end of 2021.

CFPB Finalizes Advisory Opinions Policy

On November 30, the CFPB issued its final Advisory Opinions Policy, which allows any person or entity seeking to comply with regulatory requirements to email the CFPB for an advisory opinion that publicly addresses and provides guidance on regulatory uncertainty in existing CFPB regulations. The CFPB will prioritize requests that it can legally address through an interpretive rule, while also weighing the request’s alignment with CFPB statutory objectives, the benefit to consumers of resolving the interpretive issue, the known impact on the actions of other regulators and the impact on available CFPB resources. Each advisory opinion issued will include a description of the incoming request. The CFPB may also issue advisory opinions on its own initiative. All advisory opinions will be published in the Federal Register and on the CFPB’s website.

CFPB Announces Advisory Opinion on Earned Wage Access

On November 30, the CFPB issued an advisory opinion regarding earned wage access (EWA) products. In the opinion, the CFPB offered guidance on the definition of “credit” under Regulation Z, concluding that a “Covered EWA Program”, defined by a specific set of criteria, does not involve the offering or extension of “credit” as defined under Regulation Z.

CFPB Announces Advisory Opinion on Education Loan Refinancing

On November 30, the CFPB issues an advisory opinion regarding the refinancing or consolidation of certain education loan products. The opinion concluded that private loan consolidation products that satisfy and replace multiple federal, or federal and private, loans, as well as private loan refinance products that satisfy and replace a single federal or private loan, are covered under the term “private education loan” in the Truth in Lending Act (TILA) and Regulation Z. These loans are subject to TILA and Regulation Z’s requirements in subpart F (including Regulation Z’s disclosures, prohibition on co-branding, 30-day rumination period, and right to cancel), because a loan that consolidates federal loans or a loan that refinances a federal loan incurred expressly for postsecondary educational expenses is, itself, “expressly for postsecondary educational expenses.”

CFPB Issues No Action Letter Related to Use of Artificial Intelligence Underwriting Model

On November 30, the CFPB granted a no-action letter to an online loan marketplace company for its artificial intelligence (AI) loan origination and underwriting platform for banks, credit unions and non-bank lenders to use in originating loans. According to the company, the model aims to expand credit access to those with no or limited credit or work history. Read the Consumer Finance Enforcement Watch blog to learn more about the no-action letter.

Federal Reserve Board Announces Extension for Several Lending Facilities

On November 30, the Federal Reserve, with approval from the Treasury Department, announced an extension through March 31, 2021 of several of its lending facilities, for purposes of continuing the flow of credit to the economy during the COVID-19 pandemic and providing certainty that facility availability will continue through the first quarter of 2021. The extension applies to the Money Market Mutual Fund Liquidity Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility and the Paycheck Protection Program Liquidity Facility.

OCC Releases Quantitative Measurements for Volcker Rule Implementation

On November 30, the Office of the Comptroller of the Currency (OCC) published instructions and technical specifications for preparing and submitting quantitative measurements relating to the Volcker Rule. In addition to clarifying what should be prepared for each measurement, the OCC instructions include guidance on how to develop a Narrative Statement, the Trading Desk Information Schedule and the Quantitative Measurements Identifying Information Schedules. These instructions follow last year’s revisions by the OCC, Federal Reserve, Commodity Futures Trading Commission, Federal Deposit Insurance Corporation and SEC to regulations implementing the Volcker Rule, which included changes to the regulatory requirement of submitting certain quantitative measurements. Covered banking entities must comply with the rule by January 1, 2021.

OCC Reduces 2021 Assessments on National Banks and Federal Savings Associations

On December 1, the OCC announced that it is reducing the rates in all Fee Schedules by 3% for the 2021 calendar year. The 2021 reduction is in addition to the 10% reduction to all Fee Schedules in 2020 and to the General Assessment Fee Schedule in 2019. The reduction reflects increased operating efficiencies that the agency has achieved over the last several years. The reduced assessments go into effect January 1, 2021, and will be reflected in assessments paid on March 31, 2021 and September 30, 2021.

Litigation and Enforcement

BitMEX Founder’s Charges Highlight Risks for DeFi

In October, the Commodity Futures Trading Commission (CFTC) and the U.S. Department of Justice (DOJ) filed enforcement actions against the entities and individuals that own and operate the Bitcoin Mercantile Exchange (BitMEX), a trading platform for cryptocurrency derivatives. The CFTC alleges that, since 2014, BitMEX has operated an unregistered trading platform and violated CFTC regulations by, among other things, failing to implement required anti-money laundering (AML) procedures. The DOJ in turn is charging BitMEX’s three founders and its first employee with criminal violations of the Bank Secrecy Act and conspiracy for willfully failing to establish, implement and maintain an adequate AML program. Read the Digital Currency + Blockchain Perspectives blog to learn more about this heightened regulatory scrutiny.

CFPB Files Suit Against Debt Relief Company

On December 1, the CFPB announced that it filed suit against a Massachusetts debt settlement and relief company over alleged violations of the Telemarketing Sales Rule and Consumer Financial Protection Act in connection with the company’s debt-settlement and debt relief services. The complaint seeks injunctive relief, monetary damages, civil penalties and costs associated with the action. Read the Consumer Finance Enforcement Watch blog to learn more about the complaint.

CFPB Files Suit Against Online Lender for Alleged Violations of Military Lending Act

On December 4, the CFPB announced that it filed suit against an online lender that offers single-payment and installment loans to consumers for alleged violations of the Military Lending Act (MLA). This suit is part of a broader CFPB enforcement initiative targeting lenders for alleged violations of the MLA. Read the Consumer Finance Enforcement Watch blog to learn more about the complaint.

FTC Reaches Settlement with Debt Collection Company for “Debt Parking” Scheme

On November 30, the Federal Trade Commission (FTC) announced that it had reached a settlement with a debt collection company for its “debt parking scheme” (also known as “passive debt collection”) in which the company allegedly placed bogus or questionable debts on consumers’ credit reports in an attempt to coerce them to pay the debts. According to the FTC, the company itself determined that as much as 97% of the debts it investigated were inaccurate or not valid. Read the Consumer Finance Enforcement Watch blog for the results of the settlement.

Goodwin News

Close Out 2020 and Prepare for 2021 with Goodwin’s Year-End Tool Kit

Goodwin is pleased to present the 2020-2021 Year-End Tool Kit to help public companies prepare for 2020 year-end reporting and the 2021 annual meeting season. We invite you to take advantage of the latest digital advancement in our annually updated tool kit using the Nasdaq Governance Solutions secure cloud-based platform to manage and distribute your company’s director and officer questionnaires. In partnership with Nasdaq Governance solutions, we have made the industry standard in D&O questionnaires more accessible, efficient, and secure than ever before. For the latest updates, we recommend that you check out our Year-End Tool Kit site.

Financial Services Forward Focus Webinar Series

Goodwin’s 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, or learn more about the latest webinars below.

Past Webinars

  • M&A Today and Tomorrow (December 2 and 9) | Goodwin lawyers and distinguished panels of investment bankers recently presented the Financial Services Forward Focus: M&A Today and Tomorrow. Part 1 discussed the current state of the M&A market (where we are and where we are going) and the important issues and process leading up to the signing of a definitive agreement. Part 2 discussed the key elements of a well-crafted, well-received deal that buyers and sellers should be thinking about before announcing a transaction and best practices for a smooth pathway toward closing.

This week’s Roundup contributors: Josh Burlingham, Kelly Grosshuesch.