Weekly RoundUp
June 9, 2022

SEC Proposes ESG Disclosure Rules and Changes to the Names Rule

In This Weekly Roundup Issue. The U.S. Securities and Exchange Commission (SEC) proposed Environmental, Social and Governance (ESG) rules for investment advisers and investment companies and proposed changes to the names rule; the Commodity Futures Trading Commission (CFTC) is seeking public comment on climate-related financial risk; the Consumer Financial Protection Bureau (CFPB) published a Consumer Financial Protection Circular; the Financial Crimes Enforcement Network (FinCEN) issued an Advance Notice of Proposed Rulemaking (ANPRM) to request public comment on the implementation of a no-action letter process at the agency; the Federal Deposit Insurance Corporation (FDIC) issued a final rule related to false advertising; and the CFPB issued an interpretive rule affirming states’ authorities to enforce the Consumer Financial Protection Act (CFPA). These and other developments are discussed in more detail below.

Regulatory Developments

SEC Proposes ESG Disclosure Rules for Investment Advisers and Investment Companies and Proposes Changes to the Names Rule

On May 25, the SEC proposed a package of new rules to address and enhance investor disclosure practices, and related policies and procedures, regarding ESG investment considerations and objectives by investment advisers to registered investment companies, private funds and other clients. On the same day, the SEC proposed amendments to Rule 35d-1 under the Investment Company Act of 1940 (the Names Rule) that would, among other things, significantly expand the scope of the terms used in the names of registered funds that would subject the fund to the requirements of the Names Rule, including terms indicating that the fund’s investment decisions incorporate one or more ESG factors.

Read the client alert for a summary of both sets of proposed rules.

CFPB Issues Interpretive Rule, Encouraging State Enforcement of CFPA

On May 19, the CFPB issued an interpretive rule affirming states’ authorities to enforce the CFPA, including violations of Federal consumer financial laws. Although states have already been exercising this right through public enforcement actions (independently, in multi-state groups, and in cooperation with the CFPB), this new interpretive rule follows on the heels of the CFPB’s May 16th announcement about Consumer Financial Protection Circulars, intended to provide guidance to other regulators on how the CFPB intends to enforce federal consumer financial laws, signaling an expansion of the CFPB’s efforts to promote and harmonize state enforcement actions against a broader cross-section of companies and individuals than even the CFPB can reach. The CFPB clarified that its own enforcement actions do not put a halt to state actions, and states can bring enforcement actions to stop or remediate harm not addressed by a CFPB enforcement action against the same entity. The CFPB also intends to consider other measures to promote state enforcement of federal consumer financial laws.

FDIC Issues Final Rule Relating to False Advertising

On June 2, the FDIC approved a final rule implementing section 18(a)(4) of the Federal Deposit Insurance Act (the New Rule). The New Rule prohibits any person from “misusing the name or logo of the FDIC or from engaging in false advertising or making knowing misrepresentations about deposit insurance.” The New Rule also gives the FDIC authority to investigate violations and take enforcement action, including cease and desist orders and the imposition of civil money penalties. The FDIC stated that is required due to an increasing number of instances where financial service providers or other entities have misused the FDIC’s name or logo to give the public the impression that the deposits are insured by the FDIC. The FDIC believes that the final rule provides transparency that will promote stability and confidence in FDIC deposit insurance and in the financial system as a whole. Prior to the New Rule, the FDIC had never issued specific regulations regarding false representations.

CFTC Releases Request for Information on Climate-Related Financial Risk

On June 2, the CFTC unanimously voted to release a Request for Information (RFI) to seek public comment on climate-related financial risk. The goal is to better inform the CFTC’s understanding and oversight of climate-related financial risk as it relates to the derivatives markets and underlying commodities markets.

Public responses to this request will guide the CFTC’s next steps in furtherance of its purpose to promote responsible innovation, ensure the financial integrity of all transactions subject to the Commodity Exchange Act (CEA), and avoid systemic risk. The information received will also inform the Commission’s response to the recommendations of the Financial Stability Oversight Council 2021 Report on Climate-Related Financial Risk and inform the ongoing work of the Climate Risk Unit. The CFTC will likely use this information to inform potential future actions, including issuing new or amended guidance, interpretations, policy statements, regulations or other potential CFTC action within its authority under the CEA as well as its participation in any domestic or international fora.

“My intention is to focus on ensuring that America’s farmers, ranchers, manufacturers, commercial end-users, and investors are equipped to manage their risks from increasingly severe and frequent weather events as well as the transition to a net-zero, low-carbon economy.”
CFTC Chairman Rostin Behnam

CFPB Confirms that Creditors Using Black-Box Credit Models or Complex Algorithms Must Be Able to Provide Specific Reasons for Taking Adverse Action

On May 26, the CFPB published a Consumer Financial Protection Circular, affirming that creditors cannot lawfully use black-box credit models, complex algorithms, artificial intelligence or similar machine-learning technologies to make lending decisions, if they are unable to identify and explain the specific reasons for denying a credit application or taking other adverse action. The Equal Credit Opportunity Act (ECOA) requires creditors to provide in a notice to consumers the specific and accurate reasons for taking adverse action, and if a model’s users or developers cannot articulate the reasoning behind some of the models’ outputs, providing adverse action notices that meet ECOA’s requirements may not be possible. ECOA does not permit creditors to use technology that prevents them from providing specific and accurate reasons for adverse actions, and there is no exception for technology that is too complicated, too opaque in its decision-making, too new or inadequately designed, tested or understood.

Goodwin also wrote about this topic in a recent client alert.

FinCEN Advance Notice of Proposed Rulemaking for No-Action Letter Process

On June 3, FinCEN issued an ANPRM to request public comment on the implementation of a no-action letter process at the agency. Generally, through a no-action letter, a person may request an agency to review a proposed course of action to determine whether it would violate law. After reviewing the particular facts involved and relevant laws and regulations, the agency will state if it would take enforcement action against for the proposed course of action. The ANPRM arose from FinCEN’s June 28, 2021 report to Congress, which determined that FinCEN should undertake a rulemaking to establish a no-action letter process. In particular, FinCEN believes that a no-action letter process would encourage innovation and improve enforcement of the Bank Secrecy Act.

FinCEN requests that written comments be submitted by August 5, 2022.

CFPB Launches New Office of Competition and Innovation

On May 24, the CFPB announced the opening of a new office housed in the CFPB’s Research, Markets, and Regulation division: the Office of Competition and Innovation (OCI). The OCI replaces Project Catalyst and the Office of Innovation, launched in 2014 and 2018, respectively, putting an end to No Action Letters and Sandboxes that applied to individual companies’ specific product offerings. The OCI will seek to benefit consumers by: spurring innovation in financial services; identifying and analyzing obstacles for new market entrants, including by hosting exploratory events; promoting competition; leveling the financial services playing field; creating market conditions where consumers have choices; and making it easier for consumers to switch financial providers. The CFPB also noted that in a future rulemaking, it intends to leverage Section 1033 of the Consumer Financial Protection Act to grant consumers access to their own data.

SEC Adopts New Electronic Filing Requirements for “Glossy” Annual Reports, Form 144 Notices and Other Documents

On June 3, the SEC announced that it had adopted amendments to its rules that will require electronic filing or submission of a variety of documents that SEC rules currently permit to be filed or submitted in paper.

Read the client alert to learn about the elements included in these documents.

SEC Enforcement Weighs in On Variable Annuity Exchanges for the First Time

After years of relative silence related to variable annuity exchanges on the regulatory front, the U.S. Securities and Exchange Commission announced last week settled charges against RiverSource Distributors, Inc. under Section 11 of the Investment Company Act of 1940, which regulates variable annuity exchanges. This is the first SEC enforcement action under Section 11.

Read the client alert to learn more.

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