Weekly RoundUp
February 2, 2023

Federal Reserve Issues Policy Statement on Section 9(13) of the Federal Reserve Act

In This Weekly Roundup Issue. The Board of Governors of the Federal Reserve System (Federal Reserve) issued a policy statement on Section 9(13) of the Federal Reserve Act; the Consumer Financial Protection Bureau (CFPB) proposed amending Regulation Z to reduce credit card late fees; the Federal Deposit Insurance Corporation (FDIC) announced a 45-day extension of the comment period for proposed changes to its regulation regarding the FDIC official sign, advertising statement and misrepresentations of deposit insurance; and the Securities and Exchange Commission (SEC) re-proposed a rule to prohibit conflicts of interest in certain securitizations. These and other developments are discussed in more detail below.

Regulatory Developments

Federal Reserve Issues Policy Statement on Section 9(13) of the Federal Reserve Act

On January 27, the Federal Reserve issued a policy statement interpreting section 9(13) of the Federal Reserve Act, which authorizes the Federal Reserve to limit the activities of any state member bank, setting forth a rebuttable presumption that the Federal Reserve will exercise its authority to limit state member banks to engaging in only those activities that are permissible for national banks, unless those activities are permissible for state banks by federal statute or the FDIC. The policy statement notes this presumption could be rebutted if there is a clear and compelling rationale for the Federal Reserve to allow deviations, and the state member bank has robust plans for managing the risks of such activities in accordance with principles of safe and sound banking, though the Federal Reserve has not yet been presented with facts and circumstances that would warrant rebutting its presumption. The policy statement provides examples as to how the Federal Reserve presumptively applies section 9(13) in the context of crypto-asset related activities. Specifically, the Federal Reserve presumptively prohibits state member banks from holding most crypto-assets as principal. The policy statement also provides that any state member bank seeking to issue a dollar token would need to demonstrate, to the satisfaction of Federal Reserve supervisors, that the bank has controls in place to conduct the activity in a safe and sound manner, and to receive a Federal Reserve supervisory nonobjection before commencing such activity.

CFPB Proposes Amending Regulation Z to Reduce Credit Card Late Fees

On February 1, the CFPB issued a Notice of Proposed Rulemaking to amend Regulation Z, which implements the Truth in Lending Act, to better ensure that late fees on credit card accounts are reasonable and proportional to the late payment and costs incurred by issuers to handle late payments. If finalized, the proposed rule would lower the safe harbor dollar amount for late fees to $8, end the automatic annual inflation adjustment for the late fee safe harbor amount, eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type, and restrict any late fee charge to 25% of the required minimum payment. The proposed rule also seeks public comment on whether the CFPB’s proposed changes should apply to all credit card penalty fees, whether the immunity provision should be eliminated altogether, whether consumers should be granted a 15-day courtesy period, after the due date, before late fees can be assessed, and whether issuers should be required to offer autopay in order to make use of the immunity provision. Comments must be received by the later of April 3, 2023 or within 30 days after publication of the Notice of Proposed Rulemaking in the Federal Register, whichever is later.

FDIC Announces 45-Day Extension of Comment Period for Proposed Changes to its Regulation Regarding the FDIC Official Sign, Advertising Statement and Misrepresentations of Deposit Insurance

On January 30, the FDIC announced a 45-day extension to the public comment period regarding the FDIC’s December 13, 2022 announcement of a notice of proposed rulemaking amending part 328 of its regulations in order to modernize the rules governing use of the FDIC’s official sign and advertising statements and to clarify the FDIC’s regulations regarding misrepresentations of deposit insurance coverage.

The FDIC received public requests for an extension of the public comment period, and has determined a 45-day extension is appropriate, requiring comments to be received no later than April 7, 2023.

SEC Proposes to Prohibit Conflicts of Interest in Certain Securitizations

On January 25, the SEC re-proposed a rule (the “Proposed Rule”) to implement Section 27B of the Securities Act of 1933, a provision added by Section 621 of the Dodd-Frank Act. Intended to prevent the sale of asset-backed securities (“ABS”) that are tainted by material conflicts of interest, the Proposed Rule would prohibit securitization participants, collateralized loan obligation managers, affiliates and their subsidiaries from engaging in certain transactions that could incentivize a securitization participant to enter into certain transactions that would represent betting against their own deals.

The SEC originally proposed a rule to implement Section 27B in September 2011 but was never adopted. The newly re-prosed rule incorporates the comments received in response to the initial proposed rulemaking. The public comment for the Proposed Rule will remain open for 60 days following publication on the SEC’s website or 30 days following publication in the Federal Register, whichever period is longer.

SEC Division of Examinations Publishes Regulation Best Interest Risk Alert

On January 30, the SEC Division of Examinations published a risk alert with observations from initial and subsequent broker-dealer Regulation Best Interest (“Reg. BI”) exams. Reg. BI compliance became mandatory on June 20, 2020. Since then, SEC and FINRA staff have provided answers to FAQs, published prior risk alerts, and highlighted Reg. BI compliance in their respective examination, enforcement, and risk monitoring priorities reports and letters. Over time, SEC and FINRA exams focused on Reg. BI compliance have evolved from merely considering administrative and housekeeping items (like compliance with the forms and instructions) to substantive reviews and closer consideration of potential violations. This was particularly true during 2022. The SEC also commenced its first Reg. BI litigation against a broker-dealer and its personnel in June 2022.

Read more about this Risk Alert in a recent client alert.

FINRA 2023 Examination and Risk Monitoring Report Highlights Numerous Risk Areas for Brokers

On January 10, FINRA published the 2023 Report on FINRA’s Examination and Risk Monitoring Program. The Report serves as a resource for firms to use to bolster their compliance programs and provides a roadmap of FINRA’s main areas of examination for 2023.

FINRA’s 2023 priorities continue to include topics such as AML, cybersecurity, net capital, communications, and sales practices (including issues related to Reg. BI and Form CRS). Notably, the Report includes a broader range of topics than in the prior two years, especially related to matters pertaining to market integrity. It also contains a new section on financial crimes, which addresses topics included in previous reports (i.e., cybersecurity and technology governance, AML, fraud, and sanctions) as well as manipulative trading.

Learn more about the FINRA report in a recent client alert.

New Federal M&A Broker Exemption is a Big Deal!

On December 29, 2022, President Biden signed H.R.2617, codifying a federal exemption from SEC registration for small business M&A brokers as new Exchange Act Section 15(b)(13). Limitations exist, as does the requirement to comply with state laws and regulations, but the legislation is a welcome development for those seeking to facilitate smaller mergers, acquisitions, and other strategic corporate transactions (as well as buyers and sellers using those unregistered intermediaries’ services). Reliance on the new exemption is available beginning on March 29, 2023.

Read more about this topic in a recent client alert.


Litigation and Enforcement

CFPB Seeks Dismissal of Complaint Filed by the U.S. Chamber of Commerce Challenging the CFPB’s Update to the UDAAP Section of Its Examination Manual

A recent Goodwin blog post covers the latest about the CFPB’s response to the U.S. Chamber of Commerce’s complaint challenging the CFPB’s updated to its UDAAP Section of Its Examination Manual. This is the culmination of a long campaign by the U.S. Chamber of Commerce against the CFPB during which the Chamber has accused Director Chopra of “trying to radically reshape the American financial services sector by breaking time-tested bipartisan norms and skirting the agency’s legal authority.” Read more here.


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Editors
Samantha M. Kirby
William McCurdy

Contributors
Josh Burlingham
Nico Ramos 
Serene Qandil
Ximeng (Sammy) Tang