On February 3, the White House released a Presidential Memorandum that may potentially lead to a delay and/or rescission of the Fiduciary Rule. As discussed in a previous client alert, the Fiduciary Rule was finalized in April of 2016 and scheduled to become operative on April 10, 2017. Under the rule, financial advisers providing recommendations with respect to retirement assets are to be held to a “fiduciary” standard of care and ERISA’s prohibited transaction rules. In anticipation of the April 2017 implementation, many firms in the advisory, brokerage and insurance industries have made significant changes to their products and fee structures, in some cases exiting the sector entirely. Proponents have argued that the Fiduciary Rule is necessary to ensure that financial advisers act in their clients’ best interest when they give retirement investment advice. Industry advocates have argued that having fewer advisers offering services in this space actually hurts smaller investors, who now will have fewer choices when shopping for retirement investment advice.
The Presidential Memorandum directs the Department of Labor (DOL) to examine the Fiduciary Rule “to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.” In particular, the DOL is instructed to consider whether investors will be harmed by reduced access to financial advice, services and investments related to retirement, whether the rule has resulted in “dislocations or disruptions” in the retirement services industry that may adversely affect investors or retirees, and whether the rule is likely to cause an increase in litigation, increasing the price investors and retirees pay for such services. If, after following the above considerations, the DOL makes affirmative findings, it is instructed to publish (for notice and comment) a new proposed rule rescinding or revising the Fiduciary Rule. Given the considerations outlined by the Presidential Memorandum, there is a significant chance that the Fiduciary Rule as currently drafted does not become operative in April as scheduled.
On February 3, President Trump signed an executive order (Order) entitled “Core Principles for Regulating the United States Financial System.” The Order begins by stating that it shall be the policy of the Trump administration to regulate the U.S. financial system in a manner consistent with seven “Core Principles” of regulation, namely to: empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth; prevent taxpayer-funded bailouts; foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry; enable American companies to be competitive with foreign firms in domestic and foreign markets; advance American interests in international financial regulatory negotiations and meetings; make regulation efficient, effective, and appropriately tailored; and restore public accountability within federal financial regulatory agencies and rationalize the federal financial regulatory framework.
The Order goes on to direct the Secretary of the Treasury to consult with the heads of the member agencies of the FSOC (the Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Securities and Exchange Commission (SEC), the Treasury Department and the Consumer Financial Protection Bureau (CFPB)) and report to the president within 120 days of the Order as to which existing laws and regulations comport with the Core Principles, and which inhibit them. Although not named specifically, regulations adopted in response to Dodd-Frank are likely to receive a holistic review as a result of the Order.
On February 7, the Office of Compliance Inspections and Examinations of the SEC issued an SEC Risk Alert (Risk Alert) discussing the compliance topics most frequently identified in deficiency letters that were sent to SEC-registered investment advisers (advisers). The five compliance topics addressed in this Risk Alert are deficiencies or weaknesses involving: (1) Rule 206(4)-7 (the Compliance Rule) under the Investment Advisers Act of 1940 (the Advisers Act); (2) required regulatory filings; (3) Rule 206(4)-2 under the Advisers Act (the Custody Rule); (4) Rule 204A-1 under the Advisers Act (the Code of Ethics Rule); and (5) Rule 204-2 under the Advisers Act (the Books and Records Rule). Each of these topics discusses examples of typical deficiencies in order to highlight the risks and issues that examiners commonly identified. The SEC recommends that advisers review their compliance programs and practices in light of the topics noted in the Risk Alert.
On February 3, the Federal Reserve Board released the scenarios to be used by banks and bank supervisors for the 2017 Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank stress test exercises. CCAR evaluates the capital planning process and capital adequacy of the largest U.S.-based bank holding companies. This year, 13 of the largest and most complex bank holding companies will be subject to both a quantitative evaluation of their capital adequacy and a qualitative evaluation of their capital planning capabilities. Twenty-one bank holding companies with less complex operations will no longer be subject to the qualitative portion of CCAR. Bank holding companies participating in CCAR are required to submit their capital plans and stress testing results to the Federal Reserve by April 5, 2017. The Federal Reserve will announce the results of its supervisory stress tests by June 30, 2017.
Enforcement & Litigation
On February 2, Goodwin released the 2016 Consumer Finance Year in Review, a detailed report that highlights the major litigation, enforcement and regulations that impacted the consumer finance industry in 2016. The second annual report, produced by the firm’s Financial Industry and Consumer Financial Services Litigation groups, is one of the few in the industry that takes an in-depth view of the issues, trends and regulatory developments across a variety of sectors, including mortgage servicing, credit and prepaid cards, credit reporting, student lending, auto lending, debt collection, and payday lending, among others. The report can be accessed through the LenderLaw Watch and Enforcement Watch blogs.
A recent decision by the Ninth Circuit has created a circuit split regarding the interpretation of the Fair Debt Collection Practices Act (FDCPA). In Vien-Phung Ho v. ReconTrust Co. et al., case no. 10-56884, the court held that the trustee of a California deed of trust is not a “debt collector” under the statute. This decision is in direct conflict with holdings from the Fourth and Sixth Circuits, which have held that a trustee is a “debt collector” under the FDCPA. See Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 378–79 (4th Cir. 2006); Glazer v. Chase Home Fin. LLC, 704 F.3d 453, 461 (6th Cir. 2013). View the LenderLaw Watch blog post.
On January 31, the Attorney General for the Commonwealth of Virginia (VA AG) announced that it entered into a settlement with a small dollar loan lender. The lender allegedly engaged into a “rent-a-tribe” scheme through a South Dakota company that held itself out as a Native American business entity. The company purportedly used this “facade” to deceive consumers into believing federal and state law would not apply to any loans it issued. The VA AG asserted that the company violated of the Virginia Consumer Protection Act (VCPA) because the lender charged more than 12% interest on its loans. According to the VA AG, the lender charged as much as 230% interest in some cases. View the Enforcement Watch blog post.
Lawmakers and central banks are in the midst of a movement to gradually diminish and ultimately eliminate the use of cash by their citizens. This global trend comes in all different flavors as over the past year and a half, some countries have eliminated high-value banknotes (India) or restricted ATM usage (China). Others have chosen less intrusive and more bespoke routes, such as allowing cashless donations to the homeless (Amsterdam). The reasons for this push to phase out cash are just as varied – a few are attempting to combat inflation (Venezuela), while the majority, including Singapore, are aiming to prevent money laundering and tax evaders. To these governments in the latter camp, cash is too often used to aid criminal enterprises that thrive under the cloak of anonymity made possible by these cash transactions. However, to citizens across the globe, this ubiquity and obscurity are exactly what make cash so useful. View the Digital Currency Perspectives blog post.
On January 30, the CFPB filed a complaint in the United States District Court for the Central District of California against several debt relief law firms and individual attorneys based in Orange County, California and Kansas City, Kansas. The CFPB brought the action under the Telemarketing and Consumer Fraud and Abuse Prevention Act, 15 U.S.C. §§ 6102(c), 6105(d), the Telemarketing Sales Rule (TSR), 16 C.F.R. pt. 310, and Sections 1031(a), 1036(a)(1), 1054, and 1055 of the Consumer Financial Protection Act of 2010 (CFPA), 12 U.S.C. §§ 5531(a), 5536(a)(1), 5564, and 5581 in relation to the defendants’ marketing and sale of debt relief services. View the Enforcement Watch blog post.
Section 512(c) of the Digital Millennium Copyright Act (the DMCA) provides online service providers with conditional safe harbors from liability for copyright infringement resulting from the actions of their users. In order to qualify for safe harbor protection, among other requirements, the service provider must designate an agent to receive notifications of claimed copyright infringement, by making contact information for the agent available to the public on its website and by providing such information to the U.S. Copyright Office. Effective January 1, 2017, the U.S. Copyright Office established new registration requirements for designating agents under the DMCA, including a requirement that any service provider with an existing agent designation registration must re-register its designation of agent by December 31, 2017, in order to maintain eligibility under the DMCA safe harbor. For more information, view the client alert issued by Goodwin’s Technology Practice.
Due to the impending weather conditions and for the safety of everyone involved, Goodwin has decided to postpone the YES Boston 2017 panel discussion on Financial Technology and networking reception, originally scheduled for February 9. Updated information will be provided as soon as a new date is finalized. Please email email@example.com with any questions.
Carl Metzger, a partner in Goodwin's Financial Industry and Business Litigation practices and Chair of the firm's Risk Management and Insurance practice, will moderate the panel, “What Could a Hacking Event Mean to Directors and Officers?” This cutting-edge panel will explore the intersection of cyber events and potential corporate director and officer liabilities. Cyber industry experts will discuss ‘hacking,’ and the moderator will lead the panelists in a discussion of the possible boardroom liabilities. The group of experts will also cover best board practices regarding cyber liability on proactive (pre-breach) and reactive (post-breach) bases. For more information, please visit the event website.
Alison Douglass, partner in Goodwin’s Financial Industry Practice and ERISA Litigation Practice and Scott Webster, chair of Goodwin’s ERISA & Executive Compensation Group will be panelists at the Callan Associates Workshop. The discussion will focus on "Facing Today’s Challenges: Toward More Effective Fiduciaries."
The premier event for Community Bank CEOs. At the 2017 ABA National Conference for Community Bankers, we’ll develop strategies that take into account the community bank of now, but look ahead to new opportunities. Goodwin is a sponsor. For additional information, please visit the event website.