On April 12, the Financial Industry Regulatory Authority (FINRA) published Regulatory Notice 17-14 (the Notice) as part of the new FINRA360 initiative, in which FINRA is conducting a review of various aspects of its operations and programs. In the Notice, FINRA requests comment on the effectiveness and efficiency of FINRA’s existing rules, operations and administrative processes that address the capital-raising activities of its member firms and their impact on capital formation. Among the rules that impact capital formation identified by FINRA are the new Capital Acquisition Broker (CAB) Rules; the new Funding Portal Rules for crowdfunding offerings; the Research Analyst Rules for equity (Rule 2241) and debt (Rule 2242) securities; direct participation programs, such as REITs (Rule 2310); the Corporate Financing Rule for public offerings (Rule 5110) and the related rule covering conflicts of interest in public offerings (Rule 5121); rules governing private placements (Rules 5122 and 5123); restrictions on sales to certain persons in public offerings (Rule 5130); new issue allocations and distributions (Rule 5131); and fairness opinions (Rule 5150). FINRA requests comments on these and any other rules that affect the capital-raising process. Among the questions raised by FINRA are whether its rules have effectively responded to the problems they were intended to address; what, if any, unintended consequences have arisen from FINRA’s rules related to the capital-raising process; whether there are any ambiguities in the rules that FINRA should address to aid firms’ compliance and enhance the capital-raising process while ensuring investor protection concerns are addressed; and whether FINRA can make any of its administrative processes or interpretations related to the capital-raising process more efficient and effective. Comments are due by May 30, 2017.
On April 12, FINRA published Regulatory Notice 17-15 requesting comment on proposed amendments to FINRA Rule 5110, the Corporate Financing Rule. A copy of the proposed rule text is available in Attachment A to the Notice and a copy of the text marked to show changes from the current rule text is available in Attachment B. The Corporate Financing Rule requires underwriters in public offerings to file materials and information with FINRA so that FINRA can review the reasonableness of underwriting compensation and other terms of the underwriting prior to commencement of the offering. The proposed amendments are intended to modernize the rule and simplify and clarify its provisions. One significant conceptual change would be to eliminate the term “items of value” and combine the concepts of that term into the term “underwriting compensation.” Whether an item was received within 180 days before the required filing date would no longer be an element of the definition of underwriting compensation. Instead, the amended Rule would introduce the defined term “review period,” and underwriting compensation received during that period would be reviewed. The applicable review period would depend on the nature of the offering; in shelf offerings, the review period would, under the amended rule, begin 180 days before the required filing date for the takedown, rather than the required filing date for the shelf registration statement. Other changes include new filing exemptions, revisions to the exceptions from underwriting compensation for certain securities received during the review period that will expand their availability, revisions to the lock-up requirements, including an exception for offerings meeting the requirements of SEC Forms S-3, F-3 or F-10, and deletion of the prohibition on receiving non-accountable expense reimbursements in excess of 3% of the offering proceeds, although total expenses will still be subject to the overall cap on underwriting compensation. The proposed amendments would also permit underwriting compensation to be disclosed in the offering materials on an aggregate, rather than itemized, basis. Finally, FINRA proposes to permit underwriters to value convertible securities using a securities valuation method that is commercially available and appropriate for the type of securities to be valued, rather than requiring use of the formula currently prescribed by the Rule. Comments on the proposal are due by May 30, 2017.
The Office of the Comptroller of the Currency (OCC) published a new exam guidance booklet describing the various risks and risk management practices fundamental to retail lending. Specifically, the booklet focuses on seven categories of risk, including credit, interest rate, operational, liquidity, compliance, strategic and reputation risks. In the guidance booklet, the OCC states that although risk management practices vary across institutions, examiners expect to see certain basic elements in a sound risk management framework, including (1) structured oversight by the board and senior management, (2) clear and consistent policies and operating procedures, (3) a well-established risk appetite, (4) structured risk assessments, (5) well-defined processes for policy exceptions, (6) effective monitoring reports, and (7) well-designed strategies, business plans, and product testing. The booklet’s examination procedures section supplements the core assessments in the supervision booklets of the Comptroller’s Handbook and instructs examiners to use the document when certain risks, products or services suggest that an evaluation beyond the core assessment may be required. The booklet also details the OCC’s minimum heightened standards for designing and implementing a risk governance framework for large and covered banks.
Next month, the OCC will host its first responsible innovation office hours. During this round, the OCC expects to hold approximately 15 meetings with national banks, federal savings associations, and financial technology (Fintech) companies from May 16 to 17, 2017, in the OCC’s San Francisco field office. Meetings of up to an hour may be requested through the OCC’s invitation. As noted in the November 2, 2016, edition of the Roundup, the OCC’s Office of Innovation, which is implementing the responsible innovation initiatives Comptroller Thomas Curry announced late last year, intends to expand the OCC’s outreach programs in technology hubs across the United States. Also as reported in a previous client alert, the OCC recently announced a draft supplement to the agency’s Licensing Manual, which would cover national bank charter applications from Fintech companies. The OCC was accepting comments on the draft supplement through close of business April 14, 2017, and discussions of such charters are likely to figure prominently in next month’s meetings.
Enforcement & Litigation
On March 31, the D.C. Circuit held in Bais Yaakov of Spring Valley v. FCC that, based on a plain reading of the Telephone Consumer Protection Act (TCPA), the FCC does not have the authority to mandate that senders of solicited fax advertisements include opt-out notices in their fax advertisements. The decision overturned an FCC rule and, in so doing, shut down a theory of liability that had threatened significant class-action exposure for senders of fax advertisements. The ruling may signal that the D.C. Circuit will favor a narrower reading of the TCPA’s authority going forward. View the LenderLaw Watch blog post.
Join members of Goodwin’s Fintech team at our San Francisco office for a symposium on the OCC’s new Fintech bank charter. This seminar for tech-enabled lending and payments leaders will provide a deep dive on the ins and outs of the OCC’s bank charter for Fintech companies. Attendees will come away with a command of the advantages and challenges of the bank charter, empowering you to do your own reasoned cost-benefit analysis of this opportunity. Topics covered will include powers and permissible activities; financial inclusion, including expectations on how product and service offerings should meet the needs of all members of communities served; application process, including preparation, written business plan, pre-filing meeting with the OCC, application content, application information publicly available and subject to public comment, confidential portions of application submission, decision criteria, timing and cost; capital requirements; and OCC supervision, examinations and major requirements. To register for the event, click here.
Marshall Fishman, litigation partner in Goodwin’s Financial Industry Practice and Practice Head of New York Commercial and Financial Litigation, is speaking at the NYSBA’s Commercial Litigation Academy 2017 NYC Live & Webcast. He will be participating on the “Pleadings in State Court, Federal Court, and Arbitration” panel. For more information, please visit the event website.
The Financial Research Associates Bank/Alternative Lender Strategic Partnership Summit will take a deeper look at partnership strategy for banks and alternative lenders, especially in the small business lending space. The agenda consists of both bankers and alternative lending professionals who provide a wide range of experienced voices to weigh-in on the many challenges facing both sides of the industry. Mike Whalen, a partner in Goodwin’s Financial Industry and Fintech practices, will be speaking on a panel at the summit. For more information, please visit the event website.
Jim McGarry, partner in Goodwin’s Financial Industry and Consumer Financial Services Litigation practices and Kimberly Monty Holzel, associate in Goodwin’s Financial Industry, Consumer Financial Services and Fintech practices, will be panelists on Knowledge Group’s live webinar, “CFPB’s Final Prepaid Card Rule: Maximizing Opportunities and Minimizing Risks.”
Bill Weintraub, partner in Goodwin’s Financial Industry Practice and co-chair of its Financial Restructuring Practice, will be a speaker at the American Bankruptcy Institute’s 2017 New York City Bankruptcy Conference. He will be speaking on the “Equitable Mootness” panel which will focus on the current state of the doctrine and recent criticisms, especially from the Third Circuit (Philadelphia Newspapers, SemCrude, One2One Communications), and its applications (City of Detroit (invoking the doctrine to reject the attempted restoration of pension benefits in the city’s bankruptcy)). Goodwin is a sponsor. For more information, please visit the event website.This week’s Roundup contributors: Alex Callen, Kata Fustos, Evyn Rabinowitz and George Schneider.