Weekly RoundUp May 10, 2017

Financial Services Weekly News

Editor's Note

In this Issue. The House Financial Services Committee passed the Financial CHOICE Act that would make significant changes to the Consumer Financial Protection Bureau; the U.S. Securities and Exchange Commission (the SEC) proposed amendments to the Investment Advisers Act of 1940 to reflect changes made by the Fixing America’s Surface Transportation Act of 2015; a new Acting Comptroller of the Currency was named; the Office of the Comptroller of the Currency revised the fiduciary powers section of the Comptroller’s Licensing Manual; and the Federal Reserve Board and the Federal Deposit Insurance Corporation issued Frequently Asked Questions on Large Bank Resolution Plans. In addition, the SEC settled charges with another registered investment adviser and an affiliated distributor for improperly using mutual fund assets to pay for distribution and other expenses, making that two such administrative proceedings in the same week. These and other recent developments are discussed below. 

Editor's Note

Regulatory Developments

House Financial Services Committee Passes Financial CHOICE Act

On May 4, the House Financial Services Committee passed the Financial CHOICE Act (CHOICE Act) on a party line vote. The current version of the CHOICE Act would, among other things:

  • Transform the Consumer Financial Protection Bureau (CFPB) from an independent agency to an executive agency, subject to congressional oversight and the congressional appropriations process, with its director removable at will by the president. 
  • Rename the CFPB as the Consumer Law Enforcement Agency, while making it an enforcement only agency without a supervisory function (leaving federal banking regulators to perform consumer protection supervisory functions) and eliminating its authority to enforce unfair, deceptive or abusive acts and practices.
  • Provide regulatory relief to community banks and those engaged in residential mortgage lending.
  • Repeal the Volcker rule, which bars proprietary trading and sponsoring and investing in covered funds.
  • Repeal the Durbin amendment, which caps debit interchange fees charged by large banks and prohibits network exclusivity.
  • Provide regulatory relief for banks that maintain a 10% leverage ratio.
  • Fix the “true lender” issue by overturning the Second Circuit Court of Appeals’ decision in Madden v. Midland Funding

While the CHOICE Act is likely to pass the House in some form, its chances of passage are remote in the Senate since 60 votes are required to overcome a filibuster. Nevertheless, some targeted reforms, including regulatory relief for community-based institutions, could be enacted.

Amendments to Investment Advisers Act Rules to Reflect Changes Made by the FAST Act

On May 3, the SEC proposed amendments to the definition of a “venture capital fund” in the Investment Advisers Act of 1940, as amended (the Advisers Act) rule 203(l)-1 and the definition of “assets under management” in Advisers Act rule 203(m)-1 to reflect the changes made to the Advisers Act by the Fixing America’s Surface Transportation Act of 2015 (the FAST Act). The FAST Act amended the “venture capital fund adviser exemption” under section 203(l)-1 of the Advisers Act by deeming small business investment companies (SBICs) other than business development companies to be “venture capital funds” for purposes of the exemption, and amended the “private fund adviser exemption” under section 203(m)-1 by excluding the assets of SBICs for purposes of calculating private fund assets under management. The SEC is proposing to reconcile inconsistencies between the FAST Act and the Advisers Act rules by amending rule 203(l)-1 to include SBICs in the definition of venture capital funds, and amending rule 203(m)-1(d)(1) to exclude an adviser’s regulatory assets under management attributable to SBICs from the definition of assets under management for purposes of determining whether an adviser may rely on the exemption. The proposal does not impact those advisers to SBICs and non-SBIC private funds that switched from registered investment adviser to exempt reporting adviser status, or determined to maintain registered investment adviser status, after the enactment of the FAST Act or the issuance of guidance by the Division of Investment Management in March 2016.

Acting Comptroller of the Currency Named

On May 5, Keith A. Noreika was named Acting Comptroller of the Currency. Mr. Noreika was formerly a partner at the law firms of Simpson Thacher & Bartlett LLP and Covington & Burling LLP, specializing in banking regulation. Former Comptroller of the Currency Thomas J. Curry, whose term expired in April, had resigned his post on May 5, clearing the way for Mr. Noreika’s appointment.

OCC Revises Fiduciary Powers Section of Comptroller’s Licensing Manual

The Office of the Comptroller of the Currency (OCC) has revised the Fiduciary Powers section of the Comptroller’s Licensing Manual. The May 2017 update reflects revised OCC regulations and the integration of the Office of Thrift Supervision into the OCC. The section addresses the policies and procedures a national bank or federal savings association (banks) should follow when seeking approval to exercise fiduciary powers, exercise fiduciary powers in a new state, or surrender its fiduciary powers voluntarily. It also covers circumstances in which expedited review of an application is appropriate, and when the OCC may revoke a bank’s fiduciary powers. The section contains links, references and other helpful resources for financial institutions exercising or seeking to exercise fiduciary powers.

Federal Reserve Board and FDIC Release FAQs on Large Bank Resolution Plans

On May 5, the Federal Reserve Board (Board) and the Federal Deposit Insurance Corporation (FDIC) released FAQs regarding their previously released guidance for use in developing the 2017 resolution plan submissions by eight large domestic bank holding companies. The FAQs address capital and liquidity requirements and forecasting, governance mechanisms, management of critical third-party vendors and other operational issues, derivatives and trading activities, legal entity rationalization and other general and legal matters related to the resolution planning process. According to the Board and the FDIC, the FAQs are being released to better inform the public about the resolution planning process and are not binding on the Board or FDIC.

CFPB Supervisory Highlights Focus on Mortgage Origination, Mortgage Servicing and Student Loan Servicing

On April 26, the CFPB issued a press release and its latest Supervisory Highlights, which spotlight the CFPB’s recent enforcement efforts in the areas of mortgage loan origination, mortgage loan servicing and student loan servicing. The Supervisory Highlights reflect what the CFPB sees as common problems in each area, and may signal what conduct the CFPB will be paying particular attention to in its future enforcement efforts. View the LenderLaw Watch blog post

Enforcement & Litigation

Mutual Fund Adviser and Distributor Settle with SEC Over Alleged Improper Use of Mutual Fund Assets

On May 2, Calvert Investment Management, Inc. (the Adviser) and Calvert Investment Distributors, Inc. (the Distributor, and together with the Adviser, the Calvert Entities) settled administrative and cease-and-desist proceedings brought by the U.S. Securities and Exchange Commission (SEC) in which the SEC alleged that, from January 1, 2008, through December 31, 2014, they improperly used the assets of certain funds (the Funds) that they advised/distributed to pay for (i) the distribution and marketing of Fund shares outside of a written, board-approved Rule 12b-1 plan and (ii) expenses for sub-transfer agent services in excess of expense caps that were in place for the Funds.  In addition, the SEC alleged that the conduct rendered certain of the Funds’ prospectus disclosures concerning payments for distribution-related services materially inaccurate.  As a result of this conduct, the SEC alleged that the Adviser violated Section 206(2) of the Investment Advisers Act of 1940 and Section 34(b) of the Investment Company Act of 1940 (the 1940 Act), and the Calvert Entities caused the Funds to violate Section 12(b) of the 1940 Act and Rule 12b-1 thereunder. Without admitting or denying the SEC’s findings, the Adviser and Distributor, each, consented to a cease and desist order; the Adviser agreed to a censure; and the Calvert Entities agreed to pay a civil monetary penalty totaling approximately $22.6 million.  The SEC stated in the order that it agreed to impose a reduced penalty in light of the Calvert Entities’ self-reporting of the fee payments, significant cooperation and prompt remediation, including enhanced policies and procedures regarding payments for distribution and sub-TA services and plans to reimburse affected shareholder accounts.  The Calvert Entities had previously announced the discovery of the overpayments in October 2016.

Goodwin News

The Conference on Consumer Financial Law’s 2017 Annual Consumer Financial Services Conference – May 15 - 16

The Conference on Consumer Finance Law's 2017 Annual Consumer Financial Services Conference is a two-day conference that will address mortgage lending and servicing issues as well as debt collection and bankruptcy issues. Joseph Yenouskas will be speaking on the “Mortgage Servicing Litigation” panel. For additional information, please visit the event website.

CFPB’s Final Prepaid Card Rule: Maximizing Opportunities and Minimizing Risks – May 17

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.” 

American Bankruptcy Institute: 2017 NYC Bankruptcy Conference – May 18

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

ACI’s 3rd Annual Conference on Women Leaders in Financial Services Law and Compliance – May 22 - 23

ACI is pleased to announce its 3rd Annual Women Leaders in Financial Services Law and Compliance. This conference will provide a forum for women in the financial services legal and compliance community to discuss professional opportunities and to foster communication between like-minded individuals about the key legal, compliance, regulatory and enforcement developments in the past year. All presentations, a mixture of both professional development and substantive topics, will be tailored to empower women in this space and to give women the skills necessary for continued success in the financial services industry. Inez Friedman-Boyce, a partner in Goodwin’s Securities Litigation and White Collar Defense Group, will speak on a panel titled “Evaluating the Impacts of the New Administration on the Financial Industry.” Goodwin is the exclusive cocktail sponsor for the event. For more information, please visit the event website.

This week’s Roundup contributors: Alex Callen, Karla Perez and George Schneider