Weekly RoundUp December 06, 2017

Financial Services Weekly News

Editor's Note

We Don’t Need No Stinking Badges. In 2013, former financial advisor, Raymond Lucia, was fined and barred from the industry by the Securities and Exchange Commission (SEC) for material misrepresentations to clients regarding, among other things, his company’s “Buckets of Money” investment strategy and backtesting results. In a challenge of the SEC’s decision, Lucia had argued that the presiding administrative law judge (ALJ) was not appointed by SEC commissioners and was consequently in violation of the Appointments Clause, U.S. Const. Art. II, § 2, cl. 2. A three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit upheld the ALJs’ constitutionality, finding that the ALJs did not need to be appointed directly by the SEC commissioners because the commissioners themselves retained the authority to accept or overrule in-house judges’ decisions. In contrast, a three-judge panel of the U.S. Court of Appeals for the 10th Circuit in Denver ruled that the ALJs do violate the Appointments Clause because they are not appointed by SEC commissioners, resulting in a split-circuit decision.

On November 29, the Solicitor General on behalf of the United States submitted a brief in Raymond J. Lucia and Raymond J. Lucia Companies, Inc. v. Securities and Exchange Commission in which the Solicitor General agreed with the petitioners that the U.S. Supreme Court should decide whether ALJs are inferior officers under the Appointments Clause. The Solicitor General took the position that SEC ALJs are inferior officers for purposes of the Appointments Clause but recommended that the Supreme Court appoint an amicus curiae to defend the contrary judgment of the Court of Appeals for the District of Columbia Circuit. To put to rest any claim that administrative proceedings pending before, or presided over by, SEC ALJs violate the Appointments Clause, on November 30, the SEC ratified the agency’s prior appointment of its ALJs. Now we wait to see if the U.S. Supreme Court will weigh in.

Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

FINRA Requests Comment on the Effectiveness and Efficiency of Its Payments for Market Making Rule

On November 28, the Financial Industry Regulatory Authority (FINRA) issued a regulatory notice requesting comment on Rule 5250, also known as the “Payments for Market Making” rule. The rule expressly prohibits a member or associated person from accepting payment or other consideration, directly or indirectly, from an issuer or its affiliates and promoters, for publishing a quotation, acting as a market maker, or submitting an application in connection therewith. Several exceptions to Rule 5250 exist, notably (1) payment for bona fide services (e.g., investment banking services), (2) reimbursement of any payment for registration imposed by the SEC or state authorities and for listing fees imposed by a self-regulatory association, and (3) any payment expressly provided for under the rules of a national securities exchange. FINRA is seeking responses to questions related to the rule’s effectiveness, implementation, impacts and efficiency. The deadline for comments is January 29, 2018.

President Announces Intent to Nominate New FDIC Chair

On November 30, President Trump announced his intent to nominate Jelena McWilliams to serve as member of the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) for the remainder of a six-year term expiring July 15, 2019, and to be nominated to serve as the next Chairperson of the FDIC for a five-year term. Ms. McWilliams currently serves as Executive Vice President, Chief Legal Officer and Corporate Secretary for Fifth Third Bank in Cincinnati, Ohio. Ms. McWilliams would succeed current FDIC Chair Martin Gruenberg, whose term expired in November. Mr. Gruenberg is eligible to remain on the FDIC board but has not yet said if he will retire once his successor as chair is confirmed. With Joseph Otting now leading the Office of the Comptroller of the Currency (OCC), Jerome Powell expected to be confirmed by the Senate as the next Chair of the Board of Governors of the Federal Reserve System (Federal Reserve) and Mick Mulvaney serving as Acting Director of the Consumer Financial Protection Bureau (CFPB), the heads of all four federal banking agencies will soon have been named by President Trump.

First Deputy Comptroller of the Currency Discusses Whether the Bank Holding Company Structure Is Obsolete

On November 28, Keith A. Noreika, First Deputy Comptroller of the Currency, spoke before the American Enterprise Institute about whether the bank holding company structure is appropriate for all banking organizations. Mr. Noreika conceded that the holding company structure “may continue to serve a useful purpose for large complex companies,” especially those with international activities, but he cast doubt on the structure’s utility for smaller organizations. Mr. Noreika cited the June 2017 consolidation of Bank of Ozark’s holding company structure as support for the contention that such a holding company structure may impose duplicative managerial, operational and administrative costs upon smaller organizations. Mr. Noreika also pointed to the diminution of certain benefits of the holding company structure, making such structures less attractive for organizations conducting business primarily through their bank and bank subsidiaries without engaging in the broader suite of activities permissible for holding companies, including reduced flexibility to issue capital instruments and downstream capital under the Dodd-Frank Act and the Basel capital rules; additional regulatory burdens, such as stress testing, triggered by “arbitrary” asset thresholds; and inefficiencies stemming from regulatory and supervisory redundancies.

Senate Banking Committee Advances Bi-Partisan Regulatory Reform Bill

On December 5, the Senate Banking Committee voted 16-7 to pass S. 2155, the “Economic Growth, Regulatory Relief and Consumer Protection Act,” a bipartisan bill designed to provide regulatory relief for banks and credit unions and to “improve our nation’s financial regulatory framework and promote economic growth.” Details of the bill were reported in the November 15 edition of the Roundup. Four Democrats joined all 12 Republicans on the committee in supporting the bill. With a dozen Democratic Senators publicly supporting the proposed legislation, the bill seems likely to meet the 60-vote threshold necessary to overcome a filibuster and pass the full Senate.

Countercyclical Capital Buffer Stays at 0%

On December 1, the Federal Reserve announced that it had voted to maintain the Countercyclical Capital Buffer (CCyB) at the current level of 0%. The CCyB is an extension of the capital conservation buffer calculated in accordance with the Federal Reserve’s Regulation Q (12 CFR Part 217). The CCyB is intended to be a tool that can help reduce the risk that regulatory capital requirements will tighten credit and undermine the broader economy’s performance (thus contributing to additional bank credit losses) during a downturn. The Federal Reserve may adjust the CCyB amount for credit exposures in the United States based on a range of macroeconomic, financial and supervisory information indicating an increase in systemic risk in accordance with the Federal Reserve’s policy statement establishing a framework for implementing the CCyB, which is available in Appendix A to 12 CFR Part 217.

Federal Banking Agencies Revise CRA Regulations to Conform to Recent Changes to Regulation C

On November 24, the OCC, Federal Reserve and FDIC (agencies) published a final rule that revises their regulations implementing the Community Reinvestment Act (CRA). The final rule amends the CRA regulations’ definitions of “home mortgage loan” and “consumer loan” to conform to recent changes made by the CFPB to Regulation C, which implements the Home Mortgage Disclosure Act (HMDA). The final rule also amends the CRA public file content requirements for consistency with Regulation C, makes technical amendments to remove cross references related to the proposed amended definitions, and removes an obsolete reference to the Neighborhood Stabilization Program.

FHFA Announces Maximum Conforming Loan Limits for 2018

On November 28, the Federal Housing Finance Agency (FHFA) announced the maximum conforming loan limits for mortgages to be acquired by Fannie Mae and Freddie Mac in 2018. In most of the U.S., the 2018 maximum conforming loan limit for one-unit properties will be $453,100, an increase from $424,100 in 2017. The new ceiling loan limit for one-unit properties in most high-cost areas will be $679,650 — or 150 percent of $453,100.

OCC Revises Comptroller’s Licensing Manual

On November 30, the OCC released the revised “Capital and Dividends” booklet of the Comptroller’s Licensing Manual. The OCC revised the “Capital and Dividends” booklet to include the following:

  • the requirements, policies and procedures for a bank to change its permanent capital and pay dividends; and
  • reference information including resource links, sample forms and other forms a bank may use during its capital and dividend process.

This revised “Capital and Dividends” booklet replaces the prior booklet issued in November 2007.

OCC Releases 2018 Fees and Assessment Schedule

On December 1, the OCC released its 2018 fees and assessment schedule. No inflation adjustment was made for assessments in 2018, and marginal rates remain the same as 2017. Assessments are due March 31 and September 30, based on Call Report information as of December 31 and June 30, respectively.

California Department of Business Oversight Invites Comments on Property Assessed Clean Energy (PACE) Regulations

California Governor Brown recently signed legislation establishing the nation’s most extensive set of consumer protections for California homeowners who finance energy-efficiency improvements through the Property Assessed Clean Energy, or PACE program. Under the legislation, the Department of Business Oversight (DBO) is authorized to license PACE program administrators and regulate the PACE industry. The new law requires PACE program administrators to be licensed by the DBO by January 1, 2019.  The DBO will be drafting regulations to implement the new law and is seeking comments from interested parties prior to initiating a formal rulemaking action with the Office of Administrative Law. The deadline to submit comments is January 5, 2018.

Client Alert: ISS Releases Compensation-Related Preliminary FAQs for 2018 Proxy Season

On November 27, Institutional Shareholder Services (ISS) released Preliminary Frequently Asked Questions (Preliminary FAQs) for its 2018 U.S. compensation policies. The Preliminary FAQs apply to annual meetings held on or after February 1, 2018. ISS published the Preliminary FAQs in response to questions regarding upcoming changes to the quantitative pay-for-performance screening methodology and the Equity Plan Scorecard (EPSC). Importantly, the Preliminary FAQs related to the EPSC specifically note that the Preliminary FAQs do not represent an exhaustive list of the EPSC updates, but may be useful in understanding some of the more significant changes to the EPSC. Consistent with prior years, ISS expects to publish more detailed information in an update to the Preliminary FAQs and a methodological whitepaper in mid-December 2017. For more information, read the client alert issued by Goodwin’s ERISA and Executive Compensation practice.

Israeli Regulators to Decide Regulatory Fate of ICOs in December

At the end of August, the Israeli Security Authority (ISA), the Israeli equivalent of the U.S. Securities and Exchange Commission, announced it had formed a committee to study whether, and how, to apply Israeli securities laws to initial coin offerings (ICOs). Specifically, the ISA stated it would examine six issues related to ICO regulation, including reviews of the economic nature of the transactions, regulations of other countries, applicability to securities laws and threats to innocent investors. On November 24, it was reported through unnamed sources that the ISA committee’s report, due out by December 31, 2017, was considering strict regulations of ICOs, and possibly even an outright ban on them, similar to what China has done. View the Digital Currency + Blockchain Perspectives blog post.

Enforcement & Litigation

Federal Reserve Enters Consent Order With Kansas Bank Over Deceptive Mortgage Origination Practices

On November 28, the Federal Reserve announced that it had entered into a consent order with a Kansas state bank, resolving allegations that the bank engaged in deceptive residential mortgage lending practices in violation of Section 5 the Federal Trade Commission Act. View the Enforcement Watch blog post.

Goodwin News

East West Blockchain Conference – December 10

Bringing together founders of leading blockchain startups, crypto investors and regulators from around the world, East West Blockchain aims to narrow the information asymmetry between U.S. and Asia Pacific markets and facilitate partnerships that bridge geographical differences, and between startups and traditional companies, to bring clarity and insight into the rapidly evolving blockchain industry. Grant Fondo, partner and chair of Goodwin’s Digital Currency + Blockchain Technology practice, will be a featured speaker on a panel discussing regulatory aspects of blockchain and ICO fundraising.

Bank Director’s: Acquire or Be Acquired: January 28-30

Bank Director’s 24th annual Acquire or Be Acquired Conference focuses on banks seeking to explore strategic short- and long-term growth options. Regina Pisa will be speaking on the panel “Effectively Communicating an M&A Transaction” on January 28. Samantha Kirby and Matt Dyckman will also be in attendance. For more information, please visit the event website.

This week’s Roundup contributors: Alex Callen and Bill McCurdy.