Weekly RoundUp
December 20, 2017

Financial Services Weekly News

Banks Look Like Winners in Tax Reform Bill.  On December 20, the House of Representatives, by a vote of 224-201, and the Senate, by a vote of 51-48, passed the Tax Cuts and Jobs Act, the nation’s first sweeping tax reform legislation in over 30 years. No Democrats in either the House or Senate voted for the legislation. President Trump is expected to sign the bill into law later this week.

The legislation is broad reaching and will impact a variety of entities including private companies, public companies and tax exempt entities across a broad range of industries, including financial services. The Roundup and several other Goodwin publications will provide more detail in the coming days. Significant provisions that will be beneficial to the banking industry include:

  • Reducing the maximum tax rate for C corporations from 35% to 21%; 
  • Providing for a 20% deduction for Subchapter S banks and other pass-through entities; and
  • Eliminating the corporate alternative minimum tax.

In addition, the legislation retained low-income housing and new markets tax credits and exempted small business with $25 million or less in gross receipts (prime borrowers for community and many regional banks) from restrictions on deducting net interest expense. The legislation also is expected to have a positive effect on economic growth, possibly encouraging more lending that would benefit banks of all sizes. 

But the news is not all good for banks. The legislation also:   

  • Eliminates the deductibility of FDIC insurance premiums for banks with $50 billion or more in assets and limits their deductibility for banks between $10 billion and $50 billion in assets proportionally based on asset size (banks with less than $10 billion in assets would still be able to deduct the full amount of their insurance premiums);
  • Caps the mortgage interest deduction for new mortgages of $750,000 or more;
  • Eliminates the interest deduction for new home equity lines of credit; and
  • Eliminates operating loss carrybacks and limits net operating loss carryforwards.

In addition, many banks will have to write down the value of their deferred tax assets as a result of the lower marginal corporate tax rates, which could result in significant charges for some banks in the fourth quarter of 2017. 

As with any major piece of legislation, there are winners and losers. However, despite some challenges, banks, which tend to have relatively high effective tax rates, are expected to be among the biggest winners of the tax reform legislation.

The Roundup will be on hiatus for the next two weeks, and will resume publication on January 10. We wish all of you a happy holiday season and a wonderful New Year.

Regulatory Developments

Federal Regulatory Agencies Update Rulemaking Agendas for 2018

The Office of Management and Budget’s Office of Information and Regulatory Affairs has released the Unified Agenda of Regulatory and Deregulatory Actions, an agenda that  represents the Trump administration’s next step in fundamental regulatory reform. The agenda includes the Current Agency Statements of Regulatory Priorities for several federal financial services regulatory agencies. The regulatory priorities of the Consumer Financial Protection Bureau can be found here. The regulatory priorities of agencies that are part of the Treasury Department, including the Office of the Comptroller of the Currency (in some cases jointly with the FDIC and Federal Reserve) and the Financial Crimes Enforcement Network (FinCEN) can be found here

FinCEN Provides Answers to Frequently Asked BSA Questions

On December 15, FinCEN published answers to Bank Secrecy Act (BSA)-related frequently asked questions (FAQs). These FAQs are meant to provide financial institutions with guidance in their BSA compliance efforts and are part of a broader transparency initiative announced by Treasury Under Secretary for Terrorism and Financial Intelligence Sigal Mandelker at the ABA Financial Crimes Enforcement Conference earlier this month. FinCEN will periodically update these FAQs.

SEC Division of Trading and Markets Deputy Director to Retire

On December 13, the Securities and Exchange Commission (SEC) announced that Gary Barnett, Deputy Director in the Division of Trading and Markets, will retire from the agency at the end of the year. Since January 2015, Mr. Barnett has overseen the division’s Office of Broker-Dealer Finances, Office of Derivatives Policy, Office of Trading Practices, its Volcker rule team, and its participation in various global regulatory initiatives. In addition, he has been a member of the agency’s Cybersecurity Working Group and its Fintech Working Group and has been its senior most representative on multiagency groups including the Senior Supervisors Group and the Supervisors Roundtable on Governance Effectiveness.

Client Alert: SEC Issues Warnings Regarding Celebrity-Promoted Coin Offerings and Moves Swiftly Against Unregistered ICOs

The SEC recently issued two warnings about investments sold on the basis of celebrity endorsements, including one relating to initial coin offerings (ICOs), and followed up with enforcement actions against unregistered ICOs. Investors can be misled by biased promotions. Receipt of cash or other consideration in exchange for promoting a security can create an incentive to describe the security in an attractive light, regardless of associated risks, costs and fees. Promoters of ICOs that are securities must fully disclose any consideration received, including the type (i.e., cash or securities), amount and the identity of the party making the payment, in order to comply with federal securities laws. For more information, read the client alert issued by Goodwin’s Digital Currency + Blockchain Technology practice.

Client Alert: SEC Issues Cease and Desist Order and Further Guidance on ICOs

On December 11, the SEC issued a cease-and-desist order to Munchee Inc. (Munchee), a company that was in the process of a $15 million ICO, for selling unlicensed securities. The SEC found that the ICO targeted investors, with the expectation of future profits, rather than users of the company’s products, with the explicit aim of using the token sale proceeds to further develop its iPhone application and corresponding “ecosystem.” Munchee, upon being contacted by the SEC, stopped the sale and returned all ICO proceeds. Immediately following the publication of the Munchee Order, SEC Chairman Jay Clayton released a public statement on cryptocurrencies and ICOs, reiterating the SEC’s focus on substance over form in evaluating the implications of the federal securities laws on ICOs. Chairman Clayton specifically cautioned against assuming that any particular token will be considered a utility. Chairman Clayton’s comments suggest that the SEC may consider a true utility token to be an exception to the rule, which warrants caution and forethought when proceeding with any unregistered token sale. These developments represent the latest guidance from the SEC, as it endeavors to further define the bounds of regulation in the burgeoning ICO market. For more information, read the client alert issued by Goodwin’s Digital Currency + Blockchain Technology practice.

ICO Participant Liability – Could You Be Liable for Assisting in the Sale of Unregistered Securities?

An ICO does not happen on its own. Rather, there are companies and individuals that assist in successful token sales. These can include ICO consultants, marketing firms, board members, partners at private equity and venture capital firms, and those that assist in finding buyers for tokens. While there are benefits to those making ICOs happen, there are also risks. View the Digital Currency + Blockchain Perspectives blog post.

Enforcement & Litigation

Client Alert: Delaware Supreme Court Increases Risk for Boards in Making Discretionary Director Compensation Awards

On December 13, the Delaware Supreme Court issued a decision in In re Investors Bancorp, Inc. Stockholder Litigation, holding that director compensation awards made pursuant to an equity compensation plan that permits a board of directors discretion in making such awards will not be reviewed under the business judgment rule, which treats them as presumptively valid. Rather, such discretionary awards will be subject to review under the entire fairness standard, which places the burden of proof on the directors to show that the award process and amounts were objectively fair to the corporation and its stockholders. The Court held that director compensation awards will be reviewed under a deferential business judgment standard of review only if specific awards are approved by a fully informed disinterested stockholder vote or if awards are made pursuant to a “self-executing” equity compensation plan that is approved by a fully informed disinterested stockholder vote and permits directors no discretion in making such awards. Investors Bancorp represents a significant development in Delaware director compensation law that may lead to increased stockholder challenges to director compensation awards as excessive. For more information, read the client alert issued by Goodwin’s Securities + Shareholder Litigation practice. 

Goodwin News

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 will also be in attendance. For more information, please visit the event website.