Regulatory Developments
Senate Confirms Jerome Powell to Serve as Next Fed Chair
On January 23, the U.S. Senate confirmed Jerome Powell as the next chair of the Board of Governors of the Federal Reserve System (Federal Reserve) by a vote of 84-13. Mr. Powell will assume leadership of the Federal Reserve upon the expiration of Janet Yellen’s four-year term on February 3, 2018. While Mr. Powell received broad bipartisan support, he was opposed by a handful of prominent senators, both liberal and conservative, including Democrats Elizabeth Warren of Massachusetts, Kamala Harris of California and Cory Booker of New Jersey and Republicans Ted Cruz of Texas, Rand Paul of Kentucky, Mike Lee of Utah and Marco Rubio of Florida.
Acting Director Mulvaney Announces Call for Evidence Regarding CFPB Functions
On January 17, the CFPB announced that it will publish in the Federal Register a series of Requests for Information (RFIs) seeking comment on the CFPB’s enforcement, supervision, rulemaking, market monitoring and education activities. Over the coming weeks, these RFIs will provide an opportunity for the public to submit feedback and suggest ways to improve outcomes both for consumers and for covered entities. The first RFI will seek comment on Civil Investigative Demands (CIDs), which are issued by the CFPB during enforcement investigations. The CFPB anticipates that comments to this RFI will help it evaluate existing CID processes and procedures and determine whether any changes are warranted.
Fed Vice Chair for Supervision Discusses Post-Crisis Regulatory Reform Initiatives
On January 19, Randal Quarles, Vice Chairman for Supervision for the Federal Reserve, delivered a keynote address at the American Bar Association Banking Law Committee Annual Meeting in Washington, D.C. (Meeting), in which he discussed effecting post-crisis financial regulatory reforms. Mr. Quarles asserted that core post-crisis reforms, including those concerning higher and better quality capital, stress testing, liquidity regulation and resolution planning, have contributed to the strength of the financial system. But he also explained that there is room for improvement and laid out a path for further refinement, identifying the following areas of focus: small bank capital simplification, burden reduction in resolution planning, enhancements to stress testing, leverage ratio recalibration, and Volcker rule simplification. Mr. Quarles also described a comprehensive regulatory review being conducted by his staff and some of the views he has developed. He supported the concept of applying “tailored” regulations to both small and large institutions, which is to say that the nature of the regulation applied to an institution should be commensurate with the institution’s risk. Areas identified as candidates for tailoring include liquidity regulation (especially the liquidity coverage ratio), advanced approaches thresholds, and loss absorbency requirements. Mr. Quarles also suggested a willingness to revisit old-line issues, including the Federal Reserve’s framework for evaluating the existence of “control” under the Bank Holding Company Act, which he characterized as “built up piecemeal” over time, more “ornate” than the statute’s basic standards, and “in some cases [it] cannot be discovered except through supplication to someone who has spent a long apprenticeship in the art of Federal Reserve interpretation.” At the Meeting, there was a consistent tone and message from the Federal Reserve supporting regulatory reform and tailoring. As a result, financial institutions should expect the core post-crisis reforms to be preserved, but with incremental changes around the margins.
Federal Banking Regulators Release Interagency Statement on Accounting and Reporting Implications of New Tax Law
On January 18, the Federal Reserve, Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation released an Interagency Statement on Accounting and Reporting Implications of the New Tax Law (Interagency Statement). The Interagency Statement is consistent with previous guidance released by the Securities and Exchange Commission (SEC) and Financial Accounting Standards Board, which requires that the effect of changes in tax laws or rates be recognized in the period in which the legislation is enacted. As the new tax law was enacted before December 31, 2017, institutions must record the effects of the new tax law in their December 31, 2017, regulatory reports. The Interagency Statement also provides guidance on how to resolve the disproportionate tax effects in accumulated other comprehensive income as a result of the re-measurement of deferred tax assets and liabilities and the impact of the new tax law on regulatory capital.
OCC Report Discusses Key Risks to Federal Banking System
On January 18, the OCC reported that credit, operational and compliance risks are key concerns for the federal banking system in its Semiannual Risk Perspective for Fall 2017. The report covers risks facing national banks and federal savings associations based on data as of June 30, 2017, and focuses on issues that pose threats to those financial institutions regulated by the OCC. Highlights from the report include:
- The credit environment continues to be influenced by aggressive competition, tighter spreads and slowing loan growth. These factors are driving incremental easing in underwriting practices and increasing concentrations in select loan portfolios, leading to heightened risk if the economy weakens or markets tighten quickly.
- Operational risk continues to challenge banks because of increasing complexity of cybersecurity threats, use of third-party service providers and increasing concentrations in third-party service providers for some critical operations.
- Compliance risk remains elevated as banks continue to manage money laundering risks, as well as consumer compliance risks, particularly due to the increasing complexity in consumer compliance regulations.
House of Representatives Passes Bill Impacting Closed-End Funds
On January 17, the House of Representatives passed House Resolution 4279, the “Expanding Investment Opportunities Act,” by a vote of 418-2 in favor of the bill. If passed by the Senate in the current form, the bill would direct the SEC to amend certain rules that would reduce filing and offering regulations for closed-end funds by enabling those that meet certain requirements to file and offer shares as “well-known seasoned issuers.” If the SEC fails to finalize the amendments to those rules specified in the bill within one year after enactment, the revisions would become effective immediately. The bill was introduced by Rep. Trey Hollingsworth (R-IN) in November 2017. According to a statement in his press release, the legislation “would reduce unnecessary regulatory burdens that raise costs for investors. In turn, this would enhance the ability of closed-end funds to act as a source of financing the economy.”
House Financial Services Committee Advances Bill to Repeal Money Market Reform
On January 11, the House Financial Services Committee voted 34-21 to advance a bill aimed at returning regulations of money market funds to pre-reform status. House Resolution 2319, the “Consumer Financial Choice and Capital Markets Protection Act of 2017,” overrides portions of the SEC’s Money Market Fund Reform Rule that resulted in significant changes to the regulatory framework applicable to money market funds (for a summary of these regulatory reforms, view the client alert prepared by Goodwin’s Investment Management practice). The bill, among other things, would allow all money market funds, including institutional prime and institutional tax-exempt money market funds, to maintain a stable net asset value per share so long as the funds meet certain criteria and also would allow all money market funds to elect not to be subject to the default liquidity fee requirements imposed by Rule 2a-7 under the Investment Company Act of 1940 (the 1940 Act). The bill would also prohibit direct federal assistance (e.g., guaranteeing any loan or debt issuance) to any money market fund. The legislation will next be considered by the full House of Representatives.
House Financial Services Committee Passes Mutual Fund Litigation Reform Act Bill
On January 18, the House Financial Services Committee passed a bill in a 31-25 vote to amend Section 36(b) of the 1940 Act. The bill, which is also known as the Mutual Fund Litigation Reform Act, was introduced by Rep. Tom Emmer (R-MN) earlier in the month to “provide complaint and burden of proof requirements for certain actions for breach of fiduciary duty.” In a press release, Emmer stated that “[b]y cutting down the number of frivolous lawsuits targeted at mutual funds, we can allow Americans to continue to make the investments they need for their future.” The bill awaits consideration by the full House of Representatives.
Client Alert: New PCAOB Audit Standard for Audit Reports
The Public Company Accounting Oversight Board (PCAOB) recently published interpretive guidance on audit reporting standard AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (December 4, 2017). The SEC approved AS 3101 on October 23, 2017. Although audit reports are prepared by a company’s independent auditor, companies may want to be aware of the changes that AS 3101 will require in audit reports for 2017 and future years. Some of these changes in audit reports will apply to Form 10-K reports that are due in February or March 2018 for companies that have December 31 fiscal year-ends. For more information, read the client alert issued by Goodwin’s Public Companies practice.
Client Alert: NYSE Dividend Notification Changes Effective February 1
On February 1, 2018, the amendments to the New York Stock Exchange Listed Company Manual adopted in August 2017 become effective. These amendments will require listed companies to notify the NYSE at least 10 minutes before a company announces any dividend or stock distribution or the fixing of a record date for any dividend or stock distribution, even if the announcement is made outside of market hours. For more information, read the client alert issued by Goodwin’s Public Companies practice.
OFAC Issues Statement on Venezuelan Digital Currency
On January 19, the Office of Foreign Assets Control (OFAC) issued FAQ 551 stating that U.S. persons who deal in the prospective Venezuelan digital currency (the Petro) may be exposed to U.S. sanctions risk under Executive Order 13808:
551. In December 2017, Venezuelan President Nicolas Maduro announced plans for the Government of Venezuela to launch a digital currency. According to public reporting, Maduro indicated that the digital currency would carry rights to receive commodities in specified quantities at a later date. Were the Venezuelan government to issue a digital currency with these characteristics, would U.S. persons be prohibited from purchasing or otherwise dealing in it under E.O. 13808? A currency with these characteristics would appear to be an extension of credit to the Venezuelan government. Executive Order 13808 prohibits U.S. persons from extending or otherwise dealing in new debt with a maturity of greater than 30 days of the Government of Venezuela. U.S. persons that deal in the prospective Venezuelan digital currency may be exposed to U.S. sanctions risk.
Enforcement & Litigation
On January 19, SEC Co-Enforcement Directors Stephanie Avakian and Steven Peikin and Commodity Futures Trading Commission (CFTC) Enforcement Director James McDonald issued the following joint statement regarding virtual currency enforcement actions: “When market participants engage in fraud under the guise of offering digital instruments – whether characterized as virtual currencies, coins, tokens, or the like – the SEC and the CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws. The Divisions of Enforcement for the SEC and CFTC will continue to address violations and bring actions to stop and prevent fraud in the offer and sale of digital instruments.”
This concise and pointed statement reinforces a clear tone from top officials at the SEC and CFTC that these regulators will continue to investigate potential fraudulent activity involving digital currencies, initial coin offerings (ICOs) and related products and ventures and, where appropriate, will pursue enforcement action against those who are involved. A challenge with which the regulators will continue to grapple, however, is the balance between pursuing their enforcement mandates, while at the same time encouraging – and attempting to not stifle – innovation in this space. View the Digital Currency + Blockchain Perspectives blog post.
SEC No-Action Letter Regarding Engaging on Fund Innovation and Cryptocurrency-Related Holdings
On January 19, the SEC issued a no-action letter to the Investment Company Institute and the Securities Industry and Financial Markets Association identifying a number of questions concerning how funds holding substantial amounts of cryptocurrencies and related products would satisfy the requirements of the 1940 Act and its rules. The topics covered by the questions included valuation, liquidity, custody, arbitrage, and potential manipulation and other risks. The SEC Staff did not provide answers to the questions, but instead invited interested persons to engage with the Staff in detail on how to address the questions going forward. The Staff explicitly stated that until the questions identified in the letter can be addressed satisfactorily, the Staff does not believe that it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products, and the Staff noted that if a sponsor were to file a post-effective amendment under rule 485(a) to register a fund that invests substantially in cryptocurrency or related products, the Staff would view that action unfavorably and would consider actions necessary or appropriate to protect Main Street investors, including recommending a stop order to the SEC.
BitConnect and the Advent of State Securities Enforcement Over ICOs
In the wake of the SEC’s clarifying guidance in Munchee regarding the application of the federal securities laws to ICOs, there has been increased activity among both federal and state regulators as they seek to deter what they deem to be sales of unregistered securities in the form of token sales. Indeed, following the SEC’s lead, state regulators are undertaking their own investigations of technology companies building platforms on the blockchain who are seeking to raise funds through ICOs. On January 4, the Enforcement Division of the Texas State Securities Board joined the apparent crackdown on ICOs in the name of consumer protection, issuing an emergency cease-and-desist order (the Texas Order) to BitConnect, a Britain-based technology company that was planning to launch its ICO within the week. On January 9, the Securities Division of the North Carolina Department of Secretary of State agreed, issuing a temporary order to cease and desist to BitConnect, alleging similar violations to those in the Texas Order. View the Digital Currency + Blockchain Perspectives blog post.
NY AG Moves to Compel Debt Collector to Respond to Discovery Requests
On January 17, the New York Attorney General (AG) filed a motion to compel a debt collection company and its owner to produce financial documents, business records and other documents in a lawsuit alleging that the defendants were part of an illegal debt collection scheme. The lawsuit, which was filed in November 2016 by the CFPB and the AG, alleges that the defendants violated the Consumer Financial Protection Act, Fair Debt Collection Practices Act and New York state law by purchasing defaulted consumer debt, and then inflating each debt by $200, even where not authorized to do so by contract or applicable law. The defendants allegedly impersonated law enforcement officials and threatened consumers in order to collect the debts. View the Enforcement Watch blog post.
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.
Elder Financial Protection Seminar for Legal and Compliance Personnel – February 7
Please join us for an Elder Financial Protection Seminar, a forum for legal and compliance personnel (often the first and last lines of defense) to discuss emerging issues in the financial industry. The seminar will focus on the banking, brokerage and trust/fiduciary sectors and will feature a premiere lineup of speakers, including industry professionals, regulators and trade groups. To register for the event, click here.
This week’s Roundup contributors: Alex Callen, John Newell and Jacob Osborn.