Weekly RoundUp February 28, 2018

Financial Services Weekly News

Editor's Note
Consumer Finance 2017 Year in Review. Year 2017 brought leadership change at the Consumer Financial Protection Bureau (CFPB), turnover at various regulatory agencies, the continued rise of state-level actors, and new rules, lawsuits and enforcement actions. Analyzing the key developments from last year will allow financial services companies looking forward to 2018 to anticipate and prepare for changes in the law, new regulatory interpretations, and shifting legislative and enforcement priorities. This year-end review synthesizes prior coverage of 2017’s most significant developments and actions from Goodwin’s LenderLaw Watch and Consumer Finance Enforcement Watch blogs, and offers predictions on what the industry might expect in 2018 in the mortgage, credit card, student lending, credit reporting, auto lending, debt collection, TCPA, payday lending, Fintech and appellate areas. For more information, read Goodwin’s Consumer Finance 2017 Year In Review
Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

 CFPB Seeks Feedback on External Engagements and Supervision Processes

On February 14, the CFPB issued a request for information seeking feedback on its supervision processes. This is the fourth in an ongoing series of RFIs designed to provide the CFPB with input on how it is fulfilling its statutory obligations and how to improve outcomes for both consumers and covered entities. The public is invited to provide comment on the efficiency and effectiveness of the CFPB’s supervision program and whether any changes to the program would be appropriate, including changes to the timing, frequency and scope of supervisory exams, information collection requests, the exam manual, the effectiveness of onsite exam work, exam communications including supervisory letters and exam reports, among other things. Comments are due 90 days after publication in the Federal Register. Additionally, on February 21, the CFPB issued its fifth RFI seeking information about its external engagements. The CFPB is seeking comments from interested parties on ways to engage the public and receive feedback on the work of the agency. The CFPB will also accept comments for 90 days after this RFI is published in the Federal Register. Over the coming weeks, the CFPB anticipates issuing more RFIs on a number of topics including complaint reporting, rulemaking processes, CFPB rules not under section 1022(d) assessment, inherited rules, guidance and implementation support, consumer education, and consumer inquiries and data policy. 

Treasury Recommends Modifications to Orderly Liquidation Authority and to Bankruptcy Code

On February 21, the Department of the Treasury (Treasury) released a report (Report) to the President of the United States recommending reforms to curtail the orderly liquidation authority (OLA) established through the Dodd-Frank Act. The FDIC’s OLA permits the FDIC to be appointed as receiver of a distressed financial company, subject to satisfaction of numerous “exceedingly high” statutory hurdles. The Report describes Treasury’s concerns that, once invoked, OLA grants too much unchecked administrative discretion that potentially could be misused to bail out creditors and risks undermining market discipline. In the Report, Treasury recommends retaining OLA as an “emergency tool for use under only extraordinary circumstances,” but prioritizing other resolution pathways by enacting an effective bankruptcy process for financial companies and then, within the OLA regime, eliminating opportunities for ad hoc disparate treatment of similarly situated creditors, reinforcing existing taxpayer protections, and strengthening judicial review.

If OLA is a resolution method of last resort for a distressed financial company, then bankruptcy should be the method of “first resort,” according to the Report, which recommends adopting a new chapter of the bankruptcy code (a so-called “Chapter 14”) that would provide for clear, predictable and impartial adjudication of claims, while adding procedural features tailored to the unique challenges posed by large, interconnected financial firms. The Report describes a two-entity recapitalization model and certain temporary stays on contractual rights for use in that process. According to the Report, such a process would contribute to appropriate market pricing of risk.  The Report also recommends several reforms to the FDIC’s commitments and to OLA itself.  

FASB Issues Final Standard to Resolve Accounting Issues After Tax Reform

On February 14, the Financial Accounting Standards Board (FASB) announced its final accounting standard describing how banks can adjust regulatory capital balances that were affected by the Tax Reform and Jobs Act (Tax Reform). The new standard allows for the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from Tax Reform. As a result, the new standard eliminates the stranded tax effects resulting from Tax Reform. However, the underlying guidance still requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The new standard is effective for all entities for fiscal years beginning after December 15, 2018, but early adoption is permitted for (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance.

House Passes “Madden Fix”

On February 14, the House of Representatives passed H.R. 3299, a bill that codifies the “valid-when-made” doctrine in an attempt to end the confusion created by the Madden v. Midland Funding decision. Specifically, the bill amends the Revised Statutes, the Home Owners’ Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act to state that bank loans that are valid when made as to their maximum rate of interest in accordance with federal law shall remain valid with respect to that rate regardless of whether a bank has subsequently sold or assigned the loan to a third party. The prospects for passage of the bill in the Senate, or inclusion of the provision in the bipartisan financial regulatory relief bill pending before the Senate, are unclear.

SEC Extends Compliance Dates for Elements of Liquidity Rule; SEC Staff Issues FAQs for Liquidity Classifications

On February 21, the Securities and Exchange Commission (SEC) adopted an interim final rule that extends by six months the compliance dates for portions of Rule 22e-4 (the liquidity rule) and related reporting requirements adopted in October 2016 for registered open-end investment companies (for a summary of these requirements, view the client alert prepared by Goodwin’s Investment Management practice). The interim final rule extends by six months the compliance dates for, among other liquidity rule requirements, the liquidity classification, highly liquid investment minimum, and fund board oversight requirements (including initial approval of the liquidity risk management program) to June 1, 2019, for larger fund groups, and December 1, 2019, for smaller fund groups. All other rule elements and related reporting items will go into effect as originally scheduled: December 1, 2018, for larger fund groups, and June 1, 2019, for smaller fund groups.

On the same date, the SEC staff released responses to a second set of frequently asked questions (FAQs) on the liquidity rule relating primarily to the liquidity classification requirements. More specifically, these FAQs address, among other items, the use of the asset class classification method; permissible practices with respect to the “reasonably anticipated trading size” requirement and price impact standard; classification of investments in other pooled investment vehicles (e.g., mutual funds and ETFs); compliance monitoring under the liquidity rule; timing and frequency of investment classifications; reporting events to fund boards and the SEC; and how ETFs that are not so-called “In-Kind ETFs” may consider their in-kind redemption activity in connection with their investment classification and highly liquid investment minimum obligations.

Client Alert: SEC Reiterates Cybersecurity Guidance and Provides Color on Disclosure Implications

On February 20, the SEC published Commission Statement and Guidance on Public Company Cybersecurity Disclosures (the “Release”), which states the Commission’s interpretive views on cybersecurity matters in public company disclosures. The Release reiterates earlier SEC staff guidance on specific disclosure areas. The Release also provides new guidance on how public operating companies’ disclosure controls and procedures and policies on insider trading and Regulation FD/selective disclosure should address cybersecurity risks and incidents. It reflects the Commission’s increasing attention to cybersecurity, and reinforces the necessity for public companies to have in place appropriate policies, controls and procedures for cybersecurity issues and their disclosure. Companies that have not yet filed their annual reports on Form 10-K may wish to consider the guidance in the Release during preparation of their Form 10-K. For more information, read the client alert issued by Goodwin’s Public Companies practice. 

Enforcement & Litigation

Client Alert: U.S. Supreme Court Restricts Reach of Dodd-Frank Whistleblower Protections

The Supreme Court has unanimously decided, in Digital Realty Trust, Inc. v. Somers, No. 16-1276, that the whistleblower protections of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 are only available to employees who bring information concerning violations of the securities law to the SEC, and are not available to employees who only report corporate wrongdoing internally. Following this ruling, employees who report complaints internally, as opposed to the SEC, are excluded from Dodd-Frank’s anti-retaliation protections, which may incentivize employees to forego internal reporting and instead bring information concerning violations of the securities law directly to the SEC. For more information, please read the client alert issued by Goodwin’s Labor + Employment, Securities Litigation and Appellate Litigation groups. 

Client Alert: Federal District Court Dismisses Mutual Fund Excessive Fee Lawsuit

On February 14, the U.S. District Court for the Southern District of New York in Manhattan issued a decision dismissing a complaint brought under Section 36(b) of the Investment Company Act of 1940, as amended, that alleged that an investment adviser had violated its fiduciary duties by charging excessive advisory fees to a mutual fund. The decision is the first since 2011 in which a court has granted a motion to dismiss a Section 36(b) complaint alleging excessive mutual fund fees. More than 20 other mutual fund excessive fee complaints have been filed since the Supreme Court decided Jones v. Harris, 559 U.S. 335 (2010), and almost all have proceeded to discovery rather than being dismissed at the pleadings stage. For more information, please read the client alert issued by Goodwin’s Financial Industry group.

Northern District of Illinois Decertifies TCPA Class Action

On February 13, the U.S. District Court for the Northern District of Illinois decertified a Telephone Consumer Protection Act (TCPA) text-message class in light of new evidence of consent obtained during the class-member identification process. Johnson v. Yahoo! Inc., No. 1:14-cv-02028, is instructive for TCPA defendants in several key respects because it shows the importance of considering whether relevant evidence might be in the hands of third parties and the individualized nature of sifting through the actions of users and subscribers. Although Johnson also teaches that an order granting certification is not necessarily the final word, litigants should heed the court’s warnings to identify substantive and particular evidence of individualized issues early on in a suit. View the LenderLaw Watch blog post

Student Loan Debt Relief Company Banned From Doing Business in Kansas

On February 6, a Kansas state court entered a default judgment against a Florida student debt relief company banning it from doing business in Kansas and ordering it to pay over $39,000 back to one consumer. Kansas Attorney General Derek Schmidt (Kansas AG) had accused the company of violating the Kansas Consumer Protection Act, K.S.A. 50-627, by offering consumers “loan consolidation preparation services” for a fee even though such services are available free of charge from the United States Department of Education, and for allegedly making misrepresentations on its website. View the Enforcement Watch blog post.  

Goodwin News

5K Good Run in Conjunction With 2018 ICI Mutual Funds & Investment Management Conference – March 19

Goodwin’s Investment Management practice is hosting its 10th Annual Good Run in conjunction with ICI’s 2018 Mutual Funds & Investment Management Conference. In recognition of the participants, Goodwin will make a donation to Expect Miracles, a leading advocate in the fight against cancer within the financial services industry.

This week’s Roundup contributors: Alex Callen, Christina Hennecken, Bill McCurdy, and Andrew Zutz.