Weekly RoundUp July 11, 2018

Financial Services Weekly News

Editor's Note

Third Circuit Affirms AXA Section 36(b) Decision.  On July 10, the U.S. Court of Appeals for the Third Circuit affirmed the district court’s decision in favor of the investment adviser in the Sivolella v. AXA Equitable Section 36(b) litigation (AXA 36(b) case). The Third Circuit does not make any new law about Section 36(b) or the Gartenberg factors. It merely states that the plaintiffs failed to show that the district court’s factual and credibility findings were wrong (or “clearly erroneous”).

The AXA 36(b) case was tried and the district court issued a decision setting out its detailed factual and credibility findings. The district court found that the plaintiffs had not met their burden of proving a single one of the Gartenberg  factors. An appellate court reviews factual findings and credibility findings under a very deferential standard under which it will not disturb those findings unless the appellate court determines that those findings are “clearly erroneous.” (In contrast, an appellate court reviews legal conclusions by a district court without any deference to the district court’s legal conclusions.) In this case, the Third Circuit ruled that the plaintiffs did not show that District Court Judge Sheridan’s factual findings and credibility findings were clearly erroneous, so it affirmed the district court’s decision. The decision is non-precedential, meaning it does not bind lower courts. (Appellate courts often do this when a decision raises no novel issues of law and is decided solely on the facts.)

In other recent developments, the Securities and Exchange Commission (SEC) (1) proposed a new rule that would allow exchange-traded funds (ETFs) to operate without first seeking an exemptive order, (2) adopted amendments to public disclosure requirements relating to the liquidity risk management rule, (3) adopted amendments to its Inline XBRL filing requirements, and (4) adopted amendments expanding smaller reporting company eligibility; the Federal Deposit Insurance Corporation (FDIC) and the Board of Governors of the Federal Reserve System (Federal Reserve) are seeking public comment on revised resolution plan guidance; and several federal banking agencies issued a series of statements to provide guidance to regulated institutions on how to comply with regulations and reporting obligations affected by the Economic Growth, Regulatory Relief, and Consumer Protection Act. These and other developments are discussed below.

Editor's Note

Regulatory Developments

SEC Proposes New Approval Process for ETFs

On June 28, the SEC voted unanimously to propose a new rule 6c-11 and form amendments (the Proposal) intended to create a consistent, transparent and efficient regulatory framework for ETFs and to facilitate greater competition and innovation among ETFs. The Proposal would rescind certain existing exemptive orders granted to ETFs and their sponsors and permit ETFs that satisfy certain conditions to operate within the scope of the Investment Company Act of 1940 (Act) without the expense and delay of obtaining an exemptive order. The new rule would be available to ETFs, defined as registered open-end management investment companies that: (1) issue (and redeem) creation units to (and from) authorized participants in exchange for a basket and a cash balancing amount (if any); and (2) issue shares that are listed on a national securities exchange and traded at market-determined prices. For those ETFs that meet the definition, the Proposal would provide them with exemptions from provisions of the Act that are necessary to operate. These exemptions are generally consistent with the existing relief the SEC has given to ETFs and their sponsors. The Proposal would also amend Form N-CEN and update prospectus disclosure requirements to improve the usefulness of ETF prospectuses to investors who purchase and sell shares in the secondary market. The SEC invites public comment on the Proposal, which will remain open until 60 days after publication in the Federal Register.

SEC Adopts Targeted Changes to Liquidity Risk Management Disclosure

On June 28, the SEC adopted amendments (the Amendments) to public disclosure requirements relating to the liquidity risk management rule applicable to open-end investment companies (funds). The liquidity rule would have required funds to publicly disclose the aggregate liquidity classification profile of their portfolios on Form N-PORT on a monthly basis. The Amendments eliminate this requirement, and replace it with a new Form N-1A requirement to include a narrative-style discussion in a fund’s annual or semi-annual shareholder report about the “operation and effectiveness” of the fund’s liquidity risk management program during the period covered by the report. The Amendments also permit funds to report on Form N-PORT a single investment under multiple liquidity classification categories in three circumstances: (1) if a fund has multiple sub-advisers with differing liquidity views; (2) if portions of the position have differing liquidity features that justify treating the portions separately; or (3) if the fund chooses to classify the position through evaluation of how long it would take to liquidate the entire position (rather than basing it on the sizes it would reasonably anticipate trading). The Amendments also add a new item to Form N-PORT, requiring a fund to report its cash holdings and certain cash equivalents. Larger fund complexes (i.e., $1 billion or more of net assets) must comply with the Form N-PORT requirements by June 1, 2019 (the first N-PORT filing date would be July 30, 2019), and must comply with the Form N-1A requirements by December 1, 2019.

SEC Adopts Inline XBRL Filing Requirements for Open-End Investment Management Companies

On June 28, the SEC voted to adopt amendments to its eXtensible Business Reporting Language (XBRL) requirements for, among other companies, open-end investment management companies, including ETFs (collectively, “funds”), that are subject to risk/return summary XBRL requirements. The amendments were substantially adopted as initially proposed in March 2017, with only slight changes to the compliance date phase-in period for funds. A fund subject to such XBRL reporting currently is required to submit to the SEC, and post on its website, an Interactive Data File, or the machine-readable computer code in XBRL format, through an exhibit to its registration statement or form of prospectus pursuant to paragraph (c) or (e) of Rule 497 under the Securities Act of 1933 within 15 business days of the effective date of such filing. The amendments require the use of the Inline XBRL format, which is both human and machine readable, and allows funds to embed XBRL data directly into an HTML filing, thus eliminating the need for a separate XBRL exhibit filing. The amendments also eliminate, among other things, the requirement to post the Interactive Data File to the fund’s website. The amendments require a fund to submit the Interactive Data File concurrently with the applicable filing on or before the date that such filing becomes effective. Accordingly, the amendments also eliminate the current 15-business-day filing period during which a fund must submit the related Interactive Data File. A fund must comply with the amendments based on the following schedule: any applicable filing that becomes effective on or after (1) two years after the effective date of the amendments for a fund in a large fund group (i.e., funds that, together with other investment companies in the same “group of related investment companies,” have net assets of $1 billion or more as of the end of their most recent fiscal year) and (2) three years after the effective date of the amendments for all other funds. The final rule will become effective 30 days after publication in the Federal Register.

Client Alert: SEC Expands Smaller Reporting Company Eligibility

The SEC has adopted amendments that will increase the number of companies eligible to take advantage of the SEC’s reduced, or scaled, disclosure rules as a “smaller reporting company” or “SRC.” The amendments increase the maximum public float for SRCs from less than $75 million to less than $250 million as of the last business day of the company’s most recently completed second fiscal quarter. As an alternative to the public float test, the amended SRC definition will also expand SRC eligibility to companies that have less than $100 million in annual revenues if they have either no public float or have a public float that is less than $700 million. For more information, read the client alert issued by Goodwin’s Public Companies practice.

FDIC and Federal Reserve Seek Comment on Proposed 2019 Resolution Plan Guidance

On June 29, the FDIC and the Federal Reserve jointly announced that they are seeking public comment on revised resolution plan guidance for the eight largest, most complex U.S. banks. Resolution plans, or living wills, present the firm’s strategy for rapid, orderly resolution under bankruptcy in the event of material financial distress or failure of the firm. The proposed guidance would apply beginning with the July 1, 2019, resolution plan submissions of impacted firms, and is largely similar to the guidance issued by the agencies in April 2016. Updates to the guidance include addressing the agencies’ expectations regarding the impact of resolution on (1) derivatives and trading activities, with respect to firms’ capabilities to book, monitor and identify derivatives exposures (including risk-transfer exposures between affiliates); and (2) payment, clearing and settlement services, directing firms to take account of the firm’s role as both a user and provider of such services. Comments on the proposal will be accepted for 60 days following the proposal’s publication in the Federal Register.

Federal Banking Agencies Begin to Implement Provisions of Regulatory Reform Law

Last week, the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency (OCC) (together, the Banking Agencies) and the Consumer Financial Protection Bureau (CFPB) issued a series of statements to provide guidance to regulated institutions on how to comply with regulations and reporting obligations affected by the Economic Growth, Regulatory Relief, and Consumer Protection Act, the regulatory reform law enacted in May 2018 better known as S. 2155,  during the interim period between the law’s passage and the date on which the regulations impacted by S. 2155 are amended to incorporate its changes.

On July 6, the Banking Agencies issued a joint statement clarifying the obligations of financial institutions and their holding companies in the following areas:

  • Stress Testing Relief for Banks Under $100 Million in Assets. To avoid unnecessary burdens and maintain consistency between bank holding companies (which were immediately exempted from the company-run stress testing requirements of Section 165(i)(2) of the Dodd-Frank Act) and depository institutions (which were not immediately exempted), the Banking Agencies are extending until November 25, 2019, the company-run stress testing deadline for depository institutions with average total consolidated assets of less than $100 billion.
  • Volcker Rule and Resolution Plans. The Banking Agencies will not enforce their regulations implementing Volcker Rule or resolution planning requirements in a manner inconsistent with S. 2155.
  • High Volatility Commercial Real Estate (HVCRE) Exposures. S. 2155 provided for a 150% risk weight only for HVCRE loans that are defined as an “HVCRE ADC Loan.” The Banking Agencies confirmed that, until reporting instructions are revised, a depository institution reporting HVCRE exposures on Schedule RC-R, Part II of the “call report” (or holding company reporting on Schedule HC-R, Part II of the FR Y-9C, consistent with its subsidiary depository institutions) may: (1) reasonably estimate and report only HVCRE ADC Loans and refine estimates in good faith without needing to amend prior reports; or (2) continue reporting and risk-weighting HVCRE exposures consistent with the current reporting instructions until the Banking Agencies take further action.
  • Examination Cycle. The Banking Agencies intend to engage in rulemaking to implement the increase in the total asset threshold (from $1 billion to $3 billion) for well-capitalized insured depository institutions’ eligibility for an 18-month examination cycle.
  • Municipal Bond Obligations as High-Quality Liquid Assets (HQLAs). S. 2155 provided for municipal obligations satisfying certain criteria to be treated as HQLAs under the Banking Agencies’ liquidity coverage ratio regulations and others. The Banking Agencies will not take action to require an institution subject to their liquidity regulations to exclude from the definition of HQLA those municipal obligations believed to meet the criteria for inclusion until rulemaking addressing the change is implemented.
  • Appraisals for Qualifying Rural Transactions. The Banking Agencies are evaluating whether any action is required to implement S. 2155’s provision for an exemption from appraisal requirements for certain transactions of less than $400,000 involving real property (or interests therein) located in rural areas.

On July 6, the Federal Reserve issued a separate statement, which largely overlaps with the Banking Agencies’ joint statement, but further provides:

  • Assessments. The Federal Reserve will collect assessments from all bank holding companies and savings and loan holding companies with total consolidated assets of $50 billion or more assessed for the year 2017, but will not collect from those with total consolidated assets of less than $100 billion for the year 2018 and after.
  • Enhanced Prudential Standards. The Federal Reserve will not require holding companies with less than $100 billion in total consolidated assets to comply with the enhanced prudential standards in Regulation YY, the liquidity coverage ratio requirements in Regulation WW, the capital planning requirements in Regulation Y, and other reporting, disclosure, and recordkeeping requirements.

On July 5, the CFPB, the FDIC and the OCC each issued statements acknowledging the partial exemptions granted under S. 2155 for certain Home Mortgage Disclosure Act (HMDA) data reporting requirements for banks and credit unions originating fewer than 500 closed-end mortgage loans or 500 open-end lines of credit, as applicable, in each of the two preceding calendar years. The agencies noted that:

  • The new law will not affect the format of the loan/application registers for institutions filing HMDA data collected in 2018.
  • Institutions that no longer have to report information for certain data fields as a result of S. 2155 should enter an exemption code for the specified field.
  • More information will be provided in a revised filing instructions guide, which the CFPB expects to issue later this summer.
  • Institutions will not require data resubmission for HMDA data collected in 2018 and reported in 2019 unless data errors are material.
  • The agencies do not intend to assess penalties for errors in 2018 HMDA data, and will credit good-faith compliance efforts in their diagnostic examinations of 2018 HMDA data.

Enforcement & Litigation

Federal Judge Rules CFPB Structure Unconstitutional

On June 21, a judge in the Southern District of New York ruled that the CFPB’s single director structure is unconstitutional. See CFPB v. RD Legal Funding LLC (2018 WL 3094916 (S.D.N.Y. June 21, 2018)). In doing so, the court adopted two dissenting opinions from PHH Corp. v. CFPB (881 F.3d 75 (D.C. Cir. 2016)), a D.C. Circuit opinion upholding the constitutionality of the CFPB’s structure, which we reported on here. View the LenderLaw Watch blog post.

President Repeals CFPB’s Indirect Auto Lending Guidance

One month after the U.S. Senate and U.S. House of Representatives voted to repeal the CFPB’s indirect auto lending guidance under a Congressional Review Act challenge, President Trump signed the resolution to make the repeal official on May 21, 2018. The guidance, which Congress and the president have now signaled to be an overreach of the CFPB’s jurisdiction, provided that indirect auto lenders could be held liable under the Equal Credit Opportunity Act and Regulation B. Opponents of the guidance argued it was an end run around the Dodd-Frank Act’s prohibition restricting the CFPB from regulating auto lenders. View the LenderLaw Watch blog post.

Goodwin News

Breakfast and Blockchain: A Discussion on ICOs, Global Crypto Innovation and Regulation – July 13

Despite increased regulatory activity, blockchain application development and the use of digital token offerings to fund blockchain and digital currency-related projects continues to be on the rise. During just the first half of 2018, 765 initial coin offerings (ICOs) have raised $4.8 billion, nearly eclipsing the total number of offerings and money raised in 2017. We invite you to join us in London for an interactive discussion on the current state of the blockchain and crypto ecosystem. Our panel will include Ryan Jesperson, President of The Tezos Foundation, a leading platform for smart contracts and decentralized applications; David McHenry, Head of Global Treasury and Payments Advisory - EMEA at Silicon Valley Bank; Stan Stalnaker, Founder & Chief Strategy Officer of Hub Culture, a global social network service operating Ven digital currency, and other related, blockchain-based platforms; and Grant Fondo, Chair of Goodwin’s global Digital Currency and Blockchain Technology practice and a former Assistant U.S. Attorney. Discussion topics will include blockchain technology and its applications; current international landscape for cryptocurrencies and ICOs; recent U.S. and U.K. regulatory developments; and international “safe harbor” jurisdictions.

ACI’s 30th National Forum on Consumer Finance Class Actions and Government Enforcement – July 16-17

ACI’s 30th National Forum on Consumer Finance Class Actions and Government Enforcement gathers industry decision-makers, counsel and executives to discuss the latest developments and expert strategies for navigating class actions, litigation and government enforcement activity in the consumer financial services arena. Sabrina Rose-Smith, partner in Goodwin’s Financial Industry and Consumer Financial Services Litigation practices, will serve as co-chair of the forum. Brooks Brown, partner in Goodwin’s Financial Industry group and co-chair of its Banking and Consumer Financial Services practice, will be a speaker on the panel, “The Telephone Consumer Protection (TCPA) Litigation Bubble: Evolving Technology, Record-Breaking Settlements and Uncertain Legal Precedent.” For more information, please visit the event website.

This week’s Roundup contributors:  Geoff Anghelone, Alex Callen, Dennis Craig, Will Lane, Elizabeth Organ, and Andrew Zutz.