Weekly RoundUp August 15, 2018

Financial Services Weekly News

Editor's Note

Hollow Victory.  At the close of its 2013 fiscal year end, the Total Return Fund, sponsored by Pacific Investment Management Company LLC (PIMCO), held over $230 billion in assets under management and, at one point in time, was the largest mutual fund in the world, according to a complaint filed on behalf of Robert Kenny, an investor in the fund. But as the increase in assets in the fund led to larger and larger amounts of compensation being paid to PIMCO and an affiliated distributor (the Defendants), the fund’s performance suffered. According to the complaint, the Total Return Fund’s poor performance led to turmoil and strife among management at PIMCO and the eventual resignation of key executives, including Bill Gross and Mohamed El-Erian. News of their departures compounded the poor results of the fund, leading to billions of dollars in redemptions from the fund. Much ado was made about the compensation paid to ex-co-CIOs and co-CEOs Gross and El-Erian. Notwithstanding the poor performance of the fund, the complaint notes that Gross and El-Erian received bonus compensation to the tune of $290 million and $230 million, respectively.

On December 31, 2014, investor Robert Kenny initiated a lawsuit under Section 36(b) of the Investment Company Act of 1940 alleging that the Defendants breached their fiduciary duties with respect to their receipt of investment advisory fees, supervisory and administrative fees, and distribution and servicing fees because the fees were so disproportionately large that they bore no reasonable relationship to the services rendered and could not have been the product of arm’s-length negotiations. The complaint also notes that, among other things, despite the large size of the fund, economies of scale were not passed to the fund and its shareholders. As the litigation continued to advance, a trial date was set for October 9, 2018.

On August 8, the U.S. District Court for the Western District of Washington in Seattle entered a stipulation of dismissal with prejudice, thereby concluding the matter in its entirety. In agreeing to the stipulation, the parties requested that key documents remain under seal. In a curious turn of events, on August 9, Judge Ricardo Martinez, the judge presiding over the matter, issued an order requiring the parties to file a response to show cause. The parties had until August 16 to produce satisfactory grounds for keeping the documents under seal. PIMCO reportedly has settled the lawsuit without disclosing the terms.

In other developments this past week, the Consumer Financial Protection Bureau (CFPB) updated Regulation P to implement legislation amending the Gramm-Leach-Bliley Act, the Financial Crimes Enforcement Network (FinCEN) extended limited exceptions from the beneficial ownership rule for legal entity customers, the New York Department of Financial Services (NYDFS) issued a reminder of the approaching cybersecurity regulation compliance deadline, and the CFPB released its file format verification tool for Home Mortgage Disclosure Act filings.

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

Regulatory Developments

CFPB Updates Regulation P to Implement Legislation Amending Gramm-Leach-Bliley Act

On August 10, the CFPB finalized certain amendments to Regulation P that will allow financial institutions that meet certain criteria to be exempt from the requirement of sending annual privacy notices to their customers, which is otherwise generally required by the Gramm-Leach-Bliley Act (GLBA). Under the GLBA, when financial institutions share customers’ nonpublic personal information with unaffiliated third parties, customers must also be provided with the right to “opt out” of such sharing. In December 2015, the GLBA was amended to allow a financial institution to qualify for an exemption from having to send annual privacy notices if (1) such institution limits its data sharing so that the customer does not have an opt-out right and (2) the privacy notice has not changed from the one previously provided to the customer. The CFPB’s new rule amends Regulation P to implement these changes to the GLBA and establishes deadlines by which an institution must resume annual privacy notices if it ceases to qualify for the exemption.

FinCEN Extends Limited Exception From Beneficial Ownership Rule for the Rollover or Renewal of Certain Financial Products

On May 16, as discussed in the May 23 edition of the Roundup, FinCEN issued a 90-day limited exceptive relief effective through August 9, 2018, to covered financial institutions from the obligations of the Beneficial Ownership Rule for Legal Entity Customers (Beneficial Ownership Rule) for certificate of deposit or loan accounts that were established before the Beneficial Ownership Rule’s applicability date of May 11, 2018. FinCEN issued this 90-day limited exception in order to determine whether, and to what extent, a further exception would be appropriate for such products and services. On August 8, FinCEN further extended this limited exception for an additional 30 days effective through September 8, 2018, for the rollover or renewal of certificate of deposit or loan accounts that were established before May 11, 2018, to further consider the issue.

NYDFS Reminds Regulated Entities of Approaching Cybersecurity Regulation Compliance Deadline

On August 8, the NYDFS issued a press release reminding all regulated entities covered by the NYDFS cybersecurity regulation that the third transitional period for the cybersecurity regulation ends on September 4, 2018. Beginning on that date, banks, insurance companies, and other financial services institutions regulated by the NYDFS will be required to have:

  • commenced mandatory annual reporting to the board by the Chief Information Security Officer concerning critical aspects of the cybersecurity program
  • established an audit trail designed to reconstruct material financial transactions sufficient to support normal operations in the event of a breach
  • implemented policies and procedures to ensure the use of secure development practices for IT personnel that develop applications for the covered entity
  • implemented encryption to protect nonpublic information held or transmitted by the company
  • developed policies and procedures to ensure secure disposal of information that is no longer necessary for the business operations
  • implemented a monitoring system that includes risk-based monitoring of all persons who access or use any of the company’s information systems or who access or use the company’s nonpublic information

The NYDFS also reminded regulated entities that, under the cybersecurity regulation, they must evaluate the risk that any third-party service providers pose to the security of their systems and data and ensure that such systems and data are protected by March 1, 2019.

CFPB Releases File Format Verification Tool for HMDA Filings
On August 9, the CFPB released its file format verification tool for Home Mortgage Disclosure Act (HMDA) data collected in 2018 that will be submitted in 2019. The file format verification tool allows filers to test whether a file meets certain formatting requirements specified in the HMDA Filing Instructions Guide, specifically that the file is pipe-delimited; has the proper number of data fields; and has data fields formatted as integers, where necessary.

Goodwin News

MBA Regulatory Compliance Conference 2018 – September 16-18

The Mortgage Bankers Association brings together inside and outside counsel, compliance officers, company executives, government relations professionals, policy directors, and quality assurance professionals to discuss current topics impacting the mortgage industry’s regulatory environment for this three-day conference. Goodwin is a sponsor and Tony Alexis, partner in Goodwin’s Financial Industry practice and head of the Consumer Financial Services Enforcement practice, will be speaking on the “Applied Compliance: Trends in RESPA Section 8 Compliance” track. Sabrina Rose-Smith, partner in Goodwin’s Financial Industry and Consumer Financial Services Litigation practices, will be speaking on the “Emerging Compliance Risk: Navigating State UDAP Laws” track. For more information, visit the event website.

Fiduciary Investment Advisors 2018 Annual Conference – September 20-21

Goodwin partner Michael Isenman will be a panelist at the Fiduciary Investment Advisors (FIA) 2018 Annual Conference. Mike will be a speaker on the panel “401(k)/403(b) Mock Deposition: How to Protect Against & Prepare for Defined Contribution Litigation.” For more information, visit the event website.