Regulatory Developments
Federal Banking Agencies Propose 9% Leverage Ratio for Basel III Relief
On November 20, the Federal Reserve, FDIC, and Office of the Comptroller of the Currency (OCC) (collectively, the Agencies) invited public comment on a notice of proposed rulemaking (Rule) that would exempt community banks with a leverage capital ratio of at least 9% from the complex Basel III capital requirements and deem them to be well capitalized for purposes of the Agencies’ prompt corrective action framework. The Rule is mandated by Section 201 of S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, which directed agencies to set a community bank leverage ratio between 8% and 10%.
As previously reported in the Roundup in November 2017 and March 2018, Section 201 of S. 2155 requires the Agencies to promulgate rules exempting institutions with less than $10 billion in total consolidated assets from the Basel III capital and liquidity requirements and deeming such institutions to satisfy the requirements to be “well capitalized” under Section 38 of the Federal Deposit Insurance Act if they comply with a newly established community bank leverage ratio of between 8% and 10%. The Rule would grant such relief to depository institutions and depository institution holding companies that (a) have less than $10 billion in total consolidated assets, (b) have off-balance sheet exposures, trading assets and liabilities, mortgage serving assets, and temporary difference deferred tax assets below the limitations enumerated in the Rule, (c) have a community bank leverage ratio (i.e., ratio of tangible equity capital divided by average total consolidated assets) of greater than 9%, and (d) are not advanced approaches banking organizations. A qualifying community banking organization would be able to opt into or out of the community bank leverage ratio framework by indicating its election in its periodic reports to the Agencies, as provided in the Rule. The Rule also addresses the treatment of community banking organizations that fall below the community bank leverage ratio requirement and related calculations. Comments on the Rule must be received no later than 60 days after its publication in the Federal Register.
On November 20, the FDIC announced that the Deposit Insurance Fund (DIF) reserve ratio rose from 1.33% at the end of the second quarter of 2018 to 1.36% at the end of the third quarter of 2018, passing the statutory requirement of 1.35% of insured deposits. As a result, banks at or above $10 billion in consolidated assets will no longer be required to pay quarterly “surcharge assessments” after the December payment of the third quarter 2018 assessment, even if the reserve ratio declines to below 1.35% in the future. Based on an FDIC rule to implement Section 334 of the Dodd-Frank Act, such banks were required to pay a quarterly 1.125 basis point “surcharge assessment” beginning in the third quarter of 2016 until the fund reached 1.35%. For banks below $10 billion in consolidated assets, the recapitalization of the DIF and the increase of the reserve ratio above 1.35% will lower future assessments payable. The FDIC will allocate assessment credits to these banks for the amounts they contributed to increase the reserve ratio from 1.15% to 1.35%. When the reserve ratio increases to 1.38%, these banks will be able to use such credits to partially offset their assessments.
CFPB Publishes Semiannual Regulatory Agenda
On November 16, the CFPB published its Semiannual Regulatory Agenda, as part of the Fall 2018 Unified Agenda of Federal Regulatory and Deregulatory Actions, as coordinated by the Office of Management and Budget under Executive Order 12866. This agenda anticipates having various regulatory measures considered from October 1, 2018, to September 30, 2019. The agenda notes the work done by the CFPB to implement the Economic Growth, Regulatory Relief, and Consumer Protection Act, such as implementing an interim final rule that adjusts certain model forms under the Fair Credit Reporting Act, and a procedural rule providing clarifications to the Home Mortgage Disclosure Act.
FHFA Announces Maximum Conforming Loan Limits for 2019
On November 27, the Federal Housing Finance Agency announced the maximum conforming loan limits for mortgages to be acquired by Fannie Mae and Freddie Mac in 2019. In most of the U.S., the 2019 maximum conforming loan limit for one-unit properties will be $484,350, an increase from $453,100 in 2018. In most high-cost areas, the new ceiling loan limit for one-unit properties in 2019 will be $726,525, or 150% of $484,350.
Agencies Propose Raising Residential Real Estate Appraisal Threshold to $400,000
On November 20, the Federal Reserve, FDIC, and OCC jointly released a notice of proposed rulemaking, which would amend the agencies’ regulations to raise the threshold for required appraisals for certain residential real estate transactions from $250,000 to $400,000. With respect to transactions that fall below the threshold, regulated financial institutions would need to obtain evaluations of the real-property collateral that are consistent with safe and sound banking practices. Such evaluations can be less detailed and do not need to be prepared by a licensed or certified appraiser. The proposed rulemaking also incorporates an exemption from appraisal requirements for rural residential transactions. Comments must be received within 60 days of publication of the notice in the Federal Register.
On November 21, the Federal Reserve and the CFPB announced the dollar thresholds in Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing) that will apply for determining exempt consumer credit and lease transactions in 2019. Based on the annual percentage increase in the CPI-W as of June 1, 2018, the protections of the Truth in Lending Act and the Consumer Leasing Act generally will apply to consumer credit transactions and consumer leases of $57,200 or less in 2019. However, private education loans and loans secured by real property (such as mortgages) are subject to the Truth in Lending Act regardless of the amount of the loan.
Federal Reserve and CFPB Propose Amendments to Regulation CC
On November 21, the Federal Reserve and the CFPB jointly proposed amendments to Regulation CC that would:
- implement a statutory requirement to adjust for inflation the amount of funds depository institutions must make available to their customers;
- implement in Regulation CC, EFA Act amendments made by the Economic Growth, Regulatory Relief, and Consumer Protection Act, which include extending coverage of the EFA Act to American Samoa, the Commonwealth of the Northern Mariana Islands, and Guam; and
- reopen for public comment certain funds-availability amendments in subpart B of Regulation CC that the Federal Reserve published in 2011 regarding funds availability schedule provisions and associated definitions. In taking this step, the agencies have not made a decision on whether to make any aspects of the 2011 proposal final rule.
The agencies are accepting comments on all aspects of the proposed amendments for 60 days following publication in the Federal Register.
Federal Reserve Amends Regulation J to Simplify and Conform With Regulation CC
On November 15, the Federal Reserve approved amendments to Regulation J, which governs the collection of checks and similar items by Federal Reserve Banks, as well as fund transfers through FedWire. There are three major categories of change to Regulation J under this amendment:
- Clarify that Subpart A of Regulation J does not allow for Federal Reserve Banks to handle electronically created items (ECIs);
- Modify the rights and obligations of sending banks, paying banks, and Federal Reserve Banks to better reflect an environment almost entirely consisting of electronic check collection and returns; and
- Expressly state that terms used in financial messaging standards (e.g., ISO 20022) do not confer legal status or responsibilities under Regulation J.
These amendments will become effective on January 1, 2019.
FDIC Requests Information on Small-Dollar Lending
On November 14, the FDIC issued a Request for Information (RFI) seeking public comment on small-dollar lending issues. Recognizing the role that small-dollar credit products can play in the financial stability of U.S. households, the FDIC is endeavoring to learn more about the supply of and demand for those products and how the FDIC could encourage and enable banks to provide them to consumers. The FDIC’s suggested topics for commenters include:
- Consumer demand for small-dollar lending;
- Benefits and risks of small-dollar lending;
- Legal, regulatory, supervisory, operational, economic and marketplace challenges associated with small-dollar lending;
- Features of small-dollar credit products;
- The potential for technological innovation in small-dollar lending; and
- Alternative products and services that could complement or replace small-dollar credit products.
The FDIC will accept comments from all interested members of the public until January 22, 2019.
FFIEC Releases Cybersecurity Resource Guide
The Federal Financial Institutions Examination Council (FFIEC) has released a Cybersecurity Resource Guide for financial institutions. The Cybersecurity Resource Guide identifies organizations and entities that provide services designed to promote financial institution resilience. Several different types of resources are listed in the Cybersecurity Resource Guide, ranging from written guidance to interactive assessments. The list is organized by the type of cybersecurity service offered: assessments, exercises, information sharing and response reporting. The Cybersecurity Resource Guide indicates whether the resources listed are free, or require a fee. Although the FFIEC does not endorse any organization listed in the Cybersecurity Resource Guide, this guide can assist financial institutions in designing, evaluating and improving cybersecurity practices, or reporting a cybersecurity event.
FASB Finalizes CECL Extension for Non-Public Companies
On November 15, the Financial Accounting Standards Board issued an accounting standards update that allows non-public business entities to implement the current expected credit loss (CECL) standard on January 1, 2022, instead of December 31, 2021. The one-day change effectively gives the qualifying entities an additional year to implement CECL.
SEC Updates Investment Company Reporting Modernization Reform FAQs
On November 14, the staff of the SEC’s Division of Investment Management updated its Investment Company Reporting Modernization Reform FAQs. A marked copy of the FAQs that shows the revisions to the previous iteration of the FAQs from April 27, 2018, is available here. The updated FAQs do not revise any of the existing FAQs from April 2018 but provide for nine additional responses to frequently asked questions. These additional responses address, among other things, the timing requirement for a fund to respond to the items in Form N-CEN related to fund liquidity risk management programs, whether a fund may report monthly total returns on Form N-PORT without deducting sales loads and redemption fees charged to all accounts, whether a fund must continue to file reports on Form N-PORT and a registrant’s obligations with respect to filing reports on Form N-CEN if the registrant or series thereof has liquidated, merged or is otherwise terminated, and whether a fund that has an effective registration statement under the 1933 Act, but whose shares have not yet been publicly offered, is required to file Form N-PORT.
Client Alert: NYSE Updates Smaller Reporting Company Exemption
The New York Stock Exchange (NYSE) has filed an amendment that will change the threshold for exemptions from NYSE compensation committee requirements for smaller reporting companies (SRCs) under Section 303A.00 of the NYSE Listed Company Manual (NYSE Manual). The NYSE amendment will conform eligibility for these exemptions to the revised definition adopted by the Securities and Exchange Commission (SEC) earlier this year. The SEC published the NYSE amendments on November 6, 2018, and the amendments became effective on November 26, 2018. For more information, read the client alert issued by Goodwin’s Public Companies practice.
Client Alert: U.S. Government to Define “Emerging Technologies,” Impacting CFIUS and Export Controls
On November 19, the Department of Commerce published an Advanced Notice of Proposed Rulemaking (ANPR) seeking public comment on how to identify certain “emerging technologies” that are essential to U.S. national security. The ANPR identifies 14 technology categories under consideration, including biotechnology, artificial intelligence, data analytics, robotics, and others. The ANPR does not yet change the current law; however, after comments are received and the rule takes effect, these “emerging technologies” will be treated as “critical technologies” under the Committee on Foreign Investment in the United States’ (CFIUS) new Pilot Program, subjecting some foreign investments in certain U.S. businesses that deal in “emerging technologies” to a 45-day pre-investment, mandatory CFIUS declaration requirement and review process. For more information, read the client alert issued by Goodwin’s Global Trade practice.
Enforcement & Litigation
SEC Reaches First Settlement in Connection With an Unregistered Crypto Exchange
On November 8, the SEC announced that it settled charges against Zachary Coburn, the founder of blockchain token trading platform EtherDelta, over operating an unregistered securities exchange. The SEC’s cease-and-desist order to Coburn describes EtherDelta’s website as a user-friendly interface resembling online securities trading platforms. The order states that over 3.6 million trades in digital assets were placed on EtherDelta between its launch on July 12, 2017, and December 15, 2017, when Coburn stopped collecting transaction fees. Further, 92% of those trades occurred after the SEC released the DAO Report on July 25, 2017. As noted in the order, the SEC advised in the DAO Report that platforms trading in digital assets constituting securities may be “exchanges” under federal securities laws requiring either registration with the SEC or exemption from registration. The SEC determined that during the relevant period, EtherDelta met the criteria of an “exchange” under federal securities laws, but was not registered with the SEC or operating pursuant to a registration exemption. In turn, Coburn’s actions in founding EtherDelta, writing and deploying the site’s smart contract, and overseeing the site’s operations contributed to violations of the federal securities laws. View the Digital Currency & Blockchain Perspectives blog post.
SEC Issues Guidance Regarding Application of Securities Laws to Blockchain Technologies
On November 16, the SEC’s Divisions of Corporation Finance, Investment Management, and Trading and Markets issued a Statement on Digital Asset Securities Issuance and Trading, summarizing recent SEC enforcement actions “involving the intersection of long-standing applications of our federal securities laws and new technologies.” While underscoring the SEC’s ongoing support for technological innovation, the statement also emphasized that market participants must “still adhere to our well-established and well-functioning federal securities law framework when dealing with technological innovations, regardless of whether the securities are issued in certificated form or using new technologies, such as blockchain.” The statement described five enforcement actions as illustrative of three categories of recurring compliance issues within the SEC’s purview: (1) ICOs and other initial offers and sales of digital asset securities; (2) investment vehicles for investment into digital asset securities, and those who advise others about such investments; and (3) trading of digital asset securities on secondary markets. View the Digital Currency & Blockchain Perspectives blog post.
Ninth Circuit’s Mandate on ATDS Definition Stayed Pending Petition for Writ of Certiorari
On November 7, in the closely followed case, Marks v. Crunch San Diego, LLC, No. 14-56834 (9th Cir.), the Ninth Circuit granted a stay of its ruling on the Telephone Consumer Protection Act’s (TCPA) definition of an “automatic telephone dialing system” (ATDS) while appellee Crunch San Diego, LLC files a petition for writ of certiorari of that ruling to the Supreme Court. View the LenderLaw Watch blog post.
On November 2, the United States Attorney for the Southern District of New York announced a settlement with a New York based credit union, resolving allegations that the credit union had illegally repossessed cars owned by servicemembers on active duty in violation of the Servicemembers Civil Relief Act, 50 U.S.C. § 3952 (“SCRA”). Under the SCRA, the credit union was prohibited from such repossessions without a court order. According to the settlement, the U.S. Attorney’s investigation revealed that the credit union had committed multiple SCRA violations and that prior to 2014 it did not have any written policies or procedures with respect to the SCRA’s protections against certain auto repossessions. View the Enforcement Watch blog post.
Enforcement activity by the Department of Justice (DOJ) and the Federal Trade Commission (FTC) makes clear that enforcement of Section 8 of the Clayton Act, the prohibition against interlocks between competitors, is alive and well. Board members and officers must be on alert to avoid any instance of serving on the boards or executive teams of competitors. Failure to follow Section 8’s prohibitions can lead to costly government investigations and management distraction, not to mention potential legal exposure. This alert provides a refresher on Section 8’s elements, as well as best practices to ensure compliance. For more information, read the client alert issued by Goodwin’s Antitrust & Competition practice.
Goodwin News
2018 Banking Symposium – November 29
On November 29, Goodwin will host its 7th Annual Banking Symposium, a forum for CEOs and senior management to discuss emerging issues in the financial industry. This year’s symposium, Banking in a Brave New World, will feature panel discussions about the bold ways that banks are responding to the changing banking landscape, as well as political and regulatory uncertainty. This year’s keynote speaker is William Kristol, founder and editor-at-large, The Weekly Standard, and political analyst, ABC News. For more information, visit the event website.
PLI’s Nuts and Bolts of Corporate Bankruptcy 2018 – December 17
Businesses in financial distress are not an unusual sight these days, and as a result, it is essential for attorneys of all levels and in all practice areas to become familiar with the fundamental tenets of bankruptcy law. Whether you are just starting out in your career, thinking about broadening your practice area to include this field, or want to be able to spot the issues when advising your clients, this program will provide you with an essential foundation. Hear from a premier faculty of experts who will arm you with the practice tips and basic concepts every bankruptcy attorney needs. Learn how to guide your clients through this complicated process, and find out what questions to ask your clients. Learn when it is time for a distressed company to consider bankruptcy and discover when reorganization is an option. This course is perfect for attorneys who want to learn or re-learn how to counsel their clients on bankruptcy issues in the most effective manner. Partner Michael Goldstein is speaking at the event. Click here for event details.
This week’s Roundup contributors: Alex Callen, Christina Hennecken