On December 7, the Financial Industry Regulatory Authority (FINRA) released its second annual Report on Examination Findings, which highlights observations from recent FINRA examinations based on their potential significance, frequency and impact on investors and the markets. The report focused most heavily on suitability for retail customers, which includes reasonable-basis suitability, customer-specific suitability and quantitative suitability. FINRA observed a variety of suitability issues, including inadequate consideration of the retail customer’s financial situation, investment experience, risk tolerance, time horizon, investment objectives and liquidity needs. FINRA also observed registered representatives providing unsuitable recommendations for complex products, creating an overconcentration in illiquid securities, engaging in excessive trade volume and frequency and failing to take cumulative fees, sales charges or commissions into account when making a recommendation. Generally, effective suitability supervisory programs identify risks, develop policies and implement controls tailored to the features of the products offered and the customer base served. Examples of such effective supervisory programs include some which restricted or prohibited registered representatives from recommending various products to certain investors, some which required registered representatives to receive training on complex or high-risk products before they may recommend such products and some which created limits for trading volume, frequency and cost to prevent unsuitable trading practices.
Other highlighted observations from the report include fixed income mark-up disclosure, reasonable diligence for private placements and abuse of authority. Finally, the report briefly discussed the following additional observations: anti-money laundering, accuracy of net capital computations, liquidity, segregation of client assets, operations professional registration, customer confirmations, DBAs and communications with the public, best execution, TRACE reporting and market access controls.
On December 6, on a party line vote, the United States Senate confirmed Kathy L. Kraninger to serve as the Director of the Consumer Financial Protection Bureau (CFPB) for a five year term. Ms. Kraninger assumed her duties as the second permanent director of the CFPB on December 10. Ms. Kraninger previously served as Associate Director of the Office of Management and Budget; Clerk of the United States Senate Committee on Appropriations; and Deputy Assistant Secretary for Policy at the Department of Homeland Security.
The FDIC has re-issued its guidance that establishes timelines for processing applications, notices and other requests submitted to the FDIC. The revised guidance applies to filings processed by FDIC Regional Offices. FDIC Regional Offices make decisions on approximately 95% of filings made with the FDIC. The guidance provides processing timelines for both standard and expedited requests. While this guidance applies to submissions by all existing and proposed insured depository institutions, the FDIC stated that certain filings would not be subject to the timelines included in the release. For example, the timelines would not apply to filings that raise legal or policy issues, could attract unusual attention or publicity, or involve an issue of first impression.updated the Affordable Mortgage Lending Guide so as to reflect the current information available about mortgage products offered through Fannie Mae and Freddie Mac. The Affordable Mortgage Lending Guide serves as a resource for community banks to compare mortgage products and to determine whether they wish to expand or initiate a mortgage lending program. Among administrative changes, the update removes products which are no longer offered, such as the FHA Refinance of Borrowers in Negative Equity Positions product, adds new products, such as the Fannie Mae MH Advantage™ and Freddie Mac HomeOneSM, and reflects changes to several existing products.
The Alternatives Reference Rates Committee (ARRC), a group of private-sector market participants and public agencies convened by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York, issued consultations on draft fallback language for bilateral business loans and securitizations that reference the U.S. dollar London Interbank Offer Rate (LIBOR). The draft was made as part of ARRC’s plans to facilitate the transition from LIBOR to its recommended alternative rate, the Secured Overnight Financing Rate (SOFR). ARRC proposed two approaches for fallback language one of which would provide a streamlined amendment mechanism to negotiate a replacement benchmark in the future and the other which would replace LIBOR with a version of SOFR which would provide more upfront clarity. The two approaches build in triggers related to the LIBOR cessation and a proposed mechanism for implementing a replacement rate and setting a spread.
On October 1, the Delaware Court of Chancery, in Akorn, Inc. v. Fresenius Kabi AG, et al., held for the first time that a target company had suffered a material adverse effect (MAE) sufficient for an acquiror to validly exercise its contractual right to terminate a merger agreement and walk away from a deal without cost. The Fresenius case is an important additional data point for M&A practitioners in understanding how courts analyze terminations arising from an MAE. While the Court did not alter the legal standard used in prior case law, the fact that the Court ruled in favor of the acquiror and the heavily fact-intensive analysis illustrate the approach that will be taken by courts and provide some useful lessons for those involved in M&A. For more information, read the client alert issued by Goodwin’s Mergers & Acquisitions practice.
Enforcement & Litigation
On November 13, the District of Minnesota rejected the Ninth Circuit’s expansive interpretation of the Telephone Consumer Protection Act’s (TCPA’s) automatic telephone dialing system (ATDS) provision in Marks v. Crunch San Diego, LLC. In Roark v. Credit One Bank, N.A., No. 16-cv-00173 (D. Minn. Nov. 13, 2018), the court instead turned to the language of the statute itself and found that the equipment at issue did not satisfy that definition. Moreover, the court found that defendant had relied in good faith on consent it had received from the previous owner of plaintiff’s phone number and therefore could not be held liable under the TCPA. View the LenderLaw Watch blog post.
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.