Regulatory Developments
SEC Proposes Rule to Streamline Regulatory Framework for Fund of Funds Arrangements
On December 19, the SEC voted to propose rule 12d1-4 under the Investment Company Act (ICA) to streamline the regulatory framework for fund of funds arrangements by permitting registered investment companies (RICs) or business development companies (BDCs) to acquire securities of other such funds in excess of the limits set forth in section 12(d)(1) of the ICA without obtaining an exemptive order from the SEC, subject to the below conditions:
- Control and Voting – RICs or BDCs acquiring other such funds cannot control those funds and must vote their securities to minimize influence over such funds.
- Redemption Limits – RICs or BDCs who acquire more than 3% of the securities in any one other RIC or BDC cannot redeem more than 3% of those securities in any 30-day period.
- Excessive Fees – The investment manager of an acquiring fund must evaluate the aggregate fees associated with investments in RICs or BDCs.
- Complex Structures – Except under limited circumstances, the proposed rule would prohibit funds from creating three-tier fund of funds structures.
The comment period will be open for 90 days after publication of the proposed rule in the Federal Register.
SEC’s OCIE Announces 2019 Examination Priorities
On December 20, the SEC’s Office of Compliance Inspections and Examinations (OCIE) announced its 2019 examination priorities for its national exam program. These priorities provide a preview of key areas where the OCIE intends to focus its limited resources during the coming year, but they do not necessarily encompass all of the areas that will be covered in its examinations. The six general categories for the examination priorities are: (1) compliance and risk at entities responsible for critical market infrastructure, such as clearing agencies, national securities exchanges, and transfer agents; (2) matters of importance to retail investors, including disclosure and calculation of fees and expenses that investors pay; (3) the operations of FINRA and the Municipal Securities Rulemaking Board; (4) digital assets; (5) cybersecurity; and (6) anti-money laundering. As compared to recent years, the OCIE’s priorities have largely remained consistent, with the notable change that, as digital assets continue to grow in both volume and importance, the OCIE has now established “digital assets” as its own stand-alone category, as opposed to a subtopic heading as it was in 2018. Moreover, a number of new subtopic headings have been featured in the 2019 exam priorities, which include broker-dealers entrusted with customer assets, conflicts of interest, microcap securities, and portfolio management and trading. Compliance departments of investment advisers and other registrants should analyze their compliance policies and practices to ensure that their firms are adequately addressing risks and areas that are included in the OCIE’s list of examination priorities.
On December 19, the FDIC published a financial institution letter addressing the agency’s final rule (Final Rule) on the treatment of reciprocal deposits. As previously reported in the Roundup in March 2018 and in September 2018, Section 202 of S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act (Economic Growth Act), amends section 29 of the Federal Deposit Insurance Act (12 U.S.C. § 1831f) to help well-run smaller banks raise stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits. The Final Rule distinguishes between institutions that are both well capitalized and well rated and those that are not. On the one hand, institutions that are well capitalized and well rated can receive reciprocal deposits that will be deemed to be non-brokered deposits up to a “general cap,” which is the lesser of (1) 20% of the institution’s total liabilities or (2) $5 billion. Reciprocal deposits exceeding the general cap will be considered brokered deposits. On the other hand, institutions that are not well capitalized or not well rated will be subject to the lesser of the general cap or a “special cap,” which derives from the average amount of reciprocal deposits held over the four quarters before the institution became not well capitalized or not well rated. For such institutions, reciprocal deposits exceeding the applicable cap (general or special) will be considered “brokered deposits.” Section 29 restricts, and in some cases prohibits, the solicitation, acceptance, and renewal of brokered deposits and governs rates paid on such deposits by institutions that are less than well capitalized. However, because well capitalized institutions generally may accept brokered deposits without restrictions, the Final Rule may benefit institutions that are not well capitalized or well rated more than other institutions. The Final Rule will take effect 30 days after the Final Rule’s publication in the Federal Register.
Also on December 19, the FDIC published its advance notice of proposed rulemaking (ANPR) inviting comment on all aspects of the FDIC’s brokered deposit and interest rate regulations. The ANPR is part of an FDIC initiative to comprehensively review all aspects of its regulatory approach to brokered deposits and interest rate restrictions, which generally apply to institutions that are less than well capitalized. The FDIC will be accepting comments on all such topics for 90 days after the ANPR’s publication in the Federal Register.
Agencies Finalize Three-Year Phase-In for CECL’s Regulatory Capital Effects
On December 21, the FDIC, the Office of the Comptroller of the Currency (OCC), and the Board of Governors of the Federal Reserve System (Federal Reserve) approved a final rule modifying their regulatory capital rules and providing an option to phase in over a period of three years the day-one regulatory capital effects of updated accounting standard known as the "Current Expected Credit Losses" (CECL) methodology. The final rule also revises the agencies' other rules to reflect the update to the accounting standards. The CECL standard, which goes into effect in 2020 for SEC registrants, 2021 for non-SEC banks that are FASB-defined "public business entities," and 2022 for all other banks, requires an estimate of expected credit losses over the life of the portfolio to be effectively recorded upon origination. The final rule will take effect April 1, 2019. Banking organizations that choose to early adopt CECL may elect to adopt the rule as of the first quarter 2019.
On the same date, the Federal Reserve issued a statement noting that to “reduce uncertainty, allow for better capital planning at affected firms, and gather additional information on the impact of CECL,” it plans to maintain the current framework for calculating allowances on loans in the supervisory stress test until after the 2021 stress test cycle and to “evaluate appropriate future enhancements to this framework as best practices for implementing CECL are developed.” With regard to company-run stress tests, the Federal Reserve said that it would “not issue supervisory findings on firms’ stressed estimation of the allowance under CECL in CCAR’s qualitative assessment any earlier than 2022.”
Regulators Issue Joint Notice for Proposed Updates to Management Interlock Rules
The FDIC, OCC and Federal Reserve (collectively, the Agencies) recently issued a joint notice of proposed rulemaking and request for comment regarding management interlock rules. The Agencies’ proposed rule would increase the major assets prohibition thresholds for management interlocks in the agencies’ rules implementing the Depository Institution Management Interlocks Act. Currently, the rule limits directors and management officials of a depository institution with more than $2.5 billion in total assets from also serving at an unaffiliated organization with more than $1.5 billion in total assets. The proposed rule would increase the major assets prohibition thresholds to $10 billion each to account for changes in the United States banking market since the interlock rules were established in 1996. The increase will also reflect inflation and other market changes. Comments on the proposed rulemaking should be submitted before sixty days after publication in the Federal Register.
Fed Proposes Rule to Conform Stress Testing Requirements with S. 2155
On January 8, the Federal Reserve invited public comment on a proposal that would modify company-run stress testing requirements to conform with the Economic Growth Act. The proposal would raise the threshold requiring state-member banks to conduct their company-run stress tests from $10 billion in total consolidated assets to $250 billion. Additionally, in place of the current annual cycle, the proposal would generally require firms above the threshold to conduct company-run stress tests once every other year. The proposal also would eliminate the hypothetical "adverse" scenario from company-run stress tests for bank holding companies, state member banks, U.S. intermediate holding companies of foreign banking organizations, and any nonbank financial company supervised by the Federal Reserve. Similarly, the Federal Reserve would no longer include an "adverse" scenario in its supervisory stress tests. The firms would still be required to test themselves against a more severe hypothetical scenario, known as the "severely adverse" scenario, and the supervisory stress tests also would continue to include a "severely adverse" scenario. The proposal is similar to separate proposals issued by the FDIC and OCC. Comments will be accepted until February 19, 2019.
CFPB Issues Policy Guidance on HMDA Data Release
On December 21, the Consumer Financial Protection Bureau (CFPB) issued final policy guidance describing the Home Mortgage Disclosure Act (HMDA) data the CFPB intends to make publically available beginning in 2019. This guidance has been issued after reviewing public comments received on the proposed policy guidance that was issued in September 2017. The final guidance includes modifications to publically released HMDA data starting in 2019 that are intended to protect consumers’ privacy; for example, the CFPB will not release property addresses and applicants’ credit scores, and the CFPB will release certain information with more reduced precision, such as disclosing ranges (rather than specific numbers) for applicant’s age, loan amount, and number of units in the dwelling. The CFPB also announced its intention to conduct a separate notice-and-comment rulemaking (to commence in 2019) to incorporate HMDA data changes to the text of Regulation C, which will allow the CFPB to collect additional public comments and further consider what HMDA data will be disclosed in future years.
Expanded Examination Cycle for Certain Small Insured Depository Institutions
On December 28, the FDIC, the OCC and the Federal Reserve (collectively, the Agencies) announced that the agencies are adopting final rules to implement section 210 of the Economic Growth Act. Section 210 of the Economic Growth Act amends the Federal Deposit Insurance Act to require the Agencies to examine qualifying insured depository institutions with less than $3 billion in total assets at least once every 18-months. Before the Economic Growth Act, the agencies were required to examine qualifying insured depository institutions every 12-months. The Agencies released interim final rules on August 29, 2018, and are adopting the interim rules as final rules without changes. The final rules will become effective on January 28, 2019.
Comptroller’s Handbook: Updated Booklets and Rescissions
On December 28, the OCC issued updates to certain booklets in its Comptroller’s Handbook (the Handbook). The OCC updated the “Bank Premises and Equipment,” “Consigned Items and Other Customer Services,” and “Litigation and Other Legal Matters” booklets of the Handbook. These new booklets were issued to reflect:
- references to OCC issuances published since these booklets were last issued,
- the integration of federal savings associations into certain regulations; and
- clarifications concerning supervisory guidance, sound risk management practices, legal language, or the roles of the bank’s board or management.
The revised and updated booklets replace the booklets of the same title previously issued in 2016 and 2015.
Bank Secrecy Act Video Updated
On December 28, the FDIC released a technical assistance video to provide community banks with an overview of anti-money laundering regulations. The video discusses requirements under the Bank Secrecy Act (BSA) and Office of Foreign Asset Control (OFAC) sanctions programs. In addition to providing general guidance on BSA and OFAC compliance, this video includes information about recently enacted requirements, such as beneficial ownership and customer due diligence. This video is intended to assist directors of FDIC-supervised banks and savings associations with understanding and implementing effective anti-money laundering and sanctions compliance programs. For more information, please refer to FIL-90-2018.
Goodwin Alert: SEC Adopts Final Hedging Policy Disclosure Rules
The SEC has adopted final rules that will require companies to disclose any practices or policies regarding the ability of employees and directors to engage in certain hedging transactions with respect to a company’s equity securities. The final rules will apply to proxy statements and information statements for the election of directors during fiscal years that begin on or after July 1, 2019 (July 1, 2020 for emerging growth companies and smaller reporting companies). In the adopting release, the SEC clearly states that the final rules “should not be construed as suggesting companies need to have a practice or policy regarding hedging, or a particular type of practice or policy. These amendments relate only to disclosure of hedging practices or policies.” For more information read the client alert issued by Goodwin’s public companies practice.
Enforcement & Litigation
Goodwin Alert: Court of Chancery Declares Federal Forum Provisions Invalid
The Delaware Court of Chancery issued a decision on Wednesday in Sciabacucchi v. Salzberg, et al., C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018) declaring that federal forum selection provisions purporting to require claims under the Securities Act of 1933 be brought in federal court (Federal Forum Provisions) are “ineffective and invalid.” These Federal Forum Provisions had been adopted in reaction to the United States Supreme Court decision ruling in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), finding that the Securities Litigation Uniform Standards Act of 1998 did not eliminate concurrent state court jurisdiction over class action lawsuits asserting claims under the Securities Act of 1933. Given concerns about stockholder litigation proceeding in state courts, companies such as Blue Apron, Stitch Fix, and Roku included Federal Forum Provisions in their certificates of incorporation in advance of their recent public offerings. For more information read the client alert issued by Goodwin’s securities litigation practice.
Goodwin Alert: California Department of Justice to Hold Forums, Seek Comment on CCPA
Starting January 8, 2019 and continuing through February 13, 2019, the California Department of Justice will hold six state wide public forums on the California Consumer Protection Act (CCPA) during which interested parties may comment on the law ahead of a formal rulemaking conducted by the California Attorney General. Written comments may be submitted in lieu of attending the forums. The proceedings offer a vital opportunity to influence the regulations that will ultimately be enforced and help clarify ambiguities in the statute. For more information read the client alert issued by Goodwin’s Privacy + Cybersecurity practice.
Goodwin News
Acquire or Be Acquired Conference - January 27-29, 2019, Phoenix, AZ
Goodwin is sponsoring, and partner Regina Pisa is presenting at the 25th anniversary of Bank Director’s Acquire or Be Acquired Conference. In 2018, over 1,200 executives came together to explore financial growth options, consider strategic opportunities and discuss initiatives involving partnerships. For some, the conference reinforced the notion that now is the right time to sell; for others, it proved that the next few years present real options to expand. This year's conference session highlights include The Mechanics of Successful Deals, Preparing for Performance, Aligning Yourself for Future Growth, Key Regulatory Priorities, Don't Let Your Digital Strategies Fail and Ingredients of An Extraordinary Bank.
This week’s Roundup contributors: Alex Callen, Jessica Craig, William McCurdy, Alex Nourafshan and Andrew Zutz.