Weekly RoundUp April 24, 2019

Financial Services Weekly News: Fed Proposes Revisions to Control Regulations for First Time in Decades

Editor's Note

Fed Proposes Revisions to Control Regulations for First Time in Decades. On April 23, the Board of Governors of the Federal Reserve System (Federal Reserve Board) invited public comment on a notice of proposed rulemaking that would revise its regulations related to determinations of whether a company has the ability to exercise a “controlling influence” over another company for purposes of the Bank Holding Company Act or the Home Owners’ Loan Act. Although the Federal Reserve Board previously has issued policy statements (including one as recently as 2008), the Federal Reserve Board has not materially modified its “controlling influence” regulatory presumptions since the 1980s, and reform has been a topic of recent speeches by Federal Reserve Board leadership, including those of Vice Chairman for Supervision Randal K. Quarles. According to the Federal Reserve Board, the proposal is intended to increase transparency and provide greater clarity regarding what the Federal Reserve Board considers to be a “controlling influence,” thereby supporting consistent decision-making and reducing regulatory burdens for investors and other interested parties, who generally shape their strategies to avoid acquisitions of control, which triggers the restrictions and obligations imposed upon bank holding companies and savings and loan holding companies.

Notably, the proposal includes a tiered framework that would incorporate the major factors and thresholds that the Federal Reserve Board typically views as presenting controlling influence concerns. The proposed framework would be structured so that, as an investor’s ownership percentage in the target company increases, the additional relationships and other factors through which the investor could exercise control generally must decrease in order to avoid triggering the application of a presumption of control. In particular, the proposal creates a tiered structure for these presumptions, based on the level of voting ownership at three different levels: 5%, 10% and 15%, and lays out several factors that the Federal Reserve Board will use to determine if a company has control over another company. The key factors include the company's total voting and non-voting equity investment in the bank; director, officer, and employee overlaps between the first company and the second company; and the scope of business relationships between the first company and the second company. The proposal describes what combination of those factors would and would not trigger control (see the chart showing how different combinations of the factors would or would not result in control). The proposal also includes an explicit presumption of noncontrol, which would apply if the first company controls less than 10% of every class of voting securities of the second company and if the first company is not presumed to control the second company under any of the proposed presumptions of control. In addition, the proposal streamlines the process for divestiture of control.

Upon initial review, the proposal generally appears to lighten the Federal Reserve Board’s approach with respect to director interlocks and business relationships involving equity investments of less than 5%. Importantly, the proposal could benefit banks and fintech companies alike at a time when more and more banks are considering partnerships with fintech firms. In the proposal, the Federal Reserve Board noted that the additional transparency provided by the proposal “should have an incremental increase in the ability of a banking organization to make investments in other companies — including fintech companies — by generally reducing the risk of unexpected control concerns.” This additional transparency could also make investments in banks and bank holding companies more appealing to private equity funds. 

Comments will be accepted for 60 days after publication in the Federal Register. For additional information, please contact a member of Goodwin’s Banking group, part of its Financial Industry practice, and look for a more detailed client alert in the coming days.

Editor's Note

Regulatory Developments

Fed and FDIC Invite Comment on Modifications to Resolution Plan Requirements

On April 16, the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC) invited public comment on a proposal modifying their resolution plan requirements for large banking firms. The proposal, which would affect domestic and foreign banks with more than $100 billion in total consolidated assets, would establish a graduated set of resolution planning requirements that depend on the level of risk a firm poses for the financial system. For the most systemically important firms, the proposal would adopt the current practice of requiring resolution plans to be submitted on a two-year cycle. The proposal would tailor the rule’s requirements for firms that do not pose the same systemic risk as the largest institutions, requiring these plans to be submitted on a three-year cycle. Both groups of firms would alternate between submitting full plans and targeted plans. Foreign banks with the smallest or least complex U.S. operations would be required to submit reduced content plans, commensurate with their reduced operations. 

A targeted resolution plan would include core elements like capital and liquidity, material changes to the firm, as well as areas of interest identified by the agencies. Generally, reduced content plans would include only material changes since the prior plan submission. All plans would continue to include a publicly available section.

For the smallest and least complex domestic firms that engage in traditional banking activities and present the least risk, the proposal would eliminate resolution planning requirements. However, if one of those firms engages in risky activity above a certain threshold, it would be required to submit a resolution plan. 

Comments on the proposal will be accepted through June 21, 2019.

FDIC Seeks Comment on New Approaches to Insured Depository Institution Resolution Planning

On April 16, the FDIC approved an advance notice of proposed rulemaking (ANPR) seeking comment on ways to tailor and improve the agency's rule requiring certain insured depository institutions (IDIs) to submit resolution plans (IDI Rule). The FDIC is undertaking a comprehensive review of the IDI Rule. According to the FDIC, advanced resolution planning is critically important for the largest IDIs to ensure the FDIC has timely access to information it would need to execute a resolution under the Federal Deposit Insurance Act. The ANPR seeks comment on ways to make the process more efficient and less time-consuming without diminishing its benefits.

The IDI Rule currently requires IDIs with more than $50 billion in assets to submit resolution plans that should enable the FDIC to resolve the institution in the event of insolvency. Among other issues, the agency is considering revising the $50 billion threshold for application of the rule and tiering the rule's requirements based on the size, complexity, or other characteristic of an IDI. The FDIC is also seeking feedback on ways to streamline plan submissions for larger, more complex firms and on whether to replace plan submissions with periodic engagement and capabilities testing for smaller, less complex firms that are subject to the rule.

The FDIC board also voted to delay the next round of submissions under the IDI Rule until the rulemaking process has been completed.

Comments on the ANPR will be accepted through June 21, 2019.

Agencies Propose Supplementary Leverage Ratio Relief for Custodial Banks

On April 18, the Federal Reserve Board, the FDIC and Office of the Comptroller of the Currency (Agencies) invited public comment on a notice of proposed rulemaking (Rule) that would modify their capital rules to exclude from the supplementary leverage ratio requirements qualifying central bank deposits of custodial banks. As previously reported in the Roundup in November 2017 and March 2018, the Agencies’ action is required under Section 402 of S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act.

The Rule provides that a custodial bank would be able to exclude deposits placed at a qualifying central bank from its total leverage exposure, which is the denominator of the supplementary leverage ratio. The Rule specifies that a depository institution holding company, together with any subsidiary depository institution, would be considered predominantly engaged in custody, safekeeping, and asset servicing activities if the U.S. top-tier depository institution holding company has assets under custody that are at least 30 times the amount of its total assets. The Rule further specifies that a  “qualifying central bank” is a Federal Reserve Bank, the European Central Bank, or a central bank of a qualifying member country of the Organisation for Economic Co-operation and Development. The amount of qualifying central bank deposits eligible for exclusion from total leverage exposure would be limited by the amount of deposit liabilities on the consolidated balance sheet of the organization that are linked (as defined in the Rule) to fiduciary or custody and safekeeping accounts. According to the Agencies, the Rule would currently apply to three advanced approaches banking organizations: The Bank of New York Mellon Corporation, Northern Trust Corporation, and State Street Corporation.

Comments will be accepted for 60 days after the Rule’s publication in the Federal Register.

OCIE Addresses Common Regulation S-P Compliance Issues

On April 16, the Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) published a list of Regulation S-P compliance issues it observed regarding privacy notices and safeguarding customer records and information. OCIE found that many firms were failing to provide initial privacy notices, annual privacy notices, or opt-out notices. Other times, notices were provided but they did not accurately reflect the firms’ policies and procedures. OCIE also noticed a lack of written policies and procedures regarding administrative, technical, and physical safeguards of customer information. Of the firms that had written policies, many did not account for customer information on personal devices, the inclusion of personally identifiable information in electronic communications, or what actions would be taken to address a cybersecurity incident. Additionally, OCIE noted a lack of training surrounding these policies and lack of oversight of outside vendors. OCIE encourages all registrants to review their policies and procedures to ensure compliance with Regulation S-P.

CFTC to Provide an Exception to its Annual Privacy Notice Requirements

On April 22, the Commodity Futures Trading Commission (CFTC) revised CFTC Regulation 160.5 (Privacy Notice Rule). Previously, CFTC’s Privacy Notice Rule required certain futures commission merchants, retail foreign exchange dealers, commodity trading advisors, commodity pool operators, introducing brokers, major swap participants, and swap dealers (collectively, Registered Entities) to provide annual privacy notices to customers. The CFTC’s amended Privacy Notice Rule will remove the requirement to provide these annual privacy notices if the Registered Entity (i) provides nonpublic personal information to nonaffiliated third parties only in accordance with Sections 160.13, 160.14, and 160.15 under the Privacy Notice Rule and any other exceptions adopted by the CFTC and (ii) has not changed its policies and practices with regard to disclosing nonpublic personal information from the policies and practices that were disclosed to the customer in the Registered Entity’s most recent privacy notice sent to the customer.

The CFTC’s changes to the Privacy Notice Rule were permitted pursuant to Title V of the Fixing America’s Surface Transportation (FAST) Act. Section 503 of the FAST Act, called “Eliminate Privacy Notice Confusion,” enables financial regulators to amend their privacy notice requirements originally required to be adopted under the Gramm-Leach-Bliley Act. The CFTC worked with staff from the Consumer Financial Protection Bureau (CFPB) to ensure that the amended Privacy Notice Rule is consistent with rules recently finalized by the CFPB. In addition, CFTC consulted with the SEC, the Federal Trade Commission (FTC), and the National Association of Insurance Commissioners on the revised privacy notice regulations.

Enforcement & Litigation

FinCEN Penalizes PTP Virtual Currency Exchanger for Anti-Money Laundering Violations

On April 18, the Financial Crimes Enforcement Network (FinCEN), a bureau of the United States Department of the Treasury, assessed a civil money penalty against Mr. Eric Powers for willfully violating the registration and reporting requirements under the Bank Secrecy Act (BSA). Mr. Powers conducted business as a peer-to-peer exchanger of convertible virtual currency, qualifying him as a “money transmitter” that must register as a money services business (MSB), develop, implement and maintain an effective anti-money laundering program and file suspicious activity reports and currency transaction reports (CTRs) in accordance with the BSA. Mr. Powers completed over 200 transactions that involved more than $10,000 each in currency, but did not file a single CTR. This was FinCEN’s first enforcement action against a peer-to-peer virtual currency exchanger, resulting in a $35,000 fine and industry bar for Mr. Powers from providing any further MSB services.

FTC Announces $3.85 Million Settlement with Online Lender

On April 15, the FTC announced that it had reached a settlement with an online lending company for $3.85 million, resolving allegations that the company had engaged in unfair and deceptive loan servicing practices in violation of Section 5 of the Federal Trade Commission Act (FTC Act), 15 U.S.C. § 45, the Telemarketing Sales Rule, 16 C.F.R. Part 310, and Section 913(1) of the Electronic Fund Transfer Act, 15 U.S.C. § 1693k, and its implementing Regulation E, 12 C.F.R. § 1005.10. According to the FTC, the online lender allegedly violated these provisions when it made unauthorized charges on customers’ accounts and required that borrowers make automatic payments from their bank accounts. For example, the FTC claimed that the company had charged customers their monthly payments twice or more in one month and refused to refund such duplicate payments despite complaints. The company also allegedly advertised that borrowers could use credit or debit cards to make payments on installment loans offered on its website, when in fact consumers were unable to do so. Read the Enforcement Watch blog post.

Supreme Court Rules That FDCPA Does Not Apply to Nonjudicial Foreclosure Proceedings

On March 20, in the case of Obduskey v. McCarthy & Holthus LLP, the U.S. Supreme Court ruled that the Fair Debt Collection Practices Act (FDCPA) does not apply to entities that conduct non-judicial foreclosure sales. In so holding, the court zeroed in on the FDCPA’s definition of “debt collector,” which states that, for the purpose of a separate provision of the FDCPA (15 U.S.C. § 1692f(6)), the “term [debt collector] also includes any person . . . in any business the principal purpose of which is the enforcement of security interests.” (Emphasis added). The court held that the qualification of “debt collector” effectively exempts those who primarily seek to enforce foreclosure interests from the majority of the FDCPA’s provisions. Read the LenderLaw Watch blog post.

Goodwin News

Massachusetts Bankers Association 2019 Annual Convention — April 25

The Annual Convention of the Massachusetts Bankers Association serves as a major activity of the association for banker/director education and networking. The program will include nationally recognized authorities addressing vital issues affecting the financial services industry in Massachusetts, New England and at the national level. Goodwin is a sponsor and Regina Pisa, Bill Mayer, Samantha Kirby, Bill Stern and Matt Dyckman will be in attendance. For more information, visit MBA’s website.

Finance Officer/Legal Counsel Conference for the Association of Jesuit Colleges and Universities — April 26

The AJCU Finance Officers Conference meets annually and communicates regularly through an active AJCU listserv. At their annual meeting, attendees are given the opportunity to share ideas and information through panel and round-table discussions, utilizing a mix of industry experts and institutional representatives to bridge the theoretical and conceptual with real-world practical application. Financial Industry partner Jamie Fleckner will participate in a session on “Retirement Plan Governance and Best Practices.” For more information, please visit the event website.

NRS Spring 2019 Compliance Conference — April 28

Join NRS at the Spring 2019 Compliance Conference where industry experts will address how investment adviser and broker-dealer firms can successfully navigate the disruptive currents of regulatory change and adapt procedures to compliance programs. Goodwin's Financial Industry Counsel, David Solander, will be speaking at the conference on Current Issues for Private Funds and Cryptocurrencies & Blockchain from a Compliance Perspective. For more information, please visit the event website.

This week’s Roundup contributors: Alex Callen, Ethan Green, Christina Hennecken, Viona Miller and George Schneider.