Weekly RoundUp July 17, 2019

Financial Services Weekly News: Securities Regulators Issue New Guidance on Opportunity Zones, LIBOR Transition

Editor's Note

In This Issue. The Securities and Exchange Commission (SEC) and North American Securities Administrators Association (NASAA) explained how state and federal securities laws might apply to fundraising for opportunity zones; the SEC’s Divisions of Corporation Finance, Investment Management, and Trading and Markets and the Office of the Chief Accountant issued division-specific guidance related to the expected discontinuation of the London Interbank Offered Rate (LIBOR) in 2021; the Commodity Futures Trading Commission (CFTC) and SEC jointly proposed aligning the minimum margin required on security futures with other similar financial products; the Federal Deposit Insurance Corporation (FDIC) finalized rule changes to simplify the process for making insurance determinations in the event a bank is placed into receivership; and federal banking agencies requested comment on a proposal to clarify the treatment of land development loans under the agencies’ capital rules. These and other developments are discussed in more detail below.

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

Regulatory Developments

SEC and NASAA Issue Joint Statement on Securities Law Considerations for Opportunity Zone Investments

On July 15, the SEC and NASAA issued a joint statement explaining the potential application of state and federal securities laws to fundraising for opportunity zones. The federal Tax Cuts and Jobs Act of 2017 established the “opportunity zone” program to provide tax incentives for long-term investing in designated economically distressed communities. The program allows taxpayers to defer and reduce taxes on capital gains by reinvesting gains in qualified opportunity funds (QOFs) that are required to have at least 90 percent of their assets in designated low-income zones. The joint statement analyzes the applicability to QOFs of laws and rules relating to securities registration and registration as a broker, investment company or investment adviser, and discusses available exemptions, concluding that securities law requirements apply to QOFs to the same extent as they do to other similar investments. In a separate statement, Chairman Jay Clayton expressed the intention to explore ways to change existing rules to create a simplified path to allow participation by “Main Street Investors,” such as an exemption where the investment opportunity is limited to residents of the opportunity zone or adjacent zip codes within the same state, on a basis that provides adequate investor protection.

SEC Staff Issues Statement On Transition Away From LIBOR

On July 12, the SEC’s Divisions of Corporation Finance, Investment Management, and Trading and Markets and the Office of the Chief Accountant (collectively, the Staff) issued a joint statement, which included division-specific guidance related to the expected discontinuation of the London Interbank Offered Rate (LIBOR) in 2021. LIBOR is used extensively in the U.S. and globally as a “benchmark” or “reference rate” for various commercial and financial contracts, including corporate and municipal bonds and loans, floating rate mortgages, asset-backed securities, consumer loans, and interest rate swaps and other derivatives. In its statement, the Staff highlighted the urgency of the need to implement alternative reference rates, as regulators and market participants seek to avoid business and market disruptions related to the discontinuation of LIBOR.

Although the SEC does not endorse the use of any particular reference rate, the Staff noted that the Alternative Reference Rates Committee (ARRC), a working group convened by the Federal Reserve Board and the Federal Reserve Bank of New York, has identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate to LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions.

Additionally, the Staff encouraged market participants to: (i) begin the process of identifying existing contracts that extend past 2021 to determine their exposure to LIBOR; and (ii) consider whether contracts entered into in the future should reference an alternative rate to LIBOR (such as SOFR) or, if such contracts reference LIBOR, include effective fallback language. The Staff also noted that an impact assessment of the discontinuation of LIBOR should extend beyond identification, evaluation and mitigation efforts related to existing or new contracts, and encouraged market participants to also identify, evaluate and mitigate other consequences the discontinuation of LIBOR may have on their businesses, such as on strategy, products, processes and information systems.

Joint CFTC and SEC Proposal to Align Margin Requirements for Security Futures with Similar Financial Products

On July 9, the CFTC and SEC issued a joint proposal to align the minimum margin required on security futures with other similar financial products (Margin Proposal). The Margin Proposal would set the minimum margin requirement for security futures at 15 percent of the current market value of each security future. The CFTC and the SEC are issuing the Margin Proposal due to the lower margin requirements that have been established for comparable financial products. The public comment period on the Margin Proposal will remain open for 30 days following publication in the Federal Register.

FDIC Finalizes Changes to Recordkeeping Requirements for Deposit Insurance Determinations

On July 16, the FDIC approved amendments to two rules to simplify the process for making insurance determinations in the event a bank is placed into receivership. Part 370 of the FDIC's Rules and Regulations, "Recordkeeping for Timely Deposit Insurance Determination," has been amended to address a number of issues. Most notably, it will now allow for an optional one-year extension of the rule's original compliance deadline of April 1, 2020. The final rule is similar to what was proposed in April 2019, with some changes made in response to the public comments received.  Part 370 is currently applicable to the 32 FDIC-insured institutions that have more than 2 million deposit accounts and establishes recordkeeping requirements to facilitate rapid payment of insured deposits to customers if one of those institutions were to fail.

The FDIC also amended Part 330 of its Rules and Regulations to expand the types of evidence it would consider when determining whether joint accounts qualify for increased deposit insurance coverage. This change affects all insured depository institutions regardless of size. The FDIC will continue to look to signature cards when determining deposit insurance coverage on joint accounts but may now also rely on other information contained in a bank's deposit account records that establishes co-ownership of a joint account. This change does not expand or contract deposit insurance coverage for joint accounts and does not place any increased burden on depositors or FDIC-insured institutions. This change to Part 330 is substantively the same as the change proposed in April 2019.

Federal Banking Agencies Propose Rule on the Capital Treatment of Land Development Loans

On July 12, the Federal Reserve Board, the FDIC and the Office of the Comptroller of the Currency invited public comment on a proposal to clarify the treatment of land development loans under the agencies’ capital rules. This proposal expands on the agencies’ September 2018 proposal to revise the definition of high-volatility commercial real estate (HVCRE) as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act. The land development proposal would clarify that loans that solely finance the development of land for residential properties would meet the revised definition of HVCRE, unless the loan qualifies for another exemption. The land development proposal would apply to all banking organizations subject to the agencies’ capital rules. Comments will be accepted for 30 days after publication in the Federal Register.

Enforcement & Litigation

CFPB Settles $25 Million Lawsuit with Debt-Settlement Provider

On July 9, the Consumer Financial Protection Bureau (CFPB) announced that it settled its lawsuit against the nation’s largest debt-settlement services provider for allegedly engaging in deceptive debt-settlement acts or practices. The company agreed to pay $20 million in restitution to affected consumers and a $5 million civil money penalty. Read the Enforcement Watch blog post.

Fourth Circuit Upholds Tribal Immunity Under Arm-of-the-Tribe Doctrine

On July 3, in Williams v. Big Picture Loans, LLC (No. 18-1827), the Fourth Circuit ruled that a small-dollar lender affiliated with the Lake Superior Chippewa Indian Tribe (Tribe) was entitled to tribal sovereign immunity from state interest rate laws as an “arm of the tribe,” dismissing a class action suit alleging that the Tribe’s activities violated Virginia usury law. The ruling is a potential watershed. Although the Supreme Court recognized that tribal immunity from state law extends to arrangements with third parties — to the extent that the arrangement benefits the tribe — the Williams case marks the first time that such an arrangement has been upheld at the federal appellate level. Read the LenderLaw Watch blog post.

Goodwin News

ACI’s 31st National Forum on Consumer Finance Class Actions and Government Enforcement — July 23-24

Today, consumer financial services companies face a broad range of threats exclusive to this industry, and they require representation that appreciates the nuances this arena requires. ACI’s annual conference will explore expert strategies for navigating class actions, litigation and government enforcement activity in the consumer financial services arena. Financial Industry partner Anthony Alexis will be speaking on Fintech and Consumer Finance: Analyzing the Latest Innovations, Compliance Challenges of the Bank Partner Model and OCC Fintech Charter, and the Rise of “True Lender” Litigation. For more information, please visit the event website.

This week’s Roundup contributors: Mac Laban, Bill McCurdy, George Schneider and Tierney Smith.