The Federal Reserve, the FDIC and the OCC announced last week that they have extended for an additional two years the current safe harbor from Volcker rule enforcement for activities conducted by certain foreign investment funds known as foreign excluded funds. With limited exceptions, the Volcker rule prohibits banking entities from engaging in proprietary trading and from sponsoring and acquiring an ownership interest in a covered fund. For purposes of the Volcker rule, a banking entity includes a foreign banking organization that is subject to the Bank Holding Company Act and its affiliates, but there is an exclusion from the definition of banking entity for covered funds. A foreign excluded fund is a foreign investment fund that is not a covered fund because its ownership interests are offered and sold solely outside of the United States and that meets certain other requirements. A foreign excluded fund controlled by a banking entity would generally be treated as a banking entity itself, which means it would be subject to the Volcker rule prohibitions on proprietary trading and covered funds activities.
In 2017, the federal banking agencies released a policy statement to address concerns raised by foreign banking organizations about the extraterritorial effect of the Volcker rule on foreign excluded funds. Under the policy statement, the banking agencies announced that they would not take action under the Volcker rule during the one-year period that ended on July 21, 2018 against a foreign banking entity based on attribution of the activities and investment of a foreign excluded fund that met certain qualifications described in the policy statement. Last year, the federal banking agencies published a notice of proposed rulemaking in which they solicited public comment on proposed revisions to their regulations implementing the Volcker rule. Among other matters, the banking agencies requested public comment on the appropriate treatment of foreign excluded funds and stated that they would extend the safe harbor provided by the policy statement for qualifying foreign excluded funds for an additional year. The most recent action extends that safe harbor for an additional two-year period, until July 21, 2021. While the banking agencies did not comment on the status of the pending rulemaking proposal, this most recent development suggests that action on the proposed rulemaking may not be forthcoming in the near future.
On July 22, the Federal Reserve, FDIC, OCC, National Credit Union Administration (NCUA) and FinCEN issued a joint statement to emphasize their risk-focused approach to examinations of banks’ Bank Secrecy Act/anti-money laundering (BSA/AML) compliance programs. The statement outlines common practices for assessing a bank’s money laundering or terrorist financing risk profile, assisting examiners in scoping and planning the examination, and initially evaluating the adequacy of a bank’s BSA/AML compliance program. The statement does not establish new requirements, and also notes that having a risk-based compliance program enables a bank to allocate compliance resources commensurate with its risk.
On July 17, FASB voted to propose a delay of the effective date for implementation of the current expected credit loss (CECL) standard for smaller reporting companies (as defined by the SEC), non-SEC public companies, and private companies until fiscal years beginning after December 15, 2022. For all other public companies, CECL would still take effect for fiscal years ending after December 15, 2019. Early adoption will continue to be permitted for all entities for fiscal years beginning after December 15, 2018. FASB also issued a second FASB Staff Q&A regarding CECL.
On July 18, the SEC approved a rule change amending Section 302 of the New York Stock Exchange (NYSE) Listed Company Manual to provide exemptions for certain issuers from the requirements to hold annual shareholders’ meetings. The amended Section 302 provides that the annual meeting requirement does not apply to companies whose only securities listed on the NYSE are non-voting preferred and debt, passive business organizations (such as royalty trusts), or certain derivative and special-purpose securities listed pursuant to certain other listed rules. If a company also lists common stock (whether voting or non-voting common stock), voting preferred stock or their equivalent on the NYSE, such issuer must continue to hold an annual meeting of shareholders. Notwithstanding the existence of an exemption from the annual shareholder meeting requirement, companies with NYSE-listed securities will remain subject to any applicable state and federal securities laws with respect to the holding of annual meetings and any other types of shareholder meetings, including any such requirements set forth in the Investment Company Act of 1940.
Enforcement & Litigation
On July 17, FINRA announced that it reached settlements with 56 member firms and obtained a total of $89 million in restitution for nearly 110,000 charitable and retirement accounts as a result of its mutual fund fee waiver initiative. All of the firms subject to the settlement failed to waive mutual fund sales charges for the eligible accounts and failed to reasonably supervise the sale of mutual funds offering sales charge waivers. According to Susan Schroeder, Executive Vice President and Head of Enforcement at FINRA, the enforcement action was a “multi-year effort with the goal of obtaining meaningful restitution for mutual fund investors who were not afforded the sales charge waivers they were entitled to.” Beginning in May 2016, FINRA launched a targeted exam, known as a sweep, to conduct a review of a group of firms that had not self-reported the issue. FINRA and other regulators conducted sweeps to gather information on emerging issues and use this information to focus examinations and pinpoint an appropriate regulatory response, as needed. FINRA sanctioned 11 firms through the sweep, and reached settlements with another 35 firms, most of which self-reported prior to the sweep. In total, FINRA sanctioned 56 firms for failing to waive mutual fund sales charges for eligible charitable organizations and retirement accounts, and failing to reasonably supervise the area. Of the 56 firms sanctioned, 43 were granted extraordinary cooperation and not fined. The remaining 13 firms were fined a total of $1.32 million.
On July 19, the Georgia Attorney General’s Office (AG) announced that it had entered into a settlement with a company allegedly offering unlawful and deceptive credit repair services in violation of the Georgia Fair Business Practices Act. Read the Enforcement Watch blog post.
On July 11, the Federal Trade Commission (FTC) announced that it had obtained a temporary restraining order against defendants operating an alleged student loan debt relief scheme that, according to the FTC, tricked thousands of consumers by making false claims that it would service and pay down their student loans, causing consumer harm of at least $23 million. View the Enforcement Watch blog post.
On July 11, the Massachusetts Office of Attorney General Maura Healey announced that a for-profit educational institution and its parent company would provide over $1.6 million in debt relief to settle claims that it did not provide its students with critical information on program job placement, loan repayment, and graduation rates, as required by state law. Read the Enforcement Watch blog post.This week’s Roundup contributors: Jessica Craig, Stephen Shaw and Tierney Smith.