Weekly RoundUp August 21, 2019

Financial Services Weekly News: Agencies Simplify Volcker Rule

Editor's Note

In This Issue. The Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) approved an interagency final rule to simplify and tailor requirements relating to the Volcker Rule; the Securities and Exchange Commission (SEC) issued guidance to assist investment advisers in fulfilling their proxy voting responsibilities; and the Department of Housing and Urban Development (HUD) issued a proposed rule to amend its interpretation of the Fair Housing Act's disparate impact standard to better reflect a 2015 U.S. Supreme Court decision. These and other developments are discussed in more detail below.

Please note: The Roundup will be on hiatus for the next two weeks due to the Labor Day holiday. We will resume publication on September 11.

Editor's Note

Regulatory Developments

FDIC and OCC Approve Interagency Final Rule to Simplify and Tailor the Volcker Rule

On August 20, the FDIC and the OCC approved an interagency final rule to simplify and tailor requirements relating to Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as the "Volcker Rule." The Volcker Rule generally prohibits banking entities from engaging in proprietary trading and from owning or controlling hedge funds or private equity funds. The final rule, which remains subject to the approval of the Board of Governors of the Federal Reserve System, SEC, and Commodity Futures Trading Commission, will:

  • Tailor the rule's compliance requirements based on the size of a firm's trading assets and liabilities, with the most stringent requirements applied to banking entities with the most trading activity;
  • Retain the short-term intent prong of the "trading account" definition from the 2013 rule only for banking entities that are not, and do not elect to become, subject to the market risk capital rule prong;
  • Replace the rebuttable presumption that instruments held for fewer than 60 days are covered under the short-term intent prong with a rebuttable presumption that instruments held for 60 days or longer are not covered;
  • Clarify that banking entities that trade within internal risk limits set under the conditions in this final rule are engaged in permissible market making or underwriting activity;
  • Streamline the criteria that apply when a banking entity seeks to rely on the hedging exemption from the proprietary trading prohibition;
  • Limit the impact of the rule on the foreign activities of foreign banking organizations; and
  • Simplify the trading activity information that banking entities are required to provide to the agencies.

The FDIC also published a fact sheet summarizing the provisions of the final rule and the changes from the notice of proposed rulemaking released in July of 2018. The final rule would include many of the proposal’s changes to the proprietary trading restrictions, with certain changes based on comments received. In particular, the final rule would not include the proposed accounting prong in the “trading account” definition. Instead, the final rule would retain a modified version of the short-term intent prong, eliminate the 2013 rule’s rebuttable presumption that financial instruments held for fewer than 60 days are within the short-term intent prong of the trading account, and add a rebuttable presumption that financial instruments held for 60 days or longer are not within the short-term intent prong of the trading account. Banking entities with total consolidated trading assets and liabilities of less than $1 billion would be considered to have “limited” trading assets and liabilities and would be subject to a rebuttable presumption of compliance with the final rule.

Upon its publication in the Federal Register, the final rule will have an effective date of January 1, 2020, and a compliance date of January 1, 2021. However, a banking entity may voluntarily comply, in whole or in part, with the changes to the rule prior to January 1, 2021.

SEC Clarifies Investment Advisers’ Proxy Voting Responsibilities and Application of Proxy Rules to Voting Advice

On August 21, the SEC issued guidance to assist investment advisers in fulfilling their proxy voting responsibilities, particularly where they use the services of a proxy advisory firm, and provides guidance on proxy voting disclosures under Form N-1A, Form N-2, Form N-3, and Form N-CSR under the Investment Company Act of 1940.The guidance clarifies how an investment adviser’s fiduciary duty and Rule 206(4)-6 under the Investment Advisers Act of 1940 relate to an adviser’s proxy voting on behalf of clients, particularly if the investment adviser retains a proxy advisory firm.The guidance follows a question and answer format and provides examples to help facilitate compliance.The SEC also issued an interpretation of Exchange Act Rule 14a-1(l) that proxy voting advice generally constitutes a solicitation under the federal proxy rules and related guidance regarding the application of the antifraud provisions in Exchange Act Rule 14a-9 to proxy voting advice.The guidance and interpretation will be effective upon publication in the Federal Register.

HUD Issues Proposal Aligning ‘Disparate Impact’ Rule with Supreme Court Ruling

On August 16, HUD issued a proposed rule to amend its interpretation of the Fair Housing Act's disparate impact standard to better reflect the U.S. Supreme Court's 2015 ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., which recognized disparate impact analysis to demonstrate discrimination claims under the Fair Housing Act but added key limitations to ensure the burden of proof is on the plaintiff, and to provide clarification regarding the application of the standard to state laws governing the business of insurance. The rule follows a June 20, 2018, advance notice of proposed rulemaking, in which HUD solicited comments on the disparate impact standard set forth in HUD's 2013 final rule, including the disparate impact rule's burden-shifting approach, definitions, and causation standard, and whether it required amendment to align with the decision of the Supreme Court in Inclusive Communities Project, Inc. 

In the proposed rule, HUD proposed a new burden-shifting framework that requires a plaintiff’s disparate impact allegations to plead facts supporting five elements: (1) a challenged practice is arbitrary, artificial and unnecessary; (2) a “robust causal link” exists between the challenged policy or practice and the disparate impact; (3) to explain how the challenged policy or practice has a harmful effect on a protected class; (4) the disparity is significant; and (5) the injury is directly caused by the challenged policy or practice. In addition, in response to comments received in connection with the June 2018 rulemaking that requested a safe harbor for “complicated, yet increasingly commonly used, algorithmic models” assessing factors such as risk or creditworthiness, HUD requested comment on three proposed defenses for rebutting disparate impact claims where they can show that such models achieve “legitimate objectives.”

The first defense would allow a defendant to provide analysis showing that the model is not the actual cause of the disparate impact alleged by the plaintiff. The second defense would provide that a defendant can show that use of the model is standard in the industry, it is being used for the intended purpose of the third party, and that the model is the responsibility of a third party. The third defense is similar to the first and would provide a defendant with another method of showing that the model is not the actual cause of the disparate impact. Comments are due on October 18, 2019.

FDIC Issues Proposed Rule Amending National Rate Cap

On August 20, the FDIC issued a proposed rule related to interest rate restrictions that apply to less than well capitalized insured depository institutions. Under the proposed rule, the FDIC would amend the methodology for calculating the national rate and national rate cap for specific deposit products to “provide a more balanced, reflective, and dynamic national rate cap.” The national rate would be the weighted average of rates offered on a given deposit product by all reporting institutions weighted by domestic deposit share. The national rate cap for particular products would be set at the higher of (1) the 95th percentile of rates paid by insured depository institutions weighted by each institution's share of total domestic deposits, or (2) the proposed national rate (i.e., the weighted average) plus 75 basis points. The proposed rule would also simplify the current local rate cap calculation and process by allowing less than well capitalized institutions to offer up to 90 percent of the highest rate paid on a particular deposit product in the institution's local market area. Additionally, the proposed rule seeks comment on alternative approaches to setting the national rate caps, including setting the national rate cap at the higher of the current rate cap or the previous rate cap. Comments will be accepted for 60 days after the proposed rule is published in the Federal Register.

Goodwin Alert: SEC Proposes Round Three of Disclosure Modernization

As reported in the Roundup last week, the SEC has proposed a third group of amendments to its disclosure requirements. The proposals would generally simplify disclosure about a company’s business, emphasizing a principles-based approach. The proposals would also allow the disclosure requirements in the legal proceedings section to be satisfied by links to legal proceedings disclosure included elsewhere in the report or registration statement. Finally, the proposals would change the disclosure standard for risk factors from the “most significant” to “material,” require a summary of risk factor disclosures if the risk factor section is more than 15 pages, require risk factors to be organized under headings, and discourage risk factors that could apply generically to any company or any offering, but to the extent generic risk factors are presented, require companies to present them at the end of the risk factors section under a separate heading. Read the client alert issued by Goodwin’s Public Companies practice.

Enforcement & Litigation

Seila Law LLC Files Petition for Writ of Certiorari Regarding the CFPB's Constitutionality

On June 28, Seila Law LLC filed a petition for a writ of certiorari with the U.S. Supreme Court seeking review of the Ninth Circuit’s ruling that the Consumer Financial Protection Bureau’s (CFPB) single-director structure is constitutional. As Lender Law Watch covered previously, in CFPB v. Seila Law LLC, No. 7-56324 (9th Cir. 2019), the CFPB had filed petition to force Seila Law to comply with a civil investigative demand (CID) it had issued to determine whether the firm had violated the Telemarketing Sales Rule. On May 6, 2019, in agreeing with the en banc D.C. Circuit’s conclusion in PHH Corp. v. CFPB, 881 F.3d 75 (DC Cir. 2018), the Ninth Circuit held that the CFPB’s structure was lawful and did not interfere with the President’s ability to exercise his executive power. Read the LenderLaw Watch blog post.

Goodwin News

New Hampshire/Vermont Annual Conference – September 6-8

The New Hampshire and Vermont Bankers Associations’ Annual Conference welcomes CEOs, presidents, and senior management to Boston for two days of networking and discussion on topics such as the U.S. and New England economy, diversity and cybersecurity. Goodwin is a sponsor. For more information, visit the event website.

This week’s Roundup contributors: Stella Padilla.