Regulatory Developments
SEC Derivatives Rule (Re)Proposal and Other Proposals
On November 25, the SEC proposed Rule 18f-4 under the Investment Company Act of 1940, as amended (the 1940 Act), which was designed to enhance the regulation of the use of derivatives by mutual funds, exchange traded funds (ETFs), closed-end funds and business development companies (collectively, Funds). The 1940 Act limits Funds’ ability to obtain leverage, including via derivative transactions. The proposed rule would permit Funds to enter into derivative and certain other transactions, notwithstanding 1940 Act leverage restrictions, provided certain conditions are met. These conditions include: (i) the adoption of a derivatives risk management program; and (ii) compliance with a limit on the amount of a Fund’s leverage-related risk exposure (Risk Limit). Subject to certain conditions, the proposed rule would also provide relief with respect to reverse repurchase agreements and similar financing transactions, as well as “unfunded commitments” to make certain loans or investments. The proposed rule also includes an exception from the Risk Limit condition for Funds that use derivatives on a limited basis, as well as a set of alternative conditions that would except certain leveraged or inverse Funds from the proposed Risk Limit condition. Proposed Rule 18f-4 would also require a Fund to file a confidential report on Form N-LIQUID (to be renamed Form N-RN) if the Fund falls out of compliance with its Risk Limit for more than three consecutive business days. Forms N-PORT and N-CEN would also be amended to require public disclosure regarding derivatives exposure and other relevant information.
In the same release, the SEC proposed sales practice rules that would establish a set of due diligence and approval requirements for broker-dealers and SEC-registered investment advisers with respect to trades in shares of certain leveraged investment vehicles. In addition, the SEC proposed: (i) amendments to Rule 6c-11 under the 1940 Act that would permit certain leveraged or inverse ETFs to rely on Rule 6c-11; and (ii) to rescind corresponding exemptive orders.
On November 26, the SEC’s Division of Investment Management and Division of Trading and Markets (together, the Staff) issued frequently asked questions (FAQs) on Form CRS, which the SEC adopted in June 2019 as part of its regulatory suite of rules, interpretive guidance and forms commonly referred to as Regulation Best Interest (collectively, Regulation BI). Pursuant to new rules adopted by the SEC under the Securities Exchange Act of 1934 and the 1940 Act in connection with Regulation BI, registered broker-dealers and registered investment advisers, respectively (together, firms), will be required to deliver a brief relationship summary to retail investors in a manner specified in Form CRS. Among other things, Form CRS will require a firm to provide information about the relationships and services the firm offers to retail investors, fees and costs that retail investors will pay, specified conflicts of interest and standards of conduct, and disciplinary history. The FAQs, which the Staff expects to update from time to time as needed, address relationship summary format and delivery requirements with respect to Form CRS. Regulation BI became effective on September 10, 2019 and existing firms must comply with Regulation BI, including Form CRS, by June 30, 2020. For more information about Regulation BI, view the client alert prepared by Goodwin’s Financial Industry group.
Bank Regulators Clarify Requirements for Providing Financial Services to Hemp-Related Businesses
On December 3, the Board of Governors of the Federal Reserve System (Federal Reserve), Office of the Comptroller of the Currency (OCC), the FDIC, the Financial Crimes Enforcement Network (FinCEN), and the Conference of State Bank Supervisors issued joint guidance on providing financial services to customers engaged in hemp-related businesses (the Statement). The Statement clarifies the legal status of hemp growth and production and the relevant requirements under the Bank Secrecy Act (BSA) for banks providing services to hemp-related businesses and emphasizes that, because hemp is no longer a Schedule I controlled substance under the Controlled Substances Act, banks are no longer required to file suspicious activity reports (SAR) for customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations. For hemp-related customers, banks are expected to follow standard SAR procedures, and file a SAR if indicia of suspicious activity warrants. The Statement provides banks with background information on the legal status of hemp, the U.S. Department of Agriculture's (USDA) interim final rule on the production of hemp, and the BSA considerations when providing banking services to hemp-related businesses. The Statement also indicates that FinCEN will issue additional guidance after further reviewing and evaluating the USDA interim final rule. The Statement also provides that, because marijuana remains a Schedule I controlled substance, when providing financial services to customers engaged in marijuana-related businesses, banks should continue following FinCEN guidance FIN-2014-G001 – BSA Expectations Regarding Marijuana-Related Businesses.
Federal Regulators Issue Joint Statement on the Use of Alternative Data in Credit Underwriting
On December 3, the Federal Reserve Board, CFPB, FDIC, OCC and National Credit Union Administration issued a joint statement on the use of alternative data in underwriting by banks, credit unions, and non-bank financial firms. In the joint statement, the agencies indicated that they are aware of a broad range of alternative data that bank and non-bank financial firms are either using or contemplating for use in credit underwriting, as well as in fraud detection, marketing, pricing, servicing, and account management. Such alternative data may include information not typically found in consumers’ credit reports or customarily provided by consumers when applying for credit, such as cash flow data derived from consumers’ bank account records. The joint statement highlights the potential benefits and risks associated with the use of alternative data, while cautioning financial institutions to undertake “a thorough analysis of relevant consumer protection laws and regulations to ensure firms understand the opportunities, risks and compliance requirements before using alternative data” and reminding financial institutions that “[r]obust compliance management includes appropriate testing, monitoring and controls to ensure consumer protection risks are understood and addressed.” The joint statement invited firms to consult with appropriate regulators when planning for the use of alternative data.
CFPB Updates Rulemaking Agenda
On November 20, the CFPB published its Fall 2019 rulemaking agenda, which lists the regulatory matters that the CFPB reasonably anticipates having under consideration during the period from October 1, 2019 to September 30, 2020. Specifically, the CFPB conveyed that, as early as December 2019, it intends to: (1) issue a proposed rule to address the July 21, 2020 expiration of the remittance rule’s temporary exemption from certain disclosure requirements for insured depository institutions and insured credit unions; (2) implement a limited extension of the expiration date for Temporary GSE QM loans – a category of QMs otherwise scheduled to expire no later than January 10, 2021 – for purposes of smoothly transitioning away from this category of loan; (3) begin pre-rule activity in regard to adapting the Truth in Lending Act’s (TILA’s) ability-to-repay requirements to “Property Assessed Clean Energy” (PACE) financing; and (4) begin pre-rule activity for an exemption from the escrow requirement for loans made by certain creditors with assets of $10 billion or less that also meet other criteria.
Then, in January, March, April, and July 2020, respectively, the CFPB intends to: (1) take action on proposed rulemaking implementing the Fair Debt Collection Practices Act (Regulation F), potentially addressing communications in connection with debt collection, interpreting and applying prohibitions on harassment or abuse, false or misleading representations, and unfair practices in debt collection, and clarifying requirements for certain consumer-facing debt collection disclosures; (2) issue a final rule addressing permanent thresholds for collecting and reporting data on open-end lines of credit and closed-end mortgage loans; (3) finalize its proposal to rescind in their entirety the mandatory underwriting provisions in its 2017 payday rule, titled Payday, Vehicle Title, and Certain High-Cost Installment Loans; and (4) issue a notice of proposed rulemaking to coincide with the issuance of a proposed rule addressing the public disclosure of Home Mortgage Disclosure Act data in light of consumer privacy interests.
CFPB Seeks Public Comment on Upcoming Assessment of Integrated Mortgage Disclosure Rule
On November 20, the CFPB announced that it will conduct an assessment of the TILA–RESPA (Real Estate Settlement Procedures Act) Integrated Disclosures (TRID) Rule, fulfilling its duty under Section 1022(d) of the Dodd-Frank Act to assess all significant rules that the CFPB issues within five years of their effective date. The TRID Rule combines certain mortgage disclosures that consumers receive under TILA and RESPA and requires that all creditors use standardized forms for most transactions and provide loan estimates and closing disclosures to consumers within three business days. Specifically, the CFPB is seeking public comment on its plans for assessing the rule on a range of topics, including the feasibility and effectiveness of the assessment plan, recommendations to improve the assessment plan, and recommendations for modifying, expanding, or eliminating the TRID Rule. Comments are due by January 21, 2020.
CFPB Proposes Changes to Remittance Rule
On December 3, the CFPB issued a notice of proposed rulemaking (NPRM) relating to its Remittance Rule (Rule). The Rule generally requires companies that provide remittance transfers in the normal course of business to disclose to consumers certain fees and the exchange rates that apply to transfers. The Rule also includes an exception that allows certain banks and credit unions to estimate certain fee and exchange rate information instead of disclosing exact amounts in certain circumstances, but this exception expires by statute in July 2020. The NPRM proposes to allow certain banks and credit unions to continue to provide estimates under certain conditions where it could be economically infeasible for these institutions to provide exact disclosures. This could preserve consumers’ ability to send remittances from their bank accounts to certain destinations and reduce the compliance burden for banks and credit unions. In addition, the CFPB is proposing to increase the safe harbor threshold that determines whether a company makes remittance transfers in the normal course of its business and is subject to the Rule. Under the NPRM, companies making 500 or fewer transfers annually in the current and prior calendar years would not be subject to the rule. According to the CFPB, this would reduce the burden on over 400 banks and almost 250 credit unions that send a relatively small number of remittances—less than .06 percent of all remittances. Comments are due 45 days after publication of the NPRM in the Federal Register.
FDIC Releases Enforcement Actions Manual
On December 2, the FDIC publicly released its Formal and Informal Enforcement Actions Manual (Manual). The 135-page Manual is divided into 11 topical chapters, including chapters on administrative matters, authority, and specific types of enforcement actions. The Manual instructs FDIC staff developing, processing, and monitoring formal and informal enforcement actions against insured depository institutions and institution-affiliated parties for violations, unsafe and unsound practices, and other actionable misconduct. The Manual’s release is intended to provide greater clarity and transparency regarding the operations of the FDIC’s enforcement action program. It is not intended to establish supervisory requirements or industry guidance.
California Signs Two New Consumer Protection Bills into Law
On September 25, California’s governor signed into law two bills that impact financial consumer services companies in California: California Assembly Bill 539 and California Senate Bill 187. Both laws go into effect January 1, 2020. Read the LenderLaw Watch blog post.
This week’s Roundup contributors: Josh Burlingham, Alex Callen.