On December 23, DFS issued a letter to financial institutions regulated by the DFS to seek assurance that regulated institutions’ boards of directors, or the equivalent governing authorities, and senior management fully understand and have assessed the risks associated with LIBOR cessation, have developed an appropriate plan to manage them, and have initiated actions to facilitate transition. The letter reminded institutions that trillions of dollars in credit, derivatives, and securities transactions are linked to LIBOR, and that the cessation of LIBOR by the end of 2021, and transition to the Secured Overnight Financing Rate (SOFR) in 2020, will have a significant impact on such institutions as well as the broader market. DFS warned that the likely cessation of LIBOR poses significant risks if not appropriately managed. Therefore, DFS requires that each regulated institution submit a response to DFS describing the institution’s plan to address its LIBOR cessation and transition risk. The plan should describe (1) programs that would identify, measure, monitor and manage all financial and non-financial risks of transition, (2) processes for analyzing and assessing alternative rates, and the potential associated benefits and risks of such rates both for the institution and its customers and counterparties, (3) processes for communications with customers and counterparties, (4) a process and plan for operational readiness, including related accounting, tax and reporting aspects of such transition, and (5) the governance framework, including oversight by the board of directors, or the equivalent governing authority, of the regulated institutions. Financial institutions regulated by DFS must submit their assurances regarding LIBOR preparedness to DFS before February 7, 2020.
On December 18, the CFTC issued three important no-action letters to provide relief to swap dealers and other market participants as part of the industry-wide initiative to transition legacy swaps that reference LIBOR to new swaps that reference alternative benchmarks, including SOFR, the preferred alternative benchmark for U.S. dollar LIBOR contracts. Each of the CFTC’s no-action letters set forth conditions under which counterparties will qualify for relief in connection with amending swap transactions to update provisions referencing LIBOR, or other interbank offered rates, to replacement rates such as SOFR and other alternative benchmarks.
To prepare for the possible permanent cessation of LIBOR, and in order to facilitate the adoption of SOFR, market participants are expected to (1) amend swaps to include new fallback provisions for when LIBOR is discontinued, (2) amend swaps to replace LIBOR with SOFR and (3) potentially enter into new swaps to hedge the basis risk between legacy rates and new rates. When swap dealers and other market participants amend legacy swap transactions or enter into new swap transactions, such amendments or new trades trigger the application of a wide range of rules adopted by the CFTC pursuant to Title VII of the Dodd-Frank Act. If market participants had to comply with the rules imposed under Title VII, it could jeopardize the industry-wide effort to efficiently transition away from LIBOR. The CFTC’s no-action letters provide relief from the requirements that would otherwise be applicable as a result of the expected swap amendments. To provide the necessary relief, the separate divisions issued the no-action letters.
- The Division of Swap Dealer and Intermediary Oversight issued CFTC Letter 19-26, which provides relief to swap dealers from registration de minimis requirements, uncleared swap margin rules, business conduct requirements, confirmation, documentation, and reconciliation requirements, and certain requirements applicable to commercial end-user counterparties.
- The Division of Market Oversight CFTC issued CFTC Letter 19-27, which provides time-limited relief from the swap execution facility trade execution requirement.
- The Division of Clearing and Risk CFTC issued CFTC Letter 19-28, which provides time-limited relief from the swap clearing requirement and related exceptions and exemptions.
As previously reported in the Roundup, CFTC Chairman Heath Tarbert had already notified market participants that the CFTC would publish series of no-action letters in Chairman Tarbert’s recent speech regarding “Zombie LIBOR” issues on December 11. Upon announcing the CFTC’s no-action letters, Chairman Tarbert said, “I am pleased that the CFTC is one of the first agencies out of the gate to provide LIBOR-transition relief. This is a testament to the hard work of our dedicated staff and our commitment to providing market participants with clarity.” Chairman Tarbert also reminded market participants that “next year is going to be crucial for the transition away from LIBOR. Firms that fail to do so will put themselves and the global financial system at risk. The CFTC remains committed to working with market participants and our fellow regulators on this critical issue.”
On January 7, the SEC’s OCIE announced its 2020 examination priorities for its national exam program. These priorities provide insight into areas where the OCIE intends to focus during the coming year, but they do not necessarily encompass all of the areas that will be covered in its examinations. The general categories for the 2020 examination priorities are: (1) matters of importance to retail investors, including disclosures pertaining to fees and expenses that investors pay, and conflicts of interest; (2) information security; (3) financial technology and innovation, including digital assets and electronic investment advice (often referred to as “robo-advisers”); (4) focus areas relating to registered investment advisers (RIAs), including new RIAs that have never been examined, investment companies, broker-dealers and municipal advisors; (5) anti-money laundering programs; (6) compliance and risks at entities responsible for critical market infrastructure, such as clearing agencies, national securities exchanges, alternative trading systems and transfer agents; and (7) the operations of the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board.
As compared to last year, the OCIE’s priorities have largely remained consistent, with one notable development pertaining to the SEC’s adoption of Regulation Best Interest: the Broker-Dealer Standard of Conduct and new Form CRS Relationship Summary and release of its Interpretation Regarding Standard of Conduct for Investment Advisers in June 2019. To further assist broker-dealers before the June 30, 2020 compliance date, the OCIE notes that it plans to engage with broker-dealers during examinations on their progress on implementing the new rules. After the compliance date, the OCIE intends to assess implementation of the requirements of Regulation Best Interest, including policies and procedures regarding conflict disclosures, and for both broker-dealers and RIAs, the content and delivery of Form CRS. In addition, in light of SEC-registered firms’ and other market participants’ transition away from LIBOR, a widely used reference rate in a number of financial instruments, to an alternative reference rate, the OCIE noted that it will be reviewing firms’ preparations and disclosures regarding their readiness, particularly in relation to the transition’s effects on investors.
On December 30, the SEC announced that it is proposing amendments to Rule 2-01 under Regulation S-X to codify certain staff consultations and modernize certain aspects of its auditor independence framework. The proposed amendments primarily focus on fact patterns presented to SEC staff through consultations that involve a relationship with, or services provided to, an entity that has little or no relationship with the entity under audit, and no relationship to the engagement team conducting the audit. In particular, the SEC proposes to amend the definition of an affiliate of the audit client to address certain affiliate relationships in common control scenarios and the definition of investment company complex, shorten the look-back period for domestic first-time filers in assessing compliance with the independence requirements, add certain student loans and de minimis consumer loans to the categorical exclusions from independence-impairing lending relationships, replace the reference to “substantial stockholders” in the business relationship rule with the concept of beneficial owners with significant influence, introduce a transition framework for merger and acquisition transactions to consider whether an auditor’s independence is impaired, and make certain other updates. The proposed amendments are subject to public comment for 60 days after publication in the Federal Register.
The SEC has approved proposed amendments to the definitions of “accredited investor” and “qualified institutional buyer” (QIB). If approved, the proposed amendments would expand investor access to private capital markets by adding new categories of natural persons and entities that may qualify as accredited investors or QIBs. The proposed amendments are subject to public comment for 60 days after publication in the Federal Register. To learn more, read the client alert issued by Goodwin’s Public Companies practice.
The staff of the SEC Division of Corporation Finance has published “Confidential Treatment Applications Submitted Pursuant to Rules 406 and 24b-2,” Disclosure Guidance Topic No. 7, which updates and replaces the prior guidance in Staff Legal Bulletin 1 (1997) and Staff Legal Bulletin 1A (2001). In March 2019, the SEC adopted amendments to the exhibit requirements in Item 601(b) of Regulation S-K that permit companies to file redacted material contracts without having to provide the information to the SEC staff for review and apply for confidential treatment of the redacted information, as long as the redacted information is not material and would be competitively harmful if publicly disclosed. Although most companies now use this method to protect competitively sensitive information, the confidential treatment application process provided by Securities Act Rule 406 and Exchange Act Rule 24b-2 is still available, and in some cases is the only available method to protect confidential information in exhibits filed with the SEC. These include:
- Extensions of previously-granted confidential treatment applications; and
- Filings such as Schedule 13D or filings for which the exhibit requirements are governed by Item 1016 of Regulation M-A.
CF Disclosure Guidance Topic No. 7 provides updated guidance for companies on how and what they should submit when filing a confidential treatment application. This includes:
- How to apply for confidential treatment, including instructions on filing the exhibit on EDGAR and the required contents and process for submitting the written application;
- Guidance on the materiality of omitted information and excessive omissions;
- The process that the staff follow when reviewing confidential treatment applications; and
- The process for requesting extensions of previously-granted confidential treatment orders, including use of the short form application for an extension.
When seeking to extend previously-granted confidential treatment orders, companies should note that filing the redacted exhibit on EDGAR following the procedures provided by the 2019 amendments to Item 601(b) will not provide confidential treatment for previously filed information.
On December 23, the Board of Governors of the Federal Reserve System (Federal Reserve Board) approved (1) modifications to the Federal Reserve Banks’ National Settlement Service (NSS) and Fedwire® Funds Service to support enhancements to the same-day automated clearinghouse (ACH) service, (2) changes intended to reduce the risk that the modified service closings and cutoffs would increase the frequency of delays to the reopening of the Fedwire Funds Service, and (3) corresponding changes to the Federal Reserve Policy on Payment System Risk (PSR policy) related to a new posting time for transactions and an increased daylight overdraft fee. Specifically, the Federal Reserve Board has approved the following modifications and enhancements to be implemented in March 2021, which would accommodate Nacha's current effective date of March 19, 2021 for implementing the later same-day ACH window:
- The National Settlement Service will close at 6:30 p.m. ET, one hour later than its current closing at 5:30 p.m. ET. The opening time for the National Settlement Service will remain at 7:30 a.m. ET.
- The Fedwire Funds Service will close at 7 p.m. ET, 30 minutes later than its current cutoff at 6:30 p.m. ET. The Fedwire Funds third-party cutoff will occur at 6:45 p.m. ET, 45 minutes later than its current cutoff at 6 p.m. ET. The opening time for the Fedwire Funds Service will remain at 9 p.m. ET on the previous calendar day.
- The Reserve Banks will modify their current practice of maintaining a two-hour window between the closing and the reopening of the Fedwire Funds Service to maintain only a 90-minute window.
- The Reserve Banks will raise the threshold for granting extensions to the Fedwire Funds Service closing time from $1 billion to $3 billion. The Reserve Banks, in consultation with the Federal Reserve Board, will determine whether further increases to the threshold are warranted to maintain the regular and consistent opening of the Fedwire Funds Service at 9 p.m. ET.
- The Federal Reserve Board is amending part II of the PSR policy to add a new 6 p.m. ET posting time for same-day ACH transactions, remove the current 5:30 p.m. ET posting time for ACH return transactions, and make conforming changes to the daylight overdraft fee calculation.
On December 20, the Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency, Farm Credit Administration and Federal Housing Finance Agency announced they will reopen and extend until January 23, 2020 the comment period on their September 17, 2019 proposal that would, as covered in the September 18, 2019 edition of the Roundup, amend the 2015 Swap Margin Rule to, among other things, remove the requirement for covered swap entities to collect initial margin from affiliates and promote an orderly transition away from LIBOR. The agencies extended the comment period to allow interested persons more time to analyze the issues and prepare their comments, which were originally due by December 9, 2019.
On December 20, the FDIC and the Federal Reserve Board announced that they will extend until February 28, 2020 the deadline on the request for information on their use of the Uniform Financial Institutions Rating System, also known as the CAMELS rating system. As covered in the October 23, 2019 edition of the Roundup, the agencies had, on October 18, 2019, requested comments on both the consistency of ratings assigned under the CAMELS rating system and how the agencies use CAMELS ratings in enforcement actions and in reviewing bank applications. The agencies extended the comment period to allow interested persons more time to analyze the issues and prepare their comments, which were originally due by December 30, 2019.
On December 13, Massachusetts regulators held their first “Meet the Regulators” event, connecting key Massachusetts regulators with the Fintech community. At the event, Undersecretary Edward A. Palleschi from the Office of Consumer Affairs and Business Regulation, and regulators from the Division of Banks (DOB), the Division of Insurance (DOI), and the Massachusetts Securities Division (MSD) made introductions and presented on areas of the law in the Fintech space most recently garnering regulator attention.
The DOB noted the broad scope of Fintech activities, including algorithms, robo-advising, automation, and other innovative communication methods, identifying their supervisory focus on cybersecurity as well as initial due diligence, contract language, and ongoing monitoring involving third-party service providers. The DOB also acknowledged the breadth of its regulatory reach, which includes not only institutions taking deposits, but a variety of non-depository consumer financial service providers, such as mortgage, consumer finance, debt collection, money services businesses, and other lending and payment platforms.
The DOI encouraged innovators in the Insuretech space to engage with the DOI if there is a perceived roadblock or issue with a proposed, new service or product, as the DOI is interested in helping to find a path forward for innovations that benefit consumers and insurers.
The MSD discussed its Fintech Working Group, newly formed in March 2019 to facilitate listening, learning, and addressing issues of innovation and regulation in emerging Fintech. The MSD explained that because it defines a “security” as encompassing unconventional financial investments, innovators should carefully consider how their products or services might fall under existing regulatory regimes, including banking, insurance, or securities.
The Massachusetts regulators expressed their hope that this event would mark the first of a series of regular gatherings.
On December 10, the Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB) jointly hosted a workshop on accuracy in consumer reporting. The workshop was divided into four panels and featured a variety of speakers ranging from consumer advocates to industry representatives. Each panel sought to address the unique challenges, complexities, and recent developments that impact accuracy in consumer reports. Read the LenderLaw Watch blog post.
Enforcement & Litigation
In a recent decision, the Second Circuit in ;United States v. Blaszczak may have made the prosecution of insider trading significantly easier by ruling that the government is not required to prove that an insider received any “personal benefit” in exchange for sharing material, nonpublic information with a trader when the crime is charged under the wire fraud and securities fraud statutes in Title 18 of the United States Code. This ruling establishes an explicit distinction between what the government must prove to convict defendants of insider trading charges brought under Title 18 rather than those charged under the Securities Exchange Act of 1934, found in Title 15 of the United States Code (Exchange Act). To learn more, read the client alert issued by Goodwin’s White Collar Defense practice.
On December 11, the FTC announced it had reached a settlement with the remaining defendants in an enforcement action against multiple related companies and their controllers involved in an alleged phantom debt scheme in which the defendants pressured consumers into paying non-existent debts by threatening legal action and falsely claiming to be attorneys or affiliated with attorneys. Read the Enforcement Watch blog post.
On December 11, PayPal, Inc. filed suit against the CFPB in the District of Columbia, challenging the CFPB’s Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z) Rule’s application to digital wallets. Read the LenderLaw Watch blog post.
The 2020 Consumer Financial Services Committee Meeting of the ABA Business Law Section will consist of nearly 250 practice-area professionals. Goodwin is a sponsor. For more information, click here.This week’s Roundup contributors: Zoe Bellars, Christina Hennecken, Stella Padilla and Briana Whinnie.