Regulatory Developments
SEC’s OCIE Releases Its Cybersecurity and Resiliency Observations
On January 27, the SEC’s OCIE released its examination observations of cybersecurity and operational resiliency practices.
The observations highlight certain approaches taken by market participants in the areas of: (i) governance and risk management; (ii) access rights and controls; (iii) data loss prevention; (iv) mobile security; (v) incident response and resiliency; (vi) vendor management; and (vii) training and awareness. OCIE provided its observations to assist market participants in their consideration of how to enhance cybersecurity preparedness and operational resiliency.
Governance and Risk Management. OCIE observed that a key element of effective programs is the incorporation of a governance and risk management program that generally includes, among other things: (i) a risk assessment to identify, analyze, and prioritize cybersecurity risks to the organization; (ii) written cybersecurity policies and procedures to address those risks; and (iii) the effective implementation and enforcement of those policies and procedures.
Access Rights and Controls. OCIE provided its observations regarding access controls, which generally include: (i) understanding the location of data, including client information, throughout an organization; (ii) restricting access to systems and data to authorized users; and (iii) establishing appropriate controls to prevent and monitor for unauthorized access.
Data Loss Prevention. OCIE observed several measures designed to prevent data loss, including: routine scans to check for vulnerabilities; perimeter security; detective security; patch management; hardware and software inventory management; encryption and network segmentation; insider threat monitoring; and securing and monitoring legacy systems.
Mobile Security. OCIE observed measures that firms using mobile devices and mobile applications take, including: establishing policies and procedures for their use; managing use of mobile devices; implementing security measures; and training employees on policies and effective measures to protect mobile devices.
Incident Response and Resiliency. OCIE observed that organizations with a response plan included a plan for various cyber-attack scenarios; addressed reporting requirements; designated specific employees with roles and responsibilities in the event of a cyber-attack; and tested and assessed the plan. OCIE also observed strategies to address resiliency, including maintaining an inventory of core business operations and systems; assessing risks and prioritizing business operations; and maintaining back-up data in a different network and offline.
Vendor Management. OCIE observed that organizations established a vendor management program; had an understanding of vendor relationships, including contractual obligations, and employed vendor monitoring and testing.
Training and Awareness. OCIE observed that organizations employed training on policies and procedures on the firm’s cybersecurity policies; training on cybersecurity and resiliency; and monitoring and assessing the effectiveness of training.
FDIC and OCC Issue Joint Statement on Heightened Cybersecurity Risk
On January 16, the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency (together, the Agencies) issued a joint statement on heightened cybersecurity risk to remind financial institutions about the cybersecurity risk management principles set forth in the Interagency Guidelines Establishing Information Security Standards (see 12 CFR 30 and 12 CFR 364) and the cybersecurity materials provided by the Federal Financial Institutions Examination Council. According to the Agencies, “the growing number of attacks highlights the critical importance of making cybersecurity preparedness and resiliency a top priority.” The Agencies note that increased geopolitical tensions and threats of aggression may result in attacks against U.S. targets and interests, and the Agencies urge senior management of financial institutions to re-evaluate the adequacy of their information technology safeguards against threats, especially safeguards against ransom and other destructive malware. Key institutional controls include response, resilience, and recovery capabilities; identity and access management; network configuration and system hardening; employee training; security tools and monitoring; and data protection.
SEC Releases New Compliance and Disclosure Interpretations on MD&A
On January 24, the SEC published three new compliance and disclosure interpretations that provide guidance on how companies can comply with the option to exclude the third-year financial comparison in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) under the amended instruction to Item 303(a). These CDIs provide unsurprising guidance on two incorporation-by-reference questions and a question whether the amended instruction to Item 303(a) permits a company to omit the third-year financial discussion if the company believes it is “necessary” for its MD&A disclosure.
ISDA Seeks Clarity on “Zombie” LIBOR Issues
On January 24, ISDA published two letters that ISDA sent to the Financial Conduct Authority (FCA) and ICE Benchmark Administration (IBA). ISDA’s letters to the regulatory agencies are intended to provide swap market participants with additional details regarding the period of time that UK banks may publish rates that may be non-representative of actual LIBOR. ISDA’s letters to the FCA and IBA are part of an industry-wide process to mitigate the risks caused by a “zombie” LIBOR situation. A zombie LIBOR could exist in 2021, before the FCA has officially announced that LIBOR is dead or has ceased to exist, but after the FCA no longer compels panel banks to submit interest rates to determine LIBOR. This interim period or “pre-cessation” period could feature a zombie LIBOR, a LIBOR that’s neither live nor officially dead, but merely an inaccurate representative of true LIBOR. While the market is split on how to deal with a LIBOR that is unrepresentative of true funding rates, ISDA and other key regulators are in agreement that any pre-cessation period should be as short as reasonably possible and that pre-cessation fallback triggers should be implemented by market participants.
UK Regulators on LIBOR Transition: “The time to act is now”
On January 16, the Bank of England (BoE), FCA and the Working Group on Sterling Risk-Free Reference Rates (RFRWG) published a set of documents that outline regulatory priorities and milestones for LIBOR transition in 2020. The BoE and FCA published a joint letter to set out initial expectations for firms’ transition progress during 2020, including in relation to the targets set by the RFRWG. The documents are important, not only for financial institutions supervised in the UK, but for any institution with material exposure to LIBOR-based agreements. For example, the RFRWG published a set of “lessons learned” from recent conversions of legacy LIBOR contracts, as well as a factsheet that makes clear the “whys” and “whats” of LIBOR transition and sets out why all market participants need to act now.
Andrew Hauser, Executive Director for Markets at the BoE, noted: “Today’s suite of publications helps provide greater clarity to the market on a number of issues central to LIBOR transition as we head towards the 2021 deadline.” The publications by the BoE, FCA and RFRWG, along with an update in December, provide a comprehensive suite of materials to support LIBOR transition in 2020. The guidance in the publication, and statements by the UK regulators, make clear that for LIBOR transition, the time to act is now.
On January 17, the U.S. Department of the Treasury published long-awaited regulations that substantially implement the balance of new authorities under which the Committee on Foreign Investment in the United States (CFIUS) will review inbound foreign investment for national security concerns, as granted in the August 2018 Foreign Investment Risk Review Modernization Act (FIRRMA). The new Part 800 Rule is complex and bittersweet, markedly expanding CFIUS’s powers and reflecting modest changes in response to public comments on the proposed rule. To learn about the important features of the new Part 800 Rule, read the client alert issued by Goodwin’s Global Trade practice.
SEC Deems Digital-Currency Investment Vehicle a Reporting Company
On January 21, Grayscale Bitcoin Trust (Trust) became the first digital currency investment vehicle to attain the status of an SEC reporting company. The Trust’s sponsor, Grayscale Investments, LLC (Grayscale), is a digital currency asset manager that offers cryptocurrency investment products that provide exposure to Bitcoin and Ethereum, among other assets. The Trust holds Bitcoin in particular, and issues shares to investors that represent an ownership interest in the Trust. The purpose of the Trust is to provide investors a cost-effective and convenient way to invest in Bitcoin without the complications that may result from buying and holding Bitcoin directly. Since 2015, shares of the trust have traded publicly on OTCQX under the ticker symbol GBTC. For more information, read the Digital Currency & Blockchain Perspectives blog post.
Enforcement & Litigation
CFPB Announces Policy Regarding Prohibition on Abusive Acts or Practices
On January 24, the CFPB released a policy statement outlining framework that the CFPB will immediately begin to apply in matters of supervision and enforcement regarding the “abusive” element of unfair, deceptive, or abusive acts or practices (UDAAP). According to the policy statement, the CFPB will (1) focus on citing or challenging “abusive” conduct only when the harm to consumers outweighs the benefit to consumers, (2) generally avoid citing abusiveness in conjunction with unfairness or deception when the violation relies on all or nearly all of the same facts, and (3) seek financial penalties for abusiveness, beyond pure restitution for injured consumers, only in the absence of a good-faith effort by the offending institution to comply with the law. The CFPB acknowledged the influence on the policy statement of the Symposium on Abusive Acts or Practices that it hosted in June 2019 with academics and practitioners, as well as feedback from stakeholders. Although the policy statement is welcome news to the consumer financial services community regarding the self-restraint the CFPB will exercise before citing or alleging that a practice or conduct is abusive, it provided little clarity the industry had sought. However, the CFPB left open the possibility of engaging in future rulemaking in order to provide further clarification on its abusiveness standard.
California and New York Propose to Expand Consumer Protections
At the start of the new year, both California’s Governor Gavin Newsom and New York’s Governor Andrew Cuomo proposed expansions to their respective state’s regulatory oversight of consumer financial services. Of particular note, Governor Newsom’s 2020-21 Budget Summary (California’s Proposal) explained that the reason behind California’s proposed regulatory expansion is the belief that “[t]he federal government’s rollback of the [CFPB]” leaves consumers “vulnerable to predatory businesses and leaves companies without the clarity they need to innovate.” Governor Cuomo’s 2020 State of the State Address (New York’s Proposal) based its need for regulatory expansion on a similar notion — regulating “many bad actors that go unchecked.” Cuomo stated that New York “license[s] barbers, home inspectors and used car dealers [] – so it makes no sense that [New York] [doesn’t] have the authority to license an industry that can cause families financial ruin.” Read the LenderLaw Watch blog post.
Goodwin News
Goodwin Alert: The Past, Present and Future of the Non-Traded NAV REIT Structure
More than 15 years ago, on behalf of an internationally recognized financial services firm, Goodwin created the first open-ended non-traded REIT structure that allowed for regular sales and redemptions at net asset value (NAV REIT). That NAV REIT offering was cleared with federal and state regulators but was unfortunately shelved on the eve of the Great Recession, and it has taken well over a decade for this structure to become well established. Today, with Blackstone Real Estate Income Trust raising staggering amounts of capital, NAV REITs are dominating the non-traded REIT space. While the basic NAV REIT structure has not changed significantly since it was first developed, there is currently some variation in product design in the space, and there is room for more variation and improvement. To learn more about the history of NAV REITs, some of the features of NAV REITs currently in the market, and potential new features to improve upon the structure that may be implemented in the future, particularly with respect to the liquidity feature that is central to its appeal to a wide range of investors, read the client alert issued recently by Goodwin’s REITs practice.
ABA Conference for Community Bankers — Feb. 9-12
Community banking is about building relationships with your customers and your community. Attend the American Bankers Association’s Conference for Community Bankers in Orlando, Florida, and expand your network of fellow bank leaders from across the country. Join the ABA as it celebrates its 40th anniversary to hear from experts who understand community banking and leave with new insights and practical takeaways to grow your business. Goodwin is a sponsor. For more information, click here.
This week’s Roundup contributors: Josh Burlingham, Alex Callen and Justin Pierce.