On April 7, the SEC’s OCIE issued two risk alerts: Examinations that Focus on Compliance with Regulation Best Interest and Examinations that Focus on Compliance with Form CRS. According to OCIE, the risk alerts are designed to provide broker-dealers and investment advisers with advance information about the expected scope and content of the initial examinations for compliance with Regulation Best Interest and Form CRS. The compliance date for Regulation Best Interest and Form CRS is June 30, 2020. After the compliance date, initial examinations will likely occur during the first year after the compliance date.
Initial examinations of Regulation Best Interest will focus on assessing whether broker-dealers have made a good faith effort to implement policies and procedures reasonably designed to comply with Regulation Best Interest, including the operational effectiveness of broker-dealers’ policies and procedures. For example, the examination will include review of disclosures and policies and procedures designed to address exercise of reasonable diligence, care, and skill when making a recommendation to a retail customer, conflicts of interest associated with recommendations to retail customers and compliance with Regulation Best Interest as a whole. Initial examinations of Form CRS will focus on assessing whether firms have made a good faith effort to implement Form CRS, including reviewing the filing and posting of a firm’s relationship summary as well as its process for delivering the relationship summary to existing and new retail investors. The initial examinations will take into account firm-specific effects from disruptions caused by COVID-19. According to Pete Driscoll, Director of OCIE, “Regulation Best Interest and Form CRS are critical to the protection of Main Street investors, and we feel it is important to share our plans for initial examinations to help firms assess their preparedness as the June 30, 2020 compliance date nears.”
On April 8, the SEC’s Division of Investment Management staff released an Information Update regarding a procedural matter relating to the exemptive application process. When the SEC issues a “notice” of an exemptive application, the notice typically states that interested persons who wish to submit a hearing request must submit the request in writing to the SEC’s physical mailing address. In light of disruptions caused by COVID-19, the notices will now require interested persons to submit any such hearing requests by sending an e-mail to the SEC.
On April 6, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) issued two interim final rules to implement Section 4012 of the CARES Act, which requires the agencies to temporarily lower the community bank leverage ratio to 8%. The interim final rules, which can be found here and here, go beyond the requirements of the CARES Act in that they provide community banking organizations with a clear and gradual transition back to the 9% leverage ratio requirement, rather than resetting the ratio at 9% after December 31, 2020 as contemplated by the CARES Act.
The interim final rules modify the community bank leverage ratio framework so that:
- Beginning in the second quarter 2020 and until the end of the year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the community bank leverage ratio framework; and
- Community banking organizations will have until January 1, 2022 before the community bank leverage ratio requirement is re-established at greater than 9%.
Under the interim final rules, the community bank leverage ratio will be 8% beginning in the second quarter and for the remainder of calendar year 2020, 8.5% for calendar year 2021 and 9% thereafter. The interim final rules also maintain a two-quarter grace period for a qualifying community banking organization whose leverage ratio falls no more than 1% below the applicable community bank leverage ratio.
The changes will be effective upon publication of the interim final rules in the Federal Register. Comments to the interim final rules will be accepted for 45 days after such publication.
On April 1, the Federal Reserve issued an interim final rule that temporarily excludes U.S. Treasury securities and deposits at Federal Reserve Banks from the denominator of the supplementary leverage ratio. The change is expected to facilitate institutions’ increased reserve balances resulting from the Federal Reserve’s asset purchases and establishment of various programs to support the flow of credit to the economy and institutions’ need to continue to accept high levels of customer deposits, all without requiring institutions to increase capital. The Federal Reserve stated that the temporary exclusion is intended to allow institutions to expand their balance sheets as appropriate to continue to serve as financial intermediaries, not to allow institutions to increase capital distributions, and that it will administer the rule accordingly. The interim final rule has immediate effect and will remain in effect until March 31, 2021. The Federal Reserve will accept public comments on the interim final rule for 45 days after its publication in the Federal Register.
The federal financial institution regulatory agencies, in consultation with state financial regulators, issued a revised interagency statement encouraging financial institutions to work constructively with borrowers affected by COVID-19 and providing additional information regarding loan modifications. The revised statement clarifies the interaction between the interagency statement issued on March 22, 2020, and the temporary relief provided by Section 4013 of the CARES Act. Section 4013 allows financial institutions to suspend the requirements to classify certain loan modifications as troubled debt restructurings (TDRs). The revised interagency statement reiterates previous guidance indicating that the agencies will not criticize institutions for working with customers affected by COVID-19 in a safe and sound manner. The agencies' examiners will exercise judgment in reviewing loan modifications, including TDRs, and will not automatically adversely risk-rate credits that are affected by COVID-19, including those considered TDRs. Regardless of whether modifications are considered TDRs or are adversely classified, agency examiners will not criticize prudent efforts to modify terms on existing loans for affected customers.
The revised interagency statement also provides the agencies' views on consumer protection considerations. While lenders and servicers must adhere to consumer protection requirements, “the agencies will take into account an institution’s good-faith efforts demonstrably designed to support consumers and comply with consumer protection laws” during the national emergency. In this regard, the revised interagency statement expressly provides that “the agencies do not expect to take a consumer compliance public enforcement action against an institution, provided that the circumstances were related to the National Emergency and that the institution made good faith efforts to support borrowers and comply with the consumer protection requirements, as well as responded to any needed corrective action.”
On April 3, the Financial Crimes Enforcement Network (FinCEN) updated previously issued notices to assist financial institutions in complying with the Bank Secrecy Act (BSA) and to announce a direct contact mechanism for COVID 19-related issues.
Beneficial Ownership Information Collection Requirements for Existing Customers. FinCEN stated that PPP loans for existing customers will not require re-verification under the BSA for eligible federally insured depository institutions and federally insured credit unions. Non-PPP loans may be afforded certain exceptive relief to beneficial ownership requirements pursuant to FinCEN’s September 7, 2018 ruling (FIN-2018-R004). If renewal, modification, restructuring or extension for existing legal entity customers falls outside of the scope of FIN-2018-R004, FinCEN recognizes that there may be delays in compliance.
BSA Reporting Obligations & Updates to Currency Transaction Report (CTR) Filing Obligations. In response to the COVID-19 pandemic, FinCEN acknowledged financial institutions may have trouble meeting certain BSA obligations and that there may be some reasonable delays in compliance. FinCEN also suspended the implementation of the February 6, 2020 ruling (FIN-2020-R001) on CTR filing obligations when reporting transactions involving sole proprietorships and entities operating under a “doing business as” (DBA) name (the “2020 Ruling”) until further notice. FinCEN stated it will work on issuing further information on these types of filings, but until such issuance, financial institutions should continue to report transactions involving sole proprietorships and DBAs under prior practice. Financial institutions that already made changes to comply with the 2020 Ruling will not need not revert to prior practice and may report in accordance with FIN-2020-R001.
New FinCEN COVID-19 Online Contact Mechanism. FinCEN stated it also created a COVID-19-specific online contact mechanism for financial institutions to communicate FinCEN COVID-19-related concerns while adhering to BSA obligations. Financial institutions that wish to use such communications should go to www.FinCEN.gov, click on “Need Assistance,” and select “COVID19” in the subject drop-down list. Such COVID-19-related communications are strongly encouraged but not required. Depending on the volume, FinCEN may only respond via an automated message confirming receipt.
On April 3, the federal financial institution regulatory agencies and state financial regulators, including the Federal Reserve, FDIC, OCC, Consumer Financial Protection Bureau (CFPB), National Credit Union Administration and Conference of State Bank Supervisors issued a joint policy statement encouraging servicers to offer consumers short-term payment forbearance programs, such as the one established by the CARES Act. If a borrower requests forbearance on a federally-backed mortgage loan due to financial hardship that is the direct or indirect result of COVID-19, servicers must provide a CARES Act forbearance that allows borrowers to defer their mortgage payments for up to 180-days or longer. Mortgage servicers offering these programs or plans will not have to provide an acknowledgement notice within 5 days of receipt of an incomplete application, provided the servicer sends the acknowledgment notice before the end of the forbearance or repayment period.
The statement also informs mortgage servicers of the agencies' flexible supervisory and enforcement approach during the COVID–19 pandemic regarding certain notices and communications to consumers required by mortgage servicing rules, including Regulation X. The agencies, for example, do not intend to take supervisory or enforcement action against mortgage servicers for delays in sending annual escrow statements, certain early intervention and loss mitigation notices or taking certain actions relating to loss mitigation set out in the mortgage servicing rules, provided that servicers make good faith efforts to comply in reasonable time.
On April 3, the FDIC issued a Financial Institutions Letter extending the public comment period for its notice of proposed rulemaking for brokered deposits (Proposed Rule) by 60 days. This extension provides bankers and other interested parties additional time in light of challenges associated with COVID-19. Among other things, the Proposed Rule (1) revises the definition of the “facilitation” prong of the “deposit broker” definition, (2) provides that a wholly owned operating subsidiary be eligible for the insured depository institution exception to the deposit broker definition under certain circumstances and (3) amends the “primary purpose” exception. The FDIC has set June 9, 2020 as the end of the extended comment period.
On April 2, in a Joint Release, the Federal Reserve, FDIC, OCC, SEC and Commodity Futures Trading Commission announced that they would consider comments submitted prior to May 1, 2020 on their proposal to modify the Volcker rule’s general prohibition on banking entities investing in or sponsoring hedge funds or private equity funds, or “covered funds.” The comment period was extended from April 1, 2020 to May 1, 2020 to allow for further analysis of the issues and to allow for potential disruptions resulting from COVID-19.
On April 6, the Federal Reserve Bank of New York announced that it had opened the registration process for its previously announced Commercial Paper Funding Facility (CPFF). The Reserve Bank also released an expanded set of Frequently Asked Questions (FAQs) pertaining to the facility’s operations. The CPFF will begin funding purchases of commercial paper on April 14, 2020.
On April 1, the CFPB issued a policy statement for credit reporting companies and furnishers concerning credit reporting guidance during the COVID-19 pandemic. This statement comes in the wake of the interagency statement, which encourages financial institutions to work constructively with borrowers and other customers affected by COVID-19, and provides more specific advice to consumer finance companies on meeting their reporting obligations. Read the client alert to learn more about the statement and its key provisions.
On March 20, the U.S. Department of Education issued a press release announcing several student loan relief efforts as protection to borrowers to combat COVID-19’s impact on the student lending industry. The orders outlined in the press release by U.S. Secretary of Education Betsy DeVos, along with emergency aid granted by the CARES Act and state regulators, demonstrates that the issue of federally held student loan debt will likely remain at the forefront during this pandemic. Read the LenderLaw Watch blog post to learn more about the student debt relief efforts and the potential regulatory and litigation risks resulting from this economic disruption.
Enforcement & Litigation
On March 30, ten years to the day after the Supreme Court issued its decision in Jones v. Harris, 559 U.S. 335 (2010), the U.S. Court of Appeals for the Sixth Circuit issued the first published federal appellate decision addressing the factors for deciding claims under Section 36(b) of the Investment Company Act of 1940 in a post-Jones world. Read the client alert for more information on the Court’s new decision.
The COVID-19 pandemic has led businesses in all sectors to seek different ways to generate revenue and find new financing to weather the storm in this unprecedented time. While these activities along with federal aid are desirable as our economy struggles, receipt of government funds and aid comes with significant legal risks. Read the client alert for more information on how to prepare for this heightened scrutiny.