Weekly RoundUp October 22, 2020

SEC Adopts Rule Providing New Regulatory Framework For Fund-Of-Funds

Editor’s Note

In the News. The Securities and Exchange Commission (SEC) announced that it adopted Rule 12d1-4 under the Investment Company Act of 1940 (the 1940 Act), providing a new regulatory framework for fund-of-funds and final amendments to certain auditor independence requirements; the Consumer Financial Protection Bureau (CFPB) issued a final rule extending the Government-Sponsored Enterprise (GSE) Patch and provided clarification around RESPA marketing service agreements; the Federal Deposit Insurance Corporation (FDIC) issued an interim final rule to provide temporary relief from certain audit and reporting requirements in order to mitigate unintended consequences resulting from pandemic-related stimulus actions; and the federal banking agencies finalized (1) the net stable funding ratio final rule, (2) a rule to limit the interconnectedness and reduce the impact from failure of the largest banking organizations, and (3) amendments to its capital and total loss absorbing capacity rules. These and other developments are discussed in more detail below.

We also invite you to visit Goodwin’s Coronavirus Knowledge Center and Consumer Financial Services Industry COVID-19 Hub, which are updated regularly, to learn how cross-industry teams at Goodwin are helping clients to fully understand and assess the ramifications of COVID-19,  navigate the potential effects of the outbreak on their businesses and evaluate whether and how to safely reopen.


Editor’s Note
Editor’s Note
Editor’s Note

Regulatory Developments

SEC Updates Auditor Independence Rule

On October 16, the SEC announced that it adopted final amendments to certain auditor independence requirements in Rule 2-01 of Regulation S-X. The final amendments are based on recurring fact patterns that the SEC staff has observed over years of consultations in which certain relationships and services triggered technical independence rule violations that were non-substantive rule breaches or required potentially time-consuming audit committee review of non-substantive matters. The final amendments:

  • Amend the definitions of “affiliate of the audit client,” in Rule 2-01(f)(4) and “investment company complex,” in Rule 2-01(f)(14) to address certain affiliate relationships, including entities under common control;
  • Amend the definition of “audit and professional engagement period,” specifically Rule 2-01(f)(5)(iii), to shorten the look-back period for domestic first time filers in assessing compliance with the independence requirements;
  • Amend Rule 2-01(c)(1)(ii)(A)(1) and (E) to add certain student loans and de minimis consumer loans to the categorical exclusions from independence-impairing lending relationships;
  • Amend Rule 2-01(c)(3) to replace the reference to “substantial stockholders” in the business relationships rule with the concept of beneficial owners with significant influence;
  • Replace the outdated transition provision in Rule 2-01(e) with a new Rule 2-01(e) that introduces a transition framework to address inadvertent independence violations that only arise as a result of a merger or acquisition transactions; and
  • Make certain other miscellaneous updates.

The amendments become effective 180 days after publication in the Federal Register. Voluntary early compliance is permitted after the amendments are published in the Federal Register in advance of the effective date provided that the final amendments are applied in their entirety from the date of early compliance. Auditors are not permitted to retroactively apply the final amendments to relationships and services in existence prior to the effective date or the early compliance date if selected by an audit firm.

CFPB Issues Final Rule Extending the GSE Patch

On October 20, the CFPB issued a final rule extending the GSE Patch until the mandatory compliance date of a final rule amending the General Qualified Mortgage (QM) loan definition in Regulation Z. The GSE Patch was scheduled to expire on January 10, 2021. The CFPB did not amend the provision in Regulation Z stating that the GSE Patch will expire if the GSEs (Fannie Mae and Freddie Mac) exit conservatorship.

The CFPB issued a proposal to amend the General QM loan definition on June 22, 2020, the same day it issued a proposal to extend the GSE Patch. The CFPB is currently developing a final rule amending the General QM loan definition and is planning to issue it at a later date.

CFPB Provides Clarification Around RESPA Marketing Service Agreements

On October 7, the CFPB published an FAQ on the Real Estate Settlement Procedures Act (RESPA) Section 8 and certain provisions of Regulation X, addressing common scenarios involving gifts, promotional activities and marketing services agreements (MSAs). The CFPB also rescinded Compliance Bulletin 2015-05 – RESPA Compliance and Marketing Services Agreements on the grounds that the Bulletin does not provide regulatory clarity on RESPA and Regulation X compliance. However, the rescission does not render MSAs per se or presumptively legal. Rather, MSA compliance will depend on specific facts, circumstances, and how the MSA is structured and implemented.

FDIC Approves Interim Final Rule to Provide Temporary Relief from Part 363 Audit and Reporting Requirements

On October 20, the FDIC issued an interim final rule to provide temporary relief for insured depository institutions that have experienced large cash inflows resulting from participation in the Paycheck Protection Program (PPP), Money Market Mutual Fund Liquidity Facility, and Paycheck Protection Program Liquidity Facility, or due to other factors such as the effects of other government stimulus efforts. In many cases, in light of the absence of regulatory action, such insured depository institutions would be required to incur substantial costs as a result of the COVID-19 pandemic and participation in these stimulus programs. The interim final rule would allow insured depository institutions that have experienced growth to determine whether they are subject to the requirements of Part 363 of the FDIC’s regulations for fiscal years ending in 2021 based on the consolidated total assets as of December 31, 2019. Such insured depository institutions, whose asset growth may be temporary but significant, would otherwise be required to develop processes and systems to comply with the annual independent audits and reporting requirements of Part 363 on a potentially short-term basis. The interim final rule is effective immediately, and comments will be accepted for 30 days after publication in the Federal Register.

Federal Banking Agencies Finalize Net Stable Funding Ratio Final Rule

On October 20, the FDIC, Office of the Comptroller of the Currency (OCC) and Board of Governors of the Federal Reserve System (Federal Reserve) finalized the net stable funding ratio (NSFR) final rule, which will require large banks to maintain a minimum level of stable funding, relative to each institution’s assets, derivatives and commitments over a one-year period. As a result, the NSFR rule will support the ability of banks to lend to households and businesses in both normal and adverse economic conditions by reducing liquidity risk and enhancing financial stability. The final rule complements the agencies’ liquidity coverage ratio rule, which focuses on short-term liquidity risks.

The final rule is generally similar to the proposal from May 2016 and includes several changes based on further analysis and public input on the proposal. In particular, the calibration is now tailored to be consistent with the Economic Growth, Regulatory Reform, and Consumer Protection Act, and matches the tailored calibration of the liquidity coverage ratio. Additionally, the funding requirements for certain assets were modified to better reflect their risks and support the stability of certain funding markets. The final rule is effective on July 1, 2021. Holding companies and any covered nonbank companies regulated by the Federal Reserve will be required to publicly disclose their NSFR levels semiannually beginning in 2023.

Federal Banking Agencies Finalize Rule to Reduce the Impact of Large Bank Failures

On October 20, the OCC, FDIC and Federal Reserve finalized a rule to limit the interconnectedness and reduce the impact from failure of the largest banking organizations. The final rule is substantially similar to the proposal announced last year and complements other measures that the agencies have taken to limit interconnectedness among the largest banking organizations. U.S. global systemically important bank holding companies (GSIBs), as well as U.S. intermediate holding companies of foreign GSIBs, are required to issue debt with certain features under the Federal Reserve “total loss-absorbing capacity,” or TLAC, rule. That debt could be used to recapitalize the holding company during bankruptcy or resolution if it were to fail. To discourage the largest banking organizations from purchasing TLAC debt, the final rule prescribes a more stringent regulatory capital treatment for holdings of TLAC debt. The regulatory capital treatment in the final rule will help to reduce the interconnectedness between the largest banking organizations and, if a GSIB were to fail, reduce the impact on the U.S. financial system from that failure. This rulemaking also includes a revision to the Federal Reserve’s TLAC requirements that will require GSIBs to report publicly their outstanding TLAC debt. The final rule is effective on April 1, 2021.

Federal Banking Agencies Finalize Changes to Capital and TLAC Rules

On October 8, the OCC, FDIC and Federal Reserve issued a final rule that revises the definitions of “eligible retained income” in the agencies’ capital rule and in the Federal Reserve’s total loss absorbing capacity (TLAC) rule. The final rule is identical to two interim final rules issued earlier this year in response to the effects of the COVID-19. The capital rule and TLAC rule respectively limit capital distributions as a function of eligible retained income by financially stressed organizations to help to preserve their capital and support lending; however, the agencies believe that if the distribution limits are too restrictive, then organizations could face sharp increases in their distribution limitations when their applicable ratios fall to certain levels, thereby incentivizing the organizations to reduce lending or take other actions to avoid using their capital buffers. The final rule’s revised definitions allow organizations to more gradually reduce distributions as they enter stress and accordingly provide banking organizations with stronger incentives to continue lending in stress scenarios. The final rule is effective January 1, 2021.

FinCEN Issues Advisory on Unemployment Insurance Fraud During Pandemic

On October 13, the Financial Crimes Enforcement Network (FinCEN) issued an advisory to alert financial institutions to unemployment insurance fraud observed during the COVID-19 pandemic. The advisory contains descriptions of COVID-19-related unemployment insurance fraud, associated financial red flag indicators and information on reporting suspicious activity.

SEC Adopts New Regulatory Framework for Fund-of-Funds Arrangements

On October 7, the SEC adopted Rule 12d1-4 (the Rule) under the 1940 Actand related amendments designed to put in place a comprehensive and streamlined regulatory framework for fund-of-funds arrangements. Read the client alert for an overview of the recently adopted Rule and related rule and form amendments.

Divided SEC Votes to Propose “Finder” Exemption from Broker Registration

On October 7, the SEC voted 3-2 to propose a conditional exemption (“Exemption”) to permit natural persons to engage in limited securities activities as “finders” on behalf of private issuers without registering as brokers under Section 15 of the Securities Exchange Act of 1934, as amended (“Exchange Act”). The proposed Exemption would put an end to some of the debate and uncertainty surrounding the permissibility of private issuers using unregistered finders to assist with raising capital, a murky area of U.S. securities law and regulation that Goodwin covered in greater detail in a previous client alert. Read the client alert to learn more about the background of the proposed Exemption, its impact if adopted and the questions it raises. 

Minority Investments in Asset Managers

While the market for “GP stakes” and similar non-controlling transactions with asset managers has grown considerably over the last ten years, there is also a growing interested and activity in the middle market as many prospective investors are already limited partners in the manager’s funds or clients of the manager. Read the client alert for Goodwin’s perspective, derived from our representative experience with various investors, target companies and management teams in minority transactions, on the factors that a target company and its management team should consider in connection with a proposed minority investment.

White House Issues Memorandum Urging Federal Agencies to Adopt Protections for Subjects of Enforcement

On August 31, the Office of Information and Regulatory Affairs (OIRA), an arm of the Office of Management and Budget (OMB) within the Executive Branch, issued a memorandum (M-20-31 memorandum) to implement Section 6 of Executive Order 13924, which reflects the Trump administration’s efforts to combat the economic consequences of COVID-19 as well as to address existing gaps in the enforcement framework with broadly-applicable protections for entities that are subject to enforcement. The memorandum, which articulates ten principles for agencies to consider in reviewing their existing procedures, could have implications for civil and administrative enforcement proceedings by the CFPB and other federal financial regulatory agencies, which may have inspired the CFPB’s recent policy statement on applications for early termination of consent orders. To learn more about the M-20-31 memorandum and its impact on financial regulatory agencies, read the LenderLaw Watch blog.

Litigation and Enforcement

Department of Justice Announces “Cryptocurrency: An Enforcement Framework”

On October 8, the United States Attorney General’s Cyber Digital Task Force announced the release of a publication entitled Cryptocurrency: An Enforcement Framework (the “Enforcement Framework), which comes in the wake of a criminal indictment unsealed on October 1 concerning Bitcoin Mercantile Exchange (“BitMEX”). Read the Digital Currency + Blockchain Perspectives blog to learn more about the Enforcement Framework’s areas of focus for illicit cryptocurrency activity, the DOJ’s efforts in combating these threats and the ongoing challenges that the government faces in cryptocurrency enforcement.

CFPB Settles with Auto Finance Company for Alleged UDAAP Violations

On October 13, the CFPB announced that it had entered into a consent order with an auto finance company, alleging that the company’s repossession practices from 2013 through 2019 constituted unfair and deceptive acts and practices under the Consumer Financial Protection Act (CFPA). Under the consent order, the company agreed to pay the CFPB a civil money penalty of $4 million and to provide up to $1 million in consumer redress to consumers who were subject to wrongful repossession. Read the Enforcement Watch blog to learn about the CFPB’s allegations against the company.

Louisiana District Court Finds TCPA Robocall Prohibition Unconstitutional Prior to July 2020

On September 28, Judge Martin C. Feldman of the United States District Court for the Eastern District of Louisiana issued an important decision in Creasy v. Charter Commc’ns, Inc ruling that the Telephone Consumer Protection Act (TCPA) provision banning robocalls (47 U.S.C. § 227(b)(1)(A)(iii) was unconstitutional in its entirety during the roughly five-year period beginning in November of 2015 through July 6, 2020. Read the LenderLaw Watch blog for more about Judge Feldman’s decision and how it may impact TCPA litigation involving alleged robocalls across the United States.

Goodwin News

Financial Services Forward Focus Webinar Series 

Goodwin’s latest webinar series “Financial Services Forward Focus,” presented by a cross-discipline team of Goodwin lawyers, explores the topics that are most relevant for the financial services industry in a challenging market. From changing regulatory guidelines to fintech, mergers and acquisitions and corporate social responsibility, Goodwin will take attendees through these topics and provide guidance to help you navigate the current market conditions. Please visit the web page for more information and to access recordings and resources from previous sessions. 

This week’s Roundup contributors: Josh Burlingham, Alex Callen, Viona Harris and Tierney Smith