Weekly RoundUp January 06, 2021

SEC Finalizes Reforms Under Investment Advisers Act

Editor's Note

In this Issue. The Securities and Exchange Commission (SEC) finalized reforms under the Investment Advisers Act to modernize rules that govern investment adviser advertisements and payments to solicitors, and published a risk alert containing observations from completed regulatory examinations that were focused on broker-dealer and investment adviser compliance; the Consumer Financial Protection Bureau (CFPB) issued an advisory opinion for developing Equal Credit Opportunity Act-compliant special purpose credit programs and published compliance assistance sandbox approval orders on a dual-feature credit card program and an earned wage access program; and the Office of the Comptroller of the Currency (OCC) issued an interpretive letter on preemption standards, proposed changes to its bank premises rules, proposed a rule that would allow it to issue exemptions from its SAR regulations and published an interpretive letter clarifying that national banks and federal savings associations may participate in independent node verification networks and use stablecoins to conduct payment activities and other bank-permissible functions. These and other developments are discussed in more detail below.

We also invite you to visit Goodwin’s Coronavirus Knowledge Center, which is 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 Adopts Amendments to Advertising and Cash Solicitation Rules

On December 22, the SEC adopted amendments to modernize and combine the existing advertising and cash solicitation rules for advisers registered or required to be registered with the SEC. Among many other things, the amendments:

  • Streamline the advertising and cash solicitation requirements under the newly named “Investment Adviser Marketing Rule” (numerous long-standing no-action letters will be withdrawn); 
  • Replace the four per se prohibitions of the advertising rule with seven general prohibitions based on historic anti-fraud principles (but also includes specific requirements as to disclosure, diligence, policy and oversight);
  • Set forth numerous new definitions, including a new two-prong definition of “advertisement” that: 
    • addresses advertising in the first prong and solicitation in the second and 
    • is designed with flexibility intended to address the ongoing evolution and interplay of technology and advisers’ communications with their clients and private fund investors; 
  • Include provisions regarding the presentation of gross performance, related performance, extracted performance, hypothetical performance and predecessor performance; 
  • Permit the use of testimonials, endorsements and third-party ratings, subject to certain conditions; and
  • Expand the application of solicitation requirements to the solicitation of private fund investors and incorporates the concept of non-cash compensation. 

Simultaneously, the SEC adopted related amendments to the books and records rule and Form ADV, the investment adviser registration and reporting form.  The amendments will become effective 60 days after publication in the Federal Register and allow for an 18-month transition period beginning from the effective date. The amendments will be discussed in an upcoming Goodwin client alert.

SEC Adopts Modernized Marketing Rule for Investment Advisers

The Securities and Exchange Commission today announced it had finalized reforms under the Investment Advisers Act to modernize rules that govern investment adviser advertisements and payments to solicitors. The amendments create a single rule that replaces the current advertising and cash solicitation rules. The final rule is designed to comprehensively and efficiently regulate investment advisers’ marketing communications. 

OCIE Exam Observations: Large Trader Obligations

On December 16, the SEC’s Office of Compliance Inspections & Examinations (recently renamed as the Division of Examinations) (OCIE) published a risk alert (Risk Alert) containing observations from completed regulatory examinations that were focused on broker-dealer and investment adviser compliance with Rule 13h-1 under the Securities Exchange Act of 1934 (Rule), which sets forth reporting requirements for market participants that conduct a substantial amount of trading activity in national market system securities (i.e., Large Traders). The Risk Alert is also intended to remind broker-dealers of their reporting obligations on Electronic Blue Sheets, as well as their upcoming reporting obligations with respect to the consolidated audit trail (CAT).

OCIE encouraged investment advisers to review their compliance policies and procedures relating to: (1) identifying situations that could lead them to be deemed Large Traders; (2) timely filing and amendments of Form 13H; and (3) notifying broker-dealers through which they execute transactions of their Large Trader status. OCIE encouraged broker-dealers to assess and make any necessary changes to its supervisory and compliance policies and procedures with respect to: (1) applicability of the Rule to broker-dealers and their affiliates; (2) timely filing and amendments of Form 13H; (3) reporting requirements under Electronic Blue Sheets and the CAT, as well as applicable FINRA rules; (4) monitoring customer activity to identify customers that may be Large Traders, but have not provided their large trader identification numbers (LTIDs), and the process of contacting such customers; and (5) identifying and associating new accounts for existing Large Traders.

With respect to the CAT, OCIE reminded market participants that, beginning on April 26, 2021, large broker-dealers will be required to report certain account information regarding account holders with a LTID or an unidentified LTID number. The reporting requirements and guidance for such reporting are set forth in the CAT Reporting Customer and Account Information Technical Specifications for Industry Members. 

CFPB Issues Advisory Opinion on Developing Special Purpose Credit Programs 

The Equal Credit Opportunity Act’s (ECOA’s) implementing Regulation B already provides creditors with general guidance for developing ECOA-compliant special purpose credit programs (SPCPs). However, with the hope that more creditors will offer SPCPs and increase access to credit to underserved groups, the CFPB issued additional guidance in the form of an advisory opinion to stakeholders for use in developing ECOA-compliant SPCPs. The CFPB clarified that the written plan of a for-profit organization’s SPCP must contain information that supports the need for the program, including: (1) the class of persons that the program is designed to benefit; (2) the procedures and standards for extending credit pursuant to the program; (3) either (a) the time period during which the program will last or (b) when the program will be reevaluated to determine if there is a continuing need for it; and (4) a description of the analysis the organization conducted to determine the need for the program. The CFPB also clarified that a for-profit organization can use the organization’s own research or data from outside sources, including governmental reports and studies or research or data already in the public domain, to inform its determination that a SPCP would benefit a certain class of people. However, the organization’s analysis must show that a class of people would otherwise be denied credit or receive credit on less favorable terms under the organization’s own credit standards. The CFPB maintained that the creditor offering the SPCP must determine the legitimacy of its SPCP and that the CFPB does not determine whether individual programs qualify for SPCP status.

CFPB Issues Approval Order Granting Safe Harbor Under Regulation Z for Dual-Feature Credit Card Program

On December 30, the CFPB issued a compliance assistance sandbox (CAS) Approval Order, granting the requesting bank three years of safe harbor from liability under the Truth in Lending Act and its implementing Regulation Z for specific aspects of the bank’s dual-feature credit card program (DFCC) related to disclosures and notices, ability to pay, security deposits and rate reevaluation. The bank’s proposed DFCC program offers consumers with lower credit scores the opportunity to improve or establish their credit profile by providing the bank a security deposit to obtain a secured credit card and, upon meeting certain eligibility thresholds over the course of at least one year, to graduate to use the unsecured feature of the account. The terms of both the secured and unsecured use of the DFCC program will be presented to consumers in account opening disclosures and again when the consumer is provided the opportunity to opt-in to unsecured use.

CFPB Affirms Regulation Z Does Not Apply to Non-Recourse Earned Wage Access

Recently, the CFPB issued an order accepting into the CFPB’s compliance assistance sandbox an earned wage access (EWA) program where participating employees are not obligated to repay the provider. The order affirms that the EWA program does not involve “credit” and therefore is not subject to the Truth in Lending Act and its implementing regulation, Regulation Z (together, Regulation Z). Read the Fintech Flash to learn more about the EWA program and what the impact of the CFPB’s order is on it.

OCC Issues Interpretive Letter on Preemption Standards

On December 18, the OCC issued an Interpretive Letter regarding the state preemption standards and requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Section 25b of the Dodd-Frank Act codified the preemption standards and established procedural requirements that apply when the OCC concludes that certain state laws are preempted. More specifically, Section 25 states that federal law may preempt state consumer financial law (1) where the state consumer financial law has a “discriminatory effect” on national banks when compared to the law’s effect on state chartered banks, (2) where it prevents or significantly interferes with a national bank’s exercise of its powers (the Barnett standard), or (3) by a provision of federal law other than title 62 of the Revised Statutes. The Interpretive Letter discusses the process through which the OCC will determine whether a state law is preempted. For example, the OCC may issue a regulation or order on a case-by-case basis if it determines that the state law may be preempted under the Barnett standard. The OCC confirmed that it would consult with the CFPB when determining whether other state laws have substantially similar terms. Any preemption determination of the OCC will be reflected in a quarterly publication and the OCC will submit a report to Congress when issuing its review. 

OCC Proposes Changes to Bank Premises Rules

On January 4, the OCC issued a notice of proposed rulemaking that would amend its regulations governing the ownership of real property by national banks and federal savings associations. Under the National Bank Act, national banks are generally prohibited from speculating or investing in real property but may hold real property necessary to accommodate the transaction of their business (bank premises). Historically, the bank premises of federal savings associations have been treated similarly even though the Home Owners Loan Act lacks a similar prohibition. In relation to bank premises, regulatory issues may arise under the OCC’s existing flexible and precedent-based approach where excess space or “modern” kinds of real estate, such as mixed-use, offsite, shared or virtual work spaces are involved. The rule would codify clear standards for supervised institutions. Significantly, it would also impose as a new permissibility threshold a 50% occupancy test with respect to the overall space of each building or severable piece of land. In addition, the ability to permit third-party use of excess space as a means to avoid economic waste would be subject to a new requirement that the space have a nexus with the transaction of the bank’s business. The rule would also include grandfathering provisions. Public comment is specifically requested on a variety of rule-related matters, including whether different rules should apply to national banks and federal savings associations; whether the 50% occupancy threshold should be higher or lower; whether the calculation of the occupancy threshold should be revised or include any adjustments or carveouts; whether certain types of leases should be treated differently; whether certain temporal limits or exclusions should be included; and whether any specific uses should be impermissible. Comments on these and other aspects of the rule must be received 45 days from publication in the Federal Register.

OCC Proposes Rule Regarding Exemptions to SAR Requirements

On December 17, the OCC issued a notice of proposed rulemaking (Proposed Rule) that would revise its regulations governing the filing of suspicious activity reports (SARs). The Proposed Rule would allow the OCC to issue exemptions from such SAR regulations, making it possible for the OCC to grant relief to national banks or federal savings associations to develop innovative solutions to meet Bank Secrecy Act requirements. The OCC noted that a national bank and federal savings association seeking an exemption from the OCC’s SAR regulation would also need to separately seek an exemption from FinCEN’s SAR regulations to the extent applicable. Comments may be submitted for 30 days following the publication of the Proposed Rule in the Federal Register.

OCC Clarifies That Federally Chartered Banks and Thrifts May Use Stablecoins for Payment Activities 

On January 4, the OCC published an interpretive letter clarifying that national banks and federal savings associations may participate in independent node verification networks (INVN) and use stablecoins to conduct payment activities and other bank-permissible functions. The agency letter concludes a national bank or federal savings association may validate, store, and record payments transactions by serving as a node on an INVN. Likewise, a bank may use INVNs and related stablecoins to carry out other permissible payment activities. In deploying these technologies, a bank must comply with applicable law and safe, sound and fair banking practices, and should develop and implement sound risk management practices that align with banks’ overall business plans and strategies.

FDIC Publishes Financial Institutions Letter Clarifying Part 363 Compliance Requirements

On October 20, the Federal Deposit Insurance Corporation (FDIC) issued an Interim Final Rule (IFR) to provide temporary relief for insured depository institutions that have experienced large cash inflows resulting from participation in government stimulus programs. 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 IFR allowed insured depository institutions that have experienced significant but possibly temporary asset growth to determine whether they are subject to the annual independent audits and reporting requirements of Part 363 the FDIC’s regulations for fiscal years ending in 2021 based on their consolidated total assets as of December 31, 2019. On December 22, the FDIC published Financial Institutions Letter FIL-116-2020 that, among other things, 

  • Allows an IDI to determine whether it is subject to the requirements of Part 363 of the FDIC’s regulations for fiscal years ending in 2021 based on the lesser of the IDI’s (a) consolidated total assets as of December 31, 2019, or (b) consolidated total assets as of the beginning of its fiscal year ending in 2021; and
  • Reserves to the FDIC the authority to require an IDI to comply with one or more Part 363 requirements if the FDIC determines that asset growth was related to merger or acquisition transactions. 

Federal Reserve and FDIC Release Annual CRA Asset-Size Threshold Adjustments for Small and Intermediate Small Institutions 

On December 17, the Board of Governors of the Federal Reserve System (Federal Reserve) and the FDIC announced the annual adjustment to the asset-size thresholds used to define small bank and intermediate small bank under the Community Reinvestment Act (CRA) regulations. For 2021, the definitions of small and intermediate small institutions for CRA examinations will change as follows: 

  • “Small bank” means an institution that, as of December 31 of either of the prior two calendar years, had assets of less than $1.322 billion.
  • “Intermediate small bank” means a small institution with assets of at least $330 million as of December 31 of both of the prior two calendar years and less than $1.322 billion as of December 31 of either of the prior two calendar years.

These asset-size threshold adjustments are effective January 1, 2021. 

FinCEN Proposes New Reporting, Recordkeeping Requirements for Crypto Transactions

On December 18, the Financial Crimes Enforcement Network (FinCEN) proposed new requirements for certain transactions involving convertible virtual currency (CVC) or digital assets with legal tender status (LTDA) to address the illegal finance threat created by the CVC market and the expected growth of the LTDA market. Under the rule, banks would be required to submit reports, keep records and verify the identity of customers in relation to transactions involving these types of assets that are held in wallets hosted in certain jurisdictions identified by FinCEN or in “unhosted wallets,” which are wallets not hosted by a financial institution. Submissions of comments on the proposed new requirements ended on January 4, 2021, and FinCEN will conduct a final regulatory flexibility analysis after consideration of those comments.

SEC to Permit Custody of Digital Asset Securities by “Special Purpose” Brokers
Christmas came early for many in the digital asset community by way of a statement from the SEC on December 23 that grants relief in the area of broker “custody” of digital asset securities. The framework laid out by the SEC will operate somewhat like a hybrid no-action letter/safe harbor/pilot program, pursuant to which “special purpose” brokers may follow certain, specific steps and custody digital asset securities during a five-year program period without the risk of facing an enforcement action. Read the client alert for background, key points and observations.  

U.S. Paycheck Protection Program Restarts: Summary of Key Updates
On December 27, the President signed into law the Consolidated Appropriations Act, 2021 (H.R. 133), which modifies and reopens the U.S. Small Business Administration’s Paycheck Protection Program (PPP) initially created under the CARES Act. The reopened PPP is available through March 31, 2021 and, in addition to being available for first-time program applicants, makes an additional second (or “second-draw”) PPP loan available for certain small and hard-hit existing PPP borrowers. Read the client alert for a summary of the updates this bill makes with respect to PPP loans, key terms of new second-draw PPP loans and highlights for lenders.  

December 23, 2020 Marks Jay Clayton’s Final Day as SEC Chairman
SEC Chairman Jay Clayton announced that December 23 would be his last day at the helm of the agency. This leads to the likely outcome that SEC Commissioner Hester Peirce, or potentially Commissioner Elad Roisman, will serve as interim Chair until approximately January 20, 2021 when President-Elect Biden is sworn in as President. Read the Digital Currency + Blockchain Perspectives blog for more information. Goodwin will continue to monitor for any developments on this front. 

Litigation and Enforcement

SEC Sues Ripple and Executives in Connection With Ongoing Sales of XRP 

 The SEC, in one of its final acts under the leadership of Chair Jay Clayton, approved enforcement action aimed at Ripple Labs, Inc. (Ripple) and two of its executives, Brad Garlinghouse and Chris Larsen. The SEC filed its complaint on December 22 in the Southern District of New York, alleging that sales of XRP during a period ranging from 2013 through 2020 constitute an ongoing unregistered offering of securities in violation of Section 5 of the Securities Act of 1933, as amended. The complaint revisits common themes from prior enforcement actions to support its assertion of the existence of an investment contract. Read the Digital Currency + Perspectives blog to learn more about the SEC’s arguments against Ripple and two of its executives.

CFPB Secures Consent Order Against Student Loan Servicer for Failure to Comply with 2015 Consent Order and Alleged Deceptive Acts and Practices
On December 22, the CFPB announced that it had secured a consent order against a national student loan servicer based on its failure to comply with a 2015 consent order issued by the CFPB. Read the Consumer Finance Enforcement Watch blog to learn more about the consent order.

CFPB Enters Into $4.75 Million Consent Order With Subprime Auto Lender and Servicer for FCRA Violations
On December 22, the CFPB announced that it had entered into a consent order with a national lender and originator of subprime auto loans over the company’s alleged violations of Section 623(a)(1)(A) of the Fair Credit Reporting Act (FCRA) (15 U.S.C. § 1681-s2(a)) and Regulation V, 12 C.F.R. § 1022.42(a). Read the Consumer Finance Enforcement Watch blog to learn more about the consent order.

Plaintiffs Withdraw Appeals in Madden-Related Securitization Cases

In November and December of 2020, plaintiffs withdrew their appeals in separate securitization cases related to the issues raised in Madden v. Midland Funding. Consistent with a recent decision in Petersen v. Chase Card Funding, et al. from the U.S. District Court for the Western District of New York concerning Chase’s credit card securitization program, on September 28, the U.S. District Court for the Eastern District of New York (Court) granted Defendants’ motion to dismiss in Cohen v. Capital One Funding, et al. The case involved securitizations of receivables from credit card accounts that were originated by Capital One Bank. The Plaintiffs were credit card holders who asserted that Defendants—the entities that served as depositor, issuer and trustee for the securitization at issue—had charged interest in violation of New York’s usury laws. The Plaintiffs also asserted a claim of unjust enrichment based on the interest rates charged on the credit card loans. Defendants moved to dismiss the complaint on the grounds that (1) Plaintiffs’ usury claim was preempted under the National Bank Act, (2) the usury claim fails under New York’s “valid when made” rule, and (3) the unjust enrichment claim was duplicative and derivative of the usury claims.  

The Court held that Plaintiffs’ usury claim was preempted under Sections 85 and 86 of the National Bank Act and Section 25(b)(1)(B) of the Dodd-Frank Act and therefore did not need to reach a decision on the “valid when made” question. The Court found that Plaintiffs’ common law unjust enrichment claim as duplicative of the usury claim, because Defendants’ collection of interest on Plaintiffs’ credit card accounts was subject to Virginia law rather than New York law, and Virginia does not prescribe interest rate limits. 

In support of its preemption holding, the Court noted that, as a national bank, Capital One has the authority to set and modify the interest rate and fees charged to credit card holders. The Court also reasoned that, absent preemption, Capital One would be forced to either “forego securitization altogether, or else modify interest rates on a state-by-state basis,” either of which would significantly interfere with Capital One’s powers as a national bank, which include the authority to charge interest on loans at a rate permitted by the bank’s home state and the power to sell interests in loan contracts. Finally, the Court noted that the securitization program at issue was distinguishable from Madden because Capital One retained ownership and control of the credit card accounts whose receivables were securitized, whereas the national banks in Madden “severed their contractual ties to plaintiff’s debt.” 

Goodwin News

Close Out 2020 and Prepare for 2021 with Goodwin’s Year-End Tool Kit 

Goodwin is pleased to present the 2020-2021 Year-End Tool Kit to help public companies prepare for 2020 year-end reporting and the 2021 annual meeting season. We invite you to take advantage of the latest digital advancement in our annually updated tool kit using the Nasdaq Governance Solutions secure cloud-based platform to manage and distribute your company’s director and officer questionnaires. In partnership with Nasdaq Governance solutions, we have made the industry standard in D&O questionnaires more accessible, efficient, and secure than ever before. For the latest updates, we recommend that you follow @GoodwinLaw and #GoodwinYETK on Twitter or check our Year-End Tool Kit site.

This week’s Roundup contributors: Josh Burlingham, Alex Callen, Jessica Craig, Christina Hennecken, Stephen Kim and Bill McCurdy.