On January 20, the newly installed Biden administration moved to institute a broad “regulatory freeze” on last-minute rules issued by the Trump administration, directing agencies across the federal government to withdraw or delay action on potentially dozens of regulations. The delay could have implications for some of agency rules, including rules recently adopted by the U.S. Securities and Exchange Commission (SEC) such as the Advisers Act marketing rules (not yet published), the Derivatives Rule (published but not yet effective) and the Fair Value rule (also published but not yet effective).
The memorandum from the Biden administration states that, “with respect to rules that have been sent to the [Office of the Federal Register (OFR)] but not published in the Federal Register, immediately withdraw them from the OFR for review and approval as described in [the memorandum], subject to [certain exceptions].”
With respect to rules that have been published in the Federal Register, or rules that have been issued in any manner, but have not taken effect, the memorandum directs agencies to consider postponing the rules’ effective dates for 60 days from the date of the memorandum for the purpose of reviewing any questions of fact, law, and policy the rules may raise and to consider opening a 30-day comment period.
On January 14, the OCC finalized a rule that prohibits national banks and federal savings associations (banks) that are “covered banks” from declining to provide financial services to controversial industries such as fossil fuel companies, private prisons, gun manufacturers and others.
As previously reported in the Roundup, the OCC asserted in its notice of proposed rulemaking on November 20, 2020 that some banks have taken such action with respect to a variety of controversial industries based on “criteria unrelated to safe and sound banking practices,” and the proposal specifically cited complaints by the Alaska Congressional delegation regarding the denial by large banks of financial services to new oil and gas projects in the Arctic. During the public comment period, which closed on January 4, 2021, the OCC received approximately 35,700 comments including 4,200 supporting the proposal and 31,290 (including 28,000 form letters) opposing it. The OCC adopted the rule substantially as proposed, subject to some minor changes.
Among other things, the rule effectively overrides banks’ ability to make category-wide evaluations of nonfinancial impacts of serving controversial industries including potential loss of customer goodwill and other reputational damage to the bank, which can nonetheless have financial impacts on banks. The rule, however, allows banks to deny financial services to a specific customer if justified by a “quantified and documented failure to meet quantitative, impartial risk-based standards established in advance by the covered bank.” In its adopting release, the OCC insists that, when determining whether to provide financial services to a particular customer, “[a]ll legitimate risks can be quantified, albeit with varying degrees of precision,” citing reputation as such a risk.
On January 13, the OCC conditionally approved the conversion of a South Dakota non-depository trust company to a national trust bank. The institution offers custody services primarily to institutional investors that transact in digital assets and cryptocurrencies, as well as ancillary and other services. As a condition of approval, the OCC is requiring the institution to enter into an operating agreement that includes minimum capital and liquidity requirements, limitations on activities (consistent with a business plan), and governance and risk management requirements. The OCC is also requiring the institution’s parent organization to enter into agreements to provide capital and liquidity support and maintenance for the benefit of the institution. The OCC’s conditional approval of this charter conversion also demonstrates its increasing comfort with organizations focused on digital assets. This action follows on the heels of an OCC interpretive letter permitting national trust banks to engage in activities permissible for a state trust bank or trust company under state law in the state where the national bank is located, such as acting as a custodian, even if those state-authorized activities are not necessarily considered fiduciary in nature under federal law.
On January 19, the OCC, FDIC, Board of Directors of the Federal Reserve System (Federal Reserve), Consumer Financial Protection Bureau (CFPB) and National Credit Union Administration (NCUA) adopted a final rule to clarify and codify the role of supervisory guidance as provided in the September 11, 2018 Interagency Statement on the Role of Supervisory Guidance (FIL-49-2018), and as proposed in the November 5, 2020 joint proposed rule. In doing so, FIL-49-2018 was rescinded and replaced with the final rule, codified at 12 CFR Part 302, clarifying that, unlike regulation, supervisory guidance does not have the force and effect of law and only outlines supervisory expectations and priorities or articulates views regarding appropriate practices for a given subject area. The CFPB pledged that it would not take enforcement actions or issue supervisory criticisms based on non-compliance with supervisory guidance. The FDIC similarly announced that it would limit the use of numerical thresholds in its guidance and instruct its examiners not to criticize an institution for a “violation” of supervisory guidance. For additional information regarding the actions taken by the CFPB, read the LenderLaw Watch blog.
On January 19, the FDIC adopted revised Guidelines for Appeals of Material Supervisory Determinations. The revised guidelines are intended to enhance the independence of appeals decisions and clarify the procedures and timeframes that apply to appeals when the FDIC is taking a formal enforcement action. The revised guidelines generally replace the existing Supervision Appeals Review Committee (SARC) with an independent, standalone office within the FDIC, known as the Office of Supervisory Appeals (Office), which will be independent of the divisions that have authority to issue material supervisory determinations while still operating within the FDIC. Appeals submitted to the Office will be decided by a panel of reviewing officials. The revised guidelines also:
- Change the standard of review for appeals to the Division Director so that the Division Director makes an independent supervisory determination without deferring to the judgments of either party;
- Require that communications between the Office and either supervisory staff or the appealing institution, including materials submitted to the Office for review, also be shared with the other party to the appeal;
- Allow an institution to request expedited review in its appeal to the Office; and
- Modify the procedures and timeframes for when determinations underlying formal enforcement-related actions may be appealed.
The revised guidelines will take effect when the Office is fully operational; current guidelines will remain in effect until that time. The FDIC will publish a notice to inform institutions when this occurs.
On January 19, the FDIC, Federal Reserve, OCC, NCUA and Financial Crimes Enforcement Network (FinCEN) issued responses to frequently asked questions (FAQs) regarding suspicious activity reporting and other AML considerations for financial institutions that are required to submit Suspicious Activity Reports (SARs). The responses to the FAQs address requests by law enforcement to maintain accounts, receipt of grand jury subpoenas and law enforcement inquiries, maintaining customer relationships following the filing of SARs, filing SARs based on negative news media searches, information provided in SAR data and narrative fields, and SAR character limits.
On January 14, FinCEN announced it would reopen the comment period for its proposed rulemaking regarding certain transactions involving convertible virtual currency or digital assets with legal tender status. As reported in a previous edition of the Roundup on December 18, 2020, FinCEN released a notice of the proposed rulemaking, which provides that banks and money services businesses would be required to submit reports, keep records and verify the identity of customers in relation to transactions above certain thresholds involving convertible virtual currency and digital assets with legal tender status wallets not hosted by a financial institution in certain jurisdictions. Among other things, FinCEN is opening the comment period for an additional 15 days for comments on the proposed reporting requirements regarding for transactions greater than $10,000 individually or in the aggregate that involve unhosted wallets or wallets hosted in a jurisdiction identified by FinCEN. FinCEN is also extending the comment period for 45 days to allow comments on the proposed requirements that banks and money services businesses report certain information regarding counterparties to transactions by their hosted wallet customers and recordkeeping requirements.
On January 7, the U.S. Treasury Department and the Internal Revenue Service released final regulations under Section 1061 of the Internal Revenue Code of 1986, as amended. The final regulations address the three-year holding period requirement under Section 1061 in order for holders of certain “carried interests” to qualify for preferential capital gains tax rates. Read the client alert for background on Section 1061 and a summary of the principal rules retained and changed in the final regulations.
Litigation and Enforcement
On December 22, 2020, the SEC filed a complaint against Ripple Labs, Inc. (Ripple) and two of its executives, Brad Garlinghouse and Chris Larsen in the U.S. District Court for the Southern District of New York, covered in a previous Roundup, alleging that sales of $1.3 billion of XRP by Ripple and the executives 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. This complaint opens the question of whether former CFTC Chair Gary Gensler, President Biden’s nominee to chair the SEC, will continue current enforcement in the blockchain space or if new rules and guidance will be on the horizon with the potential to rattle the industry. Read the client alert to learn more about the SEC’s allegations against Ripple and their common themes in the blockchain industry.
On January 14, the office of the Minnesota Attorney General (Minnesota AG) announced that it had reached a settlement with a California-based student loan debt-relief company that allegedly collected unlawful fees from customers and made misrepresentations to them regarding its ability to forgive student loans. Read the Consumer Finance Enforcement Watch blog to learn more about the Minnesota AG allegations and the settlement agreement.
On January 5, the CFPB Taskforce on Federal Consumer Financial Law (Taskforce) issued a final report (Report) with recommendations on how to improve consumer protection in the financial marketplace. In proposing changes to the existing legal and regulatory framework, the Report is centered around five key principles:
- consumer protection;
- information and education;
- competition and innovation;
- regulatory modernization and flexibility; and
- inclusion and access.
Read the LenderLaw Watch blog for more information on the Report.
On January 15, the CFPB announced it had filed suit in the United States District Court for the District of Connecticut against a Connecticut-based mortgage company and three individual defendants for alleged violations of the Truth in Lending Act the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Mortgage Acts and Practice-Advertising Rule, and the Consumer Financial Protection Act of 2010. The complaint alleges that the company and individuals engaged in unlawful mortgage-lending practices. Read the Consumer Finance Enforcement Watch blog to learn more about the complaint.
Visa abandoned its $5.3 billion acquisition of Plaid Inc., a fintech company known for its data aggregation technology, but which was developing a potential rival to Visa’s online debit services. The parties abandoned the transaction, which was announced in January 2020, in the midst of a challenge to the deal by the U.S. Department of Justice Antitrust Division, which sued to block the transaction in early November 2020 based on the theory of nascent competition. Read the latest Fintech Flash to learn more about the abandoned acquisition and concept of “killer acquisitions” seen lately in the antitrust enforcement space.
Goodwin is a sponsor at the ABA Conference for Community Bankers, taking place from February 16-17, 2021, which provides the banking community with the opportunity to forge and grow valuable connections across the industry. This highly interactive virtual event puts conversation at the forefront, with planned speaker Q&As, peer group exchanges and small-group video conversations. Goodwin lawyers Samantha Kirby and Matt Dyckman will be joined by OceanFirst Bank’s General Counsel for a discussion on “Lessons Learned from COVID-19: Perspectives from Inside and Outside the Bank.”
Goodwin is a sponsor at the Mutual Funds and Investment Management conference, sponsored by the Investment Company Institute and the Federal Bar Association and being held virtually on March 15, 17 and 19. Don’t miss the chance to learn from experts, earn CPE and CLE credits, and virtually network with peers.
Goodwin Welcomes Alli Schoenthal as New York Head of Consumer Financial Services Litigation + Enforcement
On January 25, Goodwin announced the addition of Allison Schoenthal as partner and New York head of Consumer Financial Services Litigation + Enforcement. Schoenthal represents banks, trusts, lenders, government-sponsored enterprises, private equity firms, and loan servicers in consumer finance litigation and enforcement matters. Read the press release to learn more.This week’s Roundup contributors: Josh Burlingham, Alex Callen, Jessica Craig and Laura Craven.