SEC Division of Examinations Releases 2021 Examination Priorities
On March 3, the SEC Division of Examinations (Division) released its 2021 Examination Priorities. The Division noted that it will focus on enforcing recently established rules and standards of conduct for registered investment advisers (RIAs) and broker-dealers – Regulation Best Interest, the Interpretation Regarding Standard of Conduct for RIAs, and rules regarding Form CRS. The Division further stated that it will focus on fraudulent practices and conflicts of interest of RIAs, broker-dealers and investment companies; protection of retail investors in mutual funds and ETFs; adequacy of compliance programs of RIAs and investment companies; RIAs of private funds; broker-dealer compliance with the Customer Protection Rule and the Net Capital Rule; broker-dealer trading practices; municipal advisors; information security and operational resiliency of market participants; compliance with anti-money laundering rules and regulations by market participants; and preparedness of market participants for the discontinuation of LIBOR. The Division noted that it will particularly focus on advancements of financial technology (i.e., “Fintech”) and digital assets. Specifically, the Division stated that it would focus on automated investment tools and platforms (e.g., “robo-advisers”), the use of technology to facilitate compliance with regulatory requirements (i.e., “Regtech”) and financial services and market infrastructure in connection with digital assets.
SBA Revises PPP Loan Amount Calculation and Eligibility
On March 3, the SBA issued an interim final rule implementing recent changes to the PPP. The interim final rule allows individuals who file an IRS Form 1040, Schedule C to calculate their maximum loan amount using gross income. This calculation change applies only to PPP loans approved after the effective date of the interim final rule. Borrowers that have already had their loans approved cannot increase their PPP loan amount based on the new maximum loan formula. Businesses electing to use gross income to calculate their first-draw PPP loan will only have a safe harbor presumption of making the necessary certification of economic necessity if they reported $150,000 or less in gross income on their Schedule C being used to apply for a first-draw PPP loan. Borrowers with reported gross income greater than $150,000 will be subject to additional SBA review. The SBA has issued updated forms for borrowers and lenders reflecting these changes and loan amount calculations.
Consistent with the previous announcement by the Biden Administration, the interim final rule also (1) removes a restriction on business at least 20% owned by an individual who was arrested for or convicted of a felony related to financial assistance fraud in the previous five years or any other felony within the previous year from obtaining PPP loans; and (2) removes a restriction on businesses at least 20% owned by an individual who is delinquent on student loan from receiving PPP loans.
CFPB Officially Proposes Delay of Compliance Date for General QM Final Rule
On March 3, consistent with its recent statement on the subject, the CFPB formally issued a notice of proposed rulemaking to delay the mandatory compliance date of the General Qualified Mortgage (QM) final rule from July 1, 2021 to October 1, 2022. If the proposed rule is finalized, the old DTI-based General QM definition, the new price-based General QM definition and the GSE Patch (unless the GSEs exit conservatorship prior to October 1, 2022) would all remain available as long as the lender received the consumer’s application prior to October 1, 2022. Comments on the proposed rule must be received on or before April 5, 2021.
SEC Division of Examinations’ Risk Alert Regarding Digital Asset Securities
On February 26, the SEC’s Division of Examinations (Division) issued a Risk Alert noting that “Digital Asset Securities” (i.e., assets issued and/or transferred using distributed ledger or blockchain technology, including, e.g., “virtual currencies,” “coins” and “tokens”) and other digital assets entail characteristics and risks that must be considered in designing a regulatory compliance program. Based on its observations in examinations of investment advisers, broker-dealers, securities exchanges and transfer agents involved with Digital Asset Securities and other digital assets, the Division set forth how it will focus its examinations of such market participants going forward. Regarding investment advisers, the Division noted it will scrutinize a number of points related to portfolio management, books and records, custody, disclosures, valuation methodologies and registration issues. Regarding broker-dealers, the Division noted it will scrutinize the safekeeping of funds and operations, registration requirements, compliance with anti-money laundering legislation, due diligence of digital assets in connection with offerings, disclosures of conflicts of interest and the digital asset trading of registered representatives as an outside business activity.
SEC Streamlines Variable Insurance Contract Substitution Process
The SEC issued a no-action position allowing insurance companies to substitute, without obtaining a new order, underlying fund options for variable life and annuity contracts. As long as the insurance company has obtained an order approving a previous substitution under Section 26(c) of the Investment Company Act of 1940, the insurance company may implement a new substitution without a new order. The terms and conditions of the new substitution must be substantially similar to the terms and conditions approved by the prior order. The insurance company must file – with its prospectus supplement filed under Rule 497 – a correspondence filing setting forth information about the substitution. This correspondence file must discuss why each existing fund and corresponding replacement fund are substantially similar and include a comparison of the investment objectives, strategies and risks of each existing fund and its corresponding replacement fund. The no-action position will be effective upon publication in the Federal Register.
Bank Regulators Update BSA/AML Examination Manual
The FFIEC, a formal interagency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau, has updated its Bank Secrecy Act/Anti-Money Laundering Examination Manual. The updated section are set forth below.
- Assessing Compliance with BSA Regulatory Requirements
- Customer Identification Program
- Currency Transaction Reporting
- Transactions of Exempt Persons
Future updates to other sections of the manual will be announced as they are completed.
Litigation and Enforcement
When Perquisites Stop Being Fun and Create Serious Liability Risks to an Issuer
Last week, the SEC brought enforcement actions against a company and its former CEO for failure to adequately disclose certain compensation and related party transactions. The move is a stark reminder of the costs of failing to build adequate internal procedures to ensure both that company policies are adequately developed, implemented, and enforced and that potentially disclosable information is provided to, and vetted by, counsel when preparing proxy materials and other SEC filings. Moreover, it highlights the SEC’s continued focus on the disclosure of executive perquisites. Read the client alert for a summary of the enforcement actions and its potential implications on a company’s policies and procedures.
2021 ICI Virtual Mutual Funds + Investment Management Conference
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 Financial Industry Blog Updates
Check out Goodwin’s latest thought leadership on finance industry happenings across our blogs.
This week’s Roundup contributors: Justin Kanter