Weekly RoundUp March 25, 2021

SBA Implemented Changes to PPP as a Part of American Rescue Plan Act

Editor’s Note

In this Issue. The federal bank regulatory agencies announced that the temporary change to the supplementary leverage ratio for depository institutions will expire as scheduled on March 31, 2021; the Small Business Administration (SBA) issued an interim final rule implementing changes to the Paycheck Protection Program (PPP) that were included in the American Rescue Plan Act, the COVID-19 relief bill that took effect earlier this month; the Alternative Reference Rate Committee (ARRC) issued a statement indicating that it will not be in a position to recommend a forward-looking Secured Overnight Financing Rate (SOFR) term rate by mid-2021 and encouraged market participants to transition away from LIBOR without reliance on a forward-looking SOFR term rate; the U.S. Securities and Exchange Commission (SEC) published frequently asked questions to provide additional guidance on its new fair valuation rule (Rule 2a-5 under the Investment Company Act of 1940); the New York State Department of Financial Services (NYDFS) announced a consent order that signaled its growing focus on financial institutions’ incident response and security practices; and the SEC filed an enforcement action charging a public company with repeated violations of Section 13 of the Securities Exchange Act and Regulation FD (Fair Disclosure). 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

Temporary Supplementary Leverage Ratio Changes to Expire as Scheduled

On March 19, the Board of Governors of the Federal Reserve System (Federal Reserve), Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation announced that the temporary change to the supplementary leverage ratio (SLR) for depository institutions, issued on May 15, 2020, will expire as scheduled on March 31, 2021.

In announcing that the temporary SLR modification will expire as scheduled, the Federal Reserve noted that, although certain destabilizing factors have eased since the SLR modification, it “may need to address the current design and calibration of the SLR over time to prevent strains from developing that could both constrain economic growth and undermine financial stability.” Accordingly, the Federal Reserve indicated that it would soon seek public comment on several potential SLR modifications.

SBA Issues Interim Final Rule Implementing PPP Changes

On March 22, the SBA issued an interim final rule implementing changes to the PPP that were included in the American Rescue Plan Act, the COVID-19 relief bill that took effect earlier this month. The interim final rule makes several clarifications and changes to the PPP, including:

  • Changes the interplay between the Shuttered Venue Operator Grant Program and the PPP;
  • Makes businesses with an NAICS code beginning with 72 that employ no more than 500 employees per physical location eligible for first-draw PPP loans;
  • Clarifies that electric cooperatives and telephone cooperatives are eligible for PPP loans if they have no more than 300 employees per physical location;
  • Clarifies that electric cooperatives and telephone cooperatives are no longer permitted to use the employee-based SBA size standard for their industry or SBA’s alternative size standard to determine size; and
  • Provides additional detail on the types of payroll costs that are not eligible for loan forgiveness.

The interim final rule will take effect immediately upon publication in the Federal Register.

ARRC Encourages Market Participants to Transition Away from LIBOR Without Reliance on Forward-Looking SOFR Term Rate

On March 23, the ARRC released a statement indicating that it “will not be in a position to recommend a forward-looking SOFR term rate by mid-2021.” The ARRC stated that its conclusion was “based on the current level of liquidity in SOFR derivatives markets,” indicating that “robust underlying activity and a limited scope of use over time are important conditions to help ensure that a recommended term rate does not reintroduce the vulnerabilities that first prompted the transition away from LIBOR.”

U.S. supervisory guidance encourages banks to cease entering into new contracts that use U.S. dollar LIBOR as soon as practicable and in any event by December 31, 2021. However, in its statement, the ARRC said that it “cannot guarantee that it will be in a position to recommend an administrator that can produce a robust forward-looking term rate by the end of 2021” and urged market participants not to wait for a forward-looking term rate for new contracts, but to instead be prepared to use the tools available now, such as SOFR averages and index data that can be applied in advance or in arrears, as described in the User's Guide to SOFR.

SEC Publishes FAQs Related to New Fair Valuation Rule for Registered Funds

On March 18, the staff of the SEC’s Division of Investment Management (Staff) published frequently asked questions to provide additional guidance on new Rule 2a-5 under the Investment Company Act of 1940 (the Fair Valuation Rule), which the Staff expects to update from time to time to include responses to questions from market participants seeking to comply with the rule prior to its September 8, 2022 compliance date. For more information on the Fair Valuation Rule, see our previous Client Alert relating to the adoption of the rule.

Litigation and Enforcement

NYDFS Consent Order Signals Regulator’s Growing Focus on Financial Institutions’ Incident Response and Security Practices

In early March, the NYDFS announced a consent order that required Maine-based mortgage servicer Residential Mortgage Services, Inc. (Residential) to pay a $1.5 million fine and implement numerous security measures to remedy alleged data security failures.

The enforcement action and the consent order were the result of a routine NYDFS safety and soundness examination of Residential. This is the second action the NYDFS has taken to enforce its cybersecurity regulation since the measure came into effect in 2017, with the intent to protect consumers and the financial system from increasing threats of cyber-attacks. It is also one of the first instances of a state government sanctioning a company for failing to provide notice of a business email compromise. The settlement makes it clear that the NYDFS expects financial institutions to thoroughly investigate cybersecurity incidents and is prepared to impose substantial fines and penalties for investigations that do not meet the department’s expectations. For additional information, read the client alert.

SEC Signals Heightened Scrutiny of Issuer/Analyst Communications and More Reg FD Enforcement

On March 5, the SEC filed an enforcement action in the U.S. District Court for the Southern District of New York charging AT&T with repeated violations of Section 13 of the Securities Exchange Act and Regulation FD (Fair Disclosure), as well as charging three AT&T Investor Relations (IR) mid-level employees with aiding and abetting those violations.

The enforcement action against AT&T is only the second action taken by the SEC concerning Regulation FD since 2013. The charges follow a four-year investigation and could signal a new focus by the SEC on scrutinizing regular communications between an issuer and analysts to ensure compliance with fair disclosure requirements. In a press release announcing the charges, the SEC stated that “selective disclosure of material information in private phone calls with analysts is precisely the type of conduct Regulation FD was designed to prevent.” The SEC further noted that it is “committed to assuring an even playing field by taking appropriate action, including litigation when necessary, against public companies and their executives who selectively disclose material nonpublic information.” This enforcement action raises important questions about when discussions concerning market trends cross the line into discussions of material nonpublic information, and suggests that the SEC may be more actively looking at issuer communications with research analysts. For additional information, read the client alert.

Illinois Imposes 36% MAPR Rate Cap on Consumer Loans; Takes Aim at Fintech-Bank Partnerships and Secondary Market Transactions

On March 23, the Predatory Loan Prevention Act (the PLPA) was signed into law by Illinois Governor J.B. Pritzker. The PLPA imposes a 36% military annual percentage rate (MAPR) cap on all loans made to Illinois consumers. It applies to all consumer loans made or renewed on or after the effective date of the PLPA and is effective immediately. Failure to comply with the interest rate cap may result in the consumer loan becoming null and void. The PLPA was part of a legislative package intended to address economic inequities, which also created the Illinois Community Reinvestment Act, and expanded civil rights. Read the client alert to learn more about the APR and its impact on bank partnerships and the secondary market.

Goodwin News

Goodwin Financial Industry Blog Updates

Check out Goodwin’s latest thought leadership on finance industry happenings across our blogs.

FinReg+Policy Watch

UK ICO Confirms Transfers of Data to SEC in the Public Interest
CFTC Announces New Climate Risk Unit — the “CRU”

This week’s Roundup contributors: Mac Laban and Sammy Tang.