Weekly RoundUp April 15, 2021

SEC Raises Concerns About Misleading ESG Practices, Highlights Potential Violations

Editor’s Note
In This Issue. The U.S. Securities and Exchange Commission (SEC) Division of Examinations issued a Risk Alert raising concerns about misleading Environmental, Social, and Governance (ESG) disclosures by investment firms; the U.S. Senate confirmed Gary Gensler to serve as the new chairman of the SEC; the federal banking agencies issued a joint statement addressing how risk management principles described in the Supervisory Guidance on Model Risk Management (MRMG) relate to systems or models used by banks to assist in complying with the requirements of Bank Secrecy Act (BSA) laws and regulations, and requested comments and information on the extent to which the principles discussed in the MRMG support compliance by banks with BSA/anti-money laundering laws and regulations; the Board of Governors of the Federal Reserve System (Federal Reserve) announced plans to automate non-merger-related Federal Reserve Bank stock reporting requirements; the Federal Deposit Insurance Corporation (FDIC) announced that it is seeking public input on potential modernization of its sign and advertising requirements; and Fannie Mae and Freddie Mac (Enterprises) each announced that loans purchased by the Enterprises on or after July 1, 2021 must conform to the requirements outlined in the CFPB’s recently finalized General QM Final Rule, effectively ending the GSE patch. These and other developments are discussed in more detail below.
Editor’s Note
Editor’s Note
Editor’s Note

Regulatory Developments

SEC Raises Concerns About Misleading ESG Practices, Highlights Potential Violations

On April 9, the SEC’s Division of Examinations (Division) issued a Risk Alert regarding the Division’s review of ESG investing. The Risk Alert provides insight into the SEC’s perspective on the “potential violations” referred to in the SEC’s announcement, released on March 4, 2021, of an ESG Task Force in the SEC’s Division of Enforcement. The Risk Alert focuses on the accuracy and consistency of disclosures, marketing claims and other public statements; the application of ESG approaches throughout firms; the adequacy of ESG policies and procedures; compliance oversight; and the sufficiency of ESG-related documentation. Read the client alert to learn more.

Gensler Confirmed as New SEC Chairman

On April 14, the U.S. Senate confirmed Gary Gensler to serve as the new chairman of the SEC. Gensler previously served as chairman of the Commodity Futures Trading Commission from 2009 to 2014, where he led rulemaking to implement several Dodd-Frank Act reforms to swaps and derivatives markets. During his confirmation hearing, Mr. Gensler promised to prioritize digital currency regulation and ESG matters if confirmed. His confirmation gives Democrats a 3-2 majority among commissioners.

Banking Agencies Seek Information and Comment on the Application of Supervisory Guidance on Model Risk Management to AML Compliance

On April 9, the Federal Reserve, Office of the Comptroller of the Currency (OCC) and FDIC, in consultation with the National Credit Union Administration (NCUA) and Financial Crimes Enforcement Network (FinCEN), issued a joint statement addressing how risk management principles described in the Supervisory Guidance on Model Risk Management (MRMG) relate to systems or models used by banks to assist in complying with the requirements of Bank Secrecy Act (BSA) laws and regulations. The statement further notes that it does not alter existing BSA/anti-money laundering (AML) legal or regulatory requirements or establish new supervisory expectations, and that no specific model risk management framework is required.

Concurrently with the joint statement, the Federal Reserve, OCC, FDIC, NCUA and FinCEN issued a request for information (RFI) seeking comments and insight on the extent to which the principles discussed in the MRMG support compliance by banks with BSA/AML laws and regulations. 

Fed to Automate Non-Merger-Related Federal Reserve Bank Stock Reporting Requirements

On April 8, the Federal Reserve issued a notice of proposed rulemaking (NPR) that would automate non-merger-related adjustments to member banks’ subscriptions to Federal Reserve Bank capital stock, and would also make related technical amendments to Regulation I and conforming changes to Form FR 2056. Under Regulation I, a member bank must apply annually, and sometimes quarterly, to adjust its subscription upon the filing of its call report. The Federal Reserve Banks are developing software that will automatically pull information from call reports, eliminating the need for these adjustment applications. The NPR, however, would not change practices related to merger-related stock adjustment applications; rather, the NPR would codify the Federal Reserve Banks’ current practice of requesting such applications. Comments on the NPR must be submitted on or before June 14, 2021.

“Climate risks and sustainability are critical issues for the investing public and our capital markets.”
– Acting SEC Chair Allison Herren Lee

FDIC Seeks Input on How to Modernize Sign and Advertising Requirements for Banks

On April 9, the FDIC announced that it is seeking public input on potential modernization of its sign and advertising requirements, last significantly updated in 2006, to better reflect today’s market dynamics, how banks and savings associations are operating and transforming their business models, and how consumers are using banking services. The FDIC is also interested in exploring ways to reduce consumer confusion and help consumers distinguish FDIC-insured banks and savings association from non-bank entities, particularly those operating across digital and mobile channels, and to support the banking industry’s efforts to understand and apply these rules. The FDIC’s initial soliciting of public input was postponed after its February 19, 2020 announcement due to challenges associated with the COVID-19 pandemic. The new comment period will close on May 24, 2021.

Fannie Mae and Freddie Mac Announce Effective End of GSE Patch

In separate letters dated April 8, Fannie Mae and Freddie Mac (Enterprises) each announced that loans purchased by the Enterprises on or after July 1, 2021 must conform to the requirements outlined in the CFPB’s recently finalized General QM Final Rule. The announcement effectively ends the so-called “GSE-patch” effective July 1, 2021, at least for now. The Enterprises’ revised loan purchase policy was required by recent amendments to their senior preferred stock purchase agreements with the U.S. Department of the Treasury (Treasury), which amendments stated that Fannie Mae and Freddie Mac may no longer acquire loans that do not meet the standards set forth in the General QM Final Rule. Fannie Mae and Freddie Mac will continue to be able to purchase GSE patch loans that do not meet these standards, provided that such loans (1) have application dates on or before June 30, 2021 and (2) are purchased either (a) as whole loans on or before August 31, 2021 or (b) in mortgage-backed securities pools with an issue date on or before August 1, 2021.

The letters follow the CFPB’s proposal to delay the mandatory compliance date of the General QM Final Rule until October 1, 2022. If finalized, this delay, when combined with the language of the senior preferred stock purchase agreements with Treasury, could extend the GSE patch under the new general QM requirements until the earlier of the new compliance date or until the Enterprises exit conservatorship.

Goodwin News

Goodwin at the NRS Spring Compliance Conference

Join us at the NRS Spring 2021 Compliance Conference for Investment Advisers and Broker Dealers, where industry experts will address how firms can successfully navigate the disruptive currents of regulatory change and adapt procedures to compliance programs. Goodwin partner Nick Losurdo will participate in the “FINRA Examination of Broker Dealers” panel, focusing on the strategic planning required for a successful examination in today’s work environment, along with best practices for working with and responding to the examiners and managing the post-examination process. Learn more about the conference and register today.

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Editors
Nicole Griffin

Contributors
Josh Burlingham
Alex Callen
Sammy Tang