Regulatory Developments
FSOC Acknowledges Climate Change as Threat to Financial Stability
On October 21, FSOC released a new report formally acknowledging climate change as an emerging and increasing threat to U.S. financial stability. The report recognized the actions already being undertaken by FSOC member agencies, including the SEC, the Board of Governors of the Federal Reserve, the Commodities Futures Trading Commission and the Federal Housing Financing Agency. In its report, FSOC offered over 30 specific recommendations to U.S. financial regulators, laying out necessary actions to identify and address climate-related risks to the financial system and promote the resilience of the financial system to those risks.
Federal Reserve Governor Michelle Bowman Advocates for Community Banks
On October 22, Federal Reserve Governor Michelle W. Bowman delivered a speech at the 2021 Community Bankers Symposium, hosted by the Federal Reserve Bank of Chicago, in which Governor Bowman discussed the importance of community banks to the country’s financial system, and how the lack of new bank formation is a significant issue for the banking industry. Governor Bowman noted that over 2,000 new banks were formed between 1990 to 2008, in contrast to the 44 de novo banks formed in the last decade, and seven new banks formed from 2009 to 2013. Governor Bowman acknowledged the economic, regulatory and market realities that discourage the formation of de novo banks, while also highlighting how community banks provide crucial services to populations underserved by large institutions through relationship-based lending and banking. Governor Bowman concluded by noting that it is important to continue discussions on how the regulatory and supervisory framework can be further tailored to ensure that community banks remain a part of the future of the U.S. financial system.
OCC Releases FAQs Regarding Proposed Rescission of June 2020 CRA Rule
On October 26, the OCC released a set of Frequently Asked Questions (FAQs) regarding its proposal to rescind its June 2020 Community Reinvestment Act (CRA) rule. The FAQs discuss the rulemaking process and the OCC’s consideration of potential CRA issues during any transition from the June 2020 CRA rule. The OCC’s proposal to rescind the OCC’s June 2020 CRA rule was published in the Federal Register on September 17, 2021. If adopted, the proposal would replace the OCC’s June 2020 CRA rule with rules based on the 1995 CRA rules that had been adopted jointly by the OCC and other federal banking agencies. Comments regarding the rescission proposal must be received by October 29, 2021.
Payment Systems: Revised Comptroller’s Handbook Booklet and Rescissions
On October 21, the OCC issued the revised “Payment Systems” booklet of the Comptroller’s Handbook. This booklet is used by OCC examiners in connection with the examination and supervision of national banks, federal savings associations, and federal branches and agencies of foreign banking organizations. The booklet provides examiners with information regarding payment systems, types of payments, risks associated with payment systems, and associated risk management practices; discusses requirements of 12 CFR 7.1026 regarding payment systems memberships; includes expanded examination procedures for examiners to use when assessing payment products and services; and includes supplemental procedures for deeper review of certain payment activities.
SEC Risk Alert Regarding Regulatory Compliance for Mutual Funds and ETFs
On October 26, the SEC’s Division of Examinations staff (the Staff) issued a risk alert setting forth the Staff’s observations following a series of examinations that focused on mutual funds and ETFs (collectively, funds). The Staff conducted examinations of more than 50 fund complexes, covering more than 200 funds and nearly 100 advisers to assess industry practices and regulatory compliance in areas that may impact retail investors. The Staff observed deficiencies or weaknesses in funds’ and their advisers’ compliance programs and disclosures to investors.
With respect to compliance programs, the Staff observed funds and their advisers did not establish, maintain, update, follow and/or appropriately tailor their compliance programs to address various business practices, including portfolio management, valuation, trading, conflicts of interest, fees and expenses, and advertisements and sales literature.
The Staff observed that some funds did not (1) have appropriate policies in place for monitoring and reporting accurate information to their boards, (2) provide appropriate processes for the annual 15(c) reviews, (3) complete required annual reviews of compliance programs, addressing the adequacy of the policies and their effectiveness, (4) ensure that the annual report from the chief compliance officer addressed the operation of the policies and procedures of the fund’s adviser, or (5) adopt or maintain appropriate policies and procedures for the funds’ boards to exercise appropriate oversight over their advisers.
With respect to disclosures to investors, the Staff noted that the disclosures to investors were not always accurate, complete or consistent and that the disclosures in the funds’ statement of additional information (SAI) did not include required information. Additionally, the Staff observed that some funds had inaccurate, incomplete or omitted disclosures in advertising or sales literature that may be misleading to investors and confuse investment decisions.
Finally, the Staff provided a list of best practices to help funds and their advisers craft adequate compliance programs and disclosure practices. These suggestions include the following: (1) review of compliance programs and procedures for consistency with business practices, (2) conduct periodic testing and reviews for compliance with disclosures and assess the effectiveness of compliance policies and procedures in addressing conflicts of interests, (3) ensure that the compliance programs adequately address the oversight of vendors, (4) adopt and implement policies and procedures to address compliance with regulations, exemptive orders and related disclosures and conflicts of interest, (5) ensure that information provided to the board is accurate, (6) ensure that the funds adhere to processes for board reporting, including an annual review of the compliance program, (7) review and amend disclosures in the funds’ prospectuses, SAIs and other investor communications and update funds’ website disclosures concurrently, (8) review and test fees and expenses disclosed in funds’ prospectuses, SAIs and other investor communications for accuracy and completeness, and (9) review and test funds’ performance advertising for accuracy, appropriateness and completeness.
CFPB Announces Final Rule Updating Dollar Thresholds Under Regulation Z
On October 25, the CFPB issued a final rule amending official interpretations for Regulation Z, which implements the Truth in Lending Act (TILA), updating dollar amounts of various thresholds adjusted annually based on the annual percentage change in the Consumer Price Index. For use beginning on January 1, 2022, these new dollar amounts include:
- For open-end consumer credit plans under TILA, the threshold that triggers requirements to disclose minimum interest charges;
- For open-end consumer credit plans under the CARD Act, amendments to TILA safe harbor amounts for violation penalty fees;
- For Home Ownership and Equity Protection Act of 1994 loans, the adjusted total loan amount threshold, and adjusted points-and-fees dollar trigger, for high-cost mortgages; and
- For qualified mortgages, thresholds for the spread between the annual percentage rate and the average prime offer rate, and the thresholds for total points and fees.
“[P]olicymakers need to achieve a meaningful balance in our supervisory approach for community banks. Otherwise, community banks will continue to face a regulatory and supervisory framework that is ill-suited for a lower-risk profile and activities that are less complex than those of larger institutions.”
– Federal Reserve Board Governor Michelle W. Bowman
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