Regulatory Developments
Stress Test Scenarios for 2022
The Federal Reserve, the OCC and the FDIC released stress test scenarios to assist in the annual stress testing for banking institutions and other financial companies (institutions). One element of the stress tests is the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) annual exercise to evaluate institutions’ resilience and to assess whether the largest institutions in the U.S. have enough capital to continue their operations in times of economic and financial stress. Complementary to that is the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) stress testing, which is a forward-looking exercise to assess if institutions have enough capital to absorb losses and support operations during economic downturns. The stress tests are meant to assist with the government’s oversight responsibilities and assist in assessing risk profiles of institutions.
The Federal Reserve released hypothetical scenarios for the CCAR testing to see how institutions with average total consolidated assets of $100 billion or more would likely perform under the hypothetical recessions, which include: (1) the unemployment rate rising from 5.75%(from the starting point) to 10%; (2) a sharp decline in economic activity; (3) increase in market volatility; (4) widening of corporate bond spreads; and (5) a collapse in asset prices, including a 40% decline in commercial real estate prices. Different components of the test apply to each bank. Additionally, such institutions with large trading operations will be tested against a global market shock component and institutions with substantial trading or custodial operations will be tested against the default of their largest counterparty. The OCC and the FDIC released economic and financial scenarios for the upcoming Dodd-Frank Act stress testing. Per the Dodd-Frank Act, national banks and Federal savings associations with average total consolidated assets greater than $250 billion must use the scenarios to conduct the stress tests. The OCC and the FDIC are required to publish the stress testing scenarios every year by February 15.
SEC Proposes Rule Amendments to Modernize Beneficial Ownership Reporting
On February 10, the SEC announced proposed rule amendments under the Exchange Act Sections 13(d) and 13(g) governing beneficial ownership reporting in order to improve transparency and provide “more timely information to meet the needs of today’s financial markets.” The proposed rule would: (1) accelerate the filing deadline for beneficial ownership reports for Schedules 13D and Schedules 13G from 10 to five days; (2) require amendments to beneficial ownership reports to be filed filing within one business day; (3) clarify circumstances where groups formed by two or more persons would be subject beneficial ownership reporting; (4) expand application of 13D and 13G regulations to particular derivative securities; (5) allow for new exemptions; and (6) require Schedule 13D-G filings to be completed via a “structured, machine-readable data language.”
Comments are due 30 days after publication in the Federal Register, or April 11, whichever is later.
“These amendments would update our reporting requirements for modern markets, reduce information asymmetries, and address the timeliness of Schedule 13D and 13G filings.”
– SEC Chair Gary Gensler
CFPB Announces Enhanced Process for Public to Directly Petition CFPB for Rulemaking
On February 16, in an effort to broaden access to the CFPB rulemaking process, and in line with recommendations from the Administrative Conference of the United States for improving transparency and ensuring that the public has a meaningful opportunity to petition the government, the CFPB announced that members of the public can now submit direct petitions to the CFPB by emailing petitions@cfpb.gov with requests for new rules or the amendment or repeal of existing rules. All petitions, including attachments and other supporting materials, will become part of the public record, subject to public disclosure, and posted on public dockets for review and comment.
FINRA Publishes 2022 Report on Exam and Risk Monitoring Program
On February 9, FINRA published its 2022 Report on FINRA’s Examination and Risk Monitoring Program. This report provides insights from FINRA’s oversight programs to FINRA member firms. The report covers 21 different topics, including five new subjects: (1) Firm Short Positions and Fails-to-Receive in Municipal Securities; (2) Trusted Contact Persons; (3) Funding Portals and Crowdfunding Offerings; (4) Disclosure of Routing Information; and (5) Portfolio Margin and Intraday Trading. For the first time, the publication focuses on new material in sections that have appeared in previous iterations, as well as findings that are especially relevant for firms in their first year of operation. As in previous years, FINRA will adapt its areas of focus throughout 2022 to address emerging regulatory concerns and risks for investors that may arise throughout the year.
AR/VR and the Metaverse Will (Someday) Change Financial Services Regulation – Here’s How
Chances are, most reading this have not journeyed into the world of virtual reality (VR) and augmented reality (AR) or taken a virtual step in the metaverse. If you don’t have a metapresence yet, that might change soon. Well-known tech companies are devoting significant resources to plant digital stakes in the metaverse via augmented and virtual experiences and services. One even formally changed its name based on the belief that the metaverse is the next digital frontier, akin to social media’s infancy in the mid-2000s.
But will the financial services industry venture into the metaverse?
Read the client alert to learn what the metaverse has to do with financial regulation, and what the future may hold.
SEC Focus on Cybersecurity Begins to Take Shape
The SEC is implementing a campaign to overhaul the agency’s expectations around cybersecurity and cyber incident reporting for the financial services industry and corporate America generally. This enhanced cybersecurity focus will take shape in the following three key areas: (1) cyber “hygiene” and preparedness; (2) cyber incident reporting to the SEC; and (3) public cyber disclosures.
Read the client alert for more information on the SEC’s campaign and what it entails.
SEC Proposes Changes to Whistleblower Program Rules
On February 10, the SEC proposed two amendments to the rules governing its whistleblower program, Exchange Act Rules 21F-3 and 6. “These amendments, if adopted, would help ensure that whistleblowers are both incentivized and appropriately rewarded for their efforts in reporting potential violations of the law to the Commission,” said SEC Chair Gary Gensler.
Read the client alert for more on these latest proposed amendments.
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