EDITOR NOTE: There’s a reason why we don’t trust bureaucrats and, in some cases, legal experts and authorities. It’s the way they hide things behind textual labyrinths. Case in point: there are several entries in this piece that serve as points of suspicion. Too many, in fact--and almost all in non-transparent language. First off is the SAR exemptions for certain FDIC-supervised banking institutions. Who among these institutions are exempted from reporting financial crimes, and why? The second point is that of protocols in the event of a cybersecurity hack--up to 36 hours to report a hack to federal authorities, and up to 2 customers potentially affected by the hack (the sentence is grammatically unclear, so it's even harder to understand). Is this sufficient when millions of customers’ bank accounts are on the line? Last point is an attempt to dismiss PPP suspicions. There are too many sources (citing their own factual “sources”) to show how ineffective and inefficient (and potentially corrupt) the PPP rollout was during the pandemic. This site attempts to counter that information, without citing any credible sources.
On December 15, the FDIC approved a final rule to revise and modernize its regulations relating to brokered deposits. The final rule establishes a new framework for analyzing whether deposits made through deposit arrangements qualify as brokered deposits, including those between insured depository institutions (IDIs) and third parties, such as financial technology companies. Specifically, the final rule:
- Clarifies when a person meets the deposit broker definition in a way that provides clear rules by which banks and third parties can evaluate whether particular activities cause deposits to be considered brokered;
- Identifies a number of bright-line categories (called “designated exceptions” which include deposits where the agent has less than 25% of the total “assets under administration” for its customers; health savings accounts; deposits related to certain real estate and mortgage servicing transactions; certain retirement funds; and customer funds held for various regulatory, tax and other government purposes) for business arrangements that automatically satisfy the primary purpose exception; and
- Establishes a transparent application process for entities that seek a “primary purpose exception” but do not meet one of the “designated exceptions.”
The final rule tracks the proposed rule, which was discussed in the December 18, 2019 edition of the Roundup, while providing additional relief in several key areas, notably replacing the proposed “information sharing” prong with a new, tailored prong that targets a specific active form of matchmaking. The rule also clarifies that a third party that has an exclusive relationship with only one bank - often seen between a fintech company and a partner bank - would not be captured by the deposit broker definition.
The final rule also amends the methodology for calculating the interest rate restrictions that apply to less than well-capitalized IDIs. Under the rule, the national rate cap will generally be the higher of (1) the average rate paid on deposits, plus 75 basis points, or (2) 120% of U.S. Treasury rates, plus 75 basis points. The rule becomes effective on April 1, 2021, with an extended compliance date of January 1, 2022.
On December 15, the FDIC issued a final rule requiring certain conditions and commitments for each deposit insurance application approval, non-objection to a change in control notice and merger application approval that would result in an FDIC-insured industrial bank or industrial loan company (together, ILCs) becoming controlled by a company (a Covered Company) that is not subject to consolidated supervision by the Board of Governors of the Federal Reserve System (Federal Reserve). The FDIC also released a fact sheet summarizing the final rule.
The rule was prompted by increased interest in deposit insurance for ILCs controlled by commercial firms or financial firms pursuing nontraditional business models, each of which might present special risks to the Deposit Insurance Fund. The rule imposes requirements designed to (1) govern the Covered Company’s relationship with the ILC, (2) require financial support to the ILC from the Covered Company and (3) require recordkeeping and reporting. Historically, the FDIC has, as a matter of policy, imposed similar requirements on companies controlling ILCs. The rule will codify the FDIC’s supervisory expectations and thus improve transparency for future applicants. The rule is largely consistent with the FDIC’s March 2020 notice of proposed rulemaking as covered by the March 18, 2020 edition of the Roundup and discussed in a subsequent Goodwin client alert. Some significant differences from the proposal, however, include (1) additional Covered Company reporting requirements about security, confidentiality and integrity of certain consumer and nonpublic personal information, (2) the Covered Company’s permissible representation on the board of a subsidiary ILC has been raised from 25% to 50% and (3) restrictions on certain restrictions on ILC subsidiaries related to appointment of directors and senior executive officers will apply only during the first three years after becoming a subsidiary of a Covered Company. The rule becomes effective on April 1, 2021.
On December 15, the FDIC published a notice of proposed rulemaking that would amend the FDIC’s Suspicious Activity Report (SAR) regulation to permit the FDIC to issue additional, case-by-case exemptions from SAR filing requirements to FDIC-supervised institutions. The FDIC’s current SAR regulation allows exemptions from SAR filing requirements for physical crimes (robberies and burglaries) and lost, missing, counterfeit or stolen securities. The proposed rule would amend the SAR regulation to permit the FDIC to issue additional, case-by-case exemptions from SAR filing requirements to FDIC-supervised institutions. The proposed amendments would allow the FDIC, in conjunction with FinCEN, to grant exemptions to FDIC-supervised institutions that develop innovative solutions to otherwise meet Bank Secrecy Act requirements more efficiently and effectively. The FDIC is proposing this rule as a proactive measure to address the likelihood that FDIC-supervised institutions will leverage existing or future technologies to report, share or disclose suspicious activity in a different manner. The FDIC expects that the amendments to the SAR regulation will reduce regulatory burden on financial institutions and encourage technological innovation in the banking sector. Comments on the proposed rule will be accepted for 30 days after publication in the Federal Register.
On December 14, a final rule issued recently by the FDIC became effective, removing the agency’s requirements in branch applicants for statements regarding compliance with the National Historic Preservation Act of 1966 (NHPA) and the National Environmental Policy Act of 1969 (NEPA). Before this effective date, the FDIC was the only federal banking agency that required consideration of NHPA and NEPA in connection with branch applications, so the rule will improve the consistency of the FDIC’s branch application procedures with those of the Office of the Comptroller of the Currency (OCC) and the Federal Reserve. The FDIC staff reviewed its interpretations of NHPA and NEPA as part of a comprehensive regulatory review and determined that the approval of a branch application only authorizes certain banking activities at a location—not any construction, demolition or other activity that could impact historic property or the environment—and such that branch application approvals should not be subject to NHPA and NEPA. The only public comment related to the rule was supportive of the change. Accordingly, the final rule amends the FDIC’s regulations and rescinds its statements of policy regarding the NHPA and the NEPA requirements for branch applications. The FDIC also indicated that statements regarding the NHPA and the NEPA similarly would not be required for deposit insurance applications and that it would update its related policy statement at a later date.
On December 15, the FDIC and OCC approved a proposed rule that would require banking organizations to notify their primary federal regulator “as soon as possible and no later than 36 hours after the banking organization believes in good faith that [a “computer-security incident” or “notification incident”] has occurred.” The rule would also require bank service providers to notify “at least two individuals at affected banking organization customers immediately after the bank service provider experiences a computer-security incident that it believes in good faith could disrupt, degrade, or impair services provided for four or more hours.” The Federal Reserve is expected to approve the proposed rule at a later date. Comments will be due 90 days after publication in the Federal Register.
On December 9, the FDIC and the Federal Reserve announced several actions relating to resolution plans, commonly known as living wills. First, the agencies confirmed that weaknesses previously identified in the resolution plans for several large foreign banks have been remediated. Second, the agencies finalized guidance for the resolution plans of certain large foreign banks, modifying proposed guidance to tailor expectations around resolution capital and liquidity, derivatives and trading activity, as well as payment, clearing and settlement activities. Finally, the agencies clarified that foreign and domestic banks in Categories II and III of the large bank regulatory framework will be required to include core elements of a firm’s resolution strategy—such as capital, liquidity and recapitalization strategies—as well as how each firm has integrated changes to and lessons learned from its response to the coronavirus into its resolution planning process for next year’s resolution plans, which are now due December 17, 2021.
On December 10, the CFPB issued the General QM Final Rule. The Rule replaces the current requirement for General QM loans (i.e., a consumer’s debt-to-income ratio (DTI) cannot exceed 43%) with a limit based on the loan’s pricing. The CFPB deems the new Rule a more holistic and flexible measure of a consumer’s ability to repay than DTI alone. If the annual percentage rate (APR) does not exceed the average prime offer rate for a comparable transaction by 1.5 percentage points or more as of the date the interest rate is set, the loan receives a conclusive presumption that the consumer had the ability to repay. If the APR exceeds the average prime offer rate for a comparable transaction by 1.5 percentage points or more but by less than 2.25 percentage points, the loan receives a rebuttable presumption that the consumer had the ability to repay.
While the General QM Final Rule retains the General QM loan definition’s existing product-feature and underwriting requirements and limits on points and fees, the Rule:
- Removes Appendix Q to Part 1026 — Standards for Determining Monthly Debt and Income;
- Requires lenders to consider a consumer’s DTI ratio or residual income, income or assets other than the value of the dwelling, and debts;
- Provides more flexible options for creditors to verify consumers’ income or assets other than the value of the dwelling and the consumers’ debts for QM loans; and
- Provides higher pricing thresholds for loans with smaller loan amounts for subordinate-lien transactions and certain manufactured housing loans.
The Rule takes effect 60 days after publication in the Federal Register with a mandatory compliance date of July 1, 2021. Between the Rule’s effective and mandatory compliance dates, there will be an optional early compliance period during which creditors can use either the current or revised General QM definition. The General QM Final Rule and the Seasoned QM Final Rule support a smooth and orderly transition away from the Government Sponsored Enterprises (GSE) Patch on the earlier of July 1, 2021 or the date the GSEs exit conservatorship.
On December 10, the CFPB issued the Seasoned QM Final Rule, creating a new category for qualified mortgages (QMs): Seasoned QMs. To become a Seasoned QM, a loan must be a first-lien, fixed-rate covered transaction with no balloon payments and must comply with general restrictions on product features and points and fees. As required under the General QM Final Rule, a creditor must also consider the consumer’s DTI ratio or residual income, income or assets other than the value of the dwelling, and debts and verify the consumer’s income or assets other than the value of the dwelling and the consumer’s debts. The loan must also “season” by being held in portfolio by the originating creditor or first purchaser for a 36-month period, and have no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days at the end of the seasoning period. If such loans are seasoned for period at least 36 months in the manner set forth in the Final Rule, the CFPB presumes compliance with the ability-to-repay (ATR) requirements and the covered transaction receives safe harbor from ATR liability at the end of the seasoning period. The Seasoned QM Final Rule will take effect 60 days after publication in the Federal Register and will apply to covered transactions for which creditors receive an application on or after the effective date.
On December 10, in remarks to the annual American Bankers Association/American Bar Association Financial Crimes Enforcement Conference, FinCEN Director Kenneth A. Blanco provided important clarification on FinCEN’s information sharing program under Section 314(b) of the USA PATRIOT Act, and announced that FinCEN is issuing a new 314(b) Fact Sheet and rescinding previously issued guidance (FIN-2009-G002) as well as a former administrative ruling (FIN-2012-R006) (parts of which are incorporated into the guidance in the new 314(b) Fact Sheet).
The Small Business Administration (SBA) published a “myth versus fact” document this week, highlighting what the SBA considers to be erroneous assertions about the Paycheck Protection Program (PPP). Specifically, the SBA’s “myth versus fact” document countered four common misconceptions with facts about the PPP’s structure and review process:
- Myth #1: PPP is wrought with waste, fraud and abuse.
- Fact: The SBA has a robust process to prevent waste, fraud and abuse. All loans are currently undergoing an automated review, and all loans of $2 million or more will undergo a manual review. Moreover, any loan may be selected for a manual review.
- Myth #2: PPP only supported large corporations, not small businesses.
- Fact: The PPP was deployed to help keep small businesses afloat, and 75% of businesses that received PPP loans had nine or fewer employees. Also, 87% of all loans, or nine out of ten, were $150,000 or less.
- Myth #3: PPP did not support workers.
- Fact: PPP has supported more than 51 million American jobs and accounts for more than 80% of small business payroll in the United States. In addition, the SBA ensured Americans’ paychecks were protected by requiring at least 60% of PPP funds to cover payroll costs.
- Myth #4: PPP funds did not reach historically underserved communities.
- Fact: The SBA and the U.S. Department of Treasury worked closely with lenders to ensure PPP participation by CDFIs, MDIS, and minority, women, veteran, or military-owned lenders due to their unmatched ability to reach underserved communities. A review of census tracts indicates 28% of the U.S. population lives in low and moderate income census tracts, and when matched against the distribution of PPP loans, 27% of the PPP funds went to low and moderate income communities, which is in line with their representation in the population.
As previously discussed in the November 25 edition of the Roundup, the SEC has adopted amendments to several of the financial disclosure requirements in Regulation S-K. Continuing the SEC’s efforts to modernize and streamline its disclosure requirements, these amendments will (1) revise Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A, Regulation S-K Item 303) to clarify and streamline MD&A disclosure, (2) streamline Supplemental Financial Information (Item 302) and (3) eliminate the contractual obligations table (Regulation S-K Item 303(a)(5)) and the Selected Financial Data table (Item 301). The final amendments generally follow the amendments proposed in January 2020. Read the client alert for a detailed summary of the changes from the amendments in the financial disclosures required by Item 301 (Selected Financial Data), Item 302 (Supplementary Financial Information) and Item 303 (MD&A) of Regulation S-K, and what companies should to comply with the amendments.
Companies with December 31 fiscal years are likely to be able to choose to comply with the amendments in their Form 10-K annual report for 2020.
On December 14, the SEC’s Disclosure Review and Accounting Office within the Division of Investment Management published an Accounting and Disclosure Information statement (ADI) highlighting current findings from the staff’s ongoing review of registered funds’ emerging markets risk disclosure.
The ADI notes that the staff has been reviewing the disclosure of risks for both actively-managed funds with significant exposure to emerging markets and funds that track indices with significant exposure to emerging markets. The ADI also notes a number of emerging markets risks that should be disclosed to investors in funds with emerging market exposure, including significantly less publicly available information about companies in emerging markets due to differences in applicable regulatory, accounting, auditing, and financial reporting and recordkeeping standards. The ADI notes that, in some jurisdictions, foreign investments may be made through organizational structures that are necessary to address restrictions on foreign investments, but that may limit investor rights and recourse.
The ADI notes that the staff has observed a range of practice in the level and quality of risk disclosure provided by funds regarding emerging markets and urged consideration of the following factors and how the factors can impact the fund when drafting risk disclosures:
- risks related to, but not limited to, lack of liquidity, market manipulation concerns, limited reliable access to capital, political risk, and foreign investment structures;
- whether and how emerging markets risks arising from differences in regulatory, accounting, auditing, and financial reporting and recordkeeping standards could impede an adviser’s ability to evaluate local companies or impact the fund’s performance;
- any limitations on the rights and remedies available to the fund, individually or in combination with other shareholders, against portfolio companies;
- if an index fund, whether the index provider will have less reliable or current information—e.g., due to issues associated with the regulatory, accounting, auditing, and financial reporting and recordkeeping standards in the relevant emerging market—when assessing if a company should be included in an index or determining a company’s weighting within the index;
- if an index fund, any limitations concerning the adviser’s ability to assess the index provider’s due diligence process over index data prior to its use in index computation, construction and/or rebalancing; and
- whether the limitations stated above could impact the stated investment objective of the fund.
In early November 2020, the staff of the SEC Division of Investment Management (IM Division), in consultation with the SEC’s “FinHub” staff, issued a statement in response to a No-Action Letter from the Wyoming Division of Banking purporting to provide interpretive guidance on both Wyoming and federal securities laws, including in the area of custody of digital assets. While the statement does not necessarily provide regulatory clarity, it does serve as an important reminder for industry participants to be mindful of regulatory jurisdiction and the circumstances under which it is appropriate (or not) to rely on the statements of a particular regulator in the broader context of goods and services offered. Read the Digital Currency + Blockchain Perspectives blog to learn more about the letter and key takeaways from the SEC staff’s statement.
As previously discussed in the November 25 edition of the Roundup, on November 20, the OCC issued a proposed rule with the objective of ensuring banks offer fair access to financial services as some receive significant political pressure from various for-profit and not-for-profit organizations to deny financial services to customers in certain industries, including, but not limited to: (1) family planning organizations; (2) privately owned correctional facilities; (3) makers of shotguns and hunting rifles; (4) oil exploration companies; and (5) other similar industries. With this proposed rule, the OCC has set out to address the issue of large banks engaging in category or industry-based risk evaluations to deny these type of industry customers access to financial services. Read the LenderLaw Watch blog for more information about the rule and its impact on banks. Comments on the agency’s proposed rule are due by January 4, 2021.
LITIGATION AND ENFORCEMENT
On December 9, the SEC issued an order instituting administrative and cease-and-desist proceedings against a global securities pricing service, ICE Data Pricing & Reference Data, LLC (ICE Data PRD). The SEC charged ICE Data PRD for willfully violating Section 206(4) of the Investment Advisers Act of 1940 (the Advisers Act) and Rule 206(4)-7 thereunder, which requires registered investment advisers to adopt and implement written policies and procedures reasonably designed to prevent violation of the Advisers Act and related rules.
ICE Data PRD provides global securities pricing, evaluations and other information to its advisory clients through various subscription options. ICE Data PRD typically delivers prices based on its analysis of a variety of market information to produce an evaluated price. The SEC alleged that, from at least 2015 through September 2020 (Relevant Period), for certain categories of fixed-income securities for which ICE Data PRD was not able to provide an evaluation, ICE Data PRD instead delivered to its clients a quote received from a single market participant, also known as a “single broker quote” or “broker quote.” The SEC alleged that Relevant Period, ICE Data PRD delivered to its clients single broker-quoted prices while failing to adopt and implement policies and procedures designed to address the risk that such prices would not reasonably reflect the value of the securities. The SEC further alleged that ICE Data PRD did not effectively or consistently implement quality controls. Due to these alleged failures, the SEC found that ICE Data PRD provided clients with inaccurate and unreliable prices of certain securities. Without admitting or denying the SEC’s findings, ICE Data PRD agreed to cease and desist from committing any violations or future violations of Section 206(4) of the Advisers Act and Rule 206(4)-7, to a censure, and to pay a civil money penalty in the amount of $8 million to settle the charges.
On December 8, the CFPB announced that it had entered into a consent order with a New Jersey debt collection company, resolving allegations that the debt collection company violated the Fair Debt Collection Practices Act and the Consumer Financial Protection Act. The debt collection company was engaged in the business of purchasing consumer-debt accounts from debt brokers and placing the accounts for collections with collections law firms in the states where the consumers were located (Connecticut, New Jersey, and Rhode Island). Read the Consumer Finance Enforcement Watch blog for a summary of the alleged violations and consent order.
On December 11, the CFPB and the Arkansas Attorney General (AG) announced that they filed a complaint and proposed stipulated judgment in the U.S. District Court for the Eastern District of Arkansas against a home-security company. Read the Consumer Finance Enforcement Watch blog for a summary of the alleged violations and proposed stipulated judgement.
Originally posted by JD Supra