Insights from Winston & Strawn
CFPB Targets Payday Lenders
On March 25th, the Consumer Financial Protection Bureau (“CFPB”) proposed new rules that would govern the relationship between payday lenders and the more than two and a half million American households that take advantage of payday loans each year. The CFPB has characterized the practices of the industry as causing consumers to be caught in a “debt trap.” Echoing a similar tone, consumer advocates have characterized the loans as having excessive interest and fees. Industry groups have responded that their products fill a legitimate need of providing access to credit to an underserved segment of the population and that rules as proposed may deny lowincome individuals access to funds during emergencies.
In particular, the proposed rules have targeted the lack of underwriting that occurs when issuing these loans. Because payday lenders have preferential access to consumer's bank accounts, Richard Cordray, the Director of the CFPB, characterized lenders as basing lending decisions “on a lender’s ability to collect and not on a borrower’s ability to repay.” To address the issue, the CFPB’s proposed rules divide loans into two categories, (i) short term loans (less than 45 days) and (ii) longer term loans (defined as more than 45 days and an allin annual percentage rate in excess of 36 percent and in which the lender has access to the consumer’s account or paycheck or has an interest in the consumer’s vehicle). The proposed short term loans rules center around an increased requirement for lenders to verify the income, financial obligations, and borrowing history of the lender to determine the borrower’s ability to repay the loan. The proposed rules would also provide general structural limitations to the loans, such as: (i) prohibiting the use of a vehicle as collateral, (ii) setting maximum loan amounts, and (iii) limiting the number of loans that could be made in a short time to a consumer, generally instituting a 60day “cooling off” period. The corrective actions proposed for longer term loans also generally include increased underwriting standards that assess the borrower’s ability to repay, while providing that such underwriting is not required if the borrower meets certain other standards and (i) the loan has an annual interest rate of less than 28%, or (ii) the periodic payments will be less than 5% of the consumer’s expected gross income over the period.
The proposed rules will impact a variety of financial institutions. While most payday lenders are operated as standalone storefront lenders or websites, due to the substantial profit available—the CFPB estimates that the industry generates $8.7 billion in interest and fees per year—some traditional financial service providers, such as banks and credit unions, have started to offer these services.
Previously, payday lenders have primarily been subject to regulation at the state level. The significant changes that would be produced if the CFPB’s proposal is enacted suggests that the proposals will receive numerous comments going forward and the CFPB will face substantial resistance if the proposals are not altered in response to those comments.
Feature: Regulation A+
As noted last week, on March 25th, 2015 the Securities and Exchange Commission (“SEC”) adopted amendments to Regulation A of the Securities Act of 1933 (the “Securities Act”) that were required by the Jumpstart Our Business Startups Act (“JOBS Act”). Known as Regulation A+, the amendments provide an updated exemption from Securities Act registration for smaller companies. The final rules provide for two tiers of offerings: Tier 1, for offerings of securities of up to $20 million in a 12month period, and Tier 2, for offerings of securities of up to $50 million in a 12month period. The final rules also provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers” in Tier 2 offerings. Tier 1 offerings will be subject to federal and state registration and qualification requirements, and issuers may take advantage of the coordinated review program developed by the North American Securities Administrators Association (“NASAA”).
Crowdfund Insider analyzed the new rules, highlighting the Tier 2 provision which preempts state Blue Sky laws. The article includes a synopsis of the amendment’s salient points and provides a chart comparing offerings made in accordance with Tier 1, Tier 2, Rule 506(c) of Regulation D of the Securities Act, and proposed Regulation Crowdfunding.
A summary of the amendment’s provisions was also compiled by TechCrunch, which the amendments changes to Regulation A. TechCrunch compiled a chart providing a sidebyside comparison of the differences between Tier 1 offerings and Tier 2 offerings.
Focusing on Tier 1 offerings, Washington Business Journal speculated on how well the NASAA’s recently adopted coordinated review program will work.
American Banker discussed the opportunities the amendments afford online lenders and community banks, calling the timing of the amendments “fortuitous.” (subscription required).
The possible impact the amendments may have on early stage venture capital was discussed by Nish Archarya in Forbes.
Econsultancy highlighted the costs and savings companies using Regulation A+ may experience.
SEC Commissioner Daniel M. Gallagher recently discussed the shortcomings he sees in Regulation A+ in a speech he gave at Vanderbilt Law School. Although pleased with many of the new rule’s provisions, Gallagher believes that the rule should have, among other things, provided issuers with relief from more of the registration requirements of Section 12(g) of the Securities Exchange Act of 1934 (the "Security Exchange Act") and raised the offering limit to $75 million. Gallagher also called for reforms to the crowdfunding provisions of Title III of the JOBS Act and Rules 504 and 505 of Regulation D.
Banking Agency Developments
Revised Subordinated Debt Guidance
On April 3rd, the Office of the Comptroller of the Currency (“OCC”) published a Bulletin on its revised and reorganized guidance for subordinated debt issued by national banks. The new guidelines apply to all subordinated debt issued by national banks and federal savings associations regardless of whether the subordinated debt is included in regulatory capital. The OCC also revised the “Sample Subordinated Note” and replaced it with two sample notes for national banks.
OCC Bulletin on Servicemembers Civil Relief Act
On April 1st, the OCC issued a Bulletin informing national banks, federal savings associations, and federal branches and agencies of foreign banks of the temporary extension of certain protections under the Servicemembers Civil Relief Act enacted by the Foreclosure Relief and Extension for Servicemembers Act of 2014.
OCC Quarterly Report on Bank Trading and Derivatives Activities
On April 1st, the OCC published the OCC’s Quarterly Report on Bank Trading and Derivatives Activities. The report finds, among other things, that insured U.S. commercial banks and savings institutions reported trading revenue of $4.4 billion in the fourth quarter of 2014, down $1.3 billion, or 22 percent, from $5.7 billion in the third quarter. For all of 2014, trading revenue totaled $22.7 billion, a 3 percent increase from 2013. Credit exposures from derivatives increased in the fourth quarter. Net current credit exposure rose $47 billion, or 12 percent, to $445 billion. OCC Press Release.
On March 30th, the Federal Financial Institutions Examination Council (“FFIEC”) released two statements about ways that financial institutions can identify and mitigate cyberattacks. The first addresses destructive malware and the second, compromising credentials. In addition, the FFIEC provided information on what institutions can do to prepare for and respond to these threats. FFIEC Press Release.
OCC Mortgage Metrics Report
On March 27th, the OCC released the OCC Mortgage Metrics Report for the fourth quarter of 2014. Among other things, the report found that the performance of firstlien mortgages serviced by eight national banks has improved, with 93.2% of mortgages included in the report classified as current and performing. The percentage of mortgages that were 30 to 59 days past due was 2.4% of the portfolio, a 9.4% decrease from a year earlier. Seriously delinquent mortgages and foreclosure activity among reporting servicers also continued to decline. OCC Press Release.
Treasury Department Developments
Treasury Department and IRS Issue 401(k) Guidance
On April 2nd, the Department of the Treasury and the Internal Revenue Service (“IRS”) issued guidance designed to facilitate automatic enrollment and contribution increases in 401(k) and similar retirement savings plans. This guidance adds to the current IRS selfcorrection program, which allows plan sponsors to easily correct administrative errors without risking the plan’s tax qualification and without having to obtain IRS approval. The guidance simplifies and reduces the cost and burden of the correction process if a 401(k) or 403(b) plan using automatic enrollment or automatic increases fails to implement the correct amount of employee contribution. Treasury Department Press Release.
CFPB Releases New Consumer Toolkit for Mortgages
On March 31st, the CFPB released a new toolkit that guides consumers through the process of shopping for a mortgage and buying a house. Developed as part of the CFPB’s “Know Before You Owe” mortgage initiative, the toolkit will help consumers take full advantage of the new Loan Estimate and Closing Disclosure forms that lenders are required to begin providing in August. CFPB Press Release.
Securities and Exchange Commission
Investment Advisory Committee Agenda
The SEC published the agenda for the Investment Advisory Committee’s April 9, 2015 meeting. Among other things, the Committee will discuss: (i) the results of the investor behavior survey performed by the Commodity Futures Trading Commission (“CFTC”); (ii) background checks as a means to address elder financial abuse; (iii) proxy access and the SEC staff’s review of Rule 14a8(i)(9) under the Securities Exchange Act (which may include a recommendation); (iv) an update on the SEC proxy voting roundtable; and (v) an update on the recommendations of the SEC Advisory Committee on Small and Emerging Companies. Meeting Notice.
Mining Disclosure Rules
On March 30th, the Wall Street Journal reported the SEC recently said in a court filing that it will not be considering rules required by the DoddFrank Act on the disclosure of payments made by resource extractors until spring 2016. Disclosure Delay.
Commodity Futures Trading Commission
Relief from Business Conduct Standards for Legacy SPVs
On March 31st, the CFTC Division of Swap Dealer and Intermediary Oversight provided noaction relief to provisionally registered swap dealers from compliance with certain CFTC regulations. The relief related to business conduct standards with counterparties and swap trading relationship documentation when entering into swaps with certain special purpose vehicles in existence prior to October 10, 2013. CFTC Press Release.
Relief from CCO Annual Report
On March 27th, the CFTC’s Division of Swap Dealer and Intermediary Oversight issued a noaction letter that provides futures commission merchants, swap dealers and major swap participants relief from the requirements of Regulation 3.3(f), under which registrants must deliver to the CFTC their chief compliance officer annual report within 60 days after the end of their fiscal year. The letter provides an additional 30 days to deliver the reports. CFTC Press Release.
Central Clearing Concerns
On April 2nd, Bloomberg summarized comments made at the CFTC’s Market Risk Advisory Committee Meeting where participants discussed efforts to centrally clear more swaps trades. Central Clearing.
On March 31st, the CFTC announced that during the week of April 612, 2015, CFTC staff will highlight efforts to encourage investors to check the background of financial professionals before investing their money. Through advertising, social media, and targeted outreach, the CFTC will urge investors to visit SmartCheck.gov and to make this part of a routine step when considering investing with a new financial professional and even with established advisors. CFTC Press Release.
Federal Rules Effective Dates
April June 2015
Commodity Futures Trading Commission
May 26, 2015 Residual Interest Deadline for Futures Commission Merchants. 80 FR 15507.
Federal Housing Finance Agency
April 10, 2015 Federal Home Loan Bank Capital Stock and Capital Plans. 80 FR 12753.
Federal Housing Finance Board
April 10, 2015 Federal Home Loan Bank Capital Stock and Capital Plans. 80 FR 12753.
Securities and Exchange Commission
June 15, 2015 Nationally Recognized Statistical Rating Organizations. 79 FR 55077.
[This rule is effective November 14, 2014; except the amendments to Sec. 240.17g3(a) (7) and (b)(2) and Form NRSRO, which are effective on January 1, 2015; and the amendments to Sec. 240.17g2(a)(9), (b)(13) through (15), Sec. 240.17g5(a)(3)(iii)(E), (c)(6) through (8), Sec. 240.17g7(a) and (b), and Form ABS15G, which are effective June 15, 2015. The addition of Sec. Sec. 240.15Ga2, 240.17g8, 240.17g9, 240.17g 10, and Form ABS Due Diligence15E are effective June 15, 2015.]
May 18, 2015 Regulation SBSRReporting and Dissemination of SecurityBased Swap Information. 80 FR 14563.
SecurityBased Swap Data Repository Registration, Duties, and Core Principles. 80 FR 14437.
April 3, 2015 Department of the Treasury Acquisition Regulation; Technical Amendments. 80 FR 11595.
Exchanges and SelfRegulatory Organizations
Financial Industry Regulatory Authority
FINRA Membership Application Survey
On March 30th, the Financial Industry Regulatory Authority (“FINRA”) requested comment on the effectiveness and efficiency of its membership application rules. Comments should be submitted on or before May 14, 2015. FINRA Regulatory Notice 1510.
Algorithmic Trading Supervision
On March 26th, FINRA issued guidance on effective supervision and control practices for those employing algorithmic trading strategies. FINRA Regulatory Notice 159.
On March 25th, FINRA announced that as of April 1, 2015, new, increased qualification examination fees will be in effect. FINRA Regulatory Notice 158.
International Swaps and Derivatives Association
Members of ISDA Determination Committee Named
On March 31st, the International Swaps and Derivatives Association (“ISDA”) announced the names of those who will serve on ISDA’s five regional Determinations Committees. ISDA Press Release.
NASDAQ OMX Group
Amendment and Restatement of Rules Proposed
On March 31st, the SEC provided notice of NASDAQ OMX BX’s and NASDAQ OMX PHLX’s individually filed proposals that would amend and restate their respective exchange rules in order to provide a clearer and more detailed description of certain aspects of their functionality. The proposed rule changes are in response to SEC Chair Mary Jo White’s request that each selfregulatory organization conduct a comprehensive review of each order type offered to members, and how it operates in practice. The proposed amendments provide additional examples of order type operation to promote greater understanding of the NASDAQ OMX BX’s and NASDAQ OMX PHLX’s market structure. In addition, the NASDAQ OMX BX and NASDAQ OMX PHLX note that certain functionality added to their market in past years have been described as a type of order but would be more precisely described as an attribute that may be added to a particular order. Accordingly, the restated rules will distinguish between “Order Types” and “Order Attributes,” while providing a full description of the Order Attributes that may be attached to particular Order Types. Except where specifically stated otherwise, all proposed rules are restatements of existing rules and therefore do not reflect substantive changes in the rule text or in the operation of the Exchanges. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of April 6.
Refinement of Appointment Process Proposed
On April 2nd, the SEC provided notice of NYSE Arca’s and NYSE MKT’s separately submitted proposals to amend their respective rules to refine the appointment process utilized by the NYSE Arca and NYSE MKT. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of April 6.
The Options Clearing Corporation
Resizing of Clearing Fund and Addition of Financial Resources Proposed
On March 27th, the SEC provided notice of The Options Clearing Corporation’s filing of a proposal that would establish procedures for the monthly resizing of its Clearing Fund and add financial resources through intraday margin calls and/or an intramonth increase of the Clearing Fund to ensure that it maintains adequate financial resources in the event of a default of a Clearing Member or group of affiliated Clearing Members presenting the largest exposure to The Options Clearing Corporation. Comments should be submitted on or before April 23, 2015. SEC Release No. 3474603.
Delaware Considers Three Corporate Law Amendments
On April 2nd, University of California, Berkeley, law professor Steven Davidoff Solomon discussed three proposed amendments to the Delaware General Corporation Law. The proposals address appraisal rights, forum selection, and loser pays bylaws. DGCL Amendments.
Investment Managers Seek Independence
On April 2nd, Reuters described the steps investment managers are taking to conceal their plans to depart well known investment firms. The number of managers leaving big firms is likely to increase as retention agreements expire and the large asset managers impose higher fees. Investment Manager Departures.
Labor Department’s Fiduciary Standard Proposal
On April 1st, the Hill enumerated the arguments being made in support and in opposition to the Department of Labor’s expected fiduciary standard rule for retirement advisers. The Office of Management and Budget could release its review of the proposal by midApril. Fiduciary Standard.
Accounting Fraud Class Actions on the Rise
On March 31st, Cornerstone Research published “Accounting Class Actions and Settlements 2014 Review and Analysis.” The report found that the number of accounting fraud class actions filed in 2014 rose sharply higher even though the overall number of securities class actions remained relatively unchanged. Accounting Fraud Report.
On March 31st, CFO.com summarized the finding of a recent study which found a direct correlation between the size of a chief financial officer’s signature and the likelihood of financial misreporting. Signature Correlation.
On March 30th, Reuters discussed the trend among pension funds to recategorize some hedge funds, which had been considered alternative investments, as mainstream investments in their equity portfolio. Reclassification.
On March 30th, the Wall Street Journal discussed heightened U.S. regulatory oversight of banks which one bank executive called “Occupy Board Meetings.” The regulators are meeting with bank directors and reviewing board minutes to determine whether boards are adequately overseeing management. MicroManagement.
On March 27th, Market Watch highlighted the growing disagreement between Federal Reserve Board Vice Chair Stanley Fischer and SEC Commissioner Daniel M. Gallagher over who should oversee the asset management industry and how that oversight should be conducted. Regulatory Tussle.
SEC Questioning Banking Regulators
On April 1st, the Wall Street Journal quoted SEC Chief Economist Mark Flannery as questioning banking regulators’ efforts to tighten control over nonbank sources of credit. Questions.