Insights from Winston & Strawn
The Financial Crimes Enforcement Network’s (“FinCEN”) new “Customer Due Diligence Requirements for Financial Institutions” rule (the “CDD Rule”) became effective on May 11, 2018. Noting that the verification of legal entities and identification of beneficial owners is of primary import when conducting customer due diligence, FinCEN adopted the CDD Rule to strengthen requirements applicable to any covered financial institution’s anti-money laundering program. Covered financial institutions generally include U.S. banks, mutual funds brokers or dealers in securities, futures commission merchants, and introducing brokers in commodities.
The CDD Rule’s explicit requirements have four primary components, which require covered financial institutions to establish and maintain written policies and procedures that are reasonably designed to (i) obtain and verify the identity of customers, (ii) obtain and verify the identity of the beneficial owners of companies opening accounts, (iii) understand the nature and purpose of customer relationships to better develop risk profiles of customers, and (iv) conduct continuous monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. The requirement to obtain and verify beneficial ownership information applies to any individual who owns 25% or more of a legal entity and/or any individual who controls such legal entity.
To address the CDD Rule, the Loan Syndications and Trading Association (the “LSTA”) has already published revisions to the LSTA’s model form of credit agreement. Those revisions include a new condition precedent to require a beneficial ownership certification from the borrower and additional reporting covenants with respect to changes in beneficial ownership. Nevertheless, agent banks are currently taking various approaches to obtaining beneficial ownership information and disseminating such information with syndicate lenders. As institutions create internal processes to comply with the CDD Rule, and potential loan syndication market approaches develop, agent banks and their legal advisors will need to give due consideration to the privacy and confidentiality issues presented by sharing such sensitive information
Feature: Piwowar Announces Resignation, Leaving Fate of Conduct Standard Proposals in Doubt
Securities and Exchange Commission (“SEC”) Commissioner Michael S. Piwowar announced last week that he intends to resign from the agency this summer. Although his term officially expires on June 5, 2018, Piwowar informed President Trump in his resignation letter that he will remain in his role until the earlier of July 7, 2018, or the swearing in of his successor. In response to Piwowar’s announcement, SEC Chairman Jay Clayton issued a statement praising Piwowar for “emphasizing the importance of economic analysis in the agency’s efforts, and for raising the level of involvement and rigor of the Commission’s analysis in matters ranging from rulemaking to enforcement” during his term.
During his time as acting chairman, Piwowar, a longtime critic of the regulatory reforms under the Dodd-Frank Act, took aim at several controversial provisions of the post-crisis reforms, calling for reviews of the pay ratio disclosure rule and the due diligence requirements of the conflict minerals rule. Piwowar also took steps to revoke the subpoena powers of staff in the SEC’s Division of Enforcement, a move that exemplified what Bloomberg described as Piwowar “taking full advantage of his temporary powers.” As acting chairman, Piwowar drew the ire of Congressional Democrats, who asked the SEC’s Office of Inspector General (“OIG”) to investigate Piwowar’s actions to determine whether he had exceeded his authority. The OIG’s investigation ultimately concluded that Piwowar’s actions did not violate any laws or undermine the SEC’s mission. In a more recent controversy, Piwowar reportedly chastised a group of bank executives for inserting themselves into the gun control debate, suggesting that their promise to rethink business relationships with gun manufacturers could jeopardize Republican support for loosening regulations on derivatives and proprietary trading.
Piwowar’s announcement comes a mere four months after the swearing in of the SEC’s newest commissioners, Robert J. Jackson and Hester M. Peirce, which marks the first time the SEC has had a full commission since 2015, and at time when the restored Commission is arguably beginning to hit its stride. Piwowar’s decision to resign has the potential to derail the SEC’s regulatory agenda, as his departure would leave the Commission with two Republicans and two Democrats, introducing the potential for deadlock on more controversial proposals. Many observers see Piwowar’s departure as jeopardizing the SEC’s highly anticipated proposals governing conduct standards for investment professionals in their relationships with retail investors, which the SEC approved for public comment just a few weeks before Piwowar’s announcement. Speaking to Investment News, Barbara Roper, director of investor protection at the Consumer Federation of America, voiced concerns that a new Republican commissioner appointed by the current administration could upend the proposed standards: “If the [Trump administration] were to replace Commissioner Piwowar with someone as skeptical of regulation as Commissioner [Hester] Peirce, that could be the nail in the coffin of an enhanced standard for broker-dealers.” Other observers remained more optimistic that Piwowar’s departure would have little impact on the success of the proposals. Former SEC Commissioner Luis Aguilar told Think Advisor that the proposals, which were criticized by both Republican and Democratic members of the Commission during the vote, already “require a compromise” before they are finalized, and that “Chairman [Jay] Clayton may actually have an easier time reaching a compromise with just three other commissioners rather than four commissioners, as there is one less view to consider.” The fate of the proposal is further complicated by the fact News pointed out, if the Trump administration decides to nominate replacements for both Piwowar and Stein at the same time, the SEC could be left with just three commissioners during the confirmation process, which would give a single commissioner the power to block votes under the SEC quorum rules.
The comment period on the proposed conduct standards will end on August 7, 2018, about one month after Piwowar plans to leave the SEC. Given the number of vacancies at other federal financial agencies, it is unclear whether Piwowar’s replacement will be confirmed before the final rule is ready for consideration by the Commission.
Banking Agency Developments
Military Lending Act: New Comptroller’s Handbook Booklet and Rescissions
On May 11th, the Office of the Comptroller of the Currency (“OCC”) announced that it has issued the “Military Lending Act” booklet of the Comptroller’s Handbook. This new booklet, part of the Consumer Compliance series of the Comptroller’s Handbook, is for use by OCC examiners when assessing compliance with the Military Lending Act.
OCC Hosts Operational Risk Workshop in Pennsylvania
FFIEC Announces Availability of 2017 Data on Mortgage Lending
On May 7, the Federal Financial Institutions Examination Council (“FFIEC”) announced the availability of data on mortgage lending transactions at 5,852 U.S. financial institutions covered by the Home Mortgage Disclosure Act.
Board Welcomes Release of Global Strategy for Reducing Wholesale Payments Fraud. On May 8th, the Federal Reserve Board announced that it has welcomed the release of a global strategy for reducing wholesale payments fraud. The strategy, published in a report by the Bank for International Settlement’s Committee on Payments and Market Infrastructures, sets forth an approach to reducing the risk of wholesale payments fraud related to endpoint security with the broader objective of supporting financial stability.
Board announces approval of final amendments to its Regulation A. On May 7th, the Federal Reserve Board announced the approval of final amendments to its Regulation A, which governs extensions of credit by Federal Reserve Banks, to make certain technical adjustments, including reflecting the expiration of the Term Asset Backed Securities Loan Facility program. The final amendments are effective 30 days after the date of publication in the Federal Register, which is expected shortly.
Spring 2018 Rulemaking Agenda
On May 10th, the Consumer Financial Protection Bureau (“CFPB”) published the semiannual update of its Spring 2018 rulemaking agenda.
Treasury Department Developments
U.S. and UAE Disrupt Large-Scale Currency Exchange Network Transferring Millions of Dollars to the IRGC-QF
On May 10th, the U.S. Department of the Treasury announced thatthe U.S. and the United Arab Emirates (“UAE”) have jointly taken action to disrupt an extensive currency exchange network in Iran and the UAE that has procured and transferred millions in U.S. dollar-denominated bulk cash to Iran’s Islamic Revolutionary Guard Corps-Qods Force (“IRGC-QF”) to fund its malign activities and regional proxy groups.