Insights from Winston & Strawn

Efforts to repeal the Department of Labor’s (“DOL’s”) fiduciary rule are already well underway. On October 12th, the House Financial Services Committee passed a bill by Rep. Ann Wagner (R-MO) to repeal the fiduciary rule. The bill, known as the Protecting Advice for Small Savers Act of 2017, H.R. 3857, would replace the fiduciary standard with a best-interest standard for broker-dealers. Under the bill, an investment recommendation to retail customers would satisfy the best-interest standard if it reflects “reasonable diligence” on the part of the broker, the definition of which would be modeled on the existing definition from the Financial Industry Regulatory Authority (“FINRA”). FINRA requires that brokers use reasonable “care, skill and prudence” based on a customer’s individual investment needs. This standard explicitly does not require a broker-dealer to recommend the least expensive security or investment strategy, and in a significant departure from the DOL’s fiduciary rule, it does not require brokers to “analyze all possible securities, other products, or investment strategies before making a recommendation.” In addition, the bill would nullify any state regulation of a brokerdealer.

The bill has received praise from many opponents of the DOL’s fiduciary rule, so this may be the compromise version that eventually replaces the DOL’s fiduciary rule for good. The bill still has a long road ahead of it in the House and Senate before it can be presented to the President for consideration, so amendments and delays may be in store. 

Feature: Industry Reacts to CFPB’s Payday Lending Rule

On October 5th, the Consumer Financial Protection Bureau (“CFPB”) demonstrated again that it will continue to advance an aggressive regulatory agenda through publication of a final rule that creates consumer protections for payday loans by imposing new restrictions on the industry. The new protections will apply to loans that require consumers to repay all or most of the debt at once, including payday loans, auto title loans, deposit advance products, and longer-term loans with balloon payments. The final rules respond to concerns about what the CFPB calls “payday debt traps” created by lending practices that force borrowers who are unable to pay back the full balance to roll over or refinance the loans repeatedly, leading to expensive new charges. CFPB Director Richard Cordray said that the final rule “takes square aim at the practices that produce these outcomes – the failure to underwrite these loans and the business model built on repeated re-borrowing.”

A key provision of the new rule is the requirement that lenders conduct a “full-payment test” to determine upfront that borrowers can afford to repay their loans and still meet basic living expenses and major financial obligations without re-borrowing. Lenders will be required to verify income and major financial obligations and estimate basic living expenses for a one-month period. These requirements will not apply to certain short-term loans of up to $500 with a “principal-payoff option,” which will allow the borrower to get out of debt more gradually by requiring the borrower to pay off at least one-third of the original principal before extending the loan. Under this option, lenders would be limited to making no more than three loans in quick succession and would be prohibited from lending to consumers that have taken out more than six short-term loans or been in debt for more than 90 days on short-term loans over a rolling 12-month period. 

The rule will also impose new reporting requirements on lenders that make short-term loans under the fullpayment test or principal-payoff option, which will require them to use CFPB-registered credit-reporting systems to report or obtain information about these loans. Lenders will also be prohibited from repeatedly attempting to debit consumers’ bank accounts to collect payment, which can often lead to borrowers incurring multiple fees for returned payments and insufficient funds. Under the rule, lenders will have to notify consumers before attempting to debit the consumer’s account to collect payment for a loan and will be unable to debit an account after two unsuccessful attempts unless the lender obtains new authorization from the borrower. 

The new restrictions and requirements under the CFPB’s rule represent a sea change for the industry, which expressed dismay at the rule. Speaking to the Washington Post, Edward D’Alessio, executive director of the Financial Service Centers of America, warned that the rule’s restrictions will “cripple” and “devastate” payday lenders, forcing many out of business. Dennis Shaul, chief executive of the Community Financial Services Association of America, told the Los Angeles Times that the rule will harm consumers who are already financially vulnerable and unable to access any other type of credit. Consumer advocates praised the rule, saying it provides desperate borrowers essential protections against the predatory practices of many operators in the short-term loan industry. 

While the primary providers of short-term loans criticized the rule, some lenders stand to benefit. The final rule eased some of the restrictions set out in the CFPB’s original proposal by exempting certain longer-term loans and other less risky loan options from its requirements. These include small personal loans made by community banks or credit unions or other lenders who make 2,500 or fewer covered short-term or balloonpayment loans per year and derive no more than 10 percent of their revenue from such loans. Members of the Credit Union National Association were relieved that the final rule exempts short-term loans that comply with the requirements of the National Credit Union Administration’s (“NCUA”) Payday Alternative Loan program. Reuters noted that the structure of the final rule may encourage banks to return to the market and serve customers who have had to rely on payday lenders for credit. Following the release of the CFPB’s rule, Acting Comptroller Keith A. Noreika rescinded the Office of the Comptroller of the Currency’s (“OCC”) supervisory guidance on the offering of deposit advance products by national banks and federal savings associations, which had discouraged banks from offering these short-term loans. Noreika said that the rescission was necessary to prevent banks from being subject to inconsistent regulation and the OCC encouraged banks to continue offering “responsible products that meet the short-term, small-dollar credit needs of consumers,” although some commentators raised concerns that the OCC’s move will open the door to borrowers falling into debt traps set by banks once payday lenders have exited the business. 

The payday lending industry is already planning to fight the new rule, although it is unclear whether it will be able to galvanize the support of Congress. While Republican lawmakers have been highly critical of the CFPB’s rollout of new regulations, many are reluctant to use the Congressional Review Act to overturn regulations viewed as protecting consumers. Political analysts cited by The New York Times stated that the chances of overturning the rule are “very low.” Analysts interviewed by The Financial Times noted that by exempting longerterm loans from the final rules, the CFPB improved the chances that the rule could withstand Congressional review. Without the support of Congress, payday lenders may be forced to seek relief in the courts.  

Banking Agency Developments

OCC 

OCC Releases Updated List of Permissible Activities for National Banks and Federal Savings Associations On October 13th, the OCC announced the release of its updated list of permissible activities for national banks and federal savings associations. The publication titled, Activities Permissible for National Banks and Federal Savings Associations, Cumulative, updates the list of permissible activities to reflect applicable precedent for national banks, streamlines certain entries for readability, and includes applicable interpretive letters and corporate decisions issued by the OCC affecting federal savings associations. Impact of Evidence of Discriminatory or Other Illegal Credit Practices on Community Reinvestment Act Ratings On October 12th, the OCC issued a bulletin to make public Policies and Procedures Manual, which sets the agency’s policy and framework for determining the effect of evidence of discriminatory or other illegal credit practices on the Community Reinvestment Act (“CRA”) rating of a national bank, federal savings association, or federal branch. 

Federal Reserve

U.S. Faster Payments Governance Framework Formation Team Announced On October 13th, the Federal Reserve, on behalf of the Governance Framework Formation Team, announced the 27 members of the collaborative industry short-term work group that will focus on developing a governance framework for faster payments in the U.S.  

Securities and Exchange Commission

Proposed Rules

SEC Proposes Amendments to Modernize and Simplify Regulation S-K Disclosure Requirements At an Open Meeting on October 11th, the SEC voted to propose amendments to modernize and simplify certain disclosure requirements in Regulation S-K, and related rules and forms, as mandated by the Fixing America’s Surface Transportation (“FAST”) Act and recommended by the SEC staff’s FAST Act Report. Among other things, the proposed rule would eliminate the risk factor examples listed in the disclosure requirement and revise the description of property requirement to emphasize the materiality threshold; eliminate certain requirements for undertakings in registration statements; change exhibit filing requirements to permit the omission of portions of exhibits that do not contain material information; allow for flexibility in discussing historical periods in the Management’s Discussion and Analysis; and require data tagging for items on the cover page of certain filings and the use of hyperlinks for information that is incorporated by reference and available on EDGAR. Comments are due within 60 days of publication in the Federal Register. SEC Chairman Jay Clayton remarked that the “proposed rule changes should result in significant savings of time and money for registrants without any reduction in material information and with increased accessibility.” SEC Commissioner Kara M. Stein supported the proposal, but said that it could do more “to truly modernize both how companies provide disclosure and how investors receive it,” particularly with respect to requiring legal entity identifiers (“LEIs”) for all registrants and subsidiaries. See also remarks by SEC Commissioner Piwowar in support of the proposal.

Speeches and Statements

Clayton, Stein Discuss Technology and Innovation at Investor Advisory Committee Meeting

SEC Chairman Jay Clayton and SEC Commissioner Kara M. Stein addressed the SEC’s Investor Advisory Committee meeting on October 12th. Clayton updated the Committee about the SEC’s proposed amendments to disclosure requirements under Regulation S-K and the SEC’s efforts to assess the effects on securities markets of blockchain technology and other technological innovations. Stein emphasized the importance of considering advances in technology, including blockchain and the electronic delivery of information, from the perspective of the investor. 

Other Developments

Whistleblower Earns $1 Million Award

The SEC announced on October 12th that it has awarded over $1 million to a whistleblower who provided the SEC with information and substantial documentation of a securities law violation by a registered entity that affected retail customers.

Staff Announcements

On October 10th, the SEC announced that Walter E. Jospin, Regional Director of the SEC’s Atlanta office, plans to leave the agency. The SEC announced on October 6th that Robert Evans III has been named Chief of the Office of International Corporate Finance in the SEC’s Division of Corporation Finance.

SEC Invites Comments on Semiannual Regulatory Agenda

The SEC provided notice on October 10th that it has approved the agenda of its rulemaking actions and submitted the agenda for publication in the Unified Agenda of Federal Regulatory and Deregulatory Actions, pursuant to the Regulatory Flexibility Act. Comments on the agenda should be submitted within 30 days of publication in the Federal Register.

Commodity Futures Trading Commission

CFTC Comparability Determination on EU Margin Requirements and a Common Approach on Trading Venues

On October 13th, U.S. Commodity Futures Trading Commission (“CFTC”) Chairman J. Christopher Giancarlo announced determinations by the CFTC and the European Commission (“EC”) on comparability and equivalence of margin requirements for uncleared swaps, as well as a common approach regarding certain CFTC and European Union (“EU”) authorized derivatives trading venues. See Federal Register: Comparability Determination for the European Union: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants. 

Interpretation of the CEA and CFTC Regulations Regarding the Characterization of Variation Margin Payments and All Other Cash Flows for Cleared Swaps

On October 12th, the CFTC’s Division of Clearing and Risk confirmed that, under the Commodity Exchange Act and CFTC regulations, variation margin and all other payments in satisfaction of outstanding exposures on a counterparty’s cleared swap positions constitute settlement of the outstanding exposure and not collateral against it. CFTC Letter No. 17-51. 

CFTC Will Seek to Delay Swap Dealer Registration Rules

On October 11th, Chairman J. Christopher Giancarlo told members of the House Committee on Agriculture that he will seek to delay rules that would increase the number of firms that must register as swap dealers. Giancarlo’s plan to seek a one-year delay of the rules would require firms with smaller swaps activity to register as swaps dealers and face stricter oversight. Reuters. 

 

Federal Rules Effective Dates

October 2017 – December 2017

Consumer Financial Protection Bureau

October 19, 2017

 

Amendments to the 2013 Mortgage Rules Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z). 81 FR 72160.

 

 

Amendments to the 2013 Mortgage Rules Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z); Correction. 82 FR 30947.

October 1, 2017

 

Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth In Lending Act (Regulation Z). 81 FR 83934.

 

 

Amendments to Federal Mortgage Disclosure Requirements Under the Truth in Lending Act (Regulation Z). 82 FR 37656.

 

 

Federal Deposit Insurance Corporation

October 1, 2017

 

Recordkeeping Requirements for Qualified Financial Contracts. 82 FR 35584.

 

 

Federal Financial Institutions Examination Council

November 24, 2017

 

Collection and Transmission of Annual AMC Registry Fees. 82 FR 44493.

October 2, 2017

 

Description of Office, Procedures, and Public Information. 82 FR 45697.

 

 

Federal Reserve System

November 13, 2017

 

Restrictions on Qualified Financial Contracts of Systemically Important U.S. Banking Organizations and the U.S. Operations of Systemically Important Foreign Banking Organizations; Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions. 82 FR 42882.

November 1, 2017

 

Rules Regarding Availability of Information. 82 FR 45679.

 

 

Treasury Department

November 27, 2017

 

Changes to the In-Bond Process. 82 FR 45366.

November 13, 2017

 

Nondiscrimination on the Basis of Age in Programs and Activities Receiving Federal Financial Assistance From the Department of the Treasury. 82 FR 47107.

October 11, 2017

 

Department of the Treasury Employee Rules of Conduct. 82 FR 47105.

 

 

Exchanges and Self-Regulatory Organizations

Chicago Board Options Exchange

CBOE Proposes Electronic-Only Order Type

On October 12th, the SEC requested comments on the Chicago Board Options Exchange Incorporated’s (“CBOE”) proposal to create an electronic-only order type that would only auto-execute electronically, route to an electronic exchange auction process, or route to the electronic book, and would be cancelled if routing for manual handling would be required under CBOE rules. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of October 16, 2017. SEC Release No. 34-81862.

International Swaps and Derivatives Association

ISDA Launches New Protocol on Venezuelan Derivatives Transactions in Response to U.S. Sanctions

On October 11th, the International Swaps and Derivatives Association (“ISDA”) announced that it has released the ISDA 2017 Venezuela Additional Provisions Protocol, which will assist market participants that have entered into credit derivatives transactions referencing Venezuela or Petroleos de Venezuela, S.A., following the imposition of sanctions on Venezuela by the U.S. The Protocol is open for adherence for ISDA members and non-members from October 11, 2017, until October 18, 2017.

NYSE

SEC Approves NYSE’s Listing Standards for Subscription Receipts

On October 11th, the SEC issued an order granting accelerated approval to the New York Stock Exchange LLC’s (“NYSE”) amended proposal to modify the NYSE Listed Company Manual to adopt initial and continued listing standards for Subscription Receipts. SEC Release No. 34-81856.

Industry News

Bill to Repeal DOL’s Fiduciary Rule Passes House Panel

Rep. Ann Wagner (R-Mo.)’s bill to repeal the DOL’s fiduciary rule has passed out of the House Financial Services Committee. The bill establishes a best-interests standard for broker-dealers and keeps a fiduciary rulemaking under the SEC’s jurisdiction.The bill, which passed by a vote of 34-26, now goes to the House. ThinkAdvisor.

St. Louis Fed President Cautions That Bank Regulators Are ‘Complacent’ over Risks Presented by Fintech Companies

On October 12th, St. Louis Fed President James Bullard stated that U.S. banking regulators need to hasten efforts to address the risks posed by fintech companies to the banking sector, which could be “eviscerated” by these revolutionary newcomers. In an interview with Reuters, Bullard noted that “[w]e need to speed up our consideration of the fintech issues and think harder about what is the regulatory environment that is going to be appropriate,” adding that “… we have been complacent so far.”