Insights from Winston & Strawn

Among recent financial services regulatory developments, there appear to be at least four worthy of particular note. First, the Consumer Financial Protection Bureau (“CFPB”) released a Fair Lending Report setting forth its priorities in that area in the coming year. Second, the Congressional Research Services (“CRS”) issued a report on “Cost-Benefit Analysis and Financial Regulator Rulemaking.” Third, House Financial Services Committee Chairman Hensarling released a summary of bill changes describing revisions to his proposed financial reform legislation, the Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers, and Entrepreneurs) Act, addressing some subjects that were not covered by a memorandum that he released last February; he subsequently released the full text of the 593-page bill. Fourth, the Chairman of the House Judiciary Committee submitted a report on a bill entitled “Stop Settlement Slush Funds Act of 2017.”

The CFPB Fair Lending Report indicates that priority will be given to redlining, servicing of mortgages and student loans, and small business lending. In the area of redlining, the CFPB will consider whether any lenders have “intentionally discouraged” potential loan applicants in minority neighborhoods from applying. In the area of loan servicing, the CFPB will be looking for any evidence that servicers are discriminating on an unlawful basis when delinquent borrowers try to work out new loan payment plans. In the area of small business lending, the CFPB will move forward on a rulemaking to require small business lenders to collect data on race and gender of the owners of small business loan applicants and borrowers as authorized by Section 1071 of the Dodd-Frank Act.

The CRS report notes that financial services regulators are required by law to conduct cost-benefit analyses of proposed regulations, but those analyses are subject to less specific instructions than those applicable to other federal government agencies. Some say that is good because the effects of financial regulation are more likely to include transfers between groups that are not well accounted for in measurements of net effects and that uncertain cost-benefit analyses may disguise agency discretion as objective fact. Those who argue for more stringent cost-benefit analyses by financial services regulators believe it would discipline agencies by creating greater transparency of the agencies’ evaluations of proposed regulations. The House has already passed four bills in this Congress that would increase cost-benefit analyses requirements.

Chairman Hensarling’s Summary of Bill Changes, which he calls “Choice 2.0,” covers a very wide gamut of financial services regulation. It would reform stress testing and restrict operational risk capital requirements. It would require de novo review of an agency regulation two years after adoption of the regulation. It would increase some Securities and Exchange Commission (“SEC”) penalty provisions. It would remove the Comptroller of the Currency and Director of the CFPB from the Federal Deposit Insurance Corporation (“FDIC”) board and replace them with direct Presidential appointees. It would require financial agencies promulgating a rule with $100 million or more a year in impact to select the least costly, most cost-effective, or least burdensome alternative unless otherwise explained. It also would require financial agencies to minimize duplication between federal and state authorities in bringing enforcement actions. It would prohibit a financial agency from entering into a settlement that provides payments to persons not victims of alleged wrongdoing as has been alleged in the CFPB’s enforcement action against Ally Financial. It also would override the Madden case in which the Second Circuit U.S. Court of Appeals ruled that a nonbank transferee of a loan originated by a national bank may not charge the same interest rate that the national bank may charge under the National Bank Act; thus, Choice 2.0 would provide that a loan that is valid when made as to its interest rate remains valid regardless of subsequent sale. It raises the threshold for Regulation A+ offerings from $50 million to $75 million. The Director of the CFPB would be removable at will by the President, and the Deputy Director of the CFPB would be appointed by the President and be removable at will by the President, instead of being appointed by the Director. The CFPB would only have enforcement authority and would lose its current supervisory authority; its enforcement authority would not extend to unfair, deceptive, or abusive acts and practices, but would be limited to the enumerated consumer protection laws. The CFPB complaint database would no longer be published. Choice 2.0 would exempt banking organizations with at least 10 percent Tier 1 capital from the Federal Reserve’s stress testing regime. The SEC is to establish an Enforcement Advisory Committee and to accept its recommended reforms or report to Congress reasons for not doing so. It further requires that, if the Department of Labor promulgates a fiduciary rule, that rule must be substantially similar to the SEC’s rule. Chairman Hensarling has announced that a hearing on the new bill will be held April 26.

The House Judiciary Committee reported on the “Stop Settlement Slush Funds Act of 2017” which prohibits an official of the federal government from entering into any settlement agreement providing for a payment to any person other than the federal government and other than a payment that provides restitution for harm (including environmental harm) caused by the party making the payment. The report asserts that the Department of Justice, in the past, subverted Congress’ spending power by requiring settling defendants to donate money to non-victim third parties, in some cases giving defendants double credit for such donations while direct relief to consumers was merely dollar-for-dollar. The report further asserts that such non-victim third parties lobbied the Department for such payments and that such payments amounted to more than a billion dollars over a 30-month period. In some cases, such donations restored funding that Congress specifically cut. Defenders of this practice cite generalized harm to communities that cannot be addressed by restitution to persons harmed, but the majority of the Committee felt that such redress beyond redress of individual harm becomes a policy question best left to Congress, not to prosecutors. The report cites several bank robo-signing mortgage lending settlements as well as residential mortgage-backed securities (RMBS) settlements as examples of this practice.

Feature: As U.K. Financial Sector Plans for Brexit, Prime Minister Seeks Support for Brexit Mandate

On April 18th, the U.K. Financial Conduct Authority (“FCA”) published its annual business plan, which outlines the regulator’s priorities and specific areas of work during the next year. Among the FCA’s top priorities is the smooth transition of the financial regulatory framework as the U.K. withdraws from the European Union (“EU”). In an introductory statement, FCA chief executive Andrew Bailey emphasized that the FCA’s primary concern during the Brexit process would be “to ensure that the financial services industry remains resilient and well placed to meet users’ needs.”

Noting that it will offer technical support to the U.K. government during Brexit, the FCA highlighted five principles that will govern how it will advise the government during the withdrawal process. These principles include cross-border market access; consistent global standards; cooperation between regulatory authorities; influence over standards; and the opportunity to recruit and maintain a skilled workforce. To finance the additional work it must undertake to support Brexit, the FCA increased its annual funding requirement so that it can allocate £2.5 million to associated Brexit planning costs. The Financial Times noted that the extra demands placed on the FCA by Brexit has required the regulator to postpone its plans to streamline its handbook and may require other adjustments to its priorities.

In assessing the risk outlook for the upcoming year, the FCA warned that Brexit has created a great deal of uncertainty with the potential to affect financial markets and the wider U.K. economy. The regulator stressed that the “consequences of the U.K.’s exit on the financial sector will depend on the outcome of the Article 50 negotiations,” noting that currently there is “little information available about the form and nature of these negotiations.” Additional warnings about the potential impact of Brexit came from the International Monetary Fund (“IMF”), which released its Global Financial Stability Report last week. In its report, the IMF cautioned that uncertainty about the outcome of Brexit poses a threat to global financial stability.

Adding an additional wrinkle to the state of Brexit negotiations, U.K. Prime Minister Theresa May announced last week her plan to seek an early national election in June in an effort to bolster support for her positions during Brexit negotiations. A report in Bloomberg explained that May’s call for holding an early election, which she hopes will solidify the Conservative Party’s majority in the House of Commons, rather than waiting until the next scheduled election in 2020, could make Brexit less disruptive by giving May more flexibility in altering the length of negotiations or proposing a period of transition without the pressure of an impending election. The move is not without risk, however. While the Conservative Party currently leads in the polls, a good showing by candidates opposed to Brexit, as the Washington Post pointed out, could limit May’s ability to negotiate a “hard” Brexit.

Amid the renewed uncertainty over Brexit negotiations, the U.K. financial sector and regulators look for a way forward. The Financial Times discussed efforts by the City of London to find alternative ways for firms to enter EU markets post-Brexit, including through “voluntarism” where individual U.K. firms could strike agreements directly with EU regulators by agreeing to bind themselves to EU regulations. The Telegraph reported that the City of London Corporation’s International Regulatory Strategy Group urged EU and U.K. regulators to take steps to cooperate with each other when developing regulations post-Brexit so that the U.K. can maintain equivalence and continue to access EU markets, a position supported by Bank of England Governor Mark Carney. The Association for Financial Markets in Europe has urged British and EU politicians to come to an agreement on a transition plan for banks to implement the changes that will be required as a result of Brexit negotiations, maintaining that the two-year timetable for Brexit negotiations is too short and could lead to turmoil in the financial markets. As banks prepare to move their operations out of the U.K. after Brexit, the European Central Bank advised banks that it could take six months or more to obtain a license to operate in the EU. According to Reuters, European Securities and Markets Authority (“ESMA”) Chair Steven Maijoor, anticipating a potential “race to the bottom” among EU countries looking to attract relocating U.K. financial firms, indicated that ESMA would issue guidance to EU national securities regulators on the supervision of relocated firms and may look to introduce limits on outsourcing and delegation.

Banking Agency Developments


CFPB Finalizes Effective Date Extension for Prepaid Accounts Rule

On April 20th, the Consumer Financial Protection Bureau (“CFPB”) announced its release of a final rule delaying the general effective date of our rule governing prepaid accounts by six months. The rule will now take effect on April 1, 2018. The CFPB has also decided to revisit at least two substantive issues in the prepaid accounts rule through a separate notice and comment rulemaking process. The agency stated that it expects to release that proposal in the coming weeks.

Agency Is Updating its Ex Parte Policy on Rulemaking

On April 18th, the CFPB announced that it is updating its ex parte policy on rulemaking, which addresses the procedures, deadlines, and exceptions for publicly disclosing ex parte presentations. The two key updates include an exemption for state entities similar to the existing exemption for Federal agencies, as well as procedural improvements including the fact that outside parties are no longer responsible for both sending ex parte communications to the CFPB and posting them to 

Securities and Exchange Commission

Requests for Comment

SEC Extends Comment Period on Possible Changes to Required Disclosures by Bank Holding Companies

The Securities and Exchange Commission (“SEC”) announced on April 18th that it is giving more time for stakeholders to submit comments in response to its request for public input regarding the disclosures required by Industry Guide 3, Statistical Disclosure by Bank Holding Companies. The SEC has extended the comment period, which was scheduled to end on May 8, 2017, until July 7, 2017.

SEC Provides Notice of Semiannual Regulatory Agenda

The SEC issued a notice on April 17th that announced its approval of the publication of an agenda of its rulemaking actions, as required by the Regulatory Flexibility Act, which will be included in the Unified Agenda of Federal Regulatory and Deregulatory Actions and published in the Federal Register this spring. Comments on the agenda should be submitted within 30 days of publication in the Federal Register.     

No-Action Relief and Exemptive Orders

No Enforcement Recommended Against Feeder Fund or Master Fund

On April 19th, the SEC’s Chief Counsel’s Office determined that it will not recommend any enforcement action to the SEC against Ironwood Multi-Strategy Fund LLC (“Feeder Fund”) or Ironwood Institutional Multi-Strategy Fund LLC (“Master Fund”) if the Feeder Fund does not pay registration fees on shares it sells to the public or tender offer registration fees on shares it offers to repurchase from the public. See Incoming Letter.     


Updated C&DI on Intrastate Offers and Sales

On April 19th, the SEC updated Securities Act Rule 141.06, which states that an issuer making ongoing offers and sales pursuant to Rule 147 would be able to transition to offers and sales in reliance on Rule 147A. See Intrastate Offering Exemptions: A Small Entity Compliance Guide for Issuers.

Commodity Futures Trading Commission

DSIO Issues Extension of No-Action Relief for Swap Dealers Doing Business in Europe

On April 18th, the CFTC’s Division of Swap Dealer and Intermediary Oversight (“DSIO”) announced that it has issued an extension of the time-limited no-action relief provided in CFTC Staff Letter 17-05 from May 8, 2017 until November 7, 2017. This extended relief states that the DSIO will not recommend enforcement against a swap dealer that is subject to, and in compliance with, the margin requirements for non-centrally cleared OTC derivatives in the EU for failure to comply with the CFTC’s final margin rule.

Federal Rules Effective Dates

April 2017 – June 2017

Click here to view table. 

Exchanges and Self-Regulatory Organizations

Bats Global Markets

SEC Takes More Time to Consider BZX’s Proposed Changes to Company Listing Fees

On April 14th, the SEC designated June 17, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings concerning Bats BZX Exchange Inc.’s (“BZX”) proposed rule change to amend the fees applicable to securities listed on BZX and the related fee schedule. SEC Release No. 34-80461.     

Financial Industry Regulatory Authority

FINRA Updates Private Placement Filer Form

In a Regulatory Notice published on April 21st, the Financial Industry Regulatory Authority (“FINRA”) announced that it has updated the form that firms use to file offering documents and information for the private placement of securities. The revised form, which will be made available on May 22, 2017, includes new and updated questions that will aid in the review of the filed material and removes other questions.

FINRA Extends Comment Period on Enhancements to Engagement Programs

On April 20th, FINRA extended the comment period on its request for input on potential improvements to its engagement programs, including FINRA’s committees, rulemaking process and member relations and related programs. Comments should now be submitted on or before June 19, 2017. FINRA Special Notice.     

International Swaps and Derivatives Association

ISDA Launches Second Protocol on Bail-In Provisions of Article 55 BRRD

On April 19th, the International Swaps and Derivatives Association (“ISDA”) announced the publication of the second Bail-in Article 55 BRRD Protocol. The protocol will assist in-scope entities in Austria, Belgium, Denmark, and Sweden in complying with requirements  to include a contractual term in agreements creating any relevant liability governed by the law of a third country to ensure their creditors recognize that the liability may be subject to bail-in under the European Union Bank Recovery and Resolution Directive (“BRRD”).     


LCH SA Proposes Revisions to Recovery Risk Margin for Index CDS

On April 13th, the SEC requested comments on a proposed rule change filed by LCH SA that would revise its margin methodology with respect to credit default swaps (“CDS”) by eliminating the recovery rate risk charge as a component of the margin methodology as it applies to index CDS. Comments should be submitted on or before May 10, 2017. SEC Release No. 34-80450.

SEC Seeks Comments on LCH SA’s Proposed Amendments to CDS Margin Framework

On April 13th, the SEC provided notice of a proposed rule change filed by LCH SA that would amend its CDS margin framework to provide for an approximation-based method to replace the algorithm that is currently used in the event that the ISDA standard model for pricing CDS fails as a result of extreme spread curves. Comments should be submitted on or before May 10, 2017. SEC Release No. 34-80451.     

Municipal Securities Rulemaking Board

MSRB Offers New Course for Municipal Bond Issuers

The Municipal Securities Rulemaking Board (“MSRB”) announced on April 19th that it has made available a free online course for municipal government professionals who finance public projects with municipal bonds. The course highlights key considerations at different stages of the issuance process to assist these professionals in understanding best practices and potential risks.      


SEC Designates Longer Period for Considering Nasdaq’s Proposed Rule on Stabilizing Agents for Follow-On Offerings

On April 17th, the SEC designated June 4, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings concerning The NASDAQ Stock Market LLC’s (“Nasdaq”) proposal to adopt Rule 7017 to enhance the level of information provided to a member acting as the stabilizing agent for a follow-on offering of additional shares of a security that is listed on Nasdaq. SEC Release No. 34-80465.     


SEC Designates Longer Period for Considering Nasdaq’s Proposed Rule on Stabilizing Agents for Follow-On Offerings

On April 17th, the SEC designated June 4, 2017, as the date by which it will approve, disapprove, or institute disapproval proceedings concerning The NASDAQ Stock Market LLC’s (“Nasdaq”) proposal to adopt Rule 7017 to enhance the level of information provided to a member acting as the stabilizing agent for a follow-on offering of additional shares of a security that is listed on Nasdaq. SEC Release No. 34-80465.

Industry News

Trump to Order Reviews of Financial Rules, Mnuchin Says

Reuters reported on Treasury Secretary Steven Mnuchin’s statement that President Trump will be ordering the U.S. Treasury Department to examine two powers given to regulators following the 2008 financial crisis. Trump will reportedly sign two memos on April 21st – one memo will temporarily bar regulators from identifying new nonbank financial institutions as systemically important financial institutions (“SIFIs”) needing stricter oversight, while also ordering a review of the SIFI procedure. The other memo will put a temporary pause on the use of “orderly liquidation authority” to unwind distressed financial institutions, unless the president directs it in an emergency.     

Report Finds That SEC Enforcement Actions Against Broker-Dealers Are Up 20%

According to a report from Cornerstone Research, SEC enforcement actions against broker-dealers were up 20% in the first half of the government’s fiscal year, and now account for a quarter of all enforcement actions by the agency. The report noted that the vast majority of SEC actions filed continued to come in the form of administrative proceedings instead of civil actions. InvestmentNews.     

IMF Reviews Top Threats to Markets and Banks

On April 19th, The Wall Street Journal reported on the International Monetary Fund’s (“IMF”) warning that high corporate leverage could threaten financial stability as the Federal Reserve raises short-term interest rates, because higher borrowing costs could block firms’ ability to service debts.