This regular publication from DLA Piper focuses on helping banking and financial services clients navigate the ever-changing federal regulatory landscape.

  • Regulators propose amendments to Volcker Rule's covered funds restrictions. Five federal financial regulatory agencies have released a proposal to ease restrictions on bank investments in certain pooled investment vehicles that previously would have been flagged under the "covered funds" provision in the Volcker Rule.  The new proposal would allow banks greater opportunities to make indirect investments, including in startups and long-term debt instruments.  On January 30, the Fed, FDIC, OCC, SEC and CFTC issued a notice of proposed rulemaking intended to "improve and streamline" the Volcker Rule's treatment of covered funds, and to permit banking entities to offer products and services that do not present the sorts of regulatory concerns that Volcker was meant to address. The agencies' proposal is similar to their 2018 efforts to clarify the portions of the Volcker Rule that govern prohibitions on proprietary trading activities, which became effective this January. The proposed rule represents a significant opportunity for banks and their affiliates to shape and define new exclusions and exemptions from the Volcker Rule's prohibitions. Similarly, the expanded set of exclusions would allow certain funds, such as venture capital funds or SBICs, which may seek investment from banking entities, to expand their investor base.  The Volcker Rule, which became law in 2010 as part of the Dodd-Frank Act, was intended to prevent banks from investing in hedge funds and private equity funds, but the agencies determined that the rule as previously drafted was overly broad in defining those funds.  The FDIC has issued a one-page fact sheet summarizing the new modifications.
    • Fed Governor Lael Brainard, the sole remaining Democrat on the Board, cast the only vote against the proposal at the Fed Board's January 30 meeting.  "Some credit funds played a material role in the financial crisis," Brainard said. "These funds were not transparent in their activities, misled investors and contributed to the financial abuses Congress intended to address in passing the Dodd-Frank Act."
    • In his statement in support of the proposed rule, Fed Vice Chair for Supervision Randal Quarles said, "The objective behind the Volcker covered funds proposal is straightforward: simplifying the Volcker Rule in light of our experience with the rule over six years of implementation."
    • Comments on the proposed rule are due April 1, 2020.
  • Fed finalizes rule on determining "control."  At the same January 30 meeting, the Fed finalized its framework for defining how much of a stake banks can take in other companies, and vice versa, before becoming subject to more stringent Fed oversight.  The Fed Board, this time in a unanimous vote, approved a final rule clarifying what type of ownership constitutes "control" under the Bank Holding Company Act (BHC Act) and the Home Owners' Loan Act (HOLA).  The final rule, which codifies the presumptions in Regulation Y and Regulation LL, is largely similar to the proposal the Fed put out for public comment last May.  It is intended to simplify and increase the transparency of determinations of when a company may exercise a controlling influence over another company, expanding the number of presumptions for use in such determinations.  Included in the rule is a tiered framework that substantially revises and clarifies the Fed's existing regulatory presumptions of control.  The framework, summarized in a single chart, has four tiers, each identified by the threshold percentage level of voting stock held by a potential controlling party.  In addition, the rule includes a new presumption of non-control if a company owns less than 10 percent of the outstanding securities of each class of voting stock of another company and is not presumed to control the other company due to other factors identified in the rule.  The final rule is effective on April 1, 2020.
  • CFPB releases policy statement on "abusive" practices standard. The CFPB has issued its long-awaited framework for how it will define and apply the "abusiveness" standard in supervision and enforcement matters.  The CFPB policy statement, announced January 24, is intended to clarify the standard under which Dodd-Frank gave CFPB authority to punish financial services providers for violating the longstanding federal prohibition on "unfair" or "deceptive" acts or practices. The 2010 statute also introduced a new "abusive" standard, the scope and meaning of which has remained uncertain for financial firms and regulators. "This uncertainty creates challenges for covered persons in complying with the law," according to the policy statement. "The Bureau wants to make sure that such uncertainty does not impede or deter the provision of otherwise lawful financial products or services that could be beneficial to consumers." The key provisions of the new policy include:
    • focusing on conduct only when the harm it causes to consumers outweighs the benefit
    • focusing on "stand alone" violations of the abusive standard, and generally avoiding combining abusiveness findings with unfairness or deception violations arising from the same facts and
    • seeking monetary relief for abusiveness only when there has been a lack of a good-faith effort to comply with the law – though the Bureau says it will continue to seek restitution for injured consumers regardless of whether a company acted in good or bad faith.

    CFPB left open the possibility that it could issue further definitions of the abusiveness standard. The new policy went into effect the day it was announced.

    • While the banking industry has long sought a clearer definition of the abusiveness standard, consumer organizations expressed concern that the narrow standards would benefit dishonest businesses at the expense of cheated customers. A joint statement by the National Consumer Law Center, the Center for Responsible Lending and Americans for Financial Reform Education Fund stated that, rather than clarifying the standard, the CFPB statement "inserts a great deal of vagueness, and signals that the CFPB is prepared to give companies a pass when they commit abusive acts."
    • Last June, CFPB held a Symposium on Abusive Acts or Practices with academics and practitioners which, along with feedback from stakeholders, helped to inform the development of the new policy statement.  An archived webcast can be found here.
  • FDIC adopts finalized changes to securitization safe harbor rule.  The FDIC on January 30 finalized and adopted changes to its securitization safe harbor rule, which addresses circumstances that may arise if the FDIC is appointed receiver or conservator for an insured depository institution (IDI) that has sponsored one or more securitization transactions.  Under the final rule, FDIC is removing a disclosure requirement, which was established by the safe harbor rule when it was amended and restated in 2010, that documents governing securitizations transactions be compliant with the SEC's Regulation AB to be afforded safe harbor treatment by the FDIC. As such, the new rule is expected to ease the reporting and disclosure requirements imposed by Reg AB to encourage certain mortgage-backed securitizations.  While the SEC has not applied the Reg AB disclosure requirements to private placement transactions, the safe harbor rule has generally required the disclosures as a condition for eligibility, which FDIC has determined to be a disincentive for IDIs to sponsor securitizations of compliant residential mortgages. In the ten years since the disclosure requirements were established, other regulatory changes contributing to the same objective have been implemented, the FDIC stated.  The final rule is unchanged from the proposed rule put out for public comment last July.  It would be effective either 30 or 60 days after publication in the Federal Register, according to the rule text.
  • CFPB appoints new enforcement director opposed by Financial Services Committee Chair.  The CFPB on January 30 announced key additions to its executive team, including the appointment of Thomas G. Ward to the post of Assistant Director of Enforcement in the Supervision, Enforcement and Fair Lending Division.  Before joining the Bureau, Ward served as a Deputy Assistant Attorney General in the Civil Division at the Justice Department, and he has also worked on financial and securities litigation and investigations in private practice.  House Financial Services Committee Chair Maxine Waters (D-CA) voiced opposition to Ward's appointment as CFPB's chief enforcement official late last year when it was still at the rumor stage.
  • In a December 17 letter to CFPB Director Kathleen Kraninger, Waters wrote that naming Ward to the enforcement post, which is a non-political civil service position, would run afoul of federal law because he served as a political appointee in his previous Justice Department job.  Kraninger responded to Waters in a January 29 letter that included OPM's determination that Ward's hiring was "free from political influence and complies with applicable service laws and regulations."  The enforcement head's job had been vacant since May, when former enforcement head Kristen Donoghue resigned.  Cara Petersen had been serving as acting enforcement chief in the interim.
  • New York and California moving on consumer financial protection enforcement.  Two states from opposite sides of the country that wield significant influence on financial services regulatory matters are taking proactive steps in the direction of enhanced protections for consumers of financial products.  New York State Financial Services Superintendent Linda Lacewell on January 9 announced the creation of a new Consumer Protection Task Force within the Department of Financial Services that she said "will further DFS's mission to protect consumers as the federal government rolls back important consumer protections."  One of the task force's first priorities will be to help NYDFS implement the consumer protection proposals that Governor Andrew Cuomo set out in his 2020 State of the State agenda, such as strengthening regulatory oversight of debt collectors; cracking down on elder financial abuse; increasing access to affordable banking services; and strengthening the state's consumer protection laws to protect New Yorkers against unfair, deceptive, and abusive practices.  Meanwhile, California Governor Gavin Newsom proposed in his 2020-2021 budget proposal that California enact a new "California Consumer Protection Law," which would rename the California Department of Business Oversight to the Department of Financial Protection and Innovation.  The new state entity would be "modeled on the activities of the federal Consumer Financial Protection Bureau, to provide consumers with more protection against unfair, deceptive, and abusive practices when accessing financial services and products," according to the governor's budget summary.
  • Financial Services Democrats seek GAO audit on the role of alternative data in expanding access to credit.  Members of the House Financial Services Committee are calling on the director of the Government Accountability Office "to explore the use of alternative data in expanding access to credit, with a particular focus on mortgage credit."  Led by Committee Chair Maxine Waters (D-CA), the lawmakers sent a January 16 letter to Gene Dodaro, Comptroller General of the United States, requesting information about the benefits and drawbacks of alternative data in mortgage lending and the role of the federal government in overseeing its use by credit reporting agencies and lenders.  The letter asks GAO to address a series of questions, including how different entities within the credit industry have used alternative data to expand access to mortgage credit.  Other questions include the extent to which alternative data determines a consumer's creditworthiness and whether these alternative sources are "more likely to raise concerns about correlations with prohibited discriminatory factors."  The members also ask how the benefits and risks associated with alternative data and fintech "vary across different groups, such as minorities and younger borrowers," the implications for compliance with fair lending standards such as the Equal Credit Opportunity Act and the Fair Housing Act and if regulatory agencies are equipped to provide oversight of the use of alternative data in mortgage lending.  In addition to Waters, the letter was co-signed by Reps. Al Green (D-TX), Chair of the Subcommittee on Oversight and Investigations; Bill Foster (D-IL), Chair of the Task Force on Artificial Intelligence; Stephen Lynch (D-MA), Chair of the Task Force on Financial Technology; and Josh Gottheimer (D-NJ), a member of the committee.
  • FDIC-OCC cybersecurity bulletin warns of heightened risk. The Fed and the OCC are warning financial institutions under their supervision of the importance of sound cybersecurity risk management principles during periods of heightened global tensions. The joint statement from the two agencies, issued January 16, stresses the importance of sound risk management measures, including:
    • reviewing, updating and testing incident response and business continuity plans
    • protecting against unauthorized access with proper authentication and
    • securely configuring systems and services.
  • The principles elaborate on standards in the Interagency Guidelines Establishing Information Security Standards and in resources provided by the Federal Financial Institutions Examination Council (FFIEC) members, such as the joint statement on destructive malware issued in March 2015.  While the report does not cite any specific threats, it does refer to a "heightened threat environment" arising from "increased geopolitical tensions and threats of aggression."  It goes on to note that cyberattacks against financial institutions are becoming more frequent and severe, with cyber actors seeking to use malware to exploit vulnerabilities in computers and networks, or "introducing infected external devices to computers and networks through removable media."  The bulletin was addressed to the CEOs of all national banks, federal savings associations and federal branches and agencies, as well as department and divisions heads, examining personnel and other interested parties.
  • Fed issues bulletin regarding observations and risks associated with fintech.  The Federal Reserve Board's Division of Consumer and Community Affairs recently issued its latest Consumer Compliance Supervision Bulletin, providing observations on fintech and emerging potential risks to financial organizations. The December 2019 bulletin highlighted strategies for banks to apply existing compliance requirements and risk management methodologies to mitigate the new risks associated with adoption of fintech in areas such as online and mobile banking and targeted Internet-based marketing.  In particular, the Fed warns that management of third-party risk is "crucial" as banks work with fintech firms.
  • CSBS releases accountability report on initiatives to streamline state licensing and supervision of fintech companies.  The Conference of State Bank Supervisors has issued an accountability report charting the progress that has been made on initiatives to streamline state licensing and supervision of fintech companies. The report, issued January 7, provides 11 distinct commitments "to accountability and transparency through these systemic changes."  Those commitments basically fit into four categories: (1) using CSBS regtech for licensing and exams; (2) driving for consistency among states; (3) creating uniform definitions and practices; and (4) increasing regulatory transparency.  Two years ago, CSBS convened a Fintech Industry Advisory Panel and released Vision 2020 for Fintech and Non-Bank Regulation. Last year, CSBS published its recommendations, and the latest report details progress on initiatives identified by the panel.  "This process of reimagining nonbank financial services regulation creates a stronger supervisory system where innovation can thrive while consumer protection is paramount," said John Ryan, CSBS president and CEO. "Today's report demonstrates state regulators' commitment to accountability and transparency through these systemic changes."

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