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Treasury Report Calls for Extensive Regulatory Relief to Capital Markets
On October 6, the U.S. Treasury Department published a report that focuses on capital market oversight and outlines challenges and recommendations to reduce regulatory burdens. The report, “A Financial System That Creates Economic Opportunities: Capital Markets,” is the second in a series of four the Treasury plans to issue in response to President Trump’s Executive Order 13772, which mandated a review of financial regulations for inconsistencies with promoted “Core Principles.” (See Buckley Sandler Special Alert here.) The report notes that while certain capital market regulatory framework elements function well, there remain significant challenges. Specifically, the report recommends—among other things—reducing fragmentation, overlap, and duplication in the U.S. regulatory structure. This includes focusing on effecting changes to promote efficiency and more clearly defining regulatory mandates that would allow agencies to issue joint rulemaking and foster coordination.
Treasury’s recommendations focus primarily on market regulations but also build upon themes identified in the first report published in June 2017, which primarily focused on solutions for providing relief to banks and credit unions. The second report identifies recommendations, actions, and associated “Core Principles” within the following categories:
- “promoting access to capital for all types of companies, including small and growing businesses, through reduction of regulatory burden and improved market access to investment opportunities”;
- “fostering robust secondary markets in equity and debt”;
- “appropriately tailoring regulations on securitized products to encourage lending and risk transfer”;
- “recalibrating derivatives regulations to promote market efficiency and effective risk mitigation”;
- “ensuring proper risk management for [central counterparties] and other financial market utilities because of the critical role they play in the financial system”;
- “rationalizing and modernizing the U.S. capital markets regulatory structure and process”; and
- “advancing U.S. interests by promoting a level playing field internationally.”
A fact sheet accompanying the report further highlights Treasury’s recommendations to streamline regulations.
SEC Approves FINRA’s Streamlined Securities Competency Exams for Industry Professionals and Consolidated Registration Rules
On October 5, the Financial Industry Regulatory Authority (FINRA) announced SEC approval of its proposal to consolidate certain registration rules and streamline competency exams for professionals entering or re-entering the securities industry. Under Regulatory Notice 17-30, the NASD and NYSE incorporated registration rules are now consolidated as “FINRA rules” to provide member firms “consistency and uniformity.” The rules will allow member firms to permissively register all associated persons of a firm and establish waiver programs for registered employees who “move to a financial services industry affiliate of a member firm.” Further, as previously discussed in an InfoBytes post concerning the proposed rule, FINRA’s new streamlined examination structure is designed to eliminate duplicative testing and remove outdated categories. The changes include a general knowledge examination that all new representative-level applicants will be required to pass, in addition to a revised qualification examination appropriate to their job functions. Changes to FINRA’s continuing education requirements have also been made. The rule takes effect October 1, 2018.
Second Circuit Upholds Large Monetary Judgment Against International Bank
On September 28, the U.S. Court of Appeals for the Second Circuit affirmed a New York District Court’s 2015 ruling, which requires a major international bank to pay $806 million for selling allegedly faulty mortgage-backed bonds to Fannie Mae and Freddie Mac. In the original suit brought by the Federal Housing Finance Agency (FHFA), FHFA alleged that the bank overstated the reliability of the loans for sale. In upholding the lower court’s decision, the Second Circuit concluded that the marketing prospectus used to sell the mortgage securities to Fannie and Freddie between 2005 and 2007 contained “untrue statements of material fact.” Specifically, the prospectus falsely stated that the loans were compiled with the underwriting standards described therein, including standards related to assessing the creditworthiness of the borrowers and appraising the value of properties.
Federal Agencies Offer Regulatory Relief for Hurricane Victims
Federal agencies continue to announce regulatory relief for financial institutions aiding consumers affected by recent hurricane disasters. InfoBytes coverage on previous disaster relief measures can be accessed here, here, and here.
Freddie Mac. On September 25, Freddie Mac issued Bulletin 2017-21 (Bulletin) to extend certain temporary selling and servicing requirements meant to provide flexibility and relief for mortgages and borrowers in areas impacted by all hurricanes occurring on or after August 25 through the 2017 hurricane season. In particular, Freddie Mac will reimburse sellers for property inspections completed prior to the sale or securitization of mortgages secured by properties in disaster areas caused by a 2017 hurricane. Freddie Mac is also requiring servicers to suspend foreclosure sales and eviction activities on property located in eligible disaster areas affected by Hurricane Maria. However, the Bulletin provides that a servicer can proceed with a foreclosure sale if it can confirm that (i) inspection was completed on a mortgaged property “identified as vacant or abandoned prior to Hurricane Maria,” and (ii) the property sustained no “insurable damage.” The Bulletin also reminds servicers to report all mortgages affected by an eligible disaster that are 31 or more days delinquent to Freddie Mac.
Veterans Affairs (VA). On September 27, the VA issued Circular 26-17-28 to outline measures that it encourages mortgagees to utilize to provide relief to veterans affected by Hurricane Maria. Specific recommendations include: (i) extending forbearance to distressed borrowers; (ii) establishing a 90-day moratorium on initiating foreclosures on affected loans; (iii) waiving late charges; (iv) suspending credit bureau reporting with the understanding that servicers will not be penalized by the VA; and (v) extending “special forbearance” to National Guard members who report for active duty to assist recovery efforts.
FDIC. On September 27, the FDIC released a financial institution letter to provide additional guidance for depository institutions assisting affected consumers. As previously covered in Infobytes, the FDIC released guidance for Hurricane Harvey disaster relief, and issued a joint press release in conjunction with the Federal Reserve Board, Conference of State Bank Supervisors, and the OCC as a response to those affected by Hurricane Irma. The newest release, FIL-46-2017, announced regulatory relief for financial institutions affected by Hurricane Maria, and steps to facilitate recovery in affected areas, which include: (i) “extending repayment terms, restructuring existing loans, or easing terms for new loans,” and (i) “encourage[ing] depository institutions to use non-documentary verification methods permitted by the Customer Identification Program requirement of the Bank Secrecy Act for affected customers who cannot provide standard identification documents.” Further, banks that support disaster recovery efforts, the FDIC noted, may receive favorable Community Reinvestment Act consideration.
SEC. On September 28, the SEC issued an order providing regulatory relief to companies and individuals with federal securities law obligations who have been affected by recent natural disasters. The order provides conditional exemptions to certain securities laws requirements for specified periods of time. The Commission additionally adopted “interim final temporary rules” applicable to Regulation Crowdfunding and Regulation A filing deadline extensions.
Financial Crimes Enforcement Network (FinCEN). On October 3, FinCEN issued a notice to financial institutions that file Bank Secrecy Act reports to encourage communication with FinCEN and their functional regulator regarding any expected filing delays caused by recent hurricanes.
CFTC Orders Large Financial Institution to Pay for Supervision Failures
On September 28, the Commodity Futures Trading Commission (CFTC) announced a concurrent filing and settling of charges against a large financial institution/clearing firm (Firm) for failing to adequately supervise fee processing. The Order alleges that between 2009 and 2016, the Firm did not implement and maintain adequate procedures and systems that could account for and help prevent the risk of overcharging customers for exchange and clearance fees. In 2015, according to the Order, the Firm modified its processes to prevent future overcharges to customers.
The settlement requires the Firm to pay a $500,000 civil penalty.
CFTC Director of Enforcement Offers Incentives to Regulated Companies for Self-Reporting and Cooperation
On September 25, the U.S. Commodity Futures Trading Commission Director of the Division of Enforcement James McDonald spoke before the New York University Institute for Corporate Governance & Finance to address the Division’s priorities and outline its self-reporting and cooperation program. Director McDonald described the Division’s enforcement actions as part of a “broader mission to facilitate healthy, robust, and resilient markets,” with the goal of deterring misconduct. “Optimal deterrence,” he stressed, requires receiving buy-in from regulated companies and financial institutions, which is the premise of the Division’s cooperation and self-reporting program. The Division’s program requires companies to comply with three specific criteria: (i) voluntarily report wrongdoing to the Division in a timely and fully disclosed manner prior to the announcement of a government investigation; (ii) proactively cooperate with the Division throughout the investigation; and (iii) engage in timely and appropriate remedial measures to prevent future misconduct, and implement fixes to internal compliance and control programs. Should a company follow these steps, Director McDonald stated, the Division “will recommend a substantial reduction in the penalty,” and in “extraordinary circumstances . . . may recommend declining to prosecute a case.”
District Court Grants $30 Million Settlement in Payday Lending Securities Class Action Suit
On September 20, a federal judge in the U.S. District Court for the Eastern District of Pennsylvania issued a memorandum signing off on a settlement between a payday lender and a class of institutional investors, resolving allegations that the lender violated securities laws when it made “materially false and misleading statements” about its financial health and the nature of its U.K. lending practices. According to the plaintiffs, the lender’s misstatements artificially inflated the common stock during the class period (January 28, 2011 through February 3, 2014), so that when the lending practices were revealed, the stock prices declined. Further, the lender allegedly (i) “routinely lent to borrowers without conducting any affordability checks”; (ii) “permitted borrowers to roll over loans that [they] could not afford to repay, enriching [the lender] with fees”; and (iii) presented “loan loss reserves [that] were understated as a result of its poor lending practices, its failure to adequately monitor the quality of its loans, and its failure to properly account for loans that were rolled over.” In 2016, the court granted class certification and the parties reached a settlement after extensive discussions. The final settlement approved in the memorandum creates a settlement fund of $30 million, of which $7.5 million will go towards attorneys’ fees and costs. The court signed a judgment approving the class action settlement the same day.
SEC Reaches Settlement With Investment Adviser for Allegedly Overcharging Clients
On September 14, the SEC announced a settlement in an administrative proceeding against a national bank’s investment adviser subsidiary that allegedly overcharged more than 4,500 clients a total of over $1.1 million for costlier mutual fund share classes that carried 12b-1 marketing and distribution fees when shares of the same mutual funds were available without such fees. The SEC alleged that, from at least December 2011 through approximately June 2015, the investment adviser breached its fiduciary duties, made inadequate disclosures regarding conflicts of interest between the investment adviser and its representatives (who ultimately shared in the gains from the 12b-1 fees as compensation), and did not update its compliance policies and procedures to require its investment adviser representatives to identify or evaluate available share classes. The order cites violations of the Investment Advisers Act of 1940, as well as Rule 206(4)-7. While the investment adviser has neither admitted nor denied the allegations, it has, among other things, agreed to pay a penalty of more than $1.1 million, will provide disgorgement plus interest on any 12b-1 fees that have not yet been refunded to customers, and has been censured.
China Bans Commercial Trading of Initial Coin Offerings
On September 4, the People’s Bank of China and several Chinese regulators reportedly jointly announced plans to ban the commercial trading of bitcoin and other cryptocurrencies. This measure, announced in a statement issued by the Ministry of Industry and Information Technology of the People’s Republic of China, will outlaw all fundraising Initial Coin Offerings (ICOs), and declares ICOs and the sale of virtual currency as unauthorized illegal financing behavior, suspected of illegal sale tokens, illegal securities issuance, and illegal fund-raising, including financial fraud, pyramid schemes and other criminal activities. The statement reportedly stresses that virtual currency in China will not be recognized as a legal form of currency and must not be circulated as currency when financing activities. Furthermore, going forward, all cryptocurrency trading platforms are prohibited in China from acting as central counterparties to facilitate the exchange of tokens for virtual currencies. Additionally, one of China’s bitcoin exchanges reportedly published an announcement on its website saying it will close its bitcoin currency trading platform in the country on September 30.
The SEC recently released an investor bulletin about ICO investment risks and offered fraud prevention guidance. (See previous InfoBytes summary here.) ICO sales are often used to raise capital, and the SEC is monitoring companies who use this method for fraudulent purposes.
District Court Denies Class Certification for Lack of Temporal Constraint on Proposed Class Definition
On August 30, the U.S. District Court for the Southern District of New York issued an opinion and order denying the certification of a proposed class of investors alleging that a bank failed in its responsibilities as trustee of five residential mortgage-backed securities. The court found that “the proposed class cannot be certified because it is not ‘defined using objective criteria that establish a membership with definite boundaries’ . . . [such as] a fixed date, a window of acquisition, or length or continuity of ownership.” The judge ruled that the lack of a “temporal constraint on the proposed class definition” meant investors who bought and sold the securities before and after the alleged violations occurred could be included in the suit, despite the fact that any losses incurred by these groups would not necessarily be associated with the bank’s alleged misconduct. However, the court ruled that the plaintiff may file an amended motion proposing an alternative class construction within 45 days.