The Consumer Financial Protection Bureau (“CFPB”) announced Tuesday that going forward the agency will provide more information in its Civil Investigative Demands (“CIDs”). The American Bankers Association and others had voiced concerns about the often vague and expansive scope of such demands in response to the Bureau’s 2018 Request for Information (“RFI”) seeking feedback on the CID process. The CFPB indicated that it will include more detail regarding the potentially wrongful conduct under investigation and the potentially applicable provisions of law that may have been violated in its CIDs. The Bureau says that it “typically” will specify the business activities subject to its authority. In cases where determining its authority over the relevant activity is one of the purposes of the investigation, it may disclose that fact in the interests of transparency.
On April 17, 2019, CFPB Director Kathleen Kraninger outlined her approach in executing the Bureau’s statutory mission in a speech to the Bipartisan Policy Center. This was Director Kraninger’s first major speech since taking the helm at the Bureau. Kraninger’s remarks were organized around the tools that the Bureau will utilize to advance its core mission of preventing consumer harm. The speech was consistent with the Director’s recent testimony to House and Senate Committees but also provided a number of clues as to the priorities of the Bureau in the near future.
Director Kraninger began by stating the Bureau’s focus, under her leadership, will be the prevention of harm to consumers. She went on to say the Bureau would deploy four tools—education, rulemaking, supervision and enforcement—to realize this overarching mission.
- Education. Director Kraninger stated that the Bureau will provide education programming intended to empower consumers to make optimal financial decisions. The programming will outline approaches to consumer savings, especially as they pertain to emergency needs.
- Rulemakings. The Bureau will pursue rulemaking “deliberately and transparently.” Director Kraninger indicated that rulemaking would provide “clear rules of the road” to regulated or supervised entities. The Director noted the Bureau must recognize imposing additional compliance costs on financial service providers can impact consumer access to credit. She indicated that a proposed rule pertaining to debt collection practices are forthcoming and, among other things, would limit the number of calls collectors can make on a weekly basis, address the use of email and text communications in debt collection, and require certain disclosures at the beginning of the collection process.
- Supervision. Director Kraninger stated an intent to review the Bureau’s approach to examinations, while emphasizing that CFPB examinations will assess whether supervised entities are meeting their obligations by promoting “a culture of compliance” that prevents harm in the first instance. The Director also set forth a commitment to enhance the Bureau’s coordination and collaboration with other federal regulators.
- Enforcement. The Director stated that enforcement is an essential tool for the Bureau because education, rulemaking and supervision will not address every consumer protection issue. Following an evaluation of the Bureau’s approach to investigations, the Director intends to implement an enforcement regime that will “foster compliance, help prevent consumer harm, and right wrongs.” The Bureau is also committed to partnerships with state attorneys general and bank supervisors.
Finally Director Kraninger announced the Bureau will launch a “symposia series” on topics related to the CFPB’s mission. The first symposium will focus on clarifying the meaning of “abusive acts or practices” in the Dodd-Frank Act.
The Director’s speech was closely watched by stakeholders. Members of the financial services industry viewed the speech favorably, with the CEO of the Consumer Bankers Association issuing a statement applauding the director for a “common-sense, principled approach.” Consumer advocates, on the other hand, expressed concerns about the Director’s promised modernization of debt collection rules.
On April 16, 2019, the Federal Deposit Insurance Corporation (“FDIC”) announced its approval of an Advance Notice of Proposed Rulemaking (“ANPR”) inviting comment on ways to improve its rule requiring insured depository institutions with $50 billion or more in total assets (“Covered Insured Depository Institutions” or “CIDIs”) to submit periodic resolution plans to the FDIC (the “IDI Rule”). In a statement accompanying the ANPR, FDIC Chairman Jelena McWilliams noted that “[a]fter several years of reviewing the IDI plans that firms submit, we are interested to learn how we can make this process more tailored and targeted, while continuing to advance the FDIC’s important resolution readiness efforts.”
[This article was also published in Law360]
Despite enduring the longest government shutdown in U.S. history, the U.S. Securities and Exchange Commission’s Division of Enforcement filed more cases in the first six months of this fiscal year than in the same period last year. From October 2018 through the end of March, the division filed 216 new “stand-alone” actions, compared to just 149 during the first six months of FY 2018.
This increase was largely due to 79 cases filed on a single day in March against investment advisers for alleged disclosure failures relating to conflicts of interests associated with certain mutual fund fees. With the addition of these cases, enforcement actions against investment advisers made up nearly 50% of all cases filed so far this fiscal year.
Excluding the 79 March settlements from the half-year results, the division filed only 137 stand-alone enforcement actions — 12 fewer than at the same point last year, though perhaps more in line with our expectations, considering the time lost during the shutdown.
Overview of FY 2019 Enforcement
Despite bringing fewer cases involving broker dealer misconduct, insider trading and public finance abuse, the division is outpacing its FY 2018 results in the areas of issuer reporting/audit and accounting, Foreign Corrupt Practices Act and, as mentioned above, investment adviser misconduct.
The division is also close to where it was in FY 2018 with respect to market manipulation cases, just 10% off last year’s pace. Below is a chart comparing this year’s performance to FY 2018. For a comprehensive analysis of FY 2018, see our earlier article here.
As the chart above shows, the government shutdown assuredly had a negative impact on several program areas. Every enforcement area but investment adviser misconduct, FCPA and issuer reporting/audit and accounting has seen a decline relative to the same period last year. Most notable is the decline in securities offering cases, which had increased each of the past two years.
Nevertheless, some enforcement activity continued during the shutdown and even a few enforcement actions were brought. According to Chairman Clayton, during the shutdown, the SEC “focused on monitoring the functioning of our markets and, as necessary to prevent imminent threats to property, taking action.” That action involved filing only 10 new cases during the lull.
Notably, during the shutdown, the division sued nine individuals and entities accused of hacking into the SEC’s EDGAR system — the electronic portal used by the public to make SEC filings — in 2016. The defendants purportedly accessed the system to extract nonpublic information for use in illegal trading.
Before the shutdown, the SEC brought several significant cases against public companies for disclosure violations and fraudulent or otherwise deficient financial statements or internal controls. Once the shutdown ended, the agency picked up where it left off, ending with 20% more cases in these areas than during the same period last year.
In addition to significant cases against the Hertz Corporation, Lumber Liquidators Holdings Inc. and Volkswagen Aktiengesellschaft, the SEC punctuated those efforts with two mini-sweeps — one addressing alleged longstanding but unaddressed internal controls failures and another focused on alleged failures to disclose that required quarterly reviews by external auditors had not occurred.
On April 11, 2019, Acting Director of the Office of Management and Budget (the “OMB”) Russell T. Vought sent a memorandum to executive department and federal regulatory agency heads regarding compliance with the Congressional Review Act (the “CRA”). The memorandum clarifies that the CRA applies to “a wide range of other regulatory actions” beyond notice-and-comment rulemaking, including “guidance documents, general statements of policy, and interpretive rules.” The memorandum also formalizes a process for how the Office of Information and Regulatory Affairs (“OIRA”) will classify regulatory actions for CRA purposes. The memorandum could significantly tighten Congress’ control over regulatory agencies. Continue Reading
On March 29, 2019, the Federal Deposit Insurance Corporation (the “FDIC”) proposed changes to its Part 370 rule that would significantly reduce the compliance burdens on large insured depository institutions subject to that rule. The Part 370 rule, entitled Recordkeeping for Timely Deposit Insurance Determination, imposes new requirements on certain large insured depository institutions to facilitate the prompt payment of insured deposits in the event of the institution’s failure. The Part 370 rule became effective on April 1, 2017, but has a compliance deadline of April 1, 2020.
On April 2, 2019, the federal banking agencies proposed a rule that would require large banking organizations to deduct from their regulatory capital certain investments in total loss-absorbing capacity (“TLAC”) debt issued by global systemically important banking organizations (“G-SIBs”) rather than to risk-weight such investments as is currently done. The rule is intended to reduce interconnectedness in the financial system by discouraging (but not prohibiting) banking organizations from investing in G-SIBs’ debt, and therefore has important implications for the marketability and liquidity of debt instruments that G-SIBs are required to issue under the Federal Reserve’s TLAC requirements.
In a chart accompanying this blog post, we have compared the key parameters of the interagency proposal to the deduction requirements included in the Federal Reserve’s 2015 TLAC proposal and the Basel Committee’s 2016 final standard. Comments on the interagency proposal are due June 7, 2019.
On March 28, 2019, the House Financial Services Committee (“HFSC”) voted 45-15 to advance to the full House of Representatives the bill H.R. 1595, the “Secure and Fair Enforcement Banking Act of 2019” (the “SAFE Banking Act” or the “Act”). The SAFE Banking Act would shield banks and credit unions from federal regulatory penalties for providing financial services to legitimate cannabis-related businesses and service providers. The bill, sponsored by Representatives Ed Perlmutter (D-CO) and Denny Heck (D-WA), had nearly 150 cosponsors and passed as an amendment in the nature of a substitute on a bipartisan basis, with eleven Republicans voting in favor of the legislation.
Although 47 states, plus the District of Columbia, have legalized or decriminalized some form of adult recreational, medical, or limited-medical marijuana or marijuana cannabidiol oil, the manufacture, distribution, or possession of marijuana is illegal under the federal Controlled Substances Act (“CSA”), except as authorized in very narrow circumstances. The legal uncertainty resulting from the divergence in federal and state law has caused most large financial institutions to decline to provide financial services to cannabis-related businesses directly, as well as to many service providers of cannabis-related businesses, such as suppliers, landlords, and other vendors. As a result, many cannabis-related businesses that operate legally under state law are forced to operate on a cash-only basis, which creates public safety risks and provides opportunities for money laundering and other financial crimes.
The SAFE Banking Act
The SAFE Banking Act would create several important protections for depository institutions and federal and state credit unions (collectively, “depository institutions”) that provide financial services to cannabis-related legitimate businesses (“CRLBs”), which is defined broadly to include any individual or company that engages in a wide range of cannabis-related activities in accordance with state law. These protections would also apply to CRLB service providers, defined broadly to include entities that sell goods or services to CRLBs or provide any business services, including the sale or lease of real or any other property, or any other ancillary service relating to cannabis (“Service Providers”). Specifically, the Act would prohibit federal banking regulators from:
- Terminating or limiting the deposit insurance or taking any other adverse action under section 8 of the Federal Deposit Insurance Act (which authorizes regulators to take enforcement actions against institutions) solely because the depository institution provides financial services to a CRLB or Service Provider;
- Prohibiting, penalizing, or otherwise discouraging a depository institution – or entity performing a financial service for or in association with a depository institution – from providing financial services to a CRLB or Service Provider;
- Recommending, incentivizing, or encouraging a depository institution not to offer, or to downgrade or cancel, financial services solely because the account holder is or becomes a CRLB or Service Provider, or an employee, owner, or operator of a CRLB or Service Provider; and
- Taking any adverse or corrective supervisory action on a loan made to a CRLB or Service Provider, or an employee, owner, or operator of – or owner or operator of real estate or equipment leased to – a CRLB or Service Provider.
Importantly, the Act provides that for purposes of the Money Laundering Control Act of 1986 (18 U.S.C. §§ 1956, 1957) “and all other provisions of Federal law,” the proceeds from a transaction conducted by a CRLB or Service Provider shall not be considered proceeds from an unlawful activity solely because the transaction was conducted by a CRLB or Service Provider. Moreover, a depository institution – or entity performing a financial service for or in association with a depository institution that provides a financial service to a CRLB or Service Provider – (and their officers, directors, and employees) “may not be held liable pursuant to any federal law or regulation” solely for providing financial services to a CRLB or Service Provider, or investing income derived from such services in states where cannabis is legal.
On March 29, 2019, the board of the FDIC approved a notice of proposed rulemaking that would revise the supplementary leverage ratio (“SLR”) to exclude certain deposits placed at central banks from custodial banks’ SLR denominators, implementing section 402 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”). The OCC and Federal Reserve are expected to adopt substantially identical proposals.
On Wednesday, March 27, 2019, the CFTC’s Market Intelligence Branch of the Division of Market Oversight issued a report on the impact of automated orders in futures markets to determine how technological change affects futures trading. Automated trading refers to orders that are generated or routed without human intervention. The CFTC presented the report before the Technology Advisory Committee, also on Wednesday.
In preparing the report, the Division of Market Oversight examined billions of data points from the CFTC’s own, internal transaction data for thirty futures contracts during the period from January 2013 through December 2018. The market data reviewed covered eight commodity groups including: Currencies, Equities, Financials, Energies, Metals, Grain, Oilseeds, and Live Stock. The report concludes as follows:
- The percentage of automatically placed orders has increased for all commodity futures markets;
- Automated orders are smaller in size than manual orders and their resting times are shorter than those of orders placed manually;
- Automated orders are almost always limit orders; and
- While automation has increased steadily each year, historical volatility of end-of-day prices has not exhibited a similar increase.
Commissioner Quintenz highlighted the report in his opening remarks before the Technology Advisory Committee, noting that the report would “become a substantial anchor and reference point in the journey to achieve an objective, data-driven understanding of the impact that automated and algorithmic trading have on our markets.”
Importantly, the report discussed automated trading generally and did not focus on high frequency trading. High frequency trading is a type of automated trading performed over extremely short timeframes.
The CFTC has previously examined how to regulate automated trading through the Technology Advisory Committee and a rule proposal, Regulation AT, proposed several years ago. While the current Chairman has stated that he will not pursue Regulation AT in its proposed form, the new nominee to serve as Chairman and Commissioner of the CFTC, Heath Tarbert, indicated during his nomination hearing before the Senate that he would like to see Regulation AT reconsidered. In any event, the use of technology in trading remains a focal point of the Commission and Staff.