CFTC Adopts Amendments to Whistleblower Rule, Asserts Anti-Retaliation Authority

On May 22, 2017, the Commodity Futures Trading Commission (“CFTC”) announced the finalization of amendments to its whistleblower rules.  The most important change is the CFTC’s assertion of the authority to enforce Section 23(h)(1) of the Commodity Exchange Act (“CEA”), which prohibits retaliation against whistleblowers.  When it originally promulgated its whistleblower rules in 2011, the CFTC took the position that it “does not have the statutory authority to conclude that any entity that retaliates against a whistleblower commits a separate and independent violation of the CEA,” because while the CEA provides for an individual cause of action for retaliation, it does not explicitly provide for a CFTC cause of action or other enforcement mechanism.  The CFTC has now determined that its “2011 interpretation failed to fully consider the statutory context of Section 23 and other CEA provisions,” including the CFTC’s general authority to prosecute violations of the CEA.  The amendments also prohibit attempts to impede individuals from communicating with the CFTC about a violation of the CEA, including through enforcement of a confidentiality agreement.

The upshot is that in any case where an individual reports alleged violations of the CEA, either internally to their employer or externally, there now exists the potential for the CFTC to bring an independent enforcement action to remedy any allegedly improper retaliation in response to that reporting.  The anti-retaliation provision provides that an employer may not “discharge, demote, suspend, directly or indirectly threaten or harass” or in any other way “discriminate against, a whistleblower in the terms and conditions of employment” because the whistleblower lawfully provided information to the CFTC or provided assistance in any proceeding related to the provision of such information.  Notably, liability for retaliation does not depend on whether the whistleblower ultimately qualifies for an award.  With the CFTC asserting the independent authority to enforce the anti-retaliation provisions of the CEA, market participants may want to review their policies and procedures surrounding responding to reports of wrongdoing, including those policies and procedures intended to prevent retaliation.  Market participants should also review employment agreements to ensure there are no limitations that can be read as preventing potential whistleblowers from coming forward with information.

In addition to asserting authority to enforce the CEA’s anti-retaliation provisions, the CFTC also adopted a number of other changes which, generally speaking, eased the requirements for a whistleblower to be eligible for an award.  Easing the requirements for award eligibility may lead to more whistleblower complaints.  Given that the CFTC’s Whistleblower Office has been active in reviewing complaints and forwarding them to the CFTC Division of Enforcement for investigation, this may lead to an increase in Enforcement activity.

FASB Announces Public Meeting as New Credit Loss Standard’s Effective Dates Approach

The Financial Accounting Standards Board (“FASB”) will hold an open meeting on June 12, 2017, to hear concerns from financial institutions regarding FASB’s recently finalized Accounting Standards Update for measuring credit losses on financial instruments (the Current Expected Credit Loss standard, or “CECL”) under Generally Accepted Accounting Principles (“GAAP”).

FASB issued the new CECL standard on June 16, 2016, following a vote on April 27, 2016. The new CECL standard will require financial statements to reflect credit losses once they are expected, compared to current accounting standards, which permit financial institutions to delay the recognition of credit losses until it is probable that such losses have been incurred. FASB has characterized the change as a post-financial crisis reform designed to provide investors with timelier and more accurate information. The standard’s various effective dates commence with fiscal years beginning after December 15, 2019.

Financial institutions have expressed concerns that the CECL standard will negatively impact access to credit by incentivizing short-term lending—for which predicting losses over the life of a loan from the time of origination is easier—at the expense of longer loans, such as mortgages, and less predictable lending, such as certain small business loans and loans to non-prime customers. FASB has taken the position that the standard need not have such an impact because the new standard takes into account the fact that longer repayment timelines introduce greater uncertainty. The standard characterizes loss estimation as “subjective” and requires estimation methods to be only “practical and relevant to the circumstance” of a particular loan.

Financial institutions have also argued that the new CECL standard would have the effect of imposing increased capital requirements. By requiring financial institutions to account for expected losses up front, the standard will require them to maintain greater loan-loss reserves (i.e., Allowance for Loan and Lease Losses, or “ALLL”). Additions to ALLL increase expenses, which has the effect of decreasing retained earnings and therefore regulatory capital, while the capital rules count only a limited amount of ALLL toward regulatory capital. As a result, financial institutions will have to retain a greater amount of their earnings or issue more capital instruments than under current accounting practices to maintain the same level of regulatory capital. Although FASB has indicated that changes to the new CECL standard are unlikely, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the National Credit Union Administration stated in March 2017 that the agencies would “consider the impact of the CECL standard on ALLL and related capital calculations” as they weigh possible changes to their capital rules.

Parties must register to attend the FASB public meeting in person. The meeting will also be transmitted by webcast.

CFTC Launches FinTech Initiative “LabCFTC”

On May 17, 2017, the Commodity Futures Trading Commission (“CFTC”) announced the launch of its financial technology (“FinTech”) initiative, LabCFTC.  Per the agency, the initiative is designed to “promot[e] responsible FinTech innovation to improve the quality, resiliency, and competitiveness of the markets the CFTC oversees.”  According to Acting Chair J. Christopher Giancarlo, LabCFTC is “intended to help us bridge the gap from where we are today to where we need to be: Twenty-First century regulation for 21st century digital markets.”  LabCFTC is the latest effort by Acting Chair Giancarlo to implement the vision for the CFTC that he has consistently advocated—a flexible, forward thinking, responsive agency that fosters productive innovation.

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D.C. Circuit Holds Oral Argument in Rehearing of PHH v. CFPB

On May 24, 2017, the U.S. Court of Appeals for the D.C. Circuit held en banc oral argument in the rehearing of PHH Corp., et al. v. Consumer Financial Protection Bureau (“PHH”).  The lively oral argument extended well beyond the time originally allotted by the Court, as lawyers for PHH, the Department of Justice, and the Consumer Financial Protection Bureau took turns trying to help the Court evaluate whether the structure of the CFPB or the Bureau—particularly the role of a single director who may be fired only for cause—violates the Constitution.

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Financial Regulators to Reassess Volcker Rule

Federal financial agencies are taking steps to reevaluate the Volcker Rule as part of the Trump Administration’s review of financial regulations.  In a May 8, 2017 meeting of the Financial Stability Oversight Council, Treasury Secretary Steve Mnuchin reportedly directed the five agencies responsible for the Volcker Rule – the Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency (“OCC”), Federal Deposit Insurance Corporation (“FDIC”), Securities and Exchange Commission (“SEC”), and Commodity Futures Trading Commission (“CFTC”) – to reassess the rule.  The official readout of the meeting states that the Council “discussed efforts to assess the efficacy of the Volcker Rule.”

Secretary Mnuchin’s statements during his Senate confirmation hearings suggest that reform of the Volcker Rule could include focusing the rule on the activities of insured depository institutions rather than their affiliates, and revising the definition of proprietary trading to remove uncertainty about the line between prohibited proprietary trading and permissible market making.

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Bipartisan Bills Providing Regulatory Relief to Community and Midsize Banks Emerge in Senate

Senators Jon Tester, D-Mont., and Jerry Moran, R-Kan., introduced a bill today (S. 1139) that would raise the threshold for a banking organization to be subject to Dodd-Frank Act Stress Tests (DFAST) to $50 billion in total consolidated assets from the current $10 billion threshold.  The bill, titled the Main Street Regulatory Fairness Act, would provide relief for 72 banking organizations that currently have consolidated assets of $10 billion or greater, but less than $50 billion.  The bill would also provide federal banking agencies with flexibility to require the DFAST exercise to be conducted less frequently than annually for banking organizations that would remain subject to DFAST.

Earlier this month, Senators Tester and Moran also reintroduced the CLEAR Relief Act, S. 1002, which would provide relief to community banks that includes:

  • amendments to the “qualified mortgage” definition to include any mortgage originated and retained for at least three years by a bank with less than $10 billion in total consolidated assets;
  • an exemption from the Volcker Rule for banking organizations with $10 billion or less in total assets;
  • an exemption from the requirement of the Sarbanes-Oxley Act to conduct annual management assessments of internal controls for banking organizations with $1 billion or less in total consolidated assets; and
  • an exemption from escrow requirements under the Truth in Lending Act for banks with $10 billion or less in total consolidated assets.

These two bills signal that bipartisan regulatory reform legislation is likely to focus on relief for community and midsize banking organizations rather than larger institutions.

CFTC Proposes Amendments to CCO and Annual Report Requirements for Certain CFTC Registrants

The CFTC recently proposed amendments (the “Proposal”) to its regulations regarding certain duties of chief compliance officers (‘‘CCOs’’) of swap dealers (‘‘SDs’’), major swap participants (‘‘MSPs’’), and futures commission merchants (‘‘FCMs’’) (collectively, ‘‘Registrants’’); and certain requirements for preparing and furnishing to the Commission an annual report containing an assessment of the Registrant’s compliance activities. The Proposal aims to increase efficiencies, reduce regulatory burden, and clarify the scope of CCO duties. In addition, the Proposal is designed to further harmonize the CFTC’s rules with the SEC’s counterpart CCO rules.

Proposed changes include:

  • Defining the term “Senior Officer”: Under CFTC Regulation 3.3(a)(1), a CCO must report to the board of directors or the “senior officer” of a Registrant. Current CFTC Regulation 3.3 does not define this term. The CFTC has proposed defining “senior officer” as “the chief executive officer or other equivalent officer of a registrant”, on the theory that creating a direct reporting line from the CCO to the board or to the highest executive officer will ensure the greatest CCO independence.
  • Duty to Resolve Conflicts of Interest: Under current CFTC Regulation 3.3(d)(2), a CCO must resolve “any conflicts of interest that may arise”. The Proposal adds a reasonableness qualifier such that a CCO is required to take “reasonable steps” to resolve conflicts. The CFTC stated in the Proposal that requiring the CCO to personally resolve any potential conflict of interest may be overly burdensome. The changes clarify that routinely encountered conflicts can be resolved in the normal course of business consistent with the CCO’s general administration.
  • CCO Annual Reporting: CFTC Regulation 3.3(e)-(f) currently require a CCO to deliver an annual report describing the Registrant’s compliance program, in order to promote periodic self-evaluation and inform the Commission of possible compliance weaknesses. Industry participants have indicated to the CFTC that producing such a report is burdensome given the value of the report, given that compliance policies and procedures do not change from year-to-year. As a result, the Commission is proposing–among other things–to eliminate the requirement of CFTC Regulation 3.3(e)(2) to review each obligation under the CEA and CFTC Regulations and to describe the policies and procedures that fulfill such obligations. The annual report would still include other components set out in current CFTC Regulation 3.3(e), such as descriptions of: the Registrant’s written policies and procedures, the effectiveness of such policies and procedures, areas for improvement of the current compliance program, Registrant resources for compliance, noncompliance issues, and recent changes to a Registrant’s policies and procedures. The Proposal also seeks to amend CFTC Regulation 3.3(f)(1) to require that CCOs deliver the annual report to the Registrant’s board of directors, senior officer, and the audit committee (or equivalent body). The current rule only requires that the annual report be furnished to a Registrant’s board of directors or senior officer.

The proposed amendments to CFTC Regulation 3.3 generally are in keeping with Acting Chairman Giancarlo’s regulatory approach of reducing burdensome regulations where possible and being sensitive to the concerns of industry participants. Industry participants should review the Proposal to determine the impact of the proposed changes and make comment to the agency if any aspects of the proposed amendments need to be revised. The comment period for the Proposal will be open through July 7, 2017.

FDIC Settles Unfair and Deceptive Practices Investigation with Bank and Institution-Affiliated Parties

On May 11, 2017, the Federal Deposit Insurance Corporation (“FDIC”) announced settlements with Bank of Lake Mills and two of its institution-affiliated parties, Freedom Stores, Inc. and Military Credit Services, LLC.  The settlements require the companies to pay restitution totaling $3 million to past and present borrowers who were harmed, impose civil monetary penalties totaling $242,000 on the companies, and require the companies to take affirmative steps to comply with the Federal Trade Commission Act.  The FDIC assessed the largest of the civil money penalties, $151,000, against Bank of Lake Mills.  Each restitution order provides that the bank, but not the institution-affiliated parties, must deposit not less than $3 million into a trust or other segregated deposit account for purposes of providing restitution.

The settlements relate to the following alleged unfair and deceptive practices:

  • Charging interest to consumers who paid their loans off within six months, even though the loans had been advertised as interest free for six months;
  • Selling add-on products whose terms were not clearly disclosed; and
  • Failing to provide consumers an opportunity to exercise their monthly premium payment option for debt cancellation coverage on loans originated by Bank of Lake Mills.

The settlements highlight the FDIC’s broad enforcement authority, including over non-bank institution-affiliated parties, and serve as a useful reminder to Fintech companies and other non-banks doing business with FDIC-supervised banks that the FDIC’s enforcement authority extends to them as well.

CFPB Issues Request for Information on the Small Business Lending Market

On May 10, 2017, the Consumer Financial Protection Bureau (“CFPB”) issued a request for information on small business lending. In a press release accompanying the request, the CFPB stated that its goal is to “learn more about how small businesses engage with financial institutions, with a particular focus on women-owned and minority-owned small business,” in order to help “implement [its] data collection rule.” The small business data collection rule, mandated by Section 1071 of the Dodd-Frank Act but not yet proposed by the CFPB, will impose reporting requirements on financial institutions for information concerning “credit applications made by women-owned, minority-owned, and small businesses.” The CFPB has previously clarified that “financial institutions’ obligations under [S]ection 1701 do not go into effect until the Bureau issues necessary implementing regulations.”

The request for information does not come as a surprise, given the CFPB’s indication in its Fifth Annual Fair Lending Report (which we discussed last month) that it will increase its focus on small business lending. In a speech at the Small Business Lending Field Hearing held on May 10, CFPB Director Richard Cordray emphasized that “business opportunity — especially opportunities for small businesses — often hinges on the availability of financing.”

In the request for information, the CFPB acknowledged that it is in the “early stages” of implementing a small business data collection rule that is designed to “fill existing gaps in the general understanding of the small business lending environment” and identify “potential fair lending concerns regarding small businesses.” The CFPB further stated its belief that the rule should cover “an extensive share of the market and contain enough flexibility to analyze different market segments.” At the same time, the CFPB expressed interest in “exploring potential ways to implement [the rule] in a balanced manner” that would minimize burden to both industry and the CFPB.

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Republican Lawmakers Pen Letter to Secretary Acosta Encouraging the DOL to Delay the Fiduciary Rule “in its Entirety”

On May 2, 2017, more than 100 Republican lawmakers wrote a letter to the recently installed Labor Secretary Alexander Acosta encouraging the Labor Department to “delay ˗ in its entirety” the Department of Labor’s final rule on the definition of fiduciary (the so-called “fiduciary rule”). This new rule expands the definition of fiduciary under ERISA and the Internal Revenue Code and requires financial advisors to act in the best interest of their clients when offering advice related to retirement accounts. Continue Reading

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