On October 29, 2019, the House Committee on Financial Services held a hearing entitled “Financial Services and the LGBTQ+ Community: A Review of Discrimination in Lending and Housing.” Witnesses at the hearing included Harper Jean Tobin, the Director of Policy at the National Center for Transgender Equality, Michael Adams, CEO of SAGE (Services and Advocacy for GLBT Elders), and Alphonso David, President of the Human Rights Campaign.
On November 6, the Consumer Financial Protection Bureau (“CFPB”) held a symposium on the prospective implementation of Section 1071 of the Dodd-Frank Act, codified as 15 U.S.C. § 1691c-2, which requires financial institutions to inquire about and report to the CFPB whether a business credit applicant is a women-owned, minority-owned, or small business. The CFPB may make such information available to the public. Section 1071 is often viewed as HMDA for small business, a reference to the Home Mortgage Disclosure Act, which requires financial institutions to collect and report information about mortgage applicants to the CFPB, some of which is made public.
Section 1071 amended the Equal Credit Opportunity Act of 1974 in 2010 to “facilitate enforcement of fair lending laws” and to “enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.” In 2011, the CFPB announced that financial institutions’ obligations to collect information under the law would not go into effect until it issued implementing regulations. To date, however, the CFPB has not issued proposed or final regulations to implement Section 1071.
In her prepared remarks, CFPB Director Kathy Kraninger reassured symposium participants that Section 1071 rulemaking will be done with “care and consideration,” and with the goal of maintaining access to credit for small businesses, suggesting that the CFPB will exercise caution as it seeks to implement the law. Earlier this year, Director Kraninger and the CFPB were named as defendants in a lawsuit alleging a violation of the Administrative Procedures Act because the CFPB has not yet issued Section 1071 implementing regulations.
The federal banking agencies issued a final rule today that permits banking organizations not subject to the advanced approaches capital rules to adopt simplifications to the calculation of their regulatory capital beginning January 1, 2020, rather than April 1, 2020 as was originally finalized in July 2019.
On October 22, 2019, the U.S. Government Accountability Office (“GAO”) issued two letters concluding that three Federal Reserve Supervision and Regulation letters, SR 12-17: Consolidated Supervision Framework for Large Financial Institutions, SR 14-8: Consolidated Recovery Planning for Certain Large Domestic Bank Holding Companies, and SR 11-7: Guidance on Model Risk Management, are “rules” under the Congressional Review Act (“CRA”) and therefore must be submitted to Congress and the Comptroller General for review before they can take effect. The GAO letters respond to requests made by several senators for determinations of whether the three SR letters, as well as SR 15-7: Governance Structure of the Large Institution Supervision Coordinating Committee (LISCC) Supervisory Program, are rules under the CRA. The GAO concluded that SR 15-7 is not a rule under the CRA.
On October 18, the Supreme Court granted certiorari in Seila Law v. Consumer Financial Protection Bureau (CFPB). The question presented before the Court is “whether the substantial executive authority yielded by the CFPB, an independent agency led by a single director, violates the separation of powers.” In addition, the Court requested that the parties brief and argue an additional question: “If the Consumer Financial Protection Bureau is found unconstitutional on the basis of the separation of powers, can 12 U.S.C. § 5491(c)(3) [the for-cause removal provision] be severed from the Dodd-Frank Act?”
On October 17, 2019, the Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and National Credit Union Administration released for public comment a proposed interagency policy statement on allowances for credit losses (“ACLs”). The proposed policy statement reflects the Financial Accounting Standards Board’s adoption of the current expected credit losses (“CECL”) methodology.
On Friday, the leaders of the Securities and Exchange Commission (“SEC”), Commodity Futures Trading Commission (“CFTC”), and Financial Crimes Enforcement Network (“FinCEN”) (collectively, the “Agencies”) issued a “Joint Statement on Activities Involving Digital Assets” (the “Joint Statement”). The Joint Statement serves as a reminder that businesses engaged in activities involving digital assets – or, as they are sometimes called, virtual currencies or cryptocurrencies – should be attentive to their anti-money laundering (“AML”) obligations, including under the Bank Secrecy Act (“BSA”).
The Joint Statement notes that the BSA requires “financial institutions” to: (1) establish and implement an effective AML program; and (2) comply with certain recordkeeping and reporting requirements, including the filing of suspicious activity reports (“SARs”). These requirements apply not just to a financial institution’s traditional lines of businesses, but also to its businesses involving digital assets.
The U.S. Government’s fiscal year-end filing rush has resulted in a wave of new spoofing enforcement. In August, the Fraud Section of the Department of Justice’s (“DOJ”) Criminal Division charged four individuals with spoofing in precious metals futures markets. In September, the Commodity Futures Trading Commission (“CFTC”) brought overlapping charges against three of those individuals, and separately charged two trading firms and their employees. Finally, in an independent development, the United Kingdom’s Office of Gas and Electricity Markets (“Ofgem”) announced its first-ever spoofing charges against an energy trading firm in September.
The new cases show that the DOJ’s Criminal Fraud Section and the CFTC are continuing to coordinate their enforcement activities. On the same day, September 16, 2019, the DOJ unsealed the August indictment and the CFTC announced civil charges for the same conduct. The agencies first unveiled their heightened coordination in this area in January 2018, when they initiated parallel spoofing takedowns that have since resulted in several guilty pleas, settlements, an acquittal (Flotron), and a hung jury (Thakkar).
In their recent filings, the agencies reveal new charging strategies. The DOJ’s unsealed indictment includes the first-ever RICO charge for spoofing. Both agencies are also charging attempted manipulation under the Commodity Exchange Act (“CEA”) in certain cases. While attempted manipulation previously has been applied to spoofing, the DOJ and CFTC omitted the charge in their parallel actions in January 2018.
The new strategies may be belated responses to the DOJ’s April 2018 trial defeat in Flotron, in which the jury acquitted a trader of a single count of conspiracy to commit spoofing. A broader menu of charges allows the DOJ to introduce a wider array of evidence at trial, and gives the jury more options to convict.
Spoofing enforcement has taken a new turn overseas as well. On September 5, Ofgem announced its finding that Engie Global Markets (“EGM”) engaged in spoofing to manipulate wholesale gas prices between June and August 2016. Ofgem’s press release defined spoofing as “manipulating prices by placing bids or offers to trade with no intention of executing those bids or offers in order to buy or sell at a higher or lower price and increase trading profits.”
Ofgem found that EGM’s spoofing conduct violated Article 5 (prohibition on market manipulation) of Regulation (EU) No 1227/2011 on wholesale energy market integrity and transparency. This appears to be the first time that Ofgem has issued a fine for spoofing.
As the DOJ and CFTC continue to dedicate significant resources to spoofing enforcement, and overseas regulators, such as Ofgem, increasingly enter the mix, it is safe to assume that spoofing will continue to be a key risk area for commodities and derivatives traders and the firms and institutions that employ them.
On October 2, 2019, Governor Gavin Newsom signed California’s Public Banking Act, AB 857, into law. California previously prohibited cities and counties from extending credit to any person or corporation, and required that local agencies deposit all funds to state or national banks. AB 857 now permits cities and counties to establish a “public bank,” which is defined as “a corporation [organized as either a nonprofit mutual benefit corporation or a nonprofit public benefit corporation] for the purpose of engaging in the commercial banking business or industrial banking business, that is wholly owned by a local agency, local agencies, or a joint powers authority . . . .”
A city or county in California interested in establishing a public bank must create a separate corporation with an independent board of directors and obtain approval from the Federal Deposit Insurance Corporation (“FDIC”) for deposit insurance. The city or county must also obtain a certificate of authorization to transact business from California’s Department of Business Oversight and conduct “a study to assess the viability of the proposed public bank.” AB 857 caps the number of public banks in California to no more than two new licensees per calendar year, and no more than ten in existence at one time. California joins North Dakota as the only other state to allow public banks.
Under the new law, cities and counties may lend available funds to public banks, deposit funds in public banks, and invest in public banks, subject to certain requirements. In addition, public banks in California are authorized to make distributions to local agencies that are shareholders of the public bank. Public banks are required to conduct retail activities in partnership with local financial institutions, and are prohibited from competing with local financial institutions. Specifically, public banks can only engage in retail activities without partnering with a local financial institution if those retail activities are not offered or provided by local financial institutions in the jurisdiction of the local agencies that own the public bank.
In practice, supporters expect public banks to use local revenues as a deposit base for nonprofit, community-based lending at lower interest rates than private banks. Critics of public banks caution against the government becoming involved in the business of banking, which they argue may result in inefficiencies, corruption, and self-dealing.
In November 2018 the Federal Financial Supervisory Authority (“Bundesanstalt für Finanzdienstleistungsaufsicht”, “BaFin”) and Deutsche Bundesbank published a guidance on outsourcing of services to cloud service providers (“Guidance on Cloud Services”). According to BaFin and Deutsche Bundesbank the Guidance on Cloud Services has not stipulated any new requirements, but has condensed the already existing general requirements in terms of outsourcing projects and the procurement of IT-services with regard to cloud services. It is addressed to credit institutions, financial services institutions, insurance undertakings, pension funds, investment services enterprises, capital management companies, payment institutions and e-money institutions. Now, BaFin and Deutsche Bundesbank have published an official English version of the Guidance on Cloud Services which is available here. The Guidance on Cloud Services addresses important issues as (e.g.) information and audit rights; rights to issue instructions; data security/protection; termination provisions; chain outsourcing and information duties; and applicable law. Some of these points are regulated in a similar way to the current EBA Guidelines on outsouring arrangements which have integrated the former EBA Recommendations on outsourcing to cloud service providers.