Federal Reserve Releases Proposals to Tailor Enhanced Prudential Standards

On October 31, 2018, the Board of Governors of the Federal Reserve System (“Board”) released two draft notices of proposed rulemaking (“NPRs”) to tailor its enhanced prudential standards (“EPS”) in accordance with Section 401 of the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”).

One NPR, issued by only the Board, would tailor the application of EPS relating to capital stress testing; risk management; liquidity risk management, liquidity stress testing, and liquidity buffer requirements; and single-counterparty credit limits to U.S. bank holding companies (“BHCs”) and apply EPS as tailored to covered savings and loan holding companies (“SLHCs”).  The other NPR, a joint proposal with the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”), would tailor requirements under the agencies’ regulatory capital rules, the liquidity coverage ratio (“LCR”) rules, and proposed net stable funding ratio (“NSFR”) rules.  At the Board’s open meeting, Governor Brainard voted against the NPRs, saying in her prepared remarks that the proposals go beyond the provisions of EGRRCPA.

The proposals would establish a revised framework for applying EPS to large U.S. banking organizations, with four categories that reflect the different risks of covered firms in each category:

  • Category IV Firms: $100-$250 billion in total assets and does not meet Category I, II or III standards.
  • Category III Firms: $250 billion-$700 billion in total assets or $100 billion-$250 billion in total assets with $75 billion or more of a risk-based indicator (weighted short-term wholesale funding, nonbank assets, or off-balance sheet exposure), and does not meet Category I or II standards.
  • Category II Firms: $700 billion or more in total assets or cross-jurisdictional activity of $75 billion or more, and does not meet Category I standard.
  • Category I Firms: U.S. global systemically important BHCs. Continue Reading

BCFP Reaches Settlement with Small-Dollar Lender in Connection with Allegedly “Abusive” Practice

On October 24, 2018, the Bureau of Consumer Financial Protection (“BCFP” or the “Bureau”) announced that it had reached a settlement with Tennessee-based small-dollar lender and check casher, Cash Express LLC, which agreed to resolve the Bureau’s claims by paying a $200,000 fine and approximately $32,000 in restitution to affected consumers.  The consent order includes a finding that, among other allegations, Cash Express had engaged in “abusive” acts and practices in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), notwithstanding recent indications from Acting Director Mick Mulvaney that the “abusive” standard lacks clarity.

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BCFP to Reconsider Payday Loan Rule

Today, the Bureau of Consumer Financial Protection issued a public statement of its intent to issue proposed rules in January 2019 to reconsider its final rule regarding payday, vehicle title, and certain high-cost installment loans, commonly referred to as the “payday loan rule,” and to address the rule’s compliance date.  The Bureau is currently planning to propose revisiting only the rule’s ability-to-repay provisions and not its payments provisions.  If not amended or repealed, the rule’s ability-to-repay provisions are scheduled to come into effect August 19, 2019.

State Regulators Renew OCC Suit Over Fintech Charter

On October 25, 2018, the Conference of State Bank Supervisors (“CSBS”) filed a complaint in the United States District Court for the District of Columbia to stop the Office of the Comptroller of the Currency (“OCC”) from issuing special purpose national bank charters to fintech companies.  The lawsuit follows a similar suit against the OCC by the New York State Department of Financial Services (“DFS”) in the United States District Court for the Southern District of New York, which we discussed in September.

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Financial Stability Oversight Council Rescinds Last Nonbank SIFI Designation

On October 17, 2018, the Financial Stability Oversight Council (“FSOC”) announced that it  voted unanimously to rescind its designation of Prudential Financial, Inc. as a so-called “systemically important financial institution” (“SIFI”).  Section 113 of the Dodd-Frank Wall Street and Consumer Protection Act (“Dodd-Frank Act”) enables FSOC to identify a nonbank financial company for supervision by the Board of Governors of the Federal Reserve System (“Board”) and be subject to enhanced prudential standards.  FSOC was established by Title I of the Dodd-Frank Act.  It is comprised of ten voting members, including the leaders of eight federal financial regulators, the Secretary of the U.S. Department of the Treasury (“Treasury”) who serves as chair, and an independent member with insurance expertise who is appointed by the President for a six-year term.

Prudential was designated as a SIFI on September 19, 2013.  Last week’s announcement was the culmination of FSOC’s mandatory annual review of its designation that commenced for Prudential in May 2016.  As required by its procedures, FSOC reviewed written materials submitted by Prudential and consulted with the its state and federal regulators.  In its review, FSOC identified certain factors that materially affected its previously conclusions that Prudential could post a threat to financial stability if it experienced material financial distress through the exposure, asset liquidation, and critical function or service transmission channels.  Following the vote, Treasury Secretary Steven T. Mnuchin said, “The Council’s decision today follows extensive engagement with the company and a detailed analysis showing that there is not a significant risk that the company could pose a threat to financial stability.  The Council has continued to act decisively to remove any designation that is not warranted.”  FSOC previously rescinded its designations of American International Group, Inc., General Electric Capital Corporation, Inc., and MetLife Inc. as nonbank SIFIs.  Prudential was the last remaining designated nonbank financial company.

The vote is indicative of a shift in FSOC’s process for making these designations.  In November 2017, Treasury issued a memorandum in response to a directive from the President to review FSOC’s process for nonbank financial company designations.  Treasury’s recommendations for FSOC include focusing on an activities-based or industry-wide approach to assessing threats to financial stability and providing a clear “off-ramp” to designated nonbank financial companies.  Counselor to the Treasury Secretary Craig Phillips has frequently discussed the need for reform to FSOC’s designation process and has said that FSOC members are engaging on the topic.  It is expected that FSOC will publish more details on an activities-based designation approach in the near future.

BCFP Releases Fall 2018 Rulemaking Agenda

On October 17, 2018, the Bureau of Consumer Financial Protection (“BCFP” or the “Bureau”) announced the release of its Fall 2018 semiannual update of its rulemaking agenda, which is included in the Unified Agenda of Federal Regulatory and Deregulatory Actions (the “Unified Agenda”), published by the Office of Information and Regulatory Affairs (“OIRA”). The BCFP’s updated rulemaking agenda is available on the OIRA web site. The agenda lists twelve rulemakings in the prerule, proposed rule, and final rule stages and another eight potential rulemakings in the long-term actions stage. These items include a number of new and revised rulemaking items, reflecting recent legislative enactments and evolving Bureau priorities. Continue Reading

Governor Brainard Discusses Financial Inclusion, Fintech, and Reforms to the Community Reinvestment Act

On October 17, 2018, Federal Reserve Board Governor Lael Brainard discussed the potential for financial innovation, and in particular, fintech products and services, to foster financial inclusion of underserved families and small businesses.  She has frequently addressed the importance of fintech, including cryptocurrencies, digital currencies and distributed ledger technologies and the role of banks in fintech innovation.  Governor Brainard explained the need for a more nuanced approach to financial inclusion that focuses on an individual or business’s holistic financial health, instead of just access to accounts or access to credit.

Governor Brainard highlighted mobile apps, online- and phone-only accounts, and machine learning as tools that banks and fintech companies are offering to help improve financial access for the unbanked or underbanked.  She also discussed the role of the Board of Governors of the Federal Reserve System (“Board”) in financial inclusion, and suggested that it is the Board’s responsibility to facilitate safe, innovative, and ubiquitous faster payment systems.  Governor Brainard has previously called for faster payment systems and the Board recently requested public comments on actions it could take to facilitate real-time payments.  She concluded by emphasizing the Board’s focus on maintaining consumer protection while supporting socially beneficial and responsible innovation.

Governor Brainard separately discussed the importance of providing financial access to underserved communities in a speech on October 15, 2018 regarding reform of the Community Reinvestment Act (“CRA”).  Governor Brainard encouraged the industry to comment on the OCC’s advanced notice of proposed rulemaking on revisions to the Community Reinvestment Act framework, as we discussed in detail in a prior blog post.  In her remarks, she said that the Board will review the comment letters in anticipation of a joint proposal with the OCC and the Federal Deposit Insurance Corporation, noting that she understands the importance of a single set of CRA standards.  Governor Brainard called for tailoring the CRA regulations to banks of different sizes and business models, and updating the assessment area standards by which a bank’s CRA performance is assessed to reflect technological developments, a theme she has championed in prior speeches (available here, here, and here).

OCC Reaffirms Willingness To Accept and Grant Special Purpose Charters to Fintech Companies

On October 9, 2018, Grovetta Gardineer, the Office of the Comptroller of the Currency’s (“OCC’s”) senior deputy comptroller for compliance and community affairs, reaffirmed the OCC’s willingness to accept applications from fintech companies seeking a special purpose national bank charter and grant such applications if the application meets certain requirements.

These remarks, which were made in response to questions at the Online Lending Policy Institute conference, follow the OCC’s July 2018 policy statement that the agency would “consider applications for national bank charters from companies conducting the business of banking, provided they meet the requirements and standards for obtaining a charter.” The OCC’s decision to begin accepting applications for the fintech bank charter is discussed in more detail in our recent Fintech Regulatory Update.

As discussed in a previous blog post, on September 14, 2018, the New York Department of Financial Services (“NYDFS”) filed a complaint in federal court to block the OCC from issuing any fintech bank charters. This complaint follows a previous lawsuit brought by NYDFS in 2017. This suit was dismissed because the federal district court concluded that the matter was not yet ripe for adjudication since the OCC had only proposed to issue the charter.

In addition, on September 12, 2018, the Conference of State Bank Supervisors (“CSBS”) announced that it would pursue litigation against the OCC for issuing fintech bank charters. As discussed in a previous blog post, the CSBS previously filed a lawsuit against the OCC that also was dismissed by the federal district court.

In responding to a question about potential litigation, Gardineer made clear that the OCC does not question its authority to grant a fintech bank charter. Gardineer also stated that the OCC is in ongoing conversations with the Board of Governors of the Federal Reserve System regarding whether a fintech charter would provide access to certain Federal Reserve services, including the payments system.

The Long Wait Is Not Over, but the SEC Advances its Security-Based Swap Dealer Rules and Reopens the Comment Period for Capital and Margin Requirements for Security-Based Swap Dealers

For several years Swap Dealers registered with the Commodity Futures Trading Commission (“CFTC”) have been awaiting action by the Securities and Exchange Commission (“SEC”) related to security-based swap dealers.  While the wait is by no means over, on October 11, 2018 the SEC voted 4 to 1 to reopen the comment period for proposed rules on capital and margin requirements for security-based swap dealers and major security-based swap participants, and capital requirements for broker-dealers.  The rule was originally proposed in October 2012, with additional proposals in May 2013 (relating to cross-border treatment) and in October 2014 (relating to requirements for non-bank security-based swap dealers).  In addition to reopening the comment period, the SEC sought comment on a number of additional questions, including potential changes to the language of the proposed rules, many in response to comments the SEC received from the original proposal.  Among other things, the SEC is seeking comment on:

  • Potential changes to the proposed capital rules for security-based swap dealers and major security-based swap participants, including changes to how capital would be calculated;
  • Potential changes to the proposed margin requirements, including allowing possible SEC approval of a uniform initial margin model, and potential exceptions to margin requirements;
  • Potential changes to the proposed segregation requirements, including giving counterparties to non-cleared security-based swaps with a security-based swap dealers the option to allow the dealer to hold the initial margin, with requirements similar to broker-dealer customer protection rules; and,
  • What the SEC should consider in making substituted compliance determinations for foreign security-based swap dealers.

Since the rule was initially proposed in 2012, the CFTC and prudential banking regulators have issued capital and margin rules for the swap dealing entities they regulate – harmonization with those rules is likely to be a significant consideration in the approach of the final rule.  In addition, market participants have advocated for substituted compliance between the CFTC and SEC rules for swap dealers.

Chairman Jay Clayton and Commissioners Hester M. Peirce and Elad L. Roisman voted for the reopening of the comment period, and generally voiced support for the release and additional requests for comment.  Commissioner Kara M. Stein voted to reopen the comment period, but criticized the process, arguing that the additional requests for comment were in fact a “shadow rulemaking” containing a “significant change in policy, which is cleverly hidden in questions” that, because not issued as a rule proposal, did not have the economic analysis that a typical SEC rule proposal would have.  Commissioner Robert J. Jackson, Jr. voted against reopening the comment period, arguing that the proposal is essentially asking industry participants whether they should be allowed to take more risk, and that the potential paring back of capital and margin requirements based on the answers might introduce greater systemic risk.

Covington’s Futures and Derivatives practice has assisted multiple swap dealers with the implementation of CFTC requirements and will continue to follow these related developments at the SEC in order to assist clients with their security-based swap dealer registrations.

State Securities Regulators Step Up Scrutiny of Cryptoassets and ICOs

On October 10, the North American Securities Administrators Association (“NASAA”)—an association of state, provincial, and territorial securities regulators in the United States, Mexico, and Canada—released its annual Enforcement Report (the “Report”). The Report demonstrates that, while stepped-up enforcement activity has been observed at the federal level with respect to cryptoasset markets, state regulators are increasingly getting in on the action.

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