REGULATORY DEVELOPMENTS
CFPB ISSUES REMINDER OF NEW THRESHOLD FOR REPORTING HMDA OPEN-END LINES OF CREDIT DATA
On November 12, the CFPB reminded institutions that effective January 1, 2022, pursuant to a final rule issued by the CFPB in April 2020, the threshold for reporting Home Mortgage Disclosure Act (HMDA) data about open-end lines of credit will change to 200 from the prior threshold of 500. For example, beginning on January 1, 2022, an institution that originated at least 200 open-end lines of credit in both calendar years 2020 and 2021, and that meets all other Regulation C institutional coverage criteria, will be required to collect, record and report data about its open-end lines of credit for calendar year 2022 to be submitted by March 1, 2023. In addition, an institution that meets the loan-volume threshold for closed-end mortgage loans and all other Regulation C institutional coverage criteria – but not the threshold for open-end mortgage loans – may still report open-end lines of credit data, if it wishes to do so. However, if the institution chooses to report such data, it must report all of the applications, originations and purchases of its open-end lines of credit that would be covered transactions as if the institution had met the open-end line of credit threshold. To assist institutions in complying with this change, the CFPB issued updated HMDA FAQs.
FINCEN RELEASES UPDATED ADVISORY ON RANSOMWARE AND THE USE OF THE FINANCIAL SYSTEM TO FACILITATE RANSOM PAYMENTS
On November 8, FinCEN updated and replaced its October 1, 2020 Advisory on Ransomware and the Use of the Financial System to Facilitate Ransom Payments in response to the increase of ransomware attacks in recent months against critical U.S. infrastructure. The updated advisory provides information on: (1) the role of financial intermediaries in the processing of ransomware payments; (2) trends and typologies of ransomware and associated payments; (3) ransomware-related financial red flag indicators; and (4) reporting and sharing information related to ransomware attacks.
SEC EXAMINATION DIVISION OBSERVATIONS: ELECTRONIC INVESTMENT ADVICE AND INVESTMENT ADVISERS’ FEE CALCULATIONS
The SEC’s Division of Examinations (the Examinations Division) published two risk alerts – one pertaining to advisers that provide electronic investment advice and the other related to investment advisers’ fee calculations.
On November 9, the Examinations Division issued a Risk Alert about its observations of compliance issues of advisers providing automated digital investment advisory services, or “robo-advisory” services. The Examinations Division noted that nearly all of the examined advisers received a deficiency letter, with observations most often noted in the areas of (1) compliance programs, including policies, procedures, and testing, (2) portfolio management such as an adviser’s fiduciary obligation to provide advice that is in each client’s best interest, and (3) marketing/performance advertising, including misleading statements and missing or inadequate disclosure. The Examinations Division staff also observed, among other things, advisers that were relying on, but not acting in accordance with, the internet adviser exemption and Rule 3a-4 under the Investment Company Act of 1940.
On November 10, the Examinations Division issued another Risk Alert highlighting its observations of compliance issues regarding fee calculation and billing practices of investment advisers. The Risk Alert supplements compliance concerns that the Examinations Division previously noted in its April 2018 risk alert. The advisory fee-related deficiencies observed included: (1) advisory fee calculation errors, such as over-billing of advisory fees, inaccurate calculations of tiered or breakpoint fees, and inaccurate calculations due to incorrect householding of accounts; and (2) not crediting certain fees due to clients, such as prepaid fees for terminated accounts or pro-rated fees for onboarding clients. In addition, the staff observed fee-related compliance and disclosure issues. The issues identified were related to incomplete or misleading Form ADV Part 2 brochures and/or other disclosures, including disclosure that: (1) did not reflect current fees charged or whether fees were negotiable; (2) did not accurately describe how fees would be calculated or billed; and (3) was inconsistent across advisory documents, such as stating the maximum fee in an advisory agreement that exceeded the fees disclosed in the adviser’s brochure. The Examinations Division staff also identified examined advisers that did not have any written agreements or documentation establishing the client fee amount.
