In This Issue. The Securities and Exchange Commission (SEC) was active this week, moving to shorten the settlement cycle for broker-dealer transactions from T+3 to T+2 and issuing updated guidance clarifying the safe harbor for inadvertent investment companies under the 1940 Act. Meanwhile, in litigation and enforcement news, the Consumer Financial Protection Bureau (CFPB) entered into a consent order with a credit reporting agency to resolve allegations of misrepresentation and the Federal Trade Commission (FTC) issued an order against a debt relief company regarding alleged misrepresentations. These and other recent developments are discussed below.

Regulatory Developments

Client Alert: SEC Shortens Settlement Cycle to T+2

The SEC has adopted an amendment that will shorten the standard settlement cycle for most broker-dealer transactions from T+3 to T+2. Related amendments to rules of the New York Stock Exchange, the Nasdaq Stock Market and the NYSE MKT approved by the SEC in February 2017 will become operative concurrently with this amendment. For more information, view the client alert issued by Goodwin’s Public Companies Practice.

SEC Division of IM Guidance: Safe Harbor for Inadvertent Investment Companies

The staff of the SEC’s Division of Investment Management issued a guidance update clarifying Rule 3a-2 under the Investment Company Act of 1940 (the 1940 Act), the “transient investment company” safe harbor, as it applies to holding companies (the Safe Harbor). Rule 3a-2 currently exempts issuers from the definition of an “investment company” for one year starting from the earlier of either (1) the date when the issuer owns securities or cash that exceed 50% of the issuer’s total asset value (the 50% Threshold), or (2) the date when the issuer owns or proposes to acquire investment securities that exceed 40% of the issuer’s total asset value (the 40% Threshold). However, because many holding companies hold securities of their subsidiaries routinely and continuously in an amount that constantly exceeds the 50% Threshold, such holding companies are effectively blocked from ever using the Safe Harbor. In the guidance update, the SEC clarified that the one-year period for holding companies will not be triggered until a holding company exceeds the 40% Threshold.

Banking Agencies Issue Joint Report to Congress Under the Economic Growth and Regulatory Paperwork Reduction Act of 1996

On March 22, the member agencies of the Federal Financial Institutions Examination Council (FFIEC) issued a joint report to Congress detailing their review of rules affecting financial institutions. The review was conducted pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) by the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC), and in conjunction with the National Credit Union Administration (NCUA). EGRPRA requires the federal banking agencies, along with the FFIEC, to conduct a review of their rules at least every 10 years to identify outdated or unnecessary regulations. The report describes several joint actions planned or taken by the federal financial institutions regulators as a result of their EGRPRA review, including:

• Simplifying regulatory capital rules for community banks and savings associations;
• Streamlining reports of condition and income (Call Reports);
• Increasing the appraisal threshold for commercial real estate loans;
• Addressing appraiser shortages in rural areas;
• Expanding the number of institutions eligible for less frequent examination cycles;
• Clarifying guidance regarding flood insurance;
• Increasing the major assets interlock threshold; and
• Providing additional guidance on Regulation O.

The report also describes the individual actions taken by each agency to update its own rules, eliminate unnecessary requirements, and streamline supervisory procedures.

Enforcement & Litigation

CFPB Enters Into Consent Order With Credit Reporting Agency Over Alleged Misrepresentations

On March 23, the CFPB announced that it had entered into a consent order with a California-based credit reporting agency (CRA) and its subsidiaries, resolving allegations that the CRA deceived consumers by misrepresenting that the credit score reports that it marketed to consumers were used by lenders in determining a consumer’s credit worthiness. View the Enforcement Watch blog post.

FTC Issues Order Against Debt Relief Company for Alleged Misrepresentations

On February 27, the FTC entered into a stipulated order for permanent injunction and monetary judgment with defendants United Debt Counselors, LLC, a debt relief company, and its principals, banning the defendants from making misrepresentations about financial products and services and requiring the defendants to pay a $9 million penalty. The order concerns the FTC’s allegations that defendants—through mail advertisements and statements on their website and via telephone—misrepresented how much consumers’ credit card debt would be reduced when using the defendants’ services. View the LenderLaw Watch blog post.

Client Alert: Massachusetts Supreme Judicial Court Clarifies the Requirements for Shareholder Inspection Demands

In Chitwood v. Vertex Pharm. Inc., SJC-12101 (March 20, 2017), the Massachusetts Supreme Judicial Court (SJC) provided important guidance on the scope of the Massachusetts shareholder inspection statute, Mass. G.L. 156D § 16.02, as well as the requirements for a shareholder who makes a demand pursuant to the statute. The case is noteworthy as the SJC’s first-ever decision concerning the requirements of the Massachusetts inspection statute, and Massachusetts companies and practitioners will want to take careful note of the key distinctions between Massachusetts and Delaware law in this area, as highlighted by the Court’s opinion. Goodwin served as counsel to Vertex Pharmaceuticals Inc. (Vertex) in the case. For more information, view the client alert issued by Goodwin’s Securities Litigation and White Collar Defense Group.