Regulatory Relief, One Way or Another. It seems that banks may finally be the beneficiaries of meaningful regulatory relief and such relief is coming from several different sources. Yesterday, May 8, 2018, as discussed in more detail below, the House of Representatives passed a resolution of disapproval under the Congressional Review Act (CRA) which, combined with prior action by the Senate, will invalidate the Consumer Financial Protection Bureau’s (CFPB) 2013 indirect auto lending guidance. Meanwhile, leadership changes at the Board of Governors of the Federal Reserve System (Federal Reserve), the Office of the Comptroller of the Currency (OCC), and the CFPB have already delivered regulatory relief in areas such as regulatory capital, financial reporting, appraisal thresholds, mortgage servicing, and prepaid cards, and promise to deliver more with proposed rules on regulatory capital and liquidity pending. Finally, and perhaps most promisingly, House Speaker Paul Ryan announced yesterday that the House will vote on S. 2155, the Senate’s bipartisan financial regulatory relief bill, without amendment, clearing the path for S. 2155 to become law before Memorial Day.  Further, Speaker Ryan and Majority Leader McConnell each announced an agreement to consider an additional regulatory reform package to include provisions with bipartisan support in the House, but which were not included in S. 2155, later this year.

Regulatory Developments

House Votes to Repeal CFPB Indirect Auto Lending Guidance On May 8, by a 234-175 largely party line vote, the U.S. House of Representatives passed a resolution of disapproval (S.J. Res. 57) under the CRA relating to “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” issued by the CFPB. As reported in the April 25 edition of the Roundup, the Senate recently passed an identical resolution of disapproval. Once signed by President Trump, the resolution of disapproval will invalidate the CFPB’s 2013 guidance on indirect auto lending, which imposed limits on how and what indirect lenders pay car dealers who provide financing and how much discretion dealers have to set loan terms and rates.

FINRA Amends Rule 3310 to Conform to FinCEN’s Final Rule on Customer Due Diligence Requirements for Financial Institutions

On May 3, the Financial Industry Regulatory Authority (FINRA) filed for immediate effectiveness amendments to Rule 3310. Rule 3310, FINRA’s Anti-Money Laundering (AML) Compliance Program rule, is amended to reflect the Treasury Department’s Financial Crimes Enforcement Network’s final rule on Customer Due Diligence Requirements for Financial Institutions (CDD Rule). These amendments follow FINRA’s Regulatory Notice 17-40 which provided guidance to member firms regarding their obligations under FINRA Rule 3310 in light of the CDD Rule. The amendments merely codify existing expectations and do not add new requirements. In codifying these expectations, FINRA incorporated into Rule 3310 the ongoing customer due diligence requirement established by the CDD Rule and specifically required FINRA member firms to establish AML programs that, at a minimum, include appropriate risk-based procedures for conducting ongoing customer due diligence. FINRA indicates in its Regulatory Notice 18-19 that these AML programs should include procedures that allow the member firms to (1) understand the nature and purpose of customer relationships for the purpose of developing a customer risk profile, and (2) conduct ongoing monitoring to identify and report suspicious transactions. Member firms should ensure that AML programs are updated to comply with the CDD Rule by May 11, 2018.

SEC Proposes Amendments to Auditor Independence Rules With Respect to Debtor-Creditor Relationships

On May 2, the Securities and Exchange Commission (SEC) issued a proposal to amend its auditor independence rules in a manner that would refocus the analysis that must be conducted to determine whether an auditor is independent when the auditor has a lending relationship with certain shareholders of an audit client at any time during an audit or professional engagement period. The proposed amendments:

• focus the analysis solely on beneficial ownership, rather than on both record and beneficial ownership, to more effectively identify shareholders with “a special and influential role with the issuer”;
• replace the existing 10 percent bright-line shareholder ownership test with a “significant influence” test, which involves a more qualitative analysis of whether a lender has the ability to “exert significant influence” over an auditor’s policies;
• add a “known through reasonable inquiry” standard with respect to identifying beneficial owners of the audit client’s equity securities, given the difficulty of accessing beneficial-ownership records; and
• amend the definition of “audit client” for a fund under audit to exclude funds that otherwise would be considered affiliates of the audit client.

Comments are due by July 9, 2018.

Client Alert: SEC Proposal to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Investment Professionals

On April 18, the SEC voted to propose a package of rulemakings and interpretations designed, in the words of the accompanying press release, “to enhance the quality and transparency of investors’ relationships with investment advisers and broker-dealers while preserving access to a variety of types of advice relationships and investment products.” The proposals consist of:

• A new Regulation Best Interest (Regulation BI), requiring a broker-dealer to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer (Release No. 34-83062);
• Interpretive guidance reaffirming and, in some cases, clarifying the SEC’s views of the fiduciary duty that investment advisers owe to their clients (Release No. IA-4889); and
• A requirement to provide a new short-form relationship summary called Form CRS (for client or customer relationship summary) (Release Nos. 34-83063 and IA-4888).

The SEC invites comment on the proposals. The public comment period will remain open until August 7, 2018. For more information, read the client alert issued by Goodwin’s Financial Industry practice.

Federal Banking Regulators to Host Teleconference on CECL Methodology

The Federal Deposit Insurance Corporation, the OCC, and the Federal Reserve will host an interagency conference call on May 15, 2018, from 1:00 pm to 2:00 pm Eastern Time to address certain proposed changes to their capital rules, including: (1) the definition of a new term, Allowance for Credit Losses; (2) revised definition of carry value for available-for-sale debt securities and purchased credit deteriorated assets; (3) mechanics of the proposed CECL transition provision; and (4) new disclosure and regulatory reporting requirements. A question-and-answer session will follow the presentation. For information on how to participate in the teleconference, please see the Financial Institutions Letter (FIL-23-2018).

Enforcement & Litigation

DOL Announces Temporary Enforcement Policy for Fiduciary Rule

On May 7, the U.S. Department of Labor (DOL) issued a bulletin announcing a temporary enforcement policy related to the DOL’s “Fiduciary Rule” and related exemptions (Rule). To consider possible amendments to the Rule, the DOL had previously delayed the applicability of the best interest contract exemption, principal transaction exemption, and certain prohibited transaction exemption amendments for an extended transition period through July 1, 2019, during which the DOL would not pursue claims against fiduciaries who were working in good faith to comply with the Rule. Expecting a decision from the U.S. Court of Appeals for the Fifth Circuit vacating the Rule and related exemptions in their entirety, the DOL is now permitting institutions to continue to rely on its prior temporary enforcement policy. For the period from June 9, 2017, until after the DOL issues further guidance, the DOL “will not pursue prohibited transactions claims against investment advice fiduciaries who are working diligently and in good faith to comply with the impartial conduct standards for transactions that would have been exempted…or treat such fiduciaries as violating the applicable prohibited transaction rules.” Investment advice fiduciaries may also rely on other applicable exemptions. The DOL is considering the need for other temporary or permanent relief and will consider applications for additional relief.