In This Issue. The Board of Governors of the Federal Reserve System (Federal Reserve) announced that it is seeking public comment on proposed principles for large banking organizations to manage climate-related financial risks; the Consumer Financial Protection Bureau (CFPB) reported on Servicemembers Civil Relief Act (SCRA) protection usage by active duty servicemembers and recommended creditor best practices; the CFPB issued a Notice of Intent to make a preemption determination with respect to whether the Truth in Lending Act (TILA) preempts a New York State commercial financing law; the CFPB published a blog post clarifying the threshold for reporting data on closed-end mortgage loans; the Federal Reserve finalized clarifying and technical updates to its policy governing the provision of intraday credit to healthy depository institutions with accounts at the Federal Reserve Banks; the U.S. Securities and Exchange Commission’s (SEC) Division of Examinations published a Risk Alert to highlight observations from investment adviser and broker-dealers related to compliance with Regulation S-ID; the SEC reopened the comment period on its proposed rule regarding share repurchase disclosure modernization; and the Office of the Comptroller of the Currency (OCC) published its assessment rates for the 2023 calendar year. These and other developments are discussed in more detail below.
Regulatory Developments
Federal Reserve Invites Public Comment on Proposed Principles for Large Banking Organizations to Manage Climate-Related Financial Risks
On December 2, the Federal Reserve announced that it is seeking public comment on soon to be released proposed principles (Principles) intended to provide a high-level framework for the safe and sound management of exposures to climate-related financial risks, physical risks and transition risks for banking organizations having more than $100 billion in total assets. The Principles cover governance; policies, procedures and limits; strategic planning; risk management; data, risk measurement and reporting; and scenario analysis.
The Federal Reserve welcomes comments on all aspects of the Principles, with emphasis on the following questions:
- In what ways, if any, could the Principles be revised to better address challenges a financial institution may face in managing climate-related financial risks?
- Are there areas where the Principles should be more or less specific given the current data availability and understanding of climate-related financial risks? What other aspects of climate-related financial risk management, if any, should the Federal Reserve consider?
- What challenges, if any, could financial institutions face in incorporating the Principles into their risk management frameworks?
The Federal Reserve is keeping the comment period open for 60 days following publications of the Principles in the Federal Register which is expected in the near future.
CFPB Reports on SCRA Protection Usage by Active Duty Servicemembers and Recommends Creditor Best Practices
On December 7, the CFPB released a report revealing that despite protections under the SCRA, including the ability to reduce the interest rate on any pre-service obligations or liabilities to a maximum of 6%, only a small fraction of active duty servicemembers receive interest rate reductions. In response, the CFPB recommended that creditors:
- Apply SCRA interest rate reductions to every account held by a servicemember at an institution, if the servicemember invokes their rights for one account; and
- Automatically apply SCRA rights, even absent a servicemember request, by checking the Defense Manpower Data Center SCRA website monthly to identify borrowers eligible for the SCRA interest rate cap.
“Our analysis suggests that members of the Reserves and the National Guard who serve in active-duty status are not receiving interest rate reductions on their loans pursuant to the law. Given rising interest rates, financial companies should take steps to ensure military family financial rights are respected.”
- CFPB Director Rohit Chopra
CFPB Issues Notice of Intent on TILA Preemption of New York Commercial Financing Law
On December 7, in response to a written request, the CFPB issued a Notice of Intent to make a preemption determination with respect to whether the TILA preempts a New York State commercial financing law. The CFPB’s preliminary determination is that the New York law is not preempted by TILA, because the New York law regulates commercial financing transactions rather than consumer-purpose transactions. The CFPB requests comment on whether it should finalize its preliminary determination that the New York law — as well as potentially similar laws in California, Utah, and Virginia — are not preempted. Comments must be received on or before January 20, 2023.
CFPB Confirms Data Reporting Threshold for Closed-End Mortgage Loans
On December 7, the CFPB published a blog post clarifying that the threshold for reporting data on closed-end mortgage loans is 25 loans in each of the two preceding calendar years, which is the threshold established by the 2015 Home Mortgage Disclosure Act (HMDA) Final Rule, rather than the 100 loan threshold set by the 2020 HMDA Final Rule. This return to the 2015 HMDA Final Rule follows the U.S. District Court for the District of Columbia’s ruling in National Community Reinvestment Coalition (NCRC) et al v. Consumer Financial Protection Bureau (CFPB), which vacated a portion of the 2020 HMDA Final Rule. Recognizing that financial institutions affected by this change may need time to come into compliance with their reporting obligations, the CFPB advised that it does not intend to cite HMDA violations or pursue enforcement actions for failing to report closed-end mortgage loan data collected between 2020 and 2022 for covered institutions that originated at least 25 closed-end mortgage loans in each of the two preceding calendar years but fewer than 100 in either or both of the two preceding calendar years.
Federal Reserve Board Finalizes Updates to Policy on Payment System Risk
On December 2, the Federal Reserve finalized clarifying and technical updates to its policy governing the provision of intraday credit to healthy depository institutions with accounts at Federal Reserve Banks. The updates expand access to collateralized intraday credit under the Policy on Payment System Risk (PSR policy) while providing greater clarity to institutions, streamlining administrative requirements, supporting the launch of the FedNow℠ Service, and simplify and incorporate the related Overnight Overdrafts policy into the PSR policy. The final updates are substantially similar to the proposal issued in May 2021. The final updates related to the deployment of the FedNow℠ Service and the Overnight Overdrafts policy will become effective when Reserve Banks begin processing live transactions for the FedNow℠ Service, which is targeted for launch in May to July 2023.
SEC Publishes Risk Alert Highlighting Observations From Investment Adviser and Broker-Dealers Related to Compliance with Regulation S-ID
On December 5, the SEC Division of Examinations (Division) published a Risk Alert to highlight observations from recent examinations of investment advisers and broker-dealers related to compliance with Regulation S-ID. Regulation S-ID requires the development and implementation of a written identity theft prevention program (Program) for firms (e.g., broker-dealers and investment advisers that qualify as financial institutions or creditors under the Fair Credit Reporting Act) that offer or maintain covered accounts. The Risk Alert highlighted deficiencies, such as: failure to identify covered accounts, including new categories or types of covered accounts, and failure to conduct risk assessments. The Risk Alert also highlighted deficiencies in the establishment of a Program, such as Programs that were not tailored to a firm’s business model and Programs that did not cover all required elements of Regulation S-ID. Other deficiencies highlighted in the Risk Alert include Programs that did not have reasonable policies and procedures to identify relevant red flags for covered accounts or policies and procedures to detect and respond to any red flags that are detected. Lastly, the Risk Alert highlighted deficiencies in the administration of firms’ Programs. The Division staff observed firms that did not appear to provide sufficient information to a board of directors or designated senior management through periodic reports, firms that had inadequate training for employees and firms that did not evaluate controls in place at service providers used to perform services in connection with the covered accounts. The Division encourages broker-dealers and investment advisers to review their practices, policies, and procedures with respect to their identity theft programs and to consider whether any improvements are necessary.
SEC Reopens Comment Period on Share Repurchase Disclosure Modernization Proposed Rule
On December 7, the SEC announced that it has reopened the comment period on the amendments proposed on December 15, 2021 to the rules that require disclosure about an issuer’s repurchases (buybacks) of its equity securities. The public comment period will be open for 30 days after the reopening release is published in the Federal Register. The Goodwin client alert that discusses the proposed amendments is available here.
The SEC press release states that the SEC is reopening the comment period because, after the proposed amendments were published for public comment, The Inflation Reduction Act of 2022 was enacted. The law imposes upon certain corporations a non-deductible excise tax equal to one percent of the fair market value of any stock of the corporation repurchased by such corporation during a taxable year. The SEC staff has prepared a memorandum that discusses potential economic effects of the new excise tax.
OCC Reduces 2023 Assessments on National Banks and Federal Savings Associations
On December 1, the OCC published its assessment rates for the 2023 calendar year. The calendar year 2023 assessment rates include reductions to the general assessment fee schedule of 40% for all banks on their first $200 million in total balance sheet assets, and a 20% reduction for all banks on balance sheet assets above $200 million and up to $20 billion. The calendar year 2023 assessment rates do not include any changes to the 2022 assessment rates for the independent trust and independent credit card fee schedules. The 2023 assessment rates become effective on January 1, 2023, and will be reflected in assessments paid on March 31, 2023, and September 30, 2023.
FINRA, Nasdaq, and NYSE Warn Firms of Pump-And-Dump Schemes Following IPOs of Small-Cap Issuers
FINRA, Nasdaq, and NYSE published separate notices to alert their members about recent observations related to initial public offerings (IPOs) for certain small capitalization (small-cap) issuers listed on US stock exchanges and to remind members, including underwriters and other market participants, regarding associated regulatory obligations. These notices follow recent reports by several news outlets that listings of small-cap companies have been subject to enhanced scrutiny by Nasdaq over the last few months, as well as statements indicating that Nasdaq has halted IPOs of small Chinese companies. That said, Nasdaq has not announced any amendments to its listing rules.
Read the client alert for a breakdown of the warning from these three SROs.
