The OCC Takes Another Step Toward a Limited Purpose FinTech Charter.
On September 13, in a speech
at the Marketplace Lending Policy Summit 2016, Comptroller of the Currency Thomas J. Curry discussed the possible creation of a limited purpose federal banking charter for financial technology, or “FinTech,” firms. As discussed in the April 6
and June 29
editions of the Roundup
, as part of its responsible innovation initiative, the Office of the Comptroller of the Currency (OCC) is exploring whether to grant limited purpose charters to nonbank FinTech firms. In addressing whether innovation should be regulated and by whom, Comptroller Curry stated that a federal banking charter for FinTech firms would resolve this question by establishing the OCC’s supervision over such firms. While acknowledging that the OCC was still evaluating whether to grant limited purpose FinTech charters, Comptroller Curry emphasized that any such limited purpose charter would be characterized by rigorous, bank-like federal regulation and ongoing supervision, consumer protection and fairness. “If we at the OCC do decide to grant limited-purpose charters in this area, the institutions who receive the charters will be held to the same strict standards of safety, soundness, and fairness that other federally chartered institutions must meet,” Comptroller Curry said. “We want a framework that encourages and promotes advances in products, services, and processes that serve consumers, communities, and businesses better and more fairly.” Comptroller Curry’s speech, combined with the OCC’s proposal for receiverships for non-FDIC-insured charters, described below, is a clear signal that the OCC is moving closer toward the creation of a limited purpose FinTech charter.
OCC Proposes Receivership Framework for Uninsured National Banks
On September 13, the OCC issued a proposed rule addressing the conduct of receiverships for national banks that are not insured by the FDIC, such as trust banks and other limited purpose charters, and for which the FDIC would not be appointed as receiver. The proposed rule would implement the provisions of the National Bank Act that provide the legal framework for receiverships of such institutions. Comments are due by November 14, 2016.
Agencies Issue Study on Banking Activities and Investments
On September 8, the Board of Governors of the Federal Reserve System, the FDIC and the OCC released a joint report to Congress and the Financial Stability Oversight Council pursuant to Section 620 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). The report studies the activities in which banking entities (including insured depository institutions, companies that control an insured depository institution or that are treated as bank holding companies for purposes of Section 8 of the International Banking Act of 1978, and affiliates and subsidiaries of such entities) may engage and investments they may make. The report considers not only the types of permissible activities but also their associated risks and corresponding risk mitigation activities. The information is presented in three sections, one for each supervisory agency. The agencies also identify certain regulatory enhancements and areas warranting special attention.
OCC Proposes Rule Prohibiting Bank and Thrift Dealing and Investing in Certain Metals
On September 8, the OCC proposed a rule to prohibit national banks and federal savings associations from dealing and investing in metals in a physical form primarily suited to industrial or commercial uses. Comments on the proposed rule are due 60 days from the date of publication in the Federal Register.
SEC Imposes New Conditions on Liquidity Rick Oversight in Recent Wave of Interfund Lending Exemptive Orders
On September 6, the Securities Exchange Commission (SEC) issued an order (the Order) granting exemptive relief under certain provisions of the Investment Company Act of 1940 (the 1940 Act) to permit registered investment companies (funds) advised by BlackRock Advisors, LLC and BlackRock Fund Advisors to participate in an interfund lending facility pursuant to which each fund will be able to lend money to and borrow money from any other fund for temporary purposes. Under the Order, funds in need of temporary cash to cover unanticipated redemptions and for settlement purposes may borrow through the interfund lending facility at a rate lower than the bank borrowing rate, while funds making loans through the facility would earn interest at a higher rate than they otherwise could obtain from investing in repurchase agreements or certain other short-term money market instruments. Although interfund lending orders are not novel in the fund industry, the Order is one of several in a recent wave of orders in which the SEC has required funds to meet new conditions regarding their portfolio liquidity before participating in an interfund lending facility. In particular, these orders require the fund’s board of trustees, including a majority of the trustees who are not “interested persons” (as defined in the 1940 Act) of the fund, to appropriately assess: (1) if the fund participates as a lender, any effect its participation may have on the fund’s liquidity risk; and (2) if the fund participates as a borrower, whether the fund’s portfolio liquidity is sufficient to satisfy its obligations under the facility along with its other liquidity needs. These additional board oversight responsibilities reflect the SEC’s continued recent focus on effective liquidity risk management for mutual funds, which is expected to result in a comprehensive package of SEC rule reforms later in 2016.
OCIE to Conduct Examinations of Registered Investment Advisers That Employ or Contract With Previously Disciplined Supervised Persons
On September 12, the staff of the Office of Compliance Inspections and Examination (OCIE), in coordination with other SEC staff, issued a Risk Alert announcing OCIE’s new initiative to examine the supervision practices and compliance programs of registered investment advisers (RIAs) that employ or hire individuals with a history of disciplinary events in the financial services sector (the Supervision Initiative). The Supervision Initiative will assess the practices adopted by RIAs related to the supervision of individuals with a history of disciplinary events that may pose increased risks to advisory clients. In particular, examiners will focus on the following key risk areas: (1) the RIA’s compliance program, including practices surrounding the hiring process, ongoing reporting obligations, employee oversight practices, and complaint handling process; (2) the RIA’s public disclosure of regulatory, disciplinary or other related actions, with a focus on assessing the accuracy, adequacy and effectiveness of such disclosures; (3) the conflicts of interest that an RIA or supervised person may have that could affect the advisory relationship, with particular attention given to conflicts that may exist with respect to financial arrangements (e.g., unique products, services or discounts) initiated by supervised persons with disciplinary events; and (4) the RIA’s marketing and advertising materials, with a focus on identifying any conflicts of interest or risks associated with supervised persons with a history of disciplinary events. With respect to identifying exam candidates under the Supervision Initiative, the staff is evaluating information from a variety of sources, including SEC databases and filings and external sources (e.g., disciplinary information reported on an RIA’s Form ADV). As stated in the Risk Alert, OCIE staff hopes to encourage RIAs to reflect upon their own risks, practices, policies and procedures in the areas identified above and to consider making improvements in their compliance programs where necessary.
Client Alert: Mutual Funds Should Consider Accelerating Filings in Advance of Substantial Increase in SEC Registration Fee Rate
As a result of upcoming increases in securities registration fee rates applicable to mutual funds, funds with fiscal year ends of July or August and net sales should consider accelerating their annual Rule 24f-2 filings. To learn more, read the client alert issued by Goodwin’s Investment Management practice.
CFPB Monthly Complaint Snapshot Brings Bank Accounts Into Focus
On August 31, the Consumer Financial Protection Bureau (CFPB) released its Monthly Complaint Report for August 2016, this month focusing on complaints concerning bank accounts and related services. The report, which compiles data from the CFPB’s complaint database to compare consumer complaints by subject, geography, and company on a year-over-year basis, identifies trends that can aid institutions in anticipating what issues or geographies may need additional attention. View the full article on LenderLawWatch.com.
Enforcement & Litigation
U.S. District Court Adopts Predominant Economic Interest Test For Determining True Lender
The most significant challenges faced by online marketplace lenders and their bank partners using the bank partnership origination model center on the bank being viewed as the “true lender.” Courts and regulators look to the substance, not the form, of the arrangement in making this determination. On August 31, in Consumer Financial Protection Bureau v. CashCall, Inc., the U.S. District Court for the Central District of California adopted the "predominant economic interest" test for determining "the true lender" in a case involving a tribal model of installment lending. The court emphasized that the “key and most determinative” true lender factor is whether the lender “placed its own money at risk at any time during the transactions, or whether the entire monetary burden and risk of the loan program was borne by [the other party in the arrangement].” For additional details regarding the building blocks of the true lender analysis, see the most recent edition of the FinTech Flash published by Goodwin’s FinTech practice.
CFPB Fines a National Bank $100 Million
On September 8, the CFPB announced that, pursuant to a Consent Order, a national bank agreed to make full restitution to consumers and pay the CFPB a $100 million fine because many of its employees allegedly engaged in an illegal practice of opening unauthorized deposit and credit card accounts on behalf of consumers in order to obtain financial compensation for meeting sales targets. The fine is the largest in the CFPB's history. The bank will also pay an additional $35 million fine to the OCC and $50 million to the City and County of Los Angeles, for a total of $185 million in fines. According to the Consent Order, many employees engaged in “simulated funding,” whereby they would open deposit accounts “without consumers’ knowledge or consent and then transfer funds from the consumers' authorized accounts to temporarily fund the unauthorized accounts in a manner sufficient for the employees to obtain credit under the incentive-compensation program.” The bank terminated roughly 5,300 employees for engaging in these improper sales practices. These employees also “submitted applications for and obtained credit cards for consumers” and “enrolled consumers in online-banking services without their knowledge or consent.” According to the bank’s analysis, as many as 1.5 million deposit accounts and 565,000 credit cards may have been opened without authorization. Some of these deposit accounts and credit cards incurred fees, which the bank is in the process of refunding. In addition to paying monetary relief, the bank also agreed to engage an independent consultant to conduct an independent review of the bank’s sales practices. The bank agreed to the stipulated consent order without admitting or denying the findings of fact and conclusions of law, except as necessary to establish the CFPB’s jurisdiction. A separate OCC Consent Order additionally “requires the bank to take corrective action to establish an enterprise-wide sales practices risk management and oversight program to detect and prevent unsafe or unsound sales practices.”
Eleventh Circuit Invalidates Another Western Sky Arbitration Clause
On August 29, the Eleventh Circuit upheld a Northern District of Georgia decision invalidating an arbitration clause in Jessica Parm v. National Bank of California, N.A. (Docket No. 15-12509). Defendant National Bank of California (National Bank) argued that plaintiff Jessica Parm’s (Parm) payday loan contract compelled her to arbitrate her claims individually with National Bank. The Eleventh Circuit disagreed, however, finding that the arbitration clause was illusory because the chosen arbitration forum was unavailable, and refused to dismiss the putative class on the basis that Parm was required to arbitrate her claims. View the full article on LenderLawWatch.com.
ICBA Sues NCUA Over Commercial lending Rule
On September 7, the Independent Community Bankers of America (ICBA) filed a lawsuit against the National Credit Union Administration (NCUA) challenging its final rule on credit union business lending. The ICBA asserted that the final rule would allow credit unions to exceed limitations on commercial lending activity established by Congress while at the same time relaxing regulatory oversight – putting consumers and the financial system at risk. By allowing a credit union to exclude nonmember commercial loans or participations from its calculation of the member business loan cap, the ICBA alleged that the NCUA has provided the credit union industry with a huge loophole it can easily exploit to increase commercial lending in violation of the Federal Credit Union Act, as amended by the Credit Union Membership Access Act. The NCUA has not commented on the lawsuit, citing its policy of not commenting on litigation.