Financial Services Weekly News - August 2017

by Goodwin


Editor's Note

In This Issue. The Office of the Comptroller of the Currency (OCC) announced that it was seeking public comments on revising the Volcker Rule; the Securities and Exchange Commission (SEC) offered a window into its regulatory agenda for the coming year and provided much anticipated guidance on token sales; the Federal Deposit Insurance Corporation (FDIC) released its updated risk management manual of examination policies; and state attorneys general and district courts moved forward with enforcement actions against a host of debt collectors and lenders. These and other recent developments are covered below.

Regulatory Developments

OCC Solicits Public Comments on Revising the Volcker Rule

On August 2, the OCC announced that it was seeking public comment on revising the final regulation implementing section 619 of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (commonly known as the Volcker Rule) in order to better accomplish the purposes of the rule while decreasing the compliance burden on banking entities and fostering economic growth. In particular, the OCC has solicited input on ways to tailor the rule’s requirements and clarify key provisions that define prohibited and permissible activities. The OCC also seeks input on how the federal regulatory agencies could implement the existing rule more effectively without revising the regulation. The public is invited to provide supporting data that can inform specific changes to the regulation, and help assess the effectiveness of implementation efforts to date. The OCC has requested that respondents provide any comments within 45 days of publication in the Federal Register.

SEC Regulatory Agenda Update Offers Potential Insights into 2017-2018 SEC Rulemaking

The Office of Information and Regulatory Affairs, which is part of the Office of Management and Budget, recently published an updated regulatory agenda identifying rulemaking projects that the SEC intends to propose or adopt during the next year, as well as those the SEC has designated as “long-term actions.” The regulatory agenda is not binding in any way on the SEC, and its predictive value has historically been modest. The current SEC regulatory agenda may be of even less predictive value than usual because it reflects the priorities of then-Acting Chairman Piwowar as of March 2017, and may not reflect the current priorities of SEC Chairman Clayton, who was confirmed in May 2017. However, public statements by representatives of the new administration and members of the Republican majority in both chambers of Congress have highlighted changes in regulatory policies that have resulted in increased interest in the status of SEC rulemaking projects, especially the still-pending proposals relating to executive compensation matters under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Key developments include: 

  • The compensation-related disclosure rulemaking proposals relating to pay for performance, executive compensation clawbacks and hedging policy disclosure that the SEC proposed in 2015 under the Dodd-Frank Wall Street Reform and Consumer Protection Act are now listed as “long-term actions” (rather than “final rule stage,” as previously listed), indicating an unspecified timeframe for SEC action. Note that the SEC has previously adopted the CEO pay ratio disclosure rule in final form and, notwithstanding various statements that suggested potential action to defer or prevent the effectiveness of this rule, the CEO pay ratio disclosure rule is currently on track to require disclosure of 2017 compensation in 2018 proxy statements for many companies.
  • The SEC rulemaking projects relating to universal proxy cards, corporate board diversity disclosure and Regulation D/Form D disclosure enhancement are now among those listed as long-term actions.
  • The SEC rulemaking initiatives relating to disclosure updates and simplification, simplification of emerging growth company disclosure requirements and Form S-1 forward incorporation by reference for smaller reporting companies, revision of the smaller reporting company definition, Form 10-K summaries, and additional audit committee disclosures are among those that continue to be shown as “final rule stage” or “proposed rule stage” in the current SEC regulatory agenda.

Client Alert: Reminder: SEC Exhibit Hyperlink and HTML Format Rules Become Effective September 1

Beginning September 1, 2017, rules adopted in March 2017 by the SEC will require companies to include active hyperlinks to exhibits in most reports filed with the SEC under the Securities Exchange Act of 1934 (Exchange Act) and most registration statements filed under the Securities Act of 1933 (Securities Act). This applies to exhibits filed with the report or registration statement as well as exhibits incorporated by reference to prior filings. The final rules will also require companies to file most registration statements and reports in HTML format, rather than ASCII. Although the first periodic report affected by the new rules for companies with a calendar year end will be the Form 10-Q report for the third quarter, the new rules apply to most reports and registration statements, including Form 8-K reports. For more information, view the client alert issued by Goodwin’s Public Companies practice.

Client Alert: SEC Issues Long-Awaited Guidance on Token Sales

The SEC announced on July 25 that Initial Coin Offerings (ICOs) and other market participants offering digital assets by “virtual” organizations may be subject to the requirements of federal securities laws. The SEC made clear that simply because there is new technology involved, the SEC still looks at the conduct involved to determine whether a security has been issued. The SEC guidance was issued as part of its investigative report into DAO Tokens where it concluded that such tokens were of a character as to fall under the definition of a security under current law. The implications of the ruling are broad and still somewhat unknown, as the SEC left the door open to the possibility that not all tokens may constitute securities, but also stated that “[t]hose participating in unregistered offerings also may be liable for violations of the securities laws.” Unfortunately, the guidance did not provide significant further insight into the SEC’s view as to when a token sale crosses over the line to becoming a security. The SEC’s full decision and related releases can be found here. For more information, view the client alert issued by Goodwin’s Digital Currency and Blockchain Technology practice.

FDIC Updates Risk Management Manual of Examination Policies

On July 26, the FDIC released revisions to the FDIC Risk Management Manual of Examination Policies (Manual). In accordance with July 29, 2016, guidance from the FDIC Board of Directors, the Manual revisions focus on instructions to examiners regarding supervisory recommendations and reports of examination. In general, supervisory recommendations are not enforcement actions, but are intended to inform the bank of changes the FDIC believes are needed in its practices, operations, or financial condition. The Manual revisions instruct examiners to ensure supervisory recommendations address meaningful considerations, are communicated clearly in writing and discuss corrective action. The Manual revisions also instruct examiners on how to present supervisory recommendations in their reports, and how to update certain schedules to the report of examination. A “Bank of Anytown” illustration demonstrates the revised instructions.

Client Alert: The General Data Protection Regulation – Top 10 Considerations

The clock is ticking and in less than a year the European Union (EU) General Data Protection Regulation (GDPR) will be in full force. Companies should be getting ready now in order to avoid hefty fines for violations (up to 20 million euros or 4% of global annual revenues, whichever is higher). Transparency and accountability are at the core of the GDPR. Accordingly, it is imperative that companies know their data assets, perform comprehensive assessments of their data policies and practices, implement processes for addressing new data subject rights, implement data breach reporting protocol, and review vendor agreements and renegotiate terms as necessary to align with the GDPR. For more information, view the client alert issued by Goodwin’s Privacy and Cybersecurity practice.

Enforcement & Litigation

Virginia AG Obtains $480,000 Settlement With Small-Dollar Lender

On July 25, the Virginia Attorney General’s Office (Virginia AG) announced that it had reached a settlement with a small-dollar open-end credit lender. According to the Virginia AG, the lender offered open-end cash advances, both at a storefront and online, through short-term loans with interest rates as high as 240%, often in small amounts and to less advantaged consumers. View the Enforcement Watch blog post.

Debt Collector Ordered to Pay $25 Million to State of Texas for Illegal Debt Collection Practices

On July 11, Texas Attorney General Ken Paxton secured a $25 million judgment and permanent injunction against a portfolio management company and a small law office for violations of the Texas Debt Collection Act, Texas Deceptive Trade Practices-Consumer Protection Act, and Identity Theft Protection and Enforcement Act. View the Enforcement Watch blog post.

FTC Obtains Temporary Restraining Order Freezing Assets of Debt Collection Operation

On July 10, 2017, the U.S. District Court for the Middle District of Florida entered a temporary restraining order (TRO) halting operations and freezing the assets of a debt collection operation, at the request of the Federal Trade Commission (FTC). The FTC charged the defendant company and individuals with violating Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), and the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. §§ 1692-1692p. The FTC alleged that the debt collectors called consumers without identifying themselves as debt collectors and falsely told consumers that criminal actions were being commenced against them. According to the FTC, the callers posed as attorneys and coerced a number of consumers to pay phantom debts in order to avoid arrest.  The FTC further alleged that the defendants posed as legitimate small businesses, which may have harmed those entities’ reputations and customer relations. View the Enforcement Watch blog post.

U.S. Attorney Announces Settlement With Florida Condominium Complex Over Alleged FHA Reverse Mortgage Fraud

On July 20, acting United States Attorney Stephen Muldrow announced a civil settlement with the owner of a Florida condominium complex over fraudulent reverse mortgage transactions.  Defendant had been accused of violating the False Claims Act (FCA) and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). View the Enforcement Watch blog post.

New Jersey District Court Considers Expansion of FCRA Liability

On July 17, a New Jersey federal district court heard oral arguments in a motion to dismiss a putative class action lawsuit alleging violations of the Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681a et seq. The FCRA claim in the case, In re: Horizon Healthcare Services Inc. Data Breach Litigation, case no. 2:13-cv-07418 (D.N.J.), arises from a theft suffered by Horizon Healthcare Services, a health insurance provider. The theft occurred when unknown individuals stole Horizon employees’ computers from an office building. The computers contained personal information of Horizon customers, including social security numbers and medical information, although it is unclear whether anyone’s personal information was accessed as a result of the theft. The plaintiffs in the case claim that Horizon intentionally or negligently failed to safeguard customers’ personally identifiable information from unauthorized disclosure, alleging that Horizon kept data unencrypted and otherwise handled data improperly and not in accordance with current cybersecurity best practices. View the LenderLaw Watch blog post.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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