No Short-Term Fixes. On February 3, President Trump signed an Executive Order and a Presidential Memorandum intended to provide a framework to “roll back” the Dodd-Frank Act (Dodd-Frank) and to review the Fiduciary Rule previously adopted by the Department of Labor and scheduled to become operative on April 10, 2017. Additional details about the Executive Order and Presidential Memorandum can be found below. While each executive action directs the affected administrative agencies to review various regulations and report as to whether they are consistent with the framework enunciated in such executive action, neither changes any law or regulation on its own. The Presidential Memorandum does not modify the Fiduciary Rule or delay its operative date. Similarly, the Executive Order on Dodd-Frank requires the Treasury Secretary to consult with heads of the member agencies of the Financial Stability Oversight Council (FSOC) and report within 120 days as to whether existing laws (not just Dodd-Frank) meet the president’s seven Core Principles for regulation of the financial system set forth in the Executive Order. Nevertheless, the executive actions, particularly when combined with the president’s January 30 executive order (covered in the February 1 edition of the Roundup) designed to reduce the regulatory burden on American businesses and control regulatory costs, makes it clear that regulatory relief is a priority of the Trump administration and lays the groundwork for future regulatory relief initiatives. However, there is only so much that a president can do to bring about regulatory reform on his own. Certain regulatory relief initiatives, such as repeal of the Volcker Rule or the Durbin Amendment, require legislative action that may be difficult to achieve in the Senate given Democratic opposition to any roll back of Dodd-Frank. In addition, amending or repealing the regulations adopted in response to Dodd-Frank would require the cooperation of the affected financial regulatory agencies, many of which are headed by persons appointed to fixed terms by President Obama. Therefore, the Trump administration may have difficulty effecting any significant regulatory change in the short term and its ultimate success in reducing the regulatory burden on the financial services industry may depend more on personnel changes and the adoption of new supervisory and enforcement policies at financial regulatory agencies.
White House Releases Presidential Memorandum Ordering Review of Fiduciary Rule
On February 3, the White House released a Presidential Memorandum that may potentially lead to a delay and/or rescission of the Fiduciary Rule. As discussed in a previous client alert, the Fiduciary Rule was finalized in April of 2016 and scheduled to become operative on April 10, 2017. Under the rule, financial advisers providing recommendations with respect to retirement assets are to be held to a “fiduciary” standard of care and ERISA’s prohibited transaction rules. In anticipation of the April 2017 implementation, many firms in the advisory, brokerage and insurance industries have made significant changes to their products and fee structures, in some cases exiting the sector entirely. Proponents have argued that the Fiduciary Rule is necessary to ensure that financial advisers act in their clients’ best interest when they give retirement investment advice. Industry advocates have argued that having fewer advisers offering services in this space actually hurts smaller investors, who now will have fewer choices when shopping for retirement investment advice.
The Presidential Memorandum directs the Department of Labor (DOL) to examine the Fiduciary Rule “to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.” In particular, the DOL is instructed to consider whether investors will be harmed by reduced access to financial advice, services and investments related to retirement, whether the rule has resulted in “dislocations or disruptions” in the retirement services industry that may adversely affect investors or retirees, and whether the rule is likely to cause an increase in litigation, increasing the price investors and retirees pay for such services. If, after following the above considerations, the DOL makes affirmative findings, it is instructed to publish (for notice and comment) a new proposed rule rescinding or revising the Fiduciary Rule. Given the considerations outlined by the Presidential Memorandum, there is a significant chance that the Fiduciary Rule as currently drafted does not become operative in April as scheduled.
President Trump Issues Executive Order Directing Review of U.S. Financial Regulations
On February 3, President Trump signed an executive order (Order) entitled “Core Principles for Regulating the United States Financial System.” The Order begins by stating that it shall be the policy of the Trump administration to regulate the U.S. financial system in a manner consistent with seven “Core Principles” of regulation, namely to: empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth; prevent taxpayer-funded bailouts; foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry; enable American companies to be competitive with foreign firms in domestic and foreign markets; advance American interests in international financial regulatory negotiations and meetings; make regulation efficient, effective, and appropriately tailored; and restore public accountability within federal financial regulatory agencies and rationalize the federal financial regulatory framework.
The Order goes on to direct the Secretary of the Treasury to consult with the heads of the member agencies of the FSOC (the Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Securities and Exchange Commission (SEC), the Treasury Department and the Consumer Financial Protection Bureau (CFPB)) and report to the president within 120 days of the Order as to which existing laws and regulations comport with the Core Principles, and which inhibit them. Although not named specifically, regulations adopted in response to Dodd-Frank are likely to receive a holistic review as a result of the Order.
SEC Issues Risk Alert Regarding the Five Most Frequent Compliance Topics Identified in OCIE Examinations of Investment Advisers
On February 7, the Office of Compliance Inspections and Examinations of the SEC issued an SEC Risk Alert (Risk Alert) discussing the compliance topics most frequently identified in deficiency letters that were sent to SEC-registered investment advisers (advisers). The five compliance topics addressed in this Risk Alert are deficiencies or weaknesses involving: (1) Rule 206(4)-7 (the Compliance Rule) under the Investment Advisers Act of 1940 (the Advisers Act); (2) required regulatory filings; (3) Rule 206(4)-2 under the Advisers Act (the Custody Rule); (4) Rule 204A-1 under the Advisers Act (the Code of Ethics Rule); and (5) Rule 204-2 under the Advisers Act (the Books and Records Rule). Each of these topics discusses examples of typical deficiencies in order to highlight the risks and issues that examiners commonly identified. The SEC recommends that advisers review their compliance programs and practices in light of the topics noted in the Risk Alert.
Federal Reserve Releases Scenarios for 2017 CCAR and Dodd-Frank Stress Tests
On February 3, the Federal Reserve Board released the scenarios to be used by banks and bank supervisors for the 2017 Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank stress test exercises. CCAR evaluates the capital planning process and capital adequacy of the largest U.S.-based bank holding companies. This year, 13 of the largest and most complex bank holding companies will be subject to both a quantitative evaluation of their capital adequacy and a qualitative evaluation of their capital planning capabilities. Twenty-one bank holding companies with less complex operations will no longer be subject to the qualitative portion of CCAR. Bank holding companies participating in CCAR are required to submit their capital plans and stress testing results to the Federal Reserve by April 5, 2017. The Federal Reserve will announce the results of its supervisory stress tests by June 30, 2017.
Enforcement & Litigation
Goodwin Releases 2016 Consumer Finance Year in Review
On February 2, Goodwin released the 2016 Consumer Finance Year in Review, a detailed report that highlights the major litigation, enforcement and regulations that impacted the consumer finance industry in 2016. The second annual report, produced by the firm’s Financial Industry and Consumer Financial Services Litigation groups, is one of the few in the industry that takes an in-depth view of the issues, trends and regulatory developments across a variety of sectors, including mortgage servicing, credit and prepaid cards, credit reporting, student lending, auto lending, debt collection, and payday lending, among others. The report can be accessed through the LenderLaw Watch and Enforcement Watch blogs.
Ninth Circuit: Trustees Are Not “Debt Collectors” Under the FDCPA
A recent decision by the Ninth Circuit has created a circuit split regarding the interpretation of the Fair Debt Collection Practices Act (FDCPA). In Vien-Phung Ho v. ReconTrust Co. et al., case no. 10-56884, the court held that the trustee of a California deed of trust is not a “debt collector” under the statute. This decision is in direct conflict with holdings from the Fourth and Sixth Circuits, which have held that a trustee is a “debt collector” under the FDCPA. See Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 378–79 (4th Cir. 2006); Glazer v. Chase Home Fin. LLC, 704 F.3d 453, 461 (6th Cir. 2013). View the LenderLaw Watch blog post.
Small Dollar Lender to Refund Virginia Consumers Over $15 Million
On January 31, the Attorney General for the Commonwealth of Virginia (VA AG) announced that it entered into a settlement with a small dollar loan lender. The lender allegedly engaged into a “rent-a-tribe” scheme through a South Dakota company that held itself out as a Native American business entity. The company purportedly used this “facade” to deceive consumers into believing federal and state law would not apply to any loans it issued. The VA AG asserted that the company violated of the Virginia Consumer Protection Act (VCPA) because the lender charged more than 12% interest on its loans. According to the VA AG, the lender charged as much as 230% interest in some cases. View the Enforcement Watch blog post.
Bitcoin’s Role in the War on Cash
Lawmakers and central banks are in the midst of a movement to gradually diminish and ultimately eliminate the use of cash by their citizens. This global trend comes in all different flavors as over the past year and a half, some countries have eliminated high-value banknotes (India) or restricted ATM usage (China). Others have chosen less intrusive and more bespoke routes, such as allowing cashless donations to the homeless (Amsterdam). The reasons for this push to phase out cash are just as varied – a few are attempting to combat inflation (Venezuela), while the majority, including Singapore, are aiming to prevent money laundering and tax evaders. To these governments in the latter camp, cash is too often used to aid criminal enterprises that thrive under the cloak of anonymity made possible by these cash transactions. However, to citizens across the globe, this ubiquity and obscurity are exactly what make cash so useful. View the Digital Currency Perspectives blog post.
CFPB Files Suit Against Debt Relief Attorneys
On January 30, the CFPB filed a complaint in the United States District Court for the Central District of California against several debt relief law firms and individual attorneys based in Orange County, California and Kansas City, Kansas. The CFPB brought the action under the Telemarketing and Consumer Fraud and Abuse Prevention Act, 15 U.S.C. §§ 6102(c), 6105(d), the Telemarketing Sales Rule (TSR), 16 C.F.R. pt. 310, and Sections 1031(a), 1036(a)(1), 1054, and 1055 of the Consumer Financial Protection Act of 2010 (CFPA), 12 U.S.C. §§ 5531(a), 5536(a)(1), 5564, and 5581 in relation to the defendants’ marketing and sale of debt relief services. View the Enforcement Watch blog post.