Good News, Bad News. Key developments in federal securities laws have recently brought both good news and bad news for current and prospective public companies. First, the Securities and Exchange Commission (SEC) announced a proposal to expand the current exemption for “testing the waters” to all companies. Proposed Rule 163B would permit prospective issuers, whether or not they qualify as emerging growth companies, to engage in discussions with qualified institutional buyers or institutional accredited investors to assess investor interest before the company commits the time and expenses necessary for a potential securities offering. On the other hand, several recently filed shareholder suits show there is a heightened scrutiny of routine proxy disclosures in order to challenge non-employee director compensation. In light of this trend, during the upcoming proxy season, particular attention should be paid to proxy disclosures concerning director compensation. Additional details about these key developments, as well as other actions taken by the Federal Deposit Insurance Corporation (FDIC), Consumer Financial Protection Bureau (CFPB), and SEC, are discussed in more detail below.
FDIC Proposes Assessing Users of Community Bank Leverage Ratio as Small Banks
On February 21, the FDIC published a notice of proposed rulemaking (Rule) in the Federal Register seeking public comment on a proposal that would assess banks that elect to use the Community Bank Leverage Ratio (CBLR) framework as small banks for deposit insurance purposes. CBLR banks would be able to choose to use either CBLR tangible equity or tier 1 capital for their assessment base calculation, and either the CBLR or the tier 1 leverage ratio for the Leverage Ratio that the FDIC uses to calculate an established small bank's assessment rate. The Rule would also implement technical amendments and clarify that a custodian bank would not have to change its custodial bank deduction or reporting items related to the deduction. The FDIC intends to provide an online tool to help estimate assessments under the Rule. Comments on the Rule must be received on or before April 22, 2019.
As previously reported in the November 28, 2018 edition of the Roundup, the proposed CBLR framework would allow qualifying community banking organizations with a leverage capital ratio of at least 9% to elect an exemption from the complex Basel III capital requirements and be deemed to be well capitalized for purposes of the federal banking agencies’ prompt corrective action framework. The CBLR framework is mandated by Section 201 of S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, which directed federal banking agencies to set a community bank leverage ratio between 8% and 10%. Due to delays caused by the recent government shutdown, the comment period for the proposed CBLR framework remains open, and comments on it must be received on or before April 9, 2019.
FDIC Adopts Revised Examination Procedures for Prepaid Accounts Rule
On February 22, the FDIC announced the adoption of revised interagency examination procedures to incorporate the CFPB’s amendments to Regulation E and Regulation Z to enhance consumer protections for prepaid accounts (Prepaid Account Rules). The Prepaid Account Rules address consumer protections, pre-acquisition and other disclosures, limitations on liability and error resolution requirements, periodic statements, and new requirements requiring the posting and submission to the CFPB of prepaid account agreements. The FDIC’s examiners will use the updated interagency examination procedures to evaluate financial institutions' compliance with the Prepaid Account Rules, effective April 1, 2019.
CFPB Releases Small Entity Compliance Guide for Payday Lending Rule
The CFPB has released its small entity compliance guide (Guide): “Payday, Vehicle Title, and High-Cost Installment Lending Rule: Payment-Related Requirements.” The Guide’s aim is to provide information that may be helpful for payday lenders when implementing the payment-related requirements of the Payday Lending Rule (Rule). The CFPB issued the final Rule in October 2017, which governs personal loans with short-term or balloon-payment structures and certain additional installment loan products. The CFPB this month issued a subsequent notice of proposed rule-making, which reconsidered the mandatory underwriting provisions of the Rule. In addition to the information regarding payment-related requirements, the Guide also provides information on the Rule’s general provisions, record retention, and compliance. The Guide does not provide guidance on the underwriting provisions, but the CFPB plans to update the Guide to include such guidance once the underwriting provisions are fully considered.
SEC’s OCIE Issues Risk Alert on Transfer Agent Safeguarding of Funds and Securities
On February 13, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a risk alert highlighting certain issues associated with paying agent activities conducted by transfer agents (TAs), including significant deficiencies identified across examinations of 75 TAs between October 2014 and September 2017. Those deficiencies can be generally grouped into two categories: (i) safeguarding of funds and securities (the Safeguarding Rule) and (ii) notification to unresponsive payees and policies for lost securityholder searches (the Lost Securityholder/Unresponsive Payee Rule). Regarding the Safeguarding Rule, deficiencies were identified around misappropriation and theft; insufficient policies, procedures, and controls; inadequate account reconciliation procedures; and deficient security protocols. Regarding the Lost Securityholder/Unresponsive Payee Rule, deficiencies were identified around noncompliant securityholder search practices; missing or late notifications to unresponsive payees; and inadequate policies and procedures. The OCIE also highlighted some key features of robust policies and procedures it saw during examinations, including specific practices around safeguarding funds, safeguarding physical securities, and managing contact with/procedures related to lost securityholders and unresponsive payees.
Goodwin Alert: SEC Proposes Universal Access to “Testing-the-Waters” Exemption
The SEC has announced a proposal to expand the current exemption for “testing-the-waters” communications — currently limited to emerging growth companies — to all companies, including investment companies. Proposed Rule 163B will permit prospective issuers, regardless of size, to engage in discussions with qualified institutional buyers or institutional accredited investors to assess investor interest before the company commits the time and expenses necessary for a potential securities offering. For more information, read the client alert issued by Goodwin’s practice.
Enforcement & Litigation
Goodwin Alert: Shareholder Suits Target Non-Employee Director Compensation at Public Companies
Recent shareholder suits show there is a heightened scrutiny of routine proxy disclosures in order to challenge non-employee director compensation. Plaintiffs’ attorneys are focusing on non-employee director compensation and compensation plans, particularly in comparison to peer companies – a trend that was expected following the late-2017 Delaware Supreme Court decision in In re Investors Bancorp, Inc. Stockholder Litigation. Two cases asserting allegations of excessive director compensation have already been filed in 2019, and at least 10 cases were filed in 2018. In light of this trend, during the upcoming proxy season, particular attention should be paid to proxy disclosures concerning director compensation. For more information, read the client alert issued by Goodwin’s ERISA & Executive Compensation and Securities & Shareholder Litigation practices.
SEC Settles With Gladius Networks for Unregistered ICO; Declines to Issue Monetary Fine Due to Self-Reporting
On February 20, the Enforcement Division of the SEC issued an Order Instituting Cease-And-Desist Proceedings Pursuant To Section 8a Of The Securities Act Of 1933, Making Findings, And Imposing A Cease-And-Desist Order against Gladius Network LLC (Gladius) for an initial coin offering allegedly conducted in violation of Sections 5(a) and 5(c) of the Securities Act of 1933. Notably, as a result of Gladius self-reporting to the Division of Enforcement in the summer of 2018, cooperating with the investigation, and taking “prompt remedial steps” in response to the staff’s concerns, the SEC did not impose a monetary penalty in connection with this settlement. Read the Digital Currency & Blockchain Perspectives blog post.
Supreme Court Issues Decision on Federal Arbitration Act
On January 15, the U.S. Supreme Court issued an important decision regarding the enforceability of certain arbitration agreements under the Federal Arbitration Act (FAA).In New Prime Inc. v. Oliveira, No. 17-340, the Supreme Court unanimously held that courts should determine whether a contract falls within the “contracts of employment” exception to the FAA before compelling arbitration.The court also held that “contracts of employment” include contracts with independent contractors. Read the LenderLaw Watch blog post.