Financial Services Weekly News - May 2017

by Goodwin


Editor's Note

In This Issue. The Senate confirmed Jay Clayton as the new chairman of the U.S. Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corporation (FDIC) released its final handbook for organizers of de novo banks, the IRS revoked previously issued private letter rulings granted to regulated investment companies, and regulators, including the SEC and the Consumer Financial Protection Bureau (CFPB), handed out a host of enforcement actions to lenders and debt collectors. These and other recent developments are covered below. 

Regulatory Developments

Senate Confirms New SEC Chairman

The U.S. Senate has confirmed Jay Clayton as chairman of the SEC in a 61-37 vote. He replaces Michael Piwowar, who was named acting chairman following the resignation of Mary Jo White in January. Mr. Clayton formerly was a partner at the law firm of Sullivan & Cromwell, LLC, where he advised clients on numerous mergers and initial public offerings.

SEC Staff Provides No-Action Relief for the Creation of ETF Shares for Close-Out Purposes

On April 26, the staff of the SEC’s Division of Trading and Markets issued a no-action letter to Latour Trading LLC, a registered broker-dealer that is a market maker in exchange-traded products (Applicant), relating to the creation of shares for exchange-traded funds (ETFs). Under Rule 204 of Regulation SHO under the Securities Exchange Act of 1934 (Rule 204), a participant (Participant) of a registered clearing agency must (1) deliver securities to a registered clearing agency for clearance and settlement by settlement date, or (2) close-out a “fail to deliver” position at a registered clearing agency in any equity security for a long or short sale transaction in that equity security by borrowing or purchasing securities of like kind and quality. A Participant must close-out a “fail to deliver” position by certain time periods required by Rule 204. In the no-action letter, the SEC staff provided assurances that it would not recommend enforcement action under Rule 204 if the Applicant, after being allocated a portion of a “fail to deliver” position in the securities of an ETF from a Participant, closes out the “fail to deliver” position by submitting irrevocable instructions to create shares in the ETF directly to an authorized participant of the ETF no later than the beginning of regular trading hours on the applicable close-out date, provided certain conditions set forth in the letter are satisfied. The Applicant represented that the proposed ETF share creation approach is consistent with the policy of enforcing the strict close-out requirements of Rule 204 as it requires the Applicant to take affirmative action and irrevocably commit itself to purchase the ETF shares within the timeframes set forth in Rule 204. 

FDIC Releases Final Handbook for Organizers of De Novo Banks

On May 1, the Federal Deposit Insurance Corporation (FDIC) released its final handbook for organizers of de novo banks. As discussed in the January 11 edition of the Roundup, the FDIC had previously proposed, and invited public comment on, the handbook, which is designed to assist de novo bank organizers applying for federal deposit insurance. The final version provides additional clarification sought by commenters. According to the FDIC, the handbook provides a plain language overview of the requirements and considerations significant to the application process, and provides organizers a clear and transparent explanation of the path to obtaining deposit insurance. The handbook offers guidance for navigating the three phases of establishing an insured institution: pre-filing activities, the application process, and pre-opening activities. It provides useful information for organizers of a new depository institution, and reflects comments from organizers and other interested parties during recent industry outreach events. It does not establish new policy or guidance, or modify existing policy or guidance.

Commodity-Linked Note Private Letter Rulings Revoked by the IRS

At least 31 IRS rulings previously granted to regulated investment companies (RICs) with respect to certain equity-linked notes referencing commodities have been revoked. This action by the IRS follows an informal “pause” in granting such rulings in July 2011, and formal announcement in September 2016 of the IRS’s no-rule policy with respect to “any issue relating to the treatment of a corporation as a regulated investment company under section 851 and related provisions that requires a determination whether a financial instrument or position is a security as defined in the Investment Company Act of 1940 (the 1940 Act),” as previously discussed in a client alert. The revoked IRS rulings appear to have relied, at least in part, on determinations by the IRS that the relevant derivatives were 1940 Act securities; the revocation letters state that such rulings are no longer “in accord with the views of the Service.” Discretionary retroactive relief was granted by the IRS, where requested by the relevant funds, limiting the effect of the revocations to new derivatives issued by relevant RICs after June 30, 2017.  Many of the IRS private letters at issue also contained rulings that subpart F income or PFIC inclusions were "qualifying income" for RICs; the subpart F/PFIC rulings would be separately revoked by regulations proposed by the IRS in September 2016, if finalized, as further discussed in our prior client alert. The remaining open question for RICs relying on the retroactive relief granted by the IRS will be in what circumstances their derivatives will be deemed exchanged or reissued under section 1001; “Regulations under section 1001 on the modification of nondebt financial instruments” is a project on the Treasury’s priority guidance plan list for 2016-2017 and could be raised by modifications to the terms of a derivative or changes to the derivative's reference assets.

Enforcement & Litigation

Registered Investment Adviser Settles Charges Resulting from Erroneous Payments

On May 1, William Blair & Company, L.L.C. (the Adviser) settled charges that it negligently used mutual fund assets to pay for (1) distribution and marketing of fund shares outside of a written, board-approved Rule 12b-1 plan and (2) sub-transfer agent (sub-TA) services in excess of board-approved limits, totaling approximately $1.25 million. The SEC alleged that the conduct rendered certain of the William Blair Funds’ (Funds) disclosures concerning payments for distribution and sub-TA services inaccurate. The SEC also alleged that the Adviser failed to fully disclose to the Funds’ Board of Trustees (Board) that the Adviser (and not a third-party service provider) would retain a fee for providing shareholder administration services to the Funds under a shareholder administration services agreement between certain of the Funds and the Adviser. As a result of this conduct, the SEC asserted that the Adviser violated Section 206(2) of the Advisers Act of 1940 and Section 34(b) of the 1940 Act, and caused the Funds to violate Section 12(b) of the 1940 Act and Rule 12b-1 thereunder. Without admitting or denying the SEC’s findings, the Adviser consented to a cease and desist order and a penalty for $4.5 million. The SEC took into consideration the Adviser’s remedial actions after identifying the payment errors, including notifying the Board, reimbursing the Funds with interest and supplementing its practices of providing oversight of payments to financial intermediaries.

CFPB Lawsuit Targets High-Interest Online Lenders

On April 27, the CFPB announced the filing of a suit against four online lenders alleging that the lenders illegally collected debts on invalid loans. The complaint alleged violations of the Consumer Financial Protection Act (CFPA), 12 U.S.C. §§ 5531(a), 5536(a), and 5564(a), and the Truth in Lending Act (TILA), 15 U.S.C. § 1601 et seq., for engaging in unfair, deceptive, or abusive acts and for improper disclosures. View the Enforcement Watch blog post.

CFPB Fines Auto Lender $1.25 Million for Violations of Consent Order

On April 26, the CFPB announced that it reached a consent order with an Ohio-based auto lender that allegedly violated a prior CFPB consent order by failing to properly return $1 million in refunds and credits to its customers. According to the CFPB, the auto lender specializes in auto loans to service members. Under the new order, the auto lender must pay approximately $1.1 million in credits to customers and an additional civil penalty of $1.25 million. View the Enforcement Watch blog post.

President of Debt Collector Ordered to Pay $2 Million for FDCPA Violation

On April 24, Federal Trade Commission (FTC) announced that a federal court ordered the president of a debt collection company to pay $2 million in civil penalties under the Federal Trade Commission Act (FTC Act) and the Fair Debt Collection Practices Act (FDCPA). A judge in the U.S. District Court for the Eastern District of Texas found that the company and the president participated in deceptive acts and practices in violation of the FTC Act, 15 U.S.C. § 45(a), and multiple provisions of the FDCPA, 15 U.S.C. §§ 1692-1692l, by falsely representing themselves as attorneys and improperly threatening debtors with legal actions, such as lawsuits, garnishments, bank levies, and seizures. The action was brought as part of the FTC’s Operation Collection Protection. View the Enforcement Watch blog post.

D.C. Circuit Affirms Denial of the CFPB’s Investigation of a College Accrediting Organization

On April 21, the United States Court of Appeals for the District of Columbia Circuit affirmed the lower court’s decision denying the CFPB’s petition to investigate a college accreditation organization. The Court limited its holding to the particular Civil Investigative Demand (CID), finding that the Notification of Purpose within the CID did not adequately describe the unlawful acts and practices the CFPB intended to investigate. By affirming on the narrow issue, the Court avoided deciding whether the CFPB has authority to investigate the accreditation process. View the Enforcement Watch blog post.

Operation Collection Protection Secures $2 Million Civil Penalty Against President of Debt Collection Company

On April 12, the FTC announced that it had secured a $2 million civil penalty against the president of a debt collection company for violating the Fair Debt Collection Practices Act (FDCPA) in United States v. Commercial Recovery Systems, Inc. — one of over a hundred cases brought in connection with the coordinated effort by the FTC and other enforcement agencies to crack down on abusive debt collectors known as “Operation Collection Protection.” 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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