Financial Services Weekly News - October 2016 #2

by Goodwin


Editor's Note

Never Satisfied. Despite the Securities and Exchange Commission’s announcement that, in its just completed fiscal year 2016, it filed a record 868 enforcement actions reprimanding misconduct by companies and their executives and by registrants and gatekeepers under the leadership of Chair Mary Jo White, on Friday, Senator Elizabeth Warren sent a 12-page letter to President Obama urging him to fire Chair White for allegedly undermining his administration’s priorities and ignoring the SEC’s core mission of investor protection because, among other things, she has “refused to develop a political spending disclosure rule despite her clear authority to do so…” Historically, the SEC chair steps down after a national election, which allows the new president to select the leader of the SEC. If Chair White maintains tradition, there will be a new leader to focus on in a few more months. Other recent developments are discussed below.

Regulatory Developments

SEC Proposes T+2 Settlement

On Sept. 28, the SEC voted to propose a rule amendment to shorten the standard settlement cycle for most broker-dealer securities transactions from three business days after the trade date (T+3) to two business days after the trade date (T+2). The proposed amendment is designed to reduce risks that arise from the value and number of unsettled securities transactions prior to the completion of settlement, including credit, market and liquidity risk faced by U.S. market participants. As proposed, the amendment would prohibit, with certain exceptions, a broker-dealer from entering into a contract for the purchase or sale of a security that provides for the payment of funds and delivery of securities later than two business days after the trade date, unless otherwise expressly agreed to by the parties at the time of the transaction. Comments on the proposal are due on or before Dec. 5, 2016.

New York Focuses on Incentive Compensation Practices

On Oct. 11, New York Governor Andrew M. Cuomo and the New York Department of Financial Services (NYDFS) issued guidance admonishing regulated banking institutions to ensure their incentive compensation arrangements do not encourage inappropriate practices. Specifically, regulated banking institutions may not tie employee performance indicators to incentive compensation without implementing effective risk management, oversight and control mechanisms. In the shadow of the fines and penalties levied against  a national bank by the federal government for programs that encouraged employees to boost sales figures, the guidance specifically targets cross selling and referral bonus arrangements. In addition to appropriate internal risk controls, regulated banking institutions should also eliminate inappropriate incentive and performance arrangements; balance the risks and rewards of their incentives and performance benchmarks, lest misalignment encourage employees to take on unwarranted risks; and formalize and document relevant governance and oversight practices. Regulated banking institutions are expected to maintain records documenting the structure, approval process, management and oversight of their incentive compensation arrangements. NYDFS will scrutinize such arrangements during supervisory exams, including mechanisms for identifying and deterring misconduct, participation in frontline business units, risk management and audit, and board of directors’ oversight.

Client Alert: Regulatory Update: SEC Adopts New Requirements for Fund Liquidity Risk Management and Amendments to Permit the Use of “Swing Pricing”

On Oct. 13, the SEC unanimously adopted regulatory changes that require open-end funds, including mutual funds and exchange-traded funds (ETFs), to establish liquidity risk management programs. The SEC also adopted, by a 2-1 vote, rule and form amendments to permit certain open-end funds to use “swing pricing.” For more information, view the client alert prepared by Goodwin’s Investment Management Practice.

Client Alert: The FTC Announces New Rules for Debt in Calculating HSR Reporting, Effective Immediately

On Oct. 6, the Federal Trade Commission announced an immediate change in the way it will treat debt to determine whether any transaction that has not yet closed may require an HSR Act pre-closing notification. Starting Oct. 7, the old rule that new debt taken on by a target does not count for HSR Act purposes is no longer applicable – now, all debt must be taken into account to determine whether the $78.2 million size of transaction threshold is satisfied. For more information, view the client alert prepared by Goodwin’s Antitrust & Competition Practice.

SEC Announces “Tandy” Representations No Longer Needed in Filing Reviews

On Oct. 5, the SEC announced that it would no longer require companies and other legal entities filing documents with the SEC to include “Tandy” representations in their responses to SEC Staff comments on SEC filings. Tandy representations were previously required written acknowledgements that any disclosures were the company’s responsibility and that the company would not raise the SEC review process and acceleration of effectiveness as a defense in any legal proceeding. In the announcement, the SEC explained that while it remains true that companies are responsible for the accuracy and adequacy of the disclosure in their filings, the SEC Staff does not believe that it is necessary for companies to make the affirmative Tandy representations in their filing review correspondence. While Tandy representations will no longer be required or requested, the Staff will instead include the following statement in its comment letters: “We remind you that the company and its management are responsible for the accuracy and adequacy of their disclosures, notwithstanding any review, comments, action or absence of action by the staff.” The SEC stated that this change is effective upon publication of the announcement.

CFPB Updates Small Entity Compliance Guide for TRID Disclosures

The Consumer Financial Protection Bureau (CFPB) has issued an updated small entity compliance guide to the TILA-RESPA integrated disclosures. According to the CFPB, the purpose of the guide is to provide an easy-to-use summary of the CFPB’s TILA-RESPA Rule issued on Dec. 31, 2013. This guide also highlights issues that small creditors, and those that work with them, might find helpful to consider when implementing the TILA-RESPA Rule. The guide incorporates guidance from recent compliance webinars on records retention; construction loans; disclosures of seller-paid costs; and form completion, formatting, revision and delivery, among other topics. The CFPB also issued a revised guide to the Loan Estimate and Closing Disclosure forms.

Enforcement & Litigation

Client Alert: In Long-Awaited Decision, D.C. Circuit Reverses CFPB Enforcement Ruling and Finds CFPB Structure Unconstitutional In Part

On Oct. 11, the D.C. Circuit issued its opinion in PHH Corporation v. Consumer Financial Protection Bureau. In the long-anticipated decision, the court found the CFPB’s structure unconstitutional in insulating the Director from removal by the President, rejected several of the Bureau’s interpretations of RESPA, held the Bureau’s efforts to apply that interpretation retroactively violated due process, and clarified that RESPA’s three-year statute of limitations applies to all the Bureau’s enforcement actions, whether in court or before an administrative law judge. The D.C. Circuit did not invalidate the Bureau in its entirety, holding that the Bureau’s unconstitutional structure could be remedied by severing the unconstitutional tenure provision of the statute. For more information, view the client alert prepared by Goodwin’s Consumer Financial Services Litigation Group.

CFPB Settles With National Credit Union Over Alleged Deceptive Debt Collection Practices

On Oct. 11, the CFPB announced that it entered into a consent order with a national credit union over allegations that the credit union made false and misleading representations to consumers when attempting to collect on past due accounts. The credit union serves military members and their families. The CFPB alleged that the credit union falsely threatened legal action against service members when they became delinquent on credit card accounts or had overdrawn depository accounts. The CFPB determined that because the credit union rarely pursued legal action against service members, the letters sent to service members threatening legal action were false and misleading under the Consumer Financial Protection Act. For more information, view the full Enforcement 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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