SEC Adopts Broad Exempt Offering Reforms

Goodwin

REGULATORY DEVELOPMENTS

SEC Adopts Broad Exempt Offering Reforms

On November 2, the SEC adopted a series of amendments that will significantly change existing rules governing (1) the integration of offerings, (2) offering/investment limits, (3) communication limitations and (4) eligibility for Regulation Crowdfunding and Regulation A. The amendments will also make various changes that will improve access to offerings under Regulation D, Regulation A and Regulation Crowdfunding. A chart summarizing the amendments is included in the SEC press release and fact sheet, which was released along with the amendments. The amendments will be effective 60 days after publication in the Federal Register, which will likely result in the amendments becoming effective in early February of 2021. The amendments will be discussed in more detail in an upcoming Goodwin client alert.

DOL Finalizes Rule on ESG Investment

On October 30, the DOL finalized a rule revising the longstanding investment duties regulation, generally requiring fiduciaries of ERISA plans or ERISA pooled funds to base investment decisions only on pecuniary factors. Pecuniary factors are defined as those that a fiduciary prudently determines are “expected to have a material effect on the risk and/or return of an investment based on appropriate investment horizons consistent with the investor’s investment objectives and funding policy.” The rule would inhibit fiduciaries from considering environmental, social, governance (ESG) or similar factors (whether in individual investment decisions or investment strategies, screens or policies), which may divert investments from fossil fuel, weapons, gaming and similar industries in favor of industries sensitive to issues like climate change, workforce diversity and inclusion and pay equality. ESG considerations remain permissible in two circumstances: (1) where the ESG considerations are pecuniary in nature, and (2) as a “tie breaker” where pecuniary considerations do not produce a “winner” among reasonably available investment alternatives. Additional conditions apply to the second circumstance that may substantially limit its use. While the rule governs only ERISA plans and ERISA pooled funds, it will affect those investors’ choices of other investments, including both registered and private funds, dampening, if not eliminating, interest in funds that expressly employ ESG strategies, screens or other considerations for non-pecuniary purposes (e.g., funds that pursue a “double bottom line”). Funds that employ ESG considerations only for pecuniary purposes but do not make that practice clear in fund disclosures should revisit them. The rule takes effect 60 days after publication in the Federal Register.

SEC Updates Regulatory Framework for Registered Fund Derivative Investments

On October 28, the SEC adopted new Rule 18f-4 (the Derivatives Rule) under the Investment Company Act of 1940 (1940 Act) relating to registered funds’ (excluding money market funds) use of derivatives. Under the Derivatives Rule, funds using derivatives generally will have to: (i) adopt a derivatives risk management program administered by a derivatives risk manager and overseen by the fund’s board of directors, and (ii) comply with an outer limit on fund leverage risk based on value at risk, or “VaR.” Funds that use derivatives only in a limited manner will not be subject to these requirements, but will have to adopt and implement policies and procedures reasonably designed to manage the fund’s derivatives risks. In addition, the SEC amended Rule 6c-11 under the 1940 Act to allow leveraged/inverse ETFs, which rely on derivatives to achieve their investment objectives, to operate without the expense and delay of obtaining an exemptive order if they satisfy the conditions under Rule 6c-11.

Federal Financial Regulatory Agencies Propose Rule to Codify Supervisory Guidance Affirming the Non-Binding Role of Supervisory Guidance

On October 20, the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Federal Reserve), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration, and CFPB (Agencies) issued a notice of proposed rulemaking for a rule intended to confirm that the Agencies will follow and respect the limits of administrative law in carrying out their supervisory responsibilities by affirming that supervisory guidance does not create binding legal obligations for the public, including for supervised institutions. As standard practice, the Agencies issue supervisory guidance in numerous forms about a variety of matters within their purview, such as to clarify or express views or expectations about matters affecting the institutions they supervise. Such supervisory guidance often appears as interagency statements, advisories, bulletins, policy statements, questions and answers, and frequently asked questions. Unlike laws or regulations, supervisory guidance does not undergo formal legislative or administrative rulemaking processes, and it does not have the force of law. Nonetheless, supervised institutions often perceive that Agency examiners enforce supervisory guidance as if it were a law or regulation. In 2018, the Agencies issued a joint statement affirming these basic tenets of administrative law, such that enforcement action should not be taken against a supervised institution on the basis of a violation of or noncompliance with supervisory guidance. Of course, the 2018 statement was itself supervisory guidance. The proposed rule, which includes a revised version of the joint statement, would clarify and codify the principles set forth in 2018’s “guidance on guidance.” Comments on the proposed rule must be received 60 days from publication in the Federal Register.

NYSDFS Outlines Expectations for Managing Climate Risks

On October 29, the NYSDFS issued a letter to state-regulated financial institutions, which provides background information for and outlines the NYSDFS’s expectations regarding climate change risk. The NYSDFS outlines the various physical and transition risks that are brought about by climate change. The letter provides that mortgage loans, commercial real estate loans, agricultural loans and derivatives portfolios are examples of the types of assets that can be at risk due to weather events. In addition, the letter highlights that climate change could, “negatively impact the balance sheets of regulated non-depositories through adverse impact on the businesses of their customers, including their loss of income, as well as any devalued investments due to physical or transition risks.” The letter outlines the NYSDFS’s expectations with respect to regulated organizations and regulated non-depositories including incorporating financial risk from climate change into governance frameworks and risk management processes, and suggests that non-depositories develop strategic plans for the effects of climate change.

CFPB Issues Final Rule to Implement the FDCPA

On October 30, the CFPB issued a final rule regarding the Fair Debt Collection Practices Act (FDCPA). The rule restates and clarifies the FDCPA’s prohibitions on harassment and abuse, false or misleading representations, and unfair practices by debt collectors when communicating with consumers to collect consumer debt, including via text and email. The rule also addresses disputes and record retention, among other topics. Notably, the rule prohibits a debt collector from calling a consumer, in connection with the collection of a particular debt, more than seven times in seven consecutive days or in seven consecutive days of having had a telephone conversation with the consumer about the debt. Debt collectors who communicate with a consumer electronically must, through the same means of electronic communication, accept from the consumer a cease communication request or notification that the consumer refuses to pay the debt. Additionally, those debt collectors communicating with consumers electronically must offer consumers a reasonable and simple method to opt out of electronic communications at a specific email address or telephone number. The CFPB also confirmed that the FDCPA’s prohibition on harassing, oppressive or abusive conduct applies to telephone calls, text, email and other communication media.

The CFPB did not finalize the proposed safe harbor for debt collectors against claims that a lawyer falsely represented his or her involvement in the preparation of a litigation submission. The CFPB plans to issue another debt collection final rule focused on consumer disclosures in December 2020.

CFPB Issues Final Rule Amending Disclosure of Records and Information Regulation

On October 29, the CFPB issued a final rule, revising subparts A and D of section 1070 of title 12 of the Code of Federal Regulations, to clarify defined terms and promote transparency around its practices and anticipated use of confidential information generated and received during the course of its work. Although the CFPB acknowledges that the majority of revisions are clarifications, corrections or technical changes, the CFPB’s final rule offers an analysis of the perceived benefits, costs and impacts of its revisions compared to the status quo.

Fed Announces Actions to Make MSLP Loans Available to Smaller Businesses

On October 30, in an effort to encourage greater participation in the Main Street Lending Program (MSLP), the Federal Reserve announced several actions it has taken to make MSLP loans available to more businesses. Among other things, the Federal Reserve lowered the minimum loan size for three MSLP facilities available to for-profit and nonprofit borrowers from $250,000 to $100,000 and adjusted fees to “encourage the provision of these smaller loans.” The Federal Reserve and the Department of the Treasury also issued a new frequently asked question document clarifying that Paycheck Protection Program (PPP) loans of up to $2 million may be excluded for purposes of determining the maximum loan size under the MSLP, if certain requirements are met, which should also help smaller businesses access MSLP loans.

Joint Agency Paper Offers ‘Sound Practices’ for Operational Resilience

On October 30, the Federal Reserve, OCC and FDIC released an interagency paper outlining sound practices for strengthening operational resilience. Examples of risks to operational resilience include cyberattacks, natural disasters, and pandemics. The "Sound Practices to Strengthen Operational Resilience" paper outlines practices to increase operational resilience that are drawn from existing regulations, guidance, statements and common industry standards. The practices are grounded in effective governance and risk management techniques, consider third-party risks, and include resilient information systems. The paper does not revise the agencies' existing rules or guidance. The practices are for domestic banks with more than $250 billion in total consolidated assets or banks with more than $100 billion in total assets and other risk characteristics.

OCC Issues Final “True Lender” Rule

On October 27, the OCC issued its final True Lender Rule (Final Rule). As LenderLaw Watch previously reported, in July 2020, to resolve the legal uncertainty discouraging many banks and companies from entering into partnerships to offer loans to consumers, the OCC issued its proposed true lender rule to address the question of which entity makes a loan when the “loan is originated as part of a lending partnership involving a bank and a third party.” The Final Rule establishes a test for determining when a bank makes a loan and therefore is the “true lender” in the lending relationship, applying only to national banks and Federal savings associations. Read the LenderLaw Watch blog to learn more about the impact of the OCC’s Final Rule on the financial industry.

LITIGATION AND ENFORCEMENT

CFPB Settles with Auto Lender for Alleged UDAAP Violations

On November 2, the CFPB announced that it had entered into a consent order with a Texas-based auto lender after alleging that the company engaged in deceptive acts and practices in violation of the Consumer Financial Protection Act by falsely claiming that its SMART payment plan would save consumers money. Read the Enforcement Watch blog to learn more about the CFPB’s allegations and the results of the consent order.

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