In This Issue. The Financial Crimes Enforcement Network (FinCEN) Issues Notice of Proposed Rulemaking Regarding Access to Beneficial Ownership Information and Related Safeguards; the Consumer Financial Protection Bureau (CFPB) Proposes Rule to Establish Public Registry of Supervised Nonbanks’ Terms and Conditions; the Board of Governors of the Federal Reserve System (Federal Reserve) and Federal Deposit Insurance Corporation (FDIC) Issue New Asset-Size Thresholds under Community Reinvestment Act (CRA); the CFPB Issues Three Annual Threshold Adjustment Final Rules; the Office of the Comptroller of the Currency (OCC), the Federal Reserve, and the FDIC Issue Revised Interagency Statement to Extend the “Extension of the Revised Statement Regarding Status of Certain Investment Funds and their Portfolio Investments for Purposes of Regulation O and Reporting Requirements under Part 363 of FDIC Regulations”; the Federal Reserve Adopts Final Rule to Implement the Adjustable Interest Rate (LIBOR) Act; and the Federal Reserve Adopts Revised “Guidelines for Appeals of Material Supervisory Determinations.” These and other developments are discussed in more detail below.
FinCEN Issues NPRM Regarding Access to Beneficial Ownership Information and Related Safeguards
On December 15, FinCEN issued a Notice of Proposed Rulemaking (NPRM) that would implement provisions of the Corporate Transparency Act (CTA) that govern the access to and protection of beneficial ownership information. The NPRM follows the final rule that FinCEN issued on September 30, 2022, requiring most corporations, limited liability companies, and other similar entities created in or registered to do business in the United States to report information about their beneficial owners to FinCEN (see the Goodwin alert here). The NPRM proposes regulations that would govern the circumstances under which such information may be disclosed to federal agencies; state, local, tribal, and foreign governments; and financial institutions, and how it must be protected.
The proposed regulations specify how government officials may access beneficial ownership information in order to support law enforcement, national security, and intelligence activities, and how certain financial institutions and their regulators would access such information in order to fulfill customer due diligence requirements and conduct supervision. The NPRM also proposes amendments to the final rule to specify when reporting companies may report FinCEN identifiers associated with entities. Comments to the proposed rule are due within 60 days after being published in the Federal Register.
“In this next step, the proposed rule would provide the highest standards of security and confidentiality while ensuring that the new beneficial ownership database is highly useful to law enforcement agencies in its efforts to combat financial crime. As we drive toward full implementation of the Corporate Transparency Act, we move closer to exposing criminals, corrupt actors, and anyone trying to hide ill-gotten gains in the United States.”
– FinCEN Acting Director, Himamauli Das
CFPB Proposes Rule to Establish Public Registry of Supervised Nonbanks’ Terms and Conditions
On January 11, following a December 2022 proposed rule to establish a registry of nonbank financial institutions, the CFPB proposed another rule that would generally require supervised nonbanks to register annually if they use terms or conditions that waive or limit consumer rights or other legal protections – for example, servicemembers’ legal protections; credit reporting rights; lender liability; unenforceable waivers in mortgage contracts; bankruptcy or complaint rights; any constitutional, statutory, or common law legal protection, right, or defense; time or place for consumers to bring legal actions; class action rights; or arbitration provisions. Both company information and information about the use of the terms and conditions would be published for the CFPB and agencies from all levels of government to consider when prioritizing their supervision and enforcement resources. The public comment period will remain open until the later of 60 days following publication of the proposed rule on the CFPB’s website or 30 days following publication of the proposed rule in the Federal Register.
Federal Reserve and FDIC Issue New Asset-Size Thresholds under CRA
Effective January 1, the Federal Reserve and the FDIC announced updated asset-size thresholds to define certain banks under CRA regulations. The updates to the asset-size thresholds occur annually and apply to the definition of a “small bank” and an “intermediate small bank” and are based on measures of inflation. With the updates, a “small bank” is defined as of December 31 of either of the prior two calendar years, an institution with assets less than $1.503 billion. A “intermediate small bank” is defined as an institution with assets of at least $375 million as of December 31 of both of the prior two calendar years and less than $1.503 billion as of December 31 of either of the prior two calendar years. The classification of the various institutions impact how the institution is examined under the CRA and certain reporting requirements. The final rule can be found here.
CFPB Issues Three Annual Threshold Adjustment Final Rules
On December 27, the CFPB issued three annual threshold adjustment final rules. First, the CFPB increased the asset-size exemption threshold in Regulation C from $50 million to $54 million so that banks, savings associations, and credit unions with assets of $54 million or less as of December 31, 2022 are exempt from collecting data in 2023. Second, the CFPB increased exemption thresholds in Regulation Z for certain creditors and their affiliates that regularly extend covered transactions secured by first liens from $2.336 billion to $2.537 billion and for certain insured depository institutions and insured credit unions with assets of $10 billion or less from $10.473 billion to $11.374 billion. Finally, the CFPB increased the maximum amount of each civil penalty within its jurisdiction; the new maximums will apply to civil penalties assessed after January 15, 2023 associated with violations that occurred November 2, 2015 or later.
Agencies Issue Revised Statement to Extend the Extension of the Revised Statement Regarding Status of Certain Investment Funds and their Portfolio Investments
On December 22, the OCC, the Federal Reserve, and the FDIC (collectively, the agencies) issued a revised interagency statement to extend the “Extension of the Revised Statement Regarding Status of Certain Investment Funds and their Portfolio Investments for Purposes of Regulation O and Reporting Requirements under Part 363 of FDIC Regulations.” Regulation O, 12 CFR 215, places quantitative limits and qualitative restrictions on extensions of credit by banks to executive officers, directors, principal shareholders, and related interests of such persons. Over the past few years, fund complexes have acquired or have approached acquiring more than 10 percent of a class of voting securities of a wide range of public companies, including banks and non-bank companies. The revised interagency statement explains that the agencies will continue to exercise discretion not to take action against banks or against certain companies that sponsor, manage, or advise investment funds and institutional accounts (fund complexes) that become principal shareholders of banks (principal shareholder fund complexes). The discretion relates to certain extensions of credit by banks to portfolio companies of the principal shareholder fund complex (fund complex-controlled portfolio companies) that otherwise would violate Regulation O, 12 CFR 215, provided certain eligibility criteria are satisfied.
Highlights of the statement include that (i) the agencies will continue to exercise discretion in not bringing action against principal shareholder fund complexes and banks for extensions of credit to fund complex-controlled portfolio companies that would otherwise violate Regulation O, provided the principal shareholder fund complexes and banks satisfy certain criteria that ensure the principal shareholder fund complex does not control the bank and (ii) the agencies are providing this no-action position while the Federal Reserve, in consultation with the other agencies, considers whether to amend Regulation O to address this issue.
Federal Reserve Adopts Final Rule to Implement the Adjustable Interest Rate (LIBOR) Act
On December 16, the Federal Reserve adopted a final rule implementing the Adjustable Interest Rate (LIBOR) Act. The final rule established benchmark replacements based on Secured Overnight Financing Rate (SOFR) that will replace LIBOR-based rates in certain financial contracts after June 30, 2023. The final rule will take effect 30 days after publication in the Federal Register.
The London Interbank Offered Rate (LIBOR), the dominant benchmark rate used in financial contracts for decades, will be phased out after June 30, 2023, while many existing financial contracts do not have terms that provide for the use of a clearly defined and practicable replacement benchmark rate after that date. As required by the LIBOR Act, the final rule establishes benchmark replacements for such contracts governed by U.S. law that reference overnight, one-month, three-month, six-month, and 12-month LIBOR. The final rule also ensures that LIBOR contracts adopting a benchmark rate selected by the Federal Reserve will not be interrupted or terminated following LIBOR’s replacement.
Federal Reserve Adopts Revised ‘Guidelines for Appeals of Material Supervisory Determinations’
On December 13, in response to the Federal Reserve’s October 2022 request for comment on proposed changes to Guidelines for Appeals of Material Supervisory Determinations (“Guidelines”), the Federal Reserve adopted revised Guidelines for Appeals of Material Supervisory Determinations (“Guidelines”), incorporating changes proposed by the FDIC as well as further changes incorporating suggestions and addressing concerns raised by commenters.
The revised Guidelines expand and clarify the role of the FDIC’s Ombudsman in the appeals process, adding the Ombudsman to the Supervision Appeals Review Committee (“SARC”) as a non-voting member. Both parties to the appeal will receive materials considered by the SARC on a timely basis, and in time to prepare for a meeting with the SARC, if one is requested, subject to applicable legal limitations. Additionally the revised Guidelines permit institutions to request a stay of a supervisory action or determination from the appropriate Division Director who will have discretion to grant a stay and may grant a stay subject to certain conditions, where appropriate, while an appeal is pending. The Guidelines also provide that decisions regarding a stay must be provided to institutions, in writing, including the reasons for the decision. The revised Guidelines became effective on December 13, 2022.
SEC Staff Issues Important New Guidance on Presentation of Investment-Level Performance Under the Marketing Rule
On January 11, 2023, the staff of the Division of Investment Management at the US Securities and Exchange Commission (“SEC Staff”) updated their Marketing Rule FAQs. A new FAQ appears to impose the net performance presentation requirement at the investment-level (and not just the portfolio-level) under the amended Rule 206(4)-1 under the Investment Advisers Act of 1940 (the new “Marketing Rule”). This FAQ represents the most significant interpretative position that the SEC Staff has taken publicly since the Marketing Rule’s November 4, 2022 compliance date.
Read more about the updated FAQs in a recent client alert.
FINRA Reminds Firms of Trusted Contact Person Requirement, Benefits, and Related Effective Practices
FINRA remains very focused on preventing financial exploitation of seniors and other investors. Firms can expect to see senior investor protection as a key area of focus in the forthcoming 2023 Report on FINRA’s Examination and Risk Monitoring Program, as it has been perennially. In the meantime, FINRA published Regulatory Notice 22-31 reminding members of their regulatory obligations under Rule 4512 with respect to “Trusted Contact Persons” or “TCPs,” explaining the benefits of designating TCPs, and providing resources to educate customers about the role and value of TCPs. Perhaps the most significant section of the notice is the non-exhaustive list of effective practices FINRA provided to assist firms with obtaining TCP information.
Read more about this update here.
SEC Adopts Amendments to Rules Governing Rule 10b5-1 Trading Plans
On December 14, 2022, the Securities and Exchange Commission unanimously adopted final rules relating to Rule 10b5-1 plans. Properly structured, a Rule 10b5-1 plan provides an affirmative defense to Rule 10b-5 liability for insider trading. The SEC adopted the new rules to address its concerns that corporate insiders may be trading under Rule 10b5-1 in ways that harm investors and undermine the integrity of securities markets. The newly-adopted rules implement amendments to the requirements for establishing the Rule 10b5-1 affirmative defense and require enhanced disclosures for trading plans. Trades made pursuant to plans that do not conform to the new requirements will not be entitled to the benefit of the affirmative defense provided by Rule 10b5-1.
Read the client alert for key takeaways.
SEC “Gift” to the Industry: Four Market Structure Proposals, 3-2 Votes (In Part), but No Partridge in a Pear Tree
On December 14, 2022, the SEC proposed four separate equity market structure rulemakings, each of which, if adopted, will have significant effects on the markets and various industry participants. The rulemakings cover proposed new “Regulation Best Execution” (new Exchange Act Rules 1100, 1101, and 1102 establishing a best execution standard and requiring robust policies and procedures for firms engaging in certain conflicted transactions with retail customers); a proposed new “Order Competition Rule” (new Exchange Act Rule 616, including requiring certain retail equity orders to be exposed in auctions before being internalized); amendments to Exchange Act Rule 605 (enhancing broker disclosure of order execution information); amendments to Exchange Act Rules 610 and 612 (amending minimum pricing increments and exchange access fee caps and enhancing the transparency of better-priced orders); and amendments to Exchange Act Rule 10b5-1 (including requiring enhanced disclosures related to insider trading plans).
Read the client alert for more information on this topic.