US Regulatory Research
Senate Banking Committee Members Send Letter to Fed Chairman Powell Regarding Real-Time Payments
On 22 July, a bipartisan group of five senators on the U.S. Senate Committee on Banking, Housing, and Urban Affairs (“Senate Banking Committee”) sent a letter to Federal Reserve (“Fed”) Chairman Jerome Powell “regarding the Federal Reserve’s October 2018 request for comment (RFC) on ‘actions the Federal Reserve could take to support faster payments in the United States.’” Although the senators “are open minded to the RFC’s suggestion that the Federal Reserve may decide to enter [the market for faster payments] as a direct competitor of existing private sector faster payments solutions through a proposed real-time gross payments settlement (RTGS) system,” the lawmakers “are seeking additional information regarding how a potential Fed-operated RTGS system would impact the adoption, quality, and eventual ubiquity of real-time payments in the U.S.”
Senate Banking Committee Holds Hearing on Cannabis and Banking
On 23 July, the Senate Banking Committee held a hearing entitled “Challenges for Cannabis and Banking: Outside Perspectives.” Testifying at the hearing were: Senator Cory Gardner (R-CO); Senator Jeff Merkley (D-OR); Rachel Pross, Chief Risk Officer, Maps Credit Union; Joanne Sherwood, President and CEO, Citywide Banks, on behalf of the American Bankers Association (“ABA”); Garth Van Meter, Vice President of Government Affairs, Smart Approaches to Marijuana; and John Lord, CEO, LivWell Enlightened Health. Gardner testified about the disconnect between federal and state marijuana laws. He stated that, as a result of the disconnect, “[b]anks will not accept industry money for fear of regulatory action or federal forfeiture.” Merkley testified about the “uncertain legal environment” that financial institutions operate in under conflicting state and federal laws. He stated that the Secure and Fair Enforcement Banking Act of 2019 (“SAFE Banking Act”) would “give legitimate businesses acting in compliance with state cannabis laws access to the banking system.” Pross testified about the dangers of cash-only businesses, which are “especially true in the cannabis industry given the lack of access to mainstream financial services.” Sherwood said that the ABA supports the SAFE Banking Act; she explained that “[w]ithout congressional action and clearer guidance from banking regulatory agencies, that entire portion of economic activity [the legal state-cannabis industry], which operates across all 50 states, may be marginalized from the banking system.” Van Meter testified about the risks of the SAFE Baking Act, including: (i) the potential for international cartels to “infiltrate the banking system in a much more systematic way,” (ii) the potential for an influx of potent products into the market, (iii) and the potential for “money laundering and black-market investors.” Lord discussed how the “lack of reliable access to traditional banking services” for the cannabis industry creates situations in which businesses have “struggled to obtain and maintain bank accounts with egregiously high fees.” Lawmakers’ questions focused on how clearly the Financial Crimes Enforcement Network (“FinCEN”) had defined marijuana businesses, the dangers of all-cash businesses, and whether federal regulation was required.
At the hearing, the committee also considered the following bills:
o S. 1200, the Secure and Fair Enforcement Banking Act of 2019.
o S. 2201, the Clarifying Law Around Insurance of Marijuana (or “CLAIM”) Act [DISCUSSION DRAFT].
House Financial Services Committee Holds Hearing on Proposed Merger of SunTrust and BB&T
On 24 July, the U.S. House Committee on Financial Services (“House Financial Services Committee”) held a hearing entitled “The Next Megabank? Examining the Proposed Merger of SunTrust and BB&T.” Testifying at the hearing were: Kelly King, Chairman and CEO, BB&T Corporation; and William Rogers, Jr., Chairman and CEO, SunTrust Banks, Inc. King emphasized the benefits of the merger, including: (i) creating 15 new branches in under-banked “majority-minority communities,” (ii) making investments in technology that “will allow us to provide the digital services our clients expect,” (iii) continuing “a partnership that will benefit historically black colleges and universities across the country,” (iv) enhancing the companies’ scale and financial strength in order to issue “more mortgages for families and loans to small businesses,” (v) maintaining “appropriate management and staffing levels,” (vi) operating using strong risk management standards, and (vii) investing in the future by “increasing our scale and capabilities so that we can serve out communities in even more profound ways.” Rogers testified about the reasoning behind the proposed merger, stating that it will: (i) lead to “enhanced data security and a full complement of financial services offerings fueled by leading technology”; (ii) ensure consistent and continued customer care; (iii) provide employees “an unprecedented commitment to pension plans”; and (iv) increase competition by creating a “stronger regional bank that reduces the concentration of systemic risk at the top of the market.” Several Democratic lawmakers asked the banks to halt the merger process until the House Financial Services Committee could conduct more investigations. There was bipartisan agreement that cybersecurity and fintech are chief concerns for the banking industry. Both King and Rogers emphasized that the merger would help combat cybercrime and provide more fintech solutions to customers, including those in communities without physical branches.
Five Republican Senators Send Letter to SEC Chairman Clayton
On 24 July, five Republican senators sent a letter to Securities and Exchange Commission (“SEC”) Chairman Jay Clayton “regarding the national security risk China poses to all American investors because of the planned collection of their personally identifiable information (PII) by the Consolidated Audit Trail (CAT) database.” The senators wrote: “The CAT is a U.S. Securities and Exchange Commission (SEC) creation that requires broker-dealers, trading venues and stock exchanges to report all trade information and retail investor information to a single database. Given the aggressive nature of the Chinese Communist Party’s cyber agenda and the risk this presents to the American people, we are asking the Commission to prohibit the collection of any retail investor PII by the CAT.”
Senate Finance Committee Holds Hearing on Nominations
On 24 July, the U.S. Senate Committee on Finance (“Senate Finance Committee”) held a hearing to consider the nominations of: (i) Brent McIntosh to be an Under Secretary of the Department of the Treasury (“Treasury”), (ii) Brian Callahan to be General Counsel for the Treasury, (iii) Brian McGuire to be a Deputy Under Secretary of the Treasury, and (iv) Travis Groves to be Judge on the U.S. Tax Court.
House Financial Services Committee Task Force Holds Hearing on Expanding Access to Credit
On 25 July, the House Financial Services Committee’s Task Force on Financial Technology held a hearing entitled “Examining the Use of Alternative Data in Underwriting and Credit Scoring to Expand Access to Credit.” Testifying at the hearing were: Chi Chi Wu, Attorney, National Consumer Law Center; Aaron Rieke, Managing Director, Upturn; Kristin Johnson, McGlinchey Stafford Professor of Law, Tulane University Law School; Lawrance Evans, Managing Director of Financial Markets & Community Investment, Government Accountability Office; and Dave Girouard, Founder and CEO, Upstart Network, Inc. Testimony and questions sought to find a balance between increasing access to credit for “credit invisible” individuals without using data that inadvertently discriminates against certain populations. As Wu explained, “The danger of gathering massive amounts of data and using algorithms to analyze them is that they reinforce and entrench existing inequality, whether it be racial or economic.” Evans testified, “Clear communication from [the Consumer Financial Protection Bureau] and the federal banking regulators on appropriate use of alternative data in the underwriting process would bring fintech lenders greater certainty about their compliance with fair lending and other consumer protection laws, and help federally regulated banks better manage the risks associated with partnering with fintech lenders that use these data.” All the witnesses agreed that regulators would need to determine what data can and should be collected for alternative credit underwriting to comply with fair credit reporting laws. Johnson further elaborated that “learning algorithms will likely decide the most fundamental terms of any credit arrangement” and that “[t]he successful expansion of access to credit may depend largely on regulators’ effective supervision of the integration of alternative data and reliance on opaque, inscrutable and non-intuitive algorithms.”
At the hearing, the committee also considered:
o H.R. _____, the Credit Access and Inclusion Act of 2019 [DRAFT].
o H.R. _____, the FHA Additional Credit Pilot Program Reauthorization Act [DRAFT].
SEC & Securities
Roundtable on Short-Term/Long-Term Management of Public Companies and SEC’s Periodic Reporting System and Regulatory Requirements
On 18 July, the SEC’s Division of Corporation Finance (“CF”) hosted a roundtable on short-term/long-term management of public companies and the SEC’s periodic reporting system and regulatory requirements. The roundtable hosted two panels: (i) the first panel discussed the impact of a short-term focus on the capital markets, focusing on whether certain behaviors of market participants or regulatory changes could encourage long-term thinking and investment; and (ii) the second panel discussed the periodic reporting system’s role in fostering a long-term focus, with the panelists debating whether the current periodic reporting regime, alongside the issuing of quarterly earnings releases and quarterly earnings guidance, contribute to or promote a short-term focus by market participants.
o Chairman Jay Clayton delivered a statement during the roundtable in which he emphasized that the focus of these debates must remain on the protection of “Main Street” investors and that “[h]aving this perspective is -- their perspective -- in mind is I think key to understanding why long term perspective on investing is important.” Clayton argued that regulators should “be looking for rules of the road that foster both liquidity and a long term perspective,” as both issues are vital for the protection of Main Street investors and that “too often in Washington we think there's a tradeoff of one thing for another.” Lastly, Clayton urged the participants of the roundtable to consider all of the issues to be discussed from two points of view: (i) “to look at the macro forces that drive short term behavior in our markets generally and explore market based initiatives to address them,” such as “what drives companies to issue earnings guidance, while others do not”; and (ii) “to look at our disclosure framework and other regulations as a package not as individual items to determine whether they efficiently allow companies to focus on long term performance.”
SEC Staff Announcement
On 23 July, the SEC announced that Emily Westerberg Russell has been named Chief Counsel of the Division of Trading and Markets.
CFTC & Derivatives
CFTC Extends Public Comment Period for Swap Data Repositories Proposal
On 22 July, the Commodity Futures Trading Commission (“CFTC”) announced it was extending the comment period for the proposed rulemaking to amend certain CFTC regulations related to swap data reporting until 28 October 2019. The proposed amendments would “update requirements for swap data repositories (SDRs) to verify swap data with reporting counterparties, update requirements to correct swap data errors and omissions, and update and clarify certain SDR operational and governance requirements.”
CFTC and FinCEN Clarify Customer Identification Program and Beneficial Ownership Obligations
On 22 July, the CFTC’s Division of Swap Dealer and Intermediary Oversight (“DSIO”) and FinCEN issued an interpretative guidance to introducing brokers in commodities (“IBs”). The guidance clarifies “the customer identification program and beneficial ownership requirements applicable to such IBs under the Bank Secrecy Act.” DSIO Director Kulkin stated that this guidance “eliminates duplicative efforts without impacting money laundering or terrorist financing risk.”
Bank Regulators, FinCEN, and NCUA Publish Joint Statement on Risk-Focused Bank Secrecy Act/Anti-Money Laundering Supervision
On 22 July, the Fed, Federal Deposit Insurance Corporation (“FDIC”), Office of the Comptroller of the Currency (“OCC”) (together, the “Bank Regulators”), FinCEN, and National Credit Union Administration (“NCUA”) published a joint statement on risk-focused Bank Secrecy Act (“BSA”) /anti-money laundering (“AML”) supervision. In their statement, the agencies highlighted the importance of banks maintaining a risk-based compliance program to satisfy the requirements of the BSA as “[a] risk-based compliance program enables a bank to allocate compliance resources commensurate with its risk.” The statement also “outlines common practices for assessing a bank's money laundering/terrorist financing risk profile, assisting examiners in scoping and planning the examination and initially evaluating the adequacy of the BSA/AML compliance program.” The statement also reminded banks that bank examiners “evaluate the adequacy of a bank’s BSA/AML compliance program relative to its risk profile” and that because “banks vary in focus and complexity … the scope of BSA/AML examinations varies by bank.”
Fed and FDIC Publish Public Sections of Resolution Plans for Eight Large Banks
On 23 July, the Fed and FDIC published the public sections of the resolution plans for eight large banks, which describe the bank’s strategy for rapid and orderly resolution under bankruptcy. The banks are: (i) Bank of America Corporation; (ii) Bank of New York Mellon Corporation; (iii) Citigroup Inc.; (iv) Goldman Sachs Group; (v) JPMorgan Chase & Co.; (vi) Morgan Stanley; (vii) State Street Corporation; and (viii) Wells Fargo & Company.
OCC Issues Bulletin Regarding Lending Standards for Asset Dissipation Underwriting
On 23 July, the OCC issued a bulletin to “remind bankers and examiners that real estate and mortgage lending activities are subject to specific regulatory standards and guidelines.” Specifically, banks originating mortgage loans using asset dissipation underwriting (“ADU”) should: (i) “develop and maintain risk governance processes that are commensurate with the credit risk of ADU, particularly if the offering constitutes a deviation from the bank’s existing mortgage lending business activities”; and (ii) “refer to the regulatory real estate and mortgage lending standards and guidelines in 12 CFR 30, 12 CFR 34 (national banks), and 12 CFR 160.101 (FSAs) when developing, implementing, and administering new mortgage underwriting processes such as ADU.”
OCC Issues Bulletin Regarding Fraud Risk Management Principles
On 24 July, the OCC issued a bulletin overviewing the OCC’s expectations with regards to the implementation of its fraud risk management principles. Specifically, the OCC expects banks that it regulates to have : (i) “sound corporate governance practices that instill a corporate culture of ethical standards and promote employee accountability”; (ii) a “risk management system [that] include[s] policies, processes, personnel, and control systems to effectively identify, measure, monitor, and control fraud risk consistent with the bank’s size, complexity, and risk profile”; (iii) a risk management system and system of internal controls … designed to prevent and detect fraud [and] appropriately respond to fraud, suspected fraud, or allegations of fraud”; (iv) a system where “[b]ank management…assess the likelihood and impact of potential fraud schemes and use the results of this assessment to inform the design of the bank’s risk management system”; (v) a system where “[s]enior management and the board of directors… measure, monitor, and understand fraud losses across the enterprise and employ tools that appropriately quantify and assess loss experience and exposure”; and (vi) “[c]ontrol reviews and audits [that] include fraud risk as part of their assessments.”
FDIC Announces Meeting of Advisory Committee on Community Banking
On 24 July, the FDIC announced that it will hold a meeting of the Advisory Committee on Community Banking on 30 July 2019. The meeting will: (i) provide “an update on various supervisory policy issues and the FDIC Subcommittee on Supervision Modernization, as well as brief Committee members on minority and community development financial institutions, Money Smart financial education materials, and de novo institutions”; (ii) cover the U.S. Small Business Administration collaboration efforts; and (iii) include a discussion about local banking conditions.
Fed and FDIC Announce Completion of Evaluations of 2018 Resolution Plans of 82 Foreign Banks
On 26 July, the Fed and FDIC announced: (i) the completion of their evaluations of the 2018 resolution plans (also known as “living wills”) of 82 foreign banks; and (ii) the extension until 1 July 2021 of the deadline for the next resolution plans of those foreign banks, as well as 15 domestic banks. The agencies did not identify any shortcomings or deficiencies in the plans filed by the foreign banks but did request additional specific in the next resolution plans from seven of the firms. According to the agencies’ joint press release, “[The] extension will mitigate uncertainty around the banks’ filing requirements while the agencies’ April proposal to revise the resolution plan rule remains pending.”
OCC Issues Bulletin Regarding Revised and Updated Booklets and Rescissions
On 25 July, the OCC issued a bulletin containing a fully revised “Corporate and Risk Governance” booklet and an updated “Internal and External Audits” booklet of the Comptroller’s Handbook. The updated documents: (i) “reflect relevant OCC issuances and auditing standards published since these booklets were last issued”; (ii) “reflect the integration of federal savings associations into certain regulations”; (iii) “include clarifying edits regarding supervisory guidance, sound risk management practices, or legal language”; (iv) “clarify the duties and responsibilities of the bank’s board and management”; and (v) “revise certain content for general clarity.”
OCC Staff Announcements
On 24 July, the OCC announced the assignments of Beverly Cole as the Deputy Comptroller of the Northeastern District and Beth Dugan and Mark Richardson as Co-Deputy Comptrollers for Large Bank Supervision.
CFPB, FTC, and States Announce Settlement Over 2017 Data Breach
On 22 July, the Consumer Financial Protection Bureau (“CFPB”), the Federal Trade Commission (“FTC”), 48 States, the District of Columbia, and Puerto Rico announced a “global settlement” that would provide up to “$700 million in monetary relief and penalties” as a result of the “2017 data breach of Equifax’s system that impacted approximately 147 million consumers.” In a complaint and proposed stipulated order filed in the federal district court in the Northern District of Georgia, the CFPB and other plaintiffs alleged that Equifax “engaged in unfair and deceptive practices in connection with” the 2017 breach. If the court approves the settlement, it will “provide up to $425 million in monetary relief to consumers, a $100 million civil money penalty, and other relief.” The breach resulted in the exposure of “U.S. consumers’ sensitive personal information, including names, addresses, social security numbers, and dates of birth.”
o At the press conference announcing the settlement, CFPB Director Kathy Kraninger said, “Through the Bureau’s actions, up to $425 million will be available to consumers for the time and money spent to protect themselves from the very real threat of identity theft, to reimburse them for actual identify theft caused by the breach, and to pay for credit monitoring services for consumers and compensation for their losses.” She then explained some of the details of the compensation process for different categories of Equifax consumers.
CFPB Issues ANPR Regarding Qualified Mortgages and Expiration of GSE Patch
On 25 July, the CFPB issued an Advance Notice of Proposed Rulemaking (“ANPR”) “seeking information relating to the expiration of the temporary qualified mortgage provision applicable to certain mortgage loans eligible for purchase by the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac.” This provision, commonly known as the “GSE Patch,” is part of the CFPB’s Ability to Repay/Qualified Mortgage (“ATR/QM”) Rule and is scheduled to expire no later than 10 January 2021. In the ANPR, the CFPB solicits comments on possible amendments to the ATR/QM Rule in light of the GSE Patch’s scheduled expiration. Comments on the ANPR are due with 45 days of its publication in the Federal Register.
o July 29: The SEC’s Fixed Income Market Structure Advisory Committee will hold a public meeting.
o July 29: Comments are due on the SEC’s proposed rule on “Amendments to the Accelerated Filer and Large Accelerated Filer Definitions.”
o July 29: Comments are due on the SEC’s proposed rule on “Amendments to Financial Disclosures About Acquired and Disposed Businesses.”
o July 30: The FDIC’s Advisory Committee on Community Banking will hold a meeting (described above).
o July 30: The Senate Banking Committee will hold a hearing entitled “Examining Regulatory Frameworks for Digital Currencies and Blockchain.”
o August 1: Comments are due on the CFTC’s “Notice of Intent to Renew Collection Numbers 3038-0068 and 3038-0083: Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants.”
o August 13: The SEC’s Small Business Capital Formation Advisory Committee will hold a public meeting, the agenda for which is yet to be finalized.
o August 14: The SEC will host the 38th Annual Government-Business Forum on Small Business Capital Formation.