There has been substantial physical and virtual ink spilled over recent financial regulatory announcements about a review of the Volcker Rule—the controversial Dodd-Frank Act provision that generally prohibits proprietary trading and private investment fund sponsorship/investment by covered banking organizations. But will these agency activities lead to any change? In our view, they may lead to some minor changes, but no major ones.
On July 25, the US Securities and Exchange Commission (SEC) issued a Report of Investigation (Report), along with a companion investor bulletin, telling the world that if you use distributed ledger (blockchain) to raise capital, you must comply with federal securities laws. Is this a surprising development? We believe not.
The subject of the Report is The DAO and its related parties and founders. The DAO is an unincorporated organization styled as a “decentralized autonomous organization,” a form of virtual organization that conducts its commercial activities on a distributed ledger. The Report describes The DAO as a for-profit business that creates and holds assets through the sale of virtual DAO tokens (Tokens) to investors in exchange for virtual currency. These assets were to be used to fund a variety of “projects” generally entailing the automation—through a blockchain—of corporate governance and decision-making mechanisms, either within or outside of a traditional corporate structure.
Acting Federal Trade Commission (FTC) Chairman Maureen Ohlhausen has released a list of changes to how the agency’s Bureau of Consumer Protection (BCP) will issue civil investigative demands (CIDs)—the principal consumer protection investigative tool the agency wields. These changes result from Chairman Ohlhausen’s previously announced effort to reduce administrative burdens on legitimate businesses.
The Consumer Financial Protection Bureau (CFPB) has issued its final regulation (Rule) limiting the use of mandatory pre-dispute arbitration by providers of covered consumer financial products and services. The Rule will become effective 60 days after publication in the Federal Register (which should occur in the next few days) and will apply to transactions commencing six months after the effective date (roughly April 2018).
The CFPB’s authority does not extend to broker-dealers and other firms regulated by the US Securities and Exchange Commission or US Commodity Futures Trading Commission, or to auto dealers, attorneys, and retailers acting as such, but these entities could be swept back under the ambit of the Rule if they act as service providers to a covered provider or otherwise assist and facilitate such a provider. For example, an auto dealer is exempt from application of the Rule, but to the extent that a dealer directly assists and participates in the auto loan or leasing business on behalf of or in concert with a financial institution, that dealer would likely be covered as to the specific transaction.
On June 22, senior officials from the three primary federal bank regulatory agencies—the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (Board), and the Federal Deposit Insurance Corporation (FDIC)—testified before the Senate Committee on Banking, Housing and Urban Affairs (Committee) on, among other things, financial services reform matters. In the wake of the Financial CHOICE legislation (CHOICE Act), which recently passed the House of Representatives, and the more recent US Department of the Treasury report (Treasury Report) recommending changes to the current financial regulatory framework, financial reform’s legislative center of gravity has now moved to the Senate, which is currently trying to develop its own version of such legislation.
One of President Donald Trump’s early official acts in February 2017 was to sign an executive order stating a series of “Core Principles” for the regulation of the US financial system and directing the secretary of the Treasury to report, in consultation with the members of the Financial Stability Oversight Council, on the extent to which existing laws, regulations, and other regulatory requirements promote the Core Principles. In response to the executive order, the US Department of the Treasury has just released a wide-ranging report (Report) addressing many aspects of current US financial regulation and recommending changes to the current regulatory framework.
The Office of the Comptroller of the Currency (OCC) has released FAQs to supplement its 2013 guidance on risk management of third-party relationships. The FAQs specifically address bank relationships with fintech companies and marketplace lenders, relationships that were not necessarily an OCC focus when the 2013 guidance was issued.
As with its 2013 guidance, the FAQs focus on managing risk through a bank’s adequate due diligence and ongoing monitoring of third-party service providers such as fintech companies, and places ultimate responsibility for risk management with the bank’s management and board of directors. The FAQs recognize that the levels of due diligence and ongoing monitoring may differ based on the risk and complexity presented by specific third-party relationships.
After a relatively quiet May on the financial regulatory front, an item from an atypical source caught our attention. We don’t always troll the cable news outlets for authoritative information on financial regulatory matters, but the June 1 interview that Federal Reserve Board (Board) Governor Jerome H. Powell gave to CNBC sparked our interest because his remarks seemed to signal a course correction—but nothing more than that—in the federal government’s handling of bank regulation and supervision. Powell’s status as Chairman of the Board’s Committee on Supervision and Regulation means that he speaks with substantial authority on financial regulatory matters, so his remarks hold weight in this area and are worth sharing.
The Consumer Financial Protection Bureau (CFPB) announced that it has filed suit against four online lenders owned by the federally recognized Habematolel Pomo of Upper Lake Indian Tribe based on alleged violations of state licensing and usury laws.
The factual allegations in this lawsuit, filed in the US District Court for the Northern District of Illinois, are unremarkable. The CFPB charges that the online lenders at issue make small-dollar loans at very high interest rates and that the entities’ tribal ownership is both legally irrelevant and factually dubious. The CFPB also alleges relatively modest violations of Regulation Z’s requirement to disclose the annual percentage rate in an oral response to a consumer inquiry about the cost of credit. The CFPB, however, alleges that the defendants engaged in unfair, deceptive, and abusive acts and practices (UDAAP) in violation of federal law through their efforts to collect on loans that were usurious under state law, or for which other state-law violations vitiated or limited the borrowers’ obligation to repay.
As we reported last fall, New York Department of Financial Services Superintendent Maria T. Vullo stated that she was “ardently opposed” to the Office of the Comptroller of the Currency’s (OCC’s) intention to process applications for a new financial technology (fintech) company charter. We now see just how much her counterparts in other states share that view, as the state bank regulators recently came together under the Conference of State Bank Supervisors (CSBS) banner to ask the federal courts to stop the OCC’s fintech charter initiative.
In its complaint in Conference of State Bank Supervisors v. Office of the Comptroller of the Currency filed on April 26 in the US District Court for the District of Columbia (Complaint), the CSBS has asked the court to declare that the OCC’s creation of the fintech charter is unlawful and that the OCC be enjoined from pursuing this initiative—saying, in substance, that the OCC doesn’t have the statutory authority to grant nontraditional bank charters of this nature.