October in Washington, DC is typically busy, marking the start of a new fiscal year for the federal government, a new term of the Supreme Court, and, this year, a lot of activity by financial regulators and Congress.

Just this week:

  • There were two hearings in the Senate Banking Committee on consumer protection.
  • The Senate confirmed Randal Quarles as the newest member of the Board of Governors of the Federal Reserve System (the Federal Reserve Board) by a 65–32 vote.
  • The CFPB released its long-awaited and much discussed, including by us at All Things FinReg, final rules regulating payday loans, vehicle title loans, and certain other high-cost loans (the Payday Lending Final Rule).
  • The OCC rescinded its 2013 Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products in response to the Payday Lending Final Rule.

In a series of agency actions culminating with Federal Deposit Insurance Corporation (FDIC) approval on September 27, the three federal banking agencies (FDIC, Office of the Comptroller of the Currency, and Federal Reserve Board) (Agencies) have proposed changes (Proposal) to the US regulatory capital rules (Rules) that would

  • simplify the regulatory capital qualification requirements applicable to certain types of bank assets,
  • revise and clarify the regulatory capital treatment of high volatility commercial real estate exposures (HVCRE), and
  • make other technical changes to the regulatory capital regulations.

Broker-dealers can breathe a collective sigh of relief. The Financial Industry Regulatory Authority, Inc. (FINRA) has filed a rule change with the Securities and Exchange Commission (SEC) to delay the effective date of certain changes to its maintenance margin rule for Covered Agency Transactions (e.g., to-be-announced transactions, specified pool transactions, transactions in collateralized mortgage obligations) until June 25, 2018.

In brief, in August 2016, FINRA announced the adoption of changes to Rule 4210 with respect to the treatment of “Covered Agency Transactions” that would require FINRA members that engage in covered agency transactions with counterparties to

The Consumer Financial Protection Bureau (CFPB) has issued its first No-Action Letter under the final policy on No-Action Letters that it released in early 2016. The No-Action Letter was requested by and issued to Upstart Network, Inc., an online marketplace lending platform. Under the No-Action Letter, the CFPB states that it “has no present intention” to recommend an enforcement or supervisory action against Upstart with regard to its compliance with the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B. Like many marketplace and other new online lenders, Upstart uses alternative lending criteria in its underwriting process in order to expand access to credit for borrowers who might not otherwise qualify for loans or can only qualify for loans with higher interest rates.

The Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (Board), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the Agencies) have jointly announced a proposed rulemaking that would extend the existing transitional periods for certain regulatory capital deductions and risk weights (Proposed Rule). The proposed extension would apply to banking organizations that are not subject to the advanced approaches capital rules, which generally means those banking organizations with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure. Significantly, the Agencies state that the Proposed Rule is being issued in preparation for a forthcoming proposal that would “simplify the regulatory capital treatment of these items.”

On August 17, 2017, the Consumer Financial Protection Bureau (CFPB) and 12 state attorneys general (the Government) filed proposed settlements with Aequitas Capital Management, a now-defunct private equity firm, in connection with loans that Aequitas funded for students of another bankrupt entity, Corinthian Colleges, Inc. The settlements follow the Government’s allegations that Aequitas engaged in “unfair, deceptive, or abusive acts or practices” (UDAAP) under Dodd-Frank and under similar state statutes targeting “unfair and deceptive acts and practices” (UDAP). Corinthian, formerly one of the largest for-profit colleges in the country, suffered a total collapse in 2015 following enforcement actions by both the US Department of Education (ED), for alleged violations of its rules, and the US Securities and Exchange Commission (SEC), for alleged securities fraud. Aequitas itself is currently in receivership following SEC allegations of securities fraud and of Aequitas operating in a “Ponzi-like fashion.”

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.