Financial Industry Resource Center

SEC and CFTC Adopt Rules on Red Flags and Identity Theft

Hunton & Williams LLP — Thu, 11 Apr 2013 15:27:09 -0500

On April 10, 2013, the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) jointly adopted rules that require broker-dealers, mutual funds, investment advisers and certain other regulated entities to adopt programs designed to detect “red flags” and prevent identity theft. These rules implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, that amended the Fair Credit Reporting Act (“FCRA”) to direct the SEC and the CFTC to adopt rules requiring regulated entities to address risks of identity theft. The 2003 amendments to the FCRA required other regulatory authorities to issue identity theft red flags rules, but did not authorize or require the SEC or the CFTC to issue their own rules.

The final rules require “financial institutions” and “creditors” (as defined in the FCRA) to develop and implement written identity theft prevention programs “designed to detect, prevent, and mitigate identity theft in connection with certain existing accounts or the opening of new accounts.” The rules set forth four elements that the regulated entities must incorporate into their identity theft prevention programs. These elements include adopting policies and procedures to (1) identify relevant red flags, (2) detect the red flags, (3) respond appropriately to red flags that have been detected, and (4) periodically update the program to reflect changes in identity theft risks to customers and to the regulated entity. The rules also establish specific requirements for covered credit or debit card issuers to assess the validity of notifications of changes of address under certain circumstances.

The final rules will become effective 30 days after publication in the Federal Register, with compliance required by six months after the effective date.

The Essentials: The CFPB's Final "Ability-to-Repay/Qualified Mortgage" Rules

Hunton & Williams LLP — Tue, 22 Jan 2013 15:24:17 -0500

On January 10, 2013, the Consumer Financial Protection Bureau (the “CFPB”) issued final rules (the “Ability-to-Repay Rules”) amending Regulation Z under the Truth in Lending Act (“TILA”) to implement the ability-to-repay requirement for residential mortgage loans and protections from liability for qualified mortgages and certain other consumer protections as required by Sections 1411, 1412 and 1414 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”).

Consumer Financial Protection Bureau Releases Final "Ability-to-Repay/Qualified Mortgage" Rules

Hunton & Williams LLP — Tue, 15 Jan 2013 14:12:25 -0500

On January 10, 2013, the Consumer Financial Protection Bureau (CFPB) released its final “Ability-to-Repay/Qualified Mortgage” rules. The rules and the concurrent proposed amendments were posted on the CFPB’s website following published remarks by Director Richard Cordray and a two-hour “field hearing” in Baltimore, MD. The bureau also promised to publish plain-language booklets and educational videos to help guide lenders through the maze of new rules.

The rules, which are over 800 pages long, are “final” in the sense that they have been revised from the proposed rules that were released for comment last summer, and they are now “official.” However, the rules do not take effect for another year (January 10, 2014), and the bureau issued an additional 184-page “concurrent proposal” containing potential amendments to the new rules that address and/or clarify unresolved issues such as exemptions for certain nonprofit creditors and homeownership stabilization programs, an additional definition of a qualified mortgage for certain loans made and held in portfolio by small creditors such as community banks and credit unions, and inclusion of loan originator compensation in the points and fees calculation. Notwithstanding the pending amendments and delayed effective date, the rules issued last week will have an enormous impact on the mortgage lending business, and their complexity makes prompt commencement of implementation work essential.

The Consumer Financial Protection Bureau Provides Guidance for Mortgage Advertising

Hunton & Williams LLP — Tue, 20 Nov 2012 10:32:49 -0500

In a joint-agency media conference and press release with the Federal Trade Commission today, the Consumer Financial Protection Bureau used the “rulemaking-through-enforcement” method of regulation to create several de-facto guidelines for what is “unfair, deceptive, or abusive” in mortgage advertising. Bypassing the more arduous rulemaking process, the CFPB published “sample warning letters” that effectively made the following advertising practices illegal:

CFTC No-Action Letters

Hunton & Williams LLP — Mon, 15 Oct 2012 14:56:00 -0500

On October 11, 2012, the U.S. Commodity Futures Trading Commission (CFTC) issued two interpretive letters and today, issued a no-action letter. The letters were issued to the National Association of Real Estate Investment Trusts (NAREIT), the American Securitization Forum (ASF) and certain persons designated as swap persons and ICE/NYMEX contract persons, respectively.

Responding to Questions on Swaps Activity and Commodities Regulation

Hunton & Williams LLP — Thu, 20 Sep 2012 11:25:19 -0500

Recently adopted rules under the Dodd–Frank Act establish a comprehensive new regulatory framework for swaps, including their use and those who use them. We have prepared the below questions and answers to help clarify issues regarding the new rules. The questions and answers are not intended to be comprehensive or to address every situation but, rather, are intended to provide a general overview and explanation of matters related to the regulation of swaps.

New FINRA Rule 5123 Imposes Filing Obligation for Certain Private Placements

Hunton & Williams LLP — Wed, 12 Sep 2012 07:37:23 -0500

New FINRA Rule 5123 will require each FINRA member that sells a security in a private placement, subject to certain exemptions, to file with FINRA a copy of any private placement memorandum, term sheet or other offering document used in connection with such private placement within 15 calendar days after the date of the first sale, or to indicate to FINRA that no such offering documents were used. Due to the exemptions, the regulatory burden of this new requirement will fall primarily on offerings of Section 3(c)(1) private investment funds and other offerings made to individuals or retail investors. A copy of FINRA Regulatory Notice 12-40 (September 2012) (Private Placements of Securities) is available here.

SEC JOBS Act Implementation

Hunton & Williams LLP — Thu, 06 Sep 2012 13:45:33 -0500

SEC Proposes Rules Relating to General Solicitation and General Advertising for Rule 506 and Rule 144A Offerings.

On August 29, 2012, the Securities and Exchange Commission proposed amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933, as required by Section 201(a) of the Jumpstart Our Business Startups Act (“JOBS Act”). The proposed amendments will permit certain unregistered exempt offerings of securities using general solicitation and general advertising. A copy of the SEC’s proposing release is available here.

CFPB Proposes Comprehensive Mortgage Servicing Regulations

Hunton & Williams LLP — Fri, 31 Aug 2012 10:20:29 -0500

The Consumer Financial Protection Bureau recently issued two notices of proposed rulemaking implementing Truth-in-Lending Act and Real Estate Settlement Procedures Act regulations required by the Dodd-Frank Act. These NPRs represent the CFPB’s first step toward its stated goal of establishing national standards for mortgage servicing.

The NPRs incorporate many of the provisions of the March 2012 National Mortgage Settlement among state attorneys general, the federal government, and five of the largest mortgage loan servicers and propose additional rules related to a number of fundamental servicing activities, including borrower communications, loss mitigation, information management, and complaint and error resolution. A detailed discussion of the NPRs and the proposed rules is attached.

CFTC Issues Foundational Definitions For New OTC Derivatives Regulation

Hunton & Williams LLP — Wed, 15 Aug 2012 11:32:50 -0500

On August 13, 2012, the U.S. Commodity Futures Trading Commission (“CFTC” or “Commission”) issued a joint final rulemaking in conjunction with the U.S. Securities and Exchange Commission (“SEC”) further defining the term “Swap” as required under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in July 2010 in response to the 2008 financial crisis. Title VII of the Act established a new framework for the regulation of the over-the-counter (“OTC”) derivatives markets. The Act requires the CFTC and SEC to establish a number of new regulations to implement the requirements of the Act, including further definitions of what constitutes a “Swap,” as well as defining two new classes of market participants: Swap Dealers and Major Swap Participants. Together, these foundational definitions determine which market participants may be subject to more than 50-plus new CFTC regulations.

CFPB Indicates Intent to Regulate Service Providers to Financial Institutions

Hunton & Williams LLP — Thu, 09 Aug 2012 09:52:19 -0500

Earlier this year, the Consumer Financial Protection Bureau (“CFPB”) published a Bulletin signaling its intent to regulate and exercise enforcement authority over service providers to financial institutions. Pursuant to Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act and its implementing regulation, Regulation P, the CFPB has authority over certain large banks, credit unions and other consumer financial services companies. The Bulletin notes that the CFPB’s goal is to ensure compliance with “[f]ederal consumer financial law,” which includes the Gramm-Leach-Bliley Act and its implementing regulations, the Privacy Rule and the Safeguards Rule.

The Bulletin recommends that financial institutions take the following steps to ensure their service providers comply with the law:

Conduct due diligence to ensure that the service provider understands and will comply with the relevant laws;
Request and review the service provider’s policies and procedures to ensure that the service provider’s employees are properly trained and supervised;
Set forth contractual provisions that address the service provider’s compliance responsibilities and the consequences of noncompliance;
Establish internal controls and monitor the service provider’s compliance with the law; and
Act promptly to remediate any problems that are discovered through the monitoring process.

In the press release accompanying the Bulletin, CFPB Director Richard Cordray noted that “Consumers must not be hurt by unfair, deceptive, or abusive practices of service providers. Banks and nonbanks must manage these relationships carefully and can be held accountable if they break the law.”

President Obama Signs Jobs Act Into Law

Hunton & Williams LLP — Thu, 05 Apr 2012 14:29:57 -0500

On April 5, 2012, President Obama signed H.R. 3606, the Jumpstart Our Business Startups (JOBS) Act (the “Act”), into law. The Act is intended to help smaller companies access the U.S. capital markets by relaxing certain regulatory compliance and disclosure requirements and easing the capital formation process for private companies and private investment funds. A copy of the Act is available here.

With Appointment of Richard Cordray Consumer Watchdog Sets its Agenda

Hunton & Williams LLP — Tue, 03 Apr 2012 09:57:59 -0500

With the January 4, 2012 recess appointment of former Ohio Attorney General Richard Cordray as its first director, the Consumer Financial Protection Bureau quickly is coalescing around an aggressive regulatory agenda. What can large financial institutions and other participants in the financial services industry expect from this new federal regulator?

Formed by Congress as part of the 2010 Dodd-Frank financial reform legislation, CFPB only recently assumed its full regulatory powers through the President’s recess appointment. CFPB’s regulatory authority derives, in part, from the traditional consumer protection functions set forth in a number of federal statutes previously enforced by the Federal Reserve Board, OCC, FDIC, and others. But CFPB appears to define its mandate more broadly. In testimony before Congress, Cordray noted that “[p]rior to the financial crisis, seven federal agencies had some responsibility for consumer financial protection, but none of these agencies had consumer financial protection as its sole priority, or the tools to regulate and oversee the whole market,” and went on to state that “[w]e plan to use all of the tools available to us to ensure that everyone respects and follows the rules of the road. Where we can cooperate with financial institutions to do that, we will; when necessary, however, we will not hesitate to use enforcement actions to right a wrong.”

Who is subject to CFPB Oversight?

CFPB has supervisory, rulemaking, and regulatory authority over banks with over $10 billion in assets. With the Cordray appointment, CFPB may now begin supervising non-bank participants in the consumer financial markets, including non-depository “mortgage related” companies, payday lenders, student loan providers, or other entities that qualify as “larger participants” in the financial markets or whose products or services pose potential risks to consumers.

Last month, CFPB released a proposed final rule defining some of the “larger participants” in the consumer financial markets that will be subject to federal supervision and enforcement authority. Debt collectors with annual receipts over $10 million are considered “larger participants” under the proposed rule. In recent months, debt collection practices have come under greater scrutiny, similar to the scrutiny applied to mortgage foreclosures practices. Courts and enforcement agencies have faulted debt collectors for failing to properly document and verify amounts owed.

Consumer reporting agencies, on the other hand, are deemed “larger participants” if they have over $7 million in annual receipts. Though CFPB estimates that this includes only about 30 companies, they account for 94% of the credit reporting market. Subsequent rulemakings will define thresholds applicable to prepaid credit card issuers, finance companies, and debt relief companies. Companies that service, originate, or broker residential mortgages, payday lenders, and private education lenders are subject to CFPB’s supervision regardless of their size or impact in the financial markets.

CFPB’s proposed rule is the first effort to subject these non-bank entities to the same CFPB oversight as banks. Non-bank entities will be subject to CFPB examination to assess compliance with all federal consumer financial laws and potential risks to consumers and the financial markets.

What is CFPB’s Preliminary Focus?

With an estimated budget of $365 million in 2012 and a proposed budget of $448 million for 2013, CFPB is expected to scrutinize broadly consumer lending practices through on-site examinations and targeted investigations into possible violations of existing laws. Significantly, CFPB has authority under Dodd-Frank to define and ultimately proscribe any acts or practices that it deems unfair, deceptive, or abusive. This includes acts that CFPB believes are likely to cause substantial injury or interfere with the consumer’s ability to understand a particular product or service. CFPB has yet to define what it considers unfair, deceptive, or abusive.

On March 2, CFPB announced the launch of a web-based tool for collecting complaints related to checking, savings and other bank accounts. CFPB implemented similar systems for mortgage and credit cards complaints in 2011.

Last month CFPB announced an inquiry into checking account overdraft programs. The investigation will consider how overdraft practices are affecting consumers and will focus on transaction re-ordering to increase fees, the clarity of the information provided to consumers, and any disproportionate impact on young and low-income consumers. CFPB also appears to be focusing in on the payday lending industry, holding a public hearing in Alabama in January and issuing examination procedures for short-term, small-dollar loans.

Other CFPB initiatives include issuance of several prototype disclosure forms for consumers — including a monthly mortgage statement, a model form to help students compare student loans, and revised mortgage loan disclosures.

As CFPB continues to define the scope of its regulatory power, it remains subject to intense scrutiny on Capitol Hill, from both Republicans who object to Cordray’s recess appointment and the scope CFPB’s power and Democrats who expect CFPB to correct lending practices believed to have contributed to the credit crisis. Industry participants will have to watch carefully in the coming months to see how CFPB meets these competing expectations.

House Passes JOBS Act

Hunton & Williams LLP — Tue, 20 Mar 2012 15:28:07 -0500

On March 8, 2012, the House of Representatives (the “House”) passed H.R. 3606, the Jumpstart Our Business Startups (JOBS) Act (the “Bill”), by a vote of 390 to 23. The Bill consists of a collection of bills that have been introduced in the House over the past year, including four that had already passed the House by wide margins. The Bill is intended to help smaller companies access the U.S. capital markets by relaxing certain regulatory compliance.

SEC Issues No-Action Responses for Proxy Access Proposals

Hunton & Williams LLP — Wed, 14 Mar 2012 08:28:01 -0500

On March 7, 2012, the Staff of the Securities and Exchange Commission (the “Staff”) issued responses to a series of no-action requests seeking to exclude shareholder proxy access proposals. These no-action responses represent the first significant guidance from the Staff following the 2011 amendments to Rule 14a-8 that permit inclusion of proxy access proposals. The Staff permitted six companies to exclude precatory proposals that were based on a model prepared by a coalition of shareholders called the “United States Proxy Exchange.”1 The Staff did not permit exclusion, however, of a binding proposal submitted by Norges Bank Investment Management. That proposal would provide access to holders of 1% of a company’s stock for one year. In addition, the Staff did not agree that a company that had voluntarily adopted a proxy access bylaw could exclude a proposal on the basis that it had been substantially implemented.

SEC Adopts Rules Relating to Qualified Client Standard for Performance Fee Rule

Hunton & Williams LLP — Wed, 22 Feb 2012 15:26:59 -0500

On February 15, 2012, the Securities and Exchange Commission ("SEC") adopted new rules under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), as required by Section 418 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"). The new rules codify the SEC's July 12, 2011 order to increase the dollar amount tests applicable to qualified clients that may be charged performance fees under Rule 205-3. A copy of the SEC's adopting release is available here.

SEC Adopts Rules Relating to Net Worth Standard for Accredited Investors

Hunton & Williams LLP — Wed, 04 Jan 2012 10:29:49 -0500

On December 21, 2011, the Securities and Exchange Commission (“SEC”) adopted new rules under the Securities Act of 1933, as amended (the “Securities Act”), as required by Section 413(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The rules exclude the value of a person’s primary residence for purposes of determining whether the person qualifies as an “accredited investor” on the basis of having a net worth in excess of $1 million. A copy of the SEC’s release is available here.

ISS Updates its Voting Policies for the 2012 Proxy Season

Hunton & Williams LLP — Wed, 30 Nov 2011 14:58:21 -0500

Institutional Shareholder Services (“ISS”) recently announced its updated voting policies for the 2012 proxy season. The policies will become effective for shareholder meetings held on or after February 1, 2012. While the policies cover various matters, we have summarized below certain policies relating to corporate governance matters that may be of particular interest to corporations.

SEC Adopts Rules For Private Fund Reporting

Hunton & Williams LLP — Mon, 21 Nov 2011 11:09:56 -0500

On October 26, 2011, the Securities and Exchange Commission (“SEC”) adopted new rules under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), as required by Sections 404 and 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The new rules create a new reporting form — Form PF — to be filed quarterly or annually by registered investment advisers that manage private funds, including hedge funds and private equity funds. A copy of the SEC’s adopting release is available here.

Court Vacates the SEC's Proxy Access Rules

Hunton & Williams LLP — Mon, 25 Jul 2011 09:00:00 -0500

Earlier today, the U.S. Court of Appeals for the D.C. Circuit vacated the Securities and Exchange Commission's ("SEC") proxy access rules, which had been stayed pending the outcome of this litigation. The court found that the SEC "inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters." In addition, the unanimous three-judge panel stated that "[b]y ducking serious evaluation of the costs that could be imposed upon companies from use of the rule by shareholders representing special interests, particularly union and government pension funds, we think the Commission acted arbitrarily."

As we previously explained, the proxy access rules would have permitted shareholders who collectively owned at least 3% of a company's shares for a period of three years to include nominees in a company's proxy materials. The court's decision is a rebuke to the SEC, but the SEC could request a rehearing, appeal to the supreme court or revise its analysis without necessarily changing the rules.

Click here for a copy of the decison.