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SBA seeks to end SBLC moratorium
On November 7, SBA published a proposed rule in the Federal Register seeking to lift the moratorium on licensing new small business lending companies (SBLCs) and adding a new type of entity called a “Mission-Based SBLC.” The moratorium was imposed in 1982, after the agency lacked adequate resources to effectively service and supervise additional SBLCs participating in SBA’s 7(a) loan program beyond the 14 it was authorized to approve. According to SBA, while the majority of 7(a) lenders are federally-regulated depository institutions, “SBLCs are regulated, supervised, and examined solely by SBA” and “are subject to specific regulations regarding formation, capitalization, and enforcement actions.” SBA explained that there are capital market gaps in certain markets that “continue to struggle to obtain financing on non-predatory terms.” The proposed rule seeks to lift the licensing moratorium and further create the Mission-Based SBLC to help bridge the financing gap. Mission-Based SBLCs will be nonprofit entities that will help SBA meet the needs of underserved communities and increase opportunities for access to capital in precisely targeted capital market gaps. Comments on the proposed rule are due January 6, 2023.
Fed asks for comments on publicizing FRB master accountholders
On November 4, the Federal Reserve Board issued a notice and request for comment seeking feedback on proposed amendments to its Guidelines for Evaluating Account and Services Requests. Specifically, the proposed amendments would require the Federal Reserve Banks to publish a periodic list of depository institutions that have access to Reserve Bank accounts (often known as “master accounts”) and payment services. In August, the Fed adopted final guidance establishing “a transparent, risk-based, and consistent set of factors for Reserve Banks to use in reviewing requests to access these accounts and payment services.” Recognizing that the longstanding practice of both the Fed and the Reserve Banks “has been to not disclose account-related information to the general public on the basis that such information is considered confidential business information,” the Fed said it is considering “the potential benefits of expanding the disclosure of the names of institutions that have access to accounts and services” following comments received from stakeholders that called for greater public disclosure of account-related information. Comments are due 60 days after publication in the Federal Register.
Republican senators oppose FTC’s ANPR on data privacy and security
On November 3, three Republican Senators sent a letter to FTC Chair Lina Khan expressing their opposition to the FTC’s Advanced Notice of Proposed Rulemaking (ANPR) for the Trade Regulation Rule on Commercial Surveillance and Data Security. As previously covered by InfoBytes, in August the FTC announced the ANPR covering a wide range of concerns about commercial surveillance practices, specifically related to the business of collecting, analyzing, and profiting from information about individuals. In the letter, the Senators argued that both consumers and businesses would benefit if Congress enacted comprehensive federal legislation addressing data privacy. According to the Senators, the FTC “lacks the authority to create preemptive standards” and the proposed rulemaking “would only add uncertainty and confusion to an already complicated regulatory landscape, increasing compliance costs, reducing competition, and ultimately harming consumers.” The Senators requested that the FTC withdraw its rulemaking proposal, explaining that “[c]onsumer data privacy and security are complex issues which will require standards that are robust, adaptive, and can balance the interests of consumers with the needs of businesses.” The Senators noted that they believe “that this balance can only be struck within federal legislation that is comprehensive and preemptive, such that the law creates a single national standard.”
VA proposes amendments to IRRRL requirements
On November 1, the Department of Veterans Affairs (VA) published a proposed rule in the Federal Register, which would amend the agency’s rules on VA-backed interest rate reduction refinancing loans (IRRRLs). Specifically, the proposed amendments would update existing VA IRRRL regulations to meet current statutory requirements for determining whether the agency can guarantee or insure a refinance loan. The amendments would modify current regulations to reflect requirements related to, among other things, net tangible benefit, recoupment, and seasoning standards. Additionally, due to confusion among program participants, VA is proposing clarifications to minimize the risk of lender noncompliance, thereby safeguarding veterans, easing lender concerns, reducing potential instability in the secondary loan market, and insulating taxpayers from unnecessary financial risk. Comments on the proposed rule are due January 3, 2023.
Chopra says CFPB is examining industry standard settings
On November 2, CFPB Director Rohit Chopra delivered prepared remarks before a public meeting of the Bureau’s Consumer Advisory Board briefly touching upon on several topics related to the Buy Now Pay Later market, big tech and data collection, peer-to-peer payment platforms, and Section 1033 rulemaking concerning consumers’ rights to their personal financial data. Notably, Chopra raised an area of discussion concerning industry standard-setting organizations and providers of critical infrastructure. Recognizing that private organizations play a major role in setting standards across sectors of the economy, Chopra emphasized that “[d]ecentralized, open banking will likely rely on fair standard-setting, through an amalgam of legally binding rules and industry developed standards.” He warned though that it “can be difficult to achieve fair standard-setting, since incumbents will have a strong economic interest when it comes to protecting their turf.” Chopra pointed to the telecommunications and health care industries as areas where private organizations “are not neutral, but are instead owned or governed by certain market participants” and where other players may also integrate a function akin to a lobbying or trade association. Explaining that the Bureau has been devoting a lot of time to this space, Chopra said the agency is gathering insights into other countries’ experiences, such as the UK’s Open Banking Implementation Entity (which was established to provide critical services and infrastructure), as well as domestic developments. He stated the Bureau will develop rulemaking with a practical mindset of how requirements would be operationalized in the market.
SEC proposes new requirements for advisors that outsource services to third parties
On October 26, the SEC proposed new oversight requirements for outsourced investment advisory services. The proposed rule, issued under the Investment Advisers Act of 1940, would prohibit registered investment advisers from outsourcing certain services and functions without conducting due diligence prior to engaging a third-party service provider. The proposed rule would apply to advisors that outsource certain “covered functions,” including services or functions necessary for providing advisory services in compliance with federal securities laws that—if not performed or negligently performed—would result in material harm to clients. Under the proposed rule, advisors would also be required to periodically monitor a third party’s performance and reassess whether it is appropriate to continue to outsource its services and functions. Additionally, the SEC is proposing corresponding amendments so that it may collect “census-type information” about third-party service providers, as well as amendments that would require advisors to maintain books and records related to the proposed rule’s oversight obligations.
SEC Chairman Gary Gensler released a statement supporting the proposed amendments. “[T]hese rules, if adopted, would better protect investors by requiring that investment advisers take steps to continue to meet their fiduciary and other legal obligations regardless of whether they are providing services in-house or through outsourcing, whether through third parties or affiliates,” Gensler said, explaining that the increased use of third-party service providers “has led staff to make several recommendations to ensure advisers that use them continue to meet their obligations to the investing public. When an investment adviser outsources work to third parties, it may lower the adviser’s costs, but it does not change an adviser’s core obligations to its clients.”
Commissioner Hester M. Peirce criticized the proposed rule, with Peirce claiming the proposal “may end up abrogating fiduciary duty and replacing it with [a] predefined approach to best interest—one not responsive to unique facts and circumstances.” She also expressed concerns related to the proposal’s potential impact on smaller advisors that may face disproportionate competitive challenges. Commissioner Mark T. Uyeda also dissented, expressing concerns over whether “there is any observable problem related to investment advisers’ oversight of service providers that necessitates the blanket imposition of specified oversight requirements.”
CISA releases new cybersecurity performance goals
Recently, the Cybersecurity and Infrastructure Security Agency (CISA) released a new report outlining baseline cross-sector cybersecurity performance goals (CPGs) for all critical infrastructure sectors. The report follows a July 2021 national security memorandum issued by President Biden, which required CISA to coordinate with the National Institute of Standards and Technology (NIST) and the interagency community to create fundamental cybersecurity practices for critical infrastructure, primarily to help small- and medium-sized organizations improve their cybersecurity efforts. The CPGs were informed by existing cybersecurity frameworks and guidance, as well as real-world threats and adversary tactics, techniques, and procedures observed by the agency and its partners. CISA noted in the report that the CPGs are not comprehensive but instead “represent a minimum baseline of cybersecurity practices with known risk-reduction value broadly applicable across all sectors, and will be followed by sector-specific goals that dive deeper into the unique constraints, threats, and maturity of each sector where applicable.” Organizations may choose to voluntarily adopt the CPGs in conjunction with broader frameworks like the NIST Cybersecurity Framework. “The CPGs are a prioritized subset of IT and operational technology (OT) cybersecurity practices that critical infrastructure owners and operators can implement to meaningfully reduce the likelihood and impact of known risks and adversary techniques,” CISA said in its announcement.
DOE announces final rules for targeted debt relief programs
On October 31, the Department of Education (DOE) announced final rules to streamline and improve targeted debt relief programs. (See DOE fact sheet here.) The final rules implement several changes to protect student borrowers, including:
- Borrower defense to repayment and arbitration. The final rules establish a strong framework for borrowers to raise a defense to repayment if their post-secondary institution misleads or manipulates them. Claims pending on or received on or after July 1, 2023, can be decided individually or as a group, and may be based on one of the following categories of actionable circumstances: substantial misrepresentation, substantial omission of fact, breach of contract, aggressive and deceptive recruitment, or judgments or final secretarial actions. The final rules will only provide full relief (partial discharges will not be considered), with approved claims requiring “that the institution committed an act or omission which caused the borrower detriment of such a nature and degree that warrant full relief” based upon a preponderance of the evidence. Additionally, the final rules establish certain recoupment processes for DOE to pursue institutions for the cost of approved claims, and will allow borrowers to litigate their case “by preventing institutions that participate in the Direct Loan program from requiring borrowers to engage in pre-dispute arbitration or sign class action waivers.”
- Closed school discharges. The final rules provide an automatic discharge of a borrower’s loan “one year after a college’s closure date for borrowers who were enrolled at the time of closure or left 180 days before closure and who do not accept an approved teach-out agreement or a continuation of the program at another location of the school.” Borrowers who accept but do not complete a teach-out agreement or program continuation will receive a discharge one year after the last date of attendance.
- Total and permanent disability discharge. The final rules include new options for borrowers who have had a total and permanent disability to receive a discharge, including borrowers (i) who receive additional types of disability review codes from the Social Security Administration (SSA); (ii) who later aged into retirement benefits and are no longer classified by one of SSA’s codes; (iii) who have an established disability onset date determined by SSA to be at least 5 years in the past; and (iv) whose first continuing disability review is scheduled at three years. The final rules also eliminate a three-year income monitoring requirement.
- Interest capitalization. Under the final rules, “interest will no longer be added to a borrower’s principal balance the first time a borrower enters repayment, upon exiting a forbearance, and leaving any income-driven repayment plan besides Income-Based Repayment.” Specifically, the final rules eliminate all instances where interest capitalization—which occurs when a borrower has outstanding unpaid interest added to the principal balance—is not required by law.
- Public Service Loan Forgiveness. As previously covered by InfoBytes, the final rules will provide benefits for borrowers seeking Public Service Loan Forgiveness, including providing credit toward the program for borrowers who have qualifying employment.
- False certification. The final rules will provide borrowers with an easier path to discharge when a college falsely certifies a borrower’s eligibility for a student loan. This includes expanding allowable documentation, clarifying applicable discharge dates, and allowing for the consideration of group discharges.
The final rules are effective July 1, 2023.
DOE expands support for veterans/servicemembers and incarcerated individuals
On October 27, the Department of Education (DOE) announced final rules cracking down on deceptive practices affecting veterans and servicemembers and expanding college access to incarcerated students. (See DOE fact sheet here.) The final rules, among other things, (i) implement a change to the “90/10 rule” made by the American Rescue Plan in 2021, which closed a loophole in the Higher Education Act that previously incentivized some for-profit colleges to aggressively recruit veterans and servicemembers in order to receive more DOE funding (going forward, these institutions may no longer count money from veteran and service member benefits toward a 10 percent revenue requirement); (ii) expand access to DOE’s Second Chance Pell Experimental Sites Initiative to allow incarcerated individuals in nearly all states to participate; (iii) provide incarcerated individuals with access to the FSA’s Fresh Start initiative, which will help borrowers with defaulted loans access income-driven low monthly payments as well as with access to Pell Grants; and (iv) clarify requirements and processes for post-secondary institutions when changing ownership, which may require institutions to provide additional financial protection or impose other conditions to protect against risks arising from the transaction.
SEC says exchanges must have policies on incentive compensation given in error
On October 27, the SEC announced final rules requiring securities exchanges to adopt listing standards that require issuers to develop and implement policies providing for the recovery of erroneously awarded incentive-based compensation received by executive officers. The final rules require a listed issuer to file the policy as an exhibit to its annual report and to include disclosures related to its recovery policy and recovery analysis where a recovery is triggered. The SEC first proposed new rules for executive compensation disclosure in 2015, but they were not finalized. The SEC reopened consideration of the rules last year, and in August, adopted a new requirement that a reporting company’s proxy statement and other disclosures include a table showing executive compensation and financial performance measures.
According a statement released by SEC Chairman Gary Gensler, the new rules will “strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors.” Commissioner Hester M. Peirce also released a statement, where she noted that implementing the statutory clawbacks mandate is “commendable,” but “doing it—expansively, inflexibly, and impractically—is not.” Peirce noted that the final rule “does not permit company boards, guided by their fiduciary duty, to determine when clawing back compensation makes sense,” and that “[s]uch an approach would have served shareholders by ensuring that companies claw back erroneously awarded compensation when doing so yields a net benefit to shareholders.” The final rules will become effective 60 days after publication in the Federal Register. Exchanges will be required to file proposed listing standards no later than 90 days following publication of the release in the Federal Register, with listing standards effective no later than one year following such publication.