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Treasury requests comments on certain nonbanks
On January 28, the U.S. Treasury Department published a notice and request for comment in the Federal Register on the proposed information collection “Determinations Regarding Certain Nonbank Financial Companies.” According to the notice, “information collected in § 1310.20 from state and federal regulatory agencies and from nonbank financial companies will be used generally by the [Financial Stability Oversight Council] to carry out its duties under Title I of the Dodd-Frank Act.” Additionally, “[t]he collections of information in §§ 1310.21, 1310.22 and 1310.23 provide an opportunity for a nonbank financial company to request a hearing or submit written materials to the Council concerning whether, in the company’s view, material financial distress at the company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the company, could pose a threat to the financial stability of the United States.” Comments are due March 29.
SEC reopens comments on “pay versus performance” proposal
On January 27, the SEC reopened the comment period on a proposed rule to amend the current executive compensation disclosure rule and implement Dodd-Frank’s “pay versus performance” requirement. Item 402 of Regulation S-K requires companies to disclose the relationship between their financial performance and executive compensation. The proposal (originally published in 2015, and covered by InfoBytes here), was intended to give shareholders new metrics by requiring registrants to clearly disclose “the relationship between executive compensation actually paid and the financial performance of the registrant.” All reporting companies, except smaller companies, would be required to disclose the relevant compensation information for the last five fiscal years. Smaller reporting companies would only be required to disclose the information for the past three fiscal years, and foreign private issuers, registered investment companies, and emerging growth companies would be exempt from the relevant Dodd-Frank statutory requirement.
According to the SEC, the reopening of the comment period will allow interested persons to comment on the proposed rules in light of developments since the 2015 proposal was released. The SEC noted in its press release that, in reopening the comment period, the Commission is “considering whether additional performance metrics would better reflect Congress’s intention in the Dodd-Frank Act and would provide shareholders with information they need to evaluate a company’s executive compensation policies.” SEC Chair Gary Gensler signaled support for the proposed rule, noting that it would “strengthen the transparency and quality of executive compensation disclosure,” and would fulfill a Congressional mandate under Dodd-Frank. However, Commission Hester M. Peirce dissented, stating that while she agreed it is time to move forward on the “nearly twelve-year-old Dodd-Frank rulemaking mandate,” she disagreed with the approach and would have favored a re-opening release that asked the public “whether [the SEC] should permit companies greater flexibility to determine which financial performance measure is appropriate in this context and to determine how to calculate executive compensation actually paid.”
CFPB seeks input on “junk fees”
On January 26, the CFPB announced an initiative requesting comments from the public on fees that are associated with consumers’ bank accounts, prepaid or credit card accounts, mortgages, loans, payment transfers, and other financial products and that are allegedly not subject to competitive processes that ensure fair pricing. Bureau research found that back-end fees often hide a product’s true cost and can undermine a competitive market. The agency cited statistics showing that in 2019, major credit card companies charged more than $14 billion annually in punitive late fees, and that banks’ revenue from overdraft and non-sufficient funds fees exceeded $15 billion during this same time period. In a measure to reduce these “junk fees” the Bureau’s request for information (RFI) seeks input on (i) fees charged to consumers that they believed were covered by a product or service’s baseline price; (ii) unexpected fees charged for a product or service; (iii) fees that seemed high for the purported service; and (iv) fees that were unclear. The RFI also asks for examples of companies or markets that obtain significant revenue from these types of fees and seeks to explore, among other things, whether consumers understand fee structures disclosures and what “oversight and/or policy tools should be used to address the escalation of excessive fees or fees that shift revenue away from the front-end price[.]” The Bureau also asks small businesses, non-profit organizations, legal aid attorneys, academics and researchers, state and local government officials, and financial institutions, including small banks and credit unions, to submit feedback as well. The comment period opened February 4 and closes on March 31.
CFPB Director Rohit Chopra added that information gathered from the RFI will be used to (i) “issue new rules and guidance to spur competition and transparency” (the Bureau also intends to review some of the rules inherited from the Federal Reserve Board); (ii) identify reasons why financial institutions allegedly do not compete on certain types of fees and features; and (iii) create new rules to provide consumers more control over their data and more opportunities to move their money.
SEC chair considers updating cybersecurity rules
On January 24, SEC Chair Gary Gensler discussed the agency’s cybersecurity policy work before the Northwestern Pritzker School of Law’s Annual Securities Regulation Institute. Gensler commented that the SEC is working to improve the overall cybersecurity resiliency of the financial sector with a focus on four groups of entities, including broker-dealers and investment companies, public companies, service providers that are not necessarily registered with the agency but that work with SEC financial sector registrants, and the SEC itself. Areas that may benefit from being “freshen[ed] up” include SEC regulations related to systems compliance and integrity (which focus on reducing the occurrence of system issues and improving resiliency), as well as cyber “hygiene” and incident reporting requirements. With respect to data privacy, Gensler commented that there may be opportunities to modernize and expand Regulation S-P, which requires registered broker-dealers, investment companies, and investment advisers to protect customer records and information. Noting that Regulation S-P was adopted more than two decades ago, Gensler has also asked SEC staff to provide “recommendations about how customers and clients receive notifications about cyber events when their data has been accessed,” including breaches of personally identifiable information. He stated that recommendations could also include changes to the timing and substance of notifications currently required under Regulation S-P. Gensler also asked for recommendations on whether and how to update public companies’ cybersecurity practices and cyber risk disclosures. He also noted that the SEC needs to explore and address cybersecurity risks arising from service providers, adding that measures “could include holding registrants accountable for service providers’ cybersecurity measures with respect to protecting against inappropriate access and investor information.”
FDIC approves final rule for trust, mortgage servicing accounts
On January 21, the FDIC published a final rule that amends the deposit insurance regulations for trust accounts and mortgage servicing accounts. According to the FDIC, the final rule is “intended to make the deposit insurance rules easier to understand for depositors and bankers, facilitate more timely insurance determinations for trust accounts in the event of a bank failure, and enhance consistency of insurance coverage for mortgage servicing account deposits.” The final rule, among other things: (i) establishes a formula to calculate deposit insurance coverage for all revocable and irrevocable trust accounts; (ii) “provides a maximum amount of deposit insurance coverage of $1,250,000 per owner, per insured depository institution for trust deposits”; and (iii) establishes that “a deposit owner’s trust deposits will be insured in an amount up to $250,000 per beneficiary, not to exceed five beneficiaries, regardless of whether a trust is revocable or irrevocable, and regardless of contingencies or the allocation of funds among the beneficiaries.” Additionally, the final rule allows principal and interest funds advanced by a mortgage servicer to be included in the deposit insurance calculation. The rule is effective April 1, 2024. In addition, the FDIC released a fact sheet on the final rule.
FinCEN proposes SAR pilot program
On January 24, FinCEN issued a Notice of Proposed Rulemaking (NPRM) to establish a limited-duration pilot program for financial institutions to share suspicious activity reports (SARs), pursuant to Section 6212 of the Anti-Money Laundering Act of 2020. The pilot program would allow financial institutions with SAR reporting obligations to share SARs and related information (subject to certain restrictions) with their foreign branches, subsidiaries, and affiliates for the purpose of combating illicit finance risks. The NPRM would expand guidance that previously only permitted SARs to be shared internally with foreign head offices, controlling companies (domestic or foreign), and domestic affiliates, and seeks input on the expected costs and benefits, technical challenges, merits of quarterly reporting, and SAR confidentiality protections. According to FinCEN, the pilot program is intended to provide feedback as the agency considers longer-term approaches towards SAR sharing with foreign affiliates. Comments are due March 28.
FTC clarifies Holder Rule provision
On January 20, the FTC issued an advisory opinion addressing the FTC’s Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses’ impact on consumers’ ability to recover costs and attorneys’ fees. Commonly known as the Holder Rule, the provisions protect “consumers who enter credit contracts by preserving their right to assert claims and defenses against any holder of certain loans and credit sales contracts, even if the loans or contracts are assigned to a third party.” Because a seller’s use of practices to foreclose these rights constitutes an unfair practice under Section 5 of the FTC Act, the Holder Rule requires sellers to include a notice in credit contracts of a consumer’s right to claims and defenses related to a seller’s misconduct. While courts have addressed the issue of whether consumers are able to recover costs and attorneys’ fees from the holder of a credit contract, the FTC noted that some courts and finance companies have misinterpreted previous FTC statements to suggest that the Holder Rule preempts state laws that authorize attorney fee awards against loan holders. According to the advisory opinion, the “Holder Rule does not eliminate any rights the consumer may have as a matter of separate state, local, or federal law. Consequently, whether costs and attorneys’ fees may be awarded against the holder of the credit contract is determined by the relevant law governing costs and fees.” Noting that “[n]othing in the Holder Rule states that application of such laws to holders is inconsistent with Section 5 of the FTC Act or that holders should be wholly or partially exempt from these laws,” the FTC added that “if the applicable law requires or allows costs or attorneys’ fee awards against a holder, the Holder Rule does not impose a cap on such an award.” While it is not clear how much deference courts would give to the advisory opinion, companies may choose to consider the Commission’s statement.
Fed examines ramifications of U.S. central bank digital currency
On January 20, the Federal Reserve Board published a discussion paper, Money and Payments: The U.S. Dollar in the Age of Digital Transformation, which calls for public comments on questions related to the possibility of a U.S. central bank digital currency, or CBDC. “The introduction of a CBDC would represent a highly significant innovation in American money,” the Fed said, although the agency noted that it “does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.” The paper examines the pros and cons of a potential CBDC and outlines a series of potential benefits, including faster payment options between countries. Among the various CBDC structures the Fed is considering is an intermediated model through which the private sector would facilitate the management of CBDC holdings and payments through accounts or digital wallets. Potential intermediaries could include commercial banks and regulated nonbank financial service providers. Such a model “would facilitate the use of the private sector’s existing privacy and identity-management frameworks; leverage the private sector’s ability to innovate; and reduce the prospects for destabilizing disruptions to the well-functioning U.S. financial system,” the Fed said. Additionally, a potential CBDC would also need to be readily transferable between customers of different intermediaries and must be designed to comply with rules regulating money laundering and the financing of terrorism (including the identification of persons accessing CBDC).
While a CBDC could improve cross-border payments and increase financial inclusion, the Fed warned that a CBDC may also yield potential negative effects, including affecting monetary policy implementation and interest rate control, as well as illicit finance controls and operational resilience. Consumer privacy could also be a concern, the Fed stated, noting that “any CBDC would need to strike an appropriate balance between safeguarding consumer privacy rights and affording the transparency necessary to deter criminal activity,” as the infrastructure of a CBDC could create opportunities for hackers since it would “potentially have more entry points than existing payment services.” The CBDC model under consideration would have intermediaries leverage exiting tools to address privacy concerns.
Feedback on the paper will be received through May 20.
FFIEC issues final update for Examination Modernization Project
On January 21, the Federal Financial Institutions Examination Council (FFIEC) issued a statement presenting the results of the final phase of its Examination Modernization Project. The project, which was initiated to identify and assess measures to improve the community bank safety and soundness examination process, sought feedback on examination processes from select supervised institutions and examiners. FFIEC released previous project updates, which focused on meaningful supervisory burden reduction and tailoring examination plans and procedures based on risk (covered by InfoBytes here). The final phase addressed feedback related to examination requests and authentication requirements for FFIEC members’ supervision systems. Identified best practices include that: (i) information requests should be risk-focused and relevant to an examination; (ii) supervised institutions should be allowed sufficient time to produce requested information; (iii) examiners should coordinate information requests among the exam team to avoid duplication and redundancy; (iv) requests should be made through an institution’s designated regulatory examination point-of-contact; and (v) requests should be clearly articulated in writing. With respect to feedback received related to authentication requirements, FFIEC noted that its Task Force on Supervision has approved a common authentication solution to allow member agencies and supervised institutions “to securely authenticate to supervision systems, while eliminating the need for multiple credentials to access regulator systems.”
OFAC amends Transnational Criminal Organizations Sanctions Regulations
On January 21, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) published a final rule in the Federal Register amending the Transnational Criminal Organizations Sanctions Regulations. The final rule reissues the regulations in their entirety to further implement Executive Order (E.O.) 13581 and E.O. 13863 related to transnational criminal organizations. Last July, President Biden extended the national emergency related to significant transnational criminal organizations declared in E.O. 13581 for an additional one-year period. Replacing regulations that were published in abbreviated form in January 2012 (and amended in July 2019 here), OFAC’s final rule provides additional comprehensive interpretive guidance, definitions, general licenses, and other regulatory provisions. The final rule is effective immediately.