PH FedACTion: Financial Regulatory Updates
This Week in Washington for November 16, 2020
November 23, 2020
Dina Ellis
THE BIG PICTURE
For the latest advice for businesses dealing with the coronavirus, be sure to check out Paul Hastings’ targeted alert series: https://www.paulhastings.com/coronavirus
The United States continued to see a massive surge in COVID-19 cases as the death toll surpassed 250,000, a grim milestone as the country continues to grapple with the pandemic. The latest wave of infections included several elected officials such as Senators Chuck Grassley (R-IA) and Rick Scott (R-FL), and Representatives Cheri Bustos (D-IL) and Don Young (R-AK). A second vaccine candidate was found to be over 94% effective, an exciting and promising result. The FDA is expected to approve an emergency use authorization and begin vaccinating health care workers shortly thereafter, though widespread availability is not expected until spring or early summer. The CDC recommended that Americans avoid traveling and gathering for the Thanksgiving holiday, but millions are still expected to do so, and may unwittingly seed an additional round of outbreaks. As the public grows increasingly weary of social distancing restrictions, public health officials cautioned Americans to remain vigilant, as the next few months may see the worst hospitalization and death rates to date.
The President continued his legal campaign to overturn the election results in the critical swing states of Michigan, Pennsylvania and Georgia, but was met with little success as his lawyers failed to present evidence backing up their allegations. On Friday, Georgia’s Secretary of State announced the state’s hand recount had been concluded, and certified the results, affirming Joe Biden’s victory. The administration’s refusal to concede and cooperate with the transition teams organized by President-elect Biden has hindered their ability to plan for an orderly transfer of power. Despite this hurdle, Joe Biden and Kamala Harris met with corporate and labor leaders, national security experts and Democratic congressional leadership as they lay the groundwork for their administration. Biden made additional staffing announcements, with Rep. Cedric Richmond (D-LA) set to leave Congress to lead the Office of Public Engagement, and Louisa Terrell expected to serve as director of the Office of Legislative Affairs. President-elect Biden plans to formally announce his first round of cabinet nominations on Tuesday.
Other highlights of last week include:
An additional 742,000 Americans filed for unemployment benefits as the economic effects of the coronavirus pandemic continue to ripple throughout the economy.
On Tuesday, Acting Secretary of Defense Chris Miller announced the President had ordered a troop drawdown in Iraq and Afghanistan, with U.S. force levels set to fall to just 2,500 in each country by January 15.
The President’s decision to fire top cybersecurity official Chris Krebs drew rare bipartisan blowback as Republicans described it as unnecessarily adding to “confusion and chaos.”
LAST WEEK ON THE HILL
House Nominates Leaders for Next Congress: On Wednesday, House Speaker Nancy Pelosi secured her Caucus’s nomination to serve another term as Speaker, which she has pledged will be her last. Rep. Katherine Clark (D-CT) beat out Rep. David Cicilline (D-RI) to serve as assistant speaker. The Republican Caucus re-elected Rep. Kevin McCarthy (R-CA) to serve as minority leader, with Rep. Steve Scalise (R-LA) retaining his role as minority whip.
HOUSE FINANCIAL SERVICES COMMITTEE
Hearing on “Insuring against a Pandemic: Challenges and Solutions for Policyholders and Insurers”: On Thursday, the Subcommittee on Housing, Community Development and Insurance held a hearing a virtual hearing to discuss the challenges and opportunities for policyholders and insurers in dealing with the issues raised by the pandemic. The panel also considered H.R. 7011, the Pandemic Risk Insurance Act, and the draft text of H.R. __, which would require the Federal Insurance Office to conduct a study of business interruption insurance coverage in the United States.
Ann Cantrell, Owner, Annie’s Blue Ribbon General Store
John Doyle, President and Chief Executive Officer, Marsh
Brian Kuhlmann, Chief Corporate Counsel, Shelter Insurance, on behalf of APCIA
Michelle Melendez McLaughlin, Chief Underwriting Office, Chubb North America
R.J. Lehmann, Executive Editor and Senior Fellow, International Center for Law and Economics
SENATE BANKING COMMITTEE
Hearing on “Oversight of the Securities and Exchange Commission”: On Tuesday, the full Committee held a hearing a virtual hearing to receive testimony from Securities and Exchange Commission Chairman Jay Clayton regarding the work and agenda of the SEC. The hearing likely marked Chair Jay Clayton’s final appearance as he concludes his tenure at year-end. Committee Chair Mike Crapo (R-ID) praised Clayton’s work on finalizing Regulation Best Interest, while Ranking Member Sherrod Brown (D-OH) criticized the rule, saying it reduced transparency and undermined existing protections. Sen. Elizabeth Warren (D-MA) sharply criticized the Commission’s failure to implement a “mandatory, uniform standard for reporting on climate risk.”
Jay Clayton, Chairman, U.S. Securities and Exchange Commission
ON THE FLOOR
Judy Shelton’s Nomination Fails to Pass Procedural Hurdle in Senate Prior to Recess: Senate Majority Leader Mitch McConnell’s plan to advance the nomination of Judy Shelton to a vacant seat on the Federal Reserve Board faltered this week after Senators Chuck Grassley (R-IA) and Rick Scott (R-FL) were forced to isolate due to COVID-19 exposure. The next Senate vote is not scheduled until November 30th, and with Mark Kelly set to replace Sen. Martha McSally (R-AZ) before the New Year, the window of opportunity for Shelton may have passed.
LEGISLATION INTRODUCED AND PROPOSED
H.R. 8760: Rep. Emanuel Cleaver (D-MO) introduced H.R. 8760, which would require the Board of Governors of the Federal Reserve System and the Securities and Exchange Commission to issue an annual report to the Congress projecting and accounting for the economic costs directly and indirectly caused by the impacts of climate change, and to require the Federal Retirement Thrift Investment Board to establish a Federal Advisory Panel on the Economics of Climate Change.
H.R. 8761: Rep. Greg Gianforte (R-MT) introduced H.R. 8761, which would reduce premiums under the National Flood Insurance Program for certain properties.
H.R. 8778: Rep. Norma Torres (D-CA) introduced H.R. 8778, which would amend the Emergency Economic Stabilization Act of 2008 to authorize use of amounts under the Troubled Assets Relief Program to be used for activities under the Emergency Solutions Grant Program of the Department of Housing and Urban Development or the Hardest Hit Fund Program of the Department of the Treasury.
H.R. 8786: Rep. Anthony Gonzalez (R-OH) introduced H.R. 8786, which would amend the Investment Company Act of 1940 to prohibit limitations on closed-end companies investing in private funds.
THIS WEEK ON THE HILL
Congress is in recess for the Thanksgiving holiday.
THE REGULATORS
Treasury Secretary Mnuchin Requests Federal Reserve Return Unused Stimulus Funds: On Thursday, in a letter to Federal Reserve Chairman Jerome Powell, Treasury Secretary Steven Mnuchin rejected a requested extension of the 13(3) facilities using CARES Act funding and requested the Fed return the US$455B in unused funding by the end of the year. While Mnuchin said the programs are no longer needed, Powell noted that the Fed “would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.” Top congressional Democrats blasted the move as “irresponsible and misguided” as the country continues to weather the economic fallout from the pandemic, however Mnuchin garnered support from Senate Majority Leader Mitch McConnell (R-KY) and Sen. Pat Toomey (R-PA).
Agencies Announce Threshold for Smaller Loan Exemption from Appraisal Requirements for Higher-Priced Mortgage Loans: On Wednesday, the Federal Reserve Board, CFPB and OCC announced that the threshold for exempting loans from special appraisal requirements for higher-priced mortgage loans during 2021 will remain at US$27,200, as it was in 2020. The threshold amount will be effective January 1, 2021, and is based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) as of June 1, 2020.
Agencies Announce Dollar Thresholds in Regulations Z and M for Exempt Consumer Credit and Lease Transactions: On Wednesday, the Federal Reserve Board and the CFPB announced the dollar thresholds in Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing) that will apply for determining exempt consumer credit and lease transactions in 2021. Based on the annual percentage increase in the CPI-W as of June 1, 2020, the protections of the Truth in Lending Act and the Consumer Leasing Act generally will apply to consumer credit transactions and consumer leases of US$58,300 or less in 2021. However, private education loans and loans secured by real property (such as mortgages) are subject to the Truth in Lending Act regardless of the amount of the loan.
Agencies Release Fact Sheet to Clarify Bank Secrecy Act Due Diligence Requirements for Banks and Credit Unions that Offer Services to Charities and Non-Profits: On Thursday, the Federal Reserve Board, FDIC, NCUA and OCC issued a joint fact sheet clarifying that bank and credit union compliance efforts to meet Bank Secrecy Act due diligence requirements for customers that are charities and other nonprofit organizations should be based on the money laundering risks posed by the customer relationship. The fact sheet highlights the importance of legitimate charities and nonprofit organizations having access to financial services and being able to transmit funds through legitimate and transparent channels, especially in the context of responding to the coronavirus. It also clarifies that charities and nonprofit organizations as a whole do not present a uniform or unacceptably high risk of being used or exploited for money laundering, terrorist financing, or sanctions violations, and that banks and credit unions must develop risk profiles that are appropriate for the risks presented by each customer. Additionally, it provides examples of customer information that may be useful to banks and credit unions in determining those risk profiles.
Agencies Provide Temporary Relief to Community Banking Organizations: On Friday, the Federal Reserve Board, FDIC and OCC announced an interim final rule that provides temporary relief for certain community banking organizations related to certain regulations and reporting requirements as a result, in large part, of their growth in size from the coronavirus response. Community banking organizations are subject to different rules and requirements based on their risk profile and asset size. Due to participating in federal coronavirus response programs—such as the Paycheck Protection Program—and other lending that supports the U.S. economy, many community banking organizations have experienced rapid and unexpected increases in their sizes, which are generally expected to be temporary. The temporary increase in size could subject community banking organizations to new regulations or reporting requirements. With regard to the requirements covered by the interim final rule, community banking organizations that have crossed a relevant threshold generally will have until 2022 to either reduce their size, or to prepare for new regulatory and reporting standards.
Federal Reserve Board Issues Final Rule Modifying the Annual Assessment Fees for Its Supervision and Regulation of Large Financial Companies: On Thursday, the Federal Reserve Board issued a final rule modifying the annual assessment fees for its supervision and regulation of large financial companies, as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). The final rule is nearly identical to the proposal issued in November 2019. The final rule raises the threshold at which fees are assessed for bank holding companies and savings and loan holding companies from US$50B to US$100B in total consolidated assets. Additionally, it adjusts the amount charged to certain bank holding companies and savings and loan holding companies following changes from the Board related to the EGRRCPA.
Treasury and IRS Issue Guidance Clarifying the Deductibility of Expenses Where a Business Received a PPP Loan: On Wednesday, the Treasury Department and IRS released guidance clarifying the tax treatment of expenses where a Paycheck Protection Program (PPP) loan has not been forgiven by the end of the year the loan was received. Since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible. This results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket. The guidance noted that if a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not. The guidance encouraged businesses to file for forgiveness as soon as possible, adding that in the case where a PPP loan was expected to be forgiven, and it is not, businesses will be able to deduct those expenses.
New York Fed to Host Event Exploring the Role the Financial Sector Can Play in Mitigating Climate Risk for the Most Vulnerable: On Thursday, the Federal Reserve Bank of New York, in conjunction with Climate Safe Lending Network (CSL Network), hosted an event exploring the intersection of climate change approaches in the financial sector and opportunities for community resilience and inclusion. The event brought together international climate investors, sustainability officers, and experts on urban and environmental policy to discuss pathways to building resiliency in the low-income communities that are most vulnerable to the flooding, fires, and more frequent and severe storms caused by climate change.
New York Fed Hosts Event Discussing Artists’ Impact on Community Health and Wellbeing: On Friday, the Federal Reserve Bank of New York, in partnership with the Yerba Buena Center for the Arts, hosted an event focused on the role of artists in building an equitable economy and their influence on community health and wellbeing. The event featured discussions with and about artists as catalysts of change in communities, as well as academics who will provide research on the connection between arts and health. Leaders from the community development and healthcare sectors discussed the contributions of artists and how investments in artists and arts-programming support community building and facilitate change.
OCC Proposes Rule to Expand Access to Bank Services, Capital, and Credit: On Friday, the OCC proposed a rule to ensure increased access to banking services provided by national banks, federal savings associations, and federal branches and agencies of foreign bank organizations. The proposal would require banks to provide access to services, capital, and credit based on the risk assessment of individual customers, rather than broad-based decisions affecting whole categories or classes of customers. The proposal would require banks to finance companies such as gun manufacturers and oil companies, which have frequently proven unpopular and subjects of criticism. Acting Comptroller Brian Brooks expressed the view that “there is a creeping politicization of the banking industry that has the propensity to be very, very dangerous,” and championed the proposal as a solution.
**SEC Adopts Rules to Facilitate Electronic Submission of Documents to the Agency: On Tuesday, the SEC voted to adopt rules and rule amendments that will provide additional flexibility in connection with documents filed with the Commission by permitting the use of electronic signatures in authentication documents, and facilitate electronic service and filing in the Commission's administrative proceedings. These new rules and amendments are part of a series of initiatives designed to modernize and strengthen the agency's operations.
SEC Adopts Amendments to Modernize and Enhance Management’s Discussion and Analysis and other Financial Disclosures: On Thursday, the SEC announced that it had voted 3-2 along party lines to adopt amendments that will modernize, simplify and enhance certain financial disclosure requirements in Regulation S-K. The amendments are intended to enhance the focus of financial disclosures on material information for the benefit of investors, while simplifying compliance efforts for registrants. In their dissent, Democratic Commissioners Allison Lee and Caroline Crenshaw said the elimination of a section related to supply chain and risk management was concerning, and added that it “fails completely to address climate risk.”
CFTC Unanimously Approves Final Rule for Granting Exemptions from Derivatives Clearing Organization Registration: On Wednesday, the CFTC unanimously approved a final rule establishing a framework for the Commission to grant an exemption from registration as a derivatives clearing organization (DCO) to a clearing organization organized outside of the U.S. for the purpose of clearing proprietary swap transactions for U.S. persons.
CFTC Unanimously Approves Final Rule Amending Swap Execution Facility Requirements: On Wednesday, the CFTC unanimously approved a final rule amending certain parts of its regulations relating to the execution of “package transactions” on swap execution facilities (SEFs) and the resolution of error trades on SEFs. Both matters are currently the subject of relief in Commission staff no-action letters. The final rule amends part 37 of CFTC regulations to allow the swap components of certain categories of package transactions to be executed on-SEF but through flexible means of execution rather than through the required methods of execution for “required transactions.” In addition, the final rule amends part 36 of CFTC regulations to include an exemption from the trade execution requirement for swap transactions that are executed as a component of a package transaction that also includes a component that is a new issuance bond.
CFTC Staff Extends Temporary Swap Data Reporting Relief for Certain International Swap Dealers and Major Swap Participants: On Thursday, the CFTC’s Division of Market Oversight (DMO) issued a staff letter extending no-action relief to certain CFTC-registered swap dealers (SDs) and major swap participants (MSPs). The extended relief stipulates that DMO will not recommend that the CFTC take an enforcement action against a non-U.S. SD or a non-U.S. MSP for failure to comply with the swap data reporting requirements in Part 45 and Part 46 of the CFTC’s regulations as long as: (i) the swaps are with non-U.S. counterparties that are not guaranteed affiliates, or conduit affiliates, of a U.S. person; (ii) the entity is established in Australia, Canada, the European Union, Japan, Switzerland, or the United Kingdom; and (iii) the entity is not part of an affiliated group in which the ultimate parent entity is a U.S. SD, U.S. MSP, U.S. bank, U.S financial holding company, or U.S. bank holding company.
FHFA Announces Final Capital Rule for the Enterprises: On Wednesday, the Federal Housing Finance Agency announced a final rule that establishes a new regulatory capital framework for Fannie Mae and Freddie Mac (the Enterprises). The final rule is substantively similar to the proposed rule in terms of overall structure and approach. As required by the proposed rule, an Enterprise must maintain tier 1 capital in excess of 4.0 percent to avoid restrictions on capital distributions and discretionary bonuses. FHFA has made three notable changes to the risk-based capital requirements in addition to a number of other refinements. The notable changes include: (1) Increased capital relief for credit risk transfers (CRT); (2) Reduced capital requirements for single-family mortgage exposures subject to COVID-19 related forbearance; and (3) Increased the exposure level risk-weight floor for single-family and multifamily mortgage exposures to 20%. Sen. Sherrod Brown (D-OH) criticized the rule, saying “Director Calabria’s rush to finish this rule without addressing concerns raised about its effects is a recipe for disaster.”
FDIC Seeks Financial Advisor to Establish New “Mission-Driven Bank Fund” to Support FDIC-Insured Minority Banks and Community Development Financial Institutions: On Wednesday, the FDIC announced a competition to choose one or more experienced financial advisors to support the development of a new Mission-Driven Bank Fund. The Fund will provide a vehicle for private sector and philanthropic investment in FDIC-insured Minority Depository Institutions (MDIs) and Community Development Financial Institutions (CDFIs). The selected financial advisor(s) will work with the FDIC to develop a structure and operational aspect for the Fund.
COMINGS AND GOINGS AT THE AGENCIES
SEC Chairman Jay Clayton to Conclude Tenure at Year End: On Monday, SEC Chairman Jay Clayton confirmed that, after serving for more than three and a half years, he will conclude his tenure at the end of this year, ahead of the June 2021 expiration of his term. During his tenure, Chairman Clayton focused the agency’s resources on advancing the interests of Main Street investors through initiatives that promoted economic growth, investment opportunity, market integrity and investor protection.
Marie-Louise Huth Named as Associate General Counsel for Legal Policy at SEC: On Wednesday, the SEC announced that it has named Marie-Louise Huth as an Associate General Counsel for Legal Policy in the Office of the General Counsel. Most recently, Ms. Huth served as the Chief Counsel for the Division of Economic and Risk Analysis.
Lourdes Caballes and Michael Rufino Named Associate Directors of OCIE's Broker-Dealer Examination Program in the SEC's New York Regional Office: On Thursday, the SEC announced that Lourdes Caballes and Michael Rufino have been named Associate Directors of the Office of Compliance Inspections and Examinations Broker-Dealer Examination Program in the New York Regional Office. Ms. Caballes has been an Assistant Director in OCIE's Clearance and Settlement Examination Program since December 2016, while Mr. Rufino will join the SEC from the Financial Industry Regulatory Authority.
President Trump Plans to Nominate Acting Comptroller Brian Brooks to Full Term: The President indicated he plans to nominate current Acting Comptroller of the Currency Brian Brooks to a full five-year term, an unusual move for the lame duck session. Senate Banking Committee Chairman Mike Crapo (R-ID) indicated he would scheduling a confirmation hearing, while Ranking Member Sherrod Brown (D-OH) said the nomination “must be rejected immediately.” If confirmed, Brooks’ tenure could be rather short, as U.S. law allows a five-year term “unless sooner removed by the President,” and it is expected President-elect Biden would select his own choice for the agency.
OTHER NOTEWORTHY NEWS
European Council Adopts Conclusions on Role of Regulatory Sandboxes: On Monday, the European Council adopted a set of conclusions on the role of regulatory sandboxes and experimentation clauses in an innovation-friendly, future-proof, sustainable and resilient EU regulatory framework. In these conclusions, the Council affirms that regulatory sandboxes can offer significant opportunities particularly to innovate and grow for all businesses, especially SMEs, including micro-enterprises as well as start-ups, in industry, services and other sectors.
New York Department of Financial Services Announces Settlement with NRA: On Wednesday, NYDFS Superintendent Linda Lacewell announced the Department had entered into a consent order with the National Rifle Association over charges announced in February of violations of New York Insurance Law. The consent order includes a civil monetary penalty of US$2.5M, in addition, the NRA is banned from marketing insurance in the State or receiving compensation in connection with any newly issued New York insurance policies for five years, irrespective of whether the NRA obtains a license.
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Paul Hastings’ Government Relations team is monitoring these issues. We help our clients craft strategies to address federal legislative and regulatory matters. Please reach out to us if your organization needs assistance with congressional or regulatory relations.
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