On July 24, OCC Comptroller Curry delivered remarks before the New England Council in Boston, MA regarding the risks that financial institutions face today. Rising interest rates and regulatory compliance were two of the three risks discussed. Curry emphasized that the inevitable rise in interest rates could greatly affect loan quality, particularly loans that were not carefully underwritten to begin with, and that ”[l]oans that are typically refinanced, such as leveraged loans,” would be particularly severely affected. Recognizing the impact that Dodd-Frank continues to have on banks, Curry said that financial institutions face two categories of risk from new regulations: (i) “banks run afoul of the new regulations, possibly damaging their reputations and subjecting themselves to regulatory penalties”; and (ii) banks devote their time and money to regulatory compliance, rather than putting those resources toward serving their customers and communities. The final and “perhaps the foremost risk facing banks today,” according to Curry, is cyber threats. Curry outlined the agency’s efforts to curtail cyber intrusion in the banking industry, highlighting the June 30 release of its Semiannual Risk Assessment and the creation of a Cybersecurity and Critical Infrastructure Working Group, which was designed to (i) increase cybersecurity awareness; (ii) promote best practices; and (iii) strengthen regulatory oversight of cybersecurity readiness. Curry noted, however, that information-sharing is just as important as self-assessment and supervisory oversight: “We strongly recommend … that financial institutions of all sizes participate in the Financial Services Information Sharing and Analysis Center, a non-profit information-sharing forum established by financial services industry participants to facilitate the sharing of physical and cyber threat and vulnerability information.” Collaboration among banks of all sizes and non-bank providers, Curry stated, can be a “game-changer” in more ways than one: “By promoting the discovery of common interests and common responses to the risks that you face in your businesses and we all face together, you provide an invaluable service to New England and to the United States.”
On August 5, the SEC adopted a rule requiring public companies to disclose the pay ratio of their CEO to the median compensation of their employees. The rule gives companies some flexibility in the method of determining the pay ratio while providing investors with information to assess the compensation of CEOs. Methods companies may employ to identify the median employee include using (i) a statistical sample of the total employee population; (ii) payroll or tax records that contain a consistently applied compensation measure; or (iii) yearly total compensation as calculated under the existing executive compensation rules. The total compensation for CEOs and total compensation for average employees must be calculated in the same manner. Under the new rule, companies must also disclose the methodology used for identifying the median employee’s annual compensation. Companies will be required to provide disclosure of their pay ratios for their first fiscal year beginning on or after Jan. 1, 2017. Smaller reporting companies, emerging growth companies, foreign private issuers, MJDS filers, and registered investment companies are exempt from the pay ratio rule, which will be effective 60 days after publication in the Federal Register.
DC Circuit Bars Retroactive Application of Dodd-Frank Act Provisions Permitting SEC to Bar Association with Municipal Advisors and Rating Organizations
On July 14, the U.S. Court of Appeals for the District of Columbia Circuit ruled that Dodd-Frank Act provisions authorizing the SEC to punish certain misconduct by barring association with municipal advisors and rating organizations may not be applied with respect to misconduct that took place prior to the effective date of the provisions. Koch et al. v. SEC, No. 14-1134 (D.C. Cir. Jul. 14, 2015). The Koch appeal arose from an SEC finding that the defendants had violated the securities laws by engaging in a market manipulation practice known as “marking the close,” and the SEC’s imposition of sanctions that, among others, prohibiting Koch from associating with municipal advisors and rating organizations. The DC Circuit upheld the finding of violations, but vacated the part of the order barring Koch from associating with municipal advisors and rating organizations on the basis the relevant Dodd-Frank provisions authorizing that sanction had not been enacted at the time of the misconduct. The court determined that applying those provisions was impermissibly retroactive, as there was no showing that Congress intended the provisions to apply retroactively and because it triggered additional legal consequences not existing at the time of the misconduct. The court did not disturb the other remedial orders in the case, including bars to association with other securities industries.
On June 9, six federal agencies – the Federal Reserve, CFPB, FDIC, NCUA, OCC, and the SEC – issued a final interagency policy statement creating guidelines for assessing the diversity policies and practices of the entities they regulate. Mandated by Section 342 of the Dodd-Frank Act, the final policy statement requires the establishment of an Office of Minority and Women Inclusion at each of the agencies and includes standards for the agencies to assess an entity’s organizational commitment to diversity, workforce and employment practices, procurement and business practices, and practices to promote transparency of diversity and inclusion within the organization. The final interagency guidance incorporates over 200 comments received from financial institutions, industry trade groups, consumer advocates, and community leaders on the proposed standards issued in October 2013. The final policy statement will be effective upon publication in the Federal Register. The six agencies also are requesting public comment, due within 60 days following publication in the Federal Register, on the information collection aspects of the interagency guidance.
On April 29, the SEC voted 3-2 to propose rules that would implement Dodd Frank’s pay-versus-performance provision by requiring companies to disclose the relationship between their financial performance and executive compensation. According to SEC Chair Mary Jo White, the proposed rules “would better inform shareholders and give them a new metric for assessing a company’s executive compensation relative to its financial performance.” All executive officers currently submitting their financials in the summary compensation table must abide by the proposed rules’ disclosure requirements. The rules would require that all reporting companies, except smaller companies, disclose the relevant compensation information for the last five fiscal years; smaller reporting companies will only be required to disclose the information for the past three fiscal years. Foreign private issuers, registered investment companies, and emerging growth companies will be exempt from the relevant Dodd-Frank statutory requirement. The comment period for the proposed rules will be open for 60 days after publication in the Federal Register.
On April 22, the SEC announced an award of more than $1 million to a compliance officer for providing the agency with information on the company’s misconduct. The Dodd-Frank Act whistleblower regime is designed to encourage employees to submit evidence of securities fraud. When sanctions of a successful enforcement action exceed $1 million, the program allows for up to 30 percent of the money collected to be provided to the whistleblower. Since the program began in 2011, 16 whistleblowers have received upwards of $50 million from an investor protection fund, which was established by Congress and is financed through the monetary sanctions the SEC receives from securities law violators.
On March 12, the FTC announced its coordination with the CFPB to reauthorize for a three-year term their memorandum of understanding (MOU), which outlines the two agencies’ coordination under the Consumer Financial Protection Act. The interagency agreement outlines processes for, among other things, coordinated law enforcement activities, commencement of or settling investigations and actions and proceedings, intervention in law enforcement actions, consultation on rulemaking and guidelines, sharing supervisory information, sharing consumer complaint information, and coordination to minimize duplicative or burdensome oversight or administrative proceedings.
The CFPB announced on February 23 that it plans to host a field hearing on the issue of arbitration provisions within various consumer financial contracts. According to the CFPB’s blog post, the hearing will take place on March 10 in Newark, New Jersey, and will feature remarks from CFPB Director Richard Cordray, testimony from consumer groups, industry representatives, and members of the public. The Dodd-Frank Act instructs the CFPB to study the use of pre-dispute arbitration provisions in consumer financial contracts (and provide a Report to Congress) and gives the CFPB the authority to issue regulations on the use of arbitration clauses if the CFPB chooses. In December 2013, the CFPB issued a report on its preliminary findings, which indicated that approximately 9 out of 10 arbitration clauses used by large banks in credit card and checking account agreements prevent consumers from participating in class actions.
On February 13, the FDIC released the third and final technical assistance video intended to assist bank employees to comply with certain mortgage rules issued by the CFPB. The final video addresses the Mortgage Servicing Rules and the “Small Servicer” exemption. The first video, released on November 19, 2014, covered the ATR/QM Rule, and the second video, released on January 27, covered the Loan Originator Compensation Rule.
CFPB Orders Nonbank Mortgage Lender to Pay $2 Million Penalty for Deceptive Advertising and Kickbacks
On February 10, the CFPB announced a consent order with a Maryland-based nonbank mortgage lender, ordering the lender to pay a $2 million civil money penalty, in part for allegedly failing to disclose its financial relationship with a veteran’s organization to consumers. According to the consent order, the CFPB alleged that the lender, whose primary business is originating refinance mortgage loans guaranteed by the VA, paid a veteran’s organization a fee to be named the “exclusive lender” of the organization and that failing to disclose this relationship in marketing materials targeted to the organization’s members constituted a deceptive act or practice under the Dodd-Frank Act. The CFPB further alleged that, because the veteran’s organization urged its members to use the lender’s products in direct mailings from the lender, call center referrals, and through the organization’s website, the monthly “licensing fee” and “lead generation fees” paid to the veteran’s organization and a third party broker company as part of marketing and referral arrangements constituted illegal kickbacks in violation of RESPA. In addition to the civil penalty, the consent order requires the lender to end any deceptive marketing, cease deceptive endorsement relationships, submit a compliance plan to the CFPB, and comply with additional record keeping, reporting, and compliance monitoring requirements.
On February 9, the SEC issued a proposed rule implementing Section 955 of the Dodd-Frank Act. The rule would require directors, officers, and other employees of public companies to disclose in proxy and information statements whether they use derivatives and other financial instruments to offset or “hedge” against the decline in equity securities granted by the company as compensation, or held, directly or indirectly, by employees or directors. The proposed rule would apply to equity securities of a public company, its parent, subsidiary, or any subsidiary of any parent of the company that is registered with the SEC under Section 12 of the Exchange Act. Public comments will be accepted for 60 days following publication in the Federal Register.
On January 21, the Committee on Financial Services, in a voice vote, agreed to a new oversight plan that identifies the areas that the Committee and its subcommittees plan to oversee during the 114th Congress. Notable sections of the oversight plan include: (i) examining the governance structure and funding mechanism of the CFPB; (ii) reviewing recent rulemakings by the CFPB and other agencies on a variety of mortgage-related issues; (iii) examining the effects of regulations promulgated by Dodd-Frank on community financial institutions; and (iv) examining proposals to modify the GSEs.
On January 15, the Federal Reserve and the FDIC issued a joint press release making available the public sections of resolution plans of firms with less than $100 billion in qualifying nonbank assets. The Dodd-Frank Act requires that certain banking institutions periodically submit resolution plans to the Federal Reserve and the FDIC describing the bank’s strategy for rapid and orderly resolution in the event of material financial distress or failure of the company. The public portions of these “living wills” are available on the Federal Reserve and FDIC websites.
On January 14, the SEC adopted new rules for security-based swap data repositories (SDRs), which store swap trading data. The rules require SDRs to register with the SEC and set reporting and public dissemination requirements for security-based swap transaction data. That reporting requirement, known as Regulation SBSR, outlines information that must be reported and publicly shared for each security-based swap transaction. The new rules are designed to increase transparency in the security-based swap market and are anticipated to reduce risks of default, improve price transparency, and hold financial institutions accountable for misconduct. The rules implement mandates under Title VII of the Dodd-Frank Act and will become effective 60 days after publication in the Federal Register. Persons subject to the new rules governing the registration of SDRs must comply with them by 365 days after they are published in the Federal Register.
On December 8, the U.S. Court of Appeals for the Third Circuit held that application of Dodd-Frank’s Anti-Arbitration provision did not apply to causes of action asserted under the Anti-Retaliation Dodd Frank Provision due to the limiting language of the arbitration law. Khazin v. TD Ameritrade Holding Corp, No. 14-1689 (3rd Cir. Dec.8, 2014). In 2013, the plaintiff filed suit in the District of New Jersey alleging that he had been fired in the preceding year for whistleblowing. According to the complaint, the retaliation occurred after the plaintiff questioned a supervisor about the pricing of a financial product that did not comply with relevant securities regulations. The District Court ruled that Dodd Frank’s Anti-Arbitration Provision did not prohibit the enforcement of arbitration agreements that were signed before the enactment of Dodd-Frank. Rather than deciding on the timing issue, however, the Court of Appeals upheld the decision on statutory construction grounds based on the limiting language of the Anti-Arbitration provision indicating that it only applied to causes of action contained within the same section, and not all allegations under Dodd-Frank.