Industry Developments

OCC Provides Additional Details to Evaluate Charter Applications From fintech Companies

 

On March 15, 2017, the Office of the Comptroller of the Currency (“OCC“) issued a “Draft Licensing Manual Supplement for Evaluating Charter Applications from Financial Technology Companies,” which provides additional details on the evaluation of national bank charter applications from financial technology (“fintech“) companies that engage in the business of banking. The supplement explains how the OCC will apply the licensing standards and requirements in existing regulations and policies to fintech companies applying for special purpose national bank charters. The supplement also describes unique factors that the agency will consider in evaluating applications from fintech companies; expectations for promoting fair access, fair treatment and financial inclusion; and the agency’s approach to supervising those fintech companies that become national banks. Release. Manual Supplement.

Nationstar Mortgage to Pay $1.75 Million Penalty for HMDA Violations

 

On March 15, 2017, the Consumer Financial Protection Bureau (“CFPB“) ordered Nationstar Mortgage LLC (“Nationstar“) to pay a $1.75 million civil penalty for violating the Home Mortgage Disclosure Act (“HMDA“) by consistently failing to accurately report data about mortgage transactions between 2012 through 2014. The $1.75 million civil penalty is the largest HMDA penalty imposed by the CFPB to date. The CFPB found that (1) Nationstar’s HMDA compliance systems were flawed and generated mortgage lending data with significant, preventable errors; (2) Nationstar failed to maintain detailed HMDA data collection and validation procedures and failed to implement adequate compliance procedures; and (3) Nationstar failed to consistently define data among its various lines of business. In addition to the civil penalty, the CFPB ordered Nationstar to develop and implement an effective compliance management system and to review, correct and make available its corrected HMDA data from 2012-2014. Release. Full Order.

Rating Agency Developments

 

On March 16, 2017, DBRS issued a report entitled General Corporate Methodology. Report.

On March 16, 2017, DBRS issued a report entitled North American Single-Asset/Single-Borrower Methodology. Report.

On March 16, 2017, Fitch issued a report entitled U.S. Auto ABS Quarterly Index Report. Report.

On March 16, 2017, Moody’s issued a report entitled Global Alcoholic Beverage Industry. Report.

On March 16, 2017, Moody’s issued a report entitled Regulated Electric and Gas Networks. Report.

On March 15, 2017, DBRS issued a report entitled Rating North American CMBS Interest-Only Certificates. Report.

On March 10, 2017, Fitch issued a report entitled Criteria for Analyzing Large Loans in CMBS. Report.

On March 10, 2017, Fitch issued a report entitled Global Non-Bank Financial Institutions Rating Criteria. Report.

On March 10, 2017, Moody’s issued a report entitled Financial Guarantors. Report.

On March 8, 2017, Fitch issued a report entitled Updated U.S. Auto Lease ABS Rating Criteria. Release.

House Committee on Financial Services Comments on OCC Fintech Charter

 

All 34 Republican members of the Financial Services Committee of the U.S. House of Representatives, including Chairman Jeb Hensarling (Tex. – R) and Vice Chairman Patrick McHenry (N.C. – R), in a letter dated March 10, 2017, to Comptroller of the Currency Thomas Curry, urged the Office of the Comptroller of the Currency (“OCC“) not to “rush” the decision to create special purpose national bank charters for fintech companies without giving stakeholders the opportunity to see the details of the prospective charter and the opportunity to comment, and also without giving the incoming Comptroller the opportunity to assess the charter after Comptroller Curry’s term expires in April 2017. The letter advises Comptroller Curry that if such opportunities for review, comment and assessment are not provided, “Congress will examine the OCC’s actions and, if appropriate, overturn them.” A number of banks, community bank organizations and others previously provided comments to the OCC urging the OCC to assure that there will be a level playing field for newly chartered fintech banks and existing banks.

First Department Grants Summary Judgment Against RMBS Collateral Manager for Failure to Raise Issue of Fact Regarding Loss Causation

 

On March 2, 2017, the New York Supreme Court, Appellate Division, First Department reversed a decision from the New York Supreme Court and dismissed a complaint filed by two hedge funds against the collateral manager of a $400 million collateralized debt obligation (“CDO“) investment. Plaintiff hedge funds Basis PAC-Rim Opportunity Fund (Master) and Basis Yield Alpha Fund (Master) (together, “Basis“) filed a lawsuit asserting fraud claims against defendant TCW Asset Management Company (“TCW“), which had served as the collateral manager for the Dutch Hill II CDO. Dutch Hill II was created to serve as an investment vehicle for the purpose of taking a net long position on extremely risky RMBS; TCW selected the assets for the Dutch Hill II portfolio and made representations to Basis about the viability of the subprime RMBS market. Basis purchased over $27 million of Dutch Hill II notes in 2007, but the notes were all but valueless following the housing crisis. In moving for summary judgment, TCW submitted expert evidence showing that the housing market crash would have caused Basis’s losses even if the collateral underlying the CDO had not been misrepresented, as Basis alleged. In response, Basis did not submit sufficient evidence rebutting that opinion or showing that any of the particular misrepresentations by TCW caused its losses. The Supreme Court had denied summary judgment, holding that there were issues of fact as to loss causation. The First Department reversed, concluding that by failing to rebut TCW’s evidence, Basis had not raised an issue of fact as to loss causation.  Opinion.

Rating Agency Developments

 

On March 8, 2017, Fitch issued a report entitled U.S. Auto Lease ABS Rating Criteria. Report.

On March 7, 2017, DBRS issued a report entitled Mapping Financial Institution Internal Ratings to DBRS Ratings for Global Structured Credit Transactions. Report.

On March 7, 2017, Fitch issued a report entitled National Scale Ratings Criteria. Report.

On March 7, 2017, Moody’s updated its rating criteria for variable rate instruments supported by conditional liquidity facilities. Report.

On March 6, 2017, Fitch issued a report entitled Criteria for Analyzing Multiborrower U.S. and Canadian Commercial Mortgage Transactions. Report.

On March 6, 2017, Moody’s updated its rating criteria for gas prepayment bonds. Report.

On March 3, 2017, DBRS issued a report entitled Rating Public-Private Partnerships. Report.

On March 3, 2017, Fitch issued a report entitled SME Balance Sheet Securitisation Rating Criteria. Report.

On March 3, 2017, Fitch issued a report entitled North America and Asia-Pacific Multiborrower CMBS Surveillance Criteria. Report.

On March 2, 2017, DBRS issued a report entitled Rating Sports Franchises and Stadium Financings. Report.

SEC Approves Rules to Ease Investor Access to Exhibits in Company Filings

 

On March 1, 2017, the Securities and Exchange Commission (SEC) voted to adopt rule and form amendments that will require issuers to include a hyperlink to each exhibit in a filing’s exhibit index. The intent of the rule and form amendments is “to make it easier for investors and other market participants to find and access exhibits in registration statements and periodic reports that were originally provided in previous filings.” The final rules will take effect on September 1, 2017. Release. Final Rule.

SEC Issues Guidance Update and Investor Bulletin on Robo-Advisers

 

On February 23, 2017, the Securities and Exchange Commission (SEC) published information and guidance on the use of robo-advisers, “which are registered investment advisers that use computer algorithms to provide investment advisory services online with often limited human interaction.” Each of the SEC’s Division of Investment Management and Office of Investor Education and Advocacy published information on the use of robo-advisors. Due to the “unique issues raised by robo-advisers,” the Division of Investment Management issued guidance for investment advisers that contains “suggestions on meeting disclosure, suitability and compliance obligations under the Investment Advisers Act of 1940.” The Investor Bulletin issued by the Office of Investor Education and Advocacy provides information individual investors should consider when using robo-advisors, which includes the level of human interaction important to the investor, the information that the robo-adviser uses in formulating recommendations, the robo-adviser’s approach to investing and the fees and charges involved. Release. Guidance. Investor Bulletin.

Agencies Release Swap Margin Guidance

 

On February 23, 2017, the Federal Reserve Board (Board) and the Office of the Comptroller of the Currency (OCC) issued guidance regarding how supervisors should examine for compliance with the swap margin rule. The swap margin rule “established margin requirements for swaps not cleared through a clearinghouse”, and margin requirements “help ensure the safety and soundness of swap trading and help reduce risk to the financial system associated with non-cleared swaps.” The guidance issued by the Board and the OCC “explains that the Board and the OCC expect swap entities covered by the rule to prioritize their compliance efforts surrounding the March 1, 2017, variation margin deadline according to the size and risk of their counterparties.” Board Release. OCC Release. Board Guidance. OCC Guidance.

SEC Staff Issues Guidance Update and Investor Bulletin on Robo-Advisers

 

On February 23, 2017, the Securities and Exchange Commission (“SEC“) published information and guidance for investors and the financial services industry on the use of robo-advisers, described by the Staff as “registered investment advisers that use computer algorithms to provide investment advisory services online with often limited human interaction.” Press Release.

The guidance update (the “Update“) was issued by the SEC’s Division of Investment Management in order to address the unique issues raised by robo-advisers. It makes a number of specific suggestions on meeting disclosure, suitability and compliance obligations under the Investment Advisers Act of 1940 (the “Advisers Act“). The Update, however, is less prescriptive than the “Report on Digital Investment Advice” issued by the Financial Industry Regulatory Authority (“FINRA“) in March 2016 (the “FINRA Report“).

The FINRA Report generally addressed the issues faced by “financial services firms” (including both broker‑dealers and investment advisers) in the use of “digital investment advice tools.” As stated by FINRA, the effective practices discussed in the FINRA Report are “specifically intended for FINRA-registered firms, but may be valuable to financial professionals generally.” Accordingly, it is suggested that the Update be read carefully in conjunction with the FINRA Report, particularly by dually registered broker-dealers and investment advisers.

The Update notes that there may be a variety of means for a robo-adviser to meet its obligations to clients under the Advisers Act and that not all of the issues addressed in the Update will be applicable to every robo-adviser.

Also on February 23, 2017, the SEC’s Office of Investor Education and Advocacy (OIEA) published an Investor Bulletin that “provides individual investors with information they may need to make informed decisions if they consider using robo-advisers.”

The Investor Bulletin describes a number of issues investors should consider, including:

  • The level of human interaction important to the investor,
  • The information the robo-adviser uses in formulating recommendations,
  • The robo-adviser’s approach to investing,

The fees and charges involved.