SEC Proposes to Modernize Disclosures of Business, Legal Proceedings and Risk Factors Under Regulation S-K

 

On August 8, the SEC announced that it has voted to propose rule amendments to modernize and simplify certain disclosures required pursuant to Regulation S-K since the regulation was first adopted over 30 years ago. The proposal addresses Items 101(a) (description of the general development of the business), 101(c) (the narrative description of the business) and 105 (risk factors). The proposal has a 60-day public comment period following the proposal’s publication in the Federal Register. Release. Proposal.

’40 Act Leeway for Mortgage REITS and Others

The SEC Investment Management Division published a no-action letter on August 15 addressed to Redwood Trust that provides a certain degree of Section 3(c)(5)(C) compliance leeway for mortgage REITs and mortgage bankers. The Redwood letter is a recognition by the staff that the ebb and flow of mortgage loans into and out of a mortgage banking business, and the retention of cash proceeds from time to time, is an integral part of the business, as is the retention of the right to service loans to facilitate both loan sales and securitizations.

Specifically, the staff concluded that there would be no objection to Redwood treating certain MSRs and cash proceeds in the manner described below for purposes of the Section 3(c)(5)(C) exclusion from the registration requirements of the Investment Company Act of 1940. Redwood Trust No-Action Letter – 2019

  • MSRs created when mortgage loans are sold or securitized can be treated as “qualifying interests” under Section 3(c)(5)(C), and
  • Cash proceeds from mortgage principal amortizations, interest payments and payoffs in connection with real estate-related assets, as well as from the sale of such assets, including to securitization trusts, can retain the characterization of the assets from which the cash proceeds were derived for purposes of Section 3(c)(5)(C), subject to the time limitations indicated in the letter; e.g. sell whole loans and treat the cash proceeds of the sale as “qualifying interests” (subject to such time limitations).

As we stated in our April 12, 2019, letter to the SEC staff on behalf of Redwood, these cash proceeds are “integral parts of and directly related to and arising from Redwood’s mortgage banking activities” and, likewise, created MSRs “are acquired as a direct result of Redwood’s mortgage banking activities”. Our letter references the staff’s Great Ajax no-action letter of February 12, 2018, in which the staff said that it “would be willing to entertain other no-action requests to treat as qualifying interests certain other mortgage-related assets if they are acquired by an issuer as a direct result of the issuer being engaged in the business of purchasing or otherwise acquiring whole mortgage loans (e.g., certain “A-Notes” and servicing rights)”. Orrick Letter to SEC, April 12, 2019

(Redwood also obtained a no-action letter in 2017 relating to the treatment of credit risk transfer securities as “real estate-type interests” under Section 3(c)(5)(C). In the Orrick letter to the staff, we noted, among other things, that credit risk transfer securities share similar characteristics with, and have the same economic substance as, agency partial pool certificates, which are treated as “real estate-type interests” under Section 3(c)(5)(C). In its letter, the staff recognized the similarities between credit risk transfer securities and agency partial pool certificates and concluded that the credit risk transfer securities described could be treated as “real estate-type interests”.  Redwood Trust No-Action Letter – 2017 ; Orrick Letter to SEC, September 5, 2017)

Federal Reserve Announces Plan to Develop a New Round-the-Clock Real-Time Payment and Settlement Service to Support Faster Payments

 

On August 5, the Federal Reserve Board announced that the Federal Reserve Banks will develop a new round-the-clock real-time payment and settlement service, called the FedNow℠ Service, to support faster payments in the United States. The rapid evolution of technology presents a pivotal opportunity for the Federal Reserve and the payment industry to modernize the nation’s payment system and establish a safe and efficient foundation for the future. The Federal Reserve believes faster payment services, which enable the near-instantaneous transfer of funds day and night, weekend and weekdays, have the potential to become widely used and to yield economic benefits for individuals and businesses by providing them with more flexibility to manage their money and make time-sensitive payments. Release.

HUD Announces Agency Efforts to Reduce Risk From Cash-Out Refinance Lending

 

On August 1, the U.S. Department of Housing and Urban Development (HUD) announced joint policy actions designed to reduce risk associated with cash-out refinance lending. The changes preserve homeowners’ ability to convert home equity to cash via a government-sponsored mortgage but also improves the risk profile of HUD’s housing finance programs. To address these concerns, the Federal Housing Administration (FHA) will lower its maximum loan-to-value (LTV) requirements for cash-out refinance transactions from 85 percent to 80 percent. This policy change will be effective for loans with case numbers assigned on or after September 1, 2019 and aligns with the maximum cash-out LTV allowed by the Government Sponsored Enterprises (GSEs). Release.

EBA Publishes Opinion on Eligibility of Deposits, Coverage Level and Co-Operation Between Deposit Guarantee Schemes Under the DGSD

 

On August 8, the European Banking Authority (EBA) published an opinion (EBA-Op-2019-10) on the eligibility of deposits, coverage level and co-operation between deposit guarantee schemes (DGS) under the Deposit Guarantee Schemes Directive (DGSD) (2014/49/EU).

The opinion outlines a number of general and specific proposals for the European Commission to consider when preparing its mandated report on the progress made towards implementing the DGSD and if the Commission prepares a proposal for a revised DGSD.

The opinion sets out the EBA’s proposals on a range of topics, including:

  • Home-host co-operation, and co-operation agreements between DGS
  • DGS’ co-operation with various stakeholders
  • Transfer of contributions
  • Coverage level
  • Current list of exclusions from eligibility and current provisions on eligibility

It includes a report that provides a detailed analysis of each topic, including the background, methodology, data sources, options to address the issues identified and conclusions.

EBA Publishes Feedback on Review of Single Rulebook Q&A

 

On August 6, the EBA published feedback following a review of the use, usefulness and implementation of its single rulebook Q&A.

The review was carried out in the second half of 2018 using questionnaires addressed to competent authorities and selected industry representatives. It was limited to Q&A relating to the Capital Requirements Regulation (CRR) ((EU) No 575/2013) and the Capital Requirements Directive (CRD) (2013/36/EU), which (at the time) accounted for about one third of final Q&A.

The EBA’s main findings include the following:

  • There are limited cases of non-application of Q&A identified by survey participants.
  • Competent authorities and institutions (to a slightly lesser extent) are, overall, satisfied with the utility of the single rulebook Q&A tool and the answers. However, they suggest various improvements relating to matters including response times, the search function and the presentation of the final answers.
  • There are similarities in terms of the measures taken by competent authorities at the institution level or by institutions internally to promote the Q&A tool and the use of answers.
  • Competent authorities use regular or ad hoc measures to encourage the use of the Q&A tool internally.

Based on its review, the EBA has provided non-prescriptive good practice guidance that institutions could adopt with respect to the use of Q&A (see chapter 4).

In addition, the EBA will consider the comments and suggestions received on the process, tool and answers, with a view to developing realistic and workable proposals for improvements. The EBA is also considering the reported cases of non-application in more detail to better understand the obstacles and issues in relation to the Q&A. It expects follow-up actions to be limited to informal exchanges and ad hoc queries to relevant competent authorities.

European Commission Requests the EIOPA Advise on PEPP Regulation Delegated Acts

 

On August 5, the Council of the EU published a cover note, which attaches a call for advice from the European Commission to the European Insurance and Occupational Pensions Authority (EIOPA) (dated July 31) on possible delegated acts concerning the Regulation on a Pan-European Personal Pension Product (PEPP Regulation) ((EU) 2019/1238).

The Commission requests advice relating to:

  • The criteria and factors to determine when there is a significant PEPP saver protection concern under Article 64(9).
  • The specification of additional information for supervisory reporting under Article 40(9) of the PEPP Regulation.

The PEPP Regulation was published in the Official Journal of the EU on July 25.

The Commission requests the final version of the advice by August 14, 2020.

The FCA Reclassifies Cryptoassets, But Is It Moving Away From Its Technology Neutral Approach?

 

On August 5, the Financial Conduct Authority (FCA) released final guidance on cryptoassets in a policy statement that includes feedback from their January consultation paper. It is important to note that the policy statement is of a limited scope and focuses on whether different types of cryptoassets fall within the regulatory perimeter of the Financial Services and Markets Act 2000 (FSMA) and Electronic Money Regulations 2011 (EMRs). While the policy statement does touch upon the use of cryptoassets for payment services, prospectus requirements and anti-money laundering issues, it does not provide much new guidance on these areas. Read the full Orrick-authored article here.

FDIC Annual Publication Examines Potential Credit and Market Risks

 

The Federal Deposit Insurance Corporation (FDIC) published its annual review of the primary risk factors facing the banking system, focusing on the categories of credit risk and market risk. The key credit risk identified by the FDIC is increased competition among lenders as loan growth has slowed, posing risk management challenges given market demand for higher-yielding leveraged loan and corporate bond products, resulting in looser underwriting standards. The main market risk recognized in the report is the current interest rate environment. Release. Report.