Financial Industry Developments

FHFA Issues Final Rule on Fannie Mae and Freddie Mac Duty to Serve Underserved Markets

On December 13, 2016, the Federal Housing Finance Agency (FHFA) issued a final rule implementing the Duty to Serve provisions mandated by the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008 (HERA).  The statute established a duty for Fannie Mae and Freddie Mac to serve three underserved markets: manufactured housing, affordable housing preservation and rural housing.  The intent of the provisions is to increase the liquidity of mortgage investments and improve distribution of investment capital available for mortgage financing for very low-, low- and moderate-income families in the manufactured housing, affordable housing preservation and rural housing markets. Press Release. Final Rule.

Federal Banking Agencies Finalize an 18-Month Examination Cycle for Small Banking Institutions

On December 12, 2016, the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board and the Office of the Comptroller of the Currency (OCC) finalized rules that generally allow well-capitalized and well-managed banks and savings associations with less than $1 billion in total assets to benefit from an 18-month examination cycle rather than a 12-month cycle.  Prior to the adoption of the interim final rules, only firms with total assets of less than $500 million were eligible to benefit from the extended 18-month cycle.  The final rules are meant, among other things, to reduce regulatory compliance costs for smaller institutions. Press Release. Final Rule.

On December 14, 2016, Fitch published its rating criteria for debt issued by airports. Report.

On December 12, 2016, DBRS released its methodology for rating project finance. Report.

On December 12, 2016, DBRS released its methodology for rating solar power projects. Report.

On December 12, 2016, DBRS released its methodology for rating wind power projects. Report.

On December 12, 2016, DBRS released its methodology for rating companies in the pipeline and the diversified energy industry. Report.

On December 12, 2016, DBRS released its preferred share and hybrid security criteria for corporate issuers. Report.

On December 8, 2016, Fitch updated its EMEA RMBS rating criteria with an addendum for analyzing securities backed by Belgian residential mortgage loans. Report.

On December 8, 2016, Fitch updated its EMEA RMBS rating criteria with an addendum for analyzing securities backed by French residential mortgage loans. Report.

On December 8, 2016, DBRS released its surveillance methodology for CMBS transactions. Report.

Investment Management

Federal Reserve Board Provides New Details on Volcker Rule's Illiquid Funds Requirements

On December 12, 2016, the Federal Reserve Board announced additional details regarding how banking entities may seek an extension to conform their investments in a narrow class of funds that qualify as "illiquid funds" to the requirements of Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as the Volcker Rule. An illiquid fund is defined by the statute as a fund that is "principally invested" in illiquid assets and holds itself out as employing a strategy to invest principally in illiquid assets.

The Volcker Rule generally prohibits insured depository institutions and any company affiliated with an insured depository institution from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring or having certain relationships with a hedge fund or private equity fund. These prohibitions are subject to a number of statutory exemptions, restrictions and definitions.

The Dodd-Frank Act permits the Board, upon an application by a banking entity, to provide up to an additional five years to conform investments in certain legacy illiquid funds where the banking entity had a contractual commitment to invest in the fund as of May 1, 2010. The five-year extension for certain legacy illiquid funds is the last conformance period extension that the Board is authorized to provide banking entities under the statute.

According to the guidelines adopted by the Board, firms seeking an extension should submit information, including details about the funds for which an extension is requested, a certification that each fund meets the definition of illiquid fund, a description of the specific efforts made to divest or conform the illiquid funds, and the length of the requested extension and the plan to divest or conform each illiquid fund within the requested extension period.

The Board expects that the illiquid funds of banking entities will generally qualify for extensions, though extensions may not be granted in certain cases – for example, where the banking entity has not demonstrated meaningful progress to conform or divest its illiquid funds, has a deficient compliance program under the Volcker Rule or where the Board has concerns about evasion.

The Board consulted with staffs of the other agencies charged with enforcing the requirements of the Volcker Rule, and the agencies plan to administer their oversight of banking entities under their respective jurisdictions in accordance with the Board's conformance rule and the attached guidance.

SEC Issues No-Action Letter Regarding Relief from Registration under Advisers Act for Adviser to Affiliated Foundation

On December 8, 2016, the Chief Counsel's Office of the Division of Investment Management of the Securities and Exchange Commission ("Commission") provided "no‑action letter" assurance to CenturyLink Investment Management Company, an investment adviser registered as such under the Investment Advisers Act of 1940 ("Adviser"), that it would not recommend enforcement action to the Commission if it were to withdraw its registration. Adviser is an indirect wholly owned subsidiary of CenturyLink, Inc., a telecommunications firm ("Parent"), that was established, and has been operated, for the sole purpose of providing investment advisory services to (i) the employee benefit plans sponsored by the Parent (the "Plans"), which were established solely for the benefit of current and previous employees of the Parent, its predecessors and affiliates, and comprise retirement and health and welfare employee benefit plans, including both qualified and nonqualified plans governed by the Employee Retirement Income Security Act of 1974 ("ERISA"); and (ii) the CenturyLink - Clarke M. Williams Foundation (the "Foundation"), a charitable foundation organized as a Colorado nonprofit corporation by a predecessor company of the Parent for charitable and educational purposes.

The response of the staff is consistent with other no-action letters issued to wholly owned subsidiaries of a parent that satisfy comparable conditions, except with respect to the Foundation. The significance of this letter is that it extends the application of these principles to advisory services provided to a charitable foundation under the circumstances presented.

In providing its response, the staff stated that its position is based particularly on representations that:

• Adviser is an indirect wholly owned subsidiary of the Parent and has been established, and has been operated, for the sole purpose of providing investment advisory services to the Plans and the Foundation;
• Adviser does not hold itself out to the public as an investment adviser, provides investment advice only to the Plans and the Foundation, and will not in the future provide investment advisory services to any third party;
• The Plans are established solely for the benefit of current and previous employees of the Parent, its predecessors and affiliates, and comprise employee benefit plans governed by ERISA;
• The Foundation is a charitable foundation organized as a Colorado nonprofit corporation by the Parent for charitable and educational purposes, and its beneficiaries are charitable and educational organizations; the Parent is the sole voting member of the Foundation, has rights with respect to the management of the Foundation and, since 2012, is its sole contributor;
• The only amounts received by the Parent in connection with the Plans are reimbursements that are subject to the restrictions imposed by ERISA;
• The only amounts received in connection with Adviser's advisory services to the Foundation are reimbursements to the Parent from the Foundation for Adviser's expenses associated with such advisory services; and
• Neither the Plans nor the Foundation is required to register as an investment company under the Investment Company Act of 1940.

European Financial Industry Developments

EBA Final RTS on Cooperation and Exchange of Information for Passporting under PSD2

On December 14, 2016, the European Banking Authority ("EBA") published the regulatory technical final draft on passport notifications under the revised Payment Services Directive ((EU) 2015/2366) ("PSD2") (EBA/RTS/2016/08).

Article 28 of PSD2 requires an authorized payment institution to inform the competent authorities of its home member state if it wishes to provide payment services for the first time in one or more member states other than its home member state. Article 28(5) gives the EBA a mandate to develop draft RTS, specifying method, means and details of the cross-border cooperation between competent authorities in the context of passport notifications of payment institutions. The RTS must include the scope of information to be submitted, a common terminology and standard templates, to ensure that the process is consistent and efficient.

The EBA consulted on the draft RTS in December 2015. Changes to the final version of the RTS in light of responses to the consultation include:

• More clarity for when a payment institution uses an agent or an e-money institution uses a distributor.
• New provisions so that payment institutions will be informed when the notification is transmitted from the competent authority in the home member state to the authority in the host member state.
• A new field in a number of templates to include the legal entity identifier (LEI) as an identification number where available.
• Deletion of information relating to governance arrangements and internal control mechanisms, outsourcing and the agent structural organization.

The EBA has also published a flowchart providing a guide to competent authorities on which notification templates to use, a copy of which can be found here.

The final draft RTS will now be submitted to the European Commission for endorsement. The draft Delegated Regulation states that it shall enter into force 20 days after it is published in the Official Journal of the EU (OJ).

EBA Final Guidelines on Disclosure Requirements for EU Banking Sector

On December 14, 2016, the European Banking Authority ("EBA") published a final report (EBA/GL/2016/11) containing guidelines on regulatory disclosure requirements following its consultation in June 2016.

The guidelines follow an update of the Pillar 3 requirements by the Basel Committee on Banking Supervision (BCBS) and do not change the substance of the regulatory disclosures regarding the requirements defined in Part Eight of the Capital Requirements Regulation (Regulation 575/2013) ("CRR").

They provide further guidance and support to institutions in complying with both the CRR and the Pillar 3 requirements. In particular, the guidelines cover the entire content of the Pillar 3 framework, with the exception of:

• Securitization requirements, which are currently under discussion at the EU level following the finalization of a revised securitization framework at the international level.
• Other disclosure requirements in Part Eight of the CRR for which there are already EBA delegated or implementing regulations or guidelines, such as own funds and leverage ratio.

The guidelines apply to globally and other systemically important institutions ("G-SIIs" and "O-SIIs"). Competent authorities may still require institutions that are neither G-SIIs nor O-SIIs to apply some or all the guidance provided for in the guidelines when complying with the requirements in Part Eight of the CRR.

The guidelines apply from December 31, 2017. However, an accompanying press release states that G‑SIIs are encouraged to comply with a subset of the guidelines as soon as December 31, 2016.

European Commission Confirms Insurance Block Exemption Regulation Not to Be Renewed

On December 13, 2016, the European Commission announced in a press release that Regulation 267/2010, the Insurance Block Exemption Regulation ("IBER"), will not be prevented from expiring on March 31, 2017. The IBER entered into force on April 1, 2010 and provides a block exemption for agreements relating to joint compilations, tables and studies. This enables the exchange of statistical information (calculations, tables and studies), subject to the specified conditions, and common coverage of certain types of risks (co-(re)insurance pools), subject to market share thresholds and other specified conditions.

In March 2016, the Commission published a report and document presenting the preliminary findings and conclusions of its review of the IBER, which began in 2014. The Commission's provisional conclusion with regard to joint compilations, tables and studies was that the functioning of the insurance industry no longer appears to require a special instrument like a block exemption regulation. As regards co-(re)insurance pools, the Commission considered the IBER to be of limited use and relevance.

The Commission has now confirmed the block exemption is no longer warranted because the Commission's 2011 Guidelines on horizontal cooperation (OJ 2011 C11/1) already provides guidance on how to assess the conformity of joint compilations, tables and studies with EU antitrust rules. However, the expiry of the IBER does not mean that these forms of cooperation become unlawful under Article 101 of the Treaty on the Functioning of the European Union (TFEU). Rather, insurers, as with all other companies doing business in the EU, will need to assess their cooperation in the market context to see whether it is in line with EU competition rules.