Maryland Legal Alert for Financial Services

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Maryland Legal Alert - October 2020






SEC Expands Definition of ‘Accredited Investor’

In a final rule release issued August 26, 2020, the Securities and Exchange Commission (SEC) amended Rule 215 and Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (Securities Act), to expand the definition of “accredited investor.”

These amendments are intended to allow more investors to participate in private offerings. The SEC also made conforming amendments to the definition of “qualified institutional buyer” in Rule 144A under the Securities Act.

The amendments add new categories of individuals who qualify as accredited investors based on their professional certifications, knowledge or experience. In addition, the definition of accredited investor now includes:

  • Certain investment advisers;
  • Certain limited liability companies;
  • Rural business investment companies;
  • Any other entities, including Native American tribes, that were not formed for the specific purpose of acquiring the securities being offered but that own certain investments in excess of $5 million; and
  • A “family office,” as defined by the “family office rule” set forth in the Investment Advisers Act of 1940, as amended, that meets certain conditions.

The amendments become effective 60 days after they are published in the Federal Register.

Contact Andrew D. Bulgin with any questions concerning this topic.

Contact Andrew D. Bulgin | 410-576-4280

SEC Updates and Codifies Requirements for Statistical Disclosures by Banking Registrants

On September 11, 2020, the Securities and Exchange Commission (SEC) issued a final rule release in which it updated and codified the statistical information that SEC-registered bank holding companies must disclose in their periodic reports, and expanded the scope of banking entities that must comply with the updated reporting requirements.

The statistical information is currently set forth in the SEC’s “Industry Guide 3,” which calls for disclosure in seven areas:

  1. Distribution of assets, liabilities and stockholders’ equity; interest rates; and interest differential;
  2. Investment portfolios;
  3. Loan portfolios;
  4. Summary of loan loss experience;
  5. Deposits;
  6. Return on equity and assets; and
  7. Short-term borrowings.

The “Industry Guide 3” currently applies only to SEC-registered bank holding companies and is merely guidance. When these rules become effective, however, compliance will be mandatory and banks, savings and loan associations, and savings and loan holding companies that have a class of equity securities registered under the Securities Exchange Act of 1934, as amended, will also have to include the required statistical information in the periodic reports that they file with the SEC or their primary federal banking regulator.

The rules are contained in a new Part 1400 of Regulation S-K and compliance will be required, starting with reports issued in respect of a registrant’s first fiscal year ending on or after December 15, 2021.

Contact Andrew D. Bulgin with any questions concerning this topic.

Contact Andrew D. Bulgin | 410-576-4280

SEC Amends Rule Governing the Quotation of OTC Securities

On September 16, 2020, the Securities and Exchange Commission (SEC) adopted amendments to Rule 15c2-11 promulgated under the Securities Exchange Act of 1934, as amended, which governs the publication of quotations for securities in a quotation medium other than a national securities exchange, such as over-the-counter (OTC) securities.

Under the amended rule, a broker-dealer may not initiate or resume quotations for a security in a quotation medium unless it has reviewed key, basic information about the issuer of the security. The amendments seek to modernize the requirements and promote additional transparency for investors, so that there is current information about an issuer and security before a broker-dealer provides quotes. The amendments will undoubtedly have the effect of requiring issuers of OTC securities to increase the amount of information that they make public, so that broker-dealers will continue to publish price quotations.

The amendments will be effective 60 days after they are published in the Federal Register, with a general compliance date that will be nine months after the effective date and a specific compliance date that will be two years after the effective date for provisions requiring certain historical financial information for the issuer.

Contact Andrew D. Bulgin with any questions concerning this topic.

Contact Andrew D. Bulgin | 410-576-4280

Multistate Settlement Implicates Ability to Pay Considerations in Auto Finance

Recently, the attorneys general (AGs) for 34 states, including Maryland, announced a settlement with a large subprime auto finance company. The settlement concludes a multiyear investigation into the finance company’s indirect auto lending practices.

The AGs alleged that the finance company knowingly exposed deeply subprime borrowers to risky auto loans, which featured high loan-to-value ratios, expensive backend ancillary products (such as vehicle service contracts and GAP waivers), and high payment-to-income ratios.

The AGs also alleged that the finance company ignored dealer misconduct, such as doctoring income and expense information, and inflating collateral values. The AGs also emphasized that many consumers lacked any “residual income (remaining income after factoring in debt service and housing and insurance expenses).”

The AGs and the finance company ultimately reached a settlement. The company will pay $65 million in restitution to certain consumers and $7 million to the participating states for administrative costs. Also, for certain consumers in default, the company must waive their deficiency balances, totaling $45 million, and allow them to retain their vehicles. For other customers, the company must waive approximately $433 million in deficiency balances and buy back loans that it sold to facilitate the deficiency waivers.

The settlement also imposes injunctive relief. The company cannot extend financing if a consumer has zero or negative residual income and cannot require dealers to sell ancillary products. Notably, for a four-year period, the company must also conduct quarterly reviews of its loan defaults to determine if the defaulting consumer lacked positive residual income at origination. The company must waive the deficiency balances for those consumers that lacked positive residual income at origination. In addition, when calculating residual income and relying on default data, the company must use expense figures that reasonably reflect the customer’s geographic area.

The settlement further requires the company to implement measures to better monitor dealers that engage in misconduct and require additional documentation from those dealers.

Practice Point: This settlement is yet another sign of regulators’ growing focus on the auto finance industry. Lenders should review their underwriting policies and ensure they have appropriate controls over their dealer partners. Lenders can expect to receive additional scrutiny as to their consumers who lack positive residual income and should review their portfolios accordingly.

Please contact Bryan M. Mull with any questions concerning this topic.

Contact Bryan M. Mull | 410-576-4227