Duane Morris Banking and Finance Law

October 10, 2024October 10, 2024 by Joseph E. Silvia

FDIC Extends Comment Period for Proposed Rule on Brokered Deposits

On October 8, 2024, the Federal Deposit Insurance Corporation (“FDIC”) announced an extension to the comment period on its notice of proposed rulemaking (“NPR”) regarding brokered deposits. Originally, the comment period for the PR was to close on October 22, 2024, but is now planned to close on November 21, 2024.

The original NPR, “Unsafe and Unsound Banking Practices: Brokered Deposits Restrictions,” was published by the FDIC this past August. The NPR would revise 12 C.F.R. Parts 303 and 337 with a goal of improving the analysis of “deposit brokers” and ensure accurate reporting of such deposits.

The NPR seeks to achieve these goals with a few key revisions, among others. First, the FDIC is proposing to update the definition of a “deposit broker, ” particularly with respect to the analysis of the “primary purpose” exception to the definition, which is critical for anyone trying to avoid brokered deposit classification. Second, the NPR continues to exempt well-capitalized institutions from brokered deposit restrictions, but will generally enhance the rules for other insured depository institutions to “strengthen the safety and soundness of the banking system by ensuring that less than well-capitalized institutions are restricted from relying on brokered deposits to support risky, rapid growth.”

The NPR can be found at https://www.federalregister.gov/documents/2024/08/23/2024-18214/unsafe-and-unsound-banking-practices-brokered-deposits-restrictions.

September 26, 2024 by Duane Morris

Changes to Bank Merger Review Process Announced by Federal Agencies

On September 17, 2024, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) separately finalized previously proposed policy statements on their review of bank mergers under the Bank Merger Act (BMA) and its implementing regulations. Noticeably missing in action was the Board of Governors of the Federal Reserve System, who has not issued any policy statement that would update or amend its review of bank mergers. Also on September 17, 2024, the Department of Justice (DOJ) formally withdrew from the 1995 joint Bank Merger Guidelines and issued commentary on its plans to transition to the 2023 Merger Guidelines for its review of bank mergers.

Read the full Alert on the Duane Morris LLP website.

July 9, 2024 by Roger S. Chari

Has Your State Passed the Crypto UCC Amendments?

There’s less than a year to go until the proposed implementation of the Uniform Commercial Code amendments relating to cryptocurrencies and other digital assets. The drafters of the amendments contemplated a gradual phase-in of the rules over a period of at least a year, but no earlier than July 1, 2025, to give secured parties time to assess their secured status and take any necessary actions. Many states that have approved the amendments opted for a July 1, 2025 start date, but some of them selected a later date. In addition, slightly more than half of the states have not yet approved the amendments. It’s likely that these states will also choose a later start date.

For a secured lender operating in multiple states, keeping track of the implementation dates can be confusing. Losing track of them can potentially lead to significant consequences, including loss of priority in crypto assets. For an overview of the adoption of the UCC amendments by the various states so far, take a look at our recent Alert.

June 10, 2024 by Roger S. Chari

Congressional Disapproval of SAB 121 Vetoed

On May 31, 2024, the President vetoed H.J.Res 109, which evidenced the disapproval by Congress of Staff Accounting Bulletin 121 of the Securities and Exchange Commission. This followed several years of industry and bipartisan efforts in Congress to blunt the effect of or nullify the rule.

On its face, SAB 121 is fairly innocuous. Crypto assets held in custody by an SEC reporting company for its clients must be reported both as an asset and as a liability on its balance sheet. From an accounting perspective, this is balance sheet neutral since the asset and liability cancel each other out.

For regulated banks that want to expand their traditional client custody business from securities and other financial assets to crypto, this is a departure from the standard accounting treatment that can be prohibitively expensive. Assets held in custody are usually balance sheet neutral to a bank since they belong to the bank’s customers and are not included on the bank’s balance sheet. Adding the asset and subtracting it as a liability is mathematically neutral. However, treating crypto in custody as a liability of the bank triggers the minimum capital requirements that banks are required by regulators to maintain to manage investment risk and prevent a collapse if there is a run on the bank.

Why did the SEC change the rule for crypto assets in custody? Did they have the authority to do so? Why does it apply to banks? We discuss these and other questions in our recent Alert.

May 22, 2024 by Roger S. Chari

Happy Bitcoin Pizza Day!

In case you haven’t heard of it, today marks the 14^th anniversary of the first recorded use of bitcoin to pay for goods and services, the delivery of two large pizzas. With the price of bitcoin currently hovering around $70,000, it is shocking to hear that the price paid was 10,000 bitcoins. However, at the time, bitcoin was worth less than half a cent, around $0.0041, making the purchase price about $41.

While Bitcoin Pizza Day is a fun milestone for the cryptocurrency community to celebrate, in many ways the commercial use of bitcoin in the United States has not evolved much since 2010. Buying, holding and using bitcoin is generally not illegal, and the Financial Crimes Enforcement Network of the US Department of the Treasury has acknowledged that a seller may accept payments in bitcoin as a medium of exchange. However, bitcoin is still not legal tender (except in El Salvador). Sellers in the U.S. are not required to accept bitcoin, and most of them do not.

For banks that want to facilitate crypto payments by their customers, there are a number of hurdles to overcome. Pursuant to a joint statement on January 3, 2023 by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, banks are “neither prohibited nor discouraged from providing banking services to customers of any specific class or type.” Nonetheless, the regulators believe that the holding of crypto assets by banks “is highly likely to be inconsistent with safe and sound banking practice,” and they are continuing to assess whether crypto activities “can be conducted in a manner that adequately addresses safety and soundness, consumer protection, legal permissibility, and compliance with applicable laws and regulations, including anti-money laundering and illicit finance statutes and rules.”

Alternatively, there are now a number of non-bank apps and other payment services that will convert bitcoin into dollars for purposes of facilitating payments. These services tend to be treated as money services businesses or money transmitters subject to strict anti-money laundering rules under the Bank Secrecy Act, FinCEN regulations and state law. Different states take varying views on the use of crypto, and these services may not be licensed to operate in every state.

In addition to these challenges, a buyer has to be careful of the tax law consequences of using cryptocurrencies to make purchases. Under Internal Revenue Service notice 2014-21, cryptocurrencies are property, and capital gains tax is due if the fair market value of the property or services purchased exceeds the purchaser’s adjusted basis in the cryptocurrency used to make the purchase. In other words, if a person bought one bitcoin in 2010 and used that bitcoin in 2024 to splurge for a Porsche (or a Bored Ape Yacht Club NFT) for $70,000, that person would owe capital gains tax on $70,000 (minus the $0.0041 cost of buying the bitcoin).

With all that in mind, spend your crypto wisely.

May 16, 2024 by Roger S. Chari

UCC Amendments for Digital Assets Effective in DC

On May 3, 2024, Law L25-0158 was published in the District of Columbia Register. Titled the “Uniform Commercial Code Amendment Act of 2024,” it is the codification in Washington, DC of the 2022 Amendments to the UCC drafted by the Uniform Law Commission and the American Law Institute. The 2022 Amendments hold out the promise of establishing uniform rules (at least in the US) for transferring digital assets such as cryptocurrencies and non-fungible tokens, and granting lenders a security interest in those assets that can be perfected by control.

Although the DC law is effective as of April 20, 2024, per the uniform transition rules adopted by the law, the provisions will not have substantive effect until July 1, 2025. This time delay was built into the rules to give market participants time to learn and adjust to the new rules and implement any changes that the new rules will require. Washington, DC is not the first jurisdiction to adopt the 2022 Amendments, but it is arguably the most important. Under the uniform choice of law rules in the 2022 Amendments, the UCC in effect in the District of Columbia will govern most, if not all, matters relating to perfection and priority of security interests in digital assets, at least for the foreseeable future.

Many questions and challenges are posed by the 2022 Amendments. Are all digital assets covered? Are cryptocurrencies money? Are digital tokens securities? What does it mean to perfect a security interest in a bunch of ones and zeros that only exist on a decentralized blockchain that isn’t located on a particular server or controlled by any particular entity? We will explore these and other issues in the coming weeks and months.

June 28, 2023 by Duane Morris

Department of Justice Adopts New Focus on Bank Merger Assessments

On June 20, 2023, Assistant Attorney General Jonathan Kanter addressed the Brookings Institute to discuss the 60-year anniversary of a seminal Supreme Court of the United States case concerning bank mergers: United States v. Philadelphia National Bank. Kanter used the opportunity to announce a new approach by DOJ to its assessment of bank mergers consistent with President Biden’s July 2021 Executive Order on Promoting Competition in the American Economy. The new approach removes predictability from the merger review process and adds uncertainty as to how DOJ will assess competitive harm in bank mergers in a similar fashion to DOJ’s recent withdrawal of support for three policy statements that had permitted certain “safety zones” in the healthcare sector.

To read the full text of this alert, please visit the Duane Morris website.

June 15, 2023 by Drew D. Salvest

Re Avanti – Fixed / Floating Charge Security Under English Law

In the recent case of Re Avanti Communications Limited (in administration)[1] (Re Avanti), the court considered the nature of fixed and floating charges. Whether a charge is fixed or floating has implications for both lenders and administrators in terms of determining to what extent a chargor can recover from the charged assets and to what extent a borrower can deal with its assets.

Background of case:

In Re Avanti, the administrators applied to the court to determine whether certain assets were subject to a fixed or floating charge pursuant to debentures granted by the relevant company. As all net proceeds from the sale of fixed charge assets are paid to secured creditors, and proceeds from the sale of floating charge assets are not paid to secured creditors until those who rank ahead of them under English insolvency law (such as administrator’s costs and HMRC) have been paid in full, the characterization of the charge was crucial for determining whether the secured lenders would recover their secured debt in full. If the charges over the assets were fixed, secured creditors could recover the amount owed to them. If the charges were determined to be floating, HMRC would rank as a preferential creditor with respect to certain taxes due by the insolvent company and would receive a portion of the proceeds from the sale of the assets.

The finance documents in question contained a restriction on the disposal of the relevant assets with certain exceptions, for example an exception allowing the company to dispose of obsolete assets. Exceptions are commonly negotiated in finance documents where certain assets are dealt with by a company in its ordinary course of business or circulating capital (such as inventory).

Two-stage test:

In determining whether the assets in question were subject to a fixed or floating charge, the Judge applied the two stage test set out in Agnew v Commissioners of Inland Revenue[2].

At the first stage, the court must determine the intention of the parties and which rights and obligations were intended to be granted with respect to the relevant assets.[3] At the second stage, the court then determines whether as a matter of law, irrespective of the intention of the parties, the assets are fixed or floating, with this analysis requiring consideration of the degree of control the chargor has over the relevant assets. In this particular case, although there were exceptions to the prohibition on asset disposals, the exceptions were restrictive and did not allow disposal in the ordinary course of business, which would indicate a floating charge. Although disposals were permitted in certain circumstances, the restrictions were strictly limited. In this second stage, there is a clear distinction between assets that form part of a company’s circulating capital and assets that although they form a class (such as, for example, machinery), are not fluctuating. Assets that form part of a company’s circulating capital are more likely to be subject to a floating charge, and assets that do not fluctuate are more likely to be subject to fixed security. The ability of the company to deal with a certain class of assets does not mean these assets are subject to a floating charge – it is a matter of the degree of control that the company can exercise over the relevant assets.

Impact of case:

This case clarifies that a complete prohibition on the ability of a company to dispose of the charged assets is not required for the court to determine the assets are subject to a fixed charge. Any exceptions must be clearly drafted when a chargee is seeking to take fixed security over the relevant assets.

If you have any questions about this post, please contact Drew D. Salvest, Natalie A. Stewart, Rebecca Green any of the attorneys in our Banking and Finance Industry Group or the attorney in the firm with whom you in regular contact.

[1] Re Avanti Communications Limited (in administration) [2023] EWHC 940 (Ch)

[2] Agnew v Commissioners of Inland Revenue [2001] UKPC 28

[3] Re Avanti Communications Limited (in administration) [2023] EWHC 940 (Ch) at [26]

May 26, 2023 by Natalie A. Stewart

FCA Consultation Paper on the Proposed Changes to the UK Listing Rules

By Natalie Stewart and Tobias Clapp

On 3 May 2023, the Financial Conduct Authority (“FCA”) released a Consultation Paper which detailed proposed changes to the Listing Rules for companies listed on the London Stock Exchange Main Market and AIM. The consultation period will run until 28 June 2023. The FCA also intends to publish a further follow-up paper to address the wider changes to the rules later in 2023.

Why are the changes required?

The FCA announced the reform with the aim of streamlining the current listing rules to attract a wider range of companies to list in the UK, to improve choice for potential investors and to encourage competition. The Financial Times reported a 40% drop in UK initial public offering (IPO) listings since 2008, in spite of the government’s efforts to attract more UK listings during the same period.

The decline in UK IPO activity over the past 15 years has been compounded in more recent years as well, with 2022 seeing a £15 billion reduction in equity raised from IPOs from the previous year. It is right that the adverse macroeconomic and geopolitical environment during 2022 directly contributed to the stagnation of UK IPO activity. While many other countries saw a similar trend of a reduction in IPOs, it is clear that the UK saw greater declines than most. More recently, Arm Ltd, a Japanese owned and Cambridge based microchip designer, has indicated it will choose the New York Stock Exchange for its floatation (as opposed to the London Stock Exchange) citing the onerous rules imposed by the FCA as the primary reason for the decision.

What changes are being considered

The most substantive change being proposed is to the listing segments for equity shares in commercial companies. Currently there are two listing segments: the first for standard listings and the second for premium listings. The proposed amendment would combine these two segments into a single segment, thereby harmonising the method of listing for all equity shares in commercial companies. While this proposal would see a slight increase in the regulatory impact on standard listed issuers, it would have a marked decrease on the requirements currently imposed on premium listed companies. This amendment would make the UK system more similar to other jurisdictions such as the USA, who favour a more disclosure-based approach. The FCA has stated that this could lead to greater risk of failure for younger companies and could encourage companies to pursue risker transactions after listing; however, this will be likely offset by the wider benefits of a more diverse range of companies listing in London and greater investment opportunities generally. With more varied types of companies being able to consider floating on the Stock Exchange, investors will benefit from a broader choice of investment options.

In order to facilitate the creation of the new combined listing segment while still maintaining market integrity, the FCA will allow existing issuers to transition from their current listing category into the new combined segment. The FCA has promised to provide sufficient time to prepare and implement these changes to all issuers that require it. The length of time companies will be given to transition has yet to be published.

Following the creation of a combined listing segment, the current sponsorship regime will also be subject to lighter regulation. While a sponsor declaration will still be required for an IPO, the role of a sponsor will be greatly reduced after the IPO is complete. The role of sponsors post IPO will be limited primarily to providing opinions when an issuer wishes to undertake a related party transaction or assisting in relation to significant transactions. This also means that the sponsor’s declaration in relation to significant transactions will no longer be required and will be replaced by a prescribed content requirement, which requires the issuer to provide an announcement to the market instead. These changes are designed to relax the current regime imposed on companies that would have previously been considered a premium listing while not imposing any further burden on companies that would have been considered standard listings, as these companies were already subject to similar obligations under the UK Market Abuse Regulation. Ultimately, the FCA’s goal in reforming the role of sponsors is to ensure consistency of treatment for all commercial companies and therefore safeguarding market integrity through focused high-quality expert advice from sponsors.

As detailed above, issuers listing in the new combined listing segment will be required to adhere to the related party transaction rules. These rules will represent yet another relaxation of requirements on companies that would have previously been categorised as premium listings, as it removes the need for independent shareholder approval and an FCA-approved circular in certain circumstances. Sponsors will however still be required to provide a fairness opinion.

Currently, a company that wishes to undertake an IPO must be able to provide three years of consistent records, a financial statement representing 75% of their business and a clean working capital statement. This requirement will be removed, allowing for more companies to be eligible to list on the London Stock Exchange’s Main Market with the desire that this will attract younger companies in more preferred industries such as technology or companies with non-conventional corporate structures which would have previous been precluded from listing.

The combined listing segment will also require all issuers to provide a FCA-approved circular to obtain a majority shareholder approval (75% or more in this case) at the point of delisting. The consequential loss of transparency that delisting involves for investors investing in companies that would have previously been standard listed companies will now be offset by the mandatory provision of this circular.

Conclusion

The FCA has stated that the decision by any firm to list on a particular market is based on a number of factors such as availability of capital and taxation. The UK has also in the past been considered to have a complex regulatory environment for listing companies on the London Stock Exchange. The changes to these regulations and listing rules above are part of a wider plan to provide more transparency for investors and sponsor oversight to ensure FCA standards are maintained. Further changes to eligibility requirements will encourage early-stage companies to consider an IPO and the removal of mandatory shareholder votes on certain transactions will allow companies pursuing activities such as acquisitions to do so more freely.

If you have any questions about this post, please contact Natalie A. Stewart or any of the attorneys in our Banking and Finance Industry Group with whom you are in regular contact.

May 16, 2023 by Drew D. Salvest

UK Retail Disclosure Update

Background

The Financial Conduct Authority (“FCA”) is seeking to overhaul the current retail investor disclosure regime that is based on EU rules and is no longer viewed as fit for purpose in the UK.

The FCA published a discussion paper in December 2022 seeking feedback on new disclosure rules to ensure retail investors are able to get clear and useful information, such as the costs involved with investing and investment risk, in order to better facilitate investment decisions.

On 9 December 2022, His Majesty’s Treasury (the “Treasury”) published a consultation paper on the future of retail disclosure in the UK, further indicating the UK’s intention to replace the EU retail disclosure rules with a new regime.

Treasury Consultation Paper on PRIIPs and UK Retail Disclosure

The Treasury’s consultation paper set out the government’s intentions to repeal the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation (“PRIIPs Regulation”) as it is not “fit for purpose” and sought views on a new framework to replace it.

The PRIIPs Regulation was introduced in 2018 in the EU with the goal of providing retailers with a standardised single document that they could use to compare packaged retail investment products or “PRIIPs” in the EU retail market.

The PRIIPs Regulation requires PRIIP manufacturers to produce a “Key Information Document” (KID) and to publish this KID on their website. Anyone advising a retail investor on a PRIIP or selling a PRIIP to a retail investor must provide the investor with this KID before any transaction is concluded. Financial services firms have raised issues with the highly prescriptive format of the KID and how this reduces flexibility in communicating with clients. Many firms provide their own “fact sheets” in addition to the KID, leading to non-standardised documents being provided to clients which can be confusing for investors and a burden for firms. The Treasury is of the view retail investors should receive disclosure information in a standardized format that can be tailored by firms, something that is not currently permitted by the PRIIPs Regulation.

Another issue raised in the paper is the impact of the PRIIPs Regulation on investment products created in other jurisdictions and the cost of compliance and liability risks. The Treasury outlines that these costs can dissuade firms from making these products available to retail investors in the UK. An example provided in the paper is that following the introduction of the PRIIPs Regulation, many firms did not produce a KID for their corporate bonds due to the extra cost and possible liability risk. This led to fewer corporate bond products being available for purchase by retail investors. The Treasury is seeking to improve accessibility as the requirement to produce a KID has restricted choice for retail investors.

The paper sets out the government’s intentions to revoke the PRIIPs Regulation and to remove the Undertaking for Collective Investment in Transferable Securities (UCITS) disclosure requirements so that the FCA will become responsible for establishing a future retail disclosure regime. As set out in the paper, the Treasury do not intend to keep any PRIIPs or UCITS disclosure requirements in legislation but rather intend for future disclosure requirements to be included in the FCA Handbook.

FCA Future Disclosure Framework Discussion Paper:

The PRIIPs Regulation will be repealed by the Financial Services and Markets Bill (the “FSM Bill”), which is currently before Parliament and likely to become law in 2023. Rules relating to retail disclosure are currently set out in various legislation and FCA rules, resulting in a complex regulatory landscape. The FSM Bill repeals retained EU law in financial services, including the PRIIPs legislation and the UCITS disclosure requirements.

Under the new UK regime, the responsibility for regulatory oversight and development of future retail disclosure rules will become a matter for the FCA. The FCA will determine the format and presentation requirements for disclosure and regulatory requirements related to retail disclosure will be maintained in FCA rules rather than in legislation. The FCA will be tasked with integrating UCITS and PRIIPs disclosure into a clear UK retail disclosure framework before the 2026 exemption end date.

The FCA published the discussion paper “Future Disclosure Framework” as a first step in developing a new regulatory retail investment framework. The FCA sought feedback from financial services firms and consumers to create a disclosure regime that applies to all retail products including UCITS, PRIIPs, non-PRIIPs packaged products and some NURS.

It is noted by the FCA that the disclosure regulations were designed with paper-based disclosure in mind rather than digital disclosure and given the trend in online investment, feedback was sought on the delivery, presentation and content of retail disclosure. The FCA notes that “for example, most firms provide disclosure as a single PDF prior to the point of sale. Research suggests consumers do not engage with disclosure when it is provided this way.” Providing information to retail consumers in the right format is a priority for the FCA to support consumer choice.

Final Remarks:

Following Brexit, the UK has signaled a clear intention to repeal retained EU law in retail disclosure and create clear detail disclosure rules regulated by the FCA, rather than the patchwork of regulations and laws that currently exists. The priority of both the Treasury and FCA has been made clear – to adapt to the digital age and allow financial services firms to be more flexible, while still operating within a standardized framework.