The U.S. regulatory agencies were out in full force this week, with significant activity and pronouncements that will have a meaningful impact on the financial services industry.

It’s hard to summarize these important developments in this short introduction to this week’s issue, so we encourage readers to carefully review our authors’ insightful contributions. 

In addition, our firm was honored last week to be named at the IFLR Americas Awards as the “Team of the Year” in the “Financial Services Regulatory” category for our work in the crypto and LIBOR spaces. We are also so proud of our colleague Lary Stromfeld, who heads our LIBOR Preparedness Team, for receiving an “Outstanding Achievement Award” in recognition of his critical role in the drafting and ultimate passage of LIBOR legacy contract legislation at the New York State and federal levels. What a well-deserved honor!

As we prepare this weekend in the U.S. to honor our Armed Forces, especially those who made the Ultimate Sacrifice, we cannot help but also acknowledge the tragic events in Uvalde, Texas and, just a week earlier, in Buffalo, New York and Laguna Woods, California. The sadness is deep and overwhelming.

Daniel Meade and Michael Sholem
Co-Editors, Cabinet News and Views

By Michael J. Ruder

Special Counsel | Capital Markets

By Melissa Farber

Associate | Capital Markets

The Securities and Exchange Commission (the “SEC”) yesterday proposed amendments to rules and forms relating to ESG disclosures for investment advisors and investment companies. Specifically, the proposed changes seek to expand U.S. funds’ disclosure requirements to clients and shareholders and to prevent misleading and deceptive claims relating to ESG qualifications.

The SEC’s proposed rule explains that the intent of the proposed rules is to “create a consistent, comparable, and decision-useful regulatory framework for ESG advisory services and investment companies to inform and protect investors while facilitating further innovation in this evolving area of the asset management industry.” The proposal would require disclosure regarding ESG strategies in fund prospectuses, annual reports, and adviser brochures. It would also require, in some cases, tabular ESG disclosure. Finally, it would require certain environmentally focused funds to disclose the greenhouse gas (GHG) emissions associated with their portfolio investments. A fact sheet released by the SEC can be found here.

Interestingly, the proposal categorizes ESG-focused funds into three different categories, and provides different disclosure requirements for each category:

1. Integration Funds. Funds that integrate ESG factors alongside non-ESG factors in investment decisions would be required to describe how ESG factors are incorporated into their investment process.

2. ESG-Focused Funds. Funds for which ESG factors are a significant or main consideration would be required to provide detailed disclosure, including a standardized ESG strategy overview table.

3. Impact Funds. A subset of ESG-Focused Funds that seek to achieve a particular ESG impact would be required to disclose how it measures progress on its objective.

This vote follows the SEC’s announcement earlier this week that a major financial institution agreed to pay a $1.5 million penalty for misleading statements and omissions regarding its quality review of ESG factors in investment decisions. This settlement, taken together with yesterday’s rule proposal and March’s proposed climate disclosure rule, makes it apparent that the SEC is serious in its efforts to tackle so-called “greenwashing” and “social washing” concerns about ESG-related disclosures. As a result of this increased focus by the SEC, funds and other issuers should consult with counsel to ensure that their public statements and disclosures regarding ESG matters are not potentially misleading.

Yesterday’s proposal will be published in the Federal Register for public comment. The comment period will remain open for 60 days after publication. The SEC’s decision to allow for only 60 days to comment is notable because in recent weeks the SEC has faced public criticism and comment letters regarding the short comment periods on numerous recent rule proposals.

Please contact Cadwalader if you have questions about the application of the proposed rules.

By Rachel Rodman

Partner | Consumer Financial Services Enforcement and Litigation

By Wesley Wintermyer

Associate | White Collar Defense and Investigations

The Consumer Financial Protection Bureau ("CFPB") issued an interpretive rule on May 19, reiterating the authority that states have to pursue companies and individuals that violate federal consumer financial protection laws, including the Consumer Financial Protection Act of 2010 ("CFPA").

When Congress enacted the CFPA in 2010, it provided for concurrent enforcement by federal and state regulators. Congress viewed federal preemption of state enforcement efforts as one cause for the Great Recession, and it thus equipped states with express enforcement authority under the CFPA. The CFPB’s new rule interpreting the CFPA is not subject to notice-and-comment rulemaking under the Administrative Procedures Act, and it will become effective upon publication in the Federal Register. The rule affirms that:

• States are not limited by statutory limitations on the CFPB’s enforcement authority. The CFPA includes a long list of exemptions to the CFPB’s authority, such as: merchants; retailers; accountants and tax preparers; attorneys engaged in the practice of law; persons regulated by the Securities and Exchange Commission; persons regulated by the Commodity Futures Trading Commission; and auto dealers. The rule interprets these exemptions as not applying to states or state regulatory entities because Congress applied these carve-outs only to the “Bureau” or “Director.” Thus, according to the CFPB, states can use the CFPA to pursue enforcement actions “against a broader cross-section of companies and individuals” than even the CFPB itself.
• States have authority to enforce the CFPA and other federal financial protection laws. The CFPA authorizes states to bring civil actions against “covered persons” or “service providers” that violate: (1) the CFPA (e.g., by engaging in unfair, deceptive, or abusive acts or practices); (2) any of the 18 enumerated consumer laws listed within the CFPA (e.g., Equal Credit Opportunity Act, Fair Debt Collection Practices Act, Truth in Lending Act); or (3) any rule or order prescribed by the CFPB, such as consent orders. The interpretive rule notes that the CFPA requires that states consult with the CFPB before initiating any such action.
• CFPB enforcement actions do not box out state enforcement actions. Where the CFPB is pursuing enforcement, states can bring coordinated actions or separate actions to stop or remediate harm that is not addressed by the CFPB’s action against the same entity. The CFPA allows such concurrent actions except in a few instances, such as for mortgage loan modification and foreclosure rescue services. The CFPB views concurrent state actions as “complementary enforcement activities” that serve to protect consumers at the state level.

The interpretive rule is meaningful more for its timing than its content. States have been empowered to bring civil actions under the CFPA since its passage. Thus, we view this rule as an express call to arms to states to bolster their enforcement efforts − particularly as to: (1) enforcement of Bureau consent orders; and (2) entities that are exempted from the CFPB’s authority.