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Volume 9, no. 20 |
May 19, 2014 |
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| The private equity fund world is a buzz about the treatment of fees and expenses after comments made by Andrew Bowden, the director of the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations, at the Private Equity Fund Compliance Forum 2014 on May 6th. Mr. Bowden shared insights that the Office of Compliance Inspections and Examinations has learned from its Presence Exam Initiative, an initiative designed to establish a presence with the private equity industry following the call for increased regulatory oversight. Since these exams began almost two years ago, the Securities and Exchange Commission (the “SEC”) has found deficiencies in the treatment of fees and expenses more than 50% of the time. The SEC points to hidden fees and expense-shifting as troubling practices uncovered as a result of the examinations. The remarks suggest that most deficiencies are a result of an adviser’s failure to provide adequate disclosure or to adhere to the terms of it’s limited partnership agreement. The spotlight on fees and expenses has caused both private equity fund advisers and their investors to focus on the area—an impact on fund terms is likely to follow. |
| Megan Devaney |
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Last month Keith F. Higgins, the Director of the SEC’s Division of Corporation Finance (the “Division”), discussed the SEC’s plans to make its disclosure regime more effective. As theRacetotheBottom pointed out, Higgins’ speech marked a change in what had been the SEC’s original approach to reforming its disclosure policy. According to theRacetotheBottom, the SEC initially set out to examine what it perceived to be disclosure “overload.”
But in his speech, Higgins outlined something which more closely resembles a dialogue. First, the Division will review specific sections of Regulation S-K and S-X to determine if the requirements can be updated to reduce the costs and burdens and eliminate duplicative disclosures. It will also examine whether there is information that ought to be disclosed but currently is not. As part of this process the Division intends to seek considerable public comment and to that end has launched a spotlight page where companies, investors and other market participants may voice their views.
Specific areas to be reviewed include whether Industry Guides and form-specific disclosure requirements should be updated and perhaps codified in Regulation S-K; how investors use the separate financial statements submitted under Regulation S-X; and harmonizing the disclosure required under Securities Act rules with those of the Securities Exchange Act. View Financial Executives International Daily’s summary of Higgins’ speech here. |
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| On May 16th, the OCC issued final rules combining certain rules originally issued jointly with the other Federal banking agencies by the OCC with respect to national banks and by the former Office of Thrift Supervision with respect to savings associations. Specifically, the OCC is combining rules relating to consumer protection in insurance sales, Bank Secrecy Act compliance, management interlocks, appraisals, disclosure and reporting of Community Reinvestment Act-related agreements, and the Fair Credit Reporting Act (“FCRA”). This rulemaking also makes technical amendments to the OCC’s FCRA rule to conform to provisions of the Dodd-Frank Act. The rulemaking will not result in any substantive changes in the combined rules. The rule is effective on June 16, 2014. 79 FR 28393. |
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| On May 13th, the OCC reported that the financial condition of community national banks and federal savings associations in the nine-state Central District improved in 2013 as banks focused on strengthening risk management systems to help boost their performance. More than 85 percent of 491 community national banks and thrifts located in the Central District are top-rated, 1 or 2, on the five-point scale, a level not seen since early 2009. The OCC also reported that the number of problem banks fell to 72 institutions in the Central District, down from a peak of 146 national banks and thrifts in 2011. OCC Press Release. |
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| On May 9th, the Federal Reserve Board announced that as part of its program of operational testing of its policy tools, the Federal Reserve plans to conduct a series of eight consecutive operations offering seven-day term deposits through its Term Deposit Facility. Individual operations will be held on the first business day of each week beginning the week of May 19, 2014. Federal Reserve Board Press Release. |
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| The OCC will host a workshop in St. Louis on June 23-25, 2014 for directors of national community banks and federal savings associations. “Mastering the Basics: A Director’s Challenge” is a three-day workshop designed exclusively for directors of institutions supervised by the OCC and provides practical information on the roles and responsibilities of a community bank director. OCC Press Release. |
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| On May 15th, SEC Commissioner Daniel A. Gallagher submitted to the Commission his personal comments concerning the Office of Financial Research’s “Asset Management and Financial Stability Report.” The comments pointedly critique the report, the Financial Stability Oversight Council (the “FSOC”) which requested the report (and which has prohibited Gallagher from attending meetings as an observer), and the FSOC process which, he believes, is “far more dangerous to our financial markets than the purported risk factors it was purportedly created to address.” Gallagher Comments. |
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| On May 14th, SEC Chair Mary Jo White testified before the Senate subcommittee on financial services concerning the agency’s fiscal year 2015 budget request. A top SEC priority under the budget request is to add 316 additional staff to the examination program in its Office of Compliance Inspections and Examinations. This would allow the agency to examine more registered firms, particularly in the investment management industry; build out the examination program to implement newly expanded responsibilities with respect to municipal advisors, swap market participants, private fund advisers, crowdfunding portals and other new registrants; and more effectively risk-target and monitor other market participants. The Enforcement Division seeks to hire 126 new staff, including additional legal, accounting, and industry specialized experts, primarily for investigations and litigation. The SEC also requests 25 new positions for its Division of Corporation Finance. These resources are needed for Corporation Finance to continue its multi-year effort to enhance its disclosure review program for large or financially significant companies. White Testimony. |
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| On May 14th, Bloomberg, citing the remarks of Stephen Luparello, Director of the Division of Trading and Markets, reported that the SEC will soon begin its tick test pilot program, which would widen the minimum stock price spread for small sized firms. The pilot is meant to test whether larger price spreads would improve the liquidity for smaller companies’ stock. Tick Test. |
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| On May 9th, SEC Commissioner Daniel M. Gallagher discussed the dearth of information concerning investment advisers, suggesting the use of third-parties (including self-regulatory organizations) to remedy that shortcoming. The additional information would also be useful in determining whether the fiduciary duty owed by brokers and investment advisors should be harmonized. Gallagher Remarks. |
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| Draft updates to the EDGAR filer manual have been posted. The draft updates affect the General Information, EDGAR Filing, and N-SAR Supplement. The updates are being made to reflect changes scheduled to be implemented on June 16, 2014. |
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| The SEC’s Office of Investor Education and Advocacy issued investor alerts on the potential risks involving investments in marijuana-related companies and mutual fund fees and expenses. |
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| On May 15th, the CFTC’s Division of Market Oversight (the “DMO”) extended to August 15, 2014, the conditional time-limited relief provided in CFTC Letter No. 13-76 for Australian-based trading platform Yieldbroker Pty Limited. DMO will not recommend that the CFTC take enforcement action against Yieldbroker for failure to register as a swap execution facility. CFTC Letter No. 14-70. |
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| On May 14th, Bloomberg reported the CFTC is examining whether banks are improperly evading the provisions of the Dodd-Frank Act which require the central clearing of derivative contracts. End Run. |
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| On May 13th, Risk.net reported the CFTC is close to adopting a framework through which foreign central counterparties can obtain exemptive relief from registration as derivatives clearing organizations. Exemptive Relief. |
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| On May 12th, the CFTC’s Division of Swap Dealer and Intermediary Oversight issued a staff letter in which it described a streamlined approach for considering requests for registration no-action relief on an expedited basis from commodity pool operators (“CPO”) who delegate certain activities to a registered CPO. Under the streamlined approach, relief would be limited to certain circumstances and subject to a number of conditions, including that the delegating CPO represent in its form of request that certain specified criteria are met. DSIO will continue to consider requests for CPO registration relief involving delegating CPOs where the specified criteria set forth in the letter cannot be met. CFTC Press Release. |
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| The CFTC’s Global Markets Advisory Committee has scheduled a meeting for May 21, 2014. The agenda includes a discussion of issues related to the cross-border coordination of oversight of foreign-based swap clearinghouses and foreign swaps execution facilities. CFTC Press Release. |
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| May 12, 2014 |
Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organizations; Correction. 79 FR 26831. |
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| July 1, 2014 |
Restrictions on Sales of Assets of a Covered Financial Company by the Federal Deposit Insurance Corporation. 79 FR 20762. |
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| May 7, 2014 |
Removal of References to Credit Ratings in Certain Regulations Governing the Federal Home Loan Banks. 78 FR 67004. |
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| June 30, 2014 |
Credit Union Service Organizations. 78 FR 72537. |
| May 30, 2014 |
Capital Planning and Stress Testing. 79 FR 24311. |
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| June 16, 2014 |
Integration of National Bank and Savings Association Regulations: Interagency Rules. 79 FR 28393. |
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| July 7, 2014 |
Removal of Certain References to Credit Ratings Under the Securities Exchange Act of 1934. 79 FR 1521. |
| June 1, 2014 |
Broker-Dealer Reports. 78 FR 51909. |
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| May 8, 2014 |
Ukraine-Related Sanctions Regulations. 79 FR 26365. |
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| On May 15th, the Financial Industry Regulatory Authority announced SEC approval of amendments to FINRA Rule 5110 (Corporate Financing Rule-Underwriting Terms and Arrangements). The amendments expand the circumstances in which termination fees and rights of first refusal are permissible; exempt from the filing requirements certain collective investment vehicles that are not registered as investment companies; and make clarifying, non-substantive changes regarding documents filed through FINRA’s electronic filing system. The amendments are effective immediately. FINRA Regulatory Notice 14-22. |
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| On May 15th, the Financial Industry Regulatory Authority announced SEC approval of amendments to FINRA rules governing the reporting of (i) over-the-counter transactions in equity securities to the FINRA facilities; and (ii) orders in NMS stocks and OTC equity securities to the Order Audit Trail System (“OATS”). The OATS amendments were implemented April 7, 2014, and the ORF amendments will be implemented September 15, 2014. The implementation date for the requirement relating to reporting in milliseconds to the ADF and TRFs is September 29, 2014. The implementation date for the remainder of the ADF and TRF amendments will be announced separately and will be during the first quarter of 2015. FINRA Regulatory Notice 14-21. |
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| On May 15th, Reuters noted the comments of Andrew Ceresney, Director of the SEC’s Enforcement Division, concerning the Financial Industry Regulatory Authority’s apparent reluctance to require respondents in enforcement actions to admit wrongdoing. Ceresney said that he “understood” the FINRA’s position. Understanding. |
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| On May 13th, the SEC provided notice of the Chicago Board Options Exchange’s filing of a proposal to add rules regarding orders that are tied to stock, including a proposed definition of tied to stock orders and a related reporting requirement. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of May 19. SEC Release No. 34-72154. |
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| On May 16th, the Eleventh Circuit discussed what constituted a “government instrumentality” for purposes of the Foreign Corrupt Practices Act (the “FCPA”). It concluded that an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own is a government “instrumentality” under the FCPA. To determine what constitutes control and a function the government treats as its own the Court suggested the following non-exhaustive list of factors: the foreign government’s designation of the entity, its ownership, its hiring authority, its financing, and the length of the relationship. Applying those factors to the case at hand, which involved the provision of telecommunication services related to Haiti, the Court found that defendants’ interactions with the Haitian telecoms firm and its executives violated the FCPA. It reached that conclusion even after the current Haitian government submitted statements suggesting that the Haitian company was not owned by the Haitian government. U.S. v. Esquenazi. |
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| On May 16th, Reuters noted regional banks’ growing role in financing and hedging commodity transactions, especially in the oil and natural gas sectors. Growth Opportunity. |
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| On May 15th, Reuters discussed a recently release Federal Reserve Board staff paper which concluded that the imposition of redemption fees and redemption suspensions would actually spark, not slow, runs on money market funds. Unintended Consequences. |
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| On May 14th, the Wall Street Journal summarized the remarks of Thomas Curry, the Comptroller of the Currency. Curry urged state regulators to oversee financial firms’ “shadow banking” activities. Shadow Banking. |
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| On May 14th, Reuters reported the Financial Stability Oversight Council is reviewing the activities of risk modelling companies and examining financial firm reliance on these third-party service providers. Risk Modelers. The Federal Reserve Board recently published a staff working paper entitled “Model Risk of Risk Models,” which evaluates the model risk of models used for forecasting systemic and market risk. |
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| The fifth installment of The Real Deal, “Trends and Developments in M&A (Part II): Private Company Targets,” will be held on May 20, 2014, from 12:00 - 1:30 p.m. (Central). The Real Deal is a webinar series addressing current trends, challenges, and legal topics pertinent to M&A and securities professionals. Webinar. |
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| Antitrust and Competition — The EU Weekly Briefing is designed to provide timely updates on recent European Union competition law by including a short description of, and links to, recent developments. EU Weekly Briefing. |
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| Subscribe to Winston & Strawn’s Lending Law Digest, where attorneys blog on topics such as corporate lending, commercial lending, leveraged finance, sponsor finance, ABL, DIP loans, special assets, and much more. |
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