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Volume 9, no. 32 |
August 25, 2014 |
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In recent speech to attendees at a Dallas securities conference, Rick Fleming, the Director of the SEC Office of the Investor Advocate (“OIA”), recommended that the SEC be allowed to hire more SEC examiners and to collect annual “user fees” from registered advisers for the purpose of funding more frequent SEC examinations.
To justify the need for more frequent examinations, Fleming remarked that at current examination rates investment advisers can expect to be examined by the SEC only once every 11 years. A primary reason for such a low rate of exams appears to be the slow growth of SEC resources over the past 10 years relative to the increasing number of advisers and assets under management during the same period. The SEC, as currently constructed, has had a difficult time keeping up with the growing number of registered advisors, especially in light of the additional examination burdens imposed on the SEC following the enactment of Dodd-Frank. In the past decade, the number of SEC-registered advisers has grown by approximately 40 percent and assets under management has more than doubled, while the SEC office responsible for examining those advisers has grown by a mere 10%.
While Fleming notes that many industry associations and experts have endorsed the concept of user fees, including David Tittsworth, President of the Investment Advisor Association, the concept of a user fee is not without its detractors.
First, Fleming indicates that there is a philosophical objection to expanding government regulatory authority, especially in light of significant SEC budget increases in the years following the financial crisis. However, while spending by the Office of Compliance Inspections and Examinations (“OCIE”) has indeed increased, Fleming notes that the increasing number and complexity of registrants far outpaces the growth in OCIE spending. Further, certain other major expenditures have accounted for much of the overall increase to the SEC budget, such as EDGAR modernization and the development of other technological innovations by the SEC. As a result, the rate of examinations and the available resources to conduct them has not adequately increased.
Second, some opponents of the user fee concept simply believe there are more viable solutions, such as requiring advisers to hire third-parties to conduct SEC-style examinations. However, Fleming notes the conflicts of interest inherent when the examinee selects and compensates the examiner. Further, Fleming presumes the expense of such audits would actually be more burdensome that annual user fees.
The push for user fees is a relatively recent, but not entirely new development. Fleming’s remarks echo recommendations made by the OIA in an earlier June 30 report to Congress. In 2013, Rep. Maxine Waters, D-Calif., introduced a bill (The Investment Adviser Examination Improvement Act of 2013 (H.R. 1627)), that would allow the SEC to collect user fees. In the period since this bill was introduced, Mr. Fleming and the OIA are merely the latest to join the growing chorus of voices endorsing the concept of charging registered advisers a user fee to fund the SEC’s examination activities. Winston & Strawn will continue to monitor this situation as it develops. |
| Wade Challacombe |
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Although the Securities and Exchange Commission (“SEC”) proposed rules to implement the JOBS Act’s crowdfunding provisions last year, it has yet to adopt them. Despite that fact, or perhaps because of the absence of final rules, the discussion on how crowdfunding may assist small companies raise capital continues. br />
The Securities Law Prof Blog noted an article by Indiana University Kelley School of Business Professor Abbey Stemler entitled “The JOBS Act and Crowdfunding: Harnessing the Power – and Money – of the Masses.” The article notes the potential power of crowdfunding, but cautions that substantial risks accompany those possibilities.
Similarly, Slate warned of the pitfalls awaiting crowdfunded companies, which include extensive registration and reporting requirements.
Blogging for The Conglomerate, Wharton Professor Eric Orts suggested that crowdfunding could prove to be the type of disruptive legal technology that changes the landscape of business organization.
The Conglomerate also posted University of Illinois Professor Christine Hurt’s blog on state crowdfunding laws. Hurt lists the states that have passed or are considering intrastate crowdfunding laws and two websites which engage in intrastate crowdfunding. |
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| On August 20th, the Office of the Comptroller of the Currency (“OCC”) published a Bulletin on the revised “Merchant Processing” booklet of the Comptroller’s Handbook. The revised booklet, which also covers federal savings associations, provides updated guidance to examiners and bankers on assessing and managing the risks associated with merchant processing activities. |
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| On August 19th, the federal banking agency members of the Federal Financial Institutions Examination Council with Community Reinvestment Act responsibilities (the Federal Reserve Board, Federal Deposit Insurance Corporation, and OCC), announced the availability of data on small business, small farm, and community development lending reported by certain commercial banks and savings associations, pursuant to the CRA. Joint Press Release. |
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| On August 18th, the OCC announced it will host a public meeting of the Minority Depository Institutions Advisory Committee (“MDIAC”) on October 7, 2014. The MDIAC provides advice to the Comptroller of the Currency about minority depository institutions and assesses the current condition of minority depository institutions, regulatory changes that may ensure the health and viability of minority depository institutions, and other issues affecting these institutions. The agenda for the MDIAC meeting will include a review of accomplishments, a discussion of the status of the minority depository institutions, and current topics of interest to the industry. Members of the public may submit written statements to the MDIAC on or before September 29, 2014. OCC Press Release. |
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| On August 15th, the Federal Reserve Board and the FDIC provided additional guidance to firms that will be filing resolution plans for the second time in December 2014. Each plan must describe the company’s strategy for rapid and orderly resolution under the U.S. Bankruptcy Code in the event of material financial distress or failure of the company. Among other things, the agencies released the tailored resolution plan template for 2014. The template focuses on the nonbanking operations of the firm and on the interconnections and interdependencies between the nonbanking and banking operations. The optional template is intended to facilitate the preparation of tailored resolution plans. Joint Press Release. |
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| On August 19th, the Consumer Financial Protection Bureau released a bulletin outlining expectations for mortgage servicers that transfer loans. The bulletin includes information on how mortgage servicers should pay special attention to new rules protecting consumers applying for loss mitigation help or trial modifications. CFPB Press Release. |
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| On August 20th, Reuters summarized the contents of a SEC letter to investment advisors seeking information on their wrap fee accounts. The letter seeks information on the advisors’ wrap fee policies and assets held in such accounts. Wrap Fee Sweep. |
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| On August 20th, Bloomberg reported the Municipal Securities Rulemaking Board is seeking SEC approval of a proposed rule which would require municipal bond traders to adopt best execution practices for their clients. Best Execution. |
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| On August 20th, the SEC announced that its Chief Information Officer, Thomas Bayer, is planning to leave the agency in October. SEC Press Release. |
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| On August 19th, the Office of Compliance Inspections and Examinations (“OCIE”) launched an examination initiative for newly regulated municipal advisors. Over the next two years, OCIE will examine municipal advisors’ for, among other things, their compliance with their fiduciary duty obligations, their books and recordkeeping, and their disclosure, fair dealing, supervision, and employee qualifications and training. SEC Press Release. |
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| On August 15th, the SEC published its second annual report to Congress on how it uses the data collected from private funds. |
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| On August 18th, the Commodity Futures Trading Commission’s (“CFTC”) Division of Market Oversight issued a no-action letter providing swap execution facilities time-limited, conditional relief from certain data reporting and recordkeeping requirements in relation to confirmations required for uncleared swap transactions executed on or pursuant to the rules of a SEF under Commission Regulation 37.6(b). The no-action relief expires on September 30, 2015. |
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| On August 18th, the CFTC’s Division of Clearing and Risk provided Clearing Corporation of India Ltd. no-action relief from the requirements to register as a derivatives clearing organization for the clearing of Indian Rupee-denominated interest rate swaps and Indian Rupee-denominated forward-rate agreements. |
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| On August 18th, the CFTC’s Divisions of Clearing and Risk and Swap Dealer and Intermediary Oversight issued a no-action letter providing that enforcement action will not be recommended against the Chicago Mercantile Exchange, Inc., or certain of its clearing members, regarding the execution and submission of future commission merchant acknowledgment letters required by Regulation 1.20. |
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| October 1, 2014 |
Regulatory Capital Rules: Advanced Approaches Risk-Based Capital Rule, Revisions to the Definition of Eligible Guarantee. 79 FR 44120. |
| August 20, 2014 |
Transferred OTS Regulations and FDIC Regulations Regarding Post-Employment Activities of Senior Examiners. 79 FR 42181. |
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Transferred OTS Regulations and FDIC Regulations Regarding Disclosure and Reporting of CRA-Related Agreements. 79 FR 42183. |
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| October 1, 2014 |
Regulatory Capital Rules: Advanced Approaches Risk-Based Capital Rule, Revisions to the Definition of Eligible Guarantee. 79 FR 44120. |
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| October 1, 2014 |
Regulatory Capital Rules: Advanced Approaches Risk-Based Capital Rule, Revisions to the Definition of Eligible Guarantee. 79 FR 44120. |
| August 8, 2014 |
Assessment of Fees. 79 FR 38769. |
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| September 8, 2014. |
Application of “Security-Based Swap Dealer” and “Major Security-Based Swap Participant” Definitions to Cross-Border Security-Based Swap Activities; Republication. 79 FR 47277. |
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Application of “Security-Based Swap Dealer” and “Major Security-Based Swap Participant” Definitions to Cross-Border Security-Based Swap Activities. 79 FR 39067. |
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| October 10, 2014 |
Department of the Treasury Regulations for the Gulf Coast Restoration Trust Fund. 79 FR 48039. |
| August 7, 2014 |
Government Securities Act Regulations; Replacement of References to Credit Ratings and Technical Amendments. 79 FR 38451. |
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| On August 19th, the SEC provided notice of the Chicago Board Options Exchange’s withdrawal of a proposed rule change to add Rule 6.19, “Trade Nullification and Price Adjustment Procedure,” and to make certain conforming administrative changes. SEC Release No. 34-72866. |
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| On August 18th, the SEC provided notice of The Depository Trust Company’s (“DTC”) withdrawal of proposed procedures for issuers of securities deposited at DTC for book entry services when DTC imposes or intends to impose restrictions on the further deposit and/or book entry transfer of those securities. SEC Release No. 34-72860. |
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| On August 15th, the SEC provided notice of the Financial Industry Regulatory Authority’s (“FINRA”) filing of a proposed amendment to FINRA Rule 9231 to add a category of persons eligible to be a Panelist on a Hearing Panel or an Extended Hearing Panel constituted to conduct disciplinary proceedings. FINRA is also proposing to make a conforming amendment to FINRA Rule 9232, which comprises criteria for the appointment of a Panelist to a Hearing Panel or an Extended Hearing Panel. Comments should be submitted on or before September 11, 2014. SEC Release No. 34-72854. |
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| On August 21st, the International Swaps and Derivatives Association announced the launch of the ISDA 2014 Credit Derivatives Definitions Protocol. ISDA Press Release. |
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| On August 20th, the SEC approved NASDAQ OMX BX’s proposed amendment of the current BX Market Maker quoting obligations to adopt rules permitting BX Market Makers to act as Lead Market Makers (“LMMs”) provided the LMM meets certain obligations and quoting requirements. In addition, the proposal provides assigned LMMs with certain participation entitlements and provides Public Customers with priority when the Price/Time execution algorithm is in effect. SEC Release No. 34-72883. |
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| On August 18th, the National Futures Association informed members of advisories issued by the Financial Crimes Enforcement Network concerning jurisdictions with anti-money laundering deficiencies and the development of a culture of Bank Secrecy Act compliance. NFA Notice I-14-19. |
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| On August 21st, the Second Circuit affirmed district court orders enjoining FINRA arbitrations. In these two consolidated cases, appellants sought review of district court orders which granted a financial services firm’s motion to enjoin a FINRA arbitration brought against the firm by a public financing authority. The Second Circuit held that in each case, the FINRA arbitration rules had been superseded by forum selection clauses requiring “all actions and proceedings” related to the transactions between the parties to be brought in court. Goldman, Sachs & Co. v. Golden Empire Sch. Fin. Auth. |
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| On August 20th, the Second Circuit denied a petition seeking en banc review of a panel opinion which held that the Racketeer Influenced and Corrupt Organizations Act (“RICO”) can apply extraterritorially where, as here, liability or guilt could attach to extraterritorial conduct under the relevant RICO predicate. The European Community alleges that RJR Nabisco participated in a global money-laundering scheme with organized criminal groups in violation of RICO. Denying the petition for en banc review, the Court held that the plaintiffs are not required to plead that their alleged injuries actually occurred in the United States. European Community v. RJR Nabisco. View the amended panel opinion here. |
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| On August 15th, the Second Circuit affirmed the dismissal of a securities fraud lawsuit stemming from Porsche’s attempt to takeover Volkswagen. Plaintiffs purchased securities-based swaps pegged to the price of Volkswagen shares. They alleged that defendants made fraudulent statements and took deceptive actions to conceal Porsche’s intention to takeover VW in violation of Section 10(b) of the Securities Exchange Act. Applying the Supreme Court’s analysis in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), and its own precedent in Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012), the Court held that the relevant actions in this case were so predominantly German as to compel the conclusion that the complaint fails to invoke Section 10(b) in a manner consistent with the presumption against extraterritoriality. The Court noted the extremely fact intensive nature of cases involving the extraterritorial application of Section 10(b) and declined to draw a bright-line test for when the application of Section 10(b) will be considered extraterritorial. Because the Court recognized that plaintiffs might be able to draft an amended complaints that would invoke a domestic application of Section 10(b), the case was remanded to allow the district court to entertain a motion to amend the complaint. Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings SE. |
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| On August 21st, Risk.net summarized a letter sent to the Financial Stability Board signed by SEC Chair Mary Jo White on behalf of the OTC Derivatives Regulators Group. The letter asks the FSB to unambiguously request countries to remove privacy laws requiring firms to mask counterparty identification information. Unmasking. |
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| On August 21st, New York Times columnist Floyd Norris discussed the conflicts of interest present in the auditing and credit rating industries and the difficulties regulators have faced in addressing those conflicts. Conflicting Conflicts. On August 18th, CFO.comreported on the SEC’s efforts to adopt conflict of interest rules for credit rating agencies. Credit Raters. |
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| On August 21st, Reuters summarized what the G20 hopes to accomplish at its November meeting. Issues include capital cushions, termination agreements for derivatives, and repo reforms. Global Agenda. |
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| On August 20th, the Department of Labor issued a request for information (“RFI”) on the use of brokerage windows, self-directed brokerage accounts and similar features in 401(k)-type plans. The RFI seeks information concerning the scope of investment options typically available through a window; demographic and other information about participants who commonly use brokerage windows; the process of selecting a brokerage window and provider for a plan; the costs of brokerage windows; and what kind of information about brokerage windows and underlying investment options typically is available and disclosed to participants. Comments should be submitted on or before November 19, 2014. Department of Labor Press Release. |
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| On August 20th, Reuters reported the asset management industry is reevaluating its international lobbying approach in light of indications that the Financial Stability Board (“FSB”) may impose market restrictions on asset managers in times of financial crisis. The FSB had originally considered designating the largest asset managers as systemically important. But when the industry objected to using size as the sole measurement, the FSB opened the possibility of regulating activities. Backfire. |
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| On August 20th, the Federal Trade Commission announced Berkshire Hathaway Inc. has agreed to pay $896,000 in civil penalties to resolve allegations that it violated the Hart-Scott-Rodino Act’s (“HSR”) premerger reporting laws in connection with the 2013 acquisition of voting securities in USG Corporation. According to the FTC’s complaint, Berkshire Hathaway changed convertible notes it owned in USG into 21.4 million voting securities on December 9, 2013. As a result of the conversion, the value of its USG holdings exceeded $283.6 million, the premerger reporting threshold under the HSR Act at the time. The company subsequently made a corrective filing, and acknowledged that the transaction should have been reported under the HSR Act. Just six months prior, Berkshire Hathaway made a corrective filing in connection with a June 2013 acquisition of $41 million of voting securities in Symetra Financial Corporation, a transaction that resulted in Berkshire Hathaway holding Symetra voting securities valued at more than $283.6 million. The FTC took no action against Berkshire Hathaway following its first HSR Act violation, and relied on the firm’s assurances that it would implement appropriate HSR monitoring procedures going forward. FTC Press Release. |
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| On August 18th, the New York Federal Reserve Bank’s Liberty Street Economics blog discussed a recent New York Fed staff report which found that the possible imposition of restrictions on a financial intermediary’s ability to fulfill redemption requests may promote “preemptive runs.” Redemption Gates. |
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