Regulatory Developments
On Dec. 11, the SEC proposed new Rule 18f-4 under the Investment Company Act, introducing a new regulatory regime for the use by registered investment funds and business development companies (Registered Funds) of derivatives transactions, “financial commitment transactions,” and other senior securities transactions, as these terms are uniquely defined in Rule 18f-4 (described collectively as transactions in Senior Securities). The rules are designed to bring uniformity and bright-line tests to Registered Funds engaging in these transactions, cap the leverage Registered Funds obtain through use of Senior Securities, and introduce procedural safeguards. If adopted, the proposed rule would require Registered Funds to comply with Senior Security regulation falling into five categories: (1) portfolio limitations, (2) asset segregation requirements, (3) derivatives risk management programs, (4) new recordkeeping requirements, and (5) amendments to proposed forms N-PORT and N-CEN. The portfolio limitations, in general, require Registered Funds to meet one of two tests: either an “exposure-based” test limiting a Registered Fund’s exposure to Senior Securities transactions (measured by the securities’ notional value) to 150% of the Registered Fund’s net assets; or a “risk-based” test allowing notional value exposure of up to 300% of net assets, provided that the Registered Fund’s calculated VaR (value at risk) is less when including the fund’s derivatives than it is when excluding them. The asset segregation requirements require Registered Funds holding derivatives to segregate assets for a mark-to-market coverage amount and an additional risk-based coverage amount reasonably determined by the board (though subject to certain SEC requirements), and also require segregation of 100% of the notional value of financial commitment transactions. Further, a Registered Fund that either has notional derivatives exposure exceeding 50% of net assets or uses “complex derivatives” must establish a formalized derivatives risk management program which, among other requirements, must be approved by the board and be administered by a designated derivatives risk manager. The comment period for proposed Rule 18f-4 closes 90 days after publication in the Federal Register.
On Dec. 8, FinCEN issued FinCEN Notice 2015-1 announcing a further extension of the filing date for certain Report of Foreign Bank and Financial Accounts (FBAR) filings by individuals with signature authority over, but no financial interest in, one or more foreign financial accounts. The filing date, which had been June 30, 2016, has been extended to April 15, 2017. FinCEN explained that the extension was being provided “in light of ongoing consideration of questions regarding the filing requirement and its application to” those individuals.
On Dec. 10 the SEC issued two new C&DIs concerning the application of Section 71003 of the Fixing America’s Surface Transportation (FAST) Act (discussed in the Editor’s Note in last week’s Roundup) permitting EGCs to omit certain financial information in filings.
FINRA Provides Notice to Members of Obligations When Providing Stock Quote Information to Customers
On Dec. 9 FINRA announced that it had issued Regulatory Notice 15-52, reminding firms and registered representatives of their obligations under Rule 603(c) of Regulation NMS (Vendor Display Rule) when providing quotation information to customers. FINRA noted that the SEC staff recently made clear its view that if a registered representative provides a quotation to a customer that can be used to assess the current market or the quality of trade execution, reliance on non-consolidated market information as the source of that quotation would not be consistent with the Vendor Display Rule. In light of the SEC staff’s statements, FINRA advised firms to review whether they are in compliance with the requirement in the Vendor Display Rule that broker-dealers provide a consolidated display of market data when they are providing quotation information to customers.
SEC Approves FINRA’s Proposed Rule Change to Apply Markup Rule to Government Securities
The SEC has approved FINRA’s proposed rule change (discussed in the Oct. 7 Roundup) to amend FINRA Rule 0150 to apply 2121 (Fair Prices and Commissions) and its Supplementary Material .01 (Mark-Up Policy) and .02 (Additional Mark-Up Policy for Transactions in Debt Securities, Except Municipal Securities) to exempted securities that are government securities.
NFA Announces New Forex Reporting Requirements for FDMs
On Dec. 9 the National Futures Association (NFA) issued Notice I-15-29 announcing that, in conjunction with the changes to forex dealer member (FDM) capital requirements that take effect on January 4, 2016 (announced in Notice I-15-21), NFA is requiring FDMs to report additional information in the daily Forex Financial Report (FFR), which will assist NFA in its ongoing monitoring of FDMs. In addition, the Notice describes new line items NFA is adding to the supplementary information section of the monthly 1-FR-FCM (or FOCUS II) filing, which are intended to assist firms in properly calculating their net capital requirements under the new requirements.
Goodwin Procter News
Goodwin Procter’s Capital Markets and Technology Companies practices have issued a client alert on the recently enacted FAST Act which includes several securities law provisions that will facilitate resales of privately placed securities and streamline capital-raising for emerging growth companies (EGCs). Among the securities law provisions contained in the FAST Act are a new exemption for resales of securities, a reduced waiting period for EGC roadshows for an initial public offering (IPO), a grace period for EGCs that lose EGC status before completion of their IPO, and reduced financial statement disclosure requirements for pre-effective registration statement filings for EGC IPOs.
Contacts
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Peter W. LaVigne
Of Counsel