Financial Services Alert - June 25, 2013 June 25, 2013
In This Issue

Massachusetts Division of Banks Issues Opinion Regarding Approval Process for Installation of Interactive Teller Machines at Non-Branch Locations

On June 7, 2013 the Commonwealth of Massachusetts Division of Banks (the “Division”) issued an opinion, Selected Opinion 013-002, (the “Opinion”) regarding the application process for the installation of Interactive Teller Machines (each, an “ITM”) at locations that are not authorized bank branches.  Responding to correspondence from Lowell Co-operative Bank (now known as Sage Bank, the “Bank”), the Division concluded that ITMs should be considered electronic branches, governed by Massachusetts General Laws (“MGL”) chapter 167B rather than branches governed by MGL chapter 167C.  Consequently, the application process for operation of an ITM will follow the same procedures for the establishment of an ATM, specifically the requirement to submit a notice to the Division within 30 days after opening the ATM or ITM location.

In reaching this conclusion, the Division analyzed the types of transactions offered by ITMs, asking whether these services bring ITMs within the prohibition on “manned” electronic branches under MGL chapter 167B.  According to the letter submitted by the Bank, ITMs provide services similar to ATMs, except that ITMs also feature a video functionality that permits a bank to provide services typically routed through a customer service call center directly to the customer via a more interactive video process.  The ITMs at issue in the request by the Bank offer eight transaction services not available through ATMs.  Three of these services, stop on debit card, verification of account history, and check orders, can be processed directly through an ITM’s connection to a customer assistance center.  The following five remaining transaction services require a signature form submitted independently by the customer: stop payments, debit card reissue, report loss of money order, report loss of treasurer’s check, and change of address.  Given that each of these transactions is initiated by the customer, and that five of the eight transactions require a customer to submit forms independently, the Division concluded that ITMs are not “manned” electronic branches as addressed in chapter 167B, but instead are more closely akin to a type of ATM through which customers may interact with a bank’s customer service center for selected transactions.  Accordingly, the Division concluded that the Bank’s ITMs can be licensed through the same process as ATMs.  The Division also stated that consumer protections in effect for ATM operations would apply with equal effect to ITM-initiated transactions.

Although the Opinion authorizes the Bank to operate an ITM, the Division emphasized that the Opinion should not be construed as a blanket authorization of all ITM operations in Massachusetts.  Federal banking precedents are not binding on the Division, but the Division noted that OCC guidance on the operation of remote service units (“RSUs”) provides that an RSU is not a “branch” under the National Bank Act even when “equipped with a telephone or televideo device that allows contact with bank personnel.

OCC Issues Final Rule Implementing Dodd-Frank Amendments to Lending Limit, Which Concern Certain Credit Exposures From Derivatives and Securities Financing Transactions

The OCC adopted a final rule (the “Final Rule”) that implements Section 610 of the Dodd-Frank Act (“Section 610”), amends 12 C.F.R., part 32 of the OCC’s regulations, and expands the statutory definition of “loans and extensions of credit” for the consolidated lending limit rule which will be applicable to national banks and federal and state-chartered savings associations.  An interim final rule (the “Interim Final Rule”) implementing Section 610 was previously adopted by the OCC and was discussed in the June 26, 2012 Financial Services Alert.  The Final Rule largely retains the substance of the Interim Final Rule, but makes a significant number of technical changes.  The Final Rule completes the elimination of the OCC’s separate lending limit regulation for savings associations. In general, a national bank’s or savings association’s extensions of credit to a single borrower are limited to 15% of the institution’s unimpaired capital and surplus, if unsecured, and 25% of unimpaired capital and surplus, if fully secured.  State-chartered banks (but not state-chartered savings associations) are subject to separate lending restrictions under Section 611 of the Dodd-Frank Act.

The definition of “loans and extensions of credit under Section 610 and the Final Rule includes any exposure to a person arising from a derivative transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction, or securities borrowing transaction.”  Section 610 and the Final Rule also add a definition of “derivative transaction” that includes any transaction that is a contract, agreement, swap, warrant, note, or option that is based, in whole or in part, on the value of, any interest in, or any quantitative measure or the occurrence of, any event relating to, one or more commodities, securities, currencies, interest or other rates, indices, or other assets.

The Final Rule provides three methods for calculating the credit exposure of derivative transactions other than credit derivatives.  As outlined in the Explanatory Table provided in the Final Rule, the three methods are:  (1) a model method; (2) a conversion factor matrix method; and (3) a current exposure method (which, to a certain extent, takes into account the effects of netting and collateral).  The Final Rule also provides three methods for calculating credit exposure arising from securities financing transactions.  The three methods are:  (a) a model method; (b) a basic method; and (3) a collateral haircut approach (which reflects the effects of netting and collateral).

Under the Final Rule, a national bank or savings association (each referred to in this paragraph as a ”Bank”) may choose which method of calculating credit exposure it will use unless the Bank’s federal banking regulatory agency requires it to use a specific method for safety and soundness purposes.  In a change from the Interim Final Rule, the Final Rule does not require a Bank to use one method for calculating credit exposure arising from all derivative transactions as well as credit exposure arising from all securities financing transactions, but instead allows the Bank’s federal banking regulatory agency to permit the Bank, subject to safety and soundness concerns, to use a specific method to calculate credit exposure and to apply it to all or to specific transactions.

The compliance date for the Final Rule is October 1, 2013, which represents a three-month extension from the July 1, 2013 compliance deadline originally set by the Interim Final Rule.

SEC Staff Allows Advisers Selected for Wrap-Fee/Managed Account Program to Satisfy Brochure and Brochure Supplement Delivery Requirements by Providing Them to Unaffiliated Adviser Sponsoring the Program

The staff of the SEC’s Division of Investment Management (the “Staff”) granted no-action relief to advisers (the “Program Advisers”) selected by an unaffiliated adviser (the “Sponsor”) to participate in the Sponsor’s wrap-fee or managed account programs or arrangements (the “Programs”) that would allow a Program Adviser to satisfy Rule 204-3 under the Investment Advisers Act of 1940 regarding delivery of the Program Adviser’s Form ADV Part 2A and 2B (the “Brochure Documents”) to a Program client by delivering the Brochure Documents to the Sponsor acting as the client’s agent.  The relief is subject to a number of conditions, including the following:

  • The Sponsor has discretionary authority over each client account in the Programs including the authority to select Program Advisers to manage client assets.
  • A client would need to consent to the delivery of Brochure Documents to the Sponsor.  This consent would be revocable, and upon request, the Sponsor would deliver the Brochure Documents to a client at no cost.
  • The Sponsor would inform each client of the Program Advisers managing the client’s account.
  • The Sponsor’s compliance program would include procedures designed to ensure that (1) it appropriately reviews the Brochure Documents ; (2) it appropriately manages any material conflicts that might arise for the Sponsor with respect to a Program Adviser (e.g., because of a business relationship) by sending the Program Adviser’s Brochure Documents to a client for evaluation, suggesting that the client engage another party to evaluate the conflict, or using some other suitable means; and (3) its decisions on the hiring and firing of Program Advisers are exercised in accordance with its fiduciary obligations and on the basis of appropriate due diligence and ongoing oversight.

The Staff’s response notes that a Sponsor might send a Program client disclosures about a Program Adviser other than those relating to a conflict of interest, e.g., disclosures relating to extraordinary financial events such as insolvency or bankruptcy or relating to disciplinary matters that a Program Adviser would be required to disclose to clients through Form ADV Part 2 or otherwise.

Goldman Sachs & Co., SEC No-Action Letter (publ. avail. June 20, 2013).

CFTC Provides No-Action Relief from Fingerprinting Requirement for Certain Non-U.S. Associated Persons

The CFTC’s Division of Swap Dealer and Intermediary Oversight (the “Division”) issued a no-action letter providing relief from the general requirement that each natural person that is associated with a registered entity (a “sponsoring registrant”) submit fingerprints that are used to conduct a background fitness check for that associated person.  Specifically, the relief applies with respect to those associated persons who have not resided in the United States since reaching 18 years of age (“Non-U.S. Associated Persons”).  The relief letter notes that the National Futures Association (“NFA”), which receives the fingerprint cards, submits them only to the FBI.  The letter also acknowledges that the fingerprint requirement may violate the privacy laws of certain non-U.S. jurisdictions.

The relief provides that a sponsoring registrant may submit, for non-U.S. Associated Persons, either (i) a fingerprint card or (ii) a certification, signed by a person duly authorized to bind the sponsoring registrant, certifying that (1) a reasonable criminal history background check using a reputable commercial service was conducted, (2) such criminal history background check did not reveal any matters that constitute a disqualification under Sections 8a(2) or 8a(3) of the Commodity Exchange Act, other than those disclosed; and (3) such sponsoring registrant shall maintain records documenting that such criminal history background check was performed and the results thereof.

Sponsoring registrants that wish to avail themselves of the relief must submit a Form 8-R for each Non-U.S. Associated Person along with the certification, and notify the NFA within 30 days after the filing of the Form 8-R that it has not submitted a fingerprint card.  The no-action letter notes that the Division will continue to explore alternatives to the fingerprint requirement in the context of Non-U.S. Associated Persons, and may revisit the guidance set forth in the letter at a future date, but without prejudice to those who have already relied on the letter.

The letter is similar to, and based on, similar relief provided in a previous no-action letter with respect to the submission of fingerprints for principals of CFTC registrants that have not resided in the United States since reaching 18 years of age (discussed in the December 18, 2012 Financial Services Alert).

FINRA Requests Immediate Effectiveness of New Form for Electronic Private Placement Filings Under Rule 5123

On June 20, 2013, FINRA made a rule filing with the SEC (SR-2013-026) to amend Rule 5123 (the “Rule”) to mandate electronic filing of documents and information required to be filed within 15 days after the commencement of the offering of a private placement not exempt from the Rule.  FINRA also submitted a copy of the proposed electronic form, which includes new questions seeking information not previously required to be provided in Rule 5123 filings.  FINRA stated that it has filed the proposed rule change for immediate effectiveness and requested that the SEC waive the requirement that the proposed rule change not become operative for 30 days after the date of filing, so that FINRA would be able to implement the proposed rule change immediately.

Rule 5123 requires each member that sells securities in a non-public offering (other than offerings exempted by the Rule) to file, within 15 days after the date of first sale, a copy of any private placement memorandum, term sheet or other offering document or, if none, to indicate that no such offering documents were used.  Rule 5123 is a companion to Rule 5122, which requires filing with respect to private offerings by a member or a control person of the member, and imposes certain other requirements not applicable to Rule 5123 offerings.  Electronic filing is currently required under Rule 5123, but FINRA has not previously required completion of an electronic form.

The proposed electronic form would require information about the maximum sales commission and aggregate amount of other compensation to registered persons disclosed in the offering document and the stated or target rate of return as disclosed in the offering document.  The form would also require an answer of Yes, No or Unknown to the following questions:

  • Whether the offering is a contingency offering;
  • Whether independently audited financial statements are available for the issuer’s most recently completed fiscal year;
  • Whether the issuer is able to use offering proceeds to make or repay loans to, or purchase assets from, any officer, director or executive management of the issuer, sponsor, general partner, manager, advisor or any of the issuer’s affiliates;
  • Whether the issuer has a board of directors comprised of a majority of independent directors or a general partner that is unaffiliated with the firm;
  • Whether the issuer has engaged, or does the member anticipate that the issuer will engage, in a general solicitation in connection with the offering or sale of the securities; and
  • Whether the issuer, any officer, director or executive management of the issuer, sponsor, general partner, manager, advisor or any of the issuer’s affiliates has been the subject of SEC, FINRA or state disciplinary actions or proceedings or criminal complaints within the last 10 years.

The proposal has not yet been published in the Federal Register.