Financial Services Alert - April 29, 2014 April 29, 2014
In This Issue

OCC Proposes to Increase Assessments for Large National Banks and Federal Savings Associations; Leaves Assessments for All Other Institutions Unchanged

The OCC proposed to increase assessments for national banks and federal savings associations with assets of more than $40 billion.  The proposal would not increase assessments for national banks and federal savings associations with $40 billion or less in assets.  The proposed increase for such large institutions would range between 0.32 percent and 14 percent, depending on the institution’s total assets, with an average projected increase of 12 percent.  The OCC said that there are currently 25 institutions with assets of more than $40 billion which would be affected by this proposal.

Comments on the proposed assessment increase must be received by June 12, 2014.

The Conference of State Bank Supervisors and the North American Securities Administrators Association Release Guidance Regarding Virtual Currencies

The Conference of State Bank Supervisors (the “CSBS”), through its Emerging Payments Task Force (the “Task Force”), and the North American Securities Administrators Association (the “NASAA”) released Model State Consumer and Investor Guidance on Virtual Currency (the “Guidance”).  The Guidance is designed to assist state regulatory agencies in providing consumers with information about virtual currency as well as factors that consumers should consider when transacting with or investing in virtual currencies.  The Guidance further explains what virtual currency is, provides a list of risks consumers should consider when investing, and reminds consumers to research the sort of regulation, if any, that would apply to virtual currency transactions or investments in their state.  Specifically, the Guidance encourages consumers to “do their homework” and consider the following before investing in virtual currency:

  • Virtual currencies and companies dealing in virtual currencies may or may not be regulated;
  • Virtual currencies can be stolen or otherwise subject to cybercrime;
  • Virtual currencies are volatile in value;
  • Virtual currencies have been connected to criminal activities; and
  • Virtual currency transactions may be taxable.

The Task Force was created to examine changes in the area of legacy payment systems, retail payment innovations and virtual currencies.  Topics to be addressed by the Task Force include establishing the right characterization of virtual currency, consumer protection needs raised by instantly settled payments, the resolution of conflicts between commercial entities in an instantaneous transfer system and whether, and in what manner, states should license entities involved with digital currency.  Massachusetts Commissioner of Banks David Cotney, the chairman of the Task Force, has stated that he expects that the Task Force will eventually draft a framework for oversight of virtual currencies to offer to states for adoption.  The Task Force will hold a public hearing on May 16, 2014 in Chicago to gather comments regarding the potential impact of emerging technologies, products and services on monetary, regulatory and consumer decisions.

Goodwin Procter: The Alternative Investment Fund Managers Directive – April 2014 Status Update of Implementation Throughout Europe

Glynn Barwick in the firm’s London Office has prepared a further update on progress made by the EU Member States in implementing the Alternative Investment Fund Managers Directive.  The Update features a chart highlighting the most important issues for fund investors and outlining the regulatory requirements for each country.

SEC Proposes Recordkeeping, Reporting, and Notification Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants

The SEC issued a release proposing recordkeeping, reporting, and notification requirements for security‑based swap dealers (“SBSDs”) and major security-based swap participants (“MSBSPs”).  Although described as seeking to establish consistent requirements to avoid “potential competitive disparities” between different categories of SBSDs, the proposals, which are modeled on rules applicable to broker-dealers, generally apply somewhat differently to the following three categories of SBSDs and MSBSPs:  (1) “broker-dealer SBSDs” or “broker-dealer MSBSPs,” which are registered broker-dealers that also act as SBSDs or MSBSPs; (2) “bank SBSDs” or “bank MSBSPs,” which are regulated by a prudential regulator; and (3) “stand-alone SBSDs” or “stand-alone MSBSPs,” which are neither broker-dealers nor regulated by a prudential regulator.

The proposals would generally govern broker-dealer SBSDs and broker-dealer MSBSPs by amending existing regulations applicable to broker-dealers to address issues relating to security-based swaps.  New rules have been proposed for stand-alone SBSDs and stand-alone MSBSPs, which are generally based on, but narrower in scope than, those applicable to their broker-dealer counterparts in an effort to reflect the fact that the stand-alone entities will engage in a narrower range of activities than broker‑dealers.  The rules governing bank SBSDs and bank MSBSPs would be narrowest in scope, in acknowledgement of the fact that banking entities are subject to existing recordkeeping and reporting requirements imposed by the prudential regulators and because those regulators, rather than the SEC, would administer some of the requirements that the proposed SEC rules applicable to broker-dealer and stand-alone entities are designed to advance.  Some of the proposed rules applicable to bank SBSDs and bank MSBSPs are designed to conform to existing banking regulations.  The proposing release solicits comment on “whether alternative approaches would be appropriate” for each of the various types of SBSDs and MSBSPs.

The proposals would amend Rule 17a-3 under the Securities Exchange Act of 1934 (the “Exchange Act”), which imposes record-keeping requirements on broker-dealers, to apply to broker-dealer SBSDs and broker-dealer MSBSPs and to make certain technical amendments.  Proposed new Rule 18a-5 under the Exchange Act, which is modeled on Rule 17a-3, would impose record-keeping requirements on stand‑alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs.  The records required to be maintained would include daily trading records (“trade blotters”), ledger accounts, a securities record, memoranda of brokerage orders, and memoranda of proprietary trades with respect to security-based swaps activity.  The proposals would also amend Rule 17a-4 under the Exchange Act, which applies to broker-dealers, to specify requirements for how long the records must be preserved and the manner in which they must be preserved; proposed new Rule 18a-6 would impose similar requirements on stand-alone and bank SBSDs and MSBSPs.  Generally, records would be required to be preserved for either three years or six years, depending on the specific type of record, and must be stored in an easily accessible place for at least the first two years.

Exchange Act Rule 17a-5, which codifies a reporting program for broker-dealers, would be amended under the proposals to apply to the security-based swap activities of broker-dealer SBSDs and broker-dealer MSBSPs.  Proposed new Exchange Act Rule 18a-7, which is modeled on Rule 17a-5 as proposed to be amended, would apply to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs.  All SBSDs and MSBSPs would report on proposed Form SBS, a new form modeled on the Financial and Operational Combined Uniform Single Report, or “FOCUS Report.”  In the case of broker-dealer SBSDs and broker-dealer MSBSPs, reporting on the Form SBS would replace their use of certain parts of the FOCUS Report.  Broker-dealer SBSDs, broker-dealer MSBSPs, stand-alone SBSDs, and stand-alone MSBSPs would be required to file proposed Form SBS on a monthly basis, while banking SBSDs and banking MSBSPs would be required to do so on a quarterly basis to conform with the existing requirement that banking entities file call reports on a quarterly basis.

The proposals also include a “notification program” in which SBSDs and MSBSPs would be required to notify the SEC upon the occurrence of certain events pertaining to their financial or operational condition, such as a failure to meet minimum capital requirements, early warnings of potential capital problems, failure to make and keep current books and records, and insufficient liquidity reserves.  Rule 17a-11 under the Exchange Act, an existing notification rule applicable to broker-dealers, would be amended to account for a broker-dealer that is also an SBSD or MSBSP.  A new rule, proposed Rule 18a‑8 under the Exchange Act, would be based on Rule 17a-11 and would apply to stand-alone SBSDs, stand-alone MSBSPs, banking SBSDs, and banking MSBSPs.

Comments on the proposal are due on July 1, 2014.

SEC Staff Provides Guidance on Fund Deregistration Applications

The staff of the SEC’s Division of Investment Management (the “Staff”) issued IM Guidance Update No. 2014-5, which provides guidance on responding to selected items in Form N-8F, the from used to apply for deregistration under the Investment Company Act of 1940.  Among other matters, the Guidance Update addresses issues particular to unit investment trusts and appropriate responses for different “Abandonment of Registration” scenarios.