0First Circuit Limits SOX Whistleblower Coverage to Employees of Public Companies

In an important case of first impression, the First Circuit recently ruled that whistleblower protection under Section 806 of the Sarbanes Oxley Act (“SOX”) is generally limited to employees of public companies.  Lawson v. Fidelity Mgmt. & Research, LLC, No. 10-2240, 2012 WL 335647 (1st Cir. Feb. 3, 2012).  Chief Judge Lynch authored the opinion, overturning the District Court’s decision below, and reigning in an expansive interpretation of Section 806 that would have extended whistleblower protection to employees of private companies that enter into contractual relationships to provide goods or services to public companies. 

The central issue in the case was one of statutory interpretation: what did Congress mean in Section 806 when it provided that “[n]o company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 . . . , or that is required to file reports under section 15(d) of the [Act] . . . , or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of” the employee’s protected whistleblowing activity?  18 U.S.C. § 1514A(a) (emphasis added).  For purposes of its opinion, the First Circuit referred to companies registered under Section 12 of the Securities Exchange Act of 1934 (the “1934 Act”) or filing reports under Section 15(d) of the 1934 Act as “public companies.”

The plaintiffs in the case were both employees of privately held investment advisers (the “Advisers”).  The Advisers had entered into advisory contracts with certain mutual funds, which by virtue of the ongoing public offering of their shares under the Securities Act of 1933 were required to file reports with the SEC under Section 15(d) of the 1934 Act, making them public companies for Section 806 purposes.  Plaintiffs claimed that they were terminated or constructively terminated in retaliation for engaging in whistleblowing protected by Section 806.  Section 806 protects, among other things, providing information “regarding any conduct which the employee reasonably believes constitutes a violation of section 1341 [mail fraud], 1343 [wire fraud], 1344 [bank fraud], or 1348 [securities or commodities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by . . . a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct) . . . .”  Plaintiffs claimed that the Advisers retaliated against them in violation of Section 806 for, among other things, complaining about cost accounting methodologies used and alleged inaccuracies in a registration statement drafted by the Advisers for certain mutual funds.  Plaintiffs alleged that they reasonably believed when they complained that they were blowing the whistle on violations of federal securities laws or SEC rules or regulations. 

Plaintiffs argued that they were protected from retaliation by Section 806 because that provision covers employees of private companies that enter into contracts or subcontracts with a public company.  In addition to denying that it had taken any adverse employment action against plaintiffs because of their alleged protected activities, the Advisers countered that plaintiffs were not covered by Section 806 because they were not public company employees.  Section 806 coverage, the Advisers argued, does not extend beyond employees of public companies.

The First Circuit agreed with the Advisers.  The court based its decision on Section 806’s plain language, its title and caption, SOX’s language outside of Section 806, and SOX’s legislative history.  The court also recognized Supreme Court precedent counseling against overly broad interpretations of securities laws that exact burdens on American companies beyond those intended by Congress.

Section 806’s Plain Language

The First Circuit held the Advisers’ to be the “more natural reading” of Section 806.  Section 806, the court found, first enumerates the employers that are covered—publicly traded companies with a class of securities registered under section 12 or those that file reports with the SEC under section 15(d)of the Securities Exchange Act (the “Act”).  Section 806 then enumerates a list of representatives of the employer that, along with the public company itself, may not retaliate against an employee for engaging in protected whistleblowing activity.

To read Section 806 differently, the court noted, would lead to anomalies.  To accept plaintiffs’ reading that because Section 806 prohibits retaliation by “any officer, employee, contractor, subcontractor, or agent” of a public company, it must also protect employees of those entities against retaliation, one would have to accept that Congress intended to protect employees of employees and employees of officers from whistleblower retaliation.  Of course, employees and officers do not typically have employees.

Section 806’s Title and Caption

The First Circuit next considered Section 806’s title and caption.  Section 806’s title states that it concerns “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud.”  Section 806’s caption similarly provides: “Whistleblower protection for employees of publicly traded companies.”  Neither the title nor the caption suggest that Congress intended Section 806 to extend to protect employees of private companies.  This “double limitation,” the court found, “strongly work[ed] against plaintiffs’ interpretation.”  And consideration of the title and caption was appropriate, the court found, because neither contradicted the plain meaning of Section 806’s text.  Rather, they shed light on that meaning.

SOX’s Other Text

Congress’s textual choices elsewhere in SOX, the court found, confirmed its intent to limit Section 806’s scope to employees of public companies.  The court’s review of SOX’s text beyond Section 806 revealed that when Congress intended whistleblower coverage to extend to employees of private companies, it knew how to do so clearly.  For example, in Section 1107, Congress broadly criminalized retaliation for whistleblowing directly to law enforcement officers regardless of who the whistleblower works for.  The First Circuit noted that Section 806’s scope “is, by contrast, conspicuously narrow.”

Strict Interpretation of Securities Laws

In interpreting Section 806, the First Circuit was guided by the Supreme Court’s admonishment “not to give securities laws a scope greater than that allowed by their text.”  See, e.g., Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761, 772 (2008); Pinter v. Dahl, 486 U.S. 622, 653 (1988).  The court found that the plain language, title, and caption of Section 806 show that Congress “did not intend coverage to reach beyond employees of public companies.”  The court recognized the Supreme Court’s direction “to be particularly attentive to such language choice in interpreting the securities laws.”

The First Circuit rejected plaintiffs’ argument that the remedial purposes behind SOX required it to interpret Section 806 broadly to protect employees of private companies that enter into contracts or subcontracts with public companies.  To do so, the court held, would contravene Supreme Court precedent by elevating SOX’s remedial purposes above Section 806’s actual text.

Legislative History

Despite finding that Section 806’s text and principles of statutory interpretation alone confirm the Advisers’ interpretation of Section 806, the First Circuit also considered the legislative history behind the provision.  The court recognized that Section 806 evolved as a response to the Enron disaster, which of course involved whistleblower retaliation in an attempt to cover up shareholder fraud at a large public company.  Nowhere in Section 806’s legislative history did Congress suggest that it sought to extend whistleblower protection to employees of private companies.

Deference to DOL and SEC Rejected

Finally, in reaching its decision, the First Circuit refused to defer to the positions of the U.S. Department of Labor and Securities and Exchange Commission, both of which filed amicus briefs in support of plaintiffs’ broad interpretation of Section 806.  Administrative deference was inappropriate in this case, the court held, for several reasons: (1) Congress did not delegate authority to the DOL or SEC to interpret the term “employee” in Section 806; (2) even if it had, deference would be inappropriate because the term “employee” is not ambiguous; and (3) both the DOL and the SEC interpretations of Section 806 lacked the “power to persuade.”


The First Circuit held that Section 806 whistleblower protection is generally limited to employees of public companies, and does not extend to employees of private companies that enter into contracts or subcontracts with public companies.  The decision overturns a sweeping interpretation of Section 806, an interpretation that would have subjected every private company, large or small, with any type of contract or subcontract to provide goods or services to a public company to the burdens and costs associated with complying with and defending litigation arising from Section 806.

                             * * * The Advisers were represented in this matter by Goodwin Procter. * * *

0Federal Banking Agencies Update Guidance Concerning Allowance for Loan and Lease Losses

The FRB, FDIC, OCC and NCUA (the “Agencies”) jointly released updated guidance (the “Guidance”) concerning allowance for loan and lease losses (“ALLL”) estimation practices associated with loans and lines of credit secured by junior liens (typically second mortgages and home equity lines of credit) on one- to four-family residential properties (“Junior Liens”).  The Guidance incorporates and updates similar guidance provided in 2005 and 2006, but the updated Guidance stresses, and provides further direction with respect to, the Agencies’ policies and expectations with respect to treatment of Junior Liens.

The Guidance states that in estimating its ALLL, a financial institution (“FI”) should gather enough information to assess its probable losses from its Junior Lien portfolios.  The FI should obtain information on the status of senior liens.  In addition, the Guidance states that FIs with significant Junior Lien portfolios should segment those portfolios based on risk factors.  Specifically, the Agencies suggest that FIs consider the following risk factors:

(1)   the delinquency or modification status of both the senior and Junior Liens;

(2)   credit scores;

(3)   loan-to-value ratios;

(4)   the type of property securing the loan;

(5)   the location of the property; and

(6)   for home equity lines of credit, whether the consumer is making only minimum payments or could be subject to future “payment shock.”

The Agencies further state that an FI “should adjust a loan group’s historical loss rate for the effect of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the [loan] group’s historical loss experience.”

Finally, the Guidance discusses the responsibilities of examiners in reviewing the ALLL of an FI that has a Junior Lien portfolio and the supervisory options available to the examiner should he or she conclude that the FI’s ALLL is not appropriate or its ALLL evaluation process is deficient.

0CFTC Rescinds QEP Exemption from Commodity Pool Operator Registration

The CFTC issued a final rule eliminating the so-called “QEP exemption” from registration with the CFTC as a commodity pool operator (a “CPO”) under CFTC Rule 4.13(a)(4).  The QEP exemption was available to a pool if (a) its investors were “qualified eligible persons” (within the meaning of CFTC Rule 4.7(a)(2)) (“QEPs”) or “accredited investors” (as defined in Regulation D under the Securities Act of 1933 (the “Securities Act”)) and (b) the interests in the pool were exempt from registration under the Securities Act and not marketed to the public in the United States.  Persons relying on the QEP exemption will have until December 31, 2012 to either (1) avail themselves of another exemption from registration as a CPO or (2) register as a CPO with the CFTC.  For all other persons, the rescission of the QEP exemption is effective 60 days after its publication in the Federal Register.  

In a change from its original proposal, the CFTC did NOT rescind CFTC Rule 4.13(a)(3), which provides an exemption for CPOs of pools that have “de minimis” futures activity as defined in the rule.  The CFTC did, however, amend Rule 4.13(a)(3) to modify the calculation of “de minimis” thresholds to include swap transactions based on the amount of “commodity interests” traded.  The CFTC has proposed, but not yet finalized, a rule amending the definition of “commodity interest.”

0CFTC Issues Final Rule Amending Registration Exemptions for Registered Investment Companies and Proposes to Harmonize Compliance Obligations for Registered Investment Companies Required to Register as Commodity Pool Operators

The CFTC adopted changes to Part 4 of its regulations involving registration and compliance obligations for commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”).  Among other things, the CFTC amended CFTC Rule 4.5 (the “Rule 4.5 Amendments”) to impose new conditions on the ability of mutual funds and other registered investment companies (collectively, “RICs”) to effect transactions in futures and swaps without the need for CPO registration.  In general, the Rule 4.5 Amendments increase the number of conditions a RIC must meet to claim relief from CPO regulation, in part by reinstating trading and marketing conditions that were part of Rule 4.5 prior to 2003.  The CFTC also issued a proposal designed to facilitate compliance by RICS no longer able to rely on Rule 4.5 with the CFTC’s disclosure, reporting, and recordkeeping requirements (the “Harmonization Proposal”). 

The Rule 4.5 Amendments

The CFTC adopted proposed changes to Rule 4.5 with minor modifications to its February 2011 proposal.  As a general matter, the Rule 4.5 Amendments impose trading threshold and marketing restrictions for RICs claiming exclusion from the CPO definition under Rule 4.5 by largely reinstating certain conditions that were part of Rule 4.5 prior to 2003.  In particular, the Rule 4.5 Amendments restore the condition that aggregate initial margin and premiums related to a RIC’s derivatives positions (other than those entered into for “bona fide hedging” purposes) may not exceed five percent of the liquidation value of the RIC’s portfolio.  In a change from the February 2011 proposal, the Rule 4.5 Amendments introduce an alternative to the 5% initial margin/premiums test.  Under this alternative test, the net notional value of a RIC’s derivatives positions (other than those entered into for “bona fide hedging” purposes) may not exceed 100% of the liquidation value of the RIC’s portfolio. 

In addition to the trading conditions, the Rule 4.5 Amendments reinstate a marketing restriction that was part of the pre-2003 version of Rule 4.5 (the “Marketing Restriction”).  As proposed, the Marketing Restriction would have prohibited the marketing of interests in a RIC “as a vehicle for trading in (or otherwise seeking investment exposure to) the commodity futures, commodity options, or swaps markets.”  In adopting the Rule 4.5 Amendments, the CFTC removed the parenthetical “(or otherwise seeking investment exposure to),” commenting that the clause did not meaningfully add to the restriction.  In the adopting release, the CFTC provided a list of factors it believes are indicative of marketing a RIC as a vehicle for investing in commodity futures, commodity options, or swaps.  In response to public comment, the CFTC also stated that having considered who should register as CPO with respect to a RIC, it had concluded that the investment adviser for a RIC should register in that capacity.

Compliance with amended Rule 4.5 is required by the later of December 31, 2012, or 60 days after the effective date of final rulemaking defining the term “swap.”  Entities required to register due to the amendments to Rule 4.5 will be subject to the CFTC’s recordkeeping, reporting, and disclosure requirements pursuant to part 4 of the CFTC’s regulations within 60 days following the effectiveness of a final rule implementing the Harmonization Proposal, as discussed below.

The Harmonization Proposal

In view of the number of RICs that will no longer be able to rely on Rule 4.5, the CFTC proposed a number of rule amendments intended to harmonize the compliance obligations arising under CFTC rules with those imposed by the SEC.  In this regard, the Harmonization Proposal seeks to minimize the burdens of complying with two compliance regimes by focusing on three areas: (a) delivery of disclosure documents and periodic reports; (b) recordkeeping; and (c) disclosure content.  The following is a brief summary of the CFTC’s proposals in these areas:

Delivery of Disclosure Documents and Periodic Reports. The CFTC’s current regulations require that a CPO deliver to each prospective participant in a pool a disclosure document no later than the time at which the CPO delivers a subscription agreement to such participant.  The CPO may not accept or receive money from a prospective participant unless the CPO first receives from the participant a signed and dated acknowledgment that the participant received the disclosure document.  A registered CPO must also distribute account statements to pool participants, including a statement of operations and a statement of net assets. Such account statements must be distributed monthly for pools with net assets of more than $500,000, and otherwise at least quarterly.

Under the Harmonization Proposal, the CFTC proposes to amend Rule 4.12(c) to permit the CPO of any pool whose units of participation will be offered and sold pursuant to an effective registration statement under the Securities Act of 1933 to claim relief from, among other requirements, the disclosure document delivery and acknowledgement requirements under Rule 4.21 and certain periodic financial reporting obligations under Rule 4.22.  This relief is subject to certain conditions, including that the CPO make the disclosure document readily accessible on its website, and is generally consistent with relief that the CFTC has provided to CPOs of commodity exchange-traded funds (“Commodity ETFs”) with respect to these provisions.  The CFTC is not, however, proposing relief for fund advisers from the content or timing of the monthly account statement requirement, as the CFTC believes that this information is readily available.

Recordkeeping.  Under CFTC Rule 4.23, a CPO must maintain its books and records at its main business office.  The Harmonization Proposal, consistent with the relief granted for Commodity ETFs, would permit the CPO to retain the required books and records with specified third parties. 

Disclosure Content.  The Harmonization Proposal also addresses certain areas in which the CFTC’s and the SEC’s disclosure requirements are in conflict.  These areas include, among others, the following:

  • Performance. Under Rule 4.25(c), CPOs that have less than a three-year operating history, must disclose in a disclosure document the prior performance of pools and accounts other than the commodity pool it is offering.  Under the Harmonization Proposal, the CFTC recognizes that this requirement may conflict with the SEC’s positions regarding the use of past performance and is proposing that the performance of other pools and accounts may be presented in a RIC’s statement of additional information rather than its prospectus.

  • 4.24(a) Cautionary Legend. Under Rule 4.24(a), each disclosure document prepared and distributed by registered CPOs must prominently display the following prescribed cautionary statement on its cover:


    The Harmonization Proposal notes that this cautionary statement differs from the standard disclosure that is required to be included on the front cover of a RIC’s prospectus by the Securities Act of 1933.  Accordingly, the Harmonization Proposal provides flexibility for the RIC to use a statement that combines the SEC and CFTC legends.

  • Break-Even Point and Fees and Expenses Disclosure. Under the Harmonization Proposal, RICs would be required to present in their prospectuses, immediately following the disclosures required by the summary section of SEC Form N-1A, a “break-even point,” which is defined as “the trading profit that a pool must realize in the first year of a participant’s investment to equal all fees and expenses such that such participant will recoup its initial investment, as calculated pursuant to rules promulgated by a registered futures association pursuant to section 17(j) of the Act.”  17 CFR 4.10(j)(1).  The Harmonization Proposal would also require the disclosure of certain fees and expenses in a manner different from Form N-1A. 

  • Updating Amendments.  The Harmonization Proposal would require CPOs and CTAs to file updates of all disclosure documents twelve months from the date of the document, rather than nine months as is currently required. 

Comments on the Harmonization Proposal are due 60 days after its publication in the Federal Register.

0DOL Issues Final Regulation Regarding Service Provider Fee Disclosure

The Department of Labor (“DOL”) issued a final regulation (the “Final Regulation”) under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974, as amended.  The Regulation will require persons providing certain services to most ERISA-covered pension plans (including 401(k) plans and defined benefit pension plans) to disclose to plan fiduciaries detailed information regarding fees and compensation.

For the most part, the Final Regulation carries forward the provisions of the DOL’s interim final regulation under Section 408(b)(2), which was described in the August 3, 2010 Financial Services Alert.  Significant differences between the Final Regulation and the interim final regulation include the following:

  • The Final Regulation does not apply to persons providing services to certain plans funded with Internal Revenue Code Section 403(b) annuity contracts or custodial accounts that satisfy certain conditions (e.g., among other things, they must have been issued prior to 2009, and the sponsoring employer has stopped making contributions).
  • Under the Final Regulation, a covered service provider must provide more information concerning its receipt of “indirect compensation.” including a description of the arrangement between the service provider and the payer of the indirect compensation.
  • The investment-related information that must be provided with respect to designated investment alternatives available under a plan that permit participants to direct investments is conformed to the disclosure requirements relating to designated investment alternatives under the DOL’s regulation concerning disclosures to participants (the “Participant-Level Fee Disclosure Regulation”), which is described in the November 2, 2010 Financial Services Alert.

The Final Regulation is effective July 1, 2012, with regard to both existing and new covered service arrangements.  As a result, all covered service providers will be required to satisfy the Final Regulation’s disclosure obligations with respect to all existing ERISA clients that are covered plans by that date in order to continue to rely on the prohibited transaction exemption provided by Section 408(b)(2).  The effective date of the Participant-Level Fee Disclosure Regulation is tied to the Final Regulation’s effective date.  See the July 19, 2011 Financial Services Alert.  For plans with calendar year plan years, the initial annual disclosures regarding plan-level and investment-level information under the Participant-Level Fee Disclosure Regulation must be provided no later than August 30, 2012, and the first quarterly statement of fees and expenses must be provided no later than November 14, 2012 (reflecting fees and expenses deducted from the participant’s account during the quarter ending September 30, 2012).  A more detailed summary of the Final Regulation and the Participant-Level Fee Disclosure Regulation will be forthcoming.

0FinCEN Issues Final Rule Requiring Residential Mortgage Lenders and Originators to Implement Anti-Money Laundering Programs and to File Suspicious Activity Reports

FinCEN issued a final rule (the “Final Rule”) requiring non-bank residential mortgage lenders and originators (“RMLOs”), as “loan or finance companies,” to file suspicious activity reports (“SARs”) and to establish anti-money laundering (“AML”) programs.  Under the Final Rule, RMLOs will be subject to AML and SAR standards and requirements that are substantially identical to those applicable to banks and other financial institutions that offer retail consumer banking services and originate mortgage loans.  The Final Rule does not require RMLOs to comply with other Bank Secrecy Act (“BSA”) regulations, including, but not limited to, filing currency transaction reports. 

Under the Final Rule, a residential mortgage originator is defined as “[a] person who accepts a residential mortgage loan application or that offers or negotiates the terms of a residential mortgage loan.”  A residential mortgage lender means “[t]he person to whom the debt arising from a residential mortgage loan is initially payable on the face of the evidence of indebtedness or, if there is no such evidence of indebtedness, by agreement, or to whom the obligation is initially assigned at or immediately after settlement.”  The term “residential mortgage lender” does not include an individual who finances the sale of the individual’s own dwelling or real property.  Certain categories of persons are excepted from the Final Rule’s coverage, including a bank, a person registered with and functionally regulated or examined by the SEC or the CFTC, any government sponsored enterprise regulated by the Federal Housing Finance Agency, any Federal or state agency or authority administering mortgage or housing assistance, fraud prevention or foreclosure prevention programs, or an individual employed by a loan or finance company.  Additionally, there is a qualified exception for mortgage servicers—mortgage servicers are excepted if they do not extend residential mortgage loans or offer or negotiate the terms of residential mortgage loan applications. 

FinCEN noted that the Final Rule is only the first step in subjecting loan and finance companies to BSA regulations, and that the Final Rule presents a definition of “loan or finance company” that could be expanded to include other types of loan and finance related businesses and professions in later iterations of the regulation.

AML Program Requirements

The AML requirements include, at a minimum: (i) the development of internal policies; (ii) the designation of a compliance officer; (iii) an ongoing employee training program; and (iv) an independent audit function to test programs.  FinCEN anticipates that each RMLO will tailor its AML program to fit its own size, needs and operational risks. 

SAR Requirements

Under the Final Rule, RMLOs must report suspicious transactions that are conducted or attempted by, at, or through a loan or finance company and that involve or aggregate at least $5,000 in funds or other assets; transactions are reportable whether or not they involve currency.  Four categories of transactions specifically require reporting.  A loan or finance company is required to report a transaction if it knows, suspects, or has reason to suspect that the transaction (or a pattern of transactions of which the transaction is a part): (i) involves funds derived from illegal activity or is intended or conducted to hide or disguise funds or assets derived from illegal activity; (ii) is designed, whether through structuring or other means, to evade the requirements of the BSA; (iii) has no business or apparent lawful purpose, and the loan or finance company knows of no reasonable explanation for the transaction after examining the available facts; or (iv) involves the use of the loan or finance company to facilitate criminal activity.

The Final Rule requires that RMLOs file a SAR within 30 days of becoming aware of a suspicious transaction. FinCEN noted that it intends to establish a uniform electronic form for use by all financial institutions obligated to file SARs, that it intends to phase out the manual filing of paper SAR forms, and that RMLOs will therefore be required to use FinCEN’s electronic, web-based E-filing system to file SARs.

Examination; Compliance Periods

FinCEN, which estimates that the impact of the AML Program and SAR filing requirements will not be significant, has not yet delegated examination authority, and will work with other relevant regulators to develop compliance examination procedures. 

The Final Rule will become effective 60 days after its publication in the Federal Register.  RMLOs will be required to develop and implement AML program within 6 months after the Final Rule’s publication and will be required to file SARs regarding transactions initiated 6 months after the publication.  Goodwin Procter has worked with a broad range of banks, mutual funds and other financial institutions to develop AML programs suited to their individual needs and risk profile.

0CFTC Proposes Volcker Rule Regulations

The CFTC approved a proposed rule implementing Section 619 of the Dodd-Frank Act, commonly referred to as the “Volcker Rule,” which generally prohibits any banking entity from engaging in proprietary trading and from sponsoring or acquiring an ownership interest in hedge funds, private equity funds, and commodity pools, subject to several exemptions that permit banking entities to engage in certain underwriting, market-making, and risk mitigating hedging activities.  The CFTC’s proposed rule is substantially similar to the proposed rules issued jointly in October by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the FDIC, and the SEC, which were discussed in the October 20, 2011 Financial Services Alert.  As required by the Dodd-Frank Act, the CFTC and the other applicable regulators consulted and coordinated extensively in preparing their rules to ensure that they are comparable and consistently applied.  The rules issued by the CFTC would only apply to banking entities, including affiliates and subsidiaries, for which the CFTC is the primary regulatory agency, such as CFTC-registered swap dealers, commodity pool operators, and commodity trading advisors.

Chairman Gary Gensler explained that the CFTC did not join the other regulators in proposing the joint rules in October because of “capacity” issues.  He noted that the CFTC was working on a number of regulations and stressed his desire to consider the rules carefully rather than rushing to meet a deadline.  He also added that the departure of Commissioner Dunn and his replacement by Commissioner Wetjen weighed in favor of the later proposal date.

Chairman Gensler also noted that the banking regulators have the lead role in crafting the Volcker Rule regulations, calling the CFTC a “supporting member” of the regulatory group.  Echoing that point, CFTC staff, when asked certain questions about why the proposed rules were drafted as they were, pointed to the need for consistency with the joint rules.

The proposed rule was approved by a party-line vote of 3-2.

Commissioner Jill Sommers explained her dissenting vote by stating that the CFTC had not yet had time to fully consider the implications of the lengthy and complex rule.  She also criticized the timing and process of the vote, arguing, “We are proposing rules that are virtually identical to the other agencies’ proposed rules well after they have been widely criticized and after many have called for those agencies to start over, including Paul Volcker.”

Commissioner Scott O’Malia acknowledged that the CFTC must comply with Dodd-Frank in a responsible way, but called the proposal a “fatally flawed rule.”  Commissioner O’Malia pointed to the possibility of conflicts among regulators and questioned how regulatory consistency can be achieved.  He also argued that the rule fails to provide the CFTC with any specific enforcement ability. 

Chairman Gensler encouraged interested parties to submit comments on the proposed rule, expressing particular interest in suggestions to ease the compliance burden imposed by the rule.  Comments will be due 60 days from the proposed rule’s forthcoming publication in the Federal Register.

0SEC Staff Supplements FAQ on Form ADV and IARD

The staff of the SEC’s Division of Investment Management (the “Staff”) supplemented its “Frequently Asked Questions on Form ADV and IARD” with questions regarding mid‑sized advisers, master-feeder arrangements, the identification of a private fund with its Form D file number, private fund identification numbers (PFIDs) and the calculation of regulatory assets under management.

0SEC Staff Posts Responses to Questions about the Family Office Exclusion under the Advisers Act

The staff of the SEC’s Division of Investment Management (the “Staff”) posted on the SEC website a set of responses to questions about Rule 202(a)(11)(G)-1 under the Investment Advisers Act of 1940 (the “Family Office Rule”), which provides an exclusion from the definition of “investment adviser” for a family office that meets the Rule’s conditions.  (See the June 23, 2011 Goodwin Procter Alert for a detailed discussion of the Family Office Rule.)  Topics covered are (1) ownership and control of the family office, (2) key employees, (3) family members, (4) non-advisory services and (5) the grandfathering provision.  The Staff expects to update the posting from time to time.