Financial Services Alert - October 9, 2012

In a speech before the Financial Markets Law Committee Seminar at the Bank of England, CFTC Chairman Gary Gensler suggested possible timing for the CFTC to finalize outstanding regulations mandated by the Dodd-Frank Act.  He stated that the “first set” of clearing requirement determinations may be finalized in October 2012, with mandatory compliance phasing in, depending on the type of entity, between January and the summer of 2013.  Regulations involving transparency, such as those pertaining to minimum block sizes and swap execution facilities, should be finalized in the fall of 2012.  Chairman Gensler expressed his expectation that the CFTC will address final margin rules in early 2013.  He also observed that the CFTC is in the process of finalizing its interpretive guidance regarding the cross-border application of its swap regulations, but did not give an anticipated timeline for completing the guidance.  In addition to rulemaking initiatives, Chairman Gensler discussed LIBOR rate manipulation and CFTC cooperation with global regulators in the matter.

The CFTC’s Division of Swap Dealer and Intermediary Oversight issued a letter to futures commission merchants (FCMs) clarifying the record keeping requirements for customer segregated and secured funds maintained in carrying broker omnibus accounts.  In summary, the letter sets forth a determination by the Division’s staff that the practice of using a single account to hold both segregated and secured assets, regardless of memo notation as to allocation of the assets, does not provide a clear delineation of the assets as required under CFTC Regulations 1.20 and 30.7 and, in the event of a bankruptcy, may put customer funds at risk.

FINRA filed a proposal (the “Proposal”) to amend NASD Rule 2711 and NYSE Rule 472 (“Research Analyst Rules”) to make changes mandated by the Jumpstart Our Business Startups Act (“JOBS Act”) with respect to emerging growth companies as defined in Section 3(a)(80) of the Securities Exchange Act of 1934 (“Exchange Act”).  Certain of the proposed changes, which would be retroactive to April 5, 2012, would apply to a provision on communications between research analysts and subject companies and provisions relating to the quiet periods around certain events.  FINRA also proposed related changes to other quiet period provisions based on SEC guidance that the additional changes are consistent with Congressional intent; these related changes would become effective upon SEC approval.

Emergency Growth Companies Under the JOBS Act

The JOBS Act creates special rules governing registration with the SEC, auditing standards and related matters for companies that are emerging growth companies, as defined in Section 3(a)(80), at the time of their initial public offerings and for a period of time, up to five years, thereafter.  One of the elements of the emerging growth companies definition is that the company had annual gross revenues of less than $1 billion (an amount subject to periodic adjustment for inflation) during its most recently completed fiscal year.  The JOBS Act added a subsection (c) to Section 15D of the Exchange Act (applicable to research analysts) limiting the application of FINRA and SEC rules as they affect research reports concerning emerging growth companies.  The Proposal is intended to conform FINRA rules to the requirements of Section 15D(c) and to make certain other changes consistent with Congressional intent.

Changes Mandated by the JOBS Act

Participation in Pitch Meetings.  NASD Rule 2711(c)(4), part of the rules on communications with subject companies, prohibits a research analyst from participating in efforts to solicit investment banking business, including participating in pitches for investment banking business to prospective investment banking clients.  Retroactive to April 5, 2012, NASD Rule 2711(c)(4) would be amended to provide that it “shall not prevent a research analyst from attending a pitch meeting in connection with an initial public offering of an Emerging Growth Company that is also attended by investment banking personnel; provided, however, that a research analyst may not engage in otherwise prohibited conduct in such meetings, including efforts to solicit investment banking business.”

Quiet Period Changes.  Rule 2711(f) imposes quiet periods around public offerings and other events involving subject companies during which certain member firms may not publish research about those companies.  FINRA proposes to amend Rule 2711(f), retroactive to April 5, 2012, to provide that the following provisions of 2711(f) will no longer be applicable with respect to emerging growth companies:

• (f)(1)(A) – imposing a quiet period on a manager or co-manager of an IPO for 40 calendar days following the date of offering;
• (f)(2) – imposing a quiet period on other participants in an IPO for 25 calendar days following the date of the offering; and
• (f)(4) – imposing a 15-day quiet period on a manager or co-manager of a public offering before the expiration, termination or waiver of a lock-up agreement entered into in connection with the offering.

Other Quiet Period Changes

FINRA proposes to amend Rule 2711(f), effective upon SEC approval, to provide that the following provisions of 2711(f) will no longer be applicable with respect to emerging growth companies:

• (f)(1)(B) – imposing a quiet period on a manager or co-manager of a secondary offering for ten calendar days following the offering; and
• (f)(4) – imposing a 15-day quiet period on a manager or co-manager of a public offering after the expiration, termination or waiver of a lock-up agreement.

Equivalent changes are proposed for NYSE Rule 472, which continues to apply to NYSE member firms.

Public Comments Solicited

Comments are due 21 days after publication of the rule filing in the Federal Register. 

The OCC issued a bulletin, OCC 2012-30 (the “Bulletin”), in which the OCC summarized how the OCC reflects Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) compliance examination findings in the OCC’s bank ratings and assessment systems.  The OCC said the changes summarized in the Bulletin reflect the OCC’s “longstanding policy that weaknesses in a bank’s BSA/AML program are serious safety and soundness concerns that require [bank] management’s prompt attention.”

In the Bulletin the OCC highlighted four specific changes:

1. Effective July 18, 2012, OCC examiners no longer consider BSA/AML examination findings when assigning a rating under the FFIEC’s Camels Consumer Compliance Rating System;
2. OCC examiners do consider BSA/AML examination findings in a safety and soundness context when assigning a rating for the management component of the FFIEC’s Camels Rating System.  Serious deficiencies in a bank’s BSA/AML compliance program create a presumption that the bank’s rating for “management” will be reduced;
3. OCC examiners consider BSA/AML compliance examination findings in a safety and soundness context when assigning ratings for “risk management” and for “compliance” under the Risk Management, Operational Controls, Compliance and Asset Quality (ROCA) rating system for federal branches and agencies; and
4. While OCC examiners, as noted in (1) above, no longer consider BSA/AML examination findings when assigning consumer compliance ratings, the OCC does consider BSA/AML examination findings when assessing compliance risk under the OCC’s risk assessment system (which reflects a bank’s compliance with all applicable laws and regulations).

In accordance with Section 1103 of the Dodd-Frank Act, the FRB and its requirement that the FRB increase its transparency with respect to the names of banks that borrow from the FRB’s discount window, the FRB made publicly available (with an approximately two-year time lag) the names of banks that used the discount window during the period from July 22, 2010 (the day after the date the Dodd-Frank Act was enacted) through September 30, 2010.  Prior to the Dodd-Frank Act, the names of borrowers of overnight funds from the FRB’s discount window to “meet unexpected needs” were kept strictly confidential by the FRB.  The FRB said that the information it released on discount window loans includes the name of the borrower, the amount borrowed, the interest rate charged and information concerning collateral pledged.

The FRB also made information available concerning open market operations, securities lending activities, foreign exchange transactions and foreign currency reserve investments.  It is anticipated that the FRB will make similar transaction information available in subsequent quarters (and with a continuing time lag of approximately two years).