Financial Services Alert - November 13, 2012

At a meeting held on November 13, 2012, the Financial Stability Oversight Council (“FSOC”) approved proposed recommendations for the structural reform of money market mutual funds (“MMFs”).  Pursuant to its authority under Section 120 of the Dodd-Frank Act and as set forth in a release from the FSOC (the “Release”), FSOC is proposing three alternatives for public comment:

1. Floating Net Asset Value.  Require MMFs to have a floating net asset value (“NAV”) per share by removing the special exemption that currently allows MMFs to utilize amortized cost accounting and/or penny rounding to maintain a stable NAV of $1.00.
2. Stable NAV with NAV Buffer and “Minimum Balance at Risk.”  Require MMFs to have an NAV buffer with a tailored amount of assets of up to 1 percent to absorb day-to-day fluctuations in the value of the funds’ portfolio securities and allow the funds to maintain a stable NAV.  The NAV buffer would be paired with a requirement that 3 percent of a shareholder’s highest account value in excess of $100,000 during the previous 30 days — a minimum balance at risk (“MBR”) — be redeemed on a delayed basis. 
3. Stable NAV with NAV Buffer and Other Measures.  Require MMFs to have a risk-based NAV buffer of 3 percent to provide explicit loss-absorption capacity that could be combined with other measures to enhance the effectiveness of the buffer and potentially increase the resiliency of MMFs.  Other measures could include more stringent investment diversification requirements, increased minimum liquidity levels, and more robust disclosure requirements.  To the extent that it can be adequately demonstrated that more stringent investment diversification requirements, alone or in combination with other measures, complement the NAV buffer and further reduce the vulnerabilities of MMFs, FSOC could include these measures in its final recommendation and would reduce the size of the NAV buffer required under this alternative accordingly.

Alternatives 1 and 2 essentially track the reform options advanced by SEC Chairman Schapiro earlier in the year that, as discussed in the August 28, 2012 Financial Services Alert, were ultimately withdrawn due to a lack of support from a majority of the SEC Commissioners. 

In the Release, FSOC acknowledged that other reform options may achieve similar outcomes.  In this regard, FSOC is also seeking public comment on other potential reforms, including, for example, standby liquidity fees and redemption gates. 

In his remarks, Secretary Geithner emphasized that the FSOC may not need to take further action if the SEC issues its own proposal, allowing the comment process to take place at the primary regulator-level.  Secretary Geithner also mentioned the other options at the FSOC’s disposal, which include the FSOC’s designation authority with respect to Systemically Important Financial Institutions (so called, SIFIs) and financial market utilities or payment clearing or settlement activities that FSOC determines are, or likely to become, systemically important, and the potential involvement of primary banking regulators.

Comments are due no later than 60 days after the Release is published in the Federal Register.

The FRB, FDIC and OCC (the “Agencies”) issued a joint release (the “Release”) in which they advised banking institutions that the effective date of the Agencies’ revised regulatory capital rules is expected to be delayed until after January 1, 2013, the effective date stated in the proposed versions of the regulatory capital rules (the “Proposed Rules”).

FINRA published Regulatory Notice 12-49 to announce SEC approval of FINRA’s 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.  The proposed amendments are discussed in the October 9, 2012 Financial Services Alert (“FINRA Proposes Amendments to Research Analyst Rules to Conform with Requirements of the JOBS Act”).  The amendments have been approved and adopted as proposed.  Rule changes mandated by the JOBS Act were made effective as of April 5, 2012, the date of enactment of the Act.  Changes to the quiet period requirements not mandated by the JOBS Act were made effective as of October 11, 2012.

SEC Guidance Concerning Research Analysts Participating in Pitch Meetings

As mandated by the JOBS Act, the prohibition on research analyst participation in pitch meetings for investment banking business with prospective investment banking clients was amended to permit research analysts to attend pitch meetings in connection with an initial public offering of an emerging growth company.  The rule was further amended to provide, however, that “a research analyst may not engage in otherwise prohibited conduct in such meetings, including efforts to solicit investment banking business.”  In the SEC release approving the rule amendments (Release No. 34-68037), the SEC referred to guidance previously provided by its staff in the form of Frequently Asked Questions (“FAQs”) regarding the provisions of the JOBS Act applicable to research analysts and emerging growth companies.  The response to Question 4 of the FAQs describes what research analysts may do in a pitch meeting with an emerging growth company, saying that the analysts “could, for example, introduce themselves, outline their research program and the types of factors that the analyst would consider in his or her analysis of a company, and ask follow-up questions to better understand a factual statement made by the emerging growth company’s management.”  

In response to Question 4 of the FAQs, the SEC also cautions that the amendment to the research analyst rules relating to attendance at pitch meetings does not affect the prohibitions in the so-called Global Settlement, in 2003 and 2004, of the enforcement actions brought by the SEC, self-regulatory organizations and other regulators against twelve investment banks.  Under the Global Settlement, a research analyst is not permitted to participate in a communication with a subject company in the presence of investment banking personnel.  Thus, the exception permitting research analysts to attend pitch meetings with emerging growth companies is at present available only to research analysts at firms that are not subject to the Global Settlement and have not voluntarily elected to be governed by the Global Settlement.

The CFTC issued interpretive guidance addressing CFTC regulations that govern the treatment of cleared swaps customer contracts by futures commission merchants (“FCMs”) and derivatives clearing organizations (“DCOs”).  Among other things, the guidance, which was provided in a question and answer format, clarifies that “cleared swaps customer collateral” includes all of a cleared swaps customer’s property that margins, guarantees, or secures cleared swaps, even if the value of such collateral exceeds that customer’s margin requirement.  The guidance reiterates that FCMs are prohibited from using one cleared swaps customer’s collateral to meet a margin call for another customer’s cleared swaps, even if the value of the collateral exceeds that required, while stating that an FCM must use its own assets to cover a margin call attributable to an undermargined cleared swaps customer.  In addition, the guidance clarifies which funds may be tapped by a DCO to cover losses in the event of an FCM default, and in what order. 

The CFTC has issued a no-action letter providing temporary limited relief from certain record-keeping requirements applicable to swap dealers (“SDs”) and major swap participants (“MSPs”).  The relief comes in response to a letter from the Securities Industry and Financial Markets Association stating that operational constraints would impair the ability of SDs and MSPs to comply with the rules in a timely manner.  The relief delays until March 31, 2012 (i) the requirement that SDs and MSPs make and keep records of certain oral communications of substantially all relevant personnel involved in swaps activity; (ii) the requirement that they maintain all transaction records in a manner “identifiable and searchable” by transaction and counterparty; (iii) the requirement that they use a timestamp recording transaction times in Coordinated Universal Time (“UTC”) rather than local time for certain records, and (iv) the requirement that SDs and MSPs retain swaps records at their principal places of business or other designated principal offices.  

The Administrative Review Board (the “ARB”) of the United States Department of Labor recently issued a ruling rejecting a whistleblower claim brought by a former employee (the “Claimant”) against Bank of America Corp. under the Sarbanes-Oxley Act of 2002 (“SOX”).  The ARB ruled in Bank of America’s favor on the grounds that Bank of America would have taken negative action against the Claimant, including terminating the Claimant’s employment, independent of the Claimant’s engagement in alleged whistleblowing activities.  Under SOX whistleblower protections, an employer can avoid liability by demonstrating that it would have taken the same unfavorable employment-related action even in the absence of an employee’s protected whistleblowing activities.  By way of background, in January 2007 the Claimant, a senior vice president and software developer, filed a whistleblower complaint under SOX on the basis that negative performance reviews and the resulting ineligibility for a year-end bonus constituted retaliation for his complaints regarding the design of an anti-money laundering surveillance program to which he was assigned.  The ARB ruling, which affirmed the ruling of an administrative judge, found that Bank of America showed clear and convincing evidence that it would have issued negative reviews and ultimately terminated the employment relationship with the Claimant based on the Claimant’s history of unprofessional communications with co-workers, including secretly recording conversations with fellow employees.