0Basel Committee Revises Liquidity Rules and Grants Banks Additional Time to Satisfy the Liquidity Requirements
The Group of Governors and Heads of Supervision (the “GHOS”) of the Basel Committee on Banking Supervision (the “Basel Committee”) announced its adoption of certain substantial revisions (the “Revisions”) to the Liquidity Coverage Ratio (the “LCR”) included in the Basel Committee’s Basel III liquidity framework. The GHOS also announced that banks would have additional time to satisfy the new liquidity requirements.
Basel III defines the LCR as the ratio of the “stock of high-quality liquid assets” to “total net cash outflows over the next 30 calendar days.” The minimum LCR is 100%. The minimum LCR is intended to ensure that banks have sufficient unencumbered high-quality liquid assets and overall liquidity to remain in a safe and sound condition even in times of severe financial stress. The GHOS provided a summary description of the LCR as well as a listing of the agreed Revisions to the formulation of the LCR.
Prior to the Revisions, high quality liquid assets were limited to cash and governmental bonds. The Revisions expand the range of eligible assets under the LCR to include highly-rated residential mortgage-backed securities and certain unencumbered equities, as well as certain corporate debt securities. All these newly eligible assets will be subject to valuation haircuts, and, in the aggregate, these newly eligible assets may not exceed 15% of a bank’s total qualifying LCR assets.
The Revisions also modify (in a manner that facilitates banks’ ability to comply) the assumptions banks must make regarding the severity of the financial crisis for which they would be required to have sufficient liquidity. Under the Revisions, for example, banks must assume that, in a theoretical 30-day crisis, they would see 3% of their retail deposits vanish. Prior to the Revisions banks were to assume that 5% of their retail deposits would leave the bank. Banks are also required to assume that corporate clients would draw down credit lines by 30% in a crisis. Prior to the Revisions, banks were required to assume that corporate clients would draw 100% of available lines in a crisis.
The GHOS also announced that the Revisions would grant banks four additional years (until 2019) to satisfy fully the new liquidity requirements. Banks will be required to have a minimum LCR of 60% on January 1, 2015 with the ratio increasing by 10% in each of the following years until the 100% minimum LCR requirement is reached on January 1, 2019.
0CFPB Issues Final Rule on Ability-to-Repay Standards and Qualified Mortgage Exception
The CFPB issued a final rule on ability-to-repay standards and a qualified mortgage exception. The Dodd-Frank Act requires creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling. The rule provides creditors with minimum requirements for making such ability-to-repay determinations. Creditors are required to consider the following eight underwriting factors: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (4) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history.
While the Dodd-Frank Act provides that qualified mortgages are entitled to a presumption that the creditor satisfied the ability-to-repay requirements, the final rule provides a safe harbor for loans that satisfy the definition of a qualified mortgage and are not “higher priced.” Higher-priced loans are subject to a rebuttable presumption. A “qualified mortgage” is a loan that does not contain certain risky features, such as negative amortization, interest-only payments, balloon payments, a term exceeding 30 years, has a debt-to-income ratio of not more than 43%, and for which the creditor considers and verifies the consumer’s current debt obligations, alimony, and child support. The rule is effective January 10, 2014.
In conjunction with the final rule, the CFPB also issued a proposal to amend portions of the ability-to-repay rule for small creditors holding loans in portfolio. The proposal would allow small creditors to originate loans with a debt-to-income ratio greater than 43% and still qualify as qualified mortgages. The proposal would also allow small creditors to originate loans with higher annual percentages rates and still avail themselves of the qualified mortgage safe harbor. A small creditor would be defined as a creditor having total assets of $2 billion or less and, together with its affiliates, originated 500 or few first-lien covered transactions during the previous calendar year. Comments on the proposal are due February 25, 2013.
0Goodwin Procter Alert Describes Effect on U.S. Managers Marketing to European Investors of European Commission’s Level 2 Regulation Implementing the AIFMD
Goodwin Procter issued a client alert that discusses the European Commission’s publication of the Alternative Investment Fund Managers Directive (AIFMD) Level 2 implementing regulation and analyzes the regulation’s implications for U.S. managers of non-European funds that seek to market to European investors after July 22, 2013.
0Goodwin Procter Alert Discusses OFAC Issuance of General License Authorizing Foreign Subsidiaries of U.S. Companies to Wind Down Transactions with Iran
A Goodwin Procter Alert issued by the firm’s National Security and Foreign Trade Regulation Practice discusses the general license issued by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”) that gives foreign subsidiaries of U.S. companies through March 8, 2013, to wind down any open transactions or dealings involving Iran that would otherwise be unlawful. This authorization will be of interest to foreign companies attempting to comply with the Iran Threat Reduction and Syria Human Rights Act of 2012 (the “Threat Reduction Act”) and Executive Order 13628 (October 9, 2012), which expanded the reach of U.S. sanctions against Iran by closing the long-standing “foreign-subsidiary loophole.” The Threat Reduction Act was discussed in an August 16, 2012 Goodwin Procter Alert.
0SEC Staff Grants Two-Year Extension of No-Action Relief Permitting Broker-Dealers to Rely on Registered Advisers to Perform AML Customer Identification
The staff of the SEC’s Division of Trading and Markets issued a no-action letter to the Securities Industry and Financial Markets Association (SIFMA) that extends for two years relief granted by the staff in 2011 that allows broker-dealers to rely on registered investment advisers to satisfy the broker-dealers’ customer identification program (CIP) obligations for shared customers under certain conditions. For a description of the 2011 relief, please see the January 25, 2011 Financial Services Alert.
0FINRA Provides Guidance on New Rules Governing Communications with the Public
FINRA issued a Regulatory Notice providing guidance in the form of questions and answers on compliance with its new communication rules, which will become effective on February 4, 2013 (the “Effective Date”). The new rules, which were approved by the SEC on March 29, 2012, were discussed in the April 24, 2012 Financial Services Alert, and the announcement of the effective date for the new rules and other guidance provided by FINRA was described in the July 17, 2012 Financial Services Alert.
Among the topics covered in the guidance are the following:
Transitional Filing Issues
- Previously Filed Material. The guidance confirms that a firm is not required to refile an advertisement or item of sales literature that the firm previously has filed with the FINRA Advertising Regulation Department unless the firm makes material changes to a previously filed retail communication.
- Material Not Previously Filed. The guidance confirms that if a firm intends to continue to use retail communication material after the Effective Date that was not subject to a filing requirement under NASD Rule 2210 (and has not been previously filed), but will become subject to a filing requirement under the new FINRA Rule 2210, then it must file the retail communication with FINRA within ten business days of the Effective Date.
- Filings Prior to the Effective Date. The guidance confirms that if a firm files retail communications material prior to the Effective Date, FINRA will review the material under the standards contained in existing rules; however, the firm will be deemed to have met its filing requirement under the new rules and will not be required to refile the material after the Effective Date.
Changes to Filing Requirements for New Member Firms
The guidance confirms that FINRA Rule 2210 revises the filing requirements for new member firms in the following respects:
- The one-year period during which a new member must file its advertisements at least 10 business days prior to first use commences on the date reflected in the Central Registration Depository system as the date that FINRA membership became effective, and if the one-year anniversary of such date is prior to the Effective Date, then no further pre-use filings are required.
- The pre-use filing requirement for new member firms applies only to retail communications that would have been considered “advertisements” under NASD Rule 2210.
- If a retail communication is a free writing prospectus that has been filed with the SEC pursuant to Rule 433(d)(1)(ii) under the Securities Act of 1933, the firm may file the retail communication within 10 business days after first use rather than 10 business days prior to first use.
- Retail Structured Products. The guidance states that FINRA Rule 2210(c)(3)(E) requires a firm to file within 10 business days of first use or publication retail communications concerning any security that is registered under the Securities Act of 1933 and that is derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance or a foreign currency (“registered structured products”), and confirms that the purpose of this requirement is to require firms to file communications about structured products that are registered under the Securities Act and not to create a duplicative requirement for retail communications that are already subject to filing, such as retail communications concerning mutual funds (including exchange traded funds), closed-end funds, variable insurance products, direct participation programs or collateralized mortgage obligations. The guidance provides examples of registered structured products, including: exchange-traded notes that are not registered under the Investment Company Act of 1940 but are registered under the Securities Act, registered reverse convertible notes, registered structured notes, registered principal protection notes, and any other registered security that includes embedded derivative-like features.
- Recommendations. The guidance confirms that the disclosure requirements related to recommendations contained in the new rules do not apply to a mutual fund portfolio manager’s discussion of the fund’s past performance (such as a manager’s discussion that accompanies an annual or semi-annual report).
- Public Appearances. The guidance also describes the extent to which a member firm must supervise a registered representative making a scripted presentation at a seminar for prospective retail investors. Among other things, the guidance states that the member firm is responsible for approving any retail communication used as part of the seminar presentation prior to its use, and that the firm must have written procedures appropriate to its business, size, structure and customers to supervise the registered representative’s appearance, including procedures related to education and training.
- Disclosure of Firm Name. The guidance confirms that the requirement in FINRA Rule 2210(d)(3) to disclose a firm’s name applies to retail communications and correspondence, and that sales scripts, slide presentations and brochures used in connection with a public appearance must disclose the firm’s name. The guidance also confirms that a registered representative is not required to disclose the firm’s name as part of non-scripted, extemporaneous remarks during a public appearance.
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