Weekly RoundUp
April 8, 2015

Financial Services Weekly News

The SEC Acts to Protect Whistleblowers Against Restrictive Confidentiality Provisions. In a development that should send HR directors and general counsels to review their form confidentiality agreements, the SEC announced that it had settled administrative proceedings against KBR Inc. based on SEC findings that restrictive language in a form confidentiality statement used with KBR employees interviewed as part of the firm’s internal investigation program improperly impedes whistleblowing activity in violation of Rule 21F-17 under the Securities Exchange Act. Adopted as part of rulemaking that implemented the SEC whistleblower program provisions of the Dodd-Frank Act, Rule 21F-17 prohibits taking “any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.” Under the language objected to by the SEC, an employee executing the confidentiality agreement was prohibited from discussing any particulars of the interview or its subject matter without the prior authorization of KBR’s law department, and unauthorized disclosure could serve as grounds for disciplinary action including termination. As a remedial measure, KBR amended the form confidentiality agreement to state that it did not prohibit the reporting of possible violations of federal law or regulation to any governmental agency or entity or the making of other disclosures protected under the whistleblower provisions of federal law or regulation. KBR also agreed to pay a civil money penalty of $130,000. Significantly, the settlement order noted that the SEC was unaware of any instances in which a KBR employee was prevented from communicating directly with the SEC staff about potential securities law violations, or in which KBR took action to enforce the form confidentiality agreement or otherwise prevent such communication. In the Matter of KBR, SEC Release No. 34-74619 (Apr. 1, 2015).

Regulatory Developments

OFAC Issues Guidance Relating to Announcement of Joint Comprehensive Plan of Action Regarding Iran’s Nuclear Program

The Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued guidance relating to the April 2 announcement of parameters for a Joint Comprehensive Plan of Action regarding the Islamic Republic of Iran’s nuclear program.

OCC Issues Revised and Reorganized Guidelines on Subordinated Debt and Replaces Sample Subordinated Note with Two Sample Notes for National Banks

The Office of the Comptroller of the Currency (OCC) has revised and reorganized its current guidance for subordinated debt issued by national banks (at appendix A of the “Subordinated Debt” booklet of the Comptroller’s Licensing Manual) and replaced it with new “Guidelines for Subordinated Debt.” The guidelines are consistent with the regulatory capital rules and the licensing rules for national banks and federal savings associations. The new guidelines apply to all subordinated debt issued by national banks and federal savings associations, regardless of whether the subordinated debt is included in regulatory capital. The OCC also revised the “Sample Subordinated Note” (at appendix B of the “Subordinated Debt" booklet) and replaced it with two sample notes for national banks, the first for a subordinated debt note included in tier 2 capital, and the second for a subordinated debt note that is not included in tier 2 capital. The sample notes apply only to subordinated debt issued by a national bank because there is no pre-existing sample note for federal savings associations. The OCC is developing sample notes for federal savings associations and expects to publish the sample notes in the near future. The new guidelines and sample notes are effective for subordinated debt issued on or after April 3, 2015.

SEC Staff Provides Relief to Permit Underlying Funds in Fund-of-Affiliated-Funds Structure to Obtain Exposure to an Asset Class by Investing in an Affiliated Fund Dedicated to That Asset Class

The Staff of the SEC’s Division of Investment Management granted no-action relief to Franklin Templeton Investments and related persons that would allow an underlying fund held by a Franklin Templeton fund-of-affiliated-funds to invest in a registered open-end fund managed by a Franklin Templeton adviser as a means of obtaining exposure to a particular category of assets or securities. Use of such a “central fund,” which would be offered exclusively to the Franklin Templeton funds, would be designed to achieve greater portfolio management efficiency by reducing the trading and settlement costs and addressing other operational inefficiencies associated with separately managing each investing fund's holdings in the designated asset class. The request for relief describes current plans to centralize the management of investments in floating rate instruments by the Franklin Templeton funds. Subject to a number of conditions, the relief provides a limited exception for an underlying fund to invest in central funds without regard for the restrictions on investments in other open-end funds to which the underlying fund is subject in order to be an eligible investment for a Franklin Templeton fund-of-affiliated-funds that relies on Section 12(d)(1)(G) of the Investment Company Act to invest in underlying funds in excess of the limits on investments in other investment companies imposed by Sections 12(d)(1)(A) and (B) of the Act. Franklin Templeton Investments, SEC No-Action Letter (pub. avail. Apr. 3, 2015).

Enforcement & Litigation

SEC Alleges Improper Valuation of CLO Fund Assets by Affiliated Advisers and Their Owner

The SEC announced that it had commenced an administrative proceeding against affiliated advisers that served as collateral managers for three collateralized loan obligation (CLO) funds and Lynn Tilton, the advisers’ owner and principal, alleging they overstated the value of assets in the three funds. The SEC found that these valuations were inconsistent with the methodology provided in the CLO funds’ indentures and were conducted on an undisclosed discretionary basis by Tilton in such a way that the respondents were able to collect or accrue almost $200 million in fees and preference share distributions to which they were not entitled. The SEC also found that the respondents’ practices caused investors in the CLO funds to receive false and misleading financial statements. In response to the SEC’s action, the respondents filed suit in federal court alleging that the SEC’s administrative proceeding is unconstitutional. In the Matter of Lynn Tilton, Patriarch Partners, Patriarch Partners VIII, Patriarch Partners XIV, and Patriarch Partners XV, SEC Release No. IA-4053 (Mar. 30, 2015).

SEC Brings Administrative Proceeding Against Two Affiliated Advisers, Their Third-Party Compliance Consultant and Certain Individuals Alleging Overstatement of Client Accounts and AUM in Form ADV Filings

The SEC commenced an administrative proceeding against (1) Aegis Capital and Circle One Wealth Management, two affiliated advisers formerly registered with the SEC; (2) Diane W. Lamm, who served as COO of the advisers and their common parent; (3) Strategic Consulting Advisors, a consultant that provided compliance services including chief compliance officer (CCO) services to the advisers; and (4) David I. Osunkwo, a principal of Strategic Consulting Advisors who served as each adviser’s CCO. The SEC’s order commencing the proceedings alleges that in violation of Investment Advisers Act rules relating to filings with the SEC and required books and records, the advisers filed Form ADV filings which substantially overstated each adviser’s client accounts and assets under management, and that the two advisers did not keep their own separate books and records, instead maintaining their records on an unsegregated basis with other affiliates under the name of their common parent. In the Matter of Aegis Capital, Circle One Wealth Management, Diane W. Lamm, Strategic Consulting Advisors and David I. Osunkwo, SEC Rel. No. 34-74608 (Mar. 30, 2015).