Weekly RoundUp
April 1, 2015

Financial Services Weekly News

FINRA Requests Comment on Current Membership Application Rules. As part of its ongoing retrospective rule review process, FINRA has published, in Regulatory Notice 15-10, a request for comment on the effectiveness and efficiency of its membership application rules. These include, among others, NASD Rule 1011 (Definitions), IM-1011-1 (Safe Harbor for Business Expansions), Rule 1013 (New Member Application and Interview), Rule 1014 (Department Decision) and Rule 1017 (Application for Approval of Change in Ownership, Control, or Business Operations). The new member application (NMA) and continuing member application (CMA) processes have become more thorough and, consequently, more challenging, expensive and time-consuming, in recent years, at the same time the SEC is putting pressure on marketing personnel of private funds, finders and other intermediaries to become registered as brokers. In addition, crowdfunding and other financial technology firms that find they may need to become registered as brokers face a process that, including pre-filing preparation, can take eight months to a year to complete. FINRA’s request for comments on the member registration rules presents a good opportunity to urge measures to speed the application process, especially for private placement brokers that do not hold customer funds or securities.

Regulatory Developments

CFPB Considers Rules on Debt Traps and Payment Collection Practices

On March 26, 2015, the Consumer Financial Protection Bureau (CFPB) announced it will consider proposing rules restricting payday debt traps and harmful payment collection practices and provided an outline of the proposed rules. The rules would require, among other things, enhanced underwriting to ensure borrowers can repay the loans when due, verification by the lender of the borrower’s financial history, limitations on consecutive loans and, for short-term loans, provision of affordable repayment options. For short-term loans, the proposals would cover credit products that require consumers to pay back the loan in full within 45 days, such as payday loans, deposit advance products, certain open-end lines of credit, and some vehicle title loans. For long-term loans, the proposals would apply to high-cost credit products of more than 45 days where the lender collects payments through access to the consumer’s deposit account or paycheck, or holds a security interest in the consumer’s vehicle, and where the all-in annual percentage rate (including add-on charges) is more than 36 percent. This category could include longer-term vehicle title loans, some high-cost installment loans and similar open-end products. The CFPB is also considering proposals that would require lenders of covered loans to provide borrower notification before accessing deposit accounts and to limit unsuccessful withdrawal attempts that lead to excessive deposit account fees.

The FCA Publishes Its Business Plan for the 2015-2016 Year

The UK Financial Conduct Authority (FCA) has published its business plan for 2015-2016 in which it sets out its objectives for the coming year. Most of its plans relate to financial services offered to UK-based retail consumers but some of its plans have a broader scope. In the area of banking and shadow banking, the FCA will continue its work in relation to dark pools and transparency. The regulator has been concerned for some time about potential conflicts of interest that stem from the lack of transparency in dark pool trading. This year will also be the first year for full authorization of many peer-to-peer lending and crowdfunding site operators. In an effort to emphasize individual responsibility, the FCA has taken an increasing percentage of its enforcement action against individuals, as opposed to firms. It expects to continue this trend. And with respect to financial crime and money laundering: the FCA will increase its scrutiny of the financial crime procedures of regulated firms to ensure that they are fit for purpose, including work on the fourth EU Money Laundering Directive.

SEC Staff Provides No-Action Relief Under Custody Rule With Respect to Private Fund Owned by Adviser Principals and Their Immediate Family Members

The Staff of the SEC’s Division of Investment Management granted no-action relief to 16th Amendment Advisors LLC, a registered adviser, from certain provisions of Rule 206(4)-2 under the Investment Advisers Act (known as the “Custody Rule”) with respect to the adviser’s management of a private fund and its feeder fund whose only investors are the adviser’s principals and their spouses and minor children, as well as vehicles established for their benefit. Under the relief, the adviser need not comply with the notice, quarterly account statement and surprise examination requirements in clauses (a)(2), (a)(3) and (a)(4) of the Custody Rule with respect to the funds, nor with the audited annual financial statement requirements of clause (b)(4). The relief’s conditions focus on the principals’ “plenary access” to information concerning the management of the adviser, the funds and each fund’s general partners (or equivalent), their status as officers or directors of the adviser with executive responsibility (or having a similar status or function), and their material ownership in the adviser. 16th Amendment Advisors LLC, SEC No-Action Letter (Mar. 23, 2015).

SEC Staff Provides No-Action Relief to Omit Shareholder Proposal Relating to Disclosure of Investment Performance Related Data

The Staff of the SEC’s Division of Investment Management granted no-action relief to LMP Real Estate Income Fund, Inc., an NYSE-listed registered closed-end fund, to omit a shareholder proposal submitted by shareholder Thomas C. DeWard from the Fund’s proxy materials pursuant to Rule 14a-8(i)(7) under the Securities Exchange Act on the basis that the proposal relates to the Fund's ordinary business. Mr. DeWard’s proposal would have required the dissemination of various kinds of performance data on an investment-by-investment basis with quarterly updates going forward. Tom DeWard Shareholder Proposal (LMP Real Estate Income Fund, Inc.), SEC No-Action Letter (Mar. 25, 2015).

Enforcement Litigation

SEC Reaches Settlement Agreements with Lead Underwriter and Former Executives Over Misstatements in Offering Materials Resulting From Failure to Act on Due Diligence Reports

The SEC announced that it had reached agreement with Macquarie Capital (USA) Inc. and former Macquarie Capital managing director Aaron Black and former investment banker William Fang to settle SEC charges filed in federal district court alleging violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 because of false statements in offering documents for a secondary offering of Puda Coal for which Macquarie Capital was the lead underwriter. According to the SEC’s complaint, the offering documents in question falsely stated that Puda Coal held a 90% ownership stake in a Chinese coal company, a claim repeated in Macquarie Capital’s own marketing materials, even though Macquarie Capital had received a due diligence report showing that Puda Coal did not own any part of the coal company. Macquarie Capital agreed to settle the SEC’s charges by paying $15 million and separately covering the costs of setting up a Fair Fund to compensate investors who suffered losses after purchasing shares in the public offering by Puda Coal. Black agreed to pay $212,711 and Fang agreed to pay $35,000 to settle the charges. In addition to the monetary penalties, Black has agreed to be barred from supervisory positions in the securities industry and Fang has agreed to be barred from the securities industry, both for at least five years. The settlements are subject to court approval.

SEC Charges Nearly Two Dozen Unregistered Broker-Dealers

On March 26, the SEC charged 21 companies and individuals who from July 2009 through June 2012 regularly bought and sold securities on behalf of a Chicago-based trading firm without registering with the SEC as required under the federal securities laws. The SEC found that Global Fixed Income, LLC entered into agreements with third parties that acted as unregistered broker-dealers by buying billions of dollars’ worth of newly issued bonds on its behalf, causing Global Fixed Income’s allocation in the bond offerings to increase. Because the offerings were regularly oversubscribed, Global Fixed Income was often able to sell the bonds within a few days for a small profit, which it split with the third-party participants.The SEC’s order finds that Global Fixed Income and Charles Perlitz Kempf, who arranged the deals, caused violations of Section 15(a)(1) of the Securities Exchange Act of 1934, that Kempf willfully aided and abetted violations of Section 15(a)(1), and that the third-party participants committed violations of Section 15(a)(1). They consented to the order without admitting or denying the findings and must collectively pay nearly $5 million in disgorgement of profits plus approximately $1 million in penalties. The order also suspends Kempf from associating with a registered entity or participating in a penny stock offering for 12 months.

Massachusetts Securities Division Enters Consent Order Against Broker for Internal Use of Presentation Materials Prior to Compliance Review

The Massachusetts Securities Division entered into a consent order with a brokerage firm (Firm) registered with the Division based on the use of presentation materials on two occasions in presentations to the Firm’s financial advisors, executives and employees before the material had been reviewed by the Firm’s compliance group. The consent order did not find that the presentation material as used violated applicable content standards, and the Division stated that it was not aware of any customer complaints or customer impacts arising from the use of the presentation material. For what the Division described as a failure to comply with the Firm’s internal policies and procedures regarding prior approval of internal-use material, the Firm was fined $2.5 million and subject to a cease-and-desist agreement, censure and other administrative remedies. In the Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated (Mar. 23, 2015).

New ERISA Litigation Update Available

Goodwin Procter’s ERISA Litigation Practice published its latest quarterly ERISA Litigation Update. The update discusses (1) a Massachusetts federal district court decision rejecting an ERISA challenge to a 401(k) plan service provider’s float practices (2) a Supreme Court decision that overturned the Sixth Circuit’s long-standing Yard-Man presumption, ruling that courts should apply ordinary contract principles to determine whether benefits have vested; (3) an en banc decision by the Sixth Circuit ruling that an insurance company that wrongfully denied benefits to a participant under a disability plan was not liable under ERISA for the profits it earned on the benefits during the period they were improperly withheld from the participant; (4) a Second Circuit decision holding that in response to material misstatements made by the plan administrator, a court can exercise its equitable powers to reform the terms of a cash balance retirement plan to provide greater benefits than stated, for which the plan sponsor would be required to make payments on a class-wide basis; and (5) Lockheed Martin Corp.’s settlement of the 401(k) excessive fee litigation pending against it in federal court in Illinois.

Client Alert - Supreme Court Clarifies Liability Standard for Statements of Opinion in Securities Offering Registration Statements

Goodwin Procter issued a client alert that discusses the U.S. Supreme Court’s decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund addressing whether and under what circumstances an issuer’s statement of opinion or belief may give rise to liability under Section 11 of the Securities Act of 1933. The client alert analyzes the likely impact of the decision and its applicability to investment banks that underwrite securities offerings.