Weekly RoundUp
July 1, 2015

Financial Services Weekly News

SEC Ban on Certain Third-Party Solicitation of Municipal Entities to Go into Effect on July 31 with Related No-Action Relief. On June 25, the SEC provided notice that the ban on solicitation of advisory business from any governmental entity on behalf of an investment adviser subject to Rule 206(4)-5 by any person other than a “regulated person” will go into effect on July 31, 2015. A regulated person is an SEC-registered investment adviser, registered broker-dealer or registered municipal advisor subject to rules, like Rule 206(4)-5, prohibiting the solicitation of municipal entities to which the solicitor has made a political contribution in the past two years. Rule 206(4)-5(c) provides that the prohibition also applies to solicitation of a municipal entity to invest in a “covered investment pool” advised by the investment adviser; covered investment pools include registered investment companies and companies excluded from registration under Section 3(c)(1) or 3(c)(7) of the Investment Company Act. The effective date of the ban on third-party solicitation was delayed until nine months after the SEC’s final rule requiring registration of municipal advisors went into effect. The MSRB has proposed to amend MSRB Rule G-37, banning certain political contributions, to apply to municipal advisors, but that amendment is not yet effective. Rule G-37 currently applies to municipal securities brokers and dealers and certain financial advisors. FINRA, which regulates most broker-dealers, does not have a rule restricting political contributions comparable to Rule 206(4)-5. In order to avoid a situation in which investment advisers would not be able to pay most registered brokers and other persons to solicit municipal entities beginning July 31, the SEC staff on June 25 issued FAQ I.4 granting the following blanket no-action position: “Until the later of (i) the effective date of… a FINRA pay to play rule or (ii) the effective date of… an MSRB pay to play rule [applicable to municipal advisors], the Division would not recommend enforcement action to the Commission against an investment adviser or its covered associates under rule 206(4)-5(a)(2)(i) for the payment to any person to solicit a government entity for investment advisory services.”

Regulatory Developments

FINRA Proposes Rule to Require Member Websites to Link to BrokerCheck

FINRA has proposed an amendment to FINRA Rule 2210 to require each of a member’s websites to include a readily apparent reference and hyperlink to BrokerCheck on: (1) the initial webpage intended to be viewed by retail investors; and (2) any other webpages including a professional profile of one or more registered persons who conduct business with retail investors. The proposed requirements would not apply to members that do not provide products or services to retail investors, or to directories or lists of registered persons limited to names and contact information.

SEC Issues Guidance Regarding Personal Securities Transactions Reports by Registered Investment Advisers

On June 26, the SEC published an IM Guidance Update addressing Rule 204A-1, which provides that a registered investment adviser must report the personal securities trading of certain of its employees who have access to material non-public information (“access persons”). Subsection (b)(3)(i) of the Rule provides an exception to the reporting requirements when the securities are held in accounts over which the owner has “no direct or indirect influence or control.” The Guidance Update clarifies that an access person providing a trustee with management authority over a trust for which he is grantor or beneficiary, or providing a third-party manager discretionary investment authority over his or her personal account, by itself, is insufficient for an adviser to reasonably believe that the security owner had no direct or indirect influence or control over the trust or account for purposes of relying on the reporting exception. The Guidance Update includes examples of additional controls that an adviser should consider implementing as a part of policies and procedures reasonably designed to enable the adviser to determine whether the access person actually has direct or indirect influence over a trust or account.

FFIEC Releases Cybersecurity Assessment Tool

The Federal Financial Institutions Examination Council (FFIEC) has issued a Cybersecurity Assessment Tool (Assessment) for institutions to evaluate their cybersecurity risks and preparedness. The release of the Assessment follows a summer 2014 pilot program to evaluate cybersecurity preparedness at community financial institutions. In addition to the Assessment, the FFIEC has made supplementary resources available, including an executive overview, a user’s guide, an online presentation explaining the Assessment, and appendixes mapping the Assessment’s baseline items to the FFIEC Information Technology (IT) Examination Handbook and to the National Institute of Standards and Technology’s (NIST) Cybersecurity Framework. The OCC has announced that it will gradually incorporate the Assessment into its examinations of the institutions it supervises, beginning in late 2015.

CFTC Issues Proposed Rule on Cross-Border Margin

On June 29, the CFTC announced that it had voted to propose a rule that would apply the CFTC’s margin requirements for uncleared swaps in the context of cross-border transactions. The proposed rule would apply to CFTC-registered swap dealers and major swap participants that are not subject to the margin requirements of other prudential regulators, such as the FRB, OCC or FDIC. Under the proposed rule, covered swap entities would be required to comply with the Commission’s margin rules for all uncleared swaps in cross-border transactions, with a limited exclusion. In addition, the proposed rule would allow covered swap entities to comply with comparable margin requirements in a foreign jurisdiction as an alternative means of complying with the Commission’s margin rules for uncleared swaps (so-called “substituted compliance”). Eligibility to use substituted compliance will depend on whether parties are US or non-US entities and whether the obligations of a non-US entity under the relevant swap are guaranteed by a US person. The CFTC has provided a Fact Sheet on the proposed rule. The comment period for the proposed rule ends 60 days after the publication in the Federal Register.

Enforcement and Litigation

New ERISA Litigation Update Available

Goodwin Procter’s ERISA Litigation Practice published its latest quarterly ERISA Litigation Update. The update discusses (1) a Supreme Court decision vacating and remanding a Ninth Circuit decision applying the six year statute of limitations to bar parts of excessive fee claims; (2) the Solicitor General’s urging the Supreme Court to decline to hear an ERISA fiduciary breach case concerning which party bears the burden of proof on loss causation; (3) the Ninth Circuit’s division over the implication of Fifth Third v. Dudenhoeffer when plan fiduciaries are alleged to have breached duties by allowing a plan to hold employer stock during a time of alleged artificial inflation of the share price; (4) a District Court of Colorado decision declining to dismiss class action litigation challenging an insurer’s stable value product; and (5) a summary of upcoming conferences and presentations by Goodwin’s ERISA Litigation Practice.