Weekly RoundUp
October 7, 2015

Financial Services Weekly News

Dissent Highlights New SEC Position on Use of Assumed Rather Than Actual Data in Backtested Performance. The published dissents of SEC commissioners can shed useful light on the jurisprudence of rulemaking. That is the case with the Oct. 2 Dissenting Opinion of Commissioners Daniel Gallagher and Michael Piwowar to the Opinion of the Commission in In the Matter of Raymond J. Lucia Companies and Raymond J. Lucia, Sr., SEC Release No. 34-75837 (Sept. 3). The respondents in that case had used backtested data to demonstrate how their “Buckets of Money” approach (a re-balancing strategy) would have performed during periods beginning in 1966, when the Dow Jones Industrial Average stagnated for a 16-year period, and 1973, when the stock market dropped significantly for two years. Gallagher and Piwowar did not disagree that the respondents had violated the law in various ways. However, they stated that in one respect the “Commission majority has…needlessly engaged in ‘rulemaking by opinion.’” Specifically, they found that the majority opinion had “create[d] from whole cloth specific requirements for advertisements that include the word ‘backtest.’” They continued, “Despite the lack of any statutory or regulatory definition of what constitutes a ‘backtest,’ the majority opinion finds it fraudulent or deceptive practice if a backtest fails to use actual historical rates — even if the slideshow presentation specifically discloses the use of assumed rates for certain components.” The dissenting Commissioners went on to argue that the use of a steady assumed inflation rate of 3% in the respondents’ backtest presentation, when the use of the assumed rate, rather than a historical rate, was adequately disclosed, was not misleading. There is merit to the view that changes of this kind should be made by rule rather than litigation. The rulemaking process offers the benefit of public comment, which might suggest situations in which the use of assumed values is acceptable, and rules are more accessible to persons taxed with compliance than enforcement opinions. The recent Supreme Court denial of certification of U.S. v. Newman, the Second Circuit decision overturning the convictions of two hedge fund managers accused of insider trading and redefining one of the elements for proving insider trading, is a reminder of the complications that can ensue when the SEC seeks to define violations of law by litigation.

Regulatory Developments

FINRA Files Proposed Rule Change to Apply Markup Rule to Government Securities

On Sept. 30 FINRA filed with the SEC a proposed rule change, published in the Federal Register on Oct. 6, to amend FINRA Rule 0150 to apply 2121 (Fair Prices and Commissions) and its Supplementary Material .01 (Mark-Up Policy) and .02 (Additional Mark-Up Policy for Transactions in Debt Securities, Except Municipal Securities) to exempted securities that are government securities. Comments are due by Oct. 27.

FINRA Provides Notice of SEC Approval of Amendments to FINRA Rules Regarding Temporary and Permanent Cease and Desist Orders

On Oct. 2 FINRA issued Regulatory Notice 15-35 announcing that the SEC had approved amendments to FINRA rules that lower the evidentiary standard to impose a temporary cease and desist order (TCDO); create a new expedited proceeding for repeated failures to comply with a TCDO or a permanent cease and desist order (PCDO); harmonize the provisions governing how documents are served in temporary cease and desist and expedited proceedings; clarify FINRA’s authority to impose a PCDO; and ease FINRA’s administrative burden in temporary cease and desist proceedings. The amendments become effective on Nov. 2, 2015.

FINRA Proposes Rule Change to Merge FINRA Dispute Resolution, Inc. into and with FINRA Regulation, Inc.

On Oct. 6 FINRA announced that it had filed with the SEC a proposed rule change to merge its dispute resolution subsidiary, FINRA Dispute Resolution, Inc. (FINRA Dispute Resolution) into and with its regulatory subsidiary, FINRA Regulation, Inc. (FINRA Regulation). FINRA is pursuing this merger to align its corporate structure with its operational realities and reduce administrative duplication associated with maintaining distinct corporate entities. The SEC will seek public comment on the proposal for 21 days after publication in the Federal Register.

SEC Approves Rule Governing Sales of Securities on Military Installations to Members of the U.S. Armed Forces or Their Dependents

On Sept. 30 FINRA announced in Regulatory Notice 15-34 that the SEC approved the adoption of FINRA Rule 2272 (Sales and Offers of Sales of Securities on Military Installations) to govern sales and offers of sales of securities by firms on the premises of any military installation to members of the U.S. Armed Forces or their dependents. The rule becomes effective March 30, 2016.

CFPB Considers Rule Proposal to Ban Consumer Financial Companies From Using Certain Arbitration Clauses

On Oct. 7 the CFPB announced that it is considering proposing rules that would ban consumer financial companies from using arbitration clauses to block consumers from suing in groups to obtain relief. The CFPB provided an outline of the proposals under consideration, a list of questions on which it is seeking input from small business representatives providing feedback to the Small Business Review Panel and a March 2015 report on arbitration prepared by the CFPB pursuant to a mandate under the Dodd-Frank Act.

FDIC Communicates Supervisory Expectations for TRID Rule Compliance

On Oct. 2 the FDIC issued a Financial Institutions Letter providing guidance on its initial supervisory expectations in connection with its examinations for compliance with the TILA–RESPA Integrated Disclosure Rule (TRID Rule) effective Oct. 3, 2015. According to the FDIC, its examiners will use interagency examination procedures to evaluate for compliance with the TRID Rule. During initial examinations, examiners will take into account the scope and scale of changes necessary to achieve effective compliance. Examiners will expect that good faith efforts have been made to timely comply. The FDIC’s TRID Rule approach will be similar to its approach to initial examinations for compliance with the ability-to-repay/qualified mortgage rules.

Enforcement & Litigation

Client Alert: Court Invalidates US-EU Data Transfer Safe Harbor Program

On Oct. 6 the Court of Justice of the European Union (CJEU) invalidated the 2000/520 European Commission Decision that established US-EU Safe Harbor. The decision has an immediate effect on any organizations that relied on Safe Harbor protections, leaving them exposed to claims that their data transfers are unlawful. Goodwin Procter’s Privacy & Cyber Security practice shares in its client alert mechanisms that companies can use to combat disruptions that Safe Harbor’s invalidation may cause. The firm will be holding an informational webinar to provide more insights into the decision and its practical impacts on companies on Friday, Oct. 9, at 2 p.m. EDT.

Client Alert: CA Attorney General Settlement Requires Hiring of Privacy Officer: Businesses with Web Presences Subject to Increasing California Enforcement

Goodwin Procter’s Privacy & Cyber Security practice issued a client alert on the California Attorney General’s recent settlement with website operator Houzz which includes, for the first time, a requirement to hire a privacy officer. This step coincides with an increase in privacy-related enforcement from the California Attorney General, who has far-reaching authority over companies doing business online.