Weekly RoundUp
December 22, 2015

Financial Services Weekly News

FINRA and MSRB Seek SEC Approval of “Pay-To-Play” Rules. On Dec. 16 FINRA and the MSRB both announced that they had filed rules to establish prohibitions and restrictions on political contributions by regulated persons, also known as pay-to-play rules. The FINRA proposal would adopt Rule 2030 (Engaging in Distribution and Solicitation Activities with Government Entities) and 4580 (Books and Records Requirements for Government Solicitation Activities with Government Entities), applicable to the activities of member firms that engage in distribution or solicitation activities for compensation with government entities on behalf of investment advisers. The MSRB proposal would amend Rule G‑37, extending the MSRB’s established municipal securities dealer pay-to-play rule to all municipal advisors, including those acting as third-party solicitors, and would be the first MSRB rule provisions specifically tailored to the activities of those that solicit business from municipal entities on behalf of third-party municipal securities dealers, municipal advisors and investment advisors. The two sets of rules are intended to coordinate with SEC Rule 206(4)‑5, addressing pay-to-play practices of investment advisers. Rule 206(4)‑5, among other things, prohibits an investment adviser from providing payment to any person to solicit a government entity for investment advisory services on behalf of the investment adviser unless the person is a “regulated person.” A “regulated person” includes a FINRA member firm or a registered municipal advisor, provided that: (a) FINRA or MSRB rules prohibit the person from engaging in distribution or solicitation activities if political contributions have been made; and (b) the SEC finds, by order, that such rules impose substantially equivalent or more stringent restrictions on registered persons than the SEC pay-to-play rule imposes on investment advisers and that such rules are consistent with the objectives of Rule 206(4)‑5. The SEC stated that the ban on third-party solicitations would be effective nine months after the compliance date of a final rule adopted by the SEC by which municipal advisors must register under the Exchange Act. The SEC adopted a final municipal advisor rule on Sept. 20, 2013, with a compliance date of July 1, 2014. However, in Question I.4 to Staff Responses to Questions about the Pay to Play Rule, the SEC staff granted a further extension until the adoption of FINRA and MSRB pay-to-play rules. Both proposals request comments, which are due 21 days after publication of the filing in the Federal Register.

The Roundup is being published a day early today because of the holidays. There will be no Roundup next week. We wish a Merry Christmas to those who celebrate Christmas and to everyone a relaxing break with family and friends and a happy and prosperous new year.

Regulatory Developments

FDIC Rule Amends Filing Requirements and Processing Procedures for Changes in Control

On Dec. 16 the FDIC announced the adoption of a final rule amending the FDIC's filing requirements and processing procedures for notices filed under the Change in Bank Control Act. The changes are intended to consolidate and conform the regulations applicable to change in control notices filed with respect to state nonmember banks, state savings associations, and certain parent companies, and makes existing FDIC practices more transparent. The rule takes effect Jan. 1, 2016.

SEC Issues Staff Report on Accredited Investor Definition

On Dec. 18 the SEC announced that it had issued a Report on the Review of the Definition of “Accredited Investor” (the Report) prepared by the staff. The announcement noted that the Dodd-Frank Act directs the Commission to review the accredited investor definition as it relates to natural persons every four years to determine whether the definition should be modified or adjusted. The staff noted that while the accredited investor definition had its first and primary application to the exemptions in Regulation D, it also has applications elsewhere in the securities laws. For example, Section 501 of the JOBS Act increased the holders of record threshold for purposes of registration under Section 12(d) of the Exchange Act for certain issuers to either 2,000 persons or 500 persons who are not accredited investors. The Report considers the impact of raising the net worth and income standards for individual accredited investors and also explores alternative approaches for both individuals and entities, including permitting new investments by persons that have previously qualified, and permitting individuals with a minimum amount of investments, or certain professional qualifications indicating financial sophistication, to qualify regardless of their income or net worth. The SEC invites comment on the Report.

SEC, in Cooperation with FINRA, Issues Investor Alert on Securities-Backed Lines of Credit

On Dec. 21 the SEC issued an Investor Alert on Securities Backed Lines of Credit in cooperation with FINRA, which also announced the alert. The alert describes securities backed lines of credit (SBLOCs) and how they work, and discusses the potential advantages and risks (including tax consequences) of using them. The alert includes 10 suggested questions for investors to ask to help ensure they understand the potential benefits and risks of SBLOCs.

OCC Releases 2015 Risk Report

The OCC recently released a report covering risks facing national banks and federal savings associations. The agency’s Semiannual Risk Perspective for Fall 2015 highlights strategic, underwriting, cybersecurity, compliance, and interest rate risks as its key supervisory concerns. Comptroller of the Currency Thomas J. Curry expressed concerns over weakening credit standards, among other risks, during a call discussing the report.

Federal Reserve Board Releases Guidance on Capital Planning

On Dec. 21 the Federal Reserve Board released guidance to its examiners and banking institutions that consolidates the capital planning expectations for all large financial institutions and clarifies differences in those expectations based on firm size and complexity. The guidance for complex firms clarifies expectations that have been previously communicated to firms, including through past Comprehensive Capital Analysis and Review (CCAR) exercises and related supervisory reviews. The guidance for noncomplex firms clarifies the supervisory expectations to be applied for the firms' capital planning processes.

Federal Reserve Seeks Comment on Proposed Countercyclical Capital Buffer Framework

The Federal Reserve Board (the Board) announced on Dec. 21 that it is seeking public comment on its proposed policy statement detailing the framework the Board would follow in setting the Countercyclical Capital Buffer (CCyB). The CCyB is designed to increase the resilience of large banking organizations by raising capital requirements on internationally active banking organizations when there is an elevated risk of above-normal losses. Once fully phased in, the buffer could range from 0% of risk-weighted assets in times of moderate financial-system vulnerabilities to a maximum of 2.5% when vulnerabilities are significantly elevated. In addition to releasing the framework for comment, the Board also voted to affirm the CCyB amount at the current level of 0%. Comments may be submitted until Feb. 19, 2015.

Enforcement & Litigation

FinCEN Settles Card Club Enforcement Action

On Dec. 17 FinCEN announced its first settlement with and assessment against a “card club” gaming establishment. Oaks Card Club d/b/a Oaks Club (Oaks), of Emeryville, California admitted that it violated the program and reporting requirements of the Bank Secrecy Act (BSA). The settlement and FinCEN’s assessment require Oaks to pay a fine of $650,000 for willful violations of the BSA. A card club is a type of gaming establishment where games are generally limited to those actually involving cards and in which players play against each other and not against the “house.” Like casinos, card clubs are defined as financial institutions under the BSA and are subject to FinCEN’s rules.

SEC Announces Fraud Charges Against Investment Adviser

On Dec. 15 the SEC announced that it had brought a complaint against Atlantic Asset Management LLC (AAM), a Stamford, Connecticut-based investment advisory firm, alleging that AAM invested more than $43 million of client funds in illiquid bonds issued by a Native American tribal corporation without disclosing the conflict of interest arising from the fact that the bond sales generated a private placement fee for the broker-dealer, whose parent company partially owns AAM.