Weekly RoundUp
January 13, 2016

Financial Services Weekly News

Regulators Set The Tone for 2016 Examinations. On Jan. 5, FINRA announced the issuance of its 2016 Regulatory and Examination Priorities Letter. This year’s list of priorities focuses on three broad-based areas, including (1) culture, conflicts of interest and ethics; (2) supervision, risk management and controls; and (3) liquidity. On Jan. 11, the SEC released the examination priorities of its Office of Compliance Inspections and Examinations. Although much of its focus is a continuation of priority themes set last year – protection for retail investors, including retirement savings; assessing issues related to market-wide risks; maximizing its analytical capabilities to identify and examine regulated entities that may be engaged in illegal activity – the SEC has added new focus areas to its agenda. This year the SEC staff intends to focus examination efforts on exchange-traded funds and variable annuities. Both FINRA and the SEC intend to intensify their examination efforts on cybersecurity. This week’s Roundup includes a link to our client alert on FINRA’s examination priorities.

Also, springing out of the gates this year is guidance from the SEC’s Division of Investment Management on distribution and sub-accounting fees. The guidance comes in the wake of its September 2015 “distribution in guise” administrative proceeding against a registered investment adviser and distributor for improperly using fund assets to pay for distribution by treating the payments as sub-transfer agency payments. This week’s Roundup also includes a link to our client alert on the IM guidance.

Regulatory Developments

Client Alert: FINRA Releases 2016 Regulatory and Examination Priorities Letter

Goodwin Procter’s Investment Management practice has issued a client alert on FINRA’s Jan. 5 release of its annual Regulatory and Examination Priorities Letter (the Letter), along with its press release from FINRA chairman and CEO Richard Ketchum summarizing the Letter. In addition to broadly identifying three policy issues for member firms to address in 2016 – (1) culture, conflicts of interest and ethics; (2) supervision, risk management and controls; and (3) liquidity – the self-regulatory organization also identified more specific policies and procedures it will use as guideposts in reviewing member firms’ compliance with a vast range of examination priorities.

SEC Releases 2016 Examination Priorities

On Jan. 11, the SEC issued a press release announcing its Office of Compliance Inspections and Examinations’ (OCIE) examination priorities for 2016. OCIE’s 2016 Examination Priorities Letter is largely similar to OCIE’s 2015 Letter, though new areas of focus include liquidity controls, public pension advisers and product promotion, as well as a focus on two specific types of investment products – exchange-traded funds and variable annuities.

Client Alert: SEC Issues Long-Awaited Guidance Regarding Payments for "Distribution in Guise"

Goodwin Procter’s Investment Management practice has issued a client alert on the Staff of the SEC’s Division of Investment Management’s (the Staff) recently published Guidance containing the Staff’s views and recommendations relating to mutual fund distribution and sub-accounting fees. The Guidance is an outgrowth of the Staff’s observations from a three-year “distribution in guise” sweep exam of mutual fund complexes, investment advisers, broker-dealers and transfer agents conducted by OCIE and other offices and divisions of the SEC to identify whether firms were using fund assets to directly or indirectly finance any activities primarily intended to result in the sale of fund shares outside of an approved 12b-1 Plan.

CFTC Division Grants No-Action Relief from the Swap Clearing Requirement for Small Bank Holding Companies, Savings and Loan Holding Companies and CDFIs

On Jan. 8, the CFTC’s Division of Clearing and Risk (the Division) issued a no-action letter announcing that it will not recommend enforcement action against small bank holding companies (BHC) or savings and loan holding companies (SLHC) for failure to clear swap transactions through a derivatives clearing organization under Section 2(h)(7) of the Commodity Exchange Act and part 50 of CFTC’s regulations (17 C.F.R. § 50.50). The rules already permit certain banks and savings associations to elect exception from the swap clearing requirement, but offer no such cost-saving advantages to the BHCs or SLHCs that often face prohibitive transaction costs. The Division has conditioned eligibility for this no-action relief upon a BHC or SLHC (1) having no more than $10 billion in consolidated assets, and (2) complying with the conditions applicable to banks and savings associations under Regulation 50.50 for electing not to clear a swap. In a parallel no-action letter, the Division granted similar relief to community development financial institutions (CDFIs) certified by the Treasury Department, subject to certain conditions, including a $200 million annual limit on aggregate notional value and a restriction of no more than 10 transactions per year. As a result of the relief, CDFIs and holding companies for community banks will be able to continue to engage in hedging activities vital to managing interest rate risk.

Client Alert: ISS Publishes Proxy Access FAQs

Goodwin Procter’s Capital Markets practice issued a client alert reporting that ISS has published two FAQs that supplement its 2016 Proxy Voting Guidelines Updates for the Americas that were summarized in another Goodwin client alert, "ISS Policy Changes for the 2016 Proxy Season" (Dec. 8, 2015). The new FAQs provide guidance on voting recommendations that ISS is likely to issue for shareholder meetings held on or after Feb. 1, 2016 based on ISS evaluation of (1) a board’s implementation of a proxy access policy and (2) proxy access nominees. Companies that have adopted proxy access policies in response to a majority-supported shareholder proposal, or are considering submitting a management proposal to shareholders for approval, may be especially interested in the policy provisions that ISS considers problematic.

Enforcement & Litigation

Don’t Bank on It: Marijuana Still Illegal Under Federal Law, Says District Court

Proliferating marijuana-related businesses are still risky banking clients. On Jan. 5, Judge Jackson of the U.S. District Court for the District of Colorado reinforced marijuana’s illegality under federal law by dismissing a lawsuit seeking equitable relief brought by The Fourth Corner Credit Union, a Colorado credit union catering to marijuana-related businesses, against the Federal Reserve Bank of Kansas City for denying a routine master account application. Master accounts are necessary to access key Federal Reserve System banking services. Marijuana is legal under Colorado state law, and, although it remains a Schedule I controlled substance, both the Department of Justice and FinCEN have purportedly eased enforcement activities against certain marijuana-related businesses. Judge Jackson, however, emphasized that a regulator’s choice to “look the other way” does not alter the federal laws criminalizing marijuana. The court acknowledged that its decision would put the credit union out of business, but dismissed the case on the ground that it was unable to issue an order that would facilitate criminal activity. This decision highlights the exposure facing financial institutions servicing marijuana related businesses, as the denial or termination of access to key services or of relationships with other financial institutions or counterparties can have severe ramifications.