Weekly RoundUp
March 8, 2017

Financial Services Weekly News

Marching On. Notwithstanding the industry’s watch of the Senate’s confirmation of new leadership for the Department of Labor (DOL) and the Securities and Exchange Commission (SEC), the DOL proposed a delay in the applicability date of its final Fiduciary Rule and the SEC issued guidance on circumstances when an adviser may inadvertently have custody of client assets and advanced disclosure and filing priorities, in part, by announcing that it is seeking comments on bank holding company disclosures. In addition, the Federal Trade Commission (FTC) reached settlements in two mortgage-relief scam cases. These and other recent developments are covered below.  

Regulatory Developments

Client Alert: DOL Fiduciary Rule: Proposed Delay to the Applicability Date

The DOL has proposed a 60-day delay in the applicability date of its final regulation redefining the term “fiduciary” and issuing new exemptions and related amendments (collectively, the “Fiduciary Rule” or “Rule”). As discussed in our prior client alert, the Fiduciary Rule is scheduled to be generally effective on April 10, 2017; however, if the 60-day delay is finalized, the new applicability date will be June 9, 2017. Following publication of the proposal in the Federal Register on March 2, 2017, there will be a 15-day comment period, after which we expect the DOL to promptly finalize the delay. For more information, view the client alert issued by Goodwin’s ERISA & Executive Compensation Practice.

SEC Issues Guidance on Inadvertent Custody Under the Custody Rule

The staff of the SEC’s Division of Investment Management issued a guidance update discussing certain situations that involve an investment adviser inadvertently obtaining custody of client assets pursuant to Rule 206(4)-2 under the Advisers Act of 1940 (the Custody Rule) and potential solutions to address the issue. The staff’s guidance focuses narrowly on separate account advisory relationships in which custodial agreements between the investment adviser and the client’s qualified custodian may impute the adviser with custody it did not know about or intend to have. In a typical “delivery versus payment” arrangement between the adviser and the custodian, the investment adviser should not have custody based on the adviser’s authority to issue instructions to a custodian to effect or settle trades. The staff cautions, however, that any agreement that permits the adviser to instruct the custodian to otherwise disburse or transfer assets, even when the agreement with the client does not permit the adviser to direct the disbursement or transfer of assets, may result in the adviser having custody of the client’s assets because the custodian may not be aware of the constraints in the management agreement. The staff suggested that advisers may mitigate the risk by providing a letter to the custodian that limits the adviser’s authority to “delivery versus payment” notwithstanding the wording of the custodial agreement, and to have the client and custodian provide written consent to acknowledge the arrangement.

In a nearly contemporaneous action, on February 21, the SEC staff issued a no-action letter to the Investment Adviser Association to provide the conditions in which the staff would not recommend enforcement under the Custody Rule when an investment adviser has entered into a standing letter of authorization (SLOA) with a client to transfer assets to a designated third party and does not subject the client account to surprise examination. Importantly, in both the guidance and the no-action letter, the staff indicates its willingness to provide relief under the Custody Rule when circumstances around an adviser’s custody of assets mitigate potential harms to its clients.     

SEC Seeks Comments on Bank Holding Company Disclosures Under Guide 3

On March 1, the SEC announced that it is seeking comments on the disclosures that publicly traded bank holding companies are required to provide to investors under Industry Guide 3, Statistical Disclosure by Bank Holding Companies (Guide 3). Acknowledging that the financial services industry has changed dramatically since Guide 3 was first published in 1976, the SEC is requesting comments on whether the current required disclosures provide sufficient information to investors, how the current required disclosures could be improved and whether other public companies in the financial industry should be required to provide similar information to investors. Comments are due to the SEC 60 days after the request for comment is published in the Federal Register.

Client Alert: SEC Adopts Mandatory Exhibit Hyperlinks and HTML Format Rules

The SEC has adopted final rules that will require companies to include active hyperlinks to exhibits in most registration statements filed under the Securities Act of 1933 and most reports filed under the Securities Exchange Act of 1934. The final rules will also require companies to file most registration statements and reports in HTML format, rather than ASCII. For more information, view the client alert issued by Goodwin’s Public Companies Practice.

SEC Proposes Inline XBRL Filing Requirements

On March 1, the SEC proposed amendments to rules and forms that specify certain content and format requirements for eXtensible Business Reporting Language (XBRL) reporting for operating company financial information and mutual fund risk/return summaries. A filer subject to such XBRL reporting currently is required to submit to the SEC, and post on its website, an Interactive Data File, or the machine-readable computer code in XBRL format, through an exhibit to its Related Official Filing for an operating company and its registration statement or form of prospectus pursuant to paragraph (c) or (e) of Rule 497 under the Securities Act of 1933 for a mutual fund. The proposed amendments would require the use of the Inline XBRL format, which is both human and machine readable. The Inline XBRL format allows filers to embed XBRL data directly into an HTML filing, thus eliminating the need for a separate XBRL exhibit filing and potentially reducing risk for erroneously tagging data. In this regard, the SEC stated that the proposed amendments are intended to facilitate improvements in the quality of XBRL data and decrease XBRL preparation costs. The proposed amendments would also eliminate, among other things, the requirement to post the Interactive Data File to the filer’s website. An operating company filer would continue to be generally required to submit the Interactive Data File with the Related Official Filing. However, a mutual fund would be permitted to submit the Interactive Data File concurrently with certain post-effective amendments to its registration statement on or before the date that such post-effective amendment becomes effective. In either case, the proposed amendments eliminate the current 15 business day period during which mutual funds must submit Interactive Data Files. The proposal is subject to a 60-day public comment period following the date first published in the Federal Register.

Client Alert: State and Federal Tax Law Developments Affect Same-Sex Couples and MA Residents with Out-of-State Real Estate

Recent changes in state and federal tax laws impact same-sex couples and any Massachusetts residents who own real estate in another state. Those who may be affected by these changes should act soon to protect the possibility of preferable tax treatment. For more information, view the client alert issued by Goodwin’s Trusts and Estates Planning Practice.

Enforcement & Litigation

Client Alert: Court Rules for Fund Adviser in Excessive Fee Case Against Hartford

On February 28, the court in the mutual fund excessive fee case against Hartford (Kasilag v. Hartford Inv. Fin. Servs., LLC, No. 1:11-cv-01083 (D.N.J.)) issued a 70-page opinion ruling in favor of the fund adviser and against the plaintiffs. The opinion, issued by Judge Bumb of the U.S. District Court for the District of New Jersey, followed trial of the case in November and closing arguments held earlier in February. The plaintiffs had limited their evidence to two Gartenberg factors, the nature and quality of the services and the adviser’s profitability. The court concluded that consideration of the two factors did “not suggest that the [advisory] fee is so disproportionate that it could not have been negotiated at arm’s length.” The court’s decision is the ninth consecutive trial victory for mutual fund advisers defending excessive fee suits brought under Section 36(b) of the Investment Company Act of 1940, and the second consecutive trial victory since the U.S. Supreme Court decided Jones v. Harris in 2010. For more information, view the client alert issued by Goodwin’s Financial Industry Practice.  

Client Alert: Massachusetts Supreme Judicial Court Rules Merger Challenges Must Be Brought Derivatively

In a decision that will have significant implications for M&A litigation involving Massachusetts corporations, on March 6, the Massachusetts Supreme Judicial Court held that a shareholder challenge to a proposed merger generally must be brought as a derivative action on behalf of the corporation. For more information, view the client alert issued by Goodwin’s Securities and Shareholder Litigation Practice.

FTC Reaches $1.7 Million Settlement with Final Defendant in Mortgage Relief Scheme

On February 23, the FTC announced that it entered into a settlement with the final individual defendant in an alleged mortgage relief scheme worth over $1.7 million. As a result of a joint federal-state enforcement sweep known as “Operation Mis-Modification,” the FTC filed a complaint in 2014 (and an amended complaint) against six defendants for violations of federal law. According to the FTC, the defendants violated Section 5(a) the FTC Act, 15 U.S.C. § 45(a), which prohibits unfair or deceptive commercial acts or practices, by falsely representing that they could help lower consumer mortgage payments and interest rates, and falsely claiming to be associated with government agencies or the consumers’ lenders or servicers. The FTC further alleged that the defendants charged illegal advance fees for their services in violation of the Mortgage Assistance Relief Services (MARS) Rule, 16 C.F.R. Part 322, recodified as 12 C.F.R. Part 1015 (Regulation O), which bans the collection of fees for mortgage foreclosure rescue and loan modification services until homeowners have an acceptable written offer from their lender or servicer. View the Enforcement Watch blog post.

FTC Settles with Remaining Defendant in Alleged Mortgage Scam Case

On February 21, the United States District Court for the Central District of California issued a stipulated order as to the final defendant in an alleged mortgage-relief scam. The court had entered judgment against the other co-defendants in the case, Federal Trade Comm’n v. CD Capital Investments, LLC, No. SACV14-01033 (C.D. Cal.), in August 2016. In the case, the FTC had filed a complaint alleging that the stipulating defendant (an individual named Gabriel Stewart) and his co-defendants (two individuals and three companies) had violated the law by (1) falsely representing that they could help homeowners reduce their mortgage payments or avoid foreclosure; (2) falsely representing that they were affiliated with a government agency or with homeowners’ mortgage lenders or servicers; and (3) illegally charging advanced fees. The complaint claimed that these actions violated the FTC Act and the Mortgage Assistance Relief Services Rule (known as the MARS Rule). View the LenderLaw Watch blog post.

DC Court of Appeals Orders Rehearing of PHH v. CFPB

On February 16, the United States Court of Appeals for the D.C. Circuit granted Respondent Consumer Financial Protection Bureau’s (CFPB) petition for rehearing en banc of PHH Corp. v. CFPB, No. 15-1177 (D.C. Cir.). In doing so, the court vacated its October 11, 2016, order, which had held, inter alia, that the CFPB’s single-director structure that permitted removal of the director only “for cause” was unconstitutional. To remedy what the court found was a constitutional violation, the court had severed the “for-cause” provision of the Dodd-Frank Act in its October 11 order. View the LenderLaw Watch blog post.

Goodwin News

Facing Today’s Challenges: Toward More Effective Fiduciaries – March 14

Alison Douglass, partner in Goodwin’s Financial Industry Practice and ERISA Litigation Practice, and Scott Webster, chair of Goodwin’s ERISA & Executive Compensation Group, will be panelists at the Callan Associates Workshop. The discussion will focus on “Facing Today’s Challenges: Toward More Effective Fiduciaries.”

Higher Education Symposium – April 13

Goodwin is pleased to present this event created specifically to address issues faced by trustees, officers and in-house counsel at colleges, universities and research institutions. We are delighted to present David Greene, President of Colby College, as our keynote speaker. David is a highly respected leader in education and business and will provide an inspiring perspective on his experience with public/private partnerships focused on revitalizing cities and neighborhoods where schools are located. The symposium will also feature a panel discussion with in-house counsel at higher education institutions concerning the relationships between schools and their students, as well as interactive sessions led by industry experts and thought leaders on privacy and cybersecurity and recent developments in 403(b) plan excessive fee litigation. For more information, please visit the event website.

This week’s Roundup contributors: Geoff Anghelone, Amanda Russo, David Solander and Alyssa Sussman.