Weekly RoundUp
October 30, 2019

Financial Services Weekly News: SEC Issues Guidance on Certain Disclosures Related to Investment Adviser Compensation

In This Issue. The staff of the Securities and Exchange Commission’s (SEC) Division of Investment Management issued a set of FAQs setting forth its views regarding the disclosure of certain conflicts related to investment adviser compensation; federal financial agencies issued a proposal to amend swap margin requirements for a registered swap dealer that is an insured depository institution or is otherwise supervised by one of the agencies; and the Board of Governors of the Federal Reserve System (Federal Reserve Board) and the Federal Deposit Insurance Corporation (FDIC) finalized a rule that modifies their resolution plan requirements for large firms. These developments are discussed in more detail below.

Regulatory Developments

SEC IM Division Issues FAQs Regarding Disclosure of Certain Conflicts Related to Investment Adviser Compensation

On October 18, the staff of the SEC’s Division of Investment Management issued a set of FAQs setting forth its views regarding the disclosure of certain conflicts related to investment adviser compensation. The staff reminds advisers that compensation arrangements can result in conflicts of interest and trigger disclosure obligations both under the adviser’s fiduciary duty and Form ADV. The FAQs focus on disclosure obligations regarding mutual fund 12b-1 fees and revenue sharing but notes that the same principles and obligations apply to other forms of compensation. A key focus area for the staff is mutual fund share class conflicts. In particular, the FAQs include examples of specific factors to consider when reviewing differential compensation among share classes, including the nature of the conflict and how the adviser addresses the conflict. Among other things, the FAQs include a reminder that an adviser disclosing that it “may” have a conflict as a result of receiving 12b-1 fees or revenue sharing payments is not adequate when the conflict actually exists.

Agencies Propose Rule to Amend Swap Margin Requirements

On October 28, the Federal Reserve Board, FDIC, Office of the Comptroller of the Currency, Farm Credit Administration, and Federal Housing Finance Agency (Agencies) released a notice of proposed rulemaking to amend swap margin requirements for a registered swap dealer that is an insured depository institution or is otherwise supervised by one of the Agencies. The rule would propose the following changes to the swap margin rule:

  • Provide relief by allowing legacy swaps to be amended to replace existing interest rate provisions based on certain interbank offered rates (IBORs) and other interest rate benchmarks. The proposal would apply to IBOR benchmarks and other interest rate benchmarks that are reasonably expected to be discontinued or are reasonably determined to have lost their relevance as a reliable benchmark due to a significant impairment, without such swaps losing their legacy status.
  • Amend the swap margin rule's requirements for inter-affiliate swaps. The proposal would repeal the requirement for a covered swap entity to collect initial margin from its affiliates, but would retain the requirement that variation margin be exchanged for affiliate transactions.
  • Add one more initial margin compliance period for certain smaller counterparties and clarify the existing trading documentation requirements in the swap margin rule.
  • Amend the swap margin rule to permit amendments caused by certain routine life-cycle activities that covered swap entities may conduct for legacy swaps, such as notional amount reductions and portfolio compression exercises, without triggering margin requirements.

The Agencies will be accepting comments on the proposed changes for 30 days from the date the proposal is published in the Federal Register.

Agencies Finalize Changes to Resolution Plan Requirements; Keeps Requirements for Largest Firms and Reduces Requirements for Smaller Firms

On October 28, Federal Reserve Board and the FDIC announced that they had finalized a rule that modifies their resolution plan requirements for large firms, as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act. The final rule retains resolution plan elements in place for the largest firms, while reducing requirements for smaller firms that pose less risk to the financial system.

The final rule is substantially the same as the proposal from earlier this year and establishes resolution planning requirements tailored to the level of risk a firm poses to the financial system. For the most systemically important firms, the final rule would adopt the current practice of requiring resolution plans to be submitted on a two-year cycle. Firms that do not pose the same systemic risk as the largest institutions would be required to submit resolution plans on a three-year cycle. Both groups of firms would alternate between submitting full resolution plans and targeted resolution plans. A targeted resolution plan would include core elements related to capital, liquidity, and plans for recapitalization, as well as material changes to the firm and areas of interest identified by the agencies. Targeted resolution plans would not include certain areas if they are materially unchanged from one cycle to another, such as descriptions of management information systems and corporate governance systems. As a result, targeted resolution plans would give the agencies meaningful insight into the key vulnerabilities in a firm's resolution strategy. In a change from the proposal, only smaller and less complex firms could request changes to their full resolution plans and both agencies would need to approve those requests for them to become effective.

Foreign firms with relatively limited U.S. operations would be required to submit reduced resolution plans. Firms with less than $250 billion in total consolidated assets that do not meet certain risk criteria would no longer be subject to the rule. These firms have simpler structures, engage more exclusively in traditional banking activity, and present less risk. The changes do not affect the resolution planning requirements under the FDIC’s insured depository institution rule for large insured depository institutions, which is part of a separate rulemaking.

Node Agreements for Blockchain-Based Tokens

The method by which cryptocurrency and digital asset companies issue their blockchain-based tokens into the market has evolved, pushed along by regulatory developments and technological advancements. We have observed the popularity ebb-and-flow of direct token sales, simple agreements for tokens, genesis tokens convertible into principal tokens, and gifted distributions. Over the past year, more companies have been choosing another method for issuing initial stakes of tokens and strengthening the health and distribution of blockchain networks — the “node agreement.” To learn more about node agreements and how they enhance market participation and distribution, read the new Digital Currency & Blockchain Perspectives blog post.

Goodwin News

NYBA Financial Services Forum — November 5-8

The New York Bankers Association’s Financial Services Forum is an event focused on providing first-rate banker education for NYBA members. The forum will include important industry updates and outlooks, a focused workshop for directors and trustees, targeted breakfast workshops, and valuable networking opportunities. Goodwin is a sponsor. Click here to register.

Annual Consumer Financial Services Conference — November 7-8

The two-day Annual Consumer Financial Services Conference offers the highest-quality panels and presentations on the most pertinent issues facing the industry. Goodwin is a silver-level sponsor. Financial Industry partner David Permut will be speaking at this conference. Click here to learn more.

This week’s Roundup contributors: Daniel Isaacs.