Financial Services Alert - March 20, 2012 March 20, 2012
In This Issue

FINRA Files Proposed Amendments Relating to Adoption of New Standardized Electronic Continuing Membership Application Form

FINRA filed with the SEC proposed amendments to NASD Rule 1012 and NASD Rule 1017 (the “Amendments”) to adopt new standardized electronic Form CMA (“Form CMA”).  Rule 1017 provides parameters for certain changes in a member’s ownership, control, or business operations that would require a continuing membership application (a “CMA”), and Rule 1012 prescribes certain general provisions related to applications filed with FINRA, including CMAs.  FINRA explained that Rule 1017 does not currently require an applicant seeking approval of a change in a member’s ownership, control, or business operations to submit a standardized form as part of its CMA and that the Rule provides little detail regarding required contents of the CMA.  Rule 1012 currently permits CMAs to be submitted in paper copies by mail, overnight courier or hand delivery (or by facsimile upon agreement by FINRA and the applicant), and Rule 1017 directs that CMAs be filed in the FINRA District Office where the member has its principal place of business.  In proposing the Amendments, FINRA acknowledged that the current process for completing and submitting CMAs results in applications with information deficiencies, inefficiencies in the review process and unnecessary delays in properly forwarding information to the correct people within FINRA.  In this regard, FINRA noted that it had formed a centralized Membership Application Program Group within FINRA at the start of 2011.

The Amendments

Rule 1012 and Rule 1017 would be amended to permit the FINRA Department of Member Regulation to designate the manner and format of filing of Form CMA, and Rule 1017 would also require that each application contain a completed Form CMA at the time filed.

Contents of the New Form CMA

Form CMA has been designed to elicit information from applicants based on the standards of admission, contained in NASD Rule 1014, against which all CMAs are evaluated by FINRA.  Additionally, Form CMA has been structured with embedded flexibility to allow for variations based on the particular application type being submitted.  In this regard, FINRA noted that Form CMA has been designed to provide existing members with a streamlined application process similar to that which applicants for membership currently experience via the standardized online Form NMA.  Form CMA has been organized around 12 standards designed to obtain content necessary to evaluate the member based on NASD Rule 1014.  The information sought to satisfy the 12 standards of admission includes the following:

Standard 1.  Applicant overview information, including details of the proposed business change, verification of current business activities, new business lines and changes in supervisory structure.

Standard 2.  Information relating to any effect on the licenses and registrations of the applicant resulting from the proposed changes discussed in the CMA.

Standard 3.  The member’s compliance with securities laws, and just and equitable principles of trade.  Information reported in response to Standard 3 will include a discussion of, among other things, the applicant’s disciplinary history and applicable litigation.

Standard 4.  Contractual or business relationships of the applicant and any changes expected to result.

Standard 5.  The facilities of the applicant and any material change in the facilities expected to result.

Standard 6.  The communications and operational systems of the applicant, and any expected changes to those systems.

Standard 7.  Information regarding the applicant’s net capital requirement, and any impact on the net capital requirement that will result from the changes discussed in the CMA.

Standard 8.  Information regarding the applicant’s financial controls, including any change in the financial and operations principal, and the impact of the changes discussed in the CMA on the financial controls.

Standard 9.  The applicant’s written supervisory procedures (“WSPs”) and any changes to the WSPs that will result from the changes discussed in the CMA.

Standard 10.  The applicant’s supervisory structure, and any changes to the supervisory structure that will result from the changes discussed in the CMA.

Standard 11.  Information regarding the applicant’s books and records, including the impact of the changes discussed in the CMA on the books and records.

Standard 12.  The applicant’s continuing education program, including any changes in the program that may result from the changes discussed in the CMA.

Request For Comments

Comments on the Amendments are due by March 29, 2012.

SEC Staff Provides Guidance to Exempt Reporting Advisers on Reporting Special Purpose Entities in Form ADV

The staff of the SEC’s Division of Investment Management (the “Staff”) supplemented its “Frequently Asked Questions on Form ADV and IARD” (the “FAQ”) to include no-action relief under which an exempt reporting adviser (an “ERA”), i.e., an adviser relying on the venture capital fund adviser exemption under Section 203(l) of the Investment Advisers Act of 1940 (the “Advisers Act”) or the private fund adviser exemption under Section 203(m), may fulfill applicable reporting obligations under those exemptions for the general partner, managing member or similar special purpose entity (“SPE”) to a private fund over which the ERA has discretionary management authority by including the SPE in the ERA’s report on Form ADV.  The Staff’s relief is subject to the following conditions: (1) an SPE may not engage in activities that would cause the SPE to fall within the Advisers Act’s definition of  “investment adviser” other than hiring and firing the ERA; (2) the SPE may act as an SPE only for private funds or other pooled investment vehicles advised by the ERA or its “related persons” (as defined in Form ADV); and (3) the ERA’s report on Form ADV must include all the information regarding the SPE that would be included if the SPE filed a separate report on Form ADV.  The FAQ provides the following guidance about including an SPE’s information in the ERA’s report on Form ADV: (a) Schedules A and B should include an SPE’s executive officer and ownership information, identifying the SPE to which the officer and ownership information relates in the “Title or Status” column of Schedule A; and (b) responses to the questions in Form ADV should relate to and include all information concerning the ERA and each SPE being reported in the Form ADV.

FinCEN Issues Guidance Clarifying when Currency Transactions of Businesses with Common Ownership Should Be Aggregated for the Purposes of Currency Transaction Reports

On March 16, 2012, the Financial Crimes Enforcement Network (“FinCEN”) issued guidance (the “Guidance”) to clarify, for currency transaction reporting purposes, the aggregation of multiple transactions conducted by businesses with common ownership.  FinCEN’s regulations implementing the Bank Secrecy Act require that a financial institution file a currency transaction report (“CTR”) when it has knowledge that the same person has conducted multiple transactions that total more than $10,000 in currency in one business day or when it has knowledge that multiple transactions that total more than $10,000 in currency in one business day are on behalf of the same person.  If the financial institution is aware that a person conducted multiple transactions that total more than $10,000 in currency in one business day, it must file a CTR, completing two sections identifying the persons on whose behalf the transactions were conducted.  Regarding the determination of on whose behalf a transaction was conducted, the Guidance states that, separately-incorporated entities sharing a common owner are presumed to be independent persons.  However, that presumption is rebuttable, and if, based on information obtained in the ordinary course of business and using its knowledge of relevant facts and circumstances, the financial institution determines that the entities are not operating separately or independently of one another or their common owner, transactions conducted on their behalves should be aggregated.  A financial institution should use its determination of the separateness of entities in evaluating whether or not to aggregate future transactions of such entities.  If a financial institution determines that two entities are not independent of each other, and transactions are conducted on their behalves exceeding $10,000 in one business day, the financial institution should file a CTR listing each entity in separate sections indentifying the person(s) on whose behalf the transaction was conducted and listing the total cash deposit.

Clearing House Association Releases Draft Principles for Enhancing Banking Organization Corporate Governance

The Clearing House Association (the “Clearing House”), a banking association and payments company owned by the world’s largest banks, issued, through a subsidiary, an exposure draft (the “Exposure Draft”) setting out a series of corporate governance principles (the “Principles”) for enhancing banking organization corporate governance and thereby promoting a safe banking system.  The Clearing House noted that the Principles outlined in the Exposure Draft go beyond what is usually required by law and regulation.  The Clearing House stated that, among the proposed guidelines that go beyond legal and regulatory requirements in most jurisdictions are suggestions that:

(1)    independent directors constitute a substantial majority (not just a majority) of a  holding company’s Board;

(2)    “core” Board oversight duties and responsibilities be identified (including a focus at Board meetings, to the extent applicable, on risk management, capital planning, resolution plans and liquidity risk);

(3)    a holding company’s audit committee have at least one member who is a “financial expert;”

(4)    if the CEO and the Board Chairperson is the same individual, a lead independent director be appointed; and

(5)    the Board should seek to meet at least once a year with the banking organization’s principal regulator or regulators.

The Clearing House, which seeks comments on the Exposure Draft, pointed out that not all of the Principles will be appropriate for a particular banking organization and that, therefore, the Principles should be viewed as guiding principles rather than as “best practices.”  The Clearing House also stated that the Principles “will be updated periodically to reflect changes in the relevant rules, regulations, supervisory guidance and other source material,  as well as changes in industry or market practice and in the collective experience of [the banks that own the Clearing House].”

The Exposure Draft sets forth 16 Principles plus commentary on each Principle.  Topics covered include, among others:

(a)    basic responsibilities of the Board and management;

(b)    independence of Board members;

(c)    size of the Board;

(d)    Board oversight;

(e)    Board committees, including audit committees, nominating/corporate governance committees, compensation committees and risk management committees;

(f)    engaging advisors;

(g)    chairperson of the Board;

(h)    Board meetings, agendas for Board meetings and executive sessions;

(i)    minutes of Board meetings;

(j)    Board compensation;

(k)    meetings with regulators; and

(l)    director elections and shareholder rights.


The Financial Services Alert will monitor changes to the Exposure Draft and other significant developments regarding the corporate governance of banking organizations.