Financial Services Alert - April 9, 2013 April 09, 2013
In This Issue

Goodwin Procter Alert - SEC Clarifies Social Media Use and Reg FD Compliance

Goodwin Procter issued a Client Alert that discusses the SEC’s Report of Investigation with respect to Netflix, Inc. and its CEO Reed Hastings, and the Report’s implications for the use of social media to disseminate information to investors in compliance with Regulation Fair Disclosure (Reg FD).

Goodwin Procter Alert - Using the Web to Match Private Companies and Potential Investors: SEC No-Action Letters Open a Door, but Questions Remain

Goodwin Procter issued a Client Alert that analyzes two recent SEC no-action letters concerning whether website operators that seek to match early stage companies with accredited investors must register as broker-dealers.  Each website operator is an investment adviser that organizes special purpose investment funds via its website.  In each case, the SEC staff stated that it would not recommend enforcement action if the website operator did not register as a broker-dealer.

FDIC Releases Videos Designed to Provide Information to Bank Directors, Officers and Employees Regarding Responsibilities of Bank Directors and Risk Management Examination and Compliance Examination Processes

On April 3, 2013 the FDIC released six videos concerning the fiduciary role and responsibilities of bank directors and risk management examination and compliance examination processes.  The videos are available on the FDIC’s website as part of the FDIC’s “Directors Resource Center.”  The six videos, each of which is from five to eleven minutes in length, involve:


The FDIC said that it expects to issue, by the end of 2013, additional installments of videos that will cover a range of topics, including: interest rate risk, third party relationships, corporate governance, the Community Reinvestment Act, information technology, the Bank Secrecy Act, Fair Lending, appraisals and evaluations, troubled debt restructurings, the allowance for loan and lease losses, evaluation of municipal securities, and flood insurance.

FRB Adopts Final Rule Defining “Predominantly Engaged in Financial Activities” and “Significant” Nonbank Financial Company and Bank Holding Company under the Dodd-Frank Act

The FRB adopted a final rule that establishes the requirements for determining when a company is “predominantly engaged in financial activities.”  The final rule will be designated as 12 C.F.R. Part 242 – Regulation PP.  The requirements set forth in the final rule will be used by the Financial Stability Oversight Council (the “FSOC”) when it considers the potential designation of a nonbank financial company for consolidated supervision by the FRB upon the determination by the FSOC that such company could pose a threat to U.S. financial stability.  Please see the February 15, 2011 Financial Services Alert for coverage of the proposed rule regarding the designation of systemically important nonbank financial companies.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), a nonbank financial company can be designated by the FSOC for supervision by the FRB only if it is “predominantly engaged in financial activities.”  A company is considered to be predominantly engaged in financial activities if 85 percent or more of the company’s revenues or assets are related to activities that are defined as financial in nature under the BHC Act.  This calculation is based on the nonbank financial company’s revenues or financial assets as of the end of either of its two most recent fiscal years.  The Appendix to Part 242 sets forth the list of financial activities for the purposes of this calculation and Title I of the Dodd-Frank Act.

Nonbank financial companies that are supervised by the FRB are subject to heightened capital requirements and other more stringent prudential regulation.  Additionally, the FSOC may issue recommendations for primary financial regulatory agencies to apply new or heightened standards to a financial activity or practice conducted by companies that are predominantly engaged in financial activities.

The final rule also defines the terms “significant nonbank financial company” and “significant bank holding company.”  A significant nonbank financial company, however, is not necessarily systemically important.  Among the factors the FSOC must consider when determining whether to designate a nonbank financial company for consolidated supervision by the FRB is the extent and nature of the company’s transactions and relationships with other significant nonbank financial companies and significant bank holding companies.  If designated, such nonbank financial companies will be required to submit reports to the FRB, the FSOC, and the FDIC on the company’s credit exposure to other significant nonbank financial companies and significant bank holding companies as well as the credit exposure of such significant entities to the nonbank financial company.  Consistent with the proposed rule, a firm will be considered significant if it has $50 billion or more in total consolidated assets or has been designated by the FSOC as systemically important.

The final rule will become effective on May 6, 2013.

CFTC Exempts Swaps Between Certain Affiliates from Clearing

The CFTC issued a final rule exempting swaps between certain affiliates from the clearing requirement.  The exemption is available only if one counterparty to the swap directly or indirectly holds a majority ownership interest in the other or if a third party directly or indirectly owns a majority ownership interest in both counterparties.  In both cases, the entity holding the majority ownership interest in the other(s) must report its financial statements on a consolidated basis under either Generally Accepted Accounting Principles or International Financial Reporting Standards, with such financial statements including the owned counterparty or counterparties to the swap.  In addition, both parties must elect not to clear the swap, the terms of the swap must be documented in a written swap trading relationship document (or, if one of the swap counterparties is a swap dealer or major swap participant, it must satisfy the swap trading relationship documentation requirements established in CFTC Regulation 23.504), and the swap must be subject to a centralized risk management program that is reasonably designed to monitor and manage the risks associated with the swap.

In addition, the reporting counterparty of an inter-affiliate swap must provide certain information about the swap to a swap data repository, including confirmation that both affiliates are electing not to clear the swap and information about how each affiliate generally meets its financial obligations associated with entering into non-cleared swaps.  SEC filers party to the swap must also provide their SEC Central Index Key number and an acknowledgement that the appropriate committee of its board of directors has reviewed and approved the decision to enter into uncleared swaps.  Some of the information may be reported on an annual, rather than swap-by-swap, basis.

The rule also requires that each affiliate that enters into a swap for which clearing is required with an unaffiliated counterparty must clear that swap, comply with an exception to or exemption from the clearing requirement, or comply with certain foreign jurisdictions’ clearing requirements or exceptions thereto or exemptions therefrom.

The final rule does not include a proposed requirement mandating the posting of variation margin as a condition for electing the inter-affiliate exemption.

The rule becomes effective 60 days after its forthcoming publication in the Federal Register, but it includes an implementation provision stating that the clearing requirement shall not apply to a swap executed between eligible affiliated counterparties that elect not to clear the swap until the effective date of the rule.

CFTC Provides Time-Limited No-Action Relief for Commodity Pool Operators of Securitization Vehicles

The CFTC’s Division of Swap Dealer and Intermediary Oversight (the “Division”) has issued a no-action letter that provides an extension for the deadline for commodity pool operators (“CPOs”) of securitization vehicles to register with the CFTC.  The letter provides that the Division will not recommend enforcement action against the CPO of a securitization vehicle for failure to fully comply with Part 4 of the CFTC’s regulations—the part of the CFTC’s regulations that generally regulates CPOs as well as commodity trading advisors—with respect to that securitization vehicle until June 30, 2013.

The relief is contingent on several conditions.  For example, persons that wish to take advantage of the relief must initiate registration as a CPO by March 31, 2013.  They must also comply with all the provisions of Part 4 of the CFTC’s regulations, subject to certain exceptions, exclusions, and limitations based, in some cases, on the characteristics of the commodity pool.  Those availing themselves of the relief must also notify the Division via e-mail.

The letter indicates that it is intended to cover securitization vehicles that do not satisfy the conditions and criteria set forth in CFTC Staff Letter No. 12-14 or CFTC Staff Letter No. 12-45 (discussed in the October 16, 2012 and December 11, 2012 editions of the Financial Services Alert, respectively), which collectively provided that operators of securitization vehicles meeting certain enumerated criteria need not register as CPOs.  The latter letter gave CPOs of securitization vehicles that could not satisfy the requirements of either letter until March 31, 2013 to register; the newest CFTC letter extends that deadline subject to the terms and conditions described above.

SEC Staff Grants No-Action Relief for Blanket Shareholder Approval of Successor Advisory Agreements Resulting from Restructuring by Fund Advisers’ Ultimate Parent

The staff of the SEC’s Division of Investment Management (the “Staff”) granted no-action relief permitting the registered investment companies in a fund complex (the “Funds”) to obtain shareholder approval of a series of new investment advisory and sub-advisory agreements (the “New Agreements”) with the Funds’ investment advisers and affiliated subadvisers (collectively, the “Advisers”) at a single meeting of shareholders prior to the commencement of a series of related divestiture transactions by the Advisers’ ultimate parent (each a “Transaction”) that could cause successive terminations of then current investment advisory and sub-advisory agreements for the Funds to the extent that the divestiture transactions result in one or more “assignments,” as such term is defined in the Investment Company Act of 1940, as amended (the “1940 Act”), of those agreements.

Advisory Agreement Termination in the Event of Assignment

Consistent with Section 15(a)(4) of the 1940 Act, the Funds’ advisory agreements provide that they terminate automatically in the event of an “assignment,” which is defined by Section 2(a)(4) of the 1940 Act to include “any direct or indirect transfer… of a controlling block of the assignor’s outstanding voting securities by a security holder of the assignor.”  Though “controlling block” is not defined by the 1940 Act or the regulations thereunder, Section 2(a)(9) of the 1940 Act provides a rebuttable presumption of “control” when a person owns 25% or more of the voting securities of a company.  Thus, a direct or indirect transfer of 25% of the voting securities of an Adviser, e.g., through the transfer of voting securities of a direct or indirect parent of the Adviser to a third party, may be deemed a transfer of a “controlling block” of the Adviser’s outstanding voting securities, and as such, an “assignment” terminating the Adviser’s advisory agreements with the Funds.  Section 15(a) of the 1940 Act generally provides that no person may serve as an investment adviser to a registered investment company except pursuant to a written contract that, among other things, has been approved by the vote of a majority of the company’s outstanding voting securities.  Accordingly, to the extent that one or more Transactions are deemed to be an “assignment,” multiple shareholder approvals of successor advisory agreements could be required.

Restructuring by Advisers’ Ultimate Parent

Each Adviser is an indirect wholly-owned subsidiary of the U.S. holding company subsidiary (the “US Parent”) of a publicly-held non-U.S. global financial services company (the “Parent”).  In connection with the receipt of government-backed financial assistance during the financial crisis of 2008-09, the Parent agreed to a restructuring plan (the “Plan”), which includes, among other things, a requirement that it divest itself of its U.S.-based insurance operations, including its U.S.-based investment management business by year-end 2016 (the “Divestiture”).  The Parent has announced that it intends to accomplish the Divestiture in stages through the Transactions, which will include an initial public offering of the common stock of the US Parent in 2013 (the “IPO”), and a series of one or more additional public offerings of ING US, through which the Parent will divest its entire ownership interest in the US Parent over time.  Recognizing that the Transactions could result in one or more terminations of then current advisory agreements, because the Transactions could cause the “assignment” of those contracts within the meaning of the 1940 Act, the Advisers propose to seek approval of each New Agreement from the Funds’ board, but seek only a single blanket approval from Fund shareholders of all New Agreements that may result from the Transactions.  Additionally, until the Plan is complete, the Advisers undertake that the prospectuses for each open-end Fund and the shareholder reports for each closed-end Fund will disclose the relevant facts associated with the Plan and disclose that the Fund’s shareholders have approved the New Agreements.

In support of their request for no-action relief, the Advisers stated that there are reasonable arguments that the Plan may not result in any “assignment,” and therefore no New Agreements may be necessary.  In this regard, the Advisers noted that, both before and after the implementation of the Plan, the Advisers will be held, directly or indirectly, by a broadly dispersed group of public shareholders.  The Advisers represented that this is consistent with the relief provided in Dean Witter, Discover & Co.; Morgan Stanley Group Inc., SEC No-Action Letter (publ. avail. April 18, 1997), in which the Staff stated that “[t]he transfer of or issuance of a block of stock in connection with a merger involving two issuers generally would not by itself cause an assignment of the advisory contracts of their advisory subsidiaries, for purposes of the [1940 Act] or the Advisers Act, unless (1) a person who had control of either issuer prior to the transaction does not have control of the surviving entity after the transaction, (2) a person who did not have control of either issuer prior to the transaction gains control of the surviving entity, or (3) the transaction results in an advisory subsidiary being merged out of existence.”

Representations Regarding the Divestiture

The Staff based its decision not to recommend enforcement action with respect to the Adviser’s proposal regarding blanket shareholder approval of the New Agreements in particular on the Advisers’ representations that (i) the Parent is required under the Plan to complete the Divestiture prior to year-end 2016 and that the multiple offerings necessary to complete the Divestiture will all be related and, in essence, part of a single plan for Parent to divest its stake in the US Parent, and (ii) following the Divestiture, shares of the US Parent will be broadly distributed, without the acquisition of more than 25% of the US Parent by a single “person,” as such term is defined in Section 2(a)(28) of the 1940 Act.

ING Investments, LLC, Directed Services LLC and ING Investment Management Co. LLC, SEC No-Action Letter (publ. avail. March 27, 2013).

Form 13 Filers Must Use New Online Form Beginning April 29

The SEC announced that, beginning April 29, 2013, filers must file their Form 13F using the online form on the EDGAR Filing Website and construct their Information Table according to the EDGAR XML Technical Specification.  Filings made after 5:30 p.m. on Friday April 26, 2013 using the current format (text based ASCII) will be suspended.  Filers will be able to access the new Form 13F application, which will not be available for viewing or testing prior to deployment, by selecting the “File Form 13F” link from the menu of Online Forms on the EDGAR Filing website.  Form 13F and its instructions remain unchanged.