Financial Services Alert - July 16, 2013 July 16, 2013
In This Issue

Federal Banking Agencies Issue Notice of Proposed Rulemaking Setting Supplementary Leverage Ratio Standards for Largest U.S. Banking Organizations

On July 9, 2013, the FRB, OCC and FDIC (the “Agencies”) jointly issued a notice of proposed rulemaking (the “NPR”) that would increase the supplementary leverage ratio for certain very large, interconnected U.S. banking organizations.  The supplementary leverage ratio is an additional leverage ratio that organizations subject to the advanced approach of the recently issued final capital rules must maintain. The supplementary leverage ratio is based on a broader measure of credit exposures (including off-balance sheet exposures) than the leverage ratio that applies to all banking organizations. Specifically, the NPR would increase the supplementary leverage ratio requirement for any top-tier U.S. bank holding company with more than $700 billion in consolidated total assets (as reported by the bank holding company in its then most recent Consolidated Financial Statement for Bank Holding Companies on Form FR Y-9C) or $10 trillion in assets under custody (as reported by the bank holding company in its then most recent Banking Organization Systemic Risk Report on Form FR Y-15).  Such bank holding companies would be required to maintain a tier 1 capital leverage buffer of at least 2% above the minimum supplementary leverage ratio requirement of 3%, for a total of 5%. Additionally, the insured depository institution subsidiaries of such bank holding companies would be required to maintain a supplementary leverage ratio of at least 6% to be considered “well-capitalized” for prompt corrective action purposes.  Failure to maintain the required supplementary leverage ratio would result in limitations on distributions and discretionary bonus payments. It is important to be aware that applying a higher leverage ratio requirement at the insured depository institution level than at the bank holding company level appears to provide an incentive to covered banking organizations to add leverage outside of their respective insured depository institution subsidiaries.

The Agencies state in the NPR that the supplementary leverage ratio required by the NPR would, if in effect currently, apply only to the eight largest, most systemically significant U.S. bank holding companies: JP Morgan Chase & Co., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group, Inc., Morgan Stanley, The Bank of New York Mellon Corporation, and State Street Corporation. These eight companies are those U.S. organizations identified as global systemically important banking organizations (G-SIBs) in November 2012 by the Financial Stability Board.

In the NPR, the Agencies state that, from a safety-and-soundness perspective, leverage capital requirements and risk-based capital requirements complement each other by offsetting the weaknesses of the other set of capital requirements and that “the two sets of [capital] requirements working together are more effective than either would be in isolation.” The Agencies also concede that the leverage ratio requirements of the NPR would add to the potential complexity of the capital regulations as a whole and would increase the burden on banking organizations of complying with capital requirements. In light of those considerations, the Agencies state they are “proposing [in the NPR] to apply enhanced leverage standards only to those U.S. banking organizations that pose the greatest potential risk to financial stability…”

Comments on the NPR are due 60 days after its publication in the Federal Register, and the Agencies said that the requirements imposed by the NPR would take effect beginning on January 1, 2018.

SEC Votes to Eliminate Ban on General Solicitation in Private Offerings, Adopt Bad Actor Disqualification Condition for Rule 506 Offerings, and Propose Additional Reporting and Disclosure Requirements for Private Offerings

At its meeting on July 10, 2013, the SEC took action on the following three matters related to private offering exemptions under the Securities Act of 1933 (the “Securities Act”).

Elimination of Prohibition on General Solicitation in Private Offerings

The SEC adopted final rule amendments that eliminate the current prohibition against general solicitation in certain private offerings and sales relying on the safe harbor exemptions from registration pursuant to the Securities Act provided by Rule 506 and Rule 144A.  The final amendments add to Rule 506 new paragraph (c), which permits the use of general solicitation in connection with the offer and sale of securities pursuant to the Rule, provided that (i) all purchasers of securities are “accredited investors,” (ii) the issuer takes “reasonable steps” to verify that purchasers are accredited investors, and (iii) the offering otherwise complies with other applicable provisions of Regulation D, including Rule 501 and Rules 502(a) and 502(d).  (Under Rule 501, the definition of accredited investor includes a person whom the issuer reasonably believes comes within any of the enumerated categories of accredited investor at the time of the sale of the securities to that person.)  The final amendments permit securities permit Rule 144A securities to be offered to persons other than “qualified institutional buyers” (“QIBs”), including by means of general solicitation, provided that the securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe are QIBs.

The amendments leave unchanged existing paragraph (b) of Rule 506 that permits an issuer to offer and sell securities to an unlimited number of accredited investors, and to no more than 35 non-accredited investors, subject to a number of conditions, among which is a prohibition on offering or selling the securities in question through any form of general solicitation.

The final amendments are effective 60 days after their publication in the Federal Register.  For an offering that was already in progress on the effective date, any general solicitation that occurs after the effective date will not affect the exempt status of offers and sales in reliance on either exemption that occurred prior to the effective date.

Goodwin Procter has issued a client alert that addresses these rule amendments from the perspective of private fund managers.

Rule 506 Ineligibility for Offerings Involving Felons and Other “Bad Actors” 

The SEC adopted final amendments to rules and forms under the Securities Act that implement Section 926 of the Dodd-Frank Act, which directs the SEC to adopt disqualification provisions for Rule 506 offerings that are substantially similar to the disqualification provisions of Regulation A under the Securities Act and incorporate specific disqualifying events, including certain state regulatory orders and bars.  Under the final amendments, an issuer may not rely on Rule 506 if the issuer or any specified related persons is subject to a “disqualifying event” after the final amendments are effective.  The related persons of an issuer that is a pooled investment fund include the fund’s investment manager and certain of the investment manager’s personnel.  Disqualifying events include certain criminal convictions, injunctions regarding securities-related activities, and certain disciplinary action taken by financial industry regulators and SROs.  The SEC fact sheet describing the final amendments provides additional high-level detail.

The effective date of the final amendments will be 60 days after their publication in the Federal Register.  Disqualification under the final amendments will apply only for disqualifying events that occur after the effective date.  However, an issuer must disclose to investors any disqualifying events that occurred before the effective date.

Proposed Additional Reporting and Disclosure Requirements for Private Offerings

In conjunction with permitting general solicitation in a Regulation D offering via Rule 506(c), the SEC proposed amendments to Regulation D, Form D, and Rule 156 under the Securities Act.  The SEC proposal  would (1) require a Form D filing before any general solicitation, (2) require a closing Form D amendment following the conclusion of a Rule 506 offering, (3) add Rule 506 disqualification provisions for failure to file Form D, (4) require a range of additional information in Form D for Rule 506 offerings, (5) require certain legends in general solicitation materials, including specific legends for private fund performance, (6) institute a temporary 2-year requirement that general solicitation materials be submitted to the SEC on a non-public basis, (7) add Rule 506 disqualification provisions related to failure to comply with the proposed disclosure and temporary filing requirement for general solicitation materials, and (8) apply the anti-fraud guidance of Securities Act Rule 156 regarding investment company sales literature to private funds.

The proposed amendments are part of a broader effort by the SEC to analyze the market impact of, and market practices that develop as result of, permitting general solicitation in connection with private offerings under new Rule 506(c).  This initiative will be a coordinated effort on the part of various branches of the SEC, including the Office of Compliance Inspections and Examinations and the Division of Enforcement.

Comments on the proposed amendments are due no later than 60 days after the proposing release is published in the Federal Register.

*   *   *

A more detailed discussion of this rulemaking activity will be forthcoming.

IRS Notice 2013-43 – IRS Extends Timelines for FATCA Withholding and Implementation

On July 12, 2013, the Internal Revenue Service (“IRS”) issued Notice 2103-43 (the “Notice”) providing for the delay in the implementation of withholding and other requirements under the Foreign Account Tax Compliance Act (“FATCA”).  Although FATCA as passed by Congress formally went into effect on January 1, 2013, the IRS has previously deferred various effective dates (see IRS Announcement 2012-42 discussed in the October 30, 2012 Financial Services Alert).  More recently, on January 17, 2013, the Treasury Department and the IRS issued final regulations (the “Regulations”) providing for the phased implementation of the FATCA requirements commencing on January 1, 2014 and continuing through January 1, 2017.  The Notice further delays these effective dates.  Amendments also will be made to the Regulations to adopt these changes, but in the interim the guidance in the Notice may be relied on.



FATCA imposes a 30% withholding tax on “withholdable payments” made to “foreign financial institutions” (referred to in the Regulations as “FFIs”) and to “non-financial foreign entities” (referred to in the Regulations as “NFFEs”), unless certain certification, information reporting and other specified requirements are satisfied.  The term “withholdable payment” means (i) any payment of U.S. source interest, dividends, rents and other types of fixed or determinable annual or periodical income (to the extent treated as a withholdable payment in the Regulations, “U.S. FDAP”), and (ii) gross proceeds from the sale or other disposition of any property of a type that can produce interest or dividends payments that would be U.S. source FDAP income (“Gross Proceeds”).  Under the current Regulations, certain obligations that are outstanding on January 1, 2014 are “grandfathered,” and payments (including Gross Proceeds) made on such obligations are exempt from withholding.

Under FATCA, an FFI is broadly defined to include not only banks and similar financial institutions, but also investment entities, such as hedge funds, private equity funds, venture capital funds and other investment funds.  In considering the FATCA regime, it is helpful to keep in mind that the principal purpose of FATCA is to ensure compliance with federal income tax laws by “specified U.S. persons” (generally, any U.S. individual or entity other than a publicly traded corporation or its affiliates, governmental entities and tax-exempt organizations and retirement plans, and certain categories of entities such as banks, real estate investment trusts and mutual funds).  Thus, FACTA withholding applies to any withholdable payment to (i) an FFI, unless (A) the FFI undertakes certain diligence, reporting and withholding obligations with respect to its U.S. accounts - that is, the FFI agrees to become a “participating FFI,” (B) the FFI qualifies as a deemed-compliant FFI, or (C) the withholdable payment can be reliably associated with an exempt beneficial owner, all as defined under the Regulations, and (ii) an NFFE if the beneficial owner of the payment is such entity or another NFFE, unless the beneficial owner either certifies it does not have any substantial U.S. owners or furnishes identifying information regarding each substantial U.S. owner or the NFEE qualifies as an “excepted NFFE.” 

The Portal

As noted above, under the FATCA regime, certain FFIs are exempt from withholding.  Exemptions are generally available, for example, for (i) an FFI that registers and enters into an agreement with the IRS pursuant to which it undertakes certain diligence, reporting and withholding obligations (a “Participating FFI”), or (ii) an FFI that registers with the IRS and is treated as a “registered deemed-compliant” FFI under applicable Regulations (a “Registered Deemed-Compliant FFI”).  In the case of these FFIs, a critical aspect of the FATCA regime is the web-based FATCA registration portal (the “Portal”) through which they will register with the IRS and agree to act in accordance with their applicable FATCA obligations.  An FFI that has registered through the Portal will be assigned a Global Intermediary Identification Number (a “GIIN”), and the IRS will electronically post the list of FFIs registered through the Portal and their GIINs.  To establish its exempt status with a withholding agent, a Participating FFI or a Registered Deemed-Compliant FFI will be required to provide its GIIN, and the withholding agent will be required to verify it.  In general, verification entails checking the FFI’s GIIN against the IRS’ published list of registered FFIs.  Under the Regulations, the Portal was to be accessible for registration by July 15, 2013, and GIINs were to be assigned beginning no later than October 15, 2013.  The IRS was to publish the first list of Participating FFIs, Registered Deemed-Compliant FFIs and Reporting Model 1 FFIs (discussed below) by December 2, 2013 and an FFI was required to be registered by October 25, 2013 in order to be ensured inclusion on this first list.


In addition, as part of its implementation of FATCA, the IRS has entered into intergovernmental agreements (“IGAs”) with several countries and is actively negotiating IGAs with many more countries.  There are two types of IGAs – Model 1 (both reciprocal and nonreciprocal) and Model 2.  Under the Model 1 IGA, an FFI resident in, or a branch of an FFI located in, the partner jurisdiction will be required to provide specified information on its U.S. accounts pursuant to requirements established by the partner jurisdiction, which, in turn, will provide such information to the IRS (a “Reporting Model 1 FFI”).  The Model 1 IGAs also will contain a list of FFIs that are exempt from such reporting requirements (a “Nonreporting Model 1 FFI”).  In addition, under the reciprocal version of the Model 1 IGA, the U.S. would obtain and provide similar information to the partner jurisdiction on accounts held by certain residents of the partner jurisdiction in certain U.S. financial institutions.  Although a Reporting Model 1 FFI will not be required to enter into an agreement and provide information on its U.S. accounts directly to the IRS, the Regulations provide that, subject to certain transition rules, a Reporting Model 1 FFI will be required to register with the IRS and obtain a GIIN.

Under a Model 2 IGA, an FFI resident in, or a branch of an FFI located in, the partner jurisdiction will be required to provide specified information on its U.S. accounts directly to the IRS in a manner consistent with the Regulations, as supplemented by government-to-government exchange of information on request.

It is expected that the IGAs will become a dominant part of the implementation of the FATCA regime.  The model IGAs outline timeframes for FFIs in a partner jurisdiction to complete due diligence on their U.S. accounts, and these timelines along with other provisions in the IGAs interact with the Regulations in various ways.  In general, the IGAs permit an FFI to use a definition in the Regulations and rely on due diligence procedures in the Regulations, in lieu of relying on corresponding provisions of an applicable IGA, and also contain provisions that coordinate the time for obtaining and exchanging information with the time by which Participating FFIs must report similar information to the IRS under the Regulations.  In addition, the model IGAs and all of the IGAs that have been entered into contain a “most favored nation” (“MFN”) clause which entitles an FFI in a partner jurisdiction to the benefit of more favorable terms, including the due diligence rules, agreed to under any other comparable IGA.

In light of numerous comments and practical concerns regarding the phased implementation of FATCA and uncertainties about whether a particular IGA will be in effect so as to enable an FFI in a partner jurisdiction to carry out its due diligence and other obligations, as discussed below, the Notice provides for a 6-month extension of various timelines for implementation of FATCA and conforming changes to related provisions in the Regulations.  As noted above, it is also expected that amendments will be made to the Regulations to formally adopt these changes.

Changes Made by the Notice

Withholding and Grandfathered Obligations

The Notice provides that withholding will generally be required to commence on withholdable payments made after June 30, 2014 (instead of December 31, 2013).  Similarly, the definition of grandfathered obligations is expanded to cover obligations that are outstanding on July 1, 2014 (instead of January 1, 2014).  None of the other dates on which withholding is required to commence (such as withholding on Gross Proceeds, which is scheduled to commence on January 1, 2017), however, is affected by the Notice.

New Account Opening Procedures

The Regulations generally provide less stringent documentation rules with respect to preexisting obligations as opposed to new accounts.  Preexisting obligations are generally defined under the Regulations as accounts outstanding on December 31, 2013.  The Notice provides that the Regulations will be modified to extend for 6 months the treatment of an obligation as a preexisting obligation (and hence provide a 6-month delay in the timelines for implementing new account opening procedures), with particular definitional rules applicable to different categories of FFIs.

Completion of Due Diligence Procedures on Pre-Existing Obligations

Preexisting Obligations of Prima Facie FFIs

The Notice provides that withholding on withholdable payments made to a prima facie FFI with respect to preexisting obligations will apply to payments made after December 31, 2014, instead of June 30, 2014.  Similarly, with respect to a preexisting obligation, a participating FFI generally will be required to determine whether a prima facie FFI is a Participating FFI, deemed-compliant FFI or a nonparticipating FFI within six months of the effective date of its FFI Agreement (that is, by December 31, 2014 for any Participating FFI that enters into an FFI Agreement on or before June 30, 2014).  A prima facie FFI is generally an entity which is shown on a withholding agent’s database to be a “qualified intermediary” or a “nonqualified intermediary” (as those terms are defined for purposes of Chapter 3 withholding under Code sections 1441and 1442), or to be a foreign entity that is associated with certain industry codes that are deemed to be associated with financial institution status.

Other Preexisting Entity Obligations

Withholding agents, other than Participating FFIs, will be required to document payees, other than prima facie FFIs, by June 30, 2016, instead of December 31, 2015 as currently provided under the Regulations.  Accordingly, beginning on July 1, 2016 (instead of January 1, 2016) any undocumented entity that is treated as a foreign entity and is not a prima facie FFI must be treated as a nonparticipating FFI until the withholding agent obtains sufficient documentation to establish a different status for FATCA purposes of the payee.  Similarly, a Participating FFI generally will be required to perform the requisite identification procedures to determine whether an entity (other than a prima facie FFI) is itself a Participating FFI by the later of June 30, 2016 or the date that is two years after the effective date of its FFI Agreement, and will not be required to apply certain presumption rules as to the accounts of such payees until such time.

Preexisting Individual Accounts of Participating FFIs

In general, the Notice extends the dates in the Regulations for obtaining information about preexisting individual accounts, or otherwise treating such accounts as held by “recalcitrant” account holders.  The date by which Participating FFIs must perform the requisite identification procedures and obtain the appropriate documentation for “high value” accounts was extended by 6-months to June 30, 2015, and to June 30, 2016 if the account is other than a “high value” account.  The determination of whether an account is a high value account (i.e., the account had a balance or value exceeding $1,000,000 as of a specified date) is now to be measured initially as of June 30, 2014, and if that value is less than $1,000,000, the account will not be subject to enhanced review unless the balance or value exceeds $1,000,000 at the end of 2015 or any subsequent calendar year.  Thus, in effect, the obligation to determine whether enhanced review is required is deferred by one year.

Timeline for Registration and Implementation of the Portal

The Notice states that the Portal is expected to be accessible by August 19, 2013 (instead of July 15, 2013, the date in the current Regulations).  No information provided on the website will be considered final, however, until January 1, 2014, so as to allow FFIs to familiarize themselves with the use of the Portal and the registration process.  Consistent with this 6-month extension, the IRS will not issue any GIINs in 2013.  Instead, it will publish its first list of FFIs by June 2, 2014, and FFIs will be required to register by April 25, 2014 in order to be included on this first list.  As under the current Regulations, however, verification of a GIIN will not be required with respect to payments made prior to January 1, 2015 to a Reporting Model 1 FFI – such an FFI may be treated as exempt with respect to such payments if it provides other documentation required to establish its status as a Reporting Model 1 FFI regardless of whether it provides a GIIN.

Effect of IGAs

In many cases where an IGA has been signed, it is anticipated that implementing legislation by the partner jurisdiction will not have been enacted by the date on which FATCA withholding and other obligations will take effect (even taking into account the delayed effective dates in the Notice).  As a result, the Notice provides that a jurisdiction with which Treasury has signed an IGA nevertheless will be treated as having an IGA in effect if it is listed on the Treasury website:  An FFI resident (or a branch of an FFI) in a jurisdiction that is treated as having an IGA in effect will be permitted to register on the Portal as a Registered Deemed-Compliant FFI (if it is a Reporting Model 1 FFI) or a Participating FFI (if it is a Reporting Model 2 FFI).  A jurisdiction may be removed from the list, however, if it fails to take the steps necessary to bring the IGA into force within a reasonable period of time, in which case an FFI in that jurisdiction would no longer be entitled to the treatment afforded by that IGA.

Other (Due Date for First Report by a Participant FFI, Withholding Certificates, Foreign Targeted Obligations)

The Notice states that Treasury and the IRS intend to modify the Regulations to provide that a Participating FFI will be required to file information reports regarding its U.S. account holders no later than March 31, 2015 for the 2014 year only (and not 2013 and 2014 as currently required).  For FFIs in partner jurisdictions, this change also will apply through operation of the provision that allows the FFI to rely on provisions in the Regulations or through the MFN clause.

Withholding certificates and documentary evidence provided by a foreign person for Chapter 3 withholding purposes generally expire at the end of the third calendar year following the year in which they were provided.   In light of the delay in the effective dates (and hence the time when new withholding certificates and/or documentary evidence may need to be obtained for FATCA purposes), the Notice provides that withholding certificates and documentary evidence, as well as qualified intermediary, withholding partnership and withholding trust agreements, that otherwise would expire on December 31, 2013, will expire instead on June 30, 2014.  In addition, the Notice extends from January 1, 2014 until July 1, 2014, the transition rule in Notice 2012-20 that permits a withholding agent to rely on certain prior rules regarding documentation of the foreign status of a payee for purposes of the portfolio interest exemption.

The authors of this Article are Collette Goodman and Karen Turk of Goodwin Procter’s Tax Practice Area.

CFTC Approves Final Cross-Border Guidance, Reaches Understanding with European Regulators, and Provides Related No-Action Relief

The CFTC approved final guidance on the cross-border application of the Commodity Exchange Act and CFTC regulations.  It also issued a related exemptive order, announced a “Path Forward” with European regulators, and issued related no-action relief.

Cross-border guidance

Because the full text of the final cross-border guidance did not become publicly available until shortly before the Financial Services Alert’s deadline, this article provides a brief description of the guidance based on a fact sheet for the final guidance published on the CFTC website and the discussion of the final guidance during the CFTC meeting at which it was approved.  The next issue of the Financial Services Alert will provide a more detailed description of the guidance.

The final guidance provides a definition of “U.S. person” that includes natural persons that are U.S. residents as well as corporations, business entities, and funds that are organized in the United States or have their principal place of business in the United States.  It also includes collective investment vehicles, such as hedge funds, that have their principal place of business in the United States or are majority-owned by U.S. persons, directly or indirectly.

The final guidance maintains the proposed division of Dodd-Frank Act requirements into two main categories: (1) entity-level requirements (such as capital adequacy, chief compliance officer, and swap data repository reporting) and (2) transaction-level requirements (such as clearing and margin requirements, real-time public reporting requirements, and external business conduct standards).   Registered swap dealers and major swap participants that are not U.S. persons will generally be required to comply in full with all entity-level requirements, although under certain conditions they will be allowed to use “substituted compliance” to satisfy the relevant CFTC requirements by following foreign regulations determined by the CFTC to be equivalent to those of the CFTC.  Transaction-level requirements generally apply to swaps between non-U.S. persons that are registered swap dealers or major swap participants and U.S. persons (and guaranteed affiliates of U.S. persons), again subject in certain cases to substituted compliance, but do not generally apply to swaps with non-U.S. persons.  Certain Commodity Exchange Act provisions and CFTC regulations, such as those pertaining to clearing, record-keeping, and certain reporting requirements, apply to persons or counterparties other than swap dealers and major swap participants, but generally only apply to transactions involving a U.S. person.

Exemptive order

The CFTC also approved a cross-border phase in exemptive order intended to provide time for market participants “to facilitate an orderly transition to the Dodd-Frank regulatory regime.” Under the exemptive order, market participants may continue to apply the definition of the term “U.S. person” included in a CFTC order published in the Federal Register in January 2013, until 75 days after the publication of the final cross-border guidance in the Federal Register.  The order also provides that, during the same time period, a non-U.S. person does not need to include any swaps where the counterparty is a non-U.S. person or a foreign branch of a U.S. person that is registered as a swap dealer for purposes of the swap dealer de minimis calculations and major swap participant calculations.  In addition, the order provides for time-limited no-action relief from certain entity-level and transaction-level requirements for certain entities in certain non-U.S. jurisdictions.

Path Forward

In a related action, European Commissioner Michel Barnier and CFTC Chairman Gary Gensler announced a “Path Forward” on how to approach cross-border swaps.  The document explains that, due to cooperation between European and CFTC officials, “in many places certain final rules are already essentially identical” between the two jurisdictions.  The Path Forward calls for both sides to continue to work together to continue harmonizing their rules, to resolve remaining issues, and to periodically assess progress.

The Path Forward discusses several different rule-making areas and states how each will be addressed in a cross-border context.  For example, the CFTC will issue no-action relief for certain transaction-based requirements pertaining to bilateral uncleared swaps where the market participants comply with EU regulations, and the European Commission is conducting an equivalence assessment that will allow market participants the choice to comply either with EU regulations or with CFTC rules in areas found to be equivalent.  For cleared swaps, a “stricter rule applies” approach will be used where exemptions from mandatory clearing apply in one jurisdiction but not the other, thereby preventing loopholes and regulatory arbitrage.

No-action relief

The CFTC issued a series of four no-action letters related to cross-border regulation.  In the first two letters, the CFTC staff issued time-limited no-action relief to LCH.Clearnet SA and Eurex Clearing AG, each of which is a European clearinghouse that is in the process of registering with the CFTC as a derivatives clearing organization (“DCO”).  The relief states that the Division of Clearing and Risk will not recommend taking an enforcement action against either of the clearinghouses for failure to register as DCOs, or against their U.S. clearing members for failure to clear certain swaps through a registered or exempt DCO, until the earlier of December 31, 2013, or the date on which the relevant clearinghouse becomes registered as a DCO, subject to certain conditions.  The third letter provides that the CFTC’s Division of Swap Dealer and Intermediary Oversight will not recommend taking an enforcement action against a swap dealer or major swap participant for failure to comply with certain CFTC regulations (referred to in the letter as “CFTC Risk Mitigation Rules”) if it complies instead with comparable European regulations, which the letter explains are “essentially identical” to those of the CFTC.  The letter conditions the relief on the swap dealer or major swap participant fully complying with certain CFTC regulations not included within the scope of the CFTC Risk Mitigation Rules.  Finally, the fourth letter amends a series of previous no-action letters to allow foreign boards of trades (“FBOTs”) to permit identified members or other participants located in the United States to enter swap contracts directly into the FBOT’s trade matching system, subject to certain conditions.

FSOC Designates Two Nonbank Financial Companies as Systemically Important in FSOC’s First Use of This Authority Under Dodd-Frank

On July 9, 2013 the Financial Stability Oversight Council (the “FSOC”) used, for the first time, its authority under Title I of the Dodd-Frank Act to designate one or more nonbank financial companies, that the FSOC determines pose a potential threat to U.S. financial stability, as subject to consolidated supervision and enhanced prudential standards.  The two nonbank financial companies designated by the FSOC on July 9, 2013 are American International Group, Inc. and General Electric Capital Corporation, Inc. (the “Designated NFCs”).

As a result of the FSOC’s designation, the Designated NFCs will be subject to oversight by the FRB.  In arriving at their final decision to designate the Designated NFCs, the FSOC concluded that the two Designated NFCs were “systemically important” and that material financial stress at either of the Designated NFCs could pose a threat to U.S. financial stability.  In prior actions under separate authority, the FSOC has designated certain large banking organizations and financial-market utility firms as “systemically important.”

Treasury Secretary Jacob L. Lew, Chairperson of the FSOC, stated that the FSOC “will continue to review additional companies in the designation process, to address remaining threats to financial stability.”

FinCEN Grants Exception to CTR Filing Requirements in Connection with Certain Armored Car Service Transactions

The Financial Crimes Enforcement Network (“FinCEN”) issued an administrative ruling on July 12, 2013, granting an exception (the “Exception”) from reporting and data collection requirements in certain circumstances when a financial institution uses armored car services on behalf of its customers.  The Exception was issued in response to concerns about the reporting requirements under FinCEN ruling FIN-2009-R002.  FIN-2009-R002 provided that financial institutions are subject to the same Currency Transaction Report (“CTR”) filing requirements for transactions involving the use of armored car services on behalf of a customer as they are for transactions involving any other third-party service provider.  Financial institutions maintained that complying with FIN-2009-R002 is logistically challenging, because of the difficulties in differentiating transactions conducted by an armored car service on behalf of a customer from those performed on behalf of the financial institution and in identifying which transactions with an armored car service are covered within the 15-day CTR filing deadline.  In addition, financial institutions noted that, because of security concerns, it is often difficult to collect the required personal information from the armored car service employees to be included in the CTR.

In an attempt to respond to these practical concerns, while still preserving the interests of law enforcement, FinCEN granted the Exception regarding the completion of CTRs for certain armored car service transactions.  The Exception only applies if the armored car service employees conduct transactions that debit or credit the account of a financial institution’s customer pursuant to instructions from the customer or a third party.  FinCEN stressed that the Exception does not affect the obligations of financial institutions covered under the Bank Secrecy Act (“BSA”) from filing suspicious activity reports in regards to any transaction that the financial institution knows or suspects is intended to circumvent a requirement under the BSA or any other federal reporting requirement, or which has no lawful or apparent business purpose.  Financial institutions prepared to submit CTRs in accordance with this ruling may take advantage of the Exception immediately, whereas those financial institutions that are still modifying their systems to comply with the CTR filing requirements may avail themselves of the Exception and delay compliance to a date no later than September 30, 2013.