Financial Services Alert - August 13, 2013 August 13, 2013
In This Issue

SEC Adopts Final Amendments to Financial Responsibility Rules for Broker-Dealers

On July 30, 2013, the SEC adopted final amendments (the “Final Amendments”) to the financial responsibility rules for broker-dealers (SEC Release No. 34-70072) (the “Release”).  The Final Amendments make changes to the net capital, customer protection, books and records, and notification rules for broker-dealers.  The SEC first proposed the rule changes in March 2007 and re-opened the public comment period on May 3, 2012.  The Final Amendments will be effective 60 days after publication in the Federal Register (about the week of October 14) (the “Effective Date”).  This article summarizes the principal elements of the Final Amendments.

Rule 15c3-1 – Net Capital Rule

Rule 15c3-1 under the Exchange Act (the “Net Capital Rule”) requires a broker-dealer to maintain, at all times, a minimum amount of net capital depending on the nature of its business.  The capital standard in the rule is a net liquid assets test, which imposes standardized deductions (or “haircuts”) on securities, with less-liquid securities subject to deeper haircuts.  The Rule also does not allow certain items to be included in net capital and requires certain other items to be included as liabilities.  Amendments to the Net Capital Rule include the following:

  • A broker-dealer, in calculating net capital, will be required to take into account any liabilities that are assumed by a third party if the broker-dealer cannot demonstrate that the third party has the resources – independent of the broker-dealer’s income and assets – to pay the liabilities. 
  • A broker-dealer will be required to treat as a liability any capital that is contributed under an agreement giving the investor the option to withdraw it, and any capital contribution that is intended to be withdrawn within one year of its contribution.  The rule as amended provides that capital withdrawn within one year is deemed to have been intended to be withdrawn within a year unless the broker-dealer receives permission for the withdrawal in writing from its designated examining authority (“DEA”).
  • A broker-dealer will be required to deduct from net capital the amount specified by its DEA with respect to the requirement to maintain fidelity bond coverage.  FINRA and other self-regulatory organizations (“SROs”) specify maximum permissible deductible amounts for fidelity bond coverage.  Any amounts over the maximum permissible will be deducted from net capital.
  • The Net Capital Rule as amended provides that the broker-dealer must not be “insolvent.” The Final Amendments define insolvent to mean that the broker: “(i) is the subject of a bankruptcy, equity receivership proceeding or any other proceeding to reorganize, conserve, or liquidate such broker or dealer or its property or is applying for the appointment or election of a receiver, trustee, or liquidator or similar official for such broker or dealer or its property;  (ii) has made a general assignment for the benefit of creditors; (iii) is insolvent within the meaning of section 101 of title 11 of the U.S. Code, or is unable to meet its obligations as they mature, and has made an admission to such effect in writing or in any court or before any agency of the United States or any State; or (iv) is unable to make such computations as may be necessary to establish compliance with this section or with [the Customer Protection Rule].”  As amended, Rule 17a-11 under the Exchange Act will require a broker-dealer meeting the definition of insolvent to provide notice immediately upon becoming insolvent to the SEC, the firm’s DEA and, if necessary, the CFTC.
  • The amendments remove a limitation on the SEC’s ability to issue an order temporarily restricting a broker-dealer from withdrawing capital or making loans or advances to stockholders, insiders and affiliates.  Previously, the SEC could only issue such an order if the withdrawals, advances, or loans to be halted, when aggregated with all other withdrawals, advances, and loans on a net basis during a 30-day period, exceeded 30% of the firm’s excess net capital.  This 30-day/30% limitation will no longer be applicable after the Effective Date.

Rule 15c3-3 – Customer Protection Rule

Rule 15c3-3 under the Exchange Act (the “Customer Protection Rule”) is designed to protect customers of a broker-dealer by segregating their securities and cash from the broker-dealer’s proprietary business activities.  If the broker-dealer fails financially, but has conducted its business in accordance with the Customer Protection Rule, the customers’ securities and cash should be readily available to be returned to them and, if the broker-dealer is liquidated in a formal proceeding under the Securities Investor Protection Act of 1970 (“SIPA”), the securities and cash will be isolated and readily identifiable as “customer property” and, consequently, available to be distributed to customers ahead of other creditors.

The word “customer” is defined in the Customer Protection Rule to exclude broker-dealers.  However, as the SEC points out in the Release, the definition of “customer” in SIPA is broader than the definition in the Customer Protection Rule and does not exclude broker-dealers.  Broker-dealers as customers under the SIPA definition have a right to a pro rata share of the customer property, but are not entitled to receive an advance from the fund maintained by the Securities Investor Protection Corporation (“SIPC”) for customers of failed broker-dealers.

A carrying broker-dealer that carries accounts holding proprietary securities and cash of other broker-dealers (so-called “PAB accounts”) was not, under the prior rule, required to segregate cash and securities in PAB accounts as required for customer accounts, creating a risk that, if the carrying broker-dealer failed, there would not be sufficient customer property to make whole all SIPA customers, including broker-dealers with PAB accounts.  Certain amendments to the Customer Protection Rule are intended to correct the disparity in treatment of PAB accounts and the accounts of other customers.

The Final Amendments incorporate many of the provisions of a November 3, 1998 no-action letter issued to the NYSE and NASD (the “PAIB Letter”), which permitted a broker-dealer not to take a net capital deduction under the Net Capital Rule for cash held in a securities account at another broker-dealer, provided the other broker-dealer agreed to perform a reserve computation for PAB accounts, establish a separate reserve account, and maintain cash or qualified securities in the reserve account equal to the computed reserve requirement.  Because many of the provisions of the PAIB Letter are incorporated into the Final Amendments, the SEC staff is withdrawing the PAIB Letter on the Effective Date.

Definition of PAB Account.  The Final Amendments define the term “PAB account” to mean “a proprietary securities account of a broker or dealer (which includes a foreign broker or dealer, or a foreign bank acting as a broker or dealer) other than a delivery-versus-payment or a receipt-versus-payment account.”  The definition goes on to state that the term PAB account “does not include an account that has been subordinated to the claims of creditors of the carrying broker or dealer.”  Accounts subordinated to the claims of creditors of the carrying broker-dealer are excluded because they would not share pro-rata with other customers in customer property in the event of a failure of the carrying broker-dealer.  This exception allows carrying broker-dealers and the broker-dealers for whom they open accounts the flexibility to enter into business arrangements in which the carrying broker-dealer can use the funds and securities in a broker-dealer’s proprietary account.  In addition, delivery-versus-payment (“DVP”) and receipt-versus-payment (“RVP”) accounts are excluded because funds and securities are not held in those accounts but are custodied outside of the carrying broker-dealer.

Treatment of PAB Accounts.  The amendments to the Customer Protection Rule and to Rule15c3-3a require carrying broker-dealers to:

  • Perform a separate reserve computation for PAB accounts (in addition to the customer reserve computation currently required for The Customer Protection Rule customer accounts);
  • Establish and fund a separate reserve account for the benefit of PAB account holders; and
  • Obtain and maintain physical possession or control of non-margin securities carried for PAB accounts unless the carrying broker has provided written notice to the PAB account holders that it will use those securities in the ordinary course of its securities business, and has provided opportunity for the PAB account holder to object to such use.

The Final Amendments require that a carrying broker that is maintaining PAB accounts establish a special reserve account for the PAB accounts, perform a separate reserve computation for the PAB accounts and maintain cash or qualified securities in the PAB reserve account in an amount equal to the PAB reserve requirement.

The new bank account that carrying broker-dealers must establish for PAB accounts must be called the “Special Reserve Bank Account for Brokers and Dealers.”  However, since the PAIB Letter required carrying brokers to establish a special account with a slightly different name, the SEC is not requiring carrying brokers to rename special accounts already established prior to the Effective Date.

Other Amendments Relating to PAB Accounts.  The amendments make the following additional changes relating to PAB accounts:

  • A carrying broker-dealer with PAB accounts must notify its bank about the status of the PAB account and obtain an agreement and notification from the bank that the PAB reserve account will be maintained for the benefit of PAB account holders.
  • Paragraph (g) of the Customer Protection Rule has been amended to specify when a carrying broker-dealer can make withdrawals from a PAB reserve account.
  • A new paragraph (e)(4), added to the Customer Protection Rule, allows a carrying broker-dealer to use credits related to PAB accounts to finance customer debits under the Customer Protection Rule, but does not allow a carrying broker-dealer to use customer credits under the Customer Protection Rule to finance PAB debits.
  • The Net Capital Rule has been amended to provide that a broker-dealer need not deduct from capital cash and securities held in a securities account at a carrying broker-dealer except where the account has been subordinated to the claims of creditors of the carrying broker-dealer.

Banks Where Special Reserve Deposits May Be Held.  The amended Customer Protection Rule contains two new provisions governing banks at which reserve accounts are held.  First, cash on deposit in a bank affiliated with the broker-dealer may not be used to meet the reserve requirements.  However, this prohibition does not apply to securities held at an affiliated bank.  If a broker-dealer wishes to hold cash in a reserve account at an affiliated bank, it may do so by depositing qualified securities – securities issued or guaranteed by the United States – that may be held as cash.

Second, the broker-dealer also must exclude from the amount of cash in a special reserve account cash deposited with a non-affiliated bank to the extent the amount of the deposit exceeds 15% of the bank’s equity capital as reported by the bank in its most recent Call Report or any successor form the bank is required to file by its appropriate Federal banking agency.  The SEC stated that it recognizes that while a U.S. branch of a foreign bank may meet the definition of “bank” under Section 3(a)(6) of the Exchange Act, it is not FDIC-insured and does not file Call Reports, and thus would not qualify as a bank at which cash may be held in reserve accounts.  The SEC further stated that it would consider requests for exemptive relief from broker-dealers wishing to hold a reserve account at a U.S. branch of a foreign bank.

Free Credit Balances – Sweep Accounts.  Amended paragraph (j)(2)(i) of the Customer Protection Rule will permit ongoing routine transfers from the customer’s account outside of a sweep program with a one-time consent.  Specifically, the amended Customer Protection Rule provides:  “A broker or dealer is permitted to invest or transfer to another account or institution, free credit balances in a customer’s account only upon a specific order, authorization, or draft from the customer, and only in the manner, and under the terms and conditions, specified in the order, authorization, or draft.”

The Final Amendments define the term “Sweep Program” to mean a service provided by a broker-dealer where it offers to its customers the option to automatically transfer free credit balances in the securities account of the customer to either a money market mutual fund or an account at a bank whose deposits are insured by the FDIC.  Amended paragraph (j)(2)(ii) of the Customer Protection Rule permits a broker-dealer to transfer free credit balances held in a customer’s securities account to a product in its Sweep Program or to transfer a customer’s interest in one product in a Sweep Program to another product in its Sweep Program provided certain conditions are met, including:

  • The broker-dealer provides the customer with the disclosures and notices required by the Rule and by each SRO of which the broker-dealer is a member.
  • The broker-dealer provides the customer with written notice at least 30 calendar days before (A) making changes to the terms and conditions of the Sweep Program, (B) making changes to the terms and conditions of the product currently available through the Sweep Program, (C) changing, adding or deleting products available through the Sweep Program, or (D) changing the customer’s investment through the Sweep Program from one product to another.  The notice must describe the new terms and conditions of the Sweep Program or product or the new product, and the options available to the customer if the customer does not accept the new terms and conditions.
  • For an account opened on or after the effective date of the amendments, the customer gives prior written affirmative consent to having free credit balances in the customer’s securities account included in the Sweep Program after being notified of the general terms and conditions of the products available through the Sweep Program and that the broker-dealer may change the products available under the Sweep Program.

Other Changes.  The final rule amendments make additional changes, including the following:

  • Funds held in a commodities account meeting the definition of a “proprietary account” under CFTC regulations at a broker-dealer also registered with the CFTC are not to be included as free credit balances in the customer reserve formula.
  • A new paragraph (d)(4) has been added to the Customer Protection Rule (apparently causing existing paragraph (d)(4) to become (d)(5)) requiring a broker-dealer to take prompt steps to obtain physical possession or control over securities of the same issue and class as those included on the books and records of the broker-dealer that allocate to a short position of the broker-dealer or a short position for another person, excluding positions covered by paragraph (m) of the of the Customer Protection Rule, for more than 30 calendar days.
  • Provisions of Rule 15c3-2 under the Exchange Act concerning treatment of free credit balances not already covered by the Customer Protection Rule have been moved to the Customer Protection Rule and Rule 15c3-2 will be removed on the Effective Date.

Proposals Not Adopted.  Some rule changes proposed in 2007 were not adopted, including a proposal to expand the definition of “qualified securities” in the Customer Protection Rule to include certain money market funds, and a proposal to modify the haircut for money market funds in the Net Capital Rule from 2% to 1%.  The SEC is deferring consideration of those proposals until after any final action it may take on proposed changes to the regulatory scheme for money market funds under the Investment Company Act of 1940.  (See the June 11, 2013 Financial Services Alert for a discussion of the SEC’s proposed amendments to its money market fund requirements.)

SEC Adopts New Broker-Dealer Reporting Requirements Related to Custody of Client Assets

The SEC approved rule amendments that will require broker-dealers to file annual and quarterly reports relating to their custody of client assets.  A forthcoming issue of the Alert will discuss this development in additional detail.

New Guidance on Advisers Act Custody Rule Treatment of Certain Private Certificated Securities

The staff of the SEC’s Division of Investment Management provided guidance allowing certain certificated privately offered securities held by private funds to be treated in the same manner as uncertificated privately offered securities they hold.  The guidance describes conditions under which an adviser would not have to maintain with a qualified custodian an instrument evidencing ownership of a privately placed security (a “private stock certificate”) held by a pooled investment vehicle (a “pool”) in order to comply with Rule 206(4)-2 under the Investment Advisers Act of 1940 (generally referred to as the “custody rule”).  As a general matter under the custody rule, an adviser that has custody (as defined by the rule) of a pool’s funds and securities must maintain them with a qualified custodian.  However, if the pool meets the conditions described in paragraph (b)(4) of the rule regarding the distribution of its audited annual financial statements, the rule already provides an exception to the qualified custodian requirement with respect to certain uncertificated privately offered securities (“Exempt Privately Offered Securities”).  The custody rule provides that to be an Exempt Privately Offered Security, the security must:

  • be uncertificated;
  • have been acquired from the issuer in a transaction or chain of transactions not involving a public offering;
  • have its ownership recorded only on the books of the issuer or its transfer agent in the name of the pool; and
  • be transferable only with the prior consent of the issuer or holders of the outstanding securities of the issuer.

The staff guidance responds to inquiries regarding the treatment under the custody rule of private stock certificates that, aside from the fact that they were certificated, share the essential characteristics of Exempt Privately Offered Securities.  The guidance states that a private stock certificate held by a pool that distributes its audited annual financial statements in accordance with paragraph (b)(4) of the rule need not be maintained with a qualified custodian if:

  1. ownership of the security is recorded on the books of the issuer or its transfer agent in the name of the pool;
  2. the private stock certificate can only be used to effect a transfer or to otherwise facilitate a change in beneficial ownership of the security with the prior consent of the issuer or holders of the outstanding securities of the issuer;
  3. the private stock certificate has a legend restricting transfer; and
  4. the private stock certificate is appropriately safeguarded by the adviser and can be replaced upon loss or destruction.

The guidance also states the staff’s position that a partnership agreement, subscription agreement or LLC agreement is not itself a certificate under paragraph (b)(2)(B) of the custody rule, and the securities these documents represent are Exempt Privately Offered Securities if they otherwise fall within the terms of that exception (as described above).  In addition, the guidance notes that the staff considers securities that are evidenced by ISDA master agreements that cannot be assigned or transferred without the consent of the counterparty to be Exempt Privately Offered Securities.

FRB, FDIC and OCC Jointly Issue Proposed Supervisory Guidance on Implementing Stress Tests for Mid-Sized Banking Organizations

The FRB, FDIC and OCC (the “Agencies”) jointly issued proposed supervisory guidance (the “Proposed Guidance”) that describes high-level principles that should be used by mid-sized banking organizations to implement the stress tests such organizations are required to conduct under Section 165(i)(2) of the Dodd-Frank Act.  Mid-sized banking organizations are defined as all bank and savings and loan holding companies, national banks, state member banks, state non-member banks, federal savings associations, and state chartered savings associations with more than $10 billion but less than $50 billion in total consolidated assets (“Mid-Sized Banking Organizations”).  In the Proposed Guidance, the Agencies emphasize the importance of stress testing to Mid-Sized Banking Organizations as an ongoing risk management practice “that supports a company’s forward-looking assessment of its risks and better equips the company to address a range of  macroeconomic and financial outcomes.”

The Proposed Guidance describes the Agencies’ supervisory expectations of Mid-Sized Banking Organizations and the methodologies that such companies should use in conducting annual stress tests.

Under the Dodd-Frank Act rules Mid-Sized Banking Organizations must assess the potential impact of a minimum of three macroeconomic scenarios:  (1) baseline, (2) adverse and (3) severely adverse on the Mid-Sized Banking Organization’s consolidated losses, revenues, balance sheet (including risk-weighted assets) and capital.  The Proposed Guidance states that each scenario should be analyzed across all business lines and on the enterprise as a whole.  The Proposed Guidance makes it clear that Mid-Sized Banking Organizations are allowed flexibility in determining the methodologies they choose to use in conducting stress tests and that a Mid-Sized Banking Organization is expected to choose practices and methodologies that are appropriate for its risk profile, size, complexity, business risk, market foot-print and the materiality of specific portfolios of assets.  With respect to governance, controls, oversight and related documentation, the Proposed Guidance notes that the Agencies expect that Mid-Sized Banking Organizations will consider the results of stress testing in the respective company’s capital planning, assessment of capital adequacy, and risk management practices.

Comments on the Proposed Guidance are due to the OCC and the FDIC by September 25, 2013 and to the FRB by September 30, 2013.

Federal Court Strikes Down FRB’s Debit Card Interchange Fee and Network Exclusivity Rules

The Federal District Court for the District of Columbia (the “Court”) recently struck down portions of the FRB’s rule on interchange fees.  The Court’s decision revolves around an amendment proposed by Senator Richard Durbin (D-IL) to the Electronic Funds Transfer Act, codified in Section 1075 of the Dodd-Frank Act (the “Durbin Amendment”) in response to rising interchange fees.  Interchange fees are any fees established, charged or received by a payment card network for the purpose of compensating an issuer for its involvement in an electronic debit transaction.

Prior to the Durbin Amendment, the average interchange fee was approximately $0.44 per transaction.  The Durbin Amendment capped the fee at $0.21 plus 0.05% and an additional discretionary $0.01 for institutions using fraud prevention initiatives.  The Durbin Amendment also required that interchange fees for electronic debit transactions be “reasonable and proportional” to the cost incurred by the issuer and directed the FRB to issue rules interpreting such standards.  The Durbin Amendment also required the FRB to adopt rules that would:  (1) prohibit issuers and networks from restricting the number of payment card networks on which electronic debit transactions may be processed to one network or multiple affiliated networks; and (2) prohibit issuers and networks from inhibiting the ability of merchants to direct the routing of the electronic debit transaction for processing over any payment card network that may process the transactions.

In 2010, after meeting with debit card issuers, payment card networks, consumer groups and other interested groups, and circulating surveys to financial organizations and merchant acquirers, the FRB issued a proposed rule.  First, the FRB proposed that the interchange fee be limited to the costs associated with authorization, clearing and settlement (“ACS”) of an electronic debit transaction.  The FRB also proposed two standards to govern “reasonable” and “proportional” interchange fees:  under Alternative 1 each issuer was allowed to recover its actual incremental ACS costs up to a safe harbor of $0.07; and under Alternative 2, the FRB placed a flat cap of $0.12 per transaction.  Second, to implement the network exclusivity prohibition in the Durbin Amendment, the FRB proposed two alternative methods for implementation:  Alternative A required at least two unaffiliated payment card networks active on each debit card, even if one network processed only signature transactions and one handled only PIN transactions; and Alternative B required at least two active unaffiliated payment card networks for each type of authorization method (i.e., at least two networks to process PIN transactions and two networks to process signature transactions).  The proposed rule would prohibit issuers and networks from preventing a merchant from directing the routing of an electronic debit transaction over any available network.

In July 2011, the FRB finalized its rules implementing the Durbin Amendment.  In a controversial move, the FRB adopted Alternative 2 as the standard for a “reasonable” and “proportional” interchange fee, but modified it from the alternative in the proposed rule.  In particular, under the final rule, an issuer could receive up to $0.21 per transaction plus an ad valorem amount of 5 basis points (0.05%) of the transaction’s value.  The FRB reasoned that the statute allowed it to consider additional costs not explicitly excluded from consideration by the statute.  With regard to the network exclusivity prohibitions, the FRB adopted Alternative A interpreting the Durbin Amendment to restrict network exclusivity for each debit card and not for each method of authentication; thus a card complied with the FRB’s final rule if it were enabled with only one PIN network and one signature network.

The final rule became effective in October 2011.  In November 2011, plaintiffs filed suit challenging the final rule. Plaintiffs claimed that the FRB’s final rule was “arbitrary” and “an abuse of discretion” and sought declaratory relief.  More specifically, plaintiffs alleged that the Durbin Amendment limited the FRB’s consideration of allowable costs to the incremental cost of ACS and alleged that by including other costs in the fee standard, the FRB acted unreasonably.  With regard to the network non-exclusivity provisions, plaintiffs claimed that the FRB disregarded the plain meaning of the Durbin Amendment and misconstrued the statute by requiring all debit cards be interoperable with at least two unaffiliated payment networks, rather than requiring that all debit transactions be interoperable over at least two unaffiliated networks.  Plaintiffs moved for summary judgment in March 2012.

In granting plaintiffs’ summary judgment motion, the Court held that the FRB “completely misunderstood the Durbin Amendment’s statutory directive and interpreted the law in ways that were clearly foreclosed by Congress.”  The Court held that the Durbin Amendment is unambiguous in “bifurcating” the universe of debit transaction fees—those incremental ACS costs that must be considered—and other costs not specific to the transaction, which must be excluded.  The Court also noted that the Durbin Amendment required the FRB to issue rules “inhibiting the ability of any person to prohibit a merchant to direct the routing of the debit transaction” and Congress intended for each transaction to be routed over at least two competing methods for each authorization method.  However, according to the Court, the FRB “countermanded” Congressional intent by adopting a rule that required a choice among unaffiliated networks for each card, but not for each method of authentication (i.e., signature and PIN transactions).

Because the FRB’s rules were “fundamentally” and “seriously” deficient, the Court remanded the case with instructions to the FRB to vacate both the interchange fee and network exclusivity rules.  However, noting the importance of interchange and network fees to the debit card system and that many had made “extensive commitments in reliance” on the rules, the Court stayed the effect of its decision to allow the FRB to replace the rules and requested briefs on two issues:  the appropriate length of the stay and whether current standard should remain in place until replaced by valid regulations or the FRB develops interim standards sufficient to allow the Court to lift the stay.

 National Association of Convenience Stores v. Board of Governors, No. Civ. 11-02075 RJL (D.D.C. July 31, 2013)

FDIC Releases Video Guidance Regarding Management of Interest Rate Risk

The FDIC released on its website a new video (the “Video”) in its third installment of technical assistance videos designed to provide guidance to bank directors, officers and employees regarding regulatory and compliance issues and recent changes and developments.  Over the past several months the FDIC and other bank regulatory agencies have strongly urged banking institutions, in light of the current low level of interest rates and the potential significant increase in interest rate levels, to make certain that the applicable bank has in place robust processes to measure, and if needed mitigate, the bank’s exposure to potential increases in interest rates.

The Video, which is over one hour in length, discusses interest rate risk and key elements of a bank’s management and oversight of interest rate risk.  The Video has eight segments which cover, respectively,

  1. Overview of Interest Rate Risk; Recent Industry Trends
  2. Types of Interest Rate Risk
  3. Measurement Systems
  4. Rate Changes and Prepayment Assumptions
  5. Deposit Assumptions
  6. Risk Limits and Mitigation
  7. Internal Control and Review
  8. Review of Interest Rate Risk Management and Additional Resources

The Video is designed to be particularly useful to directors and officers of community banks, including members of a bank’s asset-liability management committee.  The first two installments of the FDIC’s technical assistance videos were discussed in the April 9, 2013 Financial Services Alert and the July 30, 2013 Financial Services Alert.

Goodwin Procter Alert: Court Ruling Creates Potential Liability for Investment Funds and May Have Broader Implications

Goodwin Procter issued a client alert that discusses the implications of a decision by the First Circuit Court of Appeals holding that a private equity fund was a “trade or business” in determining whether the fund might be liable for the pension plan withdrawal liability of one of its portfolio companies.

French Regulator Adopts Stringent AIFMD Regime

EU Member States were obliged to implement the Alternative Investment Fund Managers Directive into their law by July 22nd.  In common with various other states, France is late in implementing the law, and the final version is very different from the initial proposal as we described it here.  For non-EU managers, the position in France is now:

Transitional Provisions

Unlike in most other member states, there will be no transitional exemption for non-EU managers.  This means that the French AIFMD requirements apply now not in July 2014.

Marketing

The marketing of open-ended funds has always been practically impossible in France since it has always been subject to prior authorisation by the French regulator.  This will not change.

The marketing of closed-ended funds is permitted subject to a significantly more stringent AIFMD regime than that which applies in other member states.  We described here the minimum that the directive requires from non-EU managers that wish to market into the EU, but France will also require the fund to appoint a depositary and comply with the other provisions of the directive that otherwise apply only to EU managers including, presumably, the restrictions on remuneration although this is not yet clear.

In practical terms, this now means that the only way to have any dealings with French investors will be through reverse solicitation since this is not considered to be “marketing” and is therefore not subject to the AIFMD.

CFTC Adopts Rule Amendments Harmonizing Compliance Obligations for CPOs of Registered Investment Companies

The CFTC adopted rule amendments designed to harmonize certain compliance obligations for commodity pool operators (“CPOs”) of registered investment companies that are required to register with the CFTC due to recent changes to CFTC Regulation 4.5.  Under the amendments, the CFTC will accept the SEC disclosure, reporting, and record-keeping requirements applicable to registered investment companies as substituted compliance for “substantially all” (in the words of the CFTC press release and related summary documents) of Part 4 of the CFTC’s regulations.  The amendments also modify certain Part 4 requirements for all CPOs by allowing use of a third party service for record-keeping purposes and permitting all CPOs and commodity trading advisors to use a disclosure document for up to 12 months (extended to 16 months for CPOs of open-end registered investment companies relying on substituted compliance).  A more detailed description of the amendments will be forthcoming.