Financial Services Alert - March 18, 2014 March 18, 2014
In This Issue

BNA’s Banking Report Publishes Goodwin Attorneys’ Advice on Bank D&O Insurance

Goodwin Procter attorneys Matt Dyckman, Samantha Kirby, Carl Metzger, and Shoaib Ghias recently published a feature article in Bloomberg BNA's Banking Report titled “Must-Know D&O: Lessons from FDIC Guidance and Case Law on D&O Insurance.”  The FDIC is concerned about an increase in D&O insurance policies that exclude, among other things, recoveries for damages arising from federal or state banking regulatory action.  As such exclusions may expose directors to personal liability, the Goodwin attorneys outline director best practices for the evaluation of an institution’s D&O coverage and charter and bylaw indemnification provisions.

Goodwin Procter Alert: In Lawson, Supreme Court Expands SOX Whistleblower Protection to Employees of Private Contractors

Goodwin Procter’s Labor & Employment Practice issued a client alert that discusses the U.S. Supreme Court’s decision in Lawson et al. v. FMR LLC holding that a public company’s private contractors can be covered under the whistleblower protections of Section 806 of the Sarbanes-Oxley Act.

DOL Issues Proposed Rule Requiring Guide for 408(b)(2) Disclosures

On March 11, the Department of Labor (the “DOL”) issued a proposed rule (the “Proposed Rule”) which would require employee benefit plan “covered service providers” (as defined in the 408(b)(2) disclosure regulation of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”)) to provide a “guide” to augment the disclosures currently required by that regulation if such disclosures are provided in multiple or lengthy documents.  The DOL subsequently released a fact sheet describing the Proposed Rule as well as an information collection request regarding the effectiveness of the existing disclosure requirements under Section 408(b)(2).  Section 408(b)(2) provides a prohibited transaction exemption for the provision of services and requires that the services be provided pursuant to the reasonable arrangement and for not more than reasonable consideration payable from the plan.

As discussed in the May 1, 2012 Financial Services Alert, under Section 408(b)(2) of ERISA and the final regulation issued thereunder (the “Regulation”), “covered service providers” must provide certain specific disclosures (the “Disclosures”) to the responsible plan fiduciary detailing fees charged to or paid by plans in order for service arrangements to be considered “reasonable” under Section 408(b)(2) of ERISA.  The Regulation was intended to ensure that plan fiduciaries would be provided the information needed to assess (a) the reasonableness of the compensation to be paid for plan services, and (b) potential conflicts of interest that could affect the performance of those services.  The DOL did not require such Disclosures to be provided in any particular format, and permitted service providers to utilize different documents from different sources as long as all of the documents collectively contained the required information.  In releasing the Proposed Rule, the DOL noted that some plan fiduciaries need an additional tool to make effective use of such Disclosures if they are provided in multiple or lengthy documents.

The Proposed Rule would require covered service providers to provide a guide along with the Disclosures required by the Regulation, if such Disclosures are contained in multiple documents, or in a document in excess of a specified number of pages.  The DOL reserved for comment the number of pages which would necessitate the provision of a guide.  The Proposed Rule would not require covered service providers to provide a guide if all of the Disclosures are provided in a single concise document.

If required, the proposed guide must specifically identify the document and page, or “other sufficiently specific” locator such as section identification, that would enable the responsible plan fiduciary to quickly locate the following information, if applicable to the contractual arrangement: (a) the description of services to be provided to the plan, (b) a statement concerning any services to be provided as a fiduciary, (c) a description of all direct compensation, (d) a description of all indirect compensation, (e) a description of any compensation that will be paid among related parties, (f) a description of any compensation for termination of the arrangement, (g) a description of all compensation for recordkeeping services, and (h) certain financial product fees and expenses associated with plan asset vehicles.  The guide must also identify a person or office, including contact information, that a plan fiduciary may contact regarding the Disclosures.  Although the DOL did not include a model guide with the Proposed Rule, it previously released a sample guide with the Regulation which may be helpful.

The DOL has requested comments on (1) the standard to determine when a guide would be required (including whether a page number standard is the correct standard and what number of pages would be appropriate), (2) the structure of the guide and whether its requirements would be reasonable and cost effective, (3) any alternative tools that would assist plan fiduciaries in reviewing the Disclosures, and (4) whether an amendment of the Regulation should instead require a summary of “key” disclosures.  The DOL is accepting comments through May 12, 2014.

The DOL also announced its intention to conduct approximately eight to ten focus group sessions with approximately 70 to 100 fiduciaries of small pension plans (less than 100 participants) to explore current practices and the likely effects of the Proposed Rule.

The Proposed Rule would be effective 12 months after publication in final form in the Federal Register; it is not clear whether the Proposed Rule would apply to all service arrangements, including existing arrangements, or only to those entered into, or perhaps modified, after the effective date.

SEC Proposes Standards for “Covered Clearing Agencies”

The SEC has proposed standards for “covered clearing agencies,” which would include registered clearing agencies that (i) have been designated as systemically important by the Financial Stability Oversight Council and for which the SEC is the supervisory agency, (ii) provide central counterparty (“CCP”) services for security-based swaps or are involved in activities the SEC determines to have a more complex risk profile, where in either case the CFTC is not the supervisory agency for such clearing agency, or (iii) are otherwise determined to be covered clearing agencies by the SEC.  The SEC proposal would create two tiers of regulations:  the existing rules would apply to registered clearing agencies other than covered clearing agencies, while the newly-proposed rules would impose heightened standards on covered clearing agencies.

The proposed rules would require covered clearing agencies to establish, implement, maintain, and enforce policies and procedures reasonably designed to address certain enumerated areas, such as financial risk management, settlement, default management, access, and efficiency.  Some of the more notable specific proposals include a proposed rule that would require policies and procedures to address holding “qualifying liquid resources” sufficient to withstand the default by a participant and its common control affiliates (together, a “participant family”) that “would generate the largest aggregate payment obligation for the covered clearing agency in extreme but plausible market conditions”; policies and procedures regarding daily stress testing and collecting margin at least daily; and policies and procedures that provide for the covered clearing agency to hold liquid net assets funded by equity equal to at least six months of its current operating expenses to permit it to continue operations and services in the event of significant business losses, whether during a recovery or an orderly wind-down of the covered clearing agency.

Additional proposed rules would govern SEC procedures regarding, among other matters, determining whether a registered clearing agency should be considered a covered clearing agency.

Comments on the proposal will be due 60 days after its forthcoming publication in the Federal Register.

CFTC Provides Time-Limited No-Action Relief to Certain Affiliated Swap Counterparties

The CFTC has issued two separate no-action relief letters to provide time-limited no-action relief pertaining to swaps between certain affiliated counterparties.  The letters both pertain to CFTC Regulation 50.52, which exempts swaps between affiliates from the swap clearing requirement (subject to certain conditions) (the “inter-affiliate swap exemption”).  Regulation 50.52 was described in the April 9, 2013 Financial Services Alert.

The DCR Letter

The first no-action letter (the “DCR Letter”), issued by the Division of Clearing and Risk (“DCR”), essentially extends two temporary provisions of Regulation 50.52.  Regulation 50.52(b)(4)(i), which is not a temporary provision, requires that a party availing itself of the inter-affiliate swap exemption must, for each swap subject to the clearing requirement that the party enters into with an unaffiliated counterparty, either comply with the clearing requirement with respect to such swap, comply with an exception to or exemption from the clearing requirement, comply with the requirements for clearing the swap under a foreign jurisdiction’s clearing mandate that is “comparable, and comprehensive but not necessarily identical, to” the US clearing requirement, or comply with certain other alternatives.  CFTC Regulation 50.52(b)(4)(ii) and Regulation 50.52(b)(4)(iii) provide temporary alternatives to the foregoing requirement.  CFTC Regulation 50.52(b)(4)(ii) is available when one of the affiliated counterparties is located in the European Union, Japan, or Singapore, while CFTC Regulation 50.52(b)(4)(iii) is available when an affiliate located in the United States enters into swaps with a counterparty located outside the United States, European Union, Japan, and Singapore.  Both CFTC Regulation 50.52(b)(4)(ii) and CFTC Regulation 50.52(b)(4)(iii) expire, by their own terms, on March 11, 2014.

Because the CFTC has not yet announced that any non-U.S. jurisdiction has promulgated a comparable and comprehensive clearing requirement, thereby complicating the ability of market participants to fulfill the requirements of Regulation 50.52(b)(4)(i), the International Swaps and Derivatives Association (“ISDA”) petitioned DCR for relief.  In response, the DCR Letter provides that DCR will not recommend that the CFTC commence an enforcement action against an entity that utilizes Regulation 50.52(b)(4)(ii) or Regulation 50.52(b)(4)(iii) to meet the requirements of the inter-affiliate exemption until December 31, 2014.  Relief is conditional on the affiliated counterparties satisfying the other requirements of the inter-affiliate exemption, neither of the affiliated counterparties being located in a non-U.S. jurisdiction in which the CFTC has determined that a comparable and comprehensive clearing requirement exists, and the affiliated counterparties promptly providing to DCR upon request documentation regarding their compliance with the DCR Letter and the requirements of the inter-affiliate exemption.

DCR chose to issue the no-action letter in part, because, as it states in the DCR Letter, it “believes that extending the alternative compliance frameworks” (Regulations 50.52(b)(4)(ii) and 50.52(b)(4)(iii)) “may promote the adoption of comparable and comprehensive clearing requirements.  [DCR] also believes that such extensions will allow for a more orderly transition as jurisdictions establish and implement clearing requirements and the Commission issues comparability determinations with regard to those requirements.”

The DMO Letter

The second no-action letter (the “DMO Letter”), issued by the Division of Market Oversight (“DMO”), provides time-limited no-action relief from the trade execution requirement for inter-affiliate swaps.  The trade execution requirement refers to the requirement that certain cleared swaps must be executed on or through a designated contract market (“DCM”) or swap execution facility (“SEF”).  ISDA requested relief from the trade execution requirement for inter-affiliate swaps, asserting that the trade execution requirement conflicts with the reasons that affiliates execute such transactions (for example, to manage risk between affiliates rather than to seek fully competitive pricing) and will impose “unnecessary” costs and inefficiencies.

The DMO Letter provides that DMO will grant time-limited no-action relief from the trade execution requirement to eligible affiliate counterparties that transact swap transactions with one another that involve a swap subject to the trade execution requirement.  The relief is scheduled to expire on December 31, 2014.  The DMO Letter explicitly states that other requirements, such as applicable swap reporting and clearing requirements, are not affected by the relief.

DMO acknowledges in the DMO Letter the goals of the trade execution requirement and the conditions of the inter-affiliate exemption from the clearing requirement.  While noting that ISDA requested non-time-limited relief, DMO chose to provide time-limited relief to permit it time to “continue to evaluate, based on ongoing observations of inter-affiliate market activity occurring both on and off of SEFs and DCMs, whether such swap transactions should be subject to the trade execution requirement.”