Financial Services Weekly News

Regulatory Developments

OCC Issues Guidelines Establishing Risk Governance Framework Standards for Large Banks

The OCC has issued final guidelines that establish minimum standards for design and implementation of a risk governance framework for large insured national banks, insured federal savings associations and insured federal branches of foreign banks.  The guidelines generally apply to these types of institutions with average consolidated assets of $50 billion or more, institutions whose parent company controls at least one other covered institution, and other institutions, if the OCC determines that the institution’s operations are highly complex or present a heightened risk that warrants application of the guidelines.  The guidelines do not by their terms apply to community banks.  Among other requirements, the guidelines establish roles and responsibilities for a bank’s front line units and independent risk management and internal audit functions, require the board of directors to direct management to establish and implement a risk management framework that complies with the guidelines, require the board to oversee the bank’s risk-taking activities and hold management accountable for complying with the risk management framework, and require that at least two members of the bank’s board should be independent.

SEC Publishes 2014-2018 Strategic Plan for Public Comment

The SEC published for public comment its Draft Strategic Plan for fiscal years 2014 to 2018 prepared under the Government Performance and Results Modernization Act of 2010, which requires federal agencies to outline their missions, planned initiatives, and performance goals for a five-year period.  The SEC’s draft plan outlines more than 70 initiatives designed to support its primary strategic goals for the regulatory environment, enforcement, disclosure, investor education and internal agency operations.  Comments are due by March 10, 2014.

Enforcement & Litigation

SEC Announces Whistleblower Award of More Than $30 Million to Foreign Resident

The SEC announced that it expects to make an award of over $30 million under its whistleblower program, the largest award yet and the fourth award to a whistleblower living in a foreign country.  While noting recent judicial decisions addressing the extraterritorial application of federal statutes, the formal order relating to the claim states that there is a sufficient U.S. territorial nexus whenever a claimant’s information leads to the successful enforcement by the SEC of a covered action brought in the U.S., concerning violations of the U.S. securities laws.

SEC Settles with Dually-Registered Adviser and Broker-Dealer Over Failure to Maintain Adequate Insider Trading Controls

The SEC announced the settlement of administrative proceedings against a firm dually‑registered as an adviser and broker-dealer over the SEC’s findings regarding the inadequacy of the firm’s “look back” reviews of trading in employee accounts and in customer and client accounts after market‑moving announcements as a means of detecting whether trades may have been based on the misuse of material nonpublic information received by registered representatives and advisory personnel from firm customers and advisory clients.  The SEC further found that during its staff's investigation, the firm unreasonably delayed the production of certain documents, and that a portion of those documents had been altered prior to production.  In addition to agreeing to pay a $5 million civil penalty, the firm admitted to certain findings of fact in the settlement order and acknowledged that its conduct violated the federal securities laws.

SEC Settles with Adviser Over Failure to Enhance Compliance Program in Connection with Acquisition of Lehman Advisory Business

The SEC announced the settlement of administrative proceedings against an investment adviser related to the adviser’s failure to enhance its compliance infrastructure in connection with the acquisition of Lehman Brothers’ advisory business in September 2008.  The SEC found that as a result of shortcomings in its compliance program the adviser (1) executed more than 1,500 principal transactions with client accounts without securing required consents; (2) charged commissions and fees, and earned revenues, with respect to 785 accounts that were not properly disclosed; (3) violated custody provisions of the Investment Advisers Act; and (4) misreported assets under management and account information in Form ADV.  Among other sanctions, the adviser agreed to pay a civil penalty of $15 million.

SEC Settles with Adviser Over Principal Transactions

The SEC settled administrative proceedings with an adviser over its failure to obtain the prior consent to principal transactions with clients required by Section 206(3) of the Investment Advisers Act of 1940.  The transactions involved accounts which the adviser owned or in which it had an ownership interest.  The settlement includes no finding that clients suffered losses as a result of the principal trades, to which in many cases they consented after settlement.  The SEC also found recordkeeping violations with respect to the foregoing principal trades and certain other business operations of the adviser, noting in one instance conflicts between the adviser’s records and those of a third party administrator.  The adviser agreed to pay a civil penalty of $225,000.

Court Dismisses Much of Financial Industry Lawsuit Challenging Cross-Border Application of CFTC Rules

On September 16, the U.S. District Court for the District of Columbia dismissed most of a legal challenge by several financial industry groups challenging the applicability of the CFTC’s regulation of cross-border swaps transactions.  U.S. District Judge Paul Friedman found that “Congress has clearly indicated that the swaps provisions (in the 2010 Dodd-Frank Act) apply extraterritorially," though he also advised the CFTC to conduct adequate cost-benefit analyses with respect to certain of the regulations.

Client Alert - SEC Charges Officers, Directors, Stockholders and Companies for Failure to Timely File Reports Under Sections 13 and 16 of the Exchange Act

Goodwin Procter’s M&A/Corporate Governance, Capital Markets and Securities Litigation practices have issued a client alert discussing the SEC’s recent enforcement action against 34 individuals and entities over failures to make timely reports of transactions under Sections 13(d), 13(g) and 16(a) of the Securities Exchange Act of 1934.  The client alert reviews the implications of this enforcement initiative based on quantitative analysis of filing data and provides a number of recommendations for (1) public companies, (2) their directors, officers and significant stockholders, and (3) investment funds and money managers.

New ERISA Litigation Update Available

Goodwin Procter’s ERISA Litigation Practice published its latest quarterly ERISA Litigation Update. The update discusses (1) the Third Circuit’s decision in Santomenno v. John Hancock Life Ins. Co., affirming  dismissal of all claims against the insurer in a 401(k) excessive fee suit, rejecting arguments that the insurer is an ERISA fiduciary for its product’s fees, even where the service provider has the ability to make changes to its investment platform; (2) the Fourth Circuit’s decision in Tatum v. RJR Pension Investment Committee, addressing the burden of proof for loss causation in an ERISA fiduciary breach case; (3) the U.S. Supreme Court’s upcoming consideration of whether to hear a case addressing the scope of ERISA’s six-year statute of repose when applied to a claim that investments selected more than six years before suit commenced were imprudent due to allegedly excessive fees; and (4) recent First Circuit decisions rejecting challenges to the practice of paying benefits under group life insurance plans by establishing a retained asset account in the beneficiary’s name.

Industry Developments

ICI Issues Research Paper on ETFs

The Investment Company Institute issued a research paper on exchange-traded funds (ETFs)  that discusses (1) the basic structure of ETFs, (2) the different types of ETFs, how ETFs are created and by whom, and how ETFs trade, (3) the regulatory framework for ETFs in the U.S., (4) the clearing and settlement process for the creation and redemption of ETF shares in the primary market, and (5) whether investors primarily use the primary or secondary market to trade ETFs.