Weekly RoundUp October 15, 2014

Financial Services Weekly News

Editor's Note
Editor’s Note
Looking Ahead: December 1 Effective Date for FINRA Consolidated Supervision Rules. The new FINRA Supervision rules, approved by the SEC in December 2013, become effective on December 1, 2014. The new rules, 3110 (Supervision), 3120 (Supervisory Control System), 3150 (Holding of Customer Mail) and 3170 (Tape Recording of Registered Persons by Certain Firms), which replace NASD Rules 3010, 3012 and 3110(i) and corresponding NYSE rule provisions, chiefly consolidate the provisions of the old rules and related interpretive guidance. However, there are some substantive changes from the old rules. For example, FINRA Rule 3110(c)(3) eliminates the heightened office inspection requirements that NASD Rule 3010(c)(3) required firms to implement under certain specified circumstances. Instead, firms must identify potential conflicts of interest and have policies and procedures in place to prevent a location’s inspection from being compromised. Firms should make sure that their written supervisory procedures reflect the new rules by the December 1 effective date. The new rules are discussed in Regulatory Notice 14-10.
Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

SEC Announces Draft Filing Review Program for Asset-Backed Securities Issuers

The SEC’s Division of Corporation Finance announced that in connection with the Commission’s adoption of revisions to the rules governing disclosure, reporting, and the offering process for asset-backed securities (ABS), the  Division is making available to a limited number of ABS issuers staff review of their registration statements in draft form, prior to filing. Starting on October 20, 2014 at 9:00 am EDT, the Division will begin accepting requests to participate in the program, from which it will select at least two issuers per asset class on a first-come, first-served basis. Requests must be received no later than 5:30 pm EDT on October 24, 2014. To assist ABS issuers in preparing for the new disclosure requirements, the Division intends to make draft registration statements and related staff comment letters available to the public in advance of the compliance date for the revised requirements.

SEC Approves FINRA Proposal to Amend NASD Rule 2340 Relating to Per Share Estimated Valuation for Unlisted DPP and REIT Shares

On October 10, the SEC approved a rule filing by FINRA to modify the requirements in NASD Rule 2340 (Customer Account Statements) relating to the inclusion of a per share estimated value for unlisted direct participation program and real estate investment trust securities on a customer account statement and to make related changes to FINRA Rules 2310 (Direct Participation Programs) and  5110 (Corporate Financing Rule). Member firms will be required to include in customer account statements a per share estimated value of DPP or REIT securities that is developed in a manner reasonably designed to ensure that the per share estimated value is reliable. Amended Rule 2340 provides that the per share estimated value will be deemed to have been reasonably developed if either of two methodologies is used: the “net investment methodology” or the “appraised value” methodology. The amended rules will become effective no earlier than 18 months after the October 10 approval date.

SEC Publishes Proposal to Adopt FINRA Rule 2040 Regarding Payments to Unregistered Persons

The SEC published for comment a proposal to adopt new FINRA Rule 2040 (Payments to Unregistered Persons) to replace current NASD Non-Member Rules and related NYSE Non-Member Rules. New Rule 2040, which incorporates existing NASD Rule 1060(b) and NYSE Rule Interpretation 345(a)(i)/03 relating to foreign finders, is designed to align in a more straightforward fashion with Section 15(a) of the Securities Exchange Act and related SEC guidance regarding whether certain persons must be registered as broker-dealers to receive transaction-related compensation. FINRA’s proposal also includes rule changes addressing the status of persons subject to sanction or disqualification and payments by a member to those persons. (For the text of the rule changes, see pp. 125-136 of the FINRA filing.) Comments on the proposal must be submitted to the SEC no later than October 22, 2014.

FRB Releases Answers to FAQs Regarding Competitive Review Process for Bank M&A Transactions

The Federal Reserve Board last week issued answers to Frequently Asked Questions that describe the manner in which the Federal Reserve Board and the Antitrust Division of the U.S. Department of Justice evaluate the competitive effects of proposed merger and acquisition transactions involving the banking industry. The FAQs reflect the agencies’ existing practices in this area. Among other matters, the FAQs address questions such as how the agencies define the relevant geographic and product markets, the appropriate weighting of deposits of commercial banks, thrifts and credit unions for purposes of evaluating the competitive effect of a transaction, what types of proposals may qualify for approval on delegated authority based upon a preliminary competitive screen, how the Federal Reserve Board may adjust deposit data based upon particular circumstances, what types of mitigating factors the Federal Reserve Board may consider if a transaction presents competitive concerns, and how the practices of the Federal Reserve Board and the Justice Department may differ as they relate to reviewing the competitive impact of a proposed transaction.

Enforcement & Litigation

SEC Administrative Law Judge Finds Adviser and Portfolio Manager Made Misrepresentations to Money Market Fund Board and Violated Rule 2a-7

In administrative cease-and-desist proceedings brought by the SEC against the adviser to a prime money market mutual fund and the fund’s portfolio manager, an SEC administrative law judge issued an initial decision finding that (1) the adviser violated the Investment Advisers Act by making misrepresentations to the fund’s board about the fund’s Eurozone strategy and about compliance with portfolio diversification and maturity restrictions; (2) the portfolio manager aided and abetted and caused certain of these violations; and (3) the adviser and portfolio manager caused the fund to fail to comply with certain requirements of Rule 2a-7 under the Investment Company Act, resulting in violations of a number of other Investment Company Act statutory provisions and rules.  Under the initial decision, the adviser is subject to a permanent bar from association with any investment company, a cease-and-desist order, and a civil penalty of $695,000, and the portfolio manager is subject to a censure, a cease-and-desist order, and a civil penalty of $126,000. In re Ambassador Capital Management, LLC and Derek H. Oglesby, SEC Initial Decision Release No. 672, File No. 3-15625 (Sept. 19, 2014).

Client Alert - Second Circuit Fails to See the Comity in Chapter 15

Goodwin Procter’s Financial Restructuring Practice has issued a client alert discussing the Second Circuit’s recent ruling in a case involving the sale of a claim against the estate of Bernard L. Madoff Investment Securities LLC in its liquidation under the Securities Investor Protection Act. of. The SIPA claim, held by a liquidating British Virgin Islands investment fund, was sold by the BVI liquidation trustee, conditioned on the approval of both the BVI court and the U.S. Bankruptcy Court.  Because a massive settlement in the Madoff matter resulted in an increase in the value of the SIPA claim, the BVI liquidation trustee asked the BVI court to invalidate the contract for his sale of the claim. Instead, the BVI court approved the sale contract but left it to the U.S. Bankruptcy Court to separately approve the sale, raising the issue of whether, in the context of a chapter 15 ancillary bankruptcy proceeding, the Bankruptcy Court should conduct a section 363 review of a sale of the SIPA Claim or defer to the BVI court’s approval as a matter of international comity. The Second Circuit held that, in a Chapter 15 ancillary proceeding, a SIPA claim is within the territorial jurisdiction of the United States and its sale by the BVI liquidation trustee must be subjected to review under the standards applied by the Second Circuit to sales under Bankruptcy Code section 363 in cases under chapters of the Bankruptcy Code other than chapter 15. In so holding, the court vacated an earlier decision of the Bankruptcy Court, which held that the SIPA claim was not within the territorial jurisdiction of the United States and that principles of comity could trump the requirements of section 363, as applied by section 1520. Krys v. Farnum Place, LLC (In re Fairfield Sentry Ltd.), No. 13-3000, (2d Cir. Sept. 26, 2014).

Industry Developments

18 Major Banks Agree to Sign ISDA Resolution Stay Protocol

The International Swaps and Derivatives Association announced that 18 major global banks (G-18) have agreed to sign a new ISDA Resolution Stay Protocol, which has been developed in coordination with the Financial Stability Board to support cross-border resolution and reduce systemic risk. Under an ISDA Master Agreement, the insolvency of a derivatives counterparty, or the start of resolution actions against it, can trigger certain close-out rights, including termination of the swap, foreclosure on collateral and claim for payments. While many existing national resolution frameworks impose stays on early termination rights following the start of resolution proceedings, these stays might only apply to domestic counterparties trading under domestic law agreements, and so might not capture cross-border trades. The Protocol will impose a stay on cross-default and early termination rights within standard ISDA derivatives contracts between G-18 firms in the event one of them is subject to resolution action in its jurisdiction. The stay is intended to give regulators time to facilitate an orderly resolution of a troubled bank. Additional background information about the resolution is available on the ISDA website.

Goodwin Procter News

Lawdragon Honors Three Goodwin Attorneys as Among the 500 Leading Lawyers in the United States

Three Goodwin Procter attorneys, including Chairman Emeritus Regina Pisa, a member of the firm’s Financial Institutions Group, were recognized as part of an elite group comprising the top 500 lawyers in the United States. The Lawdragon 500 Leading Lawyers in America profiles the year’s most influential lawyers and most important legal matters. Also listed were Brian Pastuszenski, a member of our Securities Litigation and White Collar Defense Group and David Watson, a member of our Real Estate Capital Markets Group.

New Business Litigation Reporter Available

A new edition of the Goodwin Procter Business Litigation Reporter is available with (1) timely summaries of key cases and other developments in dedicated Business Litigation sessions and related courts throughout the country and (2) an in-depth discussion of the scope and limitations of stockholder inspection demands under Delaware Code § 220 that highlights the issues a corporation should consider upon receiving such a demand.