Weekly RoundUp November 05, 2014

Financial Services Weekly News

Editor's Note
Editor’s Note
The Day After: There are still a few undecided races but we know that Republicans will control the House and the Senate in the next session of Congress. This may provide an opportunity for more bipartisan legislation in the financial services area. There is reason to hope that Congress will be able to pass legislation that President Obama will sign that could soften some of the hard edges of the Dodd-Frank Act, such as the effect of regulations intended for large banks on small and regional banks, the application of SIFI rules to insurance companies, the regulation of end-users of derivatives, the broad definition of municipal advisor and the required disclosure of the origin of conflict minerals. In addition, the SEC may now adopt, pare back or drop some proposals that have been on hold, like the crowdfunding rules, amendments to Rule 506 and Form D, and fiduciary standards for brokers. Whatever happens, we’ll be here to cover it.
Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

Basel Committee on Banking Supervision Releases Final Net Stable Funding Ratio Standards

The Basel Committee on Banking Supervision (the “Committee”) released last week its final standards for the Net Stable Funding Ratio (“NSFR”), a key component of the Committee’s capital and liquidity reforms following the financial crisis.  To the extent implemented by national supervisors, the NSFR will require banking organizations to maintain available stable funding—consisting of capital, long term borrowings, certain types of deposits and other sources of stable funding—in an amount at least equal to the institution’s required stable funding needs over a one year time horizon.  The required amount of stable funding relates to the liquidity profile of the institution’s assets and off-balance sheet exposures.  The NSFR seeks to reduce maturity mismatches between the asset and liability sides of the balance sheet.  In general, the Committee’s final standards for the NSFR are consistent with its January 2014 consultative document, except that the Committee made certain adjustments to how institutions will be required to weight certain assets and exposures for purposes of determining required stable funding.  The Committee has established an implementation date of January 1, 2018. 

OCC Updates MRA Guidance

The OCC updated its policy and procedures regarding matters requiring attention (“MRAs”), which relay supervisory concerns identified during exams in writing to boards and management teams of national banks and federal savings banks.    The OCC stated that it will use “the five Cs” when communicating MRAs: concern, cause, consequence, corrective action and commitment. These elements are designed to encompass how a bank practice deviates from sound principles or regulations, the root cause for the MRA when evident, how the practice could affect the bank down the road, what the bank must do to address the concern and the bank’s specific action plan for responding.  The OCC also stated that examiners will respond to bank communications on MRAs within 30 days, and will communicate whether the concern will be closed or remain open for further action.

SEC Staff Issues IM Guidance Update on Mixed and Shared Funding Orders

The SEC’s Division of Investment Management issued IM Guidance Update No. 2014-10 addressing mixed and shared funding orders, which are exemptive orders that relate to variable life and annuity issuers and mutual funds serving as investment options under variable life and annuity contracts.  The staff explains the history of the orders, and notes that there may little or no need for the relief they provide.  In view of the Guidance Update, new funds should consider whether there is a need to seek an order.  In addition, funds with existing orders may consider whether they need to comply with the conditions going forward, based on the needs of the investing insurance companies and the governing participation agreements.

SEC Staff Issues IM Guidance Update on Consolidating Financial Statements for Certain Registered Funds and BDCs

The Chief Accountant’s Office of the SEC’s Division of Investment Management issued IM Guidance Update 2014-11 which addresses when to consolidate financial statements (1) for a registered fund, if it is (a) a feeder fund in a master-feeder structure or (b) is a fund of funds investing in underlying funds in the same group of investment companies, and (2) for a business development company (BDC), if it has a wholly-owned subsidiary, e.g., to facilitate investment in a portfolio company.

IRS Issues Guidance on the Use of Deferred Annuities in 401(k) Plans

The IRS issued Notice 2014-66 on October 24, 2014 addressing lifetime income provided through target date funds in 401(k) plans.  The Notice provides a special rule that is designed to facilitate the use of target date funds that include deferred annuities among their assets.  Specifically, subject to certain conditions, a plan may treat a series of target date funds as a single right under the plan and may further limit participation in one or more of the target date funds to older participants.  The Department of Labor issued a related Information Letter addressing (i) how a series of target date funds whose investments include deferred annuities as described in Notice 2014-66 may serve as a qualified default investment alternative (QDIA) and (ii) how such investments may qualify for the annuity selection safe harbor.

Enforcement & Litigation

SEC Commences Administrative Proceeding Against Adviser and Its Principals and CCO for Failing to Meet Custody Rule Deadline for Distributing Fund Financial Statements

The SEC announced that it had instituted contested administrative proceedings against (i) Sands Brothers Asset Management, LLC, a registered adviser that sponsors and manages a number of private funds, (ii) the adviser’s two principals, Steven and Martin Sands, and (iii) the adviser’s chief compliance officer (CCO), Christopher Kelly, over alleged violations of Rule 206-4(2) under the Advisers Act, often referred to as the “custody rule,” which addresses adviser access to client assets.  The SEC alleges that for the period 2010 – 2012, having failed to submit to surprise examinations by an independent public accountant as provided under the Rule, the adviser did not meet the Rule’s 120-day deadline for delivering the funds’ audited annual financial statements to investors.  According to the SEC’s order instituting administrative proceedings, the audited financials were from 40 to as much as 242 days late during this period.  The order notes that the respondents were previously sanctioned by the SEC in 2010 for custody rule violations and alleges that no remedial action was taken in response to that order to address custody rule compliance.  In re Sands Brother Asset Management, SEC Release No. IA-3960 (Oct. 29, 2014).

Industry Developments

Director of SEC’s Division of Investment Management Discusses Alternative Mutual Funds at SIFMA Complex Products Forum

In a speech at the SIFMA Complex Products Forum on October 29, 2014, Norm Champ, Director of the SEC’s Division of Investment Management, discussed, among other topics, alternative mutual funds (i.e., open-end mutual funds whose primary investment strategy involves non‑traditional asset classes, non-traditional strategies, and/or illiquid assets).  Mr. Champ stressed the need for alternative mutual funds to assess the accuracy and completeness of their disclosure of investment strategies and risks, including the need to provide disclosure using plain English.  He also touched on topics such as (1) the need to consider the degree of economic exposure an alternative investment strategy creates, in addition to the amount invested in that strategy, (2) the need to disclose material risks relating to volatility, leverage, liquidity and counterparty creditworthiness that are particular to alternative investment strategies, and (3) the need to assess disclosure in light of actual operations, an area where the Division staff has been reviewing data to make its own assessment of disclosure versus practice.

Client Alert: The Alternative Investment Fund Managers Directive One Year On – A Guide for Non-EU Managers

Goodwin Procter’s Glynn Barwick prepared a Client Alert that provides an update on the changing regulatory environment for non-EU private fund managers selling funds in the European Union as individual countries have implemented their own differing regimes under the Alternative Investment Fund Managers Directive.  The Alert discusses country-specific differences, the types of investors to be approached, the number of investors involved, record keeping and timing when it comes to reverse solicitation.  It also details what is generally acceptable when it comes to soft-marketing in most EU jurisdictions and highlights difficulties non-SEC registered fund managers face when it comes to obtaining registration in an EU jurisdiction.

Client Alert: Cross-Border EU Financial Services – a Guide for Non-EU Firms

Glynn Barwick prepared a Client Alert that discusses how non-EU firms providing cross border investment services to EU-based clients will be affected by new requirements, similar to those under the AIFMD, that will be implemented as a result of recent changes to the relevant Markets in Financial Instruments Directive (MiFID).

Goodwin Procter Financial Institutions Group News

Glosband Donates Papers to National Bankruptcy Archives

Daniel Glosband, Of Counsel in Goodwin’s Financial Institution Group and a recognized expert in the field of international insolvency and restructuring, recently donated his papers on the UNCITRAL Model Law, the UNCITRAL Legislative Guide on Insolvency Law, and Chapter 15 of the Bankruptcy Code to the National Bankruptcy Archives.  Among his many contributions to the field, Glosband was a founding member of the International Insolvency Institute, a participant in the UNCITRAL Working Group on Insolvency Law that produced the Model Law, a member of the working group that produced the UNCITRAL Legislative Guide on Insolvency Law, and one of only two primary drafters for Chapter 15 of the Bankruptcy Code. He retired as a partner at Goodwin on September 30, 2014.