Weekly RoundUp November 12, 2014

Financial Services Weekly News

Editor's Note
Editor’s Note
The SEC first proposed a study of the fiduciary obligations of brokers and investment advisers as required by the Dodd-Frank Act in July 2010. The SEC still has not made a decision about the shape of a fiduciary rule for brokers. Chairman Mary Jo White gave an indication of how far the five-member commission is from adopting a final rule when she said, at the annual meeting of the Securities Industry and Financial Markets Association (SIFMA) that “in the short term, there will be more clarity on that in terms of my own position.” ● Meanwhile, as we report below, the SEC has quietly approved the creation of a new category of registered investment company, the exchange-traded managed fund (ETMF), whose portfolio holdings will not be made public during the course of the trading day. ● FinCEN’s guidance on providing banking services to money services businesses, following, illustrates the difficulties that arise when private parties (banks and other financial institutions) are deputized to detect potential anti-money laundering violations by others.
Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

FinCEN Provides Guidance on Providing Banking Services to MSBs 

In a statement released November 10, FinCEN provided guidance to financial institutions on how they can provide banking services to money services businesses (MSBs) while meeting their obligations under the Bank Secrecy Act. The FinCEN statement acknowledges that MSBs play an important role in the financial system by providing financial services to people less likely to use traditional banking services as well as by providing remittance services, and it cites concerns that some banks may have terminated the accounts of MSBs or refused to open accounts for new MSBs due to concerns about regulatory scrutiny and the anti-money laundering risks posed by MSBs. The FinCEN statement advises that financial institutions should assess the risks of opening and maintaining an account for an MSB on a case-by-case basis and goes on to state that FinCEN does not support refusal to deal with MSBs on a categorical basis.

Federal Reserve Board Adopts Financial Sector Concentration Limit Rule

The Federal Reserve Board has adopted a final rule (Regulation XX) to implement Section 622 of the Dodd-Frank Act.  Section 622 establishes a financial sector concentration limit that precludes insured depository institutions, bank and savings and loan holding companies, foreign banks or companies treated as bank holding companies for purposes of the Bank Holding Company Act, companies that control an insured depository institution and systemically important companies designated by the Financial Stability Oversight Council for enhanced prudential supervision by the Federal Reserve Board (financial companies) from merging or consolidating with or otherwise acquiring control of another company if the resulting financial company’s liabilities would exceed 10% of financial sector liabilities.  Regulation XX establishes standards for measuring liabilities of various types of financial companies and aggregate financial sector liabilities and establishes periodic reporting requirements. The final rule also provides limited exceptions and exemptions, some of which require prior approval by the Federal Reserve board, depending on the size of the transaction and other factors.

Federal Banking Agencies Announce Public Outreach Meetings Related to Regulatory Reduction Review

The OCC, the FDIC and the Federal Reserve Board announced the first of a series of public outreach meetings related to the decennial review of their regulations required by the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA). The meeting will be held at the Los Angeles Branch of the Federal Reserve Bank of San Francisco on December 2, 2014. EGRPRA requires the Federal banking agencies to review their regulations every ten years to identify outdated or otherwise unnecessary requirements. The release indicates that further public outreach meetings will be held in various locations throughout the United States during 2015.

Federal Banking Agencies Release Leveraged Lending FAQs

The OCC, the FDIC and the Federal Reserve Board have released Frequently Asked Questions related to their March 2013 guidance concerning leveraged lending. Keep an eye out for Goodwin Procter’s upcoming Client Alert on the FAQs.

SEC Announces Intention to Grant Exemptive Relief for Exchange-Traded Managed Funds That Do Not Provide Daily Portfolio Holdings Disclosure Required of Actively Managed ETFs

The SEC announced its preliminary intention to grant the exemptive relief under the Investment Company Act necessary for Eaton Vance Management to introduce Exchange-Traded Managed Funds (ETMFs). ETMFs are  a new type of actively managed registered fund designed to offer certain cost and tax efficiencies features of exchange-traded funds (ETFs) while maintaining the confidentiality of portfolio holdings in the same manner as mutual funds. Like ETFs, ETMFs will engage in direct share purchases and redemptions only in large aggregations with a limited number of authorized institutional counterparties. ETMF shares will also trade in the secondary market on exchanges, where investors will buy and sell shares at the ETMF’s net asset value per share (NAV) plus or minus a quoted premium/discount. The price of an ETMF trade on an exchange is locked in at execution with the final transaction price (i.e., NAV plus or minus the quoted premium/discount) determined when the ETMF next calculates its NAV, typically at day’s end. Notably, ETMFs will not be required to disclose their portfolio holdings on a daily basis, which has been a condition in exemptive orders for all actively managed ETFs.  Eaton Vance Management, SEC Release No. IC-31333 (Nov. 6, 2014).

Industry Developments

Governor Tarullo Proposes $1 Billion Asset Threshold in Speech

In a speech at the Community Bankers Symposium in Chicago Federal Reserve Board Governor Daniel Tarullo proposed that the asset threshold for holding companies that must comply with debt limits under the FRB's Small Bank Holding Company Policy Statement be raised from $500 million to $1 billion. He explained that the limits were intended to curb the overuse of debt to finance acquisitions. Gov. Tarullo estimated that in 2006 when the threshold was set at $500 million, 85% of bank holding companies were under the threshold but that today, only 75% of bank holding companies qualify for the exemption. He stated that raising the threshold to $1 billion would increase the proportion of bank holding companies qualifying for the exemption to 89%. Because of the Collins amendment to the Dodd-Frank Act, Congress would have to approve an increase to the threshold.

FFIEC Releases Cybersecurity General Observations

The Federal Financial Institutions Examination Council (FFIEC) has released a document entitled FFIEC Cybersecurity Assessment General Observations relating to an assessment  conducted at more than 500 community financial institutions this past summer. The FFIEC also released a Cybersecurity Threat and Vulnerability Monitoring and Sharing Statement. In the General Observations document, the FFIEC emphasized that it is important for a financial institution’s management to understand the institution’s inherent risk of and vulnerability to cybersecurity threats and to actively manage and mitigate that risk. The General Observation document summarizes at a high level the types of risks financial institutions face in this area and poses some general questions for management and boards of directors to consider. In the Cybersecurity Threat and Vulnerability Monitoring and Sharing Statement, the FFIEC encourages financial institutions of all sizes to participate in the Financial Services Information Sharing and Analysis Center, which is a private sector nonprofit information forum established by financial services industry participants to facilitate sharing of information concerning cybersecurity threats and vulnerability.

The Legal Landscape for Peer-to-Peer Lending

This article discusses some of the key regulatory considerations that peer-to-peer lending companies must address to more effectively structure their business, and prepare for regulatory costs – both in dollars and time - that can impact strategic planning. Goodwin Procter partner Lynne Barr of the firm’s Financial Institutions group co-authored the piece, which was published in the Fall 2014 issue of REsource.