On November 20, the CFPB proposed several foreclosure-related amendments to its mortgage servicing rules. The proposal, which is open for comment for 90 days, amends various facets of the mortgage servicing rules, including rules related to successors in interest, requests for information, force-placed insurance disclosures, early intervention obligations, prompt payment crediting, and periodic statements. Additionally, the proposal amends certain loss mitigation-related requirements regarding the collection and evaluation of loss mitigation applications, the ability of a subordinate lien holder to join a foreclosure action filed by a senior lien holder, and the application of loss mitigation requirements where servicing is transferred during the loss mitigation process. The proposal would also change the definition of “small servicer” to exclude certain seller-financed transactions.
The SEC adopted Regulation Systems Compliance and Integrity (“Reg. SCI”), which will require certain self-regulatory organizations, alternative trading systems (ATSs), plan processors, and exempt clearing agencies (collectively, “SCI Entities”) to have comprehensive policies and procedures in place for their technological systems. Reg. SCI’s requirements include (i) monitoring for systems disruptions, compliance issues, and intrusions (“SCI Events”); (ii) reporting on SCI Events to the SEC and, in certain instances, to affected members and participants; (iii) periodic systems testing and related reporting to the SEC; and (iv) participation by designated members or participants in scheduled testing of business continuity and disaster recovery plans coordinated on an industry- or sector-wide basis with other SCI Entities. In conjunction with Reg. SCI’s adoption, the SEC staff issued guidance that lists examples of publications describing processes, guidelines, frameworks, or standards an SCI Entity may look to in developing Reg. SCI compliant policies and procedures. Reg. SCI becomes effective 60 days after publication in the Federal Register with compliance generally required no later than nine months after the effective date, except for the industry/sector-wide coordinated testing requirement for which compliance is not mandatory until 21 months after the effective date.
A proposal by FINRA to incorporate NASD Rule 2711 (Research Analysts and Research Reports) and portions of NYSE Rule 472 (Communications Rule) relating to research analysts and research was issued in SEC Release No. 34-73622 on November 18, 2014. The proposal would make some substantive changes, including a greater emphasis on supervisory processes to establish, maintain and enforce written policies reasonably designed to identify and effectively manage conflicts of interest relating to the preparation, content and distribution of research reports. Other proposed changes would reduce or eliminate some quiet periods and give firms more flexibility to design appropriate personal trading restrictions in place of the current prescribed blackout periods. The proposal would also amend NASD Rule 1060 and NYSE Rule 344 to create an exception from the research analyst qualification requirement for persons who prepare research reports on an occasional basis and not as part of their primary job function. A copy of the rule text may be found at the end of the FINRA rule filing. Comments are due on or before December 15, 2014.
A proposal by FINRA to adopt a new Rule 2242 (Debt Research Analysts and Debt Research Reports) was issued in SEC Release No. 34-73623 on November 18, 2014. The proposed rule, is intended to apply the concepts of current NASD Rule 2711, applicable to equity research and research analysts, to debt research and debt research analysts, with some differences based on how debt securities are traded. A copy of the rule text may be found at the end of the FINRA rule filing. Comments are due on or before December 15, 2014.
Enforcement & Litigation
FINRA announced that it has fined Citigroup Global Markets, Inc. $15 million for failing to adequately supervise communications between its equity research analysts and its clients and Citigroup sales and trading staff, and for permitting one of its analysts to participate indirectly in two road shows promoting IPOs to investors. FINRA found that from January 2005 to February 2014, Citigroup failed to meet its supervisory obligations regarding the potential selective dissemination of non-public research to clients and sales and trading staff. During this period, Citigroup issued approximately 100 internal warnings concerning communications by equity research analysts. However, when Citigroup detected violations involving selective dissemination and client communications, FINRA found, there were lengthy delays before the firm disciplined the research analysts and the disciplinary measures lacked the severity necessary to deter repeat violations of Citigroup policies. Letter of Acceptance, Waiver and Consent re: Citigroup Global Markets Inc.
The SEC’s Office of the Whistleblower issued its 2014 Annual Report to Congress required under the Dodd-Frank Act. Along with information on claims, awards, SEC efforts to combat retaliation against whistleblowers, and tips categorized by geographic location and allegation type, the report provides general profiles of whistleblower award recipients. The report notes that to date, over 40% of award recipients were current or former company employees and 20% of recipients were contractors, consultants, or persons solicited to act as consultants for the company committing the securities violation. Over 80% of the employee recipients raised their concerns internally to their supervisors or compliance personnel before reporting to the SEC. In these instances, the individuals reported information concerning possible securities violations to the SEC only after reporting the information internally and understood that the entity was not taking steps to address or remedy the violative conduct.
In an article published in the INSOL International Newsletter for November, Dan Glosband amplified the criticism of a recent Second Circuit decision that they began in an October 2014 Client Alert. Conflicting with the spirit and purpose of Chapter 15 of the Bankruptcy Code, that courts should defer to procedurally proper foreign insolvency proceedings, the court declined to grant comity to the foreign court’s approval of a sale by its liquidator and, instead – and incorrectly – required de novo review of that sale under principles applied to sales in U.S. cases under section 363.