Weekly RoundUp December 17, 2014

Financial Services Weekly News

Editor's Note

Editor’s Note

Amendment to Swaps Push-out Provision of Dodd-Frank: Section 630 of the recently passed Consolidated and Further Continuing Appropriations Act, 2015 (“Omnibus Spending Bill” – see p. 249) amends Section 716 of the Dodd-Frank Act, titled “Prohibition Against Federal Government Bailouts of Swaps Entities,” to permit certain depository institutions a greater range of swaps activities. Section 716 currently prohibits Federal assistance, including the use of any advances from any Federal Reserve credit facility or discount window, to any swaps entity. This includes an insured depository institution acting as a swaps dealer or security-based swaps dealer, unless it limits its activities to bona fide hedging activities and traditional bank activities. Section 716 does not prohibit an insured depository institution from having or establishing an affiliate that does business as a swaps entity, in effect encouraging depository institutions to push out non-permitted swaps activities to affiliates. The Omnibus Spending Bill would amend Section 716 to permit “covered depository institutions” to engage in swaps transactions other than activities in “structured finance swaps,” which are defined as “swaps or securities-based swaps based on an asset-backed security (or group or index primarily comprised of [sic] asset-backed securities).” Even activities in structured finance swaps would be permitted if undertaken for hedging or risk management purposes or if the asset-backed security underlying the structured finance swaps meets certain requirements established by rules adopted by the prudential regulators. The amendment would also extend the benefit of the exclusions to “covered depository institutions,” a term that includes not only insured depository institutions but also any U.S. uninsured branch or agency of a foreign bank. President Obama is expected to sign the Omnibus Spending Bill.
Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

OFAC Releases New Cuba-Related Frequently Asked Question
OFAC has released a statement in which it indicated its intent to revise its Cuban Asset Control Regulations to reflect recent changes in U.S. policy toward Cuba announced by President Obama, but that its existing regulations remain in effect until new regulations are issued.

Federal Reserve Board Proposes Rule for Identifying GSIBs and Establishing GSIB Capital Surcharges
The Federal Reserve Board last week issued a proposed rule to implement its authority under Section 165 of the Dodd-Frank Act to establish enhanced risk-based capital standards by identifying the largest, most interconnected U.S. based bank holding companies as global systemically important banking organizations (“GSIBs”) and imposing an additional capital surcharge on GSIBs. The proposed rule would require each top-tier U.S. bank holding company with total consolidated assets of $50 billion or more that is not a subsidiary of a non-U.S. banking organization to determine annually whether it is a GSIB based on its size, interconnectedness, substitutability, complexity and cross-jurisdictional activity. Each banking organization that is identified as a GSIB using the prescribed methodology would be subject to a risk-based capital surcharge that would increase its capital conservation buffer under the Federal Reserve Board’s regulatory capital rule. The Federal Reserve Board is proposing that the surcharge framework be phased in beginning January 1, 2016 through the end of 2018 and that it would become fully effective on January 1, 2019. Comments must be submitted by February 28, 2015. 

Federal Reserve Board Requests Comment for Depository Institution Holding Companies with Non-Traditional Capital Structures
The Federal Reserve Board has invited public comment on a proposed rulemaking that provides guidance on how to apply the Federal Reserve’s revised capital framework to depository institution holding companies with non-traditional capital structures. The proposed rule describes how the Federal Reserve would apply the qualification criteria for common equity tier 1 capital under Regulation Q to instruments issued by bank holding companies and savings and loan holding companies (holding companies) that are organized as legal entities other than stock corporations, such as limited liability companies and partnerships. The proposal describes examples of the capital instruments typically issued by holding companies organized in limited liability company or partnership form that have been reviewed by the Federal Reserve in the past, discusses features that prevent certain capital instruments from qualifying as common equity tier 1 capital, and provides suggestions on changes that would allow such instruments to qualify as common equity tier 1 capital. The proposal would extend the applicable compliance date with the Federal Reserve’s revised capital rules for all holding companies that are subject to Regulation Q and are organized in forms other than stock corporations from January 1, 2015 to January 1, 2016. Small bank holding companies that are subject to the Board’s Small Bank Holding Company policy statement rather than Regulation Q would not be affected by the proposed rule. Savings and loan holding companies that are personal or family trusts and holding companies that are employee stock ownership plans would be temporarily exempted from the proposed rule. The Federal Reserve will accept comments on the proposed rule through February 28.

SEC Chair Discusses Asset Management Initiatives
In a December 11, 2014 speech, SEC Chair Mary Jo White outlined three areas in which the SEC staff is developing regulatory initiatives for the asset management industry and discussed the SEC’s role in addressing systemic risk as a complement to its traditional missions of investor protection, orderly and efficient markets, and facilitating capital formation. The first initiative involves enhanced data reporting by registered funds and advisers, including (1) updates to the collection of basic census information, (2) significant enhancements to reporting and disclosure of fund investments in derivatives, liquidity and valuation of fund holdings, and securities lending practices and (3) collection of additional data on separately managed accounts. The second initiative involves enhancing controls for registered funds on risks related to portfolio composition, including (a) the possibility of requiring broad risk management programs for mutual funds and ETFs to address the risks related to their liquidity and derivatives use and (b) more focused requirements, such as updated liquidity standards, disclosure of liquidity risks, or measures to appropriately limit the leverage created by a fund’s use of derivatives. The third initiative addresses the impact on investors of a market stress event or the adviser’s ability to continue serving its clients. The staff is developing a recommendation to require investment advisers to create transition plans to prepare for a major disruption in their businesses. The staff is also considering ways to implement the requirements for annual stress testing by certain large investment advisers, funds and broker-dealers, as required by Section 165(i)(2) of the Dodd-Frank Act.

SEC Staff Provides Guidance on Treating Investors in Certain Private Funds as Remote Affiliates of BDCs Managed by the Same Adviser
The Staff of the SEC’s Division of Investment Management issued IM Guidance Update No. 2014-12 in response to inquiries regarding the restrictions applicable to co-investments by a business development company (BDC) alongside certain investors in a private fund organized as a limited partnership that is under common control with the BDC because of their common adviser. Under the guidance, limited partner investors whose interest in the private fund is at least 5% but no greater than 25% may be treated as having the same “remote affiliate” status they would have if the fund were a corporation and their affiliate status were based solely on the size of their interest (and not their status as partners which would otherwise cause them to be “close affiliates”). Under affiliate transaction prohibitions in Section 57 of the Investment Company Act, certain transactions between a BDC and an affiliate that would not be permitted absent exemptive relief when the affiliate is a “close affiliate” are allowed when the affiliate is a “remote affiliate” if specified requirements regarding approval by the BDC’s directors are met.

FinCEN Extends FBAR Filing Deadline Until June 30, 2016 for Certain Individuals With Signature Authority Only Over Certain Foreign Financial Accounts
On November 24, 2014, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued FinCen Notice 2014-1 (the “Notice”), extending until June 30, 2016 the date by which certain individuals with signature authority over but no financial interest in one or more foreign financial accounts must file FinCen Form 114 – Report of Foreign Bank and Financial Accounts (“FBAR”), formerly known as FinCen Form TD-F 90-22.1. The Notice further extends the deadlines that were previously extended by FinCen Notice 2013 1 and additional prior notices (together, the “Prior Notices”). For more information regarding the Prior Notices and the FBAR filing requirements, please see the January 8, 2013 Financial Services Alert.

Litigation & Enforcement

FINRA Fines 10 Firms a Total of $43.5 Million for Allowing Equity Research Analysts to Solicit Investment Banking Business and for Offering Favorable Research Coverage in Connection With Toys"R"Us IPO
FINRA announced that it has fined 10 firms a total of $43.5 million for allowing their equity research analysts to solicit investment banking business and for offering favorable research coverage in connection with the 2010 planned initial public offering of Toys"R"Us. FINRA found that each of the 10 firms used its equity research analyst as part of its solicitation for a role in the IPO. As detailed in the settlement documents, each of the firms implicitly or explicitly at presentations to Toys"R"Us management and sponsors or in follow-up communications offered favorable research coverage in return for a role in the IPO. The Letters of Acceptance documenting the settlements are available here.

FINRA Fines Firm $15 Million for Supervisory Failures Related to Equity Research and Involvement in IPO Roadshows
FINRA announced that it has entered into a settlement with Citigroup Global Markets, Inc. (Citigroup) under which the firm will pay $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, with respect to the approximately 100 internal warnings concerning communications by equity research analysts involving selective dissemination and client communications, FINRA found that there were lengthy delays before the firm disciplined the research analysts and the disciplinary measures lacked the severity necessary to deter repeat violations. FINRA also found that, in 2011, in violation of the prohibition in NASD Rule 2711(c)(5), a Citigroup senior equity research analyst assisted two companies in preparing presentations for investment banking road shows. Between 2011 and 2013, Citigroup’s written supervisory procedures did not expressly prohibit equity research analysts from assisting issuers in the preparation of road show presentation materials.

FINRA Fines Firm for Not Delivering ETF Prospectuses
FINRA entered into a settlement with Citigroup Global Markets Inc. (Citigroup) related to FINRA’s findings that the firm failed to deliver ETF prospectuses for approximately 255,000 customer purchases of approximately 160 ETFs during September to November 2010, as self reported by the firm, and from 2009 through April 2011, may have failed to deliver prospectuses for over 1.5 million ETF purchases by its customers. Citigroup agreed to pay a fine of $3 million. The settlement cited the fact that in September 2007, in connection with New York Stock Exchange Hearing Board Decision 07-143, Citigroup had consented to a finding that it had failed to deliver product descriptions (or any other disclosure document, such as a prospectus) to certain customers who purchased ETFs, and had agreed to a fine of $2.25 million.

Client Alert: Second Circuit Raises the Bar for Government Insider Trading Prosecutions – Practical Implications for the Business Community
Goodwin Procter’s Securities Litigation & White Collar Defense Group issued a Client Alert that analyzes, and discusses the practical implications of, the much publicized decision by Second Circuit reversing two high-profile insider trading convictions and making it more difficult for the government to bring insider trading liability charges against traders who are several levels removed from the corporate insider who was the original source of the information.

Goodwin Procter Persuades Court to Vacate $16.2 Million Verdict Against Loan Servicer
In a widely cited case, the Yuba County (CA) Superior Court recently set aside all but $160,000 of a $16.2 million jury verdict. The case involved tort and breach of contract claims and an award of punitive damages arising out of a residential loan modification. The court vacated the tort verdicts, finding that plaintiff could not recast a breach of contract as a tort and that there was not substantial evidence to support those verdicts. For a more detailed summary of the case, please click here.