SEC Proposes Changes to Exchange Act Registration Requirements to Implement JOBS Act Mandates
The SEC announced that it is proposing rule amendments under the Securities Exchange Act of 1934 that implement mandates under the JOBS Act. The proposed amendments would revise rules adopted under Section 12(g) of the Exchange Act to reflect the new, higher thresholds for registration, termination of registration and suspension of reporting provided in the JOBS Act. The proposed rules also would apply the thresholds specified for banks and bank holding companies to savings and loan holding companies. In addition, the proposed amendments would revise the definition of “held of record” in Exchange Act Rule 12g5-1 to exclude certain securities received pursuant to employee compensation plans and establish a non-exclusive safe harbor for determining whether securities are “held of record” for purposes of registration under Exchange Act Section 12(g). Comments on the proposed amendments are due no later than 60 days after the proposed amendments appear in the Federal Register.
SEC Extends Sunset of Temporary Rule for Advisers Governing Certain Principal Transactions Until December 31, 2016
The SEC issued a release extending until December 31, 2016 (from December 31, 2014) the date on which Rule 206(3)-3T under the Investment Advisers Act of 1940 will sunset. Rule 206(3)-3T was adopted as a temporary rule in 2007 following a decision by the Court of Appeals for the District of Columbia Circuit that struck down an SEC rule addressing the application of the Advisers Act to certain activities of broker-dealers (see the April 10, 2007 Financial Services Alert for a discussion of that decision). The Rule is designed to enable a dually-registered broker-dealer’s non-discretionary customers that have converted their current fee-based brokerage accounts to fee-based advisory accounts to have continued access to securities available on a principal basis from the firm without requiring the firm to comply with the strict terms of Section 206(3)’s disclosure and consent requirements. The SEC adopted the extension to avoid the disruption that would have resulted from allowing the Rule to expire while the SEC continues a comprehensive review of broker-dealer and investment adviser regulation that may ultimately result in different regulatory requirements.
New York DFS Superintendent Lawsky Remarks on Revised BitLicense Framework for Virtual Currency Regulation
In remarks delivered at the Bipartisan Policy Center on December 18, Benjamin M. Lawsky, Superintendent of Financial Services for the State of New York, announced the new revised proposed New York State Department of Financial Services (DFS) BitLicense framework for regulating virtual currencies. He said that the updated text of the proposed regulation would be posted for public comment on the web and in the New York State Register “in the coming days,” and that the DFS hopes to issue the final regulatory framework by early 2015. Mr. Lawsky also stated that the updated proposal incorporates many changes from the 3,700-plus public comments received during the initial period, and made clarifications regarding who would be required to obtain a BitLicense under the proposed framework.
FSOC Seeks Comment on Potential Financial Stability Risks Related to Asset Management Industry Products and Activities
The Treasury announced that the Financial Stability Oversight Council (FSOC) has issued a notice seeking public comment regarding potential risks to U.S. financial stability from asset management products and activities. FSOC is seeking input from the public about potential risks to the U.S. financial system associated with issues of liquidity and redemptions, leverage, operational functions, and resolution in the asset management industry. Comments must be received no later than 60 days after the notice’s publication in the Federal Register.
NFA Submits Amendments Excepting Loans to Wholly-Owned Subsidiaries from Prohibition on Loans by Commodity Pools to CPOs and Related Entities
The National Futures Association (NFA) submitted to the CFTC proposed amendments to the Interpretive Notice to NFA Compliance Rule 2-45, “Prohibition of Loans by Commodity Pools to CPOs and Related Entities,” that would create an exception for loans by a pool to a wholly‑owned subsidiary provided enumerated conditions are met. The NFA proposed that the amendment become effective 10 days after its receipt by the CFTC unless the CFTC notifies NFA that it will review the proposal for approval.
ESMA Publishes Final Guidance on MiFID II Implementation
The European Securities and Markets Authority has published its technical advice on the implementation of the Markets in Financial Instruments Directive II (“MiFID II”) and the associated Markets in Financial Instruments Regulation (“MiFIR”). The vast majority of the new rules apply only to European authorized firms, although the rules requiring certain investment transactions to be effected on exchanges, the rules applying to high frequency algorithmic traders and the requirement for non-EU firms dealing with the EU clients to be registered with ESMA will have effect outside the EU. The rules are likely to take effect at the beginning of 2017.
Client Alert - Federal Reserve Extends Volcker Rule Conformance Period for Covered Funds Activities for One Year
William E. Stern prepared a Client Alert that discusses the announcement by the Board of Governors of the Federal Reserve System that it has extended the conformance period under the Volcker rule for one additional year – until July 21, 2016 – to allow banking entities to conform investments in and relationships with covered funds and certain foreign funds subject to the Volcker rule that were in place prior to December 31, 2013 (“legacy covered funds”) to the requirements of the Volcker rule. The Federal Reserve Board also announced its intention to act next year to grant banking entities an additional one-year extension of the conformance period -- until July 21, 2017 -- to conform ownership interests in and relationships with such legacy covered funds to the requirements of the Volcker rule.
Litigation & EnforcementFINRA Fines Firms $1.5 Million for Failing to Conduct AML Identity Verification Procedures on Over 200,000 New Accounts
FINRA announced that it has reached a joint settlement with two St. Louis-based broker-dealers under common control, Wells Fargo Advisors and Wells Fargo Advisors Financial Network, to pay a joint fine of $1.5 million for defects in their shared proprietary system for conducting the Customer Identification Program (CIP) required under the anti-money laundering (AML) compliance requirements applicable to registered broker-dealers. FINRA found that as a result of these defects, over a period of more than 8 years the firms failed to subject approximately 220,000 new customer accounts to the required identity-verification process. In deciding on sanctions, FINRA considered that the firms discovered the CIP-related violations through an internal testing program, investigated their causes and scope, performed remedial identity verification on the approximately 100,000 affected accounts that remained open, made programming changes to their CIP and transaction processing systems in an effort to prevent recurrences, and reported the violations to FINRA in accordance with FINRA Rule 4530(b). In FINRA’s announcement, Brad Bennett, FINRA's Executive Vice President and Chief of Enforcement, commented that “[f]irms must be vigorous in the testing of their electronic systems to ensure they are operating correctly, including those designed to ensure compliance with critical aspects of the AML rules. While the firms eventually discovered the flaw in their own systems, it took far too long, resulting in hundreds of thousands of accounts to open and often close without the required identification process ever taking place.”
FinCEN Steps Up Civil Assessments Against Individuals and Smaller Outfits
FinCEN recently assessed a $1 million penalty against an individual, the Chief Compliance Officer for MoneyGram, a money services business (MSB), for actions between 2003 and 2008, when his employment ended. During that period, certain MoneyGram agents and outlets in the United States and Canada participated in schemes to defraud the public, using MoneyGram’s money transfer system to facilitate the schemes. FinCEN found that the Chief Compliance Officer had willfully violated the requirements to (1) implement and maintain an effective anti-money laundering program and (2) report suspicious activity. MoneyGram had previously settled a complaint by the Federal Trade Commission involving the same fraudulent conduct by Moneygram agents by paying an $18 million penalty. FinCEN’s civil assessments involving employees of MSBs have generally been below $45,000. FinCEN also recently assessed a $300,000 penalty against a five-employee credit union with assets totaling less than $4 million, topping the last highest penalty assessed against a credit union, which was $185,000. The credit union committed a series of violations involving over $2 billion worth of transactions; it failed to properly file SARs, permitted transactions in high-risk jurisdictions, and did not comply with requirements of Section 314(a) of the USA Patriot Act.
New ERISA Litigation Update Available
Goodwin Procter’s ERISA Litigation Practice published its latest quarterly ERISA Litigation Update. The update discusses (1) Nationwide Life Insurance Co.’s proposed $140 million settlement of ERISA fiduciary breach claims brought on behalf of a class of retirement plan trustees that purchased annuity contracts or services from Nationwide for their plans; (2) the Ninth Circuit’s application of the Supreme Court’s decision in Fifth Third v. Dudenhoeffer to reverse dismissal of a stock drop case; (3) a decision by the Sixth Circuit upholding a venue selection clause in a pension plan and affirming dismissal of the participant’s claims for benefits on the ground that such claims were not filed in the authorized venue; and (4) a federal district court decision holding that participants in a defined benefit plan had standing to challenge plan fiduciaries’ strategy of investing 100% of the plan’s assets in equities, but dismissing the challenge as untimely under ERISA’s six-year statute of limitations.