Regulatory Developments
On February 20, after collecting comments from interested parties, the SEC instituted proceedings to approve or disapprove FINRA’s proposals to amend the equity research rule, and adopt a new debt research rule. If the amendments to NASD Rule 2711 (Research Analysts and Research Reports – amendments at end of filing) are adopted, it would, among other things, be renumbered as FINRA Rule 2241, and the new debt research rule (Debt Research Analysts and Debt Research Reports – rule text at end of filing) would be adopted as FINRA Rule 2242. Comments on the proposed rule changes are due 21 days from publication in the Federal Register, and rebuttals to submitted comments are due 35 days from publication in the Federal Register.
The Staff of the SEC’s Division of Investment Management provided no-action relief in response to a request from the American Retirement Association that registered fund performance disclosures satisfying the participant-level retirement plan fee disclosure requirements of the Department of Labor in DOL Regulation 2550.404a-5 under ERISA (the “Participant Disclosure Regulation”) be treated as satisfying the requirements of Rule 482 under the Securities Act of 1933 if provided under specified conditions to plan participants or beneficiaries in certain retirement savings plans that are not subject to ERISA. Those plans include 403(b) plans, governmental 457(b) plans, governmental 401(a) plans, 415(m) plans, church 401(a) plans, non-governmental 457(b) plans, and 409A plans or 457(f) plans of governmental or tax-exempt entities. The current relief is based on 2011 no-action relief provided by the Staff at the request of the DOL with respect to registered fund performance disclosures made by plan administrators to plan participants or beneficiaries to satisfy the Participant Disclosure Regulation (as discussed in the November 1, 2011 Financial Services Alert). American Retirement Association, SEC No-Action Letter (Feb. 18, 2015).
The Staff of the SEC’s Division of Investment Management issued IM Guidance Update No. 2015-1 reminding mutual fund industry participants that the receipt of gifts or entertainment by a fund’s advisory personnel, among others, may implicate the prohibition in Section 17(e)(1) of the Investment Company Act of 1940, and therefore, in the staff’s view, should be addressed by the fund’s compliance policies and procedures. As discussed in the Guidance Update, Section 17(e)(1) generally prohibits fund advisory personnel, acting as agent, from accepting any compensation (other than regular salary or wages from the fund) from any source for the purchase or sale of any property to or for the fund. For example, a fund portfolio manager accepting any gifts or entertainment from a broker-dealer for the purchase or sale of the fund’s portfolio securities would violate Section 17(e)(1). A blanket prohibition on receiving gifts or entertainment or use of a pre-clearance mechanism for the acceptance of gifts or entertainment are mentioned as possible measures to address this issue, which the Staff has typically seen covered in adviser and fund codes of ethics.
New FinCEN Web Page Assists FBAR Filers
FinCEN has launched a new web page designed to assist individuals and institutions required to file a Report of Foreign Bank Account (FBAR). The web page includes information on determining whether an FBAR filing is required along with a variety of reference materials. FinCEN requires all FBAR reports to be filed electronically. The next FBAR filing deadline is June 30, 2015.
OCC Issues, Then Withdraws, Updated Deposit-Related Consumer Credit Handbook
On February 11, the OCC issued an updated installment to the Comptroller’s “Deposit-Related Consumer Credit” handbook. That update included statements about OCC expectations that were not consistent with prior guidance – namely that supervised financial institutions obtain customer opt-in for overdraft services (across all check and debit products), perform ability-to-repay analysis for those services, and establish overdraft fees that are “reasonably correlated to the actual cost” of the service. On February 20 the OCC placed a one-page statement on its website saying that it had withdrawn the handbook to make revisions consistent with prior guidance and anticipates that the revised handbook will be released in the next week or so.
On February 19, the Canadian Securities Administrators (CSA) announced changes to the Accredited Investor and Minimum Amount Investment exemptions and the Short Term Debt exemption. The amendments to the Accredited Investor and Minimum Amount Investment exemptions, among other things, introduce a new risk acknowledgement form for individual accredited investors that describes, in plain language, the categories of individual accredited investor and identifies the key risks associated with purchasing securities in the exempt market; provide expanded guidance on the steps a seller should take to verify the status of purchasers acquiring securities under prospectus exemptions, including the AI exemption; and restrict the Minimum Amount exemption to distributions to non-individual investors. The amendments to the Short Term Debt exemption, among other things, modify the credit ratings required to distribute short-term debt, primarily corporate commercial paper, under the short-term debt exemption; and make the short-term debt prospectus exemption unavailable for short-term securitized products, which are primarily asset-backed commercial paper, and create a new prospectus exemption for the distribution of short-term securitized products (the short-term securitized products exemption). Also on February 19, the Ontario Securities Commission (OSC) announced a notice of amendments to National Instrument 45-106 adding a Family, Friends and Business Associates exemption. The exemption, largely harmonized with an exemption currently available in other Canadian jurisdictions, allows for the sale of securities by a selling security holder or an issuer to principals of the issuer as well as certain family members, close personal friends and close business associates. The exemption is based on investors having a sufficiently close relationship with a principal of the issuer to assess the capabilities and trustworthiness of the principals and access information about their investment. As a condition to the exemption, a signed risk acknowledgement form must be obtained, setting out the key risks related to the investment and confirming how the investor qualifies to make the investment.
Goodwin Procter does not advise on Canadian securities law. We can recommend Canadian counsel if you would like more information.
Enforcement & Litigation
SEC Settles With Broker and its CEO Over Participation in CDO Liquidation Auctions
The SEC announced that it had settled administrative proceedings against VCAP Securities, LLC, a broker-dealer engaged to conduct auctions liquidating certain collateralized debt obligations (CDOs), and Brett Thomas Graham, VCAP’s CEO, over SEC findings that the respondents had improperly arranged for a third-party broker-dealer to bid in these liquidation auctions on behalf of Vertical Capital, LLC, VCAP’s affiliated investment adviser, for which the CEO acted as a portfolio manager. The third-party broker-dealer successfully bid for bonds in the liquidation auctions at prices designated by VCAP based on its knowledge of other bids and subsequently sold the bonds at a slight mark-up to funds and separate accounts managed by the affiliated adviser. Under the engagement agreements with the CDOs’ trustees, VCAP and its affiliates were prohibited from bidding in the liquidation auctions and from misusing confidential information or bidding information VCAP received as the liquidation agent. The SEC also found that the CEO used confidential bidding information to enable a third-party bidder to reduce its bid on certain bonds to a winning price only slightly higher than those submitted by other bidders. The SEC found that this conduct violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. VCAP agreed to pay disgorgement and prejudgment interest of $1,149,599. The CEO agreed to pay disgorgement and prejudgment interest of $127,733, and a civil money penalty of $200,000. The CEO also agreed to a securities industry bar for at least three years, subject to a narrow one-year exception during which the CEO may continue to be employed by the affiliated adviser solely for the purpose of assisting it in the sale, or transfer to independent managers, of securities and positions held by any funds or accounts the adviser manages. In re VCAP Securities, LLC, and Brett Thomas Graham, SEC Release No. 34-74305 (Feb. 19, 2015).
Contacts
- /en/people/l/lavigne-peter
Peter W. LaVigne
Of Counsel