Weekly RoundUp March 25, 2015

Financial Services Weekly News

Editor's Note

Focus on Fiduciary Standards. In February the President’s Council of Economic Advisers (CEA) issued a Report on the Effects of Conflicted Investment Advice on Retirement Savings. In its conclusion, the Report estimated the aggregate cost of conflicted investment advice on U.S. retirement savings at about $17 billion per year. The Report has been understood by the financial industry as intended to provide support for a stricter fiduciary definition that the Department of Labor (DOL) is considering. SIFMA, the securities industry organization, has expressed its concern about the DOL’s proposal to amend the fiduciary definition. On March 16, SIFMA released a study, prepared by NERA Economic Consulting, in response to the CEA report. The NERA study argues, among other things, that there are multiple flaws in the CEA report, leading to an overestimation of the impact of conflicted investment advice on retirement savings. Meanwhile, the SEC continues to consider and debate whether to adopt a fiduciary standard for brokers and, more importantly, what it should require. SEC Chair Mary Jo White gave the clearest statement to date of her views in testimony on March 24 before the U.S. House of Representatives Committee on Financial Services. Chair White said she believes that broker-dealers and investment advisers should be subject to a uniform fiduciary standard of conduct when providing personalized securities advice to retail investors. In particular, she stated, “as set forth in Section 913 [of the Dodd-Frank Act], the financial professional giving advice to a retail client should be required to provide advice that is in the client’s best interests, without regard to the financial or other interests of the financial professional.” She acknowledged that there remain several challenges to imposing a uniform fiduciary standard, including defining the standard, which she believes should be principles-based, providing clear guidance on what the standard would require, and providing for the “meaningful application, examination, and consistent enforcement of a uniform fiduciary standard.” At the end of her remarks on the fiduciary standard, she noted that the SEC staff has provided technical assistance to the DOL staff as the DOL considers potential changes to its definition of fiduciary, and that she intends to continue to discuss the fiduciary standard with the DOL.
Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

SEC Votes to Adopt Regulation A+ and to Propose Amendment of Rule 15b9-1

The SEC took action on two matters in a meeting of the Commissioners today. The Commission voted to adopt so-called Regulation A+, an amendment to Regulation A implementing Title IV of the JOBS Act. Regulation A+ creates two tiers of offerings. Tier 1, for offerings up to $20 million, will be subject to review by state securities administrators. Offerings that qualify for Tier 2, up to $50 million, will have the benefit of preemption of state securities registration. The second vote was to propose amendments to Rule 15b9-1, which currently permits some broker-dealers to engage in off-exchange proprietary trading without becoming members of FINRA. As amended, Rule 15b9-1 would require those brokers to become FINRA members, with an exception for floor-based dealers who continue to transact predominantly on the floor of an exchange.  

SEC Commissioner Comments on Proposals by Prudential Regulators Regarding Investment Companies and Their Advisers

In remarks at the 2015 Mutual Funds and Investment Management Conference, SEC Commissioner Michael S. Piwowar commented on actions by the Financial Stability Oversight Council (FSOC) and the Financial Stability Board (FSB) with respect to the possible treatment by those bodies of investment companies and their advisers as representing potential systemic risks or threats to financial stability. Among other criticisms, Commissioner Piwowar took issue with assertions by prudential regulators that leveraged ETFs increase market volatility, which he noted was at odds with conclusions reached in a recent working paper by researchers at the Federal Reserve and the Pennsylvania State University. Commissioner Piwowar went on to discuss action that the SEC might consider in three areas to address the broader market concerns related to investment companies being raised by prudential regulators: (1) making existing quarterly fund portfolio holding information available in an interactive data format that can be readily analyzed by investors, advisers, and other industry participants and observers; (2) eliminating the types of undertakings formerly made to state regulators limiting in-kind redemptions that gave rise to the need for the exemptive relief provided by Rule 18f-1 under the Investment Company Act; and (3) examining whether the redemption requirements of Section 22(e) of the Investment Company Act may create broader market concerns and what solutions the SEC may craft through use of its rulemaking powers to allow temporary suspension of redemptions to address those concerns.

FINRA Announces Effective Date of FINRA Rule 2040 (Payments to Unregistered Persons) and Related Rules Amended and Consolidated into FINRA Rulebook

On March 20, FINRA published Regulatory Notice 15-07 announcing SEC approval of FINRA’s rule change filing to adopt NASD and NYSE rules relating to payments to unregistered persons into the consolidated FINRA rulebook as FINRA Rules 2040 (Payments to Unregistered Persons) and 0190 (Effective Date of Revocation, Cancellation, Expulsion, or Resignation). FINRA has also amended FINRA Rule 8311 (Effect of a Suspension, Revocation, Cancellation, or Bar). The new rules and amendments become effective on August 24, 2015.

FINRA Requests Comment on Proposal to Require Registration of Associated Persons Involved in the Design of Algorithmic Trading Strategies

In Regulatory Notice 15-06, FINRA requests comments on its proposal to require registration, as a securities trader, of associated persons of member firms who are “primarily responsible” for the design, development or significant modification of an algorithmic trading strategy that generates and routes orders and order-related messages relating to equity, preferred or convertible debt securities either to an exchange or over the counter, or who are responsible for supervising or directing those activities. The proposal would amend NASD Rule 1032 (Categories of Representative Registration) by adding a new subparagraph to the description of the category of Limited Representative – Equity Trader. The proposed new category would not include everyone involved in the process of creating trading algorithms, but only the key persons. The proposal also excludes some activities that don’t involve the automation of a trading strategy, such as the creation of a standard order router designed solely to satisfy the requirements of the best execution rule. The Notice states that this proposal is one of seven FINRA initiatives relating to equity market structure and automated trading activities, including high frequency trading. Comments are due by May 18.

CFTC Staff Issues Advisory Reminding FCMs, Clearing Members and Certain Other Reporting Parties of Their Reporting Obligations Pursuant to the Ownership and Control Final Rule

On March 23 the CFTC staff issued Staff Advisory No. 15-14 to remind futures commission merchants, clearing members, foreign brokers, swap dealers, and certain reporting markets (collectively, reporting parties) of their obligation to obtain information on a timely basis from their customers or counterparties in order to comply with the ownership and control reports final rule (OCR Final Rule). The staff advisory states that, pursuant to the requirements of the OCR Final Rule, reporting parties must obtain from their customers or counterparties the information necessary for reporting parties to submit certain OCR reporting forms by the deadlines specified in the OCR Final Rule. The advisory urges reporting parties to take early steps to ensure that their customers and counterparties respond promptly to requests for OCR information and otherwise assist reporting parties in fulfilling their reporting obligations under the OCR Final Rule. The advisory also describes the requirement for electronic submission of trader identification and market participant data. Reporting obligations under the OCR Final Rule follow a staggered implementation schedule with obligations beginning on October 1, 2015.

FinCEN Issues Advisory Regarding Updates to FATF-Identified Jurisdictions with AML/CFT Deficiencies 

The Financial Crimes Enforcement Network (FinCEN) issued an advisory to financial institutions regarding February 27, 2015 updates to the Financial Action Task Force (FATF) listings of jurisdictions with strategic anti-money laundering/counter-terrorist financing deficiencies. The advisory notes that financial institutions should consider these changes when reviewing their enhanced due diligence obligations and risk-based policies, procedures, and practices with respect to the relevant jurisdictions.

Enforcement Litigation

SEC Settles with Adviser and Its Principal Over Failure to Disclose Loans Among Affiliated Private Funds

The SEC settled administrative proceedings against Stilwell Value LLC, a registered investment adviser, and Joseph Stilwell, its owner and principal, over the SEC’s findings that the adviser had provided inadequate disclosure regarding loans totaling approximately $20 million made among private funds managed by the adviser, including one fund in which the principal held an approximately 24% interest, and related conflicts of interest. The settlement order includes no findings that fund investors were harmed. The adviser and the principal agreed to disgorge to investors of the lending funds more than $239,000 representing management fees charged to the lending funds with respect to the loans, plus pre-judgment interest. In addition to a civil penalty of $250,000, the adviser also agreed that it would engage an independent monitor to conduct an ongoing three-year review of the adviser’s procedures regarding , among other things, affiliated transactions, conflicts of interest, and related disclosures, and that it would fulfill various undertakings to provide the settlement order to current and prospective clients and private fund investors. The principal agreed to a civil penalty of $100,000 and to various industry bars for a 12-month period. In a related development, the respondents voluntarily dismissed, without prejudice, a suit against the SEC claiming that requiring the respondents to submit to an SEC administrative proceeding before an administrative law judge was unconstitutional. In the Matter of Joseph Stilwell and Stilwell Value LLC, SEC Release No. IA-4049 (Mar. 16, 2015).

SEC Enforcement Chief Cautions Pharmaceutical Industry on FCPA, FDA-Related Disclosures and Internal Financial Controls 

Goodwin Procter issued a Public Company Alert on a recent speech by the SEC’s Division of Enforcement, Andrew Ceresney. Mr. Ceresney spoke about the Enforcement Division’s ongoing areas of scrutiny most relevant to pharmaceutical and life science companies at CBI's Pharmaceutical Compliance Congress on March 3, 2015. These areas include compliance with the Foreign Corrupt Practices Act, corporate disclosures relating to interactions with the Food and Drug Administration and the SEC’s internal controls and financial disclosure requirements. In his remarks, Mr. Ceresney offered several suggestions for avoiding or reducing civil and criminal liability at the corporate and personal levels, which are summarized in the alert.

Supreme Court Ruling Validates DOL’s 2010 Interpretation Regarding FLSA Status of Mortgage-Loan Officers 

Goodwin Procter’s Labor & Employment Practice has prepared a Client Alert that addresses the Supreme Court’s recent ruling in rejecting a challenge to the validity of a 2010 interpretation by the U.S. Department of Labor, which had concluded that the administrative exemption of the Fair Labor Standards Act generally does not apply to mortgage-loan officers. This alert offers a review of the Supreme Court’s decision and the 2010 interpretation, and offers some guidance for employers of mortgage loan officers.