Weekly RoundUp April 15, 2015

Financial Services Weekly News

Editor's Note
DOL Fiduciary Standard Proposal. The Department of Labor issued a notice of proposed rulemaking including a definition of the term “fiduciary,” a conflict of interest rule for retirement investments, new exemptions and related amendments in a coordinated release with several documents announcing the proposals. These include a press release, FAQs, a blog, a fact sheet (probably the best first document for advisers and their attorneys to read) and the proposals themselves. The DOL’s gateway page for the rule also contains links to other resources. In the fact sheet, the DOL notes that this proposal is different from the 2010 proposal in several ways, as a result of extensive consultation with the SEC and other stakeholders. The new proposal, while expanding the types of retirement investment advice covered by fiduciary protections, especially for IRAs, also provides carveouts for retirement education, order-taking by brokers and sales pitches to plan fiduciaries with financial expertise. Unlike the prior proposal, the new proposed rule would identify fiduciaries not by title but by the type of advice rendered. The DOL has also proposed new exemptions at the same time as the proposed new standard, so that interested persons can review and assess the new regulatory framework as a whole. One exemption is the so-called “best interest contract exemption” that requires an adviser providing retirement investment advice to enter into a contract with its client that (1) commits the firm and adviser to providing advice in the client’s best interest, (2) warrants that the firm has adopted policies and procedures designed to mitigate conflicts of interest and (3) clearly and prominently discloses any conflicts of interest, like hidden fees, that might prevent the adviser from providing advice in the client’s best interest. The intention of the exemption is for the client to have a contractual cause of action against the adviser if the client suffers financial harm as a result of the adviser’s conflict of interest. The DOL also requests comment on other possible exemptions. Comments are due within 75 days of publication of the proposals in the Federal Register.
Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

Federal Reserve Board Adopts Changes to Small Bank Holding Company Policy Statement

The Federal Reserve Board has adopted revisions to its Small Bank Holding Company Policy Statement (the Policy Statement) to raise the asset threshold to qualify for the Policy Statement from $500 million to $1 billion and to expand the applicability of the Policy Statement to savings and loan holding companies that satisfy the asset threshold and other qualitative requirements of the Policy Statement. The Federal Reserve Board adopted these changes as directed by Public Law 113-250, which was enacted in December 2014.  The Policy Statement allows small bank (and now) savings and loan holding companies to operate with higher levels of debt than otherwise permissible under the Federal Reserve Board’s generally applicable risk-based capital requirements, but companies that qualify under the Policy Statement are not eligible for expedited processing of applications unless they qualify under certain criteria described in the Policy Statement. In addition to having consolidated assets less than the asset threshold, a bank or savings and loan holding company may only avail itself of the Policy Statement if (1) it is not engaged in significant nonbanking activities either directly or through nonbank subsidiaries, (2) does not conduct significant off-balance sheet activities (including securitization and asset management or administration), and (3) does not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the Securities and Exchange Commission. Since savings associations are not banks for purposes of the Bank Holding Company Act, the Federal Reserve Board has indicated that it will not treat a savings association or a subsidiary of a savings association as a nonbank subsidiary for purposes of the Policy Statement. The Federal Reserve Board has also adopted related technical and conforming changes to Regulations Q, Y and LL. The revised Policy Statement and other changes will become effective 30 days after publication in the Federal Register.

Bank Regulatory Agencies Issue FAQs on Revised Regulatory Capital Rules

In a Financial Institution Letter dated April 6 (FIL-16-2015), the Federal Deposit Insurance Corporation announced that its staff, along with those of the OCC and the FRB, had issued frequently asked questions related to the revised regulatory capital rules. The revised capital rule took effect January 1, 2015, for most banking organizations, subject to a transition period for several aspects of the rule. The FDIC states that the FAQs are based on questions received from the banking industry and are part of the FDIC's ongoing efforts to help community banks understand and implement the revised regulatory capital rules.

NFA Provides Guidance for Bylaw 1101 Compliance When a CPO Has Delegated Investment Authority to Another Registered CPO

The National Futures Association issued Notice to Members I-15-13 providing guidance to its members regarding how to fulfill their obligations under NFA Bylaw 1101 when conducting due diligence with respect to a commodity pool whose commodity pool operator (CPO) has, in reliance on no-action relief from the CFTC Staff, delegated its responsibilities as a CPO to another person who is registered as a CPO. The Notice discusses how relevant information on such a delegation may appear on the NFA's BASIC system as a result of additional information required of CPOs when filing a pool's annual financial statement.

CFTC and Australian Prudential Regulatory Authority Sign Memorandum of Understanding on Supervision of Cross-Border Regulated Firms

On Monday, the CFTC and Australian Prudential Regulation Authority (ARPA) signed a Memorandum of Understanding (MOU) regarding cooperation and the exchange of information in the supervision and oversight of certain regulated firms that operate on a cross-border basis in both the U.S. and Australia. Through the MOU, the CFTC and ARPA express their willingness to cooperate in the interest of their respective regulatory mandates regarding derivatives markets, including protecting customers, fostering the integrity of and maintaining confidence in financial markets and reducing systemic risk.

SEC Grants Relief From 2-Year Compensation Timeout Under Advisers Act Pay-to-Play Rule Triggered When Director of Credit Research Contributed to Wisconsin Governor’s Recall Primary Election Campaign

T. Rowe Price Associates, Inc. and T. Rowe Price International Ltd, affiliated SEC‑registered advisers, were granted exemptive relief pursuant to Rule 206(4)-5 under the Investment Advisers Act, often referred to as the “Pay-to-Play Rule,” from the Rule’s two-year prohibition on receiving compensation with respect to the investments made by public pension plans that are government entities of Wisconsin in registered funds for which the advisers serve as adviser or subadviser and in a common trust fund for which T. Rowe Price International serves as adviser. The prohibition, which would have resulted in the loss of approximately $6.1 million in fees, was triggered when Michael McGonigle, a Vice President of T. Rowe Price Associates, Inc. and its parent, and a director of credit research in the Fixed Income Division and member of the Fixed Income Steering Committee, made a $250 campaign contribution in January 2011 to the recall primary election campaign of Scott Walker, the Governor of Wisconsin. Mr. Walker by virtue of his office appoints the boards that oversee the investments made by the Wisconsin public pension plans. Mr. McGonigle’s campaign contribution triggered the Rule’s timeout provisions because in his role as a director of credit research he supervises 23 research analysts for the applicants, some of whom may occasionally meet with government entity clients or prospective clients, or with consultants for prospective clients. The advisers maintained compliance procedures that include a pre‑clearance process for contributions to state and local officials and candidates. Mr. McGonigle’s failure to pre-clear (and report) the January 11 contribution was attributed to a momentary oversight on his part, as he later pre-cleared a contribution for the Wisconsin Governor’s recall general election that met the de minimis exception under the rule. The advisers discovered the contribution in March 2014 in the course of developing a testing program that includes searches of public websites for contributions made by employees. The adviser’s amended and restated application for exemptive relief on which the SEC granted the proposed relief is available here. T. Rowe Price Associates, Inc. and T. Rowe Price International Ltd, SEC Release No. IA-4058 (Apr. 8, 2015).