Weekly RoundUp May 20, 2015

Financial Services Weekly News

Editor's Note

SEC Proposals to Enhance Investment Company and Investment Adviser Reporting: As we went to press, the SEC commissioners announced that they had voted to approve two proposals. The first was for new and amended rules and forms to update and enhance the disclosure and reporting framework for registered investment companies (RICs) such as mutual funds and exchange traded funds. The second was for rules and form amendments that would seek to improve the quality of information that investment advisers retain and report to the SEC. According to the Statement of Commission Aguilar, the proposed changes for investment companies would (1) require certain RICs to report information about their portfolio holdings to the SEC on a monthly basis on new Form N-PORT, (2) standardize disclosures on derivatives in investment company financial statements, and (3) require RICs, other than face-amount certificate companies, to report certain census-type information to the Commission annually on new Form N-CEN. The proposed changes for investment advisers would (1) require advisers to enhance disclosures as to separately managed accounts, (2) request more detailed and nuanced disclosure in Form ADV regarding the adviser and its business -- such as requiring information on assets under management from non-U.S. clients -- and additional information about an adviser’s affiliation with wrap fee programs, (3) codify the Commission staff’s prior guidance that allows affiliated private fund advisers to file a single Form ADV and (4) require advisers to retain additional materials relating to the performance or rate of return for accounts that they manage. There were also statements supporting the proposals from Chair WhiteCommissioner Gallagher and Commissioner Piwowar.
Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

OCIE Acting Director Discusses SEC Examination of Private Equity Fund Managers

In a May 13 speech, Marc Wyatt, Acting Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), provided an overview of OCIE's initiatives focused on private equity fund advisers. Among other topics, Mr. Wyatt discussed OCIE’s Private Funds Unit dedicated to examining advisers to private funds, including private equity advisers, and industry response to former OCIE Director Andrew J. Bowden’s May 6, 2014 speech “Spreading Sunshine in Private Equity” (which was discussed in a May 16, 2014 Client Alert). Acting Director Wyatt highlighted three additional areas of OCIE scrutiny: (1) shifting expenses away from parallel funds created for insiders, friends, family, and preferred investors to main co-mingled, flagship vehicles, (2) co-investment allocation and related disclosure and (3) substantiation of claims by real estate advisers that affiliates are providing property management, construction management, and leasing services for additional fees that are “at market or lower.”

Federal Reserve Governor Powell Suggests Small Banks Should be Exempt from Volcker Rule and Incentive Compensation Limits

Federal Reserve Board Governor Jerome H. Powell addressed the Annual Community Bank Conference, which was held last week in New York City and sponsored by the Federal Reserve Bank of New York. Governor Powell’s remarks focused on ways that the Federal Reserve System has tailored its supervisory approach to meet the needs of community banking organizations. Notably, he suggested that banks under a certain asset threshold of “perhaps . . . $10 billion” should not be subject to the Volcker rule or to rules related to incentive-based compensation that the federal bank regulators are required by the Dodd-Frank Act to develop.

DOL Extends Comment Period on Fiduciary Rule Proposal

The Department of Labor will give interested parties an additional 15 days, until July 21, to comment on its proposed rulemaking, including a definition of the term “fiduciary,” a conflict of interest rule for retirement investments, new exemptions and related amendments, which was discussed in the April 15, 2015 Roundup. A public hearing on the proposal is scheduled for August 10.

Enforcement & Litigation

SEC Settles with Variable Insurance Product Provider Over Daily Prices Assigned Orders Received at P.O. Boxes

The SEC announced that it had settled administrative proceedings against Nationwide Life Insurance Company with respect to the SEC’s findings that the firm had violated the pricing requirements of Rule 22c-1 under the Investment Company Act of 1940 in its daily processing of purchase and redemption orders for variable insurance products and their underlying mutual funds. The SEC found that from October 1995 through September 2011, Nationwide intentionally delayed receiving purchase and sale orders for its variable insurance products delivered to certain Post Office boxes until after the 4 p.m. cut-off time for the current day’s price, thereby causing those orders to receive the next business day’s price. Nationwide agreed to pay an $8 million civil penalty. In the Matter of Nationwide Life Insurance Company, SEC Rel. No. IC-31601 (May 14, 2015).

SEC Settles with Adviser Over Failure to Correct Inspection Deficiencies

The SEC settled administrative proceedings against Trust & Investment Advisors, Inc., a registered investment adviser, Larry K. Pitts, its CEO and owner, and George M. Prugh, its CFO, over SEC findings that, contrary to representations made to SEC examination staff, the firm had failed by the time of a 2011 examination to correct deficiencies identified in 2005 and 2007 on-site examinations, including failure to complete an annual compliance review or develop a compliance manual and use of misleading statements in marketing materials. In the course of its investigation, the SEC staff found that the adviser had made additional misleading statements in its marketing materials. The adviser agreed to retain a compliance consultant and, jointly and severally with Pitts, to pay a $50,000 civil penalty. Pitts and Prugh agreed to complete 30 hours of compliance training. Prugh agreed to pay a $10,000 civil penalty. In the Matter of Trust & Investment Advisors, Inc., Larry K. Pitts and George M. Prugh, SEC Rel. No. IA – 4087 (May 18, 2015).

FINRA Fines Firm for Short Sale Violations

FINRA announced that it had reached a settlement with Morgan Stanley & Co. LLC over FINRA’s findings that the firm had violated short interest reporting requirements and improperly included positions from the accounts of non-broker-dealer affiliates in a number of aggregation units when determining each unit’s net position under Reg. SHO. The firm agreed to pay a $2 million fine.