New York State Department of Financial Services (NYDFS) Superintendent Benjamin Lawsky, at the BITS Emerging Payments Forum, announced that NYDFS has released a final version of its regulation on Virtual Currencies, commonly called the “BitLicense.” Superintendent Lawsky noted five points on the final rule. First, companies do not have to obtain prior approval if they wish to provide a standard update to their protocols, though material changes to the business model will require prior approval. Second, he reinforced the point that NYDFS does not want to be a regulator of software, but does seek to regulate financial intermediaries, or those businesses that take custody over customer funds. Third, he noted that companies do not have to file duplicate applications for a money transmission license and a BitLicense. Fourth, companies filing SARs with the federal government will not be required to make duplicate filings with NYDFS. Finally, companies will not need prior approval for every round of funding, but will need to document that an investor is not a control person. Superintendent Lawsky noted that sitting on a board of directors will not necessarily make a person a control person. We are in the process of reviewing the final BitLicense regulation and will provide more extensive coverage in Goodwin Procter’s Digital Currency Perspectives blog.
In a May 27, 2015 speech to the 2015 FINRA Annual Conference, Richard G. Ketchum, Chairman and Chief Executive Officer of FINRA, advocated for the adoption by the SEC of a “best interests of the customer” standard for broker-dealers. In his remarks, Mr. Ketchum touted the fundamental strengths of the current broker-dealer regulatory regimes of the SEC and FINRA; however, he stated his belief that adopting a “best interest of the customer” standard is an important step forward in encouraging firm compliance cultures that translate to consistent actions to place the interests of the customer first. In advocating for a consistent “best interests” standard for broker-dealers, Mr. Ketchum also noted his objections to the recent proposal by the Department of Labor (DOL) to expand the definition of the term “fiduciary” solely for ERISA and IRA purposes, and to related DOL proposals, which were discussed in the April 15, 2015 Roundup. Among other things, Mr. Ketchum stated his belief that the DOL proposal may, if adopted, result in confusion as courts or arbiters attempt to decipher contractual arrangements or a broker-dealer’s motives in recommending a transaction, and would result in broker-dealers being subject to a different legal standard with respect to ERISA and IRA assets than with respect to an investor’s other assets. Mr. Ketchum concluded his remarks by articulating a set of “markers” for crafting a “best interest” standard, including: (1) the standard should require that customer interests come first and that any conflicts must be knowingly consented to by the customer; (2) any proposal should include a requirement that financial firms establish carefully designed and articulated structures to manage conflicts of interest arising in their businesses; (3) know-your-customer and suitability standards, similar to those in current FINRA Rules, should be applied; (4) effective disclosure should be provided to investors, including a Form ADV-like disclosure document for broker-dealers; and (5) firms should take concrete steps to address the incentives for their registered persons created by differential compensation.
FINRA is soliciting comment on proposed Rule 2272 (Educational Communication Related to Recruitment Practices and Account Transfers) that would require a member firm that hires or associates with a registered representative (a “Recruiting Firm”) to provide a FINRA prepared educational communication (the “Educational Communication”) to former retail customers who the Recruiting Firm, directly or through the transferring representative, attempts to induce to transfer assets to the Recruiting Firm or who choose to transfer assets to the Recruiting Firm. The Educational Communication would highlight the potential implications of transferring assets to the Recruiting Firm, and suggests questions that a customer may want to ask to make an informed decision. The proposal replaces a prior proposal withdrawn by FINRA in June 2014 that would have required (1) disclosure to former retail customers of recruitment compensation received, or to be received, by a transferring representative in connection with moving to a firm, and (2) a reporting obligation to FINRA where a transferring representative receives a significant increase in compensation. The comment period for the proposal expires on July 13, 2015.
The Office of the Comptroller of the Currency (OCC) has issued a final rule integrating the licensing rules for national banks and federal savings associations. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the OCC became the primary federal regulator for federal savings associations. Shortly after assuming the responsibilities of the former Office of Thrift Supervision (OTS) with respect to supervision of federal savings associations, the OCC adopted the licensing and other rules of the OTS largely in their prior form and, in most cases, made only technical and conforming changes. The final rule integrates the separate licensing rules for national banks and federal savings associations by incorporating the licensing provisions for federal savings associations into existing rules relating to national banks, by eliminating requirements the OCC determined were unnecessary or inconsistent, and making other technical and conforming changes. The OCC has also provided a section-by-section overview of the final rule on its website. The OCC has issued previous rulemakings that integrated, or proposed to integrate, its rules for national banks and federal savings associations relating to lending limits, capital, flood insurance, and safety and soundness standards.
The U.S. Department of Commerce’s Bureau of Economic Analysis (BEA) recently announced that the 2014 Benchmark Survey of U.S. Direct Investment Abroad (BE-10) filing deadline for all new filers has been extended to June 30, 2015. A new filer refers to a U.S. company or person that is required to file the BE-10 survey but has never filed any BEA survey of direct investment abroad (including the BE-10, BE-11 and BE-577 surveys). A BE-10 survey must be submitted for any U.S. person that had direct or indirect ownership or control of at least 10% of the voting stock of an incorporated foreign business enterprise, or an equivalent interest in an unincorporated foreign business enterprise, at any time during the U.S. person’s 2014 fiscal year, and other forms that are part of the BE-10 series may be required to be filed on behalf of the U.S. person’s foreign affiliates. Unlike many other BEA conducted surveys, any U.S. person that satisfies the applicable reporting thresholds is required to file a BE-10 survey, regardless of whether the BEA has contacted such company or person. Moreover, the BEA’s rules do not include any minimum thresholds (in terms of assets, sales, or net income) below which a U.S. person with investments abroad would be exempted from having to file a BE-10 survey. Accordingly, this reporting requirement can have practical implications for U.S. persons with direct investments abroad and for U.S. fund managers utilizing offshore fund structures. For example, a BE-10 survey would be required for (1) a U.S. fund that holds 10% or more of the voting securities of a foreign special purpose vehicle, portfolio company, holding company, or other foreign vehicle; (2) a U.S. holding company or other fund vehicle that holds 10% or more of the voting securities of a foreign portfolio company; (3) a U.S. portfolio company that holds 10% or more of the voting securities of a foreign subsidiary; (4) a U.S. general partner of a foreign limited partnership (the BEA takes the position that the general partner of a limited partnership is deemed to control 100 percent of the voting securities of the partnership, unless the partnership agreement provides otherwise); or (5) a U.S. person that holds 10% or more of the voting securities of a foreign feeder fund structured as a corporation (e.g., a Cayman corporation).
Enforcement & Litigation
The May 2015 edition of the Goodwin Procter Business Litigation Reporter is available. In addition to timely summaries of key cases and other developments in dedicated Business Litigation sessions and related courts nationwide, the current issue features an in-depth look at the use of alternative fee arrangements (AFAs) in litigation.