Weekly RoundUp August 12, 2015

Financial Services Weekly News

Editor's Note

Short Takes. On Aug. 7 SEC Commissioner Michael Piwowar issued a lengthy statement of dissenting comments on the Pay Ratio Disclosure Rule adopted by vote of the SEC on Aug. 5. The statement outlines six separate objections to the rulemaking. It would not be surprising if some or all of these objections appeared in a lawsuit by private parties challenging the rule. ● On Aug. 10 SEC Commissioner Luis Aguilar issued a Statement on the Importance of Clarity in Commission Orders, which continues the dialogue between Commissioner Aguilar and Commissioner Daniel Gallagher on enforcement actions against chief compliance officers that we reported on in the July 8 Editor’s Note. Commissioner Aguilar states that “the need for clear and transparent Orders is especially important when Commission actions involve federal securities law violations by Chief Compliance Officers.” He notes the tension between the desire by the CCO community to know everything about the behavior that resulted in the action, and the desire of defendants to negotiate out some of the underlying facts, leaving only those necessary to support the finding of a violation, but concludes that the Commission and its staff should strive for greater clarity. ● The Department of Labor is in day three of four days of hearings on the proposed fiduciary standard and related exemptions. The DOL’s Conflict of Interest Proposal topic page contains links to the proposals as well as the public hearing agenda and the live webcast of the hearings. The DOL has indicated that transcripts of the hearings will be made available.
Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

SEC Revises 2014 Money Market Fund Reform FAQs

On Aug. 4, the SEC staff issued revised 2014 Money Market Fund Reform Frequently Asked Questions (FAQs), which were originally released on April 29, 2015. The FAQs provide the staff’s views on various aspects of the SEC’s 2014 money market fund reform rulemaking (MMF Reform). The compliance dates for separate elements of MMF Reform are staggered throughout 2015 and 2016, with the key structural changes to money market funds (MMFs) occurring in October 2016. The SEC staff updated the FAQs in a number of areas. (A redlined version of the FAQs is available on the SEC’s website here) Some of the more salient changes include: (1) in revised FAQ #2, the staff indicates that it will not object if a MMF’s board of directors determines, in advance, that certain routine actions will not constitute “financial support” that must be reported on Form N-CR; (2) in revised FAQ #3, the staff notes that it would not ordinarily view a capital contribution made by a MMF’s investment adviser to the MMF in connection with a conversion of a stable net asset value (NAV) MMF to a floating NAV MMF as “financial support” that must be reported on Form N-CR; (3) in revised FAQ #16 (formerly, #15), the staff revises the applicable test for “beneficial ownership” (in connection with determining if a “natural person” beneficially owns a MMF) by removing “voting power” from the test and clarifies, by referring to Rule 13d-3, the requisite extent of a “natural person’s” involvement in investment decision making to determine whether such person has sole or shared investment power over an investment in a MMF; and (4) in new FAQ #31, the staff provides its view that, since a MMF may only implement a redemption gate under amended Rule 2a-7 in extraordinary circumstances, the fund would be doing so as the result of an “emergency,” to the extent a MMF’s charter document limits suspensions of redemptions to “emergency” situations.

Update: SEC Adopts Registration Rules for Security-Based Swap Dealers and Major Security-Based Swap Participants

As reported in last week’s Roundup, the SEC voted to adopt registration rules and forms for security-based swap dealers and major security-based swap participants (collectively, SBS entities). The final rule (Release No. 34-75611) on SBS Entity registration and proposed rule (Release No. 34-75612) to provide a process for the SEC to determine whether it is in the public interest to permit a statutorily disqualified associated person to continue to engage in SBS transactions on behalf of an SBS entity are now available on the SEC’s website.

SEC Approves FINRA Rule Governing Sales and Offers of Securities on Military Installations

On Aug. 6, the SEC issued an order approving a proposed rule change to adopt FINRA Rule 2272, which governs sales and offers to sell securities on the premises of military installations to members of the U.S. armed forces or their dependents. The rule imposes restrictions upon FINRA members engaged in such activities, including a disclosure requirement, a suitability obligation and a ban on referral fees to persons not associated with a FINRA member.

SEC Institutes Proceedings to Determine Whether to Approve MSRB Proposal to Adopt Rule G-42 and Amend Rule G-8

On Aug. 7 the MSRB announced that the SEC had issued an order instituting proceedings to determine whether to approve or disapprove a proposed rule change consisting of proposed new Rule G-42 (Duties of Non-Solicitor Municipal Advisors) and proposed amendments to Rule G-8 (Books and Records to be Made by Brokers, Dealers, Municipal Securities Dealers, and Municipal Advisors). The effect of the order is to provide additional time for the SEC to analyze the proposed rule change. Comments may be submitted up to 30 days after publication of the order in the Federal Register.

Client Alert: ESMA AIFMD Opinion and Advice on the Passporting and Private Placement Regimes

Goodwin Procter’s Glynn Barwick prepared a client alert on the European Securities and Markets Authority’s (ESMA) issuance of an important opinion on the operation of the EU Alternative Investment Fund Managers Directive passport for EU managers. ESMA says that the regime appears to be operating broadly satisfactorily, but has identified a few significant differences between the member states that ought to be harmonized. It has also issued a further advice paving the way to the extension of the passport to Swiss, Jersey and Guernsey based managers. ESMA has not yet, however, been able to conclude that U.S., Hong Kong or Singapore based managers should benefit from the extension.

Enforcement & Litigation

Federal Court Holds That New York City’s Responsible Banking Act is Preempted

A federal court has held that New York City’s Responsible Banking Act (RBA) is preempted by federal and state law. The RBA is a New York City local law that established an eight member Community Investment Advisory Board (CIAB) composed of City officials and community and industry representatives and directed the CIAB to complete a written assessment of credit, financial and banking services needs throughout New York City with particular emphasis on low and moderate income individuals and communities. The law also required the CIAB to collect detailed information at the census tract level from banks authorized to act as depositories of New York City funds (Depository Banks) relating to their efforts to address the banking needs of low and moderate income individuals and communities in New York City and to publish a report evaluating each Depository Bank’s performance relative to benchmarks, best practices and recommendations established by the CIAB for meeting the credit and banking needs identified in its assessment. The law authorized the New York City Banking Commission to consider the CIAB’s report in connection with determining which depository institutions are authorized to hold City funds. In its decision, the United States District Court for the Southern District of New York held that the RBA was preempted by federal and New York state law because it did not merely establish conditions related to New York City’s proprietary interest in determining who it does business with but instead attempted to advance broader public policy objectives through regulation. As a result, the court held that the law is preempted by the National Bank Act to the extent it purports to apply to national banks. Similarly, the court held that the law, as applied to state chartered institutions, is preempted by New York state law because New York has a comprehensive regulatory scheme for state chartered banks that occupies the field of regulation. The decision could have broader implications beyond New York City, since several other U.S. cities have enacted laws similar to the RBA. However, to the extent those laws purport to apply to state chartered institutions, a determination whether those laws are valid as applied to state banks may hinge on applicable preemption standards in the relevant jurisdiction.

Second Circuit Denies Petition for Rehearing in Madden v. Midland Funding Case

The U.S. Court of Appeals has denied the petition of appellees Midland Funding, LLC and Midland Credit Management for rehearing or, in the alternative, rehearing en banc, in the Madden vs. Midland Funding, LLC case. This case relates to the extent to which an assignee of a loan from a national bank may enforce the interest rate provisions in the loan documents and was previously covered in the June 10 Roundup.

SEC Charges Firm With Operating Secret Trading Desk and Misusing Dark Pool Subscriber Trading Information

The SEC announced today that ITG Inc. and its affiliate AlterNet Securities have agreed to pay $20.3 million to settle charges that they operated a secret trading desk and misused the confidential trading information of dark pool subscribers. An SEC investigation found that despite telling the public that it was an “agency-only” broker whose interests don’t conflict with its customers, ITG operated an undisclosed proprietary trading desk known as “Project Omega” for more than a year. The SEC statement said that while ITG claimed to protect the confidentiality of its dark pool subscribers’ trading information, during an eight-month period Project Omega accessed live feeds of order and execution information of its subscribers and used it to implement high-frequency algorithmic trading strategies, including one in which it traded against subscribers in ITG’s dark pool called POSIT. In the settled order, ITG agreed to admit wrongdoing and pay disgorgement of $2,081,034 (the total proprietary revenues generated by Project Omega) plus prejudgment interest of $256,532 and a penalty of $18 million. 

CFTC Orders Firm to Pay a $300,000 Civil Monetary Penalty for Violations of Customer Protection Rule for Cleared Swaps and Related Supervision Failures

On Aug. 6 the CFTC announced that it had issued an order requiring Morgan Stanley & Co. LLC (Morgan Stanley), a registered Futures Commission Merchant (FCM) and provisionally registered swap dealer, to pay a $300,000 civil monetary penalty for failing to hold sufficient U.S. Dollars in segregated accounts in the United States to meet all of its U.S. Dollar obligations to cleared swaps customers. The order also found that the firm failed to implement adequate related compliance procedures. As set forth in the order, on numerous days from March 12, 2013 to March 7, 2014, Morgan Stanley failed to hold sufficient U.S. Dollars in segregated accounts in the United States to meet all U.S. Dollar obligations to the firm’s cleared swaps customers, in violation of CFTC Regulation 22.9. On those days, Morgan Stanley held the amount of the U.S. Dollar deficits in Euros and other currencies, rather than in U.S. Dollars, according to the order.