On Nov. 24 the SEC approved applications by Bloomberg STP LLC and SS&C Technologies, Inc. for an exemption from registration as a clearing agency in the conduct of the business of providing a matching service and an electronic trade confirmation service. The term “matching service” as used in the applications means an electronic service to centrally match trade information between a broker-dealer and its institutional customer. The Bloomberg application proposes a matching service that will compare post-trade information from a broker-dealer and the broker-dealer’s institutional customer and reconcile such information to generate an affirmed confirmation. The SS&C Technologies application states that its service will allow broker-dealers and their institutional customers to streamline communications and process allocation and post-trade information for fixed-income and equity trades for depository-eligible U.S. securities. Both applications state that, other than the matching service, the applicant will not perform any other functions of a clearing agency requiring registration under Section 17A of the Exchange Act, such as net settlement, maintaining a balance of open positions between buyers and sellers, marking securities to the market, or handling funds or securities.
On Nov. 24 the SEC staff issued a no-action letter to Bloomberg L.P. stating that it would not recommend enforcement action to the Commission against broker-dealers using electronic trade confirmations generated and delivered through an electronic platform provided by Bloomberg to satisfy their Rule 10b-10 confirmation delivery obligations to institutional customers with respect to trades in fixed-income and equity securities. Broker-dealers using the platform will be required to obtain the prior written, informed consent of their institutional customers to delivery of electronic confirmations through the platform.
On Dec. 1 the SEC, FINRA and the MSRB announced the opening of registration for the Compliance Outreach Program for Municipal Advisors that will take place in Philadelphia on Feb. 3, 2016, and be webcast live on the SEC website. Similar to the compliance outreach programs for broker-dealers and investment advisers, the municipal advisor program will provide municipal advisor professionals a forum for discussions with regulators about recent exam findings, regulatory issues, and compliance practices. There is no cost to attend the program. Registration is open to all municipal advisor professionals with limited in-person seating available (preference given to employees of registered municipal advisors on a first-come, first-served basis) and unlimited webcast viewing. Persons who plan to attend in person or view via webcast, are asked to register for the program here.
In Regulatory Notice 15-49 FINRA announced that the SEC approved a change to FINRA Rule 8312 (FINRA BrokerCheck Disclosure) to reduce the waiting period from 15 days to three business days for the release of certain information reported on the Form U5 (Uniform Termination Notice for Securities Industry Registration) through BrokerCheck. The effective date is Dec. 12, 2015.
The Federal Reserve Board (FRB) has announced that it intends to implement several recommendations to enhance the supervision of large and complex financial institutions. The recommendations were developed through a review conducted by the Operating Committee of the Large Institution Supervision Coordinating Committee (LISCC). In particular, the Federal Reserve System will develop policies and procedures to encourage the exchange of and response to divergent staff reviews on all supervisory matters to ensure that decision makers have available all relevant information concerning supervisory assessments and decisions and will establish minimum operating and documentation standards for all supervisory activities to ensure that supervisory assessments are supported by complete and consistent documentation.
On Nov. 30 the Federal Reserve Board announced that it had approved a final rule specifying its procedures for emergency lending under Section 13(3) of the Federal Reserve Act. Since the passage of the Dodd-Frank Act in 2010, the Board's authority to engage in emergency lending has been limited to programs and facilities with "broad-based eligibility" that have been established with the approval of the Secretary of the Treasury. The Dodd-Frank Act also prohibits lending to entities that are insolvent and imposes certain other limitations. The rule provides greater clarity regarding the Board's implementation of these and other statutory requirements. For example, the final rule defines “broad-based” to mean a program or facility that is not designed for the purpose of aiding any number of identified firms to avoid bankruptcy or resolution and in which at least five entities would be eligible to participate, effectively barring individual bailouts of financial institutions. The final rule will take effect Jan. 1, 2016.
The Federal Reserve Board on Nov. 24 issued a proposed rule that would require firms subject to the liquidity coverage ratio (LCR) requirement – generally, those with consolidated assets of $50 billion or more – to publicly disclose information about certain components of their LCR calculations. Specifically, a covered institution would be required to disclose on a quarterly basis information concerning the amount and type of high-quality liquid assets (HQLA) held by the institution as well as the amount and sources of cash outflows and inflows. The information would be required to be reported in a standard tabular format and institutions would be required to report amounts on the basis of a simple average of the components used to calculate daily LCR over the quarterly reporting period (or an average of the components used to calculate monthly LCR for institutions subject to the modified LCR rule). The proposed rule would also require a covered institution to discuss certain features of its LCR results, including the main drivers of the LCR results, changes in the results over time, the composition of HQLA, concentration of funding sources and other matters. Comments on the proposed rule will be accepted through Feb. 2, 2016.
As reported in the Sept. 2 Roundup, a federal district court issued a preliminary injunction preventing a final rule issued by FinCEN from taking effect as scheduled on Aug. 28, 2015. Section 311 of the USA PATRIOT Act authorizes the Secretary of the Treasury to require U.S. financial institutions and financial agencies to take one or more special measures against any foreign financial institution determined to be “of primary money laundering concern.” On Nov. 6, the Court granted the Government’s motion for voluntary remand to allow for further rulemaking proceedings. FinCEN announced on Nov. 30 that it had published a Notice in the Federal Register to re-open the Final Rule for 60 days to solicit additional comment in connection with the rulemaking, particularly with respect to the unclassified, non-protected documents that support the rulemaking and whether any alternatives to the prohibition of the opening or maintaining of correspondent accounts with FBME would effectively mitigate the risk to domestic financial institutions.
The New York State Department of Financial Services (NYDFS) has issued a proposed rule that would require institutions supervised by NYDFS to maintain a transaction monitoring program for the purpose of monitoring transactions after their execution for potential Bank Secrecy Act and anti-money laundering (AML) violations and to identify transactions for which the institution must file a suspicious activity report (SAR). The proposed rule would also require institutions to maintain a watch list filtering program for the purpose of interdicting, before their execution, transactions that are prohibited by applicable sanctions, including those administered by the Office of Foreign Assets Control and transactions conducted by persons on watch lists or politically exposed persons. The proposed rule would apply to all banking institutions chartered under New York law, all New York-licensed branches and agencies of foreign banks, and all check cashers and money transmitters licensed in New York. Notably, the proposed rule includes a prohibition on changing or altering the transaction monitoring and filtering program to avoid or minimize filing SARs or because an institution does not have the resources to monitor the number of alerts generated by the program and also includes an annual certification requirement that would require an institution’s chief compliance officer to certify the effectiveness of its transaction monitoring and filtering programs. The proposed rule will be subject to a public comment period for 45 days after publication in the New York State Register.
Enforcement & Litigation
On Nov. 30 the SEC issued orders in settled administrative proceedings In the Matter of Alpha Fiduciary, Inc. and Arthur Doglione and In the Matter of Michael L. Shea finding that Alpha Fiduciary, Inc. (AFI), an investment adviser registered with the SEC, distributed to clients and prospective clients performance advertising that failed to disclose with sufficient prominence and detail that the advertised performance of the AFI Global Tactical Multi Asset Class Strategies was hypothetical rather than actual. In addition, the SEC found that AFI’s advertising included examples of favorable investment decisions showing returns of up to 58.62% without providing or offering to provide all the firm’s investment decisions, and select client portfolios showing over 28% in annualized gains without determining whether those gains represented all AFI clients. Doglione is the principal owner of AFI and the former chief compliance officer. Shea was AFI’s vice president and business development director until his termination in 2013. AFI and Doglione agreed to a joint civil penalty of $250,000 and Shea agreed to a civil penalty of $25,000.
Goodwin Procter News
We are pleased to announce that Melissa Schwab Wright has joined Goodwin Procter as counsel in the firm’s Financial Institutions Group in Boston. She joins us from Choate, Hall & Stewart, where she was a member of the finance practice. As a member of Goodwin’s Debt Finance practice, Melissa will focus her practice on advising lenders and borrowers in a broad range of complex finance and restructuring transactions.