Weekly RoundUp January 06, 2016

Financial Services Weekly News

Editor's Note

SEC Ready to Dust Off Transfer Agent Rules for the 21st Century. On Dec. 22, the SEC issued a Concept Release on transfer agent regulations, which was published in the Federal Register on Dec. 31. Transfer agents, who act as agents of securities issuers in recording issuances and transfers of securities, canceling old securities and issuing new ones, facilitating communications between issuers and securityholders and making dividend and other distributions to securityholders, have been around for a long time, but regulation by the SEC only began in the 1970s, following the Paperwork Crisis of the 1960s, in which clearing agencies, transfer agents and brokerage firms were so overburdened by the paperwork resulting from increases in trading volume and the use of paper certificates of stock ownership that the NYSE closed early on some days in 1967 and 1968 and for a portion of 1968 closed down entirely on Wednesdays to allow brokerages and other parties to keep up with the volume. The Concept Release provides a historical background to the regulation of transfer agents and the emergence of book-entry recording of stock ownership with shares held in street name, as well as a summary of the existing rules and what they require. It also provides advance notice of proposed rulemaking and a request for comment on the need for additional rulemaking. The proposals, which are conceptual rather than in the form of proposed rules, include amendments and new rules with respect to: (1) registration and annual reporting requirements, (2) written agreements between transfer agents and issuers, (3) the safeguarding of funds and securities, (4) compliance with federal securities laws applicable to restricted securities, (5) cybersecurity, information technology, and related issues, and (6) definitions, scope and conforming amendments. Comments are due on Feb. 29.

With a new year before us, we would like to take this opportunity to introduce a change to the Financial Services Weekly News Roundup. Since its inception on Sept. 17, 2014, Peter LaVigne has been the sole Editor-in-Chief. In the spirit of introducing fresh and diverse perspectives, Peter is stepping down as Roundup’s editor. We are grateful for Peter’s oversight in launching and guiding the Roundup in its first year in circulation, and we are delighted that Peter will continue to contribute items on the SEC, FINRA, MSRB and other securities related matters. As always, we welcome your feedback on the Roundup, as well as on news developments of interest.
Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

CFPB Responds To Industry’s TRID Implementation Concerns

On Dec. 29 the CFPB responded to a letter by the Mortgage Bankers Association (MBA) from Dec. 21. The MBA letter asked the CFPB to clarify implementation of the TILA/RESPA Integrated Disclosure (TRID) rule, which went into effect on Oct. 3, 2015 and consolidates federal disclosures previously required for closed-end credit transactions secured by real property. The TRID rule has been viewed by mortgage industry participants, and particularly by investors, to create an unnecessarily heightened risk of liability, even where rule violations are purely technical. Some in the mortgage industry also expressed concern that it was unclear when TRID-related errors could be cured or corrected. The CFPB letter confirmed that already-existing cure provisions and limits on private liability under the Truth in Lending Act apply to TRID disclosures. The CFPB also took the view that the rule itself, cure provisions, and private liability rules taken together should present “negligible” risk of private liability to investors where there exist technical and curable errors related to TRID. Parties will have to keep a close watch to see how the CFPB’s rather benign pronouncement affects courts and the market.

GAO Finds Dodd-Frank Increasing Compliance Burden for Community Banks and Credit Unions

The Government Accountability Office (GAO) released its annual report on Dodd-Frank regulations. In the report, the GAO examined nine Dodd-Frank Act rules, primarily related to residential mortgage lending, that were effective as of October 2015 for their impact on community banks and credit unions and cited “an increase in compliance burden associated with these rules.” The increased compliance burden included increases in staff, training, and time allocation for regulatory compliance and updates to compliance systems. Industry officials also reported a decline in specific business activities, such as loans that are not qualified mortgages, due to fear of litigation or not being able to sell those loans to secondary markets. Surveys of industry officials and bankers conducted in connection with the study suggested that there have been moderate to minimal initial reductions in the availability of credit but the GAO noted that regulatory data to date has not confirmed a negative impact on mortgage lending. The report’s findings are expected to be used by community banks and credit unions to bolster their argument for regulatory reform in 2016.

SEC Issues Annual Staff Reports on Credit Rating Agencies

On Dec. 28, the SEC issued its two statutorily mandated annual reports on credit-rating agencies registered as nationally recognized statistical rating organizations (NRSROs): (1) its annual summary report of its examinations of NRSROs as mandated by Section 15E(p)(3)(C) of the Securities Exchange Act of 1934 (the 1934 Act); and (2) its annual report to Congress on its examinations of NRSROs as mandated by Section 6 of the Credit Rating Agency Reform Act of 2006. Though the 1934 Act prohibits the SEC from regulating “the substance of credit ratings,” the two reports provide valuable information regarding adherence by the 10 SEC-registered NRSROs to the federal securities laws, as well as NRSRO adherence to internal policies and procedures.

SEC Investor Advocate Issues Annual Report on Activities

On Dec. 23, the SEC’s Investor Advocate, Rick A. Fleming, issued his annual report on the activities of the Office of the Investor Advocate (the Office). The Office was created by the Dodd-Frank Act. The report on the Office’s activities for Fiscal Year 2015 (Oct. 1, 2014 to Sept. 30, 2015) focuses on the six areas of policy focus that the Office selected, which are equity market structure, investor flight (i.e., whether individual investors have abandoned the equity markets since the financial crisis), municipal market reform, data protection and cyber security, effective disclosure, and elder abuse. With respect to effective disclosure, the Office emphasizes the importance of layered disclosure, such that important information is readily accessible but an individual investor may dig deeper in a user-friendly format. The Office also supports the use of structured data in a variety of contexts (i.e., the structuring of data in a way that facilitates the use of tools by sophisticated analysts, advisers and market participants). The Office has previously expressed support for a default to electronic delivery of disclosure documents, but the report notes that the Office will review comments in response to rulemaking and continue to explore research involving customer or investor behaviors regarding the most effective delivery types.

Enforcement & Litigation

Investment Adviser and Brokerage Firm Settle “Parking” Case with the SEC

On Dec. 22 the SEC announced that Morgan Stanley Investment Management, Inc. (MSIM) had agreed to pay $8.8 million and submit to remedial sanctions and a cease-and-desist order to settle charges that it failed to adopt adequate policies and procedures to prevent unlawful cross trading by a former portfolio manager and failed to reasonably supervise the manager in violation of Sections 206(4) and 203(e)(6) of the Advisers Act and Rule 206(4)-7 thereunder. In the Order, the SEC found that a former MSIM portfolio manager effectuated several prearranged cross trades, a practice the SEC referred to as “parking,” whereby the manager (1) arranged to sell bonds to brokerage firm SG Americas Securities, LLC (SGAS) at the highest current independent bid price available for the bonds and (2) executed the repurchase side of the cross trade at a small markup over the sales price rather than at the midpoint between the best bid and offer price. The practice resulted in undisclosed favorable treatment of purchasing clients while disadvantaging selling clients from late 2011 to early 2012. Because the portfolio manager crossed two securities from two registered investment company (RIC) accounts to one RIC-affiliated client account, the SEC found that MSIM aided and abetted and caused violation of Section 17(a)(2) of the Investment Company Act as well. While MSIM had internal cross-trading policies and procedures in place, its policies and procedures did not specifically address “parking” or prearranged trading, and it did not conduct training on these specific topics during the relevant period. In a separate Order, SGAS, whose former trader assisted the MSIM portfolio manager in carrying out the schemes, agreed to pay more than $1 million and submit to remedial sanctions and a cease-and-desist order to settle the SEC’s charges.