The SEC published an IM Guidance Update highlighting two exemptions from registration under the Investment Advisers Act of 1940 (the Advisers Act) that apply to advisers to Small Business Investment Companies (SBICs) after the enactment of the Fixing America’s Surface Transportation Act (FAST Act):
- “Venture capital funds adviser exemption:” the definition of “venture capital funds” now includes SBICs, allowing an adviser who only has clients that are venture capital funds (as defined in Rule 203(l)-1) and/or SBICs to rely on this exemption.
- “Private fund adviser exemption:” Advisers Act Section 203(m) now excludes SBIC assets from counting toward the $150 million threshold, allowing an adviser that has assets under management in the U.S. of less than $150 million attributable to its non-SBIC fund clients to rely on the private fund adviser exemption regardless of the amount of assets under management in the U.S. that is attributable to any SBIC client.
An adviser to SBICs may now choose to rely on either of these exemptions or continue to rely on the “SBIC adviser exemption” (Advisers Act Section 203(b)(7)). However, unlike an adviser relying on the SBIC exemption, an adviser relying on either of the two new exemptions must file as an exempt reporting adviser (ERA) and submit its initial Form ADV within 60 days of relying on these exemptions. In addition, registered advisers that advise SBICs may now be eligible to withdraw their registration and start reporting as an ERA. An adviser switching from being registered to being an ERA must file a Form ADV-W partial withdrawal prior to submitting its first report as an ERA.
On March 21 and 28, FINRA released its second and third podcasts in a three-part series about FINRA’s 2016 Regulatory and Examination Priorities Letter. The examination priorities letter was discussed in the January 13, 2016, edition of the Roundup.
On March 22, the Consumer Financial Protection Bureau (CFPB) issued a new interim final rule to implement the Helping Expand Lending Practices in Rural Communities (HELP) Act. The effect of the new rule is to expand the number of small, rural mortgage lenders who can take advantage of special provisions in Regulation Z that permit small creditors to originate balloon-payment qualified mortgages and exempts such creditors from the escrow account requirement for higher-priced mortgages. Under the old rule, in order to qualify for these provisions, a small creditor had to operate predominantly in rural or underserved areas. The CFPB had previously interpreted “operate predominantly” as requiring that a small creditor originate over half of its covered mortgages on properties located in rural or underserved areas. Now, under the new rule, a small creditor is eligible for these provisions if it originates at least one covered mortgage loan on a property located in a rural or underserved area in the prior calendar year. The new interim final rule is effective March 31.
On March 24, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), and the Federal Deposit Insurance Corporation (FDIC) published an interagency interim final rule amending the regulations governing eligibility for the 18-month on-site examination cycle, pursuant to the FAST Act. As covered in the February 24 and January 27 editions of the Roundup, the agencies had previously approved a joint interim final rule that expanded the number of small banks and savings associations eligible for an 18-month examination cycle rather than a 12-month cycle. The latest interim final rule specifies eligibility for the 18-month exam cycle to institutions: (1) with less than $1 billion in total assets; (2) that are well capitalized; (3) with a CAMELS composite rating of 1 or 2, including a management rating of 1 or 2; (4) are not subject to a formal enforcement proceeding or order from a federal banking regulatory agency; and (5) have not undergone a change of control in the preceding 12-month period. The agencies retain the authority to maintain the current 12-month on-site examination schedule for an institution, or adopt a more frequent schedule than every 18 months, if the agency determines it would be necessary or appropriate.
FinCEN Issues Prepaid Card FAQs
As referenced in last week’s Roundup, several agencies, including the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), published a guidance clarifying the applicability of the Customer Identification Program (CIP) rule to prepaid cards issued by banks. This week FinCEN issued additional guidance on the regulatory expectations for nonbank sellers of prepaid cards. The guidance addresses frequently asked questions (FAQs) related to non-bank prepaid card offerings. The FAQs are meant to be read in addition to, and supplement, the FAQs entitled “Final Rule – Definitions and Other Regulations Relating to Prepaid Access,” which FinCEN issued on November 2, 2011. Some of the FAQs discuss de minimis cash refund requirements under state law, the use of quick response codes and other technology in connection with Prepaid Access, and the term “defined merchant” within the context of closed loop prepaid access.
FinCEN Issues Final Rule Imposing a Prohibition on the Opening or Maintaining of Correspondent Accounts for, or on Behalf of, FBME Bank Ltd.
On March 25, FinCEN issued a final rule imposing a prohibition on U.S. financial institutions from opening or maintaining a correspondent account for, or on behalf of, FBME Bank Ltd. (FBME) under the fifth special measure of Section 311 of the USA PATRIOT Act. The final rule replaces the rule published on July 29, 2015, which had been enjoined from taking effect and subsequently reopened for comment. According to FinCEN, the imposition of a prohibition under the fifth special measure “will guard against the international money laundering and terrorist financing risks that FBME poses to the U.S. financial system.” The final rule will take effect 120 days from the date of publication in the Federal Register.
The Basel Committee on Banking Supervision released a proposed framework that would limit some of the flexibility that the largest banks have in calculating risk weights for certain kinds of assets. The framework, when finalized by the Basel Committee and formally implemented in the United States, would apply only to banks using advanced approaches under Basel III. It is intended to “simplify the capital framework” and address “excessive variability” in risk-weighted assets across banks. Comments on the proposed rules are due on June 24.
On March 22, the FDIC announced that, as part of its Community Banking Initiative, it will bring together community bankers, regulators, researchers, and others for a conference on community banking on April 6 in Arlington, Virginia. The conference will “explore strategies for long-term success in the community banking sector.”
Enforcement & Litigation
On March 30, a federal district court in Washington, DC rescinded the FSOC’s determination that MetLife Inc. is a systemically important financial institution (SIFI). The FSOC had previously determined that MetLife’s potential failure would pose a threat to U.S. financial stability and designated MetLife as a SIFI, which subjected the insurer to consolidated supervision by the Federal Reserve and enhanced prudential standards. Because the judge issued her order under seal, details of the court’s order were not immediately available. The judge indicated that a public version of the opinion, with possible redactions, would be released in the future after the parties to the litigation had time to argue whether portions of the ruling should remain confidential. MetLife had contended that the FSOC made an arbitrary and capricious decision that failed to assess MetLife’s vulnerability to financial distress and failed to consider the economic effects of subjecting the insurer to stricter regulation.
On March 21, in Securities and Exchange Commission v. Arcturus Corporation et al, a Texas federal judge ruled in favor of the U.S. Securities and Exchange Commission (SEC) on securities fraud claims against brokers who sold $22 million in "partnerships" in oil and gas drilling projects, agreeing with the SEC that the projects were unregistered investment vehicles and not joint ventures. The defendants had asserted that the projects were joint ventures funded by “partners” rather than investors. But the SEC claimed, and the judge agreed, that the projects were actually securities because the investors were brought in via cold calls, had no power over the projects, weren't versed in the oil and gas business, and were completely dependent on the defendants to manage the projects.
Goodwin Procter News
Goodwin represented Charlesbank Capital Partners and Webster Capital in connection with the acquisition and ultimate sale of FullBeauty Brands (formerly OneStopPlus.com), which was named the 2016 Large Market Deal of the Year Award by Buyouts magazine. Financial Institutions partner Amber Dolman was part of the cross-disciplinary Goodwin team who led this deal.
Chambers Global: The World’s Leading Lawyers for Business recently recognized the firm and its attorneys for excellence in numerous practice areas. A total of six of the firm’s attorneys were named as leading lawyers in the legal directory’s 2016 Global edition.
Financial Institutions partner Amber Dolman sat down with The Recorder during Goodwin’s inaugural West Coast Asset Management M&A Symposium, which was co-hosted with boutique investment bank Freeman & Co. in our San Francisco office, to discuss the friction between brick-and-mortar banking regulations and cutting-edge technology. The Recorder is California’s leading news and analysis publication that covers legal, business, and technology trends shaping law practice today. To read the interview, click here.