FinCEN has proposed extending its anti-money laundering (AML) program requirement for banks to banks that are not subject to regulation by a federal functional regulator, including state chartered limited purpose trust companies. The FinCEN proposal would also require these institutions to perform ongoing customer due diligence as well as verify the identity of beneficial owners of legal entity customers, and it would extend the Customer Identification Program (CIP) requirement to certain institutions not covered under existing rules. For more information, read the client alert prepared by Goodwin’s Financial Industry practice.
On August 25, the SEC issued an order adopting FINRA Rules 2030 and 4580, as proposed by FINRA, to regulate the activities of member firms that engage in distribution or solicitation activities for compensation with government entities on behalf of investment advisers. FINRA modeled the proposed rules on the SEC’s Rule 206(4)-5 under the Investment Advisers Act of 1940, which addresses pay-to-play practices by investment advisers. Rule 206(4)-5(a)(2) prohibits an investment adviser from paying a person, other than a “regulated person,” to solicit municipal entities. “Regulated persons” include registered brokers subject to pay-to-play rules of a self-regulatory organization (like FINRA) that are substantially similar to the prohibitions of Rule 206(4)-5. The prohibition on payments to solicitors other than regulated persons has been suspended pending adoption of a qualifying FINRA rule. Member firms that engage in distribution or solicitation activities with government entities on behalf of investment advisers will now be subject to substantially equivalent restrictions to those that the SEC’s Rule 206(4)-5 imposes on investment advisers.
On August 25, the SEC announced that it was seeking public comment on disclosure requirements in Subpart 400 of Regulation S-K, including those relating to management, compensation awarded to executive officers and directors, certain security holders and corporate governance matters. This request is part of the Disclosure Effectiveness Initiative, a broad-based staff review of the disclosure requirements and the presentation and delivery of the disclosures. The public comment period will remain open for 60 days following publication of the comment request in the Federal Register.
On August 25, the SEC adopted amendments to Form ADV designed to enhance information reported by investment advisers. The form amendments require, among other things: (i) increased disclosure of separately managed accounts; (ii) greater detail about an investment adviser’s business, including details about the adviser’s branch offices and whether the adviser has one or more accounts on social media platforms; (iii) streamlined umbrella registration for private fund advisers operating under a single advisory business; and (iv) enhanced data reporting requirements for borrowing and derivatives. The SEC also adopted amendments to the “books and records” rule under the Investment Advisers Act. The new requirements become effective on October 1, 2017, and will apply to any adviser filing an initial Form ADV or an amendment to an existing Form ADV on or after the effective date.
On August 24, California Governor Edmund G. Brown, Jr. was presented with a bill that would require California public pension funds to obtain and publicly disclose substantial amounts of information regarding their investments in private investment funds. The bill would make a significant change to California's FOIA-style public disclosure rules by imposing affirmative obligations to obtain information (primarily from fund sponsors) that would then be disclosed, rather than simply requiring disclosure of information already held or used by the public pension funds. The new requirements would apply on a mandatory basis to private fund investments made on or after January 1, 2017. Public pension funds also would be required to “undertake reasonable efforts” to obtain (and then disclose) information in respect of pre-existing capital commitments to private investment funds. Governor Brown has until September 30 to decide whether or not to sign the bill.
Enforcement & Litigation
On August 25, the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC) entered into coordinated consent orders against First National Bank of Omaha (FNBO) requiring civil money penalties and customer restitution over allegations that FNBO engaged in deceptive and unfair credit card add-on practices. The regulators alleged that FNBO deceptively marketed and enrolled customers in and unfairly billed customers for credit card add-on services, such as certain debt cancellation, fraud protection and credit monitoring products, which service providers often marketed or administered and which some customers didn’t realize they were purchasing, had trouble cancelling or never received. Under the CFPB’s order, FNBO must pay a $4.5 million civil money penalty to the CFPB’s Civil Penalty Fund and $27.75 million in relief to approximately 257,000 customers. The CFPB also prohibited FNBO from marketing, selling or administering certain add-on products without securing a non-objection from regulators, and it required FNBO to implement third-party vendor monitoring, compliance and risk management programs. Under the OCC’s order, FNBO must pay a $3 million civil money penalty to the U.S. Treasury, and, in a related order, the OCC also required FNBO to reimburse customers and to implement programs similar to those required by the CFPB. These regulatory actions serve as yet another reminder that financial institutions should regularly and diligently examine their third-party risk management, monitoring and compliance programs in conjunction with their legal advisers.
In a case closely watched by the mutual fund industry, the federal district court in New Jersey ruled on August 25 in favor of a mutual fund’s investment adviser and against the shareholders who had brought the lawsuit under Section 36(b) of the Investment Company Act alleging that the adviser charged excessive fees. The 146-page opinion in Sivolella v. AXA Equitable Insurance Company came three months after closing arguments in the 26-day bench trial. The court held that the plaintiffs both (i) failed to meet their burden to demonstrate that the adviser breached its fiduciary duty under Section 36(b); and (ii) failed to show any actual damages. The court ruled that each of these failures separately prevented the plaintiffs from winning the trial. For more information, read the client alert prepared by Goodwin’s Financial Industry practice.
Goodwin’s Financial Industry senior attorney Nicole Griffin highlights how investment advisers can vet and monitor third-party service providers and mitigate risk in the article, “Performing Effective Service Provider Due Diligence.” Read the full article in the Compliance Corner of the Investment Adviser Association’s September issue of the IAA Newsletter.
On September 8 – 10, the American Bar Association (ABA) will host its Business Law Section Annual Meeting. Grow your international network of business law thought leaders and colleagues. Design your business law curriculum with over 90 CLE programs and attend committee meetings and events to build relationships with peers in your area of interest. Partners Lynne Barr and Scott Webster will be speaking at the event. For more information, please visit the event website.
Joe Yenouskas, a partner in Goodwin's Financial Industry and Consumer Financial Services Litigation practices, will be speaking at The Conference on Consumer Finance Law's 2016 Annual Consumer Financial Services Conference. Held on September 15 – 16, this conference will address mortgage lending and servicing issues as well as debt collection and bankruptcy issues. Goodwin is also a sponsor. For more information, please visit the event website.