On December 1, the National Futures Association (NFA) released guidance to remind entities claiming an exemption or exclusion from Commodity Pool Operator (CPO) or Commodity Trading Adviser (CTA) registration under Commodity Futures Trading Commission (CFTC) Regulation 4.13(a), 4.14(a)(8) or 4.5 to complete their annual affirmation requirements. Affirmations of the applicable notice of exemption or exclusion are due annually within 60 days of the end of the calendar year, which falls on Wednesday, March 1, 2017, for this cycle. The guidance confirms that failure to file an affirmation will result in an automatic withdrawal of an entity’s exemption or exclusion. To assist members in complying with their Bylaw 1101 requirements, the NFA makes available to members a list of all persons and entities that have on file with the NFA exemptions or exclusions requiring annual affirmations, their most recent affirmation date and their affirmation due date. Entities may complete the affirmation process online through the NFA’s Exemption System. Additionally, CPOs and CTAs that no longer qualify for an exemption or exclusion may register with the CFTC and apply for NFA membership through the NFA’s Online Registration System.
ISS has announced its policy updates for 2017 shareholder meetings. Significant corporate governance policy changes include negative voting recommendations for companies that restrict shareholders’ ability to amend the company’s bylaws and for newly public companies that do not have a reasonable sunset on provisions such as supermajority voting requirements and multi-class capital structures that have unequal voting rights. ISS has also updated several policies related to compensation matters, principally to clarify existing policies. For more information, view the client alert issued by Goodwin’s Public Companies Practice.
In an apparent effort to fight the kinds of cyberattacks like the massive distributed denial-of-service (DDoS) attack that crippled much of the American internet in October 2016, the Department of Homeland Security (DHS) recently released a new set of “strategic principles” for fortifying the rapidly expanding internet of things (IoT) ecosystem. For more information, view the client alert issued by Goodwin’s Privacy & Cybersecurity Practice.
On December 1, the House of Representatives passed the Systemic Risk Designation Improvement Act (Act), a bill that amends the Dodd-Frank Act’s definition of “systemically important financial institution” by eliminating the $50 billion in consolidated assets threshold and replacing it with the Basel Committee's indicator-based measurement approach. Proponents of the Act argue that “decisions on what institutions are deemed systemically important should be based not on size alone, but also on activity and other factors that actually demonstrate systemic risk.” Opponents argue that the Act would introduce too much subjectivity into SIFI determinations and force the Financial Stability Oversight Council to spend an excessive amount of time on the SIFI designation process. The White House had threatened to veto the Act if passed by the Senate, but the bill could be re-introduced after the change in administration, after which its prospects for becoming law would be much more favorable.
On November 28, the Consumer Financial Protection Bureau (CFPB) announced that it issued a compliance bulletin warning regulated financial companies about the use of employee incentive programs in providing their financial products to consumers. The CFPB advised that these types of programs, if run unchecked or with excessive sales goals, can lead to employees engaging in illegal activity, such as opening accounts without authorization, opting-in consumers for overdraft protection without authorization, and deceptive sales tactics. Noted incentive programs include linking sales to bonuses and compensation or continued employment. The bulletin includes guidance for compliance management systems (CMSs) that can be implemented by financial institutions in order to avoid violations of consumer protection laws stemming from these incentive programs. View the full EnforcementWatch blog post.
CFPB Updates Mortgage Servicing Compliance Guide
On November 30, the CFPB published an updated version of the small entity compliance guide for mortgage servicing. The revised guide incorporates the changes to Regulation X and Regulation Z that were made as a result of the CFPB’s servicing final rule issued earlier this year that generally take effect October 19, 2017.
On October 13, the U.S. Securities and Exchange Commission (SEC) adopted new rules and forms and amended current rules and forms under the Investment Company Act of 1940 (1940 Act) to significantly expand the information required to be reported by registered investment companies (the Modernization Reporting Requirements). The Modernization Reporting Requirements are designed to modernize the reporting regime under the 1940 Act and to enhance the SEC’s ability to collect, analyze, and monitor portfolio composition and census information with respect to funds. For more information, view the client alert issued by Goodwin’s Investment Management Practice.
Enforcement & Litigation
In its decision issued on December 6 in Salman v. United States, the United States Supreme Court unanimously affirmed a criminal insider trading conviction even though there was no evidence that the tipper received any direct financial benefit for his tip to a relative. Resolving the tension between the Second and Ninth Circuit Courts of Appeals as to what proof of benefit to the tipper is required, the Court explained that “the tipper benefits personally because giving a gift of trading information [to a relative or friend] is the same thing as trading by the tipper followed by the gift of the proceeds.” The opinion addressed the growing debate following the Second Circuit’s decision in United States v. Newman, which held that, where the tipper and tippee are not relatives or “close” friends, the Government must prove a relationship sufficient to give the tipper “at least a potential gain of a pecuniary or similarly valuable nature.” Following Newman, some questioned whether the Government could prosecute tippers who shared inside information with friends and family, but not for a direct financial gain. In Salman, the Government can claim a victory in obtaining reaffirmation that such cases may proceed. But as the Court noted, the issue presented was a “narrow” one and the question left for future cases is what constitutes a “friend” such that proof of some pecuniary benefit is unnecessary. For more information, view the client alert issued by Goodwin’s White Collar Defense Practice.
On December 1, the SEC issued an order (Order) accepting an offer of settlement submitted by Pacific Investment Management Company, LLC (PIMCO or Adviser) in response to charges that it allegedly misled investors about the performance of the PIMCO Total Return Active Exchange-Traded Fund (BOND), one of its first actively managed exchange-traded funds, and allegedly failed to accurately value certain portfolio securities held by BOND. According to the Order, during the four months following the launch of BOND in 2012, BOND’s significant outperformance of the Adviser’s flagship mutual fund – the PIMCO Total Return Fund – was largely attributable to an investment strategy of buying smaller-sized bonds known as “odd lots.” While the odd lot strategy employed by the Adviser was allegedly designed to bolster BOND’s performance “out of the gate,” the SEC alleged that it was not sustainable over the long-term as BOND assets grew in size. The SEC found that, in commentaries and annual reports provided to shareholders, the Adviser disclosed other reasons for BOND’s initial strong performance during this period but did not disclose that such performance resulted from the odd lot strategy. In addition, the SEC found that by using the pricing vendor marks to value the odd lots purchased by BOND, the odd lot strategy caused BOND to overvalue its portfolio and thus fail to price BOND shares on the basis of their net asset value. Furthermore, the SEC found that the Adviser’s pricing policy did not adequately address odd lot pricing and the Adviser failed to disclose the existence and impact of the odd lot strategy to BOND’s board of trustees. While the Adviser neither admitted nor denied the SEC’s findings that it violated certain provisions of the Investment Advisers Act of 1940 and the Investment Company Act of 1940, and certain rules thereunder, the Adviser has agreed to, among other things, hire an independent compliance consultant to conduct a comprehensive review of the Adviser’s compliance policies and procedures to address the pricing and valuation of odd lots and the process for reporting significant pricing issues to the appropriate pricing committee at the Adviser. In addition, the Adviser has agreed to pay a civil penalty in the amount of $18.3 million and disgorgement of fees totaling approximately $1.3 million, plus interest of approximately $198,000.
On November 30, the Federal Trade Commission (FTC) and the Florida Attorney General (AG) announced several settlements totaling approximately $27 million in an alleged fraudulent credit card debt reduction scheme. In a set of stipulated orders, all but one defendant agreed to monetary judgments, as well as bans on future telemarketing, selling debt relief services, and credit card processing. The FTC and Florida AG had brought suit in the U.S. District Court for the Middle District of Florida, alleging violations of the Federal Trade Commission Act, the Telemarketing Consumer Fraud and Abuse Prevention Act, the FTC’s Trade Regulation Rule, and the Florida Deceptive and Unfair Trade Practices Act. View the full EnforcementWatch blog post.
On November 30, the U.S. Attorney for the Southern District of Texas announced that a federal jury in the Southern District of Texas issued a verdict finding several related mortgage companies and their CEO liable in connection with their participation in the Federal Housing Administration (FHA) mortgage insurance program. The verdicts were the result of a five-week trial in which the government alleged that the defendants violated the False Claims Act (FCA) and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). View the full EnforcementWatch blog post.
Businesses in financial distress are not an unusual sight these days, and as a result, it is essential for attorneys of all levels and in all practice areas to become familiar with the fundamental tenets of bankruptcy law. Whether you are just starting out in your career, thinking about broadening your practice area to include this field, or want to be able to spot the issues when advising your clients, this program will provide you with an essential foundation. Hear from a premier faculty of experts who will arm you with the practice tips and basic concepts every bankruptcy attorney needs. Learn how to guide your clients through this complicated process, and find out what questions to ask your clients. Learn when it is time for a distressed company to consider bankruptcy and discover when reorganization is an option. This course is perfect for attorneys who want to learn or re-learn how to counsel their clients on bankruptcy issues in the most effective manner. Goodwin partner Michael Goldstein is speaking at the event. For additional information, please visit the event website.
The 2017 Consumer Financial Services Committee Meeting of the ABA Business Law Section will consist of nearly 250 practice-area professionals. Goodwin is a sponsor. For more information, please visit the event website.