On January 8, FINRA released its Annual Regulatory and Examination Priorities Letter (the Letter), which highlights issues of importance to FINRA’s regulatory programs. The Letter identifies topics FINRA will focus on in the coming year and describes areas that member firms may wish to consider as they identify opportunities to improve their compliance, supervision and risk management programs. The Letter also references FINRA’s 2017 Examination Findings Report and encourages firms to use that report as an additional resource. Focus areas for 2018 include the following:
- fraudulent activities that harm investors and damage market integrity, such as insider trading, microcap pump-and-dump schemes, issuer fraud and Ponzi-type schemes;
hiring and supervisory practices of firms that hire high-risk brokers;
- operational and financial risks, particularly with respect to business continuity planning, protection of customer assets, accuracy of firms’ financial data, technology governance, cybersecurity, anti-money laundering programs, liquidity planning, and policy and procedures for monitoring rates charged to customers for short sales;
- sales practices, particularly focusing on product suitability, use of margin and practices around ICOs, digital assets (like cryptocurrencies) and securities-backed lines of credit; and
- market integrity, particularly with respect to manipulation-surveillance programs, best-execution obligations, compliance with Rule 201 of Regulation SHO, fixed-income data integrity, certain behaviors in options markets (namely, front running in correlated products, “marking the close” activity and options-related violations of SEA Rule 14e-4), compliance with the Market Access Rule and alternative trading systems’ supervisory systems.
FINRA plans to launch several new report cards in 2018 to assist firms with their compliance efforts, including the Auto Execution Manipulation Report Card, the Alternative Trading System Cross Manipulation Report Card and the Fixed Income Mark-up Report Card, and will review whether and how firms make use of these report cards. FINRA also highlighted some significant new rules that are scheduled to become applicable in 2018: FINRA Rule 2165 (financial exploitation of specified adults), amendments to FINRA Rule 4512 (customer account information), FinCEN’s Customer Due Diligence Rule, amendments to FINRA Rule 2232 (customer confirmations), amendments to FINRA Rule 4210 (margin requirements for Covered Agency Transactions) and the consolidated FINRA registration rules (FINRA Rules 1210 through 1240).
On January 4, the DOJ issued a memorandum in which it rescinded guidance issued during the Obama administration related to the enforcement of the Controlled Substances Act, and related money laundering and other federal laws, concerning the possession, manufacture, sale and distribution of marijuana in states which have legalized the medical and/or adult recreational use of marijuana. The DOJ’s memorandum specifically rescinds the guidance provided by the so-called Cole Memoranda, which were issued in 2013 and 2014. This action by the DOJ, at a minimum, increases the risk of federal prosecution of state-legalized marijuana businesses, and increases the risk of related money laundering and/or aiding and abetting prosecutions of financial and other institutions that service such businesses. For more information, read the client alert issued by Goodwin’s Financial Industry practice.
On January 4, the Board of Governors of the Federal Reserve System (Board) requested comment on proposed guidance that would clarify the Board’s supervisory expectations related to risk management for large financial institutions. The proposed guidance is part of a broader initiative to develop a new rating system for large financial institutions that will align with the post-crisis supervisory program and complements the Board’s August 2017 guidance, which was discussed in the August 9 edition of the Roundup. The proposed guidance identifies core principles for effective senior management, business line management and independent risk management. The guidance would apply to large financial institutions, including: domestic bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets; foreign banks operating in the United States with $50 billion or more in combined U.S. assets; and nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Board. Comments on this proposal will be accepted until March 15, 2018.
On January 5, the federal banking agencies, under the auspices of the Federal Financial Institutions Examination Council (FFIEC), issued Financial Institutions Letter 4-2018, which finalized additional burden-reducing revisions that will be made to all three versions of the Call Report effective June 30, 2018. Call Report revisions to address changes in the accounting for equity securities and other equity investments will take effect March 31, 2018. These revised Call Report requirements, which were issued for comment in June 2017, are subject to approval by the U.S. Office of Management and Budget.
On December 22, the Federal Deposit Insurance Corporation (FDIC) released a resource guide describing how insured depository institutions might benefit from collaborations with and among minority depository institutions (MDIs). Arrangements with MDIs can diversify portfolios, enhance liquidity, manage interest rate risk, serve the needs of a wider range of customers and, if helping meet the needs of low- to moderate-income areas, might qualify for CRA consideration. An insured depository institution may also receive CRA consideration when it engages beyond the normally applicable geographic restrictions in certain activities with minority- or women-owned financial institutions or low-income credit unions. The resource guide includes links to a list of MDIs and contact information for the relevant FDIC staff, who can help insured depository institutions interested in pursuing collaborative relationships with MDIs.
Beginning January 1, financial institutions may submit HMDA data collected in 2017 on the FFIEC’s online HMDA Platform. In order to assist financial institutions make these submissions, the CFPB has released two new tools. The CFPB’s new “digital check tool” is designed to help financial institutions satisfy HMDA’s Universal Loan Identifier requirements. The “digital check tool” is able to generate the necessary check digit for a Loan Entity Identifier and loan or application ID. The “digital check tool” is also able to confirm the check digit for any complete Universal Loan Identifier. The second tool the CFPB released is a “rate spread calculator” that will calculate the spread between the Annual Percentage Rate and a survey-based estimate of APRs currently offered on prime mortgage loans of a comparable type.
On December 21, the U.S. Senate confirmed the nomination of Robert Jackson (Democrat) and Hester Peirce (Republican) as SEC Commissioners. Peirce is a Senior Research Fellow and Director of the Financial Markets Working Group at the conservative Mercatus Center at George Mason University. She previously served on Senator Richard Shelby’s staff on the Senate Committee on Banking, Housing and Urban Affairs, and she also has experience at the SEC as a staff attorney in the Division of Investment Management and as counsel to former Commissioner Paul Atkins. Jackson is a professor at Columbia Law School and director of its Program on Corporate Law and Policy. Peirce’s term expires on June 5, 2020, and Jackson will complete the remainder of a term that expires on June 5, 2019. The new Commissioners include a Democrat because the Securities Exchange Act of 1934 provides that not more than three of the Commissioners shall be members of the same political party, and in making appointments, members of different political parties shall be appointed alternately as soon as may be practicable. Of the three other Commissioners, Chairman Jay Clayton is an independent, Commissioner Michael Piwowar is a Republican, and Commissioner Kara Stein is a Democrat; Stein’s term expired June 5, 2017, but she can continue to serve until her successor (who has not yet been nominated) is appointed and has qualified, or until the expiration of the next session of Congress, which will likely expire in December 2018. The addition of the two new Commissioners is expected to ease SEC rulemaking, as the current quorum requirement is three Commissioners. Prior to the Senate confirmation, therefore, any one of the three Commissioners could have prevented an action from going forward by not attending the meeting at which it was to be considered.
On January 5, the SEC adopted final rule amendments to the definition of a “venture capital fund” in the Investment Advisers Act, as amended (the Advisers Act) rule 203(l)-1 and the definition of “assets under management” in Advisers Act rule 203(m)-1 to reflect the changes made to the Advisers Act by the FAST Act. The FAST Act amended the “venture capital fund adviser exemption” under section 203(l)-1 of the Advisers Act by deeming small business investment companies (SBICs) other than business development companies to be “venture capital funds” for purposes of the exemption, and amended the “private fund adviser exemption” under section 203(m)-1 by excluding the assets of SBICs for purposes of calculating private fund assets under management. The amendments were initially proposed in May 2017, as previously discussed in the May 10 edition of the Roundup. Noting that it did not receive any germane comments, the SEC adopted the amendments as they were proposed. The amendments become effective 60 days after publication in the Federal Register.
On December 22, the SEC issued a staff bulletin and related interpretations regarding accounting for the tax reform bill that was signed into law that same day. While recognizing that estimates are required and that there may be a need for adjustments when information becomes available, the staff bulletin generally provides a one-year period for making refinements to estimates, but notes that if actual or reasonable estimations of tax reform effects are available, they should be reported in 2017. The interpretations include guidance on Form 8-K disclosure requirements.
Speaking of tax reform, the bill signed into law on December 22 (Tax Reform Law) doubles the federal estate, gift and generation-skipping transfer tax exemptions for transfers occurring in 2018 through 2025. Depending upon the terms of your estate planning documents, the increase in the exemption amount could alter the intended disposition of your assets at your death. For more information, read the client alert issued by Goodwin’s Trusts + Estates Planning practice.
The Tax Reform Law will also significantly impact private equity funds and their portfolio companies, as well as the transactions in which each engage. For more information, read the client alert issued by Goodwin’s Tax practice.
Institutions of higher education will also feel an impact. Notably, new excise taxes will be imposed on excess executive compensation and investment income of highly endowed private colleges and universities. In addition, the legislation modifies certain provisions relating to unrelated business taxable income, eliminates the charitable deduction for college athletic seating event rights and repeals the exclusion from income of interest on advance refunding bonds. For more information, read the client alert issued by Goodwin’s Higher Education practice.
The Tax Reform Law will impact compensation and benefits programs of a variety of entities including private companies, public companies and tax-exempt organizations of all sizes across a broad range of industries. For more information, read the client alert issued by Goodwin’s ERISA + Executive Compensation practice.
On the same day that a meteorological blizzard slammed the Eastern Seaboard, U.S. financial regulators unleashed their own flurry of statements and warnings surrounding ICOs and cryptocurrencies. Bundle up, because if the first week of the year is a prelude of things to come, then 2018 is sure to be a busy year in terms of regulatory focus on this space. View the Digital Currency + Blockchain Perspectives blog post.
Major derivatives market operators CBOE Holdings and CME Group have jumped into the digital currency fray by launching cash-settled bitcoin futures contracts. The exchanges recently cleared de facto regulatory hurdles when the Commodity Futures Trading Commission (CFTC) announced the completion of the exchanges’ “self-certification” process. The CFTC was quick to note that it has not formally approved or endorsed these products. Instead, the exchanges self-certified their products’ compliance with the Commodity Exchange Act and CFTC regulations. The distinction between self-certification and formal CFTC approval is mostly semantics for a product like bitcoin futures, as getting to this point involved extensive discussions between the exchanges and CFTC staff, during which the exchanges agreed to various CFTC-imposed requirements (regarding contract specifications, margining and information sharing with underlying bitcoin exchanges) to protect customers and support market integrity. View the Digital Currency + Blockchain Perspectives blog post.
Many managers may have assumed that the EU PRIIPS Regulation (the Regulation) does not apply to them because they do not generally raise capital from retail investors. However, due to the wide definition of “retail investor” and the scope of application of the Regulation, this will not necessarily be so, and all managers will need to consider the Regulation before offering any investment opportunity to EU retail investors. For more information, read the client alert issued by Goodwin’s Private Investment Funds practice.
Enforcement + Litigation
In the last several months the United States’ federal antitrust enforcement authorities, the Federal Trade Commission (FTC) and the Antitrust Division of the DOJ have challenged and sought to unwind three consummated mergers in whole or in part. These challenges serve as a stark reminder that the antitrust authorities will seek to unwind consummated mergers that, in their view, have reduced competition or have created a monopoly. In fact, many are unaware that antitrust authorities may challenge closed transactions even if the transactions were not required to be reported first under the Hart-Scott-Rodino Act pre-merger notification regime. Thus, even when a proposed transaction does not meet the filing requirements, parties to a transaction should nevertheless seek experienced antitrust counsel that can assess the potential for substantive antitrust risk. Failing to do so can result in inadvertent entanglement with lengthy investigations and, indeed, even litigation. In most instances, buyers will assume full responsibility to defend the investigations and/or litigation. In the event the parties are required to unwind part or the whole transaction, the additional burdens are heavy. For more information, read the client alert issued by Goodwin’s Antitrust + Competition practice.
On December 19, the FTC filed a motion to compel discovery responses and the production of documents in a case the FTC filed against a student loan debt relief company and its owner in the U.S. District Court for the Southern District of Florida. The FTC claims that the student loan debt relief company promised consumers it would reduce or eliminate student loan debt in exchange for a monthly fee (around $50) and an initial fee (as high as $1,200), which would be applied toward their loans. The company also promised that it would provide credit repair services and improve credit scores. But the FTC alleges that the company failed to enroll consumers in any debt forgiveness or payment reduction programs, did not reduce or eliminate payments, did not apply any fees charged to repay debts and did not provide credit repair services. View the Enforcement Watch blog post.
Bank Director’s 24th annual Acquire or Be Acquired Conference focuses on banks seeking to explore strategic short- and long-term growth options. Regina Pisa will be speaking on the panel, “Effectively Communicating an M&A Transaction” on January 28. Samantha Kirby and Matt Dyckman will also be in attendance. For more information, please visit the event website.