On April 12, the Office of Compliance Inspections and Examinations (OCIE) of the Securities and Exchange Commission (SEC) issued a National Exam Program Risk Alert which lists the compliance issues related to fees and expenses charged by SEC-registered advisers that were most frequently identified in deficiency letters sent to such advisers. The most frequently observed deficiencies fell into the following categories: fee-billing based on incorrect account valuations; fee-billing in advance or with improper frequency, based on documentation or disclosures; applying incorrect fee rates; omitting rebates and applying discounts incorrectly; inadequate or absent disclosures on advisory fees; and adviser expense misallocations. The OCIE encourages advisers to review their practices and disclosures in these areas to ensure that they are complying with the Investment Advisers Act, relevant rules, and their fiduciary duties. The OCIE notes that in response to such deficiency observations, advisers have elected to enhance or change their practices and policies, as well as reimburse clients for any overbilled amounts of fees and expenses.
On April 10, the staff of the SEC’s Division of Investment Management updated its responses to frequently asked questions (FAQs) related to the investment company reporting modernization reforms adopted in October 2016 and revised in December 2017. The updates provide guidance on compliance dates for the reporting of liquidity information on Forms N-PORT and N-CEN as modified by the SEC’s amendments to the reforms adopted in December 2017. The SEC staff provided a marked copy of the FAQs highlighting the updates.
On April 5, the New York Attorney General Eric T. Schneiderman’s office released a report on mutual fund fees and announced a voluntary agreement with 13 firms to make additional disclosures to investors. The report and agreement with the firms follows an investigation by the Investor Protection Bureau of the Office of the New York Attorney General, which did not result in any criminal or civil charges against the firms. The firms agreed to make available “Active Share” metrics about their funds. Active Share measures the overlap between a mutual fund’s holdings and its benchmark index. In addition to the announcement, the report details the findings of the investigation into fees charged by actively managed mutual funds, their disclosure to investors, and their portfolio composition relative to their fees. The key findings are that:
- an actively managed fund could cost an investor almost 4.5x more in fees than an investment in a passive fund;
- higher fees do not correlate with the fund’s potential to outperform the market; and
- mutual fund managers widely use the Active Share metric and provide the metric to professional and institutional investors, but not to retail investors.
In announcing the report and voluntary agreement, the New York Attorney General’s Office explained that it believes the Active Share metric would help investors determine whether the fees they pay for a higher-fee actively managed fund are worth the value over a lower-fee index fund.
On April 10, the Federal Reserve issued a proposed rule that would change the way it calculates a required capital buffer for bank holding companies with $50 billion or more in consolidated assets. Currently, bank holding companies with more than $50 billion in total consolidated assets undergo annual CCAR stress tests run by the Federal Reserve. The proposal would introduce a stress capital buffer (SCB) that would be sized through the stress test and would be part of the firm’s ongoing capital requirements, producing a tailored and risk-sensitive capital regime for large banking organizations. For example, if a firm has a common equity tier 1 capital ratio of 9 percent and it declines to 6 percent under the stress test, its SCB for the coming year would be 3 percent. The SCB would then be added to the minimum 4.5 percent common equity capital requirement, which remains unchanged. This would result in a 7.5 percent common equity capital requirement for the coming year. If the firm is a GSIB, its GSIB surcharge would be added to the SCB. Additionally, four quarters of planned dividends would be added to the SCB. With the proposed changes, large firms would be required to meet 14 capital-related requirements, instead of the current 24. The proposed rule would also modify several assumptions in the CCAR to better align them with a firm’s expected actions under stress. Comments on the proposed rule will be accepted for 60 days after publication in the Federal Register.
On April 11, the Federal Reserve and the OCC issued a proposed rule that would tailor the so-called “enhanced supplementary leverage ratio” requirements to the business activities and risk profiles of the largest domestic financial firms. Enhanced supplementary leverage ratio standards apply GSIBs, as well as the insured depository institution subsidiaries of those firms. Currently, GSIBs must maintain a supplementary leverage ratio of more than 5 percent, which is the sum of the minimum 3 percent requirement plus a buffer of 2 percent, to avoid limitations on capital distributions and certain discretionary bonus payments. The insured depository institution subsidiaries of the GSIBs must maintain a supplementary leverage ratio of 6 percent to be considered “well capitalized” under the prompt corrective action framework. At the holding company level, the proposed rule would modify the fixed 2 percent buffer to be set to one half of each firm’s risk-based capital surcharge. For example, if a GSIB’s risk-based capital surcharge is 2 percent, it would now be required to maintain a supplementary leverage ratio of more than 4 percent, which is the sum of the unchanged minimum 3 percent requirement plus a modified buffer of 1 percent. The proposal would similarly tailor the current 6 percent requirement for the insured depository institution subsidiaries of GSIBs regulated by the Federal Reserve and the OCC. Comments on the proposed rule will be accepted for 30 days after publication in the Federal Register.
On April 17, the Federal Reserve, OCC and FDIC proposed a revision to their regulatory capital rules to provide all banking organizations with the option to phase in the regulatory capital effects of the Current Expected Credit Losses (CECL) accounting methodology. The proposal addresses the regulatory capital treatment of credit loss allowances under CECL and would allow banking organizations to phase in the day-one regulatory capital effects of CECL adoption over three years. Comments on the proposal will be accepted for 60 days after publication in the Federal Register.
On April 10, the FDIC proposed to rescind the Office of Thrift Supervision rule requiring state savings associations to conduct fiduciary activities in accordance with applicable state law and in a safe and sound manner. The FDIC also proposed to amend current FDIC regulations to clarify and state explicitly that both state savings associations and state nonmember banks are required to obtain the FDIC’s prior written consent to exercise trust powers granted by chartering authorities. State savings associations had not previously been required to obtain the written consent of the FDIC prior to engaging in fiduciary activities permitted by applicable state law. The proposal also would permit state savings associations to act as trustees or custodians of certain qualifying accounts (such as IRAs, health savings accounts and education savings accounts) as long as the accounts are invested in bank deposit products and the bank does not have investment discretion.
On April 10, the FDIC issued a letter to all FDIC-supervised institutions to raise awareness of the potential role of cyber insurance in financial institutions’ risk management programs. The letter noted that FDIC-supervised institutions are not required to maintain cyber insurance, but that such insurance could help offset financial losses from a variety of exposures, including data breaches resulting in the loss of confidential information that may not be covered by more traditional types of insurance, such as general liability insurance. The FDIC cautioned, however, that cyber insurance is not a replacement for a sound and effective risk management program. While the FDIC’s letter is not intended to provide new regulatory expectations, we believe it highlights the increasing importance of cyber insurance as a risk management tool.
On April 11, the Consumer Financial Protection Bureau (CFPB) issued a request for information (RFI) seeking comments and information regarding consumer complaints and inquiries. The CFPB is currently reviewing its handling of consumer complaints and inquiries. In addition, the CFPB is seeking comments on possible changes, consistent with existing law, to its process for addressing such complaints and inquiries. The CFPB will accept comments through June 15, 2018.
Enforcement & Litigation
The SEC last week sued Longfin Corp., a financial technology company that recently entered the cryptocurrency space, as well as Longfin’s CEO and three others affiliated with the company. The complaint, filed in federal court in Manhattan, was unsealed on April 6, 2018, when the SEC obtained a court order to freeze over $27 million in trading proceeds. View the Digital Currency & Blockchain Perspectives blog post.
On April 4, Georgia Attorney General Chris Carr announced an $8.5 million settlement with a national debt collector, resolving allegations that the company violated the Fair Debt Collection Practices Act and the Georgia Fair Business Practices Act. View the Enforcement Watch blog post.
Join NRS at its Spring 2018 Conference – Compliance Agility: Risk, Resources & Technology, where industry experts will address how investment adviser and broker-dealer firms can successfully navigate the disruptive currents of regulatory change and adapt agile procedures to compliance programs.
Hosted by the American Bar Association, this special program is dedicated to an in-depth analysis of the emerging legal issues and the latest legal events concerning digital currencies, like bitcoin, and blockchain technology. Grant Fondo, partner and chair of Goodwin’s Digital Currency & Blockchain Technology practice, will be a featured speaker.
Consero’s 2018 Financial Services & Insurance Litigation Forum will address current and looming legal and business challenges faced by today’s chief litigation officers, providing a one-of-a-kind opportunity to share best practices and strategies that will help lead their departments and companies in the right direction. Goodwin is a sponsor. For more information, please visit the event website.
MBA’s Legal Issues and Regulatory Compliance Conference gathers industry leaders to consider best practices, organizational changes needed to assimilate to final rules and knowledge to educate staff. Goodwin is a sponsor.
Join American Conference Institute for the Inaugural Fintech Regulatory & Compliance Payments Conference. This conference will bring together an unparalleled faculty of in-house counsel and compliance professionals, senior executives from industry-leading companies, high-level regulatory and enforcement officials, and top outside counsel specializing in payment systems and Fintech who will provide you with the key insights, proven strategies, and best practices necessary to navigate the legal, compliance, and technical hurdles arising from this brave new world. For more information, please visit the event website.
The Annual Convention of the Massachusetts Bankers Association serves as a major activity of the association for banker/director education, as well as grassroots networking among member institutions and associate members. The program will include nationally recognized authorities addressing vital issues affecting the financial services industry in Massachusetts, New England and at the national level. Meeting sessions will cover topics relevant to managing a successful bank as well as understanding the local/global economy. Goodwin is a sponsor of this year’s program and will host a cocktail reception in conjunction with the conference on Thursday, May 3, at 5:00 pm ET. For more information on the reception and to register, please click here.
At Consensus, CoinDesk’s 4th annual blockchain technology summit, professionals from leading industry startups, investment firms, financial services giants, global brands, academic institutions and policy groups will return to New York to discuss the evolving real-world applications of blockchain technology. The 2018 summit will feature three days of demos, networking and expert discussions regarding the most important commercial developments, technical innovations, and public policy issues; 250+ speakers, and 4,000+ attendees who are building the foundations of the blockchain and digital currency ecosystem. Goodwin is a Block Sponsor of the event. For more information, please visit the event website.
Goodwin will serve as a sponsor at the 2018 Pennsylvania Bankers Association Annual Convention. Samantha Kirby and Matthew Dyckman will speak on the “Mission Critical: The importance of Board Composition & Succession to the Future of the Enterprise” session. For more information, please visit the event website.