On March 12, the SEC’s Division of Investment Management staff issued a letter to the Investment Adviser Association announcing the staff’s plans to seek industry input on custodial practices relating to (i) trading that is not processed or settled on a delivery versus payment basis (non-DVP) and (ii) investing in digital assets. The staff received questions about non-DVP custodial practices following its February 2017 staff guidance regarding the custody rule under the Investment Advisers Act of 1940 (the Custody Rule). To help inform potential regulatory action, the staff is seeking input from industry participants on non-DVP practices and risks including, among other items: what instruments trade on a non-DVP basis, the risks of misappropriation associated with non-DVP trading, a custodian’s role in non-DVP trading, and how evolving technologies may affect client protection in non-DVP trading.
The staff noted in the same letter its focus on characteristics of digital assets, such as the use of distributed ledger technology (DLT) like blockchain to record ownership, the anonymity of DLT transactions, and the challenge to auditors in examining digital assets and DLT. To this end, the staff is seeking input on topics such as: challenges digital assets present for advisers in regards to complying with the Custody Rule, the extent to which advisers are construing digital assets as “funds” or “securities” for purposes of the Custody Rule and including digital assets for purposes of regulatory assets under management for registration-triggering thresholds, and the extent to which DLT can be used more broadly to evidence security ownership. The staff stated in the letter that amendments to the Custody Rule are on the SEC’s long-term unified agenda and signaled that the staff’s considerations of the Custody Rule would be broad and not limited to just non-DVP and digital asset matters.
On March 15, five U.S. federal agencies — the Board of Governors of the Federal Reserve System, the Farm Credit Administration, the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Finance Agency, and the Office of the Comptroller of the Currency (together, the Agencies) — adopted an interim final rule that is intended to assist financial firms in the United Kingdom in the event the U.K. exits the European Union without a withdrawal agreement. The interim final rule amends the Swap Margin Rule to clarify that financial firms in the U.K. may transfer existing “grandfathered” non-cleared swap portfolios (which were entered into before the relevant regulatory margin requirements took effect) to affiliates or other related entities located in the EU or the United States, without triggering application of the Swap Margin Rule. The interim rule went into effect immediately, but the Agencies will accept comments on the rule through April 18, 2019.
On March 15, the FDIC issued a final rule rescinding Part 350 from the Code of Federal Regulations. As discussed in the October 31, 2018, edition of the Roundup, Part 350 required, among other things, FDIC-insured state nonmember banks and FDIC-insured state-licensed branches of foreign banks to make available annual disclosures including (i) financial data comparable to the Consolidated Reports of Conditions and Income filed for the previous two year-ends; (ii) FDIC required information such as disclosure of enforcement actions; and (iii) other information at the option of the bank. The Office of the Comptroller of the Currency and the Federal Reserve Board also require similar disclosures. The FDIC determined that such information is accessible to the public via the internet through the FDIC’s website and determined to rescind Part 350 to remove the disclosure requirements. The final rule takes effect on April 17, 2019.
Enforcement & Litigation
On March 18, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal prior to discovery of a complaint filed under Section 36(b) of the Investment Company Act of 1940. The Second Circuit’s decision is significant for a number of reasons. First, it is the first appellate decision regarding a complaint premised on a “subadvisory fee comparison” theory, which contends that an advisory fee is excessive if it is larger than the fee the adviser charges for providing subadvisory services. Second, it is one of only a few decisions in the last 10 years that affirms dismissal of a Section 36(b) complaint before discovery. Third, the Second Circuit held that in determining whether to dismiss a Section 36(b) complaint, the issue is not whether one or more of the so-called Gartenberg factors weigh in favor of the plaintiff, but rather whether all of the allegations and Gartenberg factors, considered collectively, plausibly suggest that an adviser has violated Section 36(b). For more information, read the client alert issued by Goodwin’s Financial Industry group.
On March 11, the SEC announced settlements with 79 self-reporting investment advisers in connection with the SEC’s Share Class Disclosure Initiative (Initiative), which was created in February 2018 to address concerns that investment advisers were not adequately disclosing, or acting consistently with disclosures regarding, conflicts of interest related to their mutual fund share class selection practices. According to the SEC, such practices deprive investors, especially retail investors, of the ability to make informed investment decisions about appropriate share classes when purchasing mutual funds. The Initiative enabled investment advisers to avoid financial penalties if they timely self-reported violations of the Advisers Act resulting from undisclosed conflicts of interest, agreed to review and correct all relevant disclosure documents concerning mutual fund share class selection and 12b-1 fees, and evaluate whether existing clients should be moved to an available lower-cost share class and move clients, as necessary. Without admitting or denying the SEC’s findings, the settling investment advisers consented to cease-and-desist orders, to censure, and to disgorgement of fees with prejudgment interest to affected clients. As a result of the Initiative, more than $125 million will be returned to advisory clients.
The U.S. Commodity Futures Trading Commission (CFTC) announced that a federal court entered a consent order with 1pool Ltd. The consent order resolves a previous CFTC action against the Marshall Islands-based 1pool Ltd., and its CEO and owner, Patrick Brunner. The CFTC’s action alleged that, between 2016 and 2018, 1pool Ltd. illegally offered retail commodity transactions margined in bitcoin, failed to register as a futures commission merchant, and failed to implement sufficient anti-money laundering procedures. According to the Director of Enforcement for the CFTC: “This action shows the CFTC’s commitment to ensuring that intermediaries offering transactions within our jurisdiction register with the CFTC and implement policies and procedures necessary to prevent money laundering and other illicit transactions. These requirements serve to preserve market integrity and protect customers. This action also reflects the CFTC’s commitment to coordinate closely with our fellow regulators to ensure that we uncover and prosecute the entire scope of any misconduct.” The defendants paid a total of $990,000 to resolve the CFTC action. This amount includes a civil monetary penalty of $175,000 and $246,000 in disgorgement. 1pool Ltd. was also required to return customers’ bitcoin in its possession. 1pool Ltd. has returned 93 bitcoins, valued at $570,000.
On March 12, the Southern District of Florida dismissed a putative Telephone Consumer Protection Act (TCPA) case for a second time because of repeated pleading defects. In Settle v. State Farm Fire and Casualty Co., Judge Ursula Ungaro granted State Farm’s dismissal request because the plaintiff’s efforts to fix defects in her original complaint were inadequate. Although Judge Ungaro’s order totals only two pages, it has much to teach TCPA defendants who often face generic and unclear complaints. Read the LenderLaw blog post.
On February 25, the U.S. Supreme Court accepted appeal from the Third Circuit’s decision in Rotkiske v. Klemm et al., No. 16-1668 (3d Cir. May 15, 2018). The court is now primed to answer whether the Fair Debt Collection Practices Act (FDCPA) encompasses the “discovery rule” — which tolls the statute of limitations until a plaintiff discovers he or she has been harmed — even though the relevant portion of the FDCPA, 15 U.S.C. § 1692k(d), limits a cause of action thereunder to “one year from the date on which the violation occurs.” In Rotkiske v. Klemm, No. 18-328, the Supreme Court will have the opportunity to resolve a circuit split between the Third Circuit and the Fourth and Ninth Circuits concerning whether the discovery rule applies to the FDCPA. Read the LenderLaw blog post.
For over 50 years, SIFMA’s C&L Annual Seminar has convened industry leaders and regulators for information sharing, collaboration, and networking. Register to join us at this premier event for compliance and legal professionals in financial services: March 24-27 at the JW Marriott Desert Ridge in Phoenix, Arizona. Goodwin is a Premium Patron Sponsor of the event.
CBA LIVE is the must-attend event for the retail banking industry. More than 1,500 senior bankers and industry leaders gather from across the country to experience this premier event. CBA LIVE offers top-notch programming tailored toward professionals motivated to learn new trends and share ideas with the most influential decision makers in the business. Goodwin Financial Industry partner Anthony Alexis will be a speaker at the opening session of the CFPB forum. Mr. Alexis’ session will focus on what’s to come from the Consumer Financial Protection Bureau in our current climate and under its new leadership. For more information, please visit the event website.