Weekly RoundUp September 11, 2019

Financial Services Weekly News: OCIE Issues Risk Alert on Investment Adviser Principal and Agency Cross Trading Compliance

Editor's Note

In This Issue. The Securities and Exchange Commission (SEC) issued a risk alert on investment adviser principal and agency cross trading compliance issues, published disclosure interpretations relating to the Inline XBRL rules adopted in June 2018, and announced increases in filing fees, effective October 1, 2019; the Federal Financial Institutions Examination Council (FFIEC) member agencies updated the interagency flood insurance examination manual and encouraged a standardized approach to assessing cybersecurity preparedness; the Federal Deposit Insurance Corporation (FDIC) clarified its risk-focused approach to examination policies; and the Consumer Financial Protection Bureau (CFPB) brought several new enforcement actions. These and other developments are discussed in more detail below.

Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

OCIE Issues Risk Alert on Investment Adviser Principal and Agency Cross Trading Compliance Issues

On September 4, the Office of Compliance Inspections and Examinations (OCIE) of the SEC issued a risk alert highlighting the most common deficiencies identified in investment-adviser examinations regarding principal trading and agency cross transactions when acting as a broker. In general, investment advisers are not permitted to (1) buy or sell a security from a client for its own account (principal trades) or (2) act as a broker for a person who is not a client and effect a sale or purchase of a security for the account of that client (agency cross transactions), without disclosure and consent from such client (with certain limited exceptions in the case of agency cross transactions). These deficiencies include non-compliance with consent and disclosure requirements of Section 206(3) of the Investment Advisers Act of 1940, as amended (Advisers Act), both in the context of individual-account clients and pooled investment vehicles (where such vehicles had significant ownership overlap), and non-compliance with the requirements relating to agency cross transaction contained in Rule 206(3)-2 promulgated under the Advisers Act. In addition, OCIE identified advisers that either did not have, or failed to follow, sufficient policies and procedures relating to principal and agency cross trading. OCIE concludes the risk alert by encouraging advisers to review and revise policies and procedures as appropriate to comply with Advisers Act requirements around principal and agency cross trading.

Goodwin Alert: SEC Issues Guidance Regarding Proxy Voting Process

On August 21, as previously covered by the Roundup, the SEC published two guidance releases regarding the proxy voting process. The first release is guidance to assist investment advisers (or fund managers) who assume voting responsibility on behalf of their clients, particularly with respect to the use of recommendations from proxy advisory firms, such as ISS and Glass Lewis (the Investment Advisers Guidance). The second release is an interpretation and guidance regarding the applicability of the federal proxy rules to voting recommendations made by proxy advisory firms (the Proxy Rules Guidance). The SEC approved both releases by a 3-2 vote, with Chairman Clayton and Republican Commissioners Peirce and Roisman forming the majority in each vote and Democratic Commissioners Jackson and Lee dissenting. For more information, read the client alert issued by Goodwin’s Public Companies and Investment Management practices.

Goodwin Alert: Inline XBRL Interpretations Issued by SEC Staff

The staff of the Division of Corporation Finance of the SEC has published nine Compliance and Disclosure Interpretations (C&DIs) relating to the Inline XBRL rules adopted in June 2018 (discussed in this Goodwin alert) and March 2019 (discussed in this Goodwin alert). The C&DIs clarify some questions about how companies should list exhibits in SEC filings, the impact of voluntarily filing documents that contain Inline XBRL, and transition issues for foreign private issuers. Note that at this time only large accelerated filers (including foreign private issuers that are large accelerated filers and prepare their financial statements in accordance with U.S. GAAP) are subject to the Inline XBRL rules. For more information, read the client alert issued by Goodwin’s Public Companies practice.

SEC Announces Increased Filing Fees for Fiscal Year 2020

On August 23, the SEC announced that the fees that public companies and other issuers (including mutual funds) pay to register their securities with the SEC will increase approximately 7.1% from $121.20 per million dollars to $129.80 per million dollars. The change will be effective on October 1, 2019. The fee rate change will apply not only to registration fees payable under Section 6(b) of the Securities Act of 1933, but also to fees payable under Section 13(e) and Section 14(g) of the Securities Exchange Act of 1934, in connection with securities repurchases and certain proxy solicitations and statements in corporate control transactions, respectively. The Section 6(b) rate is also used to calculate fees payable with an Annual Notice of Securities Sold Pursuant to Rule 24f-2 under the Investment Company Act of 1940. Because a mutual fund is required to pay its annual registration fee within 90 days after its fiscal year end, funds with fiscal years ending July 31st or August 31st have the flexibility to pay such fees before the higher fee rate takes effect. Any such fund that ordinarily would make its annual fee filing after October 1, 2019, may be able to achieve meaningful cost savings by choosing to do so before 5:30 p.m. ET on September 30, 2019 (i.e., the last business day before the rate hike). The SEC filing fee estimator is available here.

FFIEC Member Agencies Update Flood Insurance Exam Manual

On August 22, the FFIEC member agencies updated the Interagency Examination Procedures for the Flood Disaster Protection Act. The revised procedures reflect a February 2019 final interagency rule that addresses the private flood insurance provisions of the Biggert-Waters Flood Insurance Reform Act of 2012. These procedures incorporate new sections that discuss the following aspects of the final private flood insurance rule:

  • mandatory acceptance of a private insurance policy to satisfy the flood insurance purchase requirement if the policy meets the statutory and regulatory definition of “private flood insurance;”
  • discretionary acceptance of a flood insurance policy issued by a private insurer, even if the policy does not meet the statutory and regulatory definition of “private flood insurance;” and
  • discretionary acceptance of a plan issued by a mutual aid society in satisfaction of the flood insurance purchase requirement, if certain criteria are met.

FFIEC Encourages Standardized Approach to Assessing Cybersecurity Preparedness

On August 28, the FFIEC member agencies emphasized the benefits of using a standardized approach to assess and improve cybersecurity preparedness. The members note that firms adopting a standardized approach are better able to track their progress over time and share information and best practices with other financial institutions and with regulators. The agencies noted that institutions may choose from a variety of standardized tools aligned with industry standards and best practices to assess their cybersecurity preparedness. These tools, which are included in the guidance, include the FFIEC Cybersecurity Assessment Tool, the National Institute of Standards and Technology Cybersecurity Framework, the Financial Services Sector Coordinating Council Cybersecurity Profile, and the Center for Internet Security Critical Security Controls.

FDIC Clarifies Its Risk-Focused Approach to Exam Policies

On August 27, the FDIC announced updates to its Risk Management Manual of Examinations Policies to incorporate a new section titled Risk-Focused, Forward-Looking Safety and Soundness Supervision. The new section describes communication and risk-tailoring principles followed during safety and soundness examination activities and the FDIC’s long-standing examination philosophy and methods, improves transparency of the FDIC’s examination practices, and reinforces the expectations placed on FDIC supervisory staff to conduct risk-focused, forward looking supervision.

Enforcement & Litigation

Goodwin Alert: Federal Government Advocates Industry-Friendly Position In ESOP Stock Drop Supreme Court Case

Recently, the U.S. Supreme Court granted a writ of certiorari to hear Retirement Plans Committee of IBM v. Jander, a case about the legal standard for pleading a claim for breach of fiduciary duties under the Employee Retirement Income Security Act (ERISA) following a drop in the value of employer stock. In December of last year, the Second Circuit ruled that a participant in a publicly-owned company employee stock ownership plan (ESOP) could state a claim for breach of fiduciary duty against the ESOP fiduciary by pleading: (1) that the fiduciary failed to act on the basis of non-public information that would eventually have to be disclosed; and (2) that the fiduciary could not have concluded that earlier disclosure of the information would have done more harm than good. Jander v. Retirement Plans Comm. of IBM, 910 F.3d 620 (2d Cir. 2018). After petitioners filed their brief, on August 13, 2019, the Department of Labor (DOL) and the SEC signed on to an amicus brief filed by the Solicitor General on behalf of the United States, advocating that the Supreme Court adopt narrower interpretation than the Second Circuit: the Solicitor General argued that the Court should hold that ESOP fiduciaries are required to disclose non-public information only when required by federal securities laws. If the Supreme Court accepts that view, then it will overturn the Jander decision, and plaintiffs will face a high bar to plead a fiduciary breach in ESOP stock-drop cases where they cannot plausibly allege a violation of the securities laws—a result that is consistent with the view taken by more than a dozen courts considering the same issue, before the Second Circuit decided Jander. Read the client alert issued by Goodwin’s ERISA Litigation practice.

Seventh Circuit Imposes Strict Requirements for FDCPA Validation Notices Delivered Via Email

On August 8, the Seventh Circuit, in Lavallee v. Med-1 Solutions, LLC, 932 F.3d 1049 (7th Cir. 2019), ruled that emails to consumers from debt collects containing hyperlinks to information regarding debt, including validation notices, are not “communications” under the Fair Debt Collection Practices Act (FDCPA). Therefore, the court held, the emails do not provide consumers with the required validation notices under Section 1692g(a) of the FDCPA. In Lavallee, the consumer plaintiff brought a class action against the debt collector, alleging the email communications sent to the consumer failed to include disclosures required by the FDCPA regarding the amount of the debt, the consumer’s right to dispute the debt, and how to obtain more information about the alleged creditor. The debt collector had sent the consumer two emails, each concerning a separate debt, which did not include any information as to the debt and did not provide validation notices on the face of the emails, but which did provide the required information and disclosures in embedded hyperlinks. Read the LenderLaw Watch blog post.

CFPB Announces $236,000 Settlement With Illinois Debt Collector

On August 28, the CFPB announced a settlement with an Illinois-based debt collection company, resolving allegations that the company engaged in deceptive practices in violation of the Consumer Financial Protection Act (CFPA), 12 U.S.C. §§ 5531 and 5536, and the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692e. Read the Enforcement Watch blog post.

FTC Announces $30 Million Settlement With Operator of For-Profit Post-Secondary Schools

On August 27, the Federal Trade Commission (FTC) announced it had reached a $30 million settlement with an Illinois-based operator of for-profit post-secondary schools and related subsidiaries resolving allegations that the company used lead generators who engaged in deceptive conduct to market its schools in violation of Section 5(a) of the Federal Trade Commission Act, 15 U.S.C. § 45(a). According to the FTC, lead generators represented to consumers that the company’s schools were associated with the military when they were not. The lead generators also allegedly called consumers on the National Do-Not-Call Registry in violation of the FTC’s Telemarketing Sales Rule, as amended, 16 C.F.R. Part 310. The FTC’s complaint claims that the company knew or approved of the lead generators’ acts and practices, and/or benefitted from those acts and practices. Read the Enforcement Watch blog post.

CFPB and Arkansas AG Settle with Brokers Over Illegal Credit Contracts

On August 14, the CFPB and the Office of the Arkansas Attorney General (AG) entered into a proposed stipulated final judgment with three corporations that brokered extensions of credit to consumers, and the co-founder and owner of one of the corporations. The simultaneously filed complaint, filed in the U.S. District Court for the Eastern District of Arkansas, alleged that defendants engaged in unfair and deceptive acts and practices in violation of CFPA, and deceptive, unconscionable, and false practices in violation of the Arkansas Deceptive Trade Practices Act, by allegedly brokering contracts between consumers (the majority of whom were military veterans) and investors whereby consumers received lump-sum payments in exchange for assigning to the investors part of their monthly pension or disability payments. These transactions were void under federal law, which prohibits assigning a veteran’s pension payments to another person. Additionally, defendants allegedly misrepresented to consumers that these products were sales of payments rather than high-interest credit offers, and failed to disclose to consumers the interest rates of these products. Read the Enforcement Watch blog post.

Goodwin News

ABA Business Law Section Annual Meeting – September 12

Join business law professionals in Washington, D.C. for the annual ABA Business Law Section Annual Meeting. Grow your international network of business law thought leaders and colleagues. Goodwin is a sponsor of this event.

2019 PLANADVISER National Conference – 9/16/19

The 2019 PLANADVISER National Conference addresses all areas of the advisory businesses and will focus on the latest on how to manage legislative and regulatory challenges, maximize opportunities in financial wellness and health savings accounts, leverage the newest platforms, grow your client base and differentiate your message to construct investment lineups by way of the best practices in use today. Financial Industry Partner, Jamie Fleckner, will be speaking at this conference, on “Risk Management for Advisers – Litigation, Insurance, Audits.”

This week’s Roundup contributors: Christina Hennecken, Mac Laban, Viona Miller and Stella Padilla.