The following brief updates exemplify trends and areas of current focus of relevant regulatory authorities:
Revised Risk Retention Rules Published for Asset-backed Securities
The Board of Governors of the Federal Reserve System, the Department of Housing and Urban Development, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission jointly issued a revised version of their proposed rule implementing the credit risk retention requirements of section 15G of the Securities Exchange Act of 1934. Section 15G was amended by section 941 of the Dodd-Frank Act to require the securitizer of asset-backed securities to retain not less than 5 percent of the credit risk of the assets collateralizing the asset-backed securities. The credit risk retention requirement is intended to insure that securitizers, as a general matter, retain an economic interest in the credit risk of the assets they securitize. The rationale for this requirement is to provide securitizers with an economic incentive to monitor and ensure that the quality of the assets underlying a securitization transaction is in alignment with the interests of investors. The changes incorporated into the revised proposal are generally intended to increase the degree of flexibility that sponsors would have in meeting the risk retention requirements of section 15G. Comments on the proposed rule are due by October 30, 2013. The SEC’s release can be found here.
SEC Issues Business Continuity Risk Alert
The National Exam Program of the SEC’s Office of Compliance Inspections and Examinations issued a Risk Alert summarizing the results of its review of the business continuity and recovery plans (“BCPs”) of approximately 40 investment advisers, which the SEC conducted in response to wide-ranging damage and disruptions caused by Hurricane Sandy in October of 2012. In general, the Risk Alert focuses on the importance of anticipating and addressing the problems created by geographically widespread events. The Risk Alert emphasized the importance of an organization’s geographical diversity when planning a successful BCP, particularly with respect to backup locations, systems and service providers. The SEC noted that BCPS should address situations where key personnel, such as portfolio managers, are unable to work from home or other remote locations. The Risk Alert also highlighted the importance of testing the operability of critical back-up systems, and noted that some advisers encountered disruptions because they opted not to conduct such tests in order to avoid paying additional fees charged by vendors. The Risk Alert can be found here.
SEC Enforcement Changes Enforcement Priorities to Focus on Complex Products
In his remarks at a recent Practicing Law Institute conference, the co-head of the SEC’s Division of Enforcement, Andrew Ceresney, said that the division’s prosecution unit is looking more closely at “areas that have not received as much attention [until recently],” including complex financial instruments such as ETFs, derivatives, collateralized loan obligations, as well as at the credit-rating agencies. Ceresney also said that the division is newly concentrating on financial reporting and micro-cap fraud, market structure and the implementation of new rules and regulations, such as the 2012 Jumpstart Our Business Startups Act and the forthcoming Volcker Rule.
SEC Charges Investment Adviser in Alleged Cherry-Picking and Soft Dollar Schemes
On August 30, 2013, the SEC charged J.S. Oliver Capital Management, a San Diego-based investment adviser, and its president for engaging in a cherry-picking scheme that cost clients approximately $10.7 million and for the misuse of approximately $1.1 million in soft dollars. In connection with the cherry-picking scheme, the adviser allegedly waited to allocate trades until the close of trading or the next day, and gave more favorably-priced securities to accounts held by the president and his family. In connection with the soft dollar scheme, the adviser allegedly failed to disclose the use of soft dollars for (i) more than $300,000 in payments to the president’s ex-wife under his divorce agreement; (ii) more than $300,000 in “rent” for the advisory firm to conduct business at the president’s home; (iii) approximately $480,000 for outside research and analysis to a company wholly owned by an employee of the adviser; and (iv) nearly $40,000 in maintenance and other fees on the president’s personal timeshare in New York City.