Insights from Winston & Strawn

The United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN) is once again pushing for regulations that would require investment advisers registered with the Securities and Exchange Commission (SEC) to be subject to anti-money laundering (AML) requirements. In 2003, FinCEN proposed such a rule under the Bank Secrecy Act. Many concerns were raised about that proposed rule and FinCEN withdrew the proposal in 2008 and suggested it intended to propose a revised rule at a later date. Now, seven years later, it seems FinCEN may be ready to deliver a new proposed rule.  

The semiannual regulatory agenda of the Treasury Department, received by The Office of Management and Budget (OMB) on April 24, 2015, included a rule proposal by FinCEN entitled “Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Investment Advisers.” Typically, after ninety days OMB completes its review and the rule is made public and open for comment. While the draft of the proposed rule received an OMB stamp of approval in July, at this point in time, no formal rule has been published for public review or comment.  

Although the proposal in the Treasury Department’s semiannual agenda has been present in many of the recent semiannual regulatory agendas, there is reason to believe FinCEN will take the next step very soon to submit a formal rule proposal. At the November 2014 ABA/ABA Money Laundering Enforcement Conference, then Under Secretary for Terrorism and Financial Intelligence of the Treasury Department, David Cohen stated, “FinCEN, in consultation with the SEC, is working to define SEC-registered investment advisers as financial institutions and, because of their unique insight into customer and transaction information, to extend AML program and suspicious activity reporting requirements to them.”  

If registered investment advisers are defined as “financial institutions” they will be subject to similar AML requirements as banks and broker-dealers. The US Patriot Act of 2001 mandates the scope of AML program requirements, including designating a chief compliance officer, adopting risk-based procedures for verifying the identity of each client, training staff and obtaining periodic independent testing of the AML program. Further, the Bank Secrecy Act requires financial institutions to file reports with the federal government of any suspicious activity.  

If the final rule does make investment advisers subject to all of the AML regulations faced by banks and broker-dealers, the compliance cost could be significant. Further, it could impact an adviser’s timeframe for accepting new advisory clients as they will, at a minimum, be required to screen each potential client to verify the client’s identify.

Jessica Brown

Feature: Securitizations

European and international regulators have recently issued guidance to the financial industry establishing the criteria for lower risk securitization products in an attempt to bolster a securitization market still suffering from the stigma of the 2007-2009 financial crisis while maintaining regulatory safeguards.  

At a public hearing in London, the European Banking Authority (“EBA”), in response to a request from the European Commission, issued technical advice on the criteria for identifying simple standard and transparent term securitization and asset-backed commercial paper transactions and developing a regulatory framework for these transactions. The following week the EBA released the full text of its opinion. The EBA’s proposal seeks to differentiate the levels of risks within securitization products rather than applying a one-size-fits-all approach to their regulatory treatment.  

Under the EBA’s proposal, securitization transactions that meet its criteria for simplicity, standardization, and transparency, as well as underlying risk exposure, would qualify for recalibrated capital requirements that correspond to their level of risk. Additionally, the senior tranches of qualifying transactions would be subject to reductions in the risk-weight floors, with the amount of the reductions correlating to their long term ratings. EBA Press Release.  

On the heels of the release of the EBA’s securitization criteria, the Basel Committee on Banking Supervision (“Basel Committee”) and the International Organization of Securities Commissions (“IOSCO”) jointly issued final criteria for identifying simple, transparent, and comparable securitization structures. The final criteria incorporate amendments to the proposed criteria the regulators published in December 2014.  The purpose of the criteria is to assist the parties to a transaction in evaluating the risks of a particular securitization across similar products.  

The Basel Committee/IOSCO release sets out 14 criteria for evaluating a securitization product, indicating their purpose in assessing simplicity, transparency, and comparability as well as mapping them to three types of risk: asset risk, structural risk, and fiduciary and servicer risk. Joint Press Release. While the criteria provide specific guidance for evaluating securitizations for risk level, the Basel Committee and IOSCO declined to make recommendations for regulatory treatment of securitization transactions meeting the criteria, such as the reduction in capital requirements proposed by the EBA. It remains to be seen if the international regulators will follow through with a preferential regulatory framework for qualifying securitizations, or if the criteria alone will be sufficient to encourage investors to return to the securitization marke

Banking Agency Developments

OCC Hosts Minority Depository Institutions Advisory Committee Meeting

On August 21st, the Office of the Comptroller of the Currency (“OCC”) announced that it is hosting a public meeting of the Minority Depository Institutions Advisory Committee (“MDIAC”) on September 15th in Washington, D.C. MDIAC Meeting.    

Federal Reserve Bank of New York Publishes Five-Part Blog Series

On August 17th, the Federal Reserve Bank of New York (“New York Fed”) published the first of its five-part blog series. The first blog focused on U.S. Treasury market liquidity; the second, posted on August 18th, focused onthe effect of flash trading; the third, posted on August 19th, focused on high-frequency cross-market trading in U.S. Treasury markets; the fourth, posted on August 20th, focused on workups in the U.S. Treasury securities market; and the fifth, posted on August 21st, focused on dealer balance sheet stagnation. See also Reuters Story on Dealer Balance Sheet Stagnation Blog Post.

Treasury Department Developments

OFR Publishes Working Paper on Bounding Wrong-Way Risk in Measuring Counterparty Risk

On August 19th, the Treasury Department’s Office of Financial Research (“OFR”) published a working paper in which it investigates the potential impact of wrong-way risk in calculating a credit valuation adjustment (“CVA”) to a derivatives portfolio. Working Paper.

CFPB Issues Compliance Bulletin

On August 17th, the Bureau of Consumer Financial Protection (“CFPB”) issued a compliance bulletin titled “Amendment to the Interstate Land Sales Full Disclosure Act” to provide information to developers and other interested parties relating to a recent Congressional amendment to the Interstate Land Sales Full Disclosure Act. CFPB Bulletin.

FinCEN Issues Administrative Ruling Regarding MSB Regulations

On August 14th, the Financial Crimes Enforcement Network (“FinCEN”) issued a ruling regarding its money services business (“MSB”) regulations under the Bank Secrecy Act. Ruling.

Securities and Exchange Commission

SEC Marks 75th Anniversary of the Investment Company and Investment Advisers Acts

On August 21st, the Securities and Exchange Commission (“SEC”) announced it will host a conference commemorating the 75th anniversary of the Investment Company Act and the Investment Advisers Act. The event will be held on Tuesday, September 29th, and will include remarks from current SEC Commissioners and Chair Mary Jo White, along with panel discussions featuring former SEC chairs and division directors, as well as other prominent members of the asset management field. SEC Press Release.

Staff Announcements

On August 19th, the SEC named Shelly Luisi as an Associate Director in the Division of Corporation Finance. Luisi currently serves as a Senior Associate Chief Accountant in the SEC’s Office of the Chief Accountant and will assume her new role in September. On August 18th, the SEC announced that Shamoil T. Shipchandler will serve as the Regional Director of its Fort Worth Regional Office, joining the agency in October.

FINRA to Oversee Administration of Municipal Advisor Qualification Tests

On August 17th, pursuant to Section 15B(c)(7)(A) of the Securities Exchange Act, the SEC designated the Financial Industry Regulatory Authority (“FINRA”) to administer the professional qualification tests for associated persons of registered municipal advisors who engage in municipal advisory activities or engage in the management, direction or supervision of municipal advisory activities. SEC Release No. 34-75714.

Draft EDGAR Manuals Released

On August 14th, the SEC published Draft EDGAR Filer Manual (Volume I) General Information (Version 23)Draft EDGAR Filer Manual (Volume II) EDGAR Filing (Version 34)Draft EDGAR Filer Manual (Volume III) N-SAR Supplement (Version 5)Draft EDGARLink Online XML Technical Specification (Version 18); and Draft EDGAR Form SDR - XML Technical Specification (Version 3).

Private Fund Systemic Risk Data Report

On August 13th, the SEC’s Division of Investment Management published its annual report to Congress detailing its use of private fund systemic risk data collected from Form PF. The report indicates the Commission has used the data primarily in examinations and investigations of private fund advisers; in its risk monitoring activities; in its development of regulatory initiatives; and in coordinating with other federal and international regulators in areas of mutual interest relating to private fund advisers. Annual Report.

Commodity Futures Trading Commission

Proposed Amendments to Swap Data Recordkeeping and Reporting Requirements for Cleared Swaps

On August 19th, the U.S. Commodity Futures Trading Commission (“CFTC”) voted to propose amendments to existing regulations in order to provide additional clarity to swap counterparties and registered entities regarding their reporting obligations for cleared swap transactions, and to improve the efficiency of data collection and maintenance associated with the reporting of the swaps involved in a cleared swap transaction. The comment period ends 60 days after the publication in the Federal Register. Proposed Amendments.

CFTC Orders Swap Dealer to Pay $200,000 Civil Penalty for Failure to Supervise

On August 19th, the CFTC filed and simultaneously settled charges against INTL FC Stone Markets, a provisionally registered swap dealer, for failure to diligently supervise traders in its Kansas City Energy Group. Without admitting or denying the allegations, respondent agreed to settle the matter by, among other things, paying a civil monetary penalty of $200,000. Failure to Supervise.

CFTC Issues Order of Exemption from Registration as a DCO to ASX Clear (Futures) Pty Limited

On August 18th, the CFTC issued an order of exemption from registration as a derivatives clearing organization (“DCO”) to ASX Clear (Futures) Pty Limited. This order is the first issued by the CFTC based on its authority under Section 5b(h) of the Commodity Exchange Act. Order of Exemption.

CFTC Seeks Comment on Korea Exchange Inc. Petition for Exemption from DCO Registration

On August 18th, the CFTC asked for public comment on Korea Exchange Inc.’s petition for exemption from registration as a DCO. Comments should be submitted on or before September 1, 2015. DCO Exemption.

Federal Rules Effective Dates

August 2015 - October 2015

Consumer Financial Protection Bureau

October 3, 2015 2013     Integrated Mortgage Disclosures Rule Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z) and Amendments; Delay of Effective Date. 80 FR 43911.

August 31, 2015     Defining Larger Participants of the Automobile Financing Market and Defining Certain Automobile Leasing Activity as a Financial Product or Service.  80 FR 37495.

August 10, 2015     Minimum Requirements for Appraisal Management Companies.  80 FR 32657.

August 1, 2015        Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act (Regulation Z). 78 FR 79730.

Federal Deposit Insurance Corporation

October 1, 2015      Loans in Areas Having Special Flood Hazards. 80 FR 43215.   Regulatory Capital Rules: Regulatory Capital, Final Revisions Applicable to Banking Organizations Subject to the Advanced Approaches Risk-Based Capital Rule. 80 FR 41409.

August 10, 2015      Minimum Requirements for Appraisal Management Companies.  80 FR 32657.

Federal Housing Finance Agency

August 10, 2015     Minimum Requirements for Appraisal Management Companies.  80 FR 32657.

Federal Reserve System

October 1, 2015     Loans in Areas Having Special Flood Hazards. 80 FR 43215.

Regulatory Capital Rules: Regulatory Capital, Final Revisions Applicable to Banking Organizations Subject to the Advanced Approaches Risk-Based Capital Rule. 80 FR 41409.

August 10, 2015     Minimum Requirements for Appraisal Management Companies.  80 FR 32657.

Financial Crimes Enforcement Network

August 28, 2015     Imposition of Special Measure Against FBME Bank Ltd., Formerly Known as the Federal Bank of the Middle East Ltd., as a Financial Institution of Primary Money Laundering Concern. 80 FR 45057.

National Credit Union Administration

October 2, 2015     Federal Credit Union Ownership of Fixed Assets. 80 FR 45844.

October 1, 2015     Loans in Areas Having Special Flood Hazards. 80 FR 43215.

Office of the Comptroller of the Currency

October 1, 2015     Loans in Areas Having Special Flood Hazards. 80 FR 43215. Regulatory Capital Rules: Regulatory Capital, Final Revisions Applicable to Banking Organizations Subject to the Advanced Approaches Risk-Based Capital Rule. 80 FR 41409.

August 10, 2015    Minimum Requirements for Appraisal Management Companies.  80 FR 32657.

Securities and Exchange Commission

October 19, 2015     Pay Ratio Disclosure. 80 FR 50103.

October 13, 2015     Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants. 80 FR 48963.

August 14, 2015     Freedom of Information Act Regulations: Fee Schedule, Addition of Appeals Time Frame, and Miscellaneous Administrative Changes. 80 FR 41432.

Exchanges and Self-Regulatory Organizations

Chicago Board Options Exchange, Inc.

Proposed Complex Order Book and Auction Eligibility Changes Require Additional Consideration

On August 19th, the SEC issued an order instituting proceedings to determine whether to approve or disapprove the Chicago Board Options Exchange, Inc.’s (“CBOE”) proposed rule change to modify its rules governing the types of complex order origins that are eligible to participate in the Complex Order Book and the Complex Order Auction. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of August 24, 2015.  SEC Release No. 34-75736.

Municipal Securities Rulemaking Board

MSRB Amends Non-Solicitor Municipal Advisors Proposal

On August 19th, the SEC requested comment on the Municipal Securities Rulemaking Board’s (“MSRB”) amendment to its proposed adoption of Rule G-42 on the duties of non-solicitor municipal advisors and amendments to rules governing the books and records requirements for brokers, dealers, municipal securities dealers, and municipal advisors. Comments should be submitted on or before September 11, 2015. SEC Release No. 34-75737.


NASDAQ Proposes Kill Switch

On August 19th, the SEC gave notice of the filing of a proposed rule change by The NASDAQ Stock Market LLC (“NASDAQ”) , which would allow NASDAQ to adopt a Kill Switch as a risk management tool by permitting NASDAQ Options Market participants to remove quotes and cancel open orders and prevent new order submissions. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of August 24, 2015. SEC Release No. 34-75743.  

BX Kill Switch Proposed

On August 19th, the SEC gave notice of the filing of a proposed rule change by NASDAQ OMX BX, Inc. (“BX”) that would allow the Exchange to adopt an optional Kill Switch which would be applicable to all BX participants. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of August 24, 2015. SEC Release No. 34-75744.

National Securities Clearing Corporation

No Objection to NSCC’s Prefund Liquidity Program

On August 19th, the SEC gave notice of the National Securities Clearing Corporation’s (“NSCC”) filing of an amendment to its Advance Notice, which would establish the Prefunded Liquidity Program.  The Program seeks to raise prefunded liquidity and diversify its liquidity resources through the private placement of short-term and extendible-term promissory notes to institutional investors.  The Commission indicated it had no objection to the Advance Notice or the amendment and authorized the NSCC to implement the proposal. SEC Release No. 34-75730.

New York Stock Exchange LLC

NYSE Proposes Amendments to Complimentary Products and Services

On August 19th, the SEC published the New York Stock Exchange LLC’s (“NYSE”) proposed amendments to its listed company manual, which would modify the suite of complimentary products and services that are offered to certain current and newly listed companies, update the value of these products and services, and allow these products and services to be offered to companies that transfer their listing to NYSE from another national securities exchange. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of August 24, 2015. SEC Release No. 34-75740.  

NYSE Seeks to Regain Control of Enforcement-Related Regulatory Functions

On August 18th, the SEC requested comment on NYSE’s proposed rule change to amend its disciplinary rules to permit the Exchange to perform regulatory functions related to market surveillance, investigation and enforcement that are currently performed on its behalf by FINRA. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of August 24, 2015. SEC Release No. 34-75721.

Judicial Developments

Yum! Brands Did Not Mislead Investors by Describing its Food Quality and Safety Standards as ‘Strict.’

On August 20th, the Sixth Circuit, in an unpublished opinion, affirmed dismissal of the investors’ action against Yum! Brands. Investors alleged that Yum knew that batches of chicken being supplied to its KFC China subsidiary had tested positive for drug and antibiotic residue and that Yum’s food standards and safety protocols were inadequate. Plaintiffs argued it was false or misleading for Yum to not disclose the adverse results and system failures to the public, the result of which was a 17% drop in stock price after the media began exposing the issues. The Sixth Circuit found that Yum did not mislead investors by describing its food quality and safety standards as “strict.” Yum!    

SEC’s ‘Conflict Minerals’ Disclosure Rule Violates the First Amendment

On August 18th, 

a divided panel of the D.C. Circuit adhered to its original judgment that the Dodd-Frank Act’s conflict mineral disclosure requirements and the SEC’s rules implementing those requirements “violate the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have not been found to be DRC conflict free.” Conflict Minerals.    

Company Violated Rule 10b-9 by Breaking Escrow Without Receiving Minimum Capital Requirement

On August 18th, the Eighth Circuit affirmed the district court’s partial granting of summary judgment to plaintiff, who had alleged that Toy Box Development Co. breached an investment agreement with him by releasing escrow funds to itself before securing the necessary minimum capital of $350,000 under the agreement. The Circuit Court found that the district court properly held that the investment offer was an “all or nothing” agreement under Rule 10b-9 of the Securities Exchange Act and that Toy Box violated Rule 10b-9 by breaking escrow without having received $350,000 in bona fide investments. Toy Box Development Co.    

Court Reinstates Case Brought by FDIC, as Receiver for Failed Bank, Against That Bank’s Officers and Directors

On August 18th, The Fourth Circuit, among other things, vacated the district court’s grant of summary judgment on the Federal Deposit Insurance Corporation’s (“FDIC”) claims of ordinary negligence and breach of fiduciary duty as to the officer appellees. The FDIC, as receiver for failed North Carolina bank Cooperative Bank (“FDIC-R”), sued the bank’s officers and directors, alleging that they were negligent, grossly negligent, and breached their fiduciary duties, resulting in the bank’s failure. The Fourth Circuit, among other things, vacated the district court’s grant of summary judgment on the FDIC-R’s claims, finding sufficient evidence to rebut the initial evidentiary presumption of the North Carolina business judgment rule. FDIC.    

Securities Class Action Fails to Plead Intent Under PSLRA

On August 18th, the Tenth Circuit affirmed dismissal of a securities class action against ZAGG, Inc. and its former CEO and Chairman, Robert Pedersen. Plaintiffs appealed, alleging violations of the antifraud provisions of the securities laws. Plaintiffs alleged Pedersen failed to disclose in some of ZAGG’s SEC filings that he had pledged nearly half of his ZAGG shares as collateral in a margin account. The Tenth Circuit affirmed, finding plaintiffs failed to plead particularized facts giving rise to a strong inference that Pedersen acted with intent to defraud as required by the Private Securities Litigation Reform Act of 1995 (“PSLRA”). Zagg.

Industry News

Department of Labor’s Proposed Update to Definition of ‘Fiduciary’ Reveals Room for Compromise

On August 19th, Bloomberg BNA reported that a hearing on the Department of Labor’s (“DOL”) proposed update to the definition of “fiduciary” under the Employee Retirement Income Security Act showed conflicts between the DOL and financial industry groups, as well as areas in which the DOL might be willing to compromise.Fiduciary.

CPMI and IOSCO Publish Consultative Report on the Harmonization of the UTI

On August 19th, the Committee on Payments and Market Infrastructures (“CPMI”) and the IOSCO published for public comment a consultative report entitled “Harmonization of the Unique Transaction Identifier” (“UTI”). The report produces guidance as to UTI definition, format, and usage. Comments should be submitted on or before September 30, 2015. UTI.    

Senators Asking SEC to Probe Oil and Gas Companies’ Risk Disclosure

On August 19th, reported that a dozen senators are asking the SEC to look into whether oil and gas companies are fully disclosing the risks associated with their offshore operations. Risks.    

Investors Push Back Against Aggressive Leveraged Loan Terms

On August 14th, Reuters reported that concessions have been made to a growing number of leveraged loans as investors recently clamped down on U.S.-style documentation. Leveraged loans.

Winston & Strawn Publications

Investment Management Legal Resource – Blog

The Investment Management Legal Resource provides financial services professionals with up-to-date news, analysis, and commentary on regulatory and legal developments affecting the investment management industry. It covers a broad range of topics that may be of interest to traditional investment advisers, hedge fund managers, private equity fund managers, real estate fund managers, venture capital fund managers, commodity pool operators, and broker dealers. IMLR Blog.    

London Fortnightly Financial Newsletter, Volume 3, Issue 8

Fortnightly Financial News is written by lawyers in Winston & Strawn LLP’s London office, focusing on developments within the financial services industry. Newsletter.    

Antitrust and Competition –The EU Weekly Briefing, Vol 3, Issue 32

The EU Weekly Briefing is designed to provide timely updates on recent European Union competition law by including a short description of, and links to, recent developments. Newsletter.