[Winston & Strawn LLP]
VOLUME 14, NO. 4
January 28, 2019
Winston & Strawn’s Reminder of Annual Requirements for Investment Managers – 2019 Insights from Winston & Strawn Feature: FCA Releases Draft Guidance on Cryptoassets Banking Agency Developments Treasury Department Developments Securities and Exchange Commission Disruptive Technology Developments Commodity Futures Trading Commission Federal Rules Effective Dates Exchanges and Self-Regulatory Organizations Judicial Developments
Winston & Strawn’s Reminder of Annual Requirements for Investment Managers – 2019
Investment Managers face seemingly ever increasing regulatory requirements, many of which are triggered at the beginning of the calendar year or an Investment Manager’s fiscal year. This client briefing is intended as a primer for Investment Managers regarding ongoing compliance obligations and includes best practice recommendations. Briefing.
Insights from Winston & Strawn
Last week, the Pennsylvania Department of Banking and Securities (“DoBS”) released guidance (“Guidance”) on the applicability of Pennsylvania’s Money Transmitter Act (“MTA”) to virtual currency exchanges. The Guidance examined virtual currency trading platforms (“Platforms”), as well as virtual currency ATMs, kiosks, and vending machines (collectively, “Kiosks”).
In the Guidance, DoBS stated that “money” under the MTA refers only to fiat currency, and that virtual currency, including Bitcoin, is not considered to be “money” under the MTA, and the Guidance proceeded to conclude that transmitting money under the MTA required fiat currency to be “transferred with or on behalf of an individual to a 3rd party, and the money transmitter must charge a fee for the transmission.”
Based on the conclusions above, DoBS found that, while Platforms facilitate transactions in virtual currencies in exchange for fiat currencies, such fiat currencies are not directly handled by the Platforms, but are instead maintained in bank accounts at depositary institutions. Therefore, under the MTA, the Platforms are not money transmitters.
Similarly, DoBS found that Kiosks, which, for a transaction fee, dispense virtual currency in exchange for fiat currency or vice versa, are not money transmitters under the MTA.
We believe that Pennsylvania may be the first state to clarify formally that virtual currency is not “money” for purposes of money transmitter licensing laws.
John P. Alexander
Feature: FCA Releases Draft Guidance on Cryptoassets
The U.K. Financial Conduct Authority (“FCA”) took initial steps on January 23rd to bring the regulation of cryptocurrencies under its purview. The regulator announced the launch of a consultation on guidance that would provide clarity to market participants about which cryptoasset activities fall within the current regulatory framework. The consultation, which was among the recommendations released last October by the U.K. Cryptoasset Taskforce, seeks to define where digital tokens might interact with current regulations, including where cryptoassets would be considered “Specified Investments” under the Regulated Activities Order; “Financial Instruments” under the Markets in Financial Instruments Directive II (“MiFID II”); “E-Money” under the E-Money Regulations; or captured under the Payment Services Regulations.
The draft guidance divides cryptoassets into three different types of tokens: exchange tokens, security tokens, and utility tokens. The FCA concluded that exchange tokens, which include assets that are not issued or backed by any central authority and are intended to be used as a means of exchange, usually fall outside the scope of regulation. Security tokens, on the other hand, generally fall within the regulatory perimeter because they often have specific characteristics that meet the definition of a Specified Investment like a share or a debt instrument as set out in the Regulated Activities Order. Finally, since they grant holders access to a current or prospective product or service, utility tokens may meet the definition of E-Money in certain circumstances, which may place some activities involving these tokens under the scope of regulation.
The FCA’s draft guidance offers a step-by-step approach to help participants determine whether certain cryptoassets fall within the current regulatory framework, including a list of factors that should be considered when evaluating whether a token is a Specified Investment and several case studies that provide practical examples of how the FCA might apply the guidance in various scenarios involving different types of tokens. Many industry participants welcomed the FCA’s draft guidance as representing a step toward bringing much-needed clarity to a fast-growing market. Reuters noted that because the U.K. has emerged as a central hub for major cryptocurrency firms, the FCA’s work on cryptoasset regulation will likely attract the attention of market participants and regulators in other countries. Crowdfund Insider observed that the U.K.’s regulatory approach to Fintech has garnered praise for implementing regulatory protections without stifling innovation.
The FCA’s consultation on the draft guidance will close on April 5, 2019, and the FCA said that it expects to publish the final guidance this summer. While the final guidance will establish how cryptoassets interact with current regulations, it will likely set the table for the additional regulation of digital tokens. The Financial Times reportedthat the U.K. Treasury is looking at whether additional cryptoassets should be regulated by the FCA, indicating that additional rules for cryptoassets in the U.K. are likely on the way.
Banking Agency Developments
Joint Agency Releases Shared National Credit Review Finds Some Improvement in Credit Quality, Risk Remains Elevated in Leveraged Loans
On January 25th, the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency announced that they have released a report in which they found that risk in the portfolio of large syndicated bank loans has declined, due to improving conditions in most sectors.
Treasury Department Developments
U.S. Department of the Treasury Final Rules and New Proposed Guidance on Eligibility for Deduction for Certain Businesses
On January 18th, the U.S. Department of the Treasury announced that it has issued final regulations and other guidance on a substantial provision of the Tax Cuts and Jobs Act, which allows owners of sole proprietorships, partnerships, trusts, and S corporations to deduct up to 20 percent of their qualified business income.
Securities and Exchange Commission
SIFMA Asks SEC to Adopt MiFID II’s Approach to Investment Research
Bloomberg reported on January 23rd that the Securities Industry and Financial Markets Association (“SIFMA”) has asked the SEC to allow asset managers to pay brokers separately for investment research. SIFMA’s request reflects the global impact of the European Union’s (“EU”) new rules on investment research under MiFID II, which prohibits investment banks from bundling the fees they charge clients for trading and research.
SPAC IPOs Find New Appeal During Shutdown
On January 23rd, Reuters reported that companies looking to pursue initial public offerings (“IPOs”) during the government shutdown are turning to special purpose acquisition companies (“SPACs”) to go public. According to some experts, the shutdown could raise the profile of SPACs, which currently comprise only 20 percent of the IPO market.
House Bill Seeks to Limit Insider Trading
ThinkAdvisor reported on January 18th that U.S. Representatives Maxine Waters (D-CA) and Patrick McHenry (R-NC) have cosponsored a bill in the House that would require the SEC to amend Rule 10b5-1 to help curtail insider trading. Under the proposed legislation, the SEC would have to look at ways to change the rule so that corporate insiders are prohibited from indirectly engaging in insider trading by altering trading plans.
Commodity Futures Trading Commission
CFTC Plans to Withdraw Swap Trading Proposal
On January 22nd, The Wall Street Journal reported that, following sharp criticism from Wall Street, Commodity Futures Trading Commission (“CFTC”) Chairman J. Christopher Giancarlo is planning to abandon an existing proposal to transform the swaps market and rewrite it after integrating feedback from the industry.
Disruptive Technology Developments
Thanks, AI: Millions of U.S. Workers Will Be Out of a Job Sooner or Later
On January 24th, MarketWatch reported that over 30 million U.S. jobs will be affected in “a few years” or “two decades,” as artificial intelligence (“AI”) speeds up the automation of existing work. According to a new Brookings Institution report, approximately 36 million Americans hold jobs where 70 percent of their tasks could soon be performed by machines using current technology. Those most likely to be affected are food services employees; short-haul truck drivers; and clerical office workers.
MIT Researchers Develop a Better Cryptocurrency
On January 23rd, MIT News reported that Massachusetts Institute of Technology (“MIT”) researchers have developed a new cryptocurrency that substantially reduces the data users need to join the network and verify transactions.
Cryptocurrencies Racked Up Some Wins in 2018
On January 22nd, MarketWatch reported that, notwithstanding the drop in crypto asset prices, there were several notable developments for the industry in 2018.
Pennsylvania Department of Banking and Securities Recent Guidance
See Insights from Winston & Strawn above for a discussion of the Pennsylvania Department of Banking and Securities recent guidance on the applicability of Pennsulavia’s Money Transmitter Act to virtual currency exchanges.
FCA Releases Draft Guidance on Cryptoassets
See Feature: FCA Releases Draft Guidance on Cryptoassets above for a discussion of recent guidance issued by the FCA regarding the regulatory framework of cryptoassets.
Federal Rules Effective Dates
January – March 2019
Consumer Financial Protection Bureau
January 1, 2019
Appraisals for Higher-Priced Mortgage Loans Exemption Threshold. 83 FR 59272.
Truth in Lending (Regulation Z). 83 FR 59276.
Consumer Leasing (Regulation M). 83 FR 59274.
Truth in Lending (Regulation Z) Annual Threshold Adjustments (Credit Cards, HOEPA, and Qualified Mortgages). 83 FR 43503.
Federal Deposit Insurance Corporation
January 28, 2019
Expanded Examination Cycle for Certain Small Insured Depository Institutions and U.S. Branches and Agencies of Foreign Banks. 83 FR 67033.
January 15, 2019
Rules of Practice and Procedure. 83 FR 61111.
January 1, 2019
Community Reinvestment Act Regulations. 83 FR 66601.
Transferred OTS Regulations Regarding Fiduciary Powers of State Savings Associations and Consent Requirements for the Exercise of Trust Powers. 83 FR 60333.
Federal Housing Finance Agency
January 22, 2019
Golden Parachute and Indemnification Payments. 83 FR 65283.
January 7, 2018
Miscellaneous Federal Home Loan Bank Operations and Authorities-Financing Corporation Assessments. 83 FR 63054.
Federal Reserve System
February 1, 2019
Large Financial Institution Rating System; Regulations K and LL. 83 FR 58724.
January 28, 2019
Expanded Examination Cycle for Certain Small Insured Depository Institutions and U.S. Branches and Agencies of Foreign Banks. 83 FR 67033.
January 1, 2019
Community Reinvestment Act Regulations. 83 FR 66601.
Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers Through Fedwire. 83 FR 61509.
Appraisals for Higher-Priced Mortgage Loans Exemption Threshold. 83 FR 59272.
Consumer Leasing (Regulation M). 83 FR 59274.
Federal Reserve Bank Capital Stock. 83 FR 58466.
Availability of Funds and Collection of Checks. 83 FR 46849.
Truth in Lending (Regulation Z). 83 FR 59276.
Office of the Comptroller of the Currency
January 28, 2019
Expanded Examination Cycle for Certain Small Insured Depository Institutions and U.S. Branches and Agencies of Foreign Banks. 83 FR 67033.
January 1, 2019
Community Reinvestment Act Regulations. 83 FR 66601.
Appraisals for Higher-Priced Mortgage Loans Exemption Threshold. 83 FR 59272.
Securities and Exchange Commission
February 25, 2019
Modernization of Property Disclosures for Mining Registrants. 83 FR 66344.
January 18, 2019
Disclosure of Order Handling Information. 83 FR 58338.
January 14, 2019
Covered Investment Fund Research Reports. 83 FR 64180.
January 1, 2019
Optional Internet Availability of Investment Company Shareholder Reports. 83 FR 29158.
Treasury Department
January 14, 2019
Extension of Import Restrictions Imposed on Certain Archaeological and Ecclesiastical Ethnological Material From Bulgaria. 84 FR 112.
Extension of Import Restrictions Imposed on Certain Archaeological Material From China. 84 FR 107.
January 1, 2019
Disclosure Update. 83 FR 66615.
Exchanges and Self-Regulatory Organizations
Box Options Exchange SEC Delays Decision in Disapproval Proceedings for BOX’s Connectivity Fee Proposal
On January 25th, the SEC designated March 29, 2019, as the date by which it will issue an order approving or disapproving BOX Options Exchange LLC’s (“BOX”) proposed rule change to amend the BOX fee schedule to establish certain connectivity fees and reclassify its high speed vendor feed as a port fee. SEC Release 34-84989.
Cboe Global Markets
BZX Withdraws Bitcoin ETF Proposal. On January 23rd, the SEC provided notice that Cboe BZX Exchange Inc. (“BZX”) has withdrawn its proposal to list and trade shares of SolidX Bitcoin Shares issued by the VanEck SolidX Bitcoin Trust under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. Bloomberg reported that BZX pulled its proposal for the bitcoin exchange-traded fund (“EFT”) due to the government shutdown, but plans to resubmit the proposal at a later time.
Financial Industry Regulatory Authority FINRA Highlights New Priorities in 2019 Risk Monitoring and Examination Letter
The Financial Industry Regulatory Authority (“FINRA”) announced on January 22nd that it has published its 2019 Risk Monitoring and Examination Priorities Letter, which highlights the new and ongoing priorities that FINRA will emphasize in its examinations of firms in the coming year. The new areas of focus for 2019 include online distribution platforms; firms’ compliance with the Financial Crimes Enforcement Network’s (“FinCEN”) Customer Due Diligence (“CDD”) rule; and firms’ compliance with their mark-up or mark-down disclosure obligations on fixed income transactions with customers.
FINRA Offers Reminder of TRACE Reporting Obligations for OTC Transactions in Listed Bonds
On January 22nd, FINRA reminded members in a notice of their Trade Reporting and Compliance Engine (“TRACE”) reporting obligations for over-the-counter (“OTC”) transactions in TRACE-eligible securities that may also be listed on an exchange. FINRA clarified that these transactions must be reported except in cases when such transactions are executed on and reported to the exchange and the transaction information is disseminated publicly.
International Swaps and Derivatives Association ISDA Makes Recommendations for CCP Best Practices
On January 24th, the International Swaps and Derivatives Association (“ISDA”) announced the publication of a set of best practices for central counterparties (“CCPs”), which are designed to help CCPs around the world to achieve greater consistency in their risk practices. Among other things, ISDA recommends that CCPs base their risk management decisions on the risk profile of a product rather than on whether a derivative is an exchange-traded or OTC product; adapt risk controls and margin requirements to concentration, liquidity, member credit quality and wrong-way risk in a member’s portfolio; and implement effective and transparent default management processes and robust membership criteria.
ISDA Responds to Proposed Changes to Global LEI System
On January 18th, ISDA, SIFMA’s Asset Management Group, and the Managed Funds Association (“MFA”) submitted a joint response to the Legal Entity Identifier (“LEI”) Regulatory Oversight Committee’s Second Consultation on Fund Relationships in the Global LEI System, which proposed changes to the way relationships affecting funds are recorded in the Global LEI System. Among other things, the industry groups stated that they do not see a need for the Global LEI System to collect fund relationships that do not roll up to the same balance sheet or financial statement.
Municipal Securities Rulemaking Board MSRB Board Will Discuss Financial Disclosure Issues at Quarterly Meeting
On January 24th, the Municipal Securities Rulemaking Board (“MSRB”) published the list of discussion items that its Board of Directors will consider at its quarterly meeting, which will take place on January 29-31, 2019. Among other things, the Board will discuss priority areas for the MSRB’s retrospective rule review, Board outreach events for engaging with municipal market stakeholders, and concerns raised by SEC Chairman Jay Clayton about the timeliness of financial disclosures by municipal securities issuers.
Judicial Developments
Dodd-Frank’s ‘Conduct-and-Effects Test’ Gives SEC Right to Sue Over Sale of Securities Abroad
In an ongoing enforcement action, the SEC alleged that a Utah man who operated an internet traffic exchange business through his Utah-based company was involved in a Ponzi scheme related to the fraudulent sale of securities to customers who were mostly located overseas. On January 24th, the Tenth Circuit upheld the district court’s preliminary rulings, determining that the SEC’s allegations of securities fraud can extend to defendants’ sale of securities overseas under Dodd-Frank’s “conduct-and-effects test” since defendants undertook significant conduct in the U.S. to conduct sales to their customers abroad. SEC v. Scoville. Also see Law360 articlediscussing this decision.
Putative Class Action Dismissed as a ‘Covered Class Action’ Precluded by the SLUSA
Plaintiff brought a putative class action, contending that she and fewer than 50 other class members were defrauded by their investment advisor. Defendants argued that the action should be dismissed because it was a “covered class action” precluded by the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). The district court agreed and dismissed the claims with prejudice. The Seventh Circuit affirmed on January 24th, determining that the SLUSA’s “covered class action” definition includes any class action brought by a named plaintiff on a representative basis, regardless of the proposed class size. Nielen-Thomas v. Concorde Investment Services LLC.
Contact Us
For more information regarding the Financial Services Update and the Financial Services Practice please contact: Basil V. Godellas (+1 (312) 558-7237 or [email protected]) or Jay Gould (+1 (415) 591-1575 or [email protected]), Co-Chairs of Winston’s Financial Services Corporate Practice Group. Please click here to see a list of Winston & Strawn professionals with practices in the financial services industry.
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