Insights from Winston & Strawn
CF.3d 694 (2019) (“In re Financial Oversight”), underscores the consequence of imprecise financing statement collateral descriptions, which nearly cost bondholders in that case their security interest in $2.9 billion of bonds. The imprecision stems from (i) a description of collateral that referred to a definition in a document that was not attached to the financing statement and (ii) an identification of the debtor’s name that was reflected in the public organic record, but which had been subsequently amended in portions of the public organic record.
In In re Financial Oversight, the original financing statement described collateral as “pledged property” that was defined in a security agreement attached to the filing as an exhibit. The security agreement in turn defined “pledged property” by reference to a separate document that was not attached to the filing. The court held that this was not a sufficient description of collateral. However, the court also concluded that later amendments to the financing statement that included an attached definition were sufficient to cure this defect, when read together with the original filing.
With respect to the debtor’s name, the debtor was identified by a name that originated from a “public organic record.” This name was used interchangeably with an alternative name that was later introduced into the public organic record. The court held that despite the slight variation (which was caused by a revision of the official translation of the name), this identification was sufficient to perfect a security interest, because the name contained in the financing statement derived from the official record.
In re Financial Oversight reinforces the importance of technical precision and accuracy in describing collateral and identifying debtors in financing statements. Filers can avoid the issues presented in this case by including the definition of the collateral in the filing itself (whether in the collateral description field of the financing statement or by exhibit). If a deficiency is discovered, filers should amend the financing statement to correct the record, so the amendment can be read together with the original filing to cure the defect. Lastly, filers should confirm the exact name of the debtor, evidenced by the most recent official public record, prior to each filing of a financing statement or an amendment thereof.
|
|
Feature: SEC Adopts New Conduct Rulemaking Package for Investment Professionals
On June 5th, the Securities and Exchange Commission (“SEC”) announced that it has adopted a set of rules and interpretations including a new Regulation Best Interest (“Reg BI”), which increases the current broker-dealer standard of conduct, and a new Form CRS Relationship Summary, which requires registered investment advisers and broker-dealers to make available to retail investors clear information about the “nature” of the relationship with their financial professional. Finally, the SEC adopted two separate interpretations under the Investment Advisers Act of 1940: one regarding the solely incidental prong of the broker-dealer exclusion from the definition of investment adviser and the other regarding the standard of conduct for investment advisers. Pursuant to Reg BI, broker-dealers that make recommendations to retail customers of securities transactions or securities-related investment strategies will be required to act in their retail customers’ best interest, and must not put their financial interests ahead of their customers’ interests. In a statement made at the agency’s Open Meeting on June 5th, SEC Chairman Jay Clayton commented that the newly adopted rules and interpretations “are designed to enhance the quality and transparency of the financial professional-retail investor relationship.” Clayton also addressed potential criticism that Reg BI does not “enhance the broker-dealer standard of conduct beyond existing suitability obligations,” adding that the rule actually “goes significantly beyond existing broker-dealer obligations” as it “cannot be satisfied through disclosure alone. SEC Commissioner Elad L. Roisman also supported Reg BI, adding that it will properly enhance the required standard of conduct for broker-dealers by demanding that they cannot put their own interest ahead of their retail customer’s interest. SEC Commissioner Hester M. Peirce agreed, stating that broker-dealers’ new obligations will “better protect investors from bad actors.” However, SEC Commissioner Robert J. Jackson Jr. noted in a dissentthat the SEC’s new rules fail to properly raise the standard for investment advice. Investor Advocate Rick Fleming was somewhat disappointed in the SEC’s new conduct rulemaking package, stating that while Reg BI is an “improvement over the existing suitability standard for broker-dealers,” the rule has been weakened by what the SEC has taken away from investors in its interpretation of the fiduciary duty that applies to investment advisers. Reg BI and Form CRS will become effective 60 days following publication in the Federal Register, and will include a transition period through on June 30, 2020 so that firms will have enough time to bring themselves into compliance. The SEC’s two interpretations under the Advisers Act will become effective upon publication in the Federal Register.
|
|
|
