New Final Rules

Agencies Adopt Risk Retention Rules

On October 22nd, the Securities and Exchange Commission (“SEC”) announced that six federal agencies approved final risk retention rules for sponsors of securitization transactions. The new final rule is being issued jointly by the Federal Reserve Board, the Department of Housing and Urban Development, the FDIC, the Federal Housing Finance Agency, the OCC, and the SEC. The final rule requires sponsors of asset-backed securities (“ABS”) to retain not less than five percent of the credit risk of the assets collateralizing the ABS issuance. The rule also prohibits transferring or hedging the credit risk that the sponsor is required to retain. Qualified residential mortgages are exempt from the risk retention requirement as are securitizations of commercial loans, commercial mortgages, or automobile loans if they meet specific standards for high quality underwriting. The final rule will be effective one year after publication in the Federal Register for residential mortgage-backed securitizations and two years after publication for all other securitizations. SEC Press Release.

Regulatory Notices

Disapproval Proceedings Instituted for Proposed ATF’s Exemptive Application

On October 23rd, the SEC instituted proceedings to determine whether to approve or disapprove Automated Matching Systems Exchange’s (“AMSE”) application seeking a limited volume exemption under Section 5 of the Securities Exchange Act from registration as a national securities exchange under Section 6 of the Exchange Act. AMSE seeks to operate as an exchange for alternative trading systems. AMSE proposes to operate solely on an “off-order-book” trading basis. AMSE does not intend to have a physical exchange trading floor, centralized order book, or specialists or market makers with affirmative and negative market making obligations. Each member of AMSE would maintain its own automated matching system or electronic order book. Each member of AMSE would adopt its own rules governing the execution and priority of orders on its system. Trades would occur when an order to buy and an order to sell match on a member’s electronic order book. Each member would report its transactions to AMSE at such intervals as required by AMSE. The SEC’s notice notes that from the AMSE exemption application, it does not appear that the orders of the individual members of AMSE would interact with one another on any AMSE system, but rather on each distinct and separate system of AMSE’s members. That is, it does not appear that any AMSE system would operate as an exchange by bringing together purchasers and sellers of securities. As a result, the Commission is concerned that AMSE’s exemption application does not meet a key threshold requirement for being granted an exemption from exchange registration, namely, that the applicant actually be an “exchange” as defined under Section 3(a)(1) of the Exchange Act and Rule 3b-16 thereunder. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of October 27. Rebuttals should be submitted within 35 days. SEC Release No. 34- 73419.

Actively Managed ETF Exemptive Requests Preliminarily Denied

On October 21st, the SEC issued orders preliminarily denying exemptive requests individually submitted by Spruce ETF Trust and Percidian ETFs Trust. Each applicant seeks to introduce actively managed exchange- traded funds that would not be required to disclose its portfolio holdings on a daily basis. Because the Commission believes that the applications do not meet the standards for that exemptive relief, in intends to deny each request unless a hearing is requested on or before November 17, 2014. Spruce ETF Trust, Notice of Application, IC-31301; Precidian ETFs Trust, Notice of Application, IC-31300.

Other Developments

ETF Hazards

The October 25th edition of The Economist discusses the potential hazards which accompany exchange-traded funds and whether those hazards pose a systemic risk. ETF Hazards.

Braking the Acceleration

On October 23rd, Reuters discussed the comments made by Igor Rozenblit, who co-heads the SEC’s Private Funds office. Addressing the SEC’s efforts to improve private fund fee transparency, Rozenblit praised Blackstone Group’s decision to no longer include acceleration clauses in its monitoring fee provisions. Accelerated Monitoring Fees.

Articulated Standards

On October 21st, Think Advisor summarized the comments made by Andrew Bowden, Director of the Office of Compliance Inspections and Examinations. In response to questions asked at a compliance conference, Bowden said his principle advice to financial firms is to understand why it is engaged in that business and to be able to articulate it. Articulated Standards.

Financial Reporting Manual Updates

On October 20th, the Division of Corporation Finance updated its Financial Reporting Manual to reflect minor technical updates and clarifications to guidance related to registrant financial statements, development stage entities, acquisitions of working interests in oil and gas properties, individually insignificant acquirees, real estate acquisitions, pro forma financial information, and reverse mergers by foreign companies. Summary of Changes.

Office of Credit Ratings Publishes New Form 2903

On October 20th, the Office of Credit Ratings published new Form 2903, Supplemental Information for Persons Requested to Supply Information Voluntarily to the Office of Credit Ratings’ Monitoring Staff.

New EDGAR Manuals

On October 20th, the SEC adopted revisions to the Electronic Data Gathering, Analysis, and Retrieval System (“EDGAR”) Filer Manual and related rules to reflect updates to the EDGAR system. The updates are being made primarily to support the revision of the disclosure, reporting and offering process for asset-backed securities (“ABS”); system upgrade to be compatible with Internet Explorer version 8.0; and revision of the N-SAR system requirements. SEC Release No. 33-9668; New EDGAR Filer Manuals. The SEC also published EDGAR ABS XML Technical Specification (Version 1), which describes the valid structure and content of the ABS Extensible Markup Language Asset Data File Types, and EDGARLink Online XML Technical Specification (Version 13), which provides a basis for creating EDGARLink Online submissions without the use of the EDGARLink Online Application.

Diverse Definitions

On October 20th, DealBook summarized the findings of a recent paper which analyzed the board diversity disclosures made by 100 S&P-listed companies. The analysis found that although issuers are complying with SEC requirements to discuss how they consider diversity when selecting directors, the firms are defining diversity quite broadly. Instead of basing diversity on gender or ethnicity, companies are using prior experience as examples of diversity. Diverse Definitions.

Staff Analysis on Reporting and Dissemination of Security-Based Swap Information

On October 17th, the SEC published two staff reports which analyze data on the reporting and dissemination of security-based swap transaction information. The first paper analyzes the effect of the CFTC’s mandated post- trade transparency in the index credit default swaps (“CDS”) market on total credit exposure, trading volume, and trade size in the index CDS market. The second reviews recent single-name CDS transactions and whether, and if so how, dealers may hedge any large notional exposures that result from executing trades with their customers. SEC Press Release.

Staff Announcements

The SEC announced that Marc Wyatt has been named Deputy Director of the agency’s Office of Compliance Inspections and Examinations. John J. Cross III, Director of the Office of Municipal Securities, will leave the agency in November.