SEC Regulatory Requirements

SEC Fines NASDAQ Over Botched Facebook IPO

By James Kollar | Posted on

As a result of Facebook’s initial public offering (IPO) mishap last year, the SEC has charged NASDAQ with securities laws violations resulting from its poor systems and decision-making in handling the IPO and secondary market trading of Facebook shares. In order to settle the SEC’s charges, NASDAQ has agreed to pay a $10 million penalty – the largest ever against an exchange.

Exchanges such as NASDAQ have an obligation to ensure that their systems, processes, and contingency planning are adequate to manage an IPO without disruption to the market.  However, despite the anticipation that the Facebook IPO would be among the largest in history, NASDAQ failed to address a design limitation in their system that matched buy and sell orders, causing disruptions to the Facebook IPO. These disruptions then led NASDAQ to make a series of ill-fated decisions that led to the rules violations.

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SEC Proposes Cross-Border Security-Based Swap Rules

By Davis Polk & Wardwell LLP | Posted on

[Editor’s Note: The following Post is authored by Davis Polk & Wardwell LLP]

On May 1, 2013, the Securities and Exchange Commission took long awaited action to propose rules governing cross-border activities in security-based swaps. The SEC’s proposal, developed over the course of more than two years, reflects a holistic approach that differs in key respects from that taken by the Commodity Futures Trading Commission with respect to transnational swap activities (the “CFTC Proposal”). In light of the far-ranging significance of its cross-border proposal, the SEC has reopened comment periods for many of its previously proposed security based swap regulations and its policy statement on the sequencing of compliance with these rules.

The comment period for the proposed cross-border rules ends 90 days after publication in the Federal Register. The comment period for the previously proposed rules and policy statement ends 60 days after publication in the Federal Register.

This memorandum provides an overview of key provisions of the SEC’s proposal, highlighting the most important differences from the CFTC Proposal. We focus on those provisions of the SEC’s proposal that address the regulation of security-based swap dealers and security-based swap end users, but we note that the SEC’s proposal also addresses the cross-border regulation of clearing agencies, security-based swap data repositories, and security-based swap execution facilities.

To read the complete story, click here.

Weekly News Update: Bank Violations and Protecting Confidential Information

By James Kollar | Posted on

Last year the $25 billion National Mortgage Settlement meant to end mortgage servicing abuses was announced by federal and state officials; however, there is mounting evidence that not all the involved banks are living up to their commitment. The five banks involved with the settlement are Bank of America, Wells Fargo, JPMorgan Chase, Citigroup, and Ally Financial Inc. In a recent letter, New York Attorney General Eric Schneiderman claims that Bank of America and Wells Fargo are violating the terms of the settlement. Schneiderman states that the two banks have committed a combined 339 violations of servicing standards, including deliberate delays by Wells Fargo and Bank of America to reviewing loan modification applications, a practice reminiscent of the “same misconduct that precipitated the National Mortgage Settlement.” Schneiderman has plans to sue both banks for failing to uphold their obligations under the settlement. However, in a letter to Schneiderman, Bank of America responded that they cannot be sued since they have not been given ample time to remedy their alleged violations. Both Bank of America and Wells Fargo say they remain committed to the terms of the settlement and deny that they have committed violations.

According to a recent story published by Corporate Crime Reporter, the proxy advisory services firm Institutional Shareholder Services (ISS) was fined by the SEC for failing to prevent one of its employees from distributing confidential material. In exchange for information revealing how more than 100 ISS institutional shareholder advisory clients were voting their proxy ballots,  the employee, who no longer works at ISS, received expensive tickets to concerts and sporting events, meals, and an airline ticket. The SEC investigation revealed that ISS lacked sufficient controls over access to confidential client vote information, allowing for the employee to gather the data. As a result of the failure of ISS to protect its confidential information, the SEC has required ISS to pay a $300,000 penalty and allow for an independent compliance consultant to review its procedures and ensure they comply with the Investment Advisers Act’s requirements for treatment of confidential information.

EDGAR Update

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

The SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system has been updated to include the new Form 13F online application.  The ability to file online corresponds with the original goal of Section 13(f) of the 1975 Securities Exchange Act to “increase the public availability of information regarding the securities holdings of institutional investors.”  The new online application “illustrates each step of the process to submit an electronic submission and helps filers understand the tools provided by the SEC for constructing and transmitting those submissions.”  This update should make it easier for firms to provide current and accurate information about their holdings.  (more…)

BHCs Instructed to Conduct First Round of Mid-Cycle Stress Tests

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

This month the Federal Reserve instructed 18 Bank Holding Companies (BHCs) to conduct their first biannual Mid-Cycle Stress Test in compliance with the Dodd-Frank Act.  While the Federal Reserve has conducted its own stress tests since 2009, this is the first time firms will conduct the test based on their “own processes and analyses.” (more…)

Federal Reserve FBO Proposal: Will Comments on the Intermediate Holding Company Requirement Be Heeded?

By Gibson, Dunn & Crutcher LLP | Posted on

[Editor’s Note:  The following post is a Gibson, Dunn & Crutcher LLP Publication, authored by its Financial Institutions Practice Group.]

The comment period has now closed on the controversial proposed rule (FBO Proposal) of the Board of Governors of the Federal Reserve System (Board) implementing Sections 165 and 166 of the Dodd-Frank Act (Dodd-Frank) for foreign banking organizations (FBOs) and foreign nonbank financial companies supervised by the Board.  If the FBO Proposal becomes final in the manner proposed, it will mark a sea change in the regulation of the U.S. operations of FBOs, by requiring FBOs with $50 billion or more in total global consolidated assets and $10 billion or more in total U.S. nonbranch assets to form an intermediate holding company (IHC) for almost all of their U.S. subsidiaries.  In our view, the IHC requirement likely exceeds the Board’s legal authority in implementing Sections 165 and 166 of Dodd-Frank, has the tendency to increase, rather than reduce, financial instability in the United States and globally, threatens other adverse effects, and does not effectively respond to the developments that the Board perceives in the U.S. operations of FBOs and in international banking regulation generally.

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SEC Signals Investigators’ Priorities

By James Kollar | Posted on

The National Examination Program (the “NEP”) has published its examination priorities of areas perceived to have heightened risk in order to support the SEC’s market-wide regulation. While the examination priorities do not represent SEC regulations, they are reflective of SEC staff investigators’ priorities for the upcoming year based on registrants’ communications with regulators, market data, and other general information. The priorities focus on areas perceived to have heightened risk.

The NEP initially looked at market-wide priorities including fraud prevention, conflicts of interest, corporate governance and technology-related issues. On the technology front, the NEP emphasized the need to ensure that new technology helps maintain “transparent, stable markets” and “do[es] not give inappropriate advantages to some market participants over others.” The NEP indicated that it “may conduct examinations on governance and supervision of information technology systems for topics such as operational capability, market access, and information security, including risks of system outages, and data integrity compromises that may adversely affect investor confidence.”

The priorities then addressed four distinct program areas. First, the Investment Adviser-Investment Company (IA-IC) Exam Program will focus on the safety of assets, marketing and performance, conflicts of interest related to compensation arrangements and allocation of investment opportunities, and fund governance. The concentration on fund governance is “a key component in assessing risk during any investment examination” and will ensure that advisers are making accurate disclosures to fund boards and directors with their reviews “in connection with contract approvals, oversight of service providers, valuation of fund assets, and assessment of expenses or viability.” The policy topics for the IA-IC program will include money market funds, compliance with exemptive orders, and compliance with the pay to play rule.

The Broker-Deal (B-D) Exam Program takes into account the risks and activities associated with individual broker-dealers (or firms), including sales practices and fraud, trading risks, weak anti-money laundering programs, and capital risks. With capital risks, the program “intends to conduct exams of clearing firms with multiple correspondents engaging in high frequency/high volume trading” and will focus on “clearing firms internal controls for managing intraday liquidity risk, as well as assessing intraday net capital and other financial risks.” The B-D program will center on the policy topics of the JOBS act and other regulatory requirements.

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SEC Staff Provides New Guidance Regarding the Rule 15a-6 Registration Exemption for Foreign Broker-Dealers

By Latham & Watkins LLP - Dana G. Fleischman, Stephen P. Wink and Kaitlin M. Betancourt | Posted on

[Editor’s Note:  This post is a Latham & Watkins Client Advisory.  The Network has further coverage in another post.]

On March 21, 2013, the Staff of the Division of Trading and Markets of the US Securities and Exchange Commission published guidance in the form of Frequently Asked Questions on Rule 15a-6 under the Securities Exchange Act of 1934.

The FAQs resulted from the efforts of a Task Force assembled by the Trading and Markets Subcommittee of the American Bar Association to discuss and seek clarification from the Staff with respect to certain recurring issues regarding Rule 15a-6.  This clarification was requested in the form of published FAQs to provide greater transparency to the industry and to resolve certain inconsistencies created by, among other things, Staff turnover and general confusion by the industry and other regulators as to the proper application of the Rule’s rather complex provisions to a marketplace that has become markedly more global and technologically advanced in the nearly 25 years since the Rule’s adoption.

In the FAQs, the Staff affirms the general applicability of certain previously issued interpretive guidance and addresses certain aspects of the operation of Rule 15a-6, primarily with respect to issues concerning solicitation, the dissemination of research reports, recordkeeping requirements and chaperoning arrangements between foreign broker-dealers and SEC-registered broker-dealers. Although necessarily limited in scope, the FAQs provide much welcome guidance at a time when cross-border transactions have become an integral part of the securities markets.

Background

Rule 15a-6 permits foreign broker-dealers to conduct certain limited activities in the United States and with US persons without having to register as a broker or dealer under the Exchange Act. Under Rule 15a-6, foreign broker-dealers may (i) effect “unsolicited” transactions with any person; (ii) solicit and effect securities transactions with SEC-registered broker-dealers, US banks acting in compliance with certain exceptions from the definitions of “broker” and “dealer”, certain supranational organizations, foreign persons temporarily present in the United States, US citizens resident abroad and foreign branches and agencies of US persons; and (iii) subject to a number of conditions, provide research to and effect resulting securities transactions with certain types of large institutional investors.  Rule 15a-6 also provides that a foreign broker-dealer may engage in a broader scope of activities, including soliciting and entering into transactions with specified categories of institutional investors, with the assistance or intermediation of an SEC registered broker-dealer (the establishment of such an arrangement is typically referred to as a “chaperoning arrangement” and the SEC-registered broker-dealer is often referred to as the “chaperoning broker-dealer”).

To read the rest of this Client Advisory, please click here and search the Advisory number “1495.”

SEC Reminds Private Funds of Broker-Dealer Registration Requirements

By Arnold & Porter LLP - Robert E. Holton, Lily J. Lu, D. Grant Vingoe, and Lauren R. Bittman | Posted on

[Editor’s Note:  The following is an Arnold & Porter LLP Client Advisory, written by Robert E. Holton, Lily J. Lu, D. Grant Vingoe, and Lauren R. Bittman.]

SEC official reminds private funds, including contacts private equity funds, that certain fund-raising and marketing activities and fees for “investment banking activities” require broker-dealer registration.

On April 5, 2013, David Blass, Chief Counsel of the Division of Trading and Markets of the Securities and Exchange Commission (SEC), spoke before the Trading and Markets Subcommittee of the American Bar Association on broker-dealer registration issues that arise in the private funds context. In his remarks, Mr. Blass warned that acting as an unregistered broker-dealer is a violation of the Securities Exchange Act of 1934, as amended (the Exchange Act), and can have serious consequences, including sanctions by the SEC and rescission rights, even when no other wrong-doing is found. Mr. Blass also noted that the SEC staff has increased its attention to the issue of broker-dealer registration, and he reminded the audience that compliance by private fund advisers with the requirements of the Investment Advisers Act of 1940, as amended, is not enough. In light of the significant consequences of acting as an unregistered broker-dealer and the SEC staff’s increased attention to this issue and the private fund space in general, private fund advisers should review their fund-raising and marketing activities, policies and procedures and contracts and arrangements with portfolio companies and solicitors to ensure compliance.

Click here to read the entire Arnold & Porter Advisory.

Using the Web to Match Private Companies and Potential Investors: SEC No Action Letters Open a Door, but Questions Remain

By Goodwin Proctor LLP | Posted on

[Editor’s Note:  The following post is a Goodwin Proctor Alert, which relays regulatory and legislative developments.]

In a no action letter dated March 26, 2013 (the “FC Letter”), the staff of the U.S. Securities and Exchange Commission (the “SEC”) indicated that they would not recommend action against the operators of the FundersClub website (“FundersClub”) for failing to register as a broker/dealer under the U.S. Securities Exchange Act of 1934 (the “Exchange Act). Two days later, a similar letter (the “AL Letter”) was issued to the operators of the AngelList website (“AngelList”)

The Letters may remove one of the most significant obstacles to the development of a broad-scale, online business in which accredited investors are able to select and invest in private companies. However, the Letters are based upon a number of representations made by FundersClub and AngelList that may be difficult to defend or apply in practice. They also leave unaddressed a number of related legal issues. Thus, the Letters may represent only the beginning of a process in which entrepreneurs, investment managers, private companies, the Staff, the SEC and others explore and develop the rules and practices under which such a business may be operated.

This Client Alert briefly describes certain key issues and conclusions associated with the Letters and highlights some of the issues and risks that remain.

Click here to read the entire article.

[The Alert concludes that t]he Letters may be a key milestone in the development of a broad-based marketplace in which Web-based efficiencies are applied to matching (i) private companies seeking capital with (ii) accredited investors willing to provide it. Nevertheless, important open issues remain. In particular, the representations made by FundersClub and AngelList in obtaining the Letters may prove difficult to defend or apply in practice. Moreover, key questions (e.g., regarding general solicitation and the procedures by which investors may be verified as “accredited”) await further guidance from the SEC. Finally, other parties such as state regulators and various self-regulatory organizations have not yet weighed-in and may have a material impact.