Financial Services Weekly News - August 2015 #4


Regulatory Developments

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

On Aug. 19 the CFTC announced that it had 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. Among other goals, the proposed amendments are intended to remove uncertainty as to which counterparty to a swap is responsible for reporting creation and continuation data for each of the various components of a cleared swap transaction, including to further clarify whose obligation it is to report the extinguishment of a swap upon its acceptance by a derivatives clearing organization (DCO) for clearing. The CFTC stated that it anticipates the proposed amendments will have a number of other benefits, including a reduced likelihood of double counting notional exposures and an improved ability to trace the history of a cleared swap transaction from execution between the original counterparties to clearing novation. The CFTC announcement includes a Fact Sheet on the proposed amendments and statements by Chairman Timothy MassadCommissioner Sharon Bowen and Commissioner J. Christopher Giancarlo, each of whom supported the proposal. The comment period ends 60 days after publication in the Federal Register.

SEC Risk Alert on Retail Sales of Structured Securities Products by Broker-Dealers

The National Examination Program Staff of the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert on Aug. 24 detailing the findings of its examination of 10 branch offices of registered broker-dealers that distribute structured securities products (SSPs) issued by their parents or affiliates or issued by unaffiliated third parties. SSPs are corporate obligations, such as medium-term notes, that derive their value from, and provide exposure to, a variety of underlying asset classes such as a single security, baskets of securities, indices, options, commodities or foreign currencies. SSPs typically have some form of embedded derivatives and may supply, among other things, principal protection, interest payments or leveraged exposure to the referenced assets. The Risk Alert outlines deficiencies in the areas of suitability and supervision in the sale of SSPs found by OCIE during the examinations. In particular, OCIE found that all of the examined firms failed to maintain or enforce adequate controls relating to determining the suitability of SSP recommendations and failed to conduct both compliance and supervisory reviews of determinations by registered representatives of customer suitability in the SSPs, as required by their internal controls.

FINRA Proposes to Adopt NASD Rule 3040 (Private Securities Transactions of an Associated Person) as FINRA Rule 3280

On Aug. 20 FINRA filed a proposed rule change to adopt NASD Rule 3040, governing private securities transactions of an associated person, as FINRA Rule 3280. According to FINRA, the proposal contains no substantive changes, but will update cross-references within other FINRA rules.

Enforcement & Litigation

Federal Appeals Court Rejects Challenge to SEC Pay-to-Play Rule

On Aug. 25, the U.S. Court of Appeals for the District of Columbia Circuit affirmed the District Court decision in New York Republican State Comm. and Tennessee Republican Party v. Sec. Exch. Comm’n, on the grounds that the case should have been brought in the Court of Appeals, which has exclusive jurisdiction to hear challenges to SEC rules under the Investment Advisers Act of 1940, that the 60-day period for challenging the rule had ended and that there is no basis for an exception to the limitations period. The lawsuit challenged Rule 206(4)-5, which limits the ability of investment advisers to be compensated for advising governmental entities for two years after they or certain covered persons have made a contribution to government officials with the power to influence the investment adviser’s hiring by the governmental entity. The plaintiffs claimed that the rule, as applied to federal campaign contributions, exceeds the SEC’s statutory authority, violates the Administrative Procedure Act, and violates the First Amendment. New York Republican State Comm. and Tennessee Republican Party v. Sec. Exch. Comm’n, No. 14-1194 (D.C. Cir. Aug. 25, 2015).FINRA Fines Firm $2 Million for Net Capital Deficiencies

On Aug. 24 FINRA announced that it had censured and fined Charles Schwab & Co., Inc. (Firm) $2 million for net capital deficiencies and related supervisory failures. The Firm consented to entry of a Letter of Acceptance, Waiver and Consent (AWC) but neither admitted nor denied the charges. FINRA found that on three occasions, the Firm had inflows of cash that exceeded the amounts that it could invest with existing facilities; instead, the Firm transferred $1 billion to its parent company for overnight investment as an unsecured loan under a revolving loan agreement. According to FINRA, the Firm’s Treasury group approved the $1 billion transfer as an unsecured loan under the loan agreement without consulting its Regulatory Reporting group as to how these transfers would impact the Firm's net capital position. FINRA found that the Firm did not have procedures in place requiring its Treasury group to consult with its Regulatory Reporting group regarding the potential effect of its actions on net capital, and that its supervisory systems, including written procedures, were not reasonably designed to prevent the Treasury group from entering into unsecured transfers with affiliates that could result in a net capital deficiency. FINRA noted that the Firm had identified and self-reported the unsecured loans and resulting net capital deficiencies to the SEC after the third occasion and promptly adopted remedial measures, including terminating the loan agreement, establishing relationships with additional overnight investment counterparties, increasing limits with existing investment counterparties and instituting a process requiring the Treasury group to assess whether cash transfers would impact the Firm’s net capital position.

Goodwin Procter News

Mergermarket Report Recognizes Goodwin as Leading Advisor in M&A Market

Goodwin Procter was ranked by Mergermarket and Merrill DataSite as a top legal M&A advisor in the Financial Services sector among 12 other industry and regional areas in their recent “Deal Drivers Americas” report which focuses on M&A activity for the first half of 2015. Overall, Goodwin is recognized as the number one legal advisor by deal volume in the middle market for all sectors and number two by deal volume in the New England region. The report also features insights from Financial Institutions Group partner Tom LaFond concerning M&A trends and activity in the financial services sector.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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