Financial Services Weekly News - August 2015


Regulatory Developments

SEC Adopts Rules and Forms for Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants

On Aug. 5, the SEC voted to adopt registration rules and forms for security-based swap dealers and major security-based swap participants (collectively, SBS entities). According to the statement of Commissioner Luis A. Aguilar, these rules and forms, first proposed in October 2011 in Release No. 34-65543, are intended to implement Exchange Act Section 15F, added by Title VII of the Dodd-Frank Act, which requires the SEC to adopt rules to provide for the registration of SBS entities. The new rules will: (1) require filing of information about the SBS entity on a registration form, (2) require a senior officer to certify that there are policies and procedures in place to prevent violations of the federal securities laws, and to maintain documentation supporting this certification, (3) require a chief compliance officer to certify that the registrant has determined that none of its associated persons are subject to a statutory disqualification—whether they are natural persons or entities—unless relief is specifically provided by the SEC, and (4) deem an applicant to be conditionally registered as soon as its completed application for registration is submitted. In conjunction with the third point, the SEC proposed a new Rule 194 which would provide a process for the SEC to determine whether it is in the public interest to permit a statutorily disqualified associated person to continue to engage in SBS transactions on behalf of an SBS entity.

SEC Adopts CEO Pay Ratio Rule

At the same meeting on Aug. 5, the SEC voted to adopt changes to rules and forms to implement Section 953(b) of the Dodd-Frank Act requiring a public company to disclose the ratio of the total compensation of its chief executive officer (CEO) to the median total compensation received by the rest of its employees (Release No. 33-9877). The amendments to Item 402 of Regulation S-K and to Form 8-K, were first proposed in September 2013 in Release No. 33-9452. The SEC received in response over 287,000 comment letters, over 1,500 of them individual letters, with the rest being form letters. According to a statement of Commissioner Aguilar, the rule as adopted permits issuers to (1) choose a reasonable method to identify the median employee that is appropriately tailored to their business, including identifying the median employee using statistical sampling or any consistently applied compensation measure (such as payroll records), (2) exclude from the pay ratio calculation a de minimis amount of non-U.S. employees, (3) exempt from the pay ratio calculation non-U.S. employees from certain jurisdictions when foreign privacy laws make it illegal to provide the information necessary to calculate the pay ratio, and (4) calculate the median employee only once every three years, instead of every year, providing certain conditions are met. Dissenting statements were issued by Commissioners Daniel M. Gallagher and Michael S. Piwowar.

FINRA Proposes Rule Regulating Accounts Established by Associated Persons at Other Broker-Dealers and Financial Institutions

On Friday, FINRA filed with the SEC a proposed rule change to adopt FINRA Rule 3210 in the consolidated FINRA rulebook and to delete NASD Rule 3050, Incorporated NYSE Rules 407 and 407A and Incorporated NYSE Rule Interpretations 407/01 and 407/02. The new rule creates monitoring and disclosure obligations which reflect the approach that a member firm is responsible for supervising the trading activities of its associated persons. The rule reflects provisions of the NASD and NYSE rules as well as comments FINRA received in response to an April 2009 Notice.

Client Alert: New Proposed Treasury Regulations Focus on Management Fee Waivers

Goodwin Procter’s Tax practice issued a client alert on new proposed tax regulations that have been issued relating to disguised payments for services between partners and partnerships. The proposed regulations focus primarily on management fee waiver structures in investment funds, but also will impact partnership profits interests in a variety of other contexts. This client alert summarizes the proposed regulations and provides several immediate practical steps for fund sponsors to consider.

Enforcement & Litigation

FINRA Fines Firm and Suspends CEO and Compliance Officers for Sales of Unregistered Penny Stocks and AML Violations

FINRA announced on Aug. 3 that it entered an Order Accepting Offer of Settlement fining Aegis Capital Corp. $950,000 for improperly selling unregistered penny stocks and for related supervisory failures, and for failing to implement anti-money laundering (AML) policies and procedures. In the same Order, Charles D. Smulevitz and Kevin C. McKenna, who served successively as Chief Compliance and AML Compliance Officers at the time of the violations, agreed to 30- and 60-day principal suspensions, and fines of $5,000 and $10,000, respectively, for their supervisory and AML failures. In an Order Accepting Offer of Settlement in a separate proceeding, Robert Eide, Aegis’s President and CEO, was suspended for 15 days and fined $15,000 for failing to disclose more than $640,000 in outstanding liens.

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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