SEC Proposes Amendments to Update and Simplify Disclosure Requirements as Part of Overall Disclosure Effectiveness Review
On July 13, the Securities and Exchange Commission (SEC) proposed amendments to eliminate redundant, overlapping, outdated, or superseded provisions, in light of subsequent changes to disclosure requirements, U.S. Generally Accepted Accounting Principles (U.S. GAAP), International Financial Reporting Standards (IFRS), and technology. The SEC also solicited comments on certain disclosure requirements that overlap with U.S. GAAP to determine whether to retain, modify, eliminate or refer them to the Financial Accounting Standards Board (FASB) for potential incorporation into U.S. GAAP. The proposed amendments would be primarily applicable to public companies (including foreign private issuers), but also would involve requirements applicable to other entities the SEC regulates, including Regulation A issuers, investment advisers, investment companies, broker-dealers, and nationally recognized statistical rating organizations. With respect to registered investment companies, the proposals would amend disclosure requirements under Regulation S-K, Regulation S-X and certain forms required by the Investment Company Act of 1940 (including Form N-1A). The SEC previously requested public comment through two concept releases (33-9929 and 33-10064) that were published earlier in 2016 regarding disclosure effectiveness under Regulation S-K and Regulation S-X. The SEC indicated that it will continue to review those public comments and to address disclosure effectiveness on a broader scale. The public comment period for the proposed amendments will remain open for 60 days following publication of the proposing release in the Federal Register.
SEC Proposes Rules to Enhance Order Handling Information Available to Institutional and Retail Customers
On July 13, the SEC announced that it had voted to propose rules that for the first time would require broker-dealers to disclose the handling of institutional orders to customers. The proposed rules (Release No. 34-78309) also would rename “customer order” as “retail order” and expand the information included in existing retail order disclosures. The proposed rules would require broker-dealers to provide customers with standardized information about the handling and execution quality of their institutional orders (orders in exchange-listed stocks with an original market value of at least $200,000) and to disclose publicly the same information on an aggregated basis across all customers. The customer-specific disclosures would help customers assess their broker-dealers’ services, including the handling of potential conflicts of interest, risks of information leakage and best execution. The public disclosures of aggregated information would assist market participants in assessing and comparing the institutional order handling services they receive from their broker-dealers. Comments on the proposal will remain open for 60 days following publication of the proposing release in the Federal Register.
OCIE’s 2016 Share Class Initiative
On July 13, the SEC’s Office of Compliance Inspections and Examinations (the OCIE) issued a Risk Alert announcing the “Share Class Initiative,” a new initiative to address the risk that registered advisers may be making conflicted investment recommendations to their clients. Specifically, the OCIE is seeking to identify conflicts of interest in respect of advisers’ compensation and financial incentives for recommending mutual fund and 529 Plan share classes that have substantial loads or distribution fees. These include situations where the adviser is also a broker-dealer (or affiliated with a broker-dealer) that receives fees from sales of certain share classes, as well as situations where the adviser recommends that clients purchase more expensive share classes of funds for which an affiliate of the adviser receives more fees.
Noting that the SEC has stated that an investment adviser fails to uphold its fiduciary duty when it causes a client to purchase a more expensive share class of a fund when a less expensive class of that fund is available, the OCIE will focus on advisers’ practices relating to share class recommendations and will conduct “risk-based examinations of high-risk areas,” including: (1) Fiduciary Duty and Best Execution – is the adviser seeking the most favorable terms reasonably available under the circumstances?; (2) Disclosures – is the adviser making a full and fair disclosure of all material facts, including all material conflicts of interest?; and (3) Compliance Program – does the adviser have written policies and procedures reasonably designed to prevent Advisers Act violations?
EU Securities Financing Transactions Regulation Becomes Effective
On July 13, Article 15 of the European Union’s (EU) Securities Financing Transactions Regulation (the Regulation) became effective. The Regulation applies European Market Infrastructure Regulation (EMIR) type rules to parties involved in trading instruments not covered by EMIR. The Regulation applies in general to (1) securities financing transactions such as repos and securities lending, and (2) persons who reuse margin or collateral provided under a title transfer arrangement (a TTA). For the most part, the Regulation does not apply to non-EU persons who are not trading from an establishment in the EU. Beginning on the July 13 effective date, however, non-EU persons such as U.S. banks, brokers, custodians and prime brokers who use EU clients’ assets under a right of use arrangement will need to advise that client about the risks involved in TTA arrangements and must obtain the client’s prior express written consent (evidenced by a signature). ISDA has produced a model template disclosure document.
Client Alert: NASDAQ Adopts “Golden Leash” Director Compensation Disclosure Requirement
NASDAQ has adopted a new rule that will require each listed company to publicly disclose the material terms of all agreements and arrangements between any director or nominee and any person or entity (other than the company) relating to cash and non-cash compensation or other payments in connection with that person’s service or candidacy as a director of the company. For more information, view the client alert issued by Goodwin’s Public Companies practice.
Enforcement & Litigation
CFPB Issues Consent Order for Overdraft Practices
On July 14, the Consumer Financial Protection Bureau (CFPB) announced that Santander Bank, N.A. would pay $10 million in fines in connection with lapses in the management of a vendor which engaged in a course of misconduct in marketing the bank’s overdraft protection products. According to the CFPB, the bank’s telemarketing vendor used deceptive marketing and sales pitches to mislead consumers to sign up for its overdraft service without the required consent. The telemarketers were purportedly rewarded for their efforts through increased pay based on reaching sales targets. The CFPB also found that the bank’s vendor misled consumers concerning the price and benefits of the overdraft service and the consequences of not opting into the product. In addition to a $10 million penalty, the CFPB's order requires that the bank verify that all consumers enrolled for its overdraft protection in fact consented to the enrollment. It also prohibits the bank from using a telemarketing vendor to market overdraft services, prohibits the bank from requiring a target number of opt-ins or offering financial incentives based on the number of opt-ins, and requires an increase in oversight of vendors engaged in telemarketing for other consumer financial products or services.
Plaintiffs Lose Constitutional Challenge to CFPB Director Recess Appointment
On July 12, Judge Ellen Segal Huvelle for the United States District Court for the District of Columbia (the Court) issued an opinion rejecting a constitutional challenge to the CFPB Director Richard Cordray’s actions and decisions taken after his recess appointment by President Obama. The Court held that the Director effectively ratified his earlier regulatory actions after his appointment was later confirmed by the Senate.
In State National Bank of Big Spring et al. v. Jacob J. Lew, plaintiffs alleged that (1) the structure of the CFPB was unconstitutional as a matter of separations of power, and (2) the recess appointment of Director Cordray, and the actions taken by the CFPB before he was confirmed by the Senate, were also unconstitutional. The Court granted defendant’s summary judgment on the challenge to the recess appointment, agreeing that the Director’s subsequent formal ratification of his earlier actions “cured any [prior] defect,” and that there was no gain in forcing the Director to reconsider and redo his own actions.
The Court deferred ruling on broader challenge to the CFPB’s constitutionality because of the pending appeal in PHH Corp v. Consumer Financial Protection Bureau, which likewise challenges the constitutionality of the CFPB. The Roundup and Goodwin’s Enforcement Watch will continue to report on any developments in that appeal.