Financial Services Weekly News - November 2017

by Goodwin


Editor's Note

In This Issue. The U.S. House of Representatives approved the Senate’s 2018 budget resolution, potentially paving the way for tax reform; the U.S. Securities and Exchange Commission (SEC) issued three related no-action letters that provide guidance to investment advisers and broker-dealers affected by the requirements of the European Union’s (EU) Markets in Financial Instruments Directive II (MiFID II); the Treasury Department’s Office of Financial Research (OFR) recommended that a multifactor approach, not based exclusively on asset size, be used to identify and monitor systemically important financial institutions; and federal banking regulators provided answers to frequently asked questions regarding the liquidity coverage ratio rule. These and other recent developments are covered below.

Regulatory Developments

House of Representatives Approves 2018 Budget Resolution; Clears Way for Work on Tax Reform

On October 26, the U.S. House of Representatives, by a vote of 216 to 212, approved the Senate’s 2018 budget resolution, effectively clearing the way for Congress to continue working on tax reform. The House’s approval of the 2018 budget resolution will allow a tax reform bill to pass through the Senate with a simple majority vote, rather than a 60-member majority. The House Ways and Means Committee is expected to release draft language of the bill as early as this week. 

SEC Staff Issues No-Action Relief to Facilitate Implementation of MiFID II Research Provisions

On October 26, the staff of the SEC issued three related no-action letters providing guidance to investment advisers and broker-dealers affected by the requirements of the EU’s MiFID II. The no-action relief generally seeks to address certain potential conflicts between the U.S. federal securities laws and the requirements of MiFID II, which become effective on January 3, 2018. Specifically, MiFID II will require, among other things, that EU investment advisers unbundle payments for trade execution and for investment research. The relief issued by the SEC’s staff will be discussed in further detail in a forthcoming client alert. A brief summary of the trio of no-action letters follows. First, in a letter to the Investment Company Institute, the staff of the SEC’s Division of Investment Management (IM) confirmed that it would not recommend enforcement against an investment adviser that aggregates client purchase and sell orders, where certain clients may pay different amounts for research because of MiFID II. Among other conditions, all clients will continue to pay/receive the same average price for the purchase or sale of the underlying security and will pay the same amount for execution. Second, in a letter to the Securities Industry and Financial Markets Association (SIFMA), the staff of IM confirmed that, for a period of 30 months after the implementation of MiFID II (i.e., July 2020), it would not recommend enforcement against a broker-dealer that provides research services that constitute investment advice under Section 202(a)(11) of the Investment Advisers Act of 1940 (the Advisers Act) to an MiFID II-affected client without registering as an investment adviser under the Advisers Act. Finally, in a letter to the SIFMA Asset Management Group, the staff of the SEC’s Division of Trading and Markets confirmed that it would not recommend enforcement against an investment adviser seeking to rely on Section 28(e) of the Securities Exchange Act of 1934 if the investment adviser pays for research through the use of a research payment account (RPA) that conforms to the requirements for RPAs in MiFID II, and the executing broker-dealer is legally obligated to pay for the research, provided that all other applicable conditions of Section 28(e) are met.

OFR Report: Asset Thresholds Insufficient to Identify SIFIs

On October 26, the OFR released a report concluding that size is an insufficient proxy for a financial institution’s systemic importance, and that a multifactor approach to identifying and monitoring of systemically important financial institutions should be adopted instead. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, heightened prudential standards were applied to financial institutions that are deemed in the event of their failure to threaten the financial system. The report argues that this asset-based approach fails to adequately measure risk, as it is both over and under inclusive. Instead, a multifactor approach, such as that used to identify global systemically important financial institutions (G-SIBs), is better suited to evaluate systemic risk posed by institutions that are not G-SIBs. Size, interconnectedness, substitutability, complexity and cross-jurisdictional activity are factors included in the G-SIB analysis. The report also advocates certain refinements to the G-SIB approach. First, substitutability risks should be better tailored to measure concentration risk related to critical financial activities. Second, systemic importance data like that which U.S. institutions are required to report on Form FR Y-15, should also be gathered from foreign institutions’ U.S. operations to better measure risks their significant domestic footprints and operations pose to the U.S. financial system.

Federal Banking Regulators Release Frequently Asked Questions Regarding Liquidity Coverage Ratio Rule

The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve), and the Federal Deposit Insurance Corporation (FDIC) released answers to frequently asked questions (FAQ) regarding the liquidity coverage ratio rule. The FAQs are the agencies’ staffs’ interpretations of the rule based on the facts and circumstances presented and address the following topics:

  • Treatment of outflows from liquidity facilities to public sector entities in connection with variable rate demand note programs.
  • Treatment of outflows for trusts.
  • Determination of maturity for instruments with remote contingency call options.
  • Treatment of outflows for trust ledger deposit accounts and custody assets.
  • Treatment of multicurrency deposit balances.
  • Treatment of inflows from secured loans to retail clients with open maturities.
  • Treatment of eligible high-quality liquid assets and monetization in securities lending transactions.
  • Treatment of certain deposits required to be held at a foreign central bank as foreign withdrawable reserves.

Federal Banking Regulators to Host Teleconference on Liquidity and Funding Management for Community Banks

The FDIC, Federal Reserve, OCC and the Conference of State Bank Supervisors are jointly hosting a teleconference to discuss trends in community bank liquidity and funds management and related supervisory guidance. The teleconference is scheduled for November 6, 2017, from 2:00 p.m. to 3:00 p.m. Eastern Time (ET). The topics that will be discussed include: trends in liquidity and funding; the importance of a strong liquid asset cushion and diversified funding; brokered deposit restrictions; cash flow scenario analysis and sensitivity testing; and contingency funding planning.

Client Alert: ISS Releases Proposed Policy Changes for 2018 Proxy Season

ISS has proposed changes to its voting policies for 2018 relating to non-employee director compensation, poison pills and gender pay gap shareholder proposals. Public companies should be aware of the proposed changes, although most public companies will not be affected by the changes. For more information, read the client alert issued by Goodwin’s Public Companies and REITs and Real Estate M&A practices.

Enforcement & Litigation

Ninth Circuit Reverses CAFA Remand in Call Recording Case

On October 20, the Ninth Circuit reversed the Southern District of California’s remand of a putative class action alleging that defendant Monterey Financial Services improperly recorded calls to individuals in California and Washington. In Brinkley v. Monterey Financial Services, Inc., the Ninth Circuit held that the plaintiff had not demonstrated that two-thirds of her proposed class were citizens of California, as required to establish the home-controversy exception to the Class Action Fairness Act (CAFA). Defendants faced with class actions filed in state courts should evaluate Brinkley as they consider removal. View the LenderLaw Watch blog post.


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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