Regulators Jointly Approve Final Risk Retention Rule

On October 22, coordinated by the Department of Treasury, six federal agencies – the Board of Governors, HUD, FDIC, FHFA, OCC, and SEC – approved a final rule requiring sponsors of securitized transactions, such as asset-backed securities (ABS), to retain at least 5 percent of the credit risk of the assets collateralizing the ABS issuance. The final rule, which largely mirrors the proposed rule issued in August 2013, defines a “qualified residential mortgage” (QRM) and exempts securitized QRMs from the new risk retention requirement. Government-controlled Fannie and Freddie are exempt from the rule. Most notably, the final rule’s definition of a QRM parallels with that of a qualified mortgage as defined by the CFPB. Further, initially part of the proposed rule, the final rule does not include down payment provisions for borrowers. The final rule will be effective one year after publication in the Federal Register for residential mortgage-backed securities, and two years after publication for all other types of securitized assets.

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SEC Finalizes Rule To Adopt Updated EDGAR Filer Manual

Recently, the SEC issued a final rule to update its EDGAR system to support changes to the disclosure, reporting, and offering process for asset-backed securities. Specifically, EDGAR will be revised to update Volume I: General Information, Volume II: EDGAR Filing, and Volume III: N-SAR Supplement. The EDGAR system is scheduled to reflect the updates on October 20.

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SEC Appoints Marc Wyatt As Deputy Director Of National Exam Program

On October 20, the SEC appointed Marc Wyatt as the Deputy Director of the agency’s Office of Compliance and Inspection Examinations (OCIE). In September 2012, Wyatt joined the SEC as a senior specialized examiner with a concentration on examinations of advisers to private equity funds and hedge funds. In his new role working with the OCIE staff, Wyatt will oversee the examinations of SEC-registered investment advisers, investment companies, broker-dealers, self-regulatory organizations, clearing agencies, and transfer agents. Prior to joining the SEC, Wyatt served as Stark Investments’ chief executive, in addition to spending time at Merrill Lynch UK and at Alex. Brown as a senior investment banker.

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FINRA Issues Guidance Notice To Warn Against Settlements Barring Whistleblower Tips

This month, FINRA issued guidance notice 14-40 to remind firms that “it is a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) to include confidentiality provisions in settlement agreements or any other documents, including confidentiality stipulations made during a FINRA arbitration proceeding, that prohibit or restrict a customer or any other person from communicating with the Securities and Exchange Commission (SEC), FINRA, or any federal or state regulatory authority regarding a possible securities law violation.” Additionally, the notice addresses FINRA’s Code of Arbitration Procedure for Customer Disputes, emphasizing that the parties involved in the arbitration discovery process must “cooperate with each other to the fullest extent practicable in the voluntary exchange of documents and information to expedite the arbitration process.” FINRA further specifies that “stipulations between the parties or confidentiality orders issued by an arbitrator as part of the discovery process regarding the non-disclosure of the documents in question outside the arbitration of the particular case do not restrict or prohibit the disclosure of the documents to the SEC, FINRA, any other self-regulatory organization, or any other state or federal regulatory authority.”

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FINRA Issues Notice on Comprehensive Automated Risk Data System

On September 30, FINRA issued Regulatory Notice 14-37 requesting comments on a proposed rule to implement the Comprehensive Automated Risk Data System (CARDS). FINRA has described CARDS as a rule-based program that would allow FINRA to collect on a standardized, automated, and regular basis, account information, as well as account activity and security information that a firm maintains as part of its books and records. This would exclude the collection of personally identifiable information for customers, including account name, account address and Social Security number. The rule proposal would be implemented in two phases. The first phase would require carrying or clearing firms (approximately 200 firms) to periodically submit in an automated, standardized format specific information that is part of the firms’ books and records relating to their securities accounts and the securities accounts for which they clear. The second phase of CARDS would require fully-disclosed introducing firms to submit specified account profile-related data elements either directly to FINRA or through a third party. The comment period on the proposed rule expires December 1, 2014.

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SEC Delegates Authority to Invest Whistle-Blower Fund

On September 26, the SEC amended its rules to delegate authority to its CFO, Kenneth Johnson, to request that the Treasury Secretary invest a portion of the SEC’s Investor Protection Fund. The fund, comprised of over $439 million as of FY 2013, is used to award whistleblowers and fund certain IG activities. Johnson’s discretion includes determining what portion of the Fund’s monies are not required to meet current needs and thus available for investment as well as which investment maturities are most suitable. The SEC anticipates this amendment, effective September 29, 2014, will “streamline” its operations.

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SEC Announces Largest Whistle-Blower Award In Program’s History

On September 22, the SEC announced that it expects to award more than $30 million to a whistleblower who provided key information in connection with an ongoing fraud enforcement action. The award will be the largest to date for the SEC’s whistleblower program and the fourth award to a whistleblower living overseas. The program offers rewards to whistleblowers who provide high-quality, original information that results in an SEC enforcement action with sanctions exceeding $1 million. Awards are funded by an investor protection fund established by Congress and financed by sanctions imposed on securities law violators. Awards can range from ten to thirty percent of the money collected from the enforcement action.

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SEC Finalizes Rule On Asset-Backed Securities

On September 24, the SEC issued a final rule adopting significant revisions to regulations governing the disclosure, reporting, registration and the offering process for asset-backed securities (“ABS”). The revised rules aim to increase investor protection in the ABS market by making it easier for investors to review and analyze the credit risk of ABS, and limit reliance on the ratings provided by credit agencies. The rule mandates that issuers provide standardized asset-level disclosures for ABS backed by residential mortgages, commercial mortgages, auto loans, auto leases, and debt securities at the time of the offering and on an ongoing basis. The rule also modifies asset-level disclosures for RMBS and securities backed by auto loans and leases in order to reduce potential privacy risks to obligors. The rule requires ABS issuers using a shelf registration statement to file a preliminary prospectus at least three business days before the first sale of securities in the offering. Further, the regulations revise the eligibility requirements for ABS shelf offerings and require additional changes to the procedures and forms related to shelf offerings. Specifically, the rules adopt four transaction requirements for ABS shelf eligibility (certification by the CEO, asset review provision, dispute resolution provision, and disclosure of investors’ requests to communicate) and remove the prior investment-grade rating requirement in order to reduce undue reliance on credit ratings. The rule will become effective on November 24, 2014.

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FFIEC Announces Cybersecurity Preparedness Efforts

The Federal Financial Institutions Examination Council (FFIEC) recently announced a series of initiatives aimed at promoting cybersecurity preparedness for community financial institutions throughout the country. One such initiative is the creation of the Cybersecurity and Critical Infrastructure Working Group, which was launched in June 2013 in order to enhance communication among the FFIEC member agencies and build on existing efforts to strengthen the activities of other interagency and private sector groups. This announcement follows the FFIEC’s May 2013 press release that highlighted an emphasis on cybersecurity awareness. The FFIEC press release described a webinar that the FFIEC provided to 5,000 chief executive officers and senior managers from community financial institutions to raise awareness about the pervasiveness of cyber threats, and introduce new vulnerability and risk-mitigation assessments and regulatory self-assessments of supervisory policies and processes.

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Eastern District Court of Texas Holds that Bitcoin Investments Are Securities

On August 26, the U.S. District Court for the Eastern District of Texas held that the Bitcoin investments at issue are “investment contracts” and “securities” within the meaning of the Securities Act of 1933 and the Exchange Act of 1934. S.E.C. v. Shavers, et al., No. 4:13-CV-416, (E.D. Tex. Aug. 26, 2014). The Court found that the Bitcoin investments in the case satisfy the “investment of money” prong established by the Supreme Court in S.E.C. v. W.J. Howey & Co., 328 U.S. 293, 298-99 (1946), because Bitcoin has a measure of value, can be used as a form of payment, and is used as a method of exchange. The essence of an investment contract, the court reasoned, was the contribution of an exchange of value, rather than “money” in the narrow sense of legal tender only. The SEC alleged that the Defendants made a number of solicitations aimed at enticing lenders to invest in Bitcoin-related investment opportunities. The Court granted the Defendants’ motion to reconsider its prior decision on subject-matter jurisdiction, but denied the Defendants’ motion to dismiss for lack of subject-matter jurisdiction.

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FHFA Announces Settlement Of Litigation With Investment Bank

On August 22, the Federal Housing Finance Agency (FHFA) announced that it settled litigation with a major investment bank, other related companies, and several individuals over alleged violations of federal and state securities laws in connection with private-label mortgage-backed securities purchased by Fannie Mae and Freddie Mac between 2005 and 2007. In 2011, FHFA, as conservator for the two GSEs brought suit in the U.S. District Court of the Southern District of New York seeking relief for damages that allegedly resulted from a failure to adequately disclose risks related to the subject MBS offerings. Under the terms of the settlement, the bank is required to pay $3.15 billion to repurchase securities that were the subject of the claims in FHFA’s lawsuit. The difference between that amount and the securities’ current value is approximately $1.2 billion. According to FHFA, that difference is sufficient to effectively make the two GSEs whole on their investments. With this settlement, FHFA has resolved sixteen of the eighteen RMBS suits it filed in 2011. For details on those settlements, please see FHFA’s update on private-label securities suits. For specifics relating to how the August 22 settlement will impact each of the GSEs, please see the purchase and settlement agreements with Fannie Mae and Freddie Mac.

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SEC Approves Final ABS And NRSRO Rules

On August 27, the SEC adopted revisions to rules governing the disclosure, reporting and offering process for asset-backed securities (ABS) and adopted new requirements for credit rating agencies registered with the SEC to increase governance controls, enhance transparency, and increase credit rating agency accountability. The adopted ABS reforms will make it easier for investors to review and analyze the credit risk of ABS.  The revised ABS rules will (i) require issuers to provide standardized asset-level disclosures for ABS backed by residential mortgages, commercial mortgages, auto loans, auto leases, and debt securities; (ii) provide investors with an additional three days to analyze a preliminary prospectus prior to the first sale of securities in the offering; (iii) revise the eligibility requirements for ABS shelf offerings and require additional changes to the procedures and forms related to shelf offerings; and (iv) revise reporting requirements to include expanded and additional information in the prospectus disclosure for ABS. The new rules adopted for credit rating agencies registered with the SEC require these agencies to (i) consider certain identified factors with respect to establishing, maintaining, and enforcing an internal control structure and file an annual report to the SEC regarding the agency’s internal control structure; (ii) implement conflict of interest controls to prevent inappropriate considerations from affecting a credit agency’s production of credit ratings; (iii) require public disclosure of credit rating performance statistics and histories; (iv) implement procedures to protect the credibility and transparency of rating methodologies, including disclosure requirements regarding the same; and (v) establish standards to ensure that credit analysts meet certain training, experience, and competence thresholds.

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Second Circuit Finds That Forum Selection Clauses Supersede FINRA Arbitration Rule

On August 21, the U.S. Court of Appeals for the Second Circuit held that forum selection clauses, requiring “all actions and proceedings” related to the transactions between the parties to be brought in court, supplant FINRA’s arbitration rule that would otherwise apply. Goldman, Sachs & Co. v. Golden Empire Schools Financing Authority, Nos. 13-797-CV, 13-2247-CV, 2014 WL 4099289 (2nd Cir. Aug. 21, 2014). Underwriters and broker-dealers of auction rate securities brought declaratory and injunctive relief actions against issuers, seeking to enjoin FINRA arbitration of their disputes involving the securities. The parties’ broker-dealer agreements contained forum selection clauses requiring “all actions and proceedings arising out” of the transactions to be brought in court. The district courts enjoined the arbitrations based on the forum selection clauses. The Second Circuit affirmed, holding that FINRA Rule 12220, which states that members must arbitrate a dispute if arbitration is requested by the customer, is superseded by the agreements containing a forums selection clause whose language is all-inclusive and mandatory. The Second Circuit’s decision accords with a similar ruling by the Ninth Circuit, but marks a split on the issue from the Fourth Circuit, which found that a nearly identical forum selection clause did not supersede the FINRA rule.

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Federal Appeals Court Affirms Extender Statutes Trump Securities Act Statute Of Limitations

On August 19, the U.S. Court of Appeals for the Tenth Circuit reissued its original opinion affirming a district court’s holding that FIRREA’s NCUA extender statute circumvents the three-year repose period found in Section 13 of the Securities Act. Nat’l Credit Union Admin. Board v. Nomura Home Equity Loan Inc., Nos. 12-3295, 12-3298, 2014 WL 4069137 (10th Cir. Aug. 19, 2014). Extender statutes define the time period for government regulators to bring actions on behalf of failed financial organizations. The NCUA sued a number of RMBS issuers for violations of federal securities laws on behalf of two credit unions that the NCUA had placed into conservatorship. The defendant RMBS issuers countered that the suit was untimely under the applicable three-year statute of limitations in the Securities Act. The court originally held in 2013 that the NCUA’s claim was timely pursuant to the relevant extender statute, but its opinion had been vacated and remanded for further consideration in light of the Supreme Court’s recent decision in a similar case under a federal environmental statute. The court distinguished its case by first determining that the relevant statute was “fundamentally different” from the one in the Supreme Court’s case because the extender statute “plainly establishes a universal time frame for all actions brought by [the] NCUA.” The court rejected the argument that placed a distinction between statutes of limitations and statutes of repose by noting that extender statutes “displace[] all preexisting limits on the time to bring suit, whatever they are called.” The court then found that the extender statute’s surrounding language, statutory context, and statutory purpose supported its original decision that the NCUA’s suit was timely. Accordingly, the court reinstated its original opinion.

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FINRA Charges Firm With AML And Systematic Market Access Violations

On August 18, FINRA announced a complaint against a financial services and investment firm, alleging that the firm was responsible for systematic supervisory and AML violations in connection with providing direct market access and sponsored access to broker-dealers and non-registered market participants. Specifically, FINRA claims that from January 2008 through August 2013, the firm failed to “ensure appropriate risk management controls and supervisory systems and procedures,” thereby allowing its market access customers to “self-monitor and self-report” possibly manipulative trades. Moreover, FINRA asserts that during the relevant time period, the firm was made aware of these potential regulatory and compliance risks though numerous industrywide notices, disciplinary decisions taken against other industry participants, and multiple self-regulatory organization inquiries and examinations. The firm may request a hearing before the FINRA disciplinary committee. If FINRA’s charges stand, the firm could face suspension, censure, and/or monetary penalties.

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