Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The Office of the Comptroller of the Currency, or OCC, has issued a short bulletin on compliance with the Volcker Rule.  While largely a short restatement of the rule, it contains this note for community banks:

Banks that do not engage in covered activities or investments are not required to establish a compliance program under the final regulations. This exemption extends to trading activities in certain exempt government and municipal obligations. Smaller banks, with total consolidated assets of $10 billion or less, engaged in modest proprietary trading activities for their own accounts are subject to a simplified compliance program. These banks may satisfy their compliance obligations under the final regulations by including in their existing policies and procedures appropriate references to the requirements of the final regulations. These policies and procedures should be appropriate to the size, scope, and complexity of the banks.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

Following up on its January 21, 2014, formation of an interdivisional staff working group (Working Group) to review its swap data reporting and other provisions of Part 45 of its regulations, on March 19, 2014, the Commodity Futures Trading Commission (CFTC) opened a broad inquiry into those rules.

The Working Group had been asked, among other objectives, to “identify and make recommendations to resolve reporting challenges, and to consider data field standardization and consistency in reporting by market participants.” See link above at 1 “Consistent with those efforts and informed by the Working Group’s analysis to date,” the CFTC’s inquiry requests comment on “specific swap data reporting and recordkeeping rules to help determine how such rules are being applied and to determine whether or what clarifications, enhancements or guidance may be appropriate.” Id.

The CFTC inquiry consists of 69 questions, not including subsections, covering ten topic areas.

A. Confirmation Data (§ 45.3), including what terms of a confirmation of a swap transaction should be reported to a swap data repositories (SDR) as “confirmation data.”

B. Continuation Data (§ 45.4).

The CFTC is concerned that divergent methods of reporting continuation data introduces challenges to tracking the life of a swap and that nonswap dealers and major swap participants have had difficulty reporting continuation data and in accessing data reported on their behalf by swap dealers (SD) and major swap participants (MSP). The CFTC thus requests comments on how it can “ensure that timely, complete and accurate continuation data is reported to SDRs and that such data tracks all relevant events in the life of a swap.”

C. Transaction Types, Entities, and Workflows.

Market participants have requested clarification regarding the appropriate manner to report certain swap transactions and workflows that are not explicitly addressed in the swap data reporting rules. In response, the CFTC is asking whether swap data reporting rules should be clarified or enhanced to better accommodate certain transactions and workflows present in the swaps markets.

D. Primary Economic Terms (PET) Data and Appendix 1 (§ 45.3 and Appendix 1).

Market participants have faced challenges in either the initial reporting of certain PET or the subsequent reporting of modifications to these terms. Market participants have also indicated that the data elements included in Appendix 1 may not sufficiently reflect all necessary economic terms for various swap transactions. The CFTC asks a series of questions on monitoring the PET of a swap.

E. Reporting of Cleared Swaps (§§ 45.3, 45.4, 45.5, and 45.8).

The CFTC monitors the cleared swap market on a transaction and position basis to ensure compliance with the Act and CFTC rules, including those associated with trade execution and clearing. With that in mind, the CFTC asks questions on how the swap data reporting rules should address cleared swaps.

F. Other SDR and Counterparty Obligations (§§ 45.9, 45.13, 45.14).

The CFTC relies on the accuracy and completeness of swap data reported to an SDR throughout the life of a swap and thus asks how should SDRs and reporting entities ensure that complete and accurate information is reported to, and maintained by, SDRs.

G. Swap Dealer/Major Swap Participant Registration and Compliance.

The CFTC uses SDR to determine whether a market participant meets the definition of, and is required to register as, an SD or MSP. The Commission asks a series of questions on how to enhance Part 45 of its regulations to facilitate oversight of SDs and MSPs.

H. Risk.

Swap data reported to SDRs facilitates a number of CFTC risk monitoring and surveillance activities, including monitoring of both financial and market risks resulting from the accumulation of large positions in cleared and uncleared swaps. Given that use, the CFTC asks how Part 45 can better facilitate risk monitoring and surveillance.

I. Ownership of Swap Data and Transfer of Data Across SDRs.

Since the adoption of the swap data reporting and SDR rules, questions have emerged whether a particular party or parties have the legal authority to direct and/or use such swap data. Thus, the CFTC is requesting industry and public input on whether the current Commission regulations regarding “commercialization” (regulations that provide an SDR with an implied right to use data for regulatory purposes but, absent the consent of counterparties, prohibits SDRs from commercially benefitting from such data) is consistent with legal property interests and industry practices.

J. Additional Comments.

A catch-all category whereby the CFTC asks parties to identify any challenges regarding: 1) the accurate reporting of swap transaction data; 2) efficient access to swap transaction data; and 3) effective analysis of swap transaction data.

Comments will be due around May 19, 2014.

Six agencies have issued a proposed rule that would implement minimum requirements for state registration and supervision of appraisal management companies, or AMCs. An AMC is an entity that serves as an intermediary between appraisers and lenders and provides appraisal management services.

In accordance with section 1124 of Title XI of the Financial Institution Reform, Recovery, and Enforcement Act of 1989, as added by section 1473 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the minimum requirements in the proposed rule would apply to states that elect to establish an appraiser certifying and licensing agency with the authority to register and supervise AMCs.

The proposed rule would not compel a state to establish an AMC registration and supervision program, and there is no penalty imposed on a state that does not establish a regulatory structure for AMCs. However, an AMC is barred by section 1124 from providing appraisal management services for federally related transactions in a state that has not established such a regulatory structure.

Under the proposed rule, participating states would require that an AMC:

  • Register in the state and be subject to its supervision;
  • Use only state-certified or licensed appraisers for federally related transactions, such as real estate-related financial transactions overseen by a federal financial institution regulatory agency that require appraiser services;
  • Require that appraisals comply with the Uniform Standards of Professional Appraisal Practice;
  • Ensure selection of a competent and independent appraiser; and
  • Establish and comply with processes and controls reasonably designed to ensure that appraisals comply with the appraisal independence standards established under the Truth in Lending Act.

The proposed rule also would require that the certifying and licensing agency of a participating state have certain authorities, including the authority to:

  • Approve or deny initial AMC registration applications and applications for renewals;
  • Examine the AMC and require the AMC to submit relevant information to the state;
  • Verify that the appraisers on the AMC’s appraiser network or panel hold valid state certifications or licenses;
  • Conduct investigations of AMCs to assess potential violations of appraisal-related laws;
  • Discipline an AMC that violates appraisal-related laws; and
  • Report an AMC’s violation of appraisal-related laws, as well as disciplinary and enforcement actions, and other pertinent information about an AMC’s operations to the Appraisal Subcommittee of the Federal Financial Institutions Examination Council.

The proposed rule would provide participating states 36 months after its effective date to implement the minimum requirements. An AMC that is a subsidiary of a financial institution and regulated by a federal financial institution regulatory agency is required by section 1124 and the proposed rule to meet the same minimum requirements as other AMCs, although such an AMC is not required to register with a state.

In conjunction with the proposal, the Federal Deposit Insurance Corporation is proposing to rescind appraisal regulations promulgated by the former Office of Thrift Supervision (OTS). The OTS appraisal regulations are duplicative of the FDIC’s appraisal regulations in Part 323. Similarly, in a separate rulemaking, the Office of the Comptroller of the Currency is rescinding appraisal regulations promulgated by the former OTS.

The proposal was issued jointly by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Consumer Financial Protection Bureau, the Federal Housing Finance Agency, and the National Credit Union Administration.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The Minnesota Business Corporation Act was recently revised and the amendments have been signed into law.  Among other things, the changes:

  • Provide for pre-clearance of documents to be filed with the Minnesota Secretary of State.
  • Provide for dissenters’ rights in certain transactions where shareholders are eliminated in fractional share transactions.
  • Clarify the manner in which interest in dissenters’ rights actions is calculated.
  • Provide for cross-entity conversions with foreign entities.

You can find more information here.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The OCC estimates that the costs associated with the Dodd-Frank propriety trading rule known as the Volcker Rule will range from $412 million to $4.3 billion. The OCC estimates that 46 OCC-supervised banks with over $10 billion in assets will be required to report metrics and establish an enhanced compliance program, or establish a core compliance program. Of these 46, the OCC estimated that the compliance costs in 2014 will be $402 million for the seven large market-making banks and $0 for the other 39 banks. In 2015, the seven large banks are expected to spend $365 million on compliance costs and the other 39 banks are estimated to spend $176 million. Costs are estimated to remain close to 2015-levels for the following two years.

In addition, the OCC reports that the final rule will have a significant economic impact on seven small banks. The economic impact is significant if the total costs in a single year are greater than 5% of total salaries and benefits, or greater than 2.5% of total noninterest expense.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The AICPA has provided illustrative forms of audit opinions for conflict minerals reports.  The guidance also notes that a practitioner may report, for either of the two audit objectives, either directly on the subject matter or, as long as the practitioner’s opinion is not modified (that is, not qualified, adverse, or a disclaimer of opinion), on management’s assertion.

The guidance includes the following illustrative report for an independent private sector audit in which the practitioner examines and opines directly on the subject matter for both objectives:

*******

INDEPENDENT ACCOUNTANT’S REPORT

To [insert appropriate addressee]

We have examined:

  • whether the design of XYZ Company’s (the “Company”) due diligence framework as set forth in section [insert section reference] of the Conflict Minerals Report for the reporting period from January 1 to December 31, 2013, is in conformity, in all material respects, with the criteria set forth in the Organisation of Economic Co-Operation and Development Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, Second Edition 2013 (“OECD Due Diligence Guidance”), and
  • whether the Company’s description of the due diligence measures it performed, as set forth in section [insert section reference] of the Conflict Minerals Report for the reporting period from January 1 to December 31, 2013, is consistent, in all material respects, with the due diligence process that the Company undertook.

Management is responsible for the design of the Company’s due diligence framework and the description of the Company’s due diligence measures set forth in the Conflict Minerals Report, and performance of the due diligence measures. Our responsibility is to express an opinion on the design of the Company’s due diligence framework and on the description of the due diligence measures the Company performed, based on our examination.

Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and the standards applicable to attestation engagements contained in Government Auditing Standards, issued by the Comptroller General of the United States, and, accordingly, included examining, on a test basis, evidence about the design of the Company’s due diligence framework and the description of the due diligence measures the Company performed, and performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion.

Our examination was not conducted for the purpose of evaluating:

  • The consistency of the due diligence measures that the Company performed with either the design of the Company’s due diligence framework or the OECD Due Diligence Guidance;
  • The completeness of the Company’s description of the due diligence measures performed;
  • The suitability of the design or operating effectiveness of the Company’s due diligence process;
  • Whether a third party can determine from the Conflict Minerals Report if the due diligence measures the Company performed are consistent with the OECD Due Diligence Guidance;
  • The Company’s reasonable country of origin inquiry (RCOI), including the suitability of the design of the RCOI, its operating effectiveness, or the results thereof; or
  • The Company’s conclusions about the source or chain of custody of its conflict minerals, those products subject to due diligence, or the DRC Conflict Free status of its products.

Accordingly, we do not express an opinion or any other form of assurance on the aforementioned matters or any other matters included in any section of the Conflict Minerals Report other than section(s) [insert reference to section(s) referenced in paragraph 1 of this report].

In our opinion,

  • the design of the Company’s due diligence framework for the reporting period from January 1 to December 31, 2013, as set forth in section [insert section reference] of the Conflict Minerals Report is in conformity, in all material respects, with the OECD Due Diligence Guidance, and
  • the Company’s description of the due diligence measures it performed as set forth in section [insert section reference] of the Conflict Minerals Report for the reporting period from January 1 to December 31, 2013, is consistent, in all material respects, with the due diligence process that the Company undertook.

[Practitioner’s signature]

[Practitioner’s city and state]

[Date of Practitioner’s report]

***************

Note that issuers have a choice between an audit by a certified public accountant or a performance audit by another qualified professional.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The Municipal Securities Rulemaking Board, or  MSRB, is seeking comment on draft amendments to its professional qualification rules to establish requirements for municipal advisors and their associated persons. The draft amendments would set professional qualification standards for municipal advisor professionals and require municipal advisors and their associated persons engaging in municipal advisory activities to be qualified in accordance with MSRB rules.

Currently, MSRB Rule G-3 establishes the classifications and qualification requirements for associated persons of dealers. The draft amendments would add new registration classifications for municipal advisors under Rule G-3: (a) municipal advisor representatives – for those who engage in municipal advisory activities; and (b) municipal advisor principals – for those who engaged in the management, direction or supervision of the municipal advisory activities of the municipal advisor and its associated persons. The draft amendments would require each prospective municipal advisor representative to take and pass the municipal advisor representative qualification examination prior to being qualified as a municipal advisor representative. The MSRB will consider at a later date a qualification examination for municipal advisor principals. If such an examination is proposed, it is expected that each municipal advisor principal would, as a prerequisite, be required to take and pass the municipal advisor representative qualification examination before taking the municipal advisor principal qualification examination.

To provide for an orderly implementation of the proposed changes to MSRB Rule G-3, the MSRB proposes a one-year grace period for individuals currently engaged in municipal advisory activities to take and pass the municipal advisor representative qualification exam. The proposed qualification standards do not include any apprenticeship requirements.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The following Stinson Leonard Street lawyers will give presentations at the Business Law Institute:

  • Steve Quinlivan and David Jenson will give a presentation on amendments to the Minnesota Business Corporation Act.
  • Bob Thavis will give a presentation entitled “2 Top Issues in Corporate Liability Insurance: D&O Coverage for Settlements After an Admission of Wrongdoing, and Coverage for Cyber Business Claims.”
  • Jim Bullard and Bryant Tchida will give a presentation entitled “Update on Attorney-Client Privilege:  Pitfalls and Practice Pointers for In-House Counsel and Business Lawyers.”

The seminar will be held on May 5 and 6, 2014 in Minneapolis and is co-sponsored by the Minnesota State Bar Association Business Law Section and Minnesota Continuing Legal Education. You can find registration and other information here.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The SEC charged motion picture company Lions Gate Entertainment Corp. with failing to fully and accurately disclose to investors a key aspect of its effort to thwart a hostile takeover bid.  While the company agreed to pay $7.5 million to the SEC, it also admitted to nine pages of unflattering facts and that its conduct violated the federal securities laws. Here, the SEC had the goods.

To make a long and interesting story short, the company engineered a transaction with a noteholder to reduce the conversion price on outstanding notes, arranged for the sale of the notes to a director and immediate conversion of the notes to dilute the shareholder making a hostile takeover attempt.  The company failed to disclose the purpose of the transaction was to thwart a hostile takeover in an 8-K filing and the company’s Schedule 14d-9.  The script includes a board meeting at midnight.  It’s the kind of stuff you can’t make up, even if you are a motion picture company.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

In a recent speech, CFPB Director Richard Cordray stated “I recently sent letters and followed up with phone calls to the CEOs of the nation’s top credit card companies strongly encouraging them to consider making credit scores and educational content freely available to their customers on a regular basis.”  The CFPB believes, among other things, that making the information available will prompt consumers to examine their credit reports, and if necessary, report errors.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.