Three swap data repositories, or SDRs, have announced procedures to make filings for the swap end-user exception. Apparently you file with the SDR that the swap is reported to.
The three SDRs are:
• DTCC’s DDR Swap Data Repository
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The SEC previously awarded three whistleblowers in a hedge fund case an aggregate of 15% of certain funds collected.
The SEC has announced that approximately $170,000 has been administratively forfeited by the defendant in a criminal proceeding – money that is deemed collected for purposes of issuing whistleblower awards. Therefore, the three whistleblowers will now receive $8,505 each. Additional payments can be made to these whistleblowers upon forfeiture of the additional assets that have been seized.
The aggregate value of assets seized from the defendant is estimated to be approximately $845,000, and the whistleblowers are expected to ultimately receive 15 percent of this amount for a combined total of approximately $125,000.
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In a letter to various regulators, the American Bankers Association noted survey data which highlights practical challenges associated with fully complying with all of the CFPB’s requirements for new mortgage-related rules which will become effective January 10, 2014. According to the ABA, community banks in particular reported that one of the most burdensome aspects of compliance is the development, customization, and implementation of information technology projects, including software, programming, and interfaces. The survey noted that 60% of respondents stated that their vendor(s) had not provided information on when they will provide all completed software and programming updates necessary for compliance. Delivery of the software would be followed by an integration and testing phase. The actual amount of time for financial institutions to comply is further shortened by the information technology “freeze” that some institutions have in place to manage existing year-end tax and reporting requirements. Survey respondents indicated it may not be possible to test or revise the new mortgage compliance systems during this lock‐down period.
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Six federal agencies have issued a notice revising a proposed rule requiring sponsors of securitization transactions to retain risk in those transactions. The new proposal revises a proposed rule the agencies issued in 2011 to implement the risk retention requirement in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Overview
This proposal was issued jointly by the Board of Governors of the Federal Reserve System, the Department of Housing and Urban Development, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission. The rule would provide asset-backed securities, or ABS, sponsors with several options to satisfy the risk retention requirements. The original proposal generally measured compliance with the risk retention requirements based on the par value of securities issued in a securitization transaction and included a so-called premium capture provision. The agencies are now proposing that risk retention generally be based on fair value measurements without a premium capture provision.
As required by the Dodd-Frank Act, the proposal would define “qualified residential mortgage,” or QRM, and exempt securitizations of QRMs from risk retention. The new proposal would define QRMs to have the same meaning as the term qualified mortgages as defined by the Consumer Financial Protection Bureau. The new proposal also requests comment on an alternative definition of QRM that would include certain underwriting standards in addition to the qualified mortgage criteria.
Similar to the original proposal, under the new proposal, securitizations of commercial loans, commercial mortgages, or automobile loans of low credit risk would not be subject to risk retention. Further, the rule would recognize the full guarantee on payments of principal and interest provided by Fannie Mae and Freddie Mac for their residential mortgage-backed securities as meeting the risk retention requirements while Fannie Mae and Freddie Mac are in conservatorship or receivership and have capital support from the U.S. government. This provision also is unchanged from the original proposal.
Reaction
The American Bankers Association president and CEO Frank Keating said “We applaud the proposed Qualified Residential Mortgage rule released by federal regulators today. Gratefully, the proposed rule aligns the QRM definition with the existing Qualified Mortgage rule. This will encourage lenders to continue offering carefully underwritten QM loans, including those with lower down payments. As a result, it will help the economy and ensure the largest number of creditworthy borrowers are able to access safe, quality loan products at competitive prices.”
SEC Commissioner Daniel M. Gallagher said “The re-proposed risk retention rules, if adopted, will ensure that the vast majority of mortgages in the United States are insured or owned by the government, will introduce another flawed government imprimatur of creditworthiness into the markets, and will disincentivize proper risk management and due diligence in the mortgage markets. It is unfortunate that, even with the financial crisis still so fresh in the collective memory of policymakers and taxpayers, regulators seem determined to repeat the mistakes of the past.”
New SEC Commissioner Michael S. Piwowar said “I am not able to support the release in the form approved because the reproposal does not contain necessary economic analyses and does not adequately consider alternatives to credit risk retention requirements or the interplay between those requirements and other regulatory reforms.”
SEC Commissioner Kara M. Stein, also newly minted, said “I support the re-proposal of these rules implementing the credit risk retention requirements set forth in the Dodd-Frank Act. Ensuring the integrity of a robust, fair and transparent securitization market is vitally important to the businesses and families that rely on these markets.”
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The SEC has sanctioned a former portfolio manager at a Boulder, Colo.-based investment adviser for forging documents and misleading the firm’s chief compliance officer to conceal his failure to report personal trades.
According to the SEC, an investigation found that Carl Johns of Louisville, Colo., failed to pre-clear or report several hundred securities trades in his personal accounts as required under the federal securities laws and the code of ethics at Boulder Investment Advisers (BIA). The SEC stated Johns concealed the trades in quarterly and annual trading reports that he submitted to BIA by altering brokerage statements and other documents that he attached to those reports. The SEC also stated Johns later tried to conceal his misconduct by creating false documents that purported to be pre-trade approvals, and misled the firm’s chief compliance officer in her investigation into his improper trading.
To settle the SEC’s charges – which are the agency’s first under Rule 38a-1(c) of the Investment Company Act for misleading and obstructing a chief compliance officer (CCO) – Johns agreed to pay more than $350,000 and be barred from the securities industry for at least five years.
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A review of some of the approximately 300 comment letters the SEC has received relating to its latest round of Regulation D proposals is a showcase for the various types of companies that have already sprung up in the hopes of profiting from the general solicitation and (eventually) crowdfunding rules.
As we previously noted, the SEC’s adoption of new Rule 506(c), which for the first time in the history of the securities laws allows for the use of (mostly) unrestricted advertising in connection with the sale of unregistered securities, triggered a number of additional proposals by the SEC, including: 1) requiring that a pre-offering Form D be filed at least 15 days in advance of the use of general solicitation materials; 2) requiring issuers to file with the SEC copies of any general solicitation materials no later than the date the materials were first used; and 3) amending the content of Form D, including an additional item (Item 22) that requires issuers to specify the method they used to verify the accredited investor status of their investors.
Besides Congressmen (who claim that some of the proposals violate the JOBS Act) and lawyers, business interests are generally the only commenters to present any detailed analysis of or comments in response to the proposed rules. While the analysis presented is perceptive in some cases, it also tends to directly align with the business interests of the commenters. For example:
CMPLY
CMPLY, Inc., “provides solutions for measurement, management and compliance in social media” through the use of systems of “layered notices” that let users select certain form disclaimers for insertion into their social media messages by clicking on a badge or icon. CMPLY can also monitor social media channels and raise alerts when certain disclosures are omitted. Not surprisingly, in the words of James Graham, the company’s COO & CFO “we wholeheartedly support the Commission’s desire to protect investors with this proposal.” It’s easy to see how CMPLY would be in a strong position to benefit from an SEC requirement that all general solicitation materials include certain standard legends and disclaimers.
AngelList
AngelList describes itself as “a web-based platform that, among other things, helps accredited investors connect with startups in need of financing.” AngelList is critical of the proposed rules, and provides a good, coherent summary of its estimation of the problems the new rules would create:
1. The requirement to file a Form D 15 days prior to the financing, or at the close of financing even if a financing doesn’t close, is meaningless in our world. Startups are always financing.
2. The requirement to formally file all written materials provided to investors with the SEC is not feasible in a world where the materials are updated continuously.
3. The requirement to include disclosures every time you mention a financing doesn’t work for most places those appear (try tweeting boilerplate legal text in 140 characters, or requiring reporters to include it in stories).
4. These technical legal requirements place burdens on startups at a stage before they may have legal advice, and the very severe penalty for non-compliance (not fundraising for a year) is a death penalty for a not-yet-profitable business.
5. Specifically relevant to AngelList, “affiliates” or “promoters” of startups that violate these rules are also subject to penalty. Given our neutral role, we are concerned that a broad interpretation there could lead us to accidentally be swept up in this. With over 100,000 companies I’m quite certain at least one will accidentally miss something and not cure with the SEC, potentially barring offerings by AngelList and all other companies listed on AngelList for one year.”
The main suggestion from AngelList to improve the proposed rule is to allow third party companies like AngelList to automatically file certain information with the SEC electronically when the material gets updated on AngelList.
Crowdentials
Crowdentials is “a regulatory compliance software company that provides accredited investor verification services.” Not only that, it (supposedly) does so through an “inexpensive service that fully automates this process and does not require investors to disclose sensitive information like tax records.” Crowdentials is strongly in favor of the proposal to amend Form D to require issuers to identify, in Item 22, how they verified the accredited investor status of their investors.
Crowdentials even wants to impose penalties for non-compliance with Item 22 by imposing a one year ban on the use of Rule 506 for issuers who fail to complete Item 22.
CrowdCheck, Inc.
CrowdCheck “provides due diligence and disclosure services for small online securities offerings.” CrowdCheck notes that many issuers are not likely to understand that videos fall within the scope of “written communications” which would be required to be filed pursuant to proposed Rule 510T. As a result, video and other common forms of general solicitation and general advertising materials (GSGA) will likely be under-reported to the SEC. There is an incentive to under-submit materials in general, since the SEC has no way to know whether all materials will have actually been submitted.
CrowdCheck contends that the iterative nature of offering materials, which are constantly being modified in online forums in real time, does not fit with this disclosure model, and that a better use of the SEC’s resources to protect investors would be to educate the business community about securities fraud and its consequences, because many small issuers do not understand a misstatement of a material fact or an omission of facts necessary to make statements not misleading as “fraud.” CrowdCheck calls for “a clear statement now from the Commission on what can be said in GSGA communications.”
For more information on the SEC proposals, see JOBS Act and Other Securities Law Essentials for Growing Companies.
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On Friday August 23, the Commodity Futures Trading Commission clarified that typical retail energy contracts with homeowners and commercial users will not be subject to the Dodd-Frank Act’s requirements applicable to “Retail Commodity Transactions.”
Congress, in the Dodd-Frank Act, defined a Retail Commodity Transaction as “any agreement, contract, or transaction in any commodity that is entered into with, or offered to, a non-eligible contract participant or non-eligible commercial entity on a leveraged, margined, or financed basis.” See Section 742(a) of the Dodd-Frank Act, adding section 2(c)(2)(D) to the Commodity Exchange Act. Such agreements, contracts and transactions must be conducted on a regulated exchange and are subject to the CFTC’s anti-fraud authority. The Retail Commodity Transaction requirements do not apply, however, to a commodity transaction for which “actual delivery” is made within 28 days.
Trade associations representing retail energy suppliers argued that typical retail transactions — in which the sale and delivery of electricity or natural gas occurs on a recurring basics — meet the actual delivery standard and thus should not be considered Retail Commodity Transactions. For example, the National Associations of Energy Marketers requested clarification “that the type of transactions which its retail energy marketer members typically enter into with residential and commercial customers, in which they contract with the customer to provide physical energy supply (electricity or natural gas) for terms that regularly in the course of business contemplate delivery of the physical energy commodity in excess of 28 days, were not intended and should not be interpreted to constitute ‘retail commodity transactions’ under the Act [the Dodd-Frank Act.]” 78 FR 62427.
The CFTC agreed, describing the transactions as follows: “[E]nergy firms enter into fixed price contracts with customers to supply electricity or natural gas to the customer’s residence or business for a period of one or more years. The customer consumes the electricity or natural gas and subsequently pays for that usage, along with all applicable taxes, on a periodic basis.” Id. at 52428. The CFTC then said that the Dodd-Frank requirements would not apply to such transactions. “The Commission [the CFTC] is not of the view that new CEA section 2(c)(2)(D) [the new Commodity Exchange Act section added by the Dodd-Frank Act] applies to this scenario, particularly in light of the fact that the customer regularly receives delivery of and consumes the physical energy commodity over the term of the contract and periodically pays for that usage.” Id.
Trade associations expressed pleasure with the CFTC’s clarification. For example, Melissa Lauderdale, president of the Retail Energy Suppliers Association, said RESA was “pleased the CFTC agreed that our retail electricity and natural gas contracts do constitute actual delivery of a commodity. It is important for both the industry and consumers that retail suppliers be able to continue to provide products and services to residences and businesses without unnecessary regulation of these transactions that were clearly not the focus of the Dodd-Frank legislation.” E-mail to Megawatt Daily from Melissa Lauderdale, Megawatt Daily, August 26, 2013, at p. 18.
On August 19, Nicole Strydom and I gave a 10 minute presentation on the general solicitation rules and the current status of “crowdfunding” at a ceremony to announce the finalists in the student division of the Minnesota Cup. This summary of our presentation provides brief overview of the new rules on general solicitation and the forthcoming rules on crowdfunding.
Distinction between General Solicitation and Crowdfunding
General Solicitation and Rule 506(c)
Crowdfunding
Conclusion
The SEC has charged a former portfolio manager at Oppenheimer & Co. with misleading investors about the valuation and performance of a fund consisting of other private equity funds. Previously, Oppenheimer had settled its role the case.
According to the SEC, investigation found that the fund manager disseminated quarterly reports and marketing materials to prospective investors misstating that the valuation of the Oppenheimer fund’s holdings was based on values received from the portfolio managers of those underlying funds. The manager actually valued the fund’s largest investment at a significant markup to the manager’s estimated value. He also sent marketing materials reporting an internal rate of return that failed to deduct fees and expenses. As a result, the fund’s reported performance as measured by its internal rate of return – a key indicator of the fund’s performance – was significantly enhanced.
The SEC offered a word to the wise to private equity funds that wish to avoid enforcement actions: “Interim valuations are especially important when used to raise funds in the private equity industry,” said the Co-Chief of the SEC Division of Enforcement’s Asset Management Unit. “Private fund managers must provide investors with accurate disclosures about valuation methodologies as well as fund fees and expenses so they can make fully informed investment choices.”
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The Municipal Securities Rulemaking Board, or MSRB, is seeking comment on proposed rule changes that would set forth in a single rule the requirements to and process by which brokers, dealers and municipal securities dealers (“dealers”) and municipal advisors (collectively “regulated entities”) register with the MSRB. The substance of the single rule would be similar to that of existing rules, with the exception of new requirements to provide additional contact and firm identification information, as well as data concerning the scope of dealer activities.
Currently, regulated entities must reference a series of MSRB rules when registering with the MSRB, as there is no single “registration” rule. Prior to engaging in municipal securities or municipal advisory activities, regulated entities must, consistent with Rule A-12, supply basic identifying information to the MSRB and pay an initial fee.
The purpose of the proposed registration rule, revised Rule A-12, is to delineate succinctly and clearly in one location the requirements and process for MSRB registration and to resolve certain other regulatory issues that are not fully addressed by existing MSRB rules. The proposed changes would result in the elimination of three current MSRB rules, Rules A-14, A-15, and G-40, as well as two forms, Forms RTRS and G-40. These forms would be replaced by the single new electronic Form A-12.
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