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

The CFPB has published a final rule that establishes procedures to implement section 1024(a)(1)(C) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. That statutory provision authorizes the Bureau to supervise a nonbank covered person when the Bureau has reasonable cause to determine, by order, after notice to the person and a reasonable opportunity to respond, that such person is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services. The Bureau is authorized to, among other things, require reports from, and conduct examinations of, nonbank covered persons subject to supervision under section 1024.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The Financial Accounting Standards Board, or FASB, together with the International Accounting Standards Board, or IASB, is comprehensively reconsidering lease accounting.  On May 16, 2013 the FASB issued Proposed Accounting Standards Update, Leases (Topic 842): a revision of the 2010 proposed Accounting Standards Update, Leases (Topic 840) (the Update).

The Update presents far reaching revisions to accounting for leases.  Lawyers will need to understand the rules to advise clients on the impact of the new rules on transactions, securities filings and debt covenants.

We have compiled a tutorial for lawyers covering the basic steps associated with the proposed lease accounting rules.  For the sake of simplicity the guide focuses on accounting for lessees.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The United States Court of Appeals for the District of Columbia Circuit yesterday upheld the Commodity Futures Trading Commission’s (CFTC) final rule on the criteria that registered investment companies (RICs) must meet to be excluded from Commodity Pool Operator (CPO) status. Investment Company Institute, et. al., v. Commodity Futures Trading Commission, Case No. 12-5413, June 25, 2013.

Following the passage of the Dodd-Frank Act, the National Futures Association (NFA) petitioned the CFTC to reinstate the criteria—used prior to 2003—to determine whether RICs were excluded from CPO status (at the time of the NFA petition, RICs had been “effectively excluded from the CPO definitions and most CFTC CPO requirements” since 2003. Slip. op. at 4.)

Following a notice and comment rulemaking, the CFTC agreed (and added swaps to the trading thresholds and additional reporting requirements).

The Investment Company Institute and the Chamber of Commerce challenged the rules in the District Court under the Administrative Procedure and Commodity Exchange Acts. The District Court summarily dismissed those challenges and yesterday the Court of Appeals agreed. The court said that the CFTC adequately explained why it had changed from excluding RICs from CPO definitions and most CPO requirements under its post-2003 regulation and returned to the more stringent pre-2003 regulation. In addition, the court rejected a variety of other challenges to the rules.

 

SEC Chair Mary Jo White testified in support of the President’s fiscal year fiscal 2014 budget request for the SEC before the Senate Subcommittee on Financial Services and General Government, Committee on Appropriations.

As a first key priority, she stated the SEC must complete, quickly and thoughtfully, the rulemaking mandates contained in the Dodd-Frank Act and JOBS Act.  She noted that part of the $1.674 billion request for fiscal 2014 would be spent on enhancing reviews of corporate disclosures — including supporting implementation of the JOBS Act.  Ms. White elaborated that the SEC requested 25 new positions for the Division of Corporation Finance. These positions would permit the SEC to hire additional attorneys and accountants to continue to enhance the Division’s reviews of large companies, and prepare, finalize, and implement the remaining rules and projects under the Dodd-Frank Act and the JOBS Act, including responding to requests for interpretive guidance with respect to new rules. Further, the additional positions would allow the Division to enhance its review of SEC rules and regulations impacting small business capital formation and better evaluate trends in increasingly complex offerings.

Speaking to progress under the JOBS Act, Ms. White noted that SEC rulewriting teams also have been working on recommendations for the Commission’s consideration with respect to JOBS Act rulemakings concerning general solicitation, crowdfunding, an exemption from registration for public offerings up to $50 million, and thresholds for registration and deregistration under Section 12(g) of the Exchange Act.  With respect to removal of the ban on general solicitation, she said the Commission and the staff continue to work diligently on completing the rule and on the recommendations for each of the other rulemaking mandates of the JOBS Act.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

In January, the CFPB issued several new mortgage rules under the Dodd-Frank Act.  The CFPB has now issued a proposed rule amending and clarifying those rules with regard to certain questions that have arisen during the implementation process.

Among other things, the proposal amends and provides clarification on six major topics. These include:

  • Facilitating the ability of servicers to offer short-term forbearance plans;
  • Addressing the process for correcting errors or mistakes that may occur when servicers perform initial completeness evaluations of loss mitigation applications, but later discover the application was incomplete;
  • Clarifying the definition of a loan originator;
  • Facilitating lending by small creditors, including those in rural or underserved areas;
  • Clarifying application of the prohibition on creditors financing credit insurance premiums; and
  • Slightly adjusting effective dates of several provisions of the Loan Originator rule.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The Center for Capital Markets Competitiveness, an arm of the U.S. Chamber of Commerce, has sent a letter to the CFPB complaining about its data collection efforts.  According to the letter, companies subject to the CFPB’s regulatory authority are being asked to provide huge quantities of data regarding individual consumers’ financial transactions on an ongoing, real-time basis.

The letter notes “To date, the Bureau’s lack of transparency around its data collection efforts makes it very difficult to evaluate the prudence and the legality of the collection process; the strength of the security measures the Bureau is taking to protect consumers’ data; the extent to which personally identifiable information is being collected, stored, analyzed, or shared; the extent to which such requests are being fully coordinated at senior levels of the Bureau to avoid redundancy; and the cost burden imposed on, and potential liability exposure incurred by companies subject to the Bureau’s requests.”

The letter also notes  “Based on your public statements, it appears that these demands may violate specific limits on the Bureau’s authority set forth in the Dodd-Frank Act:

  • The statute requires that the Bureau issue an order or regulation in order to collect this information, but the Bureau has done neither.
  • The statute restricts the Bureau’s ability to collect consumers’ personally-identifiable information, but it is not clear that the Bureau has in place appropriate safeguards to ensure compliance with that limitation.”

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The Office of Financial Research, or OFR, was created by the Dodd-Frank Act.  It recently published a paper with the title “How Likely is Contagion in Financial Networks?”  The paper notes interconnections among financial institutions create potential channels for contagion and amplification of shocks to the financial system. The authors estimate the extent to which interconnections increase expected losses, with minimal information about network topology, under a wide range of shock distributions.  The authors note expected losses from network effects are small without substantial heterogeneity in bank sizes and a high degree of reliance on interbank funding.  They are also small unless shocks are magnified by some mechanism beyond simple spillover effects; these include bankruptcy costs, fire sales, and mark-to-market revaluations of assets. The authors also illustrate the results with data on the European banking system.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The Federal insurance Office, or FIO, which was established by the Dodd-Frank Act, has issued its annual report.  Among other things, the report notes “While insurers would benefit from an increase in interest rates through improved investment returns, a sudden, significant rate increase could present threats. A sudden increase in general interest rate levels would increase unrealized losses in insurer fixed income portfolios and, at the same time, could prompt policyholders to surrender contracts for higher yield elsewhere. In such a circumstance, insurers could be forced to liquidate fixed income investments at a loss in order to fund contract surrender payments.”

Michael McRaith, Director of the FIO, noted in prepared remarks before the House Financial Services Subcommittee on Housing and Insurance, that FIO expects to produce a number of additional reports this year, including the report on how to modernize and improve the system of insurance regulation in the United States and, separately, on the breadth, scope and role of the global reinsurance market. 

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

CFTC Commissioner Bart Chilton made the following interesting remarks before the Institute of International Bankers, at The Yale Club, in New York City:

“First Volcker:  It’s a huge issue that, frankly, might be on life-support. Now, before you folks get all “yeah, yeah, yeah” and start knuckle bumping, I’ll give you fair warning. If Volcker isn’t finished in a robust fashion, that’s gonna be big trouble for banks. (Big Trouble—2002, Tim Allen and Rene Russo—great actors, but not worth a Netflix shot). Here’s why a weak Volcker Rule would be big trouble. As we noted, people are mad as hell. Many folks in fairly high levels of government—presidents of Federal Reserve Banks, Members of the House and Senate and others—want to break up the banks. Legislation has been introduced to do just that. Some want to go back to Glass-Steagall.

Now, Dodd-Frank says that banks should not be allowed to engage in proprietary trading, provided however, that they may hedge their financial business risks, e.g. risks they take on in the course of commercial banking. I think that’s a good thing. However, I have a critical caveat. What could very easily happen is that the definition of “hedging” in the final Volcker Rule could be so broad as to allow unchecked speculation costumed as hedging. We have already seen the difficult duplexity that was created with the repeal of Glass-Steagall when a couple of banks had the incentive and bet against their own customers and settled for hundreds of millions of dollars with the SEC. Remember in Wall Street (1987) just before Bud—Charlie Sheen—is arrested? Lou Mannheim—Hal Holbrook—says, “The problem with money, Bud, is that it makes you do things you don’t want to do.” If banks continue to speculate for themselves, and watch out if they bet against their customers ever again, I think that may mark the beginning of the end for big banks. The populace and those in government will come back like a Rambo movie (1982, 1985, 1988, and 2008). And frankly, I’d be in the camp saying “You go, Rambo.””

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

On October 26, 2011, the Commission filed an enforcement action in SEC v. Andrey C. Hicks and Locust Offshore Management, LLC, 1:11-cv-11888-RGS (D. Mass. 2011) (the “Locust Matter”). The SEC alleged in its complaint that the defendants, Andrey C. Hicks (“Hicks”) and Locust Offshore Management, LLC (“Locust”), committed fraud in connection with the offer and sale of shares in the Locust Offshore Fund, Ltd. (the “Fund”), a pooled investment fund purportedly incorporated in the British Virgin Islands (“BVI”), which turned out to be wholly fictitious. On March 20, 2012, the U.S. District Court for the District of Massachusetts entered final judgments in favor of the Commission after default was entered against the defendants. Among other relief, the court held both defendants jointly and severally liable for disgorgement and prejudgment interest in the amount of $2,512,058.39. In addition, the court imposed a civil penalty on Locust Offshore Management, LLC in the amount of $2,512,058.39, and a civil penalty on Andrey C. Hicks in the amount of $2,512,058.39.

The SEC ordered that three whistleblowers shall each receive 5% of the monetary sanctions collected. “Monetary sanctions” means any money, including penalties, disgorgement, and interest, ordered to be paid and any money deposited into a disgorgement fund or other fund pursuant to Section 308(b) of the Sarbanes-Oxley Act of 2002 as a result of a Commission action or a related action. So it appears  each whistleblower stands to receive around $125,000 if collected, or  about $376,000 in total.

The claim of a fourth whistleblower was denied.  The SEC determined the information was not “original information” because it was not submitted after July 21, 2010, the date that Section 21F was added to the Exchange Act by the Dodd-Frank Wall Street Reform and Consumer Protection Act.   The SEC further concluded that the information provided by the fourth claimant after July 21, 2010 did not lead to the successful enforcement of the Locust Matter because it neither caused the SEC to open its investigation nor significantly contributed to the success of the enforcement action.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.