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

The CFPB has published the procedures it will use in examining student lenders. The Student Lending Examination Procedures are an extension of the CFPB’s General Supervision and Examination Manual and will be used as a field guide by CFPB examiners to ensure that private student lenders comply with federal consumer financial laws.

The CFPB has the authority to supervise large banks, as well as nonbanks, that make private student loans, and the procedures released today may be used to examine both types of lenders. Examiners will be assessing whether student lenders have the appropriate processes in place to prevent harm to borrowers. Examiners will be looking to verify that lenders are complying with requirements of federal consumer financial law, including:

  •  Using accurate, non-discriminatory advertising or marketing: Examiners will evaluate marketing and advertising materials, such as mail and text messages, telephone solicitation scripts, and agreements and disclosures for the products and services to make sure the materials are not deceptive, misleading, or discriminatory.
  • Making appropriate disclosures: Examiners will assess whether the lender or service provider makes proper, clear disclosures about loan costs and terms at the time of the consumer’s application, loan approval, and loan disbursement as required under special rules for education lending.
  • Providing borrowers with accurate account information: Examiners will determine if the lender or service provider, if required to do so, supplies the borrower with periodic statements that include such information as monthly payment requirements, charges, fees, and interest rate changes.
  • Handling borrower inquiries and complaints: Examiners will determine if a lender or service provider has adequate and effective channels to receive customer questions and complaints. Examiners will also evaluate the systems, procedures, and policies used by the company for tracking, handling, investigating, and resolving consumer inquiries, disputes, and complaints.

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

The CFPB has announced its proposed policy to allow companies to test new consumer disclosures on a case-by-case basis. As part of its Project Catalyst initiative, and in line with its statutory authority, the CFPB’s goal is to encourage banks, credit unions, and other financial services companies to propose and conduct trial disclosure programs.

 Under the proposed policy, the Bureau would approve individual companies, on a case-by-case basis, for limited time exemptions from current federal disclosure laws in order for those companies to research and test informative, cost-effective disclosures. The companies involved will then share the results of their trial disclosure with the CFPB. The CFPB will use that information to improve its disclosure rules and model forms. The public will have input through the rulemaking process.

 When deciding whether or not to grant a company a waiver from current disclosure requirements, the Bureau proposed policy would evaluate a number of factors including:

  • Consumer Understanding: The Bureau will assess how effectively and efficiently the proposed trial will test for potential improvements to consumer understanding about the costs, benefits, and risks of products and services.
  • Cost Effectiveness: The Bureau will evaluate how the proposed trial will help develop more cost-effective disclosure rules or policies.
  • Minimizing Consumer Risk: The Bureau will evaluate the extent to which the program is designed to mitigate any risk to consumers.

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

The CFPB has announced actions to halt two alleged mortgage loan modification scams it believes ripped-off thousands of struggling homeowners across the country. According to the CFPB, these operations took in more than $10 million by charging consumers for services that falsely promised to prevent foreclosures or renegotiate troubled mortgages.

 Violations of the law alleged in the CFPB’s complaints in both cases include:

  • Illegally charged large upfront fees: It is against the law for mortgage relief providers to charge fees before services are provided. However, the defendants in both cases collected fees early on, typically ranging between $1,000 and $4,500 from each distressed homeowner, for services that rarely if ever materialized.
  • Deceptively claimed to be affiliated with government agencies and/or programs: Defendants in both cases used deceptive language and mailings with government logos, letterhead, and/or marks to mislead consumers into believing that their mortgage relief services were sponsored by or associated with government agencies or programs.
  • Misrepresented that they would secure loan modifications for consumers: Defendants misled consumers that the defendants were experienced negotiators who would substantially reduce mortgage payments, and that defendants would identify legal violations by consumers’ banks or mortgage companies to use as leverage in loan modification negotiations. However, it appears that defendants failed to provide meaningful relief for consumers.
  • Instructed consumers to stop paying their mortgages and stop contacting their lenders: Financially distressed consumers were told to avoid interactions with their lenders and to stop mortgage payments because the defendants would provide relief, potentially putting the consumers unknowingly at risk of losing their homes and/or ruining their credit scores.

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

On December 3, 2012, FINRA released a set of FAQs relating to new Rule 5123 (our prior coverage here), which went into effect on December 3 and requires FINRA members to file with FINRA copies of the private placement memorandum, term sheet, or other offering documents used to sell a private placement within 15 days after the date of first sale. For additional background on Rule 5123, you can check out Regulatory Notice 12-40, which includes the full text of the rule.  Here are highlights from the FAQs:

  • Rule 5123 requires that material amendments to the offering documents must also be filed.  FINRA advises that amendments rising to this materiality standard will also typically trigger an offer of rescission to investors, indicating that rescission offers can perhaps be used as a guide to determine when amended offering documents must be filed with FINRA.
  • In a contingency offering, the date of first sale for purposes of computing the 15 day filing deadline will be determined based on the SEC’s guidance on this question (CD&I 257 Question 257.02), which basically states that the date of first sale is the date an investor is irrevocably committed to invest.  Depending on the terms of the offering, that could be the date a subscription agreement is received.
  • Rule 5123 has nothing to do with the content of offering documents, which must comply with the Securities Act and applicable rules – the FINRA rule only requires notice filing of copies of the offering documents used in the offering.
  • Although offerings solely to institutional investors and offerings solely to accredited investors that are entities are exempt from the requirements of Rule 5123, offerings that include sales to accredited investors who are natural persons are not exempt from the rule.
  • FINRA will not require member firms that participate in crowdfunding offerings (under the JOBS Act) to make a filing pursuant to Rule 5123.  Note that the SEC rules relating to crowdfunding are still mostly undeveloped.
  • There are two sets of exemptions from the notice filing requirement – one set, contained in Rule 5123(b)(1), contains exemptions based on the types of investors to whom sales are made and apply on a firm-by-firm basis; in other words, in the same offering, one member firm could escape the notice filing requirement by only selling to institutional investors, while another firm might also sell to a natural person and thereby trigger the filing requirement.  A second set of exemptions, contained in Rule 5123(b)(2), contains exemptions based on the types of securities being sold in the offering; these exemptions apply to all member firms involved in the offering (or none of them).
  • The new notice filings can only be made electronically through the FINRA Firm Gateway filing system.  FINRA has also released a user-guide for this system, and several of the questions in the FAQs relate to how a member firm can request and gain access to Firm Gateway for purposes of making filings.

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

ISS has published a series of frequently asked questions on its new peer group selection method. The FAQs explain the new policies.  The new procedures give weight in some circumstances to an issuer’s self-selected peers. The FAQS therefore provide issuers with an opportunity to advise ISS of any changes in its peer group for consideration by ISS.  The ISS research team will use peer group information supplied solely for the purpose of constructing peer groups. It will not be shared with any other party within or outside of ISS prior to the publication of the report. The list of company peers that ISS used as an input to its peer group construction will be included within the ISS’ proxy research report.

Issuers who wish to notify ISS of changes to their peer group must do so by December 21, 2012.

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

The SEC has approved a Nasdaq rule change regarding issuer disclosure of listing deficiencies. Nasdaq rules provide that when a listed issuer does not meet the exchange’s continued listing standards, Nasdaq notifies the issuer of the deficiency. After a listed issuer receives a Nasdaq staff determination, Nasdaq rules currently require the issuer to make a public announcement disclosing receipt of the notification and the Exchange rules upon which the Nasdaq staff determination is based. Some issuers comply with this requirement by merely disclosing the Nasdaq rule number and a description of such rule, but do not provide additional disclosure to allow the public to understand the deficiency or the underlying basis for it.

The new Nasdaq rule addresses the concern in several ways. First, the Exchange requires issuers to disclose each specific basis and concern cited by Nasdaq in the Nasdaq staff determination. The rule indicates that issuers can provide their own analysis of the issues raised in the Exchange’s delisting determination. Finally, the Nasdaq rules to allow Nasdaq to issue a public announcement if a listed issuer does not make the required announcement or at any level of a proceeding after an issuer receives a Nasdaq staff determination involving an issuer’s listing or trading. For example, if the issuer does not make the public announcement within the allotted time, if the issuer’s public announcement does not contain all of the required information, or if the issuer’s public announcement contains inaccurate or misleading information, Nasdaq may issue a public announcement with the required information.

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

The Iran Threat Reduction and Syria Human Rights Act (ITRA), signed into law on August 10, 2012, added new Section 13(r) to the Exchange Act, requiring issuers that file reports under Section 13(a) of the Exchange Act to disclose in their annual or quarterly reports whether they (or any of their affiliates) have engaged in activities that could lead to sanctions under other existing laws (e.g., the Iran Sanctions Act of 1996) or in transactions with the government of Iran.  The ITRA also requires the SEC to deliver an annual report on the Section 13(r) disclosures to the President.

Issuers required to make the Section 13(r) disclosure must describe the nature and extent of the activity, the gross revenue and net profits attributable to the activity, and whether the issuer or applicable affiliate intends to continue the activity.

This week, the SEC released compliance and disclosure interpretations aimed at clarifying some common questions regarding the scope and applicability of Section 13(r).  The CD&Is (full text here) provide the following clarifications:

  • The new disclosures apply to reports “required to be filed” after February 6, 2013; the SEC interprets this to mean that Section 13(r) applies to all reports for which the filing deadline is after February 6, 2013 – in other words, an issuer can’t avoid compliance with Section 13(r) by filing its 2012 10-K early.
  • Section 13(r) requires disclosure of the specified activities for the entire period covered by the report – even if part of that period predates the ITRA.  For a calendar year filer, this means the 2012 10-K must address activities engaged in between January 1 and December 31, 2012, even though the ITRA only became law in August.
  • The term “affiliate” as used in Section 13(r) has the definition given in Rule 12b-2 under the Exchange Act: “a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.”
  • Negative disclosure is not required for compliance with Section 13(r); if an issuer and its affiliates have not engaged in any of the specified activities, they need not include a statement to that effect.
  • Although there is an exception from the disclosure requirement for certain transactions that have been specifically authorized by a federal department or agency of the U.S. government, this exception does not apply to transactions that have been specifically approved only by a foreign government.
  • Transactions conducted pursuant to a specific Office of Foreign Asset Control (OFAC) license, as well as pursuant to a general OFAC license (which applies not to a specific transaction but to a type or class of transactions) are exempt from disclosure pursuant to Section 13(r), because both specific and general OFAC licenses come within the meaning of approval by a federal department or agency (OFAC is a part of the U.S. Department of the Treasury).
  • The information contained in the Section 13(r) disclosures will be publicly available upon filing, just as the rest of the information in the periodic reports is publicly available.

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

The CFTC staff has issued a no-action letter regarding family offices. The letter states that staff will not recommend that the CFTC take enforcement action against the operators of family offices for failure to register as commodity pool operators, or CPOs, under the Commodity Exchange Act and the CFTC’s regulations, subject to certain conditions described in the letter.

In February 2012, the CFTC promulgated certain amendments to Part 4 of the CFTC’s regulations.  This included the rescission of Regulation 4.13(a)(4), which had previously exempted from registration CPOs who operated a pool for only those individuals who met a certain “qualified eligible person” standard.  In general, family offices relied on Regulation 4.13(a)(4) as an exemption from registration. Pursuant to these recent amendments, absent affirmative relief, the CFTC believes many family offices would be required to register with the CFTC as a CPO.

The no-action letter states the staff will not recommend enforcement action for failure to register with the CFTC as a CPO against any CPO that is a family office as defined by the SEC, provided that the CPO:

  • submits a claim to take advantage of the relief, and
  • remains in compliance with  The SEC’s Rule 202(a)(11)(G)-1 under the Investment Advisers Act, regardless of whether the CPO seeks to be excluded from the Investment Advisers Act.

The relief is not self-executing and the non-action letter states what must be filed with the CFTC to perfect the claim for relief.

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

The CFTC approved new rules today requiring certain credit default swaps (CDS) and interest rate swaps to be cleared by registered derivatives clearing organizations (DCOs). Under the rules, market participants are required to submit the identified swaps for clearing by a DCO as soon as technologically practicable and no later than the end of the day of execution.

Classes of Swaps Required to be Cleared

The CFTC’s clearing determination requires that swaps in four interest rate swap classes and two CDS classes be cleared under section 2(h) of the Commodity Exchange Act and identifies these classes by basic specifications. Although the text of the final rule has not been released, the CFTC’s press release identifies the swap classes and specifications in tabular form. The determination applies only to swaps currently cleared by four DCOs: CME; ICE Clear Credit; ICE Clear Europe; and LCH.Clearnet Ltd.

Implementation of the Clearing Requirement

Under the final rule, market participants must only clear those swaps executed on or after their applicable compliance date. Swap dealers and private funds active in the swaps market will be required to comply beginning on March 11, 2013, for swaps they enter into on or after that date. Accounts managed by third party investment managers, as well as ERISA pension plans, will have until September 9, 2013, to begin clearing swaps entered into on or after that date. All other financial entities will be required to clear swaps beginning on June 10, 2013, for swaps entered into on or after that date.

End User Exception

The end user exception allows non-financial entities hedging commercial risk to elect not to clear swaps subject to the CFTC’s mandatory clearing determination. Market participants electing to utilize the end user exception do not have to comply with the reporting requirements for the exception until September 9, 2013.

The Consumer Financial Protection Bureau, or  CFPB, expects to issue a proposal next month to refine three elements of its rule regarding foreign remittance transfers.  The proposal is expected to cover the following topics:

  • Situations in which a sender provides an incorrect account number to a remittance transfer provider.  The proposal will address the way the rule applies to situations in which a sender provides an incorrect account number to a remittance transfer provider resulting in a remittance transfer being deposited into the wrong account. The CFPB intends to propose that where the provider can demonstrate that the consumer provided the incorrect information, the provider would be required to attempt to recover the funds but would not be liable for the funds if those efforts are unsuccessful.
  • Disclosure of third party fees and foreign taxes. The CFPB plans to propose revisions to the rule’s disclosure provisions concerning foreign taxes and fees assessed by the financial institution receiving the transfer. The proposal would provide additional flexibility around these requirements, including by permitting providers to base fee disclosures on published bank fee schedules and by providing further guidance on foreign tax disclosures where certain variables may affect tax rates.
  • Disclosure of regional and local taxes assessed in foreign countries. The CFPB also plans to propose that the obligation for providers to disclose foreign taxes imposed on remittance transfers is limited to taxes imposed at the national level, and does not encompass taxes that may be imposed by foreign, sub-national jurisdictions.

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