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

The Consumer Financial Protection Bureau, or CFPB, has begun accepting consumer complaints about credit reporting, giving consumers individual-level complaint assistance for the first time at the federal level.

The CFPB believes consumers should first file a dispute with the credit reporting company and get a response from the consumer reporting agency itself. The CFPB believes there are important consumer rights guaranteed by federal consumer financial law that may be best preserved by first going through the credit reporting company’s complaint process. Once that process is complete, if the consumer is dissatisfied with the resolution or if the consumer reporting agency does not respond, the CFPB states it is available to assist.

The CFPB also accepts complaints on credit cards, mortgages, bank accounts and services, consumer loans, and private student loans.

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 adopted rule 17Ad-22  that establishes standards for how registered clearing agencies should manage their risks and run their operations.

The rule was adopted in accordance with the Securities Exchange Act of 1934 and the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd Frank Act provides the SEC with additional authority to establish standards for clearing agencies, including for those clearing agencies that clear security-based swaps.

The new rule would require registered clearing agencies that provide central counterparty services to maintain certain standards with respect to risk management and operations. Among other things, the rules would set standards with respect to measurement and management of credit exposures, margin requirements, financial resources and margin model validation. The rule also establishes certain recordkeeping and financial disclosure requirements for all registered clearing agencies as well as several new operational standards for these entities.

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

The staff of the SEC has reported that 1,504 advisers to hedge funds and other private funds have registered with the agency since the Dodd-Frank Wall Street Reform and Consumer Protection Act mandated such registration.

A total of 11,002 investment advisers now are SEC-registered, with 37% advising hedge funds and other private funds. Assets under management at SEC-registered advisers has risen about $5.7 trillion, or 13%, even though the number of advisers fell about 15% as the Dodd-Frank Act required mid-sized advisers to move from federal to state oversight.

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

This is our second post examining some of the comment letters the SEC has received in response to proposed Rule 506(c) – we reviewed the SEC’s Investment Advisory Committee recommendations here.

This post provides an overview of comment letters submitted by the North American Securities Administrators Association (NASAA) dated October 3, 2012, the Consumer Federation of America dated October 3, 2012, and the American Federation of Labor and Congress of Industrial Organizations / Americans for Financial Reform (AFL-CIO/AFR) dated October 5, 2012.

From the NASAA Comment Letter:

  • “In 2011, fraudulent Rule 506 offerings were ranked as the most common product or scheme leading to enforcement actions by state securities regulators” and are among the most common traps for investors.
  • State securities regulators are the primary enforcers of anti-fraud provisions, even in regards to Rule 506 offerings: the SEC initiated 124 total “securities offerings” enforcement actions in 2011, while state regulators took more than 200 enforcement actions relating to Rule 506 offerings alone.
  • “As of the date of the Report, the Commission had never brought a single action against a company for violating Rule 503 by failing to file the required Form D, and we are unaware of any subsequent enforcement actions to enforce the filing requirements. However, state regulators routinely review Form D to ensure that the offerings actually qualify for an exemption under Rule 506 and to look for “red flags” that may indicate a fraudulent offering.”
  • A Form D filing should be required prior to public advertising in order to put state securities regulators on notice that a general solicitation offering will be taking place (otherwise a state regulator who sees a public advertisement will have no way of knowing if it is part of a Rule 506 compliant offering or is a part of an unregistered offering, non-exempt public offering).
  • Even though the JOBS Act directed the SEC to “require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as are determined by the Commission,” the SEC has utterly failed to fulfill the second part of this mandate – determining appropriate methods. Since the SEC has only parroted the “reasonable steps” language from the JOBS Act, state regulators will be stuck making case by case judgment calls, resulting in inconsistent interpretations, state to state, and in increased litigation.
  • The SEC should adopt non-exclusive safe harbors for verification of accredited investor status in order to provide regulators and market participants with some certainty.  The NASAA provides several proposals for safe harbors, including reliance on broker-dealers for verification.
  • The NASAA is dismayed by the SEC’s willingness to implement the provisions of the JOBS Act allowing the use of general solicitation without also fulfilling the requirement of the JOBS Act that the SEC adopt rules to disqualify bad actors from using general solicitation in private offerings.
  • The SEC should place reasonable restrictions on the content of the advertising that can be used,  similar to the restrictions described in CF Disclosure Guidance: Topic No. 3 (released in December 2011) – for example, requiring a balanced presentation of risks and rewards of the potential investment, and requiring that any statements contained in the advertising be consistent with offering documents. One concern is that “puffing” type claims that are permissible in the advertising world generally could result in securities law liability for unwary issuers. With respect to private funds, there should be a separate set of rules comparable to restrictions that apply to mutual funds, similar in content to Rule 482, the standard from Rule 156, and Rule 206-4(8).

From the AFL-CIO / AFR Comment Letter, in addition to several of the same points raised by the NASAA letter:

  • The SEC should update the accredited investor definition as a basic safeguard, and should consider restricting Rule 506 offerings that use general solicitation to a new defined subset of accredited investors, called “Large Accredited Investors” that would satisfy higher threshold amounts, such as a net worth of $2.5 million or income of at least $400,000.
  • The SEC should prohibit private funds relying on the exemptions in Sections 3(c)(1) and (7) of the Investment Company Act – the entities that use Rule 506 offerings the most often – from using general solicitation, because the congressional intent for the lift of the ban on general solicitation was clearly aimed at small businesses rather than hedge funds and private equity funds.
  • The SEC should require that any advertising materials an issue intends to use in connection with an offering be pre-filed with the SEC (similar to FINRA’s requirement that broker-dealers pre-file similar materials) and create and/or enhance record keeping requirements with respect to matters such as investor qualifications and advertisements actually used in the offering.

From the Consumer Federation of America Comment Letter, in addition to points already discussed:

  • The SEC has unnecessarily restricted the scope of its proposed rule and its request for comments: “Unaccountably, the Commission only requests comment on its proposed approach to verification of accredited investor status and its proposed addition of a checkbox to Form D, dismissing without justification other issues and alternative regulatory approaches that have been brought to its attention.”
  • The SEC already fails to devote sufficient resources to oversight of Rule 506 offerings, and has repeatedly failed to take action in the face of rule violations, as noted in a 2009 Inspector General’s report.  The “reasonable steps” standard proposed by the SEC will be difficult to enforce and will further overwhelm the SEC’s enforcement resources.
  • If an issuer relies on a third party to verify that an investor is an accredited investor, the third party should be under obligations to maintain the accuracy of its information and safeguard investor data, at a minimum.
  • The accredited investor definition should be broadened to require financial sophistication, not just a relatively high income or net worth, which are not reliable indicators of investment experience and have not been appropriately adjusted in the three decades since they were originally proposed.

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

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) which, among other things, amended certain provisions of the Investment Advisers Act.  These amendments included provisions that delegate generally to the states regulatory responsibility over certain mid-sized advisers – i.e., those that have between $25 million and $100 million of assets under management.  These provisions and related rule amendments required a significant number of advisers registered with the SEC to withdraw their registrations with the SEC and to switch to registration with one or more state securities authorities.

SEC staff, in coordination with state securities regulators, contacted SEC registered investment advisers before and after relevant filing deadlines to remind them of their filing obligations  to withdraw from SEC registration by filing Form ADV-W if no longer eligible. The registrants listed in the Appendix to a recent SEC notice either have not filed a Form ADV amendment with the SEC in 2012, or have indicated on Form ADV that they are no longer eligible to remain registered with the SEC as investment advisers but have not filed Form ADV-W to withdraw their registration. Accordingly, the SEC believes that reasonable grounds exist for a finding that these registrants are no longer in existence, are not engaged in business as investment advisers, or are prohibited from registering as investment advisers under section 203A of the Investment Advisers Act, and that their registrations should be cancelled pursuant to section 203(h) of the Investment Advisers Act.

Any registrant listed in the Appendix to the SEC notice that wishes to file a Form ADV amendment indicating that it is eligible for registration or a Form ADV-W to withdraw its registration with the SEC may do so by December 17, 2012. The registrations of registrants whose amended Form ADVs are received by the Commission by December 17, 2012 will not be cancelled, and the registrations of registrants that file Form ADV-W will be withdrawn and will not be cancelled by an SEC order or orders.

At any time after December 17, 2012, the SEC may issue an order or orders cancelling the registrations of any or all of the registrants listed in the Appendix to the SEC notice.

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

On October 15, the Investor Advisory Committee (IAC) established by Section 911 of the Dodd-Frank Act released its recommendations to the SEC on the proposed general solicitation rule. This is the first of several posts over the next few days that will examine some of the comment letters the SEC has received in response to proposed Rule 506(c).

According to its website, the purpose of the IAC is “to advise the Commission on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, and on initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace. The Dodd-Frank Act authorizes the committee to submit findings and recommendations for review and consideration by the Commission.”

In brief, here are the recommendations of the IAC:

  • As a precondition for claiming the new general solicitation exemption, issuers should be required to file a new “Form GS” or a revised version of Form D that would include data relating to control persons, the identity of the issuer’s accountants and legal counsel, a description of the business and proposed use of proceeds, and a description of the issuer’s plans with respect to general solicitation.
  • Copies of all materials used in the general solicitation should be provided to the SEC either before or shortly following the first sale.
  • The SEC should provide clear and enforceable safe harbors for verifying accredited investor status, including safe harbors relating to the use of third parties for verification, to replace the facts and circumstances “reasonable steps” standard that the SEC has proposed.
  • Filing Form D should be a condition for relying on the Regulation D exemption (currently Form D is required to be filed, but it is not actually a condition to the exemption).
  • The SEC should take steps to ensure that any performance claims used in general solicitation materials “are based on a clear, well-defined, and auditable standard.”
  • The SEC should revise the natural person prong of the accredited investor definition to better align the definition with persons who have the financial sophistication to analyze private offerings and/or sufficient wealth to withstand losses. The IAC acknowledges that the SEC is prohibited from adjusting the net worth portion of the definition until 2014, but asserts that other revisions to the accredited investor definition are possible now.
  • The SEC should adopt the “bad actors” rule that was proposed in May 2011 pursuant to Section 926 of the Dodd-Frank Act.  The IAC feels that all rules relating to offerings using general solicitation should take effect at the same time, including the proposed rule that would disqualify bad actors from taking advantage of the general solicitation exemption.

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 the Comptroller of the Currency, or OCC, has issued a bulletin to provide guidance to national banks and federal savings associations with  $10 billion or less in total assets on using stress testing to identify and quantify risk in loan portfolios and help establish effective strategic and capital planning processes.

The OCC believes that community banks, regardless of size, should have the capacity to analyze the potential impact of adverse outcomes on their financial conditions. The OCC’s guidance describes various types of stress test methods that community banks may use and provides one example of a simple stress test framework to consider. The OCC encourages community banks to adopt a stress test method that fits their unique business strategy, size, products, sophistication, and overall risk profile.

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

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 directed the SEC to engage an independent consultant to conduct a broad and independent assessment of the SEC’s internal operations, structure, funding, and the agency’s relationship with Self-Regulating Organizations. Issued in March 2011, the consultant’s study, prepared by Boston Consulting Group, or BCG, provided recommendations designed to increase the SEC’s efficiency and effectiveness. The SEC has provided the third of four agency reports to Congress pursuant to the requirements of section 967(c) of the Dodd-Frank Act.  Section 967(c) requires periodic reports on the “implementation of the regulatory and administrative recommendations contained in” the consultant’s report required by section 967(b) of the Dodd-Frank Act.

The SEC notes that the BCG recommendations provided the SEC with an opportunity to assess and implement improvements to the agency’s core internal infrastructure:

  • redesigning organizations,
  • enhancing risk management capabilities and internal controls,
  • strengthening the agency’s understanding of its workforce strengths,
  • improving processes to improve customer service, managing resources, and
  • building valuable capabilities.

The report states that over the past 18-months, the SEC has made significant strides in responding to all of the recommendations. The report also notes that all major Divisions and Offices have undertaken process improvement initiatives to improve the effectiveness and timeliness of their activities and to make more effective use of resources.

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

The Consumer Financial Protection Bureau, or CFPB, has  proposed updates to existing regulations that it believes would make it easier for spouses or partners who do not work outside of the home to qualify for credit cards.  The proposal would allow a stay-at-home spouse or partner to rely on shared income from his or her spouse or partner when applying for a credit card account.

The Credit Card Accountability Responsibility and Disclosure Act, or CARD Act, became law in 2009.  The CARD Act requires that card issuers evaluate a consumer’s ability to make the necessary payments before opening a new credit card account. Under current CARD Act regulations issued by the Federal Reserve, a card issuer generally may only consider the individual card applicant’s income or assets.

The CFPB’s proposed revision would allow credit card applicants who are 21 or older to rely on third-party income to which they have a reasonable expectation of access.  Although the proposal applies to all applicants regardless of marital status, the CFPB expects that it will ease access to credit particularly for stay-at-home spouses or partners who have access to a working spouse or partner’s income.

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

The Securities and Exchange Commission has proposed rules regarding capital, margin, and segregation requirements for security-based swap dealers and major security-based swap participants.

The proposed rules are required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which authorizes the SEC and other regulators to put in place a comprehensive framework for regulating the over-the-counter swaps markets.

Under the Dodd-Frank Act, the SEC must impose margin and capital requirements to help ensure the safety and soundness of security-based swap dealers and major security-based swap participants. The margin rules are required to be appropriate for the risk associated with security-based swaps that are not “cleared” by a security-based swap clearing agency. The proposed segregation rules are intended to facilitate the prompt return of customer property to customers before or during a liquidation proceeding if a security-based swap dealer fails.

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