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

The Consumer Financial Protection Bureau, or CFPB, is convening a hearing to gather information and input on the payday lending market. The CFPB has also published its Short-Term, Small-Dollar Lending Procedures – a field guide CFPB examiners will use to make sure payday lenders – banks and nonbanks – are following federal consumer financial laws.

The Short-Term, Small Dollar Lending Procedures describe the types of information that the agency’s examiners will gather to evaluate payday lenders’ policies and procedures, assess whether lenders are in compliance with federal consumer financial laws, and identify risks to consumers throughout the lending process. The procedures track key payday lending activities, from initial advertisements and marketing to collection practices.

The CFPB will be implementing its payday lending supervision program based on its assessment of risks to consumers, including consideration of factors such as the volume of business and the extent of state oversight. The CFPB also will be coordinating with federal and state partners to maximize supervisory capability and minimize regulatory burden. If a violation of a federal consumer financial law has occurred, the CFPB will determine whether supervisory or enforcement actions are appropriate.

In general, CFPB supervision will include gathering reports from and conducting examinations of bank and nonbank activities. The examination process will begin with scoping, review of information, and data analysis followed by onsite examinations. The CFPB will be in regular communication with supervised entities, and it will conduct follow-up monitoring.

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The Consumer Financial Protection Bureau, or CFPB, has adopted a rule that will increase protections for consumers who transfer money internationally. Under the new rule, remittance transfer providers will generally be required to disclose the exchange rate and all fees associated with a transfer so that consumers know exactly how much money will be received on the other end. The rule also requires remittance transfer providers to investigate disputes and remedy errors.

Consumers transfer tens of billions of dollars from the United States to foreign countries each year. According to the CFPB, these transactions can involve undisclosed fees and exchange rates that result in less money for the intended recipients. The CFPB believes those sending the money may not know how much the recipient will actually receive because the fees and exchange rates can be obscured in the transfer.

Prior to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, international money transfers were generally excluded from existing federal consumer protection regulations. To remedy this, the Dodd-Frank Act expanded the scope of the Electronic Fund Transfer Act to provide protections for senders of remittance transfers, and mandated that rules implementing certain provisions of the new protections be issued by January 21, 2012.

Under the Bureau’s rule, remittance transfer providers must disclose the fees, the exchange rate, and amount to be received by the recipient. Disclosures must generally be provided when the consumer first requests a transfer and again when payment is made. Consumers will generally have 30 minutes after payment is made to cancel a transaction.

Dodd-Frank transferred authority to implement the new requirements from the Federal Reserve Board to the CFPB in July 2011. The Federal Reserve Board issued a proposed rule in May 2011. The final rule provides for a one-year implementation period. In issuing the final rule, the CFPB considered the Federal Reserve Board’s proposed rule and comments that were received.

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The SEC staff has issued frequently asked questions on the SEC’s rule regarding exemption of family offices from registration under the Investment Adviser Act.  The Dodd-Frank Act required the SEC to adopt this exemption.

 

Some highlights of the FAQs include:

  • A board comprised of independent board members that are less than a majority does not preclude reliance on the family office exemption.
  • A non-family client owning non-voting shares would cause the office to lose its qualification as a family office under the rule.
  • The key employee definition does not include key employees of a family-owned operating company that is not a family office.
  • In-laws do not qualify as family members when they are related through the spouse of the common ancestor or through spouses or spousal equivalents that are family members.
  • The definition of family member does not include descendants of a stepchild whose parent later divorced the family member stepparent.
  • Examples of spousal equivalents include same-sex domestic partners as well as opposite sex partners that have determined not to marry even though they live together in a relationship generally equivalent to married couples.
  • Activities such as providing non-advisory services (such as catering, tax filing, accounting, housekeeping) to non-family members do not affect the determination of whether or not the family office may rely on the rule.  However, advisory services cover a broad range of activities and a family office should consider carefully whether any of the services it provides to non-family members are advisory services that make it subject to the Advisers Act.

 

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The ABA submitted a no-action letter request to the SEC to clarify certain investment adviser registration matters following the Dodd-Frank Act with respect to private equity and hedge fund advisers.  The SEC response can be found here.

Section 203(a) of the Investment Advisers Act generally provides that it is unlawful for an investment adviser to engage in business without registering under that Act, unless an exemption is available. Section 202(a)(11) of the Investment Advisers Act defines the term “investment adviser” broadly to include any person who for compensation provides advice about securities as part of a regular business. This definition is sufficiently broad to include not only a corporation, partnership or sole proprietorship doing business as an investment adviser, but also many of the adviser’s employees. Nevertheless, the SEC and its staff have, as a matter of administrative practice, not required natural persons associated with a registered adviser to themselves register separately solely as a result of their activities as associated persons.   The SEC has treated the registered adviser’s registration with the SEC as effectively covering these associated persons.

In a December 8, 2005 letter addressed to the American Bar Association’s Subcommittee on Private Investment Entities (“2005 Staff Letter”), the staff took a similar approach with respect to certain special purpose vehicles (“SPVs”) created by a registered adviser.   In that letter, the staff stated that it would not recommend enforcement action to the SEC under section 203(a) or section 208(d) of the Advisers Act against a registered adviser and an SPV if the SPV does not separately register as an investment adviser, subject to the following representations and undertakings (collectively, the “2005 Conditions”):

  • the investment adviser to a private fund establishes the SPV to act as the private fund’s general partner or managing member;
  • the SPV’s formation documents designate the investment adviser to manage the private fund’s assets;
  • all of the investment advisory activities of the SPV are subject to the Advisers Act and the rules thereunder, and the SPV is subject to examination by the Commission;  and
  • the registered adviser subjects the SPV, its employees and persons acting on its behalf to the registered adviser’s supervision and control and, therefore, the SPV, all of its employees and the persons acting on its behalf are “persons associated with” the registered adviser (as defined in section 202(a)(17) of the Advisers Act).

Subject to the 2005 Conditions, the SPV would look to and essentially rely upon the registered adviser’s registration with the Commission in not submitting a separate Form ADV.

The ABA submitted the no-action request as a result of the Dodd-Frank Act’s repeal of the exemption previously provided by section 203(b)(3) of the Advisers Act The ABA inquired whether the 2005 Staff Letter continued to represent the position of the staff.

In response, the SEC staff noted, among other things:

  • The 2005 Staff Letter continues to represent the staff’s position.
  • The position expressed in the 2005 Staff Letter is not limited to a registered adviser with a single SPV.
  • The staff would not recommend enforcement action to the SEC against a registered adviser and its SPV(s) if the only persons acting on an SPV’s behalf that the registered adviser does not supervise and control are directors who are independent of the registered adviser.
  • The SEC staff will not recommend enforcement action to the SEC against an investment adviser that files a single Form ADV (“filing adviser”) on behalf of itself and each other adviser that is controlled by or under common control with the filing adviser that is registering through a single registration with the filing adviser (each, a “relying adviser”)  where the filing adviser and each relying adviser collectively conduct a single advisory business.

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The Dodd- Frank Wall Street Reform and Consumer Protection Act required GAO to review several aspects of the municipal securities market, including the mechanisms for trading, price discovery, and price transparency. Accordingly, GAO has issued a report that report examines:

  • municipal security trading in the secondary market and the factors that affect the prices investors receive, and
  • the SEC’s and self- regulatory organizations’, or  SROs, enforcement of rules on fair pricing and timely reporting. For this work, GAO analyzed trade data, reviewed federal regulators’ programs for enforcing trading rules, and interviewed market participants and federal regulators.

GAO recommends that SEC collect and analyze information on SROs’ fixed-income regulatory programs on an ongoing basis to better inform its risk-based inspection approach. SEC agreed, but noted it would need additional resources to conduct more frequent oversight of the SROs

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The FDIC has approved a notice of proposed rulemaking, or NPR, that would require certain large insured depository institutions to conduct annual capital-adequacy stress tests. The proposal, to implement section 165(i)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, would apply to FDIC-insured state nonmember banks and FDIC-insured state-chartered savings associations with total consolidated assets of more than $10 billion. The FDIC regulated 23 state non-member banks with total assets of more than $10 billion as of Sept. 30, 2011.

The stress tests would provide forward-looking information that would assist the FDIC in assessing the capital adequacy of the banks covered by the rule. According to the FDIC, the banks that would be required to conduct the stress tests also are expected to benefit from improved internal assessments of capital adequacy and overall capital planning.

The NPR defines “stress test” as a process to assess the potential impact of economic and financial conditions on the consolidated earnings, losses and capital of the bank over a set planning horizon, taking into account the current condition of the bank and its risks, exposures, strategies, and activities. The NPR describes the content of the reports institutions are required to publish, and the timeline for conducting the stress tests and producing the required reports.

The Dodd-Frank Act requires each primary federal financial regulator, including the FDIC, to issue consistent and comparable stress-testing regulations for financial companies with total consolidated assets of more than $10 billion. In terms of its requirements, the NPR is substantively similar to a proposal the Federal Reserve published in December 2011.

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The FDIC has approved a final rule requiring an insured depository institution with $50 billion or more in total assets to submit to the FDIC periodic contingency plans for resolution in the event of the institution’s failure. These resolution plans will inform the FDIC’s ability, as receiver, to resolve the institution in a manner that ensures that depositors receive access to their insured deposits within one business day of the institution’s failure (two business days if the failure occurs on a day other than a Friday), maximizes the net-present-value return from the sale or disposition of its assets, and minimizes the amount of any loss to be realized by the institution’s creditors. The plans will supplement the FDIC’s own resolution planning work with information that would help facilitate an orderly resolution in the event of failure.

The final rule, adopted by the Board under the Federal Deposit Insurance Act, is a complement to separate joint rulemaking with the Federal Reserve that the FDIC Board approved in September 2011 under Section 165(d) of the Dodd-Frank Act. The Section 165(d) rule requires certain systemically important nonbank financial companies and bank holding companies to prepare resolution plans – the so-called “living wills” – for such entities to be resolved in an orderly manner under the Bankruptcy Code.

The final rule for insured depository institutions was preceded by an interim final rule adopted in September 2011. The interim final rule became effective on Jan. 1, 2012, and will remain in effect until it is superseded by this final rule effective April 1, 2012. The final rule includes several modifications that were made in response to comments received, including modifications to more closely align the final rule with the Section 165(d) rule.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

GAO has issued a report under Section 919A of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires that requires GAO to identify and examine potential conflicts of interest between investment banking and both equity and fixed-income (debt) research staff in the same firm. The report examines:

  • the effectiveness of the regulatory actions taken to address research analyst conflicts of interest, and
  • additional actions regulators could take to further address research analyst conflicts.

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Morgan Stanley seeks to exclude the following shareholder proposal submitted on behalf of the Comptroller of the City of New York as custodian and a trustee of several pension funds from its upcoming proxy statement:

“RESOLVED, that shareholders of Morgan Stanley (the “Company”) urge the Compensation Committee (the “Committee”) of the board of directors to strengthen the Company’s compensation clawback policy, as applied to senior executives, by:

  •  Providing that failure to appropriately manage or monitor an employee who engaged in “conduct detrimental to the Company” (as determined by the Committee) or conduct constituting “cause” for termination will support recovery of compensation; and
  •   Requiring disclosure in a filing on Form 8-K of any decision by the Committee or full board on whether or not to exercise the Company’s right to recover any particular award of compensation.

These amendments should operate prospectively and be implemented in a way that does not violate any contract, compensation plan, law or regulation.

“Recovery” of compensation includes cancellation, forfeiture and recapture.

“Conduct detrimental to the Company” includes causing a significant financial loss or other reputational harm to the Company or one of its businesses.”

Morgan Stanley seeks to exclude the proposal because:

  • the proponents have submitted more than one proposal;
  • the company has already substantially implemented the Proposal;
  • the proposal is impermissibly vague and indefinite so as to be misleading in violation of Rule 14a-9; and
  • the proposal deals with matters relating to the ordinary business operations of the Company.

The Company notes that although the proposal is in the form of a single submission, it consists of multiple parts. The proposal urges, first, that the Company’s clawback policy provide that certain failures of management or monitoring will support recovery of compensation and, second, that disclosure on Form 8-K be required for any decision by the Compensation, Management Development and Succession Committee or full board of directors on whether or not to exercise the Company’s right to recover any particular award of compensation.

The Company also argues it has established clawback provisions and procedures that permit recovery in these circumstances.  Therefore the proposal has already been implemented.

Finally the Company believes the proposal is vague and indefinite.   It is unclear from the proposal whether the proponents are requesting that the Company “strengthen” its current clawback policy by (i) modifying its current policies to include a supervisory element or (ii) creating a new clawback policy separate and distinct from the clawback policies of the Company that are currently in place.

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The case of Dennis v. Hart, before the U.S. District Court for the Southern District of California, is another recent decision regarding litigation resulting from a say-on-pay vote that was not supported by shareholders.  The case relates to PICO Holdings, Inc.

The case was originally filed in state court, and the defendants filed a notice of removal asserting substantial federal questions.  In the motion before the Court, the plaintiff sought relief including damages, injunctive relief, and a “[d]eclaration that the adverse May 13, 2011 advisory shareholder vote on the PICO Board’s 2010 executive compensation rebutted the business judgment surrounding the PICO Board’s decisions to increase executive compensation in 2010.”

In deciding plaintiff’s motion, the court reviewed the Declaratory Judgment Act.   The court noted the language of the Dodd-Frank Act expressly states that it “may not be construed … to create or imply any change to fiduciary duties” nor does it “create or imply any additional fiduciary duties.” See 15 U.S.C. § 78n-1(c). Therefore the court concluded the Dodd-Frank Wall Street Reform Act did not change state law regarding fiduciary duty or the business judgment presumption and dismissed the plaintiff’s claim for declaratory judgment.

Defendants contend that resolution of the plaintiff’s claim for breach of fiduciary duty requires a determination as to whether, under the Dodd-Frank Act, an adverse say-on-pay vote should be interpreted or constructed as evidence of a breach of fiduciary duty.  The court saw it differently and noted to the extent that plaintiff seeks to use the negative say-on-pay vote as evidence that the business judgment presumption was rebutted, resolution of the issue depends on California state law. Therefore federal question jurisdiction did not exist and the case was remanded to state court.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.