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

The CFPB has announced the second phase of its Know Before You Owe mortgage project, which will combine the two forms consumers get before finalizing a home loan into a single, easy-to-understand mortgage closing document. The CFPB is asking for public feedback on two alternative prototypes, which are designed to clearly explain the final details of the loan and closing costs.

Current federal law says that at or before closing on a mortgage loan, borrowers generally must be given two documents – the federal Truth in Lending Disclosure and the HUD-1 Settlement Statement. The CFPB is now combining these two forms. The CFPB is also consolidating other new and current federal mortgage disclosure requirements – boiling down unnecessary paperwork by as much as 50 percent.  The mortgage closing document prototypes build upon the feedback received in the first phase of the Know Before You Owe mortgage project, which focused on the loan estimates consumers receive shortly after they apply for a mortgage.

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

Raj Date, Special Advisor to the Secretary of the Treasury for the Consumer Financial Protection Bureau, or CFPB, recently provided written testimony to the Subcommittee on Financial Institutions and Consumer Credit Committee on Financial Service, United States House of Representatives.

Mr. Date noted one of the CFPB’s central responsibilities is to identify and address outdated, unnecessary, or unduly burdensome regulations. The CFPB has a unique opportunity to streamline and simplify rules to ensure that they are truly making consumer financial markets work better. The CFPB has inherited from other agencies numerous regulations, many of which have been on the books for years. Changes in technology, market practices, and the legal landscape may have caused some of these rules to be obsolete, unnecessary, redundant, or counterproductive.

Mr. Date announced the CFPB will initiate a targeted review of these rules in search of ways to update and streamline the regulations. Consistent with the CFPB’s philosophy, it will ask the public to participate in this process from the beginning. The CFPB will invite public input to identify specific rules that should be priority candidates for review, to provide a fact base to help the CFPB evaluate the costs, benefits, and impacts of those rules, and to suggest alternatives that may achieve the goals of the underlying statute at a lower cost.

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

The Municipal Securities Rulemaking Board, or MSRB, has launched an online “toolkit” for state and local governments as part of its work to protect municipal entities under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The MSRB is providing information to state and local governments about issuing bonds as it relates to regulations governing financial professionals, as well as instructions for using the MSRB’s Electronic Municipal Market Access (EMMA®) website. The EMMA website allows state and local governments to easily make bond disclosure documents available to the public.

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

The Consumer Financial Protection Bureau, or CFPB, has outlined plans to provide advance notice of potential enforcement actions to individuals and firms under investigation. The Early Warning Notice process allows the subject of an investigation to respond to any potential legal violations that CFPB enforcement staff believe have been committed before the CFPB ultimately decides whether to begin legal action.

The Early Warning Notice process is modeled on similar procedures that have been successful at other federal agencies. It begins with the Office of Enforcement explaining to individuals or firms that evidence gathered in a CFPB investigation indicates they have violated consumer financial protection laws. Recipients of an Early Warning Notice are then invited to submit a response in writing, within 14 days, including any relevant legal or policy arguments and facts.

The Early Warning Notice is not required by law, but CFPB believes it will promote even-handed enforcement of consumer financial laws. The decision to give notice in particular cases is discretionary and will depend on factors such as whether prompt action is needed.

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

The Dodd-Frank Act established the Financial Stability Oversight Council, or FSOC, for the purpose of monitoring risks to the stability of the U.S. financial system.  Working with other regulators, FSOC will gather information from many sectors of the financial system for this purpose. In order to assist FSOC in this process, the Dodd-Frank Act directs the SEC to collect information from advisers to hedge funds and other private funds as necessary for FSOC’s assessment of systemic risk. The SEC and CFTC have adopted Form PF to implement this requirement.

Form PF elicits non-public information about private funds and their trading strategies, the public disclosure of which could adversely affect the funds and their investors. The SEC does not intend to make public Form PF information identifiable to any particular adviser or private fund, although the SEC may use Form PF information in an enforcement action. The Dodd-Frank Act amends the Investment Advisers Act to preclude the SEC from being compelled to reveal this information except in very limited circumstances. Similarly, the Dodd-Frank Act exempts the CFTC from being compelled under FOIA to disclose to the public any information collected through Form PF and requires that the CFTC maintain the confidentiality of that information consistent with the level of confidentiality established for the SEC in section 204(b) of the Investment Advisers Act. The Commissions will make information collected through Form PF available to FSOC, as the Dodd-Frank Act requires, subject to the confidentiality provisions of the Dodd-Frank Act.

The Dodd-Frank Act contemplates that Form PF data may also be shared with other Federal departments or agencies or with self-regulatory organizations, in addition to the CFTC and FSOC, for purposes within the scope of their jurisdiction.  In each case, any such department, agency or self-regulatory organization would be exempt from being compelled under FOIA to disclose to the public any information collected through Form PF and must maintain the confidentiality of that information consistent with the level of confidentiality established for the SEC in section 204(b) of the Investment Advisers Act.  Prior to sharing any Form PF data, the SEC also intends to require that any such department, agency or self-regulatory organization represent to the SEC that it has in place controls designed to ensure the use and handling of Form PF data in a manner consistent with the protections established in the Dodd-Frank Act.

Certain aspects of the Form PF reporting requirements also help to mitigate the potential risk of inadvertent or improper disclosure. For instance, because data on Form PF generally could not, on its own, be used to identify individual investment positions, the ability of a competitor to use Form PF data to replicate a trading strategy or trade against an adviser is limited.  In addition, the deadlines for filing Form PF have, in most cases, been significantly extended from the proposal.

In addition, the SEC staff is working to design controls and systems for handling of Form PF data in a manner that reflects the sensitivity of this data consistent with the confidentiality protections established in the Dodd-Frank.  This will include programming the Form PF filing system with appropriate confidentiality protections.

In advance of the compliance date for Form PF, SEC staff will review the controls and systems in place for the use and handling of Form PF data.  SEC staff is also carefully considering the other recommendations of commenters in designing controls and systems for Form PF. Depending on the progress at that time toward the development and deployment of these controls and systems, the SEC will consider whether to delay the compliance date for Form PF.

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

The Dodd-Frank Act amended the Sarbanes-Oxley whistleblower provisions. The Department of Labor has published interim final rules to take into account the amendments.  According to the DOL, the regulatory revisions reflect the statutory amendments and also seek to clarify and improve OSHA’s procedures for handling Sarbanes-Oxley whistleblower claims. The DOL also believes these revised regulations are designed to be consistent with the procedures applied to claims under other whistleblower statutes administered by OSHA.

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

The Municipal Securities Rulemaking Board, or MSRB, today filed amendments to its proposal regarding the duties of underwriters to state and local government issuers under the MSRB’s “fair dealing” rule.  The proposal is a key piece of the MSRB’s rulemaking initiatives to protect issuers in the municipal market, which is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Our analysis on the original proposal can be found here.

The MSRB’s proposal, which is awaiting approval from the SEC, would for the first time establish detailed obligations of underwriters of municipal securities to their state and local government clients regarding clear disclosure of risks and conflicts of interest, among other things.

The amendments, which in part address comments received from market participants, would enhance certain disclosure requirements for underwriters as well as clarify the risks disclosure part of the proposal. The amendments would require more robust disclosures from underwriters to state and local government issuers regarding the underwriter’s role, compensation and actual or potential conflicts of interest. 

Among the required disclosures would be a statement that, although the underwriter has a duty to deal fairly with the issuer, unlike a municipal advisor, the underwriter does not have a federal fiduciary duty to the issuer. An underwriter would also be required to disclose whether its compensation is contingent upon the closing of the transaction and that contingent fee compensation presents a conflict of interest, as it may cause the underwriter to recommend a transaction that it is unnecessary or larger than necessary.

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

The SEC has proposed rules mandated by the Dodd-Frank Act that would require new disclosures by public companies concerning conflict minerals that originated in the Democratic Republic of the Congo or an adjoining country.  Final rules have not yet been adopted.  However, some recent developments are noted below.

Recently the SEC held a public roundtable to address the agency’s required conflict minerals rulemaking under Section 1502 of the Dodd-Frank Act.  PLI’s Securities Law Practice Center has a summary of the roundtable.

Compliance Week outlines a study done at Tulane University, which notes that  the aggregate cost to comply with the Dodd-Frank Act’s conflict minerals rule, as it is currently proposed, could run as high as $7.93 billion, dwarfing the Securities and Exchange Commission’s $71.2 million estimate of the costs for companies to comply with the reporting requirement.

Finally, TheCorporateCounsel.net’s Proxy Season Blog highlights a memo outlining recent California legislation that requires public companies contracting with the State of California to ensure that their supply chains are free of “conflict minerals” sourced from the Democratic Republic of the Congo.

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

The Dodd-Frank Act established the Financial Stability Oversight Council, or FSOC, for the purpose of monitoring risks to the stability of the U.S. financial system.  Working with other regulators, FSOC will gather information from many sectors of the financial system for this purpose. In order to assist FSOC in this process, the Dodd-Frank Act directs the SEC to collect information from advisers to hedge funds and other private funds as necessary for FSOC’s assessment of systemic risk. The SEC has adopted Form PF to implement this requirement.

Form PF is a joint effort of the SEC and the CFTC. In designing the form, SEC and CFTC staff also consulted extensively with staff representing other members of FSOC, including staff from the Treasury and the Federal Reserve.

Reporting Requirements

Under the new reporting requirements, only SEC-registered advisers with at least $150 million in private fund assets under management must file Form PF. These private fund advisers are divided by size into two broad groups – large advisers and smaller advisers. The amount of information reported and the frequency of reporting depends on the group to which the adviser belongs.

“Large private fund advisers” are:

  • Advisers with at least $1.5 billion in assets under management attributable to hedge funds.
  • Liquidity fund advisers with at least $1 billion in combined assets under management attributable to liquidity funds and registered money market funds.
  • Advisers with at least $2 billion in assets under management attributable to private equity funds.

All other respondents are considered smaller private fund advisers.

The SEC anticipates that most private fund advisers will be regarded as smaller private fund advisers, but that the relatively limited number of large advisers providing more detailed information will represent a substantial portion of industry assets under management.  As a result, these thresholds will allow FSOC to monitor a significant portion of private fund assets while reducing the reporting burden for private fund advisers.

Smaller Private Fund Advisers

Smaller private fund advisers must file Form PF only once a year within 120 days of the end of the fiscal year, and report only basic information regarding the private funds they advise. This includes limited information regarding size, leverage, investor types and concentration, liquidity, and fund performance. Smaller advisers managing hedge funds must also report information about fund strategy, counterparty credit risk, and use of trading and clearing mechanisms.

Large Private Fund Advisers

Large private fund advisers must provide more detailed information than smaller advisers. The focus and frequency of the reporting depends on the type of private fund the adviser manages.

  • Large hedge fund advisers must file Form PF to update information regarding the hedge funds they manage within 60 days of the end of each fiscal quarter (instead of 15 days in the rule proposal). These advisers must report on an aggregated basis information regarding exposures by asset class, geographical concentration, and turnover by asset class. In addition, for each managed hedge fund having a net asset value of at least $500 million, these advisers are required to report certain information relating to that fund’s exposures, leverage, risk profile, and liquidity. Large hedge fund advisers are not required to report position-level information.
  • Large liquidity fund advisers must file Form PF to update information regarding the liquidity funds they manage within 15 days of the end of each fiscal quarter. These advisers must provide information on the types of assets in each of their liquidity fund’s portfolios, certain information relevant to the risk profile of the fund, and the extent to which the fund has a policy of complying with all or aspects of the Investment Company Act’s principal rule concerning registered money market funds (Rule 2a-7).
  • Large private equity fund advisers must file Form PF annually within 120 days of the end of the fiscal year. They must respond to questions focusing primarily on the extent of leverage incurred by their funds’ portfolio companies, the use of bridge financing, and their funds’ investments in financial institutions.

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

Events surrounding the 2007 financial crisis raised questions about the governance of the twelve Federal Reserve Banks, particularly the boards of directors’ roles in activities related to supervision and regulation. The Dodd-Frank Act required GAO to review the governance of the Reserve Banks. GAO has issued a report that:

  • analyzes the level of diversity on the boards of directors and assesses the extent to which the process of identifying possible directors and appointing them results in diversity on the boards,
  • evaluates the effectiveness of policies and practices for identifying and managing conflicts of interest for Reserve Bank directors, and
  • compares Reserve Bank governance practices with the practices of selected organizations.

The GAO report made the following recommendations:

  • To help enhance economic and demographic diversity and broaden perspectives among Reserve Bank directors who are elected to represent the public, encourage all Reserve Banks to consider ways to broaden their pools of potential candidates for directors, such as including officers who are below the senior executive level at their organizations.
  • To further promote transparency, direct all Reserve Banks to clearly document the roles and responsibilities of the directors, including restrictions on their involvement in supervision and regulation activities, in their bylaws.
  • As part of the Federal Reserve System’s continued focus on strengthening governance practices, develop, document, and require all Reserve Banks to adopt a process for requesting waivers from the Federal Reserve Board director eligibility policy and ethics policy for directors. Further, consider requiring Reserve Banks to publicly disclose waivers that are granted to the extent disclosure would not violate a director’s personal privacy.
  • To enhance the transparency of Reserve Bank board governance, direct the Reserve Banks to make key governance documents, such as board of director bylaws, committee charters and membership, and Federal Reserve Board director eligibility policy and ethics policy, available on their websites or otherwise easily accessible to the public.

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