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

The Consumer Financial Protection Bureau, or CFPB, released a report examining the differences between credit scores sold to consumers and scores used by lenders to make credit decisions.

The Dodd-Frank Wall Street Reform and Consumer Protection Act required the CFPB to study the differences between credit scores consumers purchase and those creditors use to make credit decisions.  The CFPB’s report covers:

  • ·        the process of developing credit scoring models,
  • ·        why different scoring models may produce different scores for the same consumer,
  • ·        how different scoring models are used by creditors in the marketplace,
  • ·        what credit scores are available to consumers for purchase, and
  • ·        ways that differences between the scores provided to creditors and those provided to consumers may disadvantage consumers.

Consumer reporting agencies, or CRAs, compile and maintain files on consumers that are used to produce credit reports. Credit scores are numerical summaries of the comparative credit risks of default; they are calculated based on information contained in credit files and credit reports. These scores are important because they are used to make credit-granting decisions, to identify prospects for credit offers and solicitations, to make decisions about raising or lowering credit limits on credit cards, and to set terms for mortgages or other loans, among other uses.

While most credit scores are purchased by lenders and other users to assess consumers’ credit risk, consumers can also purchase credit scores when they obtain their free annual credit reports, when they request copies of their credit reports directly from CRAs, or when they enroll in “credit monitoring” services that offer credit reports and scores for a monthly subscription fee. The credit scores available for purchase by consumers may vary from the score used by a lender for a variety of reasons, including:

  • Use of different scoring models;
  • Lenders and consumers may not use the same CRA;
  • Data in the consumer’s credit reports change between the time the consumer purchases a score and the time the lender obtains the score;
  • A consumer and a lender  could possibly access different reports from the CRA, if they were to use different identifying information about the consumer;

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

Section 804 of the Dodd-Frank Wall Street Reform and Consumer Protection Act  provides the Financial Stability Oversight Council, or FSOC, the authority to designate a financial market utility, or  FMU, that FSOC determines is or is likely to become systemically important because the failure of or a disruption to the functioning of the FMU could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the United States financial system.  FSOC has adopted its final rule.  This final rule only addresses the designation of FMUs. FSOC expects to address the designation of payment, clearing, or settlement activities as systemically important in a separate rulemaking.

The designation of an FMU as systemically important by FSOC subjects the designated FMU to the requirements of Title VIII of the Dodd-Frank Act. For example, Section 805(a) of the Dodd-Frank Act authorizes the Board of Governors of the Federal Reserve Board, the CFTC and the SEC, in consultation with FSOC and one or more of the other supervisory agencies and taking into consideration relevant international standards and existing prudential requirements, to prescribe risk management standards governing the operations related to the payment, clearing, and settlement activities of systemically important FMUs.

Section 804(a)(2) of the Dodd-Frank Act provides that, in determining whether an FMU should be designated as systemically important, FSOC must consider:

  • The aggregate monetary value of transactions processed by the FMU;
  • The aggregate exposure of the FMU to its counterparties;
  • The relationship, interdependencies, or other interactions of the FMU with other FMUs or payment, clearing or settlement activities;
  • The effect that the failure of or a disruption to the FMU would have on critical markets, financial institutions, or the broader financial system; and
  • Any other factors that FSOC deems appropriate.

FSOC expects to use a two-stage process for evaluating FMUs prior to a vote of proposed designation. The first stage will consist of a largely data-driven process for FSOC to identify a preliminary set of FMUs, whose failure or disruption could potentially threaten the stability of the U.S. financial system.  In the second stage, the FMUs identified through the first stage of review will be subject to a more in-depth review, with a greater focus on qualitative factors, in addition to other institution and market specific considerations.

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

Real estate valuations, which encompass appraisals and other estimation methods, have come under increased scrutiny in the wake of the recent mortgage crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that GAO study the various valuation methods and the options available for selecting appraisers, as well as the Home Valuation Code of Conduct (HVCC), which established appraiser independence requirements for mortgages sold to Fannie Mae and Freddie Mac. GAO recently released its study.  GAO examined:

  • the use of different valuation methods,
  • factors affecting consumer costs for appraisals and appraisal disclosure requirements, and
  • conflict-of-interest and appraiser selection policies and views on their impact.

GAO concluded that, partly in reaction to appraiser independence requirements, lenders have increasingly relied upon appraisal management companies, or AMCs, to perform certain functions. Despite the increased use of AMCs, GAO believes direct federal oversight of AMCs is limited because the focus of regulators is primarily on lenders, and state-level requirements for AMCs are uneven, ranging from no laws to laws with specific standards for registering with the state.   GAO noted some appraisal industry participants have raised concerns that the management practices of some AMCs may be negatively affecting appraisal quality. Among the areas of concern are AMCs’ practices for key functions, including selecting appraisers for assignments, reviewing completed appraisal reports, and establishing qualifications for appraisal reviewers. The federal banking regulators have emphasized the importance of these functions in guidelines that apply to lenders’ appraisal functions. The Dodd Frank Act requires the federal banking regulators and other federal agencies to set minimum state standards for registering AMCs, which provides an opportunity for the regulators to address these areas of concern and promote more consistent oversight of these functions, whether performed by lenders or AMCs. GAO believes doing so could help to provide greater assurance to lenders, the enterprises, and federal agencies of the quality of the appraisals provided by AMCs.

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

In previous blogs, we have discussed how to take advantage of the one-month grace period for XBRL filings and how to correct errors in XBRL filings.  We thought it would be useful to provide an example of filings where issuers took advantage of the one-month grace period.

EV Energy Partners, L.P

The purpose of the Amendment No. 1 on Form 10–Q/A to EV Energy Partners, L.P.’s quarterly report of Form 10–Q for the quarter ended March 31, 2011, filed with the Securities and Exchange Commission on May 9, 2011 (the “Form 10–Q”), is solely to furnish Exhibit 101 to the Form 10–Q in accordance with Rule 405 of Regulation S–T.

No other changes have been made to the Form 10–Q.  This Amendment No. 1 speaks as of the original filing date of the Form 10–Q, does not reflect events that may have occurred subsequent to the original filing date and does not modify or update in any way disclosures made in the original Form 10–Q.

Pursuant to rule 406T of Regulation S–T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Act of 1934, as amended, and otherwise are not subject to liability under those sections.

WebMD Health Corp.

The sole purpose of this amendment to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011, originally filed with the Securities and Exchange Commission on May 10, 2011, is to furnish Exhibit 101 to the Form 10-Q, which contains the XBRL (eXtensible Business Reporting Language) Interactive Data File for the financial statements and notes included in Part  I, Item 1 of the Form 10-Q. As permitted by Rule 405(a)(2)(ii) of Regulation S-T, Exhibit 101 was required to be furnished by amendment within 30 days of the original filing date of the Form 10-Q.

No other changes have been made to the Form 10-Q and the Form 10-Q has not been updated to reflect events occurring subsequent to the original filing date.

Blyth Inc.

The sole purpose of this Amendment No. 1 to the Company’s Quarterly Report on Form 10-Q for the period ended April 30, 2011 (the Form 10-Q), as filed with the Securities and Exchange Commission on June 3, 2011, is to furnish Exhibit 101 to the Form 10-Q as required by Rule 405 of Regulation S-T. Exhibit 101 to this report furnishes the following items from the Company’s Form 10-Q formatted in eXtensible Business Reporting Language (XBRL): (i) the unaudited Consolidated Statements of Earnings (Loss) for the Three Months Ended April 30, 2011 and 2010, (ii) the unaudited Consolidated Balance Sheets as of April 30, 2011 and January 31, 2011, (iii) the unaudited Consolidated Statement of Stockholders’ Equity for the Three Months Ended April 30, 2011 and 2010, (iv) the unaudited Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2011 and 2010, and (v) the unaudited Notes to Consolidated Financial Statements.

No changes have been made to the Form 10-Q other than the furnishing of Exhibit 101 described above. This Amendment No. 1 does not reflect subsequent events occurring after the original filing date of the Form 10-Q or modify or update in any way disclosures made in the Form 10-Q.

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

Banks and their affiliates have conducted proprietary trading, using their own funds to profit from short-term price changes in asset markets. To restrain risk-taking and reduce the potential for federal support for banking entities, the Dodd-Frank Wall Street Reform and Consumer Protection Act prohibits banking entities from engaging in certain proprietary trading. It also restricts investments in hedge funds, which actively trade in securities and other financial contracts, and private equity funds, which use debt financing to invest in companies or other less liquid assets. Regulators must implement these restrictions by October 2011. As required by Section 989 of the Dodd-Frank Act, GAO reviewed:

  • what is known about the risks associated with such activities and the potential effects of the restrictions, and
  • how regulators oversee such activities.

GAO concluded trading and investments in hedge funds and private equity funds had advantages and disadvantages. While the activities produced a steady—if small—revenue stream for the institutions, they also contributed to losses during the financial crisis, which added to even greater losses from their lending and securitization activities. Further, GAO believes these activities opened the door to potential conflicts of interest that in some cases resulted in enforcement actions against some firms. While some market participants expressed concerns that the restrictions on proprietary trading activities could negatively affect U.S. financial institutions and the economy by reducing banks’ ability to diversify their income and compete with foreign institutions and reducing liquidity in asset markets, GAO believes the actual potential for such effects remain unclear. 

GAO believes one challenge for regulators in implementing the Dodd-Frank Act’s restrictions will be to be mindful of possible unintended consequences. In addition, regulators will face the challenge of identifying and monitoring permissible activities that can create risks similar to those posed by proprietary trading and fund investments. For example, the GAO found that many of the largest losses experienced by these institutions were in activities such as lending and underwriting. For these reasons, and because of the uncertainty over whether some activities are or are not proprietary trading, GAO believes regulators can best ensure the overall safety of the U.S. financial system by remaining vigilant about all activities that pose risks to large financial institutions regardless of whether such activities fall under the definitions of proprietary trading and hedge fund and private equity fund investments that regulators develop as part of the required rulemaking.  GAO believes because the regulators have yet to collect more complete information on the number and nature of trading desks where proprietary trading could be occurring, or firms’ hedge fund and private equity fund investment activities, they risk not being able to most effectively implement the restrictions. 

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

 

Under section 742(c) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), certain foreign exchange transactions with persons who are not “eligible contract participants” (commonly referred to as “retail forex transactions”) with a registered broker or dealer would have been prohibited as of July 16, 2011, in the absence of the SEC adopting a rule to allow such transactions. The SEC has adopted interim final temporary Rule 15b12-1T to allow a registered broker-dealer to engage in a retail forex business until July 16, 2012, provided that the broker-dealer complies with the Securities Exchange Act of 1934, the rules and regulations thereunder, and the rules of the self-regulatory organization(s) of which the broker-dealer is a member, insofar as they are applicable to retail forex transactions.

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

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act brought certain advisers to private funds under the federal securities laws, requiring them to register with SEC.   These advisers include hedge fund and private equity sponsors that re registered with the SEC.  The GAO has issued a report on the feasibility of forming a self-regulatory organization, or SRO, to provide primary oversight of private fund advisers. The report discusses:

  • the feasibility of forming such an SRO, and
  • the potential advantages and disadvantages of a private fund adviser SRO.

Regulators, industry representatives, investment advisers, and others told GAO that it was difficult to opine definitively on the feasibility of a private fund adviser SRO, given its unknown form, functions, and membership. Nonetheless, the general consensus was that forming a private fund adviser SRO could be done, as evidenced by the creation and existence of other SROs. At the same time, they said that the formation of a private fund adviser SRO would require legislation and would not be without challenges.

Creating a private fund adviser SRO would involve advantages and disadvantages. The SEC will assume responsibility for overseeing additional investment advisers to certain private funds on July 21, 2011. It plans to oversee these advisers primarily through its investment adviser examination program. However, the SEC likely will not have sufficient capacity to effectively examine registered investment advisers with adequate frequency without additional resources, according to a recent SEC staff report. A private fund adviser SRO could supplement SEC’s oversight of investment advisers and help address SEC’s capacity challenges. However, such an SRO would oversee only a fraction of all registered investment advisers. Specifically, the SEC would need to maintain the staff and resources necessary to examine the majority of investment advisers that do not advise private funds and to oversee the private fund adviser SRO, among other things. Furthermore, by fragmenting regulation between advisers that advise private funds and those that do not, a private fund adviser SRO could lead to regulatory gaps, duplication, and inconsistencies.

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

 

 

 

The SEC has issued an order that raises, to adjust for inflation, two of the thresholds that determine whether an investment adviser can charge its clients performance fees. The order carries out a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The order will affect registered advisers to hedge funds and private equity groups.

Rule 205-3 under the Investment Advisers Act allows an investment adviser to charge a client performance fees if the client meets certain criteria, including two tests that have dollar amount thresholds. Under today’s order, an investment adviser will be able to charge performance fees if the client has at least $1 million under the management of the adviser, or if the client has a net worth of more than $2 million. Either of these tests must be met at the time of entering into the advisory contract. The previous thresholds were $750,000 and $1.5 million respectively, and were last revised in 1998.

The Dodd-Frank Act requires that the SEC issue an order to adjust for inflation these dollar amount thresholds by July 21, 2011 and every five years thereafter.

As we have previously noted, performance fees can continue to be charged where the performance fee arrangement was permissible when the advisory contract was entered into.

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 the agency’s approach to supervising large depository institutions to ensure compliance with federal consumer financial protection laws.  The supervisory process that will begin on July 21, 2011.

The consumer agency will conduct examinations to help ensure that consumer financial practices at large banks conform with consumer financial protection legal requirements. The CFPB’s bank supervision program will oversee the 111 depository institutions that have total assets over $10 billion.  Subsidiaries and all other affiliates of these institutions also fall under the CFPB’s authority.  These institutions collectively hold more than 80 percent of the banking industry’s assets.

The examiners will be managed out of satellite offices in Chicago, New York, San Francisco, and Washington, D.C.  A large part of the CFPB’s supervision staff will be made up of experienced examiners:  By the end of July, the CFPB supervision team will include more than 100 staff members transferring directly from the Federal Deposit Insurance Corporation, the Federal Reserve System, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. The CFPB expects eventually to have several hundred examiners on board, coming from a variety of backgrounds, including state regulatory agencies and industry.

CFPB supervision will be an on-going process of pre-examination scoping and review of information, data analysis, on-site examinations, and regular communication with regulated entities, prudential regulators, and as well as follow-up monitoring. For most depository institutions supervised by the CFPB, periodic examinations will be conducted.  For the largest and most complex banks in the country, the agency will implement a year-round supervision program that will be customized to reflect the consumer protection and fair lending risk profile of the organization. 

During an examination, the CFPB will assess each institution’s internal ability to detect, prevent, and remedy violations that may harm consumers by reviewing the institution’s internal procedures and conducting interviews with personnel. Examiners will look at the products and services the institution offers, with a focus on risk to consumers. The institution’s compliance with requirements during the entire life cycle of the product or service will be reviewed, including how a product is developed, marketed, sold and managed.  Fair lending reviews will be conducted to detect and address potential discriminatory practices, and, more generally, the institution’s policies and practices will be evaluated to ensure compliance with consumer financial protection laws and regulations. 

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

The Dodd-Frank Act shifts regulatory responsibility for many “mid-sized advisers” to state authorities.  A “mid-sized adviser” is an investment adviser that has between $25 million and $100 million of assets under management.  The SEC has recently posted some frequently asked questions in this area to its web site.  Some of the topics addressed are:

  • Are mid-sized advisers required to register with the Securities and Exchange Commission?
  • In which states would a mid-sized adviser not be “subject to examination” by the state securities authority?
  • How does a mid-sized adviser determine if it is “required to be registered” in the state where it maintains its principal office and place of business?
  • When is a mid-sized adviser that is no longer eligible for Commission registration required to switch to state registration?

In the adopting release related to this topic, the SEC stated “All state securities authorities other than Minnesota, New York and Wyoming have advised our staff that advisers registered with them are subject to examination.”  In these FAQs, the SEC has dropped Minnesota from the list of states where investment advisers are not “subject to examination.”  We are not sure what is going on, as Minn. Stat. § 80A.66 has always provided “audit and inspection” authority.  Perhaps the SEC got it wrong in the first place or the relevant Minnesota authorities did not timely respond (or responded incorrectly) to the SEC request.

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