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Volume 9, no. 43 |
November 17, 2014 |
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With the end of the year approaching, below is a brief summary of some of the significant year-end and beginning-of-the-year compliance items that investment advisers to private funds should be considering:
- Quarterly Form PF filing for advisers to “large” hedge funds. Advisers to “large” hedge funds (advisers with more than $1.5 billion in private fund assets under management) should remember to file their quarterly Form PF filing. For advisers with a December 31 fiscal year end, this means the next quarterly Form PF filing is due December 1, 2014.
- Annual audit of private funds. Advisers relying on the “audit” approach under the custody rule of the Investment Advisers Act should remember to (1) confirm their auditor is (a) registered with and subject to inspection by the PCAOB and (b) engaged to conduct an audit of their private funds and (2) provide copies of the annual audited financials to investors within 120 days of the end of the fiscal year. Advisers to fund-of-funds should provide such financials within 180 days. Please note the Securities and Exchange Commission (the “SEC”) recently brought enforcement action against an adviser for repeatedly providing significantly late audited financials to investors in the funds advised by such adviser.
- Form13F and Schedule 13D, 13G and 13F filings. In the beginning of 2015, advisers should remember to make their applicable 13H, 13D, 13G, and 13F filings and amendments thereto. 13H filings (which require disclosure of certain information by “large traders”) are due annually, within 45 days following the end of the calendar year and also must be promptly amended following the end of the calendar quarter in which any of the information contained in a Form 13H filing becomes inaccurate for any reason. Similarly, an adviser is required to promptly file an amendment to its Schedule 13D if there are any materials changes to their current filing. Schedule 13Fs and Schedule 13G amendments are due on February 17, 2015. As previously reported by Winston & Strawn, the SEC recently took enforcement actions against Schedule 13G and 13D filers as part of its “broken windows” approach to securities regulation enforcement, pursuant to which the SEC is striving to pursue every violation of the securities rules and laws no matter how small or minor.
- Quarterly transaction and annual holdings reports. Advisers also should confirm that their Chief Compliance Officer or other compliance personnel will be receiving and reviewing the applicable quarterly transaction and annual holding reports from the appropriate advisory personnel in accordance with the terms of the adviser’s code of ethics.
Please note that the above list is not exhaustive and highlights just a few of the compliance obligations advisers should be fulfilling. Please contact your Winston & Strawn attorney if you have any questions about your periodic compliance obligations. |
| Sarah M. Hesse |
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| In light of the continued emphasis which the Securities and Exchange Commission (the “SEC”) and Justice Department place on Foreign Corrupt Practices Act (“FCPA”) enforcement, how to avoid violating the FCPA is the subject of an article by David Kotz and Susan M. Mangiero. The article summarizes some of the steps firms can take to minimize their FCPA exposure, including establishing written audit procedures, whistleblowing programs, and training programs. CFO.com further suggests the automation of certain FCPA compliance practices. For example, CFO.com suggests the employment of software that analyzes payments. |
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| On November 13th, the Federal Reserve Board (the “Board”) announced the annual indexing of the reserve requirement exemption amount and the low reserve tranche. The Board also announced changes to the nonexempt deposit cutoff level and the reduced reporting limit. Federal Reserve Board Press Release. |
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| On November 7th, the Federal Deposit Insurance Corporation (“FDIC”), Federal Reserve Board, and Office of the Comptroller of the Currency (“OCC”) published the annual Shared National Credits (“SNC”) review, which found that the volume of criticized assets remained elevated at $340.8 billion, or 10.1 percent of total commitments, which approximately is double pre-crisis levels. Leveraged loans as reported by agent banks totaled $767 billion, or 22.6 percent of the 2014 SNC portfolio and accounted for $254.7 billion, or 74.7 percent, of criticized SNC assets. Material weaknesses in the underwriting and risk management of leveraged loans were observed, and 33.2 percent of leveraged loans were criticized by the agencies. In a supplemental report, the agencies highlighted findings specific to leveraged lending, including serious deficiencies in underwriting standards and risk management of leveraged loans. Joint Agency Press Release. See also OCC Bulletin. |
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| On November 13th, the Consumer Financial Protection Bureau (“CFPB”) published for comment new federal consumer protections for the prepaid market. The proposal would require prepaid companies to limit consumers’ losses when funds are stolen or cards are lost, investigate and resolve errors, provide easy and free access to account information, and adhere to credit card protections if a credit product is offered in connection with a prepaid account. The CFPB is also proposing new “Know Before You Owe” prepaid disclosures that would provide consumers with clear information about the costs and risks of prepaid products upfront. Comments should be submitted within 90 days after publication in the Federal Register, which is expected shortly. CFPB Press Release. |
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| On November 12th, the Financial Crimes Enforcement Network (“FinCEN”) advised of the October 24, 2014 update made by the Financial Action Task Force to its list of jurisdictions with strategic AML/CFT deficiencies. FinCEN Advisory. |
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| On November 10th, U.S. Treasury Undersecretary David Cohen discussed recent anti-money laundering (“AML”) initiatives. He would like legislative clarification of the existing statutory safe harbor from civil liability for filing a suspicious activity report (“SAR”). He advocated that the Bank Secrecy Act should also be amended to clarify that financial institutions and their officers may enjoy the protection of the SAR safe harbor without having to demonstrate that a SAR was filed in good faith. In addition, he proposed that the USA PATRIOT Act should similarly be amended to provide financial institutions with greater comfort to share information with one another on illicit activity. FinCEN, in consultation with the SEC, is working to define SEC-registered investment advisers as financial institutions and to extend AML program and suspicious activity reporting requirements to them. Primary AML regulatory requirements would also be extended to Commodity Futures Trading Commission (“CFTC”)-registered Retail Foreign Exchange Dealers and Commodity Pool Operators. Cohen Remarks. See also Reuters. |
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| On November 10th, FinCEN issued a statement concerning the provision of banking services to money services businesses (“MSBs”). FinCEN believes that banking organizations can serve the MSB industry while meeting their Bank Secrecy Act obligations. FinCEN is concerned that banks are indiscriminately terminating the accounts of all MSBs, or refusing to open accounts for any MSBs. Such a wholesale approach runs counter to the expectation that financial institutions can and should assess the risks of customers on a case-by-case basis. FinCEN Statement. |
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| On November 7th, the SEC published guidance to smaller entities on recent changes to SEC rules regarding credit rating agencies and asset-backed securities. The guidance summarizes amendments to Securities Exchange Act Rule 17g-1, the instructions for Exhibit 1 to Form NRSRO, Rule 17g-2, Rule 17g-3, Rule 17g-5, Rule 17g-7, and Form ABS-15G; and newly added Securities Exchange Act Rule 17g-8, Rule 17g-9, Rule 17g-10, Form ABS Due Diligence-15E, and Rule 15Ga-2., providers of due diligence services to asset-backed securities, issuers and underwriters. Small Entity Compliance Guide. |
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| The SEC will hold an open meeting on November 19, 2014 to consider whether to adopt Regulation Systems Compliance and Integrity under the Securities Exchange Act of 1934 and conforming amendments to Regulation ATS. Sunshine Act Notice. |
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| The SEC published the agenda for its November 20, 2014 Government-Business Forum on Small Business Capital Formation. SEC Small Business Forum Press Release. On November 19, 2014, a day prior to this year’s Small Business Forum, the SEC will partner with the Small Business Administration to present information on the Jumpstart Our Business Startups (“JOBS”) Act. SEC JOBS Act Press Release. |
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| On November 11th, Bloomberg discussed the criticism some have levelled at the proposed tick test pilot that would widen the increments for trading the shares of certain smaller companies. Tick Test Critics. |
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| On November 10th, Reuters noted SEC Chair Mary Jo White’s rulemaking agenda. Among other things, White hopes to address market structure issues in the coming months. Agenda. |
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| On November 10th, Bloomberg reported Andrew Ceresney, Director of the Division of Enforcement, said that his office intends to seek individual liability against those who violate municipal securities rules. Individual Focus. |
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| On November 13th, the CFTC and SEC published for comment proposed clarifications of the CFTC’s interpretation concerning forward contracts with embedded volumetric optionality. Comments should be submitted within 30 days after publication in the Federal Register, which is expected shortly. |
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| On November 13th, the CFTC’s Division of Swap Dealer and Intermediary Oversight issued Volcker rule guidance. The guidance addresses metrics reporting during the conformance period and mortgage-backed securities of government-sponsored enterprises. |
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| On November 13th, the CFTC’s Division of Swap Dealer and Intermediary Oversight issued no-action relief to futures commission merchants (“FCMs”) concerning the holding of customer funds deposited to margin foreign futures and foreign options transactions under Regulation 30.7. Regulation 30.7 limits the amount of customer margin funds an FCM is permitted to maintain in accounts with non-U.S. depositories to 120 percent of the required margin on the customers’ foreign futures and foreign options positions. The no-action relief permits an FCM to exclude customer funds deposited with a foreign bank or trust company that otherwise qualifies as a depository under Regulation 30.7 from the calculation of the 120 percent limit. The Division also issued two interpretations of Regulation 30.7. The first permits net offsetting of customer funds between the FCM and the foreign depository. The second provides that an FCM may substitute U.S. dollars for foreign currency in 30.7 customer accounts and consider such transaction as for the benefit of the FCM’s customers. CFTC Press Release. |
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| On November 10th, the CFTC’s Division of Market Oversight provided further time-limited no-action relief for swaps executed as part of certain interest rate and credit default swaps that have been made available to trade and are executed as part of five specified categories of “package transactions.” Under the relief provided in CFTC Letter No. 14-137, market participants will also have the opportunity to transition their trading of these swap components onto swap execution facilities and designated contract markets. The letter sets forth a phased compliance timeline. CFTC Press Release. |
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| On November 14th, Reuters reported CFTC Commissioners appear to agree that changes are needed in the CFTC’s derivatives trading rules in order to address global market fragmentation. Rule Changes. |
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| On November 12, CFTC Commissioner Christopher Giancarlo announced he will be issuing a white paper seeking comment on the apparent mismatch between how the CFTC regulates the swaps industry and the trading and market structure characteristics of the swaps markets. The paper will then review the adverse consequences of the CFTC’s swaps trading framework and propose an alternative. Giancarlo Statement. |
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| On November 12th, the Wall Street Journal summarized the remarks of CFTC Chair Timothy Massad. Massad said the agency will investigate the circumstances under which derivatives counterparty identities are revealed after a transaction is completed. Some claim that this disclosure discourages central clearing of derivatives. Post-Trade Disclosure. |
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| January 1, 2015 |
Consumer Leasing (Regulation M). 79 FR 56482. |
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Truth in Lending (Regulation Z). 79 FR 56483. |
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Truth in Lending (Regulation Z) Annual Threshold Adjustments (CARD ACT, HOEPA and ATR/QM). 79 FR 48015. |
| December 1, 2014 |
Defining Larger Participants of the International Money Transfer Market. 79 FR 56631. |
| November 17, 2014 |
Electronic Fund Transfers (Regulation E). 79 FR 55970. |
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| January 1, 2015 |
Regulatory Capital Rules: Regulatory Capital, Revisions to the Supplementary Leverage Ratio. 79 FR 57725. |
| November 24, 2014 |
Transferred OTS Regulations Regarding Securities of State Savings Associations. 79 FR 63498. |
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| December 1, 2014 |
Procedures and General Definitions. 79 FR 64661. |
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| December 1, 2014 |
Procedures and General Definitions. 79 FR 64661. |
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| November 26, 2014 |
Capital Plan and Stress Test Rules. 79 FR 64025. |
| December 31, 2014 |
Financial Market Utilities. 79 FR 65543. |
| January 1, 2015 |
Concentration Limits on Large Financial Companies. 79 FR 68095. |
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Truth in Lending (Regulation Z). 79 FR 56483. |
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Consumer Leasing (Regulation M). 79 FR 56482. |
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Regulatory Capital Rules: Regulatory Capital, Revisions to the Supplementary Leverage Ratio. 79 FR 57725. |
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| November 10, 2014 |
OCC Guidelines Establishing Heightened Standards for Certain Large Insured National Banks, Insured Federal Savings Associations, and Insured Federal Branches; Integration of Regulations. 79 FR 54517. |
| January 1, 2015 |
Regulatory Capital Rules: Regulatory Capital, Revisions to the Supplementary Leverage Ratio. 79 FR 57725. |
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| November 14, 2014 |
Nationally Recognized Statistical Rating Organizations. 79 FR 55077.
[This rule is effective November 14, 2014; except the amendments to Sec. 240.17g-3(a)(7) and (b)(2) and Form NRSRO, which are effective on January 1, 2015; and the amendments to Sec. 240.17g-2(a)(9), (b)(13) through (15), Sec. 240.17g-5(a)(3)(iii)(E), (c)(6) through (8), Sec. 240.17g-7(a) and (b), and Form ABS-15G, which are effective June 15, 2015. The addition of Sec. Sec. 240.15Ga-2, 240.17g-8, 240.17g-9, 240.17g-10, and Form ABS Due Diligence-15E are effective June 15, 2015.] |
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Nationally Recognized Statistical Rating Organizations; Correction. 79 FR 61576. |
| November 24, 2014 |
Asset-Backed Securities Disclosure and Registration; Correction. 79 FR 66607. |
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| November 6, 2014 |
Supplemental Standards of Ethical Conduct for Employees of the Department of the Treasury. 79 FR 65873. |
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| On November 10th, the SEC approved BATS Exchange’s proposed amendment of BATS Rule 21.7 (“Market Opening Procedures”) to modify the process by which the BATS Exchange’s equity options trading platform (“BATS Options”) opens trading at the beginning of the day and after trading halts. The BATS proposal would modify the Opening Process in the following manner: (1) orders in the Opening Process will be executed based on time priority instead of price-time priority; (2) certain orders that are not executed during the Opening Process will be treated as if they had been entered by a User rather than canceled; and (3) add certain clarifying language to BATS Rule 21.7 in order to make the Opening Process more clear. The changes do not amend the process by which orders are entered or the Opening Price is determined or validated. SEC Release No. 34-73571. |
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| On November 12th, the Financial Industry Regulatory Authority published for comment a proposal that would expand the alternative trading system (“ATS”) of the Financial Industry Regulatory Authority (“FINRA”) transparency initiative to publish the remaining equity volume executed over-the-counter, including non-ATS electronic trading systems and internalized trades. Comments should be submitted on or before January 9, 2015. FINRA Regulatory Notice 14-48. |
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| On November 12th, FINRA published for comment a proposal that would reduce the synchronization tolerance for computer clocks. Comments should be submitted on or before January 9, 2015. FINRA Regulatory Notice 14-47. |
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| On November 12th, FINRA published for comments a proposal that would identify over-the-counter trades in NMS stocks reported more than two seconds following trade execution as “out of sequence” and not last sale eligible for public dissemination purposes. Comments should be submitted on or before January 9, 2015. FINRA Regulatory Notice 14-46. |
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| On November 12th, the International Swaps and Derivatives Association (“ISDA”) announced that the ISDA 2014 Resolution Stay Protocol is open for adherence. The Protocol will come into effect on January 1, 2015 for the 18 banks that have signed on to the Protocol. Although adherence is voluntary, a U.S. bankruptcy component of the Protocol will come into effect once relevant rules have been issued by U.S. regulators. The Protocol incorporates certain restrictions on creditor contractual rights that would apply when a U.S. financial holding company becomes subject to U.S. bankruptcy proceedings. This includes a stay on cross-default rights that would restrict the counterparty of a non-bankrupt affiliate of an insolvent U.S. financial holding company from immediately terminating its derivatives contracts with that affiliate. A non-defaulting party’s right to terminate derivatives trades with a direct counterparty that is under insolvency proceedings is unaffected by the Protocol. ISDA Press Release. |
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| On November 12th, the SEC provided notice of NASDAQ Stock Market’s filing of a proposed amendment to Rule 7015(d) to include the IPO Indicator as a new enhancement to the NASDAQ Workstation. In addition to providing order entry and quote functionality, the NASDAQ Workstation also includes several features designed to assist subscribers with managing and monitoring their trading activity. NASDAQ is proposing to include a new feature designed to assist member firms in monitoring their orders in the NASDAQ Halt Cross process leading up to the launch of an initial public offering. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of November 17. SEC Release No. 34-73574. |
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| On November 7th, the SEC provided notice of NYSE Arca’s filing of a proposed rule change to modify the NYSE Arca Options fees for qualified contingent cross transactions. The Exchange proposes to implement the fee changes on November 1, 2014. Currently, the Exchange charges $0.10 per contract side for QCC transactions, regardless of whether a customer is part of the transaction. The Exchange proposes to adopt a differentiated fee schedule and to instead charge $0.00 per contract side for Customers and $0.20 per contract side for non-Customers. Comments should be submitted on or before December 5, 2014. SEC Release No. 34-73557. |
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| On November 6th, the SEC provided notice of NYSE Arca’s and NYSE MKT’s separately filed proposals to amend their respective rules to clarify and conform with the functionality of the trade collar protection mechanism in use on each exchange. The amendments specify (a) how marketable Limit Orders behave when received in a wide market, (b) how subsequently-arriving Market Orders effect collared orders, and (c) the values associated with a Trading Collar. Comments should be submitted on or before December 4, 2014. |
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| On November 12th, the SEC provided notice of The Options Clearing Corporation’s (the “OCC”) filing of an emergency waiver of the provision of OCC’s Rules calling for monthly adjustments of its Clearing Fund that would otherwise have required an advance notice. OCC believes that the change was appropriate and is now filing an emergency notice in accordance with the requirements of Sections 806(e)(2)(B) and (C) of the Payment, Clearing and Settlement Supervision Act. On October 15, 2014, OCC increased the size of the Clearing Fund for the remainder of October 2014 from $3.8 billion to approximately $5.6 billion. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of November 17. SEC Release No. 34-73579. |
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| On November 13th, the Financial Stability Board published for comment “Standards and Processes for Global Securities Financing Data Collection and Aggregation.” The proposed standards and processes define the data elements for repurchase agreements, securities lending, and margin lending that national/regional authorities would be asked to report as aggregates to the FSB for financial stability purposes. Comments should be submitted on or before February 12, 2015. FSB Press Release. |
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| On November 12th, CFO.com summarized a study conducted by Ohio State University accounting professor Jeffrey Hoopes entitled “Reading the Roadmap: IRS Attention to Financial Statements.” The study notes the IRS’s increased usage of firms’ Form 10-K’s and what that usage may mean. Map Reading. |
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| On November 10th, the Financial Stability Board (the “FSB”) requested comment on proposed rules that would require global systemically important banks to hold additional buffers, called total loss-absorbing capacity, to ensure that these firms have sufficient capacity to absorb losses, both before and during resolution. Comments should be submitted on or before February 2, 2015. FSB Press Release. |
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| The Real Deal Webinar Series: Representation & Warranty Insurance: Winston & Strawn partners Eva Davis and Oscar David will lead this webinar along with Jonathan Gilbert, senior managing director of Crystal & Company, and Phil Casper, vice president and regional underwriting manager of AIG. They will discuss R&W insurance in the current market including. Webinar. |
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