SEC Division of Investment Management Issues Guidance on Holding Companies and the Transient Investment Company Rule Under the Investment Company Act

 

Earlier this month, the SEC Division of Investment Management issued guidance with respect to situations in which an operating company may find that, upon the occurrence of an extraordinary event, it meets the definition of an “investment company” under the Investment Company Act of 1940 (“Company Act“), even though it intends to remain in such status only temporarily. Absent an exclusion or exemption from this definition, the operating company may be required to register under the Company Act. Rule 3a-2 under the Company Act, however, provides a one-year safe harbor for such transient investment companies if certain conditions are satisfied.

The Staff of the Division of Investment Management has received inquiries regarding the commencement of the one-year safe harbor as it applies to holding companies that are engaged in various businesses operating through wholly owned and majority-owned subsidiaries where neither the holding companies nor their subsidiaries are regulated as investment companies (“Holding Companies“).

In response, the Staff has clarified that the one-year safe harbor period does not begin until the occurrence of an extraordinary event causes a Holding Company to have certain characteristics of an investment company. It is the staff’s view that when adopting Rule 3a-2, the Commission did not intend to limit the circumstances under which an issuer could rely on the rule in such a way that Holding Companies are treated differently than other issuers because of the Holding Companies’ organizational structures.

CFPB Proposes to Provide Flexibility in Collecting Information

 

On March 24, 2017, the Consumer Financial Protection Bureau (“CFPB“) released a proposal to amend Equal Credit Opportunity Act regulations. The proposal would provide flexibility for lenders in collecting information about mortgage applicants’ ethnicity, race and sex. The CFPB’s proposal is meant to provide clarity to mortgage lenders regarding their obligations under the law and to promote compliance with rules intended to ensure that consumers are treated fairly. The proposal is open for public comment for 30 days after its publication in the Federal Register. Press Release. Proposal.

Rating Agency Developments

 

On March 29, 2017, Moody’s published its approach to assessing credit risk for multilateral development banks and other supranational entities. Report.

On March 28, 2017, DBRS published its methodology for rating Canadian ABCP and related enhancement features. Report.

On March 28, 2017, Fitch published its U.K. income-contingent student loans rating criteria. Report.

On March 28, 2017, Fitch published an update to its rating criteria for trust preferred collateralized debt obligations (TruPS CDOs). Release.

On March 28, 2017, KBRA published its U.S. consumer loan ABS rating methodology. Report.

On March 24, 2017, DBRS published its methodology for rating companies in the forest products industry. Report.

On March 24, 2017, DBRS published its methodology for rating companies in the radio broadcasting industry. Report.

On March 24, 2017, DBRS published its methodology for rating companies in the television broadcasting industry. Report.

On March 24, 2017, DBRS published its methodology for rating companies in the printing industry. Report.

On March 24, 2017, DBRS published its methodology for rating companies in the publishing industry. Report.

On March 24, 2017, Moody’s published an update to its local currency country risk ceiling for bonds and other local currency obligations. Report.

On March 23, 2017, DBRS published its North American CMBS multi-borrower rating methodology. Report.

On March 23, 2017, Fitch published an update to its criteria for estimating losses on U.S. mortgage pools for RMBS transactions. Report.

European Commission Republishes CMU Report on Addressing National Barriers to Capital Flows

 

The European Commission has republished a report as part of its Capital Markets Union (CMU) initiative on addressing national barriers to capital flows.

The European Commission originally published the report in February 2017, but later removed it from its website. The European Commission stated that it was made aware of certain inaccuracies, mainly due to incomplete or conflicting information, and so decided to adopt an amended version. The majority of the changes relate to the removal of references to specific member states.

In the report, the European Commission sets out the initial findings of its expert group of representatives of member states on national barriers to cross-border capital flows and the steps that the Commission expects member states to take to address them. The issues highlighted include barriers to the cross-border distribution of investment funds, national approaches to crowdfunding and residence requirements on managers of financial institutions.

European Commission Responds to ECON Concerns About MiFID II Systematic Internalizers Operating Broker Crossing Networks

 

The European and Monetary Affairs Committee (ECON) has published correspondence between the European Parliament’s negotiating team for the Markets in Financial Instruments Directive (“MiFID“) II package of measures and Vice-President Valdis Dombrovskis about concerns relating to the potential establishment of networks of systematic internalizers (“SIs“) and of other liquidity providers that might circumvent certain MiFID II obligations, in particular concerning the trading of shares.

In a letter dated February 24, 2017, the negotiating team refers to the European Securities and Markets Authority’s (“ESMA“) letter from February 1 to Olivier Guersent, Director General, Financial Services and Capital Markets Union. The negotiating team and ESMA share the same concern that certain investment firms may be setting up interconnected SIs to cross third-party buying and selling interests via matched principal trading or other types of back-to-back transactions. The negotiating team has asked the European Commission to examine whether these practices comply with the letter and spirit of the MiFID II framework.

Mr. Dombrovskis responded in a letter dated March 16, 2017, setting out the conclusions of an initial investigation into the issue. He explained that a group of exchange operators are concerned about attempts to establish broker crossing networks in which both SIs and high frequency trading (HFT) firms interact in a manner that market operators describe as multilateral. Market operators are concerned that such networks may not be considered a multilateral trading system by all competent authorities, and so some variants of broker crossing networks may not be required to be authorized as multilateral trading facilities (“MTFs“). On the other hand, investment firms argue that the establishment of electronic links between SIs and other liquidity providers would not amount to the creation of an MTF. Market operators have requested that guidance be issued to the effect that such networks involving the rapid exchange of order information between participating SIs is an MTF and should be authorized as such.

The European Commission proposes to engage in a dialogue with ESMA and competent national regulators to determine the jurisdictions that the alleged broker crossing networks could potentially be established in. The European Commission will then engage with the relevant authorities on how to address the establishment of such networks within the MiFID II rules.

European Commission Publishes Inception Impact Assessment on New Prudential Framework for Investment Firms

 

The European Commission has published an inception impact assessment on its review of the appropriate treatment for investment firms.

The impact assessment relates to the Commission’s review of the prudential framework for investment firms, as required by Articles 293(2), 498(2), 508(2) and 508(3) of the Capital Requirements Regulation (“CRR“) (Regulation 575/2013). In November 2016, the European Banking Authority (“EBA“) published a discussion paper on a new prudential framework, with the aim of submitting an opinion and report to the European Commission by June 30, 2017.

The impact assessment provides an overview of the background to the initiative and the European Commission’s ongoing work. The European Commission states that, in light of the EBA’s consultation on the prudential framework, it does not intend to launch its own public consultation. It is, however, carrying out a consultation with industry stakeholders on the proposal. In particular, it intends to liaise with the industry on aspects of the proposal, such as the calibration and impact of any changes to the regime and foreseeable potential costs.

The European Commission states that the bulk of any new rules will take the form of a Regulation. This will be accompanied by a Directive covering elements that need to take the form of a directive for legal reasons, such as organizational and authorization requirements and corporate governance.

The impact assessment indicates that the European Commission will adopt a legislative proposal in the fourth quarter of 2017.

The European Commission is seeking feedback on the impact assessment. The European Commission’s website on impact assessments states that the deadline for comments is April 19, 2017.

SEC Adopts T+2 Settlement Cycle for Securities Transactions

 

On March 22, 2017, the Securities and Exchange Commission (SEC) adopted an amendment to Rule 15c6‑1(a), shortening the standard settlement cycle for most broker-dealer securities transactions by one business day, beginning on September 5, 2017. The amended rules shorten the settlement cycle from three business days (T+3) to two business days (T+2). The purpose of the amended rule is to enhance efficiency, reduce risk and ensure coordinated and expeditious transition by market participants to a shortened standard settlement cycle. Release.

Banking Agencies Issue Joint Report to Congress Under the Economic Growth and Regulatory Paperwork Reduction Act of 1996

 

On March 21, 2017, the Office of the Comptroller of the Currency (OCC) announced that the Federal Financial Institutions Examination Council (“FFIEC“) issued a “EGRPRA Joint Report to Congress,” which details a review of rules affecting financial institutions conducted under the Economic Growth and Regulatory Paperwork Reduction Act of 1996, which requires federal banking agencies and the FFIEC to conduct a review of their rules at least every 10 years to identify outdated or unnecessary regulations. The review focused on the effect of regulations on smaller institutions, such as community banks and savings associations. The report describes joint actions planned or taken by the federal financial institutions regulators, including simplifying regulatory capital rules for community banks and savings associations, streamlining reports of condition and income, increasing the appraisal threshold for commercial real estate loans and expanding the number of institutions eligible for less frequent examination cycles. Release. Full Report.

SDNY Finds Three of Commerzbank AG’s RMBS Claims Against The Bank of New York Mellon Timely Under German Three-Year Statute of Limitations

 

On March 21, 2017, Judge George Daniels of the United States District Court for the Southern District of New York partially granted and partially denied defendant’s motion to dismiss in Commerzbank AG v. The Bank of New York Mellon. With respect to the central breach of contract claims, Judge Daniels held that The Bank of New York Mellon (“BNYM”) had not carried its burden for dismissal under applicable German law, as it had failed to prove that Commerzbank AG had sufficient knowledge of each element of each of its claims with respect to each Trust, “such that it could have commenced [the] action with an expectation, or some prospect, of success,” three years prior to filing. The court also denied the BNYM’s motion to dismiss for failure to state a claim with respect to Commerzbank’s claims for breach of contract, and negligence for failure to avoid conflicts of interest. It granted BNYM’s motion to dismiss Commerzbank AG’s claims for the violation of the covenant of good faith, violation of the Streit Act, and breach of fiduciary duty. Memorandum Decision and Order.

SDNY Grants Trustees’ Motion to Dismiss Triaxx CDOs’ RMBS Claims for Lack of Standing

 

On March 21, 2017, Judge Naomi Reice Buchwald of the United States District Court for the Southern District of New York issued a Memorandum and Order granting defendants’ motion to dismiss plaintiffs’ First Amended Complaint in Triaxx Prime CDO 2006-1, Ltd., et al. v. The Bank of New York Mellon and U.S. Bank, for lack of standing. In dismissing the claims, the court held that the plaintiff CDOs – certificateholders in several RMBS trusts for which the defendants, U.S. Bank and Bank of New York Mellon, serve as RMBS trustees – had ceded any right to initiate litigation on their own behalf when they assigned away “all . . . right, title and interest” in the underlying assets to their respective CDO indenture trustees. Judge Buchwald granted leave to file an amended complaint within thirty days so long as any such amended complaint explains how the plaintiffs’ cured the standing issue. Order and Memorandum.