The SEC Adopts Cross-Border Security-Based Swap Rules

On February 10, the Securities and Exchange Commission (the “SEC”) adopted rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act to regulate both U.S. and foreign dealers who engage in security-based swap dealing activities in the U.S. The rules require non-U.S. companies to include certain transactions in their determinations of whether such companies are subject to registration as security-based swap dealers. The final rules will take effect 60 days after publication in the Federal Register, but compliance is not required until 1 year after the publication or the SBS Entity Counting Date, whichever comes later. Press release.

SEC Issues Staff Report on Accredited Investor Definition

On December 18, the Securities and Exchange Commission issued a staff report (the “Report”) on the definition of “accredited investor” set forth in Rule 501(a) of Regulation D under the Securities Act of 1933. The Dodd-Frank Wall Street Reform and Consumer Protection Act directs the Commission to review the accredited investor definition as it relates to natural persons every four years to determine whether the definition should be modified or adjusted. Staff from the Divisions of Corporation Finance and Economic and Risk Analysis prepared the Report in connection with the first review of the definition.

The Report examines the history of the accredited investor definition and considers comments on the definition received from a variety of sources, including public commenters, the SEC’s Investor Advisory Committee and its Advisory Committee on Small and Emerging Companies. The Report considers alternative approaches to defining “accredited investor,” provides staff recommendations for potential updates and modifications to the existing definition and analyzes the impact potential approaches may have on the pool of accredited investors.

The primary recommendations of the Report are:

  • The Commission should revise the financial thresholds, requirements for natural persons to qualify as accredited investors and the list-based approach for entities to qualify as accredited investors.
  • The Commission should revise the accredited investor definition to allow individuals to qualify  as accredited investors based on other measures of sophistication besides their net worth and income.

The Report suggests detailed alternate approaches to implementing these recommendations.

The Commission is inviting members of the public to provide comments on the accredited investor definition, generally, and specifically on the staff recommendations contained in the Report, although a deadline for submitting comments has not been set.

Final Rule Issued to Establish Minimum Margin Requirements for Non-Cleared Swaps and Non-Cleared Security-Based Swaps

On December 3, 2015, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Federal Housing Finance Agency (collectively, “Agencies”) issued a final rule establishing capital requirements, as well as minimum requirements for the exchange of initial and variation margin, for covered swap entities with respect to non-cleared swaps and non-cleared security-based swaps. The purpose of the requirements is to offset the greater risk to such entities, and thus, the amount of margin required will vary based on relative risk. The final rule implements sections 731 and 764 of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 and will take effect on April 1, 2016 – however, the minimum margin requirements will not phase-in until September 1, 2016. All swap counterparties must comply with the variation margin requirements by March 1, 2017, while swap counterparties with more than $3 trillion in outstanding swap activity must comply with both the initial and variation margin requirements by September 1, 2016. Press Release. Final Rule.

Fed Announces Dates of Stress Test Releases

On February 12, the Fed announced that results from the latest supervisory stress tests conducted as part of Dodd-Frank will be released on March 5, and the related results from the Comprehensive Capital Analysis and Review, will be released on March 11.  Results for both exercises will be released at 4:30 p.m.  Release.

 

SEC Proposes Rules for Disclosure of Hedging Policies

On February 9, the SEC issued proposed rules that are intended to enhance disclosure of company hedging policies for directors and employees, as mandated by Dodd-Frank. The proposal would require disclosure about whether directors, officers and other employees are permitted to hedge or offset any decrease in the market value of equity securities held, directly or indirectly, by employees or directors. The proposed rules would require disclosure in proxy and information statements for the election of directors and apply to companies subject to the federal proxy rules, including smaller reporting companies, emerging growth companies, business development companies, and registered closed-end investment companies with shares listed and registered on a national securities exchange.  ReleaseProposed Rule.

Federal Reserve Board Issues Final Rule Implementing Dodd-Frank Section 622

On November 5, the Federal Reserve Board issued a final rule implementing Section 622 of the Dodd-Frank Act, which generally prohibits a financial company from combining with another company if the ratio of the resulting company’s liabilities exceeds 10% of the aggregate consolidated liabilities of all financial companies.  Press ReleaseFinal Rule.

Fed Issues Final Rule to Amend Regulation HH and Payment System Risk Policy

On October 28, the Federal Reserve Board issued a final rule that amends the Regulation HH risk-management standards for companies that have been designated as systemically important by the Financial Stability Oversight Council and for which the Fed has standard-setting authority pursuant to Title VIII of Dodd-Frank.  Key changes include establishing separate standards to address credit risk and liquidity risk, new requirements on recovery and orderly wind-down planning, a new standard on general business risk, a new standard on tiered participation arrangements, and increased requirements on transparency and disclosure.  Release.  Final Rule.  Policy Statement.

Agencies Release Economic Scenarios for 2015 Stress Testing

On October 23, regulators released the economic scenarios that will be used by financial institutions with total assets of over $10 billion for stress tests required under Dodd-Frank. The baselineadverse, and severely adverse scenarios include 28 variables that reflect economic activity, including unemployment, exchange rates, prices, income, interest rates, and other relevant parameters of the economy.  Regulatory review will cover 31 companies that will have to submit their capital plans on or before January 5, 2015.  Fed Release.  FDIC Release.

Joint Federal Regulators Approve Final Risk Retention Rules

On October 21 and 22, the Fed, HUD, FDIC, FHFA, OCC, and SEC jointly approved final risk retention rules.  The final rules, which implement Section 941 of Dodd Frank, generally follow the re-proposed rules issued in August 2013, mandating that sponsors retain at least 5% of the credit risk in asset-backed securities transactions.  Generally, risk may be retained by holding either a horizontal or avertical slice of issued securities, while additional options are available for specific types of securitizations.  The rules will apply toresidential mortgage-backed securities one year after publication in the Federal Register, and will apply to all other asset classes two years after publication.  Final Rules.  Joint Release.

SEC Launches Municipal Advisor Exam Initiative

On August 19, the SEC Announced a Municipal Advisor Exam Initiative for newly registered municipal advisors.  This “presence” exam initiative appears to be similar in scope and purpose to the “presence” examinations that the SEC has been conducting of investment advisers that were newly registered as a result of the implementation of the Dodd-Frank-Act.

SEC rules that took effect on July 1 generally require municipal advisors to register with the SEC under the final registration process during a four-month phase-in period by October 31. The examinations are designed to establish a presence with the newly regulated municipal advisors.  Over the next two years, the SEC Staff plans to examine a significant percentage of these advisors using an approach that focuses on identified risks.  Areas targeted for scrutiny may include the municipal advisor’s compliance with its fiduciary duty to its municipal entity clients, books and recordkeeping obligations, disclosure, fair dealing, supervision, and employee qualifications and training. Press Release.