Morgan Stanley to Settle RMBS Securities Claims by the SEC for $275 Million

On February 25, Morgan Stanley disclosed that it had reached an agreement in principle with the SEC staff to pay $275 million in disgorgement and penalties in settlement of an investigation into subprime RMBS sponsored and underwritten by Morgan Stanley in 2007.  The settlement would cover alleged violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, and Morgan Stanley would neither admit nor deny the allegations.  The settlement remains subject to final approval by the Commission.  SEC Filing.

No-Action Letter Provides Guidance Regarding “Knowledgeable Employees” of Private Fund Advisers

On February 6, the staff of the SEC’s Division of Investment Management issued a no-action letter with respect to Rule 3c-5 of the Investment Company Act of 1940 (the Company Act) that represents a substantial improvement over the existing guidance regarding the definition of “knowledgeable employees” thereunder, i.e., persons who are not required to be “qualified purchasers” under Section 3(c)(7) of the Company Act, or to be counted for purposes of the 100 beneficial owner limit under Section 3(c)(1) of the Company Act.  Response.

Municipal Advisor Registration Rules

On January 10, SEC announced that the Office of Municipal Securities has issued interpretive guidance relating to the implementation of final rules requiring municipal advisors to register with the SEC.  In addition, on January 13, SEC announced that compliance with the new final municipal advisor rules will not be required until July 1, 2014.  The effective date had been January 13, 2014.  Interpretive GuidanceMunicipal Advisor Registration FAQsSEC Release (Compliance Date)SEC Final Rule.

Volcker Rule Exclusion for TruPS CDOs

On January 14, the Fed, CFTC, FDIC, OCC and SEC issued an interim final rule which will permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities (TruPS CDOs) if the following conditions are met: (i) the TruPS CDO was established and the interest was issued before May 19, 2010; (ii) the banking entity reasonably believes that the offering proceeds received by the TruPS CDO were invested primarily in Qualifying TruPS Collateral (as defined by the rule); and (iii) the banking entity’s interest in the TruPS CDO was acquired on or before December 10, 2013, the date the agencies issued final rules implementing section 619 of the Dodd-Frank Act (the Volcker Rule).  The agencies also released a non-exclusive list of issuers which meet the requirements of the interim final rule.  Comments must be submitted within 30 days of publication in the Federal Register.  Joint ReleaseJoint Interim Final RuleList of Excluded CDO Issuers.

SEC Issues Interpretive Guidance on New Municipal Advisors Registration Rule

On January 10, the SEC announced that its Office of Municipal Securities has issued interpretive guidance to address questions from market participants regarding the implementation of new final SEC rules requiring municipal advisors to register with the SEC.

State and local governments frequently use paid advisors to help them decide how and when to issue municipal securities and how to invest proceeds from the sales.  The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act required these advisors to register with the SEC like other market intermediaries.  The SEC’s final rule was adopted in September 2013 and becomes effective on January 13, 2014.  Among the issues addressed in the guidance are:  (i) the advice standard, including the general information exclusion and the treatment of business promotional materials used by underwriters; (ii) the exemption for independent municipal advisors; (iii) the exclusion for registered investment advisers; (iv) the underwriter exclusion, including engagements as underwriters; and (v) the effective date of the final rules and the compliance period for using the final registration forms.  Interpretative Guidance.

SEC Announces Examination Priorities for 2014

On January 9, the SEC announced its examination priorities for 2014, which cover a wide range of issues at financial institutions, including investment advisers and investment companies, broker-dealers, clearing agencies, exchanges and other self-regulatory organizations, hedge funds, private equity funds and transfer agents.

The market-wide priorities include fraud detection and prevention, corporate governance and enterprise risk management, technology controls, issues posed by the convergence of broker-dealer and investment adviser businesses and by new rules and regulations, and retirement investments and rollovers.  Program Priorities.

SEC Removes References to NRSRO Ratings

On December 27, the SEC adopted amendments to eliminate references in certain of its rules and forms to credit ratings.  The changes were mandated by Dodd-Frank.  Rating references were removed from the following rules and forms:

  • Rule 5b-3 under the Investment Company Act;
  • Forms N-1A, N-2, and N-3;
  • Rule 15c3-1 (and certain appendices) under the Securities Exchange Act of 1934;
  • Rule 15c3-3 under the Securities Exchange Act of 1934; and
  • Rule 10b-10 under the Securities Exchange Act of 1934.

Release.  Final Rules #1.  Final Rules #2.