securities

SEC Proposes Amendment to Rule 144

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On December 22, the SEC proposed to amend Rule 144. Among other things, the amendment would revise the holding period determination to the date of acquisition upon the conversion or exchange for market-adjustable securities acquired on the conversion or exchange of certain securities of issuers that do not have securities listed on a national securities exchange. The amendment would also require electronic filing of Form 144 and would eliminate the requirement to file Form 144 for resales of securities of issuers that are not subject to Exchange Act reporting. The public comment period will be open for 60 days following the publication of the proposed rule in the Federal Register. Release.

FINRA and SEC Announce Tick Size Pilot Program

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On October 3, 2016, the Financial Industry Regulatory Authority (“FINRA”) and the Securities and Exchange Commission (“SEC”)’s Office of Investor Education and Advocacy issued an Investor Alert announcing a new National Market System (NMS) Plan that will implement a Tick Size Pilot Program (the “Pilot”) that will widen the minimum quoting and trading increment – sometimes called the “tick size” – for some small capitalization stocks. The goal of the Pilot is to study the effect of tick size on liquidity and trading of small capitalization stocks.

The Pilot has been implemented pursuant to the Jumpstart Our Business Startups Act which, among other things, directed the SEC to conduct a study and report to Congress on how decimalization affected the number of initial public offerings, and the liquidity and trading of securities of smaller capitalization companies.

Under the Pilot, the tick size will be widened from a penny ($0.01) to a nickel ($0.05) for specified securities listed on national securities exchanges (“Pilot Securities”). For some Pilot Securities, only quoting will need to occur in $0.05 increments, while for others, both quoting and trading generally will need to occur in increments of a nickel.

The Pilot will include a specified subset of the exchange-listed stocks of companies that have $3 billion or less in market capitalization, an average daily trading volume of one million shares or less and a volume-weighted average price of at least $2.00 for every trading day. There will be a control group of approximately 1,400 securities and three test groups, each with approximately 400 securities selected by a stratified sampling.

The Plot will run for a two-year period that will commence on October 3, 2016.

The data collected from the Pilot will be used by the SEC, national securities exchanges and FINRA to assess whether wider tick sizes enhance the market quality of these stocks for the benefit of issuers and investors—such as less volatility and increased liquidity.

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Rating Agency Developments

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On August 10, 2016, KBRA published its rating methodology for global closed-end fund securities issuances. Report.

On August 10, 2016, KBRA published its rating methodology for global investment funds. Report.

On August 10, 2016, KBRA published its rating methodology for enhanced equipment trust certificates and secured aircraft debt. Report.

On August 10, 2016, KBRA published its rating methodology for global passenger airlines. Report.

On August 9, 2016, Fitch updated its rating criteria for sports facilities, leagues and franchises. Report.

On August 8, 2016, S&P published its methodology for rating corporate cash flow and synthetic collateralized debt obligations (CDOs). Report.

On August 8, 2016, S&P published its methodology for rating above the sovereign in structured finance transactions. Report.

On August 4, 2016, Fitch published its rating criteria for SHFA mortgage insurance or guarantee funded programs. Report.

On August 4, 2016, Fitch updated its rating criteria for commercial mortgage-backed securities and loans in EMEA. Report.

ESMA Updates Q&A on Application of UCITS Directive

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The European Securities and Markets Authority (ESMA) has published an updated version of its Q&A paper on the application of the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive (2009/65/EC) as most recently revised by UCITS V (2014/91/EU).  The purpose of the Q&A is to promote common supervisory approaches and practices in the application of the UCITS and its implementing measures.  The most recent updates reflect a Q&A relating to the valuation of OTC derivatives and are highlighted in yellow in the paper.

The latest version of the Q&A is available here.

FinCEN Proposes Funding Portals Regulations under Bank Secrecy Act

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On April 4, 2016, the Financial Crimes Enforcement Network, a bureau of the Department of the Treasury (“FinCEN”), proposed amendments to the definitions of ‘‘broker or dealer in securities’’ and ‘‘broker-dealer’’ under the regulations implementing the Bank Secrecy Act (“BSA”). This rulemaking would amend those definitions explicitly to include “funding portals” that are involved in the offering or selling of “crowdfunded securities” pursuant to Section 4(a)(6) of the Securities Act of 1933. The consequence of those amendments would be that funding portals would be required to implement policies and procedures reasonably designed to achieve compliance with the BSA Act requirements currently applicable to brokers or dealers in securities. FinCEN stated that:  “The proposal to specifically require funding portals to comply with the Bank Secrecy Act regulations is intended to help prevent money laundering, terrorist financing, and other financial crimes.”  Written comments of this proposal must be submitted on or before June 3, 2016.

The Jumpstart Our Business Startups Act, enacted into law on April 5, 2012, established the foundation for a regulatory structure for startups and small businesses to raise funds by offering and selling securities through “crowdfunding” without having to register the securities with the Securities and Exchange Commission (“SEC”) or state securities regulators.  In order to take advantage of this exemption for offerings of crowdfunded securities, an issuer must use the services of an intermediary that is either a broker registered with the SEC or a “funding portal” registered with the SEC.

ECB Publishes Eurosystem Oversight Report

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On February 27, 2015, the European Central Bank (“ECB“) published its 2014 Eurosystem oversight report, the third such report, reviewing the oversight that the Eurosystem has performed in the period from 2011 to mid-2014.  The Eurosystem is the monetary authority of the Eurozone and consists of the European Central Bank and the central banks of each of the Eurozone member states.

The oversight report focuses on the Eurosystem’s oversight of financial market infrastructures, including payment systems, securities and derivatives clearing and settlement systems and trade repositories.

The oversight report also discusses future work priorities. The future work priorities state that the oversight priorities of the Eurosystem will still be driven by the implementation measures of the regulatory reform process and the need to avoid the emergence of systemic risks in the Eurozone. The Eurosystem will also conduct assessments of the design and operation of T2S, the securities settlement platform operated by the Eurosystem that is set to go live in June 2015. Finally the Eurosystem will continue to conduct regular analyses of correspondent banking activities and is currently reviewing its assessment guides for credit cards, direct debits and credit transfers.  Report.

District Judge Reaffirms Denial of Motion to Dismiss RMBS Repurchase Suit

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On January 7, Judge Alvin K. Hellerstein of the United States District Court for the Southern District of New York denied WMC’s motion to reconsider the denial of its motion to dismiss in light of the intervening New York state appellate decision in ACE Securities v. DB Structured Products (covered in the January 6, 2014 edition of the Week in Review).  Judge Hellerstein had relied on the trial court decision in ACE as support for his original ruling that the plaintiff trustee’s claims accrued when WMC refused to repurchase loans that allegedly breached certain representations, not when the representations first were made.  WMC moved to reconsider after the First Department; Appellate Division reversed the trial court in ACE and held that breach of contract claims accrue when the representations are made.  Judge Hellerstein denied the motion, stating that while he had read the ACE appellate decision, it did not change his view that “the contract was breached not at the time of closing but at the time of failure to cure.”  Order Denying Motion to Dismiss.  Order Denying Reconsideration.

Final Rules Implementing the Volcker Rule

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On December 10, the Fed, CFTC, FDIC, OCC and SEC issued final rules to implement Section 619 of the Volcker Rule Act (the Volcker Rule), which prohibit insured depository institutions and banking entities from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options for their own account.  Banking organizations covered by the rules will be required to fully conform their activities and investments by July 21, 2015.  Joint Release.  Final Rules.  Fact Sheet.

SEC Files Complaint for Securities Fraud Against Former IndyMac Bank CFO

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On February 11, 2011, the SEC filed a complaint in the Central District of California against IndyMac’s former Chief Financial Officer, S. Blair Abernathy, alleging violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act in connection with six IndyMac RMBS offerings in 2007 and several other public securities filings in 2008 on behalf of IndyMac Bancorp, Inc. The complaint alleges that, in 2007, Abernathy received monthly reports indicating that 12%-18% of IndyMac Bank’s loans contained misrepresentations, but that he failed to take reasonable steps to ensure that IndyMac’s RMBS offering documents included adequate disclosures in light of that information. It also alleges that Abernathy was negligent in failing to adequately disclose to investors the deteriorating financial condition of IndyMac Bancorp once he became its CFO in 2008. Complaint.