On June 16, 2016, the Securities and Exchange Commission (“SEC”) announced that it had proposed rules to update the disclosure requirements for mining properties. The proposed revisions are meant to align disclosure requirements with “current industry and global regulatory practices and standards.” The proposed rules would, among other updates, revise Regulation S-K to include in a new subpart the SEC’s mining property disclosure requirements. The proposed rules would also rescind Industry Guide 7. Release.
Securities and Exchange Commission
SEC Adopts Trade Acknowledgment and Verification Rules for Security-Based Swap Transactions
On June 8, 2016, the Securities and Exchange Commission publicized the implementation of “rules that will establish timely and accurate trade acknowledgment and verification requirements for security-based swap (SBS) entities that enter into SBS transactions.” Press release.
SEC Finds that Private Equity Fund Adviser Acted as Unregistered Broker
On June 1, 2016, the Securities and Exchange Commission (“SEC”) announced that a private equity fund advisory firm and its owner agreed to pay more than $3.1 million to settle charges that they engaged in brokerage activity, charged fees without registering as a broker-dealer and committed other securities law violations.
An SEC investigation found that Blackstreet Capital Management, LLC (“Blackstreet”) and its principal performed in-house brokerage services rather than using investment banks or broker-dealers to handle the acquisition and disposition of portfolio companies for a pair of advised private equity funds. Of particular interest is the SEC highlighted that “Blackstreet fully disclosed to its funds and their investors that it would provide brokerage services in exchange for a fee” and that the limited partnership agreements of the advised funds “expressly permitted” the adviser “to charge transaction or brokerage fees.” However, this did not suffice.
In the press release announcing the Order, Andrew J. Ceresney, Director of the SEC Enforcement Division, emphasized that the rules are clear that “before a firm provides brokerage services and receives compensation in return, it must be properly registered within the regulatory framework that protects investors and informs our markets.”
Of note, the Order did not address whether or not Blackstreet offset transaction fees payable by the advised funds against its management fee. This is significant because in April 2013 the Chief Counsel of the SEC’s Division of Trading and Markets gave a speech in which he stated that “to the extent [a private equity fund] advisory fee is wholly reduced or offset by the amount of [a] transaction fee, one might view the fee as another way to pay the advisory fee, which, in my view, in itself would not appear to raise broker-dealer registration concerns.” Since the Order does not disclose whether or not there was a fee offset in the case presented, it is unclear whether the current SEC staff holds the view expressed by the Chief Counsel in 2013.
SEC Adopts Amendment to Form 10-K
On June 1, 2016, the Securities and Exchange Commission (SEC) approved an interim final rule implementing Section 72001 of the Fixing America’s Surface Transportation (FAST) Act. The rule allows Form 10-K registrants to provide a summary of business and financial information contained in the annual report, provided that each item in the summary includes a cross-reference by hyperlink to the material contained in the Form 10-K to which such item relates. The rule will become effective once published in the Federal Register. Rule. Press Release.
Agencies Invite Comment on Proposed Rule to Prohibit Incentive-Based Pay that Encourages Inappropriate Risk-Taking in Financial Institutions
On May 16, 2016, six federal agencies – the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Federal Reserve Board of Governors, the National Credit Union Administration, the Office of the Comptroller of the Currency and the Securities and Exchange Commission – requested public comments on proposed rule that would “prohibit incentive-based compensation arrangements that encourage inappropriate risks at covered financial institutions.” Comments must be submitted by July 22, 2016. Release.
U.S. Treasury Department Issues White Paper on Online Marketplace Lending Industry
On May 10, 2016, the Department of the Treasury issued a white paper on online marketplace lending that maps the current market landscape, reviews industry insights and offers policy proposals for the road ahead. Based on approximately 100 responses from online marketplace lenders, financial institutions, investors and other key industry figures, the Treasury, in consultation with the CFPB, FDIC, Federal Reserve Board, FTC, OCC, SBA and SEC, made several notable recommendations and observations.
The white paper explores policies that would expand regulatory oversight, including standardized representations and warranties in securitizations, pricing methodology standards, the implementation of a registry for tracking data on transactions and the reporting of loan-level performance, among others. In addition, the Treasury mentions potential cybersecurity threats, anti-money laundering, the uneven protections and regulations in place for small business borrowers and the growth of the mortgage and auto loan markets as some of the emerging trends to monitor. The Treasury is also considering the role of federal agencies in regulating these areas, including the formation of an interagency working group for online market place lending. Press Release. White Paper.
Covered Broker-Dealer Provisions Under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act
On February 17, the Securities and Exchange Commission and the Federal Deposit Insurance Corporation “jointly propos[ed] a rule to implement provisions applicable to the orderly liquidation of covered brokers and dealers under Title II of the Dodd-Frank Act[.]” The two government agencies issued the proposed rule pursuant to the Dodd-Frank Act, which specifically empowers them to regulate the liquidation of specific large financial entities. Release.
SEC Approves Interim Final Rules Implementing Two Provisions of the FAST Act
On January 13, the Securities and Exchange Commission announced that it approved interim final rules implementing two provisions of the Fixing America’s Surface Transportation (FAST) Act, adopted by Congress in December, that revise financial reporting forms for emerging growth companies and smaller reporting companies.
The Congressionally mandated rules revise Forms S-1 and F-1 to provide that as long as emerging growth companies’ registration statements include all required financial information at the time of the offering, they will be allowed to omit certain historical period financial information prior to the offering. In addition, the rules revise Form S-1 to allow smaller reporting companies to use incorporation by reference for future filings the companies make under the federal securities laws after the registration statement becomes effective.
The interim final rules also include a request for comment on whether the rules should be expanded to include other registrants or forms.
The rules will become effective when published in the Federal Register and the public comment period will remain open for 30 days following their publication.
SEC Announces 2016 Examination Priorities
On January 11, the SEC announced its Office of Compliance Inspections and Examinations’ (OCIE) 2016 priorities. New areas of focus include liquidity controls, public pension advisers, product promotion, and two popular investment products – exchange-traded funds and variable annuities. The priorities also reflect a continuing focus on protecting investors in ongoing risk areas such as cybersecurity, microcap fraud, fee selection, and reverse churning.
The 2016 examination priorities address issues across a variety of financial institutions, including investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies, and national securities exchanges. Areas of examination include:
- Retail Investors – OCIE will continue several 2015 initiatives to assess risks to retail investors seeking information, advice, products, and services to help them plan for and live in retirement. It also will undertake examinations to review exchange-traded funds (ETFs) and ETF trading practices, variable annuity recommendations and disclosure, and potential conflicts and risks involving advisers to public pension funds.
- Market-Wide Risks – OCIE will continue its focus on cybersecurity controls at broker-dealers and investment advisers. New initiatives for 2016 include an evaluation of broker-dealers’ and investment advisers’ liquidity risk management practices, and firms’ compliance with the SEC’s Regulation SCI, designed to strengthen the technology infrastructure of the U.S. securities markets.
- Data Analytics – OCIE’s enhanced ability to analyze large amounts of data will assist examiners’ ongoing initiatives to assess anti-money laundering compliance, detect microcap fraud, and review for excessive trading. Data analytics also will help examinations focused on promotion of new, complex, and high-risk products.
The published priorities for 2016 are not exhaustive and may be adjusted in light of market conditions, industry developments and ongoing risk assessment activities.
SEC Reopens Comment Period for Proposed Amendments to Rule 13n-4 under the Securities Exchange Act of 1934
On January 15, the Securities and Exchange Commission reopened the comment period for proposed amendments to rule 13n-4 through a release entitled “Access to Data Obtained by Security-Based Swap Data Repositories and Exemption from Indemnification Requirement[.]” The SEC reopened the comment period due to the recent passing of the Surface Transportation Reauthorization and Reform Act of 2015, which contained provisions that affected the language in the prior proposal. Release.