Financial Law Blog

Updates on Banking Law, Investment Management Law, Securities Law, Commodities/Derivatives Law

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CFTC proposes allowing Luxembourg, UK, Irish, and Canadian GAAP in annual reports by CPOs

CPOs are required to provide an annual report to pool participants and the NFA. The report can be either in accordance with GAAP or, subject to certain conditions, IFRS. CFTC Staff, however, have been providing one-off relief to CPOs following accounting conventions of other jurisdictions. The CFTC recently proposed amending its regulations to allow CPOs to report in accordance with U.K. GAAP, New Irish GAAP, Luxembourg GAAP, and Canadian GAAP, subject to certain conditions. If the changes are adopted, CPOs with pools in foreign jurisdictions would not need to request individualized no-action relief should they wish to prepare pool financial statements in accordance with these accounting conventions.

SEC brings enforcement action for confidentiality provision without a whistleblower carveout in employment agreements

The Securities and Exchange Commission last week settled an enforcement action against a firm for including in its employee agreements a confidentiality provisions that would impede potential whistleblowers. The firm, BlueLinx Holdings Inc, is a listed company subject to the Exchange Act.

The firm’s agreements with employees contained a number of confidentiality provisions, including one that forbade employees from voluntarily sharing company information. What the provisions did not contain was a carve out “permitting an employee to provide information voluntarily to the Commission or other regulatory or law enforcement agencies.” The SEC found that by including such provisions in agreements with employees, the firm “raised impediments to participation by its employees in the SEC’s whistleblower program.” In so doing, the firm violated Exchange Act Rule 21F-17, which prohibits impeding communication with the SEC about possible securities law violations.

This is at least the third action this year by the SEC against firms for using provisions in employment agreements that impede employees from voluntarily providing information to the SEC’s whistleblower program. SEC staff had also been warning firms over the past few years that the SEC is actively looking for such provisions in employment agreements. Since there is no allegation in these cases that a particular whistleblower was impeded, it is fair to assume that the SEC will not wait for a whistleblower to come along before it brings such a case against any other firm with these provisions in its employment agreements.

FRB approves bank merger that takes institutions beyond $10 billion and into enhanced prudential standards

The Federal Reserve Board approved the merger of Chemical Financial Corporation with Talmer Bancorp this week. The merger will push these institutions beyond the $10 billion asset mark, thus subjecting the resulting financial holding company to the Federal Reserve’s enhanced prudential standards. In that regard, the FRB notes that “Chemical has the financial and managerial resources to comply with the Board’s [enhanced prudential standards], and the Board will monitor Chemical’s compliance with these regulations through the supervisory process.”

In the financial stability analysis, the FRB highlighted that it “generally presumes that a proposal that results in a firm with less than $25 billion in consolidated assets will not pose significant risks to … financial stability” so long as the resulting institution would not be overly complex. The merger was approved within 7 months of announcement.

FRB orders Goldman Sachs to pay $36.3 million relating to violations of confidential supervisory information rules

The FRB today ordered Goldman Sachs to pay a $36.3 million civil money penalty arising from violations of rules regarding confidential supervisory information. The release states that the “Board expects all firms, including Goldman Sachs, to comply with all U.S. laws, rules, and regulations.” (emphasis supplied)

The majority of supervisory information received by banks from their regulators is considered confidential. That is, confidential supervisory information is not only internal materials that regulators don’t share with banks. Each of the FRB, OCC, and FDIC has its own rules on what specifically constitutes “confidential” supervisory information, and under what circumstances banks can share it — even with their attorneys, financial advisers, and potential transaction partners. Under the rules, not only the sender but also the recipient of supervisory information could be in violation if the information is “confidential.”

The FRB’s release may be a reminder to practitioners to take their obligations under the rules regarding confidential supervisory information seriously, lest the regulators do that for them.

Carlyle Group, Lee Equity and HarbourVest invest in Carlile Bancshares, pending regulatory approval

Carlyle Group, along with prior Carlile Bancshares investors Lee Equity and HarbourVest, are investing in a round of Carlile Bancshares securities. Carlile Bancshares, which “was established to invest in community banks throughout the Southwest including Texas, New Mexico, Oklahoma and Colorado” completed its last bank acquisition in 2014. Pending regulatory approval, Carlile Bancshares will have cash for more buys.

Large banks predominantly engaged in retail commercial banking receiving M&A approval from FRB

The Federal Reserve Board yesterday approved Huntington Bancshares’ acquisition of FirstMerit. Both are large institutions — Huntington Bancshares has assets of $71.1 billion and FirstMerit $25.5 billion. On closing Huntington would become the 34th largest depository in the United States.

This merger was approved by the FRB within 6 months of announcement and the approval mirrors the recent Federal Reserve Board approval of KeyCorp’s acquisition of First Niagara Financial Group Inc. In the financial stability analysis, the FRB highlighted that both companies are “predominantly engaged in retail commercial banking activities” and the resulting institution would not be overly complex.

OCC releases guidance on corporate governance and the risk governance framework for supervised banks

The OCC released guidance today on corporate governance and enterprise risk management for OCC-supervised financial institutions. The document is a booklet which will be incorporated into the OCC’s Comptroller’s Handbook.

The guidance contains a discussion of expectations regarding board structure, committees, and the risk governance framework, integrating guidance which practitioners had been cobbling together from a variety of sources in the past.

The guidance also contains the OCC’s views on risk management systems (which are part of the “risk governance framework”) including the “three lines of defense” — front line units, independent risk management, and internal audit.

Risk management guidance for banks with direct or indirect exposure to oil & gas borrowers released by FDIC

The FDIC released supervisory guidance this week to FDIC-supervised financial institutions with direct or indirect oil & gas exposure.

“When O&G related borrowers experience financial difficulties, the FDIC encourages financial institutions to work constructively with borrowers to strengthen the credits and to mitigate losses where possible.” The release of this guidance suggests that this is an area of supervisory concern, particularly for institutions with concentrated exposures. The FIL warns that if a bank’s exposure to O&G remains concentrated notwithstanding efforts at diversification, that “may indicate the need for capital levels higher than the regulatory minimums.”

The FIL, which applies to large institutions as well as those with assets under $1 billion, makes a number of recommendations regarding institutional risk management policies. For example:

  • When working with troubled borrowers, a “well-conceived workout plan and effective internal controls” are required.
  • Management should closely monitor all credit concentrations and report the results of concentration monitoring programs regularly to the board of directors.

CFTC proposes removing clearing requirement from registration exemption for foreign entities

The CFTC proposed revisions to Regulation 3.10 yesterday which would remove the clearing requirement from the registration exemption for foreign entities.

Regulation 3.10(c) allows foreign entities touching “commodity interest” transactions to not register with the CFTC as CPOs, CTAs, FCMs and IBs so long as they meet certain conditions. For example, with respect to such transactions, the foreign entity must act only on behalf of persons located outside the U.S. The foreign entity would still be subject to all the substantive rules relating to the transactions, but not those rules which relate only to CFTC registrants.

The CFTC proposed doing away with the requirement that foreign entities clear their commodity interest transactions through a registered FCM. Although prior no-action relief from CFTC Staff allowed foreign entities to rely on the exemption without clearing through FCMs, a change by the Commission in the regulation itself would provide more certainty and permanence to foreign entities intending to rely on the exemption.

State Street settles SEC enforcement of ICA 34(b) violation for $167.4 million

State Street agreed yesterday to settle enforcement action by the SEC alleging that it applied undisclosed markups to foreign currency exchange trades by its custody clients, which include mutual funds.

The agreement is part of a global settlement with SEC, DOJ and DOL totaling $382.4 million, $167.4 million of which is disgorgement and penalties with respect to the SEC enforcement action. The SEC will issue its order only after a court approves State Street’s settlement of related securities class actions.

The SEC’s order “will find” that State Street willfully violated Section 34(b) of the ’40 Act and caused violations of Section 31(a) and Rule 31a-1(b) by giving mutual fund custody clients “trade confirmations and monthly transaction reports that were materially misleading in light of the representations it made about how it priced foreign currency exchange transactions.”

The SEC used similar reasoning in its 2011 enforcement action against Morgan Asset Management. Release No. 34-64720 (“Any person who makes a material misrepresentation … in the records required to be maintained by the Fund, or submits inflated prices to be included in the Fund’s NAV calculations and the records forming the basis for the Fund’s financial statements, violates Section 34(b)”).

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