SEC Adopts Amendments to Rule 15c2-12

Rule 15c2-12 of the Securities Exchange Act of 1934 (Rule 15c2-12) was adopted by the Securities and Exchange Commission (SEC) in 1989 to establish standards for the procurement and dissemination of disclosure documents by underwriters as a means of enhancing the accuracy and timeliness of disclosure to municipal securities investors. Previous amendments to Rule 15c2-12 incorporated provisions: (1) prohibiting underwriters from purchasing or selling municipal securities in connection with a primary offering unless the issuer and/or an obligated person had committed to providing continuing disclosure (1994); (2) establishing a single centralized disclosure repository for the electronic collection and availability of information regarding municipal securities (2008); and (3) making significant changes to the material event notice requirements and making the continuing disclosure requirements of Rule 15c2-12 applicable to variable rate demand obligations (2010).

In March 2017, the SEC published for comment proposed amendments to Rule 15c2-12, which focused on material financial obligations that could impact an issuer’s liquidity, overall creditworthiness, or an existing security holder’s rights. A wide range of commenters sent comment letters to the SEC in response to the proposed amendments and encouraged the SEC to consider narrowing the scope of the proposed amendments to avoid overburdening market participants.

On August 20, 2018, the SEC announced that it adopted amendments to Rule 15c2-12 (the 2018 Amendments) in substantially the form as proposed with some revisions, including the deletion of the broader language which would have included all leases and any “monetary obligation resulting from a judicial, administrative, or arbitration proceeding.”

For an overview of the 2018 Amendments and relevant guidance from the SEC, click here.

SEC Order Seeks to Clarify Steps Forward Following Lucia

By Steven M. Felsenstein, Elaine C. Greenberg, Laura Metcoff Klaus, Mark E. Solomons, Terry R. Weiss and Michael Pusateri on August 29, 2018 Posted in Client Alert, Financial Regulation, Financial Services Litigation, Litigation, SEC, U.S. Supreme Court

In a previous GT Alert, we summarized and analyzed the Supreme Court’s June 21, 2018, decision in Lucia v. Securities & Exchange Commission, 138 S. Ct. 2044 (2018). That GT Alert cited the SEC’s 30-day stay of “all administrative proceedings” “before an administrative law judge” and foretold continued uncertainty concerning the status of administrative law judges and their decisions. A subsequent 30-day stay was issued on July 20, 2018, and expired on Aug. 22, 2018. On that date, the SEC issued an order entitled In re: Pending Administrative Proceedings (the Order), summarizing the SEC’s position on, and reaction to, the Lucia decision.

The Order is clear in at least one respect. In response to the Supreme Court’s holding that complaining litigants are entitled to “a new ‘hearing before a properly appointed’ official,” the Order provides for “the opportunity for a new hearing before an ALJ who did not previously participate” in a pending proceeding. The SEC will provide such an opportunity through a “remand [of] all proceedings” and will “vacate any prior opinion” issued in these matters. In an exhibit to the Order, the SEC listed 126 proceedings that may be subject to remand.¹ The next day, the SEC’s Chief ALJ issued a subsequent notice identifying an additional 68 currently-pending cases for remand.

The Order also leaves some discretion to the litigants themselves. It solicits “express agreement[s] by the parties regarding alternative procedures” for assigning cases to the Chief ALJ for her consideration. The Chief ALJ’s subsequent notice explained that the parties could also, upon mutual agreement, decide to “remain with the previously designated administrative law judge.” The parties’ decisions on these matters must be provided to the Chief ALJ no later than Sept. 7, 2018. She, in turn, will reassign cases no later than Sept. 21, 2018. Then, within 21 days of assignment, the parties may again “submit proposals for the conduct of further proceedings.”

Finally, the Order seems to affirm the SEC’s belief in the constitutional validity of its Nov. 30, 2017, ratification of its five administrative law judges (notwithstanding that their initial appointments were carried out by SEC staff). It states that “in an abundance of caution and for avoidance of doubt, we today reiterate our approval of their appointments as our own under the constitution.”

While the Order’s grant of new hearings to complaining litigants seems straightforward enough, its two other features – giving litigants a say in their fates moving forward and affirming the constitutional validity of the Nov. 30, 2017, ratification – raise several questions. What will be the nature of these alternative procedures? Will those litigants accept ratification of the current crop of ALJs whose initial appointments gave rise to the challenge ultimately heard by the Lucia Court? If the litigants demand adjudicators other than those five ALJs, how might the SEC react? In short, it seems possible that these lingering questions may lead to further uncertainty and, perhaps, to further litigation.

SIFMA C&L 2018 Annual Seminar Summary

By Terry R. Weiss and Stefanie M. Wayco on April 2, 2018 Posted in SEC

General Session Panel Highlights

One-on-One with SEC Chairman Jay Clayton and SIFMA President & CEO Kenneth E. Bentsen, Jr.

The conference began with a one-on-one discussion with SEC Commissioner Clayton. He applauded the agency for its diverse talent and an ability to coordinate effectively with other state and federal regulators and FINRA.

Commissioner Clayton acknowledged that the jurisdiction of multiple regulators touches upon the relationship of the typical customer/financial advisor. That presents two related potential challenges: competing standards of conduct and compliance with those standards. In his view, those challenges are at least initially met with less multiple regulatory oversight. That said, he did not expand upon how a reduction in regulatory jurisdiction could be achieved given what are certain to be competing interests of the various regulators.

No Q&A with Commissioner Clayton would be complete without a discussion of the Best Interest Standards and the Fifth Circuit Court of Appeals’ strike down of the DOL’s fiduciary rule last week. Commissioner Clayton said that the decision has not affected the SEC’s rulemaking and that it will be acting reasonably soon to address the issue.

For more information on the Seminar, please read the GT Alert “SIFMA C&L 2018 Annual Seminar Summary.”

SCOTUS Rules Dodd-Frank Does Not Protect Internal Whistleblowing

By Terry McCourt, Todd Wozniak and Jack Gearan on February 28, 2018 Posted in Dodd-Frank, Sarbanes-Oxley Act, SEC, Securities, U.S. Supreme Court

On Feb. 21, 2018, the U.S. Supreme Court held that the anti-retaliation provision of the Dodd-Frank Act (DFA) protects only employees who complain to the Securities and Exchange Commission (SEC) and not those who make only internal complaints.

In a unanimous decision, the justices ruled in favor of Digital Realty Trust (Digital Realty), finding that employees who bring securities law complaints against their employers must first take their allegations to the SEC to be protected by the DFA anti-retaliation provisions.

The decision resolves a long-standing circuit split, discussed in a prior GT Alert, between the Fifth Circuit Court of Appeals which held internal reporting was not protected by the DFA, and the Second and Ninth Circuits which held that internal reporting was protected.

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FINRA Plans Major Changes to Expungement Rules

By John K. Wells on February 26, 2018 Posted in Brokers, FINRA, SEC

FINRA recently issued Notice to Members 17-42, which proposes sweeping changes to the process by which a securities broker may seek to expunge reference to a customer complaint from his or her public record. The comment period for the proposed rule amendments ended on Feb. 5, 2018. The proposed changes will now to go the SEC for review and approval. The proposal, if approved, would result in a major overhaul of the expungement process, and, as FINRA acknowledges, will likely increase the cost and the difficulty for brokers making expungement requests. Industry participants may wish to comment to the SEC before the proposal is approved.

Key provisions of the proposed rule amendments include:

Brokers making a request for expungement must pay a minimum filing fee of $1,450;
Requests for expungement must be filed within one year of the closing of a customer arbitration case, or from the closing of a customer complaint (if no arbitration case was filed);
Requests for expungement relief must be filed not against the customer who initiated the complaint (as in current practice), but against the firm which employed the broker at the time the complaint was made, and firms will be assessed a member surcharge and a processing fee (thus increasing the costs for both brokers and firms when expungement relief is sought);
Unless a request for expungement relief is decided in an existing arbitration case, all such requests must be heard by a panel of special arbitrators who must (1) be qualified as public chairpersons, (2) have completed enhanced expungement training; (3) be admitted to practice law in at least one jurisdiction; and (4) have at least five years’ experience in litigation, federal or state securities regulation, administrative law, service as a securities regulator, or service as a judge. This is true even if a broker makes a proper request for expungement relief during the course of an arbitration, litigates the case before a properly-constituted panel for an extended period of time and then settles the matter on the eve of the arbitration hearing; in such instances the broker will be required to file an entirely separate action, subject to an entirely different set of rules.
Brokers must appear at an expungement hearing in person or by videoconference, and such hearings may no longer be conducted telephonically.
Decisions of the arbitration panel on requests for expungement must be unanimous.

For a more detailed analysis of the proposed rule amendments, please see the GT Alert, “FINRA Plans Major Changes to Rules Governing the Expungement of Customer Complaint Information.”

EU Proposes New Rules to Manage Leverage and Derivative Exposure for Funds – Are Asset Managers Ready?

By Nanette Aguirre on February 23, 2018 Posted in Brokers, European Union

The European Systemic Risk Board (the Board) published a recommendation that the European Union should adopt rules to prevent funds from taking on excessive debt and from allocating inadequate reserves to compensate for assets that are hard to sell. The board went so far as to suggest stronger liquidity stress tests, improved liquidity management and tighter supervision. Private funds whose portfolios are comprised of leveraged and complex derivatives are paying close attention to this call for action by the Board as it comes on the heels of a separate announcement detailing the International Organization of Securities Commissions’ (IOSCO) focus on improving how complex derivative products are being offered to retail investors. IOSCO is proposing everything from new leverage limits, minimum margin requirements and a host of other measures for products like binary options and contracts for differences. Asset managers who sought to reposition their derivative strategies in registered funds will need to monitor these developments closely with their counsel and consider repositioning certain strategies through over-the-counter transactions. While IOSCO’s proposal impacts EU as well as U.S. regulators alike, the impact would be minimal in the United States considering existing caps on Reg T and portfolio margining leverage capabilities along with restrictions on U.S. retail persons trading contracts for differences. For those who have benefitted from arranged financing or enhanced leverage platforms generally offered through UK broker dealers, it is important to determine whether the existing leverage model can be repositioned under alternative portfolio margining/stress models by consulting with qualified counsel.

D.C. Circuit Court of Appeals Rules that CFPB Structure is Constitutional, but Rejects the CFPB’s Interpretations of RESPA

By Andrew S. Wein on February 5, 2018 Posted in CFPB, Real Estate

On Jan. 31, 2018, the U.S. Court of Appeals for the District of Columbia Circuit issued its long-awaited ruling in the PHH v. Consumer Financial Protection Bureau case, finding that the structure of the Consumer Financial Protection Bureau (CFPB) is constitutional, but reinstating the previous panel decision rejecting the CFPB’s interpretations of the Real Estate Settlement Procedures Act (RESPA) and the relevant statute of limitations. While PHH may appeal the constitutional ruling to the Supreme Court, and other cases involving the CFPB continue to raise the separation of powers and other structural constitutional issues, this decision is significant in that (a) a three-judge panel of the same circuit court had previously ruled that the CFPB’s structure was constitutionally infirm, and (b) the court has now reinstated the prior ruling rejecting the CFPB’s interpretation of RESPA Section 8(c)(2) and the applicable statute of limitation.

For more information, read the GT Alert, “D.C. Circuit Court of Appeals Rules that CFPB Structure is Constitutional, but Rejects the CFPB’s Interpretations of RESPA.”

FINRA Releases 2018 Annual Regulatory and Examinations Priorities

By Terry R. Weiss, William Mack and Stefanie M. Wayco on January 15, 2018 Posted in FINRA, Technology

As it does every January, FINRA released its annual Regulatory and Examinations Priorities Letter identifying areas of examination focus for the coming year, recurring challenges faced by firms, and possible risks impacting the financial sector. FINRA’s 2018 exam priorities for the first time identify cryptocurrencies and related initial coin offerings (ICOs). Other first-mentions include technology governance, business continuity plans, and non-purpose loans. FINRA’s highest listed priorities this year are the repeated priorities of fraud and recidivist brokers.

Protecting senior investors was a prominent part of FINRA’s Exam Priorities in 2014, 2015, 2016, and 2017. In 2018, protection of seniors was not a delineated priority issue but permeated most all other topics.

Despite the fact that FINRA has announced a more strategic use of its resources, most of the old favorites make an appearance including suitability, AML, and cybersecurity.

For more information, please read the GT Alert “FINRA’s 2018 Annual Regulatory and Examination Priorities.”

Financing Bitcoin: The Problem of Actual Delivery

By Matthew Frankle and Nora Wong on January 10, 2018 Posted in Blockchain, Blockchain Technology Task Force, CFTC

The CFTC has asserted that Bitcoin is, and other virtual currencies may be, commodities under the Commodity Exchange Act. As such, pursuant to Section 2(c)(2)(D) of such Act, “off exchange” financed retail transactions in virtual currency are prohibited unless an exception applies. One exception found in Section 2(c)(2)(D)(ii)(III)(aa) provides, in relevant part, that such a prohibition shall not apply to a “contract of sale that results in actual delivery [of the commodity] within 28 days.” On December 15, 2017 the CFTC issued a proposed interpretation and requested comments on the meaning of “actual delivery” in the context of virtual currencies and retail financed transactions.

This GT Advisory discusses whether secured financing can be maintained while satisfying the CFTC’s interpretation of “actual delivery”. Moreover, the advisory considers whether the “actual delivery exception” is available for retail finance transactions that are not “contracts of sale.”

To read the full GT Advisory, please click here.

NY Department of Financial Services Proposes its Own Fiduciary Rule in Response to U.S. DOL Delay

By Michael J. Murphy and Katharine J. Neer on January 4, 2018 Posted in Financial Regulation, Retirement

In February, President Trump signed an Executive Order directing the U.S. Department of Labor (DOL) to review the fiduciary rule for brokers that President Obama’s Labor Department adopted. The federal rule would expand the definition of “investment advice” in the retirement context and require brokers to provide advice that is in the consumer’s best interest. While the federal fiduciary rule is under review, the U.S. DOL delayed some of the rule’s requirements until July 1, 2019. In response, Governor Cuomo announced that the New York Department of Financial Services (DFS or Department) proposed a rule requiring brokers to put their customers’ best interests first in life insurance and annuity transactions.