Friday, October 24, 2014

SIFMA May Challenge Exchange Fees

[This story previously appeared in Securities Regulation Daily.]

By Matthew Garza, J.D.

The SEC’s Chief Administrative Law Judge has determined that the Securities Industry and Financial Markets Association (SIFMA) has standing to challenge rule changes made by NYSE and NASDAQ that establish fees for access to depth-of-book data. Administrative Proceedings Rulings Release No. 1921, October 20, 2014.

SIFMA challenged changes made by the NYSE and NASDAQ to rules governing fees charged for access to this “non-core” depth-of-book data, which was free prior to 2006 rule amendments. Chief ALJ Brenda Murray explained in a footnote that the exchanges are required to make available “core” data, which includes information such as best price offered and bid for each security, whereas non-core depth-of-book data is not required to be made available. Depth-of-book data, known as “ArcaBook” at the NYSE, refers to information on outstanding limit orders to buy stocks at prices lower than, or to sell stocks at prices higher than, the best prices on a respective exchange.

Background. The NYSE originally proposed the rule change to allow it to charge fees for depth-of-book data in May 2006, an action that was approved by the Commission but vacated by the D.C. Circuit after the court found that the economic justification of the rule change was not adequately established. In 2010 the Dodd-Frank Act changed the procedures for implementation of SRO rules. It allowed new rules to become effective immediately upon filing with the SEC, subject to the Commission’s authority to suspend the rules within 60 days. NYSE and NASDAQ then re-proposed amendments regarding depth-of-book fees and the SEC declined to suspend them.

A petition filed by SIFMA to the D.C. Circuit to review the re-proposed rule changes were refused by the court, which cited the Dodd-Frank SRO rulemaking process changes. The court said however, “we take the Commission at its word ... that it will make the section 19(d) process available to parties seeking review of unreasonable fees charged for market data, thereby opening the gate to our review.” SIFMA continued to petition the SEC to set aside the rule changes.

Challenge. Exchange Act Sec. 19(d)(2) says that SRO action shall be subject to regulatory review on its own motion, or “upon application by any person aggrieved.” SIFMA asserted that it had had associational standing to challenge the rule changes as a “person aggrieved.” The NYSE argued that the association did not establish that its members were aggrieved. The SIFMA declarations “do nothing more than assert each SIFMA Declarant is aggrieved ‘simply because it has to pay something for ArcaBook,’” NYSE argued.

The exchange also asserted that its 2010 re-proposed rule responded to the D.C. Circuit’s concerns and was based on a new and different record. SIFMA countered that the exchange conflated the issues of jurisdiction and the merits, and that it is not required to show that the fees at issue are unreasonable in order to establish standing.

The ALJ agreed, saying that the only question at this stage of the challenge was whether SIFMA has established that its members are subject to limitation of access to depth-of-book data. “The question here is not whether SIFMA showed that the rules at issue have imposed unreasonably high fees, but whether it should have an opportunity to do so.” The judge ruled that SIFMA met its burden to establish association standing, and scheduled four hearings, starting on December 22, to determine if the rule changes should be vacated.

Thursday, October 23, 2014

LIBOR Administrator Proposes Reforms to Calculation of Benchmark

[This story previously appeared in Securities Regulation Daily.]

By Lene Powell, J.D.
The Intercontinental Exchange group ICE Benchmark Administration (IBA) published a position paper on LIBOR, the widely referenced interest rate benchmark administered by IBA. The group called for LIBOR to be generated from observable market transactions “to the greatest extent possible” and calculated using a unified, prescriptive methodology featuring a waterfall approach.
Background. ICE LIBOR is a benchmark rate published for five currencies, with seven maturities quoted for each, indicating the interest rate that banks pay when they borrow from each other on an unsecured basis. LIBOR is referenced by about $350 trillion of outstanding business in maturities ranging from overnight to more than 30 years.
Following the discovery by regulators of widespread LIBOR manipulation and resulting sanctions for a number of banks, Martin Wheatley, head of the U.K. Financial Conduct Authority (FCA), published a review in September 2012 that concluded that there should be statutory regulation of LIBOR. The Wheatley Review set out a ten-point plan for the reform of LIBOR, including the transfer from the British Bankers’ Association (BBA) to a new administrator. IBA became authorized and regulated by the FCA as the new LIBOR administrator in February 2014. 
After the Wheatley Review, changes were made to the LIBOR process, including the implementation of a surveillance system by IBA, external auditing of administrators and submitters, and the introduction of statutory regulation featuring an Approved Persons regime. As a result of these and other changes, LIBOR is now harder to manipulate, and there are appropriate legal punishments for any attempts at manipulation, said IBA. 
Findings. The IBA paper confirmed some key assumptions. First, the inter-bank unsecured lending market declined precipitously during the financial crisis of 2007-2009, and is still too low in some tenors to support an entirely transaction-based rate. This decline has been driven by a significant increase in perceived risk of bank counterparty default, as well as regulatory capital charges and an increase in liquidity available to banks due to crisis measures taken by major central banks. In addition, the benchmark submitters to LIBOR have committed resources to strengthen submission processes and internal governance. Further, each benchmark submitter has developed its own methodology for establishing LIBOR submission, using a wide range of transactions to anchor their LIBOR submissions within the existing waterfall of methodologies referenced in the Wheatley Review.
Proposed enhancements. To replace the variety of methodologies used by benchmark submitters, IBA called for the adoption of a more unified transaction-based methodology. The proposed methodology will use a more prescriptive calculation, with pre-defined parameters that the IBA Oversight Committee will keep under review. 
All wholesale and professional entities should be regarded as eligible counterparty types, including central banks and large corporates. Some transactions should be directly included, including submitters’ unsecured wholesale funding deposits, Commercial Paper, and primary issuance Certificates of Deposit. Other transaction types, such as OIS, Repos, FX Forwards, FRAs, and FRNs, should be included only when a bank’s lack of direct transactions means that the submitter has to rely on expert judgment.
IBA will implement a waterfall of calculation methodologies in order to ensure the rate is always available, even in times of market stress. Where transactions are not available for a currency and tenor, or are below minimum transaction size or aggregate volume, interpolation techniques should be used. To ensure consistency, IBA will issue interpolation formula guidelines. If interpolation is not possible, then expert judgment should be used as a last resort. The submission and supporting data are reviewed both by additional individuals at the submitting bank and by the surveillance team at IBA.
The paper also made recommendations as to the timing of transactions, reasonable market size for transactions, panel composition, and delayed publication of individual submissions.
Timetable for change. Following recommendations of the Financial Stability Board, the IBA set out the following timetable:
  • By end Q1 2015: IBA will have worked with contributing banks to analyze available transaction data.
  • By end Q2 2015: In conjunction with the Bank of England and FCA, IBA will have considered the recommended LIBOR methodology and the viability of each LIBOR tenor.
  • By end 2015: IBA will have publicly consulted on changes.
To inform the evolution of LIBOR, IBA requested feedback generally on the position paper, and also issued a questionnaire to gather information about the usage and importance of individual tenors.

Tuesday, October 21, 2014

CFTC Global Roundtable Examines Clearing for Non-Deliverable Forwards

As the CFTC readies a proposal on the clearing of non-deliverable forwards, the Commission convened a global meeting to discuss whether mandatory clearing should be required of NDF swaps contracts. The meeting was under the auspices of the CFTC’s Global Markets Advisory Committee, chaired by Commissioner Mark Wetjen. At the start of the meeting, Commissioner Wetjen announced the formation of a subcommittee on foreign exchange (FX) experts.

Brian O’Keefe, CFTC Deputy Director, Division of Clearing and Risk, noted that, with regard to the NDF clearing mandate, there is no specific recommendation currently on the table , but that there has been some staff work done on this.

Without going into all of the details of the recommendation because it is subject to change, he said that one of the first questions to be addressed about the mandate is which currency pairs should the CFTC be focusing on. There are a number of trading activities and a variety of different pairs, but the liquidity characteristics are different depending on the pair.

The staff is also thinking about creating a clearing requirement. In his view, there are a number of factors that need to be considered in determining mandatory clearing, including outstanding notional amounts, trading liquidity, adequate pricing data, framework capacity and operational expertise to clear these products, and the effect of mitigation of systemic risks on competition.

Essentially, the proposed class would have 12 reference currencies and those 12 represent the ones that have been submitted to the CFTC. The settlement currency would be U.S. dollars. The staff is doing its analysis with regard to liquidity around that.

He noted that the staff conducted an initial analysis using the real time reporting data at the end of 2013 and into the spring of 2014 that showed that there was approximately $7.4 trillion in the NDF currencies. What is striking, he said, and needs to be addressed, is that most of this is in uncleared transactions. This goes to the factor of capacity and the ability that clearinghouses have to take on that additional volume.

Rodrigo Buenaventura, Head of Markets Division at the European Securities and Markets Authority (ESMA), noted that ESMA has six months to decide whether to propose clearing for this type of derivative. ESMA has already sent a proposal to the European Commission on interest rate derivatives, he said, and a proposal on credit default swaps is expected by the end of November. That leaves the third instrument, NDFs. ESMA will concentrate on whether that particular class should or should not be subject to compulsory items.

Under the E.U. process, after ESMA submits a proposal and the European Commission approves it, the E.U. Parliament or Council could intervene upon a belief that the standard is contrary to Level 1 legislation, in this case ,the EMIR Regulation. While this has not yet happened in the last three years, he noted, it remains a possibility that must be respected.

In terms of the criteria of the product, ESMA must assess three elements: standardization, reliability of pricing and liquidity. Regarding standardization, ESMA found that the level of standardization of is very high and comparable to credit and interest rates swaps.

But there are some peculiarities with NDFs, he cautioned, one of which is maturity, with the maturity of most trades being below three months, which he described as being very short. Indeed, 90% of maturities are below three months, 30% are below 30 days, and 10% are less than seven days.

David Bailey, Director of Financial Market Infrastructure for the Bank of England, spoke from the perspective of a supervisor of the clearinghouses. From that oversight aspect, he noted, when considering a clearing mandate the focus is the capacity of the central counterparty. While that is something regulators have usually considered when authorizing a central counterparty to clear a product, he observed, it is very important that regulators refresh their analysis when a clearing mandate is considered. Other factors that must be considered are size and scale, and liquidity.

E.U. Set to Resume Work on Money Market Fund Legislation

The new E.U. Parliament and the new Financial Services Commissioner signaled their intent to resume work on legislation enhancing the regulation of money market funds, an effort that stalled in the last Parliament and Commission. In a letter to the E.U. Council, Martin Schultz, President of the European Parliament, indicated that the body would take up the unfinished business of a Regulation on Money Market Funds (2013/0306). 

In his confirmation hearings before a Parliamentary panel, Financial Services Commissioner-designate Lord Jonathan Hill vowed to move forward with the money market fund reform proposals that are currently on the table. He said that the E.U. must find a solution that will allow money market funds to play a role in economy while at the same time ensuring financial stability. He believes that under the current regulatory regime money market funds can pose a systemic risk. He will try to build a consensus on regulations that are effective and at the same time encourage investment.

What is currently on the table is a proposal requiring money market funds to have a capital cushion buffer of 3 percent for constant NAV funds that can be activated to support stable redemptions in times of decreasing value of the fund’s investment assets. The proposed Regulation would also require certain levels of daily and weekly liquidity in order for the money market fund to be able to satisfy investor redemptions. Money market funds are obliged to hold at least 10 percent of their assets in instruments that mature on a daily basis and an additional 20 percent of assets that mature within a week.

Parliamentary Panel Approves Lord Hill as E.U. Financial Services Commissioner

After two contentious hearings, the E.U. Parliamentary Committee on Economic and Monetary Affairs favorably reported out the nomination of Lord Jonathan Hill of the U.K. as Commissioner for Financial Services and Financial Stability by a vote of 45-13. A final vote by the whole Parliament is set for October 22, with the new Commission expected to begin its duties on November 1. Lord Hill will replace Michel Barnier of France as the E.U.’s top securities and banking regulator. Similar to Commissioner Barnier, Lord Hill emphasized that the avoidance of regulatory arbitrage is a paramount concern, both within the E.U. and with the United States. He will continue Commissioner Barnier’s fight to achieve financial regulatory convergence with the U.S.

Recently, Commissioner Barnier called on Lord Hill to continue the effort to have mandated cross-border financial regulatory convergence included in the trade talks with the United States and convince U.S. regulatory partners that this approach will not lower standards but will achieve greater financial stability. During his conformation hearings, Lord Hill addressed the concerns of some MEPs that U.S. regulators have implemented increasingly stringent extraterritorial requirements for financial firms operating cross-border. The Commissioner-designate noted that, while the U.S. tries to regulate its global financial firms even when they are operating in the E.U., the Commission should recognize U.S. regulations as equivalent when it can; and defer to such regulations. 

On the issues around shadow banking, Lord Hill said that the Commission must be alert to the emergence of new risks in this sector. Shadow banking is a broad term, he noted, and it encompasses some activities that policy makers and regulators may want to encourage. The challenge is to implement effective regulation while not suppressing innovation.

He emphasized the free flow of capital, to which he is totally committed, greatly depends on restarting a private, high quality securitization market. This will be one of his top priorities. He said the choice between regulation and growth is a false dichotomy. Regulators can encourage better securitization without increasing risk.

The Commissioner-designate is also committed to the principle of regulatory proportionality, and eschews a one-size-fits-all approach to regulation. The Commission should look at the size of the firm and scale the regulation accordingly.

While noting that corporate governance is not part of his remit, it will go to the Justice Commissioner, Lord Hill said that incentive compensation should be aligned with performance and the long-term interests of the company. That alignment broke down during the run up to the financial crisis, he noted, when executive compensation was not geared to the long-term interest of the company and its shareholders. He supports clawbacks of bonuses and other forms of incentive compensation.

Sunday, October 19, 2014

PCAOB Panel Discusses Valuations of Financial Assets

The PCAOB Standing Advisory Group (SAG) discussed one of the most controversial and complex issues of financial accounting and auditing, estimates and measurements of financial assets, at a special meeting today. This discussion came against the backdrop of a consultation on the issues previously set out by the PCAOB.

International Accounting Standards Board Member Patrick Finnegan detailed five concrete recommendations to the PCAOB on the consultation. First, he endorsed a single standard aligning risk assessment standards with substantive testing. Second, he called for the use of third-party estimates of fair value. Complexity abounds in this area, he noted, and the use of third parties, such as for collecting data and applying it to models, could be useful and even necessary.

The IASB member’s third point involved the expectation gap. He believes that a single set of principles in this area would send a strong signal to the marketplace.

His fourth recommendation is that auditors should have access to the committee process of any entity assigning values to financial instruments. Auditors need a seat at the table to observe management’s discussion of valuations. His fifth and final recommendation is to place a heavy emphasis on auditor education in this area. There is a close nexus between experience and evaluating complex estimates and measurements. For example, auditors must have significant education to properly evaluate any impairment of assets. They must, for example, understand how credit risk changes in relation to events.

FASB Member Larry Smith said there is no silver bullet for auditing estimates and measurements of financial assets. Auditors have been auditing estimates forever, he noted, but fair value estimates have raised the level of concern over estimates and measurements.

SAG members had concerns about a single standard for all measurements, including fair value estimates. Philip Johnson cautioned the PCAOB not to be too prescriptive in the standard.

Former FASB Chair, and SAG member, Robert Herz said that this is a very important subject in moving financial accounting and auditing forward. The fair value standard reflects the view that sometimes management has to come up with best estimates, but, at the same time, actual market values should not be ignored. One of the problems that came out of the financial crisis was that some derivatives have no active trading. The reforms put derivatives on exchanges, he noted, and that will help to get a fair value estimate, but will not solve the problem completely. Quoted market price is a good metric, he added.

Mr. Herz chairs the Morgan Stanley audit committee. In that role, he likes to hear about any changes from quarter-to quarter in this area from the auditors or from management. Consistency is important in the area of valuation of financial assets and, similarly important is the need to detect any management bias. Risk management also plays a role in this area, said the former FASB Chair, as does understanding the challenges as they develop. Also, more broadly, this is part of good corporate governance. Standard setting should consider behavioral aspects, how people would react to situations.

The use of specialists in developing a valuation was debated. SAG member Jean Joy said that third-party specialists can be most useful in valuing assets and liabilities in acquisitions and business combinations, as well as in valuing Level 3 illiquid assets. But she cautioned that a troubling aspect of Level 3 is that here, even specialists have a wide variety of estimates.

Robert Herz, while noting that more and more firms have internal specialists, agreed with Ms. Joy that outside specialists are needed for valuing assets in business combinations.

SAG member Douglas Maine opined that it would be useful for the Board to issue guidance for the use of specialists in valuing financial assets and also ensure that audit committees are the first line of defense in this area. PCAOB Chief Auditor Marty Baumann revealed that the Board has asked the staff to prepare a consultation paper on the use of valuation specialists and that this project is on the staff’s agenda.

In conclusion, Barbara Vanich, PCAOB Associate Chief Auditor, said that there appears to be support for a single standard that emphasizes auditor skepticism and risk assessment. She said that the staff is interested in hearing the views of people on how the standard could be more principles-based.

Saturday, October 18, 2014

Chairman Massad Addresses the CFTC’s Most Pressing Issues

[This story previously appeared in Securities Regulation Daily.]

By Matthew Garza, J.D.

In remarks before the Outlook 2014 conference, sponsored by the Managed Funds Association, CFTC Chairman Timothy Massad shared his views on two of the most pressing issues currently before the CFTC—tweaking the rules mandated by the Dodd-Frank Act, and cross border harmonization.

End-users. Massad said that it should be expected that rules as significant as those mandated by the Dodd-Frank Act would require clarification and adjustment, noting that part of the CFTC’s job is to make sure the rules do not impose undue burdens or unintended consequences on nonfinancial commercial companies that rely on the derivative markets, such as manufacturers and farmers. “They were not responsible for the crisis or the excessive risks that have come out of this market,” he stated.

To accomplish this, the CFTC has reproposed rules on margin for uncleared swaps to exempt end-users from the requirements. He said the CFTC was able to shift the views of banking regulators to bring their respective rules on the subject in line. The CFTC has addressed the ability of many local utility companies to access the energy swap market, and is now looking at other issues involving commercial end-users, such as contracts with embedded volumetric optionality and certain record keeping obligations. He said he expects the CFTC to act on those matters before year end.

Cross border harmonization. Massad said that he shares the concern of many that harm could result if derivative reforms adopted by different jurisdictions are not in harmony. He said the CFTC is making progress, but the OTC derivatives industry developed into a global industry without any regulation, so historical perspective on this issue is necessary to understand the challenges. He pointed out that the rules for securing bank loans aren’t the same in the states, and asked how many would expect the rules governing the sale of securities to be the same in all the G-20 nations. “Now we are seeking to regulate it through the actions of the various G-20 nations, each of which has its own legal traditions, regulatory philosophy, administrative process and political dynamics. There will inevitably be differences.”

The CFTC issued substituted compliance determinations for many of its rules last December, he said, and the agency expects to do more once other jurisdictions issue rules. He did say that he believes the E.U. should recognize the U.S. central clearinghouses as equivalents, but they have not yet issued any equivalence determinations. He said the E.U. believes that changes are necessary in U.S. treatment of clearinghouses that are located in Europe but are also registered in the U.S.

The U.S. dual registration regime has worked, he said, partially because the U.S. simply required that clearing of futures take place at clearinghouses that are registered in the U.S. and meet U.S. standards, which tie into U.S. bankruptcy laws. “We have seen this work in MF Global and Lehman most recently. We built our swap mandates on this framework of dual registration, and as a result, clearing of swaps for Americans largely takes place overseas.” He said that the issue is very important to the industry and he believes that the dual registration approach a good one. “Regulators must work together to make sure clearinghouses operate transparently and do not pose risks to financial stability.”

Thursday, October 16, 2014

Maryland Adopts Intrastate Small Business Exemption

[This story previously appeared in Securities Regulation Daily.]

By Jay Fishman, J.D.

The Maryland Legislature adopted, effective October 1, 2014, a non-crowdfunding intrastate small business exemption.

Legislation. The exemption covers any security issued by a Maryland-organized entity that:
  • Conducts a securities offering in accordance with Securities Act Section 3(a)(11)/SEC Rule 147 and in accordance with any Maryland Securities Commissioner-adopted additional conditions such as issuer restrictions, offering limitations, and required disclosures and notice filings;
  • Offers and sells the securities only to Maryland residents;
  • Caps the aggregate price of the securities offering at $100,000;
  • Caps the consideration paid by any single purchaser at $100; 
  • Allows commissions or other remuneration to be paid to only Maryland-registered broker-dealers or agents; and
  • Is not subject to any Maryland Securities Commissioner-defined disqualification or to the Maryland Securities Act anti-fraud provisions.
Regulation. The Maryland Securities Commissioner adopted by administrative order, effective October 1, 2014, the following additional conditions that an issuer must meet to claim the statutory intrastate small business exemption.
  • The issuer must be an entity organized under Maryland law, qualified to do business in Maryland, and have its principal place of business in Maryland. Additionally, the issuer must use at least 80 percent of its net proceeds from sales made under the exemption to operate its Maryland business or to provide services in Maryland.
  • Offers and sales must be made exclusively in Maryland, i.e., offerees and purchasers must be “Maryland residents” as defined. 
  • The aggregate offering price during any 12-month period may not exceed $100,000.
  • Investors may cancel an investment at any time before the issuer has raised the minimum offering amount.
  • The issuer, before selling the security, must deliver to each prospective purchaser: (1) for a note offering, a complete Form MISBE-2 or a disclosure document containing the Form MISBE-2- required information; or (2) for a Commissioner-approved non-note offering, a disclosure document containing the Form MISBE-2 required information that has been adapted to the non-note offering.
  • The issuer must file with the Maryland Securities Commissioner not later than 15 days after the first sale of securities under the exemption: (1) a Form MISBE-1 or a document containing the MISBE-1 required information; and (2) a $100 filing fee.
  • The sold securities may not be resold.
The exemption is available only for promissory notes, but the Maryland Securities Commission may extend the exemption to other security-types.

The “bad boy” disqualification provisions for the Maryland limited offering exemption (MLOE) apply to this intrastate small business exemption. The integration provisions and the insignificant deviation provisions for MLOE also apply.

In addition, the issuer must, in connection with the documentation of any securities sold under this intrastate small business exemption: (1) place a legend on the securities-evidencing documentation stating that the securities have not been registered under the Maryland Securities Act and setting forth the resale restriction; and (2) obtain from each purchaser a written representation of the purchaser’s residence.

In connection with any offer or sale under the exemption, the issuer must also: (1) disclose the resale restriction in writing; and (2) comply with the SEC’s guidance regarding the issuer’s use of its website to promote the offering and intrastate offerings found in Question 141.05 at

Wednesday, October 15, 2014

SIFMA Tells Fed to Give Banks More Time to Conform Funds

[This story previously appeared in Securities Regulation Daily.]

By Mark S. Nelson, J.D.

The Securities Industry and Financial Markets Association (SIFMA) asked the Federal Reserve to give banks new guidance and a one-year delay to help them meet the 2015 conformance deadline for bringing covered funds into compliance with the Volcker rule. Banks are likely to flood the Fed with extension requests in Q4 2014, SIFMA told the Fed’s general counsel in a letter published yesterday.

Fed guidance. The lack of Fed guidance for illiquid funds is one of the main worries for SIFMA’s members. SIFMA said not many funds will fall within the conformance rule, despite the Dodd-Frank Act’s plan to include them, because of the delay between the adoption of the final conformance rule (issued in February 2011 and later clarified in June 2012) and the final Volcker regulations (December 2013). Specifically, SIFMA asked the Fed to find a way to let illiquid funds partake of the stable run-off period until 2022 by aligning the Dodd-Frank Act’s intent with its regulatory implementation to close the two-year gap.

“Our members are at a loss as to how to proceed in the absence of further guidance from the Federal Reserve staff,” said SIFMA. According to SIFMA, 14 of its members with illiquid funds, who represent nearly 3,000 funds, planned to ask the Fed to extend the time to meet the conformance rule. The numbers include illiquid hedge fund interests for which a buyer may exist, but the fund cannot be sold in secondary markets.

Likewise, SIMFA estimates that over 1,500 funds will need a delay to satisfy asset management rules. This will include the time needed to “sell down” or conform employees’ stakes in covered funds. Logistics also will play a role in extension requests because of the time funds may need to get investor and regulatory approvals to rename covered funds or fund families, especially if the bank has ceded control of the fund or its adviser to another entity.

Other recommendations. SIFMA also wants banks to be able to finish their contractual duties owed to a fund for its lifetime, even if the fund is in its late stages and will be wound up. Yet another recommendation is to grant a one-year categorical extension to the conformance period to all currently registered investment companies and foreign public funds to let sponsors dilute seed capital. This latter request could be augmented by separate relief creating a presumptive seeding period for some non-legacy funds.

SIFMA listed many other ways the Fed can provide guidance or more time to meet Volcker rule mandates. SIFMA also said it will soon ask the Fed for a one-year delay related to the conformance period for banking entities’ interests in all foreign funds. An extension would help to ease the Volcker rule’s burden on overseas markets.

The preliminary data cited by SIFMA in its letter to the Fed came from a survey of its members. SIFMA said that despite the lack of data on assets under management or market valuations, the results of the 19-member sample cited in its letter show the likelihood that many banks will ask the Fed for extensions later this year. In fact, SIFMA said its data may “substantially underestimate” the volume of requests.

Monday, October 13, 2014

CFTC Chair Vows to Work with New E.U. Financial Services Commissioner on Cross-Border Swaps Regulation

CFTC Chair Tim Massad committed to working with his E.U. counterpart on harmonizing cross-border derivatives regulation. In an interview at the Financial Services Roundtable Global Summit, the CFTC Chair said that he looks forward to working with the E.U. Financial Services Commissioner-designate, Lord Hill, on issues of equivalence and substituted compliance around OTC derivatives regulation. Chair Massad said that he would reach out to Lord Hill after the E.U. Parliament confirms him as Commissioner for Financial Services, Financial Stability, and Capital Markets, which is now expected to occur by November 1.

Chair Massad that cross-border regulatory harmonization is a difficult challenge since it must go through nation states with different philosophies and legal traditions.

On the recognition of derivatives clearinghouses, he noted that E.U. authorities have not yet recognized U.S. clearinghouses as equivalent. They should do so as soon as possible, he advised. The CFTC Chair observed that clearinghouses are registered in a number of countries. The rules should be harmonized. The risk of fragmentation came when the E.U. said they would impose capital charges if they do not recognize a U.S. clearinghouse.

Chairman Massad pointed out that CFTC rules protect U.S. customers and are tied to the U.S. Bankruptcy Code. For example, if a futures commission merchant (FCM) defaults, bankruptcy rules provide for the transfer to another intermediary in order to ensure customer protection and avoid a cascade of defaults.

There is now mandated clearing of some swaps, noted the Chair, but there will always be uncleared swaps due to, for example, a lack of liquidity or new products. The CFTC is working with the Fed and the E.U. on margin for uncleared swaps to ensure that the rules are very similar. He added that margin for uncleared swaps is a big part of risk mitigation.

The Chair also mentioned a recent federal court ruling recognizing that the some oversaes derivatives activity could import risk into the U.S. and endorsed CFTC rulemaking to address that scenario. He added that E.U. authorities have the same view as the CFTC that the derivatives market is a global market and that market participants can do things in one jurisdiction that impacts another jurisdiction.

Finally, Chairman Massad spoke on CFTC resources and budget constraints. He noted that the OTC derivatives market is eight times the size of the futures markets, and Congress has given the SEC the challenging job of regulating this market. The CFTC is building the infrastructure to facilitate a big date collection effort, he observed, and the budget challenge makes this job harder. For example, he pointed out that the CFTC cannot examine large derivatives clearinghouses as frequently as it would like to on what he described as a very small budget.

Standards Adopted Implementing E.U. Credit Rating Agency Regulation

The European Commission adopted three proposed standards needed to implement key provisions of the Regulation on Credit Rating Agencies. The standards, which were proposed by the European Securities and Markets Authority (ESMA) set out the disclosure requirements for issuers, originators and sponsors on structured finance instruments; reporting requirements to credit rating agencies for the European Rating Platform; and reporting requirements for rating agencies by ESMA. Financial Services Commissioner Michel Barnier stated that implementing the revised Regulation on credit rating agencies by setting out reporting and disclosure requirements in three important areas marks another step in improving transparency and restoring confidence in the financial system.

The standard requiring enhanced disclosure around structured finance instruments is designed to improve investors’ ability to make an informed assessment of the risks related to such complex financial instruments. This disclosure obligation aims in particular at reducing investors’ dependence and reliance on credit ratings and reinforcing competition between credit rating agencies.

Another standard determines the content and the presentation of the information, including structure, format, method and timing of reporting that credit rating agencies must disclose to ESMA for the purpose of the European Rating Platform. ESMA will set up this Platform, which will allow investors to consult and easily compare all available credit ratings for all rated instruments.

Finally, the Commission approved a standard setting out the content and format of data on fees charged by credit rating agencies to their clients to be periodically reported to ESMA for the purpose of its ongoing supervision of rating agencies. The information collected under this standard will allow for the verification by ESMA of whether pricing practices are discriminatory and thereby facilitate fair competition and mitigate conflicts of interest.

Saturday, October 11, 2014

Germany Remains Strong for Financial Transaction Tax

Germany remains strongly in favor of implementing an E.U. financial transaction tax, reaffimed Federal Finance Minister Wolfgang Schäuble, but it is a complicated matter, he added. In an interview with Badische Zeitung, the Minister said he is convinced that once the tax is implemented E.U. members that now oppose it will end up adopting the financial transaction tax. He said that the E.U. definitely plan to make good progress on implementing the tax this year.

But he acknowledged that some member states are against the financial transaction tax because they are afraid that the financial sector will take its business elsewhere. Even the 11 countries that want to move forward with the tax have differences of opinion. Germany supports a comprehensive financial transaction tax, but right now ``we just need an agreement.’’

In recent remarks, European Commissioner for Taxation Algirdas Semeta urged E.U. members to agree on the implementation of the first step of the FTT before the end of this year, with the ultimate goal of a broad based tax. priority should be given to the discussions on the Financial Transaction tax under enhanced cooperation.

Friday, October 10, 2014

Four Senators Urge SEC to Quickly Finalize General Solicitation Investor Protection Rules

Four U.S. Senators urged the SEC to act promptly and without further delay to finalize and strengthen proposed investor protections for private securities offerings in the wake of the Commission’s rule allowing general solicitation and advertising of private securities offerings under Regulation D. A year ago the SEC implemented the JOBS Act ending of the ban on general solicitations and, so, for the last year, issuers have been allowed to use highway billboards, internet advertisements, cold calls to senior living centers, and promotional T-shirts to market their securities to investors, with no education for investors and limited disclosure of risks. In a letter to SEC Chair Mary Jo White, Senators Elizabeth Warren (D-MA), Jack Reed (D-RI), Carl Levin (D-MI) and Ed Markey (D-MA) expressed deep concern that, for the last year the Commission has allowed private securities offerings to take place using general solicitation and advertising without adequate investor protections.

Two safeguards are especially important and should be adopted without further delay, said the Senators. First, general solicitation materials that will be used by issuers, especially for private investment funds, should be filed with the Commission, and should contain risk disclosures. Such requirements will provide the Commission and other regulators with a more complete understanding of the general solicitation landscape, they noted, and will deter misleading advertisements.

Mutual funds, which generally are less risky to investors than private securities offerings, are required to submit advertising materials for review by regulators and are required to include specific risk disclosures in their advertisements. The Senators believe that private securities offerings, especially for private investment funds, should be subject, at minimum, to the same standards as mutual funds. They noted that similar requirements for submission of materials and uniform disclosure of past performance were recommended by the Commission’s Investor Advisory Committee in 2012.

Second, issuers should be required to file a Form D before engaging in general solicitation, and those who engage in general solicitation without filing the required Form D registration form, or who file improperly, should not be allowed to rely upon the Securities Act registration exemption until corrective action is taken. In the view of the Senators, current rules, coupled with lax enforcement, have resulted in an environment where there are few, if any, meaningful consequences for issuers that fail to file a Form D in a timely manner.

Investor Advisory Committee Offers Recommendations on Accredited Investor Definition and Proxy Vote Disclosure

[This story previously appeared in Securities Regulation Daily.]

By Jacquelyn Lumb

SEC Chair Mary Jo White provided the Investor Advisory Committee with an update on its actions since the group last met, which included money market fund reforms, amendments to the registered asset-backed security disclosure regime, and finalization of over a dozen Dodd-Frank Act mandates related to conflict of interest and governance of credit rating agencies. Next on the SEC’s rulemaking front is the Dodd-Frank executive compensation and OTC mandates, she said. She also expects the SEC to act on credit risk retention rules, Regulation SCI and other market structure issues. White added that the Division of Corporation Finance has made good progress on its disclosure effectiveness project.

SEC’s actions on IAC recommendations. With respect to the IAC’s recommendations, White said the SEC will hold a roundtable early next year to explore a number of proxy matters, including universal ballots. The staff is continuing its work on ways to improve the quality and usefulness of structured data while also trying to reduce the compliance burden. On the tick size initiative, White said the SEC should soon publish a proposal for public comment on a 12-month pilot to widen the tick sizes for certain stocks.

The staff also continues to work on the IAC’s recommendations related to target date funds, a uniform fiduciary duty for investment advisers and broker-dealers, and remains focused on efforts to obtain sufficient funding for investment adviser examinations.

Accredited investor definition. Barbara Roper, the director of investor protection at Consumer Federation of America, and chair of the IAC’s investor-as-owner subcommittee, provided an overview of the subcommittee’s work on drafting a definition of accredited investor, which has come to play an important role in determining whether an offering qualifies for a private offering exemption. The recommendation would revise the definition as it pertains to natural persons to address the loss of the protections that existed before the lifting of the general solicitation and advertising bans.

The IAC approved the subcommittee’s recommendations to encourage the SEC to consider allowing individuals to qualify as accredited investors based on their financial sophistication, and to consider whether the current financial thresholds should be adjusted for inflation. The IAC also encouraged the SEC to strengthen the protections for non-accredited investors who rely on recommendations from purchaser representatives to qualify as sophisticated investors.

Disclosure of preliminary proxy votes. Damon Silvers, associate general counsel for the AFL-CIO, presented the recommendation of the subcommittee regarding impartiality in the disclosure of preliminary voting results. The subcommittee analyzed the role of brokers and banks in the proxy distribution process, as well as that of broker agent, Broadridge Financial Solutions. Silvers advised that brokers almost universally contract out to Broadridge the distribution of proxy voting materials and instructions.

Broadridge’s actions. In uncontested solicitations, issuers and their agents can obtain from Broadridge the cumulative voting status beginning the day after the first distribution of proxy materials. The decision to provide preliminary proxy results is at Broadridge’s discretion, but the original intent in doing so was to let issuers know if they had a quorum.

In contested solicitations, Broadridge used to provide a status report to both sides, but in May 2013, it ceased to provide the vote status upon the request of the exempt solicitor—one who sends solicitation materials advocating a position on a shareholder matter but does not distribute its own proxy card. Broadridge then provided the information where authorized by the issuer and subjected it to a three party confidentiality agreement among the issuer, Broadridge and the exempt solicitor. Silvers said the change occurred during the JP Morgan vote in which a shareholder proponent sought to separate the role of CEO and chair.

Ministerial and impartial role. The exemption to the proxy rules contemplates that brokers are not participants and play only a ministerial and impartial role in the solicitation process. The subcommittee noted that concerns have been raised over the lack of impartiality and the failure to act in a ministerial fashion in connection with the disclosure of voting results during an exempt solicitation, and about potential conflicts of interest in the validation of voting results.

The subcommittee recommendation was for the SEC to take the necessary steps to ensure that the Rule 14a-2(a)(1) exemption is conditioned upon the broker or its designated intermediary acting in an impartial and ministerial fashion throughout the proxy process, including the disclosure of preliminary voting information.

The subcommittee members differed on whether the SEC should address this issue through guidance or rulemaking. Former Commissioner Steven Wallman, the founder and CEO of Foliofn, Inc., said there is no support for providing preliminary results to one side and not the other. Any rationale for doing so is weak.

Inaction by SEC. Silvers said the SEC could have resolved the JP Morgan matter with a phone call, but enough time has passed with no SEC action that the subcommittee decided to make its recommendation. When asked to what extent Broadridge has addressed this issue on its own, Ann Yerger, the executive director of the Council of Institutional Investors, replied that it has not. The full committee approved the subcommittee’s recommendations.

Thursday, October 09, 2014

CFTC’s Global Markets Panel to Discuss Bitcoin and Swaps Clearing

[This story previously appeared in Securities Regulation Daily.]

By Mark S. Nelson, J.D.

The CFTC’s Global Markets Advisory Committee (GMAC) will meet today to discuss bitcoin and the clearing of non-deliverable forwards (NDF) swaps contracts. The GMAC, sponsored by Commissioner Mark P. Wetjen, is expected to hear opening remarks from Chairman Tim Massad and Commissioners Sharon Bowen and Chris Giancarlo. The GMAC meeting is set to run from 1:30 to 5:00 p.m.

On the bitcoin front, CFTC officials and industry representatives will explain what bitcoin is and how bitcoin derivatives may be used. The panelists also will discuss the CFTC’s self-certification process as it relates to bitcoin. Another panel will talk about whether the CFTC should mandate clearing of NDF swaps contracts.

Tuesday, October 07, 2014

Senators Ask CFTC to Scrutinize FBOT Approvals on Aluminum Futures

Senators Sherrod Brown (D-OH), Tammy Baldwin (D-WI), and Elizabeth Warren (D-MA) urged the CFTC to conduct a thorough review of the London Metal Exchange (LME), the largest exchange for aluminum futures, before approval of the LME’s application as a foreign board of trade (FBOT). The Senators pointed to concerns with ongoing irregularities in the trading of aluminum contracts and warehousing practices as need for further action. In a letter to CFTC Chair Tim Massad, they cautioned that if the CFTC is unable to work with the LME and the U.K. Financial Conduct Authority to come to a resolution that fully addresses the delivery issues facing end users, Congress may be forced to legislate in this area.

In that event, the CFTC should refrain from approving LME’s application for registration as an FBOT until Congress has had the opportunity to address distortions in aluminum futures trading and delivery by taking appropriate legislative action through the CFTC reauthorization process. Legislation is currently pending in Congress that would reauthorize the CFTC for five more years. It would also be useful for the CFTC to suggest any legislative changes to the Commodity Exchange Act that might improve the CFTC’s authority and oversight concerning the LME and other FBOTs.

The FBOT registration process, as allowed by the Dodd-Frank Act and defined by the CFTC regulations, provides an opportunity for meaningful market oversight that protects U.S. end-users and consumers. The Senators said that it is critical that the CFTC use this opportunity to examine the LME’s practices and to work with the Financial Conduct Authority and the LME to ensure that the LME meets the standards the CFTC set forth in its FBOT registration rule.

The Senators have deep concern with the ongoing irregularities in trading of aluminum contracts and the warehousing and physical delivery of aluminum to end users. They asked the CFTC to also immediately use its oversight tools to thoroughly examine aluminum markets used by U.S. participants and to allow sufficient time for Congress to make any necessary legislative fixes through the reauthorization of the Commodity Exchange Act before authorizing foreign boards of trade through the CFTC’s FBOT registration process.

More specifically, the legislators have serious concerns that aluminum contracts’ storage and delivery provisions, as overseen by the LME, are vulnerable to manipulation and have resulted in an inefficient physical delivery settlement process which raises costs for consumers and erodes confidence in the LME. They identified problematic LME rules, including insufficient warehouse load-out rules and practices for LME aluminum contracts that have resulted in end-users waiting in queues for as many as 683 days to take delivery of aluminum, despite high levels of production and large amounts of aluminum waiting in storage for delivery. In addition, there are inadequate rules requiring the institution of “Chinese walls” between warehouse companies and trading operations to prevent conflicts of interest between commercial investments and other financial activities.

Rules preventing warehouse owners from storing their own metals in their warehouses, but allowing the parent company of a warehouse owner to store metals in a warehouse owned by one of its subsidiaries, are also problematic, as are overly restrictive LME rules prohibiting only unreasonable incentive payments, which the Senators called a vague term that is open to abuse. Even while the LME itself has acknowledged that warehouse competition is conducted on the basis of high incentive payments, and such payments are significantly linked to the existence of aluminum queues, it has taken no steps to address this structure.

Monday, October 06, 2014

International Cooperation Essential to Effective Enforcement, White says

[This story previously appeared in Securities Regulation Daily.]

By John Filar Atwood

Fraudulent schemes commonly reach across borders, making international cooperation essential to the SEC’s enforcement program, according to Commission Chair Mary Jo White. In remarks to the IOSCO annual conference in Rio de Janiero, she said that the agency made more than 900 requests for international assistance in the last fiscal year and received valuable support from regulators in Germany, Australia, Guernsey, Liechtenstein and elsewhere.

In her speech, White said that the Commission is constantly working to improve its enforcement program. In fiscal 2013, the SEC brought more than 675 enforcement actions and obtained orders for $3.4 billion in penalties and disgorgement. She noted that the agency will be announcing soon the results for fiscal 2014, which just ended, and hinted that the SEC had another productive year.

Strengthening deterrence. One strategy the Commission employs, White said, is to bring innovative actions to increase its enforcement reach and to strengthen deterrence of wrongdoing. As examples, she cited recent actions charging violations of the market access rule, a case against an individual for misleading and obstructing a compliance officer of an investment adviser, and the first case applying the Dodd-Frank Act whistleblower anti-retaliation provisions.

As evidence of its efforts to continually improve, White discussed three enforcement program enhancements implemented since she took over as chair. They are the creation of new task forces to target particular types of misconduct, a change to the settlement protocol to require public admissions of wrongdoing in some cases, and the whistleblower program.

Task forces. In June 2013, the SEC established a Financial Reporting and Audit Task Force which focuses on ensuring accurate and reliable financial reporting. The task force uses innovative analytical tools to more quickly identify potential issues in financial statements and disclosures that merit further investigation, White said.

According to White, there has been a significant jump in the number of financial fraud and issuer disclosure cases that have been filed since the task force was formed. The group also has increased awareness among companies and auditors that the SEC is closely focusing on the quality of their financial reports and audits.

She noted that the Commission also established a Microcap Fraud Task Force to increase its efforts to eliminate fraud in the microcap industry. The “pump and dump” scheme is a perennial enforcement problem, she said, and the task force is increasingly obtaining trading suspensions to stop misconduct sooner, often before the dump of shares can occur, and limiting the ability of wrongdoers to profit from their schemes.

Admissions of wrongdoing. White said that the SEC modified the longstanding no admit-no deny settlement protocol to require public admissions of wrongdoing in cases the Commission believes require a greater measure of public accountability. The cases involve particularly egregious conduct, a large number of harmed investors, significant risk to the markets or to investors, conduct that obstructs or impedes the SEC’s investigation, ones in which the wrongdoer poses a future threat to investors or the markets, and cases in which admissions would enhance the deterrence message.

The change in protocol should strengthen the impact and message of the enforcement program, according to White. Greater public accountability results in increased investor confidence in the SEC’s enforcement program and in public markets, she noted, and serves as a warning to would–be violators.

Whistleblower program. The whistleblower program has been successful, White said, generating more than 3,000 tips in each of the last two years. She believes recent awards, including $30 million to a non-U.S. person, will encourage even more whistleblowers both within and outside the U.S. to report misconduct and help the enforcement staff to bring wrongdoers to justice.

Saturday, October 04, 2014

E.U. Financial Services Commissioner-Designate Grilled by Parliamentary Panel

Lord Jonathan Hill, European Commissioner-designate for Financial Stability, Financial Services, and Capital Markets, was grilled by the European Parliament’s Economic and Monetary Affairs Committee this week and will be called back for a second hearing next week. Lord Hill announced a plan to combat risk, close financial loopholes and create a strong capital market. Broadly, he will identify obstacles to the free flow of capital and, specifically, he will encourage investment in high quality securitization by unlocking private investment without engendering the taking of undue risk.

While it appears that corporate governance will not be part of his portfolio, it went to the Justice Commissioner, Lord Hill opined that compensation incentives must be aligned with performance. In his view, the breakdown in aligning pay with performance was a problem that helped cause the financial crisis because it worked against executives acting in the company’s long-term interest. He also said that clawbacks of executive compensation are appropriate in some circumstances. He emphasized his commitment to be a Financial Services Commissioner for all E.U. Member States, not a representative of the U.K. financial services industry.

Responding to a questionnaire from Parliament, Lord Hill promised to work for the consistent cross-border implementation of international standards and principles in all key jurisdictions and close loopholes that can present risks to financial stability, and ensure a level playing field globally. He will seek to deepen regulatory cooperation with the U.S. on financial services, in order to avoid companies having to comply with two sets of similar but not identical rules. He will pursue similar work with other G20 countries and other jurisdictions, especially those with important financial markets.

The regulation of shadow banking is also on his radar screen. He pledged to begin discussions in order to set strong international standards that will then need to be implemented at the E.U. level. One of his first priorities will be to design a recovery and resolution regime for non-bank entities, most notably derivatives central counterparties.

Friday, October 03, 2014

Piwowar Says More Analysis Needed on Uniform Fiduciary Standard for Investment Advisers and Broker-Dealers

[This story previously appeared in Securities Regulation Daily.]

By Jacquelyn Lumb

In remarks to the National Association of Plan Advisors, SEC Commissioner Michael Piwowar talked about the appropriate standard of care for those who provide investment advice to retail investors. Piwowar said he has not reached a decision on this matter, but the SEC must do a cost-benefit analysis before acting. He suggested a potential fix to the issue and made clear his opposition to linking the SEC’s action to the Department of Labor’s. The SEC is an independent agency and should act only when it has the necessary information to promote its mission of protecting investors, maintaining fair and orderly markets, and facilitating capital formation, he advised.

Piwowar traced the history of initiative to address the disparate standards for broker-dealers and investment advisers, culminating in a staff study and a recommendation to adopt a uniform fiduciary standard of conduct when provide personalized investment advice to retail customers. He said the rigor of the study could be called into question, but there is no doubt that retail investors do not understand the differences between the duties of broker-dealers and those of investment advisers.

Costs and benefits. In considering whether a regulatory change is necessary, Piwowar said the SEC must take into consideration the marginal benefits and the marginal costs. The SEC took an important step, in his view, when it sought data about various approaches to the standard of care issue in 2013. The SEC received many comments that it will assess as it determines whether to proceed with rulemaking.

Piwowar noted that he is not aware of any evidence that retail investors are being harmed or disadvantaged under one regulatory regime compared to the other. He added that a uniform standard may not even result in different investment advice from what clients receive today. The adoption of a uniform standard still may not clear up investor confusion given the differences in advertising rules, supervisory requirements, licensing and registration, and books and records requirements, according to Piwowar.

Given these differences, the staff also recommended that the SEC consider harmonizing the regulatory requirements of broker-dealers and investment advisers when they perform the same or similar functions. In Piwowar’s view, this topic should be part of the debate or the cost-benefit analysis will be incomplete.

Real-world example. Piwowar expressed concerns about the potential cost to retail investors that may result from a uniform standard. He said a real-world example is occurring in the U.K. following its introduction of a retail distribution review (RDR), which bans advisers from taking a commission for selling products and requires that all fees that are paid only by clients must be agreed upon in advance. Before the RDR, advisers did not charge for advice, but earned commissions from asset managers for selling their products. The resulting “advice gap” was much worse than predicted, Piwowar said, with many now reporting that the services offered by financial advisers are too expensive and opting to manage their own portfolios.

Based on the data available to date, Piwowar said the potential benefits of a fiduciary standard seem elusive while the potential costs may be very high. The SEC must take a measured and deliberate approach to his issue, he advised.

Potential fix. Piwowar believes the SEC’s disclosure requirements may play a role in the problem. He suggested that the SEC consider developing a disclosure document for broker-dealers and investment advisers based on testing various formats and their effect on investor comprehension. He said the options may include a summary disclosure document similar to the mutual fund summary prospectus, a disclosure statement for retail investors at the start of a business relationship as described in FINRA’s 2010 concept proposal, or similar to the table of information included in the Truth in Lending disclosure requirements for credit card applications and solicitations.

As for those who believe the SEC should act on a uniform fiduciary standard before the DOL reproposes its definition of fiduciary, or at least adopt a uniform fiduciary duty standard after the DOL does, Piwowar said his position is a firm no. The SEC must fully understand the issue and the possible costs and benefits before it acts, he advised.

Wednesday, October 01, 2014

Four Senators Urge SEC to Quickly Finalize General Solicitation Investor Protection Rules

Four U.S. Senators urged the SEC to act promptly and without further delay to finalize and strengthen proposed investor protections for private securities offerings in the wake of the Commission’s rule allowing general solicitation and advertising of private securities offerings under Regulation D. A year ago the SEC implemented the JOBS Act ending of the ban on general solicitations and, so, for the last year, issuers have been allowed to use highway billboards, internet advertisements, cold calls to senior living centers, and promotional T-shirts to market their securities to investors, with no education for investors and limited disclosure of risks. In a letter to SEC Chair Mary Jo White, Senators Elizabeth Warren (D-MA), Jack Reed (D-RI), Carl Levin (D-MI) and Ed Markey (D-MA) expressed deep concern that, for the last year the Commission has allowed private securities offerings to take place using general solicitation and advertising without adequate investor protections.

Two safeguards are especially important and should be adopted without further delay, said the Senators. First, general solicitation materials that will be used by issuers, especially for private investment funds, should be filed with the Commission, and should contain risk disclosures. Such requirements will provide the Commission and other regulators with a more complete understanding of the general solicitation landscape, they noted, and will deter misleading advertisements.

Mutual funds, which generally are less risky to investors than private securities offerings, are required to submit advertising materials for review by regulators and are required to include specific risk disclosures in their advertisements. The Senators believe that private securities offerings, especially for private investment funds, should be subject, at minimum, to the same standards as mutual funds. They noted that similar requirements for submission of materials and uniform disclosure of past performance were recommended by the Commission’s Investor Advisory Committee in 2012.

Second, issuers should be required to file a Form D before engaging in general solicitation, and those who engage in general solicitation without filing the required Form D registration form, or who file improperly, should not be allowed to rely upon the Securities Act registration exemption until corrective action is taken. In the view of the Senators, current rules, coupled with lax enforcement, have resulted in an environment where there are few, if any, meaningful consequences for issuers that fail to file a Form D in a timely manner.

Form D is an important tool for federal and state securities regulators to be able to track and monitor offerings, and to target surveillance and education efforts appropriately. Without it, fear the legislators, a regulator’s first sign of a problematic offering may be a phone call from an investor who faces a lost retirement. The current regulation does not require a Form D to be filed until two weeks after an offering has commenced, and for many offerings, provides little incentive to file at all. Requiring pre-filing and adding a real consequence for failing to properly file with the Commission, such as the potential loss of the issuer’s Securities Act exemption, would provide better information to regulators and a much-needed incentive for issuers to comply with the filing requirements.