Market Solutions

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In This Issue Municipal Time-of-Trade Disclosure & Suitability 2014 Legal and Legislative By Gregg L. Bienstock, Esq. Lumesis, Inc. Issues Conference ...... 19 2014 Securities Compliance SEC Approves New Rule A. Time-of-Trade Disclosure Seminar...... 20 Codifying Principle-Based 1. New Rules Actually Make Rule and Interpretive Notices; Legislative/Regulatory Actions.....2 Things Easier For You SEC Approves Incorporation New Members...... 2,8,10,13 While many fret with the of Requirements in Suitability introduction of new rules and New Publication...... 9 Determination. amendments to existing rules, both Program Update...... 19 n March 7, 2014, the the MSRB and SEC have made Sponsor Acknowledgement...... 21 Municipal Securities clear that their objective is to help Watch For...... 15 ORulemaking Board those who want to comply with the rule. The SEC’s Release (Release Who’s News...... 18 (MSRB) received approval from the Securities and Exchange No. 34-71665) provides that: Commission (SEC) to consolidate extensive interpretive guidance Rule G-47 is designed to on the fair-practice obligations of consolidate most of the municipal securities dealers into previously issued guidance into three new rules and amendments rule language which the MSRB to an existing rule. Rules focused believes would ease the burden Market Solutions on Time-of-Trade Disclosures to on dealers and other market Editor investors, dealers’ dealings with participants who endeavor to Dorcas Pearce sophisticated municipal market understand, comply with and Contributing Editors* professionals and suitability of enforce these obligations.… Marc-Alain Galeazzi dealers’ recommendations of [t]he MSRB maintained that Barbara R. Mendelson municipal securities transactions the codification is an effort will be effective July 5, 2014. to consolidate the current Market Solutions is a quarterly newsletter obligations into streamlined about the activities of the Financial Markets Whether you are a Compliance Association as well as legislative/regulatory Professional charged with rule language. [Emphasis developments of interest to FMA members. protecting your firm and their supplied.] The opinions expressed in this publication employees, an Advisor interfacing are those of the authors, not necessarily Interestingly, the above quote from those of the Association and are not meant with retail clients or someone to constitute legal advice. Market Solutions working with non-SMMPs, these the SEC mirrors, in large part, the is provided as a membership service of the clarified rules should be welcome language the MSRB highlighted in Financial Markets Association, 333 2nd as the guesswork around “what its Request for Comment on Street, NE - #104B, Washington, DC 20002, information to disclose and Codifying Time-of-Trade [email protected], 202/544-6327, www.fmaweb.org. Please let us have your communicate” has been clarified. Disclosure Obligation (February suggestions on topics you would like to see This paper focuses on the 2013 Notice 2013-04): addressed in future issues. content and nuances of the new …ease the burden on dealers and ©2014, Financial Markets Association rules around Time-of-Trade Disclosure, the amended rule other market participants who regarding suitability and explores endeavor to understand, comply how technological innovation has with and enforce the Time-of- and will impact compliance and Trade Disclosure Obligation. business practices. (Continued on Page 3)

REGISTER NOW for FMA’s LEGAL AND LEGISLATIVE ISSUES CONFERENCE October 23–24, 2014 ■ Hyatt Regency Washington (on Capitol Hill) ■ Washington, DC Market Solutions 2 Legislative/Regulatory Actions

This column was written by lawyers from Morrison U.S. Banking Regulators Seek Comment & Foerster LLP to update selected key legislative and on Interagency Effort to Reduce regulatory developments affecting financial services and Regulatory Burden capital markets activities. Because of the generality of On June 4, 2014, the Federal Reserve Board, FDIC, this column, the information provided herein may not and the OCC (the “Agencies”) issued a notice be applicable in all situations, and should not be acted of regulatory review and request for comments upon without specific legal advice based on particular to identify outdated, unnecessary, or unduly situations. burdensome regulations for insured depository institutions, as required by the Economic Growth and In this issue, we address various selected Regulatory Paperwork Reduction Act of 1996. developments from the Banking Regulators, the To facilitate this review, the Agencies have divided Dodd-Frank Act’s Title VII and the Consumer regulations into 12 subject-matter categories, which Financial Protection Bureau (CFPB), and we have a will be addressed in four Federal Register requests look across the pond to the most recent updates in over the next two years. The requests invite the Europe public to identify in such categories outdated, unnecessary, or unduly burdensome regulatory requirements imposed on insured depository institutions and their holding companies. BANKING REGULATORS The June 4 request seeks comment on the following three categories: Applications and OCC Issues Interim Volcker Rule Reporting, Powers and Activities, and International Examination Procedures Operations. The remaining nine categories, which will be addressed in the three subsequent requests On June 12, 2014, the OCC issued interim procedures for examiners to assess banks’ progress (Continued on Page 8 ) in developing a framework to comply with the requirements of what is commonly known as the “Volcker Rule.” The Volcker Rule prohibits banking entities from engaging in short-term proprietary FMA Welcomes trading of financial instruments and from owning, New Members! sponsoring, or having certain relationships with hedge funds or private equity funds. The interim procedures would apply to George Alexakos Crowe Horwath examinations of national banks (other than certain Brian Baum Goodwin Procter LLP limited-purpose trust banks), federal savings associations, and federal branches and agencies Gregg Bienstock Lumesis, Inc. of foreign banks. Although the OCC’s interim Patrick Brooks Stifel Nicolaus procedures are addressed to examiners rather than banks, they shed some (long-awaited) light on Christopher Cuzzucoli LPL Financial the OCC’s focus and priorities with regard to the Heather Dautel Wells Fargo Securities implementation of the Volcker Rule. The interim procedures are divided into four categories: General Patrick Dennis Oyster Consulting, LLC Procedures, Proprietary Trading, Covered Funds, and Robert Ducklo FTN Financial Conclusions. For more information, please read our client alert at http://www.mofo.com/~/media/Files/ClientAl Askari Foy SEC/Atlanta Regional Office ert/140617OCCInterimVolckerRuleProcedures.pdf. Bruce Harrison P.J. Robb Variable Corp.

The new rule delivers as billed although, as selling is a factor that can be considered in making discussed below, one must continue to assess the materiality determination: the efficacy of their policies and procedures as “Whether the customer is purchasing or selling clarification is provided and technology continues the municipal securities may be a consideration to make material information more reasonably in determining what information is material.” accessible. G-47, Supplementary Material: .01(d). 2. Introduction to the New Time-of-Trade G-47 makes clear that the “Time-of-Trade Disclosure Obligations Disclosure” obligation Rule G-47 is a codification extends to recommended and of the interpretive guidance “The new rule makes clear its application unsolicited orders as well on Time-of-Trade Disclosure as primary and secondary Obligations that were part is when you ‘sell a municipal security to a market transactions. In other of MSRB Rule G-17. This customer, or purchase a municipal security words, in all situations where codification is part of the from a customer, whether unsolicited or a municipal bond is traded MSRB’s effort to review for, or on behalf of, a retail its rules and, in this case, recommended, and whether in a primary client or non-SMMP proper clarify the obligations of offering or secondary market transaction.’ ” those interfacing with retail disclosure, as provided for in clients and non-SMMPs in G-47, is required. the municipal space. In addition to the MSRB’s stated b. Material Information that is Reasonably purpose, protection of the retail investor has been Accessible and continues to be a priority of the SEC, FINRA and the MSRB. G-47(a) speaks to material information that is reasonably accessible to the market. Information is considered G-47 provides, in part, as follows: material if: No broker, dealer, or municipal securities dealer …there is a substantial likelihood that the shall sell a municipal security to a customer, or information would be considered important or purchase a municipal security from a customer, significant by a reasonable investor in making an whether unsolicited or recommended, and whether investment decision. Rule G-47(b) (ii). in a primary offering or secondary market transaction, without disclosing to the customer, This provision seems to leave open, to an orally or in writing, at or prior to the extent, what a reasonable investor would consider time-of-trade, all material information known “important or significant” for purposes of their about the transaction, as well as material investment decision. G-47’s non-exhaustive list information about the security that is reasonably of examples of disclosure obligations in specific accessible to the market. G-47(a); SEC Release scenarios provides insight as to what may be No. 34-71665. [Emphasis supplied.] important or significant. See G-47, Supplementary Material: .03. 3. Details Worth Noting The “Time of Trade Disclosure” obligation also requires the disclosure of material information that a. Application of the Time-of-Trade is reasonably accessible to the market. Accordingly, Disclosure Requirement one must have an understanding of what it means The “Time-of-Trade Disclosure” applies to both the for information to be “reasonably accessible to the sale to and purchase from a customer. The “purchase market.” In this next section, we explore the explicit from” was a step further than many had contemplated language of Rule G-47 as well as the reality that this under G-17 and its interpretive guidance. In response requirement, by its very nature (and past language to comments submitted during the rule-making from the regulators) is evolutionary. process, the MSRB added the following sentence to clarify that whether the customer is purchasing or (Continued on Page 4)

Rule G-47(b) provides that information is that the obligation was and is to “disclose material “reasonably accessible to the market where the information that is reasonably accessible.” What was information is made available publicly through “reasonably accessible” even a year or two ago has established industry sources” and goes on to define changed. Technology has evolved as have the ways in “established industry sources:” which to ensure your firm’s practices are in line with (i) “Established its policies. industry sources” shall Technology brings to the include the MSRB’s … “Documentation –‘if you can’t fore two realities. First, it (“EMMA”) system, document that it happened, has made more and better rating agency reports, it didn’t happen.’” information available. and other sources of As noted above, what is information relating to “reasonably accessible” municipal securities today is very different than transactions generally used by brokers, dealers, what fit this category one, three or five years ago. Ask and municipal securities dealers … G-47(b)(i). yourself: [Emphasis supplied.] • Do those dealing with your retail clients have Importantly, this language explicitly supports the real-time access to material information for notion that one must go beyond a rating report or communication to the client at or before the EMMA in order to identify and disclose information time-of-trade? that is reasonably accessible. This notion is further supported by the MSRB’s • Is the information current? 2012-16 Notice and the SEC filing itself. The • Is the information in one place for ease of use 2012-16 Notice specifically recognized the and delivery? importance of technological enhancements to the advancement of disclosure and transparency: • Can you verify all the required information was disclosed? The MSRB expects that, as technology evolves and municipal securities information becomes • Can you efficiently access information to answer more readily available, new “established industry the question of whether the material information sources” are likely to emerge. was disclosed at or before the time-of-trade? This pronouncement, coupled with language As one ponders the above questions, it is worth from FINRA’s Regulatory Notice 10-41 regarding considering, with the introduction of enhanced “established industry sources” and “material technology, is “checking the box” really the best way information about the security that is reasonably to demonstrate or document your firm’s policies are accessible to the market”, is instructive. indeed practiced, especially as regulators speak more In meeting these disclosure, suitability … about documentation and proof of action? To this obligations, firms must take into account all point, at the March 11, 2014, FINRA Conference in material information that is known to the firm New York, we routinely heard about the importance or that is available through “established industry of documentation with one presenter commenting sources,” … Resources outside of EMMA may that he was told “if you can’t document that it include press releases, research reports and happened, it didn’t happen.” other data provided by independent sources… Second, FINRA and the SEC have made clear Therefore, firms should review their policies and that technology, coupled with data examination and procedures for obtaining material information review, will be an important part of the examination about the municipal securities .... [Emphasis and enforcement protocol. They now have the data supplied.] and technology to better identify the types of activity that may be riskier based on market or individual Technological evolution and the emergence of new behavior and focus their examination in ways sources is critical as one contemplates the reality previously not available. (Continued on Page 5)

Combine the advances in technology with the in technology and information availability (just as reality that there is clarification around what is the SEC and FIRNA does). Consider, at a minimum, required to be disclosed and you have a changed an annual review of policies, procedures and tools landscape in terms of what is available and what is to available to support compliance. be disclosed. A read of G-47 makes clear that a simple review of past material event disclosure filings or an Suitability OS summary from the time of issuance will fall short The SEC-approved amendment to G-19 focuses on the of “material information reasonably accessible.” reasonable-basis obligation and provides, in pertinent Current market conditions and the introduction of part: a clarified rule should be cause for a re-examination of policies, procedures and what is actually being (a) The reasonable-basis obligation requires a done. Rule G-47, covered in detail above, enables the broker, dealer or municipal securities dealer regulator and enforcement arm to dismiss the defense to have a reasonable basis to believe, based on of “the rule was less than clear” and “I thought reasonable diligence, that the recommendation is checking the box was enough.” Additionally, interest suitable for at least some investors… [R]easonable rate, credit and liquidity risk calls into question what diligence must provide … an understanding of was disclosed to the client at the time-of-trade about the potential risks and rewards associated with the bond and the risks associated therewith. the recommended municipal security… and an One may also want to consider whether or not understanding of information about the municipal they can “prove” or document that the disclosure security …, including the information described in was made. While G-47, a codification of G-17 and MSRB Rule G-47 (Time-of-Trade Disclosure), to its interpretive guidance, is silent on the subject the extent such information is material. The lack of requiring proof, the subject of being able to of such an understanding when recommending document what has been done has been the topic of a municipal security or strategy violates the discussion at several forums and most recently was suitability rule. [Emphasis supplied.] cited by several participants at the FINRA New York The importance of the requirements of Rule G-47 Conference cited above. Proof may be a good thing go beyond Time-of-Trade Disclosure and form a to have when one is asked to prove disclosure was foundational aspect of one of the three legs of the stool made. When put to the test – either an examination to support a suitability determination. or complaint – would you prefer the “he said, she said” approach, or something more? B. What Do I Need to Disclose? As noted above, the objective of G-47 is to codify 4. New Rule Requires a Review of Policies, a principle-based rule with extensive interpretive Procedures and Practices guidance into something that addresses the concerns The introduction of a new Rule with an effective of market participants. G-47 maintains a basic premise date of July 5, 2014 would seem to be a warning embodied in G-17—disclosure of material information shot across the bow for firms and their professionals reasonably accessible—and also sets forth a non- to undertake a thorough review of their policies, exhaustive list of examples of “information that may be procedures and actual practices – are those material in specific scenarios and require Time-of-Trade interacting with retail investors and non-SMMPs Disclosures to a customer.” G-47 makes clear that “… providing proper disclosure to the retail client and other information may be material to a customer in are you documenting it? Those seeking to embrace these and other scenarios.” Thus, “material information policies, procedures and practices consistent with reasonably accessible” remains the standard. the language and spirit of G-47 should ensure their 1. Disclosure of Investment-Specific Risk approach supports transparency and disclosure of “material information about the security that is G-47 makes clear the importance of disclosing risk reasonably accessible to the market.” In this regard, factors specific to the investment. Supplementary it is important to consider continued advancements Material, .01(a) makes clear that: (Continued on Page 6)

Established in 1991, FMA is the leading association specifically dedicated to meeting the special and unique needs of banks and bank-affiliated securities firms. Market Solutions 6 Municipal Time-of-Trade Disclosure… Continued from Page 5 [t]he disclosure “Combine the advances This section focuses on obligation includes in technology with the reality three alternatives to address a duty to give a the requirements of G-47. customer… facts that that there is clarification around As you contemplate the are material to assessing what is required to be disclosed Time-of-Trade Disclosure the potential risks of the and you have a changed landscape requirement, consider the investment. in terms of what is available evolutionary nature of the Facts material to and what is to be disclosed.” technology and the cost- assessing potential risks benefit of the alternatives. seem to incorporate the potential risks of a given investment: think credit, 1. EMMA Plus Some Work interest rate, liquidity, market and other risks. There is a “go it alone” approach – EMMA, rating While some firms have taken to delivery of such agency reports, and “other sources of information information once a year, one has to contemplate the relating to municipal securities transactions generally efficacy of such an approach when the requirement used by brokers, dealers, and municipal securities is for disclosure specific to a particular securityat or dealers that effect transactions in the type of before the time-of-trade. municipal securities at issue.” In considering this approach, contemplate the time associated with 2. What is Not Acceptable: gathering all of the required information, the creation of a consistent approach to regularly access the same The Supplementary Material for G-47 matter-of-factly and the development of a construct to ensure the lets us know what is not acceptable to satisfy the information is delivered (documentation). Based on disclosure obligation. our research and market feedback, it can take up to • The public availability of material information 30minutes per trade to access the various sources and through EMMA, or other established industry identify “material information about the security that sources, does not relieve brokers, dealers, and is reasonably accessible to the market.” municipal securities dealers of their obligation to If you opt for this approach, as suggested by G-47, make the required Time-of-Trade Disclosures to a a good place to start is EMMA. From there, it is up customer. to you to find the right way to satisfy the obligation. Should you choose to pursue this path be sure to • A broker, dealer, or municipal securities dealer contemplate a process for documenting all you do may not satisfy its disclosure obligation by and storing the same. directing a customer to an established industry source or through disclosure in general advertising 2. The Advisor Platform materials. Supplementary Material .01(b) (c). DIVER Advisor was created to address the Time-of- Trade Disclosure Obligation for municipal bonds. C. Steps To Consider to Meet Your Time-of- The need for the platform was identified by market Trade Disclosure Obligation participants who recognized that technology can be Let’s start with the fact that the Supplementary used to address the time-consuming requirements Material provides that “… dealers must implement around this obligation. These same market processes and procedures reasonably designed to participants suggested there was a need for a tool to ensure that material information regarding municipal support compliance before the FINRA examination securities is disseminated to registered representatives so that advisors and the firm were protected. who are engaged in sales to and purchases from a The Advisor platform addresses Time-of-Trade customer.” Supplementary Material .04. You then Disclosure Obligations by producing, for every must have policies and procedures to ensure that the municipal bond, a report that is ready for client material information that is disseminated to your delivery. The report is produced in seconds, can representatives is communicated to your clients – be easily delivered to clients and is supported by a both retail and non-SMMP. (Continued on Page 7)

Established in 1991, FMA is the leading association specifically dedicated to meeting the special and unique needs of banks and bank-affiliated securities firms. Market Solutions 7 Municipal Time-of-Trade Disclosure… Continued from Page 6 robust compliance reporting engine. Each “Municipal Disclosure Obligation for your non-SMMP and retail Bond Report” brings together information to support client are cause to revisit your policies and actual the Time-of-Trade Disclosure Obligation and includes practices. Have you kept up with technology, or will custom risk factors, geo-located news links for every the regulator be a step ahead? Can you document bond and sector-based economic and demographic that disclosure has been made? data to help understand the critical factors that As protection of the retail and non-SMMP investor drive the fiscal well-being of the Issuer. “Material continues to be of paramount importance, one can information about the security that is reasonably make a strong argument that the clarified obligations accessible to the market” – providing business may result in increasingly significant penalties for efficiencies and documentation that you accessed and those firms that do not take the necessary steps to delivered the same. shore-up existing policies, procedures and tools to The Advisor platform, made fully available in April address Time-of-Trade Disclosure Obligations. ■ 2013, was presented to FINRA for comments and feedback and, as demonstrated by the more than Sources and Related Documents: 29,000 subscribers, has been embraced by market • SEC Order Granting Approval of a Proposed Rule Change participants. Consisting of Proposed MSRB Rule G-47, on Time of Trade Disclosure Obligations, Proposed Revisions to MSRB Rule 3. Tools Designed to Meet Other Needs G-19, on Suitability of Recommendations and Transactions, With the introduction of G-47 as a final Rule, Proposed MSRB Rules D-15 and G-48, on Sophisticated practices deemed “good enough to get by” need to Municipal Market Professionals , and the Proposed Deletion be revisited to ensure that “square peg in the round of Interpretive Guidance – http://www.sec.gov/rules/sro/ hole” practices/solutions do, in fact, satisfy G-47. msrb/2014/34-71665.pdf. While many of these practices are effective for the • MSRB Regulatory Notice 2014-07, March 12, 2014. purpose for which they were created or may satisfy part of the obligation – a summary of the Official • Muni Time of Trade Disclosure - Why a New Rule and Why the Delay? February 11, 2014 – http://www.lumesis. Statement or a list of Continuing Disclosures – com/pdf/Final-Time-of-Trade-Disclosure.pdf. they do not appear to satisfy the obligations under G-47 (revisit that OS summary and determine if it • Retail Client Time of Trade Disclosure: “New” Rules on is current; are you sure news stories identified by the Way...Are You Prepared? September 26, 2013 – http:// a third party capture information your firm may www.sifma.org/thought-leader-library/2013/retail- deems material?). Material information reasonably client-time-of-trade-disclosure--new-rules-on-the- accessible, with today’s technology, is much more way---are-you-prepared-/. expansive. In considering such tools, also take into account Gregg Bienstock is the CEO and Co-Founder of the question of efficiency and the ability to effectively Lumesis, Inc. a technology and information delivery firm disseminate the information to the retail client. focused on providing compliance, credit and data tools Lastly, for those opting to address the mantra of and solutions for the municipal bond market. Gregg is a “documentation,” does your solution or a patch-work frequent speaker on municipal market and compliance approach provide you the documentation you need to panels. support that the disclosure was actually made?

Conclusion: Clarified Obligations May Lead to More Penalties Now that G-47 has been approved and its effective date looming, do your policies, procedures and practices meet the requirements? Advances in technology and clarity around the Time-of-Trade

Established in 1991, FMA is the leading association specifically dedicated to meeting the special and unique needs of banks and bank-affiliated securities firms. Market Solutions 8 Legislative/Regulatory Actions Continued from Page 2 for comment, are the following: Banking Operations; percent, to avoid restrictions on capital distributions Capital; Community Reinvestment Act; Consumer and discretionary bonus payments. In addition, IDIs Protection; Directors, Officers, and Employees; of G-SIBs must maintain a minimum 6 percent SLR to Money Laundering; Rules of Procedure; Safety and be considered “well capitalized” under the Agencies’ Soundness; and Securities. prompt corrective action framework. The final rule, The Agencies’ request includes a chart that lists the which has an effective date of January 1, 2018, categories of regulations, divides the categories into currently applies to the following G-SIBs and their specific subject-matter areas, and identifies the types IDIs: Bank of America Corporation, Bank of New of institutions affected by the regulations. York Mellon Corp., Citigroup Inc., Goldman Sachs Group, Inc., JP Morgan Chase & Co., Morgan Stanley, State Street Corp., and Wells Fargo & Co. U.S. Banking Regulators Issue The Agencies also issued a separate NPR proposing Supplementary Leverage Ratio Notice a technical correction to the definition of “eligible guarantee” in the Agencies’ risk-based capital rules. of Proposed Rulemaking, and Adopt The comment period for both NPRs ended June 13, Enhanced Supplementary Leverage 2014. Ratio Final Rule In a separate action, the FDIC board also adopted On April 8, 2014, the same Agencies issued a notice as final its Basel III interim final rule, which is of proposed rulemaking (NPR) that would modify substantively identical to the final rules adopted by the denominator calculation for the supplementary the Federal Reserve Board and the OCC in July 2013. leverage ratio (SLR) in order to reflect recent changes (Continued on Page 9) agreed to by the Basel Committee on Banking Supervision. The SLR, which was finalized last year, requires banks to maintain a minimum 3 percent ratio of tier 1 capital to total leverage exposure. Among other changes, the NPR would revise the treatment of on- and off-balance sheet exposures for purposes of calculating total leverage exposure. FMA Welcomes The SLR applies to all banking organizations subject More New Members! to the Agencies’ advanced approaches risk-based capital framework, which generally include those with $250 billion or more in total consolidated assets or $10 billion or more in on-balance-sheet foreign Robert Jamieson Wiand Guerra King LLP exposure; other banking organizations that opt in to the advanced approaches; and depository institution Rebecca Jenkins BB&T Bank subsidiaries of banking organizations that trigger one Alistair Johnson FINRA/New Orleans of the aforementioned thresholds. Carmen Jones Tennessee Securities Division The Agencies also adopted a final rule to impose an enhanced supplementary leverage ratio (ESLR) on Angie Karna Nomura Securities International, Inc. U.S. top-tier bank holding companies (“BHCs”) with more than $700 billion in total consolidated assets or Thomas LaFond Goodwin Procter LLP more than $10 trillion in assets under custody (i.e., Michele Lascarides Capital One global systemically important banks or G-SIBs), and any insured depository institution (IDI) thereof. The Yoan Manuel Lorenzo Mercantil CommerceBank ESLR, also known as the “leverage capital surcharge,” Rochelle McAllister Federal Reserve Bank of requires G-SIBs to maintain a leverage buffer of Chicago 2 percentage points above the minimum SLR requirement of 3 percent, for a total of more than 5

DODD-FRANK ACT TITLE VII Required SEF trading for many vanilla swaps went into effect, in accordance with the CFTC’s UPDATE rules, starting in February of this year. Under the The phase-in of Title VII of the Dodd-Frank Act and CFTC’s cross-border rules, a counterparty not the CFTC’s regulations thereunder continues. Other otherwise subject to the CFTC’s clearing and trade than anticipated rules relating to position limits and execution rules will generally become subject to margin for uncleared swaps, the CFTC’s rules relating those requirements when it transacts with a U.S. to swaps have largely been finalized and are in the counterparty a swap that must executed on an SEF. process of being implemented. Nonetheless, recent As a result, many non-U.S. parties have reportedly months have been eventful. Among the significant refused to trade with U.S. parties. Similarly, under events have been the fragmentation of the market, guidance that the CFTC released last November, in apparent reaction to the CFTC’s rules relating to a multilateral trading platform located outside the mandatory clearing and swap execution facilities United States providing persons located in the U.S. (each, a SEF), and the CFTC’s issuance of no-action with the ability to trade or execute swaps is expected letters relating to the SEF execution of “package to undertake the painstaking process of registering trades” and the cross-border application of its with the CFTC as an SEF. Accordingly, many non- transactional rules. U.S. swaps trading platforms have ceased facilitating The market’s fragmentation results from the transactions for U.S. counterparties. It is not clear CFTC’s decision to implement, ahead of non-U.S. how, or when, the CFTC’s regulations will be regulators, rules relating to mandatory clearing and harmonized with those of non-U.S. regulators. the trade execution requirement — the required Separately, in early May, the CFTC gave time- trading of certain swaps on trading platforms such limited no-action relief in relation to the SEF as SEFs or designated contract markets (each, a execution of multi-leg “package transactions.” The “DCM”) — while, at the same time, making those CFTC defines a package transaction as a transaction rules applicable to market participants outside the involving two or more instruments (i) that is U.S. that trade with or facilitate transactions for U.S. executed between two or more counterparties; (ii) market participants. That decision has given market that is priced or quoted as one economic transaction participants that would not otherwise be subject to with simultaneous or near simultaneous execution of the CFTC’s rules a disincentive to transact with or all components; (iii) that has at least one component facilitate transactions for U.S. parties. (Continued on Page 10)

New Publication Bloomberg Brief, the electronic newsletter division of Bloomberg L.P. that publishes 17 market leading newsletters to over 265,000 global customers, has launched a daily newsletter that showcases Bloomberg’s coverage of business, politics, and culture in London. The London Brief has been in beta to select clients and registrants since February but due to increasing demand, Bloomberg is now making the title more widely available. The newsletter is free of charge to both Bloomberg Professional Terminal users and non-users alike. London Brief is available at: http://www.bloombergbriefs.com/london. With 10,000 registered users in the beta test phase alone, London Brief is the fastest growing newsletter Bloomberg Brief has ever launched. The newsletter also employs a groundbreaking technical platform to provide readers with a seamless platform experience. The London Brief is published at 5 pm GMT every weekday and is aimed at everyone working in the City of London, as well as those with a vested interest in what is happening in the British capital. Produced specifically for commuters in a short, easy to digest format, the newsletter has regular columns such as Business, Politics, Boris Watch, and Out of Office, all delivering the most important information out of London.

Established in 1991, FMA is the leading association specifically dedicated to meeting the special and unique needs of banks and bank-affiliated securities firms. Market Solutions 10 Legislative/Regulatory Actions Continued from Page 9 that is a swap that is subject to the trade execution CFPB UPDATE requirement; and (iv) where the execution of each component is contingent upon the execution of all Exercise of UDAAP Authority other components. Under the CFTC’s no-action letter for package The CFPB has pursued a number of enforcement transactions, a leg of a package transaction that actions using its unfair, deceptive or abusive would otherwise be required to be executed on a SEF acts or practices (UDAAP) authority. The CFPB’s may not be required to be executed on a SEF if it is most recent enforcement action alleging UDAAP part of a package transaction. Certain of the relief violations used the deception standard and focused granted in the letter has already expired, but other on credit card “add-on” products, such as payment relief is scheduled to last until November 15, 2014. protection features and identity theft protection The relief that remains in effect until that date relates products. Since the agency’s inception, the majority to package transactions in which: of CFPB actions alleging UDAAP violations have been based on deception claims—CFPB allegations • the components include at least one swap regarding deception are more than twice as frequent component that is subject to the CFTC’s trade as unfairness claims and more than five times more execution requirement, and at least one swap frequent than “abusive” claims. Thus far, the few component that is under the CFTC’s exclusive instances in which the CFPB has alleged abusive jurisdiction and not subject to the CFTC’s clearing acts or practices have been in the product areas of requirement; debt collection, debt settlement/debt relief, mortgage • the components include at least one swap settlement services, and private student lending. For component that is subject to the CFTC’s an analysis of the CFPB’s use of its UDAAP authority, trade execution requirement, and at least one component (other than a transaction in U.S. (Continued on Page 11) Treasury securities) that is not a swap; or • the components include at least one swap component that is subject to the CFTC’s trade FMA Welcomes execution requirement, and at least one swap component that is a swap over which the CFTC More New Members! does not have exclusive jurisdiction. In addition, in another no-action letter issued in Désirée McAloon CCO Investment Services Corp. early June, the CFTC extended until the end of this Patrick McArdle Navigant year relief that it previously gave in relation to the application of its transactional requirements to swaps James Martignon Ulmer & Berne LLP between non-U.S. persons. In an interpretation last Richard Miller The Prudential Insurance year, the CFTC stated that even a swap between a Company of America non-U.S. swap dealer and a non-U.S. person that is booked in a non-U.S. branch of the dealer is subject Kristen Montet CenterState Bank to the CFTC’s transactional rules, if the non-U.S. Pete Newman Lumesis, Inc. swap dealer uses personnel or agents located in the U.S. to negotiate, arrange, or execute the swap. The Erin Pais Wells Fargo Securities June letter extended previous relief regarding the Adonna Parker First Tennessee Bank application of the CFTC’s transactional requirements in such circumstances. The CFTC has also issued a Melinda Peevy Maynard, Cooper & Gale, PC related request for comment. Ursula Pfeil PNC Financial Services Group, Inc.

Established in 1991, FMA is the leading association specifically dedicated to meeting the special and unique needs of banks and bank-affiliated securities firms. Market Solutions 11 Legislative/Regulatory Actions Continued from Page 10 see our presentation on the topic at http://media.mofo. financial services and bank products. For additional com/docs/pdf/140604-cfpb-udaap/. information about the RFI, see http://www.mofo.com/~/ media/Files/ClientAlert/140611CFPBMobileFinancial.pdf. Inquiry into Mobile Financial Services On June 11, 2014, the CFPB released a request for Proposal to Amend Annual Privacy information (RFI) concerning the use of “mobile Notice Rule financial services,” specifically among unbanked On May 13, 2014, the CFPB proposed amendments and underbanked consumers. The RFI was released to Regulation P, which mandates that financial in advance of a field hearing on the same subject institutions provide their customers with initial and that the CFPB held the next day in New Orleans, annual notices regarding their privacy policies. Under Louisiana. These developments demonstrate the the current regulation, there is no exception from the CFPB’s desire to stay abreast of innovation within the annual notice mailing requirement even if a financial financial services industry. institution has not changed its information-sharing In the RFI, the CFPB expresses its interest in practices. As a result, the annual notice requirement learning more about how consumers use mobile has been described as redundant, unnecessary, and devices to access financial products and services, costly. manage finances and achieve their financial goals. Under the proposed rule, financial institutions According to the CFPB, the agency plans to use that meet certain requirements, such as using the responses to the RFI in developing “consumer CFPB’s Model Privacy Notice, could post the privacy education and empowerment strategies” related to notice online and include a reminder of the notice’s developments involving mobile financial services. availability in regular mailings to consumers once per Along with the RFI, the CFPB published a series of year. Thus, financial institutions could forgo mailing “consumer tips” to provide consumers with ‘best annual privacy notices by posting such notices practices for security” when using mobile devices for online, if the financial institution meets certain financial services. conditions. Financial institutions that do not mail The CFPB’s initial focus in this area appears to be an annual notice would be required to clearly and on the intersection between mobile financial services, conspicuously notify consumers where the notice can and the unbanked and underbanked populations; be found, and to promptly mail to consumers a notice that is, how mobile financial services can be accessed upon their request at a toll-free telephone number. by those populations. Nevertheless, the CFPB’s Comments on the proposal are due July 14, 2014. recent activity regarding mobile financial services is To read our client alert discussing the CFPB’s proposal, a strong signal that the agency is paying attention to see http://www.mofo.com/~/media/Files/ClientAlert/140512 technological developments in this area, and could CFPBsPromisetoEasePrivacyNoticeBurdens.pdf. focus on products and services that involve access to (Continued on Page 12)

o save on printing/postage costs, FMA uses email “blasts” as much as possible to let our members Tand contacts know about our upcoming educational programs. FMA’s email program format necessitates that these “blasts” be addressed “To: Dorcas Pearce/FMA” / “From: Dorcas Pearce/FMA” with the recipients in the “Bcc” section. Please make sure your technology department allows these emails, typically providing information on our annual Compliance Seminar and Legal & Legislative Issues Conference, to get through to you. Unless you are a FMA member, you should receive no more than 5–7 emails annually. If you no longer want to be on FMA’s distribution list, please contact Dorcas Pearce ([email protected] or 202/544- 6327) to be deleted. At that time, please provide an alternate contact at your firm so that someone can route our emails appropriately…perhaps a training director or a compliance officer / internal auditor / attorney in the legal dept. Thanks for your help in keeping our costs in line and for getting our notices into the proper hands.

Established in 1991, FMA is the leading association specifically dedicated to meeting the special and unique needs of banks and bank-affiliated securities firms. Market Solutions 12 Legislative/Regulatory Actions Continued from Page 11 Fourth Supervisory Highlights Report Firstly, the BRRD requires firms to submit to their relevant competent authorities recovery plans, which On May 22, 2014, the CFPB released its fourth set out the arrangements the firm has in place to take edition of Supervisory Highlights, a report that early action to restore its viability in a time of severe provides an overview of the CFPB’s supervision work financial stress. Firms must update their recovery completed between November 2013 and February plans at least annually and whenever there is a change 2014. The report discusses a number of the CFPB’s in their legal or organizational structure or business or “examination findings” that have been identified in financial situation that could have a material effect on the course of the agency’s supervisory activities. It their recovery plans. In addition, resolution authorities also discusses recent public enforcement actions and (in consultation with competent authorities) will be non-public supervisory actions. The report presents required to prepare resolution plans, to determine findings according to industry and issue area. This how best to resolve a failed or failing firm or indeed particular report focuses on the areas of credit whether the firm is resolvable. reporting, debt collection, small-dollar lending, and Secondly, the BRRD provides various early compliance with fair lending requirements. With intervention powers to competent authorities to respect to fair lending, the CFPB said it identified take action to address problems at an early stage, concerns in circumstances where a lender makes including requiring a firm to implement its recovery exceptions to established credit standards. plan; drawing up an action program and convening The report discusses in some detail the importance a meeting of shareholders to adopt urgent decisions; that the CFPB places on supervised entities having preparing a debt restructuring plan with its creditors; a well-developed compliance management system. and provide for any changes to its legal or operational According to the CFPB, a strong compliance program structures. If there is a significant deterioration in the consists of written policies and procedures that are firm’s financial position, and other early intervention “consistent” with one another; an employee training powers are insufficient to remedy the situation, program that has “appropriate breadth and depth”; the competent authority can appoint a special internal monitoring; and corrective action plans. management body or a temporary administration to The report also reiterates a number of the CFPB’s replace the firm’s management for up to a year. expectations regarding third-party service providers, Thirdly, where the recovery plan and early including that supervised entities “carefully” select intervention measures are unable to prevent service providers; include compliance expectations the failure of a firm, the BRRD provides various in contracts with those companies; and monitor resolution powers to a resolution authority. These their work and complaints about their work. The powers are only exercisable where the firm is failing Supervisory Highlights report is accessible at: http:// or likely to fail, where there is no reasonable prospect files.consumerfinance.gov/f/201405_cfpb_supervisory- that any solution, other than a resolution action highlights-spring-2014.pdf. taken, would prevent the failure of the firm within a reasonable timeframe, and where a resolution EUROPE action is necessary in the public interest. The main objectives of the resolution powers are to ensure EU Bank Recovery and Resolution the continuity of critical functions in a firm, to Directive avoid adverse effects on financial stability, to protect taxpayers by minimizing reliance on extraordinary On June 12, 2014, the text of the Bank Recovery public financial support to avoid destruction of value and Resolution Directive (BRRD) was published in and minimize cost of resolution, to protect depositors the Official Journal of the EU following its adoption covered by the deposit guarantee scheme, and to by the Council of the EU on May 6, 2014, and the protect client funds and client assets. European Parliament on April 15, 2014. The BRRD provides four main resolution tools: The BRRD is part of the EU’s approach to deal with (i) a sale of business tool, which allows resolution crises at banks and certain investment firms at the authorities to sell all or part of the failing firm; earliest opportunity, and introduces a range of new regulatory tools and powers. (Continued on Page 13)

(ii) a bridge institution tool, which involves European PRIIPs Regulation identifying the good assets and separating them into On April 15, 2014, the European Parliament a new firm under temporary public sector ownership approved, with amendments, the European that would be sold to another private sector entity; Commission’s draft regulation (the “Regulation”) (iii) an asset separation tool, which allows bad relating to packaged retail investment and insurance- assets to be put into an asset management vehicle to based products (PRIIPs). The Regulation is expected maximize their recovery over time; and (iv) a bail-in to be adopted into law by the Council this summer, tool, which gives resolution authorities the power and will apply, directly and uniformly in all Member to write off all equity and to write off senior and States, two years after it comes into force. subordinated unsecured debt or to convert it into The Regulation aims to enable retail investors to an equity claim. The purpose of the bail-in tool is to understand and compare the key features of different absorb losses with a view to recapitalizing the firm packaged investment products, regardless of their internally so that it can continue as a going concern, legal form. It obliges product manufacturers and or if that is not possible, with a view to providing distributors (i.e., the persons advising on or selling capital for the new entity into which critical and the PRIIP) respectively to produce and provide to other “good” business has been transferred. The tool retail investors key information documents (KIDs) in ensures that the costs of resolution are borne by the respect of such products, on paper or via a website, shareholders and unsecured creditors. free of charge and “in good time” before the purchase. At the time of writing, Member States have until December 31, 2014, to transpose the BRRD into their Scope national laws and to start applying the provisions on A PRIIP is essentially defined as any instrument, January 1, 2015 (with the exception of the “bail-in” including instruments issued by special purpose tool, whose application may be delayed until January vehicles, whose return fluctuates by reference to 1, 2016, although the UK Treasury has already the value or performance of other assets. This indicated that it will transpose the bail in provisions covers all investment funds (including UCITS into UK law by January 1, 2015). funds), all structured products (whether packaged as insurance policies, funds, securities, bank deposits, or otherwise), and any derivative, subject in each case to certain express exclusions, such as FMA Welcomes “vanilla” securities that do not contain an embedded More New Members! derivative, non-structured deposits, and insurance products where the surrender value is not exposed to market fluctuations. Celeste Pryor FTN Financial Patrick Runyon SS&C Technologies, Inc. Format and Content of KID The KID must be a maximum of three sides of A4 Daphne Smith Tennessee Department of paper in length and must be accurate, fair, clear, Commerce and Insurance and not misleading. It should not contain any Kenneth Somma SS&C Technologies, Inc. unnecessary information beyond that which is May Thao Union Bank specified in the Regulation and must be a stand- alone document, referring to other documents only Linda Chatman Thomsen Davis Polk & Wardwell LLP in very limited circumstances. Further, the KID Stephen Topetzes K&L Gates LLP must be reviewed on a regular basis by the product manufacturer, in order to ensure that it is up-to-date Nimna Varghese Ernst & Young LLP and remains compliant with the Regulation. Further Michael Vossler Lumesis, Inc. details as to the format and content of the KID will be provided in forthcoming draft regulatory technical Daniel Waldman Arnold & Porter LLP standards from the European Supervisory Authorities, (Continued on Page 14)

Established in 1991, FMA is the leading association specifically dedicated to meeting the special and unique needs of banks and bank-affiliated securities firms. Market Solutions 14 Legislative/Regulatory Actions Continued from Page 13 which will take into account the different types and manufacturers and distributors will fall within its natures of PRIIPs and the different capabilities of remit if they market to EU retail investors, including retail investors to comprehend their features. registered offerings of structured products originating The Regulation contains considerable prescriptive from the U.S. It is also unclear whether disclaimers requirements as to the form of the KID. It must for structured products contractually required by have the title “Key Information Document” at the license agreements, as well as U.S. Regulation S and top of the first page, together with an explanatory other securities laws legends, should be included statement that must follow the language set out in in the KID; under the Regulation, these types of the Regulation. The KID must also include certain disclosures do not constitute “key information” that sections in the sequence set out in Article 8 of the is necessary to enable investors to understand a PRIIP. Regulation, including the details of the PRIIP and It is hoped that the territorial scope of the Regulation the product manufacturer, the product’s objectives, and its interaction with U.S. securities laws will be its risk/reward profile (including a summary risk clarified by level 2 regulation. indicator and narrative explanation of its significance and limitations), the associated costs (both in Interaction with the Prospectus Directive and the aggregate and percentage terms to aid comparability), UCITS IV Directive and terms of redemption. The KID must also contain Products that are within the scope of the UCITS a “comprehension alert,” where applicable, stating: IV Directive will be exempt from complying with “You are about to purchase a product that is not the Regulation for a period of five years after the simple and may be difficult to understand.” Regulation comes into force. For securities subject to If a KID is misleading or inaccurate, is inconsistent the Prospectus Directive, there is no such exemption. with legally binding contractual or pre-contractual Therefore, issuers of structured securities to retail documents, or breaches the requirements of the investors under a prospectus will have to produce Regulation, a PRIIP manufacturer may be subject to both a KID and an issuance-specific summary civil liability if retail investors can demonstrate loss (required by the Prospectus Directive). This seems to resulting from reliance on the KID. The Regulation run counter to the objective of providing a more level obliges competent authorities of Member States to playing field between different types of products, provide for appropriate administrative sanctions for and it will be confusing for investors to receive two breaches of the Regulation. Sanctions include the different types of summaries in respect of the same prohibition or suspension of the marketing of the product ■. relevant PRIIP, fines, and public censure.

Territorial Scope *Nimesh Christie, Afia Fening, Peter J. Green, The Regulation aims to create a consistent approach Ben Hardy, Jeremy C. Jennings-Mares, James C.H. to the content and format of investor disclosure Nguyen, Ryan H. Rogers, Diana E. Whitaker, and for PRIIPs within the EU, and so it seems all PRIIP James Schwartz contributed to this column

Happy 4th of July!

Established in 1991, FMA is the leading association specifically dedicated to meeting the special and unique needs of banks and bank-affiliated securities firms. (Continued on Page 13)

Market Solutions 15

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SEC Press Release 2014-123 (June 25, 2014) – The SEC MSRB Press Release (June 4, 2014) – The MSRB is currently adopted the first of a series of rules and guidance on cross- conducting a survey (through early July) of registered border security-based swap activities for market participants. municipal advisors to assess their business activities.

June 23, 2014 – The MSRB reminded municipal securities Federal Reserve Press Release (June 4, 2014) – The federal dealers that consolidated fair-dealing obligations, contained bank regulatory agencies sought comment to identify outdated, in revised MSRB Rule G-19 on suitability of recommendations unnecessary, or unduly burdensome regulations imposed and transactions, new MSRB Rule G-47 on time of trade on insured depository institutions. The first notice seeks disclosure obligations, and new MSRB Rules G-48 and D-15 on comment on regulations from three categories: Applications sophisticated municipal market professionals, as well as related and Reporting; Powers and Activities, and International changes to MSRB Rule G-8, become effective on July 5, 2014. Operations. The public has until September 2, 2014, to review and comment on this first set of categories. FDIC Press Release 46-2014 (June 16, 2014) – The FDIC released proposed rulemaking to amend their Annual Stress OCC News Release 2014-75 (May 28, 2014) – The OCC Test rule. This proposed rule would shift back the timing of the announced significant changes intended to strengthen both annual stress testing cycle by approximately 90 days, and clarify the supervisory process and the examining force supervising that institutions covered by the Annual Stress Test rule will not the nation’s largest and most complex financial institutions. have to calculate their regulatory capital ratios using the Basel The OCC will expand the organization, functions, and III advanced approaches until the stress testing cycle beginning responsibilities of its large bank lead expert program to improve on January 1, 2016. This follows similar action by the FRB and horizontal perspective and analysis, systemic risk identification, the OCC on June 12. quality control and assurance, and resource prioritization.

OCC Bulletin 2014-27 (June 12, 2014) – The OCC issued FINRA Regulatory Notice 14-24 (May 23, 2014) – FINRA interim procedures for examiners to assess banks’ progress released the April 2014 Supplement to the October 2002 in developing a framework to comply with requirements of Security Futures Risk Disclosure Statement. The Supplement section 619 (the Volcker rule) of the Dodd-Frank Act and the added new disclosure to accommodate proposed changes by implementing regulations adopted by the OCC with the other OneChicago, LLC, to list a product with a physical delivery rule-writing agencies. Because of the Volcker Rule’s complexity, settlement cycle shorter than three business days. The the OCC developed these interim examination procedures to implementation date of the Supplement was June 23, 2014. help examiners understand and focus on the rule’s key aspects and to work with banks during the conformance period to OCC Bulletin 2014-23 (May 23, 2014) – The OCC issued a measure progress toward achieving compliance by July 21, final rule that combines certain rules that the OCC originally 2015. The OCC will supplement these procedures during the issued jointly with the other federal banking agencies conformance period with in-depth procedures for examiners to regarding national banks with rules that the former Office test banks’ compliance on an ongoing basis. of Thrift Supervision issued regarding savings associations. Specifically, the OCC combined rules relating to consumer MSRB Press Release (June 9, 2014) – The MSRB launched a new protection in insurance sales, Bank Secrecy Act compliance, electronic price discovery tool on its EMMA website that allows management interlocks, appraisals, disclosure and reporting investors to more quickly and easily find and compare prices of of agreements related to the Community Reinvestment Act municipal securities with similar characteristics. and the Fair Credit Reporting Act. This final rule also makes technical amendments to the OCC’s FCRA rule to conform June 6, 2014 – The MSRB sought approval to amend Rule G-3 to provisions of the Dodd-Frank Act. This final rule became to eliminate the FINOP requirement and limit permissible effective on June 16, 2014. Series 6 activities. These amendments affect MSRB Rules G-3, G-7 and G-27. CFTC Press Release 6936-14 (May 22, 2014) – The CFTC issued a proposed rule amendment to adjust the de minimis June, 2014 – To assist municipal advisors in identifying the threshold for determining if an entity that enters into swaps MSRB rules that are applicable to them, the sorting function with utility special entities must register as a swap dealer. in the rules section of the MSRB website has been enhanced. And, the CFTC published notice to open the comment period Municipal advisors may choose the “municipal advisor” option to further consider certain hedging issues related to market from the drop-down menu in the “Rules for” tab of the MSRB practices in physical commodity derivatives. This comment rules section on msrb.org. This will display only those rules period expires July 3, 2014. CFTC Staff also issued a no- that are currently in effect for municipal advisors. Municipal action letter that provides relief from compliance with certain advisors may also wish to click on the “Upcoming Changes” tab requirements under Regulation 1.35(a) for certain members of to learn about new rules or amended rules with future effective designated contract markets or swap execution facilities. dates. (Continued on Page 16)

Established in 1991, FMA is the leading association specifically dedicated to meeting the special and unique needs of banks and bank-affiliated securities firms. Market Solutions 16

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Federal Reserve Press Release (May 22, 2014) – The Federal May 12, 2014 – The MSRB reminded municipal advisors that Reserve Board repealed its Regulation DD (Truth in Savings) an annual fee of $300 per professional is being implemented and Regulation P (Privacy of Consumer Financial Information) beginning in the second half of 2014 in conjunction with the and issued final amendments to the Identity Theft Red Flags SEC’s permanent registration process for municipal advisors. rule in Regulation V (Fair Credit Reporting). Municipal advisor firms will not be invoiced for the fee and advisors are required to remit the fee directly to the MSRB. OCC Bulletin 2014-22 (May 21, 2014) – The OCC issued a Notice of Proposed Rulemaking to integrate its rules for MSRB Press Release (May 12, 2014) – The MSRB published national banks and federal savings associations relating to guidance to assist municipal advisors with understanding policies and procedures for corporate activities and transactions changes to the MSRB’s registration process taking effect May (licensing rules). 12, 2014. The guidance seeks to clarify that these changes are separate and apart from the SEC’s transition to a permanent SEC Press Release 2014-99 (May 16, 2014) – The SEC warned registration regime for municipal advisors. investors about marijuana-related investments amid recent trading suspensions. Federal Reserve Press Release (May 8, 2014) – The Federal Reserve Board invited comment on a proposed rulemaking FINRA Regulatory Notice 14-23 (May 16, 2014) – FINRA that would implement section 622 of the Dodd-Frank issued an interpretation to clarify the classification and trade Act which prohibits a financial company from combining reporting of certain “hybrid” securities to FINRA. In accordance with another company if the ratio of the resulting financial with this interpretation, as of June 16, 2014, firms are required company’s liabilities exceeds 10 percent of the aggregate to report transactions in covered hybrid securities to TRACE. consolidated liabilities of all financial companies. Comments should be submitted by July 8, 2014. FINRA Regulatory Notice 14-22 (May 15, 2014) – The SEC approved amendments to FINRA Rule 5110 to permit OCC Bulletin 2014-20 (May 1, 2014) – The OCC, FRB and termination fees and rights of first refusal; provide an FDIC sought comment on a notice of proposed rulemaking exemption from the filing requirements for certain collective that would revise the advanced approaches risk-based capital investment vehicles; and clarify the electronic filing rules by removing the requirement that only guarantees requirement. The amendments became effective May 15, 2014. provided by certain counterparties are eligible for recognition as credit risk mitigants. The comment period ended on June FINRA Regulatory Notice 14-21 (May 15, 2014) – The SEC 13, 2014. approved amendments to equity trade reporting and OATS rules. Effective dates–OATS: April 7, 2014; ORF: September 15, CFTC Press Release 6918-14 (May 1, 2014) – The CFTC’s 2014; ADF and TRFs: (millisecond reporting): September 29, Divisions of Market Oversight and Clearing and Risk 2014; ADF and TRFs (remaining amendments): First Quarter announced further implementation of the trade execution 2015. requirement for certain interest rate and credit default swaps.

CFTC Press Release 6926-14 (May 12, 2014) – The CFTC’s OCC Bulletin 2014-19 (May 1, 2014) – The OCC, FRB and Division of Swap Dealer and Intermediary Oversight announced FDIC sought comment on a notice of proposed rulemaking a streamlined approach for considering requests for relief from that would revise the calculation of total leverage exposure registration for delegating commodity pool operators. in a manner generally consistent with revisions to the international leverage ratio framework published by the MSRB Notice 2014-11 (May 12, 2014) – The MSRB received Basel Committee on Banking Supervision in January 2014. approval to consolidate dealers’ fair-pricing obligations The supplementary leverage ratio applies to all banking into MSRB Rule G-30, facilitating dealer compliance with a organizations subject to the agencies’ advanced approaches fundamental investor protection regulation. The rule changes risk-based capital framework. The comment period ended on become effective on July 7, 2014. June 13, 2014.

May 12, 2014 – Effective May 12, 2014, MSRB Rule A-12 was OCC Bulletin 2014-18 (May 1, 2014) – The OCC, FRB and amended to consolidate MSRB registration requirements into FDIC adopted a final rule to strengthen the supplementary a single rule and to create a simplified electronic registration leverage ratio standards for the largest, most systemically form. Municipal advisor firms that are currently registered significant U.S. banking organizations. The final rule applies with the MSRB under the previous requirements are reminded to any bank holding company with more than $700 billion that they must verify, update and complete their registration in consolidated total assets or $10 trillion in assets under information in the new form by August 10, 2014. custody and any insured depository institution subsidiary

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Established in 1991, FMA is the leading association specifically dedicated to meeting the special and unique needs of banks and bank-affiliated securities firms. Market Solutions 17

Watch For (Continued from page 16) of these covered BHCs. Banking organizations subject to the recent changes agreed to by the Basel Committee on Banking enhanced supplementary leverage ratio requirements are Supervision (comment period ended June 13, 2014). In a required to calculate and publicly report their supplementary separate action, the FDIC Board also adopted as final its Basel leverage ratios beginning in the first quarter of 2015. The III interim final rule, which is substantively identical to the supplementary leverage ratio requirements are not effective final rules adopted by the Federal Reserve Board and the OCC until 2018. in July 2013.

FINRA Regulatory Notice 14-19 (April 30, 2014) – FINRA FINRA Regulatory Notice 14-15 (April 8, 2014) – FINRA requested comment on a revised proposal to require a requested comment on the effectiveness and efficiency of its hyperlink to BrokerCheck in online retail communications gifts and gratuities and non-cash compensation rules. The with the public. The comment period expired June 16, 2014. comment period expired May 23, 2014.

FINRA Regulatory Notice 14-18 (April 30, 2014) – FINRA FINRA Regulatory Notice 14-14 (April 8, 2014) – FINRA revised the Investment Company and Variable Contracts requested comment on the effectiveness and efficiency of its Products Principal (Series 26) examination program. The communication with the public rules. The comment period implementation date was June 16, 2014. expired May 23, 2014.

SEC Press Release 2014-78 (April 17, 2014) – The SEC Federal Reserve Press Release (April 7, 2014) – The FRB proposed new rules for security-based swap dealers and major announced that it intends to exercise its authority to give security-based swap participants covering recordkeeping, banking entities two additional one-year extensions to reporting, and notification requirements and would establish conform their ownership interests in and sponsorship of additional recordkeeping requirements for broker-dealers to certain collateralized loan obligations covered by section 619 account for their security-based swap activities. of the Dodd-Frank Act, commonly referred to as the Volcker rule. FINRA Regulatory Notice 14-16 (April 11, 2014) – The Securities Industry/Regulatory Council on Continuing SEC Press Release 2014-66 (April 3, 2014) – The SEC sought Education released its Spring 2014 Firm Element Advisory comment on a recommendation by its Investor Advisory Update. The Council produces the FEA to identify regulatory Committee regarding disclosure by target date mutual funds. and sales practice topics that firms should consider in their Firm Element training plans –http://cecouncil.com/Documents/ FEA_Semi_Annual_Update.pdf.

FDIC Press Release 28-2014 (April 10, 2014) – The FDIC Available Publications urged financial institutions to actively utilize available resources to identify and help mitigate potential cyber-related OCC News Release 2014-91 (June 25, 2014) – The OCC risks, including the United States Computer Emergency released its Spring 2014 Semiannual Risk Perspective in which Readiness Team (www.us-cert.gov); U.S. Secret Service competitive pressures and strategic and operational risks topped Electronic Crimes Task Force (www.secretservice.gov/ectf. the list of supervisory concerns facing national banks and shtml); FBI InfraGard (www.infragard.org); regional coalitions federal savings associations. (www.rpcfirst.org); and Information Sharing and Analysis Centers (www.isaccouncil.org). Financial institutions were also The MSRB published its most recent statistical report on reminded that they may obtain information specific to products trading, interest rate and other characteristics of the municipal or applications they use at the applicable vendor websites. variable rate securities market. The report, “Municipal Variable Additionally, financial institutions that utilize third party Rate Demand Obligations and Auction Rate Securities: Interest service providers should check with their provider about the Rate and Trading Trends,” updates earlier trend analysis and existence of user groups that also could be valuable sources of provides information on municipal variable rate securities information. through March 2014. The MSRB also publishes an annual “Fact Book” and quarterly municipal securities statistics FDIC Press Release 25-2014 (April 8, 2014) – The FRB, available electronically on www.msrb.org. FDIC and OCC adopted a final rule (effective January 1, 2018) to strengthen the leverage ratio standards for the OCC Bulletin 2014-25 (May 28, 2014) – The OCC issued the largest, most interconnected U.S. banking organizations. The “Collective Investment Funds” booklet of the Comptroller’s banking agencies also issued a notice of proposed rulemaking Handbook. This revised booklet replaced a similarly titled that would modify the denominator calculation for the booklet issued in October 2005. This booklet provides supplementary leverage ratio in a manner consistent with (Continued on Page 18)

Established in 1991, FMA is the leading association specifically dedicated to meeting the special and unique needs of banks and bank-affiliated securities firms. Market Solutions 18

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updated guidance to examiners and bankers on collective OCC Bulletin 2014-11 (March 27, 2014) – The OCC issued the investment funds offered to customers of national banks “Asset-Based Lending” booklet, which is new to the Comptroller’s and federal savings associations; explains the risks Handbook. The booklet provides risk management guidance to inherent in such products and services; and provides a examiners and bankers for asset-based lending activities; expands framework for managing those risks. and replaces prior ABL guidance; and presents risk-rating examples.

Who’s News

Naomi Camper has been named head of JPMorgan Ernesto “Ernie” Lanza, Deputy Executive Director Chase’s newly-formed Office of Nonprofit at the MSRB, will soon join the Washington office Engagement which coordinates the firm’s of Greenberg Traurig, LLP. relationships with nonprofit groups focused on policy issues related to low- and moderate-income Mark Lasswell, formerly of Wells Fargo, has communities. (Continuedjoined Securities on Page 13) America in Omaha as the firm’s CCO. Cory Claussen, formerly Senior Professional Staff at the Senate Committee on Agriculture, Nutrition, Craig Lewis, formerly Chief Economist and and Forestry, has joined the CFTC as Director of Division of Economic and Risk Analysis Director Legislative Affairs. at the SEC, has left the agency to return to his position as the Madison S. Wigginton Professor of John Easterling, formerly SVP/CCO at Frost Finance at Vanderbilt University’s Owen Graduate Brokerage Services, has retired after 42 years in the School of Management. financial services industry. Congratulations, John. Rebecca Olsen has been named Chief Counsel in Casey Jennings, formerly Senior Associate, the SEC’s Office of Municipal Securities. Regulatory and Government Affairs in the Financial Institutions Group at WilmerHale, has joined Ursula Pfeil, formerly Counsel in the Legislative the Consumer Protection Finance Board as a and Regulatory Activities Division at the OCC, Regulations Attorney in their Office of Research, has joined PNC Financial Services Group, Inc. as Markets, and Regulations. Senior Counsel in Regulatory Affairs. Mike Kadish, formerly Managing Director and Head John Ramsay, formerly Director of the SEC’s of U.S. Bank Regulatory, Royal Bank of Scotland Division of Trading and Markets, is joining IEX Legal, has joined Deutsche Bank AG as Managing Group, Inc. as Chief Market Policy and Regulatory Director and Head of U.S. Bank Compliance. Officer. Jessica Kane has been named Deputy Director in the Lawranne Stewart, formerly Chief Counsel to the SEC’s Office of Municipal Securities. Financial Services Committee of the U.S. House of Representatives, is now serving as Interim Senior Jennifer Kelly, currently Senior Deputy Comptroller Counsel in the office of CFTC Chairman Tim for Midsize and Community Bank Supervision at the Massad. OCC, will succeed John Lyons as the agency’s Senior Deputy Comptroller for Bank Supervision Policy Sharon Zackula, formerly Associate General and Chief National Examiner when Mr. Lyons Counsel and Associate Vice President at FINRA, retires August 1. has joined the MSRB as Associate General Counsel.

Established in 1991, FMA is the leading association specifically dedicated to meeting the special and unique needs of banks and bank-affiliated securities firms. Market Solutions 19

Program Update

2014 Legal & Legislative Conference egistrations are now being accepted for If you would like to volunteer to speak on any of RFMA’s 23rd Legal & Legislative Issues these topics…or suggest other noted leaders in their Conference which will take place October 23 field as panelists…please contact Dorcas Pearce and – 24 at the Hyatt Regency Washington (Capitol she will advise the program planning committee of Hill) here in Washington, DC. This annual your interest/input. The complete e-brochure will be program is a high-level forum for banking and distributed mid- to late July and will also be featured securities attorneys as well as senior compliance on FMA’s website – www.fmaweb.org. officers, risk managers and regulators. The CLE and CPE accreditation (among others) … day and a half program provides participants as well as team discounts…will be available, so be with an opportunity to share information on sure to budget for (and plan to attend) the 23rd current legal and regulatory developments as annual Legal & Legislative Issues Conference. well as network with peers and regulators. Be Contact Dorcas Pearce ([email protected] sure to ask for the first-timers or the 2-for-1 or 202/544-6327) if you have questions or wish to registration discount. register. Online registration is also an option. The Program Planning Committee is currently developing an agenda focusing on current areas of regulatory and Congressional/agency scrutiny and activity. Members include: Alma Angotti ATTENTION SPONSORS! (Navigant); Russell Bruemmer (WilmerHale); Jeffrey Holik (PNC Financial Services Group, FMA is actively pursuing sponsorship Inc.); Edward Johnsen (DLA Piper LLP (US)); opportunities regarding this conference. Elisa Mangual (The Northern Trust Company); Please contact FMA if your firm would Barbara Mendelson (Morrison & Foerster LLP); like to support this event. and Gail Bernstein (WilmerHale). The working agenda currently features these panels: › General Counsels: FRB, FDIC, FINRA, OCC, CFTC, & SEC › Legislative Update from Hill Staffers › Volcker Rule › Derivatives › AML/OFAC/FCPA › Cybersecurity, Data Privacy & Technology Vendor Management › Broker-Dealer Sales Practice Issues › Cross-Border Regulatory Developments › Too Big to Fail › SEC Division Reports Enforcement, Corporation Finance, Investment Management, Trading and Markets, OCIE and Economic and Risk Analysis (Continued on page 20)

Established in 1991, FMA is the leading association specifically dedicated to meeting the special and unique needs of banks and bank-affiliated securities firms. Market Solutions 20

Program Update (continued from page 19)

2014 Securities Compliance Seminar Nashville, Tennessee…also known as Music City… was a fantastic host city for FMA’s 23rd Securities Compliance Seminar taking place April 23 – 25, 2014 at the Marriott Nashville Hotel (@ Vanderbilt University). This annual program was a three-day educational and networking experience for securities compliance professionals, internal auditors, risk managers, attorneys and regulators. And, attendees were eligible for CPE and CLE accreditation.

Congratulations to the Program Planning Regulatory Forum Committee for developing a varied agenda topics › Anthony DiMilo n FDIC and securing noted industry leaders and regulators › Askari Foy n SEC as speakers. Members included: Cindy Keenum › Donald Litteau n FINRA Brown (Sterne Agee); Kevin Lesinski (Seyfarth Shaw › Michael Post n MSRB LLP); Penny Michael (FTN Financial); Mac Northam › Brandon Reddington n OFAC (Securities Risk Management, Ltd.); Diane Novak › Daphne Smith n Tennessee Dept of Commerce (RBS Citizens Wealth Management Division); and Jeff and Insurance Suhanic (PNC Investments, LLC). Municipal Advisor Compliance The agenda featured these general sessions, › Cynthia Friedlander n FINRA concurrent workshops and peer discussions: › Michael Post n MSRB Key 2014 Legislative and Regulatory › Mary Simpkins n SEC Initiatives KYC and Suitability Rule 2111 › Russell Bruemmer n WilmerHale LLP › Sara Andres n Capital One › Deborah Parker Bailey n Deloitte & Touche LLP › Buddy Doyle n Oyster Consulting › Mark Carberry n Neal, Gerber & Eisenberg LLP › Julie Wilson Portera n Maynard, Cooper › Jeffrey Holik n PNC Financial Services & Gale, PC Group, Inc. Dual Registrants (BD & RIA) The Volcker Rule…At Last › Louis Dempsey n Renaissance Regulatory › David Block n Union Bank, NA Services › Nimna Varghese n Ernst & Young LLP › Gary Klein n NEXT Financial Group Internal Audit Hot Topics › James Sallah n Sallah Astarita & Cox, LLC › Daniel Johnson n Credit Suisse Electronic Communications / Social Media › Ally Kidik n KeyBank Update › Brian Portman n Ernst & Young LLP › Joanna Belbey n Actiance, Inc. Financial Crimes: Money Laundering and › Mark Griffin n Baker, Donelson, Bearman, Bribery and Corruption Caldwell & Berkowitz, PC › n › Laura Gellman n Bank of America Patricia Harrison Simmons & Company › Alistair Johnson n FINRA International › Daniel Tannebaum n PricewaterhouseCoopers Whistleblowers and CCO Liability › Thomas DiLeonardo n KPMG LLP › Christopher Robertson n Seyfarth Shaw LLP › Brian Rubin n Sutherland, Asbill & Brennan LLP

(Continued on Page 21)

Established in 1991, FMA is the leading association specifically dedicated to meeting the special and unique needs of banks and bank-affiliated securities firms. Market Solutions 21

Program Update (continued from page 20)

Conflicts of Interest / Insider Trading supervision rules; concerns arising from the MSRB’s › Francois Cooke n ACA Compliance Group manual rewrite project and training proposal; best › James Martignon n Ulmer & Berne LLP practices for reducing compliance officer liability; › Jeff Walter n U.S. Bancorp Investments, Inc. and more - based on the needs of the participants. This session was designed for persons new to the Workshops securities industry as well as seasoned compliance and audit personnel. Attendees were able come Retail Compliance away with new ideas and best practices/resources for › Christine Kaufman n Impact Consultants making compliance more manageable and they had Institutional Compliance the chance to get answers to specific questions about › Matthew Hardin n Hardin Compliance their individual compliance and audit programs Consulting Thanks to everyone who participated and › James Rabenstine n Nationwide Financial contributed to the success of this annual Services spring program…committee members, speakers, attendees and sponsors.

Peer Discussions FMA gratefully acknowledges Broker-Dealer Compliance Hot Topics these sponsors of FMA’s 2014 › Brian Rubin n Sutherland, Asbill & Securities Compliance Seminar Brennan LLP Volcker Rule › David Block n Union Bank, NA Internal Audit Hot Topics › Brian Portman n Ernst & Young LLP › Ally Kidik n KeyBank Key 2014 Legislative/Regulatory Initiatives › Cindy Keenum Brown n Sterne Agee Risk 2014 and Beyond › Sara Andres n Capital One Electronic Communications/Social Media › Joanna Belbey n Actiance, Inc. Municipal Advisor Compliance › Michael Post n MSRB Pre-Seminar Workshop Christine Kaufman of Impact Consultants, Inc. led an optional pre-seminar interactive workshop on Wednesday, April 23 from 8:30 to 10:45 am. This KPMG LLP workshop presented a unique opportunity to network with other compliance and audit professionals in an intimate setting. A myriad of topics were discussed - such as “hot topics” from the SEC’s and FINRA’s examination priority lists; assessing supervisory systems in light of FINRA’s new consolidated

Established in 1991, FMA is the leading association specifically dedicated to meeting the special and unique needs of banks and bank-affiliated securities firms. Market Solutions 22

Program Update (continued from page 21)

2015 Securities Compliance Seminar Save these dates April 22-24, 2015!

FMA’s 2015 Securities Compliance Seminar will return to the B Ocean Hotel (now the Sonesta Fort Lauderdale) in Florida next spring. Fort Lauderdale was the host city of the 2013 program and the hotel, located across the street from the beach, was a great favorite with many of the attendees who clamored for a return.

Mark your calendar…and hope to see you there.

P. S. The Planning Committee will be assembled in the summer to begin work on program development. Contact Dorcas Pearce to volunteer…as a committee member, a general session panelist, workshop facilitator or peer discussion leader…or to share topical and/or speaker recommendations. Sponsor inquiries will also be welcome.

Established in 1991, FMA is the leading association specifically dedicated to meeting the special and unique needs of banks and bank-affiliated securities firms.