On August 5, 2015, in a 3-2 vote, the SEC adopted the rule implementing the controversial pay ratio requirement pursuant to the Dodd-Frank Act. The rule requires companies to disclose:
- the median of the annual total compensation of all employees, excluding the principal executive officer, or CEO;
- the annual total compensation of the CEO (which is already required to be disclosed); and
- the ratio of these two amounts.
The new rule applies to companies required to provide executive compensation disclosure under Item 402(c)(2)(x) of Regulation S-K in proxy statements or annual reports on Form 10-K, as well as registration statements or other filings. Most companies are required to report the pay ratio disclosure for their first fiscal year beginning on or after January 1, 2017.
As part of its continuing but slow expansion of the types of financial institutions that are subject to anti-money laundering (AML) obligations under the Bank Secrecy Act and USA PATRIOT Act, FinCEN proposed on August 25, 2015, to require certain investment advisers to establish and maintain AML programs and file suspicious activity reports (the Proposed Rules). The Proposed Rules go further than FinCEN’s 2002 and 2003 proposals for investment advisors, which generally were limited to proposing AML program requirements only, without additional suspicious activity reporting and certain other record keeping requirements.
In explaining its rationale for the Proposed Rules, FinCEN acknowledges that advisers work with financial institutions that are already subject to BSA requirements, such as when executing trades through broker-dealers to purchase or sell client securities, or when directing custodial banks to transfer assets. FinCEN notes, however, that these institutions may not have sufficient information to assess suspicious activity or money laundering, and that investment advisers therefore have an important role to play in safeguarding the financial system from terrorist activities and financial crime.
General Scope and Examination Authority
Under the Proposed Rules, covered investment advisers would include any persons who are registered or required to be registered with the SEC under section 203 of the Investment Advisers Act. This would include both primary advisers and subadvisers. However, because advisers with less than $100 million in regulatory assets under management are generally prohibited from registering with the SEC, those advisers would not be subject to the Proposed Rules.
Have you thought about offering your customers wealth management services? The fee opportunities are attractive and the regulatory issues are more manageable than you might think.
Why should a bank’s board directors consider entering the wealth management business? For one, several of your competitors are already doing so. Wells Fargo already employs over 15,000 financial advisors and is looking to serve an even broader swath of the mass market than it already does. And, according to the American Banker, approximately 25% of all banks plan to offer wealth management services by the end of 2016, according to a survey conducted by that publication. If that survey data is representative across the banking industry, your board would not be in the leading edge if you are not considering the risks and rewards of building or acquiring a wealth management division.
This article assumes that U.S. community banks are not looking to compete directly with the largest private banks in advising billionaires on anything from buying a private jet to investments in complex derivatives. Instead, most community banks will offer basic wealth management services, including administering retirement assets held in 401(k) plans and IRAs, advice in setting up educational and health savings plans and perhaps basic trust services to assist in administering family trusts. Other service offerings, such as insurance, securities custody, securities lending, securities clearing and settlement, are sometimes considered part of wealth management or trust services, but this article does not discuss those other services because they are generally not a good fit for community banks, at least in the early stages of launching a wealth management division. Basic wealth management services are, at least in theory, a natural complement to the business of offering deposit services and loans to wealthier bank customers.
The SEC recently adopted new rules to lift the ban on general solicitations and general advertising for Rule 506 private placements and Rule 144A offerings. In addition, the SEC also adopted rules disqualifying “bad actors” from taking advantage of the Rule 506 private placement safe harbor. These new rules will be effective on September 23, 2013. The SEC has further proposed new rules that, among other things, require an SEC filing at the start of Rule 506 placements involving general solicitation, the inclusion of additional cautionary legends and disclosures in offering materials as well as a temporary (two-year) requirement to file general solicitation materials with the SEC.
Regulation D’s Rule 506 provides a safe harbor exemption from registration under the Securities Act of 1933 for private offerings made to accredited investors and no more than 35 non-accredited investors who meet certain investment sophistication requirements. The SEC estimates that Rule 506 offerings account for more than 90% of all Regulation D safe harbor private offerings and substantially all of the capital raised under Regulation D. Prior to these new rules, an offering would not satisfy the Rule 506 safe harbor exemption if any general solicitation or general advertising occurred. General solicitation and advertising includes advertisements published in magazines and newspapers or broadcast by television or radio or made available through unrestricted websites. Widely disseminating offering materials absent pre-existing relationships with investors may even be deemed a general solicitation.
General Solicitation Ban Removed
As mandated by the JOBS Act (to be completed by July of last year), the SEC is adding new Section 506(c) to permit general solicitation and advertising to offer and sell securities in a Rule 506 offering if (a) all purchasers are accredited investors or the issuer reasonably believes that they are accredited investors, and (b) the issuer takes reasonable steps to verify that all purchasers are accredited investors.
While any relief still has a long (and uncertain) path before it would be effective, on October 26, 2011, the House Financial Services Committee approved four bills (with bipartisan support) that would remove regulatory federal securities law obstacles to capital formation.
H.R. 1965 would, for banks and bank holding companies, raise the SEC registration threshold to 2,000 shareholders and the deregistration threshold to 1,200 shareholders.
H.R. 2167, the “Private Company Flexibility and Growth Act,” would raise the SEC registration threshold for all companies to 1,000 shareholders and would exclude accredited investors and certain employees from the definition of “held of record” for registration purposes.
H.R. 2940, the “Access to Capital for Job Creators Act,” would permit general solicitation and general advertising for private offerings conducted under Rule 506, so long as all purchasers were accredited investors.
House Passes Government Funding Bill, Shutdown Looms Again
The fiscal year Continuing Resolution (CR) that funds the government in lieu of Appropriations bills expires on September 30th. Therefore, Congress is required to pass another funding resolution by October 1st in order to prevent a government shutdown. The House passed its CR late Thursday night after cutting an additional $100M from the Department of Energy program that backed the Solyndra loan. The House bill contains $3.65B in disaster relief, which is partially offset by a $1.5B cut to a Department of Energy loan program for manufacturers of fuel-efficient cars. On Friday, the Senate voted to reject the House’s bill by a vote of 59 to 36 because Senate Democrat leaders are seeking greater disaster relief funding. The most likely outcome is for the House and Senate to pass a “clean” CR that funds the government until November 18 and postpones the debate over increasing disaster funding. While Congress is scheduled to be in recess next week, the House and Senate must reach an agreement on a funding resolution before recessing.
Former SEC General Counsel Testifies About Madoff Ties
On Thursday, David Becker, the former general counsel of the Securities and Exchange Commission (SEC), testified before two Congressional panels regarding a report released this week by the SEC’s inspector general that referred Becker’s actions to the Justice Department for an investigation of possible violations of conflict-of-interest laws. Prior to Becker’s appearance before the committees, SEC Chairman Mary Schapiro and SEC Inspector General David Kotz also testified about their knowledge of the Becker matter. While Becker testified that he told numerous SEC officials about his financial connection to Madoff accounts, Schapiro told the Committee that she did not inform the other four SEC commissioners because Becker was cleared by the SEC’s ethics office. It is unclear if the Justice Department’s investigation will lead to any charges against Becker, but the SEC is already adopting several changes based on the inspector general’s report, including redirecting the top ethics officer to report directly to the chairman of the commission, rather than the general counsel.
House Subcommittee Passes First Postal Reform Bill
On Wednesday, the House Government Reform Oversight Subcommittee passed legislation to overhaul the U.S. Postal Service (USPS). The bill, sponsored by Rep. Darrell Issa, R-Calif., Chairman of the House Oversight and Government Reform Committee, would allow USPS to drop a delivery day and adjust labor costs. However, Rep. Dennis Ross, R-Fla., who chairs the House Oversight Subcommittee responsible for postal issues, introduced and passed a substitute amendment to the bill that also would cut back door-to-door delivery and reduce the postal workforce starting with retirement-eligible employees before laying off other staff. The bill now heads to the full Committee for consideration.
Geithner Meets with Eurozone Finance Ministers
On Friday, Treasury Secretary Timothy Geithner met with seventeen European finance ministers in Poland to discuss the eurozone’s debt crisis. Jean-Claude Juncker, president of the Eurogroup, announced the group decided to delay till October a decision on whether to pay out the next tranche of a multi-billion euro loan to Greece. The two-day meeting of Europe’s Economic and Financial Affairs (ECOFIN) Council — hosted by Polish Finance Minister Jacek Rostowski and the president of the National Bank of Poland — comes ahead of G20 and IMF meetings later this month. The European Central Bank, along with the Fed, the Bank of England, the Bank of Japan and the Swiss National Bank, also announced that three U.S. dollar auctions would be held between October and December.
Senate Committee Passes Increased Funding for SEC and CFTC
On Thursday, the Senate Appropriations Financial Services Subcommittee passed its FY 2012 funding bill giving banking and commodities regulators large budget increases to help them implement sweeping new financial regulations. The bill, which will now go to the full U.S. Senate for a vote, gives the Securities and Exchange Commission a fiscal 2012 budget of $1.407 billion, an increase of roughly 19 percent from its current fiscal 2011 budget of $1.185 billion and the Commodity Futures Trading Commission an estimated 19 percent increase in its funding, jumping from $202 million to $240 million for fiscal 2012. That bill would also split oversight of the nearly $600 trillion over-the-counter derivatives market between the two regulators and give the SEC greater authority to regulate hedge funds, credit-rating agencies and municipal advisers. However, the fate of the bill remains uncertain because House Republicans oppose many of the Dodd-Frank provisions which increase the need for expanded SEC and CFTC budgets. Earlier this year, the House Appropriations Financial Services Subcommittee passed a bill that would reduce the CFTC’s budget to $171.9 million but maintain the SEC’s funding at its FY 2011 level. With the end of the year approaching, House and Senate leaders are bracing themselves for another omnibus bill that combines all the unpassed appropriations bills into one major bill. The House and Senate will most likely fail to pass similar Financial Services Appropriations bills which will cause the bill to be wrapped into the omnibus thereby reducing the chance of large increases for the SEC or CFTC.
Fitzpayne Nominated for Treasury Legislative Affairs Chief
On Wednesday, the White House announced that President Obama intends to nominate Alastair Fitzpayne as the next assistant secretary of Treasury for legislative affairs. Fitzpayne has been Treasury’s deputy chief of staff since January 2009. He was a legislative assistant to former Sen. Evan Bayh (D-Ind.) from 2001 to 2006. From 2007 to 2009, he served as a senior policy adviser to Rep. Rahm Emanuel (D-Ill.).
House Republicans Introduce Disaster Funding Bill
On Wednesday, House Republican leaders introduced a stopgap spending bill to keep the government operating though mid-November and provide $3.65 billion in short-term federal assistance to replenish strained disaster reserves. The funding resolution would impose a 1.4 percent cut on most agencies and Cabinet departments, including Defense, to stay within 2012 spending caps set in August. FEMA and the Corps of Engineers would immediately benefit from a first installment of $1 billion in emergency funds to avoid any disruption in aid for these last weeks of the 2011 fiscal year ending September 30. The second $2.65 billion represents a down payment toward FEMA’s 2012 budget. With two weeks left in fiscal 2011, FEMA’s disaster reserve fund has dwindled to $377 million and the agency has been operating since late August on an “immediate needs” basis, forcing delays in longer-term recovery projects around the nation. Senate Democrats, who have been pursuing their own much larger $6.9 billion disaster aid package, said they did not support the current House approach, but left open the possibility of agreement if House Republicans consider more disaster aid. The House is schedule to vote on its bill next week.
FDIC Approves New Systematic Risk Rules
On Tuesday, the FDIC approved new sets of rules that the largest banks will have to follow in drafting plans in the event of their own collapse. The panel also approved contingency planning guidelines for insured banks. The new rules, which were authorized in the Dodd-Frank Act, are designed to eliminate the need for bailouts by giving the FDIC power to liquidate large firms whose failure could threaten the financial system. Banks with at least $50 billion in assets will have to file such plans, as will any firm designated as systemically important by the Financial Stability Oversight Council. The final rule changes the filing timeline from an April draft proposal released by the FDIC and Fed, moving toward a tiered phase-in based on the total of non-bank assets held by firms. Companies with more than $250 billion in non-bank assets are required to file the plans by July 1, 2012. Firms with non-bank assets between $100 billion and $250 billion would be required to file by July 1, 2013, and all other firms would be required to submit plans by December 2013. The agency also approved unanimously a separate rule dictating resolution plans for FDIC-insured banks with more than $50 billion in assets. The rule, which the agency began drafting before the completion of the Dodd-Frank Act, would apply to 37 banks and thrifts. Thirty four of those firms would be required to file resolution plans with the Fed because of the size of their parent company. The rule takes effect January 1, 2012, and would be subject to a 60-day public comment period.
If you have any questions regarding any of these issues, please contact:
Matt Jessee, Policy Advisor
1 314 259 2463
Q1 GDP Slows to 1.8%
On Thursday, the Bureau of Economic Analysis announced that the U.S. GDP growth rate in the first quarter of 2011 slowed to an annual rate of 1.8 percent, compared to a rate of 3.1 percent in fourth quarter 2010 and 3.7 percent in first quarter 2010. The Bureau cited a combination of lower-than-expected economic data, global energy uncertainty, and concerns about the budget deficit as causes of the growth rate decelerating.
Bernanke Announces Rates to Stay at Near Zero, Ends Bond Buying Program
On Wednesday, Federal Reserve Chairman Ben Bernanke held his first quarterly press conference in which he said that the economy and job market are improving moderately, but the housing market and other factors such as gas prices continue to be a drag on growth. He announced that the Fed plans to end the $600 billion treasury bond-buying program in June and will leave interest rates at their current levels. The event followed a two-day meeting of the Fed’s policymaking committee at which the central bank indicated continuity in its strategy. The Fed’s bond buying program known as the second round of quantitative easing, or “QE2,” will expire as scheduled at the end of June. The Fed also maintained its near-zero target for short-term interest rates, where it has been since December 2008, and indicated that it expects to keep rates “exceptionally low” for “an extended period.”
Debt Ceiling Vote
The vote to increase the U.S. government’s borrowing ceiling beyond the current limit of $14 trillion has become the hot topic in Congress. While the Treasury Department’s original estimate was that the ceiling would need to be raised by mid-May, the Department is now saying it could hold out till July but would need to take extraordinary measures. While the measure is expected to easily pass the Senate, the question remains whether the House can pass such a bill. House Speaker John Boehner (R-OH) said this week that he will not guarantee a vote on bill to raise the debt limit, much less passage of such a bill, without cuts in discretionary spending and alterations of entitlements such as Medicare and Medicaid. Congress returns next week from its two week recess, and House Republicans plan to hold a series of meetings to gather feedback from their Members about the debt ceiling.
Japan Announces Disaster Relief Fund
On Friday, Japanese Finance Minister Yoshihiko Noda announced a 4 trillion yen ($48.5 billion) emergency budget for disaster relief in the wake of the nuclear crisis triggered by the March tsunami. Noda said the government would not issue new bonds to pay for the fund, and the cabinet plans to submit the emergency budget to parliament on April 28. Given that the material damage alone from the disaster could top $300 billion, the government is expected to seek additional future disaster funding that will likely require tax increases and debt financing.
Justice Department Examines NYSE/Nasdaq/ICE Merger
On Wednesday, Nasdaq-OMX CEO Robert Greifeld and ICE CEO Jeffrey Sprecher disclosed in a letter to NYSE Euronext’s board that they are in discussions with the antitrust division of the Justice Department (DOJ) after buying NYSE Euronext stock which triggered the DOJ’s antitrust review. The letter also disclosed that Nasdaq-OMX and ICE are willing to pay NYSE Euronext $350 million if DOJ blocks their proposed takeover, an offer they say is now based on “fully committed financing” of $3.8 billion.
On April 10, NYSE Euronext ’s board rejected the Nasdaq/ICE unsolicited $11.3 billion proposal and affirmed its February agreement to merge with Deutsche Boerse AG for $9.5 billion in stock. The agreement with Deutsche Boerse includes a payout of 250 million euros ($358 million) should that deal fall apart. NYSE Euronext acknowledged that it had received the Nasdaq/ICE reverse break up free proposal and that its board is reviewing the matter.
S&P Changes U.S. Long Term Rating from Stable to Negative
On Monday, Standard & Poor’s Ratings Services (S&P) changed its outlook on the U.S. long-term credit rating from stable to negative because ” the U.S. has relative to its ‘AAA’ peers very large budget deficits, rising government indebtedness, and the path to addressing these is not clear.” While the S&P affirmed the U.S. ‘AAA’ long-term and ‘A-1+’ short-term sovereign credit ratings, it also predicted at least a one-in-three chance that it could lower its long-term rating on the U.S. within two years because of the increased risk that the political negotiations over when and how to address both the medium and long-term fiscal challenges will persist until at least after the elections in 2012.
European Central Bank Announces Interest Rate Hike; Portugal Bailout Next
On Thursday, Jean-Claude Trichet, European Central Bank president, announced a 25 basis point rise in eurozone borrowing costs, to 1.25 percent. This will be the first of such an increase since the 2008 financial crisis. In response to the news, the euro initially dipped against the dollar but later appreciated to trade above $1.43. In his remarks, Trichet also said the ECB had encouraged Portugal to request an international bailout, which is estimated at 80 billion euros, roughly the same amount as Ireland but less than the 110 billion euro package offered to Greece. EU, European Central Bank and International Monetary Fund officials will meet in Lisbon next week to negotiate the cuts that are deeper than those that were rejected by Portuguese opposition politicians last month.
SEC Reviews Private Company Share Rules
On Wednesday, SEC Chairman Mary Schapiro sent a letter to House Government Reform Committee Chairman Darrell Issa (R-CA) saying that she had ordered a review of all the rules that affect share issues by privately held companies. According to the letter, the likely changes would include raising from 499 the number of shareholders private companies can have without being required to open their books, and also making it easier for such companies to publicize share offerings. The SEC review also will examine issues raised by the growing use of “special purpose vehicles” that allow a pool of investors to buy a stake in a company, while counting as only one shareholder for the purposes of the SEC rules. Shapiro’s letter also indicated that the SEC is considering relaxing a strict ban on private companies publicizing share issues, known as the “general solicitation” ban.
FDIC Introduces New Fed Borrowing Fee
Last Friday, the Federal Deposit Insurance Corp. (FDIC) issued a new rule that increases the fees on banks that borrow overnight funds from the Federal Reserve. The FDIC introduced the higher fees as called for in last year’s Dodd-Frank financial reform law. The higher fee has led some companies to step out of the short-term lending markets, exacerbating an already low supply of Treasury bills used to back borrowing. On Tuesday, the FDIC issued a response to criticism of the rule saying that the notice of proposed rulemaking was announced in November giving banks sufficient time to make adjustments and that the Congressionally-mandated change better reflect risks to the industry-funded Deposit Insurance Fund.