The Securities Litigation Expert Blog

2013 SEC Examination Priorities

Posted by Jack Duval

Feb 22, 2013 1:37:52 AM

The SEC has released it's 2013 Examination Priorities.  (SEC)  The priority list includes:

  • For investment advisers and investment companies — presence exams for newly registered private fund advisers, and payments by advisers and funds to entities that distribute mutual funds

  • For broker-dealers — sales practices and fraud, and compliance with the new market access rule

  • For market oversight — risk-based examinations of securities exchanges and FINRA, and order-type assessment

  • For clearing and settlement — For transfer agent exams, timely turnaround of items and transfers, accurate recordkeeping, and safeguarding of assets. For clearing agencies designated as systemically important, conduct annual examinations as required by the Dodd-Frank Act.

See our coverage of the Finra 2013 exam priorities here.
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Topics: FINRA, examination, Dodd-Frank, Investment Advisors, investments, SEC, Compliance, Dodd-Frank Act, regulation.

Dodd-Frank Act Driving Compliance Hiring

Posted by Jack Duval

Dec 28, 2012 2:05:41 AM

Hedge funds and private equity funds are having to build out their compliance capabilities due to new rules under the Dodd-Frank Act, the New York Law Journal reports.  (NLLJ)  The most interesting fact of the article may be this:

In addition, scores of regulations have been issued under Dodd-Frank and there are more to come. Only one third of the 398 requirements under Dodd-Frank have been written into rules, according to a Davis Polk & Wardwell analysis. Another third have been written into proposed rules while the final third have yet to be proposed.

"If the pace of new regulation continues the way we've seen in the last year or two, I think more and more [financial services] firms will be adding to their legal and compliance departments," said Adam Reback, a chief compliance officer at hedge fund J. Goldman & Co. "It means more filings, it means more leg work, it means more monitoring. You just need more people to get it done" and more resources.

See our previous coverage of the Dodd-Frank Act here, here, here, and here.
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Topics: Dodd-Frank, Investment Advisors, SEC, Compliance, private equity fund, Dodd-Frank Act, hedge funds, regulation., New York Law Journal

SEC Report on Credit Ratings for Structured Finance Products

Posted by Jack Duval

Dec 22, 2012 4:18:00 AM

This blog post continues our expert analysis of complex investments and their regulation.

The SEC has issued a report (as part of the ongoing Dodd-Frank Act implementation) that addresses the credit ratings of structured finance products.  (SEC)  While this 82 page, 591 footnote, plus appendix report will surely be at the top of everyones Christmas reading list, I have taken the time to give you the highlights.  It all comes down to conflicts of interest in the payment structure of the ratings agencies.  Right now, it is presented as a false dilemma between issuer-pay and subscriber-pay models.

Obviously, there could be myriad other payment models.  Nevertheless, here's the latest thinking on these options:

Issuer-Pay Conflicts

Under the issuer-pay model, the NRSRO is paid by the arranger to rate a proposed structured finance product. As discussed above, investors may not purchase a structured finance product if it is not rated at a specific level because, for example, they are subject to laws or regulations that provide benefits or relief based on credit ratings. Investors also may be subject to investment guidelines that require the instruments they hold to be rated at or above a certain category in a rating scale (e.g., the four highest categories). Arrangers also desire higher credit ratings to lower financing costs of the products they structure as lower ratings generally result in higher interest rates. For these reasons, this payment model presents an inherent conflict of interest because the arranger has an economic interest in obtaining credit ratings that are demanded by investors and that lower the issuer’s financing costs and the NRSRO has an economic interest in having the arranger hire it in the future.38 This creates the potential that the NRSRO will be influenced to issue the credit ratings desired by the arranger.

Subscriber-Pay Conflicts

As with the issuer-pay model, the subscriber-pay model also presents certain conflicts of interest. These conflicts result because subscribers – the source of the NRSRO’s revenues – could have an interest in specific credit ratings and, consequently, could exert pressure on the NRSRO to determine or maintain credit ratings that will result in outcomes that favor the subscriber.69 For instance, subscribers may use the credit ratings of the NRSRO to comply with, and obtain benefits or relief under, statutes and regulations using the term “NRSRO,” or subscribers may own investments or have entered into transactions that could be favorably or adversely impacted by a credit rating issued by the NRSRO. In other words, a subscriber (like an issuer) may have an interest in the NRSRO determining or maintaining a particular credit rating. In cases where the interests of a substantial number of subscribers are aligned, this potential conflict may be heightened.

See our previous coverage of NRSROs under Dodd-Frank here.
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Topics: ratings agencies, Dodd-Frank, SEC, NRSRO, Compliance, Section 939F, Dodd-Frank Act, regulation., Complexity

ISDA Response to Dodd-Frank

Posted by Jack Duval

Dec 14, 2012 3:54:24 AM

The International Swaps and Derivatives Association has submitted a 39 page comment on the Dodd-Frank Act.  (ISDA)

Here is the extract of their key points:

Initial Margin ("IM")

  1. Negative consequences of IM. As proposed, the IM requirement could severely challenge the resiliency of the financial system and will severely curtail the use of uncleared swaps for hedging, which would disrupt key financial services, such as those that provide for wider availability of home loans and domestic and international corporate finance.

  2. Proposed alternative. In lieu of IM, systemic risk can be effectively mitigated by: imposing VM requirements with daily collection (subject to limited exceptions) and zero thresholds; implementation of appropriate capital requirements, and mandatory clearing of liquid standardized swaps.


  1. Timing and Consistency. The Prudential Regulators' margin rules should be coordinated and consistent with the margin requirements of the CFTC, the SEC and regulators in other major financial jurisdictions. The Prudential Regulators should re-propose their rules on margin after they have had the opportunity to review and consider the final findings of the Basel/IOSCO Working Group and the SEC's proposed margin rules.

  2. Phase-In/Clearing: Compliance with the margin requirements should be phased- in over time and no earlier than the clearing requirements for the same asset class. The proposed time period of 180 days for implementation of the final rules is insufficient. The effective date for margin requirements for a given asset class should follow the implementation of mandatory clearing for that asset class.

Scope: Entities – We re-emphasize the recommendation that end-users, special purpose vehicles ("SPVs") and state and municipal government entities be excluded from the margin requirements. ISDA's position is that all sovereigns and central banks should post margin in order to achieve international comity. Unilateral action by a regulator in the U.S. or any other jurisdiction would be damaging to market participants and market liquidity.

Margin Calculation - We strongly recommend that the collection of IM not be required. While the Dodd-Frank Act provides for IM requirements for bank swap dealers, the Prudential Regulators have latitude in how they address that reference to IM and should consider the severe negative consequences of the proposed IM requirements. If the Prudential Regulators find it necessary to require the collection of IM, IM should be collected on a static basis, the amounts should be low and thresholds should be allowed as determined by the CSEs. In addition, calculation and posting of IM on or before execution date should not be required.

The proposed standardized tables would result in excessive IM requirements. Based on our review of aggregated QIS data from eight leading banks (which represent 45-50% of the total notional amount of the swap market), ISDA estimates that the amount of IM required using the standardized tables as proposed in the Study and the PR Proposal would be over $10.2 (in the Study)/7.6 (in the PR Proposal) trillion, over 6 times that required if an IM model were used.7 One way to address this issue would be to allow netting. The current proposal does not allow netting when the standardized table is used to calculate IM, whereas the Study and SEC proposals allow some netting with use of the standardized table.

  1. Netting – In general, netting that is legally enforceable should be permitted. The Prudential Regulators should also allow portfolio-based margining across cleared and uncleared swaps, other products and across legal structures. The Study allows netting within asset class when a model is used, and across comparable contracts with the schedule is used. The Prudential Regulators should also consider the approach proposed by the SEC, which allows broad netting for margin.

  2. Collateral

    1. Eligible collateral. Eligible collateral and applicable haircuts should be determined by the CSEs. At a minimum, the rules should adopt a broader range of eligible collateral as proposed by the Study. Alternatively, the Prudential Regulators' final rules may avoid specifying types of products and securities as eligible, as proposed by the SEC, subject to prescribed haircuts.

    2. Segregation. If IM is required, segregation and third party custody for IM should be at the agreement of the parties and not be required by regulation.8 CSEs should be allowed to offer asset protection mechanisms other than third party segregation that would provide that collateral be "immediately available" as recommended by the Study; e.g. segregation on the books of the CSE. The SEC proposal provides that SBSDs hold collateral in an account under the control of the SBSD and third party segregation is at the election of the counterparty that is not an SBSD. Parties posting collateral should have the option to allow the CSE to re-hypothecate the collateral.

  3. Inter-Affiliate Swaps - As stated in the prior letter to the Prudential Regulators, inter- affiliate trades should be excluded from margin requirements. Swaps between affiliates do not add systemic risk. Such trades are used to internally allocate risk and encourage centralized risk management. Imposition of margin requirements on inter-affiliate trades would add cost and inefficiency to internal risk management.

  4. Cross-Border Trades - Affiliates of U.S. persons should not be treated as U.S. persons under the margin rules, as proposed by the CFTC in its cross-border guidance. For swaps involving multiple jurisdictions, non-U.S. regulatory regimes should be recognized. 

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Topics: Data Analysis, Swaps, ISDA, Dodd-Frank, initial margin

SEC Announces Over 1,500 Private Fund Advisors Register as Investment Advisors

Posted by Jack Duval

Oct 20, 2012 3:47:35 AM

As a result of the Dodd-Frank legislation, hedge fund, private equity fund and other fund managers are having to register as Investment Advisors with the SEC.  This is a significant development as trillions of assets are now coming under the aegis (and scrutiny) of the SEC.  We will have more commentary on this later, but here are some initial links for your review:

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Topics: RIA, Dodd-Frank, Investment Advisors, Investment Advisor, SEC, Compliance, private equity fund, regulation., hedge fund

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