Regulatory Developments
SEC Proposes New Round of Money Market Fund Reforms
On December 15, the SEC voted, by a 3-2 vote, to propose money market fund reforms that would significantly impact the regulatory framework governing money market funds. According to the SEC, the proposed reforms are designed to improve the resilience of money market funds by reducing the risk of shareholder “runs” on money market funds, especially during times of liquidity stress. The SEC indicated that the proposed rulemaking is informed by the experiences of money market funds during March 2020 in connection with the market volatility from the onset of the COVID-19 pandemic, which included heavy outflows from institutional prime money market funds. The public comment period for the proposed money market reforms will remain open for 60 days.
The key aspects of the proposed reforms consist of amendments to Rule 2a-7 under the Investment Company Act of 1940 (the 1940 Act) (and related form amendments) that would, if adopted: (a) remove the ability of a money market fund to impose liquidity fees or redemption gates once the fund falls below certain liquidity thresholds; (b) require an institutional prime and institutional tax-exempt money market fund, but not a government or retail money market fund, to use “swing pricing” on each day it has net redemptions (swing pricing is the process of adjusting the fund’s net asset value (NAV) to effectively pass on the costs stemming from redemption activity to the redeeming shareholders, which the SEC believes will help mitigate the risk of redemptions motivated by a perceived “first-mover advantage”)); (c) increase the minimum liquidity requirements for a money market fund by raising the “daily liquid asset” minimum from 10% to 25% of the fund’s total assets and the “weekly liquid asset” minimum from 30% to 50%; (d) require a money market fund, when the fund’s “daily liquid assets” fall below 12.5% or its “weekly liquid assets” fall below 25%, to notify its board of directors and file a public report with the SEC within one business day after the occurrence; (e) modify certain aspects of the stress testing provisions to require a money market fund to test its ability to maintain “sufficient minimum liquidity” under specified hypothetical events, where each fund would be permitted to determine the level of liquidity that it considers sufficient instead of using a bright-line threshold of 10% “weekly liquid assets” for this purpose; (f) prohibit a government and retail money market fund, which has a stable NAV, from implementing a so-called “reverse distribution mechanism” or any similar device that would reduce the number of the fund’s outstanding shares as a means of maintaining the fund’s stable NAV, which would effectively require a government or retail money market fund that has to apply a negative yield (this could occur, for example, in a negative interest rate environment) to convert from a stable NAV to a “floating” NAV; and (g) modify certain reporting requirements (including the monthly portfolio holdings reports filed by money market funds) to, in the SEC’s view, improve the SEC’s ability to monitor and analyze money market fund data.
SEC Proposes Amendments to Rule 10b5-1 Trading Plans
On December 15, the SEC proposed amendments to Rule 10b5-1 trading plans, as SEC Chairman Gary Gensler first previewed in June in the wake of increased scrutiny of the plans. A Rule 10b5-1 plan provides an affirmative defense to Rule 10b-5 liability for insider trading. If approved, the following amendments would, according to Chair Gensler, close potential gaps in the insider trading regime and build trust in the capital markets.
Read our client alert to learn more about these proposed amendments.
SEC Proposes Amendments to Modernize Share Repurchase Disclosure
On December 15, the SEC proposed amendments to modernize and improve disclosure about repurchases of an issuer’s equity securities that are registered under Section 12 of the Securities Exchange Act of 1934. Specifically, the proposed amendments would require an issuer to provide more timely disclosure on a new Form SR regarding purchases of its equity securities for each day that it, or an affiliated purchaser, makes a share repurchase. The proposed amendments would also enhance the existing periodic disclosure requirements about these purchases. Comments to the proposed amendments are due on or before 45 days after being published in the Federal Register.
FinCEN Seeks Comments on Modernization of U.S. AML/CFT Regulatory Regime
On December 14, FinCEN issued a request for information (RFI) seeking comments on ways to streamline, modernize and update the anti-money laundering and countering the financing of terrorism regime (AML/CFT) in the United States. Specifically, FinCEN requests comments on ways to efficiently and cost-effectively modernize risk-based AML/CFT regulations and guidance, issued pursuant to the Bank Secrecy Act (BSA). Comments received in response to the RFI serve to support FinCEN’s statutory mandate to review BSA regulations and guidance on an ongoing basis pursuant to Section 6216 of the Anti-Money Laundering Act of 2020.
FinCEN is specifically reviewing whether AML/CFT programs, among other things, are reasonably designed to assure and monitor compliance with the BSA and are risk-based so that financial institutions give more attention and resources to higher risk customers and activities. Additionally, FinCEN seeks to ensure that AML/CFT programs continue to require certain reports and records that are useful in countering financial crime and that these programs support the U.S. in commitments to conform with international standards to combat such crimes. After the review is complete, the Secretary is required to make appropriate changes to the regulations and guidance. Written comments are due by February 14, 2022.
“We recognize that the illicit finance threat landscape continues to evolve and that technology and innovation now play an important role in the efficient application of resources to combat illicit finance. I urge all relevant stakeholders to review the RFI and comment on ways that FinCEN can modernize AML/CFT regulations and guidance and better promote a risk-based approach to AML/CFT compliance.”
- FinCEN Acting Director Himamauli Das
SEC Proposes Rules to Prevent Fraud in Connection With Security-Based Swaps Transactions, to Prevent Undue Influence over CCOs and to Require Reporting of Large Security-Based Swap Positions
On December 15, the SEC proposed rules to prevent fraud, manipulation and deception in connection with security-based swaps, to prevent undue influence over the Chief Compliance Officer (CCO) of security-based swap dealers and major security-based swap participants (SBS Entities), and to require any person with a large security-based swap position to publicly report certain information related to the position. Proposed new Rule 9j-1 would prohibit fraudulent, deceptive or manipulative conduct in connection with all transactions in security-based swaps, including misconduct in connection with the exercise of any right or performance of any obligation under a security-based swap. Further, proposed new Rule 15Fh-4(c) would prohibit personnel of an SBS Entity from taking any action to coerce, mislead or otherwise interfere with the SBS Entity’s CCO. Finally, proposed new Rule 10B-1 would require any person, or group of persons, who owns a security-based swap position that exceeds the threshold amount set by the rule to promptly file with the SEC a statement containing the information required by Schedule 10B on the SEC’s EDGAR filing system. The filings will be publicly available. Such transparency could provide relevant parties with advance notice that certain market participants are building large positions and could facilitate risk management and inform pricing of security-based swaps. The comment period will remain open for 45 days after publication in the Federal Register.
Federal Reserve Reiterates Its Supervisory Expectations for Large Banks’ Risk Management with Investment Funds
On December 10, the Federal Reserve reiterated its expectations for large banks’ risk management policies and procedures related to investment funds in SR 21-19. The letter applies to banking organizations with extensive derivative portfolios and close relationships with investment funds. The Federal Reserve letter stems from the failure of Archegos Capital Management, which resulted in over $10 billion of losses across several banks.
CFPB Updates Its Electronic Fund Transfers FAQs
On December 13, the CFPB updated its Electronic Fund Transfer Act (EFTA) and Regulation E FAQs to offer clarification around person-to-person (P2P) payments and P2P payment providers, confirming that:
- Regulation E covers P2P payments, credit-push P2P payments, and P2P debit card “pass-through” payment transfers;
- The term “financial institution” can include P2P payment providers, bill payment services, and depository institutions, even when a P2P payment was initiated through a non-bank P2P payment provider; and
- Obligations under the statute and regulation regarding error resolution and unauthorized transfers apply to depository institutions who hold a consumer’s account that becomes subject to alleged EFT fraud or error through a non-bank P2P payment provider.
CFPB Publishes Fall 2021 Rulemaking Agenda
On December 13, the CFPB published its Fall 2021 Rulemaking Agenda, listing key regulatory matters upon which the CFPB plans to focus between November 1, 2021 and October 31, 2022. Because the CFPB submitted its Fall 2021 agenda to the Office of Management and Budget before Director Rohit Chopra began his term on October 12, 2021, the CFPB anticipates that its Spring 2022 Agenda will more fully reflect the regulatory priorities of the Director.
OCC Issues Final Rule to Rescind its 2020 Community Reinvestment Act Rule
On December 14, the OCC issued a final rule to rescind the June 2020 Community Reinvestment Act (CRA) rule and replace it with a rule based on the rules adopted jointly by the federal banking agencies in 1995. The final rule takes effect on January 1, 2022.
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