The Staff (the “Staff”) of the SEC’s Division of Investment Management recently wrote to the Investment Company Institute (the “ICI”) announcing that it would not recommend enforcement action if a money market fund board did not designate at least four nationally recognized statistical rating organizations (“NRSROs”) whose ratings would be used by the fund to determine the eligibility of portfolio securities for the purposes of Rule 2a-7 under the Investment Company Act of 1940.  The Staff also provided relief from related disclosure requirements for the designated NRSROs.  The compliance timeline for the February 2010 amendments to Rule 2a 7 and other rules affecting money market funds would have required a money market fund to comply with both provisions by December 31, 2010.

In its letter to the ICI, the Staff said that its no-action relief would remain in effect until the SEC determines whether to modify Rule 2a 7 and remove all references in the rule to NRSROs, as required by Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (discussed in the July 28, 2010 Alert).  Until such modifications to Rule 2a 7, the Staff said that a money market fund must continue to comply with its obligations for determining and monitoring whether its securities, other than unrated asset backed securities, are or continue to be eligible securities for purposes of Rule 2a-7 as in effect before the February 2010 amendments to Rule 2a 7 took effect on May 5, 2010.  The Staff said that a money market fund may continue to acquire unrated asset-backed securities as permitted by the February 2010 amendments.  (Prior to the February 2010 amendments, a money market fund could acquire an asset-backed security only if the security was a rated security for purposes of Rule 2a-7.)

The Federal Reserve Bank of New York (the “FRB-NY”) expanded the number of counterparties eligible to participate with the FRB-NY in reverse repurchase agreements.  The new eligible participants are 26 money market funds (managed by a total of 14 investment managers, including, e.g., Bank of America, BlackRock, Fidelity, Goldman Sachs, Legg Mason, Vanguard and Wells Fargo).  The 26 new money market fund participants will join the existing 18 primary dealers currently eligible to participate in reverse repurchase transactions with the FRB-NY.  The addition of the 26 new potential counterparties is a matter of “prudent advance planning,” said the FRB-NY, and is intended to enable the FRB-NY, when it deems it appropriate, to lower bank reserves and tighten monetary policy.

The FDIC, the OCC and the FRB (the “Agencies”) issued a joint advance notice of proposed rulemaking (the “ANPR”) regarding alternatives to the use of credit ratings in the Agencies’ risk-based capital rules for banking organizations.  The ANPR was issued in response to Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires the Agencies to review, by July 21, 2011, (1) their regulations requiring the use of an assessment of the credit-worthiness of a security or money market instrument and (2) any references to or requirements in such regulations regarding credit ratings.  The Agencies must “modify any such regulations identified by the review to remove any reference to or requirement of reliance on credit ratings and to substitute in such regulations such standard of credit-worthiness as [the Agencies] shall determine as appropriate for such regulations.”  In making such determination, the Agencies must “seek to establish, to the extent feasible, uniform standards of credit-worthiness” for use by the Agencies, taking into account the entities they regulate and the purposes for which such entities would rely on such standards of credit-worthiness. [Read more →]

Although the staff of the SEC (the “Staff”) has not completed its review of derivatives use by registered funds, which, among other issues, is exploring the adequacy of derivatives-related disclosures (see the March 30, 2010 Alert for a more detailed discussion of the Staff’s review), the Staff provided initial observations on registration statement and shareholder report disclosures regarding derivatives use in a letter sent to the Investment Company Institute for communication to its members. [Read more →]

The Staff of the SEC’s Division of Investment Management recently wrote to the Investment Company Institute (the “ICI”) and stated that a money market fund may treat a short-term floating rate security (“STFRS”) that is subject to an unconditional demand feature as a short term variable rate security (“STVRS”) for the purpose of calculating the fund’s dollar weighted average life to maturity (“WAL”).  Rule 2a-7 under the 1940 Act, which regulates all registered investment companies that hold themselves out as money market funds or which use the term “money market” or a similar term in their names, requires among other things that each money market fund maintain a WAL of 120 days or less.  Rule 2a-7(c)(2)(iii) provides that WAL is calculated without reference to the maturity shortening provisions in Rule 2a 7(d) regarding interest rate readjustments. [Read more →]

The FDIC issued proposed guidance on automated overdraft payment programs (the “Proposal”), which outlines additional expectations for the banks it supervises.  The Proposal would supplement the FRB’s overdraft rules under Regulation E, which are discussed in more detail in the June 1, 2010 and November 17, 2009 Consumer Financial Services Alerts.  Whereas the new Regulation E opt-in requirement addresses only paying overdrafts resulting from one-time debit card and ATM transactions, the Proposal provides that customers should have an opportunity to opt out of the payment of overdrafts resulting from non-electronic transactions (e.g., checks).  The Proposal also provides that banks should not process transactions in a manner designed to maximize the cost to customers.  In addition, the Proposal calls for banks to monitor accounts and take meaningful and effective action to limit customer use of overdraft coverage as a form of short-term, high-cost credit, including, for example, by giving customers who overdraw their accounts on more than six occasions where a fee is charged in a rolling 12-month period a reasonable opportunity to choose a less costly alternative and decide whether to continue with fee-based overdraft coverage.  Moreover, the Proposal states that the FDIC expects banks to institute appropriate daily limits on overdraft fees.  The Proposal notes that overdraft payment programs will be reviewed at FDIC examinations.  Comments on the Proposal are due no later than September 27, 2010.

The FDIC announced that it has adopted an open-door policy (the “Policy”) designed to allow the public to give input and track the process that will lead to the adoption of rules and regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  The Policy goes beyond the requirements of the Administrative Procedure Act to allow public participation even before regulations are drafted and proposed.  Under the Policy, interested parties can request a meeting with FDIC officials or staffers, and the FDIC will provide increased disclosure concerning meetings between senior FDIC officials and private sector individuals.  The FDIC will disclose the names and affiliations of the private sector individuals as well as the subject matter of the meeting.  The FDIC said that the Policy will apply to “meetings discussing how the FDIC should interpret or implement provisions [of the Dodd-Frank Act] that are subject to independent or joint rulemaking by the FDIC.”  The FDIC also stated that it will hold a series of round table discussions with external parties on issues concerning implementing rules adopted under provisions of the Dodd-Frank Act.

The FDIC Board of Directors approved the establishment of a new Office of Complex Financial Institutions (“CFI”) and a new Division of Depositor and Consumer Protection (“DCP”).  The FDIC organized the CFI and the DCP to help the FDIC meet its responsibilities under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).

The CFI, said the FDIC, will conduct continuous reviews and oversight of bank holding companies with more than $100 billion in assets and will examine any nonbank financial companies designated as systemically important by the Financial Stability Oversight Council created by the Dodd-Frank Act.  The CFI is also the FDIC unit responsible for using the FDIC’s powers under the Dodd-Frank Act to implement orderly liquidations of bank holding companies and nonbank financial companies that fail.  The FDIC said that the establishment of the CFI is the first step in ending the presumption of “too big to fail.”

The FDIC Board of Directors adopted a final rule (discussed in FDIC Financial Institution Letter, FIL 49-2010) amending its deposit insurance and advertising of FDIC membership regulations to conform with provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permanently increase the standard maximum deposit insurance amount, effective July 22, 2010, from $100,000 to $250,000.

The SEC published a joint advance notice of proposed rulemaking requesting comment from interested parties on rulemaking by the agencies to further define certain key definitions that are part of the comprehensive scheme for regulating swaps and securitybased swaps set forth in the Wall Street transparency and Accountability Act of 2010, Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The SEC has requested public comment on other rulemaking and studies required by the Dodd-Frank Act, as discussed in the August 3, 2010 Alert. The key definitions at issue are the definitions of “swap,” “security-based swap,” “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant,” “eligible contract participant,” and “security-based swap agreement.” The two agencies have also solicited comment on the regulations regarding “mixed swaps” that Title VII requires them to jointly prescribe. For further discussion of Title VII of the Dodd-Frank Act, please see the August 2, 2010 Special Edition of the Alert.

• Dodd-Frank Wall Street Reform and Consumer Protection Act - Public Company Impact
• Dodd-Frank and Other Developments Affecting the Securities Lending Industry
• The Wall Street Transparency and Accountability Act of 2010: Regulation of Derivatives Markets

The Basel Committee on Banking Supervision (the “BCBS”) announced that the central bank governors and heads of banking supervision agencies from the BCBS’s member countries reached “broad agreement on the overall design of the capital and liquidity reform package,” including the definition of capital, the treatment of counterparty credit risk, the leverage ratio, and the global liquidity standard.  The BCBS expects to finalize proposed capital buffers by the end of 2010, and the governors and heads of supervision agreed to finalize the capital set-aside requirements (i.e., the percentage of risk-weighted assets required to be held) and phase-in arrangements at their next meeting in September, 2010.  The BCBS also announced that it will publicly issue its economic impact assessment in August, 2010. [Read more →]

The House Financial Services Committee adopted by voice vote a bill (“H.R. 5823”) that would establish a legislative and regulatory framework for U.S. covered bonds, including a regime to handle the failure of a bond issuer.  H.R. 5823 was introduced by Representative Scott Garrett, along with co-sponsors Representative Paul E. Kanjorski and Financial Services Committee Ranking Member Spencer Bachus, on July 22, 2010 to supersede a pervious version (“H.R. 4884”) that was introduced in March 2010.  While similar in many ways to H.R. 4884, H.R. 5823 also includes some significant differences, as discussed below.  For more information on H.R. 4884, and covered bonds more generally, please see the March 30, 2010 Alert.  Covered bond provisions came very close to inclusion in the recently-enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), but ultimately did not make it out of the conference committee that reconciled the House and Senate versions of the Dodd-Frank Act. [Read more →]

The OCC, FRB, FDIC, OTS, NCUA and the Farm Credit Administration (the “Agencies”) issued final rules (the “Rules”) under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “SAFE Act”).

The SAFE Act requires that mortgage originators who work for financial institutions that are regulated by the Agencies register with the Nationwide Mortgage Licensing System (“NMLS”), a database of mortgage originators at banks, thrifts and credit unions. 48 states use NMLS to license and supervise mortgage brokers and originators, and it is expected that all 50 states will use NMLS by the end of 2010.

The Rules, which take effect on October 1, 2010 require that each mortgage originator at an institution regulated by any of the Agencies (i) obtain a unique identifier through NMLS that will remain attached to that individual loan originator throughout his or her career, notwithstanding changes in employer and (ii) provide that identifier to customers. This is intended to allow consumers access to employment and background information on mortgage originators.

Mortgage lenders employed at institutions that are not supervised by the Agencies are required to be licensed in the states in which they operate and, if the state or states in which they are licensed offers the NMLS registry, the deadline for those mortgage lenders to be registered with NMLS was on July 31, 2010.

The SEC announced that it has established a page on its website designed to facilitate public comment in advance of formal action by the SEC on the various topics that will be the subject of SEC rulemaking and studies under the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The SEC also announced that the SEC staff will follow new procedures when meeting with interested parties regarding SEC rulemaking, as follows:

“Staff will try to meet with any interested parties seeking a meeting. When the number of requests exceeds availability, the staff will seek out parties with varying viewpoints. Staff may have to limit the number of meetings with similarly situated parties and will limit multiple meetings with the same party.

Staff will reach out as necessary to solicit views from affected stakeholders who do not appear to be fully represented by the developing public record on a particular issue.

Staff will ask those who request meetings to provide, prior to the meeting, an agenda of intended topics for discussion. After the meeting, the agenda will become part of the public record.

Meeting participants will be encouraged to submit written comments to the public file, so that all interested parties have the opportunity to review and consider the views expressed.”