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Banking Agencies Permit "Reduced Content" Living Wills for Smaller FBOs
On June 10, 2016, the Federal Reserve Board and Federal Deposit Insurance Corporation announced they are permitting 84 foreign banking organizations (not identified) with limited U.S. operations to file "reduced content" resolution plans for their next three resolution plans. As reported, the decision is intended "to increase clarity and reduce burden by creating more certainty around future filing requirements." All of the 84 firms have less than $50 billion in total U.S. assets. The agencies said "the reduced content plans should focus on changes the firms have made to their prior resolution plans, actions taken to improve the effectiveness of, or that may alter, those plans, and, where applicable, actions to ensure any subsidiary insured depository institution is adequately protected from the risks arising from the activities of nonbank subsidiaries of the firm. The first of these reduced content plans must be submitted to the agencies by December 31, 2016. To file reduced content plans for the next three years, the firms must maintain less than $50 billion in U.S. assets and not experience any material events.
Federal Reserve Updates Risk Management Supervisory Guidance for Smaller FBOs
On June 8, 2016, the Federal Reserve updated its Supervisory Guidance that partially supersedes SR letter 95-51, "Rating the Adequacy of Risk Management and Internal Controls at State Member Banks and Bank Holding Companies". The guidance clarifies Board and senior management oversight of risk management, policies, procedures and limits, risk monitoring and MIS, and internal controls. One revision extends the applicability of the guidance to the U.S. operations of foreign banking organizations with total consolidated U.S. assets of less than $50 billion (such as ISP), which were not previously subject to SR 95- 51. The guidance notes, however, that FBO risk management processes and control functions for the U.S. operations may be implemented domestically or outside of the U.S. and in cases where the functions are performed outside of the U.S., the FBO's oversight function, policies and procedures, and information systems need to be sufficiently transparent to allow U.S. supervisors to assess their adequacy. Additionally, the FBO's U.S. senior management need to demonstrate and maintain a thorough understanding of all relevant risks affecting the U.S. operations and the associated management information systems, used to manage and monitor these risks within the U.S. operations. With respect to Board responsibilities, the guidance states in a footnote: "For the purpose of this guidance, for foreign banking organizations, 'board of directors' refers to the equivalent governing body of the U.S. operations of the FBO."
The guidance goes on further to state that:
The board of directors should collectively have a balance of skills, knowledge, and experience to clearly understand the activities and risks to which the institution is exposed. The board of directors should take steps to develop an appropriate understanding of the risks the institution faces, through briefings from experts internal to their organization and potentially from external experts. The institution's management information systems should provide the board of directors with sufficient information to identify the size and significance of the risks. Using this knowledge and information, the board of directors should provide clear guidance regarding the level of exposures acceptable to the institution and oversee senior management's implementation of the procedures and controls necessary to comply with approved policies, the guidance states.
SEC Finds that Private Equity Fund Adviser Acted as Unregistered Broker
On June 1, 2016, the Securities and Exchange Commission ("SEC") announced that a private equity fund advisory firm and its owner agreed to pay more than $3.1 million to settle charges that they engaged in brokerage activity, charged fees without registering as a broker-dealer and committed other securities law violations.
An SEC investigation found that Blackstreet Capital Management, LLC ("Blackstreet") and its principal performed in-house brokerage services rather than using investment banks or broker-dealers to handle the acquisition and disposition of portfolio companies for a pair of advised private equity funds. Of particular interest is the SEC highlighted that "Blackstreet fully disclosed to its funds and their investors that it would provide brokerage services in exchange for a fee" and that the limited partnership agreements of the advised funds "expressly permitted" the adviser "to charge transaction or brokerage fees." However, this did not suffice.
In the press release announcing the Order, Andrew J. Ceresney, Director of the SEC Enforcement Division, emphasized that the rules are clear that "before a firm provides brokerage services and receives compensation in return, it must be properly registered within the regulatory framework that protects investors and informs our markets."
Of note, the Order did not address whether or not Blackstreet offset transaction fees payable by the advised funds against its management fee. This is significant because in April 2013 the Chief Counsel of the SEC's Division of Trading and Markets gave a speech in which he stated that "to the extent [a private equity fund] advisory fee is wholly reduced or offset by the amount of [a] transaction fee, one might view the fee as another way to pay the advisory fee, which, in my view, in itself would not appear to raise broker-dealer registration concerns." Since the Order does not disclose whether or not there was a fee offset in the case presented, it is unclear whether the current SEC staff holds the view expressed by the Chief Counsel in 2013.
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