Implementing Dodd-Frank: Current Status of SEC Mandatory Rulemaking | White & Case LLP International Law Firm, Global Law Practice
Implementing Dodd-Frank: Current Status of SEC Mandatory Rulemaking

Implementing Dodd-Frank: Current Status of SEC Mandatory Rulemaking

THE DELTA REPORT
Derivatives Newsletter
September 2016

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Introduction

Multiple sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") contain a provision requiring the SEC to implement rules regarding the subject matter addressed therein. Through these rulemaking provisions, the SEC has "increased transparency, better investor protections and new regulatory tools" that serve to create "a stronger marketplace and financial future for all Americas".6

To date, the SEC has taken action to address many of these rulemaking provisions, and of July 2016, the SEC has adopted final rules for 78% of the rulemaking provisions required under the Dodd-Frank. As we continue to receive inquiries from clients regarding the status of the SEC's rulemaking process regarding different requirements, we thought it useful to provide an interim update.

The SEC tracks its rulemaking status on its website,7 where it provides an overview of the rules enacted, as well as an overview of the new regulatory oversight departments that have been created together with the studies that have been undertaken by these departments, all as required in connection with its implementation of the Dodd-Frank Act.

Although the rulemaking process is ongoing, the SEC has adopted or proposed specific rules with respect to each of the following categories:

We set forth below a summary of the adopted and proposed rules with respect to each category.

 

Private Funds

In the private funds category, the SEC has adopted the following rules:

  • Sections 404 and 406: Requires advisors to hedge funds and private funds to maintain and report certain information to the SEC and CFTC
  • Sections 407 and 408: Defines "venture capital firm" and provides an exemption from registration for venture capital firms and private fund advisers managing less than $150 million in private funds
  • Section 409: Defines "family office" for purposes of excluding individuals that manage their own family's financial portfolios from being deemed an "investment advisor" and subject to the Investment Advisers Act
  • Section 410: Provides for the transaction of mid-sized investment advisors (i.e., individuals or entities that manage between $25 million and $100 million in assets) from regulation by the SEC to state regulation
  • Section 413: Revises the standard for determining status as an "accredited investor" for purposes of investing in unregistered securities offerings to exclude the value of an individual's home from net worth calculations
  • Section 418: Modifies threshold for determining status as a "qualified client" of a registered investment advisor

The SEC has adopted final rules for all rulemaking provisions required under the Dodd-Frank Act with respect to the regulation of private funds.

 

Volcker Rule

In the Volcker Rule category, the SEC has adopted the following rule:

  • Section 619: Prohibits proprietary trading and certain interest is, and relationships with, hedge funds and private equity funds

In addition, the SEC has adopted the following interim rule:

  • Section 619: Provides an exception from prohibited relationships for banking entities that retain an interest in certain types of collateralized debt obligations that are backed primarily by trust preferred securities

The SEC has adopted final rules for the sole rulemaking provision required under the Dodd-Frank Act with respect to the Volcker Rule.

 

Security-Based Swaps

In the security-based swaps category, the SEC has adopted the following rules:

  • Section 712: Adopts rules regarding derivatives products, including a definition for mixed swaps (among other swaps-related definitions), as well as specific recordkeeping requirements for trade repositories, swap dealers, security-based swap dealers, major swap participants and security-based swap participants*

* Rule jointly published with the Commodity Futures Trading Commission

  • Section 761: Adopts rules regarding swap market intermediaries, including identification of major security-based swap participants and an exemption from the definition of security-based swap dealer for "de minimis" activity
  • Section 763: Adopts rules regarding clearing agencies and security-based swap repositories:

(a) the clearing process regarding security-based swaps (including staying a clearing requirement and review of transactions approved for clearing, prevention of evasion of clearing requirements and transition reporting rules)
(b) governance rules and duties
(c) collection and public availability of security-based swap transaction and pricing data

  • Section 764: Adopts rules with respect to security-based swap dealers and security-based major swap participants, including:

(a) registration requirements
(b) applicable business conduct standards
(c) documentation requirements
(d) duties, including requirements regarding risk management procedures, disclosure of general information, ability to obtain information, conflicts and antitrust

  • Section 766: Adopts transition rules regarding reporting security-based swap transactions entered into prior to enactment of Dodd-Frank, as well as rules regarding reporting of uncleared security-based swap transactions

In addition, the SEC has proposed the following final rules (which have yet to be adopted):

  • Section 763: Proposes general rules and rules regarding data collection and reporting for security-based swap execution facilities, as well as rules regarding fraudulent activity with respect to security-based swaps
  • Section 764: Proposes reporting and recordkeeping requirements for security-based swap dealers and security-based major swap participants, including daily trading recordkeeping requirements, capital and margin requirements (for non-bank security-based swap dealers and security-based major swap participants)
  • Section 765: Proposes conflicts of interest rules for security-based swap dealers and security-based major swap participants
  • Section 766: Proposes specific recordkeeping requirements for certain types of security-based swaps

 

Clearing Agencies

In the clearing agencies category, the SEC has adopted the following rules:

  • Section 805: Establishes authority of the SEC to prescribe risk management standards for designated clearing entities and provides minimum standards pertaining to governance and risk management practices of registered clearing agencies
  • Section 806: Establishes process by which designated clearing agencies will provide notice of proposed changes to rules, procedures or operation of designated financial market utilities

The SEC has adopted final rules for all rulemaking provisions required under the Dodd-Frank Act with respect to the regulation of clearing agencies.

 

Municipal Securities Advisors

In the municipal securities advisers category, the SEC has adopted the following rules:

  • Section 975: Adopts rules regarding registration of municipal advisors, as well as approval of rules proposed by the Municipal Securities Rulemaking Board regarding standards of conduct and board membership.

The SEC has adopted final rules for the sole rulemaking provision required under the Dodd-Frank Act with respect to municipal advisors.

 

Executive Compensation

In the executive compensation category, the SEC has adopted the following rules:

  • Section 952: Adopts rules regarding the independence of Compensation Committees, including SEC to direct self-regulatory organizations to:

(a) Direct self-regulatory organizations to prohibit listing of certain securities by issuers that do not comply with compensation committee independence requirements or other requirements under Section 10C of the Exchange Act
(b) Identify factors that could affect compensation committee independence
(c) Issue rules regarding proxy disclosure of compensation consultants

  • Section 953: Adopts rules regarding additional executive compensation disclosure with respect to pay ratio of chief executive officer to median compensation of employees
  • Section 972: Adopts rules regarding disclosure of board leadership (including Chairman / Chief Executive Officer structure) in annual proxy statement

The SEC has also approved the following rule (in part).

  • Section 951: Adopts rules regarding shareholder approval of executive compensation and "golden parachute" compensation requirements

In addition, the SEC has proposed the following final rules (which have yet to be adopted):

  • Section 953: Proposes disclosure rules regarding pay versus performance of executives
  • Section 954: Proposes rules regarding recovery of executive compensation
  • Section 955: Proposes rules regarding disclosure of hedging activity by employees and directors
  • Section 956: Proposes rules regarding disclosure of compensation structure and prohibition of certain compensation arrangements at certain financial institutions

 

Asset-Backed Securities

In the asset-backed securities category, the SEC has adopted the following rules:

  • Section 941: Adopts rules regarding credit risk retention (in general and with respect to residential mortgages) by securitizes of asset-backed securities, including certain exemptions to the credit risk retention rules
  • Section 942: Adopts rules standardizing disclosure obligations with respect to asset-backed securities in certain asset classes, as well as suspension of reporting obligations for certain asset classes
  • Section 943: Adopts rules regarding use of representations and warranties with respect to asset-backed securities
  • Section 945: Disclosure of due diligence of asset-backed securities

In addition, the SEC has proposed the following final rule (which has yet to be adopted):

  • Section 621: Proposes rules to prohibit conflicts of interest in respect of certain securitization transactions

 

Credit Rating Agencies

In the credit rating agencies category, the SEC has adopted the following rules:

  • Section 932: Adopts rules regarding:

(a) internal controls governing implementation of and adherence to policies and procedures for determining credit ratings
(b) separation of ratings departments from sales and marketing departments
(c) policies and procedures regarding look-back reviews
(d) fines and penalties for certain violations
(e) transparency of ratings performance
(f) methodologies for credit rating (including form and certification)
(g) certain rules regarding the use of third-parties that conduct due diligence in ratings process

  • Section 936: Adopts rules regarding standards for training, experience and competence required for credit rating analysts
  • Section 938: Adopts rules regarding universal ratings symbols

The SEC has also approved the following rules in part.

  • Section 939: Proposes rules regarding the removal of statutory references to the Investment Company Act and the Exchange Act regarding credit ratings and substitutes standards to be established by the SEC
  • Section 939A: Proposes rules regarding the review of reliance on credit ratings with respect to a limited set of credit ratings in SEC statues, rules and forms that have not yet been addressed

 

Specialized Disclosures

In the specialized disclosures category, the SEC has adopted the following rules:

  • Section 1502: Adopts rules regarding disclosure of use of "conflict minerals" *

* Rule currently under review by the U.S. Court of Appeals for the District of Columbia Circuit

  • Section 1504: Adopts rules regarding disclosure by resource extraction issuers of payments to governments (domestic and foreign) related to commercial development in oil, gas or mineral resources industries

The SEC has adopted final rules for the sole rulemaking provision required under the Dodd-Frank Act with respect to municipal advisors.

 

Other

In the asset-backed securities category, the SEC has adopted following rules:

  • Section 916: Streamlines the procedural rules for filings by self-regulatory organizations
  • Section 924: Implements whistleblower provisions under Section 21F of the Securities Act
  • Section 926: Prohibits felons and other "bad actors" from offering or selling securities under Regulation D
  • Section 929W: Revised rules regarding notice to missing security holders for delivery of dividends and interest
  • Section 939B: Eliminated exemption for credit rating agencies from fair disclosure rule
  • Section 989G: Conforms the Internal Control Audit Requirements for Smaller Companies such that that auditor attestation requirement does not apply to non-accelerated filers
  • Section 1088: Requires investment companies and broker-dealers to adopt policies and procedures to prevent identity theft*

* Rule issued jointly with the CFTC

In addition, the SEC has proposed the following final rule (which has yet to be adopted):

  • Section 205(h): Proposes rules implementing orderly liquidation of covered brokers and dealers

The following final rules have not yet been addressed:

  • Section 165: Rules regarding tress tests
  • Section 915: Rules regarding regulations of the Office of Investor Advocate
  • Section 929X(a): Rules regarding reform of short sales
  • Section 984(b): Rules to increase transparency of information available to brokers, dealers and investors with respect to lending or borrowing securities

 

6 Mary Jo White, Public Statement, Statement on the Anniversary of the Dodd-Frank Act (June 2015), http://www.sec.gov/news/statement/statement-on-the-anniversary-of-the-dodd-frank-act.html.
7 Securities and Exchange Commission, Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act (July 2016), https://www.sec.gov/spotlight/dodd-frank.shtml.

 

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