Edited by: Eric R. Fischer, Jackson B.R. Galloway and Elizabeth Shea Fries
In This Issue:
- IRS and Treasury Department Issue Highly-Anticipated FATCA Regulations
- FRB and OCC Issue Cease and Desist Orders Against JPMorgan Chase Requiring Enhancements to Risk Management Program Related to Derivatives Trading Activity and to Bank Secrecy Act/Anti-Money Laundering Compliance Program
- Financial Stability Oversight Council Extends Comment Period for Money Market Fund Reform Proposals
- CFTC Extends Comment Period for Proposed Rule Regarding FCMs and DCOs
- SEC Extends Comment Period for Proposed Capital, Margin, and Segregation Rules for Security-Based Swap Dealers and Major Security-Based Swap Participants
- SEC Approves FINRA Proposal to Amend FINRA Rule 4530 to Eliminate Certain Redundant Disclosure and Permit Online Filing of Copies of Litigation Documents
- SEC Approves FINRA Rule Change to Adopt Interim Form for Funding Portals under the Crowdfunding Provisions of the JOBS Act
IRS and Treasury Department Issue Highly-Anticipated FATCA Regulations
On January 17, 2013, the IRS and Treasury Department released final regulations under the Foreign Account Tax Compliance Act ("FATCA"). The FATCA provisions, enacted as part of the Hiring Incentives to Restore Employment Act of 2010 ("HIRE Act") and contained in Chapter 4 (sections 1471 through 1474) of the Code require withholding on certain foreign financial institutions ("FFIs") that do not comply with certain requirements intended to ensure that the IRS obtains information relating to U.S. accounts maintained by such FFIs. In addition, FATCA requires withholding on certain nonfinancial foreign entities ("NFFEs") that are deemed to pose a significant risk of U.S. tax avoidance and that do not meet certain disclosure obligations. On February 15, 2012, the IRS and Treasury Department issued proposed regulations (discussed in our February 21, 2012 Financial Services Alert) that contained complex and detailed rules regarding the procedures that withholding agents and participating FFIs must follow in determining the status of account holders, as well as in identifying and documenting U.S. accounts. The final regulations generally follow the contours of the proposed regulations, but contain several modifications intended to more specifically target the regulations to areas of concern and reduce unnecessary administrative burdens on those subject to FATCA.
Brief Overview Of The FATCA Regime
FATCA imposes a 30% withholding tax on "withholdable payments" made to a "foreign financial institution" ("FFI"), unless (i) the FFI enters into an agreement with the IRS (a "participating FFI") to comply with certain information reporting and documentation requirements regarding its U.S. accounts (i.e., accounts held by one or more specified U.S. persons or U.S. owned foreign entities), and to withhold on pass-thru payments made to recalcitrant account holders and nonparticipating FFIs, (ii) the FFI qualifies for "deemed-compliant" status under Treasury regulations, or (iii) the FFI is treated as an exempt beneficial owner (such as a foreign government or certain foreign pension funds). An FFI is broadly defined to include any foreign entity that (i) accepts deposits in the ordinary course of a banking or similar business, (ii) as a substantial portion of its business holds financial assets for the account of others, or (iii) is engaged or holds itself out as being engaged primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such assets. Accordingly, the term FFI includes foreign investment vehicles such as foreign hedge funds and private equity funds. Under FATCA, "withholdable payments" include U.S. source interest (including, for this purpose, interest paid by foreign branches of domestic banks), dividends, rents, and other types of "fixed and determinable income" ("FDAP income") and gross proceeds from the sale or other disposition of property that can produce interest or dividends from U.S. sources.
In addition, FATCA imposes a 30% withholding tax on withholdable payments made to a non-financial foreign entity ("NFFE"), unless the NFFE certifies that it does not have any substantial U.S. owners or complies with certain information reporting requirements regarding each substantial U.S. owner. In general, an NFFE is any foreign entity that is not a foreign financial institution.
Summary of Significant Changes in Final Regulations
Following is a brief summary of the significant changes in the final regulations, which will be discussed in more detail in a forthcoming Client Alert.
- Extensions. The final regulations incorporate extensions on withholding, reporting and due diligence obligations that were included in the proposed regulations and in IRS Announcement 2012-42 (discussed in our October 30, 2012 Financial Services Alert). In addition, the final regulations further expand the scope of grandfathered obligations by exempting from Chapter 4 withholding all obligations that are outstanding on January 1, 2014, and any associated collateral. In addition, the final regulations provide that to the extent obligations (and associated collateral) give rise to withholdable payments under future regulations issued under section 871(m) (relating to dividend equivalent payments) or to foreign pass-thru payments under future FATCA regulations, such obligations will be grandfathered if they are outstanding at any point prior to six months after such future regulations are published.
- Scope of Covered Financial Institutions. In response to comments, the final regulations treat passive entities that are not professionally managed as NFFEs rather than FFIs.
- Expansion of definition of "deemed compliant" and other exempt categories of FFIs. The final regulations expand the categories of "deemed compliant" FFIs somewhat by adding certain qualified credit card issuers, limited term debt investment entities and sponsored FFIs to the categories of deemed compliant FFIs. In addition, the final regulations expand the categories of foreign retirement funds that qualify as exempt beneficial owners.
- Interaction with IGAs. In conjunction with the proposed regulations, the Treasury Department released a joint statement with France, Germany, Italy, Spain and the United Kingdom outlining an intergovernmental approach to implementing FATCA and automatic information exchange between partner countries. On July 26, 2012, the Treasury Department issued model agreements for two types of such intergovernmental agreements ("IGAs") – a Model 1 form of IGA under which the foreign country would agree to collect information required by FATCA and automatically exchange such information with the IRS, and a Model 2 form of IGA which would offer FFIs a choice between direct reporting to the IRS and indirect reporting using local authorities and automatic information exchange. Under the Model 1 IGA, a U.S. withholding agent generally is not be required to withhold on payments to an FFI in the "FATCA partner country" with which the U.S. has entered such an IGA, except in the case of significant non-compliance by an FFI with its reporting obligations, in which case the non-compliant FFI would be designated as a nonparticipating FFI for FATCA purposes. On September 14, 2012, the Treasury Department announced the signing of the first Model 1-type IGA with the United Kingdom, and since that date, IGAs of both types have been entered into or are being negotiated with several other countries. The final regulations address the relationship of the FATCA obligations of FFIs that are covered by an IGA to those under the final regulations.
- Diligence Procedures. The final regulations contain numerous modifications aimed at streamlining the diligence procedures for identifying and documenting the Chapter 4 status of account holders.
FRB and OCC Issue Cease and Desist Orders Against JPMorgan Chase Requiring Enhancements to Risk Management Program Related to Derivatives Trading Activity and to Bank Secrecy Act/Anti-Money Laundering Compliance Program
The FRB issued two Cease and Desist orders, by consent, against JPMorgan Chase & Co. ("JPMC"). The first FRB order requires JPMC to enhance its risk management program and its finance and internal audit functions and, in particular, its investment and investment oversight functions and Chief Investment Office ("CIO"). The FRB states that the first FRB order "follows the disclosure of significant losses in a large synthetic credit portfolio that was managed by the CIO." The second FRB order requires JPMC to enhance its Bank Secrecy Act/Anti-Money Laundering ("BSA/AML") compliance programs at JPMC's subsidiaries.
In separate but related actions, the OCC issued a derivatives trading cease and desist order, by consent, against JP Morgan Chase, N.A. ("JPM N.A.") concerning unsafe and unsound practices and violations of law and regulation related to derivatives trading activities by the CIO and a BSA/AML cease and desist order, by consent, against JPM, N.A. and two other depository institution subsidiaries of JPMC concerning deficiencies in the banks' overall BSA/AML compliance programs. In the derivatives trading cease and desist order the OCC asserted that JPM N.A.'s internal controls failed to identify and prevent more than $6 billion of losses related to credit derivatives trading conducted by the CIO.
The OCC's BSA/AML cease and desist order states the JPM N.A.'s and its sister banks' BSA/AML compliance programs had critical deficiencies in connection with the reporting of suspicious activities, monitoring of transactions, conducting customer due diligence and risk assessments as well as in implementing adequate systems of internal controls and independent testing.
Neither the orders issued by the FRB nor the orders issued by the OCC assessed any monetary penalties or took actions against any individuals.
Financial Stability Oversight Council Extends Comment Period for Money Market Fund Reform Proposals
On January 15, 2013, the Financial Stability Oversight Council ("FSOC") announced that it was extending until February 15, 2013 the period for public comment on its proposed recommendations for money market mutual fund reform (which were discussed in the November 20, 2012 Financial Services Alert). The comment period had been set to expire on January 18, 2013. Granted in response to a request by the SEC Chairman, the extension is designed to give the public more time to comment on the proposed recommendations in the report, as well as to consider a report from the SEC Staff issued in response to questions posed by SEC Commissioners Aguilar, Paredes and Gallagher relating to money market fund reform. The SEC Staff's report was discussed in the December 11, 2012 Financial Services Alert.
CFTC Extends Comment Period for Proposed Rule Regarding FCMs and DCOs
The CFTC extended the comment period on its proposed rules pertaining to futures commission merchants (FCMs) and derivatives clearing organizations (DCOs) (as discussed in the October 30, 2012 Financial Services Alert), originally scheduled to close on January 14, 2013, until February 15, 2013.
SEC Extends Comment Period for Proposed Capital, Margin, and Segregation Rules for Security-Based Swap Dealers and Major Security-Based Swap Participants
The SEC extended the comment period on its proposed capital, margin, and segregation rules for security-based swap dealers and major security-based swap participants (discussed in the October 23, 2012 Financial Services Alert) until February 22, 2013. The comment period was originally scheduled to end on January 22, 2013.
SEC Approves FINRA Proposal to Amend FINRA Rule 4530 to Eliminate Certain Redundant Disclosure and Permit Online Filing of Copies of Litigation Documents
On January 14, 2013, FINRA filed a proposal with the SEC (File No. SR-2013-006) to amend FINRA Rule 4530 (the "Rule"), which requires a member firm, among other things, to report within 30 days certain criminal and other disclosable events for itself and its associated persons, and to promptly file copies of certain litigation documents with FINRA. The proposal would amend the Rule to eliminate some reporting of information already disclosed to or known to FINRA, and also permit online filing of litigation documents, as an alternative to the filing methods now permitted. The SEC approved the rule proposal on January 18, 2013, effective January 14, the date of filing by FINRA.
Exception for Information Filed on Form U4. Rule 4530 reporting to FINRA does not eliminate or reduce the obligation to report the same events, to the extent required, on Forms BD, U4 or U5. However, certain information disclosed on Form U5 (for termination of registered representatives) is not required to be reported under Rule 4530. The proposed exemption would likewise except from reporting events listed in Rule 4530(a)(1) that are disclosed on Form U4 (the application for registration of representatives). These include findings of securities and similar investment-related violations by regulatory agencies or business or professional organizations; customer complaints alleging theft or misappropriation of funds or securities or of forgery; registration or suspension from registration by securities or other regulatory agencies or suspension or expulsion from membership in a self-regulatory organization (SRO); criminal indictment or conviction of a felony or of certain misdemeanors; and being a defendant or respondent in certain litigation or arbitration matters. As the Rule is proposed to be amended, if the event is of a type that is disclosable on Form U4, and is actually disclosed, it would not need to be reported under Rule 4530.
FINRA proposes to add functionality to the Central Registration Depository (CRD) system, through which amendments to Forms U4 are filed, to enable filers to designate through the use of a checkbox that data reported on certain Form U4 disclosure reporting pages (DRPs) should also be applied to satisfy the corresponding requirement under Rule 4530(a)(1).
Exception for FINRA Findings and Actions. Rule 4530(a)(1)(A) requires a member to report external findings by regulatory agencies and SROs regarding the member or an associated person. Rules 4530(a)(1)(C) and (D) require a member to report regulatory actions against the member or an associated person. Those provisions do not currently exclude findings and actions by FINRA. However, FINRA notes in its filing that FINRA staff have access to information about FINRA findings and actions through an enterprise-wide solution. Therefore, FINRA proposes to add supplementary material to the Rule to provide that members are not required to report actions and findings by FINRA that would otherwise be required to be reported by Rule 4530(a)(1)(A), (C) and (D).
Online Filing of Litigation Documents. Members may currently satisfy the requirement to file copies of documents in certain criminal actions, civil complaints and arbitration claims, as required by Rule 4530(f), by filing the copies in paper form or electronic form, as a scanned email attachment or saved on a disk delivered to FINRA. FINRA proposes to amend the rule to give members the additional option of filing the required documents online via FINRA's Firm Gateway. In conjunction with the proposed rule change, FINRA proposes to create a new form, available on the Gateway, by which filers will be able to provide basic information about the person filing the documents and the matter to which it relates.
Implementation Date; Comments. FINRA stated in its rule filing that it will announce the implementation date of the rule change in a regulatory notice to be published no later than 60 days following the date of filing, and that the implementation date will be no later than 180 days after the date of filing. Comments on the rule proposal are due 21 days after its publication in the Federal Register.
SEC Approves FINRA Rule Change to Adopt Interim Form for Funding Portals under the Crowdfunding Provisions of the JOBS Act
FINRA filed with the SEC a proposed rule change to adopt the Interim Form for Funding Portals ("IFFP"). The IFFP is an online form for prospective intermediaries that intend to apply for membership with FINRA as funding portals ("prospective funding portal members") pursuant to Title III of the Jumpstart Our Business Startups Act (the "JOBS Act"). The SEC approved the rule proposal on January 11, 2013, effective immediately.
FINRA is inviting prospective funding portal members, on a voluntary basis, to submit information to FINRA using the IFFP until FINRA and the SEC adopt final rules with respect to registered funding portals.
FINRA had previously issued Regulatory Notice 12-34 requesting comment concerning rule changes FINRA should consider for the regulation of funding platforms (see " FINRA Requests Comment in Advance of Proposing Rules for Crowdfunding Intermediaries"). At this time, FINRA has not yet proposed any such rules.
The information requested on the IFFP (a copy of which is attached to the FINRA filing) includes the following:
- Contact information;
- General information about the funding portal;
- Information about ownership and the portal's own funding;
- Information about the prospective funding portal's management, business relationships, business model and compensation.
Filers are also required to describe how they will address the requirements for funding portals under the JOBS Act, including investor education, reducing the risk of fraud, ensuring adherence to aggregate selling limits and protecting the privacy of information. The SEC and FINRA have not yet provided guidance regarding these requirements.
FINRA indicated that it will accord confidential treatment to the information the prospective funding portal members submit on the IFFP, and that prospective funding portal members are not bound by the responses indicated on the IFFP and will be permitted to change their responses on the final application form.
The SEC has requested comments on the rule change, which are due on or before February 8, 2013.
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