Financial Services Update______December 12, 2011
Volume 6, No. 45



IN THIS ISSUE

Insights from Winston & Strawn

In the News

Congressional Developments

Joint Agency Actions

Banking Agency Developments

Treasury Department Developments

Commodity Futures Trading Commission

Securities and Exchange Commission

Exchanges and Self-Regulatory Organizations

Judicial Opinions


Insights from Winston & Strawn [Top]

Last Tuesday, December 6, the Senate Banking Committee held a hearing on the banking regulators' implementation of the Dodd-Frank Act. Representatives of the Federal Reserve Board, the FDIC, and the Comptroller of the Currency all testified.
Federal Reserve Governor Daniel Tarullo testified that hundreds of staff members are contributing to Dodd-Frank projects and that the Fed has issued 29 final rules, public notices, and reports and has another 13 rules underway. All told, the Fed expects to issue 60 sets of rules and formal guidelines as part of its implementation efforts. The Board's staff has participated in more than 300 meetings with outside parties.
Governor Tarullo also took the occasion to explain how strong capital requirements remain "the most supple form of prudential regulation, because they can provide a buffer against bank losses from any source." He explained that deficiencies in historic capital requirements included their status as lagging indicators of a bank's condition, that the kind of capital that qualified for regulatory purposes was not uniformly reliable as a buffer against losses, and that capital requirements had been simply too low. Therefore, the Board will integrate Dodd-Frank capital provisions into the Board's overall capital program.
Already, the "Collins Amendment" in Dodd-Frank precludes declines in minimum capital requirements based on bank internal modeling. He advised that the banking agencies would be jointly proposing regulations consistent with "Basel 2.5" market risk capital requirements agreed upon by banking regulators around the world (which the banking agencies did the very next day), as well as internationally agreed-upon Basel III capital requirements upgrading the quality of capital, increasing the quantity of minimum capital, and creating a capital conservation buffer.
The Board will also be proposing additional enhanced risk-based capital requirements for large bank holding companies (those with consolidated assets of $50 billion or more) under Dodd-Frank, but Governor Tarullo suggested that these additional capital requirements might be "quite modest" unless the large bank holding company was globally systemically important.
Finally, Governor Tarullo mentioned that Dodd-Frank-mandated Board stress testing of large bank holding companies and internal stress testing of those between $10 billion and $50 billion in assets would be implemented later in 2012, but that, meanwhile, the Board is using a modified form of stress testing as part of its new capital planning process established for large bank holding companies.
Acting FDIC Chairman Martin Gruenberg noted that it had been 17 months since enactment of Dodd-Frank, explained that the FDIC had sole rulemaking authority under Dodd-Frank in two areas: orderly liquidation authority for systemically important financial institutions and deposit insurance reforms and had completed within a year after passage of Dodd-Frank, five major final rules in those areas.
In implementing orderly liquidation authority, the FDIC, last July, issued a final rule defining how creditors will be treated and how claims will be resolved in an FDIC receivership under the Dodd-Frank Act. The FDIC has also adopted two rules regarding resolution plans. The first, required by Section 165(d) of Dodd-Frank, requires large bank holding companies and non-bank financial companies designated as systemically significant by the new Financial Stability Oversight Council to develop, maintain, and periodically submit resolution plans to regulators. The second, not required by Dodd-Frank, requires all large insured depository institutions to develop, maintain, and submit resolution plans to the FDIC.
In the area of deposit insurance reform, the FDIC permanently increased the standard deposit insurance coverage limit to $250,000 and temporarily, until December 31, 2012, provided for unlimited deposit insurance for "noninterest-bearing transaction accounts." It also changed the deposit insurance assessment base from domestic deposits to average consolidated total assets minus average tangible equity, thereby reducing the share of assessments paid by community banks by about a third ($340 million in the second quarter).
Section 939 of the Dodd-Frank Act requires the agencies to remove references to credit ratings from their regulations which affects capital regulations and regulations governing permissible investments. That requires the development of credit risk metrics that identify gradations of risk in a consistent supportable manner that can be reasonably implemented by a range of banks. The proposed market risk capital rule issued the day after the hearing proposed a specific alternative to credit ratings.
Acting Chairman Gruenberg also discussed joint rules under Dodd-Frank, on which the FDIC was working, including the Volcker Rule, the securitization risk retention rule, swap margin rules, incentive compensation rules, and a stress test rule.
Finally, Acting Comptroller of the Currency John Walsh testified about integration of the functions of the Office of Thrift Supervision into the OCC which has been successfully completed. The Office is now considering substantive amendments to its regulations to reduce duplication and provide for consistent treatment for national banks and federal savings associations. It will also integrate more than 1,000 OTS supervisory policies into a consolidated OCC policy framework, rescinding several hundred OTS documents that are duplicative or obsolete. Also, the Thrift Financial Report (TFR) financial reporting forms are being discontinued and thrifts will instead use the call report forms used by banks.
He also discussed the OCC's coordination with the CFPB explaining how the CFPB has assumed responsibility for conducting examinations for compliance with federal consumer financial laws at national banks and federal savings associations with total assets greater than $10 billion. Meanwhile, the OCC has been processing non-credit card consumer complaints on behalf of the CFPB, but will, in the next several months, turn that work entirely over to the CFPB. The agencies, he explained, also have issued a joint policy statement clarifying how the $10 billion asset threshold will be measured and when.
The OCC has established a Consumer Issues Steering Committee to act as liaison with the CFPB. Acting Comptroller Walsh mentioned that the CFPB is required by law to consult with the banking regulators prior to and during the rulemaking process, citing the example of the "ability to repay" requirements for "qualified mortgages," which he suggested should be carefully coordinated with the "qualified residential mortgage" criteria in the risk retention rulemaking being pursued by the banking agencies, HUD, the FHFA, and the SEC. He indicated that the banking agencies are working to develop an agreement on a consultation process that will give the banking regulators reasonable time. He also said that the banking regulators also have initiated efforts to develop a MOU that will implement examination coordination with the CFPB.
Acting Comptroller Walsh also testified about the OCC's participation in the activities of the Financial Stability Oversight Council, particularly praising the function the FSOC serves facilitating candid confidential exchanges of information among regulators, such as assessments of the situation in European financial markets.
The Acting Comptroller also expressed the need to harmonize Dodd-Frank requirements with Basel III capital and liquidity requirements and the Basel Committee's G-SIB surcharge.
Finally, Mr. Walsh reviewed a number of other Dodd-Frank rulemakings the OCC has undertaken jointly with other agencies, including the credit risk retention rulemaking, minimum margin and capital requirements on non-cleared derivatives entered into by swap (and security-based swap) dealers and major swap (and security-based swap) participants, incentive compensation rulemaking, and the Volcker Rule.
The testimony of all three agencies suggests that considerable Dodd-Frank implementation has been accomplished, much is still ongoing, and much more is still to come.
This will be our last issue for this year. Happy holidays.
In the News [Top]
  • Structured CDs.
On December 9th, Bloomberg reported that Goldman Sachs will issue structured CDs tied to the Dow Jones Industrial Average and insured by the FDIC. Structured CDs.
  • Labor Department Provides E-Disclosure Guidance.
On December 8th, the Department of Labor's Employee Benefits Security Administration issued Technical Release 2011-03R, which revises the department's interim policy regarding the use of electronic media to satisfy the disclosure requirements under the department's final participant-level fee disclosure regulation. Labor Department Press Release.
  • Banks Seek Broader Volcker Rule Definition of "Illiquid" Funds.
On December 7th, Reuters reported that banks are seeking more time to sell their stakes in certain assets as required by the "Volcker Rule," the Dodd-Frank Act provision restricting banks' proprietary trading. Because the rule gives banks more time to sell "illiquid" assets, the banks are trying to expand what will be considered illiquid. Defining Moment.
  • The Robin Hood Tax.
On December 6th, the New York Times' DealBook discussed the growing support for a "Robin Hood" tax, a small tax levied on financial transactions. Robin Hood.
  • Regulators Revisiting "Qualified Residential Mortgage" Definition.
On December 6th, Reuters reported that regulators responsible for drafting risk retention rules for originators of asset-backed securities are revisiting what would be considered a "qualified residential mortgage," exempt from the risk retention requirement. Risk Retention.

Congressional Developments [Top]
  • Congressmen Propose New Funding Source for CFTC.
On December 8th, Congressmen Rosa DeLauro, Peter Welch, and Leonard Boswell announced that they will introduce legislation aimed at fully funding the CFTC. The "Wall Street Accountability through Sustainable Funding Act" would create a new funding mechanism for the CFTC modeled after the SEC's funding source. Under their plan, the CFTC would cover its annual budget by collecting transaction fees from all market participants. DeLauro Press Release.
  • Senate Blocks Cordray Confirmation.
On December 8th, the Los Angeles Times discussed the Senate's refusal to confirm Richard Cordray as Director of the Consumer Financial Protection Bureau, and what that might mean. Ramifications.

Joint Agency Actions [Top]
  • Revisions to the Market Risk Capital Rules are Proposed.
On December 7th, the federal banking regulators published a notice of proposed rulemaking proposing modifications to the agencies' market risk capital rules for banking organizations with significant trading activities. The amended NPR includes alternative standards of creditworthiness to be used in place of credit ratings to determine the capital requirements for certain debt and securitization positions covered by the market risk capital rules. The proposed creditworthiness standards include the use of country risk classifications published by the Organization for Economic Cooperation and Development for sovereign positions, company-specific financial information and stock market volatility for corporate debt positions, and a supervisory formula for securitization positions. Comments should be submitted on or before February 3, 2012. Joint Agency Press Release.
  • Revisions to the Call Report are Proposed.
On November 21st, the federal banking regulators published for comment proposed revisions to the Call Report that would take effect in 2012. The revisions are intended to provide data to meet safety-and-soundness needs or for other public purposes. The proposed new data items would be added to the Call Report as of the June 30, 2012, report date, except for two proposed revisions that would take effect March 31, 2012, in connection with the initial filing of Call Reports by savings associations. The proposed new data items, which are focused primarily on institutions with $1 billion or more in total assets, would help the agencies better understand institutions' lending activities and credit risk exposures. The agencies also are proposing certain revisions to the Call Report instructions that would take effect March 31, 2012. Comments should be submitted on or before January 20, 2012. FFIEC Press Release.
Banking Agency Developments [Top]
  • OCC Issues Bulletin on Integrating OTS Guidance.
On December 8th, the OCC published a bulletin outlining the process it will follow in fully integrating the Office of Thrift Supervision's policy guidance documents into a common set of supervisory policies that applies to both national banks and federal savings associations.
Treasury Department Developments [Top]
  • CFPB Proposes Simplified Credit Card Agreement.
On December 7th, the Consumer Financial Protection Board ("CFPB") published for comment a proposed prototype credit card agreement that is shorter, written in plain language, and explains key features upfront. The CFPB also plans to pilot test the prototype with Pentagon Federal Credit Union. CFPB Press Release.
Commodity Futures Trading Commission [Top]
New Final Rules and Guidance
  • CFTC Issues Guidance on Submitting Large Swaps Trader Reports.
On December 7th, the CFTC's Division of Market Oversight issued a Guidebook for Part 20 Reports providing additional guidance and detailed instructions for submitting large swaps trader reports to the Commission. CFTC Press Release.
  • CFTC Approves Amendments to Regulations 1.25 and 30.7.
On December 5, the CFTC unanimously adopted amendments to its regulations regarding the investment of customer segregated funds subject to CFTC Regulation 1.25 (Regulation 1.25) and funds held in an account subject to CFTC Regulation 30.7. Certain amendments reflect the implementation of new statutory provisions enacted under Title IX of the Dodd-Frank Act. The amendments address: certain changes to the list of permitted investments (including the elimination of in-house transactions), a clarification of the liquidity requirement, the removal of rating requirements, and an expansion of concentration limits including asset based, issuer-based, and counterparty concentration restrictions. The amendments also address revisions to the acknowledgment letter requirement for investment in a money market mutual fund ("MMMF"), revisions to the list of exceptions to the next-day redemption requirement for MMMFs, the elimination of repurchase and reverse repurchase agreements with affiliates, the application of customer segregated funds investment limitations to 30.7 funds, the removal of ratings requirements for depositories of 30.7 funds, the elimination of the option to designate a depository for 30.7 funds, and certain technical changes. The amendments are effective 60 days after publication in the Federal Register, which is expected during the week of December 12.
  • Registration of Foreign Boards of Trade.
On December 5th, the CFTC adopted new final rules, as required by the Dodd-Frank Act, that establish a registration requirement for foreign boards of trade that wish to provide their identified members or other participants located in the United States with direct access to their electronic trading and order matching systems. The new rule will replace the CFTC's current process of staff no-action letters. The new rule is effective 60 days after publication in the Federal Register, which is expected during the week of December 12.
Proposed Rules and Requests for Comment
  • Process for a Designated Contract Market or Swap Execution Facility to Make a Swap Available to Trade.
On December 5th, the CFTC voted to publish for comment a further notice of proposed rulemaking on the process for making a swap available to trade under Section 2(h)(8) of the Commodity Exchange Act. Comments should be submitted within 60 days after publication in the Federal Register, which is expected during the week of December 12.
  • CFTC Provides Guidance on the Meaning of "Actual Delivery."
On December 2nd, the CFTC published an interpretation of the meaning of the term "actual delivery," and guidance on how the CFTC will determine if the actual delivery exception applies to a transaction. Section 742(a) of the Dodd-Frank Act amended the Commodity Exchange Act to add a new section, 2(c)(2)(D), entitled "Retail Commodity Transactions." Section 2(c)(2)(D) broadly applies to any agreement, contract, or transaction in any commodity that is entered into with, or offered to, a non-eligible contract participant or non-eligible commercial entity on a leveraged, margined, or financed basis. The Section requires such agreements, contracts, and transactions to be conducted on a regulated exchange and subjects them to the CFTC's anti-fraud authority. However, the Section does not apply if "actual delivery" of the commodity is made within 28 days. The Commission issued the interpretation to explain its view of "actual delivery" and provide several examples of when "actual delivery" does and does not occur. Comments should be submitted within 60 days after publication in the Federal Register, which is expected during the week of December 12. CFTC Press Release.
Other Developments
  • Technology Advisory Committee to Discuss Issues Regarding Swaps.
The CFTC's Technology Advisory Committee will meet on December 13, 2011 to discuss swap execution facilities; defining, classifying, and observing high frequency traders and their impact on the markets; and the interim recommendations from the Subcommittee on Data Standardization on universal product and legal entity identifiers, standardization of machine-readable legal contracts, semantics, and data storage and retrieval. CFTC Press Release.
  • CFTC Volcker Rule to be Similar to Other Agencies'.
On December 6th, Reuters reported that CFTC Chairman Gary Gensler, testifying before the Senate Banking Committee, said that his agency's proposed Volcker rules will be similar to those proposed by the other agencies. Volcker Rule.
  • ISDA and SIFMA Challenge Position Limits Rule.
On December 2nd, the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association sued the CFTC over its new position limits rule. The Associations believe that the rule may adversely impact commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility. In addition, the Associations contend that the CFTC's decision-making process in enacting the rule was procedurally flawed. Among other deficiencies, the Associations allege the CFTC adopted the rule without making findings as to the necessity and appropriateness of the position limits, as required by statute. Furthermore, the CFTC failed to conduct any meaningful cost-benefit analysis and lacked a reasoned basis for its rule. ISDA Press Release.
Securities and Exchange Commission [Top]
  • SEC Opens Registration for CCO Conference.
The SEC has opened registration for its national seminar to help CCOs and other senior personnel at investment management firms enhance their compliance programs. The event will take place on January 31, 2012, at the SEC's Washington D.C. headquarters, and will include panel discussions to analyze compliance and other significant issues being faced by investment advisers and registered investment companies. SEC Press Release.
  • SEC Uses Data Mining to Identify Enforcement Targets.
On December 8th, Business Week reported that the SEC's new approach to enforcement analyzes data to identify potential problems instead of relying on tips. Some worry, however, that over-reliance on data could lead to unwarranted examinations of highly profitable legitimate firms. Data Mining.
  • SEC Takes Go-Slow Approach to ETFs.
On December 7th, Reuters reported the comments made at the "Super Bowl of Indexing," a conference on exchange-traded funds ("ETFs"). According to one conference participant, it could take years for the SEC to approve ETFs based on new or innovative methods. ETFs.
  • Enforcement Target.
On December 4th, Investment News reported investment advisers are the next target for SEC Enforcement. Target.

Exchanges and Self-Regulatory Organizations [Top]
The Depository Trust Company
  • Temporary Reduction in Net Debit Cap Proposed.
On December 2nd, the SEC provided notice of The Depository Trust Company's proposal to temporarily reduce each Participant's maximum net debit cap for night cycle processing of valued transactions over weekends and holidays, and restore such debit cap at the start of day cycle processing for the next settlement date (i.e., the first business day following the weekend or holiday). In so doing, DTC believes that it would reduce the systemic risk associated with a liquidity shortfall and would enhance the safety and soundness of the U.S. settlement system. Comments should be submitted on or before December 29, 2011. SEC Release No. 34-65871.
Financial Industry Regulatory Authority
  • FINRA Announces Data Collection for BATS.
On December 8th, the Financial Industry Regulatory Authority announced that, effective December 15, 2011, FINRA's Web-based Regulation Filing Applications system will include a new exchange/market code "H" for reporting short interest positions in securities for which the BATS Exchange, as of the designated settlement date, is the primary exchange or market in the United States on which the security is listed. Regulatory Notice 11-55.
  • FINRA Proposes Amendments Invalidating Predispute Arbitration Agreements for Whistleblower Claims.
On December 6th, the SEC provided notice of the Financial Industry Regulatory Authority's proposal to amend FINRA Rule 13201 (Statutory Employment Discrimination Claims) of the Industry Code, and FINRA Rule 2263 (Arbitration Disclosure to Associated Persons Signing or Acknowledging Form U4), to align the rules with statutes that invalidate predispute arbitration agreements for whistleblower claims. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of December 12. SEC Release No. 34-65896.
  • SEC Approves Proposed Amendment Regarding Customer Account Information.
On December 5th, the SEC granted accelerated approval of the Financial Industry Regulatory Authority's proposal to amend FINRA Rule 4512 (Customer Account Information) to except institutional accounts from the requirements of FINRA Rule 4512(a)(1)(C). SEC Release No. 34-65890.
  • SEC Approves Best Execution and Interpositioning Rules for Inclusion in Consolidated Rulebook.
On December 5th, the SEC approved the Financial Industry Regulatory Authority's proposed adoption of NASD Rule 2320 (Best Execution and Interpositioning) and Interpretive Material 2320 as FINRA Rule 5310 in the Consolidated Rulebook. SEC Release No. 34-65895.
  • FINRA Proposes Amendments Relating to Post-Trade Transparency for Agency Pass-Through Mortgage-Backed Securities Traded TBA.
On December 2nd, the SEC provided notice of the Financial Industry Regulatory Authority's proposed amendments to the Rule 6700 Series (the Trade Reporting and Compliance Engine ("TRACE") rules), which are designed to provide greater transparency for transactions in Agency Pass-Through Mortgage-Backed Securities traded on a "to be announced" basis ("TBA transactions"). First, FINRA proposes to amend Rule 6730 to reduce the reporting period for TBA transactions in two phases. Second, FINRA proposes to amend Rule 6750 to provide for the dissemination of information on TBA transactions in real-time (i.e., immediately upon FINRA's receipt of the transaction report). Third, in Rule 7730, FINRA proposes to establish fees for a data set of real-time TRACE disseminated TBA transaction data at the same rates currently in effect for similar real-time TRACE disseminated data sets, and for a data set of historic TRACE TBA transaction data at the same rates currently in effect for similar Historic TRACE Data sets. FINRA also proposes to delete references to a pilot program that is no longer in effect and make other minor technical, administrative or clarifying amendments to Rule 6730 and Rule 7730. Finally, FINRA proposes to establish a limit or "cap" of $50 million for disseminated TBA transactions as part of FINRA's dissemination policies and protocols, so that the actual size of a TBA transaction in excess of $50 million would be displayed as "$50MM+" in disseminated TRACE data. Comments should be submitted on or before December 29, 2011. SEC Release No. 34-65877.
Fixed Income Clearing Corporation
  • FICC Proposes Guaranteed Settlement Services.
On December 6th, the SEC provided notice of the Fixed Income Clearing Corporation's proposal to allow the Mortgage-Backed Securities Division to provide guaranteed settlement and central counterparty services. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of December 12. SEC Release No. 34-65899.
International Securities Exchange
  • ISE Proposes "Legging Orders" Proposed.
On December 6th, the SEC provided notice of the International Securities Exchange's proposal of a new order type called "legging orders" to provide additional liquidity for complex orders resting on the complex order book. A complex order resting on the complex order book may be executed either by: (i) trading against an incoming complex order that is marketable against the resting complex order, or (ii) legging into the market when the net price of the complex order can be satisfied by executing all of the legs against the best bids or offers on the Exchange for the individual options series. Legging orders are designed to increase the opportunity for complex orders to leg into the market. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of December 12. SEC Release No. 34-65900.
International Swaps and Derivatives Association
  • Sample Tri-Party IA Provisions.
On December 6th, the International Swaps and Derivatives Association published new sample tri-party independent amount provisions for segregation of funds with a third party custodian. ISDA Announcement.
National Futures Association
  • Effective Date of Amendments Regarding the Anti-Money Laundering Program.
On December 6th, the National Futures Association advised that the amendments to the Interpretive Notice entitled "NFA Compliance Rule 2-9: FCM and IB Anti-Money Laundering Program," will become effective on January 3, 2012. The amendments incorporate changes made by the Financial Crimes Enforcement Network to the regulations of the Bank Secrecy Act ("BSA") relating to suspicious activity reports, provide Members with additional guidance with respect to the annual training and independent audit requirements, and make several other technical changes which conform the Notice to specific requirements in the BSA. NFA Notice I-11-22.

Judicial Opinions [Top]
  • Justice Department Production of Documents does not Create a SEC FOIA Waiver.
On December 9th, the D.C. Circuit upheld the SEC's assertion of exemption 5 to a Freedom of Information Act ("FOIA") request submitted by Williams & Connolly. The law firm filed a FOIA request with the SEC in an effort to obtain 114 sets of documents related to a securities fraud investigation. It claims the Justice Department, by producing 11 sets of those documents in a related criminal case, waived the SEC's assertion of the attorney work product privilege as embodied in FOIA exemption 5. Disagreeing, the D.C. Circuit holds that the Justice Department's disclosure has no bearing on whether FOIA permits the SEC to withhold the remaining 103 documents. Williams & Connolly v. SEC.
  • IPO Underwriter is not the Issuer's Fiduciary.
On December 8th, the New York state appellate court affirmed the entry of summary judgment dismissing investors' breach of fiduciary duty claims against Goldman Sachs. Plaintiffs, investors in eToys, alleged that Goldman Sachs, eToys' IPO underwriter, misled the company into underpricing its IPO. The Court held that eToys and Goldman Sachs operated at arm's length and no fiduciary relationship existed. EBC I, Inc. v. Goldman Sachs & Co.
  • Madoff Investor's Suit against the SEC is Dimissed.
On December 8th, a Federal District Court dismissed a lawsuit filed against the SEC by an investor in Bernard Madoff's Ponzi scheme for the agency's alleged failure to detect and end the fraud. The Court held that no federal regulation or policy prescribes a course of action for the SEC. Because plaintiff's claim falls within the discretionary function exception to the Federal Tort Claims Act, the Court lacks subject matter jurisdiction over that claim. Because plaintiff failed to allege facts supporting the claims that the SEC aided and abetted Madoff, those claims fail as well. Baer v. U.S.

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