Financial Services Update______January 9, 2012
Volume 7, No. 2



IN THIS ISSUE

Insights from Winston & Strawn

In the News

Banking Agency Developments

Treasury Department Developments

Commodity Futures Trading Commission

Securities and Exchange Commission

Exchanges and Self-Regulatory Organizations

Judicial Opinions

Rules Effective Dates

Winston & Strawn Speaking Engagements and Publications


Insights from Winston & Strawn [Top]

On January 4, 2012, the staff of the Securities and Exchange Commission's ("SEC") Office of Compliance Inspections and Examinations issued a Risk Alert relating to investment advisers use of social media ("Alert"). The Alert provides the examination staff's observations regarding the use of social media, the concerns that may arise from the use of social media and suggestions for complying with the antifraud, compliance and recordkeeping requirements of the federal securities laws. See the heading "SEC Issues Risk Alert on Investment Adviser Use of Social Media" below for a link to the Alert. The Alert was issued contemporaneously with the commencement of an enforcement action against an investment adviser charged with offering to sell fictitious securities on a social media website. While this Alert should not be relied upon as legal advice or as definitive guidance issued by the SEC, it offers insight into the SEC's way of looking at the rapidly changing medium of social media and the relevant issues facing investment advisers who use or permit the use of social media by their employees, solicitors and/or certain third parties. In particular, advisers that use or permit the use of social media should periodically evaluate the effectiveness of their compliance programs as it relates to social media, given the rapid changes that are occurring and the evolution of social media in the marketplace.
Also last week, the SEC published guidance related to new Form PF, which was adopted under Rule 204(b)-1. The adoption of Form PF and the reporting required thereunder stem from the Dodd-Frank Wall Street Reform and Consumer Protection Act, which directed the SEC and the Commodity Futures Trading Commission ("CFTC") to adopt rules requiring investment advisers to private funds to file reports containing such information deemed necessary to assist in assessing systemic risk. The information filed on Form PF will be shared with the Financial Stability Oversight Council. Under Rule 204(b)-1, which was jointly adopted by the SEC and the CFTC, investment advisers registered with the SEC that advise "private funds" with more than $150 million in assets under management will have to periodically file Form PF with the SEC. In addition, private fund advisers that are dually registered with the CFTC will satisfy certain proposed CFTC reporting obligations by filing private fund information on Form PF. The CFTC has separately proposed (but not finalized) a companion rule that would implement new reporting requirements that would apply only to commodity pool operators and commodity trading advisers.
As a general matter, the amount of information required to be reported, the frequency with which it is reported and the initial deadlines for filing are dependent upon the amount of private fund assets advised and the types of private funds advised. The new rule creates categories of large private fund advisers and defines certain types of private funds such as "hedge funds," "liquidity funds" and "private equity funds." Generally, all advisers to private funds required to report on Form PF, except certain large hedge fund advisers and large liquidity fund advisers, will be required to report on Form PF annually, within 120 days of the end of the adviser's fiscal year. Certain large hedge fund advisers and large liquidity fund advisers will be required to file Form PF quarterly within 60 days and 15 days, respectively, of the end of each quarter. In addition, Rule 204(b)-1 sets out a two-stage initial reporting deadline phase-in for Form PF. Generally, advisers to private funds must start filing Form PF within 120 days following the end of their first fiscal year ending after December 15, 2012. Advisers with at least $5 billion of assets under management attributable to hedge funds, liquidity funds and private equity funds will begin filing Form PF following the end of their first fiscal year or quarter as applicable, ending after June 15, 2012.
As we have reported in prior Updates, the SEC has finalized their definition of "accredited investor." A copy of our Client Briefing on this topic can be found below under the heading "SEC Amends "Accredited Investor" Definition."
In the News [Top]
  • Europe to Restrict Synthetic ETFs.
On January 6th, Reuters reported that European regulators are set to adopt new rules limiting synthetic exchange-traded funds. ETFs.
  • Internal Investigations.
On January 5th, CFO.com discussed when and how a firm should conduct an internal fraud investigation. Internal Investigations.
  • The Labor Department's Retirement Fund Rules.
On January 4th, Bloomberg discussed new Labor Department rules set to go into effect this year which are intended to make 401(k) fees more transparent. Transparency. On January 5th, Reuters reported on the Labor Department's December 15, 2011, request to retirement plan advisers seeking information on customer accounts. The information request was made after industry participants asked the agency to quantify the costs and benefits of a new fiduciary standard for retirement advisers. Some recipients of the request are calling it burdensome leading consumer groups to conclude that the industry is engaging in stalling tactics. Information Overload.
  • Regulatory Cost-Benefit Analysis.
On January 3rd, Reuters blogger John Kemp discussed the costs and benefits of a regulatory cost-benefit analysis. Costs and Benefits.

Banking Agency Developments [Top]
  • OCC Publishes Bulletin on Asset-Size Threshold Revisions.
On January 5th, the OCC issued a Bulletin on its revisions to the Community Reinvestment Act regulations that were effective January 1, 2012. The revisions adjust the asset-size thresholds to be used to define "small bank," "small savings association," "intermediate small bank," and "intermediate small savings association" based on the annual percentage change in the Consumer Price Index.
  • OCC Releases Public Service Ads on Independent Foreclosure Review.
On January 4th, the OCC released print and radio public service advertisements to increase awareness of the Independent Foreclosure Review, announced in November 2011. OCC Press Release.
Treasury Department Developments [Top]
  • CFPB Launches Shadow Banking Initiative.
On January 5th, the Consumer Financial Protection Bureau ("CFPB") announced the launch of its non-bank supervision program. The CFPB's approach to non-bank examination will be the same as its approach to bank examination. The CFPB Examination Manual, released in October 2011, is the field guide that examiners will use for both. CFPB Press Release. See also Washington Post (discussing the recess appointment of Richard Cordray as CFPB director).
  • FinCEN Reports on 2011.
On January 5th, the Financial Crimes Enforcement Network issued its annual report on 2011. Annual Report.
  • SIFI Assessments Proposed.
On January 3rd, the Treasury Department published for comment a proposed rule implementing Section 155 of the Dodd-Frank Act, which directs the Department to establish an assessment schedule for bank holding companies with total consolidated assets of $50 billion or greater and nonbank financial companies supervised by the Federal Reserve Board, to collect assessments equal to the total expenses of the Office of Financial Research. Included in those expenses are those of the Financial Stability Oversight Council and certain expenses of the FDIC. The proposed rule outlines the key elements of the Treasury Department's assessment program, which will collect semiannual assessment fees from these companies beginning on July 20, 2012. Comments should be submitted on or before March 5, 2012. 77 FR 35.
Commodity Futures Trading Commission [Top]
  • Open Meeting.
The CFTC will hold an open meeting on January 11, 2012, to consider:
  • A final rule on the registration of swap dealers and major swap participants;
  • A final rule on the protection of cleared swaps customer contracts and collateral;
  • A final rule on business conduct standards for swap dealers and major swap participants with counterparties;
  • A proposed rule on the prohibitions and restrictions on proprietary trading and certain interests in, and relationships with, hedge funds and private equity funds; and
  • The delegation of authority for the performance of registration functions by the National Futures Association with respect to swap dealers and major swap participants.
CFTC Press Release.
  • CFTC Questions Proposed "Political Events" Contracts.
On January 5th, the CFTC announced it has issued a letter informing the North American Derivatives Exchange ("NADEX") that the agency has commenced a 90-day review of NADEX's proposed political event derivatives contracts that would essentially allow traders to bet on the 2012 elections. The review is based on the possibility that these contracts may involve, among other issues, "gaming or an activity that is unlawful under any State or Federal law." The CFTC requested NADEX to suspend the listing and trading of its proposed contracts during the review period. Comments on NADEX's submission should be submitted on or before February 4, 2012. In addition, the CFTC seeks public comment on specific questions related to political event contracts to assist in its evaluation of NADEX's submission. The CFTC's 90-day review period ends on April 2, 2012. CFTC Press Release.
  • CFTC Denies Motion to Stay Position Limit Rules.
On January 4th, the CFTC denied the motion of the International Swaps and Derivatives Association ("ISDA") and the Securities Industry and Financial Markets Association ("SIFMA") to stay the effective date of new position limits for futures and swaps. The rules will be effective January 17, 2012 as planned. CFTC Order. On December 2, 2011, the ISDA and SIFMA sued the CFTC, challenging the new rules.

Securities and Exchange Commission [Top]
  • SEC Provides Guidance on Form PF.
On January 5th, the SEC published guidance on the SEC's and CFTC's new reporting requirements for certain advisers to hedge funds and other private funds. Small Entity Compliance Guide.
  • SEC Issues Risk Alert on Investment Adviser Use of Social Media.
On January 4th, the SEC issued a National Examination Risk Alert titled "Investment Adviser Use of Social Media," which provides staff observations based on a review of investment advisers of varying sizes and strategies that use social media. The SEC also issued an Investor Alert and an Investor Bulletin on investing and social media. SEC Press Release.
Exchanges and Self-Regulatory Organizations [Top]
  • FINRA 2012 Renewal Statements.
On January 3rd, FINRA issued a Notice aimed at helping firms review, reconcile, and respond to their Final Renewal Statements as well as view the reports that are currently available in Web CRD/IARD for the annual registration renewal process. The payment deadline is February 3, 2012.
  • NYSE Circuit Breaker Levels.
On December 30th, the New York Stock Exchange announced new circuit-breaker collar trigger levels for first-quarter 2012, which are effective January 3, 2012. NYSE Information Memo 11-31; NYSE Euronext Press Release.
  • Trading Halt Proposal to be Considered with Limit Up-Limit Down Proposal.
On December 28th, the SEC instituted proceedings on whether to disapprove FINRA's and the stock exchanges' individually submitted proposals to amend their respective rules relating to trading halts due to extraordinary market volatility. The SEC believes that the exchanges' proposals should be considered together with the exchanges' and FINRA's proposed Limit Up-Limit Down Plan to help assure that these mechanisms interact appropriately with one another, and that details of the market-wide circuit breakers are fully evaluated. Comments should be submitted on or before January 25, 2012. Rebuttal comments should be submitted on or before February 8, 2012. SEC Release No. 34-66065.

Judicial Opinions [Top]
  • Gift Cards and State Escheat Laws.
On January 5th, the Third Circuit addressed the application of state escheat laws to gift cards. Plaintiffs, gift card issuers, challenged the application of New Jersey's escheat laws to gift cards. The Third Circuit affirmed the trial court's order preliminarily enjoining the retroactive application of the law to existing gift cards. Because the statute's place-of-purchase presumption and accompanying treasury guidance are likely preempted by federal common law, the Court also affirmed the preliminary injunction prohibiting prospective application of those provisions. However, according to the court, issuers are unlikely to succeed on the merits of their statutory preemption and due process claims and the denial of a preliminary injunction on those issues was therefore proper. New Jersey Retail Merchants Assoc. v. Sidamon-Eristoff.
Rules Effective Dates [Top]
  • Mine Safety Disclosure - Effective January 27, 2012.
The SEC is adopting rule amendments to implement Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1503(a) of the Act requires issuers that are operators, or that have a subsidiary that is an operator, of a coal or other mine to disclose in their periodic reports filed with the SEC information regarding specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities. Section 1503(b) of the Act mandates the filing of a Form 8-K disclosing the receipt of certain orders and notices from the Mine Safety and Health Administration. 76 FR 81762.
  • Net Worth Standard for Accredited Investors - Effective February 27, 2012.
The SEC is adopting amendments to the accredited investor standards under the Securities Act of 1933 to implement the requirements of Section 413(a) of the Dodd-Frank Act. Section 413(a) requires the definitions of "accredited investor" in the Securities Act rules to exclude the value of a person's primary residence for purposes of determining whether the person qualifies as an "accredited investor" on the basis of having a net worth in excess of $1 million. This change to the net worth standard was effective upon enactment by operation of the Dodd-Frank Act, but Section 413(a) also requires revision of the current Securities Act rules to conform to the new standard. The SEC is also adopting technical amendments to Form D and a number of other rules to conform them to the requirements of Section 413(a) and to correct cross-references to former Section 4(6) of the Securities Act, which was renumbered Section 4(5) by Section 944 of the Dodd-Frank Act. 76 FR 81793.
Winston & Strawn Speaking Engagements and Publications [Top]
  • SEC Amends "Accredited Investor" Definition.
On December 21, 2011, the SEC amended the definition of "accredited investor" under the Securities Act of 1933 to change the treatment of an investor's primary residence in determining accredited investor status. Briefing.

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