Financial Services Update______January 17, 2012
Volume 7, No. 3



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]

Last Wednesday, January 11, was a busy day at the Commodities Futures Trading Commission ("CFTC") with the adoption of three final regulations and one proposed regulation required by the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). For those of our readers who may have chosen to spend the weekend watching exciting NFL play-off games or acting as newly deputized fashion police during the Golden Globe awards rather than digging into over 800 pages of CFTC regulations, we offer here a very brief summary of the new rules.
Final Rules on Business Conduct Standards. Dodd-Frank required that swap dealers and major swap participants adopt business conduct standard rules applicable to all counterparties and additional specific rules applicable to "Special Entities," which under the final rule, include governmental entities, ERISA plans and endowments. One key departure from the proposed rules is that the CFTC relaxed the business conduct standards applicable to Special Entities in response to comments from ERISA plans and municipalities that the heightened standard would adversely affect their access to the swaps market and that ERISA plans and municipalities generally would have advisors negotiating on their behalf in swap transactions. Under the final rule, as long as the swap dealer is not also acting as an advisor to the Special Entity, the swap dealer must have a reasonable basis to believe that a Special Entity has a representative that is knowledgeable and independent or, in the case of a Special Entity that is an ERISA plan, a representative that is an ERISA fiduciary. The swap dealer need not, however, determine that the swap is in the best interest of the Special Entity, as had been proposed.
Final Rules on Cleared Swaps Customer Contracts and Collateral. This rule adopts the so-called "Legally Segregated Operationally Commingled" or "LSOC," model of holding collateral. Under the LSOC model, the Futures Commissions Merchant ("FCM") must hold swaps customers' collateral separate from its own property but, at least prior to an FCM's bankruptcy, swaps customers' collateral may be commingled with other swaps customers' collateral. This is how FCMs currently hold futures customers' collateral.
Final Rules on Registration of Swap Dealers and Major Swap Participants. This rule establishes a process for the registration of swap dealers and major swap participants and also provides that no swap dealer or major swap participant may permit any "person associated with" the swap dealer or major swap participant subject to a "statutory disqualification" to effect swaps or be involved in effecting swaps. The rules provide that a "statutory disqualification" refers to a disqualification under Sections 8a(2) or 8a(3) of the Commodity Exchange Act and that "person associated with a swap dealer or major swap participant" refers only to natural persons (not entities).
Proposed Rule on Proprietary Trading (the "Volcker" Rule). The CFTC is the last of the five regulators to issue proposed rules limiting propriety trading by banking entities. The CFTC in its fact sheet on the proposed rules states that the requirements are substantively similar to the so-called "Joint Volcker Rule" issued by the other regulatory agencies, while also including some CFTC-specific provisions.
One well-worn adage that has been particularly true in the case of the Dodd-Frank regulations is that the "devil is in the details." Since there are over 800 pages of details, many financial services practitioners, including we here at Winston & Strawn, continue to review and analyze the new rules with the intention of more detailed briefings to come. For now, however, we hope this and the information and links below under "Commodity Futures Trading Commission" is a helpful start.


In the News [Top]
  • Ex-SEC Attorney Settles with the Justice Department but SEC Rejects Related Proposal.
On January 13th, Reuters reported that Spencer Barasch, the former head of the SEC's Fort Worth office, has settled Justice Department's allegations that he inappropriately represented alleged Ponzi schemer R. Allen Stanford. The SEC rejected Barasch's offer to settle related administrative charges. Partial Settlement.
  • Congressional Subcommittee Schedules Volcker Rule Hearings.
On January 11th, MarketWatch reported that a House Financial Services Committee will hold hearings on January 18, 2012, on the Volcker Rule's potential impact on employment. Hearings.
  • Convicted of Insider Trading, Ex-CEO Files for Tax Refund.
On January 11th, Bloomberg reported that Joseph Nacchio, the former head of Qwest Communications who was convicted of insider trading, has filed a claim alleging that he is due nearly $18 million in tax refunds. According to Nacchio, since he was forced to disgorge his illegal profits, he should be refunded the taxes paid on those profits. Tax Claim.
  • Global Banking Regulators Clarify Liquidity Standards.
On January 8th, the Group of Governors and Heads of Supervision ("GHOS"), the oversight body of the Basel Committee on Banking Supervision, discussed the Basel 3 liquidity standards. With respect to the Liquidity Coverage Ratio ("LCR"), GHOS members reiterated that a bank is expected to have a stable funding structure and a stock of high-quality liquid assets that should be available to meet its liquidity needs in times of stress. Once the LCR has been implemented, its 100 percent threshold will be a minimum requirement in normal times. But during a period of stress, banks would be expected to use their pool of liquid assets, thereby temporarily falling below the minimum requirement. The Basel Committee will provide a clarification to that effect and additional guidance on the circumstances that would justify the use of the liquidity pool. The Basel Committee will also examine how central banks interact with banks during periods of stress, with a view to ensuring that the workings of the LCR do not hinder or conflict with central bank policies. Bank of International Settlements Press Release.

Banking Agency Developments [Top]
  • OCC Workshops.
The OCC has announced its 2012 schedule of workshops for directors of nationally chartered community banks and federal savings associations. The OCC will offer four different workshops: "A Director's Challenge: Mastering the Basics," "Directors: Where is the Risk in Your Bank," "Compliance Risk: What Directors Need to Know," and "Credit Risk: A Director's Focus." OCC Directors Workshop Press Release. The first workshop of 2012 will occur in Anaheim, CA on January 23-25, 2012 and is entitled "A Director's Challenge: Mastering the Basics." OCC Anaheim Press Release.
  • OCC Issues Guidance on Interest Rate Risk Management.
On January 12th, the OCC published a Frequently Asked Questions document to clarify the 2010 Interagency Advisory on Interest Rate Risk Management. The guidance addresses areas critical to effective and sound interest rate risk management, including appropriate measurement and reporting, robust and meaningful stress testing; assumption development reflecting the institution's experience; and comprehensive model validation. OCC Bulletin.
  • FDIC's Systemic Resolution Advisory Committee to Meet.
The FDIC's Systemic Resolution Advisory Committee will meet on January 25, 2012. FDIC Meeting Notice.
  • Federal Reserve Board Governor Discusses Home Foreclosures.
On January 7th, Federal Reserve Board Governor Sarah Bloom Raskin called for intensified public enforcement of any laws violated by mortgage servicers. Raskin Remarks.
  • OCC Bulletins on OTS Integration.
On January 6th, the OCC issued two Bulletins regarding the integration of the Office of Thrift Supervision ("OTS") into the OCC. In Bulletin 2012-2, the OCC rescinded certain OTS documents. See Documents Appendix. In Bulletin 2012-3, the OCC rescinded all OTS Transmittal Letters. See Letters Appendix.

Treasury Department Developments [Top]
  • OFAC Issues Implementing Regulations.
On January 12th, the Treasury Department's Office of Foreign Assets Control ("OFAC") issued regulations implementing Executive Order 13581 of July 24, 2011 ("Blocking Property of Transnational Criminal Organizations"). OFAC will supplement these regulations with a more comprehensive set of regulations, which may include additional interpretive and definitional guidance and additional general licenses and statements of licensing policy. OFAC also is amending other regulations to clarify the availability of general licenses on OFAC's website. The regulations are effective immediately. 77 FR 1864.
  • CFPB Publishes Mortgage Origination Examination Procedures.
On January 11th, the Consumer Financial Protection Bureau ("CFPB") published the "Mortgage Origination Examination Procedures," a field guide for CFPB examiners looking at mortgage originators in both the bank and nonbank sectors of the industry. CFPB Press Release.
  • Treasury Sanctions Three Associates of Mexican Drug Lord.
On January 10th, the Treasury Department's Office of Foreign Assets Control designated three individuals with ties to Sinaloa Cartel leader Joaquin Guzman Loera (a.k.a. Chapo Guzman) as Specially Designated Narcotics Traffickers pursuant to the Foreign Narcotics Kingpin Designation Act. As a result of the action, U.S. persons are prohibited from conducting financial or commercial transactions with the designees and any assets they may have under U.S. jurisdiction are frozen. Treasury Department Press Release.

Commodity Futures Trading Commission [Top]
New Final Rules
  • CFTC Adopts Swap Dealer Registration Rules.
On January 11th, the CFTC adopted a new final rule on the registration of swap dealers and major swap participants. The new rule also requires swaps entities to become and remain members of a registered futures association. The new rule is effective 60 days after publication in the Federal Register, which is expected during the week of January 16th. The CFTC also voted to delegate to the National Futures Association the authority for the performance and registration of swap dealers and major swap participants. Fact Sheet; Questions and Answers.
  • CFTC Adopts Rules for the Protection of Swaps Customer Contracts and Collateral.
On January 11th, the CFTC adopted a new final rule on the protection of cleared swaps customer contracts and collateral. The new rule will be effective 60 days after publication in the Federal Register, which is expected during the week of January 16th. Fact Sheet; Questions and Answers.
  • CFTC Votes to Adopt Business Conduct Standards for Swap Entities.
On January 11th, the CFTC voted to adopt a final rule on business conduct standards for swap dealers and major swap participants with counterparties. See Fact Sheet; Questions and Answers.
Proposed Rules
  • CFTC Proposes Volcker Rules.
On January 11th, the CFTC voted to publish for comment a proposed rule on the prohibitions and restrictions on proprietary trading and certain interests in, and relationships with, hedge funds and private equity funds. The CFTC proposal also asks additional questions specific to the CFTC and omits matters only relevant to the Federal Reserve Board. Comments should be submitted within 60 days after publication in the Federal Register, which is expected during the week of January 16th. Fact Sheet.
Other Developments
  • Tentative Rulemaking Schedule.
On January 11th, the CFTC published a tentative Dodd-Frank Act rulemaking schedule. Schedule.

Securities and Exchange Commission [Top]
  • SEC Advisory Committee on Small and Emerging Companies to Meet.
The SEC's Advisory Committee on Small and Emerging Companies will hold a public meeting on February 1, 2012. The meeting will be webcast on the Commission's website at www.sec.gov. The agenda for the meeting includes consideration of recommendations and other matters relating to rules and regulations affecting small and emerging companies under the federal securities laws. Written statements should be submitted on or before January 27, 2012. SEC Release No. 33-9293.
  • GAO Reports on the SEC's Research Analyst Conflicts of Interest Settlement.
On January 12th, the Government Accountability Office released a report on the effectiveness of the SEC's 2003 research analyst conflicts of interest global settlement. The report discusses the steps the SEC and the Financial Industry Regulatory Authority have taken to address continuing issues and suggests the SEC consider codifying any unmet terms of the settlement. GAO Summary.
  • Social Media's Risks.
On January 12th, Reuters discussed the SEC's Investment Adviser Risk Alert on the use of social media. Social Media's Risks.
  • Flash Crash Response.
On January 12th, Reuters summarized the steps that the SEC has taken in response to the May 2010 "flash crash," and the actions that it may take in the future. Flash Crash Response.
  • Cost-Benefit Analysis Delays Fiduciary Duty Rule.
On January 12th, Bloomberg reported that the SEC's proposed harmonization of broker and investment adviser fiduciary duties has been delayed because the SEC is still in the process of quantifying the costs and benefits of the proposal. Delay.
  • Cybersecurity Disclosure.
On January 10th, Bloomberg discussed the SEC's new cybersecurity disclosure guidance and how companies are likely to respond. Cyber Response.
  • The SEC's Agenda.
On January 9th, CFO.com discussed the SEC's rulemaking agenda for 2012. Agenda.
  • SEC Modifies Settlement Policy.
On January 7th, Reuters reported that the SEC is changing its settlement policy to prohibit defendants from using "neither admit nor deny" language if they admitted liability in a related criminal proceeding. Settlement Change.
  • Corporation Finance Issues Guidance on European Sovereign Debt.
On January 6th, the Division of Corporation Finance provided guidance on the disclosures that registrants should make concerning their exposure to European sovereign debt. Guidance.

Exchanges and Self-Regulatory Organizations [Top]
C2 Options Exchange
  • Proposed Changes to Automated Improvement Mechanism are Filed.
On January 11th, the SEC provided notice of C2 Exchange's proposal to amend Rule 6.51 to (i) allow trading permit holders ("TPHs") to enter Agency Orders for fewer than 50 contracts into C2's Automated Improvement Mechanism ("AIM") at the national best bid or offer ("NBBO"); and (ii) allow Initiating TPHs to designate a limit price if it elects to auto-match. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of January 16th. SEC Release No. 34-66131.
Chicago Board Options Exchange
  • CBOE Proposes the Deletion of Request-for-Quotes Rules.
On January 9th, the SEC provided notice of the Chicago Board Options Exchange's proposal to delete rules relating to requests-for-quotes ("RFQs") for the CBOE Stock Exchange ("CBSX"). CBOE is requesting the change because CBSX Remote Market-Makers are required by rule to maintain two-sided quotations and because CBSX links orders to NBBO markets when CBSX is not quoting at the NBBO. CBSX participants, therefore, have never inquired about utilizing RFQs. Additionally, the functionality for users to transmit RFQs on CBSX is not fully supported by the system. Comments should be submitted on or before February 3, 2012. SEC Release No. 34-66119.
Financial Industry Regulatory Authority
  • FINRA Guidance on Labor Department's Communications Rules.
On January 13th, the Financial Industry Regulatory Authority provided guidance on the application of NASD Rules 2210 (Communications with the Public) and 2211 (Institutional Sales Material and Correspondence) to information provided by a firm to participant-directed individual account plan participants pursuant to U.S. Department of Labor rules under Section 404(a)(5) of the Employee Retirement Income Security Act of 1974. FINRA Regulatory Notice 12-02.
  • FINRA Proposes the Preclusion of Class Action Employment Issues from Being Arbitrated under its Industry Code.
On January 5th, the SEC provided notice of the Financial Industry Regulatory Authority's proposed amendment to Rule 13201 of the Code of Arbitration Procedure for Industry Disputes ("Industry Code") to preclude collective action claims by employees of FINRA members under the Fair Labor Standards Act, the Age Discrimination in Employment Act, or the Equal Pay Act of 1963, from being arbitrated under the Industry Code. Comments should be submitted on or before February 1, 2012. SEC Release No. 34-66109.
Fixed Income Clearing Corporation
  • SEC Designates Longer Period to Consider Proposal to Provide MBS Clearing Services.
On January 10th, the SEC designated March 9, 2012, as the date by which it will either approve or institute proceedings to determine whether to disapprove the Fixed Income Clearing Corporation's proposal to allow its Mortgage-Backed Securities Division to provide guaranteed settlement and central counterparty services. SEC Release No. 34-66124.
NYSE Euronext
  • Enhanced Blue Sheet Submissions under Exchange Rule 410A.
On January 10th, NYSE Euronext, in conjunction with the Financial Industry Regulatory Authority and other interested members of the Intermarket Surveillance Group, announced that it is enhancing the data required to be submitted under NYSE Rule 410A (also known as Electronic Blue Sheets) to improve the regulatory agencies' ability to analyze trading activities and to support compliance with a SEC rules provision. NYSE Euronext Information Memo 12-1.

Judicial Opinions [Top]
  • Credit Repair Organizations Act Does Not Preclude Arbitration of Claims.
On January 10th, the Supreme Court addressed whether the Credit Repair Organizations Act ("CROA") precludes enforcement of an arbitration agreement in a lawsuit alleging violations of CROA. Plaintiffs' credit cards, issued by defendants, contained an arbitration clause which defendants invoked when plaintiffs sued for alleged violations of CROA. The Court held that CROA's disclosure requirements are just that and do not give plaintiffs a non-waiveable right to sue in court. The Federal Arbitration Act therefore controls, and plaintiffs must arbitrate their claims. CompuCredit Corp. v. Greenwood.
  • Failed Brokerage's Rehypothecation of Excess Customer Collateral Was Not Improper.
On January 10th, the Second Circuit affirmed the dismissal of claims filed by customers of Refco Capital Markets ("RCM"). Plaintiffs claimed that former officers of RCM and RCM's auditor improperly rehypothecated customer collateral in violation of the customer agreements and the securities laws. The Second Circuit held that plaintiffs failed to sufficiently allege that defendants misled them or did not intend to comply with their obligations when made. The customer agreements warned plaintiffs RCM intended to rehypothecate excess margin and RCM specifically stated it was not a U.S.-regulated company. It therefore did not imply its compliance with U.S. laws. Capital Management Select Fund Ltd. v. Bennett.
  • Conviction of Refco's Outside Lawyer is Vacated; New Trial Ordered.
On January 9th, the Second Circuit vacated and remanded the conviction of Refco Inc.'s outside lawyer, Joseph Collins, on securities fraud and related charges stemming from the commodity brokerage's collapse. The Court held that Collins was deprived of his right to attend every aspect of his trial when the trial court held an ex parte interview with a single juror accused of misconduct. Because the error was not harmless, the case must be remanded for retrial. U.S. v. Collins.
  • Reacceptance of Cashier's Check Without Proper Endorsements Constitutes Conversion.
On January 9th, the United States Court of Appeals for the Fifth Circuit affirmed a trial court's finding that Wells Fargo committed conversion. An SEC receiver sued Wells Fargo after it reaccepted a cashier's check purchased from it by W Financial Group, an account holder, that Wells Fargo then accepted for deposit into an account other than that of the named payee, and without the proper endorsement. The Fifth Circuit held that under the Uniform Commercial Code, Wells Fargo committed conversion and that the trial court properly rejected the bank's defenses. Jones v. Wells Fargo Bank, N.A.

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 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]
  • Johnsen Discusses Public Policy and Regulatory Reform.
Edward Johnsen, a partner in Winston & Strawn's New York office, will participate in a panel discussion titled "Public Policy and Regulatory Reform: The Dollars and Sense of Dodd-Frank," to be held February 2, 2012 in New York. Event.

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