As previously reported (See this newsletter, Vol.7, No.5, dated January 30, 2012), and in the wake of the European Council meeting of December 8-9, 2011, 25 European leaders signed on March 2, 2012, the Treaty on Stability, Coordination and Governance. The so-called fiscal compact aims at strengthening fiscal discipline and introducing stricter surveillance within the Euro area, in particular by establishing a "balanced budget rule". The main elements of the Treaty include a requirement for national budgets to be in balance or in surplus, a criterion that would be met if the annual structural government deficit does not exceed 0.5% of GDP at market prices. This balanced budget rule must be incorporated into the member states' national legal systems, preferably at constitutional level, within one year after the entry into force of the treaty. In the event of deviation from this rule, an automatic correction mechanism will be triggered. It will be defined by each member state on the basis of principles proposed by the European Commission. The EU Court of Justice will be able to verify national transposition of the balanced budget rule. Its decision is binding, and can be followed up with a penalty of up to 0.1% of GDP, payable to the European Stability Mechanism in the case of euro area member states. The fiscal compact will be legally binding as an international agreement and will enter into force following ratification by at least 12 euro area member states. It will only apply to those contracting parties whose currency is the euro, while the others will be bound by its provisions once they adopt the euro, unless they declare their intention to be bound by certain provisions at an earlier date. One of the notable features of the Treaty is that it formalizes the existence of summits of the Eurozone, allowing those who share the single currency to take certain decisions while involving, where appropriate, the other contracting parties as well as informing the other members of the European Union.

• Too Many Cooks?

On March 2nd, Reuters discussed the subpoenas issued by the Justice Department as part of the Financial Fraud Enforcement Task Force's investigation into the mortgage-backed securities industry. The subpoenas cover much of the same ground already investigated by the SEC. Subpoenas.

• Swap Limitations.

On March 1st, the New York Times' DealBook noted the limitations of credit default swaps, using Greek bonds as a case study. Greek Case Study.

• Proposed Bill Seeks to Close Stock Option Tax Loophole.

On February 29th, Senator Carl Levin introduced a bill aimed at closing a tax loophole that allows companies to deduct as a compensation expense, the current value of stock options exercised by employees. Levin Remarks. See also Washington Post.

• The Finance Dorks versus Darth Vader.

On February 29th, Bloomberg columnist Susan Antilla discussed Occupy the SEC and its comments to the proposed rules implementing the Dodd-Frank Act's prohibition against proprietary trading. Occupy the SEC.

• California Considers Homeowner Bill of Rights.

On February 29th, the Los Angeles Times summarized proposed bills in California which are collectively known as the "California Homeowner Bill of Rights." The bills' provisions include prohibiting lenders from instituting foreclosure while renegotiating mortgage terms with the homeowner, require the maintenance of foreclosed homes, and the creation of a grand jury to investigate foreclosure improprieties. Homeowner Bill of Rights.

• Volcker Rule Exemptions.

On February 28th, Reuters discussed the questions regulators must address in considering whether to expand exemptions from the Volcker rule's prohibition against proprietary trading. Exemptions.

• Fund Manager Fined $5 Million for Inadequate CDO Disclosure.

On February 28th, the Massachusetts Secretary of the Commonwealth fined a fund manager $5 million for failing to disclose material information to investors in a collateralized debt obligation ("CDO"). The administrative complaint alleges the fund manager did not tell investors that a hedge fund which assisted in the selection of the CDO's assets would benefit if the CDO failed. Consent Order.

• MF Global Developments.

On February 28th, Bloomberg reported that a federal grand jury has subpoenaed MF Global's primary regulator. Subpoena. The New York Times' DealBook noted that despite CME Group's disclosure of the subpoena, and the confirmation that a criminal investigation of MF Global is underway, evidence of malfeasance at MF Global has yet to be discovered. Instead, MF Global's missing customer money may have been the result of poor risk controls. Evidence.

• Social Media.

On February 27th, the San Francisco Chronicle summarized the SEC's requirements regarding issuers' use of social media. Social Media.

• Insider Trading Investigation.

On February 27th, Reuters reported that the FBI's hedge fund insider trading investigation could last five more years. FBI Investigation. On February 28th, the Washington Post reported that the SEC may bring significant new insider trading cases within the next six to nine months. SEC Investigation. On March 1st, the New York Times' DealBook discussed the significance of the insider trading investigations. Significance. On March 2nd, CorpCounsel.com published its interview of Judge Richard Howell, who presided over the insider trading trial of Raj Rajaratnam. Interview.

• FDIC Publishes Quarterly Banking Profile.

On February 28th, the FDIC published its latest Quarterly Banking Profile which contains financial results for the fourth quarter of 2011 as well as the full year. Insured commercial banks and savings institutions reported an aggregate profit of $26.3 billion in the fourth quarter of 2011, a $4.9 billion improvement from the $21.4 billion in net income the industry reported in the fourth quarter of 2010. FDIC Press Release.

• Federal Reserve Board Publishes Action Plans for Supervised Financial Institutions.

On February 27th, the Federal Reserve Board released action plans for supervised financial institutions to correct deficiencies in residential mortgage loan servicing and foreclosure processing. It also released engagement letters between supervised financial institutions and independent consultants retained by the firms to review foreclosures that were in process in 2009 and 2010. Federal Reserve Board Press Release.

• CRA Assistance for Areas Harmed by Hurricanes is Extended.

On February 27th, the OCC issued a bulletin advising that the OCC is extending the time period for Community Reinvestment Act ("CRA") activities that support the revitalization and recovery of the areas that hurricanes Katrina and Rita devastated. The OCC will continue to provide CRA consideration for community development loans, investments, and services that revitalize or stabilize those areas through December 31, 2014.

• Treasury Department Designates Taliban Explosives Procurer.

On March 2nd, the Treasury Department's Office of Foreign Assets Control designated improvised explosive devices facilitator Abdul Samad Achekzai for acting for or on behalf of the Taliban. As a result of today's action, all property in the United States or in the possession or control of U.S. persons in which Abdul Samad Achekzai has an interest is blocked, and U.S. persons are prohibited from engaging in transactions with him. Treasury Department Press Release.

• CFPB Taking Consumer Complaints.

On March 1st, the Consumer Financial Protection Bureau announced it has begun taking complaints from consumers concerning bank services. CFPB Press Release.

• FinCEN Seeks Comments on Possible Customer Due Diligence Obligation.

On February 29th, the Financial Crimes Enforcement Network issued an advanced notice of proposed rulemaking to solicit public comment on questions pertaining to the possible application of an explicit customer due diligence obligation on financial institutions, including a requirement for financial institutions to identify beneficial ownership of their accountholders. FinCEN Press Release.

• FinCEN Reminds of BSA Filing Requirement.

On February 28th, the Financial Crimes Enforcement Network reminded financial institutions and others subject to the Bank Secrecy Act ("BSA") of the compliance requirement to file the most current version of a BSA report. FinCEN Notice.

• Treasury Department Calls for Large Position Reports.

On February 27th, the Treasury Department called for Large Position Reports from those entities whose reportable positions in the 1-1/4% Treasury Notes of January 2019 equaled or exceeded $2 billion as of close of business Tuesday, February 21, 2012. Entities with reportable positions in this note equal to or exceeding the $2 billion threshold must report these positions to the Federal Reserve Bank of New York. Entities with positions in this note below $2 billion are not required to file Large Position Reports. Reports must be received by the Government Securities Dealer Statistics Unit of the Federal Reserve Bank of New York before noon Eastern Time on Friday, March 2, 2012, and must include the required position and administrative information. Treasury Department Press Release.

• Treasury Department Publishes Fact Sheet on Additional Iranian Financial Sanctions.

On February 27th, the Treasury Department announced regulations implementing sanctions on foreign financial institutions that knowingly conduct or facilitate certain significant financial transactions with the Central Bank of Iran ("CBI") or a U.S.-designated Iranian financial institution. The regulations contain various time-based triggers for the imposition of sanctions, beginning February 29, 2012, subject to certain exceptions authorized by the statute. With certain limitations, U.S. financial institutions are prohibited from opening, and strict conditions are imposed on the maintaining, a correspondent account or a payable-through account in the United States for a foreign financial institution that the Secretary of the Treasury determines has knowingly conducted or facilitated any significant financial transaction with the CBI or a U.S.-designated Iranian financial institution. Treasury Department Fact Sheet.

• FinCEN to Require Electronic Filing.

On February 24th, the Financial Crimes Enforcement Network ("FinCEN") advised it will be publishing a final notice requiring financial institutions to electronically file all reports except the Report of International Transportation of Currency or Monetary Instruments ("CMIR") and the Report of Cash Payments Over $10,000 Received in a Trade or Business ("Form 8300") by July 1, 2012. As previously announced, FinCEN is extending the deadline for financial institutions' mandatory use of FinCEN's new Currency Transaction Report and Suspicious Activity Report to March 31, 2013. FinCEN Reminder; FinCEN Press Release.

• CFTC and SEC Jointly Propose Rules to Protect against Identity Theft.

On February 28th, the CFTC and SEC jointly published for comment a proposed rule aimed at protecting investors from identity theft by ensuring that broker-dealers, mutual funds, and other SEC-regulated entities create programs to detect and respond appropriately to red flags. Section 1088 of the Dodd-Frank Act transferred authority over certain parts of the Fair Credit Reporting Act from the Federal Trade Commission ("FTC") to the SEC and CFTC for entities they regulate. The proposed rules are substantially similar to rules adopted in 2007 by the FTC and other federal financial regulatory agencies that were previously required to adopt such rules. Comments should be submitted within 60 days after publication in the Federal Register, which is expected during the week of March 5. SEC Press Release.

• Swap Dealer Recordkeeping Rules.

On March 1st, the CFTC published the adopting release and new final rules establishing reporting, recordkeeping, and daily trading records requirements for swap dealers and major swap participants. The rules will be generally effective 60 days after publication in the Federal Register, which is expected shortly. Specific compliance dates are noted throughout the release. Final Rules.

• Block Trade Proposal.

On February 24th, the CFTC published for comment proposed rules establishing minimum block sizes for large notional off-facility swaps and block trades, and measures for protecting the identities of parties to swap transactions. Comments should be submitted within 60 days after publication in the Federal Register, which is expected shortly.

• Roundtable Discussion of Customer Protection Issues.

On February 29th and March 1st, the CFTC held a roundtable discussion concerning customer protection issues in the wake of MF Global's collapse and the disappearance of up to $1.2 billion in customer funds. Reuters summarized some of the comments, noting that there did not appear to be a consensus on what should be done. Reuters. Bloomberg summarized a proposal made by the Futures Industry Association, which suggests brokerages submit to their primary regulator daily reports of their customer segregated accounts. Bloomberg.

• Swap Dealers.

On February 28th, Bloomberg reported a CFTC vote on swap dealer definitions may occur on March 9, 2012. The definition of swap dealer may include firms engaged in swap trading on a proprietary basis. A vote on rules implementing capital requirements for swap dealers will occur later. Swap Dealers. On March 1st, Bloomberg reported the U.K.'s Financial Services Authority ("FSA") has been asking firms whether they intend to register as U.S. swaps dealers. The FSA fears that a U.S. registration may limit its oversight authority or result in regulatory conflicts if a default occurs. The article states that the CFTC may vote on March 20, 2012, on who must register as a swap dealer. U.K. Concerns.

• Judge is Skeptical of Position Limit Requirement.

On February 27th, Bloomberg summarized oral arguments in the lawsuit challenging the CFTC's position limits. Plaintiffs, the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association, seek to preliminarily enjoin the implementation of the CFTC's position limit rules. Judge Robert Wilkins, of the U.S. District Court for the District of Columbia, expressed skepticism for the CFTC's argument that the Dodd-Frank Act required it to promulgate position limits. Oral Argument.

• CFTC Inspector General Finds No Misconduct in Position Limits Rulemaking.

The CFTC has released a redacted version of its Inspector General's preliminary findings concerning alleged dishonesty and corruption in the CFTC's promulgation of position limit rules. While the Inspector General found no evidence of misconduct, the incendiary charges alleged "that the team leader for the position limits rulemaking 'sneakily' got himself appointed team lead and thereafter removed from the team the most experienced members," engaged in improper ex parte communications, and that the position limits rulemaking would be unworkable because it was not compatible with the large swaps trader reporting rule. Inspector General's Preliminary Report.

• Interpretive Guidance Regarding Performance Disclosure for Forex CTAs.

On February 27th, the CFTC's Division of Swap Dealer and Intermediary Oversight issued an interpretation regarding the time period for which past performance is required to be disclosed by persons required to register as commodity trading advisers ("CTAs") because they engage in off-exchange retail foreign currency transactions ("retail forex"). Such persons ("Forex CTAs") are required to disclose performance information for the period beginning October 18, 2010, the date upon which the Commission's regulations governing retail forex became effective. A Forex CTA that chooses to present past performance information for any period of time prior to October 18, 2010, must do so in accordance with the time period as specified in Regulation 4.35(a)(5), must include all accounts directed by the Forex CTA, must present the information in the format specified in Regulation 4.35, and must have and maintain adequate books and records to substantiate the information. CFTC Letter No. 12-01.

• Fee Rate Advisory.

On March 1st, the SEC announced it has determined that a mid-year adjustment to the Section 31 transaction fee rate is necessary. Effective on April 1, 2012, the Section 31 transaction fee rate will be set at $22.40 per million. The rate change does not apply to the Section 31 assessment on security futures transactions, which will remain at the current rate of $0.0042 per round turn transaction. SEC Press Release.

• Senators Seek to Loosen Disclosure Rules for Resource Extractors.

On March 1st, The Hill reported Senators Lisa Murkowski and John Cornyn have asked the SEC to give companies broader leeway when disclosing payments to foreign governments in accordance with the Commission's proposed rule on the disclosure of payments by resource extraction issuers. Letter.

• Division of Trading and Markets Official Discusses AML.

On February 29th, David W. Blass, SEC Chief Counsel, Division of Trading and Markets, discussed the Division's anti-money laundering ("AML") efforts. Blass summarized recent AML-related enforcement matters, noting that firms must verify the identities of omnibus sub-account holders, and the need to identify the beneficial owners of high-risk accounts. He also discussed the SEC and CFTC's establishment of a Capital Markets Working Group that will focus on money laundering vulnerabilities in the capital markets. Blass Remarks.

• SEC Issues Risk Alert on Unauthorized Trading.

On February 27th, the SEC issued a risk alert regarding the detection of unauthorized trading in brokerage and advisory accounts. The alert notes that changes in trading patterns, a high volume of trade cancellations or corrections, manual trade adjustments, or unexplained profits for a particular trader or client may warrant additional scrutiny. The alert suggests compliance measures that firms might implement to protect themselves and their clients from unauthorized trading. The alert also discusses policies that require traders to take vacations without remote access to trading accounts. These policies could be enhanced, for instance, by using the trader's vacation to conduct a special review of the trader's portfolio for signs of unusual activity. SEC Press Release.

• SEC Examines Exchange's Ties.

On February 25th, Reuters, covering a Wall Street Journal article, reported the SEC is examining the ties between BATS Global Markets and certain electronic trading firms. Ties.

• SEC Developments.

On February 24th, Bloomberg reported a new circuit breaker rule for exchanges is likely within the next month. The SEC may also extend the compliance date by which brokers must begin tracking large trader activity. Trading Developments. On February 25th, Bloomberg reported the agency is examining exchange issues such as co-location, rebates, market access, and order cancellations. Exchanges. See also Reuters.

• Commissioner Aguilar on Disclosure.

On February 24th, SEC Commissioner Luis A. Aguilar, addressing the Practicing Law Institute's SEC Speaks conference, called for the establishment of an SEC program requiring companies to disclose their political donations. Aguilar Remarks. On February 28th, CFO.com reported a recent study shows that a growing number of shareholders want more information about issuers' political activities. Shareholder Proposals.

• Commissioner Gallagher on the Treatment of Compliance Officers as Supervisors.

On February 24th, SEC Commissioner Daniel M. Gallagher, addressing the Practicing Law Institute's SEC Speaks conference, discussed whether and when compliance and legal personnel should be considered supervisors for enforcement purposes. Gallagher noted the SEC's recent enforcement action against Theodore W. Urban, the former general counsel of Ferris Baker Watts, Inc. who was accused of having failed to supervise adequately a registered representative. While the SEC's dismissal of that action provides some guidance, Gallagher believes more is necessary. He notes the paradox facing engaged legal counsel and compliance personnel. The more they bring their expertise to bear in addressing compliance issues and the provision of real-time advice for concrete problems, the more likely they are to be deemed a supervisor. Gallagher Remarks.

• SEC Approves FINRA Rules.

On March 2nd, the Financial Industry Regulatory Authority announced the SEC approved FINRA's proposed rule change to adopt FINRA Rules 5310 (Best Execution and Interpositioning) and 6438 (Displaying Priced Quotations in Multiple Quotation Mediums) in the consolidated rulebook. FINRA Rule 5310 is the new consolidated rule governing members' best execution requirements that is based largely on NASD Rule 2320 (Best Execution and Interpositioning). The Supplementary Material to Rule 5310 draws substantially from NASD IM-2320 (Interpretive Guidance with Respect to Best Execution Requirements) but includes several new provisions concerning securities with limited quotation or pricing information, foreign securities, customer instructions on routing orders, and regular and rigorous review of execution quality. Rules 5310 and 6438 become effective on May 31, 2012. FINRA Regulatory Notice 12-13.

• FINRA Amends its Code of Procedure.

On March 1st, the Financial Industry Regulatory Authority advised that the SEC approved amendments to FINRA's Code of Procedure. The amendments are procedural in nature and include the following: allowing service of a complaint (and notices of certain expedited proceedings) on counsel when counsel agrees to accept such service; permitting electronic filing of papers with an adjudicator; requiring an attorney seeking to withdraw from a disciplinary case to file a motion before withdrawal would be approved; allowing hearing officers to manage the parties' pre-hearing submissions to reduce and eliminate duplicative filings; and allowing counsel to the NAC to decide a procedural motion in an eligibility proceeding or an expedited proceeding. The amendments are effective March 30, 2012. FINRA Regulatory Notice 12-12.

• Fingerprinting Fee Revised.

On March 1st, the Financial Industry Regulatory Authority advised that effective March 19, 2012, the fee for processing each set of fingerprints submitted by a member firm to FINRA will decrease from $30.25 to $27.50. FINRA Information Notice.

• FINRA Warns Firms of Hoax Emails That Purport to Be From Regulators.

On February 29th, the Financial Industry Regulatory Authority warned firms of the dissemination of hoax emails. The emails falsely claim to be from regulators and purport to be or contain regulatory inquiries. The emails, however, may contain a link to malicious software, ask for sensitive information or otherwise pose security risks to firms. FINRA Information Notice.

• New FINRA Rules on Filing Supplemental FOCUS Reports.

On February 28th, the Financial Industry Regulatory Authority advised that the SEC approved the adoption of new FINRA Rule 4524 (Supplemental FOCUS Information), which requires each firm, as FINRA shall designate, to file such additional financial or operational schedules or reports as FINRA may deem necessary or appropriate for the protection of investors. The SEC also approved the adoption of the Supplemental Statement of Income ("SSOI"), as a supplement to the Statement of Income (Loss) page of the FOCUS Report. The implementation date of FINRA Rule 4524 is February 28, 2012. The due date of the initial SSOI, covering the quarter ending September 30, 2012, is October 26, 2012. FINRA Regulatory Notice 12-11.

• Accounting Support Fee Approved.

On February 23rd, the SEC approved the Financial Industry Regulatory Authority's proposed Governmental Accounting Standards Board accounting support fee. SEC Release No. 34-66454.

• Amendments to Definition of Approved Person are Proposed.

On February 24th, the SEC provided notice of the New York Stock Exchange's and NYSE Amex's individual filing of proposed amendments to their respective definition of approved person to exclude foreign affiliates, eliminate the application process for approved persons, and make related technical and conforming changes. Comments should be submitted on or before March 22, 2012.

• Amendments to Proposed Retail Liquidity Provider Program are Filed.

On February 24th, the SEC provided notice of the New York Stock Exchange's and NYSE Amex's filing of Amendment No. 2 to proposed rule changes adopting new Rule 107C to establish a Retail Liquidity Provider Program on a pilot basis to attract additional retail order flow to the exchanges. Amendment No. 2 makes three changes to the proposal. It: (1) limits the definition of "Retail Order"; (2) modifies the definition of the Retail Liquidity Identifier; and (3) clarifies the treatment of odd lots, round lots, and part of a round lot orders. Comments should be submitted on or before March 22, 2012. SEC Release No. 34-66464.

• What Constitutes a Domestic Transaction in Securities?

On March 1st, the Second Circuit addressed whether foreign funds' purchases and sales of unlisted securities issued by U.S. companies brokered through a U.S. broker-dealer constitute "domestic transactions" under Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010). It holds that to sufficiently allege the existence of a "domestic transaction in other securities," plaintiffs must allege facts suggesting that either irrevocable liability was incurred or title transferred within the U.S. Absolute Activist Value Master Fund Limited v. Ficeto.

• Contract Formation and Arbitration.

On February 28th, the Eleventh Circuit held that when a party challenges both the formation of a contract containing an arbitration clause and the contract itself, courts must conduct a two-step analysis. First, the court considers the formation challenges to the contract containing the arbitration clause. Where, as here, the court determines that a valid contract exists, the court then determines whether the remaining challenges are to the entire agreement or to the arbitration clause. Only challenges to the arbitration clause are decided by courts. Challenges to the entire agreement are left to the arbitrator. Solymar Investments, Ltd. v. Banco Santander S.A.

• Mortgage-Backed Securities Case Remanded to State Court.

On February 27th, the Second Circuit ordered Black Rock's mortgage-backed securities ("MBS") lawsuit against Bank of America and Countrywide back to state court. The trustee for the MBS trust settled claims that Bank of America and Countrywide breached obligations owed the trusts. As a condition precedent to the settlement, the trustee initiated state court proceedings to confirm it had the authority to enter into the settlement. Certain investors intervened and removed the case to federal court under the Class Action Fairness Act ("CAFA"). The Second Circuit held that it lacked appellate jurisdiction over the matter because the case falls under CAFA's securities exception. For the same reason, the case was not removable. The Court therefore ordered the matter remanded to state court. Black Rock Financial Management Inc. v. The Segregated Account of Ambac Assurance Corp.

• New Jersey Supreme Court Addresses State Foreclosure Requirements.

On February 27th, the New Jersey Supreme Court unanimously held that under state law, a Notice of Intention to Foreclose sent to delinquent homeowners must include the name and address of the lender. In the instant matter, the notice only named the mortgage servicer. Despite the defect, the Court affirmed the entry of a default judgment against the homeowners in the foreclosure action. Given the homeowner's familiarity with the status of their mortgage and the reissuance of a proper foreclosure notice, the trial court acted within its discretion. U.S. Bank National Association v. Guillaume.

• Investment Adviser Performance Compensation - Effective May 22, 2012.

The Securities and Exchange Commission ("SEC") is adopting amendments to the rule under the Investment Advisers Act of 1940 that permits investment advisers to charge performance based compensation to "qualified clients." The amendments revise the dollar amount thresholds of the rule's tests that are used to determine whether an individual or company is a qualified client. These rule amendments codify revisions that the SEC recently issued by order that adjust the dollar amount thresholds to account for the effects of inflation. In addition, the rule amendments: provide that the SEC will issue an order every five years in the future adjusting the dollar amount thresholds for inflation; exclude the value of a person's primary residence and certain associated debt from the test of whether a person has sufficient net worth to be considered a qualified client; and add certain transition provisions to the rule. 77 FR 10358.

• SEC Revises Rules on Advisory Performance Fee Charges.

On February 15, 2012, the Securities and Exchange Commission adopted amendments to its rule on investment advisory performance fees under the Investment Advisers Act by revising the dollar amount thresholds used to determine whether an investor is a "qualified client." Briefing.

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