Financial Services Update______August 30, 2010
Volume 5, No. 32



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]

According to data released this month, China passed Japan in the second quarter to become the world's second-biggest economy. China's gross domestic product (GDP) was about half of Japan's GDP only five years ago. Three decades of spectacular growth, initiated with Deng Xiaoping's Opening and Reform Policy in 1978, have transformed China into a global, industrial and urban-centered economy and lifted 500 million people out of poverty. China's unprecedented economic transformation of the last 30 years is one of the most important economic events in modern history.
Becoming the world's second-biggest economy, however, has not added any national pride to many people in China. China's per capita income is only about one tenth of Japan's per capita income. China has a long way to go to catch up with the living standards in the developed countries.
As China continues its transformation from a planned economy to a market economy, further development of the financial markets will be the key to the new phase of its growth: transition to an economy with balanced, harmonious, healthy, and environmentally sustainable growth. This transition presents many potential opportunities to foreign firms and investors, including many readers of this Financial Services Update, who want to participate in the burgeoning Chinese financial markets. Whether you want to access the local A-share markets through the Qualified Foreign Institutional Investors program or meet a huge demand by the Chinese to invest some of their accumulated wealth into overseas markets, Winston & Strawn, with our offices in Beijing, Shanghai, and Hong Kong, is always here to help.


In the News [Top]
  • Two-Tiered Banking Industry Feared.
On August 27th, Reuters reported on the concerns critics of the loss-sharing proposal issued by the Basel Committee on Banking Supervision have raised. The proposal would require the contractual terms of capital instruments include a provision allowing, at the option of the pertinent regulatory authority, that the instrument be written off or converted to common shares in the event that a bank is unable to support itself in the private market in the absence of such conversions. Critics fear the proposal, if passed, would reinforce the creation of a two-tiered banking industry. Critics.
  • The Public-Private Investment Program.
On August 26th, the New York Times reported that the Public-Private Investment Program, a coordinated effort of the Treasury and FDIC that purchases real estate-related loans and real estate-related securities from financial institutions, has been a surprising success. PPIP.
  • California Mortgage Bill Faces Likely Defeat.
On August 27th, the Los Angeles Times reported that the California legislature will probably defeat S.B. 1275, a mortgage foreclosure prevention bill. Legislative Defeat.
  • Interchange Fees.
On August 26th, Reuters reported that the Federal Reserve Board is preparing the rulemaking process for debit and credit card interchange transactions, as required by the Dodd-Frank Act. Interchange Fees.
  • Proprietary Trading.
On August 25th, the New York Times reported that banks will engage in proprietary trading even after the Dodd-Frank Act's limits on that activity become effective. Proprietary Trading.
  • Regulators Examine Malfunctioning Algorithm.
On August 25th, Reuters reported that CME Group and the CFTC are investigating an Infinium Capital Management trading program which malfunctioned on February 3, causing a $1 million loss and a $1 spike in the price of oil. Trading Error. On August 26th, Reuters reported the response of CFTC Commissioners to its earlier report. Response.
  • Executive Compensation.
On August 25th, the Washington Post reported that Representative Barney Frank, Chairman of the House Financial Services Committee, will hold hearings on the adequacy of regulatory oversight of executive compensation in the financial services industry. Hearings.
  • Dollar's Shareholders Sue to Stop Hertz Acquisition.
On August 24th, the New York Times reported that shareholders of Dollar Thrifty Automotive Group are trying to stop Hertz Global Holdings' acquisition of Dollar, filing suit in Delaware Chancery Court. Lawsuit.
  • Federal Judges Demand More Information.
On August 23rd, the New York Times reported the possible implications of recent federal court cases where judges refused to immediately approve proposed regulatory settlements. Justice Delayed.
  • Shareholder Activists.
On August 23rd, the Los Angeles Times reported on the growing influence of shareholder activists. Gadflies.
  • Data Company's Intriguing Conclusions.
On August 22nd, the New York Times reported the surprising, and possibly disturbing, conclusions reached by a data company which analyzed the trading data from the May 6 "flash crash." Conclusions.
  • Proposed Private-Transfer-Fee Guidance.
On August 22nd, the Los Angeles Times reported on the Federal Housing Finance Agency's proposed guidance prohibiting Fannie Mae and Freddie Mac from purchasing home mortgages with private-transfer-fee provisions. Proposal.
  • Agencies Hold Hearings on Credit Default Swaps.
On August 20th, Reuters reported on the joint hearings held by the SEC and CFTC on the listing and clearing of credit default swaps. Hearings.

Banking Agency Developments [Top]
  • Federal Reserve Board to Hold Summit on Neighborhood Stabilization.
On August 26th, the Federal Reserve Board announced it will sponsor a national summit on September 1 and 2 to discuss methods and resources for encouraging neighborhood stabilization in the aftermath of the U.S. home mortgage foreclosure crisis. The forum will showcase findings from Federal Reserve research and policy efforts, including the release of the publication "REO and Vacant Properties: Strategies for Neighborhood Stabilization". Federal Reserve Board Press Release.
  • OCC Issues Bulletin on Complying with S.A.F.E. Act Registration Requirements.
On August 25th, the OCC issued a Bulletin on the new final rule which requires employees of national banks who are residential mortgage loan originators to meet the registration requirements of the S.A.F.E. Act. OCC Bulletin 2010-33.
  • ANPR Regarding Alternatives to Credit Ratings.
On August 25th, in accordance with the Dodd-Frank Act, the federal banking regulatory agencies issued an Advance Notice of Proposed Rulemaking. The Act requires the agencies to review their regulations that require the use of an assessment of creditworthiness of a security or money market instrument and make reference to, or have requirements regarding, credit ratings. The agencies must then modify their regulations to remove any reference to, or requirements of reliance on, credit ratings in such regulations and substitute in their place other standards of creditworthiness that the agencies determine to be appropriate for such regulations. The ANPR describes the areas in the agencies' risk-based capital standards and Basel changes that could affect those standards that make reference to credit ratings and requests comment on potential alternatives to the use of credit ratings. Comments should be submitted on or before October 25, 2010. 75 FR 52283. See also OCC Bulletin 2010-32.
  • FDIC's Proposed Overdraft Guidance.
On August 22nd, the Los Angeles Times summarized the FDIC's Overdraft Payment Supervisory Guidance, noting the proposed guidance's effect upon traditional check and ATM transactions. Los Angeles Times.

Treasury Department Developments [Top]
  • Treasury Designates Al-Qai'da Finance Section Leader.
On August 24th, the Treasury Department designated Muhammad Abdallah Hasan Abu-al-Khayr for acting for or on behalf of al-Qai'da. The action freezes any assets al-Khayr has under U.S. jurisdiction and prohibits U.S. persons from engaging in any transactions with him. Treasury Department Press Release.

Commodity Futures Trading Commission [Top]
  • CFTC Creates Electronic Mailboxes for Comment Submissions.
On August 26th, the CFTC announced the creation of electronic mailboxes to which the public may submit comments on the CFTC's OTC derivatives market rulemaking. Comments may be considered in the pre-proposal process but will not be treated as official comments on specific proposed rulemakings. The CFTC will accept submissions on each rulemaking topic until it publishes a proposed rulemaking for that topic in the Federal Register. Thereafter, the CFTC will accept official comments on the proposed rulemaking until the close of the rulemaking's official comment period. 75 FR 52512. See also CFTC Release No. PR5879-10.
  • CFTC Signs Cooperation Agreement with Japanese Ministries.
On August 24th, the CFTC announced it signed a Statement of Intent Concerning Cooperation, Consultation and the Exchange of Information with the Ministry of Economy, Trade and Industry of Japan and the Ministry of Agriculture, Forestry and Fisheries of Japan. The SOI establishes a framework for information sharing and facilitates cooperation in cross-border investigations of potential violations of commodity futures laws. CFTC Release No. PR-5878-10.

Securities and Exchange Commission [Top]
  • SEC Adopts New Proxy Access Rules.
On August 25th, the SEC adopted new proxy rules that will require, under certain circumstances, a company's proxy materials to provide shareholders with information about, and the ability to vote for, a shareholder's, or group of shareholders', nominees for director. The SEC also adopted related changes to certain other rules and regulations, including the existing solicitation exemptions from proxy rules and the beneficial ownership reporting requirements. The new rules are effective 60 days after publication in the Federal Register, which is expected during the week of August 30. SEC Release No. 33-9136; SEC Press Release (with fact sheet). See also Schapiro Remarks; Walter Remarks (concurring); Aguilar Remarks (concurring); Casey Remarks (dissenting); Paredes Remarks (dissenting).
  • The SEC's White Whale.
On August 22nd, the New York Times profiled Sam and Charles Wyly, whom the SEC allege used an elaborate system of off-shore trusts and subsidiaries to sell stock of companies for which they were corporate directors, and engaged in insider trading. SEC Press Release. The New York Times likens the SEC to Captain Ahab and the Wylys to the White Whale. Wyly Brothers.

Exchanges and Self-Regulatory Organizations [Top]
Financial Industry Regulatory Authority
  • New FINRA Rule Relating to Processing Fees for Company-Related Actions for Non-Exchange-Listed Securities.
On August 27th, the Financial Industry Regulatory Authority announced that, effective September 27, 2010, new FINRA Rule 6490 (Processing of Company-Related Actions) will codify the requirements in Securities Exchange Act Rule 10b-17 for issuers of a class of publicly traded securities to provide timely notice to FINRA of certain corporate actions. Regulatory Notice 10-38.
  • FINRA Announces Expansion of Arbitrator Lists.
On August 27th, the Financial Industry Regulatory Authority announced that, effective September 27, 2010, FINRA will increase the number of proposed arbitrators available for review when parties choose arbitration panels from lists generated randomly by the Neutral List Selection System. FINRA Regulatory Notice 10-37.
  • FINRA Regulatory Notice on Contrary Exercise Advices.
On August 26th, the Financial Industry Regulatory Authority advised that, effective September 7, 2010, amendments to FINRA Rule 2360 (Options) will extend the cut-off time for the submission of certain contrary exercise advices by one hour to 7:30 p.m. (ET). Additionally, in the event of a modified close of trading, the amendments extend the deadline for option holders to make a final exercise decision for an expiring standardized option by two minutes to one hour and 30 minutes following the modified closing time. FINRA Regulatory Notice 10-36.
  • Proposal to Reinstitute Short Exempt Marking for Trade Reporting and OATS.
On August 20th, the SEC provided notice of the Financial Industry Regulatory Authority's proposal to amend its trade reporting rules and Order Audit Trail System ("OATS") rules applicable to over-the-counter trades in NMS stocks, to reintroduce the short sale exempt category in light of the reinstitution of the "short exempt" marking category in connection with the SEC's implementation of a short sale circuit breaker for NMS stocks. FINRA also is proposing to require that members include the price on all route reports and a short exempt identifier, if applicable. Comments should be submitted on or before September 16, 2010. SEC Release No. 34-62748.
  • Expansion of the Order Audit Trail System Proposed.
On August 18th, the SEC provided notice of the Financial Industry Regulatory Authority's proposal to amend the Order Audit Trail System rules to extend the recording and reporting requirements to all NMS stocks, and to exclude certain firms that became FINRA members pursuant to NASD IM-1013-1 or NASD IM-1013-2 and the rules of the NYSE and that have limited trading activities. Comments should be submitted on or before September 15, 2010. SEC Release No. 34-62739.
Fixed Income Clearing Corporation
  • Accelerated Approval on a Temporary Basis for Proposed Modification Regarding the Calculation of Certain Clearing Fund Deposits.
On August 19th, the SEC granted accelerated approval to the Fixed Income Clearing Corporation's proposal to temporarily modify the rules of FICC's Government Securities Division regarding the calculation of clearing fund requirements relating to inter-dealer broker ("IDB") positions. The proposal changes to one day, the period of time in which the liquidation of a defaulting member's open position will be assumed to occur. The original assumption of a three-day liquidation period will continue to apply to non-IDB activity. The temporary modification will be in effect through February 18, 2011. SEC Release No. 34-62743.
International Swaps and Derivatives Association
  • ISDA Streamlines Credit Derivative Novation Process.
On August 25th, the International Swaps and Derivatives Association announced that it will further streamline the process of novating or assigning credit derivative trades by way of its "Credit Consent Equals Confirmation" project. ISDA Press Release.
  • Auction to be Held for Boston Generating's Loan-Only CDS.
On August 24th, the International Swaps and Derivatives Association announced that LCDX dealers voted to hold an auction for loan-only CDS transactions referencing Boston Generating LLC, a subsidiary of US Power Generating Company. Boston Generating filed a Chapter 11 petition with the US Bankruptcy Court in Manhattan on August 18, 2010. ISDA Press Release.
Municipal Securities Rulemaking Board
  • MSRB Proposes Interpretive Guidance on PACs.
On August 25th, the Municipal Securities Rulemaking Board announced it has filed with the SEC a proposed change to its interpretive guidance concerning political contributions and prohibitions on municipal securities business. The proposed interpretation provides guidance on factors that may result in a political action committee formed by or otherwise maintaining a relationship with an affiliate of a broker, dealer or municipal securities dealer being viewed as controlled by the dealer or a municipal finance professional of the dealer and thereby being treated as a dealer-controlled PAC. In addition, the MSRB is seeking comment on whether to require dealers to disclose the names of its affiliated PACs to the MSRB for public scrutiny. MSRB Notice.
  • SEC Approves Amendments to Disclosure Rule for ARS and VRDOs.
On August 20th, the SEC approved the Municipal Securities Rulemaking Board's proposed amendment of MSRB Rule G-34, CUSIP Numbers and New Issue Requirements, to enhance the interest rate and descriptive information currently collected and made transparent by the MSRB on municipal auction rate securities and variable rate demand obligations. The amendments require dealers to, among other things, submit to the MSRB documents that define auction procedures and interest rate setting mechanisms for ARS and liquidity facilities for VRDOs and report ARS bidding information. SEC Release No. 34-62755.
NASDAQ OMX PHLX
  • Trade Reporting Amendment Proposed.
On August 24th, the SEC provided notice of NASDAQ OMX PHLX's proposed amendment of Exchange Options Floor Procedure Advice ("OFPA") F-2 Allocation, Time Stamping, Matching and Access to Matched Trades; and Exchange Rule 1051, General Comparison and Clearance Rule, to state that late reports of transactions in complex spread transactions executed in open outcry may be considered "exceptional circumstances" under the rule. Comments are due 21 days after publication in the Federal Register. SEC Release No. 34-62760.
  • Change in Automated Opening System is Immediately Effective.
On August 23rd, the SEC granted immediate effectiveness to NASDAQ OMX PHLX's proposal to change the manner in which the PHLX XL automated options trading system calculates the Opening Quote Range ("OQR") in an options series during the automated opening process. The OQR is a price range outside of which the exchange will not open an option series. The proposal also reflects new system functionality to state that if, at any point during the opening process the ABBO becomes crossed (e.g., 1.05 bid, 1.00 offer), the opening process will be terminated and the exchange will not open the affected series. A new opening process for the affected series will commence at the time the ABBO is uncrossed. Comments are due 21 days after publication in the Federal Register. SEC Release No. 34-62759.
NYSE Regulation
  • NYSE Files Proxy Voting Amendment.
On August 27th, NYSE Regulation announced that it has formally filed proposed amendments with the SEC that would prohibit members from voting uninstructed shares at meetings held after July 21, 2010, if the matter to be voted on relates to executive compensation, as required by the Dodd-Frank Act. NYSE Regulation Information Memo 10-39.
  • NYSE Regulation Advises on Amendments to Pre-Opening Rule.
On August 24th, NYSE Regulation advised members of recent amendments to NYSE and NYSE Amex Equities Rule 15 (Pre-Opening Indications). The amendments clarify the use of the last reported sale on the exchanges as the reference price for pre-opening indications; and define the reference price of a security in the event that there is no last reported sale in that security on the exchanges. The amendments are effective September 5, 2010. NYSE Regulation Information Memo 10-38.

Judicial Opinions [Top]
  • Second Circuit Certifies Question Concerning the Non-Solicitation of Former Clients.
On August 24th, the Second Circuit certified to the New York Court of Appeals a question concerning the "Mohawk Doctrine," a line of New York cases which prohibit, in perpetuity, a voluntary seller of a client's good will from improperly soliciting business from that client after the client's business, including its good will, is transferred to the purchaser. In the instant case defendant, principal in an investment management firm, sold his firm and its good will to another investment manager. The Second Circuit asked whether defendant violated the Mohawk Doctrine by participating in the development of a plan, in response to a former client's inquiries, in which others at defendant's new firm would solicit the client and defendant to passively participate in a solicitation meeting. Bessemer Trust Co., NA v. Branin.
  • Broker-Dealers and Control Person Liability.
On August 20th, the Eighth Circuit held that plaintiffs stated a claim for control person liability against a broker-dealer whose registered representative conducted a Ponzi scheme, even though the fraud was conducted through a third-party brokerage firm. The defendant broker-dealer gave its registered representative access to the markets and had a duty to monitor him. Additionally, Eight Circuit law provides that culpable participation by an alleged control person in the primary violation is not an element of the claim. Lustgraaf v. Behrens.
  • Court Likens Investment Fund's Independent Board to a Rubber Stamp.
On August 11th, the Delaware Chancery Court issued its sixth written opinion in a case brought by a bank's employees who invested in a bank-formed employee investment fund that co-invested with the bank. Denying in part the defendants' motion for summary judgment, the Delaware Chancery Court discussed the funds' independent directors and their 'studious impersonation of a rubber stamp.' The Court also refused to dismiss the aiding-and-abetting claim against the bank since every member of the advisory board was a bank executive. Forsythe v. ESC Fund Management Co.

Rules Effective Dates [Top]
  • Amendments to the Informal and Other Procedures, Rules of Organization and Program Management, and Rules of Practice; Interim Commission Review of Public Company Accounting Oversight Board Inspection Reports and Regulation P - Effective September 7th, 2010.
The Securities and Exchange Commission is amending its Informal and Other Procedures to add a rule to facilitate interim SEC review of Public Company Accounting Oversight Board ("PCAOB") inspection reports under Section 104(h) of the Sarbanes-Oxley Act of 2002, and its Rules of Organization and Program Management and Rules of Practice to delegate authority to the Chief Accountant related to these reviews. The SEC is also establishing a subpart in its Informal and Other Procedures -- Regulation P -- to include procedural rules relating to the PCAOB. 75 FR 47444.
  • Political Contributions by Certain Investment Advisers - Effective September 13th, 2010.
The Securities and Exchange Commission is adopting a new rule under the Investment Advisers Act of 1940 that prohibits an investment adviser from providing advisory services for compensation to a government client for two years after the adviser or certain of its executives or employees make a contribution to certain elected officials or candidates. The new rule and rule amendments address "pay to play" practices by investment advisers. The new rule also prohibits an adviser from providing or agreeing to provide, directly or indirectly, payment to any third party for a solicitation of advisory business from any government entity on behalf of such adviser, unless such third parties are registered broker-dealers or registered investment advisers, in each case themselves subject to pay to play restrictions. Additionally, the new rule prevents an adviser from soliciting from others, or coordinating, contributions to certain elected officials or candidates or payments to political parties where the adviser is providing or seeking government business. The SEC also is adopting rule amendments that require a registered adviser to maintain certain records of the political contributions made by the adviser or certain of its executives or employees. 75 FR 41017.
  • Amendments to Form ADV - Effective October 12th, 2010.
The Securities and Exchange Commission is adopting amendments to Part 2 of Form ADV, and related rules under the Investment Advisers Act, to require investment advisers registered with the SEC to provide new and prospective clients with a brochure and brochure supplements written in plain English. These amendments are designed to provide new and prospective advisory clients with clearly written, meaningful, current disclosure of the business practices, conflicts of interest and background of the investment adviser and its advisory personnel. Advisers must file their brochures with the SEC electronically and the SEC will make them available to the public through its website. The SEC also is withdrawing the Advisers Act rule requiring advisers to disclose certain disciplinary and financial information. 75 FR 49233.

Winston & Strawn Speaking Engagements and Publications [Top]
  • Winston Sponsors Thomson's 16th Annual LPC Loan Pricing Conference.
Winston & Strawn partners Michael Mullins and Kent Walker will be speaking during the 16th Annual Thomson Reuters LPC Loan Conference, titled: You Say You Want an Evolution: Redefining the Loan Market, to be held September 22, 2010, in New York. Winston & Strawn is also serving as a sponsor for this event. Event.
  • Winston & Strawn Sponsors TMA's Annual Convention.
Winston & Strawn is proud to sponsor the TMA Annual Convention to be held October 6-8, 2010, at the JW Marriott in Orlando, Florida. TMA is a premier professional organization dedicated to corporate renewal and turnaround management. This convention is for professionals who share a common interest in strengthening the economy through the restoration of corporate value, including turnaround practitioners, appraisers, attorneys, investment bankers, equity investors, liquidators, venture capitalists, as well as, workout specialists and outsourcing professionals. Event.

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