Financial Services Update______May 2, 2011
Volume 6, No. 17



IN THIS ISSUE

Insights from Winston & Strawn

In the News

Joint Agency Developments

Banking Agency Developments

Treasury Department Developments

Commodity Futures Trading Commission

Securities and Exchange Commission

Exchanges and Self-Regulatory Organizations

Judicial Opinions

Rules Effective Dates


Insights from Winston & Strawn [Top]

The proposed rules under the Dodd-Frank Act continued this week at their typically rapid pace, with the Securities and Exchange Commission ("SEC") and the Commodity Futures Trading Commission ("CFTC") releasing proposed rules defining key terms relating to swaps. The CFTC also released a number of proposed rules, including those addressing capital requirements for swap dealers and major swap participants and a proposed rule on the protection of cleared swaps customer contracts and collateral, among other proposals each of which is discussed in the Update below. The Dodd-Frank proposals have understandably and appropriately been the focus of the "Insights from Winston & Strawn" section many times over the past several months and will certainly continue to be a focus in the future.
This week, however, we will take a breather from the Dodd-Frank parade of regulations to recap recent initiatives at another federal agency of interest to our readers--the Department of Labor ("DOL"). While certainly not rivaling the pace of the SEC and CFTC, the DOL has been busy over the last year as well. Several of the recent DOL initiatives are of interest to our readers who manage money or provide other services to employee benefit plans subject to ERISA, including 401(k) plans.
Reporting and disclosure to ERISA plan participants and ERISA fiduciaries has been a recent area of focus for the DOL. Most recently, the DOL issued regulations governing the disclosures required to be made to 401(k) plan participants regarding the investments offered under the 401(k) plan. The regulations borrow from mutual fund disclosures in several respects and require the disclosure of information about 401(k) investment options in a comparative format, including information regarding fund expenses, performance, and the appropriate benchmarks. These requirements, which generally become effective in early 2012, are imposed on the "plan administrator" (generally a person or entity within the employer sponsoring the plan). It is expected, however, that plan sponsors will, out of necessity, turn to investment managers and other service providers to obtain the required information. Thus, those readers providing services to 401(k) plans may wish to familiarize themselves with these requirements in order to respond effectively to client inquiries.
In addition to these final rules regarding 401(k) participant disclosures, the DOL has proposed additional disclosure requirements relating to "target date funds," that is, investment options with an asset allocation that adjusts to become more conservative as a specified "target date" for retirement approaches. Both legislators and regulators have focused on target date funds as they have emerged as the most commonly used "qualified default investment alternative" ("QDIA") and, as a result, have seen a meteoric increase in 401(k) plan assets in the last few years. The QDIA rules give plan fiduciaries some degree of fiduciary protection with respect to amounts invested in the option that serves as the default option, or the investment option in which amounts are invested when the participant has not given an investment instruction. The proposed rules try to increase the disclosure and transparency related to target date funds, including increased disclosure and transparency regarding the assets comprising the target date fund and the "glide path" (the movement in asset allocation over time). These regulations are currently in proposed form.
In addition to participant disclosures, the DOL has also issued "interim final" regulations regarding the required disclosures from certain service providers (generally including investment managers) to plan fiduciaries. These disclosures cover direct and indirect compensation that the covered service provider receives in connection with services provided to the plan. Unlike the 401(k) participant disclosure regulations, these rules apply to all types of ERISA-governed retirement plans, both "defined benefit" plans (like traditional pensions) and "defined contribution" plans (like 401(k) plans). The DOL collected comments on the "interim final" regulations and "final final" regulations have been expected for some time. The regulations are currently slated to become effective on January 1, 2012 but that effective date could potentially be delayed depending on when the "final final" rules are released.
Another major recent initiative by the DOL is its proposed re-definition of who is a "fiduciary" under ERISA by reason of providing investment advice. The proposal seeks to set aside 35-year-old regulations that feature a five-part test for determining when a party providing investment advice is a fiduciary under ERISA. These proposals have occasioned heated and voluminous comments (over 200 of them) as well as two days of testimony with over 40 witnesses. Among the many concerns raised by participants in the financial services industry is that the rules, as proposed, could substantially expand the parties considered to be "fiduciaries" and make it difficult, if not impossible, for certain services to continue to be provided to ERISA plans. The DOL has indicated that they intend to issue final rules on this subject during 2011 and the general sense seems to be that the DOL's current framework will remain largely intact. These changes may require the re-thinking or re-structuring of services provided to ERISA plans.
In addition to these major initiatives, the DOL is also looking into other topics, such as options for providing lifetime income through defined contribution plans and the degree to which ERISA-required disclosures can be made electronically.
We here at Winston & Strawn keep a close eye on the DOL developments that may affect our financial services and investment management clients and we will be happy to continue to keep you posted on them if you'll forgive the occasional interruption of the Dodd-Frank coverage. And now, to return to our regularly scheduled programming . . . .


In the News [Top]
  • Likely FDIC Successor Profiled.
On April 28th, Reuters profiled Martin Gruenberg, who is likely to succeed Sheila Bair as Chairman of the FDIC. Profile.
  • The Flaws in the FDIC's Resolution Authority.
On April 28th, the New York Times' Economix blog published the views of former International Monetary Fund Chief Economist Simon Johnson on the FDIC's resolution authority. Johnson evaluates the FDIC's recent report on how it would have resolved Lehman Brothers, noting the report's flaws. Op-Ed.
  • AIG Alleges That Investment Firms Committed Fraud.
On April 28th, Reuters reported that AIG's Financial Products Unit ("AIG-FP") has sued ICP Asset Management and Moore Capital in New York state court. AIG-FP alleges that ICP and Moore inflated the value of the underlying mortgages included in their offerings of collateralized debt obligations, causing AIG-FP to suffer $350 million in damages. Lawsuit. The SEC filed related charges against ICP in 2010. See SEC v. ICP Asset Management, Lit.Rel.No. 21563.
  • Jury Acquits Hedge Fund Exec.
On April 27th, the Washington Post reported a jury has acquitted former Lancer Management Group chief executive Michael Lauer of securities fraud. Federal prosecutors had alleged that Lauer manipulated the share price of stocks held by Lancer's funds to justify higher fees. A juror is quoted as saying that Lauer was only guilty of surrounding himself with jerks. Acquittal. Partial summary judgment had previously been entered against Lauer in the SEC's related civil case. See SEC v. Lauer, Lit.Rel.No. 20751.
  • FINRA's CEO Is Interviewed.
On April 25th, the New York Times' DealBook published excerpts from its interview of Richard Ketchum, the CEO of the Financial Industry Regulatory Authority. The interview discussed FINRA's efforts to oversee investment advisers and its reorganization of its enforcement unit. Interview.
  • Website Provides Data on Investment Advisers and Brokers.
On April 25th, Bloomberg reported that BrightScope Inc. has launched a searchable website aggregating data concerning disciplinary history, customer disputes, and assets under management for registered investment advisers and brokers. Data.
  • Conflicted CFOs.
On April 25th, CFO.com discussed the potential conflicts of interest faced by CFOs who are also 401(k) plan fiduciaries. Conflicts.
  • Delaware Chancery Court's Chief Judge Retiring.
On April 25th, Bloomberg reported that Delaware Chancery Court Chief Judge William B. Chandler III is retiring, effective June 17, 2011. Retirement.

Joint Agency Developments [Top]
  • Agencies Publish Proposed Credit Retention Rules.
On April 29th, the federal banking, finance, securities, and housing regulators jointly published for comment a proposed rule that would require sponsors of asset-backed securities ("ABS") to retain at least 5 percent of the credit risk of the assets underlying the securities and would not permit sponsors to transfer or hedge that credit risk. The proposal includes descriptions of loans that would not be subject to these requirements, including ABS that are collateralized exclusively by residential mortgages that qualify as "qualified residential mortgages" ("QRMs"). The proposal would establish a definition for QRMs, incorporating such criteria as borrower credit history, payment terms, and loan-to-value ratio, designed to ensure they are of very high credit quality. The proposed rule also includes investor disclosure requirements regarding material information concerning the sponsor's retained interests in a securitization transaction. Comments should be submitted on or before June 10, 2011. 76 FR 24090.
  • SEC and CFTC Vote to Propose Swap Definitions.
On April 27th, the SEC and CFTC voted to jointly propose rules defining the terms swap, security-based swap, and security-based swap agreement. The agencies also voted to propose rules regarding mixed swaps and books and records requirements for security-based swap agreements. The proposal specifically excludes insurance products from the definition of swap. SEC Press Release. See also CFTC Fact Sheet on Proposed Rules and Product Definitions; CFTC Questions & Answers on Proposed Rules and Product Definitions; Schapiro Remarks. SEC Commissioner Luis A. Aguilar highlighted one of the difficulties that the agencies faced as they crafted the proposal, asking whether the proposal's treatment of credit default swaps on an index is adequate. Aguilar Remarks.

Banking Agency Developments [Top]
  • Treasury Market Practices Group Proposes Fails Charges for Agency Debt and Agency MBS.
On April 29th, the Treasury Market Practices Group proposed that a failed-sale charge be assessed when a party to a purchase and sale agreement for agency debt or agency mortgage-backed securities fails to complete the transaction. Comments should be submitted on or before June 10, 2011. TMPG Press Release.
  • OCC Issues Bulletin on Retail Forex Proposal.
On April 28th, the OCC issued a Bulletin on its proposed rule that would authorize national banks, federal branches and agencies of foreign banks, and their operating subsidiaries to engage in certain off-exchange transactions in foreign currency with retail customers. The proposed rule also describes various requirements with which national banks must comply to conduct such transactions.
  • OCC Issues Bulletin on Proposed Incentive-Based Compensation Rules.
On April 28th, the OCC issued a Bulletin on the proposed rule that it jointly issued with other federal banking and securities regulators that implements the incentive-based compensation provisions of the Dodd-Frank Act.
  • OCC Allows Bank Branches to Close.
On April 28th, the OCC issued a proclamation allowing national bank offices affected by the severe storms in Alabama and Mississippi to close at their discretion. OCC Press Release.
  • OCC to Hold Workshops in Louisville, Kentucky.
The OCC will host workshops for directors of nationally chartered community banks and federal savings associations in Louisville, Kentucky on June 14-15, 2011. The workshops provide practical information that expands bank directors' skills and understanding of issues facing their banks. The workshops cover risk assessment ("Directors: Where is the Risk in Your Bank") on June 14th, and compliance risk ("Compliance Risk: What Directors Need to Know") on June 15th. OCC Press Release.
  • Federal Reserve Board Publishes Clarification to Truth in Lending Regulations.
On April 25th, the Federal Reserve Board published amendments to Regulation Z (Truth in Lending) to clarify aspects of prior Board rules implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009. The amendment is intended to enhance protections for consumers who use credit cards and to resolve areas of uncertainty so that card issuers fully understand their compliance obligations. The amendment states that credit card applications generally cannot request a consumer's "household income" because that term is too vague to allow issuers to properly evaluate the consumer's ability to pay. Instead, issuers must consider the consumer's individual income or salary. The amendment is effective October 1, 2011. 76 FR 22948.

Treasury Department Developments [Top]
  • Treasury Department Designates Iranian Drug Trafficker.
On April 28th, the Treasury Department's Office of Foreign Assets Control designated Iranian narcotics trafficker Bahram Ali Shayesteh as a Specially Designated Narcotics Trafficker for his involvement in millions of dollars of transactions with Afghan narcotics traffickers. Shayesteh is the managing director and 70 percent owner of Intercontinental Baumaschinen und Nutzfahrzeuge Handels GmbH, a Germany-based industrial transportation company which was also designated, as was his wife, CEO and 30 percent owner of the company, Guelin Oezer-Shayesteh. The designations prohibit U.S. persons from conducting financial or commercial transactions with Shayesteh, his wife, and his company, and any assets they may have under U.S. jurisdiction are frozen. Treasury Department Press Release.
  • FinCEN Proposes Iranian Sanctions Regulations.
On April 27th, the Financial Crimes Enforcement Network published for comment proposed regulations that would implement Section 104(e) of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 ("CISADA"). If adopted, the proposed rules would impose a reporting requirement that when invoked would require a U.S. bank to report to FinCEN certain information about foreign banks for which the U.S. bank maintains a correspondent account. Comments should be submitted within 30 days after publication in the Federal Register, which is expected during the week of May 2nd. FinCEN Press Release.

Commodity Futures Trading Commission [Top]
  • CFTC Votes to Propose Rules Implementing Dodd-Frank Provisions.
On April 27th, the CFTC voted to propose for comment:
  • Recordkeeping and Reporting Requirements for Pre-Enactment and Transition Swaps.
On April 25th, the CFTC published for comment proposed rules required by the Dodd-Frank Act concerning the reporting of data relating to un-expired swaps entered into before the date of enactment of the Dodd-Frank Act and data relating to swaps entered into on or after the date of enactment of the Dodd-Frank Act and prior to the compliance date specified in the CFTC's final swap data reporting rules. Comments should be submitted on or before June 9, 2011. 76 FR 22833.

Securities and Exchange Commission [Top]
Proposed Rules
  • SEC Extends Comment Period for Proposed Compensation Committee Listing Standards.
On April 29th the SEC extended to May 19, 2011, the period during which comments may be submitted on its proposed rules directing national securities exchanges to adopt listing standards for issuer compensation committees. SEC Release No. 33-9203.
  • SEC Proposes Removing References to Credit Rating Agencies.
On April 27th, the SEC published for comment proposed amendments that would remove references to credit ratings in several rules under the Securities Exchange Act, as required by the Dodd-Frank Act. The proposed rules remove references to credit ratings: in the SEC's net capital rule for broker-dealers; in the definition of "major market foreign currency"; when determining net capital charges for credit risk; and from Rule 15c3-3, Rules 101 and 102 of Regulation M, and Rule 10b-10 (the conformation rule). Comments should be submitted within 60 days after publication in the Federal Register, which is expected during the week of May 2nd. SEC Press Release; Schapiro Remarks. Although the Commissioners voted unanimously to issue the proposal, Commissioners Aguilar and Paredes expressed concern over what the replacement for credit ratings in the net capital rule will be. See Aguilar Remarks; Paredes Remarks.
Other Developments
  • 12b-1 Fees.
On April 29th, Reuters reported that the SEC will address mutual fund 12b-1 fees in late summer. Mutual Fund Fees.
  • SEC Releases Study on Auditor Attestation Requirements.
On April 22nd the SEC, as required by the Dodd-Frank Act, released a Study and Recommendations on Section 404(b) of the Sarbanes-Oxley Act for Issuers with Public Float Between $75 Million and $250 Million. The study addresses the auditor attestation requirement for an issuer's internal control over financial reporting. It does not address management's responsibility for reporting on the effectiveness of it internal controls.

Exchanges and Self-Regulatory Organizations [Top]
Financial Industry Regulatory Authority
  • SEC Approves FINRA Books and Records Rules.
On April 27th, the Financial Industry Regulatory Authority announced that the SEC has approved FINRA's proposal to adopt rules governing books and records for the consolidated FINRA rulebook. The new rules, FINRA Rules 2268, 4511, 4512, 4513, 4514, 4515, 5340 and 7440(a)(4), are based in large part on NASD Rule 3110, NYSE Rule 440 and NYSE Rule Interpretations 410/01 and 410/02. The new rules are effective December 5, 2011. FINRA Regulatory Notice 11-19.
  • FINRA Proposes Delaying Anti-Spinning Rule.
On April 26th, the SEC provided notice of the Financial Industry Regulatory Authority's proposal to amend FINRA Rule 5131 (New Issue Allocations and Distributions) to simplify the spinning provision, and to delay the implementation date of paragraphs (b) and (d)(4) to September 26, 2011. Comments should be submitted on or before May 16, 2011. SEC Release No. 34-64341.
NYSE/NYSE Amex
  • NYSE and NYSE Amex Each Amend Rule 72(d) Regarding Agency Cross Transactions.
On April 25th, the SEC announced the immediate effectiveness of proposals by the New York Stock Exchange, SEC Release No. 34-64334 and SEC Release No. 34-64335, to amend their respective Rules 72(d) relating to agency cross transactions. Currently, when an exchange member has an order to buy and an order to sell an equivalent amount of the same security, and both orders are for 25,000 shares or more, the member may "cross" the orders at a price at or within the exchange's best bid or offer, and does not have to break up the cross transaction to trade with any bids or offers previously displayed at the exchange's best bid or offer. The amendments change the required minimum share size from 25,000 and instead require that both the order to buy and the order to sell be "block" orders, which will be defined as the lesser of (i) at least 10,000 shares; or (ii) a quantity of stock with a market value of $200,000 or more. The exchanges also make certain conforming changes in their new rules. Comments on each rule change should be submitted on or before May 20, 2011.

Judicial Opinions [Top]
  • In Pari Delicto.
On April 25th, the Southern District Court for New York addressed the adverse interest exception to the doctrine of in pari delicto. The trustee for certain mutual funds alleged that the directors of the funds' investment manager were corruptly induced to transfer the funds' assets from a regulated Refco entity to an unregulated entity from which Refco's CEO misappropriated the assets. The special master overseeing the liquidation of Refco recommended that plaintiffs' claims be dismissed. Rejecting that recommendation, the Court held that the allegations adequately pleaded the adverse interest exception to the doctrine of in pari delicto. In re Refco Securities Litigation.

Rules Effective Dates [Top]
  • Amendment of Outside Employment and Activities Section of the SEC's Supplemental Standards of Ethical Conduct for Members and Employees of the Securities and Exchange Commission - Effective May 11, 2011.
The Securities and Exchange Commission with the concurrence of the Office of Government Ethics is amending its Supplemental Standards of Conduct for Members and Employees to eliminate a recently established prior approval requirement for outside employment. 76 FR 19901.

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