Financial Services Update______May 23, 2011
Volume 6, No. 20



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

Winston & Strawn Speaking Engagements and Publications


Insights from Winston & Strawn [Top]

Once again this week, the Dodd-Frank Act is in the spotlight, although this time it is the lack of regulations that is causing some anxiety amongst OTC derivative dealers. No doubt you have heard much about the Wall Street reforms made by the Dodd-Frank Act, which repealed the Commodity Futures Modernization Act of 2000. As a result, the Commodities Futures Trading Commission ("CFTC") has been charged with implementing new rules to regulate OTC derivatives trading by July 16, 2011. The CFTC has issued numerous proposals, but these are not yet finalized as outstanding questions from lawmakers are still to be addressed. According to a Reuters report last week, the CFTC is not going to meet the July deadline. Given the task before the CFTC, it is not surprising that this deadline may be missed, and indeed it is not the first such report. In December 2010, it was reported by Bloomberg that the CFTC Chairman Gary Gensler had informed lawmakers at a House Agriculture Subcommittee meeting that the CFTC would miss its January deadline to limit speculation in commodities, including energy and metals. Nevertheless, what is raising temperatures among the OTC dealers is the likely regulatory void that will be created on July 16, 2011 unless transition measures are put in place whilst the CFTC prepares the new regulations. We will continue to keep a close eye on developments in this regard and will issue a detailed briefing once the CFTC publishes the new regulations.
In other news, the Financial Stability Board ("FSB") announced its second peer review of the financial industry compensation practices to assess the progress being made in implementing the FSB principles. The FSB principles, which were adopted following the G20 leaders' proposals to regulate remuneration in the financial services sector back in 2009, are largely supervisory in nature. By comparison, the regulations adopted by the European Union's Capital Requirements Directive ("CRD III") are more prescriptive (for example requiring the restriction of cash bonuses to a maximum percentage of variable pay) and covers a wider group of institutions including investment firms, managers of hedge funds, private equity funds and other alternative investment vehicles. The disparity in the regulatory approach may present a challenge to multinational institutions, whose employees may therefore be subject to differing rules regarding bonuses and compensation. Our cross-border financial services team in the U.S., Europe and Asia are well placed to assist your institution in negotiating the various compensation regulations across a variety of jurisdictions.
In the News [Top]
  • Regulatory Twilight Zone.
On May 20th, Reuters reported that dealers in over-the-counter ("OTC") derivatives face a regulatory twilight zone on July 16, 2011. The Dodd-Frank Act repealed, effective July 16, 2011, the provisions of the Commodity Futures Modernization Act of 2000 that exempted OTC derivatives from being considered illegal futures and gave the CFTC explicit authority to regulate OTC derivatives. The CFTC, however, will not be able to implement its rulemaking authority by July 16, 2011. Twilight Zone.
  • SEC Examining Electronic Trading Centers' Internal Controls.
On May 18th, Reuters, covering a Financial Times article, reported that the SEC's market abuse unit is investigating whether internal controls for the computer systems at electronic trading centers are adequate to prevent failures. Market Abuse.
  • Financial Stability Board Launches Review of Compensation Practices.
On May 18th, the Financial Stability Board ("FSB"), which was established to coordinate the work of national financial authorities and international standard setting bodies, announced that it has launched its second peer review of financial industry compensation practices. The review will assess the progress made by national authorities and significant financial institutions in implementing the FSB principles for sound compensation practices. FSB Press Release.
  • Federal Reserve Board May Propose New Dividend Rules for Banks.
On May 18th Reuters, covering a Financial Times article, reported that the Federal Reserve Board may propose a rule prohibiting banks which fail financial stress tests from making shareholder dividend payments. Stress Test.
  • Senator to Propose 15 Month Delay for Swipe Fee Limits.
On May 18th, Reuters reported that Senator Jon Tester will introduce a bill that would delay for 15 months, the implementation date of the Dodd-Frank Act's limits on debit card swipe fees. Tester had originally proposed a two-year delay. Swipe Fees.
  • Report Calls for the Extension of Consumer Credit Card Protections to Small Businesses.
On May 18th, the Pew Charitable Trust published a report calling for the application of the consumer protections of the Credit CARD Act to any credit card product that requires an individual to be personally or jointly liable for account expenses, and at a minimum, requiring issuers to tell applicants whenever a credit card is not covered by the Credit CARD Act. The Pew Charitable Trust Press Release.
  • Hedging Longevity Risk.
On May 16th, Bloomberg reported that investment banks are marketing a new financial product aimed at hedging the risk that pension plan participants will live longer than expected. Longevity Risk.
  • Congressmen Ignore Clawback Requests.
On May 16th, the Washington Post reported that Congressmen from both sides of the aisle who received campaign contributions from accused Ponzi schemer Robert Allen Stanford have refused to return those funds to the receiver. Clawback.
  • House Committee Passes Three Bills Affecting the Consumer Financial Protection Bureau.
On May 13th, the House Financial Services Committee approved three bills concerning the Consumer Financial Protection Bureau ("CFPB"):
  • H.R. 1121, which establishes a five-member, bipartisan commission to lead the CFPB.
  • H.R. 1315, which provides that the Financial Stability Oversight Council ("FSOC") must set aside any CFPB regulation when a majority of the FSOC's members find that the regulation is inconsistent with the safe and sound operations of U.S. financial institutions.
  • H.R. 1667, which requires that a Senate-confirmed Director of the CFPB be in place before the transfer of regulatory authority to the new bureau.
House Financial Services Committee Press Release.
  • FBI Investigating Former SEC Official.
On May 13th, Reuters reported that the U.S. Attorney is investigating the former head of enforcement at the SEC's Fort Worth, Texas office. Spencer Barasch provided legal services to indicted Ponzi schemer Robert Allen Stanford after he left the SEC and after repeatedly being told by the agency that he could not do so. Barasch allegedly failed to recognize red flags concerning Stanford while employed by the SEC. Investigation.

Banking Agency Developments [Top]
  • OCC Warns of Fraudulent Correspondence.
On May 18th, the OCC issued an Alert advising of a fictitious letter, allegedly issued by the agency, regarding a payment transaction purportedly reviewed and discussed by employees of the OCC and by other employees within the Treasury Department. The fictitious letter and related correspondence could potentially be distributed via e-mail, fax, or postal mail. The OCC advises that any document claiming that the OCC is involved in directing the release of outstanding contractual payments is fraudulent. The OCC does not direct, via letter, the transfer of funds to individuals, business enterprises, or governmental entities.
  • FDIC Adopts as Final the Interim Final Rule on the Securities of Nonmember Insured Banks.
On May 16th, the FDIC adopted as final the Interim Final Rule published in the Federal Register on November 30, 2010 (see 75 FR 73947). The final rule adopts amendments to the FDIC's securities disclosure regulations applicable to state nonmember banks with securities required to be registered under section 12 of the Securities Exchange Act of 1934 and cross references to regulations issued by the SEC. The Final Rule incorporates, through cross references, changes in regulations adopted by the SEC into the provisions of the FDIC's securities regulations. The amendments are effective immediately. 76 FR 28168.
  • FDIC Issues Special Consumer News Publication.
On May 16th, the FDIC published a special edition of the quarterly FDIC Consumer News, which is entitled "Shop and Save...at the Bank: A Buyer's Guide to Finding the Right Loan, Credit Card or Deposit Account." FDIC Press Release.
  • FDIC Advisory Committee on Economic Inclusion to Meet.
The FDIC's Advisory Committee on Economic Inclusion will meet on June 2, 2011, to consider advice and recommendations on initiatives aimed at expanding access to banking services by underserved populations. Meeting Notice.
Treasury Department Developments [Top]
  • CFPB Publishes Mortgage Disclosure Prototypes.
On May 18th, the Consumer Financial Protection Bureau ("CFPB") announced that it has drafted a mortgage disclosure statement combining two federally required mortgage disclosures into a single form. The CFPB will begin testing two alternate prototype forms to be given to consumers who have just applied for a mortgage loan. The testing will precede and inform the CFPB's formal rulemaking process. Treasury Department Press Release (with links to CFPB testing website and to prototypes). On May 17th, Bloomberg reported the response of consumer advocates and the lending industry to the forms. Response.
  • Syrian Designations.
On May 18th, the Treasury Department announced that President Obama has signed an Executive Order imposing sanctions against Syrian President Bashar al-Assad and six other senior officials of the Government of Syria in an effort to increase pressure on the Government of Syria to end its use of violence against its people and begin transitioning to a democratic system. The Treasury Department designated 10 additional individuals and entities responsible for human rights abuses. As a result of these actions, the designees' property located in the United States or in the possession or control of U.S. persons is blocked, and U.S. persons are generally prohibited from engaging in transactions with the designees. Treasury Department Press Release.
  • FinCEN Reminds MSBs of Letter Request.
On May 17th, the Financial Crimes Enforcement Network reminded money service businesses that received FinCEN's April 27, 2011, letter requesting a list of their agents that they must do so by June 20, 2011. FinCEN Notice.
  • Treasury Department Designates Iranian Bank.
On May 17th, the Treasury Department announced the designation of Bank of Industry and Mine, an Iranian state-owned bank used by the Government of Iran to evade U.S. and international sanctions against Iranian financial institutions involved in facilitating transactions in support of Iran's proliferation activities. Treasury Department Press Release.
Commodity Futures Trading Commission [Top]
  • Large-Trader Reporting Rule Could be Finalized this Summer.
On May 19th, Reuters reported CFTC Chairman Gary Gensler said that the large-trader reporting rule required by the Dodd-Frank Act may be one of the first swaps-related items to be implemented by the agency. Large-Trader Reporting. Gensler made his remarks before the Agricultural Advisory Committee meeting. See meeting website (with links to prepared remarks and presentations).
  • CFTC Codifies Exemptive Relief Granted to Listed Commodity Pools.
On May 18th, the CFTC published amendments to its regulations for commodity pool operators ("CPOs") of commodity pools whose units of participation are listed and traded on a national securities exchange. The amendments codify the relief from certain disclosure, reporting, and recordkeeping requirements that CFTC staff previously had issued to these CPOs on a case-by-case basis. It also codifies relief from the CPO registration requirement for certain independent directors or trustees of actively-managed commodity pools that CFTC staff similarly has issued. The amendments are effective June 17, 2011. 76 FR 28641.
  • CFTC Authorizes the NFA to Perform Certain Functions Regarding CPOs.
On May 18th, the CFTC authorized the National Futures Association to process claims of exemption from certain Part 4 requirements for commodity pool operators with respect to pools whose units are listed and traded on a national securities exchange ("Commodity ETFs"); and notices of exemption from registration as a CPO filed by independent directors or trustees of Commodity ETFs. The CFTC also authorized the NFA to maintain and serve as the official custodian of certain CFTC records. The new rules are effective June 17, 2011. 76 FR 28755.
Securities and Exchange Commission [Top]
New Final Rules
  • Amendments to SEC Dormant Account Procedures.
On May 13th, the SEC amended its procedures for holding funds in any filing fee account in which there has not been a deposit, withdrawal or other adjustment. The amendment extends the holding period from 180 days to three years, after which the SEC will initiate the return of funds to the account holder without any action by the account holder. As always, account holders may request a refund of such fees at any time. The amendments are effective May 19, 2011. SEC Release No. 33-9208.
Proposed Rules and Requests for Comment
  • SEC Proposes Credit Rater Rules.
On May 18th, the SEC proposed rules implementing provisions of the Dodd-Frank Act concerning credit ratings and Nationally Recognized Statistical Rating Organizations ("NRSROs"). The proposal would require NRSROs to report on internal controls; protect against conflicts of interest; establish professional standards for credit analysts; and disclose the methodology used to determine a credit rating. The proposal also requires disclosure concerning third-party due diligence reports for asset-backed securities. Comments should be submitted within 60 days after publication in the Federal Register, which is expected during the week of May 23. SEC Press Release. See also Schapiro Remarks; Aguilar Remarks. Commissioner Kathleen Casey, while voting in favor of proposing the rule, reiterated her concern that the SEC is not fulfilling its obligations to engage in a rigorous cost/benefit analysis of its proposals. Casey Remarks.
  • Comments Requested on the Exemption of Three New Systems of Records from the Privacy Act.
On May 18th, the SEC proposed the establishment of three new systems of records and revisions to two existing systems of records. The three new systems of records are "Tips, Complaints, and Referrals (TCR) Records (SEC-63)," "SEC Security in the Workplace Incident Records (SEC-64)," and "Investor Response Information System (IRIS) (SEC-65)." Revisions are proposed for: "Personnel Management Code of Conduct and Employee Performance Files (SEC-38)"; and "Enforcement Files (SEC-42)." The proposed systems will become effective 40 days after publication in the Federal Register, which is expected during the week of May 23. SEC Release No. PA-46. In a companion release the SEC requested comments on a proposed rule to exempt from the Privacy Act portions of the three new systems of records, to the extent that the records contain investigatory materials compiled for law enforcement purposes. Comments on this proposal should be submitted within 30 days after publication in the Federal Register, which is expected during the week of May 23. SEC Release No. PA-45.
  • Private Issuer with a Beneficial Owner Holding Stock Through 500 Entities Seeks Exemptive Order.
On May 12th, the SEC provided notice of BF Enterprises, Inc.'s filing of an application for an order exempting it from the requirement to register its common stock under Section 12(g) of the Securities Exchange Act. BF Enterprises asserts that exemptive relief is appropriate because as of December 31, 2010, BF Enterprises had total assets of approximately $13.3 million and stockholders' equity of approximately $11.8 million. It further asserts that it has fewer than 85 total beneficial owners of its common stock. However, one of those beneficial owners has expressly stated under oath that its shares are held indirectly through 500 trust entities formed solely for the purpose of attempting to cause BF Enterprises to register its common stock under Section 12(g) of the Exchange Act. Comments should be submitted on or before June 16, 2011. SEC Release No. 34-64479.
Other Developments
  • Open Meeting.
The SEC will hold an Open Meeting on May 25, 2011, to consider whether to propose amendments to Regulation D under the Securities Act of 1933 to disqualify securities offerings involving certain "felons and other bad actors" from reliance on the Rule 506 safe harbor exemption from Securities Act registration. The Commissioners will also consider whether to adopt rules and forms to implement Section 21F of the Securities Exchange Act of 1934 entitled "Securities Whistleblower Incentives and Protection." SEC Meeting Notice.
  • SEC Makes Credit Rater Employment Transition Report Submissions Available.
On May 16th, the SEC announced it has updated its public website to enable credit raters to submit reports about certain employment transitions and for such reports to be made public as required by the Dodd-Frank Act. Credit raters are required to report to the SEC when they know (or can reasonably be expected to know) of a person who was associated with the credit rater within the past five years who obtains employment with any obligor, issuer, underwriter, or sponsor of a security or money market instrument, for which the credit rater issued a credit rating during the past 12 months prior to such new employment (a "covered company"). This "employment transition" reporting obligation applies when a covered company hires an individual who was a senior officer of the credit rater; participated in any capacity in determining credit ratings for a covered company; or supervised an employee that participated in any capacity in determining credit ratings for a covered company. The Commission will make this information available on the Commission's web page for NRSRO related matters.
  • Whistleblower Ineligibility.
On May 13th, CFO.com reported that Representative Michael Grimm will introduce a bill excluding compliance and legal personnel from being eligible for whistleblower bounties. Ineligible.
Exchanges and Self-Regulatory Organizations [Top]
  • Changes Proposed to Order Handling Procedures.
On May 12th, the SEC provided notice of individually filed proposed changes by BATS Exchange and BATS-Y Exchange to their respective order handling procedures to allow both Non-Displayed Orders and orders subject to price sliding (a function that allows orders that would normally be canceled automatically because of locking or crossing the National Best Bid or Offer ("NBBO") to temporarily adjust to the NBBO and reside in the exchanges' matching engines) that are not executable at their most aggressive price to be executed at one-half minimum price variation less aggressive than that price. The exchanges also propose to modify their rules to make clear that an order subject to "NMS price sliding" can be ranked at the same price as an order displayed on the other side of the book, although temporarily not executable at that price and displayed at one minimum price variation less aggressive than its price. Comments should be submitted on or before June 8, 2011.
  • SEC Grants Accelerated Approval to Modified Haircuts.
On May 13th, the SEC granted accelerated approval to the National Securities Clearing Corporation and the Fixed Income Clearing Corporation for individually submitted proposed modifications to certain haircuts currently applied to their Eligible Clearing Fund Securities. The NSCC's and FICC's respective rules require members to make deposits to the appropriate Clearing Fund with the amount of each Member's required deposit being fixed in accordance with one or more formulas. A member may satisfy its Required Deposit with a cash deposit, and NSCC and FICC rules permit a portion of the Member's deposit (with limited exception) to be evidenced by an open account indebtedness secured by Eligible Clearing Fund Securities (certain Treasury, agency, and mortgage-backed securities). NSCC and FICC permit members to fund settlement by pledging Clearing Fund deposits as collateral for loans, and NSCC and FICC maintain committed borrowing facilities for this purpose. Haircuts imposed on collateral pledged by NSCC and FICC under the borrowing facility are being increased by the lending syndicate, and therefore, NSCC and FICC must make corresponding increases in its Clearing Fund collateral haircuts in order to maintain alignment with the haircuts under the borrowing facility.
Financial Industry Regulatory Authority
  • SEC Approves Amendments to Anti-Spinning Provisions Receive Accelerated Approval.
On May 18th, the SEC granted accelerated approval to the Financial Industry Regulatory Authority's proposal to amend FINRA Rule 5131 (New Issue Allocations and Distributions) to simplify the rule's spinning provision and to delay the implementation date of paragraphs (b) and (d)(4) under the rule. SEC Release No. 34-64512.
  • Implementation Date for Know-Your-Customer Rules.
On May 18th, the Financial Industry Regulatory Authority announced that July 9, 2012, is the new implementation date for its rules governing know-your-customer and suitability obligations for the consolidated FINRA rulebook. On January 10, 2011, FINRA issued Regulatory Notice 11-02, which provided guidance regarding the new rules and announced an implementation date. The May 18th Notice announces the new implementation date and provides more guidance in response to some recent industry questions and concerns. FINRA Regulatory Notice 11-25.
  • FINRA Launches Disciplinary Actions Online Database.
On May 16th, the Financial Industry Regulatory Authority announced the launch of the FINRA Disciplinary Actions Online database, a web-based searchable system that makes its disciplinary actions accessible via its website. FINRA Press Release.
Municipal Securities Rulemaking Board
  • MSRB Makes Available Additional Information on Municipal Variable Rate Securities.
On May 16th, the Municipal Securities Rulemaking Board announced that it is providing additional information for municipal variable rate securities by making information publicly available that allows investors to assess the level of demand, liquidity provisions and auction procedures for the securities. The new information, along with current interest rates for variable rate securities, is available on the MSRB's Electronic Municipal Market Access website, at emma.msrb.org. MSRB Press Release.
NASDAQ OMX Group
  • NASDAQ OMX Group Issuer Alert Regarding Dividends and Distributions.
On May 18th, the NASDAQ OMX Group issued an Issuer Alert reminding issuers of their obligations related to dividends and distributions.
New York Stock Exchange
  • New Market Access Requirements.
On May 16th, NYSE Regulation reminded members that the new market access requirements set forth in SEC Rule 15c3-5 are scheduled to go into effect on July 14, 2011, and that members and member organizations must have the required controls and procedures in place by that time. Failure to establish and enforce the risk management controls and supervisory procedures required by SEC Rule 15c3-5 may also violate Exchange Rules, including the supervisory requirements of Rule 342. NYSE Regulation Information Memo 11-13.
NYSE Amex
  • SEC Designates Longer Period in which to Act on Proposed Electronic Trading Facility for Options Contracts.
On May 18th, the SEC designated July 1, 2011, as the date by which it must act on a proposed rule change filed by NYSE Amex relating to the formation of a Joint Venture between the exchange, its parent NYSE Euronext, and seven other entities to operate an electronic trading facility for options contracts. SEC Release No. 34-64511.
Judicial Opinions [Top]
  • Fourth Circuit Addresses Home Foreclosure Issue.
On May 19th, the Fourth Circuit held that the holder of the promissory note reflecting a home mortgage can institute foreclosure proceedings even when it is not named as the beneficiary on the deed of trust securing the loan. Both the deed of trust and Virginia case law suggest that there is no reason to treat the note and deed of trust as governed by separate forms of law. The text of the deed of trust envisions that it will be conjoined with the note. Moreover, the note and the deed of trust are contemporaneous documents that reflect a singular understanding between the parties. Horvath v. Bank of New York, N.A.
  • Mortgage-Backed Securities Lawsuit Survives Motions to Dismiss.
On May 19th, the Southern District Court of New York partially denied motions to dismiss a securities fraud case stemming from an offering of mortgage-backed securities. Plaintiffs allege that the offering documents for the interests in the pool of securitized mortgages misrepresented the underlying mortgages' compliance with underwriting standards. Partially denying motions to dismiss, the Court found that plaintiffs who still hold the securities sufficiently stated a claim under Section 11 of the Securities Act. By noting the losses incurred by those who have sold the securities, these plaintiffs pleaded a cognizable injury. The Court also held that certain Securities Act claims were not time-barred. Relying on the Supreme Court's decision in Merck & Co. v. Reynolds, as elaborated upon by the Second Circuit in City of Pontiac Gen. Emps. Ret. Sys. v. MBIA, Inc., the Court found that the statute of limitations did not begin to run until plaintiff would have sufficient information to survive a motion to dismiss. New Jersey Carpenters Health Fund v. Residential Capital.
  • California Court Reinstates Class Action Securitization Lawsuit.
On May 18th, the California Appellate Court held that the California state courts have jurisdiction over a putative class action lawsuit alleging that defendants' offering materials for mortgage-backed securities contained fraudulent misrepresentations in violation of the Securities Act. The trial court had granted defendants' demurral, finding that it lacked jurisdiction. Reinstating the case, the Appellate Court held that the state courts have concurrent jurisdiction with the federal courts because the case does not involve a covered security, one which is traded on a national exchange. Luther v. Countrywide Financial Corp.
  • Loss Causation.
On May 16th, the U.S. District Court for the Northern District of California held that loss causation must be established even in cases involving illiquid securities. Here, institutional investors who purchased municipal revenue bond anticipation notes alleged that the offering statement contained fraudulent misrepresentations. Entering summary judgment dismissing the federal securities fraud claims, the Court held that even though the market for the notes was inefficient, plaintiffs still needed to raise a triable issue of fact as to loss causation, which they failed to do. In re: Nuveen Funds/City of Alameda Securities Litigation.
Winston & Strawn Speaking Engagements and Publications [Top]
  • Regulation of Certain Wire and ACH Transfers to Persons Abroad Is Impending in the Guise of Regulation of Consumer "Remittance Transfers."
The Dodd-Frank Act, a more than 2,300 page comprehensive financial regulatory reform law that the President signed into law last July, contains a number of little known and scantily discussed provisions such as Section 1073 that provides for federal regulation of "remittance transfers," essentially consumer-initiated electronic transfers of funds to persons in foreign countries. Brief.

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