Financial Services Update______June 6, 2011
Volume 6, No. 21



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]

After a short break for Memorial Day last week, we continue our track for proposed rules under the Dodd-Frank Act. This week, one implementation rule bears particular mention: the Securities and Exchange Commission's ("SEC") proposed rule targeting certain "felons" and other "bad actors" and prohibiting security offering to such actors from qualifying for exemption from registration. The proposed amendments of Regulation D and Form D under the Securities Act of 1933, if and when effective, would disqualify felons and so-called bad actors from reliance on the safe harbor from securities registration provided in Rule 506 of Regulation D. We recall that Rule 506 is the most widely used of three exemptions to registration and allows an issuer whose offering qualifies for the Rule 506 exemption to raise unlimited capital from an unlimited number of accredited investors and up to 35 non-accredited investors without having to register. In order to make the safe harbor unavailable to felons and bad actors, the SEC proposes to reduce the scope of this exemption and exclude securities offerings that involve an issuer or any other person covered by the rule who had a "disqualifying event." Persons covered by the rule ("Covered Persons") include a wide-range of actors such as issuers, directors, officers, general partners, managing members of the issuers, beneficial owner of a minimum of 10% of the issuer's equity securities and any persons who are directly or indirectly compensated for soliciting investors (such as agents) as well as their partners, directors, officers and managing members. Disqualifying events primarily include criminal convictions, court injunctions, and restraining orders in connection with the sale or purchase of a security, the making of any type of "false filing" with the SEC, or arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, or investment adviser. It also extends to include measures such as U.S. Postal Service false representation orders issued within five years prior to the proposed sale of securities and suspension or expulsion from membership in a "self-regulatory organization." The new rule might be difficult to implement in light of the difficulty to ascertain whether a disqualifying event may apply to Covered Persons. The SEC acknowledges it will namely be providing for an exception from disqualification if the issuer can demonstrate that it did not know and reasonably could not have known that a disqualifying event existed.
The implementation of the Dodd-Frank Act further continues with three recently released proposals. First, the SEC adopted new final rules implementing the whistleblower provisions of the Dodd-Frank Act. The purpose of this whistleblower program is to reward natural persons who voluntarily expose federal securities violations to the SEC by providing it with original information which allows a successful enforcement action by the SEC and monetary sanctions of up to $1 million. This regulation is effective August 12, 2011. Second, the Office of the Comptroller of the Currency (the "OCC"), for its part, published for comments, a proposed rule implementing provisions of the Dodd-Frank Act relating to the transfer of functions from the office of Thrift Supervision and changes to national bank preemption and the OCC's visitorial authority. This recent Notice of Proposed Rulemaking completes the first step of the OCC's review of its own regulations to determine what changes are needed to facilitate a smooth regulatory transition. Indeed, under the Dodd-Frank Act, the OCC will assume responsibility for the ongoing examination, supervision, and regulation of Federal saving associations next month. And third, the Federal Deposit Insurance Corporation ("FDIC") approved the creation of the FDIC Advisory Committee on Systemic Resolutions as authorized under the Dodd-Frank Act. This committee, although deprived of any formal decision-making authority, will advice the FDIC on issues relating to systemically important company's failure. The first meeting is schedule this month.
Now, away from the Dodd-Frank Act, we note that the Employee Benefits Security Administration of the Department of Labor has proposed to delay the application of its retirement plan fee disclosure rules from July 16, 2011 to January 1, 2012. This proposal was made in recognition by the Department that no final rule is yet in place and service providers may need additional time for compliance. To refresh our recollection, the new rule, which requires retirement plan service providers to disclose comprehensive information about their fees and potential conflicts of interest to plan fiduciaries, was published in an interim final regulation last summer.
In the News [Top]
  • Personal Price.
On June 2nd, the New York Times reported on the ultimate personal price of the government's insider trading investigation, even on those not charged with a crime. Personal Costs.
  • Labor Department Proposal Regarding Retirement Fee Disclosure Rules.
On June 1st, the Department of Labor's Employee Benefits Security Administration proposed the extension, to January 1, 2012, of the applicability dates for its retirement plan fee disclosure rules. The Department published an interim final regulation on July 16, 2010, requiring retirement plan service providers to disclose comprehensive information about their fees and potential conflicts of interest to plan fiduciaries. Although the new requirements are scheduled to apply to plan contracts or arrangements for services in existence on or after July 16, 2011, the Department recognizes that because a final rule is not yet in place, service providers may need additional time for compliance. Comments should be submitted on or before June 15, 2011. Department of Labor Press Release.
  • Mortgage Securitization Lawsuit is Partially Dismissed.
On June 1st, Thomson Reuters reported that a New York state trial court has partially dismissed MBIA's lawsuit against Credit Suisse. MBIA alleged Credit Suisse fraudulently induced MBIA to insure second-lien mortgage securitizations by misrepresenting the quality of the underlying mortgages. Motion Granted.
  • Covered Equities.
On May 31st, Bloomberg columnist Laurence J. Kotlikoff proposed the creation of a covered equities market, in which mutual funds would buy mortgage-backed securities, as a replacement for Fannie Mae and Freddie Mac. Covered Equities.

Banking Agency Developments [Top]
  • FDIC Creates Advisory Committee on Systemic Resolutions.
On June 3rd, the FDIC approved the creation of the FDIC Advisory Committee on Systemic Resolutions. The Committee, authorized by the Dodd-Frank Act, was formed to advise the FDIC on the effects on financial stability and economic conditions resulting from a systemically important company's failure; how resolution strategies would affect stakeholders and customers of these entities; the tools available to the FDIC to wind down the operations of a failed organization; and the tools needed to assist in cross-border relations with foreign regulators and governments when a systemic company has international operations. The committee will not have formal decision-making authority and is expected to meet at least semiannually. The first meeting is scheduled for June 21, 2011. FDIC Press Release; Meeting Notice.
  • Federal Banking Regulators Issue Risk Guidance.
On June 3rd, the OCC announced that it, along with the Federal Reserve Board, FDIC, and OTS, is issuing guidance on the Advanced Measurement Approaches ("AMA") for Operational Risk. The guidance is intended to assist banking organizations in implementing an effective AMA framework, in addressing certain common implementation issues and challenges, and in providing key considerations for addressing these challenges. OCC Bulletin 2011-21.
  • OCC Publishes Newsletter on Charter School Financing.
On June 3rd, the OCC published a Community Developments Investments electronic newsletter that provides an in-depth look at bank financing for charter schools. The newsletter articles provide background information about charter schools, discusses the availability of federal, state, and local resources to support the financing of charter schools, and includes case studies of financing structures provided by banks. OCC Press Release.
  • Banking and Thrift Regulatory Agencies Release List of Distressed or Underserved Nonmetropolitan Middle-Income Geographies.
On June 1st, the federal bank and thrift regulatory agencies announced the availability of the 2011 list of distressed or underserved nonmetropolitan middle-income geographies where revitalization or stabilization activities will receive Community Reinvestment Act consideration as "community development." Joint Agency Press Release.
  • OCC Proposes Dodd-Frank Act Rules.
On May 25th, the OCC published for comment a proposed rule implementing several provisions of the Dodd-Frank Act, including the transfer of functions from the Office of Thrift Supervision and changes to national bank preemption and the OCC's visitorial authority. Among other things, the proposal would:
  • Implement a moratorium on changes in control of credit card banks and trust banks;
  • Revise Federal branch and agency rules to reflect the permanent increase in deposit insurance coverage; and
  • Amend OCC rules pertaining to preemption and visitorial powers.
The preemption-related amendments:
  • Eliminate preemption for national bank operating subsidiaries;
  • Apply national bank and national bank subsidiary preemption standards, as well as the visitorial powers standards applicable to national banks, to Federal thrifts and their subsidiaries;
  • Eliminate any ambiguity concerning the preemption standards in OCC regulations by removing language from OCC rules that provides that state laws that "obstruct, impair or condition" a national bank's powers are preempted; and
  • Revise the OCC's visitorial powers rule to conform to the holding of the Supreme Court's decision, as incorporated by the Dodd-Frank Act, recognizing the ability of state attorneys general to bring enforcement actions in court to enforce non-preempted state laws against national banks.
Comments should be submitted on or before June 27, 2011. OCC Press Release. See also OCC Bulletin 2011-20.
  • OCC Issues Bulletin on Proposed Margin Requirements for Swaps Dealers.
On May 25th, the OCC published a Bulletin on the proposed rule that would establish minimum margin and capital requirements for registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants subject to agency supervision.
  • OCC Publishes Bulletin on Changes to the Exempt Transaction Threshold.
On May 25th, the OCC published a Bulletin on the Federal Reserve Board's amendments to the Consumer Leasing Act and Regulation M, along with the Truth in Lending Act and Regulation Z. The amendment is effective July 21, 2011. It raises the threshold for exempt consumer leases and consumer credit transactions from $25,000 to $50,000. Additionally, on or after December 31, 2011, the threshold must be adjusted annually by any annual increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers.
  • First Quarter 2011 Quarterly Banking Profile Released.
On May 24th, the FDIC released the latest Quarterly Banking Profile. Its findings include an $11.6 billion improvement (66.5 percent) in net income for insured institutions; a significant decrease in loss provisions; and continued improvement in asset quality. FDIC Press Release.

Treasury Department Developments [Top]
  • Unblocking Notice.
On June 3rd, the Treasury Department's Office of Foreign Asset Control issued a notice unblocking the assets of Roy Ricks. 76 FR 32266.
  • CFPB Proposes List of Rules it will Enforce.
On May 31st, the Consumer Financial Protection Bureau ("CFPB") published a list of the rules and orders that it will enforce. Comments should be submitted on or before June 30, 2011. 76 FR 31222.
  • FinCEN Extends FBAR Filing Deadline for Certain Financial Professionals.
On May 31st, the Financial Crimes Enforcement Network issued Notice 2011-1 extending to June 30, 2012 the deadline for individuals with only signature authority over certain foreign financial accounts to file a Report of Foreign Bank and Financial Accounts with respect to those accounts. FinCEN Press Release.
Commodity Futures Trading Commission [Top]
  • Speculative Limits.
On June 2nd, Senator Bernie Sanders said he will introduce legislation requiring the CFTC to use its emergency authority to set speculative position limits and raise margin requirements for crude oil, gas, and heating oil. Sanders Press Release; Reuters.
  • CFTC Grants Request for No-Action Relief from Contract Market Designation and Derivatives Transaction Execution Facility Registration Requirements.
On June 1st, the CFTC's Division of Market Oversight issued a letter granting no-action relief to permit the Osaka Securities Exchange Co., Ltd. ("OSE"), to make its electronic trading and order matching system, the OSE Trading System ("OSE TS"), available to OSE Transaction Participants ("OSE TPs") in the U.S. without obtaining contract market designation or registration as a derivatives transaction execution facility. The relief applies to OSE TPs trading for their own accounts; OSE TPs who are registered as futures commission merchants, or who are exempt from such registration, submitting orders from or on behalf of U.S. customers to the OSE-TS for execution, or accepting orders for U.S. customers transmitted via automated order routing systems for transmission to the OSE-TS; and OSE TPs who are registered as Commodity Pool Operators ("CPO") or Commodity Trading Advisors ("CTA"), or who are exempt from such CPO or CTA registration, submitting orders to the OSE-TS on behalf of U.S. pools they operate or U.S. customer accounts for which they have discretionary authority, respectively, provided that an FCM or Rule 30.10 Firm acts as clearing firm and guarantees without limitation all such trades of the CPO or CTA effected through submission of orders on the OSE-TS. CFTC Letter No. 11-02.
  • CFTC to Hold Public Discussions on Unique Product Identifiers.
The CFTC will hold a public roundtable on June 8, 2011 to discuss technical aspects of implementing infrastructures for issuance and maintenance of Unique Product Identifiers ("UPIs"), as they apply to the CFTC's proposed swap data recordkeeping and reporting rules, as well as other CFTC proposed rules. The UPIs proposed by the Commission in the swap data recordkeeping and reporting rulemaking would categorize swaps according to the underlying products referenced in them. While the UPI would be assigned to a particular level of the taxonomy of the asset class or sub-asset class in question, its existence would enable the Commission and other regulators to aggregate transactions at various taxonomy levels based on the type of product underlying the swap. CFTC Press Release.
Securities and Exchange Commission [Top]
New Final Rules
  • SEC Publishes Whistleblower Rules.
On May 25th, the SEC adopted new final rules implementing the whistleblower provisions of the Dodd-Frank Act. The new whistleblower program is intended to reward individuals who expose federal securities violations. To be considered for an award, a whistleblower must be a natural person who voluntarily provides the SEC with original information that leads to a successful SEC enforcement action in which the SEC obtains monetary sanctions totaling more than $1 million. Smaller enforcement actions that arise from the "same nucleus of operative facts" may be combined for purposes of reaching the threshold for award eligibility. The rules are effective August 12, 2011. SEC Release No. 34-64545.
Proposed Rules
  • SEC Proposes Rule Disqualifying "Bad Actors" from Offering Exemption.
On May 25th, the SEC published for comment a proposed rule to implement the Dodd-Frank Act's requirement to prohibit certain securities offerings from qualifying for exemption from registration if they involve certain "felons and other bad actors." Regulation D under the Securities Act provides three exemptions that a company can use to avoid registration, the most widely used of which is Rule 506. If an offering qualifies for the Rule 506 exemption, an issuer can raise unlimited capital from an unlimited number of accredited investors and up to 35 non-accredited investors. Under the proposed rule, an offering would be unable to rely on the Rule 506 exemption if the issuer or any other person covered by the rule had a "disqualifying event" such as a criminal conviction, court injunction, or restraining order. The proposing release includes a specific request for comments on whether the disqualification provision should apply to other offering exemptions. Comments should be submitted on or before July 14, 2011. SEC Press Release. SEC Commissioner Troy A. Paredes dissented from approving the proposed rule for publication. Although he supports the policy of the rule, he objected to the rule's retroactive effect. Paredes Remarks.
Other Developments
  • Lender Liability.
On June 3rd, Reuters reported that the SEC is requiring banks to disclose to investors more information concerning the banks' potential legal liabilities. Disclosure.
  • SEC and FINRA Issue Investor Alert on Structured Notes with Principal Protection.
On June 2nd, the SEC's Office of Investor Education and Advocacy and the Financial Industry Regulatory Authority issued an investor alert called "Structured Notes with Principal Protection: Note the Terms of Your Investment." The alert is intended to educate investors about the risks of structured notes with principal protection, and to help them understand how these financial products work. SEC Press Release.
  • SEC Asked to Reopen Comment Period.
On June 1st, The Hill reported that industry representatives have written to the SEC asking that it reopen the comment period for its proposed derivatives rules. Comments.
  • SAC Capital under Investigation.
On June 1st, the Wall Street Journal reported that the SEC, Justice Department, and Senator Charles Grassley are conducting related investigations into alleged insider trading at SAC Capital Advisors LP. Investigations.
  • SEC's Inspector General Semiannual Report to Congress.
On May 31st, the Washington Post summarized the SEC's Inspector General's semiannual report to Congress. The Inspector General's recent investigations include an examination conducted at the request of the FBI, which alleged that a SEC staff member revealed the name of a confidential FBI informant. Summary.
Exchanges and Self-Regulatory Organizations [Top]
  • National Securities Exchanges Propose Limit Up-Limit Down Plan for Market Volatility.
On May 25th, the SEC provided notice of the national securities exchanges' joint filing of a plan to address extraordinary market volatility. The proposal would create a market-wide limit up-limit down mechanism intended to address extraordinary market volatility in National Market System ("NMS") Stocks, as defined in Rule 600(b)(47) of Regulation NMS under the Securities Exchange Act. The proposal sets forth proposed procedures that provide for market-wide limit up-limit down requirements that would be designed to prevent trades in individual NMS Stocks from occurring outside of the specified Price Bands. These limit up-limit down requirements would be coupled with Trading Pauses, as defined by the proposal, to accommodate more fundamental price moves (as opposed to erroneous trades or momentary gaps in liquidity). Comments should be submitted on or before June 22, 2011. SEC Release No. 34-64547.
  • NYSE and NYSE Amex Propose Permitting Proprietary Trading in Certain OTC Securities.
On May 19th, the SEC provided notice of individually filed proposed rule changes by NYSE Amex and the New York Stock Exchange to permit member organizations to engage in proprietary trading in certain OTC Bulletin Board and OTC Markets securities from their approved booth premises in certain OTC Bulletin Board and OTC Markets securities. Comments should be submitted on or before June 15, 2011.
Financial Industry Regulatory Authority
  • FINRA Reminds Firms of Their Trade Reporting Obligations.
On June 3rd, FINRA reminded firms of their obligation to submit to FINRA on the Form T Equity Trade Reporting Form, as soon as practicable, last sale reports of over-the-counter transactions in equity securities for which electronic submission is not possible. In addition, FINRA announced a new process for the electronic submission of Form T. Firms are required to submit Form T in accordance with this new process no later than July 5, 2011. FINRA Trade Reporting Notice.
  • SEC Approves FINRA Financial Responsibility Rules.
On May 27th, FINRA announced that the SEC has approved FINRA's proposed adoption of a set of financial responsibility and related operational rules for the consolidated rulebook. FINRA Rules 4150, 4311, 4522, and 4523 are new consolidated rules governing financial responsibility, as well as certain operational and contractual requirements of members. The new rules are based in part on, and replace, provisions in the NYSE and NASD Rules. The new rules are effective August 1, 2011. FINRA Regulatory Notice 11-26.
International Securities Exchange
  • Complex Order Proposal for Optimise Platform is Filed.
On May 24th, the SEC provided notice of the International Securities Exchange's proposal specifying in its rules that complex order may be entered into the Price Improvement Mechanism for options classes traded on the Optimise platform. Comments should be submitted on or before June 21, 2011. SEC Release No. 34-64538.
Municipal Securities Rulemaking Board
  • SEC Approves Proposed Application of Rules to Financial Advisors.
On May 27th, the SEC granted accelerated approval to the Municipal Securities Rulemaking Board's proposed amendment of Rule G-23 relating to activities of financial advisors. Proposed Rule G-23 would, subject to limited exceptions, (i) prohibit a dealer financial advisor with respect to the issuance of municipal securities from acquiring all or any portion of such issue, directly or indirectly, from the issuer as principal, or acting as agent for the issuer in arranging the placement of such issue, either alone or as a participant in a syndicate or other similar account formed for that purpose; (ii) apply the same prohibition to any dealer controlling, controlled by, or under common control with the dealer financial advisor; and (iii) prohibit a dealer financial advisor from acting as the remarketing agent for such issue. In addition, the proposed interpretive guidance, as amended, would provide guidance on when a dealer that renders advice would be considered to be "acting as an underwriter" rather than as a financial advisor for purposes of proposed Rule G-23. SEC Release No. 34-64564.
New York Stock Exchange
  • Initial Trading Market Value Requirement Approved.
On May 27th, the SEC approved the New York Stock Exchange's proposal to modify the initial trading market value requirement for "Debt Securities" from $10,000,000 to $5,000,000. The term "Debt Securities" includes any unlisted note, bond, debenture or evidence of indebtedness that is: (1) statutorily exempt from the registration requirements of Section 12(b) of the Securities Exchange Act, or (2) eligible to be traded under an SEC exemptive order. SEC Release No. 34- 64561.
NYSE Arca
  • Minimum Order Size Proposal is Immediately Effective.
On May 19th, the SEC granted immediate effectiveness to NYSE Arca's proposal to reduce the minimum order entry size of a mid-point passive liquidity order from 100 shares to one share. Comments should be submitted on or before June 15, 2011. SEC Release No. 34-64523.
Judicial Opinions [Top]
  • Court Affirms the Dismissal of Paramalat SPEs' Lender Liability Claims.
On May 26th, the Second Circuit affirmed a trial court's finding that special purpose entities ("SPEs") created to provide financing for their parent company have standing to sue defendants, who provided that financing. However, the SPEs failed to state a claim against the lenders for breaches of duty and contract because they failed to allege that defendants were the proximate cause of their injury. The SPEs would have borrowed from the lenders, and sustained their losses, even if no breaches had occurred. Food Holdings Ltd. v. Bank of America Corp. (Summary Order).
  • Securities Fraud Lawsuit Reinstated.
On May 25th, the Sixth Circuit reinstated a securities fraud lawsuit against Dana Corp. and its executives, explicitly abandoning its previous approach for determining whether a plaintiff's scienter allegations are sufficient. Instead of viewing each allegation individually before looking at them as a whole, the Court, applying the Supreme Court's opinion in Matrixx Initiatives v. Siracusano, employed a holistic approach and found the instant allegations sufficient. The Court further held that good faith is an affirmative defense in claims under Section 20 of the Securities Exchange Act, and that plaintiffs are thus not required to plead. Frank v. Dana Corp.
  • General Counsel of Investment Adviser Engaged in Insider Trading.
On May 25th, the Federal District Court granted the SEC's motion for summary judgment on its insider trading claims against the former general counsel and chief compliance officer of an investment adviser and executive of the affiliated investment company. While in possession of material non-public information concerning a bond fund's liquidity and redemption problems, defendant sold her shares in the fund. Defendant's assertion of independent reasons for selling failed to remove the inference of insider trading. SEC v. Bauer.
  • Bank's Fidelity Bond Covers Losses.
On May 24th, the Sixth Circuit held that a bank's fidelity bond covered the losses that it incurred as a result of its employees' failure to properly administer the bank's indirect lending program. The bank's losses were covered by the bond's faithful performance clause, which did not require a certain level of enforcement of lending practices, or perfect enforcement, for coverage. Michigan First Credit Union v. CUMIS Insurance Society, Inc.
Winston & Strawn Speaking Engagements and Publications [Top]
  • SEC Proposes Rule to Disqualify Felons and Bad Actors from Regulation D Securities Offerings.
The Securities and Exchange Commission ("SEC") has proposed amendments to Regulation D and Form D that, if adopted, would disqualify certain "felons" and other "bad actors" from reliance on the safe harbor from securities registration provided under Rule 506 of Regulation D under the Securities Act of 1933 (the "Proposal"). Brief.
  • Malyshev Moderates Panel on Title VII of the Dodd-Frank Act.
Peter Malyshev, co-chair of the Derivatives, Futures and Securitization Standing Committee of the D.C. Bar and a member of Winston & Strawn's corporate practice, will moderate the panel titled "Update on Product and Entity Definitions Under Title VII of the Dodd-Frank Act from the SEC and CFTC" on June 9, 2011. Senior officials from the Securities Exchange Commission and the Commodity Futures Trading Commission will discuss implementation of the Dodd-Frank Act with specific attention to the most recently proposed rulemakings on product and entity definitions required under Title VII of the Act. Event.

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