Financial Services Update______July 11, 2011
Volume 6, No. 25



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]

A FINRA arbitration panel awarded a hedge fund $63.7 million in its dispute with its broker after arguing that the broker made unexpected margin calls in October 2008 that the hedge fund could not meet, ultimately leading to the hedge fund's collapse. According to news reports of the dispute, as market turbulence worsened in October 2008, losses on the hedge fund's positions mounted and the broker made a margin call requiring the hedge fund to post additional collateral to back its trades. The hedge fund responded that it had never before been required to post so much collateral so suddenly, but the broker stood by its position. Unable to meet the margin call, the hedge fund was required to sell its positions the next morning, a day the DJIA was down more than 700 points. The losses incurred that day effectively put the hedge fund out of business.
Unfortunately, the arbitration decision does not provide details of the facts (including any potential extenuating circumstances), of the arbitration panel's analysis, or of the arbitration panel's reasoning for its ruling. Yet, the arbitration panel's grant of an award seems to indicate that the broker had a duty to the hedge fund to maintain its course of dealing and not exercise its contractual right to make a margin call outside of a range in which it had previously made margin calls. While we are not providing a commentary about whether the actions of the broker were fair or unfair, it seems that the arbitration panel's decision cuts against the general contractual understanding that brokers have significant flexibility in establishing and maintaining margin accounts, and in making margin calls when it deems necessary. The questions arise: Should the broker have provided more notice of the margin call (assuming it had time available)? What duties does the broker have to its client in making margin calls? What additional contractual language could have been included in defining each party's rights and responsibilities under the margin arrangements? What should a broker do the next time it is in a similar situation?
While this decision will likely be appealed to a court, at which time the facts and an analysis should be forthcoming, it marks a significant shift from the general understandings of margin arrangements in the marketplace. We will continue to monitor this case and will provide further analysis as it develops.


In the News [Top]
  • Global Regulators Examine Risks Posed by High Frequency Trading.
On July 6th, the Technical Committee of the International Organization of Securities Commissions published a Consultation Report on "Regulatory Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency" which develops recommendations to mitigate the risks posed to the financial system by technological developments such as high frequency trading. IOSCO Press Release.
  • Prosecutors Requested Delay in Gupta Proceedings.
On July 6th, Reuters reported that the SEC delayed its administrative enforcement proceedings against Rajat Gupta, the former chairman of McKinsey & Co., at the request of federal prosecutors. Delay. The SEC brought administrative charges against Gupta alleging that he passed material, non-public information to Raj Rajaratnam, who was convicted of insider trading in May. See In the Matter of Rajat K. Gupta, SEC Release No. 33-9192.
  • The Delaware Chancery Court's Chief Judge.
On July 6th, the New York Times' DealBook profiled the new Chief Judge of the Delaware Chancery Court, Leo E. Strine Jr. Profile.
  • FDIC Sues Former IndyMac Chairman.
On July 8th, the Los Angeles Times summarized the FDIC's case against Michael W. Perry, the former chairman of IndyMac Bancorp. The FDIC seeks $600 million in damages for Perry's alleged negligence. Lawsuit.
  • CFPB to Draft Mortgage Servicing Rules.
On July 6th, Bloomberg reported that one of the first items on the Consumer Financial Protection Board's agenda will be mortgage servicing rules. Agenda.
  • Judge Rakoff to Determine Where Madoff Proceeding Should Occur.
On July 2nd, the New York Times reported that federal district court judge Jed Rakoff has ruled that he will determine whether the clawback lawsuit that the SIPC trustee for Bernard Madoff's brokerage firm filed against Madoff investors Fred Wilpon and Samuel Katz is a core proceeding which should be heard in bankruptcy court, where it was originally filed, or in federal district court. Core Proceeding.
  • Institutional Investors Shift Assets.
On June 29th, Bloomberg reported that institutional investors are withdrawing funds from prime money market funds and investing instead with funds buying only U.S. government-backed securities. The withdrawals have coincided with fears over the Greek economy, whose debt is largely owned by European banks. Prime money markets have invested about one-half of their assets in commercial paper issued by European banks. Shift.
  • Home Sweet Home.
On June 28th, Reuters reported that a residential address in Cheyenne, Wyoming, is the home of thousands of shell corporations and shelf registrations. Corporate Home.
  • FINRA Oversight of Investment Advisers Questioned.
On June 27th, Bloomberg questioned whether the Financial Industry Regulatory Authority should be given the responsibility for overseeing investment advisers. Oversight.
  • Basel Committee Proposes Capital Requirements for Global Systemically Important Banks.
On June 25th, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, agreed on the methodology for assessing systemic importance for global systemically important banks. The methodology requires global systemically important banks to hold additional capital of between 1 percent and 2.5 percent. To provide a disincentive for banks from becoming larger, an additional 1 percent surcharge could be applied. The methodology will be released for consultation at the end of July. Bank for International Settlements Press Release.

Banking Agency Developments [Top]
Joint Banking Agency Action
  • OCC and FDIC Publish List of OTS Rules to be Enforced by Each.
On July 6th, the OCC and FDIC published a list of Office of Thrift Supervision rules to be enforced by the OCC and those to be enforced by the FDIC. No substantive changes to the rules themselves are being made. 76 FR 39246.
  • Banking Agencies Issue Guidance on Counterparty Credit Risk Management.
On July 5th, the federal banking agencies issued guidance on effective counterparty credit risk ("CCR") management. The guidance is intended primarily for use by banking organizations with large derivatives portfolios, as well as for supervisors, as they assess and examine such institutions' CCR management. Joint Press Release.
  • Banking Agencies Issue Host State Loan-to Deposit Ratios.
On June 30th, the Federal Reserve Board, FDIC, and OCC issued the host state loan-to-deposit ratios that the banking agencies will use to determine compliance with section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Section 109 prohibits a bank from establishing or acquiring a branch or branches outside of its home state primarily for the purpose of deposit production. Joint Press Release.
  • OCC and OTS Publish Mortgage Metrics Report.
On June 29th, the OCC and OTS published their mortgage metrics report for the first quarter of 2011. The report finds that performance of first-lien mortgages serviced by large national banks and federal thrifts improved during the first quarter of 2011. OCC Press Release.
  • FFIEC Issues Supplemental Guidance on Internet Banking Authentication.
On June 28th, the Federal Financial Institutions Examination Council ("FFIEC") issued a supplement to the "Authentication in an Internet Banking Environment" guidance, issued in October 2005. The supplement reinforces the risk-management framework described in the original guidance and updates the FFIEC member agencies' supervisory expectations regarding customer authentication, layered security, and other controls in the increasingly hostile online environment. The FFIEC member agencies have directed examiners to formally assess financial institutions under the enhanced expectations outlined in the supplement beginning in January 2012. FFIEC Press Release.
Federal Deposit Insurance Corporation
  • FDIC Votes to Adopt Clawback Rule.
On July 6th, Reuters reported that the FDIC has voted to adopt new rules governing when and how it will "clawback" compensation from executives of failed financial institutions. The FDIC will employ a negligence standard to determine liability. Clawbacks.
  • FDIC Update.
On July 6th, MarketWatch reported that the FDIC has delayed finalizing the "living wills" provisions of the Dodd-Frank Act. Those provisions would require large financial institutions to create draft plans for their resolution in the event of failure. The agency is delaying action, in part, to coordinate its efforts with those of other countries. It did adopt a rule on creditor priority in the event of a financial institution's failure. Meeting.
Federal Reserve Board
  • Federal Reserve Board Releases Report on College Credit Card Agreements.
On July 7th, the Federal Reserve Board released a report containing 2010 payment and account information about over 1,000 agreements between institutions of higher education or affiliated organizations and credit card issuers. The Board also updated an online database that includes the full text of each agreement that was in effect during 2010. Federal Reserve Board Press Release.
  • Federal Reserve Board and FTC Issue Credit Score Disclosure Rules.
On July 6th, the Federal Reserve Board and the Federal Trade Commission issued final rules implementing the credit score disclosure requirements of the Dodd-Frank Act. If a credit score is used in setting material terms of credit or in taking adverse action, the statute requires creditors to disclose credit scores and related information to consumers in notices under the Fair Credit Reporting Act ("FCRA"). The final rules amend Regulation V (Fair Credit Reporting) to revise the content requirements for risk-based pricing notices, and to add related model forms that reflect the new credit score disclosure requirements. The final rules also amend certain model notices in Regulation B (Equal Credit Opportunity), which combine the adverse action notice requirements for Regulation B and the FCRA, to reflect the new credit score disclosure requirements. The new rules will be effective 30 days after publication in the Federal Register, which is expected soon. Federal Reserve Board Press Release.
  • Federal Reserve Board Issues Debit Card Swipe Fee Rules.
On June 29th, the Federal Reserve Board issued a final rule establishing standards for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions. As required by the Dodd-Frank Act, the final rule establishes standards for assessing whether debit card interchange fees received by debit card issuers are reasonable and proportional to the costs incurred by issuers for electronic debit transactions. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction will be the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. This provision regarding debit card interchange fees is effective October 1, 2011. The Board also approved an interim final rule that allows for an upward adjustment of no more than 1 cent to an issuer's debit card interchange fee if the issuer develops and implements policies and procedures reasonably designed to achieve the fraud-prevention standards set out in the interim final rule. If an issuer meets these standards and wishes to receive the adjustment, it must certify its eligibility to receive the adjustment to the payment card networks in which it participates. Comments on the interim final rule should be submitted on or before September 30, 2011. The fraud-prevention adjustment is effective on October 1, 2011. Federal Reserve Board Press Release (with links to Board member statements and related documents). The Board's action occurred on the same day as the Eighth Circuit's rejection of an attempt to enjoin the Board from implementing the debit card swipe fee rules. See below.
  • Federal Reserve Board Announces Extension of Liquidity Swap Arrangements.
On June 29th, the Federal Reserve Board announced that it, along with the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank, are extending existing temporary U.S. dollar liquidity swap arrangements through August 1, 2012. The Bank of Japan will consider an extension at its next Monetary Policy Meeting. Federal Reserve Board Press Release.
Office of the Comptroller of the Currency
  • OCC Publishes Newsletter on Solar Energy Investment.
On July 6th, the OCC published an online newsletter providing guidance to national banks seeking to invest in solar energy projects under the national bank public welfare investment authority. OCC Press Release.
  • OCC Extends Comment Deadline for Deposit-Related Proposed Guidance.
On July 1st, the OCC extended to August 7, 2011, the period in which comments may be submitted on its June 8, 2011 proposed guidance for deposit-related consumer credit products. OCC Press Release.
  • OCC Issues Guidance To Banks Regarding Foreclosure Practices.
On June 30th, the OCC published a Bulletin clarifying its expectations for the oversight and management of mortgage foreclosure activities by national banks. OCC Bulletin 2011-29 stresses that banks engaged in mortgage servicing must ensure compliance with foreclosure laws, conduct foreclosures in a safe and sound manner, and establish responsible business practices that provide accountability and appropriate treatment of borrowers. OCC Press Release.
  • OCC Community Development Investments Newsletter Discusses Small Business Lending.
On June 30th, the OCC published a Community Development Investments electronic newsletter on small business lending. The newsletter describes a range of new federal initiatives created by the Small Business Jobs Act as well as additional enhancements to existing credit support programs of the Small Business Administration, all designed to provide new sources of capital to help banks provide financing to small businesses. OCC Press Release.
  • OCC Issues Bulletin on Prepaid Access.
On June 29th, the OCC issued a Bulletin on prepaid access programs. National banks that offer consumers access to prepaid funds are exposed to a variety of risks, including potential fraud and money laundering, due to the complexity associated with the design, delivery, and increased functionality of prepaid access products. When such products or any components supporting them are outsourced to a third-party service provider, the risks are often more challenging to manage. The bulletin provides guidance to banks to ensure they develop and implement a comprehensive risk management program that reflects the nature and complexity of prepaid access products. OCC Press Release.
  • OCC Publishes Data on Median Family Incomes.
On June 29th, the OCC published U.S. Census Bureau and 2011 U.S. Department of Housing and Urban Development estimated median family incomes for metropolitan statistical areas, metropolitan divisions, and nonmetropolitan portions of each state. The data are used to determine 2011 borrower income levels in Community Reinvestment Act performance evaluations. OCC Bulletin.

Treasury Department Developments [Top]
  • FinCEN Advisory on Syria.
On July 8th, the Financial Crimes Enforcement Network issued an Advisory to U.S. financial institutions to take reasonable risk-based steps with respect to the potential increased movement of assets that may be related to the current unrest in Syria. U.S. financial institutions are reminded of their requirement to apply enhanced scrutiny for private banking accounts held by or on behalf of senior foreign political figures and to monitor transactions that could potentially represent misappropriated or diverted state assets, proceeds of bribery or other illegal payments, or other public corruption proceeds.
  • Treasury Department Announces Small Business Lending Fund Recipients.
On July 7th, the Treasury Department announced that six community banks received a total of $123 million as part of the first wave of capital provided by the Small Business Lending Fund ("SBLF"). The SBLF, which was established as part of the Small Business Jobs Act, encourages community banks to increase their lending to small businesses, helping those companies expand their operations and create new jobs. Treasury Department Press Release.
  • CFPB and Military JAGs Announce Joint Statement of Principles.
On July 6th, the Consumer Financial Protection Bureau ("CFPB") and the Judge Advocate Generals of the United States Army, Marine Corps, Navy, Air Force, and Coast Guard announced an agreement on a Joint Statement of Principles to provide stronger protections for service members and their families in connection with consumer financial products and services. Treasury Department Press Release.
  • Libyan Sanctions Regulations.
On July 1st, the Treasury Department's Office of Foreign Assets Control ("OFAC") issued regulations with respect to Libya that implement Executive Order 13566 of February 25, 2011. OFAC intends to supplement these regulations with a more comprehensive set of regulations, which may include additional interpretive and definitional guidance and additional general licenses and statements of licensing policy. 76 FR 38562.
  • Alphabetical List of those Subject to Iranian Sanctions.
On June 30th, the Treasury Department's Office of Foreign Assets Control published an updated, alphabetical listing of those subject to the federal government's Iranian sanctions. 76 FR 38534.
  • OFAC Republishes Amended Western Balkans Stabilization Regulations.
On June 29th, the Treasury Department's Office of Foreign Assets Control published in its entirety the Western Balkans Stabilization Regulations, part 588 of 31 CFR Chapter V, as amended. The regulations are effective immediately. 76 FR 38002.
  • Increase in SARs Attributable to MBS Repurchase Demands.
On June 28th, the Financial Crimes Enforcement Network ("FinCEN") published its First Quarter 2011 Mortgage Loan Fraud ("MLF") analysis. The number of MLF suspicious activity reports increased by 31 percent in the first quarter of 2010. FinCEN attributes the increase to large mortgage lenders conducting additional reviews after receiving demands to repurchase poorly performing mortgage loans. FinCEN Press Release.
  • Unblocking Notices.
On June 28th, the Treasury Department's Office of Foreign Asset Control ("OFAC") unblocked the assets of Shukri Mohammed Ghanem, the former Libyan oil minister whose property and interest in property had previously been subject to the federal government's Libyan sanctions. OFAC also unblocked the assets of two individuals and four entities whose property and interests in property had been subject to the federal government's Zimbabwean sanctions.
  • Treasury Department Questions OCC Preemption Proposal.
On June 28th, Reuters reported that the Treasury Department's General Counsel sent a letter to the acting Comptroller of the Currency criticizing the OCC's proposed rule implementing the Dodd-Frank Act's preemption provisions. The Treasury Department's General Counsel believes that the OCC's proposal interprets the preemption authority too broadly. Letter.

Commodity Futures Trading Commission [Top]
  • CFTC Votes to Adopt Five New Rules.
On July 7th, the CFTC voted to adopt five final rules implementing provisions of the Dodd-Frank Act. The rulemakings relate to:
  • Anti-fraud and anti-manipulation;
  • Large trader reporting for swaps on physical commodities;
  • Definition of "agricultural commodity;"
  • Preventing certain business affiliate marketing and establishing other consumer information protections under the Fair Credit Reporting Act; and
  • Expanding scope of privacy protections for consumer financial information under the Gramm-Leach-Bliley Act.
See Meeting Webpage (with links to Commissioner remarks and summaries of rulemakings). See also Reuters.
  • CFTC Releases Net Position Changes Data.
On July 5th, the CFTC announced the release of two new data sets regarding the commodity futures markets. The new reports, entitled "Large Trader Net Position Changes" and "Trading Account Net Position Changes," can be found on the agency's website. The new data provides a view of the amount of trading that results in daily net position changes. The balance of trading is due to day trading or trading in calendar spreads. The data shows that, in many cases, less than 20 percent of average daily trading volume results in traders changing their net long or net short all-futures-combined positions. The "Trading Account Net Position Changes" data relies on transaction data provided to the CFTC by the exchanges. This data identifies, for a given week, the average-daily net position change at the trading-account level. The data covers 28 physical and financial futures markets from April 2010 through May 2011. The CFTC has requested comments on the usefulness of these reports and ways to improve them. CFTC Press Release.
  • CFTC Drafts Relief from Upcoming Dodd-Frank Act Effective Dates.
On June 30th, the CFTC posted the draft of a staff "no-action" letter that would supplement exemptive relief recently proposed by the CFTC. The June 17, 2011 proposed exemptive relief and staff draft no-action letter would provide greater clarity during the transition to the new regulatory framework for swaps in light of the July 16, 2011 general effective date in Title VII of the Dodd-Frank Act. The draft no-action letter provides that the Division of Market Oversight and the Division of Clearing and Intermediary Oversight would not recommend that the CFTC commence an enforcement action against any person for failure to comply with certain Dodd-Frank Act swaps-related requirements. The proposed staff no-action letter would not limit the CFTC's applicable anti-fraud and anti-manipulation authority. CFTC Press Release.
  • CFTC Staff Allows Futures Contract Based on the FTSE Bursa Malaysia Kuala Lumpur Composite Index.
On June 28th, the CFTC's Office of General Counsel granted the request of Bursa Malaysia Derivatives Berhad for no-action relief in connection with the offer and sale in the United States of its futures contract based on the FTSE Kuala Lumpur Composite Index ("KCLI"). The KLCI is a broad-based, free-float, market-capitalization-weighted, composite index of 30 highly capitalized and actively traded stocks currently listed on the Main Board of the Bursa Securities Berhad. The Index provides a performance benchmark for the Malaysian equity market. As of May 17, 2011, the total adjusted market capitalization of the KLCI was approximately US $265 billion. CFTC Letter No. 11-03; CFTC Press Release.

Securities and Exchange Commission [Top]
Regulatory Orders
  • Amendment to Rule Filing Requirements for Dually-Registered Clearing Agencies.
On July 7th, the SEC adopted an interim final rule amending Rule 19b-4 under the Securities Exchange Act to expand the list of categories that qualify for summary effectiveness under Exchange Act Section 19(b)(3)(A) to include any matter effecting a change in an existing service of a registered clearing agency that both primarily affects the futures clearing operations of the clearing agency with respect to futures that are not security futures, and does not significantly affect any securities clearing operations of the clearing agency or any related rights or obligations of the clearing agency or persons using such service. The SEC also made a corresponding technical modification to the General Instructions for Exchange Act Form 19b-4. The amendments to Rule 19b-4 and Form 19b-4 are intended to streamline the rule filing process in areas involving certain activities concerning non-security products that may be subject to overlapping regulation as a result of, in part, certain provisions under Section 763(b) of the Dodd-Frank Act that would deem some clearing agencies to be registered with the SEC as of July 16, 2011. The interim final rule is effective July 15, 2011. Comments should be submitted on or before September 15, 2011. SEC Release No. 34-64832.
  • SEC Provides Additional Guidance, Interim Relief and Exemptions for Security-Based Swaps.
On July 1st the SEC provided additional guidance to clarify which U.S. securities laws will apply to security-based swaps starting July 16, 2011, the effective date of Title VII of the Dodd-Frank Act. The SEC approved an order granting temporary relief and interpretive guidance to make clear that a substantial number of the requirements of the Securities Exchange Act applicable to securities will not apply to security-based swaps when the revised definition of "security" goes into effect on July 16. The SEC also provided temporary relief from provisions of U.S. securities laws that allow the voiding of contracts made in violation of those laws. In addition, the SEC approved an interim final rule providing exemptions from the Securities Act, Trust Indenture Act, and other provisions of the federal securities laws to allow certain security-based swaps to continue to trade and be cleared as they have been prior to the enactment of the Dodd-Frank Act. That interim relief will extend until the SEC adopts rules further defining "security-based swap" and "eligible contract participant." SEC Press Release.
  • SEC Issues Exemptive Order for Security-Based Swap Clearing Agencies.
On July 1st, the SEC issued an exemptive order granting a temporary, conditional exemption from the clearing agency registration requirements under Section 17A(b) of the Securities Exchange Act for entities providing certain services for security-based swaps. The exemption will be effective until the compliance date for the final rules relating to the registration of clearing agencies that clear security-based swaps pursuant to Sections 17A(i) and (j) of the Exchange Act. SEC Release No. 34-64796.
  • SEC Extends Temporary Exemptions for CDS Central Counterparties.
On July 1st, the SEC extended to April 16, 2012, the expiration dates in its temporary rules that provide exemptions under the Securities Act, the Securities Exchange Act, and the Trust Indenture Act for certain credit default swaps, in order to continue facilitating the operation of one or more central counterparties for those credit default swaps as the agency considers rules implementing the clearing provisions of the Dodd-Frank Act. SEC Release No. 33-9232.
  • SEC Delegates Whistleblower Disclosure Authority to Enforcement Director.
On June 30th, the SEC amended its rules to delegate authority to the Director of the Division of Enforcement to disclose information that could reasonably be expected to reveal the identity of a whistleblower to those persons to whom disclosure may be made without loss of confidentiality under the whistleblower provisions of the Dodd-Frank Act. The amendments are effective upon publication in the Federal Register, which is expected during the week of July 4. SEC Release No. 34-64778.
  • Compliance Date for Market Access Rules is Extended.
On June 27th, the SEC extended to November 30, 2011, the compliance date by which broker-dealers must comply with certain provisions of new Rule 15c3-5. The rule requires broker-dealers with access to trading securities directly on an exchange or alternative trading system to establish, document, and maintain a system of risk management controls and supervisory procedures that is reasonably designed to systematically limit the financial exposure of the broker-dealer that could arise as a result of market access, and ensure compliance with all regulatory requirements that are applicable in connection with market access. The compliance date is extended for all of the requirements of Rule 15c3-5 for fixed income securities. In addition, the requirements of Rule 15c3-5(c)(1)(i), which requires the risk management controls and supervisory procedures reasonably designed to prevent the entry of orders that exceed appropriate pre-set credit or capital thresholds, is extended for all securities. The compliance date remains July 14, 2011 for all provisions of Rule 15c3-5 not subject to this limited extension. SEC Release No. 34-64748. See also NYSE Information Memo 11-18.
Proposed Rules
  • PCAOB Proposes Interim Inspection Program for Auditors of Broker-Dealers.
On July 6th, the SEC requested comment on the PCAOB's proposed temporary rule calling for an interim inspection program related to audits of brokers and dealers. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of July 11. SEC Release No. 34-64814. See also PCAOB Press Release (announcing adoption of interim inspection program, with links to related documents).
  • PCAOB Proposes Accounting Support Fee for Broker-Dealers.
On July 6th, the SEC requested comment on the PCAOB's proposed rules relating to the assessing and collecting of a portion of its accounting support fee from brokers and dealers to fund PCAOB oversight of audits of brokers and dealers. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of July 11. SEC Release No. 34-64816. See also PCAOB Press Release (announcing adoption of interim inspection program, with links to related documents).
  • SEC Proposes Business Conduct Rules for Swap Dealers and Participants.
On June 29th, the SEC published for comment proposed rules that would impose certain business conduct standards upon security-based swap dealers and major security-based swap participants when those parties engage in security-based swap transactions. The proposed rules would require security-based swap dealers and major security-based swap participants to communicate in a fair and balanced manner and make certain disclosures, including conflicts of interest and material incentives to potential counterparties. Comments should be submitted on or before August 29, 2011. SEC Press Release.
Other Developments
  • SEC Roundtable on IFRS.
On July 7th, the SEC held a roundtable discussion on the integration of International Financial Reporting Standards ("IFRS") with U.S. GAAP. See SEC Press Release. MarketWatch reported that commenters suggested a go-slow approach. Comments. Bloomberg reported that SEC Chairman Mary L. Schapiro said that discussions will proceed into next year. Timeline. New York Times columnist Floyd Norris wrote that "condorsement," which blends the acceptance of IFRS with convergence of IFRS with GAAP, is the most likely outcome. Condorsement.
  • Inspector General Refers SEC Leasing Issue to Justice Department.
On July 6th, Reuters reported that the SEC's Office of the Inspector General ("OIG") has asked the Justice Department to examine a document purporting to support a decision to lease additional office space for SEC expansion. However, the OIG believes that the document may have been backdated. Referral.
  • Inspector General Releases Report on Exemptive Order and No-Action Compliance.
On June 30th, the SEC's Office of the Inspector General released a report on the SEC's enforcement of conditions that it requires when granting exemptive or no-action relief. The report concludes that the SEC lacks a coordinated process for reviewing compliance with conditions and representations required by the orders and letters. To achieve effective monitoring, the SEC should engage in increased coordination with the Office of Compliance Inspections and Examinations. Inspector General's Report.
  • SEC Examining Non-Traded REITs.
On June 29th, the Wall Street Journal reported that the SEC is asking non-traded Real Estate Investment Trusts to more fully disclose to investors how they value a trust's holdings. REITs.
  • Commissioner Casey Discusses Federal Activism and Prescriptiveness.
On June 29th, SEC Commissioner Kathleen L. Casey discussed the recent trend toward shareholder empowerment. Policy choices made by Congress and the Commission concerning, inter alia, proxy access, whistleblower bounties, listing standards, and compensation clawback reflect distrust at the federal policymaker level in the effectiveness of state-law mechanisms to check public companies. Casey Remarks.
  • Enforcement Director Addresses Broker-Dealers.
On June 28th, Reuters summarized the remarks of SEC Enforcement Director Robert Khuzami concerning the valuation of initial public offerings. Khuzami said that the agency will be examining the allocation practices employed in recent offerings. IPOs. The Wall Street Journal reported that Khuzami also explained why CEOs have not been cited in enforcement proceedings concerning structured products. Most decisions concerning structured products are made below the CEO level. Structured Products.
  • Reserves Reservations.
On June 27th, the New York Times reported that the SEC's 2008 rules revising the way oil and gas producers estimate their reserves have led some to worry that the industry is now overestimating their holdings. Reserves.

Exchanges and Self-Regulatory Organizations [Top]
Financial Industry Regulatory Authority
  • FINRA to Conduct Surveys on Qualification Exams.
On June 28th, FINRA advised that, starting June 30, 2011, it will conduct surveys in anticipation of its updating the Series 6, 16, 24 and 26 qualification examinations. Through these surveys FINRA intends to gather information from currently registered individuals regarding their roles, responsibilities, and job functions, and use the information to update the related qualification exams. FINRA Information Notice.
  • FINRA Extends Effective Date for Rules Regarding Non-Margin Eligible Securities.
On June 27th, FINRA deferred to October 3, 2011, the effective date announced in Regulatory Notice 11-16 regarding margin requirements and treatment of non-margin eligible equity securities. In addition, FINRA is revising a provision regarding the day trading of non-margin eligible equity securities. FINRA Regulatory Notice 11-30.
International Securities Exchange
  • SEC Approves Amendment Regarding Complex Orders.
On July 5th, the SEC approved the International Securities Exchange's proposal to allow complex orders to be entered in the Price Improvement Mechanism. SEC Release No. 34-64805.
Municipal Securities Rulemaking Board
  • Changes to Study Outline for Series 51 Exam are Immediately Effective.
On July 5th, the SEC granted immediate effectiveness to the Municipal Securities Rulemaking Board's revisions to the Study Outline for the Municipal Fund Securities Limited Principal Qualification Examination (Series 51). The implementation date of the rule change is August 1, 2011. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of July 11. SEC Release No. 34-64804.
New York Stock Exchange
  • SEC Designates Longer Period to Consider Proposed Changes to the Listed Company Manual.
On July 5th, the SEC designated a longer period for SEC action on the New York Stock Exchange's proposal to add new Section 907.00 to the Listed Company Manual, which sets forth certain complimentary products and services that are offered to currently and newly listed issuers. The SEC will either approve or disapprove or institute proceedings to determine whether to disapprove the proposal by August 21, 2011. SEC Release No. 34-64809.
  • NYSE Reminds of Policies Governing Conduct.
On July 1st, NYSE Euronext reminded members of the policies governing conduct on New York Stock Exchange premises, including the NYSE and NYSE Amex Equities trading floor. NYSE Information Memo 11-20.
  • NYSE Announces New Circuit-Breaker Collar Trigger Levels.
On June 30th, the New York Stock Exchange announced the new circuit-breaker collar trigger levels for third-quarter 2011, effective July 1, 2011. NYSE Press Release; NYSE Information Memo 11-19.
  • NYSE Members Reminded of Obligation to Update FCM Information.
On June 27th, NYSE Regulation reminded members of the obligation to confirm and/or update their list of Futures Commission Merchants ("FCMs") on a semi-annual basis. All individuals engaged in program trading of index futures should be included on the list of FCMs. NYSE Regulation Information Memo 11-17.

Judicial Opinions [Top]
  • Aiding and Abetting Securities Fraud is Not a RICO Predicate Act.
On July 7th, the Second Circuit dismissed Racketeer Influenced and Corrupt Practices Act ("RICO") claims asserted by victims of Bernie Madoff's Ponzi scheme against the banks through which Madoff allegedly conducted his fraud. The RICO Amendment to the Private Securities Litigation Reform Act precludes plaintiff's claim. That amendment bars a civil RICO claim premised on predicate acts of securities fraud, including mail or wire fraud, even where the plaintiff could not bring a private securities fraud aiding and abetting claim against the same defendants. MLSMK Investment Co. v. JP Morgan Chase & Co. Reuters noted that a similar case has been filed in bankruptcy court by the trustee for the Securities Investor Protection Corporation against the same banks. SIPC Trustee.
  • Predatory Lending Claim Reinstated.
On July 7th, the First Circuit reinstated a homeowner's lawsuit against his lender, Countrywide Home Loans, for unjust enrichment and violation of the Massachusetts consumer protection law. Genuine issues of material fact exist regarding whether Countrywide fraudulently inflated the homeowner's occupation title and income so that it could qualify him for a mortgage loan for which he would not have qualified and which Countrywide knew he could not repay. Frappier v. Countrywide Home Loans, Inc.
  • Regulatory Investigations into MBIA's Accounting Practices were Covered by its D&O Policies.
On July 1st, the Second Circuit held that directors and officers liability insurance policies issued by defendants covered costs incurred by plaintiff, MBIA, as a result of SEC and New York Attorney General investigations into MBIA's accounting practices. The policies also covered the costs incurred by MBIA's special litigation committee formed to investigate shareholder demands and the independent consultant examining two transactions questioned by the SEC. SEC v. MBIA Inc. v. Federal Insurance Co.
  • Federal Reserve Board can Implement Debit Card Swipe Fee Limits.
On June 29th, the Eighth Circuit allowed the Federal Reserve Board to implement rules limiting debit card swipe fees as required by the Dodd-Frank Act. Petitioners challenged the limits on due process and equal protection grounds and sought to preliminarily enjoin the Board from implementing the rules. The district court denied the motion holding that petitioner is unlikely to prevail on the merits and the Eighth Circuit affirmed. TCF National Bank v. Bernanke.
  • Ninth Circuit Rules for BP in Securities Fraud Case.
On June 29th, the Ninth Circuit held that an issuer's breach of a contractual promise of specific future conduct made in conjunction with SEC reporting requirements is not a sufficient foundation for a securities fraud action. Plaintiffs alleged that BP contractually promised to prudently conduct its oil pipeline operations and that those contracts were attached as exhibits to SEC filings. According to the plaintiffs, BP knowingly failed to prudently conduct its operations, making its contractual statements fraudulent misrepresentations. Disagreeing, the Ninth Circuit held that the instant contractual statement was forward looking, not a representation of current fact. Nor did the statement's subsequent periodic filing with the SEC certify compliance. The statement's terms were broad and evolving. Reese v. BP Exploration (Alaska) Inc.
  • Holders of Enron's Commercial Paper Prevail over Enron's Creditors.
On June 28th, the Second Circuit held that payments made by Enron to redeem its commercial paper prior to maturity were not avoidable under the Bankruptcy Code. In doing so, the Court answers in the affirmative an issue of first impression among the appellate courts: whether the Bankruptcy Code's safe harbor, 11 U.S.C. Sec. 546(e), which shields settlement payments from avoidance in bankruptcy, extends to an issuer's payments to redeem its commercial paper prior to maturity. In re: Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V.
  • Lender's Violations of Federal Reserve Board Regulations can be Asserted as Affirmative Defenses.
On June 28th, the Seventh Circuit vacated a summary judgment enforcing promissory notes against borrowers who used the loan proceeds to participate in their employer's stock incentive program. The borrowers can assert the lender's violation of Federal Reserve Board Regulations G and U, which govern loans made for the purchase of securities, as affirmative defenses. The Court further found that issues of material fact precluded the entry of summary judgment on the borrowers' affirmative defense that the transactions violated the securities laws. Costello v. Grundon.
  • Court Dismisses SEC Enforcement Action for Improper Venue.
On June 28th, the D.C. Circuit ordered the district court to dismiss an SEC enforcement action, without prejudice, for lack of venue. In doing so, it reversed a jury's verdict finding that defendant aided and abetted his employer's securities fraud. It rejected the SEC's co-conspirator theory of venue since defendant's alleged securities violation did not occur within the District of Columbia. The only act that occurred within the District was the filing of a Form 10-Q by defendant's employer, and that act was not attributed to defendant. SEC v. Johnson.
  • Morgan Keegan Wins SEC Lawsuit.
On June 28th, the Northern District of Georgia entered summary judgment in favor of Morgan Keegan in the SEC's lawsuit alleging that Morgan Keegan made fraudulent misrepresentation in its marketing and sale of auction rate securities ("ARS"). Morgan Keegan made adequate written disclosure concerning the risks associated with ARS. The court found that the SEC's reliance on the statements of four investors who allegedly received contrary oral representations was inadequate, and that the SEC cannot base a claim on behalf of all ARS investors on the experiences of four people. SEC v. Morgan Keegan & Co. See also Wall Street Journal.
  • Judge Rules against Madoff Feeder Fund Investors.
On June 28th, the Bankruptcy Court overseeing the liquidation of Bernard Madoff's broker-dealer ruled that investors in funds that in turn invested with Madoff are not claimants within the meaning of the Securities Investor Protection Act. SIPC v. Bernard L. Madoff Investment Securities LLC. See also Reuters. On June 28th, the New York Times published an article on Judge Denny Chin, who sentenced Madoff to 150 years in prison. Sentence.

Rules Effective Dates [Top]
  • Beneficial Ownership Reporting Requirements and Security-Based Swaps - Effective July 16, 2011.
The SEC readopted, without change, certain portions of Rules 13d-3 and 16a-1, thus preserving the application of existing beneficial ownership rules to persons who purchase or sell security-based swaps after the effective date of new Section 13(o) of the Securities Exchange Act of 1934. Section 13(o) provides that a person shall be deemed a beneficial owner of an equity security based on the purchase or sale of a security-based swap only to the extent that the SEC adopts rules after making certain determinations with respect to the purchase or sale of security-based swaps. After making the necessary determinations, the SEC readopted the relevant portions of Rules 13d-3 and 16a-1 to confirm that, following the July 16, 2011, statutory effective date of Section 13(o), persons who purchase or sell security-based swaps will remain within the scope of these rules to the same extent as they are now. 76 FR 34579.
  • Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers - Effective July 21, 2011.
The SEC is adopting rules to implement new exemptions from the registration requirements of the Advisers Act for advisers to certain privately offered investment funds; these exemptions were enacted as part of the Dodd-Frank Act. As required by Title IV of the Dodd-Frank Act -- the Private Fund Investment Advisers Registration Act of 2010 -- the new rules define "venture capital fund" and provide an exemption from registration for advisers with less than $150 million in private fund assets under management in the United States. The new rules also clarify the meaning of certain terms included in a new exemption from registration for "foreign private advisers." Release No. IA-3222.

Winston & Strawn Speaking Engagements and Publications [Top]
  • Winston Hosts Briefing on Dodd-Frank's Impact on Energy and Commodities Traders.
Winston & Strawn attorneys Peter Malyshev and Ray Wuslich will lead a practical, interactive discussion regarding the Dodd-Frank Act of 2010 impact on energy and commodities traders on July 13, 2011 in the firm's New York office. Event.

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