Financial Services Update______September 19, 2011
Volume 6, No. 34



IN THIS ISSUE

Insights from Winston & Strawn

In the News

Banking Agency Developments

Treasury Department Developments

Commodity Futures Trading Commission

Exchanges and Self-Regulatory Organizations

Judicial Opinions

Rules Effective Dates

Winston & Strawn Speaking Engagements and Publications


Insights from Winston & Strawn [Top]

On September 15, 2011, the European Commission published its latest interim forecast, which presents its assessment of economic prospects in the Euro area and the whole of the EU for 2011. After a strong first quarter, and a considerable softening in the second, the new projections for the remainder of the year imply a slower recovery than expected at the time of the spring forecast. Downside risks to the growth prospects have increased, primarily due to concerns about the unresolved Euro-area crisis and its repercussions on financial markets' health, as well as the global economic slowdown.
The report was published just one day after José Manuel Barroso, current President of the European Union, reported before the European Parliament on the economic crisis and the euro, urging European governments to shift from intentions to actions and to implement the package agreed to on July 21, 2011, by all Euro-area heads of state and government, the President of the European Commission, and the President of the European Central Bank, in the presence of the International Monetary Fund. At that meeting, a unique solution for the crisis in Greece was found involving a partnership between the official and private creditors. An agreement was also reached on ground-breaking measures aimed at reinforcing the Euro area's systemic response to the crisis by enhancing the effectiveness of the European Financial Stability Facility (EFSF), which is now authorized to intervene in a precautionary way and on the secondary markets.
Concurrently, the European Council confirmed on September 16, 2011, that the Finance Ministers of the EU Member States had agreed on the so-called six-pack (a package comprising five regulations and one directive) initially presented by the EU Commission in September 2010 in an attempt to improve budgetary discipline in the Member States and strengthen stability of the EU economy. Four of six proposals deal with fiscal issues, including a reform of both preventive and corrective part of the stability and growth pact. A new directive on requirements for budgetary frameworks will ensure that national budgetary frameworks reflect the objective of increasing fiscal discipline in the EU. Moreover, the surveillance of the Member States' economic policies will be broadened through introduction of a mechanism for the prevention and correction of excessive macroeconomic imbalances. A new "excessive imbalance procedure" with corresponding potential sanctions for non-compliance will be established. The European Parliament will be required to vote on the package at the September plenary session, with the ECOFIN Council formally adopting it in early October.
Despite these measures, markets seem to bet against the Eurozone's ability to face the current turmoil, bringing an additional level of uncertainty to the equation. Attorneys in our four European offices continue to monitor these developments as they unfold and will report regularly on the evolution of the European legal framework as a result of the political moves by the European institutions.
In the News [Top]
  • Regulators Examine Banks' Valuation of Their Assets.
On September 15th, Bloomberg reported that the Federal Reserve Board and OCC are examining bank asset valuations to determine whether they are holding sufficient loss reserves. Regulators are particularly focused on second mortgages where the homeowner is already delinquent on the first mortgage. Examinations.
  • House Holds Hearings on SEC Fixes.
On September 15th, the House Financial Services Committee held hearings entitled: "Fixing the Watchdog: Legislative Proposals to Improve and Enhance the Securities and Exchange Commission." Issues discussed at the hearings included proposed H.R. 2308, the SEC Regulatory Accountability Act, and the SEC Modernization Act of 2011. The SEC Regulatory Accountability Act would require the SEC to engage in additional cost-benefit analysis before promulgating any new regulation. The SEC Modernization Act would reorganize and restructure the agency. The Washington Post reported that former SEC Chairman Harvey Pitt blasted both proposals, noting that the SEC Modernization Act would cause some divisions to lose critical independence and calling the Regulatory Accountability Act cumbersome and imprudent. He also had sharp words for SEC Inspector General David Kotz. Pitt Remarks. See also Hearing Webpage.
  • House Subcommittee Holds Hearings on Crowd Funding.
On September 15th, the House Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs held hearings entitled "Crowd Funding: Connecting Investors and Job Creators." Hearing Webpage. The Wall Street Journal reported that Meredith Cross, SEC Director, Division of Corporation Finance, said that there could be benefits to crowd funding. See also Cross Prepared Remarks.
  • Federal Reserve Board Governor Questions the Benefits of Big Banks.
On September 15th, Reuters summarized the remarks of Federal Reserve Board Governor Daniel Tarullo. Tarullo questioned the benefits of large financial institutions, suggesting that there are limits to the economies of scale that they may provide. See Tarullo Remarks.
  • Living Wills.
On September 13th, the FDIC voted to approve a final rule to be issued jointly with the Federal Reserve Board that would implement Section 165(d) of the Dodd-Frank Act. That provision requires bank holding companies with assets of $50 billion or more and companies designated as systemic by the Financial Stability Oversight Council to report periodically to the FDIC and the Federal Reserve the company's plan for its rapid and orderly resolution in the event of material financial distress or failure. The Federal Reserve will consider whether to adopt the rule shortly. FDIC Press Release. The FDIC also adopted an Interim Final Rule that would require an insured depository institution with $50 billion or more in total assets to submit periodic contingency plans to the FDIC for resolution in the event of the financial institution's failure. See Resolution Plan Work Stream; FDIC Press Release on Insured Institutions.
  • Labor Department Issues Technical Release on the Use of Electronic Media to Satisfy ERISA Disclosure Requirements.
On September 13th, the Department of Labor's Employee Benefits Security Administration issued Technical Release 2011-03 which sets forth an interim policy regarding the use of electronic media to satisfy disclosure requirements under the department's final participant-level fee disclosure regulation. The participant fee disclosure regulation requires employers to disclose more information about plan and investment costs to workers who direct their own investments in ERISA-covered 401(k) and other individual account retirement plans. Under the final rule, plans generally have until at least May 31, 2012 to start giving better information on 401(k) and similar plan fees and expenses. Labor Department Press Release.
  • Minnesota Attorney General Opposes Broad Settlement.
On September 13th, Bloomberg reported the Minnesota Attorney General has joined the growing number of state attorneys general who contend that a settlement with banks regarding home mortgage servicing and foreclosure practices should not waive claims concerning the banks' issuance of mortgage-backed securities. Attorneys General.
  • Marshals Service Handling of Assets Criticized by Justice Department.
On September 13th, the Justice Department issued a report critical of the Marshals Service's handling of Bernard Madoff's seized assets. See also Reuters.

Banking Agency Developments [Top]
  • OCC Issues July Cost of Funds Reports.
On September 15th, the OCC issued the monthly Cost of Funds reports (current and historical), which provide information about funding costs, as of July 31, 2011, for institutions formerly regulated by the Office of Thrift Supervision. OCC Press Release.
  • FDIC Announces Early Closure of Midwest Temporary Satellite Office.
On September 14th, the FDIC announced that it will close its Midwest Temporary Satellite Office in Schaumburg, Illinois on September 28, 2012. FDIC Press Release.
  • OCC Encourages Firms to Work with Customers Affected by Drought and Wildfires.
On September 13th, the OCC issued a Bulletin encouraging national banks and federal savings associations to work with customers affected by the wild fires and drought in the southwest United States.
  • Federal Reserve Board Asks for More Information about Proposed Merger.
On September 12th, Reuters reported that the Federal Reserve Board has asked Capital One Financial Corp. for additional information concerning the bank's proposed acquisition of ING Direct. Questions.
  • OCC Issues Bulletin on Retail Forex and Federal Savings Associations.
On September 12th, the OCC issued a Bulletin on its interim final rule applying retail foreign exchange transaction regulations to federal savings associations.
  • OCC Issues Bulletin on Revised Enforcement Policy.
On September 9th, the OCC, in accordance with the Dodd-Frank Act, revised the scope of its Policies & Procedures Manual ("PPM") for taking appropriate enforcement action, to include federal savings associations. The revised PPM will provide for consistent and equitable enforcement standards for national banks and federal savings associations. OCC Bulletin.
Treasury Department Developments [Top]
  • Treasury Department Designates Cocaine and Bulk Cash Trafficking Coordinator.
On September 15th, the Treasury Department's Office of Foreign Assets Control announced the designation of Mexican national Alfredo Vasquez Hernandez (a.k.a. Alfredo Compadre) pursuant to the Foreign Narcotics Kingpin Designation Act for providing support to and acting on behalf of the Sinaloa Cartel and its leader, Joaquin Guzman Loera (a.k.a.Chapo Guzman). As a result of the action, U.S. persons are prohibited from conducting financial or commercial transactions with the designees and any assets they may have under U.S. jurisdiction are frozen. Treasury Department Press Release.
  • FinCEN Proposes Mandatory E-Filing of BSA Reports.
On September 14th, the Financial Crimes Enforcement Network published for comment a proposal that FinCEN reports required under the Bank Secrecy Act be filed electronically beginning June 30, 2012. Comments should be submitted within 60 days after publication in the Federal Register, which is expected during the week of September 19. FinCEN Press Release.
  • Small Business Lending Fund.
On September 14th, the Treasury Department announced that an additional 61 community banks received a total of $608 million as part of the next wave of funding provided through 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. Treasury Department Press Release.

Commodity Futures Trading Commission [Top]
  • CFTC May Delay Effective Date for Swap Reporting Rule.
On September 15th, Reuters reported the CFTC may delay until November 21, 2011, the effective date for its new reporting rules for physical swaps. The new rules require routine position reports from clearing organizations, clearing members and swap dealers and also apply to reportable swap trader positions. The current effective date is September 20, 2011. Delay.
  • CFTC is Strongly Divided on Position Limits.
On September 14th, Reuters reported CFTC staff appear to be strongly divided on whether the agency can craft a workable speculative position limits rule. Anonymous emails, notes slipped under doors, and media leaks evidence the highly-charged atmosphere. Divisions.
  • CFTC Rulemaking Process.
On September 13th, the New York Times' DealBook noted the impact the D.C. Circuit's opinion vacating the SEC's proxy access rule has had on the CFTC's rulemaking process. Rulemaking.
Exchanges and Self-Regulatory Organizations [Top]
Chicago Stock Exchange
  • Proposed Amendment Regarding the Cancellation of Certain Trades is Approved.
On September 9th, the SEC approved the Chicago Stock Exchange's proposed amendment of Article 20, Rule 9 (Cancellation of Transactions) and Interpretation and Policy .01 thereunder, regarding the cancellation of the stock leg of stock-option transactions done on the Exchange. SEC Release No. 34-65308.
  • SEC Designates Longer Period to Act on Proposal Regarding the Submission of Clearing-Related Information.
On September 8th, the SEC designated October 24, 2011 as the date by which it will respond to the Chicago Stock Exchange's proposal to add CHX Rule 6 (Submission of Clearing Information) to Article 21 (Clearance and Settlement) to set forth the terms upon which CHX will submit information for clearing and settlement and to amend Article 1, Rule 1 (Definitions) and Article 21, Rule 1 (Trade Recording with a Qualified Clearing Agency) to add, delete, and modify certain defined terms. SEC Release No. 34-65300.
Depository Trust Company
  • New Subscription Services Proposed.
On September 7th, the SEC provided notice of the Depository Trust Company's filing of a proposal to allow it to add new Daily Report and Commercial Paper Family Report subscription categories to DTC's Security Position Report Service. Comments should be submitted on or before October 5, 2011. SEC Release No. 34-65286.
Financial Industry Regulatory Authority
  • FINRA Provides Information on Operations Professional Qualification Exam.
On September 16th, FINRA issued information on the Operations Professional Qualification Exam including fees, procedures, and a content outline of the exam. FINRA Regulatory Notice 11-42.
  • FINRA Issues Reminder on Research Reports and Conflicts of Interest.
On September 12th, FINRA reminded members of the need for heightened supervision over solicitation and research activities where an issuer has communicated an expectation of favorable research as a condition of participating in an offering. FINRA Regulatory Notice 11-41.
NASDAQ OMX BX
  • SEC Suspends and Institutes Disapproval Proceedings Regarding Exchange's Proposal Regarding Certain PIP Fees.
On September 13th, the SEC suspended a proposed rule change and instituted proceedings to determine whether to approve or disapprove a proposed rule change submitted by NASDAQ OMX BX. The Exchange proposed to amend the BOX Fee Schedule with respect to credits and fees for transactions in the BOX Price Improvement Period ("PIP"). The SEC believes that it is appropriate to evaluate the effect of the proposed rule change on competition among different types of market participants and on market quality, particularly with respect to the net fee differential that it would place on BOX Options Participants that respond to a PIP auction compared to a BOX Options Participant that initiated the PIP auction. Comments should be submitted within 45 days after publication in the Federal Register, which is expected during the week of September 19. SEC Release No. 34-65330.
NASDAQ Stock Market
  • SEC to Consider Proposed Reverse Merger Listing Standards Jointly.
On September 12th, the SEC instituted proceedings to determine whether to disapprove the NASDAQ Stock Market's proposed additional listing requirements for reverse mergers so that the NASDAQ proposal can be considered jointly with similar proposals by the New York Stock Exchange and NYSE Amex. Interested persons are invited to submit written data, views and arguments regarding whether the proposed rule change should be disapproved by October 17, 2011. Any person who wishes to file a rebuttal to any other person's submission must file that rebuttal by October 26, 2011. SEC Release No. 34-65319.
Options Clearing Corporation
  • OCC Proposes Amendments Required by the Dodd-Frank Act.
On September 14th, the SEC provided notice of the Options Clearing Corporation's proposed rule change to facilitate compliance by OCC with new core principles ("Core Principles") applicable to derivatives clearing organizations ("DCOs") that are set forth in the Commodity Exchange Act, as amended by the Dodd-Frank Act. In particular, new DCO Core Principle O requires DCOs to establish fitness standards for directors, clearing members and certain other individuals. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of September 19. SEC Release No. 34-65338.
Judicial Opinions [Top]
  • Dismissal of Suit Against Commission Merchants for Aiding and Abetting Ponzi Scheme Affirmed.
Commodity pool investors were defrauded by their pool operator, who traded the pooled funds for his own account through futures commission merchants. The investors sued the merchants under the Commodity Exchange Act (CEA) for aiding and abetting the pool operator's scheme. On September 16th, the Fifth Circuit affirmed dismissal of the complaint for failure to state a claim, holding that the investors had not sufficiently alleged that the merchants had "willfully" aided and abetted the CEA violations. The court considered, but did not have to decide, whether "willfully" aiding and abetting requires actual knowledge and specific intent to further the violations or, instead, may require only "extreme recklessness" when there is a special duty of disclosure or when the assistance provided is unusual in character or degree, because the investors' allegations in this case did not meet either standard. Amacker v. Renaissance Asset Management LLC.
  • Securities Lending and Tax.
On September 15th, the Ninth Circuit addressed the tax consequences of certain securities lending programs. It held that a purported securities loan with a fixed term of at least 250 days and possibly as long as 450 days, entered into for the purpose of avoiding taxable income for the lender, does not qualify for nonrecognition treatment as a securities loan. Samueli v. Commissioner of Internal Revenue.
  • Court Lifts Asset Freeze Imposed against Innocent Spouse.
On September 15th, the Second Circuit vacated preliminary injunctions freezing the assets of the innocent former spouse of a defrauder. In response to certified questions, the New York Court of Appeals held that where fair consideration is given by the innocent spouse, the innocent spouse may retain assets that were unknowingly obtained through the fraud. CFTC v. Walsh.
Rules Effective Dates [Top]
  • Suspension of the Duty To File Reports for Classes of Asset-Backed Securities Under Section 15(D) of the Securities Exchange Act of 1934 - Effective September 22, 2011.
Section 942(a) of the Dodd-Frank Act eliminated the automatic suspension of the duty to file under Section 15(d) of the Securities Exchange Act of 1934 for asset-backed securities issuers and granted the SEC the authority to issue rules providing for the suspension or termination of such duty. The SEC is adopting rules to provide certain thresholds for suspension of the reporting obligations for asset-backed securities issuers. The Commmission is also amending its rules relating to the Exchange Act reporting obligations of asset-backed securities issuers in light of these statutory changes. 76 FR 52549.
  • Rules Implementing Amendments to the Investment Advisers Act of 1940 - Effective September 19, 2011.
The Securities and Exchange Commission is adopting new rules and rule amendments under the Investment Advisers Act of 1940 to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules and rule amendments are designed to give effect to provisions of Title IV of the Dodd-Frank Act that, among other things, increase the statutory threshold for registration by investment advisers with the SEC, require advisers to hedge funds and other private funds to register with the SEC, and require reporting by certain investment advisers that are exempt from registration. In addition, the SEC is adopting rule amendments, including amendments to the pay to play rule, that address a number of other changes made by the Dodd-Frank Act. 76 FR 42950.
  • Large Trader Reporting - Effective October 3, 2011.
The SEC is adopting new Rule 13h-1 and Form 13H under Section 13(h) of the Securities Exchange Act of 1934 to assist the SEC in both identifying, and obtaining trading information on, market participants that conduct a substantial amount of trading activity, as measured by volume or market value, in the U.S. securities markets. Among other things, Rule 13h-1 will require a "large trader," defined as a person whose transactions in NMS securities equal or exceed 2 million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month, to identify itself to the SEC and make certain disclosures to the SEC on Form 13H. 76 FR 46960.
Winston & Strawn Speaking Engagements and Publications [Top]
  • The Impact of Dodd-Frank on Energy and Commodities Traders.
Winston & Strawn will present an eLunch titled "The Impact of Dodd-Frank on Energy and Commodities Traders" on Thursday, September 22, 2011 at 12:15 p.m. (Central). Event.
  • Winston to Speak and Sponsor Thomson Reuters' 17th Annual LPC Loan Conference.
Winston & Strawn corporate finance partners will speak at the 17th Annual Thomson Reuters LPC Loan Conference to be held Thursday, September 22, 2011 in New York. The theme of this year's conference is "Boom to Bust and Back: The Global Loan Market Moves Forward." Event.
  • Winston & Strawn Sponsors TMA's 2011 Annual Convention.
Winston & Strawn will sponsor the 2011 Turnaround Management Association (TMA) Annual Convention, to be held October 25-27, 2011 in San Diego. Twitter co-founder Biz Stone is the keynote speaker. Event.
  • Winston & Strawn Sponsors 16th Annual LSTA Conference.
Winston & Strawn is sponsoring the 16th Annual Loan Syndications and Trading Association's (LSTA) Conference to be held on November 2, 2011 in New York. Event.

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