• Credit Rating Agencies' Emails Question the Industry.

On April 22nd, the New York Times reported that the Senate Permanent Subcommittee on Investigations released exhibits from its hearings on the role of credit rating agencies in the liquidity crisis. The exhibits include internal emails from and between employees at the rating agencies who appear to voice misgivings over the industry's willingness to provide credit ratings to collateralized debt obligations. Exhibits. See also Subcommittee Website (with links to witness' prepared remarks).

• Former KB Homes CEO Guilty on Four Counts.

On April 22nd, the Los Angeles Times reported that a jury has found former KB Homes CEO Bruce Karatz guilty of mail fraud, lying to regulators and lying to accountants in a case arising out of the company's alleged improper backdating of stock options. The jury acquitted Karatz on 16 counts including those charging him with illegal stock option backdating. Citing post-verdict juror comments, the Los Angeles Times reported that the jury thought that Karatz did not intentionally plan to engage in illegal backdating but lied to hide his activity afterwards. Verdict.

• FTC Proposes Revisions to the Horizontal Merger Guidelines.

On April 20th, the Federal Trade Commission released for public comment proposed revisions to the Horizontal Merger Guidelines. The updated Guidelines, which outline how the federal antitrust agencies evaluate the likely competitive impact of mergers and whether those mergers comply with U.S. antitrust law, are being revised jointly by the FTC and the Department of Justice. Comments should be submitted on or before May 20, 2010. FTC Press Release.

• Treasury Does Not Seek Customized Derivatives Ban.

On April 22nd, Reuters reported the remarks of Treasury Deputy Secretary Neil Wolin, who said that the Department does not oppose the use of customized derivatives for the management of specific risks. Customized Derivatives. See also Text of Remarks.

• Senate Committee Passes Derivatives Bill.

On April 21st, the Senate Agriculture Committee passed the Wall Street Transparency and Accountability Act of 2010, which would closely regulate the trading of derivative securities. The bill was supported by only one Republican, Senator Charles Grassley. Among other things, the bill requires the central clearing of derivatives, prohibits federal assistance to derivatives traders, and mandates registration and disclosure requirements. See Bill Summary. See also Washington Post. On April 22nd, Reuters reported that the bill also requires the CFTC and Treasury Department to study the transparency of U.S. carbon markets. Study.

• Senate Leaders Near Agreement.

On April 21st, Bloomberg reported that Senate leaders are moving closer to agreeing on a bipartisan financial reform bill. Democrats may abandon a Republican-opposed proposal that would have created a liquidation fund for failing financial institutions. However, disagreements on a consumer financial protection agency and the regulation of derivatives remain. Prospects. On April 23rd, the Washington Post reported that Senate Majority Leader Harry Reid intends to bring the debate to a head, scheduling a vote on cloture for April 26, 2010. If Democrat and Republican leaders cannot find middle ground over the weekend before the vote, the stage may be set for a filibuster. Vote.

• Senators Support Glass-Steagall.

On April 20th, the New York Times reported that Senators Richard Shelby, John McCain, Johnny Isakson and John Cornyn have expressed support for the reinstitution of the Glass-Steagall Act. Glass-Steagall.

• Community Bank Supervision.

On April 23rd, Bloomberg reported on opposition to a provision in the Senate's regulatory reform proposal that would limit the Federal Reserve Board's supervisory authority to the largest U.S. banks, those with assets of $50 billion or more. Opposition.

• Federal Reserve Board to Holds Public Meetings on Revisions to the Home Mortgage Disclosure Act Regulations.

On April 23rd, the Federal Reserve Board announced that it will hold four public hearings on potential revisions to Regulation C, which implements the Home Mortgage Disclosure Act. The hearings will take place at the Federal Reserve Bank of Atlanta on July 15, the Federal Reserve Bank of San Francisco on August 5, the Federal Reserve Bank of Chicago on September 16, and the Federal Reserve Board in Washington, D.C. on September 24. Federal Reserve Board Press Release.

• OCC Publishes Community Development Insights.

On April 23rd, the OCC published Community Developments Investments, its on-line newsletter. This edition provides a snapshot of various Recovery Act programs that are designed to encourage lending, investments and community development services activities in response to community needs. OCC Press Release.

• Executive Compensation.

On April 22nd, Bloomberg reported that Federal Reserve Board supervisors have advised executives and directors of the largest banks to end compensation practices that encourage excessive risk. Executive Compensation.

• FDIC Publishes New Appeals Processes Guidelines.

On April 19th, the FDIC published revised Guidelines for Appeals of Material Supervisory Determinations ("SARC Guidelines"), which were adopted by the FDIC's Board on April 13, 2010. The SARC Guidelines govern the Supervision Appeals Review Committee process and supersede the FDIC's prior SARC Guidelines. In addition, on April 13th, the Board adopted revised Guidelines for Appeals of Deposit Insurance Assessment Determinations. The revised guidelines were effective upon adoption. 75 FR 20358.

• Federal Reserve Board Posts Online Consumer Publication on Gift Cards.

On April 19th, the Federal Reserve Board announced the online publication of What You Need to Know: New Rules for Gift Cards, which is designed to help consumers better understand gift card practices. The publication describes the types of cards that are covered under gift card rules released last month, and highlights key protections including new limits on expiration dates, requirements for clear fee disclosures, and fee restrictions. Federal Reserve Board Press Release.

• OCC Warns of Fraudulent Regulatory Issuances.

On April 16th, the OCC alerted banks and bank regulators regarding the circulation of fraudulent correspondence regarding the release of funds supposedly under the control of the Comptroller of the Currency. OCC Alert 2010-6.

• TARP Inspector General Recommends Mandatory Principal Reductions.

On April 20th, the Special Inspector General for the Troubled Asset Relief Program released its Quarterly Report to Congress. Addressing the Administration's Home Affordable Modification Program, the report recommends that the Treasury Department reevaluate the voluntary nature of the principal reduction portion of the program and the three-month minimum term for the unemployment forbearance initiative.

• CFTC Approves New Exchanges; Considers Film Option and Futures Exchanges.

On April 20th, the CFTC approved the applications of Cantor Futures Exchange, L.P. for designation as a contract market and Cantor Clearinghouse, L.P. to be registered as a derivatives clearing organization. The CFTC is still considering Cantor's request for approval of a contract related to domestic motion picture box office receipts. Moreover, given the novel nature of the contract that Cantor has proposed trading, the CFTC has requested, and Cantor has agreed, that rather than self-certifying such contracts, Cantor will submit all new classes or categories of media-related contracts it intends to list for approval by the Commission. The Commission has not approved the trading of any futures or options related to box office receipts. CFTC Release No. PR5811-10. Similarly, on April 16th, the CFTC approved the application of Media Derivatives, Inc. ("MDEX") for designation as a contract market. MDEX also requested approval from the CFTC of a contract related to motion picture box office receipts. The Commission is still considering that issue and like Cantor, MDEX has agreed that rather than self-certifying such contracts, MDEX will submit all new classes or categories of media-related contracts it lists for approval by the CFTC. CFTC Release No. PR5809-10. On April 22nd, the Los Angeles Times reported that the Wall Street Transparency and Accountability Act of 2010, passed by the House Agriculture Committee on April 21, 2010, prohibits futures trading in box office receipts. Ban.

• CFTC to Consider Significant Price Discovery Determinations.

On April 19th, the CFTC announced it will meet on April 27, 2010, to consider whether contracts offered for trading on the IntercontinentalExchange, Inc., the Natural Gas Exchange, Inc. or the Chicago Climate Exchange, Inc. perform significant price discovery functions. CFTC Release No. PR5810-10.

• Comments Submitted in Response to Market Structure Concept Release.

On April 23rd, Bloomberg summarized some of the comments submitted to the SEC in response to its January 14, 2010 Concept Release on Equity Market Structure. Exchanges such as NYSE Euronext would like the SEC to impose a price improvement mechanism on private trading platforms. Brokers who internalize trades respond that limiting alternative transactions would reduce competition. Comments.

• Chairman Schapiro Testifies Before the House Financial Services Committee.

On April 20th, SEC Chairman Mary L. Schapiro testified about the SEC structure for the supervision of investment banks and their holding companies, the failure of Lehman Brothers, the lessons learned from the Consolidated Supervised Entity program, and the legislative and regulatory initiatives necessary to address the supervision and resolution of systemic entities in the future. The Division of Corporation Finance issued letters to various public companies requesting detailed information about their use of repurchase agreements or similar transactions involving the transfer of assets where they have an obligation to repurchase them. Among other things, these letters instruct the companies to describe their accounting for these transactions, their business purpose, and their impact on liquidity; provide detailed information about the financial statement impact of these transactions throughout each quarter; and discuss how the impact differed from that presented at each quarter end. Schapiro Testimony.

• Strike-Price Intervals and Trading Hours Established for Options on Index-Linked Securities.

On April 20th, the SEC granted accelerated approval to individually submitted proposals from NASDAQ OMX PHLX and the NASDAQ Stock Market, establishing strike-price intervals for options on Index-Linked Securities and trading hours for these products.

• Exchange Proposes $1 Strikes.

On April 16th, the SEC provided notice of the Chicago Board Options Exchange's filing of a proposal permitting $1 strike prices for options on trust issued receipts. Comments should be submitted on or before May 10, 2010. SEC Release No. 34-61935.

• DTC Amends Rules Regarding End of Day Liquidity.

On April 15th, the SEC granted immediate effectiveness to The Depository Trust Company's proposal to amend its rules to enhance processing as it relates to end of day liquidity. Upon implementation of the new function, DTC participants would be able to set a profile in the Participant Browser System so that they can request that excess funds be wired to their settling bank account at approximately 3:20 PM (ET). Comments should be submitted on or before May 13, 2010. SEC Release No. 34-61922.

• Effective Date for TRACE Reporting of ABS and MBS Transactions.

On April 23rd, the Financial Industry Regulatory Authority announced that effective February 14, 2011, firms must begin reporting asset- and mortgage-backed securities transactions to TRACE. FINRA will not disseminate the data; instead it will collect and study the transaction data and may propose to disseminate it in the future. In addition, reporting fees for ABS and MBS transactions, and other related amendments to TRACE and FINRA rules, will take effect on that day. FINRA Regulatory Notice 10-23.

• FINRA Reminds Broker-Dealers of Their Reg D Obligations.

On April 20th, the Financial Industry Regulatory Authority reminded broker-dealers of their obligation to conduct a reasonable investigation of the issuers and securities that they recommend in private placement offerings. FINRA Regulatory Notice 10-22. See also FINRA Press Release.

• FINRA Announces Changes to Exam and Continuing Education Scheduling Procedures.

On April 20th, the Financial Industry Regulatory Authority announced changes to the process for scheduling exams and continuing education sessions. To safeguard the personal identifying information of exam and CE candidates, FINRA is phasing out the use of Social Security numbers to schedule exam and CE appointments. FINRA Information Notice.

• FINRA Proposes to Eliminate a Defense in Expedited Proceedings.

On April 19th, the SEC provided notice of the Financial Industry Regulatory Authority's proposal to explicitly eliminate the "inability-to-pay" defense in expedited proceedings. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of April 26. SEC Release No. 34-61938.

• FINRA Proposes Amendments to BrokerCheck.

On April 16th, the SEC provided notice of the Financial Industry Regulatory Authority's proposal to amend FINRA Rule 8312 (FINRA BrokerCheck Disclosure) to expand the information released through BrokerCheck, both in terms of scope and time disclosed, and to establish a process to dispute the accuracy of (or update) information disclosed through BrokerCheck. Comments should be submitted on or before May 13, 2010. SEC Release No. 34-61927.

• ISDA Publishes Research Note on Close-Out Netting.

On April 22nd, the International Swaps and Derivatives Association published a research note on "The Importance of Close-Out Netting."

• MSRB Seeks Comments on the Pricing of Municipal Securities.

On April 21st, the Municipal Securities Rulemaking Board published for comment draft interpretive guidance on the requirements of Rule G-30 concerning the establishment of the prevailing market price and the calculation of mark-ups and mark-downs for municipal securities transactions effected by brokers, dealers or municipal securities dealers in a principal capacity. Comments should be submitted on or before June 4, 2010. MSRB Press Release and Draft Guidance.

• NYSE Regulation Publishes SEC Guidance on the Use of Pegging E-Quotes by Floor Brokers to Effect Issuer Repurchases.

On April 22nd, NYSE Regulation published the SEC staff's response to its questions regarding the use of pegging e-Quotes on NYSE to effect issuer repurchases (also referred to as "buy-backs") within the price condition of the "safe harbor" of Rule 10b-18 under the Securities Exchange Act of 1934. NYSE Regulation Information Memo 10-18.

• New Continued Listing Standards.

On April 15th, the SEC approved the New York Stock Exchange's proposal to make permanent changes to its continued listing standards that are currently in effect on a pilot basis. Under the change, companies that listed under certain initial listing standards are considered to be below compliance standards if average global market capitalization over a consecutive 30 trading-day period is less than $50 million and, at the same time, total stockholders' equity is less than $50 million. SEC Release No. 34-61912.

• Mortgage Pass-Through Securities Litigation Proceeds.

On April 22nd, a federal district court substantially denied motions to dismiss a putative class action securities fraud lawsuit. Purchasers of mortgage pass-through certificates issued by Wells Fargo allege that the offering documents contained numerous false and misleading statements concerning Wells Fargo's loan underwriting standards, appraisals and the credit quality of the certificates. While certain causes of action were dismissed with leave to amend, and the claims against the credit raters were dismissed with prejudice, the court denied in large part the motions to dismiss filed by Wells Fargo and the securities underwriters. Plaintiffs adequately alleged the offering documents failed to disclose Wells Fargo regularly, systematically and pervasively varied from its stated mortgage underwriting standards and appraisal requirements. Plaintiffs pleaded the misstatements with sufficient particularity and did not have to link the misstatements to any particular loan packaged in the securities purchased by plaintiffs. In re Wells Fargo Mortgage-Backed Certificates Litigation.

• Ignorance is No Defense.

On April 21st, the Supreme Court held that the bona fide error defense of the Fair Debt Collection Practices Act does not apply to a violation resulting from a debt collector's mistaken interpretation of the legal requirements of the FDCPA. A law firm filed suit on behalf of a mortgage company to foreclose on property owned by petitioner. The complaint included a notice that the mortgage would be assumed valid unless disputed in writing. Petitioner's lawyer sent a letter disputing the debt and when the mortgage company acknowledged that the debt had been paid, the law firm withdrew the suit. Petitioner then sued contending that by requiring her to dispute the debt in writing the law firm violated the FDCPA. The trial court held that the law firm violated the Act, but could assert the bona fide error defense and the Sixth Circuit affirmed. The Supreme Court reversed. Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich, LPA.

• State Court Lawsuit to Enforce Terms of Securitizations is Not Removable under CAFA.

On April 20th, the Second Circuit addressed the removability of a case under the Class Action Fairness Act. Putative class action plaintiffs purchased from defendants securitizations whose underlying mortgages became the subject of lawsuits brought by state attorneys general alleging predatory lending practices. To settle that lawsuit, defendants agreed to modify the terms of the mortgages. Plaintiffs then filed a state court suit seeking a declaratory judgment that defendants must repurchase the modified mortgage backed securities. Defendants removed the case to federal court in accordance with CAFA where, on the plaintiffs' motion, remand was ordered. On appeal, the Second Circuit held that it lacked jurisdiction to review the trial court's remand. Plaintiffs, as holders of securities, were seeking to enforce rights created by the securities and the suit therefore fell within CAFA's exceptions and may not be removed. Greenwich Financial Services Distressed Mortgage Fund 3 LLC v. Country Financial Corp.

• Lehman Bondholders Make End Run.

On April 20th, the district court overseeing the Lehman Brothers securities and ERISA litigation refused to stay a significant part of a FINRA arbitration brought by a purchaser of Lehman bonds and filed against Richard S. Fuld Jr., the former CEO and Chairman of Lehman Brothers Holdings, Inc., and its broker-dealer, Lehman Brothers, Inc. ("LBI"). Plaintiff, who bought the bonds from LBI, seeks to hold Fuld liable for LBI's failures to disclose risks associated with the bonds and for various breaches of duty and contract under theories of respondeat superior and control person liability. It bases its claims, in large part, on the special examiner's report concerning Fuld's alleged decisions to increase LBHI's risk profile, his public statements about LBHI's financial health, internal memoranda, and LBHI's use of "Repo 105-108" transactions and related accounting. Finding that Fuld, as CEO and Chairman of LBI, was an associated person and that six of plaintiff's seven claims arise out of LBI's business activities, the court held that the claims were the proper subject of a FINRA arbitration. In doing so the court recognized the merit to having the claims against Fuld adjudicated in one court, subject to the Private Securities Litigation Reform Act and the Securities Litigation Uniform Standards Act. However, it concluded that Fuld's arguments were conclusory and that Fuld had failed to show that the arbitration would interfere with the federal, multi-district litigation. In the Matter of the Application of Richard S. Fuld, Jr.

• Money Market Fund Reform - Effective May 5, 2010.

The SEC is adopting amendments to certain rules that govern money market funds under the Investment Company Act of 1940. The amendments will tighten the risk-limiting conditions of Rule 2a-7 by, among other things, requiring funds to maintain a portion of their portfolios in instruments that can be readily converted to cash, reducing the maximum weighted average maturity of portfolio holdings, and improving the quality of portfolio securities; requiring money market funds to report their portfolio holdings monthly to the SEC; and permitting a money market fund that has "broken the buck" (i.e., re-priced its securities below $1.00 per share), or is at imminent risk of breaking the buck, to suspend redemptions to allow for the orderly liquidation of fund assets. The amendments are designed to make money market funds more resilient to certain short-term market risks, and to provide greater protections for investors in a money market fund that is unable to maintain a stable net asset value per share. 75 FR 10059.

• Amendments to Regulation SHO - Effective Date May 10, 2010, Compliance Date November 10, 2010.

The SEC has amended Regulation SHO to include a short sale price rule that will be triggered by a significant drop in a security's price. Under new Rule 201, trading centers will be required to establish written policies and procedures designed to prevent short sales of a covered security at a price that is less than or equal to the current national best bid, whenever the price of that security decreases by 10% or more from its closing price on the prior day. Once triggered, the price restriction will remain in place for the remainder of the day and the following trading day. 75 FR 11231. Please see the Winston & Strawn Client Briefing on this topic. Client Briefing.

• Winston Speakers to Participate in Webcast on FINRA Guidance on Social Networking.

Robert Boresta and Brian Heidelberger of Winston & Strawn are speaking on a webcast sponsored by the Knowledge Congress on June 22 on "FINRA Guidance on Social Networking Blurs the Line Between Personal and Business Related Activity." Event Information.

• FINRA Reminds Broker-Dealers of Obligations in Regulation D Offerings.

On April 20, 2010, the Financial Industry Regulatory Authority issued Regulatory Notice 10-22 to remind broker-dealers of their of their obligations to comply with FINRA's rules governing suitability, communications and supervision when they recommend securities offered under Regulation D promulgated under the Securities Act of 1933, as amended. Briefing.

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