Financial Services Update______October 24, 2011
Volume 6, No. 39



IN THIS ISSUE

Insights from Winston & Strawn

In the News

Congressional Developments

Joint Agency Action

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]

On October 20, the Securities and Exchange Commission (the "SEC") provided notice that it will be holding a meeting on Wednesday, October 26 to consider whether to adopt a rule that will require hedge fund and other private fund advisers to report information for use by the Financial Stability Oversight Council (the "FSOC") in its evaluation of risks to the financial stability of the United States. Earlier this year, in Release No. IA-3145, the SEC and the Commodity Futures Trading Commission released proposed joint rules under the Commodities Exchange Act and the Investment Advisers Act of 1940 (the "Advisers Act") to implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The proposed rules would require (i) investment advisers registered with the SEC that advise more than one private fund client and (ii) commodity pool operators and commodity trading advisers registered with the SEC as investment advisers that advise more than one private fund to complete a Form PF. To date, nearly forty comment letters have been submitted regarding the proposed rules and the Form PF.
The Dodd-Frank Act established the FSOC to monitor risks to the United States' financial stability. In addition to creating the FSOC, the Dodd-Frank Act amended adviser registration requirements under the Advisers Act to expand the scope of investment adviser registration requirements. Congress rationalized that registration of such advisers would provide information about private funds' sizes, strategies, and positions. Together with the information provided by registered investment advisers in their Form ADVs, the SEC and CFTC were empowered to require registered investment advisers to report systematic risk information to the SEC on the Form PF. The proposing release noted that the Form PF is intended to be complementary to, not duplicative of, the Form ADV required to be completed by registered investment advisers. In its current form, the Form PF runs forty-four pages. Among other disclosures, the Form PF requires an investment adviser to provide information regarding the adviser's identity, assets under management, borrowings, investor base, and investment strategies. Depending on the types of funds managed by the investment adviser and the amount of assets under management, additional information and more frequent reporting is required. The proposing release explains that the information is intended to monitor systematic risk, something the Form ADV was not designed to collect. Given that much of the information requested by the Form PF is non-public information, the proposed rules state that the information provided by advisers in the Form PF will not be made available to the public, but may be disclosed to Congress, federal regulators, self-regulatory organizations or otherwise in enforcement proceedings.
In the News [Top]
  • SEC and CFTC Commissioners Confirmed.
On October 21st, Bloomberg Business Week reported that the Senate has confirmed President Barack Obama's nominees to the Securities and Exchange Commission (the "SEC") and the Commodity Futures Trading Commission (the "CFTC"). Daniel M. Gallagher and Luis A. Aguilar were confirmed as SEC Commissioners and Mark P. Wetjen as a CFTC Commissioner. Confirmation.
  • FINRA Examining Risk Disclosures.
On October 20th, Reuters reported that the Financial Industry Regulatory Authority ("FINRA") is examining whether brokers are adequately disclosing to their clients the risks associated with investments in private companies. FINRA Examination.
  • The Inter-Regulatory Divide.
On October 16th, the New York Times' DealBook discussed the inter-regulatory squabbles that are hampering the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). Squabbles.
  • G20 Supports Capital Surcharge.
On October 15th, Reuters reported the G20 voted to support mandatory capital surcharges for the world's largest banks which will be required in addition to those to be imposed by Basel III. The G20 will meet next month to name the banks affected. Surcharge.

Congressional Developments [Top]
  • Bill Would Limit Venue for Corporate Bankruptcies.
On October 18th, Bloomberg reported on H.R. 2433, the Chapter 11 Bankruptcy Venue Reform Act of 2011. The bill would restrict corporate bankruptcy filings to the state in which a firm has its principal place of business or holds most of its assets. Forum Shopping.
  • Bills Would Limit Mandatory Arbitration Clauses.
On October 18th, the Los Angeles Times reported on S. 987, the Arbitration Fairness Act, which would make consumer, employment, and civil rights arbitration agreements unenforceable, and S. 1652, the Consumer Mobile Fairness Act, which would make arbitration agreements in cell phone contracts unenforceable. Arbitration Agreements.
Joint Agency Action [Top]
  • Agencies Issue Notice Regarding Loans in Areas Having Special Flood Hazards.
On October 17th, the Office of the Comptroller of the Currency (the "OCC"), Federal Reserve Board, FDIC, Farm Credit Administration, and National Credit Union Administration (the "Agencies") finalized two new questions and answers. These questions and answers address loans in areas having special flood hazards. One relates to insurable value and the other relates to force placement. The Federal Register notice also withdraws one question and answer regarding insurable value. The Agencies also have significantly revised two questions and answers that were initially proposed on July 21, 2009 regarding force placement of flood insurance. Additionally, the Agencies are proposing revision to a previously finalized question and answer. These three revised questions and answers are being proposed for comment. The effective date of the final questions and answers is October 17, 2011. Comments on the proposed questions and answers should be submitted on or before December 1, 2011. 76 FR 64175. See also Federal Reserve Board Press Release; OCC Bulletin.
Banking Agency Developments [Top]
  • OCC Establishes Advisory Committees on Minority Institutions.
On October 21st, the OCC announced it has established advisory committees to provide perspectives to the agency on the unique challenges and needs of minority depository institutions and mutual savings associations. OCC Press Release.
  • FFIEC Announces Adjustment to Survey Data in Census Data File.
On October 19th, the Federal Financial Institutions Examination Council ("FFIEC") announced that it will incorporate the 2010 American Community Survey data into the FFIEC-published census data file. The new methodology responds to a change in the way the U.S. Census Bureau collects information that is reflected in the FFIEC's census data. The FFIEC publishes census data as part of the Home Mortgage Disclosure Act ("HMDA") aggregate and disclosure data and as a separate census data file. The census data are used to provide context to HMDA and Community Reinvestment Act data. FFIEC Press Release.
  • FFIEC Announces Revisions to the Calculation of Annual Median Family Income Data.
On October 19th, FFIEC announced that beginning in June 2012, it will calculate the annual Median Family Income ("MFI") data that are published each June. The 2012 MFI Data will incorporate the U.S. Census Bureau's American Community Survey information and will be referred to as FFIEC Median Family Income Data. FFIEC Press Release.
  • Federal Reserve Board Approves Living Will Provisions for SIFIs.
On October 17th, the Federal Reserve Board approved a final rule implementing the resolution plan requirement in the Dodd-Frank Act for bank holding companies with assets of $50 billion or more and nonbank systemically important financial institutions. Under the final rule, such an entity must develop a plan describing its strategy for rapid and orderly resolution in bankruptcy during times of financial distress. A resolution plan must include a strategic analysis of the plan's components, a description of the range of specific actions the company proposes to take in resolution, and a description of the company's organizational structure, material entities, interconnections and interdependencies, and management information systems. Federal Reserve Board Press Release.
Treasury Department Developments [Top]
  • Treasury Department Requests Comment on Improving Insurance Regulation.
On October 17th, the Treasury Department's Federal Insurance Office, in accordance with the Dodd-Frank Act, requested comment on how to modernize and improve the country's insurance regulatory system. Comments are requested on all aspects of the insurance industry, including identifying issues contributing to systemic risk. Comments should be submitted on or before December 16, 2011. Treasury Department Press Release.

Commodity Futures Trading Commission [Top]
New Final Rules
  • CFTC Adopts Rules for Derivatives Clearing Organizations.
On October 18th, the CFTC voted to adopt new final rules for derivatives clearing organizations ("DCOs"). The new regulations establish the regulatory standards for compliance with DCO Core Principles A (Compliance), B (Financial Resources), C (Participant and Product Eligibility), D (Risk Management), E (Settlement Procedures), F (Treatment of Funds), G (Default Rules and Procedures), H (Rule Enforcement), I (System Safeguards), J (Reporting), K (Recordkeeping), L (Public Information), M (Information Sharing), N (Antitrust Considerations), and R (Legal Risk). The new rules also (i) update and add related definitions; (ii) adopt implementing rules for DCO chief compliance officers; (iii) revise procedures for DCO applications; (iv) adopt procedural rules applicable to the transfer of a DCO registration; and (v) add requirements for approval of DCO rules establishing a portfolio margining program for customer accounts carried by a futures commission merchant that is also registered as a securities broker-dealer. The rules will generally be effective 60 days after publication in the Federal Register, which is expected during the week of October 24. CFTC Fact Sheet; CFTC Q&A.
  • CFTC Adopts Position Limits.
On October 18th, the CFTC voted to adopt new final rules governing position limits for futures and swaps. The new rules set limits on speculative positions in twenty-eight core physical commodity contracts and their "economically equivalent" futures, options, and swaps (collectively "Referenced Contracts"). The establishment of speculative limits on Referenced Contracts will occur in two phases. Spot-month limits will be effective sixty days after the term "swap" is defined under the Dodd-Frank Act. For the nine "legacy" agricultural Referenced Contracts that currently are subject to CFTC administered limits, the new non-spot-month limits will go into effect sixty days after the term "swap" is further defined under the Dodd-Frank Act. For all other Referenced Contracts, the limits will be made effective by CFTC order after the CFTC has received one year of open interest data on physical commodity cleared and uncleared swaps under the swaps large trader reporting rule. CFTC Fact Sheet; CFTC Q&A.
Proposed Rules
  • CFTC Proposes Extension to Effective Date for Swap Regulation.
On October 18th, the CFTC voted to propose for public comment an amendment to its July 14, 2011 Order which grants temporary exemptive relief from certain provisions of the Commodity Exchange Act. The Exemptive Order clarified the effective date of the provisions in the swap regulatory regime established by Title VII of the Dodd-Frank Act, providing temporary relief from certain provisions that would otherwise have become effective on July 16, 2011. The CFTC proposes to amend the July 14 Order by extending the potential latest expiration date of the July 14 Order from December 31, 2011 to July 16, 2012; and adding provisions to account for the repeal and replacement (as of December 31, 2011) of part 35 of the CFTC's regulations. Comments should be submitted within 30 days after publication n the Federal Register, which is expected during the week of October 24. CFTC Fact Sheet.
Securities and Exchange Commission [Top]
Staff Legal Bulletins
  • CorpFin Issues Legal Bulletin on Shareholder Proposals.
On October 18th, the SEC published a staff legal bulletin providing the view of the Division of Corporation Finance regarding: (i) the types of brokers and banks that constitute "record" holders under Rule 14a-8(b)(2)(i) of the Securities Exchange Act of 1934 (the "Exchange Act") for purposes of verifying whether a beneficial owner is eligible to submit a proposal under Rule 14a-8; (ii) common errors shareholders can avoid when submitting proof of ownership to companies; (iii) the submission of revised shareholder proposals; (iv) procedures for withdrawing no-action requests regarding proposals submitted by multiple proponents; and (v) the Division of Corporation Finance's new process for transmitting Rule 14a-8 no-action responses by email. Staff Legal Bulletin No. 14F.
  • CorpFin Publishes Legal Bulletin on Legality and Tax Opinions.
On October 14th, the SEC published a staff legal bulletin providing the views of the Division of Corporation Finance regarding legality and tax opinions filed in connection with registered offerings of securities. Staff Legal Bulletin No. 19.
Meeting Notices
  • SEC Small Business Capital Formation Forum.
On November 17, 2011 the SEC will hold its annual SEC Government-Business Forum on Small Business Capital Formation. The forum will include two panel discussions, one on current capital formation issues for private companies and a second on initial public offerings and securities regulation involving smaller public companies. SEC Press Release.
  • SEC to Hold Roundtable on Revenue Recognition.
On November 8, 2011 the SEC will hold a public roundtable discussion to consider financial statement measurements (and associated disclosures) that incorporate judgments about future events. The SEC will accept comments regarding issues addressed at the roundtable until December 8, 2011. SEC Release No. 34-65602; SEC Press Release (with links to related materials).
  • Open Meeting.
On October 26, 2011, the SEC will vote on whether to adopt a rule requiring advisers to hedge funds and other private funds to report information for use by the Financial Stability Oversight Council in monitoring risk to the U.S. financial system. The new rule under the Investment Advisers Act of 1940 (the "Advisers Act") would implement Sections 404 and 406 of the Dodd-Frank Act. SEC Open Meeting Notice.
Other Developments
  • OCIE Associate Director Named.
On October 21st, the SEC announced that Andrew J. Bowden has been appointed as an Associate Director to lead the National Investment Adviser/Investment Company Examination Program in the SEC's Office of Compliance Inspections and Examinations. SEC Press Release.
  • Chairman Schapiro's Comments on Short Sales and Insider Trading.
On October 20th, Reuters reported the remarks of SEC Chairman Mary L. Schapiro at the Managed Fund Association conference. Chairman Schapiro said it is unlikely that the agency will ban the short-selling of stocks. Schapiro Remarks. On October 21st, the Wall Street Journal reported that Chairman Schapiro, in response to a question posed by former SEC Chairman Harvey Pitt concerning expert networks, said that "a pretty bright line" exists between receiving stock research and insider trading. Expert Networks.
  • SEC Examining ETFs.
On October 19th, Eileen Rominger, SEC Director, Division of Investment Management, testified before a Senate subcommittee concerning exchange-traded products ("ETPs") and exchange-traded funds ("ETFs"). SEC staff members from across multiple Divisions and Offices are currently engaged in a general review of ETPs, which includes gathering and analyzing detailed information about specific products. For example, SEC staff members are currently reviewing ETPs' investor disclosure, liquidity levels and transparency, fair valuations, efficiency in the arbitrage process and the relationship between market volatility and ETPs. SEC staff members also have deferred consideration of exemptive requests for ETFs seeking to register under the Investment Company Act of 1940 (the "Company Act") who make significant investments in derivatives. This action was taken in light of concerns raised generally about the use of derivatives by all registered investment companies, including ETFs. Further, the SEC recently instituted its first insider trading case involving ETFs. The SEC alleges that non-public information concerning Goldman Sachs' ETF trading strategy was used by a former Goldman Sachs employee and his father to trade in the underlying securities. Rominger Testimony.
  • SEC Reviewing Investment Advisers' Plain-English.
On October 18th, Reuters reported the SEC is beginning its review of investment advisers' plain-English disclosure brochures required by amended Form ADV Part 2. Review.
  • OCIE Director Discusses the Role of Compliance and Ethics in Risk Management.
On October 17th, Carlo V. di Florio, SEC Director, Office of Compliance Inspections and Examinations, discussed the heightened role of ethics in an effective regulatory compliance program, and the role of both ethics and compliance in enterprise risk management. di Florio Remarks.
  • Audit Rules for Traders Expected by Year-End.
On October 14th, Bloomberg reported the SEC is likely to adopt rules for a consolidated audit trail for equities by the end of the year. Audit Trail.
Exchanges and Self-Regulatory Organizations [Top]
  • SEC Approves Commentary Concerning Market Maker Continuous Quoting Obligations.
On October 14th, the SEC approved separately filed proposals by NYSE Amex and NYSE Arca to add Commentary .01 to their respective Rule 925.1NY to indicate that market makers will not be obligated to quote in adjusted option series and to reference an existing exception to the quoting obligations.
Financial Industry Regulatory Authority
  • FINRA Proposes Private Placement Rule.
On October 18th, the SEC approved FINRA's proposed adoption of FINRA Rule 5123, which requires that members and associated persons that offer or sell applicable private placements provide relevant disclosures to each investor describing the anticipated use of offering proceeds, and the amount and type of offering expenses and offering compensation. FINRA Rule 5123 also would require that the private placement memoranda, term sheets or other disclosure documents, and any exhibits thereto, be filed with FINRA no later than fifteen calendar days after the date of the first sale, and any material amendments to such document, or any amendments to the disclosures mandated by the Rule, be filed no later than fifteen calendar days after the date such document is provided to any investor or prospective investor. Comments should be submitted within twenty-one days after publication in the Federal Register, which is expected during the week of October 24. SEC Release No. 34-65585.
  • FINRA Proposes to Require Carrying/Clearing Member Firms to Maintain and Keep Current Certain Records in a Central Location.
On October 21st, FINRA published a Regulatory Notice requesting comment on a proposed new rule that would require carrying/clearing member firms to maintain and keep current certain records in a central location. The comment period expires December 9, 2011. Regulatory Notice 11-48.
  • FINRA Extends Time to Take and Pass Operations Professional Exam.
On October 17th, the SEC granted accelerated approval to FINRA's proposal to amend new FINRA Rule 1230(b)(6) (Operations Professional) to provide those who are required to register as Operations Professionals from October 18, 2011, through December 16, 2011, and who are required to pass a qualifying exam, additional time to take and pass that exam. Comments should be submitted on or before November 14, 2011. SEC Release No. 34-65580.
  • FINRA Proposes Best Execution and Interpositioning Rule for Consolidated Rulebook.
On October 17th, SEC provided notice of FINRA's filing of a proposal adopting NASD Rule 2320 (Best Execution and Interpositioning), and Interpretive Material 2320, as FINRA Rule 5310 in the Consolidated Rulebook with several changes. The proposed rule change (i) replaces the Three Quote Rule with Supplementary Material emphasizing a member's best execution obligations when handling an order involving any security, equity or debt, for which there is limited pricing information available; (ii) includes Supplementary Material codifying a FINRA member's obligations when it undertakes a regular and rigorous review of execution quality likely to be obtained from different market centers; (iii) includes new Supplementary Material concerning FINRA members' best execution obligations when handling orders for foreign securities; and (iv) includes Supplementary Material addressing situations where the customer has, on an unsolicited basis, specifically instructed the FINRA member to route its order to a particular market. Comments should be submitted on or before November 14, 2011. SEC Release No. 34-65579.
  • FINRA Proposes Amendments to Rule Governing Minimum Quotations Size for OTC Equities.
On October 14th, the SEC provided notice of FINRA's proposed amendment to FINRA Rule 6433 (Minimum Quotation Size Requirements for OTC Equity Securities). The amendments would, among other things, change minimum quotation sizes to simplify the tier structure, facilitate the display of customer limit orders under new FINRA Rule 6460 (Display of Customer Limit Orders) (the "limit order display rule"), and generally expand the scope of the rule. Comments should be submitted on or before November 10, 2011. SEC Release No. 34-65568.
ICE Clear Credit
  • SEC Approves Proposed Rules Regarding the Clearing of Emerging Markets Sovereigns.
On October 18th, the SEC approved ICE Clear Credit's proposed addition to its rules of Sections 26D and 26E to provide for the clearance of Emerging Markets Standard Sovereign CDS Contracts ("SES Contracts"). ICE will clear SES Contracts on four sovereign reference entities: the Federative Republic of Brazil, the United Mexican States, the Bolivian Republic of Venezuela, and the Argentine Republic. SEC Release No. 34-65588.
International Securities Exchange
  • SEC Approves Amendments Related to Complex Orders.
On October 13th, the SEC approved the International Securities Exchange's ("ISE") proposed amendment of ISE Rule 722 to: (i) allow market makers to enter quotations for complex order strategies on the complex order book, provided that such quotations will not execute automatically against bids and offers for the individual legs of the order, and make existing market maker risk management tools available for these quotations; (ii) add a size pro rata method of execution priority for bids and offers on the complex order book at the same price; and (iii) provide for an enhanced allocation of complex orders to a market maker that an Electronic Access Member designates as a "Preferred Market Maker" and that satisfies certain requirements. SEC Release No. 34-65548.
Judicial Opinions [Top]
  • Second Circuit Adopts Third Circuit's Presumption of ERISA Compliance.
On October 19th, the U.S. Court of Appeals for the Second Circuit joined the Third, Fifth, Sixth and Ninth Circuits in holding that a presumption of compliance with the Employee Retirement Income Security Act of 1974 ("ERISA") exists when an employee stock option plan fiduciary invests plan assets in the employer's stock. To overcome that presumption, a plaintiff must establish that investing in the employer's stock was an abuse of discretion. Here, ERISA participants alleged that defendants violated ERISA by offering company stock as a plan choice when defendants knew the stock had become an imprudent investment. Applying the abuse of discretion standard, the Second Circuit found that no abuse of discretion occurred. Additionally, the defendants did not owe a duty to disclose nonpublic information regarding the expected performance of the stock, and the complaint insufficiently alleged that the defendants knowingly made misstatements. Gray v. Citigroup, Inc. See also companion opinion, Gearren v. McGraw-Hill Cos., Inc.
  • Purchaser of Home in Landmark Massachusetts Case Lacks Standing to Sue for Quiet Title.
On October 18th, the Massachusetts Supreme Judicial Court ("SJC") held that the purchaser of a home that had been improperly foreclosed upon lacks standing to bring a quiet title action. The instant purchaser had bought the home which was the subject of an earlier SJC opinion in which the Court held that a lender who forecloses before being assigned or recording the mortgages does not take title to the home. Bevilacqua v. Rodriguez.
Winston & Strawn Speaking Engagements and Publications [Top]
  • 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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