• The Risks of Value at Risk.

On May 11th, Reuters reported that JP Morgan failed to minimize and detect its $2 billion synthetic credit default trading losses earlier in part because of its adoption of a new value at risk model. The disclosures reemphasize the important role played by modeling. VaR at Risk.

• Broker-Dealers Called to Account.

On May 10th, CFO.com reported that the Financial Industry Regulatory Authority and the CFTC are taking an increasing interest in the accounting practices of broker-dealers. Accounting Practices.

• Playing the Crowd.

On May 9th, CFO.com discussed who will benefit from the JOBS Act's crowdfunding provisions and summarized the compliance questions that should be considered if crowdfunding is sought. Crowdfunding.

• Material Deterrence.

On May 9th, the New York Times' DealBook reported that the Hong Kong securities regulator has proposed prison sentences for sponsors of initial public offerings who make materially misleading statements. Deterrence.

• The Foreign Corrupt Practices Act.

On May 9th, Corporate Counsel published an article on the future of Foreign Corrupt Practices Act ("FCPA") enforcement authored by former U.S. Attorney General Alberto Gonzales, Richard Westling, and William Athanas. FCPA Forecast. On May 8th, the Washington Post discussed FCPA enforcement and efforts to clarify the Act's contours. Recent high-profile cases, however, have complicated the debate, making meaningful changes unlikely. FCPA Debate.

• Labor Department Issues Fee Disclosure Guidance.

On May 7th the Labor Department's Employee Benefits Security Administration issued guidance meant to help plan administrators and service providers comply with the requirements of new rules regarding the disclosure of fees and investment expenses in retirement plans. Labor Department Press Release.

• The Flash Crash Two Years Later.

On May 7th, Bloomberg columnist Mark Buchanan discussed the May 6, 2010 "flash crash" when stock exchanges gyrated wildly. While accepted wisdom, and the CFTC's and SEC's report, blames the investment firm Waddell & Reed for the event, Buchanan contends Waddell & Reed was actually providing liquidity, not hampering it. Assessing Blame. On May 6th, Forbes collected the views of industry participants on whether anything has changed in the last two years. Two Years Later.

• Senate Subcommittee to Hold Hearings on ETFs.

On May 6th Investment News reported that Senator Jack Reed, Chairman of the Senate securities subcommittee, has scheduled hearings on exchange-traded funds ("ETFs"). The announcement follows sanctions imposed by the Financial Industry Regulatory Authority against four firms for making unsuitable sales of complex ETFs. Hearings.

• The Cost of Doing Business.

On May 6th, the New York Times summarized the findings of a study conducted by Woodbine Associates, a financial consulting firm. The study concluded rebates that stock exchanges pay brokers could be costing investors billions. Rebates. On May 10th, Reuters reported Senator Charles Schumer has asked SEC Chairman Mary L. Schapiro to require brokers to disclose rebates and pass any savings on to customers. Letter.

• Acting FDIC Chairman Outlines SIFI Resolution.

On May 10th, FDIC Acting Chairman Martin J. Gruenberg discussed the FDIC's authority to resolve failing systemically important financial institutions ("SIFIs"). Gruenberg outlined how the FDIC would implement its resolution authority, noting that it would place the institution in receivership, creating a bridge holding company for the SIFI's assets and investments. Shareholders and subordinated and unsecured creditors would be left in receivership, although some of the SIFI's debt would be converted into equity. Additional liquidity for the new firm could be obtained from the Orderly Liquidation Fund. Gruenberg Remarks.

• Swap Entity Access to Banking Services.

On May 10th, the Federal Reserve Board, FDIC and OCC issued guidance regarding the effective date of Section 716 of the Dodd-Frank Act with respect to entities for which each is the prudential regulator. Section 716 generally prohibits swap entities from accessing the Federal Reserve's credit facilities or discount window and FDIC insurance. Because Section 716 was part of the Wall Street Transparency and Accountability Act of 2010, the effective date for that prohibition is July 16, 2013. 77 FR 27456.

• Picking Sides.

On May 8th, the New York Times' DealBook questioned the Federal Reserve Board's action that blocked the corporate reform efforts of activist shareholders at two banks. Board Action.

• Politicizing the Fed.

On May 7th, Reuters reported that a senator's demand will likely leave the Federal Reserve Board with two vacancies and further politicize the institution. Politics.

• CFPB Considering New Home Mortgage Originating Standards.

On May 9th, the Consumer Financial Protection Bureau outlined rules it is considering that would simplify mortgage points and fees. These rules, which the CFPB expects to propose this summer and finalize by January 2013, are meant to make it easier for consumers to understand mortgage costs and compare loans. CFPB Press Release.

• SAR Activity Review Published.

On May 9th, the Financial Crimes Enforcement Network published the 21st Issue of SAR Activity Review - Trends, Tips & Issues.

• Designations.

On May 8th, the Treasury Department's Office of Foreign Assets Control announced the designation of four key Sinaloa Cartel operatives, including two sons of Sinaloa drug lord Joaquin "Chapo" Guzman Loera. The action prohibits U.S. persons from conducting financial or commercial transactions with these four individuals and also freezes any assets they may have under U.S. jurisdiction. Treasury Department Press Release.

• BSA E-Filing Webinar Materials Available.

On May 8th, the Financial Crimes Enforcement Network made the materials from its webinar on Bank Secrecy Act e-filing technical specifications available on its website. See Presentation Materials; Archived Recording.

• BSA Filing Reminder.

On May 7th, the Financial Crimes Enforcement Network reminded that beginning on July 1, 2012, all Bank Secrecy Act reporting must be done electronically. FinCEN Notice.

• FinCEN Extends Comment Period on Customer Due Diligence Proposal.

On May 4th, the Financial Crimes Enforcement Network announced it is extending to June 11, 2012, the period in which to submit comments on its advance notice of proposed rulemaking on the development of a customer due diligence ("CDD") regulation that would codify, clarify, consolidate, and strengthen existing CDD regulatory requirements and supervisory expectations, and establish a categorical requirement for financial institutions to identify beneficial ownership of their accountholders, subject to risk-based verification and pursuant to an alternative definition of beneficial ownership.

• CFTC Votes to Adopt DCM Core Principles.

On May 10th, the CFTC voted to approve new final rules implementing Sections 735 and 723 of the Dodd-Frank Act relating to the obligations of designated contract markets ("DCM"). The new rules establish the regulatory obligations that each DCM must meet in order to comply with Section 5 of the Commodity Exchange Act, as amended by the Dodd-Frank Act. They generally codify guidance and/or acceptable practices currently in practice. See Fact Sheet; Questions and Answers. The rules adopted do not include Core Principle 9, Execution of Transactions. That proposal would require at least 85 percent of all trading in each contract to occur in the centralized market or risk forced de-listing. See Sommers Remarks.

• CFTC Publishes Fees for Rule Enforcement Program.

On May 7th, the CFTC published the fees it will charge for fiscal year 2011 to designated contract markets and registered futures associations to recover the costs incurred by the CFTC in the operation of its program of oversight of self-regulatory organization rule enforcement programs. Each SRO is required to remit electronically the fee applicable to it on or before July 6, 2012. 77 FR 26672.

• Proposed Order Extending Effective Date of Certain Swap Regulations.

On May 10th, the CFTC published for comment a proposed order extending until December 31, 2012, the effective date for certain swap regulations. The proposal would allow the clearing of agricultural swaps; remove any reference to the exempt commercial market; and exempt board of trade grandfather relief previously issued by the CFTC. Comments should be submitted within 14 days after proposal publication in the Federal Register, which is expected during the week of May 14. CFTC Press Release.

• Commissioner O'Malia Publishes Dodd-Frank Act Timetable.

On May 10th, CFTC Commissioner Scott O'Malia published a list of the remaining Dodd-Frank Act rules, orders and guidance upon which the CFTC must act, as well as a timetable of when he understands the agency expects to vote on those issues. He requests comments on the list and timetable, specifically asking whether the schedule is achievable and whether the sequencing is appropriate. O'Malia Remarks.

• Distinctions Without a Difference.

On May 10th, Bloomberg reported the CFTC may use the distinction between an "affiliate" and a "branch" in determining whether its swaps rules will apply to foreign entities. Distinctions.

• Staffing Up.

On May 10th, Reuters reported the CFTC has added staff to analyze the costs and benefits associated with new rules. Staffing Up.

• Staff Concludes Emergency Powers are Limited.

On May 9th, Reuters reported CFTC staff have concluded that the agency's emergency powers do not include the authority to impose trading limits on the energy markets. Emergency Authority.

• SEC Considering Mini-Options.

On May 9th, Business Week reported the SEC will meet with NYSE Arca Options and the International Securities Exchange to discuss mini-options. Mini-Options.

• Regulators Issue Statement on OTC Derivatives.

On May 7th, the SEC released a statement issued jointly by it and other regulators meeting in Toronto, Canada, to discuss the regulation of over-the-counter derivative trading. The regulators discussed a range of implementation issues, including: pre- and post-trade transparency, margin for uncleared derivatives, coordination of clearing mandates, access to data in trade repositories, and cross-border clearing house crisis management. The regulators committed to continue to engage in bilateral discussions as necessary in their efforts to implement new requirements for OTC derivatives. SEC Press Release.

• SEC Hiring Outside Investigator to Examine its Internal Inspector General.

On May 7th, Bloomberg reported the SEC will hire an outside investigator to examine allegations of misconduct within the agency's Office of the Inspector General ("OIG"). The alleged misconduct apparently stems from events during the tenure of the former Inspector General, H. David Kotz. Outside Investigator. On May 10th, Reuters reported that David Webber, the SEC OIG's assistant inspector general for investigations, has been placed on administrative leave after other employees complained that Webber said he wanted to bring a gun to work. Administrative Leave.

• Proposed Amendments to CDS Index Clearing Services are Approved.

On May 8th, the SEC approved the Chicago Mercantile Exchange's proposed amendments relating to credit default swap guaranty fund allocations, end-of-day pricing procedures, daily submission deadlines, holiday accrual processing, and the price alignment interest payment timeline. SEC Release No. 34-66941.

• FINRA Requests Comment on Proposed FOCUS Supplement.

On May 7th, the Financial Industry Regulatory Authority ("FINRA") requested comment on a proposed supplement to the FOCUS report concerning derivatives and other off-balance sheet items. Comments should be submitted on or before June 4, 2012. FINRA Regulatory Notice 12-23.

• SEC Approves Increase in Limit for Simplified Arbitrations.

On May 3rd, the SEC approved FINRA's proposed amendment of FINRA Rules 12401 (Number of Arbitrators) and 12800 (Simplified Arbitration) of the Code of Arbitration Procedure for Customer Disputes, and FINRA Rules 13401 (Number of Arbitrators) and 13800 (Simplified Arbitration) of the Code of Arbitration Procedure for Industry Disputes, to raise the limit for simplified arbitration from $25,000 to $50,000. SEC Release No. 34-66913.

• Amendment to Procedures for Making Certain Calculations Is Approved.

On May 3rd, the SEC approved ICE Clear Europe's proposed amendment of the ICE Clear Europe Limited CDS Procedures, Finance Procedures, and Rules with respect to the calculation and payment of interest on Mark-To-Market Margin on CDS transactions. SEC Release No. 34-66911.

• Changes to Rate Risk Exposure Measurement Is Approved.

On May 3rd the SEC approved ICE Clear Credit's proposed reduction in the current level of risk mutualization among clearing participants and proposed modification of the initial margin risk model so that it is easier for clearing participants to measure their recovery rate risk exposure. SEC Release No. 34-66916.

• Proposed Increase in Customer Margin Requirement Receives Accelerated Approval.

On May 3rd, the SEC granted accelerated approval to ICE Clear Credit's proposal to require future commission merchant clearing participants to collect margin from their customers in respect of such customers' non-hedge positions at a level that is 10 percent greater than ICC's related margin requirement with respect to each product and swap portfolio. SEC Release No. 34-66918.

• MSRB Announces New Underwriter Duties.

On May 7th, the Municipal Securities Rulemaking Board announced that beginning in August, underwriters of municipal securities will be required to disclose to their state and local government clients risks about complex financial transactions, potential conflicts of interest, and compensation received from third-party providers of derivatives and investments, among other new requirements. The new rules include explicit and expanded requirements for underwriters aimed at protecting state and local governments that issue municipal bonds. MSRB Press Release. See also MSRB Notice 2012-25 (SEC Approves Interpretive Notice on the Duties of Underwriters to State and Local Government Issuers); SEC Release No. 34-66927 (SEC order approving the MSRB's new requirements).

• Order Granting Immediate Effectiveness to Complex Order Fee and Rebate Proposal is Suspended.

On April 30th, the SEC suspended proposed rule changes and instituted proceedings to determine whether to approve or disapprove proposed rule changes filed by NASDAQ OMX PHLX relating to Complex Order fees and rebates for adding and removing liquidity in Select Symbols. Comments should be submitted on or before May 25, 2012. Rebuttal comments should be submitted on or before June 8, 2012. SEC Release No. 34-66884.

• SEC Designates Longer Period to Consider Proposed Market Maker Changes.

On May 8th, the SEC designated June 26, 2012 as the date by which it will either approve or disapprove NYSE Arca's proposed amendments to Commentary .01 to NYSE Arca Rule 6.35 and to make non-substantive changes to NYSE Arca Rules 6.35, 6.37, 6.84, and 10.12. The proposals would allow a market maker's trades effected on the trading floor to accommodate cross trades executed pursuant to NYSE Arca Rule 6.47 to count toward the requirement that at least 75 percent of a market maker's trading activity be effected in classes within the market maker's appointment. SEC Release No. 34-66945.

• New Options Quotation Proposed.

On May 7th, the SEC provided notice of NYSE Arca's filing of a proposal that would add a new paragraph to NYSE Arca Options Rule 6.62 to provide for a Post No Preference Light Only Quotation ("PNPLO Quotation"). A PNPLO Quotation would be an electronic Market Maker quotation that, upon initial entry into the NYSE Arca System, would only be eligible to execute against displayed liquidity on the Consolidated Book. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of May 14. SEC Release No. 34-66937.

• SEC Designates Longer Period to Consider Proposed Retail Liquidity Program.

On May 4th, the SEC designated July 6, 2012 as the date by which it will either approve or disapprove proposed rule changes submitted by the New York Stock Exchange and NYSE Amex that would adopt new Rule 107C to establish a Retail Liquidity Program on a pilot basis to attract additional retail order flow to the exchanges. SEC Release No. 34-66928.

• Dismissal of Securities Fraud Lawsuit against CBS Corp. Is Affirmed.

On May 10th, the Second Circuit affirmed the dismissal of securities fraud claims filed against CBS Corp. and certain officers and directors. Plaintiffs alleged CBS Corp. violated the securities laws by delaying interim impairment testing of the company's intangible assets despite indicia that such a test was necessary. The Court, however, held that to state a claim, plaintiffs must have plausibly alleged that defendants did not believe the statements regarding goodwill at the time they made them and that plaintiffs' reliance on accounting standards was not enough. They needed to also allege that defendants knew impairment testing was necessary. Moreover, because plaintiffs conceded an efficient market for CBS Corp. stock, they failed to plead reliance. City of Omaha, Nebraska Civilian Employees' Retirement System v. CBS Corp.

• Compliance Officer is an At-Will Employee.

On May 8th, in a 5-2 decision the New York Court of Appeals held that a hedge fund's chief compliance officer who was allegedly fired after confronting the hedge fund's president about questionable trading activity is an at-will employee, who possesses no additional employment protections. Sullivan v. Harnisch.

• Lehman's Former Officers and Directors Must Produce Personal Financial Information.

On May 7th, the Federal District Court evaluating the proposed settlement of securities fraud claims against former officers and directors of Lehman Brothers ordered certain of those officers and directors to produce for in camera inspection financial documents necessary for the Court to determine whether they would be able to withstand a judgment greater than the one proposed. The $90 million proposed settlement would be paid entirely from insurance proceeds and none of the individual officers or directors would have to personally contribute to the settlement. In re Lehman Brothers Securities and ERISA Litigation.

• Investment Adviser Performance Compensation - Effective May 22, 2012.

The SEC is adopting amendments to the rule under the Investment Advisers Act of 1940, as amended that permits investment advisers to charge performance-based compensation to "qualified clients." The amendments revise the dollar-amount thresholds of the rule's tests that are used to determine whether an individual or company is a qualified client. These rule amendments codify revisions that the SEC recently issued by order that adjust the dollar-amount thresholds to account for the effects of inflation. 77 FR 10358.

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