Financial Services Update______January 23, 2012
Volume 7, No. 4



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]

As two of this week's "In the News" articles make clear, Congress continues to closely monitor regulation of the financial industry. Some members of the House of Representatives are challenging the wisdom of the Volcker Rule, questioning whether the issues that the rule is designed to address (proprietary trading and investments in hedge funds and private equity funds by depository institutions) really played a significant role in the 2008 financial crisis. They are also raising concerns that the rule could place the country's largest commercial banks at a competitive disadvantage vis-a-vis their foreign counterparts. Also at issue is whether removing a number of financial institutions from the trading markets will have a significant negative impact on market liquidity, especially if there are not carefully considered exceptions for market-making. Another concern is the potentially staggering cost to financial institutions of complying with the rule. At the same time, the Senate Agriculture Committee and a number of self-regulatory organizations are considering policies to better protect customer property and funds.
Although the principal concern behind these and similar congressional efforts is the protection of the markets and market participants, broader concerns also factor into the debate. In his opening statement Wednesday at a joint hearing titled "Examining the Impact of the Volcker Rule on Markets, Businesses, Investors and Job Creation," New Jersey Congressman Scott Garrett, Chairman of the Subcommittee on Capital Markets and Government-Sponsored Enterprises for the House Financial Services Committee, expressed apprehension that market liquidity could be restricted, "which ultimately kills jobs," and that constraints on investment options for depository institutions will lead to a concentration of risk on the balance sheets of banks that could make them less rather than more stable.
It is important to remember that we have entered a major election year, when the Presidency, one-third of the Senate, and the entire House of Representatives are up for grabs. And despite what often appears to be an overly enhanced focus by the media and others on personal and other issues, the paramount issue for many Americans continues to be the economy and how to prevent a reoccurrence of the 2008 financial crisis. With that in mind, it is not surprising that so many legislators and others in government and in other regulatory positions are remaining closely focused on issues related to the financial markets.
As always, we will be watching these developments closely over the next several months in an effort to keep our clients informed with respect to these matters.
In the News [Top]
  • The Volcker Rule.
On January 18th, two House Financial Services subcommittees held joint hearings on the impact of proposed regulations implementing the "Volcker Rule," the Dodd-Frank Act's prohibition against proprietary trading by certain financial and insured depository institutions. See Hearing Webpage (with links to archived webcast and to witness' prepared remarks). Bloomberg summarized the statements of Congressmen who decried the proposed regulation's complexity. Bloomberg also noted that Acting Comptroller of the Currency John Walsh said that the regulations could put U.S. firms at a competitive disadvantage. Other speakers called claims that the regulations would inhibit liquidity in the financial markets specious.
  • Customers vs. Creditors.
On January 18th, Bloomberg summarized the arguments made by the CFTC and MF Global Holdings' bankruptcy trustee to the bankruptcy court overseeing the latter's reorganization. The court had requested briefing on the priority of claims submitted to it. The CFTC contends that customers of MF Global's insolvent futures commission merchant should be repaid before other creditors, including the parent company. Priorities. See also CFTC Reply Brief.
  • Senate Agriculture Committee Seeks MF Global Recommendations.
On January 18th, the New York Times' DealBook reported that the Senate Agriculture Committee has asked the commodities industry to make policy recommendations in response to MF Global's collapse and the disappearance of up to $1.2 billion in customer funds. Recommendations.

Banking Agency Developments [Top]
  • OCC Announces Workshop in Fort Lauderdale, Florida.
The OCC will host a workshop for directors of nationally chartered community banks and federal savings associations in Fort Lauderdale, Florida on February 27-29, 2012. The workshop will provide practical information that is intended to expand bank directors' skills and understanding of issues facing their banks. The workshop is entitled "A Director's Challenge: Mastering the Basics" and is geared primarily to directors of national community banks and federal savings associations with assets of less than $5 billion who would like to review the fundamental requirements of their position. OCC Press Release.
  • FDIC Approves Final Rule Requiring Resolution Plans for the Largest Insured Depository Institutions.
On January 17th, the FDIC approved a final rule requiring insured depository institutions with $50 billion or more in total assets to submit to the FDIC periodic contingency plans for resolution in the event of the institution's failure. The final rule for insured depository institutions was preceded by an interim final rule adopted in September 2011. The interim final rule became effective on January 1, 2012, and will remain in effect until it is superseded by this final rule, which is effective April 1, 2012. The final rule includes several modifications that were made in response to comments received, including modifications to more closely align the final rule with the rule previously jointly adopted by the FDIC and the Federal Reserve under Section 165(d) of the Dodd-Frank Act. The Section 165(d) rule requires certain systemically important nonbank financial companies and bank holding companies to prepare resolution plans. FDIC Press Release.
  • FDIC Proposes Stress Tests for Largest Insured State Banks.
On January 17th, the FDIC published for comment a notice of proposed rulemaking that would require certain large insured depository institutions to conduct annual capital-adequacy stress tests. The proposal, to implement Section 165(i)(2) of the Dodd-Frank Act, would apply to FDIC-insured state nonmember banks and FDIC-insured state-chartered savings associations with total consolidated assets of more than $10 billion. Comments should be submitted within 60 days after publication in the Federal Register, which is expected during the week of January 23rd. FDIC Press Release.
  • OCC Issues Cost of Funds Reports.
On January 17th, the OCC issued the monthly Cost of Funds reports (current and historical), which provide information about funding costs, as of November 30, 2011, for institutions formerly regulated by the Office of Thrift Supervision. OCC Press Release.

Treasury Department Developments [Top]
  • Payday Lenders.
On January 19th, The Consumer Financial Protection Bureau ("CFPB") held hearings on payday lenders, stating that it would implement its payday lending supervision program based on its assessment of risks to consumers. The CFPB will coordinate its efforts with other federal and state agencies. Its examination of payday lenders will begin with scoping, review of information, and data analysis followed by onsite examinations. The CFPB will be in regular communication with supervised entities, and it will conduct follow-up monitoring. CFPB Press Release. The CFPB also published its Short-Term, Small-Dollar Lending Examination Procedures, a field guide that CFPB examiners will use to make sure that payday lenders, including banks and nonbanks, are following federal consumer financial laws.
  • Treasury Designates Guatemalan Drug Traffickers.
On January 19th, the Treasury Department's Office of Foreign Assets Control ("OFAC") announced the designation of Guatemalan national Marllory Dadiana Chacon Rossell and seven other individuals and entities connected to Chacon Rossell's drug trafficking and money laundering organization as Specially Designated Narcotics Traffickers. The action prohibits U.S. persons from conducting financial or commercial transactions with these entities and individuals and freezes any assets that the designees may have under U.S. jurisdiction. Treasury Department Press Release.
  • Unblocking Notices.
On January 18th, OFAC published the names of 15 individuals and 29 entities whose property and interests in property have been unblocked pursuant to Executive Order 12978 of October 21, 1995, "Blocking Assets and Prohibiting Transactions With Significant Narcotics Traffickers." OFAC also published the names of one individual and one entity whose property and interests in property have been unblocked pursuant to the Foreign Narcotics Kingpin Designation Act. On January 19th, OFAC published the name of an individual whose property and interests in property have been unblocked pursuant to Executive Order 13315 of August 28, 2003, "Blocking Property of the Former Iraqi Regime, Its Senior Officials and Their Family Members, and Taking Certain Other Actions," as amended by Executive Order 13350 of July 30, 2004. OFAC also published the name of an entity whose property and interests in property have been unblocked pursuant to Executive Order 13315 as amended by Executive Order 13350.
Commodity Futures Trading Commission [Top]
  • Business Conduct Standards for Swap Dealers and Major Swap Participants.
On January 17th, the CFTC published new final rules prescribing external business conduct standards for swap dealers and major swap participants.
Securities and Exchange Commission [Top]
  • SEC Seeks Comments on Financial Literacy and Investor Disclosure.
On January 18th, the SEC, in accordance with Section 917 of the Dodd-Frank Act, requested comment on financial literacy and investor disclosure issues. The SEC is seeking comment on methods to improve the timing, content, and format of disclosures to investors regarding financial intermediaries, investment products, and investment services. It also requests comment on information that retail investors need in order to make informed financial decisions before hiring a financial intermediary or purchasing an investment product or service. In addition, the SEC seeks comment on how to make investment expenses and conflicts of interest in investment transactions more transparent to investors. Comments should be submitted within 60 days after publication in the Federal Register, which is expected during the week of January 23rd. SEC Release No. 34-66164; SEC Press Release.
  • Corporation Finance Revises the Financial Reporting Manual.
On January 19th, the Division of Corporation Finance released a summary of changes made to the Financial Reporting Manual as of September 30, 2011.

Exchanges and Self-Regulatory Organizations [Top]
  • SROs to Review Customer Segregated Account Safeguards.
On January 18th, CME Group and the National Futures Association announced, in conjunction with the InterContinental Exchange, the Kansas City Board of Trade, and the Minneapolis Grain Exchange, the formation of a joint committee to review how self-regulatory organizations can strengthen current safeguards for customer segregated funds in light of the MF Global bankruptcy. The committee will hold its first meeting within the next two weeks and plans to issue a series of recommendations by the end of the first quarter of this year. NFA Press Release. On January 19th, Reuters reported that NFA President Dan Roth believes that increased spot checks of futures commission merchant records are likely. Roth Comments.
Chicago Stock Exchange
  • CBOE Proposes Amendments to Institutional Broker Rules.
On January 18th, the SEC provided notice of the Chicago Stock Exchange's proposed amendments that would permit broker-dealers registered with the exchange as Institutional Brokers to operate a non-Institutional Broker unit within the same Participant Firm. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of January 23rd. SEC Release No. 34-66177.
The Depository Trust Company
  • SEC Approves Proposed Risk Management Controls.
On January 18th, the SEC approved The Depository Trust Company's proposed enhancements to the risk management controls associated with the receiver authorized delivery function. SEC Release No. 34-66179.
Financial Industry Regulatory Authority
  • SEC Approves Amendments to FINRA Rulebook.
On January 18th, FINRA announced that the SEC has approved amendments to FINRA Rule 0160 (Definitions) and the repeal of Incorporated NYSE Rule 2A (Jurisdiction) from the FINRA rulebook. The amendments take effect on February 21, 2012. FINRA Regulatory Notice 12-04.
  • FINRA Provides Guidance on Complex Products.
On January 17th, FINRA provided guidance regarding the supervision of complex products, which may include a security or investment strategy with novel, complicated or intricate derivative-like features, such as structured notes, inverse or leveraged exchange-traded funds, hedge funds, and securitized products such as asset-backed securities. The Notice identifies characteristics that may render a product "complex" for purposes of determining whether it should be subject to heightened supervisory and compliance procedures, and provides examples of heightened procedures that may be appropriate. FINRA Regulatory Notice 12-03.
  • Supreme Court Denies Certiorari in Case Challenging the Creation of FINRA.
On January 17th, the Supreme Court denied certiorari in a case alleging that the National Association of Securities Dealers and NYSE Group made misstatements in a proxy solicitation leading to the creation of the Financial Industry Regulatory Authority. Cert. Denied. In the opinion below, the Second Circuit held that NASD and NYSE Group were immune from a private damages lawsuit.
  • SEC Designates Longer Period for Commission Action on Proposal Regarding the Trading of Agency MBS.
On January 13th, the SEC designated January 22, 2012, as the date by which it will either approve, disapprove, or institute proceedings to determine whether to disapprove FINRA's proposed rule change related to post-trade transparency for agency pass-through mortgage-backed securities traded "to be announced." SEC Release No. 34-66149.
NASDAQ OMX Group
  • Alternative Listing Bid Price Proposed.
On January 13th, the SEC provided notice of the NASDAQ Stock Market's proposal to adopt an alternative to the $4 initial listing bid price requirement for the Nasdaq Capital Market of either $2 or $3, if certain other listing requirements are met. Comments should be submitted on or before February 10, 2012. SEC Release No. 34-66159.
National Futures Association
  • NFA Accepting Registration Applications for SDs and MSPs.
On January 19th, the National Futures Association announced that it is accepting applications for registration as a swap dealer or major swap participant. NFA Press Release.
NYSE Euronext
  • Gambling is Prohibited.
On January 17th, NYSE Euronext reminded exchange members that promoting or participating in certain gambling activities on NYSE premises, including the NYSE and NYSE Amex trading floors, is strictly prohibited by the Floor Conduct and Safety Guidelines and Exchange Rules. NYSE Information Memo 12-2.

Judicial Opinions [Top]
  • Second Circuit Strictly Applies Short-Swing Profit Provision.
On January 20th, the Second Circuit held that a beneficial owner's acquisition of securities directly from an issuer (at the issuer's request and with the board's approval) is subject to the strict liability for short-swing profit provisions of Section 16(b) of the Securities Exchange Act. The Second Circuit noted that defendants (limited partnerships that acquired the securities under a private investment in public equity transaction), are not directors by deputization, nor officers, nor directors. Therefore, the exemption from Section 16(b) liability provided by SEC Rule 16b-3(d) does not apply. Unlike officers and directors, defendants - beneficial owners by virtue of their 10 percent ownership - do not necessarily owe a fiduciary duty to the corporation. Moreover, the Court held that the defendants are beneficial owners for purposes of Section 16(b) liability notwithstanding their delegation of voting and investment control over their securities portfolios to their general partners' agents. Huppe v. WPCS International Inc.
  • Court Sua Sponte Enters Summary Judgment Dismissing Research Analyst Securities Fraud Case.
On January 13th, the Massachusetts Federal District Court precluded the testimony of securities fraud plaintiffs' loss causation expert. Plaintiffs, investors in AOL-Time Warner, alleged that defendants made material representations concerning AOL-Time Warner. The Court, however, found that the expert's event study suffered from pervasive methodological errors and lacked congruity with actual data. Because the preclusion of the expert's testimony meant plaintiffs failed to raise a triable issue of fact regarding loss causation, the Court sua sponte entered summary judgment dismissing the complaint. Bricklayers and Trowel Trades International Pension Fund v. Credit Suisse First Boston.
Rules Effective Dates [Top]
  • Mine Safety Disclosure - Effective January 27, 2012.
The SEC is adopting rule amendments to implement Section 1503 of the Dodd-Frank Act. Section 1503(a) of the Act requires issuers that are operators, or that have a subsidiary that is an operator, of a coal or other mine to disclose in their periodic reports filed with the SEC, information regarding specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities. Section 1503(b) of the Act mandates the filing of a Form 8-K disclosing the receipt of certain orders and notices from the Mine Safety and Health Administration. 76 FR 81762.
  • Net Worth Standard for Accredited Investors - Effective February 27, 2012.
The SEC is adopting amendments to the accredited investor standards under the Securities Act of 1933 to implement the requirements of Section 413(a) of the Dodd-Frank Act. Section 413(a) requires the definitions of "accredited investor" in the Securities Act rules to exclude the value of a person's primary residence for purposes of determining whether the person qualifies as an "accredited investor" on the basis of having a net worth in excess of $1 million. This change to the net worth standard was effective upon enactment by operation of the Dodd-Frank Act, but Section 413(a) also requires revision of the current Securities Act rules to conform to the new standard. The SEC is also adopting technical amendments to Form D and a number of other rules to conform them to the requirements of Section 413(a) and to correct cross-references to former Section 4(6) of the Securities Act, which was renumbered Section 4(5) by Section 944 of the Dodd-Frank Act. 76 FR 81793.
Winston & Strawn Speaking Engagements and Publications [Top]
  • Johnsen Discusses Public Policy and Regulatory Reform.
Edward Johnsen, a partner in Winston & Strawn's New York office, will participate in a panel discussion titled "Public Policy and Regulatory Reform: The Dollars and Sense of Dodd-Frank," to be held February 2, 2012, in New York. Event.

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