As the real estate and credit markets continue to struggle, a financial institution should focus its efforts on enterprise-wide risk management issues. Financial services regulators and Congress implore each financial institution to find new and better ways to identify, monitor, and manage a myriad of risks. Among the risk management tools that examiners recently have focused their reviews is portfolio stress testing. In many recent examinations, examiners have identified certain products and portfolios for which a financial institution has limited historical data to test the broad changes in market conditions that financial institutions have experienced over the past nine months. Consequently, examiners continue to take harsh positions regarding the credit quality of certain commercial real estate and financial derivative portfolios.

• Senate Banking Committee Schedules Vote on Mortgage Assistance Bill.

The Senate Banking Committee is close to passing legislation assisting troubled homeowners refinance their mortgages through the Federal Housing Administration. The bill would also restructure the oversight of Fannie Mae and Freddie Mac. The Committee has scheduled a vote for May 20, 2008. Senate Bill.

• Congress Closes "Enron Loophole."

On May 15th, a measure closing the "Enron Loophole" was passed by the Senate as part of the Farm Bill conference report. The measure was earlier passed by the House. Among other things, the bill requires electronic energy traders to provide an audit trail and record-keeping, imposes speculation limits, and increases penalties for market manipulation. Senator Feinstein Press Release.

• New ABX Derivative Contracts Begin Trading.

On May 14th, analysts stated that the new ABX derivative contracts will make valuation and hedging easier. ABX Contracts.

• U.S. and European Regulators to Consider Mutual Recognition.

On May 14th, the Transatlantic Economic Council, comprised of U.S. and European regulators, agreed to consider mutual recognition of securities regulations. Mutual Recognition.

• N.Y. Insurance Commissioner Suggests Regulating Credit Derivatives.

On May 13th, New York Insurance Commissioner Eric Dinallo has suggested regulating portions of the credit derivatives industry as insurance products. Regulation.

• British Banker's Association Reviews Libor.

On May 13th, the British Banker's Association ("BBA") accelerated its annual review of the London interbank offered rate ("Libor"). Critics of Libor have complained that banks have deliberately misquoted their borrowing costs. The BBA will announce the results of its review on May 30, 2008. Libor.

• House Subcommittee Investigating Alleged Manipulation of Energy Markets.

On May 12th, the House Energy and Commerce Subcommittee on Oversight began examining speculation in the energy markets, including the role of investment banks. The Subcommittee has scheduled hearings on the issue for May 21, 2008 with additional hearings occurring in June. Energy Manipulation.

• Federal Reserve Chairman Urges Banks to Raise Capital.

On May 15th, Federal Reserve Chairman Ben S. Bernanke addressed the Federal Reserve Bank of Chicago's Annual Conference on Bank Structure and Competition. He discussed risk-management practices in financial institutions as well as the supervisory oversight of those practices. The restoration of strong incentives for sound risk management should enable institutions to overcome the difficulties seen in the recent application of the originate-to-distribute model and allow its successful use again. The Fed Chairman stressed the need for generous capital cushions and strongly urged financial institutions to be proactive in their capital-raising efforts. Bernanke Remarks.

• Federal Reserve Approves Amendments to Appendix A of Regulation CC.

On May 13th, the Federal Reserve Board approved amendments to Appendix A of Regulation CC that reflect the restructuring of the Federal Reserve's check processing operations in the Sixth and Eighth Districts. The amendments are effective July 19, 2008. 73 FR 28319.

• Federal Reserve Chairman Addresses Federal Reserve Bank of Atlanta Financial Markets Conference.

On May 13th, Federal Reserve Chairman Ben S. Bernanke discussed the principles that should guide central banks' actions to support market liquidity, the liquidity measures implemented by the Federal Reserve in response to recent financial turmoil and liquidity regulation. Although the Federal Reserve stands ready to increase the size of its term auction facility, Bernanke warned against the "moral hazard" that accompanies such steps. Bernanke Remarks. See also Bloomberg.

• OCC Issues Bulletin on Application Security.

On May 9th, the OCC issued a bulletin reminding national banks and their technology service providers that application security is an important component of their information security program. OCC Bulletin.

• Treasury Designates Three Belarusian Enterprises.

On May 15th, the Treasury Department's Office of Foreign Asset Control designated three Belarusian enterprises of Belneftekhim Concern, Lakokraska OAO, Polotsk Steklovolokno OAO, and the Belarusian Oil Trade House. Any assets of these entities that are within U.S. jurisdiction must be frozen. Additionally, U.S. persons are prohibited from conducting financial or commercial transactions with these entities. Treasury Department Press Release.

• FinCEN Publishes SAR Activity Review.

On May 13th, the Financial Crimes Enforcement Network published Issue 13 of the SAR Activity Review, Trends, Tips and Issues. In the SAR Activity Review, FinCEN states that residential mortgage loan fraud has been increasing at an average of 44 percent per year since 2004. In addition, instances of identity theft increased 96 percent since 2004. Increases in SAR filing activity was also seen in the insurance industry, primarily in New York, Massachusetts, and Ohio. The SAR filing activity has increased so much that FinCEN will begin to develop an SAR for specific for the insurance industry. Currently, insurance companies use the securities industry form, Form SAR-SF, when filing an SAR. SAR Activity Review.

• Treasury Department Eases Financial Sanctions on Burma for Humanitarian Relief.

On May 12th, the Treasury Department's Office of Foreign Asset Control authorized U.S. financial institutions to process transfers of funds, unlimited in amount, for noncommercial, personal remittances to or from Burma, or for or on behalf of an individual ordinarily resident in Burma. The license does not allow transfers by, to, or through persons blocked under the Burma sanctions program. The license, however, does allow transfers to be made utilizing the services of blocked financial institutions in Burma, provided the transfers are made through third-country banks and that debits or credits are not made to any blocked account that is on the books of a U.S. financial institution. Treasury Department Press Release.

• CFTC Finds No Evidence of Manipulation in the Silver Markets.

On May 14th, the CFTC announced that a study conducted by the Division of Market Oversight has found no evidence of manipulation in the silver markets for the 2005-2007 period. CFTC Release No. 5499-08.

• SEC Amends Definition of Eligible Portfolio Company under the Investment Company Act.

On May 15th, the SEC published the adopting release for a new rule under the Investment Company Act of 1940 that will more closely align the definition of eligible portfolio company, and the investment activities of business development companies, with the purpose that Congress intended. The amendment expands the definition of eligible portfolio company to include certain companies that list their securities on a national securities exchange. The amendment will be effective 60 days after publication in the Federal Register. SEC Release No. IC-28266; SEC Press Release.

• SEC Votes to Propose Amendments Requiring Use of Interactive Data for Financial Reporting.

On May 14th, the SEC announced that it has voted to propose amendments requiring all U.S. companies to provide financial information using interactive data beginning next year for the largest companies, and within three years for all public companies. SEC Press Release. See also Remarks of SEC Chairman; Remarks of Legal Branch Chief.

• SEC Advisory Committee on Improvements to Financial Reporting Requests Comment on Subcommittee Reports.

On May 15th, the SEC's Advisory Committee on Improvements to Financial Reporting published four subcommittee reports that were presented to the Advisory Committee at its May 2, 2008 open meeting and requested public comment on those subcommittee reports. The subcommittee reports contain the subcommittees' updates of their work through the May 2, 2008 open meeting and contain preliminary hypotheses and other material that will be considered by the full Committee in developing recommendations for the Committee's final report. Comments should be submitted within 30 days after publication in the Federal Register. SEC Release No. 33-8918.

• Industry Associations Release Exposure Draft on Principles Affecting the Distribution of Structured Products to Individuals.

On May 12th, the European Securitisation Forum, International Capital Market Association, London Investment Banking Association, International Swaps and Derivatives Association, and Securities Industry and Financial Markets Association released an exposure draft of "Structured Products: Principles for Managing the Distributor-Individual Investor Relationship." The global, non-binding Principles address a wide range of issues affecting distribution of structured products to individual investors. Comments should be submitted on or before June 16, 2008. Joint Press Release.

• FINRA Advises of Supplement to the Options Disclosure Document.

On May 15th, FINRA advised that the SEC has approved a supplement to the Options Disclosure Document ("ODD") that provides additional disclosures regarding certain binary options, also known as fixed-return options, and delayed start options. The supplement also amends the front cover page of the ODD to update the list of U.S. exchanges that trade options issued by The Options Clearing Corporation. FINRA Information Notice.

• FINRA Issues Interpretive Letter Regarding Discretionary Accounts.

On May 15th, FINRA issued a Staff Interpretive Memorandum regarding the use of a negative response process under NASD Rule 2510(d)(2)(D) to designate an alternative money market sweep fund when an existing sweep fund closes with inadequate notice. FINRA Interpretive Letter.

• FINRA Proposes Consolidated Rules.

On May 14th, the FINRA requested comment on four sets of proposed rules based, in part, on existing NASD and NYSE Rules. The proposals are part of the ongoing process to integrate current NASD and NYSE rules into a new Consolidated FINRA Rulebook. FINRA Regulatory Notice 08-23 seeks comment on financial responsibility rules; FINRA Regulatory Notice 08-24 seeks comment on supervision and supervisory control rules; FINRA Regulatory Notice 08-25 seeks comment on books and records rules; and FINRA Regulatory Notice 08-26 seeks comment on a rule requiring member firms, with certain exceptions, to provide customers with FINRA's Web site address and information regarding FINRA's BrokerCheck program at least once every calendar year. Comments on the proposed rules should be submitted on or before June 13, 2008.

• FINRA Exempts Certain Intermarket Sweep Orders from Manning Rules.

On May 6, 2008, the SEC approved a FINRA proposal to exempt certain Regulation NMS-compliant Intermarket Sweep Orders ("ISOs") from the restrictions against trading ahead of customer limit and market orders found in FINRA IM-2110-2 and Rule 2111 (the "Manning and "Market Manning" rules). FINRA members will be exempt from the trading ahead restrictions if an ISO is routed in compliance with Regulation NMS and the customer limit order or market order is received after ISO is routed. The exemption also will apply if the member executes an ISO to facilitate a customer limit order or market order and the customer has consented to not receiving the better prices obtained by the ISO. The exemption is similar to one adopted by the NYSE to Rule 92 and approved by the SEC on July 5, 2007. SEC Release No. 34-57784.

• ISE Amends Rule Relating to Exposure of Public Customer Orders.

On May 12th, the SEC granted accelerated approval to the International Securities Exchange's proposal to provide that before a primary market maker sends an order through the options intermarket linkage system (a "Linkage Order") on behalf of a public customer, the public customer order will be exposed at the national best bid or offer ("NBBO"), for a period not to exceed one second, during which ISE market makers may enter responses up to the size of the order being exposed. If the order cannot be executed in full on the ISE at the current NBBO or better and it is marketable against the current NBBO, a Linkage Order will be sent on the customer's behalf for the balance. Otherwise it will be placed on the ISE book. Comments should be submitted within 21 days after publication in the Federal Register. SEC Release No. 34-57812.

• Nasdaq Proposes Listing Rules for Managed Fund Shares.

On May 8th, the SEC provided notice of the NASDAQ Stock Market's proposal to adopt new Nasdaq Rule 4420(o) which will permit listing and trading, or trading pursuant to unlisted trading privileges, of securities issued by actively managed, open-end investment management companies and to amend certain other Nasdaq rules to incorporate references to such "Managed Fund Shares." Comments should be submitted on or before June 4, 2008. SEC Release No. 34-57800.

• NYSE Regulation Extends Operative Date for Rule 92(c)(3).

On May 12th, NYSE Regulation advised NYSE members that it has filed with the SEC a request to extend the operative date of NYSE Rule 92(c)(3) to March 31, 2009. When the NYSE amended Rule 92 to permit riskless principal trading, it implemented Rule 92(c)(3), which requires member organizations to submit to an NYSE database a report of the execution of the facilitated order and sufficient information to provide an electronic link of the execution to all of the underlying orders. NYSE Regulation had informed member organizations that they must submit the reports, and use an "R" account-type indicator for riskless principal transactions, by May 14, 2008, but now wants the extension so that it can review with FINRA and member organizations Rule 92 and FINRA's limit order protection ("Manning") rule in order to harmonize those rules. NYSE Regulation Information Memo 08-27.

• Court Consider Class Action Fairness Act.

On May 13th, the Second Circuit considered the scope of the Class Action Fairness Act ("CAFA"). Among other things, CAFA expands federal diversity jurisdiction by allowing removal of securities cases of national impact from the state courts and confers appellate jurisdiction to review orders granting or denying motions to remand such removed cases. Plaintiffs, seeking relief under a state consumer fraud statute, alleged that defendants, while marketing debt certificates, failed to disclose that the issuer was insolvent. The Court held that plaintiffs' claims do not enforce the rights of the certificate holders as holders, and therefore do not relate to the rights or duties created by or pursuant to any security. The Court therefore accepted jurisdiction over the appeal and reversed the district court's remand order. Pew v. Cardarelli.

• Philipp Speaks at National Futures Association Workshop on Promotional Material.

Winston & Strawn Financial Services partner Michael Philipp participated on a panel for a National Futures Association workshop titled "Promotional Material Rules and Regulations" on Monday, May 19, 2008, in Chicago. Event Information.

• Edwards Participates in GC Roundtable at SIFMA Chicago Seminar.

Winston & Strawn financial services partner Christine Edwards will speak at the Securities Industry and Financial Markets Association (SIFMA) Compliance & Legal Division's Chicago Regional Seminar titled The Changing Compliance & Legal Landscape to be held on June 3, 2008 in Chicago. Event Information.

• Webb, Sullivan, and Edwards Speak at ALM General Counsel Conference.

Winston & Strawn litigation partners Dan Webb and William Sullivan and corporate partner Christine Edwards will be among the speakers at the 20th Annual General Counsel Conference to be held June 9-10, 2008 in New York City. Event Information.

• Wes Nissen Moderates Panel at Managed Funds Association Forum 2008.

Winston & Strawn financial services partner Wesley G. Nissen will moderate the "Sound Practices Highlights" session panel at the Managed Funds Association's Forum 2008 on Monday, June 23, 2008 from 10:00 -11:15am. Event Information.

• Recent Winston & Strawn Client Briefings.

President's Working Group Committees Release "Best Practices" for Hedge Fund Participants, May 15, 2008. View Briefing.

OCC Modifies Regulations to Relieve Burden and to Conform to Statutory Changes, May 15, 2008. View Briefing.

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