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| | ______July 19, 2010 | | Volume 5, No. 27 |
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| Insights from Winston & Strawn |
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On Thursday, July 15th, the Senate finally approved the Dodd-Frank Wall Street Reform and Consumer Protection Act, the most sweeping piece of financial legislation in generations. Overcoming opposition from most Republicans and a handful of Democrats, roughly equal measures of criticism that the bill goes too far and that it doesn't go far enough, and even the death of one of the bill's supporters — Senator Robert Byrd (D-W.Va.) — the Democrats finally mustered the 60 votes necessary to end debate on the bill and move to a vote.
The bill is monumental in scope. In more than 2300 pages it affects the activities of, among others, banks and bank holding companies, investment advisers, broker-dealers, insurance companies, municipal securities advisers, hedge funds, and private equity funds. It limits the investment and proprietary trading activities of banks and their affiliates, requires sellers of asset-backed securities to have "skin in the game," and expands protection for whistleblowers. It calls for registration of hedge fund advisers and greater transparency for derivatives. It impacts credit cards, debit cards, and other forms of consumer credit. It establishes the Financial Stability Oversight Council, the Treasury Department Office of Financial Research, the Consumer Financial Protection Bureau, and the Office of the Investor Advocate. It even gives the Federal Reserve the power to require a large bank holding company to divest holdings if it poses a "grave" threat to U.S. financial stability. Everyone who owns, operates, works for or advises a financial firm is affected in some way by this legislation; however, the extent of the impact is far from clear. Much of what is covered requires formal studies, analysis, and the writing of regulations. Thus, implementation will play out over several months and, in some cases, years. So despite all of the time and effort spent turning the bill into law, and all of the analysis and commentary that has been done so far, this is really just the beginning.
On Wednesday, July 21st, we will hold the second of four scheduled webinars designed to shed light on the various parts of this important legislation. Information regarding the webinars, including how to register, can be found in the Winston & Strawn Speaking Engagements and Publications section, below, or on our Global Financial Markets Spotlight Web site.
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| In the News |
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- Senate Passes Regulatory Reform Bill.
On July 15th, the Senate passed the regulatory reform bill. See, e.g., New York Times. Bloomberg Business Week summarized the key provisions of the legislation and noted areas that will require new agency rulemaking. Provisions. Separately, the New York Times reported on the bill's impact on derivatives trading. Derivatives. Reuters reported analyst conclusions concerning the bill's effect on banks' fees, earnings and growth. Analysts. - Labor Department Issues Interim Final Rules on Fee Disclosure by Retirement Plan Service Providers.
On July 15th, the Department of Labor announced an interim final rule on the disclosure of fees and conflicts of interest affecting retirement plans. The rule is intended to assist fiduciaries in determining both the reasonableness of compensation paid to plan service providers and any conflicts of interest that may impact a service provider's performance under a service contract or arrangement. The interim final rule requires disclosure of the direct and indirect compensation that certain service providers receive in connection with the services that they provide. The rule applies to plan service providers that expect to receive $1,000 or more in compensation, and that provide certain fiduciary or registered investment advisory services; make available plan investment options in connection with brokerage or recordkeeping services; or otherwise receive indirect compensation for providing certain services to the plan. The interim final rule is effective July 16, 2011. Comments should be submitted on or before August 30, 2010. Labor Department Press Release; Fact Sheet. - Treasury Market Practices Group Releases Best Practices Recommendations.
On July 15th, the Treasury Market Practices Group published a set of best practices recommendations related to trading and settlement in the Treasury, agency debt, and agency mortgage-backed securities markets. Comments on " Best Practices for Treasury, Agency Debt, and Agency MBS Markets" should be submitted on or before July 29, 2010. TMPG Announcement. - Law Firms as Investment Managers.
On July 15th, the Boston Globe reported that an increasing number of people in the Boston area are turning to law firms to manage their investments. Investment Managers. - Regulatory Reform and Failing Firms.
On July 14th, the New York Times analyzed the regulatory reform bill's provisions for failing financial firms. Bailout Provisions. - Report Warns of Risks in China's Banks.
On July 14th, the New York Times reported that the credit rating agency Fitch has issued a report expressing concern for the financial health of banks in China. The report found that banks in China may be hiding their financial risks and that Chinese regulators may have understated recent loan growth. China's Banks. - Consumer Financial Products Regulator.
On July 14th, Bloomberg reported on the comments of Elizabeth Warren, chairman of the congressional panel overseeing the Troubled Asset Relief Program, concerning the expected creation of a consumer financial products regulator. Comments. - FDIC Files D&O Lawsuit Against Former IndyMac Executives.
On July 12th, the Los Angeles Times reported that the FDIC has filed a negligence lawsuit against four former IndyMac Bank executives for making 64 inappropriate loans to home builders. D&O Lawsuit.
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| Banking Agency Developments |
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- OCC Publishes Bulletin on CRA Revisions.
On July 14th, the OCC published a Bulletin on the federal banking and thrift regulatory agencies' proposed revisions to the Community Reinvestment Act regulations and the upcoming hearings on the proposal. - Federal and State Banking Regulators Issue Statement on Deepwater Horizon Oil Spill.
On July 14th, federal and state banking regulators urged financial firms to work with customers and clients affected by the Deepwater Horizon Mobile Offshore Drilling Unit explosion and oil spill in the Gulf of Mexico. Examiners will consider the unusual circumstances of banks and credit unions in affected areas in determining the appropriate supervisory response to safety-and-soundness issues. Interagency Statement. See also OCC Bulletin. - FDIC Votes to Revise Backup Supervisory Authority.
On July 12th, the Board of Directors of the FDIC voted to revise its Memorandum of Understanding with the primary federal banking regulators to enhance the FDIC's existing backup authority over insured depository institutions that the FDIC does not directly supervise. The revised agreement will improve the FDIC's ability to access information necessary to understand, evaluate, and mitigate its exposure to insured depository institutions, especially the largest and most complex firms. The revised MOU gives the FDIC backup supervision authority under an expanded list of circumstances, including when the insurance pricing system suggests that an insured depository institution might be at higher risk, when institutions are defined as "large" under international regulatory guidelines, or when large, interconnected bank holding companies are defined as "systemic" by the financial reform legislation. At large, complex insured depositary institutions, the FDIC will establish an expanded continuous, full-time, on-site staff presence. FDIC Press Release; Executive Summary. The OCC supports the MOU. Dugan Statement.
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| Treasury Department Developments |
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- FinCEN Extends Comment Period for Proposed Prepaid Access Rules.
On July 15th, the Financial Crimes Enforcement Network advised that it has extended, until August 27, 2010, the period of time in which comments may be submitted on its proposed amendments to the Bank Secrecy Act regulations applicable to Money Services Businesses with regard to stored value or prepaid access. FinCEN Press Release. - Treasury Designates Drug Traffickers.
On July 15th, the Treasury Department's Office of Foreign Assets Control designated nine individuals and 13 entities located in Colombia, Mexico, and Panama as Specially Designated Narcotics Traffickers. The action prohibits U.S. persons from conducting financial or commercial transactions with these individuals and entities, and freezes any assets that the designees have under U.S. jurisdiction. Treasury Department Press Release.
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| Commodity Futures Trading Commission |
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- "Systemically Important" Clearinghouses May Need to Meet Additional Standards.
On July 15th, Reuters reported that the CFTC, with the new authority that it receives under the regulatory reform bill, may require the firms that clear trades in derivatives to meet additional standards if they are considered to be "systemically important." Systemic Importance. - CFTC Seeks Budget Increase.
On July 15th, Bloomberg reported that the CFTC will seek an increase in its budget so that it can meet its new rulemaking obligations under the regulatory reform bill. The bill gives the CFTC additional authority over credit default swaps, and the agency has identified 30 areas where new rulemaking will be required. Budget. - CFTC Proposes Business Continuity and Disaster Recovery Regulations for DCMs and DCOs.
On July 14th, the CFTC published for public comment a proposed regulation that would establish a recovery standard for designated contract markets and derivatives clearing organizations that the CFTC determines to be critical financial markets, in the event of a wide-scale disruption that affects such entities' trading or clearing operations. The proposal would require those DCMs and DCOs to maintain a business continuity and disaster recovery plan and BC-DR resources sufficient to satisfy a same-day recovery time objective for trading and clearing, as well as geographic dispersal of infrastructure and personnel sufficient to achieve that objective. Comments should be submitted within 30 days after publication in the Federal Register, which is expected during the week of July 19. CFTC Release No. PR5853-10. - Technology Advisory Committee Meets.
On July 14th, Reuters reported on the CFTC's Technology Advisory Committee meeting. CFTC Commissioner Scott O'Malia said that the CFTC must address the risks posed by algorithmic trading and the expansion of the over-the-counter swaps market. O'Malia Remarks. Bloomberg reported the remarks of CFTC Chairman Gary Gensler, who suggested that limits on direct access may be necessary. Direct Access. - CFTC Proposes Rules to Improve Account Ownership and Control Data Collection.
On July 12th, the CFTC proposed for public comment new rules for the collection of certain ownership, control, and other information for all trading accounts active on U.S. futures exchanges and other reporting entities. The information will be collected via an account ownership and control report. Comments should be submitted within 60 days after publication in the Federal Register, which is expected during the week of July 19. CFTC Release No. PR5850-10. - Technology Advisory Committee.
On July 12th, the CFTC named the members of its Technology Advisory Committee. TAC Members. It also listed the paper topics suggested for presentation by TAC members. List. See also CFTC Release No. PR5849-10.
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| Securities and Exchange Commission |
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New Final Rules
- SEC Adopts New Ethics Guidelines.
On July 15th, the SEC, with the concurrence of the Office of Government Ethics, adopted supplemental standards of ethical conduct for the SEC's members and employees. The new supplemental standards give guidance to SEC members and employees on permitted, prohibited, and restricted financial interests and transactions, and on engaging in outside employment and activities. In addition, the SEC has revised its ethics rules to make them compatible with the Office of Government Ethics' government-wide ethics provisions and to reflect current SEC policies. SEC Release No. 34-62501. Request for Comments
- SEC Issues Concept Release on Proxy Access.
On July 14th, the SEC issued a Concept Release on the U.S. proxy system, asking whether rule revisions should be considered to promote greater efficiency and transparency. Comments should be submitted within 90 days after publication in the Federal Register, which is expected during the week of July 19. SEC Press Release. See also Schapiro Remarks; Casey Remarks; Aguilar Remarks. Other Developments
The SEC Commissioners will hold an Open Meeting on July 21, 2010, to consider whether to propose for public comment a new rule, and rule and form amendments, reforming the regulation of distribution fees paid by registered open-end management investment companies. The proposal would provide a new framework for the ways in which funds currently use their assets to pay for sales and distribution expenses pursuant to Rule 12b-1 under the Investment Company Act of 1940, and would revise disclosure requirements for transaction confirmations pursuant to Rule 10b-10 under the Securities Exchange Act of 1934. The SEC will also consider whether to adopt amendments to Part 2 of Form ADV, and related rules under the Investment Advisers Act of 1940, requiring investment advisers to provide clients with narrative brochures containing plain English descriptions of the advisers' businesses, services, and conflicts of interest. The amendments also would require advisers to electronically file their brochures with the SEC and the brochures would be available to the public through the SEC's website. Open Meeting Notice. - Brokerages Seek Stricter Rules for Market Makers.
On July 13th, Bloomberg reported that a group of brokerages have written to the SEC in support of stricter rules for market makers in the wake of the May 6, 2010, market events. The brokerages suggested that market makers be required to: (i) quote at the best bid and offer price at least five percent of the time; (ii) post offers for a specified number of shares at staggered prices; and (iii) limit spreads. Market Makers.
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| Exchanges and Self-Regulatory Organizations |
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Financial Industry Regulatory Authority
- SEC Approves Rules for Adoption in Consolidated Rulebook.
On July 12th, the SEC approved FINRA's proposed adoption of FINRA Rule 4210 (Margin Requirements), FINRA Rule 4220 (Daily Record of Required Margin), and FINRA Rule 4230 (Required Submissions for Requests for Extensions of Time under Regulation T and SEC Rule 15c3-3) in the Consolidated FINRA Rulebook. SEC Release No. 34-62482. - SEC Approves Amendment to Arbitration Procedures.
On July 9th, the SEC approved FINRA's proposed amendment of the Codes of Arbitration Procedure to increase the number of arbitrators on lists generated by the Neutral List Selection System. SEC Release No. 34-62480. - FINRA Expands BrokerCheck.
On July 8th, the SEC approved FINRA's proposed amendment of FINRA Rule 8312 (FINRA BrokerCheck Disclosure) to expand the information released through BrokerCheck, both in terms of scope and time; and to establish a formal process to dispute the accuracy of, or update, information disclosed through BrokerCheck. SEC Release No. 34-62476; FINRA Press Release. NASDAQ Stock Market
- Market Access Rule Is Delayed.
On July 13th, the SEC granted immediate effectiveness to the NASDAQ Stock Market's proposal to delay the application of NASDAQ Rule 6411(d), NASDAQ's Market Access Rule. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of July 19. SEC Release No. 34-62491. - Nasdaq Proposes Volatility-Based Trading Pause.
On July 7th, the SEC provided notice of the NASDAQ Stock Market's proposal to adopt Rule 4753(c), a volatility-based pause in trading in individual NASDAQ-listed securities traded on NASDAQ. NASDAQ is proposing the rule initially as a six-month pilot that will cover 100 NASDAQ Securities, beginning August 1, 2010. The rule would be in addition to the market-wide single-stock circuit breakers adopted on June 10, 2010. Comments should be submitted on or before August 5, 2010. SEC Release No. 34-62468. NYSE Amex
- NASDAQ-Listed Securities Granted Unlisted Trading Privileges on NYSE Amex.
On July 9th, the SEC granted accelerated approval to NYSE Amex's proposal to adopt as a pilot program, a new rule series for trading securities listed on the Nasdaq Stock Market pursuant to unlisted trading privileges, and amending existing NYSE Amex Equities rules as needed to accommodate that trading. Comments should be submitted on or before August 5, 2010. SEC Release No. 34-62479. See also NYSE Regulation Information Memo 10-34. - NYSE Regulation Provides Information on the Trading of ETFs Pursuant to the Nasdaq Securities Pilot Program.
On July 12th, NYSE Regulation provided NYSE Amex members with information concerning the Invesco PowerShares QQQ exchange-traded fund, which has been approved for trading on NYSE Amex Equities in accordance with the Exchange's new Nasdaq Securities Pilot Program. NYSE Regulation Information Memo 10-33. NYSE Arca
- NYSE Arca Adopts Trading Collars.
On July 13th, the SEC granted immediate effectiveness to NYSE Arca's proposed trading collars that would prevent a market order from trading more than a certain percentage away from a calculated reference price, which would be continuously updated based on market activity. The proposed rule would be in addition to the market-wide single-stock circuit breakers adopted on June 10, 2010. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of July 19. SEC Release No. 34-62485. See also NYSE Press Release.
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| Judicial Opinions |
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- Court Upholds Investment Adviser Fraud Conviction.
On July 14th, the Sixth Circuit affirmed the investment adviser fraud conviction of an investment adviser to a hedge fund who also advised a public pension fund investing in that hedge fund. The trial court properly allowed the jury to determine whether defendant had a fiduciary relationship with the pension fund, and the evidence supported that finding. U.S. v. Lay. - D.C. Circuit Vacates Fixed Indexed Annuity Rule.
On July 12th, the D.C. Circuit granted a petition for rehearing in a consolidated case and vacated Rule 151A under the Securities Act of 1933, which provides that fixed indexed annuities are not annuity contracts within the meaning of the Securities Act, thereby subjecting them to the requirements of the Act. The court held that the SEC failed to properly consider the effect of the rule upon efficiency, competition, and capital formation. In the earlier opinion the Court had remanded the rule for reconsideration. American Equity Investment Life Insurance Co. v. SEC.
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| Rules Effective Dates |
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- Amendment to Municipal Securities Disclosure - Effective August 9, 2010.
The SEC is adopting amendments to Rule 15c2-12 under the Securities Exchange Act of 1934 relating to municipal securities disclosure. The amendments revise certain requirements regarding the information that a broker, dealer, or municipal securities dealer, acting as an underwriter in a primary offering of municipal securities, must reasonably determine that an issuer of municipal securities or an obligated person has undertaken to provide, in a written agreement or contract for the benefit of holders of the issuer's municipal securities, to the Municipal Securities Rulemaking Board ("MSRB"). Specifically, the amendments require a broker, dealer, or municipal securities dealer to reasonably determine that the issuer or obligated person has agreed to provide notice of specified events in a timely manner not in excess of ten business days after the event's occurrence; amend the list of events for which a notice is to be provided; and modify the events that are subject to a materiality determination before triggering a requirement to provide notice to the MSRB. In addition, the amendments revise an exemption from the Rule for certain offerings of municipal securities with put features. The SEC also is providing interpretive guidance intended to assist municipal securities brokers, dealers, and municipal securities dealers in meeting their obligations under the antifraud provisions of the federal securities laws. 75 FR 33099.
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| Winston & Strawn Speaking Engagements and Publications |
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- Swift Justice in China for U.S. Banks Suffering Fraud Losses.
On two occasions in the past six months, Winston & Strawn attorneys have helped the firm's U.S. bank clients to recover money that was transferred from U.S. accounts to Hong Kong/China as a result of fraud. Briefing. - The Proposed Office of Financial Research: Beware of Its Scope, Mission, and Enforcement Powers.
On June 29, 2010, a Congressional Conference Committee released the final version of the financial reform legislation now known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, which includes provisions calling for the creation of a new regulatory agency called the Office of Financial Research. Briefing.
- Winston Announces Four Scheduled Briefings on Dodd–Frank Wall Street Reform and Consumer Protection Legislation.
On July 12, Winston & Strawn—led by partners Chris Edwards and Marvin Miller, with bank regulatory counsel Jerry Loeser—held the first of four scheduled client webinars on the massive 2,300+ pages of the House-Senate Conference report. Upcoming sessions and topics are: July 21: A discussion of "Regulation of Markets and Market Participants - Derivatives, Securities, Hedge Funds, Investment Advisers, and Broker-Dealers," led by Wes Nissen, Ed Johnsen, Michael O'Brien, Robert Boresta and Peter Malyshev; August 6: A report from Winston's European and Asian offices on "International Regulatory Reform Developments" and a "Focus on the New Enforcement Environment under Dodd-Frank"; and August 20: New Executive Compensation, Corporate Governance, and Officer and Director Considerations under Dodd-Frank. Event. - Boresta Discusses Recent Developments in the Regulation of Private-Placement Broker-Dealers.
Robert Boresta, of counsel in Winston & Strawn's New York office, will lead an interactive webinar entitled "Recent Developments in Regulation of Private Placement Broker-Dealers," on July 20 at 1:30 p.m. (Eastern). Event. - Buckingham to Discuss How Legislative Changes Are Affecting the Hedge Fund Industry.
On July 22, Milt Buckingham, a partner in Winston & Strawn's financial services group, will speak on the panel at "Cocktails & Commentary--The Latest on Tax Policy from Capitol Hill and Pending Regulatory Changes," a seminar organized by Deloitte and Hedge Funds Care (HFC). Event. - Winston & Strawn Sponsors TMA's Annual Convention.
Winston & Strawn is proud to sponsor the TMA Annual Convention to be held October 6-8, 2010, at the JW Marriott in Orlando, Florida. TMA is a premier professional organization dedicated to corporate renewal and turnaround management. This convention is for professionals who share a common interest in strengthening the economy through the restoration of corporate value, including turnaround practitioners, appraisers, attorneys, investment bankers, equity investors, liquidators, venture capitalists, as well as, workout specialists and outsourcing professionals. Event.
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