Winston & Strawn LLP: Financial Services Update - February 9, 2009

Financial Services Update______February 9, 2009
Volume 4, No. 6



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

Federal Appellate Court Opinions

Rules Effective Dates

Winston & Strawn Speaking Engagements and Publications


Insights from Winston & Strawn [Top]

This should be yet another significant week in Washington, with the Senate nearing a vote, possibly as early as Tuesday, on its fiscal stimulus bill. Although passage in the Senate is all but assured, reconciling the differences between the House and the Senate versions will not be easy. However, given the continued precarious state of the economy, the rush will be on to enact a recovery package as soon as possible. Votes by the full Congress on the final version of the bill may come late this week. Some economists are questioning the wisdom of using massive fiscal stimulus to combat the nation's economic woes, while others are no doubt finding fault with the proposed spending programs. However, it would appear that most of the nation is willing to support federal spending of this size, as long as it is designed to foster long-term economic growth. Will Congress be able to roll up its sleeves, honor President Obama's call for post-partisan dialogue, and produce a sensible package this week that meets this standard?
Also, on Tuesday, Feb. 10, Treasury Secretary Geithner is expected to announce a significant expansion and revision to the government's comprehensive banking/financial services rescue plan. In particular, according to press reports, the Treasury Department will seek to go forward with its proposed version of the much-anticipated "bad bank" idea. Under this plan, the government would establish an aggregator bank that would buy troubled assets with financing from the private sector and public TARP money. Many details of this plan remain to be worked out. However, the idea seems to be a promising one, which should be worthy of Wall Street's and the public's support. Other aspects of the Obama administration's financial rescue plan appear to be, pending last-minute revisions, (i) issuing new terms and conditions for companies that receive or have received government aid, in addition to the executive compensation restrictions previously announced, (ii) providing for another round of possible capital injections with more stringent terms, (iii) expanding TALF to include assets beyond student, credit card, and auto loans, (iv) with necessary legislation, giving the FDIC supervisory power over non-depository financial institutions, and (v) creating national standards for home mortgage modification and relief. In addition, equally important, it is reported that the Treasury will undertake a public relations "makeover" to attempt to strengthen public support for these and other initiatives. We look forward to the release of the details surrounding these important initiatives in the coming days and weeks, as the United States and other nations continue their long climb up from their current economic woes.


In the News [Top]
  • Federal Reserve Hires Consultants to Assist with TARP.
On February 6th, Bloomberg reported on the outside consultants hired by the Federal Reserve to assist with the oversight and management of the Troubled Asset Relief Program and the concerns that such relationships have raised. Consultants.
  • Treasury Department to Unveil Further Responses to Financial Crisis.
Treasury Secretary Timothy Geithner is expected to announce on February 10, 2009 that the federal government will become a partner with the private sector to purchase banks' troubled assets, by organizing an aggregator "bad bank" that would be jointly owned by the government and the private sector. Other major changes to or expansions of the government's financial services rescue plan also are expected to be announced February 10. Bailout Changes.
  • TARP Inspector General Releases Report.
The Special Inspector General for the Troubled Asset Relief Program, Neil M. Barofsky, has released a report warning that the Term Asset-Backed Securities Loan Facility is at risk for fraud and suggesting that the Treasury Department not participate in the program until safeguards are in place. The Inspector General will also request each recipient of TARP funds to provide an accounting. Report.
  • TARP Regulators Testify Before Senate Banking Committee.
Neil M. Barofsky, Elizabeth Warren, Chairwoman of the TARP Congressional Oversight Panel, and Gene Dodaro, Acting Comptroller General, testified before the Senate Banking Committee. The regulators called for better oversight of TARP and warned of areas susceptible to fraud. Barofsky stated that his office will be examining possible instances of criminal fraud. Hearings. See also Barofsky Written Testimony; Warren Written Testimony; Dodaro Written Testimony.
  • Volcker Testifies before Senate Banking Committee.
Paul A. Volcker, Chairman of the President's Economic Recovery Advisory Board, testified before the Senate Banking Committee. Among other things, Volcker called for the regulation of hedge funds and the tighter regulation of systemically important financial institutions. Volcker Testimony.
  • New U.S. Attorney General Comments on Financial Industry Investigations.
U.S. Attorney General Eric Holder issued a statement concerning possible Justice Department investigations of the financial industry. In the statement, Holder states there will be no "witch hunts," but his department will hold those who engaged in financial misconduct responsible for their actions. Comments.

Banking Agency Developments [Top]
  • FDIC Releases Survey Results.
On February 5th, the FDIC released the results of its first national survey of banks' efforts to serve the unbanked. FDIC Press Release.
  • Federal Reserve Board Extends Liquidity Programs.
On February 3rd, the Federal Reserve Board announced the extension, through October 30, 2009, of its existing liquidity programs that were scheduled to expire on April 30, 2009. The extended programs are the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Money Market Investor Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. In addition, the temporary reciprocal currency arrangements (swap lines) between the Federal Reserve and other central banks have been extended to October 30. The current expiration date for the Term Asset-Backed Securities Loan Facility remains December 31, 2009. Other Federal Reserve liquidity facilities, such as the Term Auction Facility, do not have a fixed expiration date. Federal Reserve Board Press Release.
  • Federal Reserve Board Publishes New Rules Regarding the Asset-Backed Commercial Paper Money Market Liquidity Facility.
On January 30th, the Federal Reserve Board published new final rules pertaining to the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility ("AMLF"), which extends loans to banking organizations to finance their purchases of high-quality asset-backed commercial paper from money market mutual funds.
  • The Board also adopted a third final rule providing a temporary exception to the limitations in section 23A of the Federal Reserve Act, allowing all insured depository institutions to provide liquidity to their affiliates for assets typically funded in the tri-party repo market. This exception expires on October 30, 2009, unless extended by the Board, and is subject to various conditions to promote safety and soundness.
Federal Reserve Board Press Release.
  • Federal Reserve Board Publishes Homeowners Preservation Policy for Residential Mortgage Assets.
On January 30th, the Federal Reserve Board published a policy that was adopted to help avoid preventable foreclosures on certain residential mortgage assets held, owned, or controlled by a Federal Reserve Bank. Federal Reserve Board Press Release.

Treasury Department Developments [Top]
  • Treasury Department Announces Executive Compensation Guidelines.
On February 4th, the Treasury Department issued new guidelines on executive pay for financial institutions receiving government assistance. The guidelines distinguish between banks participating in any new generally available capital access program and banks needing "exceptional assistance." Banks falling under the "exceptional assistance" standard have bank-specific negotiated agreements with Treasury. Examples include AIG, and the Bank of America and Citi transactions under the Targeted Investment Program. All companies receiving government assistance must ensure compliance with executive compensation provisions. Going forward, companies receiving exceptional assistance must also limit the total amount of compensation awarded an individual, senior executive to no more than $500,000. Any additional pay must be in restricted stock that vests when the government has been repaid with interest. Further conditions include requiring firms to submit their compensation structure to shareholders for a non-binding vote and expanding clawback provisions. The Treasury Department will also seek comment on proposed executive compensation guidance for firms receiving generally available assistance. Finally, the Treasury Department suggested long term reforms for compensation structure and will sponsor a conference on executive pay reform. Treasury Department Press Release. On February 6th, Reuters reported on possible loopholes to the compensation guidelines. Loopholes.
  • Treasury Department Designates Kurdish Group as Terrorist Organization.
On February 4th, the Treasury Department designated the Free Life Party of Kurdistan ("PJAK"), a Kurdish group operating in the border region between Iraq and Iran, for being controlled by the terrorist group Kongra-Gel. Any assets PJAK has under U.S. jurisdiction are frozen, and U.S. persons are prohibited from engaging in any transactions with PJAK. Treasury Department Press Release.
  • FinCEN Releases Updated MSB Registration List.
On February 5th, the Financial Crimes Enforcement Network released an updated MSB Registration List.
Commodity Futures Trading Commission [Top]
  • CFTC Nominee Supports Use of Clearinghouses for Derivatives.
On February 4th, Reuters reported the written responses of Gary Gensler, who has been nominated to be Chairman of the CFTC. Among other things, Gensler supports the use of central clearinghouses for derivatives. Responses.
  • CFTC Launches "This Month in Futures Markets."
On February 4th, the CFTC announced the launch, on a six-month trial basis, of a new monthly report: "This Month in Futures Markets." The report, produced by the Commission's Office of the Chief Economist, will provide information concerning regulated futures markets in graphical and tabular displays. The report will draw from the Commission's Commitment of Traders data and display various market statistics for 22 actively-traded commodity markets. CFTC Release No. 5607-09.

Securities and Exchange Commission [Top]
  • Commission Adopts New Rules for Credit Rating Agencies.
On February 2nd, the SEC published the adopting release and text of rule amendments imposing additional requirements on nationally recognized statistical rating organizations to address concerns about the integrity of their credit rating procedures and methodologies. The amendments are effective April 10, 2009. The compliance date is April 10, 2009, except that the compliance date for the amendment to Section 240.17g-2(d) is 180 days after publication in the Federal Register. SEC Release No. 34-59342.
  • SEC Extends Period for Submitting Comments on Proposed IFRS Roadmap.
On February 3rd, the SEC extended to April 20, 2009, the period for submitting comments on the proposed Roadmap for the potential use of financial statements prepared in accordance with IFRS by U.S. issuers. SEC Release No. 33-9005.
  • SEC Proposes Additional Rule Amendments for Credit Rating Agencies.
On February 2nd, the SEC proposed amendments to its rules governing the conduct of nationally recognized statistical rating organizations ("NRSROs"), which would require the public disclosure of credit rating histories for all outstanding credit ratings issued by a nationally recognized statistical rating organization ("NRSRO") on or after June 26, 2007, that were paid for by the obligor being rated or by the issuer, underwriter, or sponsor of the security being rated. The SEC also requested detailed information about the issues surrounding the application of a disclosure requirement on subscriber-paid credit ratings. The SEC also re-proposed for comment an amendment to its conflict of interest rule that would prohibit an NRSRO from issuing a rating for a structured finance product paid for by the product's issuer, sponsor, or underwriter unless the information about the product provided to the NRSRO to determine the rating and, thereafter, to monitor the rating is made available to other persons. Comments should be submitted on or before March 26, 2009. SEC Release No. 34-59343.
  • Subprime Lending Enforcement Actions Expected.
On February 6th, Reuters reported that the SEC expects to file additional enforcement actions involving subprime mortgage lending this year. Subprime Lending.
  • Chairman Schapiro Addresses PLI "SEC Speaks in 2009" Program.
On February 6th, SEC Chairman Mary L. Schapiro discussed the SEC's direction and the revitalization of enforcement. Among other things, Schapiro announced that Enforcement Division staff will no longer be required to seek Commissioner approval before seeking money penalties from firms. She also directed a return to earlier SEC policy that allowed for more rapid approval of formal orders of investigation. Other SEC initiatives include improving the quality of credit ratings and promoting a centralized clearinghouse for derivatives. Schapiro Remarks.

Exchanges and Self-Regulatory Organizations [Top]
  • Price Requirement for Continued Listing Eliminated.
The SEC has declared effective separate proposals by the Chicago Board Options Exchange, International Securities Exchange, NASDAQ OMX BX and NYSE Alternext to eliminate of the $3 underlying security price requirement for continued listing of options and listing of additional series of options.
Chicago Board Options Exchange
  • Program Allowing Transactions at a Price Below $1 Is Extended.
On January 30th, the SEC granted immediate effectiveness to the Chicago Board Options Exchange's proposed extension, to May 29, 2009, of its program that allows transactions to take place at a price that is below $1 per option contract. Comments should be submitted on or before February 27, 2009. SEC Release No. 34-59331.
Financial Industry Regulatory Authority
  • FINRA Advises of Amendments to Rules on the Supervision of Market Letters.
On February 5th, FINRA announced that, effective immediately, firms may supervise "market letters" e.g., discussions of broad based indices or notices of rating or price target changes, as correspondence rather than sales literature, unless the letters are distributed to 25 or more existing retail customers within any 30-calendar-day period and make a financial or investment recommendation or otherwise promote the firm's products or services. The amendments also eliminates the requirement that market letters be approved in advance by an authorizedperson. FINRA Regulatory Notice 09-10.
  • FINRA Issues Regulatory Notice on Customer Account Statements and Due Diligence Requirements for Unlisted REITs and DPPs.
On February 4th, FINRA addressed certain requirements that apply to the per-share customer account statement values and dividend distributions of REITs and DPPs that are sold through broker-dealers, invest in real estate and do not trade on a national securities exchange. FINRA Regulatory Notice 09-09.
  • Amendments to Disputes Code Are Approved.
On February 2nd, the SEC approved FINRA's proposed amendments to the Code of Arbitration Procedure for Customer Disputes and the Code of Arbitration Procedure for Industry Disputes, raising the amount in controversy that will be heard by a single chair-qualified arbitrator to $100,000. SEC Release No. 34-59340.
NASDAQ OMX BX
  • Proposal Eliminating the Market Hours Day Time-in-Force Is Immediately Effective.
On February 2nd, the SEC granted immediate effectiveness to NASDAQ OMX BX's proposal to amend the rules governing its new equity trading platform, the NASDAQ OMX BX Equities Market, to eliminate the time-in-force of Market Hours Day for orders entered into the System. MDAY orders may be entered beginning at 7:00 AM, but may only execute during the Exchange's regular market hours from 9:30 AM to 4:00 PM. The change is designed to prevent MDAY orders entered prior to 9:30 AM from queuing and subsequently attempting to execute simultaneously at 9:30 AM. Comments should be submitted within 21 days after publication in the Federal Register. SEC Release No. 34-59341.
  • Effective Date of Directed Order Process Extended.
On January 28th, the SEC granted immediate effectiveness to NASDAQ OMX BX's proposed extension of the effective date of the amended rule governing the Directed Order Process on the Boston Options Exchange from January 31, 2009 to May 29, 2009. Comments should be submitted on or before February 25, 2009. SEC Release No. 34-59311.
NASDAQ Stock Market
  • NASDAQ Proposes Reduction in Exposure Time.
On January 28th, the SEC provided notice of NASDAQ Stock Market's filing of a proposed rule change to reduce the order exposure time on the NASDAQ Options Market (the time during which Options Participants may not execute as principal against orders they represent as agent) from three seconds to one second. Given that many market participants are able to respond within a one-second exposure period on the NASDAQ Options Market's fully automated trading platform, Nasdaq does not believe that it is necessary or beneficial to require such orders to be exposed to market risk for a longer period. Comments should be submitted on or before February 18, 2009. SEC Release No. 34-59310.
New York Stock Exchange
  • NYSE and NYSE Alternext to Report Single Closing Print to the Consolidated Tape.
On February 4th, NYSE Regulation advised members that, effective February 6, 2009, the New York Stock Exchange and NYSE Alternext will report a single closing print to the Consolidated Tape for each of its respective securities pursuant to amendments to NYSE and NYSE Alternext Equities Rules 116 ("Stop" Constitutes Guarantee) and 123C (Market On The Close Policy And Expiration Procedures). NYSE Regulation Information Memo 09-05. See also SEC Release 34-59345 (granting immediate effectiveness to the plan).
  • NYSE to Establish Risk Management Gateway Service.
On February 3rd, the SEC approved the New York Stock Exchange's proposed establishment of the Risk Management Gateway Service. SEC Release No. 34-59354.
NYSE Arca
  • Proposed Changes to Certain Listing Standards Approved.
On January 30th, the SEC approved NYSE Arca's proposal to amend NYSE Arca Equities Rule 5.2(j)(6), relating to the initial listing standards for Equity Index-Linked Securities, Commodity-Linked Securities, Currency-Linked Securities, Fixed Income Index-Linked Securities, Futures-Linked Securities and Multifactor Index-Linked Securities. SEC Release No. 34-59332.
  • Flexible Exchange Options Maximum Term Increased.
On January 27th, the SEC granted immediate effectiveness to NYSE Arca's proposal to amend its rules governing Flexible Exchange Options to increase the maximum term to fifteen years. Comments should be submitted on or before February 24, 2009. SEC Release No. 34-59305.

Federal Appellate Court Opinions [Top]
  • Seventh Circuit Addresses Scope of Financial Institution Bond.
On February 5th, the Seventh Circuit held that losses incurred by plaintiff First State Bank of Monticello were a covered risk under the financial institution bond issued by defendant Ohio Casualty Insurance. Addressing whether the losses occurred on bank premises, the Court held that although the act of nonpayment occurred off-premises, the false pretenses occurred on-premises and therefore constituted covered losses. First State Bank of Monticello v. Ohio Casualty Insurance Co.
Rules Effective Dates [Top]
  • Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies - Effective March 31, 2009.
The Securities and Exchange Commission is adopting amendments to the form used by mutual funds to register under the Investment Company Act of 1940, and to offer their securities under the Securities Act of 1933, in order to enhance the disclosures that are provided to mutual fund investors. The amendments require key information to appear in plain English in a standardized order at the front of the mutual fund statutory prospectus. The SEC also is adopting rule amendments that permit a person to satisfy its mutual fund prospectus delivery obligations under Section 5(b)(2) of the Securities Act by sending or giving the key information directly to investors in the form of a summary prospectus and providing the statutory prospectus on an Internet Web site. Upon an investor's request, mutual funds also must send the statutory prospectus to the investor. These amendments are intended to improve mutual fund disclosure by providing investors with key information in plain English in a clear and concise format, while enhancing the means of delivering more detailed information to investors. Finally, the Commission is adopting additional amendments that are intended to result in the disclosure of more useful information to investors that purchase shares of exchange-traded funds on national securities exchanges. SEC Release Nos. 33-8998.
Winston & Strawn Speaking Engagements and Publications [Top]
  • Winston & Strawn Presents eLunch on Tracking Use of TARP Proceeds.
Winston & Strawn partners Christine Edwards, Michael Melbinger, Jim Miller, Marvin Miller, and Paul Pilecki will present an eLunch seminar entitled "Tracking Use of TARP Proceeds" on Feb. 12, 2009 at 12 p.m. Central. This is the fourth presentation in a continuing series of briefings on recent EESA and TARP developments. This briefing will provide suggestions on the implementation of internal tracking procedures for use of TARP proceeds, and related compensation committee "risk" assessments. Event Information.
  • Andrew McDonough Moderates Panel at Northwestern's 2009 Private Equity and Venture Capital Conference.
Winston & Strawn partner Andrew McDonough, who is based in the firm's Chicago office and concentrates his practice in mergers and acquisitions and private equity, will be moderating a panel discussion at Northwestern University Kellogg School of Management's 2009 Private Equity and Venture Capital Conference to be held on Feb. 11, 2009 in Evanston, Ill. The firm is also serving as a gold-level sponsor of this event. Event Information.
  • Jeff Marwil to Discuss Clawback Litigation at Madoff Litigation Conference.
Winston & Strawn partner Jeff Marwil, co-chair of the firm's restructuring and insolvency practice, will participate as a speaker in the Madoff Litigation Conference to be held from 1 to 5:30 p.m. on Feb. 25, 2009 in New York City. The event is being sponsored by HB Litigation Conferences. Event Information.
  • Troubled Assets Relief Program: Recent Developments Regarding Tracking and Monitoring Use of Capital Purchase Program Funds .
Winston & Strawn has prepared a briefing on the recent developments regarding tracking and monitoring use of Capital Purchase Program funds. Briefing.

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