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| | ______February 16, 2009 | | Volume 4, No. 7 |
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| Insights from Winston & Strawn |
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For those hardest hit by our current recession and skyrocketing joblessness, Tuesday's signing of the $787 billion economic stimulus bill, the American Recovery and Reinvestment Act of 2009 (ARRA), by President Obama has not come soon enough. However, the White House has cautioned that the recovery will not be immediate indicating that increased economic activity will "take time to show up in the statistics." Despite the promises of change on both sides of the aisle, the tone in Washington seemed to be politics as usual throughout this process. The final bill lacked bipartisan support, receiving no Republican votes in the House and just three Republican votes in the Senate.
Perhaps triggered by the lack of detail in Treasury Secretary Geithner's announcement of the new phase of economic stimulus aimed at the financial industry, language was added to the ARRA in conference that placed economic compensation restrictions on firms participating in TARP. Although not as restrictive as prior Senate language, these provisions place significant limits on the compensation of executives at institutions that receive Capital Purchase Program funds. The ARRA prohibits the payment or accrual of bonuses, retention awards, or other incentive compensation to a number of employees, between 1 and 25, depending on the level of CPP assistance received, except in the form of long-term restricted stock awards not greater than one-third of the total amount of annual compensation of the employee receiving the stock. For banks that received less than $25 million, the restrictions apply to the highest-compensated employee; for banks between $25 million to $250 million, the top five employees would be covered; for banks between $250 million and $500 million, it would apply to senior executives and the next top 10 employees; and for banks that have received more than $500 million in CPP funding, restrictions are placed on senior executives and the next top 20 employees. The provision contains a second exemption for any bonus payment required to be paid under a written employment contract executed on or before February 11, 2009. The ARRA also prohibits severance payments of any amount to a senior executive officer or any of the next five most highly compensated employees of the TARP recipient. Additionally, the language added in conference requires the Secretary of the Treasury to review past compensation paid out to the top 25 employees of the TARP recipients and negotiate for reimbursements if he decides those payments were contrary to the public interest.
Most disturbing about this amendment is that it was added at the last minute and it applies retroactively to any institution that received CPP funds. Fortunately, the compensation limit was partially offset by removing the requirement to raise capital from third parties in order to redeem Treasury-held preferred stock early. This measure reflects the politically charged atmosphere in which CPP funds are considered a "bailout" rather than a mechanism to increase lending through the banking system, which is now shouldering the entire burden of supplying credit to the economy. Until the nonbank credit system is fully restored by increasing liquidity and confidence, Congress should look upon banks as the solution and not the problem.
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| In the News |
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Plans to reduce home mortgage foreclosures include legislation allowing bankruptcy courts to rewrite mortgage terms, protections for loan servicers who rewrite mortgage terms and government subsidies. Foreclosures. - Number of U.S. Treasuries Primary Dealers May Increase.
The Federal Reserve Bank of New York may increase the number of primary dealers in U.S. Treasuries. Primary Dealers. - OTS Seeks Suspension of Home Foreclosures.
On February 11th, the Office of Thrift Supervision urged OTS-regulated institutions to suspend foreclosures on owner-occupied homes until the Financial Stability Plan's "home loan modification program" is finalized. OTS Press Release. On February 11th, FBI Deputy Director John Pistole, testifying before the Senate Judiciary Committee, stated that the Bureau is currently investigating 38 cases of bank and mortgage related fraud and that the number of active cases is likely to grow into the hundreds. Neil Barofsky, special inspector general for the Troubled Asset Relief Program, testified that criminal investigations related to funds disbursed under TARP have also been opened. The Justice Department may form a mortgage fraud task force. Hearings. Three Senators have sponsored legislation that would strengthen financial fraud laws and increase funding for financial fraud enforcement measures. Legislation.
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| Banking Agency Developments |
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- OCC and OTS to Expand Scope of Mortgage Performance Data Gathered.
On February 13th, the Office of the Comptroller of the Currency and the Office of Thrift Supervision announced they are expanding the scope of the mortgage performance data gathered from national banks and thrifts to include additional information on the affordability and sustainability of loan modifications. The two agencies are also publishing the OCC-OTS Mortgage Metrics Data Dictionary. Joint OCC-OTS Press Release. - Federal Reserve Board Prepared to Expand TALF.
On February 10th, the Federal Reserve Board announced, in coordination with Secretary Geithner's new Financial Stability Plan, that it is prepared to undertake a substantial expansion of the Term Asset-Backed Securities Loan Facility. The expansion could increase the size of the TALF to as much as $1 trillion and could broaden the eligible collateral to encompass other types of newly issued AAA-rated asset-backed securities, such as commercial mortgage-backed securities, private-label residential mortgage-backed securities, and other asset-backed securities. An expansion of the TALF would be supported by the provision by the Treasury of additional funds from the Troubled Asset Relief Program. Federal Reserve Board Press Release. - Federal Reserve Board Releases Additional Terms for TALF.
On February 6th, the Federal Reserve Board released additional terms and conditions, including loan rates and collateral haircuts, of the Term Asset-Backed Securities Loan Facility. The new terms and conditions include a revised definition of eligible borrowers and additional specifications regarding eligible ABS collateral. In addition to a new term sheet, the Board released a revised frequently-asked-questions document detailing the changes. Federal Reserve Board Press Release.
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| Treasury Department Developments |
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- Treasury Secretary Unveils Financial Stability Plan.
On February 10th, Treasury Secretary Timothy Geithner announced the replacement of the Troubled Asset Relief Program with the Financial Stability Plan. Three new programs will be established under the new framework. First, the Financial Stability Trust will conduct a stress test of major banks, improve bank balance sheet transparency and disclosure and provide capital assistance to those institutions needing it. Second, the Public-Private Investment Fund will provide government capital and government financing to help leverage private capital and help private markets. The fund will be targeted to the legacy loans and assets held by many financial institutions. Third, working jointly with the Federal Reserve, the Treasury Department will commit up to a trillion dollars to support a Consumer and Business Lending Initiative aimed at assisting secondary lending markets. The lending initiative will be built on the Federal Reserve's Term Asset-Backed Securities Loan Facility. Geithner Remarks; Financial Stability Plan Fact Sheet. See also, www.financialstability.gov. On February 11th, the New York Times reported on the ramifications of the financial stress test and, on February 12th, reported that some people believe that more direct government intervention is required. - Financial Regulatory Agencies Provide Additional Information Concerning the Financial Stability Plan.
On February 10th, the Treasury Department, Federal Reserve Board, FDIC, Office of the Comptroller of the Currency and the Office of Thrift Supervision issued a joint press release providing additional information concerning the Financial Stability Plan. In addition to the programs announced by Treasury Secretary Timothy Geithner, the FDIC will extend the Temporary Liquidity Guarantee Program to October 31, 2009. Joint Press Release. - Treasury Department Designates Financial Network of Peruvian Drug Kingpin.
On February 10th, the Treasury Department designated 26 companies and 14 individuals tied to Peruvian drug kingpin Fernando Zevallos Gonzales. This financial network, based in Peru, Panama and the British Virgin Islands, is now subject to financial sanctions pursuant to the Foreign Narcotics Kingpin Designation Act. The action freezes any assets that the designated firms and individuals may have under U.S. jurisdiction and prohibits U.S. persons from conducting financial or commercial transactions involving those assets. Treasury Department Press Release. - Treasury Department Designates Tamil Foundation.
On February 11th, the Treasury Department designated the Tamil Foundation, the U.S. based support network of the Sri Lanka-based terrorist group the Liberation Tigers of Tamil Eelam. Under the designation, assets that the Tamil Foundation has under U.S. jurisdiction are frozen, and U.S. persons are prohibited from engaging in any transactions with the Tamil Foundation. Treasury Department Press Release.
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| Commodity Futures Trading Commission |
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- CFTC Approves Limits on the Number of Agricultural Delivery Instruments That Can Be Held for Non-Commercial Purposes.
On February 13th, the CFTC announced it has approved a request by the Chicago Board of Trade to limit the number of delivery instruments an entity can hold for non-commercial purposes. This limit applies to warehouse receipts or shipping certificates for the Exchange's Corn, Mini-sized Corn, Wheat, Mini-sized Wheat, Oat, Rough Rice, Soybean, Mini-sized Soybean, Soybean Oil and Soybean Meal contracts and limits the number of certificates/receipts anyone can hold to an amount equal to the spot month speculative position limit. The CBOT intends to implement the amendments on February 17, 2009, such that persons owning or controlling more than the specified limit of certificates or receipts as of that date will have until May 31, 2009, to come into full compliance with the limits on Corn, Wheat, Oat, Rough Rice, Soybean, and Soybean Meal. For Soybean Oil, persons holding certificates in excess of the new limits will have until September 25, 2009, to come into full compliance. CFTC Release No. 5613-09. - House Agriculture Committee Passes CDS Bill.
On February 12th, Reuters reported that the House Agriculture Committee passed H.R. 977, the "Derivatives Markets Transparency and Accountability Act of 2009." The bill's provisions permit, among other things, the suspension of trading in naked credit default swaps and require the trading of swaps through a clearinghouse. Legislation. - Division of Market Oversight Issues Advisory Concerning Recordkeeping Requirements.
On February 6th, the Division of Market Oversight issued an Advisory to address any industry misunderstanding of the CFTC's recordkeeping requirements applicable to futures commission merchants, introducing brokers, and members of a designated contract market. CFTC Release No. 5611-09.
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| Securities and Exchange Commission |
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- SEC Publishes Amendments Requiring Mutual Funds to Provide Risk/Return Summary Information in Interactive Form.
On February 11th, the SEC published the adopting release and text of rule amendments requiring mutual funds to provide risk/return summary information in interactive data format using the eXtensible Business Reporting Language (XBRL). The interactive data will be provided as exhibits to registration statements and as exhibits to prospectuses with risk/return summary information that varies from the registration statement. The SEC also adopted rules to permit investment companies to submit portfolio holdings information in a voluntary program. The amendments are effective July 15, 2009. The compliance date is January 1, 2011. SEC Release No. 33-9006.
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| Exchanges and Self-Regulatory Organizations |
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Chicago Board Options Exchange
On February 4th, the SEC approved the Chicago Board Options Exchange's proposed adoption of a Trade, Flash and Cancel order type for the CBOE Stock Exchange ("CBSX"). If the CBSX is quoting at the national best bid or offer when a Trade, Flash and Cancel order is submitted, the CBSX will execute the incoming order automatically against the published quotation. If the CBSX is not quoting at the NBBO, the order will be exposed electronically to CBSX traders for up to three seconds, rather than routed away to other markets. SEC Release No. 34-59359. Financial Industry Regulatory Authority
- Proposed Amendments to Codes of Arbitration Procedure Approved.
On February 4th, the SEC approved the FINRA's proposed amendments to the Codes of Arbitration Procedure to require arbitrators to provide an explained decision upon the joint request of the parties. SEC Release No. 34-59358. NASDAQ Stock Market
- Nasdaq Adopts Policy for Trade Reports That Are Inconsistent With Prevailing Market Prices.
On February 6, 2009, the SEC published an order approving a proposal by the NASDAQ Stock Market to adopt a policy relating to trade reports that are determined to be inconsistent with the prevailing market. Nasdaq will address such trades by contacting the listing exchange (if it is not Nasdaq) and, where executions take place across multiple markets, each such other market, to determine whether any erroneous trade reports were filed. If the Nasdaq trade price is inconsistent with the prevailing market for the security, Nasdaq may append an "Aberrant Report Indicator" to the trade report. Nasdaq will discourage vendors and other data recipients from using such prices when calculating the security's high, low or last sale price. The proposal is retroactive to September 1, 2008. Release No. 34-59370. - Proposed OATS Data Recordation Requirement Exemption Approved.
On February 6th, the SEC approved the NASDAQ Stock Market's proposed adoption of a limited exemption from OATS order data recordation requirements for registered options market makers. SEC Release No. 34-59369. National Securities Clearing Corporation
- Fund Members Must Validate Accuracy of Data.
On January 30th, the SEC approved the National Securities Clearing Corporation's proposed addition of an agreement that requires NSCC fund members to have taken reasonable steps to validate the accuracy of the data that they submit to the Mutual Fund Profile Service database. SEC Release No. 34-59321. New York Stock Exchange
- NYSE Discontinues Policy Prohibiting Transfer Agents from Charging Fees for Issuing Stock Certificates.
On January 30th, the SEC approved the New York Stock Exchange's proposal to discontinue its policy prohibiting transfer agents from charging fees for issuing stock certificates. SEC Release No. 34-59320. NYSE Arca
- Increase In Certain Minor Rule Plan Sanctions Approved.
On February 10th, the SEC approved NYSE Arca's proposed amendments increasing certain sanctions under the minor rule plan. SEC Release No. 34-59376.
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| Federal Appellate Court Opinions |
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- 401(k) Trustee Hired By Plan Sponsor Is Not a Functional Fiduciary.
On February 12th, the Seventh Circuit held that neither the trustee hired by a 401(k) plan sponsor nor the investment advisor to the mutual funds included in the 401(k) plans owe fiduciary duties to the plan participants. Even if the third-party trustee limited plan offerings to mutual funds managed by a sister company, the trustee did not exercise sufficient discretionary authority to be a functional fiduciary. The Court held further that the plan sponsor owed no duty to disclose the revenue sharing arrangement between the third-party plan trustee and the investment advisor. Hecker v. Deere & Company. - Shareholder Lawsuit Falls within SLUSA Savings Clause.
On February 11th, the Ninth Circuit held that a shareholder lawsuit fell within the savings clause of the Securities Litigation Uniform Standards Act and therefore ordered the suit remanded to state court. Addressing the Delaware carve-out provision of SLUSA, 15 U.S.C. Sec. 77p(d), the Court found that the complaint was based on the law of the state in which the issuer of the relevant securities was incorporated and that it involved a communication with respect to the sale of those securities on behalf of the issuer to its shareholders. Madden v. Cowen & Company. - Court Analyzes Swap Agreements under Bankruptcy Code.
On February 11th, the Fourth Circuit held that the Bankruptcy Code does not require commodity forward agreements to be traded in a market or on an exchange and to not involve physical delivery in order to be exempt from avoidance. In re Natural Gas Distributors, LLC. - Sarbanes-Oxley Reasonable Belief Addressed.
On February 9th, the First Circuit addressed the elements of a Sarbanes-Oxley Act whistleblower claim for the first time. It held that a successful plaintiff must have both a subjectively and objectively reasonable belief that the acts in question violated the laws set forth in the Sarbanes-Oxley Act. Day v. Staples, Inc. - SEC Failed to Meet Aiding and Abetting Pleading Standard.
On February 6th, the First Circuit addressed whether the SEC stated a claim for aiding and abetting securities fraud. The Court held that the defendants' alleged acquiescence to a scheme concealing a retirement plan administrator's failure to invest plan assets did not constitute substantial assistance. Defendants' alleged non-disclosure of the plan did not cause the losses and the Court therefore affirmed the dismissal of the complaint. SEC v. Papa.
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| Rules Effective Dates |
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- 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. - Amendments to Rules for Nationally Recognized Statistical Rating Organizations - Effective April 10, 2009.
On February 2, 2009, the SEC adopted rule amendments that impose additional requirements on nationally recognized statistical rating organizations in order to address concerns about the integrity of their credit rating procedures and methodologies. SEC Release No. 34-59342. - Interactive Data to Improve Financial Reporting - Effective April 13, 2009.
On January 30th, the SEC announced the adoption of final rules requiring companies to provide financial statement information to the SEC and on their corporate Web sites in interactive data format using the eXtensible Business Reporting Language (XBRL). The purpose of these changes is to ensure that data is provided in a form intended to improve its usefulness to investors. The rules will apply to public companies and foreign private issuers that prepare their financial statements in accordance with U.S. GAAP, and foreign private issuers that prepare their financial statements using IFRS as issued by the International Accounting Standards Board. The interactive data will be provided as an exhibit to periodic and current reports and registration statements, as well as to transition reports for a change in fiscal year. SEC Release No. 34-59324.
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| Winston & Strawn Speaking Engagements and Publications |
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- The Hedge Fund Transparency Act of 2009: A New Legislative Initiative Calling for Increased Oversight of Private Investment Funds.
Winston & Strawn has prepared a briefing on proposed legislation regarding oversight of private investment funds. Briefing. - Update 2: Summary of Federal Reserve's Term Asset-Backed Securities Loan Facility.
Winston & Strawn has prepared a briefing regarding revised terms and conditions for the Term Asset-Backed Securities Loan Facility. Update. - 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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