Financial Services Update______September 10, 2012
Volume 7, No. 33



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 Developments

Rules Effective Dates

Winston & Strawn Speaking Engagements and Publications


Insights from Winston & Strawn [Top]

  • SEC Proposes Rules to Eliminate the Prohibition Against General Solicitation and General Advertising
In April, the President signed into law the Jumpstart Our Business Startups Act (the "JOBS Act"). The JOBS Act is designed to enhance capital formation and improve access to capital markets. Accordingly, Title II of the JOBS Act requires the Securities and Exchange Commission (the "SEC") to relax prohibitions against general solicitation in certain private offerings. On August 29th, the SEC proposed rules to implement Title II.

Proposed Amendments to Rule 506 of Regulation D - Proposed Rule 506(c)
The JOBS Act directs the SEC to amend Rule 506 of Regulation D to provide that the prohibition against general solicitation contained in Rule 502(c) shall not apply to offers and sales of securities made pursuant to Rule 506, provided that purchasers of the securities are accredited investors. To implement the change, the SEC proposed new Rule 506(c), which permits the use of a general solicitation to offer and sell securities under Rule 506, provided that certain conditions are satisfied. These conditions are (1) the issuer must take reasonable steps to verify that the purchasers of the securities are accredited investors; (2) at the time of the sale of securities, all purchasers of securities must be accredited investors, either because they come within one of the enumerated categories of persons that qualify as accredited investors or because the issuer reasonably believes that they so qualify; and (3) all terms and conditions of Rule 501 (the definitions governing Regulation D), Rule 502(a) (covering integration) and Rule 502(d) (limitations on resale) are satisfied.
Under the proposed rules, whether an issuer has taken "reasonable steps to verify that the purchasers of the securities are accredited investors" will depend on the particular facts and circumstances of each transaction. This non-prescriptive approach reflects the marketplace reality that Rule 506 offerings vary from transaction to transaction and this approach is intended to provide flexibility to issuers in verifying an investor's status. The SEC will consider a number of interconnected factors when determining the reasonableness of the steps taken by an issuer to verify that a purchaser is an accredited investor. The SEC provided a non-exhaustive list of some of these factors, which include: the nature of the purchaser and the type of accredited investor that the purchaser claims to be; the amount and type of information that the issuer has about the purchaser; the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering; and the terms of the offering, such as minimum investment amount.
With respect to the nature of the purchaser, the SEC explains that as the definition of "accredited investor" in Rule 501(a) includes both natural persons and entities, the SEC expects the steps that would be reasonable for an issuer to take to verify whether a purchaser is an accredited investor would likely vary depending on the type of accredited investor that the purchaser claims to be. Regarding the amount and type of information that the issuer has about the purchaser, the more information an issuer has indicating that a prospective purchaser is an accredited investor, the fewer steps it would have to take to reasonably determine accredited investor status, and vice versa. Finally, concerning the nature and terms of the offering, the SEC provides that an issuer who solicits new investors through a website accessible to the general public would likely be obligated to take greater measures to verify accredited investor status than an issuer that solicits investors from a database of pre-screened accredited investors maintained by a registered broker-dealer. The ability of a purchaser to satisfy a minimum investment amount requirement that is sufficiently high that only accredited investors could reasonably be expected to meet it could also be considered a factor in verifying accredited investor status.
Although general solicitation and advertising will be permitted under new Rule 506(c), the SEC did preserve existing Rule 506(b) to allow issuers to conduct Rule 506 offerings without the use of general solicitation. Additionally, the SEC proposed a revision to Form D to add a separate filed or check box for issuers to indicate whether they are claiming an exemption under Rule 506(c).

Proposed Amendments to Rule 144A of the Securities Act of 1933
Section 201(a) of the JOBS Act also directs the SEC to revise Rule 144A of the Securities Act of 1933 to provide that securities sold pursuant to Rule 144A may be offered to persons other than Qualified Institutional Buyers ("QIB"), including by means of general solicitation, provided that securities are ultimately sold only to persons the seller, and any person acting on behalf of the seller, reasonably believes is a QIB. The SEC proposed amending the language of Rule 144A(d)(1) to remove references to "offer" and "offeree" which has the effect of allowing offers through general solicitation while requiring that the securities be sold only to a QIB or to a purchaser that the seller, and any person acting on behalf of the seller, reasonably believes is a QIB.

Private Funds May Rely on Proposed Rule 506(c) of Regulation D
Privately offered investment funds generally avoid the regulatory provisions of the Investment Company Act of 1940 (the "Investment Company Act") by relying on either Section 3(c)(1) (not more than 100 beneficial owners) or Section 3(c)(7) (all beneficial owners must be qualified purchasers), in order to be excluded from the definition of "investment company" under the Investment Company Act. One of the conditions to be met under both Sections 3(c)(1) and 3(c)(7) is that the investment fund is not making nor does it propose to make a "public offering" of its securities. The SEC has confirmed that private funds are permitted under the JOBS Act to make a general solicitation under proposed Rule 506(c) without losing the ability to rely on Sections 3(c)(1) or 3(c)(7) of the Investment Company Act.
Kathryn E. Leonard
In the News [Top]
  • The Fairness of Fairness Opinions.
On September 5th, DealBook noted the increased use of fairness opinions for non-merger and acquisition type transactions and the consequences of that reliance. Fairness Opinions.
  • Prepaid Debit Cards.
On September 5th, Reuters summarized the results of a Pew Charitable Trusts study of prepaid debit cards. Prepaid Debit Cards.
  • Libor – The Next Global Settlement?
On September 4th, DealBook discussed state regulators' investigation into whether their state investments were harmed by the alleged manipulation of Libor by the rate-setting banks. Global Settlement.
  • New York Attorney General Investigating Private Equity Firms Over Management Fee Waivers.
On September 1st, the New York Times reported that the New York Attorney General has subpoenaed private equity firms as part of an investigation into whether the funds are improperly categorizing management fees as investments in order to lower their tax rate. Private Equity.
  • FHFA to Raise Fees by 10 BPs.
On August 31st, Bloomberg reported that the Federal Housing Finance Agency will raise the fees charged, by 10 basis points, by Fannie Mae and Freddie Mac for guaranteeing mortgages. Fee Hike.
  • Banks Want Transaction Account Guarantee Program Extended.
On August 29th, Reuters reported that 80 state banking associations have written to Congress to ask that the Transaction Account Guarantee program be extended. The program is set to expire at the end of 2012. Two More Years.
  • Volcker Rule's Liquidity Exemption.
On August 29th, Reuters reported that recent Volcker rule lobbying efforts have turned their attention to the liquidity exemption contained in the current proposal. Liquidity.
  • Coming this Fall: FCPA Guidance.
On August 29th, the Wall Street Journal reported that the Justice Department will release Foreign Corrupt Practices Act enforcement guidance ahead of an Organization for Economic Cooperation and Development working group meeting scheduled for October 10, 2012. FCPA Guidance.
  • Risk Management.
On August 29th, CFO.com summarized the two principal forms of enterprise risk management and why U.S. companies should consider adopting the approach taken by the International Organization for Standardization. Risk Management.
Banking Agency Developments [Top]
  • FDIC Advisory Committee on Economic Inclusion to Meet.
The Federal Deposit Insurance Company's (the "FDIC") Advisory Committee on Economic Inclusion (the "Committee") will meet on September 12, 2012, to discuss results of the FDIC's second National Survey of Unbanked and Underbanked Households. The Committee also will discuss new initiatives relating to Model Safe Accounts and mobile financial services. FDIC Press Release.
  • Agencies Propose Three Interrelated Rules Establishing an Integrated Regulatory Capital Framework.
On August 30th, the Federal Reserve Board (the "Board"), FDIC, and Office of the Comptroller of the Currency (the "OCC") published in the Federal Register three proposed rules establishing an integrated regulatory capital framework. The agencies had first published the proposals in draft form on June 7, 2012. The proposed rules would implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act'). The rulemaking was divided into three proposed rules to minimize the burden on smaller and mid-sized banking organizations and to allow firms to focus on the aspects of the proposed revisions that are most relevant to them.
  • Regulatory Capital Rules: Advanced Approaches Risk-based Capital Rule; Market Risk Capital Rule, would apply to banking organizations that are subject to the banking agencies' advanced approaches rule or to their market risk rule. This proposal would enhance the risk sensitivity of the current rule for internationally active firms to address counterparty credit risk and interconnectedness among financial institutions. It also would apply the advanced approaches rule and market risk capital rule to savings and loan holding companies that meet the relevant size, foreign exposure, or trading activity thresholds. As part of the restructuring of the capital rules into an integrated framework, this proposal incorporates the final market risk rule that was approved on June 7, 2012, and which was also published in the Federal Register on August 30, 2012. See below.
Comments on the proposals should be submitted on or before October 22, 2012. See also OCC Bulletin.
  • Market Risk Capital Rule.
On August 30th, the Board, FDIC, and OCC published a final rule implementing changes to the market risk capital rule, which requires banking organizations with significant trading activities to adjust their capital requirements to better account for the market risks of those activities. A draft of the final rule was first published on June 7, 2012. The final rule implements certain revisions made by the Basel Committee on Banking Supervision to its market risk framework. The final rule is effective January 1, 2013. See also OCC Bulletin; Federal Reserve Board June 7 Press Release.
  • FFIEC Proposes Appraisal Subcommittee Revisions.
On August 30th, the Appraisal Subcommittee ("ASC") of the Federal Financial Institutions Examination Council published for comment proposed revisions ASC Policy Statements. The proposed Policy Statements provide guidance to ensure state appraiser regulatory programs comply with Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. Comments should be submitted on or before October 29, 2012. 77 FR 52721.
  • FDIC Publishes Second Quarter 2012 Banking Profile.
On August 28th, the FDIC published its latest Quarterly Banking Profile. Among other things, the FDIC reports that insured commercial banks and savings institutions had aggregate net income of $34.5 billion in the second quarter of 2012, a $5.9 billion improvement from the $28.5 billion in profits the industry reported in the second quarter of 2011. Almost two-thirds of all institutions reported improvements in their quarterly net income from a year ago. Also, the share of institutions reporting net losses for the quarter fell to 10.9 percent from 15.7 percent a year earlier. FDIC Press Release.
  • Stress Tests for Medium-Sized Banks May Be Delayed.
On August 27th, the Board and the FDIC announced that they may change the implementation timeline for the annual company-run stress test requirements required by the Dodd-Frank Act. The changes under consideration would delay implementation until September 2013 for covered institutions, bank holding companies, state member banks, and savings and loan holding companies with between $10 billion and $50 billion in total consolidated assets. Federal Reserve Board Press Release. See also FDIC Press Release.
  • Banking Agencies Publish Shared National Credits Review for 2012.
On August 27th, the Board, FDIC, and OCC published the Shared National Credits Review for 2012. The review finds that credit quality of large loan commitments owned by U.S. banking organizations, foreign banking organizations, and nonbanks improved in 2012 for the third consecutive year. The volume of criticized loans remained high at $295 billion compared with levels before the financial crisis, but declined 8.1 percent from 2011. Despite this progress, poorly underwritten loans originated in 2006 and 2007 continue to adversely affect the Shared National Credits portfolio. Joint Agency Press Release.

Treasury Department Developments [Top]
  • CFPB Extends Comment Deadline for Proposed Integrated Mortgage Disclosure Rules.
On September 6th, the Consumer Financial Protection Bureau (the "CFPB") extended to November 6, 2012, the period in which comments may be submitted on its proposed changes to the definition of finance charge and whether to delay implementation of certain disclosure requirements added to the Truth in Lending Act and the Real Estate Settlement Procedures Act by Title XIV of the Dodd-Frank Act. 77 FR 54843. The CFPB had first published its proposed integrated mortgage disclosure rules on August 23, 2012. See 77 FR 5116.
  • CFPB Extends Comment Deadline for Proposed High-Cost Mortgaged and Homeownership Counseling Amendments.
On September 6th, the CFPB extended to November 6, 2012, the period in which comments may be submitted on its proposed changes to the Home Ownership and Equity Protection Act ("HOEPA") regarding whether and how to account for the implications of a more inclusive finance charge on the scope of HOEPA coverage. The extension does not apply to any other aspect of the HOEPA proposal. 77 FR 54844. The CFPB had first published its proposed high-cost mortgage and homeownership counseling amendments to the Truth in Lending Act and HOEPA on August 15, 2012. 77 FR 49090.
  • CFPB Exam Procedures for Consumer Reporting Market.
On September 5th, the CFPB published the procedures it will use in examining credit bureaus and other consumer reporting companies. CFPB Press Release.
  • Unblocking Notices.
On September 6th, the Treasury Department's Office of Foreign Asset Control ("OFAC") unblocked the assets of three individuals and two entities whose property and interests in property had been unblocked pursuant to the Foreign Narcotics Kingpin Designation Act. In addition, OFAC published an amendment to the identifying information of one individual previously designated pursuant to the Kingpin Act. OFAC also published the names of five individuals and one entity whose property and interests in property had been unblocked pursuant to Executive Order 12978 of October 21, 1995, "Blocking Assets and Prohibiting Transactions With Significant Narcotics Traffickers." In addition, OFAC published an amendment to the identifying information of one individual previously designated pursuant to Executive Order 12978. Separately, OFAC published the names of 25 individuals and one entity whose property and interests in property had been unblocked pursuant to Executive Order 12978.
  • Designations.
On August 29th, OFAC announced the designation of ADT Petroservicios, S.A. De C.V., an oil services company owned by narcotics trafficker Francisco Antonio Colorado Cessa who is tied to Los Zetas. The designation, taken pursuant to the Foreign Narcotics Kingpin Designation Act, prohibits U.S. persons from engaging in any transactions with ADT Petroservicios, S.A. De C.V. and freezes any assets the company may have under U.S. jurisdiction. Treasury Department August 29 Press Release. On August 31st, the Treasury Department designated eight individuals who hold leadership positions within the designated foreign terrorist organization, Lashkar-e Tayyiba. Treasury Department August 31 Press Release. On September 6th, OFAC announced the designation of Griselda Lopez Perez, a wife of fugitive drug lord Joaquin "Chapo" Guzman Loera. Treasury Department September 6 Press Release.

Commodity Futures Trading Commission [Top]
Final Rules and Regulatory Orders
  • Eurex's Futures Contract is Certified.
On August 28th, the Commodity Futures Trading Commission's (the "CFTC") Division of Market Oversight issued a letter advising Eurex Deutschland that its Euro STOXX 50 Ex Financials Index futures contract submitted for review on July 12, 2012, was deemed certified. CFTC Press Release.
  • CFTC Issues Swap Dealer Business Conduct Rules.
On August 27th, the CFTC unanimously approved business conduct rules for swap dealers and major swap participants. The rules establish procedures to promote legal certainty by requiring timely confirmation of all swap transactions, setting forth documentation requirements for bilateral swap transactions, and requiring timely resolutions of valuation disputes. CFTC Press Release.
Other Developments
  • NFA Proposes Amendments to NFA Bylaws and Registration Rules.
On August 22nd, the National Futures Association ("NFA") submitted to the CFTC proposed amendments to NFA Bylaw 301 and Registration Rules 401 and 402. Such proposals will be deemed effective 10 days following the CFTC's receipt unless the CFTC notifies the NFA that the CFTC has decided to review the proposals for approval. The amendment to Bylaw 301 provides that members registered with the CFTC as an FCM, IB, CPO or CTA and engaged in activities involving swaps must be approved as a "swaps firm" or "swaps associated persons" by the NFA. The amendments to the Registration Rules modify certain proficiency requirements for persons applying to be registered as associated persons. NFA Amendments.
  • Open Meeting.
The CFTC will hold a public meeting on September 12, 2012 to consider whether to propose rules that would enhance the protections for customers and customer funds held by futures commission merchants and derivatives clearing organizations and whether to adopt final rules adapting existing regulations to incorporate swaps. CFTC Press Release.
  • Phone Call Recording Rules.
On September 7th, Bloomberg reported on the CFTC's struggle to finalize a rule governing when swap traders must keep recordings of telephone calls. The Wire. On June 7, 2011, the CFTC proposed a rule that would require swap traders to record certain calls.
  • Complying with the New Business Conduct Rules.
On September 6th, Risk.net discussed the CFTC's new business conduct rules and what swap dealers must do to comply with those rules. Compliance Deadline.
  • Extended Registration.
On September 5th, DealBook reported that the CFTC is extending to at least January 2013 the date by which swap dealers must register with it. Extended Registration.

Securities and Exchange Commission [Top]
New Final Rules
  • SEC Updates EDGAR Filer Manual.
On August 30th, the Securities and Exchange Commission (the "SEC") published revisions to the Electronic Data Gathering, Analysis, and Retrieval ("EDGAR") System Filer Manual and related rules to reflect updates to the EDGAR system. The revisions are being made primarily to support submission of Confidential Registration Statements; require Form ID authentication documents in PDF format; automate LTID generation for Large Trader registrations; support minor updates to Form D; remove superseded XBRL Taxonomies; remove the OMB expiration date from Form TA-1, TA-2, TA-W, 25-NSE; and request of unused funds. SEC Release No. 33-9353.
Proposed Rules
  • SEC Proposes Rule Lifting General Solicitation Prohibition.
On August 29th, the SEC published for public comment proposed rules eliminating the prohibition against general solicitation and general advertising in certain securities offerings. Under the proposed rules, which are mandated by the Jumpstart Our Business Startups Act, companies would be permitted to use general solicitation and general advertising to offer securities under Rule 506 of Regulation D and Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"). Although the proposal lifts the general solicitation ban, only accredited investors would be allowed to purchase the securities being offered. Comments should be submitted within 30 days after publication in the Federal Register, which is expected during the week of September 3. SEC Press Release. In their opening meeting remarks, Commissioners Elisse B. Walter and Luis A. Aguilar raised investor protection concerns and regretted that the proposal did not include additional requirements. Commissioners Troy A. Paredes and Daniel M. Gallagher lamented the length of time it has taken the SEC to publish the proposal and the fact that no interim final rule was released.
Other Developments
  • Market Technology Roundtable Rescheduled.
The SEC announced that its market technology roundtable, which was scheduled for September 14, 2012, will be postponed until October 2, 2012. The change was made to accommodate scheduling conflicts and to better respond to strong interest from individuals and groups wishing to participate in the roundtable discussion. SEC Press Release.
  • It's What You Know and Who You Know.
On September 5th, Bloomberg, using emails obtained via a Freedom of Information Act request, noted the close relationship former SEC Commissioner Annette Nazareth maintains with her former colleagues, SEC Chairman Mary Schapiro and then SEC General Counsel and Senior Policy Director David Becker. Access.
  • Fee Rate Advisory.
On August 31st, the SEC announced that in fiscal year 2013 the fees that public companies and other issuers pay to register their securities with the SEC will be set at $136.40 per million dollars. Fee Rate Advisory. See also SEC Release No. 33-9357.
  • OCIE Risk Alert on MSRB Rule G-37.
On August 31st, the SEC's Office of Compliance Inspections and Examinations issued a risk alert on "pay-to-play" prohibitions for brokers, dealers and municipal securities dealers under Municipal Securities Rulemaking Board rules. SEC examiners have observed practices that raise concerns about firms' compliance with their obligations under MSRB Rule G-37. SEC Press Release.
  • SEC Publishes Study on Financial Literacy.
On August 30th, the SEC released its study on the existing level of financial literacy among retail investors as well as methods and efforts to increase the financial literacy of investors. The study identifies investor perceptions and preferences regarding a variety of investment disclosures. The study shows that investors prefer to receive investment disclosures before investing, rather than after, as occurs with many investment products purchased today. The study identifies information that investors find useful and relevant in helping them make informed investment decisions. This includes information about fees, investment objectives, performance, strategy, and risks of an investment product, as well as the professional background, disciplinary history, and conflicts of interest of a financial professional. Investors also favor investment disclosures presented in a visual format, using bullets, charts, and graphs. SEC Press Release.
  • Commissioners' Statement on Money Market Mutual Funds.
On August 28th, SEC Commissioners Daniel M. Gallagher and Troy A. Paredes issued a statement concerning the future regulation of money market mutual funds. The Commissioners emphasized that although they did not support Chairman Mary L. Schapiro's specific proposals on that subject, the two Commissioners do not oppose further improvements to the SEC's oversight and regulation of money market funds. Alternative approaches include the imposition of "gates" on redemptions and enhanced disclosure about the risks of investing in money market funds. They also pose a series of questions concerning the interaction of money market mutual funds with other sectors of the financial markets. Commissioners' Statement.
  • A Quiet Review.
On August 27th, Reuters reported that the SEC may review its "quiet period" rules in response to complaints that retail investors did not receive the same information as institutional investors prior to Facebook's initial public offering. Quiet Review.
  • The Risks of Anonymity.
On August 24th, Risk.net suggested that the SEC's decision to protect the anonymity of the person who received the first whistleblower award under the Dodd-Frank Act may hurt, rather than help, the agency's efforts. Anonymous Risks.
Exchanges and Self-Regulatory Organizations [Top]
Chicago Board Options Exchange
  • Universal Spread Margin Rules Approved.
On August 29th, the SEC approved the Chicago Board Options Exchange's proposed universal spread margin rules. SEC Release No. 34-67752.
Financial Industry Regulatory Authority
  • SEC Approves New FINRA Rules Regarding Private Placements.
On September 5th, the Financial Industry Regulatory Authority ("FINRA") announced that the SEC has approved new FINRA Rule 5123 to require each FINRA member firm that sells an issuer's securities in a private placement, subject to certain exemptions, to file with FINRA a copy of any private placement memorandum, term sheet or other offering document the firm used within 15 calendar days of the date of the sale, or indicate that it did not use any such offering documents. Firms must file the required offering documents electronically with FINRA through the FINRA Firm Gateway. The rule becomes effective December 3, 2012, and applies prospectively to private placements that begin selling efforts on or after that date. In addition, effective December 3, 2012, firms must submit filings regarding member firm private offerings, as required by FINRA Rule 5122 (Private Placements of Securities Issued By Members), through the Firm Gateway. FINRA Regulatory Notice 12-40.
  • FINRA Requests Comment on TRACE Dissemination Issues.
On September 5th, FINRA requested comment on two issues relating to the dissemination of information on TRACE-eligible securities transactions. First, FINRA seeks input on whether it should maintain or modify current TRACE dissemination caps, under which the actual size (volume) of a transaction over a certain par value is not displayed in disseminated realtime TRACE transaction data. Second, FINRA requests comment on whether transactions in TRACE-eligible securities effected pursuant to Securities Act Rule 144A should be disseminated, and if so, the scope and manner of such dissemination. Comments should be submitted on or before October 10, 2012. FINRA Regulatory Notice 12-39.
  • Amendment to FINRA Dispute Resolution By-Laws Proposed.
On September 5th, the SEC provided notice of FINRA's filing of a proposed amendment to the By-Laws of FINRA Dispute Resolution, Inc. to clarify that services provided by mediators, when acting in such capacity and not representing parties in mediation, should not cause the individuals to be classified as "Industry Members" under the By-Laws. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of September 10. SEC Release No. 34-67784.
  • New Front Running Rule Approved.
On September 4th, the SEC approved FINRA's proposed adoption of existing NASD IM-2110-3 as new FINRA Rule 5270 (Front Running of Block Transactions) in the consolidated FINRA rulebook. As adopted, FINRA Rule 5270 is broader than the earlier NASD interpretive material and provides further clarity into activities that FINRA believes are inconsistent with just and equitable principles of trade. SEC Release No. 34-67774.
  • Stop and Stop Limit Order Amendments Approved.
On September 4th, the SEC approved FINRA's proposed rule changes to the handling of stop and stop limit orders. The amendments allow members to offer customers stop orders and stop limit orders that would be triggered by a transaction or by an event other than a transaction (e.g., a quotation). SEC Release No. 34-67778.
  • Accelerated Approval Granted to Proposed Margin Requirements Amendment.
On August 29th, the SEC granted accelerated approval to FINRA's proposed amendment of FINRA Rule 4210 (Margin Requirements) to: (1) revise the definitions and margin treatment of option spread strategies; (2) clarify the maintenance margin requirement for non-margin eligible equity securities; (3) clarify the maintenance margin requirements for non-equity securities; (4) eliminate the current exemption from the free-riding prohibition for designated accounts; (5) conform the definition of "exempt account"; and (6) eliminate the requirement to stress test portfolio margin accounts in the aggregate. In addition, the proposed rule change amends FINRA Rule 4210 to make non-substantive technical and stylistic changes. SEC Release No. 34-67751.
  • SEC Approves FINRA's Short-Interest Reporting Amendments.
On August 24th, FINRA announced the SEC has approved amendments to FINRA Rule 4560 (Short-Interest Reporting). The amendments: (1) codify the requirement that member firms report only "gross" short interest existing in each proprietary and customer account (rather than net positions across accounts); (2) clarify that member firms' short-interest reports must reflect only those short positions that have settled or reached settlement date by the close of the FINRA-designated reporting settlement date; and (3) delete certain existing exceptions to the rule. FINRA Regulatory Notice 12-38.
International Swaps and Derivatives Association
  • FIA-ISDA Cleared Derivatives Addendum Is Published.
On August 29th, the Futures Industry Association ("FIA") and the International Swaps and Derivatives Association ("ISDA") published the FIA-ISDA Cleared Derivatives Addendum, a template that can be used by U.S. futures commission merchants and their customers to document their relationship with respect to cleared over-the-counter swaps. ISDA Press Release.
National Futures Association
  • NFA Announces Pre-Filing Option for Certain CPOs.
On September 6th, the NFA announced it is modifying its Electronic Exemption System to assist persons currently operating a pool pursuant to a CFTC Regulation 4.13(a)(4) exemption that will qualify for an exemption under CFTC Regulation 4.7, 4.12 or CFTC Advisory 18-96, so that these persons may pre-file for the applicable exemption, with an effective date of January 1, 2013. By choosing the pre-filing option, the operator will not become subject to the additional reporting and disclosure requirements related to the newly claimed exemption until 2013. NFA Notice I-12-20.
  • NFA Publishes Updated Regulatory Requirements.
On September 1st, the NFA published an updated Regulatory Requirements to reflect the adoption of NFA Financial Requirements Section 16 and its related interpretive notice regarding futures commission merchant financial practices and excess segregated funds/secured amount disbursements, including new SIDR filing requirements. NFA Notice.
  • New Notification Requirements For Certain Disbursements From Customer Segregated Accounts.
Effective September 1, 2012, any futures commission merchant ("FCM") that makes a disbursement or a series of disbursements from its customer segregated funds account(s) or its foreign futures and foreign options customer secured amount funds account(s) that are not for the benefit of customers and that exceed 25 percent of the FCM's residual interest in either of those funds account(s) based upon the firm's most current daily segregated funds or secured amount funds calculation must comply with additional requirements imposed under NFA Financial Requirements Section 16. NFA Notice I-12-18.
New York Stock Exchange
  • Amendment to PL Select Order Approved.
On September 5th, the SEC approved NYSE Arca Equities' proposed amendment of Rule 7.31(h) to add a PL Select Order. The PL Select Order would be a subset of a Passive Liquidity Order. NYSE Arca Equities Rule 7.31(h)(7) would define the PL Select Order as a PL Order that would not interact with an incoming order that: (i) has an immediate-or-cancel ("IOC") time in force condition, (ii) is an ISO, or (iii) is larger than the size of the PL Select Order. The PL Select Order would otherwise, except for the specified restrictions on trading with certain incoming orders, operate as a PL Order and retain its standing in execution priority among PL Orders. In the instances when an incoming order meets one of the PL Select Order restrictions, the PL Select Order would not interact with the incoming order and could be traded through. SEC Release No. 34-67785.

Judicial Developments [Top]
  • SEC Insider Trading Case Is Reinstated.
On September 6th, the United States Court of Appeals for the Second Circuit vacated the entry of summary judgment dismissing the SEC's insider trading claims. In doing so, the court set forth the elements of tipper and tippee liability. It then found that the trial court erred in relying on an internal investigation conducted by the tipper's employer as evidence that the tipper did not breach a fiduciary duty. The internal investigation did not include outside witnesses and the corporate motivation may not have coincided with the public interest presented by the SEC's suit. SEC v. Obus.
  • Statistical Modeling and Falsity.
On September 6th, the United States Court of Appeals for the Ninth Circuit affirmed the dismissal of plaintiff's securities fraud claims for failure to adequately allege falsity and scienter. Merely alleging that defendants should have used a different statistical methodology in their drug trials is not sufficient to allege falsity. And alleging that some investors might have wanted more extensive information does not make the alleged original statements false or misleading. Finally, plaintiff points to no allegations that defendants believed that they made false or misleading statements. Inter-Local Pension Fund GCC/IBT v. Rigel Pharmaceuticals, Inc.
  • Delaware Business Arbitration Law Ruled Unconstitutional.
On August 30th, the New York Times reported a U.S. District Court has found Delaware's business arbitration law, which allows sitting Delaware Chancery Court judges to privately arbitrate business disputes, unconstitutional. Constitutionality.
  • FINRA Expungement Case Reinstated.
On August 30th, Reuters reported brokers are closely watching a California case in which a broker seeks to expunge his public securities brokerage records held within the central registration depository database maintained by FINRA. A California appellate court ruled that the trial court applied the wrong standard in dismissing the broker's case. Expungement.
  • Another Reason to Settle Without Admitting or Denying Liability.
On August 27th, the United States Court of Appeals for the Ninth Circuit reversed and remanded defendant's conviction for selling unregistered securities in violation of Rule S-8 of the Securities Act. To prove intent, the government introduced a previous SEC civil complaint for an alleged earlier violation of that rule. The court held that the admission of that evidence was an error. In order for the government to introduce the prior SEC complaint, there must have been sufficient evidence from which the jury could conclude that defendant actually committed the allegedly-similar bad act. That burden was not met, especially where, as here, the defendant settled the civil action with no admission of liability. U.S. v. Bailey.
  • Two Billion Dollar Judgment Affirmed.
On August 27th, the Delaware Supreme Court affirmed the Chancery Court's award of over $2 billion in damages and more than $304 million in attorneys' fees in a shareholder derivative lawsuit. The Court agreed that Americas Mining Corporation, the subsidiary of Southern Copper Corporation's controlling shareholder, and affiliate directors of Southern Peru, breached their fiduciary duty of loyalty to Southern Peru and its minority stockholders by causing Southern Peru to acquire the controller's 99.15% interest in a Mexican mining company, Minera Mexico, S.A. de C.V., at an unfair price. Americas Mining Corp. v. Theriault.
Rules Effective Dates [Top]
  • Consolidated Audit Trail – Effective October 1, 2012.
The SEC is adopting Rule 613 under the Securities Exchange Act of 1934 to require national securities exchanges and national securities associations to submit a national market system ("NMS") plan to create, implement, and maintain a consolidated order tracking system, or consolidated audit trail, with respect to the trading of NMS securities, that would capture customer and order event information for orders in NMS securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution. 77 FR 45722.
Winston & Strawn Speaking Engagements and Publications [Top]
  • Ron Jacobson to Speak at TMA's MidAmerica Regional Conference – September 13, 2012.
Ron Jacobson, finance partner and co-chair of Winston & Strawn's corporate lending and debt capital markets practice groups, will speak at Turnaround Management Association's MidAmerica Regional Conference on September 13, 2012 in Chicago. The theme of the sixth annual conference is "Creating Opportunities in a Slow Growth Period." Event Information.
  • Winston & Strawn Coordinates IAPP's "Privacy After Hours."
Winston & Strawn will coordinate the International Association of Privacy Professionals' "Privacy After Hours" event on September 19, 2012 in Chicago. Event Information.

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