• The Global Proposal.

The Financial Stability Board ("FSB"), an international level organization comprised of national financial authorities and international standard setting bodies, has requested comment on proposals aimed at mitigating the potential systemic risks associated with shadow banking, defined as "credit intermediation involving entities and activities (fully or partially) outside the regular banking system." The proposals address the possible effect the traditional banking system has upon the shadow banking system, and vice versa; the susceptibility of money market funds ("MMFs") to "runs"; and the mitigation of systemic risks posed by other shadow banking practices including securitizations, secured financing, and securities lending. FSB Press Release. The proposal consists of three documents: an overview discussing the FSB's approach to shadow banking issues and a summary of its recommendations; a report entitled "Policy Framework for Strengthening Oversight and Regulation of Shadow Banking Entities" which sets out a policy framework to assess and mitigate bank-like systemic risks posed by shadow banking entities other than MMFs; and a report entitled "Policy Recommendations to Address Shadow Banking Risks in Securities Lending and Repos" that sets out 13 recommendations to enhance transparency, strengthen regulation of securities financing transactions, and improve market structure. Comments on any of these documents should be submitted on or before January 14, 2013. The blog site Conglomerate analyzed the FSB proposals noting that the FSB's findings may be used to support U.S. money market fund reform proposals (see below). Conglomerate.

• SEC Shadow Banking Developments: Securities Lending and Money Market Funds.

The U.S. SEC has also addressed shadow banking issues recently. In the beginning of November, the Division of Investment Management published a collection of its no-action letters upon which investment companies have relied to engage in securities lending activities, summarizing the relief provided by each letter. At the end of November, the Division of Risk, Strategy, and Financial Innovation published its responses to questions posed by Commissioners Luis Aguilar, Daniel Gallagher, and Troy Paredes concerning proposed money market fund reforms. The staff findings may be used to support efforts to promulgate new money market fund rules. See below.

• CFTC Implications for Securitizations.

More recently, industry representatives have communicated their concerns that certain investments in securitization vehicles may expose firms to registration requirements as commodity pool operators. See Managed Funds Association Blog post. According to Hedge Fund Alert, the MFA believes that no-action relief granted by the CFTC's Division of Swap Dealer Intermediary Oversight delaying CPO registration requirements for fund of funds (see below), applies to such securitization vehicles. Implied Relief. Asset-Backed Alert reported the CFTC will soon publish an interpretive letter granting explicit exemptive relief from swap registration and reporting requirements for most asset-backed instruments. The treatment of synthetic and insurance-linked products, however, is still unknown. Explicit Relief.

• FDIC Advisory Committee on Economic Inclusion.

On December 7th, the FDIC announced that the Advisory Committee on Economic Inclusion will meet on December 13, 2012, to discuss the results of the FDIC's survey on the banking industry's efforts to serve the unbanked and underbanked. The committee also will discuss household savings trends and initiatives and mobile financial services and how they can be used to address the unbanked and underbanked populations. FDIC Press Release.

• FDIC Publishes Quarterly Banking Profile.

On December 4th, the FDIC summarized its latest Quarterly Banking Profile. Among other findings, the FDIC noted that insured institutions reported aggregate net income of $37.6 billion in the third quarter of 2012, a $2.3 billion (6.6 percent) improvement over the third quarter of 2011. Also noteworthy was a decline in the number of banks on the FDIC's "Problem List" from 732 to 694. Third-quarter loan loss provisions totaled $14.8 billion, which was 20.6 percent less than the $18.6 billion that insured institutions set aside for losses in the third quarter of 2011, and asset quality indicators continued to improve. FDIC Press Release.

• CFPB Statement of Intent on Information Sharing with States.

On December 6th, the Consumer Financial Protection Bureau issued a Statement of Intent on how the CFPB intends to share information with State Regulators. The document sets forth best practices in the coordination of supervision and information sharing between the CFPB and State Regulators.

• Amendments to Cuban Assets Control Regulations.

On December 3rd, the Treasury Department's Office of Foreign Assets Control published amendments to the Cuban Assets Control Regulations to authorize the processing of funds transfers for the operating expenses or other official business of third-country diplomatic or consular missions in Cuba. OFAC also amended the Cuban Assets Control Regulations to authorize certain payments for services rendered by Cuba to United States aircraft that currently require the issuance of a specific license. The amendments are effective immediately. 77 FR 71530.

• Extension of Dates for Certain Filing Requirements of Designated Financial Market Utilities.

On December 5th, the SEC extended to December 10, 2013, the date for certain filing requirements of Rule 19b-4(n)(1) and Rule 19b-4(o)(2) under the Securities Exchange Act of 1934. The effected requirements concern the process by which designated clearing agencies for which the Commission is the supervisory agency submit advance notices and security-based swap submissions to the Commission. SEC Release No. 34-68357.

• Money Market Funds.

On December 5th, the SEC's Division of Risk, Strategy, and Financial Innovation published its responses to questions posed by Commissioners Luis Aguilar, Daniel Gallagher, and Troy Paredes concerning money market fund redemptions during the financial crisis, the effect of the agency's 2010 money market fund reforms, and how future reforms may affect investor demand for money market funds. The report concludes that the 2010 reforms would not have prevented the "runs" on money market funds which followed after The Reserve Primary Fund's net asset value fell below $1.00. Nor would the 2010 reforms have prohibited The Reserve Primary Fund from holding Lehman Brothers debt. On December 7th, Reuters reported Aguilar says he can now support additional reforms to money market funds provided that any new rules include the study's findings. Aguilar Support.

• Iran Threat Reduction and Syria Human Rights Act Disclosure Requirements.

On December 4th, the SEC's Division of Corporation Finance provided guidance in the form of new questions 147.01-147.07. The new guidance concerns the disclosure required by Section 219(b) of the Iran Threat Reduction and Syria Human Rights Act of 2012.

• Investment Management Director Considers ETFs and Derivatives.

On December 6th, Norm Champ, SEC Director, Division of Investment Management discussed the Division's activities, including the status of its review concerning investment company use of derivatives. Division staff will no longer defer consideration of exemptive requests under the Investment Company Act relating to actively-managed exchange-traded funds that make use of derivatives, provided any such exemptive request includes two specific representations to address some of the concerns that led to the Division's decision to defer consideration of these types of applications. These representations are:  (1) that the ETF's board periodically will review and approve the ETF's use of derivatives and how the ETF's investment adviser assesses and manages risk with respect to the ETF's use of derivatives; and (2) that the ETF's disclosure of its use of derivatives in its offering documents and periodic reports is consistent with relevant Commission and staff guidance. Because of concerns regarding leveraged ETFs, however, the Division will continue not to support new exemptive relief for such ETFs. Champ also summarized recent steps taken by the Division to implement the Dodd-Frank Act and the JOBS Act and future regulatory initiatives. Champ Remarks.

• Bad Actors.

On December 6th, Reuters noted that one year after it was supposed to have acted, the SEC has yet to complete the rulemaking required by Section 926 of the Dodd-Frank Act, which requires the agency to adopt rules that disqualify securities offerings involving certain "felons and other bad actors" from reliance on the safe harbor from Securities Act registration provided by Rule 506 of Regulation D. The rules must be "substantially similar" to Rule 262, the disqualification provisions of Regulation A under the Securities Act, and must also cover matters enumerated in Section 926 (including certain state regulatory orders and bars). Investor advocates would like the SEC to complete its "bad actors" rulemaking before it adopts rules implementing the JOBS Act's provision lifting the Securities Act's general solicitation ban for private offerings. Bad Actors. Investment News discussed two enforcement actions brought by Massachusetts against recidivist securities law violators and a crowdfunding warning issued by the North American Securities Administrators Association. Recidivist Warning.

• Proxy Services Review.

On December 5th, Reuters reported Edward Knight, the general counsel for NASDAQ OMX Group, has asked the SEC to complete its review of the proxy voting system. Knight claims the influence of proxy services companies has substantially grown while those firms' accountability has not. Proxy Review.

• Possible SEC Chairman Profiled.

On December 2nd, Reuters profiled Sallie Krawcheck, a former banking executive who is considered a leading contender to succeed Mary L. Schapiro as Chairman of the SEC. Profile.

• Legacy Concerns.

On December 1st, the Washington Post discussed Representative Patrick T. McHenry's charges that outgoing SEC Chairman Mary L. Schapiro delayed the immediate elimination of the Securities Act's general solicitation ban for private offerings, as required by the JOBS Act, because of pressure exerted by "special interest groups" and concerns over her "legacy." Legacy.

• SEC to Host Roundtable on Decimal-Based Trading.

The SEC will host a roundtable on February 5, 2013 to discuss the impact of decimal-based stock trading on small and mid-sized companies, market professionals, investors, and U.S. securities markets. SEC Press Release.

• Interest Rate Asset Class.

On December 4th, the CFTC approved ICE Trade Vault, LLC's request for an order to remove the interest rate asset class from ICE Trade Vault's provisional registration as a swap data repository. ICE Trade Vault had previously received provisional swap data repository registration to accept swap data for the interest rate, credit, foreign exchange, and other commodity asset classes. CFTC Press Release.

• DTCC Data Repository.

On December 3rd, the CFTC approved an order for DTCC Data Repository (U.S.), LLC, a provisionally registered swap data repository, to accept swap data for the "other commodity" asset class. CFTC Press Release.

• Reporting Mid-Market Mark to Counterparties.

On December 6th, the CFTC's Division of Swap Dealer and Intermediary Oversight issued a no-action letter that provides swap dealers and major swap participants with relief from the requirement to disclose the pre-trade mid-market mark to counterparties in certain foreign exchange transactions.

• Reporting Obligations for Complex Swaps.

On November 30th, the CFTC's Division of Market Oversight announced the issuance of a time-limited no-action letter granting relief for bespoke or complex swaps from certain reporting obligations under Part 43 and Part 45 of the CFTC's regulations.

• CPO Registration Relief.

The CFTC's Division of Swap Dealer Intermediary Oversight has issued a series of no-action letters advising that it will not recommend enforcement action against funds of funds, family offices, and business development companies for failing to register as commodity pool operators if certain conditions are met.

• Hurricane Sandy Relief.

On December 5th, the CFTC's Division of Market Oversight, in order to account for certain disruptions to the testing of swap data reporting systems caused by Hurricane Sandy, provided swap dealers with time-limited no-action relief from swap data reporting obligations with respect to equity swaps, foreign exchange swaps and other commodity swaps. For these asset classes, the letter provides swap dealers with reporting relief under Part 43 and Part 45 of the CFTC's regulations until February 28, 2013, and under Part 46 of the CFTC's regulations, until March 30, 2013. CFTC Press Release.

• CFTC Staff Study of High-Frequency Trading.

On December 3rd, the New York Times discussed a study of high-frequency trading co-authored by the CFTC's departing chief economist. The study, which is being peer-reviewed and has been neither endorsed nor released by the CFTC, looked at a small segment of a CFTC-regulated market in which HFT occurs. The studies' authors found that algorithmic traders in that market made significant profits at the expense of traditional investors. Study.

• Bureau of Consumer Financial Protection

January 1, 2013 - Consumer Leasing (Regulation M) 77 FR 68735.

January 1, 2013 - Truth in Lending (Regulation Z) 77 FR 69736.

January 2, 2013 - Defining Larger Participants of the Consumer Debt Collection Market. 77 FR 65775. Correction. 77 FR 72913.

• Office of the Comptroller of the Currency

December 3, 2012 - Cuban Assets Control Regulations. 77 FR 71530.

December 6, 2012 - Rules of Practice and Procedure; Rules of Practice and Procedure in Adjudicatory Proceedings; Civil Money Penalty Inflation Adjustments. 77 FR 66529.

• Pension Benefit Guaranty Corporation

December 1, 2012 - Benefits Payable in Terminated Single-Employer Plans; Interest Assumptions for Paying Benefits. 77 FR 68685.

January 1, 2013 - Allocation of Assets in Single-Employer Plans; Valuation of Benefits and Assets; Expected Retirement Age. 77 FR 71321.

• Securities and Exchange Commission

December 24, 2012 - Purchase of Certain Debt Securities by Business and Industrial Development Companies Relying on an Investment Company Act Exemption. 77 FR 70117.

January 2, 2013 - Clearing Agency Standards. 77 FR 66220.

• Joint Final Rule - Commodity Futures Trading Commission; Securities and Exchange Commission

December 31, 2012 - Further Definition of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant," "Major Security-Based Swap Participant" and "Eligible Contract Participant". Release No. 34-66868.

• Commodity Futures Trading Commission

January 2, 2013 - Adaptation of Regulations to Incorporate Swaps. 77 FR 66288.

• SROs Publish RFP on Consolidated Audit Trail.

On December 6th, NYSE Euronext advised that the national securities exchanges and the Financial Industry Regulatory Authority published on the dedicated Consolidated Audit Trail NMS website a RFP concept document seeking feedback on the feasibility and costs of implementing the Consolidated Audit Trail reporting requirements being considered by the self-regulatory organizations. Comments should be submitted on or before January 18, 2013. Interested persons are also reminded that the SROs will host an in-person event to discuss the Consolidated Audit Trail on December 10, 2012. NYSE Euronext Information Memo 12-30. On December 3rd, BusinessWeek reported the SROs will ask the SEC to delay for eight months the effective date for the Consolidated Audit Trail rules. Delay.

• FINRA Advises of SEC Reporting Relief.

On December 7th, the Financial Industry Regulatory Authority advised that the SEC's Division of Trading and Markets is granting an optional one-day extension (during the December 2012 month-end holidays) to firms for making the deposit of amounts required to be reserved pursuant to Securities Exchange Act Rule 15c3-3. These reserved amounts are based on the Customer and PAIB reserve formula computations prescribed by Securities Exchange Act Rule 15c3-3(e)(3) and computed as of December 21 and 28, 2012. FINRA Regulatory Notice 12-54.

• FINRA Studies Industry's Disaster Recovery Plans.

On December 4th, the Wall Street Journal reported the Financial Industry Regulatory Authority is examining when and how financial firms implemented their disaster recovery plans during Hurricane Sandy. Disaster Recovery.

• FINRA Waives Certain TRACE Late Fees.

On December 3rd, the Financial Industry Regulatory Authority announced it will waive TRACE late trade reporting fees if a firm in an area affected by Hurricane Sandy reported certain transactions in TRACE-eligible securities late. The late trade reporting fee will be waived for transactions that were executed on Monday, October 29, 2012, or Tuesday, October 30, 2012, by firms located in the affected areas (or that have their fixed income operations in the affected areas), provided that the affected firms reported the transactions no later than Wednesday, October 31, 2012. FINRA Regulatory Notice 12-53.

• New FINRA Front-Running Rule.

On December 3rd, the Financial Industry Regulatory Authority announced that effective June 1, 2013, FINRA Rule 5270 addressing the front running of block transactions will replace NASD IM-2110-3 in the Consolidated FINRA Rulebook. Rule 5270 applies to a broader range of securities than IM-2110-3, includes new Supplementary Material regarding permitted transactions, and codifies that front running of a customer order may violate other FINRA rules or the federal securities laws. FINRA Regulatory Notice 12-52.

• FOCUS Reports Reminder.

On December 3rd, the Financial Industry Regulatory Authority reminded members of their obligation to file annual audit and Financial and Operational Combined Uniform Single reports by the required due dates. FINRA Information Memo.

• NASDAQ Proposes Retail Price Improvement Plan.

December 3rd, the SEC provided notice of the NASDAQ Stock Market's filing of a proposed rule change that would establish the Retail Price Improvement Program on a pilot basis. Comments should be submitted within 21 days after publication in the Federal Register, which is expected shortly. SEC Release No. 34-68336.

• Guidance on the Annual Affirmation Requirement.

On December 3rd, the National Futures Association reminded members that under CFTC rules, those entities that are currently operating under an exemption or exclusion from CPO or CTA registration must annually affirm the applicable notice of exemption or exclusion within 60 days of the calendar year end. The first notice affirming these exemptions is due for the calendar year ending December 31, 2012 and annually thereafter. Failure to affirm the appropriate exemptions or exclusions will be deemed as a request to withdraw the exemption or exclusion and therefore, result in the automatic withdrawal of the exemption or exclusion once the 60 day period has elapsed. NFA Notice to Members I-12-30.

• Longer Period Designated for Consideration of Proposed Index Funds.

On November 29th, the SEC designated January 16, 2013 as the date by which it will approve, disapprove, or institute disapproval proceedings regarding NYSE Arca's proposed listing and trading of shares of the U.S. Equity High Volatility Put Write Index Fund and the U.S. Equity Synthetic Reverse Convertible Index Fund. Notices.

• Margin Withdrawal Limitation is Immediately Effective.

On November 28th, the SEC granted immediate effectiveness to The Options Clearing Corporation's proposed rule change to explicitly state that OCC may reject a request for withdrawal of margin or make an intra-day margin call in situations where a Clearing Member's projected settlement obligations could exceed OCC's available liquidity resources. Such action might be taken even though OCC has made no adverse determination as to the financial condition of the Clearing Member, the market risk of the Clearing Member's positions, or the adequacy of the Clearing Member's total overall margin deposited in the accounts in question. Comments should be submitted on or before December 26, 2012. SEC Release No. 34-68308.

• Dismissal of Merrill Lynch-Bank of America Merger Lawsuits Affirmed.

On December 4th, the Second Circuit affirmed the dismissal of two derivative shareholder lawsuits arising out of Bank of America's acquisition of Merrill Lynch. Additional demand futility burdens were borne by plaintiffs where, as here, double derivative issues are raised by post merger claims, and the instant plaintiffs failed to carry that burden. Furthermore, the district court did not abuse its discretion when it concluded plaintiff did not demonstrate that the post-merger board acted in bad faith or conducted an unreasonable investigation when it decided not to pursue corporate waste claims. Lambrecht v. O'Neal (Summary Order).

• Ratings Agencies Win Mortgage-Backed Securities Suit.

On December 3rd, the Sixth Circuit affirmed the dismissal of state law claims brought against various credit rating agencies. Institutional investors who purchased mortgage-backed securities receiving AAA (or the equivalent) credit ratings sued the ratings agencies after the value of the MBS collapsed. Affirming the dismissal of plaintiffs' negligent misrepresentation claim, the Sixth Circuit held the credit raters owed no duty of care to plaintiffs and the ratings were not actionable misrepresentations. Plaintiffs' assertion that the agencies did not believe in the correctness of their ratings was unreasonable. Plaintiffs' claims under Ohio blue sky law were similarly dismissed. Ohio Police & Fire Pension Fund v. Standard & Poor's Financial Services LLC.

• Supreme Court Declines Certiorari in ERISA Fiduciary Duty Case.

On December 3rd, the U.S. Supreme Court let stand a Sixth Circuit opinion allowing GM employees to sue State Street Bank for breach of fiduciary duty. The employees, participants in GM's ERISA plan, allege that State Street, the fiduciary for GM's retirement plans, breached its fiduciary duty by allowing participants to invest in GM even though GM was nearly bankrupt. The Sixth Circuit held that while a complaint must plausibly allege that a fiduciary breached its duty, it need not overcome the presumption that an ESOP trustee acted reasonably by remaining invested in the employer's stock. The Court further held that State Street had a fiduciary duty to select and maintain only prudent investment options in the plans. State Street petitioned the Supreme Court for certiorari, which the Court denied.

• Diamond Food Securities Fraud Lawsuit Moves Forward.

On November 30th, a U.S. District Court denied motions to dismiss securities fraud claims brought against Diamond Foods and two of its executives. The Court found that the magnitude of the alleged wrongful accounting, the fact that the GAAP violations were basic, and Diamond's inconsistent and deliberately ambiguous statements regarding the nature and purpose of allegedly improper payments all contribute to a strong inference of intentional misconduct. Claims asserted against Diamond's auditor, however, were dismissed. The allegations against it were based on assumptions of what might have or could have occurred. Very few facts were alleged regarding what it actually did. In re Diamond Foods, Inc., Securities Litigation.

• Committee Changes and the SEC.

On December 7th, Reuters discussed changes in the leadership of the Senate Banking Committee and House Financial Services Committee. Those changes will most likely delay, if not prevent, proposals creating a self-regulatory organization for investment advisers and harmonizing the fiduciary duty standard for investment advisers and broker-dealers. Committee Changes.

• Blogging CEOs.

On December 6th, the San Francisco Chronicle blogged about a blog posted by Netflix CEO Reed Hastings. In a post on his company Facebook page, Hastings wrote that Netflix subscribers were viewing one billion hours of content every month. The SEC advised Netflix that the post may have violated Regulation FD. Hastings then blogged about the enforcement notice, commenting that with 200,000 followers, many of whom being reporters and bloggers, his posts appeared to be rather "public." Public Blogs. On December 7th, Bloomberg discussed reactions to the controversy. While some believe the incident shows that Regulation FD should be updated to include social media, others believe that dissemination of information via subscriber-based vehicles is inherently restrictive. Response.

• Regulators Discuss Derivatives.

On December 4th, regulators from the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland and the United States issued a joint statement concerning the cross-border regulation of derivatives. Among other things, the regulators agreed to consult with each other prior to making any final determinations regarding which derivatives products will be subject to a mandatory clearing requirement and will also consider recognizing substituted compliance. Joint Statement.

• The Return of the Too Big to Fail Debate.

On December 4th the Washington Post, focusing on comments made by Federal Reserve Board Governor Daniel Tarullo, discussed the likelihood banking regulators will renew their efforts to limit the risks posed by the largest banks. Sequel.

• Regulatory Arbitrage.

On December 2nd, Reuters reported large international financial institutions are advising their non-U.S. customers to route derivatives trades through the firms' off-shore offices in order to avoid U.S. derivatives, clearing and reporting requirements. How long such regulatory arbitrage will be allowed to occur is unknown. Arbitrage.

• Antitrust and Competition—The EU Weekly Briefing, Vol. 1, Issue 7.

Antitrust and Competition — The EU Weekly Briefing is designed to provide timely updates on recent European Union competition law by including a short description of, and links to, recent developments. EU Weekly Briefing.

• Contact Us.

If you have any questions about the information in this Update, or about any financial services matters generally, please click here to see a list of Winston & Strawn professionals.