Winston & Strawn LLP: Financial Services Update - October 6, 2008

Financial Services UpdateOctober 6, 2008
Volume 3, No. 36



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]

With Friday's passage into law of the Emergency Economic Stabilization Act of 2008, the full weight of the federal government is now finally behind efforts to stem the credit crisis and prevent the nation's economy from slipping into a broader recession. Many, if not most, would say this is a welcome development, given the unprecedented events of the last several weeks. However, many important details of the Act's centerpiece, the Troubled Assets Relief Program, still need to be worked out, including how to establish fair prices of the assets to be purchased, and how to minimize conflicts of interest involving the participating asset managers. Only time will tell if the Program is a success, given the scope and complexity of the crisis. There can, of course, be legitimate disagreement over the efficacy of the Act to solve the current problems as well as the wisdom of the federal government getting involved in these issues the first place. However, here can be little doubt that without some type of comprehensive public sector response, the crisis would likely have taken a more serious turn, at least in the short term.
Also included in the Act are a number of miscellaneous tax provisions affecting a variety of businesses and individuals, some of which extend tax relief provisions that were set to expire soon. Many of these provisions have little to do with the current credit crisis and will not directly affect the financial services industry. However, Congress did include one provision as a companion "revenue raiser" that will surely be to the dismay of many hedge fund managers. After much speculation in the industry about when and even whether this would happen, with the Act, Congress has effectively eliminated the ability of hedge fund managers to defer fee compensation earned offshore. The law is effective for services performed after December 31, 2008. In order to further offset last week's large commitment of public funds and stem our ever-increasing federal budget woes, does this action on deferred compensation mean that Congress and the new administration will now be looking for additional ways to raise revenue from hedge fund managers? Could elimination of favorable tax treatment on "carried interest" for hedge fund managers and private equity fund managers be far behind? Given the current political and fiscal climate, it is fair to say that everything may now be on the table for consideration.
In the News [Top]
  • Financial Rescue Package Enacted.
The Emergency Economic Stabilization Act of 2008 was enacted into law. The statute provides the Secretary of the Treasury with authority to purchase or insure up to $700 billion of mortgage-related assets and requires the Treasury Department and other federal agencies to modify individual mortgages they hold or control. As part of that plan, the statute expands the Federal Housing Administration's Hope for Homeowners program. The legislation also includes oversight measures and executive compensation restrictions. Senate Banking Committee Fact Sheet. See also Senate Banking Committee Analysis; FHA Press Release.
  • Private Investors Want Opportunity to Purchase Distressed Assets.
On September 29th, the Boston Globe reported private equity funds and foreign investors want the opportunity to buy distressed securitizations in a Treasury-organized auction of the assets. Private Investment.
  • FDIC's Role Expanding.
On October 1st, Bloomberg reported on the growing role the FDIC and its Chair, Sheila Bair, are playing in the efforts to stabilize the financial markets. Not only is the depository insurer moving to increase insurance limits, it is acting preemptively, as in the case of Citigroup's purchase of Wachovia. Some are also calling upon the FDIC to guaranty all bank creditors. Role. See also New York Times (consequences of increased deposit insurance). On October 2nd, the Washington Post reported that the FDIC's plans to modify mortgages held by IndyMac, which the FDIC seized in August, may be expanded to include other mortgages acquired by the government as part of a stabilization program. Modifications.
  • SEC's 2004 Decision to Change Net Capital Calculations.
On October 2nd, the New York Times reported on the SEC's decision in 2004 to change the way investment banks calculate net capital and the consequences of that decision. Consequences.

Banking Agency Developments [Top]
  • OCC Issues Guidance on Bank Response to Disasters.
On October 3rd, the OCC issued guidance reminding banks they have discretion to decide whether to open or close during a natural disaster or other emergency, and encouraging banks to work with affected borrowers. OCC Bulletin 2008-26.
  • Banking Regulators Extend CRA Consideration for Activities Associated with Hurricanes Katrina and Rita.
On September 29th, the OCC announced the time in which CRA consideration for disaster-related activities that help to revitalize major disaster areas related to hurricanes Katrina and Rita has been extended for an additional 36 months. OCC Bulletin 2008-24.
  • Federal Reserve Board Announces 2009 Reserve Requirement.
On September 29th, the Federal Reserve Board announced the annual indexing of the reserve requirement exemption amount and of the low reserve tranche for 2009. The Board also announced the annual indexing of the nonexempt deposit cutoff level and the reduced reporting limit that will be used to determine deposit reporting panels effective 2009. Federal Reserve Board Press Release.
  • Federal Reserve Board Announces Additional Liquidity Measures.
On September 29th, the Federal Reserve Board announced central banks will engage in additional coordinated actions to expand U.S. dollar liquidity capacity. Actions by the Federal Reserve include an increase in the size of the 84-day maturity Term Auction Facility auctions to $75 billion per auction from $25 billion beginning with the October 6 auction, two forward TAF auctions totaling $150 billion that will be conducted in November to provide term funding over year-end, and an increase in swap authorization limits with the Bank of Canada, Bank of England, Bank of Japan, National Bank of Denmark, European Central Bank, Bank of Norway, Reserve Bank of Australia, Bank of Sweden ), and Swiss National Bank to a total of $620 billion, from $290 billion previously. Federal Reserve Board Press Release.
Treasury Department Developments [Top]
  • Treasury Designates Corporate Network Tied to the Amezcua Contreras Organization.
On October 2nd, the Treasury Department's Office of Foreign Assets Control named 10 individuals and six companies tied to the Amezcua Contreras Organization, a major Mexican drug trafficking organization, as Specially Designated Narcotics Traffickers. The designees, all based in Mexico, are now subject to economic sanctions pursuant to the Foreign Narcotics Kingpin Designation Act. The designation action freezes any assets the 16 designees may have under U.S. jurisdiction and prohibits U.S. persons from conducting transactions or dealings in the property interests of the designated individuals and entities. Treasury Department Press Release.
  • Treasury Designates FARC International Commission Members.
On September 30th, the Treasury Department's Office of Foreign Assets Control designated eight international representatives of the Revolutionary Armed Forces of Colombia, a narco-terrorist organization. The action freezes any assets the designated entities 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's Temporary Guarantee Program for Money Market Funds.
On September 29th, the Treasury Department opened its Temporary Guarantee Program for Money Market Funds to any publicly offered eligible money market mutual fund, both retail and institutional, that applies for and pays a fee to participate in the program. The program will exist for an initial three month term, after which the Secretary of the Treasury will review the need and terms for extending the program. To participate, the Treasury Department will require money market funds with a net asset value per share greater than or equal to $0.9975 as of the close of business on September 19, 2008, to pay an upfront fee of 1 basis point, based on the number of shares outstanding on that date. Funds with net asset value per share of greater than or equal to $0.995 and below $0.9975 as of the close of business on September 19, 2008, will be required to pay an upfront fee of 1.5 basis points, based on the number of shares outstanding on that date. These fees will only cover the first three months of participation in the program. Funds with a net asset value below $0.995 as of the close of business on September 19, 2008, may not participate in the program. Treasury Department Press Release; FAQs.
  • Treasury Issues Guidance on Protecting Soldiers' FSA Funds.
On September 29th, the Treasury Department and Internal Revenue Service issued Notice 2008-82, which protects reservists from losing funds in their health Flexible Spending Arrangement accounts after being called to active duty. Treasury Department Press Release.

Commodity Futures Trading Commission [Top]
  • CFTC Adjusts Civil Monetary Penalties Maximum.
On October 3rd, the CFTC published amendments to its rule governing the maximum amount of civil monetary penalties to adjust for inflation. This rule sets forth the maximum dollar amount for civil monetary penalties assessable for violations of the Commodity Exchange Act, and Commission rules and orders. The rules also reflect the higher penalties enacted this year by Congress for violations of the Act. The amendments are effective October 23, 2008. 73 FR 57512.
  • CFTC Provides Interpretive Guidance on Funds Related to Cleared-Only Contracts Determined to Be Included in a Customer's Net Equity.
On October 2nd, the CFTC published interpretive guidance clarifying the appropriate treatment under the commodity broker provisions of the Bankruptcy Code and Part 190 of the Commission's Regulations of claims arising from contracts that, although not executed or traded on a Designated Contract Market or a Derivatives Transaction Execution Facility, are subsequently submitted for clearing through a Futures Commission Merchant to a Derivatives Clearing Organization. 73 FR 57235.
  • CFTC Requests Comment on Clearinghouse's Request for Registration as a DCO.
On October 1st, the CFTC requested public comment on an application by International Derivatives Clearinghouse, LLC for registration as a derivatives clearing organization. Comments should be submitted on or before Friday, October 17, 2008. CFTC Release No. 5560-08.
  • CFTC to Co-Chair International Task Force on Commodities Markets.
On October 1st, the CFTC announced it will co-chair the International Organization of Securities Commission's ("IOSCO") newly-created Task Force on Commodity Markets ("TFCM"), along with the United Kingdom Financial Services Authority. IOSCO's Technical Committee has charged the TFCM with examining the current supervisory approaches for overseeing commodity markets worldwide. CFTC Release No. 5561-08.
  • CFTC Permits Brazilian Derivatives Exchange to Make Electronic Trading System Available to Authorized Persons in U.S.
On September 26th, the Division of Market Oversight issued a letter granting no-action relief to permit the Brazilian Derivatives Exchange, BM&F Bovespa S.A. - Bolsa de Valores, Mercadorias e Futuros, to make its electronic trading and order matching system ("GTS") available to persons that have been authorized to directly access GTS from the United States without obtaining contract market designation or registration as a derivatives transaction execution facility pursuant to Sections 5 and 5a of the Commodity Exchange Act, respectively. CFTC Letter No. 08-18.
Securities and Exchange Commission [Top]
New Final Rules
  • SEC Extends Temporary Emergency Orders.
On October 1st, the SEC issued a Press Release announcing that it was extending the emergency orders issued in response to the instability of the financial markets.
  • First, the SEC extended its temporary orders prohibiting short selling in the securities of certain financial companies, to allow time for completion of work on the anticipated passage of the Emergency Economic Stabilization Act of 2008. The extended order was scheduled to expire at 11:59 PM (ET) on the third business day after enactment of the legislation, but in any case no later than 11:59 PM (ET) on October 17, 2008. On Friday, October, 3rd, the SEC Division of Trading and Markets issued a Statement advising that the President had signed the legislation, meaning that the order prohibiting short sales of the securities of financial institutions will expire at 11:59 p.m. (ET) on Wednesday, October 8, 2008.
  • Second, the SEC extended its temporary requirement that institutional money managers report to the SEC, on Form SH, short sales of certain publicly traded securities. This order is also extended to 11:59 PM (ET) on October 17, 2008, but the SEC intends that the order will continue in effect beyond that date without interruption in the form of an interim final rule that will be open for public comment. . The SEC also advised that all Forms SH, including those that were due on Monday, September 29, 2008, will remain nonpublic, to the extent permitted by law, without filers being required to submit confidential treatment requests. See also Revised Form SH; Revised Form SH Instructions.
  • Third, the SEC temporarily eased restrictions on the ability of issuers to repurchase their securities. This order will be extended beyond its currently scheduled expiration, to 11:59 PM (ET) on October 17, 2008.
  • Fourth, the SEC extended until 11:59 p.m. (ET) on October 17, 2008, the mandatory T+3 Close-Out Requirement for short sales and the penalties for violation of this requirement including prohibition against further short sales of the security by any broker-dealer acting on behalf of the short seller unless shares are pre-borrowed. The SEC intends for this rule to continue beyond October 17 as an interim final rule.
The Press Release also includes reminders about the repeal of the options market maker exception from the short sale close-out provisions in Rule 203(b)(3) of Regulation SHO, and new Rule 10b-21 under the Securities Exchange Act of 1934, which makes it unlawful for short sellers to deceive broker-dealers or other market participants about their intention or ability to deliver securities for timely settlement and then fail to deliver by settlement date. SEC Press Release. Winston & Strawn has prepared a Briefing discussing the extended orders.
  • SEC Releases Technical Amendment to Item 407 of Regulation S-K.
On September 26th, the SEC released a technical amendment to Item 407 of Regulation S-K to change a reference to Independence Standards Board Standard No. 1 in Item 407 to the applicable requirements of the PCAOB regarding the independent accountant's communications with the audit committee concerning independence. The amendment will be effective on September 30, 2008. SEC Release No. 33-8961.
  • SEC and FASB Provide Fair Value Accounting Guidance.
On September 30th, the SEC and FASB provided guidance on the implementation and interpretation of FAS 157, Fair Value Measurements. Among other things, the guidance allows the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, to measure fair value when relevant market evidence does not exist. The guidance further provides that broker quotes may be an input when measuring fair value, but are not necessarily determinative if an active market does not exist for the security, and notes that disorderly transactions are not determinative when measuring fair value. SEC Press Release. On October 1st, CFO.com reported FASB will offer additional fair value guidance in the form of an illustration after an accelerated comment period. Additional Guidance.
  • Congressman Calls for Reinstatement of NYSE Rule 80A Collars.
On September 30th, Reuters reported Representative Edward Markey has written the SEC urging it to order the New York Stock Exchange to reinstate Rule 80A collars. Collars.
  • SEC Issues Fee Rate Advisory.
On September 29th, the SEC issued a Fee Rate Advisory advising that when fiscal year 2009 starts on October 1, 2008, the SEC expects to be operating under a continuing resolution that will extend through March 6, 2009. During this period, fees paid under Section 6(b) of the Securities Act of 1933 and Sections 13(e), 14(g) and 31 of the Securities Exchange Act of 1934 will remain at their current rates. SEC Fee Rate Advisory.
  • SEC Requests Comment on Ways to Modernize Disclosure System.
On September 26th, the SEC, in connection with its October 8, 2008 roundtable discussion, requested comments on ways in which its current disclosure system can be modernized to provide investors more useful and timely information to help them make investment choices. Comments should be submitted on or before October 22, 2008. SEC Release No. 33-8962.
Exchanges and Self-Regulatory Organizations [Top]
BATS Exchange
  • Proposed Amendments Regarding Market Makers are Immediately Effective.
On September 25th, the SEC granted immediate effectiveness to BATS Exchange's proposed amendments to BATS Rulebook Chapter XI, adding four new rules regarding the registration and obligations of market makers and amending Rule 1.5 to add definitions of "Market Maker" and "Market Maker Authorized Trader." The changes are designed to enable BATS members to register as Market Makers and to provide for the regulation of those Market Makers. Comments should be submitted on or before October 22, 2008. SEC Release No. 34-58644.
Financial Industry Regulatory Authority
  • SEC Approves Amendment Eliminating Yield Reporting to TRACE; FINRA Will Disseminate Standard Data in Real Time.
On October 1st, FINRA advised that the SEC has approved an amendment to NASD Rule 6230 (Transaction Reporting). Effective November 3, 2008, member firms will no longer report yield to TRACE. Instead, FINRA will calculate and disseminate a Standard Yield calculated in the TRACE System for each transaction in a TRACE-eligible security. FINRA Regulatory Notice 08-52.
  • FINRA Proposes Amendment Regarding Market Letters.
On September 25th, the SEC provided notice of the Financial Industry Regulatory Authority's proposal to amend NASD Rules 2210 (Communications with the Public) and 2211 (Institutional Sales Material and Correspondence) and incorporated NYSE Rule 472 (Communications with the Public) to address the supervision of market letters. Among other things, the proposal would amend the definition of "sales literature" in NASD Rule 2210 to exclude market letters that qualify as "correspondence," and would define "correspondence" in NASD Rule 2211 to include market letters distributed by a member to one or more of its existing retail customers and fewer than 25 prospective retail customers within any 30 calendar-day period. The changes would allow firms to distribute most market letters in timely manner without requiring a registered principal to review each market letter prior to distribution. Comments should be submitted within 21 days after publication in the Federal Register which is expected during the week of October 6. SEC Release No. 34-58648.
Fixed Income Clearing Corporation
  • Expansion of Securities Eligible for GFC Repo Service is Immediately Effective.
On September 30th, the SEC granted immediate effectiveness to the Fixed Income Clearing Corporation's proposed amendment of the rules of the Government Securities Division, expanding the types of securities eligible for the GFC Repo service. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of October 6. SEC Release No. 34-58696.
International Securities Exchange
  • Change in FX Options Closing Settlement Reference Time is Immediately Effective.
On September 25th, the SEC granted immediate effectiveness to the International Securities Exchange's proposal to amend its FX Options closing settlement value rule by changing the reference time from 2:00 p.m. (ET) to 5:00 p.m. (ET). Comments should be submitted on or before October 24, 2008. SEC Release No. 34-58645.
International Swaps and Derivatives Association
  • ISDA Launches Revised Documentation Template for European CDS.
On October 3rd, the International Swaps and Derivatives Association launched a revised documentation template for credit default swaps referencing the iTraxx LevX index of European leveraged loans, an index administered by Markit Group Limited. The revised template incorporates a provision for settlement by reference to an auction following a credit event, bringing the European documentation in line with the North American Loan CDS documentation. ISDA Press Release.
  • ISDA Launches Fannie Mae and Freddie Mac CDS Protocol.
On September 30th, the International Swaps and Derivatives Association launched the 2008 Fannie Mae and Freddie Mac CDS Protocol. The Protocol, which is open until October 2, offers institutions the ability to amend their documentation for various credit derivatives transactions in order to utilize an auction scheduled for October 6, 2008 to determine the final price for certain Fannie Mae and Freddie Mac obligations. Markit and Creditex will administer the auction. ISDA Press Release.
NASDAQ OMX PHX
  • Proposed Trading Halt Rule for Certain Derivative Securities is Immediately Effective.
On September 26th, the SEC granted immediate effectiveness to the proposal by NASDAQ OMX PHLX ("Phlx") to amend Phlx Rule 136 to state that the Phlx will halt trading in new derivative securities products listed on the Phlx for which a net asset value (and in the case of managed fund shares or actively managed exchange-traded funds, a "disclosed portfolio") is disseminated if the Phlx becomes aware that the net asset value and, if applicable, the disclosed portfolio is not being disseminated to all market participants at the same time. Comments should be submitted on or before October 24, 2008. SEC Release No. 34-58658.
NASDAQ Stock Market
  • NASDAQ Cancels Certain Trades in Google Shares.
On September 30th, the NASDAQ Stock Market cancelled all trades in the shares of Google at or above $425.29 and at or below $400.52 that were executed in NASDAQ between 15:57:00 and 16:02:00 ET. The cancelled trades were triggered by erroneous orders that were routed to NASDAQ from another market center. NASDAQ Stock Market Press Release.
  • NASDAQ to Maintain Consolidated List of Firms Subject to SEC Emergency Short Sale Rule.
On September 29th, NASDAQ Stock Market announced it will maintain a consolidated list of Included Financial Firms that are subject to the SEC's Emergency Short Sale Order for all exchanges, and a summary of any additions and deletions for NASDAQ, on the NASDAQ Trader website. The list will be updated once daily, effective the next trading day. NASDAQ Regulatory Alert 2008-030.
New York Stock Exchange
  • Suspension of Certain Rules Due to Events of September 15, 2008 Is Immediately Effective.
On September 24th, the SEC granted immediate effectiveness to the New York Stock Exchange's proposed rule change suspending the operation of certain NYSE rules to respond to the market impact of the events of September 15, 2008, including the bankruptcy filing by Lehman Brothers Holdings Inc. Comments should be submitted on or before October 22, 2008. SEC Release No. 34-58631.
  • Amendment Regarding Liquidity Replenishment Points is Immediately Effective.
On September 24th, the SEC granted immediate effectiveness to the New York Stock Exchange's proposed amendment of Exchange Rule 1000(a)(iv)(C) (Liquidity Replenishment Point) to widen the value ranges for the calculation of liquidity replenishment points. Comments should be submitted on or before October 22, 2008. SEC Release No. 34-58629.

Federal Appellate Court Opinions [Top]
  • Court Holds Whistleblower Claims are Arbitrable.
On October 2nd, the Second Circuit held that whistleblower claims brought under the Sarbanes-Oxley Act are arbitrable. The Court further held that the specific arbitration agreement at issue provided the plaintiff with an adequate opportunity to protect her statutory rights. Guyden v. Aetna.
  • Third Circuit Applies SEC's Interpretation of Section 16 of the Exchange Act.
On October 1st, the Third Circuit, affirming the entry of summary judgment in defendants' favor, held that principles of stare decisis do not require it to find that defendants violated the short swing profits prohibition of the Securities Exchange Act. The SEC's interpretation of Exchange Act Section 16 is reasonable and entitled to deference. Because the SEC's new Rule 16b-3 is a clarification of existing rulemaking, its application to the instant case does not have an impermissible retroactive effect. Levy v. Sterling Holding Company, LLC.
  • Court Vacates Bar Order Entered in Class Action Securities Fraud Lawsuit.
On October 1st, the Ninth Circuit vacated and remanded bar orders entered against a non-settling defendant in a class action securities fraud lawsuit. Bar orders issued pursuant to the Private Securities Litigation Reform Act may only bar claims for contribution and indemnity or disguised claims for such relief. Independent claims may not be barred under federal law. In re Heritage Bond Litigation.
  • Class Action Plaintiffs May Rely on Fraud-on-the-Market Presumption in Case Against Research Analysts.
On September 30th, the Second Circuit held that plaintiffs alleging securities fraud against research analysts need not make a heightened evidentiary showing in order to benefit from the fraud-on-the-market presumption of reliance upon the allegedly false information. The Court, however, vacated the class certification and ordered the matter remanded in order to give defendants an opportunity to rebut the fraud-on-the-market presumption. In re Salomon Analyst Metromedia Litigation.

Rules Effective Dates [Top]
  • Exemption from Registration under Section 12(g) of the Securities Exchange Act of 1934 for Foreign Private Issuers - Effective October 10, 2008.
On September 5th, the SEC amended the rule that exempts a foreign private issuer from having to register a class of equity securities under Section 12(g) of the Securities Exchange Act of 1934 ("Exchange Act") based on the submission to the Commission of certain information published by the issuer outside the United States. The exemption allows a foreign private issuer who meets specified conditions to have its equity securities traded in the U.S. over-the-counter market without registration under Section 12(g). Federal Register pp. 52751-52769.
Winston & Strawn Speaking Engagements and Publications [Top]
  • SEC Extends Actions Addressing Short Sales and Current Market Conditions.
On October 3rd, Winston & Strawn published a Briefing discussing the SEC's announcement that it was extending the emergency orders that it issued on September 17 and September 18, 2008, addressing short selling and other matters relating to the current market situation. Briefing.
  • Winston & Strawn Sponsors 20th Annual ABA/ABA Money Laundering Enforcement Conference.
Winston & Strawn is a sponsor of the 20th annual ABA/ABA Money Laundering Enforcement Conference to be held October 19-21, 2008 in Washington, D.C. This year's conference is titled "Protect Your Bank Against Money Laundering Risk" will bring together regulatory and legal practitioners of the American Bankers Association and the American Bar Association who will deliver essential, up-to-the-minute information on anti-money laundering strategies and solutions. Event Information.
  • Pilecki Speaks at 2008 Annual Risk Management and Regulatory Examination/Compliance Seminar.
Winston & Strawn financial services partner Paul Pilecki will be among the speakers at the Institute of International Bankers 2008 Annual Risk Management and Regulatory Examination/Compliance Seminar to be held on October 21-22, 2008 in New York City. This program provides the Institute's member banks with definitive and timely information on critical examination and supervision issues as well as best practices. Event Information.
  • Winston & Strawn Sponsors LSTA 13th Annual Conference.
Winston & Strawn will be a sponsor of The Loan Syndications and Trading Association, Inc. 13th Annual Conference to be held on Thursday, October 23, 2008 in New York City. Event Information.

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