Corporate & Financial Weekly Digest : Corporate Finance Lawyers & Attorneys for Legal Developments in Business & Financial Services

Co-authored by James B. Anderson

The Securities and Exchange Commission has announced its planned schedule for proposing and adopting rules and taking other action to implement the corporate governance and disclosure provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Certain of the Dodd-Frank Act provisions apply to proxy materials and proxy voting records that are prepared in connection with annual meetings of shareholders that occur after six months following enactment (January 20, 2011). For these provisions, the SEC intends to propose and adopt final rules prior to such date. Other corporate governance provisions of the Dodd-Frank Act are not effective until the SEC adopts rules; of these, some include dates by which the SEC must act, while others are silent. The SEC considers matters with specified dates indicative of congressional priorities and will propose and adopt rules with respect to these areas first. The SEC expects to adopt all rules with dates specified in the Dodd-Frank Act by one year following enactment (July 21, 2011). Below are the time periods set forth in the SEC’s planned rulemaking schedule and the rules to be proposed or adopted during such time periods, as well as certain related actions. Section references are to the Dodd-Frank Act.

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Co-authored by Natalya S. Zelensky

On September 20, NYSE Arca, Inc. issued a proposal to amend NYSE Arca Equities Rule 7.23 to adopt pricing obligations for Market Makers. Under the proposal, NYSE Arca will require Market Makers to continuously maintain two-sided Q Order trading interest within a Designated Percentage from the National Best Bid and Offer (NBBO) for each security in which they are registered. These pricing obligations are intended to eliminate trade executions against Market Maker placeholder Q Orders traditionally priced far away from the inside market. Permissible Q Orders will be determined by, among other things, the time of day in which a Q Order is entered and the individual character of the security.

Click here to read Release No. 34-62946.

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Co-authored by Natalya S. Zelensky

The Financial Industry and Regulatory Authority is adding a new alert-reporting criterion for leverage in Financial and Operational Combined Uniform Single (FOCUS) Reports. FOCUS Reports detail a firm’s operational and financial conditions and are submitted electronically to FINRA. FINRA’s alert-monitoring criteria is designed to more closely surveil those firms that carry customer accounts or self-clear transactions that may be experiencing financial or operational problems that warrant special monitoring.

Click here to read FINRA Regulatory Notice 10-44.

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Co-authored by Natalya S. Zelensky

The Securities and Exchange Commission has approved new Financial Industry and Regulatory Authority rules that extend certain Regulation NMS protections to quoting and trading of over-the-counter (OTC) Equity Securities. Effective February 11, 2011, these new rules: (1) set forth permissible pricing increments for the display of quotations and acceptance of orders, (2) require firms to avoid locking and crossing quotations within an inter-dealer quotation system, and (3) establish a cap on access fees imposed against a firm’s published quotation. Effective May 9, 2011, the new rules will require an OTC Market Maker, subject to certain exceptions, to display the full size of customer limit orders that improve the price of the Market Maker’s displayed quotation or that represent more than a de minimis change in the size of the Market Marker’s quote if at the best bid or offer.

Click here to read FINRA Regulatory Notice 10-42.

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Co-authored by Vanessa L. Friedman

The Commodity Futures Trading Commission announced that it will hold a public meeting on October 1 regarding the first series of rule proposals pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The meeting will be held at 9:30 a.m. EDT in the CFTC Hearing Room at 1155 21st Street NW, Washington, D.C. The CFTC will consider proposed rules relating to: (1) financial resource standards for systemically important central counterparties, and (2) governance and conflicts of interest standards for designated clearing organizations, designated contract markets and swap execution facilities. The CFTC will also consider an interim final rule regarding the timing of reporting pre-enactment unexpired swaps to a swap repository or the CFTC.

The CFTC press release about the meeting is available here, and the Federal Register release is available here.

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Co-authored by Vanessa L. Friedman

The Commodity Futures Trading Commission has published a request for comment (the Notice) with respect to a National Futures Association (NFA) petition for rulemaking asking the CFTC to amend Rule 4.5 to restore certain limitations on the activities of registered investment companies (RICs) that claim an exclusion from registration as a commodity pool operator under that rule. The amendments requested by NFA would reinstate the requirements that any RIC claiming an exclusion from registration under Rule 4.5: (1) will not market the RIC as a means of obtaining exposure to commodity futures or options, and (2) will limit its commodity futures and options positions (other than positions held for bona fide hedging purposes) to no more than 5% of the liquidation value of the portfolio. The comment period for the Notice expires on October 18.

The Federal Register release of the Notice is available here, and the June NFA petition is available here.

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Co-authored by Vanessa L. Friedman

CME Group, Inc. has sent a letter to the Commodity Futures Trading Commission reaffirming its position that it is not required to accept for clearing ELX Futures “exchange of futures for futures” (EFF) transactions.

Last year, the Chicago Board of Trade (CBOT) issued a Market Regulation Advisory Notice stating that CBOT rules do not allow the execution of EFF transactions. CFTC staff subsequently took the position that neither the Commodity Exchange Act (CEA) nor CFTC regulations prohibit such transactions, and the CFTC sent a letter to CME in August restating this position. In addition, the CFTC Division of Market Oversight (DMO) sent a second letter requesting from CBOT a written response and the production of records addressing whether the CBOT Advisory Notice complies with Core Principle 18 of Section 5(d) of the CEA (antitrust considerations).

In its September 13 reply, CME defended CBOT’s ban on EFF transactions and reiterated its position that such transactions are wash sales and/or fictitious trades. CME also responded to the DMO’s letter addressing its inquiries regarding antitrust considerations and detailing CBOT’s legal and economic rationale for prohibiting EFF transactions.

Copies of both letters, with attachments, are posted on the CFTC’s website, available here.

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Co-authored by Vanessa L. Friedman

CME Group, Inc. issued an Advisory Notice regarding CME Clearing’s new Cleared over-the-counter (OTC) Customer Sequestered regulatory class, which is set to replace the use of 30.7 Secured status for customer positions in certain swaps and forwards on October 4.

The Advisory Notice, which includes links to further information regarding the new regulatory class, is available here.

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Co-authored by Brian Schmidt

The U.S. Court of Appeals for the Second Circuit has ruled that corporations are not subject to liability under “customary international law”, otherwise known as the “law of nations” and that, as such, corporations cannot be held liable under the U.S. Alien Tort Statute. Although he concurred in the result, Judge Leval vigorously disputed the majority’s conclusion on this issue.

Plaintiffs asserted claims against corporate defendants affiliated with the Royal Dutch Petroleum Company for aiding and abetting violations of the law of nations. According to the plaintiffs, Royal Dutch engaged in extensive oil exploration and production in a region of Nigeria since 1958. During this period, a local movement was organized to protest the environmental effects of oil exploration. The plaintiffs alleged that from 1993 to 1994, the Nigerian military, with the assistance of the defendants, organized and executed a brutally violent campaign against the local resistance and asserted claims against the defendants, all of whom were corporations, under the Alien Tort Statute in an action in the Southern District of New York.

Under the Alien Tort Statute, a unique statute passed by the first Congress of the United States in 1789, “district courts have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States.” 28 U.S.C. Section 1350. The Second Circuit held that in order to determine whether jurisdiction existed under the Alien Tort Statute, the court first had to determine whether corporations were subject to liability under the law of nations. The court, in an extensive opinion, found that while international law recognized individual liability in cases under the law of nations, such as for human rights violations, liability under the law of nations had never been extended to include a corporation. Accordingly, the court held that claims against corporations could not be asserted under the Alien Tort Statute and ruled that dismissal of all claims against the defendants was warranted. (Kiobel v. Royal Dutch Petroleum Co., Nos. 06 Civ. 4800, 06 Civ. 4876, 2010 WL 3611392 (2d Cir. Sept. 17, 2010))

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Co-authored by Brian Schmidt

The U.S. Court of Appeals for the Fifth Circuit reversed a lower court ruling that had dismissed the Securities and Exchange Commission’s securities complaint against Mark Cuban. The SEC alleged that Mr. Cuban violated the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as Rule 10b-5, by trading stock in Mamma.com based on confidential information he allegedly misappropriated from its chief executive officer.

According to the complaint, Mr. Cuban, a significant minority shareholder in Mamma.com, was contacted by the company’s CEO about a private investment in public equity, or PIPE, offering. The CEO allegedly told him that the information he was going to provide was confidential and must be kept confidential. Mr. Cuban became upset when he heard the offer because he understood that the PIPE offering would dilute his ownership stake in Mamma.com. At the close of the initial call, Mr. Cuban allegedly told Mamma.com’s CEO: “[n]ow I’m screwed. I can’t sell.” Thereafter, the CEO emailed Mr. Cuban, referring him to a representative to provide additional details. Mr. Cuban called the representative and, the Fifth Circuit held, there is a reasonable inference that he obtained the details of the offering, including the prices available to PIPE participants. One minute later, Mr. Cuban contacted his broker and sold his entire position.

Once the PIPE offering was announced, Mamma.com’s share price declined by as much as 39%. By selling when he did, Mr. Cuban saved $750,000. Reading these allegations in a light most favorable to the SEC, as required on a motion to dismiss, the Fifth Circuit determined that the complaint provided a plausible basis to find that the CEO and Mr. Cuban agreed that Mr. Cuban was not to trade on the information he learned about Mamma.com’s PIPE offering. By trading in violation of that agreement, he allegedly misappropriated the confidential information for his own benefit, providing the basis for the SEC’s claims. As a result, the circuit court remanded the case for further proceedings, including discovery, consideration of summary judgment and, if reached, trial. (SEC v. Cuban, No. 09 Civ. 10996, 2010 WL 3633059 (5th Cir. Sept. 21, 2010))

One day after this opinion was issued, Mr. Cuban prevailed against the SEC with respect to an action under the Freedom of Information Act that he filed to obtain certain documents relating to Mamma.com, as well as other businesses he was affiliated with, at least some of which, according to the U.S. District Court for the District of Columbia, had been improperly withheld. (Cuban v. SEC, No. 09-0996 (D.D.C. Sept. 22, 2010))

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The Senate and the House of Representatives have passed the small business lending bill. The legislation, among other things, creates a $30 billion fund to provide capital for banks with assets under $10 billion to increase their small business lending. Assuming that the President signs the bill, which is expected shortly, the U.S. Treasury Department is expected to begin working with regulators within a week to develop the program’s term sheet and application. The bill also includes provisions that increase the Small Business Administration 7(a) guarantee program’s maximum loan size from $2 million to $5 million, and provide $505 million to maintain its temporary 90% loan guarantee. Other provisions in the legislation provide $1.5 billion in grants to support $15 billion in new small business lending through already successful state programs, and reduce small business taxes by allowing firms to carry back general business tax credits to offset their taxes from the previous five years. Among the critical issues that will be considered by regulators is whether to treat the capital investments made through the new fund as Tier 1 capital.

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Co-authored by James B. Anderson

On September 15, the Securities and Exchange Commission adopted amendments to its rules and forms to conform them to new Section 404(c) of the Sarbanes-Oxley Act, as added by Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 404(c) provides that the auditor attestation report on internal controls over financial reporting required in annual reports under Section 404(b) of the Sarbanes-Oxley Act shall not apply with respect to any audit report of an issuer that is neither an accelerated filer nor a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934. Prior to enactment of the Dodd-Frank Act, a non-accelerated filer (a company with a public equity float under $75 million) would have been required under Item 308 of Regulation S-K to include an auditor attestation report in the filer’s annual report filed with the SEC for fiscal years ending on or after June 15, 2010.

Click here for the complete text of the SEC’s adopting release.

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Co-authored by Jonathan D. Weiner

At a September 17 open meeting, the Securities and Exchange Commission, by a unanimous vote, approved the publication for comment of proposed rules that would require enhanced disclosure of short-term borrowings by registrants. The SEC also approved the publication of guidance regarding enhanced disclosure of short-term borrowing under existing rules requiring disclosure of an issuer’s liquidity and capital resources.

The proposed rules would require the issuer’s Management Discussion and Analysis (MD&A) to include quantitative and qualitative disclosure regarding short-term borrowing during the period reported. Current rules require issuers to disclose short-term borrowing as of the end of the period reported. The proposed rules would require issuers to disclose, among other things, the average and maximum amount of short-term borrowing during the period reported as well as the weighted average interest rates for all classes of short-term borrowing. So-called “Financial Companies” (as such term will be defined in the proposed rules) will be required to provide such averages and maximum borrowings on a daily basis, while other issuers will be required to provide such information on a monthly basis.

The SEC also approved interpretive guidance intended to remind issuers that current rules regarding disclosure of liquidity and capital resources as part of MD&A do not permit the use of financial structures to mask an issuer’s financial condition. In that regard, the guidance will clarify that financial ratios presented in periodic reports may not be presented in a way that obscures an issuer’s financial condition. Lastly, the guidance will address the presentation of information in an issuer’s table of contractual obligations.

According to the SEC, the new rules are primarily intended to address concerns that a “snapshot” of an issuer’s financial condition as of the end of a period may not shed light on an issuer’s need for short-term borrowing or fully inform investors of the risks or capital requirements for the company.

The text of the proposed rules and interpretive guidance was not available at press time, but a press release is expected to be posted to the SEC’s website.
 

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On September 13, the Financial Industry Regulatory Authority announced that it has censured and fined Trillium Brokerage Services, LLC, a New York-based proprietary trading firm, $1 million for using an illicit high-frequency trading strategy and related supervisory failures. Nine traders at Trillium entered numerous layered orders on the NASDAQ Stock Market and NYSE Arca designed to create the false appearance of buying or selling in an attempt to obtain better prices than they would have otherwise, FINRA said in a news release.

According to FINRA, the Trillium traders created a false appearance of buy- or sell-side pressure by entering the non-bona fide orders, often in substantial size relative to a stock’s overall legitimate pending order volume. As a result, other market participants were induced to enter orders to execute against limit orders previously entered by the Trillium traders. Once such orders were filled, FINRA said, the Trillium traders would then immediately cancel orders that had only been designed to create the false appearance of market activity. The 46,000 instances generated approximately $575,000 in profit and took place over a three-month period, beginning on November 1, 2006.

In addition to the nine traders, FINRA also took action against Trillium’s Director of Trading and its Chief Compliance Officer. The 11 individuals were fined $802,500, required to return $292,000 in profits and suspended from the securities industry for periods ranging from six months to two years. As part of the settlement, Trillium and the individuals neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

To read the Letter of Acceptance, Waiver and Consent to FINRA, click here.

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Co-authored by Jessica M. Garrett

On September 9, the Delaware Court of Chancery issued its decision in eBay Domestic Holdings, Inc. v. Newmark, et al., which arose from a dispute between eBay and craigslist concerning eBay’s decision to compete with craigslist in the online classifieds business while at the same time owning a substantial minority stake in craigslist.

In August 2004, eBay acquired a 28.4% interest in craigslist, becoming one of three shareholders in the privately held company. The terms of eBay’s investment were memorialized in a Shareholders’ Agreement, which set forth: (1) eBay’s confidentiality obligations as a craigslist stockholder; (2) eBay’s right to consent to certain transactions in which craigslist may engage; (3) numerous transfer restrictions on the shares owned by the three craigslist shareholders; (4) eBay’s right to compete with craigslist, subject to certain consequences; and (5) the consequences if eBay chose to compete with craigslist. The Stock Purchase Agreement required eBay to approve a new charter for craigslist which provided for a three-person board of directors to be elected based on cumulative voting. The voting arrangement was such that each of the three shareholders—eBay, Craig Newmark and James Buckmaster—could elect one of three directors.
 

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Co-authored by Jessica M. Garrett

On September 8, the Delaware Court of Chancery denied a motion for a preliminary injunction to prevent the consummation of a merger plan, pursuant to which Hertz Global Holdings, Inc. will buy all the shares of rental car competitor Dollar Thrifty Automotive Group, Inc. Under the Hertz merger plan, Hertz will pay $32.80 per share in cash (including a $200 million special dividend that will only be paid in the event of the merger) and 0.6366 shares of Hertz stock for each share of Dollar Thrifty stock. At signing, the merger consideration was valued at $41 per share. Avis Budget Group, Inc. has emerged with a bid a that tops the Hertz bid, offering a combination of cash and stock valued at $46.50 per share. The primary differences between the Hertz bid and the Avis bid are that Avis has refused to promise to pay any reverse termination fee in the event that antitrust approval for an Avis-Dollar Thrifty merger is not obtained, and Avis has not matched the level of divestitures Hertz is willing to make in order to achieve antitrust approval.

Under the principles set forth in Revlon v. MacAndrews & Forbes Holdings, Inc., when a company is sold in a change of control transaction, a board is charged with the obligation to secure the best value reasonably attainable for its shareholders. Here, the shareholders that brought the injunctive action argued that by failing to take affirmative steps to draw Avis into a bidding contest with Hertz before signing a definitive merger agreement with Hertz, the Dollar Thrifty Board breached its duty to take a reasonable approach to immediate value maximization, as required by Revlon.

In denying the motion, the court found that the Board’s behavior was entirely reasonable and properly motivated. The court noted that the record reflects that “the entire Dollar Thrifty Board had no conflict of interest that gave them a motive to do other than the right thing. The record reveals no preference on the part of the Board for Hertz over Avis or any other acquirer... When directors who are well motivated, have displayed no entrenchment motivation over several years, and who diligently involve themselves in the deal process choose a course of action, this court should be reluctant to second-guess their actions as unreasonable.” (In re Dollar Thrifty Shareholder Litigation, 2010 WL 3503471 (Del. Ch. Sept. 8, 2010))

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Co-authored by Christina Grigorian

On September 12, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (the Banking Agencies) released a statement in support of the agreement reached at the meeting of the G-10 Governors and Heads of Supervision regarding the recommendations made by the Basel Committee on Banking Supervision.

The agreement requires the ten signatory countries to increase the quality, quantity and international consistency of capital; to strengthen liquidity standards; to discourage excessive leverage and risk taking; and to reduce procyclicality in regulatory requirements.

The agreement calls for national jurisdictions to implement the new requirements beginning January 1, 2013, with a phased-in compliance regimen so that institutions have the opportunity to implement the new standards gradually over time.

In their statement of support, the Banking Agencies noted that the strengthening of capital is consistent with the Dodd-Frank Wall Street Reform and Consumer Protection Act and also noted that the Basel Committee continues to develop measures to improve the loss absorbing capacity for systemically important institutions.

For more information, click here.

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Co-authored by David J. Gonen

The Federal Trade Commission has recently issued a series of proposed amendments to the rules governing the Hart-Scott-Rodino (HSR) Premerger Notification Program. It has also proposed significant amendments to the HSR Report form itself. The link to the Commissions Notice of Proposed Rulemaking and request for public comment can be found here.

Three of the proposed changes will have substantial impact on financial buyers and other acquirers who operate multiple funds or other investment vehicles. First, HSR filers who share common managers with other entities will need to provide information on the other commonly managed entities—defined as “associates” in the amended rules—even though they are separately owned. Thus, funds that now share a common manager, or partnerships that share a common general partner, with the HSR filer will now be treated as “associates” of the filer and the filer will need to disclose information about them.

Second, acquiring firms will need to disclose whether their “associates” (or businesses that are owned by the associates) receive revenues from the same line of business as the acquired firm. This will require that the filer inquire into the business holdings and revenue sources of its associated entities.

Third, acquiring firms will also need to disclose minority holdings of their associates (holdings of 5-50%) in entities that also drive revenues from the same industry as the acquired firm.

For financial investors, private equity, and families of funds, these proposed amendments to the HSR rules are potentially quite significant. These changes will be addressed in greater detail in a Katten CLE seminar in New York on September 23.

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The Internal Revenue Service, Department of Labor and Department of Health and Human Services published new rules in the Federal Register on August 26 regarding the new requirements for external claims appeals procedures for group health plans. These rules, under section 2719 of the Public Health Service Act, were enacted as part of Health Care Reform. The rules apply to group health plans which are NOT considered “grandfathered” under Health Care Reform.

The rules are contained in Employee Retirement Income Security Act (ERISA) Technical Release No. 2010-01. They are in the form of an “interim enforcement safe harbor,” meaning that compliance with the safe harbor will protect the plan (and insurer) from violation of the statute. The safe harbor rules apply for plan years starting after September 23 until superseded by future guidance (which is to be published by July 1, 2011).

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On September 16, HM Treasury published its third consultation on new insolvency arrangements for investment firms. The consultation sets out the government’s final proposals for a special administration regime (SAR) for investment firms. These proposals are derived from the December 2009 consultation entitled “Establishing resolution arrangement for investment banks” (see the December 18, 2009, edition of Corporate and Financial Weekly Digest).

The SAR is designed to enhance the method by which any investment firm failures occurring in the future will be dealt with. It will take the form of an administration procedure with special administration objectives (SAOs).

The new regime will include new SAOs designed to ensure that administrators focus on:

• the return of client assets;
• engagement with market infrastructure bodies and the authorities; and 
• maximizing returns to creditors.

The government considers that the SAR will give administrators a clear framework within which to conduct investment firm administrations without needing to make frequent applications to the court for directions. In addition, it is hoped that the adjustments made by the SAR will make the UK insolvency regime less expensive and less disruptive.

Read more.

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On September 15, the European Commission published its proposed regulation on over-the-counter (OTC) derivatives, central counterparties and trade repositories. The proposed regulation encompasses all OTC derivatives and is applicable to financial and non-financial firms who either use OTC derivatives or have large positions in OTC derivatives. It has two key aims: (1) increased transparency, and (2) reduced counterparty and operational risk.

The proposed regulation seeks to implement the objectives of the September 26, 2009, G20 Summit, which outlined compulsory clearing of standardized OTC derivative contracts and reporting of OTC derivatives contracts to trade repositories. (An earlier version of this proposal was described in the June 18 edition of Corporate and Financial Weekly Digest.)

The main elements of the proposed regulation are:

• mandatory central counterparty (CCP) clearing of OTC derivatives, subject to pre-defined eligibility criteria;
• risk mitigation—where OTC contracts are not eligible for CCP clearing, the proposed regulation requires the counterparties to the contract to put in place certain risk mitigation techniques; 
• CCPs—the proposed regulation sets out the authorization and supervision requirements for CCPs established in EU member states including conduct of business, organizational and prudential requirements;
• interoperability—where there is an interoperability arrangement between two or more CCPs that involves a cross-system execution of transactions, the relevant CCPs will need prior approval from their national regulator contingent on satisfactory risk management procedures; and
• reporting obligation to trade repositories—detailed transactional information on OTC derivatives contracts will be required to be reported to trade repositories. The data held by trade repositories will be made available to national regulatory authorities. Trade repositories will be required to publish aggregate positions by class of derivatives on the contracts reported to them. The European Securities Markets Authority will be responsible for the registration and surveillance of trade repositories.

There will be certain exemptions from the clearing requirement, for example, where OTC derivatives are used for hedging business risk. However, in such cases firms will be required to hold more capital against the contracts.

Read more.

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On September 15, the European Commission published its proposal for the regulation of short selling and credit default swaps (CDS). The proposal largely follows the Committee of European Securities Regulators’ recommendations, as described in the March 5 and June 18 editions of Corporate and Financial Weekly Digest.

The three main objectives of the regulation are: (1) the creation of a harmonized pan-European short selling regulatory regime; (2) increased transparency; and (3) the reduction of risk.

The Commission has proposed a two-tier disclosure regime: investors will be required to disclose net short positions to their national regulators once a threshold of 0.2% of the issued share capital of the relevant company is crossed and to make public disclosure to the market at a higher threshold of 0.5%. Naked short selling is severely restricted. There will also be a regime whereby market participants must inform regulators about credit default swap positions related to EU sovereign debt issuers.

The regulation contemplates the possibility of competent national authorities being given the power to temporarily ban or restrict short selling and CDS in emergency circumstances.

The proposal is now with the European Parliament and the European Council for their approval. Once adopted, the regulation would apply from July 1, 2012.

Read more.

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Co-authored by Natalya S. Zelensky

On September 9, the Securities and Exchange Commission announced that it has adopted a temporary rule requiring municipal advisers to register with it by Oct. 1 in order to comply with the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act.

“We have acted expeditiously to create a temporary registration system to gather key data and provide transparency about municipal advisers,” said SEC Chairman Mary Schapiro in a press release. “As a result, regulators, investors, and state and local governments will have a much better understanding of those who provide services in the municipal market.”

The SEC expects to implement a permanent rule later this year. The temporary rule applies to all municipal advisers who provide advice to state and local governments and other borrowers involved in the issuance of municipal securities. The advice may be related to derivatives, guarantee investment contracts, investment strategies or the issuance of municipal securities. It also applies to municipal advisers who solicit business from a state or local government for a third party.

The SEC said these advisers should begin registering with the SEC as soon as possible because the Oct. 1 deadline is in less than a month.

The commission has provided a FORM MA-T for municipal advisers on its website.

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Co-authored by Natalya S. Zelensky

The Financial Industry Regulatory Authority reminds firms of their obligation to provide timely, accurate and complete information on Form U5, Uniform Termination Notice for Securities Industry Registration. Firms must file Form U5 no later than 30 days after terminating an associated person’s registration. Also, firms are required to file an amended Form U5 when they learn of circumstances or facts that make a previously filed Form U5 incomplete or inaccurate. Firms must provide the person whose registration has been terminated with a copy of any Form U5 (initial or amended) at the same time that it is filed with FINRA.

In addition, FINRA noted that every question on Form U5 stands on its own and firms should carefully read each question and respond appropriately to each question. Failing to provide accurate and complete information on Form U5 in a timely manner may subject firms to civil and administrative penalties.

Click here to read FINRA Regulatory Notice 10-39.

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Co-authored by Natalya S. Zelensky

The Financial Industry Regulatory Authority has released the August 2010 Supplement to the October 2002 Security Futures Risk Disclosure Statement. The effective date for the Supplement is October 7. The Futures Risk Statement has general disclosures on the risks and characteristics of security futures. The Supplement adds a new disclosure to accommodate OneChicago, LLC’s proposed change to list a class of security futures for which adjustments will be made for ordinary dividends. The Supplement should be read with the Futures Risk Statement, both of which are available here.

To comply with the requirements of FINRA Rule 2370(b)(11)(A), firms may distribute the Supplement in a variety of ways, including, but not limited to: (1) distributing the Supplement to a customer who has already received the Futures Risk Statement not later than the time a confirmation of a transaction is delivered to every customer that enters into a security futures transaction, or (2) conducting a mass mailing of the Supplement to all customers approved to trade security futures who have already received the Futures Risk Statement.

Click here to read the FINRA Information Notice.

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Co-authored by Christian B. Hennion

The Commodity Futures Trading Commission has extended the period for public comment on its recent proposal to adopt a new account “Ownership and Control Report” (OCR), pursuant to which the CFTC would collect detailed account information from reporting entities on a weekly basis (including identifying and contact information with respect to both beneficial owners and account controllers, whether the account is traded pursuant to an automated system, the executing and clearing brokers, and an indication of whether the account is a firm omnibus account). The comment period on the CFTC proposal now closes on October 7.

Notice of the extension is available here, and the original CFTC proposal is available here.

The CFTC will also host a public roundtable on the OCR at 1:00 p.m. E.D.T. on September 16. Information regarding the roundtable, including dial-in information, is available here.

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Co-authored by Christian B. Hennion

The Commodity Futures Trading Commission has adopted final rules regarding over-the-counter foreign currency (forex) transactions with retail customers. The new rules are substantially similar to the rules proposed by the CFTC in January, and reflect the first body of final rules adopted by the CFTC in connection with its implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The rules institute a variety of requirements in connection with retail forex transactions, including registration, disclosure, recordkeeping, financial reporting, minimum capital and other standards and requirements.

Subject to certain exceptions for “otherwise regulated” entities, the new rules will generally require entities offering forex contracts to retail customers to register with the CFTC as either futures commission merchants (FCMs) or registered foreign exchange dealers (RFEDs), depending upon the nature of the business conducted by those entities. Persons who solicit orders, exercise discretionary trading authority and/or operate pools with respect to retail forex generally will be required to register as introducing brokers, commodity trading advisors, commodity pool operators or as associated persons of such entities, as appropriate.

The new rules also implement a minimum net capital requirement for RFEDs and FCMs offering retail forex transactions equal to $20 million plus 5% of the amount (if any) by which such registrant’s liabilities to its retail forex customers exceeds $10 million. Significantly, the rules do not include the “10-to-1” leverage limitation for retail forex transactions that was included in the original proposal. Instead, the rules establish initial minimum security deposit requirements for retail forex contracts equal to 2% of the notional value for major currencies and 5% of the notional value for non-major currencies, and delegate authority to the National Futures Association to set higher security deposit requirements and to make changes in the designation of particular currencies as “major” currencies.

The CFTC press release announcing the new rules, which includes links to the final rules and a CFTC Q&A regarding the new rules, is available here.

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Co-authored by Christian B. Hennion

The Commodity Futures Trading Commission has proposed amendments to its Part 4 Rules to provide exemptions from certain requirements set forth in those rules with respect to the operation of “commodity ETFs,” or pools for which the units of participation are sold in a registered public offering and listed for trading on a national securities exchange. The proposed amendments to CFTC Rule 4.12 would codify exemptive relief previously granted by CFTC staff to registered commodity pool operators (CPOs) operating commodity ETFs. The proposed amendments would permit CPOs to claim an exemption from certain disclosure, reporting and recordkeeping requirements otherwise applicable to CPOs, based on their substituted compliance with applicable securities law requirements. The CFTC has also proposed the adoption of a new Rule 4.13(a)(5), which provides an exemption from CPO registration for certain independent directors and trustees of commodity ETFs who serve on the commodity ETF’s independent audit committee solely for purposes of compliance with federal securities laws.

The comment period for the CFTC’s proposed rules will expire 45 days after their publication in the Federal Register. The CFTC press release, including a link to the Federal Register release, is available here.

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Co-authored by Christian B. Hennion

The National Futures Association (NFA) has set an October 7 effective date for recent amendments to its Interpretive Notice entitled “NFA Compliance Rule 2-30(b): Risk Disclosure Statement for Security Futures Contracts.” Pursuant to NFA Compliance Rule 2-30(b), NFA members that are notice registered as broker-dealers and their associated persons are required to provide their customers with a risk disclosure statement regarding the trading of security futures products (SFPs) at or before the time that a customer’s account is approved to trade SFPs. NFA members and associates with existing customers approved for SFP trading must distribute the amended paragraph of the risk disclosure statement to such customers no later than the time a confirmation of an SFP transaction is delivered to such customer.

The NFA Notice to Members regarding the amendments is available here.

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Co-authored by Christian B. Hennion

Commodity Futures Trading Commission Chairman Gary Gensler has announced that the CFTC will publish a list of all meetings held by either the Chairman or CFTC staff with outside organizations regarding the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

The list will be published on the CFTC’s website, and can be accessed here.

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Co-authored by Gregory C. Johnson

Allegations that the directors of a technology company inflated the firm’s business prospects and understated its potential liabilities will not support a claim for securities fraud because the plaintiffs did not sufficiently allege that the directors knew these projections were false when made.

Rackable Systems Inc. predicted robust earnings for the fourth quarter of 2006, but fell short of its goal by about five cents per share and announced in 2007 that it would shift its business model to provide more standardized inventory. The price of Rackable’s shares fell 65%, and investors sued Rackable for securities fraud, alleging that the company overstated its business prospects and understated certain liabilities, such as a potential tax payment of about $1.2 million. Rackable moved to dismiss.

The plaintiffs argued that Rackable’s directors knew that their projections were overly optimistic because they had hired an outside auditor to evaluate their business during that period and that the directors should have created a reserve for the potential tax payments. The U.S. District Court for the Northern District of California rejected these arguments, holding that the plaintiffs had not pleaded sufficient facts to show that the auditor’s findings made the firm’s projections misleading or that the tax liability was improperly disclosed. (In re Rackable Sys., Inc. Sec. Litig., No. 09 Civ. 0222(CW), 2010 WL 3447857 (N.D. Cal. Aug. 27, 2010))

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Co-authored by Gregory C. Johnson

The principals of a pharmaceutical company could be held personally liable for securities fraud based on allegations that the defendants misled investors and used the firm as an alter ego for their own interests.

Five principals of Immunosyn Corp. allegedly induced two investors to invest $1.025 million in the company by promising that the firm had an exclusive right to sell a “super drug” called SF-1019, and that the investors would receive 102,500 free-trading shares of Immunosyn in exchange. The principals then purportedly sold the drug through other channels and forced the investors to accept restricted stock instead of free-trading shares. The investors sued Immunosyn and its principals, alleging fraudulent inducement and that the defendants were personally liable for any losses because they had commingled their personal and business assets.

The defendants sought dismissal, arguing that the investors had not provided sufficient details about the dates of the underlying misrepresentations and that they had provided only conclusory allegations that Immunosyn was the defendants’ alter ego. The U.S. District Court for the Southern District of California disagreed, holding that the plaintiffs had identified a discrete timeframe for the misrepresentations of between early 2006 and May of that year, and that they had sufficiently alleged a failure to follow corporate formalities and a failure to segregate personal and business assets. (Albergo v. Immunosyn Corp., No. 09 Civ. 2653(DMS), 2010 WL 3339398 (S.D. Cal. Aug. 24, 2010))

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The U.S. Court of Appeals for the Seventh Circuit has recently allowed Verizon Communications, Inc. to correct a mistake in the drafting of its cash balance plan that could save Verizon over $1 billion in pension benefits.

The decision is one of first impression in the Seventh Circuit. The decision is remarkable because it is reported to conflict with the case law in a number of the other federal circuits dealing with a plan sponsor’s ability to unilaterally correct retroactively a drafting error (a so-called “scrivener’s error”) in qualified retirement plan documents. The decision is also contrary to the IRS’s consistently stated opinion that employers may not unilaterally correct retroactively drafting errors in plan documents.

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