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

Co-authored by Palash Pandya

On January 25, the Securities and Exchange Commission proposed rules amending the accredited investor standards under the Securities Act of 1933 to reflect the requirements of Section 413(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed rules would amend Rules 215 and Rule 501(a)(5) of the Securities Act to exclude the value of a person's primary residence from the $1 million net worth (or joint net worth) test for determining whether a person is an "accredited investor" under Regulation D. The proposed rules would also amend Rules 215 and Rule 501(a)(5) to clarify that net worth is calculated by excluding only the investor's net equity in its primary residence by adding the phrase "calculated by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property." While this clarification (as well as the technical and conforming amendments referenced below) supplements Section 413(a) of the Dodd-Frank Act, the exclusion itself was effective upon enactment of the Dodd-Frank Act.

• Email This
• Print
• Comments
• Trackbacks

On January 25, the Securities and Exchange Commission adopted, by a 3-2 vote, final rules under Section 14A of the Securities Exchange Act of 1934, which was enacted by Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 14A requires public companies to conduct separate non-binding shareholder advisory votes to approve the named executive officer (NEO) compensation (say-on-pay) and the frequency of the say-on-pay vote (say-on-when). Section 14A also requires expanded, tabular format disclosure of NEO compensation arrangements in connection with mergers or similar transactions (golden parachutes) and a related separate advisory vote on golden parachutes in merger proxy statements. Although the final rules are not effective until 60 days after publication in the Federal Register, the say-on-pay and say-on-when requirements are effective for annual or special shareholder meetings occurring on or after January 21, 2011, under the Dodd-Frank Act provisions. The final rules provide transition guidance pending the effectiveness of the rules. The rules on golden parachute disclosure and the separate advisory vote are effective April 25.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Natalya S. Zelensky

On January 21, the Securities and Exchange Commission issued a Study in which the SEC staff recommended establishing a uniform fiduciary standard for investment advisers and broker-dealers providing personalized investment advice about securities to retail customers that is consistent with the standard that currently applies to investment advisers. The standard, according to the Study, should be no less stringent than the standard currently applied to investment advisers under Sections 206(1) and (2) of the Investment Advisers Act of 1940, and would require broker-dealers and investment advisers to act in the best interest of retail customers without regard to their own financial or other interest. The Study also urges the SEC to issue interpretive guidance and to engage in rulemaking to address the duties of loyalty and care that are part of this uniform fiduciary standard.

According to the Study, which was required under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the staff of the SEC was guided by an effort to establish a uniform standard providing for the integrity of personalized investment advice given to retail investors. The SEC staff's recommendations also include suggestions for implementing the new standard and for harmonizing the broker-dealer and investment adviser regulatory regimes and discuss a variety of topics, including disclosure, principal trading, investor education, advertising and other communications, use of finders and solicitors, regulatory oversight, licensing and registration of firms and their associated persons, recordkeeping and the interpretation of key phrases, such as what "personalized investment advice about securities" means. Notably, the Study is under criticism from two SEC commissioners, who issued a press release the day after the Study's release opposing the Study's release to Congress as drafted.

Click here to read the Study.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Natalya S. Zelensky

In a no-action letter issued on January 11 (2011 Letter), the Securities and Exchange Commission's Division of Trading and Markets extended and modified no-action relief it had previously granted allowing broker-dealers to rely on SEC-registered investment advisers to perform some or all of the broker-dealers' anti-money laundering (AML) customer identification program (CIP) obligations. Under the 2011 Letter, the broker-dealer's reliance on the investment adviser must be reasonable under the circumstances, and the investment adviser must enter into a contract with the broker-dealer in which the investment adviser agrees that: (a) the adviser has implemented its own AML Program consistent with the requirements of Section 5318(h) of the Bank Secrecy Act and will update such AML Program as necessary to implement changes in applicable laws and guidance; (b) the adviser (or its agent) will perform the requirements of the broker-dealer's CIP in a manner consistent with Section 326 of the USA PATRIOT Act; (c) the adviser will promptly disclose to the broker-dealer potentially suspicious or unusual activity detected as part of the CIP being performed on the broker-dealer's behalf to enable the broker-dealer to file a Suspicious Activity Report, as appropriate in such broker-dealer's judgment; (d) the adviser will annually certify to the broker-dealer that the representations in the reliance agreement will remain accurate and that it is in compliance with such representations; and (e) the adviser will promptly provide its books and records regarding its performance of CIP to the SEC, a self-regulatory organization (SRO) with jurisdiction over the broker-dealer, or to authorized law enforcement agencies, directly or through the broker-dealer, at the request of the broker-dealer or such bodies. The SEC agreed to extend the no-action position under the existing no-action letters until May 11, after which the terms of the 2011 Letter will govern.

Click here to read the SEC's 2011 Letter.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Kevin M. Foley and Vanessa L. Colman

At an open meeting on January 26, the Commodity Futures Trading Commission proposed rules that would repeal exemptions from registration and effect substantial changes to the reporting requirements applicable to commodity pool operators (CPOs) and commodity trading advisors (CTAs) under the CFTC's Part 4 rules. Among the significant changes that would be effected by the proposed rules are the following:

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Kevin M. Foley and Vanessa L. Colman

The Commodity Futures Trading Commission announced that it will hold open meetings on the twelfth and thirteenth series of rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act on February 11 and February 24, respectively. Details regarding the February 11 meeting are available here, and information about the February 24 meeting is available here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Kevin M. Foley and Vanessa L. Colman

The staff of the Commodity Futures Trading Commission announced that it will hold a public roundtable discussion on January 28 to address issues related to swap data recordkeeping and reporting requirements, including unique counterparty, product and swap identification and a master agreement library and portfolio data warehouse. The press release announcing the roundtable, including location and dial-in information and how to submit comments, is available here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Kevin M. Foley and Vanessa L. Colman

The National Futures Association (NFA) has issued a Notice to Members providing guidance regarding the calculation of retail forex customer accounts maintained by retail foreign exchange dealers (RFEDs) and futures commission merchants (FCMs).

Pursuant to Commodity Futures Trading Commission Regulation 5.5, RFEDs, FCMs and introducing brokers (IBs) that participate in over-the-counter retail forex transactions must, upon opening an account for a customer, provide the customer with (a) certain written disclosures, and (b) with respect to the four most recent calendar quarters during which the RFED or FCM maintained retail forex accounts, the total number of non-discretionary "open" retail forex customer accounts maintained by the RFED or FCM, the percentage of such accounts that were profitable during the quarter and the percentage of such accounts that were not profitable during the quarter.

The NFA Notice clarifies that the term "open" account includes only those accounts that entered into trades during a particular quarter and/or maintained an open position at any time during the quarter, regardless of whether a cash balance was maintained, interest was paid and/or any fees were incurred during the quarter.

The NFA Notice can be found here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Maxwell Li and Robert Grundstein

The Commodity Futures Trading Commission and Securities Exchange Commission jointly proposed rules that would implement Sections 404 and 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act by creating a new Form PF, which is designed to gather information regarding the private fund industry that would be useful to the Financial Stability Oversight Council in monitoring systemic risk. Form PF would be required to be filed periodically by any investment adviser registered or required to be registered with the SEC that advises one or more private funds. The proposed CFTC rule would require commodity pool operators (CPOs) and commodity trading advisors (CTAs) registered with the CFTC to file Form PF with the SEC in lieu of proposed CFTC filing requirements, but only if those CPOs and CTAs are also registered with the SEC as investment advisers and advise one or more private funds. Information reported on Form PF would generally remain confidential.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Gregory C. Johnson

The U.S. Court of Appeals for the First Circuit affirmed dismissal of securities fraud claims against a technology company, holding that the plaintiffs failed to establish that the failure to disclose unfavorable regulatory changes in Japan was a result of defendants' wrongful intent.

Waters Corp. manufactures and sells water treatment equipment worldwide, deriving 10% of its revenue from sales in Japan. The Japanese government eased water regulations in March 2007, reducing the demand for Waters' equipment, but company officials did not mention this development during a conference call with investors in October, stating instead that the "softness in Japan" was related to general economic conditions. When Waters missed its 2007 fourth quarter earnings forecast, company officials disclosed the Japanese government's actions and Waters' stock price dropped 20%. Investors sued the company and its directors for securities fraud under the Private Securities Litigation Reform Act (PSLRA), but their claims were dismissed by the district court.

The First Circuit affirmed the dismissal, holding that that the failure to disclose the Japanese government's actions did not give rise to a strong inference of scienter as required by the PSLRA. The court ruled that even though company officers knew about the new regulations in March 2007, the plaintiffs failed to establish that the defendants knew the change would have a material impact on the company. Because company officials could have reasonably believed the regulatory changes would not significantly impact worldwide sales during 2007, the failure to disclose the changes did not establish that they acted with the requisite scienter for securities fraud. (City Of Dearborn Heights v. Waters Corp., 2011 WL 167837 (1st Cir. Jan. 20, 2011)).

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Gregory C. Johnson

A federal district court recently held that a group of aggrieved consumers will not be able to pursue their fraud claims as a class against the company that purportedly deceived them because the company's growing awareness that the customers would not receive their merchandise raised questions of fact requiring individualized adjudication.

Bassett Furniture Industries manufactures furniture that it sells through factory-owned and independent dealers. One independent dealer encountered financial difficulties, and Bassett directed the dealer to conduct a prolonged "liquidation sale," using most of the proceeds to reduce its debt to Bassett rather than to pay to obtain additional furniture from Bassett to deliver to its customers. When the dealer went out of business, a group of 188 customers who did not receive the furniture they ordered sued Bassett for fraud, arguing that the liquidation sale was a Ponzi scheme that Bassett knew would eventually collapse.

The U.S. District Court for the Eastern District of Wisconsin denied class certification for the fraud claims. The court observed—and the plaintiffs conceded—that Bassett's awareness that the liquidation sale would fail changed over time, as Bassett had more confidence that the dealer could bankroll current sales with future purchases at the inception of the sale than it did at the end. Accordingly, the strength of each plaintiff's fraud claim depended on the date that the plaintiff placed the order, raising individualized questions of fact and precluding collective adjudication. Similarly, the court refused to certify a class with respect to breach of contract against Bassett because those claims required an individualized inquiry into the reasonableness of each plaintiff's reliance on the dealer's apparent authority to act on behalf of Bassett. (Schmidt v. Bassett Furniture Industries, 2011 WL 67255 (E.D. Wisc. Jan. 10, 2011)).

• Email This
• Print
• Comments
• Trackbacks

On January 20, the UK Financial Services Authority (FSA) published a final notice announcing that it had fined City Index Limited £490,000 (approximately $780,000) for failing to provide accurate transaction reports.

Between November 2007 and September 2009, City Index submitted inaccurate reports for about 2 million transactions (nearly 60% of its reportable transactions for that period). It failed to send any reports for around 55,000 reportable transactions and submitted incorrectly completed reports for a further 1.97 million transactions.

In addition, City Index was found to have breached FSA principles. It failed to put in place a mechanism for ensuring the accuracy and validity of its transaction reports, and failed to identify fundamental errors in its transaction reporting process upon the implementation of a new trading platform. These breaches occurred despite the FSA sending repeated reminders to firms of their obligations to provide accurate data and of the importance of compliance with the FSA rules on transaction reporting.

As it had agreed to settle at early stage, City Index qualified for a 30% discount from the original fine of £700,000 (approximately $1.1 million). Further, the penalty took into account the fact that City Index had taken steps to address the concerns raised including the retention of independent consultants to conduct a formal review of its transaction reporting and starting a project to remedy the transaction reporting issues.

To read the final notice, click here.

• Email This
• Print
• Comments
• Trackbacks

On January 21, Neil Rollins, a former senior manager of PM Onboard Limited, a waste industry firm, was sentenced to a prison term of 27 months for insider dealing and money laundering. Rollins was also ordered to pay £197,000 (approximately $310,000) in confiscation.

This case is the fifth successful prosecution brought by the UK Financial Services Authority (FSA) as part of its ongoing drive to promote efficient, orderly and fair markets and to tackle market abuse. The sentence follows Rollins's trial which ended in late November 2010 with guilty findings on five counts of insider dealing and four counts of money laundering after he traded on the basis of information he obtained as a result of his senior position and laundered the proceeds.

Margaret Cole, Managing Director of Enforcement and Financial Crime at the FSA, said: "By pursuing a criminal prosecution in this case, the FSA has shown that it will take tough action against those who abuse positions of trust by dealing on the basis of inside information. Rollins' crime was aggravated by the fact that he sought to hide his conduct from the FSA by laundering the proceeds. The guilty verdicts and sentence in this case send a message, loud and clear, that insider dealing and money laundering are serious crimes."

Read more.

• Email This
• Print
• Comments
• Trackbacks

On January 25, the UK Financial Services Authority (FSA) published DP11/1, a discussion paper on Product Intervention. DP11/1 considers how the FSA and its successor (the planned Consumer Protection and Markets Authority (CPMA)) should pursue consumer protection and sets out initial proposals for comment.

As part of its new consumer protection strategy introduced in 2010, the FSA has adopted a more interventionist approach with the aim of anticipating consumer detriment where possible and thereby preventing it. This approach aims to scrutinize the whole of the product life cycle from start to finish rather than just focusing on issues arising at the point-of-sale.

• Email This
• Print
• Comments
• Trackbacks

On January 25, the UK Financial Services Authority (FSA) issued a Final Notice to JJB Sports plc that detailed a fine of £455,000 (approximately $725,000). The FSA found that JJB had failed to disclose information to the market about the true cost of two acquisitions. These failings had led to a false market in JJB shares for over nine months.

On December 18, 2007, JJB announced its purchase of Company A for £5 million (approximately $8 million). JJB failed to disclose that in addition to that purchase price it had also paid approximately £10 million (approximately $16 million) for in-store stock.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Palash Pandya

On January 25, the Securities and Exchange Commission will hold an open meeting to discuss, among other matters, whether to adopt rules to implement Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (adding Section 14A to the Securities Exchange Act of 1934), which requires shareholder advisory votes (1) to approve the compensation of executives, a so-called “say-on-pay” vote and (2) as to the frequency of shareholder say-on-pay votes. Also required are expanded, tabular format disclosure of executive compensation in connection with mergers or similar transactions (golden parachutes) and a related separate advisory vote on golden parachutes in merger proxy statements. These requirements are effective for annual or special shareholder meetings occurring on or after January 21. The SEC had proposed rules under Section 14A on October 18, 2010.

The SEC will also consider whether to propose rule amendments that would implement Section 413(a) of the Dodd-Frank Act regarding the definition of “accredited investor” for private placement purposes. Section 413(a) of the Dodd-Frank Act excludes the value of a person’s primary residence from the calculation of net worth when determining an “accredited investor” under Rules 215 and 501(a)(5) of the Securities Act of 1933. On July 23, 2010, the SEC’s Division of Corporation Finance issued Compliance and Disclosure Interpretation (C&DI) 179.01 (as well as C&DI 255.47, which is identical), which confirmed that the exclusion was effective upon enactment of the Dodd-Frank Act and that the SEC would amend its rules to conform them to the adjusted net worth standard in the Dodd-Frank Act.

Read more.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Palash Pandya

On January 14, the Securities and Exchange Commission’s Division of Corporation Finance issued Compliance and Disclosure Interpretations (C&DIs) with respect to Regulation S-K, Item 304 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure; and Form 8-K, Item 4.01 – Changes in Registrant’s Certifying Accountant.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Kevin M. Foley and Vanessa L. Colman

The Commodity Futures Trading Commission has published its ninth series of proposed rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The ninth series of CFTC rule proposals relates to the swap trading relationship documentation requirements for swap dealers (SDs) and major swap participants (MSPs) and the imposition of position limits on certain derivatives (which will be discussed in a forthcoming client advisory).

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Kevin M. Foley and Vanessa L. Colman

The National Futures Association (NFA) has amended NFA Financial Requirements (FR) Sections 11(b), 14(c) and 14(d), effective February 1. Under FR Section 11, a Forex Dealer Member is prohibited from including assets held at an “unregulated person” in its determination of current assets for purposes of calculating its adjusted net capital. The amendments will revise the list of persons that are “unregulated” by (1) deleting “a financial institution regulated by a U.S. banking regulator” and “an insurance company regulated by any U.S. state”; (2) adding “a bank or trust company regulated by a U.S. banking regulator”; and (3) adding foreign banks and trust companies “regulated in a money center country” that maintain regulatory capital of more than $1 billion. NFA may still, on a case-by-case basis, approve the use of certain foreign equivalent entities that are appropriately regulated and capitalized.

FR Section 14 defines foreign institutions that are qualified to hold assets covering liabilities to retail Forex customers. Amendments to this section include (1) removal of foreign equivalent broker-dealers and foreign equivalent futures commission merchants as “qualifying institutions”; and (2) deletion of banks or trust companies regulated in the money center country whose, or whose holding company’s, “commercial paper or long-term debt instrument... is rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization” from the list of “qualifying institutions.”

NFA’s submission letter to the Commodity Futures Trading Commission, dated December 6, 2010, can be found here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Maxwell Li

As required by Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission has released a study conducted by the staff of the Division of Investment Management reviewing and analyzing the need for enhanced examination and enforcement resources for investment advisers. The study finds that the number and frequency of examinations of investment advisers have declined over the past six years. The staff expects that the frequency of examinations could increase following the effective date of amendments to the Advisers Act under the Dodd-Frank Act as a result of a substantial decrease in the number of registered investment advisers, many of whom will transition from federal to state registration. The amount of any potential increase in examinations, however, may be offset by the need to divert examination resources to fulfill new examination obligations that the SEC was given by the Dodd-Frank Act. In addition, the staff expects the number of registered investment advisers and the assets managed by them to grow in subsequent years, and finds that the SEC will face significant capacity challenges in examining registered investment advisers. The staff recommends that Congress consider the following three approaches to strengthen the SEC’s investment adviser examination program: (1) authorize the SEC to impose user fees on SEC-registered investment advisers to fund their examinations; (2) authorize one or more self-regulatory organizations (SROs) to examine, subject to SEC oversight, all SEC-registered investment advisers; or (3) authorize the Financial Industry Regulatory Authority to examine dual registrants for compliance with the Advisers Act.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Brian Schmidt

The U.S. District Court for the District of New Jersey denied a motion for partial summary judgment, ruling that the contested issue, whether a conceded breach of fiduciary duty by two individual defendants could be imputed to corporate defendants, should go to trial.

The individual defendants, former employees of the plaintiff corporation, created two entities (the corporate defendants in this suit) without the plaintiff’s knowledge and during their employment. One of the corporate defendants sold equipment at a profit to the plaintiff. One of the individual defendants was responsible for determining what equipment plaintiff purchased from both the corporate defendant and other companies. The other corporate defendant competed with the plaintiff directly.

The court ruled that based on the interactions between the corporate defendants and the plaintiff, the corporate defendants could not owe the plaintiff a fiduciary duty. However, under New Jersey law, the fiduciary duties owing to the plaintiff by the individual defendants could be imputed to the corporate defendants. The court noted that a number of critical facts remained undeveloped, “including whether and how the individual defendants utilized the corporate veil to facilitate the breach of their duties.” Accordingly, because the absence of these facts on the record signaled a genuine issue of material fact, summary judgment was precluded. (Vibra-Tech Engineers, Inc. v. Kavalek, No. 08-2646 (NLH), 2011 WL 111417 (D.N.J. Jan. 13, 2011))

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Brian Schmidt

The U.S. District Court for the District of Nevada quashed a third party subpoena on a bank because the subpoena was overbroad.

Plaintiffs sued a series of individuals and corporate entities for construction defects, fraud and conspiracy. Plaintiffs alleged that the defendants “converted property and misled them through incomplete repairs, non-disclosures, misinformation, inaccurate reserves and an inadequate budget, into purchasing” the subject properties. Plaintiffs later amended their complaint to add allegations that the various defendants were alter egos of each other, and issued a third party subpoena to a bank requesting “any and all banking records” concerning the defendants, including “but not limited to, any and all e-mails, correspondence, etc.”

The court acknowledged that, to establish alter ego liability, plaintiffs can normally review the records of “corporate assets, transactions, management proceedings and other information relevant to piercing the corporate veil.” However, such discovery is still limited to the relevance standard in the Federal Rules of Civil Procedure. The court found that the plaintiffs’ subpoena, by seeking all banking information relating to the defendants, and not just information that might relate to the lawsuit, was overbroad. The court suggested that plaintiffs could depose certain defendants or direct specific interrogatories to them regarding their alter ego claim, which might assist the plaintiffs in creating a more targeted subpoena, and quashed the subpoena. (Copper Sands Home Owners Assoc’n, Inc. v. Copper Sands Realty, LLC, 10 Civ. 00510 (GMN)(LRL), 2011 WL 112146 (D. Nev. Jan. 13, 2011))

• Email This
• Print
• Comments
• Trackbacks

The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) voted on December 18 to approve an interim final rule clarifying how the agency will treat certain creditor claims under the new orderly liquidation authority established under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Title II of the Dodd-Frank Act provides a mechanism for appointing the FDIC as receiver for a financial company if the failure of the company and its liquidation under the Bankruptcy Code or other insolvency procedures would pose a significant risk to the financial stability of the United States. FDIC Chairman Sheila Bair said: “The orderly liquidation process established under Title II of the Dodd-Frank Act imposes the losses on shareholders and creditors, while also protecting the economy and taxpayer interests. The interim final rule provides needed guidance to the market and underlines the clear statutory intent that creditors bear the losses of any failure. Shareholders and unsecured creditors should understand that they, not taxpayers, are at risk....”

• Email This
• Print
• Comments
• Trackbacks

The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) on December 18 approved a final rule to include Interest on Lawyer Trust Accounts (IOLTAs) in the temporary unlimited deposit coverage for noninterest-bearing transaction accounts. The Dodd-Frank Wall Street Reform and Consumer Protection Act provides temporary, unlimited deposit insurance for all noninterest-bearing transaction accounts. The FDIC’s final rule implements the December 29 amendment to that Act by including IOLTAs within the definition of a “noninterest-bearing transaction account.”

All funds held in IOLTA accounts, together with all other noninterest-bearing transaction account deposits, are fully insured, without limit, from December 31, 2010, through December 31, 2012. This coverage is separate from, and in addition to, the coverage provided to depositors for other accounts at an insured depository institution.

Read more.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Joseph Iskowitz, Robert Grundstein and Maxwell Li 

On January 18, the Financial Stability Oversight Council (FSOC) took three actions to satisfy statutory obligations imposed on it under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

1. Study on Implementation of the Volcker Rule

FSOC released the study on how best to comprehensively implement the Volcker Rule in a manner that constrains risk-taking by, and promotes the safety and soundness of, banking entities that is required under Section 619 of the Dodd-Frank Act. The study included the following key recommendations by the FSOC that seek to identify and eliminate prohibited proprietary trading activities and investments in or sponsorships of hedge funds and private equity funds by banking entities:

• Email This
• Print
• Comments
• Trackbacks

On January 19, the UK Financial Services Authority (FSA) published final disciplinary notices to Clark Rees LLP (CR) and its two partners, Ceri Rees and Paul Clark. Mr. Rees was fined £17,500 (approximately $27,800), and Mr. Clark was fined £10,500 (approximately $16,700). Both partners were banned for two years from performing customer functions in relation to unregulated collective investment schemes (a category of fund products which includes almost all private funds including all hedge funds other than those established within the EU Undertakings for Collective Investment in Transferable Securities framework), and both were permanently banned from carrying out senior management functions in a regulated firm. The FSA revoked CR’s permission to carry on investment business.

The FSA found that both Mr. Clark and Mr. Rees had failed to educate themselves about the statutory and regulatory provisions relating to the marketing of unregulated collective investment schemes and in particular the limited circumstances in which they can be promoted to retail customers. Promotion of such funds is permitted only to retail investors when they met specific qualifying criteria primarily in relation to investment experience. Neither partner of CR was aware of these restrictions, and as a result, promoted and recommended unregulated collective investment schemes to ordinary retail investors.

This specific disciplinary action by the FSA follows from its general announcement on the sale of private investment funds, as reported in the August 13, 2010, edition of Corporate and Financial Weekly Digest.

To read Paul Clark’s final notice, click here.
To read Ceri Rees’s final notice, click here.
To read Clark Rees LLP’s final notice, click here.

• Email This
• Print
• Comments
• Trackbacks

On January 18, the European Securities and Markets Authority (ESMA) published the responses to the Committee of Securities and Regulators’ (CESR) December 2010 call for evidence on the Alternative Investment Fund Managers Directive (AIFMD) implementing measures. (ESMA replaced CESR on January 1, 2011.)

The call for evidence (see the December 10, 2010, edition of Corporate and Financial Weekly Digest) requested input regarding CESR’s technical advice to the European Commission on the implementing measures for the EU AIFMD. This input will be taken into account by ESMA in the development of its draft advice on the content of the AIFMD implementing measures, which will be published for consultation in 2011. The published responses came from a variety of trade associations and individual firms.

To view the responses, click here.

• Email This
• Print
• Comments
• Trackbacks

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, public companies holding their annual meetings on or after January 21 will be required to include in their proxy statements a non-binding proposal soliciting shareholders’ views on whether “say-on-pay” proposals should be submitted to shareholders on an annual, biennial or triennial basis. Proxy cards for such annual meeting will be required to provide shareholders with these three choices plus the ability to abstain.

Many companies have yet to decide whether to recommend one of these choices to shareholders and, if so, which choice to recommend. There have been conflicting reports with respect to the favored choice of public companies. On the one hand, Compensia News published a listing of 87 companies that filed proxy materials through January 8 containing “say-on-frequency” proposals, with a majority (45) favoring triennial “say-on-pay” votes. Twenty-five companies recommended annual votes, nine recommended biennial votes, and eight companies provided no recommendation. The listing of companies in each category does not provide any clear trend as between larger and smaller companies.

On the other hand, a Towers Watson poll of 135 publicly traded companies that had not yet filed proxy statements found that a majority of those surveyed expected to recommend annual “say-on-pay” votes. The Towers Watson survey also notes that most surveyed companies do not know the level of favorable shareholder vote that would be considered a “success” or otherwise indicative of preference. This is understandable, considering that shareholders will be required to be given four choices, that no one choice may actually receive a majority of the votes cast, and that in any event the vote is non-binding.

Click here to read the Compensia News report.
Click here to read the results of the Towers Watson poll.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Natalya S. Zelensky

The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority’s proposal to adopt consolidated rules governing know-your-customer and suitability obligations. The effective date for the new rules is October 7. The new know-your-customer rule, FINRA Rule 2090, will replace New York Stock Exchange Rule 405(1) and will require member firms to use reasonable diligence, in regard to the opening and maintenance of every account, to know the essential facts concerning every customer. The know-your-customer obligation arises at the beginning of the customer-broker relationship and does not depend on whether the broker has made a recommendation. Unlike NYSE Rule 405, FINRA Rule 2090 does not specifically address account opening, supervision or orders.

The new suitability rule, FINRA Rule 2111, will replace NASD Rule 2310 and will require a member firm or associated person to have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. The triggering event for the new rule will continue to be a broker-dealer’s recommendation. Additionally, the new rule applies to recommended investment strategies or securities regardless of whether the recommendation results in a transaction or generates transaction-based compensation. The rule also clarifies the types of information that brokers must attempt to obtain and analyze as part of their suitability analysis, condenses the sections relating to the three main suitability obligations and harmonizes the institutional-investor exemption with the more common definition of institutional account in NASD Rule 3110(c)(4).

Click here to read FINRA Regulatory Notice 11-02.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Natalya S. Zelensky

The Securities and Exchange Commission is requesting comments on a proposal to expand Financial Industry Regulatory Authority Rule 5122 to apply to all private placements in which a member firm participates, not just those in which the member firm (or its control entity) is the issuer. Current FINRA Rule 5122 generally requires that a member firm or associated person engaging in a private placement of unregistered securities in which it (or a control entity of such member) is the issuer: (1) disclose in the offering documents the intended use of offering proceeds, offering expenses and the amount of selling compensation to be paid to the broker-dealer and its associated persons; (2) submit the offering documents to the FINRA Corporate Financing Department prior to or at the time such documents are provided to a prospective investor; and (3) comply with the requirement that at least 85% of the offering proceeds raised may not be used to pay for offering costs, discounts, commissions or any other cash or non-cash sales incentives, and that such proceeds must be used for the business purposes disclosed in the offering documents. FINRA also is proposing to retain all of the current exemptions in the rule except for the existing exemption for offerings in which a member firm acts primarily in a wholesaling capacity. The proposed rule change makes several other changes affecting broker-dealers participating in private placements. Comments to the SEC must be received by March 14.

Click here to read FINRA Regulatory Notice 11-04.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Natalya S. Zelensky

Beginning July 11, the Financial Industry Regulatory Authority will begin phasing in the expansion of the Order Audit Trail System (OATS) rules to include orders for all national market system (NMS) stocks. This will effectively extend the OATS recording and reporting requirements to NMS stocks listed on markets other than the National Association of Securities Dealers Automated Quotations (e.g., New York Stock Exchange, NYSE Amex and NYSE Arca). The expansion of the OATS rules will be accomplished in three phases based on the symbol of the security on July 11, July 18 and July 25. FINRA will announce at a later time the details of which security symbols will be subject to OATS reporting during each phase.

Click here to read FINRA Regulatory Notice 11-03.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Kevin M. Foley and Joshua A. Penner

The ABA Securities Association, the Clearing House Association, the Financial Services Roundtable, the Futures Industry Association, the International Swaps and Derivatives Association, and the Securities Industry and Financial Markets Association (the Industry Groups) have submitted a comment letter with the Commodity Futures Trading Commission in response to a comment letter submitted by the U.S. Department of Justice (DOJ) urging the implementation of more-stringent rules relating to ownership and conflicts of interest for designated contract markets (DCMs), derivatives clearing organizations (DCOs) and swap execution facilities (SEFs).

The Industry Groups’ comment letter urges the CFTC to refrain from imposing limitations on the aggregate voting power that may be held by major dealers and financial institutions in DCMs, DCOs and SEFs. The Industry Groups argue that, contrary to the DOJ’s assertion, imposing aggregate voting limitations would decrease rather than promote competition within the markets for derivatives trading and clearing because the ability to offer ownership interests is vital to the ability of newly formed exchanges and clearinghouses to attract the liquidity necessary to successfully compete against incumbents. Furthermore, the Industry Groups argue that aggregate voting limitations are not necessary to prevent abuse and anti-competitive governance arrangements in the industry given the other tools available to the CFTC to monitor and regulate DCMs, DCOs and SEFs. Finally, the Industry Groups also urge the CFTC to avoid imposing burdensome composition requirements with respect to integral board committees of DCMs, DCOs and SEFs, including in particular DCO risk management committees, arguing that doing so will also impede the ability of newly formed exchanges and clearinghouses to attract the participation required to successfully compete against incumbents.

The original DOJ comment letter can be found here.
The Industry Groups’ comment letter can be found here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Jessica M. Garrett

Plaintiffs sued an escrow company for its role in a Ponzi scheme in which, according to a finding of fraud contained in a separate default judgment, non-parties Bradley Holcom and Jose Pinedo stole more than $6.4 million of plaintiffs’ investments. Plaintiffs asserted claims for, among other things, securities fraud under Sections 10(b) and 20(a) of the Securities Exchange Act, and aiding and abetting fraud. Defendant Citizens Title & Trust, Inc. moved to dismiss the securities fraud and aiding and abetting fraud claims, which motion was granted by the U.S. District Court for the Southern District of California.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Jessica M. Garrett

The Securities and Exchange Commission brought an enforcement action against three former executives of a major media company, alleging that the executives improperly reported $1 billion in online advertising revenue. The SEC alleges that, in 10 separate transactions, the media company declined discounts or lower prices for goods, services, or the settlement of disputes, and instead paid inflated prices that were offset, dollar for dollar, by sums ostensibly paid for online advertising (collectively referred to as the “‘round trip’ transactions”). This advertising “revenue” artificially inflated the media company’s revenues for the years 2000 through 2003.

• Email This
• Print
• Comments
• Trackbacks

On January 4, the Federal Deposit Insurance Corporation announced its expectation, along with the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, the Farm Credit Administration, and the National Credit Union Administration (the Agencies), that the system for federal registration of residential mortgage loan originators (MLOs) will begin operation on or around January 31. The Agencies’ rules implementing the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (S.A.F.E. Act) require MLOs to register with the Nationwide Mortgage Licensing System and Registry within 180 days of the date the Registry begins accepting federal registrations. The Agencies will confirm the opening date for federal registration closer to the actual date and will publish notice of that date in the Federal Register.
 

• The S.A.F.E. Act is intended to improve the accountability and tracking of residential MLOs, enhance consumer protection, reduce fraud and provide consumers with easily accessible information regarding an MLO’s professional background.
• MLOs employed by Agency-regulated institutions will have 180 days from the date on which the Registry begins accepting federal registrations to complete initial registration. At present, the Agencies expect the initial registration period to expire on July 29. 
• After the initial registration period expires, MLOs will be prohibited from originating residential mortgage loans until they successfully complete the federal registration process. 
• The Agencies’ rules provide a de minimis exception whereby MLOs that originated five or fewer mortgage loans during the previous 12 months are not required to complete the federal registration process.

Read more.

• Email This
• Print
• Comments
• Trackbacks

On January 10, the UK Financial Services Authority (FSA) announced a guilty plea by three people accused of insider dealing. Christian Littlewood, a senior investment banker, his wife, Angie Littlewood, and a family friend, Helmy Sa’aid, pleaded guilty to the eight counts of insider dealing alleging that they had made almost £590,000 (approximately $930,000) profit from trades in a number of London Stock Exchange and Alternative Investment Market listed shares between 2000 and 2008.

Mr. Littlewood worked at Dresdner Kleinwort until 2007 and at Shore Capital from 2008 to 2009. His wife was a qualified barrister who had also worked as an investment banker. Mr. Sa’aid, a Singaporean national, was returned to the UK in March 2010 after being extradited from Mayotte, one of the Comoros Islands in the Indian Ocean.

Margaret Cole, the FSA’s Managing Director of Enforcement and Financial Crime, said: “It seems that the penny is beginning to drop. These guilty pleas show that our strategy of a tough approach to insider dealing—and, in particular, demonstrating that we are prepared to fight difficult criminal prosecutions to trial—is paying off. Dedicated hard work, bold and innovative use of the tools at our disposal and close seamless cooperation between our markets, enforcement and intelligence functions underpin our successful track record in this complex area.”

The trio’s sentencing and confiscation hearing will take place in early February.

To read more, click here.

• Email This
• Print
• Comments
• Trackbacks

On January 11, the newly established European Securities and Markets Authority (ESMA) announced that its Management Board had held its first meeting.

At the meeting, the first six members of the Management Board were elected, including nominees from six EU national regulators, one of whom was the UK Financial Services Authority’s Director of Markets. The Board also announced the adoption of internal rules for ESMA, including terms of reference for its decision-making process for the adoption of technical standards and guidelines. The Board also confirmed that all Level 3 measures previously issued by its predecessor entity, the Committee of European Securities Regulators, remain valid.

To read more, click here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Blase J. Kornacki

On December 22, President Obama signed H.R. 3082, the continuing resolution that will fund federal agencies until approximately February. The resolution has triggered increases in fees collected by the Securities and Exchange Commission. Effective December 27, 2010, the fee rate applicable to registration of securities, registered repurchases of securities by issuers or their affiliates and proxy solicitations and statements in corporate control transactions has increased from $71.30 per $1 million to a new rate of $116.10 per $1 million. The fee change will also affect the fees payable with the Annual Notice of Securities Sold Pursuant to Rule 24f-2 under the Investment Company Act of 1940, which are based on the rate applicable to the registration of securities. Furthermore, effective January 21, the fee rate applicable to securities transactions on exchanges and over-the-counter markets will increase from $16.90 per $1 million in transactions to a new rate of $19.20 per $1 million.

Click here to read the SEC’s Fee Rate Advisory #5 for Fiscal Year 2011.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Jonathan D. Weiner

On December 14 and January 4, Institutional Shareholder Services (ISS) published FAQs regarding its policies for determining proxy voting recommendations for meetings to be held on or after February 1. As described in the December 3, 2010, edition of Corporate and Financial Weekly Digest, ISS previously published its updated recommendation policies for the 2011 proxy season. The FAQs addressed ISS policies related to, among other things, executive compensation, director elections and other corporate governance matters, including the following:

• Email This
• Print
• Comments
• Trackbacks

On January 3, the Securities and Exchange Commission published a notice of proposed rule changes submitted by BATS Exchange, Inc. BATS proposes to modify BATS Rules 15.1(a) and (c), which relate to the fees applicable to its members. Specifically, BATS proposes to revise the “Options Pricing” section of its fee schedule as follows:

1. Customer Order Pricing—Decrease the fee for customer orders that remove liquidity from BATS and increase the rebate for customer orders that add liquidity to BATS.
2. NBBO Setter Rebate—Where a member meets certain daily average volume requirements, add a rebate for orders that establish a national best bid or national best offer. 
3. Firm and Market Maker Pricing—Increase the fee for firm and market maker orders that remove liquidity from BATS and increase the rebate for firm and market maker orders that add liquidity to BATS.
4. Directed ISO Pricing—Simplify the pricing of all directed ISOs (intermarket sweep orders that bypass BATS’s system and are immediately routed to another options exchange specified by the user) by charging a flat rate per contract for such orders.
5. Routing Pricing—Establish fees that will apply to all best execution routing strategies offered by BATS and to destination specific order (a market or limit order that instructs BATS’s system to route the order to a specified trading center after the order is exposed to BATS’s Option Book) routing strategies.

The proposed rule changes became operative on January 3.

To read the SEC release, click here.

• Email This
• Print
• Comments
• Trackbacks

On January 3, the Securities and Exchange Commission published a notice of a proposed rule change submitted by the Chicago Board Options Exchange (CBOE). CBOE currently makes subsidy payments to CBOE Trading Permit Holders (TPHs) that provide “certain order routing functionalities” to other CBOE TPHs and/or use such functionalities themselves. These payments are meant to subsidize the participating CBOE TPHs’ costs of providing such order routing functionalities to other CBOE TPHs.

CBOE proposes to extend its current subsidy program to (1) enable CBOE to establish subsidy arrangements with broker-dealers that are not CBOE TPHs (Non-CBOE TPHs), and (2) extend the program to permit both CBOE TPHs and Non-CBOE TPHs to collect subsidy payments for providing such order routing functionalities to Non-CBOE TPHs.

To read the SEC release, click here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Christopher T. Shannon

On January 3, the Securities and Exchange Commission published a notice of proposed rule changes submitted by NASDAQ Stock Market LLC. NASDAQ proposes to modify its Investor Support Program (Rule 7014), which enables NASDAQ members to earn a monthly fee credit for providing additional liquidity to NASDAQ and increasing the NASDAQ-traded volume of what are generally considered to be retail and institutional investor orders in exchange-traded securities. Specifically, NASDAQ proposes to make several adjustments to the Investor Support Program in an effort to moderate the ability of its members, on a prospective basis, to gain fee credits without effectively adding targeted liquidity to NASDAQ.

To read the SEC release, click here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Vanessa L. Colman

The Commodity Futures Trading Commission has published its eighth series of rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The eighth series of CFTC rules and rule proposals relate to confirmation, portfolio reconciliation and portfolio compression requirements for swap dealers (SDs) and major swap participants (MSPs), registration obligations of derivatives clearing organizations (DCOs) and core principles and other requirements applicable to swap execution facilities (SEFs).

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Kevin M. Foley and Vanessa L. Colman

The Commodity Futures Trading Commission announced that it will hold open meetings on the ninth and tenth series of rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act on January 13 and January 20, respectively.

Details regarding the January 13 meeting are available here, and information about the January 20 meeting is available here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Kevin M. Foley and Vanessa L. Colman

The Commodity Futures Trading Commission has issued a notice of proposed rulemaking to further implement the Conflict of Interest Core Principles for derivatives clearing organizations (DCOs), designated contract markets (DCMs) and swap execution facilities (SEFs) by addressing, among other things, reporting requirements, obligations of transparency in decision-making and limitations on the use or disclosure of non-public information.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Kevin M. Foley and Vanessa L. Colman

The U.S. Department of Justice (DOJ), in a comment letter submitted to the Commodity Futures Trading Commission, has urged the implementation of more-stringent rules relating to ownership and conflicts of interest for designated contract markets (DCMs), derivatives clearing organizations (DCOs) and swap execution facilities (SEFs). The DOJ comment letter was submitted in response to an October 2010 rule proposal by the CFTC, which would impose specific structural governance requirements and limitations on the ownership of DCMs, DCOs and SEFs.

In its letter, the DOJ expressed concern that the ownership limitations proposed for DCMs and SEFs, which limit the voting power that may be exercised by any single member thereof, do not also include aggregate voting limitations to restrict the aggregate voting power that may be held by major dealers and financial institutions. Absent such limitations, the DOJ is concerned that such entities may be able to use their control over these trading platforms to limit competition. The DOJ also recommends enhancing the CFTC’s proposed governance requirements by increasing the participation of independent directors on DCM, DCO and SEF boards and/or board committees.

The DOJ comment letter is available here. The CFTC’s rule proposal is available here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Kevin M. Foley and Vanessa L. Colman

The Commodity Futures Trading Commission has issued a final order exempting the trading and clearing of certain options (Exempted Options) from the Commodity Exchange Act and regulations thereunder to the extent needed to allow such options to be traded on national securities exchanges and cleared though the Options Clearing Corporation. Exempted Options include options on (1) the CBOE Gold ETF Volatility Index (which measures the implied volatility of options on shares of the SDPR Gold Trust, an exchange traded fund (ETF) that intends to reflect the performance of the price of gold bullion), and (2) any other index that measures the volatility of the price of shares of gold ETFs.

The Federal Register release of the order can be found here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Kevin M. Foley and Vanessa L. Colman

The National Futures Association (NFA) has published a Notice to Members which provides guidance to registered commodity pool operators (CPOs) and commodity trading advisors (CTAs) regarding their disclosure of conflicts of interest arising from the collection of incentive fees. The NFA guidance is based upon guidance that NFA received from the Commodity Futures Trading Commission’s Division of Clearing and Intermediary Oversight (DCIO), which oversees NFA in its review of CPO and CTA Disclosure Documents.

In its letter, DCIO noted that typical incentive fee arrangements, in which a CPO or CTA receives a fee or other compensation based upon its trading performance, could be viewed as creating a conflict of interest between the CPO or CTA and its pool investors or clients by encouraging the CPO or CTA to take excessive risks and/or maximize short-term performance in order to earn outsized incentive fees. Accordingly, the DCIO letter prescribes that every CPO and CTA that charges an incentive fee of this type must include discussion in its Disclosure Document that such fees may encourage the CPO/CTA to take excessive risk and may place the interests of the CPO/CTA in conflict with those of its clients or investors. In its Notice to Members, NFA urges its CPO and CTA members to review their Disclosure Documents and include any additional disclosures prior to submitting any subsequent filings of the document. Although NFA’s Notice to Members does not expressly discuss the status of registered CPOs and CTAs that rely upon the relief provided under CFTC Rule 4.7, or of CPOs and CTAs that are exempt from registration with NFA, because such CPOs and CTAs are not required to prepare and file Disclosure Documents with NFA, they are not directly affected by the NFA’s Notice to Members.

The NFA Notice to Members is available here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Jonathan Rotenberg

A district court granted defendants’ motion to dismiss plaintiffs’ claim for securities fraud on the ground that the complaint failed to plead fraud with particularity, as required by the Private Securities Litigation Reform Act of 1995 (PSLRA).

In September 2009, individual defendants allegedly represented to plaintiff Dupont, then president and chief executive officer of defendant Freight Feeder, that they had obtained investors in one of Freight Feeder’s programs, and that they would need to assume control of Freight Feeder to secure additional venture capital. As a result, Dupont agreed to a buyout agreement pursuant to which he surrendered his interest in, and control of, Freight Feeder in exchange for an up-front payment of $12,000 and monthly payments of $12,000 in each of the 36 months following the closing of the buyout agreement.

Defendants only made three payments to Dupont under the buyout agreement, and after learning from defendant Bridges that Freight Feeder wanted to sell Freight Feeder’s assets and retain its liabilities in an empty corporate shell, plaintiffs brought suit claiming, among other things, securities fraud on the part of defendants in connection with the buyout agreement. Defendants moved to dismiss the action on the grounds that, among other things, the district court lacked subject matter jurisdiction, because the complaint failed to state a cause of action for securities fraud.

In granting defendants’ motion to dismiss, the district court found that, contrary to the pleading standards set forth in the PSLRA, the complaint did not contain any alleged misrepresentations of the defendants that include the time, place and identity of the speaker, or the content of the alleged misrepresentation. The district court also held that the complaint failed to plead scienter with the requisite particularity. (Dupont v. Freight Feeder Aircraft Corp., No. 4:10-CV-239-A, 2010 WL 5093159 (N.D.Tex. Dec. 7. 2010))

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Jonathan Rotenberg

Plaintiff, a major direct broadcast satellite (DBS) television provider and holder of seven registered trademarks and service marks incorporating the word “DISH,” brought an action against defendants alleging that defendant Dish 1 Up, a retailer of another major DBS provider, operates call centers using a “confusingly similar phone number” to plaintiff’s 1-800 number to mislead and confuse consumers. Defendants pled several counterclaims against plaintiff, alleging that plaintiff improperly secured a trademark on the generic word “DISH,” and that due to this improper and invalid trademark, plaintiff has engaged in predatory and anticompetitive acts, including claiming exclusive common law trademark rights in “vanity” telephone numbers and asserting exclusive trademark rights to marketing phrases containing the generic word “DISH.”

In finding that defendants failed to adequately allege antitrust injury, the district court cited to Sixth Circuit Court of Appeals precedent, holding that in an antitrust action a plaintiff must show that (1) the alleged violation tends to reduce competition in some market and (2) the plaintiff’s injury would result from a decrease in that competition rather than from some other consequence of the defendant’s actions. While plaintiff adequately alleged anti-competitive behavior on the part of defendants, it alleged injury resulting from this anti-competitive behavior in a conclusory fashion, insufficient to survive a motion to dismiss. (Dish Network, LLC v. Fun Dish, Inc., No. 1:08 CV 1540, 2010 WL 5230860 (N.D.Ohio Dec. 16, 2010))

• Email This
• Print
• Comments
• Trackbacks

On December 22, the Board of Governors of the Federal Reserve System approved an interim rule amending Regulation Z, which implements the Truth in Lending Act (TILA). The Board issued the interim rule “to clarify certain aspects of a September 24, 2010 interim rule,” in response to public comments.

The September 2010 interim rule requires creditors who extend consumer credit secured by real property or a dwelling to disclose summary information about interest rates and payment changes in a tabular format. (The interim rule implements provisions of the Mortgage Disclosure Improvement Act (MDIA) which amended TILA to require mortgage lenders to disclose examples of how a loan’s interest rate or monthly payments can change. Those statutory amendments will become effective on January 30.)

• Email This
• Print
• Comments
• Trackbacks

On December 22, the Federal Housing Finance Agency (FHFA) adopted a final rule for Fannie Mae and Freddie Mac (the Enterprises) pertaining to portfolio holdings. The final rule implements section 1109 of the Housing and Economic Recovery Act of 2008 (HERA) and adopts without change FHFA’s interim final rule on portfolio holdings, which was effective January 30, 2009. The final rule establishes, as the standard for the Enterprises’ portfolio holdings, the criteria set forth in the Senior Preferred Stock Purchase Agreements (PSPAs), which specified that each Enterprise may hold mortgage assets up to $900 billion as of December 31, 2009. Under the final rule, for each subsequent year starting December 31, 2010, each Enterprise is required to reduce its maximum holdings of mortgage assets by 10% of the maximum limit in the preceding year until the limit reaches $250 billion. At that point, no further reduction in the maximum limit is “currently” required.

The PSPAs were entered into to on behalf of the Enterprises by the FHFA acting as conservator and the U.S. Treasury Department to capitalize the Enterprises following severe losses by the Enterprises in 2007. In return for the support provided through the PSPAs, Fannie Mae and Freddie Mac provided certain compensation (including preferred stock and warrants) to the Treasury and accepted various restrictions. Following additional amendments to the PSPAs, on December 24, 2009, the parties again amended the PSPAs to provide further capital to the Enterprises, which had depleted all their capital and had combined losses that required them to draw $150.8 billion of senior preferred stock pursuant to the PSPAs through September 2010. The latest amendment let stand the maximum allowable amount of mortgage assets each Enterprise could own on December 31, 2009—$900 billion. However, the covenant requiring the Enterprises to reduce their mortgage assets was revised such that it is based on the maximum amount that they were permitted to own as of December 31 of the immediately preceding calendar year, rather than the amounts they actually owned at that time.

The rule is effective upon publication in the Federal Register.

Read more.

• Email This
• Print
• Comments
• Trackbacks

On December 21, the Office of the Comptroller of the Currency (OCC) issued Bulletin 2010-45, which describes how national banks can apply to receive Tier 1 capital in exchange for lending to small businesses. The Small Business Lending Fund (SBLF) aims to stimulate small business lending by providing capital to participating community banks, generally defined as those banks with $10 billion or less in assets. The U.S. Treasury Department will provide banks with capital by purchasing Tier 1-qualifying preferred stock or equivalents in each bank. The price a bank pays for SBLF funding will be reduced as the bank’s small business lending increases. (The program is also available to state-chartered banks as well as savings banks and their holding companies.)
The dividend rate on SBLF funding will be reduced as a participating community bank increases its lending to small businesses. The initial dividend rate will be, at most, 5%. If a bank’s small business lending increases by 10% or more, then the rate will fall to as low as 1%. Banks that increase their lending by amounts less than 10% can benefit from rates set between 2% and 4%. If lending does not increase in the first two years, however, the rate will increase to 7%. After 4.5 years, the rate will increase to 9% if the bank has not already repaid the SBLF funding.

The SBLF was created pursuant to the Small Business Jobs Act of 2010, which directs the Treasury, acting through its Secretary, to make capital investments in eligible financial institutions to address the continuing effects of the financial crisis on small businesses and to increase those businesses’ access to credit. The Act authorizes the Treasury to purchase up to $30 billion in preferred stock and other financial instruments from financial institutions to increase the availability of credit for small businesses.

Click here to read OCC Bulletin 2010-45.
Click here to read more about the Small Business Lending Fund.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Brandon D. Hadley

On January 6, the Internal Revenue Service issued final regulations (T.D. 9513) under U.S. Treasury Department Regulation Section 1.1001-3 clarifying that a change in the issuer’s credit quality between the issue date and the modification date of a debt instrument is not considered in determining the nature of the instrument or property that results from modification of the debt instrument. For example, a decrease in the fair market value of a debt instrument between the issue date and modification date is not taken into account if it is attributable to the deterioration of the obligor’s financial condition and not to a modification of the instrument’s terms. This rule does not apply if the modification includes the substitution of a new obligor or the addition or deletion of a co-obligor.

On January 5, the IRS released Revenue Procedure 2011-16 with respect to modifications of mortgage loans held by a real estate investment trust (REIT). If a mortgage loan modification qualifies for the safe harbor described below, then (1) the REIT is not required to treat it as a new commitment to make or purchase a loan for purposes of ascertaining the loan value of the real property; (2) the modification is not a prohibited transaction; and (3) the IRS will not challenge the REIT’s treatment of a loan as a real estate asset if the REIT computes the loan value using one of the acceptable methods provided by Revenue Procedure 2011-16.

The new safe harbor applies to a mortgage loan modification which (or an interest in which) is held by a REIT if either (1) the modification was occasioned by default, or (2) the modification satisfies both of the following conditions based on all of the facts and circumstances: (A) the REIT or servicer of the pre-modified loan, after a diligent contemporaneous determination of the risk, reasonably believes that there is a significant risk of default of the pre-modified loan upon maturity of the loan or at an earlier date; and (B) the REIT or servicer reasonably believes that the modified loan presents a substantially reduced risk of default, as compared with the pre-modified loan.

Click here for a copy of the final regulations, and here for a copy of the REIT guidance.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Brandon D. Hadley

On January 6, the Internal Revenue Service released proposed rules (REG-131947-10) under U.S. Treasury Department regulation 1.1273-2 that simplify and clarify when property is considered to be “publicly traded” for purposes of determining the issue price of a publicly traded debt instrument and the fair market value of publicly traded property received in exchange for a debt instrument.

The proposed rules would provide that if information about the sales price of a debt instrument (or information sufficient to calculate the sales price) appears in a medium (e.g., the Financial Industry Regulatory Authority’s Trade Reporting and Compliance Engine database) that is made available to persons who regularly purchase or sell debt instruments, such debt instruments would be considered publicly traded. The proposed rules also would provide that property is considered to be publicly traded if a firm price quote to buy or sell the property is available or an indicative price quote is provided by a dealer, a broker or a pricing service.

Property listed on an exchange would continue to be “publicly traded,” but the current list of foreign exchanges would be replaced and expanded to include any securities exchange that is officially recognized, sanctioned, regulated or supervised by a governmental authority of the foreign country.

The proposed rules would presume that the fair market value of property is its trading price, sales price or quoted price, whichever is applicable.

Click here for a copy of the proposed rules.

• Email This
• Print
• Comments
• Trackbacks