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

Co-authored by: Christopher H. Mendoza and Christian B. Hennion

Gary Barnett has been appointed to serve as the Director of the Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight, a newly created division that is part of the CFTC’s restructuring to fulfill its expanded responsibilities under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Mr. Barnett is currently head of the U.S. Derivatives and Structured Finance Practice Group at Linklaters LLP in New York, NY.

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Co-authored by David A. Pentlow, Robert J. Wild and James B. Anderson

On July 29, the Securities and Exchange Commission once again updated its planned schedule for adopting rules and taking other actions to implement the corporate governance and disclosure provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As reported in the April 15, 2011, edition of Corporate and Financial Weekly Digest, the SEC had previously announced its revised planned rulemaking schedule to implement provisions of the Dodd-Frank Act. Below are updated time periods set forth in the SEC’s further revised rulemaking schedule for governance and disclosure rules to be 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 David A. Pentlow, Robert J. Wild and David S. Kravitz.

On July 26, the Securities and Exchange Commission adopted final rules removing credit ratings as one of the several alternative “transaction” eligibility criteria for companies seeking to use short-form registration statements when registering primary offerings of non-convertible securities. The new rules were adopted pursuant to Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which required U.S. Federal agencies to remove references to, or requirement of reliance on, credit ratings from their regulations and replace such ratings with a standard of credit-worthiness that the agency deemed appropriate.

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The Commodity Futures Trading Commission and Securities and Exchange Commission have published a request for comment in connection with a joint study and report to Congress on international swap and clearinghouse regulation. The study and report, required under section 719(c) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, must identify major swap contracts, dealers, exchanges, clearinghouses and regulators in the United States, Asia and Europe; describe the methods for clearing swaps and systems used for setting margin; and indicate similar areas of regulation for harmonization. Comments must be received within 60 days of the publication of the request for comment in the Federal Register.

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The Federal Reserve Board on July 28 issued a proposed rule that sets standards for banking organizations regulated by the Federal Reserve that engage in certain types of foreign exchange transactions with retail customers. The proposal, issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, outlines requirements for disclosure, recordkeeping, business conduct, and documentation for retail foreign exchange transactions. Institutions engaging in such transactions will be required to identify themselves to their regulator and to be well capitalized. They will also be required to collect margin for retail foreign exchange transactions

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Co-authored by Jonathan D. Weiner

On July 8, the Securities and Exchange Commission's Division of Corporation Finance issued new Compliance and Disclosure Interpretations (C&DIs) on executive compensation disclosure and reporting with respect to the frequency of shareholder advisory votes on executive compensation (i.e., "say on pay").

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Co-authored by Sarah E. Connolly

On July 12, the Securities and Exchange Commission issued an order raising the thresholds for determining who is a "qualified client" for purposes of Rule 205-3 under the Investment Advisers Act of 1940. Rule 205-3 exempts an investment adviser from the prohibition against charging a client performance fees in certain circumstances, including when the client is a qualified client. Under the order, a qualified client is one who: (1) has at least $1 million under the management of the adviser immediately after entering into the advisory contract, or (2) the adviser reasonably believes has a net worth of more than $2 million at the time the contract is entered into. These thresholds were raised from $750,000 and $1,500,000, respectively, to adjust for inflation, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC's order becomes effective on September 19.

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Co-authored by Maxwell Li

On July 11, the U.S. Government Accountability Office (GAO) released a report on the feasibility of forming a self-regulatory organization (SRO) to provide primary oversight of private fund advisers. The report was part of a mandate by the Dodd-Frank Wall Street Reform and Consumer Protection Act to address the potential gap in the regulation of private fund advisers. In preparing the report, GAO reviewed federal securities laws, the recently completed Securities and Exchange Commission study on the investment adviser examination program, past regulatory and legislative proposals to create an SRO for investment advisers, and associated comment letters. GAO believes that the formation of a private fund adviser SRO is feasible but includes challenges such as the passage of new legislation, raising sufficient start-up capital and reaching agreements on fee and governance structures. The report also notes that while a private fund adviser SRO could supplement and help the SEC's oversight of investment advisers, the fragmentation between regulation of private fund advisers and non-private fund advisers could lead to regulatory gaps, duplication and inconsistencies.

Click here to read the GAO report.
Click here to read a summary of the SEC's study on the investment adviser examination program in the January 21 edition of Corporate and Financial Weekly Digest.
Click here to read a summary of industry comments on the desirability of a private fund adviser SRO in the November 12, 2010, edition of Corporate and Financial Weekly Digest.

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Co-authored by Christian B. Hennion

The Commodity Futures Trading Commission has issued an Order, essentially in the form proposed, providing temporary relief from certain swap-related provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act that would otherwise take effect on July 16. The Federal Register release accompanying the Order groups the provisions of Title VII as to which the CFTC has regulatory responsibility into four broad categories:

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

At a July 7 meeting, the Commodity Futures Trading Commission approved five final rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act: (1) large trader reporting for physical commodity swaps; (2) anti-manipulation and anti-fraud requirements; (3) the definition of an "agricultural commodity;" (4) protection of consumer information under the Fair Credit Reporting Act; and (5) the scope of consumer privacy protections under the Gramm-Leach-Bliley Act.

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

In compliance with Executive Order 13563, "Improving Regulation and Regulatory Review,'' the Commodity Futures Trading Commission has developed a Plan to review its existing regulations to evaluate their continued effectiveness in achieving the objectives for which they were adopted. Under the Plan, after the CFTC has substantially finished promulgating rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC intends to conduct reviews of those regulations not examined in connection with the Dodd-Frank Act, to determine whether any such regulations should be modified or repealed in order to make the CFTC's regulatory program more effective and less burdensome. The CFTC has requested comments on the Plan by interested parties. Comments must be received by August 29.

The Federal Register release of the CFTC's request for information regarding the Plan can be found here.

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In a long awaited action, the Federal Deposit Insurance Corporation (FDIC) issued a final rule on July 6 which addresses the FDIC's rights and powers as receiver of a nonviable systemic financial company under the orderly liquidation authority provisions of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Chairman Sheila Bair, conducting her last meeting before leaving the agency, stated that, "A fair amount of the goal of the orderly liquidation authority is to convince investors in large financial institutions that their money is at risk if the institution fails." The final rule will adopt with certain changes the proposed rule set forth in the Notice of Proposed Rulemaking (NPR) approved by the FDIC's Board on March 15 and also will incorporate, with certain changes, the Interim Final Rule (IFR) issued by the Board on January 18. Of particular interest is the so-called "claw-back" rule, which will allow the FDIC to recoup certain earnings of senior executives for mere negligence, as opposed to a higher standard of gross negligence. The final rule did not finalize the criteria for determining whether a company is predominantly engaged in activities that are financial in nature or incidental thereto, which will determine in part whether a company needs to write and submit for approval a "living will."

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Co-authored by Christina Grigorian

On June 29, the Board of Governors of the Federal Reserve System (Federal Reserve) issued its long-awaited rule establishing standards for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions (Debit Card Rule). The issuance of the Debit Card Rule was required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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Co-authored by Christopher T. Shannon

On June 15, the Securities and Exchange Commission proposed amendments to the broker-dealer financial reporting rule in order to strengthen the audits of broker-dealers as well as the SEC's oversight of the way broker-dealers handle their customers' securities and cash.

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In March, the Securities and Exchange Commission issued a proposed rule that was intended to meet the SEC's obligations under Section 766 of the Dodd-Frank Wall Street Reform and Consumer Protection Act to determine the extent to which a security-based swap will be deemed to involve the acquisition of beneficial ownership of underlying equity securities for the purposes of Sections 13 and 16 of the Securities Exchange Act of 1934. The proposed rule was noncontroversial because in the SEC's view existing Exchange Act Rules 13d-3 and 16a-1 already provide sufficient guidance on this topic, so the rule was technically just a "re-adoption" of those rules without change. The proposed rule has now been reissued without change as a final rule that will take effect on July 16.

The final rule can be found here.

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Co-authored by Kevin M. Foley and Christopher H. Mendoza

The Commodity Futures Trading Commission has proposed to issue an order (the Proposed Order) providing temporary relief from certain swap-related provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act that would otherwise take effect on July 16, 2011. The CFTC proposal, which describes the scope of the proposed exemptive relief but does not include the actual text of the Proposed Order, groups the provisions of Title VII as to which the CFTC has regulatory responsibility into four broad categories:

1. provisions that, by their terms, do not take effect without the adoption of implementing rules;
2. self-effectuating provisions that include references to terms that require further definition;
3. self-effectuating provisions that do not reference terms requiring further definition and that repeal current provisions of the Commodity Exchange Act (CEA); and
4. other self-effectuating provisions.
    

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

The Commodity Futures Trading Commission will hold a public meeting on June 14 at its headquarters in Washington, D.C., to consider the effective date of various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 754 of the Dodd-Frank Act provides that "[u]nless otherwise provided in this title, the provisions of this subtitle shall take effect on the later of 360 days after the date of the enactment of this subtitle [i.e., July 16, 2011] or, to the extent a provision of this subtitle requires a rulemaking, not less than 60 days after publication of the final rule or regulation implementing such provision of this subtitle."

Further information about the meeting is available here.

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Six federal agencies have approved and will submit a Federal Register notice that extends the comment period on the proposed rules to implement the credit risk retention requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 15G generally requires the securitizer of asset-backed securities (ABS) to retain an economic interest of no less than 5% in the credit risk of the assets collateralizing the ABS and would not permit transfer of or hedging that credit risk. Section 15G includes a variety of exemptions from this requirement, including an exemption for ABS that are collateralized exclusively by ''qualified residential mortgages,'' as such term is defined by the Agencies by rule. The comment period was extended to August 1 to allow interested persons more time to analyze the issues and prepare their comments. (Originally, comments were due by June 10.) The Agencies stated, "Due to the complexity of the rulemaking and to allow parties more time to consider the impact of the [proposed rule] on affected markets, the Agencies have determined that an extension of the comment period until August 1, 2011 is appropriate."

The proposal was issued by the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Federal Housing Finance Agency, and the U.S. Department of Housing and Urban Development.

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On June 9, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (the agencies) announced that they are seeking comment on proposed supervisory guidance regarding stress-testing practices at banking organizations with total consolidated assets of more than $10 billion.

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On November 9, 2010, the Federal Deposit Insurance Corporation's Board of Directors issued a final rule implementing Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 343 of the Dodd-Frank Act provides unlimited insurance coverage for noninterest-bearing transaction accounts at all insured depository institutions (IDIs) from December 31, 2010, through December 31, 2012. The final rule imposes certain notice requirements, including the requirement that if an IDI modifies the terms of a deposit account so that the account no longer will be eligible for unlimited deposit insurance coverage, the institution "must notify affected customers and clearly advise them, in writing, that such actions will affect their deposit insurance coverage." As explained in the preamble to the final rule, this notice requirement is intended primarily to apply when IDIs begin paying interest on a demand deposit accounts (DDA), permitted beginning July 21, 2011, under Section 627 of the Dodd-Frank Act.

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On May 25, the Securities and Exchange Commission issued proposed rule amendments that disqualify securities offerings involving certain "felons and other 'bad actors'" from reliance on the safe harbor from registration under Section 4(2) of the Securities Act of 1933 provided by Rule 506 of Regulation D to reflect the requirements of Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 926 of the Dodd-Frank Act requires that that the SEC issue disqualification rules for Rule 506 offerings that are "substantially similar" to the disqualification rules provided by Rule 262 of the Securities Act, which apply to securities offerings under Regulation A.

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Co-authored by Kari E. Hoelting

On May 25, the Securities and Exchange Commission issued final rules creating a whistleblower program under Section 21F of the Securities Exchange Act of 1934 as required by Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new program authorizes the SEC to pay rewards to individuals who voluntarily provide the SEC with original information that leads to successful SEC enforcement actions that result in monetary sanctions totaling more than $1 million. The total amount of the award is between 10% and 30% of the monetary sanctions.

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Co-authored by James B. Anderson

On May 25, the Securities and Exchange Commission will hold an open meeting to discuss whether to adopt rules and forms to implement the whistleblower provisions added to Section 21F of the Securities Exchange Act of 1934 by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under rules proposed on November 3, 2010, the SEC will pay an award or awards to one or more whistleblowers who voluntarily provide the SEC with original information that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million. The proposed rules define certain terms critical to the operation of the whistleblower program, outline the procedures for applying for awards and the SEC's procedures for making decisions on claims, and generally explain the scope of the whistleblower program to the public and to potential whistleblowers. Of interest will be the SEC's response to critics who have argued that the SEC's proposed rules will thwart the effectiveness of corporate compliance programs.

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Co-authored by Robert Grundstein

Section 403 of the Dodd-Frank Wall Street Reform and Consumer Protection Act repeals, as of July 21, the private adviser exemption in Section 203(b)(3) of the Investment Advisers Act of 1940 and will require advisers relying on that exemption (including advisers to many hedge funds and other private funds) to register with the Securities and Exchange Commission.

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Co-authored by Christina Grigorian

On May 12, the Board of Governors of the Federal Reserve System published for comment changes to Regulation E, which implements the Electronic Fund Transfer Act. The proposal contains new protections for consumers who send remittance transfers to consumers or entities in a foreign country.

The proposed changes were mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires that consumers get certain disclosures in connection with remittances to foreign countries, including information about fees, the applicable exchange rate, and the amount of currency to be received by the recipient. The Dodd-Frank Act also requires that senders of remittance transfers have certain error resolution rights.

Comments are due 60 days after publication in the Federal Register.

For more information, click here.

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Co-authored by Christian B. Hennion

The Securities and Exchange Commission has proposed amendments to Rule 205-3 under the Investment Advisers Act of 1940, as amended (the Advisers Act), to revise the definition of "qualified client." Under Rule 205-3, accounts of qualified clients are exempted from the Advisers Act's general prohibition against SEC-registered investment advisers charging performance-based fees to their advisory clients. Currently, a qualified client generally includes any client that has either (1) $750,000 or more under management with the investment adviser or (2) a net worth of at least $1.5 million.

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Co-authored by Gregory C. Johnson

A New York federal district court recently ruled that, with limited statutorily defined exceptions, a whistleblower asserting private relation claims under the Dodd-Frank Wall Street Reform and Consumer Protection Act must allege that the information he provided was reported to the Securities and Exchange Commission. The court held, however, that the Dodd-Frank Act does not require that the whistleblower directly provide the information to the SEC in order to pursue a claim. Rather, all that is required is that the whistleblower allege that he acted jointly in an effort to provide the information concerning the alleged misconduct to the SEC.

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On May 3, the Office of the Comptroller of the Currency (OCC) issued revised examination procedures for the Protecting Tenants at Foreclosure Act (Tenants Protection Act). The Tenants Protection Act, which is part of the Helping Families Save Their Homes Act of 2009, became effective on May 20, 2009. The Tenants Protection Act provides protections to bona fide tenants in the case of any foreclosure on a federally related mortgage loan or on any dwelling or residential real property. These protections provide that any immediate successor in interest in such a foreclosed property, including a bank that takes title to a house after foreclosure, will assume the interest subject to the rights of any bona fide tenant and must comply with certain notice requirements.

The Dodd-Frank Wall Street Reform and Consumer Protection Act revised the Tenants Protection Act by adding a definition for the date of a notice of foreclosure and by extending its expiration date to December 31, 2014.

These revised procedures replace the Tenants Protection Act procedures that were distributed via OCC Bulletin 2010-2, which this issuance rescinds.

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On May 10, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) approved a proposed rule to adopt requirements for FDIC-supervised institutions that may engage in certain foreign exchange transactions with retail customers which fall under the provisions of Section 742 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As amended by the Dodd-Frank Act, the Commodity Exchange Act (CEA) provides that a U.S. financial institution for which there is a federal regulatory agency shall not enter into, or offer to enter into, a transaction described in Section 2(c)(2)(B)(i)(I) of the CEA with a retail customer except pursuant to a rule or regulation of a federal regulatory agency allowing the transaction under such terms and conditions as the federal regulatory agency shall prescribe ("retail forex rule"). The Dodd-Frank Act does not require that retail forex rules be issued jointly, or on a coordinated basis, with any other federal regulatory agency. While each federal banking agency is issuing a separate proposed rule, the federal banking agencies are coordinating their efforts. According to the FDIC, its notice of proposed rulemaking is substantially similar to the OCC's notice of proposed rulemaking regarding retail foreign currency transactions published on April 22 and regulations adopted by the Commodity Futures Trading Commission in September 2010.

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Co-authored by Natalya S. Zelensky

The Securities and Exchange Commission is seeking public comment on the feasibility, benefits and costs of two short selling disclosure regimes as a part of a study mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 417 of the Dodd-Frank Act requires the SEC to conduct studies of the feasibility, benefits and costs of (1) requiring reporting in real time, publicly or, in the alternative, only to the SEC and the Financial Industry Regulatory Authority, short sales positions in publicly listed securities, and (2) conducting a voluntary pilot program in which public companies could agree to have sales of their shares marked "long," "short," or "market maker short," and purchases of their shares marked "buy" or "buy-to-cover," and reported as such in real time through the Consolidated Tape. The SEC must submit a report on the results of these studies to Congress no later than July 21. Comments are due on or before 45 days after publication in the Federal Register.

Click here to read SEC Release No. 34-64383.

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On April 29, the U.S. Department of the Treasury published a formal notice of its intention to exclude Foreign Exchange Swaps and Foreign Exchange Forwards from the definition of swaps under provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The exclusion is being accomplished by exercise of the authority given to the Secretary of the Treasury in the Dodd-Frank Act to make a determination that those products "should not be regulated as swaps." As a result of the determination, FX Forwards and FX Swaps (1) cannot be subjected to mandatory clearing and exchange trading, and (2) will not count for purposes of determining a party's status as a Swap Dealer or Major Swap Participant. However, the exclusion is narrowly drawn so that those products will nevertheless be subject to certain other Dodd-Frank Act swap requirements, and other types of foreign exchange transactions that do not qualify as FX Swaps and FX Forwards will remain subject to the Dodd-Frank Act.

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Co-authored by Kevin M. Foley and Christian B. Hennion

The Commodity Futures Trading Commission has determined to extend the public comment period for over 30 of its proposed rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act until June 3. The rule proposals covered by the extension were proposed between October 2010 and March 2011 and relate to various aspects of the regulatory framework for swaps under the Dodd-Frank Act. For many of these proposed rulemakings, the public comment period has already closed, and is therefore being reopened until June 3. Comments previously received by the CFTC on such rule proposals after the close of the original comment period will be treated as if received during the reopened comment period and need not be resubmitted.

In its release announcing the extension of the public comment period, the CFTC also requests comment on the order in which it should consider the final rule proposals.

The CFTC release, including a full list of the affected rule proposals, is available here.

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Section 989G(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act required the Securities and Exchange Commission to conduct a study to determine how the SEC could reduce the burden of complying with Section 404(b) of the Sarbanes-Oxley Act (the auditor attestation requirement) for companies whose market capitalization is between $75 and $250 million, while at the same time maintaining investor protection. The SEC was also required to consider whether an exemption for such companies from Section 404(b) compliance would encourage the U.S. listing of initial public offerings (IPOs).

In a 113-page study published on April 22, the SEC concluded that the existing requirements for issuers with a $75-$250 million public float to comply with the auditor attestation provisions of Section 404(b) should be maintained and that no new exemptions should be granted. Specifically, the SEC found that over time the costs and burdens of Section 404(b) compliance have declined and that eliminating them would not "justify the loss of investor protections and benefits to issuers...". It also found that "the evidence does not suggest that granting an exemption to issuers that would expect to have $75-$250 million in public float following an IPO would, by itself, encourage companies in the United States or abroad to list their IPOs in the United States". In sum, the SEC, noting that the Dodd-Frank Act already exempts approximately 60% of reporting issuers from Section 404(b) compliance, does not recommend further extending this exemption.

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Co-authored by Natalya S. Zelensky

The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Commodity Exchange Act to provide that a U.S. financial institution for which there is a federal regulatory agency could not enter into retail foreign exchange (retail forex) transactions except pursuant to a rule or regulation of a federal regulatory agency allowing such transactions. The Office of the Comptroller of the Currency (OCC) has proposed a rule authorizing national banks, federal branches or agencies of foreign banks, and their operating subsidiaries (national banks) to engage in retail forex transactions. In addition, the proposed rule describes various requirements that national banks must comply with in order to engage in such transactions. The proposed rule is modeled on the Commodity Futures Trading Commission's retail forex rule in order to promote consistent treatment of retail forex transactions regardless of whether a retail forex customer's dealer is a national bank or a CFTC registrant. Comments on the OCC's proposed retail forex rule must be received by May 23.

Click here to read the OCC's proposal in the Federal Register.

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

The Commodity Futures Trading Commission has published its fourteenth series of proposed rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. These proposals include capital requirements for swap dealers (SDs) and major swap participants (MSPs), interpretive guidance regarding various proposed definitions and the regulation of mixed swaps, proposed rules concerning the bankruptcy protection of cleared swaps customer contracts and collateral, and amendments to adapt certain CFTC regulations to Dodd-Frank Act requirements.

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On April 14, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National Credit Union Administration, the Securities and Exchange Commission, and the Federal Housing Finance Agency, published a notice of proposed rulemaking in the Federal Register to implement the incentive-based compensation provisions of Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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Co-authored by Kevin M. Foley, Christian B. Hennion and Vanessa L. Colman

The Office of the Inspector General (OIG) for the Commodity Futures Trading Commission has issued a report summarizing its investigation into the CFTC's cost-benefit analyses for four rulemakings promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The OIG investigation, which was conducted at the request of Reps. Frank Lucas (R-OK) and K. Michael Conway (R-TX), reviewed how the CFTC formulated its cost-benefit analyses for its rulemakings regarding (1) definitions of "swap dealer," "major swap participant" and other key terms from Title VII of the Dodd-Frank Act; (2) confirmation, portfolio reconciliation and compression requirements for swap dealers and major swap participants; (3) core principles for designated contract markets; and (4) duties of swap dealers and major swap participants.

In its report, OIG concludes that, to a varying extent for the various rulemakings examined, the CFTC's Office of General Counsel (OGC) appeared to have a more dominant role in formulating the cost-benefit analysis than did the CFTC's Office of the Chief Economist (OCE), at times overriding the latter's input into the process. OIG further stated that the OGC's methodology for formulating cost-benefit analyses utilized a historic and "somewhat stripped down" analytical approach, and recommended that a "more robust" approach, with greater OCE input, be implemented.

A copy of the OIG report is available here.

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Co-authored by Kevin M. Foley, Christian B. Hennion and Vanessa L. Colman

The Commodity Futures Trading Commission announced that it will hold an open meeting on the fourteenth series of rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act on April 27. At the meeting, the CFTC will consider, among other things, proposed rulemakings regarding capital requirements for swap dealers and major swap participants, bankruptcy protections for cleared swaps and associated collateral, product definitions under Title VII of the Dodd-Frank Act and other conforming amendments to CFTC regulations.

Information about the meeting is available here.

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Co-authored by James B. Anderson

On April 8, the Securities and Exchange Commission updated its planned schedule for adopting rules and taking other actions to implement the corporate governance and disclosure provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As reported in the September 24, 2010, edition of Corporate and Financial Weekly Digest, the SEC had previously announced its planned rulemaking schedule to implement provisions of the Dodd-Frank Act. The updated schedule delays implementation of some of these provisions by as much as six months. Below are updated time periods set forth in the SEC's revised rulemaking schedule for governance and disclosure rules to be 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 Kevin M. Foley and Joshua A. Penner

The Commodity Futures Trading Commission has published its thirteenth series of proposed rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposals relate to the establishment of initial and variation margin requirements for uncleared swaps and to recordkeeping and reporting requirements for existing swaps.

Margin Requirements for Uncleared Swaps

The CFTC has proposed rules to implement Section 731 of the Dodd-Frank Act, which requires the CFTC to adopt rules imposing initial and variation margin requirements on all swaps that are not cleared by a derivatives clearing organization (DCO). The margin requirements would apply to uncleared swaps entered into after the effective date of the rules.

The proposed rules would apply to swap dealers (SDs) and major swap participants (MSPs) that are not subject to oversight by a regulator other than the CFTC. Margin requirements would vary by counterparty, depending on whether the counterparty is a "financial entity," as defined under Section 2(h)(7)(C) of the Commodity Exchange Act. The proposed rules would require initial and variation margin to be paid on all uncleared swaps that are entered into between an SD or MSP with an SD or MSP. Initial margin posted for swaps between SDs and MSPs would have to be deposited with a third-party custodian and could not be rehypothecated.

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

The Commodity Futures Trading Commission and the Securities and Exchange Commission will jointly conduct a public roundtable discussion to address the schedule for implementing final rules for swaps and security-based swaps under the Dodd-Frank Wall Street Reform and Consumer Protection Act, including whether to phase in the implementation of the new requirements. The roundtable will take place on May 2 and 3 at the CFTC headquarters in Washington, D.C. Further information about the public roundtable, including how to submit advance comments to the CFTC and SEC, is available here.

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On April 12, federal banking regulators (Agencies) proposed regulations, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, requiring certain large participants in the OTC swaps market (“covered swaps entities”) to collect margin from other covered swaps entities. This proposed regulations would impose initial margin and variation margin requirements on covered swaps entities for uncleared swaps. This would require covered swaps entities to calculate and collect initial margin and variation margin from all swap counterparties. The amount of margin that would be required would vary based on the relative risk of the counterparty and the swap. The proposed regulations would also impose existing regulatory capital rules on covered swaps entities. These initial margin, variation margin and capital standards are intended, according to the Agencies, to offset the risk to swap entities and the financial system arising from the use of swaps that are not cleared.

The proposed regulations would require commercial end users to comply with the margin requirements noted above only if their exposure is above a predefined level calculated by the seller of the swap; commercial end users of derivatives would not be required to post margin unless their activity exceeds the risk limits of the entity with which they are transacting. According to the Agencies, low-risk financial end users, including most community banks, would not be required to post margin unless their activity exceeds substantial thresholds or the risk limits of the entity with which they are transacting.

The proposal establishes minimum quality standards for acceptable margin collateral. It also establishes minimum safekeeping standards for collateral posted by covered swap entities to ensure that collateral is available to support the trades and not housed in a jurisdiction where it is not available if defaults occur.

Comments to these proposed rules are being solicited through June 24. New trades would not be subject to the proposed requirements until after the proposed effective date, which is currently planned for six months after the federal banking regulators issue the final version of these proposed requirements.

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

The Commodity Futures Trading Commission announced that it will hold an open meeting on the thirteenth series of rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act on April 12. At the meeting, the CFTC will consider, among other things, proposed rulemakings regarding the imposition of margin requirements for uncleared swaps on swap dealers and major swap participants.

Information about the meeting is available here.

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The Federal Reserve Board on April 6 requested comment on a proposed rule to repeal the Board's Regulation Q, which prohibits the payment of interest on demand deposits by institutions that are member banks of the Federal Reserve System. The proposed rule would implement Section 627 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which repeals Section 19(i) of the Federal Reserve Act in its entirety effective July 21. The repeal of that section of the Federal Reserve Act on that date eliminates the statutory authority under which the Board established Regulation Q. The proposed rule would also repeal the Board's published interpretation of Regulation Q and would remove references to Regulation Q found in the Board's other regulations, interpretations and commentary. The Board is seeking comment on whether the repeal of Regulation Q, currently set forth at 12 CFR 217.101, is expected to have implications for balance sheets and income of depository institutions, short-term funding markets such as the overnight federal funds market, the demand for interest-bearing demand deposits, and competitive burden on smaller depository institutions. Some bankers feel that their banks will be compelled to offer accounts that pay interest or lose corporate business, which would either crimp margins or eliminate a source of deposit liabilities.

Technically, the proposal would affect only member banks of the Federal Reserve System. However, other banking agencies are expected to follow suit with similar actions that would apply to their regulatees, regardless of size, that hold demand deposits. The proposal would permit, but not require, member banks to pay interest on demand deposits maintained at those institutions. As such, the Board expects that the proposal would have a positive impact on such entities because it would eliminate an obsolete regulatory provision and because member banks are not obligated to offer interest-bearing demand deposits following the repeal of Regulation Q. The Board promulgated Regulation Q on August 29, 1933, to implement Section 19(i) of the Act. In the past, Regulation Q also contained provisions implementing then-current statutory provisions regulating the rates of interest payable on various types of interest-bearing deposits. The Depository Institutions Deregulation Act of 1982 phased out these statutory interest rate limitations effective in March 1986. After that time, Regulation Q consisted primarily or exclusively of provisions related to implementing Section 19(i)'s prohibition of the payment of interest on demand deposits by member banks.

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Co-authored by David S. Kravitz

On March 30, the Securities and Exchange Commission proposed rules directing the national securities exchanges to adopt listing standards related to the compensation committees of listed companies and their consultants and advisers, as required by Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added Section 10C to the Securities Exchange Act of 1934. As with all listing standards, the exchanges would need the approval of the SEC prior their adoption.

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

The Financial Stability Oversight Council (FSOC) has released proposed rules regarding the criteria under which it will designate certain financial market utilities (FMUs) as "systemically important."

The Dodd-Frank Wall Street Reform and Consumer Protection Act defines an FMU generally as any person that manages or operates a multilateral system for the purposes of transferring, clearing or settling payments, securities, or other financial transactions among financial institutions or between a financial institution and that person.

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The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) approved on March 29 a joint Notice of Proposed Rulemaking (NPR) for covered systemic organizations to file and report resolution plans and credit exposure reports as required in Title I, Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Resolution plans, also known as "living wills," would have to be submitted within 180 days of the effective date of a final regulation, and Credit Exposure Reports would have to be filed 30 days after the end of each calendar quarter. The NPR is to be issued jointly with the Board of Governors of the Federal Reserve System. The regulation would apply to organizations that have $50 billion or more in total consolidated assets.

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Six federal agencies, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission, the Federal Housing Finance Agency, and the Department of Housing and Urban Development, are seeking comment on a proposed rule, approved by the FDIC on March 30, that would require sponsors of asset-backed securities (ABS) to retain at least 5% of the credit risk of the assets underlying the securities and would not permit sponsors to transfer or hedge that credit risk. The proposal, totaling 376 pages in length, would provide sponsors with various options for meeting the risk-retention requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The options include but are not necessarily limited to: (1) a "vertical" slice of the ABS interests, whereby the sponsor or other entity retains a specified pro rata piece of every class of interests issued in the transaction; (2) a "horizontal" first-loss position, whereby the sponsor or other entity retains a subordinate interest in the issuing entity that bears losses on the assets before any other classes of interests; (3) a "seller's interest" in securitizations structured using a master trust collateralized by revolving assets whereby the sponsor or other entity holds a separate interest that is pari passu with the investors' interest in the pool of receivables (unless and until the occurrence of an early amortization event); or (4) a representative sample, whereby the sponsor retains a representative sample of the assets to be securitized that exposes the sponsor to credit risk that is equivalent to that of the securitized assets. The proposed rules also include disclosure requirements that are an integral part of and specifically tailored to each of the permissible forms of risk retention.

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On March 30, the Securities and Exchange Commission will hold an open meeting to discuss, among other matters, whether to adopt rules to implement Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 952 requires the SEC to direct the national securities exchanges and national securities associations to prohibit the listing of equity securities of issuers (with certain exceptions) whose compensation committees do not comply with the independence and other requirements set forth in Section 952 of the Dodd-Frank Act. These requirements include that each compensation committee member be an "independent" (as defined by the SEC) director and that such committees have authority to engage, and be directly responsible for the appointment, compensation and oversight of the work of, independent compensation consultants, legal counsel, or other advisors to a compensation committee. Section 952 lists various "independence" factors for the SEC to consider. Section 952 also requires that issuers provide appropriate funding for purposes of retaining such compensation consultants and advisors. Finally, Section 952 of the Dodd-Frank Act directs the SEC to provide appropriate procedures for an issuer to have reasonable opportunity to cure any defects with respect to the requirements outlined above, and provides that Section 952 does not apply to a "controlled company."

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With the July 16 general effective date of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act fast approaching, Commissioner Gary Gensler of the Commodity Futures Trading Commission outlined his thinking on the finalization and implementation of swap rules in a speech given to the Futures Industry Association on March 16.

With respect to finalization, Commissioner Gensler affirmed his desire to have all rule proposals (as opposed to final rules) completed by the end of April, with rules being finalized in the three broad groupings: the Early Group, the Middle Group and the Late Group.

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

The Dodd-Frank Wall Street Reform and Consumer Protection Act added a new Section 4c(a)(5) to the Commodity Exchange Act (CEA) regarding disruptive trading practices, which prohibits any trading, practice or conduct on or subject to the rules of a "registered entity" that (a) violates bids or offers; (b) demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period; or (c) is, is of the character of, or is commonly known to the trade as, "spoofing" (bidding or offering with the intent to cancel the bid or offer before execution).

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In a no-action letter issued on March 16, the Securities and Exchange Commission's Division of Investment Management extended temporary no-action relief under Section 17(f) of the Investment Company Act of 1940 to any registered investment company (Fund) if the Fund or its custodian places and maintains assets in the custody of LCH.Clearnet Limited (LCH), a U.K. derivatives clearing organization, or an LCH clearing member that is a futures commission merchant registered with the Commodity Futures Trading Commission for purposes of meeting LCH's or a clearing member's margin requirements for certain cleared interest rate swap contracts. The SEC relied, among other things, upon the following representations in deciding to flexibly apply the 1940 Act's custody requirements: (1) LCH and clearing members will address each of the requirements of Rule 17f-6 under the 1940 Act; (2) each clearing member will hold Fund assets as part of the over-the-counter derivatives account class; and (3) each clearing member will be required to segregate customer funds and securities from the clearing member's own assets. The SEC's temporary no-action position will expire on July 16, upon the conclusion of a one-year transition period following the effective date of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Click here to read the SEC's no-action letter.

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The discussion agenda for the Federal Deposit Insurance Corporation's (FDIC's) open meeting includes:

• Notice of Proposed Rulemaking to Implement Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Credit Risk Retention)
• Resolution Plan and Credit Exposure Reports—Notice of Proposed Rulemaking

The meeting will be held in the board room on the sixth floor of the FDIC building located at 550 17th Street, N.W., Washington, D.C. This board meeting will be webcast live via the Internet and subsequently made available on demand approximately one week after the event.

Click here for more information and here to view the event.

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Co-authored by Kari E. Hoelting

On March 16, members of the Capital Markets Subcommittee of the House Financial Services Committee introduced several bills designed to amend or supplement the Dodd-Frank Wall Street Reform and Consumer Protection Act, including those described below:

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Section 766 of the Dodd-Frank Wall Street Reform and Consumer Protection Act specifies that the Securities and Exchange Commission must set rules to determine the extent to which a security-based swap will be deemed to involve the acquisition of beneficial ownership of underlying equity securities for the purposes of Sections 13 and 16 of the Securities Exchange Act of 1934. The SEC has decided that existing Rules 13d-3 and 16a-1 already provide sufficient guidance on this topic so it is merely proposing to "re-adopt" those rules without change in order to meet the requirement of Section 766. The SEC accordingly issued on March 17 a notice of proposed rule that contains a lengthy discussion of the current rules and states that "the purpose of the proposed rulemaking is solely to preserve the regulatory status quo." Comments are due on April 15.

The notice of the proposed rule can be found here.

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The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) on March 15 approved a Notice of Proposed Rulemaking (NPR) to further clarify application of the Orderly Liquidation Authority (OLA) contained in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act. (The NPR issued an interim rule on the same subject on January 18, which "clarified certain discrete issues under the OLA." The earlier interim rule addressed discrete topics including the payment of similarly situated creditors, the honoring of personal services contracts, the recognition of contingent claims, the treatment of any remaining shareholder value in the case of a covered financial company that is a subsidiary of an insurance company, and limitations on liens that the FDIC may take on the assets of a covered financial company that is an insurance company or covered subsidiary.)

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

The Commodity Futures Trading Commission has published its twelfth series of proposed rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act as well as a proposed interpretive order to give effect to the Dodd-Frank Act provisions relating to "disruptive" trading practices. The proposals relate to technical amendments to regulations governing commodity pool operator (CPO) and commodity trading advisor (CTA) registration; requirements for processing, clearing and transferring customer positions; and the intermediary registration requirements as they relate to swap dealers, major swap participants (MSPs) and swap execution facilities (SEFs).

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As required by Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission has announced that it is proposing a rule applicable to broker-dealers and investment advisers with $1 billion or more in assets that would (1) require them to file annual reports with the SEC related to incentive-based compensation; (2) prohibit incentive-based compensation arrangements that encourage inappropriate risk-taking by providing excessive compensation or that could lead to material financial loss to the firm; (3) provide additional requirements for firms with $50 billion or more in assets, including deferral of incentive-based compensation of executive officers and approval of compensation for people whose job functions give them the ability to expose the firm to a substantial amount of risk; and (4) require them to develop policies and procedures that ensure and monitor compliance with requirements related to incentive-based compensation.

When announcing the proposed rule, SEC Chairman Mary Schapiro stated that she is particularly interested in commenters' views on (1) how assets would be calculated for purposes of determining whether institutions fall within either component of the proposed rule; (2) how the proposed rule might affect the broad array of financial firms covered by Section 956, including broker-dealers and advisers—most particularly private fund advisers, given how they often structure their compensation; and (3) the proposal's potential impact on broker-dealer and investment adviser business models and the variety of services they provide to investors.

Public comments on the rule proposal should be received within 45 days after it is published in the Federal Register. The full text of the proposed rule is not yet available.

For a copy of the SEC's press release, see here.
For a copy of SEC Chairman Mary Schapiro's remarks, see here.

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On March 2, the Securities and Exchange Commission will hold an open meeting to discuss, among other matters, whether to propose rules to implement Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 956 requires that not later than nine months after enactment, the appropriate federal regulators jointly shall adopt regulations requiring "covered financial institutions" (as described below) with assets of $1 billion or greater to disclose incentive compensation to their appropriate federal regulator. Disclosure is required of all incentive-based compensation arrangements in sufficient detail for the regulator to determine if the arrangement with the executive officer, employee, director or principal shareholder is excessive or could lead to a material financial loss. Within the same time frame, federal regulators are also required to jointly prescribe regulations to prohibit any type of incentive-based compensation by "covered financial institutions" with assets of $1 billion or greater that is excessive or could lead to material financial loss. Covered financial institutions include depository institutions, depository institution holding companies, credit unions, registered broker-dealers and registered investment advisers.

The SEC will also consider whether to propose rule amendments that would implement Section 939A of the Dodd-Frank Act relating to references to credit ratings in filings under the Securities Act of 1933 and the Investment Company Act of 1940. Section 939A of the Dodd-Frank Act requires that the SEC: (1) review any regulation issued by it that requires the use of an assessment of the credit-worthiness of a security or money market instrument and any references to or requirements in its regulations regarding credit ratings, (2) modify any regulations to remove any reference to or requirement of reliance on credit ratings, and (3) substitute in its regulations a standard of credit-worthiness with alternative requirements.

See the February 11 edition of Corporate and Financial Weekly Digest for a discussion of currently proposed rules under Section 939A of the Dodd-Frank Act.

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Co-authored by Palash Pandya

On February 9, the Securities and Exchange Commission proposed rules amending the Securities Act of 1933 and the Securities Exchange Act of 1934 to replace rule and form requirements for securities offerings and issuer disclosure rules that rely on, or make special accommodations for, credit ratings to reflect the requirements of Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 939A of the Dodd-Frank Act requires that the SEC (1) review any regulation issued by it that requires the use of an assessment of the credit-worthiness of a security or money market instrument and any references to or requirements in its regulations regarding credit ratings, (2) modify any regulations to remove any reference to or requirement of reliance on credit ratings, and (3) substitute in its regulations a standard of credit-worthiness with alternative requirements. The proposed rules are similar to rules proposed in 2008, which were not adopted by the SEC.

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The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) on February 7 approved a final rule on Assessments, Dividends, Assessment Base and Large Bank Pricing. The rule, which is quite detailed and complicated, implements changes to the deposit insurance assessment system mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act and revises the assessment system applicable to large banks to eliminate reliance on debt issuer ratings and make it more forward-looking. Dodd-Frank required that the base on which deposit insurance assessments are charged be revised from one based on domestic deposits to one based on assets, and that the amount of assessments collected be revenue neutral as between the current system (based on liabilities) and the new system (based on assets). FDIC Chairman Sheila Bair said, "The rule should keep the overall amount collected from the industry very close to unchanged, although the amounts that individual institutions pay will be different."

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Co-authored by Christina Grigorian

On February 7, the Federal Deposit Insurance Corporation (FDIC) released a proposed joint rule that will also be released by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, the National Credit Union Administration, the Securities and Exchange Commission and the Federal Housing Finance Agency (the Agencies) regarding incentive-based compensation arrangements (Proposal). The Proposal is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In summary, the Proposal would require the reporting of incentive-based compensation arrangements by a "covered financial institution" and prohibit incentive-based compensation arrangements at a covered financial institution that provide excessive compensation. In this regard, the Agencies have proposed standards to determine whether incentive-based compensation is "excessive" in a particular case. In addition, the Proposal prohibits arrangements that could expose the institution to inappropriate risks that threaten an institution's safety and soundness and could lead to a material financial loss. To accomplish this, the Proposal sets forth standards that are consistent with the principles set forth in the Interagency Guidance on Sound Incentive Compensation Policies (adopted June 2010) for determining whether an incentive-based compensation arrangement may encourage inappropriate risk-taking.

For purposes of this provision, a "covered financial institution" is a bank with total consolidated assets of more than $1 billion. Additional restrictions would be imposed for institutions with $50 billion or more in total consolidated assets.

Comments are due 45 days after publication in the Federal Register.

For more information, click here.

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Co-authored by Palash Pandya

On January 28, the Securities and Exchange Commission extended the comment period for proposed rules to implement Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding "conflict minerals" disclosure from January 31 to March 2. As reported in the December 17, 2010, edition of Corporate and Financial Weekly Digest, the SEC issued proposed rules implementing disclosure and reporting requirements regarding the use by issuers of so-called conflict minerals from the Democratic Republic of the Congo and adjoining countries. The proposed rules are expected to apply to many more issuers than might have first been expected due to the various uses of conflict minerals and their derivatives and the broad scope of the SEC's proposed rule encompassing such minerals as are "necessary to the functionality or production of a product manufactured, or contracted to be manufactured" by a reporting company. Assuming the SEC adopts final rules in April 2011, as required by Section 1502 of the Dodd-Frank Act, a December 31 fiscal year-end issuer would first have to provide conflict minerals disclosure or a Conflict Minerals Report after the end of its December 31, 2012, fiscal year. In its release extending the comment period the SEC acknowledged that the nature of the proposed disclosure requirements "differs from the disclosures traditionally required by the Exchange Act"; they would require extensive due diligence efforts by public companies.

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On January 27, the Securities and Exchange Commission issued a staff study on improving investor access to information about investment advisers and broker-dealers. For more information, please see "SEC Staff Study on Access to Information About Investment Professionals" in Investment Companies and Investment Advisers below.

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At its open meeting on February 2, the Securities and Exchange Commission proposed Regulation SB SEF under the Securities Exchange Act of 1934 to implement Section 763 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In addition, it proposed (1) an interpretation of the definition of "security-based swap execution facility" added as Section 3(a)(77) of the Exchange Act by the Dodd-Frank Act; (2) to amend Rule 3a-1 under the Exchange Act to exempt a registered security-based swap execution facility (SB SEF) from regulation as an "exchange"; and (3) to add Rule 15a-12 under the Exchange Act to exempt a registered SB SEF from regulation as a broker-dealer, subject to certain conditions. A security-based swap is broadly defined as a swap over (a) a single security, (b) a loan, (c) a narrow-based group or index of securities, or (d) events relating to a single issuer or issuers of securities in a narrow-based security index.

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Co-authored by Natalya S. Zelensky

On January 27, as required by Section 919B of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission released a study conducted by the staff of the Office of Investor Education and Advocacy recommending steps to improve investor access to information about investment advisers and broker-dealers. The staff recommends in the next 18-month period: (1) unifying the search results from BrokerCheck and IAPD (Investment Adviser Public Disclosure)—the online applications through which the public may obtain information regarding broker-dealers and investment advisers, respectively—so that each system searches the other's database and returns results from both; (2) adding a ZIP code search or other indicator of location function to BrokerCheck and IAPD to more easily permit investors to locate and compare nearby financial services providers; and (3) adding educational content to BrokerCheck and IAPD, including links and definitions of terms that may be unfamiliar to individual investors. The staff recommends that subsequent to the next 18-month period, the SEC and Financial Industry Regulatory Authority continue to analyze, including through investor testing, the feasibility and advisability of expanding BrokerCheck to include additional information currently available in CRD (Central Registration Depository)—the database developed by FINRA in consultation with the states from which the information made available through BrokerCheck is derived—including historical information, as well as the method and format of publishing that information. The staff also recommends that the SEC continue to evaluate expanding IAPD content and the method and format of publishing that content, including through investor testing.

To read the study, click here.
To read the SEC's press release, click here.

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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.

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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.

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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.

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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:

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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.

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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.

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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.

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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).

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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.

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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....”

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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.

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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:

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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.

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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).

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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.

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Co-authored by Palash Pandya

On December 15, the Securities and Exchange Commission issued proposed rules implementing disclosure and reporting requirements regarding the use by issuers of conflict minerals from the Democratic Republic of the Congo and adjoining countries (DRC countries) added as Section 13(p) to the Securities Exchange Act of 1934 by Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1502(e)(4) of the Dodd-Frank Act defines “conflict mineral” as cassiterite, columbite-tantalite, gold, wolframite, or their derivatives, or any other minerals or their derivatives determined by the Secretary of State to be financing conflict in the DRC countries. The proposed rules are expected to apply to many more issuers than might have first been expected due to the various uses of conflict minerals and their derivatives and the SEC’s broad definition of “manufacture.”

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

The Commodity Futures Trading Commission has published its seventh series of rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The latest round of CFTC rules and rule proposals relates to an “end user” exception from otherwise-mandatory swap clearing requirements; governance requirements for derivatives clearing organizations (DCOs), designated contract markets (DCMs) and swap execution facilities (SEFs); the reporting of swaps entered into after the enactment of Dodd-Frank but before the effectiveness of the CFTC’s swap recordkeeping rules; and business conduct standards for swap dealers (SDs) and major swap participants (MSPs).

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On December 15, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) voted on a final rule to set the insurance fund’s designated reserve ratio (DRR) at 2% of estimated insured deposits. The Dodd-Frank Wall Street Reform and Consumer Protection Act set a minimum DRR of 1.35% and left unchanged the requirement that the FDIC Board set a DRR annually. The Board must set the DRR according to the following factors: risk of loss to the insurance fund, economic conditions affecting the banking industry, preventing sharp swings in the assessment rates, and any other factors it deems important.

FDIC Chairman Sheila Bair stated, “Given previous statutory limitations on the ability of the FDIC to build reserves in excess of 1.25%, our resources heading into the financial crisis were woefully inadequate. This new rule will allow us to better prepare for the future. It will also give the industry greater certainty around the premium structure. While the 2% designated reserve ratio established by the board is higher, the trade-off will be lower, more predictable premiums over time. By building higher reserves during the good times, we will significantly reduce the risk of pro-cyclical assessments when the inevitable next downturn occurs.”

However, the FDIC in the final rule made it clear that it “views the 2% DRR as a long-range, minimum target.”

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

The Commodity Futures Trading Commission held a public meeting on December 1 to propose its sixth series of rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFTC has published notification of (and, in most cases, requested public comment on) the following five rule proposals.

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Co-authored by Jonathan D. Weiner

On November 19, Institutional Shareholder Services (ISS) published updated policies for determining its proxy voting recommendations for meetings to be held on or after February 1, 2011. ISS’s policy updates for 2011 include the following:

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On October 8, the Securities Investor Protection Corporation (SIPC) filed a proposed bylaw amendment with the Securities and Exchange Commission regarding the minimum annual assessments for SIPC members. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 amended the Securities Investor Protection Act of 1970 (SIPA) by changing the minimum assessments from $150 to 0.02% of a member’s gross revenues from securities business.

SIPC now proposes to amend its bylaws to be consistent with SIPA, as amended by the Dodd-Frank Act. SIPC, however, proposes to change the minimum assessments benchmark from gross revenues to net operating revenues. SIPC believes most securities firms no longer structure their business on a gross revenue basis and instead use a net operating revenue basis (i.e., exclude interest and dividend expenses in their revenue calculations). Since assessments based on net operating revenues will be less than assessments based on gross operating revenues, SIPC’s proposed rule change will still be consistent with SIPA, as amended by the Dodd-Frank Act.

On November 30, the Securities and Exchange Commission published a notice soliciting public comment on SIPC’s proposal.

To read the SEC release, click here.

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Co-authored by Vanessa L. Friedman

The Commodity Futures Trading Commission has requested comments on the following five rule proposals to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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Co-authored by Vanessa L. Friedman

A number of the proposals approved by the Commodity Futures Trading Commission at its meeting on November 10 and reported in the November 19 edition of Corporate and Financial Weekly Digest were published for comment in the Federal Register.

The release requesting comment on the CFTC’s notice of proposed rulemaking regarding registration of foreign boards of trade is available here. The CFTC’s proposed rule requiring each futures commission merchant, swap dealer (SD), and major swap participant (MSP) to designate a chief compliance officer and file an annual report regarding its compliance activities is available here. Both of these releases were published November 19; the comment period for each ends January 18. Additionally, the release requesting comment on the CFTC’s proposed rules that would establish and govern the duties of SDs and MSPs is available here. The CFTC’s notice of proposed rulemaking regarding conflicts of interest requirements applicable to SDs and MSPs is available here. Finally, the CFTC’s proposed rules governing registration of SDs and MSPs is available here. All three of these releases were published November 23, and the comment period for each ends January 24.

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Co-authored by Vanessa L. Friedman

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Commodity Futures Trading Commission is charged with leading an interagency working group in (1) conducting a study regarding the oversight of existing and prospective carbon markets, and (2) making recommendations to Congress for the oversight of carbon markets to ensure their efficiency, transparency and security. The CFTC has requested public comment on the study, specifically with regard to the study’s regulatory objectives and the ultimate oversight of the carbon markets.

The comment period closes December 17. The CFTC’s notice and request for comment is available here.

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Co-authored by Blase J. Kornacki

Section 404 of the Sarbanes-Oxley Act (SOX 404) mandates that public companies assess their internal controls over financial reporting (ICFRs). SOX 404(a) requires company management to assess ICFRs, and SOX 404(b) calls for registered public accounting firms to attest to and report on the assessments, made by management.

Implementation of SOX 404 began with U.S. accelerated filers who were first required to provide management assessment and auditor attestation in annual reports for periods ending on or after November 15, 2004. Since 2004, all filers, other than non-accelerated filers (who now have been permanently exempted from the requirements of SOX 404(b) by the recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act), have phased into the SOX 404 regulatory scheme and are currently required to provide SOX 404(a) and (b) certifications in their annual reports.

In the six years since the initial implementation date of SOX 404, Audit Analytics has compiled annual reports and published data on the required auditor attestations and management assessments. The SOX 404 Dashboard - Year Six Update, published in October, reports that in year six of SOX 404, only 2.4% of filings contained adverse auditor attestation disclosures. This represents a more than 50% drop since year five, in which the adverse disclosure rate came in at 5%, and an even more significant drop since year one, in which the adverse disclosure rate was 16.9%. The study shows a steady decline in adverse auditor attestations throughout the six years of SOX 404’s existence and suggests that auditor involvement in the evaluation process may have led to the improvement of companies’ ICFRs. However, the study also shows that adverse disclosure rate for management-only assessments continues to be high—27.8% in 2010. Nonetheless, the year six figure reflects a drop from 32.3% in year five, 32.0% in year four, and 32.8% in year three. The study suggests that the high percentage of adverse management assessments indicates that non-accelerated filers fail to maintain ICFRs that are as reliable as ICFRs maintained by accelerated filers.

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Co-authored by Kenneth M. Rosenzweig and Christian B. Hennion

The Commodity Futures Trading Commission has requested comments on six rule proposals to implement additional provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

• Registration of Foreign Boards of Trade: Section 738 of the Dodd-Frank Act provides the CFTC with authority to implement a registration system for a foreign board of trade (FBOT) that provides direct access to its trading system to market participants located in the United States. The CFTC’s proposed rules would create a registration process for FBOTs to replace the existing system of staff-issued no-action relief (from which the proposed rules are substantially derived), and would make it unlawful for any FBOT to permit direct access to U.S. participants without first registering with the CFTC. An FBOT that seeks to provide direct access to participants in the United States must submit a registration application to the CFTC that includes information regarding the FBOT’s membership criteria, trading system, contracts to be made available to U.S. participants, settlement and clearing systems, home regulatory regime, and rules and rule enforcement. FBOTs currently operating pursuant to no-action relief would be required to apply for registration pursuant to a “limited” registration application process. The factors to be considered by the CFTC in determining whether to grant an FBOT application are substantially similar to those currently applicable to the no-action review process, including evaluation of whether the FBOT’s home regulatory authority oversees the FBOT in a manner that is comparable to CFTC oversight of designated contract markets (DCMs).

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On November 17, the Federal Reserve Board issued guidelines for evaluating proposals by large bank holding companies (BHCs) to undertake capital actions in 2011, such as increasing dividend payments or repurchasing or redeeming stock. According to the Board, “The criteria provide a common, conservative approach to ensure that BHCs hold adequate capital to maintain ready access to funding, continue operations, and continue to serve as credit intermediaries, even under adverse conditions.” Bank holding companies should consult with Federal Reserve staff before taking any actions that could result in a diminished capital base, including actions such as increasing dividends, implementing common stock repurchase programs, or redeeming or repurchasing capital instruments more broadly (planned capital actions).

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On November 17, the Federal Reserve Board requested comment on a proposed rule to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that give banking firms a defined period of time to conform their activities and investments to the Volcker Rule. The Volcker Rule generally prohibits banking entities from engaging in proprietary trading in securities, derivatives or certain other financial instruments, and from investing in, sponsoring or having certain relationships with a hedge fund or private equity fund. The statute generally provides banking entities two years to bring their activities and investments into compliance with the Volcker Rule, and allows the Board to extend this conformance period for specified periods under certain conditions. The proposed rule does not address other aspects of the Volcker Rule that are subject to separate rulemaking requirements by other agencies.

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Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act directs the Securities and Exchange Commission to study the extent to which designating one or more self-regulatory organizations (SROs) to augment its efforts in overseeing investment advisers would improve the frequency of examinations of investment advisers. In a November 2 comment letter to the SEC regarding its study, Richard Ketchum, Chairman and CEO of the Financial Industry Regulatory Authority, advocated establishing one or more investment adviser SROs. Chairman Ketchum wrote that the main problem with the oversight of investment advisers is the lack of examination resources. He pointed out that the SEC, despite its best efforts, is unlikely to successfully oversee investment advisers because of funding limits. He further added that cooperating with one or more SROs in the oversight process would help increase the frequency of examinations and resources devoted to enforcement, and suggested that FINRA would be ready and willing to assist the SEC. If FINRA were to seek authorization as an investment adviser SRO, it would create a separate affiliate, with its own Board of Governors, to ensure that the SRO establishes programs appropriate to the adviser industry.

In separate prior comment letters to the SEC, the Managed Funds Association, the Investment Adviser Association and the Investment Company Institute have each argued against establishing an investment adviser SRO.

To read FINRA’s letter click here.
To read the MFA’s letter click here.
To read the IAA’s letter click here.
To read the ICI’s letter click here.

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On November 9, the Federal Deposit Insurance Corporation approved a final rule to implement Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 343 provides temporary unlimited coverage for noninterest-bearing transaction accounts. This separate coverage will become effective on December 31, 2010, and will end on December 31, 2012. All funds held in such accounts are fully insured, without limit, and this coverage is separate from, and in addition to, the coverage provided to depositors for other accounts at an insured depository institution.

Noninterest-bearing accounts, as defined in Dodd-Frank, include only traditional, noninterest-bearing demand deposit (or checking) accounts that allow for an unlimited number of transfers and withdrawals at any time, whether held by a business, individual or other type of depositor. The final rule expressly states that Negotiable Order of Withdrawal (NOW) and Interest On Lawyers Trust Accounts (IOLTAs) are not covered under the Dodd-Frank definition of noninterest-bearing transaction accounts and do not qualify for temporary unlimited coverage. Insured institutions must post a notice in the main office, in every branch and on the bank’s website, and must further mail notice to all holders of NOW and IOLTA accounts no later than December 31.

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On November 9, the Federal Deposit Insurance Corporation approved two proposed rules that would amend the deposit insurance assessment regulations. The first would implement a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act that changes the assessment base from one based on domestic deposits (as it has been since 1935) to one based on assets. The second proposal would re-propose changes for the deposit insurance assessment system for large institutions ($10 billion and higher) given Dodd-Frank’s changes to the assessment base. This proposal replaces a proposed rule approved by the FDIC Board in April.

In accordance with a provision in Dodd-Frank, the FDIC is proposing to change the assessment base from adjusted domestic deposits to average consolidated total assets minus average tangible equity. Since the new base would be much larger than the current base, the FDIC is also proposing to lower assessment rates, which achieves the FDIC’s goal of not significantly altering the total amount of revenue collected from the industry.

The second assessment-related item replaces a proposed rule revising the deposit insurance assessment system for large institutions that was approved by the FDIC on April 13. The proposal approved on November 9 would eliminate risk categories and debt ratings from the assessment calculation for large banks and would instead use scorecards. The scorecards would include financial measures that are predictive of long-term performance.

The proposed rule incorporates a change in the timing of assessments in that it appears to measure when risk is assumed as opposed to when problems develop. Speaking of this forward view of assessment, FDIC Chairman Sheila Bair stated, “Over the long term, institutions that pose higher risk would pay higher assessments when they assume these risks rather than when conditions deteriorate. During the crisis, it became clear that our large bank pricing metrics were lagging indicators of financial deterioration, to a greater extent than the metrics we use for smaller institutions.”

Both proposals will have a 45-day comment period upon publication in the Federal Register. The FDIC is also proposing that both changes in the assessment system be effective as of April 1, 2011.

Click here to read the first notice of proposed rulemaking.
Click here to read the second notice of proposed rulemaking.

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Co-authored by Palash Pandya

On November 3, the Securities and Exchange Commission issued proposed rules for implementing the whistleblower provisions added to Section 21F of the Securities Exchange Act of 1934 by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the proposed rules, the SEC will pay an award or awards to one or more whistleblowers who voluntarily provide the SEC with original information that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million.

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Co-authored by Janet M. Angstadt

The Financial Industry Regulatory Authority released a notice requesting comment on its proposal that would require member firms at or prior to commencing a business relationship with a retail customer to provide a written statement to such customer describing the types of accounts and services it provides, potential conflicts associated with such services and any limitations on the duties the firm otherwise owes to retail customers.

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Co-authored by Janet M. Angstadt

On November 3, the Securities and Exchange Commission proposed a new rule under the Securities Exchange Act of 1934 (Exchange Act) that is intended to prevent fraud, manipulation and deception in connection with the offer, purchase or sale of any security-based swap, the exercise of any right or performance of any obligations under a security based-swap, or the avoidance of such exercise or performance.

Section 761(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act defines a “security-based swap” as “any agreement, contract, or transaction that is a swap, as defined in Section 1(a) of the Commodity Exchange Act, that is based on a narrow-based security index, or a single security or loan, or any interest therein or on the value thereof, or the occurrence or non-occurrence of an event relating to a single issuer of a security or the issuers of securities in a narrow-based security index, provided that such event directly affects the financial statement, financial condition or financial obligations of the issuer.”

A key characteristic of most security-based swaps, as compared to other securities, is the obligation for and right to ongoing payments or deliveries between the parties throughout the life of the security-based swap. The exercise of such rights or performance of such obligations under a security-based swap presents opportunities and incentives for fraudulent conduct. Parties to a security-based swap may engage in misconduct to trigger, avoid or affect the value of such ongoing payments or deliveries. To address the increased exposure to fraudulent conduct related to security-based swaps, the SEC is proposing Exchange Act Rule 9j-1.

The proposed rule would subject security-based swaps, as securities, to the general antifraud and anti-manipulation provisions of the federal securities laws (e.g., Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933), but would also explicitly reach misconduct that is in connection with the “exercise of any right or performance of any obligation under” a security-based swap. Therefore, the proposed rule would explicitly reach misconduct in connection with the ongoing payments or deliveries characteristic of security-based swaps. Misconduct to trigger, avoid or affect the value of such ongoing payments or deliveries would be explicitly prohibited.

Click here to read the full text of the SEC release.

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Co-authored by Kenneth M. Rosenzweig

The Commodity Futures Trading Commission announced that it will hold a public meeting to propose rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding: (1) registration of foreign boards of trade; (2) registration of swap dealers and major swap participants; (3) implementation of the new whistleblower provisions of the Commodity Exchange Act; (4) conflict of interest policies and procedures for futures commission merchants (FCMs), introducing brokers, swap dealers and major swap participants; and (5) FCM, swap dealer and major swap participant compliance policies.

The meeting will take place at 1:00 p.m. Eastern on November 10.

The CFTC’s press release, which includes information on viewing a webcast of the meeting, can be found here.

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The Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 21F to the Securities Exchange Act of 1934. Section 21F mandates that the Securities and Exchange Commission, pursuant to regulations prescribed by the SEC, pay awards to eligible whistleblowers who voluntarily provide the Commission with “original information” about a violation of federal securities laws that leads to the successful enforcement of a “covered judicial or administrative action.” The Dodd-Frank Act mandated awards range between 10% and 30% of monetary sanctions imposed, where such sanctions exceed $1 million. The SEC intends to propose whistleblower rules at its open meeting next Wednesday, November 3.

At a recent conference organized by the National Association of Corporate Directors, SEC Chairman Mary Shapiro, responding to concerns voiced that the Dodd-Frank whistleblower program would give employees at public companies very strong incentives to bypass corporate whistleblower programs and report alleged violations directly to the SEC, stated, “It is not our desire in any way, shape, or form to undermine the processes that great public companies have built in to ensure that they handle whistleblowers appropriately. We don’t want to undermine what we view as a critically important component of regulation, and that is the corporate effort to ensure that whistleblowers are heard and their information is acted upon reasonably, and problems are fixed early on.” Whatever rules are proposed by the SEC, they will need to address the balance between preserving corporate whistleblower programs and implementing the Dodd-Frank mandate.

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Co-authored by Kenneth M. Rosenzweig and Christian B. Hennion

The Commodity Futures Trading Commission has issued five rule proposals and an advance notice of proposed rulemaking, five of which relate to rulemakings required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The sixth is not mandated by the Dodd-Frank Act, and relates to permitted investments of customer funds and funds held in foreign futures accounts.

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Co-authored by Kenneth M. Rosenzweig and Christian B. Hennion

The U.S. Treasury Department has requested public comment on whether foreign exchange swaps and forwards should be exempted from the definition of a “swap” under the Commodity Exchange Act (CEA). Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Secretary of the Treasury is permitted to make a determination that foreign exchange swaps, foreign exchange forwards, or both, should be excluded from the CEA’s “swap” definition, based on consideration of various enumerated factors.

In its request for comment, the Treasury has solicited comment on several specific questions, including the primary risks of, and risk management techniques in use in, the foreign exchange swaps and forward markets, and how mandatory clearing and exchange trading might affect market liquidity in the U.S. dollar, as well as U.S. dealers and end-users. The comment period expires on November 29.

A copy of the Treasury’s request for comments is available here.

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Co-authored by Kenneth M. Rosenzweig and Christian B. Hennion

In response to certain amendments made by the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to swaps in “agricultural commodities,” the Commodity Futures Trading Commission has proposed to define “agricultural commodities” for the first time.

The CFTC’s proposed definition would include all of the “enumerated commodities” listed in Section 1a of the Commodity Exchange Act (CEA), as well as:

• commodities derived from living organisms that are “generally fungible” and used primarily for human food, shelter, animal feed or natural fiber;
• tobacco, products of horticulture, and such other commodities used or consumed by animals or humans and designated by the CFTC as agricultural commodities; and
• commodity-based contracts (e.g., basis swaps and qualifying index contracts) based wholly or principally on a single underlying agricultural commodity.

The CFTC has requested comments on a number of aspects of the definition, including its exclusion of biofuels, and its potential impact on swaps currently transacted pursuant to CEA Sections 2(g) and 2(h). The comment period expires on November 26.

A copy of the CFTC release is available here.

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On October 18, the Securities and Exchange Commission proposed new 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 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, 2011.

Inclusion of the say-on-pay or say-on-when proposal does not require the filing of a preliminary proxy statement. The proposed rules also require disclosure in Compensation Discussion and Analysis (CD&A) whether, and if so, how companies have considered the results of previous say-on-pay votes. The proposed rules require that shareholders shall be given a separate say-on-when vote to determine the frequency of the say-on-pay vote, i.e., whether it shall be as often as every year, every other year or once every three years. The separate say-on-when vote must occur at least once every six years. Because companies that have received Troubled Asset Relief Program (TARP) funds are required to have annual say-on-pay votes, these companies are exempt from the requirement to include a say-on-when proposal until the company is no longer subject to the TARP restrictions. While the proposed rules require smaller reporting companies to include a say-on-pay vote, smaller reporting companies can continue to follow the scaled compensation disclosure requirements and are not required to include CD&A.

The proposed rules also require institutional investment managers who are required to file Form 13F (generally those who manage publicly traded equity securities having an aggregate fair market value of at least $100 million) to file Form N-PX, Annual Report of Proxy Voting Record, by August 31 of each year to report the manager’s votes relating to the say-on-pay, say-on-when and golden parachute matters described above. Form N-PX, which is currently required to be filed by registered management investment companies, is being amended for use by institutional investment managers as well.

The comment period for the proposed rules closes on November 18.

Click here and here to read the text of the proposed rules.

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Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission has announced that it will be holding a public meeting on Tuesday, October 26 at 9:30 a.m. Eastern to consider the issuance of several proposed rulemakings. Proposed rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act that will be discussed at the meeting include:

• prohibition of market manipulation and disruptive trade practices;
• provisions common to registered entities;
• removing any reference to or reliance on credit ratings in CFTC regulations and proposing alternatives; and
• process of review of swaps for mandatory clearing.

In addition, the CFTC will consider one proposed rulemaking not arising out of the Dodd-Frank Act involving CFTC Rule 1.25, the investment of customer funds and funds held in an account for foreign futures and foreign options transactions.

The meeting will be webcast on the Internet, and the audio feed of the meeting will be available on a listen-only conference call.

The webcast of the meeting can be accessed at www.cftc.gov. The listen-only conference call can be dialed in to at 1-866-844-9416, with a pass code of 28228.

The Federal Register releases concerning the proposed rulemakings to be discussed can be accessed here.

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Co-authored by Seth M. Messner

The Securities and Exchange Commission has proposed Rule 202(a)(11)(G)-1 under the Investment Advisers Act of 1940, as amended (Advisers Act), to define “family offices” that would be excluded from the definition of “investment adviser.” The proposed rule was mandated in Section 409 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Act).

Family offices are established by wealthy families to manage their wealth, plan for their families’ financial future and provide other services to family members. Absent an exclusion, family offices would typically fall under the definition of investment adviser under the Advisers Act.

Many family offices have previously relied on the exemption from registration under the Advisers Act in Section 203(b)(3) for an investment adviser who during the course of the preceding 12 months has had fewer than 15 clients and who neither holds itself out generally to the public as an investment adviser nor acts as an investment adviser to any investment company or business development company. The Act eliminated the exemption contained in Section 203(b)(3), effective July 21, 2011.

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Section 766 of the Dodd-Frank Wall Street Reform and Consumer Protection Act generally requires security-based swaps that were entered into prior to July 21 and which were still outstanding as of that date (“pre-enactment unexpired security-based swaps”) to be reported. Pursuant to that requirement, the Securities and Exchange Commission adopted an interim final rule (the Rule) in an effort to implement these reporting requirements pending the adoption of final rules relating to the reporting of security-based swaps and associated recordkeeping requirements. In addition, the Rule includes an interpretive note (the Note) which imposes current recordkeeping obligations on the parties to pre-enactment unexpired security-based swaps.

Reporting Obligations

New Rule 13Aa-2T under the Securities Exchange Act of 1934 requires that a counterparty to a pre-enactment unexpired security-based swap transaction submit certain information to a registered security-based swap data repository or to the SEC by the earlier of: (x) the compliance date that will be established by SEC rules, or (y) within 60 days after a security-based swap data repository is registered with the SEC and becomes operational. The information required to be reported includes: (1) a copy of the transaction confirmation in electronic form, if available, or in written form if there is no electronic copy; and (2) if available, the time the transaction was executed. The Rule also requires the parties to pre-enactment unexpired security-based swap transactions to provide the SEC with any information relating to these transactions that the SEC may request.

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Co-authored by Vanessa Friedman

The Commodity Futures Trading Commission has announced that it will hold a meeting next week to address proposed rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding: (i) the definition of “agricultural commodity”; (ii) position reports for physical commodity swaps and options on physical commodity swaps; (iii) increasing privacy protections for consumer financial information under the Gramm-Leach-Bliley Act; and (iv) rules concerning business affiliate marketing and discarding consumer information under the Fair Credit Reporting Act.

The meeting will take place at 9:30 a.m. on October 19. Please click here to see the CFTC’s press release for information on attending the meeting in person or online, or listening in via conference call.

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Co-authored by Vanessa Friedman

Two of the proposals approved by the Commodity Futures Trading Commission at its meeting on October 1 and reported in the October 8, 2010 edition of Corporate and Financial Weekly Digest were published for comment in the Federal Register on October 14.

The release requesting comment on the CFTC’s interim final rule requiring the reporting of certain information concerning unexpired swaps entered into prior to the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act is available here. The comment period ends November 15.

The release requesting comment on the CFTC’s proposed rules regarding financial resources requirements for derivatives clearing organizations is available here. The comment period ends December 13.

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Co-authored by Christian B. Hennion

In connection with its ongoing implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Commodity Futures Trading Commission last Friday voted to propose several rules for publication in the Federal Register. The CFTC proposals include rules relating to the financial resources requirements for derivatives clearing organizations (DCOs) and the mitigation of conflicts of interest by DCOs, designated contract markets (DCMs), and swap execution facilities (SEFs).

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Co-authored by James B. Anderson

On September 29, the Securities and Exchange Commission adopted an amendment, effective upon publication in the Federal Register, to remove the specific exemption from Regulation FD for issuer disclosures made to nationally recognized statistical rating organizations and credit rating agencies, as required by Section 939B of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Under Rule 100(b)(2)(iii) of Regulation FD as in effect prior to the SEC’s final rule, the issuer or person acting on its behalf need not publicly disclose the material nonpublic information if the disclosure of such information is made to a credit rating agency that makes its credit ratings publicly available, or is made pursuant to Rule 17g-5(a)(3) to a nationally recognized statistical rating organization.

Regulation FD was adopted to address the problem of selective disclosure made to those who would reasonably be expected to trade securities on the basis of the information or provide others with advice about securities trading, by requiring that when an issuer, or any person acting on its behalf, discloses material nonpublic information to certain enumerated persons (including brokers, dealers, investment advisers, institutional investment managers, investment companies and certain persons associated with the foregoing and holders of the issuer’s securities), the information must also be publicly disclosed.

Following the removal of the Regulation FD exemption for rating agencies, if a rating agency is determined to be one of the enumerated persons covered by Regulation FD, or if a rating agency is deemed to be acting on behalf of the issuer and the rating agency discloses material nonpublic information to one of the enumerated persons covered by Regulation FD, then the obligations of Regulation FD could apply to information disclosed by the issuer to the rating agency, unless the rating agency expressly agrees to maintain the disclosed information in confidence as set forth in Rule 100(b)(2)(ii) of Regulation FD.

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

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Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission has published an Advanced Notice of Proposed Rulemaking seeking public comment regarding the appropriate regulatory treatment of agricultural swaps.

The Dodd-Frank Wall Street Reform and Consumer Protection Act provides that “swaps” (which are defined to include options) in an “agricultural commodity” (as defined by the CFTC) are prohibited unless entered into pursuant to a rule, regulation or order of the CFTC adopted pursuant to section 4(c) of the Commodity Exchange Act (CEA), the CFTC’s general exemptive authority.

The CFTC notes that, under the current regulatory framework, Part 35 of its Regulations permits bilateral over-the-counter agricultural swaps between eligible counterparties subject to certain requirements, while Part 32 of the Regulations separately permits certain counterparties to enter into “agricultural trade options,” also subject to certain requirements.

Because Part 35 of the CFTC Regulations was promulgated under the CFTC’s exemptive authority under Section 4(c) of the CEA, the swaps exemption under Part 35 continues to be effective pursuant to Section 723(c)(3) of the Dodd-Frank Act. However, Part 32 of the CFTC Regulations, which was promulgated under the CFTC’s plenary authority regarding commodity options under Section 4c(b) of the CEA, has been superseded by Dodd-Frank, and the CFTC must therefore promulgate new regulations concerning options on agricultural commodities.

The CFTC is seeking comment on the appropriate conditions, restrictions or protections to be included in any CFTC regulation or order governing the trading of agricultural swaps and agricultural options, as well as information regarding the current market in agricultural swaps and options and the impact of clearing requirements on the current market.

The Federal Register release concerning the proposed rulemaking, including the method for submitting comments, can be found here.

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On September 27, the Federal Deposit Insurance Corporation (FDIC) Board of Directors approved the issuance of a proposed rule to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act to provide depositors at all FDIC-insured institutions unlimited deposit insurance coverage on noninterest-bearing transaction accounts beginning December 31, 2010, through December 31, 2012. Under the proposal, the FDIC will create a new, temporary deposit insurance category for noninterest-bearing transaction accounts. These accounts are primarily checking accounts used by businesses for payrolls, accounts payable and other purposes.

Unlike the FDIC’s voluntary Transaction Account Guarantee (TAG) Program, which will expire at the end of this year, the Dodd-Frank provision will apply at all FDIC-insured institutions, and it will cover only traditional checking accounts that do not pay interest. The proposed rule emphasizes that, starting January 1, 2011, low-interest consumer checking accounts and Interest on Lawyer Trust Accounts (IOLTAs) (currently protected under the TAG Program) will no longer be eligible for an unlimited guarantee.

The proposed rule requires insured depository institutions to provide notice and disclosure requirements to ensure that depositors are aware of and understand the types of accounts that will be covered by this temporary deposit insurance coverage. To comply with the disclosure and notification requirements, institutions must: post a notice in their main office, each branch and, if applicable, on their website; notify customers currently covered by the FDIC’s TAG Program that, beginning January 1, 2011, low-interest checking accounts and IOLTAs no longer will be eligible for unlimited guarantee; and notify customers individually of any action they take that will affect the deposit insurance coverage of funds held in noninterest-bearing transaction accounts.

The FDIC will be accepting comments on the proposed rule through October 15.

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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 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 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 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 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

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 Joshua A. Penner

The Commodity Futures Trading Commission has published a Federal Register notice seeking public input on the CFTC’s proposed rulemaking areas to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act.

On July 21, the CFTC released the list of 30 areas of rulemaking for over-the-counter derivatives to implement the Act. The CFTC has made separate electronic mailboxes available for comments with respect to 29 of the 30 individual areas, as well as a general comment mailbox (the addresses for which mailboxes can be found in the Federal Register notice). The CFTC has indicated that the views of interested parties may be considered in the pre-proposal process but will not be treated as official comments on specific proposed rules.

The CFTC will accept submissions on each rulemaking topic until such time as it publishes a proposed rule for that topic in the Federal Register. Thereafter, it will accept official comments on such proposed rules until the close of the proposed rule’s official comment period. All submissions provided to the CFTC will be published on the CFTC’s website. The submissions will not be subject to pre-publication review, and personally identifying information will not be removed.

The CFTC press release regarding the Federal Register release can be found here.
The Federal Register release can be found here.

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On August 18, the Securities and Exchange Commission provided notice that at an open meeting on August 25, the Commission will consider whether to adopt changes to the federal proxy and other rules to facilitate director nominations by shareholders.

In June 2009, the SEC proposed proxy access rules, but delayed adopting them pending confirmation, in the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, of its power to implement such rules. Speculation with respect to the new rules centers primarily around the percentage and duration of ownership necessary to require the company to include the stockholder’s nominees in the company’s proxy statement and whether there will be some relief for smaller public companies.

The SEC’s Sunshine Act Notice can be accessed here.
The SEC’s 2009 Proxy Access proposal can be accessed here.

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Co-authored by Vanessa L. Friedman

The Commodity Futures Trading Commission and the Securities and Exchange Commission have issued a joint advance notice of proposed rulemaking (the Joint Notice) seeking public comment regarding the agencies’ mandate to regulate swaps and security-based swaps under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Joint Notice requests public comments on the CFTC’s and SEC’s joint regulation of “mixed swaps” and the adoption of regulations further defining the following terms: (1) “swap”; (2) “security-based swap”; (3) “swap dealer”; (4) “security-based swap dealer”; (5) “major swap participant”; (6) “major security-based swap participant”; (7) “eligible contract participant”; and (8) “security-based swap agreement”. The comment period for the Joint Notice expires on September 20.

A copy of the Federal Register release of the Joint Notice is available here.

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Co-authored by Vanessa L. Friedman

The Commodity Futures Trading Commission has withdrawn its January proposal to establish federal speculative position limits for futures and option contracts on certain energy products. In its withdrawal notice, the CFTC cited the significant revisions to the Commodity Exchange Act (CEA) introduced by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFTC plans to issue a notice of rulemaking and propose position limits for exempt and agricultural commodity derivatives, including energy derivatives, in compliance with the CEA as amended by the Dodd-Frank Act (which requires the CFTC to establish limits for exempt and agricultural commodity derivatives within 180 days and 270 days, respectively, of the date of enactment of the Dodd-Frank Act).

The notice of the CFTC withdrawal is available here.

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Co-authored by Christina Grigorian

On August 10, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Office of Thrift Supervision (collectively, the Banking Agencies) issued an advanced notice of proposed rulemaking regarding the use of credit ratings in the Banking Agencies’ risk-based capital rules (the Proposal). The issuance is in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires federal agencies to review, no later than one year after enactment, any regulation that requires use of an assessment of creditworthiness of a security or money market instrument and any references to, or requirements in, regulations regarding credit ratings. Where feasible, the Banking Agencies are also required to remove references or requirements to rely on credit ratings and to substitute an alternative standard of creditworthiness.

The Proposal describes where the Banking Agencies rely on credit ratings in their regulations. It also includes an informative table that provides an overview of where credit ratings are referenced in such regulations and used as a basis for capital requirements. The Banking Agencies will use the information they collect in response to the questions set forth in the Proposal to begin to develop an alternative to the use of credit ratings in their respective capital rules.

Comments are due to the Banking Agencies within 60 days after publication in the Federal Register.

For more information, click here.
 

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On August 10, the Federal Deposit Insurance Corporation Board of Directors adopted a final rule amending its insurance regulations (12 C.F.R. Part 330) and advertising regulations (12 C.F.R. Part 328) to conform with provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permanently increased the standard maximum deposit insurance amount (SMDIA) from $100,000 to $250,000. This permanent increase in the SMDIA became effective July 22 and is retroactive to January 1, 2008.

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Co-authored by Palash Pandya

On July 23, the Securities and Exchange Commission's Division of Corporation Finance issued a new Compliance and Disclosure Interpretation (CDI) in connection with the change to the definition of "accredited investor" under Rules 215 and 501 of the Securities Act of 1933 mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act). As reported in the July 23 edition of the Corporate and Financial Weekly Digest, Section 413 of the 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). CDI 179.01 (as well as CDI 255.47 which is identical), while confirming that the exclusion was effective upon enactment of the Act, also states that the SEC will issue amendments to its rules to conform them to the adjusted net worth standard in the Act. CDI 179.01 also states that while the value of the person's primary residence must be excluded when determining net worth for purposes of Rules 215 and 501(a)(5), pending implementation of the changes to the SEC rules, the related amount of indebtedness secured by the primary residence up to its fair market value may also be excluded when determining net worth for purposes of such Rules. However, indebtedness secured by the residence in excess of the value of the home should be considered a liability and deducted when determining net worth for purposes of Rules 215 and 501(a)(5).

In addition, the SEC's Division of Corporation Finance withdrew CDI 255.13, which provided that an investor may include the estimated fair market value of his principal residence as an asset for purposes of Rule 501(a)(5). The withdrawal was necessary to be consistent with Section 413(a) of the Act.

CDI 179.01 can be found here.

Katten's July 23 edition of the Corporate and Weekly Financial Digest can be found here.
 

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Co-authored by Jonathan Weiner

On July 27, Securities and Exchange Commission Chairman Mary Schapiro announced that the SEC is soliciting public comments in connection with regulatory initiatives required to be undertaken by the SEC pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act). The SEC is generally required by law to establish a public comment period at the time it proposes rules or rule amendments. However, because of the volume of new regulations required by the Act and the time constraints imposed, the public will have the opportunity to express its views (and will have access to others’ views) on various topics requiring regulatory rulemaking and study under the Act even before the SEC proposes rules or amendments. To facilitate this process, the SEC has established a web-based platform for members of the public to submit and review comments on each of the various topics that will be subject to SEC rulemaking and study.

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Two little-noted provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), enacted on July 21, have the potential to make less attractive a "safe harbor" exemption for private placements of securities currently available under the Securities Act of 1933, as amended (the '33 Act).

Rule 506 of Regulation D, promulgated under the '33 Act, has provided, subject to other provisions of Regulation D, a "safe harbor" for the sale of securities to an unlimited number of "accredited investors" as well as to no more than 35 sophisticated investors who are not "accredited investors." The Dodd-Frank Act provides for the narrowing of the definition of "accredited investor" and adds "bad boy" provisions to Rule 506 of Regulation D.

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Yesterday, the Senate approved the Dodd-Frank Wall Street Reform and Consumer Protection Act with no changes to the governance provisions of the Conference Committee version of the bill. President Obama is expected to sign it in the near future. The bill includes significant changes to corporate governance and executive compensation and disclosure applicable to publicly traded issuers. Provisions address say on pay, proxy access, compensation clawbacks, compensation committee independence and further restrictions on broker discretionary voting.

Click here to read the Katten Client Advisory providing a more detailed discussion of these Dodd-Frank provisions.
Click here to read the bill.

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Earlier this week, the House of Representatives approved the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Senate vote has been delayed until mid-July with signing by President Obama expected thereafter. The bill includes significant changes to corporate governance and executive compensation and disclosure applicable to publicly traded issuers. Provisions address say on pay, proxy access, compensation clawbacks, compensation committee independence and further restrictions on broker discretionary voting. Of note is that the majority voting requirement that would have required directors in uncontested elections to be approved by a majority of the votes cast was dropped from the Senate version of the bill.

An upcoming Katten Client Advisory will provide a more detailed discussion of the Dodd-Frank provisions.

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