PLC Global Finance update for January 2011: United States

The United States update for January 2011 for the PLC Global Finance multi-jurisdictional monthly e-mail.


Dispute resolution

Litigation year in review

Herbert S. Washer ( , and Christopher R. Fenton

Developments in private securities litigation

One of the single most important developments in private securities litigation in 2010 for foreign issuers, and US issuers that raise capital in foreign markets, was undoubtedly the Supreme Court's decision in Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010) (See Legal update, Congress acts quickly to curtail the impact of the Supreme Court's recent decision barring the extra-territorial application of US securities laws.) In that case, the Supreme Court held that the anti-fraud provisions of the US securities laws, like Section 10(b) of the Securities Exchange Act of 1934, apply only to:

  • Transactions in securities listed on an American exchange.

  • Transactions in any other securities in the United States.

Consequently, investors who purchased securities on foreign exchanges may no longer seek damages in US courts under the US securities laws.

Since June 2010, when the Supreme Court issued its opinion, plaintiffs' attorneys have struggled to re-interpret Morrison to create a loophole that allows investors in foreign securities to assert fraud claims under US securities laws in spite of the Supreme Court's bright-line test. To date, all of the courts that have ruled on these arguments thus far have rejected them. (See Legal update, Plaintiff's attempts to re-write Morrison to apply Section 10(b) to foreign securities encounter resistance from US judges.)

In 2011, it is likely that plaintiffs' attorneys will continue to seek ways around Morrison. In the latest decision to interpret Morrison, the Court dismissed Section 10(b) claims based on swap agreements referencing foreign-traded securities that were executed in the United States and governed by New York law. (See Elliot Associates v. Porsche Automobil Holding SE, Civ. Action No. 10-4155, slip. op. at 8-13 (Dec. 30, 2010)), (Elliot Associates 2010). The Court was concerned not with the place where the parties entered into the swaps or the law they chose to govern their agreement, but with the underlying nature of the transaction at issue. Because it found that the swaps were the "functional equivalent" of trading in the underlying securities on a foreign exchange, the Court determined that they were beyond the reach of Section 10(b) (Elliot Associates 2010).

But other efforts to circumvent Morrison are expected, and in some cases, already underway. First, investors likely will seek to bring claims under foreign law in US courts. Plaintiffs will also attempt to assert claims in state court under state law. Finally, plaintiffs in some instances will abandon US courts altogether and asset their claims in foreign courts under foreign law. For example; on 10 January 2011, two US plaintiffs firms issued a press release announcing that they had filed a civil action in Utrecht Civil Court on behalf of a specially formed foundation comprised of investors from the US, Europe and elsewhere in connection with the collapse of Belgium-based financial services company, Fortis NV. (See PR Newswire: International investors join forces, 10 January 2011) (Newswire, 10 Jan 2011) The firms touted the foundation's action as " an important new avenue for pursuing international securities claims in the wake of last year's US Supreme Court decision in Morrison and "a valuable template for investor recoveries outside the US." (Newswire, 10 Jan 2011) These investors had previously brought a securities fraud class action in US court, but their claims were dismissed because the Court found that they had no meaningful connection to the US.

In the coming year, the Supreme Court has agreed to review three additional cases, each of which concerns important questions whose resolution promises to have a substantial impact on the landscape of private securities litigation:

  • In Janus Capital Group, Inc. v. First Derivative Traders, 09-525, the Supreme Court will address the question of whether a secondary actor can be held liable for participating in the drafting or dissemination of a misstatement that is not attributed to that actor. The Supreme Court's decision in this case is expected to more clearly define the line between conduct that is actionable under the federal securities laws and that which is merely aiding and abetting. This issue is of particular importance to underwriters and other professionals involved in the sale of securities, including lawyers and accountants.

  • In Matrixx Initiatives, Inc. v. Siracusano, 09-1156, the Supreme Court will address the standard for materiality, in particular, whether customer complaints about a product are material and therefore require disclosure, even if the number of complaints is not statistically significant. Matrixx presents the Supreme Court with the opportunity to adopt a bright-line disclosure rule that would not only provide publicly-traded companies that manufacture or sell products with clear guidelines about what to disclose and when, but also provide lower courts with a clearer basis on which to dismiss claims on the ground that they are immaterial as a matter of law.

  • In Erica P. John Fund, Inc. v. Halliburton, Co, No. 09-1403, the Supreme Court will decide whether a plaintiff asserting a Section 10(b) claim must affirmatively prove that defendants' alleged misconduct caused investors' losses in order to obtain certification as a class action. This case is particularly important because if the Supreme Court decides that plaintiffs must prove loss causation at the class certification stage, defendants will be presented with yet another meaningful opportunity to seek early dismissal of class claims—before defendants incur the burdens of fact discovery and before the aggregation of plaintiffs' claims creates extraordinary pressure to settle even meritless claims.

Trends in SEC enforcement

2010 was a transformative year for the Securities and Exchange Commission (SEC). At the beginning of the year, the SEC announced a series of reforms designed to substantially strengthen its ability to police the markets. The Enforcement Division was also re-tooled when it was given new mechanisms intended to afford it the type of leverage previously reserved for criminal law enforcement agencies, such as the ability to enter into cooperation, deferred prosecution and non-prosecution agreements. (Legal update, The 'new' SEC takes an aggressive stand on insider trading) According to the Director of Enforcement, the newly-minted cooperation initiative was a "potential game-changer" for the agency. Reinvigorated, the SEC also adopted an aggressive posture towards insider trading cases, many of which targeted foreign nationals and conduct abroad. (Legal update, The 'new' SEC takes an aggressive stand on insider trading) However, at that time, there was a serious question as to whether the SEC would have the resources necessary to effectively prosecute its new campaign.

Midway through last year, Congress came to the aid of the agency. As part of the Dodd-Frank Act, Congress enacted a series of laws designed to give incentives and protections to whistleblowers who voluntarily provide original information to the SEC, expand the reach of the agency's authority to prosecute claims against aiders and abettors, and authorise the SEC to seek more stringent penalties against all defendants in administrative proceedings. (Legal update, Congress empowers the 'new' Securities and Exchange Commission)

By the end of the year, the SEC had taken several significant steps towards meeting its enforcement objectives:

  • On 20 December 2010, the SEC announced that it entered into its first non-prosecution agreement. Carter's Inc., an Atlanta-based clothing store, entered into the agreement with the SEC concerning an "isolated" fraud perpetrated by the company's executive vice president of sales. (SEC Release No. 2010-252 (Dec. 20, 2010)) (SEC Release 2010). Carter's agreed to cooperate with the SEC in connection with its ongoing investigation, use best efforts to obtain full and complete cooperation of the company's current and former officers, directors, employees and agents, and provide full and truthful testimony, non-privileged documents, information and other materials. Carter's was not required to admit liability. (SEC Release 2010)

  • On 3 November 2010, the SEC announced its proposed rules for implementing the whistleblower program mandated by the Dodd-Frank Act and asked that all comments be submitted for the agency's consideration by 17 December 2010. One notable feature of the proposed rules is that persons with a pre-existing duty to report, attorneys who obtained information from client engagements, and independent public accountants who obtain information through an engagement required by law are not permitted to be whistleblowers. The SEC has also attempted to prevent company personnel from "front running" legitimate internal investigations by excluding from the definition of whistleblower any person who learns about a violation through a company's internal compliance program. The SEC has also attempted to discourage employees from bypassing their company's internal compliance program by considering higher percentage awards for whistleblowers who first report internally.

  • On 30 November 2010, the SEC also announced that it had charged an accountant and his wife who resided in San Francisco for leaking information to family members in London in a multi-million dollar international insider trading scheme. (SEC Release No. 2010-234 (Nov. 30, 2010) (SEC Release 30 Nov 2010). This particular investigation was unique because it was the first time that the SEC, Department of Justice and UK Financial Services Authority had worked together in an insider trading case. (SEC Release 30 Nov 2010)

In 2011, the SEC will likely continue to use its new cooperation tools and coordinate with other domestic and foreign regulators in order to maximize its ability to police the US securities markets.


Executive compensation and employee benefits

Changes to executive medical benefits under the Patient Protection and Affordable Care Act

Kenneth J. Laverriere ( , Doreen E. Lillienfeld, Sharon Lippett and Mark Gelman

On 10 January 2011, the US Internal Revenue Service (IRS) issued Notice 2011-1, delaying the application of provisions of the Patient Protection and Affordable Care Act of 2010, prohibiting insured group health plans from discriminating in favour of highly compensated individuals. The delay provides welcome relief to plan sponsors, many of whom would have been required to comply with the new requirements in 2011. Under the Notice, the discrimination provisions under the Act will not apply until after a transition period following the issuance of guidance or regulations under the Act.

The discrimination provisions under the Act apply discrimination rules to insured medical plans that are similar to the discrimination rules that apply to self-insured arrangements under existing law. As a general matter, however, the existing rules are ambiguous, and have not been clarified by the IRS. Nonetheless, understanding the basic structure of the rule for self-insured arrangements may serve as a guide for anticipating how the rule will be applied for insured arrangements after regulations have been issued under the Act. Even before the new rule comes into effect, employers will want to consider how it may apply to their executive medical arrangements, particularly new arrangements and amendments or renewals of severance arrangements providing post-employment medical benefits for executives.

Structure of current rule

The discrimination rules for self-insured plans prohibit discrimination in favour of highly compensated individuals with respect to eligibility and benefits. (Generally, a highly compensated individual is either a 10% shareholder or one of the five highest paid officers or highest paid 25% of all employees.) Whether a plan discriminates as to eligibility is determined either by:

  • A numerical test based on the percentage of all employees that in fact benefit or are eligible to benefit under the plan.

  • Based on whether the classification of employees that are covered under the plan discriminates in favor of highly compensated individuals.

Whether a plan discriminates as to benefits depends on whether the plan provides benefits to highly compensated individuals that it does not provide to all other participants. To comply with the benefits test under the current rule, the plan document must not permit discrimination in benefits in favour of highly compensated individuals and the plan must not actually discriminate in favour of such individuals in operation. While the regulations implementing the rule for self-insured plans do not define the term "benefits", they suggest that the term is to be broadly construed. In the case of both the eligibility and benefits tests, the regulations for self-insured plans raise a number of questions and issues concerning the application of the discrimination rule that are yet unresolved.

Effect of non-compliance for self-insured and insured plans

If a self-insured plan does not satisfy the discrimination requirements, the value of the discriminatory benefit is taxable to the highly compensated individuals. In contrast, under the Act, if an insured plan does not comply with the comparable discrimination rule, the sponsoring employer may be subject to monetary penalties of up to US$100 per day per employee discriminated against (capped at the lesser of US$500,000 and the amount paid for the plan by the employer in the preceding year). In addition, under the Act, employees may also have a private right of action to enforce the rule. It would appear that a participant who is not a highly compensated individual in an insured plan would have the right to file a lawsuit under the US Employee Retirement Income Security Act (ERISA) to compel the sponsoring employer to provide non-discriminatory benefits.

Exceptions under the Act

The Act potentially excludes two types of medical arrangements from the new rule, although it is likely that the scope of these exceptions will be clarified by future regulation:

  • Grandfathered plans. The new discrimination requirements do not apply to insured plans that are "grandfathered" under the provisions of the Act. A grandfathered plan is generally one that was in effect on 23 March 2010 and continues to maintain benefits and cost sharing requirements within parameters set by government regulations.

  • Former employee plans. The new discrimination requirements apparently do not apply to insured group health plans that have fewer than two active employees as participants. Plans that fit this requirement might be, for example, insured retiree-only plans that are not part of the sponsoring employers' plans covering active employees.

Identifying and correcting non-compliance

Where one of the limited exceptions under the Act is not available for an insured plan, the sponsoring employer will need to consider if the plan complies with the new discrimination requirements and, if it does not, how to achieve compliance with the Act's requirements. As potential discrimination issues frequently arise in connection with employment agreements or other executive severance arrangements, a first step to identifying potentially non-compliant arrangements is to review executive severance arrangements that provide for post-employment medical benefits to highly compensated individuals. Where benefits are found in an employment agreement or severance agreement with a highly compensated individual, the nature of the agreement may require the individual’s consent to any change. For this reason, even in advance of the effective date of the new rule, employers should give special attention to new arrangements or renewals of existing arrangements to ensure that they do not introduce or preserve discriminatory benefits that may require correction at a later date.

In addition, requirements affecting the taxation of deferred compensation plans under the US Internal Revenue Code may, in certain instances, limit an employer's ability to amend existing arrangements. In particular, where an employer intends to replace a potentially discriminatory benefit with one that complies with the discrimination rules, the employer will need to consider if the replacement is an acceleration or deferral of the payment of deferred compensation that would not be permitted under the Code.

For more information about the discrimination rule and deferred compensation requirements under the Code, please see our memorandum entitled Shearman & Sterling: Post-employment medical benefits for executives after health care reform.


Financial institutions

Busy agenda ahead for US bank regulatory agencies in 2011

Bradley K. Sabel ( , Hilary Allen ( and Gregg L. Rozansky

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) brought about several important changes to US banking law. The implications of the Act for US banks, US bank holding companies, and non-US banks that operate one or more US banking offices will become clearer in 2011, as important interpretive matters are addressed through the issuance of administrative regulations. Several of the important rulemakings expected to be issued this year by the US federal banking agencies, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve, are highlighted below.

The Volcker Rule

The so-called Volcker Rule provisions of the Act instruct the US federal financial agencies to prohibit US banking institutions and non-US banks with US banking operations from:

  • Conducting "proprietary trading".

  • "Sponsoring" and "acquiring" any interest in a "hedge fund" or "private equity fund".

  • Guaranteeing the performance of, or lending to, a sponsored, managed or advised hedge fund or private equity fund.

In addition, the Volcker Rule places a cap, of 10% of financial industry "liabilities", on M&A related growth for banking institutions and large financial groups operating in the United States.

The US federal financial agencies (including the OCC, FDIC and Federal Reserve) are tasked with establishing parameters for the several important exceptions to the Volcker Rule prohibitions and the Federal Reserve is charged with implementing the Volcker Rule compliance timetable within the boundaries set by the Act. The outcome of rulemakings will have an enormous impact on matters such as the extent to which non-US banks, whether or not operating in the United States, may have a relative advantage over US banking organisations in terms of trading and funds-related profits.

Important rules to watch:

  • Financial Stability Oversight Council recommendations to the US federal financial agencies on the interpretation and implementation of the Volcker Rule (due by 21 January 2011).

  • Final Federal Reserve regulations regarding the transition timetable for bringing activities and investments into compliance with the Volcker Rule (rules due by 21 January 2011). (Proposed rules relating to the compliance timetable were issued on November 2010.)

  • Proposed and final US federal financial agency rules interpreting and implementing the Volcker Rule (expected by end of June 2011; final rules due by 21 October 2011).

The "Collins Amendment": minimum capital requirements for US banks and US bank holding companies:

Section 171 of the Act (the "Collins Amendment") tightens minimum leverage and risk-based capital requirements for US bank holding companies (including those controlled by non-US parent companies) and certain large US banks. The Collins Amendment also effectively eliminates "Tier 1" regulatory capital treatment for trust preferred securities issued by US bank holding companies.

On 15 December 2010, the OCC, FDIC and Federal Reserve jointly proposed a rule that would implement the Collins Amendment's requirement that the federal banking agencies establish leverage and risk-based capital requirements for large financial groups that are quantitatively no less than those that currently apply to insured US depository institutions, regardless of their size. The proposed rule asks for industry feedback (due on 28 February 2011) on questions including:

  • How should the Collins Amendment requirements be applied to non-US banks in the context of:

    • applications to establish branches (where the Federal Reserve is required in certain cases to assess whether the non-US bank applicant's capital is equivalent to the capital that would be required of a US banking organisation);

    • in evaluating capital comparability in the context of non-US bank "financial holding company" declarations.

Important rule to watch:

  • Final US federal banking agency rules implementing the proposed rule issued on December 15th (possibly second half of 2011; no statutory deadline).

More stringent "safety and soundness” standards for large US bank holding companies

Under Title I of the Act, the Federal Reserve is responsible for adopting stricter prudential standards for US bank holding companies that hold US$50 billion or more in consolidated assets (for example; stricter than those standards that apply to smaller institutions). In addition, the Federal Reserve and the FDIC are required to issue joint rules requiring these institutions to periodically submit plans for their rapid and orderly resolution (resolution plans or living wills). The Federal Reserve is authorised to apply several of these stricter standards/rules to non-US banking groups operating in the United States with greater than US$50 billion in consolidated assets.

Important rules to watch:

  • Proposed Federal Reserve rule to implement supervisory assessment fees for bank holding companies (and savings and loan holding companies) with consolidated assets of US$50 billion or more (expected by 31 March 2011).

  • Proposed and final Federal Reserve rule implementing the requirement, currently in effect, that the Federal Reserve be provided with written notice prior to acquiring a non-bank company with assets of US$10 billion or more (expected by 31 March 2011; final rule expected by 30 June 2011).

  • Proposed joint Federal Reserve and FDIC rule establishing requirements to prepare "resolution plan" (or living will) requirements (expected by 30 June 2011).

  • Proposed Federal Reserve rule establishing the following enhanced prudential standards (expected by 30 June 2011):

    • enhanced risk-based capital and leverage requirements;

    • liquidity requirements;

    • risk-management requirements;

    • credit exposure limits to any one unaffiliated entity and requirements for reports regarding significant credit exposures;

    • requirements for risk committees of the board of directors (applicable to publicly traded bank holding company with assets of at least US$10 billion);

    • requirements that the Federal Reserve and the company conduct internal and external stress tests;

    • requirements that institutions take increasingly stringent corrective measures as their financial conditions deteriorate.

Orderly liquidation authority of the FDIC

Title II of the Act authorises the FDIC to write regulations and policies to implement its resolution authority (referred to as the "orderly liquidation authority") over failing financial companies that could pose a significant threat to US financial stability (for example; systemically important US bank holding companies). On 19 October 2010, the FDIC proposed a rule to clarify the rights of creditors of institutions subject to the orderly liquidation authority.

Important rules to watch

  • Final FDIC rules regarding creditor rights (FDIC target is July 2011).

  • Final and proposed rules on industry assessments (on a post-failure basis) to pay the costs of an orderly liquidation (FDIC target for proposed rule is April 2011 and for a final rule is July 2011).

Other important anticipated regulations applying to US depository institutions, US bank holding companies, and/or non-US banking groups with US banking operations

Important rules to watch:

  • New rules for approval of bank transactions. Proposed and final Federal Reserve rules implementing the requirement that the Federal Reserve consider the stability of the US financial system when making a determination regarding mergers of banks and acquisitions of US bank holding companies (proposed rule expected by 31 March 2011; final rule expected by end of June 2011).

  • New rules for financial holding company status. Proposed and final Federal Reserve rules implementing requirements that a bank holding company demonstrate that it is "well-capitalised" and well-managed before it can qualify as a financial holding company (proposed rule expected by end of March 2011; final rule expected by end of June 2011). Existing US law only requires that US bank subsidiaries of bank holding companies meet these criteria.

  • Incentive compensation rule and disclosure. Proposed and final US federal financial agency rules to prohibit incentive-based compensation arrangements that discourage inappropriate risk-taking by financial institutions and to require the disclosure and reporting of certain incentive-based compensation information (proposed rule expected by end of March 2011; final rule due by 21 April 2011).

  • Capital and margin requirements for bank derivatives dealers and major market participants. Final rules by the appropriate bank regulatory agency setting capital and margin requirements by banking institutions required to register as a "swap dealer" or "major swap participant" (final rule due by July 2011).

  • Restrictions on transactions with insiders. Proposed Federal Reserve rule providing detail on limitations on US depository institution transactions with insiders such as executive officers and directors (expected by end of March 2011).

For a detailed discussion and analysis of these as well as other areas addressed by Dodd-Frank, please see our memorandum entitled: Landmark financial regulatory reform legislation passed by US Congress.

Shearman & Sterling LLP has also published separate client alerts regarding the Volcker Rule. Please see the latest memorandum entitled: Financial regulatory reform update: The Volcker Rule continues to garner outsized attention in the wake of passage of financial reform legislation.


Financial markets regulation

Year in review for asset managers

Nathan J. Greene ( , Geoffrey B. Goldman, Michael J. Blankenship , Russell D. Sacks and Jesse P. Kanach

Following on the confidence shaking volatility of 2008 and 2009 and the Madoff scandal of the same period, 2010 was a year of political reaction, with striking consequences for the US asset management industry. The Dodd-Frank Wall Street Reform and Consumer Protection Act was the publicity-grabbing tip of the iceberg (See Landmark financial regulatory reform legislation passed by US Congress) but US regulators also proposed a spate of new rules that directly target asset managers.

Here are some key highlights, with a look ahead to 2011, which is likely to see continued intense activity.

SEC rules adopted in 2010

  • Custody rules for investment advisers. New rules, already in effect, added requirements for investment advisers having actual or "deemed" (for example, access) custody to client assets. (See SEC amends investment adviser custody rules)

  • US money market funds. New rules already in effect tightened the operations of US money market funds (please see US money market fund reform initiatives adopted).

  • Short sales. A reinstated "uptick rule" will be implemented this quarter. The new rule places certain restrictions on short selling when a stock is experiencing a drop of 10% or more from the previous day's closing price. (Please see Short sales: a new circuit breaker)

  • "Pay to play" rules for investment advisers. New rules for political contributions by advisory firms and their personnel, and the use of placement agents to market to state and local government investors, come into effect this quarter. (Please see SEC adopts rules targeting "Pay to Play" practices by investment advisers)

  • Registration form for investment advisers. The newly overhauled Form ADV comes into effect this quarter. (Please see SEC finalises ten year effort to overhaul Form ADV for investment advisers)

  • Large traders. New rules that would require IDs and reporting for large traders (defined as a firm or individual whose transactions in exchange-listed securities equal or exceed two million shares or US$20 million during any calendar day, or 20 million shares or US$200 million during any calendar month) were proposed April 2010. The large trader reporting system enhances the SEC's ability to identify large market participants, collect information on their trades, and analyse their trading activity. (Please see SEC proposes large trader reporting system)

  • "Rule 12b-1" overhaul for US mutual funds. The SEC would revamp how mutual funds and their investors compensate intermediaries; the rulemaking was subject to scathing industry criticism and is presumed dead at least until the SEC completes its Dodd-Frank rulemaking cycle. (Please see In rule 12b-1 overhaul, SEC proposes dramatic changes to mutual fund distribution arrangements)

  • Investment adviser registration. The SEC will soon finalise new registration rules for US and non-US fund managers and other currently unregistered investment advisers; the underlying registration requirements mandated by Dodd-Frank come into effect July 2011. (Please see Dodd-Frank Act Rulemaking: SEC proposes new exemptions and disclosure requirements for investment advisers)

  • Whistleblowers. The SEC proposed Dodd-Frank whistleblower reporting, protection and bounty provisions in November 2010; citing budget constraints the SEC simultaneously announced it would not be opening the Congressionally mandated whistleblower office. (Please see SEC: SEC proposes new whistleblower program under Dodd-Frank Act)

SEC studies

  • Investment adviser "SRO" study. As required by Dodd-Frank, the SEC currently has a study open on the merits of an industry funded self-regulatory organisation for investment advisers. Such an SRO is opposed by investment advisers, who see expense and duplicative regulation, and supported by broker-dealers and by the existing broker-dealer FINRA. Results are expected mid-January 2011.

  • Investment adviser/broker-dealer harmonisation study. As required by Dodd-Frank, the SEC has a study open on the merits of harmonising the currently separate regulatory regimes for investment advisers and broker-dealers. Perhaps most controversial is the possibility of applying a "fiduciary duty" to broker-dealers.

SEC enforcement priorities

Volcker Rule and systemic risk regulation

  • Volcker Rule. Subject to a multi-year phase-in period, the Volcker Rule provisions of Dodd-Frank will limit the relationships that banking organisations can have with hedge funds and private equity funds. (Please see Shearman & Sterling's banking group's article in this PLC edition titled Busy agenda ahead for US banking regulatory agencies in 2011.)

  • Systemic risk. Dodd-Frank's newly established Financial Stability Oversight Council, a council of senior US financial regulators, has begun meetings to identify companies to be subject to heightened systemic risk regulation. Investment managers and investment funds are not currently viewed as direct targets of this initiative, but the statutory authority granted the new council is broad enough to potentially extend systemic risk oversight and regulation of asset management industry participants. (Please see Shearman & Sterling's banking group's article in this PLC edition titled Busy agenda ahead for US banking regulatory agencies in 2011.)

SEC no-action letters

  • Brumberg, Mackey & Wall, P.L.C. (17 May 2010) and Nemzoff & Company, LLC (30 November 2010). The SEC staff gave guidance as to the perennial question of what types of activities require broker-dealer registration; the staff declined to conclude that broker-dealer registration was not required if Brumberg, Mackey & Wall, P.L.C., a law firm, and Nemzoff & Company, a consulting company for not-for-profit hospitals, engaged in the limited referral activities described in their request letters in exchange for transaction-based compensation. (Please see SEC: Letter of no-action request and SEC: Letter of no-action request of of Nemzoff & Company LLC.)

FINRA rules

  • IPO allocations. FINRA adopted Rule 5131, which prohibits the allocation by a FINRA member (a category comprising nearly all SEC-registered broker-dealers) of new issue securities to any account (which can include an investment fund) in which an executive officer or director of a particular company of a public or covered non-public company has a beneficial interest of more than 25% of such account. (Please see SEC approves FINRA Rule regarding IPO allocation practices)

Derivatives regulation under Dodd-Frank

  • Comprehensive regulation of derivatives. Dodd-Frank will establish a comprehensive new regulatory framework for over-the-counter (OTC) derivatives. Authority over these products will be divided between the CFTC and the SEC. These new requirements are expected to change significantly the way the OTC derivative market operates, and include the following (for each of the notes below, please see Dodd-Frank Wall Street Reform and Consumer Protection Act: implications for derivatives).

  • Registration and regulation of “swap dealers” and "major swap participants". Firms that deal in OTC derivatives, take substantial net positions in OTC derivatives or create significant counterparty credit exposure will be required to register with the SEC and/or the CFTC and be subject to federal supervision and substantive regulation, including as to capital, margin, business conduct, documentation, recordkeeping and reporting.

  • Clearing and trading requirements. Some broad category of OTC trades will be required to be cleared through a regulated clearinghouse and traded on a regulated exchange or a regulated swap execution facility. A limited exemption from these requirements will be available for non-financial end-users of derivatives that are hedging commercial risk in connection with their business activities. Cleared OTC derivatives will generally have to be carried through a futures commission merchant or broker-dealer.

  • New margin and segregation requirements. Uncleared OTC trades may become subject to new margin requirements, although the extent to which such requirement will apply to non-financial end-users remains uncertain. Dealer counterparties will be required to offer third-party segregation of initial margin for uncleared swaps. These provisions are intended to address concerns raised in the wake of the Lehman Brothers insolvency with respect to the treatment of collateral held by insolvent brokers and dealers.

  • Position limits. The SEC and CFTC may impose position limits with respect to certain OTC and cleared derivative contracts.

  • Reporting requirements. OTC derivatives will have to be reported to a swap data repository, and pricing and other key economic data for OTC derivatives will be disseminated publicly.

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