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." FINRA Amends Sanction Guidelines The Financial Industry Regulatory Authority has revised two
sections of its Sanction Guidelines in response to recent FINRA
disciplinary cases. In particular, the amendments: 1) specify a causation standard for restitution orders; 2) allow FINRA adjudicators to order damages be paid to those
actually injured; 3) indicate that certain factors in determining sanctions may be
more relevant than others in a given disciplinary matter; and 4) instruct FINRA adjudicators to consider other regulators'
imposed sanctions in FINRA disciplinary matters. The Sanction Guidelines provide guidance for crafting sanctions
for potential violations of FINRA's rules. FINRA adjudicators
and FINRA's Department of Market Regulation and Enforcement
rely on these guidelines when determining sanctions and negotiating
settlements in disciplinary matters. The Sanction Guidelines
delineate General Principles Applicable to All Sanction
Determinations (General Principles) and the Principal
Considerations to be Used in Determining Sanctions (Principal
Considerations). FINRA Sanction Guidelines permit FINRA adjudicators to order
restitution to remediate misconduct. Restitution seeks to restore
the status quo by "disgorging" the unjust enrichment of
the wrongdoer. General Principal 5 allows adjudicators to calculate
orders of restitution based on the actual amount of loss sustained
due to the misconduct, and thus, FINRA restitution orders may
exceed the amount of the "ill-gotten gain." The
Securities and Exchange Commission requested that FINRA specify the
causation standard required under General Principle 5 when
restitution is ordered. Revised General Principle 5 clarifies that
"proximate causation" is the required standard. General Principle 6 recognizes FINRA adjudicators' ability
to impose fines in the amount of the financial benefit derived from
the wrongdoer's misconduct. The amendment to General Principle
6 allows FINRA adjudicators to order some or all of the amount
payable by the wrongdoer be paid to harmed customers, in addition
to applying the amount toward fines payable to FINRA. FINRA revised its Principal Considerations generally to clarify
that some of the enumerated factors used in determining sanctions
will be more relevant than others in a given disciplinary matter.
FINRA explains that not every enumerated factor will be aggravating
or mitigating depending on the facts and circumstances of a case or
the type of violation. Principal Consideration 14 instructs FINRA adjudicators to
consider sanctions imposed by other regulators arising from the
same misconduct at issue. For example, FINRA adjudicators should
consider sanctions imposed by state regulators in determining the
appropriate sanctions in its own adjudications. Click here to read FINRA Regulatory Notice
11-13. 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. These groups were not crisply defined by Commissioner Gensler,
but some salient characteristics of each are noted below: Early Group—To be finalized in the
spring. Rules in this group will include, without limitation,
entity definitions, registration requirements, the end-user
exception from clearing, large position reporting and
whistle-blowing. Middle Group—To be finalized
in the summer. Rules in this group will include, without
limitation, rules relating to clearinghouses, business conduct
standards for swap dealers, data and trading markets, as well as
rules for agricultural swaps, governance rules for derivatives
clearing organizations, designated contract markets and swap
execution facilities, and rules for segregation for uncleared
swaps. Late Group—To be finalized in late
summer and early fall. Rules in this group will include, without
limitation, those relating to disruptive trading practices, product
definitions, capital and margin requirements, supervision and
testing requirements and conforming rules. With respect to implementation, Commissioner Gensler said that
he favored a pragmatic approach. "We are looking to phase in
implementation, considering the whole mosaic of rules," he
said. He stated in particular that the CFTC would use the
flexibility given to it by the statute to specify effective dates
no earlier than 60 days after the adoption of a final rule
to provide for orderly implementation of related rules, explaining,
"So, even if we finish finalizing rules in a particular order,
that doesn't mean that the rules will be required to become
effective in that order. Implementation dates may be conditioned
upon other rules being finalized. Furthermore, we are looking at
phasing implementation dates based upon a number of considerations,
possibly including asset class, type of market participant and
whether the requirement would apply to market platforms, like
clearinghouses, or to specific transactions, such as real time
reporting. For example, we are considering whether a rule might
become effective for one asset class or one group of market
participants before it is effective for other assets or other
groups of market participants." The Commissioner's full speech can be found here. 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). On March 18, the Commodity Futures Trading Commission published
a proposed interpretive order regarding these disruptive trading
practices under the Dodd-Frank Act (and simultaneously terminated a
previously issued advance notice of proposed rulemaking on the same
subject). The proposed interpretive order provides market
participants with guidance regarding CEA Section 4c(a)(5) and
addresses concerns by market participants in response to the
advanced notice of proposed rulemaking. Items clarified by the
proposed interpretive order include the scope of Section 4c(a)(5),
what specific conduct and trading practices would violate the
statute, what it means to "violate" bids or offers, and
certain other terms set forth in the statute. Specifically, the CFTC's proposed interpretation of CEA
Section 4c(a)(5) provides for this purpose that: Section 4c(a)(5)(A) forbids "buying a contract at a price
that is higher than the lowest available offer price and/or selling
a contract at a price that is lower than the highest available bid
price." The CFTC's proposed interpretation would deem such
a purchase or sale to be in violation of Section 4c(a)(5)(A),
regardless of the intent of the buyer or seller. Comments on the proposed interpretive order must be received by
May 17. The Federal Register release is available here. 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. The U.S. Supreme Court found that allegations of
"statistical significance" were not a requirement for
pleading materiality in a securities fraud action arising from a
pharmaceutical company's alleged failure to disclose reports
linking its cold remedy with loss of smell. Plaintiff-shareholders alleged in the complaint that statements
made by defendant Matrixx relating to revenues and product safety
were misleading in light of reports that Matrixx had received, but
did not disclose, concerning consumers who had lost their sense of
smell after using Matrixx's Zicam cold remedy. Matrixx moved to
dismiss the complaint, arguing, among other things, that plaintiff
had failed to plead the elements of a material misstatement. The district court granted defendants' motion to dismiss,
finding that plaintiff had not alleged a statistically significant
correlation between the use of Zicam and smell loss so as to make
failure to publicly disclose the reports a material omission. The
U.S. Court of Appeals for the Ninth Circuit reversed, holding that
a materiality determination requires "delicate
assessments" of what a "reasonable shareholder"
would infer from a given set of facts, and found that the district
court had erred by requiring that the plaintiff specifically allege
the statistical significance of the reports to establish
materiality. The Supreme Court affirmed. It reasoned that Matrixx's
argument relied upon the flawed premise that statistical
significance is the only reliable indication of causation. The
Court found that medical professionals and researchers do not limit
the data they rely on only to statistically significant evidence,
and courts frequently permit expert testimony on causation based
upon evidence other than statistical significance. On this basis,
the Court concluded that in certain cases reasonable investors
could view non-statistically significant data as material, and thus
no such allegation should be required to plead materiality.
(Matrixx Initiatives, Inc. v. Siracusano, 2011 WL 977060
(U.S. March 22, 2011)) Plaintiff asserted a securities class action complaint against
Nextwave Wireless Inc., as well as certain of its officers and
directors. The complaint alleged that defendants made 17 statements
that were false and misleading to investors over an extended period
of time, and that as a result defendants were liable under Rule
10(b) of the Securities Exchange Act. The court had dismissed plaintiff's prior complaint and
directed plaintiff to file an amended pleading. Defendants moved to
dismiss the amended complaint, arguing that the complaint failed to
provide a plain and concise statement of plaintiff's claims as
required by the Federal Rules of Civil Procedure, and because the
complaint failed to adequately plead scienter under the Private
Securities Litigation Reform Act of 1995. In granting the motion, the district court criticized plaintiff
for including in the complaint large excerpts of defendants'
public statements with no indication of what particular statements
within those excerpts plaintiff considered false and misleading.
The court also found that plaintiff failed to allege how the
statements of various confidential witnesses on which plaintiff
relied amounted to scienter. The court allowed plaintiff one
additional opportunity to amend the complaint, but cautioned that
"if the complaint is again a chore to piece together, it will
be dismissed with prejudice." (Lifschitz v. Nextwave
Wireless Inc., et al., 2011 WL 940918 (S.D. Cal. March 16,
2011)) Today the Federal Deposit Insurance Corporation (FDIC) announced
a change in address for its Consumer Response Center (CRC) within
the Division of Depositor and Consumer Protection. This address
change requires all FDIC-supervised financial institutions to
update certain consumer notices, as described below, as soon as
practicable. FDIC Consumer Response Center 1100 Walnut St., Box #11 Kansas City, MO 64106 The discussion agenda for the Federal Deposit Insurance
Corporation's (FDIC's) open meeting includes: 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. Staff from the Federal Deposit Insurance Corporation's
(FDIC's) Division of Depositor and Consumer Protection will
host a teleconference on March 29 to discuss the 2010 Overdraft
Payment Program Supervisory Guidance issued in November 2010
(FIL-81-2010). The purpose of the call is to assist FDIC-supervised
institutions as they implement efforts to mitigate risk in response
to the expectations and recommendations identified in the guidance.
In addition to providing an overview of the guidance, staff will
address examination and implementation issues based on discussions
with, and questions received from, FDIC-supervised
institutions. As part of the transfer of the Bank Secrecy Act regulations from
31 CFR Part 103 to 31 CFR Chapter X, the Financial Crimes
Enforcement Network (FinCEN) has updated the regulatory citations
found in its forms to 31 CFR Chapter X. There have been no
substantive regulatory changes to the forms or the data elements
requested through them as a result of this update of the regulatory
citations. The updated forms are available for use here. Please note that FinCEN will
continue to accept and process older forms that contain citations
to 31 CFR Part 103. Click here to read more. Click here for a list of updates to each
form. On March 23, the UK Government announced its budget and tax
proposals for the UK tax year April 2011–April 2012.
Significant changes include: Bank Levy—There will be increases in
the UK bank levy payable by UK-based banks and the UK branches of
overseas banks from January 1, 2012. The new rates will be 0.078%
for short-term liabilities and 0.039% for long-term
liabilities. New Criteria for Investment Trust
Companies—An investment trust company is a
widely held quoted company which operates as a UK-based retail
investment fund in corporate form. Investment trust companies have
traditionally been faced with strict limitations on what they can
invest in and strict rules mandating diversity of investment. The
Government announced plans to liberalize these rules to allow
investment trust companies to follow a wider range of investment
practices. 1) An intention to fully reform the CFC rules so that,
generally, the attribution rules will apply only to the profits of
CFCs which have been artificially diverted elsewhere. There will be
a partial exemption for finance companies, resulting in a charge of
only one quarter of the full rate of UK corporation tax. By 2014,
this will mean that the effective tax rate for these companies will
be only 5.75%. The Government will consult on draft legislation in
May 2011 to take effect in 2012. 2) A series of interim reforms to include: an exemption for CFCs
whose main business is patent exploitation where the intellectual
property and CFC have little underlying connection to the UK, a
three-year "holiday" from the rules for CFCs which only
become UK CFCs because a foreign parent has been taken over by a UK
group, and a de minimis exemption for profits below £200,000
(approximately $322,000).
and
David A. Pentlow
SEC/CORPORATE
SEC Schedules Open Meeting to Consider Dodd-Frank Rules
Relating to Compensation Committees and their Consultants and
Advisors
BROKER DEALER
Revisions to General Principles
Revisions to Principal Considerations
OTC DERIVATIVES
Implementation Schedule for Dodd-Frank Swap Rules
CFTC
CFTC Publishes a Proposed Interpretive Order on Disruptive
Trading Practices under Dodd-Frank
INVESTMENT COMPANIES AND INVESTMENT ADVISERS
SEC Provides Temporary Relief for Investment Companies
Regarding Custody of Collateral to Support Cleared Interest Rate
Swaps
LITIGATION
Supreme Court Rejects Statistical Significance as Bright-Line
Rule for Materiality
District Court Dismisses Complaint for Failure to Adequately
Plead Scienter
BANKING
Address Change for FDIC's Consumer Response Center
FDIC to Hold Open Meeting on March 29
FDIC Staff Teleconference on Overdraft Payment Program
Supervisory Guidance on March 29
FinCEN Updates Regulatory Forms and Citations
UK DEVELOPMENTS
UK Government Announces 2011 Budget, Tax Changes
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