Plaintiffs whose securities lending collateral has dropped in value have brought several recent actions against two securities lending agents (“Lending Agent”). Two of these cases are discussed below.

• On October 21, 2008, plaintiffs brought a federal court action against a Lending Agent alleging the Lending Agent breached its fiduciary duties, imprudently invested securities lending collateral and inadequately disclosed losses on the collateral. In its complaint, the plaintiffs seek to withdraw from the Lending Agent’s securities lending program without loss, plus damages. According to press reports, the Lending Agent has stated that the collateral was invested in commingled funds, and it would be unfair to other clients if the plaintiffs were permitted to withdraw.
• On October 3, 2008, plaintiffs and a Lending Agent settled an action that the plaintiffs had brought against the Lending Agent in September with respect to the plaintiffs’ withdrawal from the securities lending program. The plaintiffs’ allegations included claims that the Lending Agent had mismanaged its investments by investing in risky securities and then refused to honor the plaintiffs’ attempted withdrawal from the securities lending program as losses were rapidly escalating. The plaintiffs sought to recover $7.5 million in losses and withdraw from the program. According to press reports, the matter was settled by the plaintiffs exiting the program at a $6.6 million loss. (Shortly before this settlement, the Lending Agent also announced that it was providing direct support to certain commingled funds which held certain securities and which were used for the investment of securities lending collateral.)
• In October 2008, plaintiffs filed suit in state court alleging that they had been defrauded and had suffered $17.5 million in losses as a result of the Lending Agent investing the plaintiffs’ securities lending collateral in illiquid, long-term securities, instead of high quality money market instruments.

For more information see: BP Corp. North America Inc. Savings Plan Investment Oversight Committee v. Northern Trust Investments, N.A., No. 08-CV-6029, (N.D. Ill); University of Washington v. Northern Trust Co., No. 08-CV-1458 (W.D. Wash.); Minnesota Workers’ Compensation Reinsurance Association, et al. v. Wells Fargo Bank et al. (CV-08-10825 (Ramsey Co. Dist. Ct. Minn.); and League of Minnesota Cities Insurance Trust v. Wells Fargo Bank, N.A. et al. , No. 0:08-CV-05147 (Dist. Minn.)
 

On November 3, 2008 petitioners filed for a writ of certiorari for Supreme Court review of Jones v. Harris Associates L.P., 527 F.3d 627 (7th Cir. 2008). The petitioners seek review of whether the Seventh Circuit erroneously held, in conflict with the decisions of three other circuits, that a shareholder’s claim that the fund’s investment adviser charged an excessive fee is not cognizable under Section 36(b) of the Investment Company Act, unless the shareholder can show that the adviser misled the fund’s directors who approved the fee. The response is due December 3, 2008.

For more information see: http://origin.www.supremecourtus.gov/docket/08-586.htm  

The Massachusetts Department of Consumer Affairs and Business Regulation has issued final regulations implementing the Commonwealth’s security breach law. These regulations become effective on January 1, 2009 and establish rigorous standards for safeguarding personal information.

For more information on the regulations please see the WilmerHale Client Alert, “Protection of Personal Information: Massachusetts Requires Comprehensive Information Security Policy” at: http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=8529.

On October 26, 2008, the first nine qualifying financial institutions (“QFIs”) entered into letter agreements styled “Major Financial Institution Commitments” (each a “Letter Agreement”) with the Treasury Department (“Treasury”) documenting the terms of Treasury’s investment in these institutions pursuant to the Capital Purchase Program (“CPP”) of the Troubled Asset Relief Program (“TARP”) under the Emergency Economic Stabilization Act of 2008. Each of the initial nine QFIs entered into a substantively identical Securities Purchase Agreement Standard Terms, which include forms of a preferred stock certificate of designations and warrant. Eight of the nine investments closed on October 28, 2008.

It appears that the Treasury Department intends to take a “one size fits all” approach to CPP documentation for QFIs that are bank holding companies which file periodic reports with the SEC. Future participating QFIs that are both bank holding companies and SEC reporting companies will be asked to enter into substantively identical agreements to those entered into by the initial participants.

For more information on TARP please see the WilmerHale Client Alert “Troubled Asset Relief Program Update: Treasury Completes Major Financial Institution Commitments” at:
http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=8532  

In October, the staff of the SEC’s Division of Investment Management issued a number of no-action letters to money market mutual fund advisers and/or other affiliates granting relief to permit such advisers and/or affiliates to engage in certain transactions with the funds. Such affiliated transactions are designed to help maintain a fund’s $1.00 net asset value per share. These affiliated transactions involve different support arrangements, including direct purchase by the affiliate of troubled securities in question from the affiliated fund and agreements to purchase the securities in the future if certain events occur.

For more information please see the SEC No-Action Letters at:
http://sec.gov/divisions/investment/im-noaction.shtml#money  

The SEC announced that it adopted several amendments to rules regarding the Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system. Specifically, effective January 1, 2009, all applications for exemptive and other orders under any section of the Investment Company Act of 1940 (“Investment Company Act”) as well as Regulation E filings of small business investment companies and business development companies must be filed electronically via EDGAR. Applications filed electronically will be available to the public on the EDGAR system. The rule amendments also make the temporary hardship exemption unavailable for submission of applications under the Investment Company Act. Finally, the rule amendments eliminate the requirement that certain documents accompanying an application be notarized and the requirement that applicants submit a draft notice as an exhibit to an application.

For more information please see Final Rule Release at:
http://sec.gov/rules/final/2008/33-8981.pdf  

On October 21, 2008 Lori Richards, the Director of the SEC’s Office of Compliance, Inspections and Examinations (“OCIE”), announced examination priorities for 2009 in a speech to the National Society of Compliance Professionals. Ms. Richards stressed the growing importance of compliance personnel in the current market environment and urged firms to resist cutting compliance related budgets. Ms. Richards also highlighted a number of items relating to investment advisers that the OCIE staff will be focused on in upcoming examinations, including:

• Portfolio Management: Compliance staffs should be mindful that recent losses may provide an impetus for portfolio managers to trade more aggressively than they should or to deviate from investment objectives.
• Financial Controls: Advisers in precarious financial condition should be aware that they are obligated to disclose this fact to clients.
• Valuation: OCIE examiners will focus on controls and procedures for valuation of illiquid and difficult-to-price securities.
• Structured Products: OCIE examiners will focus on products marketed as being relatively “safe,” such as principal protected notes and other products, and will review the adequacy of disclosures concerning credit risk, liquidity, and investment risk.
• Controls and Processes at Recently Merged or Acquired Firms: Compliance staff must help ensure that controls and processes do not fall through the cracks in a merged organization.
• Money Market Funds: In examining money market funds and their advisers, OCIE staff will focus on compliance with Rule 2a-7 regarding the creditworthiness of portfolio securities, shadow pricing, compliance oversight and, more broadly, whether funds are stretching for yield and exposing themselves to excessive undisclosed risk.
• Short Selling; Market Manipulation: OCIE will focus on compliance with new short sales rules and firms’ policies and procedures to prevent employees from knowingly creating, spreading, or using false or misleading information to manipulate securities prices.
• Other Areas of Focus: OCIE also will continue to focus on other areas such as: suitability and appropriateness of investments for clients; disclosure; controls to prevent insider trading; trading, brokerage arrangements and best execution; proprietary and employees’ personal trading; undisclosed payments; safety of customer assets; anti-money laundering; compliance, supervision and corporate governance.

For more information please see Director Richard’s Speech at:
http://sec.gov/news/speech/2008/spch102108lar.htm

FINRA published Regulatory Notice 08-56, which announced a consolidated set of interpretations issued by SEC staff with respect to the following rules: Exchange Act Rules 15c3-1, 15c3-2, 15c3-3, 15c3-4, 17a-3, 17a-4, 17a-5, 17a-11 and 17a-13.

FINRA also published Regulatory Notice 08-57, announcing the SEC’s approval for certain consolidated FINRA Rules. The first phase of new consolidated FINRA Rules was approved by the SEC in August and September 2008, and will be effective on December 15, 2008. The new consolidated FINRA Rules approved by the SEC and effective December 15, 2008 include: Rule 0100 Series (General Standards); Rule 2010 (Standards of Commercial Honor and Principles of Trade); Rule 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices); Rule 2070 (Transactions Involving FINRA Employees); Rule 3130 (Annual Certification of Compliance and Supervisory Processes); Rule 3220 (Influencing or Rewarding Employees of Others); Rule 4560 (Short-Interest Reporting); Rule 5110 (Corporate Financing Rule – Underwriting Terms and Arrangements); Rule 5130 (Restrictions on the Purchase and Sale of Initial Public Equity Offerings); Rule 5150 (Fairness Opinions); Rule 5190 (Notification Requirements for Offering Participants); Rule 6121 (Trading Halts Due to Extraordinary Market Volatility); Rule 6470 (Withdrawal of Quotations in an OTC Equity Security in Compliance with SEC Regulation M); Rule 6000 through 7000 Series (generally involving regulatory requirements and fees for quoting, trading, reporting, clearing and comparing over-the-counter transactions); Rule 8000 Series (Investigations and Sanctions); Rule 9000 Series (Code of Procedure); and Rule 10000, 12000, 13000 and 14000 Series (involving Dispute Resolution procedures).

The FINRA Regulatory Notice 08-56 can be found at: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p117228.pdf  

The FINRA Regulatory Notice 08-57 can be found at: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p117255.pdf  

FINRA published Regulatory Notice 08-55 which requests comment on its proposed consolidated FINRA Rules regarding research. These Rules would replace existing NASD Rule 2711 (Research Analysts and Research Reports) and NYSE Rule 472 (Communications with the Public). The proposed Rules include certain changes to the existing NASD Rule 2711 and NYSE Rule 472. The proposed Rules would:

• Broaden the obligations on member firms to identify and manage research conflicts;
• Create a more flexible supervisory approach with respect to research analyst account trading in securities of companies a research analyst covers;
• Provide additional guidance regarding selective – or tiered – dissemination of a firm’s research reports;
• Extend the exemption for firms with limited investment banking activity to include certain aspects related to research analyst compensation determination;
• Exempt from the registration and qualification requirements personnel who produce “research reports” but whose primary job is something other than a research analyst (e.g., a registered representative or trader); and
• Remove the requirement to attest annually that the firm has in place supervisory policies and procedures reasonably designed to achieve compliance with the applicable provisions of the rules.

Comments must be received by FINRA by November 14, 2008.

For more information see the FINRA Regulatory Notice at: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p117213.pdf

On October 20, 2008 the SEC charged a former analyst who worked for a hedge fund, with improper trading. Without admitting or denying the allegations, the analyst agreed to settle charges that he engaged in unlawful insider trading in connection with a “PIPE” offering. The SEC alleged that the analyst had agreed to keep information regarding a PIPE offering confidential; that on the basis of material, non-public information regarding the PIPE offering, he issued a recommendation that resulted in the hedge fund establishing a short position in the PIPE issuer’s shares; and that he had signed a stock purchase agreement with respect to the PIPE offering on behalf of his hedge fund, representing that the hedge fund did not hold a short position in the common stock of the issuer of the PIPE when he knew the fund did hold a short position.

The analyst agreed to an injunction, to disgorge $13,427 plus prejudgment interest, and to pay a $317,000 civil penalty.

For more information see the SEC Litigation Release available at:
http://sec.gov/litigation/litreleases/2008/lr20784.htm  

On October 22, 2008, the FTC announced a six-month delay in FTC enforcement of the so-called “Red Flags Rule” relating to identity theft. As described in the August 1, and September 5, 2008 WilmerHale Investment Management News Summaries, the rule requires certain financial institutions and creditors to develop and implement identity theft prevention programs to prevent, detect, and mitigate identity theft in connection with certain covered accounts. Under the new timetable, mutual funds and other financial institutions and creditors subject to the FTC’s enforcement jurisdiction under the Fair Credit Reporting Act have until May 1, 2009, to achieve compliance. On the other hand, the deadline for other financial institutions and creditors regulated by the federal bank regulatory agencies or the National Credit Union Administration has not been extended by those agencies.

For more information see the FTC materials available at: http://ftc.gov/opa/2008/10/redflags.shtm 
Also see the WilmerHale Client Alert, “Federal Trade Commission Delays Enforcement of "Red Flags Rule" for Certain Financial Institutions and Creditors” available at: http://www.wilmerhale.com/about/news/newsDetail.aspx?news=1273  

On October 22, 2008, the FTC announced a six-month delay in FTC enforcement of the so-called “Red Flags Rule” relating to identity theft. As described in the August 1, and September 5, 2008 WilmerHale Investment Management News Summaries, the rule requires certain financial institutions and creditors to develop and implement identity theft prevention programs to prevent, detect, and mitigate identity theft in connection with certain covered accounts. Under the new timetable, mutual funds and other financial institutions and creditors subject to the FTC’s enforcement jurisdiction under the Fair Credit Reporting Act have until May 1, 2009, to achieve compliance. On the other hand, the deadline for other financial institutions and creditors regulated by the federal bank regulatory agencies or the National Credit Union Administration has not been extended by those agencies.

For more information see the FTC materials available at: http://ftc.gov/opa/2008/10/redflags.shtm 
Also see the WilmerHale Client Alert, “Federal Trade Commission Delays Enforcement of "Red Flags Rule" for Certain Financial Institutions and Creditors” available at: http://www.wilmerhale.com/about/news/newsDetail.aspx?news=1273  

FINRA published Regulatory Notice 08-60 announcing temporary margin maintenance, net capital and reserve formula requirements with respect to certain money market funds that have frozen customer redemptions or whose net asset value has declined below $1.00. The temporary requirements are a response to requests for guidance regarding the net capital and customer reserve formula treatment relating to the liquidity that some firms have provided to their customers on their money market fund holdings, despite such funds’ suspension of redemptions.

The temporary requirements were effective October 21, 2008.

For more information please see the FINRA Regulatory Notice at:
http://www.finra.org/Industry/Regulation/Notices/2008/P117276  

FINRA recently published Regulatory Notice 08-58, which provides guidance on disclosures by member firms regarding money market fund participation in the U.S. Treasury Department’s Temporary Guarantee Program (the “Treasury Program”). FINRA reminded firms that although FINRA Rules do not require that they inform customers of a money market fund’s participation in the Treasury Program, any communications with customers referring to the Treasury Program should be fair and balanced, and should disclose the following information:

• The U.S. Treasury Department provides a guarantee to participating money market fund shareholders based on the number of shares invested in the fund at the close of business on September 19, 2008.
• Any increase in the number of shares an investor holds after the close of business on September 19, 2008, will not be guaranteed.
• If a customer closes his/her account with a fund or broker-dealer, any future investment in the fund will not be guaranteed.
• If the number of shares an investor holds fluctuates over the period, the investor will be covered for either the number of shares held as of the close of business on September 19, 2008, or the current amount, whichever is less.
• The Treasury Program expires on December 18, 2008.
• A customer could lose coverage under the Treasury Program if the customer liquidates or transfers its shares in a participating money market fund.

For more information please see the FINRA Regulatory Notice at: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p117260.pdf

In a no-action letter dated October 22, 2008, the SEC’s Division of Investment Management stated that it would not take enforcement action under various provisions of the Investment Company Act of 1940, as amended (the “Investment Company Act”), and the rules thereunder against money market funds and the structuring and referral agent to SPVs under the MMIFF (the “Structuring Agent”), with respect to money market funds’ participation in the MMIFF. The no-action letter granted the following relief and provided the following guidance for money market funds generally:

• ABCP to be issued by the SPVs under the MMIFF may be treated as “Asset Backed Securities” under Rule 2a-7(a)(3) and, therefore, may be purchased by money market funds that rely on Rule 2a-7 of the Investment Company Act.
• A money market fund purchasing any ABCP will not be required to “look through” the SPV issuing the ABCP for purposes of the diversification test under Rule 2a-7(c)(4)(ii)(D)(1)(i), provided that the following conditions are met:

   

  • First, a money market fund may not acquire ABCP if, as a result, all ABCP issued by all SPVs held by the fund would exceed 2.5% of the fund’s total assets;
  • Second, any ABCP acquired by the money market fund must be a “First Tier Security,” as defined in Rule 2a-7;
  • Third, for purposes of a money market fund making additional purchases of securities of an issuer whose securities may be held by an SPV, the fund must add the entire value of all ABCP it holds to the value of other holdings of securities of the issuer held by the fund, for diversification purposes.
  • Fourth, if a money market fund purchases ABCP in the secondary market (i.e., not in connection with the sale of Eligible Assets to an SPV in connection with the MMIFF), it must treat the ABCP being purchased as set forth in the third condition above.
     
   
• Based on certain representations in the Structuring Agent’s no-action request and the fact that the MMIFF is a temporary measure designed to provide liquidity to money markets, the SEC staff stated it would not recommend enforcement action under Section 12(d)(3) of the Investment Company Act against money market funds participating in the MMIFF, despite the fact that such money market funds may be advised by affiliated persons of financial institutions that have significant securities-related businesses and are major issuers of Eligible Assets under the MMIFF.

The no-action letter also granted specific relief for money market funds advised by the Structuring Agent to allow its affiliated money market funds to participate in the MMIFF despite the Structuring Agent’s relationships with the SPVs.

A copy of the SEC no-action letter can be found at:
http://www.sec.gov/divisions/investment/noaction/2008/jpmsi102208.pdf

On October 21, 2008, the Federal Reserve announced the creation of the MMIFF to support a private sector initiative to provide additional liquidity to U.S. money markets. Under the MMIFF, a series of private sector special purpose vehicles (“SPVs”) will purchase certain Eligible Assets (defined below) from eligible investors – initially only U.S. money market mutual funds. The MMIFF is designed to complement two other Federal Reserve liquidity facilities to provide liquidity to money markets.

Under the MMIFF, the SPVs may purchase at amortized cost U.S. dollar denominated certificates of deposit, bank notes, and commercial paper with remaining maturities of 90 days or less, which are issued by one of fifty specific financial institutions with a short-term debt rating of at least A-1/P-1/F-1 from two or more major nationally recognized statistical rating organizations (“Eligible Assets”). Each SPV is expected to hold securities issued by ten of these financial institutions. Eligible Assets of any one issuer may not exceed 15% of the assets of an SPV.

The SPVs’ purchases of Eligible Assets will be financed through a combination of the SPVs selling asset-backed commercial paper (“ABCP”) and loans from the Federal Reserve Bank of New York (“NY Fed”). The SPVs will issue ABCP equal to 10% of the Eligible Assets’ purchase price and the remaining 90% of the financing for such purchases will be via loans from the NY Fed. These loans will be on an overnight basis, at the primary credit rate, with recourse to the applicable SPV, senior to the ABCP, and secured by all of the assets of the SPV.

If assets held by an SPV are downgraded, the SPV will discontinue all asset purchases until all of the SPV’s assets issued by the issuer of the downgraded assets have matured. If assets held by an SPV go into default, the SPV will discontinue all future asset purchases and repayments on the ABCP. Thereafter, the proceeds from the maturation of the SPV’s assets will be used to repay the loan from the NY Fed. When all of the SPV’s assets have matured, any remaining cash will be used to repay principal and interest on the ABCP. Under this repayment structure, the holders of the ABCP will be the first to bear any losses associated with the assets in default held by the SPV, thereby protecting the NY Fed.

For more information see the Federal Reserve press release available at:
http://www.federalreserve.gov/newsevents/press/monetary/20081021a.htm  

On October 7, 2008 the DOL published final regulations to the statutory exemption for cross-trades involving ERISA accounts. The regulations address the requirements under ERISA §408(b)(19), including the requirement that a plan’s independent fiduciary consent to participation in a cross-trading program and the requirement that an investment manager adopt, and cross-trades be effected in accordance with, written cross-trading policies and procedures. The final regulations are substantially similar to the interim final regulations that were issued in February 2007, with a few notable clarifications including:

• Pooled Investment Vehicles: Under ERISA §408(b)(19)(E), each plan participating in the transaction must have assets of at least $100 million. Thus, for hedge funds and other pooled investment vehicles, availability of the exemption is limited to those vehicles comprised solely of plans or master trusts with assets of at least $100 million.
• Effect of Isolated Noncompliance: The DOL states that individual instances of noncompliance with the policies and procedures by the investment manager would not by themselves render the statutory exemption inapplicable to the investment manager’s entire cross-trading program (provided the other cross-trades did meet all the requirements of §408(b)(19)).
• Sampling for Compliance Officer’s Review: The DOL notes that nothing in the final regulations would preclude cross-trades from being reviewed using a sampling methodology based on the universe of cross-trades effected by the investment manager under the exemption (provided the methodology is disclosed in the investment manager’s policies and procedures).
• Application to Affiliated Investment Managers: The DOL affirms that securities trades executed between an account managed by an investment manager and an account managed by an affiliate of such manager are beyond the scope of the exemption.

The final regulations are effective on February 4, 2009. An investment manager who has obtained a fiduciary’s authorization, in accordance with ERISA §408(b)(19)(D), prior to the effective date based on compliance with the interim final regulations, will not be required to obtain a reauthorization following disclosures that reflect the final regulations.

The full text of the final regulations is available at:
http://www.dol.gov/federalregister/PdfDisplay.aspx?DocId=21589
 

The SEC announced two preliminary settlements in principle with two financial institutions that would provide individual investors, small businesses and small charitable organizations with the opportunity to sell back to the respective financial institutions auction rate securities (ARS) the investors purchased. Similar to prior settlements between the SEC and other financial institutions, the agreements require the financial institutions to use best efforts to provide liquidity to other businesses, charities, and institutional investors.

The proposed settlement would allege that each financial institution made misrepresentations to its customers when it told them that ARS were safe and highly liquid cash and money market alternative investments.

For more information see the SEC press releases available at:
http://www.sec.gov/news/press/2008/2008-247.htm 

http://www.sec.gov/news/press/2008/2008-246.htm 

 

On October 8, 2008 the SEC announced that, pursuant to the Emergency Economic Stabilization Act of 2008, it will conduct a study of mark-to-market accounting standards as applicable to financial institutions. The SEC requested comments on the study, which should be received on or before November 13, 2008. The study will cover:

• The effect of mark-to-mark accounting on a financial institution’s balance sheet;
• The impact of mark-to-mark accounting on bank failures in 2008;
• The process used by the Financial Accounting Standards Board in developing accounting standards; and
• Alternative accounting standards to those provided in FASB 157.

The SEC also announced that on October 29, 2008, it will host the first of two roundtables on “mark-to-market” accounting and current market conditions.

For more information see the SEC request for comments available at:
http://www.sec.gov/rules/other/2008/33-8975.pdf

http://sec.gov/news/press/2008/2008-252.htm

On October 8, 2008 the staff of the SEC’s Division of Investment Management issued no-action assurance that it would not recommend enforcement action pursuant to Section 18(f) of the Investment Company Act against a money market fund if such fund participates in the U.S. Treasury Temporary Guarantee Program for Money Market Funds (the “Treasury Program”). The Investment Company Institute sought the no-action relief to dispel concerns that a money market fund’s participation in the Treasury Program could create “senior securities” as defined in Section 18(g) of the Investment Company Act.

For more information see the SEC no-action letter available at: http://www.sec.gov/divisions/investment/noaction/2008/ici100808.pdf>

The staff of the SEC’s Division of Investment Management issued a no-action letter assuring that it would not recommend enforcement action to the SEC if a money market fund uses amortized cost value rather than available market quotations in “shadow pricing” its portfolio securities pursuant to Rule 2a-7 of the Investment Company Act of 1940, as amended (the “Investment Company Act”) through January 12, 2009. However, the no-action letter indicated that a money market fund may not use the amortized cost method if the particular circumstances suggest that amortized cost is not appropriate.

The staff’s no-action position is limited to portfolio securities that:

• Have a remaining maturity of 60 days or less (remaining maturity is measured without regard to paragraph (a)(12) of Rule 2a-7);
• Are First Tier Securities as defined in paragraph (a)(12) of Rule 2a-7; and
• The fund reasonably expects to hold until maturity.

Separately, the Irish Financial Regulator has approved similar more expansive relief for Irish authorized money market funds.

For more information see the SEC no-action letter available at: http://www.sec.gov/divisions/investment/noaction/2008/ici101008.htm

In response to industry and congressional requests, the SEC reopened comment period on new rules relating to indexed annuities and certain other insurance contracts. The SEC originally proposed the rules on June 25, 2008 and the original comment period closed on September 25, 2008. The proposed rule would define the terms “annuity contract” and “optional annuity contract” under the Securities Act and is intended to clarify the status of indexed annuities under the federal securities laws. The proposed rules would also exempt insurance companies from filing reports under the Exchange Act with respect to indexed annuities and other securities. To qualify for this exemption the securities must be regulated under state insurance law, the issuing insurance company and its financial condition must be subject to supervision and examination by a state insurance regulator and the securities must not be publicly traded.

For more information see the SEC rule release and request for comments available at: http://sec.gov/rules/proposed/2008/33-8976.pdf  

This week the SEC announced a series of rules and rule amendments related to short sales that: (i) require weekly reporting of certain short sales by institutional investment managers until August 1, 2009; (ii) eliminate the options market maker exception to the Regulation SHO “close out” requirements; (iii) prohibit deceptive practices by short sellers regarding their intention and ability to locate and deliver securities at the settlement date; and (iv) impose enhanced delivery requirements on sales of equity securities until July 31, 2009.

• The requirement that Form SH Filers file with the SEC reports regarding their short sales and positions on Form SH is extended until August 1, 2009.
• Beginning on October 18, 2008, the filing deadline for Form SH for each week in which reportable short sales were effected will be changed from the first business day of the calendar week to the last business day of the calendar week, giving the reporting manager additional time to prepare and submit the report.
• Form SH Filers will no longer be required to report the information requested in: (i) column 5 of the current Form SH (the value of securities sold short); (ii) column 7 of the current Form SH (the largest intraday short position); and (iii) column 8 of the current Form SH (the time of day of the largest intraday position).
• Form SH Filers will be required to report ALL short positions, including short positions effected prior to September 22, 2008, provided, however, that during a transition period for reports due on October 24, and October 31, 2008, Form SH Filers may exclude short positions effected before September 22, 2008.
• The fair market value prong of the de minimis exception to short sale positions will be raised from a fair market value of $1 million to a fair market value of $10 million, provided, however, that if a Form SH Filer elects not to report pre-September 22, 2008 short sale positions during the transition period (i.e., in its October 24, or October 31, 2008 Form SH filings) the existing de minimis threshold of $1 million will apply until such Form SH Filer begins to report pre-September 22, 2008 short sale positions.
• Regarding confidential treatment, the rule states that all Forms SH filed with the SEC will be “nonpublic to the extent permitted by law.” In addition, the release states that a Form SH Filer should not submit a confidential treatment request to the SEC, but must label its Form SH as non-public, as required by the instructions to the form.
• Form SH Filers will be required to submit XML tagged data in its Form SH filings with the SEC.

Rule 10a-3T is effective October 18, 2008 until August 1, 2009. The SEC has also requested comments on Rule 10a-3T and Form SH, which must be received by the SEC within 60 days after publication in the Federal Register.

For more information see the SEC rule release and request for comments available at
http://sec.gov/rules/final/2008/34-58785.pdf  

Amended Rule 203(b)(3) is effective October 17, 2008.

For more information see the SEC rule release and request for comments available at
http://sec.gov/rules/final/2008/34-58775.pdf

• Broker-Dealer Trading for Its Own Account. Under Rule 10b-21 a broker-dealer effecting short sales for its own account would be liable if the broker-dealer does not obtain a valid locate source of the equity security and fails to deliver the securities on the settlement date.
• Seller Representations to Broker-Dealers. If a seller deceives a broker-dealer about its holdings in a security or about the validity of its locate source, the seller will be similarly liable under Rule 10b-21.
• Seller Reliance on Broker-Dealer or Easy to Borrow List. A seller would not violate Rule 10b-21 if the seller makes no representations regarding its ability to locate and/or deliver and the seller either (i) relies upon the executing broker-dealer to comply with the Regulation SHO locate requirement or (ii) relies in good faith on a broker-dealer’s “easy to borrow” list.
• Seller Causing a Broker-Dealer to Enter a “Long Order” for a Security the Seller Does Not Own. A seller, including a broker-dealer trading for its own account, will be liable under Rule 10b-21 if the seller causes a broker-dealer to mark an order to sell a security as a “long order” if the seller “knows or recklessly disregards that it is not deemed to own the security being sold.”

Aiding and Abetting Liability for Broker-Dealers. A broker-dealer could be liable for aiding and abetting a customer’s fraud under the proposed rules. However, Rule 10b-21 does not impose any additional liability or requirements on any person, including broker-dealers, beyond those of any Exchange Act Rule, including aiding and abetting liability.

For more information see the SEC rule release and request for comments available at:
http://sec.gov/rules/final/2008/34-58774.pdf

For more information about the rule, including its various exceptions, see the SEC rule release and request for comments available at: http://sec.gov/rules/final/2008/34-58773.pdf

On October 10, 2008, WilmerHale held a Webinar entitled “Responding to the Market Crisis: Enforcement Activity, Implementing the TARP Legislation, and the Litigation and Regulatory Environment.”

For more information see WilmerHale’s website available at
http://www.wilmerhale.com/about/news/newsDetail.aspx?news=1265  

On October 6, 2008, the Fed published a letter granting a request by a depository institution for an exemption from the limits on transactions with affiliates under Section 23A of the Federal Reserve Act and the Board’s Regulation W. The letter allows the depository institution to purchase assets from an affiliated money market fund above the quantitative limits in order to help the money market fund meet its redemption requests without having to sell assets into an illiquid market. The letter imposes the following limits and conditions on the transactions:

• the depository institution may only purchase assets from registered money market funds that operate pursuant to Rule 2a-7 under the Investment Company Act of 1940.
• the purchase of assets would be limited to the amount necessary to cover net redemptions in the money market funds, up to a specified aggregate amount.
• the assets purchased must be externally rated A1/P1 or the credit equivalent thereof.
• the purchase must be made at fair market value as determined by a reliable third-party service.
• the parent of the depository institution must agree to reimburse the depository institution for any losses sustained by the depository institution in connection with the purchased assets.
• the parent of the depository institution and the depository institution must remain “well capitalized.”
• the purchases must occur prior to a specific date.

The Fed has stated that it is open to consider similar requests from depository institutions under similar circumstances.

For more information see the Fed materials available at http://www.federalreserve.gov/newsevents/press/monetary/20081006a.htm
http://www.federalreserve.gov/boarddocs/legalint/FederalReserveAct/2008/20081006/20081006.pdf

On October 7, 2008, the Fed announced the creation of the Commercial Paper Funding Facility which will provide a liquidity backstop to US issuers of commercial paper through a special purpose vehicle (“SPV”). The SPV will purchase 3-month unsecured and asset-backed commercial paper directly from eligible US issuers. The Fed will provide financing to the SPV at the target federal funds rate and it will be secured by all of the assets of the SPV. For commercial paper that is not asset-backed commercial paper, the SPV will be secured by the retention of up-front fees paid by the issuers or by other forms of security acceptable to the Fed in consultation with market participants.

Commercial paper (including asset-backed commercial paper) purchased by the SPV must be rated at least A1/P1/F1 by a major Nationally Recognized Statistical Rating Organization. The maximum amount of commercial paper a single issuer may sell to the SPV will be the average amount of commercial paper the issuer had outstanding in the month of August 2008, less any amount of the issuer’s outstanding commercial paper held by investors other than the SPV. The SPV will cease to purchase commercial paper on April 30, 2009, unless the Fed agrees to extend the facility.

For more information see the Fed materials available at http://www.federalreserve.gov/newsevents/press/monetary/20081007c.htm; and
http://www.newyorkfed.org/markets/CPFF_Terms_Conditions.html.

• The Treasury will select asset managers of securities separately from asset managers of mortgage whole loans.
• Asset Managers will be financial agents of the United States.
• Financial Institutions are eligible to be designated as financial agents of the US.
• Prospective financial agents will be solicited through the issuance of a public notice, posted on the Treasury website, requesting that interested and qualified Financial Institutions submit a response.
• The Treasury will evaluate the initial response from all interested and qualified Financial Institutions, and will invite certain candidates to continue to the second phase of the financial agent selection process. The Treasury will evaluate responses from the second phase candidates, and will determine whether a candidate will continue to be considered.
• Financial Institutions selected must sign a Financial Agency Agreement with the Treasury.
• At each stage in the selection process, personnel from various offices will evaluate the candidate submissions and makes recommendations to the head of the Office of Financial Stability, who will make the final decisions.
• The Treasury expects to designate multiple asset managers and sub-managers to obtain the proper expertise in different asset types and different segments of the mortgage credit market.
• The Treasury will issue separate notices to identify smaller and minority- and women-owned Financial Institutions.
• The selection process may involve extremely short deadlines for submitting information and for traveling to Washington, DC for meetings or interviews.
• The Treasury will not reimburse or otherwise compensate a prospective asset manager for expenses or losses incurred in connection with the selection process.

For more information see the Treasury materials available at
http://www.ustreas.gov/press/releases/hp1181.htm; and
http://www.ustreas.gov/press/releases/reports/assetmanagers.pdf.

The Treasury stated that they have two mechanisms available for engaging private-sector firms in implementing the Emergency Economic Stabilization Act of 2008. Specifically, the Treasury may use the Financial Agent Authority and the procurement under the Federal Acquisition Regulation (“FAR”). Under the Financial Agent Authority, the Treasury may retain a broad class of financial agents to provide services on its behalf. The selection of financial agents will occur through processes which will be posted on the Treasury’s website.

In addition, the Treasury may obtain supplies and services using a procurement contract under the FAR. The Treasury expects that a number of contracts will be awarded through other than full and open competition, using the previously established provisions of the FAR applicable to conditions of unusual and compelling urgency. Procurement opportunities and information about contracts awarded will be posted at http://www.fedbizopps.gov. Businesses may submit capability statements to the Treasury’s Office of Procurement Executive at [email protected].

For more information see the Treasury Press Release available at
http://www.ustreas.gov/press/releases/hp1179.htm.

Anthony Ryan, the Treasury’s Acting Under Secretary for Domestic Finance, discussed a policy framework and the practical effects of the Treasury’s implementation of the Emergency Economic Stabilization Act of 2008 at the Investment Company Institute’s Equity, Fixed Income and Derivatives Market Conference. Mr. Ryan stated that a policy framework that restores the optimal balance between private-sector market discipline and regulatory oversight is needed. The Treasury plans to play an important role in the formation of the financial policy and regulatory structure, including coordinating the efforts of the President’s Working Group on Financial Markets (“PWG”). Mr. Ryan highlighted four recommendations of the PWG: (1) better and more useful transparency and disclosure, (2) increased risk awareness, (3) improved risk management, and (4) better capitalized and more liquid institutions. Also, Mr. Ryan discussed the role of a market stability regulator with broad powers focusing on the overall financial market.

In discussing the practical effects of the recent legislation, Mr. Ryan stated that the flow of credit is vitally important to the economy and this problem must be addressed to restore confidence in the economic markets. Mr. Ryan stated that Treasury needs to begin its preparations and the implementation of the legislation. Lastly, he stated that in the coming days, the Treasury will hire the expertise to help them optimally design and implement their new authorities.

For more information see the Treasury materials available at
http://www.ustreas.gov/press/releases/hp1182.htm; and the PWG’s statement at
http://www.ustreas.gov/press/releases/hp1177.htm.

On October 6, 2008, the SEC’s Division of Enforcement posted its SEC Enforcement Manual on its website. According to the manual, the electronic document is designed to be a reference for the staff in the Division of Enforcement in the investigation of potential violations of the federal securities laws. It contains various general policies and procedures and is intended to provide guidance only to the staff. The manual indicates that it is not intended to, does not, and may not be relied upon to create any rights, substantive or procedural, enforceable at law by any party in any matter civil or criminal.

For more information see the SEC Enforcement Manual available at http://www.sec.gov/divisions/enforce/enforcementmanual.pdf  

SEC Chairman Christopher Cox announced the appointment of James Clarkson as the Acting Regional Director of the SEC’s New York Regional Office. Currently, Mr. Clarkson serves as the Division of Enforcement’s Director of Regional Office Operations at the SEC’s Washington, DC headquarters and will continue in this position while splitting his time between the two positions. Mr. Clarkson has worked at the SEC for more than 30 years. He earned his undergraduate degree from Princeton University, an MBA from Columbia University and his law degree from the New York University School of Law.

For more information see the SEC Press Release available at
http://www.sec.gov/news/press/2008/2008-236.htm.

On October 3, 2008, the SEC charged five broker-dealer registered representatives with securities fraud for refinancing their customers’ homes with subprime mortgages that they could not afford in order to sell them unsuitable securities. The SEC alleges that these registered representatives sold primarily variable universal life policies to clients who were unable to pay for these securities and the subsequent monthly payments. In order to pay for these securities, the registered representatives instructed their clients to refinance their fixed rate mortgages into subprime adjustable-rate negative amortization mortgages. The registered representatives were paid from the mortgage refinancing as well as the sale of securities. The SEC alleges that the customers had little formal education, little prior investment experience, and several did not speak English fluently, if at all.

In making the sales, the registered representatives allegedly misrepresented the expected returns from the securities, the liquidity of securities and the nature of the securities and terms of the new mortgages while failing to disclose material facts about the products. In addition, the SEC complaint alleges the representatives falsified customer account forms and prepared order tickets that contained incorrect information. The SEC complaint charged the registered representatives with violations of the antifraud provisions of the securities laws.

For more information see the SEC materials available at
http://www.sec.gov/news/press/2008/2008-237.htm;
http://www.sec.gov/litigation/litreleases/2008/lr20768.htm; and
http://www.sec.gov/litigation/complaints/2008/comp20768.pdf.

The SEC’s Division of Trading and Markets stated that the SEC’s emergency order that prohibited persons from selling short the securities of financial institutions expired at 11:59 p.m. ET on Wednesday, October 8, 2008 due to the President’s signature of the Emergency Economic Stabilization Act of 2008 (H.R. 1424).

For more information see the SEC Press Release available at
http://www.sec.gov/news/press/2008/2008-238.htm.

Without any fanfare, the IRS has released a new Form TD F 90-22.1 (commonly referred to as the “FBAR”) and instructions for taxpayers to report financial interests in, and signature authority over, foreign financial accounts. Taxpayers are permitted to use the prior version of the FBAR until December 31, 2008. Thus, the new FBAR is relevant to taxpayers who must report their interests in, and signature authority over, foreign financial accounts for the 2008 calendar year by June 30, 2009. In general, the 2008 FBAR will require reporting by additional persons and disclosure of more information.

Each United States person who has a financial interest in or signature authority over financial accounts, including bank, securities “or other types of financial accounts” in a foreign country must file the FBAR if the aggregate value of the financial accounts exceed $10,000 at any time during the calendar year. The FBAR must be filed with the Treasury Department by June 30 of the succeeding year. There are significant potential criminal and civil penalties for failure to file an FBAR. Further, federal income tax returns include a question whether the taxpayer owns more than 50% of the stock of any corporation owning one or more foreign bank accounts, or at any time during the year had an interest in or signature authority over a financial account in a foreign country.

The new FBAR contains several notable developments, including:

• Late or Amended FBARs. If a late or amended FBAR is filed, the taxpayer must include a statement explaining the reason for the late or amended filing.
• Mutual Funds and Debit/Credit Cards. The definition of financial accounts has been clarified to include mutual fund interests and similar commingled funds, debit cards and prepaid credit cards. Thus, persons who hold interests in foreign mutual funds and similar commingled funds must report such interests on an FBAR.
• Foreign Persons Required to File. Non-resident aliens and foreign entities doing business in the United States are now required to file an FBAR. No de minimis rule has been provided for foreign persons who do business in the United States.
• Trusts. If a foreign financial account is held through a trust arrangement established by a United States person (including now foreign persons in the United States), the United States person must report the account if a trust protector has been appointed to monitor the trustee and influence trustee decisions.
• Limited Employee Reporting Exception. The special rule that exempts employees of a domestic corporation from being required to file a FBAR for accounts they control but have no financial interest in when they receive written notice from the domestic corporation’s CFO has been expanded. First, such written notice may now be made by the CFO or similar responsible officer. Second, as previously stated only in internal IRS guidance, employees of subsidiaries of the domestic corporation may take advantage of the written notice exemption. The IRS apparently considers this exception only to be available for corporate subsidiaries and, based on oral discussions with the IRS, does not consider employees of a wholly-owned LLC to be eligible for the reporting exception.
• Specific Value Required. Taxpayers are required to show the specific dollar value of the foreign financial account. The prior version of the FBAR permitted taxpayers to check one of four boxes based on the range of values for the account.
• Joint Accounts. For joint accounts, taxpayers are required to provide the name and address of the other joint owner (or principal joint owner if there is more than one). For spousal joint accounts, spouses may file a single FBAR. If only one spouse has separate foreign financial accounts in addition to the joint accounts, the combined FBAR is also permitted. Combined reporting is not permitted if both spouses both have separate foreign financial accounts in addition to the joint accounts.
• Recordkeeping. Recordkeeping standards are expressly stated. “Detailed information about each account . . . must be recorded and retained for five years from June 30 of the year following the calendar year reported.” This rule does not, however, override federal income tax recordkeeping rules which generally require information to be retained so long as they may be material to the administration of federal tax law.

For more information see the IRS Form available at
http://www.irs.gov/pub/irs-pdf/f90221.pdf.

The legislation to eliminate most offshore fee deferral arrangements, which was described in the Investment Management News Summary dated September 26, 2008, has been attached to the version of the 2008 Emergency Economic Stabilization Act (H.R. 1424) that was passed by the U.S. Senate on October 1, 2008, and the U.S. House of Representatives on October 3, 2008.

For more information see the bill (H.R. 1424) available at
http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.1424.eas:.

Final regulations in Massachusetts were issued establishing standards for the protection and storage of consumers’ personal information. The Office of Consumer Affairs and Business Regulation (“OCABR”) issued standards as a result of legislation that was enacted in 2007. The final regulations apply to any person who owns, licenses, stores, or maintains “personal information” (first and last name in combination with social security number, driver’s license or state identification number, financial account number, or credit/debit card number) about a resident of the Commonwealth of Massachusetts. If personal information is owned, licensed, stored, or maintained, the person must have a comprehensive information security program and comply with specified system security requirements. The OCABR issued standards for protecting personal information and computer system security requirements.

These standards appear to be more demanding than the SEC’s protection of personal information requirements. The final regulations require, among other things, the business to: (a) develop a security plan, (b) assess internal and external security risks, (c) provide training for employees, (d) prevent terminated employees from gaining access to personal information, (e) ensure that service providers protect personal information and obtain a certification that such is the case prior to providing them with personal information; (f) review security measures annually; and (g) notify customers and the state of when breaches occur. The new regulations also allow residents of Massachusetts to lock their credit reports in order to protect against identify theft. The new regulations are set to take effect on January 1, 2009.

For more information see the materials available at
http://www.mass.gov/?pageID=ocapressrelease&L=3&L0=Home&L1=Consumer&L2=Identity+Theft&sid=Eoca&b=pressrelease&f=080922_IDTheft_regsandexecorder&csid=Eoca;
http://www.mass.gov/?pageID=ocaterminal&L=3&L0=Home&L1=Consumer&L2=Identity+Theft&sid=Eoca&b=terminalcontent&f=idtheft_201cmr17&csid=Eoca;
http://www.mass.gov/Eoca/docs/idtheft/eo504.pdf;

The Treasury opened its Temporary Guarantee Program for Money Market Funds on September 29, 2008 and issued FAQs to assist in resolving questions regarding the program. Under the program, the Treasury will guarantee the share price of any publicly offered eligible money market fund (retail, institutional, taxable, and tax-exempt) that applies for and pays a fee to participate in the program. Specifically, the guarantee will be triggered if a participating fund’s net asset value (“NAV”) falls below $0.995, commonly referred to as “breaking the dollar” or “breaking the buck.” To be eligible for the program, the money market fund must be regulated under Rule 2a-7 under the Investment Company Act of 1940, maintain a stable share price of $1, and be publicly offered and registered with the SEC. The program provides coverage to shareholders for amounts that they held in participating money market funds as of the close of business on September 19, 2008. Money Market Funds with an NAV below $0.995 as of the close of business on September 19, 2008 may not participate in the program.

To participate in the program, money market funds with an NAV per share greater than or equal to $0.9975 as of the close of business on September 19, 2008, must pay an upfront fee of 0.01 percent (1 basis point) based on the number of shares outstanding on that date. Funds with an NAV per share of greater than or equal to $0.995 and below $0.9975 as of the close of business on September 19, 2008, must pay an upfront fee of 0.015 percent (1.5 basis points) based on the number of shares outstanding on that date. The program will exist for an initial three month term and the fees paid will only cover the initial term. The Secretary of the Treasury will review the need and terms for extending the program at the end of the initial term. Funds that would like to participate in the program must apply by October 8, 2008, using the forms on the program’s webpage. Under Treasury and IRS guidance, tax-exempt money market funds may participate in the program without treating the program as a federal guarantee that jeopardizes the tax-exempt treatment of such funds.

For more information see the Treasury materials available at
http://www.treasury.gov/press/releases/hp1163.htm;
http://www.treasury.gov/press/releases/hp1161.htm; and
http://www.treas.gov/offices/domestic-finance/key-initiatives/money-market-fund.shtml  

As part of the SEC’s Senior Summit, the staff of the SEC, the Financial Industry Regulatory Authority (“FINRA”), and the North American Securities Administrators Association (“NASAA”) released a joint report discussing practices that financial services firms may use to strengthen their policies and procedures for servicing older investors. The report, entitled Protecting Senior Investors: Compliance, Supervisory and Other Practices Used by Financial Services Firms in Serving Investor, summarizes firms’ practices relating to senior investors in areas such as the methods of remodeling supervisory and compliance structures to meet the changing needs of senior investors, effective communication with senior investors, advertising and marketing to senior investors, and ensuring the appropriateness of investments.

For more information see the materials available at
http://www.sec.gov/news/press/2008/2008-220.htm; and
http://www.sec.gov/spotlight/seniors/seniorspracticesreport092208.pdf.

The SEC announced the annual CCOutreach National Seminar to be held on November 13, 2008, for chief compliance officers (“CCOs”) of mutual funds and investment advisers. The seminar will include panel discussions highlighting various compliance issues for mutual funds and investment advisers, such as sound practices with respect to valuation, prevention of insider trading, ensuring best execution, and making meaningful and understandable disclosures to investors. The seminar will be held at the SEC’s Washington, DC headquarters from 9am ET to 5pm ET. Attendance is limited to 500 people and mutual fund and investment adviser CCOs will be given priority on a first-come, first-served basis. A webcast of the seminary will be available on the SEC’s website. The next SEC/FINRA CCOutreach National Seminar for broker-dealer CCOs will be held in the spring of 2009.

For more information see the SEC Press Release available at
http://www.sec.gov/news/press/2008/2008-221.htm.

An investment adviser settled an SEC enforcement action finding that the adviser defrauded affiliated mutual funds by failing to disclose that the funds’ administrator rebated to the investment adviser some of the administrative fees paid by the funds to pay for expenses that should have been paid for by the adviser. The SEC order found that the adviser entered into improper and undisclosed side agreements with the administrator of the affiliated mutual funds. The administrator rebated approximately 1/3 of its administrative fee to pay for the adviser’s marketing and certain non-marketing expenses, with the understanding that the adviser would continue to recommend the administrator to the funds’ board of directors.

In addition, the SEC order found that the adviser failed to disclose that the administrator rebated to the adviser some of the fees it charged the affiliated funds for securities lending services as a consulting fee, in exchange for the adviser recommending to the funds’ board of directors that the administrator provide securities lending services to the funds. In settling the charges, the adviser agreed to a cease and desist order, disgorgement, and a penalty.

For more information see the SEC materials available at
http://www.sec.gov/news/press/2008/2008-222.htm; and
http://www.sec.gov/litigation/admin/2008/ia-2784a.pdf.

The SEC charged an investment adviser and its owner with fraud for failing to disclose a material conflict of interest when recommending that their clients invest in a hedge fund when the adviser had a financial interest in making such recommendations. Specifically, the investment adviser recommended that its clients invest in a hedge fund without disclosing that it had a side agreement with the hedge fund’s adviser to receive a portion of the hedge fund adviser’s performance fee. The hedge fund collapsed in 2007 and the investment adviser’s clients lost nearly all of the money they invested in the hedge fund. The SEC’s complaint, filed in federal district court, charges the investment adviser and its owner with violation of the antifraud provisions of the federal securities laws. The SEC is seeking an injunction, disgorgement of the performance fees paid by the hedge fund’s adviser to the investment adviser, and financial penalties. On March 4, 2008, the SEC filed a civil action in federal district court against the hedge fund’s adviser and three of its principals in connection with the collapse of the hedge fund and another hedge fund.

For more information see the SEC materials available at
http://www.sec.gov/news/press/2008/2008-224.htm;
http://www.sec.gov/litigation/litreleases/2008/lr20737.htm;
http://www.sec.gov/litigation/complaints/2008/comp20737.pdf; and
http://www.sec.gov/news/press/2008/2008-28.htm.

The SEC announced that it will hold a roundtable on October 8, 2008, to discuss ways to modernize its disclosure system to give investors more usefully and timely information for investment decision making. The roundtable, part of the SEC’s 21st Century Disclosure Initiative, will be organized into two panels. One panel will explore the data, technology, and processes that companies and other filers use in satisfying their SEC disclosure obligations. The second panel will consider how the SEC could better organize and operate its disclosure system so that companies enjoy efficiencies and investors have better access to high-quality information. The SEC will invite as panelists investor representatives, company officials, information intermediaries, practitioners, and academics. The roundtable will take place at the SEC’s Washington DC headquarters from 9am ET to 1pm ET. A webcast of the roundtable will also be available on the SEC’s website.

For more information see the SEC Press Release available at
http://www.sec.gov/news/press/2008/2008-227.htm; and
http://www.sec.gov/disclosureinitiative.

The SEC announced that a district court judge granted its motion for summary judgment against the sole manager and principal owner of an investment manager of two hedge funds. The court found that the manager violated the anti-fraud provisions of the federal securities laws. The summary judgment order found that the manager materially overstated the funds’ valuations, manipulated the prices of seven securities that made up a material portion of the funds’ portfolio, failed to provide any basis to substantiate or explain the valuations of shell corporations held in the funds’ portfolios; provided investors with fake portfolio statements; and falsely represented the funds’ portfolio holdings in newsletters. The judge entered a permanent injunction against the manager for future violations of several of the federal securities laws and reserved ruling on the SEC’s claim for disgorgement with prejudgment interest against the sole manager. The SEC is seeking a financial penalty and disgorgement.

For more information see the SEC materials available at
http://www.sec.gov/news/press/2008/2008-225.htm.

The SEC staff issued a no-action letter allowing certain transactions between two merging investment advisers under Section 203 and 206 of the Investment Advisers Act of 1940 (“Advisers Act”). Specifically, the SEC staff would not recommend enforcement action if the acquiring adviser treats the purchase of assets and liabilities of the acquired adviser as an acquisition and assumption of substantially all of the assets and liabilities of the acquired adviser for purposes of Section 203(g) of the Advisers Act, rule 203-1 thereunder, and Instruction 4.a.(1) for Part 1A of Form ADV. In addition, the SEC staff would not recommend enforcement action under Section 206(3) of the Advisers Act if the acquiring adviser engages in certain principal transactions with former advisory clients of the acquired adviser (which client accounts were transferred to the acquiring adviser in connection with the merger) for 15 days after the acquisition if the following conditions are met: (a) the acquiring adviser makes the disclosures required by Section 206(3) to each advisory client within 15 business days after each transaction; (b) each transaction is consistent with the policy of the advisory client participating in the transaction; (c) the acquiring adviser maintains and preserves for a period of not less than 6 years, the first 2 years in an easily assessable place: (1) a written copy of all records relating to each transaction, and (2) a written record of each such transaction setting forth a description of the instrument purchased or sold, the identity of the parties to the transactions, and the terms of the purchase or sale transaction.

For more information see the SEC No-Action letter available at
http://www.sec.gov/divisions/investment/noaction/2008/barclays091908-203.pdf.

The SEC staff has stated in a no-action letter that it would not recommend enforcement action against any bank that participates in the Federal Reserve’s Asset-Backed Commercial Paper Money Market Fund Liquidity Facility without obtaining an exemptive order. The program enables U.S. depository institutions, bank holding companies (parent companies or U.S. broker-dealer affiliates), or U.S. branches and agencies of foreign banks (“banks”) to borrow from the Federal Reserve Bank of Boston on a nonrecourse basis if they use the proceeds to purchase certain types of asset-backed commercial paper (“ABCP”) from a money market fund at the amortized cost value of such ABCP. Specifically, the SEC staff stated that it would not recommend enforcement action under Section 17(a)(2) of the Investment Company Act of 1940 (“Investment Company Act”) against any bank that purchases ABCP from a money market fund that is an affiliated person of the bank when the amortized cost value of the purchased ABCP is equal to or greater than its market value at the time of the transaction. These transactions include the following characteristics:

• Because each purchase will be effected at the amortized cost of the security, the terms of the program address the concerns about overreaching that Section 17(a) was designed to prevent.
• The terms of the transaction would comply with the terms of rule 17a-9 under the Investment Company Act, except that the securities may continue to be “eligible securities” as defined in rule 2a-7 under the Investment Company Act.
• The ABCP to be purchased from a money market fund will be determined by the fund’s adviser, and must be made consistent with the adviser’s fiduciary duties to the fund, and in the best interest of fund’s shareholders.
• The money market fund will keep and maintain records of these transactions as required by rules 31a-1 and 31a-2 under the Investment Company Act.
• The transactions would meet the standards for the SEC to issue an exemptive order under Section 17(b) of the Investment Company Act.

For more information see the SEC No-Action letter available at
http://www.sec.gov/divisions/investment/noaction/2008/ici092508.htm.

The SEC’s Division of Investment Management has issued an FAQ about a money market fund that recently “broke a dollar” and money market funds in general. In addition to explaining what it means for a money market fund to “break a dollar” or “break a buck,” the SEC staff provided a status update on the money market fund that “broke a dollar.” Also, the FAQ briefly addresses the Treasury’s guarantee program and the steps the SEC is taking to prevent future problems with money market funds.

For more information see the SEC FAQ available at
http://www.sec.gov/divisions/investment/guidance/reservefundmmffaq.htm.

The SEC and the Financial Accounting Standards Board (“FASB”) provided clarification regarding FAS 157 to help preparers, auditors, and investors address fair value measurement questions. Specifically, the clarification addresses the following issues: (a) when there is not an active market for a security, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable; (b) broker quotes may be an input when measuring fair value, but are not necessarily determinative if an active market does not exist for the security (brokers may rely more on models with inputs based on the information available only to the broker); (c) disorderly transactions are not determinative when measuring fair value and orderly transactions in an inactive market should be considered in management's estimate of fair value; (d) there are various factors in determining whether an investment is other-than-temporarily impaired; and (e) clear and transparent disclosures are vital to providing investors with an understanding of the judgments made by management.

For more information see the SEC Press Release available at
http://www.sec.gov/news/press/2008/2008-234.htm.

The SEC’s Division of Trading and Markets provided guidance on the sale of loaned but recalled securities in an FAQ. The SEC staff confirmed that, if a person that has loaned a security to another person sells the security and a bona fide recall is initiated within 2 business days after the trade date, the person that has loaned the security is deemed to own the security for purposes of Rules 200(g)(1) and 200(b) of Regulation SHO. Also, such sale will not be treated as a short sale for purposes the following emergency orders: Form SH in the order requiring reporting of short sales, the order halting short selling in financial stock, and Rule 204T in the order to protect investors against “naked” short selling abuses. For purposes of these emergency orders, the broker-deal may mark such orders “long” and the close-out requirement for long sales under Rule 204T would apply to sales of securities.

As discussed above, this guidance has been incorporated and adopted into the SEC’s emergency order.

For more information see the SEC FAQ available at
http://www.sec.gov/divisions/marketreg/loanedsecuritiesfaq.htm.

The SEC issued orders extending the emergency orders it issued on September 17 and September 18, 2008. On October 2, 2008, the SEC issued an order to extend the emergency order that prohibited short selling of financial companies until three business days after the President’s signing of the Emergency Economic Stabilization Act of 2008, but in no case later than October 17, 2008. In addition, the SEC issued an order to extend the emergency order requiring the reporting of short sales of certain publicly traded securities by institutional money managers until October 17, 2008. The order states that Form SHs that were filed with the SEC under the original emergency order, including those that were due September 29, 2008, will remain non-public to the extent permitted by law without the filer needing to submit a confidential treatment request.

Also, the SEC issued an order extending the emergency order that eased restrictions on the ability of securities issuers to repurchase their securities pursuant to Rule 10b-18 under the Securities Exchange Act of 1934 (“Exchange Act”). This emergency order has been extended until October 17, 2008.

The SEC issued an order extending the emergency order aimed at reducing fails to deliver in a “naked” short sale and addressing potentially abusive “naked” short selling in all equity securities. The emergency order has been extended until October 17, 2008, but the SEC intends that the emergency order will continue in effect beyond that date without interruption in the form of an interim final rule. In addition, the SEC order incorporated and adopted the Division of Trading and Markets: Guidance Regarding the Commission’s Emergency Order Concerning Rules to Protect Investors Against “Naked” Short Selling Abuses and the Division of Trading and Markets Guidance Regarding Sale of Loaned but Recalled Securities (discussed below). Among other things, the SEC’s original emergency order: (a) adopted new rule 204T in Regulation SHO, on an emergency basis, requiring that short sellers and their broker-dealers deliver securities by the settlement date (three days after the sale transaction date, or T+3) and imposing penalties for failure to do so; (b) eliminated the options market maker exception from the close-out requirement in Rule 203(b)(3) in Regulation SHO; and (c) adopted rule 10b 21 under the Exchange Act, a new naked short selling anti-fraud rule.

For more information see the SEC materials available at
http://www.sec.gov/news/press/2008/2008-235.htm;
http://www.sec.gov/rules/other/2008/34-58711.pdf;
http://www.sec.gov/rules/other/2008/34-58703.pdf;
http://www.sec.gov/rules/other/2008/34-58723.pdf; and
http://www.sec.gov/rules/other/2008/34-58724.pdf.