Action Line Update

Association Comments on FSA Paper on Retail Sales of Structured Products: The Association has filed a joint comment letter, along with ICMA, ISDA, LIBA and the ESF, responding to Discussion Paper 06/4 of the U.K. Financial Services Authority on the Responsibilities of Providers and Distributors for the Fair Treatment of Customers. The response comments that, as a result of the many different structures of structured products and the different roles that may be played by providers and distributors, providers and distributors themselves are in the best position to determine how to allocate responsibility for different aspects of customer fairness. Consequently, the FSA should require providers and distributors to agree on such an allocation, record it, and inform the customer who will respond to inquiries.

SEC Proposes Rule to Bar Fraud by Advisors of Unregistered Investment Pools: The SEC has proposed a new rule under the Investment Advisors Act making it an antifraud violation for an investment advisor to a pooled investment vehicle, including a hedge fund or other company exempt from registration as an investment company under Sections 3(c)(1) or 3(c)(7) of the Investment Company Act, to make false or misleading statements to investors or prospective investors in that pool. The rule would apply even if the advisor is not registered under the Investment Advisors Act. The SEC also proposed two new rules that would revise the definition of accredited investor as it relates to offers and sales to natural persons of interests in private investment pools. Rules 509 and 216 would define a new category of accredited investor, called an accredited natural person, that would apply to offers and sales of securities issued by private investment vehicles. The term would mean a person who meets either the net worth test or income test specified in rule 501(a) or rule 215 and owns at least $2.5 million in investments (tested at the time of the investment). The complete rule proposal is available here. Comments are due by March 9, 2007.

Association Files Amicus Brief on "Scheme" Liability: The Association has filed a joint amicus brief with the Fifth Circuit Court of Appeals in the Enron Securities, Derivative and ERISA litigation. The brief argues that the District Court's certification of a plaintiff class was inappropriate, since individual issues predominate. It also notes that the ruling creates vastly unfair settlement pressures. On the issue of "scheme" liability, the brief urges the appeals court to adopt a test that only a defendant's own misstatements or omissions or participation in well-defined types of "manipulative or deceptive" conduct can constitute a primary violation of section 10(b).

SEC Issues Proposed Rules on Bank Securities Activities, Reproposes Certain Dealer Exemptions and Proposes Amendment to Rule 15a-6: The SEC and the Board of Governors of the Federal Reserve System have proposed joint rules to define important terms under the exception for traditional banking activities from the definition of broker under the Exchange Act of 1934. The SEC also issued a companion proposal regarding certain bank dealer activities and various related matters. The joint rule proposal would implement the statutory exceptions that allow a bank, under certain conditions, to continue to conduct securities transactions for its customers as part of the bank's trust and fiduciary, custodial and deposit "sweep" functions, and to refer customers to a securities broker-dealer pursuant to a networking arrangement with the broker-dealer. The companion proposal issued by the SEC reproposes an exemption from the definition of "dealer" for banks' conduit securities lending activities, a conditional exemption from the definition of "dealer" for banks' riskless principal Regulation S transactions, clarifying amendment to Exchange Act Rule 15a-6 to align that rule with the Exchange Act bank broker and dealer provisions and related rules. The proposal would also withdraw Rule 3b-9, which was struck down by the D.C. Circuit in 1986 as beyond the power of the SEC. Finally, the SEC extended until July 2, 2007 the time when banks must comply with the new broker definition. The rule proposals are available at the following links: SEC Only and Joint Proposal. Comments will be due 90 days after publication in the Federal Register.

DOJ Issues Revised Guidelines on Waiver of Privilege and Advancement of Legal Fees: On December 12, the Department of Justice issued revised guidelines for federal prosecutors to use in determining whether to prosecute a corporation. The guidelines, entitled the Principles of Federal Prosecution of Business Organizations (the McNulty Memorandum), significantly alter the 2003 DOJ memorandum on the same topic, known as the Thompson memorandum. The revised guidelines provide clarity about when a request for waiver may be sought, and requires that such requests must be approved and documented. The McNulty Memo lists specific circumstances under which the waiver can be requested, and also separates documents into Category I (privileged documents containing purely factual information), and Category II (privileged documents containing legal advice and opinions). The Memo states that requests for Category II documents should be rare, and the request must be approved by the United States Attorney and the Deputy Attorney General and, if approved, must be communicated in writing to the corporation. Finally, the McNulty Memo moves further away from the Thompson Memo by stating that prosecutors should generally not take into consideration a corporation's advancement of attorney's fees to employees when assessing cooperation unless there is evidence that the advancement of fees is being used to impede the government investigation.

SEC Issues Fee Rate Advisory #5 For Fiscal Year 2007: The SEC has announced that the continuing resolution funding for fiscal year 2007 has been extended through February 15, 2007, therefore, fees paid under Section 6(b) of the Securities Act of 1933 and Section 13(e), 14 (g) and 31 of the Securities Exchange Act of 1934 will remain at their current rates. Five days after the date of enactment of the SEC's regular fiscal year 2007 appropriation, the Section 6(b) fee rate applicable to the registration of securities, the Section 13(e) fee rate applicable to the repurchase of securities, and the Section 14(g) fee rate applicable to proxy solicitations and statement in corporate control transactions will decrease to $30.70 per million dollars from the current rate of $107.00 per million dollars. Additionally, thirty days after the appropriation, the Section 31 fee reate applicable to securities transactions on the exchanges and in the over-the-counter markets will decrease to $15.30 per million dollars from the current rate of $30.70 per million dollars. The assessment of securities futures transactions under Section 31(d) will decrease to $0.0042 for each round turn transaction from the current rate of $0.009. A press release is available here.

SEC Votes to Repropose Rules Allowing Foreign Private Issuer Deregistration Under the Exchange Act: The SEC has voted to repropose amendments to rules governing when a foreign private issuer may terminate the registration of a class of equity securities under Section 12(g) of the Securities and Exchange Act of 1934 and the corresponding duty to file reports required under Section 13(a) of the Exchange Act, and when it may cease its reporting obligations regarding a class of equity or debt securities under Section 15(d) of the Exchange Act. The amendments would allow foreign registrants to terminate their Exchange Act reporting obligations based on a quantitative benchmark designed to measure relative U.S. market interest for that class of securities. A press release is available here. Comments on the proposal will be due 30 days after publication in the Federal Register.

SIFMA Files Lawsuit to Protect Privacy of Connecticut Children and Spouses: For full story see Municipal Markets Issues section.

Senior Staff Positions Filled in Treasury's Office of Domestic Finance: For full story see Government and Federal Agency Markets Issues section.

SEC Approves FICC Rule Filing Relating to Assurances of Financial Responsibility: For full story see Government and Federal Agency Markets Issues section.

FICC GSD to Change Clearing Fund Methodology: For full story see Government and Federal Agency Markets Issues section.

FICC Files Proposed Rule Change Relating to the Wind-Down of a Participant: The Fixed Income Clearing Corporation filed with the Securities and Exchange Commission a proposed rule change regarding the wind-down of a FICC participant. The proposed rule change would add a new Rule 21A, Wind-Down of a Netting Member, to the Rules of FICC's Government Securities Division ("GSD") and a new Rule 2A, Wind-Down of a Participant, to the Rules of FICC's Mortgage-Backed Securities Division ("MBSD") to address a situation where a participant notifies FICC that it intends to wind down its activities and FICC determines, in its discretion, that it must take special action in order to protect itself and its participants. If you have any questions on this, please feel free to contact Robert Toomey at 646.637.9224 for GSD questions, and Robbin Conner at 646.637.9228 for MBSD questions.

Senior Staff Positions Filled in Treasury's Office of Domestic Finance: For full story see Government and Federal Agency Markets Issues section.

SEC Approves FICC Rule Filing Relating to Assurances of Financial Responsibility: The Securities and Exchange Commission (SEC) has approved an FICC rule filing that amended FICC's rules to, among other things, provide for actions that FICC might take to seek additional assurances from members in the event FICC is concerned about a member's financial responsibility or operational capability. If you have any questions regarding the rule change, please contact Robert Toomey at 646.637.9224.

FICC GSD to Change Clearing Fund Methodology: As was previously announced, the Government Securities Division of the Fixed Income Clearing Corporation plans to implement changes to its Clearing Fund methodology. A rule filing has been filed with the Securities and Exchange Commission ("SEC") in this regard. In the first quarter of 2007 and subject to SEC approval, FICC will replace the current GSD clearing fund calculation with a Value at Risk ("VaR") model. If you have any questions regarding the rule change, please contact Robert Toomey at 646.637.9224.

Senior Staff Positions Filled in Treasury's Office of Domestic Finance: With the swearing in of Tony Ryan as Assistant Secretary for Financial Markets on Monday December 18, a number of new senior staff positions at the Treasury's Office of Domestic Finance have been filled. They include Robert K. Steel, Under Secretary for Domestic Finance, Anthony Ryan, Assistant Secretary for Financial Markets, Matthew T. Abbot as Deputy Assistant Secretary for Federal Finance, and Karthik Ramanathan as Director, Office of Debt Management. If you have any questions on this, please feel free to contact Robert Toomey at 646.637.9224.

FICC Files Proposed Rule Change Relating to the Wind-Down of a Participant: For full story see Funding Issues section.

Fannie Mae Publishes New Single-Family MBS Master Trust Agreement : Fannie Mae has published on its website a new Single-Family MBS Master Trust Agreement for both fixed-rate and adjustable-rate mortgages, which includes servicing clarifications for MBS mortgage loan administration. The document, which Fannie Mae states generally retains the basic approach of the current Trust Indentures, is available here. Fannie Mae said the new Trust Agreement accomplishes the following objectives: It incorporates key servicing requirements; It more clearly describes Fannie Mae's roles as issuer, master servicer, guarantor, and trustee; It clarifies the servicer's role as the "Direct Servicer"; Overall, it better reflects current market practices. Fannie Mae has not yet announced an effective date for the new Trust Agreement. Fannie Mae expects to announce an effective date for the Trust Agreement during the first quarter of 2007. Fannie Mae's press release is available here. More information is available here. Please contact Robbin Conner at 646.637.9228 or Chris Killian at 646.637.9226 with questions or comments.

FNMA Updates List of Mega Pools Ineligible for Mega and REMIC Re-Securitization (December 2006): Fannie Mae has posted an updated list of mega pools which remain ineligible for inclusion in mega and REMIC re-securitizations due to discrepancies in their subtypes. The list is attached to this email, in PDF and text formats. Fannie Mae's announcement is available here. The original announcement from March 3 is available here. Please contact Chris Killian at 646.637.9226 with any questions.

SEC Approves FICC Rule Filing Relating to Assurances of Financial Responsibility: For full story see Government and Federal Agency Markets Issues section.

FICC Files Proposed Rule Change Relating to the Wind-Down of a Participant: For full story see Funding Issues section.

Federal Judge Grants Preliminary Injunction in SIFMA Suit to Protect Privacy of Children: On January 2, 2007, Judge Stefan R. Underhill of the U.S. District Court in Connecticut granted SIFMA a preliminary injunction to stop the state from publishing the names of dependent children of principal officers of state contractors on the internet website of the Connecticut State Election Enforcement Commission. Judge Underhill did not grant a preliminary injunction with respect to publishing the names of spouses of principal officers because he did not believe SIFMA had shown imminent harm to the spouses that would outweigh the State?s interest in the enforcement of its campaign finance reform law. The constitutionality of the publication requirement as to both spouses and children will now be litigated on the merits. For further information, please contact Leslie Norwood at 646.637.9230.

SIFMA Files Lawsuit to Protect Privacy of Connecticut Children and Spouses: On December 15, the Securities Industry and Financial Markets Association filed a complaint in the U.S. District Court (D. Conn.) challenging the constitutionality of provisions of the Connecticut Campaign Finance Law that prohibit certain political contributions to State Officials by the spouses and dependent children of principals of state contractors (including municipal underwriters) and require the State to publish the names of spouses and dependent children of state contractors on the State Election Enforcement Commission's Internet site on December 31, 2006. SIFMA also filed a motion for preliminary injunction to suspend the posting requirement. The law, if fully implemented, forces executives and managers of state contractors to reveal the names of their spouses and dependent children, even if the contractor's family live out of state and have made no contributions. In the suit, SIFMA argues that both Connecticut's campaign finance reform disclosure requirement as it applies to spouses and children, and the provision banning spouses and dependent children from making campaign contributions, are unconstitutional under the First and Fourteenth Amendments as they deprive individuals of their constitutionally-protected rights to privacy, to freedom of association, to equal protection and to free speech. The press release is available here. For further information, please contact Leslie Norwood at 646.637.9230.

ECB Publishes Report Assessing Accounting Standards from Financial Stability Perspective: The European Central Bank (ECB) has published a report prepared by the Banking Supervision Committee of the European System of Central Banks (ESCB) assessing accounting standards from the perspective of financial stability in the banking sector, focusing on the EU's introduction of a new accounting framework based on International Financial Reporting Standards (IFRS). The report establishes criteria considered relevant to financial stability against which it evaluates IFRS, and concludes with a presentation of its main findings and proposals highlighting positive features of IFRS, as well as areas where concerns for financial stability arise, notably: (i) the reliability of fair values; (ii) the economic basis for hedge accounting; and (iii) the provisioning regime.

Association Comments on FSA Paper on Retail Sales of Structured Products: For full story see Cross Markets Issues section.

Associations Publish Joint Response to CESR MiFID Market Transparency Consultation: 14 trade associations, including SIFMA, jointly responded to a recent consultation by the Committee of European Securities Regulators (CESR) regarding CESR's proposed Level 3 guidance on publication and consolidation of market transparency information under the Market In Financial Instruments Directive (MiFID).

ESF and CMSA Europe Issue Market Guidelines on Compliance with MAD for ABS and CMBS Markets: The European Securitisation Forum (ESF) and the Commercial Mortgage Securities Association Europe (CMSA Europe) have jointly issued market guidelines to assist participants in the asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS) markets in complying with the Market Abuse Directive (2003/6/EC or MAD) requirements for assessment and disclosure of inside information in post-issuance transaction reporting. The guidelines identify key provisions of MAD relevant to the ABS and CMBS markets, explain difficulties in interpreting the provisions as a result of certain features of those markets, and make recommendations on procedures and parties responsible for assessing and disclosing inside information and practices to adopt.

MiFID Connect Organises a Conference on MiFID Practical Implementation Issues: The associations, including SIFMA, constituting MiFID Connect are organising a conference in London for members about the practical implementation issues raised by the Market in Financial Instruments (MiFID) on January 10, 2007. Further information regarding the program, location and registration is available on the draft agenda.

ECMI Publishes Policy Brief on Bond Market Transparency: The European Capital Markets Institute has published a Policy Brief that contributes to the ongoing debate on the possible extension of MiFID trade transparency requirements (currently limited to share trading) to non-equity markets. It presents the pros and cons of introducing greater transparency into the marketplace, including a model on the possible impact of increasing transparency. The paper also highlights the insufficient level of data available to market participants and regulators on volumes and aggregate bond market activity, as well as the lack of appropriate information made available to retail investors, suggesting that dealers may have little time to come up with a solution, and that an industry code of conduct may be an appropriate avenue - and one preferable to legislative initiatives - for introducing more transparency uniformly (within each fixed income asset class) across the EU.

EU Commission Publishes Communication on Investment Research and Financial Analysts: The EU Commission has published a Communication which provides practical guidance to interested parties on the provisions of the Market Abuse Directive (2003/6/EC or MAD) and the Markets in Financial Instruments Directive (MiFID) relating to investment research and financial analysts, and responds to the September 2003 paper by the Forum Group on Financial Analysts, entitled "Financial Analysts: Best practices in an integrated European financial market", which set out recommendations to help inform the drafting of the such legislation. Amongst other things, the Communication provides an overview of the provisions contained in MAD and MiFID relating to conflicts of interest in investment research.

CESR Defines Work Programme for 2007: The Committee of European Securities Regulators (CESR) has defined its work programme for 2007. During this period, CESR plans to maintain its efforts to converge practices in the daily application of requirements contained in the Transparency Directive and the Markets in Financial Instruments Directive (MiFID), both of which will come into effect in 2007. CESR has divided its work programme for 2007 into four main priority areas: (i) markets and intermediaries; (ii) financial information; (iii) policy; and (iv) supervisory convergence and peer pressure.

ECB Assesses Hedge Fund Risk Transparency: The European Central Bank (ECB) has published its December 2006 Financial Stability Review, which provides an overview of proposals to enhance transparency of hedge fund activities as an alternative to direct regulation. The review assesses four measures for improving risk information available on hedge funds and other highly leveraged institutions, including: (i) enhanced reporting to supervisors and regulators, as pursued by the FSA in the UK; (ii) voluntary and confidential reporting to authorities; (iii) universal public disclosure; and (iv) the introduction of a single international credit register, which would deliver customised aggregate information packages to various recipient groups based on their access level. The review concludes that the credit register option is potentially the most effective method of ensuring rigorous monitoring of the sum of a hedge fund's activities, thereby minimising risky concentrations of large exposures among and across hedge funds.

FSA Publishes December 2006 International Regulatory Outlook: The Financial Services Authority (FSA) has published its December 2006 International Regulatory Outlook, which aims to help stakeholders plan for regulatory change by highlighting issues of potential concern, as well as opportunities. Amongst other things, the paper addresses: (i) the implementation of significant EU banking and securities legislation, such as the Markets in Financial Instruments Directive (MiFID) and the Capital Requirements Directive (CRD); and (ii) developments in the FSA's approach to better regulation.

CEBS Publishes Financial Reporting Guidelines: The Committee of European Banking Supervisors (CEBS) has published guidelines for the implementation of the consolidated financial reporting framework (FINREP) to be used by credit institutions and investment firms when preparing their consolidated supervisory financial returns under International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) or the Capital Requirements Directive (CRD), as and when required by a European Union Supervisory Authority.

CEIOPS Publishes Results of Second Quantitative Impact Study on Solvency II: The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has published the results of its second quantitative impact study (QIS2) which was carried out in order to assist the EU Commission with the Solvency II project. QIS2 aims to analyse the effect on insurance undertakings of the possible restatement of the value of both assets and liabilities under the Solvency II framework, as well as some possible options for setting the capital requirement (Minimum Capital Requirement and Solvency Capital Requirement). The third quantitative impact study (QIS3) is scheduled for Spring 2007, after which CEIOPS will finalise its advice to the EU Commission on capital requirements.

EU Commission Launches Call for Evidence on Commodity and Exotic Derivatives Business: In order to help fulfil its obligations under various provisions of the Markets in Financial Instruments Directive (MiFID) and the re-cast Capital Adequacy Directive (2006/49/EC) (CAD) to present a report to the EU Parliament and Council by the end of April 2008 regarding aspects of the regulatory framework concerning commodity and exotic derivatives business, the EU Commission has launched a call for evidence seeking feedback from interested parties. The articles concerned are: (i) Articles 65(3)(a), (b) and (d) of MiFID; (ii) Article 40(2) of Commission Regulation 1287/2006 implementing MiFID; and (iii) Article 48 of CAD. Comments are invited by 30 April 2007.