Action Line Update

Agencies Publish Revised Statement on Complex Structured Finance: The SEC, the Fed, the OCC and the OTC have published a final version of the Interagency Statement on Complex Structured Finance Transactions. Most of the changes are not in the body of the Statement but in the discussion called "Overview of the Final Statement". Of particular interest are (1) the reminder that CSFTs typically are conducted by a limited number of large financial institutions, so that the Statement will not affect the vast majority of financial institutions; (2) a footnote clarifying the effect of the statement on a U.S. branch or agency of a foreign bank; (3) the response to a group of law professors who had argued that CSFTs with one or more of the characteristics identified in the Statement should presumptively be prohibited; (4) the Agencies' refusal to state that institutions do not have a duty to ensure the accuracy of a client's public filings or accounting, and (5) the discussion of the need to document the decisions of an institution's senior CSFT committee.

Auction Agents Settle SEC Proceeding: Three firms that act as auction agent for auction rate securities have settled an action by the SEC in which the Commission criticized them for accepting initial or revised bids after bid submission deadlines and allowing broker-dealers to intervene in auctions after bid submission deadlines to prevent a failed auction or an all-hold auction. The agreed upon cease and desist order may be found here.

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.

SIFMA Comments to SEC on NASD Mark-Up Interpretation for Debt as it Applies to Corporate Debt Securities: On January 3, the Association filed a letter to the SEC regarding the NASD's most recent mark-up proposal, SR-NASD-2003-141 (Mark-Up Policy for Transactions in Debt Securities, Except Municipal Securities). The letter applauded the NASD's recognition that a dealer's relationships with institutional customer are qualitatively different from its relationships with retail customer and supports the NASD's proposal to exempt from NASD Rule 2440 and IM-2440 ("Mark-Up Policy") certain trades between dealers and qualified institutional buyers ("QIBS"). The Association also requested that the NASD (1) expand the exemption from the Mark-Up Policy to include transactions by dealers with QIBs in certain additional securities; (2) provide dealers with more guidance regarding the definition of "contemporaneous cost", including resorting the "size" proposal; (3) allow for a more flexible and nuanced approach in determining prevailing market price where the dealer establishes that contemporaneous cost is not the best advice of the prevailing market price; and (4) expand the discussion of the situations in which a bond dealer may consider itself a market maker. The Association's MBS and Securitized Products Division also submitted a separate complementary letter. For further information on the Corporate Credit Markets Division comment letter, please contact Mary Kuan at 646.637.9220.

New York Stock Exchange Files Proposed Rule Change Regarding Delisting: On December 20, 2006, the SEC published a proposed rule change that would eliminate the NYSE's discretion to permit companies that have not filed their periodic annual report within 12 months of the filing due date to continue to be listed. The proposed rule change can be found here. The NYSE's existing rule grants the NYSE the ability to forebear from commencing suspension and delisting of a company that has failed to file its periodic annual report within 12 months from the filing due date if the NYSE believes that, pursuant to certain factors, including the company's relative financial health and compliance with NYSE listing standards, the company remains suitable for listing. If the proposed rule change is approved, the NYSE's discretion to allow continuation of listing for companies that have failed to file their annual report by 12 months of the filing due date will expire on December 31, 2007. If the NYSE grants a dispensation to a company prior to December 31, 2007, and the company fails to file its periodic annual report by December 31, 2007, suspension and delisting procedures will commence. The deadline for comments is January 18, 2007. For further information, please contact Mary Kuan at 646.637.9220.

Corporate Credit Markets Division Master Agreement Among Underwriters Subcommittee Meeting: The next meeting of the Corporate Credit Markets Division Master Agreement Among Underwriters Subcommittee will be held on Wednesday, January 10, 2007 at 3 p.m. (ET) at the Association's 360 Madison Avenue New York office. For further information, please contact Mary Kuan at 646.637.9220.

SEC Approves of FICC Rule Filing Regarding Diversification of Clearing Fund Collateral: 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.

SEC Approves FICC Rule Filing Regarding Diversification of Clearing Fund Collateral: The Securities and Exchange Commission (SEC) has approved and Fixed Income Clearing Corporation rule filing which modifies the rules of both Divisions of FICC to diversify and standardize Clearing/Participants Fund collateral requirements across the Divisions, and specifically to expand the types of instruments which FICC may accept as eligible Clearing Fund securities and establish concentration requirements with regard to the use of certain securities; to create a correlating range of haircuts to be applied to these expanded types of eligible Clearing Fund securities; and lastly to eliminate letters of credit as a generally acceptable form of collateral securing the member's open account Clearing Fund indebtedness. The approved changes have not yet been implemented. FICC will issue a subsequent important notice notifying members of upcoming implementation timeframes. If you have any questions regarding the rule change, please contact Robert Toomey at 646.637.9224.

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.

SIFMA Comments to SEC on NASD Mark-Up Interpretation for Debt as it Applies to Structured Securities: On January 3, 2007 the MBS and Securitized Products Division of the Association submitted a comment letter to the SEC regarding the NASD's most recent mark-up proposal, SR-NASD-2003-141. This letter focuses on certain issues surrounding the mark up proposal which are specifically important to the securitization market. Please click here to view the letter: link . For more information please contact Robbin Conner at 646.637.9228.

SEC Approves FICC Rule Relating to Unregistered Investment Pools : The SEC has approved a rule filing by the FICC which defines and outlines criteria for clearing membership of unregistered investment pools. The final rule defines an Unregistered Investment Pool and outlines criteria for clearing membership in the MBS Division of the FICC, including a minimum net assets threshold of $250MM on a standalone basis, or $50MM if the pool's investment advisor has assets under management of at least $1.5B and advises an existing MBS Division participant. The pool must also obtain a rating of "above average" on an internal FICC quality assessment. The rule is available here.

FRB Governor Kohn Speaks on Housing Markets: Federal Reserve Board Governor Donald L. Kohn spoke to the Atlanta Rotary Club on January 8 about the economy, with a particular focus on housing. Kohn noted that "Although house prices nationally have decelerated noticeably and appear to have fallen in some markets, they are still high relative to rents and interest rates", but also that "that the recent data on consumer spending provide some very tentative evidence that the cooling of the housing market will have a limited effect on other forms of spending". For the complete text of Kohn's speech, click here.

Approval of FICC Rule Filing - Diversification of Clearing Fund Collateral: For full story see Government and Federal Agency Markets 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.

SIFMA Submits Final Comment Letter Regarding NJ Pay-to-Play Rules: On January 5, 2007 SIFMA submitted a comment letter to the New Jersey Election Law Enforcement Commission (ELEC) regarding its definition of "vice president". The letter suggested using a narrow definition of the term "vice president" in the definition of the term "officer", so as to make clear the rule only covers those intended to be covered by MSRB Rule G-37. Attached please find the final comment letter as submitted to the New Jersey Election Law Enforcement Commission (ELEC). For further information, please contact Leslie Norwood at 646.637.9230.

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.

CESR to Hold Open Hearing on Supervisory Functioning of Prospectus Directive: The Committee of European Securities Regulators (CESR) will hold an open hearing on 16 January 2007 in its Paris office in relation to its November 2006 call for evidence on the supervisory functioning of the Prospectus Directive and the accompanying level 2 Prospectus Regulation.

CEBS Defines Work Programme for 2007: The Committee of European Banking Supervisors (CEBS) has defined its work programme for 2007, available on its website. CEBS will focus on the convergence of supervisory practices in the operational implementation of the new framework for capital adequacy introduced by the Capital Requirements Directive (CRD), which implements the revised Basel Capital Accord (Basel II) in the EU. CEBS has divided its work programme into three main priority areas: (i) regulatory advice to the EU Commission; (ii) work to support the convergence of supervisory practices, also with a view to enhancing the cost efficiency of prudential supervision; and (iii) issues concerning co-operation and information exchange.

EU Commission Publishes Report Evaluating Financial Collateral Directive: The EU Commission has published an evaluation report on the implementation and impact of EU Directive 2002/47 on financial collateral arrangements, as required under Article 10 of the Directive. Although late implementation by many member states means that market experience of the Directive is relatively recent, the report concludes that the Directive has simplified the process of taking financial collateral and enforcing financial collateral obligations. The report also contains various proposals, including; (i) the amendment of the Directive to include specific kinds of receivables, such as credit or other claims, in the list of assets that may serve as collateral; (ii) the deletion of Article 4(3) which allows member states to opt out of the right of appropriation for the collateral taker; and (iii) the amendment of the conflict of laws rule in Article 9.

CESR Publishes Report Concerning Compliance of Credit Rating Agencies with IOSCO Code of Conduct Fundamentals: The Committee of European Securities Regulators (CESR) has published a report for the EU Commission concerning the compliance of credit rating agencies (CRAs) with the IOSCO Code of Conduct Fundamentals. Although the report notes that, to a large extent, the codes of the CRAs investigated comply with the IOSCO fundamentals, it also highlights that all of the CRAs investigated have deviated from them in relation to: (i) ancillary services; and (ii) unsolicited ratings.

FSA Publishes Eleventh Quarterly Consultation Paper: The Financial Services Authority (FSA) has published its eleventh quarterly consultation paper (CP07/1) which invites comments on miscellaneous proposed amendments to the FSA Handbook, including changes to: (i) the Supervision manual (SUP) which amend the references to prudential categories that have been replaced with new categories due to the introduction of GENPRU and BIPRU and the implementation of the Markets in Financial Instruments Directive (MiFID); and (ii) the New Collective Investment Schemes sourcebook (COLL) in order to clarify the use of the terms "deposit" and "single body" in reference to deposits placed by UCITS schemes and non-UCITS retail schemes. Comments are invited by 5 March 2007.

City of London Publishes Report on Implementation of Second Money Laundering Directive: A report by the British Institute of International and Comparative Law (BIICL), entitled "Comparative Implementation of EU Directives (II) - Money Laundering", has been published on the City of London website. The report examines the way in which the Second Money Laundering Directive (2001/97/EC) has been implemented in the UK, Spain, Italy, Greece, Poland and Lithuania and the respective arrangements in each country for monitoring and enforcing compliance. It is anticipated that the findings of the report will help to identify the changes that will be required to implement the Third Money Laundering Directive by December 2007.

FSA Publishes Handbook Development Newsletter for December 2006: The Financial Services Authority (FSA) has published its latest update on changes and prospective amendments relating to its Handbook of Rules and Guidance. The December 2006 edition reviews relevant consultation material published since the November 2006 newsletter and provides a timetable for forthcoming publications. In addition, the newsletter includes: (i) a short explanation of the content of relevant consultation material; and (ii) details of recent Handbook developments.

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.