Action Line Update

Association Files Amicus Brief on "Collective Scienter": The Association has filed a joint amicus brief with the Second Circuit in a case called Teamsters Local 445 Freight Division Pension Fund v. Dynex Capital Inc. The district court had held that a civil complaint alleging violations of Section 10(b) in connection with sales of asset-backed securities could allege scienter without pleading scienter against any particular employees of the corporation, but only that regional sales offices that purchased the mobile home loans backing the bonds disregarded the loans' creditworthiness. The brief argues that collective scienter is inconsistent with existing precedent and tantamount to liability for negligence on the part of the persons responsible for disclosure.

NASD and NYSE Proposed Rule Changes Regarding Research Analyst Conflicts of Interest Are Published in Federal Register: On January 17, the SEC published for comment in the Federal Register proposed rule changes to amend NYSE Rules 472 and 344, and NASD Rules 1050 and 2711 relating to research analyst conflicts of interest. Both the NASD and NYSE proposals would implement various changes regarding issues such as the disclosure of conflicts, the review of research reports by non-research personnel and restrictions on personal trading by research analysts. All comments must be submitted on or before March 5, 2007. The Federal Register Notice can be found here. For more information on this issue, please contact Mike Udoff at 212.618.0509 or mudoff@sifma.org.

NASD Responds to Industry Comments on Debt Mark-Up Interpretation: On January 12, the NASD responded to comments submitted to the NASD's latest proposed interpretation regarding mark-ups on debt securities. In its letter, NASD addressed comments submitted by the Association, including expanding the QIB exemption and restoring the size proposal. First, regarding the QIB exemption, NASD stated that it was important to see how the market adjusts to the basic exemption before it can further expand the exemption to include all transactions in securitized products that are rated investment grade between dealers and QIBs. On the second issue, NASD stated that the size proposal is an inappropriate basis to demonstrate that contemporaneous cost is not indicative of prevailing market price. In addition, NASD clarified the proposed provision regarding news developments. The full text of the letter is available here. For more information please contact Robbin Conner at 646.637.9228 (Structured Debt Securities), or Mary Kuan at 646.637.9220 (Corporate Debt Securities).

SEC Names James Brigagliano Associate Director of Market Regulation for Trading Practices and Processing: The SEC has named James Brigagliano as the Associate Director for Trading Practices and Processing in the Commission's Division of Market Regulation. Mr. Brigagliano is currently serving as Acting Associate Director, and oversees the Division's regulatory program in trading practices, clearance and settlement, and the enforcement liaison function. Prior to his involvement in the Division of Market Regulation, Mr. Brigagliano was Assistant General Counsel for Litigation and Administrative Practice in the Commission's Office of the General Counsel. The full press release is available here.

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.

SIFMA Responds to Moody's Proposal Regarding Rating of Preferred Securities and Hybrid Securities: On January 16, 2007, the Association filed a letter with Moody's regarding its recent proposal and amendment to such proposal regarding changes to Moody's guidelines for rating of preferred stock and hybrid securities. While the Association applauds Moody's for its desire to ensure that its rating for preferred stock and hybrid securities reflect the appropriate level of risk association with these securities, the Association notes a number of considerations that should be adequately and fully addressed before adoption of the proposal. Among other things, the letter requests detailed and well-supported rational identifying any risks associated with non-cumulative hybrid and preferred securities and further clarification about how and why those risks, if any, warrant a lower rating notch before implementing changes. The letter also requests an explanation for the proposal's inconsistent treatment of certain securities and justification for establishing a certain rating threshold for issuers for a one notch downgrade. In addition, the letter states that if Moody's does consider implementing the proposal, it should provide the public with a consolidated list of the securities subject to the proposal since market participants, particularly those holding many securities, would benefit from that information. For further information, please contact Mary Kuan at 646.637.9220.

SEC Issues Proposal to Amend Rule 105 of Regulation M Regarding Short Selling In Connection with a Public Offering: The SEC recently published a proposal to amend Rule 105 of Regulation M, which, by its terms, applies to fixed income securities as well as equity securities. The current Rule 105 restricts using the securities received in a registered offering to "cover" short sales during the restricted period. The proposal more generally prohibits any individual from effecting a short sale during the Rule 105 restricted period, and then purchasing, including entering into a contract of sale for, such a security in a registered offering, and does not provide an exception to allow those that close-out restricted period short sales prior to pricing to participate in the registered offering. The proposal, like the current rule, allows persons to effect short sales before the restricted period and still purchase, including entering into a contract of sale for, the security in the offering. Short sales are also permitted during the restricted period provided securities are not purchased during the offering. The Association is currently working on a response to this proposal. Comments for this proposal are due on or before February 12, 2007. For further information, 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.

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.

Federal Reserve Board Approves Policy on Payments System Risk Changes: For full story see Government and Federal Agency Markets Issues section.

SEC Approves of FICC Rule Filing Regarding Diversification of Clearing Fund Collateral: For full story see Government and Federal Agency Markets Issues section.

Federal Reserve Board Approves Policy on Payments System Risk Changes: The Federal Reserve Board on January 12 approved changes to its Policy on Payments System Risk. Under the revised policy, payments and settlement systems that are considered "systematically important" and that are subject to the Board's authority are expected to complete and disclose publicly self-assessments against the principles and minimum standards in the policy. The Board expects each systemically important system subject to its authority to complete and publish its initial self-assessment by December 31, 2007. The Board will communicate directly with each system expected to complete a self-assessment. The revisions also incorporate the Recommendations for Central Counterparties developed by the Committee on Payment and Settlement Systems of the central banks of the Group of Ten countries and the Technical Committee of the International Organization of Securities Commissions. These recommendations will serve as the Board's minimum standards for central counterparties identified as systemically important and subject to the Board's authority. The FRB's press release is available here, and the related notice is posted here.

SIFMA Publishes Exposure Draft of Guidelines on Delivery of GSE Offering Materials: The Association published an Exposure Draft of revisions to the Guidelines on Delivery of Offering Materials Relating to GSE Securities on January 16. The revised Guidelines incorporate an "access=delivery" electronic model for GSE offering materials and represents the first changes to the Guidelines since they were originally published in 1993. Comments on the Exposure Draft are due no later than January 31. The Exposure Draft can be accessed here. Questions and comments can be forwarded to Robert Toomey at 646.637.9224.

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.

Association Meets with SEC Regarding Mark-Up Policy for Securitized Products: Association staff and members met with representatives from the SEC last week to discuss issues surrounding the NASD's mark-up policy [SR-NASD-2003-141]. The active discussion covered topics such as whether the line for the QIB exemption in the policy between investment grade and non-investment grade makes sense for securitized products; how dealers and their counter-sides use models; and general market dynamics in the securitized products markets. The MBS and Securitized Products Division submitted a comment letter which discussed these and other issues to the SEC on January 3; it is available here. For more information please contact Robbin Conner at 646.637.9228.

Freddie Mac to Begin Posting Reference REMIC Tradable Supply Report : On January 10, Freddie Mac announced that it will begin to post to its website, on a monthly basis, a report detailing the 'net tradable supply' of its Reference REMIC securities. The report is available here. Please contact Robbin Conner at 646.637.9228 or Chris Killian at 646.637.9220 for more information.

Fed Governor Bies Speaks on Mortgage Lending: On January 11, Federal Reserve Governor Susan Schmidt Bies spoke to the National Credit Union Administration about enterprise risk management and mortgage lending. Bies' speech focused on nontraditional and subprime lending. She stated that "supervisors are discussing what can be done to ensure that [subprime] loans are being originated in a safe and sound manner and that consumers are being provided with clear and balanced information so that they can fully understand the terms and risks of these products. Subprime loan underwriting, when done prudently, should reflect all relevant credit factors, including the borrower's ability to service the debt." The complete text of Bies' speech may be found here. The discussion of mortgage lending begins about halfway down the page.

Association Files Amicus Brief on "Collective Scienter": For full story see Cross Market Issues section.

Federal Reserve Board Approves Policy on Payments System Risk Changes: For full story see Government and Federal Agency Markets Issues section.

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.

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.

MiFID Connect Publishes Draft Guidelines on UK Implementation of MiFID: MiFID Connect, a joint project of eleven industry associations including SIFMA, has published a set of draft guidelines relating to the expected Financial Services Authority (FSA) rules implementing the Markets in Financial Instruments Directive (MiFID) in the UK. The guidelines have been produced in accordance with MiFID Connect's five-stage programme of work, undertaken by the associations concerned and Clifford Chance, for establishing an industry approach towards MiFID implementation. The guidelines cover the application of MiFID requirements in relation to: (i) investment research; (ii) suitability and appropriateness; (iii) best execution; (iv) outsourcing, and (v) conflicts of interest.

CEBS, CEIOPS and CESR Publish Work Programme for 2007: The Committee of European Banking Supervisors (CEBS), the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) and the Committee of European Securities Regulators (CESR) have published a work programme for 2007, developed in accordance with their November 2005 Joint Protocol, which aims to make supervisory cooperation transparent across financial sectors and enhance consistency so that work done in one sector is coherent with the work developed in other financial sectors. During 2007, the three committees will perform joint work on: (i) financial conglomerates; and (ii) the implementation of the recommendations set out in the Financial Services Committee's February 2006 Report on Financial Supervision (endorsed by the Council of European Finance Ministers (ECOFIN) in May 2006).

EU Commission Welcomes CESR Report on Credit Rating Agencies: The EU Commission has welcomed the January 2007 Committee of European Securities Regulators (CESR) report concerning the compliance of credit rating agencies (CRAs) with the IOSCO Code of Conduct Fundamentals. In the light of the report's main conclusions, the Commission believes that no new legislative initiatives are needed as the Market Abuse Directive (MAD), the Capital Requirements Directive (CRD) and the Markets in Financial Instruments Directive (MiFID) adequately cover the most important aspects related to the activity of CRAs. However, the Commission does state that CRAs will need to continue their efforts to comply with the provisions of the code and will be pushing for improvements in areas where shortcomings have been identified.

CESR Level 3 Open Hearing on MiFID Passport and Inducement Provisions: The Committee of European Securities Regulators (CESR) will hold a level 3 open hearing on 2 February 2007 in relation to implementation of the Passport and Inducement provisions of the Markets in Financial Instruments Directive (MiFID). The hearing will take place at CESR's premises in Paris.

EU Commission Issues Second Call for Advice from CEBS on Large Exposures: The EU Commission has issued a second Call for Technical Advice, requesting advice from the Committee of European Banking Supervisors (CEBS) in relation to the current EU large exposure rules under the recast Banking Consolidation Directive (2006/48/EC) and the recast Capital Adequacy Directive (2006/49/EC). The call has been issued as part of a review which the Commission is obliged, under Article 119 of 2006/48/EC and Article 28(3) of 2006/49/EC, to conduct by 31 December 2007 in recognition of the limited changes which will be made in this area. The Commission asks CEBS to consider: (i) whether/to what extent, the issues identified throughout the call for advice can be addressed or improved through enhanced supervisory cooperation and convergence without recourse to legislative measures; and (ii) whether legislative and supervisory regimes in other jurisdictions contain features that should be considered in the EU.

Review of Financial Regulation in EU Published: The Open Europe website has published the results of a study, carried out by Keith Boyfield, Hugo Robinson and Lorraine Mullally, on the Financial Services Action Plan (FSAP) which aims to ensure the creation of a single EU market in financial services. The report sets out a list of proposals to improve the FSAP and the regulatory process for financial services. Amongst other things, the proposals include the simplification and clarification of the Transparency Directive and the Prospectus Directive, which, the report suggests, in their current form, impose unjustifiable costs on security issuers.

The Banca d'Italia (Bank of Italy) Issues Circulate No. 263The Banca d'Italia (Bank of Italy) has issued circular no 263, dated 27 December 2006, containing the "New regulations on Prudential Supervision on Banks" which set out a new framework for the capital adequacy supervision of banks and banking groups, implementing the recast Banking Consolidation Directive (2006/48/EC) and the recast Capital Adequacy Directive (2006/49/EC).

CEBS and CEIOPS Publishes Cross-Sectoral Comparison of Capital Instruments for Regulatory Capital Purposes: The Committee of European Banking Supervisors (CEBS) and the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) have published a report on the results of a cross-sectoral comparison, carried out by the Interim Working Committee on Financial Conglomerates (IWCFC), of the capital instruments that are currently eligible within European banking, securities and insurance regulation for prudential purposes. The comparison analyses the main similarities and differences between the characteristics of regulatory capital for a credit institution, an investment firm and an insurance entity. In the coming months, the IWCFC will analyse the impact that differences in the sectoral rules may have for the supervision of financial conglomerates.

EU Commission Consults on Regulation of Non-EU Audit Firms: The EU Commission has launched a consultation paper seeking views on its future strategy and priorities in relation to the regulation of non-EU audit firms. The consultation will assist the Commission in finding pragmatic and consistent solutions within the framework of the 8th Company Law Directive on statutory audit of annual accounts and consolidated accounts, which applies to both EU and non-EU audit firms. Comments are invited by 5 March 2007.

CEIOPS Publishes Statement on Role of Lead Supervisor for Insurance Groups: The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has published its "Statement on the role of the lead supervisor for insurance groups supervision" which clarifies the role of lead supervisor in the supplemental supervision of cross-border insurance groups. The statement sets out the tasks of the lead supervisor as defined in the Insurance Groups Directive and the Helsinki Protocol of May 2000 and as set out in "CEIOPS' Guidelines for Co-ordination Committees", as well as describing a "Lead Supervisor Protocol Framework".

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.