Action Line Update

Association Argues that Fraud-on-Market Theory Does Not Apply to Research Analyst Statements: The Association has filed an amicus brief with the Second Circuit arguing that the fraud-on-the-market theory first enunciated in Basic v. Levinson should not apply to non-issuer statements such as research reports. Consequently, the "predominance" requirement for class certification is not satisfied in a research analyst case, because questions of individual reliance on the research report would predominate. The brief argues that the market does not accord the same authority to analst statements as to statements from the issuer. In addition, if the presumption were extended to such third party statements, it would turn firms that employ analysts into guarantors of the market value of the securities they write about, ultimately affecting their coverage decisions.

SEC Proposes Amendments to Require Universal Internet Availability of Proxy Materials: The SEC has proposed amendments to the proxy rules of the Securities Exchange Act of 1934 that would require issuers to make proxy materials available to shareholders by posting them on an Internet Web site. Shareholders would then be notified of the availability of proxy materials. In a separate release, the SEC also concurrently adopted rules allowing issuers to voluntarily provide proxy materials over the Internet if they wish. Comments are due by March 30, 2007.

Bush Executive Order Requires Agencies to Identify Market Failures: The President has issued an amendment to Executive Order 12866 that requires government agencies that propose certain new regulations to identify in writing the specific market failure that the regulation is intended to address, and to assess the significance of that problem. The purpose of the new information is to enable an assessment of whether new regulation is warranted.

Association Challenges Applicability of U.S. Antitrust Rules to Securities Syndicates: The Association has filed a joint friend of the court brief with the U.S. Supreme Court arguing that underwriters should have implied immunity from suits brought under the antitrust laws because underwriting activities are pervasively covered by the securities laws and many aspects of the fixed-price underwriting system are inconsistent with the scheme of the antitrust laws. The case, Credit Suisse Securities v. Glen Billing, arose when a group of investors who bought stock in IPOs of technology-related companies sued a group of underwriters complaining, among other things, about the same activities that were the subject of the SEC's laddering complaints. The brief points out that the securities laws direct the SEC to consider a wide variety of factors, including not only competitive considerations but also the promotion of efficiency and capital formation. SIFMA was joined in the brief by the Chamber of Commerce of the U.S. and the Business Roundtable. It was represented by Russell Roberts Englert Orseck and Untereiner and by former U.S. Solicitor General and Judge Robert H. Bork.

NASD Members Approve By-law Changes Needed for Merger: NASD has announced that members overwhelmingly approved the by-law changes necessary for the consolidation of NASD with NYSE Regulation. According to NASD, 83% of members voted and 64% approved the amendments. The merger is expected to be effective during the second quarter.

Save-the-Date: Insurance and Risk-Linked Conference April 23-24, 2007 : The Association will host its insurance and risk-linked conference, the only conference developed exclusively by industry professionals, for industry professionals in April. The conference is set for April 23-24 at the Marriott Marquis in New York City. For further information, please contact Mary Kuan at 646.637.9220. For sponsorship opportunities, please contact Jenifer Walter at 646.637.9290.

Master Agreement Among Underwriters Meeting: The next meeting of the Master Agreement Among Underwriters will be held on Tuesday, February 6, 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.

Money Market Committee Meeting: The next meeting of the Money Market Committee will be held on Wednesday, February 7, 2007 at 4 p.m. (ET) at the Association's 360 Madison Avenue New York office. For further information, please contact Mary Kuan at 646.637.9220.

FICC Rule Proposals Approved: For full story see Government and Federal Agency Markets Issues section.

FICC Reminds Netting Members of Foreign Affiliate Trading Reporting Requirement: For full story see Government and Federal Agency Markets Issues section.

Treasury Issues Primary Dealer Questions for Quarterly Refunding: The Treasury Department's Primary Dealer Questions for its February 2007 Quarterly Refunding are available. Treasury is looking for feedback on how the primary dealers would characterize market conditions in on-the-run Treasury securities versus off-the-run Treasury securities. If you have any questions or comments please contact Robert Toomey at 646.637.9224.

FICC Rule Proposals Approved: On January 19 the Securities and Exchange Commission (SEC) approved two Fixed Income Clearing Corporation's rule proposals. The first approved rule proposal filed by FICC on September 22, 2006, sought to amend FICC's Government Securities Division's ("GSD") rules to permit GSD members to request the return of excess clearing fund collateral held on deposit with FICC on a more frequent basis than was allowed under GSD's rules. The second approved rule, filed October 16, 2006, proposed to adjust the deadline for satisfying a clearing fund deficiency call from 10:30 a.m. to 9:30 a.m. in the Schedule of Timeframes in FICC's GSD rulebook.

FICC Reminds Netting Members of Foreign Affiliate Trading Reporting Requirement: The Fixed Income Clearing Corporation reminded Netting Members of their requirement to report certain GSD netting-eligible activity engaged in by their foreign affiliates to FICC. Specifically, netting members must report to FICC in writing on an annual basis whether, and to what extent, any of their foreign affiliates engaged in GSD netting-eligible activity that exceeded the de minimis amount specified in GSD's Rules. Netting Members are required to submit the requisite information to FICC by January 31, 2007 for trading activity conducted by their foreign affiliates during the entire year of 2006. A form for this purpose has been provided by FICC.

Treasury Announces Certain Marketable Treasury Securities Not Eligible for Legacy Treasury Direct System: The U.S. Treasury Department released a final rule amendment, that provides that certain marketable Treasury securities to be auctioned will not be eligible for purchase or holding in the Legacy Treasury Direct System. Treasury issued this amendment to the auction rules because the Legacy Treasury Direct System will eventually be phased out.

Freddie Mac To Pass Through Principal Prepayments In 31 ARM PC Pools : Freddie Mac has announced it will pass through full prepayments of principal totaling $104,916,111.80 that represent repurchases of 451 "hybrid" adjustable-rate mortgage loans from 31 single-family adjustable-rate Mortgage Participation Certificate (PC) pools. Freddie Mac will reflect the prepayment activity in its February 2007 Pool Factors and will pass through the principal prepayments on the March 2007 distribution date for these adjustable-rate PCs. The adjustable-rate loans and related PCs are all still in their fixed-rate periods and have not commenced index-based adjustment to their rates. One of Freddie Mac's sellers recently notified the company that during the second half of 2006 it inadvertently delivered certain adjustable-rate mortgage loans with a LIBOR index into Freddie Mac PC pools that bear a prefix for Treasury indices. These errors triggered the repurchases. Of the adjustable-rate PC pools affected, seven have been re-securitized into nine Freddie Mac Giant adjustable-rate PCs. A listing of affected pools is attached, and is also available (along with a full press release) here. Please contact Chris Killian at 646.637.9226 for more information.

FDIC Issues Supervisory Policy on Predatory Lending: On January 22, the FDIC issued Supervisory Policy on Predatory Lending, which distinguishes predatory lending from subprime lending to consumers with limited or problem credit histories. In this policy the FDIC states that "questionable loan underwriting and the risk of litigation raise... safety and soundness concerns", while acknowledging that "there is no simple checklist for determining whether a particular loan or loan program is predatory" and also that "[subprime loans] have a legitimate place in the market". The FDIC notes that signs of predatory lending include the lack of a fair exchange of value or loan pricing that reaches beyond the risk that a borrower represents or other customary standards. Predatory loans generally include at least one of the following factors: (1) unaffordable loans based on the assets of the borrower rather than on the borrower's ability to repay; (2) loan flipping; and (3) fraud or deception. The FDIC's policy contains an outline of its response to predatory lending, which includes both examinations and supervisory actions. Please contact Robbin Conner at 646.637.9228 or Chris Killian at 646.637.9226 for more information.

Fannie Mae Adds Prepayment Premium Information to NIPS File: Effective with the New Issue Pool Statistics File (NIPS) for pools closed March 2, 2007, Fannie Mae will disseminate pool-level aggregation of the prepayment premium information connected with each underlying loan in a pool. This additional information will found in a new record type "16". The new data elements will be: Prepayment Premium Option, defined as "the method used by the lender to calculate what, if any, premium the borrower must pay should the borrower prepay the loan. Should there be more than one Prepayment Premium Option assigned to any of the underlying loans, each option will be represented as an entry in multiple records for the particular pool"; Latest Prepayment Premium End Date, defined as "the last day on which a borrower is required by the lender to pay a prepayment premium. If there is more than one loan in a pool with the same Prepayment Premium Option, this day would be the last day for the loan with the latest prepayment premium end date"; and Weighted Average Prepayment Premium Term, defined as "the weighted average of the number of months from issuance of each loan in which a borrower is required to pay a prepayment premium when prepaying a loan. If there is more than one loan in a pool with the same Prepayment Premium Option, this value is a weighted average based on a calculation." Please contact Chris Killian at 646.637.9226 with questions or concerns.

FASB Issues Final FAS 155 Scope Exception: On January 17, FASB issued the final version of Statement 133 Implementation Issue No. B40, a scope exception for certain prepayable securitization instruments from the application of Paragraph 13(b) of FAS 133. This scope exception is a response to industry comments and reflects the following changes from the original proposed statement: FASB removed criterion (b) from the scope exception and also amended criterion (c) in the proposed scope exception. Please click here for the final document, and here for a comparison of the proposed and final documents. Please contact Robbin Conner at 646.637.9228 with any questions.

Governor Bies Speaks About Mortgage Lending: In a speech to the Eller College of Management on January 18th, Federal Reserve Governor Susan Schmidt Bies spoke about the state of the economy, with a special focus on issues in the mortgage market including nontraditional mortgage products. Bies reviewed Federal Reserve publications as well as last year's Interagency Guidance on Nontraditional Mortgage Products. The full text of her speech is available here.

DTCC New Issue Information Dissemination Service for Municipal Securities: A conference call has been scheduled for Wednesday, January 31, 2007 at 11:00 a.m. (EST) for the dealer community to get an update on the status of the NIIDS Project relating to the municipal securities, particularly focusing on the data elements required to be sent inbound to DTCC and methods for getting the information to DTCC. For more information, please contact Leslie Norwood at 646.637.9230.

DTCC New Issue Information Dissemination Service--Outbound Vendor Concerns: A conference call has been scheduled for Wednesday, January 31, 2007 at 2:00 p.m. (EST) to discuss the project status with the vendor community (and those broker dealers who might be interested in receiving the outbound feed from this new service) and DTCC. For more information, please contact Leslie Norwood at 646.637.9230.

ESF Responds to CEIOPS Consultation on Draft Advice to EU Commission Relating to Solvency II Project: The European Securitisation Forum (ESF) has published its comments to the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) consultation paper, entitled "Draft Advice to the European Commission in the Framework of the Solvency II Project on Safety measures (Limits on Assets)". The comments focus on aspects of the consultation that affect securitisation/CDO/structured product transactions.

FSA Publishes Policy Statement on Implementation of MiFID and on MiFID-related Reform to Approved Persons Regime: The Financial Services Authority (FSA) has published Policy Statement 07/2 providing feedback on: (i) Consultation Paper 06/14 relating to draft changes to the FSA Handbook; and (ii) Consultation Papers 06/19 and 06/20, which contain proposals for significant amendments to the UK conduct of business regime, in order to implement aspects of the Markets in Financial Instruments Directive (MiFID). The final Handbook text is contained in annex 3 of the policy statement. The FSA has also published Policy Statement 07/3 providing feedback on Consultation Paper 06/15 relating to proposed changes to the FSA Handbook to implement the requirements of MiFID relating to the approved persons regime. The final Handbook text is contained in Appendix 1 to the policy statement. These complete the MiFID-related changes to the FSA Handbook.

CESR Publishes Responses to Consultation on Transaction Reporting under Article 25 of MiFID: The Committee of European Securities Regulators (CESR) has published the responses received to its December 2006 consultation paper on the use of standard codes for transaction reporting under Article 25 of the Markets in Financial Instruments Directive (MiFID).

FSA Signs MoU with SEC: Following the approval of the proposed merger between NYSE Group Inc and Euronext NV by the Chairmen's Committee of the Euronext regulators, the Financial Services Authority (FSA) has announced that it has signed a memorandum of understanding (MoU) with the Securities and Exchange Commission (SEC). The MoU will come into effect once Euronext Paris SA publishes a declaration that the thresholds for acceptance of the merger have been reached.

FSA Publishes Policy Statement on Integrated Regulatory Reporting: The Financial Services Authority (FSA) has publishedPolicy Statement 07/1 providing feedback on Parts II and III of Consultation Paper 06/11 relating to proposals for new integrated regulatory reporting requirements (IRR), as well as on two questions posed in Chapter 2 of the consultation concerning reporting currencies and publishing aggregated data. The statement, which contains the Integrated Regulatory Reporting Instrument 2007 and amendments to the Supervision manual (SUP), provides feedback on (i) the remit of proposed reporting for investment firms undertaking non-retail investment business and who are not subject to the Capital Requirements Directive (CRD); (ii) proposed reporting requirements for operators of personal pension schemes; and (iii) auditors' reports for certain investment firms.

CEIOPS Defines Work Programme for 2007: The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has defined its work programme for 2007. During this period, CEIOPS will, amongst other things, continue to give advice on the creation of the Solvency II framework and will prepare advice on future implementing measures and supervisory standards.

AMF Consults on MiFID Implementation Regarding Investment Services Providers: The French Financial Markets Authority (AMF) has published for consultation draft provisions designed to implement part of the Markets in Financial Instruments Directive (MiFID) in France. These provisions are due to replace the current provisions set out in Book III of its General Regulations (Règlement Général) and relate to investment services providers. Comments are invited by 1 March 2007.

France Completes Implementation of Transparency Directive: The French Ministry of Economy, Finance and Industry has published in the Journal Officiel (Official Journal) a ministerial order (arrêté), which amends Book II of the General Regulations (Règlement Général) of the AMF and finalises the implementation of the Transparency Directive in France. The amendments provide for new periodic and ongoing disclosure obligations for issuers and came into effect on 20 January 2007.

French Ministry of Economy Publishes Further MiFID Consultation and Feedback on Previous Consultation: The French Ministry of Economy, Finance and Industry has published the results of its November 2006 consultation on draft provisions that aim to implement MiFID Level 1 measures into French law. In addition, it is also inviting the public to make comments on other draft provisions that implement aspects of MiFID through Book V of the Code Monétaire et Financier (French Monetary Code). Comments are invited by 9 February 2007.

Associations Issue Joint Response to CESR Consultation Paper on Transaction Reporting: SIFMA and the associations listed in the comment letter jointly responded to a consultation paper by the Committee of European Securities Regulators (CESR) on the use by European regulators of reference standard codes in transaction reporting under the Market in Financial Instruments Directive (MiFID).

EU Commission Consults on Findings of Expert Group Reports on Integration of EU Mortgage Markets: Further to the issues highlighted by contributions received to the EU Commission's 2005 Green Paper on mortgage credit in the EU, the Commission has published the reports of two expert groups, established in April 2006 in order to explore the issues of mortgage funding and consumer protection, for public consultation. The report of the Mortgage Funding Expert Group reviews barriers to the emergence of an efficient and competitive pan-European mortgage funding market and proposes solutions to removing those that already exist. The report by the Mortgage Industry and Consumer Dialogue explores consumer protection issues revolving around: (i) pre-contractual information; (ii) advice; (iii) early repayment; and (iv) the annual percentage rate of charge. The reports will assist the Commission in finalising its White Paper which is due in June 2007. Comments are invited by 15 February 2007.

EU Commission Consults on Auditors' Liability: Following the October 2006 EU Commission study on the economic impact of the current regimes in member states regarding the statutory liability faced by audit firms, the Commission has launched a public consultation on possible options for reforming auditors' liability regimes in the EU. The options are to introduce: (i) a fixed monetary cap at European level; (ii) a cap based on the size of the audited company as measured by its market capitalisation; (iii) a cap based on a multiple of the audit fees charged by the auditor to its client; and (iv) the principle of proportionate liability, which means that each party (auditor and audited company) is liable only for the portion of loss that corresponds to its degree of responsibility. The scope of the consultation is limited to the liability that auditors face due to their possible acts of negligence associated with a corporate fraud or failure. Comments are invited by 15 March 2007.

FSA Publishes Text of New Disclosure and Transparency Rules: The Financial Services Authority (FSA) has published the text of the new Disclosure and Transparency Rules (DTR) and related amendments to the Listing Rules in the Transparency Obligations Directive (Disclosure and Transparency Rules) Instrument 2006, which was made on 21 December 2006. The new Rules, which came into effect on 20 January 2007, implement aspects of the Transparency Directive in the UK.

FSA Announces Members of Industry Groups for Retail Distribution Review: The Financial Services Authority (FSA) has announced the members of a number of industry groups who will form the working groups of its Retail Distribution Review (RDR), which was launched in June 2006 in order to identify market solutions to core problems within the retail investment market. Clive Briault, Managing Director of the FSA Retail Markets sector, believes that the RDR will act as a catalyst to improve the efficiency of the distribution of retail investment products and also that the appointment of industry leaders is an important step forward in achieving this.

ECB Publishes Working Paper on Pricing of Settlement Link Services and Mergers of Central Securities Depositories: The European Central Bank (ECB) has published a working paper, entitled "Pricing of Settlement Link Services and Mergers of Central Securities Depositories", which discusses the substantial settlement fees charged for the settlement of securities transactions through central securities depository (CSD) links where the buyer and seller are members of two different CSDs (typically located in different countries). The paper: (i) provides an explanation as to why the settlement of cross-border securities transactions proves so costly for investors; and (ii) analyses the effects that a cross-border merger of linked CSDs would have on the settlement fees that the trading parties are charged.

EU Commission Publishes Report on Governance Developments in IASB and IASCF: The EU Commission has published a report on governance developments in the International Accounting Standards Board (IASB) and International Accounting Standards Committee Foundation (IASCF). The report highlights that further improvement is desirable in relation to: (i) the governance structure of the IASB/IASCF in order to improve the accountability of the Board and of the trustees to their constituents; (ii) the IASB's due process with stakeholders to ensure that it explains the reasons for not taking into account their comments; and (iii) the issue of adequate representation of stakeholders within the governing bodies of the IASB/IASCF.

IOSCO Publishes Report on Capital Adequacy Requirements for Financial Intermediaries: The Emerging Markets Committee of the International Organization of Securities Commissions (IOSCO) has published a report, providing guidance to emerging market regulators regarding capital adequacy requirements for financial intermediaries. The report contains: (i) a survey of capital adequacy requirements in 24 emerging market jurisdictions; and (ii) a corresponding analysis with related recommendations designed to assist those members wanting to review and strengthen their existing capital adequacy regulatory framework.