Action Line Update

SEC Publishes For Comment Proposals on Equities Short Interest Reporting: The Securities Exchange Commission has published for comment proposals from the NYSE, NASD and the Amex to increase the frequency of the equities short interest reporting requirements from monthly to twice per month. The Federal Register notice is available here.

SIFMA Confirms Japan Market Close Recommendation: The Securities Industry and Financial Markets Association has confirmed its earlier recommendation for full market closes on Monday, February 12, and Monday, February 19, for the trading of U.S. dollar-denominated fixed-income securities in Japan in observance of the National Foundation and U.S. President's Day Holidays, respectively. A press release is available here.

SIFMA Confirms U.K. Market Close Recommendation: The Securities Industry and Financial Markets Association has confirmed its earlier recommendations for a full market close on Monday, February 19, for the trading of U.S. dollar-denominated fixed-income securities in the United Kingdom in observance of the U.S. President's Day Holiday. A press release can be found here.

SIFMA Confirms U.S. Market Close Recommendation: The Securities Industry and Financial Markets Association has confirmed its recommendations for a an early close at 2:00 p.m. EST, on Friday, February 16, and a full market close on Monday, February 19, for the trading of U.S. dollar-denominated fixed-income securities in the United States in observance of the President's Day Holiday. A press release is available here.

SEC 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 and will file a letter shortly. Comments for this proposal are due on or before February 12, 2007. For further information, please contact Amal Aly at 212.618.0568 aaly@sifma.org or Mary Kuan at 646.637.9220.

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 analyst 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.

The Association and ACLI Submit a Joint Letter to NAIC Regarding Hybrid Securities: On February 6, the Association filed a joint letter with the NAIC in response to questions regarding hybrid securities posed by the American Academy of Actuaries' Invested Asset Work Group. Among other things, the Associations highlight that from a loss recovery perspective and a risk perspective, hybrid securities are analogous to debt or preferred stock, and the Associations urge the Invested Asset Working Group to consider the ratings of hybrid securities as currently published by nationally recognized statistical rating organizations ("NRSROs") when analyzing incremental risks, if any, associated with hybrid securities. For further information, please contact Mary Kuan at 646.637.9220.

Moody's Response to Proposal Regarding Rating of Preferred Securities and Hybrid Securities: In a press release, Moody's is intending to continue to rate preferred stock and hybrid securities, other than hybrid securities with meaningful mandatory deferral triggers, according to existing notching guidelines with no rating distinction among cumulative, non-cash cumulative and non-cumulative obligations. For further information, please contact Mary Kuan at 646.637.9220.

NASD Proposes Amendment No. 2 to Rule 2231 (Retail Confirmation Disclosures): The NASD recently filed Amendment No. 2 to NASD Rule 2231 (retail confirmation disclosures). The Amendment modifies a number of items previously noted by the Association, although a number of issues remain unchanged. Amendment has not yet been published by the SEC for comment. If approved, the Amendment would become effective not later than 9 months following publication of the NTM announcing SEC approval. For further information, please contact Mary Kuan at 646.637.9220.

SEC Proposes Rule Change to amend NASD Rule 7010(k) Relating to TRACE Transaction Data and Data Fees: In a filing, the SEC recently proposed a rule change to amend NASD Rule 7010(k) to TRACE transaction data and data fees. The NASD filing can be found here. The proposed rule change would offer the ability to receive, for the reduced fee of $250 per month, a snapshot of real-time TRACE transaction data once each day rather than paying $1,500 to receive TRACE data continuously throughout the day. The snapshot TRACE data subscriber would be able to choose which time of day it would receive this information. NASD has stated that it expects that many institutions would choose to receive snapshot TRACE data at or shortly after 4 pm EST to value certain positions held in their investment portfolios. NASD has stated that it does not intend to develop its own technical capabilities to distribute the snapshot data directly to subscribers, but rather to permit vendors to offer real-time TRACE data in this format. The comment period expires on February 23, 2007. For further information, please contact Mary Kuan at 646.637.9220.

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.

FICC Approval of Rule Filing, VAR Clearing Fund Methodology and Return of Excess Clearing Fund Deposits: For full story see Government and Federal Agency Markets Issues section.

FICC Approval of Rule Filing, VAR Clearing Fund Methodology and Return of Excess Clearing Fund Deposits: The Securities and Exchange Commission approved an FICC rule filing relating to the implementation of changes to the Clearing Fund methodology of FICC's Government Securities Division ("GSD"). The change will replace the current GSD Clearing Fund calculation with a Value at Risk ("VaR") model, and will be implemented by FICC on Monday, February 5, 2007. All open positions as of close of business February 2, 2007 will be subject to the new Clearing Fund requirement. Members will have the new Value at Risk (VaR) and the daily Clearing Fund reports available in Report Center. FICC previously announced the approval of a rule filing regarding the return of excess Clearing Fund deposits. FICC will implement this approved change simultaneously with the implementation of the VaR-based Clearing Fund methodology. Additionally, also on February 5, 2007, monthly Clearing Fund statements will no longer be mailed and deficits and parameter notifications will no longer be faxed. Members can now obtain all this information on a daily basis through FICC's Report Center. Please note that there will be no changes to the way participants view the Clearing Fund requirement reports, submit required deposits or request returns of excess GSD Clearing Fund collateral. If you have any questions regarding the above please contact Robert Toomey at 646.637.9224.

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 Rules Regarding Unregistered Investment Pools Approved by SEC : The Securities and Exchange Commission has approved FICC Rule Filing 2006-10 which amends the Mortgage-Backed Securities Division membership requirements of entities that are unregistered investment pools. The approved rule changes include a definition for "unregistered investment pool". Under the approved rule, an unregistered investment pool is an entity that holds a pool of securities and/or other assets that meets the following criteria: (i) it is not registered as an investment company under the Investment Company Act of 1940, (ii) it does not register its securities offerings under the Securities Act of 1933, and (iii) it has an investment advisor that is registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940, or if the investment adviser is not registered, the entity has as lock-up period of two (2) years or greater. Entities that meet the definition of "unregistered investment pool" will be eligible to apply to become MBSD clearing participants only if they meet the new membership criteria, which is as follows: the investment advisor of the unregistered investment pool must: (i) be registered with the SEC under the Investment Advisers Act of 1940, or (ii) if it is not registered with the SEC, the unregistered investment pool that the investment adviser advises must have an initial lock-up period of two (2) years or greater; the unregistered investment pool will be required to have (and maintain) net assets of $250 million or greater. If the unregistered investment pool does not meet the $250 million net asset requirement, but the unregistered investment pool has net assets of at least $50 million or greater, then the unregistered investment pool will be eligible for MBSD clearing membership if its investment advisor has assets under management of at least $1.5 billion and advises an existing MBSD clearing participant; the MBSD will require an unregistered investment pool to obtain a minimum required rating of "above average" as a result of an internal qualitative assessment, which will be based on consideration of factors such as management, capital, strategy and risk profile, and internal controls. Current participants that meet the definition of "unregistered investment pool" will have one year from the date of approval of this rule filing in which to conform to the new minimum financial and qualitative rating requirements.

FICC Modifies MBSD Pool Substitution Process: The Mortgage-Backed Securities Division (MBSD) of the FICC has filed a proposed rule change which would modify the Electronic Pool Notification (EPN) rules to implement new messaging capabilities and establish a fee structure for these new capabilities. The MBSD has created a new EPN message type called the "Cancel/Correct Pool Substitution" to provide participants with an efficient method of transmitting pool substitutions to their allocation counterparties. The full rule proposal is available here. Comments are due 21 days after publication in the Federal Register.

Reg AB 1122 Relief to be Granted: Speaking at the ASF's industry conference on Monday, Paula Dubberly of the SEC stated that guidance would be forthcoming from the SEC in the form of a telephone interpretation regarding requirements for servicer attestations under section 1122 of Reg AB. Dubberly stated that, subject to certain conditions, servicers would not be required to produce separate attestations and accountants letters for all third parties which perform servicing-related functions. For more information please contact Robbin Conner at 646.637.9228 or Chris Killian at 646.637.9226

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.

MSRB Notice (2007-06) - Dealer Payments in Connection with the Municipal Securities Issuance Process: The Municipal Securities Rulemaking Board (MSRB) has published a notice to remind broker, dealers and municipal securities dealers of the application of Rule G-20, on gifts, gratuities and non-cash compensation, and Rule G-17, on fair dealing, in connection with certain payments made with expenses reimbursed during the municipal bond issuance process. For more information, please contact Leslie Norwood at 646.637.9230.

CESR Consults on Best Execution under MiFID: The Committee of European Securities Regulators (CESR) has published a Consultation Paper on aspects of MiFID best execution provisions relating to contents of execution policies, disclosure to clients, client consent, relationships between firms in chains of execution, review and monitoring and execution quality data. The deadline for comments is 16 March.

IIMG Publishes Second Interim Report on Lamfalussy Process: The Inter-Institutional Monitoring Group (IIMG) has published its second interim report on the Lamfalussy process for financial services, based on analysis in its first interim report and evidence given by stakeholders in two non-public consultations. The report identifies a number of unresolved questions and uncertainties surrounding the process and focuses on preliminary suggestions for improvement, splitting its recommendations according to the level of implementation. Amongst other things, the report observes that: (i) regulatory self-restraint is necessary at all levels; (ii) further effort to improve cooperation between supervisors should be sought; and (iii) whilst consultation is desirable at all levels, overlap should be avoided. Comments are invited by 26 March 2007.

AMF Issues Third Report on Rating Agencies and Consults on Rating Activities in the Asset Management Industry: French Financial Markets Authority (AMF) has issued its third yearly report on the role of rating agencies. The report is divided in two parts, the first of which describes the French market and its traditional focus on the rating of issuers and structured finance schemes, and the second of which relates to the rating of asset management activities. As was announced in 2006, the AMF is submitting for public consultation the second part of the report. Comments are invited by 25 March 2007. A summary presentation on the report is available here.

FSA Publishes Financial Risk Outlook 2007: The Financial Services Authority (FSA) has published its Financial Risk Outlook for 2007, highlighting economic, financial, social and legal developments which have influenced the way in which it intends to pursue its statutory objectives in the period ahead. The paper considers: (i) key factors which could de-stabilise the global economy, such as geopolitical risks and increasingly complex financial markets; (ii) the importance for firms to evaluate how they would respond to extreme risk scenarios; and (iii) the range of threats posed by terrorism and financial crime.

CESR Chairs Elect New Chair and Vice Chair: CESR Chairs have elected Eddy Wymeersch, Chairman of the Belgian Banking, Finance and Insurance Commission (CBFA) as Chairman of CESR and Carlos Tavares, Chairman of the Comissao do Mercado de Valores Mobiliarios (the CMVM), as Vice Chair of CESR to lead them for the next two years from 1 February 2007.

EU Commission Publishes Final Report of Competition Inquiry into Retail Banking Sector: The EU Commission has published the final report of its competition inquiry into the retail banking sector which highlights a number of competition concerns in the markets for payment cards, payment systems and retail banking products. The report, which concludes a sector inquiry opened in June 2005, and builds on interim reports published in April 2006 on payment cards and July 2006 on current accounts and related services, details indicators of restricted competition, including: (i) large variations in merchant and interchange fees for payment cards; (ii) barriers to entry in the markets for payment systems and credit registers; (iii) obstacles to customer mobility; and (iv) product tying. The report is supplemented by a set of frequently-asked questions.

CESR Publishes Consultation Paper on Best Execution: The Committee of European Securities Regulators (CESR) has published a consultation paper entitled " Best execution under MiFID", which attempts to provide clarity with respect to MiFID's best execution requirements, such as: (i) the main contents of an execution policy; and (ii) the level of disclosure required for investment firms to provide their clients with appropriate information about such a policy. Comments are invited by 16 March 2007.

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 published Policy 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.