Action Line Update

NASD Issues Notice to Members Adjusting Fees for Filing Offering Documents by Well Known Seasoned Issuers: The NASD has filed for immediate effectiveness a rule change with the SEC adjusting fees for the filing of offering documents by well known seasoned issuers (WKSI) pursuant to Rule 2710 (Corporate Financing). The amendments will be implemented on February 26, 2007. Since WKSIs are not required to specify a proposed maximum aggregate offering price or other applicable value on the registration statement, assessing the filing fee has been problematic in the past. In light of the fact that a WKSI shelf registration filing allows the issuer to offer registered securities for a three-year period in amounts that may exceed $750 million, NASD is imposing a new maximum filing fee on all WKSI filings. The new fee will be $75,000. NASD Notice to Members 07-05 can be found here.

SEC Issues Proposed Rule Regarding the Oversight of Credit Rating Agencies Registered as Nationally Recognized Statistical Rating Organizations: The SEC has published for comment rules to implement provisions of the Credit Rating Agency Reform Act of 2006, enacted on September 29, 2006. The Act defines the term "nationally recognized statistical rating organization," provides authority for the SEC to implement registration, recordkeeping, financial reporting, and oversight rules with respect to registered credit rating agencies, and directs the Commission to issue final implementing rules no later than 270 days after its enactment, or by June 26, 2007. Comments on this rule proposal are due before March 12, 2007. The Federal Register publication can be found here.

Susan Schmidt Bies Submits Resignation: Susan Schmidt Bies submitted her resignation Friday as a member of the Board of Governors of the Federal Reserve System, effective March 30, 2007. She does not plan to attend the March 20-21 meeting of the Federal Open Market Committee. A copy of her resignation letter is available at the Federal Revere website.

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.

SEC Publishes For Comment Proposals on Equities Short Interest Reporting: The SEC 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: SIFMA 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: SIFMA 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: SIFMA 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.

SIFMA Response to SEC Proposal to Amend Rule 105 of Regulation M Regarding Short Selling In Connection with a Public Offering: On February 13, SIFMA filed a comment letter with the SEC in response to its proposal to amend Rule 105 of Regulation M, which, by its terms, applies to fixed income securities as well as equity securities. In the letter, the Association suggests among other things, that the restricted period begin no earlier than the public announcement of the offering and that it include an "actively-traded security" exception, that short sales affecting one unit in a legal entity will not prohibit the entire entity from participating in the offering, that certain types of shorts sales be excluded from the rule, that potential violations can be cured in certain circumstances, that the securities covered by the Rule be defined similar to the definition of "subject securities" under Regulation M, that underwriters or broker-dealers acting as distribution participants in connection with the offering be excepted from the prohibitions of the Rule, and that offerings of debt securities be excluded from the Rule. For further information, please contact Amal Aly at 212.618.0568 or Mary Kuan at 646.637.9220.

SIFMA and ACLI Submit a Joint Letter to NAIC Regarding Hybrid Securities: On February 6, SIFMA 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 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 p.m. 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: SIFMA 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.

FRBNY Statement on Formation of Private-Sector Treasury Market Best Practices Group: On Friday, February 9, 2007 the Federal Reserve Bank of New York announced the formation of the Treasury Market Practices Group (TMPG). The FRBNY explained that the role of the group was to strengthen market integrity by promotion of best practices in the Treasury market. The TMPG, currently composed of representatives from dealers, buy-side firms and a custodian in the Treasury market, was formed to encourage dialogue and offer recommendations for practices in the Treasury cash, repo and related markets. As well, the TMPG made available for review a paper entitled Treasury Market Best Practices, a preliminary compilation of recommended practices to promote trading integrity and market efficiency. The TMPG is soliciting broader industry and public feedback before publishing final recommendations. The Association expects to be commenting on the TMPG's proposed best practices. As well, it looks forward to in the future working closely with the FRBNY's TMPG, to offer the group a broad industry perspective and to engage market participants on SIFMA's and FRBNY's common goal of strengthening Treasury market integrity through best practices. If you have any questions regarding the TMPG, it proposed best practices or the Association's work on the matter please contact Robert Toomey at 646.637.9224 with any questions.

FRBNY Studies Two Treasury Auctions: The Federal Reserve Bank of New York released two publications regarding U.S. Department of Treasury auctions: "Who Buys Treasury Securities at Auction?" by Michael J. Fleming, and "An Examination of Treasury Term Investment Interest Rates", by Warren B. Hrung. Contact Robert Toomey at 646.637.9224 with any questions.

Funding Division Executive Committee Meeting: A meeting of the Funding Division Executive Committee has been scheduled for Wednesday, February 14, 2007 at 4:00 p.m. at the Association's offices. Contact Robert Toomey at 646.637.9224 with any questions.

Susan Schmidt Bies Submits Resignation: For full story see Cross Markets Issues section.

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.

FRBNY Statement on Formation of Private-Sector Treasury Market Best Practices Group: For full story see Funding Issues section.

FRBNY Studies Two Treasury Auctions: For full story see Funding Issues section.

Susan Schmidt Bies Submits Resignation: For full story see Cross Markets Issues section.

FICC Approval of Rule Filing, VAR Clearing Fund Methodology and Return of Excess Clearing Fund Deposits: The SEC 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 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. 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.

FICC Rules Regarding Unregistered Investment Pools Approved by SEC : The SEC 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

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.

Joint Associations Respond to CESR Consultations on MiFID Passport and Inducements: Several trade associations, including SIFMA, jointly responded to two consultation papers issued by the Committee of European Securities Regulators (CESR) last December, one relating to the operation of the Passport under MiFID (which the associations broadly support), the other relating to the application of MiFID's inducement provisions (on which the associations have significant concerns).

CESR Consults on EU Commission Request for Advice on Transparency in Bond and Other Non-equity Markets: CESR has issued a call for evidence seeking public comment with a view to providing answers to the questions which the Commission has posed as part of its review of whether to extend MiFID price transparency provisions to non-equity markets. CESR is requesting comment on whether (i) there is any convincing evidence of market failure with respect to market transparency in any of the markets under review; (ii) there is evidence that mandatory transparency would mitigate any such market failure; (iii) the implementation of MiFID can be expected to change this picture; iv) there are any significant cases where investor protection has been significantly compromised as a result of a lack of mandatory transparency; (v) it could be feasible and/or desirable to consider extending mandatory transparency only to certain segments of the market or certain types of investors; and (vi) self-regulatory solutions are adequate to address any of the issues. Comments are invited by 6 March 2007.

CESR Consults on Best Execution under MiFID: In accordance with its MiFID Level 3 responsibility to promote supervisory convergence in respect of best execution, CESR has published a consultation paper entitled "Best execution under MiFID". The paper aims to provide clarity on a number of areas relating 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.

CESR Consults on Proposed Guidance for Transaction Reporting under MiFID: CESR has published a consultation paper containing proposed guidance for transaction reporting under Article 25 of MiFID. The proposed guidance addresses: (i) practical solutions for satisfying the reporting obligations of branches; (ii) what constitutes an executed transaction for reporting purposes; and (iii) operational solutions for issues concerning alternative reporting channels for transaction reporting. Comments are invited by 2 March 2007.

HMT Notifies EU Commission of Intention to Retain Certain UK Requirements Post MiFID: Her Majesty's Treasury (HMT) has notified the EU Commission of the Financial Services Authority's (FSA) intention, pursuant to Article 4 of MiFID level 2 Implementing Directive, to retain a number of current UK conduct of business requirements following UK implementation of MiFID. The Article 4 notifications relate to: (i) the division of responsibilities among directors and senior managers; (ii) the content of client confirmations and periodic statements; (iii) the market for packaged products; and (iv) the use of dealing commissions. The FSA will discuss the notifications with the Commission in parallel with the consultation process initiated with the publication of Consultation Paper 06/19 (CP06/19).

EU Commission Publishes Letter to CEIOPS on Third Quantitative Impact Study for Solvency II: The EU Commission has published on its website a letter sent from its Director General, Jörgen Holmquist, to the Chairman of the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), Henrik Bjerre-Nielsen, regarding the development of the third quantitative impact study (QIS3) which will assist the EU Commission with the Solvency II project. The Commission believes that it is crucial for CEIOPS to make progress in developing transparent and consistently applied EU-level guidance on how to approach calculations, such as those used for the valuation of assets and liabilities, including own funds.

CESR Consults on Possibility for Hedge Fund Indices to be Classified as Financial Indices for UCITS: Following its October 2006 consultation paper concerning the potential inclusion of hedge fund indices as eligible assets under the UCITS Directive, CESR has launched a consultation paper , entitled "Clarification of the definitions concerning eligible assets for investment by UCITS: can hedge fund indices be classified as financial indices for the purpose of UCITS?", which sets out its preliminary position in the form of proposed draft measures and has announced an open hearing on the matter on 2 April 2007 at its premises in Paris. CESR will publish a feedback statement and final Level 3 text in the second quarter of 2007. Comments are invited by 16 April 2007.

Italian Government Publishes Explanatory Note on Use of Derivatives by Public Entities: The Italian Government has published in the Italian Official Gazette an explanatory note containing clarification of Articles 736 to 739 of Law n.296 of 27 December 2006 (which provide rules for the use of derivatives by public entities) and providing a wider interpretation of the definition of indebtedness. The note states that (i) as a general principle, public entities should use derivative products only to strengthen their balance sheet and hedge risk; (ii) before entering into a derivative transaction, they should assess the existence of market risk and the overall cost of the relevant transaction; (iii) entities should reduce their credit risk exposure by entering into derivative transactions only with counterparties with a reliable credit rating as assigned by a globally recognised rating agency; (iv) before entering into any transaction, entities should have all the relevant documentation (including, without limitation, the master agreement, confirmation and schedule) and guarantees, if any; (v) the enforceability of the derivative contract is subject to a preliminary communication to the Ministry of Finance that discloses the relevant documentation; and (v) the Law also applies to contracts with a trade date preceding its effective date provided that they were not signed, amended, renegotiated or novated prior to that date.

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 U.K. 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.