Action Line Update

Agencies Seek Public Comment on Proposed Supervisory Guidance for Basel II: The federal bank and thrift regulatory agencies announced on Thursday, February 15 that they will seek public comment on three proposed supervisory guidance documents related to the September 2006 notice of proposed rulemaking on new risk-based capital requirements in the United States for large, internationally active banking organizations. Two of the proposed documents relate to the Basel II advanced approaches for calculating risk-based capital requirements: the advanced internal ratings-based (IRB) approach for credit risk and the advanced measurement approaches (AMA) for operational risk. The third document proposed guidance on the Basel II supervisory review process for assessing capital adequacy. The press release is available here. The documents will be published shortly in the Federal Register.

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.

SIFMA Response to SEC Proposal to Amend Rule 105 of Regulation M Regarding Short Selling In Connection with a Public Offering: On February 13th, SIFMA filed a comment letter with the SEC in response to its proposal to amend Rule 105 of Regulation M, which applies to fixed income and 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.

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. SIFMA 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, its proposed best practices or the SIFMA'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.

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

IOSCO Report on Implementation of Code of Conduct Fundamentals by Credit Rating Agencies: The Technical Committee of the International Organization of Securities Commissions (IOSCO) has published a report for consultation, entitled "Review of Implementation of the IOSCO Fundamentals of a Code of Conduct for Credit Rating Agencies", which aims to identify whether certain credit rating agencies, as set out in the report, have adopted a code of conduct and the degree to which such code reflects the provisions of the IOSCO Code of Conduct Fundamentals. This information is designed to inform the Technical Committee about whether any aspects of the IOSCO Code of Conduct Fundamentals need to be modified or better explained in order to reflect the realities of how credit ratings are determined and used by the market. Comments are invited by 11 May 2007.

The EU Commission Launches a New Website: The EU Commission has launched a new website which allows stakeholders, including firms, trade associations and investors, to ask questions relating to the Markets in Financial Instruments Directive (MiFID) and its implementing measures. The website also allows stakeholders to view the answers to questions that have already been asked. The Commission will consult with member states and regulators, where appropriate, before formulating answers to the questions asked via the website. The answers will represent the views of the Commission and will not have the formal status of a Communication.

CESR Publishes Final Recommendation on List of Minimum Records under Article 51(3) of MiFID: The Committee of European Securities Regulators (CESR) has issued a final recommendation to its members in order to help them to fulfil their obligation under Article 51(3) of the MiFID Level implementing Directive to produce a list of minimum records that investment firms are required to keep. The recommendation contains a non-exhaustive list of the various MiFID record-keeping requirements and provides guidance on the meaning of each one. CESR believes that both investors and the industry will benefit from a common approach to the production of the list for each jurisdiction. CESR has also published a feedback statement to its October 2006 consultation on this topic.

CESR Publishes MiFID Level 3 Guidelines and Recommendations on Market Transparency Data: In order to ensure supervisory convergence among EU member states in the implementation of MiFID, CESR has published guidelines and recommendations which aim to help investment firms, Mulitlateral Trading Facilities (MTF) and regulated markets assess the way in which competent authorities interpret the provisions of MiFID relating to the publication and consolidation of market transparency data. The guidelines will apply to CESR members in their day-to-day regulatory practices on a voluntary basis. The recommendations, however, are addressed to market participants directly and set out what CESR considers to be a reasonable approach in a number of areas relating to transparency data, such as primary and secondary publication channels. CESR has also published a feedback statement to its October 2006 consultation paper on proposed recommendations and guidelines in this area.

CEIOPS Report on Impact of Solvency II on Supervisory Authorities: In order to provide the EU Commission with input for its assessment of the impact of the Solvency II project on supervisory authorities, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has sent the Commission a report which contains the results of a questionnaire sent to CEIOPS members concerning: (i) how the new supervisory framework will affect supervision; and (ii) how supervisory authorities intend to organise themselves to face the new challenges posed by Solvency II. Amongst other things, the report states that supervisory authorities expect internal models and their validation, the introduction of standard formulae and the calculation of technical provisions to cause the largest impact on their supervisory practices.

CESR Updates Commonly-Asked Questions on Prospectuses: The CESR has published an updated version of its July 2006 guide for market participants which establishes a convergent response from all EU securities supervisors to a series of commonly-asked questions on the day-to-day application of the EU legislation on prospectuses. The latest version adds a number of questions and answers to those contained in the existing guide.

Joint Associations Respond to CESR Consultations on MiFID Passport and Inducements: On February 9, 2007, 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.

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.

FSA Publishes Business Plan and Budget for 2007/08: The U.K. Financial Services Authority has published its business plan for the financial year 1 April 2007 to 31 March 2008, setting out its budget and work priorities.

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.