Action Line Update

Amendments to Regulation SHO, SEC Re-Opens Comment Period: The Securities and Exchange Commission is re-opening the comment period on the "Amendments to Regulation SHO." This was done in response to comments received that requested that the SEC provide additional data related to the proposed amendments before it determines if additional rulemaking is necessary. The SEC proposed amendments to Regulation SHO that intended to further reduce the number of persistent fails to deliver in certain equity securities by eliminating the grandfather provision and narrowing the options market maker exception. If you have any questions or comments, please call Rob Toomey at 646.637.9224.

Fifth Circuit Denies Class Certification in Enron Fraud Case: The Fifth Circuit Court of Appeals ruled yesterday that the class-action lawsuit against investment banks over their role as advisors to Enron cannot go ahead. The decision overturns the 2005 opinion on "scheme liability" by Judge Melinda Harmon. The Fifth Circuit decision is available here. SIFMA's amicus brief in this case is available here.

NASD Chairman and CEO Mary Schapiro Announces Leadership and Structural Moves for New, Consolidated SRO:On Friday, March 16, NASD Chairman and CEO Mary Shapiro announced various staffing and organizational changes relating to the consolidation of NASD and NYSE. The press release states that the new SRO will focus on the core areas of member regulation, enforcement, dispute resolution and technology, and also provides information on what staff members will oversee each area.

SEC Amendments to Financial Responsibility Rules for Broker-Dealers: For full story see Government and Federal Agency Markets Issues section.

SEC Approves NYSE's New Bond Trading Platform: In a notice, the SEC recently approved the NYSE's new bond trading platform, NYSE Bonds, which will replace its Automated Bond System. NYSE has stated that it intends to begin rollout of NYSE Bonds on April 23. The NYSE filing can be found here. NYSE Bonds is an electronic order-driven matching system. Order marketable at the time of entry would be matched and executed (unless the price exceeds the price collar established for the bond at the time of entry). Among other things, NYSE Bonds will be able to trade unlisted debt securities of NYSE-listed equity issuers and their wholly-owned subsidiaries. Initially, this is expected to cover nearly 6,000 bonds. For further information, please contact Mary Kuan at 646.637.9220.

Register Today for the 2007 Insurance- and Risk-Linked Conference: SIFMA will host its insurance- and risk-linked conference, the only conference developed exclusively by industry professionals, for industry professionals on April 23-24 at the Marriott Marquis in New York City. To register, please visit our website. For further information, please contact Mary Kuan at 646.637.9220. For sponsorship opportunities, please contact Jenifer Walter at 646.637.9290.

Amendments to Regulation SHO, SEC Re-Opens Comment Period: For full story see Cross Markets Issues section.

SEC Amendments to Financial Responsibility Rules for Broker-Dealers: For full story see Government and Federal Agency Markets Issues section.

SEC Amendments to Financial Responsibility Rules for Broker-Dealers: The Securities and Exchange Commission (SEC) is proposing for comment certain amendments to its net capital, customer protection, books and records, and notification rules for broker-dealers under the Securities Exchange Act of 1934. The release explains that the proposed amendments would address several emerging areas of concern regarding the financial requirements for broker-dealers. They also would update the financial responsibility rules and make certain technical amendments. In addition, as part of the proposed amendments, the SEC is proposing two amendments designed to improve regulatory oversight of securities lending and repo transactions. The first proposal aims to clarify that broker-dealers providing securities lending and borrowing settlement services are assumed to be acting as principals (unless the broker-dealer takes certain steps to disclaim principal liability) and are subject to applicable capital deductions. The second proposal would require broker-dealers to notify the Commission whenever the total amount of money payable against all securities loaned or subject to a repurchase agreement, or the total contract value of all securities borrowed or subject to a reverse repurchase agreement, exceeds 2,500 % of tentative net capital; provided that, for purposes of this leverage threshold, transactions involving "government securities" are excluded from the calculation. Comments should be received on the proposed rule amendments on or before May 18, 2007. If you have any questions or comments please contact Rob Toomey at 646.637.9224.

Dodd Says Oversight Absent from Subprime Market: During a Senate Banking Committee hearing last week on recent turmoil in the subprime market, Chairman Chris Dodd (D-CT) said federal banking regulators were neglectful and did not act quickly enough when subprime lenders eased their lending standards. Roger Cole, a director in the Division of Banking Supervision & Regulation at the Federal Reserve Board, acknowledged that regulators should have done more sooner. At the urging of Chairman Dodd, Cole said he would meet with Fed governors to consider extending the Home Ownership and Equity Protection Act (HOEPA) rules to all state and federal lenders. According to Sandra Thompson, Director of the Division of Supervision and Consumer Protection at the Federal Deposit Insurance Corporation (FDIC), there are about one million loans outstanding that are expected experience rate resets in the next year. She said there is enough capital in the banking system to absorb the loss of these loans. Committee Ranking Member Richard Shelby (R-AL) expressed concern that credit rating agencies have given high ratings to mortgage-backed securities (MBS) containing subprime loans originated with lax underwriting standards. Shelby said the panel should also hear from mortgage brokers, mortgage lenders, companies that purchase MBS, and rating agencies before taking action. Chairman Dodd acknowledged passing predatory lending legislation would be difficult, and suggested regulators may be able to address most excesses under existing laws. The subprime market was also the focus of a House Oversight and Government Reform Subcommittee on Domestic Policy hearing this week. During the hearing, Subcommittee Chairman Dennis Kucinich (D-OH) expressed concern local governments are not able to properly prevent foreclosures because of limited resources and the sheer volume of potential foreclosures. Rep. Diane E. Watson (D-CA) suggested greater enforcement of the Community Reinvestment Act (CRA) may be an effective first step in preventing further problems in the subprime market. For more information on these issues, please contact Robbin Conner at 646.637.9228 or Chris Killian at 646.637.9226.

Fed Governor Kroszner Speaks on CDS and CDOs: In a speech to 2007 Credit Markets Symposium, hosted by the Federal Reserve Bank of Richmond, Federal Reserve Governor Randall S. Kroszner discussed recent innovations in credit markets, including CDS and CDOs. Kroszner said that while the development and growth of CDS has "enhanced liquidity and transparency, [created] new tools for managing credit risk, and [enabled] a greater dispersion of credit risk... Complex credit derivatives such as CDO tranches are an exception to all this: They remain largely illiquid and nontransparent". Kroszner listed three challenges for participants in these markets: limiting counterparty credit risk, modeling default correlation, and improving the infrastructure for clearing and settling credit derivative trades. The full text of Kroszner's speech is available here.

Geithner Says Subprime Problems Contained, For Now: In a speech to 2007 Credit Markets Symposium, hosted by the Federal Reserve Bank of Richmond, New York Federal Reserve Bank President and CEO Timothy Geithner said, regarding recent subprime mortgage market tumult, that "there are few signs that the disruptions in this one sector of the credit markets will have a lasting impact on credit markets as whole". Geither also discussed credit default swaps and CDOs, noting that their rapid growth is a "sign of their value to market participants." The full text of Geithner's speech is available here.

FICC Announces Testing Schedule for Pool Subs: In an important notice, the FICC has announced timeframes for participant testing of the pool substitution functionality of EPN. For CTCI users, testing will open April 9. For Easy Pool users, testing will open April 23. FICC notes that "Participants are expected to identify at least one connection ID for each Account maintained in EPN that will receive Pool Substitution messages from FICC". The full notice is available here.

Comptroller Dugan Speaks on Securitization and Financial Innovation : In a speech to the China Banking Regulatory Commission, Comptroller of the Currency John Dugan discussed securitization and the regulation of financial innovation, specifically MBS and CDOs, as well as nontraditional mortgage products. He noted that CDOs ?have become an area of supervisory focus recently?. The full text of his speech is available here.

MSRB to Host Forum on Transaction Reporting Improvements (NIIDS and CTCS): The MSRB will be hosting a forum on April 11, 2007 in New York City on proposed rule changes described in MSRB Notice 2007-10 that are designed to improve transaction reporting of new issue municipal securities. This notice can be found on the MSRB's website. For more information, please contact Leslie Norwood at 646.637.9230.

MSRB Publishes Notice Clarifying Procedure for Reporting of Inter-Dealer Transactions that Occur Outside of RTRS Business Day Hours or on Invalid RTTM Trade Dates: The MSRB has published a notice clarifying the procedure for reporting of inter-dealer transactions that occur outside of RTRS Business Day hours or on days that are not recognized as "valid" trade dates for purposes of trade comparison through the Depository Trust and Clearing Corporation's automated comparison system (RTTM). The notice addresses reporting of inter-dealer transactions that occur on weekends and on certain holidays such as Good Friday. For more information, please contact Leslie Norwood at 646.637.9230.

MSRB Issues Notice Reminding Members of Obligations Under Rule G-37 on Political Contributions and Rule G-27 on Supervision When Sponsoring Meetings and Conferences Involving Issuer Officials: The MSRB has published a notice to remind brokers, dealers and municipal securities dealers ("dealers") of the possible application of Rule G-37, on political contributions and prohibitions on municipal securities business, when dealers sponsor meetings and conferences where issuer officials are invited to attend or are featured speakers. Dealers are responsible for ensuring that their supervisory policies and procedures established under Rule G-27, on supervision, are adequate to prevent and detect violations of MSRB rules. For more information, please contact Leslie Norwood at 646.637.9230.

Charles McCreevy Speaks on Private Equity: Charles McCreevy, the EU Commissioner for the Internal Market and Services, gave a speech on private equity at the House of Commons All Party Parliamentary Group Breakfast Meeting on March 22, 2007 in London. During the speech, amongst other things, Mr. McCreevy discussed the impact on private equity investments of the EU Commission's commitment to 'undertake a systemic analysis of national barriers to private placement' as set out in its November 2006 White paper on enhancing the single market framework for investment funds.

EU Commission Consults on Proposed Changes to UCITS Directive: Following the identification, in the November 2006 EU Commission White paper on enhancing the single market framework for investment funds, of changes that need to be made to the UCITS Directive, the EU Commission has published for consultation possible adjustments to the Directive and intends to hold an open hearing on the matter on April 26, 2007 in Brussels. The Commission believes these changes are needed in order to: (i) remove administrative obstacles and delays to the cross-border marketing of funds; (ii) allow fund managers to manage funds domiciled in other member states; (iii) provide retail investors with meaningful and concise information about costs, risks and potential rewards when deciding whether to invest in a fund; and (iv) strengthen supervisory powers and supervisory cooperation to ensure the effective oversight of the European fund market. Comments are invited by June 15, 2007.

EU Commission Publishes Level 2 Directive on UCITS Eligible Assets: The EU Commission has published in the Official Journal the final text of a Level 2 Commission Directive which clarifies the definition of certain terms in the UCITS Directive concerning eligible assets. In particular, the Directive clarifies the definition of: (i) transferable securities; (ii) money market instruments; (iii) liquid financial assets with respect to financial derivatives instruments; (iv) transferable securities and money market instruments embedding derivatives; (v) techniques and instruments for the purpose of efficient portfolio management; and (vi) index replicating UCITS. The Commission Directive will come into effect on March 23, 2007. The documents are available here; and here.

CESR Publishes Final Level 3 Guidelines on Eligible Assets for UCITS: The Committee of European Securities Regulators (CESR) has published final Level 3 guidelines on eligible assets for UCITS. The guidelines: (i) aim to foster supervisory convergence concerning the application of the Level 2 Commission Directive, published on March 20, 2007, which clarifies the definition of certain terms in the UCITS Directive; and (ii) provides guidance in respect of certain other definitions contained in CESR's January 2006 final advice on this subject, that have not been included in the final Level 2 Directive. It is intended that the Level 3 guidelines and the Level 2 Commission Directive will be merged into a single package of measures by March 2008 at the latest.

Spanish Ministry of Economy and Finance Publishes Royal Decree Concerning Hedge Funds: The Spanish Ministry of Economy and Finance has published Royal Decree 362/2007 of March 16, 2007, which amends the regulations that develop Law 35/2003 on collective investment schemes (CIS), approved by Royal Decree 1309/2005 of November 4, 2005. The regulations aim to complete the Spanish financial regime for hedge funds and funds of hedge funds, and also to make it more flexible. In relation to the redemption process for these funds, the amendments, in particular, allow such funds to establish: (i) a maximum amount to be redeemed; (ii) a minimum holding period for investors; and (iii) a more flexible regime of written notice for subscriptions and redemptions. Funds will also have the right to decline instructions to redeem on any one Valuation Day. Under the amended regulations, these funds, which cannot currently address their marketing activities to retail investors, will be subject to more restrictive reporting requirements in their prospectuses.

FSA Handbook Development Newsletter for March 2007: The Financial Services Authority (FSA) has published its latest update on changes and prospective amendments relating to its Handbook of Rules and Guidance. The March 2007 edition reviews relevant consultation material published since the February 2007 newsletter and provides a timetable for forthcoming publications. In addition, the newsletter includes: (i) details of recent Handbook publications; and (ii) a short explanation of the content of relevant consultation material.

CEIOPS Publishes Letter to EU Commission on Third Quantitative Impact Study for Solvency II: The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has published on its website a letter responding to the February 2007 EU Commission letter regarding the development of the third quantitative impact study (QIS3) which will assist the EU Commission with the Solvency II project.

Joint Associations' Response to CESR on Best Execution: SIFMA and the Associations listed in the joint response responded to CESR's Consultation Paper (CP) containing possible practical guidance regarding the implementation of best execution under MiFID. While welcoming the approach taken by CESR in several areas of the CP, the Associations expressed some concerns regarding (i) the need to emphasise the "reasonableness" concept which lies at the heart of the best execution process-based approach, (ii) the fact that the CP appears to have been written primarily from the perspective of exchange-traded instruments in equity markets, (iii) certain CESR interpretations which goes beyond MiFID, (iv) the need to apply client consent to firms' order execution policies in an appropriate manner, and (v) the inclusion by CESR of two calls for evidence which are not critical to the implementation of MiFID on November 1, 2007.

IOSCO Consults on Principles for Valuation of Hedge Fund Portfolios: The Technical Committee of the International Organization of Securities Commissions (IOSCO) has published a consultation report , entitled "Principles for the Valuation of Hedge Fund Portfolios", which sets out nine principles, followed by explanatory text, designed to promote the consistent application of a set of valuation policies and procedures in respect of a hedge fund portfolio. The principles seek to ensure that a hedge fund's financial instruments are appropriately valued and that these values are not distorted to the disadvantage of fund investors. Comments are invited by June 21, 2007.

EU Commission Adopts Level 2 Legislation for Transparency Directive: The EU Commission has adopted level 2 implementing measures providing extra detail on a number of requirements contained in the Transparency Directive (2004/109/EC). Amongst other things, the level 2 measures address: (i) disclosure by issuers of financial information in half-yearly reports; (ii) disclosure of major holdings by investors; and (iii) minimum standards for the pan-European dissemination of regulated information to the public.

IOSCO Consults on 2007 Work Programme: OSCO also published a consultation report providing an outline of its short-term priorities, in order to invite comment on its work in respect of prioritisation and relevance. IOSCO is interested in receiving input in relation to: (i) opportunities to promote just, efficient and sound markets; (ii) market risks which might warrant regulatory intervention; and (iii) regulatory failures, resulting from ineffective regulation or inconsistent or incomplete sectoral or national regulations. Comments are invited by June 8, 2007.

EU Commission Requests Advice from CEBS on Liquidity Risk Management: The EU Commission has issued a Call for Technical Advice requesting advice from the Committee of European Banking Supervisors (CEBS) in relation to liquidity risk management. CEBS is invited to provide a survey of the regulatory frameworks adopted by member states and an analysis of various issues in respect of liquidity risk management, such as liquidity market risk and the impact of payment and settlement system design on liquidity management. Since there are no specific EU prudential regulations concerning liquidity risk, this call for advice will enable the Commission to assess whether changes to the existing regulatory framework are required in the form of supervisory convergence at EU level.

DGTPF Approves Project Regarding MiFID Implementation in Spain: The Dirección General del Tesoro y Pol�ca Financiera (Treasury and Financial Policy General Directorate) (DGTPF) has approved a project which partially amends the Spanish Securities Market Law in order to implement the Markets in Financial Instruments Directive (MiFID) in Spain. The project will now be sent to the Spanish Parliament for approval.

FSA Publishes March 2007 Market Watch Newsletter: The Financial Services Authority (FSA) has published the March 2007 edition of its Market Watch newsletter, which contains: (i) example scenarios involving suspicious transaction reporting; and (ii) information on transaction reporting in the context of MiFID