Action Line Update

NY Court of Appeals Holds Absolute Privilege Protects Employer's Disclosures on NASD Form U-5: The New York Court of Appeals recently ruled in the case of Rosenberg v. Metlife that statements made by an employer on the NASD Forum U-5 termination notice are subject to absolute privilege in a defamation lawsuit. The Court stated that because NASD is a delegated authority to regulate the broker-dealer industry, accurate responses on Form U-5's are pertinent to disclosing potential securities law violations. Employees who claim they were maliciously defamed on a Form U-5 may still commence an arbitration procedure. SIFMA filed an amicus brief in this case and the finding was consistent with our position.

FICC Good Friday Schedule: For full story see Funding Issues section.

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" 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.

SIFMA Issues Auction Rate Securities Guidance Documents: In a press release, SIFMA today announced that is has developed model auction procedures and standard disclosure language regarding special considerations for auction rate securities. The model auction procedures may be used as an exhibit to standard deal documents for auction rate securities such as the auction agent agreement or the broker-dealer agreement, or for other auction rate securities documents such a the bond resolution or indenture. These model procedures embody certain principles in SIFMA's Best Practices for Auction Rate Securities, which were previously issued as an exposure draft and have been finalized in conjunction with the model procedures. SIFMA also created sample disclosure language regarding the role of the broker-dealer in auctions and a note to bond counsel regarding certain other auction procedures for auction rate securities. For further information, please contact Mary Kuan at 646.637.9220.

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.

FICC Rule Filing for Repo Sub Deadline: The Fixed Income Clearing Corporation submitted a rule filing for accelerated approval with the Securities and Exchange Commission (SEC) to add a final deadline of 1:00 p.m. (New York time) to the Government Securities Division's repo collateral substitution process. Currently, FICC's rules stipulate that repo collateral substitution requests for which the notification itself or the information regarding new securities collateral is received after 12:30 p.m. will be processed on a good faith basis only. Upon SEC approval of Rule Filing, which is anticipated in April 2007, FICC will establish a final deadline of 1:00 p.m., after which FICC will not process a repo collateral substitution until the following business day. Members will be required to resubmit their substitution information on the following business day for processing. The proposed rule provides that the final deadline of 1:00 p.m. will be extended by one hour on "high volume" days as defined by the GSD's rules. FICC will continue to process substitution requests whose notification or new securities collateral information is received between 12:30 p.m. and 1:00 p.m. on a good faith basis only. If you have any questions regarding the proposed rule please contact Robert Toomey at 646.637.9224.

FICC Good Friday Schedule: The Fixed Income Clearing Corporation announced that FICC will be closed on Friday, April 6, 2007, in observance of Good Friday. FICC noted changes in its operations and schedules in an "Important Notice". If you have any questions regarding the above please contact Brian MacWilliams at 646.637.9227 or Robert Toomey at 646.637.9224.

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

FICC Good Friday Schedule: For full story see Funding Issues section.

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.

Joint Associations' Response to IIMG 2nd Interim Report on Lamfalussy Process: SIFMA and several other associations submitted a joint response setting out their views on the Inter-Institutional Monitoring Group (IIMG)'s second Interim Report containing IIMG's suggestions for further improvements to the implementation of the Lamfalussy process. The associations broadly support the IIMG recommendations and add some further suggestions of their own.

CEIOPS Publishes Final Report on Pillar I Standards under Solvency II Project: The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has published its final report advising the EU Commission on Pillar I standards under the Solvency II project, building on responses to consultation paper No 20, entitled "Draft Advice to the European Commission in the Framework of the Solvency II project on Pillar I issues - Further Advice", as well as on advice previously submitted in 2005 and 2006. The report describes the high-level objectives for the different elements of Pillar I and advises on: (i) standards for valuing assets; (ii) issues specific to the Solvency Capital Requirement (SCR) standard formula; (iii) the supervision of internal risk modelling; and (iv) the Minimum Capital Requirement (MCR), i.e., the level of capital below which ultimate supervisory action is triggered. The report also provides an alternative proposal for an integrated approach to life insurance activities under the standard SCR at Annex A.

FSA Consults on Proposals to Introduce Funds of Alternative Investment Funds to Retail Consumers: Following its previous discussion in Discussion Paper 05/3 (DP05/3) and feedback statement 06/3 (FS06/3) relating to the increasingly novel and complex investment products that are available in the retail investment market, the Financial Services Authority (FSA) has issued Consultation Paper 07/6, which sets out proposals to bring a range of funds of alternative investment funds (FAIFs) within its regulatory regime. The proposals will allow FAIFs to invest in other funds that themselves will be unregulated. This will allow, for example, funds of hedge funds to be introduced to the market for authorised collective investment schemes. The FSA is proposing to accommodate FAIFs by expanding the existing "Non-UCITS Retail Schemes" (NURSs) regime. Comments are invited by June 27, 2007.

FSA Policy Statement on Perimeter Guidance Relating to MiFID: The Financial Services Authority (FSA) has published Policy Statement 07/5 (PS07/5) providing feedback on Consultation Paper 06/9 and Consultation Paper 06/14 in relation to draft perimeter guidance concerning the scope of MiFID. CP06/9 contained draft guidance which aimed to help firms consider whether they fall within the scope of MiFID and the recast Capital Adequacy Directive (CAD). CP06/14 contained draft guidance which focused on the effect MiFID will have on the scope of regulation under the Financial Services and Markets Act 2000. Appendix 1 of the feedback statement contains the final perimeter guidance, which aims to help firms understand the effect that UK implementation of MiFID (and the recast CAD) will have on their business.

FSA Reviews Commodities Market: The Financial Services Authority (FSA) has published a paper, entitled "Growth in Commodity Investment: Risks and Challenges for Commodity Market Participants", which illustrates the changing nature of investors, as well as the expanding range of products, in commodities markets, and which estimates the current level of investment. Amongst other things, the paper states that although commodity markets have traditionally been dominated by commercial entities, there is now significant involvement by hedge funds, pension funds, and, increasingly, private individuals.

Final IOSCO Report on Disclosure Principles for Cross-Border Offerings and Listings of Debt Securities: The Technical Committee of the International Organization of Securities Commissions (IOSCO) has published a final report, entitled "International Disclosure Principles for Cross-Border Offerings and Listings of Debt Securities by Foreign Issuers", containing principles which aim to enhance the comparability of information provided by multi-national issuers when conducting a cross-border public offering or listing of debt securities. The disclosure principles relate to: (i) the identity of parties responsible for the information provided in the prospectus/offering document; (ii) the description of the debt securities being offered; and (iii) the risk factors, specific to the issuer or its industry and/or the debt securities to be offered or listed, that may affect the investor's investment decision.

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.