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 Form 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.

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 as 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.

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. (EST) 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.

OFHEO Releases Annual Report to Congress: James B. Lockhart, Director of the Office of Federal Housing Enterprise Oversight (OFHEO) released OFHEO's 2007 Report to Congress, detailing, among other things, the agency's annual examination conclusions and regulatory oversight of the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac for the year 2006. The report concludes that both Enterprises "remain a significant supervisory concern." Director Lockhart stated that "while both Enterprises made progress in correcting their problems, especially in systems, controls and financial reporting, it has taken much more time and money to correct than the GSEs or OFHEO expected," and that "a key indicator of a successful remediation will be the timely filing of annual and quarterly financial statements by each company..." The report also states that despite oversight constraints, such as complying with a 30 percent additional capital requirement and specific limits on the growth of both of their portfolios "...their support of the mortgage market grew by 8 percent in 2006 to $4.3 trillion as their guaranteed mortgage-backed securities (MBS) outstanding grew at double-digit rates". The report also includes a review and summary of the financial performance of the GSEs, OFHEO supervisory actions, the accounting environment at the GSEs, and OFHEO legislative recommendations. Lockhart in the report states that "[n]ow is the time for action on this important issue" referring to Congress's action the House Financial Services Committee's reform bill on regulatory oversight of the housing GSEs. If you have any questions regarding OFHEO's report, please contact Robert Toomey at 646.637.9224 or Robbin Conner at 646.637.9224.

Treasury Market Practices Group Conference: The Treasury Market Practices Group is hosting a conference on Thursday, June 14, 2007 from 8:30 a.m. to 12:30 p.m. at the Federal Reserve Bank of New York in New York City. Speakers at the event will provide guidance and information on applying best practice principles in the Treasury cash, repo and related markets. The conference will feature remarks by Anthony Ryan, Assistant Secretary for Financial Markets at the U.S. Department of the Treasury, and Tom Wipf, Chairman of the TMPG. All market participants - dealers, brokers, investment funds and foreign central banks - are encouraged to attend. Registration deadline is Tuesday, June 12, 2007. If you have any questions or comments please contact Robert Toomey at 646.637.9224.

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.

ECB Publishes First Report on Financial Integration in Europe: The European Central Bank (ECB) has published a report, entitled "Financial Integration in Europe", which is to be the first issue of a new annual publication contributing to advancing European financial integration and to raising public awareness of the Eurosystem's role in supporting this objective. The report, which begins by explaining the Eurosystem's interest in European financial integration and the main elements of the ECB's work on the subject, is divided into three chapters. The first chapter provides the ECB's assessment of the degree of financial integration in the different financial segments of the euro area. The second chapter provides in-depth assessment of selected issues relating to financial integration; this chapter contains three special features concerning: (i) monetary policy and financial integration; (ii) the role of cross-border banking in fostering progress in banking integration, calling for the reduction in obstacles to euro zone cross-border banking mergers; and (iii) the implications of the Single Euro Payments Area (SEPA) for financial integration. The third chapter gives an overview of the main activities pursued by the Eurosystem in 2006 to advance financial integration.

EU Commission Updates Lamfalussy League Table on Implementation of Securities-Related Directives: The EU Commission has updated its "Lamfalussy league table" which records the success of member states in meeting deadlines for the implementation of a series of securities-related Directives that were adopted as part of the Financial Services Action Plan (FSAP).

FSA Publishes Update on Investment Entities Listing Review: In response to feedback received in relation to Consultation Paper 06/21, entitled "Investment Entities Listing Review", which sets out revised proposals for the listing of investment entities, the Financial Services Authority (FSA) has announced that it will publish another consultation paper setting out proposals for a single listing regime applicable to both overseas and UK investment entities. Currently overseas companies are able to list under the "directive minimum" requirements in Chapter 14 of the Listing Rules while UK funds are subject to the more onerous requirements of Chapter 15. The consultation paper will be published in June 2007 with a view to implementation in the first quarter of 2008.

CEIOPS Announces 2007 Work Program for Insurance Groups Supervision Committee: The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has announced the 2007 work program for its Insurance Groups Supervision Committee. Amongst other things, the group will: (i) design a framework for developing a risk assessment system for insurance groups; (ii) examine supervisory requirements and practices in the reporting of intra-group transactions with the aim of developing an agreed framework for reporting; (iii) identify areas of insurance group supervision in which tasks can be delegated to or from the lead supervisor; and (iv) draft proposed additions to the current banking memorandum of understanding on crisis management to provide for the inclusion of insurance supervisors.

CEIOPS Launches Third Quantitative Impact Study for Solvency II: CEIOPS has launched its third quantitative impact study (QIS3) in order to assist the EU Commission with the Solvency II project. QIS3, which builds on CEIOPS' second quantitative impact study (QIS2) and recent advice to the Commission on Pillar I issues, aims to gain further information on: (i) the possible impact on balance sheets, and the amount of capital that might be needed, if the approach and calibration set out in the QIS3 specification were to be adopted as the Solvency II standard; (ii) the suitability of the suggested calibrations for the calculation of the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR); and (iii) the effect of applying the QIS3 specification to insurance groups. Participants in QIS3 are asked to submit completed spreadsheets and questionnaires to national supervisory authorities by 29 June 2007.

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 authorized 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.