Action Line Update
July 16, 2007
Highlights
- FICC Rule Filing Inter-bank GCF REPO® SERVICE
- Treasury International Capital (TIC) Data for May
- Industry Associations Publish Principles for Distribution of Retail Structured Products
- EU Commission Continues Infringement Proceedings Against 24 Member States Regarding MiFID Implementation
- HMT Announces Covered Bond Regime and Mortgage Lending Review
- FSA Policy Statement on Amendments to Prospectus and Listing Rules
- CEIOPS and CEBS Publish EU Commission Call for Advice on Supervision of Financial Conglomerates in Third Countries and on Eligible Capital in Context of Financial Conglomerates
- Kitty Ussher Welcomes Appointment of Hector Sants as FSA Chief Executive
- EU Commission Publishes Solvency II Proposal
- ESME Publishes Report on Use of Term Durable Medium in DMD and MiFID
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Indicates a new item. Items that are solely informational are generally removed after two weeks. New items normally will be posted to the website weekly.
CROSS MARKET ISSUES
No updates.
CORPORATE CREDIT MARKETS
SEC Requests Comment on Definition of Significant Deficiency: The Securities and Exchange Commission is requesting comments on the definition of the term “significant deficiency” for purposes of the Sarbanes-Oxley requirement that both “material weaknesses” and “significant deficiencies” be identified based upon management’s evaluation. The SEC believes that the focus of the term “significant deficiency” should be on the communication requirement that results between management, audit committees, and independent auditors. Thus, the definition the SEC proposes is that significant deficiency is “a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a registrant’s financial reporting.” Comments are due by July 18, 2007. For more information please contact Mary Kuan at 646.637.9220.
SEC Revisions to the Eligibility Requirements for Primary Securities Offerings on Forms S-3 and F-3: SEC has recently proposed to amend the eligibility requirements of Form S-3 and Form F-3 to allow domestic and foreign private issuers to conduct primary securities offerings on these forms without regard to the size of their public float or the rating of the debt they are offering. The issuers would need to satisfy the other eligibility conditions of the respective forms and must not sell more than the equivalent of 20% of their public float in primary offerings over any period of 12 calendar months. The proposal does not extend to blank check companies and shell companies, which would be prohibited from using Forms S-3 and Form F-3 for primary offerings until 12 calendar months after they cease being shell companies unless they meet the minimum $75 million threshold. As a result of the proposal, companies that are not traded on a national securities exchange, such as companies quoted on the Over-the-Counter-Bulletin Board and Pink Sheets, could also use these forms. Comments are due by August 27, 2007. For more information please contact Mary Kuan at 646.637.9220.
SEC Revisions to Rule 144 and Rule 145: The SEC has proposed revisions to Rule 144 to, among other things, shorten holding periods for affiliates and non-affiliates, and to Rule 145 to eliminate the presumption that parties (other than the issuer) who acquire securities pursuant to the reclassification of securities, merger, consolidation or transfer of assets of the issuer of the securities where security holder consent is required are underwriters (except for transactions involving a shell company that are not business combination related shell companies). The proposed amendment to Rule 144 would reduce the holding period to six months for restricted securities of companies that are subject to the reporting requirements of the Securities Exchange Act of 1934. The proposed six-month holding period for restricted securities of reporting companies would be extended for up to an additional six months, by the amount of time during which the security holder has engaged in certain hedging transactions (not to exceed 1 year). Restricted securities of companies that are not subject to Exchange Act reporting would continue to be subject to a one-year holding period prior to any public resale. The amendment to Rule 144 would also eliminate the “manner of sale” requirements for the resale of debt securities; thus, affiliates will have the option to privately negotiate the resale of securities without using a broker. Comments are due September 4, 2007. For more information please contact Mary Kuan at 646.637.9220.
FUNDING
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FICC Rule Filing Inter-bank GCF REPO® SERVICE: The Fixed Income Clearing Corporation ("FICC") has announced that it has submitted a rule filing with the Securities and Exchange Commission ("SEC") to return the GCF REPO® service of the Government Securities Division to inter-clearing bank status. Upon regulatory approval, this change will enable GCF participants to enter into GCF REPO® transactions with GCF participants who clear at a different clearing bank. If you have any questions regarding this issue please contact Robert Toomey at 646.637.9224.
GOVERNMENT AND FEDERAL AGENCY MARKETS
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Treasury International Capital (TIC) Data for May: Treasury International Capital (TIC) data for May are released and posted on the U.S. Treasury website. The next release, which will report on data for June, is scheduled for August 15, 2007.
MBS AND SECURITIZED PRODUCTS
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OCC Makes Available Downloadable Consumer Illustrations of Information on Nontraditional Mortgage Products: The Office of the Comptroller of the Currency has posted on its Web site a series of illustrations of information for consumers regarding the potential financial implications of certain nontraditional mortgage products, some of which can result in negative amortization. The illustrations are designed to complement the Interagency Guidance on Nontraditional Mortgage Product Risks that was published in 2006.
SIFMA Sends Letter to MA AG Regarding Mortgage Rules: SIFMA and the American Securitization Forum on June 29 jointly submitted a response to a request for comments by the Massachusetts Attorney General that addressed subprime-related issues such as assignee liability, judgment of a borrower’s ability to repay, suitability standards, and the expansion of Massachusetts' broker and lender regulations. SIFMA’s letter is available here.
MUNICIPAL MARKETS
EUROPEAN MARKETS
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Industry Associations Publish Principles for Distribution of Retail Structured Products: SIFMA, ESF, ISDA, ICMA and LIBA have published a set of non-binding principles for use in the retail structured products market. The principles, which focus on the management of the relationship between product providers and distributors, amongst other things, make recommendations covering: (i) each of the provider's and distributor's assessment of the other's suitability in the initial stages of the relationship; (ii) the division of roles and responsibilities between providers and distributors; (iii) responsibility for the accuracy and completeness of marketing materials such as the issuer prospectus and term sheet; and (iv) awareness of the consequences of legal and regulatory uncertainty surrounding the distinction between the roles of the provider and distributor.
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EU Commission Continues Infringement Proceedings Against 24 Member States Regarding MiFID Implementation: The EU Commission has sent formal requests, in the form of "reasoned opinions", to 24 member states relating to their failure to transpose into national law the level 1 and/or level 2 provisions of the Markets in Financial Instruments Directive (MiFID) by the January 31, 2007 deadline. Reasoned opinions have been sent to 22 member states concerning failure to transpose level 1 of MiFID and to 24 member states concerning failure to transpose the level 2 MiFID Implementing Directive. These reasoned opinions constitute the second stage of the infringement procedure under Article 226 of the EC Treaty. The member states concerned are formally requested to adopt the necessary measures within two months of receipt of the request, failing which the Commission may refer the matter to the European Court of Justice. So far, only Ireland, Romania and the UK have fully transposed both MiFID and the level 2 Implementing Directive.
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HMT Announces Covered Bond Regime and Mortgage Lending Review: Following the Prime Minister's statement on July 11, 2007 about the need to take further steps to improve the way that the mortgage markets work, the Chancellor of the Exchequer, Alistair Darling, has announced a number of new initiatives to ensure that lenders have the best access to capital market finance, and also that consumers are able to make the most informed choices when buying a mortgage. The initiatives include: (i) new legislative proposals for a covered bond regime in the UK to assist mortgage firms to finance their lending over the longer-term; (ii) a Treasury-led review to identify any further barriers to lenders wanting to raise funds in wholesale markets; and (iii) Government backing for a Private Members Bill, currently before Parliament, which will increase the proportion of funds which may be raised in wholesale markets, giving building societies more flexibility in financing their mortgages. The Chancellor will consult on creating a new regime for covered bonds, designed to help mortgage lenders finance more affordable 20 to 25 year fixed-rate mortgages, and will then report by Budget 2008 on how to overcome any barriers preventing lenders from offering long-term mortgages, including the case for changes to instruments used by the Debt Management Office.
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FSA Policy Statement on Amendments to Prospectus and Listing Rules: The Financial Services Authority (FSA) has published Policy Statement 07/8 (PS07/8) which contains feedback on Consultation Paper 06/17 (CP06/17) concerning amendments to the Listing and Prospectus Rules primarily to address issues that have emerged since the Rules were introduced on July 1, 2005, as well as the final text of the relevant rule changes. As well as reflecting the changes on which the FSA consulted in CP06/17, the final text attached to PS07/8 also reflects further changes which the FSA has taken the opportunity to make. These include: (i) updating the Listing Rules and the Disclosure and Transparency Rules to reflect references to the Companies Act 2006; (ii) amendments to the Prospectus Rules to reflect the EU Commission's amendment to the Prospectus Directive Regulation in relation to the treatment of companies with a complex financial history; and (iii) amendments to LR9 to reflect the feedback of market participants in PS06/11 concerning implementation of the Transparency Directive so that rules which refer to repealed sections of the Companies Act 1985 are nonetheless retained in the FSA Handbook.
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CEIOPS and CEBS Publish EU Commission Call for Advice on Supervision of Financial Conglomerates in Third Countries and on Eligible Capital in Context of Financial Conglomerates: The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) and the Committee of European Banking Supervisors (CEBS) have published a Call for Advice received from the EU Commission, requesting the Interim Working Committee on Financial Conglomerates (IWCFC) (a joint CEIOPS and CEBS working committee) to provide technical advice on: (1) supervision of financial conglomerates whose head office is in Switzerland or the USA. The guidance is relevant to EU competent authorities when making so-called 'equivalence' decisions pursuant to Article 18 of the Financial Conglomerates Directive on whether, for financial conglomerates with their head offices outside the EU, there is supervision in place which is equivalent to the supplementary supervision which the Financial Conglomerates Directive requires. The Commission has requested the IWCFC to provide the technical advice by the end of December 2007. CEBS and CEIOPS are inviting comments from interested parties by September 14, 2007; (2) the rules relating to eligible capital for prudential purposes in the banking, securities and insurance sectors, in the context of their application to financial conglomerates. In particular, the IWCFC is asked to assess whether any differences in these sectoral rules are sufficiently problematic, when viewed from the perspective of conglomerate supervision, to warrant action and, if so, to provide recommendations for the action that should be taken. Given that ongoing work is taking place which may lead to changes in the relevant sectoral rules (such as the Solvency II project in the insurance sector and the Own Funds review in the banking/securities sector), the Commission asks the IWCFC to maintain close contact with CEBS and CEIOPS during the process of producing the technical advice. The Commission has requested the IWCFC to provide the technical advice by the end of January 2008. CEIOPS and CEBS are inviting comments by September 28, 2007.
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Kitty Ussher Welcomes Appointment of Hector Sants as FSA Chief Executive: Kitty Ussher, the Economic Secretary to Her Majesty's Treasury (HMT), has welcomed the appointment of Hector Sants as the new Chief Executive of the Financial Services Authority (FSA), and confirmed his appointment to the FSA Board in this capacity. Mr Sants, who is currently Managing Director of the FSA Wholesale and Institutional Markets Division, will take up his post as Chief Executive on July 20, 2007, succeeding John Tiner who will step down at the FSA Annual Public Meeting on July 19, 2007.
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EU Commission Publishes Solvency II Proposal: The EU Commission has issued a formal proposal for a Directive on the taking-up and pursuit of the business of Insurance and Reinsurance (known as Solvency II), designed to harmonize the financial solvency requirements for insurance undertakings across the EU, with a view to ensuring their financial solvency and ability to withstand adverse events. Amongst other things, Solvency II would: (i) create more sophisticated solvency requirements for insurers, which would cover not only insurance risks, but also market risk (e.g., a fall in the volume of an insurer's investment), credit risk and operational risk; and (ii) require there to be a dedicated 'group supervisor' for an insurance group, based in the group's home country. The Commission aims for the new system to be in operation by 2012. The Solvency II proposal is part of the Commission's Better Regulation strategy and its commitment to simplifying the regulatory environment and cutting red tape. In this regard, the adoption of Solvency II will involve replacing 14 existing Directives with one single Directive. The proposal will now pass to the EU Parliament and Council for consideration.
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ESME Publishes Report on Use of Term Durable Medium in DMD and MiFID: The European Securities Markets Experts Group (ESME) has published a report on the use of the term "durable medium" in the Distance Marketing Directive (DMD) and the Markets in Financial Instruments Directive (MiFID). In the light of confusion over how to interpret the term in the context of the DMD when considering communication methods other than paper, the importance of the term in the context of MiFID and the increasing demand for firms to move away from paper communication, the report aims to identify: (i) whether there are any inconsistencies between the use of the term in the two Directives which are difficult to justify and which cause problems for firms; and (ii) whether the term has any inherent uncertainties which could cause difficulties for firms and enforcement authorities.
FSA Finds Poor Practice by Intermediaries and Lenders Within Subprime Market: The Financial Services Authority (FSA) published its latest review of the behaviour of intermediaries and lenders within the sub-prime mortgage market, which services consumers with impaired credit histories, and has found weaknesses in responsible lending practices and in firms’ assessments of consumers’ ability to afford a mortgage. While the research found no significant evidence of sub-prime mortgages being sold incorrectly to prime customers, several other issues were identified for both intermediaries and lenders when selling to sub-prime customers. In relation to intermediaries the FSA found that: (i) in a third of the files reviewed there was an inadequate assessment of consumers’ ability to afford the mortgage; and (ii) in almost half of the files there was an inadequate assessment of customers’ suitability (e.g., needs and circumstances) for the mortgage. For lenders, the FSA identified that: (i) none of the lenders adequately covered all relevant responsible lending considerations in their policies; and (ii) in many cases, lenders did not apply their own policies in practice. As a result of the review, the FSA has now commenced enforcement action against five firms.
FSA Publishes First Proposals for Discussion from Retail Distribution Review: The FSA published Discussion Paper 07/1 (DP07/1), entitled “A Review of Retail Distribution” which forms part of the Retail Distribution Review (RDR) launched in June 2006 to identify market solutions to core problems within the retail investment market. DP07/11, seeks to: (i) improve the current standard of professionalism within the retail investment market; (ii) find more cost effective ways of making advice available to a wider range of consumers; and (iii) improve consumer understanding of what they are getting for their money. To achieve this, the key proposal of DP07/11 is that the regulated investment advice market could be divided into two parts: (i) professional financial planning and advisory services, offered by highly qualified advisers serving those consumers who need the full range of advice; and (ii) primary advice services, offering advice in respect of more simple products. Comments are invited by December 31, 2007.
CEIOPS Publishes its Interim Progress Report on Supervisory Convergence in the Field of Insurance and Occupational Pensions for the FSC: The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) published its Interim Progress Report on Supervisory Convergence in the Field of Insurance and Occupational Pensions for the EU Financial Services Committee (FSC). The report adopts and addresses the headings from the section of the FSC’s report on Financial Supervision (on challenges for supervision) which are: (i) fostering supervisory convergence and supervision; (ii) enhancing the cost-efficiency of the EU Insurance Supervisory regime; and (iii) improving cross-border supervision. In addition to updating on its work towards supervisory convergence, the report: (i) gives indications of CEIOPS' future activities and some challenges; (ii) summarises stakeholders’ replies to CEIOPS’ Performance Assessment Questionnaire; and (iii) sets out CEIOPS Convergence Committee’s Terms of Reference.
CEIOPS Publishes consultation paper on the establishment of a Mediation Mechanism between Insurance and Pensions Supervisors: CEIOPS published a consultation paper on the Establishment of a Mediation Mechanism between Insurance and Pensions Supervisors in response to the Franc Report request to explore the preconditions to the establishment of such a mediation mechanism. CEIOPS proposals include that the mediation mechanism: (i) will only deal with issues of a cross-border nature; (ii) must only address the issues that are within the competence of the CEIOPS members; and (iii) focus on the cooperation and exchange of information between competent authorities under the relevant sectoral directives. The consultation paper suggests mediation could be useful to solve the following types of disputes: (i) processes for consultation between competent authorities; (ii) processes of exchange of information; and (iii) conflicts raised under relevant CEIOPS Protocols. Comments are invited in by October 5, 2007.
Proposal of Legislative Decree implementing MiFID before the Italian Government for Approval: The Ministry of Finance brought before the Council of the Ministries of the Italian Government a draft Legislative Decree implementing the Market in Financial Instruments Directive (MiFID) for approval (the Decree). The implementation of MiFID in Italy is scheduled for November 1, 2007. Consob (the Italian regulator) has produced a first draft of the regulation implementing the Decree, which is scheduled to be issued in the next few weeks after the approval of the Decree.
CESR Publishes List of EU Listed Shares and “Liquid Shares” under MiFID: The Committee of European Securities Regulators (CESR) has calculated and published, in the form of a database, a set of information regarding all EU shares which are admitted to trading on a regulated market, in accordance with Article 34(5) of the MiFID implementing Regulation (No 1287/2006 of August 10, 2006). The information included in this database allows market participants to identify liquid shares (which trigger the obligation for systematic internalisers to publish firm quotes under Article 27 of MiFID) and to determine the block sizes for waivers from pre-trade transparency requirements and delayed post-trade publication. The database contains 7206 shares, of which 894 are identified as liquid. Click on the below links to: (i) access the database; (ii) view the Developer’s Guidelines for CESR’s database on shares admitted to trading on EU regulated markets; and (iii) view CESR's guidebook on MiFID market transparency calculations.
FSA Publishes Feedback and Further Consultation on Listing Review for Investment Entities: The FSA has published a combined consultation and feedback paper entitled Consultation paper 07/12 ‘Investment Entities Listing Review - Further consultation, feedback on CP06/21, policy statement on CP06/4 and CP06/21 and final Handbook text’, setting out proposals to revise and update the listing regime for investment entities. In light of feedback received on CP06/21 (proposals for a single listing regime applicable to both overseas and UK investment entities), FSA is proposing further targeted changes to Chapter 15 of the Listing Rules, which include: (i) modifying board independence arrangements; (ii) making it easier for feeder funds to list; and (iii) removal of quarterly portfolio disclosure. The further consultation sets out some additional changes to the Listing Rules, designed to create a modern, flexible and unitary regime to be in place by the end of the first quarter of 2008. The policy statement section of Consultation Paper 07/12 deals with the feedback FSA received in two earlier consultation papers, CP06/21 and CP06/4 (concerning proposals to change the Listing Rules and Disclosure Rules in order to implement the Transparency Directive) which states that the majority of proposals were well received and will be implemented in September 2007.
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