Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, July 21, 2011

SEC & CFTC Seek Comments on International Swap Regulation

Section 719(c) of the Dodd-Frank Act requires the CFTC and the SEC jointly to study and then report to Congress on swap regulation and clearinghouse regulation in the United States, Asia, and Europe and to identify areas of regulation that are similar and other areas of regulation that could be harmonized. The report also must identify major dealers, exchanges, clearinghouses, clearing members, and regulators in each geographic area and describe the major contracts (including trading volumes, clearing volumes, and notional values), methods for clearing swaps, and the systems used for setting margin in each geographic area. In connection with the study and report, the CFTC and SEC issued a request for information through public comment.

July 21, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Report on Risk Management Supervision of Designated Clearing Entities

The CFTC, the SEC, and the Board of Governors of the Federal Reserve System (the Board) released their report on Risk Management Supervision of Designated Clearing Entities under Section 813 of the Dodd-Frank Act.  Section 813 requires that the CFTC and the SEC coordinate with the Board to jointly develop risk management supervision programs for clearing entities that have been identified as systemically important by the Financial Stability Oversight Council (the Council).

Section 813 also requires the CFTC, the SEC, and the Board to make recommendations in four areas:
(1) improving consistency in the DCE oversight programs of the SEC and CFTC,

(2) promoting robust risk management by DCEs,

(3) promoting robust risk management oversight by regulators of DCEs, and

(4)improving regulators’ ability to monitor the potential effects of DCE risk management on the stability of the financial system of the United States.

July 21, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Releases Report on Reliance on Credit Ratings

The SEC released a staff Report on Review of Reliance on Credit Ratings As Required by Section 939A(c) of the Dodd-Frank Wall Street Reform  and Consumer Protection Act.  The report describes various proposed rules to amend rules and forms in response to the enactment of Section 939A.

July 21, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Former Galleon Trader Cardillo Settles SEC Insider Trading Charges

On July 18, 2011, a judgment was entered against Michael Cardillo in SEC v. Michael Cardillo,  an insider trading case in which the SEC charged Cardillo, a trader at the hedge fund investment adviser Galleon Management, LP during the relevant time period, with using inside information to trade ahead of the September 2007 announced acquisition of 3Com Corp. and the November 2007 announced acquisition of Axcan Pharma Inc.

In its complaint, the SEC alleged that Arthur Cutillo and Brien Santarlas, two former attorneys with the international law firm of Ropes & Gray LLP, misappropriated from their law firm material, nonpublic information concerning the acquisitions of 3Com and Axcan, and tipped the inside information, through another attorney, to Zvi Goffer, a former proprietary trader at Schottenfeld Group LLC, in exchange for kickbacks. The SEC further alleged that Goffer tipped information about these acquisitions to Craig Drimal, a trader who worked out of the offices of Galleon, who tipped the information to Cardillo. As alleged in the complaint, Cardillo then traded in the securities of 3Com and Axcan on behalf of a Galleon hedge fund.

To settle the SEC’s charges, Cardillo agreed to pay disgorgement of $58,520 plus $9,523 in prejudgment interest, and a civil penalty of $29,260. In a related SEC administrative proceeding, Cardillo consented to the entry of an SEC order barring him from association with any investment adviser, broker, dealer, municipal securities dealer, or transfer agent. Cardillo previously pled guilty to charges of securities fraud and conspiracy to commit securities fraud in a related criminal case and is awaiting sentencing.

July 21, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Massachusetts Charges RBC Capital Markets with Improper Sales of Leveraged ETFs

The Massachusetts Securities Division recently filed a complaint against RBC Capital Markets charging it with dishonest sales of leveraged and inverse leveraged exchange traded funds.


July 21, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Senate Celebrates D-F's 1st Anniversary by Holding a Hearing

This is the first anniversary of Dodd-Frank, and so, of course, some Congressional committee had to hold a hearing about it; in this case, the Senate Committee on Banking, Housing and Urban Affairs.  Here is the list of announced testifiers:

           The Honorable Barney Frank (D-MA), Ranking Member, House Financial Services Committee
          The Honorable Neal S. Wolin, Deputy Secretary, U.S. Department of the Treasury
            The Honorable Ben Bernanke, Chairman, Board of Governors of the Federal Reserve System
            The Honorable Mary Schapiro, Chairman, U.S. Securities and Exchange Commission
            The Honorable Gary Gensler, Chairman, Commodity Futures Trading Commission
            The Honorable Martin J. Gruenberg, Acting Chairman, Federal Deposit Insurance Corporation
            Mr. John Walsh, Acting Comptroller of the Currency, Office of the Comptroller of the Currency

Here is SEC Chair Schapiro's testimony: “Enhanced Oversight After the Financial Crisis: The Wall Street Reform Act at One Year,” 

Here is Federal Reserve Chairman Ben S. Bernanke's testimony 

Here is CFTC Chairman Gensler's testimony.

Here is the testimony of Deputy Secretary, Treasury, Wolin.

July 21, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC & CFTC Announce Roundtable on International Issues Relating to D-F Title VII

The staffs of the SEC and the CFTC will hold a joint public roundtable on August 1 to discuss international issues related to the implementation of Title VII of the Dodd-Frank Act. They released an agenda and stated that panelists will be announced at a later date.  They are also soliciting public comments.

Session I – Cross-Border Transactions

Application of requirements to foreign and domestic entities
Reporting requirements
Mandatory clearing and trading requirements 

Session II – Global Entities

Registration as a swap or security-based swap dealer or major swap or security-based swap participant.
Substantive requirements.
Regulation of transactions versus regulation of entities.
Effect of international regulatory differences on global entities.

Session III – Market Infrastructure

Registration of clearing agencies, trade data repositories, execution facilities and exchanges.
Substantive requirements.
Effect of international regulatory differences on market infrastructure.

July 21, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Rejects Enforcement's Proposed Settlement of Clawback Case

The Washington Post reports that the SEC Commissioners rejected a proposed settlement negotiated by its enforcement division that would have resolved an enforcement action brought against Maynard Jenkins, the former CEO of CSK Auto, in 2009 to claw back about $4 million received by Jenkins during the period when its financial statements misstated the company's profitability.  The enforcement action occasioned some publicity because it is the first time the SEC has sought to claw back compensation from an executive who is not personally accused of wrongdoing.  (SOX 304 requires executives to return to their company bonus-based compensation if the company subsequently has to restate its financials, without a finding of wrongdoing on the part of the CEO.)  The enforcement division reportedly recommended a settlement for less than half the amount originally demanded.  WPost, SEC rejects proposal by its enforcement staff to settle landmark ‘clawback’ suit

July 21, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 20, 2011

SEC Takes Up Dodd-Frank Rules at July 26 Meeting

The SEC announced its agenda for an Open Meeting on July 26, 2011:

Item 1: The Commission will consider whether to adopt Rule 13h-1 and Form 13H under Section 13(h) of the Securities Exchange Act, to establish a large trader reporting system to identify market participants that conduct a substantial amount of trading activity and collect information on their trading.

Item 2: The Commission will consider whether to adopt amendments to rules and forms under the Securities Act of 1933 and Schedule 14A under the Securities Exchange Act of 1934, to replace references to credit ratings with alternative criteria. These amendments are in light of Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Item 3: The Commission will consider whether to re-propose rules related to shelf-eligibility for asset-backed securities and request additional comment on an outstanding proposal to require asset-level information about pool assets.

Item 4: The Commission will consider whether to adopt rule and form amendments under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 to require an institutional investment manager that is subject to Section 13(f) of the Securities Exchange Act to report annually how it voted proxies relating to executive compensation matters as required by Section 14A of the Securities Exchange Act, which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act.


July 20, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Former Pitney Bowes Exec Settles Insider Trading Charges

The SEC settled charges that Howard B. Wildstein, a former Pitney Bowes, Inc. executive, engaged in insider trading in the stock of MapInfo Corporation in advance of the March 15, 2007 public announcement that Pitney Bowes had entered into a definitive agreement to acquire MapInfo.

According to the SEC's complaint, in late February 2007, Wildstein learned that MapInfo was a potential target of Pitney Bowes and that executives of Pitney Bowes who were responsible for mergers and acquisitions had recently visited MapInfo. On March 1 and March 2, 2007, based on this material nonpublic information, Wildstein purchased 8,000 shares of MapInfo common stock. After the acquisition was publicly announced, Wildstein sold all 8,000 shares, realizing an unlawful profit of $51,177.

The settlement requires Wildstein to pay a total of $114,848 in disgorgement, prejudgment interest, and civil penalties. The settlement is subject to approval by the court.

July 20, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Fed Reserve Assesses $85 Million Fine Against Wells Fargo for Improper Steering

The Federal Reserve Board issued a consent cease and desist order and assessed an $85 million civil money penalty against Wells Fargo & Company, a registered bank holding company, and Wells Fargo Financial, Inc. The order addresses allegations that Wells Fargo Financial employees steered potential prime borrowers into more costly subprime loans and separately falsified income information in mortgage applications. In addition to the civil money penalty, the order requires that Wells Fargo compensate affected borrowers.

The $85 million civil money penalty is the largest the Board has assessed in a consumer-protection enforcement action and is the first formal enforcement action taken by a federal bank regulatory agency to address alleged steering of borrowers into high-cost, subprime loans.

The order requires Wells Fargo to compensate borrowers affected by these practices. To identify prime-eligible borrowers with cash-out refinancing loans who were subject to improper steering, Wells Fargo is required to reevaluate the qualifications of all borrowers who took out a subprime, cash-out refinancing loan between January 2006 and June 2008 to account for certain specific steering techniques. To identify Wells Fargo Financial borrowers whose income information was falsified without their knowledge, Wells Fargo is required to set up a procedure for potentially affected borrowers to show that their actual income at the time did not qualify them for the loans they were granted. Wells Fargo is required to provide notice of this procedure to all borrowers who obtained cash-out refinancing loans between January 2004 and June 2008 at a Wells Fargo Financial office where there is evidence that sales personnel at that office altered or falsified borrowers' income information

July 20, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 19, 2011

FINRA Issues Release on Margin Requirements for Credit Default Swaps

FINRA Rule 4240 established an interim pilot program (the Interim Pilot Program) with respect to margin requirements for certain transactions in credit default swaps (CDS). A recent FINRA Notice addresses FINRA approval of margin methodologies used by clearing agencies or derivatives clearing organizations for purposes of Rule 4240. FINRA has extended the Interim Pilot Program to January 17, 2012.

July 19, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

FINRA Plans to File Arbitration Code Amendment Not Allowing Arbitration of FLSA Collective Claims

At a recent FINRA Board of Governors meeting, the following actions were taken:

Arbitration Claims Involving Fair Labor Standards Act
The Board considered a proposed amendment to Rule 13204 of the Code of Arbitration Procedure for Industry Disputes to add collective action claims brought under the Fair Labor Standards Act or the Age Discrimination in Employment Act so that such claims may not be arbitrated under the Industry Code. While this had always been our interpretive position, the rule proposal responds to an adverse court decision.
The Board authorized staff to file the proposed amendments with the Securities and Exchange Commission (SEC).

DPP/REIT Account Values
The Board considered amendments to the customer account statement rule to revise the manner in which broker-dealers report estimated per share values of nontraded REITS and direct participation programs on their customer account statements. The proposed amendments would (1) require, if par value is shown, that it be netted by the up-front fees and expenses that are deducted from the offering proceeds, (2) permit broker-dealers to use par value only under the initial offering period, and not during a second offering period, and (3) clarify that if the broker-dealer has reason to believe that the estimated per share value in the annual report is inaccurate, then the broker-dealer must remove that value from its account statements.
The Board authorized staff to issue a Regulatory Notice requesting comment on the proposed amendments

July 19, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Monday, July 18, 2011

SEC Obtains Asset Freezes After Alleged Insider Trading by Three Swiss Entities

The SEC obtained asset freezes and other emergency relief against three Swiss-based entities it has charged with insider trading ahead of a July 11 public announcement that Swiss-based Lonza Group Ltd would be acquiring Connecticut-based Arch Chemicals Inc.  According to the SEC’s complaint, Compania International Financiera S.A., Coudree Capital Gestion S.A., and Chartwell Asset Management Services purchased more than a million common shares of Arch between July 5 and July 8, mostly in accounts based in London, England.  Immediately after the acquisition announcement on July 11, the firms began selling the recently-purchased shares of Arch common stock for millions of dollars in profits. 

In filing its complaint, the SEC requested emergency relief noting that because the defendants are foreign entities and placed their trades in overseas accounts, there was a substantial risk that, upon clearance at U.S. brokerage firms, the proceeds of the trades would likely be transferred overseas.  Among other things, the court’s order froze certain assets of the defendants and ordered repatriation of all assets obtained from the trading described in the SEC’s complaint. The court has scheduled a preliminary injunction hearing in this matter for July 25 at 10 a.m. ET. 

July 18, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FSOC Issues Final Rule on Systemically Important Financial Market Utilities

The Financial Stability Oversight Council (the Council) issued its final rule, Authority to Designate Financial Market Utilities as Systemically Important, which, under Section 804 of the Dodd-Frank Act, provides the Council the authority to designate a financial market utility (“FMU”) as "systemically important."  This final rule describes the criteria that will inform, and the processes and procedures established under the DFA, for the Council’s designation of FMUs as systemically important. designation of FMUs.

The Council expects to address the designation of payment, clearing, or settlement activities as systemically important in a separate rulemaking.

July 18, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)