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April 2008 Published by RR Donnelley Editorial Content by LegalWorks Blake A. Bell, Editor in Chief In This Issue:
SEC I: SEC Issues Rules on Disclosure of Divestment by Registered Investment Companies Under Sudan Accountability and Divestment Act
The Commission's new rules, effective as of April 30, specify the forms on which disclosures must be made and provide a transition period that ends two weeks later on May 14 for disclosure of divestments made between December 31, 2007 and April 30, 2008. 
SEC II: Commission Announces That Staff Has Completed a Review of Cross-Border Tender, Exchange Offer and Business Combination Rules
The move follows a decision by the Commission to facilitate U.S. Investors' exercise of rights in overseas mergers and acquisitions. According to the Commission: "The goal of the review of the current rules, which were adopted by the Commission in 1999, was to determine whether changes could be made that would further facilitate the ability of U.S. investors to exercise their rights in connection with cross-border mergers and acquisitions. This review included looking at areas of conflict and inconsistency with foreign regulations and practice that are frequently encountered in cross-border business combinations and that result in U.S. investors being excluded from these transactions." The move follows years of debate regarding the Commission's regulatory scheme in this arena with many arguing that it is necessary to revise the rules in numerous ways including revisions to the way U.S. ownership of a subject company's securities is calculated. (The cross-border tender offer rules apply to offers for the securities of foreign companies that have U.S. security holders. They do not apply to offers for U.S. companies.) The Commission Staff has recommended that the Commission consider proposal of the recommended rule changes "as soon as possible".
SEC III: SEC Charges Wall Street Short-Seller with Spreading False Rumors
"[O]n November 29, 2007 — approximately six months after Blackstone entered into an agreement to acquire ADS at $81.75 per share — Berliner drafted and disseminated a false rumor that ADS's board of directors was meeting to consider a revised proposal from Blackstone to acquire ADS at a significantly lower price of $70 per share. The Commission alleges that this false rumor caused the price of ADS stock to plummet, and that Berliner profited by short selling ADS stock and covering those sales as the false rumor caused the price of ADS stock to fall. According to the complaint, Berliner disseminated the false rumor through instant messages to traders at brokerage firms and hedge funds. Shortly thereafter, the news media picked up the "story." As alleged in the complaint, heavy trading in ADS stock ensued, and within thirty minutes the false rumor had caused the price of ADS stock, which had been trading at approximately $77 per share, to plummet to an intraday low of $63.65 per share — a 17% decline in the share price." Berliner agreed to settle the matter by, among other things, disgorging $26,129 in trading profits and interest, paying a third-tier civil penalty of $130,000 and agreeing to be barred from association with any broker-dealer. The Commission's actions in this matter may bode ill for any who may have been involved in disseminating false rumors regarding Bear Stearns before the collapse of that firm. The Commission and the Department of Justice reportedly have been investigating whether such rumors played a role in the firm's collapse.
SEC IV: SEC and Justice Department Reportedly Are Investigating Ralph Cioffi Who Ran the Collapsed Bear Stearns Hedge Funds that Ignited the Credit Crisis
According to Goldstein, the pace of the investigation "has quickened in recent weeks" as Prosecutors have even urged "some low-level Bear employees to hire criminal-defense lawyers in preparation for official interviews" According to the report: "The probe is moving forward on two fronts, looking at whether the managers deliberately misled investors about the funds' health and whether Cioffi and his team conjured up fraudulent values for the funds' risky subprime securities." It is the latter front that has Wall Street institutions most worried, according to the report. Valuations of thinly-traded exotic instruments have been notoriously -- and increasingly -- difficult for such firms in the last few years.
FINRA: FINRA Issues Pair of Interpretive Letters Regarding Auction Rate Preferred Securities
The April 11 letter affirmed that, based on a position taken by SEC staff that member firms would not be required to supply a charge to their net capital for any margin deficiencies resulting from non-purpose credit extended on ARPS, nor to exclude from the customer reserve formula computation, such non-purpose loans to customers provided that member firms met certain conditions specified in the letter. In gaining the relief, member firms emphasized that the credit quality of most ARS issuers had not been affected and that the securities remained highly-rated with banks willing to extend collateralized loans to broker-dealers with ARPS as collateral for such loans. After issuance of the April 11 letter, however, it became increasingly difficult for some FINRA member firms to secure bank loans collateralized by ARPS rendering the relief provided under the April 11 letter unavailable to some FINRA member firms. Thus, FINRA granted additional relief, based on consultation with SEC staff, as follows: "FINRA member firms who are not able to obtain bank loans for the amount of credit extended to customers collateralized by ARPS may be permitted to extend such credit to customers, up to an amount equal to 25 percent of their excess net capital, without having to apply a net capital charge for the credit extended, even though the member firms have not obtained a bank loan(s) for the aggregate amount of such credit extended. Member firms must notify their FINRA Coordinator prior to extending such credit and will be subject to the following requirements and conditions:
The relief granted by FINRA is an important element of regulators' efforts to alleviate illiquidity in the ARPS market. Numerous securities class actions have been filed on behalf of investors in such securities recently alleging that brokerages and financial institutions misrepresented the market for such instruments as liquid and that such instruments were essentially the same as assets held in money market funds.
IOSCO I: IOSCO Announces Release of Joint Forum Paper on Customer Suitability Issues
The paper: (1) addresses the Forum's views on the roles of regulatory authorities in charge of suitability requirements; (2) describes the Forum's view of suitability requirements including the definition of retail customer, how the determination is to be made, what the disclosure requirements should be, what suitability obligations should apply regarding specific products and certain sales program requirements; (3) supervisory monitoring including inspections and sanctions for non-compliance; (4) customer redress including private causes of action and arbitration; (5) regulatory requirements regarding risk management processes tied to suitability issues; and (6) various other topics. A key finding of the report is that the notion of suitability is recognized in regulatory requirements across all sectors, but to varying extents. According to the study, there are some differences in the application of the concept between the various sectors including securities, insurance and banking sectors and "probably" greater differences by country. The report concludes that the differences that exist "may stem, in part, from the fact that not all supervisors have consumer protection mandates".
IOSCO II: IOSCO Announces Release of Joint Forum Paper on "Risk Concentrations"
The paper is based on two surveys conducted by the Joint Forum: one directed to members of the organization's working group and a second directed to 15 supervisory bodies across 10 countries. The report concludes, among other things, that risk concentrations at most financial conglomerates still follow an older model based on identifying, measuring and managing risk within separate risk categories and within business lines. (For example, credit exposures are considered within banking business units and catastrophe risk concentrations are considered within insurance business units.) The report notes, however, that some conglomerates have begun to move toward a more "horizontal" view of risk concentrations across risk categories "as it becomes increasingly clear that risk concentrations may arise from interrelated exposures across risk categories". Conglomerates following the more "horizontal" assessment model have begun to develop management tools to acquire relevant data across the group and present it to senior cross-group risk management committees. The report further makes two interesting broad observations: (1) when compared with other risk types, the management of liquidity risk tends not to be as well integrated in a scheme of cross risk analysis probably because it is not measured in the same way as other risks; and (2) insurance-led conglomerates seem to be somewhat more experienced in undertaking the design of integrated cross-scenario analysis, perhaps because the nature of insurance business risks, particularly in the property and casualty business, are less readily amenable to linear analysis.
PRACTICAL GUIDANCE: Courtesy of RealCorporateLawyer.com RealCorporateLawyer.com provides its readers with free access to a very large collection of law firm memoranda providing practical guidance on current hot topics. Readers are encouraged to visit the frequently-updated "Emerging Legal Issues" area of the home page for such current memoranda, as well as the Expert Analysis: SEC Reform Portal section containing hundreds of other such memoranda. Recent additions include:
COMINGS AND GOINGS: Who's Doing and Saying What and Where? On April 21, the SEC announced that its Deputy Chief of Staff and Counselor to Chairman, Mike Halloran, will leave the agency in may to return to the private sector. See U.S. Securities and Exchange Commission, Mike Halloran, Deputy Chief of Staff and Counselor to the Chairman, to Leave SEC, News Release 2008-62 (Apr. 21, 2008). On April 21, the Public Company Accounting Oversight Board announced that Sharon A. Virag, its Director of Technical Policy Implementation, will leave the PCAOB as of the end of April to "take a position in the private sector". See Public Company Accounting Oversight Board, Director of Technical Policy Implementation Sharon Virag to Leave PCAOB (Apr. 21, 2008). What Are the Commissioners and Commission Staffers Saying? SEC Chairman Christopher Cox and Commissioner Paul S. Atkins were busy speakers during the month of April. Chairman Cox delivered "Remarks before the U.S. Chamber of Commerce" on April 18. On April 1, he delivered an "Address to the North American Securities Administrators Association 2008 Public Policy Conference". Commissioner Atkins delivered "Remarks Before the American Chamber of Commerce" on April 14. On April 3, Commissioner Atkins delivered "Remarks Before the Twentieth Annual Tulane Corporate Law Institute". He also gave "Remarks Before SIFMA's 40th Annual Seminar" on April 1. A few Commission Staffers also hit the speaking circuit during April. On April 24, the SEC's Director of the Division of Investment Management, Andrew J. Donohue, gave the "Keynote Address at the Practicing Law Institute, Investment Management Institute 2008". On April 12, the Commission's General Counsel, Brian G. Cartwright, delivered "Remarks Before the ABA Section of Business Law Committee on Federal Regulation of Securities". The Commission's Director of the Division of Enforcement, Linda Chatman Thomsen, issued a letter to the Editor of the New York Times on April 10 regarding "The Vigor of the S.E.C."
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©2008 RR Donnelley This free E.Zine is provided for informational purposes only and does not constitute legal advice. RR Donnelley & Sons Company is not engaged in rendering legal or other professional services. Publication on this E.Zine is not intended to create, and the information contained hereon does not constitute, an attorney-client relationship. Do not act or rely upon the information and advice given in this publication without seeking the services of competent professional counsel. The RR Donnelley Financial Services Group provides a range of solutions to address all of your business communications needs. We offer financial printing services to the capital and investments markets, as well as judgment-based outsourcing and real estate services. Through our integrated global network, we file more than 50,000 documents annually with the SEC and produce many of the critical documents for regulatory compliance and financial transactions. Our BPO services leverage an on-site/offshore delivery model, leading subject matter experts and state-of-the-art, global operations to assume functions of our clients' business. We add value through highly personalized and around-the-clock service, single-source solutions, Venue virtual data rooms, worldwide regulatory and industry expertise, and insight that comes from over 140 years of experience and achievement. For more information, visit us at www.financial.rrd.com or www.RealCorporateLawyer.com , a reference resource site for corporate and securities lawyers.
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