Insights from Winston & Strawn

SEC Proposes New Rules Regulating Use of Derivatives by Registered Investment Companies and Business Development Companies

At its December 11th Open Meeting, the SEC voted to propose new rules under the Investment Company Act of 1940 (as amended, the “40 Act”) that would limit the amount of leverage that registered investment companies (such as mutual funds, ETFs and closed-end funds) and business development companies (“BDCs”) (collectively, “funds”) could obtain through derivative and other senior securities transactions.  The proposed rule, in the words of Commissioner Kara M. Stein, is needed to “modernize[ ] [the SEC’s] approach to addressing leverage and undue speculation” by funds following a “gradual erosion of the protections afforded under the 40 Act, especially when it comes to limiting leverage.”  

The proposed rule would permit a fund to enter into derivatives transactions subject to compliance with three primary conditions:  

First, funds that invest in derivatives would be required to satisfy one of two portfolio limitations that restrict the amount of leverage a fund may obtain through the use of derivatives and related transactions.  The first is an exposure-based limitation that would require a fund to limit its exposure to derivative, financial commitment, and senior securities transactions to 150% of the fund’s net assets.  The second is a risk-based limitation that would allow a fund to increase its exposure to up to 300% of net assets so long as the fund satisfies a “value-at-risk” based test designed to determine whether the fund’s use of derivatives actually reduces the fund’s exposure to market risk.  

In both cases, a fund’s exposure to such transactions would generally be the sum of: (i) the aggregate notional amounts of the fund’s derivatives transactions (subject to certain adjustments described in the proposal); (ii) the aggregate obligations of the fund under its financial commitment transactions; and (iii) the aggregate indebtedness (including, in the case of a closed-end fund or BDC, any involuntary liquidation preference) with respect to certain other senior securities transactions entered into by the fund pursuant to the 40 Act.  The proposed rule defines the “notional amount” of any derivatives transaction as the market value of an equivalent position in the underlying reference asset for the transaction, or the principal amount on which payment obligations under the derivatives transaction are determined.  

Under the proposed rule, value-at-risk under the second portfolio limitation would be based on “an estimate of potential losses on an instrument or portfolio, expressed as a positive amount in U.S. dollars, over a specified time horizon and at a given confidence level.”  In order to satisfy the value-at-risk test, immediately following any derivatives transaction, the value at risk of a fund’s entire portfolio (including all derivative transactions) would have to be less than the value at risk of the fund’s portfolio of securities exclusive of derivatives transactions.  

Second, the proposed rule would require a fund to maintain “qualifying coverage assets” (typically cash and cash equivalents) for each derivative transaction in an amount equal to (i) the amount that would be payable if the fund were to exit the derivatives transaction at the time of determination (which generally is expected to correspond to the amount of the fund’s liability with respect to such transaction, which may include margin or similar payments or exit payments), plus (ii) a reasonable estimate of the potential amount payable by the fund if the fund were to exit the derivatives transaction under stressed conditions, determined in accordance with policies and procedures approved by the fund’s board of directors.  

Third, depending on the extent and nature of its derivatives usage, a fund may be required to establish a formalized derivatives risk management program that includes policies and procedures reasonably designed to assess and manage the particular risks presented by the fund’s use of derivatives. Such a program would be required to be approved by the fund’s board of directors and administered by a designated derivatives risk manager.  As proposed, this requirement would apply only to funds with a notional exposure to derivatives that exceeds 50% of the fund’s net assets or that engage in certain complex derivatives transactions (even if below the 50% threshold).  For this purpose, a “complex derivatives transaction” is any derivatives transaction for which the amount payable by either party upon settlement, maturity or exercise (i) is dependent on the value of the underlying reference asset at multiple points in time during the term of the transaction, or (ii) is a non-linear function of the value of the underlying reference asset, other than due to optionality arising from a single strike price.  

Commissioner Michael S. Piwowar provided the lone vote against the proposed rules.  In his dissenting comment, Piwowar expressed support for the need to provide a “clear framework” to guide funds’ derivative investment activities and the proposed rules’ asset segregation requirements, but cited two primary objections to the other requirements of the proposed rule.  

First, Piwowar objected to what he believes is a lack of data supporting the need for a separate leverage limit.  Absent such data, Piwowar believes the SEC lacks the necessary justification to imposing additional requirements on funds.  

Second, Piwowar believes the portfolio limitation and risk management requirements are premature in light of other recently proposed or adopted rules regarding derivatives or funds’ use of derivatives, which Piwowar believes will, given time, either directly impact the risks the proposed rules are intended to address and/or will ultimately provide the additional data necessary to determine whether and how the SEC should further regulate funds’ use of the derivatives.  

The proposal will be open for public comment for a period of 90 days following publication of the proposed rules in the Federal Register.

Feature: Financial Stability Oversight Council Hearing

On Tuesday, December 8th, the U.S. House Financial Services Committee (“Committee”) held a hearing on the agenda and operations of the Financial Stability Oversight Council (“FSOC”). At the hearing, Committee members raised questions about the FSOC’s transparency. The hearing, which was held on the heels of a legislative effort to diminish the FSOC’s power to identify financial firms that deserve stricter oversight, was an unusual chance for a majority of the FSOC to engage in a direct dialogue with its critics.

Creation of the FSOC

The FSOC was created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act  of 2010 (“Dodd-Frank Act”) to comprehensively monitor the stability of the U.S. financial system by bringing together officials from nine federal financial regulators to identify risks to the financial stability of the U.S.; encourage market discipline; and respond to developing risks to the stability of the U.S.’s financial system. The FSOC includes Secretary of Treasury Jacob Lew, who has said that “many of the [FSOC’s] discussions are market sensitive and ought not to be disclosed” and Federal Reserve chair Janet Yellen. Neither Lew nor Yellen appeared at the hearing because they previously testified before the Committee on related matters. Rounding out the rest of the FSOC members are officials from the Securities and Exchange Commission; the Consumer Financial Protection Bureau; the Commodity Futures Trading Commission; the National Credit Union Administration; the Federal Housing Finance Agency; the Federal Deposit Insurance Corporation; and the Office of the Comptroller of the Currency. ‘Too Big to Fail’

While supporters of Dodd-Frank claim that the legislation put an end to the taxpayer-funded bailouts for institutions considered “Too Big to Fail,” its opponents claim that the law essentially codifies “Too Big to Fail” by giving the FSOC the authority to designate certain institutions as SIFIs. The Committee members contended that the SIFI designation process has been plagued by a lack of due process and added that those businesses which are targeted by the FSOC have limited access to the materials on which the FSOC relies in making its determinations, and limited opportunity to modify their activities to become less “systemic” and avoid designation.  

In the Republican Party’s attempt to push legislation to limit the FSOC’s ability to impose tougher rules on large financial institutions, Republicans at the hearing called the FSOC too influential and not at all transparent. Specifically, Committee Chair and U.S. Rep. Jeb Hensarling (R-Texas) said in his opening statement that the FSOC “has earned bipartisan condemnation for its lack of transparency,” adding that while “two-thirds of its proceedings are conducted in private … minutes of those meetings are devoid of any useful substantive information on what was discussed.” Hensarling went on to depict the FSOC as “powerful government administrators, secretive government meetings, arbitrary rules, and unchecked power to punish or reward.” Hensarling continued, “Of all of the FSOC’s activities, none generates more controversy than its designation of non-bank financial institutions as ‘systemically important financial institutions’ (“SIFIs”) … designation anoints institutions as ‘Too Big to Fail,’ meaning today’s SIFI designations are tomorrow’s taxpayer-funded bailouts … Designation also ominously grants the Federal Reserve near de facto management authority over such institutions, thus allowing huge swaths of the economy to potentially be controlled by the federal government.”  

In addition, the Committee determined that the regulatory process is politicized because the FSOC’s authority is left to the partisan leanings of its members – all of whom except Roy Woodall, are heads of regulatory agencies who have been appointed by President Obama. The Committee noted that this biased configuration “not only distorts the lines of accountability and expertise among regulators, it distorts the balance that exists within regulatory agencies and erodes their independence.”  

In response to the Republican Committee members’ rebukes of the FSOC, lead Democrat Maxine Waters (D-Calif.) said at the hearing that some of the FSOC criticism came from those who “seem to have caught a convenient case of amnesia about this important mandate,” adding that “this work is central to preventing the types of contagion and risk that nearly crashed Main Street just seven years ago.” FSOC Member Testimony In all, eight of the 10 FSOC members testified at the hearing:  

Richard Cordray, Director, Consumer Financial Protection Bureau: In testifying that FSOC transparency is evolving and has been listening to concerns raised by Congress, Cordray said that everyone is “working together to identify risks to financial stability, promote market discipline, and respond to emerging threats to the stability of the financial system.”  

Thomas J. Curry, Comptroller of the Currency, Department of the Treasury: In discussing the functions and operations of the FSOC in his testimony before Congress, Curry noted information about the particular mandates that Congress has given to the FSOC “to identify, monitor, and respond to systemic risk” by, among other things, designating “nonbank financial companies and financial market utilities for heightened supervision.”  

Martin J. Gruenberg, Chair, Federal Deposit Insurance Corporation: Gruenberg delineated the FDIC’s and FSOC’s shared determination to identify and address systemic risk and designate SIFIs. He also detailed the SIFI designation process, which includes comparing all non-bank financial companies to public “threshold” quantitative standards, considering all statutory factors set forth in Dodd-Frank, analyzing each non-bank financial company using public information and nonpublic information from regulators to determine whether the company could pose a threat to U.S. financial stability, and notifying in writing each non-bank financial company that the FSOC believes merits further review to collect directly from the company information that was not previously available.  

Timothy G. Massad, Chair, Commodity Futures Trading Commission: Massad indicated that “one of the most valuable functions of the FSOC is simply to bring together the regulators and agencies that have responsibilities for our financial markets and institutions on a regular basis. By sharing information and ideas,” Massad added, “we are in a better position to identify and address potential systemic risks – and better serve the American people.”  

Deborah Matz, Chair, National Credit Union Administration: Matz maintained that the FSOC “has thus far promoted collaboration across financial regulators, established appropriate rules and procedures which reflect public input, identified four systemically important nonbank financial companies and furthered greater public awareness of threats to our financial system.” Matz added that “from the beginning, the Council has recognized the importance of public transparency and participation … FSOC also is committed to publicly disseminating timely information about the Council’s decisions, while balancing the need to protect proprietary corporate information and avoid moving markets.”  

Melvin Watt, Director, Federal Housing Finance Agency: Watt argued that “transparency in the designations process and in FSOC’s other work is crucial to the Council’s ability to maintain the public’s trust. On the other hand, much of the information we consider in making the assessments FSOC is required by statute to make is sensitive, nonpublic information. We spend a lot of time considering how to appropriately balance these interests. FSOC has enhanced its official transparency policies, increased the information shared through meeting minutes, hosted public outreach meetings on the nonbank designations process, and solicited public comment on the asset management industry.”  

Mary Jo White, Chair, Securities and Exchange Commission: White stressed that “the SEC’s historical tripartite mission necessarily gives the SEC unique insight into many areas on which [FSOC] is focused, such as the potential financial stability risks of asset management activities and products, the ongoing changes to market structure and the role of central counterparties.” White added that another FSOC focus “is on enhancing the transparency of its functions” and so the FSOC in February 2015 unanimously adopted changes to the designation process” which included “increased and earlier engagement with companies under review,” increased public transparency” and “an annual opportunity for designated firms to meet with [FSOC] staff to discuss and present relevant information as part of the annual review process.”  

Roy Woodall, Voting Member, Department of the Treasury, Financial Stability Oversight Council: Woodall referenced the FSOC’s “recent enhancement to its procedural transparency, its process for identifying and designating SIFIs, and its new emphasis on studying systemically risky activities that cut across several types of financial institutions,” adding that the FSOC “and its work can continue to benefit from further reforms [.]”

FINRA – Regulatory Matters at a Glance

Please click here to view a summary of the regulatory notices, rule filings, guidance and the like published by the Financial Industry Regulatory Authority (“FINRA”) during the previous month.

Banking Agency Developments


Banking Agencies Publish Consultative Paper on Revisions to Standardized Approach for Credit Risk

On December 10th, the Office of the Comptroller of the Currency (“OCC”) announced in a joint press release, along with the Board of Governors of the Federal Reserve System (“FRS”) and the Federal Deposit Insurance Corporation (“FDIC”) that the Basel Committee on Banking Supervision (“BCBS”) published a consultative paper, “Revisions to the Standardized Approach for credit risk,” which is the committee’s second consultative paper on the topic. The proposed revisions would apply primarily to large, internationally active banking organizations and not to community banking organizations. OCC Press Release.

OCC Survey Shows That Underwriting Standards Continue to Ease

On December 9th, the OCC released a report showing that underwriting among national banks and federal savings associations eased for the third consecutive year. The OCC’s 21st Annual Survey of Credit Underwriting Practices showed easing of underwriting standards within commercial and retail loan products of the 95 banks and federal savings associations surveyed, reflecting trends similar to those seen from 2005 through 2007. OCC Press Release.

Federal Reserve

Board Issues Final Rule on Revised Capital Rules for Non-Traditional Stock Corporations

On December 4th, the Federal Reserve Board (“Board”) issued a final rule providing information about how to apply the Board’s revised capital framework issued in June 2013 to depository institution holding companies that are not organized as traditional stock corporations. Board Press Release.

Treasury Department Developments


FinCEN Director Delivers Speech at FSSCC-FBIIC Meeting

On December 9th, Financial Crimes Enforcement Network (“FinCEN”) Director Jennifer Shasky Calvery spoke at the Financial Services Sector Coordinating Council (“FSSCC”)-Financial and Banking Information Infrastructure Committee (“FBIIC”) joint meeting, discussing the work that FinCEN does in the area of financial intelligence and explaining how FinCEN uses technology and data to combat cyber threats. Calvery Speech.

FinCEN Further Extends FBAR Filing Deadline for Certain Financial Professionals

On December 8th, FinCEN announced a further extension of time for certain Report of Foreign Bank and Financial Accounts (“FBAR”) filings resulting from ongoing consideration of questions regarding the filing requirement and its application to individuals with signature authority over, but no financial interest in, certain types of accounts. FBAR Filing Deadline Extension.

FinCEN Names New Policy Division Associate Director

On December 7th, FinCEN announced the selection of Andrea M. Sharrin as Associate Director of its Policy Division. Ms. Sharrin will oversee FinCEN’s regulatory functions and lead the staff that defines the framework for protecting the U.S. financial system from money laundering, terrorist financing, and other illicit finance. Sharrin Press Release.

Securities and Exchange Commission

Proposed Rules

SEC Takes Another Stab at Resource Extraction Payment Disclosure

At its Open Meeting on December 11th, the SEC voted to propose new rules that would require oil, natural gas, and mining companies to disclose payments made to the U.S. or foreign governments related to their commercial development activities.  Mandated by the Dodd-Frank Act, the new proposal revises a previous version of the rule adopted in 2012, challenged by industry groups, and overturned in federal court, according to a report in Reuters. The proposed rules would apply to domestic or foreign issuers engaged in the commercial development of oil, natural gas, or minerals that are required to file annual reports with the SEC. Under the newly proposed rule, these companies would be required to disclose any payments made to advance commercial development or that total more than $100,000 during the fiscal year, including taxes, royalties, fees, production entitlements, bonuses, dividends, and payments for infrastructure improvements. The disclosure requirements would extend to payments made by subsidiaries or another entity controlled by the issuer. Initial comments on the proposed rule should be submitted on or before January 25, 2016, while reply comments responding to issues raised in the initial comment period are due on or before February 16, 2016. SEC Press Release. In casting the lone dissenting vote, SEC Commissioner Michael S. Piwowar expressed concern that the proposed rule may introduce a new legal standard by requiring geographic information to be sufficiently detailed so a “reasonable user” can locate the specific location. Piwowar also criticized the proposal for burdening only public companies with additional disclosure requirements, placing them at a disadvantage to private and foreign companies not subject to the proposed rule. Piwowar Statement.


Division of Corporation Finance Offers New C&DIs on Securities Law Changes in FAST Act

Following last week’s enactment of the Fixing America’s Surface Transportation (“FAST”) Act, the SEC’s Division of Corporation Finance provided an overview of the main provisions in the Act that include amendments to federal securities laws in an announcement on December 10th.  The Division also published new Compliance and Disclosure Interpretations (C&DIs) on the FAST Act to clarify when an emerging growth company may omit interim financial statements or the financial statements of other entities from its filings or submissions under Section 71300 of the Act. FAST Act C&DIs.

Statements and Speeches

Audit Deficiencies and Audit Committee Workload Concern White

In the keynote address at the 2015 American Institute of Certified Public Accountants (“AICPA”) National Conference on December 9th, SEC Chair Mary Jo White provided an overview of the SEC’s views on strong financial reporting and provided an update on the SEC’s work in that area, including the disclosure effectiveness review, the concept release on audit committee disclosure, and the status of the SEC’s consideration of the use of International Financial Reporting Standards (“IFRS”). White expressed concern regarding the significant deficiencies in auditing found during Public Company Accounting Oversight Board (“PCAOB”) inspections and the increasing work required of audit committees, which may hinder an audit committee’s ability to perform its responsibilities effectively. White Remarks.

Schnurr Indicates SEC Considering Changes to Allow Issuers to Supplement Financial Statements with IFRS Information

In remarks before the 2015 AICPA National Conference on December 9th, SEC Chief Accountant James V. Schnurr provided his thoughts on key issues facing the accounting profession, including considerations about disclosure effectiveness, the role and communications of audit committees, and the importance of high-quality auditing standards. Schnurr noted that the SEC is considering regulatory changes to allow domestic issuers to supplement their financial statements with IFRS-based information, but encouraged the Financial Accounting Standards Board (“FASB”) and the  International Accounting Standards Board (“IASB”) to continue their efforts to create a single set of high-quality, global accounting standards. Schnurr Remarks. According to a report in the Wall Street Journal on December 10th, IASB Chair Hans Hoogervorst expressed displeasure with the SEC’s compromise on IFRS, noting that the U.S. is not demonstrating “strong leadership” in the advancement of global accounting rules.

Piwowar Calls for More Dodd-Frank Act Fixes

SEC Commissioner Michael S. Piwowar issued a statement on December 8th in which he praised Congress and President Obama for repealing the Dodd-Frank Act’s security-based swap data repository indemnification requirement as part of the recently enacted FAST Act.  Piwowar called the indemnification provision one of many examples of Dodd-Frank Act requirements that impede the SEC from fulfilling its core mission. Piwowar noted that the repeal of the indemnification requirement exposes a “false narrative” that any modifications of the Dodd-Frank Act would weaken the statute. Piwowar Statement.

Commodity Futures Trading Commission

No-Action Relief

CFTC Issues Extension of No-Action Relief from Certain Recordkeeping Requirements under Commission Regulations

On December 8th, the U.S. Commodity Futures Trading Commission’s (“CFTC”) Division of Swap Dealer and Intermediary Oversight and Division of Market Oversight issued a no-action letter extending the relief in CFTC Staff Letter No. 14-147, which is set to expire on December 31, 2015. Letter 14-147 provides that commodity trading advisors that are registered with the CFTC and are members of designated contract markets or of swap execution facilities are not required to record oral communications. It also provides that market participants covered by the rule will not be required to link records of oral and written communications that lead to the execution of a transaction with any particular transaction. This no-action relief is effective immediately and will expire on the effective date of any CFTC action with respect to the CFTC’s proposal to amend Regulation 1.35(a). CFTC Press Release.


CFTC to Hold Open Commission Meeting to Consider Final and Proposed Rules

On December 9th, the CFTC announced that it will hold an open meeting on December 16, 2015 at 10:30am EST to consider proposed rules on DCR System Safeguards and DMO System Safeguard Testing Requirements, as well as a final rule on Margin for Uncleared Swaps. The meeting, which will be held at the CFTC headquarters in Washington, D.C., is open to the public. CFTC Press Release.

Federal Rules Effective Dates

Click here to view table.

Exchanges and Self-Regulatory Organizations

Chicago Board Options Exchange, Incorporated

CBOE Exchanges Propose Price Protection Enhancements

On December 8th, the SEC requested comment on Chicago Board Options Exchange, Incorporated’s (“CBOE”) and C2 Options Exchange, Incorporated’s (“C2”) separately filed proposals to amend their respective rules to enhance current and add new price protection measures for orders and quotes to help prevent potentially erroneous executions. Comments should be submitted on or before January 4, 2016.

Financial Industry Regulatory Authority

FINRA Study Diagnoses Healthy Corporate Bond Liquidity, but Notes Emerging Risks.

The Financial Industry Regulatory Authority (“FINRA”) published new research regarding the state of liquidity in the U.S. corporate-bond market based on an analysis of all TRACE transactions from 2003 to September 2015. According the study published on December 10th, most measures indicate a healthy corporate-bond market, evidenced by a record level of new bond issuances, growing transaction volumes, and rising trade numbers. The study also identified areas of potentially emerging risk related to changes in market structure, including increased electronic trading, the volatility of bond ETFs, and problems with high yield in the energy sector. FINRA Press Release.

FINRA Introduces New Type of Equity Trade Reporting Submission

FINRA released information regarding rule amendments that introduce clearing-only, non-regulatory reports, a new category of trade submissions that firms can use to submit to clearing those OTC transactions in equity securities that have not been previously reported through a FINRA facility.  According to the notice published on December 8th, the new clearing only, non-regulatory reports cannot be used for regulatory reporting purposes and can only be used by firms that have satisfied their regulatory reporting obligations through other submissions to FINRA. The rule amendments will become effective on February 1, 2016. FINRA Regulatory Notice 15-51.

Firms Must Link to FINRA’s BrokerCheck Next Year

In an announcement on December 7th, FINRA provided notice that the SEC approved amendments to FINRA Rule 2210 (Communications with the Public) to require member firms’ websites to include a readily apparent reference and hyperlink to BrokerCheck on (1) the initial webpage that firms intend to be viewed by retail investors and (2) on any other webpage that contains the professional profile of one or more registered persons who conduct business with retail investors. The rule amendments will become effective on June 6, 2016. FINRA Regulatory Notice 15-50.

National Futures Association

NFA Will Add New Forex Reporting Requirements in the New Year.

On December 9th, the National Futures Association (“NFA”) notified members of new forex reporting requirements that will accompany the changes to forex dealer member (“FDM”) capital requirements, which will become effective on January 4, 2016. Starting on January 5, 2016, the NFA will require FDMs to report additional information in the daily Forex Financial Report. Beginning on January 31, 2016, FDMs will be required to include additional information in the supplementary section of the monthly 1-FR-FCM (or FOCUS II) filing to assist FDMs in calculating their net capital requirements. NFA Notice I-15-29.

NFA’s Swap Dealer/Major Swap Participant Registry Now Includes Legal Entity Identifier

On December 8th, the NFA announced that it has added legal entity identifier (“LEI”) information to its swap dealer/major swap participant registry, the data file on its website that contains a consolidated listing of information for use by those market participants and other entities who play a role in processing swap transactions. The original version of the registry without LEI information will be discontinued beginning on July 1, 2016. (12/8/2015) NFA Notice I-15-28.


NYSE Exchanges Propose Changes to Co-Location Services

On December 10th, the SEC requested comment on separate proposals filed by the New York Stock Exchange, LLC (“NYSE”), NYSE Arca, Inc. (“NYSE Arca”) and NYSE MKT LLC (“NYSE MKT”) that would amend their respective rules to provide that the co-location services offered by each exchange include three time feeds and four new Partial Cabinet Solution bundles. The three time feeds under the proposal would include a GPS Time Source, the Network Time Protocol feed, and Precision Timing Protocol. The Partial Cabinet Solution bundles would provide smaller users a more cost-effective way to create a co-location environment. Comments on the proposals should be submitted within 21 days of publication in the Federal Register, which is expected the week of December 14, 2015.

NYSE Eliminates Obligation to Report List of Futures Commission Merchants

The NYSE released an Information Memo on December 8th reminding its members and member organizations that they no longer need to update FINRA, NYSE or NYSE MKT LLC with a list of Futures Commission Merchants they use to execute agency and proprietary index futures, effective immediately. NYSE Information Memo 2015-9.

Judicial Developments

Panel Vacates SEC’s Order Against Former State Street Employees for Lack of Substantial Evidence

In 2010 the SEC contended that, during the 2007 subprime mortgage crisis, two former employees of State Street Bank and Trust Company made material misrepresentations and omissions that mislead investors about two substantially identical State Street-managed funds. The SEC subsequently imposed cease-and-desist orders on the former employees, suspended them from association with any investment adviser or company for one year, and imposed civil monetary penalties on both. On December 8th, the First Circuit vacated the SEC’s order, determining that the SEC’s findings were not supported by substantial evidence. Flannery.

Investment Fund Plaintiffs Alleging Securities Fraud Fail to Show Relationship with GPS Manufacturer Defendants

Investment fund plaintiffs appealed dismissal of their securities fraud complaint. Plaintiffs contended that the defendants, manufacturers/sellers of GPS devices, deliberately designed their GPS receivers to experience “overload interference” from out-of-band receptions that would render the receivers ineffective and that they fraudulently concealed and misrepresented this fact. On December 7th, the 2nd Circuit affirmed, finding plaintiffs failed to allege they had any relationship with defendants as the parties did not engage in commercial dealings with each other and did not have a fiduciary relationship. Harbinger.

State Court to Decide How Statute of Limitations Applies to Fiduciary Duty Claim Against Officer of Ohio Corporation (not precedential).

The Antioch Co. Litigation Trust brought an adversary proceeding against former directors, officers, trustee, and professionals, asserting claims that were transferred to it by a bankruptcy court order confirming the plan of reorganization of The Antioch Co. On December 2nd, the Sixth Circuit granted plaintiff’s motion to certify to the Supreme Court of Ohio the question of whether Ohio law will apply the doctrine of adverse domination to toll the statute of limitations provided by the Ohio Rev. Code for a claim of breach of fiduciary duty brought against a director or officer of an Ohio corporation. Antioch.

Industry News

Former SEC Commissioner Challenges Advisors to ‘Engage’ SEC on Third-Party Exam Rule

On December 8th, ThinkAdvisor reported that Troy Paredes, a former commissioner at the Securities and Exchange Commission (“SEC”) challenged advisors to bring forth their concerns about the pending SEC rule that would require them to get a third-party audit. Third-Party Exam Rule.

SEC Under Pressure to Standardize Financial Reporting.

On December 8th, reported that Reps. Darrell Issa, R-Calif. and Mike Quigley, D-Ill. are attempting to require federal regulators to more fully embrace consistent data formats for the information they collect on financial transactions with their Financial Transparency Act (H.R. 2477). This bill would write into law the requirement for standardized reporting formats that are being considered voluntarily by agencies such as the SEC and the Commodity Futures Trading Commission (“CFTC”). Financial Reporting.