• IRS ISSUES NEW PROPOSED RULES ON SWAPS: On September 15, 2011, the Internal Revenue Service (IRS) released proposed regulations that update and refine existing regulations addressing the United States tax treatment of notional principal contracts (swaps) and providing coordination rules for the taxation of swaps with the rules applicable to regulated futures contracts. Regulated futures contracts are subject to mandatory markto-market treatment and are generally subject to "60/40" capital gain treatment, that is 60 percent long-term capital gain or loss and 40 percent short term capital gain or loss. The following GT Alert, prepared by Mark Leeds and Yoram Keinan, of the New York office of Greenberg Traurig, describes these developments in more detail.
  • CFTC GRANTS TEMPORARY RELIEF FOR LARGE TRADER REPORTING REQUIREMENTS ON COMMODITY SWAPS: The Commodity Futures Trading Commission (CFTC) issued a temporary relief from certain reporting requirements under the CFTC’s new regulations on large trader reporting of physical commodity swaps and swaptions. The initial reports under the new regulations were scheduled to be submitted starting on September 20, 2011. The temporary relief was provided “until November 21, 2011, for cleared swaps, and January 20, 2012, for uncleared swaps.” Last month, the Futures Industry Association (FIA) asked the CFTC for a transition period during which the range of data required to be reported by large traders will initially be limited. According to FIA, the required data that is currently not covered by existing reporting systems of large traders includes: “name of the counterparty whose position is being reported,” information as to whether a swap is cleared or uncleared, “commodity reference price,” “execution facility indicator,” long and short “non-delta-adjusted paired swaption positions,” long and short “paired swap or swaption notional value,” and some other data. The CFTC’s press release is available by clicking here; the FIA letter to CFTC is available by clicking here.
  • SEC ISSUES CONCEPT RELEASE SEEKING COMMENT ON DERIVATIVES USE BY MUTUAL FUNDS: On August 31, 2011, the U.S. Securities and Exchange Commission (SEC) issued a release seeking public comment on the use of derivatives by management investment companies and business development companies registered under the Investment Company Act of 1940, as amended (1940 Act). The release reviewed several topics related to the use of derivatives by companies registered under the 1940 Act, including leverage-related limitations on mutual funds’ use of derivatives, the impact of derivatives on diversification and portfolio concentration requirements applicable to funds, valuation of derivatives and the risks associated with the use of derivatives, as well as related SEC guidance. The release also reviewed other regulatory schemes’ approaches to the use of derivatives by investment vehicles other than funds, including European UCITS. The SEC has requested comments regarding the current use of derivatives by funds, the SEC’s current approach to implementing the 1940 Act’s provisions applicable to derivatives and alternative approaches to derivatives employed by other regulators, among other topics. Comments are due on or before November 7, 2011. The release is available here.
  • UPDATE ON CFTC SWAP RULEMAKING SCHEDULE: A CFTC Commissioner recently indicated that the mandatory clearing of swap transactions could commence during the third quarter of 2012. Addressing the CFTC’s rulemaking schedule, the Commissioner pointed out that the definition of “swap dealers” in the current draft rules is too broad and the exemptions are too narrow, and that the proposed rules provide for a "proposed dealer compliance and documentation regime [that] alone could be burdensome enough to cause some entities to close shop." Some of the outstanding issues that CFTC will consider and focus on in connection with finalizing the swap rules include: (i) determination of “which swaps should be subject to mandatory clearing;” (ii) resolution of “extraterritoriality and inter-affiliate issues;” (iii) resolution of key definitions such as “swap dealers,” development of “policies and procedures to protect confidential market data;” and, (iv) informing the market as to the “comprehensive implementation schedule” for the rulemaking by the CFTC. A copy of the keynote address of the Commissioner is available by clicking here.
  • EXEMPTION FOR INTER-AFFILIATE SWAPS SOUGHT BY INDUSTRY: In a letter to the CFTC and other regulators, the Futures Industry Association (FIA) and several other financial trade associations asked the regulators to limit the application of certain derivatives requirements under the Dodd-Frank Act relating to interaffiliate swap transactions. The industry participants pointed out that the current rules and proposals do not address the treatment of inter-affiliate swaps, and proposed to either limit or modify the application of a number of regulations relating to swap transactions or entities engaged in swap trades, including, among others: margin, collateral segregation, public reporting, clearing and exchange trading, swap dealer registration, business conduct, position limits and certain other requirements. The text of the letter on inter-affiliates swap transactions is available by clicking here.
  • CFTC GRANTS CME CLEARING EUROPE REGISTRATION AS DCO: On September 6, 2011, the CFTC issued an order granting CME Clearing Europe Ltd., a private limited company organized under the laws of England and Wales (CME), registration as a derivatives clearing organization. According to the CFTC’s press release, CME is authorized to clear swaps and forward contracts on energy, agricultural, freight and metals products. The CFTC’s press release is available by clicking here.

INVESTMENT ADVISERS — HOUSE RELEASES DRAFT BILL TO CREATE INVESTMENT ADVISER SRO: On September 8, 2011, the Chairman of the House Financial Services Committee released a discussion draft of the Investment Adviser Oversight Act of 2011. As an amendment to the Investment Advisers Act of 1940, this bill would provide for the creation of investment adviser self-regulatory organizations (SRO), referred to as “national investment adviser associations,” and mandate all SEC- and state-registered investment advisers to register with these associations. Similar to FINRA in the broker-dealer industry, these SROs would adopt and enforce industry rules, administer period examinations of its investment adviser members and associated persons, and submit an annual financial report to the SEC. The full text of the discussion draft is available by clicking here.

BROKER DEALERS — HOUSE REPRESENTATIVES SPEAK OUT ABOUT UNIFORM FIDUCIARY STANDARD: By the end of 2011, the SEC is expected to propose rules under Dodd-Frank that, rather than maintain the current fiduciary duty standard for investment advisers and the more lenient suitability standard for broker-dealers, would create a uniform fiduciary standard applicable to any firm or person that provides personalized investment advice to retail customers. During a meeting of a House Financial Services subcommittee, numerous Congressmen opposed the creation of a uniform fiduciary standard and urged the SEC to refrain from this rulemaking unless it can produce hard evidence that new rules are necessary to address an existing problem in the industry.

DISTRESSED AND SPECIAL SITUATION INVESTORS — DISTRESSED OPPORTUNITIES: We have attached the latest Distressed Assets Opportunities lists prepared by our colleagues in the Business Reorganization and Financial Restructuring Group and the Real Estate Group. The lists can be accessed by clicking the hyperlinks.