Financial Crisis News Center

House Legislation Hedging Exemption Subject to Floor Amendments

This story appeared in Jim Hamilton's World of Securities Regulation.

The House reform legislation would require over-the-counter derivatives trading to be conducted through clearinghouses, which are set up to police derivatives trading. Under HR 4173, if a clearing mandate applies to a swap or class of swaps, then the swap dealers and major swap participants not only have to clear such trades but also have to execute them on or through a futures or securities exchange or a swap execution facility. This provision provides greater price transparency and will narrow spreads, all to the benefit of the end user. For the end users, the bill provide an exemption from the clearing mandate and, consequently, from the execution mandate. The House defeated an amendment that would have imposed an execution mandate on end users.

Initial CDS Insider Trading Case Survives Challenge

This story appeared in Jim Hamilton's World of Securities Regulation.

The first insider trading action filed by the SEC alleging misconduct in the credit default swaps market (SEC v. Rorech) survived a motion for judgment on the pleadings. The complaint, filed in the U.S. District Court for the Southern District of New York, alleged Renato Negrin, a former portfolio manager at hedge fund investment adviser Millennium Partners, L.P., and Jon-Paul Rorech, a salesman at Deutsche Bank Securities Inc., engaged in insider trading in the credit default swaps of VNU N.V., an international holding company.

SEC Enhances Proxy Disclosure, Adviser Custody Rules

This story appeared in Jim Hamilton's World of Securities Regulation.

The SEC adopted rule and form changes intended to enhance the information provided in proxy solicitations and in other forms filed with the SEC. Beginning in the upcoming annual reporting and proxy season, the new rules will improve corporate disclosure regarding risk, compensation and corporate governance matters when voting decisions are made. In addition, the SEC adopted rule changes designed to substantially increase the protections for investors who turn their money and securities over to investment advisers.

House Legislation Requires FASB to Study Securitization Standards

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The House has passed legislation requiring the Federal Reserve Board, in consultation with the SEC, to conduct a study and report to Congress on the impact on individual classes of asset-backed securities of FASB’s new securitization accounting standards, FAS 166 and 167, and the Act’s new credit risk retention requirements.

The Wall Street Reform and Consumer Protection Act, HR 4173, says that the report must make statutory and regulatory recommendations for eliminating any negative impacts on the continued viability of the asset-backed securitization markets and on the availability of credit for new lending. The study would be required to be completed in 90 days.

CCH Briefing Paper Examines House Legislation

The CCH Editorial Staff of banking and securities law analysts has authored a detailed overview titled, "House Passes Wall Street Reform Act." From the introduction:

On December 11, 2009, the U.S. House of Representatives passed legislation to restructure the financial services regulatory system, the Wall Street Reform and Consumer Protection Act of 2009 (HR 4173), by a vote of 223-202. As discussed below, the sweeping array of reforms includes the Financial Stability Improvement Act, which would create a systemic risk regulator, strengthen regulation of depository institutions and bank holding companies, improve the asset-backed securitization process, and provide for an enhanced dissolution authority. The legislation also would create a Consumer Financial Protection Agency, reform the over-the-counter derivatives market, subject hedge funds to stricter scrutiny, impose new corporate governance mandates, adopt heightened requirements for credit rating agencies and expand regulatory enforcement powers. Among other measures, the legislation features expansive consumer mortgage protections and creates a Federal Insurance Office.

Download the briefing paper

SEC Official Testifies on Best Method for Determining Madoff Distributions

This story appeared in SEC Today.

The SEC’s deputy solicitor, Michael A. Conley, advised the House Subcommittee on Capital Markets that the SEC will recommend that the bankruptcy court in the Madoff case use a constant-dollar, cash-in/cash-out method to determine the amounts to be distributed to harmed investors. The court will soon hear arguments on competing theories of valuing customer claims for payouts under the Securities Investor Protection Act. There will not be enough money to compensate all of the victims for their losses.

Conley explained that SIPA does not have clear answers to some of the questions surrounding the claims by Madoff account holders. The statute does not address how to calculate the net equity in a customer’s account under the type of fraudulent scheme run by Madoff. Currently, the trustee satisfies claims with a pro rata distribution from customer property which includes cash and securities.

Supreme Court Oral Argument in PCAOB Case Centers on SEC Control of the Board and Presidential Removal Powers

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

Supreme Court oral arguments in the case deciding the PCAOB’s constitutionality focused on the SEC’s pervasive control over the Board and the President’s control over the SEC. The case, brought by an audit firm, is before the Court on a grant of certiorari of a split panel ruling of the DC Circuit Court of Appeals that the PCAOB’s creation was constitutional because, under the Appointments Clause of the Constitution, Board Members are inferior officers of the United States who do not have to be appointed by the President and can be appointed by the SEC, as is currently required by Sarbanes-Oxley. (Free Enterprise Fund and Beckstead & Watts v. PCAOB, Dkt. No. 08-861).

Firm and CEO Charged with Fraudulent MBS Sales

This story appeared in Bank Digest.

The Securities and Exchange Commission has announced that it has filed charges against Brookstreet Securities Corp., Irvine, Calif., and its President and CEO Stanley C. Brooks with fraud for allegedly systematically selling risky mortgage-backed securities to customers with conservative investment goals. The alleged fraud cost many Brookstreet investors their savings, homes, or retirement cushions, and eventually caused the firm to collapse.

The SEC alleges that Brookstreet and Brooks developed an internal program through which the firm's registered representatives sold particularly risky and illiquid types of collateralized mortgage obligations (CMOs) to more than 1,000 seniors, retirees, and others for whom they were unsuitable. The SEC further alleges that Brookstreet continued to promote and sell risky CMOs to retail investors even after Brooks received numerous indications and personal warnings that these were “dangerous” investments that could become worthless overnight. One trader even called Brookstreet's program a “scam.” Finally, in a last-ditch effort to save Brookstreet from failing during the financial crisis, Brooks allegedly directed the unauthorized sale of CMOs from Brookstreet customers' cash-only accounts, causing substantial investor losses.

SEC Extends and Modifies Temporary Exemptions for ICE Trust U.S. LLC

This story appeared in Bank Digest.

The SEC has issued an order extending the temporary ICE Trust U.S. LLC conditional exemption from clearing agency registration under Section 17A of the Securities Exchange Act of 1934 (1934 Act) solely to perform the functions of a clearing agency for certain non-excluded credit default swap (CDS) transactions. The order also extends the temporary exemption of eligible contract participants and others from certain 1934 Act requirements with respect to nonexcluded CDS cleared by ICE Trust. In addition, the order conditionally exempts, on a temporary basis, ICE Trust clearing members from broker-dealer registration requirements and related requirements in connection with using ICE Trust to clear CDS transactions of their customers. The SEC has also extended the temporary exemption of ICE Trust and certain of its clearing members from the registration requirements of Sections 5 and 6 of the 1934 Act solely in connection with the calculation of mark-to-market prices for nonexcluded CDS cleared by ICE Trust. These temporary exemptions expire on March 7, 2010.

SEC Charges Former Officers of Subprime Lender with Fraud

This story appeared in Bank Digest.

The SEC has announced that three former top officers of New Century Financial Corporation are being charged with securities fraud for misleading investors as New Century's subprime mortgage business was collapsing in 2006. At the time of the fraud, New Century was one of the largest subprime lenders in the nation. In its complaint, the SEC alleges that New Century disclosures generally sought to assure investors that its business was not at risk and was performing better than its peers. It alleges that New Century failed to disclose important negative information, including dramatic increases in early loan defaults, loan repurchases, and pending loan repurchase requests, and that it knew this negative information from numerous internal reports it regularly received. The complaint further alleges that the fraud caused investors substantial losses. The complaint seeks a final judgment permanently enjoining defendants from future violations of the federal securities laws, disgorgement with prejudgment interest, officer and director bars, civil penalties and reimbursement of bonuses and incentive or equity-based compensation.