Corporate and Financial Weekly Digest - December 10, 2010

Edited by Robert L. Kohl and David A. Pentlow BROKER DEALER

SEC Approves FINRA Rule Regarding Verification of Member Assets at Non-Member Financial Institutions

New Financial Industry Regulatory Authority Rule 4160 will go into effect February 1 in an effort by FINRA to strengthen its ability to independently verify assets maintained by a FINRA member at a non-member financial institution. FINRA Rule 4160 will prohibit members from continuing to custody or retain record ownership of assets at non-member financial institutions that fail promptly to provide FINRA, upon FINRA's written request, with written verification of the FINRA member's assets maintained at such non-member financial institution. In the Regulatory Notice, FINRA encourages, although does not require, FINRA members to contract with non-member financial institutions maintaining the FINRA member's assets (whether proprietary or customer assets) to require such non-member financial institutions to oblige with verification requests from FINRA.

Click here to read FINRA Regulatory Notice 10-61.

New California Law Requires Lobbyist Registration for "Placement Agents" Soliciting California State Pension Plans

Effective January 1, new legislation in California (Act) will prohibit an individual or entity from acting as a "placement agent" in connection with any potential investment made by a California state public retirement system unless that person is registered as a lobbyist with the California Secretary of State and is in compliance with the California Political Reform Act of 1974 (PRA). The Act is aimed at ensuring that investment decisions of any California state public pension or retirement system are made in an impartial manner, free from any potential bias caused by gifts, campaign contributions or the financial interests of placement agents, retirement system officials and third parties who have supported these officials.

Under the Act, the definition of placement agent includes any person hired, engaged, retained by or serving on behalf of an external manager (for example, a hedge fund manager) who acts for compensation as a finder, solicitor, marketer, consultant, broker or other intermediary in connection with the offer or sale of the securities, assets or services of an external manager to a California state public pension or retirement system (or an investment vehicle in which a California public pension or retirement system is the majority investor). The placement agent definition covers broker-dealers or finders retained by an external manager and also extends to individuals employed by an external manager performing marketing functions or otherwise acting as an intermediary in connection with the offer or sale of securities, assets or services of an external manager to a California state public retirement system, unless an exemption would apply. The Act also prohibits the payment to registered broker-dealers of compensation that is contingent upon an investment being made by a California state public or pension retirement system.

Notably, the Act excludes from the placement agent definition certain individuals associated with an external manager who spend a third or more of their time, during a calendar year, managing the securities or assets owned, controlled, invested or held by an external manager. The Act also excludes from the definition of placement agent an employee, officer or director acting on behalf of an external manager (or its affiliate) that (1) is registered as an investment adviser or broker-dealer with the Securities and Exchange Commission or, if exempt or not subject to such registration, any appropriate state securities regulator, (2) was selected by and contracted with the California state public pension or retirement plan through a "competitive bidding process" (which is not specifically defined in the Act), and (3) agrees to a fiduciary standard of care defined by the standards of conduct applicable to the board of a California state public pension or retirement system.

By requiring placement agents to register as lobbyists, the Act subjects placement agents to the reporting and ethics rules that govern lobbyists under the PRA. The California Fair Political Practices Commission (FPPC), the agency tasked with adopting regulations and interpreting and enforcing the PRA, has not yet implemented rules for compliance with the Act. It is unknown when and to what extent the FPPC will be adopting more substantive rules regarding the Act before it becomes effective.

Click here for the text of the Act.

CFTC

CFTC Approves Sixth Series of Dodd-Frank Rulemakings

The Commodity Futures Trading Commission held a public meeting on December 1 to propose its sixth series of rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFTC has published notification of (and, in most cases, requested public comment on) the following five rule proposals.

Further Definitions of Swap Dealer, Major Swap Participant and Eligible Contract Participant: Section 721 of the Dodd-Frank Act creates basic definitions for the new categories of regulated entities "swap dealer" (SD) and "major swap participant" (MSP), and Section 712(d)(1) provides that the Securities and Exchange Commission and the CFTC, in consultation with the Federal Reserve Board, must further define these terms, as well as the term "eligible contract participant" (ECP). Swap Dealers. The proposed rules define a "swap dealer" similarly to the Dodd-Frank Act, as any person who: (a) holds himself out as a dealer in swaps, (b) makes a market in swaps, (c) regularly enters into swaps with counterparties in the ordinary course of business for its own account, or (d) engages in activity causing itself to be commonly known in the trade as a dealer or market maker in swaps. The CFTC states that it will interpret this definition such that the term would be able to evolve in the future as operations of the SDs and market practices develop. The proposal provides further information about the CFTC's current understanding of the distinguishing features of SDs, that they generally: (1) accommodate...