Financial Services Alert - April 17, 2012

Developments of Note

Massachusetts Department of Revenue Issues Revised, More Liberal, Draft Guidance on the Pledge of Security Corporation Stock JOBS Act Changes Also Affect Private Funds U.S. Court of Appeals for Fourth Circuit Revives Class Action Allowing Claims Under Maryland's Repossession Statute and Rejecting Federal Preemption Argument European Commission will Propose Legislation to Update and Enhance EU AML Rules; EU Banking, Insurance and Securities Regulators Issue Reports Urging Harmonization of AML Customer Identification Standards DEVELOPMENTS OF NOTE

Massachusetts Department of Revenue Issues Revised, More Liberal, Draft Guidance on the Pledge of Security Corporation Stock

A Massachusetts security corporation is an entity that receives beneficial Massachusetts tax treatment but is required to restrict its activities in two ways: (1) it may engage exclusively in buying, selling, dealing in, or holding securities on its own behalf and not as a broker; and (2) the securities must be acquired and held for investment purposes. On September 30, 2011, the Massachusetts Department of Revenue (the "DOR") issued a working draft of a Directive on the Scope of Certain Permissible Activities and Use of a Security Corporation (the "Original Draft Directive") that restricted the ability of a security corporation shareholder to pledge its stock in the security corporation as collateral for a loan to the shareholder. Security corporation classification would be denied or revoked if: (1) the stock pledged represented more than fifty percent of the value or total combined voting power of the corporation; or (2) there were negative covenants or restrictions in connection with the pledge that related to the scope of permitted assets, liabilities, or activities of the corporation. Under certain circumstances, those restrictions were to go into effect the day after the Original Draft Directive was issued.

On April 6, 2012, the DOR issued a revised working draft Directive (the "Revised Draft Directive") that removed the above restrictions imposed by the Original Draft Directive. The Revised Draft Directive does observe, however, that certain activities would result in denial or revocation of security corporation classification. Many of these prohibited activities were understood by practitioners to exceed activities permitted to a security corporation. The Revised Draft Directive includes a nonexclusive list of prohibited activities; for example, a...