Client Alerts & Publications Archive

By letter dated October 11, 2012, the Division of Swap Dealer and Intermediary Oversight of the Commodity Futures Trading Commission 1 released interpretive guidance confirming that certain securitization vehicles should not be included within the definition of “commodity pool” and that operators of such vehicles should not be included within the definition of “commodity pool operator” under the Commodity Exchange Act and CFTC rules. Separately, in a no-action letter dated October 11, 2012, the Division conditionally extended the deadline for registration as a commodity pool operator from October 12, 2012 to December 31, 2012 for vehicles that are commodity pools solely by virtue of their involvement with swaps. 

The Financial Industry Regulatory Authority, Inc. recently issued a revised rule proposal to address debt research conflicts of interest. FINRA originally published a concept proposal on debt research in March 2011 followed by a formal rule proposal in February 2012. FINRA now seeks comment on a revised rule proposal that includes amended exemptions for research distributed to certain institutional investors and for firms with limited principal debt trading activity. The revised proposal also includes other changes in response to comments on the prior proposal. 

In this issue:

1. Treasury Report Highlights Increased Bond Examination Activity by the IRS
2. Possible Cuts to Federal Subsidies for Build America Bonds and Tax Credit Bonds
3. Management of Electric Transmission and Distribution System Does Not Result in Private Business Use 

On August 10th, the Governor signed into law two bills (former HB 4662, now Public Act 97-0920, and former HB 4663, now Public Act 97-0921), making Illinois one of a growing number of states with statutes that address trust decanting and directed trusts. The new statutes will go into effect January 1, 2013. This client alert covers the trust decanting statute. Our prior client alert addressed the directed trust statute.

On Friday, September 14, 2012, the Office of Management and Budget sent a report to Congressional lawmakers discussing major cuts in federal payments to issuers of Build America Bonds and other direct-pay bonds that will have to be made if Congress is forced to make $1.2 trillion in across-the-board cuts to the federal fiscal 2013 budget under the Congressionally- mandated sequestration process. 

The Securities and Exchange Commission recently proposed rules to eliminate the prohibition against general solicitation and general advertising in securities offerings conducted in reliance on Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933, as directed by the Jumpstart Our Business Startups Act. The proposed rules are intended to create increased opportunities for private companies, including private funds, to reach a larger and broader potential investor audience. Comments on the proposed rules are due by October 5, 2012. 

The U.S. Treasury recently released a report from the Treasury Inspector General for Tax Administration that states that the Internal Revenue Service more than doubled the number of bond examinations conducted per year from the number of examinations it conducted during previous reporting periods. 

The Financial Industry Regulatory Authority, Inc. recently announced the new FINRA Rule 5123 will be effective December 3, 2012. The new rule requires FINRA member firms to file copies of any offering documents used in non-public offerings of securities. The new rule includes several key exemptions, such as offerings solely to certain institutional investors, very high net worth individuals and employees as well as offerings made pursuant to Rule 144A under the Securities Act of 1933. 

In this issue:

• Using Customer Cell Phone Numbers
• Collection
• Payments Using Mobile Devices
• Arbitration

On August 10th, the Governor signed Public Act 97-0921 (former HB 4662 and 4663) making Illinois one of a growing number of states with statutes that address directed trusts and trust decanting. These new statutes will go into effect January 1, 2013. This client alert covers the directed trust statute.

On June 22, 2012, the Second District Illinois Appellate Court entered a ruling affirming the judgment of the DuPage County Circuit Court awarding summary judgment in favor of Elgin Community College District No. 509, thereby striking down plaintiffs!/tax objectors! allegations that the District had issued certain of its bonds at excessive interest rates and with an unlawful premium. 

The Municipal Securities Rulemaking Boards Interpretative Guidance on Underwriter Fair Dealing Obligations contained in Notice 2012-25 will become effective for bonds sold on or after August 2, 2012. The Notice imposes expansive code of conduct and disclosure requirements on underwriters of municipal securities under the “fair dealing” provisions of MSRB Rule G-17, which provides in pertinent part:

“In the conduct of its municipal securities activities, each broker, dealer and municipal securities dealer shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice.” 

In this issue:

1. IRS Provides New Financial Restructuring Resources on Its Website
2. Joint Committee on Taxation Releases Report on State and Local Government Finance 3. IRS Releases Guidance Addressing Qualified Energy Conservation Bonds
4. Strategic Alliance Agreement Does Not Create Private Business Use 

The Internal Revenue Service recently released Notice 2012-44, which provides guidance concerning qualified energy conservation bonds. QECBs are taxable bonds that can be issued by state or local governments to finance certain energy conservation projects, including: (i) reducing energy consumption in publicly owned buildings by at least 20 percent; or (ii) implementing green community programs. QECBs may also be issued to finance certain electricity-producing facilities, such as wind facilities and solar facilities. 

The Securities and Exchange Commission recently approved the Municipal Securities Rulemaking Boardʼs proposed interpretative notice on the obligations of underwriters to municipal securities issuers under the fair dealing and anti-fraud provisions of MSRB Rule G-17. The Notice establishes a comprehensive code of conduct for underwriters in their dealings with municipal entities and imposes detailed disclosure obligations relating to the underwriterʼs role, compensation, and conflicts of interest, as well as the risks associated with complex municipal securities financings. The Notice takes effect on August 2, 2012. 

The Internal Revenue Service recently released Notice 2012-44, which provides guidance concerning qualified energy conservation bonds. QECBs are taxable bonds that can be issued by State or local governments to finance certain energy conservation projects, including: (i) reducing energy consumption in publicly-owned buildings by at least 20 percent; and (ii) implementing green community programs. QECBs may also be issued to finance certain electricity-producing facilities, such as wind facilities and solar facilities.

The Securities and Exchange Commission recently adopted a new rule requiring that national securities exchanges establish listing standards for public company boards of directors and compensation advisers. 

In this issue:

• Debt Suspension Agreements
• Elder Financial Abuse
• UDAAP

In this issue:

• Fair Lending - Disparate Impact
• CFPB Enforcement
• Overdrafts

With slightly less than six months remaining before the reappearance of the lower $1 million exemption from US gift tax, we are resending our June 2011 Client Alert regarding the advantages of using part or all of the $5 million (now $5.12 million) gift tax exemption before it expires at year-end.

Please contact your Chapman and Cutler LLP Trust and Estate attorney to discuss how and whether you may benefit from this unprecedented gifting opportunity. 

The Securities and Exchange Commission recently approved the Municipal Securities Rulemaking Board rule proposals governing the conduct of brokerʼs brokers. The new rules consist of (a) new MSRB Rule G-43 governing the municipal securities activities of brokerʼs brokers and certain alternative trading systems; (b) amendments to MSRB Rules G-8, G-9, and G-18 concerning recordkeeping, record retention, and agency trades by brokerʼs brokers; and (c) interpretive notice on the duties of dealers that use the services of brokerʼs brokers. The new rule, amendments, and interpretive notice become effective on December 22, 2012. 

Over the course of the last few years, the Financial Industry Regulatory Authority, Inc. has proposed changes to the rules governing broker-dealer communications with the public. After receiving significant comments on earlier proposals, FINRA recently announced that the Securities and Exchange Commission has now approved the proposed rule change, as modified by Amendments Nos. 1, 2, and 3, and will be effective as of February 4, 2013.

In this issue:

• Deposit Account Agreements
• Regulatory Enforcement Landscape Has Changed
• Dispute Resolution
• Holder in Due Course Rule

In 2012, the Securities and Exchange Commission adopted Rule 206(4)-5 and related amendments to certain other rules under the Investment Advisers Act of 1940. These rule changes are intended to prevent “pay to play” practices by investment advisers seeking to manage funds for state and local governments. 

On June 7, 2012, the Board of Governors of the Federal Reserve System released final rules relating to “Risk Capital Guidelines: Market Risk” to be issued jointly with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. The FDIC approved the rule on June 12, 2012 and the OCC will likely approve the rule within the week. 

On June 12, 2012, the Federal Deposit Insurance Corporation Board of Directors met to consider three notices of proposed rulemaking regarding the standardized approaches rule and the Basel III general and advanced approaches rules. The Board of Governors of the Federal Reserve System proposed these rules at their June 7, 2012 meeting.

The comment period for the NPRs ends September 7, 2012. 

On May 22, 2012, the Illinois General Assembly passed House Bill 4687, amending the Illinois Open Meetings Act. Once the Governor signs the bill, it will become effective January 1, 2013. 

New Financial Industry Regulatory Authority, Inc.  rules governing broker-dealer “know your customer” and suitability obligations become effective July 9, 2012. In response to several requests, FINRA recently issued Regulatory Notice 12-25 providing additional guidance on implementing the suitability rule. This Client Alert highlights several of the key issues addressed in the guidance.  

The Municipal Securities Rulemaking Board (“MSRB”) recently issued a notice seeking comments on a concept proposal that would require underwriters and municipal advisers to publicly disclose on the MSRBʼs Electronic Municipal Market Access (“EMMA”) system whether they have made or received certain payments in connection with new issues of municipal securities.

The United States Supreme Court issued its decision in the RadLAX Gateway Hotel v. Amalgamated Bank case on May 29, 2012, closing the door on a debtorʼs end-around a secured creditorʼs right to credit bid.1 In a unanimous decision delivered by Justice Scalia, the Supreme Court found its answer to be “an easy case,” rejecting recent decisions allowing a debtor to sell secured property free and clear of all liens without providing for the secured partyʼs credit bid rights when the sale was pursuant to a plan of reorganization.2 The decision provides secured creditors with predictability and consistency whether its collateral is being sold pursuant to a proposed plan or a sale during the bankruptcy case. 

On May 4, 2012, the Securities and Exchange Commission approved the Municipal Securities Rulemaking Boardʼs proposed interpretative guidance on the obligations of underwriters to municipal securities issuers under the fair dealing and anti-fraud provisions of MSRB Rule G-17. The guidance establishes a comprehensive code of conduct for underwriters in their dealings with municipal entities and imposes detailed disclosure obligations relating to the underwriterʼs role, compensation, and conflicts of interest, as well as the risks associated with complex municipal securities financings. The guidance also addresses underwritersʼ representations to issuers, review of official statements, and compensation, as well as fair pricing retail order periods. The guidance will be effective on August 2, 2012. 

In an effort to help begin the dialogue of what should be the best provisions in statute statutes and state constitutions to protect the interests of the municipalities and their access and costs in the market as well as to provide protection to the investors, this book seeks to recognize what state supervision, oversight and assistance is most desired and what, if any, access to municipal bankruptcy, if any, makes sense for both the municipality and the investors in their debt.

The Financial Industry Regulatory Authority, Inc. has delayed the implementation date of its new rules governing “know your customer” and suitability to July 9, 2012, to allow broker/dealers to better supervise and educate associated persons regarding the modified obligations. As it does not appear that any further reprieves will be forthcoming, this article will outline the scope of both Rules and the practical effects of the Rules on registered representatives, supervisors and compliance professionals. 

President Obama signed into law today the Jumpstart Our Business Startups Act, which is designed to facilitate public and private company access to the capital markets through a number of separate initiatives. These provisions are expected to have a favorable impact on smaller private companies and, in some instances, private investment funds. 

The American Recovery and Reinvestment Act of 2009 allowed the issuance of taxable municipal bonds, called build America bonds, which provide the issuer of such bonds with a direct payment from the federal government equal to 35 percent of the interest payable on such bonds. One of the tax law requirements for these bonds is that 100 percent of bond proceeds (other than amounts spent on costs of issuing the bonds) must be allocated to capital expenditures. 

In this issue:

1. 2012 IRS Tax Exempt Bonds Work Plan
2. IRS and MSRB Enter into Memorandum of Understanding
3. Administration Proposes BAB Reinstatement and Other Bond Changes
4. Current Refundings of Tax-Exempt Bonds in Certain Disaster Relief Bond Programs 

The Securities and Exchange Commission recently released a notice of proposed Municipal Securities Rulemaking Board rule changes governing the conduct of brokerʼs brokers. The proposed definition of “brokerʼs broker” generally includes a broker, dealer, or municipal securities dealer that principally effects transactions for other broker-dealers or that holds itself out as a brokerʼs broker.  

The Commodity Futures Trading Commission (the “CFTC”) recently issued final rule changes:

 • narrowing the exclusion from the definition of commodity pool operator (“CPO”) available to mutual funds and other registered investment companies (“RICs”) and their advisers;

 • eliminating an exemption from CPO registration available to private fund operators (but keeping another exemption that had also been proposed to be eliminated);

•  narrowing and rescinding certain exemptions from commodity trading advisor (“CTA”) registration;

 • adding certain risk disclosure statements for CPOs and CTAs with respect to swaps; and

 • making certain changes to reporting and certification obligations for entities required to register as CPOs and

• CTAs and entities relying on exclusions and exemptions from registration. 

The Financial Industry Regulatory Authority, Inc. recently announced that the previously approved rule change relating to the “best execution” obligation of broker-dealers will become effective on May 31, 2012. The Securities and Exchange Commission approved the rule change earlier this year, but FINRA did not announce an effective date at that time. New FINRA Rule 5310 and related Supplementary Material replace current NASD Rule 2320. 

The Securities and Exchange Commission and Commodity Futures Trading Commission recently proposed rules and guidelines that would require certain entities to develop and implement a written identity theft prevention program that is designed to detect, prevent, and mitigate identity theft in connection with certain existing accounts or the opening of new accounts. 

The Financial Industry Regulatory Authority, Inc. recently issued a revised rule proposal to apply objectivity safeguards and disclosure requirements to the publication and distribution of debt security research reports. Current FINRA rules related to research reports apply only to equity securities. 

The Securities and Exchange Commission recently adopted amendments to the dollar amount tests for the “qualified client” definition in Rule 205-3 under the Investment Advisers Act of 1940. Rule 205-3 provides exemptions from the general Advisers Act prohibition on performance-based compensation for registered investment advisers. The revised rule changes the current $750,000 assets under management test to $1 million and changes the current $1.5 million net worth test to $2 million 

The US Department of Treasury has released its general explanation of the tax proposals in the Obama administrationʼs proposed fiscal year 2013 budget. The administrationʼs proposals include provisions that, if enacted, would reinstate and expand the build America bond program and provide various changes to the tax provisions relating to municipal bonds. 

In a recent opinion of the Supreme Court of the State of Utah (Carter v. Lehi, 2012 UT 2 (2012)), the court abandoned the prior framework it used for determining whether a matter is a proper use of the peopleʼs initiative power and set forth a new framework. 

On February 8, 2012, the IRS released proposed regulations under Code §§ 1471-74 (generally referred to as the FATCA provisions). The proposed regulations clarify, expand, and relax the requirements of the earlier FATCA Notices. This Client Alert briefly summarizes the most significant changes. 

The beginning of each year provides an opportunity for investment advisers to review annual compliance and regulatory matters, including issues related to private investment funds and commodity pools. This Alert briefly summarizes some of the primary issues that advisers might consider in their 2012 annual review and update processes. Many of these issues apply to unregistered advisers as well as registered advisers. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires the Securities and Exchange Commission (“SEC”) to conduct a study of legal and regulatory requirements applicable to broker-dealers, investment advisers, and associated persons who provide personalized investment advice and recommendations about securities to retail customers.  

The Municipal Securities Rulemaking Board recently filed a proposed rule change with the Securities and Exchange Commission which would:

• amend MSRB Rule G-14 and its Real-time Transaction Reporting System Procedures to add inter- dealer yield data to the MSRBʼs Electronic Municipal Market Access website; and

• amend the RTRS information system and subscription service to remove certain outdated information and infrequently used reporting, add an RTRS-calculated yield, and require dealers to submit dollar prices for certain trades. 

The Financial Industry Regulatory Authority, Inc. recently issued guidance to members concerning the supervision of complex products — securities or investment strategies with novel, complicated, or intricate derivative-like features such as structured notes, inverse or leveraged exchange-traded funds, hedge funds, and securitized products. FINRA believes that such features may make it difficult for retail investors to understand the essential characteristics of complex products and their risks. As discussed below, FINRA also identified characteristics that may render a product “complex” for purposes of determining whether such product should be subject to heightened supervisory and compliance procedures.