United States: SEC and FRB Vote to Publish New Bank Broker Rules: Proposed Regulation R
Financial Services Alert – Developments of Note

1. SEC and FRB Vote to Publish New Bank Broker Rules: Proposed Regulation R
2. OTS Permits Op Sub to Engage in Broad Securities Activities and Pay Interest in Free Credit Balances
3. NASD and SEC Discipline Broker-Dealer over Gifts, Travel and Entertainment Provided to Certain Adviser Personnel in Effort to Increase Mutual Fund Brokerage
4. OCC Fines Grant Thornton as IAP in Connection with Audit Performed for Failed FNB of Keystone
5. SEC Seeks Comment on Staff Economic Papers Analyzing Challenged Fund Governance Requirements
6. Banking Agencies Issue Final Guidance on Commercial Real Estate Concentrations and Sound Risk Management Practices
7. SEC Adopts Proxy Rule Changes to Permit Delivery Via Website Posting of Proxy Materials and Proposes Making Website Delivery Method Mandatory
8. SEC Proposes Eliminating Short Sale Price Tests ("Tick Tests")
9. SEC Votes to Propose Rules Designed to Protect Investors in Hedge Funds and Other Pooled Investment Vehicles
10. MSRB Files Proposed Amendments to Municipal Fund Securities Advertising Rule

11. GAO Issues Report Examining the Information on Fees Provided to 401(k) Plan Participants and the Department of Labor
12. Federal Baking Agencies Grant Interim Exclusion to Banking Institutions from Effects of FAS 158 in Calculating Regulatory Capital

The SEC and FRB in separate meetings on December 13 and 18, 2006 voted unanimously to publish new bank broker rules drafted jointly by the two agencies. The proposed regulation would be called "Regulation R" and would make important changes to exceptions of trust/fiduciary, custody, networking and sweep activities from the scope of broker regulation. Other statutory exceptions, e.g., for affiliate trades, U.S. government and municipal securities, private placements and de minimis transactions, are generally not changed by Regulation R. As stated below, "banks" for purposes of Regulation R includes federal savings banks.

The proposed joint rules would replace previous rules written by the SEC alone to implement Section 201 of the Gramm-Leach-Bliley Act of 1999 ("GLBA"). GLBA Section 201 replaced the blanket exemption for banks from broker regulation with eleven exceptions intended to permit banks to engage in their historical bank securities activities without having to register as broker-dealers, but otherwise to require banks to register as broker-dealers to engage in many securities activities. Banks and banking agencies criticized previous rulemaking efforts by the SEC (the Interim Rules (66 Fed. Reg. 27760 (May 18, 2001)) and Regulation B (69 Fed. Reg. 39682 (June 30, 2004)) for failing to preserve bank securities activities and forcing banks to restructure or incur undue compliance burdens.

Joint rulemaking by the FRB and the SEC was required by section 101 of the Financial Services Regulatory Relief Act of 2006 ("FSRRA"). (FSRRA is summarized in the October 2, 2006 Alert.) The section was added to FSRRA while the bill was under consideration in the Senate last summer and is intended to end a multi-year impasse over regulatory implementation of GLBA’s bank broker provisions. SEC Chairman Cox also sought to bridge differences between securities and banking regulation by initiating meetings with banking agency staff early in his tenure.

Regulation R would make the following major changes from previous SEC rules with respect to bank trust/fiduciary, custody, sweep, networking, and other activities:

Trust and Fiduciary Exception – GLBA created an exception from the requirements of bank broker-dealer registration for bank trust and fiduciary activities on the condition a bank is "chiefly compensated" for the activities by administration fees, annual fees, fees based on assets under management, flat or capped per order processing fees not exceeding execution cost, or a combination such fees are called "relationship compensation."

• Account-by-account test. Regulation R continues to have an account-by-account calculation to satisfy the "chiefly compensated" test as previously proposed in Regulation B. The bank must receive a majority (greater than 50%) of its compensation from "relationship compensation" (Regulation B similarly would have required relationship compensation to exceed sales compensation). The calculation is eased for banks under Regulation R, however, by counting 12b-1, personal service and other fees paid by an investment company as "relationship compensation." The inclusion of 12b-1 fees, in particular, should enable more banks that receive compensation for fund trades to meet the "chiefly compensated" test.

• Bank-wide test. Regulation R continues to offer as an alternative "safe harbor" a bank-wide calculation to meet the "chiefly compensated" test. However, the proposal eliminates the Regulation B calculation limiting the bank to a 1:9 ratio of sales compensation to relationship compensation. Instead, the bank would be in compliance if its aggregate relationship compensation from trust and fiduciary accounts on a bank-wide basis is at least 70% of total compensation. The new calculation may ease compliance by permitting more sales compensation and counting more types of compensation as "relationship compensation."

Both calculations would measure a bank’s compliance on a two-year rolling average, to permit banks to experience normal fluctuations in compensation. The proposal also clarifies GLBA’s advertising restriction. A bank would be able to advertise brokerage as part of advertising broader trust or fiduciary services as long as brokerage is not advertised more prominently than other aspects of trust and fiduciary services.

Safekeeping and Custody Exception – Regulation R allows banks to accept orders from all types of custody accounts subject to conditions. Specifically, a bank may accept orders for:

• a range of employee benefit plan accounts (including pension, profit-sharing, bonus, thrift savings, church, incentive stock option, VEBA and rabbi trust plans and IRAs) subject to conditions that employees of the bank do not receive certain incentive compensation and advertising restrictions; and

• any other custody accounts, as an accommodation to customers on an unsolicited basis, subject to restrictions on advertising, investment advice, employee transaction-contingent compensation, and fees varying based on orders or quantity or price of securities.

Regulation B contained more severe restrictions on using the custody exception that, among other things, limited the exception to accounts in existence as of July 30, 2004, or trades for a "qualified investor" ($25 million invested).

Networking – The GLBA exception for networking arrangements between banks and brokers generally contains conditions limiting bank employee referral fees to a nominal one-time cash fee that is not contingent on whether the referral results in a transaction. GLBA also imposes marketing and physical separation restrictions. Referral fee quantitative restrictions would be eased under Regulation R:

• An employee referral fee would be considered "nominal" if it does not exceed the greatest of twice the average minimum and maximum hourly wage for the employee’s job category (e.g., tellers) or twice the employee’s actual base hourly pay or $25 adjusted in the future for inflation. (Regulation B proposed to limit referral fees to no more than one hour’s pay or $18 adjusted for inflation or $25.)

• An exemption from even the foregoing "nominal" referral fee requirement would be created for referrals of institutional or high net worth customers. An "institutional customer" would be defined as a non-natural person with $10 million in investments or $40 million in assets. A "high net worth customer" would be defined as a natural person with $5 million in net worth, either individually or together with the person’s spouse, excluding the person’s primary residence and debt with respect to the residence. The bank must provide certain disclosures of the employee’s potential financial interest in the referral, and the written agreement between the bank and broker-dealer must require the broker-dealer to perform a suitability or sophistication analysis of the customer.

The type of referral fee compensation permitted continues to be limited to cash. Regulation R would provide that the requirements do not affect traditional, discretionary bonus plans of banks if they are based on multiple factors or variables including those not related to transactions and if the number of securities referrals is not a factor in determining payments. For example, a multi-factor bonus plan may validly consider the value of the relationship between an institutional customer or high net worth individual and the bank and its affiliates in determining the bonus for the customer’s relationship manager. In addition, the rules would not prohibit bonuses based on overall bank or bank unit profitability.

Sweeps – Regulation R would revise the previously proposed Regulation B exemption for sweeps into no-load money market mutual funds to permit sweeps into money market funds that would not be considered no-load if the customer has some other banking relationship with the bank and the bank does not characterize the fund as no-load and gives the customer a prospectus at or before customer authorization of the transaction. Another provision would allow banks to effect fund trades directly with the fund transfer agent or National Securities Clearing Corporation’s Mutual Fund Services.

Securities Lending – Regulation R also permits a bank, as agent, to engage in securities lending transactions and any securities lending services (including investment of collateral) in connection with such transactions with or on behalf of qualified investors (as defined under the Securities Exchange Act) and employee benefit plans with not less than $25 million that can be invested on a discretionary basis.

Application of Regulation R to Thrifts – As stated above, FSRRA granted thrifts the same exceptions as banks under the Exchange Act. Thus Regulation R, unlike Regulation B, would treat banks and thrift institutions exactly the same.

Public Comment – The public comment period for Regulation R is 90 days after its publication in the Federal Register. The agencies request comment on the costs and benefits of Regulation R and particularly on whether the rules would generate the anticipated benefits or impose costs on investors, banks, bank customers, broker-dealers or other market participants. Commenters are asked to provide empirical data.

Timing – The SEC, by separate order, extended the effective date of the GLBA provisions until July 2, 2007 to give the agencies time to consider comments and finalize Regulation R. Regulation R would further extend the exemption until at least July 1, 2008.

Rescission Relief – The proposal would provide banks with a transitional 18-month exemption to prevent their contracts from being void or voidable under Section 29(b) of the Exchange Act. In addition, it would provide banks with a permanent exemption from Section 29(b), where a bank has acted in good faith and had reasonable policies and procedures in place to comply with the bank broker rules and regulations, and any violation of the registration requirements would not result in any significant harm, financial loss, or cost to the person seeking to void the contract.

Amendments to Bank Dealer Regulation – In a companion release, (SEC Release No. 34-54947; File No. S7-23-06 (December 18, 2006)) the SEC also intends to propose certain changes to its bank dealer regulation to conform with proposed Regulation R and legal developments. The dealer regulation was adopted without substantial controversy in 2003 (68 Fed. Reg. 8686 (Feb. 24, 2003)). The companion release:

• proposes a "reasonable belief" exemption (easing a similar one proposed in Regulation B) for riskless principal transactions with non-U.S. persons pursuant to Regulation S;

• amends an existing exemption for banks’ securities lending activities as a conduit lender;

• proposes amendments to conform a limited exemption from U.S. broker-dealer registration for foreign broker-dealers to amended definitions of "broker" and "dealer" under the Exchange Act.

Future Interpretations or Amendments – In response to SEC Commissioners’ questions, the SEC staff stated it believed that any further amendments to the GLBA broker provisions would require joint action with the FRB. Commissioner Annette Nazareth stated that interpretive guidance would also require joint FRB and SEC action. In response to FRB members’ questions, the FRB staff noted that it intends to have further discussions with the SEC and NASD to ensure conformity of SRO rules (such as NASD Rule 3040 on dual employees) and other guidance with the final joint regulation.

Statements of Commissioners and Governors – The SEC and FRB meetings where the rules were adopted highlighted that some controversy remains. A divergence of opinion on whether proposed Regulation R achieves investor protection existed between SEC Commissioner Raul Campos, who asked whether investor protection was being sacrificed, and Commissioner Paul Atkins, who believed more easing of the trust/fiduciary "chiefly compensated" test and networking referral restrictions should be considered. FRB members expressed an interest in ensuring that proposed Regulation R will not disrupt the banking system and will provide certainty. Governor Don Kohn asked whether the regulation is excessively prescriptive.

The OTS issued an interpretive letter ("P-2006-7") permitting an operating subsidiary of a federal savings bank to (1) engage in securities clearing and related activities, including securities lending, stock borrowing, and conduit securities lending; and (2) pay interest on its customers’ free credit balances. As to the first point, the thrift in P-2006-7 commits that the operating subsidiary will not engage in securities dealing, market making or underwriting activities, and will not purchase or sell securities except incidentally to its securities clearing activities. P-2006-7 then states that margin lending, securities conduit lending, and other lending and borrowing of securities are permissible pursuant to a thrift’s broad authority to engage in borrowing and lending. Moreover, the incidental powers of a thrift permit the operating subsidiary to provide clearing and related services and serve as a member of a clearinghouse. As to becoming a member of a clearinghouse, P-2006-7 expresses concern over the potential liability the operating subsidiary could face on account of a customer default or a default by other clearinghouse members. However, P-2006-7 also provides that the thrift mitigated that concern by explaining the low actual losses faced by clearinghouse members and other contractual protections available to the operating subsidiary.

As to the permissibility of the operating subsidiary paying interest on free credit balances, P-2006-7 identifies the concern that, as an operating subsidiary of a thrift, the operating subsidiary conceivably could be deemed to be impermissibly paying interest on demand deposits. However, to address this concern, P-2006-7 provides that the limitation on paying interest was directed specifically to thrifts (as opposed to broker-dealers), that free credit balances are not demand deposit accounts, and that the free credit balances also are not insured deposits. Based on this, the fact that broker-dealer is a functionally regulated entity, and analysis from other bank regulators, P-2006-7 determined that the broker-dealer would be permitted to pay interest on these balances.

A broker-dealer, a former trader for the broker-dealer and the trader’s former supervisor entered into settlements with the NASD and SEC related to the regulators’ findings regarding travel, gifts and entertainment provided by the former trader to certain equity trading personnel of a mutual fund adviser that used the broker-dealer to execute trades for mutual funds the adviser managed. According to the NASD’s findings, the former trader provided gifts to the adviser’s personnel that violated NASD Rule 3060, which generally limits the value of gifts given to personnel of customer firms to $100 per individual per year; in addition, the broker-dealer and the trader’s former supervisor did not adequately supervise the former trader’s activities with a view to preventing the former trader’s use of gifts, travel and entertainment in violation of NASD rules. According to the SEC’s findings, the broker-dealer violated various recordkeeping requirements under the Securities Exchange Act of 1934, as amended (the "1934 Act"), because it reimbursed its former trader for gifts, travel and entertainment that were not reimbursable under the firm’s policies, either because they were in excess of $100 or they were personal expenses, and thereby caused the broker-dealer’s books to inaccurately reflect expenses.

The SEC also found that the former trader had aided and abetted violations of Section 17(e)(1) of the Investment Company Act of 1940, as amended, which prohibits certain affiliates of a registered fund’s adviser (including the adviser’s personnel), when acting as an agent, from accepting "compensation" from any source (other than a salary or wages from the fund) for the purchase or sale of any property to or for the fund. The SEC deemed the receipt by certain personnel of the adviser of travel, entertainment and gifts from the former trader to be "compensation" to those personnel for directing brokerage transactions from the funds managed by the adviser to the broker-dealer, and viewed such "compensation" to the personnel as a violation of Section 17(e)(1), which the former trader’s activities had aided and abetted. By their failure to prevent the former trader’s aiding and abetting violations, the broker-dealer and the former supervisor were found to have violated provisions of the 1934 Act requiring them to reasonably supervise persons subject to their supervision.

In connection with its announcement of the settlement, the NASD also issued a report on its findings from a two year examination of the gift and gratuity practices of its member firms and a Notice to Members providing guidance on compliance with NASD Rule 3060, both of which will be covered in a future Alert.

The OCC assessed a $300,000 civil money penalty and a cease and desist order against the accounting firm Grant Thornton LLP ("Grant Thornton") for allegedly reckless conduct in performing the audit of First National Bank of Keystone’s (the "Bank") 1998 financial statements. Grant Thornton issued an unqualified opinion that stated that the Bank’s 1998 financial statements were consistent with generally accepted accounting principles. The OCC determined that the Bank was insolvent in 1998, and the FDIC was appointed receiver of the Bank. The OCC alleges that Grant Thornton was an Institution-Affiliated Party ("IAP") of the Bank and acted recklessly in issuing the opinion. The OCC stated that,

Grant Thornton has stated that it will file an appeal to the U.S. Court of Appeals for the D.C. Circuit. Grant Thornton’s defense is expected to center on arguments that it was misled by management of the Bank and that Grant Thornton’s conduct did not reach a level that should subject it to liability as an IAP. Many commentators have stated that this case is expected to be an important signal regarding the scope of IAP liability for accounting firms, law firms and other professional service organizations that provide services to depository institutions.

The SEC reopened the comment period on its June request for comment on rules requiring registered investment companies ("funds") that rely on certain designated exemptive rules under the Investment Company Act of 1940, as amended (the "1940 Act") to (a) have a chairman of the board who is not an interested person of the Fund within the meaning of the 1940 Act (an "Independent Director") and (b) have a board of directors consisting of no less than 75% Independent Directors (collectively, the "Governance Requirements"). (The U.S. Court of Appeals for the District of Columbia Circuit vacated the Governance Requirements in 2005, but stayed its mandate to allow the SEC to reopen the rulemaking record, as discussed in the July 5, 2005 Alert.) In reopening the comment period on the Governance Requirements, the SEC noted that the comments received in response to its June request had provided some information on costs associated with the Governance Requirements, but that few commenters had directly addressed in a meaningful way the economic implications of the provisions. In order to develop a more comprehensive record and a more thorough understanding of the economic consequences of the Governance Requirements, the SEC indicated it is inviting comment on two economic papers prepared by the Office of Economic Analysis that (i) review existing relevant economic literature related to advisers’ conflicts of interest with respect to funds they advise, as well as literature related to mutual fund governance, independent chairmen and board independence and (2) analyze the statistical properties of mutual fund returns and potential limitations inherent in any empirical analysis designed to identify a relationship between those returns and fund governance. The SEC also indicated that it is seeking comment on any other extant analyses and commenters’ best assessment of them. Expected to be published shortly, the two economic papers will appear in the public comment file. Comments must be received on or before 60 days after publication of the second of the two staff economic papers.

The OCC, FRB, FDIC and OTS (the "Agencies") jointly issued final guidance (the "Guidance") to address their concern that high and increasing concentrations of certain commercial real estate ("CRE") loans on some financial institutions’ balance sheets, along with inadequate risk management practices, may make those institutions particularly vulnerable to cyclical real estate markets. The Guidance is intended to reinforce previously-issued guidance on expectations for safe and sound CRE lending programs by focusing on capital adequacy and risk management practices of those institutions exceeding certain CRE concentration thresholds. The Guidance contains significant revisions to the proposed guidance issued in January of this year and covered in the January 17, 2006 issue of the Alert (the "Proposed Guidance"), primarily to clarify that the CRE concentration thresholds contained in the Guidance do not establish limits on an institution’s CRE lending activity, but rather will serve as a supervisory monitoring tool for the Agencies. The Guidance also contains regulatory expectations with respect to CRE programs, whether or not exceeding the specified thresholds. Certain key points of the Guidance are outlined below:

CRE Concentration Thresholds. The Guidance outlines two thresholds for an institution to use in assessing whether scrutiny of capital levels and heightened risk management practices are warranted: first, where total reported loans for construction, land development and other land (a Call Report line entry that includes loans secured by real estate made to finance land development or secured by non-farmland vacant land) represent 100% or more of the institution’s total risk-based capital; and second, where total reported loans secured by multifamily and other non-farm nonresidential properties and loans for construction, land development and other land represent 300% or more of total risk-based capital, and the outstanding balance of the institution’s CRE loan portfolio has increased by 50% or more during the prior 36 months. The first threshold is unchanged from the Proposed Guidance; however, in order to address industry concerns that the thresholds did not consider an institution’s track record for managing CRE concentrations, the second threshold has been revised to factor in whether the institution’s CRE portfolio has increased by 50% or more during the immediately preceding 36 months.

Risk Assessment Processes. The Guidance provides that institutions actively involved in CRE lending should perform ongoing risk assessments to identify CRE concentrations. The Agencies recognize that a manageable level of CRE concentration risk will vary by institution depending on the portfolio characteristics, the quality of risk management processes and capital levels and recognizes that an institution’s assessment should be based on a reasonable and supportable division of its CRE lending portfolio into segments that have common characteristics. Accordingly, through the assessment process the Guidance encourages institutions to set and monitor internal CRE concentration limits and report all concentrations to management and the Board of Directors. Depending on the results of such assessments, the institution may need to enhance its risk management systems.

CRE Risk Management Processes. The Agencies recognize that an institution’s CRE risk management process must be appropriate to the size of the institution, the size and characteristics of the CRE portfolio and the nature of the concentrations within the CRE portfolio and prescribes certain key elements that should be addressed in each institution’s CRE risk management framework, including: (1) board and management oversight, (2) portfolio management, (3) management information systems, (4) market analysis, (5) credit underwriting standards, (6) portfolio stress testing and sensitivity analysis and (7) credit risk review function. An institution that exceeds either of the CRE concentration thresholds outlined above also may require augmented risk management practices, examples of which include: (1) board and management oversight of the level of acceptable CRE exposures and implementation of a CRE strategy consistent with risk tolerance; (2) addressing the CRE strategy in the institution’s strategic plan; (3) instituting clear and measurable underwriting standards in its lending policy with only limited, documented, exceptions; (4) instituting policies specifying requirements and criteria for risk rating CRE exposures; and (5) identifying and managing concentrations, performing market analysis, and stress testing CRE credit risk on a portfolio basis.

Capital Consideration. Lastly, the Guidance states that institutions with CRE concentrations should have capital levels commensurate with the level and nature of risks to which they are exposed. While the Guidance does not set forth specific increased capital requirements, it provides that the Agencies will consider a number of factors in evaluating the adequacy of the institution’s capital, including: the level and nature of the inherent risk in the CRE portfolio, management expertise, historical performance, underwriting standards, risk management practices, market conditions and any loan loss reserves allocated for CRE concentration risk.

The Guidance will be effective immediately upon its publication in the Federal Register; however, the Agencies will provide institutions with CRE concentrations a reasonable timeframe over which to demonstrate that their risk management practices are appropriate for the level and nature of their CRE concentration risk.

At its December 13, 2006 meeting, the SEC voted to (a) adopt amendments to its proxy rules that permit issuers and others conducting proxy solicitations to do so by posting proxy materials on an Internet website and providing shareholders with notice of that availability (the "Notice and Access Model") and (b) propose proxy rule amendments that mandate use of the Notice and Access Model for all solicitations not related to a business combination transaction. Under the amendments adopted by the SEC, an issuer may, but need not, avail itself of the Notice and Access Model, but if it does so, must send the notice regarding internet availability of proxy materials to shareholders at least 40 days before the meeting date. A proxy card may not accompany the notice, but an issuer may send a paper proxy card accompanied by another copy of the notice 10 days or more after sending the initial notice. An issuer using the Notice and Access Model must send a copy of the proxy materials within three business days after receiving a request from a shareholder.

A soliciting person other than an issuer may use the Notice and Access Model in substantially the same manner as an issuer. However, a non-issuer soliciting person must send its notice to shareholders by the later of 40 days before the meeting or 10 days after the issuer files its proxy materials. A non-issuer soliciting person may limit its solicitation to shareholders who have not previously requested paper or e-mail copies of proxy materials, but if a non-issuer soliciting person sends a notice to a shareholder, it must send that shareholder a paper or e-mail copy of proxy materials upon request. When an issuer or soliciting party other than the issuer chooses to rely on the Notice and Access Model, brokers, banks and other intermediaries holding the issuer’s voting securities on behalf of beneficial owners must prepare and send their own notices designed for those beneficial owners, and a beneficial owner desiring a paper or e-mail copy of the proxy materials must request one from the beneficial owner’s intermediary. The compliance date for the amendments adopting the Notice and Access Model is July 1, 2007. No person may rely on the Notice and Access Model before then.

The SEC also proposed to require issuers and other soliciting persons to use the Notice and Access Model for all solicitations not related to a business combination transaction. Under this proposal, the Notice and Access Model would operate in substantially the same manner as described above except that, under the proposal, the notice could be accompanied by a full set of proxy materials, including a proxy statement, annual report, and proxy card. Comments on the proposal should be received by the SEC within 60 days of the proposal’s publication in the Federal Register. The SEC has not issued a formal release regarding either Notice and Access Model rulemaking. Additional details regarding each will appear in the Alert once the adopting/proposing release becomes available.

As its December 7, 2006 meeting, the SEC voted to propose eliminating the short sale price restrictions (or "tick tests") of Rule 10a-1 under the Securities Exchange Act of 1934, as amended. The tick tests were implemented by the SEC nearly 70 years ago to restrict short selling in a declining market. In connection with the adoption of Regulation SHO in 2004, the SEC commissioned a pilot study to evaluate the effectiveness of the tick test restrictions on short sales. (See the June 29, 2004 Alert for a discussion of the adoption of new Regulation SHO and the pilot program, which ends in August 2007, and the September 26, 2006 Alert for a discussion of the SEC roundtable on the pilot project.) Under the pilot, the SEC temporarily suspended the short sale price test restrictions under Rule 10a-1 and applicable SRO regulations with respect to certain stocks selected by the SEC from the Russell 3000 index (and, with respect to after-hours trading, the Russell 1000 index) because they were deemed relatively less susceptible to other sources of manipulation based on their capitalization and liquidity. The SEC now proposes, based on the results of the pilot study, to eliminate the tick tests entirely and to prohibit the SROs from imposing comparable price tests on short sales. If the proposal is adopted, brokers will no longer be required to mark sell orders as short exempt because all securities will be short exempt. In the formal release relating to the proposal, the SEC noted that numerous exemptions from the tick tests have been granted and the risk exists of creating an unlevel playing field by maintaining tick tests only with respect to certain securities. The SEC invited issuers concerned about the impact of short selling on their stock to submit empirical evidence of manipulation of stock prices. Comments on the proposal are due by February 12, 2007.

At its December 13, 2006 meeting, the SEC voted to propose (a) a new rule under the anti-fraud provisions of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and (b) revisions to rules under the Securities Act of 1933, as amended (the "1933 Act"), that provide exemptions from the 1933 Act’s registration requirements. In each case, the proposals focus on collective investment vehicles that are not required to register under the Investment Company Act of 1940, as amended (the "1940 Act"), pursuant to the exclusions provided by Sections 3(c)(1) or 3(c)(7) of the 1940 Act, and the advisers to those investment vehicles. As described in the SEC press release announcing them, the proposals provide as follows:

• The rule being pro posed under the Advisers Act would make it a fraudulent, deceptive, or manipulative act, practice, or course of business for an investment adviser to a pooled investment vehicle to make false or misleading statements or to otherwise defraud investors or prospective investors in that pool. The rule would apply to all investment advisers to pooled investment vehicles, including advisers not registered under the Advisers Act. Under the proposed rule, a pooled investment vehicle would include any investment company and any company that would be an investment company but for the exclusions in Sections 3(c)(1) or 3(c)(7) of the 1940 Act.

• The proposed amendments to rules under the 1933 Act would define a new category of accredited investor for purposes of certain exemptions from the Act’s registration requirements that would apply to offers and sales to natural persons of securities issued by "hedge funds and other private investment pools." The proposed definition would include any natural person who (a) meets either the net worth test or the income test currently required for accredited investor status, and (b) owns at least $2.5 million in investments, as defined in the proposed amendments.

Comments on these proposals should be received by the SEC within 60 days of their publication in the Federal Register. The SEC has not yet issued the formal proposing release for these proposals. The Alert will provide further details once the proposing release becomes available.

The Municipal Securities Rulemaking Board (the "MSRB") filed with the SEC proposed amendments (the "Proposed Amendments") to MSRB Rule G-21 (the "Advertising Rule"), which governs advertisements for municipal fund securities, the most common forms of which are interests in "529 college savings plans" ("529 Plans") and interests in local government investment pools. The Proposed Amendments are largely unchanged from the version that the MSRB previously published for comment (as discussed in greater detail in the August 29 Alert) and are a continuation of the MSRB’s ongoing efforts to harmonize the Advertising Rule with the SEC and NASD rules governing mutual fund advertisements (see the February 28, 2006, August 23, 2005, July 19, 2005, June 7, 2005, January 11, 2005 and May 28, 2002 Alerts regarding earlier phases of this initiative). In response to public comment, the MSRB revised it original proposal to:

• clarify the MSRB’s authority in applying home state tax benefits disclosure requirements to issuer-disseminated materials;

• clarify that generic advertisements may include the general program name of a 529 plan;

• clarify that blind advertisements (i.e., an advertisement that is informational in nature and that cannot, on its face, identify a dealer) may include dealer contact information such as telephone numbers or website addresses;

• clarify that, although dealers generally can not use blind advertisements to promote sales, a dealer may accept an order initiated by a customer who contacts a dealer through a blind advertisement;

• delete references to tax-related sunset provisions that were repealed under the Pension Protection Act of 2006;

• clarify that consistent with an interpretive position taken by the NASD regarding similar circumstances, the MSRB proposes to treat annual financial reports (and other similar

• information) regarding 529 Plans required by state law as exempt from the Advertising Rule so long as their use is limited to that required by law; and

• clarify that the distribution and use of annual financial reports by dealers is in all cases constrained by the federal securities laws, including the anti-fraud provisions.

If the SEC approves the Proposed Amendments, the MSRB has asked for an effective date of February 1, 2007 for a majority of the provisions and April 1, 2007 for provisions relating to disclosure of fees and expenses in product advertisements and correspondence containing performance data.

The General Accounting Office ("GAO") issued a report that examines the fees associated with 401(k) plans, who pays them, how plan participants receive fee information and how the Department of Labor (the "DOL") oversees plan fees and certain business arrangements involving plan service providers. The report recommends that Congress consider amending the Employee Retirement Income Security Act of 1974 to require that (a) 401(k) plan sponsors disclose to participants fee information for plan investment options and (b) 401(k) service providers disclose to plan sponsors compensation the service providers receive from other service providers. The report also recommends that the DOL require plan sponsors to report a summary of all fees paid out of plan assets or by participants.

The FRB, FDIC, OCC and OTS (the "Agencies") jointly announced an interim decision that the Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Retirement Plans ("FAS 158"), will not affect banking institutions’ regulatory capital. As early as December 31, 2006, FAS 158 will require banking institutions that sponsor single-employer defined pension or health care plans to make balance sheet adjustments to reflect the underfunded or overfunded status of each such plan. The Agencies stated that banking institutions need not reflect these FAS 158 adjustments in their regulatory capital calculations unless and until such time as the Agencies address the issue through rulemaking.

Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.