The U.S. House of Representatives, by a 380 - 41 vote, has
passed H.R. 3606, the Jumpstart Our Business Startups Act, in the form
previously approved by the Senate.  The bill now goes to President Obama, who is
expected to sign it into law.

                 Once signed into law, the JOBS Act will immediately lower
disclosure requirements in a number of respects for "emerging growth companies,"
which will comprise most newly public companies, including investment companies.
The bill also immediately increases the number of record holders that a company
can have without being required to register under the Securities Exchange Act of
1934.  The Securities and Exchange Commission is required within 90 days from
passage to allow private placements under Regulation D to be made with general
advertising and general solicitation, so long as all purchasers are accredited
investors.  Hedge funds and other private funds are among the issuers that can
take advantage of this new flexibility.  The new crowdfunding provisions, and
the new exemption for offerings not in excess of $50 million, will have to wait
for implementation by SEC rulemaking.

                 For my prior post, which addresses the bill in much more detail,
see

http://groups.yahoo.com/group/FundLaw/message/1344



John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw

President Obama today signed into law H.R. 3606, the Jumpstart Our Business
Startups Act.  The Act's provisions are immediately effective with respect to
emerging growth companies (essentially, issuers with total annual gross revenues
of less than $1 billion, unless they sold securities pursuant to an effective
registration statement on or before December 8, 2011).  Companies that meet this
requirement, and that are now registered or considering registering with the
Securities and Exchange Commission, should immediately review the Act to
consider its implications and to decide whether the company optionally should
forgo the emerging growth company exemptions under Section 107 of the Act.

Also immediately effective are the changes to the registration threshold of the
Securities Exchange Act of 1934.  Under prior law, issuers with at least $1
million in total assets were required to register under the 1934 Act within 120
days after the last day of a fiscal year on which the issuer had a class of
equity security held of record by 500 or more persons.  The JOBS Act largely
retains this standard, but carves out accredited investors (subject to a
2000-holder limit) and persons who received the securities in exempt
transactions pursuant to an employee compensation plan.  The change may be
significant for companies with a calendar fiscal year that otherwise would have
exceeded the 500-investor limit.

More significant changes are on the way, including a removal of the ban on
general advertising and general solicitation in Regulation D private placements
sold only to accredited investors, a regulatory exemption for offerings not in
excess of $50 million, and the much-touted crowdfunding exemption.  Those
changes, however, will require implementation by SEC rulemaking.

The final text of H.R. 3606 is available online at

http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf

For my prior post discussing the bill in more detail, see

http://groups.yahoo.com/group/FundLaw/message/1344


John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw

The Financial Stability Oversight Council has adopted a final rule and
interpretive guidance concerning its standards and processes for determining
that a nonbank financial company shall be supervised by the Federal Reserve
Board and subject to prudential standards under the Dodd-Frank Act.  The rules
and interpretive guidance were adopted substantially as proposed, with
clarifications in response to commenter concerns.  The rules and guidance will
be effective 30 days after publication in the Federal Register, and the FSOC
said it will immediately begin the process of evaluating nonbank financial
companies.

The FSOC indicated that it is analyzing the extent to which there are potential
threats to U.S. financial stability arising from asset management companies and
may develop additional guidance regarding potential metrics and thresholds
relevant to them.  For the time being, however, the FSOC intends to evaluate
asset managers under the current interpretive guidance.  The FSOC does not
intend to conduct cost-benefit analyses in making determinations with respect to
individual nonbank financial companies.

My prior post concerning the most recent version of the proposed rule and
guidance, reproduced below, continues to be largely accurate in describing the
rule and guidance as adopted.  Instead of a $20 billion threshold for loans and
bonds outstanding, however, the final guidance provides a $20 billion threshold
for total debt outstanding, broadly defined.


The FSOC's final rule is available at

http://www.treasury.gov/initiatives/fsoc/Documents/Nonbank%20Designations%20-%20\
Final%20Rule%20and%20Guidance.pdf

The FSOC has also provided a two-page fact sheet, at

http://www.treasury.gov/press-center/press-releases/Documents/Nonbank%20Financia\
l%20Company%20Designations%20Final%20Rule%20and%20Interpretive%20Guidance%20Fact\
%20Sheet.pdf

For the most recent version of the proposed rule and guidance, see

https://federalregister.gov/a/2011-26783



John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw




--- In FundLaw@yahoogroups.com, "fundlaw" <JMB@...> wrote:
>
> The Financial Stability Oversight Council has reproposed a rule and proposed
interpretive guidance to describe the manner in which the FSOC intends to
designate nonbank financial companies that must be supervised by the Federal
Reserve Board.  Under Section 113 of the Dodd-Frank Act, a nonbank financial
company must be supervised by the Federal Reserve Board and be subject to
prudential standards if the FSOC determines that material financial distress at
the nonbank financial company, or the nature, scope, size, scale, concentration,
interconnectedness, or mix of the activities of the nonbank financial company,
could pose a threat to the financial stability of the United States.  The FSOC
reproposal should ease concerns that money market funds may be designated as
systemically important, but the proposal leaves open the possibility that other
funds and large asset management companies may be so designated, particularly if
they have significant debt or enter into derivatives contracts.
>
> Under the proposal, the FSOC would apply a three-stage process in making its
determinations in non-emergency situations.  Stage 1 is designed to narrow the
universe to a smaller set of nonbank financial companies using quantitative
thresholds to identify companies that should be subject to further evaluation. 
In Stage 2, the FSOC will conduct a comprehensive analysis of the potential for
the identified nonbank financial companies to pose a threat to U.S. financial
stability.  Finally, in Stage 3 the FSOC will contact those nonbank financial
companies that it believes merit further review and use quantitative and
qualitative information collected directly from the company in further analysis
of whether the company should be considered for a determination.

>
> While the overall process would include significant subjective considerations,
therefore, only companies that meet the Stage 1 quantitative thresholds
generally would be subject to further analysis under this process.  However, the
FSOC may, in limited cases, initially evaluate companies in Stage 1 based on
other firm-specific qualitative or quantitative factors, such as
substitutability and existing regulatory scrutiny.  The Stage 1 thresholds would
require that a nonbank financial company have total consolidated assets of at
least $50 billion and, in addition, that it meet at least one other threshold:
>
> --Credit Default Swaps Outstanding:  There are at least $30 billion in gross
notional credit default swaps outstanding for which the company is the reference
entity.
>
> --Derivative Liabilities:  The company has at least $3.5 billion of derivative
liabilities.  Derivative liabilities equals the fair value of any derivatives
contracts in a negative position after taking into account the effects of master
netting agreements and cash collateral held with the same counterparty on a net
basis, if elected.
>
> --Loans and Bonds Outstanding:  The company has at least $20 billion of
outstanding loans borrowed and bonds issued.
>
> --Leverage Ratio:  There is a minimum leverage ratio of total consolidated
assets (excluding separate accounts) to total equity of 15 to 1.
>
> --Short-Term Debt Ratio:  There is a threshold ratio of debt with a maturity
of less than 12 months to total consolidated assets (excluding separate
accounts) of 10%.
>
>
> For purposes of applying these thresholds to investment funds under common
management, the FSOC may consider the funds as a single entity if their
investments are identical or highly similar.  Note that even a large company,
however, will not be designated as systemically important if it does not have
significant debt or enter into derivatives contracts.  There had been some
concern that large money market funds might be designated, but money market
funds generally do not incur significant debt or enter into derivatives
contracts, so for now this concern appears to be eased.  Large funds or groups
of funds that do use leverage or derivatives, however, may be more at risk.
>
> The FSOC will consider whether to establish an additional set of metrics or
thresholds tailored to evaluate hedge funds and private equity firms and their
advisers.  In addition, the FSOC will analyze the extent to which there are
potential threats to U.S. financial stability arising from asset management
companies, and the FSOC may propose additional guidance regarding potential
additional metrics and thresholds relevant to asset manager determinations.
>
>
> The FSOC press release, with a link to the reproposal, is at
>
> http://www.treasury.gov/press-center/press-releases/Pages/tg1321.aspx
>
> For my post on the earlier FSOC proposal, see
>
> http://groups.yahoo.com/group/FundLaw/message/1313
>
>
> My earlier post also discussed the Dodd-Frank Act's Volcker rule, which will
restrict the ability of banking entities to engage in proprietary trading and to
sponsor or own hedge funds or private equity funds.  The federal banking
regulatory agencies today proposed implementing rules, and the Securities and
Exchange Commission is expected to join the proposal tomorrow.  The Federal
Reserve Board's press release, with a link to the proposal, is at
>
> http://www.federalreserve.gov/newsevents/press/bcreg/20111011a.htm
>
>
>
> John M. Baker <JMB@...>
> Stradley Ronon Stevens & Young, LLP http://www.stradley.com
> 1250 Connecticut Avenue, NW, Suite 500
> Washington, DC 20036
> 202.419.8413
> 202.822.0140 fax
> FundLaw Listowner http://groups.yahoo.com/group/fundlaw
>

The Investment Company Institute and the Chamber of Commerce of the United
States have brought suit against the Commodity Futures Trading Commission to
challenge recent rule changes that will require some investment advisers to
registered investment companies to register as commodity pool operators. 
Investment Company Institute v. CFTC, No. 1:12-cv-00612 (D.D.C. filed Apr. 17,
2012).  The rule change has been unpopular within the industry; I was going to
say "controversial," but that would imply the existence of a controversy, and
I'm unaware of anyone within the industry who supports the rule change or even
believes that it addresses a need.  The case will be heard by Judge Beryl A.
Howell in the U.S. District Court for the District of Columbia.

The plaintiffs' lead argument is that the CFTC did not properly evaluate the
costs and benefits of the rule change.  Section 15(a) of the Commodity Exchange
Act, 7 U.S.C. § 19(a), imposes specific requirements for the CFTC to consider
the costs and benefits of its regulations.  Plaintiffs argue that the CFTC
failed to examine the disclosure and protections already provided through
regulation of registered funds and advisers by the Securities and Exchange
Commission, and it therefore had no basis to conclude that the CFTC requirements
offered any benefits beyond those already provided to investors.  In addition,
plaintiffs argue that the CFTC openly admitted it could not conduct a proper
analysis of the rule's costs, and they argue that the CFTC failed to consider
the costs the rule changes will impose by decreasing liquidity in the
commodities markets.  Plaintiffs also argue that the CFTC acted arbitrarily and
capriciously under the Administrative Procedures Act and that it failed to
provide interested persons a sufficient opportunity to meaningfully participate
in the rulemaking.

The plaintiffs' arguments, if successful, would result in the CFTC amendments to
17 C.F.R. §§ 4.5 and 4.27 being vacated and set aside.  These are the provisions
that require some registered fund advisers to register as CPOs and to file new
Form CPO-PQR.  The lawsuit does not attack the CFTC's rescission of  an
exemption from CPO status with respect to commodity pools whose participants are
all qualified eligible persons.  Thus, there will continue to be a CPO
registration requirements for many advisers to hedge funds and other private
funds, which in the past relied on that exemption.

The ICI webpage on the litigation, including the complaint and additional
materials, is at

http://www.ici.org/cftc_challenge

There is also a U.S. Chamber of Commerce webpage, at

http://www.chamberlitigation.com/investment-company-institute-and-chamber-commer\
ce-v-us-commodity-futures-trading-commission

For my post on the adoption of the rule change, see

http://groups.yahoo.com/group/FundLaw/message/1343


John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw

The Technical Committee of the International Organization of Securities
Commissions has issued a consultation report sharing its views and seeking
comments on the possible risks money market funds may pose to systemic stability
and on possible policy options to address these risks.  IOSCO, Money Market Fund
Systemic Risk Analysis and Reform Options; Consultation Report (Apr. 27, 2012). 
IOSCO's consultation report is part of a review, at the request of the Financial
Stability Board, of potential regulatory reforms of money market funds that
would mitigate their susceptibility to runs and other systemic risks; the FSB
asked IOSCO to develop policy recommendations by July 2012.  The Securities and
Exchange Commission is a member of both IOSCO and the FSB, and the $2.7 trillion
of assets in U.S. money market funds is a majority of the $4.7 trillion in
worldwide money market fund assets as of fourth quarter 2011.

The report notes that money market funds are vulnerable to runs because
shareholders have an incentive to redeem their shares before others do when
there is a perception that the fund might suffer a loss.  It discusses a number
of policy options, including prohibiting the use of amortized cost valuation,
requiring buffers to protect net asset values per share, requiring bank-like
regulation for money market funds, imposing portfolio liquidity requirements,
and reducing reliance on ratings.  The report preliminarily is of the view that,
although important reforms have already been adopted and implemented, several
areas of risk remain, and the safety of money market funds is paramount for
financial stability at large.  Comments on the consultation report are due on or
before May 28, 2012.

The report is available online at

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD379.pdf

The related IOSCO news release is at

http://iosco.org/news/pdf/IOSCONEWS232.pdf

For previous FundLaw posts on money market funds, see

http://groups.yahoo.com/group/FundLaw/msearch?query=%22money+market%22



John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw

Registered investment companies do not qualify as "emerging growth companies"
under the Jumpstart Our Business Startups Act, according to guidance on Title I
of the JOBS Act (FAQ #20) released today by the staff of the Securities and
Exchange Commission.  Emerging growth companies are eligible for more beneficial
treatment under the "IPO on-ramp" provisions of the JOBS Act.  Many of these
provisions have no application to most investment companies, but some could have
been relevant.  For example, emerging growth companies can submit draft
registration statements for confidential nonpublic review by the SEC staff prior
to public filing, and they can engage in communications with potential
institutional investors to determine their interest in a contemplated securities
offering.  The definition of "emerging growth company" appears on its face to
include many investment companies, but there had been uncertainty as to the
statute's practical effect; the JOBS Act essentially amends the Securities Act
of 1933 and the Securities Exchange Act of 1934, but registered investment
companies are also subject to the Investment Company Act of 1940, from which the
JOBS Act provides no exemption.


The staff guidance also provides answers to a number of other questions,
including the following:

--Asset-backed securities issuers also do not qualify as emerging growth
companies (FAQ #19).

--However, business development companies, which are technically investment
companies but do not register under the 1940 Act and are subject to only some of
its provisions, do qualify as emerging growth companies (FAQ #21).

--In determining whether a financial institution is an emerging growth company,
a financial institution must include all gross revenues from traditional banking
activities, but not gains and losses on dispositions of investment portfolio
securities (FAQ #23).

--The staff will publicly release its comment letters and issuer responses to
staff comment letters on confidential draft submissions after the registration
statement is effective (FAQ #25).


The Division of Corporation Finance page on the JOBS Act, including a link to
the new guidance, is at

http://www.sec.gov/divisions/corpfin/cfjobsact.shtml


The JOBS Act has become law as Public Law 112-106, and its final text is at

http://www.gpo.gov/fdsys/pkg/PLAW-112publ106/pdf/PLAW-112publ106.pdf


For my most recent post on the JOBS Act, see

http://groups.yahoo.com/group/FundLaw/message/1346



John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw

In an unusual step, three of the five Commissioners of the Securities and
Exchange Commission have issued a statement critical of the publication of the
consultation report on money market funds by the International Organization of
Securities Commissions.  The IOSCO consultation report, which was issued on
April 27, shares IOSCO's views and seeks comments on the possible risks money
market funds may pose to systemic stability and on possible policy options to
address these risks.  It takes the position that, although important reforms
have already been adopted and implemented, several areas of risk remain, and the
safety of money market funds is paramount for financial stability at large.  The
release of the Commissioners' statement implies that a majority of the SEC
Commissioners have at least some reservations about the reform proposals in the
consultation report.

The statement is at http://www.sec.gov/news/speech/2012/spch051112laatapdmg.pdf
and is reproduced in full below, after my signature block.  For my earlier post
on the IOSCO consultation report, see

http://groups.yahoo.com/group/FundLaw/message/1349


John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw



Statement concerning publication by IOSCO on April 27, 2012 of the "Consultation
Report of the IOSCO Standing Committee 5 on Money Market Funds: Money Market
Fund Systemic Risk Analysis and Reform Options."

On April 27, 2012, IOSCO published the above captioned Consultation Report
without the concurrence of the U.S. Securities and Exchange Commission (the
Commission).

We feel that it is important to state for the record that the Consultation
Report does not reflect the views and input of a majority of the Commission. In
fact, a majority of the Commission expressed its unequivocal view that the
Commission's representatives should oppose publication of the Consultation
Report and that the Commission's representatives should urge IOSCO to withdraw
it for further consideration and revision. Accordingly, the Consultation Report
cannot be considered to represent the views of the U.S. Securities and Exchange
Commission.

May 11, 2012

Luis A. Aguilar, Commissioner
Troy A. Paredes, Commissioner
Daniel M. Gallagher, Commissioner
U.S. Securities and Exchange Commission

The staff of the Securities and Exchange Commission has issued a no-action
letter allowing master funds in a master-feeder arrangement, when calculating
registration fees under the Securities Act of 1933, to offset the registration
fees paid by feeder funds that act as a conduit for investment in the
corresponding master fund.  GMO Trust (May 24, 2012).   As a result, it will not
be necessary for registration fees to be paid twice for the same aggregate
proceeds from investors in feeder funds, avoiding double-counting of the assets
on which the registration fees are paid.  In contrast, no offset is allowed for
fund-of-funds arrangements, because the fund of funds does not act as a conduit
for investments in the other funds.

The no-action position allows GMO Trust (the master funds) to calculate and pay
1933 Act registration fees pursuant to Rule 24f-2 based on all of its sales and
redemptions of securities during its previous fiscal year except for sales to
and redemptions from the GMO Feeder Funds that issued securities on which
registration fees were paid.  The position is based particularly on the
representations that:

--GMO Trust and GMO Series Trust (the feeder funds) each are registered as
open-end, management investment companies under the Investment Company Act of
1940;

--Shares of each GMO Master Fund and shares of each GMO Feeder Fund are
registered under the 1933 Act;

--Each series of GMO Series Trust is a feeder fund in a master-feeder fund
structure;

--Each GMO Feeder Fund is a conduit for investment in the corresponding GMO
Master Fund; and

--Each GMO Feeder Fund invests substantially all of its assets in a
corresponding series of GMO Trust. Under normal circumstances, each GMO Feeder
Fund will invest at least 95% of its assets in shares of its corresponding GMO
Master Fund with any remaining assets being held as cash.

The GMO Trust no-action letter is available online at

http://www.sec.gov/divisions/investment/noaction/2012/gmotrust052412-24f2.htm


John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw

The Securities and Exchange Commission has again extended the compliance date
for the third-party solicitor provisions of Rule 206(4)-5 under the Investment
Advisers Act of 1940, generally known as the pay-to-play rule.  Release No.
IA-3418 (June 8, 2012).  The compliance date, as previously extended, had been
scheduled for June 13, 2012.  The third-party solicitor provisions of the rule
prohibit an adviser and its covered associates from providing or agreeing to
provide, directly or indirectly, payment to any third party for a solicitation
of advisory business from any government entity on behalf of such adviser,
unless such third party is an SEC-registered investment adviser or is a
registered broker-dealer or registered municipal advisor subject to pay to play
restrictions.  Until the compliance date, however, advisers are not prohibited
by the rule from making payments to third-party solicitors.  The other
provisions of the pay-to-play rule were already and continue to be in full
effect.

As further extended, the compliance date for the third-party solicitor
provisions will be nine months after the compliance date of a final rule by
which municipal advisor firms must register under the Securities Exchange Act of
1934.  The extension is intended to ensure an orderly transition for advisers
and third-party solicitors as well as to provide additional time for them to
adjust compliance policies and procedures after the transition.  The new
compliance date is also intended to allow solicitors to assess compliance
obligations with pay-to-play rules that may be adopted by FINRA (with respect to
broker-dealers) or the Municipal Securities Rulemaking Board (with respect to
municipal advisors).  It is not clear when the SEC will adopt final registration
rules for municipal advisors, or what the compliance date will be for that rule
once it is adopted, but the current interim registration rule for municipal
advisors expires September 30, 2012.


The SEC's extending release is available at

http://www.sec.gov/rules/final/2012/ia-3418.pdf

For my original post on the adoption of the pay-to-play rule, see

http://groups.yahoo.com/group/FundLaw/message/1282

SEC staff guidance on the pay-to-play rule is available at

http://www.sec.gov/divisions/investment/pay-to-play-faq.htm



John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw

The Securities and Exchange Commission has announced that, at an open meeting on
August 22, it will consider rules to eliminate the prohibition against general
solicitation and general advertising in certain securities offerings conducted
pursuant to Rule 506 of Regulation D under the Securities Act of 1933 and Rule
144A under the 1933 Act, as mandated by Section 201 of the Jumpstart Our
Business Startups Act.  The SEC will also consider adopting rules under the
Dodd-Frank Act concerning conflict minerals and resource extraction.  The SEC
was subject to a statutory deadline to adopt those rules by April 17, 2011.

It is probably because of the Dodd-Frank rules that the meeting notice is so
unusually early - meeting notices typically are only seven days prior to the
meeting, and I've never seen an SEC meeting notice given more than seven weeks
in advance.  A bipartisan contingent of 58 members of Congress recently sent a
letter to SEC Chairman Mary Schapiro to request action on the two provisions,
and there is also a pending lawsuit by Oxfam America seeking to compel adoption
of the resource extraction rule.  The Regulation D amendments will also be late,
since the JOBS Act required them to be adopted by July 4, 2012.  The SEC
obviously won't meet that deadline, but it was clear from the beginning that
that deadline likely would not be met.

The meeting notice raises a number of questions:

--Why is the meeting so far in the future?  It seems likely that the SEC wanted
to respond to congressional pressure to specify when it could move forward on
these overdue rulemakings, but felt it would not be ready until the second half
of August.  If this is the case, there still could be one or more meetings
scheduled prior to August 22.  For example, there have been rumors that the SEC
may propose amendments to its money market fund rule (Rule 2a-7) in late July or
early August, and the SEC staff reportedly delivered a draft release to the
commissioners on June 25.  Whether such a meeting will in fact be called, of
course, is a different matter.

-- Why does the meeting notice say that the SEC will "consider rules," without
saying whether it will consider proposing rules or consider adopting rules? 
This may mean that the SEC will adopt interim rules and propose final rules, but
that is not entirely clear.

--Will the SEC propose rules governing the advertisement of hedge funds and
other private funds?  The Investment Company Institute has filed a comment
letter urging the SEC to impose content restrictions on private fund advertising
at least as extensive as those currently applicable to mutual funds.  Is it
significant that the meeting notice does not mention any such rules?

--What steps will the rules require to be taken to verify that purchasers under
the Regulation D exemption are accredited investors, and will the exemption be
met if the issuer reasonably believes that they are accredited investors? 
Several commenters filed letters addressing these issues.

The SEC meeting notice is available at

http://www.sec.gov/news/openmeetings/2012/ssamtg082212.htm

Early comment letters on Section 201 of the JOBS Act are at

http://www.sec.gov/comments/jobs-title-ii/jobs-title-ii.shtml

The press release concerning the congressional letter urging action on the
overdue rules under the Dodd-Frank Act, with a link to the letter itself, is at

http://democrats.naturalresources.house.gov/press-release/bipartisan-delegation-\
58-members-congress-call-sec-release-key-rules-reverse-resource

A Bloomberg report discussing the possible money market fund rule proposals is
at

http://www.bloomberg.com/news/2012-06-26/sec-money-market-rule-said-to-include-c\
apital-floating-shares.html


John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw

The U.S. Court of Appeals for the Second Circuit has approved a jury instruction
defining when information is "nonpublic" and thus subject to strictures on
insider trading.  United States v. Contorinis, No. 11-3-cr (2d Cir. Aug. 17,
2012).  The appellant was a hedge fund portfolio manager who placed hedge fund
trades based on information received from an investment banker, and was
criminally convicted of conspiracy to commit securities fraud and insider
trading.  The Second Circuit approved the following jury instruction defining
nonpublic information:

Information is nonpublic if it was not
available to the public through such sources
as press releases, Securities and Exchange
Commission filings, trade publications,
analysts' reports, newspapers, magazines,
rumors, word of mouth or other sources. In
assessing whether information is nonpublic,
the keyword is "available." If information
is available in the public media or in SEC
filings, it is public. However, the fact
that information has not appeared in a
newspaper or other widely available public
medium does not alone determine whether the
information is nonpublic. Sometimes a
corporation is willing to make information
available to securities analysts, prospective
investors, or members of the press who ask
for it even though it may never have appeared
in any newspaper publication or other
publication. Such information would be
public. Accordingly, information is not
necessarily nonpublic simply because there
has been no formal announcement or because
only a few people have been made aware of it.
For example, if UBS policy was to give out
certain information to people who ask for it,
that information is public information.
Whether information is nonpublic is an issue
of fact for you to decide.

On the other hand, the confirmation by
an insider of unconfirmed facts or rumors --
even if reported in a newspaper -- may itself
be inside information. A tip from a
corporate insider that is more reliable or
specific than public rumors is nonpublic
information despite the existence of such
rumors in the media or investment community.
Whether or not the confirmation of a rumor by
an insider qualifies as material nonpublic
information is an issue of fact for you to
decide.


The appellant argued that the instructions wrongly failed to indicate that
general confirmation of an event that is "fairly obvious" to knowledgeable
investors is not material, nonpublic information, and he also objected to the
instruction that "[t]he confirmation by an insider of unconfirmed facts or
rumors -- even if reported in a newspaper -- may itself be inside information." 
The Second Circuit rejected these objections, saying that a trier of fact may
find that information obtained from a particular insider, even if it mirrors
rumors or press reports, is sufficiently more reliable, and therefore is
material and nonpublic, because the insider tip alters the information mix by
confirming the rumor or reports.

The opinion also addresses the district court's order that the appellant forfeit
all $12.65 million of profits made and losses avoided by the hedge fund.  The
calculation of a forfeiture amount in criminal cases is usually based on the
defendant's actual gain, and the court ruled that the portfolio manager could
not be charged with the hedge fund's gain.  On remand, the court suggested, the
district court could decide to what extent the appellant's interest in salaries,
bonuses, dividends, or enhanced value of equity in the hedge fund is subject to
forfeiture.

The Second Circuit's opinion is available online at

http://caselaw.findlaw.com/us-2nd-circuit/1609223.html



John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw

The Securities and Exchange Commission today announced that it will consider
private placement rule changes required by the Jumpstart Our Business Startups
Act on August 29, and not August 22 as previously scheduled.  It may be
significant that the August 29 meeting notice makes no reference to money market
funds, although press reports had indicated that the SEC would propose money
market fund rule changes on that date.

According to the new open meeting notice, the SEC on August 29 will consider
whether to propose rules to eliminate the prohibition against general
solicitation and general advertising in securities offerings conducted pursuant
to Rule 506 of Regulation D under the Securities Act of 1933 and Rule 144A under
the 1933 Act, as mandated by Section 201(a) of the JOBS Act.  In a separate
notice, the SEC announced that it will not consider rulemaking under these
provisions at the August 22 meeting.  The SEC apparently will still consider
adopting conflicts minerals and resource extraction rules at the August 22
meeting.  Press reports indicate that the SEC previously planned also to adopt
interim final rules to implement Section 201 (which specified a deadline of July
4, 2012), but now plans only to propose rule changes for comment in the normal
way.

While the JOBS Act rule changes are controversial, money market fund rule
changes would be even more so.  Several press reports had indicated that the SEC
would propose major changes to money market fund regulation at an open meeting
on August 29, but that now seems unlikely.  Perhaps there was no specific
proposal that could get the support of at least three of the five Commissioners.
It is still possible, of course, that a rule proposal could be made at a later
time.


The announcement of the change to the August 22 meeting, with a link to the new
August 29 meeting notice, is at

http://www.sec.gov/news/openmeetings/2012/ssamtg082212-deletion.htm

An Investment News article on the decision not to adopt interim final rules is
at

http://www.investmentnews.com/article/20120817/FREE/120819918

An earlier Investment News article discussing the supposed money market fund
rule changes is at

http://www.investmentnews.com/article/20120808/FREE/120809939

For my prior post on the August 22 meeting, see

http://groups.yahoo.com/group/FundLaw/message/1354



John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw

Securities and Exchange Commission Chairman Mary Schapiro has announced that she
was unable to persuade two more SEC Commissioners to join her in supporting a
staff proposal to reform the structure of money market funds, and the proposal
therefore will not be published for public comment.  Schapiro suggested in her
statement that "Other policymakers now have clarity that the SEC will not act to
issue a money market fund reform proposal and can take this into account in
deciding what steps should be taken to address this issue" - an apparent
reference to the Financial Stability Oversight Council.

The announcement is no doubt a personal frustration for Schapiro.  Still, the
clear stance will at least allow the SEC to focus on other issues.  Attention to
money market fund reform is likely to continue, but presumably will be directed
to FSOC and Congress.  Schapiro's statement is below, after my signature block.


John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw


Statement of SEC Chairman Mary L. Schapiro on Money Market Fund Reform
<http://www.sec.gov/news/press/2012/2012-166.htm>
08/22/2012 09:20 PM EDT


FOR IMMEDIATE RELEASE
2012-166

Washington, D.C., Aug. 22, 2012 -- Securities and Exchange Commission Chairman
Mary Schapiro today made the following statement:

Three Commissioners, constituting a majority of the Commission, have informed me
that they will not support a staff proposal to reform the structure of money
market funds. The proposed structural reforms were intended to reduce their
susceptibility to runs, protect retail investors and lessen the need for future
taxpayer bailouts.

I -- together with many other regulators and commentators from both political
parties and various political philosophies -- consider the structural reform of
money markets one of the pieces of unfinished business from the financial
crisis.

While as Commissioners, we each have our own views about the need to bolster
money market funds, a proposal would have given the public the chance to weigh
in with their views as well. However, because three Commissioners have now
stated that they will not support the proposal and that it therefore cannot be
published for public comment, there is no longer a need to formally call the
matter to a vote at a public Commission meeting. Some Commissioners have instead
suggested a concept release. We have been engaging for two and a half years on
structural reform of money market funds. A concept release at this point does
not advance the discussion. The public needs concrete proposals to react to.

The declaration by the three Commissioners that they will not vote to propose
reform now provides the needed clarity for other policymakers as they consider
ways to address the systemic risks posed by money market funds. I urge them to
act with the same determination that the staff of the SEC has displayed over the
past two years.

As we consider money market funds' susceptibility to runs, we must remember the
lessons of the financial crisis and the history of money market funds. And, we
must be cognizant that the tools that were used to stop the run on money market
funds in 2008 no longer exist. That is, there is no "back-up plan" in place if
we experience another run on money market funds because money market funds
effectively are operating without a net.

One of the most critical lessons from the financial crisis is that, when
regulators identify a potential systemic risk - or an industry or institution
that potentially could require a taxpayer bailout - we must speak up. It is our
duty to foster a public debate and to pursue appropriate reforms. I believe that
is why financial regulators both past and present, both Democrats and
Republicans, have spoken out in favor of structural reform of money market
funds. I also believe that is why independent observers, such as academics and
the financial press -- from a variety of philosophical ideologies -- have
supported structural reform of money market funds, as well.

The issue is too important to investors, to our economy and to taxpayers to put
our head in the sand and wish it away. Money market funds' susceptibility to
runs needs to be addressed. Other policymakers now have clarity that the SEC
will not act to issue a money market fund reform proposal and can take this into
account in deciding what steps should be taken to address this issue.

History and Background

It's been a long and deliberative process that led us to the point we are at
today.

Money market funds, as we know them, actually are not permitted under existing
federal securities statutes. Instead, they exist as a result of a special
exemption granted by the SEC three decades ago. This exemptive rule, known as
rule 2a-7, allows money market funds to seek to maintain a stable $1.00 net
asset value by using penny rounding and amortized cost accounting. As a result
of this exemption, these funds do not have to comply with the mark-to-market
valuation standards required for all other mutual funds.

In exchange, money market funds relying on rule 2a-7 must follow strict
limitations on their investments.

Over the years, money market funds fostered a strong sense of stability as they
maintained a stable $1.00 NAV. Before long, retail investors were using them as
substitutes for checking accounts -- and institutional investors were using them
as vehicles for their cash management.

Between 1983 and 2008, only one small money market fund fell far enough below
the $1.00 NAV that it broke the buck, but because of its size, the impact from
that event did not spread to other money market funds or the broader market.
During that period, however, numerous sponsors of money market funds supported
the funds' stable $1.00 NAVs by purchasing out troubled securities at
above-market values; injecting cash infusions into the funds; and otherwise
engaging in capital support of their money market funds.

Unfortunately, the sense of stability this created led to what I believe to be a
false sense of security, masking risks that became all too apparent during the
financial crisis. When the Reserve Primary Fund broke the buck in the fall of
2008, this stability was shattered.

In a matter of days, panicked investors had redeemed not only massive amounts
from the Reserve Fund, but more than $300 billion from prime money market funds
across the industry. The short term credit markets froze. And, financial
institutions and operating companies worldwide were unable to effectively fund
their daily operations.

To stop the growing damage, the Treasury Department stepped in by temporarily
guaranteeing investments in money market funds. This was an unprecedented action
that put taxpayers on the hook for the performance of an investment product.

The temporary federal guarantee was supplemented by Federal Reserve Board
liquidity facilities, which also provided unprecedented assistance to money
market funds.
In short, every taxpayer in the nation found themselves a partial insurer of a
$multi-trillion investment product.
Money Market Funds' Structural Issues

While the events of the 2008 financial crisis dramatically exposed the risks
presented by money market funds, it also highlighted that the risks stem from
flaws inherent in the structure of money market funds. In particular, most of
the risks resulted from the valuation standards and stable NAV that are
permitted to exist by SEC rule, without any capital or asset cushion to back
them up.

   *   First, money market funds have no ability to absorb a loss above a certain
size without breaking the buck. We saw that first hand with the Reserve Primary
Fund, where just over 1% of that fund's assets were held in commercial paper of
Lehman Brothers. When Lehman Brothers declared bankruptcy, its commercial paper
became worthless, the fund broke the buck, investors began to flee the fund, and
other funds began to experience high rates of redemptions as a result.
   *   Second, investors of money market funds have every incentive to run at the
first sign of a problem. We saw this phenomenon play out in the week of
September 15, 2008 when over $300 billion was withdrawn from prime money market
funds. Under the "first-mover advantage," those who redeem first, get out with
their full $1.00 invested, even if the fund's assets are worth slightly less.
This leaves all the other investors holding the bag -usually the slower moving
retail investors who can lose both value and access to their money. They lose
the value when the fund reaches a mark-to-market NAV of 99-and-a-half cents and
breaks the buck. And they lose access, for an unknown period, since fund boards
are now permitted to suspend redemptions and liquidate a fund if it breaks the
buck.

This inability to absorb a loss in value of a portfolio security and the
incentive to run at the first sign of a problem are the two structural issues we
were seeking to address with the proposals under consideration by the
Commission. These are issues that are inherent in the structure of money market
funds which came to the fore in the financial crisis, but undoubtedly are still
present.

The fear of breaking the buck and triggering a run is perhaps one reason why
fund managers, in hundreds of instances, have sought some type of relief to
bolster their funds' financial condition and prevent the breaking of a buck.

Several entities - from Moody's to the Federal Reserve to our own staff - have
spelled out this fact. Indeed, based on our staff's tabulation, there have been
more than 300 such instances, dating back to the 1980s. This figure represents
those occasions where fund sponsors requested relief or otherwise notified us
that they provided sponsor capital support to their funds because of a troubled
security holding or a need to address diminished value or extraordinary
redemptions in a money market fund.

As we all know, though, and as was evident in the Reserve Primary Fund case,
there is no legal obligation for a fund's sponsor to support its fund, and there
is absolutely no certainty that every fund sponsor with a problem in its money
market fund will be able to provide capital support to the fund.

Reform Alternatives

That is why we were considering alternative proposals that would address these
two structural issues in different ways.

The two alternatives:

   *   First, that money market funds float the NAV and use mark-to-market
valuation like every other mutual fund. This would underscore for investors that
money market funds are investment products and that any expectation of a
guarantee is unwarranted. In such a scenario, investment losses in money market
fund portfolios could be both absorbed and reflected in the price - as would
gains for that matter. Similarly, while the incentive to run may not be reduced
entirely, the "cliff" effect of redeeming at $1.00, or getting stuck with a loss
and no immediate access to one's assets would no longer exist.
   *   Second, and alternatively, a tailored capital buffer of less than 1% of
fund assets, adjusted to reflect the risk characteristics of the money market
fund. This capital buffer would be used to absorb the day-to-day variations in
the value of a money market fund's holdings. To supplement that capital buffer
in times of stress, it would be combined with a minimum balance at risk
requirement. That requirement would enable investors to redeem up to 97% of
their assets in the normal course as they do today. However, it would require a
30-day holdback of the final 3% of a shareholder's investment in a money market
fund. That holdback would take a so-called "first-loss" position and could be
used to provide extra capital to a money market fund that suffered losses
greater than its capital buffer during that 30-day period. The result is that
remaining investors would not be harmed by a redeeming investor's full
withdrawal and the incentive to redeem fully and quickly at the first sign of
trouble would be diminished.

I believe these proposals have merit, address the two structural issues
identified, and deserved to see the light of day so that we could receive public
feedback.

The Reform Process

Development of these proposals was thorough and considered. In June 2009,
shortly after the financial crisis and my arrival at the Commission, the
Commission proposed an important first round of reforms to boost the resilience
of money market fund portfolios. The Commission adopted those reforms in January
of 2010. The reforms shortened maturities, improved credit qualities, and for
the first time imposed liquidity requirements for money market funds. The
reforms were based in large part on the March 2009 report of the ICI's Money
Market Fund Working Group. This first round of reforms also imposed new
disclosure requirements regarding money market fund portfolios and shadow NAVs.
Those disclosures have been very valuable to both the SEC and to investors as we
monitor money market fund portfolios.

But, when the Commission proposed the first stage of money market fund reforms
in 2009, it also requested comment on additional structural reforms: namely
whether to mandate a floating NAV and whether to require redemptions in kind. In
other words, the Commission made clear that the first round of reforms in 2010
were a first step and that additional structural reforms were expected to follow
as a second step. In fact, I specifically said as much at the time.

Thereafter, in November 2010, the Commission requested comment on structural
reform options discussed in the Money Market Fund Report issued by the
President's Working Group -- a precursor to the Financial Stability Oversight
Council. After reviewing those comments, the SEC hosted a May 2011 Roundtable on
Money Market Funds and Systemic Risk. The roundtable included voting members
from FSOC or their designee as well as fund industry representatives, investors,
academics, foreign regulators and industry observers.

Following the roundtable, our staff in consultation with staff from the Treasury
and the Federal Reserve, met with various fund industry representatives to
discuss multiple structural reform options and we received even more ideas
worthy of pursuing. And we continued to collect public comment throughout this
long process.

Once the staff narrowed money market reform options, they refined those options,
obtained suggestions for additional areas of public comment and prepared a
proposal that is shaped and strengthened by economic analysis. The draft release
presented to the Commissioners requests comment on multiple alternative
approaches to money market fund reform, including liquidity fees and gates - all
with a view of furthering the public debate.

# # #

Commissioners Daniel Gallagher and Troy Paredes, the two Republican members of
the Securities and Exchange Commission, today issued a joint statement
expressing their views on the SEC's regulation of money market funds.  Although
Gallagher and Paredes have often been seen as opposing money market fund reform,
they rebut that characterization and urge further work on strengthening the
resiliency of money market funds.  The statement is an unusually public
rejoinder to Chairman Mary Schapiro's statement of August 22, in which she
stated that the declaration by three Commissioners that they would not vote to
propose reform provided clarity that the SEC would not act.

Commissioner Luis Aguilar, the third Commissioner who declined to support
Schapiro's reform proposal, previously issued a statement on August 23, in which
he stated his support for a concept release asking serious and probing questions
about the cash management industry as a whole to diagnose its frailties and
assess where reforms are required.  Gallagher and Paredes state that they
respect his views and commend him for his efforts to engage in a constructive
dialogue.  They go on to explain in some detail why they believe that the
changes Schapiro advocated - a "floating NAV" and a capital buffer coupled with
a holdback restriction - were not supported by the requisite data and analysis,
were unlikely to be effective in achieving their primary purpose, and would
impose significant costs on issuers and investors while potentially introducing
new risks into the nation's financial system.

Gallagher and Paredes instead urge proposing a "gating" approach, which would
permit money market fund boards, as they deem appropriate and consistent with
their fiduciary obligations to investors and without having to seek an exemptive
order from the SEC, to "gate" redemptions to stave off a run and to allow the
fund manager time to mitigate the concerns of investors who otherwise may be
inclined to redeem.  Such a proposal would, they note, require enhanced
disclosures to investors that would clearly explain the liquidity and principal
reduction risks that could accompany a fund board's discretionary gating
authority.  They also urge further research into several questions, including
the effects of the 2010 money market fund regulatory reforms.

Their statement concludes by stressing that money market funds are squarely
within the expertise and regulatory jurisdiction of the SEC, and that they do
not intend to abdicate their responsibility to regulate money market funds. 
They ask that the SEC's staff of economists conduct detailed research and
analysis on money market funds, including the staff's best efforts to answer
their questions, as well as others that are germane.  Action by the SEC staff is
subject to the direction of the Chairman, so the requested staff review will not
happen automatically.  However, the statements by three Commissioners that they
favor further study - and, potentially, further reform - will undoubtedly put
pressure on Schapiro to give further consideration to money market fund reform.

The joint statement by Gallagher and Paredes is available at

http://www.sec.gov/news/speech/2012/spch082812dmgtap.htm

Aguilar's statement is at

http://www.sec.gov/news/speech/2012/spch082312laa.htm

Schapiro's statement is included in my FundLaw post, which is at

http://groups.yahoo.com/group/FundLaw/message/1357

The Chairman of the Board of the International Organization of Securities
Commissions on August 25 issued a statement affirming that IOSCO will continue
its work to develop policy recommendations for strengthening oversight and
regulation of the shadow banking system, including money market funds.  That
statement is at

http://iosco.org/news/pdf/IOSCONEWS248.pdf



John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw

At an open meeting on August 29, 2012, the Securities and Exchange Commission
proposed rules to eliminate the prohibition against general solicitation and
general advertising in securities offerings conducted pursuant to Rule 506 of
Regulation D under the Securities Act of 1933 and Rule 144A under the 1933 Act,
as mandated by Section 201(a) of the Jumpstart Our Business Startups Act. 
Release No. 33–9354 (Aug. 29, 2012).  The proposal was approved by a 4-1 vote. 
Comments will be due on October 5, 2012.

Rule 506 currently provides a safe harbor from registration requirements for
non-public offerings of securities as long as the issuer, or anyone acting on
its behalf, does not offer or sell securities through any form of general
solicitation.  New Rule 506(c) would permit the use of general solicitation to
offer and sell securities under Rule 506, provided that the following conditions
are satisfied:

*         The issuer must take reasonable steps to verify that the purchasers of
the securities are accredited investors;

*         All purchasers of securities must be accredited investors, either
because they come within one of the enumerated categories of persons that
qualify as accredited investors or the issuer reasonably believes that they do,
at the time of the sale of the securities; and

*         The general conditions of Rule 506 must be complied with, other than
the informational requirements and the ban on general solicitation and
advertising.  Specifically, securities acquired under proposed Rule 506(c) would
be subject to the integration requirements under Rule 502(a) and the resale
limitations under Rule 502(d).

The SEC did not propose specific verification methods that an issuer must use or
could use in verifying a purchaser's accredited investor status.  Instead,
whether the steps taken to verify accredited investor status are reasonable
would be an objective determination based on the particular facts and
circumstances of each transaction.

The draft release explains that issuers would consider a number of factors when
determining the reasonableness of the steps used to verify that a purchaser is
an accredited investor.  These factors include (i) the nature of the purchaser
and the type of accredited investor that the purchaser claims to be; (ii) the
amount and type of information that the issuer has about the purchaser; (iii)
the nature of the offering, such as the manner in which the purchaser was
solicited to participate in the offering; and (iv) the terms of the offering,
such as the minimum investment amount.  After consideration of the facts and
circumstance of the transaction, if it appears likely that the purchaser is an
accredited investor, the issuer would have to take fewer steps to verify
accredited investor status, and vice versa.

Additionally, the draft release proposes a revision to Form D that would add a
separate check box for issuers to indicate whether they are using general
solicitation or general advertising in a Rule 506 offering.  This would enable
the SEC to identify 506(c) offerings and to observe how well the 506(c) market
is functioning.

Finally, SEC proposed to amend Rule 144A(d)(1) to provide that securities may be
offered pursuant to Rule 144A to persons other than qualified institutional
buyers, provided that the securities are sold only to persons that the seller
and any person acting on behalf of the seller reasonably believe are qualified
institutional buyers.

Commissioner Walters, while supporting the proposal, noted that it failed to
consider how to mitigate the unintended harm that might result from the
proposal's flexibility in offering securities, especially the possibility of
increased fraudulent offerings.  She stated that she was disappointed that many
of the commenters' suggestions regarding mitigating this harm were not
incorporated into the proposal.  She requested comments on requiring issuers to
file Form D.  She stated that regulators need notice and basic information about
private offerings to prevent investor harm, and that conditioning the exemption
on filing Form D would be an effective and minimally burdensome way to maintain
investor protection.

Commissioner Aguilar voted against the proposal.  He stated that he would issue
a detailed statement on the SEC website and said that his main concern was that
the proposal increases investor vulnerability to promoters of fraudulent
schemes.  Commissioner Aguilar stated that the proposing release acknowledges
that eliminating the prohibition against general solicitation could make it
easier for promoters of fraudulent schemes to reach potential investors through
public solicitation and other methods previously not allowed.  He noted that
nowhere in the proposal did the staff address any ways to mitigate this concern.
Commissioner Aguilar stated that the SEC should have proposed, among other
things,  (i) amending the definition of accredited investor to require
consideration of the investor's financial sophistication; and (ii) amending Form
D notice requirements to enhance the timing and content of the form.

Commissioners Paredes and Gallagher supported the proposal, but both argued that
an interim final rule, and not a proposal, would have been more appropriate. 
Commissioner Gallagher pointed out that the proposal initially began as an
interim final rule, which would have allowed the staff to implement the
necessary changes required by the JOBS Act while at the same time soliciting
reactions from the market to examine the effects of those changes.  Both
Commissioners Paredes and Gallagher were disappointed that this Rule was
proposed well beyond the JOBS Act's ninety-day implementation deadline.

Chairman Schapiro responded that the comments the SEC received regarding the
Rule indicated that commenters preferred a rule proposal, and not an interim
final rule.  She stated that the SEC's normal practice is to issue a rule
proposal and allow a brief comment period.  She acknowledged that a rule
proposal, and not an interim final rule, should have been the staff's focus from
the outset.

The proposing release was published in the Federal Register today, at

https://federalregister.gov/a/2012-21681

Statements from all five commissioners are available at

http://www.sec.gov/news/speech.shtml



Jessica D. Burt, Esquire
Stradley Ronon Stevens & Young, LLP
p: 202.419.8409 | f: 202.822.0140
1250 Connecticut Avenue, N.W., Suite 500
Washington, DC 20036-2652

Federal Judge Peter Sheridan, who sits in New Jersey, has ruled that the holder
of a variable annuity has standing to bring a claim under Section 36(b) of the
Investment Company Act of 1940 for allegedly excessive compensation paid to the
investment adviser to the underlying mutual funds.  Sivolella v. AXA Equitable
Life Insurance Co., No. 3:11-cv-04194 (D.N.J. Sept. 25, 2012).  The defendants
had moved to dismiss the case, arguing that the plaintiff does not have standing
because she is not a "security holder" of the mutual funds, as required by
Section 36(b).  Under the defendants' theory, the only permissible plaintiff,
other than the Securities and Exchange Commission, would be the insurance
company that is the record holder of the fund shares.

Section 36(b) of the 1940 Act provides that investment advisers have a fiduciary
duty with respect to the receipt of compensation for services that they provide
to mutual funds and allows civil actions to be brought by the SEC or by a
security holder on behalf of a mutual fund.  The plaintiff was an investor in a
variable annuity, which is a contract between an investor and an insurance
company pursuant to which the insurance company promises to make periodic
payments to the contract owner or beneficiary, starting immediately or at some
future time.  The insurance company placed the plaintiff's premiums in a
separate account owned by the insurance company and registered as a unit
investment trust under the 1940 Act.  The UIT's assets then were invested in
mutual funds selected by the plaintiff.  It was these mutual funds that
allegedly paid excessive advisory fees, and the defendants argued that the
plaintiff's indirect relationship to the mutual funds was insufficient to make
her a "security holder."

The court noted the broad definition of "security" in the securities laws and
concluded that it makes little sense to construe "security" broadly and limit
the reach of "holders" to entities that lack any economic interest or stake in
the transaction.  Rather, it found, the plaintiff had all of the economic stake
in these transactions:  "Plaintiff and similarly situated investors are
responsible for and paid all of the challenged fees.  Plaintiff and other
investors bear the full risk of poor investment performance.  Plaintiff and
other investors have the right to instruct AXA how to vote their shares.  Assets
held in a separate account are immune from claims of AXA's creditors, while
being vulnerable to claims of the investors' creditors.  And when Plaintiff
decides to withdraw her investment in the AXA Funds, she, not AXA, pays the
taxes on that investment."  The court distinguished this from a fund-of-funds
case, in which the plaintiffs do not enjoy the incidents of ownership in the
underlying funds.

I have placed the court's order on the FundLaw website (free registration with
Yahoo Groups may be required), and it can be accessed at

http://groups.yahoo.com/group/FundLaw/files/SivolellavAXAEquitable.pdf



John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw

Treasury Secretary Timothy Geithner, in his capacity as Chairperson of the
Financial Stability Oversight Council, has circulated a letter to other FSOC
members outlining options for reform of money market funds.  Meanwhile, Daniel
Gallagher, one of the two Republican members of the Securities and Exchange
Commission, said that he would likely support requiring money market funds to
have a fluctuating share price.  Gallagher's position seemingly is a reversal of
the position he expressed last month, when he and Commissioner Troy Paredes
opposed SEC Chairman Mary Schapiro's plan to propose two alternative reforms: 
either floating the net asset values of money market funds by removing the
ability to use amortized cost accounting, or requiring money market funds to
hold a capital buffer, combined with a 3% holdback on shareholder redemptions. 
In the face of opposition to those proposals, Schapiro said the SEC would not
act and called for FSOC to use its authority under the Dodd-Frank Act to
recommend reforms.

Geithner's letter indicates that he has asked staff to begin drafting a formal
recommendation immediately and is hopeful that FSOC will consider that
recommendation at its November meeting.  The recommendation should include
Schapiro's two reform alternatives, as well as a third option that would entail
imposing capital and enhanced liquidity standards, potentially coupled with
liquidity fees or temporary "gates" on redemptions that may be imposed as an
alternative to a holdback requirement.  The letter says that the proposal should
take into account the concern expressed that reform of money market funds may
result in outflows from money market funds to less-regulated parts of the cash
management industry.

Geithner contemplates that FSOC would make a recommendation to the SEC for new
or heightened standards and safeguards under Section 120 of the Dodd-Frank Act. 
Section 120 requires public notice and comments prior to the recommendation. 
The SEC then "shall impose the standards," unless it explains in writing within
90 days why the agency has determined not to follow the recommendation of FSOC. 
It is not entirely clear whether the SEC would need to conduct its own notice
and comment process.  In any case, the SEC has something of a practice of not
meeting statutory deadlines for rulemaking activity.

Geithner's letter addresses the possibility that the SEC may be unwilling to act
in a timely and effective manner.  He notes that FSOC has the authority to
designate any nonbank financial company that could pose a threat to U.S.
financial stability.  Alternatively, he suggests, FSOC's authority to designate
systemically important payment, clearing, or settlement activities under Title
VIII of the Dodd-Frank Act could enable the application of heightened risk
management standards on an industry-wide basis.  Geithner did not mention that
"payment, clearing, or settlement activity"  is defined not to include any offer
or sale of a security under the Securities Act of 1933, which would seem to make
it difficult to include money market funds.

Geithner also indicated that bank regulatory agencies should evaluate their
authorities to impose capital surcharges on regulated entities that sponsor
money market funds, or restrict financial institutions' ability to sponsor,
borrow from, invest in, and provide credit to money market funds that do not
have structural protections.  This suggestion sounds quite ominous for
bank-affiliated money market funds, and it would not involve the SEC or require
aggressive interpretations of statutory law.  Additionally, he said, the
potentially destabilizing role of money market funds in the tri-party repo
market should be carefully assessed as part of the ongoing efforts to improve
the safety, soundness, and resiliency of that market.

Gallagher's comments were made in a Bloomberg interview published today, in
which he said that requiring money funds to have a fluctuating share price "is
an attractive option that I am likely to support."  He said he couldn't vote for
Schapiro's plan because its centerpiece was to make money market funds hold
extra capital, with floating NAVs only a secondary alternative.  He also had the
interesting comment that "This whole exercise has been about the role that money
market funds play in the short-term funding markets on which banks rely,
something that FSOC members are very concerned about.  It was never really about
investors."


Geithner's letter is available online at

http://online.wsj.com/public/resources/documents/Sec.Geithner.Letter.To.FSOC.PDF

For the Bloomberg interview with Gallagher, see

http://www.bloomberg.com/news/2012-09-27/sec-s-gallagher-calls-for-floating-pric\
e-for-money-market-funds.html

My last post on money market fund reform, including the Gallagher-Paredes
statement, is at

http://groups.yahoo.com/group/FundLaw/message/1358



John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw

The Financial Stability Oversight Council on Tuesday released Proposed
Recommendations Regarding Money Market Mutual Fund Reform (Nov. 2012).  The
proposed recommendations were issued under Section 120 of the Dodd-Frank Act,
which authorizes FSOC to determine that a financial activity or practice could
create or increase the risk of significant liquidity, credit, or other problems
and to issue recommendations for more stringent regulation to the primary
financial regulatory agency; the primary regulatory agency in this case would be
the Securities and Exchange Commission.  FSOC proposes to determine that money
market funds' activities and practices could create or increase these risks and
to recommend three alternative reforms to money market funds.  These reforms
could be adopted in the alternative, in which case a money market fund could
choose which reform applied to it.  FSOC also requests comments on other
possible reforms, including liquidity fees and gates.

FSOC is fairly candid in acknowledging the destructive impact these
recommendations would have on the money market fund industry.  It believes that
the activities and practices of money market funds that have made them appealing
to investors also contribute to their vulnerability to runs, and that reforms
that would provide meaningful mitigation of the risks posed by money market
funds would likely reduce their appeal to investors by altering one or more of
their attractive features.


Floating Net Asset Value

This reform would require money market funds to value their portfolios as other
mutual funds do, without using amortized cost or penny rounding.  Each money
market fund would re-price its shares to $100.00 per share, in order to be more
sensitive to fluctuations in the fund's net asset value per share.  In addition,
this reform would involve the rescission of Rule 22e-3, which allows a money
market fund to suspend redemptions and begin an orderly liquidation if the fund
has broken or is about to break the buck, and Rule 17a-9, which allows
affiliates of a money market fund to purchase portfolio securities from the fund
in order to support the fund's stable price per share.  The recommendations do
not address whether the SEC would be able to issue no-action letters allowing
sponsor support of money market funds, although FSOC seems to think that all
forms of sponsor support would be unnecessary.  Existing money market funds
could be grandfathered and allowed to maintain a stable NAV for a phase-out
period, potentially lasting five years.

The recommendations acknowledge that floating-NAV money market funds still would
be vulnerable to runs, particularly if they continue to be used as a cash
management product.  They also acknowledge that moving to a floating NAV may
cause the money market fund industry's assets under management to contract,
which would diminish the funds' capacity to invest in the short-term securities
of financial institutions, businesses, and governments, and that if the
transition to the floating NAV prompted investors to redeem suddenly and
substantially, the transition itself could create financial instability.


NAV Buffer and Minimum Balance at Risk

A second reform alternative would require that money market funds (other than
Treasury funds, which would be exempt) (i) maintain an NAV buffer, which would
be a tailored amount of assets in excess of those needed for a fund to maintain
its $1.00 share price and which would absorb day-to-day fluctuations in the
value of the fund's portfolio securities, and (ii) apply a minimum balance at
risk requirement to shareholders.  The NAV buffer would be calculated as
follows:  no buffer requirement for cash, Treasury securities, and Treasury
repos; a 0.75% buffer requirement for other daily liquid assets (or for weekly
liquid assets, in the case of tax-exempt funds); and a 1.00% buffer requirement
for all other assets.  To fund the buffer, a money market fund sponsor could
contribute assets to an escrow account pledged to support the fund's NAV; a fund
could issue a class of subordinated, nonredeemable equity securities that would
absorb first losses in the fund's portfolio and that could be sold to third
parties or purchased by a fund's sponsor or affiliates; or a fund could retain
some earnings it otherwise would distribute to shareholders.  FSOC notes that
the second and third options would require the SEC to amend Rule 2a-7 to allow
funds to maintain a $1.00 NAV even when the value of the fund's assets is above
$1.00.  Half the buffer would be required to be in place one year after the
effective date of any rule, and the full required buffer in two years after the
effective date.

The NAV buffer would be coupled with a requirement that 3% of any shareholder's
highest account value in excess of $100,000 during the previous 30 days (the
shareholder's minimum balance at risk, or MBR) be available for redemption only
with a 30-day delay.  The MBR requirement would apply to each record holder,
including financial intermediaries, unless the intermediaries provide the fund
sufficient information to apply the requirement to the intermediaries'
individual customers directly.  If an investor with an MBR chose to redeem all
(or nearly all) its shares, the fund would be required to delay redemption of
the MBR for 30 days, during which time the MBR would be subordinated to other
investors.  In addition, a portion of an investor's MBR could be subordinated if
the investor had made net redemptions in excess of $100,000 during the prior 30
days, with the extent of subordination approximately proportionate to the
shareholder's cumulative net redemptions during the prior 30 days.  In the event
that a fund suffered losses in excess of its NAV buffer, losses would first be
absorbed by the subordinated portions of shareholders' minimum balances at risk,
then by the remaining portions of investors' minimum balances at risk, and only
then allocated proportionally among the remaining shares in the fund.  Money
market funds would be required to file as exhibits to their registration
statements plans of liquidation providing for the liquidation of their assets in
accordance with these priorities.

The recommendations again acknowledge that this alternative would make money
market funds less appealing to investors in a number of respects, and that these
considerations could reduce the size and assets of the money market fund
industry as funds exit the market to avoid the NAV buffer and MBR requirements
or as investors choose other investment vehicles.

NAV Buffer and Other Measures

The third reform alternative would incorporate a larger NAV buffer requirement
with several additional measures.  There would be no buffer requirement for
cash, Treasury securities, and Treasury repos; a 2.25% buffer requirement for
other daily liquid assets (or for weekly liquid assets, in the case of
tax-exempt funds); and a 3.00% buffer requirement for all other assets. 
Treasury funds again would be exempt from the requirement.  The NAV buffer
requirement would be phased in over a multi-year transition period, with
one-sixth of the total amount effective after one year and one-third of the
total amount effective after two years.

This alternative also contemplates several complementary additional measures. 
First, the existing diversification requirement, which requires that most money
market funds limit their exposure to a single issuer to 5% of their assets,
could be strengthened by reducing the 5% limitation by some unspecified amount
and by extending the limit to cover an issuer's affiliates.  Second, the minimum
liquidity levels could be increased by raising the required level of daily
liquidity from the current level of 10% to 20%, and the minimum weekly liquidity
requirement from the current level of 30% to 40%.  Tax-exempt funds would remain
exempt from the daily liquidity requirement.  Third, the level or frequency of
required disclosures of portfolio holdings could be enhanced and the current
delay before public disclosure could be reduced or eliminated.

The recommendations acknowledge that this reform option, and particularly the
larger NAV buffer, would likely impose additional costs on money market funds or
the sponsors who would need to raise the capital.  However, this alternative
apparently is seen as being less harmful to the money market fund industry than
the other two reform alternatives, which have more emphatic discussion of the
negative effects on the industry's assets under management.


Comments on the proposed recommendations will be due 60 days after publication
in the Federal Register.  FSOC will then consider the comments and may issue a
final recommendation to the SEC.  The SEC then is required by the Dodd-Frank Act
to impose the recommended standards, or similar standards that FSOC deems
acceptable, or explain in writing to FSOC within 90 days why it has determined
not to follow the recommendation.  If the SEC accepts the FSOC recommendation,
FSOC expects that the SEC would implement the recommendation through a
rulemaking, subject to public comment, that would consider the economic
consequences of the implementing rule as informed by the SEC staff's own
economic study and analysis.

Now, the striking thing about that process is its complete impossibility.  It is
beyond the bounds of plausibility that the SEC could conduct an economic study
and analysis, write and issue a rulemaking proposal, receive and analyze public
comments, and write and adopt final rules, all within 90 days.  However, FSOC
also states that if the SEC moves forward with meaningful structural reforms of
money market funds before FSOC completes its Section 120 process, FSOC expects
that it would not issue a final Section 120 recommendation to the SEC.  Renewed
attention by the SEC, apparently, is the option that FSOC considers most
promising.  It is possible that FSOC also hopes that the rather onerous nature
of some of its reform options would make an SEC reform more appealing to the
industry.


The FSOC press release, with a link to the proposed recommendations, is
available at

http://www.treasury.gov/press-center/press-releases/Pages/tg1764.aspx

For my post on Treasury Secretary Timothy Geithner's September letter
preliminarily outlining the options now proposed by FSOC, see

http://groups.yahoo.com/group/FundLaw/message/1361



John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw

Norm Champ, Director of the Division of Investment Management at the Securities
and Exchange Commission, on Thursday gave a speech on the current work of the
SEC staff on initiatives relating to investment advisers.  This kind of broad
update was a frequent feature in the past, but more recently has been less
frequently seen.

Derivatives:  The most notable update was an announcement that the staff will
again consider exemptive requests under the Investment Company Act of 1940
relating to actively managed exchange-traded funds that make use of derivatives.
ETFs seeking exemptive orders to allow the use of derivatives must represent (i)
that the ETF's board periodically will review and approve the ETF's use of
derivatives and how the ETF's investment adviser assesses and manages risk with
respect to the ETF's use of derivatives; and (ii) that the ETF's disclosure of
its use of derivatives in its offering documents and periodic reports is
consistent with relevant Commission and staff guidance.  The staff announced in
March 2010 that it would defer consideration of exemptive requests from certain
actively-managed and leveraged ETFs that particularly rely on swaps and other
derivative instruments to achieve their investment objectives, and the issuance
of such exemptive orders has been on hold since then.  Because of concerns
regarding leveraged ETFs, the staff continues not to support new exemptive
relief for them.  Subsequent to Champ's speech, the staff issued an announcement
that it would not recommend enforcement action if actively-managed ETFs
operating in reliance on certain existing orders invest in options contracts,
futures contracts or swap agreements, provided that they comply with the
representations stated above.  My colleagues at Stradley Ronon Stevens & Young,
LLP have produced a Fund Alert on the SEC's change of position on derivatives,
and it is linked below.

JOBS Act:  The Jumpstart Our Business Startups Act required the SEC to revise
its rules to provide that the prohibition against general solicitation or
general advertising shall not apply to offers and sales of securities made
pursuant to Rule 506 of Regulation D, provided that all purchasers of the
securities are accredited investors.  The SEC proposed implementing rule changes
on August 29, but the proposal has proved highly controversial, both because of
its lack of investor protections and because it was initially intended to be an
interim final rule, but was changed to a conventional proposal shortly before
the open meeting to propose it.  Champ noted that commenters have different
views about the extent to which private funds should be permitted to advertise
publicly, and the staff is carefully reviewing those comments and considering
what recommendations to make to the Commission.  The addition of advertising
rules for private fund advisers is a change to the rule proposal particularly
sought by the Investment Company Institute.

(As an aside:  Patrick McHenry (R - NC), the Chairman of the House Subcommittee
on TARP, Financial Services and Bailouts of Public and Private Programs, on
November 30 wrote to SEC Chairman Mary Schapiro, criticizing the SEC's failure
to adopt an interim final rule and quoting internal emails to and from Meredith
Cross, Director of the SEC's Division of Corporation Finance, who supported
adopting an interim final rule.  The letter urged Schapiro to complete the
adoption of a final rule before she steps down from the SEC on December 14.  It
is now less than the statutorily required seven days for an open meeting notice,
and no open meeting notice has been posted, so there presumably will not be
another open meeting before Schapiro's departure.  The SEC announced on December
4 that Cross will leave the SEC at the end of the year.)

Uniform fiduciary standard:  The staff last year released a study recommending
that the SEC engage in rulemaking to implement a uniform fiduciary standard of
conduct for broker-dealers and investment advisers when they provide
personalized investment advice about securities to retail investors.  Champ said
that the staff has been working on a request for information and economic data
on this issue.

Private fund advisers:  Champ said that the staff has received inquiries
regarding the application of the investment adviser advertising rules and staff
positions to private fund advisers, especially in light of the JOBS Act, and how
certain provisions of the books and records rule apply to advisers of private
equity funds.  The staff is considering these and other issues raised by private
fund advisers and considering what action, if any, should be taken or
recommended to the Commission to address these questions.

Valuation:  Champ said that the staff believes there is a need to provide
additional guidance on valuation of securities held by registered investment
companies.  He noted that much has changed since the SEC last issued guidance
regarding valuation.

Conspicuously absent from Champ's speech:  Any reference to money market funds.


Champ's speech, which includes a link to the March 2010 press release on
derivatives, is available online at

http://www.sec.gov/news/speech/2012/spch120612nc.htm

The related no-action announcement is at

http://www.sec.gov/divisions/investment/noaction/2012/moratorium-lift-120612-etf\
.pdf

The Stradley Ronon Fund Alert on the SEC change of position on derivatives is at

http://www.stradley.com/newsletters.php?action=view&id=789

Rep. McHenry's letter to Chairman Schapiro has been posted to the SEC website at

http://www.sec.gov/comments/s7-07-12/s70712-192.pdf

A FundLaw post on the SEC's JOBS Act rule proposal is at

http://groups.yahoo.com/group/FundLaw/message/1359



John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw

The U.S. District Court for the District of Columbia has rejected a challenge to
the Commodity Futures Trading Commission's rule changes that will require some
investment advisers to registered investment companies to register as commodity
pool operators.  Investment Company Institute v. CFTC, No. 1:12-cv-00612 (D.D.C.
Dec. 12, 2012).  The Investment Company Institute and the U.S. Chamber of
Commerce brought the challenge in April, and the matter was currently pending
before the court on cross-motions for summary judgment, following a hearing on
October 5 and the completion of briefing on October 22.

Judge Beryl Howell, in a 93-page opinion, ruled that the plaintiffs had failed
to show that the CFTC acted arbitrarily and capriciously in adopting the rule
change.  The plaintiffs relied primarily on a criticism of the CFTC's
cost-benefit analysis, but the court ruled that the CFTC properly showed that
narrowing the exemption from CPO regulation would provide more transparency and
regulatory oversight of derivatives trading and that it considered and evaluated
the costs of the rule.  The court was particularly critical of the plaintiffs'
arguments that the CFTC could not reverse its 2003 broadening of the exemption,
which it called "myopic" and "even more vacuous upon examination," in light of
the 2008 financial crisis and the statutory changes made by the Dodd-Frank Act. 
Plaintiffs argued that investment companies are already thoroughly regulated by
the Securities and Exchange Commission, but the court wrote that the SEC and
CFTC have different regulatory authority and purposes, and that the mandate from
Congress in the Dodd-Frank Act to incorporate swaps into the definition of CPO
demonstrates the insufficiency of prior regulations.

The plaintiffs relied particularly on several recent cases from the D.C. Circuit
striking down SEC rulemakings.  The court distinguished those cases, ruling
that, unlike the SEC in those cases, the CFTC identified, considered, and
evaluated the costs and benefits of the rule.  The court also included a
footnote in which it cited several law review articles criticizing those cases,
particularly Business Roundtable v. SEC.

The plaintiffs will now have to consider whether to appeal to the D.C. Circuit
themselves.  In addition, the court ruled that some of the compliance
obligations challenged by the plaintiffs will not be fit for review until the
CFTC adopts its proposed harmonization rule changes, so there will be an
additional opportunity to challenge those obligations then, if the plaintiffs
decide to bring a second case.  Meanwhile, compliance with the CPO registration
requirement will be required by December 31, 2012.  The related recordkeeping,
reporting, and disclosure requirements will not apply until 60 days following
the effectiveness of the harmonization rule changes.  The CFTC staff has
indicated that those rule changes, when adopted, will likely be effective 60
days after publication in the Federal Register, so compliance with the CPO
recordkeeping, reporting, and disclosure requirements would be required 120 days
after the harmonization rule changes are published in the Federal Register.

The court's opinion is available online at

https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2012cv0612-42

My prior post on the lawsuit is at

http://groups.yahoo.com/group/FundLaw/message/1348

My post on the adoption of the CFTC rule changes is at

http://groups.yahoo.com/group/FundLaw/message/1343



John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw

A federal judge in New Jersey has refused to dismiss a complaint under Section
36(b) of the Investment Company Act of 1940 alleging excessive investment
advisory fees.  Kasilag v. Hartford Investment Financial Services, No.
1:11-cv-01083 (D.N.J. Dec. 17, 2012).  The court previously dismissed the case,
with leave to amend, as conclusory and unsupported, and the plaintiffs responded
with a second amended complaint setting out their allegations in much more
detail.  I have placed copies of the opinion and the second amended complaint on
the FundLaw website, although I did not include the expert's declaration
attached as an exhibit, as the court did not rely on it.

According to the complaint, the defendant fund adviser pays sub-advisers to
perform substantially all of the investment management services that it provides
to the funds at a fraction of the fee it charges for such services.  The
complaint alleged that the management fees the defendant charges its funds are,
on average, three times (and sometimes more than five times) the amount it pays
its sub-advisers for substantially the same services.  The complaint supported
the allegation with a table comparing the language in the sub-adviser contracts
with the similar language in the fund adviser's agreements.  The defendant
argued that it provides the funds with extensive administrative and investment
management services that are not delegated to the sub-advisers, but the court
ruled that this is a merits argument that is more appropriate at summary
judgment.

The court also addressed several other issues, including the complaint's
allegations that the funds' board of directors has not acted conscientiously in
approving the fund adviser's agreements.  The plaintiffs supported this
allegation with claims that the board members are responsible for overseeing all
85 mutual funds in the complex, a task that precludes them from assessing each
fund individually; that truly independent directors would not have approved the
management fees in light of the adviser's minimal services, economies of scale,
profitability, and exorbitant fees; that the fund adviser was the subject of an
SEC cease and desist proceeding regarding improper use of fund assets; and that
a comparison to the far lower fees charged by Vanguard for similar services is
evidence that the board should have known that the adviser's fees were
excessive.  The court ruled that, while these allegations are certainly not
dispositive, when taken together they create an inference that the board of
directors may not have adequately considered important facts when approving the
management fees, and the directors' approval requires somewhat less deference
than it would have had they diligently performed their watchdog role.

The court did dismiss, without prejudice, the plaintiffs' claims for excessive
Rule 12b-1 fees.  The plaintiffs alleged that both Class A and Class B
shareholders faced excessive 12b-1 fees.  The Class A allegations were sparse
and conclusory.  The court ruled that the plaintiffs lack Article III standing
(notwithstanding the existence of statutory standing) to challenge distribution
fees charged to Class B shares because none of the plaintiffs own shares in this
class.

The detailed complaint in this case is likely to be a model to future 36(b)
plaintiffs who seek at least to avoid dismissal before their case even reaches
discovery.  However, defendants will closely examine the court's ruling on
Article III standing to see to what extent it can apply to other situations and
serve to narrow plaintiffs' claims.

There seems to be a problem with links, and anything appearing after a link,
appearing properly on the FundLaw website.  If you are reading this on the web,
click on the Files link to the left and scroll down to "Kasilag".  (Free
registration with Yahoo Groups may be necessary to access the documents.)  For
email readers, you should be able to access the court's opinion and the second
amended complaint (again, with Yahoo Groups registration) at the links below.

http://groups.yahoo.com/group/FundLaw/files/KasilagvHartfordInvestment.pdf

http://groups.yahoo.com/group/FundLaw/files/KasilagvHartfordInvestmentSecondAmen\
dedComplaint.pdf



John M. Baker
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/FundLaw/

As widely reported, President Obama announced today that he will nominate Mary
Jo White to serve as a member of the Securities and Exchange Commission and will
designate her as the SEC's Chairman.  White will replace the current Chairman,
Elisse Walter, who has been serving only since December 15, 2012, after Mary
Schapiro stepped down from the post.  White is an experienced litigator and the
former U.S. Attorney for the Southern District of New York, which includes
Manhattan.  She became chair in 2002 of the litigation department of Debevoise &
Plimpton, where her practice concentrates on internal investigations and
criminal and civil defense of securities law violations.  She does not have
extensive regulatory experience, although her husband, John White, served as the
director of the SEC's Division of Corporation Finance from 2006 to 2008.  White,
who is 65, announced at Obama's press conference that today is their 43rd
anniversary.  The initial reaction to White's nomination has been broadly
positive from all sides.  However, there is little indication as yet of her
stands on major SEC regulatory issues.

Obama did not make any other nominations to the SEC, although Walter's term as a
commissioner expired June 5, 2012, and the term of Commissioner Troy Paredes
will expire June 5, 2013.  Possibly Obama plans to nominate replacements for
Walter and Paredes at the same time, to ease confirmation; Walter is a Democrat
and Paredes is a Republican.  Reuters indicates that White previously has been
identified as a political independent, like Schapiro before her.

Walter has not as yet indicated whether she plans to stay at the SEC until her
replacement is confirmed.  Usually SEC Chairmen who were named to that position
when first nominated do not choose to stay on after a different Chairman is
named, but commissioners who became Chairman on a short-term basis, as Walter
did, typically stay on after a new Chairman is named.  Although Walter's term as
a commissioner expired last year, she can continue to serve until the expiration
of this session of Congress (which will probably be in December), unless her
successor is appointed and has qualified prior to that time.  If White does stay
on, it may be easier for White to obtain a majority on split votes.

A transcript of President Obama's press conference is at

http://www.whitehouse.gov/the-press-office/2013/01/24/remarks-president-personne\
l-announcement

White's law firm biography is at

http://www.debevoise.com/attorneys/detail.aspx?id=26af1fa8-0acf-4ef5-9c3b-1f08b1\
aa7de0&type=showfullbio

The Reuters article on her nomination is at

http://www.reuters.com/article/2013/01/24/us-financial-regulation-nominations-id\
USBRE90N0M120130124


John M. Baker
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/FundLaw/

Two shareholders of a family of exchange-traded funds have brought suit against
the ETFs' investment adviser and trustees for allegedly excessive compensation
paid to an affiliated securities lending agent.  Laborers' Local 265 Pension
Fund v. iShares Trust, No. 3:13-cv-00046 (M.D. Tenn. filed Jan. 18, 2013).  The
plaintiffs argue primarily that the fee split, in which (they allege) the ETFs
receive 60% of securities lending income and the lending agent receives the
remaining 40%, results in a disproportionately large fee to an affiliate of the
ETF's investment adviser.  The plaintiffs seek relief under Section 36(b) of the
Investment Company Act of 1940, which provides a right of action for excessive
fund advisory compensation, as well as under Section 47(b), which provides a
right of rescission for contracts made in violation of the 1940 Act, and Section
36(a), which authorizes the SEC to bring actions for breach of fiduciary duty.

Securities lending is a common practice to increase investment returns.  An ETF,
mutual fund, or other institutional investor lends a security to a borrower,
which uses the lent security to meet its delivery obligation on a short sale or
to prevent a settlement failure.  The borrower makes payments to the lender in
the amount of any dividends or interest that the lender otherwise would have
received.  In addition, the loan is fully collateralized, and the lender invests
that collateral.  Depending on the demand for the lent security, there may also
be additional compensation paid to the lender, or the lender may rebate a
portion of the income from the collateral.  Most lenders use a lending agent
(often but not always the lender's custodian), which usually receives
compensation through a split of the securities lending revenues.

As far as I know, this is the first securities lending case to be brought by
fund shareholders.  Plaintiffs rely in part on a recent working paper, which
found that funds with sponsor-affiliated lending agents have lower returns on
lent securities.  John C. Adams, Sattar A. Mansi & Takeshi Nishikawa, Affiliated
Agents, Boards of Directors, and Mutual Fund Securities Lending Returns (Jan.
25, 2012).  Plaintiffs look primarily to Section 36(b) for their remedy and,
despite the novelty of the claim, there is a well-established framework for
evaluating claims for excessive advisory compensation under Section 36(b). 
Courts in recent years have been less willing to consider claims under other
provisions of the 1940 Act, including Sections 47(b) and 36(a).

I have placed the complaint on the FundLaw website (free registration with Yahoo
Groups may be required), and it is available at

http://groups.yahoo.com/group/FundLaw/files/LaborersLocal265viSharesTrustComplai\
nt.pdf

The article by Adams, et al., is available at

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1947503

An article in the Financial Times suggests that the agent's share typically is
from 10% or 20% to 40%.  BlackRock (the defendant in this case) is cited as
being at the higher end of the standard, but also as generating twice the market
average from its securities lending program:

http://www.ft.com/intl/cms/s/0/8af82100-4db2-11e1-b96c-00144feabdc0.html

Are agents' shares decreasing or staying the same?  Staying the same, according
to Financial News, which says that the average fee split has remained unchanged
since the early 1990s, with typically 15% to 30% retained by the custodian or
agent lender:

http://www.efinancialnews.com/story/2013-01-14/custodians-securities-lending-rev\
enue-split

Changing, says Securities Lending Times, which writes (on p. 12) that "I
remember 50:50 and 60:40 fee splits as common. Nowadays, 90:10 is common, and
the split can be even less if you are a big enough lender":

http://www.securitieslendingtimes.com/sltimes/SLTimes_issue_53.pdf


John M. Baker
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/FundLaw/

A FINRA hearing panel has ruled that FINRA rules contravene the Federal
Arbitration Act and are unenforceable to the extent that they forbid customer
agreements to waive the right to bring class actions.  Charles Schwab & Co.,
FINRA Disciplinary Proceeding No. 2011029760201 (Feb. 21, 2013).  The panel
interpreted the FINRA rules to preserve judicial class actions as an alternative
to arbitration, even when there is a pre-dispute arbitration agreement between a
FINRA member firm and its customer.  However, rules that override an agreement
to arbitrate and allow a party to an arbitration agreement to avoid arbitration
represent the kind of hostility to arbitration that the Supreme Court has found
unenforceable under the FAA, according to the panel, and these provisions of the
rules may not be enforced.

The panel also found, however, that the customer agreement violated FINRA rules
when it provided that arbitrators would have no authority to consolidate
parties' claims in arbitration.  FINRA rules preserve the right to have claims
consolidated, and this provision, the panel ruled, is not precluded by the FAA. 
Consolidated claims are not class actions or representative claims brought on
behalf of a group, but are similar individual claims brought by individual
claimants.  The panel ordered corrective action and a fine of $500,000, but did
not impose a censure.

The ruling naturally raises the question whether broker-dealers now can revise
their customer agreements and thereby avoid the risk of future customer class
actions.  FINRA's Department of Enforcement does have the right to appeal to the
National Adjudicatory Council, and it is also possible that a FINRA Governor
could call for further review by the Board of Governors.  If the Council or the
Board reverses the panel's ruling, there could also be further appeals to the
Securities and Exchange Commission and to a U.S. Court of Appeals.  It is far
from clear what the ultimate result of any appeals will be; the panel decision
itself acknowledges that the interplay of arbitration and class actions remains
controversial, and a forthcoming article in the Stanford Journal of Complex
Litigation argues that the Securities Exchange Act of 1934 trumps the
application of the FAA to FINRA rules.  Barbara Black & Jill I. Gross, Investor
Protection Meets the Federal Arbitration Act (2013).  It should also be noted
that the SEC has the authority, under Section 15(o) of the 1934 Act (as added by
the Dodd-Frank Act), to limit the use of arbitration agreements, if it finds
that such limitations  are in the public interest and for the protection of
investors.

The FINRA press release announcing the ruling, with a link to the ruling itself,
is at

http://www.finra.org/Newsroom/NewsReleases/2013/P209249

The forthcoming law journal article by Black & Gross is currently available as a
working paper, at

http://ssrn.com/abstract=2141978


John M. Baker
Stradley Ronon Stevens & Young, LLP
http://www.stradley.com<http://www.stradley.com/>
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/FundLaw/

The staff of the Securities and Exchange Commission has announced that reported
after-tax returns for mutual funds and exchange-traded funds must be adjusted to
reflect the 3.8% tax on net investment income that became applicable to some
taxpayers on January 1, 2013.  This affects fund advertising as well as required
disclosures in the fund prospectus.  The announcement was made on the SEC's web
page for Investment Management Staff Issues of Interest; unfortunately, the SEC
does not announce when this page has been revised, so announcements there are
easy to overlook.  The full staff announcement reads:


After-Tax Return
Effective January 1, 2013, the Health Care and Education Reconciliation Act of
2010 (Pub. L. No. 111-152, 124 Stat. 1029 (2010)) imposed on certain taxpayers a
3.8% tax on net investment income ("3.8% tax").

The staff recently was asked for its views on whether the 3.8% tax should be
included in determining the highest individual marginal federal income tax rate
used to calculate after-tax return required by Instructions 4 to both Item
26(b)(2) and (3) of Form N-1A. Since investors that are subject to the highest
marginal rate on taxable income (currently 39.6%) are also subject to the 3.8%
tax, we believe that registrants should include the 3.8% tax in after-tax return
calculations (e.g., use 43.4% as the highest individual marginal federal income
tax rate on ordinary income). Similarly, we believe that registrants should
include the 3.8% tax in calculating the tax on qualified dividend income and
long-term capital gains or any tax benefit resulting from capital losses
required by Instruction 7 to Item 26(b)(3) (i.e., use 23.8% as the highest
individual federal long-term capital gains tax rate, which is the sum of the
3.8% tax and the 20% maximum long-term capital gains tax rate). [February 22,
2013]


The announcement is available online at

http://www.sec.gov/divisions/investment/issues-of-interest.shtml#after-tax


John M. Baker
Stradley Ronon Stevens & Young, LLP
http://www.stradley.comhttp://www.stradley.com/>
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/FundLaw/

The Supreme Court ruled yesterday that there is no requirement to prove
materiality before certification of a class action under Rule 10b-5.  Amgen Inc.
v. Connecticut Retirement Plans & Trust Funds, No. 11-1085 (U.S. Feb. 27, 2013).
However, the victory for plaintiffs was tempered by hints of a larger victory
for defendants in the future, as several Justices suggested that it is time to
reconsider the fraud-on-the-market theory.  In a separate case, the Supreme
Court also ruled that the five-year limitations period for civil penalties in
enforcement actions brought by the Securities and Exchange Commission (and other
federal regulators) begins to run when the fraud occurs, not when it is
discovered.  Gabelli v. SEC, No. 11-1274 (Feb. 27, 2013).

Federal Rule of Civil Procedure 23(b)(3) requires that, for a class action to be
certified under that provision, the question of law or fact common to class
members must predominate over any questions affecting only individual members. 
In the Amgen case, the defendant argued that, to meet the predominance
requirement, certification must be denied unless the plaintiff proves
materiality, because immaterial misrepresentations or omissions, by definition,
would have no impact on the defendant's stock price in an efficient market.  The
circuits have split on the issue, with the Second Circuit supporting the
defendant's view and the Seventh and Ninth Circuits opposing it.  Justice
Ginsburg, writing for a 6 - 3 majority, ruled that, because materiality is
judged according to an objective standard that applies equally to all investors,
proof of materiality can wait until after a plaintiff class has been certified.

The plaintiff in the Amgen case, like the plaintiffs in most Rule 10b-5 cases,
relies on the fraud-on-the-market doctrine.  In a private cause of action under
Rule 10b-5, the plaintiff must prove reliance upon the misrepresentation or
omission.  Traditionally this requirement was met by showing that the plaintiff
was personally aware of the defendant's statement and engaged in a relevant
transaction based on that specific misrepresentation.  In 1988, however, the
Supreme Court, in a 4 - 2 vote (only six Justices participating), endorsed the
fraud-on-the-market theory, which recognizes a rebuttable presumption of
classwide reliance on public, material misrepresentations when shares are traded
in an efficient market.  Basic Inc. v. Levinson, 485 U.S. 224 (1988).  The
fraud-on-the-market theory facilitates the use of class actions in securities
fraud cases; the requirement to establish reliance otherwise would ordinarily
preclude certification of a class action, because individual reliance issues
would overwhelm questions common to the class.  In the Amgen case, four
Justices, including Justice Alito, who concurred in the majority opinion,
suggested that reconsideration of the fraud-on-the-market presumption may be
appropriate in a future case.  The majority opinion noted these views and did
not attempt to refute them, but noted that, since the defendant had conceded
that the market for its securities is efficient, the present case was a poor
vehicle for exploring the issue.

The tea leaves, then, plainly indicate that four Justices are willing, in an
appropriate case, to grant review of a case presenting the question whether the
fraud-on-the-market doctrine should be overturned, which would largely put an
end to securities fraud class actions under Rule 10b-5.  (It would not, however,
put an end to class actions brought under Sections 11 and 12 of the Securities
Act of 1933 for securities fraud involving public offerings of mutual funds and
other issuers, as those provisions do not include a reliance requirement.) 
What's more, none of the other five Justices even expressed an opinion on the
issue.  It would take only one of those five Justices to overturn the doctrine. 
Of course, it may take a while for an appropriate case to reach the Supreme
Court, and there is no assurance that the court would still have the same
membership at that time.

The Gabelli case involved the construction of 28 U.S.C. § 2462, which applies a
five-year statute of limitations to federal actions for civil penalties,
including SEC enforcement actions.  The SEC brought a civil enforcement action
six years after the defendants allegedly aided and abetted market timing, and
the Second Circuit ruled that the statute of limitations did not accrue until
the claim was discovered, or could have been discovered with reasonable
diligence, by the plaintiff.  The Supreme Court reversed in a unanimous opinion
by Chief Justice Roberts, ruling that a federal regulator's claim based on fraud
accrues, and the five-year clock of 28 U.S.C. § 2462 begins to tick, when a
defendant's allegedly fraudulent conduct occurs.  The court distinguished cases
in which the government is itself a defrauded party, in which case it does have
the benefit of the discovery rule.  The opinion noted that it did not address
the application of the fraudulent concealment doctrine, when the defendant takes
steps beyond the challenged conduct itself to conceal that conduct from the
plaintiff.  The ruling also does not apply to enforcement actions for injunctive
relief and disgorgement, which are not subject to a statute of limitations.

The opinion in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds is
available at

http://www.supremecourt.gov/opinions/12pdf/11-1085_9o6b.pdf

The opinion in Gabelli v. SEC is available at

http://www.supremecourt.gov/opinions/12pdf/11-1274_aplc.pdf


John M. Baker
Stradley Ronon Stevens & Young, LLP
http://www.stradley.comhttp://www.stradley.com/>
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/FundLaw/

The Securities and Exchange Commission and the Commodity Futures Trading
Commission have jointly adopted rules requiring affected entities to develop and
implement written identity theft prevention programs that are designed to
detect, prevent, and mitigate identity theft in connection with covered
accounts.  Release Nos. 34-69359, IA-3582, IC-30456 (Apr. 10, 2013).  The new
rules will apply to most investment companies, broker-dealers, and futures
commission merchants, some other regulated entities, and a surprisingly large
number of investment advisers.  In particular, the SEC expects most investment
advisers to private funds to be subject to the rules.   Most investment
companies and broker-dealers currently have identity theft prevention programs,
because they were required by Federal Trade Commission rules; the Dodd-Frank Act
transferred rulemaking and enforcement responsibilities to the SEC and the CFTC,
effective July 21, 2011, with respect to the entities subject to each agency's
enforcement authority.  Although investment advisers were similarly subject to
the FTC rules in theory, the FTC did not focus on investment advisers, which in
many cases will have to adopt an identity theft program for the first time.

The substantive rules, which are required by the Fair Credit Reporting Act, are
largely unchanged from the FTC rules, but the SEC and CFTC provided examples and
guidance on the rules' coverage in the adopting release.  Determining
applicability is a two-step process.  First, an entity must determine if it is a
"financial institution" or a "creditor," as those terms are defined in the FCRA.
If it is a financial institution or creditor, then it is required to determine
periodically if it offers or maintains "covered accounts" (i.e., accounts that
present a risk of identity theft or are personal accounts that permit multiple
transactions).  If it does offer or maintain covered accounts, then it must
develop and implement a written identity theft prevention program, sometimes
referred to as a "red flags" program because of the requirement to identify and
detect red flags.

For most SEC- and CFTC-regulated entities, the greater risk is that they are
"financial institutions."  A "financial institution" includes any person that,
directly or indirectly, holds a transaction account belonging to a consumer.  A
"transaction account" includes an account on which the account holder is
permitted to make withdrawals for the purpose of making payments or transfers to
third persons or others.  The SEC's examples include (i) a broker-dealer that
offers custodial accounts; (ii) a registered investment company that enables
investors to make wire transfers to other parties or that offers check-writing
privileges; and (iii) an investment adviser that directly or indirectly holds
transaction accounts and that is permitted to direct payments or transfers out
of those accounts to third parties.  In particular, a private fund adviser would
hold a transaction account if it has the authority to direct an investor's
redemption proceeds to other persons upon instructions received from the
investor.  The SEC estimates that all broker-dealers, open-end investment
companies, and employees' securities companies are likely to qualify as
financial institutions or creditors, as are most private fund advisers and about
16% of other investment advisers.  Of course, some of these entities will not
have to adopt a red flags program, if they determine that they have no consumer
accounts and are not at risk of identity theft.

While the CFTC adopted the rules seriatim, without a meeting, the SEC adoption
was at an open meeting chaired by Mary Jo White, who was sworn in as Chairman
earlier that morning.  I suppose that if you're going to have to chair an open
meeting an hour after you take office, at least let it be one with a unanimous
vote, as in this case.  All of the SEC Commissioners, including former Chairman
Elisse Walter, said that they looked forward to working with White.

The new rules will be effective 30 days after publication in the Federal
Register, and the compliance date will be six months after the effective date. 
If an entity already has a program in place that meets the requirements of the
final rules, its board is not required to reapprove the existing program.  The
adopting release is available online at

http://www.sec.gov/rules/final/2013/34-69359.pdf


John M. Baker
Stradley Ronon Stevens & Young, LLP
http://www.stradley.comhttp://www.stradley.com/>
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/FundLaw/

The Supreme Court has granted certiorari to consider whether the
anti-retaliation provisions of the Sarbanes-Oxley Act of 2002 extend protection
to employees of contractors or subcontractors of public companies.  Lawson v.
FMR LLC, No. 12-3 (cert. granted May 20, 2013).  The issue is of particular
importance to the fund industry, as almost all investment companies are public
companies covered by the statute, but most fund advisers and other service
providers are privately held.  This is just such a case, since the plaintiffs
are two employees of the adviser to the Fidelity family of funds.

Section 806 of the Sarbanes-Oxley Act, 18 U.S.C. § 1514A, provides a private
right of action for whistleblower employees of public companies who are the
subject of retaliation, and it also refers to contractors, subcontractors, and
agents of public companies, but it is not clear whether the right of action is
available only to public company employees or also extends to employees of the
contractors, subcontractors, and agents.  The key language reads, "No [public
company] . . . or any officer, employee, contractor, subcontractor, or agent of
such company . . . may discharge, demote, suspend, threaten, harass, or in any
other manner discriminate against an employee in the terms and conditions of
employment . . . ."

In the instant case, the U.S. Court of Appeals for the First Circuit ruled in a
2 - 1 decision written by Chief Judge Lynch that Congress intended to protect
only public company employees, and the references to contractors,
subcontractors, and agents means only that they too are forbidden to retaliate
against the public company employees.  The district court had taken the opposite
view, as did a long dissenting opinion by Judge Thompson.  The Administrative
Review Board of the Department of Labor subsequently rejected the First
Circuit's reasoning.

After the original briefing on the petition for certiorari, the Supreme Court
requested the views of the United States.  The Solicitor General took the view
that the First Circuit was in error, but that the question presented did not
warrant review at this time, since there is not yet a conflict between the
circuits.  The Court is apparently disinclined to wait.  An opinion is likely
sometime in the first half of 2014.

SCOTUSblog has a convenient page with links to the various filings before the
Supreme Court; the opinions below are included in the petition for certiorari,
as is the opinion of the Administrative Review Board in Spinner v. David Landau
and Associates:

http://www.scotusblog.com/case-files/cases/lawson-v-fmr-llc/


John M. Baker
Stradley Ronon Stevens & Young, LLP
http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413 phone
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/FundLaw/