Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The CFTC has proposed a rule to implement the so-called “end-user exception” to mandatory clearing of standardized swaps under the Dodd-Frank Act. Although the text of the rule has not been released, the CFTC has provided a fact sheet and Q&A outlining the major features of the rule.

Section 723 of the Act requires mandates such clearing, but provides an exception for swaps where one of the counterparties:

(i) is not a “financial entity”;
(ii) is using swaps to “hedge or mitigate commercial risk”; and
(iii) notifies the Commission, in a manner set forth by the Commission, how it “generally meets its financial obligations associated with entering into noncleared swaps.”

Financial Entities

“Financial entities” include swap dealers and major swap participants—the subject of a major joint rulemaking by the CFTC and SEC last week—as well as banks and certain other types of financial institutions.

Hedging or Mitigating Commercial Risk

Assuaging the fears of many end users in the energy, agricultural, and other industries, the Commission provided a broad and flexible definition of “hedging or mitigating risk.” The proposed definition would encompass any swap position that:
o qualifies as bona fide hedging under CEA rules;
o qualifies for hedging treatment under Financial Accounting Standards Board Accounting Standards Codification Topic 815, Derivatives and Hedging (formerly known as Statement No. 133); or
o is economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise, where the risks arise in the ordinary course of business from:
 a potential change in the value of (i) assets that a person owns, produces, manufactures, processes, or merchandises, (ii) liabilities that a person incurs, or (iii) services that a person provides or purchases;
 a potential change in value related to any of the foregoing arising from foreign exchange rate movements; or
 a fluctuation in interest, currency, or foreign exchange rate exposures arising from a person’s assets or liabilities.
The proposed definition of hedging or mitigating commercial risk would not encompass any swap position that is held for a purpose that is in the nature of speculation, investing, or trading.

Process for Notifying the CFTC of Use of the End-User Exception

The CFTC seems to have proposed a user-friendly process for notifying the Commission of how the end user claiming the exemption “generally meets its financial obligations” associated with noncleared swaps. Notice is to be provided through a swap data repository (“SDR”), if one is available, using a check-the-box approach. At the time a swap is executed, information regarding the methods used to mitigate counterparty credit risk in the absence of clearing, and other pertinent facts, such whether an affiliate or financial entity is involved, the identity of the end user, and a statement that the swap is being used for hedging purposes, would be provided to the SDR along with the other information about the swap itself that is provided to the SDR.

The proxy statements with required say-on-pay votes are starting to roll in.  Monsanto is a superb example.  The problem is, many issuers do not have the resources to match that standard.  Johnson Controls and Emerson Electric are good examples to follow for those with lesser resources.

 All three issuers have the board recommending a frequency vote be held every three years and do not appear to be intimidated by ISS’s policy of recommending a one year vote.

 The SEC proposed rules address the possibility that not all proxy tabulators will be able to handle the required four choices on the frequency vote.  Of the three proxy statements mentioned, only Johnson Controls omits the abstain choice, indicating continued uncertainty in this area for some.  As required by the proposed rules, Johnson Controls indicates that signed proxy cards returned without making a direction will not be voted.

 The SEC rules seem to require that the proxy statement say that the say-on-pay vote is required pursuant to Section 14A of the Exchange Act.  However, of these three proxy statements reviewed, only Emerson Electric makes that statement.

On another matter, none of these three proxy statements makes any sort of voluntary disclosure regarding the currently stayed proxy access Rule 14a-11.  I suspect that is the choice most issuers will make.

 Monsanto

 Say-on-Pay

 We are asking our shareowners to provide advisory approval of the compensation of our proxy officers, as we have described it in the “Executive Compensation” section of this proxy statement, beginning on page 30. While this vote is advisory, and not binding on our company, it will provide information to our people and compensation committee regarding investor sentiment about our executive compensation philosophy, policies and practices, which the Committee will be able to consider when determining executive compensation for the remainder of fiscal 2011 and beyond. Following is a summary of some of the key points of our 2010 executive compensation program. See the “Executive Compensation” section above for more information.  [Summary omitted.]

 Your vote is requested. We believe that the information we’ve provided above and within the Executive Compensation section of this proxy statement demonstrates that our executive compensation program was designed appropriately and is working to ensure management’s interests are aligned with our shareowners’ interests to support long-term value creation. Accordingly, the Board of Directors recommends that shareowners approve the program by approving the following advisory resolution:

 RESOLVED, that the shareowners of Monsanto Company approve, on an advisory basis, the compensation of the individuals identified in the Summary Compensation Table, as disclosed in the Monsanto Company 2010 proxy statement pursuant to the compensation disclosure rules of the SEC (which disclosure includes the Compensation Discussion and Analysis section, the compensation tables and the accompanying footnotes and narratives within the Executive Compensation section of this proxy statement).

 OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ADVISORY (NON-BINDING) VOTE APPROVING EXECUTIVE COMPENSATION

 Frequency

 In addition to the advisory approval of our executive compensation program, we are also seeking a non-binding determination from our shareowners as to the frequency with which shareowners would have an opportunity to provide an advisory approval of our executive compensation program. We are providing shareowners the option of selecting a frequency of one, two or three years, or abstaining. For the reasons described below, we recommend that our shareowners select a frequency of three years, or a triennial vote.

 Our executive compensation program is designed to support long-term value creation, and a triennial vote will allow shareowners to better judge our executive compensation program in relation to our long-term performance. As described in the Compensation Discussion and Analysis section above, one of the core principles of our executive compensation program is to ensure management’s interests are aligned with our shareowners’ interests to support long-term value creation. Accordingly, we grant awards with multi-year performance and service periods to encourage our proxy officers to focus on long-term performance, and recommend a triennial vote which would allow our executive compensation programs to be evaluated over a similar time-frame and in relation to our long-term performance.

 A triennial vote will provide us with the time to thoughtfully respond to shareowners’ sentiments and implement any necessary changes. We carefully review changes to our program to maintain the consistency and credibility of the program which is important in motivating and retaining our employees. We therefore believe that a triennial vote is an appropriate frequency to provide our people and compensation committee sufficient time to thoughtfully consider shareowners’ input and to implement any appropriate changes to our executive compensation program, in light of the timing that would be required to implement any decisions related to such changes.

 We will continue to engage with our shareowners regarding our executive compensation program during the period between shareowner votes. Engagement with our shareowners is a key component of our corporate governance. We seek and are open to input from our shareowners regarding board and governance matters, as well as our executive compensation program, and believe we have been appropriately responsive to our shareowners. We believe this outreach to shareowners, and our shareowners’ ability to contact us at any time to express specific views on executive compensation, hold us accountable to shareowners and reduce the need for and value of more frequent advisory votes on executive compensation.

 Your vote is requested. We therefore request that our shareowners select “Three Years” when voting on the frequency of advisory votes on executive compensation. Although the advisory vote is non-binding, our board will review the results of the vote and, consistent with our record of shareowner engagement, take them into account in making a determination concerning the frequency of advisory votes on executive compensation.

 OUR BOARD OF DIRECTORS RECOMMENDS SHAREOWNERS SELECT “THREE YEARS” ON THE PROPOSAL RECOMMENDING THE FREQUENCY OF ADVISORY VOTES ON EXECUTIVE COMPENSATION

 Proxy Card

 THIS PROXY CARD, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED. IF NO DIRECTION IS MADE BUT THE CARD IS SIGNED, THIS PROXY CARD WILL BE VOTED FOR THE ELECTION OF ALL NOMINEES UNDER PROPOSAL 1, FOR PROPOSAL 2, FOR PROPOSAL 3, FOR 3 YEARS FOR PROPOSAL 4 AND FOR PROPOSAL 5 AND IN THE DISCRETION OF THE PROXIES WITH RESPECT TO SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.

 Johnson Controls

 Say-on-Pay

The Company seeks your advisory vote on our executive compensation programs. The Company asks that you support the compensation of our named executive officers as disclosed in the Compensation Discussion and Analysis section and the accompanying tables contained in this Proxy Statement. Because your vote is advisory, it will not be binding on the Board or the Company. However, the Board will review the voting results and take them into consideration when making future decisions regarding executive compensation.

 The Company has in the past sought approval from shareholders regarding the incentive plans that we use to motivate, retain, and reward our executives. Those incentive plans, including the Annual Incentive Performance Plan, Long-Term Incentive Performance Plan, Stock Option Plan, and Restricted Stock Plan make up a majority of the pay that the Company provides to our executives. Over the years, the Company has made a number of changes to its disclosures concerning executive compensation, as well as to its executive compensation programs, in response to shareholder input, including a number of enhancements mentioned in this proxy statement.

Our company has had a long-standing tradition of delivering performance results for our shareholders, customers, and the community. We are one of the largest 100 companies in the United States (based on revenue) with operations in more than 60 countries throughout the world, and we generate over 60% of our net sales outside of the United States. The executive compensation programs have played a material role in our ability to drive strong financial results and attract and retain a highly experienced, successful team to manage our company. Until the global economy experienced the dramatic financial downturn, our company achieved 62 consecutive years of sales growth and 18 consecutive years of earnings growth, and 33 consecutive years of dividend increases.

 Our executive team has successfully managed our company through the recent dramatic economic downturn. For the fiscal year ending September 30, 2010, we grew our revenues by over 20% and our earnings by over 300%, resulting in the second most profitable year in terms of operating income in the history of the Company. Our company is again poised to continue its long-standing tradition of excellence and delivering performance results for our shareholders, our customers, and the communities we operate in and to provide a diverse and engaged workforce.

 We believe that our executive compensation programs are structured in the best manner possible to support our company and our business objectives, as well as to support our culture and traditions that have been around for over 125 years.

  •  Our compensation programs are substantially tied into our key business objectives and the success of our shareholders. If value we deliver to our shareholders declines, so does the compensation we deliver to our executives. 
  • We maintain the highest level of corporate governance over our executive pay programs. 
  • We closely monitor the compensation programs and pay levels of executives from companies of similar size and complexity, so that we may ensure that our compensation programs are within the norm of a range of market practices 
  • Our Committee, our Chairman and Chief Executive Officer, and our head of Human Resources engage in a rigorous talent review process annually to address succession and executive development for our CEO and other key executives. 

 THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE COMPANY’S COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS AS DISCLOSED IN THE COMPENSATION DISCUSSION AND ANALYSIS SECTION AND THE ACCOMPANYING COMPENSATION TABLES CONTAINED IN THIS PROXY STATEMENT.

 Frequency Vote

 The Company would also like to seek your input with regard to the frequency of future shareholder advisory votes on our executive compensation programs. In particular, we are asking whether the advisory vote should occur every three years, every two years or every year. The Company asks that you support a frequency period of every three years (a triennial vote) for future non-binding shareholder votes on compensation of our named executive officers.

 A shareholder advisory vote on executive compensation is very important to the Company. We appreciate the past approval of our incentive pay programs by our shareholders, which have historically occurred every five years. This has served both our company and our shareholders well, ensuring a direct alignment between executive compensation and financial performance results. Setting a three year period for holding this shareholder vote will enhance shareholder communication by providing a clear, simple means for the Company to obtain information on investor sentiment about our executive compensation philosophy. An advisory vote every three years will be the most effective timeframe for the Company to respond to shareholders’ feedback and provide the Company with sufficient time to engage with shareholders to understand and respond to the vote results. The Company also believes a triennial vote would align more closely with the multi-year performance measurement cycle the Company uses to reward long-term performance. Our executive compensation programs are based on our long-term business strategy, which is more appropriately reflected with a three year timeframe.

 THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR A FREQUENCY OF “THREE YEARS” FOR FUTURE NON-BINDING SHAREHOLDER VOTES ON COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS.

 Emerson Electric

 Say-on-Pay

 Recently enacted federal legislation (Section 14A of the Exchange Act) requires that we include in this proxy statement a non-binding stockholder vote on our executive compensation as described in this proxy statement (commonly referred to as “Say-on-Pay”) and a non-binding stockholder vote to advise on whether the Say-on-Pay vote should occur every one, two or three years.

 We encourage shareholders to review the Compensation Discussion and Analysis on pages 17 to 29. Emerson’s long and consistent value creation over time is attributable to a rigorously-applied management process implemented over the years by successive teams of talented and committed executives. The Company’s executive compensation program underpins and reinforces this process and the performance it generates. We believe the program strikes the appropriate balance between utilizing responsible, measured pay practices and effectively incentivizing our executives to dedicate themselves fully to value creation for our stockholders. This balance is evidenced by the following:

  •  We provide a significant part of executive compensation in performance based incentives, including primarily performance shares. Payouts of performance shares are based on achievement of financial objectives over four years and are capped at 100 percent of the share awards. 
  • We have three-year award and payout cycles, rather than an annual award cycle, for performance shares, three-year award and vesting cycles for stock options, and no set award cycle for restricted stock awards, but with a minimum three-year cliff vesting. 
  • We respond to economic conditions appropriately, such as reducing base salaries and bonuses of the named executive officers in 2009, reflecting lower year-over-year results. 
  • We do not provide tax gross-ups to our named executive officers. 
  • We have no employment, severance or golden parachute agreements with any of our named executive officers and therefore, no excise tax gross-ups. 

 The Board strongly endorses the Company’s executive compensation program and recommends that the stockholders vote in favor of the following resolution:

 RESOLVED, that the stockholders approve the compensation of the Company’s named executive officers as described in this proxy statement under “Executive Compensation”, including the Compensation Discussion and Analysis and the tabular and narrative disclosure contained in this proxy statement.

 Because the vote is advisory, it will not be binding upon the Board or the Compensation Committee and neither the Board nor the Compensation Committee will be required to take any action as a result of the outcome of the vote on this proposal. The Compensation Committee will carefully consider the outcome of the vote when considering future executive compensation arrangements.

 Board Recommendation. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE COMPANY’S EXECUTIVE COMPENSATION.

 Frequency Vote

 As mentioned above, recently enacted legislation requires that we include in this proxy statement a separate non-binding stockholder vote to advise on whether the Say-on-Pay vote should occur every one, two or three years. You have the option to vote for any one of the three options, or to abstain on the matter.

 The Board has determined that an advisory vote on executive compensation every three years is the best approach for the Company based on a number of considerations, including the following:

  •  Our compensation program is designed to induce performance over a multi-year period. For example, as discussed in the Compensation Discussion and Analysis, performance share awards represent a significant part (45-55%) of the total compensation and 70-80% of the long-term compensation for named executive officers. Unlike many companies, Emerson awards performance shares every three years rather than annually, and the payout is based on a four-year performance period. Similarly, stock options are generally awarded every three years. A vote held every three years would be more consistent with, and provide better input on, our long-term compensation, which constitutes the majority of the compensation of our named executive officers; 
  • A three-year vote cycle gives the Board sufficient time to thoughtfully consider the results of the advisory vote and to implement any desired changes to our executive compensation policies and procedures; and 
  • A three-year cycle will provide investors sufficient time to evaluate the effectiveness of our short- and long-term compensation strategies and the related business outcomes of the Company. 

 Although the vote is non-binding, our Board of Directors will take into account the outcome of the vote when making future decisions about the Company’s executive compensation policies and procedures. The Company’s stockholders also have the opportunity to provide additional feedback on important matters involving executive compensation even in years when Say-on-Pay votes do not occur. For example, the rules of the New York Stock Exchange require the Company to seek stockholder approval for new employee equity compensation plans and material revisions thereto. As discussed under “Election of Directors — Corporate Governance,” the Company provides stockholders an opportunity to communicate directly with the Board, including on issues of executive compensation.

 Board Recommendation. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE TO CONDUCT AN ADVISORY VOTE ON EXECUTIVE COMPENSATION EVERY THREE YEARS.

 Proxy Card

 THIS PROXY WILL BE VOTED AS SPECIFIED AND IN THE DISCRETION OF THE PROXIES WITH RESPECT TO SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING. IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR THE NOMINEES IN PROPOSAL 1, FOR PROPOSALS 2, 3, 4 AND 5, FOR THREE (3) YEARS IN PROPOSAL 6, AND AGAINST PROPOSAL 7.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters

CFTC and SEC staff will hold a joint public roundtable on Friday, December 10, 2010, from 1:00 p.m. to 5:00 p.m., to discuss issues related to the capital and margin requirements required under Sections 731 and 764 of the Dodd-Frank Act for swap dealers, security-based swap dealers, major swap participants and major security-based swap participants.

Section 204(b) of the Investment Advisers Act of 1940  authorizes the SEC to require investment advisers to file applications and other documents through an entity designated by the SEC, and to pay reasonable costs associated with such filings.   In 2000, the SEC designated the Financial Industry Regulatory Authority Regulation, Inc., or FINRA, as the operator of the Investment Adviser Registration Depository, or IARD system.  At the same time, the SEC approved, as reasonable, filing fees.

 FINRA has written to SEC staff, recommending revised annual and initial IARD filing fees commence on January 1, 2011.  The new recommended fee levels would increase the fee for advisers with assets under management of $100 million or higher, but would not change the fee levels for advisers with assets under management under $100 million.  The recommended annual filing fees due beginning January 1, 2011 are $40 for advisers with assets under management under $25 million; $150 for advisers with assets under management from $25 million to $100 million; and $225 for advisers with assets under management of $100 million or higher.  The recommended initial IARD filing fees due beginning January 1, 2011 are $40 for advisers with assets under management under $25 million; $150 for advisers with assets under management from $25 million to $100 million; and $225 for advisers with assets under management of $100 million or higher.  Based on projections of expected revenues and expenses and taking into account an expected reduction in the number of advisers registered or reporting to the SEC as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC believes these revised fee levels would be reasonable, as the SEC projects that they will provide adequate funding to cover IARD system expenditures.  This reduction in fees is expected to reduce aggregate filing fees that SEC-registered advisers would incur by approximately $2 million annually compared to the filing fees that would be collected based on the fee levels established in 2000.  The revised filing fees will apply to all annual updating amendments filed by SEC-registered advisers beginning January 1, 2011 and to all initial applications for registration filed by advisers applying for SEC registration beginning January 1, 2011.

 An order approving the IARD filing fees will be issued unless the SEC orders a hearing. Interested persons may request a hearing by writing to the SEC’s Secretary. Hearing requests should be received by the SEC by 5:30 p.m. on December 21, 2010.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

CFTC Commissioner Bart Chilton issued this statement entitled “Statement on Position Limits, “Keeping Promises””:

 Yesterday the Commission held the sixth in a series of open meetings to address rules implementing the Wall Street Reform and Consumer Protection Act of 2010.  I commend the CFTC’s staff for working diligently on the myriad rules mandated by the Act, even now in the face of a pay freeze.  The staff of the CFTC truly exemplifies the meaning of “service” in the performance of their roles as dedicated public servants.

 I am concerned, however, with regard to the potential derailment of what I consider to be one of the most important rules required by the Reform Act:  implementation of speculative position limits.  Congress put special emphasis on this provision, to protect markets and consumers from excessive speculation in commodities markets.  Indeed, we were given a specific implementation date for position limits on energy and metals contracts—January 17, 2011—well in advance of the majority of other Reform Act rules.  We have a commitment to enact this rule on time, a “promise to keep,” with the American consumer who is affected daily by the prices discovered on commodities markets.

 The Commission had originally intended to discuss position limits at yesterday’s meeting; unfortunately, that did not occur.  Now, it appears that the Commission does not intend to address position limits at its next scheduled open meeting, on December 9, 2010.  This makes meeting the mandatory statutory deadline difficult, but certainly not impossible.

 The Reform Act was passed over four months ago—this provision isn’t a “surprise” to anyone.  It didn’t fall out of the sky.  Of course there are issues surrounding its implementation, but none of those excuse us from meeting the statutory requirements Congress has given us.   This proposal should be discussed on December 9th at the Commission’s next meeting; a proposal should be put out for public comment as soon as possible; and we should commit to meeting the statutory deadline.  We can always find excuses, justifications, or pretexts for inaction—this rule is too important to let any of those get in the way of fulfilling our statutory responsibilities, and keeping our promise.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The Dodd-Frank Wall Street Reform and Consumer Protection Act mandates that the CFTC and the SEC conduct a study on “the feasibility of requiring the derivatives industry to adopt standardized computer-readable algorithmic descriptions which may be used to describe complex and standardized financial derivatives.”  These algorithmic descriptions should be designed to “facilitate computerized analysis of individual derivative contracts and to calculate net exposures to complex derivatives.”  The study also must consider the extent to which the algorithmic description, “together with standardized and extensible legal definitions, may serve as the binding legal definition of derivative contracts.”  In connection with this study, the staff of the CFTC and SEC seek responses of interested parties on certain questions.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The Dodd-Frank Wall Street Reform and Consumer Protection Act established the Office of Financial Research and provides it with the authority to collect data to support the Financial Stability Oversight Council, or FSOC,  and to set standards for reporting such data.  To support the FSOC in identifying connections among market participants and monitoring systemic risk, the Office of Financial Research intends to standardize how parties to financial contracts are identified in the data it collects on behalf of the FSOC. The Office of Financial Research has issued a statement of policy regarding its preference to adopt through rulemaking a universal standard for identifying parties to financial contracts that is established and implemented by private industry and other relevant stakeholders through a consensus process.  The Office of Financial Research seeks comment on a statement of policy, including but not limited to the desired characteristics for a Legal Entity Identifier, or LEI, and the institutional arrangements for issuing and maintaining identifiers and associated reference data.

 The Need for a Universal Standard for Identifying Parties to Financial Contracts

Precise and accurate identification of legal entities engaged in financial transactions is important to private markets and government regulation.  In the private sector, data identifying counterparties support communication between systems, facilitate transaction processing, and allow for accurate aggregation of positions vis-a-vis individual or classes of counterparties, which is necessary for effective risk management and calculation of margin.  Sales, compliance, and due diligence functions also rely on unique identification of counterparties.  In the public sphere, correctly identifying parties to financial contracts is critical to assessing the connections among financial firms and to monitoring systemic risk.

 There is currently no universal system for identifying the legal entities that participate in financial markets.  In the absence of such a system, private firms and regulators have created a variety of identifiers.  This creates inefficiencies for firms and presents obstacles to regulators and policymakers.

 At private firms, because there is no industry-wide legal entity identification standard, tracking counterparties and calculating exposures across multiple data systems is complicated, expensive, and can result in costly errors.  For example, maintaining internal identifier databases and reconciling entity identification with counterparties is expensive for both large firms and small firms.  Complete automation of back-office activities remains elusive, in part because of the lack of a universal identifier for legal entities. In the worst case scenario, transactions are broken or fail to settle because counterparties have not been properly identified.

 The lack of a universal identification standard also poses problems for regulators and policymakers.  For example, precise identification of financial firms is necessary to evaluate whether a firm poses a systemic risk, which involves the assessments of the relationships among firms operating across a range of markets.  Indeed, the problems that firms face in aggregating exposure are magnified in measuring risk across the system.  In addition, securities regulators must often identify parents and affiliates of broker-dealers manually and by name.  Multiple and generally different identifiers for participants in securities trading make it difficult to create a consolidated order audit trail.

 Statement of Policy

 In support of the FSOC’s duties to identify and assess risks and potential threats to the stability of the U.S. financial system, the Office of Financial research, in consultation with the Chairperson of the FSOC, intends to establish requirements for reporting data on financial contracts to the Office of Financial Research that include a standardized way of identifying counterparties.

 In establishing such rules the Office of Financial Research would prefer to adopt a universal standard developed and implemented by the financial industry and other relevant stakeholders through a consensus process. In addition, the Office of Financial Research believes that participation of international standard setting bodies would be beneficial in developing a standard that can be used widely.

 If a LEI is established to the satisfaction the Office of Financial Research by July 15, 2011, the Office of Financial Research, in consultation with the Chairperson of the FSOC, plans to issue a regulation mandating the use of such a standard for data reported to the Office of Financial Research.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

On September 24, 2007, the SEC adopted, on an interim final basis, rule 206(3)-3T, a temporary rule under the Investment Advisers Act of 1940 that provides an alternative means for investment advisers who are registered with the SEC as broker-dealers to meet the requirements of section 206(3) of the Investment Advisers Act when they act in a principal capacity in transactions with certain of their advisory clients.  The purpose of the rule was to permit broker-dealers to sell to their advisory clients, in the wake of Financial Planning Association v. SEC (the “FPA Decision”), certain securities held in the proprietary accounts of their firms that might not be available on an agency basis — or might be available on an agency basis only on less attractive terms — while protecting clients from conflicts of interest as a result of such transactions.

 As initially adopted on an interim final basis, rule 206(3)-3T was set to expire on December 31, 2009.  In December 2009, however, the SEC adopted rule 206(3)-3T as a final rule in the same form in which it was adopted on an interim final basis in 2007, except that the SEC extended the rule’s sunset period by one year to December 31, 2010.  

 Under section 913 of the Dodd-Frank Act, the SEC is required to conduct a study, and provide a report to Congress, concerning the obligations of broker-dealers and investment advisers, including the standards of care applicable to those intermediaries and their associated persons. The SEC intends to deliver the report concerning this study, as required by the Dodd-Frank Act, no later than January 21, 2011. As part of this study and any rulemaking that may follow, the SEC expects to consider the issues raised by principal trading, including the restrictions in section 206(3) of the Investment Advisers Act and the SEC’s experiences with, and observations regarding, the operation of rule 206(3)-3T.

 Accordingly the SEC is proposing to amend rule 206(3)-3T only to extend the rule’s expiration date by two additional years.  If the rule is amended, absent further action by the SEC, the rule will expire on December 31, 2012.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The federal financial regulatory agencies issued final supervisory guidance on sound practices by financial institutions for real estate appraisals and evaluations.

 Financial institutions use reliable appraisals and evaluations to determine the value of collateral for mortgages and other loans; appraisals and evaluations are integral to institutions’ real estate lending.  Institutions base credit decisions primarily on borrowers’ ability to repay, but institutions also consider the value of real estate collateral as a secondary source of repayment.

 The Interagency Appraisal and Evaluation Guidelines, which replace 1994 guidelines, explain the agencies’ minimum regulatory standards for appraisals. The guidelines incorporate the agencies’ recent supervisory issuances on appraisal practices, address advancements in information technology used in collateral valuation practices, and clarify standards for the industry’s appropriate use of analytical methods and technological tools in developing evaluations.  Financial institutions should review their appraisal and evaluation programs to ensure they are consistent with the guidelines.

The guidelines emphasize that financial institutions are responsible for selecting appraisers and people performing evaluations based on their competence, experience, and knowledge of the market and type of property being valued.  Institutions should demonstrate the independence of their processes for obtaining property values, and adopt standards for appropriate communications and information-sharing with appraisers and people performing evaluations, according to the guidelines.

 In promoting sound credit decisions, the guidelines emphasize the importance of institutions maintaining strong internal controls to ensure reliable appraisals and evaluations.  Institutions also are responsible for monitoring and periodically updating valuations of collateral for existing real estate loans and for transactions, such as modifications and workouts, according to the guidelines.

 In implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the federal financial regulatory agencies will determine whether future revisions to the Guidelines may be necessary.  However, the regulatory agencies are issuing the Guidelines to promote consistency in the application and enforcement of the agencies’ current appraisal requirements and related supervisory guidance.   In finalizing the Guidelines, the agencies considered the Dodd-Frank Act, other federal statutory and regulatory changes affecting appraisals, and the public comment process.   The Guidelines are also responsive to the majority of comments, which expressed support for the proposal and confirmed that additional clarification of existing regulatory and supervisory standards serve to strengthen the real estate collateral valuation and risk management practices across insured depository institutions.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The Commodity Futures Trading Commission, or CFTC, will hold a public meeting on Thursday, December 9, 2010, to consider the issuance of proposed rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act on the following topics:

  • Core principles and other requirements for swap execution facilities;
  • End-user exception to mandatory clearing of swaps;
  • Business conduct standards with counterparties; and
  • Governance requirements for derivatives clearing organizations, designated contract markets and swap execution facilities, and additional requirements regarding the mitigation of conflicts of interest.

 In addition to these proposed rulemakings, the CFTC will consider the issuance of an interim final rule for reporting certain post-enactment swap transactions.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.