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

Title VII of the Dodd-Frank Act broadly requires many swap transactions to be subject to exchange trading and clearing requirements.  However, many end-users of swaps that use derivatives for legitimate hedging purposes are in many cases not subject to the clearing and exchange trading requirements.  It is anticipated most end-users will elect to enter into transactions that are not traded on an exchange or subject to clearinghouse requirements so as to avoid margin requirements and the like – although such economics may be passed along by a counterparty. 

 Section 723(b) of the Dodd-Frank Act (Section 2(j) of the Commodity Exchange Act) provides that a public company may not enter into non-cleared swaps unless an “appropriate committee of the issuer’s board or governing body has reviewed and approved its decision to enter into swaps that are subject to such exemptions.”  A public company is a company that has securities registered pursuant to Section 12 of the Securities Exchange Act or is required to file reports pursuant to Section 15(d) of the Securities Exchange Act.  As the CFTC rule making process progresses public companies who wish to avoid the exchange trading and clearing requirements should obtain the requisite authorization.

 A similar requirement for “approval by an appropriate committee” is included for security-based swaps under the SEC’s jurisdiction pursuant to Section 763 of the Dodd-Frank Act (Section 3C(i) of the Securities Exchange Act).

 It is also important to note that for pre-Dodd-Frank swaps, in order to not be subject to the clearing requirements, the swaps must be reported to a swap data depository, or SDR, under Section 723 of the Dodd-Frank Act (Section 2(h)(6) of the Commodity Exchange Act).  See our commentary here.  Likewise, those same provisions require reporting of post-Dodd-Frank swaps entered into before the clearing requirements become effective.  We recommend end-users discuss and document reporting obligations when entering into new swaps with their counterparties.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

The SEC has announced that it expects to issue proposed rules on say-on-pay during October 2010.  This rulemaking is important for public companies because Dodd-Frank mandates that all proxy statements for the first annual shareholders meeting held after January 21, 2011 include a say-on-pay proposal.

The SEC has been soliciting public comment prior to issuing proposed rules.  Comment letters received provide a window into issues the SEC is likely to address but not necessarily the outcome.  Some of the themes noted from the comment letters and suggested outcomes which we support were:

No Preliminary Proxy.   The SEC should exempt proxy statements containing say-on-pay votes from the requirement to file a preliminary proxy. The exemption should be broadly written so that even more narrow say-on-pay votes not required by Dodd-Frank should not require a preliminary proxy.  A preliminary proxy would serve no useful purpose and currently proxy statements with executive compensation proposals do not require a preliminary proxy.  (See American Bar Association (“ABA”); Compensia; Society of Corporate Secretaries (“SCS”))

Form of Resolution.  Provide guidance on the form of resolution in the same manner as the TARP rule. The say-on-pay vote should be clearly based on the information in the Compensation Discussion and Analysis. (See Compensia)

Provide Guidance on What Disclosures Are Required.  The SEC should make it clear that an issuer does not have an obligation to state what action is intended is a negative vote is received.  (See ABA; Compensia)

Is the Required Vote on Frequency of Say-on Pay Binding or Nonbinding? Some believe the statute can be read both ways.  Section 14A(c) of the Exchange Act (Section 951 of the Dodd-Frank Act) is clear the vote is non-binding.  (See ABA)

Can the Board Select a Frequency of One, Two or Three Years?  Or does Dodd-Frank require the three alternatives be submitted to shareholders? A better reasoned approach is management should be able to select an alternative and if that is not approved the default rule would require a one year vote.  (See ABA; Center on Executive Compensation (“CEO”); Frederic W. Cook)  Depending on where the SEC comes out on this one, other issues arise, such as how to determine what alternative passes if there are multiple alternatives.  In addition, modifications to Rule 14a-4, which governs the form of proxy card may be required.  Finally, vote tabulators such as transfer agents may not be able to handle novel voting requirements on short notice.

Follow the TARP Model.  The model allows flexibility to discuss the text of the proposal and why shareholders should approve the resolution.  It reduces an issuer’s uncertainty as to what is permitted.  TARP recipients should be permitted to have a single vote satisfying both requirements. (See SCS; CEO).

Role of Proxy Advisory Firms.  The one-size-fits-all approach to proxy advisory firms is problematic and the advisory firms frequently make mistakes when analyzing individual compensation plans. (See SCS)

No Shareholder Proposals on Frequency of Vote.  The statute provides the opportunity for shareholders to provide input and further shareholder proposals would be disruptive. (See CEO)

Readers may find our growing inventory of say-on-pay resources helpful:

—Preparing for Say-on-Pay

—Example of a Say-on-Pay Vote

—NYSE Rule on Broker Voting

—NASDAQ Rule on Broker Non-Voting

The Dodd-Frank Wall Street Reform and Consumer Protection Act amended Section 19 of the Exchange Act, 15 U.S.C. 78s(b)(2), so that there are new deadlines by which the SEC must publish and act upon proposed rule changes submitted by self regulatory organizations, or SROs. In recognition of the amendments to Section 19, the SEC is amending its rules governing delegations of authority to the Director of the Division of Trading and Markets.  The delegation is intended to conserve SEC resources and facilitate timely and effective compliance with the amendments to Section 19 of the Exchange Act and the new statutory deadlines prescribed therein.

The authority delegated to the Director of the Division of Trading and Markets includes authority:

  • to disapprove a proposed rule change pursuant to Section 19(b) of the Exchange Act;
  • to temporarily suspend a proposed rule change of an SRO;
  • to notify an SRO that a proposed rule change does not comply with the rules of the SEC relating to the required form of a proposed rule change; and
  • to determine that a proposed rule change is unusually lengthy and complex or raises novel regulatory issues and to inform the SRO of such determination.

In addition, the SEC is amending its rules to delegate to the Director of the Division of Trading and Markets authority:

  • to determine the appropriateness of extending the time periods specified in Section 19(b) of the Exchange Act and publish the reasons for such determination as well as to effect any such extension;
  •  to update the references to proceedings to determine whether to disapprove a proposal and to provide to the SRO notice of the grounds for disapproval under consideration;
  • to find good cause to approve a proposal on an accelerated basis and to publish the reasons for such determination; and
  • to extend the period for consideration of a national market system plan or an amendment to such plan.

Check dodd-frank.com frequently for the latest news relating to the Dodd-Frank Act. including updates on SEC rule making, implementation of the Act, and analysis of the Act’s impact on the financial regulatory markets.

The SEC has posted a Sunshine Act Notice related to an open meeting to be held on October 13, 2010.  The following matters will be addressed:

  • The SEC will consider whether to adopt an interim final temporary rule under Section 766 of the Dodd-Frank Wall Street Reform and Consumer Protection Act to provide for the reporting of certain security-based swap transactions and including an interpretive note regarding retention and recordkeeping requirements for certain security-based swap transactions.  The CFTC has recently adopted a rule on a similar topic.  See our commentary here and here.
  •  The SEC will consider whether to propose Regulation MC pursuant to Section 765 of the Dodd-Frank Act to mitigate conflicts of interest at security-based swap clearing agencies, security-based swap execution facilities, and national security exchanges that post or make available for trading security-based swaps.  The CFTC has recently proposed a rule on a similar topic.  See our analysis here.
  •  The Commission will consider whether to propose rules that would implement Section 945 of the Dodd-Frank Act, which requires an issuer of asset-backed securities, or ABS, to perform a review of the assets underlying the ABS and disclose information relating to the review. The Commission will also consider whether to propose rules that would implement Section 15E(s)(4)(A) of the Exchange Act as added by Section 932 of the Dodd-Frank Act, which requires an ABS issuer or underwriter to make publicly available the findings and conclusions of any third-party due diligence report.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

We previously reported on the CFTC’s Interim Final Rule for reporting Pre-enactment Swap Transactions.  Since that time, the text of the CFTC Rule 44.00 has been published in the Federal Register and is immediately effective.

Must I Report a Swap or Preserve Data?

We have been asked by our clients who use swap transactions for hedging purposes whether they need to report the transaction or preserve data as set forth in the rule.  The rule provides:

  • with respect to a swap in which only one counterparty is a swap dealer or major swap participant, that entity is responsible for reporting the swap;
  • with respect to a swap in which one counterparty is a swap dealer and the other counterparty is a major swap participant, the swap dealer must report the swap; and
  • with respect to any other swap, the counterparties shall select one of them to report the swap.

To determine whether you must report and preserve data, you must review the definitions referenced in the rule that were established by the Dodd-Frank Act.

The term “swap dealer” means any person who (i) holds itself out as a dealer in swaps; (ii) makes a market in swaps; (iii) regularly enters into swaps with counterparties as an ordinary course of business for its own account; or (iv) engages in any activity causing the person to be commonly known in the trade as a dealer or market maker in swaps, provided however, in no event shall an insured depository institution be considered to be a swap dealer to the extent it offers to enter into a swap with a customer in connection with originating a loan with that customer.    The term “swap dealer” does not include a person that enters into swaps for such person’s own account, either individually or in a fiduciary capacity, but not as a part of a regular business.  In addition, the Dodd-Frank Act directs the CFTC to exempt from designation as a swap dealer an entity that engages in a de minimis quantity of swap dealing in connection with transactions with or on behalf of its customers.  Currently, there is significant uncertainty as to how final regulations will put a gloss on this definition.

The term major swap participant means any person who is not a swap dealer, and (i) maintains a substantial position in swaps for any of the major swap categories as determined by the CFTC, excluding (I) positions held for hedging or mitigating commercial risk; and (II) positions maintained by any employee benefit plan (or any contract held by such a plan) as defined in paragraphs (3) and (32) of section 3 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002) for the primary purpose of hedging or mitigating any risk directly associated with the operation of the plan; (ii) whose outstanding swaps create substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets; or (iii) (I) is a financial entity that is highly leveraged relative to the amount of capital it holds and that is not subject to capital requirements established by an appropriate Federal banking agency; and (II) maintains a substantial position in outstanding swaps in any major swap category as determined by the CFTC.

Given the expansive definitions, and the unfinished state of rule making, many would be well advised to preserve data until there is more clarity in the situation.  Occasional swap participants can contact their counterparties to see if they will be considered swap dealers required to report and preserve data.  If there is any doubt, data should be preserved.

What Data Must be Preserved?

The explanatory note to Rule 44.00 adopted by the CFTC is stark and simple.   It states “Each counterparty to a pre-enactment unexpired swap transaction that may be required to report such transaction shall retain, in its existing format, all information and documents, to the extent and in such form as they presently exist, relating to the terms of a swap transaction.”  Specifically, this should include:

  • Any information necessary to identify and value the transaction;
  • The date and time of execution;
  • Information related to the price of the transaction;
  • Whether the transaction was accepted for clearing and if so, the identity of the clearing organization;
  • Any modification(s) to the transaction; and
  • The final confirmation of the transaction.

 Who is the Swap Reported To?

Rule 44.02(a) requires that the designated counterparty to a pre-enactment unexpired swap transaction submit, with respect to such transaction, the following information to a registered swap data repository, or SDR, or to the CFTC: (i) a copy of the transaction confirmation in electronic form, if available, or in written form if there is no electronic copy; and (ii) if available, the time the transaction was executed.  In addition, Rule 44.02(b) provides that a counterparty to a pre-enactment unexpired swap transaction must report to the Commission on request any information relating to such transaction during the time that this interim final rule is in effect.

The Dodd-Frank Act establishes that its reporting provisions were effective immediately upon enactment of the Dodd-Frank Act, despite the fact that at this time (i) there are no registered SDRs to immediately accept the swap data; (ii) the CFTC is not prepared to accept swap data; and (iii) the CFTC has not adopted rules governing either the registration of swap dealers or major swap participants or the reporting and maintenance of such data and is not required to do so until 360 days after enactment of the Dodd-Frank Act.  In these circumstances, the CFTC believes the Dodd-Frank Act should be read to require that the reporting obligation became effective on enactment of the Dodd-Frank Act and that counterparties who are subject to this obligation should, as of the date of enactment, retain all data relating to pre-enactment unexpired swaps until such time as reporting can be effected—i.e., when swap dealers and major swap participants, as well as the appropriate SDRs, have been registered, or when permanent regulations are enacted pursuant to the Dodd-Frank Act, whichever occurs first.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

The “Volcker Rule” is named after former Federal Reserve Chairman Paul Volcker.  Broadly speaking it is a rule against banks making certain speculative kinds of investments if they are not on behalf of their customers.  The Volcker Rule is embodied in Section 619 of the Dodd-Frank Act.  Among other things, that section prohibits a “banking entity” from:

  • engaging in “proprietary trading;” and
  • acquiring or retaining any equity, partnership or other ownership in or sponsoring a “hedge fund” or “private equity fund.”

Section 619(h)(2) of the Dodd-Frank Act defines the terms “hedge fund” and “private equity fund” to mean an issuer that would be an investment company as defined in the Investment Company Act but for Section 3(c)(1) or 3(c)(7) of the Investment Company Act.  As a result, the Volcker Rule is probably applicable to ownership in a venture capital fund as well.

There are complicated exemptions to the Volcker Rule provisions of the Dodd-Frank Act.  For instance, a banking entity may organize and offer a hedge fund or a private equity fund if, among other things:

  • the banking entity provides bona fide trust, fiduciary, or investment advisory services;
  • the fund is organized and offered only in connection with the provision of bona fide trust, fiduciary, or investment advisory services and only to persons that are customers of such services of the banking entity;
  • only a de minimus amount of ownership is retained as further specified in the Dodd-Frank Act;
  • the banking entity does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the hedge fund or private equity fund or of any hedge fund or private equity fund in which such hedge fund or private equity fund invests;
  • the banking entity does not share with the hedge fund or private equity fund, for corporate, marketing, promotional, or other purposes, the same name or a variation of the same name; and
  • the banking entity discloses to prospective and actual investors in the fund, in writing, that any losses in such hedge fund or private equity fund are borne solely by investors in the fund and not by the banking entity and otherwise complies with certain additional rules to ensure the same.

The Volcker Rule will become effective upon the earlier of 12 months after the issuance of rules that implement the provisions of the Dodd-Frank Act or two years after enactment.  Generally banking institutions will have about two years after the effective date to bring operations into compliance with the Volcker Rule.

The Financial Stability Oversight Council, or FSOC, recently posted its roadmap with respect to regulatory initiatives. It indicates FSOC and the related agencies intend to complete rulemaking in this area by October 2011.

Section 619 of the Dodd-Frank Act requires FSOC to study and make recommendations on implementing the Volcker Rule. Under Section 619, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission and the Commodity Futures Trading Commission must consider the recommendations of the FSOC study in developing and adopting regulations to implement the Volcker Rule. To assist the FSOC in conducting the study and formulating its recommendations, FSOC has issued a request for information through public comment.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

The SEC has  proposed rules to implement Section 943 of the Dodd-Frank Act, which requires the SEC to prescribe regulations on the use of representations and warranties in the market for asset-backed securities as follows:

  • to require any securitizer to disclose fulfilled and unfulfilled repurchase requests across all trusts aggregated by securitizer, so that investors may identify asset originators with clear underwriting deficiencies; and
  • to require each nationally recognized statistical rating organization (“NRSRO”) to include, in any report accompanying a credit rating for an asset-backed securities offering, a description of (A) the representations, warranties and enforcement mechanisms available to investors; and (B) how they differ from the representations, warranties and enforcement mechanisms in issuances of similar securities.

The Dodd-Frank Act requires the SEC to adopt these rules within 180 days of enactment of the Dodd-Frank Act.

In April of 2010, the SEC proposed rules that would revise the disclosure, reporting and offering process for asset-backed securities (the “2010 ABS Proposing Release”).  Among other things, the 2010 ABS Proposing Release proposed new disclosure requirements with respect to repurchase requests.  Specifically, the SEC proposed that issuers disclose in prospectuses the repurchase demand and repurchase and replacement activity for the last three years of sponsors of asset-backed transactions or originators of underlying pool assets if they are obligated to repurchase assets pursuant to the transaction agreements.  These disclosure requirements would have applied to offerings of asset-backed securities registered under the Securities Act or asset backed securities offered and sold without registration in reliance upon Securities Act rules, which includes both offerings eligible for Rule 144A resales and other offerings conducted in reliance on exemptions from registration.  The SEC also proposed that issuers disclose the repurchase demand and repurchase and replacement activity concerning the asset pool on an ongoing basis in periodic reports.  As described in the proposed release, the SEC is re-proposing the disclosure requirements with respect to repurchase requests in Regulation AB in order to conform the disclosures to those required by Section 943 of the Dodd-Frank Act.

In the underlying transaction agreements for an asset securitization, sponsors or originators typically make representations and warranties relating to the pool assets and their origination, including about the quality of the pool assets.  For instance, in the case of residential mortgage-backed securities, one typical representation and warranty is that each of the loans has complied with applicable federal, state and local laws, including truth-in lending, consumer credit protection, predatory and abusive laws and disclosure laws.  Another representation that may be included is that no fraud has taken place in connection with the origination of the assets on the part of the originator or any party involved in the origination of the assets.  Upon discovery that a pool asset does not comply with the representation or warranty, under transaction covenants, an obligated party, typically the sponsor, must repurchase the asset or substitute a different asset that complies with the representations and warranties for the non-compliant asset.   According to the SEC, the effectiveness of the contractual provisions related to representations and warranties has been questioned and lack of responsiveness by sponsors to potential breaches of the representations and warranties relating to the pool assets has been the subject of investor complaint.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

As we noted last week, the Business Roundtable and the Chamber of Commerce of the United States of America (the “petitioners”) filed a petition with the United States Court of Appeals for the District of Columbia Circuit seeking review of recent changes to the SEC’s proxy and related rules.  On the same date, those groups filed with the SEC a motion to stay the effect of newly adopted Rule 14a-11 and associated amendments to the SEC’s rules pending such review.  Those groups did not seek a stay of the amendment to Rule 14a-8 that the SEC adopted at the same time as Rule 14a-11.

 The SEC has issued an order finding that, under all of the circumstances, a stay of Rule 14a-11 and related rule amendments is consistent with what justice requires.  Among other things, a stay avoids potentially unnecessary costs, regulatory uncertainty, and disruption that could occur if the rules were to become effective during the pendency of a challenge to their validity. Because the SEC and petitioners will seek expedited review of petitioners’ challenge, questions about the rules’ validity will be resolved as quickly as possible.

 The SEC also found that, under all of the circumstances of this matter, it is consistent with what justice requires to stay the effectiveness of the amendment to Rule 14a-8 adopted contemporaneously with Rule 14a-11 because the amendment to Rule 14a-8 was designed to complement Rule 14a-11 and is intertwined, and there is a potential for confusion if the amendment to Rule 14a-8 were to become effective while Rule 14a-11 is stayed.

 Accordingly, the SEC ordered that that the motion of petitioners filed on September 29, 2010 for a stay of the effect of SEC Rule 14a-11 and related amendments pending resolution of petitioners’ petition for review by the Court of Appeals was granted.  The SEC also ordered that the amendment to SEC Rule 14a-8 adopted on August 25, 2010 is stayed pending resolution of petitioners’ petition for review by the Court of Appeals.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

On October 1, 2010, the CFTC issued proposed rules on financial resource requirements for derivative clearing organizations (“DCOs”) and systematically important DCOs (“SIDCOs”).  The CFTC also issued proposed rules on conflicts of interest.  The rulemaking is permitted under the Dodd-Frank Act.   Each proposed rule is analyzed below.

Financial Resource Requirements

Section 725(c) of the Dodd-Frank Act amends Section 5b(c)(2) of the Commodity Exchange Act (“CEA”) by revising certain core principles and adding new ones. The Dodd-Frank Act also allows the CFTC to adopt implementing rules and regulations for the core principles pursuant to its rulemaking authority under Section 8a(5) of the CEA.  Section 805(a) of the Dodd-Frank Act allows the CFTC to prescribe regulations for those DCOs that the Financial Stability Oversight Council has determined are systemically important.

The proposed rule would require a DCO to maintain sufficient financial resources to meet its financial obligations to its clearing members notwithstanding a default by the clearing member creating the largest financial exposure for the DCO in extreme but plausible market conditions. For purposes of determining the largest financial exposure, the exposures of affiliated clearing members would be combined and treated as those of a single clearing member.

Because the failure of a SIDCO to meet its obligations would have a greater impact on the financial system than the failure of other DCOs, the proposed rule would require a DCO that is also a SIDCO to maintain sufficient financial resources to meet its financial obligations to its clearing members notwithstanding a default by the clearing members creating the two largest financial exposures for the SIDCO in extreme but plausible market conditions.

Conflicts of Interest

The proposed rules implement Section 726 of the Dodd-Frank Act, which requires the CFTC to mitigate conflicts of interest in the operation of certain DCOs, designated contract markets (DCMs”), and swap execution facilities (“SEFs”).  Specifically, Section 726(a) of the Dodd-Frank Act expressly empowers the CFTC to adopt “numerical limits…on control” or “voting rights” that enumerated entities may hold with respect to such DCOs, DCMs, and SEFs.   Section 726(b) of the Dodd-Frank Act directs the CFTC to determine the manner in which its rules may be deemed necessary or appropriate to improve the governance of certain DCOs, DCMs or SEFs or to mitigate systemic risk, promote competition, or mitigate conflicts of interest in connection with the interaction between swap dealers and major swap participants, on the one hand, and such DCOs, DCMs, and SEFs.  Section 726(c) of the Dodd-Frank Act directs the CFTC to consider the manner in which its rules address conflicts of interest in the abovementioned interaction arising from equity ownership, voting structure, or other governance arrangements of the relevant DCOs, DCMs, and SEFs.

In carrying out Section 726 of the Dodd-Frank Act, the CFTC identified potential conflicts of interest that DCOs, DCMs, or SEFs may face.  With respect to a DCO, the CFTC recognized that a DCO may confront conflicts of interest in, among other things, determining (i) whether a swap contract is capable of being cleared, (ii) the minimum criteria that an entity must meet in order to become a swap clearing member, and (iii) whether a particular entity satisfies such criteria. For a DCM or SEF, the CFTC identified the conflicts of interest that these entities may confront in, among other things, balancing the advancement of commercial interests and the fulfillment of self-regulatory responsibilities, including with respect to determinations on access.

To mitigate such potential conflicts of interest in the operation of DCOs, DCMs, and SEFs, the CFTC is proposing (i) structural governance requirements and (ii) limits on the ownership of voting equity and the exercise of voting power.  The CFTC views the latter as a method of enhancing the former, in that the latter limits the influence that certain shareholders may exert over the DCO, DCM, or SEF Board of Directors.  The CFTC believes that such influence may affect, among other things, the independent perspective of public directors.

The proposed rules impose specific composition requirements on DCO, DCM, or SEF Boards of Directors. Also, the proposed rules require that each DCO, DCM, or SEF have a nominating committee and one or more disciplinary panels. Further, the proposed rules require that (i) each DCO have a risk management committee and (ii) each DCM or SEF have a regulatory oversight committee and a membership or participation committee. In each case, the proposed rules impose specific composition requirements on such committees or panels.

In addition to the composition requirements, the CFTC is proposing certain substantive requirements on DCO, DCM, or SEF Board of Directors to enhance accountability to the CFTC regarding the discharge of statutory, regulatory, or self-regulatory responsibilities. Such substantive requirements include annual self-review of the Board of Directors; board member expertise in financial services, risk management, and clearing; and procedures for board member removal.

The proposed rules do not place any restrictions on ownership of non-voting equity in a DCO, DCM, or SEF. The proposed rules do limit DCM or SEF members from (i) beneficially owning more than twenty (20) percent of any class of voting equity in the registered entity or (ii) directly or indirectly voting (e.g., through proxy or shareholder agreement) an interest exceeding twenty (20) percent of the voting power of any class of equity interest in the registered entity.

With respect to a DCO only, the proposed rules require a DCO to choose one of two alternative limits on the ownership of voting equity or the exercise of voting power:

Under the first alternative, the CFTC is proposing that certain individual and aggregate limits be met.  Under the individual limit, no individual DCO member (and its related persons) may (i) beneficially own more than twenty (20) percent of any class of voting equity in the DCO or (ii) directly or indirectly vote (e.g., through proxy or shareholder agreement) an interest exceeding twenty (20) percent of the voting power of any class of equity interest in the DCO.

Under the aggregate limit for the first alternative, the enumerated entities (and their related persons), regardless of whether they are DCO members, may not collectively (i) own on a beneficial basis more than forty (40) percent of any class of voting equity in a DCO, or (ii) directly or indirectly vote (e.g., through proxy or shareholder agreement) an interest exceeding forty (40) percent of the voting power of any class of equity interest in the DCO.

Under the second alternative, the CFTC is proposing an individual limit.  Specifically, no DCO member or enumerated entity (whether or not such entity is a DCO member), and their related persons, may (i) beneficially own more than five (5) percent of any class of voting equity in the DCO or (ii) directly or indirectly vote (e.g., through proxy or shareholder agreement) an interest exceeding five (5) percent of the voting power of any class of equity interest in the DCO.

 The CFTC recognizes that circumstances may exist where neither the first nor second alternative would be appropriate for a DCO.  Consequently, the CFTC is proposing a procedure for the DCO to apply for, and the CFTC to grant, a waiver of the limits specified in the first and second alternatives.

 The CFTC is also proposing modifications to the definition of “public director” to allow for greater harmonization with the definition of “independent director” proposed by the SEC in 2004 and with currently accepted practices.  The modifications include expanding the definition of “immediate family” and adding new bright-line tests that would prohibit certain directors from being deemed “public directors.”

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

Beating the deadline (October 20, 2010) for the first of its required Dodd-Frank rulemakings by more than two weeks, the CFTC has announced publication of its required interim final rule for the reporting of pre-enactment swap transactions. The basic requirements of the reporting rule are outlined below.

What Counterparties are Responsible for Reporting
The Act itself establishes the following hierarchy regarding the entities required to report individual swaps:
– With respect to a swap in which only one counterparty is a swap dealer or major swap participant, that entity is responsible for reporting the swap;
– With respect to a swap in which one counterparty is a swap dealer and the other counterparty is a major swap participant, the swap dealer must report the swap;
– With respect to any other swap, the counterparties shall select one of them to report the swap.

Information That Must be Reported
The interim final rule identifies the following types of information that should be retained in anticipation of the reporting requirement:
– Any information necessary to identify and value the transaction;
– The date and time of execution;
– Information related to the price of the transaction;
– Whether the transaction was accepted for clearing and if so, the identity of the clearing organization;
– Any modification(s) to the transaction;
– The final confirmation of the transaction.

When the Swaps Must be Reported
The Act requires entities to report pre-enactment swaps by the earlier of (i) 60 days after the registration of an appropriate swap data repository or (ii) the compliance date established in the permanent reporting rules, to be adopted by the Commission on or before July 16, 2011.

Nature of the Interim Final Rule
An interim final rulemaking permits an agency to adopt as final a rule that has not been subject to the Administrative Procedure Act’s mandated public notice and opportunity to comment. In an interim final rulemaking, the agency publishes the rule as final and concurrently solicits public comment. The Commission stated that “[a]n interim final rulemaking is warranted in these circumstances by the necessity to provide timely notice to counterparties that they may become subject to a reporting requirement for pre-enactment swaps and to advise with respect to the data that should be preserved with respect to such reporting.”