New Curbs on The Street? 2010 Winston & Strawn LLP

Transcription

1 The Dodd-Frank Act: New Curbs on The Street?

2 The Dodd-Frank Act: New Curbs on The Street? Dodd Frank Act Session III: New Enforcement Environment; International Regulatory Perspectives Brought to you by Winston & Strawn s Corporate and Litigation Practice Groups

3 Today s Hosts Christine Edwards Corporate Chicago CEdwards@winston.com Marvin Miller Corporate New York MMiller@winston.com 3

4 The Winston & Strawn Dodd Frank Webinars July 9 General Overview, Financial Stability, Orderly Liquidation Authority, Improvements to Bank Regulation, and Bureau of Consumer Financial Protection July 21 Regulation of Markets and Market Participants: Derivatives, Securities, Hedge Funds, Investment Advisers, and Broker Dealers August 6 The New Enforcement Environment; International Regulatory Perspectives August t20 Executive Compensation and Corporate Governance 4

5 Today s Presenters Tim Rivelli Litigation Chicago TRivelli@winston.com Stephen D'Amore Litigation Chicago SDAmore@winston.com Marvin Miller Corporate New York MMiller@winston.com 5

6 New Enforcement Environment The Dodd Frank Act provides a profound increase in the regulation of the financial services industry. The Act is hundreds of pages long, requires over 200 rulemaking proceedings, and demands over 60 studies. The Act imposes new regulations on banking and nonbanking financial institutions at the federal level and fosters extensive activities at the state level. Dodd Frank creates substantial organizations and regulatory structures designed to protect investors and consumers. Under the Act, the SEC has emerged with new and enhanced enforcement and regulatory authority. 6

7 New Enforcement Environment The Dodd Frank Act establishes the Office of Financial Research ( OFR ), which is part of the Financial Stability Oversight Council ( FSOC ). The OFR has been granted broad investigative andsubpoena powers to support the work of the FSOC. The Dodd Frank Act creates an entirely new fd federal Consumer Financial Protection Bureau, which will have an initial budget substantially over $500 million and a mission to regulate consumer financial products and services. 7

8 Today s Topics SEC Enforcement Authority Increased Whistleblower Rewards & Protections Enhanced SEC Powers to Impose Civil Penalties Expansion of Secondary Liability in Securities Actions Extraterritorial Application of U.S. Securities Laws Financial Regulations Financial Stability Oversight Council and Office of Research Consumer Financial Protection Bureau Other Issues Mandatory Pre Dispute Arbitration Credit Rating Agencies International Aspects 8

9 Enhanced Whistleblower Protections and Rewards Prior to Dodd Frank, whistleblower awards were rather limited. Only available in insider trading cases Limited to a maximum award payment of 10% of the penalty assessed by the SEC Until recently, only 5 individuals had received whistleblower payments from the SEC the biggest payment was only $55,000 Earlier this year, however, an individual was paid a $1 million bounty for providing a crucial document from the family computer which helped establish an insider trading case against her ex husband and a hedge fund Dodd Frank dramatically expands the scope of the whistleblower protection and the amount of award available to the whistleblower [Section 922]. Available in all judicial and administrative enforcement actions resulting in any monetary relief Award payment now falls in a range of 10% to 30% of the penalty assessed by the SEC 9

10 Whistleblower (continued) The Dodd Frank Act establishes a fund in the Treasury of the United States known as the Securities and Exchange Commission Investor Protection Fund [Section 922]. The fund will be available to the SEC for the paying of awards to whistleblowers. The fund will consist of the monetary sanctions collected by the SECin anyjudicial or administrative action brought by the SEC under the securities laws. The fund will not include, however, any payments py distributed to victims of the violation of the securities laws. 10

11 Whistleblower (continued) Qualifications for a whistleblower : Must provide SEC with original information, which: (a) is derived from the independent knowledge or analysis of a whistleblower; (b) is not known to the SEC from any other source, unless the whistleblower is the original source of the information; (c) is not exclusively derived from an allegation made in a judicial or administrative hearing, unless the whistleblower is the original source of the information. Information must lead to a successful SEC (or related) enforcement action Related actions include any judicial or administrative action brought by: the Attorney General of the United States an appropriate regulatory authority or self regulatory organization a state attorney general Successful resolution includes any settlement of an action 11

12 Whistleblower (continued) Qualifications (continued) Only a limited number of persons are excluded from eligibility for Whistleblower awards: employees of regulatory agencies and the various SROs felons convicted of a crime related to the subject matter of the whistleblower disclosure auditors who learn of the information in the conduct of an audit 12

13 Whistleblower (continued) The payout py amount is determined by the SEC and reflects: the significance of the information provided by the whistleblower to the success of the covered judicial or administrative action the degree of assistance provided by the whistleblower and any legal representative of the whistleblower the pragmatic interest of the SEC in deterring violations of the securities laws by making awards to whistleblowers who provide information that leads to successful enforcements such additional relevant factors as the SEC may establish by rule or regulation Appeals All determinations, except the amount of award, may be appealed to the appropriate court of appeals in the United States within 30 days after the determination is issued [Section 922(a)]. ()] 13

14 Whistleblower (continued) Whistleblowers also receive various statutory protections against employer er retaliation [Section 922]. Individuals who allege that they were discharged or discriminated against for blowing the whistle have a private cause of action for reinstatement, t t two times ti back pay, and litigation expenses. Whistleblowers may file an initial complaint directly in a federal district court. There is no preliminary administrative requirement. Whistleblower claims must be filed no more than: Six years after the violation; or Three years after facts material to the right of action are known or reasonably should have been known by the employee. The non retaliation provisions apply to all companies, even those that are not otherwise subject to SEC oversight [Section 922]. 14

15 Whistleblower (continued) The expansion in Whistleblower rewards and protection is likely to lead to an increase in Whistleblower enforcement actions by the SEC. Plaintiffs attorneys may enter the field, attracted by contingency fees on potentially large economic rewards. E.g., a 30% Whistleblower award on a $100 million SEC penalty is $30 million As the number of SEC enforcement actions increase, parallel shareholder derivative actions will likely follow. Companies may face problems maintaining effective compliance programs, as potential whistleblowers may be lured by large rewards into alerting the SEC instead of internal controls. 15

16 SEC s Enhanced Ability to Impose Civil Penalties under the Dodd Frank Act Section 929P of the Dodd Frank Act amends: Section 8A of the Securities Act of 1933 Section 21B(a) of the Securities Exchange Act of 1934 Section 9(d)(1) of the Investment Company Act of 1940 Section 203(i)(1) of the Investment Advisers Act of 1940 As a result of these amendments, the SEC s ability to impose civil penalties has been greatly expanded. 16

17 Civil Penalties (continued) The Act provides the SEC with new authority to impose monetary penalties in administrative ceaseand desist proceedings against any person for violations of the securities laws. [Section 929P(a)] Formerly, this remedy was available administratively only against registered persons; the SEC could only obtain civil monetary penalties against non registered persons in enforcement actions filed in federal court. Now, the SEC can seek civil monetary penalties in both administrative and judicial proceedings. 17

18 Civil Penalties (continued) For cease and desist proceedings instituted under the 1933 Act, the Dodd Frank Act adopts the three tiered penalty grid from the Securities Exchange Act of 1934, and raises the maximum penalty amounts by 50% [Section 929P]. The maximum amount of the penalty will vary: First Tier: $7,500 for a natural person or $75,000 for any other person Second Tier: $75,000 for a natural person or $375,000 for any other person, if the act or omission at issue involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement Third Tier: $150,000 for a natural person or $725,000 for any other person, if the act or omission at issue: Involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement, and directly or indirectly resulted in (1) substantial losses or created a significant risk of substantial bt tillosses to other persons; or (2) substantial bt tilpecuniary gain to the person who committed the act or omission 18

19 Civil Penalties (continued) Dodd Frank gives the SEC the ability to impose industry wide collateral bars [Section 925]. A collateral bar prohibits securities professionals found to have violated any aspect of the securities laws from associating with any regulated entity Includes broker dealers, investment advisers, municipal securities dealers, municipal advisers, transfer agents, and statistical rating organizations Prior to Dodd Frank, the SEC could only bar an individual from that industry in which the violation was committed. 19

20 Civil Penalties (continued) Dodd Frank also permits nationwide service of SEC subpoenas in civil actions filed in Federal court [Section 929E]. SEC subpoenas issued to compel the attendance of a witness or the production of documents or tangible things at a hearing or trial may now be served at any place within the United States. This amends the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisers Act of Furthermore, the private fund information received by the SEC under the Investment Advisers Act is exempted from the Freedom of Information Act [Section 404]. 20

21 Expansion of Secondary Liability Dodd Frank expands the SEC s enforcement power against aiders and abettors of securities fraud and related claims. An aider or abettor participates in some manner in a securities fraud, butis nottheprimaryviolator the Examples often include bankers, accountants, trustees, and attorneys Under the Act, the SEC may seek civil monetary penalties in fd federal ldistrict i court enforcement actions for aiding and abetting violations of the Investment Advisers Act of 1940 [Section 929N]. Previously, the SEC lacked the authority to seek civil monetary penalties against aiders and abettors under the Advisers Act. See, e.g.,, SEC v. Bolla,, 550 F. Supp. 2d 54 (D.D.C. 2008). 21

22 Secondary Liability (continued) Monetary Penalties (continued) Additionally, the SEC may now seek civil monetary penalties and injunctions against aiders and abettors under the Securities Act of 1933 and the Investment Company Act of 1940 [Section 929M]. Previously, neither act contained any language authorizing suits against aiders and abettors. 22

23 Secondary Liability (continued) Dodd Frank expands the mens rea requirement of aiders and abettors [Sections 929M, 929N, & 929O]. Prior to the Act, an aider and abettor was required to act knowingly in the violation. Now, an aider and abettor need act either knowingly or recklessly. l Recklessness occurs, for example, where an alleged aider and abettor encountered red flags orsuspicious behavior that should have alerted him to the improper conduct of the primary violator. 23

24 Secondary Liability (continued) Dodd Frank does not provide a private right of action against aiders and abettors, but it does charge the Government Accountability Office ( GAO ) to conduct a study on the effects of granting thisprivate right. The study is to be conducted within 1 year of enactment and shall include: a review of the role of secondary actors in companies issuance of securities; the courts interpretations of the scope of liability for secondary actors under Federal securities laws after January 14, 2008; and the types of lawsuits decided under the Private Securities Litigation Reform Act of 1995 ( PSLRA ) [Section 929Z] 24

25 Secondary Liability (continued) Current Case Law on Private Rights of Action against Aiders and Abettors: Stoneridge Inv. Partners, LLC v. Scientific Atlanta, Inc., 552 U.S. 148 (2008) Affirmed that there is no private right of action for aiding and abetting liability under 10(b) of the Exchange Act However, it should be noted that the Supreme Court recently granted certiorari to review a Fourth Circuit decision which upheld a complaint seeking to hold a service provider primarily liable for help[ing] and participating p in another company s misstatements. Janus Capital Group v. First Derivative Traders, 566 F.3d 111 (4th Cir. 2009), cert. granted, (U.S. June 28, 2010) (No ) 25

26 Secondary Liability (continued) Case Law (continued) In Janus, plaintiff shareholders brought suit seeking to hold the defendant investment advisors liable for misstatements contained within the prospectuses p for Janus mutual funds. Even though the defendants had not authored the misstatements themselves (i.e. defendants were traditional secondary actors), the Fourth Circuit found the misstatements within the prospectuses to be sufficiently attributable to the defendant investment advisors. In other words, the public would likely attribute the prospectuses to the defendants, regardless of who actually authored them. The Supreme Court willnow decide whether a defendant who merely helped in the preparation of a misstatement can be held liable based on public attribution, even though the defendant s name does not appear on the face of the misstatement. 26

27 Private Rights of Action in Dodd Frank Sec. 922(d)(1)(G): requires the Inspector General of the SEC to conduct a study on a private right of action for a whistleblower that has already attempted to pursue the case through the SEC. Sec. 929Z: requires the GAO to study the impact of authorizing a private right of action against any person who aids or abets another person in violation of the securities laws. Sec. 929Y: requires the SEC to solicit public comment and conduct a study to determine whether the Securities and Exchange Act of 1934 should be extended to cover (1) conduct within the United States that constitutes a significant step in the furtherance of the violation, even if the securities i transaction occurs outside the United States and involves only foreign investors, and (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States. 27

28 Office of the Investor Advocate Dodd Frank establishes an Office of the Investor Advocate, which will be appointed by and report to the Chairmen of the SEC [Section 915]. Following consultation with the Chairmen, the Investor Advocate will have authority to hire independent counsel, as well as his own research and service staff. The Investor Advocate will be tasked with: identifying areas where investors would benefit from regulatory changes; identifying challenges that investors face in their interactions with financial firms and investment products; and analyzing the impact on investors of proposed SEC regulations and SRO rules The Investor Advocate may propose to the SEC that changes be made to regulations or orders, and to Congress that changes be made to relevant laws, or that particular agency personnel be replaced. 28

29 Investor Advocate (continued) The Investor Advocate will submit annual reports to the Senate Banking and House Financial Services Committees. The reports will include summaries of the most serious problems encountered by investors and will be submitted directly to Congress without prior review orcomment by the SEC, the President s budget overseer, or the Office of Management and Budget. The SEC will be required to formally respond to the Investor Advocate s reports. 29

30 Extraterritorial Application of U.S. Securities Laws The Law Before Dodd Frank Morrison v. National Australia Bank, Ltd., 130 S. Ct (June 24, 2010) (Scalia, J.) J) Foreign investors brought putative class action against Australian banking corporation, alleging securities fraud in connection with securities traded on foreign exchanges Held: Section 10(b) reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United dstates. t Rejected conduct and effect tests in favor of territorial transaction test Reasoned that no textual evidence in statute existed to overcome presumption that, unless a contrary intent is expressed, Congress ordinarily legislates domestic, not foreign matters While there is no reason to believe that the United States has become the Barbary Coast for those perpetrating frauds on foreign securities markets, some fear that it has become the Shangri La of class action action litigation for lawyers representing those allegedly cheated in foreign securities markets. 30

31 Extraterritoriality: Dodd Frank Effectively Reverses Morrison for SEC /DOJ Actions Explicit expression of extraterritorial jurisdiction under antifraud provisions of Securities Act (1933), Securities Exchange Act (1934), and Investment Advisors Act (1940). [Section 929P(b)] Restores conduct and effects tests: U.S. courts will have jurisdiction over SEC/DOJ claims if alleged violations involve: conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States, or the violation is committed by a foreign advisor and involves only foreign investors; or conduct occurring outside the United States that has a foreseeable substantial effect within the United States 31

32 Extraterritoriality: SEC to Solicit Public Comment and Study Private Actions The Act does not explicitly extend extraterritoriality to private actions In this regard, Morrison remains at least partially intact. Act requires SEC to solicit public comment and study extent to which private rights of action under antifraud provisions of the Exchange Act should be extended extraterritorially under conduct and effects tests. [Section 929Y] Public comments through SEC website, Study to be completed within 18 months after enactment with analysis of: scope of private right of action, including whether it should be limited to institutional investors or otherwise; implications of private right of action on international comity; economic costs and benefits of extending private right of action for transnational securities frauds; and whether a narrower extraterritorial standard should be adopted 32

33 Financial Stability Oversight Council The Act establishes a Financial Stability Oversight Council ( FSOC ) [Section 111] FSOC is an interagency council created to indentify and monitor systemic risks posed by financial firms and activities. Voting members of FSOC: Secretary of Treasury (Chair of FSOC) Chairman of Board of Governors Comptroller of the Currency Chairperson of FDIC Chairman of SEC Director of Bureau of Consumer Financial Protection (new agency) Chairperson of Commodity Futures Trading Commission Director of Federal Housing Finance Agency Chairman of National Credit Union Administration Independent d member with insurance expertise appointed by President, with Senate advice and consent Reports submitted by the Council must be accompanied by a signed statement from each voting member, stating whether the member believes that the Council,the Government, and the private sector are taking all reasonablesteps steps to mitigate systemic risk. [Section 112(b)] 33

34 FSOC (continued) The FSOC s purpose is to identify risks to the financial stability of the United States posed by distress, failure, or activities of large, interconnected bank holding companies or nonbank financial companies, promote market discipline, and respond to emerging risks in the U.S. financial system. [Section 112 et seq.] ] The FSOC s key powers will be: designation of a nonbank financial company for regulation by the Board of Governors; recommendation of heightened prudential standards for designated nonbank financial companies and large, interconnected bank holding companies After a nonbank company has been designated by the Council, the company has 30 days to bring an action in the U.S. district court in which its home office is located or the U.S. District Court for D.C. [Section 113(h)] The Council s final designation may be rescinded, but review of the designation is limited to whether the final determination was arbitrary or capricious. 34

35 Office of Financial Research The Act establishes the Office of Financial Research ( OFR ) within the U.S. Department of Treasury. The purpose of the OFR is to support the FSOC and its member agencies by: collecting and providing data and information performing applied and long term research developing risk measurement and monitoring tools standardizing types and formats of data reported and collected by member agencies making results available to financial regulatory agencies OFR must report to Congress its assessment of significant financial market developments and threats to the financial stability of the United States [Sections 153, 154] 35

36 OFR (continued) Enforcement powers of the OFR: [Section 153(f)] Power to subpoena financial companies, on written finding of Director that data is required to carry out functions of OFR Failure to comply with subpoena, punishable by contempt in U.S. District Court The FSOC and OFR shall hllmaintain the confidentiality fd of any data, information, and reports that have been submitted. The submission of any nonpublicly available data or information shall not constitute a waiver of, or otherwise affect, any privilege arising under Federal or State law (including rules of court) to which the data or information is otherwise subject. [Section 112(d)(5)(B)] The OFR may share data and information with the Council, member agencies, and the Bureau of Economic Analysis, but that information may not be shared with any individual or entity without permission of the Council. [Section 153(b)(1)] Submissions received under Section 112 are not necessarily exempt from FOIA usual rules and exceptions apply [Section 112(d)(5)(C)] 36

37 Consumer Financial Protection Bureau Title X (Consumer Financial Protection Act) of Dodd Frank establishes a new Bureau of Consumer Financial Protection ( Bureau ), charged with the task of regulating consumer financialproducts and services Director appointed by the President, with advice and consent of the Senate, for a five year term Bureau given extensive rulemaking, enforcement, and supervisory authority transferred from other agencies (except FTC) under existing Federal consumer financial laws Initial budget expected substantially to exceed $500 million 37

38 Consumer Financial Protection Bureau (continued) The Act transfers rulemaking, investigation, and enforcement authority with respect to a number of enumerated federal consumer financial protection statutes to the Bureau [Sections 1002 & 1022]. Bureau has broad authority to administer Federal consumer financial laws, which include Dodd Frank Act itself, any rule or order of the Bureau, and most federal laws relating to consumer protection (except the FTC Act and Consumer Reinvestment Act) Except for the FTC, the Bureau has exclusive authority to prescribe rules pursuant to Federal consumer financial law Transfer date between 6 18 months after enactment [Section 1062] 38

39 Consumer Financial Protection Bureau (continued) Bureau s supervisory power covers any person engaged in offering or providing a consumer financial product or service and any affiliate of such person that acts as a service provider to such person [Section 1002]. Financial product or service defined to include generally: extending credit and servicing loans extending or brokering leases that are the functional equivalent of credit providing real estate settlement services or performing appraisals engaging in deposit taking activity or transmitting funds providing check cashing, check collection, or check guaranty services providing financial advisory services collecting, analyzing, maintaining, or providing consumer report info debt collection 39

40 Consumer Financial Protection Bureau (continued) The Act exempts some individuals and institutions from the Bureau s authority, including: [Section 1027] Attorneys Real estate e boes brokers Insurance companies Accountants Tax preparers Merchants not significantly engaged in the consumer financial services Motor vehicle dealers, but with limitations... [Section 1029] 40

41 Consumer Financial Protection Bureau (continued) Bureau has authority to prevent covered institutions from engaging in unfair, deceptive, or abusive acts or practices in the provision of consumer financial products and services [Section 1031]. The Act contains guidelines on what acts and practices may be considered unfair or abusive. Bureau may prescribe rules regarding disclosures required dfor consumer financial products and services, including optional model forms that provide safe harbor protection for disclosures. Bureau may prohibit use of agreements that include mandatory arbitration clauses, although the Bureau cannot prevent consumers from entering into arbitration once a dispute has arisen. 41

42 Consumer Financial Protection Bureau (continued) The Act makes it unlawful for any covered person or service provider to: Offer or provide to a consumer any financial product or service not in conformity with Federal consumer financial llaw, or otherwise commit any act or omission in violation of such laws Engage in any unfair, deceptive, or abusive act or practice Fail or refuse to permit access to or copying of records, to establish or maintain records, or to make reports or provide information to the Bureau Knowingly or recklessly provide substantial assistance to a covered person or service provider in violation of the provisions described above [Section 1036] 42

43 Consumer Financial Protection Bureau (continued) Bureau has authority to investigate potential violations of federal consumer financial laws and to conduct hearings, subpoena testimony and records, and issue civil investigative demands. [Sections ] 1056] If Bureau determines that a person has violated a federal consumer financial law, it may issue a notice to the person to appear and contest the issuance of a cease and desist order. Bureau may also pursue civil actions for violations of federal consumer financial laws. Bureau has no criminal prosecutorial authority, but may refer potential criminal matters to DOJ. 43

44 Consumer Financial Protection Bureau (continued) State laws are not affected, unless they are inconsistent with the CFPA, in which case only the inconsistent part is affected. [Section 1041(a)(1)] If a state law provides for greater consumer protection than the CFPA, the greater protection is allowed to stand. [Section 1041(a)(2)] State Attorneys General may bring civil actions to enforce the CFPA and regulations issued by the Bureau. [Section 1042(a)] However, the state AG may only bring actions against national banks and federal savings associations to enforce Bureau regulations, and not the CFPA itself. [Section 1042(a)(2)] The CFPA contains various provisions on how preemption determinations are to be made and the deference to be given to the Office of the Comptroller of the Currency ( OCC ). [See Sections 1044 & 1046] 44

45 Other Issues: Mandatory Pre Dispute Arbitration The Dodd Frank Act provides the SEC with authority to restrict or prohibit the use of mandatory arbitration clauses. The SEC may use its authority to invalidate such clauses in contracts between broker dealers or investment advisers and their customers [Section 921]. The Act also requires the Bureau of Consumer of Financial Protection to study and report to Congress on the use of mandatory pre dispute arbitration agreements in consumer financial services contracts. The Bureau may also impose limitations on the use of such agreements or prohibit them if it is in the public interest and for the protection of consumers [Section 1028]. Historically, mandatory pre dispute arbitrations and other mechanisms have provided an important alternative means to dispute resolution, so the impact of this study may be profound. 45

46 Other Issues: Credit Rating Agencies and Increased Liability Dodd Frank eliminates the prior exemption from liability for credit rating agencies under Section 11 of the Securities Act [Section 939G]. Credit rating agencies are thus exposed to liability if they consent to the inclusion of a rating in a registration statement. In order to defend against a Section 11 claim, a rating agency would be required to show that it had reasonable grounds to believe, and did in fact believe, that the included credit rating was accurate. This reform could have major effects on the securities offering process for rated securities, but it remains unclear how rating agencies will react to this change. Rating agencies have successfully challenged claims on constitutional grounds in the past, arguing that ratings are protected by the First Amendment. See, eg e.g., Compuware Corp. v. Moody s Investors Services, Inc., 499 F.3d 520 (6th Cir. 2007). It is also possible that credit agencies will refuse to consent to the inclusion of a credit rating in an issuer s registration statement. Leading ratings firms have, in fact, begun refusing to consent to the inclusion of their ratings in bond registration statements. 46

47 Credit Rating Agencies (continued) Dodd Frank confirms that civil remedies are available against credit rating agencies under the Securities Exchange Act of 1934 [Section 933(a)]. The Act does so by specifically making the enforcement and penalty provisions of the Exchange Act applicable to statements made by a credit rating agency in the same manner and to the same extent as such provisions apply to statements made by a registered public accounting firm or a securities analyst. The Act also excludes credit ratings from the protection of the safe harbor provisions ii for forward looking statements under the Private Securities Litigation Reform Act of 1995 [Section 933(a)]. ()] 47

48 Credit Rating Agencies (continued) Dodd Frank alters the pleading standards that were implemented by the Private Securities Litigation Reform Act of 1995 ( PSLRA ) as applied to actions for money damages against rating agencies [Section 933(b)(2)]. )] Under previous standards, to survive a motion to dismiss a claim based on Rule 10b 5, a plaintiff had to allege facts giving rise to a strong inference that the defendant knowingly or recklessly made a material misstatement or omission. In the context of credit ratings, courts required plaintiffs to plead that the rating agency did not genuinely believe its opinions regarding credit quality or that the opinion lacked basis in fact. This was often a difficult standard for a plaintiff to meet. 48

49 Credit Rating Agencies (continued) Pleading Standards (continued) Under Dodd Frank, a pleading against a rating agency satisfies the state of mind requirement if it alleges facts giving rise to a strong inference that the rating agency knowingly gyor recklessly failed to conduct a reasonable investigation of the factual elements relied upon in evaluating the credit risk of the rated security. Determination of what constitutes a reasonable investigation will be based on a court s consideration of the particular facts and circumstances. The new standard dshould ldbe easier for a plaintiff li iffto meet, since a plaintiff need no longer show that a credit rating agency lacked a genuine belief in its opinions or that the opinion lacked any basis in fact. 49

50 Credit Rating Agencies (continued) The Act requires the SEC and the Comptroller General to undertake studies related to rating agencies and the credit rating process to facilitate future rulemaking [Sections 939D & 939E]. The SEC is required to conduct studies on conflicts of interest and standardizing credit rating terminology and the market stress conditions underwhich credit ratings areevaluated. The Comptroller General will study alternative means for compensating rating agencies and the creation of an independent professional organization for credit rating analysts. 50

51 INTERNATIONAL ASPECTS Marvin J. Miller Jr. 51

52 INTERNATIONAL ASPECTS China Hong Kong EU U.K. U.S. International Coordination September Webinar 52

53 INTERNATIONAL ASPECTS EU Stress tests Germany derivative rules 53

54 INTERNATIONAL ASPECTS HMT A New Approach to Financial Regulation: Judgement, Focus and Stability (7/10) Bank of England Role Financial Service Authority out Financial Policy Committee in Focus on financial stability Prudential Regulatory Authority Focus on prudential regulation of financial service firms Regulation and supervision of settlement systems and central counterparty clearing houses Consumer Protection and Markets Authority International Coordination 54

55 INTERNATIONAL ASPECTS U.S. Coordination with Foreign Regulations Increase stability by adopting strong, common regulatory standards for large financial institutions Prevent major competitive imbalances, reduce regulator arbitrage Clear allocation of regulatory responsibility for international financial firms Information exchange and analysis Global agreed upon standards Rules and supervisory practices tailored to local conditions and preferences 55

56 INTERNATIONAL ASPECTS G20 Financial Stability Board ( FSB ) International Organization of Securities Commissions ( IOSCO ) BaselCommittee on Banking Supervision ( Basel Committee ) Financial Accounting Standards Board ( FASB ) International Accounting Standards Board ( IASB ) 56

57 INTERNATIONAL ASPECTS G20 Strong regulatory framework Effective supervision Resolution authority Systemic institutions Transparency 57

58 INTERNATIONAL ASPECTS FSB Discussion Group November G20 Meeting Common principles and key attributes for effective national resolution authorities Contingent debt 58

59 INTERNATIONAL ASPECTS Basel Committee New minimum bank capital and liquidity levels Basel III Enable banks to withstand without extraordinary government support stresses of a magnitude associated with the recent financial crisis G20 (6/10) July 26, 2010 Amendments Seoul G20 Meeting in November

60 INTERNATIONAL ASPECTS IOSCO Principles Cross Border Supervisory Cooperation Hedge Funds OTC Derivatives Credit Ratings Agencies 60

61 INTERNATIONAL ASPECTS Convergence in Accounting Standards FASB/IASB Convergence Project Quarterly Updates June 2011 Target Date 61

62 INTERNATIONAL ASPECTS Bilateral Arrangements Sharing privileged information with other authorities ( 929K) Authority to share certain information with foreign authorities ( 981) 62

63 INTERNATIONAL ASPECTS Dodd Frank International support for provisions relating to Systemic regulation of all financial firms Resolution regime for financial firms OTC clearing and transparency Regulation of banks and nonbank derivatives dealers 63

64 INTERNATIONAL ASPECTS Little support for Proprietary trading restrictions Hedge fund investments Limitation of bank offerings of derivative products 10% acquisition cap Universal lbanking model dlvs. activity ii restriction i model dl 64

65 Questions? 65

66 Thank You. 66

67 Contact Information Marvin Miller Corporate New York (212) Christine Edwards Corporate Chicago (312)

68 Contact Information Stephen D Amore Litigation Chicago (312) SDAmore@winston.com Tim Rivelli Litigation Chicago (312) TRivelli@winston.com 68