U.S. Securities Law Briefing. Dodd-Frank Act Amendments to U.S. Securities Laws

July 2010 U.S. Securities Law Briefing. Dodd-Frank Act Amendments to U.S. Securities Laws Last week, U.S. President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act ), a major legislative effort to reform many aspects of the financial industry, including the regulation of securities. However, in part because reforming the securities laws was not central to the legislation, the Act does not result in a major overhaul of the U.S. federal securities laws. Rather, the Act makes a number of miscellaneous amendments to various aspects of the securities laws, most significantly with respect to liability under the securities laws, the operation and authority of the U.S. Securities and Exchange Commission (the SEC or the Commission), private offerings, beneficial ownership disclosure, brokerdealer regulation, short sales and credit rating agency regulation. 1 Liability The Act could have made very significant changes to liability for violations of the U.S. federal securities laws, but ultimately the U.S. House of Representatives (the House ) and the U.S. Senate (the Senate ) ended up limiting or rejecting proposals that would have created a private right of action for aiding and abetting securities violations and extended the jurisdiction of the U.S. courts to so-called foreign-cubed cases (i.e., cases involving non- U.S. investors who have purchased non-u.s. securities on non-u.s. stock exchanges). Instead, the final version of the legislation mainly enlarges SEC authority in enforcement actions. Extraterritorial Jurisdiction Section 929P of the Act amends each of the Securities Act of 1933 (the Securities Act ), the Securities Exchange Act of 1934 (the Exchange Act ) and the Investment Advisers Act of 1940 (the Investment Advisers Act ) to grant U.S. courts jurisdiction over any action or proceeding brought by the SEC or the U.S. government involving: (1) conduct within the United States 1 Title IX of the Act (Investor Protections and Improvements to the Regulation of Securities) also contains provisions affecting asset-backed securities ( ABS ), municipal securities and the Public Company Accounting Oversight Board s authority to share information with foreign authorities, which are not discussed in this briefing. Title IX also imposes a number of new executive compensation and corporate governance requirements, which are summarised in our briefing entitled Dodd-Frank Act Executive Compensation and Corporate Governance Provisions available under the Publications section of www.linklaters.com. For further information about other provisions of the Act, please see our International Reform of Financial Regulation website at http://www.linklaters.com/publications/20100219/pages/index.aspx, which compares financial regulatory reform across various jurisdictions. Contents Liability... 1 Extraterritorial Jurisdiction.. 1 Aiding and Abetting... 2 Control Person... 3 Anti-Fraud Provisions... 3 Credit Rating Agencies... 3 SEC Reforms... 4 Whistleblower Program... 4 Enhanced SEC Authority... 5 Deadline for Actions... 5 SEC Match Funding... 5 Investor Entities... 6 Private Offerings... 6 Regulation D... 6 Accredited Investors... 7 Beneficial Ownership Disclosure... 7 Security-Based Swaps... 7 Filing Requirements... 8 Broker-Dealers... 8 Fiduciary Duty... 8 Mandatory Arbitration... 9 Investor Notification... 9 Analyst Conflicts of Interest... 9 Short Sales... 10 Credit Rating Agencies... 10 Conclusion... 12 Appendix... 13 U.S. Securities Law Briefing 1

that constitutes significant steps in furtherance of a violation of the antifraud provisions of the Securities Act, Exchange Act or Investment Advisers Act, even if the securities transaction occurs outside the United States and involves only foreign investors; or (2) conduct outside the United States that has a foreseeable substantial effect within the United States. In essence, this provision allows the SEC or the U.S. government to bring enforcement actions in U.S. courts in foreign-cubed cases, so long as there are significant steps in furtherance of the violation within the United States. Section 929Y also directs the SEC to deliver a report to Congress within 18 months of the Act s enactment regarding the results of its study of whether a similar extension of jurisdiction should be made for private lawsuits. 2 The study is expected to consider whether extraterritorial jurisdiction should be extended to all private lawsuits, or just institutional investors; the implications of such extraterritorial jurisdiction on international comity; the costs and benefits of such action; and whether a narrower extraterritorial standard should be adopted. The extraterritorial jurisdiction language was drafted prior to the U.S. Supreme Court s decision last month in Morrison v. National Australia Bank, which rejected such conduct and effects jurisdictional tests in favour of a transactional test, at least in the context of private lawsuits. Morrison held that Section 10(b) of the Exchange Act applies only to transactions in securities listed on domestic exchanges and domestic transactions in other securities, and thus not to foreign-cubed cases. It is not clear that Section 929P is sufficient to overturn Morrison, and even if it is, Section 929P s conduct and effects tests would only apply to actions brought by the SEC or the United States, unless Congress acts following the SEC s report. Aiding and Abetting Prior to the Act, the SEC already had express statutory authority to pursue aiding and abetting violations of the Exchange Act, but only if a person knowingly provided substantial assistance to another in violating the Exchange Act. No such express aiding and abetting authority existed with respect to the Securities Act, the Investment Company Act of 1940 (the Investment Company Act ) or the Investment Advisers Act. Sections 929M to 929O of the Act provide the SEC with the authority to bring actions based on a person knowingly or recklessly provid[ing] substantial assistance to another person in violation of the Exchange Act, as well as of the Securities Act, the Investment Company Act or the Investment Advisers Act. A proposed amendment to establish a private right of action against aiding and abetting violations was not included in the final legislation; instead Section 929Z of the Act only directs the U.S. Comptroller General to complete a study within one year of the Act s enactment of the impact of authorising such a private right of action. 3 The proposed amendment to the Exchange 2 3 As originally drafted, the extension of extraterritorial jurisdiction would have applied to SEC/U.S. government actions and private lawsuits, without the requirement of a study. The study is expected to cover a review of the role of secondary actors in companies issuance of securities; the court s interpretation of the scope of liability for secondary actors under the U.S. Securities Law Briefing 2

Act would have overturned the Supreme Court decisions in Stoneridge Investment Partners, LLC v. Scientific-Atlantic, Inc., 552 U.S. 148 (2008), and Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), which preclude private lawsuits against aiders and abettors of securities violations. If the amendment had been approved, private litigants would have been able to bring aiding and abetting claims against secondary actors such as lawyers. Control Person Section 929P of the Act amends Section 20(a) of the Exchange Act, which provides for control person liability, to clarify that Section 20(a) is available in SEC enforcement actions as well as private lawsuits. Section 20(a) provides for joint and several liability for the controlling party and controlled person, unless the controlling party can show that they acted in good faith and did not directly or indirectly induce the conduct at issue. The SEC requested the clarification because a few courts have recently held that Section 20(a) is not available for SEC enforcement actions. This is significant to the SEC as it has begun using Section 20(a) in order to prosecute individuals for a company s violation of the Foreign Corrupt Practices Act ( FCPA ). Until the SEC s enforcement action against Nature s Sunshine Products Inc. 4, which settled in July 2009, an executive s liability under the FCPA had been based on a showing of direct participation or aiding and abetting the violation. In the Nature s Sunshine Products action, however, the SEC used Section 20(a) possibly for the first time in the FCPA context to allege that certain executives were liable because of their position of control and authority at the company, without alleging that they had participated in or knew of the violations. Anti-Fraud Provisions Section 929L of the Act broadens the application of the antifraud provisions of Section 9 and Section 10(a) of the Exchange Act by striking the language in those sections limiting their application to securities registered on a national securities exchange. The prohibitions against manipulation in Sections 9 and 10(a) will now apply to all securities other than government securities. Credit Rating Agencies Under the Act, credit rating agencies will be subject to significantly greater liability. Section 933 amends Section 15E of the Exchange Act, which governs nationally recognised statistical rating organisations ( NRSROs ), to allow a private right of action against credit rating agencies for violations of Section 15E. The Act applies the enforcement and penalty provisions of the Exchange Act to statements made by credit rating agencies in the same 4 federal securities laws after 14 January 2008; and the types of lawsuits decided under the Private Securities Litigation Reform Act of 1995. The SEC charged two senior executives of Nature's Sunshine Products Inc. under Section 20(a) with violating the FCPA's books and records and internal control provisions, in connection with cash payments made by the company s Brazilian subsidiary, even though the executives were not accused of any wrongdoing. The SEC complaint is available at http://www.sec.gov/litigation/complaints/2009/comp21162.pdf. U.S. Securities Law Briefing 3

manner and same extent that they apply to registered public accounting firms and securities analysts, and denies statements made by credit rating agencies the protection of the forward-looking safe harbour of Section 21E of the Exchange Act. Section 933 further provides that investors may also sue credit rating agencies for knowingly or recklessly failing to conduct a reasonable investigation. The Act also rescinds Rule 436(g) under the Securities Act, which provided an exemption from liability under Sections 7 and 11 of the Securities Act for an NRSRO 5 for ratings information included in a registration statement. Consequently, NRSROs are now included in the liability scheme for experts set forth in Section 11 of the Securities Act, meaning they can be held liable if the ratings information in a registration statement contains a material misrepresentation or omission. Generally, issuers will now have to obtain a rating agency s consent to include ratings information in a registration statement or, absent such consent, remove the ratings information from the registration statement and from any other documents incorporated by reference into the registration statement. 6 SEC Reforms The Act also contains a number of provisions intended to increase the SEC s enforcement powers and reform how the SEC operates. As discussed above, the Act provides for expanded SEC authority in aiding and abetting cases and expanded U.S. jurisdiction over SEC actions involving foreigncubed cases. The Act also establishes whistleblower rewards for successful SEC actions and increases SEC enforcement authority in a number of areas. In terms of significant reforms of the SEC operations, the Act imposes deadlines for SEC enforcement investigations and compliance examinations or inspections; changes the SEC s funding process; and requires the SEC to establish an Investor Advisory Committee and Office of the Investor Advocate. Whistleblower Program Section 922 of the Act provides for stronger incentives and protections for whistleblowers. Whistleblowers will be eligible for an award of at least 10% and up to 30% of any monetary sanctions if they provide original information leading to a judicial or administrative action brought by the SEC under the securities laws that results in monetary sanctions exceeding $1 million. Such awards will also be paid out for related actions, which are administrative or judicial actions brought by the U.S. Department of Justice (the DOJ ), an 5 6 Rule 436(g) only exempts NRSROs, not all credit rating agencies. Credit rating agencies can only become NRSROs by applying to and registering with the SEC. In 2009, the SEC issued a concept release, available at http://www.sec.gov/rules/concept/2009/33-9071.pdf, which proposed rescinding Rule 436(g) because there no longer appeared to be a basis to distinguish between NRSROs and non-nrsro credit rating agencies. Several ratings agencies have already indicated that that are currently unwilling to deliver the required consents. The SEC has issued new Compliance and Disclosure Interpretations to clarify when a corporate issuer is required or is not required to obtain the rating agency s consent. For ABS issuers, the SEC has issued a no-action letter allowing such issuers to omit the ratings disclosure required by Item 1103(a)(9) and 1120 of Regulation AB for any registered ABS offerings, but only until 24 January 2011. U.S. Securities Law Briefing 4

appropriate regulatory authority, a self-regulatory organisation or a state attorney general, based upon the original information that lead to the SEC action. The extremely high monetary sanctions resulting from recent FCPA actions hundreds of millions of dollars in several cases coupled with the minimum 10% award will likely be a significant incentive to whistleblowing. The Act also strengthens protections for whistleblowers by directly prohibiting, and by providing a private right of action, for employer retaliation 7, and prohibiting SEC staff from disclosing any information that could reasonably be expected to reveal the whistleblower s identity. Enhanced SEC Authority The Act also increases SEC authority in a number of different areas, by providing new authority to impose monetary penalties in cease-and-desist proceedings against any persons (rather than only persons registered with the SEC); clarifying that the SEC has the authority to bring enforcement actions against a formerly associated person ; providing for the nationwide service of process in federal enforcement actions; and restoring the SEC s collateral bar authority to prohibit securities professionals who have violated the securities laws from participating in all aspects of the industry including being associated with a broker, dealer, investment adviser, municipal securities dealer, municipal adviser, transfer agent, or NRSRO rather than just one part of the industry. Deadline for Actions Section 929U of the Act sets 180-day deadlines for the SEC to complete enforcement investigations and compliance examinations or inspections. In the case of enforcement investigations, the SEC staff must either file an action or notify the Director of the SEC Division of Enforcement of its intent not to file an action within 180 days after providing a Wells Notice. 8 Similarly, within 180 days after the later of completion of the on-site portion of its compliance examination or inspection or receipt of all requested records, the SEC must provide the entity being examined or inspected with written notification that the examination or inspection has concluded, has concluded with findings or that the staff requests that the entity undertake corrective action. Extensions are allowed for complex investigations upon Commission approval, or complex compliance examinations or inspections upon notice to the Commission. SEC Match Funding The Senate version of the Act would have provided for SEC self-funding so that the SEC would not be subject to the congressional appropriations process, but the provision was removed from the final legislation. Instead, Section 991 of the Act provides for match funding, which means the SEC s budget will be funded by filing fees subject to the amounts appropriated by 7 8 By contrast, the whistleblower protections enacted under the Sarbanes-Oxley Act of 2002 require whistleblowing employees who experienced retaliation to first file a complaint with the U.S. Department of Labor prior to filing a civil lawsuit. A Wells Notice is a notification from the SEC that it intends to recommend that enforcement proceedings be commenced against the recipient of the Wells Notice. U.S. Securities Law Briefing 5

Congress. The Act preliminarily authorises SEC budgets for 2011 through 2015 that steadily increase from $1.3 billion in 2011 to $2.25 billion in 2015. The President is required to submit the SEC s budget to Congress unaltered, and the SEC is allowed to use the fees its collects to establish a reserve fund of up to $100 million to fund special projects. Investor Entities The Act creates three new entities within the SEC to protect investor interests. Section 911 of the Act establishes an Investor Advisory Committee within the SEC to advise and consult with the SEC on, among other matters, its regulatory priorities and initiatives to protect investor interests. Section 915 establishes the Office of the Investor Advocate within the SEC to promote the interests of retail investors. Finally, Section 919D creates the Ombudsman to, among other things, act as a liaison between the SEC and any retail investor in resolving problems that retail investors may have with the SEC or self-regulatory organisations. The Ombudsman will be appointed by and report directly to the Investor Advocate. Private Offerings There are only a few provisions in the Act that directly affect private offerings of securities. Earlier versions of the legislation would have repealed federal preemption for certain offerings made pursuant to Regulation D, but the provision was removed and replaced with a less controversial disqualification of certain bad actors from certain Regulation D offerings. The Act also directs the SEC to re-visit the definition of accredited investor every four years. An earlier proposal would have applied Section 12(a)(2) of the Securities Act to private offerings, overturning Gustafson v. Alloyd, 513 U.S. 561 (1995), the Supreme Court decision holding that Section 12(a)(2) of the Securities Act only applies to public offerings. However, the proposal was not included in the final text of the legislation. Regulation D Section 926 of the Act disqualifies any securities offering by certain bad actors from the use of Rule 506 of Regulation D, a commonly used safe harbour for the private placement of securities. Those disqualified include: > any person who is subject to a final order by a state or federal banking agency or a state insurance or securities agency barring the person from association with the regulated entity or engaging in the securities, insurance, banking, savings associations or credit union business due to violation of an antifraud law or regulation; or > any person convicted of a felony or misdemeanour in connection with the purchase or sale of a security or involving making a false filing with the SEC. U.S. Securities Law Briefing 6

Accredited Investors The Act also directs the SEC to adjust periodically the net worth standard for natural person accredited investors under the Securities Act and to exclude from the $1 million calculation the value of the investor s primary residence. The SEC has not adjusted the accredited investor financial thresholds since Regulation D was first adopted in 1982. An earlier version of the provision required that the financial threshold be adjusted in light of price inflation, but the final language calls for adjustment or modification for the protection of investors, in the public interest, and in light of the economy. 9 The minimum net worth amount is to remain at $1 million (although the value of the investor s primary residence is now excluded from the net worth calculation) for four years following the enactment of the Act, and the SEC is directed to review the entire definition of accredited investor at least every four years. 10 Beneficial Ownership Disclosure The Act takes steps toward revising the definition of beneficial ownership with respect to the beneficial ownership disclosure requirements of Section 13(d) and 13(g) of the Exchange Act and the short swing profit reporting requirements of Section 16 of the Exchange Act, but ultimately leaves the decisionmaking to the SEC. The Act also makes changes to the Section 13(d)-(g) and Section 16 filing requirements. Security-Based Swaps Under Section 766(b) of the Act, the definition of beneficial ownership under Sections 13(d) and 13(g) of the Exchange Act is amended to contemplate the use of security-based swaps. Sections 13(d) and 13(g) require a beneficial owner of more than 5% of a company s class of securities registered under Section 12 of the Exchange Act to disclose such ownership by publicly filing a form with the SEC and notifying the company. In recent years, there has been some concern about the use of swaps to evade the Section 13(d) reporting requirements, but the U.S. courts have not yet definitively ruled that a holder of swaps beneficially owns the referenced stock for the purposes of Section 13(d). 11 9 If the SEC were to use the same calculations as in its proposed 2007 amendments to Regulation D, the increases to the financial thresholds would be significant. At the time, the SEC s Office of Economic Analysis estimated that adjusting the $1 million individual net worth test for inflation as of 1 July 2006 would mean increasing the minimum net worth amount to approximately $1.9 million. 10 Oddly, however, the Act only directs the SEC to review the definition of accredited investor under Rule 215 under the Securities Act, which applies to securities offerings exempt from registration under Section 4(6) of the Securities Act, but not under Rule 501(a) of the more commonly used Regulation D. This may simply be a drafting mistake, however, and it seems unlikely that the SEC would adjust the accredited investor definition in Rule 215 without also making the same adjustment to the definition under Rule 501(a). 11 In the main case considering the issue, CSX Corporation v. The Children s Investment Fund (UK) LLP, 562 F. Supp. 2d 511 (S.D.N.Y. 2008), the court did not reach the question of whether a holder of a cash-settled equity total return swap beneficially owns the referenced stock held by the short counterparty; rather, it relied on Exchange Act Rule 13d-3(b), which, in substance, states that where a person uses a contract or agreement to prevent the vesting of beneficial ownership of a security as part of a plan or scheme to evade the reporting requirements of Section 13(d) or (g), such person will be deemed, for purposes of Section 13(d) or (g), to beneficially own such security. U.S. Securities Law Briefing 7

Section 766(b) attempts to address this concern by requiring disclosure under Section 13(d) if a person is deemed to become a beneficial owner of such securities upon the purchase or sale or sale of a security-based swap that the Commission may define by rule. A person is deemed to acquire beneficial ownership in such case only to the extent that the SEC determines by rule that the purchase or sale of the security-based swap (or class of security-based swap) provides incidents of ownership comparable to direct ownership of the equity security, and it is necessary to achieve the purposes of Section 13(d) that such purchase or sale be deemed the acquisition of beneficial ownership of the equity security. The SEC may only promulgate such rule after consultation with prudential regulators and the Secretary of the U.S. Treasury Department. This change to the definition of beneficial ownership also applies to the short swing profit reporting requirements of Section 16(a) of the Exchange Act. Filing Requirements The Act also amends the filing requirements for the beneficial ownership disclosure required by Section 13(d) and the short-swing profit reporting required by Section 16(a). Section 13(d) requires the beneficial ownership disclosure filing to be made within 10 days after the acquisition of the securities that trigger the disclosure requirements, and Section 16(a) requires directors, officers and shareholders of more than 10% of a public company s registered class of securities (collectively, Section 16 insiders ) to disclose their ownership of the company s equity securities within 10 days of becoming a Section 16 insider. Section 929R of the Act provides the SEC with the authority but does not require the SEC to exercise the authority to shorten the length of time for making the required disclosure filings under Section 13(d) or Section 16(a). Section 929R also amends Section 13(d) to remove the requirements that the beneficial owner must also, in addition to filing a form with the SEC, send the form to the issuer by registered or certified mail and to each exchange where the security is traded. Similarly for Section 16(a), Section 929R eliminates the requirement that the form be sent to each exchange where the security is traded. Broker-Dealers Amendments to regulations affecting broker-dealers are scattered in various sections of the Act. The most significant provisions relate to the standard of care with respect to retail investors, mandatory arbitration provisions in customer agreements and investor notifications in connection with short sales. Fiduciary Duty Despite a push by the House to require the SEC to adopt rules establishing the same standard of conduct for broker-dealers and investment advisers when providing personalised investment advice to retail customers, Section 913 of the Act ultimately only requires the SEC to study the effectiveness of the existing standards of care and whether there are gaps or shortcomings in U.S. Securities Law Briefing 8

the protection of retail customers. 12 The study will also consider the impact of eliminating the broker-dealer exclusion from the definition of investment adviser under the Investment Advisers Act. The SEC must submit a report on the study to Congress within six months of the Act s enactment analysing whether there are any regulatory gaps or shortcomings and may commence a rulemaking as necessary or appropriate in the public interest and for the protection of retail customers. The SEC is specifically authorised under the Act but not directed to issue rules requiring that when providing personalised investment advice to a retail customer about securities, a broker or dealer is subject to the same standard of conduct applicable to an investment adviser under the Investment Adviser Act. Such standard of conduct requires that the broker or dealer act in the best interest of the customer without regard to the broker s or dealer s financial or other interest in providing the advice. Any material conflict of interest must be disclosed and consented to by the customer. After providing personalised investment advice, however, there is no continuing duty of care or loyalty to the customer. Mandatory Arbitration Section 921 of the Act provides the SEC with the authority to issue rules prohibiting or imposing conditions or limits on the use of agreements that require a broker s or dealer s (or investment adviser s) customer to arbitrate any future dispute between them, if the SEC finds it necessary in the public interest or for the protection of customers. Investor Notification The Act amends Section 15 of the Exchange Act to require every registered broker or dealer to provide a notice to their customers that they may elect not to allow their fully paid securities to be used in connection with short sales. If such securities are used in connection with short sales, the broker or dealer must also provide notice to the customer that the broker or dealer may receive compensation in connection with lending the customer s securities. The SEC may issue further rules regarding the form, content, time and manner of delivery of the notice. Analyst Conflicts of Interest Section 919A of the Act directs the U.S. Comptroller General to deliver recommendations and a report to Congress within 18 months of the Act s enactment based on the results of a mandated study examining the potential conflicts of interest that exist between the investment banking and research analyst staff at banks. Among other things, the study must consider whether to codify and permanently apply the reforms agreed to by the 12 firms who settled SEC v. Bear, Stearns & Co. Inc., et al., 03 CV 2937 (WHP) (S.D.N.Y.), 13 12 Retail customers are defined as natural persons who receive personalised advice about securities from a broker or dealer or investment adviser and use such advice primarily for personal, family or household purposes. 13 Notably, however, at least three of the five SEC Commissioners Mary Schapiro, Elisse Walter and Luis Aguilar have expressed support for a harmonised regulatory regime for investment advisers and broker-dealers who provide investment advice. U.S. Securities Law Briefing 9

in 2003 (the Global Research Analyst Settlement ), which included firewalls and physical separation between research and investment banking, separate reporting lines, separate legal and compliance staff and many other measures intended to promote research independence. Many of the undertakings in the original settlement have already been removed by the supervising court because they were duplicative of rules already imposed on the banks 14, and the study may represent an opportunity to rationalise such regulations and apply them evenly across the industry rather than just to the 12 settling firms. On the other hand, the study could also result in additional restrictions being imposed upon banks. Short Sales Section 929X of the Act contains several provisions affecting short sales, including: > Disclosure The SEC is directed to issue rules providing for the public disclosure of certain short sale information, based on the periodic reports filed with the SEC pursuant to Section 13(f) of the Exchange Act by certain institutional investment managers. The disclosures, which would occur at least once a month, would include: the issuer name and the title, class, CUSIP number and aggregate amount of the number of short sales of a security. > Manipulative short sales The Act amends Section 9 of the Exchange Act to make manipulative short sales unlawful and to direct the SEC to issue rules to ensure that the appropriate enforcement options and remedies are available. > Investor notification As discussed above with respect to brokerdealers, a broker or dealer must provide customers with a notice that they can elect not to allow their securities to be used in connection with short sales and if such securities are used, that the broker or dealer may receive compensation. Credit Rating Agencies The Act contains a number of provisions designed to overhaul the regulation of NRSROs. The key reforms fall into the following categories: > Internal controls and compliance Each NRSRO is required to establish effective internal control structures governing the implementation and adherence to policies, procedures and methodologies for determining credit ratings, and the SEC is directed to issue rules requiring each NRSRO to submit an annual internal controls report that includes an attestation by the chief executive officer. Each NRSRO s compliance officer must provide the SEC with an annual report on NRSRO s compliance with the securities laws and its own policies and procedures. 14 Our briefing on recent modifications to the Global Research Analyst Settlement is available at http://www.linklaters.com/pdfs/publications/us_seclaw_briefing/globalresearchanalystsettleme nt.pdf. U.S. Securities Law Briefing 10

> SEC authority to revoke registration The SEC is given the authority to temporarily suspend or permanently revoke an NRSRO s registration upon determining, after notice and the opportunity for a hearing, that the NRSRO does not have adequate financial and managerial resources to consistently produce credit ratings with integrity. > Conflicts of interest The SEC is directed to issue rules to prevent an NRSRO s sales or marketing consideration from influencing ratings. NRSROs must report to the SEC any case where a person employed by the NRSRO in the last five years has taken employment with an obligor, issuer, underwriter or sponsor of a security or money market instrument that the NRSRO has rated in the 12 months prior to the person s employment. The reporting requirements only apply with respect to the NRSRO s senior officers or employees who participated in determining credit ratings for the obligor, issuer, underwriter or sponsor. > Disclosure The SEC is directed to issue rules requiring each NRSRO to publicly disclose initial credit ratings and any subsequent changes to such ratings, as well as rules requiring each NRSRO to disclose certain information, including the data relied upon and the assumptions underlying its procedures and methodologies, in a form accompanying the publication of each credit rating. The SEC is also directed to issue rules requiring NRSROs to clearly define and disclose the meaning of any symbol used to denote a rating. > Corporate governance Each NRSRO must have a board of directors, at least half of which (and no less than two) must be independent. > Statutory references The Act amends a number of federal statutes to remove the references to credit ratings (such as references to investment grade securities). > Liability As discussed earlier, the Act increases the liability of NRSROs by allowing private rights of action against them for violations of Section 15E and eliminating the Rule 436(g) exemption. > Office of Credit Ratings The Act establishes the Office of Credit Ratings to administer the SEC s NRSRO rules and directs the U.S. Comptroller General to study whether to create an independent professional organisation for ratings analysts. Over the past two years, the SEC has already proposed rules addressing some, but not all, of the above requirements. U.S. Securities Law Briefing 11

Conclusion The main consequence of the Act with respect to securities regulation will likely be an increase in SEC enforcement actions, due to increased SEC authority in various areas, the new whistleblower program and the expected considerable increase in SEC funding. However, since many of the Act s provisions are dependent on the results of studies or SEC rulemakings, it is difficult to predict what will ultimately be the most significant changes to the securities laws made by the Act. We will continue to monitor developments in this area and welcome any queries you may have. Contacts For further information please contact: Jeff Cohen Partner (+1) 212 903 9014 jeff.cohen@linklaters.com Scott Sonnenblick Partner (+1) 212 903 9292 scott.sonnenblick@linklaters.com Jason Manketo Partner (+44) 20 7456 4654 jason.manketo@linklaters.com Jon Gray Partner (+852) 2842 4188 jon.gray@linklaters.com Edward Fleischman Senior Counsel (+1) 212 903 9011 edward.fleischman@linklaters.com This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2010 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers. Please refer to www.linklaters.com/regulation for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by emailing us at marketing.database@linklaters.com. One Silk Street London EC2Y 8HQ Telephone (+44) 20 7456 2000 Facsimile (+44) 20 7456 2222 Linklaters.com U.S. Securities Law Briefing 12

Appendix Dodd-Frank Wall Street Reform and Consumer Protection Act: Summary of Amendments to U.S. Securities Laws Section Provision Further Action to be Taken Liability 929P Extension of the extraterritorial jurisdiction of U.S. courts over actions by the U.S. government or SEC 929Y SEC study mandated to review whether extraterritorial jurisdiction provision should be extended to private actions 929M Extension of the SEC s ability to pursue aiding and abetting and control persons claims 929Z Government Accountability Office ( GAO ) study mandated to review whether to allow private right of action against aiding and abetting securities violations No further action required, although courts will determine how Morrison applies SEC directed to deliver report to Congress within 18 months No further action required GAO directed to deliver report to Congress within one year 929P Control person liability extended to reckless actions No further action required 933 Expanded credit rating agency liability under the Exchange Act SEC directed to issue rules 939G Eliminates Rule 436(g) exemption for NRSROs No further action required, though the SEC has acted in connection with rating agencies refusal to provide consent SEC Reforms 922 Expanded whistleblower incentives and protections No further action required, but SEC may issue additional rules 929P, 925, 929F Enhanced SEC authority with respect to collateral bars, cease and desist penalties and formerly associated persons No further action required 929U 180-day deadline for SEC investigations or examinations No further action required 991 SEC match funding SEC to adjust fees/rates, submit budgets 911, 915, 919D Private Offerings Establishment of the Investor Advisory Committee, Office of the Investor Advocate and Ombudsman within the SEC 926 Disqualification of certain bad actors from participation in offerings made in accordance with Regulation D Committee members, Investor Advocate and Ombudsman to be appointed SEC directed to issue rules within one year 413 Review and adjustment of accredited investor definition SEC directed to review every four years Beneficial Ownership Disclosure 766(b) Amendments to the Section 13 and Section 16 disclosure rules to contemplate derivatives and swaps SEC to issue rules after consultation with Treasury and prudential regulators 929R SEC given authority to shorten filing deadlines SEC may issue rules Broker-Dealers 913 SEC study of whether broker-dealers should be subject to same standard of care as investment advisers SEC directed to submit report to Congress within 6 months 921 SEC authority to restrict mandatory pre-dispute arbitration SEC may issue rules 929X Investor notification of securities lending SEC may issue rules Analyst Conflicts of Interest 919A GAO study of analyst/banking conflicts of interest, including whether 2003 settlement terms should be codified Short Sales GAO directed to deliver report to Congress within 18 months 929X Monthly disclosure of short sale information SEC directed to issue rules 929X Prohibition of manipulative short sales SEC directed to issue rules 929X Investor notification of securities lending SEC may issue rules Credit Rating Agencies 931 939H Various reforms affecting NRSROs No further action required for many, but SEC to issue further rules for some 13