The ICI has filed an amicus brief in a class action in Illinois state court in which the plaintiffs are seeking to avoid preemption by SLUSA. SLUSA establishes uniform standards for securities class actions and preempts state class actions alleging fraud relating to the sale or purchase of securities. The class action currently being litigated in Illinois involves allegations of negligence and recklessness by investment advisers in failing to prevent abusive market timing. The plaintiffs contend that the action is not preempted by SLUSA because it alleges negligence and recklessness rather than fraud. The state trial court has denied a defense motion to dismiss based on SLUSA preemption but has certified the issue to the Appellate Court of Illinois. The ICI has filed an amicus brief with the Appellate Court regarding the importance of SLUSA’s protections against frivolous and abusive lawsuits. The ICI contends that SLUSA should be read to preempt those state class actions that allege negligence and recklessness and should not be limited to preempting only those cases that expressly allege fraud.

For more information, see the amicus brief filed by the ICI: Brief for the Investment Company Institute as Amicus Curiae, Kircher v. Putnam Funds Trust, No. 05-08-0260 (Ill. App. Ct. 2008).

In a no-action letter, dated July 10, 2008, the Division of Investment Management has agreed that it would not recommend enforcement action to the SEC under Section 17(a) of the Investment Company Act of 1940 if a fund (the “Purchasing Fund”) invested in shares of an affiliated fund (the “Purchased Fund”) without obtaining an exemptive order. In this case, the funds were not members of the same fund family, but were affiliated because the sub-adviser of the Purchasing Fund was the adviser of the Purchased Fund. From the Purchased Fund’s perspective, Section 17(a) clearly permitted it to issue its shares to and redeem them from the Purchasing Fund; however, from the Purchasing Fund’s perspective, its ability to invest in shares of the Purchased Fund under Section 17 was not as clear. Accordingly, the staff agreed not to recommend enforcement action if the Purchasing Fund invested in shares of the Purchased Fund for cash on the same terms as other investors.

In a no-action letter, dated July 11, 2008, the Division has agreed that it would not recommend enforcement action under Section 15(a) of the Investment Company Act against a fund, its adviser or its new sub-adviser if the adviser retained a new sub-adviser on an interim basis for a fund before obtaining shareholder approval. Although Rule 15a-4 under the Investment Company Act permits an adviser or sub-adviser to be appointed on an interim basis before shareholder approval when a contract is terminated by the fund’s board or its shareholders, by a failure to renew the contract, or by an assignment of the contract, the rule was not applicable because the sub-advisory contract was being terminated due to the former sub-adviser’s exercise of a termination option. As noted in the no-action request, the fund would hold a shareholder meeting to approve a new sub-advisory contract with a new sub-adviser within 150 days of the termination of the sub-advisory contract.

On July 14, 2008, the Division issued a no-action letter that replaced its March 16, 2008 no-action letter to JP Morgan Chase. The replacement letter includes a reference to American Century Companies, Inc.,/JP Morgan & Co.,Inc., SEC No-Act. Ltr. (Dec. 23, 1997) instead of the reference in the original letter to Dean Witter, Discover & Co.; Morgan Stanley Group Inc., SEC No-Act. Ltr. (Apr.18, 1997), thereby clarifying the analytical basis for the original no-action letter. The replacement letter also makes other non-substantive changes to the original letter.

For more information, see the SEC No-Action Letters, which may be found at: http://www.sec.gov/divisions/investment/noaction/2008/troweprice071008-17a.pdf; http://www.sec.gov/divisions/investment/noaction/2008/firsttrustgallatin071108-15a.pdf; and http://www.sec.gov/divisions/investment/noaction/2008/jpmorgan071408-15a.pdf.

In an interpretive letter, dated July 15, 2008, the SEC’s Division of Investment Management has clarified that Rule 206(4)-3 under the Investment Advisers Act of 1940, commonly known as the “cash solicitation rule,” generally does not apply to cash payments made by managers of pooled investment vehicles solely to solicit investments in those funds. The cash solicitation rule prohibits a registered adviser from paying a cash fee, whether directly or indirectly, to a solicitor for solicitation activities, unless the payments are made in compliance with the specific conditions identified in the rule. These conditions include, for example, maintaining a written solicitation agreement and providing each prospective investor with a separate written disclosure document regarding the solicitation arrangement. In this letter, the Division indicates that these conditions do not apply when an adviser makes cash payments to solicitors solely to compensate them for soliciting investors to invest in privately managed investment pools which the adviser manages. To determine whether payments are made solely to compensate a solicitor for soliciting investors in a private fund so that the cash solicitation rule will be inapplicable, the adviser should evaluate: (i) the nature of the arrangement between the soliciting/referring person and the investment adviser; (ii) the nature of the relationship between the adviser and the solicited/referred person; and (iii) the purpose of the adviser’s cash payment to the soliciting/referring person. This letter supersedes several no-action letters where the staff appeared to take a contrary position. Those letters had long been criticized by many private practitioners as being inconsistent with the terms of the rule and the Advisers Act generally.

The letter notes that even if the cash solicitation rule does not apply to a particular situation, the general anti-fraud requirements of Section 206 of the Advisers Act may still apply. The soliciting person itself may fall within the definition of “investment adviser” and be subject to Section 206. This means that the soliciting person may still be required to disclose material facts regarding possible conflicts of interest to a prospective investor. Finally, the letter does not address whether a person soliciting investments in the funds might be a broker or dealer under the Exchange Act.

On the night of July 18, 2008, the SEC’s Division of Trading and Markets released answers to frequently asked questions regarding its recent naked short selling emergency order, as amended, discussed in the WilmerHale Investment Management Industry News Summary, dated July 18, 2008. The emergency order is designed to prevent naked short selling in the securities of Fannie Mae, Freddie Mac and 17 other financial services companies.

The FAQs provide clarification regarding a number of topics. For example, the Division indicates that an “arrangement to borrow” must be a bona fide agreement such that the security being borrowed is set aside at the time of the arrangement solely for the person requesting the security. The Division also confirms that, as permitted under Regulation SHO, a person effecting a short sale on behalf of a customer may rely on the customer’s representation that the customer has arranged to borrow the security from another source. In addition, the Division clarifies that the emergency order applies to any short sale transaction in publicly traded securities of the designated companies if the trade is agreed to in the United States, even if the trade is booked overseas. The FAQs also address the application of the emergency order to options exercises and assignments, re-applying a borrow for intra-day buy-to-cover trades, and the interaction with Rule 15c3-3(b) of the Securities Exchange Act of 1934.

The emergency order and the FAQs may be found at http://www.sec.gov/rules/other/2008/34-58166.pdf; http://sec.gov/rules/other/2008/34-58190.pdf; and http://sec.gov/divisions/marketreg/emordershortsalesfaq.htm. For more information, please contact any WilmerHale Investment Management lawyer listed below.

On July 22, 2008, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) released a letter to chief compliance officers summarizing select common deficiencies the staff has seen during examinations of investment advisers and broker-dealers over the past year. This is the second annual summary of this type provided by OCIE. It is designed to encourage advisers and broker-dealers to bolster their compliance programs.

• As to investment advisers and investment companies, OCIE identified deficiencies related to:
• Personal trading by investment advisory employees
• Soft dollar practices by advisers
• Supervision of solicitations for advisory services
• Mutual funds’ proxy voting practices
• Valuation and liquidity issues for high-yield municipal bond funds
• Transfer agents’ practices regarding “lost securityholders”

The alert also provides examples of effective policies that are being used by investment advisers and investment companies to prevent misconduct. Although the alert does not appear to set new legal standards, advisers and broker-dealers should anticipate that OCIE will focus on many of these issues in future examinations and may scrutinize policies and procedures that differ from those in the alert.

For more information, see the SEC letter, dated July, 2008, which may be found at http://www.sec.gov/about/offices/ocie/complialert0708.htm.

Last January, the Chairman of the SEC requested that NASD, together with the Investment Company Institute and the Securities Industry Association, convene a task force (the “Task Force”) to recommend industry-wide changes to address errors and failures in providing breakpoint discounts to investors in connection with the purchase of mutual fund shares that carry a front-end sales load. The Task Force recently published a report of its findings and recommendations to address these errors and failures and ensure that processes are in place so that investors are provided any breakpoint discounts to which they are entitled. The Task Force’s recommendations were grouped into three categories:

• The mutual fund industry should adopt common definitions of terms frequently used in describing breakpoint opportunities such as “spouse” and “minor child.” (but the Report emphasizes that this recommendation is not intended to mean that funds can or should conform the bases on which they offer breakpoints to investors).
• Mutual funds should create a central, comprehensive database (easily accessible to broker-dealer representatives) of pricing methods, breakpoint schedules, and the linkage rules used to determine when a breakpoint has been reached.
• Mutual funds should provide, in a prominent and clear format, additional prospectus and website disclosure concerning pricing methods, breakpoint schedules, and linkage rules.
• Confirmations should be revised to disclose the entire percentage sales load charged on each front-end load mutual fund purchase transaction.

2. Gathering and communicating relevant information. To assist broker-dealers in communicating with investors about breakpoint opportunities and to gather the data necessary to fully deliver all appropriate breakpoint discounts:

• Broker-dealers should require their registered representatives to maintain evidence that they have communicated the availability of breakpoint discounts to investors and made the necessary inquiry to gather the relevant data to calculate breakpoint discounts before transactions are processed.
• Broker-dealers should record and update, whenever necessary, an investor’s linkage information, preferably using a standardized worksheet that the NASD expects to develop.
• The SEC should require mutual fund prospectuses to: (1) disclose that investors may need to provide their broker-dealers with information necessary to take full advantage of breakpoint discounts; and (2) clearly explain whether breakpoint discounts are available based upon the historical cost of the investor’s total investment or whether they are available based only upon the net asset value of the investor’s holdings or the public offering price and (3) state whether the investor must keep the records necessary to demonstrate his or her historical costs.
• Mutual fund confirmations should include a legend alerting investors that they may be eligible for breakpoint discounts.
• Broker-dealers, at or prior to the confirmation of the investor’s initial purchase, should provide each investor with a written statement: (1) alerting the investor to the breakpoint opportunities; (2) referring the investor to appropriate materials to determine breakpoint eligibility; and (3) explaining that the broker-dealer requires certain information to identify and link related accounts, and, if applicable, to obtain discounts based on historical costs.
• Continuing education requirements for registered representatives should be enhanced to place greater focus on breakpoint rules, terms, and considerations.
• Participants in the sale of mutual funds and regulators should develop appropriate educational materials that clearly explain breakpoint opportunities to retail investors.

3. Meeting challenges in processing breakpoint information. To provide for better collection and sharing of information that is necessary to ensure that an investor receives any applicable breakpoint discounts:

• Non-omnibus broker-dealers should transmit tax identification number (“TIN”) and broker-dealer information number (“BIN”) data to mutual funds to assist in the linking of accounts. The Report identifies methodologies to facilitate wider access through Fund/SERV.
• Transfer agents should perform automated searches of the TIN and/or the BIN and letter of intent data supplied by the broker-dealers to calculate and verify breakpoint discounts across broker-dealers on transactions that are executed on a fully disclosed basis.

Report of the Joint NASD/Industry Task Force on Breakpoints, NASD (July 2003).

On July 8, 2008, Federal U.S. District Judge David D. Dowd, Jr. sentenced Mark Lay to 12 years in prison on fraud charges related to the loss of $216 million in investments in a hedge fund in which the Ohio Bureau of Workers’ Compensation was the sole investor. Lay, the founder, Chairman, Co-CEO, principal shareholder and Chief Investment Strategist of MDL Capital Management, Inc. (the investment adviser to the hedge fund), was also ordered to pay $212.9 million in restitution and a $590,000 forfeiture. Prosecutors alleged that Lay hid the amount the hedge fund was leveraged, which significantly exceeded the leverage limitations set forth in the Confidential Private Placement Memorandum of the hedge fund.

On July 9, 2008, the Senate Committee on Agriculture, Nutrition and Forestry voted to send to the full Senate for consideration and approval the nomination of three administrative appointees to the CFTC. The nominees are: Walter Lukken to be Chairman of the CFTC; Bartholomew H. Chilton to be a Commissioner of the CFTC for a term expiring April 13, 2013; and Scott O’Malia, to be a Commissioner of the CFTC for a term expiring April 13, 2012.

For more information, see http://agriculture.senate.gov/.

In the first three weeks of July, the SEC filled several positions. First, the SEC named Daniel M. Gallagher as a Deputy Director in the agency’s Division of Trading and Markets. Mr. Gallagher served as Counsel to SEC Chairman Christopher Cox since 2007, and before that served as Counsel to Commissioner Paul S. Atkins. Second, the SEC promoted Dr. Stewart Mayhew to Deputy Chief Economist in the agency’s Office of Economic Analysis. Dr. Mayhew joined the SEC staff in 2002 as a Visiting Academic Scholar, and since 2004 has served as an Assistant Chief Economist, leading a group that provides economic analysis and support for the SEC’s Division of Investment Management, Division of Trading and Markets, and Office of Compliance Inspections and Examinations. Third, the SEC named Wayne Strumpfer to lead the investor education unit within the SEC’s recently expanded Office of Investor Education and Advocacy. Mr. Strumpfer worked most recently at the California Department of Corporations, where he was the Deputy Commissioner of Enforcement and Investor Education. He also served as the Chairman of the Investor Education Section for the North American Securities Administrators Association. Finally, the SEC named Meridith Mitchell the SEC’s Deputy General Counsel for Legal Policy and Administrative Practice. Since 2000, Ms. Mitchell served as the Principal Associate General Counsel of the SEC.

For more information, see http://sec.gov/news/press/2008/2008-129.htm; http://sec.gov/news/press/2008/2008-132.htm; http://sec.gov/news/press/2008/2008-139.htm; and http://sec.gov/news/press/2008/2008-142.htm.

On July 15, 2008, Chairman Christopher Cox gave testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs regarding the recent developments in U.S. financial markets and the SEC’s responses to these developments. Chairman Cox noted that the credit market crisis “began with the deterioration of mortgage origination standards and a contagion of abusive lending practices, and then spread to the capital markets through securitization.” Chairman Cox mentioned three main areas in which the SEC has acted to address this problem:

• The investigation and prosecution of violations of the securities laws. According to Chairman Cox, the SEC has over four dozen pending law enforcement investigations in the subprime area, including investigations of subprime lenders, investment banks, credit rating agencies, insurers, others involved in the securitization process and banks and broker-dealers who sold mortgage-backed investments to the public.
• The regulation of problem areas in the markets, including credit rating agencies under recent authority granted to the SEC by the U.S. Congress.  
• The review of accounting standards and the improvement of disclosure standards to bring hidden risk into light. According to Chairman Cox, the Division of Corporation Finance has asked financial institutions to provide additional disclosure regarding both off-balance sheet arrangements and the application of fair value to financial instruments. In addition, the SEC’s Chief Account has asked the Financial Account Standards Board to revisit the underlying accounting guidelines to determine whether the subprime experience reflects a need for changes.

For more information, see Chairman Cox’s speech, which may be found at http://sec.gov/news/testimony/2008/ts071508cc.htm.

On July 8, 2008, the SEC released a report titled “Summary Report of Issues Identified in the Commission Staff’s Examination of Select Credit Rating Agencies.” This report summarizes the SEC’s examination of three credit rating agencies: Fitch Ratings, Ltd., Moody’s Investor Services, Inc. and Standard & Poor’s Rating Services. In these examinations, the SEC focused on the credit rating agencies’ activities in rating subprime residential mortgage-backed securities and collateralized debt obligations linked to subprime residential mortgage-backed securities. The SEC found a substantial increase in the number and in the complexity of mortgage-backed securities and collateralized debt obligations since 2002 and found that some of the credit rating agencies appear to have struggled with this increase. In addition, the SEC found that none of the credit rating agencies examined had specific written comprehensive procedures for rating such securities and obligations.

This report summarizes also the remedial actions that the credit rating agencies agreed to take as a result of these examinations. Finally, the report describes how the rules the SEC proposed on June 16, 2008 relating to credit rating agencies would address the various issues that were discovered during the examinations.

The report may be found at http://sec.gov/news/studies/2008/craexamination070808.pdf. For more information, see the statement issued by Chairman Christopher Cox on July 8, 2008, in which Chairman Cox discussed the report, which may be found at http://sec.gov/news/speech/2008/spch070808cc.htm, or the WilmerHale Investment News Summary, dated June 20, 2008, that discusses the proposed rules, which may be found at http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=8359.

On July 13, 2008, the SEC announced that it will immediately conduct examinations aimed at the prevention of the intentional spread of false information intended to manipulate securities prices. Examiners will focus on supervisory and compliance controls of broker-dealers and investment advisers and whether such controls are reasonable designed to prevent the intentional creation or spreading of false information intended to affect securities prices or other potentially manipulative conduct. These examinations are being undertaken with the Financial Industry Regulatory Authority, Inc. and the New York Stock Exchange Regulation, Inc.

These examination are in addition to the SEC’s investigations into alleged intentional manipulation of securities prices through rumor-mongering and abusive short selling that are underway currently and have resulted in the subpoena of over fifty hedge fund advisers. On this front, the SEC is seeking trading and communications data related to the short-selling and options trading in Bear Stearns and Lehman Brothers.

For more information, see the SEC Press Release, dated July 13, 2008, which may be found at http://sec.gov/news/press/2008/2008-140.htm

On July 15, 2008, the SEC issued an emergency order designed to limit naked short selling in the securities of Fannie Mae, Freddie Mac and certain financial services companies. The SEC’s order, as issued on July 15, 2008, required anyone effecting a short sale in a specified security to have borrowed or arranged to borrow the security or otherwise have the security available to borrow in its inventory prior to effecting such short sale and deliver the security on settlement date. However, on July 18, 2008, the SEC issued an amendment to the emergency order. This amendment: (1) excepts certain bona fide market makers from the borrowing requirements noted above; (2) clarifies that brokers and dealers generally may use the same processes and procedures to document compliance with the order as used for compliance with Regulation SHO; (3) excepts from the order any person that effects a short sale pursuant to Rule 144 of the Securities Act of 1933; (4) excepts from the order any sale by an underwriter, or any member of a syndicate or group participating in the distribution of the specified securities, in connection with the over-allotment of securities, or any lay-off sale by such person in connection with a distribution of the specified securities through a rights or a standby underwriting commitment; and (5) excepts from the order a net syndicate short position created in connection with the distribution of the specified securities that is part of a fail to deliver position at a registered clearing agency in the specified securities if action is taken to close out the net syndicate position no longer than the 30^th day after commencement of sales in the distribution.

The order will take effect at 12:01 a.m. EDT on Monday, July 21, 2008 and will terminate at 11:59 EDT on Tuesday, July 29, 2008, unless further extended by the SEC.

The securities identified in the SEC’s order (with ticker symbol) are:

• BNP Paribas (BNPQF or BNPQY)
• Bank of America Corporation (BAC)
• Barclays PLC (BCS)
• Citigroup Inc. (C)
• Credit Suisse Group (CS)
• Daiwa Securities Group Inc. (DSECY)
• Deutsche Bank Group AG (DB)
• Allianz SE (AZ)
• Goldman, Sachs Group Inc (GS)
• Royal Bank ADS (RBS)
• HSBC Holdings PLC ADS (HBC)
• J.P. Morgan Chase & Co. (JPM)
• Lehman Brothers Holdings Inc. (LEH)
• Merrill Lynch & Co., Inc. (MER)
• Mizuho Financial Group, Inc. (MFG)
• Morgan Stanley (MS)
• UBS AG (UBS)
• Freddie Mac (FRE)
• Fannie Mae (FNM)

For more information, see the emergency order, dated July 15, 2008, which may be found at http://www.sec.gov/rules/other/2008/34-58166.pdf and the amendment to the emergency order, dated July 18, 2008, which may be found at http://sec.gov/rules/other/2008/34-58190.pdf.

The West Virginia Supreme Court of Appeals has held that the state’s attorney general may not bring an action under the state’s consumer protection laws against financial services firms relating to the firms’ research reports and allegedly undisclosed investment banking relationships. The Court noted that the consumer protection laws did not apply to the business of buying and selling securities, and concluded that the sale and distribution of research reports is “ancillary and subsidiary to the buying and selling of securities.” Therefore, the Court concluded that the consumer protection laws do not apply to the firms’ research reports.

The case at issue involved financial services companies that provide both investment banking and securities analysis. The attorney general had alleged that the companies manipulated their analysis of securities in order to profit from undisclosed investment banking relationships, and that such conduct amounted to an unfair method of competition or an unfair or deceptive practice under the state’s consumer protection laws. The financial services companies argued that those laws do not apply to a company engaged in the business of buying and selling securities.

West Virginia v. Bear, Stearns & Co. et al., No. 32515, July 7, 2005.

On June 27, 2008, a jury in the United States District Court of the Southern District of New York returned a verdict for Bear Stearns, the defendant, and dismissed claims brought by the plaintiff, Helen Gredd, the Chapter 11 Trustee for Manhattan Investment Fund, Ltd., a hedge fund client of Bear Stearns’ prime brokerage in the 1990s. The jury held that Bear Stearns should not be held liable for failing to discover fraud at the hedge fund, which filed bankruptcy in 2000. The jury trial followed a partial reversal by the appellate court on December 17, 2007, of a ruling by the bankruptcy court granting the plaintiff’s motion for summary judgment. The bankruptcy court ruled that transfers into the fund’s margin account at Bear Stearns could be avoided in the bankruptcy because, in that court’s view, (1) the transfers by the fund’s manager were made with “actual intent to hinder, delay or defraud the fund’s creditors” as defined by Section 548(a)(1)(A) of the Bankruptcy Code; (2) Bear Stearns was an “initial transferee” under Section 550(a) of the Bankruptcy Code; and (3) Bear Stearns failed to prove that it accepted the transfers in good faith under Section 548(e) of the Bankruptcy Code. The appellate court upheld the first two findings above but overturned the bankruptcy court’s third finding, that Bear Stearns failed to prove that it accepted the transfers in good faith. The appellate court held that a reasonable jury could find that Bear Stearns’ actions were diligent, which the court considered to be sufficient to prevail on the good faith defense. Thus, the issue of whether or not Bear Stearns acted in good faith was brought before a jury on June 16, 2008.

On June 2, 2008, Plaintiffs petitioned the United States Court of Appeals for the Seventh Circuit for a rehearing and petitioned for a rehearing en banc regarding the Court of Appeals decision on May 19, 2008 in Jones v. Harris Associates, in which the Court of Appeals rejected a claim that advisory fees charged for the Oakmark family of funds were excessive and violated Section 36(b) of the Investment Company Act.

The Seventh Circuit decision captured the attention of the investment management industry and the media because, while the appellate court affirmed the district court’s previous decision that Oakmark’s advisory fees were not excessive, it rejected the “Gartenberg approach.” Instead, the appellate court articulated a new test for reviewing advisory fee challenges under Section 36(b), stating “A fiduciary duty differs from rate regulation. A fiduciary must make full disclosure and play no tricks but is not subject to a cap on compensation. The trustees (and in the end investors, who vote with their feet and dollars), rather than a judge or jury, determine how much advisory services are worth.”

For more information, see http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=8329.
 

On July 3, 2008, the IRS issued Revenue Ruling 2008-39 regarding the deductibility, for federal income tax purposes, of management fees that are paid by an upper tier investment partnership and lower tier trading partnerships to their respective managers in a “fund of funds” structure.

This guidance addressed how management fees incurred by both upper and lower tier partnerships are taken into account by individual limited partners in an upper tier partnership, when the upper tier partnership’s activities consist solely of acquiring, holding and disposing of interests in lower tier partnerships. The IRS held that in such circumstances the management fee of the upper tier partnership is not an ordinary and necessary business expense under Section 162 of the Internal Revenue Code (“Code”) that is paid or incurred by the upper tier partnership on behalf of the lower tier partnerships in the carrying on of their trading business. Instead, the IRS deemed the management fee to constitute an expense for the production of income under Section 212 of the Code. Such an expense is not taken into account in computing the upper tier partnership’s taxable income or loss, but, instead, must be separately stated by the upper tier partnership and separately taken into account by a limited partner in computing the limited partner’s federal income tax liability. For individual limited partners, Section 212 expenses, in conjunction with certain other expenses, are deductible only to the extent that they exceed 2% of the limited partner’s adjusted gross income.

The IRS further held that the management fee paid or incurred by the lower tier partnership did constitute an ordinary and necessary business expense described in Section 162 of the Code and, thus, was to be taken into account in computing the lower tier partnership’s taxable income or loss under Section 702(a)(8) of the Code. Therefore, in computing a limited partner’s federal income tax liability, since the limited partner takes into account the limited partner’s distributive share of the upper tier partnership’s taxable income or loss, which takes into account the upper tier’s distributive share of the lower tier partnership’s taxable income and loss, the limited partner gets the full benefit of the deduction for that partner’s share of the lower tier partnerships’ management fees.

This guidance will appear in the Internal Revenue Bulletin 2008-31, dated August 4, 2008.
 

On June 27, 2008, the U.S. Senate confirmed three SEC Commissioner nominees: Republican Troy Paredes, a professor at Washington University School of Law, Democrat Elisse Walter, a senior executive with FINRA and Democrat Luis Aguilar, a partner at the law firm of McKenna Long & Aldridge. In response to these confirmations, SEC Chairman Christopher Cox stated: “The President and the Senate have given the SEC three outstanding Commissioners. I look forward to welcoming them to their important positions of leadership in the finest securities regulatory agency in the world. The SEC has laid out an ambitious agenda to improve investor protection and financial markets regulation, and a full complement of Commissioners will help us achieve those important objectives.”

For more information, see the SEC Press Release, which may be found at http://www.sec.gov/news/press/2008/2008-125.htm.
 

On July 1, 2008, FINRA announced that Richard L. Goble, a member of the FINRA Board of Governors, resigned, which resignation was effective immediately. FINRA also announced that it will conduct a special election to fill Mr. Goble’s seat and will release details pertaining to that election soon. Mr. Goble had been a member of FINRA’s Board since last October after being elected by small firms as one of their three designated representatives.

For more information, see the FINRA Press Release, which may be found at http://www.finra.org/PressRoom/NewsReleases/2008NewsReleases/P038857.  

The SEC proposal would expand the class of investors to which the foreign broker-dealer could provide research reports directly from major U.S. institutional investors to qualified investors, subject to certain conditions.

Unsolicited Transactions (Third Party Quotation Systems)

Currently, paragraph (a)(1) of Rule 15a-6 provides an exemption from registration for foreign broker-dealers that effect unsolicited transactions for U.S. customers. The proposal does not change this exemption, but includes new guidance regarding the SEC’s broad interpretation of the term “solicitation,” as that term applies to quotation systems. The updated guidance, as proposed, would state that U.S. distribution of a foreign broker-dealer’s quotations by any third party system—regardless of where it primarily distributes quotations—would not be considered a solicitation for broker-dealer registration purposes, provided that transactions between the foreign broker-dealer and U.S. persons could not be executed through the system.

Solicited Transactions

The SEC also proposed significant changes to the conditions under which a foreign broker-dealer may solicit a U.S. investor to buy or sell a security without registering with the SEC as a broker-dealer. Specifically, the proposal would provide two new exemptions from the registration requirements for foreign broker-dealers engaging in solicited transactions with qualified investors (the “New Exemptions”).

The SEC proposed additional amendments to Rule 15a-6, including amendments that affect transactions with certain counterparties and customers and the activities of foreign options exchanges that are designed to familiarize U.S. entities with foreign securities. (For more information concerning this proposal, including the New Exemptions, see the WilmerHale Securities Briefing Series, dated July 2008, which discusses this proposal in greater detail.)

Comments on this release are due September 8, 2008.

For more information, see the SEC Release, which may be found at http://sec.gov/rules/proposed/2008/34-58047.pdf or the WilmerHale Securities Briefing Series, dated July 2008, which may be found at http://www.wilmerhale.com/files/Publication/9afc8201-0f9e-4bea-a9f0-7e32b869ea84/Presentation/PublicationAttachment/fd6b3c06-5be5-49cd-97d0-00a7a994b967/SECBriefing_July.pdf.

On July 3, 2008, the SEC issued final guidance and a final rule amendment, in which it took several actions intended to facilitate more expeditious handling of proposed rule changes submitted by SROs. First, the SEC provided interpretive guidance regarding the range of proposed changes to exchange trading rules that qualify for immediate effectiveness, pursuant to Rule 19b-4(f)(6) under the Exchange Act, as not significantly affecting the protection of investors or the public interest and not imposing any significant burden on competition. The SEC anticipated that the guidance would result in exchanges filing a broader range of proposed changes to trading rules for immediate effectiveness under Rule 19b-4(f)(6). Additionally, the SEC provided guidance on proposed rule changes relating to an SRO’s minor rule violation plan and “copycat” filings relating to SRO rules other than trading rules. The guidance that relates to proposed changes to trading rules is directed at SROs that operate trading systems (i.e., the national securities exchanges). The additional guidance is applicable to all SROs, including exchanges, national securities associations, clearing agencies and the Municipal Securities Rulemaking Board. Further, the SEC adopted an amendment to Rule 200.30-3(a)(12) relating to the delegation of authority to the Director of the Division of Trading and Markets regarding the publication of proposed rule changes. Amended Rule 200.30-3(a)(12) applies with regard to all SRO rule filings.

In 2001, the SEC proposed comprehensive changes to the SRO rule filing process (the “2001 Proposal”). The SEC proposed to replace completely Rule 19b-4, the rule governing the requirements for SRO rule filings, with proposed new Rule 19b-6. Proposed Rule 19b-6, among other things, would have defined terms used in proposed Rule 19b-6 to allow most exchange trading rules, other than proposals involving fundamental market structure changes, to be immediately effective upon filing with the SEC pursuant to Section 19(b)(3)(A) of the Exchange Act. The SEC also proposed related changes that would have imposed a number of new obligations on SROs filing proposed rule changes with the SEC. For example, in proposed Rule 19b-6, the SEC would have required, among other things, that a senior SRO official certify the accuracy and completeness of the proposal. The SEC also proposed to eliminate the 30-day operational date and the five-day pre-filing requirement for non-controversial rule filings.

The SEC noted that it had considered thoroughly all of the comments relating to the 2001 Proposal. In the July 3, 2008 release, the SEC did not take action on proposed Rule 19b-6, nor with regard to any of the other related changes. Instead, the SEC noted that its action is consistent with the objectives underlying the 2001 Proposal and takes into account the varying views expressed in the comments. The SEC noted that the guidance and rule adopted in the July 3, 2008 release do not alter the existing legal obligations for SROs filing proposed rule changes. The SEC expounded that the release is not modifying or replacing Rule 19b-4, nor is it imposing related obligations on SROs with regard to the rule filing process and, therefore, the SEC believes that the additional requirements proposed in the 2001 Proposal are not necessary at this time.

These guidelines and amendment will be effective on the date of publication in the Federal Register.

For more information, see the SEC Release, which may be found at http://sec.gov/rules/final/2008/34-58092.pdf.
 

As expected, on July 1, 2008, the SEC issued simultaneously three releases that propose amendments to various rules and forms that rely on credit ratings issued by nationally recognized statistical rating organizations (“NRSROs”). The proposed amendments are designed to address concerns that the references to NRSRO ratings in SEC rules and forms may have contributed to undue reliance on NRSRO ratings by market participants. (For more information concerning these proposals, see the WilmerHale Investment Management News Summary, dated June 27, 2008, which discusses the anticipated proposals in greater detail.)

The SEC proposed to amend the following rules under the Investment Company Act of 1940 (“Investment Company Act”):

(1) Rule 2a-7, which governs the operation of money market funds, would be amended to eliminate references to ratings, while offering protections similar to the current rule’s reliance on NRSRO ratings;

(2) Rule 3a-7, which excludes from the Investment Company Act’s definition of “investment company” structured finance vehicles that carry an investment grade rating, subject to certain conditions, would be amended to limit the type of investors that may participate in offerings of these vehicles to accredited investors and qualified institutional buyers;

(3) Rule 5b-3, which allows investment companies to treat the acquisition of a repurchase agreement as an acquisition of securities collateralizing the repurchase agreement for purposes of Sections 5(b)(1) and 12(d)(3) of the Investment Company Act, if the obligation of the seller to repurchase the securities from the fund is “fully collateralized,” as defined in the Investment Company Act, would be amended to eliminate the requirement that collateral other than cash or government securities be rated by an NRSRO, and instead require the investment company’s board of directors (or its delegate) to determine that such collateral securities present minimum credit risk and are highly liquid; and

(4) Rule 10f-3, which prohibits a registered investment company from purchasing any security for which an affiliated underwriter is acting as a principal underwriter during the existence of an underwriting or selling syndicate for that security, would be amended to eliminate references to ratings, while offering protections similar to the current rule’s reliance on NRSRO ratings.

The SEC also proposed to amend Rule 206(3)-3T under the Investment Advisers Act of 1940 (“Advisers Act”), which provides a temporary alternative means for investment advisers who are registered with the SEC as broker-dealers to meet the requirements of Section 206(3) of the Advisers Act when they act in a principal capacity in transactions with certain of their advisory clients. As proposed, Rule 206(3)-3T would be amended to eliminate the references to credit ratings and instead require an investment adviser to make a determination that a security presents minimal credit risk and is sufficiently liquid. An adviser seeking to rely on Rule 206(3)-3T, would have to adopt and implement policies and procedures that address the adviser’s methodology for determining whether a security is investment grade quality.

Finally, the SEC proposed to amend various rules and forms under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”), including the shelf registration rule and the net capital rule.

Comments on each release are due September 5, 2008.

For more information, see the SEC Releases, which may be found at http://sec.gov/rules/proposed/2008/ic-28327.pdf; http://sec.gov/rules/proposed/2008/33-8940.pdf; and http://sec.gov/rules/proposed/2008/34-58070.pdf, and the WilmerHale Investment Management News Summary, dated June 2008, which may be found at http://www.wilmerhale.com/publications/whPubsDetail.aspx?publication=8359.