Client Alerts & Publications Archive

With slightly less than six months remaining before the reappearance of the lower $1 million exemption from US gift tax, we are resending our June 2011 Client Alert regarding the advantages of using part or all of the $5 million (now $5.12 million) gift tax exemption before it expires at year-end.

Please contact your Chapman and Cutler LLP Trust and Estate attorney to discuss how and whether you may benefit from this unprecedented gifting opportunity. 

The Securities and Exchange Commission recently approved the Municipal Securities Rulemaking Board rule proposals governing the conduct of brokerʼs brokers. The new rules consist of (a) new MSRB Rule G-43 governing the municipal securities activities of brokerʼs brokers and certain alternative trading systems; (b) amendments to MSRB Rules G-8, G-9, and G-18 concerning recordkeeping, record retention, and agency trades by brokerʼs brokers; and (c) interpretive notice on the duties of dealers that use the services of brokerʼs brokers. The new rule, amendments, and interpretive notice become effective on December 22, 2012. 

Over the course of the last few years, the Financial Industry Regulatory Authority, Inc. has proposed changes to the rules governing broker-dealer communications with the public. After receiving significant comments on earlier proposals, FINRA recently announced that the Securities and Exchange Commission has now approved the proposed rule change, as modified by Amendments Nos. 1, 2, and 3, and will be effective as of February 4, 2013.

In this issue:

• Deposit Account Agreements
• Regulatory Enforcement Landscape Has Changed
• Dispute Resolution
• Holder in Due Course Rule

In 2012, the Securities and Exchange Commission adopted Rule 206(4)-5 and related amendments to certain other rules under the Investment Advisers Act of 1940. These rule changes are intended to prevent “pay to play” practices by investment advisers seeking to manage funds for state and local governments. 

On June 7, 2012, the Board of Governors of the Federal Reserve System released final rules relating to “Risk Capital Guidelines: Market Risk” to be issued jointly with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. The FDIC approved the rule on June 12, 2012 and the OCC will likely approve the rule within the week. 

On June 12, 2012, the Federal Deposit Insurance Corporation Board of Directors met to consider three notices of proposed rulemaking regarding the standardized approaches rule and the Basel III general and advanced approaches rules. The Board of Governors of the Federal Reserve System proposed these rules at their June 7, 2012 meeting.

The comment period for the NPRs ends September 7, 2012. 

On May 22, 2012, the Illinois General Assembly passed House Bill 4687, amending the Illinois Open Meetings Act. Once the Governor signs the bill, it will become effective January 1, 2013. 

New Financial Industry Regulatory Authority, Inc.  rules governing broker-dealer “know your customer” and suitability obligations become effective July 9, 2012. In response to several requests, FINRA recently issued Regulatory Notice 12-25 providing additional guidance on implementing the suitability rule. This Client Alert highlights several of the key issues addressed in the guidance.  

The Municipal Securities Rulemaking Board (“MSRB”) recently issued a notice seeking comments on a concept proposal that would require underwriters and municipal advisers to publicly disclose on the MSRBʼs Electronic Municipal Market Access (“EMMA”) system whether they have made or received certain payments in connection with new issues of municipal securities.

The United States Supreme Court issued its decision in the RadLAX Gateway Hotel v. Amalgamated Bank case on May 29, 2012, closing the door on a debtorʼs end-around a secured creditorʼs right to credit bid.1 In a unanimous decision delivered by Justice Scalia, the Supreme Court found its answer to be “an easy case,” rejecting recent decisions allowing a debtor to sell secured property free and clear of all liens without providing for the secured partyʼs credit bid rights when the sale was pursuant to a plan of reorganization.2 The decision provides secured creditors with predictability and consistency whether its collateral is being sold pursuant to a proposed plan or a sale during the bankruptcy case. 

On May 4, 2012, the Securities and Exchange Commission approved the Municipal Securities Rulemaking Boardʼs proposed interpretative guidance on the obligations of underwriters to municipal securities issuers under the fair dealing and anti-fraud provisions of MSRB Rule G-17. The guidance establishes a comprehensive code of conduct for underwriters in their dealings with municipal entities and imposes detailed disclosure obligations relating to the underwriterʼs role, compensation, and conflicts of interest, as well as the risks associated with complex municipal securities financings. The guidance also addresses underwritersʼ representations to issuers, review of official statements, and compensation, as well as fair pricing retail order periods. The guidance will be effective on August 2, 2012. 

In an effort to help begin the dialogue of what should be the best provisions in statute statutes and state constitutions to protect the interests of the municipalities and their access and costs in the market as well as to provide protection to the investors, this book seeks to recognize what state supervision, oversight and assistance is most desired and what, if any, access to municipal bankruptcy, if any, makes sense for both the municipality and the investors in their debt.

The Financial Industry Regulatory Authority, Inc. has delayed the implementation date of its new rules governing “know your customer” and suitability to July 9, 2012, to allow broker/dealers to better supervise and educate associated persons regarding the modified obligations. As it does not appear that any further reprieves will be forthcoming, this article will outline the scope of both Rules and the practical effects of the Rules on registered representatives, supervisors and compliance professionals. 

President Obama signed into law today the Jumpstart Our Business Startups Act, which is designed to facilitate public and private company access to the capital markets through a number of separate initiatives. These provisions are expected to have a favorable impact on smaller private companies and, in some instances, private investment funds. 

The American Recovery and Reinvestment Act of 2009 allowed the issuance of taxable municipal bonds, called build America bonds, which provide the issuer of such bonds with a direct payment from the federal government equal to 35 percent of the interest payable on such bonds. One of the tax law requirements for these bonds is that 100 percent of bond proceeds (other than amounts spent on costs of issuing the bonds) must be allocated to capital expenditures. 

In this issue:

1. 2012 IRS Tax Exempt Bonds Work Plan
2. IRS and MSRB Enter into Memorandum of Understanding
3. Administration Proposes BAB Reinstatement and Other Bond Changes
4. Current Refundings of Tax-Exempt Bonds in Certain Disaster Relief Bond Programs 

The Securities and Exchange Commission recently released a notice of proposed Municipal Securities Rulemaking Board rule changes governing the conduct of brokerʼs brokers. The proposed definition of “brokerʼs broker” generally includes a broker, dealer, or municipal securities dealer that principally effects transactions for other broker-dealers or that holds itself out as a brokerʼs broker.  

The Commodity Futures Trading Commission (the “CFTC”) recently issued final rule changes:

 • narrowing the exclusion from the definition of commodity pool operator (“CPO”) available to mutual funds and other registered investment companies (“RICs”) and their advisers;

 • eliminating an exemption from CPO registration available to private fund operators (but keeping another exemption that had also been proposed to be eliminated);

•  narrowing and rescinding certain exemptions from commodity trading advisor (“CTA”) registration;

 • adding certain risk disclosure statements for CPOs and CTAs with respect to swaps; and

 • making certain changes to reporting and certification obligations for entities required to register as CPOs and

• CTAs and entities relying on exclusions and exemptions from registration. 

The Financial Industry Regulatory Authority, Inc. recently announced that the previously approved rule change relating to the “best execution” obligation of broker-dealers will become effective on May 31, 2012. The Securities and Exchange Commission approved the rule change earlier this year, but FINRA did not announce an effective date at that time. New FINRA Rule 5310 and related Supplementary Material replace current NASD Rule 2320. 

The Securities and Exchange Commission and Commodity Futures Trading Commission recently proposed rules and guidelines that would require certain entities to develop and implement a written identity theft prevention program that is designed to detect, prevent, and mitigate identity theft in connection with certain existing accounts or the opening of new accounts. 

The Financial Industry Regulatory Authority, Inc. recently issued a revised rule proposal to apply objectivity safeguards and disclosure requirements to the publication and distribution of debt security research reports. Current FINRA rules related to research reports apply only to equity securities. 

The Securities and Exchange Commission recently adopted amendments to the dollar amount tests for the “qualified client” definition in Rule 205-3 under the Investment Advisers Act of 1940. Rule 205-3 provides exemptions from the general Advisers Act prohibition on performance-based compensation for registered investment advisers. The revised rule changes the current $750,000 assets under management test to $1 million and changes the current $1.5 million net worth test to $2 million 

The US Department of Treasury has released its general explanation of the tax proposals in the Obama administrationʼs proposed fiscal year 2013 budget. The administrationʼs proposals include provisions that, if enacted, would reinstate and expand the build America bond program and provide various changes to the tax provisions relating to municipal bonds. 

In a recent opinion of the Supreme Court of the State of Utah (Carter v. Lehi, 2012 UT 2 (2012)), the court abandoned the prior framework it used for determining whether a matter is a proper use of the peopleʼs initiative power and set forth a new framework. 

On February 8, 2012, the IRS released proposed regulations under Code §§ 1471-74 (generally referred to as the FATCA provisions). The proposed regulations clarify, expand, and relax the requirements of the earlier FATCA Notices. This Client Alert briefly summarizes the most significant changes. 

The beginning of each year provides an opportunity for investment advisers to review annual compliance and regulatory matters, including issues related to private investment funds and commodity pools. This Alert briefly summarizes some of the primary issues that advisers might consider in their 2012 annual review and update processes. Many of these issues apply to unregistered advisers as well as registered advisers. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires the Securities and Exchange Commission (“SEC”) to conduct a study of legal and regulatory requirements applicable to broker-dealers, investment advisers, and associated persons who provide personalized investment advice and recommendations about securities to retail customers.  

The Municipal Securities Rulemaking Board recently filed a proposed rule change with the Securities and Exchange Commission which would:

• amend MSRB Rule G-14 and its Real-time Transaction Reporting System Procedures to add inter- dealer yield data to the MSRBʼs Electronic Municipal Market Access website; and

• amend the RTRS information system and subscription service to remove certain outdated information and infrequently used reporting, add an RTRS-calculated yield, and require dealers to submit dollar prices for certain trades. 

The Financial Industry Regulatory Authority, Inc. recently issued guidance to members concerning the supervision of complex products — securities or investment strategies with novel, complicated, or intricate derivative-like features such as structured notes, inverse or leveraged exchange-traded funds, hedge funds, and securitized products. FINRA believes that such features may make it difficult for retail investors to understand the essential characteristics of complex products and their risks. As discussed below, FINRA also identified characteristics that may render a product “complex” for purposes of determining whether such product should be subject to heightened supervisory and compliance procedures. 

The Securities and Exchange Commission recently approved a rule change proposed by the Financial Industry Regulatory Authority, Inc. relating to the “best execution” obligation of broker-dealers. 

The Office of Compliance Inspections and Examinations of the Securities and Exchange Commission (“SEC”) recently issued a National Examination Risk Alert (the “Risk Alert”) on the use of social media by investment advisers. The Risk Alert provides guidance on the application of the Investment Advisers Act of 1940 (the “Advisers Act”) and its rules to the use of social media technologies. 

Over the course of the last few years, the Financial Industry Regulatory Authority, Inc. has proposed changes to the rules governing broker-dealer communications with the public. After receiving significant comments on earlier proposals, FINRA recently filed Amendment No. 2 to the proposed rule changes and a rebuttal letter regarding the comments received.  

The annual continuing disclosure deadline to file financial information and operating data with EMMA is rapidly approaching. Each School District should check its own bond documentation, but for most Districts the annual filing deadline is 210 days after the close of the Districtʼs fiscal year. For this reporting period the deadline is on or about January 26, 2012. If you are unsure of your filing deadline or requirements, please check with us or with your underwriter or financial advisor. We have recently seen increased scrutiny by the Securities and Exchange Commission (the “Commission”) with respect to such filings, and it is important that you comply with the requirements of each of your Continuing Disclosure Undertakings. 

On July 21, 2010, President Obama signed into law The Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act makes significant changes to the existing financial services legal framework, affecting nearly every aspect of the industry. This summary highlights many of the provisions of the Dodd-Frank Act that matter most to the asset management industry—investments advisers, broker- dealers, registered investment companies, hedge funds, private equity funds and other alternative investment funds. 

The transition to 2012 has brought two important developments in federal Clean Air Act rules that may affect power plants across the US. In late December, the US Environmental Protection Agency finalized the new power plant emissions standards for mercury, acid gases, and non-mercury metallic toxic pollutants (including arsenic, chromium, nickel, and others) for new and existing coal- and oil-fired utility steam generating units. Dubbed the “Utility MACT,” these new standards apply in all 50 states and will affect many of the nationʼs 1,400 oil- and coal-fired electric steam generating units at approximately 600 power plants throughout the country. This marks the first time that EPA has set national emissions limits on mercury from power plants 

The Financial Industry Regulatory Authority, Inc. issued Regulatory Notice 10-57 to alert member firms that it expects broker-dealers to develop and maintain robust funding and liquidity risk management practices.