Article by Robert L. Kohl and David A. Pentlow
Please see "SEC Proposes Revisions to Structured Finance Offering Rules" in Structured Finance and Securitization below.
FINRA Issues Guidance on Master Accounts and Sub-Accounts
The Financial Industry Regulatory Authority issued guidance relating to master and sub-account arrangements in Regulatory Notice 10-18. Although FINRA acknowledged that there are bona fide reasons to establish master/sub-account arrangements in certain circumstances (e.g., bona fide investment advisers and omnibus clearing arrangements), FINRA cautioned that certain arrangements raise questions regarding whether the master account and all sub-accounts can legitimately be viewed as one customer account. According to FINRA, where a firm becomes aware of the identities of the beneficial owners of sub-accounts, it may be required to recognize the sub-accounts as separate customer accounts. The Notice sets out certain "red flags" that FINRA believes would put a firm on notice that sub-accounts should not be treated as one single customer account.
PRIVATE INVESTMENT FUNDS
Treasury Secretary Recommends That European Commission Maintain Level Regulatory Playing Field
In a letter to UK Chancellor of the Exchequer Alistair Darling, U.S. Treasury Secretary Timothy Geithner expressed his desire that in further considering the Alternative Investment Fund Manager (AIFM) directive, the European Commission consider "our shared commitment to create regulatory reform that does not discriminate against foreign firms and maintains a level playing field." In his letter, Secretary Geithner says that he understands that the AIFM directive currently under discussion would discriminate against third country funds and fund managers (including U.S. funds and fund managers) by denying them the opportunity to access the EU market via a passport approach, and he expressed his hope that this provision be revised to allow non-EU funds, fund managers and global custodians the same access to promote a single market. The letter also highlights the U.S. commitment to strengthen regulation and oversight of hedge funds, legislation recently proposed by the Obama administration and passed by the U.S. House of Representatives requiring certain reporting requirements and registration for all hedge fund managers with assets under management that exceed a modest threshold, and that "our regime will treat all advisors and funds operating in the U.S. equally regardless of their origin—domestic or non-U.S." The letter was also sent to Wolfgang Schauble, Christine Lagarde and Elena Salgado Mendez, the finance ministers to Germany, France and Spain, respectively.
To view the text of the letter, click here .
INVESTMENT COMPANIES AND INVESTMENT ADVISERS
Please see "Treasury Secretary Recommends That European Commission Maintain Level Regulatory Playing Field" in Private Investment Funds above.
Last-Misrepresentation Theory Did Not Render Claims Against All Defendants Timely
In Take-Two Interactive Software, Inc. v. Brant, Take-Two Interactive Software, Inc. asserted claims for violations of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder against four of its former executives who received backdated stock options. Between 1997 and 2003, each of the four defendants allegedly received backdated option grants and signed off on public filings and proxy statements misrepresenting the expenses resulting from the backdating scheme. As a result, Take-Two was forced to restate and lower its earnings by $54.6 million for the period 1997–2005.
The defendants each moved to dismiss, asserting, among other things, that the action, which was originally commenced in July 2006, was untimely. In opposing the motion, Take-Two argued that the misrepresentation-based Section 10(b) claims were timely because misrepresentations concerning the financial impact of the backdated option grants continued into 2005.
The court rejected Take-Two's attempt to utilize a "last-misrepresentation" theory to render timely all of the defendants' alleged misrepresentations, finding that such a theory could not be used against all defendants because the statements were not made by a single entity or by "a static group of speakers acting in concert." In particular, the court noted that certain of the defendants were only affiliated with Take-Two for a short time and that by 2005, when the last misrepresentation allegedly was made, they had all ceased to be associated with Take-Two. The court did, however, deny the motion to dismiss with respect to two defendants whose misrepresentations were alleged to have continued into the period covered by the statute of repose, choosing instead to allow the parties to develop the record before it ruled on the viability of the last-misrepresentation theory with respect to Section 10(b) claims. (Take-Two Interactive Software, Inc. v. Brant, No. 06 Civ. 05279 (LTS), 2010 WL 1257351 (S.D.N.Y. March 31, 2010))
Misrepresentations Allegedly Made After Sale Held Insufficient to Sustain Securities Fraud Claim
The district court for the Eastern District of New York recently dismissed claims of securities fraud brought by a pro se plaintiff under...