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This is a photo of the National Register of Historic Places listing with reference number 7000063

Sunday, July 31, 2011

CFTC CHAIRMAN TESTIFIES BEFORE HOUSE COMMITTEE ON AGRICULTRE

"Testimony Before the U.S. House Committee on Agriculture, Washington, DC Chairman Gary Gensler June 21, 2011 Good afternoon Chairman Lucas, Ranking Member Peterson and members of the Committee. I thank you for inviting me to today’s hearing on the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). I am pleased to testify on behalf of the Commodity Futures Trading Commission (CFTC). I also thank my fellow Commissioners and CFTC staff for their hard work and commitment on implementing the legislation. Financial Crisis One year ago, the President signed the Dodd-Frank Act into law. And on this anniversary, it is important to remember why the law’s derivatives reforms are necessary. The 2008 financial crisis occurred because the financial system failed the American public. The financial regulatory system failed as well. When AIG and Lehman Brothers faltered, we all paid the price. The effects of the crisis remain, and there continues to be significant uncertainty in the economy. Though the crisis had many causes, it is clear that the derivatives or swaps market played a central role. Swaps added leverage to the financial system with more risk being backed by less capital. They contributed, particularly through credit default swaps, to the bubble in the housing market and helped to accelerate the financial crisis. They contributed to a system where large financial institutions were thought to be not only too big to fail, but too interconnected to fail. Swaps – developed to help manage and lower risk for end-users – also concentrated and heightened risk in the financial system and to the public. Derivatives Markets Each part of our nation’s economy relies on a well-functioning derivatives marketplace. The derivatives market – including both the historically regulated futures market and the heretofore unregulated swaps market – is essential so that producers, merchants and end-users can manage their risks and lock in prices for the future. Derivatives help these entities focus on what they know best – innovation, investment and producing goods and selling and services – while finding others in a marketplace willing to bear the uncertain risks of changes in prices or rates. With notional values of more than $300 trillion in the United States – that’s more than $20 of swaps for every dollar of goods and services produced in the U.S. economy – derivatives markets must work for the benefit of the American public. Members of the public keep their savings with banks and pension funds that use swaps to manage interest rate risks. The public buys gasoline and groceries from companies that rely upon futures and swaps to hedge swings in commodity prices. That’s why oversight must ensure that these markets function with integrity, transparency, openness and competition, free from fraud, manipulation and other abuses. Though the CFTC is not a price-setting agency, recent volatility in prices for basic commodities – agricultural and energy – are very real reminders of the need for common sense rules in all of the derivatives markets. The Dodd-Frank Act To address the real weaknesses in swaps market oversight exposed by the financial crisis, the CFTC is working to implement the Dodd-Frank Act’s swaps oversight reforms. Broadening the Scope Foremost, the Dodd-Frank Act broadened the scope of oversight. The CFTC and the Securities and Exchange Commission (SEC) will, for the first time, have oversight of the swaps and security-based swaps markets. Promoting Transparency Importantly, the Dodd-Frank Act brings transparency to the swaps marketplace. Economists and policymakers for decades have recognized that market transparency benefits the public. The more transparent a marketplace is, the more liquid it is, the more competitive it is and the lower the costs for hedgers, which ultimately leads to lower costs for borrowers and the public. The Dodd-Frank Act brings transparency to the three phases of a transaction. First, it brings pre-trade transparency by requiring standardized swaps – those that are cleared, made available for trading and not blocks – to be traded on exchanges or swap execution facilities. Second, it brings real-time post-trade transparency to the swaps markets. This provides all market participants with important pricing information as they consider their investments and whether to lower their risk through similar transactions. Third, it brings transparency to swaps over the lifetime of the contracts. If the contract is cleared, the clearinghouse will be required to publicly disclose the pricing of the swap. If the contract is bilateral, swap dealers will be required to share mid-market pricing with their counterparties. The Dodd-Frank Act also includes robust recordkeeping and reporting requirements for all swaps transactions so that regulators can have a window into the risks posed to the system and can police the markets for fraud, manipulation and other abuses. On July 7, the Commission voted for a significant final rule establishing that clearinghouses and swaps dealers must report to the CFTC information about the swaps activities of large traders in the commodity swaps markets. For decades, the American public has benefited from the Commission’s gathering of large trader data in the futures market, and now will benefit from this additional information to police the commodity swaps markets. Lowering Risk Other key reforms of the Dodd-Frank Act will lower the risk of the swaps marketplace to the overall economy by directly regulating dealers for their swaps activities and by moving standardized swaps into central clearing. Oversight of swap dealers, including capital and margin requirements, business conduct standards and recordkeeping and reporting requirements will reduce the risk these dealers pose to the economy. The Dodd-Frank Act’s clearing requirement directly lowers interconnectedness in the swaps markets by requiring standardized swaps between financial institutions to be brought to central clearing. This week, the Commission voted for a final rule establishing a process for the review by the Commission of swaps for mandatory clearing. The process provides an opportunity for public input before the Commission issues a determination that a swap is subject to mandatory clearing. The Commission will start with those swaps currently being cleared and submitted to us for review by a derivatives clearing organization. Enforcement Effective regulation requires an effective enforcement program. The Dodd-Frank Act enhances the Commission's enforcement authorities in the futures markets and expands them to the swaps markets. The Act also provides the Commission with important new anti-fraud and anti-manipulation authority. This month, the Commission voted for a final rule giving the CFTC authority to police against fraud and fraud-based manipulative schemes, based upon similar authority that the Securities and Exchange Commission, Federal Energy Regulatory Commission and Federal Trade Commission have for securities and certain energy commodities. Under the new rule, the Commission’s anti-manipulation reach is extended to prohibit the reckless use of fraud-based manipulative schemes. It closes a significant gap as it will broaden the types of cases we can pursue and improve the chances of prevailing over wrongdoers. Dodd-Frank expands the CFTC's arsenal of enforcement tools. We will use these tools to be a more effective cop on the beat, to promote market integrity and to protect market participants. Position Limits Another critical reform of the Dodd-Frank Act relates to position limits. Position limits have been in place since the Commodity Exchange Act passed in 1936 to curb or prevent excessive speculation that may burden interstate commerce. In the Dodd-Frank Act, Congress mandated that the CFTC set aggregate position limits for certain physical commodity derivatives. The law broadened the CFTC’s position limits authority to include aggregate position limits on certain swaps and certain linked contracts traded on foreign boards of trade, in addition to U.S. futures and options on futures. Congress also narrowed the exemptions for position limits by modifying the definition of a bona fide hedge transaction. When the CFTC set position limits in the past, the purpose was to ensure that the markets were made up of a broad group of market participants with a diversity of views. Market integrity is enhanced when participation is broad and the market is not overly concentrated. Commercial End-User Exceptions The Dodd-Frank Act included specific exceptions for commercial end-users, and the CFTC is writing rules that are consistent with this congressional intent. First, the Act does not require non-financial end-users that are using swaps to hedge or mitigate commercial risk to bring their swaps into central clearing. The Act leaves that decision up to the individual end-users. Second, there was a related question about whether corporate end-users would be required to post margin for their uncleared swaps. The CFTC has published proposed rules that do not require such margin. And third, the Dodd-Frank Act maintains the ability of non-financial end-users to enter into bilateral swap contracts with swap dealers. Companies can still hedge their particularized risk through customized transactions. Rule-Writing Process The CFTC is working deliberatively, efficiently and transparently to write rules to implement the Dodd-Frank Act. Our goal has been to provide the public with opportunities to inform the Commission on rulemakings, even before official public comment periods. We began soliciting views from the public immediately after the Act was signed into law and during the development of proposed rulemakings. We sought and received input before the pens hit the paper. We have hosted 13 public roundtables to hear ideas from the public prior to considering rulemakings. On August 1, we will host another public roundtable to gather input on international issues related to the implementation of the law. Staff and commissioners have held more than 900 meetings with the public, and information on these meetings is available at cftc.gov. We have engaged in significant outreach with other regulators – both foreign and domestic – to seek input on each rulemaking, including sharing many of our memos, term sheets and draft work product. CFTC staff has had about 600 meetings with other regulators on Dodd-Frank implementation. The Commission holds public meetings, which are also webcast live and open to the press, to consider rulemakings. For the vast majority of proposed rulemakings, we have solicited public comments for 60 days. In April, we approved extending the comment periods for most of our proposed rules for an additional 30 days, giving the public more opportunity to review the whole mosaic of rules at once. We also set up a rulemaking team tasked with developing conforming rules to update the CFTC’s existing regulations to take into account the provisions of the Dodd-Frank Act. This is consistent with a requirement included in the President’s January executive order. In addition, we will be examining the remainder of our rulebook consistent with the executive order’s principles to review existing regulations. The public has been invited to comment by August 29 on the CFTC’s plan to evaluate our existing rules. This spring, we substantially completed the proposal phase of rule-writing. Now, the staff and commissioners have turned toward finalizing these rules. To date, we held two public commission meetings this month and approved eight final rules. In the coming months, we will hold additional public meetings to continue to consider finalizing rules, a number of which I will highlight. In August, we hope to consider a final rule on swap data repository registration. In the early fall, we are likely to take up rules relating to clearinghouse core principles, position limits, business conduct and entity definition. Later in the fall, we hope to consider rules relating to trading, real-time reporting, data reporting and the end-user exemption. We will consider most of the rules with comment periods that have yet to close, including capital and margin requirements for swap dealers and segregation for cleared swaps, sometime in subsequent Commission meetings. The comment period for product definitions closes tomorrow, and working with the SEC, we will take them up as soon as it is practical. As the Commission continues with its rulemaking process, the Commission is taking great care to adhere to the requirement that the public be provided meaningful notice and opportunity to comment on a proposed rule before it becomes final. Therefore, depending on the circumstance -- such as when the Commission may be considering whether to adopt a particular aspect of a final rule that might not be considered to be the logical outgrowth of the proposed rule -- the Commission may determine that it would be appropriate to seek further notice and comment with respect to certain aspects of proposed rules. For example, in response to comments received on a proposed rule regarding the processing of cleared swaps, the Commission this week re-proposed aspects of this rule regarding the prompt, efficient and accurate processing of trades. The Dodd-Frank Act set a deadline of 360 days for the CFTC to complete the bulk of our rulemakings, which was July 16, 2011. Last week, the Commission granted temporary relief from certain provisions that would otherwise apply to swaps or swap dealers on July 16. This order provides time for the Commission to continue its progress in finalizing rules. Phasing of Implementation The Dodd-Frank Act gives the CFTC flexibility to set effective dates and a schedule for compliance with rules implementing Title VII of the Act, consistent with the overall deadlines in the Act. The order in which the Commission finalizes the rules does not determine the order of the rules’ effective dates or applicable compliance dates. Phasing the effective dates of the Act’s provisions will give market participants time to develop policies, procedures, systems and the infrastructure needed to comply with the new regulatory requirements. In May, CFTC and SEC staff held a roundtable to hear directly from the public about the timing of implementation dates of Dodd-Frank rulemakings. Prior to the roundtable, CFTC staff released a document that set forth concepts that the Commission may consider with regard to the effective dates of final rules for swaps under the Dodd-Frank Act. We also offered a 60-day public comment file to hear specifically on this issue. The roundtable and resulting public comment letters will help inform the Commission as to what requirements can be met sooner and which ones will take a bit more time. This public input has been very helpful to staff as we move forward in considering final rules. We are planning to request additional public comment on a critical aspect of phasing implementation – requirements related to swap transactions that affect the broad array of market participants. Market participants that are not swap dealers or major swap participants may require more time for the new regulatory requirements that apply to their transactions. There may be different characteristics amongst market participants that would suggest phasing transaction compliance by type of market participant. In particular, such phasing compliance may relate to: the clearing mandate; the trading requirement; and compliance with documentation standards, confirmation and margining of swaps. Our international counterparts also are working to implement needed reform. We are actively consulting and coordinating with international regulators to promote robust and consistent standards and to attempt to avoid conflicting requirements in swaps oversight. Section 722(d) of the Dodd-Frank Act states that the provisions of the Act relating to swaps shall not apply to activities outside the U.S. unless those activities have “a direct and significant connection with activities in, or effect on, commerce” of the U.S. We are developing a plan for application of 722(d) and will seek public input on that plan in the fall. Conclusion Only with reform can the public get the benefit of transparent, open and competitive swaps markets. Only with reform can we reduce risk in the swaps market – risk that contributed to the 2008 financial crisis. Only with reform can users of derivatives and the broader public be confident in the integrity of futures and swaps markets. The CFTC is taking on a significantly expanded scope and mission. By way of analogy, it is as if the agency previously had the role to oversee the markets in the state of Louisiana and was just mandated by Congress to extend oversight to Alabama, Kentucky, Mississippi, Missouri, Oklahoma, South Carolina, and Tennessee – we now have seven times the population to police. Without sufficient funds, there will be fewer cops on the beat. The agency must be adequately resourced to assure our nation that new rules in the swaps market will be strictly enforced -- rules that promote transparency, lower risk and protect against another crisis. Until the CFTC completes its rule-writing process and implements and enforces those new rules, the public remains unprotected. Thank you, and I’d be happy to take questions."

Saturday, July 30, 2011

SEC CHAIRMAN SPEAKS ON SHELF-ELIGIBILITY REQUIREMENTS FOR ASET-BACKE SECURITIES

The following is an excerpt from the SEC website: "Opening Statement at SEC Open Meeting: Item 3 — Shelf-Eligibility Requirements for Asset-Backed Securities by Chairman Mary Schapiro U.S. Securities and Exchange Commission Washington, D.C. July 26, 2011 Next, we will consider re-proposing rules outlining the requirements for an issuer of asset-backed securities to be able to use shelf registration. Today’s actions partially re-propose a set of rules the Commission proposed in April 2010 that would significantly revise the regulatory regime for asset backed securities. Among other things, the 2010 proposals were designed to increase transparency and to improve the quality of securities that are offered through the shelf registration process. Subsequent to our proposal, Congress — through the Dodd-Frank Act — sought to address some of the same concerns and we have reevaluated the proposals in light of those provisions. The proposals today also take into consideration suggestions from commenters on the April proposal. Today the staff is recommending that we re-propose shelf eligibility requirements for ABS issuers and seek additional comment on certain parts of our April 2010 proposal. As we consider a final set of rules, we will look to the rules we proposed in 2010 as well as the revisions to those proposals we are considering today. The proposals include three shelf eligibility requirements: First, the proposal would require an executive officer of the issuer to certify that the securitization is designed to produce cash flows at times and in amounts sufficient to service expected payments on the asset-backed securities being offered and sold. In addition, the executive officer would certify to the accuracy of the disclosure. This is similar to our 2010 proposal. However, to address comments we received, the re-proposed rules would offer an alternative signatory to the certification and revise the text of the certification. Second, the proposal would require the issuer to adopt a dispute resolution procedure outlining the way in which to resolve disputes over requests to repurchase assets in the pool under the terms of the transaction agreements. Also, to address concerns about the enforceability of representations and warranties, the proposal would require that an independent party in certain specified situations must confirm compliance of the assets with the representation and warranty provisions in the underlying agreements. We continue to believe that a mechanism to better enforce representations and warranties is needed to address the failures that plagued this market. Third, the proposal would require that the issuer agree to make it possible for investors to communicate with each other. This would address comments we received that some ABS investors have had difficulty locating other investors. Subsequent to the Commission’s 2010 proposals, the Dodd-Frank Act required rules that would direct sponsors to retain some of the risk associated with the ABS. The Act also eliminated the ability of ABS issuers to avail themselves of an automatic suspension from ongoing reporting. As such, this proposal at this time does not include the risk retention or continuous reporting conditions to shelf we originally included in the April 2010 proposal. Additionally, in the April proposal we proposed that ABS issuers must file standardized information about the specific loans in the pool, allowing investors to have better, more timely and usable information. Because we received many helpful and detailed suggestions in this area, the release requests additional comment about possible alternatives. I am aware that commentators have expressed concerns about certain aspects of the informational requirements for our safe harbor provisions included in the April proposal. Today’s release requests additional comment in this area as well. Finally, the release requests comment on whether the April proposal effectively implements a Dodd-Frank requirement that the Commission adopt rules requiring disclosure of the assets that back a security. I believe it is very important that we move forward to finalize our new registration and reporting rules for the ABS market. But I also want to make sure we get it right. I’m very pleased that the staff has recommended that we publish this re-proposal so that we can solicit the input we need to make these decisions. I very much look forward to receiving the public’s constructive comments on this release and moving to closure on this critically important project."

Friday, July 29, 2011

STATEMENT OF MARTIN J. GRUENBERG, ACTING CHAIRMAN FEDERAL DEPOSIT

The following statement is an excerptfrom the FDIC website: Statement of Martin J. Gruenberg, Acting Chairman, Federal Deposit Insurance Corporation on Enhanced Oversight after the Financial Crisis: Wall Street Reform at One Year before the Committee on Banking, Housing and Urban Affairs, United States Senate; 538 Dirksen Senate Office Building July 21, 2011 Chairman Johnson, Ranking Member Shelby and members of the Committee, thank you for the opportunity to testify today on the one year anniversary of the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). In the wake of the most severe episode of financial distress and the longest economic recession since the 1930s, the Dodd-Frank Act provides regulators with important new authorities to enhance financial stability and to respond to the regulatory challenges posed by large, complex systemically-important financial institutions (SIFIs). For example, the Dodd-Frank Act grants the Federal Deposit Insurance Corporation (FDIC) new authorities to manage the Deposit Insurance Fund (DIF) in a way that will make it more resilient in any future crisis. The Act also provides for a new SIFI resolution framework, including an Orderly Liquidation Authority and a requirement for SIFI resolution plans, which will give regulators much better tools with which to manage the failure of large, complex institutions. Finally, the Dodd-Frank Act also contains provisions that will complement the ongoing Basel III reforms that will make capital requirements more uniformly strong across the banking system. My testimony today will focus specifically on the implementation of these Dodd-Frank provisions to enhance the future stability of our financial system. Promoting Stability by Strengthening the Deposit Insurance Fund The FDIC has moved quickly to implement the Dodd-Frank Act changes in the FDIC deposit insurance program. These changes will help to ensure that coverage is sufficient to preserve public confidence in a crisis, that premiums are proportional to insurance risks, and that the fund itself is restored to long-term health and maintained at levels that will withstand future periods of financial distress. The following sections highlight important developments in the financial condition of the DIF and changes to the management of the fund, assessment system, and coverage limits. Restoring the Deposit Insurance Fund. Since year-end 2007, the failure of 377 FDIC-insured institutions has imposed total estimated losses of $84 billion on the DIF. In the recent crisis, as in the banking crisis of two decades ago, the sharp increase in bank failures caused the fund balance (the fund's net worth) to become negative. In the recent crisis, the DIF balance turned negative in the third quarter of 2009 and hit a low of negative $20.9 billion in the following quarter. As the DIF balance declined, the FDIC adopted a statutorily required Restoration Plan and increased assessments to handle the high volume of failures and begin replenishing the fund. The FDIC increased assessment rates at the beginning of 2009, which raised regular assessment revenue from $3 billion in 2008 to over $12 billion in 2009 and almost $14 billion in 2010. In June 2009, the FDIC imposed a special assessment that brought in an additional $5.5 billion from the banking industry. Furthermore, in December 2009, to increase the FDIC's liquidity, the FDIC required that the industry prepay almost $46 billion in assessments, representing over three years of estimated assessments. While the FDIC had to impose these measures at a very challenging time for banks, they enabled the agency to avoid borrowing from the U.S. Treasury. The measures also reaffirmed the longstanding commitment of the banking industry to fund the deposit insurance system. Since the FDIC imposed these measures, the DIF balance has steadily improved. It increased throughout 2010 and stood at negative $1.0 billion as of March 31 of this year. We expect to report that the DIF balance is once again positive when we release second quarter results next month. Under the Restoration Plan for the DIF, the FDIC has put in place assessment rates necessary to achieve a reserve ratio (the ratio of the fund balance to estimated insured deposits) of 1.35 percent by September 30, 2020, as the Dodd-Frank Act requires. Expanding the Assessment Base. The FDIC has also implemented the Dodd-Frank Act requirement to redefine the base used for deposit insurance assessments as average consolidated total assets minus average tangible equity. The FDIC does not expect this change to materially affect the overall amount of assessment revenue that otherwise would have been collected. However, as Congress intended, the change in the assessment base will generally shift some of the overall assessment burden from community banks to the largest institutions, which rely less on domestic deposits for their funding than do smaller institutions. The result will be a sharing of the assessment burden that better reflects each group's share of industry assets. The FDIC estimates that aggregate premiums paid by institutions with less than $10 billion in assets will decline by approximately 30 percent, primarily due to the assessment base change. Raising Deposit Insurance Coverage Limits. In retrospect, it appears clear that expanding the coverage of deposit accounts during the crisis helped maintain public confidence in the banking system and particularly helped community banks maintain deposits. In the aftermath of the crisis, the Dodd-Frank Act made permanent the increase in the coverage limit to $250,000. It also provided deposit insurance coverage on the entire balance of non-interest bearing transaction accounts at all insured depository institutions until December 31, 2012. This provision extends, with some modifications, an FDIC program that provided stability to banks and their business customers during the crisis. The two-year extension of full coverage for non-interest bearing transaction accounts will especially help smaller banks retain accounts commonly used for payroll and other business transaction purposes and maintain the ability to make loans within their communities. Long-term Changes to DIF Management. The Dodd-Frank Act provided the FDIC with substantial new flexibility in setting reserve ratio targets and paying dividends. The FDIC has used its new authority to adopt a long-term fund management plan that should maintain a positive DIF balance even during a banking crisis while preserving steady and predictable assessment rates throughout economic and credit cycles. FDIC analysis of the past two banking crises has shown that the DIF reserve ratio must be 2 percent or higher in advance of a banking crisis to avoid high deposit insurance assessment rates when banking institutions are strained and least able to pay. Consequently, the FDIC recently established a 2 percent reserve ratio target (also known as the Designated Reserve Ratio, or DRR) as a critical component of its long-term fund management strategy. Promoting Stability by Improving Our Capacity to Address SIFI Failures A key feature of the Dodd-Frank Act is a series of new authorities that together provide the basis for a new SIFI resolution framework that will greatly enhance the ability of regulators to address the problems of large, complex financial institutions in any future crisis. Orderly Liquidation Authority. Title II of the Dodd-Frank Act vests the FDIC with orderly liquidation authority that is similar in many respects to the authorities it already has for insured depository institutions. If the FDIC is appointed as receiver for a covered financial company, it is required to carry out an orderly liquidation of the company in a manner than ensures that creditors and shareholders appropriately bear the losses of the financial company while maximizing the value of the company's assets, minimizing losses, mitigating risk, and minimizing moral hazard. Under this authority, common and preferred stockholders, debt holders and other unsecured creditors will know that they will bear the losses of any institution placed into receivership, and management will know that it could be replaced. In addition, management that is substantially responsible for the failure of a covered financial company will be subject to the claw-back of compensation earned during the two previous years. Critical to the exercise of this authority is a clear and transparent process that is efficient and fair. With this in mind, the FDIC commenced the process of proposing rules implementing the Orderly Liquidation Authority immediately upon the passage of the Dodd-Frank Act. A Proposed Rule addressing a few critical elements of the Orderly Liquidation Authority was published last October. In January 2011, following consideration of comments, an Interim Final Rule was promulgated which implemented the initial Proposed Rule with appropriate changes, while continuing to solicit additional comment and feedback. That initial rulemaking addressed the treatment of similarly situated creditors, protection for employees of covered financial companies that continue to work for the company following failure, and protection for policyholders of insurance companies under the orderly liquidation process, among other things. A second Proposed Rule addressing the implementation authority more broadly was published with request for comment last March. This Proposed Rule addressed the important topics of the recoupment of compensation of senior executives and directors who are substantially responsible for the failure of a systemically important financial institution, as well as the priority of claims and the treatment of secured and unsecured creditors. We considered all of the comments to the Interim Final Rule and the second Proposed Rule and consulted with our fellow members of the Financial Stability Oversight Council (FSOC). With appropriate changes to address those comments and concerns, a Final Rule was approved by the Board of Directors on July 6, 2011, covering all of the aspects of the Orderly Liquidation Authority addressed in these earlier rules. This Final Rule provides a framework to resolve any U.S. financial institution, no matter its size, using many of the same powers that the FDIC has long used to manage failed-bank receiverships. While the adoption of the Final Rule Implementing Certain Orderly Liquidation Authority Provisions under Title II completes a large portion of the rulemaking required with respect to the exercise of Orderly Liquidation Authority under the Dodd-Frank Act, there is still more to do. As required by the Act, we are working with the Securities and Exchange Commission on a joint regulation implementing the Title II authority to resolve covered broker-dealers. The agencies are in agreement on the approach to the exercise of this authority, and have been meeting to finalize language of a Proposed Rule that we expect to be published in the Federal Register for public comment in the near future. Similarly, work is ongoing on a joint rule with all of the primary financial regulators regarding recordkeeping requirements for derivatives. The FDIC's experience in resolving failed financial institutions is helpful in addressing this issue, as we have a rule in place regarding recordkeeping of these qualified financial contracts with respect to insured depository institutions. In addition, work is ongoing on other rulemakings required by Title II of the Act, including a rule governing eligibility of prospective purchasers of assets of failed financial institutions, and finalization of a Proposed Rule issued in consultation with the Department of the Treasury regarding certain key definitions for determining which organizations are financial institutions within the meaning of the Dodd-Frank Act. Work also is underway to provide additional guidance to the industry in response to questions and comments received on areas such as the creation, operation and termination of bridge financial companies, and the implementation of certain minimum recovery requirements established under the Act. Resolution Plans. The Dodd-Frank Act also requires the FDIC and the Federal Reserve Board of Governors (FRB) jointly to issue final regulations within 18 months of enactment to implement new resolution planning and credit exposure reporting requirements. These rules will apply to bank holding companies with total assets of $50 billion or more and nonbank financial companies designated by the FSOC for enhanced supervision by the FRB. A Notice of Proposed Rulemaking for such a joint rule on resolution plans was published in April, and the comment period closed last month. Under the Proposed Rule, covered companies would be required to submit a resolution plan within a specified period after the final regulation becomes effective. The Proposed Rule provides that each covered company develop a plan for its rapid and orderly resolution under the Bankruptcy Code in the event of material financial distress or failure. Each resolution plan is required to contain an executive summary, a strategic analysis of the plan's components, a description of the covered company's corporate governance structure for resolution planning, information regarding the covered company's overall organization structure and related information, information regarding the covered company's management information systems, a description of interconnections and interdependencies among the covered company and its material entities, and supervisory and regulatory information. Following submission of a plan, the FDIC and FRB will review the plan to determine if it is credible and will facilitate an orderly resolution of the covered company under the Bankruptcy Code. If a resolution plan does not meet the statutory standards, after an opportunity to remedy its deficiencies, the agencies may jointly determine to impose more stringent regulatory requirements on the covered company. Further, if, after two years following the imposition of the more stringent standards, the resolution plan still does not meet the statutory standards, the FDIC and the FRB may, in consultation with the appropriate FSOC member, direct a company to divest certain assets or operations. In connection with this rulemaking, the agencies are working to develop a deliberative process for reviewing resolution plans to determine whether a plan is both credible and would facilitate an orderly resolution of the covered company under the Bankruptcy Code. Careful consideration is being given to the need to keep proprietary information contained in the resolution plans confidential to the extent permitted by law to ensure that financial companies provide full and accurate disclosures. These important issues will be addressed in the Final Rule the agencies expect to adopt in the near future. SIFI Designation. The SIFI resolutions framework authorized under the Dodd-Frank Act will automatically apply to bank holding companies with assets of $50 billion or more, as well as non-bank financial companies that are deemed by the FSOC to pose a risk to financial stability. The FDIC is currently working with its FSOC counterparts to jointly develop criteria for designating SIFIs under this authority. The FSOC agencies issued an Advanced Notice of Proposed Rulemaking (ANPR) last October and a Notice of Proposed Rulemaking (NPR) on January 26, 2011 describing the processes and procedures that will inform the FSOC's designation of nonbank financial companies under the Dodd-Frank Act. In response to the FSOC's ANPR and NPR, several commenters raised concerns about the lack of detail and clarity surrounding the designation process. The industry does need clarity about which firms will be expected to provide the FSOC with this additional information. To achieve this, the FSOC will seek to establish simple and transparent metrics, such as firm size, similar to the approach used for bank holding companies under the Dodd-Frank Act, and incorporate other relevant indicators. The goal will be to establish a clear and transparent process for SIFI designation. The FDIC Office of Complex Financial Institutions (OCFI). An important element of the FDIC's implementation effort has been the creation of a new Office of Complex Financial Institutions (OCFI) to coordinate the execution of our new SIFI resolution authorities under the Dodd-Frank Act. OCFI is already actively working with the FRB and the other agencies of FSOC to develop the capabilities needed to resolve SIFIs, if necessary, in a manner that mitigates systemic risk without reliance on taxpayer support. OCFI is structured into three groups: monitoring, resolution planning and international outreach. Staff in the monitoring group will have responsibility to evaluate risks across the financial system and at individual entities. Unlike a prudential supervisor, the monitoring group will specifically focus on the financial, operational and execution risks that could be posed in a resolution. This group is also charged with collecting information for resolution planning and exercising the FDIC's backup authority. The resolutions group will review the resolution plans that systemically important entities develop to orderly unwind through the U.S. bankruptcy process. Additionally, staff in the resolution group will develop resolution plans for these entities using the FDIC's authority under Title II of the Dodd-Frank Act. Finally, as the name implies, the international outreach and coordination group will coordinate our efforts with those in other jurisdictions charged with similar responsibilities. A critical component of successfully addressing a distressed SIFI is having sufficient information and clear strategic options at the time of failure to enable decision makers to reasonably foresee the outcomes of alternative scenarios. One of the FDIC's biggest challenges during the fall of 2008 was not having the information necessary to make informed decisions. Robust pre-planning – which entails understanding how and where these enterprises operate, as well as the structure of their business lines, counterparties, business risks, their role in the financial system, and their place in financial intermediation – is essential in giving regulators viable resolution options other than a bailout in the midst of a crisis. OCFI's monitoring activity of these systemic enterprises will be the principal mechanism for validating the entities' resolution plans and informing the FDIC on the development of Title II resolution plans. OCFI's implementation of the Dodd-Frank Act SIFI resolution authorities builds on years of FDIC experience in successfully resolving failed depository institutions. While the basic framework and principles of successfull resolution apply to both small and large institutions, the resolution of large, complex and highly-interconnected institutions poses special challenges. The strategy for resolving a systemically important entity must be custom tailored to the characteristics and systemic nature of the entity, the circumstances of failure, and the overall economic environment. Business models and organizational structures change over time, as do financial and market conditions. That is why the FDIC has directed resources to approach resolution planning as an ongoing regulatory process, not as a one-time exercise. FDIC Systemic Resolution Advisory Committee. To ensure that we have the benefit of the best thinking on complex resolution issues, the FDIC has chartered a Systemic Resolutions Advistory Commitee to provide advice and recommendations on a broad range of issues relevant to the failure and resolution of SIFIs. The Committee is composed of leading academics, prominent former policymakers, and experts from the financial industry itself. Although it has no decision-making role, Committee members will be asked to opine on topics related to the nature of systemic risk, the effects of the choice of resolution strategy on stakeholders and customers, international coordination of resolution activities, and how the market understands the new SIFI resolution authorities and how they would be applied in a future crisis. Promoting Financial Stability by Strengthening Bank Capital No banking system can maintain stability over the ups and downs of the business cycle without a strong capital base. Capital allows an institution to absorb large unexpected losses while maintaining the confidence of its counterparties and continuing to lend. In other words, strong capital minimizes the likelihood that large institutions will become troubled and need to be resolved in some way by the federal government during an economic downturn. Moreover, in situations where an institution does need to be resolved, a strong capital base provides regulators time to structure that resolution in an orderly manner without federal support and solicit bids from potential acquirers. In this sense, stronger bank capital requirements complement the Dodd-Frank Act resolution tools designed to prevent future bailouts of financial companies. Insufficient capital, in contrast, heightens a banking system's exposure to periodic crises. The knowledge that capital cushions are thin compared to the magnitude of risks that abruptly and unexpectedly loom large can contribute to a panic atmosphere and feed a crisis. Thin capital cushions also contribute to the kind of abrupt deleveraging we saw in the recent crisis and its aftermath. Since the crisis, U.S. banks have contracted lending by over $750 billion and reduced their loan commitments by more than $2.7 trillion. For all these reasons, the FDIC supports recent initiatives to strengthen bank capital requirements. While beyond the scope of this testimony, a recent initiative includes Basel III - an important initiative to strengthen the quality of capital and increase the level of minimum capital requirements. The FDIC also supports important provisions of the Dodd-Frank Act that that deal with bank capital. We believe that these provisions, contained in Section 171 and Section 165 of the Act, complement Basel III and will help promote a safe-and-sound banking system in the U.S. Section 171 of the Dodd-Frank Act states among other things that the capital requirements for the largest banks and bank holding companies must not be less than the capital requirements that are generally applicable to insured banks. The FDIC, the FRB and Comptroller of the Currency (OCC) recently finalized a rule implementing this aspect of Section 171. Consistent with Section 171, the Final Rule states that the capital requirements computed under the agencies' general risk-based capital rules will be a floor for the capital requirements of large banks that use the Advanced Approaches of Basel II (banking organizations with assets exceeding $250 billion are required to use the Advanced Approaches). In different words, the capital requirement for a large bank using the Advanced Approaches may not be less in proportionate terms than the capital requirement for a community bank with the same exposures. An important part of Section 171 is to ensure that regulatory capital for Bank Holding Companies (BHCs) is defined in a way that is at least as stringent as regulatory capital for insured banks. This expectation is consistent with the longstanding principle that BHCs should serve as a source of strength for their subsidiary banks. But during the crisis, we observed that BHCs were often less strongly capitalized on a consolidated basis than their subsidiary banks. This was largely a result of the widespread use of Trust Preferred Securities (TruPS), a form of subordinated debt, that are impermissible as Tier 1 capital for insured banks but have been permitted to meet a portion of a BHC's Tier 1 capital requirements since 1996. As debt instruments, TruPS cannot absorb losses while an organization operates as a going concern. This is an important reason why BHCs with heavier reliance on TruPS failed more often than other insured institutions during the crisis. Under Section 171, TruPS are phased-out of Tier 1 capital for BHCs with assets of at least $15 billion as of year-end 2009, with the phase-out occurring over a period of three years starting January 1, 2013. Important exceptions and grandfathering provisions exist for smaller BHCs.1 The FDIC considers Section 171 as an important safeguard for the capital adequacy of the U.S. banking system. Without Section 171, large U.S. banks could use their internal models to reduce their risk-based capital requirements, potentially well below the levels required for community banks, to levels that are inconsistent with safe and sound operations. Another important capital provision is contained in Section 165 of the Dodd-Frank Act, which requires the FRB to establish heightened capital standards for BHCs with assets of at least $50 billion and designated nonbank financial companies. These requirements can be viewed as the U.S. counterparts to the so-called SIFI capital surcharges that the Basel Committee on Banking Supervision recently published for comment. We believe a requirement for additional loss absorbency at the largest institutions is appropriate given the potential impact of a failure of one of these institutions on the financial system and the broader economy. Changes to the Regulatory Structure Under the Dodd-Frank Act The Dodd-Frank Act also mandated important changes to the structure of the financial regulatory agencies, including the sunset of the Office of Thrift Supervision (OTS) and the creation of the Consumer Financial Protection Bureau (CFPB). These changes will have important implications for the FDIC's supervisory, policy and data collection functions. Changes Related to OTS Sunset. The winding down of the OTS under the Dodd-Frank Act will result in the transfer of supervisory responsibility for 59 state-chartered savings associations to the FDIC.2 These institutions are located in 18 states and territories, with almost half of the total charters located in Ohio. All of the state-chartered institutions transferring to the FDIC are small, with the largest having assets of just over $2 billion and only 3 of the 59 having total assets exceeding $1 billion. Given the small number of charters transferring to the FDIC and their relative lack of problems and complexity, the FDIC will absorb all state-chartered savings associations into our existing supervisory program. We have assigned responsibility for examinations and other supervisory activities for each state-chartered savings association to the appropriate FDIC Regional Office. FDIC and OTS supervisory personnel began coordinating early in 2011 to ensure that that there will be no gaps in supervision and that the supervisory approach for these institutions will continue to be rigorous, consistent, and balanced both during and after the transition. We also recognize the importance of communicating regularly with the industry throughout this process. Two FDIC outreach events were held in Ohio to assist institutions in understanding the transition, and institutions in other states were contacted directly to ensure that their questions about the transition were answered. The FDIC is fully integrating OTS staff into its current organizational structure. In addition to absorbing the supervisory responsibility for state-chartered thrifts, the FDIC will transfer approximately 95 employees from the OTS, including commissioned examiners as well as other staff. The FDIC plans to open one additional local office in southern Ohio to manage the concentration of additional examination work in that location. Since the FDIC has historically recognized and accepted professional examination credentials from other federal banking agencies, including the OTS, it will treat as commissioned FDIC examiners all OTS examiners who transfer to the FDIC with OTS accreditation. The FDIC will address any individual training gaps that emerge after the transfer date through individual training and development plans. The FDIC has also worked closely with the OCC and the OTS to ensure that all transferred OTS employees are treated in full accordance with the requirements of sections 322(e) and 322(k)(2) of the Dodd-Frank Act with respect to their status, tenure, pay, and benefits. The agencies have determined, subject to public notice and comment and OMB approval, that it would be best to phase out the separate collection of Thrift Financial Report (TFR) data and to merge that data collection process into the Call Report process used by other FDIC-insured depository institutions beginning with the March 2012 reporting period. The FDIC will assume responsibility for TFR reporting on an interim basis beginning with the second quarter 2011 TFR. OTS staff previously responsible for collecting and analyzing TFR data will transfer to the FDIC to support the transition of thrifts to the Call Report and the ongoing reporting process for these institutions. In addition, OTS personnel who are assigned to the FDIC will continue to process all of the existing Savings and Loan Holding Company (SLHC) reports that were previously required to be filed by the OTS until the SLHCs can be transitioned to holding company reports required by the FRB. Changes Related to the Establishment of the CFPB. While the CFPB will be responsible for writing consumer protection rules for lenders of all types and all sizes, the current primary federal regulators will retain their enforcement responsibilities for FDIC-insured banks and thrifts with assets of less than $10 billion. This means that the FDIC will continue to examine about 4,500 state-chartered, non-member banks for compliance with consumer laws and regulations. The FDIC has held several meetings with CFPB staff to discuss transition issues, including data sharing, hiring, and consumer complaint handling, and recently supplied the CFPB with information they requested on institutions that will be transferred to its oversight, including examination reports and consumer complaint information. We are working with the CFPB on a joint Memorandum of Understanding (MOU) to provide for the transfer to the CFPB of consumer complaints involving large financial institutions. We are working hard to close out as many open examinations and enforcement cases as possible prior to the July 21 handover. But as part of our ongoing discussions, the CFPB has asked the FDIC to continue handling certain consumer complaints after the July 21 handover to provide for the orderly transition of complaint handling for large banks. We anticipate the possibility of ongoing work related to the transfer of consumer complaints between the FDIC and CFPB including, among other things, procedures for sharing information about complaints handled by each agency. The FDIC has also issued a solicitation of interest for experienced staff to apply for employment with the CFPB. At this point, 40 FDIC employees have accepted CFPB offers to transfer. Conclusion Today's testimony highlights the FDIC's progress in implementing financial reforms authorized by the Dodd-Frank Act. The Act authorized important reforms to the FDIC's deposit insurance program that will ensure that coverage is sufficient to preserve public confidence in a crisis, that premiums are proportional to insurance risks, and that the fund itself is restored to long-term health and maintained at levels that will withstand future periods of financial distress. These deposit insurance reforms are critical to both ensuring financial stability and preserving competitive balance between the largest institutions and smaller community institutions. The Act contains a number of provisions that, together, form the basis for a new SIFI resolution framework that substantially improves the ability of regulators to respond to severe financial distress on the part of a large, complex financial institution. These reforms are not a cure-all, but are designed to work in concert with the other Dodd-Frank Act reforms, including those that strengthen capital requirements and the DIF, to promote competitive balance and make financial crises less frequent and less costly in the future. Since the Dodd-Frank Act became law one year ago, the FDIC has proceeded – on our own authority and in concert with our regulatory counterparts – to implement its provisions. We have made much progress in one year, but still have considerable work ahead of us. Throughout this process, we have sought input from the industry and the public, and we continue to report back to Congress on our progress. We believe that successful implementation of these provisions will represent a significant step forward in providing a foundation for a financial system that is more stable and less susceptible to crises in the future, and better prepared to respond to crises if and when they develop. Thank you. I would be glad to take your questions."

Thursday, July 28, 2011

CFTC CHAIRMAN TESTIFIES BEFORE SENATE COMMITTEE

Testimony Before the U.S. Senate Committee on Banking, Housing and Urban Affairs, Washington, DC Chairman Gary Gensler July 21, 2011 Good morning Chairman Johnson, Ranking Member Shelby and members of the Committee. I thank you for inviting me to today’s hearing on the one-year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act. I am pleased to testify on behalf of the Commodity Futures Trading Commission (CFTC). I also thank my fellow Commissioners and CFTC staff for their hard work and commitment on implementing the legislation. Financial Crisis One year ago, the President signed the Dodd-Frank Act into law. And on this anniversary, it is important to remember why the law’s derivatives reforms are necessary. The 2008 financial crisis occurred because the financial system failed the American public. The financial regulatory system failed as well. When AIG and Lehman Brothers faltered, we all paid the price. The effects of the crisis remain, and there continues to be significant uncertainty in the economy. Though the crisis had many causes, it is clear that the derivatives or swaps market played a central role. Swaps added leverage to the financial system with more risk being backed by less capital. They contributed, particularly through credit default swaps, to the bubble in the housing market and helped to accelerate the financial crisis. They contributed to a system where large financial institutions were thought to be not only too big to fail, but too interconnected to fail. Swaps – developed to help manage and lower risk for end-users – also concentrated and heightened risk in the financial system and to the public. FSOC To help protect the American public, the Dodd-Frank Act included the establishment of the Financial Stability Oversight Council. This Council is an opportunity for regulators – now and in the future – to ensure that the financial system works better for all Americans. Adding to our challenge is the perverse outcome of the financial crisis, which may be that many people in the markets have come to believe that a handful of large financial firms will – if in trouble – have the backing of the taxpayers. We must do our utmost to ensure that when those challenges arise, the taxpayers are not forced to stand behind those institutions and that these institutions are free to fail. Derivatives Markets Each part of our nation’s economy relies on a well-functioning derivatives marketplace. The derivatives market – including both the historically regulated futures market and the heretofore unregulated swaps market – is essential so that producers, merchants and end-users can manage their risks and lock in prices for the future. Derivatives help these entities focus on what they know best – innovation, investment and producing goods and selling and services – while finding others in a marketplace willing to bear the uncertain risks of changes in prices or rates. With notional values of more than $300 trillion in the United States – that’s more than $20 of swaps for every dollar of goods and services produced in the U.S. economy – derivatives markets must work for the benefit of the American public. Members of the public keep their savings with banks and pension funds that use swaps to manage interest rate risks. The public buys gasoline and groceries from companies that rely upon futures and swaps to hedge swings in commodity prices. That’s why oversight must ensure that these markets function with integrity, transparency, openness and competition, free from fraud, manipulation and other abuses. Though the CFTC is not a price-setting agency, recent volatility in prices for basic commodities – agricultural and energy – are very real reminders of the need for common sense rules in all of the derivatives markets. The Dodd-Frank Act To address the real weaknesses in swaps market oversight exposed by the financial crisis, the CFTC is working to implement the Dodd-Frank Act’s swaps oversight reforms. Broadening the Scope Foremost, the Dodd-Frank Act broadened the scope of oversight. The CFTC and the Securities and Exchange Commission (SEC) will, for the first time, have oversight of the swaps and security-based swaps markets. Promoting Transparency Importantly, the Dodd-Frank Act brings transparency to the swaps marketplace. Economists and policymakers for decades have recognized that market transparency benefits the public. The more transparent a marketplace is, the more liquid it is, the more competitive it is and the lower the costs for hedgers, which ultimately leads to lower costs for borrowers and the public. The Dodd-Frank Act brings transparency to the three phases of a transaction. First, it brings pre-trade transparency by requiring standardized swaps – those that are cleared, made available for trading and not blocks – to be traded on exchanges or swap execution facilities. Second, it brings real-time post-trade transparency to the swaps markets. This provides all market participants with important pricing information as they consider their investments and whether to lower their risk through similar transactions. Third, it brings transparency to swaps over the lifetime of the contracts. If the contract is cleared, the clearinghouse will be required to publicly disclose the pricing of the swap. If the contract is bilateral, swap dealers will be required to share mid-market pricing with their counterparties. The Dodd-Frank Act also includes robust recordkeeping and reporting requirements for all swaps transactions so that regulators can have a window into the risks posed to the system and can police the markets for fraud, manipulation and other abuses. On July 7, the Commission voted for a significant final rule establishing that clearinghouses and swaps dealers must report to the CFTC information about the swaps activities of large traders in the commodity swaps markets. For decades, the American public has benefited from the Commission’s gathering of large trader data in the futures market, and now will benefit from this additional information to police the commodity swaps markets. Lowering Risk Other key reforms of the Dodd-Frank Act will lower the risk of the swaps marketplace to the overall economy by directly regulating dealers for their swaps activities and by moving standardized swaps into central clearing. Oversight of swap dealers, including capital and margin requirements, business conduct standards and recordkeeping and reporting requirements will reduce the risk these dealers pose to the economy. The Dodd-Frank Act’s clearing requirement directly lowers interconnectedness in the swaps markets by requiring standardized swaps between financial institutions to be brought to central clearing. This week, the Commission voted for a final rule establishing a process for the review by the Commission of swaps for mandatory clearing. The process provides an opportunity for public input before the Commission issues a determination that a swap is subject to mandatory clearing. The Commission will start with those swaps currently being cleared and submitted to us for review by a derivatives clearing organization. Enforcement Effective regulation requires an effective enforcement program. The Dodd-Frank Act enhances the Commission's enforcement authorities in the futures markets and expands them to the swaps markets. The Act also provides the Commission with important new anti-fraud and anti-manipulation authority. This month, the Commission voted for a final rule giving the CFTC authority to police against fraud and fraud-based manipulative schemes, based upon similar authority that the Securities and Exchange Commission, Federal Energy Regulatory Commission and Federal Trade Commission have for securities and certain energy commodities. Under the new rule, the Commission’s anti-manipulation reach is extended to prohibit the reckless use of fraud-based manipulative schemes. It closes a significant gap as it will broaden the types of cases we can pursue and improve the chances of prevailing over wrongdoers. Dodd-Frank expands the CFTC's arsenal of enforcement tools. We will use these tools to be a more effective cop on the beat, to promote market integrity and to protect market participants. Position Limits Another critical reform of the Dodd-Frank Act relates to position limits. Position limits have been in place since the Commodity Exchange Act passed in 1936 to curb or prevent excessive speculation that may burden interstate commerce. In the Dodd-Frank Act, Congress mandated that the CFTC set aggregate position limits for certain physical commodity derivatives. The law broadened the CFTC’s position limits authority to include aggregate position limits on certain swaps and certain linked contracts traded on foreign boards of trade, in addition to U.S. futures and options on futures. Congress also narrowed the exemptions for position limits by modifying the definition of a bona fide hedge transaction. When the CFTC set position limits in the past, the purpose was to ensure that the markets were made up of a broad group of market participants with a diversity of views. Market integrity is enhanced when participation is broad and the market is not overly concentrated. Rule-Writing Process The CFTC is working deliberatively, efficiently and transparently to write rules to implement the Dodd-Frank Act. This spring, we substantially completed the proposal phase of rule-writing and further benefited from an extra 30 days for public comment. Now, the staff and commissioners have turned toward final rules. We held two public commission meetings this month and approved eight final rules. In the coming months, we will hold additional public meetings to continue to consider finalizing rules. The Dodd-Frank Act set a deadline of 360 days for the CFTC and SEC to complete the bulk of our rulemakings, which was July 16, 2011. Last week, the Commission granted temporary relief from certain provisions that would otherwise apply to swaps or swap dealers on July 16. This order provides time for the Commission to continue its progress in finalizing rules. Phasing of Implementation The Dodd-Frank Act gives the CFTC and SEC flexibility to set effective dates and a schedule for compliance with rules implementing Title VII of the Act. The order in which the Commission finalizes the rules does not determine the order of the rules’ effective dates or applicable compliance dates. Phasing the effective dates of the Act’s provisions will give market participants time to develop policies, procedures, systems and the infrastructure needed to comply with the new regulatory requirements. In May, CFTC and SEC staff held a roundtable to hear directly from the public about the timing of implementation dates of Dodd-Frank rulemakings. Prior to the roundtable, CFTC staff released a document that set forth concepts that the Commission may consider with regard to the effective and compliance dates of final rules for swaps under the Dodd-Frank Act. We also offered a 60-day public comment file to hear specifically on this issue. The roundtable and resulting public comment letters will help inform the Commission as to what requirements can be met sooner and which ones will take a bit more time. This public input has been very helpful to staff as we move forward in considering final rules. We are planning to request additional public comment on a critical aspect of phasing implementation – requirements related to swap transactions that affect the broad array of market participants. Market participants that are not swap dealers or major swap participants may require more time for the new regulatory requirements that apply to their transactions. There may be different characteristics amongst market participants that would suggest phasing transaction compliance by type of market participant. In particular, such phasing compliance may relate to: the clearing mandate; the trading requirement; and compliance with documentation standards, confirmation and margining of swaps. Our international counterparts also are working to implement needed reform. We are actively consulting and coordinating with international regulators to promote robust and consistent standards and to attempt to avoid conflicting requirements in swaps oversight. Section 722(d) of the Dodd-Frank Act states that the provisions of the Act relating to swaps shall not apply to activities outside the U.S. unless those activities have “a direct and significant connection with activities in, or effect on, commerce” of the U.S. We are developing a plan for application of 722(d) and will seek public input on that plan in the fall. Conclusion Only with reform can the public get the benefit of transparent, open and competitive swaps markets. Only with reform can we reduce risk in the swaps market – risk that contributed to the 2008 financial crisis. Only with reform can users of derivatives and the broader public be confident in the integrity of futures and swaps markets. The CFTC is taking on a significantly expanded scope and mission. The Commission must be adequately resourced to effectively police the markets and protect the public. Without sufficient funds, there will be fewer cops on the beat. The agency must be adequately resourced to assure our nation that new rules in the swaps market will be strictly enforced -- rules that promote transparency, lower risk and protect against another crisis. Until the CFTC completes its rule-writing process and implements and enforces those new rules, the public remains unprotected. Thank you, and I’d be happy to take questions."

SEC ALLEGES DIAGEO PLC VIOLATED FOREIGN CORRUPT PRACTICES ACT

The following is an excerpt from the SEC website: Washington, D.C., July 27, 2011 — The Securities and Exchange Commission today charged one of the world’s largest producers of premium alcoholic beverages with widespread violations of the Foreign Corrupt Practices Act (FCPA) stemming from more than six years of improper payments to government officials in India, Thailand, and South Korea. The SEC found that London-based Diageo plc paid more than $2.7 million through its subsidiaries to obtain lucrative sales and tax benefits relating to its Johnnie Walker and Windsor Scotch whiskeys, among other brands. Diageo agreed to pay more than $16 million to settle the SEC’s charges. The company also agreed to cease and desist from further violations of the FCPA’s books and records and internal controls provisions. “For years, Diageo’s subsidiaries made hundreds of illicit payments to foreign government officials,” said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement. “As a result of Diageo’s lax oversight and deficient controls, the subsidiaries routinely used third parties, inflated invoices, and other deceptive devices to disguise the true nature of the payments.” According to the SEC’s order instituting settled administrative proceedings against Diageo, the company made more than $1.7 million in illicit payments to hundreds of government officials in India from 2003 to mid-2009. The officials were responsible for purchasing or authorizing the sale of its beverages in India, and increased sales from these payments yielded more than $11 million in profit for the company. The SEC found that from 2004 to mid-2008, Diageo paid approximately $12,000 per month – totaling nearly $600,000 – to retain the consulting services of a Thai government and political party official. This official lobbied other high-ranking Thai government officials extensively on Diageo’s behalf in connection with pending multi-million dollar tax and customs disputes, contributing to Diageo’s receipt of certain favorable decisions by the Thai government. According to the SEC’s order, Diageo paid 100 million in Korean currency (more than $86,000 in U.S. dollars) to a customs official in South Korea as a reward for his role in the government’s decision to grant Diageo significant tax rebates. Diageo also improperly paid travel and entertainment expenses for South Korean customs and other government officials involved in these tax negotiations. Separately, Diageo routinely made hundreds of gift payments to South Korean military officials in order to obtain and retain liquor business. The SEC’s order found that Diageo and its subsidiaries failed properly to account for these illicit payments in their books and records. Instead, they concealed the payments to government officials by recording them as legitimate expenses for third-party vendors or private customers, or categorizing them in false or overly vague terms or, in some instances, failing to record them at all. Diageo lacked sufficient internal controls to detect and prevent the wrongful payments and improper accounting. The SEC’s order found that Diageo violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. Without admitting or denying the findings, Diageo agreed to cease and desist from further violations and pay $11,306,081 in disgorgement, prejudgment interest of $2,067,739, and a financial penalty of $3 million. Diageo cooperated with the SEC’s investigation and implemented certain remedial measures, including the termination of employees involved in the misconduct and significant enhancements to its FCPA compliance program.”

SEC CHAIRMAN SCHAPRO DISCUSSES SHORT FORM REGISTRATION

The following is an excerpt from the SEC website: Speech by SEC Chairman: Opening Statement at SEC Open Meeting: Item 2 — Security Ratings by Chairman Mary Schapiro U.S. Securities and Exchange Commission Washington, D.C. July 26, 2011 Next, we will consider adopting rules that would replace credit ratings as a condition for companies seeking short-form registration when registering certain securities for public sale. If a company qualifies for short-form registration, it can offer its securities “off the shelf” — which is an expedited process for offering securities. These rules, which were proposed in February, are being considered in light of the requirements of Section 939A of the Dodd-Frank Act — a provision that requires regulators to reduce reliance on credit ratings. Today’s action is part of the Commission’s effort to do just that. In the securities arena, Forms S-3 and F-3 are the “short forms” used by eligible issuers to register securities offerings under the Securities Act. By using these forms, these issuers can rely on other reports they file to satisfy many of the disclosure requirements under the Securities Act. Currently, one of the ways that a company can qualify to use these forms is if they are registering an offering of non-convertible securities that have received an investment grade rating by at least one nationally recognized statistical rating organization (NRSRO). The rules being considered today would eliminate this eligibility test and replace it with four new tests, which the staff will describe shortly. In order to ease transition to the new rules, the rules also would include a temporary, three-year grandfather provision. We received valuable input from commentators on the proposing release, and I believe the amendments we are considering are better as a result. I believe the rules will provide an appropriate and workable alternative to credit ratings for determining whether an issuer should be able to use short form registration and have access to the shelf offering process. With the changes that we are making from the proposal, we expect just about all issuers that currently could rely on the existing test would be able to qualify for the revised forms. In addition, we also are considering rescinding Form F-9 under the Securities Act because we believe that regulatory developments in Canada have rendered that form unnecessary. And we are contemplating changes to several other rules that would be needed in light of the new eligibility criteria." I

SEC COMMISSIONER WALTER MAKES REMARKS REGARDING LARGE TRADER

The following statement is from the SEC website: Speech by SEC Commissioner: Opening Remarks Regarding the Adoption of Large Trader Reporting Requirements by Commissioner Elisse B. Walter U.S. Securities and Exchange Commission Washington, D.C. July 26, 2011 I, too, want to offer my thanks to our staff and, in particular, the individuals within the Office of Market Supervision in the Division of Trading and Markets who developed and finalized the adopting release before us today. As we all know, the Commission has, for some time now, been looking at market structure — finding ways to update our regulations and our tools to more effectively surveil the markets. The new requirements under Rule 13h-1 and Form 13H are intended to strengthen the SEC’s oversight of securities trading activities and to help us to detect potentially manipulative and abusive practices — by identifying large market participants and more effectively collecting information on their trading activity. The rule under consideration today is part of our ongoing efforts to ensure that the markets are fair, transparent and efficient — especially given that rapid technological advances have continued to produce fundamental changes in the securities markets, with new types of market participants, new trading strategies and new products in a trading environment that operates primarily on an automated basis. These changes have enabled significant market participants to use advanced trading methods to trade electronically in large volumes at high speeds. In my view, the need for the Commission to track and monitor large trading activity is even greater today than it was in 1990 when Congress passed the Market Reform Act. After three proposals, I am extremely pleased that today the Commission is considering the large trader rule for adoption. Some have expressed reservations about the rule before us, citing potential costs and the potential regulatory headache in complying with its requirements. But, I believe strongly — and Congress’ 1990 action reflects this — that regulatory agencies, like the Commission, simply cannot function or effectively carry out their missions without obtaining critical information about the activities they regulate and the people who carry out those activities. And, I believe that the new requirements in Rule 13h-1 will be a significant step toward accomplishing that. Specifically, the rule will further the Commission’s understanding of entities or individuals who qualify as large traders and help its analysis of the role they play in the marketplace, including, for example, the impact of their trading activities on the interests of long term investors. I also understand that some are concerned that the rule will impact persons who may not have had any previous contact with the Commission. However, one of the benefits of the rule is just that — it will provide the Commission with a better sense of who the significant market participants are. Having this knowledge will enable the Commission to engage in an open dialogue and discussion with large traders regarding their experience in the marketplace, which could better inform the Commission in future rulemakings and policy decisions. I would also highlight that this rule will be implemented within an existing regulatory framework, which should alleviate any undue burden and also quicken the time frame within which it can be implemented and thus provide the Commission with valuable information. Finally, I believe that another significant improvement under the rule is the timing within which the information must be provided to the Commission upon request. While the current EBS reporting system did not require that broker-dealers provide the information to the Commission by a definitive date, this rule will enable the Commission to have information at the opening of business on the day following a request, or on the same day if the situation warrants it. I think having timely information will be a huge improvement to the Commission in its surveillance and investigative activities. However, as I have said before, the large trader requirements are not a cure-all to the agency’s need for better audit trail information, but rather an additional mechanism that the Commission can use to monitor a particular set of market participants. We need to have an even more complete, timely picture of the markets, and it is my hope that the very near future will find the Commission, as the Chairman stated, in a similar position to consider for adoption the development and implementation of a consolidated audit trail that would capture customer and order event information across the markets. Today, we have an incomplete and possibly inaccurate picture of the markets. As order flow often moves from one marketplace to another, the Commission is not adequately equipped with the surveillance capabilities to gather and analyze cross-market data in a timely manner. In my view, a consolidated audit trail, along with the large trader reporting requirements, would begin to close this gap and enhance the Commission’s ability to perform its job — its market monitoring responsibilities. Thanks once again to the Division of Trading and Markets, and the rest of the staff for your excellent and hard work on this adopting release."

Wednesday, July 27, 2011

SEC VOTES FRO NEW RULE FOR LARGE TRADER REPORTING REQUIREMENTS

The following is an excerpt from the SEC website: Washington, D.C., July 26, 2011 – The Securities and Exchange Commission today voted unanimously to adopt a new rule establishing large trader reporting requirements to enhance the agency’s ability to identify large market participants, collect information on their trading, and analyze their trading activity. The new rule requires large traders to identify themselves to the SEC, which will then assign each trader a unique identification number. Large traders will provide this number to their broker-dealers, who will be required to maintain transaction records for each large trader and report that information to the SEC upon request. “May 6 dramatically demonstrated the need to enhance the SEC’s ability to quickly and accurately analyze market events. The large trader reporting rule will significantly bolster our ability to oversee the U.S. securities markets in a time when trades can be transacted in milliseconds or faster,” said SEC Chairman Mary L. Schapiro. “This new rule will enable us to promptly and efficiently identify significant market participants and collect data on their trading activity so that we can reconstruct market events, conduct investigations, and bring enforcement actions as appropriate.” The new rule has two primary components: First, it requires large traders to register with the Commission through a new form, Form 13H. Second, it imposes recordkeeping, reporting, and limited monitoring requirements on certain registered broker-dealers through whom large traders execute their transactions. The new rule will be effective 60 days after its publication in the Federal Register."

SEC CHAIRMAN STATEMENT ON LARGE TRADER REPORTING

The following is an excerpt from the SEC website: "Speech by SEC Chairman: Opening Statement at SEC Open Meeting: Item 1 — Large Trader Reporting by Chairman Mary Schapiro U.S. Securities and Exchange Commission Washington, D.C. July 26, 2011 Good morning. This is an Open Meeting of the Securities and Exchange Commission on July 26, 2011. Today, we will consider three items related to Large Trader Reporting, Asset-Backed Securities, and Ratings References. We begin with the new rule that would establish a large trader reporting regime to provide the Commission with better insight into critical segments of market activity. The rule has two primary components: First, it would require large traders to register with the Commission through a new form, Form 13H. Second, it would impose recordkeeping, reporting, and limited monitoring requirements on certain registered broker-dealers through whom large traders execute their transactions. The Commission initially proposed the large trader rule in April 2010. And less than a month later, the importance of this proposal was highlighted when we experienced the “flash crash” of May 6. That day dramatically demonstrated the need to enhance the Commission’s ability to quickly and accurately analyze market events. The fact is we live in a time when trades can be transacted in milliseconds or faster. Large market participants can trade electronically in substantial volumes, at high speed, and in multiple venues. It’s a time of rapid developments in trading technology and strategies. It is for that reason that we launched a comprehensive review of U.S. market structure — a review we initiated months before the flash crash. The large trader rule is one of several measures that grow out of that review — a rule that would enhance the Commission’s ability to obtain information about the most active market participants. This new rule, Rule 13h-1, would significantly bolster our ability to oversee the U.S. securities markets by allowing the Commission to promptly and efficiently identify significant market participants on a cross-market basis, collect data on their trading activity, reconstruct market events, conduct investigations and, as appropriate, bring enforcement matters. The collection of this information is particularly important given the increasingly prominent role played by very active market participants including high-frequency traders. In addition to this large trader rule, the Commission previously proposed establishing a consolidated audit trail for equities and options — a system that would capture customer and order event information for many securities across all markets. I anticipate that a consolidated audit trail would take longer to implement than the rule we are considering today, but it would collect and consolidate much more extensive order and transaction information than that contemplated by the large trader rule. In particular, the large trader regime is much more limited in terms of its scope and objectives. For instance, the technology requirements of this large trader regime should entail much less change than the proposed consolidated audit trail. Further, the large trader rule would leverage existing systems to address the Commission’s compelling near-term need for access to more information about large traders and their trading activities. It also would begin to improve the Commission’s ability to analyze such information. Today’s large trader rule would establish procedures for a large trader to self-identify to the Commission, which will provide important information to the Commission even after a consolidated audit trail is fully implemented. The staff is working on recommendations for Commission consideration with respect to consolidated audit trail, and I am hopeful that we will be able to move forward with that proposal in the very near term. I expect that a consolidated audit trail plan will build on and complement today’s large trader rule, and avoid unnecessary duplication or undue burden on market participants. I would like to thank the staff of the Division of Trading and Markets for their work on this matter, specifically Robert Cook, Gregg Berman, Nathaniel Stankard, James Brigagliano, David Shillman, Richard Holley, Christopher Chow, Gary Rubin, and Kathleen Gray. I also would like to thank staff in the Office of the General Counsel, specifically Mark Cahn, Meridith Mitchell, David Blass, Paula Jenson, and Deborah Flynn as well as staff in the Division of Risk, Strategy, and Financial Innovation including Jennifer Marietta-Westburg, Charles Dale, Adam Glass, and Matthew Kozora. Thanks also to Thomas Sporkin and Mark Lineberry from the Division of Enforcement; Tom Kim, David Orlic, Michele Anderson, and Ann Krauskopf from the Division of Corporation Finance; John Polise from the Office of Compliance Inspections and Examinations; Douglas Scheidt and Stephen Packs from the Division of Investment Management; and Kelly Riley from the Office of International Affairs for their contributions and collaborative efforts. Finally, I would like to thank the other Commissioners and all of our counsels for their work and comments on the rule." Now I'll turn the meeting over to Jamie Brigagliano, Deputy Director of the Division of Trading and Markets, to hear more about the Division’s recommendation."

SEC CHAIRMAN SPEAKS

The following speech is from the SEC website: "Speech by SEC Chairman: Remarks Before the Financial Stability Oversight Council Meeting by Chairman Mary L. Schapiro U.S. Securities and Exchange Commission Washington, D.C. July 18, 2011 After one year, it’s already clear that the Dodd-Frank Act is reshaping the regulatory landscape, filling gaps, reducing systemic risk, and helping to restore confidence in the financial system. And it is beginning to strengthen the financial system so it is less prone to a financial crisis. In the specific area of securities, Dodd-Frank will have a significant impact. It brings hedge fund advisers under the regulatory umbrella, creates a new whistleblower program, establishes an entirely new regime for the over-the-counter derivatives market, enhances the SEC’s authority over credit rating agencies, provides for specialized corporate disclosures, and heightens regulation of asset-backed securities — among other things. Although there is much to do to fully implement the law, we at the SEC have already established a program to incentivize insiders to bring us information about financial fraud. We have already established the process to require hedge fund and other fund advisers to register with the SEC and be subject to our rules. We have already taken advantage of an array of new enforcement tools to pursue fraud. And we have proposed virtually all of the rules necessary to build the regulatory structure for the security-based swaps market. To help fulfill the Act’s promise, the SEC was tasked with writing a large portion of the rules and, over the past year, we have accomplished a great deal. Of the more than 90 mandatory rulemaking provisions, the SEC already has proposed or adopted rules for three-quarters of them (nearly 70). And this does not include additional rules stemming from the dozens of other provisions that give the SEC discretionary rulemaking authority. The rules we’ve proposed and adopted have been strengthened because of the process we’ve put in place. We have increased transparency and made it easier for the public to provide input. And we have forged a collaborative relationship with other federal and international regulators. It is so important that we not forget the harm that the financial crisis inflicted upon our economy and our people, or ignore its lessons. That is one of the reasons it will be critical that all the regulators receive the appropriate funding to be able to fully implement this law and further protect investors — as the law intended. So after one year, I’m pleased with our progress and I’m looking forward to an even busier year to come."

SEC COMMISSIONER LUIS A. AGUILAR SPEAKS AGAIN

The following is an excerpt from the SEC website: Commissioner Luis A. Aguilar U.S. Securities and Exchange Commission Washington, D.C. July 26, 2011 Poorly designed collateralized debt obligations and other asset-backed securities (“ABS”) contributed significantly to the collapse of the credit markets of 2008 and the subsequent financial crisis. These effects are still being felt by American families and businesses. It was demonstrated that the creation and distribution of these instruments significantly increased the degree of risk in our financial system, and caused great harm to investors and to the real economy.1 In response to the problems laid bare by the crisis, in 2010 the SEC proposed amendments to its ABS regulations. Shortly thereafter, Congress, sharing many of the SEC’s concerns, included significant reforms to asset-backed securities in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). As you have heard this morning, in light of the ABS requirements in the Dodd-Frank Act and the comments received on the 2010 proposal,2 the Commission is re-proposing a subset of its amendments to the ABS regulations primarily regarding shelf eligibility. I would like to highlight that today’s proposals include transactional standards that I hope will better empower investors and begin to level the playing field between investors and ABS sponsors. The proposed rules would require securitization agreements to require that a credit risk manager, an independent third party, scrutinize underlying assets in certain circumstances. We also anticipate these new requirements will facilitate communication between ABS investors, as well as require the adoption of procedures to resolve disputes between the issuer and investors. We are requesting comment on today’s proposals, and I am interested to hear if the rules proposed today, in conjunction with the rules already under consideration, establish greater integrity in the securitization process. I look forward to the comments we will receive. I join with my colleagues to thank the staff for their hard work on this re-proposal. 1 See, e.g., “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” Majority and Minority Staff Report of the Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs (April 13, 2011), p. 12. 2 Although the focus of the release being considered today is improvements to the regulation of asset-backed securities (ABS) in light of the Dodd-Frank Act and the financial crisis, the package of proposed reforms also would repeal the transactional eligibility condition for ABS shelf registration based on credit ratings, and replace it with conditions to such eligibility that the SEC preliminarily believes would be appropriate under the circumstances, as substitute indicators of credit quality. It is important to recognize that the approach to credit ratings in this release (the “Re-proposal of Shelf Eligibility Conditions for Asset-Backed Securities and Other Additional Requests for Comment”) differs from the approach to credit ratings in another release being considered today that would adopt amendments to the eligibility standards for shelf registration of non-convertible debt securities (the “Security Ratings” release). These approaches differ notwithstanding that Section 939A of the Dodd-Frank Act encourages the SEC “to establish, to the extent feasible, uniform standards of credit-worthiness.” There are several reasons for these differences, I will highlight a few. Asset-backed securities are different from traditional debt securities. Traditional debt securities are issued by operating companies, and the investment analysis of such debt differs from ABS, which are [often] structured and require analysis of underlying assets and that structure (among other things) rather than an issuer’s operations. The differences between ABS and traditional securities has resulted in longstanding differences in treatment under the securities laws, including separate regulations for asset-backed securities offerings and separate eligibility conditions for different types of offering registrations. The purposes of the eligibility conditions that apply to shelf registrations of ABS, on the one hand, and to traditional non-convertible debt securities, on the other hand, differ. In the context of non-convertible debt securities offerings, which are the subject of the Security Ratings release, the purpose of the eligibility conditions is to permit issuers whose securities are “widely followed” to perform shelf registered offerings; the SEC does not believe the credit-worthiness of non-convertible debt securities is the appropriate criterion for whether such securities should be eligible to use registered shelf offerings."

Tuesday, July 26, 2011

ALLEGED INSIDE TRADER SETTLES WITH SEC

The following is a case below is an excerpt from the SEC website: “July 20, 2011 On July 19, 2011, the Securities and Exchange Commission filed a settled civil action in the United States District Court in New York City against Robert Doyle. The Commission alleges that Doyle unlawfully traded in securities of Brink’s Home Security. According to the Commission, between August 2009 and December 2009, Doyle misappropriated material nonpublic information showing that Tyco International, Ltd. had offered to acquire Brink’s. On the basis of this information, Doyle purchased Brink’s common stock and call options. Doyle earned $88,555 from his illegal trading in Brink’s securities. Without admitting or denying the complaint’s allegations, Doyle has agreed to settle the Commission’s charges by consenting to entry of a final judgment permanently enjoining him from violating Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder, and ordering him to pay a $44,277.50 civil penalty, $88,555 in disgorgement and $4,288.66 in prejudgment interest.”

Monday, July 25, 2011

JUDGEMENTS ENTERED AGAINST FIVE FORMER BROOKE COMPANIES EXECUTIVES



The following was an excerpt from the SEC website:

July 18, 2011

The Securities and Exchange Commission announced today that the United States District Court for the District of Kansas entered judgments, dated July 13, 2011, against five former senior executives of Kansas-based Brooke Corporation and its other, publicly-traded subsidiaries, Brooke Capital Corporation, an insurance agency franchisor, and Aleritas Capital Corporation, a lender to insurance agency franchises and other businesses. Robert D. Orr, Leland G. Orr, Michael S. Lowry, Michael S. Hess, and Travis W. Vrbas, without admitting or denying the Commission's allegations, consented to judgments enjoining them from future violations of the federal securities laws, barring them from serving as officers or directors of public companies, and requiring the payment of disgorgement and penalties. The SEC Complaint alleges that in SEC filings and other public statements for year-end 2007, and the first and second quarters of 2008, senior executives at the Brooke companies misrepresented, among other things, the number of Brooke Capital franchisees, and their financial health, the deterioration of Aleritas' corresponding loan portfolio, and the increasingly dire liquidity and financial condition of the Brooke companies.

According to the SEC's Complaint, Brooke Capital's former management inflated the number of franchise locations by including failed and abandoned locations in totals. They also concealed the nature and extent of Brooke Capital's financial assistance to its franchisees, which included making franchise loan payments on behalf of struggling franchisees. Aleritas' former management hid the company's inability to repurchase millions of dollars of short-term loans sold to its network of regional lenders. They also sold or pledged the same loans as collateral to more than one lender, and improperly diverted payments from borrowers for the company's operating expenses. Aleritas' former management also concealed the rapid deterioration of the company's loan portfolio by falsifying loan performance reports to lenders, understating loan loss reserves, and by failing to write-down its residual interests in securitization and credit facility assets.

The positions held by the former Brooke executives were:

Robert D. Orr, founder and former chairman of the board of Brooke Corporation, former chief executive officer and chairman of the board of Brooke Capital, and former chief financial officer of Aleritas
Leland G. Orr, former chief executive officer, chief financial officer, and vice-chairman of the board of Brooke Corporation, and former chief financial officer of Brooke Capital
Michael S. Lowry, former chief executive officer and member of the board of Aleritas
Michael S. Hess, former chief executive officer and member of the board of Aleritas
Travis W. Vrbas, former chief financial officer of Brooke Corporation and Brooke Capital

The judgments enjoin each of the defendants from violating Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting violations Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. The judgments further enjoin Robert Orr, Leland Orr, Lowry, and Hess from violating Exchange Act Rule 13b2-2; Robert Orr, Leland Orr, Hess, and Vrbas from violating Exchange Act Rule 13a-14 and from aiding and abetting violations of Rule 13a-1; Robert Orr and Hess from aiding and abetting violations of Exchange Act Rule 13a-11; and Robert Orr from violating Exchange Act Section 16(a) and Rule 16a-3 thereunder.

In addition to the injunctions, the judgments bar the defendants from serving as an officer or director of a public company. Lowry's judgment requires him to pay a $175,000 civil penalty and disgorgement of $214,500, with prejudgment interest of $24,004.91. Hess' judgment requires him to pay a $250,000 civil penalty, and Vrbas' judgment requires him to pay a $130,000 civil penalty. The judgments against Robert Orr and Leland Orr require them to pay civil penalties and disgorgement in amounts to be determined by the Court.”
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