DODD-FRANK ON CONGO CONFLICT MINERALS ROUNDTABLE OCTOBER 18, 2011

The following is an excerpt from an SEC e-mail: “Washington, D.C., Sept. 29, 2011 — The Securities and Exchange Commission today announced that it will host a public roundtable next month to discuss the agency’s required rulemaking under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which relates to reporting requirements regarding conflict minerals originating in the Democratic Republic of the Congo and adjoining countries. The event will take place on October 18 from 12:30 p.m. to 5:15 p.m. and will provide a forum for various stakeholders to exchange views and provide input on issues related to the SEC’s required rulemaking. The panel discussions will focus on key regulatory issues such as appropriate reporting approaches for the final rule, challenges in tracking conflict minerals through the supply chain, and workable due diligence and other requirements related to the rulemaking. “We are committed to writing an effective rule as soon as possible, and the roundtable will help us do that,” said Meredith Cross, Director of the SEC’s Division of Corporation Finance. Roundtable panelists are expected to reflect the views of different constituencies, including affected issuers, human rights organizations, and other stakeholders. A final agenda including a list of participants will be announced closer to the date of the roundtable. The roundtable will be held in the auditorium at the SEC’s headquarters at 100 F Street NE in Washington D.C. The roundtable will be open to the public with seating on a first-come, first-served basis, and the discussion also can be viewed via live webcast on the SEC website.”

SEC DISMISSED CLAIMS IN CIVIL FRAUD CASE IN LIEU OF PARALLEL CRIMINAL CONVICTION

The following excerpt is from the SEC website: September 26, 2011 “The Securities and Exchange Commission has voluntarily dismissed its claims for disgorgement, prejudgment interest, and civil penalties against former Jefferson County, Alabama Commission president Larry Langford. The Commission dismissed its claims against Langford due to the 15-year prison sentence and significant restitution and forfeiture orders entered against Langford in a parallel criminal case that arose out of the Commission’s investigation. The Eleventh Circuit Court of Appeals recently upheld the criminal sentence, which included orders to pay $119,985 in restitution to the Internal Revenue Service and forfeit $241,843.65 in benefits he received to the government. Following the Commission’s dismissal notice, the Honorable Abdul K. Kallon, United States District Judge for the Northern District of Alabama dismissed the claims against Langford and dismissed the now-completed case. The Commission’s complaint against Langford alleged he accepted approximately $156,000 in cash, loans, and other benefits in exchange for steering County bond and swap business to a long-time friend and local broker dealer. On August 8, 2011, the Court granted the Commission’s motion for summary judgment against Langford and permanently enjoined him from further violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5.”

SEC ANNOUNCES FINAL JUDGMENT IN AOL TIME WARNER MISSTATEMENT OF REVENUES CASE

The following excerpt is from the SEC website: September 29, 2011 “The U.S. Securities and Exchange Commission today announced that, on September 6, 2011, the United States District Court for the Southern District of New York entered a settled final judgment against J. Michael Kelly, the former Chief Financial Officer of AOL Time Warner Inc. and that on July 19, 2010, the district court entered a settled final judgment against Joseph A. Ripp, the former Chief Financial Officer of the AOL Division of AOL Time Warner, in SEC v. John Michael Kelly, Steven E. Rindner, Joseph A. Ripp, and Mark Wovsaniker, Civil Action No. 08 CV 4612 (CM)(GWG) (S.D.N.Y. filed May 19, 2008). The final judgments resolve the Commission’s case against Kelly and Ripp. The Commission’s complaint alleges that, from at least mid-2000 to mid-2002, AOL Time Warner overstated the company’s online advertising revenue with a series of round-trip transactions. The complaint further alleges that the defendants participated in this effort and that their actions contributed to this overstatement. Online advertising revenue was a key measure by which analysts and investors evaluated the company. Without admitting or denying the allegations in the complaint, Kelly consented to entry of a final judgment permanently enjoining him from future violations of Section 17(a)(2) and (3) of the Securities Act of 1933 and ordering him to pay disgorgement of $200,000 and a civil penalty of $60,000. Without admitting or denying the allegations in the complaint, Ripp consented to the entry of a final judgment permanently enjoining him from future violations of Rule 13b2-1 promulgated under the Securities Exchange Act of 1934 (Exchange Act) and from aiding and abetting violations of Exchange Act Section 13(b)(2)(A) and ordering him to pay disgorgement of $130,000 and a civil penalty of $20,000. Steven E. Rindner and Mark Wovsaniker remain as defendants in the Commission’s action.”

SEC ISSUES RISK ALERT WARNING IN REGARDS TO TRAIDING IN SUB-ACCOUNTS

The following is an excerpt from the SEC website: “Washington, D.C., Sept. 29, 2011 — The staff of the Securities and Exchange Commission today issued a Risk Alert warning of significant concerns regarding trading through sub-accounts, and offered suggestions to help securities industry firms address those risks. Money laundering, insider trading, market manipulation, account intrusions, unregistered broker-dealer activity, and excessive leverage are all potential risks associated with the master/sub-account trading model, according to the alert. Customers who open master accounts with a registered broker-dealer usually subdivide it for use by individual traders or groups of traders. In some instances, the sub-accounts may be divided to such an extent that the master account customer and the firm where the account is held might not know the identity of the traders in the sub-accounts. “Although master/sub-account arrangements have legitimate business purposes, some customers may use them as vehicles for illegal activity, or in an attempt to avoid or minimize regulatory obligations and oversight,” said Carlo di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations, whose national examination staff issued the alert. The alert includes suggestions for broker-dealers to address concerns arising from trading in sub-accounts and to comply with the SEC’s Market Access Rule, which requires broker-dealers to have controls and procedures to limit risks associated with offering market access to customers, including those with master/sub-accounts. “When a broker-dealer offers master/sub-accounts, this includes an obligation to reasonably design controls and procedures that address the types of risks that we identify in this report. Our national examination staff intends to scrutinize the controls and procedures at broker-dealers that offer market access to master/sub-account customers,” Mr. di Florio said. Possible approaches include: Obtaining and maintaining the names of all traders authorized to trade in each master account, including all sub-account traders; verifying the identities of all such traders, using fingerprints if appropriate, background checks and interviews; and periodically checking the names of all such traders through criminal and other databases. Monitoring trading patterns in both the master account and sub-accounts for indications of insider trading, market manipulation, or other suspicious activity. Physically securing information of customer or client systems and technology. Establishing requirements that validate the trader’s identity. Logging and tracking incidents of attempted hacking or other unauthorized penetration-of-system by outside parties. Determining that traders who have access to the broker-dealer’s trading system and technology have received training in areas relevant to their activity, including market trading rules. Regularly reviewing the effectiveness of all controls and procedures around sub-account due diligence and monitoring. Creating written descriptions of all controls and procedures for sub-account due diligence and monitoring, including the frequency of reviews, the identity of those responsible for conducting such reviews, and a description of the review process.”

SEC ALLEGES RBC CAPITAL MARKETS LLC SOLD INADEQUATE INVESTMENTS WITHOUT FULL DISCLOSURES

The following is an excerpt from the SEC website: “Washington, D.C., Sept. 27, 2011 — The Securities and Exchange Commission today charged RBC Capital Markets LLC for misconduct in the sale of unsuitable investments to five Wisconsin school districts and its inadequate disclosures regarding the risks associated with those investments. According to the SEC’s order instituting administrative proceedings, RBC Capital marketed and sold to trusts created by the school districts $200 million of credit-linked notes that were tied to the performance of synthetic collateralized debt obligations (CDOs). The school districts contributed $37.3 million of district funds to the investments with the remainder of the investment coming from funds borrowed by the trusts. The sales took place despite significant concerns within RBC Capital about the suitability of the product for municipalities like the school districts. Additionally, RBC Capital’s marketing materials failed to adequately explain the risks associated with the investments. RBC Capital agreed to settle the SEC’s charges by paying a total of $30.4 million that will be distributed in varying amounts to the school districts through a Fair Fund. Last month, the SEC separately charged St. Louis-based brokerage firm Stifel, Nicolaus & Co. and a former senior executive with fraudulent misconduct in connection with the same sale of the CDO investments to the school districts. “RBC failed Securities 101 when it sold complex derivatives that were unsuitable to five school districts without fully informing them of the risks,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. Kenneth R. Lench, Chief of the SEC Division of Enforcement’s Structured and New Products Unit, added, “RBC Capital did not provide these school districts with full and accurate information regarding the risks of these complex structured products. We are pleased that today’s settlement will result in a significant recovery by the school districts.” According to the SEC’s order, the five school districts are Kenosha Unified School District No. 1, Kimberly Area School District, School District of Waukesha, West Allis-West Milwaukee School District, and School District of Whitefish Bay. The board members and business managers for the school districts had no prior experience investing in CDOs or instruments tied to CDOs. Compared to the typical buyers of instruments tied to CDOs, the school districts were not sophisticated investors. The SEC’s order finds that the school districts lacked sufficient knowledge and sophistication to appreciate the nature of such investments. RBC Capital consented to the entry of the SEC’s order without admitting or denying any of its findings. The order censured RBC Capital and directed that it cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, which among other things prohibit obtaining money by means of an untrue statement of material fact and engaging in any transaction, practice, or course of business that operates as a fraud or deceit upon the purchaser. RBC Capital agreed to pay disgorgement of $6.6 million, prejudgment interest of $1.8 million, and a penalty of $22 million. The SEC’s investigation was conducted jointly by the Enforcement Division’s Municipal Securities and Public Pensions Unit led by Elaine Greenberg and Mark R. Zehner and Structured and New Products Unit led by Kenneth Lench and Reid Muoio. The investigative attorneys were Kevin Guerrero, Keshia W. Ellis and Ivonia K. Slade in Washington D.C. and Jeffrey A. Shank and Anne C. McKinley along with litigation counsel Steven C. Seeger and Robert M. Moye in the Chicago Regional Office. The broker-dealer examinations team of Marianne E. Neidhart, Scott M. Kalish, George J. Jacobus and Daniel R. Gregus of the Chicago Regional Office provided assistance with the investigation. Other SEC enforcement actions related to the offer and sale of CDOs include Goldman Sachs, ICP Asset Management, J.P. Morgan, and Wachovia Capital Markets.”

SHOULD FIRMS BE BANNED FROM DESIGNING A TRANSACTION TO FAIL?

The following is from a speech given by SEC Commissioner Luis A. Aguilar at an open meeting of the SEC on “Prohibiting Firms from Designing Transactions to Fail”. This speech is an excerpt from the SEC website: September 19, 2011 Today, the Commission considers a proposed rule designed to address the serious conflict of interest that results from a financial firm designing an asset-backed security, selling it to customers, and then betting on its failure. In the aftermath of the financial crisis, it became clear that firms were creating financial products, selling those same products to their customers, and then turning around and making bets against those same products they just sold. Senator Levin explained it well when he said this practice is like “selling someone a car with no brakes and then taking out a life insurance policy on the purchaser. In the asset-back securities context the sponsors and underwriters of the asset-backed securities are the parties who select and understand the underlying assets, and who are best positioned to design a security to succeed or fail.”1 Senator Levin went on to say they [the ABS sponsors and issuers], like the mechanic servicing a car, would know if the vehicle has been designed to fail. And so they must be prevented from securing handsome rewards for designing and selling malfunctioning vehicles that undermine the asset-backed securities markets.”2 The proposal under consideration is an important step forward to prohibit this practice and to protect investors from being persuaded to invest in products designed to fail. I look forward to receiving public comments on whether the proposed rule serves the public interest and meets the objective of prohibiting these material conflicts. In closing, I thank the staff for their work on this set of rules and the work to come, and I support today’s proposal.”