October 25, 2007

Treasury Rethinks the SEC’s Role

As part of the continuing efforts to address the competitiveness of the US financial markets, the Treasury Department announced that it is seeking public comment on improving the regulatory structure for the financial system. While a large portion of the request for comments is oriented toward regulation of financial institutions such as banks and insurance companies, some of the questions particularly target the split jurisdiction of the SEC and CFTC, as well as the role of the states in the securities and futures regulatory framework. The specific questions raised on these topics are:

– Is there a continued rationale for distinguishing between securities and futures products and their respective intermediaries?
– Is there a continued rationale for having separate regulators for these types of financial products and institutions?
– What type of regulation would be optimal for firms that provide financial services related to securities and futures products? Should this regulation be driven by the need to protect customers or by the broader issues of market integrity and financial system stability?
– What is the optimal role for the states in securities and futures regulation?
– What are the key consumer/investor protection elements associated with products offered by securities and futures firms? Should there be a regulatory distinction among retail, institutional, wholesale, commercial, and hedging customers?
– Would it be useful to apply some of the principles of the Commodity Futures Modernization Act of 2000 to the securities regulatory regime? Is a tiered system of regulation appropriate? Is it appropriate to make distinctions based on the relative sophistication of the market participants and/or the integrity of the market?

Comments on these and the other broad questions included in the release are due to the Treasury by November 21.

This is obviously not the first time that the jurisdictional divide between securities and futures has been raised as an issue, but I think now more than ever the debate is worth having – and settling. Based on my own experience at the SEC, I know that the uncontrollable march of financial innovation is constantly testing this artificial regulatory divide, making life difficult for those who seek to make real strides in developing potentially beneficial financial products for institutions and consumers.

Unfortunately, as noted in this Wall Street Journal opinion piece authored by William Brodsky of the CBOE, combining the SEC and the CFTC (or creating a new regulator of financial products) has been hampered by Congressional turf battles, given that different committees oversee these agencies. Brodsky notes that the problems with the split jurisdiction are highlighted by a proposal that the CBOE filed with the SEC in June 2005 to trade options on funds that invest in gold, which has gone nowhere as the SEC and CFTC are still trying to decide who should regulate the product.

There is no doubt that Treasury is taking on some big issues with its competitiveness improvement efforts. As the clock ticks down on this Administration, it will be interesting to see if any progress can be made on some of these critically important issues.

Rule 10b5-1 Plans: Countrywide CEO’s Sales in the Spotlight

At our conference entitled “Hot Topics and Practical Guidance: The Corporate Counsel Speaks,” SEC Enforcement Director Linda Chatman Thomsen spoke about, among other things, the SEC Staff’s interest in the use of Rule 10b5-1 trading plans for illegitimate purposes. Her speech was followed by an excellent panel consisting of Linda, Alan Dye and Ron Mueller, who discussed the ins and outs of using Rule 10b5-1 plans. If you missed the conference, it is not too late – you can still register to access the archived video.

At the time of Linda Thomsen’s remarks earlier this month, there was no evidence that the Staff’s interest in Rule 10b5-1 plans had resulted in any active SEC investigations of insider sales through these plans. That has now changed, with reports surfacing of an informal inquiry looking into stock sales by Countrywide CEO Angelo Mozilo. As noted in this NY Times article, an anonymous source confirmed the existence of the inquiry and its focus on Mozilo’s trades. The article notes: “Since October 2006, Mr. Mozilo has twice raised the number of shares that could be sold under his plans. In December 2006, when Countrywide shares were trading at $40.50, he increased the number of shares to be sold each month to 465,000 from 350,000. Then in February, when shares hit a high of $45.03, he increased the number of shares sold each month to 580,000. Shares closed down 74 cents yesterday, to $17.35. This month, the state treasurer of North Carolina, Richard Moore, wrote to the S.E.C. chairman, Christopher Cox, and questioned the changes Mr. Mozilo made to his selling program. ‘The timing of these sales and the changes to the trading plans raise serious questions about whether this is a mere coincidence,’ Mr. Moore wrote.”

Earlier this month, Countrywide put out this unusual press release defending Mozilo’s Rule 10b5-1 trades. The controversy over Mozilo’s stock sales under his 10b5-1 plan is not new – in an earnings call back in July, an analyst questioned Mozilo’s sales under his 10b5-1 plan while Countrywide was buying back its stock at the same time.

Be sure to check out our “Rule 10b5-1” Practice Area for the latest developments in this area.

Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing

We have posted the transcript from our recent webcast: “Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing.”

– Dave Lynn