July 2009


SEC Money Market Fund Reform

In September 2008, the Reserve Primary Fund’s NAV fell below the level invested in the fund, a rare occurrence referred to as “breaking the buck.”  As a result of the low NAV and massive withdrawal from money market funds, the Treasury Department instituted a temporary program that guaranteed the funds held in these accounts.  This program is slated to expire September 18, 2009 and other temporary credit and purchase facilities (e.g., the Money Market Investor Funding Facility and the Commercial Paper Funding Facility) are slated to expire early in 2010. Last month in an effort to restore stability to money market funds on a more permanent basis, the SEC voted to propose changes that would require money market funds to hold a portion of their portfolios in highly liquid investments, reduce their exposure to longer term investments and restrict their investments to only the highest quality securities.  The proposals would also require monthly reporting of portfolio holdings and allow suspension of redemptions if a fund “breaks the buck” to allow for the orderly liquidation of fund assets.  The SEC proposals leave open the issue of whether money market funds will continue to adhere to the $1 stable NAV format.  Some within the SEC are arguing for use of a “floating NAV” format in which the NAV could vary depending on the market value of the underlying fund assets.


Financial Crisis Inquiry Commission

The recently enacted Fraud Enforcement and Recovery Act of 2009 provided for the establishment of a “Financial Crisis Inquiry Commission.”  The Financial Crisis Inquiry Commission has a broad mandate to investigate the causes of the financial and economic crisis and has been given the authority to subpoena, hold hearings and receive evidence.  The Commission must submit a report containing its findings to the President and Congress by December 15, 2010.  This month it was announced that the 10-member bipartisan commission will be lead by Phil Angelides, a former California treasurer.  The Commission was largely modeled after the 9/11 Commission.


Consumer Financial Protection Agency Act of 2009

On June 30th, the Treasury provided Congress its consumer protection legislation.  On July 8th, Representative Barney Frank (D-MA) introduced H.R. 3126, the Consumer Financial Protection Agency Act of 2009 (CFPAA).  As covered in our June LRA, the newly proposed Agency would be an independent agency with broad jurisdiction over all consumer financial products that are not investment products and services already regulated by the SEC.  The CFPAA sets forth a transfer date not later than 60 days following the enactment of the legislation at which point regulatory authority for consumer financial protection would pass from several agencies, including the Federal Reserve, the OCC, the FDIC and others, to the Agency.  The Agency would be able to extend the definition of financial activity by rule, but could not extend the definition to include the business of insurance (with the exceptions of credit insurance, title insurance and mortgage insurance which are specifically covered by the CFPAA).



Restricted Access Funds Investing in Public Mutual Funds

In PLR 200915006, the IRS ruled that investments by existing funds and a new fund, each of which is accessible to investors only through the purchase of a variable contract, in mutual funds that are available for purchase by the general public would not violate the “investor control” doctrine.  The investments would thus not cause the owners of the variable contracts to be taxable directly on the income from the contracts for federal income tax purposes.  Importantly, this PLR seems to negate the informal, internal IRS position taken in ILM 200840043 (which proposed that any time a separate account invests directly in assets that are available to the general public, the investor control doctrine applies and the policyholder is treated as the owner of those assets for federal income tax purposes).



BB&T v. MassMutual, Clark Consulting

In May, BB&T BOLI Plan Trust filed a lawsuit against Massachusetts Mutual Life Insurance Company and Clark Consulting, Inc. in North Carolina state court.  The Trust is seeking damages in connection with approximately $55M invested in a hedge fund subaccount called Falcon Strategies, LLC (the same fund at the heart of Fifth Third’s suit against Clark and Aegon).  BB&T claimed that a “Reallocation Event” occurred (presumably under the stable value agreement) and the defendants failed to carry out their fiduciary duties by either liquidating the funds placed in the Falcon fund or timely advising BB&T of the fund’s performance so that BB&T could elect to move the funds into a more conservative fund.  Both MassMutual and Clark Consulting filed motions to dismiss last week.  In its brief, Mass Mutual argued that it was not BB&T’s fiduciary, that BB&T had no contractual right to enforce provisions of the stable value agreement and that the contractual documents did not create mandatory reallocation event obligations among other arguments.


CalPERS v. Moody’s, Fitch and Standard & Poor’s

The California Public Employees Retirement System (CalPERS), the largest pension fund in the country with $173B in assets, filed a lawsuit earlier this month against the three top ratings agencies.  The pension fund claims it invested $1.3B in three separate structured investment vehicles, all of which defaulted on their payment obligations leading to over $1 billion in losses for the pension fund.  CalPERS also claims that all three agencies received lucrative fees for helping to structure the deals and then issued top ratings on the deals they helped to create.  A hearing has been set for December 11, 2009.



FASB May Expand Mark-to-Market

Despite passing emergency rule changes last April, the Financial Accounting Standards Board (FASB) is considering expanding the use of fair-market values on corporate income statements and balance sheets in ways it never has before under a preliminary decision reached July 15th.  Under the board’s tentative plan, all financial assets would have to be recorded at fair value on the balance sheet each quarter.  The proposal issued by the International Accounting Standards Board (IASB) would allow companies to continue carrying many financial assets at historical cost including loans and debt securities.  Last week, the two boards held a joint meeting to discuss their plans.  The IASB plans to hold three public roundtables during September in New York, London and Tokyo to obtain feedback on its Exposure Draft, Financial Instruments: Classification and Measurement.  FASB will participate in those roundtables.  Additionally, FASB expects to issue one Exposure Draft that addresses the measurement, classification and impairment of financial instruments, as well as hedge fund accounting, by the end of this year or early 2010.


GAO Issues Report on Leverage at Financial Institutions

The Emergency Economic Stabilization Act (EESA) directed the Government Accountability Office (GAO) to study the role of leverage in the current financial crisis and federal oversight of leverage.  While acknowledging that federal regulators impose capital and other requirements on their regulated institutions to limit leverage and ensure financial stability, the report found that the regulatory capital measures did not always fully capture certain risks.  An example cited was financial institutions that applied risk models in ways that significantly underestimated certain risk exposures and as a result, did not hold capital commensurate with their risks.  The GAO recommended that as Congress considers establishing a systemic risk regulator that Congress considers the merits of assigning such a regulator with responsibility for overseeing system-wide leverage.  Additionally, the GAO recommended that regulators assess the extent to which reforms under Basel II, will address risk evaluation.