What follows is from Akin Gump’s corporate practice. Download a PDF of the full document here.

For questions, please contact—

• Patrick J. Dooley, 212.872.1080, New York
• Bruce S. Mendelsohn, 212.872.8117, New York
• Eliot D. Raffkind, 214.969.4667, Dallas
• Stephen M. Vine, 212.872.1030, New York
• Richard B. Zabel, 212.872.8060, New York

As the credit crisis continues to roil the markets, companies and individual investors alike are fleeing to the relative safety of cash.  We say “relative” safety, because recent events have made clear that not all cash investments are alike.  Many investors who placed their cash in money market funds were stunned by the announcement on September 16 that the $62 billion Reserve Primary Fund had “broken the buck,” i.e., its net asset value per share had dipped below $1.00.  Keeping cash at a bank, on the other hand, also began to look risky, especially after the spectacular failures of Washington Mutual and IndyMac, the two largest bank failures in U.S. history.

In response to these events, the U.S. Treasury Department announced that it would temporarily guarantee funds held in money market funds.  In addition, the Emergency Economic Stabilization Act of 2008, which was signed into law on October 3, 2008, temporarily raises the amount of insurance provided by the Federal Deposit Insurance Corporation (FDIC) from $100,000 to $250,000 per insured depositor.  Also, on October 14, 2008, the FDIC announced a new temporary guarantee program that, among other things, guarantees interbank borrowings and provides unlimited coverage for non-interest bearing deposit transaction accounts.  In this alert, we answer some of the most frequently asked questions about money market funds and bank accounts, the Treasury’s guarantee program for money market funds, and the FDIC insurance and guarantee programs for bank accounts.

MONEY MARKET FUNDS AND BANK ACCOUNTS

What is a money market fund?

A money market fund is a mutual fund that invests in high-quality, short-term debt instruments, such as government securities, certificates of deposit, commercial paper and bank notes.  Although money market funds are not required by law to maintain a $1.00 net asset value, they are required by Securities and Exchange Commission (SEC) rules to be managed to maintain a stable net asset value.  Among other things, SEC rules regulate the credit quality, maturity and diversification of investments held by a money market fund.

• Credit quality. A money market fund may invest only in U.S. dollar denominated securities that the fund’s board of directors determines present “minimal credit risks.” In addition, at least 95 percent of the assets of a taxable money market fund must consist of securities that are rated in the highest short-term rating category by two nationally recognized rating agencies (or from one such agency if only one agency has rated the security) or securities determined by the fund’s board of directors to be of comparable quality. Up to five percent of a taxable money market fund’s investments may be in securities that are in the second-highest short-term rating category or of comparable quality.
• Maturity. Money market funds are generally permitted to invest only in securities that have a remaining maturity of 397 days or fewer and must maintain a weighted average portfolio maturity of 90 days or fewer.
• Diversification. Money market funds generally may invest not more than five percent of their assets in the securities of a single issuer.[1]

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What follows is a client alert from Akin Gump’s litigation practice. A PDF of the full alert can be downloaded here.

If you have questions regarding this alert, please contact—

• Anthony T. Pierce, 202.887.4411, Washington, D.C.
• Mary A. House, 202.887.4143, Washington, D.C.

Government takeovers, bankruptcies, mortgage defaults and the broadening credit crunch have contributed to major losses across the financial services industry.  In particular, the approximately $55 trillion[1] market in credit default swaps (CDS)—many based on mortgage-backed securities—has contributed to the downfall of venerated financial institutions.  The market for CDSs is drying up, as protection sellers have had to write down huge losses on CDS portfolios.  Moreover, continuing Credit Events on CDSs means that literally trillions of dollars in CDS settlements are coming due.  Market participants, including both CDS buyers and sellers, are concerned about what rights, obligations and litigation considerations arise under CDS agreements when a Credit Event[2] on the underlying reference entity or obligation is noticed, or when a counterparty asserts an Event of Default and attempts early termination of the agreement.

Following is a discussion—generally applicable to CDS agreements—of what actions a market participant should consider in evaluating defaults, determining contract rights and managing losses.  Market participants should seek legal counsel for advice on specific agreements, as every agreement is different, and interpretation may depend on which version of the Master Agreement was chosen, as well as the Schedule, Annex, Definitions and Confirmations negotiated by the parties.[3] This article is not intended to provide legal advice and should not be relied upon as such.

Evaluating Defaults and Determining Contractual Rights and Obligations

One of the more serious questions of the unregulated CDS market is whether or not a protection seller currently assigned to pay out upon default of the reference entity or obligation has—or can raise—sufficient capital to do so.  Market participants should seek to minimize losses and consider litigation risks and opportunities by immediately organizing and evaluating information on outstanding CDSs.  As set forth in more detail below, market participants should: gather and index documentation on all CDSs; evaluate the risk of default of all parties and the reference entity and obligation; determine whether or not a Credit Event has already occurred; and determine whether or not an Event of Default has occurred.  If a Credit Event or Event of Default has occurred, this article provides a brief overview of relevant rights and obligations.

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In light of the recent flurry of SEC actions and related guidance, we offer the following summary of the SEC releases along with links to the full text of the documents.

See client alerts summarizing the recent SEC Emergency Orders here and here.

We are continually monitoring the SEC’s regulatory actions and its staff’s interpretations and will update this quick links table as necessary.

If you have questions regarding this alert, please contact—

• Patrick J. Dooley, 212.872.1080, New York
• Bruce S. Mendelsohn, 212.872.8117, New York
• Eliot D. Raffkind, 214.969.4667, Dallas
• Stephen M. Vine, 212.872.1030, New York
• Richard B. Zabel, 212.872.8060, New York

Order / Release No. and Description

1.  34-58774: Final “Naked” Short Selling Anti-Fraud Rule (October 14, 2008) — Final rule that continues the effect of Rule 10b-21 (the “Naked” Short Selling Anti-fraud Rule) indefinitely.  Rule 10b-21 will be added to the Exchange Act.

a. 34-57511: Proposed “Naked” Short Selling Anti-fraud Rule (as of Mar. 30, 2008)—Proposing release for the anti-fraud rule.

b. 34-58572: Naked Short Selling Order (Sept. 17, 2008) - Emergency order to curb “naked” short selling of securities. Extended until 11:59 p.m. E.D.T. on October 17, 2008 by Order No. 34-58711.

c. Loaned Securities Guidance: Staff Guidance Regarding Sale of Loaned But Recalled Securities (as of September. 29, 2008).  Guidance clarifying that a sale of a loaned security is not a short sale, so long as a bona fide recall is initiated within two business days after the trade date.

2.  34-58773: Interim Final Temporary “Close-Out” Rule (October 14, 2008) - Interim final temporary rule that continues the effect of Rule 204T (the “close out” rule) beyond the October 17, 2008 expiration of the extended Naked Short Selling Order.

a. Rule 204T FAQs: Staff Guidance Regarding the Naked Short Selling Order (as of Sept. 22, 2008) — Question and answer guidance regarding the adoption of Rule 204T (the “close-out” rule).

b. 34-58572: Naked Short Selling Order (Sept. 17, 2008) - Emergency order to curb “naked” short selling of securities. Extended until 11:59 p.m. E.D.T. on October 17, 2008 by Order No. 34-58711.

c. Loaned Securities Guidance: Staff Guidance Regarding Sale of Loaned But Recalled Securities (as of September. 29, 2008).  Guidance clarifying that a sale of a loaned security is not a short sale, so long as a bona fide recall is initiated within two business days after the trade date.

3.  34-58775: Final Rule Eliminating the Market Maker Exception (October 14, 2008) - Final rule that continues the elimination of the market maker exception from Rule 203 indefinitely.

a. 34-58572: Naked Short Selling Order (Sept. 17, 2008) - Emergency order to curb “naked” short selling of securities. Extended until 11:59 p.m. E.D.T. on October 17, 2008 by Order No. 34-58711.

b. Loaned Securities Guidance: Staff Guidance Regarding Sale of Loaned But Recalled Securities (as of September. 29, 2008).  Guidance clarifying that a sale of a loaned security is not a short sale, so long as a bona fide recall is initiated within two business days after the trade date.

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What follows is from Akin Gump’s corporate practice. For more information, please contact—

• Patrick J. Dooley, 212.872.1080, New York
• Bruce S. Mendelsohn, 212.872.8117, New York
• Eliot D. Raffkind, 214.969.4667, Dallas
• Stephen M. Vine, 212.872.1030, New York
• Richard B. Zabel, 212.872.8060, New York

Certain public companies may need to enhance their upcoming quarterly management’s discussion and analysis (MD&A) disclosure in light of recent Securities and Exchange Commission (SEC) and Financial Accounting Standards Board (FASB) guidance regarding fair value accounting.

In March 2008, the SEC’s Division of Corporation Finance sent letters to certain public companies, in which it highlighted certain disclosure issues relating to fair value measurements.  In September 2008, the division sent a supplemental letter, reiterating the points set forth in the March letter and providing additional suggested disclosure items.  The letters generally invite public companies to evaluate whether or not they could provide, in their MD&A, clearer and more transparent disclosure relating to their fair value measurements. The March letters provide insight into the level of detail the SEC expects from companies that may be required to apply management judgments in using unobservable inputs to determine the fair value of assets and liabilities.  The September letters supplement the March letters and further invite public companies to disclose, among other things, the way in which credit risk is incorporated into the valuation of assets or liabilities; the impact of the lack of market liquidity on fair value determination of financial instruments; and the extent to which brokers or pricing services were used to assist in fair value determination.

• The March letter is available here.
• The September letter is available here.

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The Securities and Exchange Commission (SEC) recently issued a manual from its Division of Enforcement and a request for public comment on fair value accounting, both of which may clarify the Commission’s actions and decisions.

If you have questions regarding the information in post, please contact-

Enforcement

• Jim Benjamin, 212.872.8091, New York

Fair Value Accounting

• Patrick J. Dooley, 212.872.1080, New York
• Bruce S. Mendelsohn, 212.872.8117, New York
• Eliot D. Raffkind, 214.969.4667, Dallas
• Stephen M. Vine, 212.872.1030, New York
• Richard B. Zabel, 212.872.8060, New York

The SEC Division of Enforcement published its first manual to codify its practices and procedures for investigations. While intended as an internal staff reference, the document will offer insight on how the Commission operates in enforcement matters and what it expects in its requests for information.

The full manual can be found here.

The SEC is also requesting public comment until November 13 on fair value (or “mark-to-market”) accounting, for its study mandated by the Emergency Economic Stabilization Act of 2008. The Commission also welcomes public comments on the issues, point-of-view, research and opinions it should consider in conducting the study.

More information on submitting public comments can be found here.

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This is a client alert from Akin Gump’s litigation practice. A PDF of the full alert can be downloaded here.

If you have questions regarding this alert, please contact-

• Mary A. House, 202.887.4143, Washington, D.C.
• Anthony T. Pierce, 202.887.4411,Washington, D.C.

You can find the full alert here.

Tensions are rising in the financial industry over increasing terminations and defaults on over-the-counter (OTC) derivatives, or credit default swaps (CDSs).  With large investment banks seeking Chapter 11 protection, government bailouts, the takeover of Fannie Mae and Freddie Mac, and the tightening credit market, the approximately $55 trillion market in credit default swaps, many based on mortgage-backed securities, is facing difficult circumstances[1]. The sheer size of the market - and the number of speculators in the market - means that trouble in the CDS market has implications for market failure beyond the subprime mortgage market.  As trillions of dollars in CDS settlements are likely to become due, both protection buyers and sellers are wondering where the cash will come from and how to manage losses.

CDS Basics

Before the current credit crisis, many people were unaware of these financial instruments[2]. Beginning in the 1990s, large investors in such securities as corporate debt, municipal bonds or, more recently, asset-backed securities such as collateralized debt obligations (CDOs), started to use CDSs to hedge against losses on these investments.  A CDS is akin to insurance against an investment loss, whereby the entity seeking to hedge its loss, the protection buyer, pays a premium over time to a protection seller to reimburse it for the value of covered loss in its investment should a specified Credit Event [3] occur, such as a default or bankruptcy of the reference entity or obligation[4]. Buyers take a risk, however, regarding whether the protection seller will be able to payout upon a Credit Event.  Trades on CDSs are unregulated.  Only regulated entities, such as banks (as opposed to investment banks and hedge funds), are required to set aside reserves to cover potential CDS payouts.

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After meeting to discuss the public comments received on FSP FAS 157 on Fair Value Accounting, the Financial Accounting Standards Board (FASB) issued staff guidance on the scope of the FSP. The FASB affirmed its decision that the FSP should be limited to financial assets and will be effective upon issuance for third quarter financial statements.

Statement 157 was amended to include an illustrative example of how to determine fair value when a market is not active.  The staff position may be found here.

What follows is a client alert produced by Akin Gump’s investment funds practice. Download a PDF of the full alert here.

INTRODUCTION

In response to the turmoil in the U.S. financial markets, the Securities and Exchange Board of India (SEBI) announced in a press release issued on Monday, October 6, significant changes to Indian regulations governing foreign institutional investors (FIIs) and unregistered foreign investors who intend to invest in the Indian securities market.  In order to encourage the inflow of foreign capital into India, SEBI has removed the restrictions placed on the use of offshore derivative instruments (ODIs)-often referred to as “participatory notes” or “p-notes”-to invest in the Indian market.

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The Emergency Economic Stabilization Act of 2008 (the “Act”) may result in additional relief for companies required to use “mark-to-market” accounting.  Under the Act, the Securities and Exchange Commission (SEC) is authorized to suspend mark-to-market accounting, which many have claimed has contributed to the financial crisis by requiring companies to write down assets to fire-sale prices due to the illiquidity of many trading markets.  The Act also requires the SEC, in consultation with the Federal Reserve and the Treasury Department, to conduct a study of mark-to-market accounting as it applies to financial institutions and to report to Congress within 90 days.

• SEC Authority to Suspend Mark-to-Market Accounting.The Act authorizes the SEC to suspend for any issuer or with respect to any class or category of transaction the application of Statement of Financial Accounting Standards No. 157 (”FAS 157″) if the SEC determines that the suspension is in the public interest and consistent with the protection of investors.
• While the legislation affirms the authority of the SEC to suspend mark-to-market accounting, the SEC has not indicated whether or not it will do so. Earlier this week, the SEC issued interpretive guidance on FAS 157 that affords greater flexibility to banks and other holders of illiquid securities in estimating asset values. (To see our client alert summarizing the guidance, click here.) Also earlier this week, the Financial Accounting Standards Board (FASB) proposed FSP FAS 157-d, which provides an illustration to aid practitioners in estimating the fair value of assets in markets that are not active pursuant to FAS 157. FASB announced that it would shorten its usual comment period for proposals, thereby allowing FASB to act after only a seven-day comment period. The comment period will expire on October 9, and an FASB board meeting will be held on October 10 in hopes of finalizing the guidance. FASB also announced that if FSP FAS 157-d is finalized, the guidance would be effective upon issuance, and entities with a calendar year-end would apply the guidance in their third-quarter financial statements.
• Study of FAS 157. The Act requires the SEC, in consultation with the Federal Reserve Board and the secretary of the Treasury, to conduct a study of FAS 157 as it applies to financial institutions. The study must consider (1)the effects of mark-to-market accounting on a financial institution’s balance sheet, (2)the impact of mark-to-market accounting on bank failures and on the quality of financial information available to investors, (3)the process used by the FASB in developing accounting standards, (4)the advisability and feasibility of modifying those standards and (5) alternative standards to FAS 157. The SEC must submit a report of its study to Congress within 90 days, including any administrative and legislative recommendations the SEC determines appropriate.

If you have questions regarding this post, please contact—

• Patrick J. Dooley, 212.872.1080, New York
• Bruce S. Mendelsohn, 212.872.8117, New York
• Eliot D. Raffkind, 214.969.4667, Dallas
• Stephen M. Vine, 212.872.1030, New York
• Richard B. Zabel, 212.872.8060, New York

The Securities and Exchange Commission (SEC) has extended its emergency order relaxing the requirements of Rule 10b-18 under the Securities Exchange Act of 1934.  The order is now scheduled to expire on October 17, 2008.  Although these temporary rules make it easier for companies to come within the safe harbor from the anti-manipulation provisions of the Exchange Act, companies should note that stock repurchase programs are still subject to the anti-fraud provisions of the securities laws.  The anti-fraud provisions prohibit companies from repurchasing shares if they are in possession of any material nonpublic information.  This could create a problem for some companies, particularly those whose fiscal quarter ended September 30 and whose earnings have not yet been released, to the extent such information could be considered material.  Such companies may need to release their earnings earlier than usual or otherwise ensure they do not possess material nonpublic information if they want to take advantage of this temporary relief for issuer stock repurchases.

Since the SEC issued the emergency order, several companies have announced stock repurchase programs, presumably to take advantage of the relaxed safe harbor provisions.  Since the SEC issued this emergency order, Microsoft announced a program to repurchase up to $40 billion in shares, Nike announced a similar program to purchase up to $5 billion in shares and 3Com announced a program to purchase up to $100 million in shares.  Several smaller companies have also commenced programs that will allow them to take advantage of the emergency conditions to the safe harbor.

As a reminder, the SEC’s emergency order temporarily relaxes certain timing and volume conditions of Rule 10b-18.  First, the emergency order suspends the timing conditions found in Rule 10b-18, such that the issuer repurchasing shares is permitted to make the opening purchase reported in the consolidated transaction or quotation reporting system and is also permitted to effect purchases up to the scheduled close of the market.  In addition to the relaxed timing conditions, the emergency order increases the daily volume of shares that issuers may purchase to 100 percent of the average daily trading volume for the security, compared to 25 percent as provided for in Rule 10b-18.

This emergency order became effective at 12:01 a.m. on September 19, 2008, and was originally set to expire at 11:59 p.m. on October 2.  Pursuant to the SEC’s extension, the order will now expire at 11:59 p.m. on October 17, 2008.

(See a client alert summarizing the recent SEC Emergency Orders, including the order regarding Rule 10b-18, here.)

If you have questions regarding this post, please contact—

• Patrick J. Dooley, 212.872.1080, New York
• Bruce S. Mendelsohn, 212.872.8117, New York
• Eliot D. Raffkind, 214.969.4667, Dallas
• Stephen M. Vine, 212.872.1030, New York
• Richard B. Zabel, 212.872.8060, New York