Morgan Lewis

Financial Crisis Impact and Analysis

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Risk of False Claims Act Liability for Claimants of Federal “Bailout” Funds

December 22, 2008

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (EESA) was signed into law. The EESA authorized the Secretary of the Treasury to purchase troubled assets with taxpayer funds up to a limit of $700 billion. Through the Troubled Assets Relief Program (TARP) and the Capital Purchase Program (CPP), the Department of Treasury has made about half of that capital available to financial institutions.

Read the full Litigation LawFlash here.

Recent Regulatory Initiatives Pave Way for New Bank Investors

December 1, 2008

The announcement on Friday, November 21 of a regulatory first—the approval of a “shelf” or “expandable” charter—is the latest sign that bank regulators wish to encourage new equity investors in the banking market. The Office of the Comptroller of the Currency (OCC) touted the new charter of the Ford Group Bank—which positions the investor group to bid on assets and assume liabilities from the Federal Deposit Insurance Corporation (FDIC) as receiver of failed or failing institutions—as the first of its kind. Three private equity firms plan to invest in the bank holding company that will own the bank. This recent development was preceded by the OCC’s August approval of a small bank acquisition by an investor interested in bidding in future failed bank situations.

Read the full Business and Finance LawFlash here.

Tax Considerations for Participants in U.S. Treasury’s Capital Purchase Program

November 24, 2008

Recent financial reports suggest that as many as 40% of the institutions in the banking and thrift industry will eventually participate in the U.S. Treasury Department’s $250 billion Capital Purchase Program (CPP). Although the level of interest may ultimately prove to be lower than this projection, it is conceivable that several thousand banks and thrifts may choose to participate. They may be joined by finance companies and other financial institutions that purchase, form, or convert into banks in order to be eligible for participation. It is also possible that, depending on the outcome of negotiations between Treasury and Congressional leaders concerning the potential expansion of CPP beyond the banking industry, the pool of participants may ultimately include various nonbank entities.

Read the full Tax LawFlash here.

SEC Adopts Interim Reporting Requirement for Short Sales

November 11, 2008

This FYI is an update of the FYI circulated by Morgan Lewis on October 17, 2008 reflecting additional informal guidance that we understand was provided by the SEC staff to the Managed Funds Association and other groups. To ensure that our clients have the latest developments, we have described these changes in Q&A 11 and have added a new Question and Answer in Q&A 14. We have also updated our responses to reflect the expiration of the transition period.

Read the full Securities Industry FYI here.

Financial Turmoil and the Expanding Reach of the FCPA

November 4, 2008

The current worldwide financial crisis may lead to unexpected results for U.S. businesses and individuals in their efforts to comply with the Foreign Corrupt Practices Act (FCPA). As foreign governments bail out, and in some instances nationalize, commercial and investment banks, employees of those previously private financial institutions may become “foreign officials” for purposes of the FCPA. Thus, companies must determine whether their dealings with those institutions now implicate the FCPA.

Read the full Litigation LawFlash here.

The Troubled Economy Survival Kit for Employers—Solutions for Difficult Times

October 30, 2008

Our current troubled economy presents a two-fold dilemma for many employers: new challenges must now be faced, and old challenges appear more difficult to manage. This LawFlash summarizes several of the most important lessons that have already been learned by employers attempting to cope with difficult times. Even employers not confronting imminent workforce changes will find these lessons useful.

Read the full Labor and Employment LawFlash here.

SEC Adopts Interim Reporting Requirement for Short Sales

October 17, 2008

As a follow-up to the emergency order it issued in September, the Securities and Exchange Commission (SEC) has issued an interim final rule requiring institutional investment managers to file Form SH to report their short sales. The new rule takes effect October 18, 2008 and expires on August 1, 2009. While the rule generally codifies the SEC’s earlier emergency order (Release 34-58591) and related guidance from the SEC staff, the interim rule and the SEC’s release modify certain aspects of the requirements under the emergency order. In particular, the SEC has provided additional time to submit Form SH and has raised the threshold reporting level. On the other hand, managers are now required to report pre–September 22, 2008 short positions.

We have updated our Q&As regarding the Form SH requirements. Differences between the interim rule and the emergency order are indicated by an asterisk in the question title.

The interim final rule (Release 34-58785) mandates that every institutional investment manager that exercises investment discretion over accounts holding Section 13(f) securities, and that has filed or was required to file a Form 13F for the calendar quarter, file a Form SH disclosing specified information about securities sold short during the preceding week. Managers subject to the reporting requirement include both SEC-registered and unregistered managers that exercise investment discretion over $100 million or more of the broad group of equity securities described in Section 13(f) of the Securities Exchange Act of 1934.

The SEC has asked for comments on the interim rule, which will be due 60 days after the rule is published in the Federal Register.

Read the full Securities Industry FYI here.

Emergency Economic Stabilization Act of 2008 Limits Executive Compensation and Offshore Deferrals

October 16, 2008

On October 3, 2008 President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the Act). The Act, among other things, (i) institutes the Troubled Asset Relief Program (the TARP), which authorizes the Treasury Department to purchase or insure a financial institution’s troubled assets; (ii) adds section 457A to the Internal Revenue Code (IRC), which largely eliminates the ability of taxpayers to defer compensation that is received from entities located in certain non-U.S. jurisdictions; and (iii) makes various adjustments to the application of the alternative minimum tax (the AMT). In addition to the Act, on October 14, 2008, the Internal Revenue Service (IRS) issued IRS Notice 2008-94, which clarifies certain provisions within the TARP that relate to institutions that elect to participate in this program. The impact of each of these three provisions is summarized below in Sections 1, 2 and 3, respectively.

Read the full Employee Benefits LawFlash here.

SEC Adopts Interim Close-Out Requirements for Short Sales

October 16, 2008

As a follow up to the emergency order it issued in September, the Securities and Exchange Commission (SEC) has issued interim final rules imposing close-out requirements on short sales. The new rules take effect October 17, 2008 and expire on July 31, 2009. While these rules generally codify the SEC’s earlier emergency order and related guidance from the SEC staff, the interim rules and the SEC’s release modify certain aspects of the requirements under the emergency order. Accordingly, we have updated our Q&As regarding the close-out requirements; the following Q&As replace those we sent on September 25.

The SEC’s interim rules require that clearing brokers deliver securities to settle long and short sale transactions on the scheduled settlement date for the security (generally Trade Date (T)+3) (Settlement Date). The rules also require that the clearing broker close out most fails to deliver at the beginning of the first settlement day following the Settlement Date, or T+4 (Close-Out Date).

Read the full Securities Industry FYI here.

Motion Picture Industry Benefits Accompany Emergency Economic Stabilization Act of 2008

October 13, 2008

You no doubt already are aware that the Emergency Economic Stabilization Act of 2008 (the Act) was recently signed into law. But you may not be aware that among the “sweeteners” that were added to the bill are a few items that will be of benefit to the motion picture industry. 

Read the full Business and Finance LawFlash here.

Certain Tax Provisions of the Emergency Economic Stabilization Act of 2008 and IRS Guidance Relating to the Economic Crisis

October 8, 2008

H.R. 1424 (the Act), which was signed into law by President Bush on October 3, 2008, contains tax-related provisions that can have significant implications for financial institutions, certain hedge funds, and investment companies, in addition to a variety of other taxpayers. Specifically, the Act contains provisions that:

  1. provide special rules with respect to executive compensation paid by employers participating in the Troubled Assets Relief Program (TARP);
  2. treat certain sales of Fannie Mae or Freddie Mac preferred stock by financial institutions as giving rise to ordinary income or loss;
  3. prevent the deferral of certain compensation from “tax indifferent” parties;
  4. require broker reporting of basis information with respect to securities transactions;
  5. retroactively extend through 2009 certain rules relating to regulated investment companies; and
  6. extend the period during which there is an exclusion from income for certain discharge of indebtedness income arising from discharges of indebtedness secured by the taxpayer’s principal residence.

Read the full Tax LawFlash here.

International Tax: U.S. Legislative Update

October 6, 2008

A number of important provisions impacting international transactions are included in H.R. 1424 (the Bill), which President Bush signed into law on October 3, 2008. The Bill was approved by the Senate on October 1, 2008, and then by the House of Representatives on October 3, 2008. The Bill contains three distinct subdivisions:

  • The Emergency Economic Stabilization Act of 2008
  • The Energy Improvement and Extension Act of 2008 (the Energy Act)
  • The Tax Extenders and Alternative Minimum Tax Relief Act of 2008 (the Extenders Act)

Several provisions within these subdivisions specifically relate to international tax. Notably absent from the Bill is any provision further postponing implementation of the worldwide interest allocation election beyond the deferred date already established under the Housing and Economic Recovery Act of 2008. Most importantly for corporate taxpayers focused on outbound transactions, the Bill contains a number of extenders that relate to provisions of existing law currently scheduled to sunset.

Read the full Tax LawFlash here.

The Emergency Economic Stabilization Act of 2008:
Impact of the Historic New Law

October 5, 2008

The Emergency Economic Stabilization Act of 2008 (the “Act”) was signed into law by President Bush on October 3, 2008. Passage of the Act was the result of intense debate in both the U.S. Senate and the U.S. House of Representatives and among the American people. Debate was to be expected given the magnitude of the requested funds—$850 billion (including up to $700 billion for the purchase of troubled assets and up to $150 billion for the extension or expansion of a variety of tax breaks)—and the importance of the issues the Act addresses to an economy that has been experiencing severe stress from the fallout of the “subprime crisis” which has morphed into a more general credit crisis.

The heart of the Act is based on the concept that if financial institutions could sell their “troubled assets” (including mortgages, mortgage-backed securities and other instruments), retaining assets that are not “troubled” on their balance sheets, those institutions would be perceived as safer transactional counterparties by those with whom they do business. The Act assumes that once worries about the solvency of financial institutions dissipate, credit will again begin to flow.

The Act attempts to address some very difficult questions, including how to determine the prices the U.S. government should pay for “troubled assets,” how much power is vested in the Secretary of the U.S. Department of the Treasury (the “Secretary”) under the Act and the suspension of mark-to-market accounting.

There are, of course, no easy answers to the financial crisis and to the many questions left unanswered in the Act. We hope, however, that this summary and our practice-specific comments are useful resources, and we will continue to update you as events unfold.

View the summary and practice-specific comments:

Impact of the Emergency Economic Stabilization Act of 2008 on Investment Management Firms

October 4, 2008

The Emergency Economic Stabilization Act of 2008 (Act) will directly impact investment management firms of all kinds, with the greatest impact on those firms managing accounts holding “troubled assets” eligible for purchase by the U.S. Treasury and the few firms chosen to manage the Treasury’s portfolios of troubled assets. Although the Act runs 451 pages, details on key aspects of the government’s troubled asset recovery program that affect the investment management industry remain to be spelled out by the Treasury. Despite this, investment management firms should start considering how various aspects of the Act may affect their business activities. We discuss these subjects below.

Read the full Investment Management FYI here.

Money Market Funds: Insurance, Liquidity, and Support

September 29, 2008

The past two weeks have seen a continuation or worsening of the market conditions that have challenged money market mutual funds (money funds), as well as their sponsors and advisers, over the past year. Among other things, these events have included the bankruptcy of Lehman Brothers, the downgrading of short term securities issued by various financial services companies, a spike in 1-month and 3-month LIBOR, and unprecedented illiquidity in markets for securities that traditionally have been among the deepest and most liquid. The past two weeks also saw the announcement of The Primary Fund, a series of the Reserve Fund, stating that it is unable to maintain a stable $1.00 per share net asset value (NAV), and the announcement by at least one other Money Fund that it will liquidate.

Taken together, these developments have raised questions about the ability of many money market funds to satisfy redemptions in the normal course, or in extreme cases, whether other money funds will “break the buck.” This FYI provides an overview of several options that are potentially available to money funds that may be used, alone or in combination, to address these issues:

  • Treasury Guarantee Program for Money Funds
  • Capital Support Arrangements
  • Sale of Portfolio Securities to Affiliates
  • Asset Backed Commercial Paper Liquidity Facility

Read the full Investment Management FYI here.

SEC Staff Provides Guidance on Short Sale Emergency Orders: Supplement to FYIs of September 21 and 22, 2008

September 25, 2008

As the securities industry continues to wrestle with the emergency orders issued last week by the Securities and Exchange Commission (SEC), a number of interpretive questions have been raised. The SEC staff has provided guidance on two of those orders through FAQs and informal conversations with industry participants. The recent guidance relates to the following: (1) the order imposing temporary close-out requirements on short sales, and (2) the order imposing temporary short sale reporting requirements on institutional money managers.

The SEC staff guidance is incorporated into the Q&As below; added or affected Q&As are marked “NEW” or “REVISED” as applicable. The SEC staff has indicated that it will continue to monitor the situation and provide additional guidance as appropriate. Accordingly, our discussion here is subject to further guidance from the SEC and the SEC staff.