Sneak preview of the new Knowledge Mosaic SEC Filings page. Click the image to enlarge.

We recently wrote about one of the major new features of the new platform, a substantially expanded and enhanced system for customized email alerting. Today we spotlight another new feature that, while narrower in scope, is potentially just as valuable to some.

As of the KM4 launch, Knowledge Mosaic users will be able to use a new filter on the SEC Filings page for IPOs. We’ve tagged all filings that are part of the initial public offering thread – registration statements, prospectuses, post-effective amendments, even notices of effectiveness from the SEC.

Combining the IPO filter with other search fields, users will be able, for example, to quickly ascertain which initial public offerings by selling stockholders have closed in the last 12 months, or to search for risk factor language in self-underwritten IPOs by technology start-ups headquartered in California.

Of course, these two new features – the new alerting system and the new IPO filer – are not mutually exclusive.  You can combine them, allowing you to set up real-time alerts on initial public offerings, which you can tweak and refine to your heart’s content.  And as always, everything’s included in your Knowledge Mosaic license.  So even if  transactional law is not your thing, why not sign up to be notified, say, when Facebook’s IPO goes effective?  Wouldn’t it be a refreshing change of pace to be watching what Facebook is doing, instead of the other way around?

Keep reading this blog for more information on what’s in store in KM4.

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The amendments rescind the exemption from registration provided in Section 4.13(a)(4) for qualified purchaser funds; rescind relief from the certification requirement for annual reports provided to operators of certain pools offered only to qualified eligible persons under Section 4.7(b)(3); and require the annual filing of notices claiming exemptive relief under several sections of the CFTC’s regulations. Finally, the adopted amendments include new risk disclosure requirements for CPOs and CTAs regarding swap transactions.

Section 4.5. Perhaps the most sweeping aspects of the CFTC’s new rules, however, do not really involve CPOs or CTAs; they involve SEC-registered investment companies. Section 4.5 will require investment companies to register with the CFTC if the investment company’s derivatives trading exceeds five percent of the liquidation value of its portfolio. Included within that five percent threshold are all swaps, futures, and risk management hedging activities. The CFTC does provide for an alternative threshold based on a net notional test. Under the net notional test, entities may claim a registration exemption if the aggregate net notional value of the entity’s commodity interest positions does not exceed 100 percent of the liquidation value of the commodity pool’s portfolio. 

Marketing Restrictions. Section 4.5 also prohibits investment companies from marketing themselves as a vehicle for trading in commodity futures, commodity options, or swaps markets. In response to commenters’ requests, the final rule provides guidance on the factors the agency will consider as indicative of prohibited marketing. Those factors are: (1) the fund’s name; (2) whether the fund’s primary investment objective is tied to a commodity index; (3) whether the fund makes use of a controlled foreign corporation for its derivatives trading; (4) whether the fund’s marketing materials, including its prospectus or disclosure document, refer to the benefits of the use of derivatives in a portfolio or make comparisons to a derivatives index; (5) whether, during the course of its normal trading activities, the fund or entity on its behalf has a net short speculative exposure to any commodity through a direct or indirect investment in other derivatives; (6) whether the futures/options/swaps transactions engaged in by the fund or on behalf of the fund will directly or indirectly be its primary source of potential gains and losses; and (7) whether the fund is explicitly offering a managed futures strategy.

Controlled Foreign Corporations. The CFTC believes that registered investment companies invest up to 25 percent of their assets in controlled foreign corporations (“CFCs”), which then engage in actively managed derivatives strategies. The CFTC does not oppose the continued use of CFCs by registered investment companies, but wants them to be subject to regulation. Therefore, CFCs will be required to have their CPOs register with the CFTC unless they may claim exemption or exclusion on their own merits.

Compliance. Compliance with the amendments to Section 4.5 for purposes of registration only will occur on the later of either December 31, 2012, or within 60-days following the adoption of final rules defining the term “swap,” and establishing margin requirements for such instruments. Entities required to register due to the amendments to Section 4.5 shall be subject to the CFTC’s recordkeeping, reporting, and disclosure requirements set forth in part 4 within 60 days following the effectiveness of a final rule implementing the CFTC’s proposed harmonization effort.

Harmonization. Recognizing that requiring investment companies to register as CPOs may lead to duplicative or inconsistent regulatory requirements, the CFTC separately proposed rules meant to harmonize a registered investment company’s SEC and CFTC compliance obligations. It published for comment exemptive provisions that would be available to advisers of registered investment companies who are required to register as CPOs. The exemptive provisions relate to (1) the delivery of disclosure documents and periodic reports; (2) the cycle for updating disclosure documents; (3) the timing of financial reporting to participants; and (4) the SEC-permitted use of a summary prospectus of open-ended registered investment companies. Comments should be submitted within 60 days after publication in the Federal Register, which is expected during the week of February 20.

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Paul Volcker, the inspiration behind the eponymous “Volcker Rule,” sent an eight-page letter to the federal regulators responsible for implementing the Dodd-Frank Act’s prohibition against proprietary trading. Eight-pages, compared to GE’s 37, the International Swaps and Derivatives Association’s 24, and the 154-page tome jointly submitted by the Securities Industry and Financial Markets Association, the American Bankers Association, the Financial Services Roundtable and The Clearing House Association. The proposed rule itself is almost 300 pages.

Mr. Volcker’s comments are succinct and to the point. To the various objections raised in response to the Act’s prohibition he has a two-word response: “not so.”

He groups the objections into four categories: (1) proprietary trading by commercial banks is not an important risk factor; (2) needed liquidity in trading markets will be imperiled; (3) the competitive position of U.S. based commercial banking institutions will be adversely affected; and (4) the proposed regulation is simply too complicated and costly. He addresses each in turn.

Risk. Proprietary trading is inherently speculative and, therefore, risky by definition. The failure of investment banks’ internal controls to identify those risks led them to either merge with commercial banks or obtain a banking license from the Federal Reserve. They did so for the express purpose of obtaining federal government support. Mr. Volcker reminds regulators that the handful of institutions which will most be affected by the prohibition have a choice: “give up either their proprietary trading activity or their banking license. The apparent reluctance to do the latter only reinforces the perceived value of access to the Federal safety net and the substantial implicit subsidy to borrowing costs.”

Liquidity. Mr. Volcker questions the accepted wisdom which says that ever-increasing amounts of liquidity are good. A growing number of economists believe that after a certain point, the marginal utility of liquidity diminishes.

Competition. “The argument that United States banking organizations will suffer in their competitive position vis-à-vis international banks seems superficial at best, and more likely proprietary trading is counter to their prospects. . . . Any contribution of proprietary trading to customer service and competition is not at all obvious. In fact, because of the risks, the conflicts of interest and the adverse cultural influence it may well impede effective competition.”

Complexity. “The complexity and potential cost[] of any rule-making in the world of modern finance presents a challenge. Enforcement of the restrictions required by the Volcker Rule is no exception. In approaching this problem, let us not lose sight of the fact that existing risk management practices of large financial institutions here and abroad, including some major U.S. commercial banks, fundamentally failed, at great cost to financial stability and the world economy.”

View the full-text of Paul Volcker’s comments here.

Photo by J. Thomas Shaw. Some right reserved.

This week, the financial services industry and Congress took swipes at the SEC’s and CFTC’s efforts to implement the Dodd-Frank Act’s provisions concerning swap transactions.

On February 7th, the International Swaps and Derivatives Association (“ISDA”) and the Securities Industry and Financial Markets Association (“SIFMA”) filed an application to preliminarily enjoin enforcement of the CFTC’s position limits for swaps. The motion was filed in the groups’ lawsuit challenging the propriety of the CFTC’s rule.

The lawsuit alleges that the CFTC failed to find, as allegedly required by the Commodity Exchange Act, that the new position limits were necessary or appropriate. The ISDA and SIFMA further claim that the CFTC’s rulemaking failed to include the cost-benefit analysis demanded by the Administrative Procedures Act. 

While the ISDA’s and SIFMA’s arguments on why they are likely to succeed appear meritorious, their claims concerning irreparable harm are less convincing. In the rule’s adopting release, the CFTC states that traders will not be required to comply with the position limits for swaps until 60 days after the CFTC and SEC adopt rules defining what will be considered a swap. And since neither agency has publicly stated when “swap” might be defined, the irreparable harm caused by enforcement appears speculative.

Congressional swipes at the agency’s swap rulemaking occurred on February 8th when the House Capital Markets Subcommittee held hearings entitled “Limiting the Extraterritorial Impact of Title VII of the Dodd-Frank Act.” See the Hearing Website (with links to archived webcast and witness’ prepared statements).

Last May, Blogmosaic discussed how the regulation of swaps posed extraterritorial questions on an entity-level (do foreign firms have to register their U.S. subsidiaries in the U.S.?), and on a transaction-level (is the trade subject to U.S. law?). We noted that the CFTC’s proposed entity swap registration rule considers the use of the U.S. mail (or “instrumentality of interstate commerce”) as a factor in determining whether sufficient U.S. contacts exist to require the application of U.S. law.

In October, Congressman James Himes introduced H.R. 3283, the “Swap Jurisdiction Certainty Act,” in an effort to answer the extraterritoriality question.

Georgetown University law professor Chris Brummer summarized the bill:

U.S. registered swap dealers engaging in swap transactions with a non-U.S. person would not be subject to the Dodd-Frank derivatives rules if each party reports the swap to an SEC registered swap repository. Meanwhile, under the second avenue, a non-U.S. person that registers as a swap dealer or security-based swap dealer with the CFTC or SEC, respectively, can be deemed to have satisfied Dodd-Frank capital requirements by complying with comparable regulatory requirements in the firm’s home country, so long as such home country is a signatory to the Basel Accords. The first provision thus constitutes a carve out, and the second, a gateway for future greater regulatory acknowledgement and deference through a mutual recognition regime.

Brummer notes that the proposed legislation does not provide for prudential regulation. It is simply meant as a surveillance mechanism.

And for U.S. regulators, surveillance might prove the most prudent way to swipe at swaps.

The new alerting system will offer much more powerful and precise search capability for SEC filings.  But that’s not even the most exciting thing about it.

Photo by Matt Hanson. Some rights reserved.

Photo by Fernando Zuleta. Some rights reserved.

On September 19, 2011, the SEC published for comment proposed rules implementing Section 621 of the Dodd-Frank Act, which prohibits conflicts of interest in connection with asset-backed securities (“ABS”). Originally, the comment period for the proposal expired on December 19, 2011. The SEC extended the comment period twice, with the current comment period ending on February 13, 2012. The rule is intended to prohibit underwriters, sponsors, and others who assemble ABS from packaging and selling those securities and profiting from the securities’ failures. See Blogmosaic’s earlier summary of the proposal.

Given the apparent straightforward nature of the proposal, it may come as no surprise that only 14 comments have been submitted and only one agency meeting noted (with the bulk of the comments being of the “securitizations are evil” variety). But the dearth of comments belies an underlying struggle evidenced by the Commission’s decision to extend the comment period twice.

Although not posted as a comment to this specific SEC proposal, the Securities Industry and Financial Markets Association (“SIFMA”) wrote the Commission in 2010 to present its views on Section 621 of the Dodd-Frank Act.  Citing the Act’s legislative history, SIFMA suggested a rule that required intent; in order to find that a securitization participant engaged in a prohibited material conflict of interest, it would have to be found that the securitization participant intended to benefit from the transaction’s failure.

As proposed, the rule does not require intent.

Still, it is within the niche community of Wall Street watchers that attention has been most acute.  How do we know?  By looking at a snapshot of SEC Filings queries during the four-hour block that surrounded the filing of Facebook’s historic S-1 registration statement.  The filing was accepted by the SEC at 4:47 p.m. Eastern Time.  In the two hours leading up to the filing, nearly 7% of all SEC Filings page queries by Knowledge Mosaic users were for Facebook — and that percentage jumped another point in the two hours following the filing.

We have no basis for comparison, but it’s hard to imagine any single SEC filing has ever attracted such concentrated attention.

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Last Thursday the U.S. Sentencing Commission (“USSC”) published for comment a hodgepodge of proposed amendments to its criminal sentencing guidelines. Along with proposed changes to the guidelines for various and sundry crimes — human rights violations, drunk driving, burglary, and trafficking a form of ecstasy ironically called Legal E — the proposal includes amendments and requests for comments mandated by the Dodd-Frank Act.

The Dodd-Frank Act requires the USSC to review its sentencing guidelines to insure they appropriately account for the potential and actual harm to the public and the financial markets resulting from securities fraud, mortgage fraud, and financial institutions fraud. The guidelines must “reflect (i) [t]he serious nature of the offenses, (ii) the need for deterrence, punishment, and prevention, and (iii) the effectiveness of incarceration in furthering those objectives.”

Under the proposal, a defendant’s sentence can be enhanced by 4 levels if, for example, the offense jeopardized the safety and soundness of a financial institution; or if the offense endangered the financial security of a publicly held company or a company with more than 1,000 employees.

A 4-level enhancement can also be imposed against an insider trading defendant who was an officer or director of a public company, a broker-dealer, an investment adviser, or a futures commission merchant.

And the USSC asks whether an enhancement of 2, 4, or 6 levels should be imposed if the offense involved a significant disruption of a financial market or created a substantial risk of such a disruption.

And therein lays the notable difference between the proposed amendments for financial crimes and those for other crimes. When discussing illegal drugs and burglary, the USSC addresses concrete issues like drug potency, the harm suffered by the victim, and the steps the defendant took to avoid detection or responsibility.

In contrast, the Dodd-Frank Act amendments discuss the more nebulous concepts of “significant disruption” and “substantial risk.” And the proposal not only seeks redress for harm suffered by individuals and companies, but for that possibly incurred by the “market.”

A new form of “public” retribution awaits.  Comments should be submitted on or before March 19, 2012.

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On January 17th, the CFTC published new final rules prescribing business conduct standards for swap dealers (“SDs”) and major swap participants (“MSPs”). The rules delineate recordkeeping and compliance procedures and govern the dealings SDs and MSPs have with counterparties generally, and include additional requirements when they deal with “Special Entities.” Special Entities include governmental entities, employee benefit plans subject to the Employee Retirement Income Security Act (“ERISA”), governmental plans, and endowments.

The final rules are principles-based and generally follow the framework of the proposed rules. They prohibit certain abusive practices, require disclosures of material information to counterparties, and require SDs and MSPs to undertake certain due diligence relating to their dealings with counterparties. Certain rules do not apply to transactions initiated on a swap execution facility (“SEF”) or designated contract market (“DCM”) when the SD and MSP do not know the identity of the counterparty prior to execution.

Generally, the new rules will not apply to unexpired swaps executed before the effective date of the adopting release. However, the CFTC will consider a material amendment to the terms of a swap to be a new swap, subject to the business conduct standard rules.

Under the new business conduct standards, all SDs and MSPs owe their counterparties the duties to (i) verify counterparty eligibility; (ii) disclose material information; (iii) disclose the daily mark; (iv) provide clearing disclosures; and (v) communicate fairly.

SDs must also provide, at the counterparty’s request, a scenario analysis for swaps that are not made available for trading on an SEF or DCM. An SD must also understand the risks and rewards of a recommended swap and have a reasonable basis to believe that a recommended swap is suitable for the counterparty. And the final rules include a suitability safe harbor. An SD will be deemed to have satisfied its duty to have a reasonable basis to believe that a recommended swap is suitable for the counterparty if it exchanges specified representations with the counterparty or the counterparty’s agent.

The final rules for MSPs do not include the suitability duty, pay-to-play, “know your counterparty,” and scenario analysis provisions.

SDs and MSPs can also reasonably rely on the representations of counterparties to meet due diligence obligations, make disclosures by any reliable means agreed to by the counterparty, make disclosures of material information to counterparties in a standard format, and include representations and disclosures in counterparty relationship documentation.

On Tuesday, the CFTC also released a letter from the Department of Labor stating that compliance with the business conduct standards will not, by itself, cause an SD or MSP to be an ERISA fiduciary.

However, independent representatives advising state and municipal Special Entities on swaps may be subject to registration with the CFTC as a commodity trading advisor and the SEC as a municipal advisor.

Swap dealers and major swap participants must comply with the business conduct rules on the latter of 180 days after the effective date of the rules or the date on which swap dealers or major swap participants are required to apply for registration pursuant to Commission rule 3.10.

Sneak preview of our new home page. Click the image to enlarge.

Dear Friends and Colleagues,

It is 2012. This post is focused on our goals as a company for the coming year – goals focused on serving you, our customers.

I will say upfront that these goals are audacious. We view 2012 as the year that Knowledge Mosaic Inc. stands forth from the shadows and releases the fullness of our vision for the world to witness.

Stepping forth from adolescence.

It is an exciting vision. To date, Knowledge Mosaic has stepped with adolescent awkwardness to escape from the shadow of its former identity as Securities Mosaic. In 2012, we want to shed altogether the Securities Mosaic identity.

What does this concept of a shedding mean? Think of it as a molting, as a natural process of growth. More practically, the shedding means that no one can continue to view Knowledge Mosaic as a niche transactional product for legal professionals.

Let me be clear. This shedding in no way communicates any diminishing commitment to transactional research. Indeed, our engineering agenda for the next year reflects our excitement about opportunities to apply our most advanced technologies to transactional and securities modules of Knowledge Mosaic. We will continue to serve and deepen our core markets, and more fully integrate services that met their needs with those of our broader audience

A most maturing and enduring vision.

What is new is the carapace that surrounds, structures, reinforces, and extends our original nacreous essence. Please allow me latitude to communicate some personal thoughts on this development. When I started Knowledge Mosaic in 2001, I never meant for it to be simply SEC document-retrieval service. To be honest — if that was the limit of my vision, why bother?

What I wanted to create, even back in 2001, was a new kind of framework to directly connect documents and data to learning and knowing. I had almost no capital, no employees, no programming skills, minimal market knowledge, and three hungry little mouths to feed. Two things sustained me. The first was a grim determination to succeed. The second was a fearless indifference to the market.

My background was in academics. I am an intellectual at heart. My dissertation was on the meaning of the execution of King Charles I for the emergence of modern liberal political thought and institutions. So what I brought to Knowledge Mosaic was a passion for ideas and for understanding political institutions and regulations in relation to political and policy outcomes. My ultimate goal was to map the entire federal regulatory landscape and to articulate its impact on business law.

Securities Mosaic – the first step in a long journey toward abundance.

Securities Mosaic was only the first step in this journey, and those of you who have traced our progress will note that we have broadened our research and current awareness footprint year by year. The development of our law firm memos database, with more than 100,000 memos from 200 law firms covering 46 practice areas, probably represented the most significant initial break with our more narrow focus on securities and corporate finance. However, the most important new development occurred with the release of our framework for harvesting and organizing an unlimited number of federal agency documents, and to making them accessible through the concept of “abundant search”. As you will see in subsequent emails, we are only now just getting started. With 30 of the sharpest employees you’d ever hope to work with, some of the leading engineering and legal talent in the Northwest, and progress that sharpens our eye on the prize, 2012 will bring you an entirely new kind of research and current awareness, unlike any you’ve ever seen before.

Where form meets function – the model of the iPhone.

What will this new kind of “awareness” look like? At heart, we view our work artistically, not functionally. While form and function overlap to a great extent, going forward we will emphasize the aesthetics and grace of the user experience. We want to create a package of tools and data that fit together seamlessly and open directly to the customer, so that their interactions become part of a relational experience, with Knowledge Mosaic employees and with other customers (and non-customers).

We know we pack – and will continue to pack – a vast amount of data and tools into a single product. Consider Knowledge Mosaic in this sense to be a little bit like a Swiss Army Knife, or (even better), an iPhone. Out of the gate, we’ll concede that some of the Knowledge Mosaic functionality and data will not be quite as polished or complete as would be true with a stand-alone product. This is also true with the features of the Swiss Army Knife and iPhone. One does not buy them to get a fully functional saw or screwdriver, or a top-of-the-line GPS or phone (even!). Instead, one purchases a package of functionality that is far greater than the sum of its parts, which works gracefully and artfully in a manner that elicits delight and smiles.

Not mincing words. Our goal is to provide universal access to your firm.

What does this concept of a broadly integrative, syncretistic Knowledge Mosaic mean for you? Well, let’s not mince words. We don’t do case law (not much, at least). But where “the market” used to stack us up against Westlaw Business (which is still a legitimate basis for comparison), it also now makes hard-nosed sense to imagine Knowledge Mosaic as an alternative to, or at least as a significant supplement to, big Westlaw, Lexis, and Bloomberg Law. In other words, Knowledge Mosaic can now serve pretty much every attorney in your firm, in your company, in your agency. With prices that are still lower – in some cases by orders of magnitude – than any other comparable (or non-comparable) research and news service.

Inversion.

Before turning aside for the moment, let me mention another vitally important conceptual innovation integral to the development of Knowledge Mosaic in 2012. This is the idea of inversion. In 2012, Knowledge Mosaic will literally turn itself inside out. What does this mean? Probably one of our weaknesses historically has been that we have been somewhat insular. We embraced our customers from a support standpoint, but did little else to actively engage our customers. Even our home page has had the quality of a brick wall — not very inviting! This will change in 2012.

Keep in Touch.

If you have questions or comments about the vision I’ve laid out for you here, we’d love to hear from you.  You can write me directly at pschwartz@knowledgemosaic.com; or, for a faster reply, to us all at info@knowledgemosaic.com

- Peter

Photo by Chris Hitt. Some rights reserved.

Now that the snow, ice, sleet, and hail are beginning to thaw here in Seattle, we’re able to turn the spotlight back on our brand new SEC Comment Letters page, released a week ago today.  Read more about it here, or plug in your headphones and check out this 4-minute video on the new page.  Or, if you are more a learn-it-by-doing-it person, check out the page itself.   (If you’re not a Knowledge Mosaic subscriber, you can click here to get a free, no-obligation 15-day trial, giving you full access to everything on our website.)

And speaking of ice, our Comment Letter page is only the tip of the iceberg.  We have an avalanche (sorry) of new stuff coming your way over the next six weeks or so.  Most of it will come in a major release currently scheduled for the end of next month.  Keep reading this blog for more information on what’s headed your way.

This is a good time to be a Knowledge Mosaic user.   Like being a kid with a sled on a snowy day.

The storm is supposed to blow through today, so we should be back in on Thursday.

Today’s post is a major announcement for Knowledge Mosaic users – but if you read blogmosaic regularly, you knew it was coming.   In a post shortly before Thanksgiving, we let you know that we were building a significantly upgraded SEC Comment Letters page, and that it would go live in mid-January.

Well, right on schedule, the new Comment Letters page is about to make its debut.  The official launch date is Monday, January 16.  (But you should be able to access it this weekend – sshhhhh.)

Click the image to enlarge.

The new page is lightning fast.  It offers a faceted search environment that allows you to filter results and refine your parameters as you drill down.  Specifically, it lets you:

• View all related letters in a single letter thread.
• Generate a PDF that aggregates all related letters.
• Filter letters by:

-  the SEC filing (form type) that is the subject of the letter;

-  industry category, SIC code, or A/D office; and

-  place of incorporation, including all US States, Canadian provinces, and foreign countries.

• Employ more powerful, relevance-based text searching.
• Pick companies from a dropdown list of suggested matches.
• Export results into Excel.

Of course, some things haven’t changed.  Like everything else on the Knowledge Mosaic research platform, unlimited use of the Comment Letters page is included in your site license.  If you’d like more information, email us at info@knowledgemosaic.com, or visit www.knowledgemosaic.com.

Photo by Steve Rhodes. Some rights reserved.

So, as we’ve written recently, some entrepreneurs are seeking to make their fortune by betting on horses.  With an election year now upon us, at least one other company has turned its attention to donkeys and elephants.

Last month, the North American Derivatives Exchange (“NADEX”), an online futures exchange wholly owned by U.K.-based IG Group Holdings plc, submitted to the CFTC a notice advising of its intention to offer five new “Political Election Event Derivatives.”

NADEX describes the contracts as a way of hedging against five possible 2012 election outcomes: (1) a Democratic majority in the U.S. House of Representatives; (2) a Republican majority in the U.S. House of Representatives; (3) a Democratic majority in the U.S. Senate; (4) a Republican majority in the U.S. Senate; and (5) the U.S. Presidency.

To prevent possible manipulation, NADEX prohibits all declared Presidential candidates from trading in the U.S. Presidency contract. Similarly, Senate candidates cannot trade on the outcome of the Senate contracts and Congressional candidates cannot trade on the outcome of the House contracts. Moreover, no member of the Electoral College may trade on the U.S. Presidency contract and “any individual who may have control or influence over the timing or outcome of the event underlying in any Political Event Derivative is precluded by exchange rule from trading that relevant contract.”

Despite these and other precautions, as well as NADEX’s painstaking explanation of why the contracts are permissible under the Commodity Exchange Act, the CFTC has commenced a 90-day review of NADEX’s contracts. The review is based on the possibility that these contracts may involve, among other issues, “gaming or an activity that is unlawful under any State or Federal law.” See CFTC Letter.

Comments on NADEX’s submission should be submitted on or before February 4, 2012. In addition, the CFTC seeks public comment on specific questions related to political event contracts to assist in its evaluation of NADEX’s submission. The CFTC’s 90-day review period ends on April 2, 2012 – a month after Super Tuesday, but the day before Washington, D.C., Maryland, Wisconsin, and Texas are scheduled to hold their primaries.

Photo by Nicholas B. Some rights reserved.

On January 11^th the CFTC will consider whether to adopt three new rules, whether to propose for comment  its version of the Volcker rule, and whether to delegate to the National Futures Association the authority to register swap dealers and major swap participants.

One of the three final rules being considered addresses the protection of cleared swaps customer contracts and collateral, a concern made real by the collapse of MF Global and the disappearance of up to $1.2 billion in customer funds.

In the proposed rule, the CFTC concludes that the complete legal segregation (“CLS”) model provides the best mechanism for protecting customer money when weighed against the costs associated with the other possibilities. (Four other models were also discussed: physical segregation; legal segregation; the futures model; and the optional approach.)

Under the CLS model, a futures commission merchant (“FCM”) would keep records and documentation to account for each customer’s money, but would actually hold the customer money in an omnibus account. If the FCM defaulted or became insolvent, the derivatives clearing organization (“DCO”) would have recourse only to the defaulting customer’s accounts. Non-defaulting customers would be protected, and since the requisite books and records existed, non-defaulting customers would be able to move their accounts to alternative FCMs quickly and easily.

The demise of MF Global put paid to those conclusions.

Initially, most commenters supported the CLS model. But last month the CFTC received seven supplemental comments and communications from the industry. Many of these comments noted the hypothetical shortcomings of the CLS model which MF Global’s collapse made real.

First, as both pre- and post-MF Global commenters discussed, current bilateral swaps contracts allow for the physical segregation of customer collateral. As more than one commenter noted, the proposed CLS model actually creates risk for current bi-lateral swap users by exposing them to commingled accounts. It is an ironic reform that creates risk where none previously existed.

Second, MF Global’s collapse exposed the myth of CLS portability. The feasibility of transferring (or porting) an account from one FCM to another is only as good as the FCM’s recordkeeping. As many of MF Global’s customers have found, you can’t move your money if the FCM can’t trace your money.

Third, MF Global’s insolvency has exposed the necessity of addressing how swaps (and futures) are treated in bankruptcy.

And finally, at least two commenters believe that the physical segregation of customer collateral is so important that not just swaps customers should be afforded its protections. These commenters called upon the CFTC to make physical segregation available to futures and options customers as well.

We’ll see how the CFTC responds next week.

Photo by Peter Craine. Some rights reserved.

On December 21st, the SEC published rule amendments implementing Section 1503 of the Dodd-Frank Act. Section 1503(a) of the Act requires issuers that are operators, or that have a subsidiary that is an operator, of a coal or other mine to disclose in their periodic reports filed with the Commission information regarding specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities. Section 1503(b) of the Act mandates the filing of a Form 8-K disclosing the receipt of certain orders and notices from the Mine Safety and Health Administration.

The disclosure requirements set forth in Section 1503 of the Act are currently in effect. In order to facilitate consistent compliance with the Act’s requirements, the amendments codify those requirements into the SEC’s disclosure rules and specify their scope and application. The amendments also require a limited amount of additional disclosure to provide context for certain items required by the Act.

In general, the final amendments do not expand the required disclosure beyond that required by Section 1503. The Commission found that the added burden of those additional requirements likely would have outweighed the potential incremental benefits of the additional disclosure. The amendments, therefore, apply only to mines located in the U.S. and require disclosure for each distinct mine covered by the Mine Act. Issuers are not permitted to group mines by project or geographic region. 

Although the final amendments do not extend to foreign mines, to the extent mine safety issues are material, disclosure could be required pursuant to Regulation S-K: Item 303 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), Item 503(c) (Risk Factors), Item 101 (Description of Business), or Item 103 (Legal Proceedings).

Orders and citations issued to independent contractors (who are not subsidiaries of an issuer) who are working at the issuer’s mine site would not need to be reported by the issuer. As a result, some orders or citations could go unreported if the independent contractor has no other reporting obligation. However, if individual orders or citations, or a pattern of violations, at mines owned by a reporting issuer but operated by an independent contractor are material to the issuer, disclosure could be required under Regulation S-K.

The new amendments require issuers that have matters to report to include a brief disclosure in Part II of Form 10-Q, Part I of Form 10-K and Forms 20-F and 40-F, noting that they have mine safety violations or other regulatory matters to report in accordance with Section 1503(a), and that the required information is included in an exhibit to the filing. The exhibit would include the detailed disclosure about specific violations and regulatory matters required by Section 1503(a). The final amendments do not require disclosure in the body of the periodic report of certain information, such as all fatal accidents or receipt of notice that a mine has a pattern of violations.

The new amendments do not allow issuers to exclude information about orders or citations that were received during the time period covered by the report but subsequently dismissed, reduced or vacated.

The new amendments affect Form 10-K, Form 10-Q, Form 20-F and Form 40-F, to require the disclosure required by Section 1503(a) of the Act; new Item 104 of Regulation S-K, which sets forth the disclosure requirements for Forms 10-Q and 10-K; and amendments to Item 601 of Regulation S-K, to add a new exhibit to Form 10-K and Form 10-Q for provision of this information. Amendments to Forms 20-F and 40-F, to include the same disclosure requirements as those adopted for issuers that are not foreign private issuers, are also included. In addition, the SEC is adding a new item to Form 8-K to implement the requirement imposed by Section 1503(b) of the Act, and amending Form S-3 to add the new Form 8-K item to the list of Form 8-K items the untimely filing of which will not result in loss of Form S-3 eligibility.

The new amendments are effective January 27, 2012.

Photo by soil-net.com. Some rights reserved.

Last summer, we turned the blogmosaic spotlight on the larger-than-life world of horse racing, observing that a startup called Regius Thoroughbreds, Inc. had filed the initial paperwork to go public.  Its successful IPO would have been the first by a company in that industry in 15 years.

Later that summer, as we also noted, another horse racing outfit called International Thoroughbreds, Inc. was put out to pasture, its registration having been revoked by the SEC.   In retrospect, we might have seen that as a portent of things to come: not a few weeks later, Regius Thoroughbreds withdrew its own registration.  Its IPO never got out of the starting gate.

All of which highlights the strangeness of the slough of IPO registrations filed with the SEC over the past few days.  Last Friday, it was Red Bullet Racing Corp.  Wednesday, it was Ghostzapper Racing Corp, Awesome Again Racing Corp., Perfect Sting Racing Corp., Ginger Punch Racing Corp., and Macho Uno Racing Corp.   All six are by companies seeking to breed and train thoroughbred racehorses.

As it turns out, the same ownership group is behind all of the filings.  That helps to explain the odd convergence – though there is much more to this horse tale that needs to be told.  Check out the filings here, on our list of IPO registrations for 2011.

We demonstrate this commitment in many ways. Each holiday season, for example, Knowledge Mosaic selects a charity to sponsor with the goal of helping people who face struggles in their lives. This annual gift communicates our gratitude for the blessings in our own lives and reflects our faith in the efficacious power of compassion as a force for change in the world. This year, our gift went to Northwest Harvest, an organization that provides nutritious food for hungry people in our region.

We also donate to causes when an acute need arises, supporting, for example, the March 2011 relief efforts on behalf of earthquake- and tsunami-ravaged Japan. Finally, as caring, engaged citizens of our local and global communities, Knowledge Mosaic employees are personally involved in many philanthropic causes; the company is often able to lend support to these individual efforts.  Our support earlier this year for Solar for Shikha is a great example.

Our guiding philosophy is to try to help and empower those who are most vulnerable.  Naturally, then, we often focus on children.  And helping children goes hand in hand with supporting education, which still represents the best opportunity for children to lift themselves from poverty and create new opportunities for themselves.  Supporting education, in turn, often means supporting technology initiatives, which can dramatically leverage existing educational opportunities for children. Technology can overleap barriers of geography and create possibilities for global learning communities.

Compassion opens the heart to truth and beauty. It twines us together within our company and helps us to touch, and be touched by, the desperate needs of the vulnerable among us, in our human community.

Best wishes to everyone for a peaceful and prosperous New Year.

Photo by Bryan Gosline. Some rights reserved.

As amended, the accredited investor rule will exclude any positive net equity an investor may have in his or her primary residence. Similarly, indebtedness secured by the person’s primary residence, up to the estimated fair market value of the primary residence, will not be treated as a liability, unless the borrowing occurs in the 60 days preceding the purchase of securities in the exempt offering and is not in connection with the acquisition of the primary residence. In such cases, the debt secured by the primary residence must be treated as a liability in the net worth calculation. In addition, any indebtedness secured by a person’s primary residence in excess of the property’s estimated fair market value is treated as a liability under the new definition.

The final rule amendments also include a grandfathering provision that permits the application of the former accredited investor net worth test in certain limited circumstances. The former accredited investor net worth test will apply so long as: (i) the person held the right to purchase the exempt securities on July 20, 2010, the day before the enactment of the Dodd-Frank Act; (ii) the person qualified as an accredited investor on the basis of net worth at the time the right was acquired; and (iii) the person held securities of the same issuer, other than the right, on July 20, 2010.

The amended net worth standard will take effect 60 days after publication in the Federal Register, which is expected during the week of December 26. Beginning in 2014, and every four years thereafter, the Dodd-Frank Act requires the Commission to review the “accredited investor” definition in its entirety and to engage in further rulemaking to the extent it deems appropriate.

However, we will not be sending out Knowledge Mosaic news emails on Monday the 26th, which is a legal holiday in the U.S.

We wish our friends, customers, and colleagues a happy holiday season and best wishes for the new year.