Financial Services Alert

Financial Services Alert August 7, 2007 Vol. 10 No. 51 Goodwin Procter LLP, a firm of 750 lawyers, has one of the largest financial services practic...
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Financial Services Alert

August 7, 2007 Vol. 10 No. 51

Goodwin Procter LLP, a firm of 750 lawyers, has one of the largest financial services practices in the United States.

New Subscribers, Past Issues and Background Material: If you would like anyone else to receive issues of the Financial Services Alert, would like to receive any past issues, or would like the background materials for any of the matters discussed in this issue, please contact Greg Lyons, Eric Fischer, Elizabeth Shea Fries or Jackson Galloway at 617.570.1000 or at the e-mail addresses referenced at the end of this newsletter. Alert on the Web: Back issues of the Alert are available at www.goodwinprocter.com/Pu blications/Financial%20servi ces%20Alerts.aspx

In this issue: Developments of Note 1.

SEC Issues Release Designed to Clarify Exclusion under the Proxy Rules for Shareholder Proposals Related to Director Elections

2.

SEC Proposes Proxy Rule Amendments Addressing Shareholder Proposals for Bylaw Amendments Establishing Procedures for Shareholder Nominations of Directors and the Treatment of Electronic Shareholder Forums under Federal Securities Laws

3.

BIS Report Cites Reduction of F/X Settlement Risk and Makes Further Recommendations

4.

SEC Issues Release Adopting Proxy Rule Changes to Require Delivery of Proxy Materials Via Website

5.

OTS Issues ANPR Concerning Regulation of Unfair or Deceptive Acts or Practices

6.

Massachusetts Security Breach Notice Law, Unlike Most Other States, Contains Requirements for Financial Institutions

7.

DOL Provides Guidance on ERISA Impact of New IRS 403(b) Regulations

Other Items of Note 8.

SEC Issues Release Proposing Amendments to Regulation D Private Placement Exemptions

9.

SEC Issues Release Adopting Antifraud Rule under Investment Advisers Act Directed at Advisers to Pooled Investment Vehicles

10. SEC Chairman Discusses Hedge Fund Working Group within Enforcement Division and Enforcement Actions Against Hedge Funds in Senate Testimony

Developments of Note SEC Issues Release Designed to Clarify Exclusion under the Proxy Rules for Shareholder Proposals Related to Director Elections

Disclaimer: This publication, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. ©2007 Goodwin Procter LLP All rights reserved.

The SEC issued an interpretive and proposing release (the “Release”) designed to clarify the meaning of Rule 14a-8(i)(8) under the Securities Exchange Act of 1934, as amended. Rule 14a-8 provides shareholders with an opportunity to place a proposal in a company’s proxy materials for consideration at an annual or special meeting of shareholders. A shareholder proposal that meets certain procedural requirements and does not fall within one of the categories of proposals that the Rule allows a company to exclude, must appear along side management’s proposals in the company’s proxy materials. Rule 14a-8(i)(8) allows a company to exclude a shareholder proposal from its proxy materials when that proposal relates to an election for membership on the company’s board of directors or analogous governing body. SEC Interpretation of the Rule 14a-8(i)(8) Exclusion. The SEC staff has historically interpreted Rule 14a-8(i)(8) to exclude any shareholder proposal that may result in a contested election if (a) the proposal relates either to campaign for or against a director nominee or (b) the proposal would require a company to include shareholder-nominated candidates in the company’s proxy materials. A recent decision by the US Court of Appeals for the Second Circuit held that the scope of the exclusion in Rule 14a-8(i)(8) was more limited. Interpreting a 1976 statement by the SEC addressing the exclusion,

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the Court held that Rule 14a-8(i)(8) was limited to shareholder proposals used to oppose solicitations dealing with an identified board seat in an upcoming election, and rejected the broader interpretation that the election exclusion applies to shareholder proposals that would institute procedures making such election contests more likely. The Release expresses the SEC’s position that the election exclusion should not be limited as held by the Second Circuit (which had indicated in its opinion that the SEC could modify its interpretation), and affirms past SEC staff interpretations of the exclusion. In the Release, the SEC indicates that a proposal may be excluded under Rule 14a-8(i)(8) if it would result in an immediate election contest (e.g., by making or opposing a director nomination for a particular meeting) or would set up a process for shareholders to conduct an election contest in the future by requiring a company to include shareholders’ director nominees in the company’s proxy materials for subsequent meetings. Proposed Rule 14a-8(i)(8). The Release also proposes an amendment to the text of Rule 14a-8(i)(8) designed to clarify the meaning of that exclusion consistent with the interpretation set forth in the Release. The Release solicits comment on a number of specific questions relating to the proposed clarification. Comments must be received no later than October 2, 2007.

SEC Proposes Proxy Rule Amendments Addressing Shareholder Proposals for Bylaw Amendments Establishing Procedures for Shareholder Nominations of Directors and the Treatment of Electronic Shareholder Forums under Federal Securities Laws The SEC published a formal release (the “Release”) proposing amendments to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “1934 Act”), designed to (a) facilitate shareholders’ exercise of state law rights to propose bylaw amendments regarding the procedures for nominating directors and (b) address issues of liability and compliance with the proxy rules under the 1934 Act with respect to electronic shareholder forums. These proposals are, in part, an outgrowth of three roundtables on the proxy process conducted by the SEC in May 2007. Bylaw Amendments Regarding Procedures for Shareholder Nomination of Directors. The Release includes a proposed amendment to Rule 14a-8(i)(8) under the 1934 Act that would require that shareholder proposals to amend company bylaws with respect to procedures for nominating directors be included in a company’s proxy materials, provided certain conditions are met. (Rule 14a-8 under the 1934 Act requires a company to include a shareholder proposal that meets certain procedural requirements, and does not fall within certain enumerated subject matter based exclusions under the Rule, to be included in the proxy materials circulated by the company for an annual or special meeting of shareholders.) Under the proposed amendment, a company would have to include a bylaw proposal regarding shareholder director nomination procedures in its proxy materials if (1) the shareholder (or a group of shareholders) submitting the proposal were eligible to file Schedule 13G under the 1934 Act and filed a Schedule 13G that included specified public disclosures regarding its background and its interactions with the company (to be eligible to file on Form 13G, a shareholder must not have acquired or held the securities in question for the purpose of or with the effect of changing or influencing the control of the company); (2) the proposal was submitted by a shareholder (or group of shareholders) that has continuously beneficially owned more than 5% of the company’s securities entitled to be voted on the proposal at the meeting for at least one year by the time the shareholder submits the proposal and (3) the proposal otherwise satisfies the requirements of Rule 14a-8 (i.e., the proposal does not fall within any of the other categories for exclusion under Rule 14a-8 and meets Rule 14a-8’s procedural requirements). Under the proposed amendments, the only substantive limitations on director nomination procedures in bylaw amendments proposed by a shareholder would be those imposed by state law or a company’s charter and bylaws. Disclosure Requirements – Bylaw Amendment Proposal. Under the proposed proxy rule amendments, in order for a company’s proxy materials to include a proposal relating to bylaw amendments affecting procedures governing shareholder director nominations, the shareholder (or group of shareholders) proposing the bylaw amendment would have to provide disclosure about its background, intentions and course of dealings with the company. These disclosures would be made through filings on Goodwin Procter LLP

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Schedule 13G, which the shareholder proponent would need to update as necessary. Under related amendments to the proxy rules, a company would also be required to disclose the nature and extent of its relationship with a shareholder proponent, any affiliate, executive officer or agent of the shareholder proponent, or anyone acting in concert with, or who has agreed to act in concert with, the shareholder proponent with respect to the proposed bylaw amendment. Shareholder Nominations. Under the proposed proxy rule amendments, the existing disclosure requirements for solicitations in opposition (either for a short slate or for a majority of board seats) would apply to nominating shareholders and their nominees regardless of the shareholder nomination procedure. A nominating shareholder would be responsible for providing the information to the company, and a company would not be required to include a nominating shareholder’s nominee in its proxy materials if the shareholder failed to provide the required information. When, in accordance with a shareholder nomination bylaw procedure, a shareholder nominated a candidate for director, the company would be required to file its proxy statement in preliminary rather than definitive form, in the same manner as under the existing proxy rules applicable to proxy contests. The additional disclosures proposed to be added to Schedule 13G for shareholder proponents of a bylaw amendment concerning shareholder director nominations would apply to a nominating shareholder under an adopted bylaw. A nominating shareholder would be required to provide the company with those disclosures for inclusion in the company’s proxy materials, and if a nominating shareholder failed to provide the required information, the company would not be required to include the shareholder’s nominee in the company’s proxy materials. Electronic Shareholder Forums. The Release also proposes rule amendments designed to facilitate the establishment of electronic shareholder forums. Proposed Rule 14a-18(b) under the 1934 Act would clarify that a company or shareholder would not be liable under the federal securities laws for any statement or information provided by another person on an electronic shareholder forum simply because the company or shareholder established, maintained or operated the electronic shareholder forum. The Release also proposes rule amendments designed to exempt any solicitation in an electronic shareholder forum by or on behalf of any person who does not seek directly or indirectly, either on that person’s own or another’s behalf, the power to act as a proxy for shareholder, and does not furnish or otherwise request, or act on behalf of a person who furnishes or requests, a form or revocation, abstention, consent or authorization. The exemption would apply so long as the solicitation occurred more than 60 days prior to the date announced by the company for its annual or special meeting of shareholders or if the company announces the meeting less than 60 days before the meeting date, the solicitation may not occur more than two days following the company’s announcement. Request for Comment. In addition to a number of requests for comment on specific issues with respect to the proposed rule amendments discussed above, and other related aspects of the proxy process, the Release requests comment on whether a company or shareholders should have the ability to propose and adopt bylaws that would establish the procedures that the company would follow for including non-binding proposals in the company’s proxy materials. Comments on the matters discussed in the Release must be received by the SEC no later than October 2, 2007.

BIS Report Cites Reduction of F/X Settlement Risk and Makes Further Recommendations The Committee on Payment and Settlement Systems of the Bank for International Settlements issued a consultative report (the “Report”) regarding the reduction in foreign exchange (“F/X”) settlement risk and providing suggestions for further reduction of this risk. As to the reduction of F/X risk, the Report states that in 1996 the central banks endorsed a program to reduce the risks of F/X settlement. These risks arise because settlement exposures were in many cases large relative to an institution’s capital, and the fact that between the period when an institution cannot cancel its instruction to pay the currency it is selling and when it receives the currency it is buying, it has basically the same exposure as if had extended credit to the counterparty. The Report provides that although the volume of F/X transactions in 2006 reached $3.8 trillion, the overall risk in this area has been reduced by the creation of CLS bank

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in 2002 (which is a payment/versus/payment system under the cooperative oversight of the central banks of the 15 currencies CLS covers.) CLS settled 55% of the total F/X obligations in 2006. Nonetheless, 32% ($1.2 trillion) of those 2006 F/X obligations still are addressed by the historical method—correspondent banking (which is subject to the settlement risk described above). Because of the size of this remaining exposure, the Report makes recommendations for further action by individual banks, by industry groups, and by central banks. As to individual banks, the Report recommends that they encourage the use of CLS bank wherever possible, and also seek ways to properly measure and shorten exposures when correspondent banking obligations arise. Senior management also should have clear responsibility for this activity, and set limits as to counterparty exposure levels. As to industry groups, the Report recommends that they seek to develop ways to shorten exposures, and increase the number of currencies covered by CLS bank or other methods, and warn banking institutions of the dangers of not continuing their progress in reducing F/X exposures. Finally, with respect to central banks, the Report suggests that they work with the industry to encourage further innovations like CLS bank, work to change laws that enable banks to reduce the term of their exposures, and work with bank supervisors globally to ensure banks develop appropriate risk management procedures.

SEC Issues Release Adopting Proxy Rule Changes to Require Delivery of Proxy Materials Via Website The SEC issued a formal release (the “Release”) adopting amendments to the proxy rules (the “Proxy Rules”) under Section 14 of the Securities Exchange Act of 1934, as amended (the “1934 Act”), that require persons soliciting proxies, including persons other than an issuer, to furnish proxy materials imposed by Rule 14a-3 under the 1934 Act by using a “notice and access” model for the delivery of proxy material. Under this model, proxy materials are posted on a website, and a “Notice of Electronic Proxy Materials” (“Notice”) is sent to shareholders alerting them to the materials’ availability there. The SEC’s adoption of proxy rule amendments requiring use of the notice and access follows its adoption of proxy rule amendments allowing voluntary use of the notice and access model (as discussed in the January 30, 2007 Alert). Under the rule amendments, an issuer, or other soliciting person, may initially furnish only a Notice, but must subsequently provide copies of the proxy materials in response to any shareholder requests for them. Alternatively, an issuer, or other soliciting person, may furnish paper copies of the proxy materials along with the Notice. A single solicitation may include the use of both solicitation methods, i.e., an issuer may use the “notice only” option to provide proxy materials to some shareholders and the “full set delivery” option to provide proxy materials to other shareholders. General Features. Proxy materials required to be delivered using the notice and access model include shareholder meeting notices, proxy statements, proxy cards, information statements, annual reports (other than those for registered investment companies), additional soliciting materials and any amendments to the foregoing required to be furnished to shareholders. The amendments do not permit the use of the notice and access model for business combination transactions as defined in Rule 165 under the Securities Exchange Act of 1933, as amended (the “1933 Act”), which include registered investment company reorganizations and exchange offers involving the use of Form N-14 under the 1933 Act. Notice of Electronic Proxy Material - Notice Only Option. An issuer using the notice only option must send a Notice to shareholders at least 40 days prior to the shareholder meeting date or the date votes, consents or authorizations are to be used to effect corporate action. An issuer may “household” the Notice. A Notice must be in plain English and include (a) a specified legend in bold-face type, (b) information relating to the meeting and the availability of proxy materials on a specified website and in e-mail and paper form; (c) a clear and impartial description of the matters to be considered at the meeting along with any recommendation regarding those matters and (d) information on how to access a proxy card and how to attend the meeting and vote in person. A Notice may also incorporate the notice of meeting typically included by issuers in proxy materials consistent with applicable state law requirements. No other shareholder communications may accompany the Notice, except for a reply card used to request a paper or e-mail copy of proxy materials, a shareholder meeting notice required

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under state law (if not incorporated into the Notice) and in the case of registered investment company, the issuer’s prospectus or a shareholder report required to be delivered to shareholders. The Notice may not include a means to execute a proxy (e.g., instructions for accessing telephonic voting) without having access to the proxy materials. A proxy card may be sent only 10 calendar days or more after the Notice is sent unless the proxy card is preceded by the proxy materials through the same delivery medium or accompanies the proxy card. Shareholder Requests for Paper/E-Mail Copies of Proxy Materials – Notice Only Option. Under the notice only option, a shareholder that receives a Notice may request a paper or e-mail copy of the proxy materials. The issuer must send a copy of proxy materials (in the form requested) by first class mail within three business days of the shareholder request for those materials. This obligation on the issuer’s part continues for one year after the date of the shareholder meeting or corporate action in question, but for requests received after the shareholder meeting’s conclusion, an issuer is not required to use first class mail or respond within three business days. A shareholder may also make a standing revocable election to receive proxy materials in paper or e-mail form. Notice of Electronic Proxy Materials – Full Set Delivery Option. Where an issuer, or other soliciting person, is providing a full set of proxy materials along with the Notice, the Notice need not contain all the information specified under the notice only option, e.g., the Notice does not have to describe how paper or e-mail copies of the proxy materials may be requested. In addition, the required information may be incorporated into the proxy statement and proxy card, and need not appear in a separate Notice. Under the full set delivery option, the Notice and full set of proxy materials are not subject to any requirement that they be sent at least 40 days before the meeting date, unlike the Notice under the notice only option. Website Access to Proxy Materials. The website address for proxy materials must be specific enough to lead shareholders directly to those materials, rather than to a homepage or other section of a website where the materials may be accessed. The EDGAR website may not be used to provide website access to proxy materials under the notice and access model. The proxy materials presented on the website must be in a format that is convenient for both on-line reading and printing. The format used should provide a version of those materials, including all charts, tables, graphics and similarly formatted information, that is substantially identical to the paper version of the proxy materials. Materials must also be in a readily searchable format such as HTML and may incorporate features such as hyperlinks from a table of contents to aid navigation. An issuer must post proxy materials (including the proxy card) on the website by the time it sends shareholders the related Notice, and the proxy materials should remain available through the time of the shareholder meeting at no charge. By the time it sends the Notice, the issuer must provide a means for any shareholder viewing proxy materials on the designated website to execute a proxy vote, e.g., through a linked electronic voting platform or telephonic voting information. Any additional soliciting materials must be posted on the same website no later than the date on which the additional soliciting materials are first sent to shareholders or made public. Shareholder Anonymity/Privacy. An issuer (or its agent) must maintain the website on which it posts proxy materials in a manner that does not infringe on the anonymity of shareholders accessing the website. The issuer may not track the identity of persons viewing the proxy materials on the website or use “cookies” or software to collect information on those persons. An issuer and its agents may not use an e-mail address obtained from a shareholder requesting proxy materials for any purpose other than honoring the request, and the issuer may not transfer the e-mail address to other persons without the shareholder’s express consent except as necessary to honor the request. Intermediaries. Under the amendments, brokers, banks and other intermediaries that are recordholders of an issuer’s shares must use the notice and access model. If an issuer uses the notice only option, it must provide the necessary information in sufficient time for the intermediary to prepare its own Notice for distribution to its beneficial owners at least 40 days prior to the date of the shareholder meeting or corporate action. The intermediary’s Notice will generally contain the same kind of information as an issuer’s and will be subject to similar limitations, e.g., it cannot provide a means for a beneficial owner Goodwin Procter LLP

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to provide voting instructions without first having access to the necessary proxy materials. An intermediary may choose to direct beneficial owners to proxy materials on its website or those on the issuer’s, but must in all events establish a website at which beneficial owners may access the intermediary’s request for voting instructions. An intermediary’s website posting of proxy materials must meet the same requirements as those of an issuer with respect to access, protection of user anonymity and privacy and the availability of a means to provide voting instructions. If an intermediary’s Notice directs its beneficial owners to the issuer’s website to view proxy materials, the intermediary must tell beneficial owners that they can submit voting instructions to the intermediary, but cannot execute a proxy directly through the voting mechanisms made available by the issuer (unless the intermediary has executed a proxy with the issuer in the shareholder’s favor). Like issuers, intermediaries must allow beneficial owners to make a standing revocable election to receive paper or e-mail copies of proxy materials; however, in the case of intermediaries, such a request will apply with respect to all securities held in a beneficial owner’s account. When the issuer or other soliciting person uses the full set delivery option, an intermediary may incorporate the Notice information into its request for voting instructions sent along with the proxy materials or prepare a separate Notice to accompany the proxy materials. Use of the Notice and Access Model By Persons Other than an Issuer. Persons other than an issuer soliciting proxies must also use the notice and access model, with appropriate changes to the information required in the Notice. For a non-issuer soliciting person, the deadline for sending a Notice is the later of (i) 40 days before the meeting or (ii) 10 days after the issuer sends out its proxy statement or Notice to shareholders. A non-issuer soliciting person may limit its solicitation to particular shareholders, and may combine use of the Notice only and full set delivery options. Compliance Dates. The rule amendments implementing the mandatory notice and access model are generally effective January 1, 2008. “Large accelerated filers,” as that term is defined in Rule 12b-2 under the 1934 Act, not including registered investment companies, must comply with the rule amendments beginning on or after January 1, 2008. Registered investment companies, persons other than issuers, and issuers that are not large accelerated filers may comply with the rule amendments on or after January 1, 2008, but must comply with them for proxy solicitations commencing on or after January 1, 2009.

OTS Issues ANPR Concerning Regulation of Unfair or Deceptive Acts or Practices The OTS issued an advance notice of proposed rulemaking (“ANPR”) in connection with its review of whether it should promulgate additional regulations concerning the protection of customers of OTS-regulated entities from unfair or deceptive acts or practices. Section 18(f)(1) of the Federal Trade Commission Act (the “FTCA”) grants the OTS broad authority to prescribe regulations “to prevent unfair or deceptive acts or practices by savings associations (“SAs”) or affecting commerce, including acts or practices that are unfair or deceptive to consumers.” Comments must be filed with the OTS no later than November 5, 2007. While the FTCA grants the OTS authority to issue regulations concerning unfair or deceptive practices applicable to SAs, the Home Owners’ Loan Act (“HOLA”) gives the OTS authority to apply such regulations to additional entities within the SA and savings and loan holding company (“SLHC”) structure, e.g., SA subsidiaries, service corporations and SLHCs (collectively, “OTS-Supervised Entities”). The OTS has existing regulations that ban SAs from engaging in unfair or deceptive acts or practices involving consumer credit. The OTS seeks public comment on whether it should expand its regulations to prohibit certain specific credit practices, e.g., repeatedly refinancing the same mortgage loan, charging certain over-the-limit fees on credit cards and setting expiration dates of gift cards for less than a year from issuance. Moreover, in the ANPR, the OTS seeks public comment as to whether the OTS should issue additional regulations on unfair or deceptive acts or practices that cover financial products and services and/or other products and services that do not involve consumer credit. The OTS also

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seeks public comment on whether OTS rules concerning unfair or deceptive acts and practices should cover entities other than SAs, such as SLHCs and other OTS- Supervised Entities. Furthermore, the OTS seeks public comment on the most effective way to issue such regulations and guidance, e.g., should it focus on issuing principles and standards, or should it focus on providing lists of specific acts or practices deemed unfair or deceptive? The ANPR discusses approaches currently taken by various federal and state banking regulatory agencies. Finally, the OTS seeks public comment on whether it should expand its current advertising rule, 12 CFR 563.27, and provide more comprehensive guidance to SAs that covers additional advertising or marketing practices or products and services offered by SAs and other OTS Supervised Entities.

Massachusetts Security Breach Notice Law, Unlike Most Other States, Contains Requirements for Financial Institutions Massachusetts became the 40th state to enact a law requiring that affected state residents be notified of a security breach involving their personal information. The new security breach notice law, effective on February 3, 2008, also permits state residents to place a freeze on their credit report and sets standards for the destruction of records containing personal information on state residents. The consumer notice provisions of the Massachusetts law apply to persons or entities that have experienced a “breach of security,” a term to include only a breach “capable of compromising the security, confidentiality, or integrity of personal information, maintained by a person or agency that creates a substantial risk of identity theft or fraud against a resident of the commonwealth.” The Massachusetts law defines the term “personal information” in a manner similar to the federal banking agencies’ Interagency Guidance on Response Programs for Unauthorized Access to Customer Information and Customer Notice (the “Federal Interagency Guidance”) and other state security breach notice laws. Like most state security breach notice laws, the Massachusetts law exempts encrypted data from the definition of personal information. However, the Massachusetts law requires that the encryption meet a certain technical standard. As under the Federal Interagency Guidance, and unlike most state security breach notice laws, the new Massachusetts notice requirements apply to both electronic and paper records. Although most of the state security breach notices laws enacted across the nation contain exemptions for financial institutions subject to and in compliance with the Federal Interagency Guidance, the new Massachusetts law requires that financial institutions provide notice to the state Attorney General and the Director of Consumer Affairs and Business Regulation. Once the state agencies are notified, regulated financial institutions may notify affected Massachusetts residents under the Federal Interagency Guidance. Another noteworthy feature of the Massachusetts law involves the use of encryption to protect personal information. Massachusetts residents are permitted under the new law to place a security freeze on their credit reports. Once a consumer’s credit report is frozen, a consumer reporting agency may not change certain basic information without providing written confirmation to the consumer. A third party seeking information from a frozen credit report must seek permission from the consumer to access the report. Only consumers may initiate or lift the security freeze. The new law also contains provisions requiring any person or entity possessing personal information to ensure proper disposition and destruction of records containing personal information. Financial institutions subject to records safeguarding and destruction requirements issued by the federal banking agencies should be aware of the Massachusetts requirements though the requirements may be met by compliance with the federal standards.

DOL Provides Guidance on ERISA Impact of New IRS 403(b) Regulations The Department of Labor (the “DOL”) issued Field Assistance Bulletin 2007-02 under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The bulletin provides guidance with

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respect to ERISA issues raised by final regulations recently issued by the Internal Revenue Service and the Treasury Department under Section 403(b) of the Internal Revenue Code of 1986, as amended, regarding tax shelter annuity contracts and custodial accounts (“403(b) Arrangements”). Among other things, the new 403(b) regulations require some level of employer involvement in 403(b) Arrangements, including the requirement that a 403(b) Arrangement have a written plan document. This raises potential issues under a DOL safe harbor rule which provides that 403(b) Arrangements that are funded solely by employee salary deferrals, that limit employer involvement to specified actions, and that meet certain other requirements will not be subject to Title I of ERISA. The bulletin sets forth the DOL’s view that tax-exempt employers will be able to comply with the requirements of the new 403(b) regulations and still qualify for the DOL safe harbor.

Other Items of Note SEC Issues Release Proposing Amendments to Regulation D Private Placement Exemptions The SEC published a formal release proposing changes to Regulation D (“Reg. D”) under the Securities Act of 1933, as amended (the “1933 Act”), that would: •

create a new exemption from the registration requirements of the 1933 Act that would permit limited advertising in an exempt offering where each purchaser meets the proposed definition of “large accredited investor”;



revise the term “accredited investor” in Reg. D to clarify the term’s definition and reflect developments since Reg. D’s adoption, e.g., by adding alternative investments-owned standards and amounts, introducing the concept of “investments” to determine accredited investor status, revising the treatment of joint investments, providing for future inflation adjustments and reflecting additional categories of entities that may qualify as accredited investors;



shorten the time period required by the integration safe harbor in Reg. D; and



apply uniform disqualification provisions to all offerings that seek to rely on Reg. D.

The Release also solicits additional comment on the definition of “accredited natural person” that would apply in the case of certain pooled investment vehicles, as originally proposed by the SEC in December 2006 (for more information on the original SEC proposal see the Client Alert on the firm’s website at http://www.goodwinprocter.com/Files/Publications/CA_AntiFraudRules_1_8_07.pdf.) Comments on the proposed Reg. D amendments and the definition of “accredited natural person” must be received no later than 60 days after the release’s publication in the Federal Register. More detailed coverage of these developments will follow in a Hedge Fund Alert.

SEC Issues Release Adopting Antifraud Rule under Investment Advisers Act Directed at Advisers to Pooled Investment Vehicles The SEC issued the formal release adopting a new antifraud rule under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The rule was adopted as proposed. It makes its a fraudulent, deceptive, or manipulative act, practice, or course of business for an investment adviser (as defined under the Advisers Act, regardless of whether it is registered) to a pooled investment vehicle to make false or misleading statements to, or otherwise to defraud, investors or prospective investors in that pool. A pooled investment vehicle is any investment company (as defined in the Investment Company Act of 1940, as amended (the “1940 Act”) and any company that would be an investment company but for the exclusions in Sections 3(c)(1) or 3(c)(7) of the 1940 Act. The new rule takes effect September 10, 2007. More detailed coverage of this development will follow in a Hedge Fund Alert.

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Goodwin Procter LLP Financial Services Partners and Counsel Lynne B. Barr Gary A. Beller Kay E. Bondehagen Raymond P. Boulanger Agnes Bundy Scanlan Margaret B. Crockett Eric R. Fischer Martin J. Flynn Elizabeth Shea Fries Jackson B.R. Galloway Geoffrey R.T. Kenyon Satish M. Kini Thomas J. LaFond Paul W. Lee Gregory J. Lyons Robin J. H. Maxwell William P. Mayer Philip H. Newman Sean P. O’Malley Christopher E. Palmer Regina M. Pisa Mark S. Raffman William E. Stern Michael P. Whalen Meryl E. Wiener

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SEC Chairman Discusses Hedge Fund Working Group within Enforcement Division and Enforcement Actions Against Hedge Funds in Senate Testimony In testimony before the Senate Committee on Banking, Housing and Urban Affairs, SEC Chairman Christopher Cox stated that the SEC’s Division of Enforcement has created a hedge fund working group to, among other things, coordinate and enhance efforts to combat hedge fund insider trading, including by working with other federal law enforcement agencies and self-regulatory organizations. He also discussed enforcement activity by the SEC against hedge fund insider trading activity, including cases involving trading ahead of public announcements regarding private investment in public equity (PIPE) stock offerings and trading ahead of mergers and acquisitions activity. Chairman Cox also cited the SEC’s adoption of a new antifraud rule under the Investment Advisers Act of 1940, as amended, (discussed in the immediately preceding story) that focuses on the actions of investment advisers with respect to investors in pooled investment vehicles.

To e-mail any of the above attorneys, use first initial of first name followed by last name followed by @goodwinprocter.com. For example, the e-mail address for Gregory J. Lyons would be glyons@ goodwinprocter.com

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