A US person with either a financial interest in, or signature or other authority over, a Foreign Account is required to file an FBAR for any calendar year in which the aggregate value of that account exceeded US$10,000.

More specifically, in the above context, the following meanings apply:

Coming on the heels of a spate of state and SEC suits alleging investment adviser pay to play violations, and with the agency having proposed (but never finalised) similar rules in 1999 (see Political Contributions by Certain Investment Advisers, Investment Advisers Act Release No. 1812 (4 August 1999)) neither the fact of the new SEC proposals nor their general contours come as a surprise. The proposed rules follow closely the 1999 proposal. They proposed rules also are explicitly modelled on Municipal Securities Rulemaking Board Rules (MSRB rules) G-37 and G-38, parallel regulations applicable to broker-dealers in the municipal securities business.

There are three reasons for that, each of which is acknowledged more or less explicitly in the SEC's rule release:

Proposed rule 206(4)-5(a)(1) under the Investment Advisers Act would prohibit advisers from providing advisory services "for compensation," to a government entity (broadly defined to include all state and local – but not federal – government and government-sponsored agencies, instrumentalities, plans, programs, pools of assets, and so on) for a period of two years after the adviser or any of its "covered associates" makes a "contribution" to an "official" of the government entity.

The terms in quotation marks have the following meanings:

One effect of the proposed rules will be a new degree of caution when hiring personnel who may qualify as "covered associates" - likely resulting in pre-hire questionnaires around the topic of political contributions and political activity. This is because the proposal includes a "look back" provision that subjects the adviser to the two-year ban even if a covered associate of the adviser made the triggering contribution prior to employment with the adviser. Additionally, the two-year ban continues to apply to an adviser if the covered associate who made the contribution while with the adviser then leaves the firm. The two-year ban applies only as to government entities to whose officials contributions have been made. At least under these rules, an adviser would not be restricted, for example, in providing advisory services to a public pension plan in New York after the adviser's president made a contribution to a California official with influence over the selection of advisers for a California pension plan. (This assumes of course that no such contributions were made to New York officials.)

The proposed rules absolutely prohibit advisers and their covered associates from making or agreeing to make payments to unaffiliated third parties (such as placement agents or pension consultants) to solicit government business. "Solicit" is defined broadly to include any direct or indirect communication for the purpose of obtaining a client for or referring a client to an adviser.

This prohibition would not apply to solicitations by covered associates or personnel of the adviser itself or certain affiliates of the adviser or their employees, such that an adviser could pay a sister company under common control with the adviser to solicit government business.

Some states, including New York, have recently addressed the use by investment advisers of placement agents and other third party solicitors in seeking government advisory business. The New York Attorney General, for example, published a Public Pension Fund Reform Code of Conduct banning the use of placement agents, which was adopted by several advisers as part of out-of-court settlements in pay to play investigations (see, for example, Cuomo Secures Agreement with Leading Pension Fund Advisor Pacific Corporate Group Holdings to Adopt Code of Conduct and Eliminate Pay-to-Play in Pension Funds Nationwide, where the adviser is providing or seeking to provide advisory services.)

Both the proposed SEC rules in this area and the New York Attorney General's code of conduct leave a number of ambiguities, not least that the New York code of conduct prohibits the use of "placement agents" without defining the term. Those ambiguities and the fact that intermediaries serve an important market function for both advisers and their potential clients that is not readily severed suggest that the solicitor ban – although it probably will generate less near-term attention than the political contribution rules – will take longer for the industry to both make sense of and ultimately come to terms with.

The proposed rules also prohibit advisers and their covered associates from soliciting or co-ordinating contributions to an official or payments to a political party of a state or locality.

This prohibition would restrict an adviser from, for example, "bundling" de minimis contributions of its covered associates. Like payments to third party solicitors, such adviser solicitation and co-ordination is completely banned under the proposed rules (meaning that more is at stake than a two-year ban).

The SEC would require registered advisers to invest to maintain certain new records if they:

(Unregistered advisers get a pass on this aspect of the proposal, but presumably are expected to keep similar records as a basic compliance practice.)

The new required records would include:

There are a number of exceptions:

Discussion of the proposed rules is likely to revive issues and concerns that were raised by the SEC's earlier 1999 rule-making. It therefore is useful to go back to that record and review the comment files generated then. In summarising those comments, the SEC says the following:

Our own review of the 1999 comment record turns up some interesting themes:

Letters from advisers objected to, among other things, the length of the ban, the "look back" provision in which contributions made by an individual at a prior employer carry over to taint the current employer, and the limited size and scope of the de minimis exception.

The prospect of a hard ban on using third party solicitors drew repeated comment (with an outsize impact on smaller investment advisers especially feared) (for example, Wesley Ogburn, Portfolio Manager, Stanford Management Company (Stanford University Endowment), Menlo Park, California, 4 August 2009 (noting a possible disproportionate effect on smaller investment advisers that often rely on third party solicitors and cannot afford an extensive internal marketing and sales staff)).

One letter, in particular, stands out for the size of the organisation and the compliance approach the firm said it would have to adopt. The firm argued that distinguishing who is and is not a covered person from day to day and which donations do and do not qualify for exceptions was sufficiently complex, and the penalty for a misjudgment (that is, the two-year ban) so harsh, that its response would have been a flat prohibition on every employee from making any political contributions or engaging in volunteer political activity (comment letter from Andrew J. Bowden, Deputy General Counsel and Vice President, Legg Mason, Inc., 1 November 1999).

The Federal Election Commission also weighed in. While the rules generally are not applicable to federal officials, state officials running for federal office would be covered, causing members of the FEC to comment that application of pay to play rules to federal campaigns impermissibly encroaches on the exclusive domain of the Federal Election Campaign Act of 1971 (comment letter from Darryl R. Wold, Vice Chairman, Lee Ann Elliott, Commissioner and David M. Mason Commissioner, Federal Election Commission, 1 November 1999).

Again, the public comment period ends 6 October 2009. Meanwhile Shearman & Sterling will continue to monitor and report on the rule proposal. For further information, click here.

The United States Bankruptcy Court for the Southern District of New York recently issued a decision that places into doubt the "bankruptcy remoteness" of special purpose entities (SPEs). In General Growth Property Inc.'s (GGP) chapter 11 bankruptcy case, Judge Gropper, on 11 August 2009, rejected five motions to dismiss several special purpose entities (SPE Debtors) from the parent's bankruptcy proceedings. The motions to dismiss were brought by loan servicers ING Capital Loan Services LLC and Helios AMC LLC and lenders Metropolitan Life Insurance Co. (Metlife) and KBC Bank NV (together, the Movants), each of which is a secured lender to one or more of the SPE Debtors.

The primary ground on which dismissal had been sought was that the SPE Debtors' cases were filed in bad faith in that there was no imminent threat to the financial viability of the SPE Debtors.

GGP is a real estate investment trust that owns and manages more than 200 shopping malls in 44 states across the US. A large part of GGP's secured debt consists of mortgage debt, secured by mortgages on over 100 properties, each of which is typically owned by a separate corporate entity, or SPE.

The mortgage debt can in turn be categorised as conventional or as debt further securitised in the commercial mortgage-backed securities (CMBS) market. The bankruptcy court examined three of the mortgages held by Metlife to illustrate the conventional mortgage debt, and found that each of the mortgages was an obligation of a separate SPE Debtor.

These SPE Debtors were intended to operate as SPEs, which are structured in this manner to protect the interests of their secured creditors by measures including separateness covenants and limitations on indebtedness.

The bankruptcy court found that the capital needs of the GGP group had increasingly been met through loans obtained in the CMBS market, and that GGP's business plan had been based on the assumption that it would be able to refinance this debt.

Such refinancing proved impossible with the onset of a crisis in the credit markets, and notably in the CMBS market.

In April 2009, 388 of the GGP group companies (Debtors), including a large number of SPEs, filed voluntary petitions under chapter 11 of the Bankruptcy Code in the Southern District of New York.

Lenders to some of the SPEs had attempted unsuccessfully to prevent GGP from using cash flows to the SPEs as cash collateral and from granting its DIP lenders a lien on accounts that included funds from the SPEs. In this latter case, they sought to have the chapter 11 cases of the SPE Debtors dismissed outright on the grounds that these cases were filed in bad faith.

The principle that a chapter 11 reorganisation case can be dismissed as a bad faith filing is a judge-made doctrine, which is applied "only sparingly and with great caution." (Carolin Corp. v Miller, 886 F.2d 693, 700 (4th Cir. 1989)).

To determine whether a bankruptcy filing was made in good faith, the court must examine the "totality of circumstances, rather than any single factor." (In re Kingston Square Assocs., 214 B.R. 713, 725 (Bankr. S.D.N.Y. 1997)).

The Movants argued that the SPE Debtors' bad faith was evidenced by the fact that the prospect of liability for the SPE Debtors was too remote on the date of their filings. The Movants argued further that the issue of financial distress cannot be examined from the perspective of the group but only on an individual-entity basis.

The bankruptcy court first examined the question of whether the prospect of liability for the SPE Debtors was too remote to justify a chapter 11 filing and found a number of factors, such as the existence of cross-defaults and the existence of hyper-amortisation in the case of one of the loans, that justified the Debtors' determinations that the SPE Debtors were in financial distress. The bankruptcy court noted that these determinations were made in a series of board meetings following substantial financial analysis.

Rejecting the Movants' contention that the Debtors had a good faith obligation to delay a chapter 11 filing until they were temporally closer to an actual default, the bankruptcy court refused to establish an "arbitrary rule … that a debtor is not in financial distress and cannot file a chapter 11 petition if its principal debt is not due within one, two or three years."

The bankruptcy court went on to reject the Movants' contention that the question of financial distress can only be examined on an individual-entity, and not on a group, basis. The bankruptcy court cited a number of cases in support of this decision, including one case that found that it was clearly sound business practice for a parent company to seek chapter 11 protection for its wholly-owned subsidiaries when those subsidiaries were crucial to its own reorganisation plan. (Heisley v U.I.P. Engineered Prods. Corp., 831 F.2d 54 (4th Cir. 1987)). The court accepted that the SPE structure was designed to make each SPE Debtor "bankruptcy remote." The Movants were aware, however, that they were extending credit to a company that was part of a much larger group, and that there were benefits as well as possible detriments from this structure. If the ability of the group to obtain refinancing became impaired, the financial situation of its subsidiaries would likely also be impaired.

The bankruptcy court found that the Debtors had established that the filings were designed to preserve value for the Debtors' estates and creditors, including the Movants. While accepting that the Movants had been "inconvenienced" by the chapter 11 filings, Judge Gropper held that inconvenience to a secured creditor is not a reason to dismiss a chapter 11 case, and declined to dismiss the SPE Debtors' cases.

The Commercial Mortgage Securities Association (CMSA) filed a the brief of amicus curiae (Amicus Curiae Brief) in the GGP chapter 11 cases on 1 May 2009, arguing that there are systemic implications to the SPE Debtors filing within the GGP corporate bankruptcy. According to the Amicus Curiae Brief, if GGP were allowed to treat the SPE Debtors and all of the other GGP affiliates as one enterprise with all assets held for the benefit of the collective whole, the consequences could be "disastrous to the world of real estate finance."

Judge Gropper's decision in the GGP case appears to address some of the concerns raised in the Amicus Curiae Brief. Judge Gropper expressly stated that "the fundamental protections that the Movants negotiated and that the SPE structure represents are still in place and will remain in place during the chapter 11 cases." Noting that a principal goal of the SPE structure is to guard against substantive consolidation, Judge Gropper stated that nothing in his opinion implied "that the assets and liabilities of any of the SPE Debtors could properly be substantively consolidated with those of any other entity." Judge Gropper went on to point out that the question of substantive consolidation is entirely different from the issue of whether the board of a debtor that is part of a corporate group can consider the interests of the group along with the interests of the individual debtor when making a decision to file a bankruptcy case.

It is not yet clear how this decision in the GGP case will be treated in any future litigation that raises similar issues. The decision does appear to undermine a key protection that secured lenders to entities structured as "bankruptcy remote" had relied upon in structuring secured transactions, and will likely have an impact on the way that future secured financings are structured.