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Securities Issues

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BANKRUPTCY

Background:

Disinterestedness Provisions

Current law prohibits bankruptcy judges from appointing investment banks to serve as advisers if those banks had ever underwritten or distributed any securities for a company that subsequently files for bankruptcy. This ban is in effect indefinitely, as long as those particular securities that were underwritten or distributed are outstanding. SIA supports legislation to amend the current conflict of interest standard found in section 101 of the bankruptcy code by creating a level playing field with other bankruptcy professionals. Such a provision assures that bankruptcy judges will have the discretion they need and want to evaluate all professionals against the same standard of disinterestedness. SIA also supports a netting provision to clarify the legal standing of financial contracts when a counter party becomes insolvent.

Netting Provision

As more types of market participants have engaged in a broader range of transactions for financing and risk management purposes, statutory and regulatory inconsistencies have surfaced that make it difficult for them to be sure of their rights and obligations when other parties become insolvent.

Position:

Disinterestedness Provisions

SIA supports passage of legislation that would allow bankruptcy judges to use the same criteria as is used for the banking, accounting, and legal sectors in determining candidates to act as advisers to bankrupt companies.

Netting Provision

A relatively non-controversial provision that would allow offsetting assets with liabilities for capital set aside purposes. SIA supports mechanisms to reduce systemic risk.

SIA supports the position, clarification and expansion of various provisions that allow for the termination, close-out, setoff, and netting of financial contracts. The bill would expand current-law treatment of repurchase agreements to a broader, but still limited group of assets.

Policy Points:

Disinterestedness Provisions

No other professionals – attorneys, management consultants, or accountants – are subject to the same " per se " ban. They may be considered by a judge to act as advisers even though they may have had past business relationships. Ultimately, the choice of advisers would continue to rest with the judge handling the case. The judge would still have to determine whether the adviser that would be selected is a " disinterested party. "

This means, among other things, that the adviser does not have an " interest materially adverse " to the company or its creditors or shareholders. The reforms would simply enlarge the pool of candidates that a judge could consider. Judges would continue to have the authority and discretion to evaluate candidates and prevent abuse. Broadening the pool of eligible candidates is pro-competitive, and would result in lower costs of advisory services.

Clarification of the legal standard of financial contracts when a counter party becomes insolvent would reduce systemic risk by facilitating netting across a wider range of market participants and financial products.

Netting Provision

Broad consumer and commercial bankruptcy legislation under consideration in Congress would clarify the legal standing of financial contracts when a counterparty becomes insolvent. The legislation would facilitate netting across wider ranges of market participants and financial products. Swaps and repurchase agreements-vital sources of liquidity in the capital markets-would be treated more efficiently and pose less threat of disrupting the financial markets in the event of an insolvency.

The insolvency of one party to a transaction can cause ripple effects and undermine the financial condition, intentions, and reasonable expectations of other parties in the market. Recognizing the importance of liquidity and soundness in the capital markets, Congress has included provisions in the Bankruptcy Code and the bank insolvency laws that are designed to minimize the degree to which the insolvency of one party to a financial transaction can negatively affect other parties.

Status: Signed into law April 20, 2005.

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