This article considers professional responsibility and liability issues faced by lawyers who advise clients about or make representations in connection with the end-user exemption to the mandatory clearing requirement for swaps under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). These issues may arise when lawyers advise clients or others about or attest to the accuracy of client representations in filings with governmental agencies, swap data repositories (SDR), derivatives clearing organizations (DCO), or swap execution facilities (SEF). The ethical component of this article will be analyzed under the ABA Model Rules of Professional Conduct, and, in particular, Model Rule 2.3. In addition, we will consider exposure for professional liability which may be incurred by lawyers who are accused of providing incorrect information.

Dodd-Frank generally requires that swap transactions be cleared through a clearing facility unless an exemption applies. The “end-user clearing exception” applies to derivatives regulated by the Securities and Exchange Commission and Commodity Futures Trading Commission. As the Commodity Futures Trading Commission explains, “An end-user is a non-financial entity that is using swaps to hedge or mitigate its commercial risks.”

The provisions of Title VII of Dodd-Frank take place beginning in July 2011. Regulations promulgated under Title VII take effect 60 days after final publication.

Securities-Based Swaps

Under Dodd-Frank, some derivatives are subject to regulation by the SEC, and others by the CFTC. The CFTC regulates “swaps”, the SEC regulates “security-based swaps,” and the agencies jointly regulate “mixed swaps.” Dodd-Frank exempts a securities-based swap otherwise subject to mandatory clearing if: (1) one party to the securities-based swap is not a financial entity; (2) is using the security-based swap to hedge or mitigate commercial risk; and (3) notifies the SEC how it generally meets its financial obligations associated with entering into non-cleared security-based swaps. See Pub. L. 111-203 Section 763 (a) (adding Exchange Act Section 3C(g)). This exemption is designed to allow non-financial end-users that qualify to retain flexibility in their risk management activities. 75 Fed. Reg. 79,993 (Dec. 21, 2010).

In December 2010, the SEC published proposed new Rule 3Cg-1, “End-User Exception to Mandatory Clearing of Security-Based Swaps.” The proposed rule would require non-financial entities to notify the SEC every time the end-user exception is used.  The proposed rule further provides that “a counterparty to a security-based swap that invokes [the end-user exception] shall satisfy the requirements of [the Dodd-Frank Act] by delivering or causing to be delivered the following additional information to a registered security-based swap data repository: …

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When a corporation announces a proposed merger or acquisition transaction, or rejects a tender offer, it has become routine for lawsuits to be filed on behalf of the corporation’s stockholders against the corporation and its board of directors. If the terms of the proposed transaction are thereafter improved or supplemental disclosures made, plaintiffs request that the corporation pay attorneys’ fees. In certain instances, plaintiffs’ attorneys are able to demonstrate that their lawsuit produced a substantial and specific benefit to the stockholders, such that the corporation should pay a fee. In other circumstances, the plaintiffs’ lawsuit had little or nothing to do with the corporation’s decisions concerning the proposed transactions and a fee award is not unjustified. Under the circumstances, an award of attorneys’ fees amounts to an unjustified tax upon corporate transactions. This article examines the legal basis for awarding attorneys’ fees in mergers and acquisitions cases, and the legal standards that courts have adopted in certain circumstances to deny or limit fee awards.

Awarding Attorneys’ Fees Under the Common Benefit Doctrine

The traditional American rule requires that each party pay its own attorneys’ fees and litigation costs, reasoning that a potential plaintiff should not be discouraged by the possibility of losing the case and having to pay for the defendant’s expenses. An exception, known as the “common fund” doctrine, was developed to prevent a plaintiff from being similarly discouraged when the benefits of winning the case will inure to others. Where a plaintiff’s litigation efforts create a fund to be distributed to parties other than the individual plaintiff, the court may order a reasonable portion of the fund to pay for plaintiff counsel’s efforts…

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New York’s highest court, in a 4-3 ruling, Oct. 21 rejected pleas to allow broader liability for third-party financial professionals, pulling the plug on claims that…

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The whistleblower bounty provision of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act—with its lure of generous payouts—is likely to be…

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Cloud computing may be a relatively new term in legal ethics circles, but it attracted plenty of attention at two programs presented during the recent 2010 ABA Annual Meeting in San Francisco.

Cloud computing at its core means that customers use the computer hardware of a cloud services provider instead of the customer’s own hardware for data storage, and use the provider’s software for data analysis and manipulation…

The Supreme Court of New York July 28 gave an affiliate of Cerberus Capital Management L.P.—a leading private equity firm—the green light to pursue claims that Paul Hastings Janofsky & Walker LLP and two of its attorneys provided negligent advice in connection with a $125 million secured loan…

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The Federal Circuit recently held that the scope of a protective order against a patent infringement plaintiff’s attorneys should be assessed on a counsel-by-counsel basis. By clarifying the standards, the court’s decision resolves a split among district courts and allocates the relevant burdens, but…

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The U.S. Supreme Court May 24 declined to review a controversial federal appeals court ruling concerning the scope of work-product protection for accountant work papers sought by the Internal Revenue Service in connection with a tax shelter investigation…

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The White House’s nomination May 10 of U.S. Solicitor General Elena Kagan to the U.S. Supreme Court was welcomed by many securities attorneys, but some noted that Kagan’s lack of a record as a judge makes it difficult to…

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Rejecting the Securities and Exchange Commission’s broad view of the liability of secondary actors for securities fraud, the U.S. Court of Appeals for the Second Circuit April 27 affirmed the dismissal of a securities class action against Mayer Brown LLP over the law firm’s alleged role in the massive fraud at…

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