Top 6 of '06

The most momentous legal happenings to impact the financial services industry this year.

If the end of the year is prime for reflection, January is time to look ahead.

It's safe to say the biggest legal story affecting the financial services industry doesn't appear on the list below because every year we see something just completely off-the-map unforeseeable (i.e. Refco). That shocker remains to be seen, but you heard it hear first: Whatever it is, it'll be the biggest story of 2006. Now for the also-rans:

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Enron

Finally.

Enron was the Hurricane Katrina of corporate scandals for the past five years. Since its infamous implosion, seemingly innumerable improprieties have come and gone, executives have faced sentencing, and Martha Stewart went to prison -- and made a comeback.

Now, at long last, we get the trial that, more than any other, symbolizes the corporate malfeasance of the past five years. Ken Lay and Jeffrey Skilling don't have a great chance of beating the charges against them, as the press essentially tried and convicted them years ago. But we haven't had a trial this entertaining since O.J.

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Hedge Fund Registration

During the last five years, the SEC has brought 51 cases against hedge fund advisers charged with defrauding investors of more than $1 billion. Starting February, that number may look small.

The SEC managed to levy those charges without any "sunshine" helping them out; now that (almost) all hedge funds are required to register under the Investment Advisors Act of 1940, the SEC will have a lot more access and information. Audits lead to investigations, which lead to both civil and criminal complaints.

At least for the moment, I'm guessing the extra work will overwhelm the SEC staff counsel, which is not accustomed to considering issues of such complexity, and we won't notice any real difference. But, in time, the industry will look back on 2006 -- and not fondly -- as the year hedge funds began to face true regulatory scrutiny.

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The NASD's 6-Year Eligibility Rule Will Hit 2000 Claims

Anyone who follows the market can tell you the story of the NASDAQ's meteoric rise in the mid to late '90s -- and its subsequent plunge. The beginning of the end of the dotcom boom started at the very end of March 2000. Outside some minor upswings here and there, it kept dropping for more than a year.

Why is this at all relevant as we look ahead at 2006? Because, as the year progresses, the NASD's six-year eligibility rule will begin to bar claims against brokers filed by investors who lost money in transactions made more than six years ago. The dot-com bust was the undeniable driving force behind the majority of investor arbitrations filed with the NASD and NYSE since 2000. There will always be cases filed by disgruntled investors -- we live in an overly litigious society -- but financial professionals can breathe easier with each passing day knowing that another investor's claim has become time-barred.

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A New NY State Attorney General

Eliot Spitzer caught financial institutions off guard when he boldly decided his office -- that of the NY State Attorney General -- owed it to New Yorkers to clean up Wall Street.

Traditionally, the SEC, NYSE and NASD have played the role of regulator. Spitzer's tough approach toward Wall Street has practically made him a lock to succeed Governor Pataki. But the real question is whether Spitzer's own successor will follow in his footsteps.

It is still too early to forecast the 2006 election results (for what its worth, my money is on Andrew Cuomo) but the "who" is not the issue. The primary elections will inevitably bring candidates pledging to follow Spitzer's lead. But, simply for the sake of sounding different, other hopefuls will argue vociferously that it is not the place of a State Attorney General to impose one state's regulations on a national industry like finance.

Which means it is entirely possible that 2006 could be the year we see Wall Street happily leap back into the embrace of the SEC, and welcome SRO regulation with open arms.

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Bidding Greenspan Adieu

Some say the Chairman of the Federal Reserve just chairs a committee of people who sit around and follow a mathematical formula, occasionally nudging the interest rate charged to commercial banks -- a job that could be easily filled by a computer program. Others can’t decide whether President Bush or Alan Greenspan is currently the most powerful person on the planet.

When Greenspan was first appointed to his position, a guy named George Bush was the Vice President, and our current Commander in Chief was busy running Harken Energy into the ground. 2006 will be the first year in a long time without Greenspan, and for those who view his role as the government official responsible for monetary policy as critical (and many do), the upcoming transition to Ben Bernanke will be important to watch.

uretsky@phillipson-uretsky.com

1/18/06

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