Chia-Yu Chang @ Law, P.C. 315 W. 70th Street, #12L New York, NY 10023
(212)769-1756 cychang at cychanglaw dot com
Chia-Yu Chang is an attorney admitted to practice in NY and before USPTO, and practices primarily in intellectual property (patent, trademark, copyright, trade secret), corporation, commercial transaction, finance, and estate planning. Before joining the legal profession, Chia-Yu was a fixed-income research analyst with Salomon Brothers. He holds a BS degree in geology from National Taiwan University, MS degrees from Indiana University and Columbia University, and a JD degree from Benjamin N. Cardozo School of Law. On the personal side, Chia-Yu has practiced Tai-Chi for over 20 years, and is currently learning Taiko drumming.
The Inevitable, But IMPORTANT, Disclaimer
All the materials presented in this web site are for information only. They are not legal advices.
© 2005-Present Chia-Yu Chang.
Tuesday, August 30. 2011
- Public interests v private interests
Just read a scathing opinion piece on Bloomberg.com advocating the shuttering of SEC. (See here.) Why? The fast spinning revolving door between the regulator and the industry it regulates, and the resulting festering conflicts of interest. The author, William Cohan, cited another article published in the recent Rolling Stone issue by Matt Taibbi, detailing a whistleblower’s allegations that the agency had been destroying internal investigation records at least for the past 17 years. (See here.)
On the spinning revolving door, the Rolling Stone article listed the names of the 5 past directors of the Enforcement Division at SEC from 1985-2009, and their employers directly after their SEC tenures. I have copied the list below.
Everyone knows that revolving doors create severe conflicts of interest issues, and should be properly regulated. Regulators at SEC should particularly know that best. But when it comes to regulating one’s own private interests, public interests unfortunately still have to take a back seat, even for regulators.
Thursday, July 28. 2011
It was reported recently that the hedge funds founded by George Soros, the fabled money manager, had decided to close themselves to outside investors and return about $1b of outsider money. (See, eg, here.) According to the news reports, the Soros fund managers stated in a letter to investors that they made the decision to avoid registering with the SEC. The letter indicated that the funds previously were able to avoid registration through some exemptions, but those exemptions are no longer available subsequent to the Dodd-Frank Act.
Prior to Dodd-Frank, the Investment Adviser Act required investment advisers ("IA") to register with the SEC, but provided several exemptions, including the “private fund” exemption, which exempted IAs having less than 15 clients during the past 12 months and not holding themselves out generally to the public as IAs. (See footnote 1.c.) Since Dodd-Frank eliminated only the private fund exemption, leaving the other exemptions intact, it is fair to conclude that the Soros funds avoided registration through the private fund exemption. In place of the “private fund” exemption, however, Dodd-Frank introduces a “family office” exemption (§409), allowing IAs that are “family offices” to be exempted from registration. Thus, by returning the outsider money, the Soros fund will supposedly qualify as a “family office” and continue to be exempted from registration.
It is not possible to know for sure why the Soros fund manager would rather turn away money than register with the SEC. But I would guess it’s because they want to avoid the disclosure & record keeping requirements. In terms of disclosure, an IA registers with the SEC by submitting Form ADV, which includes 2 parts, Part I and Part II. (See here.) Part I is primarily form-based, whereas Part II is narrative-based. Without going into the details, I have listed in the table below the main disclosure items in each part.
Of these items, Item #8 of Part II is probably of the greatest concern to the Soros fund managers, because it involves the fund’s proprietary trading strategies. The instruction for the item requests the IA to disclose: (1) the methods of analysis and investment strategies you use in formulating investment advice or managing assets.; (2) the material risks involved for each significant investment strategy or method of analysis; & (3) the material risks involved in a particular type of recommended security.
Furthermore, the Investment Adviser Act requires IAs to maintain records, which are subject to examination by the SEC. The Dodd-Frank Act imposes additional record-keeping requirements, requiring IAs to maintain records needed to assess systemic risks. (§404(2)) The required information include:
(A) the amount of assets under management and use of leverage, including off-balance-sheet leverage;
(B) counterparty credit risk exposure;
(C) trading and investment positions;
(D) valuation policies and practices of the fund;
(E) types of assets held;
(F) side arrangements or side letters, whereby certain investors in a fund obtain more favorable rights or entitlements than other investors;
(G) trading practices; and
(H) such other information as the Commission, in consultation with the Council, determines is necessary and appropriate in the public interest and for the protection of investors or for the assessment of systemic risk, which may include the establishment of different reporting requirements for different classes of fund advisers, based on the type or size of private fund being advised.
Needless to say, these disclosure and record-keeping requirements raised genuine concerns within the hedge fund industry. As a consequence, Dodd-Frank also provides that “proprietary information” received by the SEC or other government agencies will not be accessible to the public through the Freedom of Information Act. These safeguard measures, however, obviously were not enough for the Soros fund managers to submit to registration.
If the family office exemption were not available, I wonder whether they would have considered patenting their previously secret strategies! (See my previous post on patenting trade secrets here.)
 For example:
a. All clients of IA resides in same state as the IA (§203(b)(1), Investment Adviser Act);
b. All clients of IA are insurance companies (§203(b)(2));
c. IA has less than 15 clients in past 12 months, does not hold itself out as an IA to the public, & does not advise investment companies or business development companies (the private fund exemption, §203(b)(3));
d. IA is a charitable organization (§203(b)(4));
e. IA is a church plan under §414(e) of the Internal Revenue Code (§203(b)(5));
f. IA is registered with CFTC (§203(b)(6));
g. IA is subject to state regulations and manages less than $25m (§203A(a)(1)(A));
h. IA is subject to state regulations and does not advise an investment company (§203A(a)(1)(B)).
 The SEC has defined a “family office” as one that (a) has only family clients; (b) is wholly owned by family clients and exclusively controlled by family members/entities; and (c) does not hold itself out as an investment adviser. 17 CFR 275.202(a)(11)(G)-1 (adopted on 6/22/2011, effective 60 days after publication on Federal Register)
 The term “records” is defined as “accounts, correspondence, memorandums, tapes, discs, papers, books, and other documents or transcribed information of any type, whether expressed in ordinary or machine language.” §3(a)(37), Securities Exchange Act.
 “Proprietary information” includes “sensitive, non-public information regarding-- (i) the investment or trading strategies of the investment adviser; (ii) analytical or research methodologies; (iii) trading data; (iv) computer hardware or software containing intellectual property; and (v) any additional information that the Commission determines to be proprietary.” §404(2), the Dodd-Frank Act.
Monday, July 11. 2011
- Mindful of the limits
The movie Transformer 3 was a huge box office hit this summer. I haven’t seen it yet, but have seen the previous two. Honestly, I didn’t really like them that much. The kid characters were way too serious and the visuals were way too crowded and unfocused. However, I must admit that that “transformation” theme common in most super-hero movies has its psychological allures. Watching those cars and trucks transform into giant robots (or batman don on the black tight outfit and mask, or superman unbutton his shirt to reveal the V letter, or the supermarion puppets in the Thunderbirds series slide through high-tech tunnels and gear up to operate the marvel rescue planes) is utterly satisfying to us mortal beings. Transformation is dreams-come-true, is hope.
And therefore in the Dodd-Frank Act (Wall Street Reform and Consumer Protection Act), we (or, rather, the Congress) transformed the federal regulatory schemes and rested our hope of safeguarding the integrity of the financial system on the newly-transformed regulators. That is, if the free markets championed by capitalism failed, regulations will come to the rescue.
I’ve always believed that markets without regulations will not work. However, to think that regulations will solve all our problems is also unrealistic. Attesting to this limit are two insightful studies on the performance of the Office of Currency Controller and the Federal Reserve at the task of separating banking and commerce during the decades leading to the financial crisis, conducted by Prof Omarova of U of N Carolina. In the first study published in 2009, Prof Omarova investigated how OCC broadly interpreted the “business of banking” restrictions on commercial banking activities to eventually allow commercial banks to enter into various types of derivative markets. (See here.) In the second study, Prof Omarova turned to the Federal Reserve’s use of its exemptive authority to permit insured banks to engage in transactions with affiliates that exposed the banks to tremendous credit risks of the affiliates. (See here.)
Separation of banking and commerce is one of the fundamental cornerstones of US banking and financial law. The National Bank Act of 1863 limited commercial banks to engage in activities “necessary to carry on the business of banking”, excluding dealing and underwriting securities as amended by the Glass-Steagall Act. The Bank Holding Act of 1956 extended the restrictions to bank holding companies and affiliates.
OCC, as the regulators for federally chartered banks, is responsible for interpreting the “business of banking” clause. Prof Omarova’s study showed that since 1960’s, OCC had adopted a broad interpretation of the clause, which was given a nod by the Supreme Court in 1995.
With respect to derivatives, OCC first opened the doors to those referencing conventionally permissible assets (eg, interest rates, currencies, or gold) by relying on the “look through” doctrine. When this doctrine became too restrictive, however, OCC switched instead to the “functional equivalency” doctrine. Under the “functional equivalency” approach, an activity would be permissible as long as it performed similar functions as other permissible activities, regardless of the underlying assets. This approach opened the door for commercial banks to matched commodity swaps, commodity-linked deposits, unmatched commodity swaps, swap warehousing, and eventual equity swaps. Finally, by defining “business of banking” as virtually all forms of financial intermediations in an approach named “elastic definition” by Prof Omarova, OCC permitted banks to engage in physical hedging of commodity and equity derivatives, cash settled commodity derivatives (eg, electricity), physically settled commodity derivatives, and derivatives on various underlying indices (eg, inflation property, and catastrophe indices).
Therefore, by the time the financial crisis broke loose in 2007-2008, US commercial banks had gained the power to enter into virtually all kinds of derivative transactions. Post-crisis, however, the Dodd-Frank Act limits permissible derivative activities for commercial banks to those taken for hedging purposes and those referencing a permissible underlying asset. (That is, those permissible under the “look through” approach.)
The wall separating commercial banking from investment banking was significantly narrowed / lowered / weakened after the repeal of Glass-Steagall in 1999, permitting bank holding companies to enter into virtually all types of financial service businesses under the holding company umbrella. What’s left of the wall is primarily Sections 23A and 23B of the Federal Reserve Act, which set forth restrictions on transactions between commercial banks and their affiliates.
23A and 23B aim to achieve two goals: (1) protecting a bank from losses suffered in transactions with affiliates; and (2) restricting banks from transferring to affiliates the subsidies derived from the federal safety net. To achieve these goals, 23A generally limits the transactions between a bank and its affiliates to 10% of the bank’s capital stocks and surplus for each affiliate, and to 20% of capital stocks and surplus for all affiliates. The section additionally prohibits the bank from purchasing low-quality assets from affiliates, requires transaction terms to be consistent with safe and sound practices, and sets collateral requirements. 23B, on other hand, requires affiliate transactions to be made according to prevailing market terms.
The Federal Reserve is responsible for enforcing 23A & 23B, and is authorized to exempt affiliate transactions from the statutory restrictions if such exemptions are “in the public interest” and “consistent with the purposes” of these sections. According to Prof Omarova, however, it turned out the public interest in providing desperately needed liquidity to the non-banking sector during the crisis decisively outweighed the public interests in protecting the deposits of the public from speculative activities.
In his study, Prof Omarova examined the interpretive letters issued by the Federal Reserve between 1996 and 2010 in response to requests to exempt proposed affiliate transactions from 23A requirements. The table below summarizes those instances listed in Prof Omarova’s paper when the Federal Reserve granted exemptions to the 23A requirements. As shown in the table, Prof Omarova found that during the crisis, when protections of commercial banks afforded under 23A seemed most needed and justified, the decision-making processes at the Federal Reserve were actually dominated by the imminent need to provide emergency liquidity to the non-banking sector. At the time of market crises, the public interest in achieving the twin goals of 23A (protecting banks from losses from affiliates and preventing transfer of federal subsidies) proved to be illusive against the competing interest in providing funding to all.
Therefore, the logical construct of 23A was turned upside down by the empirical experiences gathered during this crisis. The exemptive authority under 23A proved to be too powerful for the whole design to work. Post-crisis, the Dodd-Frank Act amended 23A by, among others, giving FDIC the power to veto exemptions granted by the Federal Reserve.
Regulations, no matter how extensively and carefully constructed, will not likely prevent the occurrence of the next market crisis. Prof Omarova’s studies show that regulators are liable to mistakes, as are all mortal beings. After Glass-Steagall, however, for almost 75 years, the US financial system prospered without a major crisis. If we want to pull off another record, however, lots more than the Dodd-Frank Act will be necessary!
 Omarova, Saule T., The Quiet Metamorphosis: How Derivatives Changed the “business of Banking”, 63 U. Miami L. Rev. 1041 (2009).
 Omarova, Saule T., From Gramm-Leach-Biliey to Dodd-Frank: The Unfulfilled Promise of Section 23A of the Federal Reserve Act, North Carolina Law Review, Vol. 89, 2011; UNC Legal Studies Research Paper No. 1828445.
 12 USC §24(Seventh).
 Nations Bank of North Carolina v. Variable Annuity Life Insurance, 513 U.S. 251 (1995).
 12 USC §§371c & 371c-1.
 Transactions Between Member Banks and Their Affiliates, 67 Fed. Reg. at 76,560.
 12 USC 371c(f)(2).
Friday, January 14. 2011
- Tiptoeing for a balance, or taming of the shrew
Many people have discussed the case, Bilski v. Kappos, and so I will not repeat it. (See, e.g., here & here.) As a quick introduction, Bilski was an inventor who applied for a patent on a “method of hedging commodity transactions”; USPTO rejected it; it was appealed eventually to the US Supreme Court; and on 6/28/2010, the Supreme Court rejected the patent application as well.
Bilski did not involve software directly, but its sibling category, “business methods” (specifically, “method of hedging”). Software, however, invariably involves steps (ie, methods) of computation, and therefore the general holding in Bilski with respect to method-type inventions could be applied to software patents by analogy.
The big-picture issue in Bilski was the threshold question, “What type of ‘method’ inventions are not eligible for patents regardless of whether they are new, ingenious, or properly disclosed to the public?” The Supreme Court held that if these “method-type” inventions are simply “abstract ideas”, then they would not be eligible for patent protections, categorically. (Four of the justices would have held that all business methods were not patentable.) The Court, however, declined to give a clear guidance on how to define “abstract ideas”, and simply threw the ball back to the lower court (ie, Appellate Court of the Federal Circuit; no pun intended) to find the solution.
Most people agree with the principle that “abstract ideas” should not be eligible for patent monopolies. The principle has been a fundamental cornerstone of US patent laws since as early as the nineteen century. (E.g., Rubber-Tip Pencil Company v. Howard, 87 U. S. 498 (1874)) The devil, however, is in the details. And the real battlefield is in how USPTO and the courts decide which inventions are “abstract ideas”.
With respect to software inventions, BPAI (Board of Patent Appeals and Interferences of USPTO) in its recent decisions appears to have equated “abstract ideas” with the term “software per se”. Moreover, BPAI has shown increasing tendency to dispose of software patent applications based on the “software per se” ground since 2007. (See table below.)
I have listed below some of the software applications that have been rejected in 2010, post-Bilski, by BPAI on the “software per se” ground.
Case Date Claimed Invention* Ex Parte Proudler 07/08/2010 Ex Parte Birger et al 07/13/2010 Ex Parte Fellenstein et al 07/27/2010 Ex Parte Choo et al 07/28/2010 Ex Parte Ramanujan 08/12/2010 Ex Parte Christian et al 08/23/2010 Ex Parte Russo et al 08/30/2010 Ex Parte Hong 09/21/2010 Ex Parte Kropaczek et al 10/13/2010 Ex Parte Sung et al 10/28/2010 Ex Parte Martin 11/15/2010 Ex Parte Asare et al 11/17/2010
Ex Parte Proudler
Ex Parte Birger et al
Ex Parte Fellenstein et al
Ex Parte Choo et al
Ex Parte Ramanujan
Ex Parte Christian et al
Ex Parte Russo et al
Ex Parte Hong
Ex Parte Kropaczek et al
Ex Parte Sung et al
Ex Parte Martin
Ex Parte Asare et al
In these cases, BPAI referred to MPEP 2106.01(I), which is titled “Functional Descriptive Material: ‘Data Structures’ Representing Descriptive Material Per Se Or Computer Programs Representing Computer Listings Per Se”. The term “software per se” under BPAI, therefore, seems to refer to “data structure per se” and “computer listing per se”. Furthermore, the texts of the MPEP section distinguish the “per se” category based on whether the software or data structure defines “structural and functional interrelationships” between the software or data structure and other claimed elements of the computer. The section, however, does not define any standard or test in determining whether such “structural and functional interrelationships” have been sufficiently defined to avoid the “software per se” rejection.
Note that not all applications that had been rejected by the examiner on the “software per se” ground were affirmed by BPAI. See, e.g., Ex Parte Thornton et al, 01/06/2011. ("A system that manages the updates of land parcel drawings.") Moreover, in its first opinion after Bilski, (Research Corp Tech v. Microsoft), the Appellate Court of Federal Circuit on 12/8/2010 held that a method of generating halftone images was patent eligible. This holding contradicted with BPAI’s earlier determination in Ex Parte Hong (see table above), which also involved methods of processing pixel images. It remains to be seen whether BPAI will modify its position toward all software patent applications following Research Copr Tech, or distinguish the opinion on its facts.
Even after the anxiously anticipated Bilski opinion, there is still no clear legal guidance in deciding whether or not a software invention is simply an “abstract idea” and thus barred categorically from patent protections. This void will certainly result in more confusions and inconsistencies at USPTO and the various courts, and thus impart greater uncertainties in the software patent application processes.
Tuesday, July 14. 2009
- Are trade secrets patentable?
Tuesday, May 5. 2009
-- The value and vanity of fame
Turns out to be not in vain,
Insofar as a mark of trade
Is the center of the realm.
It's the federal or the state
That will be the game.
Wednesday, March 11. 2009
-- Risk & reward
[NOTE: This article was originally written in Chinese in January 2009, and published in the newspaper World Journal on 2/26/2009. I want to thank the World Journal for its generous permission for me to post this updated English version here.]
In light of these risks, and the surging federal deficits, the rate of success of the stimulus package will depend on its ability to attract diverse private investments and international participation. To the private sectors, on the other hand, these risks may represent new demands and new markets. When viewed from the right angle, risk and rewards are often two sides of the same coin.
For a Chinese version published on the World Journal, please click the link at the end of this paragraph. 欲閱讀在世界日報上發表的中文版, 請按此連結鍵 here.
Friday, March 7. 2008
-- In the context of greenhouse gas emission and climate change
Tuesday, March 4. 2008
-- According to United Nations estimates
"Global investments in the magnitude of from 15 trillion to 20 trillion United States dollars may be required over the next 20-25 years to place the world on a markedly different and sustainable energy trajectory."
Friday, February 22. 2008
[Note: The abbreviation "GHG" represents "Greenhouse Gas".]
Please click the link below for the Chinese version. 請按以下連結鍵閱讀中文版.
Continue reading "Potential size of the greenhouse gas markets"
Treasure and preserve what we have
Tuesday, July 19 2016
Bitcoin regulations proposed by New York regulator
Thursday, July 24 2014
Treasure and preserve what we have
Wednesday, June 4 2014
Global banking v global judgment enforcement
Thursday, April 10 2014
Expanded “prior use” defense under AIA
Monday, March 31 2014
Bondholder activism in affecting corporate climate policies
Thursday, February 16 2012
Climate change adaptation & market-based regulation
Thursday, January 26 2012
11/14/2011 Presentation on Climate Change
Friday, December 9 2011
Software patents and venture capital
Monday, September 5 2011
Software & patents
Tuesday, August 30 2011