Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The Insurance Capital Standards Clarification Act of 2014 has been presented to President Obama for signature.  The bill will:

  • Add language to Section 171 of Dodd-Frank to clarify that, in establishing minimum capital requirements for holding companies on a consolidated basis, the Federal Reserve is not required to include insurers to the extent they are engaged in activities regulated as insurance at the state level;
  • Provide a mechanism for the Federal Reserve, acting in consultation with the appropriate state insurance authority, to provide similar treatment for foreign insurance entities within a U.S. holding company where that entity does not itself do business in the United States; and
  • Limits the ability of the Federal Reserve to require insurers which file holding company financial statements using Statutory Accounting Principles to instead prepare their financial statements using Generally Accepting Accounting Principles.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

A bill has been presented to President Obama for signature that will make more small bank holding companies eligible for regulatory relief.  The bill directs the Federal Reserve to increase the qualifying asset threshold of the Federal Reserve’s Small Bank Holding Company Policy Statement from $500 million to up to $1 billion.

The relief will only be available for small bank holding companies that:

  • are not engaged in significant nonbanking activities either directly or through a nonbank subsidiary;
  • do not conduct significant off-balance sheet activities (including securitization and asset management or administration) either directly or through a nonbank subsidiary; and
  • do not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the Securities and Exchange Commission.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

You reach the point in the sale of almost every public company where the buyer wants an exclusivity agreement. Lawyers representing the target wring their hands about the effect of an exclusivity agreement and the effect of effectively taking the target out of the market and the interplay with the board’s Revlon duties.

Previously we were not aware of much guidance from the Delaware courts on the effect of exclusivity agreements. However, the Delaware Court of Chancery addressed exclusivity agreements in the opinion in In Re Comverge, Inc. Shareholders Litigation (November 25, 2014).

In Comverge the court upheld the entry into an exclusivity agreement, noting the following: “Regarding the HIG exclusivity agreement, the Board initially pushed back against HIG‘s demands for exclusivity. Moreover, even when Comverge consented to the exclusivity in January 2012, the exclusivity period was less than 20 days long, as compared to the 30 days HIG had requested. In hindsight, the timing of the Company‘s agreement may have been unfortunate, because Company X indicated its $4.00–6.00 per share interest in Comverge shortly after the exclusivity period began. But Revlon requires reasonable decisions, not perfect ones. The Comverge Board had a firm $2.00 offer on the table, with HIG conditioning any further negotiations on the acceptance of exclusivity. Based on the facts alleged and all reasonable inferences drawn from them, I do not consider it conceivable that Plaintiffs could show that the Board‘s decision to accept the exclusivity period and continue their negotiations with HIG was wholly outside the range of reasonable conduct for a board seeking to maximize value for its stockholders.”

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The CFPB released a report that found medical debt has a significant impact on consumer credit, as 43 million Americans have overdue medical debt on their credit reports. The CFPB is concerned that the systems for incurring, collecting, and reporting medical debt can create difficult challenges for consumers. To better address these challenges, the CFPB announced that the major consumer reporting agencies will be required to provide regular accuracy reports to the Bureau on how disputes from consumers are being handled.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The SEC recently announced a settlement in connection with the operation of unregistered virtual-currency-based stock exchanges. The settlement is instructive as to how the SEC will evaluate crypto-currency trading platforms (spoiler alert: the same way they evaluate all other trading platforms) and also as to the benefits of full cooperation with the SEC in the context of an investigation.

For a little over a year, two online, crypto-currency-based stock exchanges were operated by BTC Trading, Corp. (BTC Trading), a company formed and operated out of Belize and 100% owned by a California man, Ethan Burnside. The two exchanges were LTC-Global Virtual Stock Exchange (which utilized the virtial crypto-currency Litecoin) and BTC Virtual Stock Exchange (which utilized the virtual crypto-currency Bitcoin).   Issuers could sign up to offer their securities for sale to registered users of these two exchanges, and anyone with an email address could become a registered user and purchase securities. In addition, users could purchase securities in the exchanges themselves. In all, 121 issuers used these two platforms to sell shares. None of these securities or offerings were ever registered with the SEC.

Aside from operating the exchanges, Burnside and BTC Global also solicited purchasers and brokered sales via the exchanges. Burnside also purported to sell securities of LTC-Mining, a Litecoin mining enterprise operated by Burnside but unincorporated as an entity. Burnside sold what he called “LTC Mining bonds,” which entitled the bondholders to a share in profits earned by LTC-Mining from mining Litecoins.

It almost goes without saying that these activities amounted to numerous and blatant violations of the securities laws. Section 5 of the Securities Act prohibits the offer and sale of securities in interstate commerce unless the securities are registered or exempt. A securities exchange must be registered pursuant to Section 6 of the Exchange Act in order to lawfully effect or report transactions in securities, and a failure to comply is a violation of Section 5 of the Exchange Act. Other than the fact that they operated using crypto-currencies, LTC-Global Virtual Stock Exchange and BTC Virtual Stock Exchange were textbook examples of securities exchanges. Burnside and BTC Global also violated Section 15(a) of the Exchange Act by engaging in the business of effecting transactions in securities without being registered as broker-dealers or exempt from registration.

But despite these violations, Burnside emerges from the SEC settlement relatively unscathed. He is required to disgorge profits, with interest, amounting to approximately $60,000; is barred from participating in the securities industry for two years (Burnside’s livelihood does not appear to be dependent on participation in the securities industry); and must pay a civil penalty of $10,000. The SEC could have easily imposed a lifetime securities industry ban and a much higher civil penalty, but the Commission chose instead to reward Burnside’s role in the SEC investigation.

The SEC described Burnside’s cooperation as follows: “Beginning in September 2013, in immediate response to the Commission staff’s investigation, Burnside began an orderly wind down of both websites. Since September 2013, users have withdrawn funds totaling approximately 200,000 litecoins and 20,000 bitcoins, and in October 2013, both websites ceased operating. Throughout the investigation, Burnside fully cooperated with the Commission staff, providing early and substantial assistance. He made himself available to Commission staff upon request, translated data into accessible formats while producing the raw data to permit independent verification, and he retained financial audit experts to assist in the generation and formatting of reports in order to enable the staff to quickly ascertain the scope and operation of his enterprises. Burnside’s efforts facilitated the staff’s investigation involving an emerging technology.”

As for securities of LTC-Global that Burnside had sold in violation of the Securities Act, Burnside agreed to buy back all of the securities in connection with the SEC investigation. Burnside bought back the securities using Litecoins and Bitcoins and, due to changes in the exchange rates of the virtual currencies, Burnside lost value of approximately $50,000 in the buy-back.

Prior to being contacted by the SEC, Burnside had also repurchased securities of LTC Mining from investors at a loss. In June 2013, Burnside repurchased from investors the LTC Mining bonds he had previously sold them because the venture was not profitable. Burnside repurchased the bonds for about $45,000 more than he had raised by selling the bonds.

For those interested in further background on the SEC’s and FINRA’s views on crypto-currencies and the history of their actions in this area, I recommend this article from CoinDesk.com, which does a good job of providing additional context in the final paragraphs.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The NYSE proposes to amend its continued listing requirements in relation to the late filing of a company’s annual report with the SEC as set forth in Section 802.01E, or the Late Filer Rule, of the Listed Company Manual. As amended, the Late Filer Rule will:

· expand the rule to impose a maximum period within which a company must file a late quarterly report on Form 10-Q in order to maintain its listing; and

· clarify the NYSE’s treatment of companies whose annual or quarterly reports are defective at the time of filing or become defective at some subsequent date.

A company is not currently subject to the compliance periods set forth in the Late Filer Rule in connection with a failure to timely file a quarterly report on Form 10-Q with the SEC.  The NYSE now proposes to extend the application of the rule to the late filing of Form 10-Qs.

In addition, the NYSE proposes to clarify its treatment of listed companies that file defective reports.  The proposed rule change would apply to an NYSE listed company:

· that files its annual report without an audit report from its independent auditor for any or all of the periods included in such annual report;

· whose independent auditor withdraws a required audit report or the company files a Form 8-K with the SEC pursuant to Item 4.02(b) thereof disclosing that it has been notified by its independent auditor that a required audit report or completed interim review should no longer be relied upon; or

· that files a Form 8-K with the SEC pursuant to Item 4.02(a) thereof to disclose that previously issued financial statements should no longer be relied upon because of an error in such financial statements or, in the case of a foreign private issuer, makes a similar disclosure in a Form 6-K.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

SEC Commissioner Daniel M. Gallagher and Joseph A. Grundfest, Stanford Law School, Rock Center for Corporate Governance, have just published a paper titled “Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors.”

According to the paper, the Harvard Shareholder Rights Project, or the Harvard SRP, has played a central role in the debate over classified boards, and claims to have contributed to the declassification of boards at about 100 S&P 500 and Fortune 500 companies.  The Harvard SRP uses the shareholder proposal mechanism under Rule 14a-8 to pressure boards to declassify.

According to the paper, the proposal submitted by the Harvard SRP on at least 129 occasions, or the Harvard Proposal, relies substantially on empirical academic research to support the proposition that classified boards are associated with inferior corporate financial performance and shareholder valuations.  The authors state the Harvard Proposal is categorical in its description of the literature as suggesting no exception to the proposition that declassification benefits shareholders.

Gallagher and Grundfest posit these questions:  Is the Harvard Proposal’s characterization of the empirical evidence accurate? Or, to frame the question in a more pointed manner, is the Harvard Proposal materially false or misleading in violation of Rule 14a-9? Materiality, the authors believe, “does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote.”  Instead, the test for the materiality of an omission in a voting context is whether there is “a substantial likelihood that a reasonable shareholder would consider [the information] important in deciding how to vote.” The authors believe in the context of a vote to de-classify a board, the significance of the empirical research is clear: if declassification categorically improves a corporation’s financial performance then a reasonable shareholder would likely consider that information as important to a voting decision.

The paper states the Harvard Proposal, and its description of the literature, could, however, be viewed as materially false and misleading, at least as of January 2014,29 for at least two distinct reasons:

  • The Harvard Proposal’s description of the relevant empirical literature is severely incomplete. At least five recent studies conclude that classified boards are associated with inferior financial performance [Blogger’s note: There appears to be a mistake in the summary, as other parts of the paper refer to “improved financial performance.”], and that declassification is harmful to shareholder interests. These studies are emphatic that the research relied upon by the Harvard Proposal is in error.  None of these studies, however, are cited in the Harvard Proposal. The Harvard Proposal can therefore be criticized as cherry picking the literature in order to generate the false and misleading impression that the data supporting its position are far stronger than is in fact the case.
  • Recent research concludes that classified boards have heterogeneous effects and identifies specific sub-categories of firms at which the effects of classified boards are more likely to be beneficial.  The Harvard Proposal’s categorical assertion opposing classified boards fails to admit the possibility of such heterogeneity. It therefore also fails to consider the possibility that some companies that declassify in response to pressure from the Harvard SRP are within the category of firms at which classified boards are more likely to have beneficial effects and that shareholders may therefore be harmed by the success of the Harvard Proposal.

Gallagher and Grundfest then seek to establish the culpability of Harvard:  “Here, the potentially false and misleading nature of the Harvard Proposal exposes Harvard, as a university, to liability in SEC enforcement proceedings, as well as in private actions alleging violations of Rule 14a-9. The Courts of Appeal have held that negligence establishes the requisite culpability for purpose of Rule 14a-9, and a straightforward analysis supports the conclusion that it is negligent for the Harvard SRP not to be aware of — or, if it is aware, to not address — contradictory studies that are broadly disseminated among academics.”

Next the authors blame the SEC: “Rather than act as an arbiter of accuracy or materiality, the staff prefers that the company address potential misrepresentations or omissions in its response in the proxy statement. This approach is, we fear, an abdication of responsibility by the Commission, not its Staff, that damages the integrity of the proxy process and places an unnecessary burden on registrants forced to respond to potentially misleading proxy statements.  It also reflects a fundamental misapprehension of the operation of Rule 14a-8. “[U]se of the statement in opposition is sometimes an incomplete remedy” and “[t]aking valuable space to correct misstatements distracts from a substantive discussion about the proposal itself….” Litigating to exclude a proposal is also more time consuming and expensive than seeking a no-action request.   Moreover, if proponents anticipate that the Commission Staff will refuse to grant no action relief to exclude false or misleading proposals then proponents have diminished incentives to ensure the accuracy of their statements. . . The articulated defense of this position is that a “hands-off” policy helps conserve “the extensive Staff resources that were being consumed in their line-by-line review of shareholder proposals.”  However, after years of passivity, the danger arises that “the pendulum has swung too far in the direction of non-intervention.”

No commentary is this area can be complete without a reference to “broken windows:”  “The “hands-off” policy with regard to the integrity of Rule 14a-8 proposals is also at odds with the SEC Chair’s recently announced “broken windows” enforcement policy, which is based on the theory that “minor violations that are overlooked or ignored can feed bigger ones, and, perhaps more importantly, can foster a culture where laws are increasingly treated as toothless guidelines.”

I’m normally a fan of Commissioner Gallagher, believe staggered boards have their place, particularly with small and mid-cap companies, and think that the Rule 14a-8 process is often abused by shareholder proponents and is counterproductive.  But I wonder what good can really come from a sitting Commissioner undertaking this detailed attack.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

On November 3, 2014, the SEC, MSRB and FINRA held a compliance outreach program for municipal advisors. The SEC has made an unofficial transcript of the event available here.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The SEC and PCAOB collectively charged 15 audit firms for violating independence requirements in connection with audits of broker dealers.  Under SEC independence rules, which apply to audits of broker-dealers whether or not they are public companies, preparation of the financial statements filed with the Commission is a non-audit service that impairs the auditor’s independence from the audit client.

The SEC investigations found that eight audit firms, which agreed to settle the cases, generally took data from financial documents provided by clients during audits and used it to prepare their financial statements and notes to the financial statements.  Under auditor independence rules, firms cannot jeopardize their objectivity and impartiality in the auditing process by providing such non-audit services to audit clients.  According to the SEC, by preparing the financial statements, these particular firms essentially put themselves in the position of auditing their own work, and they inappropriately aligned themselves more closely with the interests of clients’ management teams in helping prepare the books rather than strictly auditing them.

The results of the seven PCAOB investigations were similar.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The SEC has filed its brief in the conflict minerals rehearing.  Amnesty International also filed its brief as intervenor and Free Speech for People filed an amicus brief.

To recap, when the court held the conflict minerals rule was compelled speech that violated the First Amendment, it did so on the basis that limited scrutiny under Zauderer was not appropriate because that was reserved for situations involving the deception of consumers.  Subsequently, an en banc court found in American Meat Inst. that other government interests outside of consumer deception could support the application of Zauderer.  For Zauderer to apply the commercial disclosure must be of purely factual and uncontroversial information.

To further frame the issue, is a compelled statement that products have not been found to be “DRC conflict free” purely factual and uncontroversial information?

According to the SEC, the key question is whether the disclosure at issue is consistent with the First Amendment interest in facilitating the free flow of factual information or, rather, trenches upon First Amendment principles by requiring a speaker to convey or endorse an opinion.  The mere fact that the speaker objects to making a factual disclosure does not make it controversial, at least in the SEC’s view.

And from there it is easy to see where this will go.  The SEC maintains the disclosure is one of “literal fact” about whether an issuer has found its products to meet a defined standard.  It merely states whether a particular issuer’s products have been found to meet the statutory standard.

The SEC also notes NAM’s view that description required by the conflict minerals rule “reflects a government viewpoint that the mineral trade bears responsibility for causing the DRC conflict” and that the definition of “DRC conflict free” is “pregnant with political and ideological conclusions and connotations.”

Maybe the most clever point was made by Free Speech for People.  It notes nothing in the statute or the rule requires any speaker to use any variant of the term “DRC conflict free.”  You can comply with Form SD with a statement as simple as “the following products are required to be disclosed pursuant to 15 U.S.C. § 78m(p)(1)(A)(ii) and its implementing rule” followed by a description of the products—such as “Model XYZ handheld cameras manufactured between Dates A and B.”

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.