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

There has been somewhat of a controversy surrounding the SEC’s rulemaking in connection with Regulation A+ under the JOBS Act.  Should larger Tier 2 offerings preempt state blue sky regulation (my preference) or be subject to state blue sky regulation (the state regulators’ preference)?  To make state regulation an easier pill to swallow, the North American Securities Administrators Association, or NASAA, previously announced that it adopted a streamlined multi-state review protocol to ease regulatory compliance costs on small companies attempting to raise capital under the JOBS Act.

The first and only issuer has apparently completed a NASAA Coordinated Review in connection with an existing offering under the existing, but rarely used, Regulation A.  Following completion of the review, the issuer filed a comment letter with respect to the Regulation A+ rulemaking with the SEC.

Among other things, the issuer noted “the Coordinated Review program has created value by defining concrete service standards. For us, the value of receiving comments in a timely fashion outweighs the marginal costs of filing in multiple states. The legal certainty this affords is substantial, and does not exist in federal review. The uniform application of NASAA’s Statements of Policy has been very helpful, and we have been able to comply with these policies despite the presence of certain conditions within our company which pertain to these policies.”

Upon learning about the comment letter, members of the House Financial Services Committee, Maxine Waters (D-CA) and Stephen Lynch (D-MA), sent SEC Chair Mary Jo White a letter.  The letter asks the SEC to study NASAA’s Coordinated Review program, and not undermine crucial investor protections by preempting the states’ regulators.

You can find the issuer’s comment letter and the letter to Chair White 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 United States District Court for the District of Delaware held that the SEC was incorrect when it rendered a no-action letter permitting exclusion of a shareholder proposal submitted under Rule 18a-8 in Trinity Wall Street v Wal-Mart Stores, Inc.  Wal-Mart had argued to the SEC that the proposal was excludable under Rule 14a-8(i)(7) as a matter related to ordinary business operations.

The proposal requested that the charter of Wal-Mart’s Board of Directors’ Compensation, Nominating and Governance Committee (“Committee”) be amended to add the following to the Committee’s duties:

“27.  Providing oversight concerning the formulation and implementation of, and the public reporting of the formulation and implementation of, policies and standards that determine whether or not the Company [i.e., Wal-Mart] should sell a product that:

1) especially endangers public safety and wellbeing;

2) has the substantial potential to impair the reputation of the Company; and/or

3) would reasonably be considered by many offensive to the family and community values integral to the Company’s promotion of its brand.”

The narrative portion of the proposal stated that the oversight and reporting duties extend to determining “whether or not the company should sell guns equipped with magazines holding more than ten rounds of ammunition (‘high capacity magazines’) and to balancing the benefits of selling such guns against the risks that these sales pose to the public and to the Company’s reputation and brand value.”

The court began its analysis by focusing on language in a prior SEC release which stated “However, proposals relating to such matters but focusing on sufficiently significant social policy issues (e.g., significant discrimination matters) generally would not be considered to be excludable, because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.”

The court noted significant social policy issues on which the proposal focuses include the social and community effects of sales of high capacity firearms at the world’s largest retailer and, according to the court,  the impact this could have on Wal-Mart’s reputation, particularly if such a product sold at Wal-Mart is misused and people are injured or killed as a result. Accordingly, the court concluded the proposal implicates significant policy issues that are appropriate for a shareholder vote.

The court believed Trinity had carefully drafted its proposal. According to the court it did not dictate what products should be sold or how the policies regarding sales of certain types of products should be formulated or implemented. The court referred to Trinity’s explanation that the proposal intentionally ensures that any day-to-day decision-making concerning the matters raised in the proposal is reserved to the management of Wal-Mart pursuant to policies created by management with board oversight.

The proposal had been submitted in connection with Wal-Mart’s 2014 annual meeting, and the court had previously refused to grant a preliminary injunction preventing Wal-Mart from distributing its proxy statement.   The court noted that Wal-Mart’s conduct was “capable of repetition” and enjoined Wal-Mart from relying on Rule 14a-8(i)(7) to exclude the proposal from its 2015 proxy statement.

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 Kara M. Stein gave a speech where she described a recently granted Rule 506 bad actor waiver.  According to Ms. Stein, “The waiver was for a limited time, and only if certain conditions were met, creating essentially a probationary period for the firm with a right to reapply after a second showing of good cause.  And the conditions are important.  For example, the recent case included a review by an independent compliance consultant, and a document signed by the principal executive or principal legal officer when the consultant’s recommendations have been implemented.  These conditions will focus and empower management to change behavior throughout the corporate culture.”

The waiver described is a departure from plain vanilla waivers granted in the past without any conditions.  I never considered those waivers a wrist slap because the bad conduct was appropriately sanctioned in the relevant proceeding and often the waiver is necessary for a normally law abiding entity to continue to do business.

Some may have surmised that the waiver Ms. Stein was referring to was an outlier, because it was rumored the SEC was deadlocked because one Commissioner was recused.  So perhaps conditions were piled on to avoid deadlock.

But Ms. Stein doesn’t see it as a one-time thing but as a new model.  According to Ms. Stein “This approach represents a breakthrough in the Commission’s method of handling waivers, and I hope to see more of this and other thoughtful approaches in the future.”  She also remarked “Each waiver request should receive an individualized, detailed, and careful analysis based on all of the relevant facts and the particular waiver policy.”

Ms. Stein also noted  “Our waiver policies should be clear and public.  Both companies and investors are entitled to know when a firm or individual may, for good cause, be allowed to avoid disqualification.” With that we can all agree.

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 Dodd-Frank Wall Street Reform and Consumer Protection Act established the Office of Financial Research, or OFR, within the Treasury Department to improve the quality of financial data available to policymakers and to facilitate more robust and sophisticated analysis of the financial system.

OFR recently published its 2014 annual report.  According to OFR, although overall risks to financial stability are not particularly elevated compared to the pre-crisis period, some have clearly intensified over the past year. One particular concern is market risk, which is the vulnerability of investor portfolios to large losses because of unanticipated adverse movements in interest rates, exchange rates, and other asset prices. OFR analysis also shows elevated risks among nonfinancial corporations in the United States because of relaxed lending standards, lower credit quality, higher debt levels in relation to total assets, and thinner cushions to counteract shocks. Market liquidity risks have also increased, in part reflecting structural changes in the way liquidity is provided.

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 granted Whole Foods no action relief to exclude a proxy access proposal submitted under Rule 14a-8.  The proponent’s proposal sought a non-binding shareholder resolution to request that the Whole Food’s Board of Directors (the “Board”) amend the company’s governing documents to implement proxy access for director nominations. Under the proponent’s proposal, any shareholder or group of shareholders that collectively hold at least 3% of the Whole Food’s shares continuously for three years would be permitted to nominate candidates for election to the Board, and the company would be required to list such nominees with the Board’s nominees in the company’s proxy statement. Under the proponent’s proposal, shareholders would be permitted to nominate up to 20% of the company’s Board, or not less than two nominees if the Board size is reduced.

However, the Whole Foods Board had determined to submit a proposal to shareholders at the 2015 annual meeting with respect to proxy access for director nominations. Specifically, the Board intends to seek shareholder approval of amendments to the company’s Amended and Restated Bylaws to permit any shareholder (but not a group of shareholders) owning 9% or more of the company’s common stock for five years to nominate candidates for election to the Board and require the company to list such nominees with the Board’s nominees in the company’s proxy statement.

Whole Foods successfully argued the proponent’s proposal may properly be excluded from the 2015 proxy materials pursuant to Rule 14a-8(i)(9) because the proponent’s proposal directly conflicts with a proposal to be submitted by Whole Foods in its 2015 proxy materials.  Under existing SEC precedent, a company may exclude a shareholder sponsored proposal where it seeks to address a similar right or matter as is covered by a company-sponsored proposal even if the terms of the two proposals are different or conflicting (e.g., the ownership percentage threshold of the shareholder-sponsored proposal is different from the ownership percentage threshold included in the company-sponsored proposal).

For now, we will celebrate with issuers the Whole Foods’ victory.  That may be short lived for a number of reasons.  ISS may now or in the future recommend against the company proposal or its directors for adopting the company proposal.  In addition, shareholder proposals could be submitted in future years under the theory that the new proposal has not been substantially implemented.  There could be back lash from institutional investors, like the New York City pension funds.  Or the SEC could amend Rule 14a-8 to provide for a different result.

In fact, shareholder proponent James McRitchie stated “Of course, I can come back next year and submit another proxy access proposal but they can easily counter with a simple modification of their bylaws, once adopted – a single shareholder holding 8.95% for five years.”  He also said “The SEC’s decision doesn’t mean the end of proxy access. I’m sure New York City Comptroller Scott M. Stringer and others will continue to submit proposals on a company by company basis, as will I.”

Stay tuned.

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 Loan Syndications and Trading Association, or LSTA, is a not-for-profit trade association representing members participating in the syndicated corporate loan market.   The LSTA has petitioned the United States Court of Appeals for the District of Columbia for review of the SEC and the Fed’s rules relating to credit risk retention and Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The LSTA challenges the rules as “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” and as “in excess of statutory jurisdiction, authority, or limitations.”

Maybe, but maybe the appropriate forum is the District Court.  Both the resource extraction and conflict minerals rule challenges were brought in the Court of Appeals but ended up in the District Court.

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 CFTC issued a no-action letter providing further relief for eligible treasury affiliates that enter into swaps that are subject to the clearing requirement in section 2(h)(1) of the Commodity Exchange Act, or CEA, and part 50 of the CFTC’s regulations. The no-action letter modifies relief that was previously issued for treasury affiliates on June 4, 2013 in CFTC No-Action Letter 13-22.

As in No-Action Letter 13-22, the letter provides relief from required clearing for “eligible treasury affiliates” that are wholly-owned by a non-financial parent company, and are “financial entities” under section 2(h)(7)(C)(i)(VIII) of the CEA because of the activities undertaken on behalf of its non-financial affiliates.

The revised no-action letter provides further relief to non-financial corporate groups and their treasury affiliates. Among other changes, the letter:

  • Amends requirements placed upon operations between a treasury affiliate and its affiliates.
  • Removes restrictions as to the number of financial affiliates that may be within the corporate group.
  • Allows treasury entities affiliated with nonbank financial companies designated as systemically important by the Financial Stability Oversight Council to elect the relief subject to certain conditions.

For an eligible treasury affiliate seeking to elect the relief from required clearing, the swap activity must still meet several conditions, including that the eligible treasury affiliate enters into the swaps for the sole purpose of hedging or mitigating the commercial risk of one or more non-financial affiliates.

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 CFTC previously granted family offices no-action relief from registration as commodity pool operators.  That letter did not provide an exemption from registration as a commodity trading advisor.  However, the CFTC has also issued a no-action letter providing family offices relief from commodity trading advisor registration, in connection with advisory services they provide to family clients.

In order to receive relief, a family office must submit a claim to the CFTC and remain in compliance with the exclusion for family offices from the definition of investment adviser adopted by the Securities and Exchange Commission in 2011.

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 CFTC has published an important proposed clarification to its seven element test regarding forward contracts with embedded volumetric optionality (EVO). The proposed interpretation provides that a contract for deferred delivery of a physical commodity (i.e., a forward contract) that contains EVO will fall within the forward contract exclusion, and thus not be regulated as an option (despite the embedded “optionality”) under the CFTC’s swaps or futures regulatory regimes, when:

1. The embedded optionality does not undermine the overall nature of the agreement, contract, or transaction as a forward contract;

2. The predominant feature of the agreement, contract, or transaction is actual delivery;

3. The embedded optionality cannot be severed and marketed separately from the overall agreement, contract, or transaction in which it is embedded;

4. The seller of a nonfinancial commodity underlying the agreement, contract, or transaction with embedded volumetric optionality intends, at the time it enters into the agreement, contract, or transaction to deliver the underlying nonfinancial commodity if the embedded volumetric optionality is exercised;

5. The buyer of a nonfinancial commodity underlying the agreement, contract or transaction with embedded volumetric optionality intends, at the time it enters into the agreement, contract, or transaction, to take delivery of the underlying nonfinancial commodity if the embedded volumetric optionality is exercised;

6. Both parties are commercial parties; and

7. The embedded volumetric optionality is primarily intended, at the time that the parties enter into the agreement, contract, or transaction, to address physical factors or regulatory requirements that reasonably influence demand for, or supply of, the nonfinancial commodity.

Proposed Fix to the Problematic Seventh Element

The proposed test would replace the currently effective seven-element test, which was issued in the CFTC’s 2012 rulemaking that set forth a definition of the term “swap.” The seventh element in the current test has been criticized by numerous industry groups and market participants (particularly in the energy industry) as unworkable–largely because of its explicit focus on the “exercise or non-exercise” of the EVO in a contract. Many consider this to require analysis of contracting parties’ intent at the time of exercise or non-exercise of the EVO (as opposed to the time of execution of the underlying contract), a task that is considered fraught with uncertainty and unpredictability—to the point that many consider reliance on counterparty representations to be untenable.

The proposed revision to the seventh element seems to largely fix this issue. The CFTC is proposing to remove the reference to the “exercise or non-exercise” of the EVO. By removing this language, the CFTC “intends to clarify that the focus of the seventh element is intent with respect to the embedded volumetric optionality at the time of contract initiation.” Thus, as long as the intended purpose for including EVO at the time of contract execution is to address physical factors or regulatory requirements influencing the demand for or supply of the commodity, the ultimate reason for exercise or non-exercise of the EVO (even if it ultimately turns out to be price) should be irrelevant. The CFTC also further advises that commercial parties “may rely on counterparty representations with respect to the intended purpose for embedding volumetric optionality in the contract, provided they are unaware, and should not reasonably have been aware, of facts indicating a contrary purpose.”

The proposed interpretation clarifies that parties having some influence over factors affecting their demand for or supply of the nonfinancial commodity (e.g., the scheduling of plant maintenance, plans for business expansion) should not be considered inconsistent with the seventh element, provided that the EVO is included in the contract at initiation “primarily to address potential variability in a party’s supply of or demand for the nonfinancial commodity.” It also clarifies that the term ‘‘physical factors’’ should be construed broadly to include any fact or circumstance that could reasonably influence supply of or demand for the nonfinancial commodity under the contract—including not only environmental factors, such as weather or location, but relevant ‘‘operational considerations’’ (e.g., the availability of reliable transportation or technology) and broader social forces, such as changes in demographics or geopolitics. Concerns that are primarily about price risk (e.g., that the cash market price will increase or decrease) at the time of contract initiation will not satisfy the seventh element, but the CFTC clarified that even such price risk concerns at initiation may satisfy the test if they are motivated by an applicable regulatory requirement to obtain or provide the lowest price (e.g., if the buyer is an energy company regulated on a cost-of-service basis).

To many industry groups and market participants, the proposed clarification, by narrowing the sweep of CFTC swap regulation to contracts that are more “derivative” or “speculative” in nature, restores the scope of CFTC swap/option regulation to what they believe Congress envisioned in passing the Dodd-Frank Act. To be sure, the new test seems likely to exclude many widely used contracts containing EVO that have generally been viewed as run-of-the mill forward contracts that merely provide commercially reasonable flexibility with respect to delivery volume in order to address uncertain supply and demand conditions. As such, the proposed interpretation is an extremely welcome development to market participants in physical commodity-based industries.

Proposed Fixes to Fourth and Fifth Elements (Extension to “Puts”)

The CFTC also revised the fourth and fifth elements in a manner that appropriately addresses “put” optionality, as opposed to just “call” optionality.

Comment Period

Comments on the proposed interpretation must be received by the CFTC on or before December 22, 2014.

Under Current NASDAQ Rule 5810(c)(1), NASDAQ staff is required to issue a delisting determination, subjecting the company to immediate suspension and delisting, if a company fails to solicit proxies and hold its annual meeting as required by Rule 5620. The NASDAQ staff has no discretion to allow additional time for the company to regain compliance.

NASDAQ proposes to amend Rule 5810(c) to provide its staff with limited discretion to provide a listed company that failed to solicit proxies and hold its annual meeting of shareholders an extension of time to comply with those requirements.

NASDAQ notes that the only other circumstance under which a company is subject to immediate suspension and delisting is when the NASDAQ staff makes a determination pursuant to the Rule 5100 Series that the company’s continued listing raises a public interest concern. That determination generally is made only following discussion and review of the facts and circumstances with the company. For all other deficiencies under the Rule 5000 Series, a listed company is provided with either a fixed compliance period within which to regain compliance, or given the opportunity to submit a plan to regain compliance, which staff reviews and can allow the company additional time to implement.

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.