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

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.

The CFPB took its first action against a “buy-here, pay-here” car dealer.   The CFPB alleged that the dealer, DriveTime, harmed consumers by making harassing debt collection calls and providing inaccurate credit information to credit reporting agencies. DriveTime agreed to pay $8,000,000 as a civil money penalty, end its unfair debt collection tactics, fix its credit reporting practices, and arrange for harmed consumers to obtain free credit reports.  DriveTime did not admit or deny the facts in the consent order with the CFPB.

The CFPB believes Arizona-based DriveTime Automotive Group, Inc. and its finance company, DT Acceptance Corporation, make up the largest buy-here, pay-here car dealer in the nation. Buy-here, pay-here means that the dealer sells the car as well as originates and services the auto loan. Buy-here, pay-here dealers typically target subprime borrowers.

According to the CFPB, at least 45 percent of DriveTime’s auto installment contracts were delinquent at a given time. When DriveTime consumers fell behind on their installment payments, DriveTime’s extensive collections operation began calling them. DriveTime had at least 290 collection employees in two domestic call centers and 80 contractors in Barbados. These employees and contractors placed tens of thousands of collection calls each weekday. At the end of 2013, DriveTime had approximately 69,000 installment contracts past due that these employees would have been calling about.

The CFPB found that DriveTime violated federal consumer financial laws and harmed consumers through illegal actions such as:

  • Harassing borrowers at work: DriveTime collectors often called borrowers at work, and DriveTime management encouraged these calls. Several consumers requested that DriveTime not call them at work but DriveTime kept calling anyway. For example, one consumer was called 30 times at work after her do-not-call request.
  • Harassing borrowers’ references: DriveTime required consumers to provide the names and phone numbers of at least four references when they applied for financing. When consumers fell behind on their payments, DriveTime called these references. Many borrowers and references requested that DriveTime no longer make these calls, but DriveTime did not stop. Some references complained that DriveTime collectors called them for months after they had requested that the company stop. The CFPB determined that this practice was unfair to consumers.
  • Making excessive, repeated calls to wrong numbers: To reach consumers who fell behind, DriveTime frequently used third-party databases to find new phone numbers. These databases were often wrong. Upon receiving DriveTime’s calls, numerous third parties told DriveTime they had the wrong number and requested that DriveTime stop calling them. Despite such requests, DriveTime continued to make these calls. In some cases, DriveTime called these wrong numbers for over a year before stopping.

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.

 

One of the most frequent questions we get this time of year is issuers asking whether there are any needed updates to director and officer questionnaires.  Necessary modifications are usually driven by changes to stock exchange corporate governance rules or changes to SEC disclosure requirements (at least as of the date of this posting).  There have not been any changes since the latest proxy season so it is not necessary in most circumstances to update questionnaires.

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.

In its 2014 Report to Congress on the Dodd-Frank Whistleblower Program, the SEC described the profile of successful whistleblowers. Because the SEC must keep the identity of whistleblowers confidential, it can only describe certain commonalities which included:

  • The information provided by each award recipient was specific, in that the whistleblower identified particular individuals involved in the fraud, or pointed to specific documents that substantiated their allegations or explained where such documents could be located.
  • The alleged misconduct was relatively current or ongoing. Because of the specific, credible, and timely nature of their tips, their information was forwarded to Enforcement staff, who followed up by contacting the whistleblowers. These whistleblowers then provided additional information or assistance to the staff during the course of the investigation.
  • Over 40% of the individuals who received awards were current or former company employees. Furthermore, an additional 20% of the award recipients were contractors, consultants, or were solicited to act as consultants for the company committing the securities violation.
  • Of the award recipients who were current or former employees, over 80% raised their concerns internally to their supervisors or compliance personnel before reporting their information of wrongdoing to the Commission.
  • If represented by counsel, a whistleblower may choose to submit his or her tip anonymously to the Commission. However, only one of the fourteen award recipients to date submitted the information anonymously.

Other Interesting information in the report includes:

  • The SEC received 3,620 whistleblower tips in 2014, compared to 3,238 in 2013.
  • Consistent with prior years, the most common allegations are corporate disclosures and financials, offering fraud, and manipulation (excluding the category of “other”).
  • Domestically most tips come from California, and internationally from India and the United Kingdom.

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 Court of Appeals for the District of Columbia has granted the petition for a panel rehearing (as opposed to an en banc rehearing) in the conflict minerals case.  The court asked the parties to file briefs which address the following questions:

  • What effect, if any, does this court’s ruling in American Meat Institute v. U.S. Department of Agriculture, 760 F.3d 18 (D.C. Cir. 2014) (en banc), have on the First Amendment issue in this case regarding the conflict mineral disclosure requirement?
  • What is the meaning of “purely factual and uncontroversial information” as used in Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626 (1985), and American Meat Institute v. U.S. Department of Agriculture, 760 F.3d 18 (D.C. Cir. 2014) (en banc)?
  • Is determination of what is “uncontroversial information” a question of fact?

The court also ordered the petitions for en banc rehearing be deferred pending disposition of the panel rehearing.

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 issued a no-action letter on November 13, 2014 to Social Finance, Inc., indicating that it would not recommend enforcement action against Social Finance for its conduct as an intermediary in social impact bond (SIB) projects.

SIB Programs

The basic concept underlying SIB programs, also sometimes called “pay for success” programs, is that private investors provide the financing for some social services program that has a specified goal, such as reducing the recidivism rate at a particular prison. The private investors are paid no return (and may not even be repaid their principal) if the stated goal is not achieved. On the other hand, if the goal is achieved, the investors are entitled to some return, which can be based on a sliding scale that corresponds to some measure of the program’s success. Social impact bond intermediaries are the companies that coordinate and oversee the projects, including by arranging the financing and managing service providers that will be providing the actual services that are intended to achieve the goal. This Forbes article has some good background on how social impact bonds work (and on Social Finance, which it describes as “the pre-eminent social impact bond intermediary worldwide”). SIB programs were pioneered in the UK, and now several U.S. states are experimenting with SIB programs and bipartisan federal legislation was introduced this summer, the Social Impact Bond Act, which would allocate $300 million in federal funding to SIB projects.

Social Finance’s Activities

Social Finance indicated in its request that its activities would include identifying investors who might be interested in purchasing LLC or limited partnership interests in special purpose vehicles that pool money for investment in SIB programs. The securities would be issued to accredited investors in private placements. The special purpose vehicle would deliver the funds to a service provider that would be tasked with performing the primary work. In its role as an intermediary, Social Finance would be involved in identifying particular initiatives that may be a good match for an SIB program, performing due diligence to understand the proposed intervention, projecting cash flows, assessing and monitoring service providers, selecting service providers, and working with an administrator on the distribution of funds to service providers. Social Finance would also have a role in “pricing and managing the risks of the SIB.” However, evaluation of whether the goal of an SIB program had been achieved, such that investors were entitled to a return, would be handled by an independent third party.

SEC No-Action Letter

Social Finance requested confirmation that the SEC would not recommend enforcement against Social Finance or its employees for violations of Section 15(a) of the Securities Act of 1933 (being engaged in the business of effecting transactions in securities without being a registered broker-dealer). The SEC agreed that it would not recommend enforcement. As usual, the SEC noted that its views should not be construed as evidence of any SEC position outside of the specific factual circumstances presented by Social Finance.

Assuming for purposes of the no-action letter that the investments in SIB projects were in fact “securities” within the definition of the Securities Act, the SEC noted the following significant factors:

  • Social Finance intends to earn fees for its services, including intermediation management fees and service outcome fees. The management fees would compensate Social Finance for performance monitoring and management, quarterly reporting to investors, and answering investor questions. The outcome fee would provide a stated payment to Social Finance based on whether the goal of the SIB program has been met, as determnined by anindependent evaluator.
  • The fees to be received by Social Finance, including any outcome fees, would not constitute compensation based on sales of securities, because the fees would be based on services performed by Social Finance or on the achievement of a positive social outcome, rather than on the number or value of securities.
  • The “matching” of investors with SIB projects would constitute only a small portion of the larger portfolio of services provided by Social Finance.
  • Social Finance would not handle investor funds or securities.
  • Certain employees of Social Finance would serve as officers, directors, employees, or managing members of a special purpose vehicle, but their compensation would be fully paid by Social Finance rather than by the special purpose vehicle.

Note that although Social Finance has some assurance that it won’t be the target of enforcement action for violating Section 15(a) of the Securities Act, several states (including Minnesota) have enacted legislation that regulates, and requires the registration of, agents or finders in connection with the sale of securities in circumstances in which Section 15(a) is not implicated.

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 and Franklin Loan Corporation have asked a federal court to approve a consent order regarding alleged violations by Franklin Loan of the loan originator compensation rule. Franklin Loan did not admit or deny the allegations in the CFPB’s complaint.

The CFPB alleged from June 2011 to October 2013, Franklin Loan paid at least $730,000 in quarterly bonuses to 32 loan officers based in part on the interest rates on the loans they provided to borrowers; the higher the interest rate of the loans closed during the quarter, the higher the loan officer’s quarterly bonus.

The CFPB found that these bonus payments violated the Federal Reserve Board’s loan originator compensation rule, which the Bureau has enforced since July 21, 2011. The rule prohibits mortgage lenders from paying loan officers based on loan terms such as interest rate. The CFPB believes Franklin Loan violated the rule by tying its loan officers’ quarterly bonuses to the interest rates on the loans they offered to borrowers.

This is the second CFPB action related to the loan originator compensation rule.  You can find information on the first violation 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 Court of Appeals for the Fifth Circuit held that revealing a whistleblower’s identity is prohibited retaliation under the Sarbanes-Oxley Act in Halliburton, Inc. v. Administrative Review Board, United States Department of Labor.

The facts were pretty straightforward.  Anthony Menendez, an employee of Halliburton, used the company’s internal procedures to submit a complaint to management about what he thought were “questionable” accounting practices. Menendez also lodged a complaint about the company’s accounting practices with the SEC, which led the SEC to contact Halliburton and instruct it to retain certain documents during the pendency of the SEC’s investigation. When Halliburton received the SEC’s notice of the investigation, the company inferred from Menendez’s internal reports that Menendez must have reported his concerns to the SEC too. Halliburton sent an email to Menendez’s colleagues that instructed them to start retaining certain documents because “the SEC has opened an inquiry into the allegations of Mr. Menendez.” Once his identity as the whistleblower was disclosed, Menendez’s colleagues, whom he had essentially accused of fraud, began treating him differently, generally refusing to work and associate with him.

Before getting into legal matters, it is important to note that the SEC concluded that no enforcement action against Halliburton was recommended. Apparently one lesson is Mr. Menendez was still entitled to the protections afforded by the Sarbanes-Oxley Act to whistleblowers.

Setting aside the detailed procedural history, the Administrative Review Board ultimately concluded that Halliburton was liable for retaliation.  Halliburton challenged the Review Board’s conclusions that:

  • Menendez suffered an “adverse action” when the company disclosed his identity as the whistleblower to his colleagues, and
  • Menendez’s protected activity was a “contributing factor” in the disclosure, as that element should be understood.

The court found under existing case law that a SOX anti-retaliation claim requires an “adverse action” which is an action harmful enough that it well might have dissuaded a reasonable worker from engaging in statutorily protected whistleblowing.  The court upheld the Review Board’s determination, noting the following:

“The undesirable consequences, from a whistleblower’s perspective, of the whistleblower’s supervisor telling the whistleblower’s colleagues that he reported them to authorities for what are allegedly fraudulent practices, thus resulting in an official investigation, are obvious. It is inevitable that such a disclosure would result in ostracism, and, unsurprisingly, that is exactly what happened to Menendez following the disclosure. Furthermore, when it is the boss that identifies one of his employees as the whistleblower who has brought an official investigation upon the department, as happened here, the boss could be read as sending a warning, granting his implied imprimatur on differential treatment of the employee, or otherwise expressing a sort of discontent from on high.”

Next, Halliburton contended that, as a matter of law, it is not enough that the protected conduct be a “contributing factor” in the employer’s adverse action.  Rather, according to Halliburton, an employee must prove a “wrongfully-motivated causal connection.”  The court rejected this contention, noting that it was unaware of any court that has held that, in addition to proving that the employee’s protected conduct was a “contributing factor” in the employer’s adverse action, the employee must prove that the employer had a “wrongful motive” too.

The court also held that Sarbanes-Oxley also permits an award of noneconomic compensatory damages, including awards for emotional distress and reputational harm.

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.

New York City Comptroller Scott M. Stringer, on behalf of the $160 billion New York City Pension Funds, has submitted proxy access shareowner proposals to 75 companies.  The proposals request a bylaw to give shareowners who meet a threshold of owning three percent of a company for three or more years the right to list their director candidates, representing up to 25 percent of the board, on a given company’s ballot.

The 75 companies were selected based on three priority issues: climate change, board diversity and excessive CEO pay.  While some companies met multiple screening criteria, resolutions were filed at:

  • 33 carbon-intensive coal, oil and gas, and utility companies;
  • 24 companies with few or no women directors, and little or no apparent racial or ethnic diversity; and
  • 25 companies that received significant opposition to their 2014 advisory vote on executive compensation.

According to a Georgeson report, the number of proxy access proposals grew in 2014. There were 13 proxy access proposals submitted to a vote during the 2014 proxy season, up from 11 in 2013. Support rose significantly from an average of 31.7% of votes cast in 2013 to 39.1% of votes cast in 2014, the largest such increase of any proposal this year. In addition, the number of proposals receiving majority support doubled from three in 2013 to six in 2014.

The Georgeson report further notes that institutions were less supportive of proposals that would afford proxy access rights for a collective group of holders who own 1% of the total outstanding shares for a continuous period of one year. In 2014, there were four proposals of the sort, which averaged a mere 4.8% of votes cast in support. In contrast, support for proposals that sought proxy access rights for a nominator who owns 3% of the company total outstanding shares for a continuous period of three years averaged 55.7% of votes cast in favor, with six of eight proposals receiving majority support.

ISS’s policy it to make a recommendation on a  case-by-case on proposals to enact proxy access, taking into account, among other factors:

  • Company-specific factors; and
  • Proposal-specific factors, including:
    • The ownership thresholds proposed in the resolution (i.e., percentage and duration);
    • The maximum proportion of directors that shareholders may nominate each year; and
    • The method of determining which nominations should appear on the ballot if multiple shareholders submit nominations

It’s likely many of these proposals may succeed.  The recipients have a tough choice to make – adopt the by-law or put it to a vote.  If successful, others who wish to advance other issues are likely to file many more such proposals in the future.

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.

In a settled enforcement action, the SEC alleged the defendant failed to implement procedures reasonably designed to prevent U.S. persons from accessing and investing in securities through its crowdfunding website.  The defendant operated a global, online, securities-based, crowdfunding platform that connects issuers with investors to raise funds in exchange for equity. Its website hosted offerings of securities from non-U.S. based companies.

Visitors to the website were permitted access to the names of the offerings, the amount of the offerings, and informational videos about the offerings without registering. According to the SEC, none of this information was password protected or restricted in any way.  Users had to register on the website to gain access to additional information about the offerings of securities listed on its website and to invest in these offerings. To register, users had to provide their names, dates of birth, email addresses, countries, and phone numbers. No representation regarding accredited investor status was requested. Additionally, the website did not contain any disclaimer or definition of “accredited investor.”

The website did include a disclaimer on its website that its services were not being offered to U.S. persons.  Despite the disclaimer that the services could not be used by U.S. persons, users who selected “United States” as their country were allowed to register on the website and gain full access to offering materials, and under certain circumstances, deposited funds with the defendant for the purpose of investing. As of May 2014, the defendant permitted over 50 persons who selected the U.S as their “country” during the website registration process to register on the website. Three U.S. residents who registered on the website invested in unregistered offerings of securities through the website.

The defendant received a percentage of the funds of the fully funded offerings of securities as compensation for its services upon closing of a deal.

The defendant allowed two of the U.S. investors to self-certify that each was an accredited investor. The defendant sent an email to two of the U.S. investors asking each to confirm their status as an accredited investor via email prior to investing in the offerings. The emails did not define or otherwise explain what the term “accredited investor” meant. Each of these U.S. investors confirmed they were accredited investors via email. The defendant did not take any further action regarding whether these two U.S. investors were accredited investors prior to allowing them to invest in offerings of securities on its website. The defendant did not request any information to verify whether the third U.S. investor was an accredited investor prior to allowing him to invest in the offerings of securities on its website.

The SEC found the actions were an unlawful public offering and that the defendant was acting as an unregistered broker dealer.  In settling the matter the SEC considered remedial acts promptly undertaken by the defendant and voluntary cooperation afforded the SEC staff.  The defendant did not admit or deny the findings in the order.

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.