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

The SEC announced that its largest ever whistleblower award estimated to be worth more than $30 million will be paid to a resident of a foreign country.  While the eligibility of foreign residents for a whistleblower award may seem obvious to many, the Second Circuit Court of Appeals recently held that the anti-retaliation provisions in Section 21F of the Exchange Act do not apply to a foreign whistleblower who experienced employment retaliation overseas after making certain reports about his foreign employer.  The SEC does not see the conclusions as being inconsistent because the whistleblower award provisions have a different Congressional focus than the anti-retaliation provisions, which are generally focused on preventing retaliatory employment actions and protecting the employment relationship.

According to the SEC, this is the fourth award to a whistleblower living in a foreign country.  That means almost 30% of whistleblowers who have had awards granted to date are not US residents.

Also of note is the SEC awarded the huge pot of cash despite the SEC’s finding that the whistleblower unreasonably delayed reporting the matter to the SEC.

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 Investor as Owner Subcommittee of the SEC’s Investor Advisory Committee established pursuant to Section 911 of the Dodd-Frank Act has issued two recommendations on disclosure of preliminary voting results.  The recommendations will be discussed at a meeting on October 9, 2014.  The members of the subcommittee are listed here.

Whether or not you agree with the recommendations, the report has merit for its clear discussion of proxy plumbing and the relation of brokers, Broadridge and issuers.  Broadridge fulfills brokers’ responsibilities to prepare and distribute a voting instruction form and proxy materials and also collects voting instructions.

In uncontested solicitations, issuers and their agents can acquire from Broadridge cumulative voting status information beginning the day after the first distribution of proxy materials.  In contested solicitations, Broadridge provides both sides a contest status report.  In these situations there are no confidentiality obligations.

Exempt solicitations are those where a solicitor sends solicitation materials advocating a position on a shareholder matter but does not distribute its own proxy card.  Issuers receive preliminary voting results in the same manner as an uncontested solicitation.  Until recently, exempt solicitors (those distributing proxy solicitation materials but not distributing their own proxy card) received the vote status information on the matter or matters subject to the solicitation. The information was provided as an aggregate total, not broken down by nominee. In May 2013, however, Broadridge ceased providing vote status information upon the request of the exempt solicitor. Instead, the information was only provided where authorized by the relevant issuer and subjected to a three party confidentiality agreement (issuer, Broadridge and exempt solicitor) with respect to the information.

Rule 14a-2(a)(1) exempts the brokers’ role in the voting process from the proxy rules. One of the conditions to the exemption is the broker act in an impartial manner.  The Investor as Owner Subcommittee sees Broadridge’s selective disclosure of preliminary voting information as inconsistent with the brokers’ requirement to be impartial since Broadridge is acting as intermediary for the brokers.

In its first recommendation, the Subcommittee believes SEC staff should specifically state that the obligation to solicit instructions on an impartial basis does not allow brokers (or their intermediaries) to do so with the awareness or expectation that the voting information will be provided to only to one side in a contested or exempt solicitation. Impartiality could be met through the denial of such information to all parties in a contested or exempt solicitation. The Subcommittee believes, however, that the staff should express a preference for disclosure on identical terms to all parties who distribute proxy materials.

The second recommendation addresses possible conflicts of interest by Broadridge.  Broadridge, in addition to distributing materials as intermediary for brokers, also has other relationships with issuers. For instance, Broadridge provides tabulation services and often asks as inspector of election for issuers.  According to the Subcommittee, when serving as an inspector and perhaps as tabulator, Broadridge is in a position to determine the validity of proxies from the very same brokers and banks on whose behalf Broadridge submitted proxies. In effect, Broadridge is in the position of examining its own work.

In the second recommendation the Subcommittee believes the staff should require brokers to take reasonable steps to verify, based upon all the relevant facts and circumstances, that the intermediary (i.e. Broadridge) will act in an impartial fashion and is not subject to impermissible conflicts of interest that impair the ability of the intermediary to act in an impartial manner.

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 is proposing to oversee larger nonbank auto finance companies for the first time at the federal level.  Currently, the Bureau supervises large banks making auto loans, but not nonbank auto finance companies. The CFPB is proposing to extend its supervision authority to the larger participants of the nonbank auto finance market. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the CFPB has authority to supervise certain nonbanks the Bureau defines through rulemaking as “larger participants” in a market.

The proposed rule would generally allow the Bureau to supervise nonbank auto finance companies that make, acquire, or refinance 10,000 or more loans or leases in a year. The Bureau estimates that about 38 auto finance companies would be subject to this new oversight. The CFPB believes these companies originate around 90 percent of nonbank auto loans and leases, and in 2013 provided financing to approximately 6.8 million consumers.

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 action, the SEC charged an investment adviser for false advertising and its chief compliance officer on related matters. The defendants did not admit or deny the charges.

Among other things, the SEC claimed advertisements which did not disclose that the portrayed results did not deduct fees and thus materially overstated investment performance were false and misleading. According to the SEC the advertisement violated Section 206(4) of the Investment Advisers Act and Rule 206(4)-1(a)(5) thereunder. Section 206(4) prohibits investment advisers from engaging in “any act, practice, or course of business which is fraudulent, deceptive or manipulative,” as defined by the Commission by rule. Rule 206(4)-1(a)(5) thereunder makes it unlawful for any registered investment adviser, directly or indirectly, to distribute an advertisement which contains any untrue statement of a material fact, or which is otherwise false and misleading.

The investment adviser’s policies and procedures manual stated the chief compliance officer “ha[d] the overall responsibility and authority to develop and implement the firm’s compliance policies and procedures and to conduct an annual review to determine their adequacy and effectiveness in detecting and preventing violations of the firm’s policies, procedures or federal securities laws.” The manual contained detailed procedures for approving advertising, including initialing and dating of approved materials. The SEC found that since the chief compliance officer failed to implement these policies and procedures, the chief compliance officer caused the investment adviser’s compliance failures.

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 testimony before a Congressional subcommittee, a GAO representative noted FSOC still lacks a comprehensive, systematic approach to identify emerging threats to financial stability. In 2012, GAO reported that FSOC’s approach might not help identify new risks or threats that member agencies had not already identified. According to GAO, the Office of Financial Research, or OFR, has made some progress in developing data tools to support FSOC since the 2012 report, but GAO’s recent observations of two of these tools suggest that one tool does not focus on risks to the financial system, while another remains in a prototype phase.

GAO noted FSOC has taken steps to improve its communication with the public but could do more to improve transparency and accountability.   FSOC approved a revised transparency policy, and FSOC staff said they had attempted to provide more information in the minutes of meetings. But FSOC staff said that they did not intend to keep detailed minutes because of the confidential information discussed. Also, FSOC staff also said that the impact of designating nonbanks for enhanced supervision would be assessed as part of a mandated January 2016 study. However, FSOC has not begun to prepare for this study according to GAO. GAO has reported on the importance of advance planning for retrospective studies so that needed data are collected.

According to GAO, FSOC staff said they did not plan to clarify the roles and responsibilities of FSOC, OFR, and member agencies because the overlapping responsibilities for monitoring systemic risk had not been problematic. Officials also said that FSOC would not adopt practices to coordinate rulemaking across member agencies, as it does not have the authority to direct independent agencies. GAO maintains that action is needed as its past work has shown that the lack of clear roles and coordination can lead to duplication, confusion, and regulatory gaps.

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 July 2, 2013, the United States District Court for the District of Columbia vacated the SEC’s resource extraction rules which were mandated by the Dodd-Frank Act.  Since that time, industry players have asked the SEC to push forward so that conforming rules can be adopted in the European Union.  But nothing has happened.

Oxfam America has now brought a suit against the SEC in federal court in Massachusetts seeking a court order to require the SEC to adopt the rules.  Oxfam cites the following as grounds for relief:

  • The Administrative Procedure Act (5 U.S.C. § 706(1)) provides a remedy to “compel agency action unlawfully withheld or unreasonably delayed.”
  • The federal mandamus statute (28 U.S.C. § 1361) gives a federal district court jurisdiction to compel an agency of the United States to perform a nondiscretionary duty owed to a plaintiff as a matter of law.

Among other things, Oxfam claims it is directly injured (read as “we have standing”) because the information disclosed pursuant to Section 1504 of the Dodd-Frank Act would be of direct value to Oxfam America, both as a shareholder and as an organization with a mission to advance accountability in the management of extractive resource revenues around the world.

Oxfam America is an international relief and development organization.

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.

Following bank regulators’ re-proposal of margin requirements for uncleared swaps by bank swap dealers (bank SDs) and bank major swap participants (bank MSPs), the CFTC has re-proposed its own very similar requirements for uncleared swaps by non-bank SDs and non-bank MSPs, referred to as “covered swap entities” or “CSEs”. The CFTC has not released the text of the proposed rule, which will be published in the Federal Register in the coming weeks, but summarizes the rules as follows.

AFFECTED MARKET PARTICIPANTS

Consistent with the CFTC’s initial April 2011 proposed margin rules, the new rules would not impose margin requirements on commercial end users. The rules would impose margin requirements on (i) trades between CSEs and SDs or MSPs; and (ii) trades between CSEs and financial end users.

INITIAL MARGIN (IM)

The rules would impose two-way (posting and collecting) IM requirements for all trades between CSEs and SDs/MSPs and between CSEs and financial end users that have over $3 billion in gross notional exposure in uncleared swaps. IM amounts would be calculated based on models or a standardized table, using a 99% confidence level over 10-day liquidation time, but the rules would permit a $65 million threshold below which IM need not be collected. The rules would permit IM to be posted in the form of cash, sovereign debt, government-sponsored debt, investment grade debt including corporate and municipal bonds, equities, and gold, all to be held at an independent custodian and not eligible for rehypothecation.

VARIATION MARGIN (VM)

The rules would require daily payment of VM for all trades between CSEs and SD/MSPs and between CSEs and financial end users. VM amounts would be calculated using methods and inputs that rely on recent trades or third-party valuations. The rules would require VM to be posted in the form of cash.

IMPLEMENTATION OF THE RULES

VM requirements would be effective December 1, 2015. IM requirements would be phased in starting December 1, 2015 and ending December 1, 2019 from the largest participants to smaller ones. The rules would apply only to uncleared swaps entered into after the rules’ effective date.

Earlier, the United States Court of Appeals for the District of Columbia Circuit ordered the appellants in the conflict minerals case, NAM et al, to file a response to the SEC’s and Amnesty International’s petition for an en banc rehearing.

The response has now been filed.  NAM says there is no need for a rehearing.  According to NAM the standard for a rehearing isn’t met because the case presents no conflict in the DC Circuit’s decisions or with decisions of the Supreme Court or other Courts of Appeals.

Maybe it’s not surprising so far because the court essentially ruled in favor of NAM.  Then NAM says what it really wants – the appellate panel should amend its decision in light of the  American Meat case to clarify that the compelled statement is not eligible for Zauderer rational basis review.  The reason Zauderer doesn’t apply is the conflict minerals disclosure does not constitute “purely factual and uncontroversial information.”

According to NAM, doing anything else would break dangerous new ground:

“Appellants are aware of no case permitting the government to require a company to adopt an ideological slogan written by the government that attacks the company and its products, and neither the SEC nor Amnesty has cited any such case. If such requirements were deemed permissible, the temptation for Congress and state legislatures to require similar self-shaming measures across a range of controversial issues could be irresistible.”

The response also includes predictable references to the “scarlet letter,” issuers with “blood on their hands” and like rhetoric that has become familiar in this case.

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 testimony before Congress, SEC Chair Mary Jo White noted that she anticipates SEC staff will conclude a two-year initiative to conduct focused, risk-based exams of newly registered private fund advisers in October 2014.  “Private fund advisers,” in general terms, is SEC lexicon for hedge fund and private equity advisors.

Also, in SEC lexicon, the examinations were referred to as “presence examinations.”  Presence examinations have been shorter in duration and more streamlined than typical examinations, and have been designed both to engage with the new registrants to inform them of their obligations as registered entities and to permit the SEC to examine a higher percentage of new registrants.

Chair White noted that as of early September 2014, staff had completed approximately 340 examinations of newly registered private fund advisers, and over 40 additional examinations were underway.

While the examinations may be winding down, maybe the resulting enforcement actions are gearing up.

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 charged 29 officers, directors, or major shareholders for violating federal securities laws requiring them to promptly report information about their holdings and transactions in company stock.  Seven publicly-traded companies were charged for contributing to filing failures by insiders or failing to report their insiders’ filing delinquencies.

35 of the 36 agreed to settle the charges in exchange for penalties ranging from $25,000 to $375,000.  The one that didn’t settle will be subject to administrative proceedings on the SEC rocket docket.  It’s important to remember that those who settled did not admit or deny the allegations.

The SEC announced the actions in two press releases, one addressing 34 of the actions where the failure to file may have been more inadvertent, and another one charging two defendants, where the failures may have been more egregious.  Or maybe there were just two different enforcement teams involved and one drove a harder bargain.  Actually, the SEC sent out three press releases (or maybe more accurately, e-mails), and appeared to be confused themselves, because the third mixed up the captions and text of the two announcements.

The SEC used quantitative analytics to identify individuals and companies with especially high rates of filing deficiencies.

The SEC enforcement initiative focused on failure to file two types of ownership reports:

  • Form 4 is a report that corporate officers, directors, and certain beneficial owners of more than 10 percent of a registered class of a company’s stock must use to report their transactions in company stock within two business days.
  • Schedule 13D and 13G are reports that beneficial owners of more than 5 percent of a registered class of a company’s stock must use to report holdings or intentions with respect to the company.

There are important lessons for everyone to learn from these actions:

  • The SEC doesn’t care if officers and directors advised the issuer in a timely manner of their transactions and the issuer failed to file the report.  The SEC will charge the officer and director anyhow, because it is their responsibility to file.  Then the SEC will go out of its way to point out that the officer or director failed to monitor whether the filings were made.
  • Most issuers undertake to assist their officers and directors in making the filings.  Just because you do it gratuitously doesn’t mean you can be sloppy.  The SEC takes the position that the issuer’s negligence is a cause of the Section 16 violation.  Meaning the issuer gets charged with the officer or director.
  • The SEC will not hesitate to charge issuers with disclosure violations for failure to disclose late Form 4’s which are required to be disclosed pursuant to Item 405 of Regulation S-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.