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

FINRA and the exchanges have complied with an SEC order to establish a national market system plan to implement a targeted 12-month pilot program that will widen minimum quoting and trading increments (tick sizes) for certain stocks with smaller capitalization.  “Smaller capitalization” stocks are those with a market capitalization of $5 billion or less; an average daily trading volume of one million shares or less; and a closing share price of at least $2 per share.

At the risk of digressing, there are many stocks in the under $5 billion market cap category that do not seem to have been punished by the onslaught of decimalization in the way of a dearth of research and the like.  One has to wonder how the issuers of the relatively healthy stocks feel about being made a guinea pig in the pilot program.

Returning to the previously well-known details as ordered by the SEC, the SEC order specified  a control group will be quoted at the current tick size increment, $0.01 per share, and trade at the increments currently permitted.   The first test group would be quoted in $0.05 minimum increments and trading could continue to occur at any price increment that is permitted today. There are two other test groups with a $0.05 minimum with different trading rules.  The pilot program would be in effect for a year.

What has not been previously known is how issuers will be slotted into the control and test groups.  According to the plan submitted by FINRA and the exchanges, an operating committee will oversee the pilot security grouping process.  The operating committee will select the pilot securities to be placed into three test groups by means of a stratified random sampling process. To effect this sampling, each of the pilot securities will be categorized as having:

  • a low, medium, or high share price based on a three month measurement period of volume weighted average price, or VW AP,
  •  low, medium, or high market capitalization based on the last day of a measurement period, and
  • low, medium, or high trading volume based on the consolidated average daily volume, or CADY, during the measurement period,

yielding 27 possible categories. Low, medium, and high subcategories will be established by dividing the categories into three parts, each containing a third of the population. Pilot securities will be randomly selected from each of the 27 categories for inclusion into the test groups.

Each primary listing exchange will make publicly available for free on its website a list of those pilot securities listed on that exchange and included in the control group and each test group.

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 Federal Reserve Board has requested comment on a proposal to repeal its Regulation AA regarding unfair or deceptive acts or practices.

The Dodd-Frank Wall Street Reform and Consumer Protection Act repealed the Board’s authority to write rules that address unfair or deceptive acts or practices, which are contained in Regulation AA.  Regulation AA includes the Board’s “credit practices rule,” which prohibits banks from using certain remedies to enforce consumer credit obligations and from including these remedies in their consumer credit contracts.

In connection with the Fed proposal, the Federal Reserve Board, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency issued guidance clarifying that the repeal of the credit practices rules applicable to banks, savings associations, and federal credit unions is not a determination that the prohibited practices contained in those rules are permissible.  The regulators believe the practices described in the former credit practices rules could potentially violate the prohibition against unfair or deceptive practices under the Federal Trade Commission Act and Dodd-Frank Act, even in the absence of a specific regulation governing the conduct.

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 obtained a consent order from an auto finance company that allegedly distorted consumer credit records for years. The auto finance company, which according to the CFPB lends primarily to subprime borrowers, allegedly failed to fix known flaws in a computer system that was providing inaccurate information to credit reporting agencies. The CFPB believes this potentially harmed tens of thousands of its customers. As a result of the consent order the lender agreed to pay a $2.75 million fine, fix its errors, and change its business practices. The auto finance company did not admit or deny the allegations.

According to the CFPB the information reported incorrectly included:

  • Wrong payments and overdue amounts: The lender allegedly provided inaccurate information about how much consumers were paying toward their debts. In many cases, the lender understated the amounts its customers were paying. When consumers made multiple payments within a single month, for example, the lender allegedly only reported one of the payments.
  • Distorted dates: The lender allegedly inaccurately reported many of its customers’ “date of first delinquency,” which is the date on which a consumer first became late in paying back the loan. In most cases, the lender was reporting the date to be more recent than it actually was. The date an account first becomes delinquent matters because it determines how long a delinquency can appear on a consumer’s credit report. Inaccurate reporting of the age of a consumer’s delinquency can cause it to appear on the consumer’s credit report longer than is allowed by the FCRA.
  • Inflated delinquencies: The lender allegedly substantially inflated the number of delinquencies for some customers when it reported customers’ last 24 months of consecutive payment activity. In one case, the lender allegedly reported that a consumer was delinquent eleven times, when in fact the consumer had only been delinquent twice.
  • Mischaracterization of vehicle surrender: When loans reach a certain stage of delinquency, the lender had the option to repossess the car. Before that happens, though, consumers have the option to voluntarily surrender their vehicle and avoid a “repossession” showing up on their credit report. The lender allagedly told credit reporting agencies that some of its customers had their vehicles repossessed, when in fact those individuals had voluntarily surrendered their vehicles back to the lienholder.

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 announced that its Office of Compliance Inspections and Examinations, or OCIE, is launching an examination initiative directed at newly regulated municipal advisors. It also sent this letter to registered municipal advisors advising them of the program.

SEC rules that took effect on July 1, 2014 generally require municipal advisors to register with the SEC through the SEC’s EDGAR system under the final registration process during a four-month phase-in period by October 31, 2014. The examinations are designed to establish a presence with the newly regulated municipal advisors. Over the next two years, OCIE plans to examine a significant percentage of these advisors using an approach that focuses on identified risks. Areas targeted for scrutiny may include the municipal advisor’s compliance with its fiduciary duty to its municipal entity clients, books and recordkeeping obligations, disclosure, fair dealing, supervision, and employee qualifications and training.

The SEC is working with the Municipal Securities Rulemaking Board, or MSRB, and the Financial Industry Regulatory Authority, or FINRA, to facilitate a coordinated approach to oversight of municipal advisors. OCIE will examine municipal advisors for compliance with applicable SEC rules and applicable final MSRB rules once the MSRB rules are approved by the SEC and become effective.

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 believes there are potential risks to consumers that may arise in connection with transfers of residential mortgage servicing rights. The CFPB has stated its concern in this area remains heightened due to the continuing high volume of servicing transfers. Servicers engaged in significant servicing transfers should expect that the CFPB will, in appropriate cases, require them to prepare and submit informational plans describing how they will be managing the related risks to consumers.

The CFPB has recently updated its guidance on mortgage servicing transfers (Bulletin 2014-01).  The revised guidance replaces CFPB Bulletin 2013-01 (Mortgage Servicing Transfers), released in February 2013, which also addressed servicing transfers.

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.

 

Amnesty International has filed a supplemental brief which continues to advocate for a rehearing en banc in the conflict minerals case.  The argument is this:  American Meat Institute v. U.S. Department of Agriculture expressly overruled a portion of the opinion in the conflicts minerals case.  That makes it clear that the appeals court erred in failing to apply the standard for First Amendment review set forth in Zauderer v. Office of Disciplinary Counsel.  As American Meat held, an interest in preventing consumer deception is not required for Zauderer to apply.

The brief goes on to discuss what would probably be a key point in any rehearing – does the conflict minerals disclosure need to be purely factual and uncontroversial?  According to the brief the answer is “no”.  Amnesty International believes Zauderer’s reference to “purely factual and uncontroversial information” was descriptive with respect to the disclosure at issue and did not purport to set a threshold requirement for Zauderer’s application in all cases.  According to the brief Zauderer does nothing more than indicate that the government cannot require companies to express opinions on matters of politics, nationalism, religion, and the like under the guise of a commercial disclosure requirement.

Of course, the brief argues that if you don’t believe the foregoing, in any event the conflict minerals disclosure is purely factual and uncontroversial.

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 issued its annual report on use of Form PF data. In its  examination and enforcement programs regarding registered investment advisers that manage private funds, the staff generally reviews information contained in the Form PF filing for inconsistencies with other information obtained from an adviser during an examination, such as due diligence reports, pitch books, offering documents, operating agreements and books and records. In addition, SEC staff typically looks for discrepancies between an adviser’s Form PF filing and any publicly-available documents related to the adviser, including the adviser’s Form ADV and brochure.

In risk monitoring activities, the staff has incorporated Form PF data to assist staff in risk monitoring activities through a proprietary analytical program known as DERA.  For example, staff queries the DERA database to identify advisers engaging in activities implicating particular areas of examination focus (exposures, valuation, high-frequency trading, etc.) and to identify possible red flags at firms that may trigger examinations.  Staff are also developing periodic reports that analyze data across a wide spectrum of filers to help identify trends and possible emerging risks in the private fund industry.

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 Municipal Securities Rulemaking Board, or MSRB, is requesting comment on draft amendments to Rule G-37, the MSRB’s pay-to-play rule for municipal securities dealers, that would extend the rule to municipal advisors.

According to the  MSRB, the draft amendments seek to curb pay-to-play activities by municipal advisors and provide greater transparency regarding their political contributions. The draft amendments would, consistent with the existing rule for dealers, generally prohibit municipal advisors from engaging in municipal advisory business with municipal entities for two years if certain political contributions have been made to officials of those entities who can influence the award of business.

Municipal advisors would be required, like dealers under the existing rule, to disclose their political contributions to officials and bond ballot campaigns for posting on the MSRB’s Electronic Municipal Market Access (EMMA®) website.   The MSRB believes public availability of this information would facilitate enforcement of the rule and promote public scrutiny of political giving and municipal advisory business.

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.

My colleagues over at our banking blog have highlighted proposed regulations by the Financial Crimes Enforcement Network, or FinCEN, under the Bank Secrecy Act  which are meant to combat illicit financial activity, including terrorist financing and money laundering.  The proposed regulations would require banks to identify the natural persons (as opposed to a legal entity) who are beneficial owners of customers that are legal entities.

“Beneficial ownership” would include:

  • each individual, if any, who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25% or more of the equity interests of a legal entity customer; and
  • an individual with significant responsibility to control, manage or direct a legal entity customer (including CEO, CFO, COO, managing member, general partner, president, vice president or treasurer), or any other individual who regularly performs similar functions.

As many know, when forming a corporation or other entity for a new venture, or opening a bank account, disclosure of this level of detail was never necessary.  Requiring that it be disclosed now could cause individuals to no longer invest in new entities and impair capital formation and other useful business transactions.  It’s not that these individuals are terrorists, launder money or cheat on their taxes, they just want to keep their private business kept private.  Even under current regulations, it is difficult for an honest foreign person to start a U.S. corporation and open a bank account without providing a SSN or equivalent for a live human being and showing up at the bank in person.

FinCENS’s idea isn’t new.   Senator Carl Levin introduced a bill requiring that this information be collected when a new corporation was formed.  The secretaries of our 50 states understandably didn’t want to collect this information (and as an aside, it would have assigned corollary duties to law firms that start corporations for clients).  The White House then proposed requiring all companies formed in any state to obtain a federal tax employee identification number. This proposal would have required the Internal Revenue Service to collect information on the beneficial owner of any legal entity organized in any state, and would allow law enforcement to access that information.  I guess the IRS didn’t want to do this either, so now the plan is to foist this information collection on banks.

I’m all for shutting down terrorists and money launderers.  But the benefits of these solutions and related costs on capital formation and economic activity need to be carefully considered.

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.

FannieMae has released a survey that indicates the CFPB’s Ability-to-Repay (“ATR”) and Qualified Mortgage (“QM”) rules will lead to increased lender costs.  Specifically, most firms (74%) reported that they expect their operational costs to increase as a result of QM rules. Lenders, on net, expect to tighten credit standards as a result of QM rules, with 36% of lenders reporting expected tightening and 6% of lenders reporting expected easing.  In addition, most lenders (80%) say they “do not plan to pursue non-QM loans” or prefer to “wait and see (business as usual). Larger lenders are more likely to pursue non-QM loans to increase their market share.

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.