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

ISDA believes there is a misperception that only a small fraction of derivatives activity relates to hedging that benefits the “real economy.”  ISDA has published an analysis that challenges this assumption. According to the analysis publicly available data published by the Bank for International Settlements reveals that 65% of over-the-counter interest rate derivatives market turnover involves an end user on one side and a reporting dealer on the other. These participants, comprising non-dealer financial institutions and non-financial customers, use derivatives primarily to hedge risks and reduce volatility on their balance sheets.

According to the analysis the remaining 35% of derivatives turnover activity relates to dealer market-making and the hedging of customer transactions.  ISDA believes these transactions are vital for market liquidity and the facilitation of client trades. Without this, end users would be unable to put on risk-reducing and cost-effective hedges, potentially leading to less hedging and more balance-sheet volatility.

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 Office of Inspector General has released a redacted version of an investigation regarding a leak of Commissioner Piwowar’s vote during an executive session of a closed Commission meeting regarding an enforcement matter.  It’s not very flattering.   Chair White and Commissioner Gallagher recused themselves from the executive session so I surmise the leak was not from them.  Ultimately, the OIG could not identify the source of the leak.

One SEC Commissioner called reporters at Reuters, which published the leaked information, four times after the meeting, once within 35 minutes after the conclusion of the executive session.  Reg FD is a good thing when it doesn’t apply to you.  Three of the calls didn’t result in a connection, but one lasted 26 minutes.  The OIG report indicates the Commissioner stated with “pretty high certainty . . . at least 99.99% sure” that he did not talk to Reuters’ reporters about the vote at issue.

In response to a question from a Reuters’ reporter about why  Commissioner Piwowar voted against the SEC settlement, an SEC staffer said “I don’t know. I don’t think it’s fair.  Go figure it out.”  Apparently the staffer believes he or she had not confirmed anything because the reporter already knew the vote count.

There was also a lot of confusion about whether proper procedures were followed and whether the room was cleared when the executive session was held.  At least one Commissioner believes Chair White’s rules are not valid.  In any event, some believe you can just stand outside the door and hear what is going on.

The report also notes that one SEC Commissioner improperly forwarded SEC confidential information to his home email address because otherwise he can’t print it.   A staffer apparently used his home email to communicate information about SEC matters to reporters.

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 has issued a useful consumer advisory on virtual currencies. The advisory notes Bitcoin transactions may not be anonymous and “Information about each and every Bitcoin transaction is publicly shared and stored forever. Persistent, motivated people will likely be able to link your transactions to, among other things, your other transactions and public keys, as well as to your computer’s IP address. So it is possible that others will be able to estimate both how much Bitcoin you own and where you are.” At the end the CFPB advises it has also begun collecting complaints on virtual currency companies.

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.

 

Around 34% of all loan officers responding to a Fed survey indicated the CFPB’s Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act (the ATR/QM rule) makes it more difficult to get conforming mortgage loans approved. The “more difficult” response rate rises to about 49% for loan officers from smaller banks for borrowers that have FICO scores of less than 680. By “more difficult” we mean references in the survey that the approval rate is “somewhat lower” to “much lower.”

About 57% of loan officers responded that approval was more difficult for prime residential mortgages with principal balances greater than the conforming loan limits announced by the FHFA.

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.

Commissioner Gallagher recently filed this opinion dissenting in part with respect to In the Matter of John W. Lawton. The matter arose out of the alleged misconduct of respondent John W. Lawton, who purportedly committed multiple violations of the antifraud provisions of the securities laws. The respondent’s alleged misconduct resulted in the imposition of a permanent injunction against him in July 2009, as well as a criminal conviction. All of the respondent’s alleged misconduct occurred before the July 21, 2010 enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In December 2010, after passage of the Dodd-Frank Act, the SEC instituted follow-on administrative proceedings against the respondent under the Investment Advisers Act of 1940, relying solely on the permanent injunction as the jurisdictional predicate. In April 2011, the law judge issued an initial decision by summary disposition, barring the respondent from associating with any investment adviser, broker, dealer, municipal securities dealer, or transfer agent. The law judge declined to impose municipal advisor or NRSRO bars against the respondent, holding that to impose those bars – based entirely on pre-Dodd-Frank misconduct – would have given impermissible retroactive effect to the collateral bar provisions of the Dodd-Frank Act.

Before Dodd-Frank, the SEC did not impose collateral bars following the decision of the United States Court of Appeals for the District of Columbia in Teicher v. SEC. Section 925 of the Dodd-Frank Act, however, amended the federal securities laws to provide the Commission with express authority to impose collateral bars. Section 925 also created the new municipal advisor and NRSRO bars.

The law judge was presented with the question of whether the Commission has the authority to impose collateral broker, dealer, municipal securities dealer, and transfer agent bars retrospectively without giving impermissible retroactive effect to Section 925 of the Dodd-Frank Act, and concluded that it does. The law judge also was presented with another important question, which arises from the Dodd-Frank Act’s creation, from whole cloth, of two entirely new bars, namely, the municipal advisor and NRSRO bars.

Before the Dodd-Frank Act, those bars did not exist, and the SEC did not have statutory authority to suspend or bar someone from association with a municipal advisor or NRSRO. Thus, before the passage of the Dodd-Frank Act, no person committing a securities law violation could reasonably have been on notice that the SEC had the authority to bar persons from working in the municipal advisor or NRSRO branches of the securities industry. According to Commissioner Gallagher, this gives rise to the central question in this case: even if the SEC does have the authority to impose certain bars collaterally and retrospectively, would the retrospective imposition of the two new Dodd-Frank bars – based entirely on pre-Dodd-Frank conduct – give impermissible retroactive effect to Section 925 of the Dodd-Frank Act? Commissioner Gallagher agreed with the law judge that it would and therefore dissented from the imposition of those two bars against the respondent.

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 Government Accountability Office, or GAO, was asked to review the benefits that the largest bank holding companies (those with more than $500 billion in assets) have received from perceived government support. In connection with that review, GAO analyzed the relationship between a bank holding company’s size and its funding costs, taking into account a broad set of other factors that can influence funding costs. As part of the analysis GAO reviewed selected studies that estimated funding cost differences between large and small financial institutions that could be associated with the perception that some institutions are too big to fail. Studies GAO reviewed generally found that the largest financial institutions had lower funding costs during the 2007-2009 financial crisis but that the difference between the funding costs of the largest and smaller institutions has since declined. According to GAO these empirical analyses contain a number of limitations that could reduce their validity or applicability to U.S. bank holding companies. For example, some studies used credit ratings which provide only an indirect measure of funding costs.

GAO said its analysis, which addresses some limitations of these studies, suggests that large bank holding companies had lower funding costs than smaller ones during the financial crisis but provides mixed evidence of such advantages in recent years. However, GAO believes most models suggest that such advantages may have declined or reversed. GAO developed a series of statistical models that estimate the relationship between bank holding companies’ bond funding costs and their size or systemic importance, controlling for other drivers of bond funding costs, such as bank holding company credit risk.

GAO stated all of its models found that larger bank holding companies had lower bond funding costs than smaller ones in 2008 and 2009, while more than half of the models found that larger bank holding companies had higher bond funding costs than smaller ones in 2011 through 2013, given the average level of credit risk each year. However, the models’ comparisons of bond funding costs for bank holding companies of different sizes varied depending on the level of credit risk.

GAO’s analysis builds on certain aspects of prior studies, but important limitations remain and GAO believes these results should be interpreted with caution. GAO’s further believes its estimates of differences in funding costs reflect a combination of several factors, including investors’ beliefs about the likelihood a bank holding company will fail and the likelihood it will be rescued by the government if it fails, and cannot precisely identify the influence of each factor. According to GAO, these estimates may reflect factors other than investors’ beliefs about the likelihood of government support and may also reflect differences in the characteristics of bank holding companies that do and do not issue bonds. Finally GAO points out that its estimates, like all past estimates, are not indicative of future trends.

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 August 2013 the SEC whistleblower claims review staff issued a preliminary determination and recommended a whistleblower claim be denied. Although the record demonstrated that the claimant provided original information to the SEC that led to the successful enforcement of a covered action, the preliminary determination recommended that the claimant’s claim be denied because the information did not appear to have been “voluntarily” provided because of a prior inquiry into the matter conducted by a self-regulatory organization, or SRO.

The whistleblower submitted a response to the preliminary determination and the SEC reconsidered and reversed its decision. It was then found because of “materially significant extenuating circumstances” it was appropriate in the public interest and consistent with the protection of investors to waive the “voluntary” requirement of Rule 21F-4(a) on the unique facts of this award claim.  See the award here.

The SEC determination doesn’t say how much the award was, but the SEC issued a press release on the determination touting a $400,000 award to a claimant who reported internally before providing information to the SEC. According to the determination:

  • prior to the enactment of the Dodd-Frank whistleblower award program and the concomitant anti-retaliation protections, the claimant was working aggressively internally at [Redacted] to bring the securities law violations to the attention of appropriate personnel and to obtain corrective action for the benefit of investors;
  • the SRO inquiry originated from information a third party provided to the SRO that in part described Claimant’s role in identifying the issue that gave rise to the violations and [– ] effort to obtain corrective action;
  • claimant was led to believe by [Redacted] early on during the SRO inquiry that [Redacted] had provided the SRO with all of the materials that claimant had developed for his use in internal efforts to obtain corrective action; and
  • claimant’s persistent efforts in reporting to the Commission once [—] learned that the SRO inquiry had been closed and that would not protect investors from future harm [Redacted] internal efforts would not protect investors from future 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.

The SEC has previously adopted a rule to define “family offices” that are excluded from the Investment Advisers Act of 1940. “Family offices” are entities established by wealthy families to manage their wealth and provide other services to family members, such as tax and estate planning services. Historically, family offices have not been required to register with the SEC under the Advisers Act because of an exemption provided to investment advisers with fewer than 15 clients. However, the Dodd-Frank Act eliminated that exemption but directed the SEC to adopt a rule exempting family offices.

The SEC has granted two exceptions with similar circumstances to strict adherence to the family office rules:

  • Gruss & Co: Inc: Here the family office provides services to two sisters of a spouse of a lineal descendant of Joseph S. Gruss and each sister’s respective spouse and children. The family office represented that each of the additional family clients has important familial ties to and is an integral part of the Gruss family. The family office maintained that including the additional family clients in the “family” simply recognizes and memorializes the familial ties and intra-familial relationships that already exist, and have existed for at least 14 years while the assets of the additional family clients were managed by the Gruss family. See the notice here and the order here.
  • Duncan Family Office: Here the family office provides services to the mother of a spouse of a lineal descendant of Dan L. Duncan, as well as certain related foundations. Similar representations were made about long-standing family ties. See the notice here and the order 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.

In April 2014, the United States Court of Appeals for the District of Columbia held the SEC’s conflict minerals rule and statute embodied in Dodd-Frank violate the First Amendment to the extent the statute and rule require regulated entities to report to the SEC and to state on their website that any of their products have “not been found to be ‘DRC conflict free.” The holding involved an interpretation of Zauderer v. Office of Disciplinary Counsel. In Zauderer, the U.S. Supreme Court stated that rational basis review applies to certain disclosures of “purely factual and uncontroversial information.” However, the D.C. Circuit had previously stated Zauderer is “limited to cases in which disclosure requirements are ‘reasonably related to the State’s interest in preventing deception of consumers.” According to the D.C. Circuit, since the conflict minerals rule did not relate to the deception of consumers, the SEC’s conflicts minerals rule, and possibly the statute, was unconstitutional.

Now the D.C. Circuit has issued its decision in American Meat Institute v. U.S. Dept. of Agriculture. The en banc opinion in that case held that Zauderer in fact does reach beyond problems of deception, to encompass the disclosure mandates at issue in that case. So while important distinctions exist between the American Meat case and the conflicts minerals case, it looks like the SEC has a shot at prevailing. Left unsaid is what happens to the SEC’s request that the conflicts minerals case be reheard en banc before the DC Circuit.

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 the former Chief Operating Officer at Harbinger Capital Partners LLC has agreed to settle allegations that he assisted a scheme by the firm and its owner to misappropriate millions of dollars from a hedge fund they managed to pay the owner’s personal taxes. Court approval of the settlement is pending.

In the settlement, the former COO admits that with knowledge of relevant violations, he provided substantial assistance in connection with a loan by failing to:
• Ensure that the lender (Harbinger Capital Partners Special Situations Fund) had separate counsel.
• Ensure that the loan was consistent with fiduciary obligations to the Special Situations Fund.
• Ensure that the owner paid an “above market” interest rate on the loan.
• Timely disclose the loan to investors.
• Take actions to cause the lender to accelerate the owners payment on the loan once investors in the Special Situations Fund were permitted to begin redeeming their investments.
The SEC stated “This settlement shows that we hold accountable not only those who perpetrate a scheme, but also those who enable them.”

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.