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

The CFPB has proposed a rule to improve information reported about the residential mortgage market. According to the CFPB, the rule would shed more light on consumers’ access to mortgage credit by updating the reporting requirements of the Home Mortgage Disclosure Act, or HMDA, regulations. The CFPB also aims to simplify the reporting process for financial institutions.

HMDA, which was originally enacted in 1975, requires many lenders to report information about the home loans for which they receive applications or that they originate or purchase. The public and regulators can use the information to monitor whether financial institutions are serving the housing needs of their communities and identify possible discriminatory lending patterns. The Dodd-Frank Act directed the CFPB to expand the HMDA dataset to include additional information about loans that would be helpful to better understand these aspects of the mortgage market.

In developing the proposed rule, the CFPB reviewed the HMDA reporting requirements. The Bureau is looking to simplify these requirements for financial institutions. The CFPB aims to:
• Standardize the reporting threshold
• Ease reporting requirements for some small banks
• Align reporting requirements with industry data standards
• Improve the electronic reporting process
• Improve data access

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.
The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

The United States District Court for the District of Nebraska has certified a question for interlocutory appeal to the Eighth Circuit in the case of Bussing v. COR Clearing, LLC (8:12-cv-238). The question involves whether improper conduct has to be reported to the SEC to qualify for anti-retaliation whistleblower protection under the Dodd-Frank Act. You can find the defendant’s brief here and the court order here. The District’s court’s decision was contrary to a ruling of the Fifth Circuit in the Asadi case. You can find our prior discussions about Asadi and similar cases here and 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 SEC provided guidance on the use of social media in M&A and other contexts. Companies have begun to cautiously make use of the guidance but the flood gates haven’t exactly opened.

Comcast-Time Warner

If you go by volume of filings, this transaction is the leader in the use of social media. It’s not just boilerplate distribution of press releases, but reaching out and engaging those with interest, and perhaps opposition. Here is an example:

The following communications were made available by posts on Twitter:

Tweet 1: 6 out of 7 channels Comcast carries are not associated with co, carry 160 independent chs #futureofvideo #comcasttwc [link to http://corporate.comcast.com/images/Comcast-Legend-July-07-Update.pdf]

Tweet 2: @publicknowledge see #FCC filings pg 7 using latest FCC data [link to http://apps.fcc.gov/ecfs/document/view?id=7521351426] [link to http://corporate.comcast.com/images/Comcast-Legend-July-07-Update.pdf]

Tweet 3: @SwanniOnTV see recent filing – less than 30% of video households; 35% of broadband [link to http://corporate.comcast.com/images/Comcast-Legend-July-07-Update.pdf] [link to http://apps.fcc.gov/ecfs/document/view?id=7521351426]

Tweet 4: @SwanniOnTV that isn’t the market – the market is MVPDs [link to http://corporate.comcast.com/images/Comcast-Legend-July-07-Update.pdf]

Tweet 5: @publicknowledge Sen. Klobuchar is from Minnesota, not Nebraska, this is the divestures see [link to http://corporate.comcast.com/images/As-Filed-2014-06-04-SpinCo-Public-Interest-Statement-with-legend.pdf] [link to http://corporate.comcast.com/images/Comcast-Legend-July-07-Update.pdf]

URS Corp

On July 13, 2014, URS Corporation posted on twitter: “@AECOM to acquire $URS Corporation bit.ly/1q85rwN.”

On July 13, 2014, URS Corporation posted on twitter: “@AECOM BREAKING NEWS: AECOM to acquire URS Corporation US$56.31 per share in cash and stock buzz.mw/bcimx_f $ACM.”

DirectTV

The following communications were made available by posts on Twitter:

Tweet 1: @coreyhawk Until the transaction closes, DIRECTV & AT&T will continue to operate as separate companies. Visit us at [link to http://bit.y/1kfu7hK]

Tweet 2: The merger announcement will have no impact on DIRECTV’s existing products, services or programming. To learn more read our Customer FAQs at [link to http://bit.ly/1kfu7hK] – Charles

Tweet 3: We are committed to continuing to provide the world-class service and experience you know and love. To learn more read our FAQs at [link to http://bit.ly/1kfu7hK] – Charles

Tweet 4: If you are looking for more information about our combination with AT&T, check our Customer FAQ at [link to http://bit.ly/1kfu7hK]

Ebay

While maybe not an M&A transaction, Ebay has been active with respect to the PayPal matter. Both the CEO, John Donahoe, and director Marc Andreessen, have been tweeting:

On January 23, 2014, John Donahoe, President, Chief Executive Officer, and Director of eBay Inc. (the “Company”) sent the following Tweet relating to the Company under the Twitter handle @Donahoe_John (https://twitter.com/Donahoe_John):

“More on why @PayPal & @ebayinc are best together, on @LinkedIn linkd.in/1fa83SF Legend: bit.ly/1dV6g3z (CEO)”

[Legends Included in Original Are Excerpted at the End of this DEFA14A Filing]
* * * * * *
Director of the Company Marc Andreessen posted the following statements in a conversation on Twitter (https://twitter.com/pmarca/status/426415162111705088) relating to the Company using the Twitter handle @pmarca (https://twitter.com/pmarca):

@pmarca tweeted: “Entire eBay board, including me, fully aligned that eBay + PayPal are best together. Disclaimer: eBay director, http://bit.ly/1dV6g3z”

[TwitterUser1] commented: “@pmarca When you believe the mantra of ‘unlocking value’ applies in public companies?”
@pmarca responded: “[TwitterUser1] When the benefit to shareholders outweighs the cost to shareholders. [eBay director, http://bit.ly/1dV6g3z ]”

[TwitterUser2] commented: “@pmarca interesting, can you share more about why you reached that decision?”
@pmarca responded: “[TwitterUser2] Entire board carefully studies on regular basis. [eBay director, http://bit.ly/1dV6g3z ]”

[TwitterUser3] commented: “@pmarca would be instructive for investors to hear details of this POV from u or another Board member or Mgt.”
@pmarca responded: “[TwitterUser3] John Donahoe, CEO, discussed at length in Q call: http://seekingalpha.com/article/1961021-ebays-ceo-discusses-q4-2013-results-earnings-call-transcript … [eBay director, http://bit.ly/1dV6g3z ]”

[TwitterUser1] commented: “@pmarca that’s correct from a textbook/biz class perspective but what about from an opertions perspective?”
@pmarca responded: “[TwitterUser1] Costs of separation-loss of synergy, disruption-often outweigh hypothetical benefits. [eBay director, http://bit.ly/1dV6g3z ]”

[TwitterUser2] commented: “@pmarca I was more interested in knowing the details that lead to the decision. I guess they are private?”
@pmarca responded: “[TwitterUser2] I’d refer 2 John Donahoe (CEO) discussion on Q call this week: http://seekingalpha.com/article/1961021-ebays-ceo-discusses-q4-2013-results-earnings-call-transcript … [eBay director, http://bit.ly/1dV6g3z ]”

[Legends Included in Original Are Excerpted at the End of this DEFA14A Filing]

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 instituted administrative proceedings against a registrant and others alleging that two individuals with prior law violations secretly controlled the operational and management decisions of the registrant while calling themselves outside “consultants.”  According to the SEC this arrangement enabled the two consultants to be de facto officers of the registrant and personally profit from the company without disclosing their past brushes with the law to investors.  While the registrant was led during the time period in question by two people with the CEO title,  management decisions made by the two consultants resulted in no revenues or viable business operations for the company.  The SEC alleges the CEOs each deferred to the consultants in derogation of their responsibilities.

While we can’t predict the outcome here, according to this case the SEC has brought such charges in the past and lost.  According to the case, the defendant was found not to be a de facto executive officer because:

  • Testimony indicated the defendant did not and could not make policy for the registrant.
  • While the defendant had substantial influence over the registrant’s acquisition program, he did not have final policy-making authority over the program.
  • The defendant did not have authority to sign contracts.
  • Supervising authority over a few persons is not necessarily indicative of policy making authority.
  • High pay is indicative of being a valued employee and not necessarily evidence of being an executive officer.

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 15 the United States Court of Appeals for the District of Columbia Circuit told CFIUS (the Committee on Foreign Investment in the United States) that constitutional due process requires that parties subject to an adverse CFIUS determination must have the right to review and respond to the unclassified evidence used in making that determination. Ralls Corporation v. Committee on Foreign Investment in the United States, Case No. 13-5315.

Born at the beginning of the Cold War, Section 721 of the Defense Production Act of 1950 requires that so-called covered transactions – “any merger, acquisition or takeover…., by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States” – be reviewed to determine the “effects of the transaction on the national security of the United States.” The CFIUS, comprising heads of various federal agencies and other high-ranking government officials with foreign policy, national security and economic responsibilities, conducts such reviews. CFIUS can mitigate the effect of any covered transaction on the national security of the United States. It can also recommend that the President suspend or prohibit any covered transaction, which the President can do if he finds credible evidence that (i) “the foreign interest exercising control might take action that threatens to impair the national security” and (ii) other provisions of law cannot protect the national security. Slip op. at 6.

Ralls Corp. is a Delaware-based corporation whose owners are Chinese nationals. Ralls bought a wind farm in Oregon located within restricted airspace and a bombing zone, operated by the US Navy. Ralls made its CFIUS filing – a CFIUS review can be initiated by the entity or by CFIUS sua sponte. It answer questions from CFIUS and met with, and gave a presentation to, CFIUS officials.

Such efforts, however, were unsuccessful. CFIUS stopped the transaction pending Presidential review. Ralls said that CFIUS did not apprise Ralls of the gravamen of CFIUS’ concerns.

The President then prohibited the transaction and ordered that Ralls divest itself of all interests in the project. But according to the court, “neither CFIUS nor the President gave Ralls notice of the evidence on which they respectively relied nor an opportunity to rebut that evidence.” Id. at 11.

Ralls appealed, claiming the President deprived Ralls of its constitutionally protected interest in the wind farm without due process of law. The District Court dismissed the claims, in part, finding that due process was met because Ralls had notice that the transaction had to be reviewed and gave Ralls an opportunity to submit evidence, including a presentation, to CFIUS, as well as follow up conversations with CFIUS.

The DC Circuit agreed with Ralls and remanded. The panel (Judge Karen LeCraft Henderson, who wrote the opinion, Judge Judith Rogers Brown and Judge Robert Wilkins) said that the government violated Ralls’ due process right by failing to provide Ralls the opportunity to review and respond to the information the President relied on in making the CFIUS decision. The court said that “due process requires, at the least, that an affected party by informed of the official action, be given access to the unclassified evidence on which the official actor relied and be afforded an opportunity to rebut that evidence.” Id. at 36. (The President relied on both unclassified and classified information in making his decision. The court ruled that Ralls could only review the unclassified evidence.)

The government argued that CFIUS determinations were not reviewable by the courts, that such matters involved political questions not suited to judicial determinations and that the Ralls complaint was moot. The DC Circuit disagreed and remanded to the District Court for further proceedings, including whether there were issues of executive privilege.

Shortly before the filing deadline for the first conflict minerals filings on Form SD, it became known that the SEC believed non-metallic forms of tin are not conflict minerals because non-metallic forms of tin are “chemically distinct from the metal derivatives themselves.” Documentation of the SEC position has been scant. However, a letter outlining the discussions by a firm that participated in the discussions has appeared on the SEC website which is some help in verifying the position.

We note however that the letter was uploaded to the comments section on the proposed conflict minerals rules which could mean it was not necessarily vetted in the same manner as more authoritative SEC staff positions.

Our thanks to The Elm Consulting Group International LLC for pointing this out.

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.

Speaking at a conference, SEC Commissioner Michael S. Piwowar’s opening remarks included “In preparing for this speech, I thought a lot about what moniker I could use to best describe the [Financial Oversight Stability Council, or] FSOC.  The Firing Squad On Capitalism.  The Vast Left Wing Conspiracy to Hinder Capital Formation.  The Bully Pulpit of Failed Prudential Regulators.  The Dodd-Frank Politburo.  The Modern-Day Star Chamber.  You get the point.  There are countless terms I could use that are appropriately pejorative and at the same time entirely accurate.  For the sake of clarity, I will stick with references to the two official nicknames of the FSOC – the “Council” or the “Unaccountable Capital Markets Death Panel.”

Raising more specific concerns, Mr. Piwowar noted:

  • Through a “macroprudential” approach the Fed would expand its reach by immediately pulling under its regulatory umbrella any firms designated as “systemically important financial institutions.”
  • The Fed, through the Council, has been ignoring the talent and skills of the hundreds of subject matter experts in each of the SEC’s rulemaking divisions – Investment Management, Corporation Finance, and Trading and Markets.  The prudential regulators on the Council have been proceeding as if they themselves are the ones who know securities markets and investment products best.
  • The SEC is not the only the Council member whose expert views are being dismissed.  The Council’s “independent member with insurance expertise” voted against the designation of insurer Prudential Financial as a SIFI.  One quote from his lengthy and sharply worded dissent most succinctly describes his position:  “[t]he underlying analysis utilizes scenarios that are antithetical to a fundamental and seasoned understanding of the business of insurance, the insurance regulatory environment, and the state insurance company resolution and guaranty fund systems.”

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.

Some smaller companies and those in the process of going public have begun adopting fee shifting by-laws.  As my colleagues at Stinson Leonard Street have advised, we urge caution for those headed in this direction until, among other things, issuers know the views of investors and proxy advisory firms and any possible legislative changes in Delaware are more clear.

Echo Therapeutics, Inc.

5.13 Litigation Costs.  To the fullest extent permitted by law, in the event that (i) any current or prior stockholder or anyone on their behalf (“Claiming Party”) initiates or asserts any claim or counterclaim (“Claim”) or joins, offers substantial assistance to, or has a direct financial interest in any Claim against the Corporation and/or any Director, Officer,  Employee or Affiliate, and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the Corporation and any such Director, Officer, Employee or Affiliate, the greatest amount permitted by law of all fees, costs and expenses of every kind and description (including but not limited to, all reasonable attorney’s fees and other litigation expenses) (collectively, “Litigation Costs”) that the parties may incur in connection with such Claim.

Biolase Inc.

Section 12.2 Certain Litigation Costs.

To the fullest extent permitted by law, in the event that (a) without obtaining advance approval of the Board, any current or former director or anyone on behalf of any current or former director (each, a “Claiming Director”) asserts any claim or initiates any proceeding or joins, offers substantial assistance to or has a direct financial interest in any claim or proceeding against the Corporation or any of its directors or officers (including any proceeding purportedly filed on behalf of the Corporation or any stockholder), and (b) such Claiming Director (or the third party that received substantial assistance from the Claiming Director or in whose claim or proceeding such Claiming Director had a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought by such Claiming Director (or third party), then such Claiming Director shall be obligated to reimburse the Corporation and any such director or officer for all fees, costs and expenses of every kind and description (including all reasonable attorneys’ fees and other litigation expenses) that the Corporation or any such director or officer actually incurs in connection with such claim or proceeding; provided, however, that the foregoing shall not apply with respect to any claim asserted or proceeding initiated by a Claiming Director for which such Claiming Director is entitled to (i) indemnification under Section 10.1 or any agreement with the Corporation or (ii) bring suit under Section 10.1(b). For purposes of this Section 12.2, “proceeding” shall have the definition set forth in Section 10.1(a) of these Bylaws.

The LGL Group, Inc.

The By-laws of The LGL Group, Inc. (the “Company”) are hereby amended by adding to Article V thereof new Sections 5.2(k) and (l) reading as follows:

(k)           To the fullest extent permitted by law, in the event that (i) any current or prior stockholder or anyone on their behalf (“Claiming Party”) initiates or asserts any claim or counterclaim (“Claim”) or joins, offers substantial assistance to, or has a direct financial interest in any Claim against the Company and/or any Director, Officer, Employee or Affiliate (together, the “Company Parties”), and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the Company Parties the greatest amount permitted by law of all fees, costs and expenses of every kind and description (including but not limited to, all reasonable attorney’s fees and other litigation expenses) (collectively, “Litigation Costs”) that the Company Parties may incur in connection with such Claim.

(l)           To the fullest extent permitted by law, in the event that any Claiming Party initiates or asserts any Claim or joins, offers substantial assistance to, or has a direct financial interest in any Claim against any Company Parties, then, regardless whether the Claiming Party is successful on its Claim in whole or in part, (i) the Claiming Party shall bear its own Litigation Costs, and (ii) the Claiming Party and the Claiming Party’s attorneys shall not be entitled to recover any Litigation Costs or, in a derivative or class action, to receive any fees or expenses as the result of the creation of any common fund, or from a corporate benefit purportedly conferred upon the Corporation.

The By-Laws of the Company are hereby amended by adding to Article V thereof a new Section 5.5 reading as follows:

Section 5.5.  Severability.  If any provision (or any part thereof) of these By-laws shall be held to be invalid, illegal or unenforceable as applied to any circumstance for any reason whatsoever: (i) the validity, legality and enforceability of such provisions in any other circumstance and of the remaining provisions of these By-laws (including, without limitation, each portion of any section of these By-laws containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and (ii) to the fullest extent possible, the provisions of these By-laws (including, without limitation, each such portion containing any such provision held to be invalid, illegal or unenforceable) shall be construed for the benefit of the Corporation to the fullest extent permitted by law so as to (a) give effect to the intent manifested by the provision held invalid, illegal or unenforceable, and (b) permit the Corporation to protect its directors, officers, employees and agents from personal liability in respect of their good faith service.  Reference herein to laws, regulations or agencies shall be deemed to include all amendments thereof, substitutions therefor and successors thereto, as the case may be.

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 guidance to registered private equity advisers regarding escrow arrangements resulting from the sale of a portfolio company.  The guidance revolves around a circumstance involving the sale of a portfolio company owned by one or more pooled investment vehicles (typically private equity funds) advised by a registered investment adviser (i.e. a private equity sponsor)  and other persons that are not clients of the adviser. As part of the sale or merger, the sellers (including the adviser’s pooled investment vehicle client(s) and other non-client owners of the portfolio company) often appoint a “sellers’ representative” to act on their behalf with respect to a portion of the sale proceeds held in an escrow following the closing of the sale or merger.  The purpose of an escrow is to hold a percentage of sale proceeds to be used in the event of indemnification or an adjustment to the sale price of a portfolio company included in the terms of the purchase or merger agreement between the sellers and buyer. An escrow typically exists for a limited period of time and the funds remaining after such time are distributed on a predetermined formula to the sellers, including the adviser’s pooled investment vehicle clients.

The custody rule adopted under the Investment Advisers Act (Rule 206(4)-2)  requires a registered investment adviser to maintain funds and securities over which it has custody with a qualified custodian (meaning certain banks, broker dealers and the like) in a separate account for each client in the client’s name, or in accounts that contain only the adviser’s clients’ funds and securities that are maintained in the adviser’s name as agent or trustee for the clients.  The funds in an escrow often belong to both the adviser’s pooled investment vehicle clients and other sellers that are not advisory clients and are typically maintained in the name of the sellers’ representative. Under these circumstances, advisers believe that the primary protections of these joint escrows for their clients (and pooled investment vehicle investors) are similar in material respects to separate escrows or escrows with only clients’ funds and that creating multiple escrows to fully comply with the custody rule would not significantly change the protections and risks.

The SEC Division of Investment Management stated it would not object if an adviser maintains client funds in an escrow under the above circumstances with other client and non-client assets, provided that:

  • the client is a pooled investment vehicle that relies on the “audit provision” and includes the portion of the escrow attributable to the pooled investment vehicle in its financial statements.  The “audit provision” requires, among other things, the pooled investment vehicle to be subject to audit at least annually by an independent public accountant registered with, and subject to regular inspection by, the Public Company Accounting Oversight Board, and for the audited financial statements to be distributed to all beneficial owners of the pool within 120 days of the pool’s fiscal year-end.
  • the escrow is in connection with the sale or merger of a portfolio company owned by the private equity fund (i.e., for indemnification or to adjust the purchase price);
  • the escrow contains an amount of money that is agreed upon as part of a bona fide negotiation between the buyer and the sellers;
  • the escrow exists for a period of time that is agreed upon as part of a bona fide negotiation between the buyer and the sellers;
  • the escrow is maintained at a qualified custodian; and
  • the sellers’ representative is contractually obligated to promptly distribute the funds remaining in the Escrow at the end of the escrow period on a predetermined formula to the sellers, including the pooled investment vehicle clients.

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 issued an interpretive rule to clarify that when a borrower dies, the name of the borrower’s heir generally may be added to the mortgage without triggering the Bureau’s Ability-to-Repay rule. This clarification will help surviving family members who acquire title to a property to take over the decedent’s mortgage, and to be considered for a loan workout, if necessary, to keep their home.

The interpretive rule explains that because an heir has already acquired the title to the home, adding the heir as a borrower on the mortgage does not trigger the Ability-to-Repay requirements. The rule does not require the creditor to determine the heir’s ability to repay the mortgage before formally recognizing the heir as the borrower. As the named borrower, the heir may more easily be able to obtain account information, pay off the loan, or seek a loan modification. The interpretive rule can also apply to other transfers, including transfers to living trusts, transfers during life from parents to children, transfers resulting from divorce or legal separation, and other family-related 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.