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

SEC Commissioner Luis A. Aguilar gave a speech to an annual conference of the North American Securities Administrators Association, otherwise known as NASAA.  On the issue of Reg A+  preemption of state law, the Commissioner noted NASAA’s proposed coordinated review of Reg A+ offerings could ameliorate many of the concerns raised by commenters regarding state blue sky review of Tier 2 offerings.  While some costs of state review will remain, a viable Coordinated Review Program should certainly reduce issuer legal costs significantly, while also reducing delay and uncertainty.

I think that most of us that advise issuers believe that Reg A+ without pre-emption is not useful.  It’s not self-serving, Tier 2 offerings have increased disclosure requirements that render state review unnecessary.

SEC Commissioner Kara Stein also gave a speech at the conference, which includes a useful analysis that the term “blue sky” originated in Kansas legislation.

Ms. Stein also demonstrated her support for NASAA ideas.   As to the pending Reg D proposals, according to Ms. Stein:

  • Form D filings should be of little moment to the legitimate issuer, while giving serious pause to those intending fraud. While firms are required to file Forms D now, that obligation is rarely enforced. If an issuer, attempting to raise millions of dollars, cannot even meet the most basic of requirements to complete and submit its Form D filings, should that issuer be allowed to rely on the Rule 506 exemption for that offering? Honest mistakes by issuers can be quickly and easily cured, or even, when appropriate, waived by the Commission.
  • We must also ensure that investors get the information they need to understand what they are being sold. Shouldn’t each piece of advertising clearly and plainly alert the investor to the risks of the investment? Or is it okay to have cautions buried in fine print or relegated to an afterthought?
  • Finally, shouldn’t we gather, and permit public analysis of the general solicitation materials? These advertising materials could be used to find problems in particular offerings, better understand our markets, look for trends and best practices, and inform our policy choices.

As to the Regulation A+ proposals, Ms. Stein noted “I have made no secret of my views that we need to work with you, our state partners here, and can benefit greatly from your unique expertise and ability. I want to take a moment to commend and congratulate NASAA and the states for voting to implement your new Coordinated Review Program. It’s my understanding that it is essentially ready to go. Well done. I have said this before, and it bears repeating, I remain concerned that the proposed Reg A+ does not provide workable options for smaller issuers, and that it unwisely precludes the states from their critical oversight function. I look forward to a continued dialogue with NASAA and others to find a better way to continue our partnership in the new Reg A+ framework.”

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 nine additional frequently asked questions, or FAQs, on the SEC’s conflict reporting rules. Some of the highlights are:

  • IPSA and DRC Conflict Undeterminable.  If any of an issuer’s products are “DRC conflict undeterminable” during the transition period, the issuer is not required to obtain an IPSA of its Conflict Minerals Report. Which infers this is the case even if some of the issuer’s products are not DRC conflict undeterminable.
  • Some But Not All Products are DRC Conflict Undeterminable.  If an issuer does not obtain an independent private sector audit, or IPSA, of its Conflict Minerals Report because one of its products is “DRC conflict undeterminable,” it cannot describe any of its other products as “DRC conflict free” in its Conflict Minerals Report.
  • Combination of Conflict Minerals in Product.   In its Conflict Minerals Report, how should the issuer describe any particular product based upon the various combinations of conflict minerals in the product?  During the temporary transition period, if an issuer has a product that would qualify as “DRC conflict free” except that the product contains a conflict mineral that the issuer is unable to determine did not originate in the DRC or an adjoining country, or is unable to determine did not directly or indirectly finance or benefit armed groups in those countries, the issuer may not describe that product as “DRC conflict free.”   Both during and after the temporary transition period, however, if an issuer determines that a product contains a conflict mineral that did finance or benefit armed groups in the DRC or an adjoining country, it must describe that product as “having not been found to be ‘DRC conflict free.’”
  • Scope of IPSA is Limited.  The scope of the IPSA does not include the completeness or reasonableness of the issuer’s due diligence, including with respect to which products the issuer described as “DRC conflict free” or “having not been found to be ‘DRC conflict free,’” or which suppliers are covered by the due diligence measures.  The IPSA scope is limited to the IPSA objective provided in the rule.  The IPSA objective is to express an opinion or conclusion as to whether:
    •  the design of the issuer’s due diligence measures as set forth in, and with respect to the period covered by, the issuer’s Conflict Minerals Report is in conformity, in all material respects, with the criteria set forth in the nationally or internationally recognized due diligence framework used by the issuer, and
    • the issuer’s description of the due diligence measures it performed as set forth in the Conflict Minerals Report, with respect to the period covered by the report, is consistent with the due diligence process that the issuer undertook.
  • IPSA Does Not Include Reasonable Country of Origin Inquiry.  The IPSA does not need to include the reasonable country of origin inquiry because, under the rule, that inquiry is a distinct step separate from the due diligence process.    As a result, the independent private sector auditor need only opine on whether the design of the issuer’s due diligence framework is in accordance with the portion of the nationally or internationally recognized due diligence framework beginning after the country of origin determination.
  • IPSA Opinion. With regard to the second part of the IPSA objective, the issuer’s conflict minerals report is required to describe the due diligence measures it undertook.  As such, the independent private sector auditor need only opine on whether the issuer actually performed the due diligence measures described in the report after the issuer determined it had reason to believe its conflict minerals may have originated in the DRC or an adjoining country.
  • Recycled and Scrap. If the issuer determines that any conflict minerals in its product came from recycled or scrap sources, the issuer must include in the body of its specialized disclosure report on Form SD the required disclosures for those conflict minerals.  The issuer must also file a Conflict Minerals Report as an exhibit to the Form SD that includes a description of the due diligence it performed and any other required disclosures about its conflict minerals that are not from recycled or scrap sources.  The Conflict Minerals Report would not need to include the disclosures for the conflict minerals from recycled or scrap sources.  An issuer is only required to obtain an IPSA of its Conflict Minerals Report and not of the disclosures contained in the body of its Form SD.
  • Continuous Due Diligence?  An issuer’s due diligence measures must apply to the conflict minerals in products manufactured during the calendar year.  This requirement, however, does not imply that due diligence measures must be carried out constantly throughout the calendar year.  It is also possible that the issuer’s due diligence measures may begin before or extend beyond the calendar year.

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 Office of Inspector General of the Board of Governors of the Federal Reserve System conducted an initial evaluation to assess the operational efficiency and effectiveness of the Consumer Financial Protection Bureau’s supervision program.

The OIG believes the CFPB can improve the efficiency and effectiveness of its supervisory activities.  Specifically, it found that the CFPB needs to:

  • improve its reporting timeliness and reduce the number of examination reports that have not been issued,
  • adhere to its unequivocal standards concerning the use of standard compliance rating definitions in its examination reports, and
  • update its policies and procedures to reflect current practices.

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.

OSHA has published the interim final text of regulations governing the employee protection (or whistleblower) provisions of the Consumer Financial Protection Act of 2010, or CFPA, Section 1057 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

This rule establishes procedures and time frames for the handling of retaliation complaints under CFPA, including:

  • procedures and time frames for employee complaints to OSHA,
  • investigations by OSHA,
  • appeals of OSHA determinations to an administrative law judge, or ALJ, for a hearing de novo,
  • hearings by ALJs,
  • review of ALJ decisions by the Administrative Review Board (acting on behalf of the Secretary of Labor), and
  •  judicial review of the Secretary’s final decision.

CFPA protects individuals who provide information to their employer, to the Consumer Financial Protection Bureau, or CFPB, or to any other Federal, State, or local government authority or law enforcement agency relating to any violation of (or any act or omission that the employee reasonably believes to be a violation of) any provision of CFPA or any other provision of law that is subject to the jurisdiction of the CFPB, or any rule, order, standard, or prohibition prescribed by the  CFPB.  CFPA also protects individuals who object to, or refuse to participate in, any activity, policy, practice, or assigned task that the employee (or other such person) reasonably believes to be in violation of any law, rule, order, standard, or prohibition, subject to the jurisdiction of, or enforceable by, the CFPB.

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.

A Fourth Circuit case, Yates v. Municipal Mortgage & Equity, LLC (March 2014), recently examined the role of 10b5-1 plans in an alleged securities fraud case involving a financial statement restatement.  To prevail on a Rule 10b-5 claim, plaintiffs must prove scienter, amongst other things.  Evidence of insider trading is often advanced as motive, because allegations of personal financial gain may weigh heavily in favor of a scienter inference.

In the Yates case, the court examined trades made by defendants pursuant to two 10b5-1 plans in the context of a motion to dismiss.  The court noted that since the trades were made under non-discretionary Rule 10b5-1 plans, it weakens any inference of fraudulent purpose.  One plan was entered into well before the start of the putative class period.  The other was instituted after the start of the class period, but before the complaint alleges any officer of the issuer new about incorrect accounting.  No allegations were made that shares were traded outside the plan. The court stated the Rule 10b5-1 plan did not completely immunize the defendant from suspicion, but that the plan did mitigate any inference of improper motive surrounding the sales.

 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.

Jeanette M. Franzel, PCAOB Board Member, recently gave her views on the PCAOB’s requirements.  Ms. Franzel noted the PCAOB has heard that in response to some recent changes, some issuers have expressed concerns about the value of additional audit work in the internal control over financial reporting, or ICFR, area, and whether there will be significant increases in costs as a result.

According to Ms. Franzel, the PCAOB has received feedback that would indicate there has not been effective communication and dialogue between audit firms and issuers about ICFR issues. In some cases, audit firms have told issuers that the PCAOB insists on detailed procedures such as the use of “screen prints” to document certain systems-related features; or specifying the number of pages that must be involved in summarizing key controls; or that auditors must attend management meetings to observe certain controls in action. Ms. Franzel stated “I assure you that the Board is not requiring procedures at that level of detail. AS 5 provides the guiding standard for ICFR audits.”

Ms. Franzel noted that unfortunately, such responses from audit firms tend to close down the dialogue with financial statement preparers about important basic issues such as identifying key controls, establishing the appropriate level of management documentation and testing, and the nature and extent of auditor testing needed to support the auditor’s ICFR opinion.

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.

Investment Advisers Act Rule 206(4)-1(a)(1) states that: “[i]t shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business . . . for any investment adviser registered or required to be registered under [the Advisers Act], directly or indirectly, to publish, circulate, or distribute any advertisement which refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by such investment adviser” (emphasis added).

The SEC’s Division of Investment Management has provided guidance to investment advisers on the use of social medial with respect to public commentary that is a testimonial.  Among other things, the guidance provides the staff believes that in certain circumstances an investment adviser’s or investment advisory representative’s publication of all of the testimonials about the investment adviser or IAR from an independent social media site on the investment adviser’s or IAR’s own social media site or website would not implicate the concern underlying the testimonial rule.

So if you don’t pick and choose and publish everything it is acceptable.  The staff isn’t really opening the flood gates here, but I suppose it is a step in the right direction.

Note there are other useful FAQs as well.

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.

Minnesota has adopted the Minnesota Revised Uniform Limited Liability Company Act (the “Revised Act”) and the legislation was signed into law by Governor Dayton on April 11, 2014.  The Revised Act will apply to all limited liability companies (“LLCs”) formed on or after after August 1, 2015 and to limited liability companies formed prior to August 1, 2015 that opt-in by amending the appropriate governing documents.  Beginning on January 1, 2018, the Revised Act will apply to all limited liability companies and the existing Minnesota Limited Liability Company Act will be repealed.  In general, the Revised Act adopts an approach that favors flexibility and contractual arrangements and brings Minnesota more in line with LLC law in Delaware and several other states.

You can find more information on the Revised Act 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 a recent speech, Keith Higgins, Director, SEC Division of Corporation Finance, gave his views on certain misperceptions and other matters regarding general solicitation under the JOBS Act.

Mr. Higgins noted that since general solicitation became effective, almost 900 new offerings have been conducted in reliance on the exemption, raising more than $10 billion in new capital.  But that pales in comparison to the use of the old “private” Rule 506 exemption (now called Rule 506(b)) which, during the same time period, was relied upon in over 9,200 new offerings that resulted in the sale of over $233 billion in securities.

Mr. Higgins noted one wonders why the new Rule 506(c) exemption has not caught on more widely with issuers who have long clamored for the general solicitation ban to be lifted. He spoke to three of the most commonly-heard explanations:

1.         Reasonable Steps to Verify. Some believe that the reluctance of issuers to use the new Rule 506(c) exemption is because the rule requires that the issuer take “reasonable steps to verify” the accredited investor status of a purchaser. It’s not true that the rule requires that an accredited investor produce his or her tax returns or brokerage statements in all circumstances. There are actually two paths for complying with the rule’s verification requirement. Issuers can rely on one of the four non-exclusive verification methods for a natural person that, if used, would be deemed to satisfy the verification requirement. The other method, however, is the principles-based verification method in which the issuer would look at the particular facts and circumstances to determine the steps that would be reasonable to verify that someone is indeed an accredited investor.

When using the principle-based verification method consider:

  • How much information about the prospective purchaser does the issuer already have? The more information the issuer has indicating that the person is an accredited investor, the fewer verification steps that it may have to take to comply with the rule’s requirement.
  • How did the issuer find the prospective investor? A person that the issuer located through publicly-accessible and widely-disseminated means of solicitation may need to undergo a greater level of verification scrutiny than a person who may have been pre-screened as an accredited investor by a reasonably reliable third party.
  • Are the terms of the offering such that only a person who is truly an accredited investor could participate? The ability of a purchaser to satisfy a minimum investment amount requirement that is sufficiently high such that only accredited investors, using their own cash, could reasonably be expected to meet it is relevant in deciding what other steps are needed to verify accredited investor status.

The SEC has had recent inquiries asking whether the staff would provide guidance – presumably on a case-by-case basis – confirming that a specified principles-based verification method constitutes “reasonable steps” for purposes of the rule’s requirement.  Mr. Higgins noted the notion of the staff reviewing and approving specific verification methods seems somewhat contrary to the very purpose of a principles-based rule and he is not yet convinced of the need for this type of staff involvement.   According to Mr. Higgins, while the staff may not be in a position at this point to provide guidance on what constitutes “reasonable steps” under particular circumstances, he believes the staff will not be quick to second guess decisions that issuers and their advisers make in good faith that appear to be reasonable under the circumstances.

2.         Definition of “General Solicitation.” Mr. Higgins noted another commonly-heard criticism is that the definition of a “general solicitation” is too vague, creating so much uncertainty about whether a particular communication or activity is a form of general solicitation that issuers have adopted a very cautious mindset about the new Rule 506(c) exemption.  He stated some may even be under the erroneous impression that the Commission has broadened the definition so that activities such as “venture fairs” and “demo days” are now prohibited. The truth of the matter is that the recent rulemaking has not changed any notions of what constitutes a general solicitation.

3.         “Overhang” of the 2013 Regulation D Proposal.  Mr. Higgins observed that he cannot predict what the Commission will ultimately do on the pending Regulation D rule proposal, but he spoke to a fear the staff has heard expressed that the proposed requirements and penalties might be applied retroactively to offerings conducted before the adoption of the proposal. He pointed to comments of SEC Chair White where she stated that issuers are not expected to comply with any aspect of the rule proposal until such time as the Commission approves a final rule and such rule becomes effective.   Ms. White also expressed her expectation that the Commission will consider the need for transitional guidance for ongoing offerings that commenced before the effective date of any final rules, as it did when it adopted Rule 506(c) last summer.

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.

An indictment was recently unsealed where the United States recently brought criminal charges, for among other things, false certifications under Section 302 and 906 of the Sarbanes-Oxley Act.  The allegations are of course horrendously egregious, and thankfully not the result of making fine judgments the U.S. Attorney thought were a little bit on the wrong side of the line.

For instance, the indictment alleges an individual knowingly filed a false report — the allegedly false report apparently had a falsified Section 305 and Section 906 certification that was not signed by the individual indicated and the purported signer was not acting as acting  CFO (see paragraph 45), and later the accused allegedly actually executed a false Section 906 certification and the SEC report did not reveal the fraud the accused signer was allegedly perpetrating (see paragraph 48).

Students of Sarbanes-Oxley may point out that the Section 302 certification is not actually part of the criminal code — so why criminal charges?  The U.S. apparently takes the position that knowingly filing a report with a false certification violates Section 807 of Sarbanes-Oxley, a criminal statute.

Why were Section 906 charges brought for only some of the allegedly false Section 906 certifications and not all?  Maybe one reason is the wrong-doer has to actually sign the false Section 906 certification for a Section 906 charge, as opposed to allegedly causing a report to be filed where someone else’s signature was fraudulently placed on the certification, which only merits a Section 807 charge.  And perhaps with respect to the 10-K referred to in paragraph 59, the faulty 302 certification is based on not disclosing fraud to the auditors which is contrary to Section 302, but not on its face contrary to Section 906.

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.