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

Norm Champ, the SEC’s Director of the Division of Investment Management, recently gave a speech addressing the SEC’s priorities regarding hedge fund managers.

As to the JOBS Act and the elimination of general solicitation, Mr. Champ noted:

  • Advisers to private funds are subject to an anti-fraud rule that prohibits fraudulent and misleading conduct with respect to fund investors, including making untrue statements of material fact to those investors.  Accordingly, advisers should carefully review their policies and procedures to determine whether they are reasonably designed to prevent the use of fraudulent or misleading advertisements and update those policies where necessary, particularly if the hedge funds intend to engage in general solicitation activity.
  • Hedge fund sponsors intending to rely on the new rule should also consider whether their current practices for verifying accredited investor status meet the requirements of the new rule.
  • In order to assist the Commission’s efforts to assess developments in the Rule 506(c) market, an inter-Divisional group has been created within the Commission to review the new market and the practices that develop.  Staff from the Division of Investment Management will play a key role in this initiative, and will work closely with staff from the Division of Corporation Finance, the Division of Economic and Risk Analysis, or DERA,, formerly the Division of Risk, Strategy and Financial Innovation, the Division of Trading and Markets, the Office of Compliance Inspections and Examinations, or OCIE, and the Division of Enforcement.  As part of the work plan, staff will, among other things, evaluate the range of accredited investor verification practices used by issuers and other participants in these offerings, and endeavor to identify trends in this market, including in regard to potentially fraudulent behavior.  Commission staff will also develop risk characteristics regarding the types of issuers and market participants that conduct or participate in offerings involving general solicitation and general advertising and the types of investors targeted in these offerings.
  • He has instructed the Division of Investment Management rulemaking and risk and examination staff to pay particular attention to the use of performance claims in the marketing of private fund interests.  In particular, this review will endeavor to identify potentially fraudulent behavior and to assess compliance with the federal securities laws, including appropriate Investment Advisers Act provisions.  I

As to the “bad actor” rules, Mr. Champ spoke about:

  • For hedge funds, potential “bad actors” under the rule could include a hedge fund’s general partner or managing member, its investment adviser and principals, significant shareholders holding voting interests, affiliated issuers and any placement agent or other compensated solicitor.
  • The final rule provides an exception from disqualification for issuers that can show they did not know and, in the exercise of reasonable care, could not have known that a covered person with a disqualifying event participated in the offering.  Given the serious consequences of a bad actor finding, hedge  fund advisers should take care when hiring employees and screening investors, and conduct appropriate due diligence when retaining third party solicitors.

On other topics, Mr. Champ stated:

  • The Division of Investment Management’s Risk and Examinations Office, or REO, intends to conduct rigorous quantitative and qualitative financial analysis of the investment management industry, strategically important investment advisers and funds.  REO, in collaboration with the DERA, is using Form PF data to develop risk-monitoring analytics, as well as to provide internal periodic reports regarding the private fund industry and particular market segments.
  • Division staff also will use Form PF data to inform policy and rulemaking with regard to private funds, and the Division intends to use aggregated, non-proprietary data in its consultative work with other securities regulators on issues of mutual interest. Similarly, other divisions are beginning to utilize this data to advance their missions. For example, the Commission’s Asset Management Unit of the Division of Enforcement is working with DERA to develop analytic tools to integrate Form PF data into research and due diligence related to investigative work and other enforcement matters. Also, the OCIE anticipates using the information collected on Form PF for, among other things, conducting pre-examination research and due diligence.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The CFPB has published a bulletin expressing its view that employers cannot require their employees to receive wages on a payroll card. The bulletin also gives the CFPB’s view on some of the federal consumer protections that apply to payroll cards, such as fee disclosure, access to account history, limited liability for unauthorized use, and error resolution rights.

With some limited exceptions, the CFPB has authority to enforce the Electronic Funds Transfer Act and Regulation E against anyone who violates them, including employers and the financial institutions that issue payroll cards. The Bureau intends to use its enforcement authority to stop violations before they grow into systemic problems, maximize remediation to consumers, and deter future violations. The Bureau also has supervisory authority over larger depository institutions engaged in, among other things, providing payroll cards. The Bureau stated it will be looking to ensure that entities comply with federal consumer financial laws.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

 

This past Monday, September 9, the Federal Energy Regulatory Commission (FERC) posted a letter from its chairman, Jon Wellinghopf, to Senators Elizabeth Warren and Edward Markey responding to their inquiries on the relationship between FERC and the Commodity Futures Trading Commission (CFTC) and FERC’s recent $410 million settlement against J.P. Morgan Energy Ventures. Read Letter to Senators Warren and Markey from Chairman Wellinghopf.

On the CFTC relationship, the chairman said the Memorandum of Understanding (MOU), as required by the Dodd-Frank Act, had not yet been reached with the CFTC.  FERC wants access to the Large Trader Report provided by the Intercontinental Exchange to the CFTC.  The chairman said the data will allow “FERC to see the names and positions of parties that have a financial interest in the formation of prices in FERC’s jurisdictional markets.”  Wellinghopf Letter at 3.  In the absence of the MOU and the Large Trader Report, FERC has developed “automated algorithmic screens” for surveillance purposes. Id.

On another CFTC relationship issue, in Hunter v. FERC, 711 F.3d 155 (D.C. Cir. 2013), the United States Court of Appeals for the District of Columbia Circuit ruled that the CFTC has exclusive jurisdiction over manipulation in the futures markets, even if the activity affected prices in the physical markets for which FERC has exclusive jurisdiction.  The chairman said he viewed that opinion “narrow in scope.” Id. at 2  But market participants view the decision more broadly to include additional transactions and products squarely within FERC’s jurisdictional markets.  Therefore, the chairman said he supported a legislative fix to “ensure FERC has the full authority needed to police manipulation of wholesale physical natural gas and electric markets.” Id.

On the JP Morgan settlement, the total amount of the settlement had been reported at $410 million – a $285 million civil penalty and disgorgement of $125 million in revenues. But the chairman said that JP Morgan also agreed to waive $262 million of claims against the California Independent System Operator, thereby raising the total dollar value of the settlement.

Finally, while the chairman conceded that “[t]he Federal Power Act does not give the Commission authority to ban traders from electricity markets for market manipulation,” Id. at 4, he said that in the Settlement Agreement, “JP Morgan has assured the Commission that the traders who engaged in the bidding strategies at issue here will not participate in bidding generation into organized markets, or otherwise engage in power market trading, on behalf of JP Morgan.” Id.

 

Join the free Spreecast on Tuesday, September 17, 2013, at 2:00 – 2:30 pm, eastern time, where the topic will be “More on Reg D Offerings Today.”  The Spreecast is being hosted by Broc Romanek of the TheCorporateCounsel.net and the speakers will be Cohen Gresser’s Bonnie Roe, Davis Wright’s Joe Wallin and myself.

A “spreecast” is an interactive video conversation that can have up to four people on screen at once, can be broadcasted live to an unlimited amount of viewers and is recorded and archived to watch later. Not only are speakers on screen, but all the participants can chat with each other – or write questions to the speakers. Each spreecast has its own unique and shareable URL.

You can find more information on how to participate here.

For other information on Regulation D and general solicitation, see JOBS Act and Other Securities Law Essentials for Growing Companies.

Check jobs-act-info.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

 

As many know, on September 23, 2013, issuers will be able to make general solicitations, or advertising, when selling securities under Rule 506 of Regulation D.  While we look forward to working with issuers on these offering, we caution issuers to consider state blue sky laws when planning for these offerings.

States, like the federal government, can regulate the offer and sale of securities in their states. It’s good news that years ago Congress passed a law called the ‘‘National Securities Markets Improvement Act of 1996” which basically preempts a state’s ability to separately regulate a Rule 506 offering.  However, states can still impose notice filings and fee requirements in connection with Rule 506 offerings.

For instance, in Minnesota, the state requires the following notice filing under Rule 2876.3020 in connection with a Rule 506 offering:

  • a copy of Form D as promulgated by the Securities and Exchange Commission;
  • a report of the aggregate value of securities included in this offering already sold or offered to be sold to persons located in this state;
  • a consent to service of process complying with Minnesota Statutes, section 80A.88, signed by the issuer not later than 15 days after the first sale of the federal covered security in Minnesota; and
  • a filing fee, which can be as high as $300.

Minnesota has other exemptions that might be applicable, but many prohibit the use of general solicitation, such as Section 80A.46(14).  Others, such as Section 80A.46(13), permit sales to accredited investors without filings, but do not appear to permit offers made to non-accredited investors under a general solicitation.

Failure to comply with the statute can result in a rescission action by purchasers, which means the investors can get their money back, and other adverse consequences.

As a result, issuers need to carefully plan any offering which uses general solicitation to consider filings under state blue sky laws.  One consequence of using general solicitation will be the payment of filing fees and a carefully coordinated filing process. 

For more information, see JOBS Act and Other Securities Law Essentials for Growing Companies.

Check jobs-act-info.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The Responsible Sourcing Network has released a paper, the goal of which is to describe the content that certain sustainable and responsible investors, or SRIs, and nongovernmental organizations, or NGOs, expect to see in an issuer’s Specialized Disclosure, or Form SD, and Conflict Minerals Report, or CMR, if a CMR is deemed necessary.  According to the paper it articulates key reporting components that are important to many SRIs and NGOs and suggests indicators that can be tracked over time to allow for comparability between reports and measure improvement. 

Among other things, the group believes an issuer should describe the process it has in place and the steps it will take to:

  • Identify risks in its supply chain.
  • Ensure compliance with its policy and program. An issuer is expected to describe the steps it has taken to ensure that its suppliers are complying with the issuer’s conflict minerals policy and program.
  • Respond to identified risks, including instances of noncompliance with its policy and program.
  • Disclose and describe the contractual language, supplier-agreement language, and/or policies it is using to implement the steps above.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The Federal Reserve Board and the Federal Deposit Insurance Corporation, or FDIC, have released an optional model template for tailored resolution plans that certain firms will be submitting for the first time later this year.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that bank holding companies with total consolidated assets of $50 billion or more and nonbank financial companies designated for enhanced prudential supervision by the Financial Stability Oversight Council submit resolution plans to the Federal Reserve and the FDIC. The initial resolution plans for one group of firms–generally those with less than $100 billion in total nonbank assets or $100 billion in U.S. nonbank assets if they are a foreign-based company–must be submitted to the Federal Reserve and the FDIC on or before December 31.

The resolution plan rule previously issued by the agencies permits eligible firms, generally those that are smaller and less complex, to file a tailored resolution plan. A tailored resolution plan focuses on the nonbanking operations of the firm and on the interconnections and interdependencies between the nonbanking and banking operations. The optional template is intended to facilitate the preparation of tailored resolution plans.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

 

The CFPB has issued a notice regarding companies that supply information to consumer reporting companies. The CFPB released a bulletin stressing that, under the CFPB’s view of the law, these companies, called furnishers, are responsible for investigating consumer disputes forwarded by the consumer reporting companies. Furnishers are also responsible for reviewing all relevant information provided with the disputes, including documents submitted by consumers.

The bulletin details the CFPB’s expectations of how furnishers should comply with the requirements of the Fair Credit Reporting Act, particularly with respect to investigations of consumer disputes they receive from consumer reporting companies.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The United States District Court for the District of Columbia previously vacated the SEC resource extraction disclosure rules.  According to various published press reports, the SEC will not appeal the decision.  “The court remanded the matter for further SEC proceedings, which the commission will undertake informed by the court’s decision” according to remarks attributed to an SEC official.  We surmise that means the SEC will propose a new rule consistent with the court decision.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The head of the CFPB, Richard Cordray, was initially appointed by a recess appointment which has generated speculation as to its validity and resulted in certain court actions.  Mr. Cordray’s appointment was subsequently confirmed by the senate in July 2013.  Mr. Cordray has recently sought to dispel doubts about his recess appointment actions by ratifying all such actions by this document published in the Federal Register.

The document states: “I believe that the actions I took during the period I was serving as a recess appointee were legally authorized and entirely proper. To avoid any possible uncertainty, however, I hereby affirm and ratify any and all actions I took during that period.”

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.