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

The AICPA has issued non-authoritative guidance which provides that auditing an SEC issuer’s financial statements and performing an independent private sector audit of a conflict minerals report would not be inconsistent with the SEC’s independence requirements under Rule 2-01 of Regulation S-X. The engagement to perform the independent private sector audit would nevertheless be considered a “nonaudit service” subject to audit committee pre- pursuant to Rule 2-01(c)(7) of Regulation S-X. In addition, the fees related to independent private sector audit would need to be included in the “All Other Fees” category of the principal accountant fee disclosures.

The guidance also addresses six other frequently asked questions.  The AICPA has also prepared a matrix indicating what types of services related to the conflict mineral rules are prohibited.

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

The CFTC business conduct rules require swap dealers to disclose the material risks of a particular swap to a counterparty, which may include market, credit, liquidity, foreign currency, legal, operational, and any other applicable risks.  ISDA has published a number of standard risk disclosure documents which include:

  • General Disclosure Statement
  • Commodities Derivative Disclosure Annex
  • Credit Derivatives Disclosure Annex

The documents are available for free download here (click on the “Disclosure Documents” tab).

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 Bank of Minneapolis has published a study that seeks to quantify the cost of increased regulation on community banks. It models the impact of new regulatory costs as the hiring of additional staff, resulting in higher total compensation and lower profitability. It also analyzes the changes in the distribution of community bank profitability.

The study finds that the median reduction in profitability for banks with less than $50 million in assets is 14 basis points if they have to increase staff by one half of a person; the reduction is 45 basis points if they increase staffing by two employees. The former increase in staff leads an additional 6 percent of banks this size to become unprofitable, while the latter increase leads an additional 33 percent to become unprofitable.

Table 4 is also interesting because it shows that increased regulation also has a significant impact on return on assets on larger community banks:

 

 

Table 4

 

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

Broc Romanek of TheCorporateCounsel.net recently described a member’s concerns that some companies were having on relying on the Dodd-Frank Act’s exemption for end-users for swaps entered into by treasury subsidiaries and affiliates:

Many non-financial companies are planning to rely on the helpful End User Exception. Some of them do not have any problem satisfying the “non-financial entity” requirement, which is determined under a very complicated definition. Under the provision most relevant for non-financial public companies, if 85% or more of the entity’s annual gross revenues is derived from activities that are “financial in nature” (as defined by banking regs) or 85% or more of its consolidated assets are related to activities that are “financial in nature” (same), then the entity is deemed to be a “financial entity” that cannot use the End User exception (there’s a 2 year lookback for each test).

The problem arises for non-financial companies that have separate legal entities for their in-house treasury operations. Even though there’s no legal requirement to use a separate legal entity for treasury operations, many companies have historically taken that approach for a variety of reasons including centralization, i.e., having one group of treasury professionals available to interface with a variety of outside banks. These so-called “treasury subsidiaries” are wholly owned by the parent company. They are often the subsidiaries that non-financial companies use as their bank-facing parties to hedge or mitigate commercial risk for the company and its subsidiaries. Because of the nature of their activities, treasury subsidiaries often fail the 85% test, and therefore are “financial entities” that cannot elect as End Users.

The CFTC recently issued no-action relief to address this concern.  Conditions to relying on the no-action relief include:

  • The eligible treasury affiliate enters into the exempted swap for the sole purpose of hedging or mitigating the commercial risk of one or more related affiliates that was transferred to the eligible treasury affiliate by operation of one or more swaps with such related affiliates;
  • The eligible treasury affiliate does not enter into swaps with its related affiliates or unaffiliated counterparties other than for the purpose of hedging or mitigating the commercial risk of one or more related affiliates;
  • Neither any related affiliate that enters into swaps with the eligible treasury affiliate nor the eligible treasury affiliate, enters into swaps with or on behalf of any affiliate that is a financial entity (“financial affiliate”), or otherwise assumes, nets, combines, or consolidates the risk of swaps entered into by any financial affiliate;
  • Each swap entered into by the eligible treasury affiliate is subject to a centralized risk management program that is reasonably designed to monitor and manage the risks associated with the swap; and
  • The payment obligations of the eligible treasury affiliate on the exempted swap are guaranteed by its non-financial parent, an entity that wholly-owns or is wholly-owned by its non-financial parent, or the related affiliates for which the swap hedges or mitigates commercial risk.

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

We previously noted certain matters that needed to be completed by May 1, 2013 for those entities engaged in derivatives transactions to allow swap dealers to comply with the CFTC’s External Business Conduct Rule.  In addition, there are two other ISDA protocols that derivative market participants should be familiar with at this time.

ISDA March 2013 DF Protocol

The ISDA March 2013 Protocol, also referred to as the DF Protocol 2.0, is intended to facilitate industry compliance with three final rulemakings by allowing market participants to:

  • supplement the terms of existing written agreements under which parties may execute swaps, or
  • enter into an agreement to apply selected Dodd-Frank compliance provisions to their trading relationship in respect of swaps.

The DF Protocol 2.0 adds notices, representations and covenants responsive to Dodd-Frank requirements that must be satisfied at or prior to the time that swap transactions are offered and executed.  Also, the DF Protocol 2.0 includes additional bilateral delivery requirements, including a Protocol Questionnaire, to allow counterparties to make certain elections related to their swap trading relationship  under Dodd-Frank.

The Protocol is intended to address the requirements of the following CFTC final rules:

  • Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading      Relationship Documentation Requirements for Swap Dealers and Major Swap      Participants;
  • End-User Exception to the Clearing Requirement for Swaps; and
  • Final Rule, Clearing Requirement Determination Under Section 2(h) of the CEA.

 ISDA 2013 Reporting Protocol

As a result of recent regulatory reforms, including rules implemented under the Dodd-Frank Act, parties will have to comply with the relevant reporting requirements for derivative transactions.  However, the same parties may also be subject to contractual, statutory, regulatory or other legal limitations (under non-disclosure, confidentiality, bank secrecy or other laws) under other laws applicable to them which could prohibit the disclosure of the relevant information.  To facilitate compliance with their reporting obligations while addressing these disclosure limitations, the Protocol contains a counterparty’s consent to the disclosure of information. However, the consent language in the Protocol may not be sufficient to fully address any applicable disclosure limitations or otherwise. Satisfaction of additional disclosure requirements, if any, will have to be met on a bilateral basis.

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

President Obama has nominated a pair of Senate aids to be SEC Commissioners.  Dr. Michael Piwowar is the Chief Economist for the U.S. Senate Committee on Banking, Housing, and Urban Affairs, a position he has held since 2009.  Dr. Piwowar was nominated to fill the spot held by current Commissioner Troy A. Paredes,  for a term expiring June 5, 2018. Kara M. Stein is currently Legal Counsel and Senior Policy Advisor to Senator Jack Reed.  Ms. Stein was nominated to fill the spot held by current Commissioner Elisse Walter,  for a term expiring June 5, 2017.

It’s anyone guess as to whether the appointments will speed up, slow down, or otherwise impact the JOBS Act rulemaking.  The SEC appears poised to tackle the tough issue of money market reform on June 5, so it appears SEC Chair Mary Jo White is moving forward.  Why money market fund reform before the JOBS Act? It’s a rational choice by Mary Jo White, as it involves systematic risk to the economy, and FSOC is breathing down the SEC’s neck on the issue.

According to Bloomberg BusinessWeek, a former SEC attorney who is now chief executive of a crowdfunding service provider, said about the crowdfunding rules  “We hear that the rules have been written by the staff and are just sitting in the in-box of the commissioners.”  OK.

SEC Commissioner Luis A. Aguilar gave a speech where he talked about the JOBS Act and immigration reform.  As to the risk of fraud associated with crowdfunding, he noted “Clearly, all investments bear some degree of risk, and it may never be possible to do away entirely with fraud. However, to the extent that Internet crowdfunding increases the risk of fraud, it will be incumbent upon the SEC and state securities regulators to counter such increased risk through robust investor education and outreach efforts, and through strong enforcement efforts, when fraud occurs.”

FINRA Chairman and Chief Executive Officer Richard Ketchum talked about the expected fragmented nature of crowdfunding and the difficulty in finding fraud according to the Bloomberg/BNA Securities Regulation & Law Report.  He reportedly said “Without trade reporting,” it will be difficult “to find the needle in the haystack with respect to a hot offering that may raise issues,” and to find that offering quickly.

John Ramsay, acting director of the SEC’s Division of Trading and Markets, was reported as discussing the screening function of broker-dealers in the crowdfunding marketplace according to the Bloomberg/BNA Securities Regulation & Law Report .  The screening would include “limiting the potential for bad actors” to enter the new market, directing participants to relevant areas, avoiding over-regulation “that is inappropriate to the nature of the function,” and ensuring that the limitations on holding funds and securities are observed.

According to MarketWatch, Commissioner Elisse Walter is in favor of lifting the ban on general solicitation, including for hedge funds, but is concerned about investor protection.

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

The SEC has issued nine frequently asked questions, or FAQs, on the disclosure of payments by resource extraction issuers.

Guidance offered by the FAQs includes:

  • Failure to timely file a Form SD regarding payments by resource extraction issuers will not cause an issuer to lose eligibility to use Form S-3.
  • Holding companies that have subsidiaries which engage in commercial development of oil, natural gas or minerals are covered by the rules, even if the holding company does not itself engage in those activities.
  • A company providing only services associated with exploration, extraction, processing and export generally would not be considered to be a resource extraction issuer.  For instance the SEC does not believe companies that provide hardware and logistics to help companies explore for or extract resources would be considered to be exploring for or extracting the resources even though their services are being used to explore or extract.  Similarly, the SEC does not believe a company engaged by an operator to provide hydraulic fracturing services or drilling services for the operator, thus enabling the operator to extract resources, would be considered to be a resource extraction issuer.
  • As to what constitutes “export,” the SEC generally would not view transportation activities by an issuer that does not have an ownership interest in the resource as directly related to the export of the resource, and therefore, the issuer would not be considered to be a “resource extraction issuer.”
  • A resource extraction issuer is required to disclose payments made to governments to further its commercial development activities and is not required to disclose other payments made to those governments.  In this regard, a resource extraction issuer may elect to segregate income from exploration, extraction, processing and export from income earned on other business activities in a particular country and disclose income taxes paid solely on the income generated by the commercial development activities.  A resource extraction issuer that does not segregate the income information may disclose that the information includes payments made for purposes other than commercial development activities.

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

The SEC has issued twelve frequently asked questions, or FAQs, on the conflict minerals rules.  Although few in number, you could almost hear the cheers at law firms throughout the world as the staff offered mostly common sense advice on some often-debated questions.

Guidance offered by the FAQs include:

  • Failure to timely file a Form SD does not result in the loss of  S-3 eligibility.
  • Merely having an issuer’s logo etched onto a generic product manufactured by a third party is not considered “contracting to manufacture the product.”  The same goes for serial numbers and other identifiers.
  • Conflict minerals included in packaging are not considered necessary to the functionality or production of the product, even if necessary to preserve the usability of the product.
  • Issuers need not file a Form SD with respect to equipment that they manufacture or contract to manufacture if that equipment is used for the service provided by the issuer and the equipment is retained by the service provider, is required to be returned to the service provider, or is intended to be abandoned by the customer following the terms of service.
  • The issuer is not required to file a Form SD if an issuer manufactures or contracts to manufacture equipment for the use in the manufacture of other products, and the manufacturing equipment is subsequently sold.

On the other side of the ledger, the FAQs provide:

  • Voluntary filers must comply with the conflict mineral rules.
  • The rules apply to consolidated subsidiaries of the issuer.
  • Including generic components which include conflict minerals in contracts manufactured by the issuer means the issuer needs to conduct a reasonable country of origin inquiry regarding the component.

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 amended its Ability-to-Repay rule to facilitate access to credit by creating specific exemptions and modifications to the CFPB’s Ability-to-Repay rule for small creditors, community development lenders, and housing stabilization programs.

The CFPB originally finalized its Ability-to-Repay rule on January 10, 2013. The Ability-to-Repay rule established that most new mortgages must comply with basic requirements that protect consumers from taking on loans they do not have the financial means to pay back. Lenders are presumed to have complied with the Ability-to-Repay rule if they issue “Qualified Mortgages,” or QMs.

The current amendments:

  • Exempt certain nonprofit creditors: The final rule exempts from Ability-to-Repay rules certain nonprofit and community-based lenders that work to help low- and moderate-income consumers obtain affordable housing.
  • Facilitate lending by certain small creditors: This amendment makes several adjustments to the Ability-to-Repay rule in order to facilitate lending by small creditors, including community banks and credit unions that have less than $2 billion in assets and each year make 500 or fewer first-lien mortgages, as defined in the rule.
  • Establish how to calculate loan origination compensation: The Dodd-Frank Act mandates that QMs have limited points and fees, and that compensation paid to loan originators, such as loan officers and brokers, is included in points and fees.  The amendment provides certain exceptions to this Dodd-Frank requirement that loan originator compensation be included in the total permissible points and fees for both QMs and high-cost loans.

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

On May 24, 2013, Governor Dayton signed into law several changes to the investment adviser statutes in Minnesota.  We previously analyzed this legislation while it was working its way through the Minnesota legislature (prior coverage here and here).   As of last Friday, it has officially become law.  You can find the as-passed text in chapter 106 of the Session Laws for the 2013 Regular Session.

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