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

The CFPB has revised its rule that creates certain protections for consumers who transfer money internationally. The revisions are intended to preserve the new consumer protections provided under the rule while facilitating industry’s compliance with the rule. Under the remittance rule, remittance transfer providers will be required to disclose certain fees and taxes, as well as the exchange rate that will apply to the transfer. The rule also provides consumers with error resolution and cancellation rights.

 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 updated existing regulations to make it easier for spouses or partners who do not work outside of the home to qualify for credit cards. The amendment allows credit card issuers to consider income that a stay-at-home applicant, who is 21 or older, shares with a spouse or partner when evaluating the applicant for a new account or increased credit limit.

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

Many corporate credit agreements are supported by subsidiary guarantees.  Those guarantees often include not only the guaranty of the obligations under the credit agreement but also any related swap agreements.  The CFTC has issued guidance clarifying that guarantors of swap obligations fall under the Dodd-Frank Act’s requirements.  Namely, the CFTC considers guarantees of swaps the same as swaps. The CFTC provided no-action relief to guarantors from enforcement of the swap requirement until March 31, 2013.

Generally, swaps, and therefore guarantees of swap obligations, may only be entered into by eligible contract participants, or ECPs.  Among other things, an ECP must have $10 million in assets.  Not all subsidiary guarantors in corporate credit agreements will meet that threshold, so work arounds have begun to appear in credit agreements.

Often the way the provisions work is to exclude non-ECP credit parties from the swap guarantee obligation and then require some sort of a keepwell agreement to provide sufficient funds so parties can meet their obligations under the swap guarantees. Here is one example from a Form 8-K filing:

“Excluded Swap Obligation” shall mean, with respect to any Credit Party, any Swap Obligation if, and to the extent that, all or a portion of the Guarantee of such Credit Party of, or the grant by such Credit Party of a security interest to secure, such Swap Obligation (or any Guarantee thereof) is or becomes illegal under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures Trading Commission (or the application or official interpretation of any thereof) by virtue of such Credit Party’s failure for any reason to constitute an “eligible contract participant” as defined in the Commodity Exchange Act and the regulations thereunder at the time the Guarantee of such Credit Party or the grant of such security interest becomes effective with respect to such Swap Obligation, unless otherwise agreed between the Borrower and the Administrative Agent. If a Swap Obligation arises under a master agreement governing more than one swap, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to swaps for which such Guarantee or security interest is or becomes illegal.

 “Qualified ECP Guarantor” shall mean, in respect of any Swap Obligation, each Credit Party that has total assets exceeding $10,000,000 at the time the relevant Guarantee or grant of the relevant security interest becomes effective with respect to such Swap Obligation or such other Credit Party as constitutes an “eligible contract participant” under the Commodity Exchange Act or any regulations promulgated thereunder and can cause another person to qualify as an “eligible contract participant” at such time by entering into a keepwell under Section 1a(18)(A)(v)(II) of the Commodity Exchange Act.

“Swap Obligation” shall mean, with respect to any Credit Party, any obligation to pay or perform under any agreement, contract or transaction that constitutes a “swap” within the meaning of section 1a(47) of the Commodity Exchange Act.

9.16. Swap Obligations. Each Qualified ECP Guarantor hereby jointly and severally absolutely, unconditionally and irrevocably undertakes to provide such funds or other support as may be needed from time to time by each other Credit Party to honor all of its obligations under the Guarantee in respect of Swap Obligations (subject in all cases to Section 3 of the Guarantee). The obligations of each Qualified ECP Guarantor under this Section 9.16 shall remain in full force and effect until a discharge of the Guarantee in accordance with Section 24(a) thereof. Each Qualified ECP Guarantor intends that this Section 9.16 constitute, and this Section 9.16 shall be deemed to constitute, a “keepwell, support, or other agreement” for the benefit of each other Credit Party for all purposes of Section 1a(18)(A)(v)(II) of the Commodity Exchange Act.

Other examples of this approach and variants can be found here and here.

You can also find ISDA standard terms addressing the same issue in the Standard Terms section of ISDA’s web site.  The documents were posted on April 19, 2013.

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

In 2012 ,the SEC adopted final rules requiring public companies engaged in certain oil and gas activities to disclose payments made to domestic and foreign governments as required by the Dodd-Frank Act.  The rules were promptly challenged by the American Petroleum Institute, the Chamber of Commerce and others in the United States Court of Appeals for the District of Columbia and the United States District Court for the District of Columbia.  The Court of Appeals recently dismissed the case for lack of jurisdiction, and now the case will proceed in the District Court.

The Appeals Court dismissed the case because:

  • Section 25(a) of the Exchange Act provides for appellate jurisdiction for a person aggrieved of final SEC orders only and does not provide jurisdiction for challenges to SEC rules.
  • The provision of the Dodd-Frank Act which required the SEC to adopt the resource extraction rules is not specifically enumerated in Section 25(b) of the Exchange Act which grants appellate jurisdiction to review specifically defined rules.

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

On Thursday the SEC sent out a press release captioned “SEC Seeks to Halt Scheme Raising Investor Funds Under Guise of JOBS Act.”  The action doesn’t really have anything to do with the JOBS Act, as in the sense that it seeks to set the boundaries of the JOBS Act or otherwise interpret its provisions.  Rather it alleges blatant garden-variety securities fraud where the defendant made statements to investors that the 2012 JOBS Act would enable him to raise billions of dollars by advertising the offering to the general public, and produce big profits for early investors.  Some believe the SEC is trying to signal that it is going to be vigilant on JOBS Act fraud.  For the rather amusing defendant’s side of the story and other interesting analysis, see this Bloomberg Businessweek article.

One lesson that those intending to enter the market legally can learn is what you put on your web site can and will be used against you by the enforcement authorities.  As of today, the defendant’s web site is still operational and is a case study in what not to do.

On a more positive note, the Wall Street Journal reported that AngelList is rolling out a long-anticipated accredited equity crowdfunding service to its users this week.  To date, the service has been available to a handful of companies, by invitation only, since December 2012. The service is now available to any qualifying startup or “top-tier” accredited angel investor using the site.

The SEC announced the agenda for a meeting of its Advisory Committee on Small and Emerging Companies on Wednesday, May 1.  While some believe JOBS Act topics will be discussed, the agenda is rather opaque and states “the presentations and the discussions are expected to cover a wide array of issues regarding small and emerging companies, such as capital formation, securities trading, and research and offering communications.”

But many are anxious for final and proposed rules without much guidance from the SEC as to when this will occur.  The CrowdCheck Blog urged everyone to be realistic by stating “While some commenters on the SEC JOBS Act comment section have resorted to unproductive heckling of the SEC to get a move on, the rest of us understand what is at stake for crowdfunding and the need to get the rules right.”  CrowdCheck says it does the basic “due diligence” that a reasonable person would do when investing small amounts of his own funds, and lets investors see the results of this due diligence in an easy-to-understand report.  There appears to be an adult lawyer or two in charge of this operation.

CFO.com has an interesting article on “How Venture Capital and Crowdfunding Can Coexist.”  The theme is perhaps crowdfunding can be used to fill gaps in a venture funded company’s funding plans. It raises the specter of venture capitalists being scared off by complex capital structures with thousands of shareholders.

Prof. Manning Warren discussed potential civil claims against crowdfunders in a guest blog at Insider Louisville and the strict liability provisions of the JOBS Act.  He notes “In addition to all other state and federal liability provisions, the JOBS Act creates a special new cause of action against companies that want to crowdfund themselves. The new law imposes liability for any false or misleading statements or omissions made in any oral or written communications to investors. Investors wanting their money back, plus interest, can file their lawsuits and win their cases without proving that the company had any intent to deceive them and without proving that the company actually caused their losses.”

Finally, while we’re on the dreary topic of litigation, Heath Abshure, Arkansas Securities Commissioner and president of National Association of Securities Administrators Association, gave a speech to his group and representatives of the SEC.  His point is investor recourse is likely to be limited given the small amounts invested in crowdfunded offerings as it would not be cost beneficial for individual investors to commence law suits.  So he advocates no restrictions on class actions.  While the JOBS Act doesn’t restrict class actions, his point is broker-dealers that are associated with the offerings often have mandatory arbitration clauses with their customers.  Implicit in his analysis seems to be those suffering losses from crowdfunding may find their entrepreneur and investment judgment proof and broker-dealers will be the only deep pockets available to make investors whole.  But opening the class action door against broker-dealers may lead to a raft of shake down litigation episodes of the type common with announced M&A transactions that could ruin the industry.

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

The CFPB has issued a report on payday and deposit advance loans finding that for many consumers these products lead to a cycle of indebtedness.  The loans generally have three features: they are small-dollar amounts; borrowers must repay them quickly; and they require that a borrower repay the full amount or give lenders access to repayment through a claim on the borrower’s deposit account.

The report found many consumers repeatedly roll over their payday and deposit advance loans or take out additional loans; often a short time after the previous one was repaid. This means that a sizable share of consumers end up in cycles of repeated borrowing and incur significant costs over time.

The CFPB has authority to oversee the payday loan market. It began its supervision of payday lenders in January 2012. The CFPB also has authority to examine the deposit advance loans at the banks and credit unions it supervises, which are insured depository institutions and credit unions, and their affiliates, that have more than $10 billion in assets. The CFPB believes the report will help educate regulators and consumers about how the industry works and provide market participants with a clear statement of CFPB concerns.

The FDIC has proposed for public comment supervisory guidance to FDIC-supervised financial institutions that offer or may consider offering deposit advance products. The proposal is intended to ensure that banks are aware of a variety of safety and soundness, compliance, and consumer protection risks posed by deposit advance loans.

The proposal details the principles that the FDIC expects financial institutions to follow in connection with deposit advance products in order to effectively mitigate potential legal, reputational, consumer protection, compliance, and credit risks. The proposal discusses supervisory expectations for the use of deposit advance products, including underwriting and credit administration policies and practices. The proposal supplements existing FDIC guidance on payday loans and subprime lending.

The OCC has also issued proposed guidance similar to the FDIC guidance.

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

By May 1, all counterparties must have provided their registered swap dealers with legal classifications and representations to allow the swap dealers to comply with the CFTC’s External Business Conduct Rule (EBCR). After the EBCR deadline, swap dealers will only continue offering and executing swaps with in-scope counterparties who have provided the necessary information for compliance. ISDA has a webinar available on its site to address the above issues.  The webinar covers:

  • Applying for a CICI number from DTCC
  • Adhering to the August 2012 D-F Protocol through ISDA’s Protocol Management website
  • Completing the client questionnaire either via the ISDA Amend utility or another delivery mechanism

ISDA has also published a standard form of confirmation for a market agreed coupon  contract as an additional choice for market participants who wish to use over-the-counter  interest rate swaps  that have common, pre-agreed terms.

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

Section 929U of the Dodd-Frank Act provides:

Not later than 180 days after the date on which Commission staff provide a written Wells notification to any person, the Commission staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent to not file an action.

The same statute also provides an exception which allows the deadline to be extended in certain circumstances.

In SEC v NIR Group LLC, E.D.N.Y., CV 11-4723, the defendants sought certain discovery regarding the SEC’s compliance with Section 929U of the Dodd-Frank Act.  The court held the discovery was neither relevant nor reasonably calculated to lead to admissible evidence.

The court found the deadline in 929U imposes only an internal deadline on the SEC and not a right to be free from any agency action occurring beyond the internal deadline.

The court noted that the targets of an SEC probe that extended beyond the deadline may well be entitled to initiate an administrative proceeding or file a declaratory judgment action to compel agency action.

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

For the first time, the SEC has entered into a Non-Prosecution Agreement (NPA) with a company relating to misconduct under the Foreign Corrupt Practices Act (FCPA).  The SEC decided not to prosecute Ralph Lauren Corporation (RLC) for violations of the FCPA as a result of the company’s cooperation with the SEC’s enforcement division during the investigation as part of the SEC’s Enforcement Cooperation Initiative.  Announced in 2010, the initiative is designed to reward companies that come forward to report legal violations and cooperate with the SEC during the ensuing investigations.

While RLC was in the process of implementing a global compliance program, including FCPA compliance training, it discovered that company representatives had paid about $592,000 in bribes and gifts to government officials in Argentina over a four year period in order to ease regulatory requirements relating to the entry of RLC products into Argentina.

After discovering the violations, RLC reported them to the SEC and took steps to cooperate in the SEC investigation, including by:

  • Reporting preliminary findings of its internal investigation to the SEC within two weeks of discovering the illegal payments and gifts
  • Voluntarily and expeditiously producing documents
  • Providing English translations of documents
  • Summarizing overseas witness interviews that the company’s investigators conducted
  • Making overseas witnesses available for interviews and bringing overseas witnesses to the U.S.

After the investigation, RLC took a number of remedial measures:

  • New compliance training
  • Termination of employment and business arrangements with all individuals involved in the wrongdoing
  • Strengthening internal controls and procedures for third party due diligence
  • Conducting a worldwide risk assessment to identify any other compliance problems

The SEC’s enforcement division is clearly using the NPA with RLC as an opportunity to do some cheerleading for the Enforcement Cooperation Initiative.  An excerpt from the press release announcing the NPA: 

“When they found a problem, Ralph Lauren Corporation did the right thing by immediately reporting it to the SEC and providing exceptional assistance in our investigation,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement. “The NPA in this matter makes clear that we will confer substantial and tangible benefits on companies that respond appropriately to violations and cooperate fully with the SEC.”

As a result of the NPA, RLC will pay $593,000 in disgorgement and $141,845.79 in prejudgment interest.  Pursuant to a corresponding criminal NPA, RLC has agreed to pay a penalty of $882,000.

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

Industry is ramping up efforts to comply with the Dodd-Frank Act’s conflict minerals requirements and the SEC’s final rules on the topic.  Examples of supplier communications are beginning to appear in the public domain.  Phillips has sent this letter to its suppliers. Flextronics has impressive supplier training materials.  The American Apparel and Footwear Association has posted these materials with sample forms at the end.

The foregoing examples uniformly rely on a template created by the Electronic Industry Citizenship Coalition (EICC) and the Global e-Sustainability Initiative (GeSI) as a common means for the collection of sourcing information related to conflict minerals.  The EICC and GeSI is a joint working group aims to enable companies to source conflict-free minerals.  There is even this YouTube video on how to get started in completing the template.

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