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

Reuters reports that Representative Patrick McHenry, of North Carolina, who chairs the House Financial Services oversight panel, said he believes the Securities and Exchange Commission lost its ability to enforce the ban on general solicitation after Congress passed the JOBS Act.  We wonder how many defense litigators are willing to take that argument to court.  The theory could have legs however if it’s true the SEC’s Corporation Finance’s chief counsel, Thomas Kim, wrote an email about his meeting with some other agency lawyers who had raised concerns to him about whether the SEC could enforce the ban “on day 91” if the agency failed to meet the deadline.  “I think they are dubious as to whether we could,” Kim reportedly wrote.

In testimony before the before the Subcommittee on Oversight and Investigations, Committee on Financial Services, U.S. House of Representatives, SEC Commissioner Elisse B. Walter offered a glimmer of hope the ban on general solicitation for private placements would be lifted soon.  She stated “Although our work on this important provision is still ongoing, the Commission needs to complete this rulemaking promptly and it is a priority for the agency.”

Lona Nallengara, Acting Director, SEC Division of Corporation Finance, also gave testimony before Congress as to what has been done in the JOBS Act rulemaking process, but he shed little light on next steps, timing and priorities.

SEC Commissioner Luis A. Aguilar seems the least enthused about the work done to date on lifting the general solicitation ban.  In a speech before the North American Securities Administrators Association, otherwise known as the state securities regulators, he stated “. . . to my profound disappointment, when the removal of the ban was proposed by the Commission, a majority of the SEC’s Commissioners proactively excluded from discussion many of the practical and cost-effective suggestions made by investors and other regulators . . . Because of the decision to ignore the recommendations by investors and other regulators, I consider the Commission’s proposal to be fatally flawed . . . A re-proposal that allows for a real discussion of reasonable alternatives is the only path forward that will adequately address investor protection issues.”  In other words, back to the drawing board in his view.

A Forbes article titled “The Trouble With Crowdfunding” discusses the provisions of the JOBS Act which permit crowdfunding for which no rules have been proposed or adopted.  The author notes “Despite the sound and fury, the crowdfunding exemption will do little to help small start-ups raise capital. That’s because it will not be economically feasible for most companies to comply with the filing and disclosure requirements; take on the risk of legal liability; and undertake annual reporting obligations to raise a maximum of $1 million in a 12-month period.”

Business Matters, a UK site, highlights an interview which notes “The main platforms seem to be deliberately hiding behind generic warnings, self certifications and cursory due diligence on factual claims and investors will almost certainly lose their money as a consequence of the poor information being provided.”

Some sites currently advertise on a generic basis the opportunity to crowdfund investments to accredited investors which many refer to as “accredited crowdfunding.”  If you’re wondering about the legality of this see our post “Accredited Crowdfunding, Internet Advertising and General Solicitation”.

If you want to learn more about traditional private placements, the status of the JOBS Act and other matters, see our materials on “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.

Umesh Tandon, president, chief compliance officer, and sole owner of Simran Capital Management, recently agreed to a settlement with the SEC relating to alleged violations of the Investment Advisers Act of 1940 and the Investment Company Act of 1940 stemming from false representations of the amount of Simran’s assets under management (AUM), a common metric used when analyzing investment advisers.  Tandon’s lies about Simran’s AUM were particularly blatant; at times, the company represented in responses to RFPs that it had AUM vastly in excess of the figures it was concurrently publicly reporting on its Form ADV.  

According to the SEC’s order, the fraud began with a response to a 2008 RFP from the California Public Employers’ Retirement System (CalPERS).  CalPERS required, among other things, that any investment adviser submitting a response to the RFP have AUM of at least $200 million.  At the time, Simran had only $80 million in AUM, but it nevertheless submitted a proposal certifying that it met the $200 million AUM threshold and ultimately won the bid over competitors who were eliminated by CalPERS for failure to meet the AUM requirement.

Over the next several years Simran managed up to $122 million for CalPERS while continuing to lie about Simran’s AUM to CalPERS and others – the largest discrepancy was in July 2010, when Simran claimed on its Form ADV that it had $375 million in AUM but actually had only $25 million in AUM.

Mr. Tandon touted the hiring of Simran by CalPERS and inflated its AUM significantly in multiple proposals to other institutional investors – including other public pension funds.  In internal e-mails, Tandon instructed his employees not to pay much attention to AUM requirements, since CalPERS had multiple requirements that Simran had not met (including the AUM requirement) but had hired Simran anyway.

Pursuant to the settlement, Mr. Tandon is barred from participating in the securities industry and is required to pay about $120,000 in penalties and disgorgement of profits.

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

The SEC opened the barn doors on use of social media, or merely reaffirmed existing guidance, depending on your point of view, in a recent Section 21(a) report.

Netflix, the subject of the Section 21(a) report, promptly responded by filing this Form 8-K.  The 8-K announces two Netfix blogs, the Netflix Facebook page and Reed Hastings Facebook page as places where information may be posted.  In addition, updates to the list will be announced on Netflix’s investor relations page.  That’s a lot of places to look.

Social media watchers wondered who would be next, and it turned out to be little known Infrax Systems, Inc.  Infrax announced its Facebook and Twitter feed may contain material information.  Social media and investor relations guru Dominic Jones of the IR Web Report noted on Twitter that “There’s something not quite right about a Co. with 1 tweet and 16 followers using Twitter for Reg FD.”

AutoNation was the next to follow suit, announcing its Facebook page and Twitter feed, together with CEO Mike Jackson’s Facebook page and Twitter feed, are places where material information might by posted.  Dominic Jones noted on Twitter that “Jackson has been using both channels for a long time and uses them well.”  So these may be channels worth monitoring for those who want to get in the business.

Just because the SEC says it is OK in some circumstances doesn’t mean that the NYSE thinks it’s always a good idea.  As Broc Romanek points out on TheCorpororateCounsel.net, the NYSE recently sent listed companies a letter reminding them while Reg FD channels are great and required, you still have to give the NYSE advance notice before the release of material news, whether on Twitter or Facebook or by traditional press release.

[Update:  AllianceBerstein announced it is going to live tweet its earnings conference call.  Where is all of this going to go? Hat tip to @footnoted]

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

James R. Wigand, Director, Office Of Complex Financial Institutions and Richard J. Osterman, Jr., Acting General Counsel, of the FDIC testified before the Subcommittee on Oversight and Investigations; Committee on Financial Services; U.S. House of Representatives.

While their testimony was captioned  “Who Is Too Big To Fail? Examining the Application of Title I of the Dodd-Frank Act,” it appears they never directly addressed the question, at least if what you want is for them to name names, like most of us.

The testimony still has some useful information though.  The FDIC hasn’t just been watching large financial institutions file living wills and not doing anything.  The testimony notes “Federal Reserve Board and FDIC staff reviewed the first wave filers’ plans for informational completeness to ensure that all information requirements of the Rule were addressed in the plans.”  Hopefully they reviewed them to determine what they will do when the next crisis arrives as well.

The testimony also addressed the status of stress tests.  It notes “Certain insured institutions and bank holding companies with assets of $50 billion or more comprised the first set of companies to conduct stress tests, which were completed in March 2013. Using September 30, 2012 financial data, institutions developed financial projections under defined stress scenarios provided by the agencies in November 2012. Each company publicly disclosed the results of their stress tests on or before March 31st of this year. Institutions with assets greater than $10 billion, but less than $50 billion, and larger institutions that have not had previously conducted stress tests, will conduct their first round of stress tests later this fall.” 

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

FINRA Chairman and CEO Richard G. Ketchum gave a speech on April 9, 2013 as part of the National Compliance Outreach Program for Broker-Dealers.

Mr. Ketchum addressed FINRA’s view that there may be a need for additional supervision with respect to the marketing and sales of “complex products.”  One such complex product is a security purchased in a private placement.  Mr. Ketchum reminded the audience of broker-dealer compliance officers that they must perform reasonable due diligence on private placement issuers due to the heightened risks to consumers resulting from “the scarcity of independent financial information and the uncertainty surrounding the market- and credit-risk exposure associated with many private placements.” 

Firms should focus their issuer due diligence on the creditworthiness of the issuer, the strength of the proffered business model, and analysis of expected rates of return as compared to industry benchmarks.  In its broker-dealer examinations, FINRA will be focusing on whether a firm has in place appropriately robust due diligence policies, procedures, and processes. 

Now that FINRA requires a copy of the offering document to be filed in connection with private placements, it will be using that information in order to identify transactions that it classifies as “higher-risk” for further review.  In fact, FINRA is refocusing its exam program to utilize the growing amount of data that FINRA is collecting in order to target on high-risk firms, brokers, activities, and products.

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

The CFPB has issued a proposed rule clarifying and making technical amendments to the 2013 Escrows Final Rule issued by the Bureau in  January 2013. This is the first of the CFPB’s planned issuances to clarify and provide additional guidance about the mortgage rules it issued in January.

The proposal has two primary purposes.  First, the 2013 Escrows Final Rule amends an existing rule that also provides protections regarding assessments of consumers’ ability to repay and prepayment penalties on certain “higher-priced” mortgage loans. The Dodd-Frank Act and certain of the other mortgage regulations the CFPB issued in January expands and strengthens the requirements concerning ability to repay and prepayment penalties. However, the 2013 Escrows Final Rule as adopted in January can be read to cut off the old protections before the new expanded protections take effect. This would create a six-month period when those consumer protections would not apply, which the amendments propose to fix.

Second, the CFPB is proposing to clarify how to determine whether or not a county is considered “rural” or “underserved” for purposes of applying an exemption in the escrows rule and special provisions adopted in three other Dodd-Frank Act mortgage rules the CFPB issued in January. The CFPB also proposes illustrations of how to do the determinations to facilitate compliance. The determinations are made based on currently applicable Urban Influence Codes or UICs, which are established by the USDA’s Economic Research Service (for “rural”), or based on HMDA data (for “underserved”).

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

There continues to be significant public discord amongst the Commissioners at the CFTC.

2014 Budget

According to Commissioner Scott O’Malia “Given the vast deficit spending challenges this country is facing, I do not believe it is fiscally prudent for the Commission to make broad unsubstantiated appeals for massive budget increases without specifically identifying its mission needs and priorities.”

Commissioner Jill Sommers stated “On February 27, 2013 Chairman Gensler testified before the Senate Committee on Agriculture, Nutrition and Forestry and stated that, due to a lack of resources, the Commission is “shelving” enforcement cases.  I had not previously been notified of such a decision, and was therefore very surprised and deeply troubled by his testimony.  Protecting the public and market participants by maintaining a robust enforcement program is one of our five stated primary goals as an agency. (See Budget, pg. 6).   A strong enforcement program is also a key pillar in realizing several of our other stated primary goals.  If we are indeed “shelving” enforcement cases then we have gravely mismanaged our resources.  Irrespective of what resources are allocated to us through the appropriation process, we clearly need to shift more resources to Enforcement. “Shelving” enforcement cases should never be an option.”

2012 Annual Performance Report

Commissioners Scott O’Malia and Jill Sommers issued a  joint statement that said  “To date, the Commission has met just 46 percent of its goals. It should be noted that six goals weren’t even considered as part of this calculation, which if included would take the unmet goals to over 59 percent. We find these results troubling.  But even more troubling is that this report fails to outline any corrective measures that the Commission should take to ensure that these specific unmet performance measures are going to be achieved in the future.”

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

Today the CFTC and the SEC jointly issued final rules that require regulated entities to adopt programs designed to prevent identity theft – so-called “red flags” rules.

Since 2003, the Fair Credit Reporting Act has authorized federal agencies responsible for banking regulations to implement programs to prevent identity theft and the FTC has been authorized to implement and enforce similar programs for entities regulated by the SEC and the CFTC.  With respect to SEC- and CFTC-regulated entities, the Dodd-Frank Act transferred the rule-making authority and enforcement responsibility for the red flags rules from the FTC to SEC and CFTC, respectively.

These rules should not be surprising to anyone, as they are nearly identical to the rules that had already been adopted by other federal agencies under the FCRA back in 2007.  Although the rules adopted by the SEC and CFTC do not expand the scope of the red flags rules that were already in place, the adopting release does contain “examples and minor language changes designed to help guide entities within the SEC’s enforcement authority in complying with the rules, which may lead some entities that had not previously complied with the Agencies’ rules to determine that they fall within the scope of the rules we are adopting today.”

On the SEC side of things, the red flags rules apply to entities that are regulated by the SEC and fall within the definition of “creditor” or “financial institution” under the FCRA.  To qualify as a “financial institution,” generally speaking an entity must hold a transaction account belonging to an individual.  The somewhat convoluted definition of “creditor” for purposes of the FCRA is a person that regularly extends, renews or continues credit, or makes those arrangements and “regularly and in the course of business … advances funds to or on behalf of a person, based on an obligation of the person to repay the funds or repayable from specific property pledged by or on behalf of the person.”  The most common types of SEC-regulated entities likely to fall subject to the red flags rules are broker-dealers holding custodial accounts, investment advisers that hold transaction accounts and are permitted to make payments to third parties out of those accounts, and registered investment companies that allow investors to make wire transfers to other parties or that offer check-writing privileges.

On the CFTC side, the red flags rules apply to entities that re regulated by the CFTC and fall within the definition of “creditor” or “financial institution” under the FCRA, provided that those terms also include any futures commission merchant, retail foreign exchange dealer, commodity trading advisor, commodity pool operator, introducing broker, swap dealer, major swap participant, or any of the foregoing that are regularly involved in the extension, renewal, or continuance of credit.

The final rules require that entities subject to the rules adopt programs to deter identify theft and  offer guidelines for such programs that should be considered by the entities as they formulate their own programs.  The SEC press release accompanying the final rules nicely summarizes the substance of the red flags rules:

“The program should include policies and procedures designed to:

  • Identify relevant types of identity theft red flags.
  • Detect the occurrence of those red flags.
  • Respond appropriately to the detected red flags.
  • Periodically update the identity theft program.

The SEC’s rules apply only to SEC-regulated entities that meet the definition of ‘financial institution’ or ‘creditor’ under the FCRA.

The rules require entities to provide such things as staff training and oversight of service providers. The rules include guidelines and examples of red flags to help firms administer their programs.

The rules require entities that issue debit cards or credit cards to take certain precautionary actions when they receive a request for a new card soon after they receive a notification of a change of address for a consumer’s account.”

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

The CFTC has issued a no-action letter that effectively extends the dates for swap counterparties who are not swap dealers (SDs) or major swap participants (MSPs) to come into compliance with the agency’s reporting rules under Part 43 (real-time reporting), Part 45 (swap data reporting), and Part 46 (“historical swap” reporting) of its regulations. Prior to the no-action letter, such non-SD/MSP counterparties were required to comply with such regulations beginning tomorrow, April 10. In the no-action letter, the CFTC Division of Market Oversight states that it will not recommend that the Commission take enforcement action against parties failing to comply with such requirements until certain later dates that depend on the type of swap and type of counterparty to the swap, effectively extending the compliance dates.

New Compliance Dates for Non-Financial Swap Counterparties
The no-action letter defines “non-financial swap counterparties” as non-SD/MSP counterparties who are also not “financial entities” under Section 2(h)(7)(c) of the Commodity Exchange Act (i.e., not SDs, MSPs, security-based SDs, major security-based swap participants, commodity pools, private funds, employee benefit plans, or person predominantly engaged in activities that are in the business of banking or in activities that are financial in nature). The swap reporting compliance dates for non-financial swap counterparties are extended as follows:

(i) For interest rate swaps and credit swaps, non-financial swap counterparties are not required to be in compliance with the Part 43 (real-time) or Part 45 (swap data) requirements until 12:01 a.m. eastern time on July 1, 2013—on condition that, by 12:01 a.m. eastern time on August 1, 2013, the non-financial swap counterparty “backload” and report to a swap data repository (SDR) all transaction data for the period from April 10, 2013, to July 1, 2013 that the non-financial swap counterparty would have been required to report pursuant to Part 45 in the absence of the no-action relief;

(ii) For “other commodity” swaps (including energy, agricultural, and metals swaps), equity swaps, and foreign exchange swaps, non-financial swap counterparties are not required to be in compliance with the Part 43 (real-time) or Part 45 (swap data) requirements until 12:01 a.m. eastern time on August 19, 2013—on condition that, by 12:01 a.m. eastern time on September 19, 2013, the non-financial swap counterparty “backload” and report to an SDR all transaction data, for the period from April 10, 2013, to August 19, 2013, that the non-financial swap counterparty would have been required to report pursuant to Part 45 in the absence of the no-action relief;

(iii) For all swap asset classes, non-financial swap counterparties are not be required to be in compliance with the Part 46 (historical swap) requirements until 12:01 a.m. eastern time on October 31, 2013. “Historical swaps” will still only include swaps entered into prior to 12:01 a.m. on April 10, 2013.

New Compliance Dates for Financial Swap Counterparties
For “financial swap counterparties,” i.e., non-SD/MSP counterparties who are “financial entities” under Section 2(h)(7)(C) of the CEA, the swap reporting compliance dates are extended as follows:

(i) For interest rate swaps and credit swaps, the compliance date for financial swap counterparties remains April 10, 2013;

(ii) For “other commodity” swaps, equity swaps, and foreign exchange swaps, financial swap counterparties are not required to be in compliance with the Part 43 (real-time) or Part 45 (swap data) requirements until 12:01 a.m. eastern time on May 29, 2013—on condition that, by 12:01 a.m. eastern time on June 29, 2013, the financial swap counterparty “backload” and report to an SDR all transaction data, for the period from April 10, 2013, to May 29, 2013, that the financial swap counterparty would have been required to report pursuant to Part 45 in the absence of the no-action relief;

(iii) For all swap asset classes, financial swap counterparties are not be required to be in compliance with the Part 46 (historical swap) requirements until 12:01 a.m. eastern time on September 30, 2013.

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

April 5, 2013 marked the one-year anniversary of the passage of the JOBS Act.  Here’s a roundup of a few of the media outlets that took the occasion as an opportunity to provide commentary on the effectiveness of the legislation.

An article at Bloomberg Businessweek explains that one of the reasons for the delay in SEC rules relating to advertising and general solicitation in Rule 506 offerings may be reservations regarding the way hedge funds may take advantage of the new rules, as opposed to small businesses.

At the Huffington Post, Chris Camillo makes an assessment of the state of crowdfunding one year after the JOBS Act, noting that while the SEC has stalled in its rule-making, the business community has been busy: “Platforms have gone from the idea stage to fully functioning businesses ready to flip the switch and ignite change in the capital markets.”

At A co-founder of perk-based crowdfunding website Indiegogo celebrates the one-year anniversary of the JOBS Act by commenting on what Indiegogo hopes the new crowdfunding rules will and won’t do.  Indiegogo wants to see regulations that keep out “gatekeepers.”  Indiegogo is not a “curator,” and wants to see the collective wisdom of the crowd determine which ideas succeed or fail.

And from The Atlantic, this article argues (as its title indicates) that the JOBS Act is an “utter failure” one year after its hopeful passage.

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