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

The CFPB, in partnership with the FTC, is issuing warning letters to approximately a dozen mortgage lenders and mortgage brokers advising them to clean up potentially misleading advertisements, particularly those targeted toward veterans and older Americans. The CFPB also announced it has begun formal investigations of six companies that it thinks may have committed more serious violations of the law.

The actions stem from a joint “sweep,” a review conducted by the CFPB and the FTC of about 800 randomly selected mortgage-related ads across the country, including ads for mortgage loans, refinancing, and reverse mortgages. The agencies looked at public-facing ads in newspapers, on the Internet, and from mail solicitations; some came to the attention of the CFPB and the FTC from consumers who complained about them.

The CFPB and the FTC were looking for potential violations of the 2011 Mortgage Acts and Practices Advertising Rule, which prohibits misleading claims concerning government affiliation, interest rates, fees, costs, payments associated with the loan, and the amount of cash or credit available to the consumer. The CFPB and the FTC share enforcement authority for the rule. Companies that the CFPB finds have violated prohibitions on misleading advertising could be subject to enforcement actions.

The CFPB’s review generally focused on mortgage advertisements, particularly ads that targeted older Americans or veterans. The FTC, meanwhile, examined ads by home builders, realtors, and lead generators. The FTC is issuing their own warning letters to about a dozen companies and continuing with their own investigations of even more companies based on their findings.

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

CFTC staff have issued a letter providing swap dealers with time-limited no-action relief from certain requirements of the CFTC’s swap data reporting rules, which are set forth at Part 43, Part 45 and Part 46 of the CFTC’s regulations. The no-action letter establishes a common monthly date by which all newly registered swap dealers must be in compliance with their reporting obligations under the rules, and extends the deadline for reporting historical swap transaction data, as required under Part 46.

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

The Commodity Exchange Act, or CEA, as amended by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, authorizes the Secretary of the Treasury to issue a written determination that foreign exchange swaps, foreign exchange forwards, or both, should not be regulated as swaps under the CEA. The Treasury Secretary has issued a determination that exempts both foreign exchange swaps and foreign exchange forwards from the definition of ‘‘swap,’’ in accordance with the applicable provisions of the CEA.

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

The Securities and Exchange Commission has sanctioned two investment advisory firms for impeding examinations conducted by SEC staff.

An SEC investigation found that Evens Barthelemy and his New York-based firm Barthelemy Group LLC misled SEC examiners by inflating the firm’s claimed assets under management (AUM) ten-fold in an apparent attempt to show that the firm was eligible for SEC registration. Another SEC investigation found that Seth Richard Freeman and his San Francisco-area firm EM Capital delayed nearly 18 months in producing books and records related to the firm’s mutual fund advisory business.

According to the SEC’s order against Barthelemy and his firm, when examiners asked for a list of client assets, Barthelemy misrepresented his firm’s AUM as $26.28 million instead of the actual $2.628 million. He downloaded client account balances from the firm’s online custodial platform onto a spreadsheet, and then manually moved the decimal points for each client one place to the right before providing it to the SEC staff. From July 2009 to early 2011, Barthelemy improperly registered Barthelemy Group with the SEC on the basis of the aspirational AUM that was 10 times higher than reality. Barthelemy Group, through Barthelemy’s actions as chief compliance officer, also failed to adopt reasonable compliance policies and procedures or to maintain required books and records concerning codes of ethics and providing the firm’s disclosure brochure to clients.

According to the SEC’s order issued today against Freeman and his firm, they failed to immediately furnish the required books and records upon request by SEC staff in December 2010. EM Capital and Freeman repeatedly promised to provide the records including financial statements, e-mails, and documents related to their management of a mutual fund. However, they did not fully comply until September 2012, months after learning that SEC staff was considering enforcement action against them.

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

The Commodity Futures Trading Commission, or CFTC, has issued, for public comment, a proposed CFTC Swaps Report that, when the proposal is finalized, will give the public a view into the previously dark swaps market.

The CFTC Swaps Report will offer the public a comprehensive view of the size, risks and activities in the swaps market. The proposal for this new market transparency initiative grew out of the swaps market reforms of the Dodd-Frank Wall Street Reform and Consumer Protection Act. While the Dodd-Frank Act only requires the Commission to publish a report on trading, clearing, participants, and products in the swaps market on a semiannual and annual basis, the agency elected to publish this information on a weekly basis. The CFTC believes this greater level of transparency will allow market participants and the public to gain a more thorough understanding of risks and developments in the swaps market.

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

ISS has released its 2013 policy updates. Highlights of the new policies include:

Pledging of Company Stock.  ISS’ proposed draft policy on the practice of pledging company stock as a problematic pay practice under ISS’ say-on-pay evaluation was met with issuer criticism that the draft policy imposes a “one size fits all” approach. Furthermore, based on discussions with several institutional investors on the practice of pledging as a problematic practice, it was indicated that a potential negative vote recommendation should be directed toward the election of directors rather than to a company’s say-on-pay proposal. ISS agrees that the practice of significant pledging (as determined to be problematic) may be considered a failure in risk oversight and thus falls under the board’s oversight role.

Acknowledging the comments received during ISS’ 2012 comment period, ISS will be taking a case-by-case approach in determining whether pledging rises to a level of serious concern for shareholders. Also in response to comments, ISS is including significant pledging of company stock as a failure of risk oversight and thus considered a governance failure whereby directors should be held accountable (rather than communicating concern through a say-on-pay recommendation).

Peer Groups.  ISS’ current peer group methodology focuses on the subject company’s GICS industry classification, which may not reflect multiple business lines in which many companies operate. As a result, some ISS peer groups omitted competitors of the target company and/or included firms that did not reflect a connection to the target considered appropriate for performance and pay comparisons.

The new methodology incorporates information from companies’ self-selected pay benchmarking peer groups in order to identify and prioritize GICS industry groups beyond the subject company’s own GICS classification. The methodology draws peers from the subject company’s GICS group as well as from GICS groups represented in the company’s peer group, while maintaining the approximate proportions of these industries in the final peer group where possible. The methodology additionally focuses initially at an 8-digit GICS resolution to identify peers that are more closely related in terms of industry. Finally, when selecting peers, the methodology prioritizes peers that maintain the company near the median of the peer group, are in the subject company’s peer group, and that have chosen the subject company as a peer. The peer group methodology maintains its focus on identifying companies that are reasonably similar to the subject company in terms of industry profile, size, and market capitalization.

Realizable Pay. Realizable pay is being added to the research report for large capitalization companies. Realizable pay will consist of the sum of relevant cash and equity-based grants and awards made during a specified performance period being measured, based on equity award values for actual earned awards, or target values for ongoing awards, calculated using the stock price at the end of the performance measurement period. Stock options or stock appreciation rights (SARs) will be re valued using the remaining term and updated assumptions, as of the performance period, using the Black-Scholes Option Pricing model. The realizable pay consideration may mitigate or exacerbate the CEO’s pay for performance concerns.

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 its second annual staff report on the findings of examinations of credit rating agencies registered with the SEC as Nationally Recognized Statistical Rating Organizations, or NRSROs.

The 2012 report discusses the staff’s findings and recommendations in eight areas, including whether the NRSRO conducts business in accordance with its policies, procedures, and methodologies, how it manages conflicts of interest, and whether it maintains effective internal controls.  The staff identified findings and made recommendations to all NRSROs.  Findings identified at one or more NRSROs include the following:

  • The methodology applied to rating certain securities appears to have been changed, but the change was not publicly disclosed for several months;
  • Certain securities were not timely downgraded in accordance with policies and procedures related to rating watch status;
  • Methodologies were published and disclosed inconsistently and in a less-than-transparent manner; and
  • Directors were not actively exercising their required oversight duties.

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

The CFTC approved an appeal of the September 28, 2012 federal district court decision that vacated the agency’s position limits rule based on a finding that the agency had neglected to first find that the limits were necessary to “diminish, eliminate, or prevent” the burden of undue speculation on interstate commerce. The agency filed a notice in the district court that it had appealed the decision to the U.S. Court of Appeals for the D.C. Circuit.

Commissioner O’Malia, one of the two dissenting Commissioner’s in the 3-2 vote to approved the appeal, issued a dissenting statement questioning the Commission’s decision to “double down on its no-justification-needed stance”:

“Even if the Commission successfully appeals the ruling, there is a very good chance that the Commission would be right back in the district court to defend against plaintiffs’ other challenges, including their argument that the Commission failed to adequately weigh the costs and benefits of the rule. To save the Commission’s time and resources, it would be much more logical for the Commission to go back to the drawing board now to study the markets and to determine whether new position limits are in fact necessary, and only if so then to decide on the most cost-effective way of establishing such limits.”

Chairman Gensler, on the other hand, issued a statement supporting the ruling, calling it “critically important that these position limits be established as Congress required.”

The SEC filed 147 enforcement actions in 2012 against investment advisers and investment companies, one more than the previous year’s record number.  The actions resulted from several risk-based, proactive measures that identify threats at an early stage so that early action to halt the misconduct can be initiated and investor harm minimized.

In 2012, several actions resulted from the Enforcement Division’s investment adviser compliance initiative, which looks for registered investment advisers who lack effective compliance programs designed to prevent securities laws violations.

The SEC also filed actions charging three advisory firms and six individuals as part of the Aberrational Performance Inquiry into abnormal performance returns by hedge funds.

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 released a Small Entity Compliance Guide relating to the recently adopted rules relating to new disclosures required of “resource extraction issuers.”  Compliance Guides like this one are required by 1996 legislation aimed at reducing regulatory compliance burdens for small businesses by explaining federal agency rules in plain language.

The Compliance Guide provides a good overview of new Rule 13q-1 and Form SD, which require resource extraction issuers to disclose “certain payments made to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals.”  You can check out some of our prior coverage of Rule 13q-1 here.

The rule applies to issuers who are required to file annual reports with the SEC and are engaged in the commercial development of oil, natural gas, or minerals, which includes the activities of exploration, extraction, processing, export, or license acquisition for any of the foregoing.  However, the rule is not meant to apply to activities that are “ancillary or preparatory” to commercial development.

The Compliance Guide provides a good overview of the definition of a number of key terms in the rule, as well as the scope, content, and means of making the required disclosure. Rule 13q-1 will require resource extraction issuers to make disclosures by filing new Form SD on EDGAR no later than 150 days after the end of the issuer’s fiscal year.  The first round of Form SD filings must be made in the fall of 2013, for fiscal years ending after September 30, 2013.

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