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

Over the past year, the Securities and Exchange Commission received more than 3,000 whistleblower tips from all 50 states and from 49 countries, according to the agency’s 2012 Annual Report on the Dodd-Frank Whistleblower Program.

Among other things, the report notes:

  • The SEC made its first award under the new program to a whistleblower who helped the SEC stop an ongoing multi-million dollar fraud. The whistleblower received an award of 30 percent of the amount collected in the SEC’s enforcement action, which is the maximum percentage payout allowed by law.
  • The SEC received 3,001 tips, complaints, and referrals from whistleblowers from individuals in all 50 states, the District of Columbia, and the U.S. territory of Puerto Rico as well as 49 countries outside of the United States.
  • The most common complaints related to corporate disclosures and financials (18.2 percent), offering fraud (15.5 percent), and manipulation (15.2 percent).

There were 143 enforcement judgments and orders issued during fiscal year 2012 that potentially qualify as eligible for a whistleblower award. The Office of the Whistleblower provided the public with notice of these actions because they involved sanctions exceeding the statutory threshold of more than $1 million.

There were 28 whistleblower tips from the State of Minnesota.

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

The CFTC Office of General Counsel (“OGC”) issued an interpretation today regarding application of the “swap” definition (and forward contract exclusion thereunder) to energy transportation and storage contracts, in response to numerous industry comments. Although the interpretation is not binding on the Commission and did not provide an explicit exception for transportation and storage contracts using a two-part fee structure, the interpretation should provide a significant measure of comfort to industry participants that, barring unusual provisions, such industry-standard contracts will not be subject to CFTC regulation under Dodd-Frank.

Background

The Commission had stated in its final swap definition rule that a transaction would not be subject to regulation as a commodity option if three elements are satisfied:

(1) the subject of the agreement, contract or transaction is usage of a specified facility or part thereof rather than the purchase or sale of the commodity that is to be created, transported, processed or stored using the specified facility;
(2) the agreement, contract or transaction grants the buyer the exclusive use of the specified facility or part thereof during its term, and provides for an unconditional obligation on the part of the seller to grant the buyer the exclusive use of the specified facility or part thereof; and
(3) the payment for the use of the specified facility or part thereof represents a payment for its use rather than the option to use it.

Numerous commenters expressed concern regarding the “however” paragraph that followed the above three-element test in the final rule:

However, in the alternative, if the right to use the specified facility is only obtained via the payment of a demand charge or reservation fee, and the exercise of the right (or use of the specified facility or part thereof) entails the further payment of actual storage fees, usage fees, rents, or other analogous service charges not included in the demand charge or reservation fee, such agreement, contract or transaction is a commodity option subject to the swap definition.

To many, this seemed to suggest that every facility usage contract that entails separate payments for fixed and variable costs, the standard fee structure for a wide variety of usage contracts in the industry, including FERC-regulated interstate transportation of natural gas, would be considered an option subject to regulation under Dodd-Frank.

The OGC Interpretation

The OGC’s interpretation represents a clear attempt to step back from such an expansive application of the rule. The intepretation states:

In OGC’s view, the ‘however paragraph’ was not intended to apply to agreements, contracts or transactions in which the buyer pays for a commodity in two parts, paying the seller’s fixed/known costs upfront and the seller’s variable costs associated with that commodity later once those costs are established or incurred.

The OGC went on to provide a new 5-part safe harbor test for such contracts:

In OGC’s view, if (1) a facility usage agreement, contract or transaction discussed herein includes a two-part fee structure, (2) the right to use the specified portion of the facility for the term of the agreement, contract or transaction is legally established upon entering into the agreement, contract or transaction, (3) the party who has legally established the right to use the specified portion of the facility for the term of the agreement, contract or transaction pays the Demand Charge/Reservation Fee in a commercially reasonable timeframe, (4) the use of the facility does not depend on the further exercise of an option and (5) the Usage Fee is in the nature of a reimbursement for the variable costs incurred by the operator of the facility in rendering the service, such a facility usage agreement, contract or transaction is not an option and is not intended to be covered by the “however paragraph.”

While clause (4) in the statement may be somewhat circular, clause (5) does not provide a bright line, and the CFTC continues to adhere to a “facts and circumstances” test for each contract, the OGC’s interpretation should provide some comfort to the industry that the CFTC will not view standard transportation and storage contracts with two-part fees as options/swaps.

The Securities and Exchange Commission and the Department of Justice have released A Resource Guide to the U.S. Foreign Corrupt Practices Act. The 120-page guide provides a detailed analysis of the U.S. Foreign Corrupt Practices Act (FCPA) and closely examines the SEC and DOJ approach to FCPA enforcement.

The guide provides helpful information to enterprises of all sizes from small businesses doing their first transactions abroad to multi-national corporations with subsidiaries around the world. The guide addresses a wide variety of topics including who and what is covered by the FCPA’s anti-bribery and accounting provisions; the definition of a “foreign official”; what constitute proper and improper gifts, travel, and entertainment expenses; facilitating payments; how successor liability applies in the mergers and acquisitions context; the hallmarks of an effective corporate compliance program; and the different types of civil and criminal resolutions available in the FCPA context. On these and other topics, the guide takes a multi-faceted approach toward setting forth the statute’s requirements and providing insights into SEC and DOJ enforcement practices. It uses hypotheticals, examples of enforcement actions and matters that the SEC and DOJ have declined to pursue, and summaries of applicable case law and DOJ opinion releases.

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 published a small entity compliance guide for the conflict minerals rules. The publication gives helpful summary advice.

The guide notes an entity is considered to be “contracting to manufacture” a product if it has some actual influence over the manufacturing of that product. This determination is based on the company’s facts and circumstances, taking into account the degree of influence the company exercises over the product’s manufacturing. A company is not deemed to have influence over the manufacturing if it merely:

• affixes its brand, marks, logo, or label to a generic product manufactured by a third party;

• services, maintains, or repairs a product manufactured by a third party; or

• specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacturing of the product.

The guide also includes useful discussions of:

• determining whether conflict minerals originated in the covered countries;

• what must be included in the conflict minerals report;

• due diligence on recycled or scrap materials; and

• independent private sector audits.

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

On November 8, 2012, the SEC rejected a motion to stay the resource extraction rules pending outcome of litigation challenging the validity of the rules.  The SEC gave the following reasons:

  • Movants have failed to demonstrate imminent, irreparable harm;
  • Movants have not demonstrated a likelihood of success on the merits; and
  • Other equitable considerations counsel against the issuance of a stay;

The SEC issued a stay of the proxy access rules when Rule 14a-11 was challenged.  In that case the SEC noted a stay avoids potentially unnecessary costs, regulatory uncertainty, and disruption that could occur if the rules were to become effective during the pendency of a challenge to their validity.

The resource extraction rules do not require issuers to file a Form SD until 150 days after the first fiscal year ending after September 30, 2013.  So perhaps the long implementation horizon is partly determinative.

The conflict mineral rules also have a long implementation timeline.  Given the result with the resource extractions rules, it seems easy to predict the SEC will not stay the conflict minerals rules either.

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

The CFPB recently began issuing examination reports and supervisory letters to financial service providers that it supervises.  It has also announced a policy that would allow supervised entities to appeal certain supervisory findings in those examination reports and supervisory letters.

An entity may appeal final CFPB compliance ratings that are less than satisfactory or any underlying adverse finding, or adverse findings conveyed to an entity in a supervisory letter. Adverse findings are those that result in a “Matter Requiring Attention” by the board of directors or principal(s) of the entity.

An entity may not appeal pursuant to this policy:

  • preliminary supervisory matters (including preliminary findings);
  • CFPB decisions to initiate supervisory measures, such as requiring memoranda of understanding;
  • enforcement actions, such as cease and desist orders; or
  • referrals of information to other regulatory agencies.

 An entity may only appeal a finding once. For example, an entity that receives a less than satisfactory rating in an examination report that is based on an earlier finding memorialized in a supervisory letter may appeal the letter or the report, but not both.

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 report highlighting its supervision activities.  The document does not refer to any specific institution, but according to the CFPB signals to all institutions the kinds of activities that should be carefully scrutinized for compliance with the law. The CFPB believes that the report will help providers of financial products and services better understand its supervisory expectations so that they can take action to comply with Federal consumer financial laws and serve their customers in a fair and transparent way.

For instance, the report notes “In the course of its supervisory activities, the CFPB has discovered numerous violations of Federal consumer financial law. In each case, it has directed the financial institution that committed violations to take corrective action. Where warranted, restitution or other relief to consumers has also been provided. As a result of CFPB supervisory activity, financial institutions have been directed to correct violations of a broad spectrum of Federal consumer financial laws and regulations. Examples of the types of violations detected through the CFPB’s review of financial institutions’ credit card, credit reporting, and mortgage origination activities are discussed [in the report]. In connection with these matters, the CFPB has confirmed that financial institutions have provided remedial relief to 1.4 million consumers, stopped illegal practices, adopted effective policies and procedures to ensure that violations do not recur, and implemented robust compliance management programs”.

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

The CFTC has provided time-limited no-action relief for swap dealers,  or SDs, and major swap participants, or  MSPs, concerning certain recordkeeping obligations under Part 23 of the CFTC’s regulations.

The no-action letter will delay until March 31, 2013, the compliance date for the following provisions:

  • The requirement that SDs and MSPs make and keep records of all oral communications related to pre-execution swap trade information (and communications that lead to the conclusion of a related cash or forward transaction), pursuant to Commission Regulations 23.202(a) and (b);
  • The requirement that SDs and MSPs maintain all transaction records and daily trading records in a manner “identifiable and searchable” by transaction and counterparty, pursuant to Commission Regulations 23.201(a)(1), 23.202(a) and 23.202(b);
  • The requirement that SDs and MSPs use a Coordinated Universal Time timestamp when recording quotations prior to and at the time of execution of a swap, pursuant to Commission Regulations 23.202(a)(1)(ii), (a)(2)(iv), (b)(3) and (b)(4); and
  • The requirement that SDs and MSPs retain swap records at their principal places of business or such other principal offices as designated by the SDs or MSPs.

The relief provided in the no-action letter is applicable to all SDs and MSPs.

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

On August 29, 2012, the SEC issued a proposal for new Rule 506(c) under the Securities Act, which would implement the mandate of the JOBS Act to allow for the use of general solicitation and advertising in private offerings where the only purchasers are accredited investors.  Since the proposal’s release, the SEC has been receiving comment letters from state securities regulators, individuals, and trade groups.  Despite the expiration of the public comment period on October 5, the SEC continues to receive and post comment letters.  We’ve previously reported on some of the major comment letters (here and here); this post examines the best of the rest.

A number of state securities regulators who are members of the NASAA submitted individual comment letters, which generally call for the SEC to take four steps:

  • Specify safe harbors for verification methods that satisfy the “reasonable steps” standard;
  • Implement the bad actor disqualifications called for by the Dodd-Frank Act and previously proposed;
  • Require a Form D filing in advance of the use of public advertising; and
  • Place reasonable restrictions on the content of public advertising.

These sentiments are shared by regulators from Hawaii, Missouri, Montana, Nevada, Ohio, South Carolina, and Virginia.

Several state regulators also offer statistics to put Rule 506 offerings in context.  Virginia regulators took enforcement actions in 24 offerings in 2010 and 2011, which resulted in $12 million in losses to Virginia investors. In Montana, investors have lost more than $100 million in fraudulent Rule 506 offerings in the last four years. In South Carolina, fraudulent Rule 506 offerings are the number one complaint received by the attorney general’s office, and those complaints have more than doubled in the last two years.

The Small Business Investor Alliance doesn’t just call for the SEC to propose safe harbors for investor verification – it actually proposes several ideas for safe harbors, such as an investor self-certification combined with a firm commitment to invest at least $200,000 in a private fund.

Although they make up a minority of the comment letters, there are certainly individuals and organizations that believe the SEC has taken the right approach in the proposed rule and has stricken the right balance between preserving investor protections and removing roadblocks for small businesses to obtain crucial capital.  A letter from Artivest Holdings, Inc. calls the SEC’s rule proposal “thoughtful and measured,” argues that the existing securities law anti-fraud provisions are adequate, and cautions that any safe harbor would quickly become a de facto minimum threshold. Similarly, a joint letter from the Securities Industry and Financial Markets Association and the Financial Services Roundtable concurs that the flexible approach proposed by the SEC will accommodate the varying circumstances of each issuer, offering, and investor.

Several commenters seem to have written for the sole purpose of congratulating the SEC on its perfect rule proposal, including BlackRock and the Biotechnology Industry Organization.

But as a group, the comment letters also provide some unexpected comedy in the form of anonymous rants, personal attacks on state securities regulators, and comments from individuals that primarily exhibit a deep and troubling misunderstanding about the nature of securities laws.  For that reason alone, it’s worth spending some time browsing the full set of letters at the SEC’s comment letter page.

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

The Consumer Financial Protection Bureau, or CFPB, has published a rule that will allow the agency to federally supervise the larger consumer debt collectors for the first time. The CFPB also released the field guide that examiners will use to ensure that companies and banks engaging in debt collection are following the law.

The consumer debt collection market covered by the rule includes three main types of debt collection:

• firms that may buy defaulted debt and collect the proceeds for themselves;

• firms that may collect defaulted debt owned by another company in return for a fee; and

• debt collection attorneys that collect through litigation.

The CFPB’s supervision authority over these entities will begin when the rule takes effect on January 2, 2013. Under the rule, any firm that has more than $10 million in annual receipts from consumer debt collection activities will be subject to the CFPB’s supervisory authority.

Pursuant to the CFPB’s supervision authority, examiners will be assessing potential risks to consumers and whether debt collectors are complying with requirements of federal consumer financial law. Among other things, examiners will be evaluating whether debt collectors:

• Provide Required Disclosures: Examiners will evaluate whether debt collectors are properly identifying themselves and properly disclosing the amount of debt owed.

• Provide Accurate Information: Examiners will assess whether debt collectors are using accurate data in their pursuit of debt.

• Have a Consumer Complaint and Dispute Resolution Process: As part of the CFPB’s compliance management review, examiners will assess whether complaints are resolved adequately and in a timely manner, whether the complaints highlight violations of federal consumer financial law, and whether the debt collector has a process in place to address consumer disputes.

• Communicate Civilly and Honestly with Consumers: Examiners will be assessing whether debt collectors have harassed or deceived consumers in pursuit of debt.

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