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

SEC Chairman Mary Schapiro gave testimony before a House committee yesterday to provide updates on the implementation of the JOBS Act and the status of rulemaking that is required under the JOBS Act.

Not surprisingly, Ms. Schapiro announced that the SEC would not meet its July 4, 2012 deadline to revise Rule 506 and Rule 144A to remove bans on general solicitation and general advertising under certain circumstances.  Ms. Schapiro noted that she had “stated to Congress prior to the passage of the Act [that] time limits imposed by the JOBS Act are not achievable.”  While she characterized the 90 day time frame for implementing the revisions to Rules 506 and 144A as not realistic, Ms. Schapiro did indicate that the SEC has made significant progress and will accomplish its objective “in the very near future.”

The testimony includes updates on a variety of phases of the rulemaking, but one of the most interesting topics (to me) was the testimony regarding the way the SEC is actively increasing the prominence and effectiveness of economic analysis in the rulemaking process.  Back in April Ms. Schapiro reported on efforts to develop new staff guidance on economic analysis.  A draft framework of that new guidance is currently being used by rulemaking teams.  In Ms. Schapiro’s words:

“I am told that the Guidance is improving both the rule writing process and the substance of the economic analysis.  [Division of Risk, Strategy, and Financial Innovation] economists are more deeply involved in the development of rule recommendations and in conveying and explaining the economic consequences of particular choices.  I expect that the Commission’s forthcoming rules will reflect this increased collaboration and attention to economic analysis.”

Ms. Schapiro noted that the SEC’s commitment to economic analysis in the rulemaking process continues to grow, as 16 new economists will be joining rulemaking teams in the near future, and an additional 20 economists are expected to be hired in fiscal 2013.

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

The CFTC has approved the first provisional registration for a swap data repository pursuant to section 21 of the Commodity Exchange Act and section 49.3(b) of the CFTC’s regulations.  The application was submitted by ICE Trade Vault, LLC.

Under the Dodd-Frank Act, swap data repositories will perform a variety of functions related to the collection and maintenance of swap transaction data and information.

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

The SEC will soon implement an EDGAR-based electronic system allowing for emerging growth companies (as defined under the JOBS Act) to request confidential, non-public review of registration statements prior to public filing.  There are several situations in which this sort of confidential non-public review – a “test-run” of sorts with the SEC to resolve any problems – is available to issuers.

One of those situations involves foreign private issuers and foreign governments.  The SEC has a policy of allowing a certain subset of foreign private issuers and foreign governments to submit registration statements and amendments to SEC staff for review on a non-public, confidential basis in recognition that foreign issuers and foreign governments desiring to make public offerings or to be listed on U.S. exchanges often face “unique circumstances.”

A second situation involving confidential non-public review relates to “emerging growth companies” and was brought into existence by the JOBS Act.  Companies that qualify as “emerging growth companies” under the JOBS Act are eligible to submit registration statements to the SEC for confidential, non-public review prior to public filing, although this program has a basis in statute, as opposed to the SEC’s non-statutory policy regarding certain foreign issuers and foreign governments.

An emerging growth company (EGC) under the JOBS Act is a company that has total gross revenues of less than $1 billion at the end of its most recently completed fiscal year and has not conducted a registered IPO of its common stock on or prior to December 8, 2011.  An EGC can maintain its special status for up to five years, although EGC status will terminate prior to the expiration of the five year period if (i) total annual gross revenue exceeds $1 billion, (ii) the worldwide public float exceeds $700 million as of the end of the second quarter following the anniversary of the EGC’s IPO or initial reporting, or (iii) the EGC’s issues more than $1 billion in non-convertible debt in any consecutive three-year period.

The SEC began with a paper-based confidential submission system that was replaced on May 14, 2012 by a secure e-mail submission system.  The SEC has now announced that the secure e-mail system will be replaced with an EDGAR-based system  for confidential non-public submission of draft registration statements, which will presumably make the submission process more convenient for issuers.  Some features of this new system will be available July 2, 2012, with the next scheduled EDGAR update, and the full system is expected to be available in the near future.

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

Section 502 the Dodd-Frank Wall Street Reform and Consumer Protection Act  requires the Federal Insurance Office, or FIO, to provide a report not later than September 30, 2012, describing the breadth and scope of the global reinsurance market and the critical role such market plays in supporting insurance in the United States. To assist the FIO  in completing this report, the FIO has issued a request for comment.

Commenters are invited to submit views on:

  • ·         The purpose of reinsurance;
  • ·         The breadth and scope of the global reinsurance market;
  • ·         The role that the global reinsurance market plays in supporting insurance in the United States;
  • ·         The effect of domestic and international regulation on reinsurance in the United States;
  • ·         The role and impact of government reinsurance programs;
  • ·         The coordination of reinsurance supervision nationally and internationally; and
  • ·         Any other topics relevant to the report.

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

 

SEC Adopts Rules for Listing Standards for Compensation Committees

 The SEC has approved new  rules required by the Dodd-Frank Act that:

  • direct national securities exchanges to adopt listing standards for public company boards of directors and compensation advisers
  • require disclosure of conflicts of interest by compensation consultants.

The first part of the new rules requires exchange listing standards to address:

  • The independence of the members on a compensation committee
  • The committee’s authority to retain compensation advisers
  • The committee’s consideration of the independence of any compensation advisers and
  • The committee’s responsibility for the appointment, compensation, and oversight of the work of any compensation adviser.

This part of new rules and rule amendments will take effect 30 days after publication in the Federal Register. No later than 90 days after effectiveness, each exchange that lists equity securities must propose listing standards that comply with the new rule. The new listing standards must be approved by the SEC within one year of the new rule becoming effective.

The second prong of the new rules provide that if any compensation consultant that has played a role in determining or recommending the amount or form of executive and director compensation, and the consultant’s work has raised any conflict of interest, then disclosure of the nature of the conflict and how the conflict is being addressed is required.  This rule is effective for any proxy or information statement for an annual meeting of shareholders at which directors will be elected occurring after January 1, 2013.

Independence Requirements

Under the final rule, the exchanges are directed to establish listing standards requiring each member of a listed issuer’s compensation committee to be a member of the board of directors and to be independent. The final rule does not require that exchanges establish a uniform definition of independence.

In developing their own definitions of independence applicable to compensation committee members, the exchanges are required to consider relevant factors, including, but not limited to:

  • a director’s source of compensation, including any consulting, advisory or compensatory fee paid by the issuer; and
  • whether a director is affiliated with the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary of the issuer.

The final rule does not specify any additional factors that the exchanges must consider in determining independence requirements for compensation committee members, nor does the final rule prescribe any standards or relationships that will automatically preclude a finding of independence. Because the rule’s relevant factors cover the same matters as the prohibitions in Exchange Act Section 10A(m)’s definition of audit committee independence, the SEC expects the exchanges to consider whether those prohibitions should also apply to compensation committee members. However, consistent with Exchange Act Section 10C, the exchanges are not required to adopt those prohibitions in their requirements and will have flexibility to consider other factors in developing their requirements.

As noted in the proposing release, Section 10C of the Exchange Act does not require that the exchanges prohibit all affiliates from serving on a compensation committee. In establishing their independence requirements, the exchanges may determine that, even though affiliated directors are not allowed to serve on audit committees, such a blanket prohibition would be inappropriate for compensation committees, and certain affiliates, such as representatives of significant shareholders, should be permitted to serve.

In addition, the final rule does not impose any required look-back periods that must be incorporated in exchange listing standards relating to the independence of compensation committee members. The SEC agreed with commentators that the determination of whether to impose a look-back period in evaluating compensation committee member independence should be left to the exchanges and noted that the exchanges already incorporate various look-back periods in their general criteria for director independence. In this respect, the final rule is similar to Exchange Act Rule 10A-3, which did not impose a mandatory look-back period for evaluating audit committee member independence in light of look-back periods already required by the exchanges for evaluating director independence generally.

Authority to Retain Compensation Advisers

The final rule does not require compensation committees to retain or obtain advice only from independent advisers.  A listed issuer’s compensation committee may receive advice from non-independent counsel, such as in-house counsel or outside counsel retained by management, or from a non-independent compensation consultant or other adviser, including those engaged by management.  The final rule does not require a compensation committee to be directly responsible for the appointment, compensation or oversight of compensation advisers that are not retained by the compensation committee, such as compensation consultants or legal counsel retained by management. Rather, the direct responsibility to oversee compensation advisers applies only to those advisers retained by a compensation committee, and the obligation of the issuer to provide for appropriate funding applies only to those advisers so retained.

Compensation Adviser Independence Factors

The SEC noted that the Dodd-Frank Act does not require a compensation adviser to be independent, only that the compensation committee of a listed issuer consider enumerated independence factors before selecting a compensation adviser. The final rules provide the compensation committee of a listed issuer may select a compensation consultant, legal counsel or other adviser to the compensation committee only after taking into consideration the following factors, as well as any other factors identified by the relevant national securities exchange or national securities association in its listing standards:

  • The provision of other services to the issuer by the person that employs the compensation consultant, legal counsel or other adviser;
  • The amount of fees received from the issuer by the person that employs the compensation consultant, legal counsel or other adviser, as a percentage of the total revenue of the person that employs the compensation consultant, legal counsel or other adviser;
  • The policies and procedures of the person that employs the compensation consultant, legal counsel or other adviser that are designed to prevent conflicts of interest;
  • Any business or personal relationship of the compensation consultant, legal counsel or other adviser with a member of the compensation committee;
  • Any stock of the issuer owned by the compensation consultant, legal counsel or other adviser; and
  • Any business or personal relationship of the compensation consultant, legal counsel, other adviser or the person employing the adviser with an executive officer of the issuer.

The final rule includes an instruction that a compensation committee need not consider the six independence factors before consulting with or obtaining advice from in-house counsel. Commentators noted that it is routine for in-house counsel to consult with, and provide advice to, the compensation committee on a variety of issues, such as, for example, the terms of an existing benefit plan or how a proposed employment contract would interrelate with other company agreements.

This instruction will not affect the obligation of a compensation committee to consider the independence of outside legal counsel or compensation consultants or other advisers retained by management or by the issuer. The SEC believes that information gathered from an independence assessment of these categories of advisers will be useful to the compensation committee as it considers any advice that may be provided by these advisers.

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

Hedge funds and private equity advisers with more than $150 million in assets under management that have registered with the SEC as investment advisers now have to begin filing Form PF with the SEC as required by the Dodd-Frank Act.  Compliance dates depend on the type of private fund adviser and assets under management.

The SEC has issued a set of frequently asked questions on Form PF.  Some of the highlights include:

  • Some private funds would be categorized as a private equity fund, except for the fact that the fund documents allow the fund to either employ large amounts of leverage or sell assets short. Some of those funds do not in fact, nor do they intend to, incur leverage or short any assets.  Notwithstanding the intent and practice of these private funds, they must be classified as a hedge fund for Form PF reporting purposes.
  • The categorization of a private fund as a hedge fund may change from reporting period to reporting period.  With respect to any fiscal quarter, a private fund should be categorized as a hedge fund if it met the definition of a hedge fund as of the last day of any month in the fiscal quarter immediately preceding the fund’s most recently completed fiscal quarter.
  • Under CFTC interpretations, a private fund that holds a single commodity interest position may be a commodity pool. Advisers however are not required to treat a private fund as a commodity pool if such private fund’s commodity interest positions satisfy either of the de minimis tests in Regulation 4.13(a)(3)(ii) issued by the CFTC. Accordingly, advisers only have to categorize such a private fund as a hedge fund if it otherwise meets the definition of a hedge fund (i.e., it may charge a performance fee, employ large amounts of leverage, or sell assets short).

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

The SEC oversees FINRA, which is charged with regulatory oversight of all securities broker-dealers conducting business with the public in the United States.  In light of recent events in the financial markets, the SEC and FINRA have faced questions about their oversight roles. The Dodd-Frank Wall Street Reform and Consumer Protection Act required GAO to study SEC’s oversight of national securities associations registered under section 15A of the Securities Exchange Act of 1934, a provision which applies only to FINRA.  GAO recently released the required study which examines:

  • how the SEC has conducted oversight of FINRA, including FINRA rule proposals and the effectiveness of its rules, and
  • how the SEC plans to enhance its oversight of FINRA.

The GAO stuffy recommends that:

  • the SEC should encourage FINRA to conduct retrospective reviews of its rules and establish a process for examining FINRA’s reviews, and
  • the SEC should follow all elements of a risk-management framework in developing its future oversight plans.

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 announced that Thomas J. Butler has been appointed Director of the agency’s new Office of Credit Ratings.

The SEC’s Office of Credit Ratings was created by the Dodd-Frank Act and is responsible for overseeing the nine registered Nationally Recognized Statistical Rating Organizations (NRSROs). Required among these responsibilities is conducting an annual exam of each credit rating agency and issuing a public report.

Mr. Butler will oversee a staff of approximately 25 lawyers, accountants, and examiners responsible for examining and monitoring the NRSROs.

Prior to the creation of the Office of Credit Ratings, the NRSRO examinations required under Dodd-Frank have been conducted by the SEC’s Office of Compliance Inspections and Examinations.

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

On June 7, 2012, SEC approved new FINRA Rule 5123, which imposes a new notice filing requirement on broker-dealers in private placements.  Specifically, the rule requires that a broker-dealer that offers or sells securities in a private placement file a copy of the disclosure documents that were given to prospective investors (including any PPM, term sheet, or other document, with exhibits) with FINRA within 15 days after the first sale in the offering.  If no disclosure document is provided to investors in connection with the private placement, the broker-dealer must notify FINRA of such fact.

The final rule is a step back from the reforms initially proposed by FINRA on October 5, 2011.  The original proposal would have required that broker-dealers ensure that prospective investors be notified of the anticipated use of proceeds, offering expenses, and offering compensation.  If this information was not included in the offering documents, the original rule would have required the broker-dealer to create a separate disclosure document that did contain the required information, and to distribute that separate document to prospective investors.  The original rule would have also required the broker-dealer to file a copy of the offering documents with FINRA within 15 days of the first sale, and to file any amendments to the offering documents with FINRA within 15 days of the date first distributed to prospective investors. 

In response to a number of comment letters, the original rule underwent three amendments that reigned in the new requirements on broker-dealers.  The result is a new notice filing requirement only.  Broker-dealers are not required to ensure that use of proceeds, offering expenses, and offering compensation information is distributed to investors, and they are not required to file amendments to offering documents with FINRA.  You can read the text of the initial rule, the amendments, the comment letters, and FINRA responses here.

There are several exemptions to the new rule, including offerings in which the FINRA member sells to only institutional accounts, qualified purchasers, qualified institutional buyers, investment companies, issuer employees and affiliates, or accredited investors.

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

March 30, 2012 was the compliance date for several provisions of the Dodd-Frank Act that amended the registration provisions of the Investment Advisers Act.  As of that date:

  • advisers to many hedge funds, private equity funds, and other “private funds” that previously were exempt from registration were required to register with the Commission;
  • exempt reporting advisers (i.e., unregistered advisers to venture capital funds and to private funds with less than $150 million in assets) were required to submit reports on Form ADV for the first time; and
  • mid-sized advisers (i.e., advisers with between $25 million and $100 million in assets under management subject to examination by state regulators) switching to state registration were required to amend their Form ADVs reporting that they are no longer eligible to remain registered with the Commission.

The SEC’s Division of Investment Management has prepared a summary of the preliminary results of these changes.  Some of the interesting statistics include:

  • Registered Private Fund Advisers:  There are approximately 3,990 investment advisers that manage one or more private funds registered with the Commission, of which 34% (1,369) registered since the effective date of the Dodd-Frank Act (July 21, 2011). The staff estimates that this represents a 52% increase in registered private fund advisers; 32% of all advisers currently registered with the Commission report that they advise at least one private fund.
  • Anticipated Impact on Population of Registered Advisers:  There are 12,623 advisers registered with the Commission with total assets under management of $48.8 trillion. Based on data recently submitted by advisers, the staff expects 2,400 mid-sized advisers will switch to state registration by June 28, 2012, resulting in approximately 10,000 advisers with $48.6 trillion in assets under management registered with the SEC. Using these projections, the staff anticipates that the cumulative impact of the Dodd-Frank Act registration changes will be a 25% decrease in the number of advisers registered with the SEC, but a 12% increase in the total assets under management of those registered advisers.

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