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

The SEC has adopted a final rule on investment advisory performance fees to raise the net worth requirement for investors who pay performance fees, by excluding the value of the investor’s home from the net worth calculation.

Under the SEC’s rule, registered investment advisers may charge clients performance fees if the client’s net worth or assets under management by the adviser meet certain dollar thresholds. Investors who meet the net worth or asset threshold are deemed to be “qualified clients,” able to bear the risks associated with performance fee arrangements.

The revised rule will require “qualified clients” to have at least $1 million of assets under management with the adviser, up from $750,000, or a net worth of at least $2 million, up from $1 million. These rule changes conform the rule’s dollar thresholds to the levels set by an SEC order in July 2011. The SEC-ordered increase in the thresholds was required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.  In addition, the revised rule will exclude the value of a client’s primary residence and certain property-related debts from the net worth calculation; the change was not required by the Dodd-Frank Act, but is consistent with changes the SEC approved in December to net worth calculations for determining who is an “accredited investor” eligible to invest in certain unregistered securities offerings.

A new grandfather provision to the performance fee rule will permit registered investment advisers to continue to charge clients performance fees if the clients were considered “qualified clients” before the rule changes. In addition, the grandfather provision will permit newly registering investment advisers to continue charging performance fees to those clients they were already charging performance fees.

Finally, the revised rule provides that every five years, the SEC will issue an order making inflation adjustments to the dollar thresholds used to determine whether an individual or company is a qualified client, as required by the Dodd-Frank Act.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

On February 13, 2012, the SEC released new CD&I 169.07, which provides guidance on appropriate descriptions of the say-on-pay advisory vote required by Rule 14a-21 under the Exchange Act.  CD&I 169.07 provides examples of proxy card advisory vote descriptions that would and would not be “consistent with Rule 14a-21’s requirement for shareholders to be given an advisory vote to approve the compensation paid to a company’s named executive officers.”

The following example is not a permissible description:

  • To hold an advisory vote on executive compensation

The SEC points out that this description could cause a shareholder to think they were only voting on whether to hold an advisory vote on executive compensation.  The SEC provides three examples of advisory vote descriptions that it deems sufficiently clear:

  • To approve the company’s executive compensation
  • Advisory approval of the company’s executive compensation
  • Advisory resolution to approve executive compensation
  • Advisory vote to approve named executive officer compensation

Check back frequently at dodd-frank.com for continuing coverage of the implementation and effects of the Dodd-Frank Act.

The Consumer Financial Protection Bureau, or CFPB, is seeking public input on a draft monthly mortgage statement that is designed to make it easier for homeowners to understand their loans and avoid unnecessary costs and fees.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that most mortgage borrowers receive periodic statements containing specified information. Under the Dodd-Frank Act, periodic statements generally must be provided by the creditor, assignee of the loan, or the mortgage servicer that manages the loan. Servicers are businesses that typically collect payments from the borrower on behalf of the owner of the loan. They also handle customer service, escrow accounts, collections, loan modifications, and foreclosures.

The CFPB expects to propose a rule related to the form later this year.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

 

The CFTC has eliminated the exemption from registration as a commodity pool operator, or CPO, set forth in CFTC Rule 4.13(a)(4).  The Rule provided an exemption from CPO registration for the operators of commodity pools with sophisticated investors.  As a result, some hedge fund advisors may be required to register as a CPO.  The CFTC believes the risks outlined in the Dodd-Frank Act with respect to private funds are also applicable to commodity pools.

The CFTC retained an exemption set forth in Rule 4.13(a)(3) that the CFTC had previously proposed to eliminate.  That Rule provides an exemption for certain de minimus trading in commodities.

Many advocated the CFTC adopt an exemption from registration as a CPO for family offices similar to the SEC family office exemption from registering as an investment adviser.  The CFTC considered the suggestion but declined to adopt an exemption.  The CFTC believes it does not have sufficient knowledge about family offices to adopt an exemption at this time.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

Many sponsors of private equity funds and hedge funds are scrambling to register as investment advisers with the SEC as required by the Dodd-Frank Act.  The process is completed by filing Form ADV with the SEC.  Likewise, many exempt advisers to private equity groups and hedge funds will also have to file a portion of Form ADV with the SEC.

The SEC has recently issued frequently asked questions on Form ADV.  Many hedge fund and private equity sponsors will find the FAQs useful in finding short-cut answers to recurring questions on Form ADV.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

We previously reported Morgan Stanley sought to exclude a shareholder proposal submitted on behalf of the Comptroller of the City of New York as custodian and a trustee of several pension funds from its upcoming proxy statement.  The shareholder purportedly sought to strengthen Morgan Stanley’s clawback policy.

The shareholder has subsequently withdrawn the proposal after discussions with Morgan Stanley.  Morgan Stanley stated it will add disclosure to clarify the breadth of the scope of its clawback provisions, including specifically noting that the clawback provisions could permit recovery of compensation for failure to appropriately supervise or manage anemployee.

Goldman received a similar clawback proposal from the same shareholder and negotiated withdrawal on substantially the same terms.

This demonstrates that controversial shareholder proposals can sometimes be dealt with by mutual understanding and incremental disclosure changes.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The Municipal Securities Rulemaking Board, or MSRB, has published a draft proposal concerning circumstances under which municipal bond underwriters would violate their duty to deal fairly by consenting to certain amendments to bond authorizing documents. The MSRB is concerned that underwriters are providing bondholder consent to document changes, such as elimination of a reserve fund or change in priority of debt service, in cases that could affect existing bondholders without prior notice.

The proposal, which is a draft interpretive notice about the MSRB’s existing “fair dealing” requirements for underwriters, seeks to address the MSRB’s concern that, in some cases, underwriters have consented to trust indenture or resolution amendments that affect existing parity bondholders, even though those authorizing documents and the official statements for the existing bonds did not provide expressly that underwriters could provide such consents. In some cases, those amendments have reduced the security for existing bondholders by, for example, eliminating debt service reserve fund requirements, or have reduced the value of existing bonds.

The draft notice would describe circumstances under which this practice would violate MSRB Rule G-17’s requirements that brokers, dealers, and municipal securities dealers deal fairly with all persons in the conduct of their municipal securities activities.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

In July 2011, the Financial Stability Oversight Council, or FSOC, adopted rules pursuant to Section 804 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The statute and rules provide FSOC the authority to designate a financial market utility, or FMU, as systemically important.  The designation of an FMU as systemically important by FSOC subjects the designated FMU to the requirements of Title VIII of the Dodd-Frank Act.  The final rule only addresses the designation of FMUs.  FSOC expects to address the designation of payment, clearing, or settlement activities as systemically important in a separate rulemaking.

The rule as adopted uses a two-stage process for evaluating FMUs prior to a vote of proposed designation. The first stage consists of a largely data-driven process for FSOC to identify a preliminary set of FMUs, whose failure or disruption could potentially threaten the stability of the U.S. financial system.  In the second stage, the FMUs identified through the first stage of review will be subject to a more in-depth review, with a greater focus on qualitative factors, in addition to other institution and market specific considerations.

In a meeting on December 21, 2011, FSOC advanced certain FMUs from stage one to stage two of the evaluation process.  The meeting minutes do not specifically identify the FMUs under consideration, but only reference a notification letter to be sent to the FMU.  So if you might be a systematically important FMU, you know who you are.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The CFPB, in fulfillment of its statutory responsibility, has submitted its inaugural Semi-Annual Report to the President and Congress. The report summarizes the CFPB’s activities and accomplishments over the period from its launch on July 21 through December 31, 2011 and provides information required by the Dodd-Frank Act.

The CFPB believes it has taken significant steps to make consumer financial markets work better for consumers and responsible companies by:

  • resolving consumer complaints about credit cards and mortgages;
  • launching a supervision program that will promote compliance with consumer protection laws in the Bureau’s jurisdiction by financial companies of all kinds;
  • evaluating and developing disclosures that make the costs and risks of financial products easier for consumers to understand;
  • working to implement statutory protections for consumers who rely on consumer financial products, such as mortgages;
  • launching the Bureau’s website – ConsumerFinance.gov – and using it to engage the public in a range of projects;
  • creating several ways in which individuals can alert the CFPB about potential violations of consumer protection laws in the Bureau’s jurisdiction; and
  • improving information about the structure of consumer financial markets and consumer behavior through practical market intelligence and independent research.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.