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

The Dodd-Frank Act amended the Investment Advisers Act to exempt from registration advisers that only manage venture capital funds, and directed the SEC to define the term “venture capital fund.”  The SEC has adopted final rules that define the term “venture capital fund.”

Under the definition, a venture capital fund is a private fund that:

  • Invests primarily in “qualifying investments” (generally, private, operating companies that do not distribute proceeds from debt financings in exchange for the fund’s investment in the company); may invest in a “basket” of non-qualifying investments of up to 20 percent of its committed capital; and may hold certain short-term investments.
  • Is not leveraged except for a minimal amount on a short-term basis.
  • Does not offer redemption rights to its investors.
  • Represents itself to investors as pursuing a venture capital strategy.

Under a grandfathering provision, funds that began raising capital by the end of 2010 and represented themselves as pursuing a venture capital strategy would generally be considered venture capital funds. The SEC is adopting this approach because it could be difficult or impossible for advisers to conform these pre-existing funds, which generally have terms in excess of 10 years, to the new definition.

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

The SEC has approved a new rule to define “family offices” that are to be excluded from the Investment Advisers Act of 1940.  “Family offices” are entities established by wealthy families to manage their wealth and provide other services to family members, such as tax and estate planning services. Historically, family offices have not been required to register with the SEC under the Advisers Act because of an exemption provided to investment advisers with fewer than 15 clients.

The Dodd-Frank Act removed that exemption so the SEC can regulate hedge fund and other private fund advisers. However, Dodd-Frank also included a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.

The new rule adopted by the SEC enables those managing their own family’s financial portfolios to determine whether their “family offices” can continue to be excluded from the Investment Advisers Act.

Which family offices will be excluded from Advisers Act regulation under the rule? Any company that:

  • Provides investment advice only to “family clients,” as defined by the rule.
  • Is wholly owned by family clients and is exclusively controlled by family members and/or family entities, as defined by the rule.
  • Does not hold itself out to the public as an investment adviser.

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

The SEC has adopted rules that require advisers to hedge funds and other private funds to register with the SEC, establish new exemptions from SEC registration and reporting requirements for certain advisers, and reallocate regulatory responsibility for advisers between the SEC and states.

Registration Deadline for Private Equity Funds and Hedge Funds

Advisers to private funds have been able to avoid registering with the SEC because of an exemption that applies to advisers with fewer than 15 clients – an exemption that counted each fund as a client, as opposed to each investor in a fund.  Title IV of the Dodd-Frank Act eliminated this private adviser exemption.  Consequently, many previously unregistered advisers, particularly those to hedge funds and private equity funds, will have to register with the SEC and be subject to its regulatory oversight, rules and examination.

These advisers will be subject to the same registration requirements, regulatory oversight, and other requirements that apply to other SEC-registered investment advisers. To provide these advisers with a window to meet their new obligations, the transition provisions the SEC is adopting today will require these advisers to be registered with the SEC by March 30, 2012.

Private Fund Advisers With Less Than $150 Million in Assets Under Management in U.S.

The SEC also adopted a rule that would implement the new statutory exemption for private fund advisers with less than $150 million in assets under management in the United States. The rule largely tracks the provision of the statute.

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

 

Some initial XBRL filers will unfortunately learn that they have submitted an XBRL data file with an error.  The question is, what steps should be taken?

Rule 406T of Regulation S-T contains a temporary provision (expiring 24 months after first becoming subject to the XBRL rules) regarding the liability attaching to XBRL filings.  Generally, the XBRL data files are subject to the anti-fraud provisions set forth in Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act.  The temporary rule helpfully provides that there is no liability under the anti-fraud provisions if:

  • the company made a good faith attempt to comply with the general XBRL content rule (Rule 405 of Regulation S-T), and
  • if the company becomes aware that the XBRL data exhibit fails to comply with Rule 405, the company “promptly amends” the XBRL data exhibit to comply with Rule 405.  “Promptly” is defined in Rule 11 of Regulation S-T to mean “as soon as reasonably practicable under the facts and circumstances at the time.”  Amendments made at the later of 24 hours or 9:30 Eastern Time on the next business day after the filer becomes aware of the need for an amendment shall be deemed promptly made.

So upon becoming aware of an error, companies will want to correct the error as soon as possible to cut-off anti fraud liability by amendment to the report to which the XBRL data file was attached.  Since the XBRL data exhibits are not subject to the officer certification requirements, an amendment to a report solely to amend the XBRL data exhibit will not have to be certified.  Prior to filing an amendment, companies should determine whether they need to consult with their audit committee, their auditors, their legal counsel and who at the company has the authority to authorize the amendment.

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

Many calendar year end filers will be subject to the final phase-in for XBRL filings for second quarter 10-Qs for the first time.  We thought it would be useful to review the grace period rules for XBRL filings in the event filers are faced with unanticipated difficulties or delays.

Initial Filings

Rule 405(a)(ii)(2) of Regulation S-T permits the first XBRL data exhibit to be filed by an amendment within 30 days after the earlier of the due date or filing date of the Form 10-Q.  The extension is only applicable for the initial required XBRL data exhibit and is not available if earlier XBRL data exhibits were voluntarily provided.  XBRL data exhibits are not subject to officer certifications as discussed in Rules 13a-14 and 15d-14.  Thus an amendment solely to include an XBRL data exhibit would not have to be certified.  See page 74 of the XBRL adopting release.

Temporary Hardship Exemption

Rule 201 of Regulation S-T provides for a temporary hardship exemption for XBRL data exhibits.  The temporary hardship exemption is available when the “filer experiences unanticipated technical difficulties preventing the timely preparation” of the XBRL data exhibit.  Instead of including the XBRL data exhibit, include a document with the following statement:

IN ACCORDANCE WITH THE TEMPORARY HARDSHIP EXEMPTION PROVIDED BY RULE 201 OF REGULATION S–T, THE DATE BY WHICH THE INTERACTIVE DATA FILE IS REQUIRED TO BE SUBMITTED HAS BEEN EXTENDED BY SIX BUSINESS DAYS

The required XBRL data exhibit must then be submitted, and where applicable, posted to the corporate web site, within six business days.

Continuing Hardship Exemptions

Rule 202 of Regulation S-T has a procedure where a filer may apply for a continuing hardship exemption.  We do not expect these requests to be routinely granted so they are not discussed further.

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

The SEC has provided guidance as to which of the Title VII requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act will apply to security-based swap transactions as of July 16, the effective date of Title VII. It also granted temporary relief to market participants from compliance with certain of these requirements.

The guidance makes clear that substantially all of Title VII’s requirements applicable to security-based swaps will not go into effect on July 16. The Commission’s action also grants temporary relief from compliance with most of the new Exchange Act requirements that would otherwise apply on July 16.

In addition, to enhance the legal certainty provided to market participants, the SEC’s action provides temporary relief from Section 29(b), which generally provides that contracts made in violation of any provision of the Exchange Act shall be void as to the rights of any person who is in violation of the provision.

The Public Company Accounting Oversight Board has adopted certain rules to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act related to audits of securities brokers and dealers.

Specifically, the PCAOB adopted a temporary rule to establish an interim inspection program for registered public accounting firms’ audits of brokers and dealers. The PCAOB also adopted rules for assessing and collecting a portion of its accounting support fee from brokers and dealers to fund PCAOB oversight of audits of brokers and dealers, consistent with the Dodd-Frank Act. The PCAOB also adopted certain amendments to existing funding rules for issuers.

The Dodd-Frank Act authorized the PCAOB to establish, by rule, a program of inspection of auditors of brokers and dealers. The law leaves to the PCAOB, subject to the approval of the SEC, important questions concerning the scope of the program and the frequency of inspections, including whether to differentiate among categories of brokers and dealers and whether to exclude from the inspection program any categories of auditors.

The temporary rule adopted by the PCAOB provides for an interim inspection program while the PCAOB considers the scope and other elements of a permanent inspection program.

Under the temporary rule, the PCAOB will begin to inspect auditors of brokers and dealers and identify and address with the registered firms any significant issues in those audits. The PCAOB also expects that insights gained through the interim program will inform the eventual determination of the scope and elements of a permanent program, and the PCAOB expects to propose rules governing the scope and elements of a permanent program in 2013.

During the interim program, the PCAOB will provide public reports on the progress of the interim program and significant issues identified. In the absence of unusual circumstances, however, the PCAOB will not issue firm-specific inspection reports before inspection work is performed under the permanent program and will not issue firm-specific inspection reports on any firms that are eventually excluded from the scope of the permanent program.

The temporary rule does not change anything about the rules or standards that govern audits of broker-dealers. As the SEC has previously explained, its rules continue to require those audits to be carried out under GAAS, or generally accepted auditing standards.

The SEC has proposed amendments to the broker-dealer financial reporting rule under the Securities Exchange Act of 1934.  The amendments would:

  • update the existing requirements of Exchange Act Rule 17a-5, facilitate the ability of the Public Company Accounting Oversight Board to implement oversight of independent public accountants of broker-dealers as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act
  • eliminate potentially redundant requirements for certain broker-dealers affiliated with, or dually-registered as, investment advisers.
  • require broker-dealers that either clear transactions or carry customer accounts to consent to allowing the SEC and designated examining authorities to have access to independent public accountants to discuss their findings with respect to annual audits of the broker-dealers and to review related audit documentation.
  • enhance the ability of the Commission and examiners of a designated examining authority to oversee broker-dealers’ custody practices by requiring broker-dealers to file a new Form Custody.

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

The CFTC has proposed an order providing exemptive relief from various swap trading provisions of the Dodd-Frank Act that would otherwise go into effect on July 16, 2011 because many of the rulemakings effectively required to enforce such provisions will not be completed by that date.

The Proposed Exemptive Relief

The proposed rule would grant temporary exemptive relief in two parts:

(1) The Commission is proposing to address provisions that would go into effect on July 16, but that reference terms such as “swap,” “swap dealer,” “major swap participant,” or “eligible contract participant,” which the Dodd-Frank Act requires the CFTC and SEC to “further define.” These definitional rulemakings will not be in place by July 16. Accordingly, the Commission is proposing to temporarily exempt persons or entities from complying with these provisions until the effective date of the definitional rulemaking for such terms or December 31, 2011, whichever is earlier. The exemption would apply only to the extent the provision specifically relates to entities or instruments such as swaps, swap dealers, major swap participants, and eligible contract participants.

(2) The Commission is proposing to address provisions of the CEA that will apply to certain transactions in exempt or excluded commodities (primarily financial and energy commodities) as a result of the repeal of various CEA exemptions and exclusions as of July 16, 2011. The Commission is proposing to temporarily exempt such transactions from certain CEA provisions until the repeal or replacement of certain of the Commission’s regulations or December 31, 2011, whichever is earlier.

Unaffected Provisions

The proposed Order would not limit in any way the CFTC’s ability to pursue fraud and manipulation under the applicable provisions of the Dodd-Frank Act.

Some provisions of the Dodd-Frank Act expressly require a rulemaking before becoming effective and thus do not require any exemptive relief to prevent them from going into effect on July 16, 2011.

Other provisions will become effective on July 16, 2011 and are not covered by the proposed exemptive relief. Examples of such provisions include the core principles for designated contract markets, the core principles for derivatives clearing organizations, and the prohibition on disruptive trading practices.

Summary Remarks by CFTC General Counsel

Dan Berkovitz, CFTC general counsel, provided the following summary remarks regarding the proposed exemptive relief:

• First, the draft order does not provide relief from the Commission’s anti-fraud and anti-manipulation authorities.
• Second, the draft order does not affect any Dodd-Frank Act implementing regulations that the Commission promulgates, including any implementation dates therein.
• Third, neither part of the proposed Order would affect the Commission’s authority with respect to futures contracts, options on futures, or transactions by retail customers in foreign currency or other commodities.
• Fourth, the proposed Order would not apply to any provision of Title VII of the Dodd-Frank Act that has already become effective.
• Fifth, the draft order states that the proposed relief would not limit the Commission’s authority under section 712(f), which provides the Commission with wide-latitude to engage in exemptions, rulemakings and other actions necessary to prepare for the effective dates of the provisions of Title VII.
• In addition, the draft proposed Order also would not affect the Commission’s ability to provide further exemptive relief, as appropriate, either prior to or after the expiration date.

Three federal banking regulatory agencies adopted a final rule that establishes a floor for the risk-based capital requirements applicable to the largest, internationally active banking organizations. The rule, finalized by the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, is consistent with the requirements of Section 171 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

A banking organization operating under the agencies’ advanced approaches risk-based capital rules is required to meet the higher of the minimum requirements under the general risk-based capital rules and the minimum requirements under the advanced approaches risk-based capital rules.

The rule also provides limited flexibility to establish appropriate capital requirements for certain low-risk exposures that, in general, are not held by insured depository institutions, but may be held by depository institution holding companies or nonbank financial companies supervised by the Federal Reserve Board.

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