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

Dodd-Frank disclosures have begun to proliferate in SEC filings.  We reviewed many recent filings and disclosures fall into the following general categories:  internal controls, forward looking statements,  executive compensation, regulatory matters and risk factors.  Examples are set forth below.

Internal Controls

PDC 2004-D Limited Partnership  (Filed September 30, 2010)

Internal Control over Financial Reporting in Exchange Act Periodic Reports

On July 21, 2010, the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act made permanent the SEC’s non-accelerated filer’s exemption, previously set to expire after December 15, 2010, from compliance with Section 404(b) of the Sarbanes-Oxley Act of 2002, or SOX. Therefore, as a non-accelerated filer, the Partnership is permanently exempted from the SOX requirement that SEC registrants provide an attestation report on the effectiveness of internal controls over financial reporting by the registrant’s external auditor.

Asia Carbon Industries, Inc.  (Filed September 29, 2010)

Recently, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which became effective on July 21, 2010, has amended Section 404 of the Sarbanes-Oxley Act of 2002 (the “Act”). The rules adopted by the SEC pursuant to the Act require an annual assessment of our internal control over financial reporting. The SEC extended the compliance dates for non-accelerated filers, as defined by the SEC. Accordingly, we believe that the annual assessment of our internal controls requirement will first apply to our annual report for the 2010 fiscal year. The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal control over financial reporting. Pursuant to the amended Act, as neither a “large accelerated filer” nor an “accelerated filer”, we are exempt from the requirements of Section 404(b) of the Act to obtain an auditor’s report on management’s assessment of the effectiveness of the Company’s internal control over financial reporting.

Golden River Resources Corp (Filed September 29, 2010)

This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to an exemption for smaller reporting companies under Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Forward Looking Statements

Western Union (Filed September 30, 2010)

Possible events or factors that could cause results or performance to differ materially from those expressed in our forward-looking statements include the following: . . . the impact on our business of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules promulgated there-under . . .

Executive Compensation

Unilife Corp (Filed September 29, 2010)

Under our incentive plans, our board of directors has the authority to revoke equity grants of employees who commit misconduct. These provisions are designed to deter and prevent detrimental behavior and permit us to prevent such employees from exercising stock options or retaining restricted stock, which would lapse if that employee has engaged in certain misconduct.

Our compensation committee will evaluate various “claw-back” alternatives and consider the advisability of adopting such policies as will protect our investors from financial misconduct and satisfy the requirements of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act.

Regulatory Disclosures

Versailles Financial Corp. (Filed September 28, 2010)

Versailles Savings and Loan Company is subject to examination, regulation and supervision by the Ohio Division of Financial Institutions, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.  As a result of The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed by the President on July 21, 2010 (the “Dodd-Frank Act”), the powers and duties of the Office of Thrift Supervision with respect to state-chartered savings and loan associations such as Versailles Savings will be transferred to the Federal Deposit Insurance Corporation within one year of the date of the legislation, subject to extension of up to six months.  At that time, Versailles Savings will be subject to the rules and regulations of, and supervision by, the Federal Deposit Insurance Corporation.  This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation’s deposit insurance funds, the banking system and depositors, and not for the protection of security holders.  Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates.  Versailles Savings also is a member of and owns stock in the Federal Home Loan Bank of Cincinnati, which is one of the twelve regional banks in the Federal Home Loan Bank System.  Versailles Savings and also is currently regulated to a lesser extent by the Federal Reserve Board, governing reserves to be maintained against deposits and other matters.  The Ohio Division of Financial Institutions and the Office of Thrift Supervision examine Versailles Savings and prepare reports for the consideration of its Board of Directors on any operating deficiencies.  Versailles Savings’ relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of Versailles Savings’ loan documents.

Versailles Financial Corporation, as a savings and loan holding company, is required to file certain reports with, is subject to examination by, and otherwise must comply with the rules and regulations of the Office of Thrift Supervision.  As a result of the Dodd-Frank Act, the powers and duties of the Office of Thrift Supervision with respect to savings and loan holding companies such as Versailles Financial Corporation will be transferred to the Federal Reserve Board within one year of the date of the legislation, subject to extension of up to six months.  At that time, Versailles Financial Corporation will be subject to the rules and regulations of, and supervision by, the Federal Reserve Board.  Versailles Financial Corporation is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Risk Factors

Alexza Pharmaceuticals Inc. (Filed September 29, 2010)

We are subject to changing rules and regulations of federal and state government as well as the stock exchange on which our common stock is listed. These entities, including the Public Company Accounting Oversight Board, the SEC and the Nasdaq Global Market, have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations and requirements in response to laws enacted by Congress. On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as “say on pay” and proxy access. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from other business activities.

Northeast Bancorp (Filed September 28, 2010)

On July 21, 2010, the President of the United States signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). The goals of the new legislation include restoring public confidence in the financial system following the 2007-2008 financial and credit crises, preventing another financial crisis and allowing regulators to identify failings in the system before another crisis can occur.  Among other things, the Act creates the Financial Stability Oversight Council, with oversight authority for monitoring and regulating systemic risk, and the Bureau of Consumer Financial Protection, which will have broad regulatory and enforcement powers over consumer financial products and services.  The Act also changes the responsibilities of the current federal banking regulators, imposes additional corporate governance and disclosure requirements in areas such as executive compensation and proxy access, and limits or prohibits proprietary trading and hedge fund and private equity activities of banks.  The scope of the Act impacts many aspects of the financial services industry, and it requires the development and adoption of many implementing regulations over the next several months and years; thus, the effects of the Act on the financial services industry will depend, in large part, upon the extent to which regulators exercise the authority granted to them under the Act and the approaches taken in implementing regulations.  The Company and the entire financial services industry has begun to assess the potential impact of the Act on business and operations, but at this early stage, the likely impact cannot be ascertained with any degree of certainty. However, it would appear that the Company is likely to be impacted by the Act in the areas of corporate governance, deposit insurance assessments, capital requirements and restrictions on fees charges that may be charged to consumers.

Sandridge Energy Inc. (Filed September 28, 2010)

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act creates a new regulatory framework for oversight of derivatives transactions by the Commodity Futures Trading Commission (the “CFTC”) and the SEC. Among other things, the Dodd-Frank Act subjects certain swap participants to new capital, margin and business conduct standards. In addition, the Dodd-Frank Act contemplates that where appropriate in light of outstanding exposures, trading liquidity and other factors, swaps (broadly defined to include most hedging instruments other than futures) will be required to be cleared through a registered clearing facility and traded on a designated exchange or swap execution facility. There are some exceptions to these requirements for entities that use swaps to hedge or mitigate commercial risk. While SandRidge may qualify for one or more of such exceptions, the scope of these exceptions is uncertain and will be further defined through rulemaking proceedings at the CFTC and SEC in the coming months. Further, although we may qualify for exceptions, our derivatives counterparties may be subject to new capital, margin and business conduct requirements imposed as a result of the new legislation, which may increase our transaction costs or make it more difficult for us to enter into hedging transactions on favorable terms. Our inability to enter into hedging transactions on favorable terms, or at all, could increase our operating expenses and put us at increased exposure to risks of adverse changes in oil and natural gas prices, which could adversely affect the predictability of cash flows from sales of oil and natural gas.

The Dodd-Frank Act also expands the CFTC’s power to impose position limits on specific categories of swaps (excluding swaps entered into for bona fide hedging purposes), and establishes a new Energy and Environmental Markets Advisory Committee to make recommendations to the CFTC regarding matters of concern to exchanges, firms, end users and regulators with respect to energy and environmental markets.

MxEnergy Holdings Inc.  (Filed September 29, 2010)

The federal government recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act pursuant to which various federal agencies will implement new regulations that will have significant impacts on the operations of financial institutions.  The impact of such regulations may affect the ability of financial institutions to offer credit and hedging instruments without significant additional capital or other costs to them.  Such increases in capital and other costs to financial institutions may result in higher costs to us in connection with our Commodity Supply Facility, which could increase our commodity, operating or financing costs or otherwise impact our profitability.

Citigroup Inc. (Filed September 29, 2010)

Citigroup may view redemption of the junior subordinated debt securities to be in its interest if certain changes in regulatory capital law or interpretation have effect on or after October 30, 2015. While Citigroup believes the capital securities are exempt from the mandatory disqualification of certain types of Tier 1 capital under Section 171(b)(5)(A) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Basel Committee on Banking Supervision (“Basel”) has proposed, among other proposals, revisions to its definition of Tier 1 capital for banks (the “Basel Proposal”) and has announced the timeframe for phasing in its new Tier 1 capital requirements. Under the Basel Proposal, Citigroup believes the capital securities represent a capital injection in the Company made by the Selling Securityholder in January 2009 and thus, currently expects the capital securities should continue to be included as Tier 1 capital of the Company until January 1, 2018. Ultimately, however, the date on which the capital securities may be excluded from the Company’s Tier 1 capital will be determined by the Capital Regulator implementing the Dodd-Frank Act and the Basel Proposal.

Walker & Dunlop, Inc (Filed September 30, 2010)

It is widely anticipated that the U.S. Congress will address GSEs as part of its next major legislative undertaking, although it is not known when, or if, that will occur. In Section 1491 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), signed into law on July 21, 2010, Congress stated that the “hybrid public-private status of Fannie Mae and Freddie Mac is untenable and must be resolved” and, further, “[i]t is the sense of the Congress that efforts to enhance by [sic] the protection, limitation, and regulation of the terms of residential mortgage credit and the practices related to such credit would be incomplete without enactment of meaningful structural reforms of Fannie Mae and Freddie Mac.”

Currently, we originate a substantial majority of our loans for sale through Fannie Mae and Freddie Mac programs. Furthermore, a substantial majority of our servicing rights derive from loans we sell through Fannie Mae and Freddie Mac programs. Changes in the business charters, structure or existence of Fannie Mae or Freddie Mac could eliminate or substantially reduce the number of loans we originate, which would have a material adverse effect on us.

Regulatory and legal requirements are subject to change. For example, Fannie Mae has indicated that it will be increasing its collateral requirements from 35 basis points to 60 basis points, effective as of January 1, 2011. The incremental collateral required for existing and new loans will be funded over approximately the next three years in accordance with Fannie Mae requirements. Ginnie Mae has indicated that it is currently considering a change to its programs that would eliminate the Ginnie Mae obligation to reimburse us for any losses not paid by HUD in return for our receiving an increased servicing fee, although it is uncertain whether these changes will be implemented. In addition, Congress has also been considering proposals requiring lenders to retain a portion of all loans sold to GSEs and HUD. The Dodd-Frank Act imposes a requirement that lenders retain “not less than 5 percent of the credit risk” of certain securitized loans, particularly those that are not “qualified residential mortgages.” It is currently unclear whether and how the Dodd-Frank Act will apply to commercial real estate lenders. The Dodd-Frank Act requires the federal banking agencies, the Federal Trade Commission (the “FTC”), HUD, and FHFA to issue rules implementing this requirement no later than 270 days after Dodd-Frank’s enactment. It also requires the federal banking agencies, the FTC, HUD, and FHFA to issue a joint rule defining a “qualified residential mortgage.” Therefore, the applicability of this provision to us and its effect upon our business will not be fully known until these agencies issue the joint rule. It is also impossible to predict any future legislation that Congress may enact regarding the selling of loans to GSEs or any other matter relating to GSEs or loan securitizations. GSEs, HUD and other investors may also change underwriting criteria, which could affect the volume and value of loans that we originate. Changes to regulatory and legal requirements could be difficult and expensive with which to comply and could affect the way we conduct our business, which could materially and adversely affect us.

Previously, we have provided examples of disclosures related to proxy access under rule 14a-11 here and here.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

The U.S. Chamber of Commerce and the Business Roundtable filed a legal challenge to the recently adopted SEC proxy access rules.  The groups asked the SEC to stay adoption of such rules, which will give certain shareholders the right to include their nominees in corporate proxy materials.  The proxy access rules are scheduled to take effect on November 15, 2010.  The groups stated that they will ask the U.S. Court of Appeals for the District of Columbia to block the rules if the SEC does not grant the requested stay.

The proxy access rules approved by the SEC on August 25, 2010, in a 3-2 vote, apply to shareholders owning at least 3% of a company’s total voting power who have held their shares for at least three years. Shareholder activists have long sought such proxy access, maintaining that it is needed to effectively challenge entrenched directors and officers.  Please see our prior discussion of the proxy access rules.

The groups’ petition to the SEC states that the rules are arbitrary and capricious in violation of the Administrative Procedure Act, and that the SEC failed to properly assess the rules’ effects on “efficiency, competition and capital formation” as required by the Securities Exchange Act of 1934 and the Investment Company Act of 1940.  According to the groups’ press release, in adopting the proxy access rules, the SEC:

  • erred in appraising the costs that proxy access would impose on U.S. corporations, shareholders, and workers;
  • ignored evidence and studies highlighting the adverse consequences of proxy access, including the leverage that it may provide to activist shareholders;
  • claimed to be empowering shareholders, but actually restricted shareholders’ ability to prevent special interest shareholders from triggering costly election contests; and
  • claimed to be effectuating state law rights, but gave short shrift to existing state laws regarding access to the proxy and related principles, including the law in Delaware and the Model Business Corporation Act, and created significant ambiguities regarding the application of federal and state law to the nomination and election process.

In response, the SEC stated that the proxy access rules are lawful and in the best interest of the public and shareholders, and that it would carefully consider and timely respond to the motion for a stay. 

Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

CFTC Chairman Gary Gensler appeared before the Senate Committee on Banking, Housing, and Urban Affairs today and shed some light on the Commission’s plans regarding the rulemakings to implement Dodd-Frank’s non-security swap trading provisions. According to the Chairman, the Commission plans to publish proposed rules in the fall, using weekly public Commission meetings. The Commission’s goal is to publish the vast majority of its proposed rules by the end of December. Chairman Gensler generally envisions four to six months to review the public comments for the proposed rules and then finalize them.

In addition, the Chairman revealed additional details on what type of entities the Commission expects to register as swap dealers. The Commission estimates that as many as 200 entities will register, including:
– approximately 80 global and regional banks currently offering swaps in the U.S.;
– approximately 60 affiliates of existing swap dealers, based on the “push-out” rule with respect to banks;
– approximately 40 non-bank swap dealers currently offering swaps; and
– approximately 20 potential new market makers.

The Chairman’s opening comments are available here.

SEC Chair Mary Schapiro testified before the Senate Committee on Banking, Housing, and Urban Affairs on September 30, 2010. In so doing she gave more clues on the SEC’s regulatory priorities under the Dodd-Frank Act and timing for rulemaking actions.

 OTC Derivatives.  Title VII of the Dodd-Frank Act provides a comprehensive framework for the regulation of the OTC derivatives market.  The SEC expects to propose and adopt Title VII rules in a series of actions, beginning in October and proceeding over the next few months.

 Clearance and Settlement.  The SEC staff is working closely with the Federal Reserve Board and the CFTC to develop, as required by Title VIII of the Dodd-Frank Act, a new framework to supervise systemically important financial market utilities, including clearing agencies registered with the SEC.  The SEC expects to propose its first set of Title VIII rules in December.

 Private Fund Adviser Registration and Reporting.   By July 2011, all large hedge fund advisers and private equity fund advisers will be required to register with the SEC.  Under the Dodd-Frank Act, venture capital advisers and private fund advisers with less than $150 million in assets under management in the United States will be exempt from the new registration requirements, although the Dodd-Frank Act does provide for recordkeeping and reporting by these advisers.   In addition, family offices will not be subject to registration. In order to implement the exemptions, the SEC must propose and adopt rules. The staff is planning to propose rules on all of these matters between October and December of this year.

 Ms. Schapiro also discussed the collection of systemic risk information from private fund advisers as required by Title IV of the Act.  However, she did not make any commitments as to when rules would be proposed.

 Corporate Governance and Executive Compensation Reforms.  Section 951 of the Act requires a shareholder advisory “say-on-pay” vote on executive compensation at least once every 3 years and a separate advisory vote at least once every 6 years on whether the say-on-pay resolution will be presented for shareholder approval every one, two, or three years. In addition, in any proxy statement asking shareholders to approve a merger or similar transaction, the Dodd-Frank Act requires disclosure about, and a shareholder advisory vote to approve, compensation related to the transaction, unless the arrangements were already subject to the periodic say-on-pay vote.  Ms. Schapiro anticipates that the SEC will propose rules designed to implement these provisions in the next few weeks.

 By April 2011, the SEC is required to adopt — jointly with other financial regulators — incentive-based compensation regulations or guidelines that apply to covered financial institutions, including broker-dealers and investment advisers, with assets of $1 billion or more.  To meet the April 2011 adoption deadline, Ms. Schapiro anticipates that the staff will submit proposed rules to the SEC for consideration as soon as December.

 The Dodd-Frank Act also requires the SEC to write rules mandating new listing standards relating to the independence of compensation committees and establishing new disclosure requirements and conflict of interest standards that boards must observe when retaining compensation consultants.  Under the Dodd-Frank Act, these rules must be adopted by the SEC within 360 days from the date of enactment of the Dodd-Frank Act, and the SEC anticipates that the staff will submit proposed rules for the SEC’s consideration by year end.

 The Dodd-Frank Act requires the SEC to amend its executive compensation disclosure rules to require public companies to disclose information showing the relationship between executive compensation actually paid and the financial performance of the company, as well as information about the total annual compensation of the chief executive officer, the median annual total compensation of all other employees, and the ratio of these two amounts.  Rule amendments also are mandated that will require public companies to disclose in their annual meeting proxy materials whether any employee or director is permitted to purchase financial instruments designed to hedge any decrease in market value of equity securities granted as part of their compensation.  Finally, the Dodd-Frank Act requires the SEC to adopt rules mandating changes to listing standards requiring companies to implement and disclose “clawback” policies for recovering from current and former executive officers incentive-based compensation paid during any three-year period preceding a material accounting restatement.   The SEC currently anticipates that the staff will submit proposed rules for the SEC’s consideration by the middle of next year.

 We have previously summarized SEC rule making time lines here and here.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

The SEC has issued a final rule repealing former Section 21A(e) of the Securities Exchange Act of 1934, pursuant to which the SEC had been empowered to make monetary awards to persons that provided information relating to insider trading violations where investigations into such violations led to the collection of civil penalties.  You might ask why, in the wake of the Dodd-Frank Act,  the SEC would repeal rules relating to insider trading bounties; the answer is because the Dodd-Frank Act replaces the old monetary awards regime with a new, more expansive program.

Under the former Section 21A, penalties were imposed, and monetary whistleblower awards were available, only for insider trading violations, defined as transactions in which a person purchased or sold a security or security-based swap agreement on a national securities exchange while in possession of material, non-public information.  Penalties could also be imposed for the communication of such material, non-public information in connection with a securities transaction. 

The Dodd-Frank Act significantly expands the scope of violations that could give rise to monetary awards for whistleblowers, and also expands whistleblower protections and anti-retaliatory measures.  Under the new Section 21F of the Exchange Act, the SEC will pay monetary awards to whistleblowers who provide the agency with “original information” that leads to the successful enforcement of a “covered judicial or administration action.”  

A “covered judicial or administrative action” is broadly defined as “any judicial or administrative action brought by the Commission under the securities laws that results in monetary sanctions exceeding $1,000,000” (my emphasis).  Under this provision, the monetary awards previously available to whistleblowers in insider trading actions are now available to whistleblowers in connection with any violation of the securities laws.  The breadth of potential actions leading to monetary awards for whistleblowers will be limited, as a practical matter, by the $1,000,000 sanctions requirement, but even so, this is a significant expansion of whistleblower compensation and protection.

The amount of the award will range from 10-30% of what has been collected of the monetary sanctions imposed in the action, and the award will be paid out of the Investor Protection Fund established by the Dodd-Frank Act.  To be eligible for an award, a whistleblower must provide “original information,” defined as information that is:1) derived from the independent knowledge or analysis of the whistleblower; 2) not known by the SEC from any other source; and 3) not exclusively derived from an allegation already made in a proceeding or investigation.

Certain types of whistleblowers are ineligible to receive monetary awards, such as members, officers, or employees of “an appropriate regulatory agency,” the department of justice, a self-regulatory organization, the Public Company Accounting Oversight Board, or a law enforcement organization.  Further, awards are not available to whistleblowers who are convicted of criminal violations in the judicial or administrative action that would otherwise have led to the award, nor are awards available to whistleblowers that fail to provide the information to the SEC “in such form as the Commission may, by rule, require.” 

The most interesting exception to eligibility for the monetary whistleblower awards applies to registered public accounting firms, though.  New Section 21F(c)(2)(C) prohibits monetary awards to whistleblowers who gain the information in the course of performing audits required by the securities laws “and for whom such submission would be contrary to the requirements of section 10A of the Securities Exchange Act of 1934.”  Section 10A provides, among other things, that if a registered public accounting firm discovers evidence of an illegal act during an audit of financial statements, it has a duty to make a report to the audit committee or board of directors of the company being audited.  The accounting firm is prohibited, on threat of civil penalties, from directly reporting the evidence of illegal acts until after the company itself has been given a chance to self-report and has failed to do so.

Check back here frequently at Dodd-Frank.com as we continue to monitor the implementation of the Dodd-Frank Act and comment on its effects.

The Commodity Futures Trading Commission published an Advance Notice of Proposed Rulemaking (ANPRM) seeking public comment regarding the appropriate regulatory treatment of agricultural swaps.

 The Dodd-Frank Wall Street Reform and Consumer Protection Act provides that swaps in an “agricultural commodity” (as defined by the Commission) are prohibited unless entered into pursuant to a rule, regulation or order of the Commission adopted pursuant to section 4(c) of the Commodity Exchange Act, the Commission’s general exemptive authority.

 The ANPRM reviews the current statutory and regulatory framework governing agricultural swaps, as well as the Dodd-Frank Act provisions applicable to agricultural swaps. The ANPRM also requests comment on the appropriate conditions, restrictions or protections to be included in any Commission rule, regulation or order governing the trading of agricultural swaps.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

This SEC revised Regulation FD to implement Section 939B of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which requires that the SEC amend Regulation FD to remove the specific exemption from the rule for disclosures made to nationally recognized statistical rating organizations and credit rating agencies for the purpose of determining or monitoring credit ratings.  The most widely known statistical rating agencies are Moody’s and Standard & Poor’s.  The change to Regulation FD will be effective upon publication in the Federal Register.

Regulation FD provides that when an issuer, or person acting on its behalf, discloses material nonpublic information to certain enumerated persons (in general, securities market professionals and holders of the issuer’s securities who may trade on the basis of the information), it must make public disclosure of that information.  As required by the Dodd-Frank Act, the SEC amended Regulation FD to remove the specific exemption provided to nationally recognized statistical rating organizations and credit rating agencies for disclosure made to them for the purpose of determining or monitoring a credit rating.   To effectuate this change, the SEC removed Rule 100(b)(2)(iii) of Regulation FD.  Due to the removal of Rule 100(b)(2)(iii), the SEC re-designated Rule 100(b)(2)(iv) as Rule 100(b)(2)(iii).

Regulation FD is designed to address the problem of selective disclosure made to those who would reasonably be expected to trade securities on the basis of the information or provide others with advice about securities trading.   Under Regulation FD, the timing of the required public disclosure of material nonpublic information that is provided by an issuer, or persons acting on its behalf, to certain enumerated persons depends on whether the selective disclosure was intentional.  For an intentional selective disclosure, the issuer must make public disclosure simultaneously.  In other circumstances, the issuer must make public disclosure promptly.  Under the regulation, the required public disclosure may be made by filing or furnishing a Form 8-K,  or by another method or combination of methods that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public.

Under the pre-amendment version of Rule 100(b)(2)(iii) of Regulation FD, the issuer or person acting on the issuer’s behalf need not make the public disclosure if the disclosure of material nonpublic information is made to a credit rating agency that makes its credit ratings publicly available, or is made pursuant to Rule 17g-5(a)(3) 8 to a nationally recognized statistical rating organization.  As required by Section 939B of the Act, the SEC  removed the exemption specifically available to these entities under Regulation FD.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

Section 957 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) adopted new Section 6(b)(10) of the Securities Exchange Act.  This new provision requires all national securities exchanges to adopt rules that prohibit their members from voting on the election of a member of the board of directors of an issuer (except for a vote with respect to the uncontested election of a member of the board of directors of any investment company registered under the Investment Company Act of 1940), executive compensation, or any other significant matter, as determined by the Commission, unless the member receives voting instructions from the beneficial owner of the shares.

 NASDAQ Rule 2251 currently governs when NASDAQ members may vote shares held for customers by adopting the FINRA Rules. The FINRA rule, in turn, currently prohibits members from voting any uninstructed shares, but also permits the member to follow the rules of another self regulatory organization (SRO) instead.   In order to assure compliance, in all cases, with newly adopted Section 6(b)(10), NASDAQ proposed to modify Rule 2251 to provide that in no event could a member vote uninstructed shares on the election of a member of the board of directors of an issuer (except for a vote with respect to the uncontested election of a member of the board of directors of any investment company registered under the Investment Company Act of 1940), executive compensation, or any other significant matter, as determined by the Commission, unless instructed by the beneficial owner of the shares.

 The SEC approved the NASDAQ rule on an expedited basis.

 The SEC has previously approved the NYSE rules in this regard.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

As part of the implementation of the Dodd Frank Wall Street Reform and Consumer Protection Act, the Federal Deposit Insurance Corporation held a roundtable discussion on September 24, 2010.  The discussions centered on the new deposit insurance assessment authority granted to the FDIC.  Industry executives, trade association representatives, and others discussed goals for the deposit insurance fund management and how those goals can best be achieved given the new authority.

 Government officials who attended included:

             Shelia Blair                               Federal Deposit Insurance Corporation

            John Walsh                               Office of Comptroller of the Currency

            John Bowman                           Office of Thrift Supervision 

            Martin Gruenberg                     Federal Deposit Insurance Corporation 

            Thomas Curry                          Federal Deposit Insurance Corporation 

            Joseph Smith                            North Carolina Commissioner of Banks

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act.

The SEC has issued interpretive guidance regarding the meaning of the term “generally accepted auditing standards” (“GAAS”) after adoption of the Dodd-Frank Act.  Section 982 of the Dodd-Frank Act amended the Sarbanes-Oxley Act of 2002  to authorize the Public Company Accounting Oversight Board (“PCAOB”), among other things, to establish, subject to approval by the SEC, auditing and related attestation, quality control, ethics, and independence standards to be used by registered public accounting firms with respect to the preparation and issuance of audit reports to be included in broker and dealer filings with the SEC pursuant to Rule 17a-53 under the Exchange Act.  The amendments directly impact certain SEC rules, regulations, releases, and staff bulletins related to brokers and dealers and certain provisions in the federal securities laws for brokers and dealers, which refer to GAAS and to specific standards under GAAS (including related professional practice standards).  There may be confusion on the part of brokers, dealers, auditors, and investors with regard to the professional standards auditors should follow for reports filed and furnished by brokers and dealers pursuant to the federal securities laws and the rules of the SEC.

The SEC is considering a rulemaking project to update the audit and related attestation requirements under the federal securities laws for brokers and dealers, particularly in light of the Dodd-Frank Act.  In addition, the PCAOB has not yet revised its rules, which currently refer only to issuers (i.e. public companies), to require registered public accounting firms to comply with PCAOB standards for audits of non-issuer brokers and dealers.  As a result, the SEC is providing transitional guidance with respect to its existing rules regarding non-issuer brokers and dealers.  Specifically, the SEC stated  references in SEC rules and staff guidance and in the federal securities laws to GAAS or to specific standards under GAAS, as they relate to non-issuer brokers or dealers, should continue to be understood to mean auditing standards generally accepted in the United States of America,  plus any applicable rules of the SEC.  The SEC intends, however, to revisit this interpretation in connection with its rulemaking project referenced above.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act.