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

Another important new exemption is the Act’s amendment of the definition of “investment adviser” in the Advisers Act to exclude “family offices.”  The Act also directs the SEC to develop, through rules, regulations, or orders, a definition of “family office” that is consistent with the SEC’s previous exemptive orders and other SEC guidance for family offices.

The Dodd-Frank Act requires that any action taken by the SEC to provide an exemption for a “family office”:

  • Be consistent with the SEC’s previous exemptive policy with respect to family offices;
  • Recognize the range of organization, management and employment structures and arrangements employed by family offices; and
  • Contain a grandfather provision that includes in the definition of “family office” any person or entity that was not registered or required to be registered as an investment adviser under the Investment Advisers Act on January 1, 2010 solely because the person provided investment advice, and was engaged before January 1, 2010 in providing investment advice, to certain natural persons and entities associated with a family office, including certain registered investment advisers that identified investment opportunities for the family office and invested in those opportunities on substantially the same terms as the family office.

A person or entity that is a “family office” solely as a result of the grandfather provision will be deemed to be an investment adviser for purposes of the anti-fraud provisions of the Investment Advisers Act.  A family office that currently relies on the private adviser exemption from registration in current Section 203(b)(3) of the Investment Advisers Act should assess whether it fits within the parameters of the SEC’s prior exemptive policy and thus will be able to rely on the new exemption for a family office.  Previously because many family offices serve families with more than 15 members, the SEC typically issued exemptive orders, which extended the 15-person exemption so long as the family office serviced descendants and spouses of one person, or the person’s companies, charities and trusts.  If the SEC continues to maintain the “direct descendant” definition in its rule making process, there could be concerns about the case of stepchildren and adoptions or close friends and family office employees.

There are a few alternatives available to family offices seeking to avoid the disclosure requirements of Dodd-Frank:

  • If investment management is outsourced, the family office will not be required to register with the SEC. 
  • Families may consider entering into multifamily office arrangements so that disclosures that will be required with the SEC do not reveal specifics about any one family’s wealth.

Families may consider becoming a private trust company under state banking regulation, although under this option a family office will be subject to state law requirements for private trust companies that should be carefully considered.

Late today, the CFTC made its first public announcements regarding how it would handle petitions for the grandfather relief made available by section 723(c) of the Dodd-Frank Act. Section 723(c) allows persons to submit petitions to the CFTC on or before September 20, 2010 to remain subject to section 2(h) of the Commodity Exchange Act (CEA) (as in effect prior to Dodd-Frank) for a period of up to one year. Such relief would presumably extend from July 15, 2011, the date when Dodd-Frank’s swap trading provisions generally become effective. Dodd-Frank provided no details regarding how such grandfather petitions should be prepared or evaluated. Now, ten days before the petitions are due, the CFTC has made its first public announcements regarding how it will treat certain types of petitions.

Trading Bilateral “Exempt Commodity” Swaps—No Grandfather Relief
The Commission announced that it will not issue grandfather relief that would allow “eligible contract participants” (certain sophisticated counterparties as defined by section 1a of the CEA) to continue trading bilateral swaps in exempt commodities (i.e., energy and metals commodities) for an additional year under sections 2(h)(1)-(2) of the pre-Dodd-Frank CEA. Sections 2(h)(1)-(2) exempt such trading activity from regulation under the CEA except with respect to the CEA’s anti-fraud and anti-manipulation provisions. The Dodd-Frank Act removes this exemption effective July 15, 2011. Rather than issuing blanket grandfather relief, the CFTC determined that it is more appropriate to accommodate transitioning issues for bilateral swaps activity in the rulemakings required to implement Dodd-Frank.

Exempt Commercial Markets—Grandfather Relief Available for the Markets (But What About the Traders?)
The Commission announced that it will make grandfather relief available that will allow ECMs (electronic trading facilities on which “eligible commercial entities” can trade exempt commodities on a principal to principal basis) to continue operating as ECMs under sections 2(h)(3)-(7) of the pre-Dodd Frank CEA, on condition that they submit a timely grandfather petition and apply to become either a swap execution facility (SEF, a new category of trading facility created by Dodd-Frank) or designated contract market (DCM). The Commission will extend the same grandfather treatment to exempt boards of trade (EBOTs) under the CEA. The exemptions will extend for as long as an ECM or EBOT has a legitimate SEF or DCM application pending before the CFTC.

While this may be welcome news to the several active ECMs in operation, such as the IntercontinentalExchange (ICE) and Natural Gas Exchange (NGX), it does not clarify whether and how traders on such markets might receive temporary grandfather relief from Dodd-Frank requirements that might apply to them (e.g., registration as a major swap participant or swap dealer and capital, margin, and business conduct requirements). With only ten days remaining before petitions are due and no guidance offered as of yet to the many entities that trade swaps on ECMs, the CFTC can likely expect a flood of non-uniform petitions from traders as the September 20 deadline draws near, adding to the already-huge administrative burden the agency faces to implement Dodd-Frank.

The SEC has announced that on September 17, 2010 it will hold an open meeting to consider whether to propose rules that would require a public company to provide certain disclosures about its short-term borrowings in its filings with the Commission. The Commission will also consider whether to publish an interpretive release to provide guidance regarding the Commission’s current disclosure requirements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” relating to liquidity and capital resources.

Looks like a response to the Lehman situation to me.

Check frequently for updates on the Dodd-Frank Act.

The proxy process represents the principal means by which shareholders become informed of and participate in the business to be undertaken at a public company’s annual meeting.  Traditionally, so-called activist shareholders have been prevented from including their own nominations for open director seats in the annual proxy materials mailed to shareholders. As we have previously explained, the Dodd-Frank Act has changed the balance of power between shareholders and company management by providing a process in which shareholders can require the inclusion of their nominations to the board of directors in proxy statements in the form of new Rule 14a-11 pursuant to the Securities Exchange Act of 1934.

By means of a letter to the board of directors and an amended Schedule 13D filing on September 8, 2010, Discovery Equity Partners, LP, a shareholder in Tier Technologies, Inc., announced its plans to take advantage of the new 14a-11 proxy access rules and submit its nominations for up to two directors to the shareholders in the proxy statement for the company’s 2011 annual meeting.  Discovery Equity Partners, LP and its sole general partner, Discovery Group (together, “Discovery”) own a combined 13.5% of the company’s outstanding common stock.

As described by RiskMetrics Group, Discovery has a history of board activism at Tier Technologies, and was involved in a proxy war in 2009.  Most recently, in January 2010 Discovery notified Tier Technologies that it intended to nominate three candidates for director.  Discovery subsequently reached an agreement with the company that resulted in the reduction of the company’s board to seven directors, separated the roles of chairman and CEO, and reimbursed Discovery for costs incurred in the 2009 proxy war.  For its part, Discovery agreed to support management and refrain from nominating director candidates at the 2010 meeting.

Pursuant to the new Rule 14a-11, the formal shareholder proxy access process will begin with the filing by Discovery of a Schedule 14N with the SEC.  The 14N can only be filed within a uniform 30-day window beginning 150 calendar days prior to the date the company mailed its proxy materials for the previous year’s annual meeting and ending 120 calendar days prior to the mailing date of the prior year’s proxy materials.  Note that although a Schedule 14N notice of intent to require the inclusion of shareholder nominees in company proxy materials is subject to the 30 day window, Schedule 14N may be filed at any time for other purposes, such as to engage in communications with other shareholders for the purpose of forming a nominating group under new Rule 14a-2(b)(7).

Tier Technologies held its 2010 annual meeting on April 8, and mailed proxy materials on March 18, meaning that Discovery would not be eligible to file a Schedule 14N until October 18, 2010, and the 30 day window would expire on November 17, 2010. However, Rule 14a-11 only becomes effective 60 days after publication in the federal register.  Although publication in the Federal Register is expected very soon, Rule 14a-11 will be unavailable to Discovery for the 2011 annual meeting if the new rule is not published by September 19.

The filing of the letter with an amended 13D brings several questions to the forefront.  One of the admitted purposes of adopting the uniform 30-day window for Schedule 14N filings, as disclosed at pages 177-178 of the SEC’s adopting release was to “reduce disruptions that might occur when a company receives shareholder nominations for director.”  Is Discovery making an end-run around that restricted filing window by disclosing its intention to use Rule 14a-11 now?  Probably not.  If the new rules were effective at this time, Discovery could file a Schedule 14N announcing its intent to form a nominating group at any time under Rule 14a-2(b)(7).

Discovery is limiting its legal options by use of this tactic.  By announcing an intent to use Rule 14a-11, it can no longer hold its securities with the purpose, or with the effect, of changing control of the registrant or to gain more board seats than are available under Rule 14a-11.  So the days of its proxy wars with Tier are over.  Tier may have a formidable challenge on its hands, as Discovery is a sophisticated investor and will likely campaign for its nominees effectively and to the maximum extent allowed by law.

Discovery’s tactic is not without legal risk.  By drawing attention to itself in this manner, other shareholders may contact Discovery and engage in various communications.  If not carefully circumscribed, those communications could be unlawful solicitations in violation of the proxy rules.

Nonetheless, we expect other activist investors will copy Discovery’s tactic.   Note that any person can file a Schedule 13D even if they do not own five percent of the outstanding stock, so such filings could proliferate.

We also expect other boilerplate surrounding Rule 14a-11 to appear frequently in Schedule 13D’s.  For instance, almost anyone filing a Schedule 13D reserves the right to engage in a broad range of transactions.  That reservation of rights will probably grow to include the right to make nominations under Rule 14a-11 and join Rule 14a-11 groups.

Check frequently for updates on the Dodd-Frank Act.

While the Dodd-Frank Act will continue to pose new and often novel compliance challenges for public companies for the foreseeable future (much like the Sarbanes-Oxley Act did in 2002), Bill George offers some good high-level insights in a recent Business Week piece that may help lessen the sting of some of the Act’s provisions in the long run.  George’s point is, of course, a good one: principled executive compensation policies that are properly aligned with shareholders’ interests will, over the long run, likely result in less desire for shareholders (especially those focused on short-term gains) to use the new tools that the Dodd-Frank Act affords them.

References to Rule 14a-11 are beginning to show up in public filings.  Set forth below are some examples.  The examples show the multitude of ways in which Rule 14a-11 will impact corporate legal practice.

 Disclosures in Proxy Statements

 Dynegy includes the following 14a-11 disclosure in its preliminary proxy statement:

 “Under Rule 14a-8 promulgated under the Exchange Act, eligible stockholders may present proper proposals for inclusion in the Company’s proxy statement and proxy, and for consideration at the next annual meeting of its stockholders, by submitting their proposals to the Company in a timely manner. To be so included for the next annual meeting, stockholder proposals must be received by the Company no later than December 6, 2010, and must otherwise comply with the requirements of Rule 14a-8. Under Rule 14a-11 promulgated under the Exchange Act, eligible stockholders and eligible groups of stockholders may be permitted to properly nominate a limited number of directors for inclusion in the Company’s proxy statement and proxy, and for consideration at the next annual meeting of its stockholders, by submitting their nominations to the SEC and to the Company in a timely manner. To be so included for the next annual meeting, a notice filing on Schedule 14N must be made with the SEC and notice must be given to the Company not later than December 6, 2010 nor earlier than November 6, 2010. In addition, our bylaws establish an advance notice procedure with regard to certain matters, including stockholder proposals not included in the Company’s proxy statement, to be brought before an annual meeting of stockholders. To be timely, a stockholder’s notice must be submitted in writing to the secretary of the Company not later than the close of business on February 20, 2011 nor earlier than the close of business on January 21, 2011, regardless of the public announcement of the adjournment of that meeting to a later date; provided, however, that if the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder, to be timely, must be submitted not earlier than the close of business on the 120th day before such annual meeting and not later than the close of business on the later of (i) the 90th day before such annual meeting or (ii) the 10th day following the day on which public announcement of the date of such meeting is first made.”

 Universal Power included the following disclosure in its definitive proxy:

 “On August 25, 2010, the SEC adopted new Exchange Act Rule 14a-11, which will permit shareholders or groups holding 3% of the voting power of U.S. public companies who have held their shares for at least three years to include director nominees in company proxy materials. In addition, the SEC also amended Rule 14a-8 to provide that companies may not exclude from their proxy materials shareholder proposals that seek to establish less restrictive proxy access procedures, and adopted a number of related rule amendments intended to facilitate proxy access. The new rules will be effective 60 days after their publication in the Federal Register, and Rule 14a-11 will apply for a company’s 2011 annual meeting if the first anniversary of the mailing of the 2010 proxy materials occurs within 120 days of effectiveness. However, the compliance date of Rule 14a-11 for smaller reporting companies has been delayed for a period of three years from the effective date.”

 Definition of Election Contest

 In change of control provisions in employment agreements and stock plans, issuers are using Rule 14a-11 to define what a threatened election contest is.  Footnote 63 of the Rule 14a-11 adopting release states “”election contest” and “contested election” refer to any election of directors in which another party commences a solicitation in opposition subject to Exchange Act Rule 14a-12(c).”  Cedar Shopping Centers’ S-3 discloses that it has a stock purchase agreement where the stock purchaser agrees not to become a participant in an “election contest” as defined in Rule 14a-11.   As an additional example, Oracle’s new long-term incentive plan defines a change of control to include:

 “[I]ndividuals who constitute the Board of Directors of the Company on the effective date of the Plan (the “Incumbent Board”) cease for any reason to constitute at least a majority thereof, provided that any Approved Director, as hereinafter defined, shall be, for purposes of this subsection (ii), considered as though such person were a member of the Incumbent Board. An “Approved Director”, for purposes of this subsection (ii), shall mean any person becoming a director subsequent to the effective date of the Plan whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee of the Company for director), but shall not include any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of an individual, corporation, partnership, group, associate or other entity or “person” other than the Board”.”

 Articles and By-laws

 Global Options Group’s preliminary proxy statement contains a disclosure which states that, according to its by-laws, any stockholder nominee for director must be accompanied by the information required in Rule 14a-11.

 Sparton Corp. is proposing to amend its certificate of incorporation in certain respects.  The new advance notice provision explicitly states that it is not applicable to Rule 14a-11 nominations.


 A 13D filed with respect to United American Healthcare indicates the stockholder, in a standstill agreement, agreed not to “take any action pursuant to any “shareholder access” proposal that may be adopted by the SEC, whether in accordance with proposed Rule 14a-11 or otherwise.”

 Use of New Schedule 14A

 Some companies, such as Hemispherx, are using the new cover page to Schedule 14A which references Rule 14a-11 even though the new rules are not yet effective.

 Check frequently for updates on the Dodd-Frank Act.

In an effort to keep implementation of the Dodd-Frank Act transparent, the CFTC has begun publishing a list of all meetings with outside organizations regarding implementation of the Act. The list discloses the outside organizations and individuals and CFTC staff involved in the meeting, the rulemaking topic discussed, and the date on which the meeting took place. From the list it is evident that the CFTC has often been participating in three or more such meetings per day, often with multiple organizations in a meeting.

Yesterday, Chairman Gensler announced that:

“The CFTC is committed to promoting both market and agency transparency. As we implement the Dodd-Frank Act, we will make meetings that we have with outside organizations regarding the rule-writing process public. We also will continue publishing materials provided to the Commission by outside organizations. This commitment to open government will help promote the integrity of the rule-writing process.”

Staff from the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) will hold two joint public roundtables in September on issues relating to implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

 The first roundtable on September 14 will be on issues related to swap data repository (SDR) registration, functions and responsibilities, the mechanics of data reporting, models for real time public reporting and the effect of transparency on liquidity of block trades and large transaction sizes.

 The first roundtable will consist of the following panels:

  •  Panel One — SDR Registration, Functions, and Responsibilities
    • Duties of SDRs in addition to those required by the Dodd-Frank.
    • The most efficient and effective way for SDRs to execute their statutory duties.
    • How to implement the confirmation function under Dodd-Frank – to what extent and under what circumstances will SDRs be expected to do trade confirmations
  • Panel Two — Mechanics of Data Reporting
    • Type of data reported by SDRs, derivatives clearing organizations (DCOs), designated contract markets (DCMs), swap execution facilities (SEFs), swap dealers and major swap participants (MSPs).
    • Parties responsible for reporting of swap and security-based swap data.
    • Means by which mandatory reporting may be made.
    • Reporting of swap and security-based swap transactions executed or cleared on an electronic platform.
    • The time by which swap and security-based swap transactions must be reported.
    • Handling of data corrections.
    • Reporting of life cycle events.
    • Reporting of past transactions.
  • Panel Three — Models for Real-Time Transparency and Public Reporting
    • Benefits of real time reporting of swaps and security-based swaps transactions.
    • Entities responsible for reporting.
    • Data elements.
    • Ensuring anonymity of market participants.
    • The meaning of “real-time”.
    • Appropriate media for real-time reporting of swap and security-based swap transaction data.
    • Feasibility/desirability of a consolidated tape or ticker for swaps and security-based swaps.
  • Panel Four — Effect of Transparency on Liquidity: Block Trade Exception
    • Defining block trades and large transaction sizes for swaps and security based swaps.
    • Determining an appropriate delay for reporting block trades and large transactions.
    • Effects of transparency on post-trade liquidity.
    • Responsibility for determining minimum block sizes and large transaction sizes for reporting purposes.

 The second public roundtable on September 15 will be on issues related to swap execution facilities and security-based swap execution facilities.

 The second roundtable will consist of the following panels:

  •  Panel One — Swap Execution Facilities (“SEFs”) and Security-based Swap Execution Facilities (“SB SEFs”)
    • Definition and scope of SEFs/SB SEFs.
    • Scope of exception from mandatory trading requirement.
  • Panel Two — Compliance with Core Principles for SEFs and SB SEFs
    • Block trades
    • Surveillance, investigation, and enforcement of SEF/SB SEF rules.
    • Cross-market issues.
    • Obligation of SEFs /SB SEFs to provide impartial access

 Check frequently for updates on the Dodd-Frank Act.

Pursuant to Section 957 of the Dodd-Frank Act, the New York Stock Exchange submitted a proposal to amend NYSE Rule 452 and NYSE Listed Company Manual Section 402.08 to prohibit member organizations from voting uninstructed shares if the matter to be voted on relates to executive compensation.  The NYSE is requesting that the SEC approve the proposal on an accelerated basis.  In addition, the proposal will clarify that the rule includes not only the giving of a proxy but also the authorization of such proxy.

Currently, brokers must deliver proxy materials to beneficial owners and request voting instructions.  If the beneficial owner does not provide voting instructions by the tenth day preceding the meeting date, Rule 452 provides that a broker may vote on certain matters if the broker has no knowledge of any contest as to the action to be taken at the meeting and provided such action is adequately disclosed to stockholders, and does not include authorization for a merger, consolidation or any matter which may affect substantially the rights or privileges of such stock.  Additionally, the rule currently specifies 20 matters with respect to which brokers may not vote without instructions from beneficial owners. 

Therefore, prior to the enactment of the Dodd-Frank Act, member organizations were permitted to cast votes on certain matters, including some executive compensation proposals, without specific instructions from beneficial owners of the stock.  However, Section 957 of the Dodd-Frank Act requires the elimination of broker discretionary voting with respect to (i) the election of a member of the board of directors of an issuer (subject to limited exceptions), (ii) executive compensation or (iii) any other significant matter, as determined by the SEC, by rule.  The NYSE already prohibits member organizations from voting uninstructed shares if the matter voted on is the election of directors and the SEC has not at this time identified other significant matters with respect to which the NYSE must prohibit member organizations from voting uninstructed shares.  Accordingly, the NYSE is proposing to add a new Item 21 and accompanying commentary to NYSE Rule 452.11 and NYSE Listed Company Manual Section 402.08(B) to provide that a member organization may not give or authorize a proxy to vote without instructions from the beneficial owner when the matter to be voted upon relates to executive compensation. 

The proposed commentary to Item 21 clarifies that a matter relating to executive compensation includes, among other things, the items referred to in Section 14A of the Securities Exchange Act of 1934, as amended, including (i) an advisory vote to approve the compensation of executives, (ii) a vote on whether to hold such an advisory vote every one, two or three years, and (iii) an advisory vote to approve any type of compensation (whether present, deferred, or contingent) that is based on or otherwise relates to an acquisition, merger, consolidation, sale or other disposition of all or substantially all of the assets of an issuer and the aggregate total of all such compensation that may (and the conditions upon which it may) be paid or become payable to or on behalf of an executive officer.  In addition, the proposed commentary to Item 21 states that a member organization may not give or authorize a proxy to vote without instructions on a matter relating to executive compensation, even if such matter would otherwise qualify for an exception from the requirements of Item 12, Item 13 or any other Item under NYSE Rule 452.11 and corresponding Listed Company Manual Section 402.08.  Any vote on such executive compensation-related matters would be subject to the proposed new requirements of NYSE Rule 452 and NYSE Listed Company Manual Section 402.08. 

Check frequently for updates on the Dodd-Frank Act.

The Securities and Exchange Commission announced on September 2, 2010, that it has adopted a temporary rule requiring municipal advisors to register with the SEC by October 1, a deadline established by the newly-enacted Dodd-Frank Wall Street Reform and Consumer Protection Act.

Municipal advisors provide advice to state and local governments and other borrowers involved in the issuance of municipal securities. The advice typically relates to municipal derivatives, guaranteed investment contracts, investment strategies or the issuance of municipal securities. Municipal advisors also solicit business from a state or local government for a third party.

Municipal advisors can now access and complete the new registration form (Form MA-T) on the SEC’s website. Municipal advisors are encouraged to begin the registration process as soon as possible because of the impending registration deadline and the requirement that applicants first obtain an ID and password.

The SEC implemented the registration provision on an interim basis in order for municipal advisors to meet the new law’s October 1 registration deadline. The SEC expects to propose a permanent rule later this year.

Information filed by municipal advisors will be made publicly available on the SEC’s website by the registration deadline.

Subject to certain exemptions, the definition of municipal advisor under the Dodd-Frank Act includes financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and certain swap advisors that provide municipal advisory services.

Form MA-T requires municipal advisors to provide identifying and contact information, and select from a list of municipal advisory activities in which they engage. Municipal advisors also are required to provide disciplinary history information similar to what the SEC obtains from registered broker-dealers and investment advisers. Municipal advisors will be required to amend the form whenever any identifying and contact information or disciplinary information has become inaccurate in any way, and whenever a municipal advisor wishes to withdraw from temporary registration.

This regulation is the first adopted by the SEC to implement the requirements of the Dodd-Frank Act.

The Commission and its staff have already taken several other actions stemming from the new law, including seeking public comment regarding the ongoing study of the obligations of brokers, dealers, and investment advisers; issuing guidance interpreting how the “value of the primary residence” should be determined for purposes of calculating an investor’s net worth; seeking public comment about various definitions in connection with over-the-counter derivatives; holding a staff roundtable, jointly with the CFTC staff, regarding the governance of clearing facilities and conflicts; and posting job announcements for many new positions required by the legislation, including 25 positions related to the new Office of Credit Ratings.

Check frequently for updates on the Dodd-Frank Act.