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

President Trump has issued an Executive Order directing the Director of the Office of Management and Budget (Director) to propose a plan to reorganize governmental functions and eliminate unnecessary agencies (as defined in section 551(1) of title 5, United States Code), components of agencies, and agency programs.

The Executive Order directs the head of each agency to submit to the Director a proposed plan to reorganize the agency, if appropriate, in order to improve the efficiency, effectiveness, and accountability of that agency. The submission must be made within 180 days of the date of the order.

Within 180 days after the closing date for the submission of suggestions discussed above, the Director is to submit to the President a proposed plan to reorganize the executive branch in order to improve the efficiency, effectiveness, and accountability of agencies. The proposed plan must include, as appropriate, recommendations to eliminate unnecessary agencies, components of agencies, and agency programs, and to merge functions.  The proposed plan is also to include recommendations for any legislation or administrative measures necessary to achieve the proposed reorganization.

The SEC declined to approve a rule change submitted by Bats BZX Exchange designed to permit the listing and trading of the Winklevoss Bitcoin Trust. The SEC said it did not approve the proposed rule change because it did not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.  The Commission believes that, in order to meet this standard, an exchange that lists and trades shares of commodity-trust exchange-traded products, or ETPs, must, in addition to other applicable requirements, satisfy two requirements that are dispositive in this matter. First, the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated

The SEC said it believes that the significant markets for bitcoin are unregulated. Therefore, Bats BZX Exchange has not entered into, and would currently be unable to enter into, the type of surveillance-sharing agreement that has been in place with respect to all previously approved commodity-trust ETPs. The SEC noted that such agreements help address concerns about the potential for fraudulent or manipulative acts and practices.

Update:  You can see the proposed judgment here.

The conflict minerals case was remanded to the United States District Court for the District of Columbia for further proceedings. Judge Jackson ordered the parties to file a joint status report indicating whether any further proceedings are necessary, and whether the Court should enter an order of final judgment to effectuate the Circuit’s decision.

In the status report, the parties noted that the United States Court of Appeals for the District of Columbia Circuit held that Section 1502 and the Rule violated the First Amendment “to the extent the statute and the rule require regulated entities to report to the Commission and to state on their website that any of their products ‘have not been found to be “DRC conflict free.””  The status report further stated:

“The parties now agree that no such proceedings are necessary.  The Court of Appeals’ decisions resolved the plaintiffs’ claim in this case that the relevant portion of the Rule as currently formulated (and the statute to the extent that it compels that portion of the Rule) violates the First Amendment; no additional proceedings are necessary to assess the validity of the Rule and statute. Accordingly, final judgment in accordance with the Court of Appeals’ decisions is appropriate.”

Assuming the Court enters the judgment as requested, my view is this means the status quo will continue under the current SEC guidance until the SEC takes further action.

In 2009 the SEC adopted rules requiring operating companies to provide the information from the financial statements accompanying their registration statements and periodic and current reports in machine-readable format using eXtensible Business Reporting Language, or XBRL, by submitting it to the Commission in exhibits to such reports and posting it on their websites, if any. Filers subject to these XBRL requirements must submit an interactive data file, including information tagged in XBRL, as an exhibit to the related official filing.

The SEC has proposed rules that would require financial statement information and mutual fund risk/return summary information to be provided in the Inline XBRL format. Inline XBRL allows filers to embed XBRL data directly into an HTML document, eliminating the need to tag a copy of the information in a separate XBRL exhibit. Inline XBRL would be both human-readable and machine-readable for purposes of validation, aggregation and analysis. The proposed amendments also would eliminate the requirement for filers to post Interactive Data Files on their websites.

You can see an example of the Inline XBRL format here.

The SEC proposes to phase in the Inline XBRL requirements for operating companies in annual increments based on the category of filer status. Large accelerated filers that prepare their financial statements in accordance with U.S. GAAP would be required to comply with Inline XBRL requirements for financial statement information in the second year after the rule is effective, followed by accelerated filers that prepare their financial statements in accordance with U.S. GAAP in the third year and all other operating company filers that are required to submit Interactive Data Files in the fourth year.

The proposed Inline XBRL requirements for financial statement information would apply to all operating company filers, including smaller reporting companies, emerging growth companies and foreign private issuers that currently are required to submit financial statement information in XBRL.

The SEC has adopted rules which will require public companies, or registrants, to include a hyperlink to each exhibit identified in an exhibit index, unless the exhibit is filed in paper pursuant to a temporary or continuing hardship exemption under Rules 201 or 202 of Regulation S-T, or pursuant to Rule 311 of Regulation S-T. This requirement will apply to the forms for which exhibits are required under Item 601 of Regulation S-K.

Registrants are not required to refile electronically any documents in paper, including organizational documents. The final rules exclude hyperlinking of any XBRL exhibits and also exclude exhibits that are filed with Form ABS-EE.  With respect to registration statements, exhibit hyperlinks are required for the initial registration statement and each subsequent pre-effective amendment.

In order to provide electronic filers time to prepare filings to include hyperlinks to exhibits, the final rules will take effect on September 1, 2017.

Currently, registrants must submit electronic filings to the Commission using the EDGAR system in either the ASCII format or the HTML format. Documents prepared in the ASCII format cannot support functional hyperlinks.  Because the ASCII format does not support hyperlink functionality, the exhibit hyperlinking requirement would be feasible only if registrants are required to file in HTML.  Under the final rules, registrants will be required to file in HTML format a registration statement or report subject to the exhibit filing requirements under Item 601 of Regulation S-K, and Forms 20-F and F-10. While the affected registration statements and reports will be required to be filed in HTML pursuant to the amendments to Rule 105, registrants may continue to file in ASCII any schedules or forms that are not subject to the exhibit filing requirements under Item 601, such as proxy statements, or other documents included with a filing, such as an exhibit.

In response to comments, The SEC adopted a phase-in period for non-accelerated filers and smaller reporting companies. Non-accelerated filers and smaller reporting companies that submit filings in ASCII will have an additional one year after the effective date of the final rules to begin to comply with the rules. During the phase-in period, these filers may continue to file registration statements or reports in ASCII and will not need to include hyperlinks to the exhibits listed in the exhibit indexes of their filings.

An instruction to Rule 105 states that a registrant must correct a nonfunctioning hyperlink or hyperlink to the wrong exhibit by filing, in the case of a registration statement that is not yet effective, a pre-effective amendment to such registration statement, or in the case of a registration statement that is effective or an Exchange Act report, in the next Exchange Act periodic report that requires, or includes, an exhibit pursuant to Item 601 of Regulation S-K (or in the case of a foreign private issuer, pursuant to Form 20-F or Form F-10). According to the SEC, if a filing contains an inaccurate exhibit hyperlink, the inaccurate hyperlink alone would not render the filing materially deficient, nor affect a registrant’s eligibility to use short-form registration statements.

GAMCO Asset Management Inc. made the news when it became the first to submit a Schedule 14N announcing a nominee for National Fuel Gas’ board of directors using a proxy access by-law. The nomination was rejected by National Fuel Gas and GAMCO withdrew the nomination.

Kanen Wealth Management LLC filed a Schedule 14N with respect to the nomination of directors for MagicJack VocalTec, Ltd., which was subsequently withdrawn upon settlement.  However, this Schedule 14N was also filed by Paul M. Posner.  MagicJack is organized under the laws of the State of Israel. An interesting preliminary proxy has been filed with the ability to vote for two competing slates of directors.  The proxy right appears to arise under Israeli law.  The preliminary proxy states “On February 2, 2017, the Company filed a revised preliminary version of this Proxy Statement which included the Carnegie Nominees, as required by the filing of the Carnegie Schedule 14N and Israeli law.”

Marcel de Groot and Michael Richard Hammersley also filed a Schedule 14N nominating directors for Paragon Offshore, plc. Paragraph 68 et seq of Paragon’s articles of association describes the right to nominate a director, but it may be unclear if it is just an advance notice provision or a proxy access right.  But the Schedule 14N states “The nomination of the Nominees is to be made on the Issuers proxy materials pursuant to the Issuers proxy access procedures set forth in its By-Laws (the Bylaws).”

Barry Honig, GRQ Consultants, Inc. 401(K) and GRQ Consultants, Inc. Roth 401(K) F/ B/O Barry Honig filed a Schedule 14N nominating John O’Rourke and Michael Galloro as directors of Bioptix, Inc. Bioptix subsequently appointed Mr. O’Rourke and another individual as directors following the resignation of three directors.  Apparently Mr. Honig had commenced a legal action in a Colorado state court to compel the company to hold a special meeting of shareholders to remove the three resigning directors and to elect three nominees proposed by Mr. Honig.  How proxy access fit into all of this is not clear to me.

President Trump has issued an Executive Order which requires the head of each agency to designate an agency official as its Regulatory Reform Officer, or RRO. Each RRO will oversee the implementation of regulatory reform initiatives and policies to ensure that agencies effectively carry out regulatory reforms, consistent with applicable law.  Agencies which issue few or no regulations can apply for an exemption.

In addition, each agency must establish a Regulatory Reform Task Force composed of designated individuals. Each Regulatory Reform Task Force must evaluate existing regulations and make recommendations to the agency head regarding their repeal, replacement, or modification, consistent with applicable law.  At a minimum, each Regulatory Reform Task Force shall attempt to identify regulations that:

  • eliminate jobs, or inhibit job creation;
  • are outdated, unnecessary, or ineffective;
  • impose costs that exceed benefits;
  • create a serious inconsistency or otherwise interfere with regulatory reform initiatives and policies;
  • are inconsistent with the requirements of section 515 of the Treasury and General Government Appropriations Act, 2001 (44 U.S.C. 3516 note), or the guidance issued pursuant to that provision, in particular those regulations that rely in whole or in part on data, information, or methods that are not publicly available or that are insufficiently transparent to meet the standard for reproducibility; or
  • derive from or implement Executive Orders or other Presidential directives that have been subsequently rescinded or substantially modified.

Each Regulatory Reform Task Force is to seek input and other assistance, as permitted by law, from entities significantly affected by Federal regulations, including State, local, and tribal governments, small businesses, consumers, non-governmental organizations, and trade associations.

Within 90 days of the date of the Executive Order, and on a schedule determined by the agency head thereafter, each Regulatory Reform Task Force shall provide a report to the agency head detailing the agency’s progress toward the following goals:

  • improving implementation of certain regulatory reform initiatives and policies; and
  • identifying regulations for repeal, replacement, or modification.

The SEC has issued a notice of a meeting to consider:

  • Whether to propose amendments to rules and forms to require the use of the Inline XBRL format for the submission of operating company financial statement information and mutual fund risk/return summaries, eliminate the requirement for filers to post Interactive Data Files on their websites and terminate the Commission’s voluntary program for the submission of financial statement information interactive data that is currently available only to investment companies and certain other entities.
  • Whether to issue a request for comment on possible revisions to statistical and other disclosures affecting registrants in the financial services industry.

You can find our prior blog on Inline XBRL reporting here.

 

On February 17, 2017, the Securities and Exchange Commission (SEC) and the North America Securities Administrators Association (NASAA) entered into an information-sharing agreement in connection with intrastate crowdfunding and regional offering rules. As these new rules begin to take effect, NASAA and the SEC plan to share information regarding their observations of the new capital-raising regimes.

Last fall, the SEC finalized rules amending Rule 147 to modernize the intrastate offering safe harbor under Section 3(a)(11) of the Securities Act of 1933.  The Rule 147 amendments arrived as many states begin to implement crowdfunding regimes that allow small business owners to raise capital using websites and social media.

In his remarks at the post-signing press conference, acting SEC chair Michael Piwowar stated, “The agreement signed by the SEC and NASAA is intended to facilitate the sharing of information to ensure that the new exemptions are serving their intended purpose of facilitating access to capital for small businesses. Under the memorandum of understanding, federal and state securities regulators will be better able to monitor the effects of the new rules and also guard against fraud.”

NASAA President and Minnesota Commissioner of Commerce Mike Rothman added, “This agreement will strengthen collaboration among state and federal securities regulators to help expand small-business investment opportunities while also protecting investors . . . . Ongoing dialogue is essential to carry out our responsibilities going forward.”

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 13 cities, including Minneapolis, Mankato and St. Cloud, MN; Kansas City, St. Louis and Jefferson City, MO; Phoenix, AZ.; Denver, CO; Washington, D.C.; Decatur, IL; Wichita, KS; Omaha, NE; and Bismarck, ND.

Drew Kuettel is a member of the firm’s corporate finance group.  Drew works in the firm’s Minneapolis office and can be reached at andrew.kuettel@stinson.com or 612.335.1743.

Update:  See our blog on the status report here.

The conflict minerals case was remanded to the United Stated District Court for the District of Columbia for further proceedings. Judge Jackson has ordered the parties to file a joint status report, on or before March 10, 2017, indicating whether any further proceedings are necessary, and whether the Court should enter an order of final judgement to effectuate the Circuit’s decision.

As previously noted, the United States Court of Appeals for the District of Columbia issued its decision on the conflict minerals rule after a rehearing. In National Association of Manufacturers, et al, v. SEC, the Court adhered to its original judgment that the SEC’s conflict minerals rule violated the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have not been found to be DRC conflict free.

The appeals Court also stated “all of this presents a serious problem for the SEC because, as we have said, the government may not rest on such speculation or conjecture. Rather the SEC had the burden of demonstrating that the measure it adopted would “in fact alleviate” the harms it recited “to a material degree.” The SEC has made no such demonstration in this case and, as we have discussed, during the rulemaking the SEC conceded that it was unable to do so. This in itself dooms the statute and the SEC’s regulation.”