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

On May 2, 2016 the North American Securities Administrators Association (NASAA) issued a release requesting public comments on a proposed Statement of Policy (SOP) that would allow issuers and its selling agents to use electronic offering documents, (e.g., subscription agreements), when conducting securities offerings. Also, the proposed SOP would allow issuers to accept electronic signatures.

The proposed SOP includes two parts, one covering the use, transmittal, and required security measures of electronic offering documents, and the other dedicated to electronic signatures. The release states the administrators drew from several sources when drafting the proposed SOP including SEC releases, FINRA interpretive letters, SEC no action letters, and its own adopted SOP regarding Electronic Delivery of Franchise Disclosure Documents.  The text of the proposal is copied verbatim below:

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Part One:

TEXT OF PROPOSED POLICY REGARDING USE OF ELECTRONIC OFFERING DOCUMENTS AND SUBSCRIPTION AGREEMENTS

A. An issuer of securities may deliver offering documents, including subscription agreements, over the Internet or by other electronic means, or in machine-readable media, provided:

     1. the offering documents:

          a. are prepared, updated, and delivered in a manner consistent with state and federal securities laws;

          b. satisfy the formatting requirements applicable to printed documents, such as font size and typeface;

          c. are delivered as a single, integrated document or file;

          d. have no links to or from external documents or content; and

          e. are delivered in a form that intrinsically enables the recipient to store, retrieve, and print the documents;

     AND

     2. the issuer:

          a. obtains informed consent from the investor or prospective investor to receive offering documents electronically;

          b. ensures that the investor or prospective investor receives timely, adequate, and direct notice when an electronic document has been delivered;

          c. employs safeguards to ensure that delivery occurred at or before the time required by law in relation to the time of sale; and

          d. maintains evidence of delivery by keeping records of its electronic delivery of offering documents and makes those records available on demand by the Administrator.

B. Subscription agreements may be provided electronically for review and completion, provided:

     1. the subscription process is administered in a manner that is equivalent to the administration of subscription agreements in paper form;

     2. mechanisms are established to ensure a prospective investor scrolls through the document in its entirety prior to initialing and/or signing;

     3. a single subscription agreement is used to subscribe a prospective investor in no more than one offering; and

     4. in the event of discovery of a security breach at any time in any jurisdiction, the electronic subscription process will be suspended and notification will be made to the Administrator and all investors.

C. Delivery requires that the offering documents be conveyed to and received by the investor or prospective investor, or that the storage media in which the offering documents are stored be physically delivered to the investor or prospective investor in accordance with subsection (A)(1).

D. Each electronic document shall be preceded by or presented concurrently with the following notice: “Clarity of text in this document may be affected by the size of the screen on which it is displayed.”

E. Informed consent to receive offering documents electronically pursuant to (A)(2)(a) in this section shall be obtained in connection with each new offering. The investor may revoke this consent at any time.

F. Investment opportunities shall not be conditioned on participation in the electronic offering documents and subscription agreements initiative.

G. Investors or prospective investors who decline to participate in an electronic offering documents and subscription agreements initiative shall not be subjected to higher costs—other than the actual direct cost of printing, mailing, processing, and storing offering documents and subscription agreements—as a result of their lack of participation in the initiative, and no discount shall be given for participating in an electronic offering documents and subscription agreements initiative.

H. Entities participating in an electronic initiative shall maintain, and shall require underwriters, dealer-managers, placement agents, broker-dealers, and other selling agents to maintain, written policies and procedures covering the use of electronic offering documents and subscription agreements.

I. Entities and their contractors and agents having custody and possession of all documents, including subscription agreements, shall store them in a non-rewriteable and non-erasable format, and maintain secure offsite backups of such documents.

J. This section does not change or waive any other requirement of law concerning registration or presale disclosure of securities offerings.

Part Two:

TEXT OF PROPOSED POLICY REGARDING USE OF ELECTRONIC SIGNATURES

A. An issuer of securities may provide for the use of electronic signatures provided:

     1. The process by which electronic signatures are obtained:

          a. will be implemented in compliance with the Electronic Signatures in Global and National Commerce Act (“Federal E-Sign”) the Uniform Electronic Transactions Act, including an appropriate level of security and assurances of accuracy;

          b. will employ an authentication process to establish signer credentials and security features that protect signed records from alteration; and

          c. will provide for retention of electronically signed documents in compliance with applicable laws and regulations;

     2. An investor or prospective investor shall expressly opt-in to the electronic signature initiative, and participation may be terminated at any time; and

     3. Investment opportunities shall not be conditioned on participation in the electronic signature initiative.

B. Entities that participate in an electronic signature initiative shall maintain, and shall require underwriters, dealer-managers, placement agents, broker-dealers, and other selling agents to maintain, written policies and procedures covering the use of electronic signatures.

C. An election to participate in an electronic signature initiative pursuant to (A)(2) in this section shall be obtained in connection with each new offering.

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Read the full release, including how to submit comments, here (starts automatic pdf download).

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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 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The Board of Governors of the Federal Reserve System is inviting comment on a proposed rule to promote U.S. financial stability by improving the resolvability and resilience of systemically important U.S. banking organizations and systemically important foreign banking organizations pursuant to section 165 of the Dodd-Frank Act.

The proposed rule would require any U.S. top-tier bank holding company identified by the Board as a global systemically important banking organization, or GSIB, certain subsidiaries of any U.S. GSIB, and certain U.S. operations of any foreign GSIB to be subjected to the following restrictions regarding the terms of their non-cleared qualified financial contracts, or QFCs:

  • A covered entity would generally be required to ensure that QFCs to which it is party, including QFCs entered into outside the United States, provide that any default rights and restrictions on the transfer of the QFCs are limited to the same extent as they would be under the Dodd-Frank Act and the Federal Deposit Insurance Act.
  • A covered entity would generally be prohibited from being party to QFCs that would allow a QFC counterparty to exercise default rights against the covered entity based on the entry into a resolution proceeding under the Dodd-Frank Act, Federal Deposit Insurance Act, or any other resolution proceeding of an affiliate of the covered entity.

GSIB’s will be determined using the Fed’s existing rule establishing risk-based capital surcharges for GSIBs.

A QFC would be defined to have the same meaning as in section 210(c)(8)(D) of the Dodd-Frank Act, and would include, among other things, derivatives, repos, and securities lending agreements. Subject to the exceptions, the proposal’s requirements would apply to any QFC to which a covered entity is party.

The proposal would also amend certain definitions in the Fed’s capital and liquidity rules; these amendments are intended to ensure that the regulatory capital and liquidity treatment of QFCs to which a covered entity is party is not affected by the proposed restrictions on such QFCs.

Under the proposal, the rule would take effect on the first day of the first calendar quarter that begins at least one year after the issuance of the final rule, which is referred to as the effective date. Entities that are covered entities when the final rule is issued would be required to comply with the proposed requirements beginning on the effective date. Thus, a covered entity would be required to ensure that covered QFCs entered into on or after the effective date comply with the rule’s requirements. Moreover, a covered entity would be required to bring a preexisting covered QFC entered into prior to the effective date into compliance with the rule no later than the first date on or after the effective date on which the covered entity or an affiliate (that is also a covered entity or covered bank) enters into a new covered QFC with the counterparty to the preexisting covered QFC or an affiliate of the counterparty.

The Office of the Comptroller of the Currency, or OCC, is expected to issue a proposed rule that would subject national banks and federal savings associations that are GSIB subsidiaries to requirements substantively identical to those proposed by the Fed.

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 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

On May 3, 2016, the SEC adopted final rules regarding reporting obligation thresholds under the Securities Exchange Act of 1934 mandated by the JOBS Act and the securities provisions of the FAST Act.  The rules become effective 30 days after publication in the Federal Register.  In a press release, SEC chair Mary Jo White announced, “With the adoption of these amendments, the Commission has completed all of the rulemaking mandated under the JOBS Act.”

Amendments to Exchange Act Reporting Thresholds

The SEC amended Rules 12g-1 through 12g-4 and 12h-3 (relating to the beginning, suspension, and termination of reporting obligations under Section 12(g)) to account for the increased thresholds created by the JOBS Act – for the majority of issuers (i.e. those other than banks) $10 million in assets and a class of equity securities held of record by 2,000 persons or 500 persons who are not accredited investors.

The final rules further amended Rule 12g-1 to clarify that the definition of “accredited investor” found in Rule 501(a) promulgated under the Securities Act of 1933 applies in the context Exchange Act Section 12(g).

Amendments to Exchange Act Rule 12g5-1

The SEC amended Rule 12g5-1 promulgated under the Exchange Act to establish a non-exclusive safe harbor for determining holders of record that allows issuers to exclude, for Section 12(g) purposes, securities “held of record” by persons who acquired them pursuant to an employee compensation agreement that would meet the requirements of Rule 701(c) promulgated under the Securities Act.  The safe harbor is also available to surviving entities after a M&A transaction if they have a reasonable belief that at the time of issuance, the securities of the predecessor were issued in a transaction meeting the requirements of Rule 701(c).

Takeaway

An issuer that is not a bank, bank holding company or savings and loan holding company is not subject to the reporting obligations imposed by Exchange Act Section 12(g) until it has more than $10 million in assets and its securities are “held of record” by either 2,000 persons or 500 persons who are not accredited investors.  An issuer who is a bank, bank holding company or savings and loan holding company need not report until it has more than $10 million in assets and the securities are “held of record” by 2,000 or more persons.

If you are so inclined, you can read the final rules release here (starts automatic download).

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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 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

 

CFS, LLC became the first crowdfunding portal application available on EDGAR. Actually, the initial application and two amendments are available. The company will conduct business under the name uFundingPortal and its website will be CrowdFundingSTAR.com.  Other than that, the application isn’t very exciting reading, but is good news as the May 16, 2016 effective date for crowdfunding nears.

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 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

On April 28, 2016, the U.S. House of Representative passed the Fair Access to Investment Research Act of 2016 (H.R. 5019) by a vote of 411 to 6. This bill directs the SEC to amend its regulations under the Securities Act of 1933 related to research reports to create a safe harbor for investment fund research reports published or distributed by brokers and dealers.

Specifically, the SEC would need to amend 17 C.F.R. § 230.139 to add to the already-existing safe harbor reports concerning “covered investment funds.” The bill defines covered investment funds as either:

(i) investment companies registered under the Investment Company Act of 1940 that have filed a registration statement under the ’33 Act that the SEC has declared effective; or

(ii) trusts or other persons issuing securities in an offering registered under the ’33 Act that is listed on a national securities exchange, the assets of which consist primarily of commodities, currencies, or derivatives of commodities or currencies, and that includes in its registration statement that a class of its securities are purchased or redeemed, subject to conditions or limitation, for a ratable share of its assets.

If this bill become law, it would ensure that reports covering mutual funds and ETFs would not be deemed to constitute offers to purchase or sell securities under the ’33 Act, even if the report’s author (i.e. a broker or dealer) is participating or will participate in the registered offering.  This safe harbor, however, explicitly excludes reports authored by the issuer or affiliates of the issuer.  Unsurprisingly, this safe harbor does not exempt reporting persons from the antifraud and market manipulations provisions of the federal securities laws.

The text of the bill can be found here.

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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 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

After a floor debate during which lawmakers on both sides of the aisle traded dueling press releases, the U.S. House of Representatives voted 325-89 in favor of the Helping Angels Lead Our Startups (HALOS) Act, on April 27, 2016. Read Rep. Hensarling’s Press Release here and Rep. Waters’ here.  We covered in detail the substantive portions of the HALOS Act last month.

In summary, the HALOS Act directs the SEC to revise Rule 502(c) of Regulation D to exempt certain categories of information disseminated at sales events (“demo days”) hosted by groups such as colleges, non-profits, and “angel investor groups.” The bill defines angel investor groups as groups composed of accredited investors interested in investing personal capital in early-stage companies that hold regular meetings, have defined processes for making investment decisions, and are not affiliated with brokers, dealers, or investment advisors.

The text of the bill is available here.

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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 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The Investor Clarity and Bank Parity Act (HR 4096) passed in the U.S. House of Representatives. The Volcker Rule adopted by the regulators limited the ability of bank holding companies and their affiliates, including investment advisers, to sponsor covered funds.  Consequently, according to the current regulations, a covered fund cannot use the name of a sponsor.  The Act eliminates this prohibition and simply allows an investment adviser to share a similar name with a covered fund, subject to certain limitations.

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 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The FDIC issued a special edition of Supervisory Insights, “A Community Bank Director’s Guide to Corporate Governance: 21st Century Reflections on the FDIC Pocket Guide for Directors.” This special corporate governance edition reviews the Pocket Guide and incorporates more recent guidance and technical resources to help board members effectively fulfill their role and duties.

The commentary highlights key governance concepts, roles, and responsibilities of directors and senior management, and discusses how FDIC examiners evaluate governance at community banks. A list of resources, with links to regulations, guidance, and training materials, is included.

According to the FDIC, directors of community banks need not perform management functions. The Guide states “Generally, directors need not be actively involved in day-to-day operations; however, they must provide clear guidance regarding acceptable risk exposure levels and ensure that appropriate policies, procedures, and practices have been established. Senior management is responsible for developing and implementing policies, procedures, and practices that translate the board’s goals, objectives, and risk limits into prudent operating standards.”

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 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Treasury’s Office of Financial Research has released a brief entitled “Credit Ratings in Financial Regulation: What’s Changed Since the Dodd-Frank Act?” The introductory statement notes “The use of credit ratings in financial regulation created perverse incentives for market participants and contributed to the financial crisis. As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress called for eliminating credit ratings in financial regulation. Regulatory agencies, in turn, introduced alternative means for evaluating credit. But these alternatives have their own challenges. This brief reviews how credit ratings have been used in financial regulation, the incentives they created, and how they were replaced after the Dodd-Frank Act.”

The brief highlights three methods used to replace reliance on credit ratings after Dodd-Frank:

  • Defining creditworthiness for certain securities is the most widely used alternative to credit ratings in financial regulation since the Dodd-Frank Act. This approach has three key features. First, regulated entities must determine the securities they hold meet the new regulatory definitions. Prudential regulators have the discretion to accept or reject these justifications. Second, regulators provide guidance about factors they will consider in reviewing firms’ determinations. Third, credit ratings still can be used, but regulated entities must justify their use.
  • In the second approach, bank regulators give companies models to use in place of credit ratings. For example, federal bank regulators use two models to replace credit ratings in setting capital requirements for securitized products.
  • In the third approach, regulators use third parties other than rating agencies to set credit standards. For example, federal bank regulators now use country risk assessments provided by the Organization for Economic Co-operation and Development (OECD) to set capital requirements for sovereign and depository institution debt.

The brief then discusses how the three alternative approaches to credit ratings bring potential challenges and concerns.

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 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.