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

ISS has issued a U.S. Equity Compensation Plans FAQ, U.S. Executive Compensation Policies FAQ and a U.S. Policies and Procedures FAQ. Here is a rough comparison of the 2015 U.S. Compensation Policies FAQ  to the 2016 U.S. Executive Compensation Policies FAQ (old on the left, new on the right).

The US Policies and Procedures FAQ provides this information with respect to proxy access:

“Under our Board Responsiveness policy guidelines, ISS will evaluate a board’s response to a majority supported shareholder proposal for proxy access by examining whether the major points of the shareholder proposal are being implemented. Further, ISS will examine additional provisions that were not included in the shareholder proposal in order to assess whether such provisions unnecessarily restrict the use of a proxy access right. Any vote recommendations driven by a board’s implementation of proxy access may pertain to individual directors, nominating/governance committee members, or the entire board, as appropriate.

ISS may issue an adverse recommendation if a proxy access policy implemented or proposed by management contains material restrictions more stringent than those included in a majority-supported proxy access shareholder proposal with respect to the following, at a minimum:

  • Ownership thresholds above three percent;
  • Ownership duration longer than three years;
  • Aggregation limits below 20 shareholders;
  • Cap on nominees below 20 percent of the board.

In instances where the cap or aggregation limit differs from what was specifically stated in the shareholder proposal, lack of disclosure by the company regarding shareholder outreach efforts and engagement may also warrant negative vote recommendations.

If an implemented proxy access policy or management proxy access proposal contains restrictions or conditions on proxy access nominees, ISS will review the implementation and restrictions on a case-by-case basis. Certain restrictions viewed as potentially problematic especially when used in combination include, but are not limited to:

  • Prohibitions on resubmission of failed nominees in subsequent years;
  • Restrictions on third-party compensation of proxy access nominees;
  • Restrictions on the use of proxy access and proxy contest procedures for the same meeting;
  • How long and under what terms an elected shareholder nominee will count towards the maximum number of proxy access nominees; and
  • When the right will be fully implemented and accessible to qualifying shareholders.

Two types of restrictions will be considered especially problematic because they are so restrictive as to effectively nullify the proxy access right:

  • Counting individual funds within a mutual fund family as separate shareholders for purposes of an aggregation limit; and
  • The imposition of post-meeting shareholding requirements for nominating shareholders.”

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 December 17, 2015, the Consumer Financial Protection Bureau (CFPB) announced three separate enforcement actions against two online lead originators and a so-called “buy-here, pay-here” auto dealer and its affiliated finance company.

Lead Originators Enforcement Actions

The CFPB brought two separate enforcement actions against online lead originators.  In the first action, the CFPB filed a complaint in federal district court in California against D and D Marketing, Inc., d/b/a T3 Leads (T3 Leads) and its owners, Grigor and Marina Demirchyan.  T3 Leads is a lead aggregator that buys consumer information from lead generators and sells those leads to payday or installment lenders and others.  The CFPB alleges that T3 Leads and the Demirchyans violated the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).  Specifically, the CFPB alleges that T3 Leads:

  • ignored lead generators’ misleading statements to consumers that their loan applications would be paired with lenders that met certain lending “standards”;
  • failed to vet lead purchasers before adding them to its network and selling them leads and failed to require lenders to certify that they complied with applicable state laws; and
  • steered consumers toward unfavorable loans, often because those lenders paid T3 Leads the highest amount for the leads.

The CFPB is seeking monetary and injunctive relief against T3 Leads and the Demirchyans.

You can view the T3 Leads/Demirchyans complaint here: http://files.consumerfinance.gov/f/201512_cfpb_complaint-v-d-and-d-marketing-inc-et-al.pdf.

In the second action, the CFPB filed an administrative consent order against Lead Publisher and its owner Eric Sancho.  Lead Publisher, like T3 Leads, bought and sold leads, which contained personal information such as consumers’ names, telephone numbers, home and email addresses, references, and employer information.  The CFPB alleges that Lead Publisher and Sancho violated the Dodd-Frank Act by selling millions of leads to related companies that used the information to harass and deceive consumers into paying alleged debts that they did not actually owe.  Specifically, the CFPB alleges that Sancho and Lead Publisher:

  • sold approximately three million consumer leads to related entities (which entities the CFPB previously brought enforcement actions against) that threatened, harassed, and defrauded consumers out of millions of dollars; and
  • facilitated fraud by permitting the related entities that purchased leads to threaten consumers with fake legal actions, such as restraining orders, in order to collect debts.

Although Lead Publisher is now out of business, the CFPB consent order bans Sancho from the financial products and online consumer leads industries and requires him to disgorge $21,151 that he obtained as a result of his allegedly unlawful conduct.

You can view the Lead Publisher/Sancho Consent Order here: http://files.consumerfinance.gov/f/201512_cfpb_eric-v-sancho-consent-order.pdf.

Auto Dealer Enforcement Action

The CFPB also announced an enforcement action against Interstate Auto Group, Inc., d/b/a CarHop, one of the country’s largest “buy-here, pay-here” auto dealers and its affiliated finance company, Universal Acceptance Corporation.  Universal Acceptance Corporation, on behalf of CarHop, provided consumer account information to the three major consumer reporting companies on a monthly basis.  The CFPB administrative consent order alleges that CarHop and Universal Acceptance Corporation violated the Fair Credit Reporting Act and the Consumer Financial Protection Act by providing consumer reporting companies with information related to consumer accounts that they knew or had reason to believe was inaccurate.  Specifically, the CFPB alleges that CarHop and Universal Acceptance Corporation:

  • deceived consumers by representing that CarHop would furnish “good credit” information to the credit reporting companies, even though CarHop never provided any positive credit information about consumers;
  • provided inaccurate information to the credit reporting companies that consumers still owed money or that their cars were repossessed, when consumers lawfully returned cars within 72 hours of purchase; and
  • failed to maintain adequate written policies and procedures related to the accuracy and integrity of the consumer information it furnished to credit reporting companies.

The CFPB consent order requires CarHop and Universal Acceptance Corporation to:

  • stop misrepresenting that they will report “good credit” or other positive information to the credit reporting companies;
  • notify the credit reporting companies of any inaccuracies related to information that they provided to those reporting companies;
  • provide credit reports to consumers who had incorrect information submitted to the credit reporting companies about their accounts;
  • implement a process for auditing information that is submitted to the credit reporting companies; and
  • pay a $6,465,000 civil penalty.

You can view the CarHop/Universal Acceptance Corporation Consent Order here: http://files.consumerfinance.gov/f/201512_cfpb_carhop-consent-order.pdf.

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.

Zane Gilmer is a member of the firm’s litigation practice group.  His practice focuses on business litigation and compliance and he is a member of the firm’s CFPB taskforce.  Zane works out of the firm’s Denver office and he can be reached at zane.gilmer@stinson.com or 303.376.8416.

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

 

 

On December 16, 2015, the Consumer Financial Protection Bureau (CFPB) announced an administrative enforcement action against debt collection firm EZCORP, Inc. (EZCORP), for allegedly engaging in illegal debt collection practices in violation of the Electronic Fund Transfer Act (EFTA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank).

EZCORP and its related entities, provided high-cost, short-term, unsecured loans, in 15 states from more than 500 storefronts, under the tradenames “EZMONEY Payday Loans,” “EZ Loan Services,” “EZ Payday Advance,” and “EZPAWN Payday Loans.”  The CFPB alleges that EZCORP engaged in unfair and deceptive debt collection practices in violation of the EFTA and Dodd-Frank.  Specifically, the CFPB alleges that EZCORP:

  • made in-person visits to consumers’ homes and workplaces for the purpose of collecting debts, which visits disclosed or risked disclosing to third-parties the existence of consumers’ debts and caused or risked causing adverse employment consequences to those consumers;
  • communicated with third-parties about consumers’ debts, including calling consumers’ credit references, supervisors, and landlords;
  • deceived consumers with the threat of legal action, even though EZCORP did not refer consumers’ accounts to any law firm or legal department;
  • lied about not conducting credit checks on loan applications, but routinely ran credit checks on consumers;
  • required debt repayment by pre-authorized checking account withdrawals, even though by law consumer loans cannot be conditioned on pre-authorizing payment through electronic fund transfers; and
  • lied to consumers by stating they could not stop electronic withdrawals or collection calls or repay loans early.

Pursuant to the CFPB consent order, EZCORP is required to:

  • refund $7.5 million to approximately 93,000 consumers who made payments to EZCORP after EZCORP made in-person collection visits or who paid EZCORP from unauthorized or excessive electronic withdrawals;
  • stop collecting on tens of millions in outstanding payday and installment debt allegedly owed by 130,000 consumers, and may not sell that debt to any third-parties. EZCORP must also request that consumer reporting agencies amend, delete, or suppress any negative information related to those debts;
  • stop engaging in illegal debt collection practices, including making in-person collection visits, calling consumers at their workplace without specific written permission from the consumers, or attempting electronic withdrawals after a previous attempt failed due to insufficient funds without consumers’ permission; and
  • pay a $3 million civil penalty.

In-Person Debt Collection Compliance Bulletin

In addition to taking action against EZCORP, the CFPB released Compliance Bulletin 2015-07, to provide guidance to creditors, debt buyers, and third-party collectors related to compliance with Dodd-Frank and the Fair Debt Collection Practices Act (FDCPA).

As it relates to Dodd-Frank, CFPB Bulletin 2015-07 warns that in-person debt collection creates heightened risk of committing unfair acts or practices in violation of Dodd-Frank.  Specifically, under Dodd-Frank an act or practice is unfair when it causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers and is not outweighed by countervailing benefits to consumers or competition. In-person collection efforts are likely to cause substantial injury to consumers because, for example, third-parties such as the consumers’ co-workers, supervisors, customers, landlords, roommates, or neighbors may learn about the consumers’ debts, which can cause reputational and other harm to the consumer.  In addition, in-person visits to a consumer’s workplace may cause harm to the consumer if the consumer’s employer prohibits personal visits.

CFPB Bulletin 2015-07 also warns that in-person debt collection efforts pose heightened risks of violating the FDCPA.  For example, section 805(a)(1) and (3) of the FDCPA prohibit debt collectors and others subject to the Act from communicating with a consumer about a debt “at any unusual time or place or time or place known or which should be known to be inconvenient to the consumer” or “at the consumer’s place of employment if the debt collector knows or has reason to know that the consumer’s employer prohibits the consumer from receiving such communication.”  Because in-person debt collection efforts may be perceived by consumers as inconvenient or debt collectors may have reason to know that a consumer’s employer prohibits consumers from receiving communications at their workplace, such in-person collection efforts may violate the FDCPA.

In addition, section 805(b) of the FDCPA prohibits third-party debt collectors and other subject to the Act from communicating with any person other than consumer in connection with the collection of a debt.  Thus, in-person collection efforts cause heightened compliance risks, because debt collectors are likely to interact with third-parties during those in-person collection efforts.

Finally, CFPB Bulletin 2015-07 warns that in-person collection efforts pose heightened risks of violating the FDCPA’s prohibition against debt collectors engaging in conduct the natural consequence of which is to harass, oppress, or abuse any person, and from using unfair or unconscionable means to collect or attempt to collect a debt.

You can view the EZCORP Consent Order here:  http://files.consumerfinance.gov/f/201512_cfpb_ezcorp-inc-consent-order.pdf.

You can view CFPB Compliance Bulletin 2015-07 here: http://files.consumerfinance.gov/f/201512_cfpb_compliance-bulletin-in-person-collection-of-consumer-debt.pdf.

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.

Zane Gilmer is a member of the firm’s litigation practice group.  His practice focuses on business litigation and compliance and he is a member of the firm’s CFPB taskforce.  Zane works out of the firm’s Denver office and he can be reached at zane.gilmer@stinson.com or 303.376.8416.

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

The CFTC has approved a final rule on margin requirements for uncleared swaps for swap dealers (SDs) and major swap participants (MSPs). The new regulation addresses margin requirements for uncleared swaps entered into by SDs or MSPs that are not subject to regulation by the prudential regulators — Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Farm Credit Administration or the Federal Housing Finance Agency. The entities subject to the rules are referred to as covered swap entities (CSEs).

The rules impose margin requirements on (i) trades between CSEs and SDs or MSPs and (ii) trades between CSEs and financial end users. The rules do not impose margin requirements on commercial end users.

Initial Margin (IM)–The rules require daily two-way margin (posting and collecting) for all trades between CSEs and SD/MSPs. The rules also require daily two-way margin for all trades between CSEs and financial end users that have over $8 billion in gross notional exposure in uncleared swaps.

The rules permit the calculation of IM to be based on models or a standardized table. Models are required to use a 99% confidence level over 10-day liquidation time. The rules permit a $50 million threshold below which IM need not be collected.

The rules permit IM to include cash, sovereign debt, government-sponsored debt, investment grade debt including corporate bonds, equities, gold, and shares of certain funds with appropriate haircuts.

IM requirements are phased-in starting September 1, 2016 and ending September 1, 2020 from the largest participants to smaller ones.

Variation Margin(VM)–The rules require daily cash payment for all trades between CSEs and SD/MSPs.  The rules also require daily posting for all trades between SD/MSPs and financial end users.

Calculation of VM requires the use of methods and inputs that rely on recent trades or third-party valuations.

The rules require VM to be in cash for all trades between CSEs and SD/MSPs. The rules permit VM of the same nature as permitted IM for all trades between SD/MSPs and financial end users.

VM requirements are effective September 1, 2016 for the largest participants and March 1, 2017 for the rest.

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 current version of the spending bill in Congress prevents the SEC from using authorized funds to require disclosure of political contributions. Tucked away on page 1982 of the Consolidated Appropriations Act, 2016 is the following text:

“None of the funds made available by any division of this Act shall be used by the Securities and Exchange Commission to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.”

While highly controversial, it may be difficult for opponents to derail at this point.

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 Public Company Accounting Oversight Board, or PCAOB, has adopted new rules to provide investors with more information about who is participating in public company audits.  The rules are subject to SEC approval.

Under the final rules, auditors will be required to file a new PCAOB Form AP, Auditor Reporting of Certain Audit Participants, for each issuer audit, disclosing:

  • The name of the engagement partner;
  • The names, locations, and extent of participation of other accounting firms that took part in the audit, if their work constituted 5 percent or more of the total audit hours; and
  • The number and aggregate extent of participation of all other accounting firms that took part in the audit whose individual participation was less than 5 percent of the total audit hours.

If approved by the SEC, the disclosure requirement for the engagement partner will be effective for auditor’s reports issued on or after January 31, 2017, or three months after SEC approval of the final rules, whichever is later. For disclosure of other audit firms participating in the audit, the requirement will be effective for reports issued on or after June 30, 2017.

The PCAOB began this rulemaking process in 2009, in response to a recommendation of the U.S. Department of the Treasury’s Advisory Committee on the Auditing Profession, by seeking comment on whether the engagement partner should be required to sign the auditor’s report.  The requirement to provide disclosure on Form AP, rather than in the auditor’s report as previously proposed, is primarily a response to concerns raised by some commenters about potential liability and practical concerns about the potential need to obtain consents for identified parties in connection with registered securities offerings.

According to the PCAOB, investors commenting in the rulemaking process have generally stated a preference for disclosure in the auditor’s report. Under the final rules, in addition to filing Form AP, firms will also have the ability to identify the engagement partner and/or provide disclosure about other accounting firms participating in the audit in the auditor’s report. This is not required, but firms may choose to do so voluntarily. The Board believes that providing information about the engagement partner and the other accounting firms that participated in the audit on Form AP, coupled with allowing voluntary reporting in the auditor’s report, will achieve the objectives of enhanced transparency and accountability for the audit while appropriately addressing concerns raised by commenters.

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.

Members of the SEC and staff gave various presentations at the 2015 AICPA Conference on Current SEC and PCAOB Developments.  Much of it contains practical guidance.  Speaking to the new accounting standard on revenue recognition, Wesley R. Bricker, Deputy Chief Accountant noted “As companies prepare their annual financial statements over the next couple of months, we are looking forward to reviewing more detailed disclosures about the expected effect the new standard will have on those financial statements. If that effect is still unknown, then in addition to making a statement to that effect, a registrant may consider advising investors when that assessment is expected to be completed. Again, this is about providing useful information to investors who need time to analyze the impact on companies.”

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 SEC has proposed Rule 13q-1 and an amendment to Form SD to implement Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to disclosure of payments by resource extraction issuers.  Rule 13q-1 was initially adopted by the SEC on August 22, 2012, but it was subsequently vacated by the U.S. District Court for the District of Columbia.

Section 1504 of the Dodd-Frank Act added Section 13(q) to the Securities Exchange Act of 1934, which directs the SEC to issue rules requiring resource extraction issuers to include in an annual report information relating to any payment made by the issuer, a subsidiary of the issuer, or an entity under the control of the issuer, to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals. Section 13(q) requires a resource extraction issuer to provide information about the type and total amount of such payments made for each project related to the commercial development of oil, natural gas, or minerals, and the type and total amount of payments made to each government.

In general, the proposed rules would require resource extraction issuers to file a Form SD on an annual basis that includes information about payments related to the commercial development of oil, natural gas, or minerals that are made to governments. The following are the key provisions of the proposed rules:

  • The term “resource extraction issuer” would apply to all U.S. companies and foreign companies that are required to file annual reports pursuant to Section 13 or 15(d) of the Exchange Act and are engaged in the commercial development of oil, natural gas, or minerals.
  • The term “commercial development of oil, natural gas, or minerals” would mean exploration, extraction, processing, and export, or the acquisition of a license for any such activity, consistent with Section 13(q).
  • The term “payment” would mean payments that are made to further the commercial development of oil, natural gas, or minerals, are “not de minimis,” and includes taxes, royalties, fees (including license fees), production entitlements, and bonuses, consistent with Section 13(q). The SEC also proposes to include dividends and payments for infrastructure improvements in the definition. In addition, the SEC proposes defining “not de minimis” to mean any payment, whether a single payment or a series of related payments, that equals or exceeds $100,000 during the most recent fiscal year.
  • In addition to the payments it makes directly, a resource extraction issuer would be required to disclose payments made by its subsidiaries and other entities under its control. An issuer would disclose those payments that are included in its consolidated financial statements made by entities that are consolidated or proportionately consolidated, as determined by applicable accounting principles.
  • The term “project” would be defined. The SEC proposes to define it in a manner similar to the EU Directives, using an approach focused on the legal agreement that forms the basis for payment liabilities with a government. In certain circumstances this definition would also include operational activities governed by multiple legal agreements.
  • The term “Federal Government” would mean the United States Federal Government.
  • The proposed rules would require a resource extraction issuer to file its payment disclosure on Form SD, on the Commission’s Electronic Data Gathering, Analysis, and Retrieval System (“EDGAR”), no later than 150 days after the end of its fiscal year. Form SD would require issuers to include a brief statement directing users to detailed payment information provided in an exhibit.
  • Recognizing the discretion granted to the SEC under Section 13(q), the proposed rules would require issuers to disclose the payment information publicly, including the identity of the issuer.
  • The proposed rules would not include any express exemptions. Instead, resource extraction issuers could apply for, and the Commission would consider, exemptive relief on a case-by-case basis.
  • In light of recent developments in the European Union and Canada, as well as the developments with the U.S. Extractive Industries Transparency Initiative (“USEITI”), Form SD would include a provision by which resource extraction issuers could use a report prepared for foreign regulatory purposes or for USEITI to comply with the proposed rules if the Commission deems the foreign jurisdiction’s applicable requirements or the USEITI reporting regime to be substantially similar to the SEC’s rules.
  • Resource extraction issuers would be required to present the payment disclosure using the eXtensible Business Reporting Language (“XBRL”) electronic format and the electronic tags identified in Item 2.01 of Form SD. These tags would include those listed in Section 13(q), as well as tags for the type and total amount of payments made for each project, the type and total amount of payments made to each government, the particular resource that is the subject of commercial development, and the subnational geographic location of the project.
  • Resource extraction issuers generally would be required to comply with the rules starting with their fiscal year ending no earlier than one year after the effective date of the adopted rules.

 

Departing from usual practice, the proposed rule has a two-step comment process.  Initial comments are due on January 25, 2016. Reply comments, which may respond only to issues raised in the initial comment period, are due on February 16, 2016. In developing the final rules, the Commission may rely on both new comments and comments that have been received to date, including those that were provided in connection with the prior rules that the Commission issued under Section 13(q).

The U.S. District Court for the District of Columbia vacated the original rule for two reasons. First, the SEC misread Section 13(q) to compel the public disclosure of the issuers’ reports. Second, the Commission’s explanation for not granting an exemption for when disclosure is prohibited by foreign governments was arbitrary and capricious.

As to the first point, The SEC states several factors support this approach. First, the statute requires the SEC to adopt rules that further the interests of international transparency promotion efforts, to the extent practicable. The SEC notes that several existing transparency regimes require public disclosure, including the identity of the issuer, without exception. A public disclosure requirement under Section 13(q) would further the U.S. foreign policy interest in supporting international transparency promotion efforts by enhancing comparability among companies, as it would increase the total number of companies that provide project-level public disclosure.

The SEC also believes it would also be consistent with the objective of ensuring that the United States is a global “leader in creating a new standard for revenue transparency in the extractive industries.” In addition, the United States is currently a candidate country under the EITI, which requires candidate countries to provide a framework for public, company-by-company disclosure in the EITI report. Permitting issuers to provide the required payment disclosure on a confidential basis could undermine the efforts of the USEITI to establish a voluntary payment disclosure regime for domestic operations. Moreover, the fact that issuers would be required by these other transparency promotion efforts to disclose publicly substantially the same payment information reduces the likelihood that the payment information would be confidential or that its disclosure would cause competitive harm.

The SEC also believes that neither the statute’s text nor legislative history includes any suggestion that the required payment disclosure should be confidential. In fact, the SEC believes the legislative history supports its view that the information submitted under the statute should be publicly disclosed.

With respect to the second point, the SEC states it will consider using its existing authority under the Exchange Act to provide exemptive relief at the request of a resource extraction issuer, if and when warranted.  The SEC believes that a case-by-case approach to exemptive relief using its existing authority is preferable to either adopting a blanket exemption for a foreign law prohibition (or for any other reason) or providing no exemptions and no avenue for exemptive relief under this or other circumstances.  Among other things, such an approach would permit the SEC to tailor the exemptive relief to the particular facts and circumstances presented such as by permitting alternative disclosure or by phasing out the exemption over an appropriate period of time.

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 SEC has provided two pieces of guidance on the FAST Act.  The first is in the general nature of an announcement describing the provisions of the FAST Act.  However, the announcement includes some information about how the SEC interprets certain provisions of the FAST Act.

The SEC also published two Compliance and Disclosure Interpretations on the FAST Act.  The CDIs relate to what financial statements Emerging Growth Companies may omit from filings under Section 71003 of the FAST Act.

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.

Overstock.com has filed this Form S-3 which proposes to sell securities using Bitcoin blockchain technology.  The S-3 has not yet been declared effective.

First question: What the heck in blockchain technology?  CFTC Commissioner J. Christopher Giancarlo described it as follows:

“The 20th century underpinnings of the current “closed ledger” financial system are inefficient and unstable. At present, centralized third parties authenticate financial information in generally three-day settlement timeframes that add undue risk, cost and volatility to the marketplace. The 2008 financial crisis revealed that a portion of the recordkeeping infrastructure of the multi-trillion dollar swaps market was recorded on handwritten tickets faxed nightly to the back offices of market counterparties.

Distributed open ledgers have the potential to revolutionize modern financial ecosystems. Unlike current settlement processes, distributed ledgers use open, decentralized, consensus-based authentication protocols. They allow people “who have no particular confidence in each other [to] collaborate without having to go through a neutral central authority.” Distributed ledgers will have enormous implications for financial markets in payments, banking, securities settlement, title recording, cyber security and the process of collateral management that is made infinitely more complex by new regulations. Open ledgers may make possible new “smart” securities and derivatives that can value themselves in real time, automatically calculate and perform margin payments and even terminate themselves in the event of a counterparty default.

Enormous resources are being invested in developing the distributed open ledger known as the blockchain. Over two dozen major global banks have joined together in a consortium to build a framework for using blockchain technology in markets. The London Stock Exchange, CME Group, Euroclear, Societe Generale and UBS have set up the Post Trade Distributed Ledger Working Group to look into how blockchain technology can be used in clearing, settlement and reporting of trades.

The Bank of England has called the blockchain the “first attempt at an ‘internet of finance’” with the potential to de-centralize legal recordkeeping the same way the Internet de-centralized data and information. This transformation will not come without consequences, however, including a greatly disruptive impact on the human capital that supports the recordkeeping of contemporary financial markets. On the other hand, the blockchain will help reduce some of the enormous cost of the increased financial system infrastructure required by new laws and regulations, including Dodd-Frank.”

The “About Digital Securities” section (but don’t forget the risk factors) in the Overstock.com S-3 illuminates how this translates into securities settlement:

“In connection with a digital securities transaction, the tØ software will publish the transaction to the proprietary ledger maintained by the Pro Securities ATS with respect to the relevant series of digital securities. Concurrently, the tØ software will electronically publish the proprietary ledger and commence the process of embedding in the Bitcoin blockchain information necessary to mathematically prove the validity of available copies of the proprietary ledger. Specifically, after a set of transactions in our digital securities have been executed and recorded to the proprietary ledger, the Pro Securities ATS will send a de minimis amount of Bitcoin from an ATS-controlled Bitcoin wallet to another ATS-controlled Bitcoin wallet using the blockchain protocol. This blockchain protocol provides for an editable field that can be used to implant code or other data within the Bitcoin transaction that will be embedded into the blockchain, and the tØ software will use this field to implant anonymized cryptographic hash functions for the digital securities transactions reflected on the proprietary ledger into the Bitcoin transfer made by the ATS. The blockchain will validate this de minimis Bitcoin transaction and embed it, together with the implanted anonymized cryptographic hash function, into the Bitcoin blockchain. As a result, once the Bitcoin transaction is immutably embedded into the Bitcoin blockchain, an immutable record of the digital securities transactions reflected on the proprietary ledger is also recorded within the Bitcoin blockchain. The Bitcoin blockchain participants involved in validating the de minimis Bitcoin transaction do not have any access to the underlying digital securities transaction data. The transaction costs associated with this process relate to the de minimis costs of the Bitcoin currency transaction conducted by the Pro Securities ATS. As a result, the Pro Securities ATS—rather than us or holders of our digital securities—will bear such minimal costs required in connection with embedding cryptographic hash functions into the Bitcoin blockchain.”

You can find more background on this in the Bitcoin Magazine.

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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.

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