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

The SEC has issued a rule proposal that would increase the aggregate amount of securities that may be offered and sold in any twelve-month period pursuant to Rule 504 from $1 million to $5 million and to disqualify certain bad actors from participation in Rule 504 offerings.

Rule 504 permits eligible issuers to offer and sell securities to an unlimited number of persons without regard to their sophistication, wealth or experience and, in certain circumstances, without delivery of any specified information. In other words, it’s another potential crowdfunding exemption.

The SEC believes the rule change would create a larger federal exemptive framework for state regulators to tailor and coordinate among themselves state specific requirements for smaller offerings by smaller issuers that are consistent with their respective sovereign interests in facilitating capital formation and the protection of investors in intrastate and regional interstate securities offerings. Increasing the offering limit from $1 million to $5 million may also make the Rule 504 exemption more attractive to start-up companies seeking capital financing, as compared to alternative financing methods, as the legal and accounting expenses of the offering may be offset by the larger gross proceeds of the offering to the issuer.

In conjunction with the proposed increase to the Rule 504 aggregate offering amount limitation, the SEC is also proposing to adopt provisions that would disqualify certain bad actors from participation in offerings conducted pursuant to the exemption. The SEC believes that the proposed disqualification provisions, which are substantially similar to related provisions in Rule 506 of Regulation D, would create a more consistent regulatory regime across Regulation D that would benefit investors in Rule 504 offerings with increased protections. The SEC also believes that its proposed rule amendments may bolster efforts among the states to enter into, or revise existing, regional coordinated review programs that are designed to increase efficiencies associated with the registration of securities offerings in multiple jurisdictions without increasing risks to investors.

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 amendments to Rule 147 under the Securities Act of 1933, which currently provides a safe harbor for compliance with the Section 3(a)(11) exemption from registration for intrastate securities offerings. The SEC proposal would modernize the rule and establish a new exemption to facilitate capital formation, including through offerings relying upon recently adopted intrastate crowdfunding provisions under state securities laws. The proposed amendments to the rule would eliminate the restriction on offers and ease the issuer eligibility requirements, while limiting the availability of the exemption at the federal level to issuers that comply with certain requirements of state securities laws.

As an aside, I ponder what the SEC Investor Advocate is going to think of these far reaching and seemingly useful changes for issuers.  The Investor Advocate has recently sought to nix useful amendments to the NYSE rules for emerging companies and has sent a letter NASAA on its “Proposed Model Legislation or Regulation To Protect Vulnerable Adults From Financial Exploitation” and to the MSRB on its “Draft Amendments to MSRB Rule A-3 to Lengthen the Term of Board Member Service.”

Basis for Amendments

Section 3(a)(11) of the Securities Act provides for an intrastate exemption and current Rule 147 helps to implement the statutory exemption. Rule 147, as proposed to be amended, would no longer fall within the statutory parameters of Section 3(a)(11). Accordingly, the SEC proposes to amend Rule 147 to create an exemption pursuant to its general exemptive authority under Section 28 of the Securities Act.  As amended, Rule 147 would function as a separate exemption from Securities Act registration rather than as a safe harbor under Section 3(a)(11). The proposed amendments, if adopted, would not alter the fact that the Section 3(a)(11) statutory exemption continues to be a capital raising alternative for issuers with local operations seeking local financing.

Elimination of Limitation on Manner of Offering

The problem with posting offers related to the sales of securities on the internet means that even if you want to sell only to Missouri residents, people living in Kansas will read the offers, a faux pas under Rule 147 as currently written. Rule 147, as proposed to be amended, would require issuers to limit sales to in-state residents, but would no longer limit offers by the issuer to in-state residents. Accordingly, amended Rule 147 would permit issuers to engage in general solicitation and general advertising that could reach out-of-state residents in order to locate potential in-state investors using any form of mass media, including unrestricted, publicly available websites, to advertise their offerings, so long as all sales of securities so offered are made to residents of the state or territory in which the issuer has its principal place of business.

Given that amended Rule 147 would allow offers to be accessible by out-of-state residents, the proposed amendments would require an issuer to include a prominent disclosure on all offering materials used in connection with a Rule 147 offering, stating that sales will be made only to residents of the same state or territory as the issuer. This proposed disclosure requirement is intended to advise investors who are not residents of the state in which sales are being made that the intrastate offering would be unavailable to them.

Elimination of Residence Requirement for Issuers

Here the Commission gives a nod to Delaware and maybe Nevada. Rule 147 currently requires issuers to be incorporated or organized under the laws of the state or territory in which the intrastate offering is conducted. This requirement, while based on the language of Section 3(a)(11), is at odds with modern business practice in which issuers incorporate or organize in states other than the state or territory of their principal place of business, for example, to take advantage of well-established bodies of corporate or partnership law.

The SEC proposes to eliminate the current requirement of Rule 147 that limits the availability of the rule to issuers organized in the state in which an offering takes place. The proposed amendments would expand the universe of eligible issuers by eliminating the current “residence” requirement, while continuing to require that an issuer have a sufficient in-state presence determined by the location of the issuer’s principal place of business.

In conjunction with the proposed requirement that all purchasers be in-state residents, the SEC believes that requiring an issuer to have an in-state principal place of business and to satisfy at least one additional requirement that demonstrates the in-state nature of the issuer’s business should adequately ensure the intrastate nature of the offering, such that state authorities can effectively regulate an issuer’s activities and enforce states’ securities laws for the protection of resident investors.

Requirements for Issuers “Doing Business” In-State

The SEC proposes to simplify the doing business in-state determination by amending the current rule requirements so that an issuer’s ability to rely on the rule would be based on the location of the issuer’s principal place of business, as opposed to its “principal office.” For purposes of the rule, the SEC proposes to define the term “principal place of business” to mean the location from which the officers, partners, or managers of the issuer primarily direct, control and coordinate the activities of the issuer. As defined, an issuer would only be able to have a “principal place of business” within a single state or territory and would therefore only be able to conduct an offering pursuant to amended Rule 147 within that state or territory. Issuers also would be required to register the offering in the state in which all of the purchasers are resident, or rely on an exemption from registration that limits the amount of securities an issuer may sell pursuant to such exemption to no more than $5 million in a twelve-month period and imposes an investment limitation on investors.

Additionally, the SEC proposes to require issuers to satisfy an additional criterion that it believes would provide further assurance of the in-state nature of the issuer’s business within the state in which the offering takes place. For these purposes, the SEC proposes to retain the 80% threshold tests of the current rule in modified form with the addition of an alternative test based on the location of a majority of the issuer’s employees. While the substance of the 80% threshold requirements of current Rule 147(c)(2) would be retained in the proposed rules, the SEC proposes to make compliance with any one of the 80% threshold requirements sufficient to demonstrate the in-state nature of the issuer’s business. This would be a change to the current test, which requires issuers to meet all three conditions. The SEC further proposes to make certain technical revisions to the existing 80% thresholds that would simplify the structure, and clarify the application, of the rules.

The proposed new “80% thresholds” are as follows:

  • The issuer derived at least 80% of its consolidated gross revenues from the operation of a business or of real property located in or from the rendering of services within such state or territory;
  • The issuer had at the end of its most recent semi-annual fiscal period prior to the first offer of securities pursuant to the exemption, at least 80% of its consolidated assets located within such state or territory;
  • The issuer intends to use and uses at least 80% of the net proceeds to the issuer from sales made pursuant to the exemption in connection with the operation of a business or of real property, the purchase of real property located in, or the rendering of services within such state or territory; or
  • A majority of the issuer’s employees are based in such state or territory.

Reasonable Belief as to Purchaser Residency Status

Current Rule 147(d) requires that offers and sales of securities pursuant to the rule be made only to persons resident within the state or territory of which the issuer is a resident.  Regardless of the efforts an issuer takes to determine that potential investors are residents of the state in which the issuer is a resident, the exemption would be lost for the entire offering if securities are offered or sold to one investor that was not in fact a resident of the state. The SEC believes that this requirement in the current rule is unnecessarily restrictive and gives rise to uncertainty for issuers.

The SEC proposes to add a reasonable belief standard to the issuer’s determination as to the residence of the purchaser at the time of the sale of the securities.  As proposed, an issuer would satisfy the requirement that the purchaser in the offering be a resident of the same state or territory as the issuer’s principal place of business by either the existence of the fact that the purchaser is a resident of the applicable state or territory, or by establishing that the issuer had a reasonable belief that the purchaser of the securities in the offering was a resident of such state or territory.

Here, the SEC is offering up a two edged sword.  The proposing release states the SEC has also eliminated the current requirement in Rule 147 that issuers obtain a written representation from each purchaser as to his or her residence.  The proposing release goes on to state smaller issuers likely to conduct intrastate offerings may mistakenly believe that obtaining a written representation from purchasers of in-state residency status would, without more, be sufficient to establish a reasonable belief that such purchasers are in-state residents.

Limitation on Resales

The SEC proposes to amend the limitation on resales in Rule 147(e) to provide that “for a period of nine months from the date of the sale by the issuer of a security sold pursuant to this rule, any resale of such security by a purchaser shall be made only to persons resident within such state or territory . . .”

The SEC also proposes to amend Rule 147(b) so that an issuer’s ability to rely on Rule 147 would no longer be conditioned on a purchaser’s compliance with Rule 147(e).   The SEC believes that this proposed amendment to the application of Rule 147(e), as it relates to Rule 147(b), would increase the utility of the exemption by eliminating the uncertainty created in the offering process for issuers under the current rules.

Integration

The proposed Rule 147 safe harbor would include any prior offers or sales of securities by the issuer, as well as certain subsequent offers or sales of securities by the issuer occurring within six months after the completion of an offering exempted by Rule 147. As proposed, offers and sales made pursuant to Rule 147 would not be integrated with:

  • Prior offers or sales of securities; or
  • Subsequent offers or sales of securities that are:
    • Registered under the Act, except as provided in Rule 147(h);
    • Exempt from registration under Regulation A;
    • Exempt from registration under Rule 701;
    • Made pursuant to an employee benefit plan;
    • Exempt from registration under Regulation S;
    • Exempt from registration under section 4(a)(6) of the Act; or
    • Made more than six months after the completion of an offering conducted pursuant to proposed Rule 147.

An offering made in reliance on Rule 147 would not be integrated with another exempt offering made concurrently by the issuer, provided that each offering complies with the requirements of the exemption that is being relied upon for the particular offering. For example, an issuer conducting a concurrent exempt offering for which general solicitation is not permitted would need to be satisfied that purchasers in that offering were not solicited by means of the offering made in reliance on amended Rule 147. Alternatively, an issuer conducting a concurrent exempt offering for which general solicitation is permitted would need to comply with the legend and disclosure requirements of proposed Rule 147(f).  If the concurrent exempt offering for which general solicitation is permitted imposes additional restrictions on the general solicitation, such as, for example, the limitations imposed on advertising pursuant to Rule 204 of Regulation Crowdfunding, the issuer’s general solicitation would not be able to go beyond the more restrictive requirements. Also, an issuer conducting a concurrent Rule 506(c) offering could not include in its Rule 506(c) general solicitation materials and advertisement of a concurrent Rule 147 offering, unless that advertisement also included the necessary disclosure for, and otherwise complied with, Rule 147(f).

State Law Requirements

Rule 147 does not currently have an offering amount limitation and does not currently limit the amount of securities an investor can purchase in an offering pursuant to the rule. Preliminarily, however, the SEC believes that, in light of the proposed changes to Rule 147, which, as noted above, would no longer be a safe harbor for compliance with Section 3(a)(11), a maximum offering amount limitation and investor investment limitations in the rule would provide investors with additional protection and would be consistent with existing state law crowdfunding provisions. As such, the SEC is proposing to limit the availability of Rule 147, as proposed to be amended, to issuers that have registered an offering in the state in which all of the purchasers are resident or that conduct the offering pursuant to an exemption from state law registration in such state that limits the amount of securities an issuer may sell pursuant to such exemption to no more than $5 million in a twelve-month period and that limits the amount of securities an investor can purchase in any such offering.

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 is expected to vote today to approve final rules to implement Title III of the JOBS Act, which will permit so-called equity crowdfunding for the first time. It has been some three years since the SEC was tasked with issuing these rules, and back in March we wondered whether the crowdfunding rules were effectively dead.  But later today the SEC will likely issue a multi-hundred page release sometime today which will set forth the text of the final rules, describe the comment letters the SEC has received since releasing proposed rules back in October 2013, and the way the SEC considered and responded to comments on those proposed rules.

In the next few days, we will be summarizing the final rules here on Dodd-Frank.com. To get you ready for more mainstream media coverage about the final crowdfunding rules in the next few days, here are some links to provide context:

You can find our post about the PROPOSED rules and their impact here.

CNBC appears to be focusing some resources on covering the new crowdfunding rules, releasing an article yesterday that mostly stresses the benefits and risks to investors of the ability to invest in early stage companies but is silent with respect to the risks to companies that utilize crowdfunding.

CNBC has also teamed with a company called Crowdnetic to provide the CNBC Crowdfinance 50, an index of the 50 private companies raising the most money through online crowdfunding platforms. Currently, this is only available to accredited investors (until after the final SEC rules are released). It is perhaps no surprise that most of the activity seems to be focused on tech companies in California.

Techcrunch has an article providing a more balanced perspective on crowdfunding, noting that even some of the players in the crowdfunding platform space aren’t necessarily enthusiastic about the prospect of the new rules.

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 more than 520 attorneys and 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.

ISS has made available for public comment certain proposed voting policies for 2016. In the United States ISS has proposed policies relating to unilateral board actions, director overboarding and compensation at externally-managed issuers.

Unilateral Board Actions

The proposed policy update will explicitly state that when a board unilaterally amends the company bylaws or charter to either classify the board or establish supermajority vote requirements in any period after completion of a company’s initial public offering (IPO), ISS will generally issue adverse vote recommendations for director nominees until such time as the unilateral action is either reversed or is ratified by a shareholder vote.

ISS is also considering implementing a policy providing that, when a board amends the bylaws or charter prior to or in connection with the company’s initial public offering to classify the board and establish supermajority vote requirements to amend the bylaws or charter, ISS will generally issue adverse vote recommendations for director nominees at subsequent annual meetings following completion of the initial public offering.

Director Overboarding

ISS proposes to revise the ISS US policy on overboarded directors to lower the acceptable numbers of board positions as follows:

  • For CEOs with outside directorships, a limit of one outside public company directorship besides their own – still to withhold only at their outside boards.
  • For directors who are not the CEO, ISS is evaluating two options, that would lower the acceptable number of total public boards from the current six (the board under consideration plus five others) to a total of either:
    • Five (the board under consideration plus four others), or
    • Four (the board under consideration plus three others).

Compensation at Externally-Managed Issuers

ISS is proposing to update its pay-for-performance analysis policy with respect to externally-managed issuers that do not provide sufficient compensation disclosure to make a comprehensive assessment for pay-for-performance and potential conflicts of interest.

Under the proposed policy change, ISS would generally recommend “Against” the say-on-pay proposal (or compensation committee members, the compensation committee chair, or the entire board, as appropriate, in the absence of a say-on-pay proposal on ballot) in cases where a comprehensive pay analysis is impossible because the externally-managed issuer provides insufficient disclosure about compensation practices and payments made to executives on the part of the external manager.

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.

Title III of the Jumpstart Our Business Startups Act, or JOBS Act, enacted in 2012 with the goal of increasing American job creation and economic growth, contains key provisions relating to securities offered or sold through “crowdfunding.” Under Section 302 of the JOBS Act, a crowdfunding intermediary that engages in crowdfunding on behalf of issuers relying on the JOBS Act’s “crowdfunding exemption” is required to register with the SEC as a “funding portal”  or broker and to register with an applicable self-regulatory organization.

FINRA is proposing the Funding Portal Rules and related forms that would apply to SEC-registered funding portals that become FINRA members pursuant to the JOBS Act and the SEC’s Regulation Crowdfunding. The proposed Funding Portal Rules reflect Regulation Crowdfunding as proposed by the SEC and would implement, under FINRA rules, the provisions of Title III of the JOBS Act.

The proposed Funding Portal Rules consist of a set of seven rules (Funding Portal Rules 100, 110, 200, 300, 800, 900 and 1200) and related forms (Form FPNMA, Form FP-CMA, Funding Portal Rule 300(c) Form, and Form FP-Statement of Revenue). In addition, as part of the proposed rule change, FINRA is proposing to adopt new FINRA Rule 4518 (Notification to FINRA in Connection with the JOBS Act) in the FINRA rulebook. New FINRA Rule 4518 would apply to registered broker members.

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.

New Margin Requirements

The Board of Directors of the Federal Deposit Insurance Corporation approved a final rule to establish margin requirements for swaps that are not cleared through a clearinghouse. This action is a joint final rule with the Office of the Comptroller of the Currency, the Federal Reserve Board, the Farm Credit Administration, and the Federal Housing Finance Agency and will apply to entities supervised by these agencies that register with the Commodity Futures Trading Commission or Securities and Exchange Commission as a dealer or major participant in swaps.

The Dodd-Frank Act required the agencies to impose margin requirements to help ensure the safety and soundness of swap dealers in light of the risk to the financial system associated with non-cleared swaps activity. The final rule takes into account the risk posed by a swap dealer’s counterparties in establishing the minimum amount of initial and variation margin that the covered swap entity must exchange with such counterparties.

The rule does not apply to swaps of financial institutions with $10 billion or less in total assets that enter into swaps for hedging purposes. This exception tracks similar exceptions that are available to these small institutions from the requirement to clear standardized swaps through a clearinghouse.

End User Exemption

In connection with adopting the new margin requirements, the FDIC also adopted an interim final rule to exempt commercial end-users and small banks. The interim final rule implements the Terrorism Risk Insurance Program Reauthorization Act of 2015, or TRIPRA, which President Obama signed into law on January 12, 2015.  Title III of TRIPRA, the “Business Risk Mitigation and Price Stabilization Act of 2015,” amends the statutory provisions added by the Dodd-Frank Act relating to margin requirements for non-cleared swaps and non-cleared security-based swaps. Specifically, section 302 of TRIPRA’s Title III amends sections 731 and 764 of the Dodd-Frank Act to provide that the initial and variation margin requirements do not apply to certain transactions of specified counterparties that would qualify for an exemption or exception from clearing, as explained more fully below. Non-cleared swaps and non-cleared security-based swaps that are exempt under section 302 of TRIPRA will not be subject to the rules implementing margin requirements. In section 303 of TRIPRA, Congress required that the Agencies implement the provisions of Title III by promulgating an interim final rule and seeking public comment on the interim final rule.

The effect of the interim final rule is to grant an exception from the margin requirements of the joint final rule for non-cleared swaps meeting certain criteria that covered swap entities enter into with certain “other counterparties” and certain financial end users. This interim final rule adopts the statutory exemptions and exceptions as required under TRIPRA. TRIPRA provides that the initial and variation margin requirements do not apply to the noncleared swaps and non-cleared security-based swaps of three categories of counterparties.  In particular, section 302 of TRIPRA amends sections 731 and 764 so that initial and variation margin requirements will not apply to a swap or security-based swap in which a counterparty (to a covered swap entity):

  • A non-financial entity (including small financial institution and a captive finance company) that qualifies for the clearing exception under section 2(h)(7)(A) of the Commodity Exchange Act or section 3C(g)(1) of the Securities Exchange Act;
  • A cooperative entity that qualifies for an exemption from the clearing requirements issued under section 4(c)(1) of the Commodity Exchange Act; or
  • A treasury affiliate acting as agent that satisfies the criteria for an exception from clearing in section 2(h)(7)(D) of the Commodity Exchange Act or section 3C(g)(4) of the Securities Exchange 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.

The SEC has completed its previously announced review of when a shareholder proposal may be excluded under Rule 14a-8(i)(9) because it directly conflicts with another proposal. The SEC believes the Rule was intended to prevent shareholders from using Rule 14a-8 to circumvent the proxy rules governing solicitations.  In considering no-action requests under Rule 14a-8(i)(9) going forward, the SEC will focus on whether a reasonable shareholder could logically vote for both proposals.  For example, where a company seeks shareholder approval of a merger, and a shareholder proposal asks shareholders to vote against the merger, the SEC agrees that the proposals directly conflict.  Similarly, a shareholder proposal that asks for the separation of the company’s chairman and CEO would directly conflict with a management proposal seeking approval of a bylaw provision requiring the CEO to be the chair at all times.

In Trinity Wall Street v. Wal-Mart Stores, Inc., the U.S. Court of Appeals for the Third Circuit addressed the application of Rules 14a-8(i)(3) and 14a-8(i)(7).  According to the SEC The majority opinion employed a new two-part test, concluding that “a shareholder must do more than focus its proposal on a significant policy issue; the subject matter of its proposal must ‘transcend’ the company’s ordinary business.”  The SEC stated it is concerned that the new analytical approach introduced by the Third Circuit goes beyond the Commission’s prior statements and may lead to the unwarranted exclusion of shareholder proposals.  As a result the Division of Corporation Finance intends to continue to apply Rule 14a-8(i)(7) as articulated by the Commission and consistent with the Division’s prior application of the exclusion when considering no-action requests that raise Rule 14a-8(i)(7) as a basis for exclusion.

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.

SEC Chair Mary Jo White recently delivered pointed remarks to a conference attended by hedge fund and private equity advisors.

One portion of her remarks was directed at operational risks of private funds, such as cybersecurity.  Another portion of her remarks outlined breaches of fiduciary duties discovered during SEC presence exams.  Chair White highlighted:

  • Concerns that some hedge fund advisers may have used marketing materials that included back-tested performance numbers, portable performance numbers, and benchmark comparisons without key disclosures.
  • In exams of private equity advisers, examiners also observed instances of conflicts involving fees and expenses. For example, staff was concerned that some advisers may have been improperly shifting expenses away from the adviser and to the funds or portfolio companies by, for example, charging a fund for the salaries of the adviser’s employees or hiring the adviser’s former employees as “consultants” paid by the funds.
  • Examiners also continue to observe advisers collecting millions of dollars in accelerated monitoring fees without disclosing the practice.
  • Next up on the enforcement list appear to be private fund real estate advisers. The SEC’s Private Funds Unit in OCIE is completing a review of private fund real estate advisers, many of which may be hiring related parties. Staff is concerned that disclosure about these arrangements may be non-existent or potentially misleading, particularly with regard to whether or not the related parties charge market rates.

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 Office of Investor Advocate has recommended disapproval of a proposed rule change of the New York Stock Exchange. In its proposed rulemaking, the NYSE would exempt certain early stage companies from having to obtain shareholder approval before selling additional shares to insiders and other related parties.  The Office of the Investor Advocate was created with a statutory mandate to examine the impacts on investors of proposed rule changes by self-regulatory organizations, including the national securities exchanges, and to make recommendations to the Commission regarding those proposals.

According to the Office, the Commission maintains a thorough review process for exchange filings, and the Commission staff carefully scrutinizes each filing under the federal securities laws. The Office believes given the general lack of awareness of such filings among investors, the exchanges may have come to expect little scrutiny from investors of their routine proposals. According to the Office, “Those days are now over. Today I make my first formal recommendation to the Commission, and it marks the beginning of my Office’s efforts to shine a brighter light on rule changes by the exchanges, either to oppose proposals that may be detrimental to investors or, conversely, to support the efforts of exchanges to amend their rules in ways that benefit investors.”

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 published a report that provides private fund industry statistics and trends, reflecting aggregated data reported by private fund advisers on Form ADV and Form PF.  Most of the data in the more than 50 separate tables and figures is being made public for the first time.  The private fund industry includes hedge funds and private equity groups.

The report includes statistics about the distribution of borrowings, an analysis of hedge fund gross notional exposure to net asset value, and a comparison of average hedge fund investor and hedge fund portfolio liquidity.

SEC Chair Mary Jo White said “While this is highly aggregated data, the statistics illustrate trends and practices in the industry.  Consider just a few examples.  First, although the total notional value of derivatives reported on Form PF has increased, from about $13.6 trillion to about $14.8 trillion, that value has decreased relative to total net assets from the beginning of 2013 to the end of 2014, from about 256% of net asset value to about 221% of net asset value.  Second, more than half of all large hedge fund advisers report aggregate economic leverage less than two and a half times their total reported hedge fund net assets.  And finally, the data indicates that fewer than 100 reporting hedge funds–representing less than $70 billion in combined net assets–manage some portion of their funds using high-frequency trading strategies.”

According to the SEC Chair “The public availability of aggregated information should help to address persistent questions, and to some degree misconceptions, about the practices and size of the private fund industry.”

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.