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

The SEC has announced an open meeting to consider clawback of executive compensation under Section 954 of the Dodd-Frank Act to be held on July 1, 2015.  According to the notice of the meeting, the SEC will consider whether to propose amendments under Section 10D of the Exchange Act, as added by Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, to require the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with Section 10D’s requirements for the recovery of incentive-based compensation.

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 June 24 the CFPB published its proposed rule for extending the effective date for implementation of the Know Before You Owe Rule to October 3, 2015.  The public has until July 7 to submit comments.

See the Stinson Leonard Street original alert published on June 19, 2015.

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 published 11 Compliance and Disclosure Interpretations related to Regulation A+ — numbered 182.01 through 182.11 under Securities Act Rules.  Highlights are:

  • Twitter is allowed for testing the waters!  Conditions include that the communication contains an active hyperlink to the required statements that otherwise satisfy Rule 255 and, where possible, the communication prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.  The “where possible” language is a nice touch, since the “prominently conveys” language seems to be required, but ignored in practice, in other staff guidance on social media.
  • An issuer is considered to have its “principal place of business” in the United States or Canada if its officers, partners, or managers primarily direct, control and coordinate the issuer’s activities from the U.S. or Canada, even if the business primarily involves managing operations that are located outside the U.S. or Canada.
  • Companies that have suspended their previous public reporting obligations under Section 15(d) of the Exchange Act in accordance with applicable rules are eligible to use Regulation A+.
  • Voluntary filers are eligible to use Regulation A+.
  • Private wholly-owned subsidiaries of Exchange Act reporting companies are eligible to use Regulation A+.
  • Regulation A+ may be used for M&A transactions, other than acquisition shelf transactions.
  • A recently created entity may provide a balance sheet as of its inception date as long as the inception date is within nine months before the date of filing or qualification and the date of filing or qualification is not more than three months after the entity reached its first annual balance sheet date.
  • State securities law registration and qualification requirements are not preempted with respect to resales of securities purchased in a Tier 2 offering (the staff had to say no once).

Filed Regulation A+ transactions continue to be somewhat mysterious when compared to my expectations.  See some examples from today, here and here, and my blog of yesterday.

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.

Perhaps the first Regulation A+ offering document has appeared on EDGAR.  According to the documents it is a Tier 2 offering for up to $50,000,000.  The offering circular states the offering commenced on June 19, 2015.  The issuer seeks to acquire one to ten  parcels of real estate in the United States, and to develop and construct on each parcel a luxurious senior housing community consisting of independent living, assisted living and/or memory care for approximately 60 to 240 residents.

Like the first conflict minerals filings, I surmise the initial Regulation A+ filings will attract public scrutiny. Pick your precedents carefully.

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 Compliance Inspections and Examinations, or OCIE, has launched a multi-year Retirement-Targeted Industry Reviews and Examinations (ReTIRE) Initiative.  OCIE is focusing on retirement-based savings in recognition of the complex and evolving set of factors that retail investors face when making such investment decisions. OCIE, through the National Examination Program (NEP), will conduct examinations of SEC-registered investment advisers and broker-dealers (collectively, registrants) under the ReTIRE Initiative that will focus on certain higher-risk areas of registrants’ sales, investment, and oversight processes, with particular emphasis on select areas where retail investors saving for retirement may be harmed.

The staff intends to use data analytics, information from prior examinations, and examiner driven due diligence to identify registrants to examine under this Initiative. As part of the examinations or the selection of examination candidates, the staff may focus on the activities of investment advisory representatives and/or broker-dealer registered representatives (collectively, representatives). The risk-based examinations conducted under the ReTIRE Initiative will focus on the services offered by the registrants to investors with retirement accounts in the following areas:

  • Reasonable basis for recommendations
  • Conflicts of interest
  • Supervision and compliance controls
  • Marketing and disclosure

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 guidance on the definition of “spouse” and “marriage” in the wake of United States v Windsor.  That case held Section 3 of the Defense of Marriage Act was unconstitutional.

As a result  the SEC will read the terms “spouse” and “marriage,” where they appear in the federal securities statutes administered by the Commission, the rules and regulations promulgated thereunder, releases, orders, and any guidance issued by the staff or the Commission, to include, respectively:

  • an individual married to a person of the same sex if the couple is lawfully married under state law, regardless of the individual’s domicile, and
  • such a marriage between individuals of the same sex.

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.

Outgoing SEC Commissioner Daniel M. Gallagher explained his dissenting votes in two SEC enforcement actions against Chief Compliance Officers.  Mr. Gallagher explained that in both instances, the Commission’s order states that the CCO was responsible for the implementation of the firms’ policies and procedures.  This, he says, illustrates a Commission trend toward strict liability for CCOs under Rule 206(4)-7.

Mr. Gallagher discussed the consequences of the SEC’s policies, including:

  • Actions like these are undoubtedly sending a troubling message that CCOs should not take ownership of their firm’s compliance policies and procedures, lest they be held accountable for conduct that, under Rule 206(4)-7, is the responsibility of the adviser itself. Or worse, that CCOs should opt for less comprehensive policies and procedures with fewer specified compliance duties and responsibilities to avoid liability when the government plays Monday morning quarterback.
  • The Commission needs to be especially cognizant of the messages it sends to the compliance community, and in particular to CCOs of investment advisers. To put it bluntly, for the vast majority of advisers, CCOs are all we have. They are not only the first line of defense, they are the only line of defense.

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.

Residential mortgage originators struggling to meet the August 1, 2015 implementation date for the new Truth-in-Lending RESPA Integrated Disclosure Rule received a reprieve yesterday.

CFPB Director Richard Cordray issued the following statement on the Know Before You Owe mortgage disclosure rule:

“The CFPB will be issuing a proposed amendment to delay the effective date of the Know Before You Owe rule until October 1, 2015. We made this decision to correct an administrative error that we just discovered in meeting the requirements under federal law, which would have delayed the effective date of the rule by two weeks. We further believe that the additional time included in the proposed effective date would better accommodate the interests of the many consumers and providers whose families will be busy with the transition to the new school year at that time.”

The public will have an opportunity to comment on this proposal and a final decision is expected shortly thereafter.

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.

Rule G-44 of the Municipal Securities Rulemaking Board, or MSRB, became effective on April 23, 2015. That Rule establishes the supervisory and compliance obligations of municipal advisors.

The MSRB has provided an educational document designed to support municipal advisors’ development of effective policies and procedures for supervision and compliance, particularly for municipal advisors that are newly subject to regulatory oversight. You can find the publication here.

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 issued an Investor Alert which says fantasy stock trading for small amounts of money can violate provisions of securities laws implemented by the Dodd-Frank Act.  I bet the Congressional drafters of these provisions who were trying to prevent another financial meltdown are surprised at this result, or at least I would hope so.

According to the SEC, the terms “swap,” “security-based swap,” and “derivative” includes any agreement, contract, or transaction whose value is based upon – or “derivative” of – the value or performance of some other financial product, event, or characteristic.  The SEC stated there are many different ways that virtual games referencing securities could involve a security-based swap.  For example, a website could charge people an entry fee to join an online fantasy stock trading competition in which they would “buy” or “sell” a virtual portfolio of securities and in which they could win a prize.  Although any actual situation would need to be analyzed based on the particular facts and circumstances involved, the SEC thinks the facts presented in this hypothetical suggest that this website may be offering security-based swaps.

The Investor Alert notes that SEC staff have recently observed websites offering many different kinds of financial instruments that may raise concerns under the federal securities laws.  SEC staff continue to investigate other websites, entities, and companies that may be taking investor money without complying with the federal securities laws.

Simultaneously with issuing the Investor Alert, the SEC announced the first settlement with a company that illegally offered complex derivatives products to retail investors.  The Dodd-Frank Act implemented two key requirements for any security-based swaps offering to a retail investor who doesn’t meet the high standard of an “eligible contract participant” defined in the law.  A registration statement must be effective for the offering, and the contracts must be sold on a national securities exchange.  These requirements are intended to make financial information and other significant details about the offering fully transparent to retail investors, and limit the transactions to platforms subject to the highest level of regulation.

The SEC asserted an SEC investigation found that Silicon Valley-based Sand Hill Exchange was offering and selling security-based swaps contracts to retail investors outside the regulatory framework of a national securities exchange and without the required registration statements in effect.  The violations were detected shortly after the offering process began, and with cooperation from the company the platform was shut down before any investor harm occurred.

According to the SEC’s order instituting a settled administrative proceeding against Sand Hill and two individuals:

  • Sand Hill began as two Silicon Valley entrepreneurs creating an online business involving the valuation of private startup companies in the region along the lines of a fantasy sports league.  But Gerrit Hall and Elaine Ou changed their business model multiple times, and earlier this year Sand Hill evolved to invite web users to use real money to buy and sell contracts referencing pre-IPO companies and their value.
  • Sand Hill sought people to fund accounts using dollars or bitcoins.  Hall and Ou did not ask users about their financial holdings or limit the offering to users with any specific amount of assets.  In fact, they wrote on the Sand Hill website: “We accept everybody regardless of accreditation status.”  Hall and Ou intended to pay users who profited from their contracts.
  • Hall and Ou understood that they were buying and selling derivatives linked to the value of private companies, and Ou falsely claimed that they were in the process of seeking regulatory approval for Sand Hill’s contracts.
  • For about seven weeks, Sand Hill offered, bought, and sold contracts through the website in violation of the Dodd-Frank provisions that limit security-based swaps transactions with people who don’t meet the definition of an eligible contract participant.  Hall and Ou exaggerated Sand Hill’s trading, operations, controls, and financial backing.
  • Sand Hill, Hall, and Ou ceased offering and selling security-based swaps following inquiries from the SEC in early April.

The SEC’s order found that Sand Hill, Hall, and Ou violated Section 5(e) of the Securities Act and Section 6(l) of the Securities Exchange Act of 1934.  Without admitting or denying the findings, Sand Hill, Hall, and Ou agreed to cease and desist from committing or causing any future violations of the securities laws.  Sand Hill agreed to pay a $20,000 penalty.

The SEC warns that its Complex Financial Instruments Unit will continue its scrutiny of the retail market for conduct that may violate the Dodd-Frank Act’s swaps provisions, including online competitions creatively monetizing what actually constitute security-based swaps transactions.

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.