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

Andrew Ceresney, Director, SEC Division of Enforcement delivered remarks at a conference where he addressed the SEC’s cooperation program.  Much of the focus was on the benefits of self-reporting and cooperation in high-stakes FCPA matters.  But he went on to say:

“But self-reporting is advisable not just in the FCPA context.  Firms need to be giving additional consideration to it in other contexts as well.  This includes self-reporting by registered firms of misconduct by associated persons, for example, and misconduct by issuer employees.  Where Enforcement staff uncovers such misconduct ourselves, a natural question for us to ask is why the firm didn’t tell us about it.  Was it because the firm didn’t know of the misconduct?  If so, what does that say about the firm’s supervisory systems, compliance program, and other controls?  On the other hand, if the firm did know about it, and the misconduct was significant, why didn’t the firm report it to us?  There will be significant consequences in that scenario from the failure to self-report.”

The last sentence seems to be an ominous warning, but not much in the form of guidance to issuers of what matters are expected to be self-reported.

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 CFPB filed a complaint and proposed consent order in federal court against PayPal, Inc.   The CFPB alleges PayPal illegally signed up consumers for its online credit product, PayPal Credit, formerly known as Bill Me Later. The CFPB alleges that PayPal deceptively advertised promotional benefits that it failed to honor, signed consumers up for credit without their permission, made them use PayPal Credit instead of their preferred payment method, and then mishandled billing disputes. Under the proposed order, PayPal would pay $15 million in consumer redress and a $10 million penalty, and it would be required to improve its disclosures and procedures.

According to the CFPB, since 2008, PayPal has offered PayPal Credit to consumers across the country making purchases from thousands of online merchants, including eBay. The CFPB alleges that many consumers who were attempting to enroll in a regular PayPal account, or make an online purchase, were signed up for the credit product without realizing it. The CFPB also believes the company also failed to post payments properly, lost payment checks, and mishandled billing disputes that consumers had with merchants or the company.

According to the CFPB, PayPal’s actions were abusive acts or practices in violation of the Consumer Financial Protection Act of 2010, 12 U.S.C. § 5531(d)(2)(B).

PayPal did not admit or deny the CFPB’s allegations.

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.

 

Those toiling away for the second required conflict minerals filings are sure to wonder whether the law is having any positive impact.  Politico has an interesting article about a trip to the DRC in an attempt to answer that question.  The author was told “not a single mine was tagging its output so that buyers could identify the mine at which it had originated.” “Tagging is very expensive, . . . We don’t have the partners to pay for it.” Of course, it’s only one person’s perspective.

Elm Sustainability Partners LLC also has a good checklist to use for final preparation of your conflict minerals filing.

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.

ISS has issued a report on compensation trends incorporating data so far from this year’s proxy filings.  According to ISS:

  • The most significant trend continuing in 2015 has been the move to performance-based pay, which has mostly been in the form of long-term equity awards. Related to that ongoing shift has been the growth in the use of Total Shareholder Return, or TSR, as a performance metric, and the use of relative awards, where the achievement of the award is based on performance relative to a group of companies, usually a peer group but sometimes a broader index like the S&P 500.
  • TSR remains the top performance metric used for long-term performance awards, with 58 percent of companies using TSR, up from 51 percent last year.
  • The shift to performance based pay has led to increased complexity and perhaps less transparency.
  • The main issue for all parties will be less visibility as to the potential value of the award. There will be more uncertainty, and greater potential for conflicting designs across multiple awards. In short, an increase in “unintended consequences,” where complexity in award design leads to a pay and performance disconnect, is a distinct possibility.

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.

 

During the week of May 10, 2015, 8-Ks were filed that disclosed 11 shareholder sponsored proxy access proposals passed and one failed.  All required three percent ownership for three years and all were opposed by the company (except for Republic Services, Inc. where the board remained neutral).  Details are as follows (percentages are based on the total of votes cast for and against):

Alexion Pharmaceuticals, Inc.  – 55% voted against (failed)

Anadarko Petroleum Corporation – 59% voted for (passed)

Anthem, Inc. – 67% voted for (passed)

Avon Products, Inc. – 76% voted for (passed)

CF Industries Holdings, Inc. – 57% voted for (passed)

Cimarex Energy Co. – 56% voted for (passed)

ConocoPhillips – 54% voted for (passed)

DTE Energy Company – 62% voted for (passed)

Duke Energy Corporation – 63% voted for (passed)

Hess Corporation – 51% voted for (passed)

Murphy Oil – 53% voted for (passed)

Republic Services, Inc. – 90% voted for (passed)

The shareholder sponsored proxy access proposal at Comstock Resources, Inc. was withdrawn prior to the meeting and no vote was taken.

Since April 19, 21 shareholder proxy access proposals have passed and ten have failed.

The trend is illustrated by the following table:

Week Proposals Passed Proposals Failed
April 19

2

4
April 26

2

2
May 3

6

3
May 10

11

1

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.

We previously reported on a U.S. Supreme Court case which interpreted the evidence destruction provisions of Sarbanes-Oxley.  A plurality of the Court held in Yates that destruction of fish was not destruction of a tangible object and therefore did not violate the Sarbanes-Oxley Act.  In that case the Supreme Court concluded that the reference to “tangible objects” in the Sarbanes-Oxley Act should be read to cover only objects one can use to record or preserve information, not all objects in the physical world.

At that time I wondered what the next case would look like . . .

In United States v. Carroll, the owner of a 1996 Saab was shot to death during a drug transaction in Humboldt County, California. In the indictment, the government alleged that after the murder was committed, the accused drove the 1996 Saab to a remote area and set it on fire. The accused were charged with knowing destruction of a “tangible object” -i.e. the Saab – with the intent to obstruct a federal investigation, in violation of a provision of the Sarbanes-Oxley Act, as codified in Title 18, United States Code, Section 1519.

The United States District Court for the Northern District of California held it was “common sense” that a Saab is not a tangible object.  The District Court noted the Yates plurality reasoned that a “tangible object” must be an object that is capable of being falsified or bearing a false entry.  This District Court found this reasoning applies with equal force to an automobile. In short, it would be just as unnatural to describe a torched sedan as falsified.

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.

 

Marc Wyatt, Acting Director, Office of Compliance Inspections and Examinations, of the SEC, recently gave his views on serious deficiencies found in examinations of private equity advisors at a conference attended by private equity officials.

Mr. Wyatt highlighted the following:

  • By far the most common deficiency noted in examinations relate to expenses and expense allocation. One of the most common and often cited practices in this area involves shifting expenses away from parallel funds created for insiders, friends, family, and preferred investors to the main co-mingled, flagship vehicles. Frequently, operational expenses, broken deal expenses, and even the formation expenses of the side-by-side vehicle are borne by investors in the main fund.
  • The SEC has detected several instances where investors in a fund were not aware that another investor negotiated priority co-investment rights. According to Mr. Wyatt, disclosing this information is important because co-investment opportunities have a very real and tangible economic value but also can be a source of various conflicts of interest. Therefore, allocating co-investment opportunities in a manner that is contrary to what has been promised to investors can be a material conflict and can result in violations of federal securities laws and regulations.
  • The SEC has undertaken a thematic review of private equity real estate advisers based on the observation that real estate managers, especially those executing opportunistic and value-add strategies, tended to be much more vertically integrated than traditional private equity managers. After buying a property, it is not unusual for a vertically integrated owner-operator investment adviser to provide property management, construction management, and leasing services for additional fees. The SEC has observed that some managers also charge back the cost of their employees who provide asset management services and their in-house attorneys. While the SEC found that sometimes these ancillary services are indeed not disclosed, a more frequent observation was that investors have allowed the manager to charge these additional fees based on the understanding that the fees would be at or below a market rate. Unfortunately, the SEC rarely saw that the vertically integrated manager was able to substantiate claims that such fees are “at market or lower.”

On the positive side, Mr. Wyatt noted that examinations disclose that some advisers are changing fee and expense practices. For example, the practice of accelerating monitoring fees when a portfolio company is sold or taken public appears to be falling out of favor and the use of evergreen provisions in monitoring agreements, which often enable advisers to take large monitoring agreement termination payments, appears to be declining. Additionally, the collection of revenues from portfolio companies’ use of group purchasing organizations is being better disclosed and contained.

The SEC has also been encouraged to learn that many advisers are increasingly retaining consultants to evaluate their fee practices and have been revising their practices where issues have been found.

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 Delaware Court of Chancery recently dismissed a derivative action in Ironworkers District Council of Philadelphia & Vicinity Retirement & Pension Plan v. Andreotti et al.  One of the many claims alleged was a Caremark claim.

Background

The dispute centered on the attempt by DuPont and its wholly owned subsidiary and seed unit Pioneer Hi-Bred International, Inc. to develop a product to compete with Monsanto Company’s  genetically modified seed–a trait known as “Roundup Ready”–which allows beneficial crops to thrive under application of Monsanto’s well-known herbicide, Roundup. Under a 2002 license agreement, DuPont and Pioneer had access to Monsanto’s Roundup Ready technology for corn and soybeans. If DuPont could develop its own competitor to Roundup Ready, it would avoid significant license fees under the agreement. In the mid-2000s, DuPont began development of that competitive product, which it called “Optimum GAT” or “GAT.”

DuPont found, however, a commercially viable GAT difficult to produce. As field trials of GAT continued to be disappointing, DuPont began development of a product that combined, or “stacked,” GAT technology with Monsanto’s Roundup Ready, which was referred to as the  GAT/RR Stack. During the development of this product, some DuPont and Monsanto employees believed that commercialization of the stacked product would violate the licensing agreement; nonetheless, development continued. Meanwhile, DuPont continued to tout GAT as a potentially-viable and profitable product. When negotiations between the parties involving the GAT/RR Stack and other licensing issues broke down, Monsanto sued DuPont in federal district court in the Eastern District of Missouri alleging, essentially, breach of the licensing agreement and patent infringement claims. DuPont defended on the ground that the agreement either permitted stacking or should be reformed, and counterclaimed alleging antitrust claims against Monsanto.

The resulting litigation proved disastrous to DuPont. The district court found that DuPont’s defense–that it had the ability to stack under the 2002 licensing agreement–was not only incorrect but that it was based on fabrication and worked a fraud on the court. As sanctions, it struck DuPont’s reformation defense and counterclaims, and awarded attorneys’ fees. Monsanto’s patent infringement claims were then tried to a jury. Despite the fact that DuPont had never sold any of the stacked product, the jury found damages due to Monsanto in the amount of $1.2 billion. DuPont decided it would appeal both the sanctions order and the damages award.

During the pendency of post-trial proceedings, the parties reached a settlement. Among other things, Monsanto agreed to forgo the jury verdict, DuPont released its antitrust claims and DuPont agreed to pay Monsanto $1.75 billion over ten years for access to technology.

Investigation of the Committee

Following the litigation, the plaintiff and others made demands on DuPont’s board of directors to investigate and consider suit against several officers and Board members of DuPont and Pioneer in connection with the development of GAT, the decision to stack, and the conduct of the Monsanto lawsuit, alleging breaches of fiduciary duties. The Board formed a special committee, comprised of directors who had joined the Board after the relevant timeframe at issue, and the Committee conducted a detailed investigation of the subjects of the demands, as set forth in a 179-page report, and determined that a suit against officers and directors was not in the best interest of DuPont. The DuPont Board adopted the recommendation of the Committee, and rejected the stockholders’ demands

The report described in detail DuPont’s processes and controls.  The report noted:

  • the Board is comprised of all independent directors
  • the Board had five standing committees with oversight of various areas
  • the role of the Ethics and Compliance Committee and Risk Oversight Committee
  • the Company had an internal audit function and
  • the Company’s litigation management procedures and disclosure procedures.

The report also discussed DuPont’s regular evaluation of its policies and procedures and improvements made from time to time.

With respect to the litigation, the Committee found that “management made fully informed decisions, in good faith, that they reasonably believed to be in the best interests of the Company.”  According to the Committee, the litigation was “well-managed, with thoughtful, reasonable strategic decisions made throughout the litigation.” That the District Court disagreed with the arguments presented did not lead the Committee to conclude that the various setbacks in litigation were the result of gross negligence, bad faith, or other breaches of fiduciary duty.

Committee’s Evaluation of the Caremark Claim

The Committee considered allegations that the Board failed in its duty of loyalty by failing to oversee operations and risk, either by utterly failing to institute and maintain adequate internal controls, or by consciously failing to monitor or oversee existing controls. The Caremark claim was acknowledged by the Committee to be “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.”  Noting further that a plaintiff must show that the directors knew they were not discharging their fiduciary obligations, the Committee found no basis for an oversight claim.

In considering the first prong of Caremark, which requires a board to implement “information and reporting systems that are reasonably designed to provide to senior management and to the Board itself, timely, accurate information to allow each, within its scope, to reach informed judgments,” the Committee outlined the “five standing committees tasked with overseeing the Company’s operations and evaluating various elements of risk,” as well as the “various structural and reporting mechanisms in place to ensure that issues are raised to senior management and then ultimately to the Board or its Committees.”  The Committee also noted that the Company maintains processes to oversee the various reporting and oversight programs, including active oversight by the Board.  In considering these factors, as well as other specific policies and procedures outlined in the report, the Committee concluded that,  “given the breadth of internal controls maintained at the Company and overseen by the Board,” there was “no basis to suggest that the directors ‘utter[ly] fail[ed] to attempt to assure a reasonable information and reporting system exists,’ as would be required to ‘establish the lack of good faith that is a necessary condition to liability’ pursuant to the first prong of a Caremark claim.”

Turning, then, to the second prong of a Caremark claim, which would require a showing that the Board “consciously failed to monitor or oversee” the Company’s operations, the Committee considered that there were no red flags which would make the Board aware that the “internal controls were inadequate, that these inadequacies would result in illegal activity, and that the board chose to do nothing about problems it allegedly knew existed.” In reaching this conclusion, the Committee found that the “Board reasonably relied on proper business processes . . . that were in place to ensure oversight” of the development of GAT, the GAT/RR Stack, and the Monsanto litigation, and that “[n]o red flags were ever raised to the Board to make it question the adequacy of these processes.”  Accordingly, the Committee was unable to find conscious disregard of oversight duties with respect to the development of GAT, stacking, or the Monsanto litigation

Court’s Analysis

To survive a motion to dismiss under Rule 23.1 where demand has been made and refused, a plaintiff must allege particularized facts that raise a reasonable doubt that:

  • the board’s decision to deny the demand was consistent with its duty of care to act on an informed basis, that is, was not grossly negligent; or
  • the board acted in good faith, consistent with its duty of loyalty.

Otherwise, the decision of the board is entitled to deference as a valid exercise of its business judgment.

The Court noted that the Committee found that the Company’s internal control systems–which, whether or not operating as designed, certainly existed—not sufficiently deficient so as to satisfy the first prong of Caremark, and that there were no “red flags” that would enable a finding that the Board consciously failed to monitor those controls, as required by the second prong of Caremark. The Court noted that  the plaintiff merely disagreed with the conclusions of the Committee, which is not enough to state an actionable claim.

The plaintiff recognized that convincing the Court that a disinterested decision to forgo a Caremark claim implicates bad faith is a tough row to hoe.  According to the Court, the plaintiff cleverly (but unpersuasively) attempted to depict the breach of duty regarding internal controls as a coin flip with both sides heads: either the Board had established no information or reporting system, making the directors liable under Caremark, or employees with fiduciary duties must have failed to comply with that system, making them liable for breaches of those duties. The Court declined to adopt the plaintiff’s analysis, stating that demonstrating that a business plan or system has failed is not the same as demonstrating an actionable breach of fiduciary duty. According to the Court,  the Committee informed itself about the Caremark claims and did not find an actionable breach of duty worth pursuing; nothing about the Board’s acceptance of this recommendation implied bad faith.

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.

During the week of May 3, 2015, 8-Ks were filed that disclosed six shareholder sponsored proxy access proposals passed and three failed.  All required three percent ownership for three years and all were opposed by the company (except Citigroup which supported the proposal).  Details are as follows (percentages are based on the total of votes cast for and against):

Citigroup Inc.  – 87% voted for (passed)

CBL & Associates Properties, Inc. – 69% voted for (passed)

CONSOL Energy Inc. – 53% voted against (failed)

eBay Inc.  – 59% voted for (passed)

HCP, Inc. – 55% voted for (passed)

NVR, Inc. – 58% voted against (failed)

Occidental Petroleum Corporation – 62% voted for (passed)

Peabody Energy Corporation – 51% voted against (failed)

St. Jude Medical, Inc. – 73% voted for (passed)

Since April 19, ten shareholder proxy access proposals have passed and nine have failed.

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 CFTC has proposed several important changes that would alleviate the reporting and recordkeeping obligations of end users with respect to trade options (or provide by rule certain relief currently only available under no-action letter) and alter certain other aspects of the existing trade option rule in Section 32.3 of the CFTC’s regulations. Trade options are commodity options for which: (1) the offeror and offeree are both producers, processors or commercial users of, or merchants handling, the subject commodity and are entering into the transaction solely for purposes related to their business (alternatively, this prong can be satisfied with respect to the offeror if the offeror qualifies as an “eligible contract participant” under Section 1a(18) of the Commodity Exchange Act); and (2) the parties intend to physically settle the transaction if the option is exercised.

Reporting and Recordkeeping Requirements

The CFTC proposes to make the following changes to its trade option reporting and recordkeeping requirements:

(1) Eliminate the Part 45 swap data reporting requirement for Non-Swap Dealer/Major Swap Participants (such non-SD/MSPs referred to herein as “end users”) with respect to trade options (this requirement was already generally inapplicable to end users under CFTC No-Action Letter No. 13-08);
(2) Eliminate the annual Form TO filing requirement with respect to unreported trade options;
(3) Clarify that end users are required to comply with only the swap data recordkeeping requirements under Section 45.2 of the CFTC’s regulations with respect to trade options (which requires market participants to maintain full, complete, and systematic records, together with all pertinent data and memoranda, on subject transactions and to open their records to inspection upon the Commission’s request), as opposed to all Part 45 recordkeeping requirements (which would require identifying each transaction by a unique swap identifier (“USI”) and unique product identifier (“UPI”) and each counterparty by a legal entity identifier (“LEI”)—also requirements from which end users already had relief under No-Action Letter No. 13-08);

Position Limits

In addition, the proposed changes would eliminate reference to application of the now-vacated Part 151 position limits rule, although the CFTC has effectively left open whether its currently pending position limits rulemaking might extend to trade options.

Affirmative Obligations

To preserve some level of visibility into end users’ trade option activity, the proposal would require those end users that enter into trade options (whether reported or unreported) with aggregate notional value in excess of $1 billion in any calendar year to provide notice to the CFTC within 30 days after exceeding such threshold—or, alternatively, in advance if they expect to exceed such threshold during the year. In addition, the rule would require end users engaging in any trade options with a SD/MSP counterparty to obtain a LEI (if they do not already have one) and to provide that LEI to such counterparty (this was also a condition of the relief under No-Action Letter No. 13-08).

Insight into Market Practices Regarding Trade Option Reporting

The CFTC’s rulemaking release also offered some insight into market participants’ existing practices with respect to trade option reporting. In 2014, approximately 330 Non-SD/MSPs submitted Form TO filings to the Commission, approximately 200 of which indicated delivering or receiving less than $10 million worth of physical commodities in connection with exercising unreported trade options in 2013. Joint comments from several energy associations (APPA, NRECA, EEI, EPSA, and LPPC) stated that one member spent more than $100,000 in information technology costs to implement a mechanism to track exercises of nonfinancial commodity options. Southern Power Company estimated that Form TO reporting required two of its full-time employees to spend 30 minutes to two hours per contract to complete Form TO, at an average cost of $200 per contract and a total annual cost of about $12,000. Roundtable comments from ConocoPhillips included an estimate that the marginal cost of Form TO reporting was “on the order of” one full-time employee and possibly higher for smaller entities with less in the way of compliance systems and procedures.

Comment Period

Comments on the proposed rule must be submitted to the CFTC on or before June 8, 2015. Commissioners Bowen and Giancarlo issued concurring statements with the rulemaking release.