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

The CFTC plans to revive the use of administrative courts to bring enforcement actions for violations of the Commodity Exchange Act and CFTC regulations, according to recent remarks by Aitan Goelman, Director of the Division of Enforcement (reported here by Reuters). This marks a shift from the agency’s practice in recent years of prosecuting such cases almost exclusively before federal courts. The Commodity Exchange Act grants authority to the CFTC to prosecute cases before either forum and to seek civil penalties of up to $140,000 before administrative courts and $100,000 before federal courts for general violations (or triple the monetary gain of the violator in either forum; or up to $1,000,000 for manipulation or attempted manipulation).

The increased use of administrative enforcement proceedings would mimic the recent practice of the SEC, which gained expanded authority to use administrative proceedings under the Dodd-Frank Act. The SEC’s use of such proceedings has been challenged by a handful of defendants, with one district court earlier this month upholding the constitutionality of such use. The SEC enforcement chief remarked alongside Goelman that the use of administrative courts resolves matters more expeditiously and offers the benefit of judges who are better equipped to tackle complex legal matters. As for Mr. Goelman, the CFTC Director of Enforcement added that the use of administrative courts would lower enforcement costs for his cash-strapped agency, although he expects similar venue challenges from defendants.

As noted here, two issuers have omitted shareholder proposals from preliminary proxy statements where no-action letters from the SEC regarding omission of the proposals have been withdrawn.  The blog suggests, within its rights, that shareholders of these companies bring the omissions to the attention of these two companies to help them avoid inadvertent further embarrassment and help ensure shareowner rights are protected.

This area has become controversial ever since the SEC stated it has ceased issuing no-action letters on this topic pending review of SEC action on the proper basis for omitting these proposals.  The surprise action by the SEC left issuers who had received these proposals in a lurch, choosing from a menu of unpalatable options.  Issuers are not required to receive no action relief prior to excluding a shareholder proposal if they believe the propsal is not required, although the proponent has perhaps the option to commence litigation to cause inclusion.  And issuers who omit such proposals must answer to shareholders as well.

And of course these are preliminary proxy statements.  The issuers could include the proposals in their final proxy statements.  One issuer filed a preliminary proxy statement because of inclusion of a management proposal that is shareholder  friendly to allow stockholders to call a special meeting of stockholders.  The other issuer filed a preliminary proxy to include a shareholder friendly agenda item  to declassify its board of directors.  So these companies appear to be anything but shareholder unfriendly to me given these proposals.  Must all shareholder friendly agenda items occur in a single year, especially given the upheaval caused by the SEC, and as issuers explore mechanisms best for their sharehlders?

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.

 

The CFPB is finalizing a policy to allow consumers to voice publicly their complaints about consumer financial products and services. When consumers submit a complaint to the CFPB, they now have the option to share their account of what happened in the CFPB’s public-facing Consumer Complaint Database. The CFPB is also publishing a Request for Information seeking public input on ways to highlight positive consumer experiences, such as by receiving consumer compliments.

The CFPB already accepts complaints on many consumer financial products, including credit cards, mortgages, bank accounts, private student loans, vehicle and other consumer loans, credit reporting, money transfers, debt collection, and payday loans.

The CFPB believes allowing consumers to share their narrative publicly will greatly enhance the utility of its database. The narratives will provide context to complaints, spotlight specific trends, and help consumers make informed decisions. According to the CFPB, the narratives may encourage companies to improve the overall quality of their products and services, and more vigorously compete over good customer service.

Companies will be given the option to select from a set list of structured response options as a public-facing response to address the consumer complaints. Companies will be under no obligation to offer a public response, and they have 180 days after the consumer complaint is routed to them to select the optional, public response. Companies will have the option to address all consumer complaints submitted after this policy announcement, not just those where a consumer consented to publication.

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.

In remarks at a conference attended by M&A professionals, SEC Chair White gave her views on fee shifting bylaws.  Currently the SEC staff is focused on making sure the disclosures in company filings about its fee shifting provision — and the implications of such provisions — are clear. If a company chooses to adopt a fee-shifting provision, it should clearly communicate to shareholders the specific features of the provisions and its effect on shareholders’ ability to bring a claim. Shareholders should be fully informed of a company’s efforts to affect their ability to seek redress so that the issue can be considered in voting and investment decisions.

But Chair White noted the day may come when the SEC changes its disclosure only focus.  Chair White is concerned about any provision in the bylaws of a company that could inappropriately stifle shareholders’ ability to seek redress under the federal securities laws. If the Commission comes to believe that these provisions improperly hinder shareholders’ exercise of their rights, it may need to weigh in more directly in this discussion, as it did with indemnification under the Securities Act.

As far as indemnification under the Securities Act goes, the SEC takes the position that corporate indemnification of directors for violation of federal securities laws is against public policy and unenforceable, and it requires disclosure about this position in registration statements filed under the Securities Act of 1933.  Also, Commission settlement orders have included bars against seeking indemnification.

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.

The CFPB announced it is seeking public comment on how the credit card market is functioning and the impact of credit card protections on consumers and issuers. This public inquiry will focus on issues including credit card terms, the use of consumer disclosures, credit card debt collection practices, and rewards programs, among others.

In 2009, Congress passed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, with the goal of bringing fairness and transparency to the credit card market. The CARD Act requires that the CFPB conduct a review of the consumer credit market every two years. As part of that review, the Bureau is seeking public comment from consumers, credit card issuers, industry analysts, consumer advocates, and others on the state of the credit card market.

Some of the specific areas that the Bureau is requesting information on include:

  • The terms of credit card agreements and practices of credit card issuers
  • Unfair or deceptive acts or practices in the credit card market
  • Debt collection practices within the credit card industry
  • Consumer understanding of rewards products

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.

Larry Stryker petitioned the Second Circuit for review of an order of the SEC that denied his claim for a whistleblower award. He sought the award under Section 21F of the Dodd-Frank Act  based on information he supplied to the SEC that it relied upon in a successful enforcement action. The SEC held that, because the information was submitted before enactment of Dodd-Frank, petitioner did not qualify for an award under Section 21F(b)(1) of the Securities Exchange Act of 1934 and related Rules 21F-(3)(a) and 21F-4(c). Concluding that the SEC’s interpretation of Section 21F was within its authority and consistent with the legislation, the Second Circuit denied Mr. Stryker’s petition.

Section 21F(f) of the Securities Exchange Act authorized the Second Circuit to review the SEC’s denial of a whistleblower award.  In denying the petition the Second Circuit gave deference to the SEC’s interpretation under the Chevron test.

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.

In an effort to quell internal (including outspoken SEC Commissioners) and external criticism, the SEC has published its policy on bad actor waivers. The policy looks fair on its face.  Application is another thing.

Initially I think it will lead to lots of those uncomfortable conversations between client and counsel that say “on the one hand these facts are good” and “on the other hand these facts are not.”

Should the SEC continue to publish waiver decisions and enough information to ascertain  the reasons therefore, eventually the securities bar will figure it out.

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.

It’s well known that Federal securities laws require beneficial owners to promptly file an amendment when there is a material change in the facts previously reported by them on Schedule 13D, commonly referred to as a “beneficial ownership report.”  It sounds easy to comply with, but the 13Ds can be on file for years, the obligations can be forgotten and facts can change rapidly in certain circumstances.

The SEC has now sent a strong reminder to the world that it takes 13D updating obligations seriously.  The SEC charged eight officers, directors, or major shareholders for failing to update their stock ownership disclosures to reflect material changes, including steps to take the companies private.  Each of the respondents, without admitting or denying the SEC’s allegations, agreed to settle the proceedings by paying a financial penalty.

The SEC’s orders find that the respondents took steps to advance undisclosed plans to effect going private transactions.  Some determined the form of the transaction to take the company private, obtained waivers from preferred shareholders, and assisted with shareholder vote projections, while others informed company management of their intention to privatize the company and formed a consortium of shareholders to participate in the going private transaction.  As described in the SEC orders, each respective respondent took a series of significant steps that, when viewed together, resulted in a material change from the disclosures that each had previously made in their Schedule 13D filings.

According to the SEC’s orders, some of the respondents also failed to timely report their ownership of securities in the company that was the subject of a going private transaction.  In addition, six respondents only disclosed their transactions in company securities months or years after the fact, not within two businesses days, as required for these disclosures by insiders.

Left unanswered is the question of “what can I do before I have to amend my 13D and inform the world?”

These don’t look like broken windows to me, although some will claim they are,  but it’s probably more of the SEC’s robo-cop program.  How hard is it to identify the universe of going private transactions, who had 13D’s on file and who didn’t amend them.  Expect the SEC to continue this approach to pick off more low hanging fruit and send messages in the future.

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.

In a recent article titled JOBS Act State of the Union (well worth a read in full), Samuel Guzik makes the case that the SEC has given up on creating rules to implement Title III crowdfunding under the JOBS Act. Title III of the JOBS Act established a framework for investments in private offerings via “crowdfunding portals” by average investors (no “accredited investor” threshyold).  Representative Patrick McHenry of North Carolina introduced crowdfunding legislation in 2011 that served as the basis for Title III, but by the time the proposal emerged from the messy legislative process, it was burdened with requirements relating to the involvement of FINRA intermediaries, company disclosure, financial statements, and low fundraising thresholds that soured many entrepreneurs on the utility of the proposal. The SEC proposed rules to implement Title III in October 2013 which included additional requirements that would be burdensome for small and emerging companies (such as the requirement that companies seeking to raise more than $500,000 must have two years of audited financials). As of last December, the SEC’s rule-making agenda called for final rules on equity crowdfunding by October 2015, with Mary Jo White indicating that the SEC had no “drop dead date” in mind for publishing final rules. Mr. Guznik argues that, in light of changes in the balance of power in Congress and certain clues from the agency, the SEC may abandon rules to implement Title III altogether and wait for new crowdfunding legislation that may be likely this spring, perhaps again from Representative McHenry.   Mr. Guznik also presents evidence that there is growing momentum for legislation to create “venture exchanges” that would act as “a secondary market a notch below the current national markets, but with right sized corporate governance requirements and trading rules better suited to the less liquid, smaller cap companies.” If he’s right, the summer of 2015 may see new legislation on both equity crowdfunding and venture exchanges.

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.

In Liang v. Berger, the plaintiff in a derivative action alleged the officers and directors of ARAID Pharmaceuticals failed to disclose material negative information about a drug under development in a timely manner.  Among other things, plaintiff claimed that a proxy statement which asked the company’s shareholders to approve executive compensation on an advisory basis failed to disclose:

  • the FDA’s concerns about the drug’s safety;
  • the agency’s demand that ARIAD continue to monitor and document safety data from a trial;
  • ARIAD’s resulting monitoring efforts; and
  • changes that ARIAD had made to the enrollment criteria for the trial.

The plaintiff further contended that disclosure “of the truth would have ended the shareholders’ support for compensation of the senior executives and reelection of directors.”

The court noted that to state a claim a proxy statement is false and misleading under Section 14(a) of the Exchange Act, a plaintiff must allege that:

  • a proxy statement contained a material misrepresentation or omission;
  •  which caused the plaintiff injury; and
  • that the proxy solicitation itself, rather than the particular defect in the solicitation materials, was an essential link in the accomplishment of the transaction.

The court held the complaint did not sufficiently allege a causal link between the proxy statement and ARIAD’s alleged injury.  Insofar as plaintiff claims that ARIAD was injured by the payment of compensation to officers, the claim fails to allege that the underlying corporate transaction (between ARIAD and the compensated executives) required shareholder approval. The proxy statement told the shareholders that their votes were sought on “an advisory basis” with respect to executive compensation but told them that “[b]ecause your vote is advisory, it will not be binding on our Compensation Committee or our Board of Directors.”

The amended complaint also failed insofar as plaintiff claimed that ARIAD was injured because a full disclosure in the proxy statement “would have ended the shareholders’ support for . . . reelection of directors.”  Although shareholders’ votes were binding on this issue, the reelection of directors does “not create any cognizable harm [for purposes of the Exchange Act] because the shareholders’ votes did not authorize the transactions that caused the losses.”

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.