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

A group has announced plans to introduce a bill that would permit the use of advertising and general solicitation in securities offerings to Minnesota residents.  The bill refers to such offerings as “MNvest Offerings” and you can see a copy of the draft bill 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 75 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 Federal Reserve Board has issued FAQs on the Volcker Rule set forth in Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The FAQs mirror other FAQs issued by Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission.

While duplicative, we note that the FAQs issued by other agencies have been updated a number of times, including as recently as December 23, 2014 – the SEC FAQs note the day updated.

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 75 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.

On November 6, 2014, the Commodity Futures Trading Commission (CFTC) released its 2014 fiscal year Enforcement Report.  In 2014, the CFTC continued its aggressive enforcement of the commodities market, in comparison to prior years.  The CFTC recorded another record year of sanctions — $3.27 billion – against companies and individuals.  Over the previous two years, sanctions total over $5 billion which is “more than the total sanctions imposed during the previous 10 fiscal years combined.”  Press Release at 1.

Stinson Leonard Street LLP reported on several of the 2014 violations in the Dodd-Frank blog, including the Moncada “spoofing” violation (entering into a trade with no intention of executing the trade) and the Shak “banging the close” violation (rapid trading at close with the intent to set the closing price.)  We will continue to follow in 2015 CFTC Enforcement actions for wash trades (offsetting trades with no economic risks, often to receive rebates or other incentives), exceeding Commission-approved speculative limits for certain commodities, and making false statements to the CFTC and its staff.

In Berman v. Neo@ogilvy LLC, the Unites States District Court for the Southern District of New York held an employee must report information to the SEC in order to qualify for the anti-retaliation protections afforded by the Dodd-Frank Act. In so doing, the court followed the Fifth Circuit’s opinion in Asadi.

The plaintiff argued that the following paragraph from the definition of “whistleblower” means that conduct does not need to be reported to the SEC: “(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), this chapter, including section 78j–1 (m) of this title, section 1513 (e) of title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.”

The court explained that clause (iii) does not define “who” is protected, but only “what acts” are protected.

The court also cited the Fifth Circuit’s explanation: “[I]f an employee reports a securities law violation internally and to the Commission on the same day, and is then fired by the CEO, who is not yet aware of the disclosure to the Commission, the employee would be protected against retaliation under the third category of subsection (h) (and indeed, only under that category).”

A notice of appeal has already been filed so we probably haven’t heard the last on this case.

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 75 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 National Association of Manufactures, the Chamber of Commerce of the United States of America and the Business Roundtable have filed their supplemental brief in the conflict minerals rehearing.  NAM et al ask the court to  amend its opinion to clarify that the SEC’s conflict minerals rule is not a “purely factual and uncontroversial” disclosure requirement within the meaning of Zauderer.

NAM believes a compelled statement of whether products are “DRC conflict free” is not purely factual and uncontroversial for at least three reasons:

  • The compelled statement is not factual in nature, but rather constitutes an ideological judgment that companies who cannot confirm where the minerals in their products originated bear some “moral responsibility for the Congo war.”
  • The compelled statement is both non-factual and controversial because it is highly misleading, susceptible to interpretations that are not factually accurate. In many cases, issuers forced to make the compelled statement will have no connection to the region at all, but will be simply unable to identify the source of their minerals due to the length and complexity of their supply chains, making their compelled association with the armed conflict misleading and inaccurate.
  • The compelled statement is both non-factual and controversial because it is highly misleading, susceptible to interpretations that are not factually accurate. In many cases, issuers forced to make the compelled statement will have no connection to the region at all, but will be simply unable to identify the source of their minerals due to the length and complexity of their supply chains, making their compelled association with the armed conflict misleading and inaccurate.

NAM distinguishes itself from the opposing briefs filed for the rehearing by noting the briefs fail to confront the foregoing issues. According to NAM, the opposing briefs  focus on the required factual descriptions of the scope and results of due diligence investigations—which NAM’s constitutional claim never challenged—rather than on the mandate that companies then add the non-factual and highly controversial statement that those facts mean a product is not “conflict free.” According to NAM that mandate that is unconstitutional. The First Amendment bars laws that require private speakers to parrot the government’s chosen vocabulary and contested characterization of a policy issue.

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 75 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 SEC Division of Investment Management recently provided guidance on whether certain key employee trusts would qualify as family clients under the rule.

Recognizing the need for family offices to attract and retain talented investment professionals as employees, the family office rule permits family offices to include as family clients certain non-family members, including those employees whose position and experience should enable them to protect themselves (“key employees”) and certain investment entities through which those key employees may invest in opportunities connected to the family office. Included in the category of key employee investment entities that would meet the definition of a family client is “[a]ny trust of which: Each trustee or other person authorized to make decisions with respect to the trust is a key employee; and each settlor or other person who has contributed assets to the trust is a key employee or the key employee’s current and/or former spouse or spousal equivalent… .”

The SEC staff believes it is within the intent of the family office rule for a non-key employee to make administrative decisions for a trust, provided investment decisions are made by a key employee.

The SEC staff also believes it generally is consistent with the intent of the family office rule for one key employee to make investment decisions on behalf of another key employee’s trust.

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 75 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.

James McRitchie was the shareholder proponent who submitted a  proxy access proposal to Whole Foods.  The SEC granted Whole Foods’ request to exclude the proposal.  Mr. McRitchie has now requested an appeal to the full Commission of the staff’s decision to grant Whole Foods a no-action letter permitting the omission of his proposal.

According to Mr. McRitchie, the staff’s position effectively denies shareholders the right to vote on competing proposals involving similar or related topics solely because the proposals contain different terms or thresholds. The interpretation effectively limits shareholders to consideration of proposals sponsored by the board of directors and eliminates any opportunity for shareholders to present alternative criteria.

Mr. McRitchie believes there is no conflict between the two proposals.   Mr. McRitchie’s proposal is precatory, merely “ask[ing]” the board to adopt an access proposal with 3%/3 year periods. Thus, he surmises, to the extent both the management bylaw and shareholder proposal are adopted, there will be no actual conflict.

We discussed yesterday that Marathon Oil had submitted a no-action letter to exclude the New York City Pension Funds’ proxy access proposal.  Marathon’s no-action letter was based on the same analysis as Whole Foods.

Now Cabot Oil has submitted a no-action letter to the SEC seeking to exclude the New York City Pension Funds’ proxy access proposal. Of course, it’s based on the Whole Foods precedent.  Cabot Oil’s board has determined to submit a proxy access proposal to its shareholders to permit any shareholder or group of shareholders collectively owning 5% or more of Cabot’s stock for three years to nominate candidates for election to the Board.

Yesterday, I predicted that it’s likely the SEC will approve Marathon Oil’s request. Today I am less sure because of Mr. McRitchie’s appeal.

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 75 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 previously issued its 2015 policy updates which we discussed here.  ISS has now issued FAQs on the independent chair policy and the Equity Plan Scorecard.

Independent Chair Policy

In this five page FAQ, ISS seeks to answer the following questions:

  • How does the new approach differ from the previous approach?
  • What additional factors will ISS assess under the new Independent Chair policy?
  • What does ISS consider a strong lead director role?
  • How will ISS consider board tenure?
  • How does ISS consider company performance?
  • How will the scope of a proposal have an effect on ISS’ analysis?
  • What problematic governance practices could be considered as reasons to support a proposal?
  • Will ISS consider a company’s rationale for maintaining a non-independent chair?
  • Is there any action short of appointing an independent chair that would be considered a sufficient response to a majority-supported independent chair proposal?

The FAQs reveal that board tenure can play a role in the analysis.  According to ISS, board tenure may be a contributing factor in determining a vote recommendation for independent chair shareholder proposals, but will be considered in aggregate with other factors. Concurrence of director/CEO tenure, lenghty directorships, or high average director tenure, may be considered. These concerns will be considered in the context of the overall leadership structure in determining whether the proposal presents the best leadership structure at the company.

And if you get a proposal, what action can you take that would be sufficient for ISS?  ISS states full implementation would consist of separating the chair and CEO positions, with an independent director filling the role of chair. A policy that the company will adopt this structure upon the resignation of the current CEO/Chair would also be considered responsive.

ISS says partial responses will be evaluated on a case-by-case basis, depending on the disclosure of shareholder input obtained through the company’s outreach, the board’s disclosed rationale, and the facts and circumstances of the case. There are many factors that can cause investors to support such proposals, without necessarily demanding an independent chair immediately. For example, through their outreach, a company may learn that shareholders are concerned about the lack of a lead director, weaknesses in the lead director’s responsibilities, or the choice of lead director. In such a case, creating or strengthening a robust lead director position may be considered a sufficient response, assuming no other factors are involved. If the company already has a robust lead director position, then the company’s outreach to shareholders to discover the causes of the majority vote and subsequent actions to address the issue will be reviewed accordingly

Equity Plan Scorecard

The Equity Plan Scorecard includes 20 FAQs:

  • What is the basis for ISS’ new scorecard approach for evaluating equity compensation proposals?
  •  How does the new ISS’ Equity Plan Scorecard (ESPC) work?
  • How do the EPSC models differ?
  • How many EPSC points are required to receive a positive recommendation?
  •  Which types of equity compensation proposals will be evaluated under the EPSC policy?
  •  How are non-employee director plans treated when another equity plan is on ballot?
  •  How will equity plan proposals at recent IPO companies be evaluated?
  •  What factors are considered in the EPSC, and why?
  •  Are the factors binary? Are they weighted equally?
  •  Which factors, on a stand-alone basis, will continue to result in a negative recommendation on an equity plan proposal, regardless of the score from all other EPSC factors?
  •  Are all covered plans subject to the same EPSC factors and weightings?
  •  How do the SVT factors work in the EPSC model?
  •  How does the burn rate factor work in the EPSC?
  •  Will ISS continue to potentially “carve out” a company’s option overhang in certain circumstances?
  •  Will there still be a 2% de minimis burn rate?
  •  Will ISS continue to accept burn rate commitments under the new policy?
  • Is the CEO equity award proportion that is considered “performance based” explicit (i.e., as disclosed in proxy by the company) or calculated based on the Grants of Plan-Based Awards table?
  • How is plan duration calculated under the EPSC?
  •  How will the EPSC operate if multiple equity plans are on the ballot?
  •  How will plan proposals that are only seeking approval in order to qualify grants as “performance-based” for purposes of IRC Section 162(m) be treated?

The FAQs go a long way in adding some transparency to a complex new policy.

Absent overriding factors, a score of 53 or higher (out of a total 100 possible points) generally results in a positive recommendation for the proposal. EPSC factors are not equally weighted. Each factor is assigned a maximum number of potential points, which may vary by model. Some are binary, but others may generate partial points. For all models, the total maximum points that may be accrued is 100.  The FAQs include a useful chart showing factors scored and definitions, but it does not include the number of points allocated to the factors.

Proposals that only seek approval to ensure tax deductibility of awards pursuant to Section 162(m), and that do not seek additional shares for grants, will generally receive a favorable recommendation regardless of EPSC factors, provided the Board’s Compensation Committee (or other administrating committee) is 100 percent independent according to ISS standards. In the case of proposals that include additional plan amendments, such amendments will be analyzed to determine whether they are, on balance, positive or negative with respect to shareholders’ interests, and ISS will determine the appropriate evaluative framework and recommendation accordingly.

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 75 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.

As previously noted, New York City Comptroller Scott M. Stringer, on behalf of the $160 billion New York City Pension Funds, has submitted proxy access shareowner proposals to 75 companies.  The proposals request a bylaw to give shareowners who meet a threshold of owning three percent of a company for three or more years the right to list their director candidates, representing up to 25 percent of the board, on a given company’s ballot.

Marathon Oil was the recipient of one of those proposals.  It has filed this no-action letter with the SEC, asking the SEC for permission to exclude the proposal because it directly conflicts with a proposal it plans to submit.

It’s likely the SEC will approve Marathon Oil’s request.  The SEC recently gave Whole Foods similar no action relief on the same grounds.  However, Whole Foods had a nine percent for five years threshold, while Marathon has five percent for five years. (5% for five years).  The Marathon no-action letter states “The Company believes that the nature of the matters in conflict between the Proponent’s Proposal and the Company Proposal are identical to the matters in conflict in Whole Foods where no-action relief was granted to the company.”

What remains to be seen is if there is investor backlash from this technique. As Marathon Oil’s proposal is much more investor friendly than Whole Foods, perhaps the risk is minimal.

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 75 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.

On December 18, the U.S. District Court for the Southern District of New York entered a Consent Order against a foreign bank (the “Bank”), imposing a civil monetary penalty of $35 million and enjoining future violations by the Bank for engaging in more than 1,000 illegal wash sales, fictitious sales, and noncompetitive transactions over a three-year period, settling a complaint that was filed by the Commodity Futures Trading Commission in October 2012.

The Illegal Transactions

The Order states that the Bank violated Section 4c(a) of the Commodity Exchange Act (the “Act”) and CFTC Regulation 1.38(a) by knowingly entering into purchases and sales of narrow-based stock index futures (NBI) and single stock futures (SSF) contracts “with the express or implied understanding that the positions later would be offset or delivered opposite each other and which were offset or delivered by sales and purchases of NBI and SSF contracts by [the Bank’s] subsidiaries.” Specifically, Bank employees knowingly structured and executed NBI and SSF block trades on the One Chicago, LLC futures exchange that were equal and offsetting in all respects and thus achieved “wash results.” In each block transaction:

(1) the futures contracts which the Bank sold and which its subsidiaries bought were the same,
(2) the purchase and sale prices for the futures contracts were the same,
(3) the delivery month of the futures contracts was the same,
(4) the purchases and sales were executed at the same time,
(5) the size of the offsetting purchases and sales were the same, and
(6) the Bank “Corporate Group” was not exposed to risk in the futures market.

The Order further states that the Bank employees who oversaw the NBJ and SSF trading knew that: (i) the offsetting transactions would negate, and did negate, the market risk inherent in futures market transactions; and (ii) profits and losses from the futures trades that accrued to the the Bank counterparties to the trades were ultimately consolidated in the Bank’s overall profits and losses, and therefore resulted in no consolidated profits or losses to the Bank Corporate Group. Because the profits and losses that accrued to the Bank counterparties from the trades netted to zero when they were consolidated in the Bank Corporate Group’s overall profits and losses, the trades amounted to “fictitious sales” under Section 4c(a) of the Act

The court also found that, the Bank violated the OneChicago exchange’s written rules, and thus engaged in “noncompetitive transactions,” in that the Bank did not report the express or implied understanding to enter the later, offsetting segments of its NBI and SSF trades to the OneChicago exchange “without delay.”

According to the Order, senior Bank personnel designed the trading strategy in part to achieve certain tax benefits for the Bank Corporate Group.

CFTC Division of Enforcement Signals “Vigorous Enforcement” of Wash Sales Prohibition

CFTC Director of Enforcement Aitan Goelman stated about the case: “Illegal wash trades may seem innocuous. They are not. They provide misleading signals to the market and are thus prohibited, whether their purpose is to lessen a foreign tax bill or another reason. This matter clearly demonstrates that the CFTC will vigorously enforce this prohibition to protect the integrity of our markets.”