US Securities Law Digest: March 2016

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MARCH 2016

Dear <<First Name>>,

Please find below the March 2016 issue of the US Securities Law Digest, for the period of December 2015, January 2016 and February 2016. This update is intended to provide a compilation of recent legal news relevant to a capital markets practice in the London and international markets. The news pieces have been collected and summarized from various sources, and links to the original sources are provided.

We continue to welcome any feedback that you may have about the Digest.
Daniel Winterfeldt
Head of International Capital Markets
CMS Cameron McKenna LLP
Founder and Co-Chair of the Forum
Ed Bibko
Head of EMEA Capital Markets
Baker & McKenzie LLP
Co-Chair of the Forum


Foreign Corrupt Practices Act ("FCPA")

The Securities and Exchange Commission ("SEC") Targets Insufficient Anti-Corruption Compliance Programs

The SEC’s recent FCPA settlements focus on companies’ lack of sufficient anti-corruption compliance programs, which means, to the SEC, that the companies did not have adequate internal accounting controls and therefore violated the books and records provisions of the FCPA. In bringing these actions, the SEC is signaling that if it perceives that a company could have identified and prevented the conduct, then the company will be held liable. Although the SEC identifies “holes” in existing compliance programs in these actions, it appears to be applying some 20/20 hindsight to suggest that these companies truly did not have sufficient internal accounting controls. Nonetheless, companies are forewarned and should apply the lessons of these settlements in reviewing the adequacy of their own anti-corruption compliance programs.

For more information, see the Bryan Cave article here.

Preventing FCPA Violations by your International Consultants, Representatives and Distributors
U.S. companies and others subject to jurisdiction under the FCPA can be held vicariously liable for an FCPA violation committed on their behalf or at their direction by third parties. In fact, most enforcement actions brought by the U.S. Department of Justice (“DOJ”) and the SEC under the FCPA involve third parties. International consultants, sales representatives and distributors represent a huge danger area for defense contractors (and other companies) seeking to grow their international business in high-risk countries around the world. This danger has been especially great for defense companies because of the declining U.S. defense budget over the past four years and the continuing uncertainty over the impact of sequestration. This article examines several “guiding principles” which the DOJ and SEC have said “always apply” to an effective third party due diligence program. It also discusses a number of “red flags” to watch out for when engaging third parties and provide a couple of real-life examples of how these red flags have been discovered and addressed.
For the full report, please see the Baker & McKenzie article, here.
PTC Inc. Reaches $28M Settlement with DOJ and SEC to Resolve China FCPA Allegations
On February 16, 2016, two Chinese subsidiaries of Massachusetts-based software company PTC Inc. (“PTC”) entered into a non-prosecution agreement with the DOJ and will pay $14.54 million to resolve allegations that the companies violated the FCPA. PTC also reached a separate civil settlement with the SEC whereby PTC will pay disgorgement of $11.8 million and prejudgment interest of $1.7 million.
Please see the Ropes & Gray article here.
Please see the Fisher Broyles article here.
Disneyland Bingo - SEC FCPA Settlement Points to Disneyland (Again)
In planning that trip to promote your products and to qualify under the FCPA affirmative defense of reasonable and bona fide expenditures, whatever you do, DO NOT take any foreign officials to Disneyland. On February 4, 2016, the SEC announced a books and records settlement with SciClone Pharmaceuticals Inc. in which the SEC alleged (and the company did not admit or deny) that from 2007 to 2012, its Chinese subsidiary “gave money, gifts and other things of value to foreign officials, including healthcare professionals (“HCPs”) who were employed by state-owned hospitals in China, in order to obtain sales of SciClone pharmaceutical products.” One focus of the settlement related to “educational” trips given to these HCPs. This alert discusses this recent settlement and considers how a good anti-corruption compliance program addresses requests for such trips.
Please see the Bryan Cave article here.
SEC settles FCPA allegations with CEO of Chile-based airline
On February 4, 2016, the SEC announced a settlement with the CEO of Chile-based LAN Airlines S.A. and its holding company Latam Airlines Group SA, Ignacio Cueto Plaza, regarding his approval of the payment of over $1.15 million to an Argentinian consultant in connection with LAN Airline’s attempts to settle disputes over wages and work conditions with employees in Argentina.  According to the SEC, Cueto knew that a portion of these payments might be passed on to union officials in Argentina and that the actual services agreed to in the underlying consulting agreement would not be performed.  Without admitting or denying the SEC’s findings, Cueto agreed to pay a $75,000 penalty and “certify his compliance with his airline’s policies and procedures by attending anti-corruption training among other undertakings.” In its administrative cease and desist order, the SEC found that Cueto violated both the FCPA’s internal accounting controls and books and records provisions.
Please see the FCPA Score Card blog entry here.

Insider Trading Liability

Second Circuit Accepts Rajat Gupta’s Insider Trading Appeal
The Second Circuit recently decided to grant a certificate of appealability in the Rajat Gupta insider trading prosecution.  Gupta is the high-profile former McKinsey & Co. Managing Director and Goldman Sachs board member who was prosecuted and convicted for providing insider information to former Galleon Group hedge fund manager Raj Rajaratnam.
Please see the Montgomery McCracken White Collar Alert blog entry here.
Tipping for Nothing: Supreme Court to Tackle Insider Trading Split over Tippee Liability
Last week, the Supreme Court agreed to hear United States v. Salman to resolve a split over insider trading liability. Because “[a]ll disclosures of confidential corporate information are not inconsistent with the duty insiders owe to shareholders,” a tipper must receive a “personal benefit” for the tip to violate securities laws (Dirks v. SEC). But what kind of personal benefit, and can it be inferred? Circuit courts are split, and the Supreme Court is about to weigh in.
Please see the Boardroom blog entry here.


SEC Settles Unregistered Broker Enforcement Action
On February 8, 2016, the SEC settled an enforcement action against Phillip Corey Roberts and Bay Peak Capital, LLC that found that each acted as an unregistered broker in violation of Section 15(a)(1) of the Securities Exchange Act of 1934 (“Exchange Act”). Roberts founded Bay Peak in 2005 for the purposes of engaging in reverse-merger transactions with China-based operating companies and in transactions to finance those business combinations and the resulting issuers. Roberts marketed Bay Peak on a website as a “privately held investment firm” with “a proven track record of success in international investment banking and investment management.” The website included press releases of successful deals and testimonials from issuers praising Roberts and Bay Peak for their role in the companies’ corporate financing and IPOs.
Please see the Investment Management Legal Resource blog entry here.

Two Broker-Dealers to Pay $154 Million to the State of NY and the SEC to Resolve Allegations of Wrongdoing by Their Dark Pools
Barclays Capital Inc. and Credit Suisse Securities settled allegations by the SEC and the New York State Attorney General related to their operation of automated trading systems known as “dark pools.” The banks settled the allegations by agreements to pay penalties in excess of $154 million in aggregate to both regulators. The regulators claimed the banks made false statements and omissions in the marketing of their dark pools. Specifically, the regulators alleged that, from December 2011 through June 2014, Barclays, in connection with its ATS known as “Barclays LX,” told clients it used a “sophisticated surveillance framework” to prevent clients from predatory trading by high-speed traders when it did not do so consistently, and failed to run surveillance reports on a weekly basis to ensure there was no “toxic flow in [LX’s] book,” after telling clients it would conduct such oversight continuously.
Please see the Katten Muchin Bridging the Week entry here.
FINRA and SEC Identify Areas of Focus and Examination Priorities for 2016
Each year, the Financial Industry Regulatory Agency (“FINRA”) and the SEC publish their priority letters explaining areas of focus for the upcoming year. The priorities reflect practices and/or products that are perceived to present either heightened risk to investors, a risk to the integrity of the U.S. capital markets, or are otherwise areas of potential concern inherent in the securities industry.
One area that FINRA will be focusing on is incentive structures and conflicts of interest that may arise with registered representatives selling proprietary or affiliated products, or products for which the firm receives third-party payments.
Please see the Burr & Forman alert here.
A Conversation with Chair White
Chair White spoke at the Annual Securities Regulation Institute in San Diego recently and participated in a Q&A session.  This blog entry highlights certain commentary on topics of interest to its readers, including disclosure effectiveness, Rule 506(c), the accredited investor definition and late stage private placements and private secondary markets.
For the full Morrison & Foerster blog entry, please see here.
Office of Compliance Inspections and Examinations Announces 2016 Priorities
On January 11, 2016, the SEC identified selected 2016 examination priorities of the Office of Compliance Inspections and Examinations (“OCIE”). The priorities reflect certain practices and products that the OCIE perceives to present potentially heightened risk to investors and/or the integrity of the U.S. capital markets. This year’s priorities are organized around three thematic areas: (i) examining matters of importance to retail investors, including investors saving for retirement; (ii) assessing issues related to market-wide risks; and (iii) using the OCIE’s evolving ability to analyze data to identify and examine registrants that may be engaged in illegal activity.
Please see the Skadden article here.
Please see the Greenberg Traurig update here.
Rule 15a-6 and Structured Note Sales Into the United States
Rule 15a-6 under the Exchange Act sets forth the limited activities that foreign broker-dealers may undertake in the United States, and still remain outside the scope of the Exchange Act’s broker-dealer registration requirements.  The rule mainly addresses four areas of activity: (i) effecting unsolicited transactions; (ii) soliciting transactions with certain institutional investors (which are then coordinated with U.S. broker-dealers); (iii) conducting business with U.S. broker-dealers and banks acting as broker-dealers, and expatriates that are temporarily in the United States; and (iv) distributing research reports to certain institutional investors.  The first three types of activities at times involve sales of structured notes, and we describe them in this article. Non-U.S. broker-dealers carefully structure these activities around Rule 15a-6, in order to avoid becoming subject to U.S. broker-dealer regulation.
For more information, see the Morrison & Foerster article here.
SEC enforcement quarterly - 4th quarter 2015
Challenges to Administrative Proceedings May Be Resolved in 2016.  The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 expanded the SEC’s ability to use administrative proceedings to pursue enforcement actions. Since then, the SEC’s use of such proceedings has grown. So too have complaints and concerns about their inherent fairness and legality. Some of these complaints center on potential violations of equal protection, due process or the separation of powers, but the argument that garnered the most attention and traction in 2015 was the contention that administrative law judges have been appointed unconstitutionally.
For more information, please see the Sidley & Austin update here.

The FAST Act

Implications of the FAST Act to Foreign Private Issuers
On December 4, 2015, the Fixing America’s Surface Transportation Act (“FAST Act”) was enacted. Although the FAST Act is aimed principally at facilitating highway and transit projects, it includes several U.S. securities law-related provisions, primarily amendments to the Jumpstart Our Business Startups Act (“JOBS Act”). A summary of the FAST Act’s key U.S. securities law-related changes relevant to foreign private issuers is set forth below. Some provisions take effect immediately or in the near future, while others require SEC rulemaking and, in the case of Regulation S-K, a long-term project commitment by the SEC stretching over the next two years.
Please see the Forum for US Securities Lawyers in London article here.
Please see the Carlton Fields article on the Fast Act here.
Please see the Cahill Gordon & Reindel client update on the Fast Act here.

Issuer Representations and Frequent Issuers
For most structured note programs, whether offered on a registered basis or a non-registered basis, the issuer makes a variety of representations about its business, finances and the offering documents. These are typically set forth in a program agreement or similar agreement with the distributors. These representations may be quite lengthy and detailed, or in the case of many seasoned issuers, may be more limited.  The program agreement is executed at the commencement of the program, while the actual offerings may take place over a period of years. Accordingly, how do the underwriters receive the benefit of these representations in subsequent offerings?
To find out more, please see the Morrison & Foerster article here.

Is There a Standard Form of Rule 144A Representation Letter?
There are many forms of Rule 144A representation letters used in the market.  For a discussion of variations and additions to the basic form, please see the Morrison & Foerster article here.

FINRA Proposes to Delay the Implementation Date of its New Debt Research Rule
On February 16, 2016, FINRA proposed delaying the implementation date of its new debt research rule (Rule 2422) until April 22, 2016. Currently, Rule 2422 is set to take effect on February 22, 2016.
The proposed FINRA rule change is available here.
Please see the full MoFo Jumpstarter blog entry here.
Copyright © 2016 Forum for US Securities Lawyers in London, All rights reserved.

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