US Securities Law Digest: May 2016

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MAY 2016

Dear <<First Name>>,

Please find below the May 2016 issue of the US Securities Law Digest, for the period of March, April and May 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")

Department of Justice Rolls Out FCPA Enforcement Pilot Program
On April 5, 2016, the Department of Justice (the “DOJ”) issued a press release and accompanying memorandum detailing what it is terming a one-year Foreign Corrupt Practices Act (“FCPA”) “pilot program” as part of an effort to provide more transparency and guidance to companies on the benefits of self-disclosing FCPA violations and cooperating with government investigations.
See the Barnes & Thornburg Government Enforcement Exposed blog entry here and the Paul Weiss article here.
Please see the Morgan Lewis article here.
See the Stinson Leonard Street blog entry here.
Novartis AG Settles SEC FCPA Action Involving China Subsidiaries’ Improper Gifts, Travel and Entertainment Payments to Healthcare Providers

On March 23, 2016, the U.S. Securities and Exchange Commission (the "SEC") announced a settlement with Novartis AG ("Novartis") regarding alleged violations of the books and records and internal accounting controls provisions of the FCPA, arising from activities in two of Novartis's indirect subsidiaries operating in China, Shanghai Novartis Trading Ltd ("Sandoz China") and Beijing Novartis Pharma Co, Ltd ("Novartis China," and, collectively with Sandoz China, the "Novartis Subsidiaries"). Specifically, the SEC alleged that employees of the Novartis Subsidiaries provided payments and other things of value to healthcare providers  in order to induce them to prescribe Novartis pharmaceutical products, and concealed the true nature of the payments in company records. Novartis neither admitted nor denied the SEC's findings.

See the Paul Weiss article here
Parent Company and Subsidiary Liability for FCPA Violations: Fighting the Disinformation Campaign
Akin to politics (to a smaller degree), there is a fair amount of disinformation, some call it bloviating, put out by the FCPA Paparazzi. Some of this disinformation is motivated by immature attempts to “market” legal services; other sources of disinformation carry a readily apparent bias, one way or the other, and usually are supported by self-citations to one’s own “scholarship” to prove their points.
One specific area where disinformation has been disseminated is surrounding the issue of parent-subsidiary liability for FCPA violations. The issue can carry some importance when debarment or other collateral consequences are imposed against a parent company for violations committed by a subsidiary.  This blog entry attempts to set out the facts and cite the law to understand exactly how such liability is created and when it can be imposed.
See the Volkov Law Group blog entry here.
Foreign Corrupt Practices Act enforcement refocuses on life sciences
Life sciences companies should prepare for renewed FCPA enforcement by U.S. authorities. This focus may be felt particularly acutely by mid-market and emerging companies with nascent compliance programs. Likewise, the globalization of healthcare is increasing the enforcement risks for companies outside of the pharmaceutical and medical device manufacturing space, including clinical research organizations, hospitals and providers.
Please see the Sidley Austin article here.


SEC Releases New Crowdfunding Rules: Good for Small Companies But at What Cost? - Part 2
This is the second part of a three-part article discussing the SEC’s new equity crowdfunding rules and how they will impact issuers and investors.  In part 2, the Long Law Group discussed the numerous requirements that companies must adhere to in order to be compliant with the equity crowdfunding rules under Title III of the Jumpstart our Business Startups Act (the “JOBS Act”).
See the full alert from the Long Law Group here.
SEC Crowdfunding Rules Effective May 16
SEC rules authorizing equity crowdfunding became effective May 16, 2016. Under the crowdfunding rules, an eligible company may raise up to $1 million on the internet in a 12-month period, through either a broker or a crowdfunding portal registered with the SEC.  To raise funds under the crowdfunding rules, a company must file with the SEC and provide to investors and the intermediary broker or crowdfunding portal a form disclosing the terms of the offering; the use of proceeds; information about the company’s directors, officers and principal stockholders; and information about the company’s business, including risk factors and a discussion of liquidity and results of operations.
See the full Loeb & Loeb alert here.

Regulation S-K

The SEC’s Regulation S-K Concept Release and Structured Notes
In April 2016, the SEC’s Division of Corporation Finance issued a 341-page concept release relating to the disclosure requirements of Regulation S-K.  The release is part of the Division’s initiative to review the disclosure requirements that are applicable to SEC registrants, and to consider ways to improve these requirements for the benefit of investors and issuers.  The SEC is also requesting public comment on the business and financial disclosure required by Regulation S-K.
See the Morrison & Foerster article here.
See the full Loeb & Loeb article here.
See the Hunton & Williams article here.
Please see the full Mayer Brown article here.
See the full Foley & Lardner article here.
Please see the Cooley blog entry here.
Please see the full Loeb and Loeb article here.

Market Volatility/HFT/ATS

SEC Issues Order Modifying and Extending the Pilot Period for the National Market System Plan to Address Extraordinary Market Volatility
On April 21, 2016, the SEC issued an order extending the pilot period of the National Market System Plan to Address Extraordinary Market Volatility, otherwise known as the limit-up-limit down (“LULD”) plan.  In issuing this order, the SEC also modified the LULD plan with respect to the reference price for securities that do not trade in the opening auction on the primary listing exchange. The modified plan now provides that in these circumstances a security’s reference price will be the previous trading day’s closing price or, if no closing price exists, the last reported sale on the primary listing exchange.
See the full Orrick Herrington blog entry here.

European Commission Defines High Frequency Trading for MiFID II
Last week the European Commission (the “EC”) clarified what constitutes algorithmic trading, high frequency trading and direct electronic access under the Markets in Financial Instruments Directive II. The EC made clear it takes a broad view of what constitutes algorithmic trading to include “arrangements where the system makes decisions, other than only determining the trading venue or venues on which the order should be submitted at any stage of the trading process, including at the stage of initiating, generating, routing or executing orders.”
See the Katten Muchin blog entry here.

How to lose $1,000,000,000,000 in 30 minutes: HFT, Liquidity and Volatility in 2016
The Wall Street we all knew is dead. It has been replaced by high frequency trading (“HFT”). With an estimated 50 to 60 percent of U.S. trading volume (equities and futures) being made by HFT firms, modern markets have become unrecognizable, and speed rules this strange new land. The fastest execution times are below 10 micro-seconds or 0.00001 seconds (it takes 0.4 seconds to blink your eyes), this means that:  "If supermarkets ran HFT programs, the average household could complete its shopping for a lifetime in under a second."
Please see the RPC Finance blog 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.
The New FINRA Registration Requirement for Algorithmic Traders: Implications for Broker-Dealers and Investment Advisers
On April 7, 2016, the SEC approved the Financial Industry Regulatory Authority’s (“FINRA”) proposed amendments to NASD rule 1032 (Categories of Representative Registration).  These amendments will require FINRA members to register associated persons who are primarily responsible for the design, development or significant modification of “algorithmic trading strategies” (or for the day-to-day supervision or direction of such activities) as “Securities Traders.”
Please see the full Schulte Roth article here.
FINRA to Publish ATS Block-Size Trade Data
On October 3, the Financial Industry Regulatory Authority will begin publishing monthly statistics on block-size trades occurring on alternative trading systems (“ATSs”). The statistics regarding ATS block-size trades will be aggregated across all National Market System stocks (i.e., there will be no security-by-security block data), will be for a time period of one month of trading, and will be published no earlier than one month following the end of the month for which trading was aggregated.
See the full Blog Corporate and Financial Weekly Digest entry here.

Halliburton II

Eighth Circuit Denies Class Certification in Securities Fraud Suit, Finding the “Fraud-on-the-Market” Presumption of Reliance Did Not Apply Under Halliburton II
On April 12, 2016, the U.S. Court of Appeals for the Eighth Circuit issued a significant decision denying class certification in a federal securities fraud action, holding that the defendants had rebutted the fraud-on-the-market presumption of class-wide reliance. IBEW Local 98 Pension Fund, et al. v. Best Buy Co., Inc., is the first federal appellate court decision denying class certification in a federal securities case under the Supreme Court’s Halliburton II decision and provides useful guidance for defendants seeking to defeat class certification in federal securities class actions by rebutting the fraud-on-the-market presumption.
Please see the full Morrison & Foerster article here.
See the Holland & Hart article here.

Broker-Dealer Issues

Updates: Two Losers + One Positive Note = A Bad Week For Broker-Dealers
There have been some developments this week in a few matters on which I have previously offered my views. To help you stay on the cutting edge of financial world current events as you mingle at your upcoming Cinco de Mayo fiestas, here are three updates.  Two, not surprisingly, represent wins for the regulators.  The third, however, offers a ray of hope for all my fellow doubters.
See the full Broker Dealer Law Corner blog entry here.
Broker Compensation-Disclosure Rule Approved by the SEC
It is not uncommon for registered representatives to change broker-dealers over the course of their career. In most cases, their customers will typically switch firms as well, as they follow their representative to wherever he or she may go. FINRA became concerned that when the representatives contacted the customers to discuss the switch, the customers may not be provided all the information necessary to make an informed decision on whether to transfer their assets.
See the Burr & Forman Securities Litigation blog entry here.

Litigation and Enforcement

SEC 2015 Enforcement Results and Trends
In recent years, the SEC has been vocal about its heightened policing efforts. Recently SEC Chair, Mary Jo White, has emphasized that “aggressive enforcement against wrongdoers who harm investors and threaten our financial markets remains a top priority, and we brought and will continue to bring creative and important enforcement actions across a broad range of the securities markets.”
This statement is not an empty threat. The SEC has increased the number and value of its enforcement actions in the last several years. Up from 686 and 755 enforcement actions in the fiscal years 2012 and 2013, respectively, the SEC brought 807 enforcement actions in 2015. Similarly, the SEC obtained orders of $4.19 billion in penalties and disgorgements for the fiscal year 2015, which showed an increase over 2013 and 2014 in which the SEC obtained orders totalling $3.4 billion and $4.16 billion, respectively.
See the Forum for US Securities Lawyers in London here.

Related Broker-Dealers Agree to Pay US $1 Million Penalty to FINRA for Allegedly Not Sending Certain Required Information to Private Bank Clients
JP Morgan Securities LLC and JP Morgan Clearing Corp. agreed to pay an aggregate fine of USD $1 Million to resolve charges brought by FINRA that, at various times from 2006 through 2014, they failed to provide certain information to private banking clients and engaged in other related violative activity. Specifically, FINRA alleged that from December 1, 2006 through December 10, 2012, JPMS failed to send notices to 3,266 of its Global Wealth Management customers confirming changes to their investment objectives within 30 days, as required by SEC rules.
See the full Katten Muchin update here.

Changes to NYSE Manual for Foreign Private Issuers

NYSE Manual is Amended to Require Foreign Private Issuers to Report Semi-Annually
On February 5, 2016, the New York Stock Exchange LLC ("NYSE") made a filing with the Securities and Exchange Commission ("SEC") for a proposed rule change amending the NYSE Listed Company Manual (the "Manual") to adopt a requirement that NYSE-listed foreign private issuers must, at a minimum, submit a Form 6-K to the SEC containing semiannual unaudited financial information. Previously, NYSE-listed foreign private issuers were only required to furnish annual financial reports. This is in contrast to the rule for NYSE-listed U.S. issuers which are required to file quarterly reports on Form 10-Q; however, NASDAQ has a comparable rule.
Please see the Forum for US Securities Lawyers in London article here.
Please see the Davies Ward article here.
FAST Relief from Some Securities Law Requirements
The Fixing America’s Surface Transportation Act (the “FAST Act”), which became law in December 2015, contained important federal securities law changes.
Among other changes, it further reduced the burdens on emerging growth companies, as defined in the JOBS Act (“EGCs”), in conducting initial public offerings. As to such offerings, among other things, the FAST Act:  reduces the required waiting period between the public filing of the offering with the SEC and the commencement of any "road shows," or, if no road show, the pre-effectiveness filing period, from 21 to 15 days; enables an issuer that qualified as an EGC at the commencement of the offering process to maintain that status for up to an additional year even though the issuer may subsequently during that process exceed the $1 billion maximum revenue threshold for EGCs.
See the Carlton Fields article here.
SEC Issues Interpretive Guidance on Satisfying Rule 144 Holding Periods for Common Stock Acquired in Exchange for Real Estate Investment Trust (REIT) Operating Partnership Units
In March 2016,  the SEC issued a no-action letter regarding satisfaction of the required holding period under its Rule 144 safe harbor for certain resales of “restricted securities” without registration under the Securities Act of 1933 (the “Securities Act”), in the context of sales of common stock of a public real estate investment trust (“REIT”) acquired in exchange for the same REIT’s operating partnership units.
See the Securities Law Insider Blog entry here.
Is it Debt or is it Not? Proposed Treasury Regulations Would Significantly Change Debt vs. Equity Analysis
Earlier this month, the IRS and Treasury Department proposed new Treasury regulations (the “Proposed Regulations”) under Section 385 of the Internal Revenue Code. The Proposed Regulations would significantly modify the tax analysis concerning the treatment of certain related-party instruments as debt vs. equity for U.S. federal income tax purposes.  If finalized in their current form, the Proposed Regulations would represent a dramatic change from long-standing case law and administrative practice in this area.
Please see the full Mintz Levin Cohn Ferris Glovsky and Popeo article here.
House of Representatives Passes the HALOS Act; Fair Access to Investment Research Act of 2016 is Introduced
On April 27, 2016, the House of Representatives passed the Helping Angels Lead Our Startups Act (H.R. 4498) (the “HALOS Act”), which was first introduced on April 16, 2015. The HALOS Act directs the SEC to amend Regulation D under the Securities Act to make the prohibition against general solicitation or general advertising inapplicable to events with specified sponsors (including angel investor groups not connected to broker-dealers or investment advisers) where: presentations or communications are made by or on behalf of an issuer; the advertising does not refer to any specific offering of securities by the issuer; the sponsor does not engage in certain activities (such as offering investment recommendations or advice to attendees); and no specific information regarding a securities offering is communicated (other than that the issuer is in the process of offering or planning to offer securities, including the type and amount of securities being offered).
Please see the MoFo Jumpstarter blog entry here.
SEC to Focus on Non-GAAP Financial Measures in 2016
On March 16, 2016, SEC Chair Mary Jo White cautioned an audience of industry professionals at the U.S. Chamber of Commerce that the SEC continues to focus on companies’ use of financial measures based on customized methodologies rather than in accordance with generally accepted accounting principles (“GAAP”). Although the SEC has relied on comment letters and, less frequently, enforcement actions to control aggressive adjustments in non-GAAP measures, White’s comments suggest that the SEC also may consider rulemaking on the topic to address specific areas of concern. While non-GAAP measures give companies the flexibility to present the results that best reflect their performance, their increasing popularity has prompted the SEC to ensure their use is not misleading and does not undermine disclosure effectiveness and investors’ ability to assess financial results.
See the full Skadden article here.
See the MoFo Jumpstarter blog entry here.
Chair White Addresses Pre-IPO Private Placements and Staying Private Longer
Speaking at Stanford, SEC Chair White addressed a broad range of issues affecting the technology sector, including the decision on the part of many privately held companies to defer their IPOs, to rely on exempt offerings to raise capital, and to rely on private secondary markets to create liquidity opportunities for existing stockholders.
See the MoFo Jumpstarter blog entry here.
The Call of NASDAQ: Five Reasons Why European Companies Choose NASDAQ
In recent years, Europe has made great strides towards achieving a genuine single capital market. A harmonized legislative framework has been developed, and market consolidation is ongoing.  In this regard, the merger of NYSE and Euronext and the resumption of talks between the London Stock Exchange and Deutsche Börse are noteworthy. Thus, it appears that both the legislative framework and the necessary macro-economic conditions are finally in place.  Nevertheless, in 2014, Materialise (€87 million) became the first Belgian company in 14 years to be listed on NASDAQ. Many others followed suit, including Galapagos (over €200 million) and Celyad (€88 million), to name but two. Indeed, more and more companies from the Benelux and, by extension, Europe, often in the IT and biotech sectors, are opting for a NASDAQ listing, and a number of other issuers are eager to cross the pond this year.
See the full Nauta Dutilh article here.
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