US Securities Law Digest: December 2015

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Dear <<First Name>>,

Please find below the December 2015 issue of the US Securities Law Digest. 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


Regulatory and Compliance

Regulation Crowdfunding - SEC adopts Final Rules for U.S. companies

On October 30, 2015, the Securities and Exchange Commission (“SEC”) adopted final rules under Title III of the Jumpstart Our Business Startups Act (“JOBS Act”) permitting individuals to invest in U.S. companies via securities-based crowdfunding pursuant to Section 4(a)(6) of the Securities Act of 1933, as amended (“Securities Act”) (“Regulation Crowdfunding”). The final rules and forms are effective 180 days after they are published in the Federal Register (i.e., approximately May 2016). The forms enabling internet funding portals to register with the SEC will be effective January 29, 2016. Regulation Crowdfunding is not available to non-U.S. companies.

See the SEC Final Rules on Crowdfunding here.

See the SEC Announcement here.

See the Forum’s U.S. Securities Update here.

See the Stinson Leonard Street articles here and here.

See the Venable article here.

See the Fried Frank article here.

See the Pillsbury Winthrop Shaw Pittman article here.

See the DLA Piper article here.

See the Stinson Leonard Street article regarding “SEC Qualifies Largest Crowdfunding Offering Ever; Offered on StartEngine” here.
SEC proposes amendments to Rule 147 and Rule 504

On October 30, 2015, in connection with the adoption of the final rules to implement securities based crowdfunding as provided under the JOBS Act, the SEC also proposed amendments to Rule 147 and Rule 504 under the Securities Act. Rule 147 sets forth the safe harbor exemption from the registration requirements of the Securities Act for intrastate securities offerings. The proposed amendments to Rule 147 are designed to modernize the rule and facilitate capital formation and, in part, are to assist issuers seeking to raise capital under state intrastate crowdfunding rules. The SEC also proposed amendments to Rule 504 under Regulation D of the Securities Act, the private placement exemption safe harbor, to increase the amount of securities that may be sold in any 12-month period to $5 million from its current $1 million and to add certain “bad actor” disqualification provisions.

See the SEC Proposed Rule Amendments to Facilitate Intrastate and Regional Securities Offerings here.

See the Cozen O’Connor article here.

See the Katten Muchin Rosenman article here.

See the Morrison & Foerster article here.
SEC staff issues new guidance on general solicitation

On August 6, 2015, the SEC issued important guidance concerning general solicitation and general advertising, including the use of online platforms by an issuer conducting a private placement. This guidance is contained in a no-action letter and in SEC Compliance and Disclosure Interpretations (“CDIs”). The guidance includes discussion of investor networks, such as angel groups, and demo days, and the potential impact of offerings involving these types of networks or events.

See the Citizen VC No-Action Letter Request here.

See the Citizen VC No-Action Letter here.

See the Forum’s U.S. Securities Update here.

See the McGuireWoods article here.

See the Cleary Gottlieb memorandum here.


SEC announces enforcement results for fiscal year 2015

The SEC announced its enforcement results for fiscal year 2015. The agency filed 807 enforcement actions totaling $4.2 billion in disgorged penalties in fiscal year 2015, as compared with 755 and $4.16 billion in fiscal year 2014. The SEC’s first-of-their-kind cases included actions against violations arising from a dark pool’s disclosure of order types to its subscribers and conflicts of interest. The SEC enforcement also addressed issues relating to cherry picking, valuation and whistleblower issues.

See the SEC Announcement here.

See the Greenberg Traurig article here.

See the Carrington Coleman article here.

See the Winston & Strawn article here.
Settlements in brief: notable settlements in September and October

Highlighted in this article are notable settlements that were reached in the United States in September and October. The SEC announced four settlements with companies who were accused of violating the “books and records” provisions of the FCPA. The SEC also settled with Grant Thornton for allegedly violating auditor independence rules. JP Morgan and five other corporations entered into settlements with the SEC in connection with alleged violations of short-selling provisions. Investment advisor R.T. Jones settled with the SEC after having been accused of violating rules on the protection of customer information and records. The Department of Justice settled with Boeing after allegations of false declarations in a project for the U.S. Air Force. Last but not least, a remarkable settlement: French bank Crédit Agricole settled with several supervisory authorities for a total amount of USD 787.3 million after multiple violations of U.S. sanctions law had surfaced.

See the De Brauw Blackstone Westbroek article here.

SEC sues individual for false tweets to manipulate prices of two stocks

The SEC filed an enforcement action in a federal court in California against James Craig, a Scottish national, for using tweets to manipulate the price of two stocks. According to the SEC, on two consecutive days in January 2013, Mr. Craig disseminated “phony tweets” regarding two publicly traded companies—Audience, Inc., a technology company, and Sarepta Therapeutics, Inc., a biopharmaceutical company—from accounts designed to appear like bona fide securities research firms. Both tweets falsely publicized detrimental news about pending regulatory issues involving the companies. In both cases, the volume of the stock increased and the price fell, and Mr. Craig tried to profit from the price decline, claimed the SEC. However, said the SEC, “[h]e waited too long each time to trade the stock” and only profited US $100 from his activity. However, “Craig’s conduct … caused harm to U.S. markets and investors by triggering significant stock price drops which undermine investor confidence,” claimed the SEC. The SEC seeks to bar Mr. Craig from future violations, and to assess a penalty and disgorgement.

See the Katten Muchin Rosenmna article here.

Recent SEC enforcement action highlights cybersecurity risks

On September 22, 2015, the SEC announced that R. T. Jones Capital Equities Management, an investment adviser, agreed to settle charges that it failed to establish required cybersecurity policies and procedures before its web server was attacked by a hacker (traced to China). The breach resulted in the compromise of personally identifiable information of 100,000 persons, including thousands of the firm’s clients.

See the SEC Announcement here.

See the Seyfarth Shaw article here.
SEC charges Blackstone with disclosure failures

On October 7, 2015, the SEC announced that three private equity fund advisers within The Blackstone Group (“Blackstone”) agreed to pay approximately $39 million to settle charges regarding their failure to inform investors about benefits that the advisers received from accelerated monitoring fees and legal fee discounts. Nearly $29 million of the $39 million will be distributed to fund investors impacted by the disclosure failures.

See the Shearman & Sterling article here.

Recent Cases

SEC Loses Bid for Rehearing on Constitutionality of Conflict Minerals Rule

On November 9, 2015, the U.S. Court of Appeals for the D.C. Circuit issued a per curiam order denying the petitions of the SEC and Amnesty International for a rehearing en banc in Natl Assoc. of Manufacturers v. SEC, the conflict minerals case. No member of the court even requested a vote. The order leaves standing the decision of the three-judge panel, decided in August 2015. In that case, the panel, by a vote of two-to-one, reaffirmed its earlier decision, concluding that the requirement in the conflict minerals rule to disclose whether companies’ products were “not found to be DRC conflict free” amounted to “compelled speech” in violation of companies’ First Amendment rights.
See the Cooley article here.
See the Bryan Cave article here.

Final SEC administrative decision required before appeal to court

In a September 29, 2015 decision, the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) affirmed the dismissal of a lawsuit brought by investment advisors who asked the D.C. Circuit to stop the SEC proceedings and to allow for judicial resolution of the enforcement action against them. The D.C. Circuit refused to intervene at this level of the dispute, finding that the investment advisors could not bypass administrative review when the security laws provide "an exclusive avenue for judicial review," which includes appeal from a final SEC decision.

See the Holland and Knight article here.

Insider Trading and Whistleblowing

New SEC report sheds light on key trends in whistleblower activity and anti-retaliation law

The SEC recently released its 2015 annual report cataloguing the year’s most important trends in whistleblower activity and anti-retaliation law. The report provides a useful look at how the Dodd-Frank Wall Street Reform and Consumer Protection Act’s (“Dodd-Frank”) substantial reforms to whistleblower law are playing out across the country. In 2015, the SEC paid more than $37 million to reward whistleblowers and has experienced a 30% increase in whistleblower tips compared to 2012. The report also documents two of the SEC’s chief enforcement priorities going forward. First, providing equal protection to whistleblowers who first issue their complaints internally, as well as to whistleblowers who bring their complaints directly to the SEC. Second, the report makes clear that the SEC will punish employers who require employees to sign confidentiality agreements that may serve to muzzle would-be whistleblowers.

See the Orrick, Herrington & Sutcliffe article here.

See the SEC report here.

See the Choate Hall & Stewart article here.

See the Stinson Leonard Street article here.

See the DLA Piper article here.

Second Circuit creates split regarding definition of whistleblower under Dodd-Frank’s anti-retaliation provisions

On September 10, 2015, the Second Circuit, in Berman v. Neo@Ogilvy LLC, split with the Fifth Circuit regarding the reach of the Dodd-Frank whistleblower anti-retaliation provisions. The crux of the debate arises from the interplay between the statutory definition of “whistleblower” and the conduct protected in Dodd-Frank’s anti-retaliation provisions. Specifically, Dodd-Frank clearly defines “whistleblower” as “any individual who provides . . . information relating to a violation of the securities law to the [SEC].” The anti-retaliation provisions of Dodd-Frank, however, prohibit retaliation against “whistleblowers” who participate in the following conduct: (i) who raise complaints relating to lawful acts done by a whistleblower in providing information to the SEC; (ii) who participate or assist in any investigation of the SEC based upon such information; and (iii) who make disclosures required or protected under the Sarbanes-Oxley Act of 2002 and any other law, rule or regulation subject to the jurisdiction of the SEC.

See Berman v. Neo@Ogilvy LLC here.
See the Seyfarth Shaw article here.

SEC pays whistleblower bounty award exceeding $325,000

On November 4, 2015, the SEC announced that it would pay a former investment firm employee a whistleblower bounty award totaling more than $325,000. Notably, the SEC’s Order indicated that the award was decreased “because after becoming aware of the wrongdoing, [the whistleblower] did nothing to report the information and did nothing to try to stop the violations from continuing to occur, which under the facts and circumstances, we find unreasonable.”

See the SEC Order here.

See the SEC Announcement here.

See the Proskauer Rose article here.

See the Osler Hoskin & Harcourt article here.

Supreme Court narrows the scope of insider trading laws involving tipping

A person who has been ‘tipped off’ and trades in securities with confidential information may escape insider trading liability in the United States. This follows a recent decision by the Supreme Court which confirmed the ruling last December by the Second Circuit Court of Appeals in New York (U.S. v. Newman, 773 F.3d 438 – Court of Appeals, 2nd Circuit 2014 (New York)) that is seen as narrowing the scope of insider trading laws involving tipping.

See the HopgoodGanim article here.

Financial Industry Regulatory Authority ("FINRA") and Broker-Dealer Topics

FINRA’s new debt and equity research rules herald wide-ranging changes for firms

Following approval by the SEC this summer, FINRA’s new rules governing equity and debt research are being implemented over the course of the coming months. The new consolidated rule governing equity research, FINRA Rule 2241 (New Equity Research Rule), represents modifications to a scheme that has been in place since 2003 following the Global Research Settlement and the Sarbanes-Oxley Act of 2002 directive to the SEC to oversee the implementation of rules designed to manage and mitigate conflicts of interest between research and investment banking. The new rule governing debt research, FINRA Rule 2242 (New Debt Research Rule), represents the first time FINRA rules will regulate communications regarding debt securities as research.

See the Sidley Austin article here.
SEC approves FINRA proposal requiring certain trace-eligible securities to be reported as soon as practicable

The SEC approved amended rules proposed by FINRA to require quicker reporting of so-called “TRACE”-eligible securities by firms required to report transactions. Under TRACE—FINRA’s trade reporting and compliance engine—broker-dealers must report transactions in certain fixed income securities within certain time frames (typically 15 minutes). Under the new FINRA rules approved by the SEC, firms must report transactions in TRACE-eligible securities subject to public disclosure “as soon as practicable.” FINRA’s new rules are effective November 30, 2015.

See the Katten Muchin Rosenman article here.

US Foreign Corrupt Practices Act ("FCPA")

Foreign Corrupt Practices Act 2015 Update

Despite a decline in enforcement actions by the SEC and the Department of Justice, the first half of 2015 has continued to highlight the relevance and ever-evolving effects of the FCPA. Notable in the first half of 2015 was the SEC’s willingness to look beyond the foreign official bribery provision of the FCPA, as it instituted actions for inadequate internal controls and violations of the FCPA’s books and records provisions against companies including Polycom, BHP Billiton, and Goodyear Tire & Rubber Company.

See the Baker & Hostetler update here.
Lessons learned from SEC v. Jackson & Ruehlen, the SEC’s Noble FCPA litigation

In the summer of 2014, on the eve of trial, the SEC settled FCPA charges against two individuals related to Noble Corporation, a global oil and gas drilling services company. SEC v. Jackson and Ruehlen, No. 12-cv-563 (S.D. Tex.). The case settled on very favorable terms for the individuals, but had it gone to trial, it would have been the first SEC case in many years to reach that far. Even with the settlement, the two years of litigation between the SEC and the Noble executives provided a window into the government’s trial strategy on a number of issues, as well as areas where judicial caselaw on the FCPA continues to evolve.

See the Buckley Sandler article here.

International Developments

The new Office of Financial Sanctions Implementation: a “UK-OFAC”?

On 8 July 2015, the UK Government further announced its plan to establish a new office to take on the role of sanctions enforcement, the Office of Financial Sanctions Implementation (“OFSI”). While OFSI is set to be established already by April 2016, much remains to be seen. The UK has pledged to increase enforcement actions and penalties in the area of financial sanctions, also by taking into account lessons from the US Treasury Office of Foreign Assets Control (“OFAC”). Against the backdrop of the current UK enforcement of financial sanctions, this note considers the new role OFSI is set to fullfil to possibly become a “UK-OFAC”.

See the Fried Frank article here.
AIFMD Passport

On October 13, 2015, the European Securities and Markets Authority (“ESMA”) published a statement by Steven Maijoor, ESMA Chair, to the Economic and Monetary Affairs Committee (“ECON”) of the European Parliament on ESMA's ongoing work on the extension of the passport under the Alternative Investment Fund Managers Directive (“AIFMD”) to non-EU alternative investment fund managers (“AIFMs”). ESMA will be working to complete its assessment of Hong Kong, Singapore and USA with a view to reaching a definitive conclusion on whether to extend the passport, begin to assess a second group of non-EU jurisdictions: Australia, Canada, Japan, the Cayman Islands, the Isle of Man and Bermuda and establish the framework which will be required if the passport is extended to one or more non-EU countries. This will involve preparing for ESMA's role in the functioning of the passporting system and strengthening supervisory co-operation.

See the Reed Smith update here.
See the A&L Goodbody article here.
See the Pillsbury Winthrop Shaw Pittman article here.
FCA announces introduction of rules on Whistleblowing

In October, the UK Financial Conduct Authority (“FCA”) published its new rules on whistleblowing. The new rules are part of a wider suit of new rules aimed at enhancing individual accountability in the wake of the banking industry scandals that have cost the banks billions in fines over the past few years.

See the DAC Beachcroft article here.

See the Eversheds article here.

See the Holman Fenwick Willan article here.
Capital Markets Union - Part 2 and Part 3: EU Covered Bond Framework

As part of the European Commission’s plan to build a Capital Markets Union (“CMU”), the European Commission has launched a consultation on the possibility of establishing a pan-European covered bond framework. Two policy options for advancing a reform agenda towards integration are outlined in the European Commission’s consultation document (Consultation Paper) on covered bonds. One option contemplates the voluntary convergence of national covered bond laws, and the other, the introduction of a dedicated EU legislative framework regulating covered bonds as a product.

See the Ropes & Gray Part 2 article here.
See the Ropes & Gray Part 3 article here.

Comprehensive Canadian crowdfunding rules published in final form
On November 5, 2015 securities regulatory authorities in Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia published in final form the long awaited crowdfunding regime which includes a crowdfunding prospectus exemption and a registration framework for funding portals. The Crowdfunding Regime is set to come into force on January 25, 2016.
See the Fasken Martineau DuMoulin article here.

Noteworthy News and Publications

House passes act facilitating resales of restricted securities
On October 6, 2015, the U.S. House of Representatives passed H.R. 1839, the Reforming Access for Investments in Startup Enterprises Act of 2015, or RAISE Act. The RAISE Act would amend the Securities Act to add a new Section 4(a)(7) codifying the “Section 4(a)(1½)” legal framework for resales of restricted securities by persons other than the issuer. The Section 4(a)(1½) resale exemption—based on case law, and not formally established by any written SEC rule or regulation—has been interpreted to permit, in certain circumstances, the resale by persons other than the issuer of restricted securities in a private placement.
See the Paul, Weiss, Rifkind, Wharton & Garrison article here.
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