Please find below the April 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.
The SEC Advisory Committee recommends no immediate changes to accredited investor income and net worth thresholds At its meeting on March 4, 2015, the SEC’s Advisory Committee on Small and Emerging Companies (the “Committee”) approved its rather limited recommendations to update the definition of “accredited investor” as it applies to natural persons as found in Rule 501 under the US Securities Act of 1933, as amended (the “US Securities Act”). Focusing on the importance of smaller public companies and emerging companies as drivers of the US economy and the reliance by these companies on raising capital from “accredited investors” utilising Rule 506 of Regulation D under the US Securities Act, the Committee chose a “do no harm” approach so as not to shrink the existing pool of accredited investors (and the pool of capital they bring to the table). In recommending that the existing income and net worth thresholds remain unchanged, the Committee stated that it was unaware of “any substantial evidence that the current definition of accredited investor has contributed to the ability of fraudsters to commit fraud or has resulted in greater exposure for potential victims” and thus saw no benefit in raising either threshold or excluding “retirement assets” from the net worth calculation.
See the Akin Gump Strauss Hauer & Feld article here.
The US Securities and Exchange Commission (the "SEC") shortens minimum period for debt tenders
The SEC recently made it much easier for issuers to conduct tender offers for debt securities. On January 23, 2015, the SEC issued a no-action letter that shortens the minimum offer period for tender offers for any debt security, regardless of credit rating, to a uniform period of five business days and allows issuers to offer other debt securities (in addition to cash) as consideration for the tendered debt securities.
Regulation A+: final rules offer important capital raising alternatives
March 25, 2015, the SEC voted unanimously to adopt final rules to implement the rule-making mandate of Title IV of the Jumpstart Our Business Startups Act (“JOBS Act”) by adopting amendments to Regulation A. In December 2013, the SEC had released a proposed rule that essentially retained the current framework of Regulation A and expanded it for larger exempt offerings. The proposed rules were generally well-received. The final rules address a number of issues raised by commenters, while retaining substantially the same approach outlined in the proposed rule.
The SEC proposes to narrow the Rule 15b9-1 exemption from FINRA membership
On March 25, 2015, the SEC proposed amendments to Rule 15b9-1 of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Rule 15b9-1 currently exempts certain brokers or dealers from membership in a registered national securities association. The SEC is proposing to eliminate the de minimis allowance under Rule 15b9-1(c) in its entirety. Under the proposal, broker-dealers that derive any income from securities transactions effected otherwise than on a national securities exchange of which it is a member will, unless another exemption is available, no longer be exempt from the requirements of Section 15(b)(8) of the Exchange Act and, accordingly, will be required to register with the Financial Industry Regulatory Authority.
On March 17, 2015, the SEC issued three new frequently asked questions (FAQs) relating to Regulation SHO. The current guidance under FAQ 2.5 provides that where a seller is net long 1,000 shares and simultaneously enters multiple orders to sell 1,000 shares owned, only one such order would constitute a long sale. Any additional orders must be marked “short.” In new FAQ 2.5(A), the SEC clarified that the guidance in FAQ 2.5 is not limited to scenarios of simultaneous order entry. Specifically, the SEC states that FAQ 2.5 also applies to marking multiple orders that are entered in rapid succession. In addition, in new FAQ 2.5(B), the SEC reiterates that unexecuted orders to sell a security are presumed to decrease a seller’s net long position. To the extent that a member believes the guidance on marketing multiple orders in FAQ 2.5 does not apply to sale orders that have no realistic possibility of being executed, the SEC reminds such member to be prepared to demonstrate, upon request, that applicable sale orders are never or rarely executed.
The SEC issues guidance on waivers of disqualification under Regulation A and Rules 505 and 506 of Regulation D
On March 13, 2015, the SEC issued guidance regarding disqualification waivers under Regulation A and Rules 505 and 506 of Regulation D of the US Securities Act, the SEC’s principal rule-based private-placement exemptions.
New reporting requirements on the horizon for US financial services providers doing business with non-US persons
Following closely on the heels of the reinstated reporting requirements for inbound and outbound direct investment involving US entities, the US Department of Commerce’s Bureau of Economic Analysis (“BEA”) has announced plans to require US financial service providers to respond to the Form BE-180 Benchmark Survey of Financial Services Transactions Between US Financial Services Providers and foreign persons. As proposed, responses to Form BE-180 will be required by October 1, 2015, from all US financial service providers that, during their 2014 fiscal year, had financial transactions totaling $3 million or more on a consolidated basis directly with non-US persons (including individuals, corporations and other entities). Failure to file a report can lead to civil and criminal penalties under the International Investment and Trade in Services Survey Act and related statutes.
See the Skadden Arps Slate Meagher & Flom article here.
The SEC charges corporate insiders in going-privates for failing to update Schedule 13Ds
The SEC announced on March 13, 2015, that it had charged eight officers, directors and major shareholders for failing to file amendments to their Schedule 13Ds to disclose steps to take their respective companies private. The respondents agreed to settle the proceedings, without admitting or denying the SEC’s allegations, by paying financial penalties.
The US Supreme Court's Omnicare decision clarifies when an opinion stated in a registration statement can give rise to Section 11 liability
On March 24, 2015, the US Supreme Court issued its opinion in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, a highly anticipated case concerning the circumstances under which allegedly false or misleading statements of opinion can give rise to liability under Section 11 of the US Securities Act. Generally, Section 11 prohibits issuers from making false or misleading statements or omissions of material fact in a registration statement in connection with a public securities offering. The Court’s Omnicare decision clarifies that an issuer’s statements of opinion cannot form the basis for Section 11 liability solely by virtue of the fact that they later prove to be incorrect. Such statements of opinion may only give rise to Section 11 liability if: (1) the issuer did not actually hold the opinion in question at the time of the registration statement, or (2) the statement of opinion was rendered misleading by a failure to disclose material facts about the basis for that opinion.
The SEC has recently contacted a number of companies seeking every confidentiality agreement, nondisclosure agreement, settlement agreement, and severance agreement the companies entered into with employees since the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) went into effect. According to a February 25, 2015 Wall Street Journal article, the SEC is also seeking documents related to corporate training on confidentiality, as well as “all documents that refer or relate to whistleblowing” and a list of terminated employees. The SEC wants to use these documents as evidence of retaliation against whistleblowers. In the SEC’s view, these agreements can represent a form of systemic retaliation if they are overly broad and serve to silence would-be whistleblowers.
The SEC approval of new FINRA public arbitrator rule imposes new limits on the pool of potential public arbitrators
The SEC recently approved FINRA’s proposed new rule changes to the definitions of public arbitrator (FINRA Rules 12100(u) and 13100(u)) and non-public arbitrator (FINRA Rules 12100(p) and 13100(p)), after receiving over 300 comment letters in addition to two letters from FINRA responding to the comment letters. The new rule significantly limits the pool of potential public arbitrators by, chiefly, permanently disqualifying any person who worked in the financial industry from being a public arbitrator. FINRA believes that this and other changes to the definitions of public and non-public arbitrators address both investor and industry concerns about perceived bias and arbitrator neutrality.
FINRA published a Report on Cybersecurity Practices (the “Report”) that is useful reading for anyone in a complex business that hopes to keep its electronic data secure. This Report is based on FINRA examinations conducted last year at a cross-section of member firms, including large investment banks, clearing firms, online brokerages, high-frequency traders, and independent dealers. FINRA had four objectives: (1) to understand the types of threats firms face; (2) to increase understanding of firms’ risk tolerance, exposure, and major areas of vulnerabilities in their IT systems; (3) to understand firms’ approaches to managing these threats; and (4) to share observations and findings with member firms. As the Report repeatedly recognizes, there is no one-size-fits-all approach to cybersecurity. But the Report does lay out a road map for what brokerages should be doing to protect themselves, no matter where they are on the food chain.
See the FINRA Report on Cybersecurity Practices here.
See the Brooks Pierce McLendon Humphrey & Leonard article here.
FINRA proposes registration of broker-dealers' algorithmic trading programs' principal developers and supervisors FINRA has proposed to require the registration of personnel at member firms who are principally responsible for the design, development or material amendment of algorithmic trading strategies, or who are responsible for supervising or directing such activity. Such persons would have to register as securities traders, a new category of registration—albeit similar in concept to the current equity trader registration category.
FINRA announces $1.5 million sanction against broker-dealer and bars president for fraud On March 12, 2015, FINRA announced an order requiring a New York-based broker-dealer to pay over $1 million in restitution and $500,000 in fines for alleged fraud in sales of a private placement offering. According to the FINRA order, from January 2011 to October 2011, the firm defrauded its customers by claiming – without performing sufficient due diligence – they would benefit from investing in the pre-initial public offering shares of a California-based automaker, but failed to disclose the criminal and adverse regulatory background of a key individual connected to the automaker. In addition to the $500,000 fine against the broker-dealer, its president has been barred from the securities industry.
FINRA Hearing Panel issues decision with potential significant impact on broker-dealers that permit registered representatives to have their own investment adviser
A FINRA Hearing Panel issued a decision on March 9, 2015 that will have a potential significant impact on any broker-dealer that allows its registered representatives to have their own investment adviser. In light of this decision, broker-dealers should assess and evaluate the adequacy of their supervisory systems and procedures relating to supervision of a representative’s outside advisory activities.
UBS fined $500,000 by FINRA for not reporting salespersons' tax liens and judgments UBS Financial Services, Inc. agreed to pay a fine of $500,000 to FINRA related to its alleged failure from about May 2010 to May 2013 to update its individual registrants’ personal information to disclose unsatisfied tax liens and judgments where it had been provided garnishment notices regarding such individuals. This updating was required by FINRA’s rules.
Foreign Corrupt Practices Act 2014 Year End Update Over the course of 2014, the Department of Justice (“DOJ”) and the SEC have continued their aggressive enforcement of the FCPA. This has led to critical developments in the law, important corporate settlements, and a heightened awareness of FCPA investigations and prosecutions. With massive fines and disgorgements levied at companies in the past year, companies conducting business across the globe must contend with the real stakes of an FCPA investigation.
The SEC recommends "localized" FCPA controls for Foreign Subsidiaries The internal controls fostered by the SEC to sfeguard against corrupt payments advocate that foreign subsidiaries implement policies, procedures and training translated in the local foreign language.
The SEC's settlement with Goodyear: a cautionary tale In a settlement announced on February 24, 2015, the SEC found Goodyear to be in violation of the FCPA in connection with bribes paid by two foreign subsidiaries, one of which came into Goodyear’s ownership through acquisition. Simply put, Goodyear had an anticorruption program in place, the bribes came to its attention arguably due to the operation of that program, and Goodyear promptly undertook comprehensive remedial actions and voluntarily disclosed the improprieties to the government. Yet, because Goodyear had allegedly failed to perform adequate due diligence during the acquisition of one of the subsidiaries and to adequately create, or ensure adherence to, FCPA-compliant programs at either subsidiary, it agreed to disgorge over $16 million for “failing to prevent or detect” the bribes.
See the SEC consent order In the Matter of The Goodyear Tire & Rubber Company here.
FCPA officials point to dollars-and-cents benefits to self-disclosure and cooperation High ranking officials in the Department of Justice and the SEC said on March 12, 2015 that companies that fail to self-report overseas bribes will face tougher FCPA fines.
See the Porter Wright Morris & Arthur article here.
The SEC sets sights on commercial bribery using FCPA accounting provisions Recent SEC enforcement actions and related commentary from SEC leadership demonstrate the SEC’s intent to penalize companies paying commercial bribes for violations of the accounting provisions of the FCPA. This trend belies a commonly held misconception that the FCPA pertains only to bribes and accounting improprieties involving foreign public officials. It also demonstrates the SEC’s increasingly expansive enforcement of the FCPA. In light of this development, companies should take steps to ensure that their compliance programs and internal controls adequately address commercial bribery and prioritize accuracy in bookkeeping.
Corruption costs: the FCPA This is the third article in a series in which Bryan Cave explain and discuss key anti-corruption risks and issues when investing or operating in "red flag" jurisdictions and sectors. The series also discusses key anti-corruption laws and what businesses can do to minimize the risks of falling foul of those laws.
ESMA publishes additional Consultation Paper on MiFID II/MiFIR implementation On February 18, 2015, the European Securities and Markets Authority (“ESMA”) published a new consultation paper (“CP”) on the implementation of the transparency provisions of the revised EU Market in Financial Instruments Directive (“MiFID II”) and the EU Market in Financial Instruments Regulation (“MiFIR”). ESMA had previously published another set of MiFID II/MiFIR consultation papers on December 19, 2014. However, the transparency-related sections of these papers did not address certain non-equity instruments. The CP is designed to fill this gap by providing ESMA’s transparency proposals for foreign exchange derivatives, credit derivatives, contracts for differences and “other” derivatives.
The European Commission expresses its intention to endorse with amendments the draft regulatory technical standards on the clearing obligation for interest rate swaps pursuant to Article 5 of Regulation (EU) no. 648/2012 The European Commission sent a letter to ESMA in which it set out its intention to endorse with amendments the technical standards published by ESMA. The amendments that the European Commission has proposed in its letter relate to postponing the start date of the frontloading requirements and providing intragroup transactions with third country counterparties with a transitional period.
SEC Speak 2015: enforcement trends and priorities for the year ahead With Chair Mary Jo White in her second year at the helm, the SEC showcased its efforts, improvements, and enforcement successes at this year’s SEC Speaks Conference. The SEC highlighted that it brought a record number of cases—755 enforcement actions—in fiscal year 2014, and obtained $4.1 billion in monetary relief. The SEC continues to emphasize its increased use of data analytics in both its regulatory efforts and enforcement investigations. As usual, the SEC, and the Division of Enforcement in particular, used the conference to present their case that the SEC is firing on all cylinders.
SEC's Risk Alert offers observations on cybersecurity The SEC released two publications addressing cybersecurity: a Risk Alert based on observations from the Office of Compliance Inspections and Examinations (“OCIE”) of registered broker-dealers and advisers and an accompanying Investor Bulletin. The Risk Alert detailed how the examined firms handled a host of cybersecurity-related issues from policies, procedures, and oversight processes to whether they had been victims of a cyberattack. The Investor Bulletin offered suggestions on how to safeguard online investment accounts (such as picking a “strong” password and always using caution on public networks and wireless connections).