Last year, the Forum for US Securities Lawyers in London started to produce a monthly US Securities Law Digest. These monthly updates are 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 from various sources and links to the original sources are provided.
We continue to welcome any feedback that you may have about the monthly Digest.
Bad boy disqualifiers are coming soon: time to upgrade diligence procedures nowOver two years ago, the Dodd-Frank Act instructed the SEC to impose “bad boy disqualification” on Rule 506 private placements. Proposed rules were published, but we are still waiting for the final rules, which were due over a year ago. Despite the long wait, the SEC has placed the final rules on its 2013 rulemaking agenda. Further, the JOBS Act, enacted last year, instructed the SEC to amend Rule 506 to lift the ban on general solicitation. This rulemaking is also overdue but anxiously awaited. The then-Director of the SEC’s Division of Corporation Finance stated recently, as have several other commentators, that the SEC needs to impose the bad boy disqualification before it lifts the ban on general solicitation.
FINRA Rule 4530 – recent revisions remind broker-dealers of the importance of the new requirement to report internal findings of violative conduct
The Financial Regulatory Authority (“FINRA”) recently amended its Rule 4530 (Reporting Requirements) to make required reporting by member firms of certain regulatory and disciplinary events less burdensome. Those relatively minor changes are discussed in this Morrison & Foerster article. This article also reminds firms of the most significant change to FINRA’s reporting requirements, made two years ago, when Rule 4530 was first enacted: the obligation of member firms to report internal conclusions of violations.
Proposed amendment regarding trading halts is approved
On February 8th, the Securities and Exchange Commission (the “SEC”) approved FINRA's proposed amendment to Rule 6440(a)(1) to permit FINRA to initiate a trading and quotation halt as a result of a Foreign Regulatory Halt when the foreign halt is imposed for news pending.
Key FINRA regulatory focus of 2013: retail sales of complex products, according to annual letter
In January, FINRA published its annual letter identifying its regulatory and examination priorities for 2013, a document intended to “represent [FINRA’s] current assessment of the key investor protection and market integrity issues on which [FINRA] will focus in the coming year.”
Although numerous such issues were identified by FINRA in its letter, including issues relating to the sale of private placement securities, anti-money laundering compliance, insider trading, margin lending practices, and algorithmic trading, a substantial focus for 2013 relates to suitability concerns and the sale of complex products to retail investors.
FINRA to firms: file communications to existing customers
As FINRA’s new rules governing communications with the public went into effect on February 4, 2013, firms may need an associated increase in their filing fee budget. Under the old regime, NASD (i.e., the National Association of Securities Dealers) had defined correspondence to include, among other things, written letters, electronic mail, instant messages, and market letters sent to one or more existing retail customers, regardless of their number. However, FINRA, under the new rules, has revised the definition of correspondence to include only a written (including electronic) communication that is distributed or made available to 25 or fewer retail investors – whether existing or prospective – within any 30 calendar-day period. Thus, if the same communication is distributed or made available to more than 25 retail investors – including both existing and prospective – within the 30-day period, it is considered a retail communication that will be required to be filed with FINRA.
Industry gives chilly response to FINRA's proposed recruitment compensation disclosure rule
With the recent close of the comment period (ended March 5, 2013), the brokerage industry nearly uniformly has given a chilly reception to FINRA’s proposal to require disclosure of broker recruiting incentives to customers when an individual broker is recruited to a new firm. FINRA’s Regulatory Notice 13-02 proposes mandatory disclosures to customers of the details of “enhanced compensation” packages offered by firms to recruit brokers at the time of first contact following a broker’s departure, and in writing with account transfer documentation. “Enhanced compensation” includes the typical recruitment packages brokerage firms provide to entice brokers to move to new firms, such as signing bonuses, upfront or back-end bonuses, loans, accelerated payouts, transition assistance, and similar arrangements. The proposed rule does not require disclosure of “enhanced compensation” of less than $50,000 and to certain institutional investors.
See the Global Regulatory Enforcement Law blog entry here.
FINRA proposes disclosure of compensation paid to move customers
FINRA proposed a new rule in November 2012 requiring brokers to disclose to non-institutional clients “enhanced compensation” in excess of $50,000 in connection with their recruitment and transfer from one broker-dealer to another. The rule would require brokers to disclose enhanced compensation to clients transferring from one firm to another for a period of one year from the broker’s start date. Enhanced compensation includes signing bonuses, upfront bonuses, back-end bonuses, loans, accelerated payouts, transition assistance, and similar arrangements, paid in connection with a job transfer to a new employer.
Brokers fined for inadequate supervision of prospectus delivery
In December 2012, FINRA fined five broker-dealers amounts ranging from US$40,000 to US$400,000 for failure to establish an adequate supervisory system and written procedures to supervise compliance with prospectus delivery requirements.
Broker-dealers have to start filing offering documents
With the recently adopted FINRA Rule 5123, broker-dealers selling private placements will have to file a copy of any private placement memorandum, term sheet, or other offering document with FINRA. Further, if there are any material amendments, those amended versions of the documents will also have to be filed. These filings must be made electronically within 15 calendar days from the date of sale for sales on or after December 3, 2012, or FINRA must be informed that no such offering documents existed.
See the Securities Compliance Sentinel article here.
Recent opinion tightens SEC’s FCPA grip over foreign nationals
A judge in the Southern District of New York denied three Hungarian nationals’ motion to dismiss charges brought by the SEC related to violations of the Foreign Corrupt Practices Act (the "FCPA"). In SEC v. Straub (1:11-cv-09645), the SEC brought a lawsuit against the three individuals for an alleged bribery scheme involving government officials in Macedonia. Despite the fact that the Hungarian nationals worked for a Hungarian company and the alleged bribery occurred with foreign nationals outside of the United States, the SEC asserted that it had jurisdiction over the individuals because the company was traded through American Depository Receipts listed on the New York Stock Exchange.
SDNY favors the SEC in Foreign Corrupt Practices Act action involving novel issues of statutory interpretation
In a case addressing an issue of first impression involving the FCPA, the US District Court for the Southern District of New York adopted an expansive interpretation of the statute’s interstate commerce requirement to allow the imposition of liability on foreign nationals for bribery occurring in a foreign country with only unintentional conduct in the United States. The Securities and Exchange Commission also benefited from a second ruling tolling the statute of limitations until the defendants were physically present in the United States.
SDNY finds lack of personal jurisdiction in Foreign Corrupt Practices Act claim
The US District Court for the Southern District of New York recently addressed whether the FCPA could reach a foreign executive of a non-US company. In contrast to the Straub case (see the article referenced immediately above), the District Court declined to exercise personal jurisdiction over the moving defendant. The decision offers a potential limiting principle for the reach of personal jurisdiction under the FCPA.
A little more than a year after Deustche Telekom (“DT”) and Magyar Telekom entered into multi-million dollar settlements with the SEC and DOJ to resolve claims that the two companies violated the FCPA, three former Magyar executives lost their bid to have their parallel SEC enforcement action dismissed. On February 8, 2013, Judge Richard J. Sullivan of the Southern District of New York denied the former Magyar executives’ motion to dismiss “in its entirety” in an opinion that—if upheld—could have far reaching implications for the government’s expansive interpretation of the FCPA.
District court reinforces broad territorial reach of the FCPA
The decision in the Magyar Telekom case maintains that engaging in unlawful conduct abroad that is "directed toward the United States, even if not principally directed there," may trigger personal jurisdiction. On February 8, Judge Richard J. Sullivan of the U.S. District Court for the Southern District of New York denied a motion by three former Magyar Telekom executives challenging the extraterritorial reach of the FCPA. The decision validated regulators' position that non-U.S. employees of foreign-owned corporations who engage in conduct that is directed toward the United States (e.g., efforts designed to violate U.S. securities regulations) can be held accountable for FCPA violations.
Increased risk of FCPA prosecution of foreign national executives of U.S. issuers: recent court decision allows open-ended statute of limitations and bases FCPA jurisdiction on email routed through US servers
A recent federal court decision highlights the increasing risk of prosecution for foreign national executives under the FCPA. The decision from the federal district court in New York denied a motion to dismiss filed by three defendants, all former foreign national executives of Magyar Telekom Plc., a Hungarian telecommunications company, finding that the five-year statute of limitations under the FCPA does not run while a defendant is outside of the United States; and emails sent and received outside of the United States, but routed through or stored on servers in the United States, were enough to assert jurisdiction over the defendants under the FCPA, regardless of whether the defendants intended or even knew that the emails were routed through the United States.
In what circumstances can foreign nationals be held liable for violating the Foreign Corrupt Practices Act?
In the last two weeks, in two separate SEC enforcement actions, judges in the United States District Court for the Southern District of New York issued rulings addressing when the SEC can bring enforcement actions against foreign nationals in cases involving bribes paid in foreign countries. In one case, the Court held that the SEC could proceed; in the other, the Court dismissed the case. These cases are of great interest not only because they explain the limits of the SEC’s jurisdiction, but they also set forth unexpected incidents of that jurisdiction, such as a potentially unlimited statute of limitations period for foreign nationals who never enter the United States.
SEC prevails in personal jurisdiction and limitations challenge to FCPA
On February 8, 2013, the SEC overcame a motion to dismiss filed by former executives of a Hungarian telecommunications company. The opinion by Judge Sullivan of the Southern District of New York accepted the SEC’s arguments on personal jurisdiction and on the calculation of the limitations period for bringing civil FCPA claims.
Fine for lack of proper controls without allegations of improper paymentsOracle Corp. will pay $2 million to resolve SEC allegations that the company’s Indian subsidiary maintained $2.2 million in offbook “secret side funds.” According to the complaint, Oracle’s India employees inflated prices for the company’s goods and services on eight government contracts and directed that its local distributors retain the excess funds, purportedly for “marketing and development expenses.” The SEC charged Oracle with a books and records violation for the subsidiary’s failure to properly carry these funds on its books as prepaid marketing expenses. Further, the SEC alleged that Oracle India employees directed its distributors to use the funds to pay phony invoices from non-existent third parties.
Silver hills may tarnish crowdfunding Both Section 2(1) of the Securities Act of 1933 (the “Securities Act”) and Section 25019 of the Corporate Securities Law of 1968 provide extensional definitions of the term “security”. That is, they each list everything within the term being defined. In each statute, the twelfth item listed is “investment contract”. In the famous case of Securities & Exchange Commission v. W.J. Howey Co., 328 U.S. 293 (1946), the Justice Frank Murphy defined the term “investment contract” as follows:
The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.
Strictly speaking, Justice Murphy did not define a “security”, but simply one type of security – an ”investment contract”.
A tale of two exemptionsThere is a fair amount of confusion about equity-based crowdfunding, how it will work once it is legal, how the crowdfunding exemption will interact with other securities law exemptions, and in general what the future holds. This is natural and to be expected in light of the dramatic nature of the two new laws Congress passed.
See the Start Up Law blog entry on this topic here.
What’s crowdfunding without advertising?Crowdfunding for equity is one of those ideas that appeals to a lot of people. It has “crowd” appeal, you could say. Why not allow a great number of individuals (thousands) to each invest a little bit of money to fund projects that would otherwise not get funded? Especially projects like rooftop solar projects or similar ventures which improve society as a whole? Isn’t this a great idea? Kickstarter now raises more money for the arts than the National Endowment for the Arts. Clearly, crowdfunding is the future we have all been waiting to be evenly distributed. (As William Gibson famously said, “The future is here, it’s just not evenly distributed yet.”)
Cybersecurity: the next big wave in securities litigation?News broke last month about significant cybersecurity breaches at many U.S. corporations that raise the possibility of a new wave of SEC enforcement actions, class actions, and derivative lawsuits. A front page New York Times article reported that cybersecurity firm Mondiant identified a Chinese military unit that hacked over 140 organizations over the last several years, stealing valuable intellectual property such as technology blueprints, proprietary manufacturing processes, business plans, and pricing documents. Companies affected by these attacks represent a wide range of industries, including information technology, construction, aerospace, and energy. The severity of these attacks will likely spur enforcement activity at the SEC, which has warned issuers about their cybersecurity disclosure obligations since 2011 in published disclosure guidance. The report and the likely reaction from the SEC will re-focus attention on cybersecurity controls and disclosure practices.
Lawyers and issuers really need to listen to SEC comments regarding cybersecurityThe SEC's Division of Corporation Finance has indicated that lawyers for issuers and issuers themselves should focus on and respond to the SEC staff's comments during the corporate filing review process.
The SEC staff has seen that issuers and their counsel are not necessarily responding completely to comments. The SEC staff believes that this has caused the process to become more complicated. In particular, the SEC staff has suggested issuers are not responding to comments relating to cybersecurity disclosures. This is an essential issue that companies must address.
See the Securities Compliance Sentinel article here.
Exchange Act reports must now disclose certain transactions and activities related to IranSection 13(r) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires any issuer obligated to file periodic reports with the SEC after February 6, 2013 to disclose certain business transactions and other activities related to Iran. New Section 13(r) is the result of the Iran Threat Reduction and Syria Human Rights Act of 2012 (the “ITR Act”) legislation that increased economic and other sanctions against Iran to persuade Iran to cease its pursuit of nuclear weapons and support for terrorism. Section 13(r) did not require any rulemaking by the SEC, but in a set of Compliance and Disclosure Interpretations issued on December 4, 2012, the SEC addressed certain questions regarding the obligations imposed on reporting issuers.
First SEC Iran disclosures unearth sale of two cars to Iranian embassySection 219 of the ITR Act requires that publicly-traded companies disclose in their annual and quarterly filings with the SEC certain dealings that the filers or any of their “affiliates” have had with Iran during the reporting period. Among the transactions required to be reported are any transactions with the Government of Iran “without the specific authorization of a Federal department or agency.”
There is no materiality or dollar amount threshold to this obligation to report dealings with Iranian government. As a result, this obligation seemingly extends to even the most trivial transaction, including legal transactions by foreign “affiliates” that are not controlled by U.S. persons and are therefore not subject to the prohibitions of section 218 of the ITR Act.
New Iran sanctions enactments apply to U.S. companies’ foreign affiliates and subsidiaries, and require SEC reporting by public companiesThe Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury enforces comprehensive sanctions that regulate, and largely forbid, most forms of trade and financial transactions by U.S. persons with Iran. Recent enactments have extended the reach of the Iran trade sanctions to foreign subsidiaries of U.S. companies, which previously were not explicitly covered by these restrictions, and also have put into effect new SEC reporting requirements for public companies listed on U.S. exchanges when they or their affiliates engage in certain activities involving Iran.
Iran sanctions developmentsThis alert provides an update regarding U.S. sanctions against Iran. As noted in Hogan Lovells’ numerous prior updates, the United States continues to expand U.S. sanctions against Iran.
Iran notices begin to roll into the SECA number of companies have filed IRANNOTICEs on EDGAR with the SEC. The notices reference disclosures made in annual reports pursuant to Section 219 of the ITR Act and Section 13(r) of the Exchange Act. What sorts of disclosures are being made?
Section 13(r) of the Securities Exchange Act of 1934: disclosure guidance for public companiesStarting in February of this year, the ITR Act imposes new reporting requirements on U.S. domestic and foreign companies that are required to file reports with the SEC pursuant to Section 13(a) of the Exchange Act. In particular, Section 219 of the ITR Act added new Section 13(r) to the Exchange Act. Under Section 13(r), Annual Reports on Form 10-K, Annual Reports on Form 20-F and Quarterly Reports on Form 10-Q filed pursuant to Exchange Act Section 13(a) must include disclosure of contracts, transactions and “dealings” with Iranian and other entities. Section 13(r) is effective beginning with reports with a due date after February 6, 2013. The Staff of the Division of Corporation Finance of the SEC has provided helpful guidance on implementation of these new requirements in Exchange Act Compliance and Disclosure Interpretations Questions 147.01-147.07 (available here).
The SEC speaks: Enforcement Panel discusses 2013 priorities and past successesAt the annual "The SEC Speaks" conference on February 22 and 23, 2013, in Washington, D.C., Acting Director George Canellos and other senior officials from the Division of Enforcement of the SEC reported on the progress of enforcement efforts, which continued at a near record pace in 2012. This year's panel signalled a new era for SEC enforcement and a significant changing of the guard. In December 2012, then-Commissioner Elisse Walter replaced Mary Schapiro as Chairman of the Commission. Less than two months later, President Obama nominated Mary Jo White, former U.S. Attorney for the Southern District of New York, to succeed Chairman Walter. Additionally, Enforcement Director Robert Khuzami announced his departure in early January 2013, and Chairman Walter appointed Mr. Canellos as Acting Director, effective February 2013. In light of these personnel changes and a slowly recovering capital market, Acting Director Canellos described the Division as being at a point of redefining its enforcement priorities. During the conference, senior enforcement officials outlined enforcement priorities moving forward under their new leadership, while emphasizing the successes of the last enforcement regime.
Head of SEC investment management division announces top regulatory prioritiesAt the Practicing Law Institute’s conference, “The SEC Speaks in 2013,” held on February 22 and 23, 2013, iin Washington, DC, Norm Champ, Director of the Division of Investment Management at the SEC, announced the Division’s top regulatory initiatives.
SEC commissioners say more regulation, oversight neededSEC commissioners called for more regulations and oversight to protect investors from fraud and other dangers, reports Miller Canfield securities compliance and enforcement lawyer, Matt Allen. Allen attended the 42nd annual “The SEC Speaks” conference in Washington D.C. on February 22 and 23, 2013. The conference features SEC commissioners and division leaders addressing legal and business issues that affect securities markets, principals, and investors.
SEC Commissioners take divergent views on corporate governance and related disclosure regulationsWith annual meeting season looming, SEC Commissioner Luis Aguilar recently advocated for improved proxy disclosure, noting that many companies "continue to fall short of providing the robust, clear and useful disclosure required by law." Acknowledging that the rules requiring disclosure of board diversity allowed diversity to be defined in any number of ways, he indicated that “to truly meet the needs of investors, a proxy statement would need to state the gender and racial or ethnic background of incumbent directors and nominees,” and whether those aspects of diversity are taken into account when considering board candidates. In fact, in his view, “if a company has no women or persons of color on its board, it should state whether or not it has considered increasing the size of its board to enhance diversity – and if not, why.”
He also urged all issuers to discuss the role of compensation and risk management. While such disclosure is required only if the risks are material, he believes that company assessments of risks and rewards in compensation plans are "inherently material" to investors. In fact, beyond specific pay schemes, he notes that the pay ratio between CEO compensation and median employee pay can create enterprise risk, including employee, customer and shareholder discontent.
Shareholder plaintiffs score a class certification win from SCOTUSIn February 2013, the Supreme Court issued its decision in Amgen, Inc. v. Connecticut Retirement Plans. In a 6-3 decision authored by Justice Ginsburg, the Supreme Court handed a win to plaintiffs in securities fraud class actions, holding that plaintiffs do not have to prove materiality at the class certification stage. The decision marks a departure from some of the Court’s more recent class action rulings, which seemed to narrow class action litigation.
Materiality is a merits issue - the Amgen Inc. opinionThe Supreme Court has handed down its first class-action related opinion of the 2012-13 Term, Amgen Inc. v. Connecticut Retirement Plans & Trust Funds. And while that opinion represents a loss for the defendants in the specific case, it's not as big a problem for securities defendants in general.
Amgen involved an alleged securities fraud committed by Amgen Inc., a biotechnology company. As the Ninth Circuit's opinion lays out the alleged misstatements:
SEC better fasten those seat belts, looks like a bumpy rideAs the securities enforcement world awaits the U.S. Court of Appeals for the Second Circuit’s decision in the SEC v. Citigroup matter – where Judge Jed Rakoff balked at the Commission’s “neither admit nor deny” policy and refused to approve a settlement for lack of evidentiary support – it now appears the SEC may face increased scrutiny in its litigation practices, regardless of how the Court of Appeals rules. Just last month, another federal judge, this time in Colorado, refused to accept a settlement until the defendant, essentially, admits that the allegations against him are true.
See the Global Regulatory Enforcement Blog entry here.
SEC takes enforcement action against adviser for inadequate written compliance policies and proceduresThe SEC recently took enforcement action against a registered investment adviser (“RIA”) for failing to have written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940 (the “Advisers Act”) as required under Rule 206(4) of the Advisers Act (In the Matter of IMC Asset Management, Inc., Investment Advisers Act of 1940, Release No. 3537, January 29, 2013). The SEC also alleged that the RIA failed to conduct an annual assessment of its policies and procedures as required under Rule 206(4)-7.
Supreme Court in Gabelli: clock starts ticking when fraud occurs, not when it’s discoveredThe law requires the SEC to bring enforcement actions seeking penalties against individuals who violate the securities laws within five years. The Supreme Court issued a unanimous ruling today that rejects the SEC’s argument that the five year clock begins to tick when they discover any alleged wrongdoing rather than the date on which the wrongdoing was committed. The author previously has suggested that the application of the SEC’s proposed “fraud discovery rule” by a government agency charged with investigation and enforcement would be counter-productive and effectively would eliminate the five year statute of limitations. To put this into context, the only federal crimes that have no statute of limitations are capital offenses that warrant the death penalty and certain terrorism, child abduction, and sex offenses. If the SEC were allowed an indefinite period of time in which to bring enforcement actions, the fraud alleged in those cases would be on par with the most serious of federal crimes. The recent decision by the Supreme Court in Gabelli v. SEC rejects such an absurd result.
Financial adviser charged with illegally providing insider informationOne of the hot topic areas of concern for the SEC is the use of material non-public trading information by professionals within the financial services industry. In this case against a Florida-based financial adviser, Kevin L. Dowd, the SEC alleges that, while Mr. Dowd did not personally trade on the material insider information, he did benefit monetarily by tipping the information to a person who traded on it.
Short-swing profit rule inapplicable to purchase and sale of different series of common stockThe U.S. Second Circuit Court of Appeals ruled that Section 16(b) of the Exchange Act does not apply to a corporate insider's purchase and sale of shares of different series of stock. Section 16(b) provides for the disgorgement of profits that corporate insiders realize from any purchase and sale, or any sale and purchase, of any publicly-traded equity security within any period of less than six months. The equity securities at issue consisted of different series of common stock of the same issuer that traded on the NASDAQ stock exchange under different ticker symbols. Neither series of stock was convertible into the other. Only one of the series of stock had voting rights. The Second Circuit, in upholding the lower court decision, held that a sale involving one series of stock could not be "paired" for Section 16(b) liability purposes with a purchase involving the other series of stock. In so holding, the court noted that the reference to "any equity security" as opposed to "any equity securities" in Section 16(b) supported an inference that the "purchase and sale" and "sale and purchase" must both occur with respect to the same equity security.
Investment bank found not guilty for failing to detect fraudA jury trial held in Federal District Court in Boston found that Goldman Sachs was not guilty for failing to detect fraud in connection with its representation of the sellers of a speech recognition company. The buyer, a Belgian company, used shares of its stock to pay the purchase price for the speech recognition company. Just a few months after the sale, the Belgian company was found to have committed a massive accounting fraud rendering its stock worthless.
The sellers brought suit against Goldman Sachs for failure to uncover that the Belgian company was a fraud. In finding for Goldman Sachs, the jury focused upon the terms of the engagement letter between Goldman Sachs and the sellers. The engagement letter provided that Goldman Sachs would help structure the sale and negotiate its terms, but not do the financial analysis. Further, the sellers were found to have disregarded a Goldman Sachs memorandum that advised them to conduct a comprehensive accounting of the Belgian company.
Plaintiffs seek to revive securities fraud class actions under Second Circuit’s “class standing” doctrineJoshua Yount previously blogged about the Second Circuit’s troubling decision in NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co, 693 F.3d 145 (2d Cir. 2012), which invented a “class standing” doctrine allowing a named plaintiff in a class action to assert Securities Act claims regarding securities that he or she never purchased. In the wake of that decision, plaintiffs have filed a flurry of motions to reconsider district court decisions that had dismissed claims like these for lack of standing.
So far, a few courts have granted those motions and revived some or all of the previously dismissed claims. E.g., New Jersey Carpenters Health Fund v. DLJ Mortg. Capital, Inc. (pdf), 2013 WL 357615 (S.D.N.Y. Jan. 23, 2013). But other courts have declined to do so, preferring to wait for a decision on the pending certiorari petition in NECA.
Second Circuit affirms dismissal of securities fraud claims relating to allegedly misleading press releaseIn Kleinman v. Elan Corporation, No. 11-3706-cv, 2013 WL 388006 (2d Cir. Feb. 1, 2013), the United States Court of Appeals for the Second Circuit affirmed the dismissal of a securities class action lawsuit alleging that defendants violated Section 10(b) of the Exchange Act, and SEC Rule 10b-5, promulgated thereunder, by issuing a misleading press release describing the preliminary clinical trial results for an Alzheimer’s drug. The Second Circuit concluded that, in the context of the full presentation of details surrounding the study of the drug, nothing omitted from the press release rendered the release false or misleading to a reasonable investor. This decision reconfirms that in order to be actionable under Section 10(b) and Rule 10b-5, an alleged omission must be misleading, not just material.
Failure to reveal internal investigation was not securities fraudIn In re Boston Scientific Corp. Securities Litigation, 686 F.3d 21 (1st Cir. 2012) (No. 11-2250), a putative class action suit was brought by shareholders, in which they alleged that several of the corporation’s public filings and statements were materially misleading for failure to reveal the existence of an internal investigation that led to the dismissal of ten sales representatives and a Divisional Vice-President of Sales. The investigation had examined compliance with internal policies concerning trips with customers in which food and entertainment spending limits were exceeded. The court dismissed plaintiffs’ securities fraud claims, finding that there was no duty to disclose an investigation that was ongoing and with an uncertain outcome, and that the termination of the employees was not material in light of the size of the sales force and other factors that contributed to a loss in income.
SEC freezes assets and brings civil charges against EB-5 investor visa project
In the first SEC enforcement action of its kind, the SEC announced on February 8, 2013 that it had filed civil charges against, and received an emergency order to freeze assets of, the Intercontinental Regional Center Trust of Chicago, a designated Regional Center under the EB-5 Immigrant Investor Program administered by U.S. Citizenship and Immigration Services and the Regional Center’s principal.
Federal court finds that SEC attorneys’ interview notes and memories are not protected by the work product doctrineIn a highly unusual decision that the SEC says “ignores 65 years of precedent,” a federal judge has held that the memories of SEC attorneys and information from their interview notes are discoverable. The SEC lawyers appear to have interviewed three key witnesses during the investigation without taking their sworn testimony, thereby avoiding the creation of a verbatim transcript. In a February 4, 2013 Order, Magistrate Judge Nathanael Cousins of the Northern District of California rejected the SEC’s argument that its attorneys’ memories and notes about these interviews were protected by the work product doctrine and ordered full responses to interrogatories regarding the interviews.
NYSE sends letter to foreign private issuersIn late February, the New York Stock Exchange’s regulation group sent its traditional annual letter to foreign private issuers (“FPIs”) that are listed on the Big Board. The letter reminds FPIs of the corporate governance and notification and filing obligations that the NYSE imposes on its listed companies. These requirements are separate from, and in some cases incremental to, the requirements imposed by the SEC or a listed company’s home country regulator. The letter focused on certain NYSE requirements.
SEC Announces 2013 Examination PrioritiesOn February 21, the SEC published its examination priorities for 2013. Priorities in each program area include: (i) for investment advisers and investment companies – presence exams for newly registered private fund advisers and payments by advisers and funds to entities that distribute mutual funds; (ii) for broker-dealers – sales practices and fraud; (iii) for market oversight – risk-based examinations of securities exchanges and FINRA; and (iv) for clearing and settlement – transfer agent exams, timely turnaround of items and transfers, accurate recordkeeping and safeguarding of assets.
See Orrick’s Financial Industry Week in Review updates here.
MNPI and NDAs: the alphabet soup of getting restrictedInvestors wanting to equip and position themselves to negotiate a debtor's restructuring may temporarily relinquish their ability to buy and sell securities in exchange for access to material non-public information ("MNPI"). This delicate balance between the need for investment liquidity and the desire for informational transparency often leads to increasingly fierce negotiation between a company and its creditors over the terms of a confidentiality or non-disclosure agreement (the "NDA").
When a company is ready to negotiate a restructuring of its public debt, it will typically direct its attorneys to negotiate an NDA with holders of substantial indebtedness. An NDA will typically require the creditor to acknowledge that it may receive MNPI. In accordance with federal securities laws, the receipt of MNPI immediately "restricts" the ability of the creditor to trade unless the creditor has executed a "big boy" letter with its counterparty. While a "big boy" puts the buyer on notice of the creditor/seller's possession of MNPI, many sellers will refrain from trading with "big boy" letters because the efficacy of the "big boy" remains uncertain, subjecting the seller to potential civil and criminal liability notwithstanding their execution.
Unintended consequences of the conflict minerals rule?There can hardly be any disagreement with the stated goal of the SEC’s Conflict Minerals Rule. Congress directed the SEC to enact rules requiring disclosure about the use of conflict minerals because it believed that the exploitation and trade of conflict minerals from the DRC were helping to finance armed conflict there — conflict characterized by extraordinary levels of violence, including sexual- and gender-based violence. It is undeniable that the Congolese people are suffering unspeakable horrors at the hands of armed groups that continue to battle for power and control in the region.
As part of the legal challenge to the Conflict Minerals Rule, an amicus brief filed by several DRC experts offers insights into the overall impact of the Rule. Professor Marcia Narine (Visiting Assistant Professor of Law, University of Missouri, Kansas City), Ambassador Jendayi Frazer (Distinguished Service Professor, Carnegie-Mellon University and Director of the Center for International Policy and Innovation), and Dr. J. Peter Pham (Director of Michael S. Ansari Africa Center at the Atlantic Council) filed the amicus brief in support of the petition for review although the experts made it clear that their support for the petition arises not out of sympathy with the petitioners’ commercial interests but because of the negative impact of the rule on the Congolese people.
You need to be concerned about analyst communications under the JOBS ActThe SEC's Division of Trading and Markets released guidance on the JOBS Act’s elimination of restrictions on analyst communication and research reports concerning initial public offerings of emerging growth companies.
The real quandary that the guidance addressed was related to the Elliot Spitzer settlement between regulators and major investment banks announced in 2003. This settlement required strict firewalls between research and underwriting activities at certain major banks. The SEC staff clearly indicated that the JOBS Act “does not change" the settlement, thus requiring said signatories to obtain court approval to alter the pact. If these signatories sought to change the pact, the SEC would then consider such an application, and respond accordingly. However, the SEC's view at this point is that it has no authority to change this settlement with a rule. Essentially, the SEC has said nothing has changed with the JOBS Act, and, if investment banks want to take advantage of the JOBS Act provisions, they better be prepared for a court fight from the SEC.
See the Securities Compliance Sentinel article here.
"It's deja vu all over again"; the uniform fiduciary duty standardOne of the greatest philosophers of our time, Yogi Berra, must have had the debate over the uniform fiduciary duty standard when he penned this line. Yes, believe it or not, the debate is about to resume.
The SEC is yet again working on possible recommendations regarding a uniform fiduciary duty for investments advisors and broker-dealers. In accordance with Dodd-Frank, the SEC is expected to issue a request for information for economic data to determine the viability of such a standard.
See the Securities Compliance Sentinel article here.
Structured notesOn February 7th, Bloomberg discussed the SEC's efforts to clarify rules governing structured note disclosures.
Foreign fund issuers selling in the United States may require registration
In this article, Ernest Badway of Fox Rothschild indicates that over the course of many years, he has been questioned by American broker dealers as to their responsibilities for sales to people outside the United States. His response has always been that they are required to obtain an opinion from counsel in those jurisdictions before proceeding. Most likely, those foreign jurisdictions may have registration requirements before conducting business in their countries.
See the Securities Compliance Sentinel article here.