Please find below the February 2014 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 recently announced the results of its enforcement activities during fiscal year 2013. Most notably, the SEC disclosed that it filed 686 enforcement actions and recovered $3.4 billion in monetary sanctions (a 10 percent increase over FY 2012 and 22 percent increase over FY 2011).
See Haynes and Boone’s “Securities litigation year in review 2013” here.
Regulation D / Form D Proposed Amendments
On July 10, 2013, the same day that the SEC adopted changes to Rule 506 and Rule 144A in order to relax the prohibition against general solicitation, the SEC also proposed for comment amendments to Form D, Regulation D and Rule 156. These proposed rules were met with an extraordinary number of comments given that many felt that the proposed changes to the Form D filing requirements and the proposed changes to the content requirements of Form D would impose significant burdens on issuers. However, in recent weeks, the tide seems to have turned and focused on investor protection concerns. Some commentators have called on the SEC to take action to move forward with the proposed rules.
See Commissioner Aguilar’s speech transcript here.
See Senator Carl Levin’s letter to the Commission suggesting that the SEC impose requirements beyond those contained in the proposed amendments here.
SEC Division of Corporate Finance Issues New Guidance on the "Bad Actor" Rule
On December 4, 2013 and January 3, 2013, the Division of Corporation Finance of the SEC issued new Compliance and Disclosure Interpretations (“C&DIs”) relating to the application of the “bad actor” disqualification for offerings made under Rule 506 of Regulation D under the Securities Act. These C&DIs help to clarify questions stemming from the SEC’s recent (September 23, 2013) rule adoptions and amendments that, among other changes, create a new Rule 506(d) which disqualifies offerings involving certain covered persons who are “bad actors” from reliance on Rule 506 and new Rule 506(e) which requires disclosure to investors of certain “bad actors” that occurred prior to September 23, 2013. In addition, one C&DI was issued under the Exchange Act with respect to “beneficial ownership.” Among other guidance, the SEC has clarified that actions taken in non-U.S. jurisdictions (e.g., convictions, court orders, or injunctions in a foreign court, or regulatory orders issued by foreign regulatory authorities) fall outside the disqualification events detailed in Rule 506(d). The SEC issued fourteen new C&DIs on December 4, 2013 and six new C&DIs on January 3, 2014.
See these new C&DIs directly on the SEC website here and here. The new C&DIs are indicated by either “[Dec. 4, 2013]” or “[Jan. 3, 2014]” at the end of each answer.
SEC issues additional transitional guidance related to Rule 506 offerings
On January 23, 2014, the SEC issued two new Compliance and Disclosure Interpretations (C&DIs) related to Rule 506 offerings commenced prior to September 23, 2013, the effective date of the new Rule 506(c) exemption. The C&DIs clarify that if an issuer commenced a Rule 506 offering before September 23, 2013, and decides, at some point after September 23, 2013, to continue that offering as a Rule 506(c) offering under the transition guidance in Securities Act Release No. 9415, the issuer is not required to take “reasonable steps to verify” the accredited investor status of investors who purchased securities in the offering before the issuer conducted the offering in reliance on Rule 506(c).
See the two new C&DIs directly on the SEC website here. The new C&DIs are indicated by “[Jan. 23, 2014]” at the end of each answer.
With 2013 rapidly coming to a close, the Government worked feverishly to conclude IGAs with a host of new countries, release a final version of the FFI Agreement and work out the kinks in its FATCA registration website. In Q4, the United States signed so-called “Model 1” IGAs with France, Costa Rica, the Cayman Islands, Guernsey, Isle of Man, Jersey, Malta, the Netherlands, Italy and Mauritius. The United States also signed a “Model 2” IGA with Bermuda. The IRS provided updated guidance, including a set of FAQs, designed to assist foreign financial institutions as they finalize the FATCA registration process.
Crowdfunding: SEC proposes to exempt from registration internet offerings up to $1 million
Late in 2013, the SEC proposed new rules that would, if approved, authorize the use of the Internet for so-called crowdfunding campaigns seeking up to $1 million per 12-month period from unlimited numbers of investors. As proposed, these campaigns would be exempt from traditional securities registration requirements. The use of crowdfunding to date has typically involved raising modest sums of capital, in effect donations, from many small contributors over the internet in order to fund a particular artistic project, such as the making of a film or musical CD. The JOBS Act, enacted on April 5, 2012, established a legal foundation for business-related investment crowdfunding under new Section 4(a)(6) of the Securities Act, directing the SEC to create a regulatory structure that would enable startups and small businesses to raise up to $1 million through crowdfunding over the internet while protecting investors from fraud or deceit.
On December 20, 2013, the staff of the SEC released its Report on Review of Disclosure Requirements in Regulation S-K, as mandated by Section 108 of the Jumpstart Our Business Startups Act (the “JOBS Act”). The Report concludes that the staff favors a comprehensive approach to revise Regulation S-K to achieve the dual goals of streamlining disclosure requirements for companies and focusing on providing useful information to investors. The Report also acknowledges that several areas of disclosure need to be examined for their usefulness to investors, including risk factors, a description of the business, corporate governance and executive compensation disclosure (which is characterized as lengthy and highly technical), offering-related requirements and exhibits.
SEC releases long-awaited proposed amendments to Regulation A
The SEC voted on December 18, 2013 to propose rules designed to build upon current Regulation A, the exemption from registration for small offerings of up to $5 million in securities within a 12-month period. The proposed exemption, mandated by Title IV of the JOBS Act and commonly referred to as “Regulation A+,” would expand the current Regulation A to enable companies to offer and sell up to $50 million of securities within a 12-month period.
The Volcker Rule: Highlights and Initial Reactions
Final regulations under the section of the Dodd-Frank Act known as the “Volcker Rule” were enacted on December 10, 2013 by five federal financial regulatory agencies (the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency (“OCC”), the Federal Deposit Insurance Corporation (“FDIC”), the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”)). The long-awaited and much-anticipated final regulations implement Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Volcker Rule is a key component of the US financial reform effort under the Dodd-Frank Act, and represents perhaps the most significant changes in US financial regulation in decades.
For FAQs for European structured finance transactions, see Allen & Overy’s article here.
New capital standard for fund investments may be more onerous than Volcker Rule
On December 13, 2013, the Basel Committee on Banking Supervision approved an amendment to Basel II risk-weights for fund investments. The new standard may prove to be another deterrent for banking entities seeking to acquire or maintain fund investments in addition to the final rules issued on December 10, 2013 by the US financial agencies to implement the Volcker Rule limits on permissible investments in private equity and hedge funds. Commenters on the proposed version of the new standard called it “punitive.”
The SEC in 2014: SEC Chairman sets 2014 agenda, promises vigorous enforcement
On January 27, 2014, SEC Chairman Mary Jo White outlined in remarks to the 41st Annual Securities Regulation Institute her agency’s 2014 agenda, promising “incredibly active enforcement” across “the entire industry spectrum.”
At the beginning of each year, the Financial Industry Regulatory Authority (“FINRA”) announces its regulatory and examination priorities for the year. The priorities are based on FINRA’s current assessment of both investor protection needs and market issues.
New FINRA supervision rules impact broker-dealers' insider trading procedures and supervisory controls
FINRA rules require member firms to establish and maintain a system of written procedures to supervise the activities of its members. On December 23, 2013, the SEC approved new FINRA rules. Among other provisions, the new rules require procedures for detecting and reporting insider trading and impose heightened standards on supervisory controls. Member firms should ensure that their actions conform to the updated regulatory scheme, which is part of FINRA’s continuing efforts to harmonize the NASD and NYSE supervisory rules into one consolidated FINRA rulebook.