Please find below the May issue of the U.S. Securities Law Digest. This monthly 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 monthly Digest.
In April 2013, the Securities and Exchange Commission (“SEC”) issued guidance in the form of the Report of Investigation under Section 21(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) which indicates that social media channels − such as Twitter and Facebook − can be used by public companies to disseminate material information, without running afoul of Regulation FD. The SEC emphasized that companies should apply the guidance from its 2008 interpretive release regarding the disclosure of material information on company websites when analyzing whether a social media channel is in fact a “recognized channel of distribution,” including the guidance that investors must be provided with appropriate notice of the specific channels that a company will use in order to disseminate material non-public information.
SEC Enters into First FCPA Non-Prosecution Agreement
On April 22, 2013, the SEC announced its first-ever non-prosecution agreement (“NPA”) in a matter involving potential violations of the Foreign Corrupt Practices Act (“FCPA”). The SEC heralded this NPA—which it entered into with Ralph Lauren Corporation—as an example of the “substantial and tangible” benefits that companies may earn through the SEC Enforcement Division’s Cooperation Initiative. However, exactly when a company may be able to secure an NPA from the SEC and exactly what benefits accrue from such a resolution remain to be seen.
On April 10, 2013, the Commodity Futures Trading Commission (the “CFTC”) and the SEC issued final rules and guidelines that will require “financial institutions” and certain “creditors” that fall under their respective jurisdictions (including commodity pool operators, commodity trading advisors, registered broker-dealers, registered investment companies, business development companies, employees’ securities companies and registered investment advisers) and that offer or maintain “covered accounts,” to develop written identity theft prevention programs.
SEC Staff Provides Guidance on Unregistered Broker-Dealer Online Crowdsourcing Platforms
The SEC staff has issued two no-action letters providing relief from the broker-dealer registration requirements of the Exchange Act for two online venture capital funding platforms. Each funding platform, after confirming the "accredited investor" status of investors using the funding platform, granted such investors access to its start-up company financing database. Investments in start-up companies listed on the funding platform would be effected through special purpose investment funds (the "Investment Funds"), rather than by direct investment. In connection with each investment made by an Investment Fund, affiliates of the applicable funding platform would receive a carried interest (i.e., the right to receive a portion of the investment profits generated by the Investment Fund). The SEC staff was willing to grant the relief after finding no other broker-dealer indicia, such as transaction-based compensation or handling of customer funds, to be associated with the funding platforms. In making its determination, the SEC staff took the position that the receipt of carried interests in the Investment Funds by affiliates of the funding platforms did not constitute transaction-based compensation.
Foreign Executive Can be Liable under FCPA for Affecting False SEC Filings
In SEC v. Straub, No. 11-9645 (S.D.N.Y. Feb. 8, 2013), the SEC alleged that executives of a Hungarian telecommunications company Magyar Telekom, Plc., had bribed Macedonian officials to limit proposed legislation that would have opened the telecommunications market in Macedonia to competition. At the time, both Magyar and its parent company, Deutsche Telekom AG, were publicly traded on U.S. stock exchanges. The SEC alleged that the defendants signed numerous management and sub-management representation letters to Magyar’s auditors falsely asserting that they had disclosed all relevant financial information and were unaware of any unlawful activity, and that this resulted in false financial statements when the Company made its annual SEC filings. The defendants were charged with violating the FCPA’s anti-bribery provision and with aiding and abetting Magyar’s violations of the FCPA’s requirement that public companies maintain accurate books and records. They moved to dismiss on multiple grounds, including, for lack of personal jurisdiction. The court rejected this argument, holding that the “minimum contacts” test for personal jurisdiction was satisfied because the defendants made false statements to the company’s foreign auditors knowing that those statements would likely affect Magyar’s financial filings in the United States.
Supreme Court: Proof of Materiality not Required to Certify Securities Class Action
In Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 133 S. Ct. 1184 (2013) (No. 11-1085), the Supreme Court held that proof that misstatements were material was not a prerequisite for certification in a securities class action. Rule 23(b)(3) requires “a showing that questions common to the class predominate, not that those questions will be answered, on the merits, in favor of the class.” Materiality is judged by an objective standard and thus, is a question common to the class. Likewise, the class’s “inability to prove materiality would not result in individual questions predominating;” it would simply mean the class would lose on the merits. Requiring proof of materiality at the certification stage would require the class to establish it will win, but the merits may be considered only to the extent relevant to determining whether the prerequisites for class certification are satisfied. The Court rejected the defendant’s policy argument that precertification proof of materiality was necessary to avoid the risk that certification would impose pressure on a defendant to settle. The Court noted that Congress had addressed settlement pressures associated with securities class actions through the enactment of the Private Securities Litigation Reform Act in 1995, but rejected calls at that time to undo the fraud on the market presumption. The Supreme Court concluded it had no basis to “encumber” class action litigation “by adopting an atextual requirement.”
SEC Lacked Jurisdiction over Foreign Securities Transaction
On February 15, 2013, the Northern District of Illinois ruled against the SEC in one of the first decisions implementing the Supreme Court’s decision in Morrison v. National Australia Bank Ltd. 131 S. Ct. 2869 (2010) (No. 08-1191). In Morrison, the Supreme Court held that Section 10(b) of the Exchange Act does not have extraterritorial reach, rather only applying to “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.” In SEC v. Benger, No. 90-c-676 (N.D. Ill. Feb. 15, 2013), the SEC brought an enforcement action against an international boiler room operation. The defendants moved for summary judgment, arguing that the transactions were extraterritorial and outside the SEC’s reach, despite the fact that much of the fraudulent activity at issue took place in the United States.
FCPA Charges Dismissed against Foreign Executive for Lack of Personal Jurisdiction
In SEC v. Sharef (No. 11-9073 (S.D.N.Y. Feb. 19, 2013), the SEC alleged that seven former executives at Siemens AG and its subsidiaries had participated in an extensive scheme to bribe government officials in Argentina. One defendant, Herbert Steffen, is a German national who had served as CEO of Siemens’ Argentinean subsidiary prior to the events alleged in the complaint. The SEC charged Steffen with violating the FCPA’s anti-bribery provision and with aiding and abetting violations by Siemens of the FCPA provision requiring public companies to maintain accurate books and records.
On March 26, 2013, the Staff of the Division of Trading and Markets of the SEC provided no-action letter relief from the broker-dealer registration requirements of the Exchange Act to FundersClub Inc. and its wholly-owned subsidiary in connection with their internet based, Rule 506 compliant securities offerings. FundersClub and its subsidiary are venture capital fund advisers under Rule 203(l)-(1) of the Investment Advisers Act of 1940. The FundersClub no action relief sets forth the Staff's interpretation of Section 201 of the JOBS Act, which provides an exemption from broker-dealer registration for persons providing certain services in connection with an offering under Rule 506 of Regulation D. In granting the requested relief, subject to numerous conditions, the Staff noted that FundersClub and its subsidiary comply with the JOBS Act, in part, because they and each person associated with them receive no compensation (or the promise of future compensation) in connection with the purchase or sale of securities (transaction-based compensation), rather they receive compensation for their traditional advisory and consulting services, (i.e., carried interest).
The JOBS Act After One Year: a Review of the New IPO Playbook
Just one year ago, the Jumpstart Our Business Startups (JOBS) Act became law. Title I of the JOBS Act significantly changed the IPO landscape, creating a new category of issuer called an emerging growth company (EGC) and rewriting the rules for EGC IPOs. Nearly 75% of issuers that priced a US IPO after April 5, 2012 identified themselves as EGCs. Latham & Watkins has created a helpful IPO Playbook detailing the effects of the JOBS Act.
FINRA Submits Rulemaking Items to the SEC for Comment and Approval
At its April 2013 board meeting, the Financial Industry Regulatory Authority (FINRA) Board of Governors approved several proposed rule changes that will be submitted to the SEC for review and approval. The proposed rulemaking items discussed at the meeting include:
Dissemination of Trade Reporting and Compliance Engine (TRACE)-Eligible Rule 144A Transactions
Alternative Display Facility Market Participant Requirements
Arbitration Panel Composition
Discovery Guide Used in Investor Arbitration Proceedings
Customer Account Statements
In a letter to FINRA representatives, FINRA chairman and CEO Richard Ketchum called attention to the proposal to publicly disseminate Rule 144A transactions in TRACE-eligible securities for those asset types currently subject to dissemination. Mr. Ketchum explained that FINRA has taken this step after reviewing the comments submitted in response to its September 2012 Regulatory Notice and in light of JOBS Act provisions.
New Whistleblower Bounty Law on The Horizon In NY?
On March 22, 2013, the New York State Senate introduced the S4362 Proposal which, through a “bounty,” gives financial awards to whistleblowers who provide original information to the Department of Financial Services (DFS) regarding violations of New York banking, insurance and financial services laws. The Proposal’s bounty program is largely modeled after the programs codified in the securities (Section 922) and commodities (Section 748) whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). Moreover, the Proposal contains anti-retaliation protections similar to those in Dodd-Frank’s securities, commodities and financial services (Section 1057) whistleblower protection provisions. This post discusses the scope of the Proposal’s coverage, as well as the breadth of its bounty program and anti-retaliation protections.
Appeals Court Dismisses Challenge to SEC Resource Extraction Rules
In 2012, the SEC adopted final rules requiring public companies engaged in certain oil and gas activities to disclose payments made to domestic and foreign governments as required by the Dodd-Frank Act. The rules were promptly challenged by the American Petroleum Institute, the Chamber of Commerce and others in the United States Court of Appeals for the District of Columbia and the United States District Court for the District of Columbia. The Court of Appeals recently dismissed the case for lack of jurisdiction, and now the case will proceed in the District Court. The Appeals Court dismissed the case because:
Section 25(a) of the Exchange Act provides for appellate jurisdiction for a person aggrieved of final SEC orders only and does not provide jurisdiction for challenges to SEC rules.
The provision of the Dodd-Frank Act which required the SEC to adopt the resource extraction rules is not specifically enumerated in Section 25(b) of the Exchange Act which grants appellate jurisdiction to review specifically defined rules.
Recent Court Decisions on Challenges to Resource Extraction and Shareholder Proposal Rules
The D.C. Circuit has dismissed for lack of jurisdiction the case brought by the American Petroleum Institute and others against the SEC rules requiring certain companies to disclose payments made to foreign governments relating to the commercial development of oil, natural gas or minerals. The case will now be decided in the U.S. District Court for the District of Columbia, where the petitioners had also filed suit "out of an abundance of caution.”
The SEC’s “unbundling” requirements have largely been the stuff of SEC lore -- periodically referred to but rarely seen in corporate governance matters. However, thanks to the high profile dispute between David Einhorn’s Greenlight Capital and Apple, the unbundling rules may finally be coming out of the shadows. As a result, companies should carefully consider their application when preparing their proxy materials, especially those that may come under attack by shareholder activists.