Please find below the November 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.
Daniel Winterfeldt Daniel.Winterfeldt@cms-cmck.com
Head of International Capital Markets
CMS Cameron McKenna LLP
Founder and Co-Chair of the Forum
EU adopts new rules for Central Securities DepositoriesOn August 28, 2014, Article 3(2) of the EU Regulation on Central Securities Depositories (“CSDR”) was published in the Official Journal requiring that where transactions in transferable securities take place on a trading venue, the relevant securities should be recorded in book entry form in a Central Securities Depositories (“CSD”) on or before the intended settlement date (unless already so recorded). This requirement applies irrespective of whether the security is currently eligible for electronic settlement or not and applies to all transactions executed under the Rules of the London Stock Exchange (the “Exchange”).
Subsequently, the European Securities and Markets Authority (“ESMA”) clarified that this book entry form requirement as required under Article 3(2) applies to all transferable securities, including those issued by the issuers established in third countries, to the extent that the settlement of the transactions in such securities takes place in a securities settlement system governed by the law of a EU Member State. While Article 3(2) is technically effective as of September 17, 2014, the Exchange received an extension until January 2, 2015 to implement this provision. Therefore, securities that have been offered or sold in reliance upon the safe harbour from the registration requirements of the US Securities Act of 1933, as amended (the “Securities Act”) provided by Regulation S (“Regulation S”) under the Securities Act for Category 3 securities, as such securities are defined in Rule 903(b)(3) (“Regulation S, Category 3 Securities”) will now be required to settle electronically on the Exchange effective January 2, 2015.
The Forum is working closely with the Exchange and Euroclear UK and Ireland Limited (“EUI”) (which owns and operates CREST, the CSD that settles most trades on the Exchange) to implement electronic settlement of Regulations S Category 3 Securities.
The Forum for US Securities Lawyers in London will be hosting a roundtable at the offices of CMS in London next week to discuss potential solutions to the issues raised by the implementation of these EU Regulations. The details are:
Date: 18 November 2014 Time: 8:00am - 9:30am (arrive from 8am for registration and breakfast) Place: CMS Cameron McKenna 160 Aldersgate Street London, EC1A 4DD
The Investor Advisory Committee recommends changes to accredited investor definition
On October 9, 2014, the Investor Advisory Committee formally presented its recommendation to the Securities Exchange Commission (the “SEC”) regarding the definition of “accredited investor” in Regulation D. The definition, largely unchanged since its inception, is aimed at identifying those who can “fend for themselves in unregistered offerings.”
Whether a potential investor needs the protection otherwise afforded by registration under the Securities Act has historically depended on three factors: (1) the investor’s access to information similar to that which would be furnished in a registration statement filed under the Securities Act; (2) the investor’s ability to bear the economic risk and illiquidity associated with private offerings; and (3) the investor’s financial sophistication. And while the Investor Advisory Committee agrees generally with those indicators, it believes the SEC should consider alternative approaches to the accredited investor concept that both more accurately measure the indicators and better balance investor protection goals with the need for a sufficient supply of capital in the private offering market.
See the Recommendation of the Investor Advisory Committee here.
See the Akin Gump Strauss Hauer & Feld article here.
The SEC adopts amendments to Money Market Fund Rule (Rule 2a-7)
On July 23, 2014, the SEC by a 3-2 vote, adopted amendments to Rule 2a-7 under the Investment Company Act of 1940 (the “1940 Act”), as amended (“Rule 2a-7”). Rule 2a-7 imposes quality, liquidity, and other requirements on any registered open-end management investment company that holds itself out to the public as a money market fund. Compliance with the various provisions of amended Rule 2a-7 will be phased in over the next two years.
See the Mayer Brown article here.
For an international perspective, see the LK Shields article here.
The SEC releases final rules on third-party diligence reports for asset-backed securities
As part of the required rule-making related to nationally recognized statistical rating organizations (“NRSROs”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the SEC recently issued final rules with respect to third-party diligence reports in asset-backed securities transactions.
The SEC finalizes rule to adopt updated EDGAR filer manual
Recently, the SEC issued a final rule to update its EDGAR system to support changes to the disclosure, reporting, and offering process for asset-backed securities. Specifically, EDGAR will be revised to update Volume I: General Information, Volume II: EDGAR Filing, and Volume III: N-SAR Supplement. The EDGAR system is scheduled to reflect the updates on October 20.
Financial regulatory agencies adopt final risk retention rules causing changes to mortgage and securitization practices
On October 21 and 22, 2014, six federal regulatory agencies jointly adopted a final rule implementing certain provisions of the Dodd-Frank Act designed to require sponsors of securitization transactions to retain credit risk in those transactions. The Board of Governors of the Federal Reserve System (Federal Reserve), Department of Housing and Urban Development, Federal Deposit Insurance Corporation (FDIC), Federal Housing Finance Agency (FHFA), Office of the Comptroller of the Currency, and the SEC each approved the final rule that defines a “qualified residential mortgage” (QRM) and establishes risk retention limits for mortgage originators depending on the characteristics of the mortgage.
On October 2, the SEC’s Division of Corporation Finance issued a new Compliance and Disclosure Interpretation (“C&DI”) regarding whether an issuer of securities may use its own website or social media to offer securities in a manner consistent with Rule 147 under the Securities Act. Rule 147 provides objective standards for satisfying the exemption from registration provided by Section 3(a)(11) under the Securities Act (which generally exempts from registration securities offered and sold by an issuer if the transaction is wholly intrastate, meaning the issuer and all the offerees/purchasers are residents of the same state).
The SEC announces record number of enforcement actions in FY 2014
On October 16, 2014, the SEC publicized its preliminary enforcement results for fiscal year 2014. In what it described as a “successful enforcement year,” the Commission brought a record 755 actions and obtained $4.16 billion in penalties and disgorgement. These 2014 figures translate to an average of $5.5 million per action, which is 11% higher than the penalties and disgorgement obtained per action in fiscal year 2013 and a whopping 30% upsurge from just two fiscal years ago. It is not a coincidence that these developments correspond neatly with the appointment of Mary Jo White as SEC Chair in 2013. In fact, Chair White has been candid from the outset of her tenure about the Commission’s intention, under her direction, to “make aggressive use of our existing penalty authority, recognizing that meaningful monetary penalties—whether against companies or individuals—play a very important role in a strong enforcement program.”
See the SEC Preliminary Enforcement Results Speech here.
The SEC published an Investor Bulletin providing a general overview of its Division of Enforcement’s investigation process. According to the SEC, “Enforcement decides whether to initiate an investigation based on many factors, including the magnitude and nature of the possible violations, the number of victims affected by the misconduct, the amount of potential or actual harm to investors from the misconduct, and whether misstated or omitted facts would have impacted investors’ investment decisions.” The SEC also describes in the bulletin the process by which it may determine to bring a legal proceeding against a respondent.
The SEC issues its six-month report on administrative proceedings
By rule, the SEC is required to issue a report on the Commission’s administrative proceedings caseload every six months. On October 29, 2014, the SEC issued its most recent report covering the six month period from April 1, 2014 through September 30, 2014. This report also included the statistics from the two prior six-month periods for comparison purposes.
The SEC faces new constitutional challenge to administrative proceedings
In a complaint filed recently in the Southern District of New York, an activist investor and his investment advisor company have gone on the offensive against the SEC. Joseph Stillwell and Stillwell Value LLC filed a complaint seeking injunctive and declaratory relief to prevent an administrative proceeding that the SEC “intends to initiate imminently.”
As the Supreme Court begins its 2014-15 term, it will be considering a number of securities cases, including the Omnicare case, which was scheduled for oral argument on November 3rd, and three other cases in which petitions for certiorari are currently pending before the Court. These cases raise significant questions concerning the standards for claims under Section 11 of the Securities Act, prosecution of insider trading, and the scope of disgorgement penalties in an SEC enforcement action.
See the Mintz Levin Cohn Ferris Glovsky and Popeo article here.
Second Circuit grafts "predominance" test on to Morrison, precluding claims founded on domestic securities transactions manipulated by foreign conduct
In 2010, the United States Supreme Court issued its decision in Morrison v. National Australia Bank, Limited, 561 U.S. 247 (2010), which set forth a bright-line test for determining when a particular case impermissibly relied on an extraterritorial application of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”). On August 15, 2014, the United States Court of Appeals for the Second Circuit was confronted with a case where the securities transaction undoubtedly took place in the United States. In addition, the securities transaction was between two parties residing in the United States. Yet, the court held that the case was an improper attempt by the plaintiffs to apply Section 10(b) extraterritorially because, despite the domestic transaction, the profit or loss on the security was tied to the share price of a company listed on a foreign exchange and foreign aspects of the claim otherwise "predominated."
MD&A rules do not create Rule 10b-5 disclosure obligation
The United States Ninth Circuit recently examined whether Item 303 of Regulation of S-K, which sets forth the MD&A rules, creates an affirmative duty of disclosure on which to pin a Rule 10b-5 case. The case centered around a significant stock price drop after the issuer disclosed it would incur a $150 million to $200 million charge related to product defects. Plaintiffs claimed the company knew it would be liable for the defective products long before the disclosures and made several intervening SEC filings that violated Rule 10b-5. On appeal the plaintiffs argued the disclosure duty under Item 303 of Regulation S–K is actionable under Section 10(b) and Rule 10b-5.
Fifth Circuit holds that insufficient partial disclosures may together sufficiently plead loss causation
Securities class action plaintiffs generally consider the conservative Fifth Circuit to be shark infested waters for pursuing federal securities claims, with very rigorous pleading and proof standards imposed with exactness. After a ruling in Public Employees’ Retirement System of Mississippi v. Amedisys, Inc. (5th Cir. Oct. 2, 2014), plaintiffs may consider the waters slightly less dangerous. In Amedisys, the Court held that a series of five partial disclosures spanning two years may be considered together to plead loss causation.
See the Akin Gump Strauss Hauer & Feld article here.
Sixth Circuit adopts new corporate scienter test in securities cases
The Sixth Circuit Court of Appeals recently issued a significant decision clarifying the pleading standards in securities litigation, clarifying what must be alleged to impute a corporation with knowledge of alleged misconduct by its agents and employees.
In an effort to bridge a decade-old divide among appellate courts on the issue of corporate scienter (state of mind), the Court created a new test in In re Omnicare, Inc. Securities Litigation, holding that the state of mind of any of the following persons are probative for purposes of determining whether misrepresentations or were made by the corporation as a whole with the requisite scienter:
The individual agent who uttered or issued the misrepresentation;
Any individual agent who authorized, requested, commanded, furnished information for, prepared (including suggesting or contributing language for inclusion therein or omission therefrom), reviewed, or approved the statement in which the misrepresentation was made before its utterance or issuance; or
Any high managerial agent or member of the board of directors who ratified, recklessly disregarded, or tolerated the misrepresentation after its utterance or issuance.
Securities-swap agreements based on foreign exchanges not subject to US laws
The United States Second Circuit affirmed the dismissal of plaintiffs’ securities fraud claims because the securities-based swap agreements at issue referenced foreign shares and would thus lead to an impermissible extraterritorial application of the United States securities laws. Parkcentral Global Hub Ltd. v. Porsche Auto. Holdings SE, No. 11-397-cv (2d Cir. Aug. 15, 2014). In so holding, the Second Circuit rejected plaintiffs’ argument that, because the swap at issue was transacted within the United States, US securities laws would apply. Absent a clear expression of Congressional intent otherwise, courts will assume that Congress intended for Section 10(b) to apply only to swap agreements that reference US-traded securities.
SEC sends strong message by awarding USD 30 million to overseas whistleblower
A recent SEC announcement shows the continuing rewarding of whistleblowing in the United States. The SEC announced on September 22, 2014 an expected award of more than $30 million to a foreign whistleblower who provided key information that led to a successful SEC enforcement action. This award is a strong message to whistleblowers from all over the world to come forward with credible information about potential violations of US securities laws. This will be the largest ever award for a whistleblower made under the SEC program.
SEC targets insiders and companies for failure to report stock trades
The SEC recently took an unprecedented step in regulatory enforcement: It is now using sophisticated data analysis to target and charge insiders that have been chronically or materially delinquent in filing required securities transaction disclosures.
Financial Industry Regulatory Authority and Broke-Dealer Topics
The Financial Industry Regulatory Authority ("FINRA") reminds employers that employees can communicate with FINRA and employers need to let them know
FINRA issued a reminder in October 2014 regarding its views on confidentiality provisions and confidentiality stipulations. In Regulatory Notice 14-40, FINRA follows up on its prior Notice to Members 04-44, in which it had cautioned firms about the use of certain provisions in settlement agreements that impede, or have the potential to impede, FINRA investigations and the enforcement of FINRA actions. Specifically, FINRA had addressed settlement agreement provisions which limited, prohibited or discouraged employees from disclosing settlement terms or underlying facts in dispute to FINRA or securities regulators. FINRA proposed acceptable language to be included in settlement agreements or similar contracts which contain confidentiality obligations.
FINRA remarks at the National Society of Compliance Professionals conference
On October 20, Carlo di Florio, chief risk officer and head of strategy of the Financial Industry Regulatory Authority, gave a speech at the National Society of Compliance Professionals regarding risk and regulatory issues in the markets and FINRA’s risk-based exam program, Comprehensive Automated Risk Data System (CARDS), the Consolidated Audit Trail (CAT) and FINRA’s efforts to improve transparency.
SEC settles Foreign Corrupt Practices Act ("FCPA") claims against water management company
On October 27, 2014, the SEC settled administrative proceedings via a cease and desist order against Layne Christensen Co., a Texas-based water management company, related to FCPA violations from operations in Africa. The SEC’s order cited over $800,000 in improper payments to officials in Mali, Guinea, the Democratic Republic of the Congo, Burkina Faso, and Tanzania, related to tax liabilities, customs clearance, expatriate work permits, and border entry. Some of those payments were as small as $4. The company agreed to pay over $4,750,000 in disgorgement and prejudgment interest, and a $375,000 penalty. The SEC cited the company’s self-disclosure, remediation, and “significant cooperation” as reasons for a smaller penalty. In August 2014, the company announced that the DOJ had declined to file charges related to the alleged FCPA violations.
United States and European Union expand sanctions measures in response to situation in Ukraine
In response to Russia’s continued efforts to destabilize Eastern Ukraine, the United States and the European Union continue to expand their coordinated sanctions regimes against Russia. The latest measures, which took effect on September 12, 2014, are designed to deepen and strengthen existing economic sanctions and target the Russian financial, energy, and defense sectors. Overall, the United States and European Union sanctions regimes in response to the Ukraine crisis have been characterized by an incremental, step-by-step intensification and increased isolation of key sectors of the Russian economy. Moreover, recent sanctions show a willingness to expand measures into new sectors despite the potential impact on United States and European Union businesses.
UK Regulators Latest Actions
The Financial Conduct Authority (the “FCA”) released details of its decision to impose a financial penalty of over £290,000 and a prohibition order on a former adviser for alleged integrity failings relating the circumstances in which he sold risky products to investors, made investments on their behalf and dealt with the FCA during its investigation.
International Regulatory Update
Among other regulatory actions, the European Union Commission proposed detailed rules on contributions to national resolution funds and Single Resolution Fund and the European Central Bank published a draft regulation on supervisory financial reporting.
See the Clifford Chance Update here.
Noteworthy News and Publications
UK, US and Hong Kong listings - Eligibility and Continuing Obligations
This publication compares the eligibility requirements for companies seeking to list their equity securities on the UK, US and Hong Kong markets and continuing obligations of those companies after they have achieved listing.
Practical implications of the JOBS Act changes to private placements: Rule 506(c), crowdfunding, and Reg A+
Two key features of the Jumpstart our Business Startups Act (“JOBS Act”) – general solicitation in Rule 506 offerings, and the increased thresholds at which an issuer will be required to register a class of securities under the Securities Exchange Act – when combined with certain advantages already enjoyed by issuers in Rule 506 offerings, open up an entirely new category of “publicly offered private offerings” that are largely exempt from substantive regulation at either the federal or state level, by issuers that will be able to avoid becoming public companies, for practical purposes, as long as they wish. Given the high costs and liability risks of operating as a publicly reporting company in the US, and the great advantages of being a Rule 506 issuer, this is a category that could prove to be very large, and very varied.
See the Pillsbury Winthrop Shaw Pittman article here.
