Please find below the September 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 provides new guidance for accredited investor verification under Regulation D
The Securities and Exchange Commission (the “SEC”) recently published six new Compliance and Disclosure Interpretations ("C&DIs") related to the verification process for accredited investors under Rule 506(c) of Regulation D. The C&DIs indicate that the SEC is strictly construing the income and net worth safe harbors for verification of a purchaser's status as an accredited investor.
New SIFMA guidance may ease accredited investor verification worries, assist Regulation D offerings using general solicitation
In June, the Securities Industry and Financial Markets Association ("SIFMA") published guidance for its members who wish to provide the confirmations allowed by Rule 506(c) under Regulation D which permits an issuer to rely on a confirmation by a registered broker-dealer or investment adviser that it has taken reasonable steps to verify the status of an accredited investor.
SEC's Office of Investor Education and Advocacy releases Alert on identifying fraudulent private placements
On August 4, 2014, the SEC’s Office of Investor Education and Advocacy issued an Investor Alert to assist investors in identifying potentially fraudulent private placements. In the Investor Alert, the Office of Investor Education and Advocacy warned investors to be cognizant of common signs of potential fraud when considering investing in an unregistered offering.
On August 27, 2014, the SEC adopted new rules for credit rating agencies implementing 14 rulemaking requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The new rules are designed to enhance governance, protect against conflicts of interest and increase transparency. The new rules apply to credit rating agencies registered with the SEC as “nationally recognized statistical rating organizations,” or NRSROs. Certain of the new rules applicable to NRSROs will take effect 60 days after publication in the Federal Register, while certain others will take effect nine months after publication in the Federal Register, the latter of which are delayed to provide time for NRSROs, issuers, underwriters and other affected parties to prepare for the changes resulting from the new requirements.
The SEC published new final rules governing the disclosure, reporting, and offering process for publicly-offered asset-backed securities (“ABS”). On August 27, 2014, the SEC voted 5-0 to adopt the long-awaited comprehensive amendments to Regulation AB and other rules affecting the offering process for asset-backed securities, commonly known as “Regulation AB II.”
The SEC decreases registration statement filing fees for fiscal year 2015
On August 29, 2014, the SEC announced that, effective October 1, the fees that public companies and other issuers pay to register their securities with the SEC will decrease from $128.80 per million dollars of securities registered to $116.20 per million dollars of securities, a decrease of approximately 10 percent. This fee rate adjustment applies to the filing fee under Section 6(b) of the Securities Act of 1933 applicable to the registration of securities, the filing fee under Section 13(e) of the Securities Exchange Act of 1934 applicable to the repurchase of securities, and the filing fee under Section 14(g) of the Exchange Act applicable to proxy solicitations and statements in corporate control transactions.
The SEC announces tick size pilot program proposal
In June 2014, the SEC ordered the national securities exchanges and the Financial Industry Regulatory Authority ("FINRA") to develop and file a proposal for a tick size pilot program. On August 26, 2014, the SEC announced that the national securities exchanges and FINRA had filed a [proposal to establish a national market system plan to implement a targeted 12-month pilot program that will widen minimum quoting and trading increments (tick sizes) for certain stocks with smaller capitalization. The SEC indicated that it plans to use the pilot program to "assess whether such changes would enhance market quality for smaller capitalization stocks for the benefit of investors and issuers."
The SEC touts whistleblower award to a compliance professional - use care in responding to reports of potential violations
On Friday, August 29, 2014 the SEC announced its first-ever whistleblower award to an audit or compliance professional. In a press release, Sean McKessy, chief of the SEC’s Office of the Whistleblower, highlighted the unique ability of audit and compliance personnel to serve as whistleblowers. He explained, “[i]ndividuals who perform internal audit, compliance, and legal functions for companies are on the front lines in the battle against fraud and corruption. They often are privy to the very kinds of specific, timely, and credible information that can prevent an imminent fraud or stop an ongoing one.”
See the SEC Final Rules governing the SEC Whistleblower Program here.
The SEC waives "voluntary" requirement, awards $400,000 to whistleblower
On July 31, 2014 the SEC announced that it paid an award to a whistleblower who first reported fraud internally (several times, according to the SEC press release), only to have his claims ignored. The whistleblower eventually took his claims to the SEC Office of the Whistleblower.
The SEC files enforcement action based on internal control problems
On July 30, 2014, the SEC announced the filing of administrative actions against the CEO/Chairman and against the former CEO of QSGI, Inc., alleging that they made misrepresentations to the company's auditors and to the public concerning the adequacy of the company's internal controls over financial reporting. The case is unusual in that there are no allegations that the financial statements themselves were inaccurate. The charges focus solely on books and records, control deficiencies, and inaccurate statements and disclosures concerning the controls.
Financial Industry Regulatory Authority and Broker-Dealer Topics
Second Circuit holds contractual forum selection clause supersedes FINRA mandatory arbitration rule and provides guidance for drafting enforceable broker-dealer agreement forum selection clause
On August 21, 2014, the U.S. Court of Appeals for the Second Circuit decided two closely watched appeals regarding the intersection of FINRA rules mandating arbitration of broker-dealer/customer disputes, and contractual forum selection clauses providing for a judicial forum. Goldman, Sachs & Co. v. Golden Empire Schools Financing Authority, et al., Nos. 13-797-cv; 13-2247-cv (2d Cir. Aug. 21, 2014). The Second Circuit's decision in Golden Empire provides important guidance for broker-dealers and institutional market participants in drafting, interpreting and applying forum selection clauses.
Recently, regulators have made inquiries about the lawfulness of U.S. brokerage firms soliciting foreign clients. The regulators want to know under what exemptions or rules U.S. firms can do business overseas. This is a new trend.
The SEC charges executive with insider trading ahead of client announcements
The SEC recently filed a complaint in the U.S. District Court for the Southern District of New York against a director at an investor relations firm charging him with multiple instances of insider trading ahead of impending news announcements by clients. According to the complaint, Michael Anthony Dupre Lucarelli, who allegedly obtained access to material, nonpublic information through his position as a Director of Market Intelligence at a Manhattan investor relations firm, traded in securities belonging to companies that his firm was advising in advance of significant corporate announcements.
See the Schulte Roth & Zabel Insider Trading Developments publication here.
See the Debevoise & Plimpton Insider Trading & Disclosure update here.
Third Circuit rejects claim that fiduciary duty required for insider trading
Insider trading cases frequently turn on the nature of the relationship between the trader and the person who is the source of information. The breach of that relationship of trust and confidence can supply the statutory element of deception, the predicate for a violation of Exchange Act Section 10(b). In U.S. v. McGee, No. 13-3183 (3rd Cir. Decided August 14, 2014) the Court rejected a claim that the SEC exceeded its authority when enacting Rule 10b5-2 because it did not require a fiduciary duty.
Doing deals abroad? What you need to know about the FCPA
The Foreign Corrupt Practices Act the (“FCPA”) makes it unlawful for a business or individual “corruptly” to offer, pay, promise to pay, or authorize payment of anything of value to a “foreign official” for the purpose of obtaining or retaining business or securing any improper business advantage. The Department of Justice (“DOJ”) and the SEC are charged with enforcing the FCPA – a task they have undertaken zealously. This summer, the SEC announced that it will be expanding its cooperation program for the FCPA, which will lead to an increase in enforcement action on companies doing business abroad. SEC enforcement action is often coupled with parallel DOJ actions, making it very important for companies to understand the FCPA.
Second Circuit addresses whether cross-border swaps fall within the territorial jurisdiction of federal securities laws
The New York-based U.S. Court of Appeals for the Second Circuit recently issued a significant decision clarifying the application of federal securities laws to cross-border securities transactions. In Parkcentral Global Hub Ltd. v. Porsche Automobil Holding SE (Porsche), the Second Circuit ruled that plaintiffs cannot necessarily invoke Section 10(b) of the Securities Exchange Act of 1934 - the primary provision in the U.S. securities laws for civil anti-fraud claims -just because their lawsuit is based on securities transactions that occurred or were entered into in the United States. The Second Circuit took a flexible approach to the invocation of Section 10(b), expressly declining to adopt a bright-line test because of the difficulty any such test would pose “in a world of easy and rapid transnational communication and financial innovation.”
Second Circuit affirmed dismissal of claims filed by the U.S. and foreign investors who purchased stocks on a foreign exchange, even though the stocks were cross-listed in the U.S.
On May 6, 2014, in City of Pontiac Policemen's & Firemen's Retirement System v. UBS AG., the United States Court of Appeals for the Second Circuit issued an opinion clarifying the limits of extraterritorial claims under Section 10(b) of the Securities and Exchange Act of 1934 arising from foreign transactions.
Section 10(b) of the Exchange Act and the rules thereunder are the principal anti-fraud provisions of US securities law. In 2010, the U.S. Supreme Court issued an opinion in Morrison v. National Australia Bank1 to the effect that Section 10(b) of the Exchange Act and Rule 10b-5 thereunder apply only in connection with a purchase or sale of a security listed on a domestic exchange, and the purchase or sale of any other security in the United States. (For more information on Morrison, please see the update by the Forum for US Securities Lawyers in London)
In City of Pontiac, the Court has further limited the extraterritoriality of the Exchange Act, which should provide some comfort to foreign issuers, especially those with securities cross-listed on an exchange in the United States.
Second Circuit rules on question of whether Dodd-Frank protects whistleblowers outside U.S.
On August 14, 2014, the United States Court of Appeals for the Second Circuit became the first U.S. appellate court to weigh in on the extraterritorial application of the whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. In Liu v. Siemens, A.G., the Second Circuit affirmed the U.S. District Court for the Southern District of New York’s dismissal of a whistleblower claim on the ground that Dodd-Frank’s anti-retaliation provision had no extraterritorial effect.
Securities class actions and IPOs increased in the first half of 2014
The number of securities class action lawsuit filed in the first half of this year increased compared to the same period last year. During the same period the number of IPOs increased significantly, suggesting that in the future there may be even more securities class actions brought, according to a new report from Cornerstone Research.
In October of 2011, the SEC filed a complaint in federal court in New York, charging Citigroup with securities fraud in connection with a synthetic collateralized debt obligation sold to investors in 2007. Simultaneously, the SEC announced, inter alia, that it was settling the matter with Citigroup for $285 million. Judge Rakoff drew the assignment of overseeing and approving the lawsuit’s resolution.
On August 28, 2014, the final text of a Directive to update Directive 2009/65/EC (UCITS IV Directive) on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) in relation to depositary functions, remuneration policies and sanctions (UCITS V) was published in the Official Journal of the European Union. The depositary rules will bring UCITS funds more in line with the requirements for depositaries of alternative investment funds under AIFMD (i.e., the Alternative Investment Fund Managers Directive).
In two separate well publicised cases, the Financial Conduct Authority (the “FCA”) last week imposed financial penalties of over £20 million in respect of mortgage advice and transaction reporting failures. It also imposed a fine of £350,000 and a ban on an individual for integrity breaches relating to the inappropriate promotion of unregulated collective investment schemes.
FCA publishes supervisory approach to financial promotions in social media
On August 6, 2014, the FCA published its guidance consultation on social media and customer communications (the “Guidance”). The Guidance is intended to clarify and confirm the FCA’s approach to the supervision of customer communications and, more specifically, financial promotions published using social media platforms. It also proposes guidance to assist those firms that use social media to communicate financial promotions to their clients as to how they might do so while still complying with the relevant rules of the FCA.
New Irish ICAV structure - "eligible entity" for U.S. tax purposes
After much anticipation in the industry, Ireland’s Department of Finance announced the publication of the Irish Collective Asset-management Vehicle Bill (ICAV) 2014 on July 29, 2014. A distinct advantage of the ICAV is that it will be considered to be an “eligible entity” for U.S. tax purposes, whereby it can elect to “check the box”.
Foreign issuer IPOs have been increasing recently as foreign issuer activity continues to improve since a marked decline in 2011 and 2012. The recent rise in foreign issuer IPOs has also been brought about in part by the accommodations afforded foreign issuers under the JOBS Act, which took effect on April 5, 2012.
European corporates are turning to the U.S. private placement market in growing numbers, as they seek to broaden and diversify their sources of funding while locking in some attractively priced long-term debt