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Federal Securities Law Blog

Information on federal securities laws, news and developments

Comment by Feb. 16 on proposed uniform state model rule for M&A brokers

Posted in Corporate Governance

The Broker-Dealer Section of the North American Securities Administrators Association is seeking comments no later than Feb. 16, 2015, on a proposed uniform state model rule exempting certain merger and acquisition brokers from registration as brokers, dealers, agents or broker-dealers under state securities laws. The proposed uniform model rule represents the evolution among regulators and Congress to exempt merger and acquisition brokers from some of the registration requirements in the federal securities laws.

The proposed state model rule would exempt from registration any broker or person associated with a broker engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an eligible privately held company, if the broker reasonably believes: Continue Reading

Bill governing M&A brokers should resurface in 2015

Posted in Corporate Governance, General Business News

During 2014, Congress has gained momentum toward creating an exemption from federal broker-dealer registration for “M&A brokers” who facilitate mergers, acquisitions, sales and similar transactions involving privately held companies.

H.R. 2274 unanimously passed the U.S. House of Representatives, but the U.S. Senate did act on the bill. If passed, the measure would have permitted M&A brokers to be involved with the sale of certain privately held companies without being registered as a broker-dealer. A number of limitations apply to the type of transaction addressed in the bill, including:

  • The size of the privately held company
  • Company leadership; the buyer would need to be actively involved, directly or indirectly, in operating the business after closing
  • Client funds; the bill forbids the M&A broker to have custody of client funds

Observers expect the bill to be reintroduced in 2015.

Shortly after H.R. 2274 passed the U.S. House, the Securities and Exchange Commission issued the M&A broker no-action letter, which concluded that the staff of the SEC Division of Trading and Markets would not recommend enforcement action if, without registering as a broker-dealer, an M&A broker engaged in M&A activities if all of the no-action letter’s conditions were satisfied. Among those conditions are that the target company must be an operating company that is a “going concern,” the buyer must be involved in operating the business after closing, and an M&A broker cannot bind a party to an M&A transaction or provide financing for an M&A transaction.

State regulators, in collaboration with the North American Securities Administrators Association, are developing a complementary model rule under state securities laws that would allow M&A brokers to be engaged in certain M&A transactions under state registration exemptions.

A compliance problem truly “Made in the USA”

Posted in General Business News, Trends

Following the expiration of a public comment period last week, the ink is now dry on the Federal Trade Commission’s consent decree against Made in USA Brand, LLC, settling charges that the Columbus, Ohio-based company sold its “Made in USA” certification label to product-sellers without making any attempt to verify whether the companies’ products were actually made in the USA.

The FTC’s case against Made in USA Brand, LLC seems to present a pretty bright line for what not to do when labeling a product as “Made in USA.” According to the FTC, the company’s certification would have been just as easily obtainable by a computer chip factory in Shenzhen, China as it would have been by a furniture maker in Pennsylvania Dutch country. But determining whether a product is truly “Made in USA” is rarely as obvious as in these extreme examples. In our increasingly globalized economy, even the most seemingly simple products may be assembled in one country from parts manufactured in another country using components made in yet another country. Can any one of these countries really claim to have “made” the product?

Fortunately, the FTC has attempted to bring a pragmatic approach to this conundrum by allowing use of a “Made in USA” label as long as “all or virtually all” of a product is made domestically. Problem solved, right? Wrong. Enter California. Continue Reading

FCPA to increasingly target individuals

Posted in Foreign Corrupt Practices Act

The head of the Department of Justice (DOJ) Criminal Division warned Friday that Foreign Criminal Practices Act (FCPA) prosecutions will increasingly target individuals wrongdoers, rather than corporations. Assistant Attorney General Leslie Caldwell, speaking at the American Conference Institute’s National Conference on the Foreign Criminal Practices Act, outlined a two-prong approach to attack foreign corruption:

  1. Bring those who pay bribes to justice “no matter how rich and powerful they are,” and;
  2. Attack corruption at its source by prosecuting and seizing the assets of corrupt foreign officials.

Caldwell warned that DOJ efforts will focus on “bribes of consequence” — payments that fundamentally undermine confidence in markets and governments. Focusing on these types of cases allows the DOJ to show corporate executives that if they participate in a scheme to improperly influence a foreign official, they will “personally risk the very prospect of going to prison.” Continue Reading

“The Bandits’ Club” gets its due

Posted in Antitrust

Our colleagues at Antitrust Law Source posted an interesting update about probable charges alleging that traders at approximately a dozen global banks – including Deutsche Bank, JPMorgan Chase, Barclays, and USB – fixed the foreign exchange market, or “forex,” market. The U.S. Department of Justice may bring charges by the end of the year. Read the complete article on Antitrust Law Source.

Supreme Court refuses to review FCPA challenge

Posted in Criminal Charges in Securities Cases, Foreign Corrupt Practices Act, Supreme Court

The U.S. Supreme Court on Monday refused to review the first Foreign Corrupt Practices Act (FCPA) case appealed to the highest Court. The appeal sought to limit the scope of the FCPA by narrowing the law’s definition of the term “foreign official.”

Joel Esquenazi and Carlos Rodriguez, former executives of Terra Telecommunications Corp., had challenged their convictions under the FCPA and had asked the Supreme Court to clarify who counted as a foreign official under the law. The Eleventh Circuit had affirmed the conviction and the ruling that defined the term instrumentality as “any entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.”

Continue Reading

Whistleblowers wanted; Holder seeks increased compensation for financial crime informants

Posted in Corporate Governance, Whistleblower Issues

In the first major public comment about white collar crime in more than a year, the Department of Justice (DOJ) called for an increase in compensation for whistleblowers under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). Senior DOJ officials, in three separate speeches, appealed to whistleblowers to come forward with information about crimes and suggested that compensation levels were too low to entice executives in the financial industry to report wrongdoing.

Attorney General Eric Holder, while speaking at New York University, suggested that Congress increase awards in cases involving banks and financial institutions. Under current law, FIRREA caps whistleblower awards at $1.6 million. Holder noted that under the False Claims Act (FCA), tipsters who provide information to law enforcement concerning wrongdoing can receive compensation at a level of 25 percent to 30 percent of the recovery received by the government.

Holder cited that in an industry that included a collective bonus pool of $26 billion and a median executive pay of $15 million, a “paltry” windfall of $1.6 million is “unlikely to induce an employee to risk his or her lucrative career in the financial sector.” Holder suggested that increased awards could improve the DOJ’s ability to gather evidence of wrongdoing “while complex financial crimes are still in progress — making it easier to complete investigations and to stop misconduct before it becomes so widespread that it foments into the next crisis.” Continue Reading

Sixth Circuit case specifies additional language required in indemnification survival clauses in M&A agreements

Posted in Executive Officer Matters, General Business News, Shareholder News

A recent Sixth Circuit case, interpreting Ohio law, found that a merger agreement stating that the representations and warranties “shall survive…the Closing until… the second anniversary date of the Closing…,” without more, was not sufficient to modify the statute of limitations for breach of contract claims related to the merger agreement. Fortunately, this issue can be remedied in merger agreements with the addition of a provision expressly limiting when “actions,” “demands” or “claims” may be brought.

This article describes the Sixth Circuit case in greater detail and provides a sample contract provision that M&A parties can add to their M&A agreements to ensure that courts will respect the parties’ intent to modify the statute of limitations in the survival clause of the agreement.

Background of the Sixth Circuit case

Escue v. Sequent, Inc., 2014 FED App. 0412N (6th Cir. 2014), involved the acquisition of Better Business Solutions of Alabama, Inc. (“Better Business”) by Sequent, Inc. pursuant to a stock for stock merger that closed Jan. 1, 2007. On Dec. 18, 2008, the plaintiff, the sole shareholder of Better Business, sent a letter to the defendant corporation stating that he intended to sue the defendant corporation for breaching its representations and warranties. However, the lawsuit was not filed until September 2009. Continue Reading

Late Form 4s aren’t just embarrassing anymore

Posted in Corporate Governance, SEC Enforcement Cases, SEC News

Yesterday, the SEC announced penalties totaling approximately $2.6 million against directors, officers, beneficial owners and issuers for failure to promptly report information about holdings and transactions in company stock.

The primary enforcement weapon for these types of failures historically has been public shaming: Rule 405 of Regulation S-K requires issuers to identify insiders who failed to file Section 16 reports on time during the previous year. But, apparently, based on yesterday’s announcement, the SEC also will levy fines against issuers and individual insiders for chronic filing failures.

Settled fines for individuals ranged from approximately $25,000 to $100,000. Six publicly-traded companies settled claims that they contributed to the filing delinquencies of their insiders and paid fines ranging from $75,000 to $150,000.

U.S. Commerce Department acknowledges that conflict minerals are too hard to track

Posted in Dodd-Frank Act, SEC News

According to a Wall Street Journal article reported by Emily Chasen, Senior Editor at The Wall Street Journal‘s CFO Journal, on Sept. 5, 2014, the U.S. Commerce Department acknowledged “it cannot determine which refiners and smelters around the world are financially fueling violence in the war-torn Congo region.”

The WSJ article noted that companies including Intel Corp. and Apple have spent a substantial amount of time and millions of dollars “investigating their supply chains to figure out which components might contain gold, tin, tungsten and tantalum from mining operations blamed for funding armed militia groups in the Democratic Republic of the Congo.” According to Tom Quaadman, vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, “[a]t the end of the day, the conflict minerals rule creates the worst outcome — it has not helped lessen the conflicts in the Congo and creates economic harm in the U.S.”

The SEC final rules on conflict minerals, adopted Aug. 22, 2012, pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, require companies to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo or an adjoining country. See SEC Adopts Final Rules for Disclosing Use of Conflict Minerals (posted Aug. 24, 2012). Additionally, the conflict mineral rules have been the subject of much litigation during the past two years, which has provided no clarity to companies as to their compliance obligations.

Editor’s note: Though the basis for the conflict mineral rules is a worthy and noble exercise, the execution has been costly and time-consuming for U.S. companies with very little benefit. If the U.S. Commerce Department cannot track the source of these minerals, how can companies be expected to do the same to comply with the disclosure rules? The SEC needs to step back and reassess the cost-benefit of the conflict mineral disclosure obligations.