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Federal Securities Law Blog

Information on federal securities laws, news and developments

SEC proposed rules for compensation clawback policies

Posted in Corporate Governance, Dodd-Frank Act, Executive Officer Matters, SEC News

The SEC has proposed rules that require the securities exchanges to adopt rules that in turn require listed companies to adopt, disclose and comply with a clawback policy for executive compensation based on erroneous financial statements. The new rules would apply to almost all companies listed on a securities exchange (such as NASDAQ and NYSE), including smaller reporting companies.

Many companies already have adopted interim clawback policies in an attempt to comply with the spirit of the law that requires the new rules, Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Until now, some key terms in the law have been undefined. The proposed rules are a good opportunity to think about whether existing policies sync with the proposed rules on the following key terms:

  • Are the correct “executive officers” included under the policy?
  • Is “incentive-based compensation” properly understood under the policy?
  • What types of, and how much, incentive-based compensation must be clawed back?
  • Are there any exceptions?
  • What types of clawback terms should be included in employment agreements?

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What types of companies might use Regulation A+ to raise capital?

Posted in SEC News

Recently finalized Regulation A+ allows most private companies to raise up to $50 million by selling securities to the public. Companies using Regulation A+ can advertise the offering and solicit investors, and anyone can invest (subject to some reasonable investment limits for non-accredited investors).

Owners of a company raising capital with Regulation A+ can sell up to $15 million of their own securities in the company as part of the offering, and there are no limits on the resale of the securities (except for affiliates), assuming a secondary market actually develops.

Regulation A+ does come with compliance obligations, including an offering statement that is subject to SEC review and comment, and audited financial statements and semi-annual reporting obligations for offerings above $20 million. But such compliance obligations are not nearly as onerous as they are for a traditional public offering. Continue Reading

World’s top banks plead guilty to gaming foreign-currency markets

Posted in Antitrust, SEC News, SEC Settlements: Policy, Issues and Disputes

Scandal roiled the banking industry Wednesday as four of the world’s largest banks — Citigroup, JPMorgan Chase, Barclays and Royal Bank of Scotland — pleaded guilty to federal antitrust violations for conspiring to manipulate foreign-currency markets over the course of several years. The scheme involved collusion by traders at the various banks to fix the U.S. dollar – euro exchange rate by coordinating trades and agreeing not to buy or sell at certain times to protect one another’s trading positions.

The guilty pleas place the banks on probation and require them to pay criminal fines totaling more than $2.5 billion, in addition to billions more that they have agreed to pay to state and federal regulators. One of these penalties — a $925 million fine levied against Citigroup — is the largest single fine ever imposed for a violation of the Sherman Act (the federal statute that criminalizes price-fixing and other horizontal conspiracies among competing businesses). The guilty pleas were also historic in that they were entered by the banks’ parent companies rather than by subsidiaries — marking the first time since the Drexel Burnham Lambert scandal of the late 1980s that the primary banking unit of an American financial institution has pleaded guilty to criminal charges.  Continue Reading

SEC votes to propose executive compensation rules

Posted in Compensation Matters, Corporate Governance, Dodd-Frank Act, Executive Officer Matters

On April 29, 2015, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Securities and Exchange Commission (SEC) voted 3 to 2 to approve a proposed amendment to executive compensation rules in Item 402 of Regulation S-K. The proposed amendment directs the SEC to adopt rules requiring registrants to disclose in their proxy or information statements the relationship between executive compensation actually paid and the financial performance of the registrant.

Specifically, the SEC is proposing new Item 402(v) of Regulation S-K that would require “a registrant to provide a clear description of (1) the relationship between executive compensation actually paid to the registrant’s NEOs [(Named Executive Officers)] and the cumulative total shareholder return (TSR) of the registrant, and (2) the relationship between the registrant’s TSR and the TSR of a peer group chosen by the registrant, over each of the registrant’s five most recently completed fiscal years.” Such disclosure should be made taking into account any change in the value of the shares of stock and dividends of the registrant and any distributions.

The SEC is seeking comments to the proposed rules which can be made in the following manner:

Electronic comments:

Paper comments:

  • Send paper comments to:
    Brent J. Fields, Secretary, Securities and Exchange Commission
    100 F St. NE
    Washington, DC 20549-1090

U.S. Supreme Court clarifies liability for opinions in registration statements

Posted in Executive Officer Matters, General Business News, Supreme Court

Opinions in registration statements continue to be one of the most commonly litigated items under Section 11 of the Securities Act of 1933 (“Section 11”). On March 24, 2015, the U.S. Supreme Court in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund clarified a lower court split in the application of Section 11 to opinions in registration statements. The court held, in pertinent part:

1. A statement of opinion does not constitute an “untrue statement of … fact” simply because the stated opinion ultimately proves incorrect. Rather, for an opinion to constitute an “untrue statement of … fact” under Section 11, the opinion expressed must not have been sincerely held by the registrant

2. Section 11 liability only attaches to an omission of material fact in a registration statement if both (i) the registration statement omits material facts about the issuer’s inquiry into, or knowledge concerning, a statement of opinion, and (ii) those facts conflict with what a reasonable investor, reading the statement fairly and in context, would take from the statement itself.

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Recent Delaware case questions ability of common stockholders to prospectively waive appraisal rights; strictly enforces notice requirement to use drag along right

Posted in Corporate Governance, Delaware News

Drag along rights and an accompanying waiver by a minority stockholder of appraisal rights in connection with a change in control transaction approved by the majority stockholder are common features in stockholders agreements among majority stockholders and minority stockholders. The recent case of Michael C. Halpin, Et. Al. v. Riverstone National, Inc., No. 9796–VCG (Del. Ch. Feb. 26, 2015) highlighted the following issues that are important for M&A practitioners:

1. The court called into question, while refusing to answer, whether common stockholders can contractually commit to waive in advance their appraisal rights associated with a change in control transaction; and

2. Failure by a majority stockholder to strictly follow the notice procedure and timing requirements of a drag along right will prohibit the majority stockholder from exercising that drag along right.

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FINRA adopts rule to permit sharing of transaction based compensation to unregistered persons

Posted in Corporate Governance, SEC News

The Securities and Exchange Commission (SEC) has approved the Financial Industry Regulatory Authority’s FINRA Rule 2040, which will permit the payment of compensation, fees, concessions, discounts, commissions or other allowances to unregistered persons if a member firm determines the activities of the unregistered person in question do not require registration as a broker-dealer. Support for the determination can be derived by, among other things, reasonably relying on previously published releases, no-action letters or SEC staff interpretations, seeking a no-action letter from the SEC or obtaining a legal opinion from an independent, reputable U.S. licensed counsel knowledgeable in the area.

A member firm’s determination must be reasonable under the circumstances and should be reviewed from time to time, suggested to be annually by FINRA, if payments to unregistered persons are ongoing. In addition, a member firm must maintain books and records that support the member firm’s determination.

FINRA Rule 2040 has an effective date of Aug. 24, 2015.

FCPA officials point to dollars-and-cents benefits to self-disclosure and cooperation

Posted in Dodd-Frank Act, Foreign Corrupt Practices Act, SEC Settlements: Policy, Issues and Disputes, Whistleblower Issues

High ranking officials in the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) said on March 12 that companies that fail to self-report overseas bribes will face tougher Foreign Criminal Practices Act (FCPA) fines.

While speaking at the Georgetown Law Center Corporate Counsel Institute in Washington, Patrick Stokes, deputy chief of the DOJ’s FCPA Division, and Kara Brockmeyer, the SEC FCPA chief, both cited real-life examples of how companies that did not self-report foreign bribes received significantly higher fines and penalties.

Stokes pointed to French conglomerate Alstom SA, which paid $772 million in fines, the largest FCPA fine in history, for an Asian bribery scheme. Stokes stated that if Alstom SA had come forward and cooperated with the an investigation, prosecutors would have sought as little as $207 million in penalties, representing a 73% reduction from the Federal Sentencing Guidelines. He stressed “measurable and clear” benefits of self-disclosure and cooperation and quipped “You don’t need a forensic accountant. You don’t need a law firm to do this.” Continue Reading

Once again, House takes up bill governing M&A brokers

Posted in Corporate Governance

HR 686, The Small Business Mergers, Acquisitions, Sales & Brokerage Simplification Act, was introduced in the U.S. House of Representatives on Feb. 3, 2015. This bill is identical to HR 2274, which was passed unanimously in the U.S. House of Representatives in 2014, but was never acted upon in the U.S. Senate.

HR 686 would exempt an “M&A broker” from registration under the Securities Exchange Act of 1934 if the M&A broker is engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an eligible privately held company. The exemption is available to a broker if the broker reasonably believes that upon closing, any person acquiring the securities or assets of the eligible privately held company or business will control and will be active in the management of the eligible privately held company or business. In addition, if the any person is offered securities in exchange for securities or assets of the eligible privately held company, such person will, prior to becoming legally bound to close, receive or have reasonable access to the most recent year-end financial statements of the issuer of such securities.

For purposes of HR 686, the term “eligible privately held company” means a company that does not have any class of securities registered or is required to file periodic information or reports with the U.S. Securities and Exchange Commission, and in the fiscal year ending immediately before the fiscal year in which the M&A broker is initially engaged, the company’s EBITDA is less than $25 million and/or the company’s gross revenues are less than $250 million.

Control is presumed to exist if a person has the right to vote 20% or more of a class of voting securities or the power to sell or direct the sale of 20% or more of a class of voting securities or, in the case of a partnership or limited liability company, has the right to receive upon dissolution, or has contributed, 20% or more of the capital.

The exemption offered by HR 686 is not available to an M&A broker who, in connection with the transfer of ownership of an eligible privately held company, has custody of the funds or securities to be exchanged or engages on behalf of an issuer in a public officer of any class of securities.

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