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Federal Securities Law Blog

Information on federal securities laws, news and developments

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

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