Federal Securities Law Source

U.S. Court of Appeals reaffirms April 2014 decision on the conflict minerals rules

We reported previously in April 2014 on the ruling by the United States Court of Appeals for the District of Columbia Circuit striking down the part of the SEC’s conflict minerals rules that requires a registrant to describe its products as not “DRC conflict free” and upholding the remainder of the conflict minerals rules. Upon a rehearing of the case by the D.C. Circuit, the court on Aug. 18, 2015 reaffirmed its previous decision by a 2-1 vote.

In its April 14, 2014 decision, the D.C. Circuit struck down the requirement in the conflict minerals rules that an issuer describe its products as not “DRC conflict free” because it violates the First Amendment by compelling speech by the issuer. Continue Reading

Student internships basis for FCPA violation

The Securities and Exchange Commission (SEC) announced Tuesday that Bank of New York Mellon (BNY Mellon) had agreed to pay $14.8 million dollars to settle Foreign Corrupt Practices Act (FCPA) violations. The agreement arose out of BNY Mellon providing internships to relatives of officials linked to a Middle Eastern Sovereign Wealth Fund.

The settlement, in which BNY Mellon is not required to admit or deny wrongdoing, was one of the first actions brought by the SEC against a financial institution under the FCPA. It is also the first anti-bribery action in which student internships were considered a thing of value for FCPA prosecution.

During 2010-2011, BNY Mellon provided bank asset and wealth management services to a Middle Eastern Sovereign Wealth Fund, a government entity responsible for the management and administration of assets of an unnamed Middle Eastern country. These assets were entrusted to BNY Mellon by the country’s Minister of Finance. At that time, BNY Mellon held assets for the Wealth Fund totaling more than $55 billion. Continue Reading

SEC proposed rules for compensation clawback policies

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?

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

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

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

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

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

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.

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