Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

As the Green Movement continues, more institutional investors are becoming concerned with the potential costs and risks of investing in projects that produce high amounts of carbon. This was the topic of a recent meeting of investors in New York organized by the United Nations Foundation and Ceres, a coalition of investors and environmental groups.

Investors have asked the SEC in the past to require carbon footprint disclosures, but the SEC has declined, and many companies are against such disclosures. The investors are not being altruistic; they are reacting to potential costs that could affect their investments, including 12 bills currently in Congress that would raise costs for companies that emit too much carbon. Investors what to know what is a company’s “climate risk,” which includes risks associated with the costs of carbon production, diminished reputation for not being green, and costs associated with environmental forces such as hurricanes that tend to disrupt energy-based investments.

The investors, including investment banks and pension and retirement funds, have a lot of power if they can agree on strategies for obtaining carbon footprint disclosures. The organizers of the meeting claimed those that attended collectively control trillions of dollars in capital.

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Brokerage firms that issue fairness opinions regarding corporate transactions have new disclosure obligations that will likely require changes to form documents used to draft the opinions and the internal procedures that govern the process. The Financial Industry Regulatory Authority (“FINRA”) has established a new Rule 2290 that requires disclosure of potential conflicts of interest between firms that render fairness opinions and the parties to the corporate transactions that are the subject of the fairness opinions. The rule is designed to alert shareholders that a fairness opinion regarding a potential transaction is not necessarily rendered by a completely independent third party. FINRA is concerned that shareholders may not be aware that the firm issuing a fairness opinion is often an advisor to a party to the transaction whose compensation may be contingent upon the success of the deal.

The new rule addresses this concern by requiring specific disclosures if a member firm issuing a fairness opinion knows or has reason to know that the fairness opinion will be provided or described to the company’s public shareholders. Even if an opinion is prepared only for use by the board of directors of a client, shareholders of the client will now be made aware of potential conflicts of interest – including contingent compensation arrangements – because fairness opinions are usually included in materials provided to public shareholders.

FINRA Rule 2290 Disclosure Requirements

The following new disclosures are required by Rule 2290:

• whether the member firm has acted as a financial advisor to any party to the transaction;

• whether compensation for the opinion is contingent upon the success of the transaction;

• material relationships during the past two years between the member firm and any party to the transaction;

• whether the member firm independently verified any of the information that formed a substantial basis for the fairness opinion and was supplied to the member by the company requesting the opinion;

• whether the fairness opinion was approved or issued by a fairness committee; and

• whether the fairness opinion addresses the fairness of the amount or nature of the compensation from the transaction to certain insiders relative to the compensation to shareholders.

FINRA Rule 2290 Procedure Requirements

Several member firms that issue fairness opinions may have already implemented many of Rule 2290’s newly required disclosures. These firms should also ensure, however, that they meet the new rule’s procedural requirements for issuing fairness opinions. Member firms that issue fairness opinions must have written procedures regarding the approval of all fairness opinions, not just those that will be provided to shareholders. Additionally, the written procedures must describe when the member firm will use a fairness committee to issue a fairness opinion and the process by which the valuation analyses used in the fairness opinion will be evaluated.

The new rule is already in effect and has been approved by the Securities and Exchange Commission. Member firms should review their templates for fairness opinions and the procedures by which fairness opinions are rendered to ensure compliance with the new rule.

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The Securities and Exchange Commission (“SEC”) recently adopted certain rule amendments mandating that the information required to be filed on Form D under the Securities Act of 1933 (“Form D”) be filed electronically through the internet.  The information required by Form D will be filed electronically with the SEC through a new online filing system that will be accessible from any computer with Internet access and the data filed will be available on the SEC’s web site.  In addition, the amendments revised Regulation D promulgated under the Securities Act of 1933 and Form D to simplify and restructure Form D and update the information required by Form D.

View Final Rule

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The SEC has recently released a Small Entity Compliance Guide to assist "small businesses" with the transition to reporting as "smaller reporting companies." As previously discussed, the S-B disclosure rules will be eliminated, as well as the small business forms, and small businesses will be required to comply with specific requirements for "smaller reporting companies" in Regulation S-K.  A copy of the Guide is attached.

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As the Presidential primary elections continue, news outlets have been reporting the accuracy of prediction markets used to predict which candidates will win. A prediction market is like a securities exchange; but instead of trading stocks, market participants trade “contracts” that designate whether an unambiguous future event will occur. The contracts trade among market participants with bid and ask prices the same way that stocks trade on a stock exchange. The bid and ask “prices” are typically limited to between 1 and 100 “points,” which represent money on some prediction markets. The 1-100 scale allows market participants to think of the trading price as the percentage likelihood that an event will occur.

For example, one such contract available on RasmussenMarkets.org, which is a prediction market that does not use money, is whether Hillary Clinton will receive the Democratic Presidential nomination in 2008. Currently, this contract is trading at around 60 points, which means that market participants collectively think there is a 60% chance that Clinton will receive the nomination.
The theory of a prediction market is that by giving individuals an incentive (often monetary), they will collectively use the information available to them to predict an accurate outcome. For example, RasmussenMarkets.org accurately predicted that Barack Obama and Mike Huckabee would each win in the Iowa caucuses.

Prediction markets implicate securities laws because the markets are particularly vulnerable to inside information, as evident by the fact that the price of a contract often increases or decreases dramatically in the days preceding a scheduled outcome. If people are trading on inside information, this begs the question of whether the SEC could intervene, which would first require determining that the contracts traded are securities. Interestingly, the Iowa Electronic Markets, a non-profit, research-based prediction market created by faculty at the University of Iowa, uses real money but operates under a “no-action” letter from the Commodity Futures Trading Commission.

Below are some other popular prediction markets:

Inkling Markets
Fluid Innovation
Hollywood Stock Exchange
Intrade

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