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Commodities trader found guilty in first “spoofing” prosecution

A Chicago jury took one hour to find a trader guilty of “spoofing” some of the world’s largest commodities futures markets by deceptive electronic trading. On Tuesday, Michael Coscia was found guilty of 12 counts of fraud and “spoofing” by attempting to flood the gold, corn, soybean and crude oil futures markets with small orders, which he intended to cancel prior to execution. This case marked the first test of anti-spoofing legislation which was enacted in the 2010 Dodd-Frank Act.

Spoofing occurs when traders rapidly place orders with the intent to cancel them before the trades can be executed – all with the intent to deceive other investors to believe that there is a spike in demand for the commodity. This tactic has become increasingly prevalent with the emergence of electronic trading which has taken the place of face-to-face trading in commodity “pits.” Federal authorities, and market experts, believe that this type of activity could not have occurred in face-to-face trading, but “spoofers,” like Coscia, can now use the anonymity of electronic trading to manipulate demand. …

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.…

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?

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

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

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.”…

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

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 …

SEC issues statement on the recent Court of Appeals decision on the Conflict Minerals Rule

We reported previously 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. Many observers have been eagerly awaiting the SEC’s response to this decision, including whether the SEC will delay the implementation of the conflict minerals rules.

On April 29, 2014, the SEC issued its response to the court’s decision in the conflict minerals rules challenge. In short, the SEC affirmed the June 2, 2014 deadline for registrants to file Form SD and their conflict minerals reports. Consistent with the court’s ruling, the SEC stated that registrants will not be required to describe their products as “DRC conflict free,” having “not been found to be ‘DRC conflict free,’” or “DRC conflict undeterminable.”

If a registrant voluntarily elects to describe any of its products as “DRC conflict free” in its conflict minerals report, it would be permitted to do so provided it had obtained an independent private sector audit (IPSA) as required by the conflict minerals rules. Pending further action from the SEC, an IPSA will not be required unless a registrant voluntarily elects to describe a product as “DRC conflict free” in its conflict minerals report.

Compliance with the conflict minerals rules can be a substantial undertaking. Registrants need to continue their compliance efforts and be prepared for the June 2, …

District Court Dismisses Conflict Minerals Challenge

On July 23, 2013, the United States District Court for the District of Columbia dismissed the challenge to the Securities and Exchange Commission (SEC) conflict minerals rules (the Rules) brought by a group of trade associations. The Rules were issued under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and require that public companies disclose the country of origin of certain minerals used in the products they manufacture or contract to manufacture.

Court Decision

The court determined, among other things, that:…

District Court Vacates Resource Extraction Issuer Payment Disclosure Rules; May Foreshadow Ruling on Conflict Minerals Challenge

On July 2, 2013, the United States District Court for the District of Columbia (the “Court”) vacated Securities and Exchange Commission (“SEC”) Rule 13q-1 (the “Rule”), which required certain companies to disclose payments made to foreign governments in connection with the commercial development of oil, natural gas or minerals. The Court found that (i) the SEC erroneously read the statutory language as requiring public disclosure of these payments; and (ii) that the SEC’s decision to deny any exemption to the disclosure requirements, specifically in the case of countries that prohibit disclosure of these payments, was arbitrary and capricious.…

SEC Approves SRO Listing Standards Relating to Independence of Compensation Committees

The SEC has approved the listing standard changes relating to compensation committee independence and consultants for both Nasdaq and the NYSE.

The proposed listing standards implement Rule 10C-1 under the Securities Exchange Act of 1934, which was added by the Dodd-Frank Act.

With respect to the Nasdaq listing standard changes, most listed companies will be required to comply with the new rules, but Nasdaq has exempted "smaller reporting companies" from compliance.  First, by July 1, 2013, the listed company must have a formal written charter that provides:

  • The compensation committee will review and reassess the adequacy of the charter on an annual basis;
  • The scope of the committee’s responsibilities and how it carries out those responsibilities, including structure, processes, and membership requirements;
  • The committee’s responsibility for determining or recommending to the board for determination, the compensation of the CEO and all other executive officers of the company, and provide that the CEO may not be present during voting or deliberations on his or her compensation; and
  • The committee’s responsibilities and authority with respect to retaining its own advisers; appointing, compensating, and overseeing such advisers; considering certain independence factors before selecting advisers; and receiving funding from the company to engage them.

The compensation committee may select, or receive advice from, a compensation consultant, legal counsel or other adviser, other than in-house legal counsel, only after taking into consideration the following factors:

  • The provision of other services to the company by the person that employs the compensation consultant, legal counsel or other adviser;
  • The amount

Lawsuit Challenges SEC Rules on Conflict Minerals

On October 22, 2012, the U.S. Chamber of Commerce, the National Manufacturers Association, and the Business Roundtable filed a lawsuit in the United States Court of Appeals for the DC Circuit seeking to modify or eliminate the Securities and Exchange Commission’s ("SEC") final rules governing conflict minerals. The SEC adopted the final rules on conflict minerals on August 22, 2012 pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") requiring companies to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo ("DRC") or an adjoining country. See SEC Adopts Final Rules for Disclosing Use of Conflict Minerals (posted August 24, 2012). The lawsuit did not contain any legal arguments or explanations for the requested modification.

In a joint statement, the U.S. Chamber of Commerce and the National Manufacturers Association stated, “[t]he final conflict mineral rule imposes an unworkable, overly broad and burdensome system that will undermine jobs and growth and may not achieve Congress’s overall objectives.” According to a report in the Wall Street Journal, the SEC estimated that approximately U.S. and foreign companies would have to comply with the conflict-minerals rules with an upfront cost of $3 to $4 billion dollars and an additional $200 million annually.…

SEC Issues Third Report on the Implementation of SEC Organizational Reform Recommendations

On October 17, 2012, the Securities and Exchange Commission ("SEC") issued its Third Report on the Implementation of SEC Organizational Reform Recommendations.  Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank Act"), the SEC was directed to engage an independent consultant to conduct a review of the SEC’s operations, structure, funding, and the SEC’s relationship with Self-Regulating Organizations.  This is the third of four reports that the SEC will provide to Congress under Section 967(c) of the Dodd-Frank Act.  The goal of this review process is to increase the SEC’s effectiveness and efficiency.

 

SEC Staff Study Regarding Financial Literacy Among Investors

On August 30, 2012, the Securities and Exchange Commission ("SEC") released its findings of a staff study (the "Study"), as mandated by Section 917 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank Act"), identifying the existing level of financial literacy among retail investors as well as the methods and efforts to increase the financial literacy of investors.  The Study identifies investor preferences regarding a variety of investment disclosures, such as that investors prefer to receive investment disclosures prior to investing. The Study also identifies information that investors find useful and relevant in helping them make informed investment decisions, such as information about fees, investment objectives, performance, strategy, and risks of an investment product, as well as the professional background, disciplinary history, and conflicts of interest of a financial professional. The Study also shows that investors favor disclosure of investment information in a visual format, using bullets, charts, and graphs.…

SEC Adopts Final Rules Requiring Payment Disclosures by Resource Extraction Issuers

On August 22, 2012, the Securities and Exchange Commission ("SEC") adopted a final rule pursuant to Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") requiring resource extraction issuers (companies engaged in the development of oil, natural gas, or minerals) to disclose in an annual report information relating to any payment made by the issuer, a subsidiary of the issuer, or an entity under the control of the issuer, to a foreign government or the U.S. government for the purpose of the commercial development of oil, natural gas, or minerals. Section 1504 added Section 13(q) to the Securities Exchange Act of 1934 (the "Exchange Act"), which requires the SEC to promulgate rules requiring disclosure to be made by resource extraction issuers annually by filing a Form SD with the SEC.

Section 13(q) of the Exchange Act requires a resource extraction issuer to provide disclosure on Form SD to be filed with the SEC that includes (1) information about the type and total amount of such payments made for each project related to the commercial development of oil, natural gas, or minerals, (2) information about the type and total amount of payments made to each government, and (3) information regarding those payments in an interactive data format.

A resource extraction issuer must comply with the new rules and form for fiscal years ending after September 30, 2013. The Form SD must be filed with the SEC no later than 150 days after the end of its fiscal …

SEC Adopts Final Rules for Disclosing Use of Conflict Minerals

On August 22, 2012, the Securities and Exchange Commission (“SEC”) adopted a new form and final rule pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) requiring companies to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo (“DRC”) or an adjoining country. Section 1502 added Section 13(p) to the Securities Exchange Act of 1934 (the “Exchange Act”), which requires the SEC to promulgate rules requiring issuers to disclose their use of conflict minerals that include tantalum, tin, gold, or tungsten if those minerals are “necessary to the functionality or production of a product” manufactured by those companies and whether any of those minerals originated in the DRC or an adjoining country.

If an issuer’s conflict minerals originated in the DRC or an adjoining country, Section 13(p) of the Exchange Act requires the issuer to provide disclosure on a new Form SD to be filed with the SEC that includes (1) a description of the measures it took to exercise due diligence on the conflict minerals’ source and chain of custody (including an independent private sector audit of the report that is conducted in accordance with standards established by the U.S. Comptroller General), and (2) a description of the products manufactured or contracted to be manufactured that are not “DRC conflict free” the facilities used to process the conflict minerals, the country of origin of the conflict minerals, and the efforts to determine the mine or location …

Federal Judge in Oregon Upholds Dismissal of “Say-on-Pay” Lawsuit Against Umpqua Board

In an Opinion and Order dated February 23, 2012, Judge Michael Mosman adopted the January 11, 2012 Findings and Recommendations of Magistrate Judge John Acosta to dismiss the derivative lawsuit against the Board of Directors of Umpqua Holdings Corporation ("Umpqua") for breach of fiduciary duty. Magistrate Judge Acosta recommendation to dismiss the say-on-pay" lawsuit was the first of its kind. Judge Mosman agreed that plaintiffs’ failure to make a presuit demand was not excused under the arguments they raised regarding the Board members’ exercise of the business judgment rule or their lack of independence or disinterest. Plaintiffs have until March 26, 2012 to amend their complaint.…

Federal Magistrate Judge in Oregon Recommends Dismissing “Say-on-Pay” Lawsuit Against Umpqua Board

On January 11, 2012, Magistrate Judge John Acosta recommended the dismissal of the derivative lawsuit against the Board of Directors of Umpqua Holdings Corporation ("Umpqua") for breach of fiduciary duty. The lawsuit was filed after the shareholders, in an advisory vote, rejected the Board-approved executive compensation program. The Magistrate Judge found that the plaintiffs failed to make a presuit demand as required for a derivative suit and were not excused from doing so under the arguments they raised regarding the Board members’ exercise of the business judgment rule or their lack of independence or disinterest. As Broc Romanek of theCorporateCounsel.Net Blog pointed out, "[t]his is the first federal court decision to dismiss such an action." Magistrate Judge Acosta has referred his Findings and Recommendations to District Judge Michael W. Mosman for review and final determination.…

Net Worth Standard for Accredited Investors

Yesterday the SEC released its final rule regarding the exclusion of the value of a person’s primary residence when determining whether the person qualifies as an “accredited investor” on the basis of having a net worth in excess of $1 million. The accredited investor standards are used to determine certain exemptions from Securities Act registration for private offerings. Prior to Dodd-Frank, investors could include their primary residence in calculating a minimum net worth of more than $1,000,000. Section 413(a) of the Dodd-Frank Act changed the requirement to exclude the value of the primary residence, for which the SEC has now finalized rules.

But, expect more changes to the accredited investor concept. Section 415 of the Dodd-Frank Act requires the Comptroller General of the United States to conduct a “Study and Report on Accredited Investors” examining “the appropriate criteria for determining the financial thresholds or other criteria needed to qualify for accredited investor status and eligibility to invest in private funds.” The study is due by July 2013, and the SEC will likely use the study for future rule making.  …

Ohio Federal Judge Allows Say-on-Pay Lawsuit to Proceed

In a September 20, 2011 Opinion, Judge Timothy Black of the Southern District of Ohio ruled that a lawsuit brought against senior executives and directors of Cincinnati Bell, Inc. alleging a breach of fiduciary duty regarding compensation would be allowed to proceed. The lawsuit focuses on the "say-on-pay" provisions of the Dodd-Frank Act: specifically, attacking the Board’s decision to increase 2010 executive compensation in light of the nonbinding vote by 66% of the voting shareholders to reject that increase. Although the defendants argued that they are entitled to rely upon the business judgment rule in proceeding with the increase in compensation, the Court held that the issue of whether defendants properly exercised that judgment or, as plaintiff claimed, acted with deliberate intent to injure the company (or reckless disregard for the company) would be an issue based on the evidence (at trial or summary judgment) and not decided at the pleading stage.…

Two Developments Involving The Protection of Investors: SEC to Re-Establish Investment Advisory Committee, While DOJ’s Inspector General Criticizes Marshal Service’s Handling of Seized Madoff Assets

There were two interesting news items this week regarding what the nation’s regulators are doing to protect investors – one from the SEC and the other from the Department of Justice. The SEC announced that it "is in the process of re-establishing an Investor Advisory Committee," while Commissioner Luis A. Aguilar expressed disappointment that the Committee was not being re-established sooner. Meanwhile, the U.S. Department of Justice Office of the Inspector General issued an Audit Report criticizing the Complex Asset Team of the U.S. Marshals Service for its management of complex assets, including its handling of certain assets seized from Bernard Madoff.…

SEC Releases Report Regarding the Status of Its Implementation of Organizational Reform Recommendations

On Friday, September 9, the Office of the Chief Operating Officer of the SEC issued its Report on the Implementation of SEC Organizational Reform Recommendations, which was mandated by Section 967 of the Dodd-Frank Act. The 25-page report was prepared to address the recommendations made in March 2011 by the Boston Consulting Group ("BCG"), who submitted a Report to Congress examining the internal operations, structure and need for reform at the SEC (as discussed here). Friday’s report noted the budgetary issues the SEC faces and reported on the largely organizational steps the agency has taken to begin the multi-year task of implementing the recommendations. In short, the SEC summarized that that "[w]hile the agency has made progress, the path forward is still long."…

SEC Settles Clawback Case With the Former CFO of Beazer Homes USA

On August 30, 2011, the SEC announced it had settled a case with James O’Leary, the former CFO of Beazer Homes USA under Section 304 of the Sarbanes-Oxley Act. Section 304’s "clawback" provision requires the reimbursement of compensation from executives under certain circumstances when their companies were in material non-compliance of financial reporting requirements due to misconduct. In Mr. O’Leary’s case, although he was not charged with any misconduct, he has agreed to reimburse $1.4 million he received after fraudulent financial statements were filed.…

New Bills Proposed in Congress to Impact Dodd-Frank and Whistleblower Provisions

Two recent posting in the blogosphere discuss the long-threatened Congressional efforts to roll back the impact of the Dodd–Frank Wall Street Reform and Consumer Protection Act. First, a post from Jim Hamilton’s World of Securities Litigation discusses Congressional efforts to repeal specific regulations and pass fundamental and structural reform of the federal rulemaking system. Second, Broc Romanek of theCorporateCounsel.net Blog has a post which discusses the Whistleblower Improvement Act of 2011, which will require whistleblowers to report matters to his or her employer before reporting to the SEC.…

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