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U.S. Appeals Court Strikes Down Part of SEC Conflict Minerals Rules, Upholds Key Parts

Posted in Corporate Governance, SEC News

On April 14, 2014, the United States Court of Appeals for the District of Columbia Circuit issued its ruling in the challenge to the SEC’s conflict minerals rules. The court struck down the requirement that an issuer describe its products as not “DRC conflict free” because it violates the First Amendment by compelling speech by the issuer. However, the Court upheld other key parts of the conflict minerals rules, including without limitation the lack of a de minimis exception, the country of origin due diligence requirement and the extension of the rules to issuers that “contract to manufacture” products.

The court concluded that compelling an issuer to describe their products as not “DRC conflict free,” is not narrowly tailored and, therefore, would not survive an immediate scrutiny review (although the court declined to state whether strict or immediate scrutiny would apply). However, the court did suggest that it would be permissible for the SEC to require an issuer to describe the conflict minerals status of its products using the issuer’s own language rather than the specific language required by the statute or the rules.…

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Corporate law must reads — excerpts from the Federal Securities Law Blog

Posted in Corporate Governance, Proxy Issues, SEC News, Whistleblower Issues

In the ever-changing world of corporate law, it’s important to have trusted resources that can keep an eye out for how the relentless evolution of regulation and legislation can affect business operations, governance, strategy and growth. Our goal is for the Federal Securities Law Blog, and the Porter Wright attorneys who contribute to it, to be one of those resources. We invite you to read our most recent e-book, which provides updates about recent federal rules changes that can have an impact on your business. Download the Corporate Must Reads e-book.…

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SEC issues no-action letter regarding transfer of ownership of privately held companies

Posted in SEC News

Earlier this month, the Securities and Exchange Commission (SEC) issued a no-action letter indicating the staff of the Division of Trading and Markets would not recommend enforcement action if an “M&A broker” were to engage in the transfer of the ownership and control of a privately held company through the purchase, sale or transfer involving securities or assets of the company, to a buyer who will actively operate the company or the business conducted with the assets of the company, without registering as a broker-dealer.

An M&A broker may not:

  1. have the ability to bind a party to an M&A transaction described above;
  2. provide financing for the M&A transaction;
  3. have custody, control or possession or otherwise handle funds or securities issued or exchanged in the M&A transaction; or
  4. facilitate an M&A transaction with a group of buyers if the group was formed with the assistance of the M&A broker.

The buyer in the M&A transaction may not be a passive investor. The buyer must acquire control and actively operate the company or the business conducted with the assets of the company. Control may be acquired through the ownership of securities, by contact or otherwise. Control is presumed to exist if the buyer or group of buyers has the right to vote 25% 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 25% or more of the capital.

For purposes of …

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SEC Agrees to First Ever Deferred Prosecution Agreement With An Individual

Posted in SEC Enforcement Cases, SEC News

A “deferred prosecution agreement” (or DPA) is not a new concept to government prosecutors or to SEC Chairman Mary Jo White, but it is new to the SEC. Under a DPA, the government agrees to withhold prosecution in exchange for enforcement assistance — providing information, implementing internal compliance policies, or other cooperation with SEC investigations.

This tool has been around for a long time (Mary Jo White used it back in her days as a federal prosecutor) but the SEC did not use it until 2011 when it agreed to a DPA with the steel pipe products company Tenaris S.A. In agreeing to the Tenaris DPA, the SEC announced “its first-ever use of the approach to facilitate and reward cooperation in SEC investigations.” The SEC promised to refrain from civil prosecution of anti-bribery charges against Tenaris in exchange for the company’s strengthening and enforcing stricter internal compliance policies.

Now, the Commission announced that it has, for the first time, agreed to a DPA with an individual, Scott Herckis of Heppelwhite Fund LP. Heppelwhite, a Connecticut-based hedge fund, was charged in 2012 with misleading investors and misappropriating fund assets. Herckis was the fund’s administrator from 2010 to 2012. The Commission credits Herckis’ “voluntary and significant cooperation” in its decision to file an enforcement action against Hepplewhite. Last month, a federal judge in New York ordered the distribution of $6 million of the assets of Heppelwhite’s founder, Berton Hochfeld, to defrauded investors.

Under the DPA, Herckis still faces penalties for his …

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SAC Capital Breaks Its Own Record, Settles Insider Trading Charges For $1.2 Billion

Posted in Insider Trading, SEC Enforcement Cases, SEC News, SEC Settlements: Policy, Issues and Disputes

In March, an affiliate of SAC Capital agreed to a record high settlement of $616 million for charges of insider trading. As it turned out, the SEC was only getting started with the company and its owner, Steve Cohen. In July, both Cohen and SAC Capital were themselves indicted on insider trading.

Based on reports, SAC Capital agreed earlier this week to settle its charges for $1.2 billion, shattering the record again. In addition, the company agreed to plead guilty to each count in the indictment and close its investment advisory business. The indictment accused the company, among other things, of fostering a culture of insider trading, citing “institutional failure.”

As if setting a new record-high settlement wasn’t enough, the settlement terms give no shelter to Cohen, personally. The settlement states outright that it provides “no immunity from prosecution for any individual and does not restrict the government from charging any individual for any criminal offense.” By refusing to grant immunity to Cohen in this deal, the SEC confirmed that it will continue its civil investigation of the billionaire hedge fund manager and is even considering criminal charges in the future.

The settlement still needs to be approved by the federal court in New York. The hearing is scheduled for Friday. For more, Dealbook has a good analysis of the settlement.…

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SEC Proposes Rules for Crowdfunding Securities Offerings

Posted in SEC News

The SEC voted unanimously to propose rules regulating the offering and selling of securities through “crowdfunding”. Crowdfunding – a method of raising money through small sums contributed by many individuals – has become an internet mainstay. But so far, crowdfunding websites (such as Kickstarter or Indiegogo) constructed their platforms so as to avoid falling under SEC regulation. In particular, the traditional crowdfunding method does not offer financial returns on an investment or a share in a company’s profits.

The proposed rules (read them in their entirety) would allow companies to raise up to $1 million through crowdfunding platforms within a 12-month period. Other features of the proposed rules include:

  • Investors will be subject to income-based limits on the total amount of securities they can purchase through crowdfunding within a 12-month period. No investor will be able to invest more than $100,000 in crowdfunding-based securities within a 12-month period.
  • Certain companies will be ineligible to raise funds through crowdfunding, including: companies that are already SEC-reporting companies, non-U.S. companies, companies with no specific business plan, and certain investment companies.
  • Companies will be required to file certain information with the SEC.
  • Companies are required to disclose certain information to the crowdfunding platform and prospective investors, such as financial statements, related-party transactions, the company’s business plan, and description of the offering.
  • Crowdfunding platforms will have to become registered with the SEC, either as broker-dealers or funding portals.

The rules were proposed as directed by the Jumpstart Our Business Startups Act (JOBS Act), …

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Mark Cuban Wins Insider Trading Trial

Posted in SEC Enforcement Cases, SEC News

After “refusing to be bullied” into settlement, Mark Cuban, the billionaire owner of the Dallas Mavericks, won over a Texas jury and was cleared of insider trading charges brought by the SEC. The nine-person jury in the federal court in Dallas determined that Cuban did not violate federal securities laws in selling his stake in Mamma.com in 2004. Cuban was accused of using material, non-public information in deciding to sell his Mamma.com shares, avoiding a $750,000 loss.

The trial centered around a conversation between Cuban and then-CEO of Mamma, Guy Faure, in which Faure informed Cuban of an upcoming equity transaction that would dilute Cuban’s ownership stake in the company. Testimony at the trial boiled down to comparing Faure’s and Cuban’s accounts of their conversation. In the end, the SEC failed to convince the jury, among other elements of insider trading, that Cuban promised to keep the information confidential or that the information was not already in the public domain.

It is a big win for Cuban, who chose to take the SEC to trial over negotiating a settlement. Cuban was pleased with the outcome, but said “it’s not like winning a [Mavericks] championship.” A spokesman for the SEC, John Nester, said the agency will “respect the jury’s decision,” but it “will not deter us from bringing and trying cases where we believe defendants have violated the federal securities laws.”

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SEC Approaches Shutdown: What Functions Will Continue?

Posted in SEC News

At the beginning of the federal shutdown, the SEC announced that it would continue to operate as normal “for a few weeks” because of its ability to access a pool of funds not available to other federal agencies. But as we continue into the third week of the federal shutdown, that ambiguous timeline of a “few weeks” may be nearing an end. In the event the SEC runs out of its backup funding, it has a contingency plan, which it released in late September.

Following is a summary of what functions will, and won’t, continue in the event of an SEC shutdown.

These SEC activities will continue:…

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SEC Agrees to $5 Million Settlement With Two Brazilian Insider Traders

Posted in Insider Trading, SEC Enforcement Cases, SEC News

On Oct. 10, 2013, the Securities and Exchange Commission (SEC) announced that Rodrigo Terpins and his brother, Michel Terpins, have agreed to pay $5 million to settle charges that they were behind suspicious trading in call H.J. Heinz Company options one day before the company publicly announced its acquisition by Berkshire Hathaway and 3G Capital. In an amended complaint filed in federal court in Manhattan, the SEC alleges that Rodrigo Terpins, through a Caymans Islands-based entity named Alpine Swift, placed the order to purchase nearly $90,000 in option positions in Heinz based on material non-public information that he received from his brother Michel Terpins.

On Feb. 14, 2013, Heinz announced that Berkshire Hathaway and 3G Capital agreed to acquire Heinz in a deal valued at $28 billion, which resulted in a gain of approximately $1.8 million or an increase by nearly 2,000 percent of the original investment. The timing, size and profitability of the trades as well as the lack of a prior history of Heinz trading in the Alpine Swift account made the transactions highly suspicious in the wake of the Heinz announcement. Shortly thereafter, the SEC froze the assets in a Swiss-based trading account.…

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SEC Formally Proposes CEO Pay Ratio Disclosure Rule

Posted in Compensation Matters, SEC News

On Wednesday, by a 3-2 vote, the SEC approved proposal of the long-anticipated CEO pay ratio disclosure rule (read the press release). The proposed rule, part of the 2010 Dodd-Frank Act, would require a public company to disclose the ratio of compensation between its CEO and the median compensation of all its other employees.

The rule derives from Section 953(b) of the Dodd-Frank Act, and will require a public company to make the following disclosures:

  1. The median of the annual total compensation of all employees, except its CEO;
  2. The annual total compensation of its CEO; and
  3. The ratio of CEO compensation to median employee compensation.

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SEC Charges Former VP of IR with Violation of Reg FD

Posted in Insider Trading, SEC Enforcement Cases, SEC News

On September 6, 2013, in its first Regulation FD enforcement action in almost two years, the SEC charged the former VP of IR for First Solar, Inc. ("First Solar") with violating Regulation FD. 

An SEC investigation determined that Lawrence Polizzotto violated Regulation FD when he indicated in telephone conversations with certain analysts that First Solar was not likely to receive a significant loan guarantee from the U.S. Department of Energy.  After becoming aware of the selective disclosure, First Solar issued an press release the next morning.

Mr. Polizzotto agreed to settle the SEC’s charges without admitting or denying the findings.  He agreed to pay $50,000 to settle the SEC’s charges and agreed to cease and desist from causing any violations and any future violations of Regulation FD and Section 13(a) of the Securities and Exchange Act.

The SEC determined that it would not bring an enforcement action against First Solar due to the its "extraordinary cooperation" with the investigation among other factors.  Prior to Mr. Polizzotto’s selective disclosure, First Solar cultivated an environment of compliance through the use of a disclosure committee that focused on compliance with Regulation FD.  In addition to immediately issuing a press release upon becoming aware of the selective disclosure, First Solar quickly reported the misconduct to the SEC.  The company also conducted additional Regulation FD training as a remedial measure.…

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SEC Will Redraft, Not Appeal, District Court Rejection of Resource Extraction Issuer Payment Disclosure Rules

Posted in SEC News

We wrote previously about the United States District Court for the District of Columbia vacating Securities and Exchange Commission Rule 13q-1, which required certain companies to disclose payments made to foreign governments in connection with the commercial development of oil, natural gas or minerals. The SEC announced Sept. 3, 2013 that it would not appeal the court’s decision and would instead redraft the rule, taking into account the court’s concerns, and restart the rulemaking process.

The court had found that:

  1. The SEC erroneously read the statutory language as requiring public disclosure of these payments; and
  2. 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.

The SEC has not provided a timetable for the redraft of the rule.

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SEC Reconsidering Pre-IPO Quiet Period

Posted in JOBS Act, SEC News

After the recent complaints that smaller investors were not as informed as larger ones about the Facebook IPO, the SEC is reviewing the “quiet period” rules. These rules restrict the communications that an issuer may have with investors during an IPO.  Attached is a letter (posted by the Wall Street Journal) that SEC Chairman, Mary Schapiro, sent to Rep. Darrell Issa, Chairman of the House Committee on Oversight and Government Reform, in response to his concerns about the IPO process.


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Feds Announce Indictment Against SAC Capital Advisors

Posted in Insider Trading, SEC Enforcement Cases, SEC News

Federal prosecutors and the F.B.I. today announced a criminal indictment against SAC Capital Advisors, the embattled hedge fund managed by billionaire Steven Cohen, based on an alleged broad conspiracy to commit securities fraud through insider trading. The indictment against the hedge fund itself — as opposed to its employees — could have disastrous consequences for the fund, including a potential exodus by its investors.

The indictment of SAC Capital is by far the largest crack yet in the company’s bow. The fund has already seen two of its employees charged with insider trading, and an SAC Capital affiliate, CR Intrinsic, recently agreed to pay over $600 million to settle SEC charges that it traded on nonpublic information about clinical pharmaceutical trials — the largest settlement in SEC history. Then, just last Friday, the SEC announced charges against Steven Cohen for failing to adequately supervise his employees and ignoring signs of suspicious trading activity.…

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District Court Dismisses Conflict Minerals Challenge

Posted in Dodd-Frank Act, SEC Enforcement Cases, SEC News

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:…

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SEC Lifts Ban on General Solicitation in Private Placements

Posted in JOBS Act, SEC News

On July 10, 2013, the Securities and Exchange Commission adopted a new rule to eliminate the ban on general solicitation and general advertising for certain private securities offerings, as required by Section 201(a) of the JOBS Act.  The final rule amends Rule 506 to permit issuers to use general solicitation and general advertising to offer their securities, provided that all purchasers of securities are accredited investors and the issuer takes “reasonable steps to verify” that such purchasers are accredited investors.

In connection with the new rule, the SEC voted to issue a rule proposal requiring issuers to provide additional information about Rule 506 offerings.  Under the proposal, issuers that intend to engage in general solicitation as part of a Rule 506 offering would, in addition to the current requirements, be required to file the Form D at least 15 calendar days prior to engaging in general solicitation.  Also, within 30 days of completion of an offering, issuers would be required to update the information contained in the Form D.  The proposal would require issuers to include certain legends on any written general solicitation material and to file, on a temporary basis, those written materials with the SEC.  Issuers would be disqualified from relying on Regulation D for one year if the issuer, or any predecessor or affiliate of the issuer, did not comply, within the last five years, with the Form D filing requirements in a Rule 506 offering.

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

Posted in Corporate Governance, Dodd-Frank Act, SEC News

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.…

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Staying Ahead of the Regulatory Curve

Posted in SEC News

Over the past several months, the SEC has issued new and updated regulations that are likely to have an impact on your business now and in the near future. The compilation of articles in this eBook — SEC Updates: Staying Ahead of the Regulatory Curve — discuss three important SEC regulatory changes:

  1. Using social media for Regulation FD — A SEC report says some companies can comply with Regulation Fair Disclosure by posting information on social media channels such as Facebook and Twitter. To avoid penalties, ask yourself a few key questions before assuming social media could be an acceptable method for your company to communicate with investors.
  2. Conflict minerals reporting — The process of tracking the components of your products to their source of origin is an extremely arduous and time-consuming task. Public companies — and private companies that provide materials to public companies — should start the inquiry process now.
  3. Compensation committee independence — An SEC rule designed to promote the independence of compensation committee members, consultants and advisers goes into effect July 1. Is your board ready to grapple with potential conflicts of interest or other independence concerns that could make some compensation committee members ineligible to serve?

Download our SEC Updates: Staying Ahead of the Regulatory Curve eBook.

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SEC Charges Revlon with Misleading Shareholders in Going Private Transaction

Posted in SEC Enforcement Cases, SEC News

On June 13, 2013, the Securities and Exchange Commission (“SEC”) charged Revlon with violating federal securities laws when the company misled shareholders during a going private transaction.  Specifically, the SEC found that Revlon violated Section 13(e) of the Securities Exchange Act of 1934 and Rule 13e-3(b)(1)(iii), which prohibits issuers and their affiliates in going private transactions from directly or indirectly engaging in any act, practice, or course of business that operates or would operate as a fraud or deceit.

In its investigation, the SEC found that in connection with a voluntary exchange offer to satisfy a significant debt to its controlling shareholder, Revlon erected “informational barriers” or engaged in what one employee termed as "ring fencing" that deprived the Revlon independent board members from knowing critical information (i.e., a third-party financial adviser found that the consideration offered in the transaction was inadequate for tendering 401(k) shareholders). The trustee administering Revlon’s 401(k) plan determined that 401(k) members could only tender their shares if a third-party financial adviser made an "adequate consideration determination," which involved assessing whether the value of the preferred stock 401(k) participants would receive was at least equal to the fair market value of the exchanged common stock shares.

The SEC’s order determined that, in an attempt to avoid a potential disclosure obligation, Revlon undertook a number of actions to avoid receiving the adequate consideration determination from the third-party adviser, including the following:

  • Revlon amended the trust agreement it had with the trustee to ensure that

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Introduction of H.R. 2274 – The Small Business Mergers, Acquisitions, Sales and Brokerage Simplification Act of 2013

Posted in SEC News

H.R. 2274, the Small Business Mergers, Acquisitions, Sales and Brokerage Simplification Act of 2013, was introduced in the U.S. House of Representatives by Rep. Bill Huizenga on June 6, 2013.  The bill is intended to reduce the regulatory costs incurred by buyers and sellers of smaller privately held companies for professional business brokerage services.  The legislation would create a simplified system for registration through a public notice filing with the Securities and Exchange Commission ("SEC") and would require appropriate client disclosures, pertaining to “M&A brokers” and their associates.  An M&A broker relying on this legislation would not be permitted to (i) receive, hold, transmit or have custody of the funds or securities to be exchanged in the transfer of ownership of an “eligible privately held company,” or (ii) engage on behalf of an issuer in a public offering of securities.

An “M&A broker” means a broker engaged in the business of effecting the transfer of ownership of an eligible privately held business , whether acting for the seller or buyer, through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the eligible privately held company, if the broker reasonably believes that (i) upon consummation of the transaction, the acquirer, acting alone or in concert with, will control and, directly or indirectly, will be active in the management of the eligible privately held company or the business conducted with the assets of the eligible privately held company; and (ii) if the

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SEC Issues Investor Alert for Private Oil & Gas Offerings

Posted in SEC News

We previously blogged about securities regulation of interests in oil and gas exploration and development. Industry participants, state and federal securities regulators have recently cautioned investors regarding investing in oil and gas ventures.

At the federal level, the U.S. Securities and Exchange Commission (SEC) issued an investor alert aimed at private oil and gas offerings. In addition to the usual cautions to investors to do their homework on these deals, the SEC encouraged investors to verify that the person offering the investment is licensed as a broker-dealer. The SEC recently stepped up its efforts to pursue “finders” and other unlicensed persons compensated by issuers to assist in finding investors. Companies raising investment funds need to understand that persons who they engage to assist in selling investments are required to have a securities license. Failure to do so exposes the issuer to civil liability, including rescission claims by investors, and potential criminal liability in cases where material misstatements or omissions are made in the private placement memorandum or other offering material, or other fraudulent activity is present. The investor alert cites several examples of recent enforcement actions where such illegal activity was involved.…

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SEC Issues FAQs on Conflict Minerals & Resource Extraction

Posted in SEC News

On May 30, 2013, the Securities and Exchange Commission (“SEC”) issued 12 Frequently Asked Questions (“FAQs”) providing guidance on various aspects of Securities Exchange Act of 1934 (“Exchange Act”) Section 13(p), Rule 13p-1 and Item 1.01 of Form SD relating to disclosure regarding the use of conflict minerals from the Democratic Republic of the Congo or adjoining countries.

The Guidance offered by the Conflict Minerals FAQs includes:…

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SEC and CFTC Red Flag Rules Become Effective May 20, 2013

Posted in SEC News

The Securities and Exchange Commission and the Commodity Futures Trading Commission have adopted rules that require most broker-dealers, mutual funds, investment advisers, and certain other regulated entities to create programs to prevent identity theft. The new rules become effective May 20, 2013, and entities regulated by the new rules must comply by November 20, 2013.

Regulated entities subject to the rules must develop identity theft prevention programs to detect “red flags” signaling potential identity theft, to respond appropriately to such red flags, and to periodically update detection programs as identity theft risks change.

Among other requirements, the Red Flag Rules apply to “financial institutions” that offer or maintain “covered accounts.” “Covered accounts” are defined broadly to include personal accounts designed to permit multiple transactions and any account with a reasonably foreseeable risk of identity theft to customers. “Financial institutions” include any entity that holds a transaction account belonging to a consumer on which the account holder can make withdrawals to pay third parties. Examples cited by the SEC include:

  1. a broker-dealer that offers custodial accounts;
  2. a registered investment company that enables investors to make wire transfers to other parties or that offers check-writing privileges; and
  3. an investment adviser that directly or indirectly holds transaction accounts and that is permitted to direct payments or transfers out of those accounts to third parties.

Many of these entities likely have identity theft prevention programs because they were previously required by Federal Trade Commission rules; however some entities, such as investment advisers, may have …

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SEC Social Media Guidance – Tread Carefully

Posted in SEC News

As discussed in a post on April 2, 2013, the SEC issued a report on that date that contained guidance on the use of social media to publicly disclose material information under Regulation FD.

The report centered on the SEC investigation of Netflix and Netflix CEO, Reed Hastings, and whether Regulation FD was violated when Mr. Hastings disclosed on his Facebook page favorable news about the number of hours that Netflix streamed in a month. The SEC decided not to bring enforcement action against Netflix or Mr. Hastings, making recognition that there has been market uncertainty about the application of Regulation FD to social media.

Regulation FD provides that a public company, or anyone acting on its behalf, may not disclose material, nonpublic information to market professionals or securityholders when it is reasonably foreseeable that someone may trade on the basis of the information, unless such information is simultaneously disclosed to the public in a method reasonably designed to provide broad, non-exclusionary distribution of information to the public.

It is important to remember that whether disclosures comply with Regulation FD must be evaluated on a case-by-case basis. The SEC stated in the report that the disclosure of material nonpublic information on the personal social media site of a corporate officer, without advance notice to investors that the site may be used for this purpose, is unlikely to satisfy Regulation FD. The SEC explained that this is true regardless of the number of subscribers. The report focused on the fact that a company must

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