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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.…

Late Form 4s aren’t just embarrassing anymore

Posted in Corporate Governance, SEC Enforcement Cases, SEC News

Yesterday, the SEC announced penalties totaling approximately $2.6 million against directors, officers, beneficial owners and issuers for failure to promptly report information about holdings and transactions in company stock.

The primary enforcement weapon for these types of failures historically has been public shaming: Rule 405 of Regulation S-K requires issuers to identify insiders who failed to file Section 16 reports on time during the previous year. But, apparently, based on yesterday’s announcement, the SEC also will levy fines against issuers and individual insiders for chronic filing failures.

Settled fines for individuals ranged from approximately $25,000 to $100,000. Six publicly-traded companies settled claims that they contributed to the filing delinquencies of their insiders and paid fines ranging from $75,000 to $150,000.…

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

Posted in Dodd-Frank Act, SEC News

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 …

SEC adopts money market fund reform

Posted in SEC News

On July 23, 2014, the Securities and Exchange Commission announced that it adopted amendments to the rules governing money market mutual funds. Read a copy of the final rules.

These amendments complete some long-awaited steps to make structural and operational reforms to address risks of investor runs in money market funds to address investor runs out of funds as occurred during the 2008 financial crisis. Specifically, the new rules require institutional prime money market funds to value the funds on a floating net asset value rather than a fixed $1 share price. Additionally, the rules allow money market funds boards to impose liquidity fees and redemption gates during periods of financial stress.

The final rules provide a two-year transition period to enable both funds and investors time to fully adjust their systems, operations and investing practices.…

Should entrepreneurs care about crowdfunding? It depends on the crowd.

Posted in Executive Officer Matters, General Business News, JOBS Act, SEC News

It has been more than two years since the JOBS Act was passed and almost nine months since the SEC proposed crowdfunding rules — but still no final rules. Should entrepreneurs care? Probably not. The proposed SEC rules are burdensome. The rules limit the total amount raised to $1 million in any rolling 12-month period, and moderate-income investors would be limited to a $5,000 investment (at the most). Additional proposed rules require audited financials (for some offerings), limits on advertising, and filings with the SEC, among other requirements. Entrepreneurs with great ideas should not settle for these types of investments.

Crowdfunding for accredited investors already exists, and it may fill an important funding gap for growing businesses that have not attracted angel investors and are not ready for venture capital or private equity. Not all startups are tech based, and not all angel investors in a particular entrepreneur’s community know what a good investment looks like. But a well-curated accredited crowdfunding platform can provide exposure to a lot of potential accredited investors.…

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

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

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, …

First conflict mineral report filed on Form SD

Posted in Corporate Governance, SEC News

On April 24, 2014, Siliconware Precision Industries Co., Ltd. (Siliconware) earned the distinction of being the first registrant to file a conflict minerals report on Form SD. Here are links to Siliconware’s Form SD and its conflict minerals report. Although the filing deadline is not until June 2, 2014, this example gives registrants a glimpse of what conflict minerals disclosure might look like.

Siliconware reported that its due diligence efforts showed a portion of its products to be “DRC conflict undeterminable” and the remainder to be “DRC conflict free,” as those terms are defined in the Exchange Act. Siliconware chose to use these terms, which were prescribed in the conflict minerals rules, notwithstanding the fact that the requirement to use those specific terms was recently struck down by U.S. Court of Appeals on First Amendment grounds.

Registrants should continue to monitor conflict minerals reports of other registrants as they are filed in order to get a sense of market practice for the conflict minerals disclosure.…

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.…

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.…

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 …

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 …

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.…

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), …

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.”

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:…

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.…

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.

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.…

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.

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.


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.…

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:…

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.

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.…