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SEC Formally Proposes CEO Pay Ratio Disclosure Rule

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

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

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

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

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

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

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

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.…

Staying Ahead of the Regulatory Curve

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.  …

SEC Charges Revlon with Misleading Shareholders in Going Private Transaction

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 the trustee would

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

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 …

SEC Issues Investor Alert for Private Oil & Gas Offerings

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.…

SEC Issues FAQs on Conflict Minerals & Resource Extraction

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:…

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

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 …

SEC Social Media Guidance – Tread Carefully

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 …

SEC Confirms Use of Social Media for Company Announcements

The SEC issued a report today that clarifies that companies may use social media outlets to make key announcements in compliance with Regulation FD (Fair Disclosure) so long as investors have previously been alerted about which social media outlet(s) will be used to disseminate such information.

Regulation FD requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-selectively.  Companies should review the SEC guidance issued in 2008 regarding the dissemination of information via websites, as that guidance also applies to questions relating to communication through social media.

The SEC report relates to an inquiry by the Division of Enforcement into a post made by Netflix CEO, Reed Hastings, on his personal Facebook page that Netflix’s monthly online viewing had exceeded one billion hours for the first time.  The SEC did not initiate enforcement action or allege wrongdoing by Hastings or Netflix, recognizing that there has been market uncertainty about the application of Regulation FD to social media.…

SEC Publishes Handbook For Foreign Issuers: “Accessing U.S. Capital Markets”

This month the SEC released a handbook for foreign companies interested in registering and issuing securities on U.S. exchanges. The handbook, titled “Accessing the U.S. Capital Markets – A Brief Overview for Foreign Private Issuers,” explains the eligibility requirements for “foreign private issuer” status and the unique registration and reporting rules that apply to foreign companies.…

SEC Freezes Assets in Swiss-Based Account From Suspected Heinz Acquisition Insider Trading Scheme

On February 15, 2013, the Securities and Exchange Commission ("SEC") issued a press release announcing that it had obtained an emergency court order to freeze assets in a Swiss-based trading account that was used to gain more than $1.7 million from insider trading activities in connection with yesterday’s announced acquisition of H.J. Heinz Company.

In a complaint filed in Federal Court in Manhattan, the SEC alleges that, prior to any public disclosure of Berkshire Hathaway’s and 3G Capital’s agreement to acquire Heinz for approximately $28 billion, unknown traders purchased call options on the day prior to the announcement of the merger.  The announcement of the merger caused Heinz’s stock to increase nearly 20 percent on substantially increased trading volume from the prior day, allowing the traders to realize substantial gains from their trades.  The SEC further alleges that the traders were in possession of material nonpublic information about the Heinz acquisition when they purchased out-of-the-money Heinz call options prior to the announcement. Additionally, these trades were made through an account that had no history of trading Heinz securities during the last six months, and on in a period where there was minimal trading in activity in Heinz call options.…

Disclosure of Corporate Political Spending

The Securities and Exchange Commission could propose rules requiring public company disclosure of spending on political activities as early as April 2013, according to the Unified Agenda of Federal Regulatory and Deregulatory Actions. The Unified Agenda is the official list of proposed regulatory activities throughout the Federal Government. The proposal listed in the Unified Agenda states only that the Division of Corporation Finance is considering whether to recommend that the SEC issue a proposed rule to require that public companies provide disclosure to shareholders regarding the use of corporate resources for political activities.

Investor activism on corporate political spending has increased significantly since the Supreme Court’s 2010 ruling in Citizens United v. FEC allowed corporations to make unlimited independent campaign expenditures for political candidates. In 2011, a group of corporate and securities professors referred to as the Committee on Disclosure of Corporate Political Spending filed a petition with the SEC in support of a rule requiring public company disclosure of political spending.

Political spending proposals offered by shareholders range from proposals that simply require disclosure to more restrictive proposals that prohibit spending (“stop spending”) or require shareholder approval of spending (“say-on-spending”).  Many companies have voluntarily adopted policies requiring disclosure of political spending, including over half of the S&P 100 (although the policies vary significantly).

If the SEC does offer a proposed rule, it will likely be opposed by business trade associations that spend money to influence political campaigns, such as the U.S. Chamber of Commerce.  …

SEC Division of Corporation Finance Issues Updated Financial Reporting Manual

On January 18, 2013, the SEC Division of Corporation Finance issued an updated Financial Reporting Manual.  The Manual was updated for issues related to significance testing for related businesses, auditor responsibility for cumulative period from inception amounts, PCAOB requirements for auditors of non-issuer financial statements, and other changes.  A full summary of the changes in the updated Manual can be found here.…

SEC No Longer Allows “Vote with the Board’s Recommendation” Option

As the 2013 proxy season approaches, Broadridge Financial Systems has informed its customers that it will no longer be permitted to present shareholders with a “Vote with the Board’s Recommendations” button when soliciting proxies or voting instructions online, over the telephone or through other voting platforms. The SEC has apparently taken a new interpretative position that the button is not permitted unless shareholders are also presented with a “Vote against the Board’s Recommendations” button. The SEC has not provided any insight into the new interpretative position, but the suggestion of a button to vote against the board’s recommendations seems problematic in the context of director election proposals and say on pay frequency votes. Broadridge says these technical complications make the proposed button not currently feasible. Of course, the bigger issue is the perceived negative impact such a button would have on retail voting.…

SEC Chairman Schapiro To Retire In December; Commissioner Walter To Take Over

The SEC announced yesterday that on December 14 of this year Mary Schapiro will step down as Chairman. Chairman Schapiro took office in January 2009, making her term as chairman one of the longest in SEC history. She was appointed by President Obama in the midst of the financial crisis. Schapiro brought decades of experience to the position, being first appointed as a commissioner by President Reagan in 1988.

During her tenure the SEC brought a record number of enforcement actions, including an average of 50 Ponzi scheme actions per year. She oversaw SEC actions related to the financial crisis against many of the largest names in the banking and finance industry. Chairman Schapiro also oversaw the SEC’s rulemaking in compliance with the new Dodd-Frank Act.

Sitting commissioner Elisse B. Walter will take over as Chairman. Ms. Walter was appointed as a commissioner by President Bush in 2008, and previously served as a Vice President for both FINRA and NASD. Prior to that she worked as General Counsel to the Commodity Futures Trading Commission. Because she is a sitting commissioner, Ms. Walter does not need to be confirmed by the Senate and will take over immediately after Chairman Schapiro retires.

Read the SEC Press Release on Chairman Schapiro’s announced retirement here.  …

SEC Issues Staff Legal Bulletin 14G on Shareholder Proposals

On October 16, 2012, the Division of Corporation Finance of the Securities and Exchange Commission issued Staff Legal Bulletin 14G ("SLB14G").  SLB14G provides guidance for companies and shareholders regarding shareholder proposals submitted pursuant Rule 14a-8 under the Securities Exchange Act of 1934 (the "Exchange Act").  Specifically, SLB14G provides guidance on three issues with respect to the submission of shareholder proposals for inclusion in proxy statements:

  • the parties that can provide proof of ownership under Rule 14a-8(b)(2)(i) for purposes of verifying whether a beneficial owner is eligible to submit a proposal under Rule 14a-8;
  • the manner in which companies should notify proponents of a failure to provide proof of ownership for the one-year period required under Rule 14a-8(b)(1); and
  • the use of website references in proposals and supporting statements.

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.…