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SEC proposes exemptions from registration for finders

On Oct. 7, 2020, the Securities and Exchange Commission (SEC) proposed a limited and conditional exemption from broker registration for natural persons, referred to as “finders,” who seek to help non-reporting, private companies raise capital from accredited investors in exempt offerings, subject to certain conditions. Generally, persons who effect transactions in securities for the account of others cannot do so through interstate commerce unless the person is registered with the SEC. There has long been ambiguity about when or if finders, who seek to bridge the gap between businesses and investors by identifying potential investment opportunities, must register as broker-dealers with the SEC. The proposed exemption seeks to clarify the role and obligations of finders so that small businesses can more easily connect with the investments they need to succeed. In the current market, small businesses often struggle to identify potential investors, and few broker-dealers are willing to raise capital in the smaller transactions.…

SEC amends definition of accredited investor

On Aug. 26, 2020, the Securities and Exchange Commission (SEC) adopted amendments to Rule 501(a), Rule 215 and Rule 144A of the Securities Act of 1933 (Securities Act). These amendments are part of the SEC’s efforts to more effectively identify qualified investors and allow for expanded investment opportunities, while still maintaining appropriate levels of investor protections.…

Learning from Yahoo!’s missteps: Meeting SEC disclosure obligations after a cyber-attack

In July 2016, Verizon announced it would buy Yahoo! for an unprecedented $4.83 billion. Several months later, Yahoo! disclosed two massive data breaches that affected 1.5 billion people, threatening to scuttle the agreement. Although Verizon recently finalized the acquisition, the hack forced Yahoo! to accept a $350 million reduction in purchase price.

Within the last few years, publically held companies—including Sony, Target, and most recently, Chipotle Mexican Grill—have been infiltrated by hackers bent on stealing trade secrets and personal information. The efficacy of cloud computing has spawned a digital arms race between companies who attempt to safeguard customer information and private and state actors, who wish to obtain it. Given that large-scale data breaches are becoming the norm, companies need to be aware of reporting and disclosure obligations they may face in the event of a breach. While most companies recognize their obligations under state data breach laws and HIPAA, few publically traded companies consider what, if anything, they should disclose to the U.S. Securities and Exchange Commission (SEC) in the event of a breach. In failing to do so, they risk SEC sanctions and potential liability from class action lawsuits, either of which could result in significant losses.…

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. …

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

NYSE Proposes Amendments to Listing Requirements to Accomodate the JOBS Act

In response to the enactment of the Jumpstart Our Business Startups Act (the “JOBS Act”), the New York Stock Exchange (“NYSE”) proposes to amend Sections 102.01C and 103.01B of the NYSE’s Listed Company Manual (the “Manual”) to permit the listing of companies on the basis of two years of reported financial data as permitted under the JOBS Act.

Specifically, these amendments provide that a company which qualifies as an emerging growth company (“EGC”) may choose to include only two years of audited financial data in the registration statement used in connection with the “first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act of 1933” (the “initial public offering date”), rather than the three years of audited financial data that had previously been required. In addition, for as long as a company remains an EGC, it is not required to file selected financial data for any period prior to the earliest period for which it had included audited financial statements in its initial public offering registration statement in (i) any subsequent registration statement filed under the Securities Act of 1933 or (ii) any Exchange Act of 1934 registration statement. 

An issuer that is an EGC will continue to be considered an EGC until the earliest of:

  • the last day of the fiscal year during which it had total annual gross revenues of at least $1 billion;
  • the last day of the fiscal year following the fifth anniversary of its initial public

Auditor Ratification Votes Expected to Increase

Following a change to New York Stock Exchange Rule 452 in July, brokers for investors who do not provide voting instructions will no longer be able to cast discretionary votes in uncontested director elections. Prior to the change, uncontested director elections were considered “routine” matters, and shares held in street name could be voted by brokers, at their discretion, if the beneficial owners failed to instruct the brokers how to vote. The new rule characterizes all director elections, including uncontested elections, as “non-routine” and applies to all annual meetings held after January 1, 2010. The rule affects all public companies because it applies to all brokers regulated by the NYSE.

One significant effect of the rule change will be increased difficulty in obtaining a quorum. If uninstructed brokers do not vote because all matters presented to the shareholders are non-routine, shares held in street name will not be treated as present for quorum purposes. Broker non-votes are only counted toward a quorum if stockholders will be voting on a routine matter.

The solution to the quorum problem appears to be including at least one routine matter on the proxy to ensure brokers vote. The most routine of all routine matters is auditor ratification, a proposal that many companies have abandoned but will likely revive.  …

Broker Discretionary Voting

On July 1, 2009, the SEC approved a proposed rule change to amend NYSE Rule 452 and Section 402.08 of the NYSE Listed Company Manual to eliminate broker discretionary voting for the election of directors. The amendment will be in effect for all elections of directors held at stockholder meetings held on or after January 1, 2010. Note that the amendment does not apply to a stockholder meeting that was originally scheduled to be held prior to January 1, 2010, but was properly adjourned to a date after January 1, 2010.

Under the current NYSE Rule 452, the election of directors was considered a "routine" matter, which allowed brokers to vote on such matter if the broker did not receive specific voting instructions from the beneficial owner within ten days of the stockholder meeting. The elimination of the election of directors as "routine" matters could have an impact where companies have adopted majority vote provisions or where companies are targets of "just vote no" or "withhold" campaigns.…

Geithner announces support for executive compensation reforms, but Congress might have its own agenda

On Wednesday, June 10, Secretary of the Treasury, Timothy Geithner outlined the Obama administration’s new proposals on executive compensation. The proposals focused on greater independence of corporate compensation committees and giving shareholders a nonbinding vote on executive compensation, commonly known as ‘say on pay’ provisions. Geithner outlined five guiding principals for executive compensation, namely:

  1. compensation plans should properly measure and reward performance;
  2. compensation should be structured to account for the time horizon of risks by aligning executive (and highly compensated individual) pay with long-term value creation;
  3. compensation should be aligned with sound risk management;
  4. golden parachutes and supplemental retirement packages should properly align the interests of executives with the interests of shareholders; and
  5. the compensation setting process should promote transparency and accountability.

Geithner promoted the administration’s support for legislation requiring greater compensation committee independence for companies listed on the national securities exchanges. The proposed legislation would require compensation committee members to meet the stringent independence standards required of audit committee members under the Sarbanes Oxley Act. In addition, the proposed legislation would provide compensation committees with the right to (i) hire compensation consultants, (ii) hire legal counsel, and (iii) require each company to “appropriately” fund the compensation committee to allow it to execute its independent compensation oversight responsibilities.

In addition, Geithner promoted the administration’s support for legislation requiring non-binding ‘say on pay’ votes by shareholders. The legislation would require all public companies to include a proposal to allow shareholders to approve or disapprove of the compensation arrangements listed in a company’s …

NYSE to Extend, Expand Temporary Easing of Continued-Listing Standards

The NYSE has extended until June 30, 2009 the temporary lowering of its market-capitalization standard for listed companies. In addition, the NYSE has temporarily suspended the $1 minimum price requirement. The NYSE stated that its actions reflect the Exchange’s “determination that suitable companies should remain listed during the current period of unusual market volatility and decline.”

On January 23, 2009, the NYSE changed the minimum global market capitalization required of listed issuers from $25 million to $15 million. The new order extends this change to June 30, 2009; otherwise it would have expired on April 22. The new order also suspends the requirement that a listed issuer’s stock price not fall below $1 over a consecutive 30-day trading period.

The NYSE has submitted the proposed temporary changes to the SEC and has asked the SEC to waive the 30-day operative delay. The NYSE expects the SEC to take prompt action to effectuate the waiver.  …

2008 IPO Slump

As 2008 ends, consider yet another indication that this was a terrible year for financial markets: there has been only one IPO in the US in the last four months according to IPO research firm Renaissance Capital. The U.S. total for 2008 was 43 new issues raising $50 million or more, which makes this the slowest year since 1979 and represents an 84% decline in the number of deals from 2007.

Of the IPOs that did make it to market, performance was not good. 58% percent of new issues in the U.S. traded down on their first day. 84% of global IPOs finished the year below their offer price.

And while it is true the rest of the world’s markets are also hurting (global IPO proceeds fell 69% compared to last year) the data indicates a disturbing trend that non-US markets may be more receptive to IPOs. The largest deal of the year was easily Visa in the U.S. at close to $18 billion, but the next 14 largest deals were on non-U.S. exchanges, including 3 in Saudi Arabia and several in the Asia-Pacific region.

The global IPO decline is directly linked to the absence of cheap credit and investors in general looking for less risky endeavors. The U.S. decline is also likely a result of increased regulation costs and increased competition with emerging markets that can still show significant growth.  …

No-Short List Expands

The list of 799 “financial companies” that cannot be subject to short sales by order of the SEC is growing. The SEC has authorized major stock exchanges to identify additional companies that should be added to the list, and the NYSE and NASDAQ have added at least 299 and 71 companies, respectively.

To identify companies, the SEC provided the exchanges with 7 criteria; if at least one criteria is met, the company goes on the list. The NYSE has confirmed that a company need only certify to NYSE that it meets the criteria to be put on the list.

NYSE reports that to be on the list a company must be a bank, savings association, registered broker or dealer, or insurance company (as defined at various points in the U.S. Code). However, this has not stopped some surprising companies from being added to the list, including CVS Caremark, General Motors, and IBM, all of which are tangentially related to lending/financing or insurance but are not traditionally thought of as a “financial company.”

Some commentators are criticizing that the goal of the no-sale list is to protect banks because they are particularly susceptible to a crisis of confidence, not to protect any company that might experience a decline in stock value. The SEC has long supported short selling as an important market tool against inflated prices.

Interestingly, two financial firms, JMP Securities and Diamond Hill Investment, asked to be taken off the no-short list because their managers support short selling activities …

More Efficient Oversight of Insider Trading

The major U.S. securities exchanges and self-regulatory organizations have agreed to consolidate oversight of insider trading in the hands of two regulators: NYSE Regulation and FINRA. The following equity exchanges and FINRA have signed the agreement, which must now be approved by the SEC:

  • American Stock Exchange LLC
  • Boston Stock Exchange, Inc.
  • CBOE Stock Exchange, LLC
  • Chicago Stock Exchange, Inc.
  • International Securities Exchange, LLC
  • NASDAQ Stock Market, LLC
  • National Stock Exchange, Inc.
  • New York Stock Exchange, LLC
  • NYSE Arca Inc.
  • Philadelphia Stock Exchange, Inc.
  • NYSE Regulation, Inc. (acting under authority delegated to it by NYSE)

Currently, each securities exchange is responsible for investigating insider trading by its market participants, which amounts to 11 separate programs. The consolidation of power into two regulators is expected to make insider trading investigations more efficient by preventing duplicative efforts and failed detection of illegal activity.

The consolidation may result in more convicted insider traders, or it may simply result in more efficient investigation of insider traders who would have been caught anyway. The Wall Street Journal’s MarketWatch reports FINRA has already referred 104 insider trading cases to the SEC in 2008, compared to 118 in all of 2007. NYSE Regulation has referred 90 cases as of the end of June, compared to 141 in all of 2007.  …

Prediction Markets and Securities Laws

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

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

Prediction markets implicate securities laws because the markets are particularly vulnerable to inside information, as evident by the fact that the price of a contract often increases or decreases dramatically in the days …

NASDAQ Revamps Marketplace Rules

The NASDAQ Listing Qualifications Department is currently accepting public comment on a new draft of its Marketplace Rules. The Rules, which describe the requirements for listing securities on NASDAQ, have been reorganized, and in some cases rewritten, to make them easier to navigate and understand; however, no substantive changes have been made.

Several improvements have been implemented, including a logical order for the Rules that begins with NASDAQ’s overall regulatory authority, then describes the requirements of each tier of the NASDAQ markets, including Global Select, Global, and Capital Markets, and then addresses corporate governance requirements, non-traditional securities listings, the process for regaining compliance, and fees, in that order.

Other new organizational features include more descriptive headings, a definitions section that precedes the Rules, elimination of sections that have been “reserved” due to deletions over the years, and discrete sections for interpretative materials.

NASDAQ will receive comments until February 1, 2008, and the changes will be filed with the SEC by the end of the first quarter 2008. …

Nasdaq Buys Dubai Stock Exchange

Yesterday it was announced that Nasdaq has reached an agreement with Dubai Bourse to purchase the Nordic OMX Exchange group, a collection of securities exchanges in Sweden, Denmark, Finland, and the Baltics. As part of the deal, Dubai Bourse will end up owning 20% of Nasdaq and 5% of Nasdaq’s voting power. Dubai Bourse also gets the right to buy most of Nasdaq’s 31% stake in the London Stock Exchange, a large block that represents Nasdaq’s failed attempt to buy the London market.

Security concerns have already been raised by President Bush, who announced a national security review of Dubai and its ownership of a major U.S. exchange. Whether these concerns will rise to the level of previous concerns  over Dubai Ports World, a United Arab Emirates company with control of U.S. ports remains to be seen. …

Nasdaq to Sell Interest in London Stock Exchange

Nasdaq announced earlier this week that it will consider selling its 31% interest in the London Stock Exchange, but most likely not to a single purchaser. The sale would end Nasdaq’s 18 month-long attempt to buy the LSE, a goal that has been continuously opposed by the LSE’s management.

Investors bent on competitive global trading (or at least competitive Euro-American trading) will have to continue to wait for the world’s second trans-Atlantic stock exchange following NYSE Group Inc.’s $14 billion purchase of Paris-based Euronext NV in April. But maybe the wait won’t be too long. Some commentators suggest Nasdaq wants to sell its LSE stake in order to outbid Borse Dubai, owner of two Dubai stock exchanges, for Sweden’s OMX market. The current bid is close to $4 billion.…

Nasdaq and NYSE vie for China

Reuters is reporting here that Nasdaq is in talks with the China Securities Regulatory Commission (China’s version of the SEC) to set up an office in Beijing. According to the article, the NYSE is also pursuing a Chinese office, the obvious goal being to secure listings from Chinese companies. Nasdaq has signed memorandums of understanding with the governments of two Chinese provinces to obtain listings and an additional MOU with the Shanghai Stock Exchange, the contents of which have not been disclosed. 

Beijing has recently drafted rules to allow foreign stock exchanges to establish offices in China, but at the same time several reports have indicated that China wants to start its own Nasdaq-style exchange. Commentators predict China, followed by India, will inspire the fiercest competition for listings among numerous overseas exchanges including markets in Germany, Hong Kong, and South Korea. …

Nasdaq/NYSE/Amex Disagree on Three-Character Symbols

The New York Stock Exchange today joined the American Stock Exchange in opposing a proposal by the Nasdaq Stock Market to allow any company with a three-character symbol that transfers its securities to Nasdaq from another domestic market to continue using its existing three-character symbol. Traditionally, companies listed on the New York or American Stock Exchange use one-, two-, or three-letter symbols, whereas companies on Nasdaq use four- and five-letter symbols.

Delta Financial Corporation became the first company with a three-letter symbol (DFC) on Nasdaq when it transferred the listing of its common stock from Amex on March 22, 2007. As reported by American Public Media, DFC’s three-letter switch was approved as a one-time occurrence.  

Nasdaq claims that allowing the portability of symbols will promote competition among exchanges, reduce investor confusion, and allow issuers to evaluate exchanges based on the most efficient trading platform and lowest investor costs without worrying about educating investors on a potential new symbol. 

NYSE and Amex counter that the proposed rule change will cause investor confusion, incorrectly assumes an issuer owns its symbol, and is inconsistent with previous requests by the SEC that the exchanges work together to develop a symbol portability plan. (See the NYSE comment letter here and the Amex comment letter here).

Public comment is now closed on the Nasdaq proposal, and the SEC must now decide whether to approve the proposed rule change or begin proceedings to determine whether the proposed rule change should be disapproved. …