Wednesday, September 20, 2017

Stein calls for global approach to cybersecurity challenges

By Jacquelyn Lumb

Commissioner Kara Stein spoke at the Eurofi financial forum in Tallinn, Estonia, about developments in technology, the challenges of cybersecurity, and their impact on internationally connected markets. She emphasized the importance of working together to solve market problems, including cyber threats, which can spread rapidly due to interconnected computer systems. We live in an age of internationalism as well as nationalism, she said, in which countries and continents are bound together.

Stein said that technology was once merely a tool but now it has reshaped some traditional financial firms. She cited, for example, one major financial firm that has reportedly reduced its equity traders from 600 to two, and one-third of its 9,000 employees are computer engineers. Another major firm has reported spending $9.5 billion on technology in 2016 alone. Many financial firms are now technology firms, she advised, and that has a powerful impact on the markets.

As technological developments have redefined the markets, Stein said the exploitation of technology has increased, particularly in the area of security breaches. In her view, this challenge cannot be addressed alone given how the markets are intertwined. One cyberattack victim can affect the entire marketplace. She called for collaboration in finding solutions that make the global financial markets more secure.

Technological changes and challenges are affecting economies, markets, and financial institutions, Stein said. She called on institutions to work together in thoughtful and creative ways for the benefit of all.

Tuesday, September 19, 2017

ISDA offers suggestions for cross-border harmonization, CCP recovery and resolution

By Lene Powell, J.D.

To reduce cross-border regulatory conflict and duplication, the International Swaps and Derivatives Association, Inc. (ISDA) published a framework to allow for substituted compliance based on risk-based principles. Separately, ISDA also published recommendations for a comprehensive recovery and resolution framework for central counterparties (CCPs).

Risk-based comparability. ISDA’s new paper, “Cross-border Harmonization of Derivatives Regulatory Regimes: A Risk-based Framework for Substituted Compliance via Cross-border Principles,” proposes risk-based principles for making comparability determinations and analyzes the derivatives regulatory frameworks of certain G-20 countries against those principles. The goal is to smooth the process for assessing regulatory comparability, reducing the risk of failure and resulting market fragmentation.

“By assessing only those rules that are meant to tackle risk, and determining whether they achieve comparable outcomes with the rules of another jurisdiction, it avoids an unnecessary, granular rule-by-rule analysis that takes a lot of time and can ultimately result in failure,” explained ISDA chief Scott O’Malia.

ISDA suggests that the CFTC’s cross-border jurisdiction is too broad and its substituted compliance approach overly burdensome. The paper offers five principles covering capital and margin requirements, risk management, recordkeeping, swap data reporting, and clearing and settlement. Together with associated policy goals, the principles form a framework focused on reducing risk.

Noting that comparability simply means that regulations achieve the same overarching goals, the paper also analyzes the CFTC legal framework and compares the regulatory frameworks of several G-20 jurisdictions (the EU, Australia, Canada, Hong Kong and Japan) and Singapore against the cross-border principles, illustrating similarities and highlighting regulatory gaps. The paper also includes a section on derivatives regulations in G-20 emerging markets, using Brazil and Mexico as examples.

CCP recovery and resolution. According to ISDA, the volume of cleared derivatives has increased significantly over recent years, with the Bank of International Settlements reporting a clearing rate of 76 percent of interest rate derivatives notional outstanding. Although the largest global banks and their clearing member units have increased capital by an estimated $1.5 trillion since the financial crisis, comprehensive resilience, recovery and resolution strategies are still critically important.

Recovery refers to measures a central counterparty can take to ensure continued viability upon extreme distress. Resolution refers to measures a resolution authority would take in accordance with a statutory resolution regime to resolve a CCP if a recovery is not successful. Building on work by the Committee on Payments and Market Infrastructures (CPMI), the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board (FSB), ISDA published a paper entitled “Safeguarding Clearing: The Need for a Comprehensive CCP Recovery and Resolution Framework”.

In the paper, ISDA makes 10 recommendations to increase CCP resilience and implement robust, unambiguous and predictable recovery and resolution mechanisms. The recommendations address haircutting, position allocation, and tear-ups, among other subjects. In addition to the recommendations, ISDA provides detailed questions to be considered in creating a regime that will provide maximum transparency and predictability, determine when the process should proceed from recovery to resolution, allocate default and non-default losses, rebalance a CCP’s book, and ensure adequate liquidity.

“These recommendations should serve to strengthen CCP oversight, and serve as a global and trusted foundation on which regulators can reliably base equivalence decisions,” said O’Malia.

Monday, September 18, 2017

ABA panel seeks clarity on finders

By Mark S. Nelson, J.D.

The broker-dealer panel at the ABA’s 2017 Business Law Section Annual Meeting in Chicago urged regulators and Congress to clarify the legal status of finders. Panelists said greater certainty is needed because of the disparate no-action letters issued by the SEC and potentially conflicting court decisions that leave finders in limbo. The panel’s timing matched that of the SEC’s soon-to-expire Advisory Committee on Small and Emerging Companies (ACSEC), which earlier this week reiterated its view that the Commission should take action on finders and asked its successor, the Small Business Capital Formation Advisory Committee, to follow-up on seeking clarification of finders’ status.

No one answers the phone. The ABA panel noted that even in the post-Jumpstart Our Business Startups (JOBS) Act environment, many of the nation’s smallest businesses still cannot get the assistance they need to raise adequate levels of capital to fund future growth. One panelist recalled clients complaining that no registered broker member of the Financial Industry Regulatory Authority would take their calls. A draft of the ACSEC’s latest report would confirm that many registered broker-dealers are uninterested in riskier, small transactions.

The alternative to using registered broker-dealers for capital raising brings many risks, including that despite the presence of some reputable non-registered finders, other finders may be unscrupulous. Faith Colish, counsel at Carter Ledyard & Milburn LLP, one of the speakers on the panel, formally titled Finding Capital: Broker-Dealer Registration After Paxton and Kramer, said capital raising had been “neglected” for a long time. Another panelist, Martin Hewitt, noted that inconsistent state laws further complicate the situation for finders.

Lack of clarity. The panels’ moderator, Marlon Paz, partner at Seward & Kissel LLP, explained that Exchange Act Section 3(a)(4) is the starting point for determining if someone must be registered with the Commission. That section defines “broker” as “any person engaged in the business of effecting transaction in securities for the account of others.” The question is where finders fit into this definition, if at all.

Colish and Linda Lerner, senior counsel at Crowell & Moring LLP, engaged in a mock debate in which they analyzed guidance from the SEC and court decisions that potentially conflict with the SEC’s views. On one side are the several SEC no-action letters that may suggest the possibility that finders, who introduce parties that may engage in a securities transaction, would not have to be registered as brokers. But some of these no-action letters also have subsequent histories that could make them challenging to apply in practice.

For example, in the 1985 Dominion Resources, Inc. no-action letter, the Division of Trading and Markets (then called the Division of Market Regulation) said it would not recommend enforcement to the Commission under Exchange Act Section 15 if Dominion Resources, which had developed expertise in placing taxable and tax-exempt securities, offered these services to other businesses seeking advice on how to structure similar transactions. But five years later, the Division revoked its prior position noting “somewhat similar” instances where the staff had denied no-action requests.

The Division also noted changed circumstances since it issued its original reply to Dominion Resources. “In the intervening years, technological advances, including the advent of the Internet, as well as other developments in the securities markets, have allowed more and different types of persons to become involved in the provision of securities related services.”

Also aligned with finders’ interests, the panelists noted the 1991 Paul Anka no-action letter in which Anka had entered into an agreement with two Canadian entities to buy shares related to a hockey club and was later to use his efforts to introduce potential accredited investors to the hockey club. The Division recommended against enforcement if Anka engaged in the specific activities stated in the no-action request letter.

The panelists said courts also have arrived at varied decisions in several recent cases. For example, the Eighth Circuit in Collyard, a case involving Paul Crawford, who founded a business to aid small companies in capital raising, and whose related license had previously been suspended, invested his own funds in a small company and then entered into an agreement with a third party to refer investors to the company he had invested in for a commission; Crawford later agreed with the company itself to refer investors for a fee. The SEC sued claiming Crawford was a broker.

The Eighth Circuit applied a non-exclusive set of six factors previously adopted by the Sixth Circuit. Of those factors, the court said the SEC presented “undisputed” evidence that Crawford met all but the one regarding employment by the issuer (Crawford was not an employee of the company he had invested in and to which he was to refer investors). Ultimately, the court concluded there was no genuine issue of material fact that Crawford was a broker. The court also rejected Crawford’s assertion that there is a “finder exception” or “finder defense” regarding registration under Exchange Act Section 15.

By contrast, the two featured cases on the ABA panel suggest that finders can limit their activities in a manner that does not implicate Exchange Act registration. In Kramer, a case with numerous evidentiary issues, the district court determined that the SEC failed to show by a preponderance of the evidence that a person was a broker. In Collyard, Crawford had raised Kramer in his defense, but the Eighth Circuit had rejected the comparison because the alleged broker in Kramer engaged in more limited activities.

The other featured case was that of Texas Attorney General Ken Paxton, whom the SEC had alleged was a broker with respect to his efforts to recruit investors for a technology company while serving as a Texas state representative. The SEC had argued that “control” over accounts is just a factor, while Paxton argued that control is an element of “broker” and that the SEC fell short of alleging that he “effected transactions” “for the account of others.” The district court leaned heavily on Kramer and one other case in concluding that “control” is an element (not a factor) and that Paxton did not have “authority” over accounts and, thus, was not a broker under the Exchange Act.

ACSEC recommendation. The ACSEC’s draft final report echoed much of what the ABA panelists said about the uncertainty for unregistered finders. According to the ACSEC, only 13 percent of Regulation D offerings involve brokers or finders, which the committee said likely results from two factors: “(a) a lack of interest from registered broker-dealers given the legal costs and risks involved in undertaking a small transaction and (b) the reluctance of those not registered as broker-dealers to provide assistance because of the ambiguities in the definition of ‘broker.’”

The ACSEC report also noted the ABA’s involvement in urging the Commission to adopt clearer rules for brokers and finders. In 2005, the ABA’s Business Law Section (and other ABA sections) issued a report from the ABA’s Task Force on Private Placement Broker-Dealers (panelist Colish was a member of the ABA task force) that urged the SEC and FINRA to provide desired clarity. The report provides a detailed explanation of why, under current laws, persons might be reluctant to engage in the activities of a finder. Chief among those reasons was the task force’s observation that the SEC’s Division of Trading and Markets appeared to be wary of finders, especially when they may receive transaction-based compensation.

Friday, September 15, 2017

MSRB cautions issuers on selective disclosure

By Jay Fishman, J.D.

The Municipal Securities Rulemaking Board (MSRB) released an advisory on selective disclosure, cautioning municipal securities issuers, dealers and advisors of their potential liability even though not being subject to the SEC’s Regulation FD for corporate issuers. The MSRB explained that these municipal market participants do remain subject to the Securities Act’s and the Exchange Act’s antifraud provisions, thereby creating liability for them in the following ways:
  1. The municipal dealer or advisor selectively discloses nonpublic material information that was known to the issuer at the time the disclosure was made, but that information was not included in a preliminary official statement or other required disclosure: the relevant documents likely suffer from a material omission or misstatement. 
  2. An individual selectively discloses nonpublic material information in breach of a duty to the issuer, and the recipient of that information buys or sells the issuer’s securities based on the information: this transaction could constitute insider trading. 
To avoid the above liabilities, the MSRB advisory asks municipal securities issuers, dealers and advisors to consider adopting Regulation FD’s dissemination principles to address how to handle instances of selective disclosure if they occur and, moreover, advocates posting the principles on the MSRB’s EMMA website. The MSRB additionally provides a set of guiding principles for issuers seeking to enhance their disclosure practices.

The advisory’s overall message, as stated by the MSRB’s Executive Director Lynnette Kelly, is to encourage municipal securities issuers and their financial professionals to protect the integrity of the municipal market by making full and fair disclosures to all investors. She declared that even inadvertent selective disclosure can disadvantage certain investors.

Thursday, September 14, 2017

Small business committee goes out urging revisit of registration exemption for compensatory plans

By Amy Leisinger, J.D.

In its last meeting before the transition to a permanent successor Small Business Capital Formation Advisory Committee, the SEC’s Advisory Committee on Small and Emerging Companies explored the need for updates to modernize Securities Act Rule 701, a registration exemption for securities issued by non-reporting companies pursuant to compensatory arrangements. In response to suggestions by industry participants, the committee agreed to recommend that Commission staff take an in-depth look at the requirements of the rule and their impact on private companies, particularly in connection with recent legislation moving Rule 701’s cap from $5 million to $10 million.

Rule 701. Under Rule 701, a company can offer its own securities as part of compensation agreements to employees, executives, or consultants without complying with registration requirements if total stock sales do not exceed certain limitations. For sales over $5 million to specified individuals during a 12-month period, a company must disclose additional information regarding the plan, related risk factors, and certain financial statements. Financial statements must be not more than 180 days old, and stock option disclosures must be delivered within a reasonable period before the date of exercise. If the threshold is exceeded and disclosures are deemed untimely, the Rule 701 exemption is lost for all stock and options granted, not just those exceeding $5 million.

Recommended modifications. During the meeting, Christine McCarthy of Orrick, Herrington & Sutcliffe LLP’s Compensation and Benefits Group noted that many private and startup companies need to compensate with equity in order to incentivize talent and hire for growth and development of the company. However, she explained, private companies at early stages lack the resources to comply with the requirements of Rule 701 and similar rules. Although the SEC staff has provided some clarification on Rule 701, she expressed the importance of further efforts to avoid undue complications to best serve private companies and small startups, as well as employee-investors.

As such, McCarthy recommended a number of modifications to Rule 701 to increase its usefulness. First, she suggested removal of the requirements that consultants be natural persons in order to fall within the exemption. Early-stage companies with minimal resources use a lot of consultants as opposed to hiring full-time at the outset, she stated, and most individual consultants will organize as entities for tax and other legal purposes, she explained. McCarthy also advocated clarifying that a material change to a previously issued Rule 701 security does not result in a new grant or sale for purposes the rule and that restricted stock units are considered “sales” on the date of grant (like options) and should be valued for Rule 701 purposes based on share value on the date of grant. While many of these limitations were put in place to address the threat of Rule 701 use for non-compensatory purposes, they really do not do much to curb abuses, she said. Many companies end up using “accredited investor” exemptions because repricing can lead to Rule 701 issues, and the better solution is to enforce the rule itself, McCarthy opined.

She also suggested a number of changes to Rule 701’s disclosure obligations. Because the $5-million limit could be exceeded at the end of a 12-month period and expanded disclosure could need to be provided for any sales during the period, a company must generally “guess” whether it will go over the threshold and begin providing disclosure before the limit is reached, McCarthy noted. As such, she recommended changing the rule to state that expanded disclosure is only required for sales occurring after the threshold is actually exceeded and to provide a buffer compliance period. Moreover, the rule should be amended to clarify the timing and delivery requirements applicable to disclosures, she said; it is important to specify what constitutes a “reasonable period of time prior to sale” and what level of certainty is required as to the completion of delivery, McCarthy stressed. To reduce the burdens on small and startup companies and simplify the process, the SEC should also consider decoupling the expanded disclosure requirements from Regulation A and other similar disclosure obligations and limiting financial disclosure updates to once a year unless a material event results in material value change, she concluded.

Steve Miller, CFO of online eyeglasses retailer Warby Parker, echoed McCarthy concerns and noted that, at the outset, a startup can face a number of challenges in incentivizing talent to work with a new company. The provision of equity under rules like Rule 701 can be a solution to the dilemma, he said, but people need flexibility in a startup and can inadvertently run afoul of exemptions. It takes time to put a structure in place, and confidentiality can be crucial as a private company begins its journey, Miller explained. Regulators need to avoid imposing onerous requirements on companies least suited to meet them and make efforts to adjust exemptions to ensure that they are truly effective for the benefit of small businesses, he opined.

Wednesday, September 13, 2017

Private equity fund adviser, principal settle fee and expense failures for $300K

By Amy Leisinger, J.D.

The SEC has charged an investment adviser and its principal with improperly charging fees to two private equity funds and using fund assets to cover certain fees and expenses. According to the Commission, the respondents failed to disclose these activities and violated the custody rule by failing to disclose associated related-party transactions in the funds’ audited financial statements. To settle the matter, the respondents agreed to cease and desist from further violations and to pay a $300,000 civil penalty (In the Matter of Potomac Asset Management Company, Inc. and Goodloe E. Byron, Jr., Release No. IA-4766, September 11, 2017).

Improper fees and expenses. Potomac Asset Management Company, Inc. provides investment advisory and management services to two private equity fund clients under limited partnership agreements and private placement memoranda The LPAs provided terms for calculation and payment of capital contributions and the payment of management fees paid to Potomac. The adviser had responsibility for paying manager expenses, including the compensation, rent, and regulatory expenses.

The SEC alleged that, from 2012 and 2013, the adviser and its principal improperly charged $2.2 million in fees to one of the funds and failed to disclose the use of fund assets to pay the fees to the fund’s limited partners. In addition, according to the SEC, after the fund’s portfolio company reimbursed the fees, Potomac failed to offset them against the management fees it charged. Neither the LPA nor the PPM authorized Potomac to charge the portfolio company fees to the fund, the Commission alleged, and the respondents did not disclose the misuse of fund assets to the limited partners.

From 2012 and 2015, according to the SEC, the respondents also used fund assets to pay Potomac’s adviser-related expenses in a manner not authorized by or disclosed in the funds’ governing documents or Forms ADV. The funds’ audited financial statements also failed to disclose these payments as related-party transactions in violation of GAAP, and, as a result, Potomac improperly relied on an exception to the Advisers Act custody rule.

Finally, the SEC stated, Potomac failed to maintain written policies and procedures reasonably designed to prevent violations of the Advisers Act arising from the allocation of fees and adviser-related expenses, and the principal failed to make timely capital contributions to the funds on behalf of the funds’ general partners and did not disclose the issue to the funds’ limited partners.

By this conduct, the SEC alleged, the respondents violated the antifraud provisions of the Advisers Act, as well as the custody rule’s requirement that client assets be maintained with a qualified custodian that provides GAAP-compliant audited financial statements to investors. In addition, they violated Rule 206(4)-7 by failing to adopt and implement appropriate policies and procedures and Section 207 of the Act by making untrue statements in SEC filings, according to the Commission.

Sanctions. Without admitting or denying the SEC’s findings, Potomac and its principal agreed to a cease-and-desist order, as well as censure. They also agreed to jointly and severally pay a civil money penalty of $300,000. In determining to accept the settlement offer, the Commission noted Potomac’s remedial acts and cooperation, particularly its creation of a limited partner advisory board and its retention of a new CCO and an independent compliance consultant.

The release is No. IA-4766.

Tuesday, September 12, 2017

Giancarlo lauds regulatory deference as key to CCP supervision

By Anne Sherry, J.D.

In an op-ed published in the French financial daily Les Echos, CFTC Chairman Chris Giancarlo stressed that regulatory deference will be the path forward to cross-border supervision of central counterparties. Giancarlo noted in particular that in the wake of the financial crisis, G-20 leaders committed at the Pittsburgh Summit to work towards consistent, rather than identical, implementation of global standards. Mutual deference to foreign regulatory frameworks follows from this pact, he wrote.

The CFTC’s regulatory framework for futures gives non-U.S. firms direct access to U.S. customers provided they comply with the rules of their home jurisdiction. The agency has some similar provisions with respect to non-U.S. swaps dealers and major swaps participants, and recently allowed certain E.U.-based CCPs seeking to operate in the U.S. to comply with corresponding E.U. regulatory requirements.

Giancarlo wrote that this arrangement allows market participants to hedge risks in efficient and resilient global markets and promotes financial stability by holding CCPs based in different jurisdictions to the same high standards. It also allows the CFTC to “work smarter, not harder” under budget constraints. In addition to supporting the cross-border activities of actors in the financial markets, deference arrangements avoid fragmentation, protectionism, and regulatory arbitrage.

The Commission’s staff is exploring how to incorporate deference into other parts of the regulatory framework and form stronger alliances with other regulators, Giancarlo added. He acknowledged that in some circumstances where the CCP is systemically important in a few jurisdictions, deference may not be possible. In those cases, joint supervision between the applicable authorities may be a better solution.

Monday, September 11, 2017

SEC hosts dialogue on exchange-traded products

By Jacquelyn Lumb

The SEC and New York University hosted a dialogue on exchange-traded products during which academics, practitioners and regulators discussed the effect of ETPs on financial markets, their implications for investors, and the future of ETPs. Commissioner Michael Piwowar opened the dialogue with some background on ETPs and their enormous growth since their introduction in 1993. Today, there are nearly 2,000 ETPs in the U.S. with over $2.7 trillion in investments. ETPs are among the fast growing asset classes, he advised.

Piwowar characterized ETPs as one of the most significant financial innovations in recent decades. They allow both institutional and retail investors to tailor their portfolios to take advantage of changing market conditions that arise throughout the day, he explained. One of the panelists described ETPS as the most democratic investment available because anyone with a brokerage account can access a broad range of asset classes and the costs are often very low.

Piwowar noted that ETPs are popular with retail investors because they provide a way to increase their portfolio diversification at a low price, while institutional investors appreciate the ability to lend shares, sell them short, and trade them on margin. He noted that ETPs constitute about 30 percent of all trading volume, which reflects active trading by both retail and institutional investors every day. Given the importance of this market, Piwowar said it is critical that the SEC identify emerging issues that may affect investors and market participants.

Piwowar noted that the industry and academics have raised concerns about ETPs’ effect on the value of the underlying securities and on the quality of the financial markets, and whether the acceleration of index investing is leading to reduced capital market efficiency. The evidence is mixed, he said, with some studies showing that securities prices reflect available information more efficiently when they are included in ETPs, while others suggest that prices of securities with stronger ETP ownership are more volatile, reflecting increased "noise" rather than information.

The SEC has seen an increase in the amount of research about the effects of ETPs on capital formation, market efficiency, and investor protection, according to Piwowar, but he called for more discussion and discovery such as the NYU dialogue. Academicians from Ohio State University, New York University, and the University of Maryland discussed the available research on ETPs’ effect on the financial markets, followed by a panel discussion on their implication for investors led by Investor Advocate Rick Fleming. The investors’ panel agreed that education is paramount. Investors must read the prospectuses and they must understand what they are reading, they advised.

Friday, September 08, 2017

No award for whistleblowers who filed late claims

By Anne Sherry, J.D.

The Second Circuit affirmed an SEC order denying a whistleblower award to two claimants who applied two years past the claim deadline. The court would not set aside the SEC’s interpretation of its rule as requiring timeliness unless the delay is due to factors beyond the claimant’s control. The Commission was also not required to provide the petitioners with actual notice of their potential eligibility for an award (Cerny v. SEC, September 7, 2017).

The notice of covered action posted on the SEC’s website listed the deadline to file a claim as June 3, 2012, but the petitioners did not apply for awards until 2014. Last March, the Commission entered a final order concluding that the claims were untimely and that the claimants had not demonstrated extraordinary circumstances warranting relief from the time bar. The claimants timely appealed to the Second Circuit.

Under the SEC’s whistleblower rules, an award claim is barred if the application is not submitted within ninety days of the notice of covered action. The Commission retains the sole discretion to waive any of its award procedures “based upon a showing of extraordinary circumstances.” It has consistently interpreted this to mean that the failure to timely file was beyond the claimant’s control.

The petitioners argued that the quality of information they provided to the agency, and the agency’s failure to properly catalog their submissions, constituted extraordinary circumstances. But they failed to demonstrate how the SEC’s interpretation of its regulation was plainly erroneous or inconsistent with the rule. The appeals court concluded that the SEC’s interpretation was controlling, and the agency did not abuse its discretion by determining that the petitioners had not established extraordinary circumstances.

The second argument before the appeals court was that the lateness should be excused because the petitioners never received actual notice of their eligibility for a whistleblower award. The court noted that under the relevant regulation, the SEC is not required to provide actual notice. The rule simply provides that when an SEC action results in monetary sanctions exceeding $1 million, “the Office of the Whistleblower will cause to be published on the Commission’s Web site a ‘Notice of Covered Action.’” The SEC did not abuse its discretion by declining to excuse the lateness based on a lack of actual notice, and to the extent the petitioners challenge the notice rule itself, that is beyond the scope of the appeals court’s review.

The case is No. 16-934-ag.

Thursday, September 07, 2017

House passes Reg. A compliance bill; FSOC bill advances ahead of Senate mark-up

By Mark S. Nelson, J.D.

The House easily passed a bill that would require the SEC to amend Regulation A with respect to issuer qualifications and Exchange Act reporting requirements. The House also passed a bill by an equally large margin that would extend the term of the independent insurance member on the Financial Stability Oversight Council.

Regulation A offerings. The Regulation A bill (H.R. 2864), sponsored by Kyrsten Sinema (D- Ariz) advanced by a vote of 403-3 after moving through the House Financial Services Committee 59-0 in July. Rule 251 of Regulation A currently provides that an issuer of securities must satisfy a variety of requirements, including that the issuer is not subject to reporting under Exchange Act Sections 13 or 15(d) immediately before the offering. The Sinema bill would direct the Commission to revise Rule 251 to remove this requirement.

Moreover, the Sinema bill would direct the Commission to amend Rule 257 of Regulation A to provide that an issuer in a Tier 2 offering that is subject to Exchange Act Sections 13 or 15(d) meets the reporting requirements of Rule 257 if the issuer meets the requirements of Exchange Act Section 13. Currently, Rule 257 requires a Tier 2 issuer to file periodic and other reports with the Commission on Forms 1-K, 1-SA, and 1-U. Tier 2 offerings are the result of changes the Commission made to Regulation A in 2015 to provide for offerings to qualified purchasers of up to $50 million with state Blue Sky registration and qualification laws preempted for these offerings.

FSOC independent member term. The Financial Stability Oversight Council Insurance Member Continuity Act (H.R. 3110) likewise passed by a wide margin. The bill, sponsored by Randy Hultgren (R-Ill), was reported by the House FSC unanimously in July and would amend the Financial Stability Act of 2010 to provide that the FSOC’s independent member with insurance expertise may continue to serve until the earlier of 18 months after his term ends or his successor is confirmed.

According to a statement by Hultgren, the bill offers lawmakers a chance to fill a gap in the Dodd-Frank Act. “Absent the appointment and confirmation of a successor, the expiration of the Independent Member’s term would leave the Council without a voting member who has insurance expertise because Dodd-Frank did not make clear if the position can be filled by an acting official.”

As enacted, the Dodd-Frank Act includes among its voting members an independent member who, in addition to having an insurance background, must be appointed by the president and confirmed by the Senate and who serves for a six-year term. A related Senate bill (S. 1463) is due to be marked-up tomorrow.

Wednesday, September 06, 2017

Court declines to bar "professional plaintiff" from serving as lead

By Rodney F. Tonkovic, J.D.

A district court has appointed an institutional plaintiff as lead plaintiff in a securities fraud class action, despite its being a "professional plaintiff." The court concluded that the presumption that a group consisting of two retirement associations was the most adequate lead plaintiff was not overcome. While another movant argued one of the group members was a "professional plaintiff" barred under the PSLRA, the court exercised its discretion to find that the group was not lawyer-driven and would be able to actively participate in the litigation (Oklahoma Law Enforcement Retirement System v. Adeptus Health Inc., August 31, 2017, Mazzant, A.).

This action was filed in late October 2016 on behalf of purchasers of certain common shares of Adeptus Health, Inc. The action was later consolidated with three others, all alleging that the company had failed to disclose material weaknesses in its internal control over financial reporting. While the claims have been stayed after Adeptus filed for bankruptcy, the parties urged the court to decide the instant motions for appointment as lead plaintiff in order to represent the class in the bankruptcy proceedings.

Professional plaintiff okayed. Of the three movants, the court appointed the Alameda County Employees’ Retirement Association and Arkansas Teacher Retirement System (collectively, the "Retirement Group") as lead plaintiff and approved the selection of counsel. One of the three movants was eliminated at the outset because it had filed its motion too late. The court then found that the Retirement Group was the presumptive lead plaintiff because it had the largest financial interest.

The other movant, however, maintained that the Retirement Group would not fairly and adequately represent the class because it was an improper group under the PSLRA. The Retirement Group, however, was able to persuade the court that it would be able to function cohesively and efficiently manage the litigation together. Moreover, the Retirement Group had participated in the bankruptcy proceeding by filing objections and hiring attorneys who have made appearances. There was little concern, the court said, that the Retirement Group was a lawyer-driven group that the plaintiffs would be unable to control.

Next, the movant argued that the Arkansas Teacher Retirement System was a professional lead plaintiff and thus barred under the PSLRA from serving as lead. Here, the court noted a split among the courts as to whether the PSLRA's restriction on professional plaintiffs applies to institutional investors like Arkansas Teacher. There is no blanket exception for institutional investors in the statute, the court said, and that status is merely a factor to consider when the court is using its discretion to apply the bar.

Exercising its discretion, the court declined to bar Arkansas Teacher from serving as lead plaintiff. The court again pointed to the PSLRA's aim to prevent lawyer-driven litigation, but did not find that to be the case here. The court explained that there was sufficient evidence to show that the Retirement Group as a whole would be able to actively participate in the litigation and control its attorneys. The court accordingly appointed the Retirement Group as lead plaintiff and approved its choice of Bernstein Litowitz and Kessler Topaz as co-lead counsel.

The case is No. 4:17-CV-00449.

Tuesday, September 05, 2017

Rep. Waters asks SEC to make conflict minerals enforcement a priority

By Mark S. Nelson, J.D.

House Financial Services Committee Ranking Member Maxine Waters (D-Calif) and Rep. Gwen Moore (D-Wis) asked the Commission to ensure that the conflict minerals rule will be enforced despite the issuance of additional guidance from the Division of Corporation Finance earlier this year that recommended against enforcement if companies do not comply with the due diligence provisions of the rule. Waters and Moore expressed their views in a letter to SEC Chairman Jay Clayton.

Guidance reconsidered. Former Acting Chairman Michael Piwowar had instructed SEC staff to review the April 2014 guidance on conflict minerals. That guidance provided detailed instructions for compliance following a D.C. Circuit decision invalidating part of the rule. The resulting April 2017 guidance did not supersede the earlier guidance, but it added that enforcement would not be recommended if companies do not file due diligence disclosures. Specifically, the new guidance said:
In light of the uncertainty regarding how the Commission will resolve those issues and related issues raised by commenters, the Division of Corporation Finance has determined that it will not recommend enforcement action to the Commission if companies, including those that are subject to paragraph (c) of Item 1.01 of Form SD, only file disclosure under the provisions of paragraphs (a) and (b) of Item 1.01 of Form SD. This statement is subject to any further action that may be taken by the Commission, expresses the Division’s position on enforcement action only, and does not express any legal conclusion on the rule.
Piwowar had previously noted his own visit to Africa, which he said informed his view that the rule is “misguided.” He would later conclude that “[i]n light of the foregoing regulatory uncertainties, until these issues are resolved, it is difficult to conceive of a circumstance that would counsel in favor of enforcing Item 1.01(c) of Form SD.”

Friday, September 01, 2017

NYSE seeks delay in important company news releases to prevent market disruption

By R. Jason Howard, J.D.

The NYSE has filed a Notice of Proposed Rule Change with the SEC to amend Section 202.06 of the NYSE Listed Company Manual to limit the issuance of material news by listed companies in the period immediately after the official closing time for the Exchange’s trading session (Release No. 34-81494, August 29, 2017).

Proposal. The proposed rule change seeks to halt the release of material information until the earlier of publication of such company’s official closing price on the Exchange or five minutes after the official closing time.

The Designated Market Maker (DMM) registered in a security facilitates the close of trading after continuous trading ends at the official closing time of 4:00 p.m. The proposal explains that “because there is trading after 4:00 p.m. Eastern Time on other exchange and non-exchange venues, if a listed company releases material news immediately after 4:00 p.m., but before the closing auction on the NYSE is completed, there can be a significant price difference in nearly contemporaneous trades on other markets and the closing price on the Exchange.”

Statutory basis. The proposal addresses the statutory basis for the proposed rule change and suggests that it is consistent with Section 6(b) and Section 6(b)(5) of the Act in that it is “designed to promote just and equitable principles of trade by ensuring that participants in the closing auction at the Exchange do not have their trades executed at a price that is inconsistent with contemporaneous trading prices on other markets that reflect material news that was released after the NYSE’s official closing time.”

The Commission is seeking comments on the proposed rule change from interested persons and within 45 days of the date of publication of this notice in the Federal Register or up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) by order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved.

The release is No. 34-81494.

Thursday, August 31, 2017

CII applauds PCAOB proposals on auditing estimates and use of specialists

By Amy Leisinger, J.D.

The Council of Institutional Investors has submitted comments to the Public Company Accounting Oversight Board in support of the board’s June 2017 proposals relating to auditing accounting estimates and fair value measurements and standards for auditors’ use of the work specialists. According to CII, the proposals will ensure more useful and consistent information for investors and increased understanding for auditors overseeing the work of specialists.

PCAOB proposals. The PCAOB’s proposal for auditing accounting estimates, including fair value measurements, emphasizes the importance of applying professional skepticism and paying more attention to potential management bias. If adopted, the proposal will replace three existing standards with a single standard and is intended to focus auditors on the estimates that pose the greatest risk of material misstatement.

The proposal relating to auditors’ use of the work of specialists aligns with the board’s risk assessment standards. It strengthens the requirements for evaluating the work of a company’s specialist and applies a risk-based approach to supervising and evaluating the work of both auditor-employed and auditor-engaged specialists.

CII support. In its letter, CII noted the importance of accurate and reliable financial statements to institutional investors and the overall well-being of capital markets. The quality of information provided in audited financial statements depends directly on the quality of the standards used by auditors to ensure that proper disclosures, according to CII, and the PCAOB’s proposed standards would enhance both accuracy and consistency throughout the industry.

In support of the estimates proposal, CII explained that fair value accounting provides investors with more useful information than other alternative accounting approaches. The proposal will increase auditor responsibility for auditing accounting estimates and fair value measurements and provide consistent requirements to increase the quality of information provided in financial statements, according to CII. In addition, CII noted, the proposal aligns requirements for auditing accounting estimates with PCAOB risk assessment standards to increase overall audit quality by ensuring that auditors focus on the most substantial risks for material misstatements and plan accordingly.

The specialist proposal serves to effectively address the more frequent use of specialists seen in connection with increased investor demand for fair value accounting, according to CII. More work done by specialists means more risk that auditors who fail to properly oversee the specialists will fail to detect potential material misstatements, CII explained. The proposal will lead auditors to devote more time and attention to specialists’ activities and increase coordination between them, CII concluded.

Wednesday, August 30, 2017

New lawsuit alleges primary dealers manipulated U.S. Treasuries, related markets

By Lene Powell, J.D.

An action filed in the Southern District of New York alleges that 27 banks have conspired since 2007 to fix and manipulate the markets for U.S. Treasuries and related auctions and derivative financial products. The plaintiffs, a financial services firm and two proprietary trading firms, contend that the banks abused their position as primary dealers to manipulate an important benchmark in violation of the Commodity Exchange Act, the Sherman Act, and common law (Breakwater Trading LLC v. Bank of America Corporation, August 25, 2017).

Primary dealers. According to the complaint, the defendants currently or previously acted as primary dealers of Treasuries, trading directly with the Federal Reserve, acting as Treasuries market makers, and bidding on Treasuries offered for sale by the U.S. Treasury at auctions. Primary dealers have certain market integrity obligations including helping to maintain vigorous competition and not engaging in price manipulation.

Alleged manipulation. The plaintiffs, liquidity providers who say their combined annual trading in the relevant products amounted to over $1 trillion during the class period, alleged that the defendants conspired to fix and otherwise manipulate U.S. Treasury Bills, Notes, Bonds, Floating Rate Notes (FRNs), and Treasury Inflation-Protected Securities (TIPS) (all together, “Treasuries”) markets, as well as related auctions and derivative financial products, including exchange-traded futures and options (“Treasury-Predicated Instruments”).

The plaintiffs say that since January 1, 2007, the defendants have used a combination of electronic chatrooms, instant messaging, and other electronic and telephonic methods to exchange confidential and competitively sensitive customer order flow information in order to coordinate trading strategies and execute transactions. The alleged aim was to artificially affect pricing in the primary and secondary Treasuries and Treasuries-Predicated Instruments markets before, during, and after Treasuries auctions.

According to the plaintiffs, independent expert analysis shows that Treasury auctions were in fact manipulated, displaying both upward and downward Treasuries pricing manipulation, with highly correlated effects across all maturities of both Treasuries and Treasuries-Predicated Instruments. The plaintiffs also cited news reports that the alleged manipulation is under investigation by the SEC, CFTC, Department of Justice, and New York State Department of Financial Services.

The plaintiffs say market participants were damaged by the defendants’ price-fixing and manipulative conduct regardless of whether the manipulation moved the price of the affected Treasury instrument artificially higher or lower.

Violations. The plaintiffs allege that the defendants violated Section 1 of the Sherman Act; Sections 6(c)(3) and 9(a)(2) of the Commodity Exchange Act (CEA) and CFTC Rule 180.2 (manipulation); and CEA Sections 6(c)(1) and 9(a)(2) (use of a manipulative or deceptive device). The plaintiffs assert that the defendants are liable under the CEA as principal for the acts of their agents and that the defendants aided and abetted one another’s violations. The plaintiffs also assert common law claims of unjust enrichment and breach of the implied covenant of good faith and fair dealing. The complaint seeks damages of three times overcharges in an amount to be determined at trial, plus fees and costs.

The case is No. 17-6497.

Tuesday, August 29, 2017

Industry stakeholders share common views on swap reporting

By Brad Rosen, J.D.

The comment period for the comprehensive review of the swap data reporting regulations contained in Parts 43, 45, and 49 of the CFTC’s regulations came to a close on August 21, 2017. The review, initiated by the CFTC’s Division of Market Oversight (DMO) in July of this year, resulted in the submission of 22 separate public comments. Eight comments came from trade organizations representing end-users, as well as another eight from the exchange/swap data repository (SDR) community. Two comment letters were submitted by financial trade organizations and two by financial firms. One comment was submitted by an organization promoting the public interest, and one by an individual member of the public.

The DMO’s stated objective for the review, as contained in CFTC Letter 17-33, is to focus on potential rule changes (1) to ensure that the CFTC receives accurate, complete, and high quality data on swaps transactions for its regulatory oversight role; and (2) to streamline reporting, reduce messages that must be reported, and right-size the number of data elements that are reported to meet the agency’s priority use-cases for swaps data. The commentators, most of which were industry stakeholders of one kind or another, enthusiastically embraced the DMO’s review initiative. Their comments expressed common themes across the communities of SDRs, exchanges, market end-users, and financial firms. An organization representing the public interest, and a member of the general public, expressed deep concerns and saw the review as first step towards dismantling reforms implemented as part of the Dodd-Frank legislation in the wake of the 2008 financial crisis.

The below comments are representative of those received from the various industry stakeholders.

Comments from the SDRs and exchanges. The CME Group, ICE Trade Vault, and Bloomberg BSDR (the SDRs) submitted a joint comment letter which contained recommendations found in many of the other submissions. Some of the main points include:
  • Work to remove uncertainty as to what must be reported and how;
  • Explore whether to combine PET (preliminary economic terms) and confirmation data into a single, clearly defined and electronically reportable set of data elements;
  • Identify most efficient and effective solution for swap counterparty(ies) to confirm the accuracy and completeness of data held in an SDR;
  • Look to reduce the number of fields currently reported;
  • Leverage existing SDR validation processes to improve consistency and completeness of data reporting; and, 
  • Work with SDRs to setup processes for rejecting swap data reports with missing or invalid data. 
In its letter, the SDRs also supported limiting the number of reporting fields to those that the CFTC requires to perform its oversight functions. They asserted that doing so will reduce burdens on reporting counterparties and the SDRs while still ensuring that the Commission can carry out its regulatory mandate.

Comments from market end-users. Market end-users echoed many of the points in their submissions made by the SDRs. The Coalition for Derivatives End-Users underscored the point that the sole legal obligation and responsibility for reporting swap transaction data should rest with the single party to the transaction that is best situated to provide and confirm timely, complete data. The Coalition concluded “imposing new reporting obligations on non-reporting parties (such as end-users), which are not in the business of dealing swaps and do not have the dedicated systems, personnel or resources to confirm swap details at an SDR, would be unnecessarily burdensome, inefficient and costly”.

Comments from ISDA and SIFMA. The International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA), the financial industry trade organizations, submitted a joint letter reflecting many of the above comments, while also encouraging regulatory harmonization among the CFTC, global regulators, and the SEC, including aligning reporting requirements on key economic and real-time data fields and values to the maximum extent possible. They noted that inconsistencies in the global reporting requirements create significant operational complexity for counterparties, which may be required to report a swap to multiple jurisdictions.

Comments from Better Markets. The comments received from Better Markets, a public interest organization, were in stark contrast to the submissions provided by the industry stakeholders. Better Markets expressed its significant concerns that the true objective of the rules review reflected an effort to weaken the regulatory framework that the CFTC had carefully crafted and previously adopted to ensure that the swaps markets are as stable, transparent, and as fair as possible. Rather than diluting the regulations in the name of streamlining the requirements and minimizing industry costs under the guise of fostering economic prosperity, Better Markets contends that swap data reporting regulations should be enhanced.

Better Markets was also troubled that the CFTC’s announcement for the swap reporting rule review made no mention of any engagement with non-industry stakeholders such as the public at large or public interest advocates during the review process. Better Markets advocates that as the review proceeds, “the Commission and the DMO should seek input from a much broader spectrum of stakeholders, not only market participants with their own self-interest in curtailing regulation.”

The Commission has previously indicated that it is aims to complete the regulatory review and revision process with full industry implementation by the end of 2019.

Monday, August 28, 2017

CFTC Enforcement Director James McDonald touts ‘substantial benefits’ of self-reporting

By Lene Powell, J.D.

Companies and individuals debating whether to self-report wrongdoing to the CFTC should know that they can get a significant reduction in their penalty for doing so, said CFTC Enforcement Director James McDonald. In a new episode of CFTC Talks, a podcast series, McDonald emphasized that Division of Enforcement views self-reporting as an important enforcement tool and that the CFTC is not trying to play “gotcha.”

Since his appointment in March, McDonald has overseen several major CFTC enforcement resolutions involving reduced penalties for self-reporting and other cooperation. In the interview hosted by Chief Market Intelligence Officer Andy Busch, McDonald also discussed his career experiences, including his work as an Assistant U.S. Attorney in the Southern District of New York and law clerk to Chief Justice John Roberts, Jr.

New emphasis on cooperation. According to McDonald, the CFTC is constantly thinking about how to give companies and individuals the right incentives to comply with the law while holding people who violated the law accountable. Over the past few months, the CFTC has highlighted the value of cooperation generally, including self-reporting, remediation, and other measures.

In January, the agency issued two advisories on cooperation, discussing factors considered in providing cooperation credit to companies and individuals. In June, trader David Liew was able to completely avoid a civil monetary penalty for spoofing and manipulation in the gold and silver futures markets by providing “substantial assistance” to the Division. Later that month, the CFTC entered into its first-ever Non-Prosecution Agreements (NPAs) with two former Citigroup traders who provided “timely and substantial cooperation” relating to their spoofing misconduct.

Earlier in August, McDonald noted that a $600,000 penalty imposed against The Bank of Tokyo-Mitsubishi for spoofing was a “substantially reduced penalty” in exchange for self-reporting and other cooperation.

Self-reporting considerations. McDonald made several points about self-reporting:
  • The CFTC is not trying to play “gotcha” with self-reporting. If the company tells the CFTC about nine violations and they go in and find a tenth violation, the CFTC will not necessarily deny self-reporting credit.
  • It is okay if the company is not sure it has identified all the wrongdoing at the time of the self-report. As long as the company “stays in the self-reporting and cooperation lane,” it’s fair to expect a real benefit “on the back end.”
  • It has to be a “real” self-report. “It can't be that you'd self-reported to one agency, one law enforcement agency, or you were required to self-report it under the law, or you had some public disclosure requirement under some other legal provision. You have to actually come in and self-report, and say here's the wrongdoing that we've identified,” said McDonald.
  • Part of self-reporting and cooperation means identifying other areas or others who were involved in the wrongdoing. Not everybody will necessarily get a free pass. Just because the CFTC gives an individual or company self-reporting credit doesn’t mean they won’t go after other individuals or companies involved.
McDonald hopes that by giving the right incentives and being transparent about expectations, the CFTC can promote compliance with the law and regulations going forward.

Keeping an open mind. For the CFTC’s part, McDonald observed that because government lawyers have a tremendous amount of power and discretion, it is particularly important for them to be open to new information that might affect their view of a case. Although it would be inefficient to constantly rethink the approach to a case, government lawyers need to consider every question with clear eyes and not get “dug in.”

“So if you're an assistant U.S. attorney, and you're investigating a case, and you're on the eve of trial, but you get new information that would make you think about the case differently, you can't be dug in just because you're on the eve of trial,” said McDonald. “You’ve got to resist that temptation.”

“I think a lot of people would be very glad to hear that,” said Busch.

Friday, August 25, 2017

Chamber of Commerce group pitches ideas to help more companies go public

By Jacquelyn Lumb

Ten organizations, including the U.S. Chamber of Commerce and Nasdaq, have written to Treasury Secretary Steven Mnuchin with recommendations to encourage more companies to go public. The recommendations will help inform Treasury’s report on capital markets that was ordered by the Administration on February 3. Among the group’s key recommendations are extending the JOBS Act on-ramp for emerging growth companies (EGCs) from five to 10 years, modernizing the internal control reporting requirements, reforming the shareholder proposal rules, and enhancing regulatory oversight of proxy advisory firms. While there are a number of reasons for the decline in public companies, the group said there are issues that policymakers can and should address.

Extend JOBS Act on-ramp. The first recommendation, to extend the on-ramp for all EGCs from five years to 10 years and to include companies that qualify as large accelerated filers, would provide an incentive for businesses to go public by exempting them from a number of costly mandates for a longer period of time. The group said there is no evidence that these exemptions have compromised investor protection or undermined confidence in the markets. The group also suggested making the on-ramp available for all initial public offerings for five years, regardless of whether the companies meet the definition of an EGC.

Modify internal control requirement. The group recommended that Congress, the SEC, the PCAOB and FASB explore ways to provide relief to small and mid-sized companies from some of the more onerous provisions of the internal control requirements in Sarbanes-Oxley Act Section 404(b). The costs of compliance were underestimated, the group explained, particularly for middle market companies in their efforts to meet the standards of the PCAOB inspection process. According to the group, many businesses report that auditors use one-size-fits-all generic templates to walk through the PCAOB inspection points. This is time consuming and does little to enhance the overall quality of controls, the group advised.

Improve disclosure effectiveness. Many CEOs point to the administrative burden of public reporting as a significant challenge in completing an IPO. The group urged the SEC to continue the disclosure effectiveness initiative and to reject further attempts to use corporate disclosure to promote agendas that are not related to providing investors with material information. The group recommended the Supreme Court’s definition of materiality outlined in TSC Industries, Inc. v. Northway Inc. in determining the disclosure requirements.

Reform shareholder proposal process. The group believes that the reform of the shareholder proposal process is long overdue. At a minimum, it urged the SEC to raise the thresholds for when a proposal can be re-submitted. As for proxy advisory firms, the group noted that Institutional Shareholder Services and Glass Lewis exert significant influence over corporate governance in the U.S. but operate with little transparency and have numerous conflicts of interest. The SEC issued guidance in 2014 that was helpful, the group advised, but these firms continue to pose a challenge for many companies. The group urged the SEC to continue to explore ways to make the industry more accountable.

Examine alternative markets for EGCs. The group recommended that the SEC examine possible alternative market structures for EGCs and others that face liquidity challenges in the secondary markets. The group also urged the SEC to find a way to promote company research, such as a safe harbor for pre-IPO research, which it believes would improve the trading environment for these stocks.

These recommendations are just a beginning, the group wrote, and it plans to continue to develop ideas to help incentivize more companies to go public.

The other signatories to the letter are the Intercontinental Exchange; Equity Dealers of America; Steven Bochner, a partner at Wilson Sonsini; Joseph Culley, Jr. with Janney Montgomery Scott; Kate Mitchell, co-founder and partner at Scale Venture Partners; Jeffrey Solomon, president of Cowen Inc.; and Joel Trotter, a partner at Latham & Watkins.

Thursday, August 24, 2017

Wolters Kluwer launches thought leadership video series on securities law

Wolters Kluwer Legal & Regulatory U.S. has introduced a video series to highlight thought leadership around new developments in securities law. In this one-of-a-kind series, Wolters Kluwer has collaborated with partners from several top law firms to cover the most pressing issues facing professionals in securities.

"We are working with experts at some of the best law firms in the country to provide our customers with exceptional thought leadership on issues affecting securities practitioners across a variety of businesses and industries," said Susan Chazin, Portfolio Director, Securities and Banking at Wolters Kluwer Legal & Regulatory U.S. "Thanks to our partners at Covington & Burling, WilmerHale and Baker Botts, Wolters Kluwer is uniquely positioned to produce content that will help our customers stay ahead of the latest developments in securities practices."

One of the videos features Covington & Burling's Keir Gumbs, who focuses on the SEC's new rules on hyperlinks, providing a concise summary of the most important takeaways for the filing process.

Dan Schubert of WilmerHale articulates the SEC's views on cybersecurity and scenarios under which it might bring a cyber-related case. Brad Bennett of Baker Botts covers practices that a company should consider in order to develop a successful corporate whistleblower program.

To view the video series, visit:

Wednesday, August 23, 2017

SEC updates pay to play rule FAQ for capital acquisition brokers

By Amanda Maine, J.D.

The SEC has issued an update to its staff response to questions about Investment Advisers Act Rule 206(4)-5, known as the “pay to play” rule. The rule prohibits certain investment advisers from providing investment advisory services for compensation to a government client (or to an investment vehicle in which a government entity invests) for two years after the adviser or certain of its executives or employees makes a campaign contribution to certain elected officials or candidates who can influence the selection of certain investment advisers. FINRA adopted its own rules modeled on the SEC rules in August 2016.

Capital acquisition brokers.
The Commission’s most recent update concerns a set of FINRA rules that apply only to firms that meet the definition of “capital acquisition broker” (CAB). CABs are registered broker-dealers that engage in a limited range of activities, including distribution and solicitation activities with government entities on behalf of investment advisers.

The third-party solicitation ban became effective in July 2015, but because FINRA had not yet adopted pay to play rules at that time, the Division of Investment Management indicated that it would not recommend enforcement action until FINRA enacted its pay to play rules. FINRA’s pay to play rules were approved by the SEC in August 2016, with the Division relief provided to firms to expire on August 20, 2017.

The latest SEC guidance on the pay to play rule includes an inquiry as to whether the Division would recommend enforcement action for the payment of any person that is a CAB to solicit a government entity for investment advisory services. FINRA had filed a proposed rule change with the SEC that would apply the FINRA pay to play rules to CABs on August 18, 2017. The staff reply clarifies that until the rules subjecting CABs to the FINRA pay to play rules are effective, the Division would not recommend that an enforcement action be undertaken under the SEC’s Rule 206(4)-5.