Securities and Financial Sector Legal Review

NY AG Writes Critical Op Ed on High-Speed Trading

Posted in Enforcement Actions and Investigations, Regulatory Actions

New York Attorney General Eric T. Schneiderman yesterday penned an New York Daily News op ed criticizing high speed trading as using “questionable practices” and “driving up the cost for other purchasers of stock.”

Schneiderman’s op ed, available here, comes on the heels of his statements last month calling for “tougher regulations and market reforms intended to eliminate the unfair advantages commonly provided to high-frequency trading firms at the expense of other investors.”

The AG’s March 18th Press Release stated:

To address this imbalance in the markets, which now tilt in favor of high-frequency traders, Attorney General Schneiderman today called on the exchanges and other regulators to review the feasibility of certain market structure reforms that could help eliminate some of the fundamental unfairness in our markets. Currently, securities are traded continuously, so that orders are accepted and matched by price, with ties broken by which order arrives first. This system emphasizes speed over price, rewarding high-frequency traders for flooding the market with orders. One detailed proposal would seek to correct this imbalance by processing orders in batches in frequent intervals, to ensure that price – not speed – is the deciding factor in who obtains a trade.

According to the Daily News, Schneiderman appeared earlier this week on CBS This Morning (video here), where he stated that high frequency trading’s “race for speed” has a “destabilizing effect” and can produce “flashes, crashes and problems.”

In yesterday’s op ed, Schneiderman wrote that he is focusing on the firms that give high speed traders “special access” to get a sneak peak at the market, stating that “Our markets work best when everyone plays by the same set of rules.”




Corporate Governance Update – March 2014

Posted in Corporate Governance

Associate Krista Giannattasio co-authored this post.

A.   Reform on the Horizon for the Uniform Unclaimed Property Act

The Uniform Unclaimed Property Act (UUPA) was promulgated with the intention of abolishing the common law on abandoned property.  The UUPA provides a system for transferring intangible personal property and personal property in safety deposit accounts, held by an entity other than the rightful owner, to the state when it is deemed abandoned by the rightful owner.  The act was originally promulgated in 1954 by the Uniform Law Commission (ULC) as the Uniform Disposition of Unclaimed Property Act.  It was amended in 1966 and wholly revised in 1981 to become the UUPA.  The UUPA was last revised in 1995 and is due for a revision.  In anticipation of the revision, the Drafting Committee of the UUPA has noted 76 issues for consideration and has requested comments by April 22, 2014.

A  statement of the issues can be found here.

B.   PCAOB No Longer Pursuing Mandatory Audit Rotation in the United States

On February 6, James Doty, chairman of the Public Company Accounting Oversight Board (PCAOB), a non-profit corporation established by Congress to oversee the audits of public companies, reported to the SEC that the PCAOB was no longer contemplating the idea of requiring mandatory audit firm rotation.  However, Chairman Doty did announce that the PCAOB was continuing to look at other ways of strengthening auditor independence and skepticism.  As Europe continues to move forward with its concept of a mandatory 10-year rotation requirement, U.S. policymakers will likely monitor the effects of that initiative.

Although Europe’s mandatory auditor rotation rules are yet to be finalized, this initiative may impact multinational companies based in the United States.  The rotation requirement is limited to statutory audits of “public interest entities” (PIEs) in the European Union (EU). This could include some EU operations of U.S. multinationals, with the biggest effect likely in financial services.  Those affected may include:

(1)  EU companies listed on EU regulated markets (NOT U.S. companies solely because they are dual listed)

(2)  Credit institutions (banks) and insurance undertakings (whether or not listed)

(3)  Other entities that an individual EU Member State may choose to designate as a PIE (scope is still unknown)

C.   New York Stock Exchanges’ Annual Letter to Listed Companies

In mid-March, the New York Stock Exchange (NYSE) posted its annual letters to its domestic and foreign-listed companies on its website.  The letter to domestic companies contains reminders of several key annual meeting deadlines and important regulations for U.S. companies such as:

(1)  Broker search cards must be sent at least twenty business days before the record date for annual meetings (ten calendar days for special meetings);

(2)  Notification to the NYSE at least ten calendar days in advance of all record dates set for any purpose (any changes will require another ten-day notice);

(3)  Recommendation of a 30-day interval between the record date and meeting date;

(4)  Three copies of proxy materials must be sent to the NYSE when they are first sent to shareholders; and

(5)  Annual CEO affirmations are due thirty days after the annual meeting, and interim affirmations are required within five business days after the triggering event.

The letter also address the NYSE’s recent changes to the compensation committee independence standards, its timely alert policy, and transactions requiring supplemental listing applications and shareholder approval, especially those that may affect voting rights.

The letter to foreign-listed companies similarly contains helpful information including reminders with respect to record dates, submission of proxy materials, written affirmations, supplemental listing applications and the NYSE’s timely alert policy.  Foreign-listed companies that do not distribute proxies in accordance with U.S. rules are also reminded of the requirement to post a prominent undertaking on its website to provide all holders the ability, upon request, to receive a hard copy of the complete audited financial statements free of charge and to issue a press release announcing the annual report filing, including the company’s website address and alerting shareholders how to receive a free copy of the audited financial statements.

D.   Vestar Capital Partners to Acquire Institutional Shareholder Services

In a March 18, 2014 press release, Vestar Capital Partners, a private equity firm specializing in management buyouts, recapitalizations and growth equity investments, announced it will acquire Institutional Shareholder Services Inc. (ISS)  for $364 million dollars from MSCI Inc.  ISS is a leading provider of corporate governance solutions to the global financial community.  The company will operate independently with the current ISS executive team once the transaction is completed (it is expected to close in the second quarter).  ISS currently works with some 1,700 clients, including institutional investors who rely on ISS’s objective and impartial proxy research and data to vote portfolio holdings, as well as corporations focused on governance risk mitigation as a shareholder-value enhancing measure.  In response to the acquisition, Gary Retelny, President of ISS, stated, “[w]ith Vestar’s support, the management team looks forward to advancing ISS’s long-standing mission of providing world-class corporate governance solutions in an independent and transparent manner.  Clients will continue to see expanded product offerings, innovative solutions, and the same high level of service that ISS has delivered to institutional investors, corporations, and governance practitioners globally for nearly three decades.”

E.    Director Keith Higgins Speaks on Regulation D

On March 28, 2014, Keith Higgins, the director of the SEC’s Division of Corporation Finance, delivered a speech on Regulation D of the Securities Act of 1933.  Under the 1933 Act, any offer to sell securities must either be registered with the SEC or meet certain qualifications set out in Regulation D to exempt them from such registration.  Regulation D standards were relaxed six months ago in connection with the Jumpstart Our Business Startups Act (JOBS Act), enacted in 2012.  Notably, Section 201(a) of the JOBS Act requires the SEC to eliminate the prohibition on using general solicitation under Rule 506 where all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors.  Since general solicitation became effective, almost 900 new offerings have been conducted in reliance on the exemption, raising more than $10 billion in new capital.  However, these 900 offerings pale in comparison to the  old “private” Rule 506 exemption (now called Rule 506(b)) which, during the same time period, was relied upon in over 9,200 new offerings that resulted in the sale of over $233 billion in securities.  Mr. Higgins gave three explanation as to why the new Rule 506(c) exemption has not caught on more widely with issuers:

(1)  Reasonable Steps to Verify. Some believe that the reluctance of issuers to use the new Rule 506(c) exemption is due to the rule requiring the issuer take “reasonable steps to verify” the accredited investor status of a purchaser.

(2)  Definition of “General Solicitation.” Many have criticized the “general solicitation” as too vague and creating uncertainty about whether a particular communication or activity is a form of general solicitation.

(3)  “Overhang” of the 2013 Regulation D Proposal.  Some have expressed concern that the proposed requirements and penalties under the 2013 Regulation D proposal may be applied retroactively to offerings conducted before the adoption of the proposal.


A.   Andy Bouchard:  Delaware’s New Chancellor

On March 20, 2014, Delaware Governor Markell announced the nomination of  Andre G. Bouchard to serve as the 21st Chancellor of the Court of Chancery.  If confirmed by the Delaware Senate, Mr. Bouchard will succeed the Honorable Leo E. Strine, Jr., who was sworn in as Chief Justice of the Delaware Supreme Court in February.  Mr. Bouchard is widely recognized as one of the country’s premier corporate law practitioners.  More information about Mr. Bouchard can be found here.

B.   Supreme Court Allows State-Law Securities Class Actions to Proceed

On February 26, 2014, in the case of Chadbourne & Parke LLP v. Troice, the Supreme Court held that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) does not bar state-law securities class actions in which the plaintiffs allege that they purchased uncovered securities that the defendants misrepresented were backed by covered securities.  This case arose from a multibillion-dollar Ponzi scheme run by Allen Stanford and several of his companies.  Stanford and his associates sold the plaintiffs certificates of deposit (CDs) issued by his bank and then used the money for their personal gain.  Although these CDs were not covered securities under SLUSA, the defendants misrepresented that they were backed by highly marketable securities that were covered by the Act.  After the plaintiffs learned of the fraud, they brought state-law class actions against alleged participants.  In a 7-2 decision, the Supreme Court held that in order to satisfy SLUSA’s “connection” requirement, a misrepresentation must be “material to a decision by one or more individuals (other than the fraudster) to buy or sell a ‘covered security.”  Because the plaintiffs had alleged only “fraudulent assurances that [Stanford's] Bank owned, would own, or would use the victims’ money to buy for itself shares of covered securities,” there was not a “connection” between a material misstatement and the “purchase or sale of a covered security.”   Notably, this decision marks the first time the Court has held that a state-law suit pertaining to securities fraud is not precluded by SLUSA, suggesting some limits to the broad interpretation of SLUSA’s preclusion provision that the Court has recognized in previous cases.

C.   Supreme Court Hears Oral Arguments in Halliburton: Critical Issues for Securities Fraud Class Actions

On March 5, 2014, the Supreme Court heard oral arguments in the case of Halliburton Co. v. Erica O. John Fund, Inc.  The Supreme Court will consider whether to overrule or limit plaintiff’s ability to rely on the legal presumption that each would-be class member in a securities fraud class action relied on the statements challenged as fraudulent in the lawsuit, or the “fraud-on-the-market” theory adopted by the Court twenty-five years ago in Basic Inc. v. Levinson. Without this presumption, putative class action plaintiffs would face substantial barriers in bringing securities fraud class action lawsuits.  While the Court is not expected to rule on Halliburton until June of 2014, the questions posed by the justices hint at changes that may make it more difficult for the plaintiffs’ securities bar to get investor classes certified.  The transcript is available here.

D.   Supreme Court Rules in Private Company Whistleblower Case

On March 4, 2014, the Supreme Court decided Lawson v. FMR LLC.  In a 6-3 ruling that reversed a Fifth Circuit decision, the Court held that the anti-retaliation protection that the Sarbanes-Oxley Act of 2002 provides to whistleblowers applies to employees of a public company’s private contractors and subcontractors. The Sarbanes-Oxley Act was enacted in response to the collapse of the Enron Corporation to protect investors in public companies.  One function of Sarbanes-Oxley is to protect “whistleblowers,” providing that: “No [public] company…or any…contractor [or] subcontractor…of such company, may discharge, demote…[or] discriminate against an employee in the terms and conditions of employment because of [whistleblowing activity]” (18 U.S.C. § 1514A (a)).  In Lawson, the plaintiffs were former employees of a private company that contracted with publicly-traded mutual funds alleging that their employer, FMR LLC, retaliated against them for reporting putative fraud.  The Court’s holding extends far beyond the mutual-fund industry to cover other contractors, including law and accounting firms.

E.    Supreme Court to Review Omnicare: A Circuit Split

The Supreme Court has granted certiorari and will review Omnicare v. Laborers District Council Construction Industry Pension Fund next term.  The issue under consideration is whether, for purposes of a claim under Section 11 of the Securities Act of 1933, a plaintiff may plead that a statement of opinion was “untrue” merely by alleging that the opinion itself was objectively wrong, as the Sixth Circuit has concluded, or must the plaintiff also allege that the statement was subjectively false – requiring allegations that the speaker’s actual opinion was different from the one expressed – as the Second, Third, and Ninth Circuits have held.

F.    Kahn v. M&F Worldwide Corp.: Delaware Supreme Court Affirms In re MFW Shareholders Litigation

In Kahn, et al. v. M&F Worldwide Corp., et al., the Delaware Supreme Court affirmed the Court of Chancery’s decision in In re MFW Shareholders LitigationIn re MFW Shareholders Litigation granted summary judgment in favor of a board accused of breaching its fiduciary duties by approving a buyout by a 43.4% controlling stockholder, where the controlling stockholder committed in its initial proposal not to move forward with a transaction unless approved by a special committee, and further committed that any transaction would be subject to a non-waivable condition requiring the approval of the holders of a majority of the shares not owned by the controlling stockholder and its affiliates.  On appeal, the Delaware Supreme Court affirmed, holding that controlling stockholder buyouts can receive business judgment review if conditioned ab initio on dual procedural protections.  The Delaware Supreme Court adopted the Court of Chancery’s formulation of the standard, ruling that the business judgment standard of review will be applied in controlling stockholder buyouts if and only if: (i) the controlling stockholder conditions completion of the transaction on the approval of both a special committee and a majority of the minority stockholders, (ii) the special committee is independent, (iii) the special committee is empowered to freely select its own advisors and to say no definitively, (iv) the special committee meets its duty of care in negotiating a fair price, (v) the minority vote is informed, and (vi) there is no coercion of the minority.  The Delaware Supreme Court further held, however, that if “after discovery triable issues of fact remain about whether either or both of the dual procedural protections were established, or if established were effective, the case will proceed to a trial in which the court will conduct an entire fairness review.”

G.   In re Rural Metro Corporation Stockholders Litigation: Court of Chancery Holds Financial Advisor Liable for Aiding and Abetting Breaches of Fiduciary Duty

Regarding the case In re Rural Metro Corporation Stockholders Litigation, on March 7, 2014, the Delaware Court of Chancery held RBC Capital Markets, LLC liable for aiding and abetting breaches of fiduciary duty by the board of directors of Rural/Metro Corporation in connection with Rural’s acquisition by Warburg Pincus LLC.  In its ruling, the Court of Chancery found that RBC, in negotiating the transaction on behalf of Rural, had engaged in multiple conflicts of interest.  According to the Court of Chancery, RBC was motivated by its contingent fee and its undisclosed desire and efforts to secure the lucrative buy-side financing work in preparing valuation materials for Rural.  Because those valuation materials were included in Rural’s proxy statement, the Court found that RBC was also liable for aiding and abetting the board’s breach of its duty of disclosure.  The Court of Chancery also noted that RBC had failed to provide interim valuation materials to Rural’s board or its special committee, and that the directors failed in their duty to be sufficiently informed to allow them to make a decision that the sale of the company.  Notably, the Court of Chancery highlighted  that directors must maintain an “active and direct role” in the sale process “from beginning to end.”  The Court of Chancery saw Rural’s special committee as failing to discharge its duty by failing to provide “guidance about when staple financing discussions should start or cease,” failing to make “inquiries on that subject,” and failing to impose a “practical check on [the investment bank’s] interest in maximizing its fees.”  Finally, the Court of Chancery found that the potential for aiding and abetting liability for investment banks, which it characterized as “gatekeepers,” would “create a powerful financial reason for the banks to provide meaningful fairness opinions and to advise boards in a manner that helps ensure that the directors carry out their fiduciary duties when exploring strategic alternatives and conducting a sale process, rather than in a manner that falls short of established fiduciary norms.”

Corporate Governance Update – February 2014

Posted in Corporate Governance

Associate Alina Mejer co-authored this post.

  1. SEC Enforcement Chief Speaks to Washington Post

Andrew Ceresney, the enforcement chief at the SEC, spoke with the Washington Post regarding his agenda. Ceresney discussed a new policy initiative which involves demanding admissions of wrongdoing in certain matters. The criteria the SEC will consider when deciding whether to demand admissions include harm to large numbers of investors, significant risk to investors and/or the markets, and situations where admissions would put investors on notice in future dealings with defendant in a way that is unambiguous. Additionally, Ceresney noted that the SEC will boost its enforcement efforts under the recently created Financial Reporting and Audit Task Force which focuses on detecting misconduct involving accounting and financial reporting disclosures, as well as audit failures.

The article can be found here.


  1. SEC Staff Seeks More Succinct Disclosure on Stock Valuation for IPO Registration Statements

After the questionable value of significant disclosure in a form S-1 was raised in the SEC’s own report examining the disclosure requirements in Regulation S-K, commenters recommended eliminating or reducing the disclosure regarding a company’s historical practice and grant by grant valuation description for establishing the fair value of the company’s common stock in connection with stock-based compensation in IPO registration statements as the information is not significant to investors. As such, Keith Higgins, the head of the SEC Division of Corporate Finance, recently indicated that the SEC staff will be looking for less detailed disclosure in the form S-1 regarding a company’s historical practice for establishing the fair value of the company’s common stock in connection with stock-based compensation. SEC staff will no longer require or expect the level of detail that companies had been providing and instead, will expect a few paragraphs describing the historical valuation methodology and what it will be post-IPO.

More information about the less onerous requirements can be found here.


  1. ISS’ QuickScore 2.0 May Cause Companies to Expand Director Independence Disclosures

Though the deadline for companies to verify the factual information pertaining to them for ISS’ QuickScore 2.0 has passed, companies should note the ISS’s new approach moving forward. Namely, companies may want to expand their new director 8-Ks to include information addressing their independence so that the information is recorded by QuickScore and directors avoid being “unclassified.”

The full ISS Update can be found here. Additionally, a more thorough exploration of the changes can be read here.

  1. Corp Fin Issues Interpretive Guidance Under Rule 14a-6 Based on Foreign Law

In a recent letter, Corp Fin states that Schlumberger Limited, and any other issuers organized in Curacao, may file a definitive proxy statement without filing a preliminary proxy statement, for certain matters subject to an annual stockholder vote under the laws of Curacao that are not among the matters specifically enumerated in Exchange Act Rule 14a-6(a).

The letter can be found here.

  1. SEC Approves PCAOB’s 2014 Budget

On February 5, 2014, SEC Commissioners on February 5, 2014 approved the PCAOB’s 2014 budget. The PCAOB’s 2014 budget is approximately $258 million and the annual accounting support fee is $252 million. Additionally, in response to an question from an SEC Commissioner, PCAOB Chair Jim Doty stated that he will no longer pursue mandatory auditor rotation.

SEC Commissioner Luis A. Aguilar’s comments on the budget approval can be found here.


  1. SEC’s Proposed Rules under the JOBS Act

The Jumpstart Our Business Startups Act (the JOBS Act) was enacted to, among other goals, legalize securities crowdfunding, lift the ban on the mass marketing of private offerings, and foster an IPO on-ramp for so-called emerging growth companies. In December, the SEC proposed rules under another section of the Act (Title IV) that would permit companies that register a “mini-IPO” with the SEC to raise up to $50 million from the general public in a 12-month period. This exemption, called “Regulation A+”, could be useful to companies looking to raise capital as state registrations would not be required. Further, a small company would be able to raise $50 million from the public, deal in unrestricted securities (which have the practical effect of being immediately re-sellable), engage in ‘testing the waters’ to gauge investor interest, and promote the offering to the broad marketplace.

A more thorough exploration of Regulation A+ can be found here.


  1. NASAA Objects to SEC’s Regulation A+ Proposal

NASAA, the association for state securities regulators, submitted a comment letter on the SEC’s Regulation A+ proposal to voice their objection to potentially being exempted from these offerings. The Regulation A+ proposal would provide for preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers.” NASAA’s letter is a response to a decades-long trend whereby federal regulators preempt state securities regulators’ authority to require qualification or registration of offers and sales of securities within their states. The letter was co-signed by the California Commissioner of Business Oversight Jan Lynn Owen and requests to meet with SEC Chair Mary Jo White and the leadership of the Division of Corporate Finance.

To read the comment letter in full, click here.

  1. Corp Fin Updates Its Financial Reporting Manual

Corp Fin updated its Financial Reporting Manual for issues related to critical accounting estimate disclosures for share-based compensation in IPOs. Among the updates, companies may be able to scale back their disclosures in the management’s discussion and analysis (MD&A) section of a Registration Statement relating to events and business developments that affected their estimates used to value stock-based compensation awards granted before the company’s IPO. Additionally, while SEC staff will continue to issue comments to help it understand unusual valuations, the staff will not expect expanded disclosure in the MD&A related to the underlying events and business developments that affected such valuations. The updated Manual also states that companies should continue to disclose methods used to determine the fair value of the company’s shares, the extent to which such estimates are considered highly complex and subjective, and that such estimates will not be necessary for new awards once the shares begin trading. The updates to the Manual reflect a broader push toward helping companies reduce tedious disclosure requirements.

To read the updated Financial Reporting Manual, click here.


  1. SEC Hires the Investor Advocate

Dodd-Frank created a new position within the SEC called the Investor Advocate. The SEC filled the position with Rick Fleming, who formerly worked at NASAA (the state securities regulators association) as the Deputy General Counsel.

The full press release can be found here.


  1. SEC Provides Broker-Dealer Relief

The SEC’s Division of Trading and Markets issued a no-action letter, entitled “M&A Brokers,” that allows a person giving advice on M&A deals to receive transaction-based compensation under certain conditions without having to register as a broker-dealer. This letter is a significant departure from prior guidance but it is subject to numerous conditions, some of which may limit its applicability, including the limitation that it only relates to the sale of privately held companies and that the M&A broker may not directly or indirectly through its affiliates provide financing for an M&A transaction.

The letter can be read in its entirety here.


  1. SEC to Host Cybersecurity Roundtable

The SEC announced that it will host a roundtable in March to discuss cybersecurity and the issues and challenges it raises for the market participants and public companies. Further, the SEC plans to discuss how they are addressing cybersecurity concerns. Given the recent attention on cybersecurity breaches, the SEC hopes to raise awareness about how various market participants can effectively manage cybersecurity threats.

The press release can be found here.


  1. ISS Updates Proxy Voting Guidelines

ISS updated its proxy voting guidelines on January 31, 2014 to address shareholder proposals that address proxy voting topics. Among the updates, ISS discussed the controversial topics of interim vote tallies, confidential voting policies, and treatment of abstentions and broker non-votes.

The updated guidelines can be found here.


  1. More Briefs Filed in Halliburton Fraud-on-the-Market Case

The Supreme Court will decide whether to abandon the “fraud on the market” presumption of reliance that has facilitated class-actions brought under Section 10(b) and Rule 10b-5 in Halliburton Co. v. Erica P. John Fund, No. 13-317. The case will be argued on March 5th and a decision is expected in June.

The briefs that have been filed thus far can be read here.


  1. Chevron Seeks Delaware Supreme Court Certification

The Delaware Chancery Court upheld the use of exclusive forum bylaws where the validity of Chevron and Fedex’s forum provision bylaws were challenged. Plaintiffs decided not to appeal that decision. Notwithstanding, Chevron asked a California judge for a similar case to be certified to the Delaware Supreme Court to bring more certainty to the use of exclusive forum bylaws. The hearing on this certification is scheduled for March 13th.

Chevron’s request can be found here.


Client Advisory: Private M&A Brokers Receive Relief from Broker-Dealer Registration and Restriction on Transaction-Based Compensation

Posted in Corporate Governance, Regulatory Actions

Our Kelley Drye & Warren LLP colleagues, M. Ridgway Barker, Paul McCurdy, and Evan Barnes have published a client advisory titled “Private M&A Brokers Receive Relief from Broker-Dealer Registration and Restriction on Transaction-Based Compensation” regarding the U.S. Securities and Exchange Commission’s (the “SEC’s”) January 31, 2014 No-Action Letter regarding M&A Brokers (the “M&A Broker Letter”)

The M&A Broker Letter expands on the types of services that the SEC staff permits M&A Brokers to provide without requiring registration as a broker-dealer.  As stated in the advisory,

An “M&A Broker” for purposes of the No-Action Letter is a person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately-held company through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the company or the business conducted with the assets of the company.

The M&A Broker Letter includes ten conditions that must be met for an M&A Broker to avoid registration requirements under the Securities Exchange Act of 1934.  The client advisory lists each of these conditions.

Going forward, M&A Brokers falling within the “four corners” of the M&A Broker Letter can take a high degree of comfort that they will not have to register as a broker-dealer in order to receive transaction-based compensation for their M&A services.

Corporate Governance Update – January 2014

Posted in Corporate Governance

Law Clerk Alina Mejer co-authored this post.


  1. SEC Technology Budget Slashed in Half

 In mid-January, Congress removed $50 million that the Securities and Exchange Commission had set aside for technology initiatives. The decision is a setback for the SEC as it had hoped to beef up its tools for spotting violations such as illegal trades and accounting fraud. Congress did not offer a reason explaining its decision.

More information about the budget cuts can be found here.

SEC Announces 2014 Examination Priorities

The SEC announced its examination priorities for 2014. Among the issues it will focus on are financial institutions, including investment advisers and investment companies, broker-dealers, clearing agencies, exchanges and other self-regulatory organizations, hedge funds, private equity funds, and transfer agents. The priorities were selected by senior exam staff and managers and other SEC divisions and offices in consultation with the chair and other commissioners. The analytics used to select the priorities included:

  • Tips, complaints and referrals, including from whistleblowers and investors
  • Information reported by registrants in required filings with the SEC
  • Information gathered through examinations conducted by the SEC and other regulators
  • Communications with other U.S. and international regulators and agencies
  • Industry and media publications
  • Data maintained in third party databases
  • Interactions outside of examinations with registrants, industry groups, and service providers .

While not exhaustive, the examination priorities hope to address market-wide issues and those that are specific to particular business models and organizations.

The SEC press release can be found here.

  1. SEC Commissioner’s Speech on Disclosure Reform

SEC Commissioner Daniel M. Gallagher gave a speech in front of the Forum for Corporate Directors in Orange County, California where he laid out his thoughts on disclosure reform. Some of his priorities include tackling disclosure reform in pieces rather than all at once, eliminating non-material disclosure requirements, reducing the number of Form 8-K triggering events, reducing redundancy by providing guidance when disclosure is not needed, and using core filing for one-time disclosures.

The full speech transcript can be found here.

  1. SEC Issues Report of Investigation Pursuant to Section 21(a)

The SEC investigated KMPG for violating the auditor independence rules. In a published report, the SEC uncovered that KMPG provided prohibited non-audit services, such as restructuring, corporate finance, bookkeeping, payroll and expert services to affiliates of companies whose financial statements they were auditing.

The SEC Report can be found here.

  1. SEC Issues Additional Transition Guidance Related to Rule 506 Offerings

The SEC issued new Compliance and Disclosure Interpretations (C&DIs) connected with Rule 506 offerings commenced prior to September 23, 2013, the effective date of the new 506(c) exemption. The new 506(c) exemption states that an issuer may choose to continue an offering commenced prior to September 23, 2013 in accordance with requirements of either Rule 506(b) or Rule 506(c). If an issuer chooses to continue an offering under the latter, then any general solicitation that occurs after the effective date will not affect the exempt status of offers and sales of securities that occurred prior to the effective date in reliance on Rule 506(b). The new CD&Is offer more transitional guidance and effectively state that if an issuer commenced a Rule 506 offering prior to September 23 and decides at some point after such date to continue the offering as a Rule 506(c), then the issuer is not required to take “reasonable steps to verify” the accredited investor statute of investors who purchased securities in the offering before the issuer conducted the offering in reliance on Rule 506(c).

The SEC Interpretations can be found here.

  1. ISS Announces It Will Revise QuickScore

On January 8, ISS announced it will launch a new version of QuickScore in mid-February. The new version will use a different method to score companies’ governance risk and will automatically reflect changes in companies’ corporate governance structures based on publicly disclosed information. By adding new factors and modifying the weightings assigned to the governance factors, ISS hopes to highlight more distinctions between companies and align scores with ISS voting policies and company performance. It should be noted that companies will continue to be scored on an overall basis and across four categories: (1) Board, (2) Compensation, (3) Shareholder Rights, and (4) Audit. Further, companies will also continue to be scored relative to other companies in the Russell 3000 Index.

The data verification period began on January 27 and a technical document will be available here.

  1. ISS Publishes Guidance on Director Compensation Bylaws

ISS adopted a new policy position that is designed to prevent board efforts to protect against “golden leash” incentive bonus schemes. The schemes are popular within certain activist hedge funds as a tool to recruit director candidates to stand for election in support of whatever business strategy the fund seeks to impose on a company. ISS warns that if a board adopts “restrictive director qualification bylaws” designed to prohibit “golden leashes” without submitting them to a shareholder vote, ISS “may” recommend a withhold vote against director nominees “for material failures of governance, stewardship, risk oversight, or fiduciary responsibilities.”

The Director Qualification/Compensation Bylaw FAQs can be found here.

  1. Nasdaq’s Final Compensation Committee Certification is Now Available

 The final form of the compensation committee certification is now available on Nasdaq’s Listing Center. Anyone can view a blank form in preview mode and Listing Center User’s can log in to complete the form online on behalf of company.

A preview of the form can be found here.

  1. “Nasdaq Private Market” Gets Regulatory Approval

Last year Nasdaq and SharesPost announced Nasdaq Private Market (NPM), a joint venture which intends to create a preeminent marketplace for private growth companies. This month, FINRA approved the registration as a broker-dealer of NPM Securities, LLC, a Nasdaq OMX Group brokerage unit. In the FINRA broker-dealer profile, NPM Securities stated that it is in “the process of registering with the SEC as an alternative trading system assisting in the matching of buyers and sellers in primary and secondary offerings of the securities of privately held companies.”

For more information, click here.

  1. NYSE Updates its “Annual Written Affirmation”

The NYSE updated its “Annual Written Affirmation” to reflect the new compensation committee independence requirements. This form must be used for companies who held their annual meeting on or after January 15, 2014.

The Annual Written Affirmation Form can be found here.

  1. FINRA Releases Its Annual Priorities Letter

FINRA’s annual priorities letter reflects market changes. For example, given the resurgence of the IPO market, FINRA will review due diligence activities, monitor the accuracy of firms’ filings regarding public underwritings with FINRA’s Corporate Finance Department, and review compliance with rules concerning the sales and allocation of IPO securities. FINRA continues to remain concerned with abuses in the private placement market, including the use of advertising and marketing materials, and the diligence undertaken by placement agents in private offerings.

The FINRA letter can be found here.

       12.       Administrative Law Judge Sanctions Auditors

An administrative law judge sanctioned Chinese affiliates of the Big Four auditors for willfully refusing to produce their work papers to the SEC related to China-based companies. The refusal to produce work papers is a violation of Section 106 of Sarbanes-Oxley and sanctions include censure and a six-month practice ban. The Chinese affiliates plan to appeal the decision to the SEC and then a federal court if they lose again. The ALJ sanctions potentially could have the effect of keeping any of the Chinese companies from the US markets as there is a six-month total practice ban for the Big Four China affiliates. However, the ban does not go into effect pending determination of the appeal.

To read the 112-page decision, click here.

New York Times Reports Slight Increase in Securities Suits in 2013

Posted in Securities Fraud and Class Actions

The New York Times reported an increase in federal class-action securities suits in 2013, compared to the prior year.  According to a study from Cornerstone Research and Standford Law School, Plaintiffs filed 166 suits in 2013, up 9 percent compared to the 152 actions filed in 2012.

The Times speculates that “fewer companies on the New York Stock Exchange and the NASDAQ mean fewer companies to target.”

Notably, while the number of cases increased, the total damages sought by the 2013 suits was the lowest since 1998:

While the amount of cases increases slightly last year, the amount of money at stake shrank drastically. In 2013, Cornerstone estimated that all the suits combined could award as much as $279 billion to plaintiffs, the lowest level since 1998. That represents a 31 percent drop from 2012 levels, and a 57 percent drop from the historical average.

The Times quoted Joe Grundfest, a professor at Standford, who stated that “In a rising market, you simply don’t have losses that are as large.”


BrokerCheck Expanded to Include National Securities Exchange Member Data

Posted in Legislation, Regulatory Actions

BrokerCheck will soon include information about registered national securities exchanges’ members and their associated persons that use the Central Registration Depository (“CRD”) for registration purposes.  As explained by the Securities and Exchange Commission (“SEC”) in its release approving Financial Industry Regulatory Authority, Inc.’s (“FINRA’s”) proposed rule change,

BrokerCheck provides the public with information on the professional background, business practices, and conduct of FINRA member firms and their associated persons. The information that FINRA releases to the public through BrokerCheck is derived from the CRD system, the securities industry online registration and licensing database. FINRA member firms, their associated persons, and regulators report information to the CRD system via the uniform registration forms.

For those broker-dealers and their associated persons that are not FINRA members but are registered with a national securities exchange, their information is kept in the Central Registration Depository through the filing of uniform registration forms.  Once the Rule amendment becomes effective, information for those firms and their associated persons will be accessible via BrokerCheck.

In approving the proposal, the SEC indicated that making certain CRD information for these firms and their associated persons available will “enhance investor protection”:

[T]he Commission believes that the proposal will enhance investor protection by making available, via BrokerCheck, information regarding the professional background, business practices, and conduct of firms and associated persons that were members solely of a national securities exchange.  Making this information available via BrokerCheck harmonizes the disclosure across the securities industry.  The information is relevant to investors and members of the public who wish to educate themselves with respect to a firm or the professional history of a current or formerly associated person of a CRD Exchange.  Further, the public’s ability to access information regarding a firm or current or former associated person, whether the individual is or was associated with FINRA or with any national securities exchange that uses CRD for registration purposes, may serve to protect investors, the integrity of the marketplace, and the public interest.

The information will be available on BrokerCheck with the amendment of FINRA Rule 8312.  FINRA intends to announce the amendment’s effective date in a regulatory notice to be published no later than 60 days following the SEC’s approval.  At the very latest, the amendment will go into effect no later than 180 days following publication of FINRA’s Regulatory Notice.  FINRA’s Rule Proposal.

As set forth in the current version of Rule 8312, the following information will be available through BrokerCheck:

(A)      any information reported on the most recently filed Form U4, Form U5, Form U6, Form BD, and Form BDW (collectively “Registration Forms”);

(B)       currently approved registrations;

(C)       summary information about certain arbitration awards against a member involving a securities or commodities dispute with a public customer;

(D)      the most recently submitted comment, if any, provided to FINRA by the person who is covered by BrokerCheck, in the form and in accordance with the procedures established by FINRA, for inclusion with the information provided through BrokerCheck. Only comments that relate to the information provided through BrokerCheck will be included;

(E)       information as to qualifications examinations passed by the person and date passed. FINRA will not release information regarding examination scores or failed examinations;

(F)       in response to telephonic inquiries via the BrokerCheck toll-free telephone listing, whether a particular member is subject to the provisions of NASD Rule 3010(b)(2) (“Taping Rule”);

(G)      Historic Complaints (i.e., the information last reported on Registration Forms relating to customer complaints that are more than two (2) years old and that have not been settled or adjudicated, and customer complaints, arbitrations or litigations that have been settled for an amount less than $10,000 prior to May 18, 2009 or an amount less than $15,000 on or after May 18, 2009 and are no longer reported on a Registration Form), provided that any such matter became a Historic Complaint on or after August 16, 1999; and

(H)      the name and succession history for current or former members.

See Recently Approved Rule 8312 Pending Determination of Effective Date.  Importantly, if there are errors in the accuracy of information disclosed through BrokerCheck, the administrative process set forth in FINRA Rule 8312(e) can be employed.

Corporate Governance Update – December 2013

Posted in Corporate Governance

Krista Giannattasio co-authored this post.

A.  SEC Removes References to NRSRO Ratings in Certain Rules and Forms

On December 27, 2013, the SEC announced that it had adopted amendments to eliminate references to credit ratings by nationally recognized statistical rating organizations (NRSROs) in certain rules and forms.  The changes were required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The SEC press release, as well as the affected rules and forms, can be found here.

B.   SEC Issues Staff Report on Public Company Disclosure

On December 20, 2013 ,the SEC issued a staff report to Congress on its disclosure rules for U.S. public companies, as part of agency’s ongoing efforts to modernize and simplify disclosure requirements and reduce compliance costs for emerging growth companies.  This report is mandated by Congress in the 2012 Jumpstart Our Business Startups (JOBS) Act.  It offers an overview of the SEC’s Regulation S-K that governs public company disclosure, as well as the staff’s preliminary conclusions and recommendations.  Notably, the study discusses possible next steps and the Staff’s preliminary suggestions for further study.  The study notes two approaches to disclosure reform: (1) a broad comprehensive review of disclosures and (2) a more targeted review topic by topic.  The study also identifies four issues that should be addressed during a reform project: (1) principles-based disclosure requirements; (2) scalability for different types of companies; (3) how disclosure is delivered and presented; and (4) navigability of disclosure.

The SEC press release, as well as report, can be found here.

C.   SEC Proposes Regulation A+ Rules

At a December 18, 2013 meeting, the SEC voted to propose rules intended to increase access to capital for smaller companies.  The SEC’s proposal would build upon Regulation A, which is an existing exemption from registration for small offerings of securities up to $5 million within a 12-month period. The updated exemption would enable companies to offer and sell up to $50 million of securities within a 12-month period. The rules are mandated by Title IV of the Jumpstart Our Business Startup (JOBS) Act.  Both of these tiers would be subject to basic requirements concerning issuer eligibility, disclosure, and other matters, building on the current provisions of Regulation A while in some cases modernizing existing provisions to make Regulation A consistent with current practice for registered offerings. Tier 2 offerings would be subject to additional requirements, such as the provision of audited financial statements, ongoing reporting obligations, and certain limitations on sales, reflecting the directives in Title IV of the JOBS Act and the additional investor protection concerns associated with larger exempt public offerings.

The SEC proposal can be found here.

D.   SEC Grants First Rule 506 Bad Actor Waiver

On November 25, 2013, the SEC granted the first bad actor waiver under Rule 506 of Regulation D to RBS Securities.  A bad actor waiver is granted when the SEC waives Regulation A and Regulation D disqualifications upon a showing of good cause that the disqualification is not necessary under the circumstances.  RBS made the following points to the SEC:

(1)  The disqualifying judgment arose out of a single offering of residential mortgage-backed securities in 2007.

(2)  The conduct did not pertain to offerings under Regulation A or D.

(3)  RBS Securities has taken steps to address the conduct alleged in the complaint. RBS Securities also has taken and will be taking actions reasonably designed to prevent potential violations of Section 17(a)(2) and (3) in connection with disclosures related to, and offer and sale of, residential mortgage-backed securities.

(4)  The disqualification of RBS Securities and its affiliates from relying on the exemptions available under Regulation A and Rules 505 and 506 of Regulation D would be unduly and disproportionately severe.

(5)  For a period of five years from the date of the final judgment, RBS Securities will furnish (or cause to be furnished) to each purchaser in a Rule 506 offering that would otherwise be subject to the disqualification under Rule 506(d)( l) as a result of the final judgment, a description in writing of the Final Judgment a reasonable time prior to sale.

The waiver can be found here.

E.    PCAOB’s New Report: Implementation of Engagement Quality Review Standard

On December 6, 2013, the PCAOB issued a report providing information about auditors’ implementation of, and compliance with, Auditing Standard No. 7, Engagement Quality Review, based on 2011 inspections of registered public accounting firms by the PCAOB.  In the report, the PCAOB made several findings: (1) while methodologies generally were consistent with the requirements of Auditing Standard No. 7, they did not always result in an appropriately executed engagement quality review; (2) in a number of engagements in which the PCAOB Inspection staff identified audit deficiencies, the staff concluded that the audit deficiency should have been identified by the engagement quality reviewer; and (3) observations from the Board’s 2012 inspections indicated that audit deficiencies and the related deficiencies in engagement quality reviews continued to be high.

The full report can be found here.

F.    SEC Chair Mary Jo White Speaks on Benefits of Shareholder Engagement

SEC Chair White recently delivered a speech addressing shareholder engagement and shareholder activism. Notably, White expressed that corporate boards and management should engage with shareholders to help improve governance and explained what she saw as the positive outcomes from increased investor activism.  White touched on some cases where such measures have helped foster more productive communication among management, boards, and shareholders.  Although White advocated that a company cannot and should not always do what every shareholder asks, she added that its board and management should listen to investors and their governance practices “when warranted.”

Chair White’s speech can be accessed here.

G.   SEC Issues 14 New “Bad Actor” Compliance and Disclosure Interpretations

On December 4, 2013, the SEC updated its “Securities Act Rules Compliance and Disclosure Interpretations” to provide fourteen new interpretations clarifying the application of the “bad actor” disqualifications from Rule 506 offerings.

The new compliance and disclosure interpretations can be found here.

H.   PCAOB Reproposes “Disclosure of Engagement Partner” Standards

On December 4, 2013, the PCAOB reproposed amendments to its auditing standards that would provide disclosure about the engagement partner and certain other participants in the audit.

The reproposed amendments can be found here.

I.       NASDAQ Proposes Compensation Committee Independence Changes to Align with NYSE

On November 26, 2013, Nasdaq filed a proposal to amend its listing rules implementing Rule 10C-1 of the Securities Exchange Act of 1934, governing the independence of compensation committee members. Currently, the Nasdaq rules use a bright-line test for independence that prohibits compensation committee members from accepting directly or indirectly any consulting, advisory or other compensatory fees from the company or any subsidiary subject to certain exceptions.  Nasdaq recognized that the rules potentially place a burden on companies’ ability to recruit eligible directors and proposed to replace this rule and its exceptions with a requirement that all compensation received from a company be considered in the independence determination.  Nasdaq has also proposed minor revisions to the affiliation prong of the compensation committee independence test under Rule 10C-1, which requires that consideration be given in independence determinations to whether a compensation committee member is affiliated with the issuer, a subsidiary of the issuer or an affiliate of a subsidiary of the issuer. All of these changes would align Nasdaq’s approach to compensation committee independence with that employed by the NYSE.

More information about the proposal can be found here.


Corporate Governance Update: November 2013

Posted in Corporate Governance, Enforcement Actions and Investigations, FINRA Arbitrations

Law clerk Emi Briggs co-authored this article.

1. SEC Announces First Deferred Prosecution Agreement with Individual

On November 12, the Securities and Exchange Commission announced a deferred prosecution agreement with former hedge fund administrator, Scott Herkis. Herkis’ voluntary cooperation aided the SEC in filing an enforcement action against Heppelwhite Fund LP manager Berton M. Hochfeld for misappropriating over $1.5 million. The terms of the agreement state that Herckis aided and abetted Hochfeld’s securities law violations and among other prohibitions must not provide any services to any hedge fund for five years and must disgorge the approximately $50,000 in fees he received for serving as Hochfeld’s fund administrator.  The SEC press release can be found here.

2. SEC Hints at Transition to New COSO Framework

In a recent meeting with the Center for Audit Quality’s SEC Regulations Committee, SEC staff maintained it would defer to COSO’s decision to supersede the 1992 framework with the newest model after December 15, 2014. COSO’s Internal Control — Integrated Framework has been relied on by public companies as means of ensuring compliance with internal control reporting requirements under Sarbanes-Oxley. While the SEC has yet to formally require companies transition to the 2013 framework, COSO’s board has determined that the previous framework will essentially cease to exist after the 2014 transition date. The new framework was released in May 2013 providing ample time and a strong incentive for companies to upgrade.

3. FINRA Announces Settlements with Two Broker-Dealer Firms

TD Ameritrade Clearing Inc. settled allegations that it failed to report or accurately report large trader positions for $1.15 million. SG Americas Securities LLC settled similar allegations for $675,000. While the settlements were announced on November 6, the settlements became final on Oct 24th and 21st respectively. Neither entity admitted or denied the allegations in their settlement agreements.

4. After Twenty-Five Years SCOTUS Revists “Fraud on the Market”

The Supreme Court has granted a petition for certiorari in Halliburton Co. v. Erica P. John Fund., Inc. By doing so it will revisit the Basic v. Levinson presumption that reliance on allegedly misleading statements can be presumed where violations of Section 10(b) and SEC Rule 10b-5 were asserted. Without this presumption, shareholders would be forced to prove actual reliance on a misrepresentation making Section 10(b) class action suits exceedingly difficult to pursue. The Court in the Halliburton case will consider the following questions:

(i) Whether it should overrule or modify the Basic holding to the extent it recognizes a presumption of reliance drawn from the fraud on the market theory.

(ii) Whether defendant my rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentation did not distort the market price of its stock.


Corporate Governance Update: October 2013

Posted in Corporate Governance

Associate Aartie Manansingh co-authored this article.

1. SEC Chair Mary Jo White Delivers Speech on Disclosure Reform

SEC Chair May Jo White recently delivered a speech regarding reporting rules and suggested that regulators review whether investors are faced with “information overload” and whether investors are better served by streamlined disclosures.  “I am raising the question . . . as to whether investors need and are optimally served by the detailed and lengthy disclosures about all of the topics that companies currently provide in the reports they are required to prepare and file with us,” White said before the National Association of Corporate Directors.  “We must continuously consider whether information overload is occurring as rules proliferate and as we contemplate what should and should not be required to be disclosed going forward.”  The full remarks can be accessed here.

2. Nasdaq Files SEC Rulemaking Petition Seeking “Models & Methodologies” Disclosure

On October 8, Nasdaq filed a petition with the SEC seeking more disclosure about how proxy advisors disclose their models and methodologies. Relatively little is known about the policies and methodologies proxy advisory firms use to determine the recommendations on proxy votes that many investors rely on. Nasdaq also petitioned to mandate public disclosure of any and all business relationship that give rise to conflicts of interest with respect to proxy advisory firms.

3. SEC Approves Proxy Distribution Fee Changes

On October 14, the SEC approved a new proxy distribution fee framework. The result should be lower reimbursement costs for companies, depending on their circumstances. The NYSE’s revised proposal was based on recommendations by its Proxy Fee Advisory Committee. The changes include, for a five-year test period a one-time, supplemental fee of 99¢ for each new account that elects, and each full package recipient among a brokerage firm’s accounts that converts to, electronic delivery while having access to an enhanced brokers’ internet platform. The new structure eliminates fees for managed accounts that hold five or fewer shares of an issuer’s securities, and reduces the incentive fee for suppression of print material in managed accounts (now to be called a “preference management fee”) to half the rate charged for other accounts.  The SEC release may be found here.

4. SEC Issues Proposal On Crowdfunding

On October 23, the SEC voted to propose rules that would implement Title II of the JOBS act to permit companies to offer and sell securities through crowdfunding. Kelley Drye has authored a client advisory on the topic.

5. Mark Kronsforst Named Chief Accountant in Division of Corporation Finance

On October 10, the SEC announced that Mark Kronforst has been named chief accountant of its Division of Corporation Finance.

6. SCOTUS Considers Scope of Preclusion of State Law Securities Fraud Class Actions Under Federal Law

On October 6th, the Supreme Court heard oral arguments in Chadbourne & Parke LLP v. Samuel Troice in which the Court is expected to clarify the scope of preclusion under the Securities Litigation Uniform Standards Act (“SLUSA”) of state-law securities fraud class actions. SLUSA amends portions of the Securities Act of 1933 and the Securities Exchange Act of 1934 to preempt certain class actions that allege fraud under state law “in connection with the purchase or sale” of securities. Such lawsuits cannot be filed in state or federal court.The Court will likely resolve a circuit split and determine when an alleged misrepresentation is sufficiently related to the purchase or sale of a covered security to satisfy the “in connection with” requirement for SLUSA to preclude state-law class actions.