SEC Issues Staff Legal Bulletin Regarding the Suspension of Reporting Obligations Pursuant to Rule 12h-3
On March 15, the Securities and Exchange Commission’s Division of Corporation Finance issued Staff Legal Bulletin No. 18 to explain the operation of Rule 12h-3 under the Securities Exchange Act and identify two situations where issuers may utilize Rule 12h-3 to suspend their reporting obligations under Section 15(d) of the Exchange Act without first obtaining a no-action letter.
When an issuer’s registration statement under the Securities Act of 1933 becomes effective, Section 15(d) of the Exchange Act requires the issuer to file periodic reports with the SEC for each class of securities covered by the registration statement. Section 15(d) also provides for automatic suspension of an issuer’s reporting obligations if, on the first day of any fiscal year other than the fiscal year in which a registration statement became effective, there are fewer than 300 record holders of the securities offered under the registration statement.
Rule 12h-3 provides a mechanism by which an issuer’s reporting obligations with respect to a class of securities registered under the Securities Act may be suspended at any time during the issuer’s fiscal year. To avail itself of Rule 12h-3, an issuer must be current in its Exchange Act reporting obligations and have fewer than 300 record holders of the class of securities for which suspension is sought (or fewer than 500 record holders for issuers satisfying maximum asset value thresholds).
Pursuant to its terms, Rule 12h-3 is not available for any class of securities for a fiscal year in which a registration statement relating to that class becomes effective under the Securities Act, or is required to be updated pursuant to Section 10(a)(3) of the Securities Act (and, if the issuer is relying on having fewer than 500 record holder threshold noted above, during the two succeeding fiscal years). However, the Bulletin confirms the Division’s view that, in the following two situations, the existence of a Securities Act registration statement that became effective or was required to be updated pursuant to Section 10(a)(3) during the time period specified in Rule 12h-3 will not preclude an issuer from filing a Form 15 to suspend its reporting obligations.
While the ability of issuers to rely on Rule 12h-3 in the above situations has been the subject of numerous no-action requests (and favorable no-action responses), an issuer that fits within either of the two situations identified above will not need a no-action letter from the Division before filing a Form 15 to suspend its Section 15(d) reporting obligations in reliance on Rule 12h-3, provided the following conditions are satisfied.
Click here to view the text of Staff Legal Bulletin No. 18 regarding the application of Rule 12h-3.
SEC Issues New Interpretations on Executive Compensation and Compensation Consultant Reporting
On March 12, the Securities and Exchange Commission’s Division of Corporation Finance issued new Compliance and Disclosure Interpretations (C&DIs) on executive compensation and compensation consultant reporting under Regulation S-K.
The SEC’s new guidance included the following.
Click here to view the C&DIs described above (Questions 119.25, 119.26 and 133.12).
Second Circuit Addresses “Bespeaks Caution” Doctrine
On an appeal from the district court’s dismissal of plaintiff’s securities fraud complaint, the U.S. Court of Appeals for the Second Circuit applied the “bespeaks caution” doctrine regarding forward-looking statements with differing results.
Plaintiff predicated its claim on two statements defendant made on the same day: a press release and a conference call, relating to a proposed favorable amendment to a key agreement defendant had with the U.S. Postal Service. Plaintiff alleged that defendant’s statements advised that an amendment was likely, and that defendant violated a duty to update the statements when it learned the amendment would not occur. In analyzing the statements, the court applied the “bespeaks caution” doctrine which renders certain forward-looking statements immaterial as a matter of law because “it cannot be said that any reasonable investor could consider them important in light of adequate cautionary language.”
The court ruled that the press release was non-actionable, but that the conference call could form a basis for securities fraud liability. The press release stated that the defendant believed it had reached an agreement in principle and anticipated the agreement would be completed shortly. In the conference call, the defendant stated that it hoped to have an agreement within weeks, that it had an agreement in principle and that it was “very confident” that the agreement would be signed “in the not too distant future.” The press release stated that there was “no guarantee” that agreement would be reached and thus the “bespeaks caution” doctrine insulated the statement from liability. However, in the conference call, the defendant indicated that the agreement was “imminent” and that in spite of boilerplate language warning that forward-looking statements were subject to risks and uncertainties, the defendant failed to adequately alert investors to the specific risk that the agreement would not materialize. (Illinois State Bd. of Investment v. Authentidate Holding Corp., 2010 WL 889294, No. 09 Civ. 1751 (2d Cir. 2010))
Veil Piercing Allegations Insufficient to Impose Liability on Non-Party to Insurance Policy; Court Vacates Attachment of Electronic Fund Transfers
The U.S. District Court for the Southern District of New York denied cross motions for summary judgment, ruling that plaintiff’s veil-piercing allegations were insufficient to establish liability against a non-party for payments due on an insurance agreement, as a matter of law.
Plaintiff insurer sued insured for amounts due under a maritime insurance agreement. Plaintiff also asserted a claim for the amount due against a non-party to the agreement under an alter-ego theory of liability. Plaintiff asserted that the two defendants shared offices, telephone numbers, the same managing director, were commonly owned and that the non-party had been involved in communications about the insurance policy. Defendant argued that it never made any premium payments on behalf of the insured and that a cross-claim between the two defendants was pending. The court ruled that plaintiff’s evidence did not establish that the non-party defendant “egregiously dominated and controlled” the insured, precluding judgment as a matter of law in favor of the plaintiff.
The court also addressed a recent Second Circuit case on the issue of the attachment of electronic fund transfers passing through the Southern District of New York and facilitated by intermediary banks. The court vacated its own attachment order, holding that such transfers are not properly the subject of attachment and also noted that the length of time electronic fund transfers may be held by New York intermediary banks does not affect whether they can be attached. (American Steamship Owners Mutual Protection v. Cleopatra Nav. Co. Ltd., 2010 WL 850185, No. 07 Civ. 9353 (S.D.N.Y. Mar. 11, 2010))
Federal Regulators Jointly Issue Policy Statement Regarding AML
The Securities and Exchange Commission issued a policy statement on anti-money laundering (AML) issues jointly with a number of federal regulators including the Financial Crimes Enforcement Network, the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation and in consultation with the staff of the Commodity Futures Trading Commission. The guidance “clarifies and consolidates existing regulatory expectations” for obtaining beneficial ownership information for certain accounts and customer relationships.
PRIVATE INVESTMENT FUNDS
Financial Regulatory Reform Bill Includes Revised Private Fund Investment Advisers Registration Act of 2010
On March 15, Senate Banking Committee Chairman Christopher Dodd (D- Conn.) introduced a revised version of his comprehensive financial regulatory reform bill, the Restoring American Financial Stability Act of 2010 (the Dodd Bill). Among the proposals set forth in the Dodd Bill is the Private Fund Investment Advisers Registration Act of 2010 (the Private Fund Act), a bill similar to a bill of the same name proposed by Senator Dodd in his previously introduced 2009 financial regulatory reform bill. Among other things, the Private Fund Act would:
If enacted, the Private Fund Act would become effective after one year, although an adviser, at its discretion, may choose to register with the SEC during this one-year transition period.
The Dodd Bill also contains provisions that are similar to the Obama proposal known as the “Volcker Rule” and the recently proposed Senate bill, the Protect our Recovery through Oversight of Proprietary Trading Act (the PROP Trading Act), that would (1) prohibit banks from sponsoring or investing in hedge funds or private equity funds or from engaging in proprietary trading and (2) require certain non-bank financial institutions to set aside additional capital if they sponsor or invest in hedge funds or private equity funds or engage in proprietary trading.
To read the text of the Dodd Bill, click here. To read Senator Dodd’s summary of the Dodd Bill, click here. Click here to read a summary of Senator Dodd’s previously proposed 2009 regulatory reform bill in the November 13, 2009, edition of Corporate and Financial Weekly Digest. Click here for more information on the PROP Trading Act in the March 12 edition of Corporate and Financial Weekly Digest.
SEC Extends Temporary Exemptions Related to Central Clearing of CDS
The Securities and Exchange Commission has extended temporary exemptions that were granted last year to ICE Trust U.S. LLC to allow it to continue clearing certain credit default swap (CDS) trades. The SEC initially acted in the wake of the credit crisis to facilitate the operation of a number of central counterparties for CDS transactions by issuing a series of different conditional orders and exemptions. These orders, among other things, provided exemptions from clearing agency registration solely to perform the functions of a clearinghouse for certain CDS transactions that are not swap agreements excluded from the definition of a “security” in the Securities Exchange Act of 1934. The SEC’s recent action extended the ICE Trust U.S. LLC exemptions until November 30. The SEC has not yet acted to grant similar extensions to NYSE Euronext or the Chicago Mercantile Exchange.
Revised OTC Clearing Proposals Included in Senate Financial Reform Bill
On March 15, Senator Christopher Dodd introduced, as a discussion draft, a revised version of his financial regulatory reform bill. The revised bill includes changes to Title VII, which relates to over-the-counter (OTC) derivatives, including a revised definition of “major swap participant” and an amended transaction-based exemption for end-users. Title VIII of the bill also includes provisions that would grant the Federal Reserve Board authority to prescribe uniform risk management, payment, and clearing and settlement standards for systemically important “financial market utilities,” a term that is defined to include derivatives clearing organizations and securities clearing agencies.
The Senate mark-up of the new bill is scheduled to begin on March 22. In announcing the bill, Senator Dodd noted that a substitute derivatives title, being drafted by Senators Reed and Gregg, may replace current Title VII of Senator Dodd’s bill during the mark-up. In addition, the Senate Agriculture Committee is expected to introduce a separate OTC derivatives bill in early April.
The text of the new bill introduced by Senator Dodd is available here.
NFA Sets Effective Date for New Quarterly Reporting Requirement for CPOs
The National Futures Association (NFA) has set an effective date of March 31 for new Compliance Rule 2-46, which requires registered commodity pool operators (CPOs), including CPOs that have claimed an exemption pursuant to Commodity Futures Trading Commission Rule 4.7, to file a quarterly report with NFA containing certain specified information. The reports are due within 45 days after the end of each calendar quarter and must include (1) the identity of the pool’s administrator, carrying broker(s), trading manager(s) and custodians, (2) a statement of changes in the pool’s net asset value over the quarter, (3) monthly performance information for the quarter, and (4) a schedule identifying any investments exceeding 10% of the pool’s net asset value as of the end of the quarter. The new reporting requirements do not apply to persons operating pursuant to an exemption from registration under CFTC Rule 4.13.
The first quarterly reports under the new rule will be due by May 17, 2010, and must be filed electronically through NFA’s EasyFile system. The NFA Notice to Members regarding the new rule is available here.
DCIO Grants No-Action Relief Permitting Introduction of Customers by Non-U.S. Bank Branches
The Division of Clearing and Intermediary Oversight (DCIO) of the Commodity Futures Trading Commission has granted no-action relief to a U.S.-based bank, permitting its foreign branches to introduce commodity futures and options customers located outside of the United States to an affiliated futures commission merchant (FCM) without such branches being required to register as introducing brokers (IBs) with the CFTC. Under Section 4d(1) of the Commodity Exchange Act (CEA), persons acting as IBs (which includes persons soliciting or accepting orders for the purchase or sale of commodity futures and options contracts) are required to register as such with the CFTC. In this case, the foreign branches would be compensated by the FCM for their introduction of non-U.S. customers to the FCM, and would therefore be considered to act as IBs and, absent relief, required to register.
The no-action relief is conditioned upon, among other things, the bank identifying all of its foreign branches engaged in introduction activities to National Futures Association, and the bank and the FCM agreeing to be jointly and severally liable for any violations of the CEA or CFTC regulations by the foreign branches. The DCIO staff issued a no-action letter based on similar facts in 2000 (Interpretative Letter No. 00-44).
A copy of the no-action letter is available here.
Federal Banking Agencies Issue Final Policy Statement on Funding and Liquidity Risk Management
The federal banking agencies, in conjunction with the Conference of State Bank Supervisors, released a policy statement on March 17 explaining their expectations for sound funding and liquidity risk management practices. This policy statement, adopted by each of the agencies, summarizes the principles of sound liquidity risk management issued previously and, when appropriate, supplements them with the “Principles for Sound Liquidity Risk Management and Supervision” issued in September 2008 by the Basel Committee on Banking Supervision. The policy statement emphasizes the importance of cash flow projections, diversified funding sources, stress testing, a cushion of liquid assets, and a formal, well-developed contingency funding plan as primary tools for measuring and managing liquidity risk. The agencies expect each financial institution to manage funding and liquidity risk using processes and systems that are commensurate with the institution’s complexity, risk profile and scope of operations. The policy statement will be effective 60 days after publication in the Federal Register, expected shortly.
Senator Dodd Releases Financial Regulatory Reform Bill
The following summarizes sections of the Restoring American Financial Stability Act of 2010, a bill introduced by Senate Banking Committee Chairman Christopher Dodd (D-Conn.). Among other things, the bill would:
EXECUTIVE COMPENSATION AND ERISA
COBRA Subsidy Changes Continue
Eligibility for the Consolidated Omnibus Budget Reconciliation Act (COBRA) subsidy has been extended until March 31, as reported in the March 12 edition of Corporate and Financial Weekly Digest. Further developments with respect to the COBRA subsidy include:
Inattention to COBRA Could Lead to Excise Taxes
With the numerous changes to the Consolidated Omnibus Budget Reconciliation Act (COBRA) subsidy and the subsidy’s various notice requirements, it would not be surprising for an employer to make a mistake in complying with COBRA. Failures to comply with COBRA (including obligations unrelated to the subsidy) can lead to excise taxes under the federal tax code and trigger an obligation to file a Form 8928 with the Internal Revenue Service (IRS). For employers, this excise tax is $100-$200 per day and can reach up to $500,000.
Employers that monitor COBRA compliance regularly and fix any failures within 30 days can typically avoid imposition of the excise tax. An employer that willfully neglects its COBRA obligations or fails to reasonably monitor its compliance with such obligations will not be entitled to such relief. In addition, if the IRS finds a COBRA failure upon audit, it must impose an excise tax on the employer.
The IRS Form 8928 and its instructions can be found here.
FSA Bans Prop Trader for Mismarking Positions
On March 16, the UK Financial Services Authority (FSA) announced that it had imposed a five-year prohibition order on Alexis Stenfors, a former trader with the London branch of Merrill Lynch International Bank Limited (MLIB) banning him from performing any function in relation to any regulated activity on the grounds that he is not a fit and proper person.
Mr. Stenfors was found to have deliberately mismarked the positions he traded on behalf of MLIB between mid-January 2009 and mid-February 2009 by around $100 million in order to avoid showing increasing losses in his books. The mismarking was discovered by MLIB, Mr. Stenfors was suspended and, after an internal investigation, dismissed by MLIB. The FSA’s Decision Notice did not criticize MLIB.
To read the Final Notice in full, click here.
FSA Publishes its 2010-11 Business Plan
On March 17, the UK Financial Services Authority (FSA) published its Business Plan for 2010-2011. The document sets out the FSA’s priorities for the coming year. The FSA characterized the Plan as “a demanding programme of work for the year requiring greater policy and supervisory resources.” Its key areas of focus are:
In developing intensive supervision, the FSA’s regulatory approach has moved to a more proactive stance. Supervisors are now making judgements on firms’ business models and intervening earlier than was previously the case if they anticipate any risks that may arise from regulated firms’ conduct, sales practices, senior management competence or product development.
The FSA considers that credible deterrence underpins its supervisory approach and emphasizes the number of criminal prosecutions for insider dealing prosecutions, and proceedings against a number of other individuals for insider dealing and making false or misleading statements to the market. (See the February 19 and March 12 editions of Corporate and Financial Weekly Digest).
To read the Plan in full, click here.
UK Government Consults on Security Interests Registration Regime
On March 12, the UK Department for Business, Innovation and Skills (BIS) published a consultation paper on the UK regime for the registration of security interests created by companies and limited liability partnerships (LLPs). Under English law, where a company or LLP uses its assets as security, it is required to register the security interest in accordance with the scheme now set out in the Companies Act 2006 but deriving essentially unchanged from the Companies Act 1900. This scheme has been subject to criticism on several grounds.
BIS is consulting on a number of areas in an effort to try to improve the security registration regime, including:
The consultation is open until June 18. BIS has indicated that it expects a further round of consultation before draft regulations will be prepared.
To read the consultation paper in full, click here.
Scope of UK Bank Payroll Tax Clarified
In December 2009, the UK Government introduced a Bank Payroll Tax (BPT) applicable in the UK to certain employees of banks and banking groups. It requires employers to pay BPT at 50% of any bonus over £25,000 paid to certain classes of employees between December 9, 2009, and April 5, 2010.
The Government has now confirmed that BPT will not apply to:
To read more, click here.
Presidency Withdraws AIFM Directive Compromise Draft
On March 16, the Spanish Presidency announced the withdrawal of its compromise Alternative Investment Fund Manager Directive (AIFM Directive) proposal following the failure ahead of the March European Council of Ministers Ecofin meeting of finance ministers to reach a sufficient level of agreement on the detailed provisions of the proposal. The Presidency stated that further discussions were “postponed until a meeting to be held at a later, still undefined, date, but will definitely take place during the six-month period of the Spanish Presidency, which finishes at the end of June.”
Meanwhile the ECON committee of the European Parliament is continuing its deliberations on the Gauzes Report proposing amendments to the European Commission’s proposed draft AIFM Directive and the amendments to the Gauzes Report’s proposals (numbering over 1,400) which have been tabled. The ECON Committee’s latest discussions on March 17 indicated that there remains a wide divergence of views on matters of principle and of detail; so the final shape of ECON’s report remains uncertain.