Members of the Securities and Exchange Commission have recently
given several speeches in which they expressed their views
(sometimes inconsistent) as to investor protection and disclosure
to investors in SEC filings. In a February 22 speech at The SEC Speaks in 2013, SEC Chairman
Elisse Walter discussed investor protection. She stressed that
regulation minimizing risks both to the larger financial system and
to investors is necessary, but also noted that all investment
involves risk inherent to the business in which the investment is
made. Ms. Walter remarked that the SEC should work to give
investors access to information and protect them from unnecessary
risks such as fraud, market manipulation, insider trading and
market structure failures, but should not discourage all
risk-taking, in order to allow for continued growth in public
offerings. Click here to read the full text of the
speech. In a February 22 speech at The SEC Speaks in 2013, SEC
Commissioner Troy A. Paredes discussed the philosophy behind
disclosure regulation. He focused on the importance of disclosure
and transparency in SEC filings in order to allow investors to
appropriately evaluate the performance of companies and incentivize
directors and officers to run businesses in a way that is
beneficial to investors. However, he expressed concern that the
increasing quantity of complex disclosure in SEC filings may result
in "information overload," which could cause investors to
be unable to separate valuable information from information that is
less useful. He suggested that shorter SEC filings with simpler
presentation of information could be more useful to investors, and
that it may be beneficial to allow some current disclosures to be
more narrowly focused, scaled back or excluded and to limit the
expansion of disclosure requirements so that companies are not
required to include information that is not material to evaluating
their businesses. Click here to read the full text of the
speech. In a February 20 speech, SEC Commissioner Luis A. Aguilar
encouraged companies to provide better and more comprehensive
disclosure in their proxy statements. He focused primarily on
disclosure provisions added or enhanced by the 2009 amendments to
Regulation S-K. He suggested that companies include thoughtful and
specific disclosure on items such as compensation policies and
practices relating to risk management, the relationship between
compensation and the company's long-term performance, the
board's role in risk oversight and the effect of that on board
leadership, and board nominating policies relating to diversity. He
also expressed support for enhanced disclosure relating to
political spending by companies, which some companies already
provide voluntarily, and noted that a rulemaking petition was filed
with the SEC seeking rules requiring such disclosure. Click here to read the full text of the
speech. The Securities and Exchange Commission's National
Examination Program (NEP) published its examination priorities for
2013. The examination priorities address market-wide issues as well
as issues with respect to the following program areas: (i)
investment advisers and investment companies, (ii) broker-dealers,
(iii) market oversight and (iv) clearing and transfer agents. The NEP identified the following as the most significant
market-wide examination priorities: Click
here for an outline of the focus of the Investment
Adviser-Investment Company Exam Program, the Broker-Dealer Exam
Program, the Market Oversight Exam Program and the Clearance and
Settlement Exam Program. Click here for the 2013 Examination
Priorities The Division of Clearing and Risk of the Commodity Futures
Trading Commission has deferred for approximately six weeks the
deadline for mandatory clearing of iTraxx Credit Default Swap
(iTraxx CDS) indices. Swap dealers, security-based swap dealers,
major swap participants, major security-based swap participants and
active funds (Category 1 Entities) must comply with the clearing
requirements for such iTraxx swaps by April 26, 2013. Commodity
pools, private funds (other than active funds) and certain other
persons primarily engaged in banking or financial activities
(Category 2 Entities) must comply by July 25, 2013. All other
entities (Category 3 Entities) must comply by October 23, 2013. The
previously established schedule for all other swaps subject to the
clearing requirement (CDX CDS indices and all four classes of
interest rate swaps) remains unchanged: Category 1 Entities-March
11, 2013; Category 2 Entities-June 10, 2013; and Category 3
Entities-September 9, 2013. More information is available here. In a February 22 speech at The SEC Speaks in 2013, Associate
Director of the Division of Trading and Markets of the Securities
and Exchange Commission Heather Seidel discussed the evolution of
exchange-traded products (ETPs) as seen from the perspective of her
office's review of stock exchange applications for ETP listing
rules under Rule 19b-4 of the Securities Exchange Act of 1934. Ms.
Seidel has seen an increase in ETP listing rule applications over
the last year with significant growth in rules sought for actively
managed exchange-traded funds (ETFs), including such ETFs utilizing
fixed income securities. She also noted an increased level of
complexity of ETPs that seek inverse and leveraged performance of
various asset classes as well as of exchange-traded notes
(ETNs). In ETP listing rule applications, Ms. Seidel stated that the
Division staff were seeking clarity as to what the ETP is, its
structure, investment objective and compliance with listing
standards. For ETPs that are not investment companies registered
under the Investment Company Act of 1940, Ms. Seidel noted that the
staff is particularly concerned with the transparency of what the
ETP is tracking, the transparency of its investment objective and
how the arbitrage mechanism, which reduces premiums or discounts of
ETP share trading prices against the ETP's net asset value,
will work for the ETP. On February 27, the Supreme Court upheld a lower court's
determination that proof of materiality is not required before
certifying a securities fraud class action. Connecticut Retirement Plans and Trust Funds sought class
certification against Amgen Inc. alleging that Amgen made material
misrepresentations about two of its flagship drugs, subsequently
affecting Amgen's stock price. Amgen asserted that materiality
must be proven before certifying the class under Rule 23(b)(3) of
the Federal Rules of Civil Procedure, which requires common
questions of law or fact to predominate in class actions. By a 6-3 vote, the Supreme Court held that challenges to
materiality were not appropriate at the class certification stage.
Justice Ginsberg, writing the opinion for the Court, noted:
"Rule 23 grants courts no license to engage in free-ranging
merits inquiries at the certification stage." Rather, the
initial stages of a class action are designed to select the best
method to litigate fairly and efficiently and Amgen's position
would "put the cart before the horse." According to the
Court, the "pivotal inquiry is whether proof of materiality is
needed to ensure that the questions of law or fact common to the
class will "predominate over any questions affecting only
individual members' as the litigation progresses." The
Court reasoned that because materiality is judged according to an
objective standard, it can be proven through evidence common to the
class. In dissent, Justice Thomas criticized the majority for
"all but eliminating materiality as one of the predicates of
the fraud-on-the market theory...." Amgen, Inc. v. Connecticut Retirement Plans and Trust
Funds, No. 11-1085 (2012). On February 22, the US Court of Appeals for the Eleventh Circuit
held that an indictment charging the unlawful importation of goods
into the United States, in violation of 18 U.S.C. §§ 545
and 371, failed to state an offense because the unlawful act was
based on a Federal Drug Administration (FDA) regulation as opposed
to a congressional statute. The court therefore vacated all
convictions and sentences. In doing so, the court set up a circuit
split regarding the interpretation of what law must be violated for
importation to be "contrary to law" under 18 U.S.C.
§ 545. Appellants, the founders and officers of Naver Trading, Corp.,
were convicted of one count of conspiring to unlawfully import
foods and six counts of smuggling goods into the United States
relating to their importation of food into the United States in
violation of FDA regulations. On appeal, the Eleventh Circuit
sua sponte raised the question of whether the unlawful
importation charge in violation of 18 U.S.C. § 525
sufficiently alleged a crime. The court found that the US government prosecuted appellants for
FDA violations that gave rise to civil remedies but did not
reference any criminal statute or specify any criminal punishment.
Applying the rule of lenity, the court held that "there is, at
a minimum, great doubt as to whether violation of this regulation
per se gives rise to criminal liability." In so doing, it
expressly disagreed with the conclusion of the US Court of Appeals
for the Fourth Circuit in finding the regulation not
"grievously ambiguous." The Eleventh Circuit also noted that the indictment did not
adequately put the appellants on notice as to which statute they
were alleged to have violated. As the court observed, "the
passing mention of unlawful acts in [the indictment] is obscured by
the vast majority of the indictment, which focuses on acts that are
not criminal in nature." Accordingly, the court concluded, the
"entire indictment did not adequately set forth a violation of
criminal law." U.S. v. Izurieta, No. 11-13585 (11th Cir. Feb. 22,
2013). On February 28, and in connection with the start of tax season,
the Financial Crimes Enforcement Network (FinCEN) issued an
advisory to remind financial institutions about tax refund fraud
and the required reporting of such activity through the filing of a
Suspicious Activity Report (SAR). According to FinCen,
"identity theft can be a precursor to tax refund fraud because
individual income tax returns filed in the United States are
tracked and processed by Taxpayer Identification Numbers (TINs) and
the individual taxpayer names associated with these numbers.
Criminals can obtain TINs through various methods of identity
theft, including phishing schemes and the establishment of
fraudulent tax preparation businesses." Financial institutions "are critical in identifying tax
refund fraud because the methods for tax refund distribution -
issuance of paper checks, and direct deposit into demand deposit or
prepaid access card accounts - often involve various financial
services providers. The number of tax refunds being distributed via
direct deposit has increased significantly over the past several
years and continues to increase annually." To see the red flags listed by FinCEN to assist financial
institutions to identify potential tax fraud, click
here. If a financial institution "knows, suspects, or has reason
to suspect that a transaction conducted or attempted by, at, or
through the financial institution involves funds derived from
illegal activity or an attempt to disguise funds derived from
illegal activity, is designed to evade regulations promulgated
under the Bank Secrecy Act (BSA), or lacks a business or apparent
lawful purpose," the financial institution may well be
required to file a SAR. To help offset the costs associated with the implementation of
the health care reform legislation, also known as the Patient
Protection and Accordable Care Act of 2010 (PPACA), the law imposes
certain fees on health insurers and sponsors of self-insured health
plans. One PPACA fee is intended to fund the Patient Centered Outcome
Research Institute (PCORI), a research institute created under
PPACA to advance research related to evidence-based medicine. The
PCORI fee is effective for each plan year ending after October 1,
2012 and before October 1, 2019. The PCORI fee is $1.00 per covered
life for the first plan year for which it is due, $2.00 per covered
life for the second plan year for which it is due, and for years
three through seven, the PCORI fee is adjusted by each year's
health care inflation rate as determined by the US Department of
Health and Human Services (HHS). The final rules issued on December
6, 2012, contain several methods for determining the number of
covered lives under a health plan. A sponsor of a self-insured health plan is responsible for
payment of the PCORI fee. For insured plans, the insurance company
is responsible for paying the PCORI (although it is expected that
insurers will pass the PCORI fee and the TRP fee (discussed below)
on to the employer purchasing the policy). The PCORI fee is due no
later than July 31 of the calendar year following the calendar year
in which the plan year ends. For calendar year plans, the first
PCORI fee for the 2012 plan year is due by July 31, 2013. PCORI
fees should be submitted to the IRS together with a properly
completed IRS Form 720 A more substantial fee arising under PPACA is expected to be in
effect for calendar years 2014, 2015 and 2016. The Transitional
Reinsurance Program (TRP) was created under PPACA to help stabilize
health insurance premiums once the requirements of PPACA become
more fully effective in 2014. In addition, PPACA requires that the
fee associated with TRP be increased so that the US Treasury
receives a total of $5 billion over the three-year period that the
TRP fee is expected to be in effect. The TRP fee is calculated based on the revenue necessary to be
collected. Specifically, PPACA provides that the aggregate amount
of TRP fees to be collected for 2014 is approximately $12 billion.
Accordingly (and based on recently issued proposed rules), the TRP
fee per covered life for 2014 is expected to be approximately $5.25
per month (or $63.00 per year). However, the specific amount of the
TRP fee for 2014 is not yet finalized. In any case, the TRP fee is expected to be reduced for 2015 and
2016 because the aggregate fees due to be collected in those years
are $8 billion and $5 billion, respectively. However, guidance
indicates that the US Department of Health and Human Services (HHS)
is considering a leveling mechanism that may reduce the 2014 TRP
fee to some degree by raising the TRP fee that would be due in 2015
and 2016. Final guidance from HHS will determine the TRP fee for
each year. The actual TRP fee owed by an insurance company or sponsor of a
self-insured health plan is determined based on the number of lives
covered by the policy or plan. In each year (2014, 2015 and 2016),
insurance companies and sponsors are to report to HHS the number of
covered lives by November 15 (the guidance contains several methods
for determining this number). HHS is then expected to notify the
sponsor or insurer of its TRP fee within 30 days. The fee will then
be due 30 days thereafter (i.e., the fee for 2014 will be payable
in late December 2014 or early January 2015). While the guidance related to the TRP fee is not yet final, it
is recommended that sponsors and insurers keep both the TRP fee and
the PCORI fee in mind when budgeting for health care costs. The final regulations regarding the PCORI fee can be found here. The proposed regulations regarding the TRP fee can be found here On February 27, the UK Financial Services Authority (FSA)
announced that it had prohibited short selling of the shares of
four named Italian financial institutions for the duration of the
February 27 trading day. The prohibition applied to all UK trading
venues on which the shares are traded. The FSA stated that it had
imposed the prohibition to assist the Commissione Nazionale per le
Societa e la Borsa (CONSOB), the Italian regulator, following the
imposition by CONSOB of a similar one-day short selling ban. The FSA and CONSOB prohibitions were imposed under emergency
powers contained in Article 23 of the EU Short Selling Regulation
(EU/236/2012) under which national regulators can impose temporary
short selling prohibitions after a significant fall in the price of
a financial instrument to prevent a further "disorderly
decline" in that instrument's price. Technical Standards which clarify certain aspects of Regulation
648/2012 on over-the-counter (OTC) derivatives, central
counterparties (CCPs) and trade repositories (generally known as
the European Markets Infrastructure Regulation or EMIR) will enter
into force on March 15, 2013, following their publication in the
Official Journal of the European Union on February 23. As reported in
Corporate and Financial Weekly Digest of December
21, 2012, the technical standards relate to: The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
SEC/CORPORATE
Recent SEC Speeches Focus on Investor Protection and
Disclosure
Investor Protection
Disclosure to Investors
BROKER DEALER
SEC 2013 Examination Priorities
CFTC
CFTC Revises Clearing Compliance Schedule for iTraxx
CDS Indices
INVESTMENT COMPANIES AND INVESTMENT
ADVISERS
SEC Division of Trading and Markets Discusses Issues
with Exchange-Traded Products
LITIGATION
Supreme Court Ruling Lowers Class Action Hurdle for
Securities Fraud Cases
Split Emerges on Customs Law after Eleventh Circuit
Vacates Smuggling Convictions
BANKING
FinCEN Issues Advisory to Financial Institutions:
Update on Tax Refund Fraud and Related Identity Theft
EXECUTIVE COMPENSATION AND ERISA
New Fees Coming for Health Plan Sponsors
PCORI FEE
TRP FEE
UK DEVELOPMENTS
One-Day Prohibition Imposed on Short Selling of Four
Italian Shares
EU DEVELOPMENTS
EMIR Technical Standards Published in the Official
Journal of the European Union
CONTRIBUTOR
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