On May 1, the Securities and Exchange Commission proposed rules
and interpretive guidance with respect to cross-border
security-based swap activities. Under this proposal, the
requirements of Title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act would generally apply to any security-based
swap transaction entered into with a US person or otherwise
conducted within the United States. For this purpose, a US person
would include natural persons residing in the United States,
entities organized or incorporated or having their principal place
of business in the United States and accounts of US persons.
Further, a transaction would be conducted in the United States if
it is solicited, negotiated, executed or booked within the United
States, regardless of the location of the counterparties to the
transaction. The proposal also provides a "substituted compliance"
regime under which market participants may, under certain
circumstances, comply with foreign regulatory requirements in lieu
of complying with comparable Title VII requirements. Under this
regime, a foreign market participant would be permitted to comply
with its home country regulatory requirements so long as the SEC
has determined that such requirements are broadly similar to those
of Title VII. The SEC has indicated that it will make this
determination by assessing whether a foreign regulatory scheme is
comparable to the regulatory scheme set forth in Title VII in any
of the following categories: (i) security-based swap dealer
registration; (ii) security-based swap data reporting; (iii)
mandatory clearing of security-based swaps and (iv) mandatory
execution of security-based swaps on certain trading venues. The
SEC would make such determination based on a holistic approach that
compares regulatory outcomes rather than by making rule-by-rule
comparisons. Under the proposal, foreign market participants that may be
security-based swap dealers would only be required to assess their
swap dealing activities conducted with US persons or within the
United States for purposes of determining whether they exceed the
de minimis registration threshold. The same principle
applies to foreign persons that may be major security-based swap
participants, except that they would also be required to take into
consideration their transactions with foreign persons guaranteed by
US persons when making this determination. Foreign security-based
swap dealers and major security-based swap participants would be
required to comply with entity-level requirements under Title VII
or a substituted compliance regime, whereas such entities would
generally be required to comply with transaction-level requirements
only with respect to their US business or transactions with US
counterparties. The proposal would provide a rule and interpretive guidance
regarding when entities that perform infrastructure functions, such
as swap execution facilities and swap data repositories, would be
required to register with the SEC, and generally takes a
territorial approach with respect to this matter. Thus, for
example, a swap execution facility may be required to register as
such in the United States if it provides US persons or non-US
persons located in the United States with the direct ability to
trade or execute security-based swaps on the foreign security-based
swap market. The proposal also provides that infrastructure
entities may be exempt from such registration if they are subject
to comparable regulation in their home countries. The full text of the SEC proposed rules and interpretive
guidance is available here. Commodity Futures Trading Commission staff recently released two
no-action letters providing relief relating to the application of
business conduct standards to prime brokers and swap dealers and
disclosure of pre-trade mid-market mark with respect to certain
transactions. Industry groups are working to develop guidelines to help prime
brokers and executing dealers with the allocation of business
conduct obligations for such parties to use in satisfying the
conditions of this no-action letter. CFTC Letter No. 13-11 is available here. CFTC Letter No. 13-12 is available here. Delaware Court Dismisses Securities Fraud Action Against Power
Plant Executives The US District Court for the District of Delaware dismissed a
class action for securities fraud against former officers and
directors of a geothermal energy company, in which the plaintiffs
alleged that the defendants had misrepresented the capacity of a
prominent power plant and their ability to construct more plants.
In 2008, the energy company completed construction of a geothermal
plant and touted the plant in 2009 as an example of their
"rapid deployment business model." In late 2009, the
company disclosed in public filings that it had encountered
unexpected difficulties in developing the plant to full capacity
and, in 2010, sought to recognize an impairment loss of $52.5
million to the value of the plant. The court dismissed the
complaint for failure to plead scienter and loss causation,
rejecting the argument that the energy company had committed
securities fraud by waiting too long to record or report the loss
incurred after learning of problems at the plant. The court also
refused to adopt the "materialization of risk" test for
loss causation, which would allow a plaintiff to plead loss
causation by showing that the defendant exposed investors to an
undisclosed risk which subsequently materialized. Instead, the
court held that the absence of any allegation of a corrective
disclosure automatically warranted dismissal. Bartesch v. Cook, No. 11-1173-RGA (D. Del. Apr. 23, 2013). The US District Court for the Northern District of Illinois
dismissed securities fraud claims against WMS Industries (WMS), a
gaming and slot machine manufacturer, and certain of its
executives, holding that a would-be class representative failed to
plead with the heightened requirements prescribed by the Private
Securities Litigation Reform Act. WMS issued guidance predicting
growth in earnings and margins in fiscal year 2011, despite
sluggish sales in the industry. The growth was based on development
of a new product named "WAGE-NET," as well as an effort
to implement operational improvements to WMS's quarter-end
sales. However, WAGE-NET received only limited regulatory approval,
ultimately did not launch, and the operational efforts were not
undertaken. The court dismissed the proposed class action with
prejudice, finding that the plaintiff had failed to demonstrate
with sufficient particularity that anticipated launch statements
regarding "WAGE-NET" and operational improvements were
false at the time they were made. The court also held that the
plaintiff had not pleaded scienter with the requisite
particularity, holding that the unobtained regulatory approval for
WAGE-NET, lack of field trials, new products that did not launch
and operational improvements that were not implemented, absent more
particularized facts, did not warrant the scienter inference urged
by the plaintiff. Conlee v. WMS Industries, Inc., No. 11C 3503 (N.D. Ill. Apr. 24,
2013). 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.
DERIVATIVES
SEC Issues Proposal Regarding Cross-Border
Security-Based Swap Activities
CFTC
CFTC Staff Issues No-Action Letters
LITIGATION
Gaming Company's Regulatory Delays Insufficient to
Give Rise to a Securities Fraud Claim