United States: Corporate And Financial Weekly Digest - November 15, 2013

Last Updated: November 19 2013

Edited by Robert Weiss and Gregory Xethalis

SEC/CORPORATE

SEC Division of Corporation Finance Issues 11 New C&DIs

On November 13, the Securities and Exchange Commission's Division of Corporation Finance issued two new Compliance and Disclosure Interpretations (C&DIs) on Rule 144A under the Securities Act of 1933 (Securities Act) and nine new C&DIs on Rule 506 under the Securities Act. These C&DIs relate to the new rules adopted by the SEC in July that lifted the decades-old ban on general solicitation and advertising in connection with private securities offerings conducted in reliance upon the exemptions from registration provided by Rules 144A and 506. The new C&DIs include the following interpretive guidance:

  • C&DI 138.03 provides that, in offerings under Securities Act Rule 144A in which securities were initially sold to financial intermediaries in exempt transactions under Securities Act Section 4(a)(2) or Regulation S, general solicitation may be conducted by the issuer as well as the initial purchasers involved in such exempt transactions and other distribution participants.
  • C&DI 138.04 clarifies that the amendments to Rule 144A permitting the use of general solicitation did not change how directed selling efforts under Regulation S are analyzed in concurrent Rule 144A and Regulation S offerings.
  • C&DI 260.05 provides that, if an issuer commenced an offering in reliance on Rule 506 prior to the effective date of the new Rule 506(c) exemption and filed a Form D notice for such offering, and if the issuer continues its offering in reliance on the Rule 506(c) exemption, it will be required to amend its Form D to reflect this change.
  • C&DI 260.06 clarifies that an issuer will not lose the ability to rely on Rule 506(c) for an offering if securities are purchased in the offering by a person who is not an accredited investor as long as the issuer took reasonable steps to verify that such purchaser was an accredited investor and reasonably believed that such purchaser was an accredited investor at the time of the sale.
  • C&DI 260.07 clarifies that, even if all purchasers in an offering are accredited investors, if the issuer failed to take reasonable steps to verify the accredited investor status of the purchasers, the issuer cannot rely on the Rule 506(c) exemption.
  • C&DI 260.08 clarifies that, if an issuer relies on one of the specific, non-exclusive verification methods in Rule 506(c) to verify the accredited investor status of a purchaser in an offering, it must satisfy the specific requirements of the method on which it relies. However, if the issuer is not able to satisfy these requirements to rely on one of these methods, it may instead determine whether it has taken reasonable steps to verify the purchaser's accredited investor status under the principles-based approach to verification.
  • C&DI 260.09 states that the third-party verification method in the non-exclusive list of verification methods in Rule 506(c) is not limited to written confirmations from attorneys and certified public accountants who are licensed or registered in a US jurisdiction and may include such individuals who are licensed or registered in foreign jurisdictions.
  • C&DI 260.10 clarifies that the verification method for existing investors in the non-exclusive list of verification methods in Rule 506(c) is limited to existing investors that purchased securities in the same issuer's Rule 506(b) offering as accredited investors prior to September 23, 2013, and continue to hold such securities. Specifically, even if a new issuer has the same sponsor as the issuer in which the investor purchased securities in a prior Rule 506(b) offering, it may not use this method of verification.
  • C&DI 260.11 states that an issuer that commenced an offering intending to rely on Rule 506(c) and did not engage in any form of general solicitation may subsequently determine to rely on Rule 506(b) for the offering as long as the conditions of Rule 506(b) have been satisfied.
  • C&DI 260.12 states that an issuer that commenced an offering in reliance on Rule 506(b) may determine, prior to any sales of securities, to rely on Rule 506(c), as long as the conditions of Rule 506(c) are satisfied.
  • C&DI 260.13 clarifies that, if an issuer has engaged in general solicitation in connection with an offering but fails to satisfy the conditions of Rule 506(c), the Securities Act Section 4(a)(2) private offering exemption will not be available to the issuer with respect to such offering.

Register for Our 2014 Proxy Season Update Webinar

On Tuesday, December 10 at 12:00 p.m. CST, please join Katten Muchin Rosenman LLP, Ernst & Young LLP and Georgeson Inc. for a timely discussion via webcast of key developments and trends impacting public companies in the 2014 Annual Report and Proxy Season.

Further details are available here; click here to register.

CFTC

CFTC Issues Cross-Border Transactions Advisory

On November 14, the Division of Swap Dealer and Intermediary Oversight (DSIO) of the Commodity Futures Trading Commission issued Advisory No. 13-69 to answer inquiries on whether a registered non-US swap dealer (SD) must comply with the Transaction-Level Requirements when entering into a swap with a non-US person if the swap is arranged, negotiated or executed by personnel or agents of the non-US SD located in the United States. DSIO advised that, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC has a supervisory interest in dealing activities that occur in the United States, regardless of the status of the counterparties. Such swaps are therefore subject to Transaction-Level Requirements if the non-US SD (whether or not an affiliate of a US person) "regularly" uses personnel or agents that are located in the United States. DSIO further indicated, "for the avoidance of doubt," that these requirements would also apply to a swap between a non-US SD and a non-US person that is booked in a non-US branch of the non-US SD if the non-US SD is using personnel or agents located in the United States to arrange, negotiate or execute the swap.

The Advisory is available here.

CFTC Issues Guidance Regarding Swap Execution Facilities

On November 14, the Commodity Futures Trading Commission's Divisions of Clearing and Risk, Market Oversight and Swap Dealer and Intermediary Oversight (the Divisions) issued guidance to swap execution facilities (SEFs) and applicants for registration as SEFs on restrictions related to intended-to-be-cleared swaps (ITBC Swaps) that are executed on SEFs and access requirements for eligible contract participants (ECPs).

The guidance addresses "enablement mechanisms," which the Divisions defined broadly to mean any device that prevents a market participant from interacting, trading with or viewing bids and offers from any other market participant on the SEF. In the Divisions' view, these restrictions are inconsistent with the SEF core principles and CFTC Regulation 37.202. The Divisions noted that, because ITBC swaps are subject to pre-execution credit checks and trades that fail to clear are void ab initio under SEF rules, enablement mechanisms are not necessary to eliminate credit risk. The guidance further takes the position that enablement mechanisms are inconsistent with other CFTC Regulations regarding SEF order books, request for quote systems and counterparty limitations.

The guidance also addresses restrictions on market access by ECPs. The guidance reflects the Divisions' view that SEFs may not, consistent with the impartial access requirement, limit access to their trading platforms to certain types of ECPs. The guidance further notes that while SEFs must require a market participant to have a clearing agreement with a clearing member prior to executing a swap, SEFs cannot require that the trade be executed through a clearing member.

The Divisions' guidance is available here.

LITIGATION

Third Circuit Finds Delaware Chancery's Arbitration Program Unconstitutional

A three-judge panel of the US Court of Appeals for the Third Circuit recently affirmed an injunction against the Delaware Court of Chancery's arbitration program, finding that the confidential proceedings violate the First Amendment right of public access.

In 2011, the Delaware Coalition for Open Government challenged an arbitration program created by the Delaware General Assembly in 2009. Under the program, parties may agree to submit private business disputes for arbitration before any sitting judge of the Court of Chancery, provided that at least one of the parties is a Delaware entity, neither party is a consumer and the amount in controversy exceeds $1 million.

In 2012, the US District Court for the District of Delaware enjoined the arbitration program, holding that the proceedings were no different than regular civil trials, and thus must provide a right of public access.

The Third Circuit upheld the district court's decision. The court applied the "experience and logic test," by which "[a] proceeding qualifies for the First Amendment right of public access when 'there has been a tradition of accessibility' to that kind of proceeding, and when 'access plays a significant positive role in the functioning of the particular process in question.'"

Writing for the majority, Judge Sloviter found that civil trials have historically been open to the public. She concluded that arbitrations had a more mixed history: although private arbitrations have generally been closed to the public, government-sponsored arbitrations have not. Because the latter type of proceeding was most relevant, and the benefits of access outweighed any potential drawbacks, Judge Sloviter held that both prongs of the "experience and logic" test were satisfied. As such, there was a right of public access to the arbitrations, and their confidentiality ran afoul of the Constitution.

Judge Fuentes's concurrence emphasized that only the program's confidentiality was problematic; he saw no inherent issues with a judge-run arbitration scheme. Consequently, Judge Fuentes sought to specify which provisions implementing the program were impermissible.

In her dissent, Judge Roth emphasized that arbitrations, both public and especially private, have historically been closed to the public. She also argued that arbitration's principal benefit is its confidentiality, which allows businesses to protect trade secrets and other information, and promotes efficient resolution of issues. Believing the Chancery program to be a "perfect model" for arbitration, Judge Roth expressed concern that the Third Circuit's decision would jeopardize Delaware's status as the "leading state for incorporations."

Delaware Coalition for Open Gov't, Inc. v. Strine, et al., No. 12-3859 (3d Cir. 2013).

Second Circuit Says Injured Investors Lack Standing to Challenge Release of Fair Funds to US Treasury

The US Court of Appeals for the Second Circuit recently held that injured investors, who had already recovered some of their losses due to certain specialist firms' "manipulative tactics," lacked standing to challenge the release to the US Treasury of settlement funds obtained by the Securities and Exchange Commission.

In 2004, the SEC alleged that seven specialist firms had engaged in "interpositioning" and "trading ahead," two types of conduct by which the firms profited at the expense of their customers. The firms ultimately settled the allegations, and disgorged $157.8 million of profits and an additional $89.4 million in civil penalties, for a total of $247.2 million.

Pursuant to the Sarbanes-Oxley Act, the SEC placed the monies in Fair Funds, which were administered by a law firm tasked with identifying, locating and reimbursing injured investors. The firm was able to match customers for 77.6% of all transactions at issue, but was unable to do so for the remaining 22.4%, leaving $159.8 million in the accounts.

The SEC solicited public comments on the disposition of the undistributed amount. Rejecting proposals from petitioners Robert Martin and Empire Programs, Inc. (Petitioners) and others, the SEC opted to release the leftover Fair Funds to the US Treasury. Petitioners then filed suit seeking review of the SEC's decision.

The Second Circuit dismissed, finding that Petitioners failed to plead an injury in fact necessary for standing purposes. The court held that any alleged injury was either fully compensated, conjectural or based on alleged violations not covered by the SEC settlements.

Because Petitioners had received payments from the Fair Funds, they had been adequately compensated for injuries arising from the conduct subject to the settlement with the SEC. Moreover, Petitioners failed to prove that they were the injured customers in any of the transactions that the Fair Funds administrator was unable to match. Due to the absence of such proof, the court found that Petitioners alleged a hypothetical injury insufficient to confer standing.

Lastly, the Second Circuit held that any injuries Petitioners suffered in non-covered transactions do not provide them an interest in the remaining funds from a settlement based on covered transactions.

Martin et al. v. US Secs. & Exch. Comm'n, No. 11-3011 (2d Cir. 2013).

BANKING

OCC Publishes Standards on the Use of an Independent Consultant

On November 12, the Office of the Comptroller of the Currency (OCC) published standards governing the use of independent consultants in enforcement actions "involving significant violations of law, fraud, or harm to consumers."

The standards describe the criteria the OCC will use in determining whether the agency would require a national bank or federal savings association to retain a consultant, as well as the institution's obligation to exercise due diligence to ensure the consultant has sufficient independence, capacity, resources and expertise. The OCC warned that:

[t]he use of an independent consultant does not absolve bank management or its board of directors of their responsibility for ensuring the bank complies with OCC enforcement actions and takes all necessary actions to correct identified deficiencies. Moreover, an independent consultant is not a substitute for the supervisory judgment of the OCC. The OCC retains responsibility for supervising national banks and federal savings associations, including overseeing and assessing bank's compliance with an enforcement action.

Read more.

Agencies Release Final Revisions to Interagency Q&As Regarding Community Reinvestment

On November 15, the federal bank regulatory agencies with responsibility for Community Reinvestment Act (CRA) rulemaking published final revisions to Interagency Questions and Answers Regarding Community Reinvestment. The Questions and Answers document provides additional guidance to financial institutions and the public on the agencies' CRA regulations.

The revisions focus primarily on community development. Community development activities are considered as part of the CRA performance tests for large institutions, intermediate small institutions, and wholesale and limited purpose institutions. Small institutions may use community development activity to receive consideration toward an outstanding CRA rating. Among other things, the amendments:

  • Clarify how the agencies consider community development activities that benefit a broader statewide or regional area that includes an institution's assessment area.
  • Provide guidance related to CRA consideration of, and documentation associated with, investments in nationwide funds.
  • Clarify the consideration of certain community development services, such as service on a community development organization's board of directors.
  • Address the treatment of loans or investments to organizations that, in turn, invest those funds and use only a portion of the income from their investments to support a community development purpose.
  • Clarify that community development lending performance is always a factor considered in a large institution's lending test rating.

The final revisions are being issued by the Federal Reserve Board, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency.

Read more.

EU DEVELOPMENTS

EU Trade Reporting to Begin in February 2014

On November 14, the registration of the first four trade repositories (TRs) under the European Market Infrastructure Regulation (EMIR) took effect. The four registered TRs are:

  • DTCC Derivatives Repository Ltd. (DDRL) (United Kingdom)
  • Krajowy Depozyt Papierów Wartosciowych S.A. (KDPW) (Poland)
  • Regis-TR S.A., (Luxembourg)
  • UnaVista Ltd (United Kingdom)

This means that the requirement to report derivatives transactions to trade repositories under EMIR will come into force on February 12, 2014 (90 calendar days after the registration date).

This reporting obligation will apply for all derivatives, including exchange-traded derivatives.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions