United States: Corporate And Financial Weekly Digest - April 18, 2014

Last Updated: April 28 2014

Edited by Robert Weiss and Gregory Xethalis


US Court of Appeals for the District of Columbia Circuit Partially Invalidates Conflict Minerals Rule

On April 14, the US Court of Appeals for the District of Columbia Circuit issued an opinion in the lawsuit challenging the Securities and Exchange Commission's conflict minerals rule which reversed, in part, the prior decision of the US District Court for the District of Columbia upholding the conflict minerals rule and remanded the case back to the district court for further proceedings. In the opinion, the court found that, to the extent that the conflict minerals rule requires an issuer to disclose that any of its products "have not been found to be 'DRC conflict free,'" such portion of the rule violates the First Amendment's prohibition against compelled speech. However, the remainder of the conflict minerals rule, including the provisions requiring issuers to conduct country-of-origin inquiries and due diligence and the lack of any de minimis exception for reporting under the rule, was upheld by the court, as opponents of the conflict minerals rule were unable to convince the court that it should be invalidated as arbitrary, capricious, an abuse of discretion or in excess of the SEC's statutory jurisdiction. As the decision remanded the lawsuit back to the lower court for further proceedings, a final decision with respect to the invalidated portion of the rule may be delayed for some time. A copy of the court's full opinion is available here.

The partial invalidation raises significant questions about how issuers should comply with the conflict minerals rule, and it is possible that the SEC will voluntarily stay the application of the rule until the courts reach a final decision. However, in the absence of a stay from the SEC, issuers should continue their efforts to comply with the conflict minerals rule for the calendar year beginning January 1, 2013 (regardless of the issuer's fiscal year), as the first filings on Form SD pursuant to the conflict minerals rule will be required to be filed with the SEC no later than May 31, 2014.

For additional information, please see the Corporate and Financial Weekly Digest edition of August 24, 2012, regarding the release of the conflict minerals rule, the edition of July 26, 2013, addressing the initial ruling in the case challenging the rule and the edition of January 10, 2014, discussing the oral arguments in the above appellate court case.


FINRA Proposes Rule 2081 to Prohibit "Bargained-For" Expungements

The Financial Industry Regulatory Authority, Inc. (FINRA) filed a proposed rule change with the Securities and Exchange Commission to adopt FINRA Rule 2081 that would prohibit broker dealers and associated persons from conditioning the settlement of a customer dispute on the customer agreeing to expunge the information regarding the dispute from the Central Registration Depository (CRD). On February 13, the FINRA Board of Governors approved the filing of the proposed rule with the SEC. FINRA did not solicit public comment for the proposed rule. The CRD system contains a variety of licensing and registration information, including administrative and disciplinary information about registered personnel. Information accessible by the public through FINRA's BrokerCheck comes from the CRD system. FINRA acknowledged that it had taken steps to prevent bargained-for expungement as part of a settlement agreement, but it continued to have concerns with respect to such conduct

which would be expressly prohibited by the proposed rule. The effective date of the proposed rule will be 90 days following SEC approval.

The proposed rule can be found here.

SEC Issues FAQs on Rule 15c3-5 for Broker Dealers with Market Access

On April 15, the Securities and Exchange Commission's Division of Trading and Markets issued guidance in the form of 19 frequently asked questions (FAQs) on Rule 15c3-5 of the Securities Exchange Act of 1934 (Exchange Act), which requires risk management controls and supervisory procedures for broker dealers with market access.

Among the issues addressed by the FAQs, the SEC staff stated that a broker dealer providing market access may contractually grant control over specific regulatory risk management controls and supervisory procedures to a broker dealer client only if the broker dealer client is better situated to implement the controls and procedures and is not trading for its own account. Broker dealers are also permitted to use independent third-party risk management tools or technology, provided that they retain exclusive control over and perform due diligence (beyond merely relying on the mere representations of the third party) on such tools or technology. The third party providing the tools or technology is permitted to be the exchange or alternative trading system. With respect to credit or capital thresholds, the broker dealer should be prepared to explain how a threshold was chosen and how it limits financial exposure. Such thresholds can be adjusted under appropriate circumstances, such as when they are met and orders exceeding such thresholds are blocked. Any reasons for modifying thresholds should be documented and retained in the books and records of the broker dealer.

Click here to read the full text of the FAQs, which includes additional topics.


CME Group Issues Notice Prohibiting Transitory EFRPs

CME Group has issued an advisory notice prohibiting transitory exchange for related positions (EFRPs) on each of the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBOT), the New York Mercantile Exchange (NYMEX) and the Commodity Exchange (COMEX). Pursuant to the advisory notice, transitory EFRPs, which had previously been permitted in CME foreign currency products, NYMEX energy products and COMEX and NYMEX metals products, will no longer be permitted as of June 2, 2014.

As provided in the advisory notice, a transitory EFRP is one whose execution is contingent upon the execution of another EFRP or related position transaction where the transactions result in the offset of the related positions without incurring market risk that is material in the context of the related position transactions. Under the newly articulated policy, each transaction must have integrity as an independent transaction exposed to market risk. The time period between transactions is also a factor in determining whether a transaction is a transitory EFRP. However, an exchange of futures for physicals in foreign currency futures in which the foreign currency position is immediately offset is permitted under revised CME Group Exchanges' Rule 538.K.

The advisory notice also provides further information relating to EFRP recordkeeping obligations, including the requirement to maintain all relevant records for the related position transaction. The advisory notice and related rule revisions will become effective on June 2, 2014.

The advisory notice, which was deemed approved by the Commodity Futures Trading Commission pursuant to CFTC Regulation 40.5, is available here.


SEC Brings Lawsuit Against Hedge Fund Manager for Defrauding Investors

On April 4, the Securities and Exchange Commission filed a complaint against Matthew D. Sample, founder of hedge fund Lobo Volatility Fund, LLC, for fraudulently raising approximately $1 million from five investors. According to the complaint, Sample raised the funds between October 2009 and June 2012 by selling Lobo limited liability units to investors and misrepresented that he would use investors' money to trade options by employing a propriety trading strategy.

The SEC alleged that Sample diverted approximately one-third of the funds for personal use and payments to other investors. The complaint further alleged that Sample's trading strategy failed, causing the loss of the remaining funds, and that Sample falsely informed investors that he was trading profitably and that the funds were being held in capital accounts. According to the SEC, after one investor made repeated requests to withdraw $500,000, Sample provided the investors with false excuses as to why he could not make a distribution.

The SEC asserts that the alleged acts violate Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), (2) and (4) of the Investment Advisers Act. Sample consented to a permanent injunction against further violations, without admitting or denying the allegations. The SEC seeks disgorgement of the illicitly obtained funds and civil penalties.

Securities and Exchange Commission v. Sample, C.A. No. 3:14-cv-1218 (N.D. Tex. Apr. 4, 2014).

SEC Alleges Insider Trading by Two Friends in Advance of the Acquisition of The Shaw Group Inc.

On April 3, the Securities and Exchange Commission brought a lawsuit against Walter Wagner and Alexander Osborn, alleging that the two friends realized almost $1 million in profits by illegally trading securities of The Shaw Group Inc. in advance of its acquisition by Chicago Bridge & Iron Company, N.V.

According to the SEC, Wagner received material, non-public information about the acquisition from his former classmate John Femenia, an associate at a large investment bank, who learned of the transaction in the course of his employment. The SEC alleged that Wagner traded on the tip and purchased Shaw equity and short-term call options, and that Wagner tipped his friend Osborn, who then did the same.

On July 30, 2012, after Chicago Bridge announced its agreement to acquire Shaw, Shaw's stock price increased 55 percent over the prior day's closing price. The complaint asserts that Wagner and Osborn then sold their Shaw equities and call options and reaped profits of $517,784 and $439,830, respectively.

The SEC alleged that the acts violate Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Wagner agreed to settle by disgorging his illicit profit plus interest, paying a civil penalty to be determined at a later date, and consenting to an injunction against further violations. The SEC litigation against Osborn is ongoing.

Securities and Exchange Commission v. Wagner, C.A. No. 8:14-cv-01036 (D. Md. Apr. 3, 2014).

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
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
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.


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.


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