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 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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.