United States: Governance & Securities Law Focus: Asia Edition, Oct 2015

In this newsletter, we provide a snapshot of the principal US, European and selected international governance and securities law developments of interest to Asian corporates and financial institutions.


SEC and NYSE/Nasdaq Developments

SEC Clarifies Definition of "Whistleblower" under Dodd-Frank Anti-Retaliation Provision

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which amended the Securities Exchange Act of 1934 (the "Exchange Act") to add Section 21F, established a series of new incentives and protections for individuals to report possible violations of the federal securities laws. Generally speaking, these incentives and protections take three forms: monetary awards for providing information, heightened confidentiality assurances and enhanced employment retaliation protections.

In response to a disagreement among courts as to the scope of the whistleblower anti-retaliation protections, in August 2015, the US Securities and Exchange Commission ("SEC") issued an interpretation clarifying that an individual's status as a whistleblower for purposes of the anti-retaliation protections does not depend on whether the individual has reported the alleged misconduct to the SEC.

The interpretive release reasons that this definition of "whistleblower" best comports with the SEC's overall goals in implementing the whistleblower program under Section 922 of the Dodd-Frank Act. Specifically, by providing employment retaliation protections for individuals who report internally first to a supervisor, compliance official or other person working for the company that has authority to investigate, discover or terminate misconduct, the SEC's interpretation avoids a two-tiered structure of employment retaliation protection that might discourage some individuals from first reporting internally in appropriate circumstances and, thus, jeopardise the investor-protection and law-enforcement benefits that can result from internal reporting.

The SEC's interpretive release is available at: http://www.sec.gov/rules/interp/2015/34-75592.pdf

SEC Decreases Filing Fees

The SEC announced that, effective 1 October 2015, the fees that public companies and other issuers pay to register their securities with the SEC will be set at $100.70 per million dollars of securities registered. This is a decrease from the current filing fee of $116.20 per million dollars.

SEC Sets Expedited Schedule to Adopt "Publish What You Pay" Rule for Resource Extraction Issuers by Late June 2016

Section 1504 of the Dodd-Frank Act, which was signed into law in 2010, directed the SEC to issue rules requiring resource extraction issuers to report annually on payments made to governments. In August 2012, the SEC adopted a final rule implementing Section 1504 of the Dodd-Frank Act, but in July 2013 the SEC rule was vacated by US federal courts. The SEC has yet to propose a new rule implementing "publish what you pay" reporting under Section 1504 of the Dodd-Frank Act.

On 2 September 2015, in an action brought by Oxfam America, Inc. to compel the SEC to issue a final resource extraction issuer disclosure rule, the US District Court for the District of Massachusetts ordered the SEC to an expedited schedule for promulgating a final rule. In its ruling, the court stated that it would retain jurisdiction over the rulemaking process so as to ensure compliance with its order.

On 2 October 2015, the SEC filed with the court a notice of its proposed expedited rulemaking schedule, in which it has endeavoured to adopt a final rule by 27 June 2016. The SEC plans to hold a vote on a proposed rule before the end of this year, following which members of the public will have a period of at least 45 days to submit comments. The SEC cautioned that this 270-day schedule is aggressive and that there are many reasons why the rulemaking may be further delayed.

The District Court's order is available at: http://www.gpo.gov/fdsys/pkg/USCOURTS-mad-1_14-cv-13648/pdf/USCOURTS-mad-1_14-cv-13648-0.pdf.

Our recent client publication, which provides an overview of the status of "publish what you pay" regulation in the United States, the European Union, Canada and Australia, is available at: http://www.shearman.com/en/newsinsights/publications/2015/05/shining-a-light-on-payments-to-governments.

New York Stock Exchange ("NYSE") Proposes Changes to Rules on Notifications of Material News and Trading Halts

The NYSE recently amended its rules relating to notifications of material news and trading halts. The rule changes, which are effective from 28 September 2015, amend Section 202.06 of the NYSE Listed Company Manual, which contains the rules applicable to issuers listed on the NYSE.

The rule changes expand the pre-market hours during which listed companies are required to notify the NYSE prior to disseminating material news, to 7:00 a.m. (US Eastern Time). Currently, listed companies are required to comply with this requirement during the NYSE trading session, so the effect of the amended rule is to extend this requirement to the period between 7:00 a.m. and the commencement of trading on the NYSE at 9:30 a.m.

The amended rules also provide the NYSE with authority to halt trading:

  • during pre-market hours at the request of a listed company;
  • when the NYSE believes it is necessary to request certain information from listed companies; and
  • in an American Depositary Receipt ("ADR") or other listed security, when the NYSE-listed security (or the security underlying the ADR) is listed on or registered with another national or foreign securities exchange and such other exchange (or regulatory authority overseeing such exchange) halts trading in such security for regulatory reasons.

The NYSE also has provided new guidance related to the release of material news after the close of trading. Section 202.06(C) of the NYSE Listed Company Manual requires companies to release material news by the fastest available means. Listed companies can disclose such material news via any Regulation FD compliant method, including by filing a Form 8-K with the SEC. The NYSE's new guidance states that listed companies releasing material news should either (i) include the news in a Form 8-K or other SEC filing, or (ii) issue the news in a press release to the major news wire services, including, at a minimum, Dow Jones & Company, Inc., Reuters Economic Services and Bloomberg Business News. The NYSE believes that distribution by either of these methods is consistent with current disclosure practices and ensures adequate dissemination.

The amended rule also includes advisory language that listed companies intending to release material news after the close of trading on the NYSE should wait until the earlier of the publication of their security's official closing price on the NYSE or 15 minutes after the scheduled closing time on the NYSE.

The NYSE memorandum summarising the rule changes is available at: https://www.nyse.com/publicdocs/nyse/regulation/nyse/timelyalertmemo_amendment.pdf

SEC Issues Concept Release Seeking Comments on Enhanced Disclosures for Audit Committees

On 1 July 2015, the SEC published a "concept" release to solicit input on possible revisions to audit committee reporting requirements, with a focus on the audit committee's reporting of its responsibilities with respect to its oversight of the independent auditor. Some have expressed a view that the SEC's disclosure rules for this area may not result in disclosures about audit committees and their activities that are sufficient to help investors understand and evaluate audit committee performance, which may in turn inform those investors' investment or voting decisions.

The majority of the SEC's current disclosure requirements relating to audit committees, which are found principally in Item 407 of Regulation S-K, were adopted in 1999. Since then, there have been significant changes in the role and responsibilities of audit committees arising out of, among other things, the Sarbanes-Oxley Act of 2002, enhanced listing requirements for audit committees, enhanced requirements for auditor communications with the audit committee arising out of the rules of the Public Company Accounting Oversight Board, and changes in practice, both domestically and internationally.

The SEC also invited public comment on other aspects of the audit committee's role beyond those involving the auditor, such as its oversight of financial reporting, internal controls and risk.

The period during which the public could submit comments on the concept release ended on 8 September 2015, and a significant volume of comment letters were submitted by reporting issuers, institutional shareholders, industry groups, law firms and other stakeholders. After considering the comments received, the SEC may proceed with a rulemaking proposal, on which there would be another round for public comment before a final rule is adopted.

The SEC's concept release is available at: http://www.sec.gov/rules/concept/2015/33-9862.pdf

Comments on the concept release are available at: http://www.sec.gov/comments/s7-13-15/s71315.shtml

Conflict Minerals Rule Developments

On 18 August 2015, a divided panel of the US Court of Appeals for the District of Columbia Circuit, in National Association of Manufacturers v. SEC ("NAM"), upheld its earlier ruling that requiring companies to describe their products as having "not been found to be 'Democratic Republic of the Congo ("DRC") conflict free'" is unconstitutional, thereby invalidating a part of the SEC's conflict minerals rule.

This most recent decision means nothing changes for SEC reporting companies that file conflict minerals disclosure on Form SD. Following the D.C. Circuit's initial decision in NAM, the SEC's Division of Corporation Finance had issued a statement that it expected reporting companies to continue to comply with the provisions of the conflict minerals rule that were upheld by the court. However, no company is required to describe its products as "DRC conflict free," having "not been found to be 'DRC conflict free,'" or "DRC conflict undeterminable". An independent private sector audit will not be required unless a company voluntarily elects to describe a product as "DRC conflict free" in its Conflict Minerals Report. This has been the status for the last two conflict minerals reporting periods (calendar years 2013 and 2014), and, unless the SEC changes the position it took following the D.C. Circuit's first decision, companies should expect to continue to prepare their conflict minerals disclosure as they have in the past.

Our related client publication is available at: http://www.shearman.com/en/newsinsights/publications/2015/08/partial-invalidation-of-sec-conflict-minerals-rule

SEC Approves Changes to FINRA Research Rules

The Financial Industry Regulatory Authority ("FINRA"), the self-regulatory organization that regulates broker-dealers in the United States, has adopted new rules relating to equity and fixed income research.

The new rule relaxes the research black-out periods to 10 days following an initial public offering in which the firm publishing equity research has participated as an underwriter or dealer, and three days following a secondary offering in which the firm has participated as manager or co-manager. The new rule eliminates the black-out period upon expiration, waiver or termination of a lock-up agreement, which brings all offerings in line with the existing accommodation for "emerging growth companies". These changes to the quiet period rules came into effect on 25 September 2015.

The new rule also affects broker-dealers' conflicts of interest policies and rules relating to the separation of the equity research and investment banking functions within a firm, among other changes to broker-dealer regulation.

Our related client publications are available at: http://www.shearman.com/en/newsinsights/publications/2015/10/new-fixed-income-research-rule-and-more; and http://www.shearman.com/en/newsinsights/publications/2015/10/finra-publishes-faqs

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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.

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