On September 29, the Business Roundtable and the U.S. Chamber of
Commerce filed a petition for review with the U.S. Court of Appeals
for the D.C. Circuit challenging the validity of new Rule 14a-11,
the so-called proxy access rule. On the same date, the Business
Roundtable and U.S. Chamber of Commerce filed a petition with the
Securities and Exchange Commission seeking to stay the
implementation of Rule 14a-11 pending resolution of the matter by
the Court of Appeals. This rule was adopted in August by the SEC
along with an Amendment to Rule 14a-8, and was to become effective
on November 15. See the August 27 edition of
Corporate and Financial Weekly Digest for a summary of
Rules 14a-11 and 14a-8 (i)(8). On October 4, the SEC granted the requested stay in the
implementation of Rule 14a-11. It also stayed the effectiveness of
Amended Rule 14a-8, even though not part of the petitioner's
petition, on the basis that it was "intertwined" with
Rule 14a-11, and cited a potential for confusion if the amendment
to Rule 14a-8 were to become effective while Rule 14a-11 is stayed.
While the parties have agreed to seek expedited review, the
SEC's stay of the two rules will remain in effect pending
resolution of the matter by the Court of Appeals. Most legal analysts, as well as a spokesman for the SEC, believe
that the matter will not be resolved until some time in the spring
of 2011, with the practical result that these rules will not be in
effect for most public companies (including those with fiscal years
ending December 31) until the 2012 proxy season. Click here for Business Roundtable's petition to
the Court of Appeals. Click here for Business Roundtable's petition to
the SEC for a stay. Click here for the SEC's order granting stay. Financial Industry Regulatory Authority member firms that are
futures commission merchants and clear over-the-counter (OTC)
derivatives for customers through Chicago Mercantile Exchange Inc.
(CME) must soon begin filing a new statement pertaining to such OTC
derivatives with FINRA as part of their monthly Financial and
Operational Combined Uniform Single (FOCUS) Report. This
requirement arises from recent amendments by CME to its financial
reporting rules and forms and by National Futures Association to
its financial requirement rules. The new statement—the
Statement of Sequestration Requirements and Funds in Cleared OTC
Derivatives Sequestered Accounts—is due to FINRA
beginning with the monthly FOCUS Report that is due on November 23
(covering the October 2010 reporting period). Click here to read FINRA Regulatory Notice
10-46. The Securities and Exchange Commission has approved the
Financial Industry Regulatory Authority's proposed rule change
to amend FINRA's trade reporting and Order Audit Trail System
rules. The implementation date for the new rules is November 10.
Among other things, the rule change requires members to indicate on
trade reports submitted to FINRA if a transaction is "short
sale exempt" and, when an order is received or originated, to
record the designation of an order as a short sale exempt order if
the order may be marked "short exempt" pursuant to SEC
Regulation SHO. Click here to read SEC Release No. 34-63032. Click
here for information on FINRA's original proposal to
reinstitute short exempt marking for trade reporting and OATS in
the August 27 edition of Corporate and Financial Weekly
Digest. In connection with its ongoing implementation of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, the Commodity
Futures Trading Commission last Friday voted to propose several
rules for publication in the Federal Register. The CFTC
proposals include rules relating to the financial resources
requirements for derivatives clearing organizations (DCOs) and the
mitigation of conflicts of interest by DCOs, designated contract
markets (DCMs), and swap execution facilities (SEFs). Under the proposed financial resources rules, DCOs would be
required to maintain financial resources that, at a minimum, (i)
exceed the total amount that would be required for a DCO to meet
its financial obligations to its clearing members notwithstanding a
default by the clearing member (or, in the case of DCOs designated
as "systematically important" by the Financial Stability
Oversight Council, the two clearing members) creating the largest
financial exposure for the DCO in extreme but plausible market
conditions, and (ii) enable the DCO to cover its operating costs
for a period of one year, as calculated on a rolling basis. For
purposes of meeting the first requirement above, DCOs would be
permitted to include: (1) margin of a defaulting clearing member,
(2) the DCO's own capital, (3) guaranty fund deposits, (4)
default insurance, and (5) potential assessments (subject to
certain haircuts and other restrictions) for additional guaranty
fund contributions. For purposes of the second requirement, DCOs
would be permitted to include the DCO's own capital and any
other financial resource deemed acceptable by the CFTC, which would
have to include unencumbered, liquid financial assets (which could
include a committed line of credit or similar facility) equal to at
least six months' operating costs. The proposed rules regarding mitigation of conflicts of interest
by DCOs, DCMs and SEFs impose specific structural governance
requirements and limitations on the ownership of such entities. The
governance requirements would, among other things, require that the
boards of directors of such entities include a minimum number of
"public directors" and certain specified committees and
disciplinary panels (each subject to specific composition
requirements). The ownership limitations set forth in the proposed
rules would require the applicable DCO, DCM or SEF to cap the
voting power of any of its members (taken together with the
member's affiliates) at 20%. A DCO (but not a DCM or SEF) could
choose one of two alternatives to come into compliance with this
requirement (or petition the CFTC for a waiver of such
requirements). One alternative would cap at 5% the amount of voting
power held or exercised by any DCO member or other "enumerated
entity" (which generally includes certain large banks, swap
dealers, major swap participants and their affiliates). The other
alternative would cap at 20% the amount of voting equity or voting
power held or exercised by any single DCO member, and would further
impose a 40% cap on the aggregate voting equity or power held or
exercised by all enumerated entities. Both sets of rules are scheduled for publication in the
Federal Register on October 8. The comment period for the
conflicts of interest mitigation rules will expire 30 days from the
date of publication; the comment period for the financial resources
rules will expire 60 days from the date of their publication. Additional information regarding the proposed rules, including
the rule text and related Q&As, can be found here. The National Futures Association (NFA) has announced that recent
amendments to NFA Bylaw 1301(b), which sets forth the schedule of
dues and assessments for futures commission merchants (FCMs), will
take effect on November 1. The amendments, which were submitted to
the Commodity Futures Trading Commission on August 30, create an
exemption from the NFA assessments charged to FCMs with respect to
trades entered on or subject to the rules of a foreign board of
trade by their customers. Specifically, the new exemption exempts
from the NFA assessment fee the proprietary trading activity of any
person who has membership privileges on an NFA member contract
market which had an annual transaction volume during the prior
calendar year of more than 1 million. The parents, affiliates and
subsidiaries of a such a person are counted separately for this
purpose. The NFA Notice to Members announcing the effective date of the
amendments, which includes a link to the amendments, is available
here. The National Futures Association (NFA) has submitted proposed
amendments to its Interpretive Notice entitled "NFA Compliance
Rule 2-9: Enhanced Supervisory Requirements" to the Commodity
Futures Trading Commission. The Interpretive Notice sets out
enhanced supervisory requirements that apply to certain NFA member
firms due to the prior association of their associated persons or
principals with disciplined firms. Among other things, the
amendments provide limited relief to certain firms that are
currently subject to enhanced supervisory requirements due to a
principal's prior affiliations; amend the enhanced capital
requirements applicable to futures commission merchants, commodity
pool operators and commodity trading advisors who are subject to
enhanced supervisory requirements; require the inclusion of certain
information in the written supervisory procedures of such firms;
and require quarterly (rather than monthly, as is currently the
case) reporting by such firms of their compliance with the enhanced
supervisory requirements. The NFA proposal was submitted to the CFTC on October 6 and,
unless the CFTC notifies NFA that it has determined to review the
proposal, will take effect 10 days after receipt by the CFTC. The proposed amendments can be found here. The U.S. District Court for the Southern District of New York
granted in part and denied in part copyright infringement claims
brought by plaintiff, a professional photographer, against a
publisher of textbooks and other related educational materials,
alleging that defendant exceeded its licenses to use
plaintiff's photographs in its publications. Defendant entered into several licensing agreements with various
photo bureaus. Although defendant contracted with the photo
bureaus, plaintiff retained the registered copyright for the
photographs. Plaintiff alleged that on numerous occasions defendant
exceeded the allowed print run for the photographs under the
licensing agreements without first seeking plaintiff's prior
authorization or paying an additional licensing fee. Defendant moved to dismiss. The district court granted the
motion in connection with one of the photo bureaus, reasoning that
the contractual provision in the relevant licensing agreement
clearly stated that the photo bureau forgoes its right to sue for
copyright infringement until defendant has been invoiced for an
unauthorized usage, and failed to pay that amount within ten days
of being billed. Plaintiff's complaint failed to allege that
defendant was invoiced for the allegedly unauthorized usage of the
photos, and plaintiff's related infringement claim was
accordingly dismissed. The district court nevertheless denied defendant's motion to
dismiss the claims arising out of the agreements with the other
photo bureaus, reasoning that the allegations of the complaint
properly stated a cause of action, despite being largely pled upon
information and belief. (Wu v. Pearson Education, Inc.,
No. 09 Civ. 6557, 2010 WL 3791676 (S.D.N.Y. Sept. 29, 2010)) The U.S. District Court for the Southern District of Indiana
dismissed plaintiff's securities fraud action against a
nationwide health care benefits provider, and its officers and
directors, in which plaintiff alleged that defendants artificially
inflated the price of the stock by making certain false and
misleading statements. Specifically, plaintiff alleged that the defendant health care
provider was experiencing system integration and claims processing
problems, a growing claims backlog, lack of visibility into claims
data, an inability to establish adequate reserves, and problems in
adequately pricing products, prior to and during the class period,
and that, as a result, certain statements defendants made during
this time were false and misleading. Defendants moved to dismiss, arguing that the allegations of
securities fraud in plaintiff's amended complaint did not
adequately plead scienter under the enhanced pleading standard of
the Private Securities Litigation Reform Act (PSLRA), and that the
allegedly false and misleading statements at issue fell within the
PSLRA's safe harbor for forward-looking statements. The court granted defendants' motion, finding that the
allegations in plaintiff's amended complaint did not create a
strong inference that defendants recklessly disregarded the truth
when making the allegedly false statements. The court also found
that the statements at issue fell within the PSLRA's safe
harbor, because they were accompanied by meaningful cautionary
language and failed to create a strong inference of actual
knowledge on the part of defendants. (Wade v. Wellpoint,
Inc., 2010 WL 3766324 (S.D. Ind. Sept. 22, 2010)) 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. and
David A. Pentlow
SEC/CORPORATE
SEC Stays Implementation of Shareholder Proxy Access Rules
BROKER DEALER
Supplemental FOCUS Filing Requirement Applicable to Certain
Joint Broker-Dealers/Futures Commission Merchants
SEC Approves Rule Change to Reinstitute Short Exempt Marking
for Trade Reporting and OATS
CFTC
CFTC Proposes Rules on DCO Financial Resource Requirements,
Conflicts of Interest
NFA Announces Effective Date of Amendments to Assessments on
Foreign Exchange Trades
NFA Proposes Amendments to Interpretive Notice on Enhanced
Supervisory Requirements
LITIGATION
Motion to Dismiss Claims for Infringing Use of Photographs
Granted in Part and Denied in Part
Scienter Inadequately Pled Under the Standard Set Forth in the
PSLRA
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