SEC Issues Guidance and Implementation of the JOBS Act The Jumpstart Our Business Startups Act (JOBS Act), which was
enacted on April 5, includes reforms intended to facilitate capital
raising by small businesses and "emerging growth
companies" (EGCs). Among other things, the JOBS Act allows for
confidential submission to the Securities and Exchange Commission
(SEC) of draft registration statements by EGCs, raises the
threshold for registration under the Securities Exchange Act of
1934 (Exchange Act), and eliminates the ban on general solicitation
and advertising for offerings to accredited investors under
Regulation D under the Securities Act of 1933 (Securities Act) and
offerings to qualified institutional buyers under Rule 144A under
the Securities Act. (See the March 30, 2012 Katten Muchin Rosenman
LLP Client Advisory
here.) On April 11, the SEC announced that it is seeking public
comments in connection with the rules required under the JOBS Act,
and will accept comments before it proposes such rules and
amendments. To view the complete text of the SEC's press release, click
here. Confidential Submission of Draft Registration
Statements Because Title I of the JOBS Act, containing the EGC "ramp
up" provisions, became operative upon enactment, the SEC has
published procedures for certain filings by EGCs and foreign
private issuers to be submitted in draft form to the SEC for
confidential, nonpublic review. Registration statements submitted
confidentially will not be deemed "filed" under the
Securities Act. According to a set of frequently asked questions
issued by the SEC's Division of Corporation Finance on April
10, the confidential submission process is not available for
Exchange Act registration statements, such as Form 10 or Form
20-F. An EGC is only eligible to confidentially submit a draft
registration statement if its common equity securities have not
been previously sold pursuant to an effective registration
statement. The frequently asked questions clarify that a company
that has had registered sales of securities that are not common
equity securities may still qualify for confidential filings of
equity offerings as an EGC. A foreign private issuer is only eligible to confidentially
submit a draft registration statement if it is eligible to submit
as an EGC or, if it is not an EGC, if it meets the Division of
Corporation Finance's policy for nonpublic submissions from
foreign private issuers. On December 8, the Division of Corporation
Finance announced that it would only review initial registration
statements submitted on a nonpublic basis of foreign governments
registering debt securities, foreign private issuers listed (or
concurrently listing) on a non-U.S. securities exchange, foreign
private issuers being privatized by a foreign government, or
foreign private issuers that can show that public filing would
conflict with the law of their applicable foreign jurisdiction.
Foreign private issuers that are shell companies, blank check
companies, or that have no or substantially no business operations
may not submit registration statements non-publicly. (See the
December 16, 2011 edition of
Corporate and Financial Weekly Digest.) Confidential submissions of draft registration statements must
be publicly filed at least 21 days prior to the road show for the
offering. However, the JOBS Act permits EGCs to make "test the
waters" communications with qualified institutional buyers and
institutional accredited investors prior to filing a registration
statement. The Division of Corporation Finance's frequently
asked questions clarify that an EGC does not need to treat such
"test the waters" communications as a road show for the
purpose of determining when the public filing must be made.
However, the frequently asked questions also clarify that if an EGC
does not conduct a traditional road show and does not engage in
activities that would fall under the definition of a road show
(other than "test the waters" communications), then the
registration statement and confidential submissions must be filed
21 days prior to the anticipated date of effectiveness. The initial
confidential submission and all amendments should be filed a
exhibits to the first publicly filed registration statement. To view the complete text of the SEC announcement and the policy
for non-public submissions from foreign private issuers, click here and here. To view the complete text of the Division of Corporation
Finance's frequently asked questions, click here. Titles V and VI of the JOBS Act, which amend Sections 12(g) and
15(d) of the Exchange Act, were also effective upon enactment.
Title V raises the threshold for registration from 500 holders of
record to either 2,000 holders or (except for banks and bank
holding companies) 500 holders who are not accredited investors. In
a set of frequently asked questions issued on April 11, the
Division of Corporation Finance clarified that under certain
circumstances, issuers that triggered this registration requirement
as of a fiscal year-end before April 5, but would not trigger the
requirement under the new threshold, are not subject to
registration obligations. If such an issuer has not yet filed an
Exchange Act registration statement for the applicable class of
equity securities, it does not need to do so. If such an issuer has
filed and Exchange Act registration statement but it is not yet
effective, the issuer may withdraw it. However, if the issuer has
already registered its applicable class of equity securities, it
must continue the registration until it is eligible to
deregister. Pursuant to the JOBS Act, the calculation of holders of record
for the registration threshold may exclude persons who received
securities pursuant to an employee compensation plan in
transactions exempted from registration under Section 5 of the
Securities Act. The frequently asked questions clarify that, as of
April 5, issuers may exclude such persons from the calculation
whether or not they are current employees. The frequently asked questions issued on April 11 also include
clarification of requirements relating to banks and bank holding
companies. To view the complete text of the Division of Corporation
Finance's frequently asked questions, click here. Title II of the JOBS Act will allow issuers to engage in general
solicitation and use general advertisements when selling to
accredited investors under Regulation D under the Securities Act or
qualified institutional buyers under Rule 144A under the Securities
Act. However, implementation of Title II requires that the SEC
amend Rule 506 of Regulation D and Rule 144A within 90 days of
enactment. On April 5, a memorandum prepared by 14 law firms on the impact
of the JOBS Act on private offerings prior to the SEC's
implementation of the changes was released. The memorandum affirms
that the current versions of Rule 506 and Rule 144A will remain in
effect until the SEC amends them, and anticipates that issuers
relying on these rules will continue their customary practices with
respect to these offerings until the SEC amends the rules. To view the complete text of the 14 law firm memorandum, click
here. On April 6, the Securities and Exchange Commission issued a
notice of filing of NASDAQ Stock Market (NASDAQ or the Exchange)
proposed Rule 5950, which would establish a new Market Quality
Program (MQP) for a one-year pilot period. Essentially, the MQP
would permit issuers to pay market makers to enhance the market
quality of certain securities listed on the Exchange. Securities
covered by the MQP would be exempt from the Rule 2460 prohibition
against direct or indirect payments by an issuer to a market
maker. The MQP is a voluntary program designed to promote market
quality in Exchange Traded Funds (ETFs), securities linked to the
performance of indexes and commodities and trust issued receipts;
however NASDAQ believes that the MQP securities will almost
entirely consist of ETFs. The details of the proposed MQP are as
follows: MQP securities must meet NASDAQ listing requirements. The SEC is soliciting comments on the proposed MQP, and it has
included a list of topics on which it particularly requests
comment. Anyone wishing to submit a comment should do so on or
before May 3. Click here for Notice of Filing of Proposed
Rule Change. UK Judgment Validates ISDA Master Agreement Performance
Suspension Provision Section 2(a)(iii) of every standard International Swaps and
Derivatives Association (ISDA) Master Agreement provides in
relevant part that a non-defaulting party does not have to perform
so long as any event of default or potential event of default is
continuing with respect to its counterparty. The exact extent of
the protection provided by this provision has been the subject of
trans-Atlantic controversy in the past few years as U.S. court
decisions coming out of the Lehman insolvency have thrown doubt on
its efficacy while some English decisions have expanded its impact
to make it even more favorable to non-defaulting parties than the
market had generally believed to be the case. A judgment handed
down by the English Court of Appeals on April 3 dealing with four
related cases has now settled the position for English law ISDA
masters on the basis that the traditional market view of the
provision was essentially correct all along – Section
2(a)(iii) suspends rather than extinguishes performance by the
non-defaulting party and the suspension can be indefinite. The
decision, however, also adds the important clarification that
suspended obligations must always be taken into account in
determining the amount due between the parties in connection with a
close-out of transactions under the relevant master agreement. For parties to New York law ISDA master agreements, the most
useful parts of the decision in Lomas and others v JFB Firth
Rixson, Inc. and others will be the reasoning used by the
court to conclude that 1) there is nothing in the master agreement
or relevant law that causes the protection of the clause to a
non-defaulting party to expire after "a reasonable time",
and 2) the provision does not violate the anti-depravation and
pari passu principles of English insolvency law. That
reasoning is likely to be cited extensively in any future case in
the U.S. that involves the same issues addressed by Judge
Peck's decision in the swap dispute between Metavante
Corporation and Lehman Brothers Special Financing. A copy of the English Court of Appeals judgment can be found here. CFTC Approves Final Rule Related to Recordkeeping and Reporting,
Conflicts of Interest and Chief Compliance Officer Designation On April 3, the Commodity Futures Trading Commission's final
rules relating to Swap Dealer (SD) and Major Swap Participant (MSP)
Recordkeeping, Reporting, and Duties; Futures Commission Merchant
(FCM) and Introducing Broker (IB) Conflicts of Interest; and Chief
Compliance Officer (CCO) Rules for SDs, MSPs and FCMs were
published in the Federal Register. The final rules were promulgated
under the Dodd-Frank Wall Street Reform and Consumer Protection Act
and approved by the Commission by a vote of 3-2 with Commissioners
O'Malia and Sommers dissenting. SD and MSP Recordkeeping, Reporting and Duties Rules: The
final rules require SDs and MSPs to maintain full and complete
records of transaction and position information for all swaps.
Basic business records (such as meetings minutes, organizational
charts, and audit documentation), certain financial records,
records of complaints against personnel and marketing material must
also be retained. The rules prescribe daily trading recordkeeping
requirements including: pre-execution, execution, and
post-execution data. SDs and MSPs are also required to report their
swaps in accordance with the real-time reporting and swap data
rules and to maintain records of all information reported to a swap
data repository. SDs and MSPs are required to establish risk management
procedures and monitor for and prevent violations of position
limits. To ensure compliance with position limits, the SD or MSP
must: (i) provide annual training for personnel, (ii) diligently
monitor and supervise trading, (iii) implement an early warning
system, (iv) test position limit procedures, (v) document
compliance with position limits on a quarterly basis, and (vi)
audit its procedures on an annual basis. SDs and MSPs are also
required to establish business continuity and disaster recovery
plans, promptly disclose any information required by the CFTC or a
prudential regulator and adopt antitrust policies. Conflicts of Interest Rules: The conflicts of interest
rules require segregated research and trading functions for SDs,
MSPs, FCMs and IBs. The rules prohibit non-research personnel from
directing the views and opinions expressed in a research report,
directing a research analyst's decision to publish a research
report, or reviewing a research report before publication for any
purpose other than verifying its factual accuracy, non-substantive
editing, or indentifying potential conflicts of interest. Research
analysts may not be supervised or controlled by the business
trading or clearing unit at an SD, MSP, FCM or IB, and may not be
compensated based on their contributions to the trading or clearing
business. All communications between research analysts and
non-research personnel concerning the content of a research report
must be made through legal and compliance staff. Firms are also
prohibited from retaliating against research analysts on the basis
of an adverse, negative or otherwise unfavorable research
report. A research analyst may not omit a material fact or qualification
in any communication with a current or prospective customer, and
firms may not directly or indirectly offer favorable research or
threaten to change research as an inducement or consideration for
the receipt of business. In all research reports and public
appearances, including third party reports, SDs, MSPs, FCMs and IBs
must prominently disclose whether a research analyst maintains a
financial interest in any derivative of a type, class, or category
that the research analyst follows and the nature of the financial
interest. The rule defines a research analyst as an employee of an SD,
MSP, FCM or IB who is primarily responsible for the preparation of
the substance of a research report relating to any derivative; a
research report is defined as any written communication (including
electronic) that includes an analysis of the price or market for
any derivative and provides information reasonably sufficient upon
which to base a decision to enter into a derivatives
transaction. CCO Rules for SDs, MSPs and FCMs: Under the rules, each SD, MSP
and FCM must designate a qualified CCO who will report directly to
the board of directors or senior officer of the SD, MSP or FCM. The
CCO is responsible for establishing compliance policies, resolving
conflicts of interest, ensuring compliance with the Commodity
Exchange Act (CEA), CFTC Regulations, and the firm's compliance
policies, and identifying and remediating non-compliance issues.
The CCO is required to prepare an annual report that contains: (i)
a description of the registrant's compliance with the CEA, CFTC
Regulations and its own policies; (ii) an assessment of the
registrant's compliance policies; (iii) a discussion of areas
for improvement; (iv) a description of compliance resources; and
(v) a summary of any non-compliance issues that were identified and
addressed. The effective date for the rule is June 4. For SDs and MSPs that
are currently registered with a U.S. prudential regulator or the
Securities and Exchange Commission, the compliance date for the
reporting, recordkeeping, daily trading records, and risk
management provisions is the later of July 2 or the date on which
SDs and MSPs are required to be registered under CFTC Rule 3.10,
and the compliance date for the business continuity and disaster
recovery and CCO provisions is the later of October 1 or the date
on which SDs and MSPs are required to be registered under Rule
3.10. For SDs and MSPs that are not currently registered with the SEC
or a prudential regulator, the compliance date for the reporting,
recordkeeping, daily trading records, and risk management
provisions is the later of October 1 or the date on which SDs and
MSPs are required to be registered under Rule 3.10, and the
compliance date for the business continuity and disaster recovery
and CCO provisions is the later of December 31 or the date on which
SDs and MSPs are required to be registered under Rule 3.10. The compliance date for the position limits, diligent
supervision, conflicts of interest, availability of information and
antitrust provisions for all SDs and MSPs is the later of June 4 or
the date on which SDs and MSPs are required to be registered under
Rule 3.10. FCMs and IBs that are currently registered must comply with the
conflicts of interest provisions (except for the clearing activity
provisions) by June 4, and must comply with the clearing activity
provisions on the later of the June 4 or the date on which SDs and
MSPs are to be registered under Rule 3.10. FCMs that are currently
registered with the CFTC and currently regulated by a prudential
regulator must comply with the CCO provision by October 1. FCMs
that are registered with the CFTC but not currently regulated by a
prudential regulator have until March 29, 2013 to comply with the
CCO provision. FCMs that are not registered with the CFTC as of the
effective date, must comply with the CCO provision upon
registration with the CFTC. Click here for more information. SEC Seeks Repayment of Executive Compensation Based on
Sarbanes-Oxley Act The Securities and Exchange Commission recently filed a
complaint in Federal Court in Texas against Michael A. Baker, the
former Chief Executive Officer of ArthroCare Corporation
(ArthroCare), and Michael T. Gluk, its former Chief Financial
Officer, asserting claims under Section 304 of the Sarbanes-Oxley
Act of 2002 (Sarbanes-Oxley). In its complaint, the SEC is seeking
to force Baker and Gluk to reimburse ArthroCare for incentive
compensation they received during the 12-month periods immediately
following ArthroCare's release of financial statements that it
later restated, as well as for the profits they obtained from their
sales of company stock during these periods. The Commission contends that Baker and Gluk were employed by
ArthroCare in their respective capacities when two sales executives
carried out a fraudulent scheme to overstate the company's
revenues in quarterly and annual statements in 2006, 2007 and the
first quarter of 2008. The SEC does not allege any participation by
Baker or Gluk in the fraudulent scheme, which involved overstating
or prematurely recognizing revenue in order to meet particular
quarter-end or year-end targets. The company eventually restated
its financial statements for these time periods. The SEC alleges
that Section 304(a) of Sarbanes-Oxley requires a chief executive
officer (CEO) or chief financial officer (CFO) to forfeit incentive
compensation and profits from the sale of company stock following
the issuing of an accounting statement that is later restated due
to material noncompliance with reporting requirements arising out
of misconduct. Section 304(a) does not expressly state that the
"misconduct" must be that of the CEO or CFO and the SEC
contends that it is unnecessary for it to tie the alleged
misconduct to the CEO or CFO in order to clawback funds from
them. The complaint is one of only a few such complaints, the first of
which was filed in 2009, in which the SEC has sought reimbursement
pursuant to Section 304 of Sarbanes-Oxley from a CEO or CFO who was
not alleged to have taken part in the wrongdoing that resulted in
the accounting restatement. Securities and Exchange Commission v. Michael A. Baker and
Michael T. Gluk, C.A. No. 1:12-cv-00285 (W.D. Tex.). Seller Entitled to Post-Closing Bonus Payment Despite Changes to
Transaction Terms The Delaware Supreme Court recently reversed a Superior
Court's grant of summary judgment in a case involving the sale
of a renewable energy business. BLGH Holdings LLC (BLGH), entered into an agreement to sell its
renewable energy business, Beacon Landfill Gas Holdings, LLC
(Beacon) to enXco, LFG, Holding, LLC (enXco) pursuant to a Unit
Purchase Agreement (UPA). The UPA required enXco to pay to BLGH a
purchase price of $12 million, plus a bonus payment if certain
conditions were met. The Beacon sale was consummated and enXco paid
the $12 million purchase price. enXco refused to pay the bonus
payment, however, asserting that the conditions for its payment had
not been met. BLGH then sued enXco for breach of contract and, on
summary judgment, the lower court dismissed its claim. The UPA predicated the bonus payment, in relevant part, on the
consummation of a transaction between Shell Energy North America,
L.P. (Shell) and enXco pursuant to which Shell would purchase
Beacon's gas production. There was no dispute that a
transaction with Shell was consummated, but the parties could not
agree on whether the transaction was "as outlined in Section
6.1(f) of the UPA," as required under the UPA in order to
trigger the obligation to make the bonus payment. Section 6.1(f)
did not set forth any specific terms for the transaction, but
rather merely referred to a letter of intent between Beacon and
Shell, which recited a number of "indicative" terms. The lower court ruled that BLGH was not entitled to the bonus
payment because the terms of the Beacon-Shell transaction were
materially different than the terms set forth in the letter of
intent. The Supreme Court reversed, finding that the UPA only
required completion of the transaction "outlined" in the
UPA, which merely referred to the Beacon-Shell transaction without
any specific transaction terms, not the more detailed letter of
intent. Moreover, the letter of intent expressly stated that its
terms could be modified. The Supreme Court held that in the face of
the provision permitting modification, enXco could not, as a matter
of law, demonstrate that the changes to the Beacon-Shell
transaction were so material that the transaction was not one in
accordance with the UPA's bonus provision. Accordingly, it
reversed the lower court's decision. BLGH Holdings LLC v. EnXco LFG Holding, LLC, C.A. No.
N10C-10-116 (Del. Mar. 27, 2012). DOL Plans to Propose Format for Service Provider Fee
Disclosures; No Required Format for 2012 Disclosures As part of its efforts to effect transparency of fees paid by
plans subject to the Employee Retirement Income Security Act of
1974 (ERISA) to investment managers and other service providers,
the U.S. Department of Labor (DOL) has indicated that it will
develop and propose a required format for a "summary
guide" of the disclosures under ERISA Section 408(b)(2). ERISA requires arrangements between ERISA plans and service
providers to be "reasonable." Regulations under Section
408(b)(2) provide that, for a services arrangement to be
reasonable, the service provider must provide disclosure, primarily
about compensation it expects to receive and, in some cases,
information about designated investment alternatives, to a
fiduciary of a covered plan, from which the service provider,
together with its affiliates or subcontractors, expects to receive
$1,000 of compensation in a year. As reported in the March 30, 2012
edition of
Corporate and Financial Weekly Digest, the
initial disclosures are due July 1, and apply to retirement plans
(e.g., pension, 401(k), but not IRAs). There is currently no required format for these disclosures, and
unless and until the DOL finalizes a required format, service
providers may draw from multiple documents in making their
disclosures. In the Section 408(b)(2) regulations, the DOL included
a "sample guide" which service providers may use to
reference the location of the required disclosures in multiple
documents. Service providers may, but are not required, to use such
a sample guide. The sample guide may be accessed by clicking
"Sample Guide" here. On March 29, the UK Financial Services Authority (FSA) published
its findings following a thematic review of anti-bribery and
corruption systems and controls in investment banks. The FSA reported that, despite long-standing regulatory
requirements to mitigate financial crime risk, the majority of
firms in its sample did not have robust anti-bribery systems and
controls in place and firms the subject of the thematic review fell
short of FSA regulatory requirements. Weaknesses related in
particular to: 1) a limited understanding of the applicable legal
and regulatory regimes; 2) incomplete or inadequate bribery and
corruption risk assessments; 3) a lack of senior management
oversight; and 4) a failure to monitor the effective implementation
of, and compliance with, anti-bribery and corruption policies and
procedures. As a result of the thematic review findings, the FSA has
published Guidance Consultation GC12/5 (Proposed Guidance on
Anti-Bribery and Corruption Systems and Controls) setting out
proposed amendments to the financial crime guide section of the FSA
rules (FC). The FSA proposes to update Chapters 2 and 6 of Part 1 of FC with
new guidance and examples of good and poor practices drawn from the
findings of its thematic review. It also proposes to include a new
Chapter 13 in Part 2 of FC, which will consolidate examples of both
good and poor practice highlighted in the report. The proposed new
guidance will not only apply to investment banks but to all firms
that fall within the scope of the FSA's financial crime
requirements. The comment period for GC12/5 ends on April 29. The FSA has indicated that it is considering whether further
regulatory action is required in relation to firms found during the
review to have fallen short of current requirements. The thematic review can be found here. GC12/5 can be found here. The UK Financial Services Authority (FSA) recently issued
finalized guidance FG12/11 (Financial Promotions, Fund
Performance and Image Advertising). FG12/11 emphasizes the duty of regulated firms promoting funds
and other products and services to explain their products and
services clearly and to provide fair and clear information, which
is not misleading. Guidance FG12/11 reiterates the fact that the principle of being
fair, clear and not misleading is at the very heart of the
regulation of financial promotions. FG12/11 states that while the
relevant FSA rules are "clear about outcomes," they do
not describe in detail how these outcomes should be achieved. The
FSA states that it is firms' responsibility to explain their
products and services helpfully and clearly. For more information, click here. On March 30, the European Security Markets Authority (ESMA)
published draft regulatory and implementing technical standards
relating to EU Regulation 236/2012 on Short Selling and Certain
Aspects of Credit Default Swaps passed by the European Council on
February 12 (see the February 24, 2012 edition of Corporate and Financial Weekly
Digest). The draft technical standards are subject to
approval by the European Commission. They will apply from November
1, 2012 when the regulation comes into effect. The technical standards deal with issues including the
following: A further technical standard, on the method of calculation of
the fall in value of a financial instrument required under Article
24(8) of the Regulation, will be published later in April. For more information, click here. 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
Exchange Act Registration Requirements
Impact on General Solicitation in Private Offerings
BROKER DEALER
NASDAQ Proposes a Paid-For Market Making Program
OTC DERIVATIVES
CFTC
LITIGATION
EXECUTIVE COMPENSATION AND ERISA
UK DEVELOPMENTS
FSA to Target Anti-Bribery and Corruption Failures
FSA Issues Guidance on the Promotion of Funds
EU DEVELOPMENTS
ESMA Published Draft Short Selling Technical Standards
Corporate and Financial Weekly Digest - April 13, 2012
Katten Muchin Rosenman LLP
Contributor
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The Jumpstart Our Business Startups Act (JOBS Act), which was enacted on April 5, includes reforms intended to facilitate capital raising by small businesses and "emerging growth companies" (EGCs).