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. 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. 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 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. 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). 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.
SEC/CORPORATE
US Court of Appeals for the District of Columbia Circuit
Partially Invalidates Conflict Minerals Rule
BROKER DEALER
FINRA Proposes Rule 2081 to Prohibit "Bargained-For"
Expungements
SEC Issues FAQs on Rule 15c3-5 for Broker Dealers with Market
Access
CFTC
CME Group Issues Notice Prohibiting Transitory EFRPs
LITIGATION
SEC Brings Lawsuit Against Hedge Fund Manager for Defrauding
Investors
SEC Alleges Insider Trading by Two Friends in Advance of the
Acquisition of The Shaw Group Inc.
ARTICLE
28 April 2014
Corporate And Financial Weekly Digest - April 18, 2014
The District of Columbia Circuit issued an opinion in the lawsuit challenging the Securities and Exchange Commission’s conflict minerals rule which reversed.