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About two years ago, the Securities and Exchange Commission adopted rules implementing provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (.PDF) that require public companies subject to the SEC's proxy rules to conduct two non-binding shareholder-advisory votes at annual meetings:

• A vote to approve the compensation of the named executive officers as described in the proxy statement for the meeting (a “say-on-pay vote”); and
• A vote on whether the company's say-on-pay vote should be held annually, every second year, or every third year (a “say-on-frequency vote”).

Those votes were first required for most public companies beginning with an annual meeting held on or after January 21, 2011, but the requirement was delayed for smaller reporting companies. Effective for annual meetings held on or after January 21, 2013, however, smaller reporting companies will be required to conduct a say-on-pay vote and a say-on-frequency vote.

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The Securities and Exchange Commission’s Conflict Minerals Rule, Rule 13p-1 (.PDF), mandated by Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added Section 13(p) to the Securities Exchange Act of 1934, was adopted on August 22, 2012, and became effective November 13, 2012.  The Rule will require a number of public reporting companies to, among other things, file with the SEC a new annual report, Form SD.  The initial Form SD is due by May 31, 2014, covering the 2013 calendar year.  Although the Rule’s required initial report now seems quite distant, and although there is a lawsuit filed by the National Association of Manufacturers and others challenging the Rule (.PDF), the time that may be necessary for many companies to comply with the Rule's requirements, and the effort and cost of that compliance, suggests that companies should consider application of the Rule sooner rather than later.

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The Securities and Exchange Commission announced on Dec. 21, 2011 that it has adopted amendments to its rules regarding the net-worth standard (PDF) for determining an individual “accredited investor” for purposes of certain exemptions from the registration requirements of the Securities Act of 1933, as amended.  As described in our post when the amendments were proposed by the SEC in January 2011, the amendments are required to conform the net-worth standard to one of the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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We recently commented on the SEC’s decision not to challenge the court ruling vacating its proxy access rule.  The Council of Institutional Investors had quickly registered its disappointment.  Global Pensions reported yesterday that a number of pension funds are now urging the SEC to issue a new rule.

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We previously discussed the SEC’s adoption of new rules with respect to exemptions from investment adviser registration.  The new rules replace the old “private adviser exemption” with a new set of exemptions.  One of the new exemptions—actually an exception from the definition of “investment adviser”—is for entities that are “family offices” as defined in the new rules.

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The SEC recently announced its implementation of a new whistleblower program designed to reward “individuals who provide the agency with high-quality tips that lead to successful enforcement actions.”  The new rules (PDF) – created pursuant to Section 922 of the Dodd-Frank Act – will become effective 60 days after they are published in the Federal Register or submitted to Congress. 

To be eligible for an award under the new program, a whistleblower must voluntarily provide original information leading to the successful enforcement by the SEC and monetary sanctions greater than $1 million.

As highlighted in our previous posts (available here and here), the final rules – much like the proposed rules (PDF) – do not require whistleblowers to first report allegations internally to qualify for bounties.  However, in an effort to encourage employees to utilize internal compliance programs when appropriate, the SEC has adopted a number of incentives, including:

• giving whistleblowers the benefit of an internal reporting date as their effective reporting date for award purposes – provided that the same information, first reported internally, is also reported to the SEC within 120 days; and
• for purposes of determining the amount of the award, taking into account the employee’s effective use or, when appropriate, misuse of their internal compliance program.

The final rules also adopt an anti-retaliation policy, which protects whistleblowers who provide information on reasonable belief that it “relates to a possible securities law violation that has occurred, is ongoing, or is about to occur.”

OUR TAKE:  The SEC’s dual system by which whistleblowers may report directly to the SEC or internally through existing programs may stifle companies’ efforts to minimize and resolve alleged compliance issues before any SEC involvement.  Whether whistleblowers will pursue SEC bounties over working through existing compliance programs, however, may depend on the how the SEC applies its rules, and pays bounties, over time.

*Many thanks to Josh McConkey, a Gardere summer associate and law student at the Georgetown University Law Center, for his contributions to this post.

The SEC has recently indicated that it may well delay, to the first quarter of 2012, the date by which certain exempt investment advisers will have to register with the SEC and certain SEC-registered advisers will have to switch to state registration.

The SEC continues to face a daunting task to propose, adopt and implement various rules to effect the changes in the status of investment advisers required by the Dodd-Frank Act.  Those required changes include:

• The deletion of the so-called “private adviser” exemption in Section 203(b)(3) of the Investment Advisers Act and the adoption of new exemptions for advisers to family offices, venture capital funds and private funds of less than $150 million, with the result that more advisers will be required to register; and
• Switching “mid-sized” advisers, which generally have between $25 million and $100 million in assets under management, from registration with the SEC to registration with the states.

The Dodd-Frank Act contemplates those changes to occur by July 21, 2011.  The SEC indicated that it expects to complete and adopt final rules regarding those changes by that date, but that it is considering permitting investment advisers affected by those changes to wait until the first quarter of 2012 to register with the SEC or to switch from SEC-registration to state-registration, as the case may be.

OUR TAKE:  The delay in the compliance date(s) appears likely, so that investment advisers affected by those changes will have more time to comply with the final rules, when adopted by the SEC.  Nevertheless, investment advisers that are likely to be affected by the changes should be prepared to review the final rules promptly and then work diligently to prepare and make the necessary filings.

The SEC recently (Mar. 2, 2011) proposed rule amendments (PDF) to remove references to credit ratings in rules and forms under the Investment Company Act of 1940.  The SEC announced the rule amendments in furtherance of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Specifically, the Dodd-Frank Act requires federal agencies to review rules that use credit ratings as an assessment of creditworthiness and to replace those credit-rating preferences with other appropriate standards in an effort to eliminate the over-reliance on credit ratings by both regulators and investors.

The rule proposal would amend Rule 2a-7 by eliminating a minimum credit rating as a required element in determining which securities are permissible investments for a money market fund.  In its place, the proposed amendment empowers the money market fund’s board (or its delegate) to make the determination regarding whether a security presents minimal credit risks and thus constitutes an eligible security for the fund.  Consistent with the current rule, money market funds will be required to invest at least 97% of their assets in securities that the board has determined present minimal credit risks from issuers with the highest capacity to meet their short term financial obligations.

The rule proposal also would remove credit ratings in three other areas: repurchase agreements (Rule 5b-3); certain business and industrial development company (BIDCO) investments (New Rule 6a-5); and shareholder reports (Forms N-1A, N-2 and N-3).

Comments to the proposed amendments must be submitted by Apr. 25, 2011.

OUR TAKE:  Similar to other efforts by the SEC to amend its rules in order to comply with the Dodd-Frank Act, these proposed rules address the perceived complacency of both regulators and investors in accepting the ratings provided by credit rating organizations as a substitute for more thorough evaluations.  By providing boards with a subjective measure of the creditworthiness of a security as opposed to an objective one that relies on the determination of a credit rating organization, boards should better understand the securities in which their fund invests and the risks that such securities present.

The SEC has recently proposed rules to require advisors of hedge funds and other private funds to report information for use in monitoring risk to the U.S. financial system as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act

Under the proposed reporting requirements (PDF), private fund advisors would be required to file a new reporting form - Form PF - periodically with the SEC.  The amount of information reported and the frequency of reporting would depend on whether the reporting party constitutes a "large private fund adviser" or a "smaller private fund adviser."  

The proposed rules define a "large private fund adviser" as an adviser with $1 billion or more in hedge fund, liquidity fund (i.e., an unregistered money market fund) or private equity fund assets under management and a "smaller private fund adviser" as including all other private fund advisers.

As should be expected, large private fund advisers would be subject to heightened information reporting obligations.  Information to be reported by large private fund advisors would include, among other things, (1) exposures by asset class, geographical concentration and turnover, (2) the types of asets in each of their liquidity fund's portfolios and (3) certain information relevant to the risk profile of the funds, including the extent of leverage and/or bridge financing by the funds.  Smaller private fund advisors would report only basic information regarding the private funds they advise.

Large private fund advisers would be required to file their Form PF quarterly.  Smaller private fund advisers would be required to file their Form PF annually.

OUR TAKE:  If private fund advisers read the Dodd-Frank Act, they knew that new information reporting requirements were on the way.  In its proposed rules, the SEC appears to acknowledge that the benefits of additional reporting requirements should always be examined against the burdens that reporting imposes on the regulated community.  Specifically, by breaking private fund advisers into two groups for reporting purposes, the SEC places the majority of the burden on the limited number of large private fund advisers (the SEC estimates only around 200), which the SEC projects account for more than 80% of assets under management.  This seems to be a reasonable approach for the SEC to take to implement this component of the Dodd-Frank Act.

As contemplated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC proposed a new rule this week that may affect some advisers to family investment portfolios.  A provision in the Dodd-Frank Act, set to take effect on July 21, 2011, exempts a “family office” from registration under the Investment Advisers Act of 1940.  The SEC’s proposed rule would define “family office” to include only those offices that provide financial services to a single family.  Importantly, any office providing investment advice to more than one family would not be exempted under the proposed rule.  The SEC has requested comments on the rule by November 18, 2010.

For additional information on the SEC’s proposed rule, see our Public Securities Alert titled “SEC Proposal Affecting Family Investment Portfolios.”

OUR TAKE:  If you currently manage an investment portfolio for one or more wealthy families, you should consult the SEC's proposed rule to determine whether your activities would fall within the new exemption from the Investment Advisers Act.