The Securities and Exchange Commission recently approved the NASDAQ listing rules (.PDF) to comply with the SEC's Rule 10C-1 under the Securities Exchange Act of 1934, as amended. Rule 10C-1 (.PDF) was adopted, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, to require securities exchanges to adopt rules regarding the independence of compensation committees and advisers to compensation committees. The approved NASDAQ listing rules are not materially different than the proposed listing rules described in the Fromthesoxup entry on October 29, 2012, though those proposed rules were somewhat revised in December 2012 and early-January 2013. Unlike as proposed, however, the approved or final listing rules are not immediately effective.
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.
A public company preparing, or beginning to prepare, the proxy statement for its 2013 annual shareholders’ meeting should be aware (or be reminded) of a new disclosure requirement adopted by the Securities and Exchange Commission last June. As part of its rulemaking under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC adopted a new Item of Regulation S-K, Item 407(e)(3)(iv) (.PDF), that requires disclosure regarding a compensation consultant whose work has raised any conflict of interest.
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.
This week, the SEC released a new Compliance and Disclosure Interpretation (“C&DI”) for Exchange Act Rule 14a-21. This rule sets forth one of the say-on-pay requirements mandated by the Dodd-Frank Act. It requires issuers to periodically afford shareholders the right to a nonbinding (i.e., advisory) vote on the compensation of the issuer’s named executive officers.
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.
We reported in May 2011 about the future of capital formation—through testimony by the SEC Chairman before a Congressional committee and the Committee Chairman’s comments. At the time Chairman Schapiro had asked the SEC staff to take a “fresh look” at the offering rules. The next chapter appears to have now begun with the Chairman’s formation of an Advisory Committee on Small and Emerging Companies on Sept. 13, 2011.
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.
We posted on Jul. 29, 2011 that the U.S. Court of Appeals for the District of Columbia had vacated the SEC’s proxy access rule. SEC Chairman Mary L. Schapiro confirmed on Sep. 6, 2011 that the SEC would not seek a rehearing or an appeal to the U.S. Supreme Court.
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.
In an October 2010 Gardere Public Securities Alert, we reported that the SEC had delayed the effectiveness of its new proxy access rule pending resolution of a lawsuit filed by the U.S. Chamber of Commerce and the Business Roundtable. The U.S. Court of Appeals for the District of Columbia vacated the SEC’s rule on July 22, 2010.
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.
In a February post, we talked about the SEC’s proposed rules to implement the “Securities Whistleblower Incentives and Protection” provisions (PDF) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the Dodd-Frank mandate, the proposed rules establish procedures for whistleblower award claims. While the SEC has not yet adopted final rules, the Dodd-Frank requirement again was the subject of Congressional debate last week.
As reported by The Deal Pipeline on May 11, 2011, business leaders testified before the House Subcommittee on Capital Markets and Government Sponsored Enterprises that the “new whistleblower rewards program threatens to wreak havoc on corporate accountability systems, slowing fixes and burdening” the SEC. Consistent with that message, Representative Michael G. Grimm (R-N.Y.) has drafted a proposed amendment to make internal reporting a requirement for an award—before or at the same time as reporting to the SEC. It also would exclude from awards employees who have a fiduciary duty or contractual obligation to investigate or respond to internal reports, as well as someone guilty of wrong-doing themselves.
In his testimony before the subcommittee, Ken Daly, President and CEO of the National Association of Corporate Directors, supported the changes proposed by Representative Grimm. Mr. Daly added that the proposed “independent knowledge” requirement should exclude attorney communications, even when the attorney-client privilege has been waived, and companies should have appropriate recourse against employees who make false allegations. NACD previously submitted its formal comment letter with respect to the proposed rules on Dec. 17, 2010. Noting that the Sarbanes-Oxley Act of 2002 already mandates a whistleblower system for public companies, Mr. Daly encouraged Congress to study the issue further and ask the SEC to delay the proposed rulemaking.
Robert J. Kueppers, Deputy CEO of Deloitte LLP, and Marcia Narine on behalf of the U.S. Chamber of Commerce also testified about the potential harm of the Dodd-Frank requirement.
OUR TAKE: The SEC is required to implement the Dodd-Frank whistleblower provision, even though it must recognize the fine line between the resulting harm and benefit. While the SEC discarded the idea of requiring internal reporting in its proposed rules—to preserve anonymity and investigative flexibility—it did recognize that it might undercut the existing, well-established whistleblower programs that have appropriate protections. The SEC also understands, however, that not all companies have met their obligation to create solid programs. Both the business concerns and the enforcement objectives are real, and in any additional review Congress must attempt a balancing act.
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. 17, 2011) proposed a rule on beneficial ownership reporting requirements and security based swaps (PDF). According to its summary, the rule is intended to preserve the application of the SEC’s existing beneficial ownership rules to persons who purchase or sell security-based swaps after the effective date of new Section 13(o) of the Securities Exchange Act of 1934.
The SEC proposes to readopt without change the relevant portions of Rules 13d-3 and 16a-1, as such proposals, “are intended to clarify that following the July 16, 2011 statutory effective date of Section 13(o), which was added by Section 766 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), persons who purchase or sell security-based swaps will remain within the scope of these rules to the same extent as they are now.”
Comments should be received on or before April 15, 2011.
OUR TAKE: The proposed rule is necessary to preserve the existing scope of the SEC’s rules relating to beneficial ownership after Section 766 of the Dodd-Frank Act becomes effective. Substantive changes will likely follow however, as the SEC continues efforts to modernize reporting under Exchange Act Sections 13(d) and 13(g).
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 recently proposed rules to implement the “Securities Whistleblower Incentives and Protection” provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed rules explain the scope of the whistleblower program to the public and to potential whistleblowers and provide a complete and self-contained set of rules, including an outline of the procedures for applying for awards and the SEC's procedures for making decisions on claims.
Under the whistleblower program, the SEC is required to pay awards to whistleblowers who voluntarily provide the SEC with original information about a violation of securities laws or the Foreign Corrupt Practices Act ("FCPA") that leads to a successful SEC enforcement action brought with monetary sanctions exceeding $1,000,000. The SEC will pay awards in totaling between 10% and 30% of the monetary sanctions that are collected in the action.
Companies are concerned that the potential for paying cash incentives to whistleblowers may reduce the effectiveness of a company’s existing compliance, legal, audit and similar internal processes for investigating and responding to potential violations of the federal securities laws and the FCPA. In response to this concern, the proposed rules include several exclusions, including an exclusion that applies any time that information is obtained from or through a company's internal procedures for identifying, reporting and addressing potential non-compliance with applicable law. It should be noted, however, that this exclusion is not applicable if the company does not disclose the information to the SEC within a reasonable time or if the company proceeds in bad faith.
OUR TAKE: Public companies should be aware of the whistleblower incentives and protections afforded by the “Securities Whistleblower Incentives and Protection” provisions of the Dodd-Frank Act, the heightened risk of investigations into their business practices and the impact on existing internal procedures. In particular, public companies may see that it is more important than ever to take appropriate action with respect to any non-compliance with federal securities laws discovered through the company's compliance, legal, audit and similar internal processes.
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.
All U.S. public companies, except for smaller reporting companies, are now required to conduct three say-on-pay shareholder votes beginning in 2011 based upon rules adopted by the SEC on Jan. 25, 2011 (PDF). Most of the requirements will not apply to smaller reporting companies until 2013.
The SEC's new rules implement the Dodd-Frank Wall Street Reform and Consumer Protection Act. That legislation requires three kinds of say-on-pay shareholder advisory votes. Two of those are votes at an annual meeting: one regarding approval of compensation to the company's named executive officers, and one regarding how often that approval vote should occur. The third is a vote regarding a company's golden parachute payments in connection with a change-in-control transaction; that vote would typically be at the time of the transaction.
The most significant departure from the proposed rules published by the SEC in Oct. 2010 is a delay in requiring smaller reporting companies to conduct the two annual-meeting advisory votes. Those companies, with a public float of less than $75 million, will not have to conduct those votes until after Jan. 21, 2013. Like all other public companies, however, smaller reporting companies will have to conduct the golden-parachute vote after Apr. 25, 2011.
OUR TAKE: Public companies, other than smaller reporting companies, should plan on spending the additional time and effort on their proxy statements this year to comply with the annual-meeting say-on-pay requirements. One of the key determinations that a company will need to make is whether to propose an advisory vote take place every year, or only every two or three years. Smaller reporting companies will have a somewhat easier task in preparing this and next year's proxy statements and will have the benefit of other companies' experiences before they must comply.
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.