In August 2011, we commented on proposals by the major national securities exchanges to impose additional listing requirements on companies completing a reverse merger with a shell company. The SEC announced earlier this month that it approved each of the rule changes, as amended, on an accelerated basis. It just became significantly harder for the shares of a reverse-merger shell company to become listed.
On October 12, 2011, the Securities and Exchange Commission joined the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation in proposing for comment the so-called “Volcker Rule” to implement Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. That section of the Dodd-Frank Act in effect requires regulated banking institutions to cease proprietary trading and certain investment activities. The proposed rule and its corresponding explanations and questions for comment are too extensive, complex, and detailed to be adequately described in a blog post or entry. But because the rule will likely be a topic of considerable comment and debate, it seems worthwhile to provide a very brief description of it.
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.
The SEC recently (Aug. 8, 2011) proposed (PDF) an amendment to Rule 146 under Section 18 of the Securities Act of 1933 to designate certain securities on BATS Exchange, Inc. as “covered securities” for purposes of Section 18. As a general matter, “covered securities” are exempt from state law registration or qualification requirements pursuant to the National Securities Markets Improvement Act of 1996 (“NSMIA”). The proposed amendment raises the question: what securities are “covered securities” today?
Soon it may just be a little harder to go public through a reverse merger transaction. The SEC published proposed rule changes from both the New York Stock Exchange (PDF) and NYSE Amex (PDF) on Aug. 4, 2011 that, if approved, may make you reconsider the reverse-merger route and probably makes the shell-company industry wince.
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.
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 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 (Feb. 9, 2011) proposed rule amendments (PDF) that would eliminate the requirement of credit ratings in determining the eligibility of an issuer to use a short-form registration statement or the expedited shelf registration process. The SEC announced the rule amendments as the first in a series of proposed rulemaking to remove references to credit ratings as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Issuers that are eligible for short-form registration have more limited disclosure requirements and are also able to register securities “on the shelf.” Currently, one of the ways to satisfy the transaction requirements for eligibility is to have registered nonconvertible securities that have been rated investment grade by at least one nationally recognized statistical rating organization.
Under the proposed rule changes, the credit rating requirement would be replaced by a test tied to the amount of non-convertible debt and other securities the issuer has sold in the previous three years. The test would be met if the issuer has issued over $1 billion of non-convertible securities, other than common equity, in the last three years. The test is modeled after the standard used to determine if an issuer is a WKSI, or well-known seasoned issuer. The proposed amendments would result in changes to both Form S-3 and Form F-3, as well as other registration statements that refer to Form S-3/F-3 eligibility, such as Form S-4.
Comments to the proposed amendments must be submitted by Mar. 28, 2011. The SEC is seeking comments that provide alternative approaches to the proposed $1 billion test.
OUR TAKE: Driven by the Dodd-Frank Act, this is the SEC’s first step to eliminate reliance in its rules on credit ratings. Substantially similar rules were proposed in 2008, but were met with strong objections. The Dodd-Frank Act requirements reflect the negative view of credit rating organizations as a contributing factor in the U.S. economic downturn and direct the SEC to substitute creditworthiness standards that the SEC determines are appropriate.
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.
The SEC proposed rule amendments on Jan. 25, 2011 to conform the definition of “accredited investor” to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Before the Dodd-Frank Act, the definition of an “accredited investor” under Rule 501 of Regulation D included a natural person with a net worth of at least $1 million, either individually or jointly with such person’s spouse, and included in the calculation of that net worth was the value of such person’s primary residence. Section 413(a) of the Dodd-Frank Act directed the SEC to amend the definition of “accredited investor” to exclude the value of an investor’s primary residence from the $1 million net worth calculation. The SEC’s proposal reflects this new requirement and provides clarification on the amount by which an investor’s net worth should be reduced when deducting the value of the primary residence from the net worth calculation.
The SEC's press release is available here. The SEC will seek public comment on its proposed rules through Mar. 11, 2011.
OUR TAKE: To confirm that individual investors qualify as "accredited investors," issuers conducting private offerings must now ensure that an investor's net worth is sufficient without his or her primary residence being included in the net worth calculation.
Gardere’s Securities and Corporate Governance Team has experience and familiarity with federal and state securities laws, enabling us to be strategic advisors to both seasoned and newly public companies.
Jess' principal areas of practice are corporate finance and securities, mergers, acquisitions and divestitures, and corporate governance. Mr. Frey represents clients in connection with a wide range of corporate finance transactions, including initial public offerings, follow-on public equity and debt offerings, secondary offerings and private placements. He has negotiated and structured asset and stock acquisitions and has represented clients in connection with commercial loans. Mr. Frey has also advised clients on compliance with the securities laws, as well as general corporate matters.
