Dear <<First Name>>,
Please find below the October 2018 issue of the US Securities Law Digest. This update is intended to provide a compilation of recent legal news relevant to a capital markets practice in the London and international markets. The news pieces have been collected and summarized from various sources, and links to the original sources are provided.
We have been working to revitalise the Forum this year. In addition to resuming this popular bi-monthly US Securities digest, we have launched our podcast, and will be holding meetings and roundtables, and publishing an updated version of our glossary.
Please visit the our re-launched website here, where you will find all past Forum content, including past digests, podcasts, and our Capital Markets Glossary (2015). The updated glossary will be published later this year.
Please feel free to forward this email on to any colleagues or contacts who may be interested. We continue to welcome any feedback that you may have about the Digest.
Thanks to Chloe Man, Martha Petrocheilos, and Trish O'Donnell of Reed Smith for their help in compiling this digest.
Best regards,
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Daniel Winterfeldt
DWinterfeldt@reedsmith.com
Partner, International Capital Markets & US Securities
Reed Smith LLP
Founder and Co-Chair of the Forum
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Edward Bibko
Ebibko@jefferies.com
Managing Director and Head of Investment Banking Legal, EMEA
Jefferies
Co-Chair of the Forum
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US SECURITIES LAW DIGEST:
OCTOBER 2018
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SEC RULES AND GUIDANCE UPDATES
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SEC amendments to update and simplify disclosure requirements become effective November 5 2018
On October 4, 2018, the Securities and Exchange Commission (the “SEC” or “Commission”) published the final rule adopting amendments to certain disclosure requirements that have become duplicative, overlapping, or outdated in light of other Commission disclosure requirements, U.S. Generally Accepted Accounting Principles (“GAAP”), or changes in the information environment. The final rule becomes effective on November 5, 2018.
On August 17, 2018, the Commission issued a release adopting the amendments, which will eliminate certain:
- Redundant and duplicative disclosure requirements, which require substantially similar disclosures as GAAP, International Financial Reporting Standards (“IFRS”), or other Commission disclosure requirements.
- Overlapping disclosure requirements, which are related to, but not the same as GAAP, IFRS, or other Commission disclosure requirements.
- Outdated disclosure requirements, which have become obsolete because of the passage of time or changes in the regulatory, business, or technological environment.
- Superseded disclosure requirements, which are inconsistent with recent legislation, more recently updated Commission disclosure requirements, or more recently updated GAAP requirements.
The Commission indicated that the amendments are intended to simplify compliance and facilitate the disclosure of information to investors without significantly altering the total mix of information available to investors.
See Akerman’s update here.
See Shearman & Sterling’s article here.
See McCarter & English’s article here.
See Cahill Gordon & Reindel’s document here.
See Cahill White & Case’s alert here.
See Greenberg Traurig’s alert here.
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Nasdaq 20% rule on private issuance revised to relax the Market Value Test
The SEC has recently approved an amendment to Nasdaq Rule 5635(d), which became effective on September 26, 2018, that modifies the circumstances in which listed companies must receive shareholder approval before they can issue 20% or more of their outstanding common stock or voting power in a private offering.
Commonly referred to as the “20% rule,” Nasdaq Rule 5653(d) (Rule) is designed to ensure that, in private offerings of 20% or more of an issuer’s equity securities at a price that is below market value, the issuer’s shareholders receive adequate notice and disclosure of the proposed offering so that they might have an opportunity to vote on the offering or exit their investment.
See Morrison and Foerster’s alert here.
See Weil Gotshal & Manges’ update here.
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Comments on proposed changes to SEC whistleblower rules highlights challenges
The numerous submissions made in response to the requests for comment by the SEC highlight that many of the proposed amendments to the whistleblower rules, if adopted, will present additional challenges for regulated entities. The amendments would create greater incentives for individuals to report certain violations of the securities laws to the SEC and to report on such violations more quickly than they do now. The rules would also enable the staff to address meritorious tips and commence enforcement actions more quickly than they do now.
See Dechert’s article here.
See Deacon’s insight here.
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SEC withdraws support for proxy advisor firms
Last month, the SEC released a Public Statement Regarding Staff Proxy Advisory Letters, concerning its upcoming Roundtable on the Proxy Process and announcing that the staff of the Division of Investment Management had determined to withdraw the letters that the staff issued in 2004 to Egan-Jones Proxy Services (May 27, 2004) and Institutional Shareholder Services, Inc., (Sept. 15, 2004).
The statement concluded:
‟Taking into account developments since 2004, the staff has determined to withdraw these letters, effective today. The staff is providing this notice of withdrawal of the letters in order to facilitate the discussion at the Roundtable and looks forward to receiving information and feedback from stakeholders with multiple perspectives at the Roundtable, including on the staff guidance in Staff Legal Bulletin No. 20 (June 30, 2014). The staff expects to utilize what it learns in any future recommendations to the Commission with respect to proxy advisory firms.”
See Winston & Strawn’s blog here.
See Baker McKenzie’s blog here.
See Hunton Andrews Kurth’s alert here.
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SEC amends definition of ‘smaller reporting company’
On June 28, the SEC announced that it had voted to amend the definition of “smaller reporting company” (“SRC”) to expand the number of companies that qualify for certain existing scaled disclosure accommodations (e.g., fewer years of financial statements and heavily abbreviated executive compensation disclosure). The expanded definition enables companies with a public float of less than $250 million to qualify as SRCs, as compared to the $75 million threshold under the prior definition. Companies with less than $100 million in annual revenues will also qualify as SRCs if they have either no public float or a public float of less than $700 million, a substantial loosening of the revenue test under the prior definition, which required companies to have less than $50 million in revenues and no public float. The SEC estimates that 966 additional companies will be eligible for SRC status in the first year under the new definition, which took effect on September 10, 2018.
See Fredikson & Byron PA’s article here.
See Bryan Cave Leighton Paisner’s article here.
See Kelley Drye’s article here.
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SEC notes that staff views are just that – staff views and not the SEC’s
Jay Clayton, chairman of the SEC, issued a statement noting staff statements solely reflect their personal opinions, and are non-binding and create no enforceable rights or obligations on the Commission. Only rules and regulations formally adopted by the Commission have the force of law, he said.
See Bridging The Week’s commentary here.
See Buckley Sandler’s Blog here.
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SEC brings enforcement actions against broker-dealer for deficient cybersecurity procedures
On September 26, 2018, the SEC announced a $1 million settlement with an Iowa-based broker-dealer over allegations that it maintained deficient cybersecurity policies and procedures, which resulted in a 2016 cyber intrusion, in violation of Regulation S-P and Regulation S-ID.
The current chairman of the SEC has identified cybersecurity as a significant concern and stated that the “Commission is focused on identifying and managing cybersecurity risks and ensuring that market participants—including issuers, intermediaries, investors and government authorities—are actively and effectively engaged in this effort and are appropriately informing investors and other market participants of these risks.”
See Shearman & Sterling’s blog here.
See Winston & Strawn’s article here.
See Bressler, Amery & Ross’ article here.
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Crypto enforcement - SEC announces first action for Investment Company Act violation
On September 11, 2018, the SEC issued a cease-and-desist order and a $200,000 penalty to Crypto Asset Management LP (“CAM”) and its founder, Timothy Enneking. The SEC’s cease-and-desist order is available here. CAM and Enneking settled the matter on a without admitting or denying basis. The SEC’s action is an important reminder for pooled investment funds to be mindful of applicable federal securities laws when organizing and structuring their operations.
See O’Meleveny’s alert here.
See Sidley Austin’s article here.
See Evershed Sutherland’s alert here.
See K&L Gates’ insight here.
See Shearman & Sterling’s article here.
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SEC announces settled enforcement action over failure to preserve documents
In July 17, 2018, the SEC announced a settlement with a New York-based broker-dealer over allegations that the broker-dealer failed to preserve records requested by the SEC and inaccurately reported certain expenses. The SEC’s order instituting proceedings alleged that the broker-dealer failed to preserve records requested by the SEC staff by deleting certain audio files, and failed to maintain accurate books and records regarding certain expenses, in willful violation of Section 17(a)(1) of the Securities Exchange Act, and Rules 17a-3 and 17a-4 thereunder. The broker-dealer agreed to pay a $1.25 million civil penalty to settle the SEC’s claims without admitting or denying wrongdoing. See In the Matter of BGC Financial, L.P., Admin Proc. No. 3-18598 (July 17, 2018).
See Shearman & Sterling’s article here.
See Morrison & Foerster’s article here.
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SEC enforcement director remarks on FCPA compliance
On October 3, 2018, Steven Peiken, Co-Director of the SEC’s Division of Enforcement, offered remarks at a white collar crime conference in New York City, discussing a range of issues related to the US Foreign Corrupt Practices Act (“FCPA”) compliance and enforcement. For example, likely responding to increasing criticism about the relatively few enforcement cases that have been brought by the SEC in recent years, Peiken addressed questions regarding the Enforcement Division’s effectiveness and efficiency metrics, noting that the Division is moving away from quantitative measurements of success to more qualitative metrics, such as whether retail investors are adequately protected and whether the agency is “keeping pace with technological change.”
See Buckley Sandler’s blog here.
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SEC settles FCPA accounting violations with Stryker
On September 28, the SEC announced a settlement with a Michigan-based medical device company, Stryker Corp., to resolve the SEC’s charges of books and records and internal controls violations. According to the order, the company agreed to pay a $7.8 million penalty and accepted the imposition of an independent compliance consultant to resolve allegations that Stryker’s Indian subsidiary failed to maintain accurate books and records, and that Stryker’s internal controls were inadequate to identify possible improper payments related to the sale of its products in India, China, and Kuwait.
This is the second enforcement action the SEC has brought against Stryker in recent years. In a prior action in October 2013, Stryker paid over $13.2 million in penalties, disgorgement, and interest to settle charges of FCPA violations for bribing doctors, health care professionals, and other government-employed officials in Argentina, Greece, Mexico, Poland, and Romania.
See Buckley Sandler’s blog here.
See Barnes & Thornburg’s insight here.
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Petrobras settles FCPA violations for $853 million to US and Brazil
On September 27, 2018, the DOJ announced that Petrobras, the Brazilian state-owned oil company, had entered into a Non-Prosecution Agreement with the DOJ, as well as settlement agreements with the SEC and Brazilian authorities, and agreed to pay a total $853.2 million in penalties to all jurisdictions. Under the terms of the settlement, DOJ and SEC will each receive 10 percent of the penalty amount, with Brazilian authorities receiving the remaining 80 percent.
As part of the settlement, Petrobras admitted that its Executive Board members “were involved in facilitating and directing millions of dollars in corrupt payments to politicians and political parties in Brazil,” while directors were “involved in facilitating bribes that a major Petrobras contractor was paying to Brazilian politicians.” The conduct included bribes related to several refineries, as well as shipyard and drillship contracts, as well as payments to “stop a parliamentary inquiry into Petrobras contracts.”
See Katten Munchin Rosenman’s article here.
See Buckley Sandler’s blog here.
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Amended FINRA registration rules now in effect
Amended Financial Industry Regulatory Authority registration, qualification and continuing education rules became effective on October 1. The amended rules, which the SEC approved on October 13, 2017, will consolidate and replace the National Association of Securities Dealers, Incorporated New York Stock Exchange and existing Financial Industry Regulatory Authority (“FINRA”) registration rules.
See Buckley Sandler’s blog here.
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FINRA regulatory notice encourages member firms to voluntarily provide information on their digital asset activities
FINRA recently issued a regulatory notice encouraging member firms to provide notification if either the firms or their associated persons or affiliates were engaging in, or planned to engage in, any activities related to digital assets such as cryptocurrencies and other virtual coins.
Citing the rapid market growth, the increasing interest from retail investors, and investor protection concerns, FINRA stated it has a keen interest in remaining abreast of the extent of member involvement in digital assets.
FINRA is requesting that each firm provide notification for activities in digital assets that include activities under Rule 3270 (Outside Business Activities of Registered Persons) or Rule 3280 (Private Securities Transactions of Associated Persons), and in digital assets that are non-securities. Additionally, FINRA is seeking information on members trading activities in derivative products tied to digital assets, such as bitcoin futures products offered by the CME and CBOE Futures Exchange.
See Drinker Biddle & Reath’s blog here.
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FINRA reminds members of obligations when relying on third-party recordkeeping services
FINRA issued guidance paralleling recent guidance issued by staff of the SEC that third-party recordkeeping services must grant access to a registrant’s required books and records, even if the registrant does not pay required fees. Any inapposite provision in a contract is prohibited. A recordkeeper that violates this could be subject to secondary liability for causing a registrant to violate its recordkeeping obligations.
See Katten Muchin Rosenman’s commentary here.
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FINRA encourages firms to report involvement in activities related to digital assets
In a regulatory notice published July 6, 2018, FINRA encourages its members to promptly notify them if they, or their associated persons or affiliates, engage in activities related to digital assets such as cryptocurrencies and other virtual coins and tokens. The notice also encourages firms to inform FINRA of changes in the event the firm, or its associated persons or affiliates, intends to begin or in fact begins engaging in activities relating to digital assets not previously disclosed, on a continuing basis through July 31, 2019.
See Steptoe & Johnson’s blog here.
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JUDGEMENT OF HIGHER COURTS
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Fifth circuit affirms dismissal of securities class action for failure to adequately allege material misstatements and loss causation
On October 3, 2018, the United States Court of Appeals for the Fifth Circuit affirmed the dismissal of a putative securities class action against Whole Foods Market, Inc. and certain of its executives under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Emps.’ Ret. Sys. of the State of Haw. v. Whole Foods Mkt., Inc., —F.3d—, 2018 WL 4770729 (5th Cir. Oct. 3, 2018). In connection with various regulatory investigations, Whole Foods admitted to mislabeling prepackaged foods such that it charged consumers for more food than the packages actually contained. Plaintiffs alleged that, by virtue of those “weights and measures” violations, the company had made three categories of misstatements to investors: (1) statements touting the company’s price competitiveness or efforts to increase its price competitiveness; (2) statements about the company’s commitment to transparency, quality, and corporate responsibility; and (3) statements announcing the company’s revenues, which plaintiffs alleged were artificially inflated as a result of the mislabeled packaging. The Court held that the first two categories of allegations did not constitute material representations, and the third did not cause plaintiffs’ alleged loss.
See Shearman & Sterling’s commentary here.
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Northern Circuit of California dismissed securities class action for failure to adequately allege material misstatements and loss causation
On September 25, 2018, Judge Haywood S. Gilliam, Jr. of the United States District Court for the Northern District of California dismissed a putative securities class action against Netflix, Inc. (the “Company”), its CEO and CFO. Ziolkowski v. Netflix, Inc., et al., No. 17-cv-01070 (N.D. Cal Sept. 25, 2018). Plaintiffs—purchasers of the Company’s common stock during the proposed class period—claimed that the Company violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making materially false and misleading statements and omissions in order to minimize the effects of a recently enacted pricing increase on subscription figures. In dismissing the complaint without prejudice, the Court held that plaintiffs failed to adequately allege any untrue statement of material fact and also failed to adequately allege scienter.
See Shearman & Sterling’s commentary here.
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Southern District of Florida dismisses certain securities fraud claims for failure to adequately allege scienter and sustains others
On October 4, 2018, Magistrate Judge Bruce Reinhart of the United States District Court for the Southern District of Florida granted in part and denied in part a motion to dismiss claims asserted under Rule 10b-5 of the Securities Exchange Act of 1934 by certain investment funds against Ocwen Financial Corporation. Owl Creek I, L.P. v. Ocwen Financial Corp., No. 18-80506-CIV (Oct. 4, 2018). Plaintiffs alleged that Ocwen and certain of its executives induced plaintiffs to invest by making inaccurate statements regarding Ocwen’s financial statements, its purported regulatory compliance, and the effectiveness of its internal controls and procedures. The Court dismissed claims based on statements in one conference call due to lack of scienter, but otherwise denied defendants’ motion.
See Shearman & Sterling’s commentary here.
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Northern District of Illinois dismisses securities class action for failure to adequately allege misstatements and scienter
On September 30, 2018, Judge Andrea R. Wood of the United States District Court for the Northern District of Illinois dismissed a putative shareholder class action against VASCO Data Security International, Inc. and certain of its officers. Plaintiff asserted claims under Sections 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Rossbach v. VASCO Data Sec., Int’l, 2018 WL 4699796, (N.D. Ill. Sept. 30, 2018). Plaintiff alleged that VASCO made a number of misstatements suggesting that revenue sources other than the company’s largest client were stronger than they really were. When the company disclosed that the revenue associated with those other products and services remained essentially flat, the stock price allegedly fell. The Court held that plaintiff’s amended complaint failed to adequately allege a false statement or scienter. Plaintiff was, however, granted leave to file a second amended complaint.
See Shearman & Sterling’s commentary here.
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New York Federal Court’s view on cryptocurrency as securities
On September 11, 2018, the U.S. District Court for the Eastern District of New York denied a motion to dismiss an indictment of a Brooklyn real estate entrepreneur in relation to two virtual currency investment schemes and initial coin offerings (“ICOs”). The indictment, which charged securities fraud against Maksim Zaslavskiy, was based, in part, on the theory that the cryptocurrencies at issue were securities. In his motion to dismiss, Zaslavskiy argued that this premise was faulty and the ICOs offered by the two companies he owned, REcoin Group Foundation, LLC (“REcoin”) and DRC World, Inc. (“DRC”), were not, in fact, securities. The court, then, was called upon to consider whether the securities laws apply to cryptocurrencies. The court also considered Zaslavskiy’s argument that the securities laws are void for vagueness as applied to cryptocurrencies and token sales.
See Sheppard Mullin Ritcher & Hampton’s blog here.
See Proskauer Rose’s insight here.
See Skadden’s blog here.
See Jones Day’s commentary here.
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California enacts female gender quotas for public companies headquartered in the State
California Becomes First State to Attempt to Require Female Representation on the Boards of Directors of Publicly Traded Companies Headquartered in the State (Even if Incorporated in Another State). On September 30, 2018, Governor Brown of California signed into law a bill, SB-826, to require female representation on the boards of directors of publicly traded companies who identify as being headquartered in the state. SB-826 makes California the first state to attempt to enact female gender quotas for boards of directors. SB-826 will become effective on January 1, 2019 and will require companies subject to the legislation to comply with the first phase of requirements (requiring boards of directors to have at least one female member) no later than December 31, 2019.
See Sullivan & Cromwell’s memo here.
See Weil Gotshal & Manges’ update here.
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Inaugural meeting of US-UK Financial Regulatory Working Group: joint statement
The inaugural meeting of the US-UK Financial Regulatory Working Group was held on 12 September 2018 in London. The working group was formed to deepen bilateral regulatory cooperation with the view to promote financial stability, investor protection, fair, orderly and efficient markets and capital formation in both jurisdictions. Regulatory cooperation is important given the UK’s withdrawal from the European Union. The working group issued a joint statement following the meeting, focusing on:
- financial regulatory reforms and future priorities to further develop the financial services activity between the UK and US markets;
- consequences of Brexit on financial stability and cross-border financial regulation; and
- US-UK financial regulatory issues resulting from Brexit.
The working group will meet again in January 2019.
See Macfarlanes’ insight here.
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