The Senate Committee on Banking, Housing and Urban Affairs held a hearing today on the nomination of Mary Jo White to chair the Securities and Exchange Commission. The Senators showed high support for White’s nomination and, contrary to expectation, asked few tough questions about her ties to Wall Street banks arising from her work at the law firm Debevoise & Plimpton LLP and other potential conflicts of interest.
Securities Regulation
U.S. Supreme Court Issues Two Significant Decisions Involving Securities Law Matters
On February 27, 2013, the U.S. Supreme Court issued opinions in two significant securities law cases, Gabelli v. Securities and Exchange Commission, 568 U.S. ___ (2013) and Amgen Inc., v. Connecticut Retirement Plans and Trust Funds, 568 U.S. ___ (2013). In the Gabelli decision the Court addressed the ability of the government to bring civil enforcement actions seeking civil penalties where the alleged fraudulent conduct occurred outside the five-year statute of limitations period. In the Amgen decision the Court addressed the class certification pleading requirements in security holder class action suits.
SEC Petitioned for Rulemaking to Accelerate 13F Filing Deadline
Last week, the NYSE Euronext, the Society of Corporate Secretaries and Governance Professionals, and the National Investor Relations Institute submitted a joint petition (available here) to the SEC, requesting that the Commission amend the beneficial ownership reporting rules under Section 13(f) of the Securities and Exchange Act of 1934, as amended. Fund managers subject to the 13(f) reporting requirements currently have until 45 days after the last day of each calendar quarter to file their Form 13F; the petition suggests that the time period be shortened to two business days.
Court Holds that Nonconvertible Securities with Different Voting Rights Not Matchable under Section 16(b)
Last week, in Gibbons v. Malone, the Second Circuit affirmed the lower court’s dismissal of a shareholder suit brought under Section 16(b) of the Securities and Exchange Act of 1934 against a former director of Discovery Communications, Inc. Also known as the short swing profit rule, Section 16(b) provides for the disgorgement of any profits earned from the purchase and sale, or sale and purchase, by a corporate insider, of any equity security within a six-month period. In Gibbons, the corporate insider sold Series C common stock, which had no voting rights, and purchased Series A common stock which had voting rights, within a six-month period. The three-judge panel held that absent SEC guidance, the purchase and sale of different types of stock in the same company, where those securities are separately traded, nonconvertible, and come with different voting rights cannot be matched, and therefore do not trigger the short swing profit rule.
SEC Approves PCAOB Auditing Standard No. 16 – Communications with Audit Committees
Yesterday, the SEC issued an order approving new Auditing Standard No. 16, Communications with Audit Committees (“AS 16”). AS 16 was previously approved by the Public Company Accounting Oversight Board (“PCAOB”) at an open meeting held on August 15, 2012. As we noted in our August client alert reporting on this new standard (available here), AS 16 retains most of the preexisting communication requirements, but also adds a number of new topics that the auditor must discuss with the audit committee and requires that the auditor seek specific responses from the audit committee when discussing certain topics. In response to comments, the SEC also clarified that the new standard will apply to audits of foreign private issuers. Significantly, the SEC concurred with the PCAOB that AS 16 will apply to emerging growth companies (“ECGs”) and will be effective for fiscal periods beginning on and after December 15, 2012.
Corp Fin Allows Company To Cease Reporting Stating Company’s Stock Is Not a Security
The SEC’s Division of Corporation Finance recently granted no-action relief that allows an SEC reporting company, Minn-Dak Farmers Cooperative, to cease reporting on the basis that the company’s common and preferred stock are not “securities” under the federal securities laws.
Departure of SEC Chairman Schapiro Creates Uncertainty Regarding Rules to Remove the General Solicitation Ban in Certain Private Offerings
On November 26, 2012, SEC Chairman Mary Schapiro announced that she will leave the Commission on Friday, December 14. Commissioner Elisse Walter will take over as Chairman.
On August 29, 2012, the SEC proposed rules to implement Section 201(a) of the JOBS Act, which requires the SEC to eliminate the prohibition against general solicitation and general advertising (together, “general solicitation”) in securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act of 1933 (the “Securities Act”) and Rule 144A under the Securities Act. The Commission voted 4-1 to propose the rules, with Democratic Commissioner Aguilar as the lone dissent, but Commissioner Walter, also a Democrat, expressed reservations about the proposal in her opening statement at the Commission’s meeting. Republican Commissioners Gallagher and Paredes strongly supported the proposed rules.
New Process for Submitting Draft Registration Statements and Amendments
Draft Registration Statements to Be Submitted and Filed on EDGAR
On September 26, 2012, the SEC’s Division of Corporation Finance announced that, beginning on Monday, October 1, 2012, Emerging Growth Companies and foreign private issuers may voluntarily submit their draft registration statements and amendments for confidential, non-public staff review using either the current secure email system or through a new EDGAR-based submission process.
SEC Raises ’33 Act Registration Fees
The SEC recently announced that Securities Act registration fees that companies are required to pay in connection with registered securities offerings will increase significantly. Effective October 1st, the current fee of $114.60 per million dollars of securities offered will increase to $136.40 per million dollars, representing an increase of more than 19 percent.
SEC Proposes Amendments Required by JOBS Act to Permit General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings
ON August 29, the Securities and Exchange Commission (the “SEC” or the “Commission”) proposed rules to implement Section 201 of the Jumpstart Our Business Startups (JOBS) Act, which requires the SEC to eliminate the prohibition against general solicitation and general advertising (together, “general solicitation”) in securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act of 1933 (the “Securities Act”) and Rule 144A under the Securities Act. The comment period for the proposed rules will expire 30 days after the proposed rules are published in the Federal Register; that is, likely around the end of September. Notably, the JOBS Act directed the Commission to issue final rules within 90 days of enactment of the JOBS Act, or by July 4, 2012, and Chairman Schapiro and Commissioners Paredes and Gallagher all expressed a desire to move expeditiously to a final rule. As a result, commenters should submit their comments on the proposal promptly in order to ensure that the Staff and Commission have ample time to consider them before issuing a final rule.Highlights of the ProposalThe following summary of the key terms of the proposal is based upon attendance at the open meeting of the Commission, information provided in a Fact Sheet on the SEC’s website (available here) and a preliminary review of the proposing release (available at here).• Rule 506 would be amended by adding a new paragraph (c), which would allow general solicitation where the issuer takes reasonable steps to verify, and reasonably believes, that each purchaser in the offering is an accredited investor. There are no changes to the definition of “accredited investor.” Thus, the issuer must take reasonable steps to verify that the purchaser satisfies one of the categories of persons defined as an “accredited investor” under Rule 501(a)(1)-(8) at the time of the sale of the securities to that person. • This means that the issuer would not lose the benefit of Rule 506(c) so long as it has taken reasonable steps to verify, and reasonably believes, that the purchaser is an accredited investor, even if a purchaser circumvents the issuer’s verification measures.• The proposed rules would not specify the methods by which an issuer must satisfy its obligation to “take reasonable steps to verify” that a purchaser is an accredited investor. Instead, in light of the wide range of types of investors that may invest in an offering conducted pursuant to Rule 506(c), the steps that an issuer takes would be required to be reasonable under the facts and circumstances. • The revised rules would include a non-exclusive list of factors that an issuer would consider when taking reasonable steps to verify that a purchaser is an accredited investor, including (i) the nature of the purchaser and the category of accredited investor that the purchaser claims to satisfy, (ii) the amount and type of information that is available to the issuer about the purchaser, and (iii) the nature of the offering, including the manner in which investors were solicited, and the terms of the investment, such as the minimum investment amount.• The existing exemption for offerings conducted pursuant to Rule 506 without engaging in general solicitation would remain unchanged.• Form D would be amended to include a checkbox indicating that an offering was conducted using general solicitation. Issuers are currently required to file Form D with the SEC upon selling securities pursuant to Regulation D, although the failure to file a Form D does not result in the loss of the exemption provided by Regulation D. Contrary to the request of some commenters, the proposed rules would not require that the issuer file the content of any solicitation or advertising with the Form D, and would not condition the availability of any exemption under Regulation D on filing the Form D. The checkbox provision is intended to allow the Commission to monitor the use of general solicitation and to assess the impact of the changes on the market, including the effectiveness of various verification practices used by issuers.• Rule 144A would be amended to permit “offers” to persons who are not QIBs, and thus to permit general solicitation in offerings conducted pursuant to Rule 144A. Subparagraph (d)(1) would continue to condition the exemption on the securities being sold only to QIBs or to purchasers that the seller and any person acting on its behalf reasonably believe is a QIB. The proposed amendments would not add any additional standards for whether a seller reasonably believes a purchaser to be a QIB or otherwise (note however that, unlike Rule 506, Rule 144A currently provides non-exclusive methods by which a seller may establish that an investor is a QIB).• The proposal clarified the Commission’s view that the use of general solicitation in connection with a Rule 506 or Rule 144A offering would not be a barrier to a concurrent offering by the issuer in an offshore transaction in reliance on Regulation S.We expect to issue a Client Alert on these proposed rules within a few days, following a more detailed review of the proposing release.