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Volume 9, no. 18 |
May 5, 2014 |
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In March, the Securities and Exchange Commission (“SEC”) issued guidance regarding the testimonial rule under the Investment Advisers Act of 1940, as amended (“Advisers Act”) and investment advisers’ use of social media. The SEC noted that it had received questions regarding investment advisers’ use of social media and publication of advertisements that included commentary about the adviser that appeared on social media sites.
Rule 206(4)-1(a)(1) of the Advisers Act prohibits an investment adviser from publishing, circulating or distributing any ads that refer (directly or indirectly) to any testimonial regarding the investment adviser or advice provided by such investment adviser. The SEC has previously advised that, subject to certain exceptions, an article by an unbiased third party regarding an investment adviser’s performance is not a testimonial. The SEC provided clarification regarding when an adviser can publicize information appearing on a third party/independent social media site. First, the investment adviser may not have any ability to affect the public commentary included on the social media site, the commenters’ ability to provide comment cannot be restricted and the social media site must allow all public commentary to be viewed on a real-time basis. Second, publicizing such information would not be in violation of the Advisers Act if:
- the independent social media site provides content that is independent of the investment adviser;
- there is no material connection between the independent social media site and the investment adviser that would call into question the independence of the independent social media site or commentary; and
- the investment adviser publishes all of the unedited comments appearing on the independent social media site regarding the investment adviser.
The SEC’s guidance also addresses a number of comments regarding specific types of information about the investment adviser that may appear on third party social media sites. The full SEC guidance may be found here. |
| Sarah Hesse |
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In September 2012, the Securities and Exchange Commission (“SEC”) published the final rule implementing the requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act that issuers with conflict minerals that are necessary to the functionality or production of a product manufactured by them disclose annually whether any of those minerals originated in the Democratic Republic of the Congo (“DRC”) or an adjoining country.
Almost immediately, a consortium of businesses led by the National Association of Manufacturers challenged the rules and on April 14, 2014, the U.S. Court of Appeals for the D.C. Circuit ruled on that challenge. The court held that newly added Section 13(p)(1) (the “Conflict Minerals Rule”) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) violated “the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have ‘not been found to be ‘DRC conflict free.’” The court rejected all other challenges based on the Administrative Procedures Act or the Securities Exchange Act and remanded the case to the district court.
The court also withheld the issuance of its mandate until seven days after the disposition of any timely petition seeking rehearing or petition for rehearing en banc. As a result, the earliest date on which the court’s mandate is likely to be issued is June 5, 2014, which is after the June 2, 2014 due date for the first reports under the SEC’s Conflict Minerals Rule.
Two weeks after the Court issued its opinion two SEC Commissioners, Daniel Gallagher and Michael Piwowar, issued a statement urging the agency to stay all further actions on the rule until all litigation was completed. The next day, however, Keith Higgins, Director of the Division of Corporation Finance, advised issuers that the Division expects firms to file their first Form SD and post their conflict minerals reports by June 2.
Under the Division’s statement:
- Companies that do not need to file a conflict minerals report should disclose their reasonable country of origin inquiry and briefly describe the inquiry they undertook.
- Companies that are required to file a conflict minerals report should include a description of the due diligence that the company undertook. If the company has products that fall within the scope of Items 1.01(c)(2) or 1.01(c)(2)(i) of Form SD, it would not have to identify the products as “DRC conflict undeterminable” or “not found to be ‘DRC conflict free,’” but should disclose, for those products, the facilities used to produce the conflict minerals, the country of origin of the minerals and the efforts to determine the mine or location of origin.
- No company is required to describe its products as “DRC conflict free,” having “not been found to be ‘DRC conflict free,’” or “DRC conflict undeterminable.” However, if a company voluntarily elects to describe any of its products as “DRC conflict free” it would be permitted to do so, provided it had obtained an independent private sector audit.
Additionally, on May 2, 2014, the SEC issued a partial stay of the Conflicts Mineral Rule regarding those portions that were found by the court to be in violation of the First Amendment. A copy of the SEC’s press release regarding the partial stay (and a link to the SEC order) can be found here. |
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| On May 1st, the Federal Deposit Insurance Corporation (“FDIC”), Federal Reserve Board, and Office of the Comptroller of the Currency (“OCC”) published new final and proposed rules aimed at strengthening the leverage ratio standards for the largest, most interconnected U.S. banking organizations. The final rule applies to U.S. top-tier bank holding companies and requires them to maintain at least a 6 percent supplementary leverage ratio to be considered “well capitalized.” The final rule, which is effective January 1, 2018, currently applies to eight large U.S. banking organizations. The banking agencies also issued a notice of proposed rulemaking (“NPR”) that would modify the denominator calculation for the supplementary leverage ratio in a manner consistent with recent changes agreed to by the Basel Committee on Banking Supervision. The revisions in the NPR would apply to all internationally active banking organizations, including those subject to the enhanced supplementary leverage ratio final rule. The agencies believe the denominator changes in the NPR would more appropriately measure leverage capital requirements and would, in aggregate, increase the requirements across these institutions. Finally, the banking agencies issued a proposed technical correction to the definition of “eligible guarantee” in the agencies’ risk-based capital rules. Comments on either of the proposals should be submitted on or before June 13, 2014. See also OCC Bulletin on Final Rule; OCC Bulletin on Proposed Change to Supplementary Leverage Ratio; OCC Bulletin on Eligible Guarantee. |
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| On April 29th, the OCC reminded national banks and federal savings associations of guidance to assist financial institutions and customers affected by extreme weather, such as the recent tornadoes in the south central and central United States. OCC Press Release. |
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| On April 28th, the OCC published a proposal that would raise assessments on national banks and federal savings associations with total assets over $40 billion. Under the proposal, the marginal assessment rate for national banks and federal savings associations with more than $40 billion in assets would increase by 14.5 percent beginning September 30, 2014. Comments should be submitted on or before June 12, 2014. OCC Press Release. |
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| On April 25th, the OCC advised that the Federal Financial Institutions Examination Council has issued an alert to notify financial institutions of a material security vulnerability in OpenSSL, a widely used encryption tool. The alert outlined the risks associated with this vulnerability (also known as Heartbleed) and the risk mitigation steps that financial institutions are expected to take to address those risks. OCC Bulletin. |
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| The OCC will host a workshop in Nashville, Tennessee on June 2-4, 2014 for directors of national community banks and federal savings associations. “Mastering the Basics: A Director’s Challenge” is a three-day workshop designed exclusively for directors of institutions supervised by the OCC and provides practical information on the roles and responsibilities of a community bank director. OCC Press Release. |
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| On April 20th, the Consumer Financial Protection Bureau (“CFPB”) proposed minor adjustments to its mortgage rules to ensure access to credit. The proposal includes two changes that would help certain nonprofit organizations continue to provide mortgage credit and servicing to underserved populations. The proposal also lays out limited circumstances where lenders that exceed the points and fees cap can refund the excess amount to consumers and still have the loan be considered a Qualified Mortgage. CFPB Press Release. |
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| On April 29th, the Financial Crimes Enforcement Network (“FinCEN”) issued rulings concerning: |
- Whether a company that provides an armored car coin and currency exchange service is a money transmitter and whether the armored car service exemption would apply to the service, FIN-2014-R008;
- The application of money services business regulations to the rental of computer systems for mining virtual currency, FIN-2014-R007;
- Whether a company that provides online real-time deposit, settlement, and payment services for banks, businesses and consumers is a money transmitter rather than a provider of prepaid access, FIN-2014-R006;
- Whether a company that offers secured transaction services to a buyer and seller in a given sale of goods or services is a money transmitter, FIN-2014-R005; and
- The application of money services business regulations to a company that offers escrow services to a buyer and seller in a given internet sale of goods or services, FIN-2014-R004.
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| On April 29th, the Division of Corporation Finance issued guidance concerning its expectations with respect to the SEC’s conflict minerals disclosure requirements. As previously required, firms are expected to file their first Form SDs by June 2, 2014. However, in light of the April 14, 2014 opinion by the U.S. Court of Appeals for the D.C. Circuit, issuers will not need to issue statements assessing the “conflict-free” status (or lack thereof) of their materials. Guidance. |
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| On May 1st, CFO Journal reported SEC Deputy Chief Accountant Daniel Murdock is puzzled, and a little concerned, by the decline in questions his office is receiving from issuers. Questions. |
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| On April 30th, Reuters reported the SEC is investigating the adequacy of the fee disclosures made by private equity investment advisors. Private Disclosures. |
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| On April 29th, SEC Chair Mary Jo White testified before the House Financial Services Committee. After summarizing the agency’s recent accomplishments, White discussed its future focus including her expectation for more settlements in which respondents are required to admit responsibility. She also noted that the Enforcement Division will be expanding and strengthening its efforts to identify securities law violations relating to the preparation of financial statements, issuer reporting and disclosure, and audit failures. White Testimony. |
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| On April 29th, SEC Commissioner Daniel Gallagher issued a statement concerning the Division of Corporation Finance’s April 24, 2014 “Revised Statement on Well-Known Seasoned Issuer Waivers,” which presents a framework for assessing the merits of well-known seasoned issuer (“WKSI”) waiver applications. Gallagher contends that disqualification is justified (and waivers should be denied), when the issuer’s financial reporting cannot be trusted. “It is only then that investors would benefit more from forcing the issuer to jump through additional hoops of Commission review than they would be harmed from the issuer’s loss of WKSI status. Refusing to grant a waiver is not a step that we should take lightly.” |
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| On April 29th, Think Advisor summarized its interview with Andrew Ceresney, who leads the SEC’s Enforcement Division. Ceresney Summary. The previous day, Think Advisor recounted its interview with SEC Chair Mary Jo White. White Summary. |
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| On May 2nd, the Commodity Futures Trading Commission (“CFTC”) made public four exemptive letters granting commodity pool operators relief from rules requiring independently audited financial statements. CFTC Letter No. 14-63; CFTC Letter No. 14-64; CFTC Letter No. 14-65; CFTC Letter No. 14-66. |
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| On May 1st, the Divisions of Market Oversight and Clearing and Risk announced that beginning May 16, 2014, market participants executing swaps subject to the trade execution requirement that are part of a so-called “package transaction” must be traded on a swap execution facility (“SEF”) or designated contract market (“DCM”), pursuant to a phased compliance timeline. The announcement, made in a no-action letter, provides a phased compliance timeline for package transactions which include at least one swap that has been made available to trade and is therefore subject to the trade execution requirement. CFTC Press Release. |
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| On April 25th, The Division of Market Oversight and Division of Swap Dealer and Intermediary Oversight provided relief to commodity trading advisors that are members of designated contract markets or swap execution facilities from the oral recording requirement of Commission Regulation 1.35(a), in connection with the execution of swaps. The relief expires on December 31, 2014. CFTC Letter No. 14-60. |
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| On April 29th, Bloomberg reported the CFTC has been meeting with other national and international regulators to discuss the oversight of cross border derivatives transactions. Crossing Borders. |
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| July 1, 2014 |
Restrictions on Sales of Assets of a Covered Financial Company by the Federal Deposit Insurance Corporation. 79 FR 20762. |
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| May 7, 2014 |
Removal of References to Credit Ratings in Certain Regulations Governing the Federal Home Loan Banks. 78 FR 67004. |
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| May 30, 2014 |
Capital Planning and Stress Testing. 79 FR 24311. |
| June 30, 2014 |
Credit Union Service Organizations. 78 FR 72537. |
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| June 1, 2014 |
Broker-Dealer Reports. 78 FR 51909. |
| July 7, 2014 |
Removal of Certain References to Credit Ratings Under the Securities Exchange Act of 1934. 79 FR 1521. |
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| On April 24th, the SEC provided notice of EDGX Exchange’s filing of a proposed rule that would permit members to designate that their Retail Orders be identified as Retail on the EDGX Book Feed. Comments should be submitted on or before May 21, 2014. SEC Release No. 34-72016. |
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| On May 1st, the SEC approved the Financial Industry Regulatory Authority’s (“FINRA”) proposed addition of Supplementary Material .02 to FINRA Rule 5210 (Publication of Transactions and Quotations) to emphasize that wash sale transactions are generally non-bona fide transactions and that members have an obligation to have policies and procedures in place to review their trading activity for, and prevent, wash sale transactions. SEC Release No. 34-72067. |
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| On April 30th, FINRA requested comment on a revised proposal to require a hyperlink to BrokerCheck in firms’ online retail communications with the public. The revised proposal would require a firm to include a readily apparent reference and hyperlink to BrokerCheck on each website of the firm that is available to retail investors. In addition, it would require a firm to include a readily apparent reference and hyperlink to BrokerCheck in online retail communications with the public that include a professional profile of, or contact information for, an associated person. Comments should be submitted on or before June 16, 2014. FINRA Regulatory Notice 14-19. |
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| On April 30th, FINRA announced it has revised the Investment Company and Variable Contracts Products Principal (Series 26) examination program. The changes will appear in Series 26 examinations administered on or after June 16, 2014. FINRA Regulatory Notice 14-18. |
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| On April 28th, the SEC approved FINRA’s proposed amendment of FINRA Rules 5110 (Corporate Financing Rule – Underwriting Terms and Arrangements) and 5121 (Public Offerings of Securities with Conflicts of Interest) to simplify and refine the scope of the rules. SEC Release No. 34-72033. |
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| On April 25th, the SEC approved the New York Stock Exchange’s proposed rule changes to provide for a bond trading license for member organizations that desire to trade only debt securities on the Exchange and to establish a new class of market participants called bond liquidity providers. SEC Release No. 34-72026. |
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| On May 1st, the Wall Street Journal reported several members of Congress have expressed frustration over the SEC’s implementation of the Jump Start Our Business Startups Act, with several representatives planning to introduce bills aimed at correcting the perceived failings. JOBS Act 2.0. |
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| On April 30th, the European Court of Justice dismissed the U.K.’s attempt to block the European Union from imposing a financial transaction tax. The Court held that the U.K.’s suit is premature since the only action authorized was the establishment of discussions for a future tax; not the imposition of an actual tax. Court of Justice Press Release. |
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| On April 29th, the House passed H.R. 4167, the “Restoring Proven Financing for American Employers Act.” The bill would exempt collateralized loan obligations (“CLOs”) from the Dodd-Frank Act’s “Volcker rule” allowing banks to hold CLOs issued before January 31, 2014. A companion bill is pending before the Senate Banking Committee. See S. 1907. |
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| On April 29th, Reuters reported state securities regulators are urging investors to carefully consider the risks associated with virtual currencies before investing in them. Virtual Warning. |
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| On April 28th, Reuters reported the U.S. Supreme Court will review the steps homeowners must follow in order to comply with the Truth in Lending Act’s notice requirements for rescinding a home loan. Notice Compliance. |
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| Winston & Strawn is hosting the Commercial Finance Association’s Syndicated Asset-Based Lending – Best Practices Workshop on May 15th. Event. |
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Winston & Strawn continued to expand its practice in Asia this week as four corporate attorneys joined the firm’s Hong Kong office. The group’s practice will focus on cross-border and international mergers and acquisitions, general commercial, and corporate matters. For additional information, please see the complete press release. |
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| The fifth installment of The Real Deal, “Trends and Developments in M&A (Part II): Private Company Targets,” will be held on May 20, 2014, from 12:00 - 1:30 p.m. (Central). The Real Deal is a webinar series addressing current trends, challenges, and legal topics pertinent to M&A and securities professionals. Webinar. |
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| The SEC’s Office of Compliance Inspections and Examinations recently issued a National Exam Program Risk Alert entitled OCIE Cybersecurity Initiative. Briefing. |
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| Subscribe to Winston & Strawn’s Lending Law Digest, where attorneys blog on topics such as corporate lending, commercial lending, leveraged finance, sponsor finance, ABL, DIP loans, special assets, and much more. |
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