SEC releases guidance in respect of proxy advisory firms

On June 30, the U.S. Securities and Exchange Commission released a staff legal bulletin intended to provide guidance for investment advisers that retain proxy advisory firms to assist with proxy voting duties.

According to the guidance, the SEC expects that investment advisers retaining a proxy advisory firm will adopt policies and procedures designed to provide sufficient ongoing oversight of the proxy advisory firm in order to ensure that proxies continue to be voted in the best interests of clients. Investment advisers should also establish and implement measures to identify and address a proxy advisory firm's conflicts that can arise on an ongoing basis.

As we discussed earlier this year, the Canadian Securities Administrators published a national policy in April setting out proposed recommendations for proxy advisory firms in relation to their activities and the services provided to their clients. The comment period on the proposal has been extended to July 23.

CRA publishes FATCA guidance for Canadian entities

Roanne C. Bratz and Judith Charbonneau Kaplan -

The Canada Revenue Agency (CRA) on June 23, 2014 posted much anticipated guidance for Canadian entities that could find themselves subject to the Foreign Account Tax Compliance Act (FATCA), which took effect on July 1, 2014.

Entitled Guidance on enhanced financial accounts information reporting - Part XVIII of the Income Tax Act, the document, which consists of 158 pages divided into 12 chapters, was prepared with the stated purpose of helping financial institutions, their advisers, and CRA officials with the due diligence and reporting obligations relating to the Canada-United States Enhanced Tax Information Exchange Agreement, which was signed on February 5, 2014 (the “Guidance”).

According to the Guidance, “[a] Canadian financial institution that is in compliance with Part XVIII will not be subject to any U.S. withholding tax on U.S. source income and gross proceeds (both on its own investments and those held on behalf of its customers) under section 1471 of the U.S. Internal Revenue Code (IRC). However, the Agreement requires that procedures be followed by Canadian financial institutions seeking to secure that outcome.”

Of particular interest, it is noted that an entity must meet two conditions before it is considered to be a  “Canadian financial institution.” The entity must be a Canadian financial institution as defined under the IGA and it must be a “listed financial institution” for the purposes of Part XVIII of the Income Tax ActSubsection 263(1) of the Act defines a “listed financial institution” for that purpose and limits its meaning to 13 categories of entities. The Guidance explains that certain investment vehicles which, for example, may not be promoted to the public if they do not seek external capital (to illustrate, a personal trust used as a means for an individual or a family to hold investable assets), are not intended to be included in the term “listed financial institution” and will be viewed as passive Non-Financial Foreign Entities (or NFFE) under Canadian law.

The CRA has indicated that it is open to further comments and that the Guidance will be updated to take into account any developments, as appropriate.

IRS publishes instructions for FATCA Form W-8BEN-E

Roanne C. Bratz and Judith Charbonneau Kaplan -

The long awaited instructions for Form W-8BEN-E, Certification of Foreign Status of Beneficial Owner for United States Tax Withholding (Entities), were finally posted on the IRS website on June 24, 2014.

Form W-8BEN-E will now be the most common form to be used by foreign entities to certify their status under both (i) Chapter 3 of the U.S. Internal Revenue Code (the Code) relating to the withholding of U.S. tax on U.S. source income of foreign entities, and (ii) Chapter 4 of the Code relating to the withholding of US tax to enforce reporting on certain foreign accounts pursuant to the Foreign Account Tax Compliance Act (FATCA). 

The revised Form W-8BEN, on the other hand, is now only to be used by individuals to certify their foreign status under Chapter 3 of the Code and to make a claim of treaty benefits for reduced withholding. 

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FATCA implementation receives Royal Assent

Roanne C. Bratz and Judith Charbonneau Kaplan -

FATCA became part of our  domestic tax law on June 19th, when Bill C-31, An Act to implement certain provisions of the budget tabled in Parliament on February 11, 2014 and other measures, received Royal Assent.

For more information on FATCA's implementation in Canada, see our previous posts on the subject.

SEC Chair outlines work undertaken to address market instability and high frequency trading

Chair White
Photo Courtesy:
www.sec.gov
In a speech yesterday given at a New York conference, U.S. SEC Chair Mary Jo White set out a number of initiatives being undertaken by the SEC to address five broad areas of concern, namely market instability, high frequency trading, fragmentation, broker conflicts and the quality of markets for smaller companies.

To that end, she stated that she has directed SEC staff to prepare a number of rules and recommendations to address the issues outlined above. This includes, among other things: (i) developing an anti-disruptive trading rule; (ii) clarifying the status of unregistered active proprietary traders; (iii) eliminating an exception from FINRA membership requirements for dealers that trade in off-exchange venues; (iv) improving firms' risk management of trading algorithms; (v) expanding the information about ATS operations submitted to the SEC and making the information available to the public; (vi) enhancing order routing disclosure; and (vii) eliminating potential sources of conflicts between brokers and customers.

Canadian regulators enter into MOU with CFTC

The OSC, AMF, ASC and BCSC announced this week that they have recently entered into a Memorandum of Understanding with the U.S. CFTC in regards to cooperation related to the supervision and oversight of entities that operate on a cross-border basis. The MOU is intended to enhance the consultation, cooperation and exchange of information between the parties.

New York Attorney General combats alleged unfair advantages for high-frequency traders

Simon Romano and Laura Levine -

In an effort to eliminate alleged unfair advantages provided by trading venues to high-frequency traders, New York Attorney General, Eric Schneiderman, has called for tougher regulations and market reforms in a speech made on March 18, 2014 at a symposium hosted by New York Law School.  The Attorney General’s speech is only part of a wider initiative launched last year examining advantages provided to high-frequency traders.

The Attorney General cites a number of services offered to high-frequency traders, including allowing traders to locate their computer servers within trading venues, providing extra network bandwidth to high-frequency traders, and attaching ultrafast connection cables and special high-speed switches to their servers, as providing high-frequency traders with the ability to make rapid trades in advance of the rest of the market, and claims that this is damaging the market as a whole. While often only a timing advantage of milliseconds, due to these services, high-frequency traders are able to obtain data feeds with pricing, volume, trade and order information in advance of other market actors.

High-frequency trading involves a significant proportion of overall trading on most markets.

For further details, see the March 18, 2014 press release available on the Attorney General’s website.

SEC reaches settlement with Lions Gate relating to disclosure violations

Simon Romano and Colin Burn

On March 13, 2014, the U.S. Securities and Exchange Commission announced that it had reached a settlement agreement with Lions Gate Entertainment Corp. that will see Lions Gate admit wrongdoing in connection with the issuance of misleading disclosure in 2010, as well as pay a $7.5 million fine. The disclosure at issue was made in connection with Lions Gate’s defense against activist investor Carl Icahn’s 2010 hostile efforts to gain control of the company via a series of takeover bids and a proxy contest.

Background

According to the SEC’s order instituting settled administrative proceedings, Lions Gate admitted to omitting material information in its public disclosure relating to an extraordinary set of transactions that resulted in Lions Gate issuing approximately 16 million Lions Gate shares to a management-friendly director. Lions Gate admitted that the transactions were designed and carried out by management to dilute entities controlled by Carl Icahn (Icahn Group), who had previously launched a campaign to gain control of Lions Gate via a series of tender offers and was expected to launch a proxy contest. The transactions diluted the Icahn Group’s interest in outstanding Lions Gate shares from 37.9% to 33.5% and increased the management-friendly director’s interest from 19.9% to 28.9%. Additionally, at the Lions Gate shareholders meeting, shareholders elected management’s slate of directors and rejected the Icahn Group’s slate. The margin of defeat for one of the five Icahn Group nominees was approximately 16 million Lions Gate shares.

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FATCA regulations create deemed compliant FI category

Roanne C. BratzJudith Charbonneau Kaplan and Anne Ramsay -

The Internal Revenue Service and the U.S. Treasury Department recently released amendments to the final FATCA regulations, in part so as to provide better coordination with the intergovernmental agreements (IGAs). Under these amendments, which are expected to be effective as of March 6, 2014, financial institutions (FIs) which are FIs under FATCA solely by virtue of being “investment entities” but which do not maintain financial accounts are referred to as "certified deemed compliant FIs."

This new deemed compliance category essentially targets investment advisors and managers who do not maintain financial accounts for their clients.

Consequently, for the purposes of the FATCA legislation and under the Canada-US IGA, such "certified deemed compliant FIs" should not be required to register with the IRS for FATCA purposes.

While certified deemed compliant FIs are not required to register with the IRS, certain identification requirements would still apply to ensure no withholding is made on US-source payments that they will receive. We expect further clarification will be made by the IRS regarding such identification requirements.

Canada and the U.S. sign FATCA agreement

Roanne C. BratzJudith Charbonneau Kaplan and Anne Ramsay -

On February 5, 2014, the Department of Finance announced that Canada and the United States have reached an agreement to address the application of the U.S. Foreign Account Tax Compliance Act (FATCA) in Canada. As described in a previous newsletter, FATCA targets American offshore tax evasion by requiring foreign financial institutions to disclose and report information in respect of their U.S. account holders. FATCA creates significant compliance issues for Canadian financial institutions.

Under the Canada-U.S. agreement, financial institutions will be required to provide relevant information on accounts held by U.S. residents and citizens to the CRA rather than to the IRS. This information will then be exchanged on an automatic, reciprocal, annual basis with the United States. Financial institutions are still subject to FATCA registration requirements and must register with the IRS through an online portal to obtain a Global Intermediary Identification Number. Canadian financial institutions compliant with the agreement will not be subject to the 30% FATCA withholding tax. Relief from compliance obligations is provided in respect of a number of registered accounts, including RRSPs, RRIFs and TFSAs. 

The Department of Finance also released draft implementation legislation, including amendments to the Income Tax Act.

Delaware provides guidance on single-bidder process

Stéphane Rousseau and Benoît C. Dubord -

In Koehler v. NetSpend Holdings Inc., decided last year, the Delaware Chancery Court discussed the duties of directors in a change-of-control transaction executed with a single-bidder process.

NetSpend conducted an initial public offering in 2010 for a price of $11 per share. In the following year, the share price fell to less than $4. After two rounds of share repurchases in 2011 and 2012, the board of directors explored several possibilities for enhancing shareholder value, including additional stock repurchases, a self-tender offer or a possible sale of the company. At that time, the board concluded that it was in the shareholders’ best interest to maintain the company as an independent, publicly owned entity.

In the fall of 2012, NetSpend’s two dominant shareholders informed the board of their intention to sell all or a significant portion of their shares. The board assisted the shareholders in their selling efforts. While noting that the entire company was not for sale, the board authorized the disclosure of financial projections to two private equity firms. For this purpose, the company executed confidentiality agreements with standstill provisions containing “Don’t Ask Don’t Waive” (DADW) clauses. In a nutshell, the clauses prevented the private equity firms from asking NetSpend to amend or waive any provision of the standstill provisions. Further, the standstill agreements did not terminate upon the announcement of another transaction.

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U.S. Volcker Rule passed by regulators

Simon Romano and Laura Levine -

Yesterday, the U.S. SEC, CFTC, FDIC, Federal Reserve, and Office of the Comptroller of the Currency approved the final rules implementing the provision of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act commonly referred to as the Volcker Rule. The Volcker Rule is ultimately designed to restrict the finance industry in the wake of the 2008-09 financial crisis and generally limit risk-taking by banks with federally insured deposits.

Named after former Federal Reserve chairman Paul Volcker, the long awaited final rules generally prohibit banking entities (defined to include insured depository institutions, companies controlling insured depository institutions, companies treated as bank holding companies for the purpose of the U.S. International Banking Act of 1978, and their respective affiliates and subsidiaries) from (i) engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments for their own account; and (ii) owning, sponsoring or having certain relationships with hedge funds or private equity funds, referred to as “covered funds”.

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SEC proposes crowdfunding rules

The U.S. Securities and Exchange Commission yesterday released proposed rules that would allow companies to raise capital through crowdfunded offerings.

The proposed rules, which are part of the rulemaking required by the adoption of the JOBS Act, would allow companies to raise a maximum aggregate amount of $1 million annually through crowdfunding. Investors with an annual income and net worth of less than $100,000 would be able to annually invest up to $2,000 or 5% of their annual income or net worth (whichever was greater). Investors with either annual income or net worth of at least $100,000 would be able to annually invest 10% of the greater of their annual income and net worth, up to $100,000.

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Delaware case provides guidance to directors of overseas corporations

Stéphane Rousseau and Benoît C. Dubord -

The recent In re Puda Coal, Inc. Stockholders Litigation decision serves as a cautionary note to directors of corporations with significant activities overseas. Specifically, the decision provides guidance to directors as to what is expected from them in order to fulfill their duties.

Puda Coal concerned a Delaware corporation listed on the New York Stock Exchange following a reverse triangular merger. The operating subsidiary and assets of the parent corporation, Puda Coal, were based in China. According to the plaintiffs, the corporation’s Chairman and Chief executive officer illegally sold the shares of the subsidiary to a third party, effectively looting the corporation of its assets.

The independent directors of Puda Coal, however, took 18 months to realize that the assets had been looted, during which time they authorized the disclosure of documents referring to the corporation’s ownership of the assets. The shareholders plaintiffs sued the directors for breach of their duty of loyalty, more specifically breach of their duty to monitor the corporation’s affairs and officers.

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A look ahead to the 2014 proxy season

Stéphane Rousseau and Benoît C. Dubord -

Key Shareholder Proposals

The 2014 Proxy Season is quickly approaching. In 2013, U.S. trends have emerged with respect to the proposals filed by shareholders with S&P 500 and Russell 2000 corporations. Four main themes of interest stand out.

First, shareholder proposals have again been filed to implement proxy access. The proposals seek to allow a shareholder or a group of shareholders under certain conditions to have their own director candidates included in the proxy form. Such proxy access would be conditional on the shareholders holding a certain threshold of the corporation’s shares (e.g. 3%) for a certain period of time (e.g. 3 years).

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Delaware case provides guidance to directors in the context of a debt proxy put

Stéphane Rousseau and Benoît C. Dubord -

In Kallick v. Sandridge Energy, the Delaware Chancery Court addressed the duties of directors in the context of a proxy put contained in a notes indenture. A group of dissident shareholders of Sandridge had advised the board of directors of their willingness to launch a consent solicitation whereby shareholders would be asked to consent to de-stagger the board, and to support their slate of candidates to the board. The board argued that the proposed candidates were not as qualified as the incumbent directors to manage the company. The board also notified shareholders that following the proxy put, the election of the dissidents’ candidates would be a change of control triggering the obligation for the company to buyback the notes at 101% of par value. According to the board, the notes buyback would put financial stress on the company.  The proxy put provided that the buyback obligation was not triggered if the board approved the list of nominees. However, the board refused to take position.

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SEC eliminates private placement solicitation and advertising prohibitions

The U.S. Securities and Exchange Commission (SEC) announced last week that it is eliminating the prohibition against general solicitation and advertising in respect of issuers taking advantage of the registration exemptions associated with offering securities to accredited investors and qualified institutional buyers. The amendments, first proposed in August 2012, are being implemented under the rulemaking required under the JOBS Act. The amendments will become effective 60 days after publication in the Federal Register.

U.S. court vacates SEC Resource Extraction Issuer Disclosure Rules

Ivan T. Grbešić -

While it was recently announced that new Canadian transparency rules are expected for mining and oil and gas companies, on July 2, 2013, the U.S. District Court for the District of Columbia (the Court) vacated the resource extraction issuer disclosure rules (Rule 13q-1 under the Securities Exchange Act of 1934) adopted last year by the Securities and Exchange Commission (SEC) pursuant to Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The disclosure rules adopted by the SEC in August 2012 required “resource extraction issuers” to file and publicly disclose annual reports with information relating to taxes, royalties, fees (including license fees), production entitlements, bonuses, and other material benefits paid by such issuer, a subsidiary of the issuer or another entity under the issuer’s control to certain governments in connection with the commercial development of oil, natural gas, or minerals, beginning with fiscal years ending after September 30, 2013.

The disclosure rules were challenged by way of a motion for summary judgment by the American Petroleum Institute, among other associations of oil, natural gas, and mining companies whose members were subject to the rules. The Court found that the SEC “misread the statute to mandate public disclosure” of the reports of each resource extraction issuer. The Court also determined that the SEC’s “decision to deny any exemption” under the disclosure rules “was, given the limited explanation provided, arbitrary and capricious”.

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SEC comments on corporate disclosures on social media

Kaleb Honsberger -

Earlier this week, the U.S. Securities and Exchange Commission released a report of its investigation regarding whether Netflix and its CEO, Reed Hastings, violated certain securities regulations prohibiting the selective disclosure of corporate information when Hastings posted a comment on his personal Facebook page regarding the achievement of a corporate milestone.

In doing so, the SEC considered the disclosure of corporate information on social media generally, ultimately finding that its 2008 guidance, which discusses the distribution of information on corporate websites, also applies to corporate disclosures made through social media channels such as Facebook and Twitter. Specifically, the SEC stated that where it is reasonably foreseeable that the recipients (securities professionals and/or shareholders) of such information will trade on the basis of such information, it must be disseminated in a manner reasonably designed to provide broad non-exclusionary distribution to the public. To achieve this, issuers must take sufficient steps to alert investors, the market and the media as to the channels that will be used for the dissemination of material, nonpublic information. As an example, the 2008 guidance encourages periodic reports or press releases to include web site addresses or other information regarding steps investors or the public can take to be in a position to receive important disclosure.

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SEC considers uniform fiduciary standard for dealers and investment advisers

On March 1, the U.S. Securities and Exchange Commission released a request for comments as it considers potentially harmonizing the standards of conduct of broker-dealers and investment advisers. While investment advisers are currently fiduciaries to their clients, broker-dealers are not uniformly subject to fiduciary standards. The notice suggests that retail customers do not appreciate the difference in duties, and expresses concern that the applicable regulatory obligations depend on the statute under which a financial intermediary is registered rather than the services provided.

As such, the SEC is requesting data and other information to assist it in determining whether to adopt a uniform fiduciary duty. Specifically, the SEC is interested in receiving empirical and quantitative data from respondents, including surveys of retail customers, information describing the extent to which different rules apply to similar activities of broker-dealers and investment advisers, and data analyzing retail customer returns generated under the two existing regulatory regimes. Comments are being accepted for 120 days after publication of the notice in the Federal Register.

As we discussed in October, the CSA has also recently released a consultation paper considering the feasibility of imposing a fiduciary duty on advisers and dealers. Comments on the CSA's paper closed on February 22.

SEC proposes eliminating solicitation and advertising prohibitions in private placements

On August 29, the U.S. Securities and Exchange Commission (SEC) proposed amendments to current rules that would provide an exemption to the prohibitions on general solicitation and general advertising in cases of offerings on a registration exempt basis under Regulation D and Rule 144A.

Under current rules, companies looking to sell securities to raise capital must either register the offering or rely on an exemption. Most registration exemptions, however, prohibit companies from engaging in general solicitation or general advertising in connection with the offering.

The proposal, part of the rulemaking required under the JOBS Act enacted earlier this year, would amend Rule 506 of Regulation D, which governs private placements, to permit companies to use general solicitation and general advertising to offer securities provided that the purchasers are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors. Meanwhile, Rule 144A, which provides an exemption for resales of certain restricted securities to qualified institutional buyers, would be amended to provide that securities sold pursuant to the rule may be offered to persons other than QIBs, provided that the securities are sold only to persons that the seller and any person acting on the seller's behalf reasonably believe are QIBs.

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SEC prohibits listings of issuers not in compliance with compensation requirements

On June 20, the U.S. Securities and Exchange Commission announced the adoption of new rules and amendments to its proxy disclosure rules that would generally prohibit national securities exchanges from listing the equity securities of an issuer that is not in compliance with compensation committee independence requirements. Publication of the rule and amendments follow an initial proposal published in March 2011, and the final version addresses comments received by the SEC.

As we discussed in our earlier blog post, foreign private issuers that disclose in their annual report the reasons for not having an independent compensation committeee would be exempt from the relevant independence requirements. Those subject to U.S. proxy rules, however, would also be subject to certain disclosure related to compensation consultants.

SEC awarded stay in "no contest" settlement case

On March 15, the U.S. Court of Appeals for the Second Circuit issued a stay of proceedings in a case brought against Citigroup Global Markets Inc. by the Securities and Exchange Commission.  The SEC's complaint against Citigroup for negligent misrepresentation related to the company's marketing of collateralized debt obligations (CDOs) and followed an industry-wide investigation into the recent financial crisis.

The SEC had asked for the stay of proceedings after the district court refused to approve the proposed consent judgment that contained no admission of liability. The district court had rejected the settlement based in part on the rationale that a consent judgment without an admission of liability was bad policy and failed to serve the public interest.

In granting the stay, the Second Circuit found a strong likelihood that the district court's ruling would be overturned. The Second Circuit took particular issue with the district court's lack of deference towards the SEC's judgment on discretionary matters of policy.

The ruling may be of particular interest to Canadian regulation-watchers in light of the fact that the OSC is currently considering adopting new enforcement tools, including "no-contest" settlements.

SEC issues guidance on amended accredited investor net worth standard

As we discussed in a post earlier this year, the U.S. SEC recently adopted an amended "accredited investor" net worth standard that excludes the value of an individual's primary residence. The SEC has now published a small entity compliance guide that summarizes the new standard and provides examples of net worth calculations.

NYSE disallows broker voting of uninstructed shares on corporate governance proposals

On January 25, NYSE Euronext announced that it would no longer permit broker voting of uninstructed shares in the case of certain corporate governance proposals previously categorized as "Broker May Vote". The change in policy follows the elimination of discretionary voting by brokers in director elections in 2010 and the prohibition introduced by the Dodd-Frank Act respecting discretionary voting by brokers on executive compensation.

SEC limits policy regarding non-public submissions from foreign private issuers

On December 8, the U.S. SEC released a statement regarding non-public submissions of initial registration statements by foreign private issuers. Historically, the SEC has allowed foreign private issuers (FPIs) to submit initial registration statements on a non-public basis for staff review prior to a public filing since the majority of FPIs were traded on foreign exchanges where there were no requirements to publicly disclose such statements before the completion of a regulatory review.

According to the SEC, however, most FPIs now making use of the non-public review process do not have securities listed outside the U.S. Consequently, the SEC has decided to generally limit its policy respecting the non-public submission of such initial registration statements to circumstances where the registrant is: (i) a foreign government registering its debt securities; (ii) a foreign private issuer that is listed or is concurrently listing its securities on a non-U.S. securities exchange; (iii) an FPI that is being privatized by a foreign government; or (iv) an FPI that can demonstrate that the public filing of an initial registration statement would conflict with the law of an applicable foreign jurisdiction. The change in policy took effect on December 8.

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SEC excludes primary residence from "accredited investor" net worth standard

The U.S. Securities and Exchange Commission has adopted an amended "accredited investor" net worth standard that, in accordance with the Dodd-Frank Act, excludes the value of an individual's primary residence. The definition of accredited investor, used to determine the availability of certain exemptions from the Securities Act of 1933 for private and other limited offerings, currently includes individuals exceeding $1 million in net worth. The recently-adopted changes would maintain the $1 million threshold, but no longer allow for a primary residence to be included in calculating net worth. As we described in a blog post last year, the SEC first proposed the change in January 2011. The amended standard will become effective on February 27, 2012.

The accredited investor exemption has also garnered attention north of the border. Specifically, the OSC expressed concern last year that issuers and dealers were improperly relying on the accredited investor exemption to ineligible investors. As we discussed in a November 2011 post, Canadian regulators have now also launched a review of the domestic accredited investor and minimum investment amount exemptions. Under Canadian rules, the accredited investor standard for individual investors includes both a $1,000,000 financial asset test and a $5,000,000 net asset test, with only the latter including an investor’s personal residence (minus liabilities). Depending on the feedback (the consultation period ends on February 29th), possible options include keeping the status quo, retaining the exemptions with adjusted thresholds, limiting the use to certain investors (such as institutional investors), using alternative qualification criteria or imposing other investment limitations.

Minister of Finance approves MOU between OSC and FINRA

The Ontario Securities Commission announced today that Ontario's Minister of Finance has approved its Memorandum of Understanding with the U.S. Financial Industry Regulatory Authority. The MOU, which we discussed in our post of November 18 and became effective as of December 13, is intended to facilitate the exchange of information between the two regulators.

ISS to host webinars on 2012 policy updates

Institutional Shareholder Services will be hosting webinars next week concerning its policy updates for the 2012 proxy voting season. As we discussed last week, ISS released updates to its proxy voting guidelines on November 17th. While next week's webinars focus on European and U.S. policy updates, the discussion on U.S. updates may be especially interesting to Canadian issuers.

U.S. "large trader" reporting system comes into effect

Earlier this year, the SEC adopted final rules establishing reporting requirements for market participants whose transactions in national market system securities equal or exceed two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month. As we discussed last year, the SEC initially proposed such requirements in April 2010 to identify large market participants and collect information regarding their trades in order to be able to monitor the impact of large trader activity on the securities market.

The reporting requirements, effective as of October 3, 2011, are intended to provide the SEC with data to support its investigative and enforcement activities.

SEC releases 2011 report on whistleblower bounty program

The U.S. Securities and Exchange Commission recently released its 2011 annual report on the whistleblower bounty program adopted earlier this year. The program was designed to award whistleblowers who voluntarily provide original information to the SEC regarding violations of securities laws where the enforcement action leads to monetary sanctions totalling more than $1 million.

According to the report, 334 whistleblower tips were received between August 12, 2011, when the final rules became effective, and September 30. The most common complaint categories were market manipulation, corporate disclosures and financial statements, and offering frauds. The SEC has yet to pay any whistleblower awards.

SEC releases guidance for the disclosure of cybersecurity incidents

In the wake of a number of high-profile cybersecurity incidents, the SEC’s Division of Corporation Finance recently released disclosure guidance on the topic of cybersecurity. While the guidance creates no new legal obligations, it is intended to provide clarity regarding the forms of disclosure that registrants may have to make. In the release, the Division of Corporation Finance recognized that while no current disclosure requirements explicitly refer to cybersecurity, there are a number of existing disclosure obligations that may require registrants to disclose cybersecurity risks or incidents.

Such cyber incidents may be deliberate or unintentional, and include gaining unauthorized access to digital systems for the purpose of misappropriating assets or sensitive information, causing operational disruption or corrupting data. Meanwhile, the concept of a cyber attack also includes actions that don’t require unauthorized access to a computer system, such as denial-of-service attacks on websites. Cyber attacks may be carried out by insiders or third parties, and may use sophisticated technology to circumvent network security, or more traditional techniques like guessing or stealing a password to gain access to a computer network.

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New listing criteria for reverse merger companies approved for US markets

Earlier this month, the U.S. Securities and Exchange Commission announced the approval of additional listing criteria for companies that become public through a reverse merger.

Under the new requirements, a reverse merger company will be unable to list on the NYSE, NYSE Amex or Nasdaq until the completion of a one-year "seasoning period" following the merger. During this period, the company must trade in the U.S. over-the-counter market or another regulated U.S. or foreign exchange. The company must also file with the SEC all required reports since the merger and would have to maintain a minimum share price for a sustained period immediately prior to its listing application. Exemptions to the new requirements, however, would be available in certain circumstances.

OSC and FINRA enter into information sharing arrangement

The Ontario Securities Commission announced today that it has entered into a Memorandum of Understanding with the U.S. Financial Industry Regulatory Authority intended to establish a formal basis for cooperation between the regulators and to facilitate the exchange of information . According to the OSC Chair Howard Wetston, "[c]ross-jurisdictional regulatory coordination is essential for protecting investors in today's global marketplace. This framework acknowledges the interconnectedness of our markets and represents our commitment to working collaboratively with our international regulatory partners to address threats to investors and markets." The MOU is subject to approval by Ontario's Minister of Finance.

SEC adopts confidential private fund risk reporting

Late last month, the U.S. SEC adopted a new rule to require registered investment advisers with at least $150 million in private fund assets under management to periodically file the new Form PF. The amount of information to be reported will depend on whether an adviser belongs to the "large adviser" or "small adviser" cateogry. The latter group, under which the SEC anticipates most advisers will fall, will have to file Form PF once per year. Only basic information regarding such things as size, leverage, investor types and concentration will be required. Large advisers will potentially report on a more frequent basis depending on whether they are a hedge fund, private equity fund or liquidity fund adviser, and will have to include more detailed information.

Meanwhile, commodity pool operators and commodity trading advisers that are dually registered with the CFTC will be able to satisfy certain CFTC filing requirements with respect to private funds, should the CFTC adopt such requirements, by filing the new reporting form with the SEC.

The new requirements represent another step in the implementation of Dodd-Frank.  Most private fund advisers will be required to begin reporting following the end of their first fiscal year or quarter to end on or after December 15, 2012. However, certain advisers with at least $5 billion of assets under management will have to begin reporting following the end of their first fiscal year or quarter ending on or after June 15, 2012. Rules requiring the registration of private fund advisers were adopted by the SEC this past June.

Court finds FINRA lacks authority to sue for collection of fines

In a judgment released earlier this month, the United States Court of Appeals for the Second Circuit found that the Financial Industry Regulatory Authority, which regulates securities firms doing business in the U.S., lacks the authority to bring court actions to collect disciplinary fines. The case, Fiero v. FINRA, involved FINRA's pursuit of unpaid fines subsequent to disciplinary action against the plaintiffs.

Specifically, the Court of Appeals found that while Section 15A(b) of the Securities Exchange Act of 1934 (the Exchange Act) provides self-regulatory organizations with the authority to discipline members by various means, including suspension, fine and censure, the legislation provides no express statutory authority for such organizations to bring judicial actions to actually collect fines. The Court found the statutory omission to be significant and intentional, and compared the provision to section 21(d) of the Exchange Act, which provides the SEC with express authority to seek judicial enforcement of penalties. In addressing the apparent enforcement gap created by FINRA's ability to levy but not pursue fines, the Court noted that FINRA can already enforce fines by the "draconian sanction" of revocation of a firm's registration.

A 1990 rule change purporting to authorize FINRA's collection of fines, meanwhile, was found to have been mischaracterized as a "house-keeping" rule when, in fact, it was a substantive change requiring publication of a notice and comment period. As such, the purported rule change "was never properly promulgated and cannot authorize FINRA to judicially enforce the collection of its disciplinary fines."

FINRA proposes requiring further disclosure of private placement proceeds

Last week, the U.S. Financial Industry Regulatory Authority published proposed amendments to its rules that would require its members and associated persons that offer or sell private placements, as well as those that participate in the preparation of private placement memoranda, term sheets or other related disclosure documents in connection with a private placement, to provide disclosure to investors regarding the anticipated use of the offering proceeds prior to sale. The disclosure to investors would also have to include information regarding the amount and type of offering expenses, as well as the amount and type of compensation provided to sponsors, consultants and members in connection with the offering.

The disclosure documentation would have to be filed with FINRA within 15 days of the first sale. Certain offerings, however, would be exempted from the new requirements, including those sold solely to qualified purchasers, qualified institutional buyers and investment companies, meeting the applicable statutory definitions. According to FINRA, its proposals will "provide important investor protections in connection with private placements without unduly restricting capital formation through the private placement offering process" while also assisting in efforts to "identify problematic terms and conditions in private placements, thereby helping to detect and prevent fraud in connection with private placements."

Comments on the proposals are being accepted for 21 days from the date of publication in the Federal Register.

SEC requests comments on use of derivatives by investment companies

On August 31, the U.S. Securities and Exchange Commission issued a concept release on the use of derivatives by mutual funds and other investment companies registered under the Investment Company Act of 1940. In the release, the SEC noted the "dramatic growth" in the complexity and volume of derivatives investments in recent years and, specifically, funds' increased use of such investments.

The release is ultimately intended to assist the SEC in determining whether further regulation or guidance is needed to improve the regulatory regime with respect to funds' use of derivatives. To that end, the release considers, and requests comment on, such issues as: (i) the costs, benefits and risks of funds' use of derivatives; (ii) restrictions on leverage; (iii) portfolio diversification and concentration; (iv) exposure to securities-related issuers; and (v) the valuation of derivatives.

Comments are being accepted by the SEC for 60 days after the publication of the release in the Federal Register.

CSA Staff concerned with U.S. exempt market dealers carrying out brokerage activities

The Canadian Securities Administrators released a staff notice today communicating their concern regarding firms that carry out brokerage activities registering as exempt market dealers. The notice describes such firms as being primarily U.S.-based broker-dealers that are members of FINRA.

According to CSA staff, the EMD category of registration was not intended for firms that conduct brokerage activities (trading securities listed on an exchange in foreign or Canadian markets), and the notice states that permitting such activity would result in differing levels of regulatory oversight between EMDs and those firms subject to IIROC requirements and supervision.

In light of their concerns, the CSA will instead "consider" registering these broker-dealers in the restricted dealer category with terms and conditions, including a requirement that such broker-dealers only deal with permitted clients. Such registrations would also be temporary while the CSA engage in a consultation process to ensure that "appropriate regulatory requirements" apply to all firms undertaking brokerage activities. According to the notice, the consultations will "likely" result in changes to the registration rules.

For more information, see CSA Staff Notice 31-327.

SEC eliminates credit ratings criteria for companies using short form registration

On July 26, the U.S. SEC adopted new rules intended to reduce the reliance on credit ratings for regulatory purposes by removing such ratings from the eligibility criteria for issuers seeking to register securities offerings using "short form" registration. Specifically, the new rules remove the condition that securities be rated investment grade by at least one credit rating agency that is a nationally recognized statistical rating organization and allow short form registration if the issuer satisfies one of four new conditions. The new rules also include a three-year grandfathering  provision.

The amendments were initially proposed in February in light of section 939A of Dodd-Frank, which calls for the review of references to credit ratings in regulations issued by federal agencies. Generally, the amendments will be effective as of September 2, 2011, except for provisions rescinding Form F-9, used by some Canadian registrants to register non-convertible investment grade debt, which will come into force on December 31, 2012.

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U.S. FATCA creates potential compliance issues for Canadian financial institutions

Our insurance group colleague Stuart Carruthers recently authored an article regarding the potential compliance issues emanating from certain provisions of the U.S. Hiring Incentives to Restore Employment Act known as the Foreign Account Tax Compliance Act. Specifically, FATCA targets American offshore tax evasion by broadening required disclosure and reporting by foreign financial institutions in respect of U.S. accountholders. While focused on insurance companies, Stuart's article identifies important issues for the consideration of Canadian financial institutions generally.

Earlier this month, the IRS and Treasury Department released a notice announcing plans to phase in FATCA requirements over the next few years.

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US Appeals Court vacates proxy access rule

As we described last August, the U.S. SEC adopted a new proxy rule last year to, under certain circumstances, require companies to include shareholder nominees for director in the company's proxy materials. In a decision released last week, however, the United States Court of Appeals for the District of Columbia vacated the rule.

Specifically, the petitioners argued that the SEC had enacted the rule

in violation of the Administrative Procedure Act ... because, among other reasons, the Commission failed adequately to consider the rule’s effect upon efficiency, competition, and capital formation, as required by Section 3(f) of the Exchange Act and Section 2(c) of the Investment Company Act of 1940.

Ultimately, the Court of Appeals agreed, finding that the SEC "acted arbitrarily and capriciously" in failing to adequately "assess the economic effects of a new rule."  

New SEC rules require hedge fund adviser registration

The U.S. Securities and Exchange Commission adopted rules last month that require advisers to private funds, including hedge funds, to register with the SEC. The initial proposals were first introduced in November 2010 (see our post of December 19) and the final rules incorporate changes in response to public comments. Ultimately, the rules give effect to provisions of the Dodd-Frank Act that increase the statutory threshold for registration by investment advisers with the SEC, require hedge fund and other private fund advisers to register with the SEC and require reporting by certain advisers that are exempt from the registration requirements. Advisers falling under the requirements will have to be registered with the SEC by March 30, 2012.

Meanwhile, the SEC also announced the adoption of rules to implement new registration exemptions for advisers with less than $150 million in private fund assets under management in the U.S. and those that qualify as "foreign private advisers". Under section 202(a)(30) of the Investment Company Act of 1940, foreign private advisers are provided an exemption from registration where the adviser (i) has no place of business in the U.S.; (ii) has fewer than 15 clients and investors in the U.S. in private funds advised by the investment adviser; (iii) has aggregate assets under management attributable to U.S. clients of less than $25 million; and (iv) does not hold itself out to the U.S. public as an investment adviser. The new rules define a number of terms contained in the legislation, such as "investor", "place of business" and "assets under management", in order to clarify the application of the exemption.

As we discussed in October, Canadian securities administrators have meanwhile been working on their own proposals relating to registration of foreign investment fund managers who manage Canadian funds or have fund investors in a Canadian province or territory. The comment period on these proposals closed on January 13, 2011 and pursuant to recent amendments to National Instrument 31-103 that just came into force on July 11, 2011, these fund managers have been given a further deferral from registration until September 2012.

IIROC publishes circuit breaker levels for Q3 2011

Earlier this week, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 11-0203 relating to securities trading halts in coordination with the application of "circuit breakers" on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds for the third quarter of 2011 are 1,200 points, 2,400 points and 3,650 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,300 points; Level 2 (20%) - 2,650 points and Level 3 (30%) - 3,950 points, and result in trading halts ranging from 30 minutes to the balance of the trading session, depending on the time of day and magnitude of the market decline. Triggering the Level 1 threshold between 2:00 and 2:30 p.m., for example, would result in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur. The threshold levels for the third quarter are slightly lower than those for the second quarter of 2011.

SEC concludes that Stanford Group investors entitled to SIPA protections

The U.S. SEC announced yesterday that it had concluded that investors with brokerage accounts at the Stanford Group Company who purchased certificates of deposit through the broker-dealer were entitled to protected "customer" status under the Securities Investor Protection Act of 1970. As such, the SEC referred the case to the Securities Investor Protection Corporation and asked the SIPA to initiate a court proceeding to liquidate the SGC. The broker-dealer, owned by Robert Allen Stanford, was charged in 2009 with perpetuating an $8 billion Ponzi scheme. For more information, see SEC release 2011-129 and SIPC's responding release.

SEC adopts whistleblower rules

The U.S. SEC has now adopted a revised final rule designed to award whistleblowers who voluntarily provide original information to the SEC regarding violations of securities laws where the enforcement action leads to monetary sanctions totalling more than $1 million. The rules also seek to support internal compliance programs by making a whistleblower eligible for an award if the information is reported internally but results in the company informing the SEC about the violations. As we discussed in November 2010, the SEC released a draft proposal last year, and the final rule reflects changes made in response to public comments on the draft.

The provisions may be of particular interest to Canadian companies since, while foreign officials and employees of state-owned enterprises are excluded from the whistle-blower program, employees of foreign companies could be eligible for rewards.

U.S. exchanges propose replacement of circuit breaker pilot

Early last month, the U.S. SEC announced that national securities exchanges and the Financial Industry Regulatory Authority (FINRA) had filed a proposal to replace the circuit breakers for individual stocks, currently in place as part of a pilot project, with a "limit up-limit down" mechanism. Circuit breakers are trading pauses imposed in individual securities due to extraordinary market volatility. The proposed new mechanism, however, would prevent trades in a security from occurring outside of a specified price band. Stocks subject to the current circuit breaker (being those on the S&P 500 Index, the Russell 1000 Index and certain others) would generally be limited to a 5% trading price band, while other equities would be limited to 10% (as compared to prices of that security in the preceding five-minute period during a trading day).

For more information on the circuit breaker pilot project, see our posts of May 19, June 7 and September 21, 2010. Notably, the pilot project has been extended to the earlier of August 11, 2011 or the date on which the limit up-limit down mechanism is adopted.

FPIs not required to submit interactive data files until SEC specifies taxonomy

In response to a letter from the Center for Audit Quality, the U.S. Securities and Exchange Commission has stated that foreign private issuers that prepare financial statements in accordance with IFRS will not be required to submit, or post online, interactive data files (using XBRL), until the SEC specifies a taxonomy for use in preparing such interactive data files. For more on the SEC's requirements for Interactive Data Files, see our post of February 18, 2009.

IIROC publishes circuit breaker levels for Q2 2011

On April 1, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 11-0016 relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds for the second quarter of 2011 are 1,200 points, 2,400 points and 3,600 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,400 points; Level 2 (20%) - 2,800 points and Level 3 (30%) - 4,200 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m., for example, would result in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

SEC proposes rules for listing standards regarding compensation committees

The U.S. SEC released a proposal this week directing national securities exchanges to require compliance with new independence requirements for compensation committees. The proposed requirements address matters such as independence of compensation consultants, the compensation committee's ability to retain independent advisers and the compensation committee's responsibility for appointing, compensating and supervising the work of such advisers.

While foreign private issuers (FPIs) would be exempt from the proposed requirements where they provide annual disclosures to shareholders of the reasons for not maintaining an independent compensation committee, those subject to U.S. proxy rules would be subject to similar requirements and the proposal further requests comments as to whether FPIs should have to provide such disclosure on Forms 20-F and 40-F. The SEC is accepting comments on its proposals until April 29, 2011.

SEC proposes prohibition of risky incentive-based compensation arrangements

On March 2, the U.S. Securities and Exchange Commission proposed a rule that would prohibit certain institutions with consolidated assets of $1 billion or more from establishing or maintaining incentive-based compensation arrangements that encourage executive officers, employees, directors or principal shareholders to expose the institution to inappropriate risks by providing excessive compensation, or that encourage inappropriate risks that could lead to material financial loss. The proposals would apply to institutions with consolidated assets of $1 billion or more and include brokers and dealers registered under Section 15 of the Securities Exchange Act of 1934 and investment advisers as defined under section 202(a)(11) of the Investment Advisers Act of 1940.

The proposal, which responds to a requirement by Dodd-Frank to prohibit such compensation arrangements, would also require the covered institutions to disclose information about their incentive-based compensation arrangements. The proposal will be open for a 45-day comment period once it is published in the Federal Register.

SEC staff recommend uniform fiduciary duty for broker-dealers and investment advisers

In late January, the U.S. SEC submitted a staff study to Congress that recommended a uniform fiduciary standard for investment advisers and broker-dealers that provide securities investment advice to retail customers. The study, which noted that broker-dealers are generally not currently subject to a fiduciary standard under federal securities laws, recommended a fiduciary standard no less stringent than currently applied to investment advisers be extended to broker-dealers. The SEC was required to undertake the study to comply with Dodd-Frank, and the study also provided suggestions for further harmonization of the broker-dealer and investment adviser regulatory regimes. Whether the study's recommendations are followed through with, however, remains to be seen.  According to the SEC, the views expressed in the study are those of SEC staff and "do not necessarily reflect the views" of the SEC or individual commissioners.

In Canada, standards applicable to registrants such as dealers and advisers were somewhat harmonized in conjunction with the coming into force of the new registration regime for dealers, advisers and investment fund managers. Work also continues on IIROC's Client Relationship Model project, which attempts to address issues relating to such things as conflicts of interest management and suitability assessment. For a further discussion, see Ed Waitzer's post of February 17, entitled "Make advisors work for investors".

SEC proposes changes to "accredited investor"

On January 25, the U.S. SEC proposed amendments to the definition of accredited investor in accordance with the Dodd-Frank Act. Specifically, under the SEC's proposal, while an individual would still need to have a net worth of at least $1 million, individually or jointly with a spouse, to meet the threshold, the amended requirements would now exclude the value of the individual's primary residence from the calculation. Comments on the proposal are being accepted until March 11, 2011.

In Canada, the definition of "accredited investor" in National Instrument 45-106 Prospectus and Registration Exemptions includes individuals with financial assets exceeding $1 million (excluding primary residence) and those with net assets of at least $5 million (including net value of primary residence).

SEC adopts say-on-pay rules

Yesterday, the SEC announced that it was adopting rule amendments that would require issuers to conduct: (i) a shareholder advisory vote to approve the compensation of executives at least once every three calendar years beginning with the first annual shareholders' meeting taking place on or after January 21, 2011; (ii) a shareholder advisory vote on the frequency of executive compensation votes at least once every six calendar years; and (iii) a shareholder advisory vote on golden parachute arrangements in connection with merger transactions. The amendments to the Securities Exchange Act of 1934 would also impose various disclosure requirements. Smaller reporting companies, however, would not be subject to the first two requirements described above until their first annual or other meeting of shareholders occurring on or after January 21, 2013.

As we discussed in October of last year, the SEC released draft proposals in the fall and the final amendments take into account feedback received.

IIROC publishes circuit breaker levels for Q1 2011

The Investment Industry Regulatory Organization of Canada (IIROC) today published Notice 11-0001 relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds for the first quarter of 2011 are 1,150 points, 2,300 points and 3,450 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,350 points; Level 2 (20%) - 2,700 points and Level 3 (30%) - 4,000 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. would result in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

SEC proposes disclosure rules for resource extraction issuers

The U.S. SEC proposed rules last week that would require domestic and foreign issuers that must file annual reports with the SEC and that engage in the commercial development of oil, natural gas, or minerals, to disclose certain payments made to the U.S. and foreign governments. The types of payments that would have to be disclosed include taxes, royalties, fees and bonuses. The proposed rules stem from Dodd-Frank amendments to the Securities Exchange Act of 1934. The SEC is accepting comments on the proposed rules until January 31, 2011.

SEC seeks to strengthen investment adviser oversight

On November 19, the SEC announced new rules to give effect to provisions of Dodd-Frank that amend the Investment Advisers Act of 1940. Specifically, the provisions include increasing the asset threshold for advisers to register with the SEC and repealing the private adviser registration exemption. Private advisers able to rely on one of the new exemptions from registration under Dodd-Frank, however, would still be required to satisfy certain reporting requirements.

The SEC also proposed rules to implement the new exemptions under Dodd-Frank, including one available to investment advisers that solely advise private funds if the adviser has assets under management in the United States of less than $150 million. A further exemption would be available to foreign private advisers that: (i) have no place of business the United States; (ii) have fewer than 15 U.S. clients and private fund investors; (iii) have less than $25 million in aggregate assets under management from U.S. clients and private fund investors; and (iv) do not hold themselves out generally to the public in the U.S. as an investment adviser. The SEC's proposals would also clarify the application of this exemption by defining a number of terms in the statutory definition of foreign private adviser.

SEC extends conflict of interest exemption for NRSROs

Our colleague Jason Kroft has published an article on our structured finance law blog regarding the recent SEC extension for nationally recognized statistical rating organizations from conflict of interest requirements in Rule 17g-5(a)(3) of the Securities Exchange Act of 1934. The post can be found here.

SEC proposes whistleblower program

On November 3, the U.S. Securities and Exchange Commission released a proposal to reward individuals that provide information that leads to successful SEC enforcement action in which monetary sanctions total more than $1 million. The proposal, emanating from Dodd-Frank, also includes provisions to discourage whistleblowers from bypassing a company's compliance program. For more information on the implementation of Dodd-Frank, see the SEC's intended schedule for planned rule proposals.

SEC releases security-based swap proposals

On November 19, the U.S. Securities and Exchange Commission proposed new rules that would require security-based swap data repositories (SDRs) to register with, and provide swap data to, the SEC. The proposal would also require SDRs to accept transaction data and maintain it for at least five years after the expiration of the applicable swap. The SEC has also proposed rules requiring parties to security-based swap transactions to report information regarding each transaction to a registered SDR, which would then be required to publicly disseminate certain information regarding the transaction. The proposals are being made pursuant to Dodd Frank, which authorizes the SEC to regulate security-based swaps. According to the SEC, "[t]aken together, the rules ... seek to provide improved transparency to regulators and the markets through comprehensive regulations for [security-based swaps] transaction data and SDRs." Meanwhile, the Commodity Futures Trading Commission is planning on similar rules with respect to swaps falling under its jurisdiction.

See Release No. 45-63347 - Security-Based Swap Data Repository Registration, Duties, and Core Principles and No. 34-63556 - Regulation SBSR - Reporting and Dissemination of Security-Based Swap Information.

SEC extends date for compliance with new short sale rule

Last week, the U.S. SEC announced that it was extending the date for compliance with its new short sale rule. The change in date is intended to provide more time for exchanges to modify their procedures and market participants to program and test systems for implementation. The new rule, which will restrict the prices at which a stock can be sold short if the stock's price 10% or more in one day, will now take effect on February 28, 2011.

SEC proposals on ABS may dampen private placements into U.S.

Our colleague Mike Rumball has published a number of posts on our Structured Finance blog regarding the recent proposals by the U.S. Securities and Exchange Commission regarding asset-backed-securities. His latest considers the potential dampening effect on private placements into the U.S. that may result from the proposed requirement that issuers perform a review of the assets underlying an ABS and disclose the nature of the review.

IIROC publishes fourth quarter 2010 circuit breaker levels

Earlier this month, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 10-00259 relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds have been announced for the fourth quarter of 2010 as 1,050 points, 2,100 points and 3,150 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,200 points; Level 2 (20%) - 2,450 points and Level 3 (30%) - 3,650 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. results in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

SEC releases executive compensation proposals

The U.S. Securities and Exchange Commission (SEC) last week released a proposal that, among other things, would require issuers that are subject to federal proxy rules to conduct: (i) a shareholder advisory vote to approve the compensation of executives at least once every three years; (ii) a shareholder advisory vote on the frequency of executive compensation votes at least once every six years; and (iii) a shareholder advisory vote on golden parachute arrangements in connection with merger transactions. The SEC's proposal, which result from an amendment to the Securities Exchange Act of 1934 emanating from the recent Dodd-Frank Act, would also impose various disclosure requirements.

Meanwhile, further proposals would require institutional investment managers that manage certain equity securities having an aggregate fair market value of at least $100 million to annually report to the SEC on how they voted proxies relating to the matters described above, namely, executive compensation, the frequency of say-on-pay votes and "golden parachute" arrangements.

The SEC is accepting public comments on the proposals until November 18.

SEC proposes rules for security-based swaps

On Wednesday, the U.S. Securities and Exchange Commission published proposed Regulation MC under the Securities Exchange Act of 1934, intended to mitigate conflicts of interest for security-based swap clearing agencies, security-based swap execution facilities and national securities exchanges that post or make available for trading security-based swaps. Under proposed Regulation MC, the agencies, facilities and exchanges noted above would be required to adopt ownership and voting limitations as well as certain governance requirements. Comments are being accepted by the SEC for 30 days after the date of the proposal's publication in the Federal Register.

The SEC also adopted an interim final rule requiring that security-based swap transactions that were entered into before the July 21, 2010  signing of the Dodd-Frank Act (and which had not expired as of that date) be reported to the SEC or a registered security-based swap data repository. According to SEC Chairman Mary Schapiro, "[t]his interim final rule provides a means for the Commission to gain a better understanding of the security-based swap markets, including their size and scope".

SEC proposes requiring issuers to review assets underlying ABS

The Securities and Exchange Commission (SEC) issued a proposal this week to require issuers of asset-backed securities to perform a review of the assets underlying the relevant securities and publicly disclose the review's findings and conclusions. While the proposal would not dictate the level or type of review to be performed, the SEC expects that the "issuer's level and type of review ... may vary depending on the circumstances." The SEC is accepting public comment on its release until November 15.

SEC and CFTC release joint report on May 6 market volatility

The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) released a joint report on Friday outlining their findings respecting the extreme market volatility of May 6, 2010. According to the report, the rapid execution of an automated sell program concerning a large number of futures contracts by a large fundamental trader during a time of high volatility and thinning liquidity was a main contributor to the day's events. The selling pressure from the automated sell program helped cause a liquidity crisis in the contracts and in individual securities.

Meanwhile, CFTC Chairman Gary Gensler stated yesterday that a joint committee of the CFTC and SEC has been asked to consider the report and make recommendations. Mr. Gensler specifically mentioned that he expects to hear recommendations with respect to: (i) requiring executing brokers to have an obligation to enter and exit in an orderly manner; (ii) increasing visibility into the full order book, either in aggregate or in detail; and (iii) potential revisions to market pauses, either for single exchanges or for cross-market circuit breakers.

The Investment Industry Regulatory Organization of Canada released its review of the day's market volatility last month.

FINRA proposes allowing all-public panel arbitrations

On September 28, the U.S. Financial Industry Regulatory Authority (FINRA) announced that it will file a rule proposal with the Securities and Exchange Commission next month that will allow investors to opt for all-public panels in arbitration claims. According to FINRA, "[g]iving each individual investor the option of an all-public panel will enhance confidence in and increase the perception of fairness in the FINRA arbitration process".

In recent months, the Investment Industry Regulatory Organization of Canada (IIROC) has also been considering changes to its arbitration program. A review of the program was initiated in December 2009, while a request for comments on specific changes was released in August 2010.

NYSE Commission outlines corporate governance principles

The New York Stock Exchange's Commission on Corporate Governance released a report last week that identified core governance principles it believed could be widely accepted and supported by issuers, investors, directors and other market participants. The Commission, formed in response to the financial crisis of 2008 and 2009, considered numerous issues, including the proper role and scope of a director's authority, management's responsibility for governance and the relationship between a shareholder's trading activities, voting decisions and governance.

Ultimately, the Commission achieved a consensus on ten principles, namely:

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SEC amends selective disclosure rules by removing credit rating agency exemption from Regulation FD

In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Securities and Exchange Commission (SEC) today published a final rule amending Regulation FD to remove the exemption previously available in respect of disclosure made to credit rating agencies.

In order to prevent selective disclosure, Regulation FD requires public disclosure of any material nonpublic information that is provided by an issuer or those acting on its behalf to certain enumerated persons, including securities market professionals. In order to implement Section 939B of the Dodd-Frank Act, Regulation FD is being amended to remove Rule 100(b)(2)(iii) of Regulation FD, which generally exempts issuers from having to make such disclosure if the material nonpublic information is provided to a credit rating agency under certain circumstances. Given the Dodd-Frank Act imposes a 90-day deadline for this amendment, the amendment will be effective for disclosure made on or after its publication in the Federal Register.

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SEC proposes enhanced disclosure of short-term borrowings

Last week, the U.S. Securities and Exchange Commission (SEC) announced proposals intended to "shed a greater light" on the short-term borrowing practices of public companies. Specifically, the proposals would require all companies that provide MD&A disclosure to provide quantitative information regarding: (i) the amount of short-term borrowings outstanding at the end of the reporting period and the weighted average interest rate on those borrowings; (ii) the average amount outstanding during the period and the weighted average interest rate on those borrowings; and (iii) the maximum month-end amount of short term borrowings during the reporting period. With respect to the last requirement, financial companies would have to provide the maximum daily, rather than month-end, amount of short-term borrowings. Companies would also be required to provide quantitative information regarding the arrangements of their short-term borrowings.

Of particular note for Canadian companies, foreign private issuers, other than MJDS filers, would be subject to substantially similar requirements, but without the requirement for quarterly reporting. MJDS filers, however, would be unaffected by the proposals.

According to SEC Chairman Mary Schapiro, "[u]nder these proposed rules, investors would have better information about a company's financing activities during the course of a reporting period - not just a period-end snapshot." As such, investors "would be able to evaluate the company's ongoing liquidity and leverage risks." Comments on the proposals are being accepted by the SEC for 60 days after their publication in the Federal Register.

SEC timing on Dodd-Frank implementation

The Securities and Exchange Commission has published a timetable on its website outlining its schedule for implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The timetable, which extends to July 2011, suggests a busy year of rule-making at the SEC and would see, among other things, new rules regarding shareholder votes on executive compensation proposed by the end of the year.

SEC expands new circuit breaker rules and approves erroneous trades procedure

On September 10, the Securities and Exchange Commission (SEC) approved new rules to expand its circuit breaker pilot program, which currently applies to stocks listed in the S&P 500 Index, to all stocks in the Russell 1000 Index and certain exchange-traded funds. As we discussed in our post of May 19, the SEC's circuit breaker is tripped and stops trading in a security for a five-minute period if the security experiences a 10 percent price change over the preceding five minutes.

The SEC also approved rules clarifying the process for breaking erroneous trades. We discussed generally the nature of the SEC's original proposal in our post of June 18.

IIROC releases results of flash crash review

Pursuant to its announcement earlier this year that it would analyze the market volatility (flash crash) of May 6, the Investment Industry Regulatory Organization of Canada (IIROC) yesterday released the results of its regulatory review. IIROC's report identified a number of factors that contributed to the fateful day's trading patterns in the securities reviewed, notably, the existence of large sell imbalances, electronic trading activity in the securities, the fact that "traditional" market makers were generally not active in the securities reviewed and the triggering of stop loss orders. 

IIROC ultimately made a number of recommendations to address the issues identified, including: (i) a review of the current market-wide circuit breaker to determine whether trigger levels are appropriate and whether an independent Canadian circuit breaker level should be employed; (ii) considering whether single stock circuit breakers should be implemented; (iii) the adoption of volatility controls; (iv) considering how to effectively manage stop loss orders in the current multi-market and high-speed environment; and (v) a review of the erroneous and unreasonable price policies and procedures.

IIROC is expecting to issue a request for comments on a single stock circuit breaker in the near future. IIROC also stated that a review of the current erroneous and unreasonable price policies and procedures is currently underway and a notice will be published for comment when completed. Guidance is expected to be issued respecting the use of stop loss orders, while news on the other recommendations will be provided as work is completed.

U.S. financial regulatory reform affects Canadian issuers

As reported widely in the media and discussed here in a blog post back in July, U.S. President Barack Obama recently signed into law sweeping new legislation intended to overhaul the U.S. financial regulatory system. While the extent of the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act may not be known for years, a number of considerations for Canadian issuers are immediately evident. These include, but are not necessarily limited to, the following:

  • Changes to disclosure requirements under the Securities Exchange Act of 1934 may impact MJDS filers by imposing additional disclosure obligations. 
     
  • Non-U.S advisers of private investment funds will, under certain circumstances, be required to register with the SEC, which will lead to new substantive requirements for such advisers. 
     
  • Further rule-making by U.S. regulators under the authority of Dodd-Frank will likely also affect Canadian issuers. For example, the SEC's new proxy rules will, under certain circumstances, apply to foreign issuers that are otherwise subject to U.S. proxy rules.

As can be seen, the long arm of financial regulatory reform in the U.S. may very well reach Canadian issuers. For that reason, issuers in this country should keep abreast of developments as they come to light.

SEC considering further improvements to market structure

During a speech to the Economic Club of New York yesterday, U.S. Securities and Exchange Commission Chairman Mary Schapiro discussed the "flash crash" of May 6 and the steps taken by the SEC to strengthen equity market structure. Ms. Schapiro also outlined further steps that may be considered, including: (i)  improving circuit breaker mechanisms; (ii) high frequency trading and whether the firms that effectively act as market makers during normal times should have any obligation to support the market in reasonable ways during "tough times"; (iii) order cancellations and whether large volumes of orders, subsequently cancelled, affect price discovery, capital formation and the capital markets generally; and (iv) market fragmentation and dark trading venues.

According to Ms. Schapiro,

The important questions are "to what extent is our structure meeting or failing to meet its goals of fair, efficient and transparent markets, and how can we modify the structure to preserve the advantages and eliminate the flaws?"

SEC commissioner dissents on proxy rule

As we wrote on August 26, the U.S. Securities and Exchange Commission recently released a proxy rule that will require companies, under certain circumstances, to include shareholder nominees for director in the company's proxy materials. While SEC Chairman Mary Schapiro outlined the the rule's benefits, SEC Commissioner Troy A. Paredes provides an alternative viewpoint. Mr. Paredes argues that the rule is flawed in that it "imposes a minimum right of proxy access, even when shareholders may prefer a more limited right of access or no proxy access at all." Further comments by the commissioners can be found here.

US CFTC releases final retail forex rules

On August 30, the U.S. Commodity Futures Trading Commission (CFTC) released final rules respecting off-exchange retail foreign currency transactions. The rules, which include requirements regarding registration, disclosure, recordkeeping, financial reporting, minimum capital and other operational standards, among other things, take effect on October 18.

SEC issues report regarding credit rating methodologies

Earlier this week, the U.S. Securities and Exchange Commission (SEC) released a report cautioning nationally recognized credit rating agencies about "deceptive ratings conduct and the importance of sufficient internal controls over the policies, procedures, and methodologies the firms use to determine credit ratings." The report stems from an investigation into whether Moody's Investor Service, Inc. violated federal registration or antifraud provisions. The SEC also stated in the report that it will utilize new provisions in the Dodd-Frank Act "for enforcement actions alleging otherwise extraterritorial fraudulent misconduct that involves significant steps or foreseeable effects within the United States."

SEC releases final rule regarding shareholder director nominations

The U.S. Securities and Exchange Commission (SEC) yesterday announced that it is amending federal proxy rules in order to "facilitate the effective exercise of shareholders' traditional state law rights to nominate and elect directors to company boards of directors." Specifically, a new proxy rule (Rule 14a-11 under the Securities Exchange Act of 1934) will, under certain circumstances, require companies to include shareholder nominees for director in the company's proxy materials.  An ownership threshold of 3% of the voting power based on securities that are entitled to be voted, held for at least three years, will be required for a nominating shareholder or group to rely on Rule 14a-11. Further, amendments to Rule 14a-8 will narrow an exception that currently permits companies to exclude shareholder proposals that relate to elections. The final rules take into account public response to the draft proposals released by the SEC in July 2009 and will generally be effective 60 days after their publication in the Federal Register.

In describing the need for the new rules, SEC Chairman Mary Schapiro stated that

[a]s a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own...Nominating a director candidate is not the same as electing a candidate to the board. I have great faith in the collective wisdom of shareholders to determine which competing candidates will best fulfill the responsibilities of serving as a director. The critical point is that shareholders have the ability to make this choice.

Notable to Canadian companies, the amended rules will apply to foreign issuers that are otherwise subject to U.S. proxy rules unless the applicable foreign law prohibits shareholders from nominating director candidates.

Minister approves regulatory cooperation MOU

As we discussed in our post of June 16, the Ontario Securities Commission, Quebec's Autorité des marchés financiers and the U.S. Securities and Exchange Commission (SEC) recently signed a Memorandum of Understanding to facilitate the supervision of regulated entities that operate on a cross-border basis. The Minister of Finance has now approved the MOU.

SEC requests public comment on obligations of investment advisers

On Tuesday, the U.S. Securities and Exchange Commission (SEC) published a request for public comment for a study to evaluate

the effectiveness of existing legal or regulatory standards of care for brokers, dealers, investment advisers, and persons associated with them when providing personalized investment advice and recommendations about securities to retail investors; and whether there are gaps, shortcomings, or overlaps in legal or regulatory standards in the protection of retail customers relating to the standards of care for these intermediaries.

Such a study is required by s. 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama last week. In Canada, most provinces and territories adopted a fiduciary standard for registrants as part of the broad registration reforms implemented last September.

SEC approves changes to adviser principal disclosure brochure

Yesterday, the Securities and Exchange Commission (SEC) approved changes to Form ADV, the principal disclosure document that registered investment advisers are required to provide to clients. According to SEC Chairman Mary Schapiro, the current form's check-the-box formal "frequently does not correspond well to an adviser's business." As such, the changes are intended to improve the information available to clients regarding those providing them with investment advice. To that end, the format of the brochure will be updated to including narrative in plain English, the content will be expanded to include topics such as fees and compensation, an adviser's disciplinary information and brokerage practices and advisers will be required to deliver brochure supplements that contain "résumé-like disclosure" regarding such things as educational background and business experience. Advisers will also be required to electronically file brochures, which will be available to the public on the SEC's website.

The amendments will be effective 60 days after publication in the Federal Register and the SEC expects that investment advisers will begin distributing and posting new brochures in the first quarter of 2011.

SEC proposes mutual fund distribution fee regulations

The Securities and Exchange Commission (SEC) yesterday announced proposals intended to improve the regulation of mutual fund distribution fees and provide enhanced disclosure for investors. Distribution fees, also known as 12b-1 fees, are fees paid by the fund out of its assets to cover distribution costs and shareholder service expenses. The proposals would limit fund sales charges, improve the transparency of fees by requiring funds to identify and more clearly disclose distribution fees, encourage retail price competition and revise fund director oversight duties. The proposals will be open to a 90-day comment period after publication in the Federal Register.

Goldman Sachs settles complaint with SEC

The U.S. Securities and Exchange Commission (SEC) announced last week that Goldman, Sachs & Co. had agreed to pay $550 million to settle charges that the company had misled investors respecting a subprime mortgage product. The settlement also requires remedial action by Goldman Sachs with respect to the company's review and approval of certain mortgage securities offerings and additional education and training of employees in this area of the company's business. For more on the case and settlement, see this article from the New York Times.

Financial regulatory reform approved by US Congress

On July 15, the U.S. Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act by a vote of 60-39. The legislation is intended to overhaul the financial regulatory system in the U.S. by improving the supervision and regulation of federal depository institutions, providing transparency to derivatives markets and setting out obligations regarding corporate governance and executive compensation.

The legislation, which was passed by House of Representatives on June 30, is now awaiting the President's signature. A brief summary of the legislation is provided by the House Financial Services Committee, while Steven M. Davidoff provides some thoughts in the New York Times' DealBook.

SEC issues concept release on proxy system

The Securities and Exchange Commission yesterday announced that it was issuing a concept release to seek public comment on the U.S. proxy system. Specifically, the comprehensive review focuses on the accuracy, transparency and efficiency of the voting process, communications and shareholder participation and the relationship between voting power and economic interest. The SEC is accepting public comment for a 90-day period.

FINRA to increase amount of broker information available to public

The U.S. Financial Industry Regulatory Authority (FINRA) yesterday announced an expansion in the amount of information that will be available to the public regarding current and former security brokers through its online BrokerCheck service. Specifically, the changes will increase the number of customer complaints that are reported publicly by disclosing historic complaints back to 1999, expand the disclosure period for former brokers from two years to ten years, make certain information regarding former brokers permanently available and formalize the process for brokers to dispute the accuracy of the information. The expansion of BrokerCheck is expected to be complete by the end of the year.

SEC reopens comment period on flash order proposal

As we discussed in our post of September 18, 2009, the U.S. Securities and Exchange Commission published a proposal last year to eliminate the exception under Rule 602 of Regulation NMS under the Securities Exchange Act of 1934 for the use of flash orders by equity and options exchanges.

On July 2, the SEC reopened the comment period on the proposal for 30 additional days.

IIROC publishes third quarter 2010 circuit breaker levels

On July 2, the Investment Industry Regulatory Organization of Canada (IIROC) published Notice 10-0191 relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds have been announced for the third quarter of 2010 as 1,000 points, 2,050 points and 3,050 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,150 points; Level 2 (20%) - 2,350 points and Level 3 (30%) - 3,500 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. results in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

CFTC and ASC sign cooperation agreement

On June 16, the Alberta Securities Commission and the U.S. Commodity Futures Trading Commission (CFTC) announced the signing of a Memorandum of Understanding intended to enhance the cooperation between the two regulators in connection with their functions relating to the supervision of covered clearing organizations. The MOU was executed on June 10.

CFTC proposes rule regarding proximity based advantages

On June 11, the U.S. Commodity Futures Trading Commission (CFTC) announced that it was proposing a rule that would require that co-location and proximity hosting services be available to all qualified market participants willing to pay for the services. Comments on the proposals are being accepted until July 12, 2010.

US federal banking regulators issue final guidance on compensation

The U.S. Federal Reserve, along with other banking regulators, issued final guidance yesterday "to ensure that incentive compensation arrangements at financial organizations take into account risk and are consistent with safe and sound practices." The guidance adopts three main principles, being that: (i) incentive compensation arrangements at a banking organization should provide employees incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risk; (ii) these arrangements should be compatible with effective controls and risk-management; and (iii) these arrangements should be supported by strong corporate governance, including active and effective oversight by the organization's board of directors.

SEC announces proposed amendments to rules for clearly erroneous trades

The U.S. Securities and Exchange Commission (SEC) announced yesterday proposed amendments to the Financial Industry Regulatory Authority rules respecting clearly erroneous transactions in exchange-listed securities. Under the current rules, a trade may be found to be clearly erroneous where the price of a transaction deviates from the consolidated last sale price for the security beyond a specified amount. These thresholds depend on the consolidated last sale price of the security and whether trading occurs during or outside normal market hours. For example, where the price of a security is up to $25, a deviation of 10% or more during normal market hours would be considered clearly erroneous.

The amendments would, among other things, establish different thresholds and standards to handle large-scale market events and would remove FINRA's flexibility to use different thresholds in unusual circumstances. In circumstances of a multi-stock event involving 20 or more securities, FINRA may use a reference price other than the consolidated last sale and will nullify transactions at prices equal to, or greater than, 30% of the reference price.

The amendments are a further response to the market volatility that occurred on May 6 and follow the recent approval of stock-by-stock circuit breakers in the U.S. We originally discussed the circuit breaker proposals in our post of May 19.

SIFMA releases systemic risk oversight study

The U.S. Securities Industry and Financial Markets Association (SIFMA) recently released the results of a study intended to "assist regulators and policymakers in preparing for expanded systemic risk oversight" and enhance the ability of regulators to respond to future systemic risk events. The study was based on interviews with a number of organizations, including regulators, securities broker-dealers, insurers and hedge funds.

SEC, AMF and OSC sign regulatory cooperation arrangement

On Monday, the U.S. Securities and Exchange Commission (SEC), Quebec's Autorité des marchés financiers and the Ontario Securities Commission (OSC) announced the signing of a memorandum of understanding to facilitate the supervision of regulated entities that operate on a cross-border basis. The parties intend to consult, cooperate and exchange information related to the supervision and oversight of such regulated entities and the MOU is intended to support and facilitate such cooperation.

SEC releases update on circuit breaker proposals

In our post of May 19, we discussed the recent SEC proposals that would see a five minute pause to trading in individual stocks that experienced a 10 percent change in price over a five minute period. On June 4, the SEC issued a statement stating that staff is reviewing comments received and that staff expects to present proposals this week.

SEC proposes consolidated audit trail system

Citing the lack of a central database containing comprehensive and readily accessible data regarding orders and executions, the U.S. Securities and Exchange Commission proposed a new rule on May 26 that would require SROs to establish a consolidated audit trail system. Under the new system, exchanges and FINRA, as well as their members, would be required to provide certain information to the central repository regarding each quote and order in a National Market System (NMS) security.

Such a consolidated system would be intended to: (i) provide regulators direct and timely access to uniform consolidated order and execution information for all orders in NMS securities from all participants across all markets; (ii) enable SROs to better fulfill their regulatory responsibilities to oversee their markets and members; and (iii) enable the SEC to better carry out its oversight of the NMS for securities.

The SEC is accepting public comments on the proposal for 60 days after its publication in the Federal Register.

FINRA proposes enhanced oversight of firms' back offices

The U.S. Financial Industry Regulatory Authority (FINRA) released a Regulatory Notice on May 26 requesting comments on proposed rule amendments intended to enhance the oversight of broker-dealers' back office operations. The proposed amendments would create a registration category for operations professionals engaged in, or supervising, activities relating to sales and trading support and the handling of customer assets. A new qualification exam for operations professionals would be established as well as continuing education requirements. Comments on FINRA's proposal are being accepted until July 12, 2010.

SEC announces circuit breaker rule proposals

As we discussed yesterday, recent media reports suggested that the U.S. Securities and Exchange Commission (SEC) was planning to announce proposals for new circuit breaker rules to address issues stemming from the market volatility of May 6. Such proposals were subsequently announced late yesterday afternoon.

Under the proposed rules, which reflect a consensus among the various U.S. stock exchanges and the Financial Industry Regulatory Authority (FINRA), trading in a stock would be paused for five minutes where the stock experienced a 10 percent change in price over a five minute period. The five minute pause would be intended to "give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price and resume trading in a fair and orderly fashion." If approved by the SEC after the comment period, the new rules would be in effect on a pilot basis through December 10, 2010, during which time SEC staff would study, among other things, the impact of other trading protocols.

The SEC and Commodity Futures Trading Commission (CFTC) also released their preliminary findings yesterday regarding the "unusual market events" of May 6. While the events of that day continue to be reviewed, the report focuses on the following "hypotheses and findings": (i) the possible linkage between the decline in the prices of stock index products and the simultaneous and subsequent waves of selling in individual securities; (ii) a generalized severe mismatch in liquidity; (iii) the extent to which the liquidity mismatch may have been exacerbated by disparate trading conventions among various exchanges; (iv) the need to examine the use of "stub quotes"; (v) the use of market orders, stop loss market orders and stop loss limit orders that, coupled with sharp price declines, might have contributed to market instability; and (vi) the impact on Exchange Traded Funds.

US to announce new market circuit breakers

The Globe and Mail is reporting today that new circuit breaker rules will soon be introduced by the U.S. Securities and Exchange Commission in an attempt to prevent the type of market volatility seen on May 6th. According to the Globe, the circuit breakers may be operational as early as June 14.

Regulators respond to market volatility

As regulators continue to investigate last Thursday's extreme market volatility, the Investment Industry Regulatory Organization of Canada (IIROC) has announced that it has re-priced or cancelled various trades occurring during the market slide. Various U.S. markets have also announced that they would cancel trades (see for example announcements from NYSE Arca and NASDAQ). Meanwhile, the Securities and Exchange Commission (SEC) announced yesterday that it has met with the leaders of the Financial Industry Regulatory AuthorityNASDAQ, BATS, Direct Edge, ISE and the CBOE, and that all parties have agreed on a structural framework for strengthening circuit breakers and handling erroneous trades.

Today, the SEC and Commodity Futures Trading Commission announced the formation of a joint committee to address "emerging regulatory issues", with the first item on the committee's agenda being a review of last Thursday's market events. Meanwhile, SEC Chairman Mary Schapiro testified before the Financial Services Committee's Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises this afternoon to summarize the events of May 6, provide an overview of the current market structure and discuss various regulatory tools to be considered "in determining how best to maintain fair and orderly financial markets and to prevent severe market disruptions in the future."

CFTC issues advisory regarding speculative position limits

On May 7, the U.S. Commodity Futures Trading Commission (CFTC) issued an Advisory to alert market participants regarding their "ongoing legal obligations to comply with speculative position limits." Specifically, the CFTC reaffirmed that such limits apply on an intraday as well as an end-of-day basis and that traders whose positions exceed the applicable speculative position limit "at any time during the day" (emphasis in text) are in violation of the pertinent regulations even if their positions are reduced below the limit by the end of the day.

TMX outlines objection to US-style short sale regulation

On May 3, TMX Group Inc., released a letter written to the Canadian Securities Administrators (CSA) outlining its position on the regulation of short sales in Canada in light of recent U.S. amendments on the subject.

Specifically, TMX recommended against adopting SEC-style amendments incorporating a price test trigger and stated that the "additional regulation of short sales in Canada is not warranted." In support of its views, TMX outlined findings from an analysis it performed on securities inter-listed on the TSX and a U.S. exchange. TMX found that on average, at least one inter-listed security would have triggered the SEC-style short sale circuit breaker every day. According to TMX, however, "it is highly unlikely that manipulative shorting occurs every day in one of the inter-listed securities." Thus, TMX urged the CSA "to take a decision on short sales that is contrary to the SEC's politically driven amendment to Reg SHO". Citing UMIR amendments to address failed trades and the strong real-time surveillance and enforcement capabilities of IIROC, TMX further outlined its support for "the removal of the short sale price test for all exchange-listed securities in order for Canadian participants to operate under one rule."

FINRA to perform market oversight functions of NYSE Regulation

It was announced on May 4 that the U.S. Financial Industry Regulatory Authority (FINRA) would be assuming the market surveillance and enforcement functions currently conducted by NYSE Regulation. Under the agreement, which is subject to review by the Securities and Exchange Commission, FINRA would assume the regulatory functions for NYSE Euronext's U.S. equities and options markets, being the NYSE, NYSE Arca and NYSE Amex.

FINRA releases guidance for investigating private placements

The U.S. Financial Industry Regulatory Authority (FINRA) yesterday published guidance regarding the suitability, disclosure and other obligations of broker-dealers recommending securities in offerings made under the SEC's Regulation D (private placements). While Regulation D provides exemptions from the registration requirements of the Securities Act of 1933, FINRA's notice stresses that broker-dealers must still conduct a reasonable investigation of the issuer and the securities being recommended and comply with other applicable requirements, including suitability and advertising and supervisory rules. Specifically, the notice provides a list of best practices that have been adopted by other firms.

Senate Committee introduces OTC derivatives proposal

The U.S. Senate Committee on Agriculture, Nutrition and Forestry introduced a draft bill today intended to "bring 100% transparency" to financial markets. According to the news release of Committee Chair Blanche Lincoln, D-Ark, the bill includes mandatory clearing and trading requirements, requires real-time reporting of derivatives trades and would prohibit federal assistance to banks that "engage in risky derivative deals".  Thus, the proposed legislation appears to take a tougher stance in its attempts to regulate financial institutions than the legislative proposals emanating from the Senate Committee on Banking, Housing, and Urban Affairs.

The U.S. House of Representatives passed comprehensive financial reform legislation in December 2009, which addressed OTC derivatives trading, but the Senate has yet to pass the House Bill or agree to a different proposal. The latest indications, however, are that the Senate is preparing for a vote in the upcoming weeks. What the final regulations will look like, however, remains unclear.

SEC releases proposals relating to options markets and large trader reporting

The U.S. Securities and Exchange Commission (SEC) yesterday proposed creating a "large trader" reporting system that would identify large market participants, collect information regarding their trades and analyze their trading activity. Traders would generally be considered to fit the "large trader" categorization where their transactions in exchange-listed securities equalled or exceeded two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month. The proposals would require such traders to identify themselves to the SEC and impose recordkeeping and reporting obligations on the part of broker-dealers.

Meanwhile, the SEC also proposed extending two investor protection measures, currently existing in stock markets, to options markets. Specifically, the SEC proposed prohibiting an option exchange from unfairly impeding access to displayed quotes and limiting the fees that an options exchange can charge those wishing to access a quote.

Comments on the proposals are being accepted for 60 days after their publication in the Federal Register.

US Supreme Court rules on fiduciary duty of investment advisers

On March 30, the Supreme Court of the United States released its decision in the case of Jones v. Harris. The case considered the fiduciary duty imposed on mutual fund advisers by section 36 of the Investment Company Act of 1940 (ICA) with respect to the receipt of compensation for services. This particular issue has been the topic of recent judicial attention.

Ultimately, the Supreme Court accepted the basic formulation of the Gartenberg test, stating that "to face liability under §36(b), an investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's length bargaining." While the basic formulation of the test appeared to be relatively uncontroversial in this case, the parties disagreed on a number of points concerning its application. Thus, the Supreme Court provided guidance on a number of issues. Specifically, the Supreme Court stated that: 

  1. since the ICA requires consideration of all relevant factors concerning the fees charged, there is no categorical rule prohibiting comparisons between the fees charged by advisers to different types of clients. The weight to be allocated to such comparisons, however, depends on the circumstances and the ICA does not ensure fee parity between mutual funds and institutional clients;
     
  2. Courts should not rely too heavily on the fees charged by other advisers; and
     
  3. A court's evaluation of an investment adviser's fiduciary duty must take into account both procedure and substance. "Where a board's process for negotiating and reviewing investment-adviser compensation is robust, a reviewing court should afford commensurate deference to the outcome of the bargaining process." Where the board's process was deficient or the adviser withheld important information, however, a court may take a more rigorous look at the outcome.

Finding that the Seventh Circuit panel focused almost entirely on disclosure, the Supreme Court vacated the Circuit Court's decision and remanded the case.

The immediate decision's effect on mutual fund fees remains to be seen, and will ultimately depend on the interpretation given to the Supreme Court's findings by lower courts. Thus, the mutual fund industry will undoubtedly watch with interest as this case, and those like it, proceed through the lower courts.

SEC and IOSCO release proposals regarding asset backed securities

On April 7, the U.S. Securities and Exchange Commission (SEC) announced proposals to revise the rules respecting asset-backed securities in order to "better protect investors in the securitization market." Specifically, the proposals would make changes to the offering process, disclosure and reporting for asset-backed securities (ABS). The changes are described by the SEC as being comprehensive and imposing new burdens in order to "provide investors with timely and sufficient information...reduce the likelihood of undue reliance on credit ratings, and help restore investor confidence in the representations and warranties regarding the assets." Comments on the proposals are being accepted by the SEC for 90 days after publication of the proposals in the Federal Register.

Meanwhile, the International Organization of Securities Commissions (IOSCO) released a report yesterday entitled "Disclosure Principles for Public Offerings and Listings of Asset Backed Securities". The report is intended to "provide guidance to securities regulators who are developing or reviewing their regulatory disclosure regimes for public offerings and listings of asset-backed securities (ABS)." Specifically, the report outlines the information that should be included in any offer or listing document for a publicly offered or listed ABS.

SEC publishes FINRA proposals regarding IPO share allocations

On February 17, the U.S. Financial Industry Regulatory Authority (FINRA) filed proposed changes to its Rules with the SEC intended to prohibit abuses in the allocation and distribution of shares in IPOs. The release amends earlier FINRA proposals by addressing issues raised by comments to its earlier proposed changes. The SEC published the proposed amendments for comment on March 11.

SEC announces review of use of derivatives by funds

The U.S. SEC announced on March 25 that its staff is conducting a review of the use of derivatives by mutual funds, exchange-traded funds (ETFs) and other investment companies to determine whether additional protections for those funds are required under the Investment Company Act of 1940  (the Act) . Staff of the SEC also intend to identify if any changes to the SEC's rules or guidance may be warranted. Pending the completion of the review, SEC staff will be deferring consideration of exemptive requests under the Act to permit ETFs that would make significant investments in derivatives. 

IIROC publishes second quarter 2010 circuit breaker levels

On April 1, the Investment Industry Regulatory Organization of Canada (IIROC) published a notice relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds have been announced for the second quarter of 2010 as 1,050 points, 2,150 points and 3,200 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,200 points; Level 2 (20%) - 2,400 points and Level 3 (30%) - 3,600 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. results in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

Earn-out providing for return of assets if targets not met, rather than expressly requiring purchaser "effort", will not be rewritten just because the weak economy and other factors have made an asset return unpalatable to the seller

Airborne Health, Inc. v. Squid Soap, LP, C.A. No. 4410 VCL
Delaware Court of Chancery | Vice Chancellor Laster | November 23, 2009

Andrew S. Cunningham

This ruling by Vice Chancellor Laster of the Delaware Court of Chancery reminds us that in a commercial relationship, the contract reigns supreme. Even though it had a sympathetic story to tell, and despite some creative appeals to tort and equitable doctrines, Squid Soap couldn't get around the fact that the Asset Purchase Agreement (APA) it had negotiated with acquiror Airborne Health - with payment heavily weighted toward the earn-out - had not adequately protected it against certain unanticipated post-closing events that occurred, most notably the economic downturn.

Background

Squid Soap had developed a child-friendly hand washing product. A hit with U.S. TV morning shows and major magazines, "Squid Soap" was soon picked up by Wal-Mart and other mass retailers. As the brainchild of a single entrepreneur, the Squid Soap business was ripe for a buyout. Despite interest from Procter & Gamble and a major hedge fund, Squid Soap selected Airborne Health, Inc., a larger entrepreneurial company, as its acquiror. Airborne had made its name with a highly successful vitamin and herb supplement that was marketed as effective against coughs and colds.

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SEC publishes staff views on no-action requests by issuers to suspend reporting obligations

The U.S. Securities and Exchange Commission published a staff legal bulletin on March 15 providing the views of its Division of Corporation Finance respecting the circumstances under which issuers may suspend their reporting obligations under section 15(d) of the Securities Exchange Act of 1934 by relying on Rule 12h-3. Citing the routine nature of no-action requests by issuers, the large body of no-action precedent and the guidance in the bulletin, the Division is of the view that, on a going-forward basis, issuers that fit within the situations identified by the bulletin and that satisfy the relevant conditions do not need a no-action response before filing the applicable form to suspend its section 15(d) reporting obligations.

U.S. Senate committee introduces financial stability bill

Earlier this month, U.S. Senator Chris Dodd, Chairman of the Senate Committee on Banking, Housing, and Urban Affairsunveiled the "Restoring American Financial Stability Act of 2010". According to Senator Dodd, the bill will (i) end "too big to fail" bailouts; (ii) create a strong and independent consumer protection watchdog; (iii) create an early warning system; and (iv) bring transparency and accountability to "exotic instruments" like hedge funds and derivatives. Of particular note, the bill also contains provisions regarding executive compensation (Subtitle E, beginning on page 868) and corporate governance (Subtitle G, beginning on page 895). A summary of the proposed legislation was also released.

CNSX receives offshore securities market status from SEC

The Canadian National Stock Exchange (CNSX) announced yesterday that the U.S. Securities and Exchange Commission (SEC) has designated it a "Designated offshore securities market" under Regulation S of the Securities Act of 1933. The designation applies to CNSX and Pure Trading.

Regulation S allows companies to bypass SEC registration requirements where offerings and sales of securities occur outside the U.S. The exemptions were created in order to encourage investments in U.S. companies by non-U.S. investors and provide safe harbours with respect to offers and sales by issuers, distributors and affiliates under Rule 903 and offshore resales under Rule 904. Regulation S, however, imposes a number of resale restrictions to ensure sales to a U.S. person do not occur.

The SEC designation, however, means that restricted securities may now generally be resold on CNSX or Pure Trading without the seller having to determine whether the buyer is in the U.S. or a U.S. person, as would otherwise have been the case.

SEC approves new short selling rule

The U.S. Securities and Exchange Commission (SEC) adopted a new short selling rule on February 24, 2010. The new rule is intended to promote market stability and preserve investor confidence during periods of stress and volatility by restricting short sellers from being able to drive the price of a stock further down when it is already experiencing downward pressure. Short selling involves the sale of stock that an investor does not own or has borrowed, where the investor intends to profit by buying the stock back at a price that is lower than the price of the short sale.  While acknowledging that short selling may be useful in that it can promote market liquidity and pricing efficiency, the SEC cautions that it may also be used to "improperly drive down the price of a security or to accelerate a declining market in a security."

The SEC considered various options over the course of the last year to address its concerns regarding short selling and has decided to implement an alternative uptick rule that would restrict short selling when the price of a security has fallen more than 10% in one day.  This restriction would remain in effect for the remainder of the day as well as the next day and under   such a scenario, short selling would only be permitted if the price of the security was above the current national best bid. The rule will apply to all equity securities that are listed on a national securities exchange, whether traded on an exchange or in the over-the-counter market, and  requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution or display of a prohibited short sale. The rule will become effective 60 days after its publication in the Federal Register, while market participants will have six months to comply with its requirements.

SEC amends proxy rules to allow e-proxy flexibility

On February 22, the U.S. Securities and Exchange Commission (SEC) announced that it was amending its proxy rules to improve the "notice and access" model for furnishing proxy materials to shareholders. Under the model, issuers are permitted to post their proxy materials on the internet and send shareholders a "Notice of Internet Availability of Proxy Materials" (a Notice), directing shareholders to the website where the proxy materials may be found, in lieu of delivering a full set of proxy materials in paper accompanied by the above Notice. While the notice and access model, adopted in 2007, was intended to promote the use of the internet as a cost-efficient and reliable means of making proxy materials available to shareholders, the SEC has found lower shareholder response rates to proxy solicitations when the notice-only option is employed.

The SEC attributes the lower response rate in cases where the notice-only option is used to confusion among investors regarding the operation of the notice and access model. Thus, issuers and other soliciting persons will be provided additional flexibility under the amendments with respect to the format and content of the Notice, including being able to provide additional materials explaining the e-proxy rules, rather than being restricted to inclusion of the boilerplate-type language currently set out by the rules. Changes are also being made with respect to the time by which a soliciting person other than an issuer must send its Notice to shareholders. The effective date of the amendments, first proposed in October 2009, is March 29, 2010.

In addition to the introducing the above amendments, the SEC also published an Alert describing changes that went into effect in January 2010 eliminating discretionary voting by brokers in the election of directors and the effects of these changes on proxy voting. The SEC also launched a new website providing investors with general information respecting, among other things, proxy voting and e-proxy rules.

FINRA's TRACE now includes government agency debt and primary bond market

As of March 1, the U.S. Financial Industry Regulatory Authority (FINRA) Trade Reporting and Compliance Engine (TRACE) will now include debt issued by federal government agencies, government corporations and government-sponsored enterprises as well as primary market transactions in new corporate debt issues. The expansion of TRACE represents a 50% increase in the number of debt securities subject to its reporting requirements.

SEC approves statement on global accounting standards and IFRS convergence

The SEC issued a statement on Wednesday outlining its position with respect to global accounting standards. Specifically, the SEC stated that it supports "the objective of financial reporting in the global markets pursuant to a single set of high-quality globally accepted accounting standards." It recognizes, however, that incorporating IFRS into the U.S. financial reporting environment would be a large task and recognizes the need for deliberation as well as a sufficient transition time to prepare for such a change.

Thus, the SEC directed its staff to develop and execute a work plan to enhance the SEC's understanding and assist it in making a decision in 2011 regarding the incorporation of IFRS into the financial reporting system for U.S. issuers. Specifically, the work plan sets out the following areas of concern: (i) sufficient development and application of IFRS for the U.S. domestic reporting system; (ii) the independence of standard setting for the benefit of investors; (iii) investor understanding and education regarding IFRS; (iv) examination of the U.S. regulatory environment that would be affected by a change in accounting standards; (v) the impact on issuers; and (vi) human capital readiness.

Considering the time required to successfully implement a change in financial reporting, the SEC stated that should it make the decision in 2011 to incorporate IFRS, the earliest that U.S. companies would report under such a system would be approximately 2015 or 2016, although SEC staff have been asked to further evaluate this timeline as part of the work plan.

SEC proxy disclosure enhancements to soon take effect

In December 2009, the U.S. Securities and Exchange Commission (SEC) published final amendments to its rules to enhance proxy disclosure. Proposed amendments were first released in July 2009 and the final rules reflect changes made in response to many of the comments received by the SEC in response to the proposed amendments.

Specifically, the final rules intend to improve the information that companies provide to shareholders regarding: (i) risk, by requiring disclosure respecting the board's role in risk oversight and, where relevant, disclosure respecting compensation policies and practices that are likely to expose the company to material risk; (ii) governance and director qualifications, by requiring expanded disclosure of the background and qualifications of directors and nominees, as well as disclosure concerning a company's board leadership structure; and (iii) compensation, by amending the reporting of stock and option awards and requiring, in certain circumstances, the disclosure of compensation consultants' potential conflicts of interest.

The amendments are effective as of February 28, 2010.

SEC publishes concept release respecting structure of equity markets

The U.S. Securities and Exchange Commission (SEC) announced in January that it was seeking public comment on issues respecting the current equity market structure. In publishing the concept release, the SEC specifically cited the dramatic change in the secondary market for equities in recent years and the trend towards a market structure with primarily automated trading. Thus, the SEC intends to assess "whether market structure rules have kept pace with, among other things, changes in trading technology and practices". The release seeks specific comment on issues such as market quality metrics, the fairness of market structure, high frequency trading, co-location services and dark liquidity. The SEC will use the comments received to help determine whether additional regulatory measures are needed to improve the current equity market structure. Further, the SEC also proposed for public comment a new market structure initiative that is intended to strengthen the risk management control of broker-dealers that provide market access.

CFTC Chairman discusses OTC derivatives regulation

Chairman Gensler
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www.cftc.gov
In early January, Chairman Gary Gensler of the U.S. Commodity Futures Trading Commission, gave a speech to the Council on Foreign Relations in New York regarding the reform of over-the-counter derivatives markets. Chairman Gensler discussed the three key components to reform, being the explicit regulation of derivatives dealers, the increase in transparency of OTC derivatives markets and a move of standard OTC derivative transactions to regulated clearinghouses. Chairman Gensler gave a speech on the same topic on January 12 to the Atlantic Council. Legislation intended to regulate OTC derivatives passed the U.S. House of Representatives in December 2009.

SEC releases final rule regarding shareholder approval of executive comp of TARP recipients

In January, the U.S. Securities and Exchange Commission (SEC) announced amendments to the proxy rules under the Securities Exchange Act of 1934 to require companies that have received TARP money to permit a shareholder advisory vote on executive compensation. The rules are effective February 18, 2010.

SEC to issue guidance on climate change disclosure

On Wednesday, the U.S. Securities and Exchange Commission (SEC) approved the issuance of interpretive guidance respecting existing SEC disclosure requirements that apply to business or legal developments relating to climate change. While the guidance has yet to be published by the SEC, a speech by SEC Commissioner Luis A. Aguilar suggests that the SEC's release will clarify the responsibility of companies to discuss (i) the direct effects of existing and pending environmental regulation, legislation and treaties on a company's business, operations, risk factors and in MD&A; (ii) the indirect effects of such regulation on a company's business; and (iii) the effect on a company's business and operations related to the "physical changes to our planet caused by climate change". Commissioner Aguilar also suggested that companies should know their emissions information in order to evaluate risks and focus on investors when considering the materiality of information.

IIROC publishes first quarter 2010 circuit breaker levels

Yesterday, the Investment Industry Regulatory Organization of Canada (IIROC) published a notice relating to securities trading halts in coordination with the application of 'circuit breakers' on U.S. markets.  In the U.S., trading halts occur based on trigger levels of 10%, 20% and 30% drops of the Dow Jones Industrial Average, calculated at the beginning of each quarter using the previous month's average closing value. The NYSE thresholds have been announced for the first quarter of 2010 as 1,050 points, 2,100 points and 3,150 points respectively.

It is IIROC's policy that it will coordinate trading halts with U.S. markets, but for days when Canadian markets are open and American markets are closed, IIROC has published related triggers based on drops in the S&P/TSX Composite Index. The TSX trigger levels are: Level 1 (10%) - 1,150 points; Level 2 (20%) - 2,300 points and Level 3 (30%) - 3,450 points, with the effects of the triggers depending on the time of day the threshold drop occurs. Triggering the Level 1 threshold between 2:00 and 2:30 p.m. results in a 30 minute halt in trading, while trading would be shut down for the rest of the day should a Level 3 halt occur.

U.S. House passes comprehensive financial reform bill

On December 11, the U.S. House of Representatives approved comprehensive legislation intended to "modernize America's financial rules" in response to last year's market meltdown. The Wall Street Reform and Consumer Protection Act of 2009, which passed by a vote of 223-202, combines a number of legislative initiatives announced in the past year into a single piece of legislation numbering almost 1300 pages in length.

The bill includes provisions respecting (i) shareholder approval of executive compensation and golden parachutes; (ii) enhanced compensation structure reporting; (iii) the regulation of OTC derivatives and specifically the requirement that all standardized swap transactions between dealers and "major swap participants" be cleared and traded on an exchange or electronic platform; and (iv) the registration and regulation of advisers to private pools of capital. 

There is no guarantee, however, that the bill will become law, as it must now go to the Senate for consideration.

SEC adopts rule amendments to strengthen protections for investment adviser custodial arrangements

The U.S. Securities and Exchange Commission (SEC) yesterday announced the adoption of rule amendments to "substantially increase the protections" for investors that trust their assets with SEC-registered investment advisers. Depending on the investment adviser's custody arrangement, the rules would require (i) advisers to engage independent public accountants to conduct annual surprise exams to verify that client assets exist; and (ii) a written custody control review that "describes the controls in place at the custodian, tests the operating effectiveness of those controls and provides the results of those tests" when the adviser or affiliate acts as custodian of client assets. The amended rules would also impose new controls on advisers to hedge funds and other private funds that comply with the custody rule. Such advisers would have to obtain an audit of the fund and deliver the fund's financial statements to fund investors, while the auditor would have to be registered with and subject to inspection by the Public Company Accounting Oversight Board.

According to SEC Chairman Mary Schapiro, "[t]hese new rules will apply additional safeguards where the safeguards are needed most - that is, where the risk of fraud is heightened by the degree of control the adviser has over the client’s assets."

SEC reopens comment period on shareholder director nomination proposal

The U.S. Securities and Exchange Commission (SEC) announced on Monday that it is reopening the comment period for its proposals on shareholder director nominations. Originally published earlier this year, the proposal would change federal proxy rules to make it easier for shareholders to nominate and elect directors to company boards. The SEC decided to reopen the comment period to allow interested parties to comment on additional data and related analyses that were submitted during and after the initial comment period and included in the public comment file.

U.S. Senator introduces Energy Security Through Transparency Act of 2009

Charles R. Kraus

On September 23, 2009, United States Senator Richard Lugar introduced a Bill entitled the Energy Security Through Transparency Act of 2009 (ESTA), which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs for further consideration.

The progress of ESTA is of interest to Canadian oil and gas issuers with annual reporting obligations under the U.S. Securities Exchange Act of 1934. Among other things, ESTA proposes to require the U.S. Securities and Exchange Commission to issue rules requiring "resource extraction issuers" (defined as an issuer that engages in the commercial development of oil, natural gas, or minerals) to include in their annual reports information relating to any payments made by the issuer, a subsidiary or partner of the issuer, or an entity under the control of the issuer to a foreign government for the purpose of the commercial development of oil, natural gas, or minerals.

ESTA provides that the required disclosure shall include the type and total of all such payments (i) for all projects, and (ii) to each foreign government, and the term "payment" is defined to include taxes, royalties, fees, licenses, production entitlements, bonuses and other material benefits.

SEC publishes proposals regarding dark pools

As described in our post of October 21, the U.S. Securities and Exchange Commission (SEC) recently voted to propose measures intended to increase the transparency of private automated trading systems known as "dark pools". On November 13, the SEC published its proposed rules and amendments to joint-industry plans. The proposals would: (i) amend the Exchange Act quoting requirements so as to apply expressly to actionable "Indications of Interest", which are similar to a typical buy or sell quote and permit others to trade; (ii) revise the order display requirements of Regulation ATS, including a substantial lowering of the trading volume threshold that triggers public display obligations for alternative trading systems; and (iii) amend the joint-industry plans for publicly disseminating consolidated trade data to require real-time disclosure of the identity of dark pools and other alternative trading systems on the reports of their executed trades.

IASB and FASB reaffirm commitment to improve IFRS

On November 5, the International Accounting Standards Board (IASB) and the U.S.Financial Accounting Standards Board (FASB) released a statement reaffirming their commitment to improving IFRS and U.S. GAAP and to bring about their convergence. The joint statement also described the boards' plans and milestone targets for individual projects.

SEC Chairman discusses proxy voting

On November 4, Mary Schapiro, Chairman of the U.S. Securities and Exchange Commission (SEC), gave a speech in New York in which she described the SEC's recent initiatives related to proxy voting. Specifically, Ms. Schapiro discussed proposals respecting shareholder director nominations, proxy enhancements and e-proxy revisions. She also stated that SEC staff is currently conducting a comprehensive review of the mechanics of proxy voting with a view to ensuring that the proxy voting system "operates with the degree of reliability, accuracy, transparency and integrity that shareholders and companies have the right to expect."

SEC releases staff accounting bulletin regarding oil and gas reporting

Charles Kraus

On October 30, the U.S. Securities and Exchange Commission (SEC) announced the release of a staff accounting bulletin to update guidance "on how the agency's staff interprets accounting rules related to the oil and gas industry." The guidance is intended to correspond with rulemaking that the SEC approved in December 2008 to modernize its oil and gas company reporting requirements. The principal revisions of the guidance include:

  • changing the price used in determining quantities of oil and gas reserves to use an average price based upon the prior 12-month period rather than year-end prices;
     
  • eliminating the option to use post-quarter-end prices to evaluate write-offs of excess capitalized costs under the full cost method of accounting; 
     
  • removing the exclusion of unconventional methods used in extracting oil and gas from oil sands or shale as an oil and gas producing activity; and
     
  • removing certain questions and interpretative guidance which are no longer necessary.

The guidance updates Topic 12 of the codification of staff accounting bulletins in order to make it consistent with the Commission’s Final Rule Release, Modernization of Oil and Gas Reporting, issued December 31, 2008. 

Financial Services Committee approves credit rating agencies bill

It's been a busy week for the U.S. House Financial Services Committee. Following its approval of a private adviser registration bill and the introduction of draft legislation to address systemic financial risk, the Committee has also approved a bill respecting credit rating agencies. The proposed legislation is intended to "take strong steps to reduce conflicts of interest, stem market reliance on credit rating agencies, and impose a liability standard on the agencies." According to the Committee's press release, the proposed legislation expands on the Treasury proposal of July 2009. Specifically, the proposed legislation clarifies the ability of individuals to sue rating agencies, adds a duty to supervise an agency's employees, requires that agencies have a board with at least one-third independent directors, provides for greater public disclosure and includes provisions regarding former employees of rating agencies that go to work for an issuer.

U.S. House Financial Services Committee introduces bill to address systemic financial risk

Secretary Geithner
Secretary Geithner
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www.treasury.gov
On October 27, the U.S. House Committee on Financial Services announced the introduction, in conjunction with the Treasury Department, of draft legislation intended "to address the issue of systemic risk and 'too big to fail' financial institutions." Specifically, the legislation would establish a "Financial Services Oversight Council" to identify financial companies and financial activities that should be subject to "heightened prudential standards in order to promote financial stability and mitigate systemic risk". A variety of options would be available to regulators in response to identified risks and according to the release, the proposed legislation would provide "for the orderly wind-down of failing firms" to ensure that "industry and shareholders absorb the risks and costs of failure, not taxpayers."

Secretary of the Treasury Timothy Geithner, meanwhile, testified yesterday before the House Committee on Financial Services regarding the draft legislation. Secretary Geithner cited the five key elements necessary for reform, being: (i) the orderly resolution of failing financial institutions; (ii)  no open-bank assistance to failing financial institutions; (iii) protecting taxpayers from losses; (iv) limiting the Federal Reserve's and the FDIC's emergency authorities; and (v) stronger constraints on size and leverage. According to Secretary Geithner, "the test for any effective set of reforms" is whether the above elements are included. According to the Secretary, the draft legislation "meets that test."

U.S. Financial Services Committee approves private adviser registration bill

The U.S. House Committee on Financial Services announced yesterday that it had passed draft legislation (available here in its initial form as introduced in the House of Representatives) that would require the registration of advisers to private pools of capital. The draft legislation would also introduce new recordkeeping and disclosure requirements for private advisers and increase the regulation of advisers to hedge funds, private equity firms and other private pools of capital.

SEC votes to propose measures regarding dark pools

Chairman Schapiro
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www.sec.gov
The U.S. Securities and Exchange Commission (SEC) today voted to propose measures to increase transparency of private automated trading systems known as "dark pools". Such private systems do not display quotes in the public quote stream and, according to the SEC, the lack of transparency associated with dark pools could create a "two-tiered market that deprives the public of information about stock prices and liquidity." As such, the SEC's proposals include requiring the public disclosure of information regarding "Indications of Interest" (IOIs), which are similar to a typical buy or sell quote and permit others to trade. As described in our post of June 19, SEC Chairman Mary Schapiro has discussed the need to regulate dark pools in the past, while in Canada, regulators recently published a consultation paper on the subject.

The SEC is inviting public comments on the proposals, which have yet to be published on the SEC website, for 90 days after their publication in the Federal Register. For more information, see the text of Ms. Schapiro's speech before the SEC's open meeting as well as the SEC fact sheet on the subject.

Senior Supervisors Group issues report on risk management and internal controls

The Senior Supervisors Group, consisting of financial supervisors from nine different countries, including the U.S. Securities and Exchange Commission and the Office of the Superintendent of Financial Institutions (Canada), issued a report today (October 21) titled "Risk Management Lessons from the Global Banking Crisis of 2008". The report identifies deficiencies in the "governance, firm management, risk management, and internal control programs that contributed to, or were revealed by, the financial and banking crisis of 2008." The weaknesses identified in the report include the failure of some boards and managers to establish and adhere to acceptable levels of risk, as well as compensation programs that "conflicted with the control objectives of the firm". Despite recent progress in improving risk management practices at financial firms, the report concludes that weaknesses remain that still need to be addressed.

RiskMetrics publishes 2009 postseason report

RiskMetrics Group has published its 2009 Postseason Report, which reviews the issues and trends of the 2009 proxy season, including proxy access, broker voting and executive compensation. While the report focuses more on the U.S. environment, Canadian issues are considered.

U.S. House Committee approves OTC derivative regulation

The U.S. House Committee on Financial Services yesterday approved draft legislation to regulate over-the-counter derivatives. Among other things, the legislation requires that: (i) standardized swap transactions be executed on a national securities exchange, board of trade or swap execution facility; (ii) swap dealers and major participants register with the appropriate commission; and (iii) reporting and recordkeeping obligations are met. The U.S. Treasury Department first proposed such legislation in mid August.

SEC and CFTC issue joint report on regulatory harmonization

Earlier today, the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) issued a joint report on the issue of regulatory harmonization. The report follows joint meetings held in early September and makes a series of recommendations on such issues as oversight and enforcement, investor and customer protection, compliance and the improvement of coordination and cooperation between the agencies.

Of particular note, the report recommends that the SEC "review its approach to cross-border access to determine whether greater efficiencies could be achieved with respect to cross-border transactions in securities..." Specifically, the report states that the SEC may consider amendments to Rule 15a-6 of the Securities Exchange Act of 1934 regarding the interaction of U.S. investors with foreign broker-dealers.

US House Committee releases draft legislation on financial reform

On October 1, the U.S. House Committee on Financial Services released, among other bills, a discussion draft of the Investor Protection Act. The IPA is intended to strengthen the powers of the Securities and Exchange Commission, while enhancing the SEC's enforcement powers and funding. Further, under the draft bill, all financial intermediaries that provide advice would have a fiduciary duty toward their customers and the SEC would also be granted the authority to prohibit or impose limitations on arbitration clauses respecting customer contracts.

On October 2, meanwhile, the Committee circulated a discussion draft of legislation intended to regulate over-the-counter derivatives. According to a committee member, the OTC bill "moves us in the right direction by reducing risk to the economy with robust and dynamic oversight of major market participants, while preserving appropriate risk-management tools for end users." The Committee is began meeting yesterday to discuss the OTC bill.

SEC publishes draft strategic plan for 2010-2015

The U.S. Securities and Exchange Commission (SEC) yesterday released for public comment a draft Strategic Plan outlining its mission, values and strategic goals for fiscal years 2010 to 2015. The identified goals include fostering and enforcing compliance with federal securities laws, establishing an effective regulatory environment, facilitating access to information that investors need to make informed investment decisions and enhancing the SEC's performance. Desired outcomes are discussed and the SEC also identified performance metrics by which to measure its progress.

SEC announces expiration of exemption to SOX provision

On October 2, the U.S. Securities and Exchange Commission (SEC) announced the upcoming expiration of the exemption from section 404 of the Sarbanes-Oxley Act currently enjoyed by public companies with a public float below $75 million. Section 404 of SOX requires public companies and their independent auditors to report on the effectiveness of internal controls. The extension for small public companies is scheduled to expire beginning with the annual reports of companies with fiscal years ending on or after June 15, 2010. The exemption had been set to expire for fiscal years ending on or after December 15, 2009, but was extended due to the recent publication of a study by the SEC's Office of Economic Analysis regarding whether post-2007 reforms were having the intended effect of "facilitating more cost-effective internal controls evaluations and audits." The study found a "significant reduction" in compliance costs following the 2007 reforms.

Certification of effectiveness of internal control over financial reporting is also required in Canada under NI 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings.  In contrast to the U.S., however, NI 52-109 does not require auditor attestation and permits "venture issuers" to omit certain certifications relating to internal controls over financial reporting and disclosure controls and procedures.

SEC approves rules for breaking clearly erroneous trades

The Securities and Exchange Commission (SEC) today announced its approval of new exchange rules (see, for example, filings respecting NYSE Arca, NASDAQ and the Chicago Board Options Exchange) for "breaking stock trades that deviate so substantially from current market prices that they are considered 'clearly erroneous.'" Specifically, the rules seek to provide consistent standards across equity markets.

Generally, the rules provide that a trade may be found to be clearly erroneous only if the price of a transaction occurring during regular trading hours exceeds the consolidated last sale price by more than 10% for stocks priced under $25, 5% for stocks priced between $25 and $50 and 3% for stocks priced over $50. The thresholds are set at 20%, 10% and 6%, respectively, for transactions occurring outside of regular trading hours. A filing involving five or more securities will be aggregated into a single filing, to which a 10% threshold will apply. Further, the erroneous trade review process must generally begin within 30 minutes of the trade.

Compare these quite specific rules to the more general discretion that applies on Canadian marketplaces by virtue of UMIR Rule 10.9, which has resulted in cancellations being quite rare events in Canada.

G-20 Leaders' Statement speaks of executive compensation reform

At the recent Pittsburgh summit, leaders of the G-20 met to, according to the leaders' statement, "turn the page on an era of irresponsibility and to adopt a set of policies, regulations and reforms to meet the needs of the 21st century global economy." The leaders' statement released on September 25 specifically discussed strengthening the international financial regulatory system by reforming compensation policies and practices and improving over-the-counter derivatives markets.

With respect to executive compensation, the G-20 endorsed the implementation standards of the newly-created Financial Stability Board respecting compensation, including: (i) avoiding multi-year guaranteed bonuses; (ii) requiring a significant portion of variable compensation be deferred, tied to performance and tied to appropriate clawbacks; (iii) ensuring that compensation for those having a material impact on the firm's risk exposure align with performance and risk; (iv) making compensation policies and structures transparent through disclosure requirements; (v) limiting variable compensation as a percentage of total net revenue when it is inconsistent with the maintenance of a sound capital base; and (vi) ensuring that compensation committees overseeing compensation policies are able to act independently. The Financial Stability Board is expected to complete a review of actions taken by national authorities to implement its compensation principles by March 2010. A progress report discussing actions taken and to be taken in the future was also released.

SEC proposes flash order ban

The U.S. Securities and Exchange Commission yesterday proposed a ban on flash trading, a practice that allows certain market participants to access information about the best available prices before the public is given an opportunity to trade. According to SEC Chairman Mary Schapiro, flash orders "provide a momentary head-start in the trading arena that can produce inequities in the markets and create disincentives to display quotes." Public comments on the amendments, which have yet to be published, are being accepted by the SEC until 60 days following their publication in the Federal Register.

Update: The proposed amendments have now been published.

SEC and FSA discuss common approaches to regulatory issues

Chairman Schapiro
Photo Courtesy of
www.sec.gov
The U.S. Securities and Exchange Commission (SEC) and the U.K. Financial Services Authority (FSA) announced plans today "to explore common approaches to reporting and other regulatory requirements for key market participants such as hedge funds and their advisers." Specifically, the two regulators "agreed to identify a common, coherent set of data to collect from hedge fund advisers/managers" in order to help the regulators identify risks to their regulatory mandates and objectives. The announcement, subsequent to a meeting between the SEC and FSA, stated that discussions also included OTC markets and central clearing, accounting issues, regulatory reform, credit agency oversight, short selling and corporate governance and compensation practices. Today's release follows an announcement by the U.S. Commodity Futures Trading Commission (CFTC) yesterday that the CFTC had signed a memorandum of understanding with the FSA "to enhance cooperation and the exchange of information relating to the supervision of cross-border clearing organizations."

SEC announces new Division of Risk, Strategy, and Financial Innovation

Yesterday, the U.S. Securities and Exchange Commission (SEC) announced the creation of its new Division of Risk, Strategy, and Financial Innovation, which combines the Office of Economic Analysis, the Office of Risk Assessment and certain other functions. According to the SEC, the new division will  "provide the Commission with sophisticated analysis that integrates economic, financial, and legal disciplines." The three broad areas that fall under the new division's responsibilities are risk and economic analysis, strategic research and financial innovation.

FINRA announces NASD rule changes regarding new investment banker registration category

In July, the U.S. Financial Industry Regulatory Authority (FINRA), published a regulatory notice regarding the approval by the Securities and Exchange Commission of amendments to NASD Rules 1022 and 1032.  The amendments, effective November 2, 2009 and first described in our post of March 19, require individuals engaged in investment banking activities to register under a new limited representative registration category for investment banking professionals and take a corresponding qualification exam in lieu of the current General Securities Registered Representative (Series 7) exam. A transition period, however, will allow individuals holding the Series 7 registration to opt into the new category until May 3, 2010 without having to take the new exam.

NYSE forms "Commission on Corporate Governance"

The New York Stock Exchange announced earlier this month that it is forming an independent advisory commission to "take a comprehensive look at strengthening U.S. best practices for corporate governance and the proxy process." While committee members have yet to be announced, the NYSE stated in its release that the commission will work with policymakers and interested constituents "to foster a comprehensive and constructive approach" to corporate governance and proxy reform.

U.S. Treasury Department announces OTC derivatives legislation

Secretary Geithner
Secretary Geithner
Photo Courtesy of
www.treasury.gov
On August 11, the U.S. Department of the Treasury announced that it had delivered to Congress proposed legislation respecting the regulation of over-the-counter (OTC) derivatives. Treasury Secretary Timothy Geithner spoke of the need for such regulation during testimony to Congress in July. According to the Department's press release, the proposed legislation "will provide for regulation and transparency for all OTC derivative transactions; strong prudential and business conduct regulation of all OTC derivative dealers and other major participants in the OTC derivative markets; and improved regulator and enforcement tools."

Specifically, the draft legislation requires that standardized OTC derivatives be centrally cleared by a securities or derivatives clearing organization, while encouraging the use of such standardized derivatives through higher capital and margin requirements for non-standardized derivatives. Financial regulatory agencies will have access on a confidential basis to OTC derivative transactions, while aggregated data on open positions and trading volumes will be available to the public. Meanwhile, federal banking agencies, the Commodity Futures Trading Commission and Securities and Exchange Commission will supervise and regulate OTC derivative dealers and major market participants. The Treasury Department hopes to have the reforms passed by the end of the year.

SEC publishes alternative uptick rule proposal

Chairman Schapiro
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www.sec.gov
On August 17, 2009, the U.S. Securities and Exchange Commission re-opened the comment period on its proposals respecting short sales first published in April. The comment period was extended to allow for supplemental comments on an alternative uptick rule that was not previously specifically subject to the request for comments. In April, the SEC sought comments on proposals that represented two approaches to imposing restrictions on short selling; the first to apply on a market-wide and permanent basis and the second during severe market declines only. With respect to the proposed market-wide and permanent rules, two alternative short sale price tests were proposed. The first was based on the current national best bid (proposed modified uptick rule) and the second based on the last sale price (proposed uptick rule). While the April proposals did not specifically seek comments on the alternative uptick rule, which would permit short selling only at a price at or higher than the current national best bid, it did enquire whether it would be preferable to the proposed modified uptick rule and the proposed uptick rule.

Under the alternative uptick rule, in an advancing or declining market, short selling would generally only be permitted at an increment above the current national best bid. The alternative uptick rule proposal is slightly different from April's proposed modified uptick rule (and the proposed uptick rule), in that only allowing short selling at an increment above the national best bid would not allow short sale to get immediate execution and would, therefore, restrict short selling to a greater extent than the other two proposed rules. It would not, however, require monitoring the sequence of bids or last sale prices. According to the SEC’s press release, this alternative uptick rule would, as a result, be easier to monitor. The comment period for the proposal will extend for 30 days from the date of publication of the proposal in the Federal Register.

CDS' New York Link may be severed

Earlier this month, CDS Clearing and Depository Services (CDS), announced that participants of the New York Link service, which allows CDS participants to clear and settle exchange and over-the-counter trades with U.S. broker-dealers via the National Securities Clearing Corporation (NSCC), will have to satisfy additional collateral requirements as of November 1, 2009. As of that date, CDS will "no longer have access to the collateral needed to protect the remaining New York Link participants from the default of a single sponsored participant." As such, CDS will require participants of the New York Link to provide additional collateral and may also require participants to pre-fund their NSCC payment obligations "from time to time". Participants have until September 30 to advise CDS whether they will remain a CDS-sponsored participant or become direct members of the NSCC and Depository Trust Company (DTC). According to CDS, "[b]ased on the number of participants who would be interested in continuing under the new requirements, CDS Clearing will evaluate the economic and risk containment impacts on operating these services." The Depository Trust & Clearing Corporation (the parent company of the NSCC and DTC), meanwhile, is prepared to "immediately begin processing membership applications of Canadian firms who wish to become members of its NSCC and DTC subsidiaries and who meet the membership criteria."

Continued listing requirements for NYSE modified

Earlier this year, the New York Stock Exchange  (NYSE) adopted a temporary policy wherein the market capitalization continued listing standard would be reduced from $25 million to $15 million. The changes have now been made permanent as of July 2, 2009.

U.S. House of Representatives approves "say on pay" bill

On July 31, the U.S. House of Representatives approved the "Corporate and Financial Institution Compensation Fairness Act of 2009", which deals with say-on-pay and compensation committee independence. The final version of the bill incorporates amendments subsequent to its approval by the House Financial Services Committee, with the final version clarifying that the section regarding enhanced compensation structure reporting to reduce "perverse incentives" shall not apply to covered financial institutions with assets of less than $1 billion. Whether the proposed legislation makes it through the Senate remains to be seen.

U.S. House Committee on Financial Services passes executive compensation reform bill

The U.S. House Financial Services Committee announced yesterday that it has approved legislation dealing with say-on-pay and compensation committee independence. While the legislation is similar to the proposals released earlier this month by the Department of the Treasury, the House legislation also includes a provision that would allow regulators to prescribe regulations that prohibit compensation structures that regulators determine encourage "inappropriate risks" by financial institutions that "could threaten the safety and soundness of covered financial institutions" or have "serious adverse effects on economic conditions or financial stability." It is expected that the House of Representatives will consider the bill on Friday.

SEC Investor Advisory Committee agrees on wide-ranging agenda

The Securities and Exchange Commission's Investor Advisory Committee, having held its first meeting on Monday, announced today that it has agreed on a broad agenda. Identified topics for discussion moving forward include: the fiduciary duties of financial intermediaries, disclosures to investors, whether majority voting for directors should be mandatory for all U.S. companies and whether investors have the information necessary to make informed proxy voting decisions.

SEC takes further action on short sales

The U.S. Securities and Exchange Commission yesterday announced that it is taking further steps in an attempt to curtail abusive "naked" short selling in equity securities and improve transparency respecting short sales generally. To that end, the SEC is making permanent, with some limited modifications, its interim final rule of October 2008 requiring broker-dealers to promptly purchase or borrow securities to deliver on a short sale. Further, the SEC stated that it is working with self-regulatory organizations to make short sale volume and transaction data available on SRO websites. The SEC's consideration of proposals on short sale price tests and circuit breaker restrictions also continues.

IIROC and FINRA announce formal cooperation agreement

The Investment Industry Regulatory Organization of Canada (IIROC) and the U.S. Financial Industry Regulatory Authority (FINRA) today announced a cooperation agreement whose objective is to "enhance the effectiveness of both organizations through the exchange of information and other cross-border assistance." The news release describing the arrangement further stated that "[i]n addition to information sharing on compliance and enforcement related matters, IIROC and FINRA plan to work together on issues related to firm oversight and examinations."

U.S. Treasury Department introduces credit rating agency reform

Secretary Geithner
Secretary Geithner
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www.treasury.gov

The U.S. Department of the Treasury announced on Monday that it was delivering to Congress proposed legislation intended to address the situation of recent years where "investors were overly reliant on credit rating agencies that often failed to accurately describe the risk of rated products." Under the proposed legislation and rules to be adopted by the Securities and Exchange Commission, credit rating agencies would, among other things, have to register with the SEC and be subject to a higher degree of oversight, they would be prohibited from providing consulting services to companies that contract for ratings, agencies would be required to manage and disclose conflicts of interest and preliminary ratings would have to be publicly disclosed to reduce "ratings shopping". According to the Treasury Department's fact sheet, the proposals will "increase transparency, tighten oversight, and reduce reliance on credit rating agencies."

U.S. Treasury Department proposes hedge fund registration requirements

As described in our post of June 18, the U.S. Treasury Department's financial reform plan included a proposal requiring that investment advisers to hedge funds and other private pools of capital whose assets under management exceed "some modest threshold" be registered with the Securities and Exchange Commission under the Investment Advisers Act. On July 15, the Treasury Department delivered such proposed legislation to Congress.

While some hedge fund managers are currently subject to regulation as “investment advisers” by the SEC under the Investment Company Act of 1940, the majority operate outside the ambit of the SEC as they are organized to qualify for exemptions from registration requirements that generally apply to managers of similar types of investment vehicles, such as mutual funds. The proposed legislation, however, would impose registration requirements on advisers to private investment funds with more than $30 million of assets under management. Funds would be subject to various obligations with respect to financial reporting, conflict of interest prohibitions and increased disclosure requirements. According to the Treasury Department's press release, the new legislation "would help protect investors from fraud and abuse, provide increased transparency, and provide the information necessary to assess whether risks in the aggregate or risks in any particular fund pose a threat to our overall financial stability.

U.S. Treasury Department releases proposed legislation dealing with say-on-pay and compensation committee independence

Ramandeep Grewal

On July 16, 2009, the U.S. Department of the Treasury released draft legislation that includes proposed amendments relating to "say-on-pay" in the form of a required non-binding shareholder vote on compensation as well as proposals relating to the authority and composition of an issuer’s compensation committee.

With respect to “say-on-pay”, the draft legislation would require any proxy, consent or authorization for an annual meeting of shareholders (or special meeting in lieu thereof) to provide for a separate non-binding shareholder vote to approve the compensation of executives. In addition to including such a non-binding shareholder vote relating to annual compensation disclosure, the draft legislation would also require that a similar vote be provided to shareholders in any proxy or consent solicitation material for a meeting or special meeting of shareholders that concerns an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all of the assets of an issuer. In such circumstances, the person making the solicitation would be required to disclose any agreements or understanding that such person has with executive officers concerning any type of compensation that is based on, or otherwise relates to, the proposed transaction as well as the aggregate total of all such compensation that may be paid or become payable to, or on behalf of, such executive officer. The disclosure is to be set out in further regulations to be promulgated by the Securities and Exchange Commission and the SEC has been given one year to issue such further regulations or other rules that may be required. 

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SEC publishes proposed amendments regarding proxy disclosure and solicitation

The U.S. Securities and Exchange Commission has now published proposed amendments to its rules in order to "improve the disclosure shareholders of public companies receive regarding compensation and corporate governance, and facilitate communications relating to voting decisions." The proposals, announced earlier this month, would expand the scope of compensation disclosure and analysis to require disclosure of a company's overall compensation program as it related to risk management. Disclosure requirements regarding the qualifications of directors and nominees would also be extended and certain issues relating to the solicitation of proxies and the granting of proxy authority would be clarified. Comments on the proposals are being accepted by the SEC until September 15, 2009.

SEC Chairman testifies in Congress on SEC oversight

Chairman Schapiro
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www.sec.gov
Chairman Mary Schapiro of the Securities and Exchange Commission (SEC) testified before the House Committee on Financial Services' Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises yesterday respecting the SEC's "role in helping to address the financial crisis" as well as the actions being taken "to improve investor protection and restore confidence" in financial markets. In her testimony, Ms. Schapiro provided an overview of the SEC's recent work and its accomplishments during her tenure at the Commission and outlined the steps the SEC is taking to address ongoing issues, including strengthening examination and oversight, improving transparency and investor protection, combating abusive short selling, enhancing the regulation of credit rating agencies and strengthening shareholder rights. Of interest, Ms. Schapiro noted that the SEC's most recent proposals regarding the regulation of short sales resulted in over 3,700 comment letters, which are currently being reviewed by SEC staff.

Secretary Geithner testifies regarding regulation of OTC derivatives

Secretary Geithner speaking in February
Citing the "enormous scale" and "critical role" of over-the-counter (OTC) derivatives in the financial markets, U.S. Treasury Secretary Timothy Geithner outlined the steps the Obama Administration intends to take to regulate OTC derivatives in testimony to Congress on July 10. The steps include: (i) requiring that all standardized derivative contracts be cleared through well-regulated central counterparties and executed either on regulated exchanges or regulated electronic trade execution systems; (ii) encouraging greater use of standardized OTC derivatives through capital requirements and other measures to facilitate migration of such derivatives onto central clearinghouses and exchanges; (iii) requiring all OTC derivative dealers and other major market participants to be subject to supervision and registration; (iv) making OTC derivative markets fully transparent by the imposition of recordkeeping and reporting requirements; (v) providing the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) with authority to enforce the regulation of OTC derivative markets; (vi) working with the SEC and CFTC to improve standards governing who can participate in OTC derivative markets and (vii) working with international counterparts to ensure that the U.S. regulatory regime is matched by effective regimes internationally. The testimony follows on recent testimony by SEC Chairman Mary Schapiro on the same subject.

Obama administration introduces bill to create Consumer Financial Protection Agency

On June 30, the Obama Administration delivered to Congress a bill that would create the Consumer Financial Protection Agency. The agency's mission would be to regulate the provision of consumer financial products and services by promoting "transparency, simplicity, fairness, accountability, and access in the market". More specifically, the agency would ensure that: 

  1. consumers have, understand, and can use the information they need to make responsible decisions about consumer financial products or services;
  2. consumers are protected from abuse, unfairness, deception, and discrimination;
  3. markets for consumer financial products or services operate fairly and efficiently with ample room for sustainable growth and innovation; and
  4. traditionally underserved consumers and communities have access to financial services.

The agency would also be provided with the power to investigate practices, issue cease and desist orders and commence civil actions against those that violate provisions of the statute. According to the Treasury Department's press release, "[f]or the first time, a single agency will have authority to examine and enforce compliance against any institution, bank or non-bank, that provides consumer financial products or services." 

SEC proposes enhanced disclosure requirements respecting proxy statements

On July 1, the U.S. Securities and Exchange Commission (SEC) proposed rule revisions "intended to improve the disclosure provided to shareholders of public companies" with respect to executive compensation and corporate governance matters in proxy and information statements. The proposals would require information regarding: the relationship of a company's overall compensation policies to risk; the qualifications of executive officers, directors and nominees; company leadership structure; and potential conflicts of interest of compensation consultants. Amendments to proxy rules intended to clarify how they operate were also proposed. The proposals follow a speech by SEC Chairman Mary Schapiro on the subject on June 10. Comments on the amendments, yet to be published on the SEC website, are being accepted until 60 days after their publication in the Federal Register.

The SEC also approved a proposal of the New York Stock Exchange (NYSE) to eliminate discretionary voting by brokers in the election of directors. Currently, NYSE Rule 452 permits voting by brokers without instructions in certain situations. The changes will apply to shareholder meetings held on or after January 1, 2010.

SEC Chairman calls for OTC derivatives regulation

Chairman Schapiro
Photo Courtesy of
www.sec.gov
Securities and Exchange Commission (SEC) Chairman Mary Schapiro appeared before the U.S. Senate's Subcommittee on Securities, Insurance, and Investment yesterday to testify regarding the regulation of over-the-counter (OTC) derivatives. Her testimony provided an overview of OTC derivatives markets and made the case for bringing securities-related OTC derivatives under the purview of the SEC.

Chairman Schapiro noted that while transactions involving OTC derivatives can replicate the economics of securities transactions without involving the purchase or sale of actual securities, such transactions currently fall outside the umbrella of federal securities laws. As such, Chairman Schapiro discussed a "functional and sensible approach to regulation", in which the SEC would have primary responsibility for securities-related OTC derivatives, while the responsibility for all other derivatives, including those related to such things as commodities, energy and foreign exchange would rest with the Commodity Futures Trading Commission. Citing the close relationship between the securities markets and securities-related OTC derivatives, Chairman Schapiro emphasized the importance of ensuring that such OTC derivatives be "subject to the federal securities laws so that the risk of arbitrage and manipulation of interconnected markets is minimized." Subjecting securities-related OTC derivatives to federal securities laws would also provide a unified and consistent framework for securities regulation.

For the testimony of the other witnesses that appeared before the Subcommittee, click here.

SEC to target "dark pools"

In a speech to New York financial writers yesterday, Securities and Exchange Commission Chairman Mary Schapiro discussed the SEC's concerns with private automated trading systems known as "dark pools". Such private systems do not display quotes in the public quote stream and according to Ms. Schapiro, the "lack of transparency has the potential to undermine public confidence in the equity markets, particularly if the volume of trading activity in dark pools increases substantially." As such, the SEC intends to take a "serious look" at potential regulatory actions to protect investors and market integrity.

Treasury Department proposals include regulation of private fund advisors

As described yesterday, the U.S. Treasury Department's "Financial Regulatory Reform: A New Foundation" includes numerous proposals to address perceived inadequacies in U.S. financial regulation. Of particular note, the report proposes requiring that investment advisers to hedge funds and other private pools of capital (including private equity and venture capital funds) whose assets under management exceed "some modest threshold" be registered with the Securities and Exchange Commission under the Investment Advisers Act. Registration of such investment advisers would make them subject to recordkeeping and disclosure requirements, including requirements to report to investors, creditors and counterparties, as well as regulators. While the reporting may vary across the different types of private pools of capital, the report proposed confidential reporting to regulators of the amount of assets under management, borrowings, off-balance sheet exposures and other “necessary” information. As stated in the report, "[r]equiring the SEC registration of investment advisers to hedge funds and other private pools of capital would allow data to be collected that would permit an informed assessment of how such funds are changing over time and whether any such funds have become so large, leveraged, or interconnected that they require regulation for financial stability purposes."

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U.S. Treasury Department releases proposed financial regulatory reforms

On June 17, U.S. President Barack Obama announced a series of proposed financial regulatory reforms, found in the Treasury Department's "Financial Regulatory Reform: A New Foundation". The recommendations include proposals to create comprehensive regulation of all OTC derivatives, harmonize futures and securities regulation and strengthen oversight of systemically important payment, clearing and settlement systems. An executive summary of the proposals was also released, as were related fact sheets.

Further U.S. regulation of executive compensation expected

Secretary Geithner
Secretary Geithner
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www.treasury.gov

The U.S. Securities and Exchange Commission released a statement Wednesday by Chairman Mary Schapiro regarding executive compensation. While recognizing that the SEC's role is not to set pay scales or cap compensation, Ms. Schapiro stated that the SEC will actively consider "a package of new proxy disclosure rules that will provide further sunshine on compensation decisions." A number of disclosure requirements that will be considered by the SEC were listed in the statement, including information regarding a company's overall compensation approach, potential conflicts of interest by compensation consultants and the experience and qualifications of director nominees.

On a similar note, Treasury Secretary Timothy Geithner released a statement after meeting with Ms. Schapiro, stating that legislation will be pursued in two specific areas respecting compensation practices. The first, "say on pay" legislation, would provide the SEC with authority to require that companies allow non-binding shareholder votes on executive compensation. The second proposed piece of legislation would provide the SEC with "the power to ensure that compensation committees are more independent, adhereing to standards similar to those in place for audit committees as part of the Sarbanes-Oxley Act."

SEC approves listing threshold for certain NYSE companies

Citing the "dramatic decline in stock prices and market capitalizations of many listed companies", the U.S. Securities and Exchange Commission recently published temporary changes filed by the New York Stock Exchange (NYSE) in its listing thresholds for certain listed companies. These changes went into effect on May 12, 2009, the date of filing by the NYSE, and will remain in force until October 31, 2009. Prior to these temporary amendments, the rules considered companies that qualified to list under the Earnings Test, Assets and Equity Test or the "Initial Listing Standard for Companies Transferring from NYSE Arca" standard of the NYSE's Listed Company Manual to be below compliance standards if their average global market cap over a consecutive 30 trading-day period was less than $75 million and, at the same time, total stockholders' equity was less than $75 million. These temporary changes have lowered the thresholds for these companies to $50 million. Although the changes are in effect, the SEC is inviting comments until June 25, 2009 as it has 60 days from the date of filing to abrogate the rule change.

U.S. GAO report recommends further industry guidance respecting short sales

The U.S. Government Accountability Office recently released a report with respect to its review of SEC rules and actions respecting naked short selling and failures to deliver. The report recommends that the SEC expedite the finalization of the temporary rule implemented in 2008 and develop a process that allows the SEC to "raise and resolve implementation issues that arise from SEC regulations".

For information on short sales in Canada, see our recent update of April 28, 2009.

SEC announces Investor Advisory Committee

On June 3, the U.S. Securities and Exchange Commission announced the creation of an Investor Advisory Committee. The Committee's scope includes advising the SEC on investors' concerns, providing perspectives on regulatory issues and serving as a source of information and recommendations with respect to the SEC's regulatory programs. The Committee is expected to begin its work in the next few weeks.

SEC proposes amendments to facilitate rights of shareholders to nominate directors

On May 20, the Securities and Exchange Commission proposed rule amendments "that would provide shareholders with a meaningful ability to...nominate the directors of the companies that they own." Under the proposals, shareholders that meet certain thresholds (including holding between 1% and 5% of the voting securities, depending on the circumstances) would be eligible to have their nominee included in proxy materials. The proposed amendments would also allow for shareholder proposals in proxy materials regarding a company's nomination procedures under certain circumstances.

Public comment on the proposed amendments will be accepted for 60 days after their publication.

SEC publishes uptick rule proposals

As recently announced, the SEC has been considering imposing restrictions on short sales and has now published its proposals on the subject. The options being considered include a short sale price test and a "circuit breaker" approach. The SEC is accepting comments on the proposals until June 19, 2009.

U.S. Eighth Circuit considers mutual fund adviser's fiduciary duties with respect to fees

The U.S. Court of Appeals for the Eighth Circuit recently released its opinion in Gallus v. Ameriprise, a case considering the scope of a mutual fund adviser’s fiduciary duties under section 36 of the Investment Company Act of 1940 (ICA). The Circuit Court found that while the Gartenberg v. Merrill Lynch case provided a “useful framework for resolving claims of excessive fees”, the size of the fee was not the only factor in considering an alleged violation of the ICA and that the adviser’s conduct during negotiation should also be considered. “[W]e read the plain language of § 36(b) to impose on advisers a duty to be honest and transparent throughout the negotiation process.”

In reversing the Minnesota District Court's decision, the Eighth Circuit found that the lower court should have compared the fees charged to institutional and mutual fund clients. “Indeed, the argument for comparing mutual fund advisory fees with the fees charged to institutional accounts is particularly strong in this case because the investment advice may have been essentially the same for both accounts.” Further, the District Court should have considered the defendants’ conduct “independent of the result of the negotiation” and specifically whether the defendants misled the plaintiffs with respect to the discrepancy in fees.

As such, the Eighth Circuit reversed the decision of the District Court granting the defendants summary judgment and remanded the case for further consideration.

SEC seeks comment on uptick rule on short sales

On April 8, 2009, the U.S. Securities and Exchange Commission voted to seek public comment on proposals to impose short sale price restrictions or circuit breaker restrictions and “whether such measures would help promote market stability and restore investor confidence.” The introduction of an uptick rule would be permanent and market-wide, while a "circuit breaker" would limit short selling for particular securities for the remainder of the day in the case of a severe decline in the security’s price. The SEC plans to publish the full text of the full proposals as soon as possible.

The proposals are now available here.

Delaware Supreme Court considers directors' fiduciary duties in sale of company

On March 25, 2009, the Supreme Court of Delaware released its decision in Lyondell Chemical Company v. Ryan, a case where the defendant directors of Lyondell were accused of breaching their fiduciary duties in conducting the sale of the company in July 2007. The plaintiffs claimed, among other things, that the directors did virtually nothing to develop a strategy for maximizing shareholder value once they became aware of the buyer’s filing of a Schedule 13D with the SEC in May 2007, which indicated that the company was “in play”. Since the company charter provided directors protection for breaches of their duty of care, this case turned on whether the directors breached their duty of loyalty by failing to act in good faith. The opinion of the Delaware Supreme Court was issued with respect to the defendants’ appeal of the decision of the Court of Chancery (memorandum opinion of July 29, 2008 and letter opinion of August 29, 2008) denying them summary judgment.

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Delaware court considers business judgment rule in light of current market challenges

The Delaware Court of Chancery recently released its Opinion in the case of In re Citigroup Inc. Shareholder Derivative Litigation, a derivative action initiated by shareholders of Citigroup against current and former directors and officers of the company. The plaintiffs claimed that the defendants breached their fiduciary duties by not adequately overseeing and managing the risks associated with the company’s involvement in the subprime lending markets. The plaintiffs maintained that the defendants ignored numerous “red flags” that indicated problems in the real estate and credit markets. The plaintiffs also alleged that the directors of the company were liable for corporate waste for, among other things, approving a letter agreement providing a multi-million dollar payment and benefits package for the company’s CEO upon retirement in November 2007. The defendants, meanwhile, brought a motion to dismiss the action, since the plaintiffs did not make a pre-suit demand to the company's directors to pursue litigation. The plaintiffs countered by pleading that demand would have been futile.

In its decision dismissing the oversight claims (for failing to adequately plead demand futility), the Court expounded on the business judgment rule and its application in the present case, where the plaintiffs framed their allegations as Caremark (failure of oversight) claims, when, in fact, the plaintiffs were “attempting to hold the director defendants personally liable for making (or allowing to be made) business decisions that, in hindsight, turned out poorly for the Company” (emphasis added). With respect to the corporate waste claim, the Court found that without further information regarding the additional compensation received by Citigroup’s CEO as a result of the letter agreement and the real value of various restrictive promises provided by him, there was reasonable doubt as to whether the compensation provided by the letter agreement was unconscionable. As such, the motion to dismiss this particular claim was denied.

Sweeping Changes to the Regulation of Hedge Funds and Private Equity Funds Proposed

Charles R. Kraus

Amid daily news stories and statements from U.S. public officials about bolstering financial system transparency through increased regulation, two U.S. senators have introduced a bill called the Hedge Fund Transparency Act (the Bill). If passed, the Bill would have significant implications not only for hedge funds, but for venture capitalists, private equity funds and other private funds, including potentially Canadian-domiciled and other offshore funds (Private Funds) that rely on commonly-used exemptions from the definition of “investment company” under the Investment Company Act of 1940 (the ICA). A statement issued by one of the Bill’s sponsors makes clear the intention to cast a wide net:

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SEC publishes final rule on interactive data for financial statments

The U.S. Securities and Exchange Commission (SEC) recently published a final rule requiring companies to incorporate interactive data, using eXtensible Business Reporting Language (XBRL), into financial statements. Issuers will have to "tag" data using a standard taxonomy and provide the interactive data as an exhibit to periodic and current reports and registration statements as well as transition reports for a change in fiscal year. Further, financial statements in interactive data format will have to be posted on a filer's corporate website. The requirements are intended to improve the usefulness of financial information to investors.  "Through interactive data, what is currently static, text-based information can be dynamically searched and analyzed, facilitating the comparison of financial and business performance across companies, reporting periods, and industries."

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Top five things Canadian issuers need to know about the SEC's new oil and gas reporting requirements

David TaniguchiCharles Kraus and Kristi Kasper |  PDF Version | Version française

As one of its last acts of 2008, the U.S. Securities and Exchange Commission (the SEC) issued its final rule adopting revisions to the oil and gas reporting disclosure requirements applicable to all U.S. domestic and most foreign issuers (the Final Rule)1. The rule revisions will become effective on January 1, 2010, and issuers will be required to begin complying with them in registration statements filed on or after that date, and in annual reports on Form 10-K and Form 20-F for fiscal years ending on or after December 31, 2009. Citing the potential for incomparable disclosures, the SEC will not permit issuers to follow the new rules prior to their effective date.

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OTC derivatives oversight and infrastructure initiatives announced in the U.S.

On November 14, 2008, the President’s Working Group on Financial Markets (PWG) announced a number of initiatives intended to provide regulatory oversight and prudent management of the over-the-counter derivatives market in the U.S. These initiatives include the implementation of central counterparty services for credit default swaps and the signing of a Memorandum of Understanding between the Federal Reserve, SEC and the Commodity Futures Trading Commission with respect to information sharing and consultation regarding CDS central counterparties issues. The PWG also announced a set of policy objectives to “guide efforts to address challenges associated with OTC derivatives.”

SEC extends prohibition of short selling financial institutions

The SEC announced yesterday that it was extending the Emergency Order of September 18 prohibiting the short selling of financial institutions. The Order was set to end at the end of the day on October 2nd, but considering the current state of the market, the SEC decided to extend the Order until the earlier of either the President's signing of the market "bailout" bill or 11:59 p.m. on October 17th, 2008.

SEC extends Order prohibiting naked short selling

The SEC has also extended its Emergency Order of September 17, 2008, which banned "naked" short selling. The Order was set to expire at the end of day October 1, but has now been extended to 11:59 p.m. on October 17, 2008. In the press release accompanying the extension Order, the SEC also communicated that the temporary reporting requirements regarding new short sales and the penalties for violations will extend beyond the above date in the form of an interim final rule.

SEC extends share repurchase Order

On October 1, the SEC announced that it is extending its Emergency Order of September 18 temporarily broadening the safe harbour from liability for issuers repurchasing securities. The extended Order will now terminate at 11:59 p.m. on October 17, 2008.

Update: The TSX has taken a similar course of action, extending its previous notice to October 17.

SEC publishes rule regarding changes to foreign issuer reporting

On September 23, 2008, the SEC issued amendments to its rules relating to foreign private issuers, which are intended to enhance information available to investors. Of note, the amendments will allow reporting foreign issuers to assess their eligibility to use the rules and special forms available to foreign private issuers once a year rather than continuously. The reporting deadline for annual reports by foreign private issuers, however, will be accelerated and disclosure requirements will be changed.

SEC introduces new short selling rules

The U.S. SEC has recently issued new rules, effective September 18, which require short sellers and broker-dealers to deliver securities by the close of business on the settlement date. A broker-dealer in violation of the close-out requirement will be forced to locate and pre-borrow securities for future short sales in the same security. The SEC took action due to its concern "about the possible unnecessary or artificial price movements based on unfounded rumors regarding the stability of financial institutions and other issuers exacerbated by 'naked' short selling."

SEC proposes IFRS roadmap

On Wednesday, the SEC also voted to publish a proposed roadmap that could lead to the adoption of International Financial Reporting Standards (IFRS) beginning in 2014.  The roadmap provides several milestones that lead to a 2011 decision on whether adoption of IFRS occurs.

SEC to modernize foreign company disclosure requirements

On Wednesday, the U.S. SEC voted to modernize and update disclosure requirements for foreign companies offering securities in U.S. markets. The amendments seek to improve access to such information by providing American investors with instant electronic access to foreign company disclosure on the internet and in English. The full text of the rules will be published by the SEC shortly.

Mutual Recognition Agreement signed between SEC and Australian Securities and Investments Commission

On Monday, the SEC announced that it had entered into a mutual recognition arrangement with the Australian Securities and Investments Commission (ASIC), together with the Australian Minister for Superannuation and Corporate Law. The agreement provides a framework for the parties to consider exemptions to regulations that would allow American and Australian exchanges and broker-dealers to operate in both jurisdictions without being subject to double regulation.  A Memorandum of Understanding Concerning Consultation, Cooperation and the Exchange of Information Related to the Enforcement of Securities Laws and a Memorandum of Understanding Concerning Consultation, Cooperation and the Exchange of Information Related to Market Oversight and the Supervision of Financial Services Firms were also agreed to, and are intended to apply broadly to all U.S. and Australian market activity.

SEC announces successor to EDGAR database

The SEC announced a successor to its EDGAR database today, which it states will provide faster and easier access to financial information. The new Interactive Data Electronic Applications (IDEA) will first supplement, but eventually replace EDGAR. IDEA will collate information from individual forms and allow investors to create reports and analysis, as opposed to the current system, which only allows investors to review one form at a time.

SEC approves amendments to NASDAQ definition of "independent director"

The US SEC recently approved a rule change to amend NASDAQ's definition of "independent director". Previous to the change, NASDAQ Rule 4200(a)(15)(B) generally provided that a director who accepted or had a family member who accepted any compensation from the company in excess of $100,000 during a period of 12 months within the previous three years may not have been deemed an independent director. The approved change to the Rule raises this threshold to $120,000.

SEC announces agreement on insider trading surveillance

In a press release dated August 13, 2008, the U.S. SEC announced that it was publishing for comment an agreement among self-regulatory organizations intended to improve the surveillance and detection of insider trading. The agreement seeks to better protect investors and improve market integrity by reallocating regulatory responsibility in order to eliminate duplication and gaps in surveillance among equity markets.

SEC announces new AML compliance initiatives

On August 7, 2008, the U.S. SEC announced two new anti-money laundering compliance initiatives. The first, an online reference site, was originally developed for the benefit of SEC examiners and provides links to relevant laws, rules and guidance to assist mutual funds in AML compliance efforts. The second initiative, a centralized SEC SAR Alert Message Line, will allow the reporting of Suspicious Activity Reports that may require immediate attention by the SEC.

U.S. SEC provides guidance on use of corporate websites for investor disclosure

On July 30, 2008, the U.S. Securities and Exchange Commission (SEC) announced new guidance for public companies with respect to investor disclosure on corporate websites. Citing the development of the internet and the emergence of social networking since the last time it issued such direction, the SEC guidance clarifies how companies can develop their websites while complying with securities regulations. 

CSX Corporation v. TCI and 3G Fund

CSX Corporation v. TCI and 3G Fund, June 11, 2008 | 08 CV 02764, U.S. District Court (S.D. N.Y.).

Alex Colangelo

U.S. Court deems hedge fund beneficial owners of shares due to arrangements designed to avoid disclosure obligations. The Court, however, finds itself constrained from ordering remedy sought by target company.

In a somewhat empty victory for the plaintiff railroad company, the U.S. District Court for the Southern District of New York found that the defendant hedge funds employed surreptitious means to avoid disclosure requirements while accumulating shares of CSX. Despite its findings, the District Court found itself restrained by precedent from preventing TCI and 3G Fund from exercising the votes associated with the shares they acquired during the time they were offside disclosure obligations. The plaintiff, therefore, had to settle for an injunction inhibiting the defendants from any future violations of disclosure obligations.

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Investment bank not liable for fairness opinion relying on unverified financial projections

The HA2003 Liquidating Trust v. Credit Suisse Securities LLC, February 20, 2008 | No. 06-3842 (U.S. Court of Appeals for the 7th Circuit)

Alex Colangelo

Contract between parties set out terms of engagement and the defendant did not have a duty to go beyond its mandate.

This case takes us back to the heady days of the dot-com boom. Back in the 1990s, HA-LO In­dus­tries was in the business of making logo-bearing promotional products that companies could use to market themselves. In 1999, the company decided it needed to join the e-commerce bandwagon and subsequently agreed to purchase Starbelly.com for $240 million in cash and shares. While Starbelly.com was a young start-up with a negligible track record, its e-commerce system was attractive to HA-LO.

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