Source: http://business.cch.com/updates/securities/november2013.htm
Timestamp: 2019-02-18 03:15:53
Document Index: 367032712

Matched Legal Cases: ['§ 3', '§ 3', '§ 4', '§ 4', '§ 4', '§ 4', '§ 24', '§17']

Securities Update- November 2013
The proposed disclosure also would include certain related-party transactions, a description of the financial condition of the company, and its financial statements. Companies would be required to update the offering document to include material changes and to provide updates about the progress in reaching the targeted offering amount. Crowdfunding issuers also must file annual reports with the SEC and provide the annual reports to investors.
Funding portals may not offer investment advice or make recommendations. They may not solicit purchases, sales, or offers to buy securities offered or displayed on their websites. The proposed rules impose restrictions on compensating people for solicitations and prohibit the funding portals from holding, possessing, or handling investor funds or securities. The proposal includes a safe harbor under which funding portals can engage in certain activities consistent with these restrictions.
SEC Chair Mary Jo White said that because of the impact the crowdfunding rules may have on the market, the staff has been directed to develop a work plan to review and monitor the use of the crowdfunding exemption. If the rules are adopted, the staff will proceed with the work plan, under which it will evaluate the types of issuers that use the crowdfunding exemption, compliance with the rule, and whether the exemption is promoting capital formation and effectively protecting investors.
White acknowledged that there is a great deal of excitement about the crowdfunding exemption. She said the SEC wants this market to thrive in a manner that is safe for investors.
Commissioner Luis Aguilar said he hopes the relatively high risk of fraud in this market will be minimized by the disclosure rules and the gatekeeping role of the intermediaries. He is concerned that crowdfunding may reach particularly vulnerable parts of the investing community and that it may be used to perpetrate affinity fraud.
Commissioner Daniel Gallagher noted that the crowdfunding provision of the JOBS Act received overwhelming support by Congress and was praised by President Obama as a potential game-changer for small businesses.
Commissioner Kara Stein highlighted three areas in which comments will be particularly helpful, including how much any single investor should be permitted to invest, whether funding portals that are not located in the U.S. should be able to conduct crowdfunding transactions in the U.S., and the proposed recordkeeping provisions. If the SEC does not get it right, she said the promise of crowdfunding will be lost.
Commissioner Michael Piwowar believes the SEC is up to the challenge of creating a crowdfunding framework consistent with its core mission. The concept of the “wisdom of the crowd” will be unleashed to allocate capital to more productive uses, he said. Release No. 33-9407 will be reported at ¶80,407.
Reg. D, Form D, and Rule 156 comment period reopened. The SEC is reopening the comment period for its proposed amendments to Regulation D, Form D and Rule 156. The comment period will remain open for 30 days after publication in the Federal Register. The SEC issued the proposal for comment on July 10, 2013 and reported that it has generated a large amount of public interest. The intent of the proposal is to assist the SEC in evaluating the development of practices in Rule 506 offerings and to address concerns that may arise in connection with new rules that permit issuers to engage in general solicitation and general advertising under Rule 506.
Under the proposed amendments, issuers would be required to file a Form D in a Rule 506 offering before engaging in general solicitation. Issuers also would be required to file a closing amendment to Form D after the termination of a Rule 506 offering. Any written general solicitation materials would have to include legends and other disclosures and, on a temporary basis, would have to be submitted to the SEC. An issuer would be disqualified from relying on Rule 506 for one year if it did not comply with the Form D filing requirements in the past five years. The proposal also would extend the antifraud guidance that is contained in the rule relating to the sales literature of private funds.
By providing additional time for comment, the SEC said the public would be able to thoroughly consider the matters addressed by the release and submit comprehensive comments to assist the SEC in its consideration of final rules. Release No. 33-9458 is reported at ¶80,368.
Lloyds did not mislead investors about acquisition of Halifax Bank. The dismissal of a fraud suit filed against Lloyds Banking Group, PLC after its acquisition of another U.K. bank was affirmed by the Second Circuit Court of Appeals because the investor plaintiff failed to sufficiently plead scienter.
The suit was filed by an investor who purchased Lloyds ADRs in the months leading up to the bank’s 2009 acquisition of Halifax Bank of Scotland (HBOS). The investor, who asserted fraud and controlling person claims under the Exchange Act, asserted that beginning on September 18, 2008, the day Lloyds announced the acquisition, the bank and its Chairman and CEO intentionally misled shareholders in order to coax them into approving the deal. They began to “slowly reveal” the poor financial condition of the acquisition target after the deal was completed on January 19, 2009, according to the investor. A three-judge panel of the Second Circuit, using a de novo standard of review, affirmed the decision of Judge Castel of the Southern District of New York to dismiss the case, holding that the investor’s allegations did not plead an intent to deceive with sufficient particularity.
The court said allegations regarding the timing of the disclosure of the target’s poor financial condition were insufficient alone to establish a strong inference of scienter, because “it would hardly make economic sense for defendants to consummate an acquisition detrimental to Lloyds.” Allegations that the Chairman and CEO were attempting to fulfill a longstanding desire to create a “superbank” also fell short because the mere existence of that goal, even if true, did not satisfy the PSLRA requirement that a plaintiff set forth a strong inference of scienter.
The court examined three alleged misstatements and one omission used by the investor to establish fraud. The first related to a conference call held on September 18, 2008, in which Lloyds announced to analysts its intent to acquire HBOS and stated that the target would contribute £60 billion in “highly liquid near cash” reserves to the combined entity. The investor argued that the assets were composed of government-issued debt, residential mortgages, and personal and commercial loans that could not be considered “liquid” or “near cash.” The court disagreed, saying that the transcript of the call made clear that the references were used to refer only to government-issued debt. The court also rejected the investor’s argument that HBOS’s election to take Emergency Liquidity Assistance (ELA) from the Bank of England on October 1, 2008, proved that it did not have “highly liquid near cash” reserves at the time of the call.
A second alleged misleading statement examined by the court regarding a statement on the same analyst call saying that the target had “meaningful incremental available assets for submission” to the Bank of England’s Special Liquidity Scheme (SLS) also was not shown to be false, according to the Second Circuit panel. The investor argued that HBOS would not have availed itself of higher interest rate ELA funding if it had the AAA-rated assets required as collateral for SLS funding. Acceptance of the ELA funding did not preclude the possibility that it had superior assets that could have been submitted to SLS, the court wrote.
Scienter allegations based on a statement by the Lloyds Chairman that “Lloyds executives were fully aware of the circumstances of HBOS,” and a statement by the CEO that HBOS was “pretty much taking liquidity at any cost at any duration,” also did not provide sufficient background to show what “circumstances” the executives knew about, or what funding they would accept, to establish scienter with sufficient particularity.
A statement during another analyst call regarding the fact that Lloyds would be acquiring about £30 billion in net assets for only £14 billion also could not be deemed misleading so as to raise a strong inference of scienter because the bank also disclosed in a circular released on the same day that a material negative adjustment to the figure was possible.
An alleged failure of the bank to disclose the target bank’s acceptance of ELA funding also could not be shown as sufficiently evidencing an intent to mislead because Lloyds did make clear that HBOS was dependent on the Bank of England’s liquidity facilities to meet its funding obligations and would be so dependent for the foreseeable future.
Because a primary violation of the Exchange Act could not be established, the court affirmed the dismissal of the controlling person claims, and also affirmed the district court’s decision to refuse to grant leave to amend the complaint a second time because it was not an abuse of discretion. Ross v. Lloyds Banking Group, PLC, (2ndCir) is reported at ¶97,644.
Bank’s offering document sufficiently disclosed securitization risks. The United States Court of Appeals for the Second Circuit affirmed a district court decision granting the defendant-appellee Royal Bank of Scotland Group’s (RBS) motion to dismiss the Freeman Group’s (Freeman) fraud claims under Securities Act Sections 11, 12(a)(2), and 15.
Freeman argued on appeal that the district court should not have dismissed its claims that the offering documents for five securities that RBS issued and underwrote failed to disclose that, in 2005 and 2006, RBS accumulated a significant amount of subprime assets and that the offering documents falsely claimed to implement effective risk management procedures. Freeman also contended that the district court abused its discretion by refusing to allow Freeman to amend its complaint.
The court determined that RBS met its legal obligations on Freeman’s first claim because the offering documents did, in fact, disclose the securities’ exposure to tens of billions of pounds worth of securitized assets, including “certain U.S. securitizations of residential mortgages” and, furthermore, identified whether the asset-associated risks and rewards were completely held, partially held, or transferred to RBS. The documents also described how RBS calculated the assets’ value and disclosed the dangers RBS foresaw, the court noted.
The offering documents did not, however, disclose the percentage of relevant securitizations that included subprime mortgages, but the court relied on its holding in previous cases that offering documents need not identify every type of asset a security contains, so long as the documents provide “extensive descriptions” of the security’s contents that are “broad enough to cover” the type of assets at issue. Moreover, the court declared that the offering document statements Freeman relied upon would not have led a reasonable investor to conclude that RBS’ “securitizations of residential mortgages” did not include any subprime assets.
The court also held for RBS on the risk management claim because Freeman, rather than citing examples of how RBS disregarded the extensive procedures disclosed in the offering documents, contended that testimony provided by RBS executives over two years later revealed that RBS’ risk management procedures were somehow inadequate. Freeman, therefore, failed to plausibly allege, as required by Securities Act Sections 11 and 12(a)(2), that RBS actually believed the risk management procedures were ineffective at the time RBS published the relevant offering documents, according to the court.
The court affirmed the district court’s decision and found no abuse of discretion because Freeman made only a one-sentence request for leave to amend and failed to identify any additional facts that, if pleaded, could cure the deficiencies that led to its initial complaint being dismissed. The Freeman Group v. The Royal Bank of Scotland Group (2ndCir) is reported at ¶97,658.
SEC brings first enforcement action for violations of the market access rule. The SEC has brought its first enforcement action under Exchange Act Rule 15c3-5, the market access rule, against Knight Capital Americas LLC. Knight agreed to pay $12 million to settle charges relating to the events on August 1, 2012, which disrupted the markets when Knight failed to prevent the entry of millions of erroneous orders. The SEC said the firm lacked adequate safeguards to limit the risks posed by its access to the markets and failed to conduct adequate reviews of the effectiveness of its controls.
The events surrounding Knight’s market access violation began when the firm moved a section of computer code that created a malfunction in its automated equity router. As Knight prepared to participate in the NYSE’s new retail liquidity program in July 2012, it incorrectly deployed a new code to the same router, which triggered the defective function. The router was unable to recognize when orders had been filled and, during the first 45 minutes after the market opened on August 1, 2012, the router sent over four million orders into the market when it was attempting fill only 212 customer orders.
Knight traded over 397 million shares during the malfunction, acquired billions of dollars in unwanted positions, and suffered a loss of over $360 million as a result. The SEC found that Knight was aware of the coding error before the markets opened on August 1, but failed to act. The SEC said that, among other violations, the firm’s CEO certification did not state that the firm’s risk management controls and supervisory procedures complied with the market access rule. The SEC also charged Knight with violations of Regulation SHO.
Knight is required to retain an independent consultant to conduct a review of its controls and procedures to ensure compliance with the market access rule. The firm, without admitting or denying the findings, also consented to being censured and agreed to cease and desist from committing or causing these violations.
In a news conference, Andrew Ceresney, the co-director of the Division of Enforcement, said the market access rule will be an important area for enforcement going forward. The investigation was conducted by the SEC’s market abuse unit. Ceresney said the SEC’s order brings to light a number of new and important facts surrounding Knight’s trading incident. He said that perhaps the biggest failure was Knight’s lack of reasonably designed controls and its inadequate efforts to comply with the market access rule in the year leading up to the incident. Firms must review their systems regularly to ensure that their controls are adequate, he said.
Ceresney said the case also shows the risks that can arise with automated trading and the necessity for controls and compliance to keep pace with market developments. The case also sends the message to investors that the SEC will vigorously enforce the market access rule, he said. In the Matter of Knight Capital Americas LLC, Release No. 34-70694, will be published at ¶80,403.
Missouri securities authority discusses potential pitfalls of private placement advertising. The Missouri Commissioner of Securities issued an advisory release discussing the SEC’s recently issued rules allowing for general solicitation and advertising in connection with the offer or sale of securities under Rule 506 of Regulation D. In two separate releases, the SEC amended Rule 506 to allow a person to generally advertise unregistered securities for sale if “reasonable steps” are taken to verify that each purchaser is an accredited investor and to disqualify felons and other bad actors from relying on the rule. The SEC changes became effective September 23, 2013. ¶35,600L.
Investor in Madoff feeder funds adequately stated fraud claims against investment adviser, auditor. The Washington Court of Appeals has held that an investor adequately stated fraud and misrepresentation claims under the Washington State Securities Act against the investment adviser and the auditor of a group of "feeder funds" that had invested in the Ponzi scheme operated by Bernard Madoff. The plaintiff had alleged that the defendants had misrepresented the monitoring and due diligence that they claimed to have performed with respect to the feeder funds. Although the investment adviser relied on federal pleading standards to argue that the complaint did not plausibly establish reasonable reliance, the complaint adequately alleged justifiable reliance under Washington's liberal notice pleading standard. In addition, the Washington courts have typically denied motions to dismiss that challenge "seller" status when the defendant is an auditor who prepared statements that were provided to investors because auditors also serve the additional role of communicating to investors about corporations and their securities. Accordingly, the claim was sufficient to survive a motion to dismiss. FutureSelect Portfolio Management, Inc. v. Tremont Group Holdings, Inc. is reported at ¶75,045.
A Practical Guide to SEC Proxy and Compensation Rules, Fifth Edition, edited by Amy L. Goodman, John F. Olson, and Lisa A. Fontenot. The 2014 Supplement is now available online. This analytical treatise includes comprehensive analysis of the SEC’s revised executive compensation disclosure rules and discusses the increase of shareholder activism. The Fifth Edition continues to be written by a team of experts with a wealth of practical experience in counseling clients on these issues. Part I focuses on the current state of executive compensation matters, reflecting the latest SEC and Internal Revenue Service regulations, interpretations, and disclosure practices. Part II deals with the proxy rules and board of directors and governance proxy disclosures. In addition to miscellaneous updates throughout the guide, the 2014 Supplement includes an updated discussion of executive compensation disclosure and CD&A practices, including updated SEC comments regarding CD&A disclosures (see § 3.04), and the impact of the Dodd-Frank Act including discussion of “say on pay,” independence of compensation committees and their advisors, as well as impending rule proposals regarding internal pay ratios, clawbacks, hedging policies, and pay for performance (see § 3.06); an updated Chapter 4 on the “say-on-pay” vote required, discussing the experience in the third year, this advisory vote has been generally required of companies, with discussion of the new ISS methodologies and practical guidance for a successful outcome (see § 4.01), and discussion of “say-on-frequency” and “say-on-golden parachutes” (see § 4.02 and § 4.03, respectively); an updated discussion of the shareholder communications rules and recent experience regarding dissident Board slates and legislative developments (see Chapter 10); a revised chapter regarding shareholder proposals including a discussion of 2013 shareholder proposal developments and experiences and new SEC Staff legal bulletin (see Chapter 12); an updated audit committee chapter including new information about company disclosure practices, new PCAOB standards, with new templates for the audit committee charter and responsibility checklist (see Chapter 14); an updated chapter including discussion of the new NASDAQ and NYSE requirements for independence of compensation committees’ members and advisers (see Chapter 16); revised appendices, including 2013 amendments to the NYSE and NASDAQ listing standards regarding compensation committees (see Appendices K and M).
Securities Regulation in Cyberspace, by Howard M. Friedman. The 2014 Supplement will soon be available online. This treatise analyzes the interweaving of technology and the securities laws, providing in-depth review of the tremendous impact technological advancements such as the Internet have had, and will continue to have, on securities regulation. The 2014 Supplement contains a completely rewritten and revised Chapter 12, Electronic Tender Offers, Takeover Bids, and Proxy Fights, which includes updated information regarding the use of websites and social media, discussion of online delivery options for proxy statements, and analysis of how invertor access to the Internet intersects with SEC requirements. Other chapters contain updates of recent developments, including: social media and Regulation FD (see Chapter 10); a new discussion of disclosure issues posed by MIME protocol, by which most e-mail is sent today (see Chapter 2); expanded coverage of the federal crowdfunding exemption under the JOBS Act (see Chapter 5); analysis of the general solicitation in Rule 506 offerings, including the SEC’s adoption of Rule 506 changes and its proposed amendments to Form D and Form D filing requirements that, if adopted, will give substantial information about the extent to which Rule 506 offerings involving general solicitations are being made online (see Chapter 5); the latest developments concerning investment advisory firms’ use of the new Securities Act § 4(b), added by the JOBS Act (see Chapter 5); a discussion of recently issued guidance from the SEC’s Division of Investment Management on when social media postings not otherwise subject to filing with FINRA need to be filed with the SEC under Securities Act Rule 497 or Investment Company Act § 24(b) (see Chapter 9); analysis of legal issues that can arise when an officer or employee who has used social media leaves the company (see Chapter 10); discussion of the SEC’s Staff Legal Bulletin 14G (see Chapter 11); discussion of the SEC’s proposed new Regulation SCI (see Chapter 18); and an updated list of online resources for securities lawyers (see Chapter 19).
Financial Reporting Handbook, by Michael Young. The latest release, Release 38, is available online. This reference provides quick access to critical aspects of financial reporting. In addition to covering the Sarbanes-Oxley Act, SEC rules and regulations, standards of the Independence Standards Board and the AICPA and requirements of the New York Stock Exchange, NASDAQ, and the American Stock Exchange,the Financial Reporting Handbook tackles important underlying themes such as the centrality of the audit committee, the individual responsibility of executives, and the integrity of the outside auditor.
#581 – Issuer’s Financial Profile
33-9470— Crowdfunding (October 23, 2013).
The SEC proposed rules to implement its JOBS Act crowdfunding mandate. The proposal would require disclosures on a new Form C.
34-70701— Order Providing Broker-Dealers a Temporary Exemption from the Requirements of Certain New Amendments to the Financial Responsibility Rules for Broker-Dealers under the Securities Exchange Act of 1934 (October 17, 2013).
This temporary exemption will give broker-dealers more time to meet operational and systems requirements under the SEC’s revised financial responsibility rules. The rules were to be effective October 21, 2013, but the temporary exemption from specified rules will last until March 3, 2014.
The SEC has proposed its long-awaited crowdfunding rules. Overall, the proposal tracks the Commission’s Jumpstart Our Business Startups (JOBS) Act mandate, but would require disclosures on new Form C. Crowdfunding will let a wider range of investors participate in offerings by small, very early-stage companies. But these offerings are capped at $1 million and must be done via a broker or crowdfunding portal. The SEC’s more than 568 page release asks the public to comment on 295 questions within 90 days after the proposed rules are published in the Federal Register.
Crowdfunding offerings will compete with other existing small exempt offering options and with the SEC’s forthcoming JOBS Act Title IV rules for modified Regulation A offerings, which will raise the maximum amount for some offerings from $5 to $50 million. Significantly, the crowdfunding proposal does not foresee an issuer needing to integrate a crowdfunding offering with other exempt offerings if each exempt offering meets its specific requirements. But issuers and investors must carefully check the dollar limits and issuer and investor requirements for each type of exempt offering.
Moreover, it remains to be seen if issuers will be as cautious about using the coming final crowdfunding rules as they have been in using the now final rules permitting general solicitation and advertising under Regulation D and Rule 144A. The SEC still reminds issuers and investors that offerings made in reliance on the crowdfunding exemption are unlawful until the Commission adopts final rules.
This month's hot topic is federal preemption. Exchange Act Section 28(f), and the parallel Securities Act provisions in Section 16(b)-(f), were added by the Securities Litigation Uniform Standards Act (SLUSA) and make federal court the exclusive venue for most securities fraud class actions. The purpose of the Act was to prevent class action plaintiffs from circumventing the federal requirements of the Private Securities Litigation Reform Act by filing the action in state court, where essentially none of the Reform Act's protections against abusive litigation were available.
SLUSA preempts any covered class action based on state law, whether filed in state or federal court, that alleges fraud or deception in connection with the purchase or sale of a covered security. The statute defines "covered class action" to include actions brought on behalf of more than 50 persons, actions brought by named parties seeking to recover damages on behalf of themselves and similarly situated unnamed parties and so-called mass actions in which a group of lawsuits filed in the same court are joined or otherwise proceed as a single action. The Act defines "covered security" to include nationally-traded securities, such as those listed by the NYSE or Nasdaq, as well as securities issued by registered investment companies, but excludes from the definition privately-placed debt securities.
Class actions improperly maintained in state court are removable to federal court. Under Section 28(f)(2), any covered class action brought in state court involving a covered security is removable to the federal district court in which the action is pending, and will be subject to Section 28(f)(1). Congress intended this provision to prevent a state court from inadvertently or improperly maintaining jurisdiction over a preempted action.
Securities Act Section 16(b)-(f) at ¶4800
Exchange Act Section 28(f) at ¶26,579
Maritime Asset Management, LLC v. NeurogesX, Inc. (ND Cal) at ¶97,670
Toth v. Envivo (ND Cal) at ¶97,705
Desmairais v. Johnson (ND Cal) will be reported at ¶97,714
CCH Explanations (e.g., ¶4805.050 and ¶26,580)
Broker-Dealer Law and Regulation – Poser & Fanto (e.g. §17.02)
Regulation of Securities: SEC Answer Book – Levy (e.g., Question 21:107)
Securities Regulation – Loss, Seligman & Paredes (e.g., Chapter 11.B.10)