Corporate & Financial Weekly Digest : Corporate Finance Lawyers & Attorneys for Legal Developments in Business & Financial Services

On March 2, the Securities and Exchange Commission will hold an open meeting to discuss, among other matters, whether to propose rules to implement Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 956 requires that not later than nine months after enactment, the appropriate federal regulators jointly shall adopt regulations requiring "covered financial institutions" (as described below) with assets of $1 billion or greater to disclose incentive compensation to their appropriate federal regulator. Disclosure is required of all incentive-based compensation arrangements in sufficient detail for the regulator to determine if the arrangement with the executive officer, employee, director or principal shareholder is excessive or could lead to a material financial loss. Within the same time frame, federal regulators are also required to jointly prescribe regulations to prohibit any type of incentive-based compensation by "covered financial institutions" with assets of $1 billion or greater that is excessive or could lead to material financial loss. Covered financial institutions include depository institutions, depository institution holding companies, credit unions, registered broker-dealers and registered investment advisers.

The SEC will also consider whether to propose rule amendments that would implement Section 939A of the Dodd-Frank Act relating to references to credit ratings in filings under the Securities Act of 1933 and the Investment Company Act of 1940. Section 939A of the Dodd-Frank Act requires that the SEC: (1) review any regulation issued by it that requires the use of an assessment of the credit-worthiness of a security or money market instrument and any references to or requirements in its regulations regarding credit ratings, (2) modify any regulations to remove any reference to or requirement of reliance on credit ratings, and (3) substitute in its regulations a standard of credit-worthiness with alternative requirements.

See the February 11 edition of Corporate and Financial Weekly Digest for a discussion of currently proposed rules under Section 939A of the Dodd-Frank Act.

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Co-authored by Brian Schmidt

The U.S. Court of Appeals for the Eighth Circuit reversed a trial court's dismissal of claims relating to a shipping dispute between a manufacturer and a distributor, holding that plaintiff's selection of an improper remedy in its demand for relief was not fatal to its claims.

Plaintiff, a Chinese manufacturer of organic insulin, entered into an agreement with the defendant, a Minnesota distributor. Under the agreement, the plaintiff was to send four shipments to the defendant. The defendant received and paid for the first shipment, but refused to pay for the second because of mold on its exterior. Plaintiff recalled the third and fourth shipments, and claims and cross-claims were filed. In plaintiff's breach of contract claim, it relied on the fact that all four shipments were delivered as specified in the purchase orders, and that defendant failed to pay for the last three shipments. The defendant moved to dismiss, arguing that a seller that recalls goods before they reach a buyer may not recover the contract price of retained goods even if there was a breach. The trial court dismissed the plaintiff's contract claims relating to shipments three and four.

The Eighth Circuit reversed. Although plaintiff's recall of shipments three and four may preclude recovery of their full contract price, if plaintiff "proves that [defendant] breached the contract as to shipments three and four, it is almost certain to be entitled to some monetary relief." Plaintiff's claims were not subject to dismissal merely because of its initial demand for the full price of the goods at issue. (Dinxi Longhai Dairy, Ltd. v. Becwood Tech. Group LLC, No. 10 Civ. 2612, 2011 WL 536490 (8th Cir. Feb. 17, 2011))

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Co-authored by Brian Schmidt

The U.S. Court of Appeals for the Eleventh Circuit affirmed the dismissal of a consolidated securities fraud action, holding that the complaint's scienter allegations did not meet the required heightened pleading standards.

Plaintiffs were shareholders in Technical Olympic USA, Inc. (TOUSA), and defendants were TOUSA executive officers. TOUSA entered into a significant joint venture acquisition funded in large part by a $675 million loan. TOUSA provided certain guarantees to the lenders. After the acquisition, TOUSA described the loan as "non-recourse" to TOUSA in Securities and Exchange Commission filings, press releases and analyst conference calls, and did not disclose the guarantees until March of 2006, after it had finalized the loan in August 2005. In November of 2006, TOUSA disclosed demand letters by the lenders under the guarantees. TOUSA's share price plummeted and it subsequently went bankrupt. Litigation followed.

Plaintiffs' securities fraud allegations focused on the characterization of the loan as non-recourse and the delayed disclosure of the guarantees. Affirming the trial court's dismissal of plaintiffs' claims, the Eleventh Circuit held that the "amended complaint fails to allege any direct evidence showing defendants acted with the requisite scienter." The complaint included no allegations that the defendants did not reasonably believe the loan to be non-recourse to TOUSA, no allegations that anyone ever questioned the non-recourse nature of the loan, no evidence that the defendants ever read the guarantees or believed more disclosures were required, thought any person at TOUSA was engaged in fraud, or had any other reason to believe the guarantees represented a material risk for TOUSA and its shareholders. Because the complaint rested only on speculative or conclusory allegations of scienter, the Eleventh Circuit found that the lower court properly dismissed the claims. (Durgin, Briclayers & Trowel Trades Intl'l Pension Fund et al. v. Mon et al., No. 09 Civ. 15595, 2011 WL 573483 (11th Cir. Feb. 18, 2011))

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Co-authored by David J. Gonen

The Federal Trade Commission (FTC) is expected to announce significant changes to the Hart-Scott-Rodino (HSR) Premerger Notification Rules, the Premerger Notification and Report Form, and the accompanying Instructions in the next several weeks. The changes, which may have been presaged by proposals issued by the FTC for public comment last August, may impose significant new reporting requirements on private equity and other funds, where one of a family of funds is making an HSR investment. The public will know which of the proposed changes were adopted when the FTC releases the new form.

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Co-authored by Kari E. Hoelting

On February 11, the Securities and Exchange Commission’s Division of Corporation Finance issued Compliance and Disclosure Interpretations (C&DIs) with respect to Regulation S-K, Item 402(t) – Golden Parachute Compensation and Rule 14a-21 under the Securities Exchange Act of 1934 – Shareholder Approval of Executive Compensation.

C&DI 128B.01 clarifies Instruction 1 to new S-K Item 402(t)(2) relating to golden parachute compensation disclosure. Although the instruction provides that disclosure is required for those executive officers included in the most recently filed Summary Compensation Table, disclosure is always required for the principal executive officer and principal financial officer, even if disclosure was not provided for such individuals in the most recently filed Summary Compensation Table pursuant to Items 402(a)(3)(i) and (ii) because they assumed such positions after the Summary Compensation Table was filed.

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Co-authored by Natalya S. Zelensky and Louis Froelich

The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority, Inc.’s proposal to adopt a rule on reporting requirements for the Consolidated FINRA Rulebook. FINRA Rule 4530, modeled after National Association of Securities Dealers (NASD) Rule 3070 and New York Stock Exchange Rule 351, requires member firms to report to FINRA certain specified events and quarterly statistical and summary information regarding written customer complaints, and file with FINRA copies of certain criminal actions, civil complaints and arbitration claims. According to Regulatory Notice 11-06, in most cases, the requirements of FINRA Rule 4530 are based on similar requirements in the NASD and NYSE rules.

FINRA Rule 4530 goes into effect on July 1. Any matter that becomes subject to reporting or filing prior to July 1 must be reported or filed in accordance with NASD Rule 3070 and NYSE Rule 351, as applicable, and any matter that becomes subject to reporting or filing on or after July 1 must be reported or filed in accordance with FINRA Rule 4530.

Click here to read FINRA Regulatory Notice 11-06.

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Co-authored by Natalya S. Zelensky and Louis Froelich

The Financial Industry Regulatory Authority, Inc. has made modifications to the FINRA Sanction Guidelines (Regulatory Notice 11-07). According to the notice, the changes reflect the experience of FINRA’s Departments of Market Regulation and Enforcement in settling and litigating cases, and incorporate the findings of federal appellate court and Securities and Exchange Commission precedent in recent FINRA disciplinary cases. The revised Sanction Guidelines are effective immediately and are available on FINRA’s website. Among other things, the revisions: (i) remove the Minor Rule Violation Plan Letter from the definition of a disciplinary “action” for purposes of considering prior actions; (ii) modify the guidelines for violations related to the sale of unregistered securities to reflect that adjudicators should consider higher fines and firm suspensions in egregious cases; and (iii) expressly provide for restitution or disgorgement in certain trading halt and best execution cases.

Click here to read FINRA Regulatory Notice 11-07. 

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Co-authored by Natalya S. Zelensky and Louis Froelich

The Financial Industry Regulatory Authority, Inc. is requesting comment on proposed consolidated FINRA rules governing markups, markdowns, commissions and fees. FINRA proposes to transfer National Association of Securities Dealers (NASD) Rule 2440, NASD Interpretive Material-2440-1 and NASD IM-2440-2 to the Consolidated FINRA Rulebook (Rulebook) as FINRA Rule 2121, subject to significant changes. Among other things, FINRA proposes to eliminate the “5% policy” and the “proceeds provision” in NASD Rule IM-2440-1. FINRA also proposes to require firms to provide commission schedule(s) for equity securities to retail customers, and to notify and obtain consent from a customer to charge a commission when a firm misses the market and trades with the customer on a principal basis. In addition, FINRA proposes to transfer NASD Rule 2430 to the Rulebook as FINRA Rule 2123, and to require member firms to provide retail customers with schedule(s) of charges and fees for services. Comments must be received by FINRA by March 28.

Click here to read FINRA Regulatory Notice 11-08.

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Co-authored by Jonathan Rotenberg

The Delaware Chancery Court recently upheld the use of a shareholder rights plan, or “poison pill,” by Airgas, Inc. (Airgas) to ward off a hostile takeover attempt by Air Products and Chemicals, Inc. (Air Products). The Chancellor’s decision came after a lengthy hostile take-over battle waged by Air Products during which it made an all cash tender offer for all outstanding shares of Airgas. Air Products’s initial offer was priced at $60 per share and ultimately was raised to a final offer of $70 per share. Airgas’s board unanimously concluded that the Air Products offer was inadequate, even after Air Products was able to have three of its own nominees elected to the board, and refused to remove its poison pill.

In a lengthy opinion, Chancellor Chandler concluded that the Airgas board’s refusal to remove its poison pill was proper and not in breach of the board members’ fiduciary duties. Chancellor Chandler analyzed the reasonableness of the Airgas’s board decision to keep the pill in place under the heightened standard set by the Delaware Supreme Court in 1985 in Unocal Corp. v. Mesa Petroleum Co., rejecting Airgas’s argument that the business judgment rule should apply because there was “overwhelming evidence” of the directors’ independence and good faith. Nevertheless, even under the heightened standard set forth in Unocal, which applies because of the “omnipresent specter” that a board may act in its own interests in a takeover situation, Chancellor Chandler concluded that the Airgas board acted reasonably.

Applying the Unocal standard, Chancellor Chandler concluded that Airgas demonstrated that it “had reasonable grounds for believing a danger to corporate policy and effectiveness existed” and that the steps it took in response to that threat were reasonable. In particular, the court determined that the board acted in good faith in responding to the offers from Air Products. In reaching this conclusion, the court pointed out that the board is comprised primarily of outside directors, including directors nominated by Air Products who ultimately agreed with the decision to keep the pill in place, and that it relied on the advice of several independent financial advisors in determining to reject the offer. Although noting that he believed the Airgas pill had served its legitimate purpose by giving the board time to express its view to stockholders on the merits of the tender offer, Chancellor Chandler held that the board’s determination to reject the offer based solely on its conclusion that it was for an inadequate price was reasonable under current Delaware law. (Air Products and Chemicals, Inc. v. Airgas, Inc., Civ. Action Nos. 5249-CC, 5256-CC (Del. Ch. Feb. 15, 2011))

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Co-authored by Jonathan Rotenberg

The U.S. District Court for the District of Connecticut denied defendants’ motion to dismiss plaintiff’s complaint for securities fraud brought under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint alleged that defendant Sturm Ruger, a company that designs, manufactures, and sells firearms, failed to disclose problems with its transition to a “lean manufacturing” model, and thereby misled plaintiffs into purchasing the company’s stock at an artificially inflated value. After the announcement in late 2006 of its new manufacturing strategy, the company’s share price rose, eventually trading at a high of over $13 per share in March 2007. However, after two positive quarters, sales fell dramatically in the third quarter of 2007, as a result of the company’s inability to produce its products at the necessary rate, and, not surprisingly, the company’s stock price also suffered.

In their complaint, the plaintiffs pointed to a number of statements in the company’s filings that they asserted were materially misleading because they did not reflect the “actual financial position of the company.” The defendants moved to dismiss the complaint, arguing that the allegedly false statements upon which the securities fraud claims are based were not actionable, because the statements were (i) puffery and mere expressions of corporate optimism, (ii) forward-looking statements accompanied by reasonable cautionary language; or (iii) accurate. The district court agreed that a number of the statements were not actionable because they constituted mere puffery or forward-looking statements subject to the safe-harbor provisions in the Private Securities Litigation Reform Act.

The court concluded, however, that the complaint adequately alleged that several statements concerning the company’s performance were materially misleading because they omitted critical information. Thus, for example, the court concluded that the complaint adequately alleged that the company’s statements concerning the magnitude of its backlog were materially misleading without the additional disclosure that the backlog was due to a slow rate of production, not increased demand for the company’s products. As a result, and because the court also determined that the plaintiffs had adequately alleged scienter, the court denied the motion to dismiss. (In re Sturm, Ruger and Co., No. 3:09-cv-1293, 2011 WL 494753 (D. Conn. Feb. 7, 2011))

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Co-authored by Christina Grigorian

The Federal Financial Institutions Examination Council (FFIEC) announced on February 14 that it has approved revisions to the reporting requirements for the Consolidated Reports of Condition and Income (Call Report). These revisions will take effect as of March 31, and include most, but not all, of the proposed Call Report changes that the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board, and the Office of the Comptroller of the Currency (the agencies) published on September 30, 2010. The agencies made certain modifications to their original proposal in response to the comments they received.

The Call Report revisions are intended to provide data to meet safety and soundness needs or for other public purposes. The revisions will help the agencies better understand banks’ credit and liquidity risk exposures, primarily through enhanced data on loans, deposits, and securitization activities. A number of the reporting changes will be relevant to only a small percentage of banks. The reporting changes include:

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The Federal Trade Commission has raised the thresholds governing premerger notification filings that must be made under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR, or the Act). Effective February 24, transactions valued above $66 million will require HSR notification when they meet the other requirements of the HSR Act. This is an increase from the previous threshold of $63.4 million. The filing thresholds for larger transactions have been adjusted as well. The old $126.9 million threshold has been increased to $131.9 million, and the old $634.4 million threshold has been increased to $659.5 million.

Under the new thresholds, the filing fee for notifiable transactions valued above $66 million but less than $131.9 million remains at $45,000. Transactions valued above $131.9 million but below $659.5 million will require a filing fee of $125,000. Transactions valued above $659.5 million will require a filing fee of $280,000.

For transactions valued between $66 million and $263.8 million under the Act, the “size of person” test must also be met for a filing to be required. The size of person thresholds have also been revised. Under the new thresholds, one party to the transaction must have net sales or total assets of at least $13.2 million, and another party to the transaction must have net sales or total assets of at least $131.9 million. Transactions valued greater than $263.8 million under the HSR rules will require a filing regardless of the size of the persons involved.

The above changes to the HSR thresholds have been published in the Federal Register, available here.

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Co-authored by Palash Pandya

On February 9, the Securities and Exchange Commission proposed rules amending the Securities Act of 1933 and the Securities Exchange Act of 1934 to replace rule and form requirements for securities offerings and issuer disclosure rules that rely on, or make special accommodations for, credit ratings to reflect the requirements of Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 939A of the Dodd-Frank Act requires that the SEC (1) review any regulation issued by it that requires the use of an assessment of the credit-worthiness of a security or money market instrument and any references to or requirements in its regulations regarding credit ratings, (2) modify any regulations to remove any reference to or requirement of reliance on credit ratings, and (3) substitute in its regulations a standard of credit-worthiness with alternative requirements. The proposed rules are similar to rules proposed in 2008, which were not adopted by the SEC.

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Co-authored by Maxwell Li

On February 8, the U.S. Federal Reserve Board adopted a final rule to implement the conformance period for compliance with the Volcker Rule, which generally prohibits banking entities from engaging in proprietary trading and from investing in, sponsoring, or having certain relationships with a hedge fund or private equity fund. The Volcker Rule generally provides banking entities two years to bring their activities and investments into compliance and allows the Board to extend this conformance period under certain conditions. The prohibitions and restrictions of the Volcker Rule take effect on the earlier of July 21, 2012, or 12 months after the issuance of final regulations. The conformance period will generally extend through the date that is two years after the effective date, and this period may be extended by the Board for up to three additional one-year periods if the Board determines that such extension(s) would not be detrimental to the public interest. The Board clarified that it will not grant all three one-year extensions at a single time as requested by several commenters, but will instead grant up to three separate one-year extensions of the general conformance period.

To read the Federal Reserve adopting release, click here.
To read the Federal Reserve press release, click here.

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Co-authored by Kevin M. Foley and Christian B. Hennion

The Division of Clearing and Intermediary Oversight (DCIO) of the Commodity Futures Trading Commission has issued its annual guidance letter to commodity pool operators (CPOs) and their accountants, summarizing annual CPO reporting obligations. The DCIO letter includes information regarding regulatory changes within the last year affecting CPOs, including the adoption by the CFTC of final regulations governing retail forex transactions and associated registration requirements, as well as the adoption by the National Futures Association (NFA) of Compliance Rule 2-46, which requires CPOs to be "fully registered" and Rule 4.7 exempt pools to file specified information with NFA on a quarterly basis. The letter also includes detailed guidance regarding the preparation and filing of CPO annual reports, including applicable deadlines and filing procedures.

The DCIO letter is available here.

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Co-authored by Jessica M. Garrett

On October 16, 2009, Raj Rajaratnam was arrested and charged with trading or conspiring to trade in securities on the basis of inside information. Following his arrest, the government served his employer, Galleon Management LP, with three grand jury subpoenas. On December 15, 2009, a grand jury returned an indictment alleging that Mr. Rajaratnam traded or conspired to trade in the securities of nine identified issuers. On February 9, 2010, the grand jury returned a Superseding Indictment alleging that Mr. Rajaratnam conspired to trade in the securities of three additional issuers. By letter dated March 22, 2010, the government identified additional issuers not previously addressed in the Superseding Indictment.

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Co-authored by Jessica M. Garrett

Individual plaintiffs residing in Switzerland and France brought suit against four corporate defendants, as well as certain corporate officers thereof, for, among other things, violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Two of the corporate officers, Jason Beckman and Jason Colodne, moved to dismiss the Amended Complaint for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6), and failure to plead fraud with particularity pursuant to Fed. R. Civ. P. 9(b).

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The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) approved on February 9 a notice of proposed rulemaking that would require certain employees of insured depository institutions (IDIs) to complete training, provided by the FDIC, on the fundamentals of FDIC deposit insurance coverage. In addition, the proposed rule would require IDI employees, when opening deposit accounts, to provide customers with the FDIC's publication, Deposit Insurance Summary, if the customer will have more than the Standard Maximum Deposit Insurance Amount (SMDIA)—$250,000—at the institution. The proposed rule also would require every IDI to provide a link to the FDIC's Electronic Deposit Insurance Estimator (EDIE) on its website.

Read more.

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The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) on February 7 approved a final rule on Assessments, Dividends, Assessment Base and Large Bank Pricing. The rule, which is quite detailed and complicated, implements changes to the deposit insurance assessment system mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act and revises the assessment system applicable to large banks to eliminate reliance on debt issuer ratings and make it more forward-looking. Dodd-Frank required that the base on which deposit insurance assessments are charged be revised from one based on domestic deposits to one based on assets, and that the amount of assessments collected be revenue neutral as between the current system (based on liabilities) and the new system (based on assets). FDIC Chairman Sheila Bair said, "The rule should keep the overall amount collected from the industry very close to unchanged, although the amounts that individual institutions pay will be different."

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Co-authored by Christina Grigorian

On February 7, the Federal Deposit Insurance Corporation (FDIC) released a proposed joint rule that will also be released by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, the National Credit Union Administration, the Securities and Exchange Commission and the Federal Housing Finance Agency (the Agencies) regarding incentive-based compensation arrangements (Proposal). The Proposal is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In summary, the Proposal would require the reporting of incentive-based compensation arrangements by a "covered financial institution" and prohibit incentive-based compensation arrangements at a covered financial institution that provide excessive compensation. In this regard, the Agencies have proposed standards to determine whether incentive-based compensation is "excessive" in a particular case. In addition, the Proposal prohibits arrangements that could expose the institution to inappropriate risks that threaten an institution's safety and soundness and could lead to a material financial loss. To accomplish this, the Proposal sets forth standards that are consistent with the principles set forth in the Interagency Guidance on Sound Incentive Compensation Policies (adopted June 2010) for determining whether an incentive-based compensation arrangement may encourage inappropriate risk-taking.

For purposes of this provision, a "covered financial institution" is a bank with total consolidated assets of more than $1 billion. Additional restrictions would be imposed for institutions with $50 billion or more in total consolidated assets.

Comments are due 45 days after publication in the Federal Register.

For more information, click here.

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On February 7, the UK Financial Services Authority (FSA) announced that the Upper Tribunal (Tax and Chancery Chamber) had directed the FSA to fine David Massey £150,000 (approximately $240,000) and ban him from performing any role in a regulated financial services firm for engaging in market abuse.

On November 1, 2007, Mr. Massey shorted 2.5 million shares of Eicom at 8p per share, knowing, as an insider, that Eicom intended to issue new shares at 3.5p per share. Mr. Massey immediately acquired 2.6 million shares from Eicom at the lower price, using those to close out his short sale. His profit on the transaction was over £100,000 (approximately $160,000).

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On February 7, the UK Financial Services Authority (FSA) published a "Dear CEO" letter from Hector Sants, FSA Chief Executive, about the transition to the new regulatory structure first announced in June 2010 (see the June 18, 2010, edition of Corporate and Financial Weekly Digest) under which the FSA will, by late 2012, be replaced by two separate regulators (the Prudential Regulation Authority (PRA) and the Consumer Protection and Markets Authority (CPMA).

This week's letter states that the process of implementing the new regime will commence on April 4, when a Prudential Business Unit (PBU) and a Consumer & Markets Business Unit (CMBU) will replace the FSA's current Supervision and Risk business units. Mr. Sants will head the PBU and Martin Wheatley, CEO designate of the CPMA, will head the CMBU.

Regulated firms will be contacted in April 2011 with more information on where their supervision will be allocated within the new regulatory structure. The FSA will publish consultative papers on the transition during the remainder of the first half of 2011.

To read the letter, click here.
To read a statement on banking by the Chancellor of the Exchequer, click here.

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On February 9, the UK Financial Services Authority (FSA) announced that it had banned Daniel Hassell, formerly a consultant at Vantage Capital Markets LLP, from working for a regulated financial services firm. The FSA found that Mr. Hassell had performed a significant influence function at Vantage without FSA approval.

Vantage had three capital partners. Mr. Hassell's job title was consultant. The majority of Vantage's brokerage business was previously owned by Mr. Hassell. That business line generated around half of Vantage's revenues. Although Mr. Hassell was not a capital partner at Vantage, he received approximately one third of Vantage's profits, was, on occasion, presented as an owner in correspondence and generally exercised a significant influence over the firm.

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On February 10, the UK Financial Services Authority (FSA) published for consultation a draft code of practice designed to improve audit effectiveness and ensure that supervisors are better informed about, and able to challenge, the firms they regulate.

The code of practice (the product of a joint FSA/Bank of England project) proposes increased coordination between auditors and supervisors. This should enhance the ability of the FSA to scrutinize specific accounting practices and related judgments and highlight emerging problems.

Principles are set out in the code for auditors and supervisors to follow when they deal with regulated firms. For certain firms, the code specifies a minimum level of formal meetings between the supervisor, the external auditor and the firm.

Andrew Bailey, Executive Director of the Bank of England, said, "With its emphasis on the importance of an open and constructive relationship, we are very pleased to be able to publish this draft code today as an important first step in redefining the nature of the auditor's role in the new regulatory framework."

Read more.

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Co-authored by Palash Pandya

On January 28, the Securities and Exchange Commission extended the comment period for proposed rules to implement Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding "conflict minerals" disclosure from January 31 to March 2. As reported in the December 17, 2010, edition of Corporate and Financial Weekly Digest, the SEC issued proposed rules implementing disclosure and reporting requirements regarding the use by issuers of so-called conflict minerals from the Democratic Republic of the Congo and adjoining countries. The proposed rules are expected to apply to many more issuers than might have first been expected due to the various uses of conflict minerals and their derivatives and the broad scope of the SEC's proposed rule encompassing such minerals as are "necessary to the functionality or production of a product manufactured, or contracted to be manufactured" by a reporting company. Assuming the SEC adopts final rules in April 2011, as required by Section 1502 of the Dodd-Frank Act, a December 31 fiscal year-end issuer would first have to provide conflict minerals disclosure or a Conflict Minerals Report after the end of its December 31, 2012, fiscal year. In its release extending the comment period the SEC acknowledged that the nature of the proposed disclosure requirements "differs from the disclosures traditionally required by the Exchange Act"; they would require extensive due diligence efforts by public companies.

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Co-authored by Natalya S. Zelensky

Effective February 1, customers in Financial Industry Regulatory Authority arbitration may choose an all-public arbitration panel in disputes in which the customer is claiming over $100,000. For such claims, customers may still choose a majority-public panel, which provides for a panel of one chair-qualified public arbitrator, one public arbitrator and one non-public arbitrator. The amendments apply only to customer disputes; they do not apply to disputes involving only industry parties. According to the Regulatory Notice, FINRA believes giving customers the option of an all-public panel will enhance confidence in and increase the perception of fairness in the FINRA arbitration process.

Click here to read FINRA Regulatory Notice 11-05.

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On January 27, the Securities and Exchange Commission issued a staff study on improving investor access to information about investment advisers and broker-dealers. For more information, please see "SEC Staff Study on Access to Information About Investment Professionals" in Investment Companies and Investment Advisers below.

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At its open meeting on February 2, the Securities and Exchange Commission proposed Regulation SB SEF under the Securities Exchange Act of 1934 to implement Section 763 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In addition, it proposed (1) an interpretation of the definition of "security-based swap execution facility" added as Section 3(a)(77) of the Exchange Act by the Dodd-Frank Act; (2) to amend Rule 3a-1 under the Exchange Act to exempt a registered security-based swap execution facility (SB SEF) from regulation as an "exchange"; and (3) to add Rule 15a-12 under the Exchange Act to exempt a registered SB SEF from regulation as a broker-dealer, subject to certain conditions. A security-based swap is broadly defined as a swap over (a) a single security, (b) a loan, (c) a narrow-based group or index of securities, or (d) events relating to a single issuer or issuers of securities in a narrow-based security index.

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Co-authored by Kevin M. Foley and Joshua A. Penner

The Commodity Futures Trading Commission issued an order on January 31 granting New York Portfolio Clearing, LLC (NYPC) registration as a derivatives clearing organization. NYPC plans to clear U.S. dollar-denominated interest rate futures contracts traded on NYSE Liffe U.S.

NYPC's approval order can be found here.

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Co-authored by Kevin M. Foley and Joshua A. Penner

The Joint Commodity Futures Trading Commission–Securities Exchange Commission Advisory Committee on Emerging Regulatory Issues will hold a public meeting on February 18, from 9:30 a.m. to 12:00 p.m. Eastern time at the CFTC's headquarters in Washington, D.C. The Committee will discuss matters relating to its recommendations regarding the "Flash Crash" market events of May 6, 2010, and other matters relating to the ongoing work of the committee.

Interested parties may submit written statements to either the CFTC or the SEC, and all submissions will be reviewed jointly by the two agencies.

The Federal Register Notice regarding the meeting, including information regarding the submission of written statements, can be found here.

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Co-authored by Natalya S. Zelensky

On January 27, as required by Section 919B of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission released a study conducted by the staff of the Office of Investor Education and Advocacy recommending steps to improve investor access to information about investment advisers and broker-dealers. The staff recommends in the next 18-month period: (1) unifying the search results from BrokerCheck and IAPD (Investment Adviser Public Disclosure)—the online applications through which the public may obtain information regarding broker-dealers and investment advisers, respectively—so that each system searches the other's database and returns results from both; (2) adding a ZIP code search or other indicator of location function to BrokerCheck and IAPD to more easily permit investors to locate and compare nearby financial services providers; and (3) adding educational content to BrokerCheck and IAPD, including links and definitions of terms that may be unfamiliar to individual investors. The staff recommends that subsequent to the next 18-month period, the SEC and Financial Industry Regulatory Authority continue to analyze, including through investor testing, the feasibility and advisability of expanding BrokerCheck to include additional information currently available in CRD (Central Registration Depository)—the database developed by FINRA in consultation with the states from which the information made available through BrokerCheck is derived—including historical information, as well as the method and format of publishing that information. The staff also recommends that the SEC continue to evaluate expanding IAPD content and the method and format of publishing that content, including through investor testing.

To read the study, click here.
To read the SEC's press release, click here.

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In an antitrust matter arising under Section 1 of the Sherman Act, the district court granted defendants' motion for summary judgment on statute of limitations grounds, despite plaintiffs' argument that the statute of limitations period should be tolled under the doctrine of fraudulent concealment. The U.S. Court of Appeals for the Third Circuit affirmed this decision, finding that a plaintiff who neglects to take reasonable measures to uncover the existence of injury is not entitled to the benefit of the fraudulent concealment doctrine.

Plaintiffs, Nog, Inc. and Sorbee International, Ltd., represented a putative class of direct purchasers of Aspartame, an artificial sweetening product. Defendants are producers of Aspartame and entities related to its distribution and supply. Plaintiffs commenced this action on April 25, 2006, alleging that defendants conspired to fix the price of Aspartame between January 1993 and December 2003. Nog, however, had not purchased the sweetener since 1995 and Sorbee's last purchase occurred in 2001. Defendants moved for summary judgment on the grounds that plaintiffs' claims were brought outside the four-year statute of limitations applicable to federal antitrust claims. Plaintiffs argued that their delay in bringing this action was attributable to defendants' efforts to fraudulently conceal their anticompetitive behavior.

The Third Circuit stated that even if it was assumed that defendants fraudulently concealed their anticompetitive conduct, there was no evidence to show that plaintiffs exercised the level of due care necessary to toll the limitations period. The court found that in spite of three clear "storm warnings," which should have put plaintiffs on notice that defendants were engaging in price fixing, plaintiffs did nothing. (In re Aspartame Antitrust Litigation, No. 09-1487, 2011 WL 263647 (3d Cir. Jan. 25, 2011))

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Plaintiffs, Newmarket Corporation, and defendants, Innospec, Inc., both produce and sell competing chemical fuel additives designed to enhance the performance of gasoline. Plaintiffs claimed that defendants bribed Iraqi and Indonesian government officials to help defendants achieve, maintain and exploit their monopoly of these fuel additives.

Plaintiffs filed a motion to amend their complaint, claiming that they should be granted leave to file a second amended complaint to include Iraq as a new, relevant, geographic market. In response, defendants asserted that the proposed amendment would be futile under what is known as the single purchaser doctrine: that a geographic market cannot be defined, for antitrust purposes, to include an area occupied by only a single purchaser. Relying on this doctrine, defendants claimed that plaintiffs' proposed amendment to the market definition would fail to survive a motion to dismiss.

The court ruled that plaintiffs' proposed amendment was not frivolous on its face and granted the motion, stating that there is some disagreement among courts as to the viability and applicability of the single purchaser doctrine. (Newmarket Corp., v. Innospec, Inc., No. 3:10CV503, 2011 WL 250993 (E.D. Va. Jan. 26, 2011))

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On February 2, the UK Financial Services Authority (FSA) announced the longest custodial sentence so far imposed for insider dealing. Christian Littlewood, a senior investment banker, was sentenced to three years and four months; his wife, Angie Littlewood, to twelve months suspended for two years; and a family friend, Helmy Sa'aid, to two years. The three had pleaded guilty to eight counts of insider dealing alleging that they had made almost £590,000 (approximately $930,000) profit from trades in a number of London Stock Exchange and Alternative Investment Market listed shares between 2000 and 2008 (see the January 14 edition of Corporate and Financial Weekly Digest).

Mr. Sa'aid was also ordered to pay £640,000 (approximately $1.03 million) in confiscation. Confiscation orders in relation to Christian and Angie Littlewood will be dealt with at a later date.

In passing sentence, His Honour Judge Leonard QC noted that sentences need to deter others. "Those rogue traders that let down the honest, discreet majority must be made to pay," he said.

Margaret Cole, the FSA's managing director of enforcement and financial crime said, "This was a case of systematic abuse by an approved person of their privileged position in the market—we are determined to stamp out such abuse. Our tough, coordinated approach to insider dealing and our commitment to taking on difficult criminal prosecutions has really begun to pay off; the guilty pleas and sentencing of the Littlewoods and Sa'aid shows that we can, and will, uncover insider dealing, even across borders, and that the people who commit these market offenses will not go unpunished."

To read the FSA's announcement, click here.

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On January 31, the European Securities and Markets Authority (ESMA) published an updated version of its table of EU member states' short-selling measures showing new measures by France and Germany.

France: With effect from February 1, the short positions disclosure regime developed by ESMA will be effective for all French shares admitted to trading on Euronext Paris and Alternext Paris. The French emergency measures adopted in September 2008 will cease to apply.

Germany: BaFin extended its net short-selling position notification and publication requirements in respect of 10 financial stocks. These requirements will continue to apply through March 25.

To view the updated ESMA table, click here.

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