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

Co-authored Jonathan D. Weiner

On June 15, the staff of the Securities and Exchange Commission's Division of Risk, Strategy, and Financial Innovation published observations regarding filers' compliance with the SEC's rules concerning interactive data for financial reporting. The staff identified some of the most common and significant issues contained in interactive data submissions based on filings made in early 2011, which included 10-K's from Large Accelerated filers, the largest of which provided detailed tagging of notes to the financial statements. The staff also reiterated its view that the rendered version of interactive data (XBRL) financial statements need not look exactly the same as HTML financial statements, emphasizing the primacy of quality, completeness and accuracy of tagging over the formatting and appearance of XBRL financial statements.

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Co-authored by Natalya S. Zelensky

On June 16, the Securities and Exchange Commission approved a proposed rule by the Financial Industry and Regulatory Authority to require registration of certain personnel of a member firm who perform and oversee member operations functions. New FINRA Rule 1230(b)(6) will establish a registration category and qualification examination requirement for certain operations personnel, as well as adopt continuing education requirements for such operations personnel. An individual will be required to register as an "Operations Professional" if the person is a "covered person," who has responsibility for one or more of 16 "covered functions," such as customer account data and document maintenance; receipt and delivery of securities and funds, account transfers; and prime brokerage. Any person required to register as an Operations Professional will be required to pass a new qualification examination, subject to certain exceptions, which tests for general knowledge about the securities industry. Continuing education requirements will also be expanded to include Operations Professionals.

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Co-authored by Elizabeth D. Langdale

The U.S. Supreme Court overturned certification of a class of 1.5 million current and former female employees of Wal-Mart Stores, Inc. in the largest sex discrimination case in history. In a 5-4 decision, the Court found that plaintiffs had not cleared the "commonality" hurdle for class certification set by Federal Rule of Civil Procedure 23(a)(2), which requires parties to prove that claims of putative class members share common questions of law and fact.

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Co-authored by Elizabeth D. Langdale

The U.S. District Court for the Western District of Washington imposed monetary sanctions on plaintiff Play Visions, Inc. and its counsel for failure to search for documents in a timely fashion, delayed and inadequate document production, false certification that the relevant records were maintained only in paper format, and for counsel's specific failure to adequately understand the client's document retention system or assist in production.

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Co-authored by Ann M. Kim

The Patient Protection and Affordable Care Act (PPACA) mandates certain requirements for claims and appeals procedures that must be followed by all health insurers and group health plans, including employer-provided plans that are subject to the Employee Retirement Income Security Act (ERISA). PPACA was originally enacted in 2010, and initially required compliance only with ERISA's claims and appeals rules. However, through prior guidance issued jointly by the Departments of Treasury, Labor and Health and Human Services (the Departments), the claims and appeals rules have been expanded. In guidance issued on June 22 (the Guidance), the Departments have clarified the new claims and appeals requirements.

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On June 27, the UK Financial Services Authority (FSA) published a financial crime consultation paper (CP11/12 – Financial Crime: A Guide for Firms) which proposes a new FSA guide designed to help firms reduce the risk of their businesses being used to facilitate financial crime, as well as other anti-financial crime measures.

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On June 22, the UK Financial Services Authority (FSA) published the results of a thematic review of how banks manage their money laundering risks, particularly with respect to high-risk customers including Politically Exposed Persons (PEPs), correspondent banking relationships and wire transfer payments.

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The UK Financial Services Authority (FSA) has published its Annual Report for 2010/11, outlining its performance against the priorities set out in its 2010/11 Business Plan and its statutory objectives. The Report highlights, among other matters:

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Co-authored by Christopher T. Shannon

On June 15, the Securities and Exchange Commission proposed amendments to the broker-dealer financial reporting rule in order to strengthen the audits of broker-dealers as well as the SEC's oversight of the way broker-dealers handle their customers' securities and cash.

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In March, the Securities and Exchange Commission issued a proposed rule that was intended to meet the SEC's obligations under Section 766 of the Dodd-Frank Wall Street Reform and Consumer Protection Act to determine the extent to which a security-based swap will be deemed to involve the acquisition of beneficial ownership of underlying equity securities for the purposes of Sections 13 and 16 of the Securities Exchange Act of 1934. The proposed rule was noncontroversial because in the SEC's view existing Exchange Act Rules 13d-3 and 16a-1 already provide sufficient guidance on this topic, so the rule was technically just a "re-adoption" of those rules without change. The proposed rule has now been reissued without change as a final rule that will take effect on July 16.

The final rule can be found here.

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Co-authored by Kevin M. Foley and Christopher H. Mendoza

The Commodity Futures Trading Commission has proposed to issue an order (the Proposed Order) providing temporary relief from certain swap-related provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act that would otherwise take effect on July 16, 2011. The CFTC proposal, which describes the scope of the proposed exemptive relief but does not include the actual text of the Proposed Order, groups the provisions of Title VII as to which the CFTC has regulatory responsibility into four broad categories:

1. provisions that, by their terms, do not take effect without the adoption of implementing rules;
2. self-effectuating provisions that include references to terms that require further definition;
3. self-effectuating provisions that do not reference terms requiring further definition and that repeal current provisions of the Commodity Exchange Act (CEA); and
4. other self-effectuating provisions.
    

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Co-authored by Gregory C. Johnson

The U.S. Supreme Court has found that a party that assists in the drafting and dissemination of a misleading statement related to the sale of a security—but that is not the legal entity ultimately responsible for the statement—will not be subject to liability for securities fraud under Securities and Exchange Commission Rule 10b-5.

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Co-authored by Gregory C. Johnson

The U.S. District Court for the Northern District of California dismissed securities fraud claims against a dental device maker based on the plaintiffs' failure to allege sufficient "hard numbers" showing that that the defendants knew their public statements were false when made.

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Co-authored by Evan A. Belosa

The U.S. Department of Labor's Employee Benefit Security Administration (EBSA) published a notice in the Federal Register on June 1 that proposed to extend the applicability dates for fiduciary-level fee disclosure regulations (29 CFR 2550.408(b)-2(c)) and related participant-level disclosures ( 29 CFR 2550.404a-5) under the Employee Retirement Income Security Act to January 1, 2012, and April 30, 2012, respectively.

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In FS11/3, a feedback statement on product intervention issued on June 14, the UK Financial Services Authority (FSA) announced that it will follow a new product intervention approach. It will actively regulate all aspects of the product life cycle and focus on the design, development and management of products. The FSA will continue its work on the later parts of the product value chain (including point-of-sale standards such as financial promotions, disclosure and advice).

The FSA acknowledges that further thinking and analysis will be required as it takes forward this approach in specific areas, and does not intend to consult on any specific new rules immediately. However, the FSA confirms its intention to move toward a single set of rules and guidance on product governance, building on what is already in place (including the treating customers fairly guidance on responsibilities of product providers and distributors for the fair treatment of customers).

FS11/3 is part of a wider debate about the future of financial regulation in the UK and the regulatory philosophy to be adopted by the Financial Conduct Authority (FCA). The FSA will publish shortly a document on the FCA's philosophy and hold a conference in late June 2011 to encourage further discussion on the FCA and what stakeholders expect from it.

Read more.

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On June 14, the UK Financial Services Authority (FSA) published the final notice it had issued to Barnett Alexander, a trader and former private client stockbroker. The FSA fined him £700,000 (approximately $1,128,000) for market abuse and banned him from performing any controlled function in an FSA regulated firm.

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On June 14, the UK Financial Services Authority (FSA) announced that it had obtained its first criminal conviction for boiler room fraud. David Mason was sentenced to two years' imprisonment, having pleaded guilty at Southwark Crown Court to: counts of carrying on a regulated activity without authorization; making false or misleading statements, promises or forecasts; and money laundering. He was also disqualified for six years from being a director of any UK company.

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On June 13, the UK government published in draft the Undertakings for Collective Investment in Transferable Securities Regulations 2011 implementing the UCITS IV Directive (2009/65/EC) into UK legislation and regulation. Assuming that they are approved by Parliament, the Regulations will be made and come into force on July 1. Changes to the FSA rules in relation to UCITS IV will be published in the near future.

Read more.
 

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On June 16, HM Treasury published "A new approach to financial regulation: the blueprint for reform," which includes a "white paper" consultation document on its proposals for reform of the UK financial services regulatory structure and a draft Financial Services Bill, the primary legislation that would bring the reforms into effect.

The draft Bill sets out the provisions that will implement the government's structural financial services reforms. These include the measures necessary to establish the new regulatory bodies: the Financial Policy Committee, the Prudential Regulation Authority and the Financial Conduct Authority. The Bill makes very extensive changes to the Financial Services and Markets Act 2000 (FSMA), as well as to the Bank of England Act 1998 and the Banking Act 2009. The government intends to publish a consolidated version of FSMA, showing the proposed amendments, "as soon as possible."

The government has announced that it aims to introduce the Bill formally into Parliament before the end of 2011.

Read more.

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In a wide-ranging speech to the SEC and Financial Reporting Institute's 30th Annual Conference on June 2, James Doty, Chairman of the Public Company Accounting Oversight Board (PCAOB) raised for discussion and review the possibility that the PCAOB may require audit firm rotation.

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Co-authored by Natalya S. Zelensky

The Financial Industry Regulatory Authority issued an Information Notice encouraging member firms to make reasonable efforts to assist investment advisers seeking to comply with Rule 206(4)-5 under the Investment Advisers Act of 1940, as amended, which is intended to curb "pay-to-play" practices. In general, the rule prohibits an investment adviser from providing advisory services for compensation to state government clients for two years after the investment adviser or specified employees or executives make contributions to certain state elected officials or candidates. FINRA recognizes that it may be difficult for investment advisers to identify these government investors when, for example, shares in a covered investment company managed by the investment advisers are held through an intermediary. FINRA is encouraging member firms to make reasonable efforts to assist investment advisers seeking to comply with the requirements of Rule 206(4)-5 in these situations.

Click here to read the FINRA Information Notice.

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Co-authored by Natalya S. Zelensky

The Financial Industry Regulatory Authority issued a Trade Reporting Notice reminding member firms of their obligation to report, as soon as practicable, to FINRA's Market Regulation Department on Form T last sale reports of over-the-counter transactions in equity securities for which electronic submission is not possible (such as if the transaction occurred on a holiday or weekend). In the Trade Reporting Notice, FINRA also announced a new process for the electronic submission of Form T. Effective July 5, member firms must submit Form T electronically through FINRA's Firm Gateway, and will no longer be able to submit Form T via email. Member firms may begin submitting Form T data via the new submission process on June 6, though they are not required to until the July 5 effective date.

Click here to read the FINRA Trade Reporting Notice.

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Co-authored by Kevin M. Foley and Vanessa L. Colman

The Commodity Futures Trading Commission will hold a public meeting on June 14 at its headquarters in Washington, D.C., to consider the effective date of various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 754 of the Dodd-Frank Act provides that "[u]nless otherwise provided in this title, the provisions of this subtitle shall take effect on the later of 360 days after the date of the enactment of this subtitle [i.e., July 16, 2011] or, to the extent a provision of this subtitle requires a rulemaking, not less than 60 days after publication of the final rule or regulation implementing such provision of this subtitle."

Further information about the meeting is available here.

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Co-authored by Brian Schmidt

The Delaware Court of Chancery sustained in part the claims of a plaintiff investor challenging a company's sale of its primary asset based upon allegations that the vote of the individual director defendants approving the sale was tainted by bonuses they received tied to that sale.

In December 2005, individual director defendants of nominal defendant Winmill & Co., Inc., a 22% shareholder in Bexil Corporation, a holding company, voted in favor of a transaction by which Bexil would sell its interest in a third company, its primary asset. In April 2006, Bexil's shareholders approved the sale, resulting in pre-tax proceeds to Bexil of approximately $38.5 million. Two of the individual director defendants who had approved the transaction received bonus compensation directly tied to the sale totaling $2.5 million.

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Co-authored by Brian Schmidt

The Superior Court of Delaware recently denied a motion to dismiss for lack of personal jurisdiction, holding that, following a merger, the defendant corporation continued to transact business within Delaware and, in connection with that business, caused injury within the state. As a result, the court determined that the assertion of personal jurisdiction over the foreign defendant was proper.

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Six federal agencies have approved and will submit a Federal Register notice that extends the comment period on the proposed rules to implement the credit risk retention requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 15G generally requires the securitizer of asset-backed securities (ABS) to retain an economic interest of no less than 5% in the credit risk of the assets collateralizing the ABS and would not permit transfer of or hedging that credit risk. Section 15G includes a variety of exemptions from this requirement, including an exemption for ABS that are collateralized exclusively by ''qualified residential mortgages,'' as such term is defined by the Agencies by rule. The comment period was extended to August 1 to allow interested persons more time to analyze the issues and prepare their comments. (Originally, comments were due by June 10.) The Agencies stated, "Due to the complexity of the rulemaking and to allow parties more time to consider the impact of the [proposed rule] on affected markets, the Agencies have determined that an extension of the comment period until August 1, 2011 is appropriate."

The proposal was issued by the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Federal Housing Finance Agency, and the U.S. Department of Housing and Urban Development.

Read more.

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On June 9, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (the agencies) announced that they are seeking comment on proposed supervisory guidance regarding stress-testing practices at banking organizations with total consolidated assets of more than $10 billion.

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The Patient Protection and Affordable Care Act (PPACA) cuts back on which drugs may be reimbursed from flexible spending accounts, health reimbursement arrangements, health savings accounts and Archer medical savings accounts. Such plans are prohibited from reimbursing for medicine or drug expenses incurred after December 31, 2010, unless the item requires a prescription, the item is available over-the-counter but the individual obtained a prescription, or the drug is insulin.

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Co-authored by James D. Van De Graaff and Michelle S. McIntosh

The Securities and Exchange Commission approved the Financial Industry Regulatory Authority's proposed consolidated rules regarding financial responsibility and related operational rules. FINRA Rules 4150, 4311, 4522 and 4523 (Consolidated Rules) are partially derived from and replace certain provisions in the New York Stock Exchange and National Association of Securities Dealers Rules. The Consolidated Rules, together with those consolidated financial responsibility rules that the SEC approved in late 2009, were adopted to permit FINRA to better effectuate "its financial and operational surveillance and examination programs." The Consolidated Rules are effective as of August 1.

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Co-authored by Jonathan Rotenberg

The U.S. Department of Labor's Administrative Review Board (ARB) adopted a liberal pleading standard for whistleblower retaliation cases under the Sarbanes-Oxley Act (SOX).

Two former employees of Parexel International LLC filed whistleblower complaints alleging that Parexel terminated their employment in violation of SOX's anti-retaliation provisions. Both former employees had complained to their superiors after discovering that other company employees were falsifying drug-testing data in violation of Food and Drug Administration rules. Parexel allegedly failed to investigate the falsification, and over the next several months both complainants were allegedly subjected to various forms of retaliation and finally terminated.

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Co-authored by Jonathan Rotenberg

Stockholder plaintiffs brought a purported class action against HomeBanc Corporation and certain of its officers and directors alleging that the mortgage and lending company committed securities fraud by improperly concealing numerous purchases of subprime mortgage securities, which allegedly caused substantial losses when the company collapsed during the housing and subprime market crash.

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On November 9, 2010, the Federal Deposit Insurance Corporation's Board of Directors issued a final rule implementing Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 343 of the Dodd-Frank Act provides unlimited insurance coverage for noninterest-bearing transaction accounts at all insured depository institutions (IDIs) from December 31, 2010, through December 31, 2012. The final rule imposes certain notice requirements, including the requirement that if an IDI modifies the terms of a deposit account so that the account no longer will be eligible for unlimited deposit insurance coverage, the institution "must notify affected customers and clearly advise them, in writing, that such actions will affect their deposit insurance coverage." As explained in the preamble to the final rule, this notice requirement is intended primarily to apply when IDIs begin paying interest on a demand deposit accounts (DDA), permitted beginning July 21, 2011, under Section 627 of the Dodd-Frank Act.

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The UK Financial Services Authority (FSA) recently announced proposed revised guidance on reporting on-exchange derivatives transactions conducted through exchange platforms. Under current FSA guidance, if a transaction conducted through an exchange platform is in a instrument whose characteristics differ from an exchange standardized derivative, the transaction must be reported as an OTC derivative transaction. If the instrument is fungible with an exchange standardized derivative, the reporting firm may report it as an on-exchange or OTC derivative transaction.

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The UK Financial Services Authority (FSA) recently announced that is had fined David McGrath, the former compliance officer of ActivTrades Plc, £3,000 (approximately $4,900) and prohibited him from performing the compliance oversight CF10 controlled function for any regulated entity because he lacked competence and capability to perform that function.

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On June 1, the UK Financial Services Authority (FSA) announced that it had censured BDO LLP for failings while acting as a sponsor during the takeover by Shore Capital Group PLC of Puma Brandenburg Limited. This is the FSA's first public censure of a sponsor in relation to the Listing Rules.

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On May 27, it was announced that the EU Council of Ministers had adopted the final text of the Alternative Investment Fund Managers Directive (AIFMD).

The Directive was adopted by the European Parliament on November 11, 2010 (see the November 19, 2010, edition of Corporate and Financial Weekly Digest).

The Directive will enter into force on the 20th day following its publication in the EU Official Journal (expected to be some time in June). After that member states will have two years to transpose the AIFMD provisions into national law. Accordingly the provisions of the AIFMD will begin to come into force in mid-2013.

Read more.

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