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

Co-authored by: Palash I. Pandya

On August 16, the Public Company Accounting Oversight Board (PCAOB) issued a Concept Release in which it proposed mandatory audit firm rotation as a method to enhance auditor independence, objectivity and professional skepticism. The PCAOB stated that its inspections frequently indicated audit deficiencies that may be attributable to a failure by an audit firm to exercise the required independence, professional skepticism and objectivity by putting the interests of company management before that of investors. The PCAOB stated that a mandatory audit firm rotation requirement, by ending an audit firm's ability to turn each new engagement into a long term income stream, could fundamentally change an audit firm's relationship with its audit client and might, as a result, significantly enhance the audit firm's ability to serve as an independent gatekeeper.

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Co-authored by: Natalya S. Zelensky and Louis J. Froelich

The Financial Industry Regulatory Authority has issued additional guidance on the application of FINRA rules governing social media sites and business communications. In January 2010, FINRA issued Regulatory Notice 10-06 (Notice), providing guidance on the application of FINRA rules regarding communications with the public and reminding member firms of the recordkeeping, suitability, supervision and content requirements for such communications. Since the publication of the Notice, member firms have raised additional questions regarding the application of the rules. FINRA states that the new guidance responds to these questions by providing further clarification about application of the rules to new technologies, and is not intended to alter the principles or the guidance provided in the prior Notice. The additional guidance addresses the following topics: (i) recordkeeping; (ii) supervision; (iii) third-party posts, third party links and websites; and (iv) accessing social media sites from personal devices.

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Co-authored by: Natalya S. Zelensky and Louis J. Froelich

The Securities and Exchange Commission approved the Financial Industry Regulatory Authority’s proposal to establish a registration category and qualification examination requirement (Series 99) for certain member firm operations personnel, as well as adopt continuing education requirements for such operations personnel and adopt NASD Rule 1120 as FINRA Rule 1250 in the consolidated FINRA rulebook with certain changes. The new rules will take effect on October 17. In addition, member firms must identify those persons required to register as an Operations Professional (Day-One Professionals) (i.e., persons who meet the depth of personnel criteria and are engaged in one or more covered functions as of the effective date of the rule) as of October 17. Day-One Professionals must request Operations Professional registration via Form U4 in the CRD system on or before December 16. Those Day-One Professionals must then pass any necessary examination on or before October 17, 2012.

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Co-authored by: Christopher H. Mendoza and Christian B. Hennion

Gary Barnett has been appointed to serve as the Director of the Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight, a newly created division that is part of the CFTC’s restructuring to fulfill its expanded responsibilities under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Mr. Barnett is currently head of the U.S. Derivatives and Structured Finance Practice Group at Linklaters LLP in New York, NY.

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Co-authored by: Christopher H. Mendoza and Christian B. Hennion

The Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements and the International Organization of Securities Commissions (IOSCO) have published a consultative report on the gathering, storing, and dissemination of over-the-counter (OTC) derivatives data by trade repositories (TRs). The consultative report was prepared in response to the October 2010 report of the Financial Stability Board, “Implementing OTC Derivatives Market Reforms,” which requested the CPSS and IOSCO to consult with other regulators to develop (i) minimum data reporting requirements and standardized formats and (ii) the methodology and mechanism for data aggregation.

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Co-authored by: Dean M. Razavi

In Animal Science Products, Inc. v. China Minmetals Corp., the U.S. Court of Appeals for the Third Circuit overturned its prior decisions in Turicentro, S.A. v. Am. Airlines Inc. and Carpet Group Int’l v. Oriental Rug Importers Ass’n, and held that the Foreign Trade Antitrust Improvements Act (the “FTAIA”) sets forth substantive merits requirements for private antitrust claims rather than a jurisdictional threshold to antitrust suits brought in connection with foreign commerce and international trade.

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Co-authored by: Dean M. Razavi

In NML Capital Ltd v. The Republic of Argentina, the U.S. Court of Appeals for the Second Circuit held that Argentina was liable for prejudgment contract interest only through the date on which the District Court first determined liability in a final judgment, and not through to a later date on which that judgment was partially modified as a result of the appeals process.

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On August 25, the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (the agencies) announced the results of the shared national credit (SNC) annual review. A SNC is any loan or formal loan commitment, and any asset such as real estate, stocks, notes, bonds, and debentures, taken as debts previously contracted, extended to borrowers by a federally supervised institution, its subsidiaries, and affiliates that aggregates to $20 million or more and is shared by three or more unaffiliated supervised institutions. Many of these loan commitments are also shared with foreign banking organizations (FBOs) and nonbanks, including securitization pools, hedge funds, insurance companies, and pension funds.

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On February 8, the Federal Reserve (or the Board) published in the Federal Register a notice of intent (NOI) to require savings and loan holding companies (SLHCs) to submit the same reports as bank holding companies (BHCs), beginning with the March 31, 2012 reporting period. The NOI stated that the Board would issue a formal proposed notice on information collection activities for SLHCs. The Federal Reserve is proposing a two-year phase-in period for most SLHCs to file Federal Reserve regulatory reports with the Board, as well as an exemption for some SLHCs from initially filing Federal Reserve regulatory reports.

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On August 22, federal government agencies (the Department of Health and Human Services, Department of Labor, and U.S. Treasury Department) published proposed regulations concerning the new mandated “summary of benefits and coverage” (SBC). Beginning March 23, 2012, group health plans (and health insurance issuers) must provide plan participants and beneficiaries with plan information in the form of the new SBC.

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Co-authored by: Fred Santo, Marilyn Selby Okoshi, and Sam Tyfield

The short selling restrictions reported in the August 19 edition of Corporate & Financial Weekly Digest have been extended by Spain and Italy until September 30, and by France until “at least November 11, 2011.” The Belgian and Greek restrictions remain of indefinite duration.

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Co-authored by: Fred Santo, Marilyn Selby Okoshi, and Sam Tyfield

On August 23, the European Securities and Markets Authority (ESMA) published consultation paper ESMA/2011/270 (Consultation on ESMA's draft technical advice to the European Commission on possible implementing measures of the Alternative Investment Fund Managers Directive in relation to supervision and third countries.)

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Co-authored by: Robert Wild and David Kravitz

On August 4, the New York Stock Exchange LLC filed a proposed rule change with the Securities and Exchange Commission to adopt additional initial listing requirements for companies that have become public through transactions in which unlisted private operating companies merge into publicly traded shell companies, commonly known as reverse mergers. The proposed amendments are similar to rules proposed by the NASDAQ Stock Market LLC and described in the April 29 edition of the Corporate and Financial Weekly Digest.

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On August 12, the Securities and Exchange Commission’s new whistleblower rules went into effect. The whistleblower rules were described in the May 27 edition of the Corporate and Financial Weekly Digest. In addition, the SEC activated a new “Office of the Whistleblower” web page for submission of tips and to provide other information on the whistleblower rules.

To view the whistleblower web page, click here.

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Co-authored by: Michelle McIntosh

On August 15, the Securities and Exchange Commission released an order “temporarily exempting the floor broker operations of broker-dealers with market access that handle orders on a manual basis” (the Floor Brokers) from the automated controls requirement of Rules 15c3-5(c)(1)(ii) and (c)(2) of the Securities Exchange Act of 1934 (the Automated Controls Rule). The Automated Controls Rule applies to each broker-dealer with market access to an exchange or automated trading system and requires, among other things, that each such broker-dealer implement a risk management control system and supervisory procedures reasonably designed to:

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The Commodity Futures Trading Commission has approved proposed amendments to National Futures Association compliance rules, bylaws and other requirements applicable to the retail forex activities of NFA members.

Among the amendments, NFA is eliminating certain existing exclusions from compliance with NFA’s forex requirements, with the result that all NFA members engaging in retail forex transactions will be subject to the applicable NFA forex requirements (subject to a limited exemption for futures commission merchants (FCMs) whose forex activities are limited to hedging currency risk for their futures customers). Currently, NFA’s retail forex requirements do not apply to FCMs and introducing brokers that are also registered with the Securities and Exchange Commission as broker-dealers.

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Co-authored by: Brian Schmidt

The United States Court of Appeals for the Second Circuit found in favor of the trustee (the Trustee) presiding over the liquidation of Bernard L. Madoff Investment Securities (BMIS), affirming the Trustee’s calculation of “net equity” in the BMIS liquidation. The Trustee calculates net equity to determine the value of claims submitted by victims of Madoff’s massive fraud.

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Customers who had signed cell phone contracts with Verizon and AT&T, brought a class action against the collection agency that the phone companies hired to collect unpaid fees and charges. The complaint alleged that the agency, Collecto, Inc., violated the Fair Debt Collection Practices Act and New York’s consumer protection statute and committed common law fraud by seeking payment of collection costs in addition to the unpaid fees owed to phone companies. Collecto moved to compel the plaintiffs to arbitrate their claims, arguing that the mandatory arbitration clauses in the agreements between the plaintiffs and the phone companies should also apply to Collecto.

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The Federal Reserve (the Board) on August 12 issued an interim final rule establishing regulations for savings and loan holding companies (SLHCs). Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), supervisory and rulemaking authority for SLHCs and their nondepository subsidiaries transferred from the Office of Thrift Supervision (OTS) (now defunct) to the Board on July 21, 2011. Last month, the Federal Reserve sought comment on a notice identifying regulations previously issued by the OTS that the Federal Reserve will continue to enforce. The interim final rule issued on August 12 implements the transfer of those regulations from the OTS to the Federal Reserve.

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Co-authored by: Evan Belosa

Pursuant to the Patient Protection and Affordable Care Act, beginning in 2014 individuals and small businesses will have access to the purchase of private health insurance through insurance exchanges. States are required to set up health insurance exchange markets, both for small businesses (the Small Business Health Option Program, or SHOP) and for individuals, or a single exchange that combines both. Forty-nine states have applied for grants to help plan and operate exchanges.

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Co-authored by: Fred Santo, Marilyn Okoshi and Sam Tyfield

On August 11, the financial regulators in Belgium, France, Italy and Spain introduced short selling restrictions on shares of certain named financial institutions and derivatives (e.g., futures) linked to those securities. The restrictions also extend to stock indices of which those securities are components.

The Belgian restrictions apply indefinitely. The three other countries’ restrictions will expire after 15 days, unless extended. Earlier that week, Greece imposed a two-month ban on short sales of all listed securities.

The regulators’ interpretations of their restrictions are constantly evolving. Changes generally are reflected in amendments to published FAQs. The websites below should be consulted for the most up to date information.

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Co-authored by: Sam Tyfield

On August 11, in the context of the short selling restrictions introduced by Belgium, France, Italy and Spain, the European Securities and Markets Authority (ESMA) issued a statement reiterating the requirements set out in the European Union Market Abuse Directive (MAD) and implemented in national laws that prohibit the dissemination of information which gives, or is likely to give, false or misleading signals as to financial instruments. This clearly includes the dissemination of rumors and false or misleading information.

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The Upper Tribunal (Tax and Chancery Chamber) has published its decision in Michiel Visser and Oluwole Fagbulu v. FSA.

Michiel Visser and Oluwole Fagbulu were fined respectively £2 million (approximately $3.3 million) and £500,000 (approximately $830,000). The fine on Fagbulu was reduced to £100,000 (approximately $166,000) on the grounds of financial hardship. Visser was CEO and Fagbulu CFO of Mercurius Capital Management Ltd (Mercurius), a UK FSA authorized entity that managed Mercurius International Fund Ltd (the Fund), a Cayman Islands hedge fund. During the relevant period from July 2006 to January 2008, the Fund had about 20 investors who had collectively invested approximately EUR 35 million (approximately $50 million). The Fund was placed in voluntary liquidation on January 11, 2008.

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On August 16, the UK Financial Services Authority (FSA) announced that it had published a final notice imposing a penalty of £210,000 (approximately $350,000) on Sir Ken Morrison (KM), the former chairman of Wm Morrison Supermarkets Plc, for breach of its shareholding disclosure rule DTR 5.8.3R.

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Co-authored by David A. Pentlow, Robert J. Wild and Kari E. Hoelting

The U.S. District Court for the Southern District of New York dismissed a claim brought under Section 16(b) of the Securities and Exchange Act of 1934, finding that the sale and purchase within six months of two different series of common stock traded under different ticker symbols and not otherwise convertible into one another or derivatives of one another did not constitute the “purchase and sale, or any sale and purchase, of any equity security” under Section 16(b) of the Exchange Act.

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Co-authored by Natalya S. Zelensky

On August 5, the Financial Industry Regulatory Authority, Inc. issued Regulatory Notice 11-38 in response to the downgrade of the U.S. long-term credit rating by Standard & Poor’s. The notice provides guidance to member firms on the application of the Securities and Exchange Commission’s Net Capital and Customer Protection Rules to U.S. Treasury securities and other securities issued, or guaranteed as to principal and interest, by the U.S. or any of its governmental agencies. The issuance of the rating downgrade does not alter the fact that under Rule 15c3-1 of the Securities Exchange Act of 1934, the credit rating assigned to U.S. Treasury securities or other securities issued, or guaranteed as to principal or interest, by the U.S. or any of its governmental agencies (government securities), by any credit ratings agency, is not a factor in determining the net capital treatment for such securities. FINRA staff has confirmed with SEC staff that this ratings action by Standard & Poor’s does not alter the net capital treatment of these government securities under Exchange Act Rule 15c3-1(c)(2)(vi)(A).

Click here to read Regulatory Notice 11-38.
 

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Co-authored by Natalya S. Zelensky

Effective August 8, the trading pause pilot rule—which was applicable only to securities included in the S&P 500 Index, the Russell 1000 Index and a list of selected exchange-traded products—was expanded to include all National Market System (NMS) stocks. The expanded trading pause pilot rule requires a threshold move of 30% (or more) to trigger a trading pause for NMS securities where they are priced at $1.00 or more, and a threshold move of 50% (or more) where such securities are priced less than $1.00. According to the Financial Industry Regulatory Authority, Inc., the expansion of the trading pause pilot rule applies the trading pause protections against excessive volatility to a wider group of securities, and permits further review and assessment of the operation of trading pauses, including whether alternative measures are appropriate.

Click here to read Regulatory Notice 11-37.
 

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Co-authored by Elizabeth D. Langdale

The Delaware Court of Chancery has upheld the assignment of a Delaware limited liability company membership interest, including the voting rights associated with that interest, to an existing member of the LLC. Omniglow LLC had three members: (i) plaintiff Achaian, Inc., which owned 20% of Omniglow; (ii) defendant Leemon Family LLC, which owned 50% of Omniglow; and (iii) Randye M. Holland, who had owned a 30% membership interest in Omniglow. In January 2010, Holland purported to transfer and assign its entire 30% interest to Achaian. Achaian then filed suit seeking an order of dissolution of Omniglow, asserting that it and Leemon were deadlocked with respect to the management of the company. Leemon opposed the motion, arguing, among other things, that Holland could not assign his voting rights in the LLC without Leemon’s consent.

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Co-authored by Elizabeth D. Langdale

An investment fund (the Lerner Fund) controlled by Randy Lerner, the owner of the Cleveland Browns, recently obtained a court order for the return of the remainder of its $40 million seed investment in a hedge fund (the Paige Fund) managed by Paige Capital Management LLC. After the expiration of the three year lock-up period, the Lerner Fund sought to redeem its full investment. The Paige Fund and its managers (the Paiges) refused to allow the full redemption and instead attempted to apply a “gate” provision in the Paige Fund’s partnership agreement that limited redemptions if they would cause more than 20% of the fund’s assets to be withdrawn. The Lerner Fund was the only investor in the fund other than a principal of the Paiges, and its redemption request, if honored, would have resulted in the withdrawal of 99.9% of the Paige Fund’s assets.

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On August 10, the Federal Housing Finance Agency (FHFA), in consultation with the U.S. Department of the Treasury and Department of Housing and Urban Development (HUD), has announced a Request For Information (RFI), seeking input on new options for selling single-family real estate owned (REO) properties held by Fannie Mae and Freddie Mac (the Enterprises), and the Federal Housing Administration (FHA). According to the release, "The RFI’s objective is to help address current and future REO inventory. It will explore alternatives for maximizing value to taxpayers and increasing private investment in the housing market, including approaches that support rental and affordable housing needs." A specific goal is to solicit ideas from market participants that would maximize the economic value that may arise from pooling the single-family REO properties in specified geographic areas.

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Co-authored by David A. Pentlow, Robert J. Wild and James B. Anderson

On July 29, the Securities and Exchange Commission once again updated its planned schedule for adopting rules and taking other actions to implement the corporate governance and disclosure provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As reported in the April 15, 2011, edition of Corporate and Financial Weekly Digest, the SEC had previously announced its revised planned rulemaking schedule to implement provisions of the Dodd-Frank Act. Below are updated time periods set forth in the SEC’s further revised rulemaking schedule for governance and disclosure rules to be adopted during such time periods, as well as certain related actions. Section references are to the Dodd-Frank Act.

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Co-authored by Gregory C. Johnson

A federal court in Texas dismissed a purported securities fraud class action against a clothing retailer because the claims (a) were based on deficient confidential witness statements and (b) failed to demonstrate that the company’s inaccurate earnings projections were made with knowledge of falsity.

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Co-authored by Gregory C. Johnson

The U.S. Court of Appeals for the Fourth Circuit affirmed the summary judgment dismissal of a breach of contract claim asserted by a medical services company because the totality of the circumstances demonstrated that the lender complied with the loan agreement by acting in good faith when it declared default.

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Effective July 21, 2011, any savings association that is a subsidiary of a savings and loan holding company (SLHC) must provide notice to its applicable Federal Reserve Bank at least 30 days before declaring a dividend. The duty to review and process these notices is one of the new responsibilities the Board assumed on July 21 as part of the supervisory and rulemaking authority previously held by the Office of Thrift Supervision (OTS) with respect to SLHCs.

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Co-authored by Michael R. Durnwald

Since the 112th Congress commenced at the beginning of this year, multiple bills have been introduced that, if enacted, would affect employee benefit plans and executive compensation. Some of this proposed legislation, which is currently in committee, is highlighted below.

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