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

Co-authored by James B. Anderson

On October 18, the staff of the Division of Corporation Finance of the Securities and Exchange Commission issued a legal bulletin (No. 14F) providing guidance relating to shareholder proposals under Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended. This bulletin discusses the staff’s reversal of its position regarding proof of ownership for shareholder proposals, clarifies the treatment of revised shareholder proposals, provides guidance on common errors shareholders can avoid when submitting proof of ownership to issuers, clarifies procedures for withdrawing no-action requests for proposals submitted by multiple proponents, and outlines the SEC’s use of email to transmit no-action responses.

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On October 26 the House Committee on Financial Services approved H.R. 2167 (the “Private Company Flexibility and Growth Act”) and sent the Bill to the House floor.

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The Financial Industry Regulatory Authority, Inc. has issued Regulatory Notice 11-48 (the Notice), which seeks comment on proposed new FINRA Rule 4516 (the Rule). The proposed rule would require each carrying or clearing member firm to maintain and keep current certain records in one central location. The comment period expires December 9.

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The Financial Industry Regulatory Authority, Inc. has issued Regulatory Notice 11-49 (the Notice), which provides guidance to member firms on certain issues regarding NASD Rule 2210 (the Rule) and communications with the public. The Notice reminds firms that: i) the Rule 2210(c) filing requirement concerning sales literature and advertisements of registered investment companies includes research reports that fall within the definition of advertisement or sales literature, and ii) the Rule 2210(c) filing requirement concerning sales literature and advertisements of public direct participation programs includes the advertisements and sales literature of exchange-traded products organized as grantor trusts that meet the definition of a FINRA Rule 2310 direct participation program.

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On October 26, the Securities and Exchange Commission adopted Form PF, which it jointly designed with the Commodity Futures Trading Commission to collect systemic risk data about hedge funds and other private funds. The CFTC is expected to vote on adopting the form within the next week. While Form PF is not yet available, SEC Chairman Mary Schapiro indicated that the new form reflects changes to the original proposal. These changes include:

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On October 24, the Commodity Futures Trading Commission’s Office of General Counsel issued a no-action letter allowing the offer and sale in the United States of the GreTai Securities Market Capitalized Weighted Stock Index (GTEX) futures contract that is traded on the Taiwan Futures Exchange.

A copy of the no-action letter may be found here.
 

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Co-authored by Elizabeth D. Langdale

The plaintiff, a former officer of Alfacell Corporation (Alfacell), a biopharmaceutical company engaged in the development of cancer therapies, brought an action against his former employer, alleging violations of Section 10(b) of the Securities and Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. The plaintiff, who had been granted stock options in Alfacell, alleged, inter alia, that Alfacell had knowingly and/or recklessly disseminated false and misleading information concerning the completion date of a clinical trial for an experimental new cancer treatment. The U.S. District Court for the District of New Jersey dismissed the plaintiff’s claims under Section 10(b) and Rule 10b-5 with prejudice. After considering Alfacell’s alleged statements in the context of the “the total mix of information available to investors,” the court determined that the plaintiff had failed to demonstrate that the alleged statements and omissions constituted material misrepresentations. The court reasoned that, even assuming the statements at issue were false, a reasonable investor, viewing all of the information made available by Alfacell, would not have considered Alfacell’s statements as “having significantly altered the total mix of information available” to the investing public.

Love v. Alfacell Corp., No. 09-5199 (MLC), 2011 WL 4915874 (D.N.J. Oct. 17, 2011)
 

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Co-authored by Elizabeth D. Langdale

The plaintiff filed an action alleging sexual harassment and retaliation by the defendants, but the only claim asserted against defendant, Pressley Ridge Foundation (the Foundation), was a claim for “piercing the corporate veil.” This claim did not plead a separate cause of action, but rather, sought to pierce the corporate veil in order to assess liability against the Foundation for the alleged wrongful acts of the other two defendants. The U.S. District Court for the Western District of Pennsylvania held that piercing the corporate veil was a valid, independent cause of action. However, the Court granted the Foundation’s motion to dismiss the complaint, finding that the plaintiff’s mere recitation of the elements of a veil-piercing claim was insufficient and that such a claim needed to be supported by specific factual averments rather than mere legal conclusions.

Patroski v. Ridge, No. 2:11-cv-1065, 2011 WL 4955274 (W.D. Pa. Oct. 18, 2011)
 

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The Federal Reserve Board (the Board) on October 26 announced the annual indexing of the reserve requirement exemption amount and of the low reserve tranche for calendar 2012. These amounts are used in the calculation of reserve requirements of depository institutions. The Board also announced the annual indexing of the nonexempt deposit cutoff level and the reduced reporting limit that will be used to determine deposit reporting panels effective in 2012.

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On October 20, the European Commission published the MiFID II proposals for amendments to MiFID (the Markets in Financial Instruments Directive (2004/39/EC)) The MiFID II proposals consist of a Regulation (MiFIR) on markets in financial instruments and on OTC derivatives, central counterparties and trade repositories and a Directive (MiFID II) on markets in financial instruments amending MiFID. The use of a Regulation directly applicable into the law of each EU member state reflects the need to achieve a uniform set of rules in certain areas.

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On October 18, Institutional Shareholder Services (ISS) published for comment proposed changes to its proxy voting policies for 2012. ISS’ proposed policy updates for 2012 include the following:

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On October 14, the staff of the SEC’s Division of Corporation Finance issued a legal bulletin (No. 19) regarding legality and tax opinions filed in connection with registered offerings of securities. The bulletin covers the requirements for these opinions, the staff’s views regarding the required elements for these opinions and the staff’s practices in reviewing them.

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The Commodity Futures Trading Commission (the CFTC) has adopted final rules implementing numerous general provisions and most core principles relating to derivatives clearing organizations (DCOs) at its October 18 open meeting. The final rules were approved by a 3-2 vote (Commissioners Sommers and O’Malia dissenting). The rules, which address15 of the 18 DCO Core Principles, were adopted largely as proposed. The CFTC did not adopt rules implementing the core principles relating to governance fitness standards, conflicts of interest and composition of governing boards. The effective dates for the final rules are staggered. Some rules will be effective 60 days after publication in the Federal Register, and others will be effective 180 days or a year after publication in the Federal Register.

The final rules can be found here.
 

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At its October 18 open meeting, the Commodity Futures Trading Commission (the CFTC) also approved final rules on speculative position limits for futures and swaps. The final rules were approved by a 3-2 vote (Commissioners Sommers and O’Malia dissenting) and reflect certain material changes to the rules proposed in January, including the retention of certain aggregation exemptions that would have been eliminated by the proposed rules. The details of the final position limit rules are the subject of a forthcoming Katten Client Advisory.

The CFTC “Fact Sheets” and “Q&As” on the final position limit rules may be found here.
 

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The Commodity Futures Trading Commission (the CFTC) has proposed to extend its earlier exemptive order that provides temporary relief from certain swap-related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) that would otherwise have taken effect on July 16 (the Order). Specifically, the Order provided relief with respect to (1) self-effectuating provisions of the Dodd-Frank Act that referenced terms requiring further definition, and (2) self-effectuating provisions of the Dodd-Frank Act that repealed existing statutory safe harbors for over-the-counter derivatives transactions.

The Order originally included an outside “sunset” date of December 31, after which the relief granted by the Order would expire. Under the proposed amendment, the latest “sunset” date for the Order would be extended until July 16, 2012.

The proposed amendment may be found here.
 

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On October 17, Financial Industry Regulatory Authority filed with the Securities and Exchange Commission a proposed rule change to adopt NASD Rule 2320 (Best Execution and Interpositioning) and Interpretive Material (IM) 2320 (Interpretive Guidance with Respect to Best Execution Requirements) as FINRA Rule 5310 in the consolidated FINRA rulebook. Like NASD Rule 2320 (commonly known as the “Best Execution Rule”), FINRA Rule 5310 would require a member, in any transaction for or with a customer or a customer of another broker-dealer, to “use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.” FINRA Rule 5310 is based largely on NASD Rule 2320. In addition, IM-2320 will be adopted as Supplementary Material to Rule 5310; however, it is important to note that the Supplementary Material contains the following significant changes:

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The plaintiff, a corporation seeking to recover outstanding debts incurred by TCI Trans Commodities A.G. (TCI Switzerland), a bankrupt Swiss entity, sued Trans Commodities, Inc. (TCINY), a New York corporation, to collect the debt. The plaintiff alleged that TCINY and TCI Switzerland were so intertwined or interrelated as to be “alter egos” or a “single entity,” and thus TCINY was liable for TCI Switzerland’s debt to the plaintiff.

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Plaintiff-investors commenced a class action suit alleging a violation of the Securities and Exchange Act of 1934 on behalf of all persons who purchased shares of defendant NVIDIA’s stock during a 9-month period. The plaintiff alleged that NVIDIA and its employees had misrepresented or omitted material facts related to manufacturing defects in its computer processors, and that they were damaged when the NVIDIA stock price dropped once the extent of the defects became known. The U.S District Court for the Northern District of California dismissed the plaintiffs’ action because the complaint failed sufficiently to plead scienter as required for securities fraud.

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The Board of Governors of the Federal Reserve System (the Board) on October 17 announced the approval of a final rule to implement the resolution plan requirement in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The final rule requires bank holding companies with assets of $50 billion or more and nonbank financial firms designated by the Financial Stability Oversight Council (the Council) for supervision by the Board to annually submit resolution plans to the Board and the Federal Deposit Insurance Corporation (the FDIC).

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Authored by Michelle Griswold.

On October 11, the Public Company Accounting Oversight Board (PCAOB) requested public comment on several proposed amendments to PCAOB standards designed to increase transparency of public company audits.

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On October 13 the Division of Corporation Finance of the Securities and Exchange Commission issued disclosure guidance to assist registrants “in assessing what, if any, disclosures should be provided about cybersecurity matters in light of each registrant’s specific facts and circumstances.”

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Authored by Avi Badash.

The Financial Industry Regulatory Authority, Inc. has issued Regulatory Notice 11-46 requiring member firms to submit electronically to FINRA their annual audit reports. This requirement is effective beginning on November 8, for all audit reports filed by member firms with a fiscal year end on or after September 30, 2011. Member firms will be required to submit their annual audit report in electronic form in PDF format via FINRA’s Firm Gateway. The Regulatory Notice discusses the details of the electronic submission process, which will replace the current submission of the annual audit reports in hard copy form to FINRA. The Regulatory Notice acknowledges that firms must continue to file annual audit reports in hard copy form with the Securities and Exchange Commission.

Click here to read Regulatory Notice 11-46.
 

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The U.S. Court of Appeals for the Second Circuit held that the Financial Industry Regulatory Authority lacks the authority to bring court actions to collect disciplinary fines it has imposed on its members.

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The U.S. Court of Appeals for the Third Circuit held last week that a brokerage firm’s sale of an account holder’s securities for failure to meet margins calls was proper, notwithstanding the account holder’s claims that his contract with the firm was a forgery.

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On October 11, the Federal Reserve Board and the Federal Deposit Insurance Corporation requested public comment on a proposed regulation implementing the so-called "Volcker Rule" requirements of Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other things, Section 619 generally contains two prohibitions. First, it prohibits insured depository institutions, bank holding companies, and their subsidiaries or affiliates (banking entities) from engaging in proprietary trading of any security, derivative, and certain other financial instruments for a banking entity's own account, subject to certain exemptions. Second, it prohibits owning, sponsoring, or having certain relationships with, a hedge fund or private equity fund, subject to certain exemptions.

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On October 11, the Financial Stability Oversight Council (the Council) approved a second notice of proposed rulemaking (NPR) and proposed interpretive guidance on its authority to require supervision and regulation of certain nonbank financial companies. In response to comments that the Council received on its first NPR, issued in January, the Council is issuing a second notice of proposed rulemaking and proposed interpretive guidance to provide (i) additional details regarding the framework that the Council intends to use in the process of assessing whether a nonbank financial company could pose a threat to U.S. financial stability, and (ii) further opportunity for public comment on the Council’s proposed approach to the determination process.

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Section 19 of the Federal Reserve Act (the Act) authorizes the Board of Governors of the Federal Reserve System (the Board) to impose reserve requirements on certain deposits and other liabilities of depository institutions for the purpose of implementing monetary policy. The Board’s Regulation D (Reserve Requirements of Depository Institutions, 12 CFR part 204) implements section 19 of the Act. Transaction account balances maintained at each depository institution are subject to reserve requirement ratios of zero, three, or ten percent, depending on the level of transaction accounts at that institution.
 

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Authored by David Kravitz.

On September 29, the Securities and Exchange Commission announced that it will host a public roundtable on October 18 to discuss the SEC’s rulemaking under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As described in the December 17, 2010, edition of Corporate & Financial Weekly Digest, on December 15, 2010 the SEC issued proposed rules implementing disclosure and reporting requirements regarding the use by issuers of conflict minerals in the Democratic Republic of the Congo (DRC).

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Authored by Tanja Samardzija.

A master/sub-account arrangement exists where the same beneficial owner maintains multiple sub-accounts; the beneficial ownership interests in the various sub-accounts may or may not be identified to a broker-dealer. On September 29, the Securities and Exchange Commision’s Office of Compliance Inspections and Examinations released a National Exam Risk Alert (the Alert) on risks associated with master/sub-account arrangements. In the Alert, the SEC’s National Exam Program (NEP) identified a number of potential risks associated with master/sub-account arrangements. Specifically, NEP identified the following potential risks:

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Authored by Jason Clouser.

The U.S. Court of Appeals for the Eleventh Circuit vacated a District Court’s entry of summary judgment on plaintiff shareholders’ claims against an internet commerce company, finding that the defendants could be held liable for knowingly reinforcing false information and thereby preventing already existing stock price inflation from dissipating.

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Authored by Jason Clouser.

The U.S. Court of Appeals for the Eleventh Circuit affirmed a District Court’s grant of summary judgment to an insurer, agreeing that the alleged violations of the Fair and Accurate Credit Card Transaction Act (FACTA) did not constitute a “publication” under the insurance policy in question and, therefore, did not trigger a duty to defend.

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