Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Friday, January 29, 2010

President Obama Sets Up Advisory Council on Financial Capability

Just in case anyone had any lingering hope that meaningful consumer and investor protection would result from the 2008 financial meltdown, read this and weep:

Today President Barack Obama signed an executive order regarding the President’s Advisory Council on Financial Capability.

According to a posting on the (I can't find an official executive order):
    The Council will provide advice to President Obama on promoting and enhancing financial literacy and financial capability among the American people.

    The White House said, "This effort is important to help keep America competitive and to assist the American people in understanding and addressing financial matters, which contributes to our national financial stability." 

Isn't this what the SEC's Investor Advisory Committee is supposed to do? 

According to an article in Investment News, the Council, under the auspices of the Treasury Dept., "will support financial products and services deemed beneficial to consumers."  It will not have any regulatory powers that the proposed Consumer Financial Products Agency would have and leads me to suspect that the reports that the CFPA -- one of the few innovative pro-consumer protection initiatives in the "financial reform" legislation -- has been ditched in face of intense industry lobbying are true.

InvNews, CFPA lite? Obama sets up new financial products council

January 29, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, January 28, 2010

FINRA Funds Four Law School Clinics to Help Investors

The Financial Industry Regulatory Authority (FINRA) Investor Education Foundation today announced $1 million in grants to launch four law school clinics that will provide legal help to underserved investors involved in securities disputes. These start-up grants will help fill the gap in legal representation for investors with small claims who do not have the financial resources to obtain legal counsel. The Foundation awarded $250,000 each to:

  • Florida International University College of Law, Miami, Florida;
  • Howard University School of Law, Washington, D.C.;
  • Pepperdine University School of Law, Malibu, California; and
  • Suffolk University Law School, Boston, Massachusetts.

The FINRA Foundation chose these law schools because they are well-positioned to launch and maintain clinics that will allow supervised law students to take on securities disputes. As a condition of the grant, each law school was required to demonstrate institutional support of the clinic beyond the three-year grant program and provide investor education and outreach in their community. Students who participate in these clinics will not receive compensation, but will benefit from serving the public interest, earning course credit and gaining experience representing clients in actual cases.

January 28, 2010 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 27, 2010

SEC Approves Interpretive Guidance on Climate Change Disclosures

The SEC today voted to provide public companies with interpretive guidance on existing SEC disclosure requirements as they apply to business or legal developments relating to the issue of climate change.  The interpretive release approved today provides guidance on certain existing disclosure rules that may require a company to disclose the impact that business or legal developments related to climate change may have on its business. The relevant rules cover a company's risk factors, business description, legal proceedings, and management discussion and analysis.

Specifically, the SEC's interpretative guidance highlights the following areas as examples of where climate change may trigger disclosure requirements:

Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.

Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.

Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.

Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

January 27, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Adopts New Rules for Money Market Funds

At its open meeting today the SEC adopted new rules designed to strengthen the regulatory requirements governing money market funds.  These changes result from the financial crisis and the weaknesses revealed by the Reserve Primary Fund's "breaking the buck" in September 2008. The SEC's new rules are intended to increase the resilience of money market funds to economic stresses and reduce the risks of runs on the funds by tightening the maturity and credit quality standards and imposing new liquidity requirements.

Improved Liquidity: The new rules require money market funds to have a minimum percentage of their assets in highly liquid securities so that those assets can be readily converted to cash to pay redeeming shareholders. Currently, there are no minimum liquidity mandates.

  • Daily Requirement: For all taxable money market funds, at least 10 percent of assets must be in cash, U.S. Treasury securities, or securities that convert into cash (e.g., mature) within one day.
  • Weekly Requirement: For all money market funds, at least 30 percent of assets must be in cash, U.S. Treasury securities, certain other government securities with remaining maturities of 60 days or less, or securities that convert into cash within one week.

The rules would further restrict the ability of money market funds to purchase illiquid securities by:

  • Restricting money market funds from purchasing illiquid securities if, after the purchase, more than 5 percent of the fund's portfolio will be illiquid securities (rather than the current limit of 10 percent).
  • Redefining as "illiquid" any security that cannot be sold or disposed of within seven days at carrying value.

Higher Credit Quality: The new rules place new limits on a money market fund's ability to acquire lower quality (Second Tier) securities. They do this by:

  • Restricting a fund from investing more than 3 percent of its assets in Second Tier securities (rather than the current limit of 5 percent).
  • Restricting a fund from investing more than ½ of 1 percent of its assets in Second Tier securities issued by any single issuer (rather than the current limit of the greater of 1 percent or $1 million).
  • Restricting a fund from buying Second Tier securities that mature in more than 45 days (rather than the current limit of 397 days).

Shorter Maturity Limits: The new rules shorten the average maturity limits for money market funds, which helps to limit the exposure of funds to certain risks such as sudden interest rate movements. They do this by:

  • Restricting the maximum "weighted average life" maturity of a fund's portfolio to 120 days. Currently, there is no such limit. The effect of the restriction is to limit the ability of the fund to invest in long-term floating rate securities.
  • Restricting the maximum weighted average maturity of a fund's portfolio to 60 days. The current limit is 90 days.

"Know Your Investor" Procedures: The new rules require funds to hold sufficiently liquid securities to meet foreseeable redemptions. Currently, there are no such requirements. In order to meet this new requirement, funds would need to develop procedures to identify investors whose redemption requests may pose risks for funds. As part of these procedures, funds would need to anticipate the likelihood of large redemptions.

Periodic Stress Tests: The new rules require fund managers to examine the fund's ability to maintain a stable net asset value per share in the event of shocks - such as interest rate changes, higher redemptions, and changes in credit quality of the portfolio. Previously, there were no stress test requirements.

Nationally Recognized Statistical Rating Organizations (NRSROs): The new rules continue to limit a money market fund's investment in rated securities to those securities rated in the top two rating categories (or unrated securities of comparable quality). At the same time, the new rules also continue to require money market funds to perform an independent credit analysis of every security purchased. As such, the credit rating serves as a screen on credit quality, but can never be the sole factor in determining whether a security is appropriate for a money market fund.

In addition, the new rules improve the way that funds evaluate securities ratings provided by NRSROs:

  • Require funds to designate each year at least four NRSROs whose ratings the fund's board considers to be reliable. This permits a fund to disregard ratings by NRSROs that the fund has not designated, for purposes of satisfying the minimum rating requirements, while promoting competition among NRSROs.
  • Eliminate the current requirement that funds invest only in those asset backed securities that have been rated by an NRSRO.

Repurchase Agreements: The new rules strengthen the requirements for allowing a money market fund to "look through" the repurchase issuer to the underlying collateral securities for diversification purposes:

  • Collateral must be cash items or government securities (as opposed to the current requirement of highly rated securities).
  • The fund must evaluate the creditworthiness of the repurchase counterparty.

 Enhancing Disclosure of Portfolio Securities

  • Monthly Web Site Posting: The new rules require money market funds each month to post on their Web sites their portfolio holdings. Currently, there is no Web site posting requirement. Portfolio information must be maintained on the fund's Web site for no less than six months after posting.
  • Monthly Reporting: The new rules also require money market funds each month to report to the Commission detailed portfolio schedules in a format that can be used to create an interactive database through which the Commission can better oversee the activities of money market funds. The information reported to the Commission would be available to the public 60 days later. This information would include a money market fund's "shadow" NAV, or the mark-to-market value of the fund's net assets, rather than the stable $1.00 NAV at which shareholder transactions occur. Currently a money market fund's "shadow" NAV is reported twice a year with a 60-day lag.

Improving Money Market Fund Operations

  • Processing of Transactions: The new rules require money market funds and their administrators to be able to process purchases and redemptions electronically at a price other than $1.00 per share. This requirement facilitates share redemptions if a fund were to break the buck.
  • Suspension of Redemptions: The new rules permit a money market fund's board of directors to suspend redemptions if the fund is about to break the buck and decides to liquidate the fund (currently the board must request an order from the SEC to suspend redemptions). In the event of a threatened run on the fund, this allows for an orderly liquidation of the portfolio. The fund is now required to notify the Commission prior to relying on this rule.
  • Purchases by Affiliates: The new rules expand the ability of affiliates of money market funds to purchase distressed assets from funds in order to protect a fund from losses. Currently, an affiliate cannot purchase securities from the fund before a ratings downgrade or a default of the securities - unless it receives individual approval. The rule change permits such purchases without the need for approval under conditions that protect the fund from transactions that disadvantage the fund. The fund must notify the Commission when it relies on this rule.

January 27, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Geithner Testifies Before House on AIG Bailout

Here is Treasury Secretary Geithner's Written Testimony before the House Committee
on Oversight and Government Reform today.

January 27, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Weinstein Calls for Reform of Financial Services Industry in Sentencing Broker

While Judge Rakoff is a close second, Judge Jack Weinstein remains the most refreshingly blunt, "tell it like he sees it" trial judge in the Second Circuit.  The Jan. 22, 2010 sentencing statement(Download Butler3) in U.S. v. Butler illustrates this.  Eric Butler was convicted of three counts of securities and wire fraud for his role in a $ 1 billion auction rate securities fraud.  In sentencing him to five years imprisonment and a $5 million fine, Judge Weinstein took the occasion to castigate "the pernicious and pervasive culture of corruption in the financial services industry."  He goes on to say:

The blame for this condition is shared not only by individual defendants like Butler, but also by the institutions that employ them, those who carelessly invest, and those who fail to regulate.  Supervision is seriously negligent; greed and short-term gain are so enormous that fraud and arrogant disregard of others' rights and of ethics almost encourage criminal activities such as defendant's.

Besides elaborating on these themes, Judge Weinstein identifies the need "to reconsider how compensation is calculated and investment products are marketed by the financial industry" and concludes that:

Systemic reform is needed; mere '[c]ompetition in product and capital markets can't be counted on to solve the problem."  (quoting from the dissent from denial of reh'g en banc in Jones v. Harris Assoc.)

January 27, 2010 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 26, 2010

University of Cincinnati March 5 Symposium on Globalization

The Globalization of Securities Regulation: Competition or Coordination? is the topic of the 23rd Annual Symposium of the Corporate Law Center at the University of Cincinnati College of Law, which will be held on March 5, 2010.  Confirmed speakers include:  William Bratton (GW), Steven Davidoff (Conn.), Frederick Tung (Emory), Hannah Buxbaum (Indiana-Bloomington), James Fanto (Brooklyn), Eric Pan (Cardozo), Robert Ahdieh (Emory), Andrea Corcoran (Align International), Chris Brummer (GW), Eric Chaffee (Dayton).  Please see the brochure(Download Corplaw2010brochureFINAL) for additional information.

January 26, 2010 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Massachusetts Securities Division Alleges Ameriprise Subsidiary Failed to Disclose Risks in Private Placements

The Massachusetts Securities Division brought an administrative action against Securities America, Inc., a subsidiary of Ameriprise Financial, alleging that from 2003-2008 the broker-dealer, acting as placement agent for Reg D offerings on behalf of Medical Capital Holdings Inc., failed to disclose material risks in connection with sales of approximately $697 million of promissory notes issued by SPCs owned by Medical Capital.  Since August 2008 Medical Capital has defaulted on all its outstanding note obligations.  The Division alleges that the firm's due diligence analyst specifically and repeatedly requested disclosure of the heightened risks.

January 26, 2010 in Other Regulatory Action | Permalink | Comments (1) | TrackBack (0)

SEC Proposes Amendments to Rule 10b-18

The SEC proposes amendments to Rule 10b-18 under the Securities Exchange Act of 1934, which provides issuers with a “safe harbor” from liability for manipulation when they repurchase their common stock in the market in accordance with the Rule’s manner, timing, price, and volume conditions. The proposed amendments are intended to clarify and modernize the safe harbor provisions in light of market developments since Rule 10b-18’s adoption in 1982.

January 26, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Agenda for Jan. 27 Open Meeting

SEC Open Meeting Agenda, January 27, 2010

Item 1: Money Market Fund Reform
Office:  Division of Investment Management
The Commission will consider a recommendation to adopt new rules, rule amendments, and a new form under the Investment Company Act of 1940 governing money market funds, to increase the protection of investors, improve fund operations, and enhance fund disclosures.

Item 2: Commission Guidance Regarding Disclosure Related to Climate Change
Office:  Division of Corporation Finance
The Commission will consider a recommendation to publish an interpretive release to provide guidance to public companies regarding the Commission's current disclosure requirements concerning matters relating to climate change.

January 26, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Brings Stop Order Proceeding Against Tsukuda-America

On Jan. 26, 2010 the SEC instituted a rare "stop-order" proceeding under Securities Act section 8(d) to stop sales of securities of Tsukuda-America Inc. pursuant to a Form S-1 registration statement declared effective April 14, 2009.  According to the complaint, the registration statement contains a false representation that Weinberg & Co. audited the financial statements and signed a consent to the inclusion of the audit report in the registration statement.

January 26, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Two Cases Alleging Illegal Short Selling in Advance of Secondary Offerings

The SEC separately charged two California investment advisory firms for engaging in improper short selling of securities in advance of their participation in a company's secondary offering. These mark the first cases filed under the SEC's amended Rule 105 of Regulation M, which is designed to prohibit manipulative short selling ahead of follow-on securities offerings, known as "shorting into the deal." The revised rule generally prohibits the purchase of offering shares by any person who sold short the same securities within five business days before the pricing of the offering.

In one case, the SEC charged Los Angeles-based AGB Partners LLC and its principals Gregory A. Bied and Andrew J. Goldberger, finding that they netted thousands of dollars in improper profits by shorting in advance of their purchase of stock in a secondary offering. In the other case, the SEC charged Los Angeles-based Palmyra Capital Advisors LLC, finding that the firm violated short selling rules and improperly profited in three of its managed hedge funds. Both firms have agreed to settle the SEC's charges.

In settling the SEC's charges without admitting or denying the Commission's findings, AGB Partners, Bied and Goldberger consented to be censured and pay more than $50,000 in disgorgement and penalties. Palmyra Capital consented to be censured and pay more than $330,000 in disgorgement and penalties.

January 26, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, January 25, 2010

Defendant in SEC Action Goes to Jail for Failing to Surrender Bon Jovi Tickets

A federal judge today ordered Minneapolis-area resident Trevor G. Cook jailed for failing to surrender more than $35 million in assets as a result of the Securities and Exchange Commission's fraud charges and asset freeze against him.  The SEC filed a motion last month in U.S. District Court for the District of Minnesota, alleging that Cook had violated the court's order freezing all of his assets. In a court hearing that concluded today, Chief Judge Michael J. Davis found Cook in civil contempt and U.S. Marshals escorted Cook from the courtroom to jail. Chief Judge Davis ordered Cook incarcerated until he, among other things, surrenders $27 million located in offshore accounts, a BMW and two Lexus automobiles, a submarine, a houseboat, a collection of expensive watches, a collection of Faberge eggs, Bon Jovi concert tickets, and $670,000 in cash.

The SEC obtained the asset freeze on Nov. 23, 2009, when the Commission charged Cook, nationally syndicated radio host Patrick J. "Pat" Kiley, and four companies they controlled in an alleged $190 million foreign currency trading scheme. According to the SEC's complaint in the case, Cook and Kiley pooled investors' funds in bank and trading accounts in the names of entities they controlled. The foreign currency trading they did conduct resulted in millions of dollars in losses, and they misused approximately half of investor funds to make Ponzi-like payments to earlier investors and pay for Cook's gambling losses and the purchase of the historic Van Dusen Mansion in Minneapolis.

January 25, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Issues Guidance on Blogs and Social Networking

FINRA issued Regulatory Notice 10-06, Guidance on Blogs and Social Networking Web Sites.  Here is the executive summary:

Americans are increasingly using social media Web sites, such as blogs and social networking sites, for business and personal communications. Firms have asked FINRA staff how the FINRA rules governing communications with the public apply to social media sites that are sponsored by a firm or its registered representatives. This Notice provides guidance to firms regarding these issues.

The notice emphasizes that each firm must develop its own policies and procedures — in the context of its own particular business model and compliance and supervisory programs — designed to ensure that the firm and its personnel are complying with all applicable regulatory requirements when using social networking sites. Some technology providers are developing systems that are intended to enable firms to retain records of communications made through social networking sites. As the Notice states, however, "FINRA does not endorse any particular technology to keep such records, nor are we certain that adequate technology currently exists."

January 25, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Sunday, January 24, 2010

McDonnell on Shareholder Proxy Access

Setting Optimal Rules for Shareholder Proxy Access, by Brett McDonnell, University of Minnesota Law School, was recently posted on SSRN.  Here is the abstract:

Recent developments in Delaware concerning shareholder bylaws and the SEC proposal concerning shareholder proxy access have moved the U.S. closer to a set of optimal rules for shareholder proxy access in nominating director candidates, but not all the way there. These rules must address both the default rule which applies in the absence of agreement within a corporation to the contrary, and the altering rule which specifies who within a corporation may choose to opt out of the default provisions. Applying principles of accountability and freedom of contract, the optimal default rule would allow for certain shareholders to use the corporate proxy to nominate director candidates. The optimal altering rule would make it easy for shareholders to propose bylaws under the Rule 14a-8 process which opt out of the default provisions. Although it would be desirable were states to set these rules on their own, a degree of managerialism at the state level combines with the history of extensive SEC regulation of the proxy process to give the SEC an important role in helping set the rules. As matters currently stand, Delaware is appropriately flexible but has the wrong default rule, while the SEC’s proposal has the right default rule but too little flexibility.

January 24, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

SEC Files Brief in Cuban Appeal

The SEC filed its brief to the Fifth Circuit appealing the district court's dismissal of its insider trading charges against Mark Cuban.  The SEC argues that

The district court, in dismissing the Commission’s complaint alleging insider trading violations, erroneously failed to apply a valid Commission rule that, by its plain terms, applies to Cuban’s conduct as alleged in the complaint. The district court also failed to recognize that, even apart from the Commission rule, the complaint states a claim under the relevant caselaw. Further, the district court failed, as required on a motion to dismiss, to draw reasonable inferences from the complaint in the Commission’s favor.

January 24, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC States its Views on Safe Harbor for Forward-Looking Statements

The SEC filed an amicus brief at the invitation of the Second Circuit in Slayton v. American Express Co., setting forth its views on certain issues relating to the safe harbor for forward-looking statements in PSLRA.  The litigation involves certain statements made in the Management’s Discussion and Analysis
(“MD&A”) section of the May 2001 Form 10-Q filed by American Express Company regarding losses in the high-yield investments of Amex subsidiary American Express Financial Advisors.

Among the issues is the question of what constitutes "actual knowledge" under Section 21E(c)(1)(B)(i).  According to the SEC:

a finding of “actual knowledge” requires more than recklessness or a reckless disregard for a substantial risk that a forward-looking statement is false or misleading. A statement of prediction or expectation, like Amex’s statement that “losses . . . are expected to be substantially lower,” contains at least three implicit factual assertions, including (i) that the statement is genuinely believed; (ii) that there is a reasonable basis for that belief; and (iii) that the speaker is not aware of any undisclosed facts tending to seriously undermine the accuracy of the statement. If the speaker actually knows that any of the implicit representations is false, then the speaker knows that the statement is misleading.

January 24, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Assurant Settles SEC Charges of improper Reinsurance Accounting

On January 21, 2010, the SEC and Assurant, Inc., settled charges that the company violated corporate reporting, books and records and internal controls provisions of the Securities Exchange Act of 1934 ("Exchange Act"). Under the terms of the settlement, Assurant will pay a civil penalty in the amount of $3.5 million.  The determination of this penalty amount took into account, among other things, the company's failure fully to comply with Commission subpoenas on a timely basis. The proposed settlement is subject to court approval.

The Commission's complaint alleges that Assurant improperly accounted for a $10 million recovery it obtained under a reinsurance policy in the aftermath of the 2004 Florida hurricane season. The complaint alleges that Assurant booked the $10 million payment as a bona fide reinsurance recovery when, in fact, the payment was, and should have been booked as, the return of a deposit under Generally Accepted Accounting Principles ("GAAP"). As a result, Assurant materially overstated the net income that it reported for the quarter ended September 30, 2004 to the public and in Commission filings.

January 24, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)