Securities Law Prof Blog

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

Thursday, September 15, 2011

SEC Announces Effective Date of Rule 14a-8 Amendments

This release FACILITATING SHAREHOLDER DIRECTOR NOMINATIONS provides notice of the effective date of the amendment to Exchange Act Rule 14a-8, the shareholder proposal rule, which will require companies to include in their proxy materials, under certain circumstances, shareholder proposals that seek to establish a procedure in the company’s governing documents for the inclusion of one or more shareholder director nominees in the company’s proxy materials.The D.C. Circuit's order in Business Roundtable v. SEC (vacating the proxy access rule) did not affect the amendment to Rule 14a-8, which was not challenged in the litigation, or the related rules and amendments adopted concurrently with Rule 14a-11 and the amendment to Rule 14a-8. Accordingly, those rules and amendments are effective upon publication of this notice in the Federal Register.

September 15, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Commissioner Walter on Mandatory Arbitration

In a Sept. 12 speech at the North American Securities Administrators Association 2011 Annual Conference that addressed a wide range of issues, SEC Commissioner Elisse B. Walter touched on the subject of mandatory arbitration and stated that the SEC would be taking up the issue soon (although Dodd-Frank does not mandate the SEC to do so),  Specifically:

Mandatory Arbitration

Regardless of changes in the relationship between investors and the professionals to whom they turn for advice, disagreements will arise that need to be resolved quickly and fairly. Following the dictates of Dodd-Frank, the SEC intends to thoroughly review the mandatory arbitration provisions that are written into most brokerage contracts. (emphasis added)

I believe that in recent years FINRA has provided a relatively cost-effective way to fairly resolve disputes. Nonetheless, I also completely understand the frustration of investors who are denied their opportunity for a day in court and find themselves forced to make their case in front of an arbitration forum.


September 15, 2011 in SEC Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

SEC Charges Global Consultanting Firm Exec and Friend with Insider Trading in Biotech Companies

The SEC today charged a former global consulting firm executive and his friend who once worked on Wall Street with insider trading on confidential information about impending takeovers of two biotechnology companies.  The SEC alleges that Scott Allen learned confidential information in advance of the acquisitions of Millennium Pharmaceuticals Inc. and Sepracor Inc. through his work at a global consulting firm that was advising the acquiring Japanese companies as they made cash tender offers. Allen allegedly tipped his longtime friend John Michael Bennett, an independent filmmaker who had previously worked at a Wall Street investment bank, as each acquisition took shape. On the basis of the nonpublic information, Bennett purchased thousands of dollars in call options in the companies and also tipped his business partner at the independent film company they co-own. The insider trading by Bennett and his tippee generated more than $2.6 million in illicit profits. Allen received cash from Bennett in exchange for the tips.

In a parallel action, the U.S. Attorney's Office for the Southern District of New York today announced the unsealing of criminal charges against Allen and Bennett.

September 15, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Senators Propose Raising Reg A Exemption to $50 Million

Senators Jon Tester (D-Mont.) and Pat Toomey (R-Pa.) recently introduced a bill to change the Regulation A exemption from registration to allow companies to sell up to $50 million in shares, up from the current $5 million. 

September 15, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Calls for Review of Exchanges' Reverse Merger Listing Standards

On Sept. 12 the SEC issued an Order instituting proceedings to determine whether to disapprove NASDAQ's proposed rule change to adopt additional listing requirements for reverse mergers (Rel. 34-65319).  On May 26, 2011,  NASDAQ filed with the SEC a proposed rule change to adopt additional listing requirements for a company that has become public through a combination with a public shell, whether through a reverse merger, exchange offer, or otherwise (a ”Reverse Merger”).  In its filing, Nasdaq noted that there have been widespread allegations of fraudulent behavior by certain Reverse Merger companies and that it was aware of situations where it appeared that promoters and others intended to manipulate prices of Reverse Merger companies’ securities higher to help meet Nasdaq’s initial listing bid price requirement.

In its Order, the SEC stated:

Nasdaq’s proposal would require Reverse Merger companies to meet certain “seasoning” requirements prior to listing, and is designed to address significant regulatory concerns, including accounting fraud allegations, that have recently arisen with respect to Reverse Merger companies. As noted above, NYSE and NYSE Amex subsequently filed proposed rule changes designed to address the same concerns as the Nasdaq proposal. Although similar to the Nasdaq proposal in many respects, certain provisions of the NYSE and NYSE Amex proposals materially differ from the Nasdaq proposal, including a one-year instead of a six-month seasoning period, and a more general requirement to maintain the minimum listing price for a “sustained period,” rather than on at least 30 of the 60 trading days prior to filing the listing application. Unlike the Nasdaq proposal, the NYSE and NYSE Amex proposals also include an exemption for Reverse Merger companies that list in connection with certain underwritten public offerings.

The Commission shares the concerns of Nasdaq, as well as NYSE and NYSE Amex, with respect to fraud and manipulation in connection with the formation of Reverse Merger companies and their listing on an exchange. The Commission also believes that meaningful enhancements to exchange listing standards, including more rigorous seasoning requirements that are appropriately targeted at Reverse Merger companies could help prevent fraud and manipulation in this area, and protect investors and the public interest. Because of the importance of this issue, however, the Commission believes the Nasdaq proposal should be considered together with the NYSE and NYSE Amex proposals, to assure that the exchanges develop and implement consistent and effective enhancements to their listing standards, to best address the serious concerns that have arisen with respect to the listing of Reverse Merger companies. Accordingly, in light of the material differences between the Nasdaq proposal and the NYSE and NYSE Amex proposals, and the concerns raised by commenters, the Commission believes that questions are raised as to whether Nasdaq’s proposal is consistent with the requirements of Section 6(b)(5) of the Act, including whether the proposed listing requirements would prevent fraud and manipulation, promote just and equitable principles of trade, or protect investors and the public interest.

September 15, 2011 | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 14, 2011

SEC Commissioner Aguilar Cites "Urgent Need" for Investor Advisory Committee

Statement of SEC Commissioner Aguilar Regarding the Urgent Need to Re‑establish the Investor Advisory Committee (September 13, 2011):

Today, the Securities and Exchange Commission (“SEC”) announced the formation of a new Advisory Committee on Small and Emerging Companies (the “ACSEC”), pursuant to the Federal Advisory Committee Act. My vote to approve the establishment of the ACSEC was conditioned on the Investor Advisory Committee1 being formed and operating prior to, or at the same time as, the formation of the ACSEC.

*    *    *    *

Thus, the need to obtain the views of investors remains critical. I am disappointed that the Investor Advisory Committee has not been re-established.8 I note that the SEC’s press release announcing the establishment of the ACSEC indicated that the SEC is in the process of re-establishing the Investor Advisory Committee.9 However, the press release did not state a date or deadline by which this will occur.

The Investor Advisory Committee is essential to the SEC’s ongoing work. I strongly urge that the SEC’s Investor Advisory Committee be immediately re-established.

September 14, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

More Dodd-Frank Matters on SEC's Next Open Meeting Agenda

The SEC has announced an Open Meeting on September 19, 2011.  The subject matters of the Open Meeting will be:

Item 1:
 The Commission will consider whether to propose a new rule under Section 621 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, to implement the prohibition under Section 621 regarding material conflicts of interest relating to certain securitizations.
Item 2:
 The Commission will consider whether to propose new rules under Section 764(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act to provide for the registration of security-based swap dealers and major security-based swap participants

September 14, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

House Committee Calls a Hearing on Crowdfunding

The House Committee on Oversight and Government Reform (Subcommittee on TARP, Financial Services, and Bailouts of Public and Private Programs) will hold a hearing on "Crowdfunding: Connecting Investors and Job Creators" on September 15.  According to a Wall St. Journal story, Rep. Patrick McHenry called the hearing in response to the SEC's refusal to allow two marketing entrepreneurs to raise money in online pledges to buy Pabst Brewing Co.  Rep. McHenry also plans to introduce legislation to make it easier to raise money through crowdfunding.  WSJ, Fizzled Beer Deal Prompts 'Crowd-Funding' Hearing

September 14, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

Brokers as Fiduciaries: The Dept. of Labor Proposed Rule

In previous posts, I have described the current debate over whether the SEC should adopt a uniform fiduciary duty standard for broker-dealers and investment advisers that provide investment advice to retail investors, and, if so, what that standard should be.   In this post I look at a related and equally contentious issue: whether the Department of Labor should adopt a proposed rule that would redefine the types of investment advice relationships that give rise to fiduciary duties under ERISA.  Since the DOL’s Employee Benefits Security Administration (EBSA) proposed the rule in October 2010, it has received over 260 comment letters and held a two-day hearing in March 2011 at which 36 witnesses presented testimony.  Phyllis C. Borzi, Assistant Secretary of Labor, EBSA, has stated that she expects a final rule out by year-end.

The DOL website sets forth the proposed rule, the transcripts of the hearings, the public comments and other commentary on the proposal.

Proposed Rule (this is taken verbatim from the DOL fact sheet)

A person gives fiduciary investment advice if, for a direct or indirect fee, he or she –

Provides the requisite type of advice:
• Appraisals or fairness opinions about the value of securities or other property;
• Recommendations on investing in, purchasing, holding, or selling securities; or
• Recommendations as to the management of securities or other property;

And meets one of the following conditions:
• Represents to a plan, participant or beneficiary that the individual is acting as an ERISA fiduciary;
• Is already an ERISA fiduciary to the plan by virtue of having any control over the management or disposition of plan assets, or by having discretionary authority over the administration of the plan;
• Is an investment adviser under the Investment Advisers Act of 1940; or
• Provides the advice pursuant to an agreement or understanding that the advice may be considered in connection with investment or management decisions with respect to plan assets and will be individualized to the needs of the plan.

Limitations recognizing that certain activities should not result in fiduciary status:

• Persons who do not represent themselves to be ERISA fiduciaries, and who make it clear to the plan that they are acting for a purchaser/ seller on the opposite side of the transaction from the plan rather than providing impartial advice.
• Employers who provide general financial/ investment information, such as recommendations on asset allocation to 401(k) participants under existing DOL guidance on investment education.
• Persons who market investment option platforms to 401(k) plan fiduciaries on a non-individualized basis and disclose in writing that they are not providing impartial advice.
• Appraisers who provide investment values to plans to use only for reporting their assets to the DOL and IRS.


Section 3(21)(A) of ERISA provides three alternative standards for determining when a person is a fiduciary.  Under § 3(21)(A)(ii), a person is a fiduciary with respect to a plan to the extent that (ii) it renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so.  On its face, then, section 3(21)(A)(ii) sets out a two-part test for determining fiduciary status: A person renders investment advice with respect to any moneys or other property of a plan, or has any authority or responsibility to do so, and the person receives a fee or other compensation, direct or indirect, for doing so.

However, in 1975, shortly after the enactment of ERISA , DOL adopted a regulation that narrowed the definition of a fiduciary by creating a five-part test.  For advice to constitute ‘‘investment advice,’’ an adviser who does not have discretionary authority or control with respect to the purchase or sale of securities or other property for the plan must—

(1) render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing or selling securities or other property
(2) on a regular basis
(3) pursuant to a mutual agreement, arrangement or understanding, with the plan or a plan fiduciary, that
(4) the advice will serve as a primary basis for investment decisions with respect to plan assets, and that
(5) the advice will be individualized based on the particular needs of the plan.

In addition, DOL further limited the term “investment advice” in 1976 by stating in an advisory opinion that a valuation of closely-held employer securities that an ESOP would rely on in purchasing the securities would not constitute investment advice.

In contrast, the proposed rule specifically includes appraisals and fairness opinions and advice and recommendations as to the management of securities and other property.  Under the proposal, fiduciary status may result from providing advice to a plan participant or beneficiary  as well as to a plan fiduciary.  In addition, the proposed rule does not require that the advice be provided on a regular basis or that the parties have a mutual understanding that the advice will serve as a primary basis for plan investment decisions.  The proposal, however, reflects the Department’s understanding that, in the context of selling investments to a purchaser, a seller’s communications with the purchaser may involve advice or recommendations, within paragraph (c)(1)(i) of the proposal, concerning the investments offered. The Department has determined that such communications ordinarily should not result in fiduciary status under the proposal if the purchaser knows of the person’s status as a seller whose interests are adverse to those of the purchaser, and that the person is not undertaking to provide impartial investment advice.

Rationale for Changing the Definition

According to DOL, the proposed rule “is designed to protect participants from conflicts of interest and self-dealing by giving a broader and clearer understanding of when persons providing advice are considered fiduciaries.”  In explaining the need to re-examine the types of advisory relationships that give rise to fiduciary duties, DOL emphasizes the changed circumstances in the thirty-five years since promulgation of the current rule: the shift from defined benefit to defined contribution plans  and the growth of individual IRAs:

[w]ith the shift to 401(k)-type plans, investment advice has become increasingly important to employers, particularly small and medium-sized employers, when choosing an appropriate menu of plan investments for their workers, and for workers when selecting among investments for their individual accounts.”  Moreover, “[w]ith the increase in the amount of assets held in IRAs, IRA holders shoulder a greater amount of investment responsibility, like 401(k) plan participants.  But, unlike 401(k) plan participants, IRA holders are more vulnerable since no other plan fiduciary protects the IRA investments.

In addition, DOL believes there is strong evidence that unmitigated conflicts cause substantial harm and that disclosure may not always be sufficient to protect investors.

Impact on Broker-Dealers

The broker-dealer community argues that the DOL proposed rule conflicts with Dodd-Frank §913 and the goals of protecting investors, preserving investor choice, and avoiding undue increased costs to investors.  In particular, they assert that adoption of the proposal would have serious negative impact on smaller investors by decreasing their access to brokerage advice and investment options.  For example, a large proportion of small investors’ IRAs are brokerage accounts, and the proposed rule would make these brokers fiduciaries.  Accordingly, broker-dealer groups are concerned that as fiduciaries they could not accept commissions and revenue sharing payments and would have to restructure the brokerage accounts as advisory accounts with wrap fees, thus increasing the costs to the investors.  In response, DOL asserts that existing exemptions already authorize brokers who provide investment advice to be compensated by commissions and it would provide further clarification later in the process.  Needless to say, “the devil is in the details.”

Next Steps

Ms. Borzi has stated that as it moves forward in the process DOL is paying special attention to two primary exceptions to fiduciary status under the proposed rule:  (1) clarifying the distinction between investment education and investment advice and (2) clarifying the scope of the “sellers’ exception.”  In so doing, it aims to address the problem of conflicted investment advice while minimizing the impact on existing compensation practices and business models.

Will DOL issue a final rule this year?  If it does, will it withstand judicial challenge?  Stay tuned.



September 14, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 13, 2011

SEC Announces New Investor Advisory Committee in Formation

The SEC announced that it is in the process of re-establishing an Investor Advisory Committee. That committee, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, would replace an earlier Investor Advisory Committee that the Commission had set up in June 2009.


September 13, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Forms Advisory Committee on Small Businesses

The SEC announced the formation of the Advisory Committee on Small and Emerging Companies to focus on interests and priorities of small businesses and smaller public companies.  The committee is intended to provide a formal mechanism through which the Commission can receive advice and recommendations specifically related to privately held small businesses and publicly traded companies with less than $250 million in public market capitalization.

The advisory committee will advise and consult with the Commission on such issues as:

  • Capital raising through private placements and public securities offerings.
  • Trading in the securities of small and emerging and small publicly traded companies.
  • Public reporting requirements of such companies.

Recently, the staff of the Commission began a review of the SEC’s rules related to the triggers for public reporting and rules restricting general solicitation in private securities offerings. The Commission will seek input from the committee in these two areas among others.

September 13, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA's Recent Guidance on Prohibition Against Offering Favorable Research to Get Business

FINRA Regulatory Notice 11-41 (Sept. 2011):Research Analysts and Research Reports
FINRA Provides Guidance on Prohibition Against Offering Favorable Research to Induce Investment
Banking Business:

Executive Summary

FINRA is reminding member firms of the need for heightened supervision
over solicitation and research activities in circumstances where an issuer
has communicated an expectation of favorable research as a condition of
participating in an offering.

September 13, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Monday, September 12, 2011

SEC Issues First Report on Implementing Consultant's Recommendations

The SEC released its Report on the Implementation of SEC Organizational Reform Recommendations
As Required by Section 967 of the Dodd–Frank Act
.  That section directed the SEC to engage an independent consultant to conduct a broad and independent assessment of the SEC’s internal operations, structure, funding, and the agency’s relationship with Self-Regulating Organizations (SROs).  The SEC is also required to report on its progress in implementing the consultant's recommendations every six months.  According to the executive summary:

Issued in March 2011, the consultant’s study provided 16 optimization initiative recommendations designed to increase the SEC’s efficiency and effectiveness. In the six months since the study was issued, the SEC has developed the necessary program management and oversight infrastructure to address the next step in the agency’s on-going multi-year change initiative: conducting a thorough analysis of each recommendation and designing appropriate approaches for those recommendations selected for implementation.

Over the next six months, significant work will have been done within each workstream to analyze the Boston Consulting Group’s (BCG) recommendations and recommend what, if any, actions should be taken. While the agency has made progress, the path forward is still long. As the analysis completes, the agency will develop implementation options, then create a time-phased, multi-year implementation plan that accounts for constraints in the agency budget, management time, and agency priorities. The agency will focus on assessing the schedule, costs, and management bandwidth required for each initiative; identifying cross-work-stream integration points; and developing a detailed prioritization and implementation plan that sequences the various implementation activities. It is at that time that trade-offs and hard decisions must be made about how to best expend resources, time and funding.

The SEC recognizes that successful implementation of many of the ideas in the BCG study will require a long-term commitment and sustained effort over several years. While still in the early stages of considering the BCG recommendations, the SEC is committed to an open and transparent process. Consistent with the statute, the agency intends to report to Congress on a regular basis on the actions taken in response to the study.

September 12, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sunday, September 11, 2011

Fisch & Roiter on Floating NAV

A Floating NAV for Money Market Funds: Fix or Fantasy?, by Jill E. Fisch, University of Pennsylvania Law School - Institute for Law and Economics, and Eric Roiter, was recently posted on SSRN.  Here is the abstract:

The announcement by the Reserve Primary Fund, in September 2008, that it was “breaking the buck,” triggered a widespread withdrawal of assets from other money market funds and led the U.S. Government to adopt emergency measures to maintain the stability of the short term credit markets. In light of these events, the SEC heightened the regulatory requirements to which money market funds - a three trillion dollar industry - are subject. Regulators and commentators continue to press for further regulatory change, however. The most controversial reform proposal would eliminate the ability of money market funds to purchase and sell shares at a stable $1/share price.

This article argues that the debate over a floating NAV is misguided. First, under current law, money market funds can maintain a $1 share price only under limited conditions. Second, a floating NAV would not achieve the goals claimed by its proponents. Third, and most important, a stable share price is critical to the existence of the money market funds industry. A required floating NAV would eliminate the fundamental attraction of money market funds for investors and, as a result, jeopardize the availability of short term capital.

The more important regulatory question, on which existing commentary has not focused, is what happens if an MMF breaks the buck. This article takes the position that this event should neither require the fund to be liquidated nor permit the board unfettered discretion in suspending redemptions. Instead the article proposes two procedural reforms designed to provide flexibility and predictability in these circumstances by allowing a money market fund to convert to a floating NAV and allowing investors to redeem most of their shares without awaiting completion of a fund’s liquidation. In conjunction with a modest amendment requiring improved fund disclosure about the circumstances under which a fund may be unable to maintain a stable share price, these changes will increase liquidity, address the pressures that may lead to a “run,” preserve the economic viability of money market funds, and allow them to respond to the preferences of investors.

September 11, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Rapp on Extraterritoriality under State Blue Sky Laws

Misapplication of the Federal Extraterritoriality Principle in Limiting the Scope of Civil Remedies for Fraud Under State Blue Sky Laws, by Robert N. Rapp, Case Western Reserve University School of Law, was recently posted on SSRN.  Here is the abstract:

States do not exercise extraterritorial power when a civil remedy for purchasers of securities victimized by unlawful conduct in the offer and sale of those securities is invoked by out of state purchasers under the Blue Sky Law of the state in and from which the distribution of securities was undertaken. The Extraterritoriality Principle under the Dormant Commerce Clause of the U.S. Constitution does not bar the invocation of a post-transaction by out of state purchasers. A United States District Court misapplied the Extraterritoriality Principle by constructing a bright-line "transaction" test to cabin the territorial limit of a purchaser remedy. The court ignored the object of regulation and protection under Blue Sky Laws as applied to the entire process of a distribution of securities, and mistakenly equated the application of a post-transaction civil remedy with the projection of state regulation outside the state.

September 11, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Omarova on Financial Services Regulation

Bankers, Bureaucrats, and Guardians: Toward Tripartism in Financial Services Regulation, by Saule T. Omarova, University of North Carolina at Chapel Hill School of Law, was recently posted on SSRN.  Here is the abstract:

The recent financial crisis highlighted a fundamental but little-noticed paradox. The rising economic cost of financial market failure is disproportionately borne by the taxpaying general public. Yet, the public lacks an ability to participate meaningfully in the process of regulating increasingly complex financial markets. The crisis exposed pervasive market misconduct, regulatory incompetence, and conflict of interest in the U.S. financial sector. Yet, the post-crisis reform legislation continues to view financial services regulation as a process involving only two familiar principals: the industry and the regulators. Despite their dismal track record as guardians of public interest, bankers and bureaucrats effectively remain in charge of protecting the public from the next financial meltdown.

This Article challenges that concept by re-envisioning systemic risk regulation as a tripartite process. It proposes the creation of a Public Interest Council (the “Council”), an independent government instrumentality established and appointed by Congress and located outside of the executive branch. Its charge would be to participate in the regulatory process as the designated representative of the public interest in preserving long-term financial stability and minimizing systemic risk. The Council would comprise individuals who are (1) competent in issues of financial regulation, and (2) independent from both the industry and regulators. Although the Council would not have any legislative or executive powers, it would have broad statutory authority to collect information from government agencies and private market participants; to investigate specific issues and trends in financial markets; to publicize its findings; and to advise Congress and regulators to take action with respect to issues of public concern. In effect, the Council’s main function would be to counteract regulatory capture and to diffuse the financial industry’s power to control the regulatory agenda by putting both bankers and bureaucrats under constant and intense public scrutiny. Despite potential implementation challenges, this proposal takes an important step toward a more effective and public-minded model of systemic risk regulation.

September 11, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)