Thursday, April 28, 2016

Another Broker Promissory Note Win

As I have written before, broker promissory note cases are difficult to defend. The firms have had decades of experience writing the documents, and honing them to a fine point so that they are not defensible.
English: Morgan Stanley - logo

But the conduct of firm employees leading up to the signing of the note and the transition to the firm are not always up to snuff. Far too often we see cases where promises are made to entice a broker to leave a firm and join the new firm, only to find that the firm cannot live up to those promises.

The problem with some of those claims is that the promises are often difficult to prove. We had great success in a case against Merrill Lynch years ago, where an arbitration panel refused to enforce a $750,000 balance owed on a note, because the firm simply refused to allow the broker to conduct the business that she was hired to conduct.

In a recent FINRA arbitration, a panel refused to enforce a promissory note against a Morgan Stanley broker. The broker's defense and counterclaim involved claims of  breach of implied covenant of good faith and fair dealing, fraud and misrepresentation, and negligent misrepresentation. The broker claimed that the firm made several false representations to him in order to tempt him to leave his then-current employer and work for Morgan Stanley. He alleged that had the firm not made these representations, he would not have left his previous employer, nor executed a promissory note with the firm.

The defense and counterclaim were a success. The panel denied any relief to Morgan Stanley, and awarded the broker $300,000 on his counterclaim, plus interest. It also ordered Morgan Stanley to pay the costs and fees associated with the arbitration.

While it doesn't happen often, with the right evidence and the right facts, brokers can win promissory cases. The arbitration award is available at SECLaw.com- link.



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Mark Astarita is a New York securities lawyer who represents investors and financial professionals across the country in securities arbitrations and investigations, and has been doing so for over 25 years. Call him at 212-509-6544 or email him at mja@sallahlaw.com if you have any questions, comments or concerns regarding such matters.

Wednesday, April 27, 2016

SEC Seeks Public Comment on Plan to Create A Consolidated Audit Trail

The Securities and Exchange Commission today voted to publish for public comment a proposed national market system (NMS) plan to create a single, comprehensive database that would enable regulators to efficiently track all trading activity in the U.S. equity and options market. The plan for the database, known as the consolidated audit trail (CAT), was submitted jointly by the self-regulatory organizations (SROs) as required by Rule 613 of Regulation NMS.

“The Commission’s action to approve the proposed CAT plan for public comment is a major market structure milestone.  CAT will enable regulators to harness today’s technology to enhance the regulation and oversight of today’s trading markets,” said SEC Chair Mary Jo White.  “It will significantly increase the ability of regulators to conduct research, reconstruct market events, monitor market behavior, and identify and investigate misconduct.”

The proposed NMS plan details the methods by which SROs and broker-dealers would record and report information, including the identity of the customer, resulting in a range of data elements that together provide the complete lifecycle of all orders and transactions in the U.S. equity and options markets. The proposed NMS plan also sets forth how the data in the CAT would be maintained to ensure its accuracy, integrity and security.

In seeking public comment on the NMS plan, the Commission also prepared a detailed preliminary economic analysis of the proposal, which includes a discussion of the economic effects, including costs of the creation, implementation and maintenance of the CAT as proposed by the SROs.

Public comments on the proposal should be received by the Commission within 60 days of its publication in the Federal Register.

*   *   *

FACT SHEET

SEC Seeks Public Comment on National Market System Plan to Create a Consolidated Audit Trail

SEC Open Meeting
April 27, 2016

Action

The Securities and Exchange Commission voted to publish for public comment a national market system (NMS) plan to create a single, comprehensive database–a consolidated audit trail (CAT)–that would enable regulators to more efficiently and accurately track trading in equity and option securities throughout the U.S. markets.  The proposed plan would increase the effectiveness of market research and monitoring, event re-construction, and the ability to identify and investigate market misconduct.  The plan is being submitted jointly by the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) to the Commission.

Highlights of the Plan

Plan Processor and Central Repository    

The CAT NMS plan provides that a plan processor will build a central repository that would receive, consolidate, and retain the trade and order data reported as part of the CAT.  Among other things, the plan processor would be responsible for:

·         Operating, maintaining, and upgrading the central repository

·         Ensuring the security and confidentiality of all data reported to the central repository

·         Publishing technical specifications containing detailed instructions for the submission of data by the self-regulatory organizations (SROs) and broker-dealers to the central repository

Data Recording and Reporting

The CAT NMS plan applies to NMS securities as well as to over-the-counter equity securities.  At the various stages in the lifecycle of an order–e.g., origination, routing, modification/ cancellation, and execution–the SROs and broker-dealers would be required to submit certain information about the order to the central repository, such as:

·         A unique identifier, provided by the broker-dealer, for the customer submitting the order

·         An identifier, provided by the SRO, for the broker-dealer receiving, originating, routing, or executing the order

·         The date and time of the order event

·         The security symbol, price, size, order type, and other material terms of the order

Generally, the CAT NMS plan requires this data to be recorded contemporaneously with the order event and reported to the central repository by 8 a.m. on the day following the event.  The CAT NMS plan also requires CAT data to be time-stamped in increments as granular as those utilized by the SROs and broker-dealers, but with a minimum time stamp granularity of one millisecond for all order events except manual order events (in which case, the time stamp granularity must be a minimum of one second).  Further, the CAT NMS plan requires the SROs and broker-dealers to synchronize their business clocks to within 50 milliseconds of the time maintained by the National Institute of Standards and Technology. 

The CAT NMS plan sets an initial maximum error rate of five percent for data reported to the central repository, subject to quality assurance testing, adjustments at each initial launch date for CAT reporters and periodic review by the operating committee.  The CAT NMS plan also discusses a phased approach to lowering the maximum error rate with the ultimate goal of one percent for data reported to the central repository. 

To assist in reducing the error rate, the SROs propose that the plan processor, among other things, measure and report errors, provide reports to the SROs and other reporters, define educational and support programs, and provide error correction tools.

The CAT NMS plan also reflects exemptive relief from certain requirements of Rule 613 that the Commission previously granted.  This exemptive relief provides the SROs with the flexibility to propose approaches in the CAT NMS plan that could potentially be more efficient and cost-effective than those required by Rule 613 without adversely affecting the reliability or accuracy of CAT data.  Specifically, the exemptive relief permits the SROs to propose, in the CAT NMS plan, that:

·         Only options exchanges–but not options market makers–be required to report information to the central repository regarding options market maker quotations

·         Instead of requiring a universal customer identifier for each customer to be used by broker-dealers for all orders, each broker-dealer could assign a unique firm-designated identifier (FDI) to each trading account.  Under this approach, broker-dealers would be permitted to use an account number or any other identifier defined by the firm as the FDI, provided each identifier is unique across the firm for each business date.  The plan processor would then assign a unique customer identifier for each customer.

·         Instead of requiring a universal identifier for each broker-dealer reporting data to the CAT, a broker-dealer could use its existing SRO-assigned market participant identifier.  The plan processor would then assign a unique identifier for each reporting broker-dealer.

·         Instead of requiring broker-dealers to link a particular order or execution to an allocation, a broker-dealer could provide an allocation report that focuses on the shares allocated and the FDI of the applicable accounts or subaccounts

·         Instead of requiring the receipt of manual orders to be time-stamped to the millisecond, a time stamp to the nearest second be permitted

Governance

The SROs propose to conduct the activities of the CAT through a Delaware limited liability company, which they would jointly own.  An operating committee comprised of all the SROs–each with one vote–would manage the company.  In addition, an advisory committee consisting of, among others, broker-dealers of various sizes and specialties, investors, and a person with significant regulatory experience, would provide input to the operating committee.

Regulatory Access and Use

The CAT NMS plan provides that the SROs and the Commission would have access to the data contained in the central repository for regulatory and oversight purposes.  The CAT NMS plan provides that CAT data would be stored in a way that allows regulators to perform complex queries, such as reconstructing market events and the status of order books at various time intervals.  Regulators would have access to CAT data through both an online targeted query tool and user-defined direct queries and bulk extracts. 

Data Security and Confidentiality

The CAT NMS plan establishes data security requirements regarding connectivity and data transfer, encryption, storage, access, breach management, and personally identifiable information (PII).  In addition, the plan processor would be responsible for:

·         Requiring individuals with access to the central repository to agree to use CAT data only for appropriate surveillance and regulatory activities and to employ safeguards to protect the confidentiality of CAT data

·         Developing a comprehensive information security program as well as a training program that addresses the security and confidentiality of all information accessible from the CAT

·         Designating one of its employees as Chief Information Security Officer, who would be responsible for creating and enforcing appropriate policies, procedures, and control structures regarding data security

Retirement of Duplicative Rules and Systems

As required by Rule 613, the CAT NMS plan contains a method to eliminate rules and systems that will be rendered duplicative by CAT, including identification of such rules and systems.

The CAT NMS plan estimates that market participants would have duplicative audit trail data reporting responsibilities for a period of up to 2.5 years after industry members begin reporting data to CAT.

Implementation Schedule

The CAT NMS plan provides for the following implementation schedule:

·         Within two months of  Commission approval of the CAT NMS plan, the SROs would be required to select the plan processor from among the remaining bidders through a two-round voting process in which each SRO has one vote

·         Within one year of Commission approval of the CAT NMS plan, the SROs would be required to begin reporting data to the central repository 

·         Within two years of  Commission approval of the CAT NMS plan, large broker-dealers would be required to begin reporting data to the central repository 

·         Within three years of  Commission approval of the CAT NMS plan, small broker dealers would be required to begin reporting data to the central repository  

Background

On July 11, 2012, the Commission adopted Rule 613 of Regulation NMS under the Securities Exchange Act of 1934.  Rule 613 requires the SROs to jointly submit a national market system plan to create, implement, and maintain a CAT that would capture–in a single, consolidated data source–customer and order event information for orders in NMS securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution.  Rule 613 outlines a broad framework for the CAT, including the minimum elements the Commission believes are necessary for an effective CAT, while allowing the SROs to draw upon their expertise to develop the details of the CAT.

What’s Next?

The notice of the CAT NMS plan will be published on the Commission’s website and in the Federal Register. Comments should be received within 60 days of publication in the Federal Register. Consistent with Rule 608, if the Commission makes the necessary findings, the Commission must approve the CAT NMS plan within 180 days.



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC News - Fraud Charges and Hiding Financial Troubles


SEC Announces Financial Fraud Cases
The SEC has announced a pair of financial fraud cases against companies and then-executives accused of various accounting failures that left investors without accurate depictions of company finances.

Litigation Marketing Company Charged With Bilking Retirees
A Los Angeles-based litigation marketing company and its co-founders have been charged with defrauding retirees and other investors who were told their money would be used to help gather plaintiffs for class-action and other lawsuits and they would earn hefty investment returns from settlement proceeds.

SEC Case Freezes Assets of Ski Resort Steeped in Fraudulent EB-5 Offerings
Fraud charges and an asset freeze have been announced against a Vermont-based ski resort and related businesses allegedly misusing millions of dollars raised through investments solicited under the EB-5 Immigrant Investor Program.

Town Officials in New York Hid Financial Troubles From Bond Investors
Ramapo, N.Y., its local development corporation, and four town officials now face fraud charges for allegedly hiding a deteriorating financial situation from their municipal bond investors.




The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions. We represent investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.

Tuesday, April 26, 2016

Thursday, April 21, 2016

SEC Issues Order Modifying and Extending the Pilot Period for the National Market System Plan to Address Extraordinary Market Volatility

The Securities and Exchange Commission today issued an order to extend for one year the pilot period of the National Market System Plan to Address Extraordinary Market Volatility, commonly known as the limit up-limit down (LULD) plan.  

The Commission also approved a modification to the manner in which the LULD plan establishes the reference price in cases where a security does not trade in the opening auction on the primary listing exchange.  In these circumstances, a security’s reference price will now be the previous trading day’s closing price or, if no closing price exists, the last reported sale on the primary listing exchange.  The Commission believes that this modification is appropriate to potentially prevent unnecessary trading pauses that are unrelated to extraordinary volatility.

The Commission extended the pilot period in order to allow the plan participants to conduct further analysis regarding the LULD plan’s operation, including how it operated during the market volatility on Aug. 24, 2015.  In particular, the Commission has directed the self-regulatory organization (SRO) participants to submit to the Commission further recommendations, as necessary, relating to: 

  • The appropriate harmonization of the SRO clearly erroneous execution rules with the plan such that trades that occur within the LULD price bands would not be broken absent legitimate technical failures
  • The establishment of specific provisions relating to the trading of exchange-traded products
  • Other changes deemed warranted in light of the market volatility on Aug. 24, 2015, including the impact of double-wide price bands during the opening period, and the advisability of coordinated reopening procedures
  • Potential enhancements to the categorization of securities into different tiers

The order is effective immediately.  The pilot period will expire on April 21, 2017.  



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Tuesday, April 19, 2016

SEC Announces Financial Fraud Cases

The Securities and Exchange Commission today announced a pair of financial fraud cases against companies and then-executives accused of various accounting failures that left investors without accurate depictions of company finances.

In one case, technology manufacturer Logitech International agreed to pay a $7.5 million penalty for fraudulently inflating its fiscal year 2011 financial results to meet earnings guidance and committing other accounting-related violations during a five-year period.  Logitech’s then-controller Michael Doktorczyk and then-director of accounting Sherralyn Bolles agreed to pay penalties of $50,000 and $25,000, respectively, for violations related to Logitech’s warranty accrual accounting and failure to amortize intangibles from an earlier acquisition.  The SEC filed a complaint in federal court yesterday against Logitech’s then-chief financial officer Erik Bardman and then-acting controller Jennifer Wolf alleging that they deliberately minimized the write-down of millions of dollars of excess component parts for a product for which Logitech had excess inventory in FY11.  For Logitech’s financial statements, the two executives falsely assumed the company would build all of the components into finished products despite their knowledge of contrary facts and events. 

In the other case, three then-executives at battery manufacturer Ener1 agreed to pay penalties for the company’s materially overstated revenues and assets for year-end 2010 and overstated assets in the first quarter of 2011.  The financial misstatements stemmed from management’s failure to impair investments and receivables related to an electric car manufacturer that was one of its largest customers.  Former CEO and chairman of the board Charles L. Gassenheimer, former chief financial officer Jeffrey A. Seidel, and former chief accounting officer Robert R. Kamischke agreed to pay penalties of $100,000, $50,000, and $30,000, respectively.

“We are intensely focused on whether companies and their officers evaluate judgmental accounting issues in good faith and based on GAAP,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.  “In these two cases, we allege deficiencies in Ener1’s failure to properly impair assets on its balance sheet and Logitech’s failure to write down the value of its inventory to avoid the financial consequences of disappointing sales.”

In the Ener1 case, the SEC also found that Robert D. Hesselgesser, the engagement partner for PricewaterhouseCoopers LLP’s audit of Ener1’s 2010 financial statements, violated PCAOB and professional auditing standards when he failed to perform sufficient procedures to support his audit conclusions that Ener1 management had appropriately accounted for its assets and revenues.  Hesselgesser agreed to be suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies.  The SEC’s order permits Hesselgesser to apply for reinstatement after two years.

“Auditors play a critical role regarding the accuracy of financial statements relied upon by investors, and they must be held accountable when they fail to do everything required under professional auditing standards,” said Michael Maloney, Chief Accountant of the SEC’s Division of Enforcement.

In the Logitech case, former CEO Gerald Quindlen was not accused of any misconduct, but has returned $194,487 in incentive-based compensation and stock sale profits received during the period of accounting violations, pursuant to Section 304(a) of the Sarbanes-Oxley Act.

The companies and executives who agreed to settlements neither admitted nor denied the charges.

The SEC’s investigation of Logitech was conducted by Paul Gunson and Matthew Finnegan, and supervised by Douglas McAllister.  The litigation is being led by Paul Kisslinger and Kevin Lombardi, and supervised by Bridget Fitzpatrick.

The SEC’s investigation of Ener1 was conducted by Carolyn Winters, Richard Haynes, and Deena Bernstein, and supervised by Douglas McAllister.  



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Monday, April 18, 2016

SEC Offers Online Tool to Help Companies Estimate Registration Fees

The Securities and Exchange Commission today announced the release of an online tool to help companies calculate registration fees for certain form submissions to EDGAR, the SEC’s electronic database of financial reports and other filings.  The new tool is intended to improve the accuracy of fee calculations and minimize the need for corrections.

The Registration Fee Estimator, created by the Filing Fees Branch in the SEC’s Office of Financial Management, is available at: http://ift.tt/1qTu7uU.

The new online tool covers the most common filings companies use to register initial public offerings, debt offerings, asset-backed securities, closed-end mutual funds, limited partnerships, and small business investment companies.  The tool prompts users to enter data based on the type of filing and the applicable fee rules and provides suggestions for completing required fee tables based on the data entered.  

The tool is intended to assist filers in estimating filing fees and provide general guidance on completing the related fee tables.  However, the Office of Financial Management reminds users that the tool should not be relied upon as an official SEC calculation or verification of these filing fees.   Filers will remain responsible for paying all required fees and accurately including all required information in their filings. 

Future versions of the Registration Fee Estimator will feature additional types of filings, including those filed annually by investment companies.

Filers with questions about the tool may call (202) 551-8989 from 9 a.m. to 5:30 p.m. ET or contact filingfees@sec.gov.



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

Friday, April 15, 2016

SEC Charges Litigation Marketing Company With Bilking Retirees

The Securities and Exchange Commission today charged a Los Angeles-based litigation marketing company and its co-founders with defrauding retirees and other investors who were told their money would be used to help gather plaintiffs for class-action and other lawsuits and they would earn hefty investment returns from settlement proceeds.

The SEC alleges that James Catipay and David Aldrich raised $11.7 million from approximately 250 investors during the past three years for their company PLCMGMT LLC, also referred to as PLC or Prometheus Law.  But only $4.3 million was actually used to locate prospective plaintiffs for lawsuits, and the company has generated scant revenue from any settlements.  Catipay and Aldrich have instead diverted millions of dollars for their personal use while failing to deliver the promised 100 to 300 percent returns to investors.  In fact, PLC is obligated to pay investors at least $31.5 million.

“We allege that Catipay and Aldrich have defrauded investors, many of them retirees, by repeatedly downplaying the risks associated with their investments and the fact that their entire business model was unrealistic to afford the exorbitant returns promised,” said Michele W. Layne, Director of the SEC’s Los Angeles Regional Office

According to the SEC’s complaint filed in U.S. District Court for the Central District of California:

·         Investors were told their funds would be used for marketing and advertising to locate plaintiffs for cases involving failed prescription drugs or medical devices.  Each investor’s money would be associated with a specific potential plaintiff.  PLC would refer the potential plaintiffs to a contingency-fee attorney and use proceeds of lawsuit settlements to pay investor returns. 

·         The arrangements purportedly enabled investors, who were mostly non-attorneys, to split legal fees with the lawyer who actually litigated a particular lawsuit, which is generally prohibited.

·         PLC, Catipay, and Aldrich enticed investors by claiming the investments were safe and “guaranteed” when in fact they were highly speculative and risky because only certain potential plaintiffs would typically qualify as actual plaintiffs, and even if a case was filed there was no guarantee they would win the lawsuit.

·         In addition to the false and misleading statements, PLC, Catipay, and Aldrich misused $5.6 million in investor funds for personal purposes, including more than $1 million for Aldrich’s personal income taxes and another million dollars to purchase a residential condominium in the name of Aldrich’s privately-held company. 

·         Aldrich and Catipay also took large salaries and admitted to SEC investigators that they have made Ponzi payments to several Prometheus investors. 

The SEC’s complaint charges PLC, Catipay, and Aldrich with violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5.  Catipay also allegedly violated Section 15(a) of the Exchange Act.  The SEC seeks preliminary and permanent injunctions, the appointment of a receiver over the company, an asset freeze, financial penalties and disgorgement plus interest, and other relief.

The SEC’s investigation was conducted by David Rosen and Carol Shau and supervised by Marc Blau.  The SEC’s litigation will be led by Amy Longo and Mr. Rosen and supervised by John Berry.



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Adopts Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants

The Securities and Exchange Commission voted on April 13 to adopt final rules implementing a comprehensive set of business conduct standards and chief compliance officer requirements for security-based swap dealers and major security-based swap participants (security-based swap entities).

The final rules are adopted under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which authorizes the Commission to implement a framework for regulating the over-the-counter security-based swap markets.

“For years, the over-the-counter derivatives market operated without basic customer protections,” said SEC Chair Mary Jo White.  “These rules better protect investors by providing fundamental reforms to the conduct of security-based swap activity that are designed to address the specific issues presented by the nature of the products and relationships in the security-based swap market.”

The final rules require security-based swap entities to comply with a range of provisions designed to enhance transparency, facilitate informed customer decision-making, and heighten standards of professional conduct.  For example, security-based swap entities are required to deal fairly with potential counterparties by communicating in a fair and balanced manner, disclosing material information about the security-based swap, including material risks, characteristics, incentives and conflicts of interest, and adhering to other professional standards of conduct. Additional requirements will apply for dealings with special entities, which include municipalities, pension plans, endowments, and similar entities.  The rules also establish supervision and chief compliance officer requirements.  In addition, the rules address the cross-border application of these requirements and the potential availability of substituted compliance.

The final rules will become effective 60 days after publication in the Federal Register.  These rules also establish a separate compliance date, which generally is based on the compliance date of the registration rules for security-based swap entities.   

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FACT SHEET

SEC Open Meeting
April 13, 2016

Action

The Securities and Exchange Commission adopted final rules implementing a comprehensive set of business conduct standards and chief compliance officer requirements for security-based swap dealers and major security-based swap participants (security-based swap entities).  The rules implement the business conduct standards and chief compliance officer requirements under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The rules are designed to enhance transparency, facilitate informed customer decision-making and heighten standards of professional conduct to better protect investors.

Highlights of the Rules

Provisions Applicable to Security-Based Swap Entities

The rules, among other things, require security-based swap dealers and major security-based swap participants to:

·         Verify whether a counterparty is an eligible contract participant and whether it is a special entity

·         Disclose to the counterparty material information about the security-based swap, including material risks, characteristics, incentives and conflicts of interest

·         Provide the counterparty with information concerning the daily mark of the security-based swap, as well as concerning the ability to require clearing of the security-based swap

·         Communicate with counterparties in a fair and balanced manner based on principles of fair dealing and good faith

·         Establish a supervisory and compliance infrastructure

·         Designate a chief compliance officer who is required to fulfill the described duties and prepare an annual compliance report.

Provisions Applicable to Security-Based Swap Dealers

The rules also require security-based swap dealers to:

  • Determine that any recommendations they make regarding security-based swaps are suitable for their counterparties
  • Establish, maintain and enforce policies and procedures reasonably designed to obtain and retain a record of the essential facts concerning each known counterparty that are necessary to conduct business with such counterparty

The final rules define what it means to “act as an advisor” to a special entity, and require security-based swap dealers who act as an advisor to a special entity to:

  • Make a reasonable determination that any security-based swap or trading strategy involving a security-based swap that it recommends is in the best interests of the special entity
  • Make reasonable efforts to obtain information that it considers necessary to make a reasonable determination that the recommendation is in the best interests of the special entity

The rules also provide a safe harbor under which the parties could agree that a security-based swap dealer is not acting as an advisor to a special entity.

Heightened Protections in Transactions with Special Entities and Other Requirements

The final rules require security-based swap dealers and major security-based swap participants acting as counterparties to special entities to reasonably believe that the special entity has a qualified independent representative who is either an Employee Retirement Income Security Act of 1974 (ERISA) fiduciary (if the special entity is an ERISA plan), or who meets the following requirements:

  • Has sufficient knowledge to evaluate the transaction and risks
  • Is not subject to a statutory disqualification
  • Is independent of the security-based swap dealer or major security-based swap participant
  • Undertakes a duty to act in the best interests of the special entity
  • Makes appropriate and timely disclosures to the special entity of material information concerning the security-based swap
  • Evaluates, consistent with any guidelines provided by the special entity, the fair pricing and appropriateness of the security-based swap
  • Is subject to pay-to-play regulations

The rules also require security-based swap dealers to comply with rules designed to prevent “pay-to-play” in transactions with municipal entities.

In addition, the rules permit security-based swap entities to reasonably rely on representations to satisfy their various due diligence obligations.  In addition, the rules generally do not apply if a counterparty’s identity is not known at a reasonably sufficient time prior to execution of the transaction to permit the security-based swap dealer or major security-based swap participant to comply with the obligations of the rules.

Cross-Border Application

The final rules define the scope of application of the transaction-level business conduct requirements to security-based swap dealers and major security-based swap participants.  In particular, the final rules require U.S. security-based swap dealers to comply with transaction-level business conduct requirements with respect to all of their transactions, except for certain transactions conducted through such dealer’s foreign branch.  Foreign security-based swap dealers are required to comply with transaction-level business conduct requirements with respect to any transaction with a U.S. person (except for a transaction conducted through the foreign branch of a U.S. person) and any transaction that the security-based swap dealer arranges, negotiates, or executes using personnel located in the United States, even if the counterparty is a non-U.S. person.

The final rules also provide for the possibility of substituted compliance. The substituted compliance rule (Exchange Act rule 3a71-6) would allow the Commission to conditionally provide that non-U.S. security-based swap dealers and non-U.S. major security-based swap participants may satisfy business conduct requirements under the Exchange Act by complying with foreign requirements that the Commission has determined to be comparable.   

Background

To enhance accountability and transparency, the Dodd-Frank Act establishes a comprehensive framework for regulating the over-the-counter swaps markets.  Among other things, the Act establishes business conduct standards for “security-based swap dealers” and “major security-based swap participants” whenever those entities act as advisors to “special entities” or engage in security-based swap transactions with counterparties, including those that are “special entities.”

Special entities include federal agencies, states and political subdivisions, employee benefit plans and governmental plans as defined under the ERISA, and endowments.

Other Regulators

The SEC worked closely with the U.S. Commodity Futures Trading Commission (CFTC) at all stages of this rulemaking. The CFTC previously adopted rules with respect to the business conduct standards of swap dealers and major swap participants.  Commission staff also has consulted with representatives of the other federal financial regulators and with Department of Labor representatives on this rulemaking.

What’s Next?

The final rules become effective 60 days after publication in the Federal Register.  These rules also establish a separate compliance date, which is based on the compliance date of the registration rules for security-based swap dealers and major security-based swap participants, with two exceptions as discussed below.  

The compliance date for application of the customer protection requirements described in Rule 3a71-3(c) to any security-based swap transaction of a foreign security-based swap dealer that is arranged, negotiated, or executed by personnel of the foreign security-based swap dealer (or its agent) located in a U.S. branch or office (as described in Rule 3a71-3(a)(8)(i)(B)) is the later of (a) 12 months following publication in the Federal Register, or (b) the compliance date of the registration rules for security-based swap dealers and major security-based swap participants.  The substituted compliance rule becomes effective 60 days after publication, without a separate compliance date.  



SEC Press Release

--- If you need help with a securities litigation, arbitration or litigation issue, email Mark Astarita or call 212-509-6544 to speak to a securities lawyer.

SEC Solicits Public Comment on Business and Financial Disclosure Requirements in Regulation S-K

The Securities and Exchange Commission voted on April 13 to publish a concept release discussing and seeking public comment on modernizing certain business and financial disclosure requirements in Regulation S-K.  The Commission is interested in receiving input on whether the disclosure requirements continue to elicit the information that investors need for investment and voting decisions and how registrants can most effectively present the information.  The Commission is also seeking comment on the costs and benefits of the disclosure requirements for companies and investors. 

The request for comment is part of the Disclosure Effectiveness Initiative, which is a broad-based staff review of the requirements, and the presentation and delivery of disclosures that companies make to investors. 

“Timely, relevant and material information is critical to investors and companies,” said SEC Chair Mary Jo White.  “The concept release establishes a thoughtful framework for better understanding investors’ and companies’ experiences with the disclosure requirements and whether investors are receiving the information they need to make informed investment decisions.”

In addition to discussing and seeking input on the disclosure requirements for business and financial information in Regulation S-K, the concept release explores how the Commission could improve the readability and navigability of company disclosures.  The Commission invites comment on various formats used to present information, such as tables and structured data, as well as different tools used to deliver disclosure, including cross-referencing, incorporation by reference, hyperlinks and company websites. 

The public comment period will remain open for 90 days following publication of the concept release in the Federal Register. 

# # #


FACT SHEET

SEC Open Meeting

April 13, 2016

Action

The Commission issued a concept release that comprehensively reviews business and financial disclosure requirements in Regulation S-K applicable to periodic reports.  The concept release, which arises out of the staff’s work on the Disclosure Effectiveness Initiative, would consider ways to enhance the disclosure requirements for the benefit of investors and companies.  The release seeks public comment on how the Commission could update its disclosure requirements to facilitate timely, material disclosure by registrants and investors’ access to that information.  The concept release also seeks comment on the presentation and delivery of disclosure by reporting companies. 

Highlights of the Concept Release

The concept release requests comment on the business and financial disclosure required in periodic reports filed by companies.  The concept release would cover:

·         The Commission’s framework for company disclosure, including the nature of the disclosure requirements, statutory mandates, and the audience for disclosure

·         Existing and potential disclosure requirements, including principles-based and line-item disclosure requirements in Regulation S-K, industry-specific disclosure, information relating to public policy and sustainability matters, and scaled disclosure requirements

·         Alternative methods of presenting disclosure that could improve readability and investor access to information.

For each of these topics, the concept release would consider the regulatory history, public input received, the administrative and compliance costs of disclosure requirements, and present specific questions for public comment.

Background                                                                              

The Commission’s framework for company disclosure derives from the Securities Act of 1933 and the Securities Exchange Act of 1934.  The Commission first introduced its current system of integrated disclosure in 1977, in which a centralized set of rules apply to both registered public offerings and periodic reports.   Regulation S-K is the central repository for the Commission’s rules covering the business and financial information outside the financial statements that companies must provide in their filings. 

What’s Next?

The concept release will be published on the Commission’s website and in the Federal Register.  The comment period will remain open for 90 days.  



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