Weekly RoundUp November 04, 2015

Financial Services Weekly News

Editor's Note

SEC Launches Crowdfunding Experiment. On Oct. 30 the SEC voted, with one dissent, to adopt final crowdfunding rules to be known as Regulation Crowdfunding. The rules, described in SEC Release No. 33-9974, complete the requirements for offerings satisfying the crowdfunding exemption in Title III of the JOBS Act and section 4(a)(6) of the Securities Act of 1933, enacted by Title III. The rules require that crowdfunding be conducted exclusively through an intermediary platform operated by either a registered broker or a registered funding portal. Intermediaries are responsible for, among other things, performing some due diligence with respect to the company and its principals and ensuring that investors do not invest more in the subject offering, together with other crowdfunding offerings during the past 12 months, than the maximum amount allowable based on each investor’s income and net worth. The SEC also adopted forms for registration of funding portals, contained in the Release. Regulation Crowdfunding will be effective in early May 2016, 180 days after publication in the Federal Register, and the forms for funding portals will be effective on Jan. 29, 2016. At the same meeting on Oct. 30, the SEC voted to propose amendments to Rule 147, the intrastate exemption, and Rule 504, the Regulation D exemption for limited offerings, both of which are described in SEC Release No. 33-9973. The amendments to Rule 147 are intended, among other things, to accommodate state crowdfunding exemptions and would permit offers to persons outside of the state provided that sales were made only to residents of the state in which the issuer is located. Rule 147 would, however, only be available for use in conjunction with a state exemption that limits the offering to $5 million in a 12-month period. The amendments to Rule 504 would increase the aggregate amount of securities that can be sold in a 12-month period from $1 million to $5 million, and disqualify certain bad actors from participation in Rule 504 offerings. Regulation Crowdfunding and the Rule 147 and Rule 504 proposals are summarized in a press release and fact sheet issued by the SEC. Commissioner Piwowar issued a statement of dissent from the vote to approve Regulation Crowdfunding on the basis that the rules are too restrictive and burdensome, although he conceded that some of those restrictions are contained in the statute. In the same statement, he agreed with the Rule 504 proposal but opposed parts of the Rule 147 proposal, in particular, the imposition of a $5 million limit on the amount that a state may permit to be sold under its exemption. In addition to objecting to the SEC’s imposing restrictions on state regulation in principle, Commission Piwowar also pointed out that states vary widely in size, comparing California, with 39 million residents and a GDP over $2 trillion, and Wyoming, with 584,000 residents and a GDP of $38 billion. Commissioners White, Aguilar and Stein issued statements in support of the two proposals. Separately, the SEC published FINRA’s Notice of Filing of a proposed rule change to adopt the funding portal rules and related forms.
Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

Client Alert: SEC Issues New Guidance on Excluding Shareholder Proposals under Rule 14a-8

Goodwin Procter’s Capital Markets practice has released a client alert on the SEC’s Division of Corporation Finance issuance of interpretive advice on how it will treat shareholder proposals under the “directly conflicts” and “ordinary business” exclusions under Rule 14a-8. The Staff will only conclude that a company can exclude a shareholder proposal because it directly conflicts with a management proposal if “a reasonable shareholder could not logically vote in favor of both proposals,” which will impose a “higher burden” on companies seeking to exclude a shareholder proposal. When evaluating shareholder proposals to determine whether a company can exclude the proposal under the “ordinary business” exclusion or must include the proposal because it relates to a significant social policy issue, the Staff will continue to evaluate shareholder proposals under its prior positions rather than adopting the new test adopted by the Third Circuit in Trinity Wall Street v. Wal-Mart Stores, Inc.

Client Alert: House Passes Act to Codify Section 4(a)(1½) Exemption for Resales of Restricted Securities

As mentioned in the Oct. 14 Roundup, the House has passed and sent to the Senate a bill that is intended to codify the so-called “Section 4(a)(1½)” exemption for resales of restricted securities. If enacted, the RAISE Act of 2015 would provide a clear legal framework for secondary markets of restricted securities and set forth specific criteria for the seller, purchaser and issuer of the securities and other conditions to be satisfied to qualify for the exemption. Goodwin Procter’s Capital Markets practice has released a client alert providing additional detail on the bill.

Federal Reserve Board Proposes Rule to Strengthen Ability of Large Banks to Be Resolved

On Oct. 30 the FRB announced the proposal of a new rule that would strengthen the ability of the largest domestic and foreign banks operating in the United States to be resolved without extraordinary government support or taxpayer assistance. The proposed rule would apply to domestic firms identified by the FRB as global systemically important banks (GSIBs) and to the U.S. operations of foreign GSIBs. These institutions would be required to meet a new long-term debt requirement and a new "total loss-absorbing capacity," or TLAC, requirement. According to the FRB statement, in order to “reduce the systemic impact of the failure of a GSIB, an orderly resolution process should allow a GSIB to fail, and its investors to suffer losses, while the critical operations of the firm continue to function. Requiring GSIBs to hold sufficient amounts of long-term debt, which can be converted to equity during resolution, would facilitate this by providing a source of private capital to support the firms' critical operations during resolution.” Domestic GSIBs would be required to hold, at a minimum, a long-term debt amount of the greater of 6 percent plus its GSIB surcharge of risk-weighted assets and 4.5 percent of total leverage exposure, and a TLAC amount of the greater of 18 percent of risk-weighted assets and 9.5 percent of total leverage exposure. The U.S. operations of foreign GSIBs generally would be required to hold, at a minimum, a long-term debt amount of the greater of 7 percent of risk-weighted assets and 3 percent of total leverage exposure and 4 percent of average total consolidated assets, and a TLAC amount of the greater of 16 percent of risk-weighted assets and 6 percent of total leverage exposure and 8 percent of average total consolidated assets.

Bank Regulators Issue Interim Final Rule Providing Exemption from Swap Margin Rule for Certain Swaps Transactions

In the Oct. 28 Roundup we reported that the FDIC had joined the Federal Reserve, FCA, FHFA and OCC in approving a final rule to establish capital and margin requirements for swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants regulated by one of the agencies ("covered swap entities"), as required by the Dodd-Frank Act. On Oct. 30 the agencies issued a joint release announcing the final rule. The agencies also announced the issuance of an interim final rule relating to the rule's exemption from margin requirements for certain non-cleared swaps and non-cleared security-based swaps used for hedging purposes by commercial end-users and certain other counterparties.

SEC Order Exempts Certain Large Traders and Broker-Dealers from Rule 13h-1 Requirements

On Oct. 30, the SEC issued an order exempting certain large traders from the self-identification requirements and certain broker-dealers from the recordkeeping, reporting and monitoring responsibilities of Rule 13h-1 under the Exchange Act. Large traders report on Form 13H after reaching the threshold for reporting provided by the Rule. The order, made in response to exemption requests by the Financial Information Forum (FIF) and Securities Industry and Financial Markets Association (SIFMA), (1) conditionally exempts equity options market participants from the self-identification requirements of the Rule if they have not met an alternate threshold applicable to equity options trading, based on the gross premiums paid for the options as opposed to the value of the underlying stock at the time of trade; and (2) temporarily exempts broker-dealers until Nov. 1, 2017 from full compliance with the recordkeeping and reporting obligations of the Rule beyond those established in Phase One, which began on Nov. 30, 2012, and Phase Two, which began on Nov. 1, 2013 and was scheduled to be replaced by full compliance on Nov. 1, 2015.

FINRA Proposes Rule to Designate Members for Mandatory Testing Under Regulation SCI

On Oct. 30, FINRA filed with the SEC a proposed rule change to adopt FINRA Rule 4380, which would grant FINRA authority to designate member firms for mandatory participation in business continuity and disaster recovery testing under SEC Regulation Systems Compliance and Integrity (SCI). FINRA would use established criteria designed to ensure participation by members that it determines to be necessary for the maintenance of fair and orderly markets if the business continuity and disaster recovery plan is activated. Designated members may be required to, for example, process test scripts to simulate trading activity and to report the results to FINRA.

FINRA Chairman and CEO Rick Ketchum to Retire in 2016

FINRA announced that Chairman and CEO Richard Ketchum plans to retire in the second half of 2016. The Board of Governors will conduct a search for his successor that will take into consideration internal and external candidates.