Second Whistleblower Award Under Dodd-Frank 11/25/2013Posted by Morse, Barnes-Brown Pendleton in Corporate, Legal Developments.
Tags: Dodd-Frank Act, SEC, whistleblower
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By: Joseph Marrow
More than three years ago, pursuant to the Dodd-Frank Act, the Securities and Exchange Commission (SEC) established an award program for whistleblowers creating a new private right of action for employees in the financial services sector who suffer retaliation for disclosing information about fraudulent or unlawful conduct related to the offering or provision of a consumer financial product or service. See article from December 2010 Enhanced Whistleblower Provisions Under Dodd-Frank Act. It was expected that the program would lead to a bounty of whistleblower awards. This has not been the case. Indeed, on August 30, 2013, the SEC announced just the second payment under the program, a $125,000 award to three whistleblowers.
The most recent award was made in connection with information that led to an SEC enforcement action against Andrey Hicks, the operator of a sham hedge fund. To be eligible for an award, whistleblowers must provide the SEC with “original information” about a violation of the securities laws that leads to a successful enforcement action in which the SEC obtains monetary sanctions exceeding $1 million. The information provided must cause the SEC to start or reopen an investigation or must significantly contribute to the success of an SEC enforcement action.
In Hicks, two of the whistleblowers furnished the SEC with information that led the SEC to open an investigation. The other whistleblower provided information that identified key witnesses and corroborated information provided by the other whistleblowers. Interestingly, the SEC only awarded the whistleblowers 15% of the award collected (the Dodd-Frank Act allows the SEC to award up to 30% to the whistleblower). It is possible that extenuating factors were in play that led to a lower award – possible culpability on the part of the whistleblowers.
The record in the proceeding demonstrates that the award process can be quite time consuming – it took more than 20 months from the filing of the enforcement action before the SEC issued its final whistleblower eligibility order. The length of time for the award process to be completed may present the most compelling evidence why there have been so few awards since the program was enacted.
For more information on this topic, please feel free to contact Joe.
Tags: conflict minerals, Dodd-Frank Act, public disclosure, SEC
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By: Carl Barnes If you haven’t been paying attention to the Securities and Exchange Commission‘s final “conflict minerals” disclosure rules, it’s time to start. Mandated by Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, these rules attempt to exert pressure on publicly traded companies to end their use of “conflict minerals” – gold, tin, tantalum or tungsten – originating in the Democratic Republic of the Congo or nine adjoining countries in their manufactured products.
Beginning in May 2014, public companies will be required to conduct detailed reviews of their manufacturing processes and supply chains to determine whether any conflict minerals that are necessary to the manufacture of their products originated in any of the covered countries. Public disclosure of the results of the inquiry will be required. If it is determined that any conflict minerals did originate in a covered country, the company must perform more extensive due diligence on the source and chain of custody of those minerals to determine whether its products are “DRC conflict free,” i.e., whether they contain minerals that “directly or indirectly [financed or benefited] armed groups in the” covered countries. Those reports, too, must be publicly disclosed and, in most cases, the reports must be audited by independent third parties.
The SEC estimates that approximately 6,000 publicly traded companies – including smaller reporting companies (companies with a public float of less than $75 million or, if they have no public float, less than $50 million in revenues) – will be affected by the rule. Privately held companies will be affected as well, when their publicly traded customers require them to conduct their own due diligence and confirm that components supplied to public companies are DRC conflict free.
A lot has happened since the SEC issued the rules in August 2012. In July 2013, a U.S. District Court rejected challenges from the National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable (read the decision here). The plaintiffs appealed, filing their opening brief with the Court of Appeals in September (read the brief here). The Government’s final brief must be filed by November 13, 2013.
So, what happens next? The rules may be struck down in whole or in part by the Court of Appeals, but manufacturers and their counsel shouldn’t count on it. Compliance will require long lead-times and won’t be easy. There are no de minimis exceptions. Companies that haven’t begun to take the steps to satisfy these rules – or even to learn about them – may be in for a shock. We’re just heading into autumn, but the disclosures required in the spring are already on us.
For more information on this topic, please feel free to contact Carl.
Tags: Dodd-Frank Act, regulation d, SEC
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By: Jeffrey Somers
Dodd-Frank recently amended the $1 million net worth accredited investor test for individuals under Regulation D (Reg D) to exclude the value of the investor’s primary residence. Dodd-Frank required the U.S. Securities and Exchange Commission (SEC) to adopt rule amendments to effect this change, which the SEC did on December 21, 2011. The rule amendments are effective February 27, 2012. You can find the final rule here.
Under the amended definition the value of an investor’s primary residence may not be included in calculating the investor’s net worth for purposes of Reg D. Likewise, debt (any mortgages and home equity loans) secured by an investor’s primary residence is ignored unless the debt exceeds the estimated fair value of the residence (an underwater mortgage), in which case excess of the mortgage debt over the fair value is included as a liability in calculating net worth. In addition, any increase in the amount of an investor’s mortgage debt within 60 days prior to the investor making the investment in question must be treated as a liability for purposes of calculating net worth (the theory being that the investor has taken value out of the residence, which is supposed to excluded, to raise cash to make the investment). This latter provision is not part of Dodd-Frank.
The amended rule does not define “primary residence” but the SEC adopting release refers to the common understanding that it is the home where the investor lives most of the time.
There is limited grandfathering for an investor’s exercise of rights to acquire securities provided (i) the right was held by the investor on July 20, 2010 (the enactment date of Dodd-Frank), (ii) the investor was an accredited investor at the time the rights were acquired, and (iii) the investor held securities of the same issuer, other than the rights, on July 21, 2010.
A capital call on a commitment made prior to July 21, 2010, is generally not subject to the amended definition. However, the definition would apply in the case of new purchases in a private fund unless the grandfathering provision applies.
Unless they have been already in response to Dodd-Frank, all subscription agreements that we use should be appropriately modified to reflect the new definition.
For more information, please contact Jeffrey Somers.
Tags: Dodd-Frank Act, proxy access, SEC
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On July 22, 2011, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit unanimously struck down Securities and Exchange Commission Rule 14a-11, also known as the Proxy Access Rule. The court vacated the Proxy Access Rule holding that the SEC failed to adequately consider the rule’s effect on efficiency, competition and capital formation as required by both the Securities Exchange Act of 1934 and the Investment Company Act of 1940.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (enacted July 2010), the SEC was authorized but not required to establish rules governing access to proxy statements. On August 25, 2010 the Proxy Access Rule was adopted by the SEC. The proposed Proxy Access Rule would have required a company, subject to proxy rules under the Securities Exchange Act of 1934, to include in its proxy materials, the name of a person or persons nominated by a qualifying shareholder or group of shareholders for election to the board of directors.
To learn more, please see the full article.
Tags: Dodd-Frank Act, Sarbanes-Oxley, whistleblower
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MBBP Attorneys Joseph Marrow and Mark Tarallo offer two articles discussing recent provisions to the Dodd-Frank Wall Street Reform and Consumer Protection Act:
- “Enhanced Whistleblower Provisions Under Dodd-Frank Act” written by Joe Marrow, discusses the expansion of protections for whistleblowers originally created under the Sarbanes-Oxley Act (SOX) under Dodd-Frank. Joe provides information on the new private right of action, the expansion of whistleblowers liability under SOX, and responses to the provisions.
- Mark Tarallo’s “Non-Mandatory Provisions of the Dodd-Frank Act as Guidance for Small Companies,” describes certain provisions of the Dodd-Frank Act that are applicable only to larger “financial services” companies but may also be adopted by all public companies who are interested in applying “best practices” for corporate governance.
For more information, please visit our resources page.
Tags: Dodd-Frank Act, investment funds
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On July 21, 2010, the Senate passed a financial reform bill called the Dodd-Frank Act. MBBP attorney Jeffrey Somers describes the new act and its impact on private investment funds in a recent client alert.
For more information on the Dodd-Frank Act and its implications, please contact Jeffrey Somers.