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Consultant or Executive Officer? SEC Brings an Action to Clarify 07/30/2014

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By: Mark Tarallo

On July 16, 2014, the United States Securities and Exchange Commission (“SEC”) brought an action against Natural Blue Resources, Inc. (“Natural Blue”), James E. Cohen (“Cohen”) and Joseph A. Corazzi (“Corazzi”)(Natural Blue, Cohen and Corazzi are referred to collectively as the “Respondents”).  The SEC is seeking a cease-and-desist order against the Respondents, alleging among other items that Cohen and Corazzi acted as the de facto executive management of Natural Blue, while failing to make any of the disclosures required of executive officers of a public company.

Natural Blue was a privately-held corporation based in Nevada that went public in August, 2009 via a reverse merger with Datameg Corporation.  In November 2009, Natural Blue entered into a consulting agreement with JEC Corp. (“JEC”) a corporation owned by Cohen’s family.  Cohen was the President of JEC, and  Corazzi was employed by JEC.  Cohen and Corazzi each had extensive disciplinary histories that would have prevented them from serving as an executive officer of Natural Blue.

From the time that Natural Blue went public in 2009 through the end of 2011, Cohen and Corazzi exercised a significant degree of control over Natural Blue through JEC.  They recommended virtually all of the directors that served on the board of Natural Blue, and almost all of the key executive positions were filled by individuals with whom they had significant preexisting business or social relationships.  Despite the fact that Natural Blue had a named CEO, Cohen and Corazzi controlled all of the key functions of Natural Blue, such as the accounting department (the CFO was an associate of Cohen’s with whom Cohen shared outside office space).  Cohen and Corazzi dealt directly with third parties and purported to enter into agreements on behalf of Natural Blue.  Despite the fact that the actions of Cohen and Corazzi did not actually generate any revenue for Natural Blue or its shareholders, they were paid significant amounts of cash and Natural Blue stock (which was sold at a profit) for their efforts.

The SEC’s action alleges among other things that the Respondents engaged in fraud by failing to accurately report the roles played by Cohen and Corazzi, and that those failures caused harm to investors.  Given the disciplinary histories of Cohen and Corazzi, it is clear why they went to the lengths that they did to hide their actual roles.  The SEC filing can be found here.

For more information on this topic, please feel free to contact Mark Tarallo.

 

SEC Chair Speaks on Corporate Governance 07/10/2014

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By: Mark Tarallo

On June 23, 2014, SEC Chair Mary Jo White spoke to the Twentieth Annual Stanford Directors’ College held at the Stanford University Rock Center for Corporate Governance.  Chair White’s remarks focused on the SEC’s view of the role of the board of directors in a corporation.

Chair White characterized her remarks as covering three topics-one attitudinal, one advisory, and one descriptive.  The “attitudinal” topic was the view that the SEC takes regarding directors as the most important “gatekeepers” of a corporation.  She noted that “it is essential for directors to establish expectations for senior management and the company as a whole, and exercise appropriate oversight to ensure that those expectations are met.  It is up to directors, along with senior management under the purview of the board, to set the all-important “tone at the top” for the entire company.”  From an advisory perspective, Chair White spoke to the obligation of the board to engage in self-reporting when they learn of any wrongdoing and working cooperatively with regulators.  She referred to prior decisions and press releases to show how self-reporting and cooperation is viewed favorably by the SEC, and called on directors to “[m]ake it clear from the outset that the board’s expectation is that any internal investigation will search for misconduct wherever and however high up it occurred; that the company will act promptly and report real-time to the Enforcement staff on any misconduct uncovered; and that the company will hold its responsible employees to account.”  Last, Chair White described the workings of the SEC’s Whistleblower program and why it is necessary for the board to take any tips or accusations seriously.  It is clear from her remarks that the SEC plans to hold boards accountable for compliance failures, and while her remarks were targeted at public reporting companies, they are instructive for private companies as well, and directors of private companies should take note of the increasing obligations to ensure compliance.

A full copy of the text of Chair White’s comments can be found here.

Please feel free to contact Mark with any questions on this topic.

SEC Commissioner Offers Guidance on Cybersecurity Issues 06/30/2014

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By: Mark Tarallo

On June 10, 2014, Commissioner Luis A. Aguilar of the United States Securities and Exchange Commission spoke at the New York Stock Exchange as part of the “Cyber Risks and the Boardroom” Conference.  As Commissioner Aguilar noted, “[c]ybersecurity has become an important topic in both the private and public sectors, and for good reason. … Indeed, according to one survey, U.S. companies experienced a 42% increase between 2011 and 2012 in the number of successful cyber-attacks they experienced per week.”  Commissioner Aguilar indicated that not only are attacks becoming more frequent, they are becoming more expensive, citing one survey that showed that the average annualized cost of cyber-crime to a sample of U.S. companies was $11.6 million per year, representing a 78% increase since 2009.   Commissioner Aguilar concluded his remarks by stating quite clearly that boards of directors bear an increasingly heavy burden when dealing with cybersecurity, as “board oversight of cyber-risk management is critical to ensuring that companies are taking adequate steps to prevent, and prepare for, the harms that can result from such attacks.”  Commissioner Aguilar laid out several steps for proactive boards to engage in, including working with management to ensure that corporate policies match up with NIST Cybersecurity Framework guidelines, creating an enterprise risk committee on the board to make sure that members are adequately educated, and preparing in advance for the “inevitable” cyber attack.  Given the SEC’s recent enhanced focus on cybersecurity issues, Commissioner Aguilar’s remarks send a clear message to directors to embrace the responsibility of addressing cyber risk and adequately preparing for attacks.

The complete transcript of Commissioner Aguilar’s remarks can be found here.

Chair Mary Jo White Discusses SEC, FAF and FASB Shared Interests at Trustees Dinner 06/23/2014

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By: Mark Tarallo

On May 20, 2014 U.S. Securities and Exchange Commission Chair Mary Jo White spoke at the Financial Accounting Foundation Trustees Dinner.  Given the audience, it is not surprising that her remarks focused on accounting issues at the SEC.  In her remarks, Chair White mentioned that the SEC is still considering the addition of International Financial Reporting Standards (“IFRS”) for domestic registrants. Although no timetable was given for when the issue would be addressed, White noted that the interests of U.S. investors would be front and center during the IFRS consideration process.  In addition, Chair White commented on the continuing efforts of the Disclosure Effectiveness Project, noting that she has directed the staff to undertake a comprehensive review of disclosure requirements under Regulation S-K and make specific recommendations for updating the requirements pursuant to a JOBS Act-mandated report on Regulation S-K that provides the staff’s recommendations for a review of corporate disclosure requirements.  She also noted that the Financial Reporting and Audit Task Force, formed in July, 2013, will continue its increased enforcement efforts and will work to look ahead to identify additional areas where financial reporting fraud may be likely to occur, while focusing on internal controls related to the areas that have already been identified as being susceptible to financial reporting fraud.

The complete transcript of Chair White’s remarks is available here.

 

SEC Continues to Adapt to Use of Social Media – Companies not Responsible for Re-Tweets 05/13/2014

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Corporate Attorney Daniele Ouellette LevyBy: Daniele Ouellette Levy

As we have discussed in prior posts, the U.S. Securities and Exchange Commission (SEC) has been considering how the use of the social media by public companies fits within the existing regulatory framework.  The SEC recently issued additional guidance regarding the use of social media by public companies.  In its guidance, appearing as C&DIs 110.02 and 232.16, the SEC clarified that when third parties re-tweet or otherwise re-transmit a social media post originated by a public company, the company is not responsible for ensuring that the re-transmission complies with securities laws.  Under the SEC’s guidance, a re-tweet or re-transmission is not attributed to the company provided that:

  • the company has no involvement with the third party’s re-transmission of the post;
  • the third party is not acting on behalf of the company; and
  • the third party is not a participant in an offering of company securities.

We believe this new guidance provides another step toward permitting public companies to use social media to communicate with stockholders and the investment community.  This trend toward social media as a preferred platform for communicating with stockholders and potential investors underlines the need for public companies to adopt a comprehensive social media policy.

For more information on this topic please contact Daniele Levy.

U.S. Court of Appeals Narrows Application of Conflict Minerals Rules 05/01/2014

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By: Mark Tarallo

On April 14, 2014, the U.S. Court of Appeals for the D.C. Circuit struck down a portion of the “conflict minerals” rules promulgated by the Securities and Exchange Commission pursuant to the Dodd-Frank Act.  In National Association of Manufacturers v. Securities and Exchange Commission, the court concluded that the provision of the conflict minerals rules that required an issuer to state on its website that its products may incorporate conflict minerals was unconstitutional on free speech grounds.  In a 2-1 decision, the court struck this requirement, while leaving the other conflict minerals reporting obligations in place.

In an effort to combat the ongoing abuses and exploitation in the Democratic Republic of Congo and other African countries, Congress incorporated into the Dodd-Frank Act a provision that the SEC issue regulations requiring certain reporting companies to investigate and disclose the source of any “conflict minerals” such as gold, tantalum and tungsten used in their products.  The goal of the rule is to identify those publicly-traded companies that use conflict minerals in their products and to pressure those companies to find legal sources for those materials.  The final rule promulgated by the SEC required an issuer to undertake a three step process:  i) determine if conflict minerals are used in the issuer’s products, and if so,  ii) undertake a “reasonable country of origin” inquiry to determine the source of those conflict minerals, and if the issuer determines that the conflict minerals may have originated in certain countries,  iii) “exercise due diligence on the source and chain of custody of its conflict minerals.”

Once an issuer determines (or has reason to believe) that the conflict minerals used in its products originated in covered countries, the issuer has an obligation to file a Conflict Minerals Report on Form SD, including a required third-party audit.  In addition, in certain circumstances, issuers were required to post a notice on their website that their products “have not been found to be DRC conflict-free.”  The recent ruling struck down just this last requirement, while leaving much of the remaining framework (including the obligations to investigate sources and file a Form SD) in place.  Issuers should continue to prepare to File Form SD, as it is difficult to predict that any further action will take place prior to the upcoming May 31 deadline.

The SEC has indicated that it is reviewing the ruling.

For more information on this topic, please feel free to contact Mark Tarallo.

Supreme Court Expands Pool of Claimants in Whistleblower Case 03/07/2014

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Corporate Attorney Joseph MarrowBy: Joseph Marrow

On March 4, 2014, the United States Supreme Court issued its decision in a much anticipated whistleblower retaliation case. In its decision, Lawson v. FMR, LLC, No. 12-3, the Supreme Court expanded the coverage of an anti-retaliation claim under Sarbanes-Oxley Act of 2002 (SOX) to an employee of a privately-held contractor (the contractor provided investment management services to Fidelity mutual funds). Pursuant to the Dodd-Frank Act, the Securities and Exchange Commission 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. The First Circuit had ruled that the anti-retaliation provision only applies to employees of public companies. In a 6 to 3 vote, the Supreme Court reversed the decision of the First Circuit in favor of expanding the coverage of the whistleblower statute to cover employees of a public company’s private contractors and subcontractors.

In Lawson v. FMR, the Supreme Court interpreted a provision of SOX, namely 18 U.S.C. Section 1514A protecting whistleblowers, which provides in part: “No [public] company …, or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of [whistleblowing or other protected activity].” The Supreme Court was faced with the question whether the protected class was simply limited to employees of the public company itself or would include “employees of privately held contractors and subcontractors – for example, investment advisers, law firms, accounting enterprises – who perform work for the public company?” Noting that SOX was enacted following the Enron scandal and in part in response to that scandal, the Supreme Court interpreted the statute as a response to a “concern about contractor conduct of the kind that contributed to Enron’s collapse.” As such, the Supreme Court held that a broader interpretation of the statute (to capture contractors that perform work for public companies) was warranted.

The implications of the Supreme Court’s decision are far reaching. The Supreme Court’s holding significantly expands the pool of potential whistleblower claimants. It remains to be seen whether the parade of horribles predicted by the dissent – resulting in a multitude of spurious claims – will come to fruition.

For more information on this topic please contact Joe Marrow.

SEC’s No Action Letter Provides Relief to M&A Brokers 03/03/2014

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Corporate Attorney Joseph MarrowBy: Joseph Marrow

On January 31, 2014, the Securities and Exchange Commission (“SEC”) Division of Trading and Markets (the “Division”) issued a no action letter (the “No Action Letter”) providing relief to M&A Brokers (as defined below), in certain stated circumstances, engaged in the purchase or sale of privately-held companies from compliance with the registration requirements of Section 15(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). By reason of the no action relief, M&A Brokers may be entitled to receive transaction-based compensation without having to register as a broker-dealer under Section 15(a) of the Exchange Act. In issuing the No Action Letter, the SEC set a number of conditions to be followed. Please see the full post for more information including the full list of conditions.

For more information on this topic, please contact Joe.

SEC Releases Study of Public Company Disclosure Requirements 02/07/2014

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Corporate Attorney Daniele Ouellette LevyBy: Daniele Ouellette Levy

The JOBS Act, which became law in April 2012, requires the SEC to conduct a review of the disclosure requirements in Reg. S-K in order to identify how the rules could be updated to modernize and simplify the registration process for emerging growth companies and reduce related costs. Reg. S-K is the primary regulation under the federal securities laws detailing the disclosure requirements applicable to public companies.

At the end of December 2013, the SEC released the results of its review of Reg. S-K.  In the study the SEC noted it had not conducted a comprehensive review of Reg. S-K since 1996 and stated that a reevaluation of the disclosure requirements was warranted due to significant changes in the manner many public companies operate their businesses and world events which have altered the regulatory framework for public companies. In such reevaluation the SEC would aim to ensure existing and potential investors, as well as the marketplace as a whole, receive meaningful information upon which to base investment decisions. In addition, the SEC stated that its regulatory framework must ensure that the disclosure requirements focus on information which is material and are flexible enough to adapt to dynamic circumstances.

This study is a starting point. In its conclusion, the SEC proposes undertaking a comprehensive plan to systematically review the disclosure requirements in all of the SEC’s rules and forms concerning the presentation and delivery of information to investors and the marketplace, not just Reg. S-K. We expect more to come on this issue.

For more information on public company disclosure requirements please contact Daniele Ouellette Levy.

Transitioning to the 2013 COSO Framework 01/23/2014

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Corporate Attorney Hillary PetersonBy: Hillary Peterson

In May 2013, the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) published an update to it’s Internal Controls – Integrated Framework, originally published in 1992. The 1992 framework has been adopted by the majority of publicly-traded companies in the United States as a way to design, implement and assess the effectiveness of the internal controls of the company. The 2013 framework has been updated in a number of ways to address the evolving issues facing companies today.

In a recent meeting of the Securities and Exchange Commission (“SEC”) Regulations Committee, the SEC staff indicated that it expects U.S. publicly-traded companies to review their internal controls and to update and revise those controls in order to comply with the newly updated COSO framework. While the new framework is not due to supersede the 1992 framework until December 15, 2014, the 2013 framework was issued in May 2013 in order to allow companies time to review and update their internal controls in advance of that date. The SEC staff has stated that, especially after the December 15, 2014 transition date, companies that continue to rely on the 1992 framework will likely receive questions from the staff about whether or not their internal controls meet the SEC standard.

For more information on the COSO Framwork, please feel free to contact Hillary Peterson.

The “Secret” IPO: Confidential filings under the JOBS Act 01/07/2014

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Corporate Attorney Hillary PetersonBy: Hillary Peterson

On September 12, 2013 Twitter announced (appropriately, in a tweet) that it had “confidentially” submitted an S-1 to the Securities and Exchange Commission (the “SEC”) in connection with a planned Initial Public Offering (“IPO”). In the immediate aftermath of the announcement, there was significant confusion as to what a confidential filing meant and how it differed from the traditional IPO filing process.

One of the goals of the Jumpstart Our Business Startups Act (commonly known as the “JOBS Act”) was to ease the burden on smaller, growing companies who wish to raise money from the public. One way in which this goal is achieved is by allowing these “emerging growth companies,” defined under the JOBS Act as a company with total gross revenue of less than $1 billion during the most recent fiscal year, to negotiate confidentially with the SEC over the substance of their S-1 filing, away from the public spotlight. Once the negotiation and drafting process is complete, a company’s final S-1 must be made available to the public 21 days before the road show commences and the company begins speaking to investors.

There are a number of benefits for a company which files confidentially with the SEC. Perhaps most significantly, confidential filing allows a company greater control over the timing of disclosure of its intention to go public. Through the confidential filing process, companies are able to test the waters and receive feedback from the SEC without having to publicly disclose essential information related to the company’s financials and other corporate information. Similarly, in the event that a company chooses not to move forward with the IPO process, filing confidentially shields that company from the damage to its reputation that would result from an abandoned offering.

According to one study, in the first year of the JOBS Act, 65% of companies that eventually filed a public registration statement had previously submitted a confidential statement with the SEC. While Twitter may be the most high-profile company yet to avail itself of the new process of confidential filing, every indication is that many companies will continue to use confidential filings as a way to begin the IPO process.

For more information on this topic, please feel free to contact Hillary.

Supreme Court Review of Whistleblower Case 12/17/2013

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Corporate Attorney Joseph MarrowBy: Joseph Marrow

Recently, the United States Supreme Court heard oral argument in a whistleblower retaliation case. In Lawson v. FMR, LLC, the Supreme Court is faced with the question whether to expand the coverage of an anti-retaliation claim under Sarbanes-Oxley to an employee of a privately-held contractor (which provides investment management services to Fidelity mutual funds), a subsidiary of a public company. Pursuant to the Dodd-Frank Act, the Securities and Exchange Commission 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. In the case on appeal to the Supreme Court, the First Circuit had ruled that the anti-retaliation provision only applies to employees of public companies. The Supreme Court must decide whether to expand the definition of the class protected by the statute to employees of privately-held companies. The decision is expected in the Spring of 2014.

For more information on this topic, please contact Joe.

SEC Encourages Firms to Review Business Continuity Planning 12/10/2013

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Corporate Attorney Daniele Ouellette LevyBy: Daniele Ouellette Levy

A year after Hurricane Sandy caused significant damage along the northeast coast, the SEC, in conjunction with FINRA and the CFTC, has issued guidance encouraging registered investment advisers and securities broker-dealers to review their business continuity plans and consider certain best practices identified in the report. These best practices were compiled by the agencies after discussions with firms impacted by Hurricane Sandy.

The SEC is encouraging firms to consider the following recommendations in reviewing their business continuity planning:

  • Establish redundant services in anticipation of the widespread lack of basic resources, such as telecommunications, transportation, electricity, office space, fuel and water;
  • Review the availability and structure of remote access for employees;
  • Assess the availability and accessibility of alternative locations, considering geographic diversity and the ability of staff to travel to such alternative sites;
  • Analyze vendor relationships and the business continuity plans of key vendors;
  • Provide detailed plans for communicating with customers and staff during any business disruption;
  • Plan for the completion of time-sensitive regulatory filings in the event of a business disruption; and
  • Conduct periodic testing of the firm’s business continuity plan and related training on at least an annual basis.

A copy of the guidance issued by the SEC may be found here.

For more information on this topic, please contact Daniele.

Relief in Sight for M&A Brokers in Smaller Deals? 12/06/2013

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Corporate Attorney Carl BarnesBy: Carl Barnes

Since the Supreme Court’s Landreth Timber decision in 1985, the sale of 100% of a company’s stock has been considered a securities transaction, regulated under the federal securities laws, even though the sale of 100% of the same company’s assets is not. Intermediaries who facilitate M&A deals for privately held companies must therefore be registered as broker-dealers under the Securities Exchange Act of 1934 and must be members of FINRA – or limit themselves to working only on asset deals. The initial and ongoing costs of registering as a broker-dealer with the SEC can be significant and it clearly isn’t in the best interests of clients for their intermediaries to try to force all transactions to be structured as asset deals. Consequently, although many intermediaries register, others skirt the law and hope for the best. Still others don’t even realize they are subject to regulation.

But wait – a bill currently before the House of Representatives may provide relief. H.R. 2274, the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2013, would provide a simplified notice-filing registration procedure for brokers who only facilitate M&A transactions involving the sale of private companies with earnings (EBITDA) of less than $25 million and revenue of less than $250 million. Many registrations would be effective upon filing.

After hearings in October, the House Financial Services Committee marked up the bill on November 14. H.R. 2274 appears to enjoy bi-partisan support and even the North American Securities Administrators Association likes it (read its testimony here) – and NASAA generally isn’t in favor of Washington DC’s recent moves to ease securities regulations. If H.R. 2274 becomes law, it will simplify life and reduce costs for many M&A brokers (costs that would otherwise be passed on to their clients), facilitate more deals and maybe even encourage registration and regulatory compliance by M&A brokers.

And if that happens, everyone wins.

For more information on this topic, please feel free to contact Carl.

Joe Martinez to Speak at BBA Seminar on Crowdfunding 12/04/2013

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Corporate Attorney Joseph MartinezOn December 10 MBBP Corporate Attorney Joseph Martinez will be speaking at a Boston Bar Association seminar titled SEC’s Proposed Rules for Crowdfunding. In October the SEC proposed rules to implement Title III of the Jumpstart Our Business Startups (JOBS) Act which introduced a new “crowdfunding” exemption from registration of securities. The rules, if finalized, would make it possible for most privately-held companies to raise capital by selling securities to the public without registering with the SEC. In this program, Joe will review some of the key provisions in the proposed rules and discuss the challenges they pose for crowdfunding.

For more information or to register, please visit the event page.

Second Whistleblower Award Under Dodd-Frank 11/25/2013

Posted by Morse, Barnes-Brown Pendleton in Corporate, Legal Developments.
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Corporate Attorney Joseph MarrowBy: 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.

Are Reg FD Enforcements Back? 11/20/2013

Posted by Morse, Barnes-Brown Pendleton in Corporate, Legal Developments.
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By: Mark J. Tarallo

In the late 1990’s, market regulators grew concerned that public companies (and their representatives) were too often engaging in “selective disclosure,” and that certain analysts and institutional investors were getting access to material information that was not available to most institutional investors (such as quarterly analyst calls made by the issuers). As a result, the U.S. Securities and Exchange Commission (“SEC”) adopted Regulation Fair Disclosure (“Reg FD”), in August 2000, in an effort to level the playing field. Reg FD required that all material information be disclosed publicly, so that all investors would get access to the information at the same time, and that if any material information was inadvertently disclosed in a private fashion that it be publicly reported within 24 hours. Many commentators regard Reg FD as having done more to foster transparency to investors than any other regulation adopted by the SEC.

The SEC is charged with enforcing Reg FD, and from 2002-2005, the SEC brought a number of enforcement actions against companies and individuals alleging violations of Reg FD. After 2005 however, the SEC did not bring any more enforcement actions under Reg FD until 2009-2010, when it brought actions against several major companies, including Office Depot.

After the Office Depot action in 2010, the SEC was relatively silent on Reg FD until this past September, when it announced an action against Lawrence D. Polizzotto, the former head of investor relations for First Solar Inc. According to the SEC’s order, Polizzotto violated Regulation FD during one-on-one phone conversations with approximately 20 sell-side analysts and institutional investors on Sept. 21, 2011, when he indicated that the company was unlikely to receive a much-anticipated loan guarantee from the U.S. Department of Energy. Polizzotto agreed to pay $50,000 to settle the SEC’s charges.

While a single case in two years may not signify that Reg FD enforcement is back on the SEC’s front burner, it certainly does serve as a reminder that issuers must remain vigilant in enforcing Reg FD compliance. All issuers subject to Reg FD should have a compliance program in place, and should regularly review the program with all company officers likely to be in possession of material, non-public information. The SEC noted that it did not bring an enforcement action against First Solar due to the company’s extraordinary cooperation with the investigation, and because First Solar generally cultivated an environment of compliance through the use of a disclosure committee that focused on compliance with Reg FD. First Solar quickly self-reported the misconduct to the SEC once it learned of it, and concurrent with the SEC’s investigation, First Solar undertook remedial measures to address the improper conduct, by (in part) conducting additional Reg FD training for employees responsible for public disclosure.

For more information on this topic, please feel free to contact Mark.

SEC Proposal – Pay Ratio Disclosure Rules 11/15/2013

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Corporate Attorney Joseph MarrowBy: Joseph Marrow

On September 18, 2013, the U.S. Securities and Exchange Commission (SEC) issued proposed rules that would require companies to disclose the ratio between the compensation of a reporting company’s compensation paid to its chief executive officer (CEO) to the median compensation paid to all its employees. As such, the proposed rule would require disclosure of the following information:

  • the total annual compensation paid to the reporting company’s CEO;
  • the median of the total annual compensation of all employees of the registrant, except for the registrant’s CEO; and
  • the ratio of the median to the total annual compensation paid to the CEO.

Those who support the proposed rule argue that the pay ratio disclosure will provide valuable information to investors (and prospective investors) by providing additional information regarding reporting company compensation practices. Opponents question the usefulness of the information and the difficulty of applying the rules to companies, particularly those with global workforces and those with many classifications of workers. The rules were adopted pursuant to requirements of Section 953(b) of the Dodd-Frank Act. Comments to the rules are due no later than December 2, 2013. It is expected that the SEC will issue final rules in 2014.

Please note that all public companies are not required to make the pay ratio disclosure. The proposed rules specifically exempt emerging growth companies (which include issuers with less than $1 billion in gross revenue in its most recently completed fiscal year), smaller reporting companies (companies with less than $75 million in public float or less than $50 million in revenues, if they have no public float) and foreign private issuers. The proposed rules require that the information be disclosed in the registrant’s annual report on Form 10-K, registration statements filed under the Securities Act of 1933 and the Securities and Exchange Act of 1934 and proxy and information statements.

Please feel free to contact a member of our public company practice group with any questions regarding the proposed rules or their implications on your company.

SEC Proposes Standards for Public Company Diversity Policies 11/12/2013

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Corporate Attorney Daniele Ouellette LevyBy: Daniele Ouellette Levy

The SEC, in coordination with five other federal agencies, recently proposed new standards for assessing the diversity policies of public companies.

Section 342 of the Dodd Frank Act directed the SEC, and certain other federal agencies, to establish an Office of Minority and Women Inclusion. This office is responsible for developing standards by which the diversity policies and practices of the entities regulated by the SEC may be assessed. In its proposal, the SEC states that an assessment of the diversity policies and practices of a public company may include a review of the following factors:

  • organizational commitment to diversity and inclusion;
  • workforce profile and employment practices;
  • procurement and business practices – supplier diversity; and
  • practices to promote transparency of organizational diversity and inclusion.

The proposal provides that the SEC will tailor its assessments to take into consideration the public company’s size and other characteristics – such as total assets, number of employees, governance structure, revenues, number of members and/or customers, contract volume, geographic location, and community characteristics. The SEC has also stated that the assessment of diversity policies and practices undertaken by the SEC will not be a formal examination, but rather will include a self-assessment by the public company, voluntary disclosure to the SEC and public disclosure via the company’s website.

The SEC has requested comments on the proposal which are due by December 24, 2013.

For more information on this topic, please feel free to contact Daniele.

“Conflict Minerals” Reporting is Coming – and Smaller Reporting Companies are Not Exempt 11/04/2013

Posted by Morse, Barnes-Brown Pendleton in Corporate.
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Corporate Attorney Carl BarnesBy: 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.

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