Corporate

Modernizing and Simplifying Disclosure with the FAST Act Mandate

Low angle side view of carBy Blake Baron

Under the FAST Act mandate, the U.S. Securities and Exchange Commission (SEC) voted on October 11, 2017 to propose amendments to Regulation S-K and related rules and forms aimed at modernizing and simplifying the current disclosure requirements for investment companies, public companies, and investment advisers.

What are the Proposed Amendments?

If adopted, the amendments would:

  • Revise rules or forms to update, streamline or otherwise improve the Commission’s disclosure framework by eliminating the risk factor examples listed in the disclosure requirement and revising the description of property requirement to emphasize the materiality threshold;
  • Update rules to account for developments since their adoption or last amendment by eliminating certain requirements for undertakings in registration statements;
  • Simplify disclosure or the disclosure process, including proposed changes to exhibit filing requirements and the related process for confidential treatment requests and changes to Management’s Discussion and Analysis that would allow for flexibility in discussing historical periods; and
  • Incorporate technology to improve access to information by requiring data tagging for items on the cover page of certain filings and the use of hyperlinks for information that is incorporated by reference and available on EDGAR.

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SEC Cyber Unit & Task Force

Security.By Melanie Figueroa

With increased attention to how securities laws may apply to digital token sales and the disruptive nature of increased cyber threats to the investor community, the Securities Exchange Commission (“SEC”) last week announced two new initiatives.  The SEC’s press release, found here, outlined the creation of the Cyber Unit (“Unit”) and the Retail Strategy Task Force (“RSTF”).

According to the press release the Unit will focus the Enforcement Division’s substantial cyber-related expertise on targeting cyber-related misconduct, including: (more…)

Walking the North Korean Tightrope

Sanctions against North Korea. ConceptBy Susan Kohn Ross

On September 21, 2017, President Trump issued an Executive Order (yet to be numbered) (“EO”) imposing additional sanctions on North Korea. It took effect the next day. The general press has quoted Treasury Secretary Mnuchin as stating: “Foreign financial institutions are now on notice that going forward they can choose to do business with the United States or North Korea, but not both.” These latest changes raise the specter for even more caution on the part of companies conducting international business. The question every CFO at every company should ask is – is our due diligence program as good as it needs to be? If not, your funds could get seized and dealing with the Dept. of Justice in these types of cases can be quite challenging.   The government often has information the private sector does not possess and, if your due diligence program is not deemed sufficient, you stand little chance of getting those funds released. Given the current climate, you can bet getting funds released related to the North Korea sanctions is going to be even more difficult!

The new Executive Order is broadly worded to include any person who is determined: (more…)

New Partnership Audit Regime and Partnership M&A Transactions

business man financial inspector and secretary making report, calculating or checking balance. Internal Revenue Service inspector checking document. Audit concept.By Charles Kolstad and Robin C. Gilden

Background:

Congress has changed the way partnership[1] audits will be conducted in the future. Beginning with tax years starting on or after January 1, 2018, audits will still be done at the partnership level; however unlike current practice where adjustments and additional tax payments are made at the partner level, under the new rules the adjustments and additional tax payments will in many cases now be done at the partnership level with the payments made in the year the tax audit is finalized. The changes were made to make it easier for the IRS to audit partnerships.

The new rules raise a number of unanswered questions in the M&A arena all of which require a significant rethinking of the way partnership M&A transactions are structured and documented. There are likely to be significant differences in the responses to the Open Issues set out below between a transaction involving a LLC, which would survive as a separate legal entity after the acquisition, and a limited partnership which would terminate and not exist as a separate legal entity after the acquisition as it would only have one member. (more…)

Effects of the Shortened T+2 Settlement Cycle

Clock and calendarBy Blake Baron

In March 2017, the United States Securities and Exchange Commission (the SEC) adopted amended Rule 15c6-1(a) which shortens the standard trade settlement cycle for most broker-dealer securities transactions from three business days (known as T+3) to two business days, (known as T+2). On Tuesday, September 5, 2017, the amended rule went into effect.

What Does the Change Apply To?

The new T+2 settlement cycle applies to the same securities transactions currently covered under the T+3 cycle, which the SEC states includes “transactions for stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds, and limited partnerships that trade on an exchange.”

However, the new cycle does not apply to certain categories of securities, such as securities exempt from registration with the SEC due to being backed by a government or governmental institution. (more…)

Nasdaq’s Change of Control Rule – Does It Apply in a Public Offering?

Tax inspector investigating financial documents through magnifyiBy Kevin Friedmann

Are you concerned about whether Nasdaq’s change of control rule will limit the size of  your public offering? According to the Nasdaq staff, you don’t need to worry about this, as long as you have a bona fide public offering.

Nasdaq Listing Rule 5635(b) provides that shareholder approval is required prior to the issuance of securities when the issuance or potential issuance will result in a change of control of the company. According to Nasdaq, a change of control would occur when, as a result of the issuance, an investor or a group would own, or have the right to acquire, 20% or more of the outstanding shares of common stock or voting power and such ownership or voting power would be the largest ownership position (the “Change of Control Rule”). See Nasdaq FAQ ID#195.

Nasdaq Listing Rule 5635(d) provides that shareholder approval is required for the issuance of common stock (or securities convertible into or exercisable for common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock (the “Private Placement Rule”). Under the Private Placement Rule, however, shareholder approval is not required for a “public offering.” (more…)

Changes From the SEC: Confidentiality is Key

IPO (Initial public offering)By Melanie Figueroa and Blake Baron

In a recent effort to foster increased public offering activity, the U.S. Securities and Exchange Commission (SEC) announced on June 29, 2017 that it will permit all companies to submit voluntary draft registration statements relating to initial public offerings (IPOs), certain follow-on offerings and national securities exchange listings for non-public review. This process will be available for nearly all offerings made in the first year after a company has entered the public reporting system. This benefit will take effect on July 10, 2017.

So, why is this an important change? (more…)

If You SEC Something, Say Something

Cybersecurity of network of connected devices and personal data securityBy Melanie Figueroa and Susan Kohn Ross

Just about every survey of General Counsels reveals the same #1 culprit of sleepless nights….. a cybersecurity hack. If you run a business in today’s global environment, it is hard to escape the fundamental reality that it is more than likely a matter of when, not if, you will face a cyber threat. And depending on the nature of your business, that threat can have a wide range of implications. If you are a public company, there is an additional issue to consider… what do you have to disclose to your investors and shareholders?

Being prepared for a hack with a comprehensive written information security plan and an equally robust incident response plan is just one component to be considered if you are a public company. You must also have a plan to meet your reporting and disclosure obligations to a variety of governmental bodies. While measuring your response needs in the wake of a hack, and determining if there are state, federal or international laws and regulations that require reporting, you must also pay close attention to possible disclosure obligations in your SEC filings. Specifically, if you have tripped a disclosure to a state attorney general or your company’s customers, then it is possible you may also have a disclosure obligation to your shareholders. (more…)

Supreme Limits:  Kokesh v. SEC Imposes a 5-Year Limit on Disgorgement Claims

By John Durrant

On June 5, 2017, the U.S. Supreme Court unanimously ruled that claims by the Securities and Exchange Commission seeking disgorgement must be commenced within five years of accrual.  The ruling, which resolved a circuit split, represents a very important curtailment of the SEC’s enforcement authority.  The SEC had previously argued that there was effectively no limitations period that applied to disgorgement and accordingly sought to disgorge purportedly ill-gotten gains going back, in some cases, decades.  Justice Sotomayor’s lucid opinion categorically rejected the SEC’s position.  Potentially more disconcerting for the SEC, language in the decision suggests the Court may look at further limitations on the judicially created disgorgement remedy in the future.

The sole question posed in Kokesh v. SEC, case number 16-529, 581 U.S. ___ (2017), was whether 28 U.S.C. § 2462 applied to claims by the SEC for disgorgement.  Section 2462 sets forth a 5-year statute of limitations for “an action, suit or proceeding for the enforcement of any civil fine, penalty or forfeiture” brought by the Government.  The SEC argued that its claims for disgorgement did not fit this definition – that a disgorging defendant was merely giving up that to which he or she was not entitled and that disgorgement was an “equitable remedy” not a “penalty.”  The Court rejected this argument, holding that disgorgement “bears all the hallmarks of a penalty” (i.e., a Government-imposed “punishment”) in two regards:  (i) it seeks to redress a wrong to the public (not an individual); and (ii) it seeks to punish wrongdoers and deter similar wrongdoing by others. (more…)

Data Breaches: An Employer’s Duty to Protect Employees’ Personal Information

By Aaron Wais

Recently, there has been much discussion about the Superior Court of Pennsylvania’s ruling in Dittman v. UPMC, which affirmed a lower court’s order dismissing an employee class action against their employer over a data breach.  While this was a significant victory for employers, non-Pennsylvania employers should temper their enthusiasm.  As one recent federal court decision in California makes clear, the reasoning of Dittman may not extend far beyond, if at all, the borders of Pennsylvania.  Moreover, regardless of their outcomes, both cases also reinforce the need for employers to maintain legally compliant, written policies for safeguarding private information and responding to data breaches.

In Dittman, a data breach resulted in the theft of the personal information (e.g., names, birth dates, social security numbers, banking information) of approximately 62,000 UMPC current and former employees.  The information was used to file fraudulent tax returns and steal tax refunds from certain employees.

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