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SEC Staff Provides New Guidance Regarding the Rule 15a-6 Registration Exemption for Foreign Broker-Dealers
[Editor's Note: This post is a Latham & Watkins Client Advisory. The Network has further coverage in another post.]
On March 21, 2013, the Staff of the Division of Trading and Markets of the US Securities and Exchange Commission published guidance in the form of Frequently Asked Questions on Rule 15a-6 under the Securities Exchange Act of 1934.
The FAQs resulted from the efforts of a Task Force assembled by the Trading and Markets Subcommittee of the American Bar Association to discuss and seek clarification from the Staff with respect to certain recurring issues regarding Rule 15a-6. This clarification was requested in the form of published FAQs to provide greater transparency to the industry and to resolve certain inconsistencies created by, among other things, Staff turnover and general confusion by the industry and other regulators as to the proper application of the Rule’s rather complex provisions to a marketplace that has become markedly more global and technologically advanced in the nearly 25 years since the Rule’s adoption.
In the FAQs, the Staff affirms the general applicability of certain previously issued interpretive guidance and addresses certain aspects of the operation of Rule 15a-6, primarily with respect to issues concerning solicitation, the dissemination of research reports, recordkeeping requirements and chaperoning arrangements between foreign broker-dealers and SEC-registered broker-dealers. Although necessarily limited in scope, the FAQs provide much welcome guidance at a time when cross-border transactions have become an integral part of the securities markets.
Background
Rule 15a-6 permits foreign broker-dealers to conduct certain limited activities in the United States and with US persons without having to register as a broker or dealer under the Exchange Act. Under Rule 15a-6, foreign broker-dealers may (i) effect “unsolicited” transactions with any person; (ii) solicit and effect securities transactions with SEC-registered broker-dealers, US banks acting in compliance with certain exceptions from the definitions of “broker” and “dealer”, certain supranational organizations, foreign persons temporarily present in the United States, US citizens resident abroad and foreign branches and agencies of US persons; and (iii) subject to a number of conditions, provide research to and effect resulting securities transactions with certain types of large institutional investors. Rule 15a-6 also provides that a foreign broker-dealer may engage in a broader scope of activities, including soliciting and entering into transactions with specified categories of institutional investors, with the assistance or intermediation of an SEC registered broker-dealer (the establishment of such an arrangement is typically referred to as a “chaperoning arrangement” and the SEC-registered broker-dealer is often referred to as the “chaperoning broker-dealer”).
To read the rest of this Client Advisory, please click here and search the Advisory number “1495.”
SEC Reminds Private Funds of Broker-Dealer Registration Requirements
[Editor’s Note: The following is an Arnold & Porter LLP Client Advisory, written by Robert E. Holton, Lily J. Lu, D. Grant Vingoe, and Lauren R. Bittman.]
SEC official reminds private funds, including contacts private equity funds, that certain fund-raising and marketing activities and fees for “investment banking activities” require broker-dealer registration.
On April 5, 2013, David Blass, Chief Counsel of the Division of Trading and Markets of the Securities and Exchange Commission (SEC), spoke before the Trading and Markets Subcommittee of the American Bar Association on broker-dealer registration issues that arise in the private funds context. In his remarks, Mr. Blass warned that acting as an unregistered broker-dealer is a violation of the Securities Exchange Act of 1934, as amended (the Exchange Act), and can have serious consequences, including sanctions by the SEC and rescission rights, even when no other wrong-doing is found. Mr. Blass also noted that the SEC staff has increased its attention to the issue of broker-dealer registration, and he reminded the audience that compliance by private fund advisers with the requirements of the Investment Advisers Act of 1940, as amended, is not enough. In light of the significant consequences of acting as an unregistered broker-dealer and the SEC staff’s increased attention to this issue and the private fund space in general, private fund advisers should review their fund-raising and marketing activities, policies and procedures and contracts and arrangements with portfolio companies and solicitors to ensure compliance.
Click here to read the entire Arnold & Porter Advisory.
Using the Web to Match Private Companies and Potential Investors: SEC No Action Letters Open a Door, but Questions Remain
[Editor's Note: The following post is a Goodwin Proctor Alert, which relays regulatory and legislative developments.]
In a no action letter dated March 26, 2013 (the “FC Letter”), the staff of the U.S. Securities and Exchange Commission (the “SEC”) indicated that they would not recommend action against the operators of the FundersClub website (“FundersClub”) for failing to register as a broker/dealer under the U.S. Securities Exchange Act of 1934 (the “Exchange Act). Two days later, a similar letter (the “AL Letter”) was issued to the operators of the AngelList website (“AngelList”)
The Letters may remove one of the most significant obstacles to the development of a broad-scale, online business in which accredited investors are able to select and invest in private companies. However, the Letters are based upon a number of representations made by FundersClub and AngelList that may be difficult to defend or apply in practice. They also leave unaddressed a number of related legal issues. Thus, the Letters may represent only the beginning of a process in which entrepreneurs, investment managers, private companies, the Staff, the SEC and others explore and develop the rules and practices under which such a business may be operated.
This Client Alert briefly describes certain key issues and conclusions associated with the Letters and highlights some of the issues and risks that remain.
Click here to read the entire article.
[The Alert concludes that t]he Letters may be a key milestone in the development of a broad-based marketplace in which Web-based efficiencies are applied to matching (i) private companies seeking capital with (ii) accredited investors willing to provide it. Nevertheless, important open issues remain. In particular, the representations made by FundersClub and AngelList in obtaining the Letters may prove difficult to defend or apply in practice. Moreover, key questions (e.g., regarding general solicitation and the procedures by which investors may be verified as “accredited”) await further guidance from the SEC. Finally, other parties such as state regulators and various self-regulatory organizations have not yet weighed-in and may have a material impact.
Firm Advice: Dodd-Frank Progress Report, April 2013
[Editor's note: The following post is from Davis Polk's April 2013 Dodd-Frank Progress Report, generated using the Davis Polk Regulatory Tracker.]
Social Media and the SEC’s Disclosure Regulations: Netflix
According to Netflix CEO Reed Hastings’ Facebook post in July 2012, “Netflix[‘s] monthly viewing exceeded 1 billion hours for the first time ever in June.” This 15-word sentence might involve Netflix in a lengthy dispute with the SEC, which believes that the posting may be in violation of the SEC’s Regulation FD. The regulation requires public entities to make full and fair public disclosure of material non-public information. Though it is unclear whether disclosing company information through social media is a violation of SEC regulations, Hastings has implied that the SEC intended such announcements to be made through a press release or a regulatory filing.
The SEC notified Hastings and Netflix of the violation through a Wells Notice. A Wells Notice indicates that a securities regulator has concluded an investigation, found infractions, and will recommend enforcement action of either a cease-and-desist action and/or a civil injunction against Netflix and Hastings. The notice gives the respondent the opportunity to explain why such an action is not needed.
Hastings has responded that he does not believe the post revealed material information. However, analysts have pointed out that Netflix’s share price increased 13 percent after the posting. Hastings also wrote that posting to his Facebook page, where many of his 200,000+ friends who are reporters can see the posting, is public disclosure.
The broader question, however, is to what extent can public companies release information through social networks without violating SEC regulations? There is no clear answer, but the SEC’s response to Netflix may give an indication of how the agency will regulate social media.
Supreme Court Refuses to Extend Statute of Limitations for SEC Fraud Actions
On February 27, 2013 the Supreme Court handed down a unanimous decision holding that the Securities and Exchange Commission (“SEC”) may not invoke the “discovery rule” when bringing fraud charges under the Investment Advisors Act. 15 U.S.C. §§ 80b-6(1), (2). The “discovery rule,” so often extended to plaintiffs in private actions, triggers the statute of limitations at the time fraud is discovered by the plaintiff. The “standard rule,” on the other hand, triggers the statute of limitations when the alleged illegal acts occurred.
In the Supreme Court’s decision in Gabelli v. SEC, the Court chose not to extend the plaintiff-friendly discovery rule to the SEC. The reasoning was based on the asymmetries between the discovery powers of private plaintiffs and the nation’s securities regulation agency. The Court specified that the federal government had powerful discovery tools, such as the power to “subpoena data, use whistleblowers and force settlements” and that this should ensure “timely action.” Moreover, the Court noted, “[T]he SEC’s very purpose is to root [fraud] out.” The Court rested the distinction on the equitable nature of the discovery rule: the SEC’s mission of discovering and prosecuting fraud, coupled with its powerful enforcement tools, “[are] a far cry from the defrauded victim the discovery rule evolved to protect.” In the Court’s view, the SEC did not need the discovery rule.
The Supreme Court’s decision led to mixed reactions. The result in Gabelli came with the approval of the Cato institute, which filed an amicus brief for the defendants. In contrast, many investors were disappointed, concluding that those who contributed to the financial crisis will continue to go without sanction. Members of the “Occupy the SEC” movement (whose amicus brief can be found here) called the decision a “boon for fraudsters.”
The Network first covered this story the day after the Court handed down its decision. See the archived “Week in Review” post here.
The Week in Review: SEC Nomination, Symposium, DOJ and FDIC
Mary Jo White, President Obama’s pick to be the next S.E.C. chairwoman, took a tough stance on Wall Street regulation yesterday, testifying before the Senate Banking Committee. Ms. White is a former federal prosecutor, although she has also worked as a corporate Wall Street defense attorney. She appears likely to win confirmation (as early as next week). If and when she does, banks should expect rigorous oversight from the government’s top securities regulation agency. During her testimony, Ms. White said: “I don’t think there’s anything more important than vigorous and credible enforcement of the securities laws.” For more, see the NYTimes. On a related note, Senator Warren (D-MA) has continued to push for increasing bank oversight and regulation.
The Berkeley Center for Law, Business and the Economy and the Berkeley Business Law Journal will be hosting their 2013 symposium on the JOBS Act this Friday, March 15. Registration is required. See a previous post for a complete description of this year’s symposium lineup.
Federal prosecutors recently caught a break in an ongoing offshore tax evasion investigation, centered around Swiss financial advisor Beda Singenberger. In a letter mailed to the United States, Singenberger unintentionally included a list of approximately 60 U.S. ‘clients.’ “The government has mined that list to great effect and prosecuted a number of people who were on that list,” according an assistant U.S. Attorney working the case. The government continues its crack-down on unreported foreign accounts, which included a $780 million settlement with UBS, Switzerland’s largest bank. For more, see Bloomberg.
A recent Los Angeles Times report shows that the FDIC has been quietly settling actions against banks involved in unsound mortgage loans—including “no press release” terms that have kept the matters quiet unless and until it received a “specific inquiry.” The newspaper claims that this practice constitutes “a major policy shift from previous crises, when the FDIC trumpeted punitive actions against banks as a deterrent to others.” Under a Freedom of Information Act request, the Times recovered more than 1,600 pages of FDIC settlement documents “catalog[ing ] fraud and negligence.” Yesterday, Forbes picked up on the story, asking, “Is the FDIC Protecting Banks from Bad Press?” For more, see the LATimes and Forbes.
New Regulations Announced: Foreign Account Tax Compliance Act
The U.S. Department of the Treasury and the Internal Revenue Service have released long-awaited final regulations implementing the Foreign Account Tax Compliance Act (“FATCA”).
Congress enacted FATCA in 2010 as part of the Hiring Incentives to Restore Employment Act (the “HIRE Act”), and it is housed in Sections 1471 through 1474 of the Code. FATCA creates a new tax information reporting and withholding regime for payments made to certain foreign financial institutions and other foreign persons. FATCA requires certain U.S. taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report information about those assets on a new form (Form 8938) that must be attached to the taxpayer’s annual tax return.
This Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds. For instance, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. The thresholds for taxpayers who reside abroad are higher. For instance, a married couple residing abroad and filing a joint return would not file a Form 8938 unless the value of the specified foreign assets they hold exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year. Instructions for Form 8938 provide further information, including details on the thresholds for reporting, what constitutes a specified foreign financial asset and how to determine the total value of relevant assets.
CFPB Announces “Ability to Repay” Rule for Mortgage Lenders
The Consumer Financial Protection Bureau has announced a new rule (the “Ability-to-Repay rule”) requiring mortgage lenders to ensure that potential borrowers will be able to repay their mortgages. The CFPB is charged with amending Regulation Z, which carries out the Truth in Lending Act. The CFPB also implements the ability-to-repay requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Under Dodd-Frank, creditors must make a reasonable and good faith determination that borrowers have a reasonable ability to repay the loan.
The Ability-to-Repay rule is aimed at protecting American consumers. According to the CFPB Director, the “Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes.”
Under the new rule:
- 1. Lenders are required to obtain and verify financial information from potential borrowers,
- 2. Lenders must evaluate and conclude that potential borrowers have sufficient assets or income to repay the loan, and
- 3. Lenders cannot use lower, introductory “teaser” interest rates (which cause monthly payments to jump to unaffordable levels) to base their evaluation of a potential borrower’s ability to repay the loan.
In assessing whether a borrower will be able to repay their loan, lenders must generally consider the following underwriting factors: 1) current or reasonable expected income or assets, 2) current employment status, 3) the monthly payment, 4) monthly payment on any simultaneous loan, 5) the monthly payment for mortgage-related obligations, 6) current debt obligations, 7) monthly debt-to-income ratio, and 8 ) credit history.
