Insights from Winston & Strawn

On October 26, 2016, the SEC voted unanimously to adopt final rules to “facilitate capital formation by smaller companies by increasing the current Securities Act exemptive framework for smaller offerings while maintaining appropriate protections for investors.” The final rules amend Rule 147 of the Securities Act of 1933 (the “Securities Act”), establish Rule 147A as an additional safe harbor for intrastate securities offerings, amend Rule 504 of Regulation D, and repeal Rule 505 of Regulation D.

The amendments modernize the Rule 147 safe harbor for compliance with Section 3(a)(11) of the Securities Act, which exempts intrastate securities offerings from registration. The changes generally work to expand the scope of companies that can rely upon Rule 147. One of the key changes is the liberalization of the requirement that the issuer be “doing business” in the applicable state.

As currently in effect, Section 3(a)(11) and Rule 147 permit an issuer to make offers and sales to residents of the state in which the issuer is incorporated or organized and doing business. Under the old Rule 147, in order to be considered to be “doing business” in a state, an issuer had to satisfy a three-part test that required (1) 80% of its revenue to come from within the state, (2) 80% of its assets to be located in the state, and (3) 80% of the funds raised to be used to fund operations in the state. The adopted amendments significantly loosen these “doing business” restrictions. Now, under the amended Rule 147, a company that is organized or incorporated under the laws of the state in which it is making the offering must satisfy only one of the following four “doing business” requirements (rather than all three prongs of the historical test): (1) 80% of its revenues come from within the state, (2) 80% of its assets are located in the state, (3) 80% of the funds raised are to be used to fund operations in the state, or (4) a majority of the issuer’s employees are based in the state.

The final rules also establish Rule 147A as a new intrastate offering exemption under the Securities Act. A separate exemption was established, rather than further amending Rule 147 in a manner that would potentially have undercut the availability of existing state-level exemptions that are expressly conditioned upon issuer reliance on Section 3(a)(11) and Rule 147. Accordingly, Rule 147A is substantially identical to the amended Rule 147, subject to two key differences.

First, Rule 147A allows issuers to make offers accessible to out-of-state residents, so long as actual sales are limited to in-state residents. This effectively permits issuers relying on Rule 147A to engage in general solicitation and general advertising that could reach out-of-state residents in order to locate potential in-state investors using any form of mass media, including unrestricted, publicly-available websites, to advertise their offerings, so long as actual sales of securities are made only to residents of the state or territory in which the issuer has its principal place of business. The new Rule 147A even acknowledges the inherent technological limitations of popular social media platforms such as Twitter by allowing issuers to distribute offering materials through platforms that technologically limit the amount of information that may be included in the communication, so long as the communication includes an active hyperlink to otherwise required disclosures.

Second, issuers relying upon Rule 147A may be incorporated or organized outside the state in which the offering is conducted. This distinction recognizes the reality that there are valid business reasons for incorporating or organizing in states, such as Delaware, other than the state in which an issuer’s principal place of business is located.

Following the effectiveness of the final rules, amended Rule 147 and new Rule 147A will both feature the following provisions:

  • The issuer must have its “principal place of business” (i.e., the location from which the officers, partners, or managers of the issuer primarily direct, control, and coordinate the activities of the issuer) in-state and satisfy at least one “doing business” requirement establishing the in-state nature of the issuer’s business (rather than all three “doing business” requirements under the old Rule 147 test).
  • The issuer must have a “reasonable belief” that that the purchaser resides in-state at the time of the sale of the securities.
  • The issuer must obtain a written representation from each purchaser as to residency.
  • Investors cannot resell their shares for a period of six months from the date of the sale by the issuer to the investors (rather than nine months from the last date of sale under the old Rule 147).
  • Issuers must provide offerees and purchasers with legends as to the limits on resales.

The amendments to Rule 147, and the new Rule 147A, will become effective 150 days after publication in the Federal Register.

The final rules also amend Rule 504 of Regulation D by increasing the aggregate amount of securities that may be offered and sold in any 12-month period from $1 million to $5 million and by disqualifying certain “bad actors” from participating in Rule 504 offerings. The bad actor disqualifications provide additional investor protection consistent with, and substantially similar to, the related provisions of Rule 506 of Regulation D. Amended Rule 504 will become effective 60 days after publication in the Federal Register.

Finally, the SEC repealed Rule 505. Rule 505 allows offerings of up to $5 million annually that must be sold only to accredited investors or to no more than 35 non-accredited investors. In light of the proposed amendments to Rule 504, the SEC solicited comments on whether Rule 505 should be repealed. Rule 505 is used far less frequently than Rule 506, and the increase in the Rule 504 offering ceiling will likely further diminish incentives to use Rule 505. Accordingly, the SEC has determined to repeal Rule 505, effective 180 days following publication of the final rules in the Federal Register.

The SEC hopes these amendments will “update and expand the capital raising activities for smaller companies, allowing them to more fully take advantage of changes in technology and business practices.” SEC Press Release. Winston & Strawn will continue to monitor the evolution and application of the amended rules to see whether these hopes are realized.

Feature: SEC Proposes Use of Universal Proxy Cards in Director Elections

At its Open Meeting on October 26th, a divided Securities and Exchange Commission (“SEC”) voted to propose amendments to the federal proxy rules to require parties in a contested election to use universal proxy cards that would include the names of all board of director nominees. The proposal would also amend the form of proxy and proxy statement disclosure requirements in order to specify clearly the applicable voting options and voting standards in all director elections. In proposing the rule amendments, the SEC resisted efforts by the House of Representatives to block the regulator from moving forward with the reforms, which culminated last summer in a vote on a spending bill that barred the SEC from drafting the rules.

The proposed amendments seek to extend the voting options available to shareholders who attend a company’s annual meeting to shareholders who vote by proxy. Currently, shareholders who vote in person at a shareholder meeting are given a written ballot at the meeting. This ballot includes the names of all duly nominated candidates for the board of directors. In contrast, shareholders voting by proxy generally must submit their votes on either the company’s or the dissident’s proxy card and cannot choose a combination of nominees from both cards.  Under the proposal, proxy contestants would be required to provide shareholders with a universal proxy card that includes the names of both management and dissident nominees.  This requirement would not apply to solicitations for contested elections involving foreign private issuers or companies with reporting obligations only under Section 15(d) of the Exchange Act, which are not subject to the federal proxy rules, or registered investment companies and business development companies. The universal proxy card would be subject to presentation and formatting requirements.

In addition to requiring a universal proxy card, the proposed amendments would impose additional disclosure and notification requirements on proxy contestants. Under the proposal, proxy contestants would be required to notify each other of their respective director candidates, with dissidents required to make their disclosure no later than 60 calendar days prior to the anniversary of the previous year’s annual meeting date, and companies required to disclose their intended candidates no later than 50 calendar days prior to the anniversary of the previous year’s annual meeting date. Proxy contestants would also be required to refer shareholders to the other party’s proxy statement for information about that party’s nominees and inform shareholders that they can access the other party’s proxy statement on the SEC’s website at no charge. Dissidents would be required to file their definitive proxy statement with the SEC by the later of 25 calendar days prior to the meeting date or five calendar days after the registrant files its definitive proxy statement.

The proposed rule amendments would also make changes to voting options and standards that would apply to all solicitations that are subject to the proxy rules. Under the proposal, proxy cards would be required to include an “against” voting option for the election of directors when there is a legal effect to a vote against a nominee. Proxy cards would also be required to give shareholders the ability to “abstain” in a director election governed by a majority voting standard.  The proposed change would eliminate the current ability to provide a “withhold” voting option when an “against” vote has legal effect.  In addition, the proposed amendments would require disclosure about the effect of a “withhold” vote in an election of directors. SEC Press Release.

In supporting the proposal, SEC Chair Mary Jo White maintained that the rule amendments “would strike the appropriate balance to further our goals for improving the proxy voting process, treating registrants and dissidents in an equitable manner while continuing to require dissidents to independently advance their own solicitations.” SEC Commissioner Kara M. Stein said that the proposal represents “a modest change” to the rules to address the fact that “few shareholders can dedicate the time and resources necessary to attend a company’s meeting in person.” Voting against the proposed amendments, SEC Commissioner Michael S. Piwowar raisedconcerns that “a universal proxy may empower specific groups of shareholders, who may use their increased influence to advance their own special interests,” and that retail investors may be left out of the process since dissidents are not required to solicit all shareholders or provide them with their proxy card or proxy statement.

Investor groups, including those representing institutional investors, welcomed the proposal. Pensions & Investments interviewed Ken Bertsch, the executive director of the Council of Institutional Investors, who said that the use of universal proxy cards would “level the playing field for investors voting by proxy.” Members of the U.S. Chamber of Commerce cited by Reuters feared that universal proxies would transform the election of directors into an “annual political-style campaign” and discourage companies from participating in public financial markets.

The SEC has invited public comment on the proposal. Comments should be submitted within 60 days of publication in the Federal Register. 

Banking Agency Developments


OCC to Host Risk Governance and Compliance Workshops in Philadelphia.

On October 27th, the Office of the Comptroller of the Currency (“OCC”) announced that it will host two workshops in Philadelphia at the Sheraton Suites Philadelphia Airport, December 6-7, for directors of national community banks and federal savings associations supervised by the OCC. The Risk Governance workshop on December 6th will combine lectures, discussion, and exercises to provide practical information for directors to effectively measure and manage risks; it will also focus on the OCC’s approach to risk-based supervision and major risks in the financial industry. The Compliance Risk workshop on December 7th will combine lectures, discussion, and exercises on the critical elements of an effective compliance risk management program; it also will focus on major compliance risks and critical regulations. Topics of discussion include the Bank Secrecy Act, Community Reinvestment Act, and the Truth-in-Lending and the Real Estate Settlement Procedures Act of 1974 Integrated Disclosures Rule.

OCC Issues Responsible Innovation Framework

On October 26th, the OCC announced that it will establish an office dedicated to responsible innovation and implement a formal framework to improve the agency’s ability to identify, understand, and respond to financial innovation affecting the federal banking system. The OCC expects the office to begin operations in first quarter 2017.

Comptroller Discusses Interagency Collaboration

On October 25th, Comptroller of the Currency Thomas J. Curry discussed the importance of interagency collaboration to the supervision and regulation of the financial services industry. The remarks came during an event for bank regulators related to accounting and auditing of regulated financial institutions.

Agencies Issue Exception on Real Estate Transactions from the Appraisal Requirements for Transactions in Areas Affected by Severe Storms and Flooding in Louisiana

On October 24th, the OCC, the Federal Deposit Insurance Corporation (“FDIC”), Federal Reserve Board of Governors (“Board”), and National Credit Union Administration announced that they have issued an exceptionfrom the appraisal requirements for real estate-related financial transactions in the communities declared to be in a major disaster area due to the severe storms and flooding in Louisiana. The agencies will not require financial institutions to acquire appraisals for affected transactions for the time period specified if certain conditions are met. The agencies will monitor institutions’ use of the appraisal exception to ensure real estate-related transactions are being originated in a manner consistent with safe and sound banking practices. The exception expires on December 31, 2017. Federal Register Notice.

Charles M. Steele Named Deputy Chief Counsel

On October 24th, the OCC announced that, effective immediately, Charles M. Steele is now its Deputy Chief Counsel. Mr. Steele, who will supervise the Administrative and Internal Law, Community and Consumer Law, Enforcement and Compliance, and Litigation divisions, will also supervise the district counsel staffs in the agency’s Southern District and Western District offices.

Federal Reserve

Board Announces Annual Indexing of Reserve Requirement Exemption Amount and of Low Reserve Tranche for 2017

On October 27th, the Board announced the annual indexing of two amounts used in determining reserve requirements of depository institutions. These amounts are the reserve requirement exemption amount and the low reserve tranche. The Board also announced changes in two other amounts, the nonexempt deposit cutoff level and the reduced reporting limit, that are used to determine the frequency with which depository institutions must submit deposit reports. The Federal Register notice contains a description of the new boundaries for deposit reporting that will be effective in 2017.

Secure Payments Task Force Identifies Key Priorities, Seeks Comments

On October 25th, the Board announced that its 160-member task force convened to advance the safety, security and resiliency of the national payment system is asking the industry for comments on its efforts to enhance payment identity management, data protection, and information sharing related to payments risk and fraud.

Fee Schedule Approved for Federal Reserve Bank Priced Services

On October 25th, the Board announced the approval of fee schedules, effective January 3, 2017, for payment services the Federal Reserve Banks provide to depository institutions. Federal Register Notice.

Board Votes to Affirm Countercyclical Capital Buffer at Current Level of 0%

On October 24th, the Board announced that it has voted to affirm the Countercyclical Capital Buffer (“CCyB”) at the current level of 0%. In making this determination, the Board followed the framework detailed in its policy statement for setting the CCyB for private-sector credit exposures located in the U.S.

Board Plans to Negotiate with FINRA to Potentially Act as Collection agent of U.S. Treasury Securities Secondary Market Transactions Data

On October 21st, the Federal Reserve Board announced that it plans to collect data from banks for secondary market transactions in U.S. Treasury securities and will enter into negotiations with the Financial Industry Regulatory Authority (“FINRA”) to potentially act as the Board’s collection agent for the data. The Board will seek public comment on its proposal. The Board’s data collection would complement the work of the Securities and Exchange Commission, which recently approved a rule change by FINRA to require its broker-dealer members to report secondary market transactions in U.S. Treasury securities.


CFPB Releases First-Ever Project Catalyst Innovation Highlights Report

On October 24th, the CFPB announced that it has released a report highlighting various market developments that have the potential to produce benefits for consumers.


FinCEN Issues FAQs on the Reporting of Cyber-Events, Crime, and Related Information through Suspicious Activity ReportsFinCEN

On October 25th, The Financial Crimes Enforcement Network (FinCEN) announced that it has issued Frequently Asked Questions (FAQs) regarding the reporting of cyber-events, cyber-enabled crime, and cyber-related information through Suspicious Activity Reports.

Securities and Exchange Commission

Final Rules

SEC Adopts Revised EDGAR Filer Manual

The SEC adopted final revisions on October 27th to the EDGAR Filer Manual and related rules to reflect updates to the EDGAR system.  The updated filer manual will be effective upon publication in the Federal Register. SEC Release No. 33-10217.

Speeches and Statements

White Envisions Greater Role for SEC in Regulation of U.S. Treasury MarketSpeeches and Statements

Bloomberg reported on SEC Chair Mary Jo White’s remarks at The Evolving Structure of the U.S. Treasury Market Second Annual Conference on October 24th, in which she said that the SEC is considering ways of extending aspects of the securities regulatory framework to U.S. Treasury market intermediaries. Among other things, White suggested that Treasury trading data should be made more available to regulators and the public to increase transparency, firms trading in Treasuries should face registration and inspection requirements similar to those imposed on broker-dealers, and trading platforms dealing in Treasuries should face more rigorous oversight. White Remarks.

Piwowar Highlights Role of Economic Analysis in Regulation

On October 21st, SEC Commissioner Michael S. Piwowar delivered remarks at the 2016 Conference on Auditing and Capital Markets. Piwowar explained how high-quality, independent economic analysis informs the regulatory process, highlighting the PCOAB’s use of economic analysis in its post-implementation review of new accounting standards as “an important component of high-quality economic analysis of regulatory decision-making.” (10/21/2016) Piwowar Remarks.

Other Developments

SEC Announces Date for Annual Forum on Small Business Capital FormationOther Developments

The SEC will hold its annual Government-Business Forum on Small Business Capital Formation on November 17, 2016. The forum will include panel discussions on the impact of the JOBS Act on capital formation for small business as well as breakout group sessions that will focus on developing specific policy recommendations. Participants should register on or before November 11, 2016. SEC Press Release.

Investment Management Updates Money Market Fund Statistics

On October 25th, the SEC’s Division of Investment Management published updated money market fund statistics. The statistics include data as of September 30, 2016. Money Market Fund Statistics.

OCIE Will Examine Compliance with Whistleblower Rules

According to a Risk Alert published on October 24th, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) will conduct examinations of registered investment advisers and registered broker-dealers to assess their compliance with key whistleblower provisions arising out of the Dodd-Frank Act. OCIE staff will review the compliance manuals, codes of ethics, employment agreements, and severance agreements used by registrants to determine whether they include provisions that might limit the types of information that employees may convey to the SEC or otherwise impede employees from communicating with the SEC or other authorities. OCIE Risk Alert.

Staff Announcements

On October 24th, the SEC announced that John W. Berry will serve as Associate Regional Director for Enforcement in its Los Angeles Regional Office. SEC Press Release.

Investment Management Publishes New Private Fund Statistics

On October 21st, the SEC’s Division of Investment Management released private fund statistics for the first quarter of 2016. 2016 Q1 Private Fund Statistics.

Federal Rules Effective Dates

October 2016 – December 2016

Click here to view table. 

Exchanges and Self-Regulatory Organizations

BATS Global Markets

BZX Proposes Changes to Reopening Auction Process under Limit Up-Limit Down Plan

On October 26th, the SEC requested comments on a proposed rule change filed by Bats BZX Exchange, Inc. (“BZX”) that would amend its rules on auctions to enhance the reopening auction process following a trading halt declared pursuant to the Plan to Address Extraordinary Market Volatility Pursuant to Rule 608 of Regulation NMS under the Act (the “Limit Up-Limit Down Plan”). BZX has also proposed to amend its rules to exclude executions that are a result of a Halt Auction from being reviewed as clearly erroneous. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of October 31, 2016. SEC Release No. 34-79162.

Chicago Board Options Exchange 

CBOE Proposes Amendments to Rules on Opening of Series under the HOSS System

On October 21st, the SEC provided notice of the Chicago Board Options Exchange, Incorporated’s (“CBOE”) proposal to amend its rules related to the process the CBOE’s Hybrid Trading System uses to open series on the exchange each trading day, known as HOSS. Among other things, the amendments would reorganize the provisions of the rule to describe the HOSS procedures in a more sequential manner, clarify the timing of each stage of the process, and enhance or modify the description of certain provisions within the rule. Comments should be submitted on or before November 17, 2016. SEC Release No. 34-79133.

Depository Trust Company

SEC Takes More Time to Consider DTC’s Clearing Agency Investment Policy

On October 26th, the SEC designated December 12, 2016, as the date by which it will approve, disapprove, or institute disapproval proceedings regarding The Depository Trust Company’s (“DTC”) proposal to amend its rules to adopt the Clearing Agency Investment Policy, which governs the investment of funds of the Clearing Agencies. SEC Release No. 34-79165.

Financial Industry Regulatory Authority

FINRA Exams Focus on Broker-Dealers’ Cross-Selling Programs

FINRA published a targeted exam letter on October 26th in connection with its review of cross-selling programs at broker-dealers. Among other things, the letter requests that firms produce documents containing descriptions of their cross-selling programs, their communications to employees regarding these programs, the monetary and non-monetary benefits to employees related to cross-selling programs, the metrics used to track and evaluate employees’ performance related to cross-selling programs, and their supervisory and compliance procedures, exception reports or other controls related to cross-selling programs. FINRA Targeted Exam Letter.

FINRA Offers Guidance on Changes to Rules Governing Communications with Public

In a Regulatory Notice published on October 26th, FINRA provided an overview of recently approved rule amendments to the filing requirements in its rules governing communications with the public and the content and disclosure requirements in its rules on the use of bond mutual fund volatility ratings. Among other things, the amendments exclude annual or semi-annual reports that have been filed with the SEC from filing requirements; eliminate generic investment company retail communications from filing requirements; and permit firms to file communications with bond mutual fund volatility ratings within 10 days of first use. The rule amendments will become effective on January 9, 2017. FINRA Regulatory Notice 16-41. 

FINRA Prepares Firms for New Pay-to-Play Rules

FINRA published a Regulatory Notice on October 24th that offers guidance to firms about new rules approved by the SEC that establish “pay-to-play” and related rules regulating the activities of member firms that engage in distribution or solicitation activities for compensation with government entities on behalf of investment advisers. FINRA’s pay-to-pay rules become effective on August 20, 2017. FINRA Regulatory Notice 16-40.


Nasdaq Proposes Changes to Reopening Auction Process and Erroneous Transactions Pursuant to Limit Up-Limit Down Plan

On October 26th, the SEC requested comments on The Nasdaq Stock Market LLC’s (“Nasdaq”) proposal to amend its rules to enhance the reopening auction process following a trading halt declared pursuant to the Limit Up-Limit Down Plan. The proposal also would amend Nasdaq’s rules to include the proposed new terms “Auction Reference Prices” and “Auction Collars” in the definition of “Order Imbalance Indicator” for purposes of the reopening process after Trading Pauses initiated under its rules governing erroneous transactions to provide that a member cannot request a review of an execution arising from a Halt Auction as a clearly erroneous execution. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of October 31, 2016. SEC Release No. 34-79158.

SEC Seeks Comments on Nasdaq’s Proposed New Retail Post-Only Order

On October 26th, the SEC provided notice of Nasdaq’s proposed rule change that would amend its rules to adopt a New Retail Post-Only Order, which would only be used in connection with orders sent on behalf of retail customers and would be cancelled if posting the order would remove liquidity or require an adjustment to the price of the order for any reason. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of October 31, 2016. SEC Release No. 34-79163.


NYSE Offers Guidance on the Prohibition on Disclosure of Non-Public Order Information in Use of New Telephone Booths

In an Information Memo published on October 21st, the New York Stock Exchange LLC (“NYSE”) offered guidance to members on the use of new telephone booths on the 18 Broad Street side of the Trading Floor, which have been excluded from the definition of “Trading Floor” under amendments to Rule 6A. NYSE reviewed the requirement for members to have adequate policies and procedures in place to detect and prevent the disclosure of Floor-based non-public order information before they can use the telephone booths. NYSE Information Memo.

SEC Rejects NYSE MKT’s Proposed Changes to Fees, Rebates, and Credits Relating to Its Customer Best Execution Auction

On October 21st, the SEC issued an order disapproving NYSE MKT LLC’s (“NYSE MKT”) proposal to modify the NYSE Amex Options Fee Schedule with respect to fees, rebates, and credits relating to the Exchange’s Customer Best Execution Auction, and to increase credits available under the NYSE MKT’s Amex Customer Engagement Program. In disapproving the rule, the SEC found that, among other things, the proposed rule was inconsistent with requirements under the Securities Exchange Act for the equitable allocation of reasonable dues, fees, and other charges among the members, issuers, and other persons using the facilities of a national securities exchange. SEC Release No. 34-79135.

Industry News

DOL Publishes Long-Awaited Guidance on Fiduciary Rule

The Department of Labor (“DOL”) released the first round of guidance on its new rule on fiduciary duties for advisers and others providing investment advice to retirement plans, plan sponsors, and IRAs. The DOL’s frequently asked questions and answers, which were published on October 27th, provide information about compliance dates, the Best Interest Contract Exemption, and the Principal Transactions Exemption. DOL staff interviewed by Think Advisor said that the DOL anticipates releasing additional guidance in at least “three waves.”

Internal Voting Records Show That SEC Commissioners Usually Agree When Suing Corporations

On October 27th, Reuters reported on the SEC’s release of a collection of internal voting records showing that the agency’s commissioners vote unanimously almost every time they take companies and executives to federal court, a divergence from the public and sometimes acrimonious differences they exhibit when debating regulatory matters.

SEC Looks Into Whether Companies Are Abusing Adjusted Earnings Metrics

On October 27th, the Wall Street Journal reported that the SEC’s Division of Enforcement has allegedly informed some companies that it is examining their use of adjusted earnings measures. The investigations are the latest in a series of recent steps by the agency to discourage use of these metrics, which critics contend allow companies to flatter their financial performance. The SEC is purportedly mainly looking into whether companies have featured modified measures too prominently in earnings releases and other disclosures.

MetLife Again Questions Its SIFI Designation

On October 25th, Dealbook reported on the Justice Department’s appeal of a lower court’s decision to strip MetLife of the designation as a systemically important financial institution (“SIFI”). In March, Judge Rosemary Collyer of the Federal District Court for the District of Columbia threw out MetLife’s SIFI designation, determining that regulators had failed to properly measure the likelihood that MetLife would experience financial distress or the impact that a failure would have on the economy as a whole. During arguments at Washington’s federal appeals court on October 24th, the judges considered whether banking regulators should have more explicitly scrutinized the likelihood that MetLife would have failed (one of the insurer’s central arguments) instead of just looking at what would happen if it did. The judges also questioned whether regulators probed deeply enough when analyzing how the insurer’s hypothetical failure would impact the financial system as a whole.