Insights from Winston & Strawn

SEC Approves Regulation Crowdfunding

At its Open Meeting on October 30th, the SEC approved a final rule to permit the offer and sale of securities through crowdfunding under Title III of the JOBS Act. The final rules will allow companies to raise up to $1 million through crowdfunding during a 12-month period and place limitations on the amount investors may invest in these securities based upon income level. The final rules incorporate several revisions to the originally proposed rules. These include exempting first time crowdfunding issuers offering more than $500,000, but not more than $1 million of securities from the requirement to provide audited financial statements. Further, the final rules permit an individual investor to invest over a 12-month period in the aggregate across all crowdfunding offerings up to (i) if the investor’s annual income or net worth is less than $100,000, the greater of (a) $2,000 or (b) 5% of the lesser of the investor’s annual income and net worth or (ii) if the investor’s annual income and net worth are both equal to or greater than $100,000, 10% of the lesser of the investor’s annual income and net worth. As with the SEC’s recent regulations around general solicitation, these limitations raise questions about whether the cost and administrative burden of complying with the rule might be prohibitively high for the small companies it was meant to help. In fact, Commissioner Piwowar voted against the final rules, objecting to the complex compliance requirements that may dissuade small businesses from participating in crowdfunding and the income limitations placed on investors and suggesting that further refinement be made once empirical studies on the results of this rule are available. Piwowar Statement.

The final rules and forms will be effective 180 days after publication in the Federal Register, except the forms enabling funding portals to register with the SEC, which will be effective on January 29, 2016. SEC Press Release.

Feature: SEC Division of Corporation Finance Delivers Guidance on Exclusion of Shareholder Proposals

As public companies prepare for the upcoming proxy season, the Securities and Exchange Commission’s (“SEC”) Division of Corporation and Finance published new guidance that explains how it will apply subsections (i)(7) and (i)(9) of Securities Exchange Act Rule 14-8(a) to requests to exclude shareholder proposals at annual meetings.

The new staff legal bulletin represents the Division’s long-anticipated response to a controversy sparked during the past proxy season by Whole Foods, which sought to exclude a shareholder proposal requesting a right of access for shareholders under Rule 14-8(a)(i)(9) by claiming the proposal conflicted with its own alternative proposal. As J. Robert Brown Jr., Professor at the University of Denver Strum College of Law, details in a recent blog post, after the Division granted Whole Foods’ no-action request, it found itself inundated with requests from companies seeking similar relief, as well as a request for reconsideration by the Whole Foods shareholder. In response, SEC staff withdrew the no-action letter issued to Whole Foods, along with several other no-action letters, and declined to consider no-action requests under subsection (i)(9) during the remainder of the proxy season pending staff review of the rule.

In its legal bulletin, the Division indicated that it will reverse course in its application of Rule 14-8(a)(i)(9) going forward. The Division explained that it will no longer consider a shareholder proposal to be in direct conflict with a management proposal if a reasonable shareholder could logically vote for both proposals. The bulletin provides hypothetical examples of proposals that the Division would no longer consider to be in conflict, noting that although variations may exist between the shareholder and management proposals, “both proposals generally seek a similar objective … and the proposals do not present shareholders with conflicting decisions.” As Professor Brown points out, the guidance attempts to draw a clear line between conflicting proposals and merely alternative proposals, although he also notes that the guidance “leaves open the possibility that companies submitting alternative proposals can obtain exclusion of a shareholder proposal by arguing that the two proposals have sufficiently antagonistic terms, even though seeking the same broad goal.”

Initial reactions to the guidance have been mixed. According to The Wall Street Journal, proponents of proxy access, including labor unions and pension funds, lauded the staff bulletin as a welcome decision in support of shareholder rights, while groups representing CEOs cautioned that the guidance will confuse shareholders and create ambiguity in the results of shareholder votes. Although the implications of the SEC’s guidance will not become clear until proxy season commences, the initial evidence of the effect of alternative proposals on voting results does not reflect ambiguity or inconsistency. According to Professor Brown in a recent blog post, the last proxy season included seven instances in which shareholders were presented with alternative proposals submitted by shareholders and management. In six of the seven cases one of the alternative proposals received a clear majority of votes, and in no instances were both proposals adopted. Professor Brown concludes that the initial data rejects the argument that the exclusion of alternative, rather than conflicting, proposals benefits shareholders.

The true test of the SEC’s guidance will, of course, come in a few months as the next proxy season begins and companies submit no-action requests to test the limits of the SEC’s interpretation. And, according to a recent article in Forbes, Whole Foods may once again be at the forefront of the debate, as it has already received a shareholder proposal seeking to revise its proxy access bylaw to allow investors to nominate a quarter of the board of directors, among other things. How public companies will address such shareholder proposals in light of the SEC’s guidance on shareholder proposal exclusions remains to be seen.

FINRA – Regulatory Matters at a Glance

Please click here to view a summary of the regulatory notices, rule filings, guidance and the like published by the Financial Industry Regulatory Authority (“FINRA”) during the previous month.

Banking Agency Developments

OCC to Host Mutual Savings Association Advisory Committee Meeting

On October 29th, the Office of the Comptroller of the Currency (“OCC”) announced that it will hold a public meeting of the Mutual Savings Association Advisory Committee (“MSAAC”) at the OCC’s office in Washington, D.C. on November 18, 2015, beginning at 8:30am EST. The purpose of the MSAAC meeting is to advise the OCC on regulatory changes or other steps that the OCC may be able to take to ensure the continued health and viability of mutual savings associations and other issues of concern to mutual savings associations. MSAAC Meeting.

Securities and Exchange Commission


Division of Corporation and Finance Issue New C&DIs Regarding Unbundling Proxy Matters related to Mergers and Acquisitions

On October 27th, the SEC’s Division of Corporation and Finance issued new Compliance and Disclosure Interpretations (“C&DIs”) regarding Securities Exchange Act Rule 14a-4(a)(3) and the unbundling of separate matters that are submitted to a shareholder vote by a person soliciting proxy authority in the context of mergers and acquisitions. The C&DIs address the circumstances in which a target company must present separately the proposed amendments to the acquiror’s organizational documents and how those requirements would be affected if the parties form a new entity to act as an acquisition vehicle to issue equity securities in the transaction. CDI 201.01 and 201.02.

Division of Investment Management Offers Guidance on Treatment of ESC Securities Held by States Under Escheatment Laws

On October 27th, the SEC’s Division of Investment Management published a Guidance Update that explains the Division’s understanding of how state escheatment laws would effect an Employees’ Securities Company’s (“ESC”) compliance with the Investment Company Act in cases where the ownership of ESC securities has been transferred to a State. The guidance notes that due to their unique nature, ESCs are exempt from many provisions of the Investment Company Act and rely on Commission-issued exemptive orders permitting their securities to be held by extended family members of eligible holders. The Division concluded that ESCs may continue to rely on exemptive orders under the Investment Company Act if the relevant securities are remitted to a State under the State’s escheatment laws. SEC IM Guidance Update 2015-04.

Speeches and Statements

Chair White Emphasizes SEC Efforts to Evaluate the Effects of Securities Offering Reforms

On October 28th, SEC Chair Mary Jo White delivered the keynote address at the 47th Annual Securities Regulation Institute. White focused her remarks on securities offering reforms implemented under the JOBS Act, including amendments to Rule 506 of Regulation D and Regulation A, and the Commission’s efforts to construct a responsive regulatory framework that assesses the impact of regulation on investors and issuers. White noted in her remarks that only a small segment of issuers are taking advantage of general solicitation and advertising under Rule 506 and while the SEC has investigated some potential cases of fraud resulting from the amendments, fraud has not become a widespread problem. White highlighted working groups and disclosure rules as important elements of the SEC’s program to evaluate the effectiveness of rule changes and identify and address potential problems. White Remarks.

White Requests Guidance from Equity Market Structure Advisory Committee on Maker-Taker Fee Structure, Regulation of Trading Venues

On October 27th, in her opening remarks at the Equity Market Structure Advisory Committee meeting, SEC Chair Mary Jo White encouraged the committee to consider a pilot to study proposed changes to the maker-taker fee structure. Chair White also urged the committee to consider how the SEC might alter its regulatory approach to trading venues to address changes in trading venue management and operation that have occurred with the increase of trading conducted through alternative trading systems (“ATSs”). White Remarks.

Aguilar Confirms Support for Maker-Taker Pilot Program

On October 27th, SEC Commissioner Luis A. Aguilar, in remarks to the Equity Market Structure Advisory Committee, reiterated his support for a maker-taker pilot program in which maker-taker rebates would be suspended for the most liquid stocks. Noting that it may be his final opportunity to address the committee as a commissioner, Aguilar also posed several longer-term questions for the committee to consider, including whether market structure is contributing to the reduction of market liquidity during times of stress, whether the use of systemic trading strategies are impacting market stability, and whether market structure has contributed to the decline in initial listings on public exchanges. Aguilar Remarks.

SEC Chief Accountant Discusses Key Issues Facing Audit Committees

On October 23rd, SEC Chief Accountant James Schnurr addressed the UCI Audit Committee Summit, discussing his perspective on the SEC’s Concept Release on Audit Committee Disclosures, the importance of internal control over financial reporting, implementation of the new revenue recognition standard, and disclosure effectiveness. Schnurr encouraged audit committees to review the implementation plans prepared by companies in preparation for the new revenue recognition standard, emphasizing that management needs to look beyond financial statements to consider how the new standard will impact other elements of a company’s operations such as information systems, contractual arrangements, and tax planning strategies. Schnurr Remarks.

Other Developments

Money Market Fund Statistics

On October 28th, the SEC’s Division of Investment Management published money market fund statistics data as of September 30, 2015. SEC Report.

SIPC Proposes New Rules Governing Broker-Dealer Supplemental Reports

On October 28th, the SEC published new rules proposed by the Securities Investor Protection Corporation (“SIPC”), which would add rules to specify the format of and information to be included in a broker-dealer’s supplemental report to SIPC. Among other things, the proposed rules incorporate relief previously granted by the SEC exempting SIPC member broker-dealers from filing the supplemental report if the broker-dealer reports $500,000 or less in total revenue. Comments should be submitted within 21 days of publication in the Federal Register, which is expected shortly. SEC Commission Notice SIPA-173.

Commodity Futures Trading Commission

CFTC’s Market Risk Advisory Committee Announces Agenda for Upcoming Public Meeting

On October 26th, the U.S. Commodity Futures Trading Commission (“CFTC”) announced the agenda for the upcoming Market Risk Advisory Committee public meeting that will be held on November 2, 2015 at CFTC’s headquarters in Washington, D.C. Agenda.

CFTC Chairman Speaks Before Swap Execution Facility Conference

On October 26th, CFTC Chairman Timothy Massad gave a speech at the Swap Execution Facility Conference. He discussed how the CFTC is remaining focused on promoting transparency and integrity in the trading process, to ensure that the markets continue to grow and evolve. Massad Speech.

Federal Rules Effective Dates

Click here to view table.

Exchanges and Self-Regulatory Organizations

Chicago Board Options Exchange

CBOE and C2 Propose Changes to Complex Order Rules

On October 27th, the SEC announced that the Chicago Board Options Exchange, Inc. (“CBOE”) and C2 Options Exchange, Inc. (“C2”) have separately proposed changes that would amend their respective rules related to complex orders regarding the initiation of a complex order auction (“COA”) and the impact of certain incoming orders and changes in the leg markets on an ongoing COA. Comments should be submitted within 21 days of publication in the Federal Register, which is expected the week of November 2, 2015.

CBOE Withdraws Proposed Change to Rule Governing Complex Orders on the Hybrid System

On October 23rd, the SEC announced that the CBOE has withdrawn its proposal to revise its rules regarding eligibility for participation in the Complex Order Book and Complex Order Auction. SEC Release No. 34-76254.

CBOE Abandons Proposed Changes to Market-Maker Solicitation Rules

On October 23rd, the SEC provided notice of CBOE’s withdrawal of a proposal to revise its rules regarding the solicitation of Market-Makers as the contra party to an agency order entered into the Exchange’s Automated Improvement Mechanism and Solicitation Auction Mechanism auctions. SEC Release No. 34-76251.

Financial Industry Regulatory Authority

FINRA Chair to Retire in 2016

On October 30th, the Financial Industry Regulatory Authority’s (“FINRA”) Chair and CEO Richard Ketchum announced that he will retire in the second half of 2016. FINRA Press Release.

FINRA Warns Investors Regarding Risks of Binary Options Trading

On October 26th, FINRA released an Investor Alert to draw attention to the risks posed by trading binary options. In addition to the inherent risks in trading binary options, which can result in the investor losing the entire investment if the binary option fails to make a pre-specified amount before it expires, the Alert notes that binary options are frequently used in fraudulent schemes. The Alert suggests that investors use agency and industry websites to verify the registration of the professionals offering binary options as well as the registration of the binary options trading platform. FINRA Press Release.

FINRA Announces New TRACE Software Affecting Non-Member Affiliates and Enhanced Market Aggregates

On October 26th, FINRA announced that it will release new TRACE software for the trade reporting and distribution of non-member affiliate trades on November 2, 2015. The new software will account for changes to Corporate and Agency Market Aggregate data and will include changes to TRACE trade reporting, dissemination, and reference data. FINRA Industry Notice.

FINRA Revamps the Series 27 and Series 28 Examination Programs

On October 23rd, FINRA announced that it has revised the Financial and Operations Principal (Series 27) and Introducing Broker-Dealer Financial and Operations Principal (Series 28) examination programs.  The changes include revisions to the examinations’ content outlines to account for changes to laws, rules and regulations, as well as the addition of information regarding job functions performed by a Financial and Operations Principal and an Introducing Broker-Dealer Financial and Operations Principal. The changes will be implemented on December 14, 2015. FINRA Regulatory Notice 15-39.

International Swaps and Derivative Association

ISDA Notes Continued Cross-Border Fragmentation in Global Derivatives Market

On October 28th, the International Swaps and Derivatives Association (“ISDA”) published a research note examining data from the global derivatives market as of June 30, 2015. According to the research note, the market for euro interest rate swaps in particular, and the global derivatives market in general, remains fragmented along geographic lines. The report continues the ISDA’s research regarding the effects of the U.S. swap execution facility rules on global liquidity pools since the rules became effective in October 2013. ISDA Research Note.


SEC Seeks Comment on Amendment to BX’s Options Price Improvement Mechanism Proposal

On October 29th, the SEC requested comment on a second amendment to NASDAQ OMX BX, Inc.’s (BX) proposed rule change that would establish an options price improvement mechanism. The amendment would revise BX’s proposal to clarify the use of Price Improving and Post-Only Orders, as well as other clarifying revisions to the text of the rule. Comments on the new amendment should be submitted within 21 days of publication in the Federal Register, which is expected the week of November 2, 2015. The SEC indicated it will approve BX’s proposed rule on an accelerated basis. SEC Release No. 34-76301.

National Futures Association

NFA Will Require Members to Adopt Cybersecurity Measures

On October 23rd, the National Futures Association (“NFA”) notified its members that it will adopt an Interpretive Notice to NFA Compliance Rules 2-9, 2-36, and 2-49 entitled “Information Systems Security Programs” (“Cybersecurity Interpretive Notice”), which was recently approved by the CFTC. The Cybersecurity Interpretive Notice requires all member firms to adopt and enforce written policies and procedures to secure customer data and access to their electronic systems, although it allows a firm to adapt the requirements so they are appropriate to a firm’s specific circumstances in order to account for the differences in size, complexity, and interconnectedness of member firms across membership categories. The Cybersecurity Interpretive Notice will become effective on March 1, 2016. NFA Press Release.


SEC Extends Consideration Period for NYSE Arca’s Global Currency Gold Fund Proposal

On October 28th, the SEC designated December 15, 2015 as the date by which it will approve, disapprove or institute disapproval proceedings regarding NYSE Arca Inc.’s (“NYSE Arca”) proposal to amend its rules to list and trade shares of the Global Currency Gold Fund under NYSE Arca Equities Rule 8.201. SEC Release No. 34-76291.

NYSE and NYSE MKT Propose to Eliminate Off-Exchange Reporting Rules

On October 27th, the SEC gave notice of the New York Stock Exchange LLC’s (“NYSE”) and NYSE MKT LLC’s(“NYSE MKT”) separately proposed changes to their respective rules that would delete Rule 410B, which governs reporting requirements for off-exchange transactions, in light of changes to regulatory oversight and rules that make the requirements under the rule duplicative. Comments should be submitted within 21 days of publication in the Federal Register which is expected the week of November 2, 2015.

SEC Approves NYSE Arca’s New Equity Trading Rules, Seeks Comment on Amendments

On October 26th, the SEC announced that it has approved a proposal by NYSE Arca that would allow the exchange to adopt new rules to assist with the implementation of Pillar, its new trading technology platform, by establishing the Retail Liquidity Program and describing how orders and modifiers in Pillar will be priced, ranked, traded, and routed using approved terminology and priority categories under the Pillar I filing. NYSE Arca has also filed two amendments to the proposal, which would correct cross references to rules and delete references to order types eliminated under Pillar. Comments on the amendments should be submitted on or before November 20, 2015. SEC Release No. 34-76267.

Judicial Developments

Denial of Underlying Receivership Claim Is Separate from the Merits of CFTC’s Ponzi Scheme Case

The CFTC alleged that the receivership estate of Winsome Investment Trust was operated as a commodity-futures Ponzi scheme. Appellant Penedo, who was hired by RIO Systems and promised an equity ownership interest in a refinery project, claimed that RIO intended to assign its rights and obligations to Winsome, which would pay him receivership assets. On October 27th, the 10th Circuit affirmed the district court’s denial of the claim, applying the collateral-order doctrine in the context of receivership assets. The panel noted that denying the claim is completely separate from the merits of the CFTC’s case. Receivership Claim.

CEO’s Fraudulent Misrepresentations, Although Adverse to the Company’s Interests, Can Be Imputed to His Corporate Employer

Reversing a district court’s dismissal of a securities fraud claim, the Ninth Circuit held on October 23rd that a CEO’s fraudulent misrepresentations could be imputed to his corporate employer even though his alleged embezzlement and misleading of investors through omissions and false statements were adverse to the company’s interests. The panel determined that the CEO, who was also the company’s founder, acted with apparent authority on behalf of the company, which placed him in a position of trust and confidence and controlled the level of oversight of his handling of the business. CEO’s Fraud.

Industry News

Former SAC Capital Advisors Portfolio Manager Seeks Reversal of U.S. Insider Trading Conviction

On October 28th, Reuters reported that the U.S. Court of Appeals for the Second Circuit was considering whether a recent appellate ruling that limited the scope of insider trading laws meant that the 2014 conviction of former SAC Capital Advisors portfolio manager Mathew Martoma should be reversed. The arguments in front of the panel followed a Second Circuit ruling in December 2014 which held that prosecutors must prove that an insider received a benefit of “some consequence,” and not just friendship, for any tips. Circuit Judge Denny Chin questioned if a retrial was needed, as jurors had been instructed that friendship could constitute an illegal benefit. Insider Trading.

PMorgan Joins ‘Proxy Access’ Trend and Adopts Clawback Disclosure

On October 26th, Reuters reported that JPMorgan Chase & Co.’s board will consider a bylaw amendment to make it easier for groups of up to 20 shareholders to nominate their own candidates for the board. This change, known as “proxy access,” has become a popular reform at many companies this year. JPMorgan noted that the amendment would include a requirement that the shareholders would need to have owned at least three percent of the company for three years, a common threshold and an approach that the board requested. JPMorgan also stated that its board has adopted a policy under which it would disclose whether it has recouped any incentive compensation from senior executives. JPMorgan.