Year in Review – U.S. Law in 2016
Insider trading decision: In December, the U.S. Supreme Court held in Salman v. United States that a tippee who trades on inside information may be liable even where the tipper received no potential pecuniary gain. In a unanimous decision, the Court handed a significant victory to enforcers. Read more. . .
Disclosure reform: In April, the U.S. Securities and Exchange Commission (the “SEC”) issued a concept release, as part of its “disclosure effectiveness” initiative, seeking public comment on many aspects of Regulation S-K, the main SEC regulation governing non-financial statement disclosure. Read more…
JOBS Act rulemaking substantially completed: In 2016, the SEC finished all the major rulemaking required by the Jumpstart Our Business Startups Act of 2012, which relaxed a number of offering requirements for emerging growth companies. Among the last to be adopted were amendments conforming SEC rules to new thresholds for registration, termination of registration, and suspension of reporting. Read more…
Focus on non-GAAP measures: In May, the SEC released new guidance on the use of non-GAAP financial measures. The SEC has reportedly notified some issuers that it is examining their use of such measures.
Whistleblower awards and developments: The SEC continued to make large whistleblower awards in 2016, including two of at least US$20m. The SEC also brought its first standalone whistleblower case, as well as charges against a company for including language in severance agreements requiring employees to waive their rights to monetary recovery should they file a charge or complaint with federal agencies.
FCPA pilot program: In April, the U.S. Department of Justice (the “DOJ”) launched a one-year pilot program to encourage companies to voluntarily self-disclose any misconduct violating the Foreign Corrupt Practices Act (“FCPA”), cooperate with government agencies, and remediate corporate compliance programs. Companies cooperating under the program can receive a reduction of up to 50% below the low end of the fine range and may not be subject to a monitor.
Employees may be fired for not cooperating: In June, the U.S. Court of Appeals for the Second Circuit affirmed a decision to dismiss a lawsuit filed by two executives claiming wrongful termination for refusal to cooperate in their company’s internal investigation. The decision affirmed the principle that employers may terminate employees for cause if they fail to cooperate in an internal investigation. Read more…
Overseas data protected from U.S. search warrant: In July, an appellate court held that a U.S.-based service provider served with a U.S. search warrant did not have to produce data stored and maintained outside the U.S., applying a presumption against extraterritorial application of U.S. law. Read more…
Resource extraction payments disclosure: In June, the SEC adopted its long-awaited final rules imposing disclosure requirements with respect to payments to governments by “resource extraction issuers.” The original rules were overturned by a federal court in 2013 and then re-proposed late last year. Read more…
Conflict minerals disclosure: In March, the DOJ decided not to seek Supreme Court review of the April 2014 decision that invalidated a portion of the SEC’s conflict minerals rules. As the SEC has not indicated that it will be re-proposing its rule, SEC-reporting companies must continue to comply with the current rule as modified by the SEC’s statement issued in response to the 2014 decision. Read more. . .
Common interest doctrine: In June, the New York Court of Appeals reaffirmed New York’s narrow interpretation of the “common interest” exception to waiver of attorney-client privilege, applying it only to communications relating to pending or anticipated litigation. In an M&A context, separately represented parties who share attorney-client communications will waive attorney-client privilege by sharing information prior to the consummation of a transaction where litigation is not pending or anticipated. Read more…
U.S. False Claims Act: In June, the U.S. Supreme Court affirmed the “implied false certification” theory as a basis for liability under the False Claims Act (“FCA”), resolving a U.S. circuit split. The Court simultaneously implemented a more stringent materiality requirement linking the misrepresentation to the federal government’s payment decision. Around the same time, the DOJ signaled, consistent with its Yates Memo of last year, an increased commitment to holding individuals accountable in civil FCA cases. Read more…
Easing of sanctions programs: In 2016, the Obama administration made changes to its various sanctions programs, including ending the Burma and the Ivory Coast sanctions, continuing to ease its Cuba sanctions, and lifting nuclear-related sanctions against Iran.
Export controls and sanctions: In October, the DOJ’s National Security Division issued new guidance on its policy incentivizing companies to voluntarily self-disclose potential criminal violations of the export controls and economic sanctions restrictions under the Arms Export Control Act and the International Emergency Economic Powers Act. Similar to the FCPA pilot program, companies making voluntary self-disclosures may receive reduced penalties for criminal export controls or sanctions violations. Read more…
Delaware rejection of “disclosure-only” settlements: Signaling a possible end to “disclosure-only” settlements, the Delaware Court of Chancery in In re Trulia, Inc. Stockholder Litigation rejected the proposed settlement of a stockholder class action that would grant a broad release in exchange for supplemental disclosure. The court said to expect disclosure settlements to be met with continued disfavor in the future.
Delaware general jurisdiction: In Genuine Parts Company v. Cepec, the Delaware Supreme Court held that a foreign corporation does not expressly consent to general jurisdiction by merely registering to do business in the state and appointing an agent for service of process. The court held that Delaware's registration statutes must be read as a requirement that a foreign corporation must appoint a registered agent to accept service of process, but not as a broad consent to personal jurisdiction in any cause of action.
Bank commodity holdings: In September, the Federal Reserve Board (“Fed”) proposed a rule requiring financial holding companies (“FHCs”) to provide more capital to support investments in physical commodities, restrict FHC ownership of power plants, and limit the amount of physical commodities trading in which an FHC can engage. The proposal also reclassifies copper as a “base” or “industrial” metal that bank holding companies cannot trade without FHC status.
Mandatory stay on QFC termination rights: In May and August, the Fed and OCC proposed rules to require U.S. globally systemically important banking institutions (“G-SIBs”) and U.S. operations of non-U.S. G-SIBs to amend qualified financial contracts (“QFCs”) to prevent immediate cancellation if the G-SIB enters into insolvency or other resolution. Covered QFCs include, among other things, derivatives, securities lending, and repurchase agreements.
Fed single-counterparty credit limits: In March, the Fed proposed a rule to address the risks associated with large credit exposures of banking organizations to counterparties. Under the proposal, a G-SIB must limit its exposure to a single counterparty to no more than 15% of tier 1 capital (with respect to other G-SIBs) or 25% of tier 1 capital (for any other counterparty). A non-G-SIB bank holding company with $50bn or more in total assets must restrict its exposure to no more than 25% of its total regulatory capital to any counterparty.
Financial institution compensation rule re-proposed: In April and May, six Federal regulators re-proposed rules prohibiting incentive-based payment arrangements that encourage inappropriate risks by certain financial institutions by providing excessive compensation, or that could lead to material financial loss; and requiring such institutions to disclose information concerning such arrangements to the appropriate regulator.
New Section 385 regulations: In October, the Internal Revenue Service (“IRS”) and Treasury released final and temporary regulations under Section 385 of the U.S. Internal Revenue Code relating to the classification of certain intercompany loans as debt or equity for U.S. federal income tax purposes. They provide that certain intercompany loans will be treated as equity for U.S. federal income tax purposes if the taxpayer fails to comply with certain documentation and recordkeeping requirements. Additionally, intercompany debt issued to a member of the issuer’s “expanded group” may be recharacterized as equity in the issuer for U.S. federal income tax purposes if issued in certain transactions.
“Dividend Equivalent Payment” rules delayed: In December, the IRS released a notice providing guidance and a phase-in schedule for complying with final and temporary regulations that re-source and require withholding on certain equity derivatives that provide for payments that are contingent on, or determined by reference to, U.S. source dividends (“dividend equivalent payments”).
Fed and New York Department of Financial Services (“NYDFS”) cyber rules: In September, the NYDFS proposed a regulation applicable to financial services companies that, among other things, require the establishment of a cybersecurity program and annual certification of compliance by either a senior executive or the entire board of directors. In October, the Fed and other agencies also proposed cybersecurity rules that would, among other things, require development of a cybersecurity risk management strategy and the establishment of incident response and resilience governance strategies.
Year to Come – U.S. Law in 2017
Trump administration’s uncertain impact on governance and regulatory environment: Companies should expect that the Trump administration will have a significant impact on existing regulatory and governance regimes. Though the specific amendments and extent of regulatory change remain unclear, the following are being considered:
- a regulatory easing of Dodd-Frank Act regulations, such as the Volcker Rule, as well as “specialized disclosure” requirements, such as the conflict minerals disclosure rule and the resource extraction payments disclosure rule;
- a renegotiation of the Joint Comprehensive Plan of Action governing Iran’s nuclear program, as well as ongoing Cuban sanctions easing;
- repeal of the “Chevron rule”, requiring courts to defer to agency interpretations of statutes unless they are unreasonable and imposition of a cost-benefit analysis requirement on all financial regulators; and
- repeal of the Department of Labor's fiduciary rule for financial advisors.
Uncertain antitrust enforcement landscape under Trump: Although the Trump administration may only have a limited effect on pending investigations and enforcement, it will likely shift some priorities. Certain key enforcement-influencing positions will now be filled by this administration’s appointees, which is likely to have a significant impact on the agencies as well as the courts. President-elect Trump will also be in a position to nominate at least one Supreme Court Justice and fill a number of longstanding vacancies at other levels of the federal courts with the backing of a Republican Congress. This may have a potentially long-term impact on key antitrust enforcement issues, including on reverse payment patent settlements, class certification in private litigation, and the extraterritorial application of the US antitrust laws.
Trump’s proposed tax plan: Donald Trump’s proposals for tax reform include lowering the corporate tax rate, repealing the corporate alternative minimum tax, allowing U.S. corporations a one-time repatriation of foreign earnings at a 10% tax rate, eliminating most corporate tax credits and deductions, taxing carried interest as ordinary income (rather than as capital gains), and reducing ordinary income and capital gains rates for individuals. There are significant differences between Trump’s proposals and the Tax Reform Blueprint set forth by the House Republicans, for example with respect to converting from a worldwide tax system to a territorial tax system, although both proposals would reduce the top federal tax rates for individuals and corporations. As a result, while it appears likely that the U.S. will carry out significant tax reform, it remains to be seen if and how Trump’s proposals would be implemented.
Increased FCPA enforcement: FCPA prosecutions have increased over the past 10 years and that trend is likely to continue. In November, the DOJ announced that its FCPA Unit is in the process of hiring 10 additional prosecutors, which will increase the size of the unit by more than 50%. The DOJ is expected to have not only an increased focus on enforcement, but also the capacity to investigate and aggressively prosecute individuals and corporations for FCPA violations. In 2016, the DOJ continued to focus on obtaining large fines for FCPA violations, including US$397.6m from VimpelCom and US$264m from JPMorgan Chase.
Shortening of settlement cycle: The SEC is expected to adopt amendments that would reduce the standard settlement cycle for most broker-dealer transactions from three business days after the trade date (“T+3”) to two business days after the trade date (“T+2”).
Disclosure effectiveness: The SEC will likely continue with their “disclosure effectiveness” initiative. The goal of the project is to improve the disclosure regime for both public companies and investors and will include amendments to Regulations S-K and S-X. The first changes will likely be the adoption of recently proposed amendments to SEC rules and forms in order to eliminate redundant, duplicative, overlapping, outdated or superseded requirements. Read more…
Compensation clawbacks: The SEC proposed, but has not yet adopted, a Dodd-Frank-mandated rule that would require U.S.-listed companies to adopt so-called “compensation clawback” policies. Although the Trump administration may try later to undo this requirement, the Financial CHOICE Act of 2016 – the bill expected to be used as the blueprint to dismantle the Dodd-Frank Act – so far does not repeal the provision.
Marketplace lending and FinTech: U.S. regulatory agencies, including the U.S. Department of the Treasury, the OCC, and the SEC, are expected to build on their efforts to create a framework to regulate FinTech companies and marketplace lending institutions, including a special purpose limited national charter proposed by the OCC.
Securities enforcement: Following a speech earlier this year by Andrew Ceresney, Director of the SEC’s Division of Enforcement, the SEC will continue to focus on private equity enforcement. Recent SEC actions against private equity firms should “send a clear signal to industry participants that their practices must comport with their fiduciary duty and disclosures in their fund organizational documents.” Read more… The new head of the SEC’s whistleblower program, Jane Norberg, has also emphasized that it is a “high priority” for her office to address confidentiality agreements that purport to prevent employees from speaking freely with the SEC. Read more…
Uncertainty of universal proxy access rule: In October, the SEC proposed amendments to the proxy rules that would require, in a contested election of directors, the public company, and the shareholder activist to each use a “universal” proxy card that includes the names of both parties’ nominees. The election results put final adoption of universal proxy access in doubt, given the opposition of Republican SEC Commissioner Michael Piwowar to such rules, as well as a provision in the Financial CHOICE Act repealing the Dodd-Frank Act’s specific delegation of authorization to the SEC to adopt proxy access.
DOJ’s broader emphasis on “governance” approach to compliance: Remarks from Hui Chen, the DOJ’s Compliance Consultant (hired in 2015), have underscored the DOJ’s “governance approach” to evaluating the compliance programs of multinationals. Notably, the Compliance Consultant has stressed the importance of: tailoring compliance policies and procedures to the specific risks of the jurisdictions in which a company operates; ensuring that compliance is “culturally translated” to ways of doing business around the world; promoting stakeholder buy-in and accountability for compliance issues; and using data and metrics to drive compliance monitoring and review. Read more…
Anticipated guidance on “Qualified Foreign Pension Funds” and partnership audit rules: The Protecting Americans from Tax Hikes Act of 2015 included several amendments to the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) rules, including a provision that FIRPTA shall not apply to a U.S. real property interest held by, or to any distribution received from a real estate investment trust by, a qualified foreign pension fund. While the provision exempts qualified foreign pension funds from FIRPTA, a qualified foreign pension fund that invests in an active U.S. real property interest may still be subject to U.S. tax, including on income that is effectively connected with a U.S. trade or business. The IRS and the Treasury Department are expected to provide additional guidance, including regulations, on these rules. Additionally, new partnership tax audit rules were introduced in 2015 which, effective for partnership tax years beginning in 2018, generally impose liability for audit adjustments at the partnership level, unless the partnership makes an election to shift the liability to persons who were partners in the audited tax year. The IRS is expected to provide additional guidance prior to the effective date.
Incentive Pay and TLAC Rules: U.S. regulators are reportedly trying to finalize incentive compensation rules before Trump’s inauguration. The incentive compensation rules are designed to rein in excessively risky behavior across the financial sector and would force bank executives and certain highly compensated employees to wait longer to cash out bonuses. The rules would also allow financial institutions seven years to claw back bonuses, even if the bonus is vested or the recipient no longer works for the firm. Similarly, Fed Governor Daniel Tarullo recently indicated that his agency was close to finalizing rules governing “total loss absorbing capacity”, which would require systemically important banks to, among other things, hold additional long-term debt to recapitalize the institution in the event that it entered an insolvency proceeding.