Updates to Compliance and Disclosure Interpretations

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The staff of the Securities and Exchange Commission’s Division of Corporation Finance has updated a bunch of Compliance and Disclosure Interpretations.

Here are a few questions that caught my eye, with a snapshot of the answer. Follow the question’s link for the complete answer.

There are many more new and revised questions under the Securities Act Sections, Rules and Forms, Regulation S-K, Exchange Act Sections, Section 16 and Regulation FD.

Securities Act Sections

Question 103.04: Where the offer and sale of convertible securities or warrants are being registered under the Securities Act, and such securities are convertible or exercisable within one year, must the underlying securities be registered at that time?

Answer: Yes. . . .

Question 139.28: Must offers and sales be suspended during the waiting period of a post-effective amendment to an effective registration statement?

Answer: Offers and sales must be suspended if the post-effective amendment is filed for the purpose of a Section 10(a)(3) amendment and the prospectus is already stale for Section 10(a)(3) purposes. . . .

Securities Act Rules

Question 212.05: Can a registration statement under Rule 415 be declared effective without an opinion of counsel as to the legality of the securities being issued when no immediate sales are contemplated?

Answer: No. However, . . .

Securities Act Forms

Question 130.14: The Item-by-Item instructions for Item 7 of Form D indicate that an issuer must enter the date of the first sale of securities in the offering if the issuer is filing a “new notice.” If an issuer is filing an amendment to a Form D filing, must the issuer provide current information about the date of first sale in the amendment?

Answer: Yes. Rule 503(a)(4) provides that an issuer that files an amendment must provide current information in response to all requirements of the form, regardless of why the amendment is filed. For example, if, in the original Form D, the issuer indicated that the first sale has “Yet to Occur” and if, by the time of the amendment, the date of first sale is known, then the issuer must disclose the actual date of first sale in the amendment.

Regulation FD

This is an all new collection of CD&’s for Regulation FD.

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Massachusetts Amends Strict Data Privacy Law (Again)

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UPDATE: Another revision was published on November 5, 2009. See: Massachusetts Amends Its Strict Data Privacy Law (Yet, Again)

The Massachusetts’ Office of Consumer Affairs and Business Regulation has decided to amend the strict data privacy law and extend the deadline for compliance. This is yet another amendment to the regulations. The last amendment had extended the compliance deadline to January 1, 2010.

In keeping with Governor Deval Patrick’s commitment to balancing consumer protection with the needs of small business owners, the adjustments to Massachusetts’ identity theft regulations allow some flexibility in compliance by small businesses. The regulations now have a risk-based approach that may make it easier on small businesses that may not handle a lot of personal information about customers. Under a risk-based approach, a business, in developing a written security program, can take into account its size, nature of its business, the kinds of records it maintains, and the risk of identity theft posed by its operations.

Key amendments to 201 CMR 17.00 include:

Section 17.01 (1) Purpose of the regulation was amended to include language from M.G.L. 93H.

Section 17.01 (2) Scope of the regulations was revised to cover “persons who own or license personal information”. Section removes previous regulatory language related to those that “store or maintain personal information”.

Section 17.02 Encryption definition was amended to be technology neutral. A definition for the term “owns and licenses” was added to focus the protection of personal information in “connection with the provision of goods or services or in connection with employment”. A new definition for the term “service provider” was added.

Section 17.03 (1) Duty to protect rules look to address size and scope of a firm within the development and implementation of a written information security plan. (2) Amends and removes some requirements for the written information security plan. (f) Amends third party vendor rules and provides a two year window relative to contracts and requirements for compliance.

Section 17.04 Amends computer requirements for persons that own or license personal information to develop a written information security plan “that at a minimum, and to extent technologically feasible, shall have the following elements”.

Section 17.05 Amends the effective date of the regulations to March 1, 2010.

There will be a hearing on the revised regulations commencing at 10:00 a.m. on Tuesday September 22, 2009, in Room No. 5-6, Second Floor of the Transportation Building, Ten Park Plaza Boston, Massachusetts 02116. Interested parties will be afforded a reasonable opportunity at the hearing to present oral or written testimony. Written comments will be accepted up to the close of business on September 25, 2009. Such written comments may be mailed to: Office of Consumer Affairs and Business Regulation, 10 Park Plaza, Suite 5170, Boston, MA 02116, Attention: Jason Egan, Deputy General Counsel, or e-mailed to [email protected].

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AIMA Warns of Global Impact of EU AIFM Directive

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The Alternative Investment Management Association has warned that the European Commission’s draft directive on Alternative Investment Fund Managers would negatively affect fund managers and investors around the world if enacted into European law.

The Directive applies primarily to any Alternative Investment Fund Managers which is established in an EU Member State and which provides management and administration services to one or more alternative investment funds. However, it will also apply to the marketing of a fund within the EU by Alternative Investment Fund Managers which are established outside the EU.

Marketing Conditions

There are five conditions that a non EU registered fund manager must meet to be able to market the alternative investment fund in the EU:

  • Its home country must have prudential regulation and ongoing supervision which is “equivalent” to the Directive’s provisions
  • Its home country allows effective market access to EU fund managers which is comparable to that granted by the EU to fund managers from that country
  • Its home country has a cooperation agreement with EU regulators for monitoring the potential implications of the activities of the Third Country Fund Manager for the stability of systemically relevant financial institutions and the orderly functioning of markets
  • Its home country has signed an agreement with EU regulators to allow the sharing of  information on tax matters
  • The fund must provide EU regulators with the identities of significant owners

Satisfying the Conditions

Unfortunately for fund managers, four out of the five requirements require their home country to act. If the EU effectively locks out funds managed by non-EU fund managers, countries may reciprocate and lock out funds managed by EU managers from their markets.

If the Directive is adopted in its current form, fund managers may need to open an EU office and subject themselves to the EU and member state regulations.

Status

The Directive is merely at the start of the EU’s legislative process and it is likely to be revised before the Directive comes into force.

References:

Control Components Inc. and the FCPA

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Control Components Inc. pleaded guilty to violating the anti-bribery provisions of the Foreign Corrupt Practices Act and the Travel Act, admitting to bribing foreign officials in a decade-long scheme.

As part of the plea agreement, Control Components agreed to pay a criminal fine of $18.2 million; create, implement and maintain a comprehensive anti-bribery compliance program; retain an independent compliance monitor for a three-year period to review the design and implementation of Control Components’ anti-bribery compliance program and to make periodic reports to CCI and the Department of Justice; serve a three-year term of organizational probation; and continue to cooperate with the Department of Justice in its ongoing investigation.

A few months ago, two former executives of Control Components pleaded guilty to conspiring to bribe officers and employees of foreign state-owned companies on behalf of the company. Mario Covino was CCI’s former director of worldwide factory sales. He pleaded guilty to one count of conspiracy to violate the FCPA and admitted to causing the payment of $1 million in bribes to officers and employees of several foreign state-owned companies. Richard Morlok was CCI’s former finance director. He pleaded guilty to one count of conspiracy to violate the FCPA and admitted to causing the payment of $628,000 in bribes to officers and employees of several foreign state-owned companies.

These days, another FCPA case seems to be fairly routine. There are two aspects of this case that are worth noting.

First, the payments were made to officers of state-owned companies, not to government bureaucrats. This is the peril of working with state-owned enterprises. As far as the FCPA and the DOJ are concerned, there is no difference.

The second item to note is that the DOJ included not only the suitcases of cash, but also included vacations to Disneyland, Las Vegas and Hawaii. The Information also included lavish sales events to entertain current and potential customers.

When dealing with customers and hosting sales events, it is important to identify who may be a government official for purposes of the Foreign Corrupt Practices Act.

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A View of the MBA Ethics Oath by the Daily Show with Jon Stewart

A hilarious view on the MBA Ethics Oath by Jon Stewart and Jon Oliver on The Daily Show. There is a great Scared Straight piece with some MBA Students.

The Daily Show With Jon Stewart Mon – Thurs 11p / 10c
MBA Ethics Oath
www.thedailyshow.com
Daily Show
Full Episodes		 Political Humor Spinal Tap Performance

FBAR Filing Deadline Extended (For Some)

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The deadline for Foreign Bank Account Reporting was June 30. The Report of Foreign Bank and Financial Account is IRS TD F 90-22.1 (.pdf). Any United States person who has a financial interest in or signature authority, or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year must file the report. An FBAR must be filed whether or not the foreign account generates any income.

Although FBAR requirement has been around for a few years, the IRS recently revised the filing requirements. It seems to have caught many people by surprise.The IRS had extended the FBAR Filing deadline to September 23 for taxpayers who reported and paid tax on all their 2008 taxable income, but only recently learned of their FBAR filing obligation and have insufficient time to gather the necessary information to complete the FBAR.

There are a few instances that the filing requirement seems unclear and really unexpected, so the IRS further extended the filing deadline in two instances:

  1. Persons with no financial interest in a foreign financial account but with signature or other authority over the foreign financial account.
  2. Persons with a financial interest in, or signature authority over, a foreign financial account in which the assets are held in a commingled fund.

If that is you, then then you have until June 30, 2010 to file FBARs for the 2008, 2009 and earlier calendar years.

In the first instance, company officers and employees were caught off guard that they need to personally file an FBAR for company accounts. As part of IRS Notice 2009-62 (.pdf), the Department of the Treasury is requesting comments regarding when a person with signature authority over, but no financial interest in, a foreign financial account should be relieved of filing an FBAR for the account. Especially, when the person with a financial interest in the account has filed an FBAR.

The second instance was triggered by statements made by the IRS in June indicating their view that the term “foreign commingled fund” includes private investment funds organized outside the United States. As part of IRS Notice 2009-62 (.pdf), the Treasury Department is asking for comments on this approach.

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Ex-Madoff Finance Chief Frank DiPascali Pleads Guilty

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Frank DiPascali, the finance chief at Bernard Madoff’s investment advisory business, pleaded guilty to helping his boss carry out a $65 billion Ponzi scheme. DiPascali pleaded guilty to 10 counts, including conspiracy, fraud and money laundering. DiPascali has been cooperating with prosecutors, explaining how he and others helped Madoff defraud investors by using money from new clients to pay earlier ones at Bernard L. Madoff Investment Securities LLC.

Maybe we will get some insight into how the fraud began and what sent Madoff and DiPascali over to the dark side. The crime is done and the victims have lost. I am hoping to get some insight into the fraud so we can apply those lessons going forward.

In addition to the criminal proceedings, the Securities and Exchange Commission also filed a complaint against DiPascali. He has consented to a proposed partial judgment, which would impose a permanent injunction against him. The part DiPascali did not consent to were the issues of disgorgement and a financial penalty which will be decided at a later time.

The judge denied a bail request by prosecutors and DiPascali’s lawyer, who argued that sending him to jail would hamper his cooperation in the investigation. He is expected to provide prosecutors with a road map of those in the Madoff inner circle who were involved in the scheme that swindled investors out of an estimated $64.8 billion.

References:

DiPascali to Plead Guilty as Madoff’s Accomplice

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Frank DiPascali, the finance chief at Bernard Madoff’s investment advisory business, is being charged with 10 crimes related to his boss’s $65 billion Ponzi scheme.

Nobody thinks Madoff was acting alone in his scheme. They already arrested Madoff’s auditor, David G. Friehling.

U.S. Attorney Lev Dassin posted the charges today in a one- page filing on his Web site. DiPascali faces up to 125 years in prison on all the counts. Prosecutors will detail the charges DiPascali will admit before U.S. District Judge Richard Sullivan later today. In a letter to the judge on Aug. 7, Dassin said DiPascali is expected to waive his right to an indictment and plead guilty to charges contained in the information.

Here are the charges against DiPascali:

Count Charge Maximum Penalties
ONE Conspiracy 5 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $250,000 or twice the gross gain or loss; mandatory $100 special assessment; restitution.
TWO Securities Fraud 20 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $5,000,000 or twice the gross gain or loss; mandatory $100 special assessment; restitution.
THREE Investment Adviser Fraud 5 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $10,000 or twice the gross gain or loss; mandatory $100 special assessment; restitution.
FOUR Falsifying Books and Records of a Broker Dealer 20 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $5,000,000 or twice the gross gain or loss; mandatory $100 special assessment; restitution.
FIVE Falsifying Books and Records of an Investment Adviser 5 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $10,000 or twice the gross gain or loss; mandatory $100 special assessment; restitution.
SIX Mail Fraud 20 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $250,000 or twice the gross gain or loss; mandatory $100 special assessment; restitution.
SEVEN Wire Fraud 20 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $250,000 or twice the gross gain or loss; mandatory $100 special assessment; restitution.
EIGHT International Money Laundering To Promote Specified Unlawful Activity 20 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $500,000, or twice the value of the monetary instruments or funds involved, or twice the gross gain or loss; mandatory $100 special assessment; restitution.
NINE Perjury 5 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $250,000, or twice the gross gain or loss; mandatory $100 special assessment; restitution.
TEN Federal Income Tax Evasion 5 yrs. imprisonment; 3 yrs. sup. release; fine of the greatest of $250,000 or twice the gross gain or loss; costs of prosecution; $100 special assessment.

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Placement Agents Fight Bans

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Placement agent bans were put in place at the New York State Common Retirement Fund and the New Mexico State Investment Council because of the pay-to-play scandals at those pension funds. Now the SEC has proposed a ban on using placement agents when seeking capital investments from public pension funds.

A coalition of placement agents is urging the SEC to pull the plug on its proposed rule, convinced it could put some of them out of business. Placement agents are accusing the Securities and Exchange Commission of regulatory overkill, saying the proposal would indiscriminately hammer both good and bad firms.

The coalition is offering an alternative proposal:

Placement agents would be barred from making political contributions to anyone in the decision-making chain of command for public pension fund investments. The placement agent would disclose its fee arrangement with the fund’s general partner to any potential limited investment partners. Placement agents must be registered with the SEC or the Financial Industry Regulatory Authority.

There are also a few comments already submitted on the SEC’s Proposed Rule for Political Contributions by Certain Investment Advisers.  Ted Carroll’s comment is short and straight to the point:

“Please stop all this nonsense. Placement agents provide a valuable service to small and midsized investment firms and 99.99% are honest diligent people. Its offensive to see the many large political donors involved in the recent pay to play schemes get to pay fines and adopt hollow policies to avoid real prosecution. Catch and punish the guilty, leave the innocent alone.”

The comment from Claude R. Parenteau points out that the actions that precipitated the SEC proposal were already illegal activities under current regulations.

The comments also point out that the restriction could disadvantage smaller investment advisers who use placement agents to outsource marketing and sales because they can’t afford the overhead of having their own full-time marketing and sales staff.

    References:

    Indemnification for Investment Professionals by Their Funds

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    A recent case decided some issues relating to the indemnification of private equity and venture capital professionals by their affiliated funds in connection with their service as directors and officers of their portfolio companies. Stockman v. Heartland Industrial Partners, L.P., (July 14, 2009), Delaware Chancery Court.

    David A. Stockman and J. Michael Stepp were investment professionals at Heartland Industrial Partners, L.P. (“Heartland”). They also served as officers and directors of Collins & Aikman Corporation (“C&A”), and joined C&A at the direction of Heartland.

    C&A got itself into some accounting trouble. That also got Stockman and Stepp involved in civil and criminal proceedings in connection with their roles at C&A. Stockman and Stepp sought advancement of legal fees and indemnification from C&A, and when C&A’s insurance was exhausted, they sought advancement of legal fees and indemnification from Heartland. Heartland refused to advance legal expenses to Stockman or Stepp unless they agreed to additional conditions not written in the Partnership Agreement.

    Stockman and Stepp argued that both advancement and indemnification to them are mandatory under Heartland’s Partnership Agreement.

    Heartland took the position that the Partnership Agreement granted it the discretion to impose additional conditions beacuse of the requirement in the advancement provision that Heartland’s General Partner give prior approval. Heartland contended that advancement is not mandatory when its General Partner has refused to provide written approval. Also, Heartland argued that indemnification is not mandatory because Stockman and Stepp must prove that the conduct giving rise to the underlying dismissed criminal action met three requirements set forth in the Partnership Agreement. Heartland asserted that it is Stockman and Stepp’s burden to demonstrate that they i) did not breach their duties to the partnership; ii) did not knowingly violate applicable law; and iii) did not act with scienter.

    The court found in favor of Stockman and Stepp on both their advancement and indemnification claims “because the plain language of the Partnership Agreement does not unambiguously support Heartland’s reading of that document.” To the extent there is any ambiguity in the Partnership Agreement regarding advancement, that ambiguity must be resolved against the partnership in favor of the officers.

    The Partnership Agreement contains a broad indemnification provision:

    To the fullest extent permitted by law, the Partnership agrees to indemnify and save harmless each of the Indemnitees from and against any and all claims, liabilities, damages, losses, costs and expenses . . . of any nature whatsoever, known or unknown, liquidated or unliquidated, that are incurred by any Indemnitee and or to which such Indemnitee may be subject by reason of its activities on behalf of the Partnership or in furtherance of the interest of the Partnership or otherwise arising out of or in connection with the affairs of the Partnership, its Portfolio Companies or any Alternative Vehicle . . . provided, that: (i) an Indemnitee shall be entitled to indemnification hereunder only to the extent that such Indemnitee’s conduct (A) was in or was not opposed to the best interests of the Partnership, (B) in the case of a criminal action or proceeding, the Indemnitee had no reasonable cause to believe his conduct was unlawful, or (C) did not constitute fraud, bad faith, willful misconduct, gross negligence, a violation of applicable securities laws or any material breach of the Agreement or the Advisory Agreement . . .

    and advancement rights under certain conditions:

    Expenses reasonably incurred by an Indemnitee in defense or settlement of any claim that may be subject to a right of indemnification hereunder shall be advanced by the Partnership prior to the final disposition thereof upon receipt of an undertaking by or on behalf of the Indemnitee to repay such amount to the extent that it shall be determined ultimately that such Indemnitee is not entitled to be indemnified hereunder. No advances shall be made by the Partnership under this Section 4.4(b)(i) without the prior written approval of the General Partner or (ii) in connection with an action brought against an Indemnitee by a Majority in Interest of the Limited Partners.

    So, advancement of expenses to Heartland Indemnitees is mandatory under the Partnership Agreement, subject to the requirement of prior written approval from the General Partner.

    You may want to check the indemnification and advancement provisions of your partnership agreements to see how well they work on the basis of this decision.

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