On March 21, 2013, the staff of the Division of Trading and Markets (the “Staff”) of the US Securities and Exchange Commission (the “SEC”) released responses reflecting the Staff’s views on frequently asked questions (the “FAQs”) relating to Rule 15a-6 (“Rule 15a-6” or the “Rule”) under the US Securities Exchange Act of 1934, as amended (the “Exchange Act”). The FAQs affirm, among other things, the SEC’s broad interpretation of Rule 15a-6 confirming the applicability of both the “Seven Firms” and “Nine Firms” to foreign broker-dealers, including those that use unaffiliated US-registered broker-dealers to intermediate transactions in accordance with Rule 15a-6(a)(3). This memorandum provides a brief background of Rule 15a-6 and highlights the important points included in the FAQs.

Introduction

Broker-dealers [1] located outside the United States that conduct securities transactions with persons in the United States (including solicitation of those transactions) are required to register with the SEC, unless an exemption from registration is available. Rule 15a-6 under the Exchange Act, which the SEC adopted in 1989, currently provides a conditional exemption from broker-dealer registration for a non-US broker-dealer falling under the definition of “foreign broker or dealer” [2] that engages in certain activities involving certain US investors. Since the adoption of Rule 15a-6, the Staff has expanded its scope through “no action” and other interpretive guidance. [3] In 2008, the SEC proposed changes to update and expand the scope of the rule, but that proposal has yet to be adopted.

…continue reading: SEC Responds to Rule 15a-6 and Foreign Broker-Dealer FAQs

In recent months, a number of companies have repurchased or announced plans to repurchase their shares. Management and boards of directors overseeing companies with significant cash stockpiles yet finding fewer mechanisms to boost earnings may soon need to decide whether or not a share repurchase is the most productive use of their cash. This post addresses the questions surrounding share repurchases that companies should consider as they evaluate the advantages, disadvantages, legal implications and strategic considerations of share repurchases.

Overview

What are the ways a company can repurchase its shares?

There are four principal ways a company can repurchase its shares, all of which are discussed below:

(1) open market purchases;

(2) issuer tender offers;

(3) privately-negotiated repurchases; and

(4) structural programs, including accelerated share repurchase programs.

Most share repurchases are effected over time through open market purchases. These are often referred to as share repurchase programs or plans.

…continue reading: Questions Surrounding Share Repurchases

On a number of occasions since returning to the SEC as a Commissioner, I’ve spoken about the Commission’s priorities, both in terms of what the Commission is doing and what it should be doing in order effectively to carry out its mandate to protect investors, ensure fair and efficient markets, and facilitate capital formation. Needless to say, the Commission does not operate in a vacuum, and for various reasons, it’s not always easy to execute those priorities as we see fit. The constant stream of external influences on the Commission’s work serves as a significant impediment to its ability to focus on the core mission, including the vital, basic “blocking and tackling” of securities regulation. Therefore, I’d like to talk about the Commission’s origin and role as an expert, independent agency — as well as the challenges to that independence — in what has become in recent years a difficult environment for independent agencies.

…continue reading: Challenges for the SEC’s Independence

On January 7, 2013, the Second Circuit Court of Appeals ruled that Section 16(b) of the Securities Exchange Act of 1934, which provides for the disgorgement of profits that corporate insiders realize “from any purchase and sale, or any sale and purchase, of any equity security” of the corporate issuer within any period of less than six months (the “short-swing profit rule”), does not apply to a corporate insider’s purchase and sale of shares of different types of stock in the same company where those securities are separately traded, nonconvertible stocks that have different voting rights. Gibbons v. Malone, No. 11 Civ. 3620, 2013 U.S. App. LEXIS 398 (2d Cir. Jan. 7, 2013). Throughout its analysis, the court characterized § 16(b) as a blunt, mechanical rule that prioritizes ease of enforcement over maximum deterrence. Acknowledging the policy reasons for a more flexible interpretation of the rule, the Second Circuit invited the SEC to consider interpreting the short-swing profit rule to cover “similar” equity securities.

…continue reading: Second Circuit Rules on Short-Swing Profit

Overview

On August 10, 2012, President Obama signed the Iran Threat Reduction and Syria Human Rights Act into law. The act is available at http://www.gpo.gov/fdsys/pkg/BILLS-112hr1905enr/pdf/BILLS-112hr1905enr.pdf.

The purpose of the act is to expand U.S. sanctions against Iran in order to compel Iran to stop pursuing a nuclear weapons program and other controversial initiatives.

Public companies, however, may have new disclosure obligations as a consequence of the act. Among other things, the act requires that companies subject to the reporting requirements of the Securities Exchange Act of 1934 (Exchange Act) make certain disclosures relating to activities that they and their worldwide affiliates knowingly engage in involving Iran in their quarterly and annual reports filed with the Securities and Exchange Commission (SEC). This provision of the act does not require additional rulemaking by the SEC in order to be effective. As a consequence, public reporting companies must comply with the new reporting obligations under the act by February 6, 2013.

…continue reading: SEC Requirements under the Iran Threat Reduction and Syria Human Rights Act

The Eleventh Circuit Court of Appeals dealt a blow to the Securities and Exchange Commission (“SEC”) and its long-standing practice of seeking broad federal court injunction orders directing defendants to refrain from any future violations of securities laws, often referred to as “obey-the-law” injunctions. In SEC v. Goble, No. 11-12059, 2012 WL 1918819 (11th Cir. May 29, 2012), the Eleventh Circuit vacated the “obey-the-law” injunctions entered against defendant Richard Goble, the founder of North American Clearing, Inc. (“North American”), because the injunctions did not satisfy Federal Rule of Civil Procedure 65(d)(1), which requires that injunctions describe, “in reasonable detail. . . the act or acts [sought to be] restrained or required.” Although the decision appears to widen an existing gap between the Eleventh and Second Circuits on the propriety of “obey-the-law” injunctions in SEC settlements, the full impact of the Goble decision remains unclear. The Eleventh Circuit’s strongly worded opinion and careful analysis could prompt other courts to question the benefit and efficacy of the SEC’s frequent practice of seeking such broad “obey-the-law” injunctions.

…continue reading: SEC “Obey-the-Law” Injunctions Held Invalid

The Commission has authorized that a Study be sent to Congress expressing the views of the Staff on the cross-border scope of the private right of action under Section 10(b) of the Securities Exchange Act of 1934. However, my conscience compels me to write separately to record my views on the Study. I write to convey my strong disappointment that the Study fails to satisfactorily answer the Congressional request, contains no specific recommendations, and does not portray a complete picture of the immense and irreparable investor harm that has resulted, and will continue to result, due to Morrison v. National Australia Bank, Ltd.

In the United States we have a strong belief that, whether rich or poor, we are all entitled to our day in court. Sadly, for many American investors this is no longer true.

If American investors are defrauded by a company that they have invested in – and that company is listed on a foreign exchange – investors may be unable to have their day in court and seek redress against this company for its lies and misrepresentations. Thus, investors have been stripped of a traditional American right.

This was not always the case. For decades, federal courts applied the same standard to determine whether U.S. federal securities law applied to frauds that took place, in whole or in part, outside of the United States. Under that standard, Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and other antifraud provisions applied “when there was ‘significant U.S. fraudulent conduct that directly caused the plaintiffs losses’ (the conduct test) or when there were ‘significant effects’ on the U.S. securities markets (the effects test).”

…continue reading: Defrauded Investors Deserve Their Day in Court

On March 26, 2012, in Credit Suisse Securities (USA) LLC v. Simmonds, the U.S. Supreme Court held 8-0 that the two-year statute of limitations for suits under the short-swing liability rules of Section 16(b) of the Securities Exchange Act of 1934 is not tolled (i.e., suspended) until an insider files a Section 16(a) disclosure statement; the limitations period can begin running even if the disclosure statement is filed at a later date or never filed at all. The Court’s decision provides insiders of U.S. public companies with better protection and more certainty against time-barred claims.

The Supreme Court reversed the Ninth Circuit, which had held, citing to its precedent, that the limitations period is tolled until an insider files the Section 16(a) disclosure statement “regardless of whether the plaintiff knew or should have known of the conduct at issue”. In dicta, the Supreme Court also rejected the Second Circuit’s rule that the limitations period is tolled until the plaintiff “gets actual notice that a person subject to Section 16(a) has realized specific short-swing profits that are worth pursuing”.

The Supreme Court did indicate some willingness to permit equitable tolling of the Section 16(b) limitations period, but under circumstances more limited than the “disclosure” rule of the Ninth Circuit or the “actual notice” rule of the Second Circuit.

…continue reading: Court Rules on Short-swing Liability Rules

In its 2010 decision in Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010), the Supreme Court addressed whether Section 10(b) of the Securities Exchange Act applies to a securities transaction involving foreign investors, foreign issuers and/or securities traded on foreign exchanges. The Morrison decision curtailed the extraterritorial application of the federal securities laws by holding that Section 10(b) applies only to (a) transactions in securities listed on domestic exchanges or (b) domestic transactions in other securities.

In Absolute Activist Value Master Fund Ltd. v. Ficeto, et al., Docket No. 11-0221-cv (2d Cir. Mar. 1, 2012), the Second Circuit addressed for the first time what constitutes a “domestic transaction” in securities not listed on a U.S. exchange. The Court held that, to establish a domestic transaction in securities not listed on a U.S. exchange, plaintiffs must allege facts plausibly showing either that irrevocable liability was incurred or that title was transferred within the United States.

Plaintiffs in Absolute Activist were nine Cayman Island hedge funds (the “Funds”) that had engaged Absolute Capital Management Holdings (“ACM”) to act as their investment manager. Plaintiffs alleged in their complaint that the ACM management defendants engaged in a variation of a pump-and-dump scheme. Specifically, defendants were alleged to have caused the Funds to purchase billions of shares of U.S. penny stocks issued by thinly capitalized U.S. companies – stocks that defendants themselves also owned – and then to have traded those stocks among the Funds in a way that artificially drove up the share value. Defendants thereby were alleged to have profited both from the fees generated through the fraudulent trading activity and the profits they earned when they sold their shares of the penny stocks at a profit to the Funds.

…continue reading: Establishing a “Domestic Transaction” in Securities under Morrison

A group of professors of American and German securities law submitted an amicus brief to the Second Circuit Court of Appeals in Elliott Associates v. Porsche, on Wednesday August 3, 2011. Amici urged the Court to prevent private parties from using U.S. courts to litigate claims that exceed the subject matter that Congress intended to regulate in Section 10(b) of the Securities Exchange Act as held by the Supreme Court in Morrison v. National Australia Bank. 130 S. Ct. 2869 (2010).

The case was brought by a group of hedge funds and other investors who took short positions in security based swap agreements that referenced the stock of Volkswagen (VW), which is traded in Germany but not in the United States. The plaintiffs sued Porsche for allegedly manipulating the price of VW stock in Germany and for allegedly misrepresenting Porsche’s intentions concerning takeover of VW. The United States District Court for the Southern District of New York (Judge Baer) held that these claims were precluded under Morrison because the plaintiffs’ transactions were the functional equivalent of transactions in VW stock, which was not traded in the United States. Amici urged affirmance of the holding below.

…continue reading: Professors Argue Against U.S. Courts Hearing Foreign Securities Claims