The SEC staff for the first time issued interpretive guidance regarding Section 402 of the Sarbanes-Oxley Act of 2002 (SOX). To date, in the absence of authoritative guidance, issuers have largely steered clear of activities arguably within the ambit of SOX 402′s prohibition on personal loans to officers and directors. The staff’s new letter provides a measure of clarity regarding SOX 402′s scope.

SOX 402, codified as Section 13(k) of the Securities Exchange Act of 1934, makes it unlawful for an issuer “directly or indirectly … to extend or maintain credit, to arrange for the extension of credit, or to renew an extension of credit, in the form of a personal loan” to any of its directors or executive officers. Violations of SOX 402 can subject issuers to civil and criminal penalties under Sections 21B and 32(a) of the Exchange Act.

…continue reading: SEC Issues SOX 402 Guidance

On September 6, 2012, the United States Court of Appeals for the Second Circuit issued an important decision in NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 11-02762-cv (Sept 6, 2012) (“NECA-IBEW”), vacating in part the dismissal of a putative class action brought under §§ 11, 12(a)(2) and 15 of the Securities Act by an RMBS purchaser. The decision includes important holdings concerning both standing in the class action context and the standard for pleading a cognizable injury under the Securities Act. First, the Court ruled that, in some defined circumstances, purchasers of RMBS certificates have standing to assert claims on behalf of purchasers of certificates in other offerings. Second, the Court held that holders of a security need not allege an out-of-pocket loss to adequately plead damages under Section 11.

…continue reading: Second Circuit Opinion on Class Actions Under the Securities Act

The financial press and blogs were abuzz in late January 2012 about the Securities Act of 1933 (Securities Act) registration statement filed by The Carlyle Group L.P. for its initial public offering. Its limited partnership agreement required all shareholder disputes with the partnership to be resolved by mandatory, binding and confidential arbitration. The provision included a prohibition against shareholders bringing class actions. Much of the discussion that was critical of the provision focused on the elimination of class actions and not on the pros and cons of arbitration as such.

According to published reports, the SEC advised Carlyle that it would not grant an acceleration order permitting the registration statement to become effective unless the arbitration provision was withdrawn. As a practical matter, Carlyle had no means to challenge the Commission and no practical alternative other than to withdraw its arbitration provision, which it did.

I object to the process by which the SEC killed Carlyle’s arbitration provision.

…continue reading: Arbitration Provisions in Corporate Governance Documents

President Obama signed into law this week the Jumpstart Our Business Startups Act (JOBS Act). Title II of the JOBS Act affects offerings by issuers pursuant to Regulation D under the Securities Act, as well as resales under Securities Act Rule 144A. In particular:

• Section 201(a)(1) of the JOBS Act directs the Securities and Exchange Commission (SEC) to amend Rule 506 to make the prohibition against general solicitation or general advertising contained in Rule 502(c) inapplicable to offers and sales under Rule 506, provided that all purchasers are accredited investors.
• Section 201(a)(2) requires the SEC to revise Rule 144A to provide that securities sold under Rule 144A may be offered to persons other than qualified institutional buyers (QIBs), including by means of general solicitation or general advertising, provided that securities are only sold to persons reasonably believed to be QIBs.
• Section 201(b) amends Section 4 of the Securities Act to provide that offers and sales exempt under Rule 506 as revised by Section 201 “shall not be deemed public offerings under the Federal securities laws” as a result of general advertising or general solicitation.

Section 201(a) requires the SEC to amend both Rule 506 and Rule 144A not later than 90 days after enactment of the JOBS Act. The following questions and answers reflect the current understanding of the undersigned law firms regarding transactions taking place during the period prior to the date the SEC’s amendments of Rule 506 and Rule 144A implementing Section 201(a) take effect (the interim period).

…continue reading: The JOBS Act and General Solicitation

Recently, the Second Circuit decided Fait v. Regions Financial Corp., No. 10-2311-cv (2d Cir. Aug. 23, 2011), in which the Court affirmed the dismissal of a putative class action alleging violations of Sections 11(a), 12(a)(2), and 15 of the Securities Act of 1933 (the “Securities Act”). The Second Circuit held that defendants’ alleged failures to write down goodwill in a timely manner and to increase loan loss reserves sufficiently during the financial crisis were not actionable, because defendants’ challenged statements were matters of opinion rather than fact. Thus, plaintiffs had to allege that defendants did not believe the statements were true at the time they were made, something the complaint failed to do. Fait promises to be a useful tool in defending claims under the Securities Act, as well as claims that a defendant otherwise misstated financial figures, when those figures depend on the judgment of management rather than strictly objective criteria. The decision may be particularly important with respect to claims against accounting firms, whose conclusions based on their audits of financial statements and internal control regularly take the form of an expression of opinion.

…continue reading: Second Circuit Clarifies Materiality Requirement in Securities Fraud Cases

In a decision that could sharply curtail the potential liability of mutual funds and their advisers and directors for non-fraudulent prospectus misrepresentations, on March 31, 2011, the U.S. District Court for the Southern District of New York dismissed a putative class action arising out of the precipitous decline in the share price of a mutual fund during the 2007 and 2008 credit crisis. [1] The plaintiffs asserted claims under §§ 11 and 12(a)(2) of the Securities Act of 1933 (Securities Act), alleging that the prospectus for the SSgA Yield Plus Fund misrepresented the Fund’s exposure to mortgage-related securities.

The court rejected the plaintiffs’ claims on loss causation grounds. The measure of permissible damages under §§ 11 and 12(a)(2) is limited to the decline in a security’s value that results from the revelation of the artificial inflation of the security’s purchase price by a misrepresentation. Because the only price at which a mutual fund may sell or redeem its shares is determined by a statutory formula based on the net asset value (NAV) of the securities owned by the fund, prospectus misrepresentations cannot inflate a fund’s NAV nor, upon revelation, cause the NAV to decline. Accordingly, the court found that the plaintiffs’ complaint failed to allege the requisite loss causation and, therefore, dismissed the action with prejudice.

…continue reading: Federal District Court Rebuffs Mutual Fund’s Prospectus Liability

In an opinion issued on February 10, 2011, in Landmen Partners, Inc. v. The Blackstone Group, L.P., a panel of the United States Court of Appeals for the Second Circuit adopted a view of materiality that may potentially reduce the pleading burden of plaintiffs asserting claims under the federal securities laws. The ruling runs counter to a judicial trend that, since the Supreme Court’s ruling in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), has applied greater scrutiny to securities class action complaints. It did so by, among other things, minimizing the pleading obligations in claims under Sections 11 and 12(a)(2) of the Securities Act of 1933; focusing its analysis on the importance of the allegedly misleading statements to a corporate segment, rather than the public entity itself; and permitting a claim to be based on corporate and market developments that were publicly known but not specifically described in the registration statement at issue.

…continue reading: Second Circuit Addresses Materiality Standard Under Federal Securities Law

For more than half a century, traditional investment funds (mutual funds) and alternative investment funds (hedge funds) occupied separate and distinct segments of the investment market.  They employed different investment strategies, were subject to different regulatory standards, and mostly catered to different classes of investors.  Increasingly, however, these two types of funds have found themselves converging toward common investing ground.

Recent changes to the capital markets, to investor preferences, and to industry regulations have caused investors to seek out investment products that contain the characteristics of both mutual funds and hedge funds.  Investment managers have responded by introducing a new breed of hybrid funds that combine the exotic strategies of hedge funds with the transparency and relative stability of mutual funds.  Because mutual funds and hedge funds operate within different logistical and regulatory frameworks, investment managers desiring to operate in this new hybrid space must familiarize themselves with the elements of each.

…continue reading: The Convergence of Traditional and Alternative Investment Products

The reds have been printed; the deal is on the road; and the champagne is on ice. Now, all that is left is for the IPO investors to step up and buy the stock. It’s a tempting moment to relax — but an experienced deal lawyer knows better. This is the time to start preparing for the possibility that the deal will be wildly oversubscribed or will struggle mightily. In either case, the question that will shortly come your way is “How much can the deal be upsized or downsized at pricing?”

…continue reading: Upsizing and Downsizing Your IPO

On December 21, 2009, the Securities and Exchange Commission issued a proposed amendment to paragraph (c) of Rule 163 under the Securities Act of 1933, as amended. Rule 163 was initially adopted in 2005 as part of the SEC’s Securities Offering Reform, which, among other things, eased many of the “gun jumping” restrictions on communications by issuers and others in connection with registered securities offerings. The proposed amendments to Rule 163 would further ease some of these restrictions and may thereby facilitate so called “wall-crossed” offerings by well-known seasoned issuers, or WKSIs. [1]

As currently in effect, Rule 163 permits a WKSI to offer securities before filing a related registration statement. Such offers may be deemed made, for example, when discussions with potential investors take place to gauge market interest prior to broad public disclosure of a transaction. However, as currently drafted, Rule 163 applies only to communications made “by or on behalf of the issuer itself.” Other offering participants, such as underwriters or dealers, may not rely on this exception from the gun jumping restrictions. This limitation can create a significant impediment to a WKSI seeking to communicate with potential investors in advance of a securities offering, but has not filed an automatic shelf registration statement, or ASR, [2] covering the security to be offered.

…continue reading: Proposed Changes May Facilitate “Wall-Crossed” Offerings