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Or perhaps this post should be entitled:

“Lessons in How Not to Preside Over Your Annual Meeting”

While I haven’t been following the proxy contest over at Harvard Illinois Bancorp, things seem to have taken an interesting turn with the filing of this rather unique shareholder proxy statement:

Stilwell Group - Harvard Illinois Bancorp Proxy Statement

Original source: my twitter feed; additional coverage here.

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With the filing deadline for the first Form SD a little more than a month away (June 2, 2014), yesterday the Division of Corporation Finance issued nine new FAQs providing additional conflict mineral disclosure guidance. This latest guidance principally addresses the independent private sector audit requirements.

Below is an edited/tl;dr rendition; the questions and answers in their entirety can be accessed through CorpFin’s Compliance and Disclosure Interpretations webpage.

Q13: May an auditor that is not a CPA perform the independent private sector audit (“IPSA”) of an issuer’s Conflict Minerals Report … ?

A13: Yes, if the applicable requirements are met. …

Q14: If, after exercising due diligence on the source and chain of custody of its conflict minerals, an issuer determines that at least one of its products may be described as “DRC conflict undeterminable,” is the issuer required to obtain an IPSA of its Conflict Minerals Report during the temporary transition period (four years for smaller reporting companies and two years for all other issuers)?

A14: No. …

Q15: If an issuer does not obtain an IPSA of its Conflict Minerals Report because one of its products is “DRC conflict undeterminable,” may it describe any of its other products as “DRC conflict free” in its Conflict Minerals Report?

A15: No. …

Q16: During the temporary transition period, an issuer has products that it manufactured or contracted to have manufactured with conflict minerals that are necessary to the functionality or production of those products. Each product is composed of a number of conflict minerals from different sources. In its Conflict Minerals Report, how should the issuer describe any particular product based upon the various combinations of conflict minerals in the product?

A16: During the temporary transition period, if an issuer has a product that would qualify as “DRC conflict free” except that the product contains a conflict mineral that the issuer is unable to determine did not originate in the DRC or an adjoining country, or is unable to determine did not directly or indirectly finance or benefit armed groups in those countries, the issuer may not describe that product as “DRC conflict free.” Both during and after the temporary transition period, however, if an issuer determines that a product contains a conflict mineral that did finance or benefit armed groups in the DRC or an adjoining country, it must describe that product as “having not been found to be ‘DRC conflict free.’”

Q17: Does the scope of the IPSA include the completeness or reasonableness of the issuer’s due diligence, including with respect to which products the issuer described as “DRC conflict free” or “having not been found to be ‘DRC conflict free,’” or which suppliers are covered by the due diligence measures?

A17: No. The IPSA scope is limited to the IPSA objective provided in the rule. … The following diagram demonstrates the two distinct parts of the IPSA objective.

IPSA Objectives Diagram

As shown, the objective is to compare A to B and C to D. Any other comparison would be outside the IPSA scope.

Q18: The … due diligence framework used by an issuer may include procedures for obtaining information about a conflict mineral’s country of origin. If so, this aspect of the … framework would encompass the reasonable country of origin inquiry requirement under the rule. In that situation, would the IPSA also include the issuer’s reasonable country of origin inquiry?

A18: No. The IPSA does not need to include the reasonable country of origin inquiry because, under the rule, that inquiry is a distinct step separate from the due diligence process. …

Q19: A product manufactured by an issuer or contracted by an issuer to be manufactured includes some conflict minerals from recycled or scrap sources, which would not require the issuer to file a Conflict Minerals Report. It also includes conflict minerals not from recycled or scrap sources, which would require the issuer to file a Conflict Minerals Report. Must the issuer provide the required disclosures about the conflict minerals from recycled or scrap sources in the Conflict Minerals Report? Would the IPSA of the Conflict Minerals Report include the conflict minerals from recycled or scrap sources?

A19: … The Conflict Minerals Report would not need to include the disclosures for the conflict minerals from recycled or scrap sources. An issuer is only required to obtain an IPSA of its Conflict Minerals Report and not of the disclosures contained in the body of its Form SD.

Q20: The second part of the IPSA objective is to express an opinion or conclusion as to whether the issuer’s description of the due diligence measures it performed … with respect to the period covered by the report, is consistent with the due diligence process that the issuer undertook. The “period covered by the report” is the calendar year. … [I]s the issuer required to exercise due diligence constantly throughout the entire calendar year covered by the Conflict Minerals Report? Could the issuer’s due diligence measures described in the Conflict Minerals Report extend beyond the calendar year?

A20: An issuer’s due diligence measures must apply to the conflict minerals in products manufactured during the calendar year. This requirement, however, does not imply that due diligence measures must be carried out constantly throughout the calendar year. It is also possible that the issuer’s due diligence measures may begin before or extend beyond the calendar year.

Q21: The IPSA objective is to express an opinion or conclusion as to whether the design of the issuer’s due diligence measures … is in conformity, in all material respects, with the criteria set forth in the … due diligence framework used by the issuer, and whether the issuer’s description … of the due diligence measures it performed … is consistent with the due diligence process that the issuer undertook. Although the rule requires that the issuer include in its Conflict Minerals Report a description of the due diligence it exercised, it does not require a separate description of the design of its due diligence framework. The rule indicates, however, that the auditor must express an opinion or conclusion as to the design of the issuer’s due diligence measures “as set forth in” the Conflict Minerals Report. Does the rule require that an issuer provide a full description of the design of its due diligence in its Conflict Minerals Report?

A21: No. … [T]he due diligence measures undertaken that are the subject of the second part of the IPSA must be described in the Conflict Minerals Report, and the description must be in sufficient detail for the auditor to be able to form an opinion or conclusion about whether the description in the Conflict Minerals Report is consistent with the process the issuer actually performed.

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On Wednesday the Division of Corporation Finance issued a revision to its July 2011 statement on well-known seasoned issuer waivers. The original statement was issued to provide guidance on what constitutes “a showing of good cause” for purposes of an ineligible issuer waiver request; it outlines the framework that CorpFin uses when assessing such a request. The revised statement updates and refines that original framework based on CorpFin’s experience with waiver requests to date.

WKSIs

A “well-known seasoned issuer” (a WKSI) is an issuer (other than an asset-backed issuer, investment company or business development company) that: (i) meets the registrant requirements of General Instruction I.A or Form S-3 or Form F-3; and (ii) as of a date within 60 days of the determination date, either: (A) has a worldwide non-affiliate equity market capitalization (a public float) of $700 million or more; or (B) has issued for cash more than an aggregate of $1 billion in non-convertible securities, other than common equity, through registered primary offerings over the prior three-year period.

Ineligible Issuers

In addition, in order to qualify as a WKSI, an issuer must not be an “ineligible issuer.” An an ineligible issuer is generally one that:

  • is an Exchange Act reporting issuer that has failed to file all reports and other materials required to be filed during the prior 12 month period (other than certain reports on Form 8-K);
  • is, or during the prior three-year period was, a blank check company, a shell company or an issuer in an offering of penny stock;
  • is a limited partnership that is offering and selling its securities other than through a firm commitment underwriting;
  • has filed, or has had filed against it, a petition for bankruptcy during the prior three-year period;
  • is, or during the prior three-year period was, the subject of a refusal or stop order, or is the subject of a pending proceeding under Section 8 or Section 8A of the Securities Act; or
  • is, or during the prior three-year period was (or whose subsidiary is or was), convicted of any felony or misdemeanor described in certain provisions of the Exchange Act, found to have violated the antifraud provisions of the federal securities laws, or made the subject of a judicial or administrative decree or order prohibiting certain conduct or activities regarding the antifraud provisions of the federal securities laws.

The Commission may waive ineligible issuer status upon a showing of good cause that it is not necessary under the circumstances that the issuer be considered an ineligible issuer. The authority to grant such waivers has been delegated by the Commission to the Director of CorpFin.

Framework for Assessing a Waiver of Ineligible Issuer Status

In assessing a request for a waiver of ineligible issuer status CorpFin will generally focus on how the conduct giving rise to ineligibility relates to the reliability of an issuer’s current and future disclosures. If the conduct does relate to the reliability of an issuer’s disclosures, CorpFin will also focus on the steps an issuer has taken to remediate any deficiencies. CorpFin’s analysis is a facts and circumstances one, with no single factor being determinative and the burden of proof being on the issuer “to demonstrate that the conduct that gave rise to the violation, and the facts and circumstances as they currently exist, do not affect its ability to produce reliable disclosure … .”

Specifically, some of the factors CorpFin will consider include:

  • the nature of the violation or conviction;
  • whether it involved disclosure for which the issuer or any of its subsidiaries was responsible;
  • whether it calls into question the ability of the issuer to produce reliable disclosure currently and in the future;
  • whether the conduct involved a criminal conviction or scienter based violation (as opposed to a civil or administrative non-scienter based violation);
  • who was responsible for the misconduct and whether it was known by the issuer or whether personnel at the issuer ignored warning signs regarding the misconduct;
  • whether the individuals responsible for or involved in the misconduct were officers or directors of the issuer, or were lower level employees in the operation of a subsidiary;
  • whether there were red flags about the conduct and whether more senior officers of the issuer disregarded these warning signs;
  • the duration of the violative conduct (did the conduct last over a period of years or was it an isolated instance);
  • what remedial measures the issuer has taken to address the violative conduct and whether those actions would likely prevent a recurrence of the misconduct and mitigate the possibility of future unreliable disclosure;
  • whether there were key changes in the personnel involved in the violative or criminal conduct;
  • whether the issuer has taken steps to improve training or made improvements to internal controls and disclosure controls and procedures;
  • the severity of the impact on the issuer if the waiver request is denied against the facts and circumstances relating to the violative or criminal conduct to assess whether the loss of WKSI status would be a disproportionate hardship in light of the nature of the issuer’s misconduct; and
  • in the context of considering whether a waiver would be consistent with the public interest and the protection of investors, any effects that the issuer’s loss of WKSI status could have for the markets as a whole and the investing public, in light of the issuer’s significance to the markets and its connectedness to other market participants.

Something to Consider Even if You’re Not a WKSI

While CorpFin’s revised statement on WKSI waivers no doubt provides WKSIs with a greater degree of insight into the waiver assessment process, even non-WKSIs can glean insight from the framework in terms of understanding CorpFin’s current thinking on what constitutes a showing of good cause for purposes of a waiver request and perhaps even outside of the context of a waiver request for those issuers that a find themselves in the midst of a violation of the antifraud or other provisions of the federal securities law.

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Nasdaq Private MarketYesterday Nasdaq (in a press release) and SharesPost (in a blog post) announced the launch of their new private capital market, the NASDAQ Private Market (NPM).

Companies

NPM will operate as an alternative trading system and will offer private companies that qualify for NPM membership the ability to conduct primary offerings (by means of private placements) and control secondary transactions in their securities (by means of structured liquidity programs).

To become a member of NPM a private company will need to meet at least one of the marketplace’s qualification requirements and comply with certain reporting and disclosure requirement. NPM also recommends, but does not require, that member companies comply certain corporate governance guidelines.

Qualification Requirements

Qualification Requirements

Reporting and Disclosure Requirements

NPM member companies will be required to meet certain ongoing reporting and disclosure requirements, including:

  • the provision of audited annual financial statements and unaudited quarterly financial statements to transaction participants;
  • disclosing company information, such as management bios, a description of the company’s business, including significant developments, operations, competition and risks, and capitalization information, annually to transaction participants; and
  • adopting an insider trading policy designed to prevent misuse of material non-public information.

Recommended Corporate Governance Guidelines

NPM also recommends, but again does not require, that member companies adhere to certain corporate governance guidelines, including:

  • having a board of directors that includes at least two independent directors.
  • having an audit committee comprised of solely of independent directors who can read and understand financial statements and which has sole responsibility for engaging and dismissing a company’s auditors;
  • adopting a code of conduct applicable to officers, directors and employees;
  • holding an annual meeting; and
  • reviewing and overseeing related-party transactions for potential conflicts of interest.

Market Participants

NPM is a dealer market, like the NASDAQ Stock Market, meaning that market participants will have to access NPM through a broker-dealer that is a member of NPM.

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Chair White on the SEC’s Agenda for 2014

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Yesterday morning SEC Chair Mary Jo White delivered the keynote address at Northwestern Law’s 41st Annual Securities Regulation Institute. Her speech, entitled “The SEC in 2014“, touches on some of the Commission’s recent undertakings and previews certain initiatives on the 2014 agenda.

Below is an excerpt edited to accentuate major points. I’ve omitted some of the footnotes and added some references and emphasis of my own (you can read the text of White’s speech in its entirety here):

The SEC in 2014

… I thought I would speak this morning about some of the transformative changes at the SEC in 2014 and, while doing that, also preview a few of the specific rulemakings and other initiatives that I expect to be on our 2014 agenda.

Evolving with Market Technology …

NEAT

Our Quantitative Analytics Unit in our National Exam Program has, for example, developed a revolutionary new instrument called “NEAT,” which stands for “National Exam Analytics Tool.”
With NEAT, our examiners are able to access and systematically analyze massive amounts of trading data from firms in a fraction of the time it has taken in years past.

In 2014, our examiners will be using the NEAT analytics to identify signs of not only possible insider trading, but also front running, window dressing, improper allocations of investment opportunities, and other kinds of misconduct.

MIDAS

This past year, we also brought on-line another transformative tool that enables us to collect and sift through massive amounts of trading data across markets instantaneously, an exercise that once took the staff weeks or months. We call this technology MIDAS – the Market Information Data Analytics System.

Every day, MIDAS collects one billion records of trading data, time-stamped to the microsecond. … At the SEC of 2014, we are aggregating this data and presenting it on our website along with a wide range of analyses. …

What is MIDAS?

Operational Integrity

… We are also focused on ensuring that the technology used by exchanges and other market participants is deployed and used responsibly in a way that reduces the risk of market disruptions that can harm investors and undermine confidence in the integrity of our markets. …

Evolving with New Financial Products

OTC Derivatives

It is not just technology that has changed over the life of the agency. So too have the financial products that investors, businesses, and other market participants use.

The Dodd-Frank Act directed the SEC – for security-based swaps – and the CFTC – for all other swaps – to create an entirely new regulatory regime for this massive market.

The Commission has proposed substantially all of the rules required to implement this new regulatory framework. … I expect the Commission in 2014 to move forward with finalizing and implementing these rules.

Money Market Funds

… Currently, the Commission is considering two significant proposals for additional [money market funds] reform[s] … .

Completing these reforms with a final rule is a critical priority for the Commission in the relatively near term of 2014.

Securitization

… [T]he Commission proposed a new set of disclosure rules for asset-backed securities … Finalizing these new disclosure rules remains an important priority for the Commission in 2014.

A related effort is the rules we are required to adopt jointly with several other agencies governing the retention of a specified amount risk by the sponsor of an asset-backed security. We re-proposed those rules late last year, and finalizing them will be a priority for 2014.

Evolving with New Paths to Capital Formation

[W]e are at the start of what promises to be a period of transformative change in capital formation.

In 2013, according to our estimates, capital raised in public offerings totaled $1.3 trillion, as compared to $1.6 trillion raised in offerings not registered with the SEC, with over 65% raised in new and ongoing Rule 506 offerings. So the private offering markets already rival the public markets in terms of capital raised.

In July, the Commission adopted rules implementing the JOBS Act mandate to lift the ban on general solicitation, and the rules became effective on September 23, 2013. Preliminary information collected by [DERA] shows that through December 31, approximately 500 offerings were conducted, raising approximately $5.8 billion.

[I]n October and December of [2013], the Commission proposed rules to implement … crowdfunding and Regulation A.

Together, these changes should provide new and expanded ways for companies of all sizes, but particularly smaller companies, to raise capital. The final implementation of crowdfunding and an updated Regulation A is an important priority in 2014, and I expect that the Commission, after thorough consideration of all comments, will move expeditiously to finalize these rules.

These rule changes for the private offering market are just the start of the Commission’s efforts. For the changes demand that the Commission stay focused on the ongoing implementation of the exemptions, what market practices develop, how much capital is being raised, how investors are impacted, and whether fraud or other misconduct is occurring in these markets.

So, staff from across the agency is also set to monitor the developments in the markets following all of these changes. An agency-wide working group has been formed to monitor offering practices and other developments in the Rule 506 market. I have also directed the staff to form similar working groups for both crowdfunding and the new Regulation A.

One key step in the effort to improve our monitoring of Rule 506 offerings will be the adoption of final rules – also proposed in July – relating to amendments to Regulation D, Form D and Rule 156. … Advancing these important rules, after due consideration of the comments we have received, is another important priority for me in 2014.

Disclosure Reform

[Note: Commissioner Gallagher also recently emphasized the need to focus on disclosure reform, as well as proxy advisory reform, in a speech before the Forum for Corporate Directors]

As we move to complete our rulemaking in the private offering area, it is important for the SEC not to lose focus on the public markets.

I recently spoke about some of my ideas about disclosure reform and in December the staff issued a report mandated by the JOBS Act that gives an overview of Regulation S-K and the staff’s preliminary recommendations as to how to update our disclosure rules. I have asked the staff to begin an active review of our disclosure rules.

We can all probably identify particular disclosure requirements that we might eliminate or modify, but that is not the kind of review and reform I am primarily focused on – and it certainly is not the kind of thoughtful and comprehensive review that I think our disclosure rules demand. I believe we should rethink not only the type of information we ask companies to disclose, but also how that information is presented, where and how that information is disclosed, and how we can take advantage of technology to facilitate investors’ access to information and make it more meaningful to them.

I have asked the staff to seek input from issuers, investors, and other market participants in 2014 …

Vigorous Enforcement in 2014

… The coming year promises to be an incredibly active year in enforcement, as we continue to vigorously pursue wrongdoers and bring enforcement actions across the entire industry spectrum.

Admissions

… [T]he SEC, like virtually every other civil law enforcement agency, typically did not require entities or individuals to admit wrongdoing in order to enter into a settlement. This no admit/no deny settlement protocol makes a great deal of sense and has served the public interest very well. …

So, why modify the no admit/no deny protocol at all? … Because admissions can achieve a greater measure of public accountability, which can be important to the public’s confidence in the strength and credibility of law enforcement and the safety of our markets. …

After studying and discussing the issue with the staff and my fellow Commissioners, I decided to modify the SEC’s protocol to demand admissions in an expanded category of settlements. That change occurred in June and you have begun to see it play out in a number of cases. When we first announced the change in approach, we outlined broad parameters of the types of cases in which we will consider requiring admissions as part of any settlement. And now, we have a number of cases with admissions that illuminate those categories.

… [C]ases involving egregious conduct, where large numbers of investors were harmed, where the markets or investors were placed at significant risk, where the wrongdoer poses a particular future threat to investors or the markets, or where the defendant engaged in unlawful obstruction of the Commission’s processes. ….

As we go forward in 2014, you will see more cases involving admissions. ….

Financial Fraud

… Last fall, the Enforcement Division formed a Financial Reporting and Audit Task Force. This dedicated group has very talented accountants and attorneys who will broaden and thereby improve the way we look at financial reporting misconduct.

The Task Force is pursuing a number of goals, including building a deep understanding of the state of financial reporting fraud … how it happens and in what specific areas.

[W]e look closely at the auditors in every financial reporting case, but we are also closely focusing on senior executives for possible misconduct warranting charges. The message is that critical accounting issues are the responsibility of all those involved in the preparation and review of financial disclosures.

Market Integrity

… In the last two years, we have tried to send a strong enforcement message to the exchanges and alternative trading systems that play critical roles in securities market transactions that they must operate fairly, within the rules and with a close eye on their responsibilities to safeguard their technology. … Market structure integrity actions will remain a priority in 2014.

[T]here are many other enforcement priorities for 2014 that you should be aware of. These include, but are by no means limited to, FCPA, insider trading, and microcap fraud. It will, in short, be a very busy year in enforcement.

Conclusion

… There is more, of course, we will be doing and considering in the coming year, both on our own initiative and as required by the Dodd-Frank and JOBS Acts – equity market structure, duties of brokers-dealers and investment advisers, the management and responsibilities of clearing agencies and credit rating agencies, Dodd-Frank executive compensation, target date funds, systemic risk issues, broker-dealer financial responsibility, and more.

(Download File)

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