Regulatory Compliance

Additional Lessons in Social Media and the Securities Laws Courtesy of Zipcar

by Vanessa Schoenthaler on January 7, 2013

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On Friday night DealBook reported that Zipcar, the car-sharing company which Avis Budget Group recently agreed to acquire, filed a Form 8-K earlier in the evening to disclose the following tweet by CEO Scott Griffith:

Scott Griffith Tweet

Zipcar also filed a copy of The Boston Globe article referenced in Griffith’s tweet and a copy of a transcript from Griffith’s CNBC interview earlier that day.

For the most part the remainder of Dealbook’s brief article goes on to discuss Netflix CEO Reed Hastings’ July 2012 Facebook posting and the potential Regulation FD issues surrounding that posting, including Netflix and Hastings’ recent receipt of Wells notices from the Securities and Exchange Commission.

But Zipcar’s filing on Friday night wasn’t about Regulation FD, which to its credit Dealbook does acknowledge:

Zipcar made the S.E.C. filing about Mr. Griffith’s Twitter message because the transaction with Avis is subject to Zipcar’s shareholder approval and securities laws dictate that the company must file with regulators any announcements that could be construed as soliciting shareholder votes.

Unfortunately, that single sentence was placed without elaboration in the middle of a discussion about the role of Regulation FD in the age of social media. So it seems like this might actually be a Regulation FD issue. But it’s not.

Zipcar’s Form 8-K filing is about the proxy solicitation rules. As Zipcar is in the process of being acquired by Avis, it must seek shareholder approval of its merger agreement, which in turn requires that Zipcar file a proxy statement to solicit shareholder votes and proxies.

Whenever anyone “solicits” proxy authority, regardless of whether it’s the company, an officer, director, shareholder or even a third-party proponent, that person must meet certain disclosure and filing requirements. While not every communication qualifies as a solicitation, the Commission does define the term broadly to include any communication—whether in the form of a widely distributed announcement or a private email message—that is reasonably calculated to result in the procurement, withholding or revocation of a proxy.

If a communication qualifies as a solicitation and it’s in writing then it must be filed with the Commission on the same day that it’s first published, sent or given to a shareholder. Written communications encompass all forms of information not otherwise disseminated orally and generally include things like blog posts, tweets, slide presentations and videos (which must be transcribed when filed).

Which is exactly what’s going on here. Griffith’s tweet and the other exhibits to Zipcar’s Form 8-K are being filed as proxy solicitation materials, not as some last-minute filing after a CEO tweet slips out (as might be inferred from the Dealbook piece). What’s more, Zipcar’s legal team seems to be right on top of its social media presence, having previously filed tweets by both the company and Griffith on January 2nd:

Zipcar Tweet

Scott Griffith Tweet

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One to Watch: Netflix Discloses that its CEO’s Facebook Posting May Trigger a Reg. FD Violation

by Vanessa Schoenthaler on December 7, 2012

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Yesterday Netflix filed a Form 8-K disclosing that it and its CEO, Reed Hastings, have each received a “Wells notice” indicating that the Staff of Securities and Exchange Commission intends to recommend that the Commission institute a cease and desist proceeding or bring a civil injunctive action or both against Netflix and Hastings for violations of Regulation FD related to a posting on Hastings’ Facebook page back in July.

Here’s the posting at issue:

Here’s Hastings’ response, also posted on his Facebook page a few moments after it was filed as an exhibit to Netflix’s Form 8-K:

Regulation FD requires that whenever a company or, as in this case, someone acting on a company’s behalf, discloses material nonpublic information to certain market participants it must also disclose that information publicly—simultaneously, in the case of an intentional disclosure, and promptly, in the case of an unintentional disclosure.  The public disclosure requirement can be satisfied by filing a Form 8-K or by any other method reasonably designed to provide broad, non-exclusionary distribution of the information to the public.

Hastings’ strongest argument is that the information was not material and therefore Regulation FD should not come into play at all. However, the more interesting argument is that information posted on his Facebook page “is very public”, which implies that even if the information in question was material, posting it on Facebook would constitute a public disclosure in compliance with the requirements of Regulation FD.

The difficulty with such a conclusion is that, as Hastings notes, Netflix “doesn’t currently use Facebook and other social media to get material information to investors … .”

For purposes of Regulation FD, information posted on a company’s website is public once it has been disseminated in a manner calculated to reach investors in general through recognized channels of distribution and investors have been afforded a reasonable waiting period to react to that information.

It would be challenging to cast Hastings’ Facebook page as a recognized channel of distribution for one instance of disclosure, particularly since investors haven’t been alerted to the fact that Netflix intended to use the page as such.

This is definitely a matter to follow, as there hasn’t been much, if anything, in the way of new guidance from the Commission on the use of company websites and social media since its 2008 release. I imagine the matter will settle around the issue of whether the information disclosed was material, but it’ll still be informative to see what arguments are raised and what position the Commission ultimately takes.

It’s also a good reminder to occasionally dust off and review your social media policy with everyone in the company.

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The SEC Announces Relief Measures for Those Affected by Hurricane Sandy

by Vanessa Schoenthaler on November 15, 2012

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Yesterday the Securities and Exchange Commission announced the issuance of an order exempting publicly traded companies and others affected by Hurricane Sandy and its aftermath from certain Exchange Act rules and requirements.

Exchange Act Reports, Schedules and Forms

In particular, the order conditionally exempts issuers subject to Sections 13(a) or 15(d) of the Exchange Act from the requirement to file certain Exchange Act reports, schedules or forms during the period from and including October 29, 2012 through November 20, 2012, provided that the issuer:

  • is unable to meet a filing deadline due to Hurricane Sandy and its aftermath;
  • files the required report, schedule or form by November 21, 2012; and
  • discloses in the report, schedule or form that it is relying on the Commission’s order and states the reasons why, in good faith, it could not file the report, schedule or form on a timely basis.

Proxy Solicitation Materials and Information Statements

The order also conditionally exempts issuers from the requirement to furnish proxy statements, annual reports and other soliciting materials, and information statements and annual reports to a security holder, provided:

  • the security holder has a mailing address located in a zip code where the postal service has suspended mail service of the type or class of mail customarily used by the issuer;
  • the issuer has followed normal procedure when furnishing solicitation or information materials to the security holder in accordance with applicable rules; and
  • if requested by the security holder, the issuer provides the solicitation or information materials by a means reasonably designed to furnish the materials to the security holder.

Any issuer or other person unable to meet a deadline, including any shareholder who is unable to meet a deadline applicable to a shareholder proposal, or delivery obligation as a result of Hurricane Sandy or who is in need of other assistance related to public filings, can also call or email CorpFin.

Auditor Independence and Reconstruction of Accounting Records

In addition, the order conditionally exempts independent certified public accountants that are engaged to provide audit services for an issuer from Exchange Act rules and requirements that prohibit auditors from providing bookkeeping or other services related to the accounting records of an audit client, provided that any such services are:

  • limited to reconstruction of previously existing accounting records that were lost or destroyed as a result of Hurricane Sandy and cease as soon as the lost or destroyed records are reconstructed, financial systems are fully operational and the issuer can effect an orderly and efficient transition to management or other service provider; and
  • subject to pre-approval by the issuer’s audit committee.

Filing Date Adjustments

The Commission also announced that it will take the following positions regarding filing dates:

For purposes of eligibility to use Form S-3 (as well as well-known seasoned issuer status) for an issuer relying on the Commission’s order, any of that issuer’s Exchange Act reports that would have been required to be filed during the period from October 29, 2012 to November 20, 2012 will be due by November 21, 2012. Such an issuer will, therefore, be considered:

  • current in its Exchange Act reports prior to November 21, 2012 if it was current in its Exchange Act reports as of October 28, 2012;
  • current in its Exchange Act reports as of November 21, 2012 if it was current in its Exchange Act reports as of October 28, 2012 and it has made any filings required during the period from October 29, 2012 to November 20, 2012;
  • timely in its Exchange Act reports prior to November 21, 2012 if it was timely in its Exchange Act reports as of Oct. 28, 2012; and
  • timely in its Exchange Act reports as of November 21, 2012 if it was timely in its Exchange Act reports as of October 28, 2012 and it has made any filings required during the period from October 29, 2012 to November 20, 2012 on or before November 21, 2012.

For purposes of eligibility to use Form S-8 and the current public information eligibility requirements of Rule 144(c), an issuer relying on the Commission’s order will be considered:

  • current in its Exchange Act reports prior to November 21, 2012 if it was current in its Exchange Act reports as of October 28, 2012; and
  • current in its Exchange Act reports as of November 21, 2012 if it was current in its Exchange Act reports as of October 28, 2012 and it has made any filings required during the period from October 29, 2012 to November 20, 2012.

Notification of Late Filing on Form 12b-25

Issuers that receive an extension on filing Exchange Act annual reports or quarterly reports pursuant to the Commission’s order will be considered to have a due date of November 21, 2012 for those reports for purposes of Exchange Act Rule 12b-25. As such, those issuers will be permitted to rely on Rule 12b-25 where they are unable to file the required reports on or before November 21, 2012.

Investment Companies, Transfer Agents and Other Persons

The Commission’s order and announcement also detail certain conditional exemptions and filing date adjustments for transfer agents, investment companies and others, which are not addressed here.

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The SEC’s Resource Extraction Rules Will Not Be Put On Hold

by Vanessa Schoenthaler on November 9, 2012

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Yesterday the Securities and Exchange Commission issued an order denying a joint motion to stay the effectiveness of Exchange Act Rule 13q-1 and new Form SD (related to disclosure of payments by resource extraction issuers) pending the outcome of the American Petroleum Institute, Chamber of Commerce, Independent Petroleum Association of America and the National Foreign Trade Council’s petition for review filed with the U.S. Court of Appeals for the D.C. Circuit on October 10, 2012.

The Court of Appeals has directed expedited briefing and argument on the parties’ petition for review, and the Commission notes in its order that a determination on Rule 13q-1′s validity may be made as soon as this spring.

Resource extraction issuers are not required to begin complying with the new rules until the fiscal year ending after September 30, 2013.

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How to Request a Filing Date Adjustment for a Late Filing

by Vanessa Schoenthaler on November 2, 2012

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While EDGAR remained up and running throughout Hurricane Sandy the rest of us may not have been so lucky. A number of east coast data centers either went down or were taken offline during the storm and millions of homes and businesses lost and many still remain without power.

One of the many compliance issues that arises in a power-related emergency is what happens if you are supposed to submit a Form 8-K, registration statement or some other filing but are unable to do so?

In the case of Hurricane Sandy, the Commission has been posting updates on its website all week and advises filing when you can and that CorpFin will consider filing date adjustments on a case-by-case basis.

Leading to the question: how do you request a filing date adjustment?

If this isn’t your first filing you probably already know that the official filing date for any EDGAR filing is the business day on which the Commission receives it, with 5:30 pm eastern time being the cutoff for Securities Act filings and most Exchange Act filings (with the exception of Section 16 filings on Forms 3, 4 and 5 and Schedule 14N filings (related to shareholder director nominees), which have a cutoff time of 10:00 pm eastern time).

As for adjusting a filing date, Rule 13(b) of Regulation S-T provides that the Commission may, upon request, adjust a filing date if a filer in good faith attempts to file a document in a timely manner but the filing is delayed due to technical difficulties beyond the filer’s control.

The Commission has previously issued guidance on how to request a filing date adjustment for both issuers and investment companies, and has made similar filing date adjustments following a 2003 power outage in the northeast.

To apply for a filing date adjustment you must submit a written request, through the EDGAR system, via EDGAR CORRESP, to the Chief, Office of Information Technology, Division of Corporation Finance (or if you are an investment management company, to the Senior Special Counsel (EDGAR), Division of Investment Management), and include the following information:

  • the filer name and CIK;
  • the accession number and EDGAR submission type of the filing;
  • a concise but detailed description of the technical difficulty leading to the late filing, including the date and time of the initial attempted transmission;
  • a statement of how the filer will be harmed if a filing date adjustment is not granted (e.g., financial statements would be stale);
  • an affirmative request pursuant to Rule 13(b) of Regulation S-T for adjustment of the filing date from the specific filing date to the date of the initial attempted transmission; and
  • any e-mails sent by the EDGAR system.

Update November 5,  2012:

The Commission announced today that it is preparing relief measures for those affected by Hurricane Sandy and it aftermath.

The measures are expected to include an extension of the filing deadline for those filings due between October 29, 2012 and November 20, 2012; the extended filing deadline anticipated to be November 21, 2012.

The extension will apply to publicly traded companies, investment companies and investment advisers, among others.

The Commission will also continue to consider other requests for additional relief on a case-by-case basis.

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NYSE and Nasdaq Propose Listing Standards for Compensation Committees and Advisers

by Vanessa Schoenthaler on October 1, 2012

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Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Securities Exchange Act of 1934 by adding new Section 10C which requires that the Securities and Exchange Commission adopt rules directing the national securities exchanges to prohibit the listing of a company’s equity securities if that company does not comply with certain compensation committee and compensation adviser requirements. To implement Section 10C, the Commission adopted new Rule 10C-1 and amended Item 407 of Regulation S-K. Rule 10C-1 requires that the national securities exchanges adopt listing rules to effectuate the requirements of Section 10C.

Each of the NYSE and Nasdaq filed proposed rule changes that would implement new Rule 10C-1 last Tuesday and Wednesday, respectively. Below is a comparative summary of those proposed changes:

   

NYSE

 

Nasdaq
General Compensation Committee Requirements No changes. Nasdaq is proposing to require that all listed companies maintain a standing compensation committee comprised of at least two independent directors.The compensation committee would be required to adopt a formal written charter specifying: (i) the scope of the committee’s responsibilities and how it carries those responsibilities out, including structure, processes and membership requirements, (ii) the committee’s responsibility for determining or recommending executive compensation, (ii) that the chief executive officer may not be present during voting or deliberation on his compensation, and (iv) the committee’s specific responsibilities and authorities related to compensation advisers.The compensation committee would be required to review and assess the adequacy of its charter on an annual basis.

Nasdaq’s proposed change would eliminate the current compensation committee alternative available in Listing Rule 5605(d)(1)(A), under which company may have a majority of the board’s independent directors determine, or recommend to the board for determination, executive compensation, in lieu of having a compensation committee.
Compensation Committee Director Independence Requirements NYSE is proposing that compensation committee members be required to be independent under the general board independence requirements (Listed Company Manual Section 303A.02), in addition to meeting independence requirements specific to compensation committee service, which would necessitate that, in affirmatively determining independence, a company’s board consider all factors specifically relevant to determining whether a director has a relationship to the company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including, but not limited to, consideration of the director’s compensation and affiliate relationships.NYSE is not proposing to adopt any specific numerical tests or require that boards consider any other specific independence factors.

Nasdaq is proposing that compensation committee members be required to be independent under the general board independence requirements (Listing Rule 5605(a)(2)) and be prohibited from accepting, directly or indirectly, any consulting, advisory or other compensatory fee from the company or a subsidiary of the company, beginning with the director’s term of service on the company’s compensation committee. This prohibition on compensatory fees would exclude fees received as a member of the compensation committee itself and fixed fees received under a retirement plan for prior service to the company.

In addition, in determining whether a director is eligible to serve on the compensation committee, a company’s board also must consider the whether the director has affiliate relationships and whether such affiliations would impair the director’s judgment as a member of the compensation committee.

Nasdaq is not proposing to adopt any specific numerical or bright line tests or require that boards consider any other specific independence factors.

Nasdaq proposes to retain the existing exception which allows a non-independent director serve on a compensation committee for exceptional and limited circumstances.
Compensation Committee Advisers NYSE is proposing that a company’s compensation committee charter specify that: (i) a compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser, (ii) a compensation committee be directly responsible for the appointment, compensation and oversight of any compensation consultant, independent legal counsel and other adviser retained by the committee, and (iii) the company provide appropriate funding for payment of reasonable compensation, as determined by the compensation committee. Nasdaq is proposing that a company’s compensation committee charter specify that: (i) a compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser, (ii) a compensation committee be directly responsible for the appointment, compensation and oversight of any compensation consultant, independent legal counsel and other adviser retained by the compensation committee, and (iii) the company provide appropriate funding for payment of reasonable compensation, as determined by the compensation committee.
Compensation Committee Adviser Independence NYSE is proposing that a company’s compensation committee charter specify that before a compensation committee selects a compensation adviser, other than with respect to in-house legal counsel, the committee must consider the six independence factors specified in Rule 10C-1(b)(4): (i) other services provided to the company by the compensation adviser’s employer, (ii) the fees received from the company by the compensation adviser’s employer as a percentage of such employer’s total revenues, (iii) the policies and procedures of the compensation adviser’s employer that are designed to prevent conflicts of interest, (iv) any business or personal relationship of the compensation adviser with a member of the compensation committee (v) any stock of the company owned by the compensation adviser, and (vi) any business or personal relationship of the compensation adviser or the compensation adviser’s employer with an executive officer of the company.NYSE is not proposing to specify any additional factors.NYSE is proposing to specify in the commentary to proposed Listed Company Manual Section 303A.05 that nothing shall be construed to: (i) require a compensation committee to implement or act consistently with the advice or recommendations of a compensation adviser, or (ii) to affect the ability or obligation of a compensation committee to exercise its own judgment in fulfillment of its duties. Nasdaq is proposing that a company’s compensation committee charter specify that before a compensation committee selects a compensation adviser, other than with respect to in-house legal counsel, the committee must consider the six independence factors specified in Rule 10C-1(b)(4): (i) other services provided to the company by the compensation adviser’s employer, (ii) the fees received from the company by the compensation adviser’s employer as a percentage of such employer’s total revenues, (iii) the policies and procedures of the compensation adviser’s employer that are designed to prevent conflicts of interest, (iv) any business or personal relationship of the compensation adviser with a member of the compensation committee (v) any stock of the company owned by the compensation adviser, and (vi) any business or personal relationship of the compensation adviser or the compensation adviser’s employer with an executive officer of the company.Nasdaq is not proposing to specify any additional factors.
Cure Period NYSE is proposing that if a company fails to meet the compensation committee requirements because a member ceases to be independent for reasons outside of that member’s reasonable control, that person, with prompt notice to NYSE and only so long as a majority of the compensation committee continues to be independent, may remain a compensation committee member until the earlier of: (i) the next annual shareholders’ meeting, or (ii) one year from the occurrence of the event that caused the member to be no longer independent. Nasdaq is proposing that if a company fails to meet the compensation committee requirements because of a vacancy on the committee or because a member ceases to be independent for reasons outside of that member’s reasonable control, the company shall regain compliance by the earlier of: (i) the next annual shareholders’ meeting, or (ii) one year from the occurrence of the event that caused the noncompliance. However, if the annual shareholders’ meeting occurs no later than 180 days following the event that caused noncompliance, the company will instead have 180 days to regain compliance.A company relying on the cure period must immediately notify Nasdaq upon learning of its noncompliance.
Transition Period NYSE is proposing that companies comply with the requirements related to the committee’s authority to retain and compensate advisers and responsibility to consider certain independence factors prior to selecting advisers beginning on July 1, 2013.NYSE is proposing that companies have until the earlier of: (i) their first annual meeting after January 15, 2014, or (ii) October 31, 2014, to comply with the independence requirements specific to compensation committee service. Nasdaq is proposing that companies immediately comply with the requirements related to the compensation committee’s authority to retain and compensate advisers and responsibility to consider certain independence factors prior to selecting advisers.Nasdaq is proposing that companies comply with the remaining requirements, including the formation of a standing compensation committee, adoption of a formal written charter and the independence requirements specific to compensation committee service, by the earlier of: (i) their second annual meeting held after the date of approval of the proposed rules; or (ii) December  31, 2014.
Exemptions NYSE is proposing to exempt smaller reporting companies from compliance with the independence requirements specific to compensation committee service.NYSE is also proposing to exempt companies that only list preferred stock, and the categories of issuers that are exempt under Rule 10C-1, including limited partnerships, companies in bankruptcy, open-ended management investment companies and foreign private issuers that disclose in their annual report the reasons they do not have an independent compensation committee.With respect to foreign private issuers, NYSE is proposing to continue to permit foreign private issuers to follow home country practices in lieu of complying with NYSE compensation committee listing standards.

Nasdaq is proposing to exempt smaller reporting companies from compliance with the independence requirements specific to compensation committee service and the requirements relating to compensation advisers.

Smaller reporting companies will not, however, be exempt from the requirement that they have a standing compensation committee comprised of at least two independent directors and adopt a formal written charter (or board resolution in place of a charter).

Nasdaq is also proposing that its existing exemptions from compensation-related listing rules remain unchanged. Exempt issuers include asset-backed issuers and other passive issuers, cooperatives, limited partnerships, management investment companies, and controlled companies.

Nasdaq is proposing to exempt foreign private issuers that follow home country practices in lieu of complying with Nasdaq compensation committee listing standards if they discloses in their annual report: (i) the reasons they do not have an independent compensation committee, (ii) the requirements they do not follow, and (iii) the home country practices followed in lieu thereof.
Update December 1, 2012:
The Commission has designated a longer period for action, until January 13, 2013, to approve or disapprove exchange rule changes related to compensation committees and advisor listing standards.

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New FINRA Rule 5123 – Private Placement of Securities Effective Date

by Vanessa Schoenthaler on September 7, 2012

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On Wednesday FINRA issued a regulatory notice informing members that new FINRA Rule 5123 – Private Placements of Securities will take effect on December 3, 2012, and will apply prospectively to private placements that begin selling efforts on or after that date.

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The Commission’s Final Rules Requiring Listing Standards for Compensation Committees and Advisers

by Vanessa Schoenthaler on June 25, 2012

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Final Rules on Compensation Committees and Compensation AdvisersSection 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Securities Exchange Act of 1934 by adding new Section 10C which requires that the Securities and Exchange Commission adopt rules directing the national securities exchanges and national securities associations to prohibit the listing of a company’s equity securities if that company does not comply with certain compensation committee and compensation adviser requirements.*

The Commission first released proposed rules and amendments to implement Section 10C in March 2011, and, thereafter, in response to a request from the Center for Capital Markets, extended the comment period through May 2011.

Last week the Commission adopted new Rule 10C-1 and amended Item 407 of Regulation S-K.

Compensation Committees Listing Standards

New Rule 10C-1 requires that, to the extent a national securities exchange lists equity securities, that exchange must adopt listing standards that address the independence of a company’s compensation committee members as well as such members’ authority to select, oversee and pay for the services of compensation advisers.

Rule 10C-1 defines a “compensation committee” to include not only board committees formally designated as compensation committees, but also any board committee that performs functions typically performed by a compensation committee (e.g., a human resources committee or corporate governance committee), and, for certain aspects of Rule 10C-1, in the absence of either a compensation or other committee that performs functions typically performed by a compensation committee, the members of a company’s board of directors who oversee executive compensation matters on behalf of the board.

The exchanges’ listing standards must prohibit the initial or continued listing of any company’s equity securities unless each member of the company’s compensation committee, as defined by Rule 10C-1, is a member of the company’s board of directors and is otherwise independent.

Subject to the Commission’s review and approval, each exchange may develop its own definition of independence, provided they take into consideration relevant factors including, without limitation:

  • a director’s source of compensation, including any consulting, advisory or compensatory fee paid by the company; and
  • whether a director is affiliated with the company, a subsidiary of the company or an affiliate of a subsidiary of the company.

There is, however, no requirement that the exchanges adopt listing standards prohibiting compensation committee membership based on any specific relationship, such as affiliate status, and they may exempt certain relationships or categories of companies as deemed appropriate.

Compensation Advisers Listing Standards

New Rule 10C-1 also requires that the exchanges adopt listing standards providing that:

  • a formally designated compensation committee or other board committee that performs functions typically performed by a compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser (each a “Compensation Adviser”);
  • a formally designated compensation committee, other board committee that performs functions typically performed by a compensation committee or, in the absence of a committee, members of a company’s board of directors who oversee executive compensation matters, are directly responsible for the appointment, compensation and oversight of any Compensation Adviser retained; and
  • each company must provide appropriate funding for payment of reasonable compensation, as determined by the compensation committee, to any Compensation Adviser.

Moreover the compensation committee will not be required to implement or act consistently with the advice or recommendations of any  Compensation Adviser, but rather will retain the ability and obligation to exercise its own judgement in fulfilling its duties.

Compensation Adviser Independence

Prior to selecting a Compensation Adviser, a compensation committee must consider six independence factors set forth in Rule 10C-1 and any other factors prescribed by the listing standards of the exchanges. The factors enumerated in Rule 10C-1 include consideration of:

  • other services provided to the company by the Compensation Adviser’s employer;
  • the fees received from the company by the Compensation Adviser’s employer as a percentage of such employer’s total revenues;
  • the policies and procedures of the Compensation Adviser’s employer that are designed to prevent conflicts of interest;
  • any business or personal relationship of the Compensation Adviser with a member of the compensation committee;
  • any stock of the company owned by the Compensation Adviser; and
  • any business or personal relationship of the Compensation Adviser or the Compensation Adviser’s employer with an executive officer of the company.

The factors should be considered in their totality, with no one factor being viewed as determinative of independence. What’s more nothing in Rule 10C-1 requires a Compensation Adviser to be independent, only that the compensation committee consider the independence factors prior to selecting a Compensation Adviser.

Exemptions

Certain categories of companies are exempt from Rule 10C-1′s independent compensation committee requirements, including limited partnerships, companies in bankruptcy, open-end management investment companies and foreign private issuers that disclose in their annual report the reason why they do not have an independent compensation committee.

In addition controlled companies and smaller reporting companies are altogether exempt from new Rule 10C-1.

What’s Next for the Exchanges

The exchanges will have until September 25, 2012 (90 days from Rule 10C-1′s publication in the federal register) to propose listing rules and amendments to implement Rule 10C-1, and until June 27, 2013 (one year from Rule 10C-1′s publication in the federal register) to have final listing rules and amendments approved by the Commission.

Disclosure of Compensation Consultant Conflicts of Interest

Section 10C of the Dodd Frank Act also requires that in any proxy or consent solicitation materials for an annual meeting (or special meeting in lieu of an annual meeting), a company disclose whether its compensation committee has retained the advice of a compensation consultant and whether the work of the compensation consultant has raised any conflict of interest and, if so, the nature of the conflict and how it is being addressed.

In implementing Section 10C the Commission notes that Item 407 of Regulation S-K already requires companies to disclose the role of compensation consultants in determining or recommending executive and director compensation. As such, a new subsection has been added to Item 407 requiring disclosure with regard to conflicts of interest and how those conflicts are being addressed. Also, in implementing Section 10C, the Commission is only requiring disclosure in proxy or consent solicitation materials for an annual meeting (or special meeting in lieu of an annual meeting) at which directors are to be elected.

Unlike the requirements of new Rule 10C-1, the new subsection of Item 407  is applicable to controlled companies, non-listed companies, smaller reporting companies and any other companies subject to the Commission’s proxy rules.

Companies must begin complying with the new disclosure requirements in any proxy or information statement for an annual meeting (or special meeting in lieu of an annual meeting) at which directors are to be elected occurring on or after January 1, 2013.

Update July 13, 2012:

Yesterday the Commission released a brief small entity compliance guide summarizing the rules related to compensation committee listing standards, from which smaller reporting companies are exempt, and the disclosure requirements related to compensation consultants conflicts of interest.

______________
*At present FINRA is the only national securities association and it does not list equity securities, so new Rule 10C-1 only applies to national securities exchanges like the NYSE, Nasdaq and NYSE Amex. In addition new Rule 10C-1 will not apply to over-the-counter markets like the OTC Bulletin Board or OTC Markets Group, which are interdealer quotation systems that quote rather than list securities.

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New FINRA Rule 5123 – Private Placements of Securities

by Vanessa Schoenthaler on June 11, 2012

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Last week the Securities and Exchange Commission approved an amended version of new FINRA Rule 5123.

The approved version of the new rule, which is considerably narrower than the original version, requires that a broker-dealer who participates in a private placement of securities file with FINRA copies of the private placement memorandum, term sheet or other offering documents, or indicate that there were no offering documents used. The filing must be made within 15 days of the date of the first sale of securities.

There are, however, a number of private placements which are exempt from new Rule 5123, for example, those involving securities sold solely to certain types of investors, such as institutional accounts, qualified purchasers within the meaning of the Investment Company Act, qualified institutional buyers (QIBs), investment companies, banks, certain employees and affiliates of an issuer, and certain accredited investors within the meaning of Rule 501(a) of Regulation D (such as banks and business development companies, but not individual investors or directors and officers). Certain types of offerings are also exempt from new Rule 5123, such as those made pursuant to Rule 144A or Regulation S.

All documents and information filed under new Rule 5123 will be afforded confidential treatment and used only to determine compliance with applicable FINRA rules and regulatory requirements.

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The JOBS Act in a Nutshell – Part III General Solicitation and Private Offering Platforms

by Vanessa Schoenthaler on April 30, 2012

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Jumpstart Our Business StartupsThe JOBS Act makes several significant changes to the rules surrounding private capital formation. One such change being the much-discussed elimination of the prohibition on general solicitation and general advertising in certain private securities offerings. Another being the addition of an exemption from broker-dealer registration for platforms that, to a certain extent, facilitate offers and sales of unregistered securities.

General Solicitation and General Advertising in Private Offerings

Section 201 of the JOBS Act requires that within 90 days of its enactment, or by July 4, 2012, the Securities and Exchange Commission revise Regulation D to eliminate the prohibition on general solicitation and general advertising in private offerings made in reliance on the safe harbor afforded by Rule 506, provided that only accredited investors participate in the offerings.

In its current form, Rule 506 allows an unlimited amount of capital to be raised from an unlimited number of accredited investors and up to 35 sophisticated non-accredited investors, provided, however, that whenever non-accredited investors participate in an offering certain information disclosure requirements must be met. In its current form Rule 506 also explicitly prohibits general solicitation and general advertising, regardless of whether participating investors are accredited or non-accredited.

Section 201 of the JOBS Act also requires that the Commission, again by July 4, 2012, revise Rule 144A to provide that securities sold thereunder may be offered to persons other than qualified institutional buyers (QIBs), including by means of general solicitation or general advertising, provided that the securities are ultimately sold only to persons that the seller or anyone acting on the seller’s behalf reasonably believe to be QIBs.

Like Rule 506, Rule 144A is a safe harbor for sales of unregistered securities. Where they differ is that Rule 506 addresses sales of securities by an issuer (akin to a primary offering), whereas Rule 144A addresses resales by persons other than an issuer (akin to a secondary offering). Very generally, the safe harbor afforded by Rule 144A allows for resales of a limited category of qualifying securities to QIBs. Rule 144A resales often follow in close proximity to the private offering in which the securities being resold were originally issued.

So how are these changes going to impact the market for private securities offerings?

Insofar as Rule 506 offerings are concerned, over time we may see a shift from other types of Regulation D offerings to Rule 506 offerings, but lifting the ban on general solicitation and general advertising is not likely to have a significant impact on the type of investors participating in Rule 506 offerings.

Based on a recent report by the Commission’s Division of Risk, Strategy and Financial Innovation (FSHI), Rule 506 is already by far the most popular private offering exemption; used in over half of all the private offerings examined in FSHI’s report. And, even though Rule 506 allows for participation by up to 35 non-accredited investor, almost 90% of all Regulation D offerings (Rules 504, 505 and 506 combined) are made up entirely of accredited investors. So, while we may ultimately see even more Rule 506 offerings, there’s not much room for a shift in the ratio of non-accredited to accredited investors.

As for transactions set up to take advantage of the Rule 144A resale exemption, they only make up a small number of the private offerings conducted each year and they generally involve larger companies that already are, or immediately become, subject to the Exchange Act’s reporting requirements. Compared to Rule 506 offerings, Rule 144A transactions are fairly niche and, while I don’t have anything in the way of stats to back it up, I don’t think that we’re going to see any great shift toward Rule 144A offerings just because general solicitation and general advertising is permitted.

Where lifting the ban on general solicitation and general advertising will undoubtedly have the greatest impact is in the amount of information about private offerings that becomes publicly available. Hopefully this will result in a better understanding of how private capital formation works, as opposed to an overload of information that is of diminishing value or quality.

One other item of note here is that, despite the JOBS Act having taken effect, the current prohibition on general solicitation and general advertising remains in place until the Commission adopts amended or new implementing rules and those rules themselves take effect.

The Platform Exemption to Broker-Dealer Registration

Finally, Section 201 the JOBS Act creates an entirely new exemption from the broker-dealer registration requirements for anyone that maintains a platform or other mechanism that permits offers, sales, purchases or negotiations of securities, or permits general solicitation, general advertising or related activities by an issuer that is offering securities, regardless of whether those activities take place online, in person or by some other means.

What’s more, the exemption is available even if the person maintaining the platform invests in or provides “ancillary services” related to the securities that are made available through the platform. Ancillary services are defined to include due diligence services, provided no compensated investment advice is given, and the provision of standardized documents, provided there is no involvement in the negotiation process and the parties are free to use their own transaction documents if they choose to.

Lastly, the exemption is contingent on there being no transaction related compensation, no possession of securities or customer funds and no involvement by persons subject to statutory disqualification under Section 3(a)(39) of the Exchange Act.

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