The New Director of Division of Corporation Finance

Yesterday the Securities and Exchange Commission announced the naming of Keith F. Higgins as director of the Commission’s Division of Corporation Finance.

Higgins was a partner in the Boston office of Ropes & Gray LLP, where he advised public companies regarding securities offerings, mergers and acquisitions, compliance and corporate governance, and underwriters regarding initial and other public offerings.

Higgins will replace Lona Nallengara, who has served as acting director since Meredith Cross’ departure in December 2012. Nallengara will assume the role of the Commission’s chief of staff.

Pressure Continues to Implement the JOBS Act 

Also yesterday, the House Financial Services Committee announced that the House of Representatives passed of a bill by a vote of 416 to 6 that directs the Commission to finalize rules implementing the provisions of the JOBS Act related to “Regulation A+” by October 31, 2013.

Of course, the bill would still have to make its way through the Senate and be signed into law before the deadline were to take effect (for what it’s worth, govtrack.us currently gives the bill a 15% chance of being enacted).

The Washington Post has a nice short piece summing up some of the current regulatory tensions facing Mary Jo White, who is scheduled to testify before the Financial Services Committee for a second time this morning on the subject of the Commission’s 2014 budget request (the Commission is seeking a 27% budgetary increase for fiscal year 2014, which would be funded entirely out of fees collected by the Commission on securities transactions).

At 10:00 AM the Senate Banking Committee will hold a hearing (which you can watch here) to consider the nominations of Richard Cordray as Director of the Consumer Financial Protection Bureau and Mary Jo White as Chairman of the Securities and Exchange Commission.

It’s generally excepted that Mary Jo While will be confirmed later this month. Below is a roundup of some of the more recent coverage regarding her nomination and prepared testimony for today’s hearing:

SEC nominee White to tackle questions on her work for NFL, banks (Reuters)

SEC nominee White promises “unrelenting” enforcement (Reuters)

SEC nominee Mary Jo White to take hard line on Wall Street (WaPo)

Nominee for S.E.C. Chief Pledges to Keep Focus on Enforcement (Dealbook)

SEC nominee Mary Jo White unlikely to face much resistance from Senate (WaPo)

US SEC nominee White pledges to complete rulemaking if confirmed (Reuters)

Mary Jo White to Focus on Fiduciary Issue at SEC (AdvisorOne)

Meanwhile, as reported by Reuters, Dealbook and InvestmentNews yesterday, former SEC Chairman Mary Shapiro has been nominated to the serve on the board of directors of General Electric Co. The shareholder vote on director nominees, among other things, will take place at GE’s annual meeting to be held on April 24, 2013.

Over the next week or so I’ll hopefully be catching up on a few things that I haven’t been able to get to from the last several weeks, the first being the new Nasdaq and NYSE compensation committee listing standards:

By way of background, 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 on September 25, 2012, and thereafter filed amendments to their proposed rule changes.

Last month, on January 11, 2013, the Commission issued orders approving the NYSE and Nasdaq rule changes, as amended, on an accelerated basis. Below is a comparative summary of the rules:

Yesterday the Financial Industry Regulatory Authority (FINRA) announced that it would begin accepting information on a voluntary basis from prospective crowdfunding portals. FINRA will use the information to better understand the funding portal community and to develop specific funding portal rules.

Prospective crowdfunding portals are encouraged to submit an Interim Form for Funding Portals (“IFFP”) as well as any additional information or documentation that might be helpful to FINRA at: fundingportals@finra.org. FINRA will treat the information submitted on a confidential basis.

The IFFP covers general business information, ownership structure, sources of funding , information about management, compensation and a prospective crowdfunding portal’s business model.

Once the Securities and Exchange Commission and FINRA adopt final crowdfunding portal rules any prospective funding portals that file an IFFP will still have to file an application to become a FINRA member.

(Download File)

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:

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:

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.

The Iran Threat Reduction and Syria Human Rights Act of 2012 (the “Act”), which was enacted on August 10, 2012, amended the Securities Exchange Act of 1934 to add new Section 13(r), requiring reporting companies to disclose certain business activities related to Iran in periodic reports filed with the Securities and Exchange Commission after February 6, 2013.

Yesterday the Division of Corporation Finance issued seven new Compliance and Disclosure Interpretations related to Section 13(r). In summary:

• If an issuer’s annual report is required to be filed after the Act’s February 6, 2013 effective date, the report must include disclosure of Iran-related business activities pursuant to Section 13(r) even if the issuer files the report early (on or before the February 6, 2013 effective date).

• If an issuer’s annual report is required to be filed after the Act’s February 6, 2013 effective date, the report must include disclosure of Iran-related business activities pursuant to Section 13(r) that occurred during the entire fiscal year covered by the report, including the period prior to enactment of the Act. For example in the case of an issuer that files an annual report for the fiscal year ending December 31, 2012, that issuer is required to disclose any Iran-related business activities specified in Section 13(r) for the period from January 1, 2012 through December 31, 2012.

• The term “affiliate” as used in the Act has the meaning set forth in Exchange Act Rule 12b-2.

• Disclosure is only required in a periodic report if an issuer or any of its affiliates engaged in any Iran-related business activities specified in Section 13(r) for the period covered by the report; it is not necessary to include a statement to the effect that the issuer and its affiliates have not engaged in any Iran-related business activities specified in Section 13(r).

• A transaction or dealing with any person or entity identified under 31 CFR § 560.304 must be disclosed unless it was specifically authorized by a U.S. federal department or agency. If a disclosable transaction was specifically authorized by a foreign governmental authority, an issuer may disclose that fact in addition to the other information specified in Section 13(r) to provide appropriate context.

• Both general and specific licenses constitute specific authorization by the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury to engage in a transaction, provided all conditions of the applicable license are strictly observed.

• Any disclosures included in a periodic report in response to Section 13(r) will automatically become publicly available upon filing through the EDGAR system.

Following up on last week’s announcement by the Securities and Exchange Commission that Commissioner Mary Schapiro will be resigning on December 14th, here’s a round-up of some of the more recent coverage:

On her legacy …

Harvey Pitt: Shaping Up a Divided SEC (WSJ)

When Ms. Schapiro took charge in January 2009, the SEC was in disarray …

That deplorable state of affairs changed with Ms. Schapiro’s ascendancy. She replaced senior SEC staff, instilled agency employees with ­renewed enthusiasm and respect for the agency’s mission, reorganized and streamlined decades-old bureaucratic and administrative structures, and fostered a new (and deeper) sense of professionalism at every level.

…

But, as Ms. Schapiro departs the agency she ably led, happy days most assuredly are not here again. The many problems the SEC must deal with are fraught with complexity and irrationality. Danger lurks around ­every corner …

The SEC, from lapdog to watchdog (WaPo Opinion)

There’s a total sea change at the agency … They are aggressive. There’s no more free passes on Wall Street. They eagerly seek out big cases. … They used to be industry’s lapdog and now they’re actually an investor’s watchdog.

A mixed record - Mary Schapiro leaves the SEC (The Economist)

The unsurprising resignation of Mary Schapiro, head of the Securities and Exchange Commission (SEC), announced on November 26th, was followed by an unsurprising flurry of statements dripping with faint praise. True, the financial markets did not collapse during her tenure, and she was more engaged than her disastrous predecessor, Christopher Cox. But those are very low bars.

… ongoing rulemaking initiatives …

New SEC head faces fights on several fronts, legal straitjacket (Reuters)

The agency also has a long way to go to complete the 95 rule makings required under Dodd-Frank.

Emails suggest SEC’s Schapiro delayed JOBS Act rule amid concerns about legacy (Reuters)

Outgoing U.S. Securities and Exchange Commission Chairman Mary Schapiro delayed immediately implementing a rule to lift a ban on broader-based advertising for private placements in part because she feared it would tarnish her legacy as a pro-investor leader of the agency, internal SEC emails obtained by a U.S. House of Representatives oversight panel show

SEC head dragged her feet on new rule at urging of lobbyist, GOP congressman says (WaPo)

Republican Rep. Patrick T. McHenry accused the outgoing chairman of the Securities and Exchange Commission of dragging her feet on a regulation to “appease” special-interest groups that opposed it and to “protect” her legacy.

Senators to SEC: It’s time to open private placements to public (Investment News)

In a letter to Chairman Schapiro Republican senators call on the Commission to lift the ban on general solicitation and general advertising by the year’s end.

… and the search for a successor …

As Miller Drops Out, Race for S.E.C. Chief Shifts (DealBook)

Mary Miller, a senior Treasury Department official, removed her name from consideration in recent days, according to several people briefed on the matter who were not authorized to discuss the process. While some Washington insiders considered Ms. Miller a top choice, several people close to her said she was “not interested” in the job.

With Ms. Miller withdrawing, Sallie L. Krawcheck, a long-time Wall Street executive, has emerged as a potential front-runner.

Sallie Krawcheck should not run the SEC (MuniLand)

Running the SEC, a complex, challenging job, requires the highest ethics to coordinate these many roles in financial regulation.

Krawcheck, while chief financial officer of the giant bank Citi, was at the heart of the largest scandal of the financial crisis. Her performance suggests that she does not have the skills or the temperament to run our nation’s primary financial regulator.

Insight: Krawcheck, possible SEC head, raises Washington image (Reuters)

To some, talk of Krawcheck as a candidate came as a surprise given her background as a former executive at banks that needed to be rescued by the government and her lack of Washington experience.

Unrelated:

Yay or Nay: An SEC and CFTC Merger?

On Thursday outgoing Congressman Barney Frank and Congressman Mike Capuano introduced Markets and Trading Reorganization Act into the house, legislation which would merge the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Following several months of speculation, Dealbook first reported this morning that Mary Schapiro will step down as Chairman of the Securities and Exchange Commission. Chairman Schapiro, who will depart on December 14, 2012, was first appointed as chairman in January 2009 and, as noted in the Commission’s press release, her tenure has outlasted 24 of the previous 28 chairmen.

Shortly after the Commission’s announcement the White House announced that President Obama will designate Commissioner Elisse Walter as chairman once Mary Schapiro departures. Commissioner Walter’s was first appointed to the Commission in 2008 and previously served as acting Chairman in January 2009; her term with the Commission is set to expire in 2013.

Dealbook and others are also reporting that the White House eventually expects to nominate another chairman. Potential successors being mentioned include: Commissioner Walter, Mary John Miller, the Treasury Department’s Under Secretary for Domestic Finance, Richard Ketchum, Chairman and Chief Executive Officer of FINRA, Sallie Krawcheck, a former Bank of America and Citigroup executive, and Robert Khuzami, the Commission’s Director of Enforcement.

Additional coverage can be found at: WSJ Law Blog and again here, Reuters and again here, FT Alphaville, Washington Post, Investment News and AdvisorOne.

I imagine Chairman Schapiro’s departure, and the uncertainty surrounding who the next permanent chairman will be, is likely to further delay implementation of both pending and upcoming Dodd-Frank Act and JOBS Act rulemaking initiatives.

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.

(Download File)