Securities Source: A Periodic Newsletter Devoted to Securities Law and Regulation Updates

The SEC Speaks: Are You Listening?

Update on Enforcement Actions
On December 17, 2013, the Securities and Exchange Commission (the "SEC") announced data relating to enforcement actions during the SEC's 2013 fiscal year that ended on September 30, 2013.

Securities Law Tracker

Securities laws and regulations are constantly evolving. Our Securities tracker provides up to date information on recent case law, Congressional legislation and SEC and SRO rulemaking, including FINRA, the NYSE and NASDAQ

Monitor Report: Key Changes and Challenges to SEC Rules

SEC Issues Report on Reg. S-K Mandated by JOBS Act
On December 20, 2013, the staff of SEC issued a report reviewing disclosure requirements under Regulation S-K, the first such comprehensive review of disclosure requirements since a 1996 task force.

SEC Proposes New Regulation A+: An Overview – Does It Make the Grade?
On December 18, 2013 the Securities and Exchange Commission (the "SEC") proposed amendments to Regulation A ("Reg. A") pursuant to Title IV of the Jumpstart Our Business Startups Act of 2012 (JOBS Act).

The SEC Speaks: Are You Listening?

Update on Enforcement Actions

By Michael Dunn

On On December 17, 2013, the Securities and Exchange Commission (the "SEC") announced data relating to enforcement actions during the SEC's 2013 fiscal year that ended on September 30, 2013. During fiscal year 2013, the SEC filed 686 enforcement actions. The $3.4 billion in disgorgement and penalties resulting from those actions is 10 percent higher than in fiscal year 2012 and 22 percent higher than in fiscal year 2011, when the SEC filed the most actions in agency history. Fiscal year 2013 also saw a significant spike in whistleblower activity with 3,238 tips being received and whistleblower payouts exceeding $14 million.

A key change in SEC policy in 2013 that will significantly affect the course of enforcement actions in 2014 and beyond is the SEC's new admissions policy for settlements. The SEC changed its longstanding settlement policy and now requires admissions of misconduct in a discrete category of cases where heightened accountability and acceptance of responsibility by a defendant are appropriate and in the public interest. These admission requirements are particularly important as such admissions in most cases will constitute "bad actor" events under recent amendments to Regulation D and proposed amendments to Regulation A that would disqualify the offending party from participating in certain offerings of securities in reliance on Rule 506 of Regulation D or Regulation A.

In fiscal 2013, actions relating to insider trading, financial crisis enforcement and misconduct by gatekeepers (e.g., accountants and lawyers) continued to be prevalent. In addition, the SEC increased its enforcement efforts in areas relating to market structure and exchanges, municipal securities offerings and Rule 105 of Regulation M that prohibits covering short sale positions by buying shares in a public offering.

As we enter 2014, the SEC expects even greater enforcement activity. In fiscal year 2013, the SEC opened 908 investigations and obtained 574 formal orders of investigation, which represent increases of 13 percent and 20 percent as compared to fiscal year 2012, respectively. With so many investigations in the pipeline, the SEC has affirmed in public releases that "the Enforcement Division headed into the next fiscal year well positioned for significant achievements across its program." In addition to the enforcement focus areas noted above, the SEC recently has created the Microcap Task Force to address fraud in the microcap markets and target gatekeepers and the Financial Reporting and Audit (FRAud) Task Force to detect and prevent financial statement and other accounting frauds.

While the SEC has identified the foregoing enforcement topics as areas of key interest, and 2013 saw a number of high profile cases in these areas (e.g., SAC Capital and Mark Cuban), it should be noted that the SEC is not limiting the scope of its enforcement activities to these areas. SEC Chair White recently noted in statements at the Securities Enforcement Forum on October 9, 2013 that the SEC must pursue not only the high profile, high dollar amount violations, but also "violations such as control failures,… and even violations of prophylactic rules." Chair White stated that the SEC should strive to be everywhere. "Investors do not want someone who ignores minor violations, and waits for the big one that brings media attention. Instead, they want someone who understands that even the smallest infractions have victims, and that the smallest infractions are very often just the first step toward bigger ones down the road. They deserve an SEC that looks at its enforcement mission in exactly that way."

As the SEC looks to broaden its enforcement reach, it is important to note that the types of actions that the SEC brings will have to expand. SEC Commissioner Daniel M. Gallagher noted in his address at the November 7, 2013 FINRA Enforcement Conference that many of the settlement agreements approved by the SEC in 2013 were weak fraud cases that "would have made excellent failure-to-supervise cases … I would much rather see the staff bring high-quality failure-to-supervise cases than to try to shoehorn bad facts into a weak fraud theory. A failure-to-supervise theory often provides an elegant solution to factual and legal difficulties posed by a questionable fraud charge, particularly a non-scienter fraud charge based on some ethereal notion of 'collective negligence.' And bringing a failure-to-supervise case would also vindicate SEC regulations that serve an important role in regulating the securities markets."

It is clear that Commissioner Gallagher's remarks at the FINRA Enforcement Conference did not fall on deaf ears. On January 2, 2014, FINRA published its 2014 Regulatory and Examination Priorities in which FINRA identified compliance with suitability standards, conflicts of interest rules, new Rule 506 and Crowdfunding activities and recidivist brokers as key enforcement areas in 2014. Any market participant doing "bad actor" due diligence under the recent amendments to Rule 506 will tell you that one of the most common disclosure events for a broker dealer on FINRA's BrokerCheck website is a failure to supervise violation. Based on the recent public statements by Chair White and Commissioner Gallagher, we anticipate a similar increase in failure to supervise and other "indirect" liability cases from the SEC in 2014 and beyond.

Securities Law Tracker

Date	Authority	Regulation	Compliance Date
7/10/13	SEC	Issued final rule eliminating the prohibition against general solicitation and general advertising in Rule 506 and Rule 144A offerings, provided that securities may only be sold to accredited investors or qualified institutional buyers, as applicable. Also, issued final rules that disqualify securities offerings involving certain "felons and other 'bad actors'" from reliance on Rule 506 of Regulation D. See full Seyfarth article here.	9/23/13
7/10/13	SEC	Proposed amendments to Regulation D, Form D and Rule 156 in connection with permitting issuers to engage in general solicitation and general advertising under new paragraph (c) of Rule 506. Such amendments include the requirement to provide offering materials used in an offering under Rule 506(c) to be filed with the SEC prior to being used. See full Seyfarth article here.	Comment Period Expired
7/23/13	U.S. Dist. Ct. D.C.	Held that the SEC's rules implementing Dodd-Frank's conflict mineral disclosure requirements do not violate the Administrative Procedures Act or the First Amendment. The Court further found that the SEC conducted a reasoned cost-benefit analysis and did not act arbitrarily or capriciously.	--
7/31/13	SEC	Amended certain rules concerning broker-dealer annual reporting and audit and notification requirements, including a requirement that broker-dealer audits be conducted in accordance with PCAOB standards, that certain broker-dealers allow representatives of the SEC or the broker-dealer's designated examining authority ("DEA") to review certain documents and that a broker-dealer to file a new form with its DEA regarding custody of securities and funds. Also the SEC adopted amendments to the net capital, customer protection, books and records, and notification rules for broker-dealers.	10/21/13
8/16/13	SEC FINRA CFTC.	The SEC, CFTC and FINRA issued a joint advisory on business continuity and disaster recovery planning. The advisory encourages firms to review their business continuity plans and improve responses to and reduce recovery time after significant large-scale events. See the advisory here.	--
8/19/13	FINRA	Updated the form to file offering documents and information pursuant to FINRA Rules 5123 (Private Placement of Securities) and 5122 (Private Placements of Securities Issued by Members) and its associated FAQs.	8/19/13
8/19/13	PCAOB	Released its second progress report on its interim inspection program for auditors of brokers and dealers, covering the audit deficiencies and independence findings. Deficiencies were noted in the audits of all of the firms inspected, and in 95 percent (57 of 60) of the individual audits selected for inspection. Progress report is available here.	--
8/30/13	SEC	Announced that in fiscal year 2014, SEC registration fees will be set at $128.80 per million dollars for securities so registered.	1/1/14
9/17/13	FINRA	Issued a new investor alert on the risks investors should consider when investing in a private placement. The investor alert is available here.	--
9/18/13	SEC	Published for comment proposed new rules that would require a public company to disclose the ratio of the compensation of its CEO to the median compensation of its employees pursuant to the Dodd-Frank Act. See full Seyfarth article here.	Comment Period Expired
9/23/13	SEC	Issued information for investors on the new SEC rule that allows general solicitation or advertising for private offerings but does not change the requirement that investors in such offerings be accredited investors. The investor alert is available here.	--
10/14/13	FINRA	Published a report on conflicts of interest in the broker-dealer industry. The report highlights effective conflicts management practices that may go beyond current regulatory requirements and identifies potential problem areas. The report is available here.	--
10/15/13	SEC	Published updates to its FAQ webpage regarding Rule 15a-6 and foreign broker-dealers. The updates address certain minimum net capital requirements, the holding of securities in certain nominee accounts, the sending of confirmations, and introducing brokers.	--
10/23/13	SEC	Proposed Regulation CF under the JOBS Act to permit the online sale of securities without registration and allow internet-based platforms or intermediaries to facilitate the offer and sale of securities without having to register with the SEC as brokers. The proposed rules address, among other things, offering limits, investment limits, required disclosure and rules for intermediaries. See the full Seyfarth article here.	Comment Period Ends 2/3/14
10/23/13	FINRA	Proposed rules and forms for SEC-registered funding portals, which must become FINRA members in accordance with Regulation CF proposed by the SEC.	Comment Period Ends 2/3/14
10/24/13	Fed Res	Proposed liquidity rules for large financial institutions that create the first standardized minimum liquidity requirement for large and internationally active banking organizations and systemically important, non-bank financial companies.	Comment Period Ends 1/21/14
10/29/13	SEC	Published updates to its Financial Reporting Manual addressing the JOBS Act, issues related to Form 8-K, including the age of interim financial statements, acquisitions of selected parts of an entity, requirements in reporting a disposition and the effect of retrospectively applied changes in accounting principles, and registrations on Form S-8.	--
11/12/13	FINRA	Released an enhanced version of BrokerCheck, allowing investors to search on the FINRA homepage and get results including an industry professional's employment status and history, industry registrations, and events such as customer disputes or disciplinary actions.	--
11/13/13	SEC	Issued 11 new compliance and disclosure interpretations (CD&Is) concerning Rule 144A Private resales of securities to institutions, Rule 506 exemption for limited offers and sales without regard to dollar amount of offering. The CD&Is may be found here.	--
11/15/13	SEC	Office of the Whistleblower issued its report on its 2013 fiscal year. The Office paid out over $14 million in bounties and received 3,238 tips. The report is available here.	--
11/21/13	ISS	Published its 2014 Corporate Governance Policy Updates with changes that largely represent a more measured, company-specific approach to corporate governance practices, and reflect a move by ISS to avoid "one-size-fits-all" policies and recommendations. The policy updates may be found here.	2/1/14
12/10/13	SEC CFTC FDIC OCC Fed Res	Issued the final rules implementing Section 619 of the Dodd-Frank Act, the "Volcker rule," prohibiting insured depository institutions and companies affiliated with insured depository institutions from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments, for their own account. The final rules also impose limits on banking entities' investments in, and other relationships with, hedge funds or private equity funds. The compliance requirements under the final rules vary based on the size of the banking entity and the scope of activities conducted.	7/21/15
12/18/13	SEC	Proposed amendments to Regulation A (Reg A+) to implement the JOBS Act. Reg. A+ provides an exemption for offerings of up to $50 million from the registration requirements of the Securities Act. The proposed rules include issuer eligibility requirements, content and filing requirements and ongoing reporting requirements. See full Seyfarth article here.	Comment Period Ends Around End of February
1/2/14	FINRA	Released its 2014 Regulatory and Examination Priorities letter. The issues FINRA will be watching include those related to suitability, recidivist brokers, conflicts of interest, and cybersecurity. The letter is available here.	--
1/2/14	SEC	Released updated drafts of Volume I and Volume II of the EDGAR Filer Manual, which outlines the procedures for submitting documents to the SEC in electronic format.	2/3/14 (if approved)
1/6/14	SEC	Issued new compliance and disclosure interpretations (C&DIs) providing guidance on Securities Act Rule 506(d) (the "bad actor" provisions under Regulation D) and Exchange Act Rule 13d-3 (determination of beneficial ownership).	--

Monitor Report: Key Changes and Challenges to SEC Rules

SEC Issues Report on Reg. S-K Mandated by JOBS Act

By Michael Dunn

On December 20, 2013, the staff of SEC issued a report reviewing disclosure requirements under Regulation S-K, the first such comprehensive review of disclosure requirements since a 1996 task force. The review was mandated by Section 108 of the JOBS Act and consists of a thorough item-by-item review of the history, regulatory landscape and market practices under Regulation S-K and staff recommendations for possible future reform of the integrated disclosure system.

The report identifies the following economic principles that the staff believes should guide the reform process:

Improving the "informativeness" of disclosure to security holders, potential investors and market participants;
Administrative and compliance costs associated with a disclosure requirement;
Whether historical objectives and policy considerations are still applicable or require updating to address disclosure gaps;
The reliability of sources of information, including those that are not the issuer, and the ability of investors to seek appropriate redress for inaccurate information;
Competitive costs of disclosure of proprietary information, particular with respect to the emerging growth companies;
Maintaining investor confidence and the reliability of public company information; and
The ability of the SEC to maintain an effective enforcement program.

In addition to these economic principles, the report states that the staff believes that any changes to the disclosure rules should address four key issues.

Any recommended revisions "should emphasize a principles-based approach as an overarching component of the disclosure framework, in order to address the tendency toward implementation of increasing layers of static requirements, while preserving the benefits of a rules-based system affording consistency, completeness and comparability of information across registrants."
Consider the appropriateness of current scaled disclosure requirements and whether further scaling would be appropriate for emerging growth companies.
Explore alternative methods of information delivery and presentation, both through EDGAR and other systems, including possible filing and disclosure systems based on the nature and frequency of the disclosures.
Consistent with the plain English requirements that already exist, identify ways to present information that is more user-friendly and navigable and discourage unnecessary repetition of immaterial information.

In addition to these general principles and theories relating to a comprehensive approach to disclosure reform, the report identifies the following specific areas of Regulation S-K in need of updating:

Risk Factors. In addition to undertaking substantive review of risk factor disclosure, the report recommends consolidating various risk related disclosures such as risk factors, legal proceedings and quantitative and qualitative risk disclosures into a single requirement.
Business, Property and Operations. When Items 101, 102 and 302 of Regulation S-K were first adopted, almost every company had a material physical presence. As our economy has evolved to a services-based, global economy, many companies no longer require physical locations to operate or can easily substitute physical locations without any material impact on their operations. The report recommends considering fundamental changes to the types of information about a company's business, operations and assets that more accurately would capture material information about modern companies.
Corporate Governance. The report identifies the use of boilerplate as a concern in respect of corporate governance, although the counterpoint to this concern is that a certain level of uniformity is to be expected in respect of governance matters that are clearly best practices. The report also suggests that consideration should be given to assessing whether current governance disclosures are material to investors.
Executive Compensation. Although the report acknowledges that executive compensation has been the subject of the most rule changes and interpretative guidance in recent years, it remains an area of lengthy and often technical disclosure relating to complex accounting rules and compensatory and benefit plans. The report suggests additional scaled disclosure may be appropriate and that certain disclosure may not be useful to investors.
Offering Documents. The report notes that many offerings are conducted pursuant to electronic delivery and the use of a physical prospectus book is increasingly rare. Accordingly, the report suggests that consolidating and streamlining the presentation in offering prospectuses may be appropriate. In addition, the report notes that the requirements pertaining to underwriting arrangements and compensation need to be updated to reflect current market practices.
Exhibit Requirements. Locating exhibits on EDGAR can be difficult as it requires navigating back-and-forth between different screens. In addition, the number of required exhibits has grown significantly since the last review of exhibits was conducted in 1980, and there is often inconsistency among different exhibit disclosure requirements (e.g., the exclusionary provisions applicable to merger agreements filed pursuant to Item 601(b)(2) are not applicable to material contracts filed pursuant to Item 601(b)(10)). The report suggests a comprehensive review of exhibits for ongoing relevancy and consistency.

The report concludes with the Staff's recommendation that the SEC take a comprehensive approach with respect to any possible reform of Regulation S-K in lieu of a targeted approach. The Staff believes a comprehensive approach, although a longer-term project involving significant staff resources, would result in more meaningful and consist changes and "achieve the dual goals of streamlining requirements for companies, including emerging growth companies, and focusing in useful and material information for investors." The Staff report remains publicly available and open for public comment. It is not known when or if the SEC will take any actions with respect to the report.

SEC Proposes New Regulation A+: An Overview – Does It Make the Grade?

By Georgia Quinn

On December 18, 2013 the Securities and Exchange Commission (the "SEC") proposed amendments to Regulation A ("Reg. A") pursuant to Title IV of the Jumpstart Our Business Startups Act of 2012 (JOBS Act). Reg. A was adopted in 1936 as a rule under the Securities Act of 1933, as amended (the "Securities Act"), in order to assist small businesses with accessing the capital markets under the SEC's recently enacted regulatory regime. Since then, Reg. A has been rarely used and is arguably defunct. In the new proposing release, the SEC noted that from 2009 through 2012, there were only 19 qualified Reg. A offerings for a total offering amount of approximately $73 million. During the same period, there were approximately 27,500 offerings of up to $5 million (i.e., at or below the statutory limit for Reg. A offerings), for a total offering amount of approximately $25 billion, which used a Regulation D ("Reg. D") exemption. Thus, in order to gain some utility from this rule, the JOBS Act mandated certain amendments to be promulgated by the SEC, which are summarized below.

Both new Reg. A, called "Reg. A+" by many, and old Reg. A, provide an exemption from the extensive public registration requirements for smaller issuances of securities by certain types of issuers. Elements of the old Reg. A that would remain the same for offerings under proposed Reg. A+ are that the securities issued may be sold publicly by means of a general solicitation, the securities issued will be freely tradable subject to certain restrictions, the civil liability provisions of Section 12(a)(2) of the Securities Act will apply to Reg A+ offerings and the issuer may engage in "testing the waters" activities similar to existing Rule 254 that permits Reg. A issuers to solicit interest prior to the filing of the offering statement with the SEC. Reg. A+ distinguishes between two types of offerings that may be conducted pursuant to its terms, Tier 1 and Tier 2. Tier 1 is substantially similar to old Reg. A, subject to few exceptions (such as allowing for electronic filings of the Form 1-A and "access equals delivery" with respect to the offering statement"). An issuer may elect to conduct an offering under either tier.

Below is a table summarizing the important provisions of the new rule.

	Tier 1	Tier 2
Issuer Limitations
Offering Cap	$5 million, including no more than $1.5 million on behalf of selling securityholders	$50 million, including no more than $15 million on behalf of selling securityholders
Ineligible Issuers	Non-U.S or Canadian entities; public filing companies; issuers subject to an SEC order pursuant to Section 12(j) in the past 5 years; issuers that have not filed required reports under Reg. A+ in the past 2 years; registered Investment Companies; issuers that are in development stage with no specific business plan or blank check companies; issuers for fractional undivided interest in oil or gas rights
Integration	Securities sold pursuant to Reg. A+ will not be integrated into prior offerings of securities or certain subsequent or simultaneous offerings, such as securities issued pursuant to a registration statement filed with the SEC, or issued under Rule 701, an employee benefit plan, Regulation S, Regulation CF, Regulation D (assuming all elements of the exemption are met) or made more than 6 months after the close of the Reg A+ offering.
Limitations on the type of security	Equity, debt, equity convertible into debt and any guaranties thereof
Investor Limitations	No limit on the amount an investor may invest	10% of the greater of the investor's net worth or annual income
Testing the Waters	Issuers may solicit interest in a potential offering with the general public either before or after the filing of the offering statement so long as accompanied by a preliminary offering circular which may be a uniform resource locator ("URL") to the preliminary offering circular or the offering statement may be obtained on EDGAR. Solicitation materials used to test the waters have to be filed when the offering statement is submitted to the SEC.
The Offering
Qualification	Offering statement must be affirmatively qualified by SEC prior to any sales of securities; non-public submission allowed (will be made public 21 days prior to qualification
Communications	Investors must receive preliminary offering statement 48 hours prior to purchase (link is ok), once offering statement is qualified, communications must be accompanied or preceded by offering statement (link is ok); may file supplements after qualification rather than post -qualification amendments to include info, such as pricing info
Offering Process		Delayed and continuous offerings (shelf offering) allowed
Offering Statement
Part I	Basic information, "bad actor" disclosure, summary info about the offering, jurisdiction, unregistered offerings within the year
Part II	Info on underwriters, risk factors, plan of distribution, business operation for last 3 years, material physical properties, discussion and analysis of issuer's liquidity capital resources and results of operations, anticipated capital needs in next 6 months, information on officers, directors and significant employees, executive compensation, beneficial ownership of officers, directors and 10% securityholders, transactions with related persons and material terms of the securities being offered
Part II	GAAP financials for past two years (only need to be audited if already available)	Audited GAAP financials for past 2 years
Part III	Exhibits - underwriting agreements, charter and bylaws, instruments defining the rights of securityholders, subscription agreements, voting trust agreements, material contracts, plans of acquisition, reorganization, etc., escrow agreements, letters regarding changes of certifying accountant, powers of attorney, consents (including auditor consent), legal opinion, test the waters materials, appointment for agent of service of process, and any offering statement filed confidentially
Ongoing Reporting	File a Form 1-Z exit report with the SEC within 30 days after termination or completion of a qualified offering to provide offering updates and info about sales	Must file annual and semiannual reports to update issuer information (Form 1-K and 1-SA); current reports following certain events (Form 1-U); and special financial reports to provide information in between the Form 1-A and the issuer's first periodic report after qualification
Exit from Ongoing Reporting		When subject to reporting requirements under Securities Exchange Act of 1934 (note: holders of Reg. A securities will be counted towards 500 and 2,000 holder of record limits in Section 12(g) of the Exchange Act); after filing Form 1-Z and completion of fiscal year following offering if fewer than 300 holders of record pursuant to Reg. A offering
Bad Actor Disqualification	Issuer is disqualified from conducting an offering under Reg. A+ to the extent it, or its officers, directors, 20% holders and others involved with the offering are "bad actors" as defined in proposed, amended Rule 262 of the Securities Act, which mirrors the recently enacted Rule 506(d) of Reg. D
Application of State Securities Laws	Required to comply with all applicable state securities laws with respect to securities sold pursuant to Reg. A+.	Preemption of state securities law registration and qualification requirements for securities sold pursuant to Reg. A+

This client alert is intended only to provide a brief summary of the proposed Reg. A+ rules. The full proposing release provided by the SEC is available here.