• SEC Staff Responds to Questions About Form PF
• SEC Requests Information to Inform Consideration of Uniform Fiduciary Standard for Broker-Dealers and Investment Advisers

Industry Update

• SEC Official Discusses Broker-Dealer Registration Issues for Private Fund Advisers
• NFA Amends Rules to Simplify Reporting Requirements for CPO and CTA Members

Litigation

• SEC Charges Former Public Company Employee in Expert-Network Insider Trading Case
• SEC Charges Mutual Fund Directors and Service Providers for Deficiencies Relating to Investment Advisory Contract Approvals

This commentary on the Brown-Vitter bill consists of a policy discussion of the bill in Part I and an analysis of the bill’s key provisions in Part II. Part II also includes a visual overview of capital requirements in the Brown-Vitter bill and a chart comparing the bill’s equity capital ratio with the U.S. leverage ratio and the proposed Basel III supplementary leverage ratio.

This week the SEC issued a report of investigation under Section 21(a) of the Securities Exchange Act of 1934 regarding its inquiry into a post by Netflix’s CEO on his personal Facebook page. In the report, the SEC affirmed that a company may use social media to communicate with investors without violating Regulation FD – as long as the company had adequately informed the market that material information would be disclosed in this manner. The report states that whether a company’s social media disclosure satisfies Regulation FD will depend upon the principles outlined in the SEC’s 2008 guidance, Commission Guidance on the Use of Company Web Sites, while recapping that guidance in a way that should make these principles more workable for companies that want to use websites, social media and other evolving communication methods to disclose important information to the market.

With the benefit of this Section 21(a) report, companies should be comfortable using evolving communication methods for corporate disclosure. Companies should continue to thoughtfully plan how to ensure that these methods alone can satisfy Regulation FD, and should remain alert to other possible federal securities law concerns that can arise when they or their executives use these methods to deliver corporate news. Below we offer a few insights into the report as well as some strategies to follow when making Regulation FD-sensitive corporate disclosures via non-traditional channels.

• SEC Staff Responds to Questions About Form PF

Industry Update

• SEC Issues Risk Alert Identifying Significant Deficiencies in Compliance with the Custody Rule
• SEC’s National Examination Program Releases its Examination Priorities for 2013
• NFA Amendment Clarifies Rule Prohibiting Loans by Commodity Pools to CPOs '

Litigation

• Supreme Court Overturns Second Circuit Ruling and Confirms that the Statute of Limitations for SEC Penalty Claims Begins when the Fraud Occurs
• SEC Charges Hedge Fund Adviser with Fraudulently Raising Capital by Misrepresenting a Fund’s Structure to Investors
• FINRA Orders Broker-Dealer to Pay more than $11 Million in Restitution and Fines for Late Pricing of Paper Mutual Fund Orders

• SEC Issues Guidance on New Iran Disclosure Requirements
• SEC Extends No-Action Relief to Broker-Dealers Who Rely on Registered Investment Advisers to Perform Customer Identification Program Obligations

Industry Update

• European Commission Adopts AIFMD Level 2 Regulations
• FinCEN Extends FBAR Filing Deadline for Certain Employees and Officers
• SEC Official Discusses Enforcement Priorities in the Private Fund Space
• SEC Expected to Move Forward with Uniform Fiduciary Standard

Litigation

• First Circuit Considers Current and Prospective Business Relationships When Evaluating Independence of Fund Directors in Shareholder Derivative Cases

Damian Schaible and Eli Vonnegut of the Davis Polk Insolvency and Restructuring Group recently published an article, "Can Selfish Be Substantial? Motivation in Substantial Contribution Claim Standards" discussing the Tropicana decision and substantial contribution claim standards generally.

• SEC Lifts Moratorium on Approving Actively Managed ETFs That Invest in Derivatives
• SEC Extends Temporary Rule 206(3)-3T Regarding Principal Transactions with Certain Advisory Clients

Industry Update 

• Annual Affirmation Requirement for Certain Exempt CPOs and CTAs
• Bill to Merge SEC and CFTC Introduced in the House of Representatives

Litigation 

• District Court Dismisses ICI and Chamber of Commerce Challenge to CFTC Amendments Affecting Registered Investment Companies
• SEC Settles Charges Against a Business Development Company and Its Executives for Overvaluing Assets and for Internal Control Failures
• SEC Settles Charges Against Investment Adviser for Misleading Use of Hypothetical Back-Tested Performance Models

• SEC Staff Responds to Questions About Form PF
• SEC Releases Guidance on Advisers Act Exemption for CFTC-Registered Investment Advisers that Advise Private Funds
• SEC Adopts New Credit Quality Standard for BIDCOs Relying on Section 6(a)(5) of the Investment Company Act
• SEC Announces List of Federal Securities Law Rules to be Reviewed Over the Next 12 Months

Industry Update

• CFTC Grants Registration Relief for Family Offices, Funds of Funds and Business Development Companies
• FSOC Issues Proposed Recommendations for Money Market Mutual Fund Reform
• Director of the OCIE Speaks on the Significance of Conflicts of Interest and Risk Governance
• FINRA Announces Arbitration for Investment Advisers that are not FINRA-Regulated Firms
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Litigation

• Court Ruling Addresses Pension “Controlled Group” Liability for Private Equity Funds
• Jury Issues Mixed Verdict in Reserve Primary Fund Trial
• SEC Charges Mutual Fund Directors for Inadequate Valuation Oversight

If the Federal Reserve actually adopts a proposal along the lines outlined in Governor Tarullo’s speech, it could have profound negative implications not only for the operations of foreign banks in the United States, but also for U.S. banking organizations doing business outside the United States. It would likely contribute and add fuel to the growing trend towards regionalization of global banking, thereby complicating and increasing the cost of providing cross-border banking services. This memorandum explores these implications as well as certain key issues and questions that remain open.

Davis Polk lawyers were joined by:

• Carol Bowie, Head - Americas Research, ISS/MSCI
  
  
  
• Andrew Letts, Managing Director, Head of SSgA Corporate Governance, State Street Global Advisors
  
  
  
• James Parsons, Securities & Finance Law Coordinator, Exxon Mobil Corporation
  
  
  
• Darla Stuckey, SVP - Policy & Advocacy, Society of Corporate Secretaries & Governance Professionals

View the webcast >

• SEC Proposes Extension of Temporary Rule 206(3)-3T Regarding Principal Transactions with Certain Advisory Clients

Industry Update

• SEC Announces Presence Exams of Newly Registered Investment Advisers
• Additional Guidance Extends FATCA Deadlines and Expands the Scope of “Grandfathered” Obligations
• Investor Advisory Committee Submits Recommendations to the SEC on the SEC’s Proposal to Eliminate the General Solicitation Ban
• SEC Staff Issues Report on Authority to Enforce the Anti-Evasion Rule Under Section 12(g) of the Exchange Act
• NFA Waives Series 3 Proficiency Exam Requirement for Associated Persons of Certain Registered CPOs and CTAs
• Speech by SEC Chairman on New Technology Initiatives to Detect Suspicious Trading

Litigation

• SEC Charges Hedge

• Recommends voting against boards of directors that do not act on shareholder proposals that were approved by the vote of a majority of shares cast in the prior year, beginning in 2014;
• Designates “significant” pledging, and any hedging, of the issuer’s stock by directors and executives as failures of risk oversight that may (or, in the case of hedging, will) warrant recommending a vote against individual directors, committee members or the entire board of directors;
• Revises its say-on-pay analysis to refine the peer group selection methodology and, at least for large-cap companies, incorporates a “realizable pay” analysis into the qualitative evaluation of pay-for-performance;
• Extends the say-on-golden parachute analysis to existing and legacy arrangements, as well as new or renewed arrangements; and
• Assesses, on a case-by-case basis, shareholder proposals to link executive compensation to environmental and social metrics.

The final policy also makes other minor changes to ISS’s positions on director elections.

These new policies will be effective for companies holding their annual shareholder meetings on or after February 1, 2013, with the exception of the board response to shareholder proposals, which is effective for annual meetings beginning in 2014. ISS indicated that it will release FAQs on the final policy in December 2012.

The 120-page Guide includes an extensive discussion of the FCPA and other statutes used in corruption investigations, provides helpful examples and hypotheticals, and discusses the government’s “Guiding Principles on Enforcement.” The Guide represents the government’s response to requests from Congress, the defense bar, members of the business community, and the Organisation for Economic Co-operation and Development (OECD) for additional clarity on the FCPA, and has been anticipated since November 8, 2011, when Assistant Attorney General Lanny A. Breuer announced that such guidance would be issued.

As expected, the Guide thoroughly consolidates and recites existing case law and resolutions and provides new examples of cases in which the DOJ or SEC previously issued declinations. While the Guide may be helpful to many, those expecting something groundbreaking may be disappointed, as the Guide does not provide any new substantive interpretations. Nor does it address many of the nuanced questions with which many companies grapple.

The Proposal’s capital and margin requirements would apply only to security-based swap dealers and major security-based swap participants that are neither banks nor bank holding companies, whereas the segregation requirements would apply to all security-based swap dealers and major security-based swap participants. In addition, the Proposal would enhance the capital requirements that apply to all large broker-dealers that have been approved to use internal models to compute net capital, regardless of whether they are security-based swap dealers.

Prior to January 1, 2013, the implementation date for the conflict mineral rules, companies must make a significant threshold determination—does the company manufacture or contract to manufacture products for which conflict minerals are necessary to the functionality or production? Companies that answer yes to this question will be subject to the conflict mineral disclosure requirements and must begin scrutinizing the origin of conflict minerals in their products on January 1, 2013. Part I of this memorandum provides some general guidelines for making this baseline determination, which is by its nature highly fact-specific. We believe these guidelines are reasonable, but it is important to note that there has only been limited guidance to date in the adopting release for the final rules and the SEC staff may interpret the rules differently in some regards in the future. We encourage you to contact us to discuss the application of the rules under your specific facts and circumstances. In addition, it will be important to monitor how similarly situated companies respond to the rules as companies who take paths at odds with other similarly situated companies may find themselves in a spotlight.

Once a company determines that it does manufacture or contract to manufacture products for which conflict minerals are necessary to the functionality or production, the company must undertake a reasonable country of origin inquiry. If, as a result of that inquiry, the company has reason to believe that its conflict minerals may have originated in the Covered Countries and may not have come from scrap or recycled sources, the company must conduct due diligence to determine whether the conflict minerals in these products originated in the Covered Countries. These inquiries and the related disclosures invoke additional interpretative questions. Part II of this memorandum contains commonly asked questions related to the reasonable country of origin inquiry and the due diligence that may follow. Part III addresses commonly asked questions concerning the mandatory disclosure and reporting on Form SD.

ISS’s proposed policy would:

• Recommend voting against boards of directors who do not act on shareholder proposals that were approved by the vote of a majority of shares cast in the prior year;
• Revise ISS’s say-on-pay criteria by refining the peer group selection methodology, incorporating “realizable pay” analysis into the qualitative evaluation of pay-for-performance and designating pledging shares as a problematic pay practice;
• Extend the analysis of golden parachute arrangements to existing and legacy arrangements rather than just new or renewed arrangements; and
• Provide for a case-by-case assessment of shareholder proposals to link executive compensation to environmental and social “sustainability metrics.”

The proposed updates are open to public comment until October 31, and the final policies are expected to be released in November. While these new policies have not yet been finalized and are subject to revision, it’s not too early for public companies to consider how these changes could affect their ISS profile in the upcoming proxy season.

• SEC Grants No-Action Relief to Exclude Tax Blocker from Definition of Investment Company
• SEC Grants No-Action Relief from Surprise Examinations to Investment Advisers to 529 Plans

Industry Update

• CFTC Provides Temporary Registration Relief to CPOs and CTAs that are Required to Register Solely Because of their Swap Activities; NFA Issues Notice that CPOs Relying on Rule 4.13(a)(4) Can Now Pre-file a Rule 4.7 Exemption
• FINRA Rule 5123 Regarding Filing Obligations in Private Placements to Take Effect on December 3, 2012

Litigation

• SEC Finds “In-Kind” Contributions Violate Pay-to-Play Rules
• SEC Settles Charges Against Investment Advisers for Failure to Disclose Revenue Sharing Arrangement and Other Conflicts of Interest
• Supreme Court to Address the Statute of Limitations for SEC Penalty Claims

The NYSE proposal has an effective date of July 1, 2013, with a transition period for compliance with compensation committee member independence requirements until 2014. The Nasdaq proposal will become effective on the date the proposal is adopted, with a transition period for requirements relating to compensation committee membership and charter until 2014. Both proposals will be published by the SEC, and comments are due on or before the date that is 21 days from publication in the Federal Register.

• SEC Issues Proposal to Eliminate General Solicitation Ban
• SEC Staff Responds to a Question About Preserving Client Anonymity on Item 7.B. of Form ADV

Industry Update

• CFTC Issues Guidance on CPO/CTA Registration and Compliance Obligations
• Statement by SEC Chairman on Money Market Reform
• SEC Announces its First Award under its Whistleblower Program
• House Passes Bill Seeking to Tighten SEC and CFTC Cost-Benefit Analysis

Litigation

• Second Circuit Relaxes Standard to Prove Aiding and Abetting Liability in SEC Enforcement Actions
• SEC Announces Deferred Prosecution Agreement with Investment Fund

Watch Richard's interview with Ning Chiu, Counsel in the Capital Markets Group

Richard explains the key components of the JOBS Act for issuers and underwriters, and the steps the SEC has taken to date to facilitate the implementation of the Act's provisions.

Watch the interview here.

• As of September 4, 2012, a total of 237 Dodd-Frank rulemaking requirement deadlines have passed. Of these 237 passed deadlines, 145 (61.2%) have been missed and 92 (38.8%) have been met with finalized rules.
• In addition, 131 (32.9%) of the 398 total required rulemakings have been finalized, while 132 (33.2%) rulemaking requirements have not yet been proposed.
• Major rulemaking activity this month included the Federal Reserve final rule on risk management standards for financial market utilities and the SEC final rules on conflict minerals and the disclosure of payments by resource extraction issuers. Additionally, the OCC, Federal Reserve, NCUA, FHFA and CFPB released a proposed rule on appraisals for higher-risk mortgage loans.

• a binding shareholder vote on the company’s policy regarding compensation (including “exit payments”) of directors, including executive directors;
• continuing the annual advisory shareholder vote on how the company’s pay policy was implemented in the previous year;
• enhanced compensation disclosure, including disclosure of a “single figure” for the total pay that directors receive for the previous year; and
• consultation by the Financial Reporting Council regarding proposed changes to the U.K. Corporate Governance Code.

To introduce the measures, the U.K. government intends to bring forward amendments to the Enterprise and Regulatory Reform Bill, which is currently before Parliament. At the same time, the U.K. government intends to publish revised, simplified regulations mandating the disclosure of director pay. These regulations would be subject to public comment prior to becoming law. The U.K. government intends to enact these measures by October 2013.

It remains to be seen whether the Federal Reserve Board will adopt similar methods for purposes of implementing the Dodd-Frank Act’s amendments to Section 23A of the Federal Reserve Act. The effective date of the OCC's interim final rule is July 21, 2012, although banks have until January 1, 2013 to comply with the rule’s requirements relating to derivative and securities financing transactions. Using examples, this client newsflash describes the interim final rule’s methods for calculating credit exposure arising from such transactions.

This memorandum reviews these important developments. While we emphasize merger control developments in 2011, we also summarize developments in regulating anticompetitive agreements and abuses of dominance as a reminder of their potential implications for those doing business in China.

Although the changes to Form 20-F itself are relatively minor this year, the continuing economic and financial crisis will require financial institutions in particular, as well as other foreign private issuers, to consider carefully the continuing consequences of the crisis when preparing their annual reports on Form 20-F. Disclosures in a number of areas of the Form 20-F will be impacted and will be the focus of SEC scrutiny. In that regard the SEC has issued disclosure guidance recently relating to exposure to European sovereign debt which will need to be taken into account when preparing this year's Form 20-F.