Two Decisions Highlight Uncertainty of Section 10(b) Liability
Two recent court decisions illustrate the uncertain parameters of liability under Section 10(b) of the Securities Exchange Act of 1934 for insider trading and other "deceptive devices," particularly in settings where there has not been a breach of fiduciary duty. On July 16, 2009, a federal district court in the Northern District of Texas dismissed an SEC insider trading case against Dallas Mavericks owner Mark Cuban. According to the SEC's complaint, Cuban traded the stock of a company, of which he is the largest shareholder, on the basis of material, nonpublic information that Cuban received from the company while having orally promised to keep the information confidential. In ruling against the SEC, the district court rejected the SEC's long-held view that third parties who accept material, nonpublic information from a company on a confidential basis are precluded from trading on the information. It held that Cuban's oral agreement to maintain confidentiality, without an agreement not to trade, was not a sufficient basis for insider trading liability. Importantly, the district court also rejected Cuban's argument that insider trading liability requires a fiduciary or fiduciary-like relationship with the provider of the information.
Less than a week later, the SEC ended up on the winning side in SEC v. Dorozhko, where the SEC charged the defendant not with insider trading but with general Section 10(b) fraud. The defendant in Dorozhko traded on material, nonpublic information of an issuer obtained through hacking a third-party financial services company's computer server. Relying on insider trading case law, the district court concluded that, because Dorozhko was an outsider without any relationship to either the issuer or the financial services company, he owed no duty to either and could not be liable for Section 10(b) fraud. The Second Circuit reversed, holding that no breach of a fiduciary duty is required for Section 10(b) fraud where there has been an affirmative misrepresentation. The court stated that an affirmative misrepresentation, such as using a false identity, would constitute a "deceptive device" under 10(b). It remanded the case to the district court for further proceedings as to whether the nature of the hacking process involved an affirmative misrepresentation or some other neutral method, such as exploiting software weaknesses, that did not involve "deception."
A more detailed description and analysis of the two decisions is available in the Davis Polk client newsflashes SEC v. Cuban: A New Decision Casts Doubt on a Key SEC Position on Insider Trading and SEC v. Dorozhko: The Second Circuit's View of Section 10(b) "Deception".
SEC Sanctions Ram Capital for Violating Broker Registration Requirements
On June 19, 2009, the SEC sanctioned New York City-based Ram Capital Resources, LLC ("Ram Capital") and its two principals for acting as brokers without being registered with the SEC in connection with dozens of PIPE offerings, in violation of the broker-dealer registration provisions of Section 15(a) of the Securities Exchange Act of 1934 (the "Exchange Act"). A PIPE, or a "private investment in public equity," involves the offer and sale of publicly traded securities by a public company to private investors.
Section 15(a)(1) of the Exchange Act requires a broker to be registered with the SEC in order to "effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security (other than an exempted security or commercial paper, bankers' acceptances, or commercial bills)." The definition of "broker" under Section 3(a)(4) of the Exchange Act is broad and includes any person, other than a bank, that is "engaged in the business of effecting transactions in securities for the account of others." An individual who engages in such activities is also required to register as or be associated with a registered broker-dealer. Receiving compensation for securities activities is usually determinative of whether an individual or entity is a broker subject to the registration requirements.
From 2001 through early 2005, Ram Capital – through its principals, Michael E. Fein and Stephen E. Saltzstein – sought investment opportunities in PIPEs and solicited investors, mainly hedge funds, to invest in PIPE offerings. According to the SEC, while acting as an intermediary between the investors and the issuers of PIPE securities, Ram Capital failed to limit its activities to identifying potential PIPE investment opportunities. Instead, it engaged in structuring, and negotiating the terms of, PIPE offerings. Fein and Saltzstein often drafted and distributed the initial term sheets for the PIPE offerings and were involved in negotiating the terms of other relevant documents, including the securities purchase agreements. Furthermore, they provided advice to both issuers and investors on the structure of the offering, including, for example, whether the offering should be structured as a common stock offering or a convertible debt offering. In exchange for the services it provided to PIPE investors, Ram Capital typically received fees consisting of 3.5% of the gross amounts invested by the investors and 25% of all warrants that the investors received as part of their investments. Fein and Saltzstein were directly compensated out of such fees.
The SEC found that Ram Capital, Fein and Saltzstein acted as brokers in connection with their activities described above. According to the SEC, although Fein and Saltzstein knew or should have known that Ram Capital is required to register with the SEC, at no point did Ram Capital so register. Nor was Fein or Saltzstein registered with the SEC or associated with a registered broker-dealer. As a result, the SEC concluded that Ram Capital, Fein and Saltzstein violated the broker-dealer registration provisions of Section 15(a) of the Exchange Act.
Without admitting or denying any wrongdoing, Ram Capital, Fein and Saltzstein settled the SEC's proceedings by agreeing to (i) accept a censure and (ii) cease and desist from committing or causing any future violations of Section 15(a) of the Exchange Act. Fein and Saltzstein are suspended from association with any broker or dealer for 12 months and six months, respectively. In addition, Fein and Saltzstein agreed to pay disgorgement ($364,721 each), prejudgment interest ($83,657 each) and a civil penalty ($90,000 for Fein and $60,000 for Saltzstein). They also agreed to perform certain additional undertakings enumerated in the SEC's order.
|See a copy of the SEC's order|
SEC, Perry Capital Settle Disclosure Violation Charges
On July 21, 2009, New York City-based investment adviser Perry Capital ("Perry") agreed to pay $150,000 to settle the SEC's charges that it failed to disclose its securities purchases on a timely basis in violation of Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 13d-1(b) thereunder. The charges relate to Perry's alleged role in the well-publicized attempted merger between Mylan Laboratories Inc. (now Mylan Inc.) ("Mylan") and King Pharmaceuticals, Inc. ("King") in 2004. Perry allegedly had acquired Mylan shares to influence the shareholder vote in Mylan's pending takeover of King while entering into total return swaps that insulated Perry from the economic risk normally associated with share ownership.
Specifically, the SEC maintained that Perry should have filed a Schedule 13D disclosing its Mylan stake within 10 days of having acquired more than 5% of Mylan's shares, in accordance with Section 13(d). Perry argued that it should be permitted to rely on Rule 13d-1(b), which allows qualified institutional investors to file a short-form disclosure statement on Schedule 13G, in lieu of a Schedule 13D, within 45 days after the end of the calendar year in which the 5% threshold was crossed. Schedule 13G's more liberal filing timeline is available to a qualified institutional investor if it "has acquired the securities in the ordinary course of [its] business and not with the purpose nor with the effect of changing or influencing the control of the issuer." The SEC concluded that Perry acquired its shares for the "exclusive purpose" of voting the shares to influence the outcome of the Mylan-King merger. According to the SEC's order, Perry's total return swaps evidenced this "exclusive purpose" since, as a result of the swaps, "Perry's acquisition of Mylan shares was not made in order to invest in, or profit from, ownership of the Mylan shares." Accordingly, the SEC concluded that Perry could not rely on Rule 13d-1(b) to defer its disclosure. While Perry ultimately filed a Schedule 13D disclosing its Mylan stake, it did so more than two months after it had acquired more than 5% of Mylan's outstanding shares.
The settlement comes amid the backdrop of increased regulatory attention on the issue of using equity swaps and other derivative instruments to obtain voting power. In testimony before a Congressional committee about derivatives market regulation on June 22, 2009, SEC Chairman Mary L. Schapiro stated that the SEC is considering whether holders of swaps and other derivative instruments "should be subject to the beneficial ownership reporting provisions of the Exchange Act when accumulating substantial share positions."
A more detailed description and analysis of the settlement is available in the Davis Polk client newsflash SEC Charges Perry Capital with Disclosure Violations in Connection with Alleged Vote Buying.
FINRA Fines Merrill Lynch, UBS over Closed-End Fund Sales
Merrill Lynch, Pierce, Fenner & Smith, Inc., now owned by Bank of America Corp., and UBS Financial Services, Inc. have agreed to pay the Financial Industry Regulatory Authority ("FINRA") $150,000 and $100,000, respectively, to settle charges for what FINRA called supervisory failures that led to unsuitable short-term sales of closed-end funds ("CEFs") at the CEFs' initial public offerings ("IPOs"). Five Merrill brokers also agreed to accept a 15-day suspension and a fine of $10,000 to settle charges for recommending unsuitable short-term sales of CEFs to clients.
CEFs are registered investment companies that sell a fixed number of shares at their IPOs, after which the shares typically trade at a discount from the IPO price on the secondary market. Due to the sale charges applied to CEF purchases at the IPO, CEFs bought at the IPO are generally not suitable for short-term investment.
The CEFs at issue had sales charges of 4.5% and a "penalty bid period" of generally 30 days to 90 days following the IPO. During the penalty bid period, brokers would lose their commissions if their clients sold CEFs purchased at the IPO. FINRA was concerned that brokers were earning high fees at the expense of their clients by soliciting clients to purchase shares of CEFs at their IPOs and subsequently, at the end of the penalty bid period, recommending that the clients sell the CEF shares at a loss, perhaps even using the proceeds to purchase shares of yet another CEF at an IPO.
According to FINRA's July 29, 2009 press release announcing the settlements, Merrill Lynch and UBS failed to put in place supervisory systems and procedures necessary for detecting and preventing unsuitable CEF trading. Neither firm provided supervisory personnel with guidance or warning about the potential issues relating to short-term sales of CEFs bought at an IPO. Nor did either firm provide guidance or training to their brokers regarding such sales.
Before FINRA's investigations, both firms launched internal investigations over unsuitable CEF recommendations and took remediation measures, including payments to clients of more than $3 million by Merrill Lynch and $2 million by UBS. Merrill Lynch sanctioned 13 brokers and UBS sanctioned 17 brokers found to have made unsuitable CEF recommendations to clients.
|See a copy of FINRA's press release announcing the settlements|
SEC RULES AND REGULATIONS
SEC Proposes Rule to Curb Pay-to-Play Practices
On July 22, 2009, the SEC voted unanimously to propose a rule that would curb pay-to-play practices by investment advisers seeking to manage public pension funds and other government plans. Pay-to-play occurs when an investment adviser makes a political contribution to an elected official in a position to influence the selection of the adviser, or to a candidate for such a position, thereby gaining an improper advantage in the hiring process. As SEC Chairman Mary L. Schapiro noted, such practices "can result in public plans and their beneficiaries receiving sub-par advisory services – at inflated prices." At its core, proposed Rule 206(4)-5 (the "Proposed Rule") under the Investment Advisers Act of 1940 (the "Advisers Act") would impose a two-year ban on an investment adviser's provision of advisory services for compensation to a government entity after the adviser or certain of its employees or executives make a political contribution that falls within this pay-to-play category.
As previously reported in the June 8, 2009 and July 1, 2009 Investment Management Regulatory Updates, pay-to-play arrangements have become a hot topic for investigation and reform at the federal, state and pension fund levels. The Proposed Rule follows in the wake of an SEC request for information from more than two dozen pension managers and financial firms concerning fees paid to placement agents. At the July 22 SEC open meeting, Chairman Schapiro explained that because it is often difficult to prove a "direct quid pro quo or intent to influence," especially when pay-to-play payments are designed to be difficult to detect, the Proposed Rule is a necessary prophylactic measure.
The Proposed Rule is modeled on Municipal Securities Rulemaking Board ("MSRB") rules G-37 and G-38, which regulate pay-to-play practices in the municipal securities markets, and is similar to a never-finalized 1999 SEC proposal, which itself was based on MSRB rule G-37. See the June 8, 2009 Investment Management Regulatory Update for a summary of the 1999 proposal. Notable changes from the 1999 proposal include a prohibition against third-party solicitors, an expansion of the types of funds covered to include registered investment companies and collective investment trusts and a narrower scope of investment adviser personnel to whom the Proposed Rule would apply.
The Proposed Rule would apply to both registered investment advisers and unregistered advisers who rely on the exemption available under Section 203(b)(3) of the Advisers Act for any investment adviser who has fewer than 15 clients and who neither holds itself out to the public as an investment adviser nor acts as an investment adviser to any registered investment company or business development company. Unlike the 1999 proposal, the Proposed Rule would not apply to advisers exempt from registration pursuant to other sections of 203(b) (e.g., 203(b)(1) (intrastate advisers) and 203(b)(2) (advisers with only insurance company clients)).
Key elements of the Proposed Rule include:
- Restricting Political Contributions. As discussed above, the Proposed Rule would bar an investment adviser from providing advisory services for compensation to a government entity for a two-year period after the adviser, or certain adviser personnel, make a political contribution to an elected official in a position to influence the selection of the adviser, or any candidate for such a position. The two-year time out would remain in effect after the covered employee who made the triggering contribution leaves the firm. Moreover, a contribution made by a covered employee would be attributed to any future adviser who engages the employee within two years after the date of such contribution, thus imposing a "look back" requirement on the adviser's hiring process. To ensure that its withdrawal does not harm the government client, the SEC's release suggests that an adviser subject to the two-year time out may be required to provide uncompensated advice for a reasonable period of time until the government client obtains a new adviser or the adviser may be obligated to continue providing advisory services pursuant to its contract with the government client at no fee.
A de minimis exception would permit contributions of $250 or less to elected officials or candidates for whom the covered employee making the contribution is entitled to vote. A second exception would be available for contributions of $250 or less to an elected official or candidate for whom the covered employee making the contribution is not entitled to vote, provided that the adviser discovers the contribution within four months after the date of such contribution and causes it to be returned within 60 days following the discovery.
- Banning Solicitation of Contributions. The Proposed Rule would prohibit an adviser and certain adviser personnel from coordinating, or working with another person or political action committee to coordinate, contributions to an elected official in a position to influence the selection of the adviser, or any candidate for such position, or payments to a political party in the state or locality in which the adviser provides investment advisory services to a government entity or seeks to do so.
- Banning Third-Party Solicitations. The Proposed Rule would also prohibit an investment adviser and certain adviser personnel from paying a placement agent, pension consultant or other third party to solicit government business on its behalf. The Proposed Rule would not, however, bar government entities from paying a pension consultant or other third party to recommend particular investment advisers for the management of public funds.
- Restricting Indirect Contributions and Solicitations. The Proposed Rule also contains a "catch-all" provision that would prohibit the investment adviser and certain adviser personnel from engaging indirectly in pay-to-play practices that the Proposed Rule would prohibit directly.
- Recordkeeping. For compliance purposes, the SEC has also proposed amendments to Rule 204-2 under the Advisers Act that would require registered advisers who have government clients or are otherwise subject to the Proposed Rule to maintain records of, inter alia, all government entities for which the adviser provides, or seeks to provide, advisory services as well as all political contributions made by the adviser and certain adviser personnel to all government entities.
The SEC may grant an exemption from the Proposed Rule, and in determining whether to do so, the SEC will consider, among other factors, whether the adviser's policies and procedures are reasonably designed to prevent pay-to-play violations, whether the adviser had actual knowledge of the contribution prior to the date on which it was made, the steps taken by the adviser upon discovering the violation, the nature of the election involved (e.g., federal, state or local) and the apparent intent of the individual who made the political contribution.
Comments on the Proposed Rule are due by October 6, 2009. Commissioner Troy A. Paredes remarked that he is particularly interested in comments that consider whether the outright ban on third-party solicitation will adversely impact "smaller and less-established" investment advisers who "legitimately use third parties" to compete for government business, as well as those that consider any First Amendment questions raised by the Proposed Rule.
We will continue to monitor any developments with respect to the Proposed Rule and other pay-to-play investigations and regulations.
|See a copy of the Proposed Rule|
|See a copy of the SEC press release|
|See a copy of Chairman Schapiro's speech|
|See a copy of Commissioner Paredes's speech|
|See a webcast of the SEC open meeting on July 22, 2009|
SEC Adopts Final Rule 204 and Announces Other Short Sale Initiatives
On July 27, 2009, the SEC adopted final Rule 204 of Regulation SHO ("Rule 204") under the Securities Exchange Act of 1934, making permanent, with minor changes, the firm delivery and close-out requirements for sales of equity securities contained in temporary Rule 204T of Regulation SHO. The rule is part of the SEC's efforts to curtail potential "naked" short selling abuses and reduce failures to deliver. Rule 204 became effective on July 31, 2009, upon the expiration of temporary Rule 204T.
In its press release announcing the adoption of Rule 204, the SEC also indicated that it would not renew temporary Rule 10a-3T (Form SH), which expired on August 1, 2009. Instead, the SEC announced a joint effort with self-regulatory organizations ("SROs") aimed at increasing public availability of short sale data by providing short sale volume and transaction data on SRO websites. The SEC is also planning to hold a roundtable to discuss other potential reforms affecting securities lending and short sale markets. The SEC release did not address pending proposals to reinstate a short sale price test.
|See the Davis Polk client newsflash Short Sales: SEC Adopts Final Rule 204, Allows Rule 10a-3T (Form SH) to Expire and Announces Other Short Sale Initiatives|
Treasury Department Releases Private Fund Investment Advisers Registration Act
The Treasury Department recently released draft legislation entitled the Private Fund Investment Advisers Registration Act of 2009 (the "Act"). The Act proposes amendments to the Investment Advisers Act of 1940 that would require nearly all private fund advisers with over $30 million of assets under management to register with the SEC. The Act would not require funds themselves to register, but would require advisers to "private funds" (as defined in the Act) to report to the SEC, on a confidential basis, information about the funds they advise to permit an assessment of systemic risk posed by the funds.
|See the Davis Polk newsflash Private Fund Investment Advisers Registration Act|
|See a copy of the Act|
Treasury Department Releases Investor Protection Legislation
On July 10, 2009, the Treasury Department released draft legislation entitled the Investor Protection Act of 2009 (the "Act"), which would, if enacted, implement portions of the financial reform proposals contained in the Administration's recent White Paper. The Act enhances the regulatory powers of the SEC in a number of areas, including authorizing the issuance of rules to: require broker-dealers and investment advisers "to act solely in the best interest of the customer or client"; prohibit sales practices, conflicts of interest and compensation schemes that the SEC deems to be contrary to investor interests; compel the provision of disclosure prior to the sale of interests in mutual funds; and limit or ban mandatory arbitration provisions in customer agreements. The Act also enhances the SEC's enforcement powers by expanding the scope of enforcement actions for aiding and abetting violations, increasing the SEC's authority to ban persons from association with any SEC-regulated entities and increasing the potential rewards for whistleblowers.
|See the Davis Polk client newsflash Investor Protection Act of 2009|
|See a copy of the Act|
Donahue Testifies on Regulation of Private Funds
On July 15, 2009, Andrew Donohue, Director of the SEC's Division of Investment Management, testified before the Senate Banking, Housing and Urban Affairs Committee's Subcommittee on Securities, Insurance, and Investment on regulation of hedge funds and other private investment pools. Under current regulations, private investment funds, including venture capital funds, private equity funds and hedge funds, are exempt from registration under the Investment Company Act of 1940 (the "Investment Company Act"). Further, advisers to such funds are often exempt from registration under the Investment Advisers Act of 1940 (the "Advisers Act"). However, recent legislative proposals, including Senator Jack Reed's Private Fund Transparency Act of 2009 and the Obama Administration's Private Fund Investment Advisers Registration Act of 2009, would require advisers of private funds with assets under management in excess of $30 million to register under the Advisers Act.
In his testimony, Director Donohue supported proposed amendments to the Advisers Act requiring the registration of private fund advisers, noting that the current registration exemption has led to a significant regulatory gap. When pressed by Senator Reed regarding his assessment of alternative approaches for regulating hedge funds and other private investment pools, Director Donohue noted that an approach requiring registration at the fund level could be challenging. He specified that requiring the registration of private funds under the Investment Company Act would be inconsistent with the statute because the protections of the Investment Company Act are primarily "intended for retail investors." Donohue added that a possible third approach would be for Congress to give the SEC the authority to promulgate rules and regulations imposing requirements on advisers and funds exempt from registration under the Advisers Act and the Investment Company Act, respectively.
|See the Senate Banking, Housing and Urban Affairs Committee's website on the hearing|
SEC Chairman Testifies Before Congress on Financial Regulatory Reform Proposals
On July 22, 2009, SEC Chairman Mary L. Schapiro testified before the House Financial Services Committee with regard to the Obama Administration's financial regulatory reform proposals that "most directly bear" on the SEC's regulatory mission, including hedge fund adviser registration, harmonization of broker-dealer and investment adviser regulation and coordination between the SEC and the CFTC. Chairman Schapiro also discussed regulation of over-the-counter ("OTC") derivatives and credit rating agencies, as well as the need to identify and address emerging systemic risks.
Notably, Chairman Schapiro expressed support for the Administration's proposed "Private Fund Investment Advisers Registration Act of 2009," which would require nearly all advisers to hedge funds and other private pools of capital to register with the SEC and which, Chairman Schapiro believes, would close a "significant regulatory gap." For further information on the proposed bill, see the Davis Polk client newsflash Private Fund Investment Advisers Registration Act. Chairman Schapiro emphasized that investment adviser registration would provide the SEC with "virtually everything" it needs to "effectively regulate" hedge funds, "with the exception of the ability to impose on the fund itself capital requirements, diversification requirements that nobody is envisioning at this time, in any event, needing to do." She stated that she looks forward to working with Congress "on issues regarding the level of additional resources that would be necessary if private fund managers were required to register . . . as well as ensuring that any law passed would provide the [SEC] with sufficient time to establish and make effective any necessary recordkeeping requirements."
With regard to the harmonization of regulatory regimes for broker-dealers and investment advisers, Chairman Schapiro stated that she believes that "all financial service providers that provide personalized investment advice about securities should owe a fiduciary duty to their customers or clients and be subject to equivalent regulation," regardless of the label attached to the provider. She strongly endorsed the Administration's proposed "Investor Protection Act of 2009," which would, among other things, require broker-dealers and investment advisers "to act solely in the best interest of the customer or client." For further information on the proposed bill, see Treasury Department Releases Investor Protection Legislation above.
Both Chairman Schapiro and CFTC Chairman Gary Gensler testified that they are committed to harmonizing, to the extent possible, the regulation of futures and securities markets, as they share the same underlying public policy objectives. To that end, the SEC and CFTC plan to hold joint hearings this fall seeking public comment on how best to fill existing gaps in the regulatory structure (particularly with respect to OTC derivatives), clarify areas where the agencies overlap in regulation and identify and reconcile inconsistencies in the agencies' respective approaches to regulating similar products and markets.
|See a copy of Chairman Schapiro's written testimony|
|See a webcast of the House Financial Services Committee hearing|
SEC Calls for Eliminating Prohibition Against Price Competition Among Broker-Dealers Selling Mutual Funds
The SEC has sent Congress a list of 42 changes that the SEC would like made to federal securities law. The list, dated July 1, 2009, and obtained by the media in mid-July, mostly contains legislative proposals that would give the SEC additional powers to investigate financial wrongdoing and bring enforcement actions. One non-enforcement related legislative proposal that has attracted wide attention calls for repealing Section 22(d) of the Investment Company Act of 1940, which prohibits broker-dealers from competing on price when selling mutual fund shares. Currently under Section 22(d), broker-dealers must sell shares in a mutual fund at the price set by the fund and thus cannot compete against each other on the commissions they charge. The proposal, if enacted into law, would allow price competition among broker-dealers and could upend the existing system for distributing mutual fund shares. In testimony before Congress on July 14, 2009, SEC Chairman Mary L. Schapiro listed the repeal of Section 22(d) among legislative changes that would allow the SEC to better protect investors.
|See the list of the SEC's legislative proposals|
SEC Launches Investor Advisory Committee
The Securities and Exchange Commission Investor Advisory Committee (the "Advisory Committee"), an advisory body recently created by the SEC to communicate investor views on the SEC's regulatory agenda, held its inaugural meeting on July 27, 2009. In his opening remarks, SEC Commissioner Luis A. Aguilar, the SEC's primary sponsor of the Advisory Committee, stated that the committee will "support the Commission's goals to promote the interests of investors, and … will also be instrumental in shaping the Commission's investor education efforts and other potential initiatives."
The Advisory Committee, whose membership represents a diverse array of individual and institutional investors, met to discuss the committee's organization and future agenda. Advisory Committee members shared their views on a variety of future Advisory Committee topics, including:
- Fiduciary Duties. Applying a uniform fiduciary duty standard to all persons who provide financial investment advice, revisiting and clarifying the various fiduciary duty standards in existence, and enhancing accountability in connection with the fiduciary standards;
- Investor Education and Effective Disclosure. Collaborating with the Department of Education to promote financial literacy curricula at the state level, applying concepts from foreign financial literacy programs to SEC investor education initiatives, and providing layers of disclosure so that investors of various sophistication levels can access information at a level of detail that makes sense to them;
- Proxy Voting. Requiring all U.S. public corporations to adopt a majority voting rule, requiring institutional investors to provide information regarding their proxy votes, and reviewing the regulation of proxy voting advisors;
- Point of Sale Disclosure. Requiring companies to disclose material information at the point of sale to allow investors to make an informed investment decision;
- Environmental, Social and Governance ("ESG") Disclosure. Enhancing public company disclosure requirements for ESG issues (e.g., labor policies, environmental footprint and liability, diversity policies);
- Technology. Using the Internet and interactive applications to present informational disclosures;
- Corporate Governance. Facilitating effective communications between shareholders and boards of directors, and clarifying the SEC Staff's approach regarding the excludability of various social issue shareholder proposals under Rule 14a-8; and
- SEC Resources. Launching an Advisory Committee review of the resources required by the SEC to effectively regulate securities markets and protect individual and institutional investors.
The Advisory Committee also considered forming several topical subcommittees in the future to address issues such as fiduciary duties, disclosure and investor education, the use of technology and interactive applications, ESG disclosure, corporate governance and SEC resources.
The next Advisory Committee meeting is scheduled for October 5, 2009.
Federal "Red Flags Rules" Compliance Date Is Pushed Back to November 1, 2009
As reported in the April 7, 2009 Investment Management Regulatory Update, the Federal Trade Commission (the "FTC") has adopted a new set of rules requiring certain "financial institutions" to adopt identity theft protection programs (the "Red Flag Rules"). The Red Flags Rules were previously set to go into effect starting November 1, 2008, although in October 2008 and April 2009, the FTC announced six-month and three-month delays, respectively, of enforcement of the rules. On July 29, 2009, the FTC announced a further three-month postponement of enforcement of the rules until November 1, 2009.
|See the FTC's announcement|
If you have any questions regarding the matters covered in this Regulatory Update, please contact any of our Investment Management Group lawyers listed below or your regular Davis Polk contact:
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