On April 3, 2017, the District Court for the District of Columbia (the “District Court”) entered a final judgment (the “Final Judgment”) in the case of National Association of Manufacturers, et al., v. SEC. The Final Judgment affirms the prior holding of the U.S. Court of Appeals for the District of Columbia in National Association of Manufacturers that Exchange Act Section 13(p)(1) and Rule 13p-1 (together, the “Conflict Minerals Rule”) violate the First Amendment to the extent the Conflict Minerals Rule requires regulated entities to report to the SEC and to state on their websites that any of their products have “not been found to be DRC conflict free.” The Final Judgment solely sets aside the portion of the Conflict Minerals Rule that requires regulated entities to report to the SEC and make the website statements. The District Court remanded, in all other respects, to the SEC.

On April 7, 2017, the staff of the SEC’s Division of Corporation Finance (the “Staff”) issued guidance on the impact of the Final Judgment on the Conflict Minerals Rule (the “SEC Guidance”). The SEC Guidance seeks to reduce the uncertainty surrounding the Conflict Minerals Rule with regard to potential enforcement actions, given that the Final Judgment and the decision of the U.S. Court of Appeals in National Association of Manufacturers leaves open the question of whether the description of being “DRC conflict free” is required by statute, or instead, a product of the SEC’s rulemaking. The Staff explained that it will not recommend enforcement action to the SEC if companies (including those subject to paragraph (c) of Item 1.01 of Form SD) only file disclosure under the provisions of paragraphs (a) and (b) of Item 1.01 of Form SD. However, the Staff expressly noted that the SEC Guidance is still subject to any further action taken by the SEC and does not express any legal conclusion on the Conflict Minerals Rule itself.

The Final Judgement is available here.

The U.S. Court of Appeals for the District of Columbia in National Association of Manufacturers is available here.

The SEC Guidance is available here.

On March 28, 2017, the U.S. District Court for the District of Salt Lake City granted the SEC’s request for a preliminary injunction in SEC v. Traffic Monsoon, LLC.  The SEC’s complaint was brought in connection with Traffic Monsoon’s operation as a web traffic exchange, in which it sold several different products designed to deliver “clicks” or “visits” to the websites of its customers, which the SEC alleged violated Exchange Act Section 10(b) and Rule 10b-5.  In its argument against the SEC’s request for a preliminary injunction, Traffic Monsoon relied on Morrison v. Nat’l Australia Bank Ltd. to assert that Exchange Act Sections 10(b) and Section 17 do not authorize a U.S. district court to enjoin activity related to foreign transactions, claiming that approximately 90% of Traffic Monsoon’s customers purchased products over the internet while located outside the United States.  In Morrison, the Supreme Court replaced the longstanding “conduct and effects test” with the “transactional test,” holding that Section 10(b) and Rule 10b-5 could be applied only in connection with the purchase or sale of a security listed on an American stock exchange and the purchase or sale of any other security in the United States.

In Traffic Monsoon, the defendants claimed that notwithstanding the passage of Section 929P(b) of the Dodd-Frank Act, which reinstated the conduct and effects test that had been repudiated in Morrison, the SEC lacked jurisdiction in Traffic Monsoon in accordance with Morrison’s transactional test.  Section 929P(b) clarified, among other things, that U.S. district courts have jurisdiction over Exchange Act Section 10(b) and Section 17(a) actions brought by the SEC if the conduct and effects test has been satisfied.  However, the Traffic Monsoon court disagreed with the defendants’ claim, holding that the legal context in which Section 929P(b) was drafted, legislative history and express purpose of Section 929P(b) all point to a congressional intent that Section 10(b) and Section 17(a) should be applied to extraterritorial transactions to the extent that the conduct and effects test can be satisfied.  Using the conducts and effects test, the Traffic Monsoon court found that the SEC had jurisdiction to bring an injunction against the defendants, given that Traffic Monsoon was conceived and created in the United States, along with the promotion of its products.  This decision is notable because it represents the first time that a U.S. district court has affirmatively held that Section 929P(b) supersedes Morrison.  More importantly, it functions as a warning to issuers that their foreign activities may nevertheless be subject to liability under U.S. securities laws, even if other U.S. district courts have continued to use Morrison’s transactional test.

A copy of the Traffic Monsoon decision is available at:  http://static.reuters.com/resources/media/editorial/20170404/secvtrafficmonsoon–opinion.pdf.

On February 14, 2017, President Trump approved Congress’ joint resolution to repeal the SEC’s resource extraction disclosure rule. That action effectively brings to a conclusion the SEC’s efforts to implement a resource extraction disclosure rule mandated more than six years ago by the Dodd-Frank Act.

Read our client alert here:  https://www.mofo.com/resources/publications/170222-repeal-of-resource-extraction-disclosure-rule.html

On February 3, 2017, President Donald Trump signed an executive order to roll back certain parts of the Dodd-Frank Act.  We will continue to monitor news relating to the executive order and report developments on this blog.

UPDATE:  The White House released the official text of the Presidential Executive Order on Core Principles for Regulating the United States Financial System later in the afternoon on February 3.  See the executive order here: https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-executive-order-core-principles-regulating-united-states.

Likely, this is only the beginning. Senator Inhofe and Representative Huizenga filed Congressional Review Act Resolution relating to the Securities and Exchange Commission’s final rule regarding the disclosure of certain payments made by resource extraction issuers. The rule was required by Section 1504 of the Dodd-Frank Act. In the statement regarding the CRA, Senator Inhofe claimed that the rule “would put [U.S.] companies at a disadvantage by forcing them to disclose confidential business information to their private and international competitors.”

On September 13, 2016, the House Financial Services Committee of the United States House of Representatives (the “FSC”) formally released H.R. 5983, the “Financial CHOICE Act” (the “CHOICE Act”). While the CHOICE Act has largely been viewed through a financial regulatory lens, as the first major concerted effort to provide an alternative to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) as a way to end “Too Big to Fail,” the CHOICE Act, as currently drafted, would also repeal a number of the specialized disclosure provisions that were contained in the Dodd-Frank Act and subsume “JOBS Act 2.0” capital formation measures that have largely been presented to date as standalone bills.

This alert provides an overview of the sections of the CHOICE Act that would impact U.S. securities laws, which are contained in Title IV and Title X of the CHOICE Act.

Read our client alert.

Click here to view our chart entitled “Capital Formation Bills Reflected in the CHOICE Act.”

On June 14, 2016, the SEC issued an order (the “Order”) to increase the net worth threshold for “qualified clients” under Rule 205-3 of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), from $2 million to $2.1 million.  Rule 205-3 currently allows an investment adviser to charge a client (a “qualified client”) performance fees if:

  • the client has at least a certain dollar amount in assets under management (currently, $1,000,000) with the investment adviser immediately after entering into the advisory contract;
  • if the investment adviser reasonably believes, immediately prior to entering into the advisory contract, that the client either (A) had a net worth of more than a certain dollar amount (currently, $2,000,000) (the “net worth test”) or (B) is a “qualified purchaser” as defined in Section 2(a)(51)(A) of the Investment Company Act of 1940, as amended, at the time the advisory contract is entered into; or
  • the client is (A) an executive officer, director, trustee, general partner, or person serving in a similar capacity, of the investment adviser or (B) is a “knowledgeable employee” of the investor adviser.

The adjustment to the net worth threshold is being made pursuant to a five-year indexing adjustment required by Section 205(e) of the Advisers Act and Section 419 of the Dodd-Frank Act.  The effective date of the increase to the net worth threshold is August 15, 2016.  Qualified clients that enter into advisory contracts in reliance on the net worth test prior to the effective date will be “grandfathered” in under the prior net worth threshold.

A copy of the Order is available at: http://www.sec.gov/rules/other/2016/ia-4421.pdf

On June 7, in a speech to the Economic Club of New York, House Financial Services Committee Chairman Jeb Hensarling announced the Republican plan to replace the Dodd-Frank Act.  The Financial Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs (CHOICE) Act is set to be introduced as legislation later this month.  The Financial CHOICE Act proposes to end taxpayer-funded bailouts of large financial institutions; relieve banks that elect to be strongly capitalized from, what Hensarling called, “growth-strangling regulation”; impose tougher penalties on those who commit fraud; and hold Washington regulators more accountable.

An executive summary, made available on the House Financial Services Committee webpage, outlines the various components of the Financial CHOICE Act.  Included in the proposal for the Financial CHOICE Act is the incorporation of various pending legislation focused on reducing regulatory burden on capital formation for small businesses.  These bills would include: H.R. 1090 (Retail Investor Protection Act), H.R. 4168 (Small Business Capital Formation Enhancement Act), H.R. 4498 (Helping Angels Lead Our Startups “HALOS” Act) and H.R. 5019 (Fair Access to Investment Research Act).

In his speech, Hensarling called the Financial CHOICE Act “the foundation of the Republican plan to reignite growth…with real reforms that work.”  We will continue to monitor developments of the Financial CHOICE Act on this blog.

Chair White, addressing the Investor Advisory Committee, provided an update on SEC rulemaking.  Chair White identified the following initiatives:

  • the disclosure effectiveness initiative;
  • the review of the “accredited investor” definition;
  • action on the tick size pilot; and
  • the adoption of final crowdfunding rules.

Chair White also noted that the Commission must complete its required rulemakings under Dodd-Frank, including the Title VII and the executive compensation related rulemakings.  See her remarks here: http://www.sec.gov/news/statement/opening-remarks-to-the-investor-advisory-committee.html.