February 2013

At the annual SEC Speaks held in Washington, DC on February 22, 2013, the SEC explained, justified, prodded, ruminated and complained.  And, despite the threat of imminent staff cuts if sequestration sets in, the Commissioners and senior staff offered an ambitious program for the coming year.

The proceedings were not without some color and controversy.

Commissioner Daniel M. Gallagher lamented the loss of the SEC’s independence, taking a swipe at Congress and the federal banking regulators.

The turning point, he suggested, was the Dodd-Frank Act.  The SEC, he said, “continues to stare down an overflowing plate of Dodd-Frank mandates in addition to its other responsibilities.”

The SEC, he cautioned, must not allow itself to assume a secondary role in the regulation of matters squarely within its jurisdiction and core competencies. This, I’m afraid, is exactly the role that the Commission has taken thus far with respect to critical initiatives, including the Volcker Rule.

Gallagher cited the Volcker Rule as an example of how Congress is attempting to whittle away the SEC’s independence.  Section 619 of the Dodd-Frank Act requires the three federal banking agencies, the CFTC and the SEC to implement the Volcker Rule.  Unfortunately, he said, “there is little doubt that notwithstanding the valiant efforts of the SEC staff, the Commission for too long has taken a back seat to the banking regulators in this rulemaking process.”

Gallagher cited what he saw was another new and immediate challenge.  FSOC, he said, “has directly challenged the Commission’s regulatory independence.”   While he did not question the importance of FSOC’s broad mandate to identify systemic risks and emerging threats to the country’s financial stability, the banking regulators have “drastically different missions.”

By definition, the securities markets put investors’ money at risk.  The SEC’s mandate, he said, is not to ensure safety and soundness, but to protect investors from fraud and to ensure fair and efficient markets.  “We must keep a healthy distance between capital markets regulation, which rightfully assumes no taxpayer safety nets, and bank regulation,” he said.

Yet, FSOC, driven by bank regulators, has been pressuring the SEC to act on money market funds, which is the SEC’s area of expertise.  He found this institutional meddling with the regulation to be “immensely troubling.”  The statutory authority that Congress granted to FSOC, he said, “is not simply a threat to the Commission’s independence—if exercised, it would be an outright annexation.”

FSOC, Gallagher noted, chaired by a cabinet appointment, consists of the individual Chairs of the banking regulators, the CFTC and the SEC.

While one might expect that the Chairman of the SEC would always represent the views of the Commission as a whole, there is no formal oversight mechanism available to the Commission to check the Chairman’s participation on FSOC.

This structure, he suggested, could lead to “undue political influence.”

Commissioner Troy A. Paredes also took a shot at Congress and the Dodd-Frank Act, which he termed “sweeping legislation that is spawning reams of new rules and regulations that I worry will overregulate our financial system and in turn suppress our country’s economic growth.”

Dodd-Frank represents what to my mind is a disquieting expansion of the federal government’s control over the economy.

Paredes also challenged the disclosure regime of the federal securities laws:  “we must account for the fact that too much disclosure, particularly when it is too complex, can be counterproductive.”

On more mundane matters, Lona Narengalla, the acting director of the Division of Trading and Markets, said that finalizing the rules implementing Title II of JOBS Act was priority of the staff.

The Division of Investment Management and the Division of Enforcement signaled more aggressive examinations and enforcement initiatives, pointing to an uptick in actions against individuals.

For additional articles by Mr. Baris, please visit: http://www.mofo.com/jay-g-baris/?op=publications&ajax=no.

At Practising Law Institute’s session, “The S.E.C. Speaks,” Commissioner Troy A. Paredes commented on the increased complexity of mandatory disclosures, and the increased quantity of disclosures.  Paredes noted that, “The information overload concern is that investors will have so much information available to them that they will sometimes be unable to distinguish what is important from what is not.”  Often information, especially risk factors, may be added just as a preventive measure, to ensure that should litigation ensue, the issuer will not be accused of failing to mention a potential risk.

The JOBS Act mandates that the Commission conduct a study of the requirements contained in Regulation S-K,   Also, the disclosure accommodations provided to Emerging Growth Companies by the JOBS Act lead one to consider the accommodations available to smaller public companies.  This is an opportune time to revisit disclosure requirements for reporting issuers and the format of these required disclosures.  Paredes suggests that accessible presentation formats (such as charts, graphs, tables, etc.) should be encouraged.  This is consistent with the findings of the recent financial literacy study, which noted that investors prefer summaries and graphic presentations.  It will be interesting to see whether Staff comments will encourage registrants to eliminate boilerplate and pare down the number of risk factors to those truly essential to an investor’s understanding of the circumstances that would impact a registrant’s business and financial results.

Given the haste with which the JOBS Act made its way through Congress, it is not surprising that there are some details that may have been neglected.

Rep. McHenry has introduced a bill (H.R. 701), co-sponsored by Representatives Schweikert, Eshoo, Garrett, and Scott, which would direct the Securities and Exchange Commission to implement rules for Section 3(b)(2) (or Regulation A+) by October 31, 2013.

Rep. Womack’s bill (H.R. 801) would address the inadvertent omission of savings and loan holding companies from the deregistration provisionsconsistent with the JOBS Act legislative history.

The Staff of the Division of Corporation Finance recently published a summary of the various capital-raising alternatives available to foreign issuers.  The summary is accessible from this link:  http://www.sec.gov/divisions/corpfin/internatl/foreign-private-issuers-overview.shtml.  The summary incorporates discussion of the applicability of various JOBS Act provisions to offerings by foreign private issuers.

Join Morrison & Foerster and IFLR for an update on the JOBS Act. The webcast will be held Thursday, March 7, from 11:00 AM – 12:30 PM EST.

Since the JOBS Act took effect in April 2012, the SEC has published many of the Act’s required studies, and released significant guidance concerning many of its provisions. Market practice continues to evolve, particularly in relation to emerging growth company IPOs.

Now approaching its first anniversary, this webcast provides an opportunity to look at how the market has utilized the JOBS Act, and the questions that remain.

Topics of discussion will include:

  • Title I practices, including confidential submissions, test-the-waters communications, and disclosures;
  • Practice pointers under Title I;
  • Emerging grown company exchange offers, mergers, and spin-offs;
  • Research guidance; and
  • General solicitation and except offerings.


  • David Lynn, Morrison & Foerster LLP
  • Anna Pinedo, Morrison & Foerster LLP
  • Tymour Okasha, Bank of America Merrill Lynch

For more information, and to register, please visit: http://www.mofo.com/The-JOBS-Act-Rulemaking-Status-and-Assessing-its-First-Year-03-07-2013/.

The SEC has posted the webcasts from its decimalization roundtable.  These are available at:  http://www.sec.gov/news/otherwebcasts/2013/decimalization-roundtable-020513.shtml.  The participants generally supported the implementation of a pilot program, and cited the need for additional empirical data regarding the effect of decimalization as well as order handling and other market structure changes on the securities of smaller and mid-cap companies.

The Staff of the SEC’s Division of Trading and Markets recently published a series of FAQs addressing certain broker-dealer matters arising in connection with Title II of the JOBS Act.  The FAQs are available here:  http://www.sec.gov/divisions/marketreg/exemption-broker-dealer-registration-jobs-act-faq.htm.

Title II of the JOBS Act formalizes the guidance that has been provided by the SEC in various no-action letters relating to the types of activities that may be conducted by matchmaking sites without requiring broker-dealer registration.  Section 201 notes that a matchmaking site will not be required to register as a broker-dealer solely by virtue of its private capital raising activities (which may include the use of general solicitation) provided that it complies with specified conditions.

The FAQs clarify that this provision does not require further rulemaking, but notes that a platform cannot permit an issuer to conduct a general solicitation in a Rule 506 offering until the SEC  promulgates its final rules.  The FAQs note that the exemption from broker-dealer registration in this section is applicable only when securities are offered and sold pursuant to Rule 506.  The FAQs also address compensation and note that “Congress conditioned the exemption on a person and its associated persons not receiving any “compensation” in connection with the purchase or sale of such security.” Congress did not limit the condition to transaction-based compensation. The staff interprets the term “compensation” broadly, to include any direct or indirect economic benefit to the person or any of its associated persons. At the same time, we recognize that Congress expressly permitted co-investment in the securities offered on the platform or mechanism. We do not believe that profits associated with these investments would be impermissible compensation for purposes of Securities Act Section 4(b).”  To this end, the FAQs note that a venture fund may operate a matchmaking site.

The FAQs also note that the availability of the exemption from broker-dealer registration should not be construed as suggesting that the entity is not otherwise a “broker” or a “dealer” and refers to its guidance on the types of activities typically associated with broker-dealer status.  The Staff also notes that the JOBS Act exemption does not address state registration requirements.

Morrison & Foerster is seeking nominations for the 2013 Regulatory Innovation Award. Morrison & Foerster established the award in 2008 through the Burton Foundation to honor an academic or non-elected public official whose innovative ideas have made a significant contribution to the discourse on regulatory reform in the areas of corporate governance and executive compensation, securities, capital markets, regulatory capital or the regulation of financial institutions.

An independent committee including academics and business leaders will consider and evaluate the nominees. The committee consults with representatives of The Burton Foundation as part of the selection process. Past award recipients include Cass Sunstein, Administrator of the Office of Information and Regulatory Affairs in the White House Office of Management and Budget and Eddy Wymeersch, former Chairman of the Committee of European Securities Regulators. For more information, please view our brochure.

We invite you to nominate a worthy innovator.  To submit a nomination, please visit our dedicated website at www.regulatoryinnovationaward.com.

In its recently released survey, 2013 BDO IPO Outlook, BDO included specific questions on the effect of the JOBS Act on the IPO market.  The report can be accessed here:  http://www.bdo.com/download/2432.  According to the survey, 42% of bankers surveyed responded that they saw no evidence that the JOBS Act had affected the IPO market positively; however, 28% of respondents noted that it was too early to make an assessment.  A significant number of those surveyed (48%) noted that institutional investors were reluctant to meet with companies in test-the-waters discussions until companies had filed publicly.