The MSCI released its Consultation on the Treatment of Unequal Voting Structures in the MSCI Equity Indexes soliciting input on index inclusion criteria relating to the shares of companies having a dual class structure. Many commenters have responded by releasing their views publicly. While many institutional investors have taken the opportunity to comment on their concerns regarding dual class structures, particularly those with no sunset provisions, and have voiced a strong preference for a one share-one vote model, some of the same institutional investors have advocated that MSCI indices continue to include the securities of companies with dual class structures. Some have suggested that the MSCI consider offering bespoke indices and broad-based indices. The broad-based indices would reflect the investable market, including the securities with unequal voting rights. By contrast, bespoke indices might be tailored to include only the securities of companies having certain characteristics. Along these lines, a bespoke index might omit the securities of companies with dual class voting structures.
On May 23, 2018, the Securities and Exchange Commission (the “Commission”) proposed establishing a research report safe harbor (Rule 139b) for unaffiliated brokers or dealers that publish or distribute research reports that cover investment funds. The Commission took this action in furtherance of the mandate of the Fair Access to Investment Research Act of 2017 (the “FAIR Act”). The FAIR Act required the Commission to expand the Rule 139 safe harbor for research reports to cover research reports on investment funds. Rule 139 permits a broker or dealer that is distributing an issuer’s securities to publish a research report about those securities without the report itself being deemed an offer to sell such securities. If adopted as proposed, the safe harbor would be made available to research reports on mutual funds, exchange-traded funds, registered closed-end funds, business development companies and similar covered investment funds. The safe harbor would be unavailable with respect to broker-dealers’ publication or distribution of research reports about closed-end registered investment companies or business development companies during their first year of operation. The adoption of an expanded safe harbor would reduce obstacles that currently prevent certain investors from accessing research reports on investment funds. However, the safe harbor would not extend to research reports issued by brokers or dealers affiliated with the investment fund. The public comment period will remain open for 30 days. The proposed rule is available here.
On June 13, 2018, the Securities and Exchange Commission will host an investor town hall at Georgia State University’s College of Law.
The town hall will cover a range of topics from finding information about investments, ICOs and digital assets, to cybersecurity. The Commissioners and SEC staff will then lead breakout sessions, including: “Bitcoin & ICOs;” “Investing in, and Raising Money by, Small Companies;” a session on mutual funds and ETFs; and others.
Visit the SEC’s Investing in America website for additional details and to RSVP.
In two recent papers, including “Inside the ‘Black Box’ of Private In-House Meetings,” authors Robert M. Bowen, Shantanu Dutta, Songlian Tang, and PengCheng Zhu, consider the timing of trading and the relationship of trading to meetings between company insiders and investors and analysts. The data collected is based on firms listed on the Shenzhen Stock Exchange in China. Companies listed on the exchange are required to disclose summary reports within two trading days of private meetings. This disclosure requirement is meant to level the playing field in much the same way as Regulation FD does in the United States. The various tests consider insider trading patterns at different time periods around private meeting dates. Given that in the United States there is no requirement to disclose corporate access opportunities, the data sets and analyses described in the papers may provide some insights. The authors found evidence of profitable insider trading around the occurrence of such private meetings. While causality cannot be established, the patterns are interesting. Requiring disclosure of the occurrence of such meetings also is an interesting approach and might be a useful extension to existing Regulation FD requirements at a time when corporate access is seen as raising a number of concerns.
Early in 2018, the Nasdaq filed with the SEC an amendment that would update certain aspects of the Nasdaq shareholder approval rules, Rule 5635. The proposal would:
- amend the measure of “market value” in connection with assessing whether a transaction is being completed at a discount from the closing bid price to the lower of the closing price as reflected by Nasdaq, or the average closing price of the common stock for the five trading days preceding the definitive agreement date;
- refer to the above price as the “Minimum Price,” and existing references to “book value” and “market value” used in Rule 5635(d) will be eliminated; and
- eliminate the references to “book value” for purposes of the shareholder vote requirement.
- Is the five-day average closing price a reasonable alternative to determining market value for purposes of shareholder approval requirements under Nasdaq Rule 5635(d)? If so, what are the benefits and/or risks to companies and their shareholders? Do the benefits and risks to companies and shareholders change under certain market conditions, such as rising markets, and if so how?
- Are there benefits and/or risks to listed companies and shareholders by permitting sales in private placements that are above market value but below book value? Could there be any potential impact on share price? Would the assessment of any potential impact, if any, change depending on the reason why a stock is trading above market price but below book value (i.e., market conditions, accounting issues)?
Given the importance of the application of these rules to many private placements and PIPE transactions, capital markets participants are urged to provide comments.
Congress has passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which principally addresses financial regulatory measures. The legislation also includes a number of securities law related provisions. For example, Section 503 requires that the SEC review the findings and recommendations of the annual SEC Government-Business Forum on capital formation and address the findings and recommendations publicly. Section 504 expands the Section 3(c)(1) exception under the Investment Company Act to include venture capital funds that have up to 250 investors and $10 million in aggregate committed capital contributions and uncalled capital. Section 507 raises the Section 701 threshold to $10 million and indexes the threshold to inflation going forward. Section 508 allows reporting companies to rely on Regulation A. Rule 509 provides closed-end funds listed on a national securities exchange and certain interval funds to benefit from the same securities offering and other provisions available to operating companies. After the Small Business Credit Availability Act was passed modernizing the securities offering and communications related provisions for BDCs, there had been concern that closed-end funds had been forgotten.
See the firm’s Legal Update here.
Effective May 11, 2018, the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”) implemented a new customer due diligence requirement. The requirement applies to certain financial institutions, including banks, broker-dealers and mutual funds, at the time each new account is opened. The rule enhances the information that financial institutions must collect regarding the identity of individuals (i.e., beneficial owners) who own or control their legal entity customers, which includes any corporation, limited liability company or partnership. Information must be collected for each owner of 25% or more of the equity interests of a legal entity customer. As a result of the rule’s recent implementation, financial institutions are devoting significant time and resources to modifying their internal systems and to implementing appropriate procedures to ensure compliance with the rule. Certain entities are excluded from the definition of “legal entity customer.” For example, SEC reporting companies are excluded from the rule because they are subject to public disclosure and reporting requirements that provide information similar to what would otherwise be collected under the rule. Companies listed on foreign exchanges are not excluded from the definition of legal entity customer. Such companies may not be subject to the same or similar public disclosure and reporting requirements as companies publicly traded in the United States and, therefore, collecting beneficial ownership information for them is required. Certain institutions are considering revising some standard form agreements, including underwriting agreements and engagement letters, to include ownership certification representations and covenants to ensure compliance. FinCEN has provided financial institutions with a certification form that may be used to obtain the required beneficial ownership information. To read FinCEN’s “Frequently Asked Questions” relating to the new rule, please click here, and to read SIFMA’s memorandum relating to the new rule in the context of certain sales of securities, click here (with attachments providing form certifications at the 25% equity ownership threshold and 10% equity ownership threshold).
In a recent paper, authors Onur Bayar, Thomas J. Chemmaur and Paolo Fulghieri consider whether allowing insiders with nonpublic information to disclose such information prior to selling their securities. The paper discusses the communications prohibitions applicable prior to, and in close proximity to, securities offerings, as well as some communications safe harbors. The authors set out a model for disclosures at different points in time prior to a securities offering. The paper concludes that even in the absence of an agency, like the Securities and Exchange Commission, that regulates disclosures, there are incentives for companies to self-regulate resulting in conservative disclosures. The authors further conclude that whether allowing disclosures prior to an equity offering is desirable depends on the proportion of Institutional investors who are able to verify the information (compared to retail investors that would not be able to test or verify disclosures). Finally, the authors also consider the nexus to the rules for bringing private securities lawsuits. Setting aside the authors’ thesis, it would seem prudent in light of the significant advances in technology since 2005 when securities offering reform last revamped the communications rules to revisit the safe harbors available to issuers.
On January 1, 2018, a European Union law regulating packaged retail insurance-based investment products (“PRIIPs”) went into effect targeting securities offered to retail investors by investment funds. If a security is considered a PRIIP, the issuer is required to publish a strictly regulated key information document (“KID”) that must be continuously updated during the distribution of the security. The liability for the content of the KID is assumed by the issuer by operation of law. The broadly drafted regulation has the potential to impact the ability of investors to purchase securities issued by U.S. exchange-listed real estate investment trusts (“REITs”). To determine whether the securities of a particular REIT should be considered PRIIPs and thereby subject to the regulation, all relevant operational facts and characteristics of the REIT must be reviewed in an analysis similar to the undertaking by REITs at the time the Alternative Investment Fund Managers Directive (“AIFMD”) was implemented throughout the European Union. Securities are considered PRIIPs if the amount repayable to the retail investor is subject to: (i) fluctuation because of exposure to reference values or (ii) the performance of one or more assets that are not directly purchased by the retail investor. Securities issued by REITs that are structured as alternative investment funds under AIFMD are considered PRIIPs.
The recently updated Securities and Exchange Commission agenda (see here and here) provides some insight on what to expect in upcoming months. The amendments to the smaller reporting company definition, which were widely supported when proposed, remain in the “final rule stage.” Likewise, the amendments to implement the FAST Act report and disclosure update and simplification (to eliminate outdated, redundant and otherwise repetitive requirements) remain in the final rule stage. It will be interesting to see whether the Commission takes action on these measures before Commissioner Piwowar’s departure. Consistent with Corporation Finance Division Director Hinman’s recent Congressional testimony about which we previously blogged, the agenda now includes in the “proposed rule stage” extending the test-the-waters provision to non-EGCs. Also in the proposed rule stage are changes to Industry Guide 3 (disclosures for banks and other financial institutions), disclosure of payments by resource extraction issuers, and additional changes to the Regulation S-K disclosure requirements. A new item was added that is referenced as “amendments to financial disclosures for registered debt security offerings.” It is not clear to what this relates. Sadly, the changes to various communications safe harbors and other Securities Act rules for business development companies are in the “long-term actions” category. The long-term actions category also includes a number of measures that have been the subject of recommendations by the Commission’s Investor Advisory Committee, such as disclosures regarding board diversity and changes to the accredited investor definition. Consistent with recent comments by representatives of the Commission, a measure relating to harmonizing private placement rules is added to the long-term actions list.