Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The SEC announced a settlement with the former chief financial officer of Beazer Homes USA to recover his bonus compensation and stock sale profits from the period when the Atlanta-based homebuilder was committing accounting fraud.

According to the SEC’s complaint filed in federal court in Atlanta, James O’Leary is not personally charged with misconduct, but is still required under Section 304 of the Sarbanes-Oxley Act to reimburse Beazer more than $1.4 million that he got after Beazer filed fraudulent financial statements during fiscal year 2006.  The SEC’s settlement with O’Leary is subject to court approval.

Earlier this year, the SEC reached a settlement with Beazer CEO Ian McCarthy to recover several million dollars in bonus compensation and stock profits that he received.

Section 304 requires reimbursement by some senior corporate executives of certain compensation and stock sale profits received while their companies were in material non-compliance with financial reporting requirements due to misconduct.  According to the SEC, this can include an individual who has not been personally charged with the underlying misconduct or alleged to have otherwise violated the federal securities laws.

Without admitting or denying the SEC’s allegations, O’Leary agreed to reimburse Beazer $1,431,022 in cash within 30 days of entry of the court order approving the settlement. This amount includes O’Leary’s entire fiscal year 2006 incentive bonus: $1,024,764 in cash incentive compensation and $131,733 previously received from Beazer in exchange for all restricted stock units he received as additional incentive compensation for fiscal year 2006. The settlement amount also includes $274,525 in stock sale profits.

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In his opening remarks for the CFTC’s Commodities Trading Conference on August 25, 2011, CFTC Chairman Gary Gensler stated “It is my hope that we vote on two proposed rulemakings seeking additional public comment on the implementation phasing of swap transaction compliance that would affect the broad array of market participants.”  According to Mr. Gensler, the proposed rulemakings would provide the public an opportunity to comment on compliance schedules applying to core areas of Dodd-Frank reform, including:

  • the swap clearing and trading mandates, and
  • the internal business conduct documentation requirements and margin rules for uncleared swaps.

Mr. Gensler also noted “Starting next month, we are likely to take up rules relating to position limits, clearinghouse core principles, business conduct and entity definitions, trading, data reporting and the end-user exemption.”

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Prior to Sarbanes-Oxley, it was fashionable for public companies to issue press releases with “pro-forma earnings,” which generally excluded certain GAAP charges from the income calculation.  To some, this measure was known as EBBS, or “Earnings Before Bad Stuff.”  As a response, Sarbanes-Oxley required, and the SEC issued, Regulation G.  Regulation G addresses “non-GAAP financial measures” and requires the most directly comparable GAAP measure be presented and a reconciliation of the most comparable GAAP and non-GAAP measures.

We reviewed some recent SEC comment letters on Regulation G.  For the most part, the comments were not surprising on a technical level.  One interesting point we noted is that the SEC, when conducting periodic reviews of issuers, is not shy about reviewing Form 8-Ks, including earnings announcements, and commenting on Regulation G deficiencies.

Some of the general categories of comments we noted were:

  • The non-GAAP operating statement conveys undue prominence.
  • All non-GAAP financial information (including forward looking information) was not reconciled to GAAP.
  • Requests to present non-GAAP financial information consistent with Securities Act filings, with an explanation of why the information is useful.
  • Where multiple non-GAAP financial measures are reported, a comment to reconcile each non-GAAP measure to the most directly comparable GAAP measure.
  • A comment to present more information as to why certain matters are not representative of future performance and are non-recurring in nature.

We also noted several comments on issuers’ Schedule 14D-9s, which an issuer files in response to a third party tender offer.  Those comments uniformly addressed projections which were presented on a non-GAAP basis (usually EBITDA) and required reconciliation to GAAP.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The Municipal Securities Rulemaking Board, or MSRB, has proposed a rule and related guidance to govern the fiduciary duty owed by municipal advisors to state and local government clients, and other municipal entity clients.

Under proposed MSRB Rule G-36 and related guidance, municipal advisors would owe a duty of loyalty and a duty of care that would require them to act in the municipal entity’s best interest. Municipal advisors, which provide advice to municipal entities about municipal securities and financial products, would be required to make clear written disclosure of certain conflicts of interests and to receive written consent to any such conflicts by authorized government officials.

The proposed rule also would prohibit an engagement with a state or local government where an “unmanageable” conflict exists, such as kickback payments to the municipal advisor from third parties. The proposed rule also establishes the concept that compensation received by a municipal advisor may be so disproportionate to the nature of the services performed that it represents a violation of the municipal advisor’s duty to act in the best interests of its municipal entity client. 

In terms of a municipal advisor’s duty of care under the proposed rule, a municipal advisor would be required to act competently in providing advisory services to its municipal entity clients and, in general, to consider alternative financings or products. Municipal advisors would also be required to make a reasonable inquiry into the facts relevant to determining whether their municipal entity clients should proceed with a financial course of action, such as issuing municipal securities.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The Federal Reserve Board is proposing a two-year phase-in period for most savings and loan holding companies, or SLHCs, to file Federal Reserve regulatory reports with the Board and an exemption for some SLHCs from initially filing Federal Reserve regulatory reports.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, supervisory and rulemaking authority for SLHCs and their nondepository subsidiaries transferred from the Office of Thrift Supervision, or OTS, to the Board on July 21, 2011. On February 3, 2011, the Federal Reserve Board sought comment on its notice of intent to require SLHCs to submit the same reports as bank holding companies, beginning with the March 31, 2012, reporting period.

After consideration of the comments received on the notice of intent, the Federal Reserve Board proposes to exempt a limited number of SLHCs from initial regulatory reporting using the Federal Reserve’s existing regulatory reports and a two-year phase-in period for regulatory reporting for all other SLHCs. Exempt SLHCs would continue to submit Schedule HC, which is currently a part of the Thrift Financial Report, and the OTS H-(b)11 Annual/Current Report.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The Bureau of Consumer Financial Protection, or CFPB, has issued a bulletin, which the CFPB refers to as the Interim ILS Guidance, to address certain administrative issues relating to the Interstate Land Sales Full Disclosure Act, or ILS.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, on July 21, 2011, all of the consumer protection functions of the Department of Housing and Urban Development, or HUD, relating to the ILS transferred to the CFPB, and the CFPB has all powers and duties that were vested in the Secretary of HUD relating to the ILS. The Dodd-Frank Act also amends the ILS to conform the transfer of these authorities to the CFPB.  The CFPB is authorized to administer and enforce requirements under the ILS, subject to the limitations and other provisions of the Dodd-Frank Act.

Later this year, the CFPB intends to publish in chapter X of title 12 of the Code of Federal Regulations the rules, including HUD’s ILS rules, for which rulemaking authority transfers to the CFPB, including conforming amendments to reflect both the transfer of authority to the CFPB under the Dodd-Frank Act and certain other changes made by the Dodd Frank Act to the underlying statutes. In the interim, the existing rules will continue in effect and the changes made by the Dodd-Frank Act to transfer authority to the CFPB were effective as of July 21, 2011 by operation of law.

The CFPB has issued Interim ILS Guidance, effective July 21, 2011, for clarification and convenience pending the issuance of revised ILS regulations in order to facilitate compliance with and administration of the ILS, as amended. HUD’s regulations implementing ILS have provided, among other things, for entities subject to the ILS to provide certain documents and payments to HUD. The guidance clarifies that such materials should be submitted to the CFPB. An entity that acts in accordance with the guidance will be considered to be in compliance with the ILS and its implementing regulations and would not be subject to CFPB enforcement for lack of compliance with the regulations referring to HUD and its contact information.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

 

Section 719(d) of the Dodd-Frank Act mandates that the CFTC and the SEC jointly conduct a study to determine whether stable value contracts, or SVCs, fall within the definition of a swap.  Section 719(d) of the Dodd-Frank Act also requires that the SEC and the CFTC, in making that determination, jointly consult with the Department of Labor, the Department of the Treasury, and the State entities that regulate the issuers of SVCs. Further, Section 719(d) of the Dodd-Frank Act provides that if the Commissions determine that SVCs fall within the definition of a swap, they jointly shall determine if an exemption for SVCs from the definition of a swap is appropriate and in the public interest.  In connection with this study, the SEC and the CFTC are seeking comment in a recently issued release.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The Consumer Financial Protection Bureau has adopted a new policy on certain non-public communications to the CFPB during the rule making process.  The policy refers to these as “ex-parte” communications.  According to the policy:

  • A person who makes an oral ex parte presentation to CFPB decision-making personnel shall, not later than three business days after the presentation, file to the rulemaking docket for the proceeding and submit to the CFPB’s Executive Secretary and all CFPB employees to whom the presentation was made, a memorandum summarizing the presentation.
  • A person who makes a written ex parte presentation to CFPB decision-making personnel (including documents shown or given to decision-making personnel during oral ex parte presentations) shall, not later than three business days after the presentation, file to the rulemaking docket for the proceeding and submit to the CFPB’s Executive Secretary and all CFPB employees to whom the presentation was made a copy of the presentation.

Thankfully, there is a little bit of flex in the CFPB policy.  Ex parte presentations do not include the following:

  • Statements by any person made in a public meeting, hearing, conference, or similar event, or public medium such as a newspaper, magazine, or blog;
  • Communications that are inadvertently or casually made;
  • Inquiries limited to the status of a rulemaking or concerning compliance with procedural requirements; or
  • Communications that occur as part of the CFPB’s regular supervisory, monitoring, research, and/or other statutory responsibilities, which communications are only incidentally relevant to, and not intended to influence the outcome of, a rulemaking proceeding.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The Municipal Securities Rulemaking Board, or MSRB, has proposed regulations that it believes would help prevent the influence of political contributions by municipal advisors in the award of business by state and local government officials.

Under the MSRB’s proposed Rule G-42, municipal advisors would be prohibited from conducting business with municipal entities for compensation for two years if they make certain political contributions to state or local government officials with authority to hire municipal advisors.  Municipal advisors also would be banned for two years from soliciting certain types of business engagements from municipal entities on behalf of others and from receiving compensation for prior solicitations.

The MSRB is proposing that the pay to play rule for municipal advisors be effective six months after the date the SEC approves rules defining the term “municipal advisor” under the Securities Exchange Act or at a later date as approved by the SEC. No contributions made prior to the effective date would result in a ban on business for compensation. Once the new rule is effective, the financial advisory services of dealers would no longer be subject to Rule G-37, although any ban on municipal securities business under Rule G-37 already in effect would continue until its two-year expiration date. 

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

Section 982 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Sarbanes-Oxley Act to give the Public Company Accounting Oversight Board, or PCAOB, explicit oversight authority with respect to audits of brokers and dealers that are registered with the SEC.  The PCAOB had previously filed a rule proposal with the SEC.

The SEC has approved the PCAOB’s proposed rule.  Only one comment letter was received.

The PCAOB rule establishes a temporary rule for an interim program of inspection that would allow the PCAOB to begin inspections of relevant audits and auditors and provide a source of information to help guide decisions about the scope and elements of a permanent program.

The temporary rule provides that the PCAOB will publish a report on the interim program no less frequently than every twelve months, beginning twelve months after the date the rule takes effect and continuing until rules for a permanent program take effect. Each report will describe the progress of the interim program and any significant observations that either may bear on the PCAOB’s consideration of a permanent program or the publication of which may otherwise be appropriate to protect the interests of investors or to further the public interest.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.