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

The Municipal Securities Rulemaking Board, or MSRB, held its quarterly Board of Directors meeting, where it completed developing the initial set of core rules of conduct for municipal advisors.

The MSRB approved a plan for effective dates of rule proposals issued earlier this year. Those proposals depend on publication by the SEC of a permanent definition of who is a municipal advisor and is therefore subject to MSRB rules.

At its meeting, the MSRB agreed to publish for public comment a new rule proposal that would require municipal advisors to provide written documentation of their municipal advisor engagements.  The goal is to disclose in the documentation information state and local governments and other municipal entities need to have to make informed decisions, including the basis of compensation, the scope of services, any manageable conflicts of interest and whether any affiliates of the municipal advisor provide advice or services related to the municipal advisor engagements.

The MSRB also approved publishing for public comment an extension of its advertising rule to municipal advisors, which would require advertising by municipal advisors of their skills and services not to be false and not materially misleading.

The MSRB also approved amendments to its proposal to apply its gifts rule to municipal advisors and plans to file the proposal with the SEC in the near future.

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

The Financial Stability Oversight Council, or FSOC, has issued its first annual report.  The report fulfills the Congressional mandate to report on the activities of the Council, describe significant financial market and regulatory developments, analyze potential emerging threats, and make certain recommendations.

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 filed a proposed rule change with the SEC to establish a new interim municipal advisor assessment under new Rule A-11, on municipal advisor assessments, and a new Form A-11-Interim to be used in connection with such interim municipal advisor assessment.  In addition, the MSRB is seeking comment on a draft survey seeking information from municipal advisors on the nature of the municipal advisory activities they undertake as well as the manner and level of compensation received by municipal advisors for such municipal advisory activities.

The proposed interim assessment is designed to defray a portion of the increased costs and expenses associated with the operation and administration of the MSRB attributable to the MSRB’s regulation of municipal advisors.  The proposed interim assessment would consist of an annual assessment equal to $300 for each assessable professional reported or required to be reported by a municipal advisor to the MSRB on new Form A-11-Interim for each fiscal year pursuant to new Rule A-11. 

For purposes of the interim assessment, an assessable professional of a municipal advisor would, pursuant to proposed Rule A-11(b)(i), consist of any natural person who is an associated person of the municipal advisor who has received compensation or other payments from the municipal advisor (excluding reimbursement for out-of-pocket expenses) includable in such person’s gross income for federal income tax purposes in the amount of $10,000 or more and who provides services in connection with the municipal advisor’s municipal advisory activities.  Such services include, but are not limited to:

  • engaging in municipal advisory business with a municipal entity or obligated person;
  • soliciting municipal advisory business with a municipal entity or obligated person on its own behalf or soliciting third-party business;
  • providing research or analytical services to other personnel of the municipal advisor engaged in the services described above or to clients of the municipal advisor above;
  • acting as supervisor of any person described above, those person’s supervisors and the Chief Executive Officer;
  • serving as a member of the municipal advisor’s executive or management committee or similarly situated officials, if any.

The MSRB expects the interim assessment to remain in effect for a limited period of time during which the MSRB, by means of a survey, would examine the nature of the municipal advisory activities undertaken by municipal advisors as well as the manner and level of compensation received by municipal advisors for such municipal advisory activities.  Based on the MSRB’s findings, the MSRB would then consider whether to replace the interim assessment with a permanent form of assessment on municipal advisors that would, together with other MSRB assessments payable by municipal advisors, brokers, dealers and municipal securities dealers, provide for reasonable assessments that are fairly and equitably apportioned among all market participants subject to MSRB regulation and that do not impose an undue burden on small municipal advisors.

The MSRB has requested that the SEC approve the proposed interim assessment for effectiveness on October 1, 2011, which is the first day of the MSRB’s fiscal year.  Municipal advisors would be required to submit completed Form A-11-Interim and to make payment of the interim assessment by November 30, 2011 based on information for the period from October 1, 2010 through September 30, 2011.  If in any subsequent fiscal year the MSRB has not yet replaced the interim assessment with a permanent form of assessment as described above, municipal advisors would be required to submit completed Form A-11-Interim and to make payment of the interim assessment by November 30 of such fiscal year based on information for the prior fiscal year.

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

The Consumer Financial Protection Bureau has issued a flurry of interim rules.  The rules include:

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

As we noted recently, the Court of Appeals vacated the SEC’s rules on proxy access which was principally set forth in Rule 14a-11.  When the SEC adopted Rule 14a-11, it also adopted amendments to Rule 14a-8.  The amendments to Rule 14a-8 provide that public companies will no longer be able to rely Rule 14a-8(i)(8) to exclude a proposal seeking to establish a procedure in a company’s governing documents for the inclusion of one or more shareholder nominees for director in a company’s proxy statement.  While the amendments to Rule 14a-8 were stayed by the SEC in connection with the proxy access litigation, our view is the SEC could lift the stay and the rules could become operative.

The revisions to Rule 14a-8 are a potent weapon for activist investors that we have long advised clients could create far more issues than the now vacated proxy access rules.  The reason is simple:  There are no onerous ownership or length of holding thresholds.  Under Rule 14a-8, a shareholder need only own $2,000 worth of stock and have held it for one year.  Long time Rule 14a-8 activists like John Chevedden may have a field day.  Well funded activists may become disruptive.

That being said, these new rules may be tempered by state law.  For instance, for companies incorporated in the State of Minnesota, a shareholder must own 3% of the outstanding common stock in order to make a binding by-law proposal.

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

The CFPB has issued an interim rule to fill a regulatory gap.  Some lenders are chartered or licensed by states, while others operate under federal charters. For years, state lenders have been able to rely on a federal law called the Alternative Mortgage Transaction Parity Act, or AMTPA, to make variable rate loans and other “alternative” mortgages, regardless of state law restrictions. Congress passed AMTPA to allow state lenders to make alternative mortgages on the same footing as their federally chartered competitors. Last year, the Dodd-Frank Act amended AMTPA to update it and to provide states more room to regulate certain fixed-rate loans and certain features of adjustable rate mortgages.

Without this interim rule implementing the AMTPA amendments, state lenders would lose their ability – overnight – to rely on AMTPA to make alternative mortgages. That could hurt not just state lenders that rely on AMTPA, some of which may be small rural banks. It could also hurt consumers by reducing their access to mortgages from those lenders.

The CFPB believes this interim rule will help preserve certainty in affected mortgage markets. It will also give lenders, consumers, and state regulators time to adjust to recent changes to the law. AMTPA was designed to preserve consumer access to alternative mortgages.

The interim rule gives state lenders two choices: They can follow state law when they make alternative mortgages or they can follow some straightforward federal requirements that provide consumers basic protections. For example, under the federal requirements, lenders must use a fair and transparent method – like a publicly available index that the lender does not control – for changing the rate on an adjustable rate loan.

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

SEC Rule 14a-11 allowed a shareholder (or group of shareholders) to include a shareholder nominee, in certain limited circumstances, in a public company’s proxy statement. The Business Roundtable and the US Chamber of Commerce challenged the rule before the Court of Appeals for the District of Columbia.  The Court issued a decision which vacated Rule 14a-11.

The Court held the SEC acted arbitrarily and capriciously for having failed to assess the economic effects of the new rule.  The Court found the SEC:

  • inconsistently and opportunistically framed the costs and benefits of the rule;
  • failed adequately to quantify certain costs or to explain why those costs could not be quantified;
  • neglected to support its predictive judgments;
  • contradicted itself; and
  • failed to respond to substantial problems raised by commenters.

Costs versus Benefits

The Court looked closely at what costs and expenses a company might incur to oppose shareholder nominees.  The SEC believed that significant funds may not be expended because a board’s fiduciary duties may prevent the company from opposing a nominee or that public companies may simply chose to include the shareholder nominee in the proxy statement. The Court found that the SEC’s prediction that public companies may not choose to oppose shareholder nominees had no basis beyond mere speculation.  The SEC did nothing to estimate and quantify the costs it expected companies to incur; nor did it claim estimating those costs was not possible.  The Court noted empirical evidence about expenditures in traditional proxy contests was readily available.

Shareholders with Special Interests

The Court found that the SEC failed to consider the impact of special interest groups from utilizing Rule 14a-11.  Commenters expressed concern that employee benefit funds would impose costs upon companies by using Rule 14a-11 as leverage to gain concessions, such as additional benefits for unionized employees, unrelated to shareholder value. The Court seemed to agree that public and union pension funds were institutional investors most likely to utilize proxy access.  The Court found that by ducking serious evaluation of the costs that could be imposed upon companies from use of the rule by shareholders representing special interests, particularly union and government pension funds, the SEC acted arbitrarily.

Frequency of Election Contests

In weighing the rule’s costs and benefits, the Court found the SEC arbitrarily ignored the effect of the final rule upon the total number of election contests.   To do so, the Court believed the SEC needed to address whether and to what extent Rule 14a-11 will take the place of traditional proxy contests.  The beneficial effects of Rule 14a-11 may include making election contests more plausible for shareholders to participate in the governance of their company.  However, without knowing how often Rule 14a-11 will take the place of traditional proxy contests, the SEC has no way of knowing whether the Rule will facilitate enough election contests to be of net benefit.

The Court also found the SEC’s discussion of the estimated frequency of nominations under Rule 14a-11 to be internally inconsistent and therefore arbitrary. Simply put, the SEC anticipated frequent use of Rule 14a-11 when estimating benefits, but assumed infrequent use when estimating costs.

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

A report released by the Consumer Financial Protection Bureau, or CFPB, recommends principles for maximizing consumers’ ability to receive and use exchange rate information when making remittance transfers, and examines the incentives and challenges related to using remittance data in credit scores.

Remittance Transfers and Exchange Rates

The Dodd-Frank Act will require remittance transfer providers to disclose, in most circumstances, the exchange rates they use and other information at the time that consumers request remittance transfers and when they pay for those transactions. The Board of Governors of the Federal Reserve System has proposed rules to implement those and other new requirements related to remittance transfers. The CFPB will assume responsibility for issuing final disclosure rules and will review comments received by the Board.

The CFPB’s report recommends that, with respect to exchange rates, policymakers and other stakeholders observe four principles for enhancing consumers’ ability to receive and use exchange rate information:

  • design, test, and use disclosures to maximize consumer comprehension;
  • facilitate consumers’ comparisons of remittance offerings;
  • adapt disclosures to the growing variety of channels that consumers use to initiate remittance transfers; and
  • couple information about exchange rates with an indication or estimate of the combined effects of fees and the exchange rate.

The report finds that implementation of some of the Dodd-Frank Act’s new requirements related to remittance transfers – including mandatory disclosures of the exchange rate used – could shed light on any need for additional exchange rate transparency measures. The CFPB also recommends that any additional transparency measures be evaluated and considered together with the range of mechanisms for increasing the competitiveness of the remittance transfer market, or promoting other consumer protection goals. 

Remittance Transfers and Credit Scores

Credit files do not routinely include remittance data. If remittance histories can help assess or predict the credit risk that consumers pose to lenders, adding such data to credit files could produce a change in the credit scores of some remittance senders.

If remittance histories are predictive of credit risk, the addition of remittance data might also allow credit scores to be generated for some consumers who are otherwise unscorable.

To use remittance histories in credit scores, market participants would need to adjust their business systems and processes to adapt to and make use of the new data. If remittance histories are predictive, then any remittance-based credit scores that were developed might have particularly positive implications for some consumers born outside of the United States. These consumers send a large proportion of remittance transfers. Earlier research suggests that certain foreign-born individuals may be disproportionately likely to have credit histories that are insufficient to generate credit scores. In other cases, existing credit data may overestimate the credit risk such individuals pose to lenders. But the actual impact of any remittance-based credit score would depend on the business model, the scoring model, the data used, and the individual. In some cases, credit scores might increase; in other cases, they might remain the same or decrease.

The report discusses the potential for remittance histories to inform credit scores, and describes planned CFPB research regarding the relationship between remittance histories and credit scores. A critical question for this research will be the extent to which remittance histories can be used to predict the credit performance of those without a credit score or to improve credit scores’ predictability with respect to other consumers. 

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

Consistent with Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Department of State (“the Department”) announced that it is undertaking a number of actions to address the problem of conflict minerals –or the exploitation and trade of gold, columbite-tantalite (coltan), cassiterite (tin), wolframite (tungsten), or their derivatives –sourced from the eastern Democratic Republic of the Congo, or DRC, that have helped to fuel conflict in the eastern DRC.

Section 1502 of the Dodd-Frank Act instructs the SEC, in consultation with the Department of State, to promulgate regulations requiring, in part, companies required to file reports with the SEC, to submit annually a description of the measures taken to exercise due diligence on the source and chain of custody of the four “conflict minerals.”  In parallel, the Department is “to provide guidance to commercial entities seeking to exercise due diligence on and formalize the origin and chain of custody of conflict minerals used in their products and on their suppliers to ensure that conflict minerals used in the products of such suppliers do not directly or indirectly finance armed conflict or result in labor or human rights violations.” The Department will consider whether to revise this guidance after the final regulations are issued by the SEC, which has indicated the regulations will be issued between August and December 2011.

The Department believes that it is critical that companies begin now to perform meaningful due diligence with respect to conflict minerals. To this end, companies should begin immediately to structure their supply chain relationships in a responsible and productive manner to encourage legitimate, conflict-free trade, including conflict-free minerals sourced from the DRC and the Great Lakes region. Doing so will facilitate useful disclosures under Section 1502 of the Dodd-Frank Act, as well as effective responses to any discovery of benefit to armed groups.

The Department specifically endorses the guidance issued by the Organization for Economic Cooperation and Development, or OECD,) and encourages companies to draw upon this guidance as they establish their due diligence practices.  We encourage companies, whether or not they are subject to the Section 1502 disclosure requirement, that are within the supply chain of these minerals to exercise due diligence based on the OECD guidance and framework as a means of responding to requests from subject suppliers and customers.

The five-step framework at the core of this system has been developed in a broadly consultative, multi-stakeholder process and has been recommended by the United Nations Security Council DRC Sanctions Committee’s Group of Experts (UNGOE), “taken forward” by the Security Council itself, and endorsed by the International Conference on the Great Lakes Region. Under this five-step framework, companies should:

  • Establish strong company management systems;
  • Identify and assess risk in the supply chain;
  • Design and implement a strategy to respond to identified risks;
  • Carry out independent third-party audit of supply chain due diligence at identified points in the supply chain; and
  • Report on supply chain due diligence.

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

The Consumer Financial Protection Bureau, or CFPB, released a report examining the differences between credit scores sold to consumers and scores used by lenders to make credit decisions.

The Dodd-Frank Wall Street Reform and Consumer Protection Act required the CFPB to study the differences between credit scores consumers purchase and those creditors use to make credit decisions.  The CFPB’s report covers:

  • ·        the process of developing credit scoring models,
  • ·        why different scoring models may produce different scores for the same consumer,
  • ·        how different scoring models are used by creditors in the marketplace,
  • ·        what credit scores are available to consumers for purchase, and
  • ·        ways that differences between the scores provided to creditors and those provided to consumers may disadvantage consumers.

Consumer reporting agencies, or CRAs, compile and maintain files on consumers that are used to produce credit reports. Credit scores are numerical summaries of the comparative credit risks of default; they are calculated based on information contained in credit files and credit reports. These scores are important because they are used to make credit-granting decisions, to identify prospects for credit offers and solicitations, to make decisions about raising or lowering credit limits on credit cards, and to set terms for mortgages or other loans, among other uses.

While most credit scores are purchased by lenders and other users to assess consumers’ credit risk, consumers can also purchase credit scores when they obtain their free annual credit reports, when they request copies of their credit reports directly from CRAs, or when they enroll in “credit monitoring” services that offer credit reports and scores for a monthly subscription fee. The credit scores available for purchase by consumers may vary from the score used by a lender for a variety of reasons, including:

  • Use of different scoring models;
  • Lenders and consumers may not use the same CRA;
  • Data in the consumer’s credit reports change between the time the consumer purchases a score and the time the lender obtains the score;
  • A consumer and a lender  could possibly access different reports from the CRA, if they were to use different identifying information about the consumer;

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