Rejection of SEC Settlements
The Securities Litigation Committee issued a report discussing the impact of the U.S. District Court for the Southern District of New York’s decision in SEC v. Citigroup Global Markets Inc. In this case, the SDNY broke with longstanding judicial deference to SEC settlements and handed down an important and controversial opinion rejecting a settlement between the Securities and Exchange Commission (“SEC”) and Citigroup Global Markets Inc. (“CGMI”) on the grounds that it failed to adequately serve the greater public interest. The ruling directly challenges the fundamental assumptions behind the SEC’s approach to enforcement of the securities laws against ongoing businesses and financial institutions. This report discusses the issues raised by this opinion and the potential impact the opinion may have if it is upheld by the Second Circuit.
Private Company Flexibility and Growth
In a letter to the Securities and Exchange Commission, the Committee on Securities Regulation provided comments on Title V: Private Company Flexibility and Growth of the Jumpstart Our Business Startups Act of 2012 ( JOBS Act). The comments, which primarily focused on the use of the accredited invest concept, offer the following suggestions, including that the Commission: 1) confirm that "accredited investor" for this purpose has the meaning set forth in Rule 501(a) under the Securities Act; 2) address through rulemaking the question of when a determination must be made whether a given holder is an accredited investor; 3) clarify that holders of securities issued in transactions covered by Rule 701 under the Securities Act would be treated as persons who receive the securities pursuant to an employee compensation plan within the meaning of Exchange Act Section 12(g)(5)(A), as amended by Section 502 of the JOBS Act; and 4) consider amending Rule 12g3-2(a) to bring the 300 U.S. resident holder criterion more in line with the new 2,000 holder standard of Section 501.
Harmonization of Compliance Obligations
In a letter to the Commodity Futures Trading Commission (CFTC), the Committee on Investment Management Regulation set forth comments on the CFTC’s proposed amendments to regulations applicable to investment companies registered under the Investment Company Act of 1940, whose advisers would be subject to registration as commodity pool operators due to changes to Regulation 4.5 recently adopted by the CFTC. The Committee offers a number of suggestions on proposed amendments and urges the CFTC to work together with the SEC to harmonize the two regulatory frameworks. Harmonization rules are necessary in order to meet the shared SEC and CFTC objectives of investor protection and to avoid any unintended disruption of Regulated Investment Company operations that may occur in the commodities market and as a consequence of the new CFTC registration requirements.
SEC Regulatory Initiatives Under the JOBS Act
The Committee on Securities Regulation sent a letter to the SEC commenting on Title 1: Reopening American Capital Markets to Emerging Growth Companies of the Jumpstart Our Business Startups Act of 2012 (JOBS Act). In its letter the Committee offered a number of suggestions that would both enhance the practical utility of the emerging growth company provisions and promote the policy objectives underlying Title 1. The suggestions include urging the SEC to: 1) incorporate a reasonable belief standard in Section 105(c); 2) provide smoother transition out of emerging growth company status; and 3) reconsider the position that foreign private issuers must choose between the previously available confidential submission procedures and emerging growth company status.
The Debt Settlement Industry
The Committees on Civil Court and Consumer Affairs issued a white paper entitled Profiteering from Financial Distress: An Examination of the Debt Settlement Industry, which, after an extensive analysis of the law and the public records of industry practices and governmental actions taken, found that widespread and systematic deceptive and abusive practices exist in the debt settlement industry. The report concludes that debt settlement for a fee that is more than nominal is inherently flawed and does not yield a net benefit to consumers, and recommends that debt settlement for a fee that is more than nominal should be prohibited in New York State. The Committees also made additional recommendations with regard to how New York should address the industry and its practices.
Regulatory Initiatives Under the JOBS Act
In a letter to the SEC, the Committee on Securities Regulation provided comments on the SEC’s regulatory initiatives under the JOBS Act. In the letter, the Committee addressed the rule changes mandated by Section 201 of the JOBS Act and offered the following suggestions:
1) the new purchaser conditions to Rule 144A and Rule 506, in offerings involving general solicitation, should incorporate a reasonable belief standard; 2) the provision to be added to Rule 506 requiring reasonable steps to determine accredited investor status should not be overly prescriptive; and 3) careful consideration should be given to the interplay of the amended Rules 144A and 506 with Regulation S.