April 9, 2012
Time to Sell the Silver
by Rick Jones
Sometimes a bank just has to sell assets. For many banks confronting capital shortfalls, this is one of those times. Last week, we wrote generally about the "Investing in Distressed Bank Assets Conference" in London. Great conference. Marquee headline: EU Banks Will Sell Risky Assets. Time for a deeper dive into issues confronted by the sellers.
So, if you want to sell a big pile of assets (steaming or otherwise), what do you do? You can certainly hire one of the well-known brokers (er, I mean loan sale advisors) in the market and tell them to have their way with you. They will do some level of loan file organization; produce some type of tape; produce a book (pretty pictures); and set up a war room. They will run a public auction process. They will jawbone the bidders. Do they do a really good job? Read on. Is this the only option? No.
The auction sale is designed to produce a market clearing price. Note, however, that as disintermediation continues, buyer fatigue is beginning to set in in the auction space. The cost to make a competent bid on a sizeable pool of loans with an unlimited number of eager bidders is enormous. Will that process continue to pull in the best and most well-heeled bidders? Don't know. It is clearly best to structure the auction as a multi-step process so first look bids can be made with limited diligence expenses and the non-real culled. A good bid process will work hard to qualify the truly serious and create a bidding environment where the real bidders don't feel like they are bidding with a herd. Thus, only the truly serious have to execute a truly deep dive. Is the right number 3? 10? Certainly not 20 plus!
In addition, a public auction is, well, public. What does it say about the seller? What information is available to any bidder who can hit send on the confi? Rooting around in a selling bank's financial drawers has become a sort of financial porn - almost irresistible. Dirty laundry comes out and the rumor mill is fired up about the seller, its health, its prospects, plans and management. At the very least, that may be less than entirely enjoyable. And market chatter can move markets and influence regulators and political constituencies.
Moreover, an auction is a one-size-fits-all execution. Sure, the broker can set up an infinitely complex array of alternative bids (Pool A, single loans, all loans in Milwaukee CBD, etc.), but it's still a straight sale of loans. That may not always be the ideal execution.
The seller should always consider a private, negotiated deal. In a negotiated deal, there is much more structural flexibility as buyer and seller work together to sort out what works best. This can have huge value to the seller if it feels it has selected the right counterparty. And the sausage making is private. On the other hand, did you get the best, market clearing price? It is hard to prove the counterfactual to the market, senior management and the Board.
An alternative to either of these sale processes is securitization. We have recently seen seasoned portfolios securitized; indeed, we are on the cusp of industrializing the securitization of sub- and non-performing loans. Can a bank find a high-yield buyer to take the risk piece and sell some IG bonds? Absolutely! This could maximize control over the process, control confidentiality and disclosure, and perhaps produce the highest return.
In any case, if you want to sell loans, you start by rounding up (warming up and qualifying) the usual suspects. In the States, there has been a very strong bid from well-capitalized banks for performing par product, while the hedgies and private equity are a strong bid for distressed and sub-performing. Notably, the high-yield players may also be a bid for par product. Pools can be flipped through securitization, with the high-yield player keeping the bottom while the top is sold to the IG gang, providing long-term leverage for the transaction.
Pick a sales process, warm up the crowd, but don't forget to put some lipstick on the pig.
Diligencing a pool of seasoned loans can be painful, really painful (and about as bad for the seller preparing a book as for the buyer). Seasoned loans were not originated for sale. They were not serviced for sale. They are relationship loans. Getting a data tape that is not incomplete or corrupt is enormously hard. Sorting out non-customary servicing records is hard. Finding the loan documents is hard. One missing note, an inconvenience; all missing notes, existential problem. The harder it is to diligence the pool, the bigger the uncertainty discount in pricing.
Valuation is made much more difficult because of heterodox collateral and heterodox loan documentation. A loan secured by a commercial building is good. A loan secured by a commercial building, a fleet of delivery vans and an undivided interest in a race horse is less than ideal. In documentation, we customarily see multiple basis provisions, pay dates, grace periods, swap and hedge structures, recourse features, maturity and amortization, etc. What a headache.
Best in class in the bad news category are restrictions on the lender's right to assign the loan. Maybe for future funding loans or the like, these restrictions could make sense. Otherwise, they do not. Drafting point going forward: don't go there. But go there, many have done, and the headaches from these restrictions reverberate through the note sale market. We find these most often in the loan documents of the European banks. There are several flavors of these restrictions, and none are good. We have seen restrictions that limit assignability to other banks, or to other banks and financial institutions (often an undefined term), or to financial institutions with a certain credit rating. We've also, and this is the most painful of all, seen transfer restrictions that simply require the borrower's consent. It's a borrower payday when that loan has to move.
If the lender has sufficient lead time, document flaws and structural flaws can be fixed, borrower consent can be obtained (although be prepared to pay a price) and other problems resolved. But, even if problems cannot be fixed, if the seller can get its arms around document and structural problems before it exposes the pool to the marketplace, it will pay dividends. Regrettably, we have yet to see a pool cleaned up good before it got to the party.
Abandon all hope, you who enter the land of swaps and hedges. OK, that's an exaggeration, but swaps and hedges deserve a separate circle in Hell when trying to sell loans. Many European bank loans (and, of course, many loans in general) have embedded swaps, collars or other derivatives. In many cases, the value of the loan is, in significant measure, dependent upon the value of the derivative. Unfortunately, derivatives typically have their own transfer restrictions and these are regularly overlooked when the loan is made. We have seen derivatives that can only be transferred with the consent of the borrower, while many others contain a litany of transferee restrictions. Cutting to the chase, the most common restriction is that the derivative must be held by a bank, and often a bank with a stipulated ratings level. If the potential buyer universe includes non-banks, this creates problems. And while there are lots of workarounds, including Total Return Swaps (TRS), 100% participations and back to back structures, they are hard, carry negative externalities and, certainly, are best sorted out before the dance begins. Fix it before exposing the pool to the marketplace. Did I say consider? I think it is insane not to fix up what can be fixed up before exposing a pool to the market. Any residential broker who can fog a mirror will tell you that a fresh coat of paint, new kitchen appliances, a mowed lawn and a new carpet gets the sale done. Same here.
And here's a thought for overachievers. This is the bonus round stuff. Consider prepackaging leverage; a cover bid from a lender prepared to lever the portfolio might be an interesting added feature to maximize the value of the bids.
In any event, enough about the sellers. Next week - some thoughts about buying: diligence, reps and other concerns.
April 9, 2012
TARP Pay Czar Makes 2012 Compensation Determinations for Execs at TARP Companies
by Barbara Black
On April 6, 2012, the Acting Special Master for TARP Executive Compensation, Patricia Geoghegan, released 2012 compensation determinations for the "top 25" executives at the three remaining companies that received exceptional Troubled Asset Relief Program (TARP) assistance - AIG, Ally Financial (formerly GMAC), and GM.
1. Overall CEO Compensation Frozen at 2011 Levels: The overall CEO compensation packages payable by AIG, Ally Financial and GM have not increased. Although there has been some modification in the mix of stock salary and long-term restricted stock for the CEO group, the overall amount of CEO compensation is frozen at 2011 levels.
2. 2012 Pay Packages Follow the Framework Established in 2009-2011: As in the prior determinations, most pay (83 percent overall in 2012), including target incentives, is in the form of stock, tying the ultimate value of the compensation to company performance. Transferability of the stock remains subject to deferral over a period of three years, and hedging of the stock compensation remains prohibited. Bonuses are subject to clawback. Cash salary continues to be limited—in most cases to $500,000 or less. The $25,000 cap on perquisites continues to apply.
3. Companies Have Made Progress Repaying Taxpayer Investments: AIG has reduced its obligations to the U.S. government (including through cancellation of undrawn commitments) by more than 75 percent. Treasury has also recovered nearly half of the TARP funds invested in GM and nearly one-third of the TARP funds invested in Ally Financial through repayments and other income.
4. 'Top 25' Compensation Packages: The group of 69 executives consists of the five senior executive officers and next 20 most highly compensated employees (based on 2011 compensation) at the three companies, minus six departures since January 1, 2012. Of that total, 48 individuals were also in the 2011 "top 25," and 21 are new members of the group. Some individual compensation packages increased, some decreased, and some remained at 2011 levels. Overall the cash compensation for these 69 individuals decreased 18 percent and their total direct compensation decreased 10 percent from 2011 levels. For the individuals in the "top 25" in both 2011 and 2012, cash compensation increased 1 percent and total direct compensation decreased 2 percent. For the individuals new to the "top 25" group for 2012, cash compensation decreased 47 percent as compared to the cash they received for 2011, and total direct compensation decreased 30 percent as compared to 2011.
April 9, 2012
The NFL is the SEC
by Usha Rodrigues
Football fans, I'm talking about the Securities and Exchange Commission, not the other SEC. Yesterday the NFL denied the appeal of several key players in the New Orleans' Saints bounty scandal. I'm not surprised that some commentators are debating the fairness of the punishment to the fans, or wondering whether the Saints are unfairly being scapegoated. I don't follow football closely enough to opine on these matters (although, like Stephen Bainbridge, I am now part owner of an NFL franchise, but that's a topic for another day).
Rather, I see the bounty scandal through the eyes of a corporate law scholar. To generalize (acknowledging, as my father always used to say, generalizations are dangerous-even this one), we worry about two big kinds of dangers in corporate law. First, we talk a lot about agency costs, an economist's fancy way of describing the risk that the cashier is stealing from the till or sleeping on the job. Pulling a fast one on management. We think that's bad.
But then there's the other danger-the employee who isn't stealing, but rather is breaking the law in order to further his employer's interests. These actions produce a social cost-if one company profits from a government contract secured by bribery, society as a whole is worse off, even though the company employees approving the bribe were genuinely acting in their employer's best interest. What the Saints coaching staff was doing was perfectly logical and perfectly loyal to the team's interests-winning at all costs. But if each team pursued this strategy, the league as a whole would fail because the system as a whole would lose credibility and players would suffer too many injuries. And here's where the NFL is the SEC-it has to come down hard on the Saints precisely because each individual team's incentives are to crush its opponents at all costs, to injure, to destroy.
Michelle Singletary makes the Greg Smith connection, observing that "In and out of sports, we should expect people to play fair and, if someone is hurt, it shouldn't be intentional. If it is, the perpetrators deserve to be thrown out of the game." She's right, although you don't need the moral opprobrium of the word "deserve" to get there. The point is, the game itself requires that this kind of agency be punished. Otherwise, everything falls apart. On Wall Street, on Main Street, and on Bourbon Street.
April 10, 2012
Bank Officers Try To Conceal The Impact Of The Financial Crisis
by Tom Gorman
A financial fraud action was brought against former bank holding company CEO Anthony Nocella and CFO J. Russell McCann by the SEC. The action centers on the efforts of the two officers to conceal the true financial condition of Franklin Bank Corp. as the market crisis unfolded and its portfolio of real estate holdings unraveled. SEC v. Nocella, Case No. 4:12-cv-1051 (S.D. Tx. Filed April 6, 2012).
This is not the first action the Commission has filed against the officers of a financial institution who tried to conceal the deteriorating financial condition of their institution as the market crisis unfolded and took its toll. Prior actions include those brought against the officers of Countrywide Financial and UCBH. This may be the first however where the CEO and CFO tried to conceal the downward spiral of the institution's loan portfolio and its finances by modifying the underlying loans to make them appear current when in fact they were not. As with prior schemes it failed.
The action centers on the efforts of Messrs. Nocella and McCann to prop-up Franklin Bank Corp., a Texas based savings and loan holding company. By the second quarter of 2007 the loan portfolio of the financial institution began to deteriorate as the financial crisis unraveled. During the summer of 2007 the two officers received reports that depicted a 24% increase in delinquencies in the loan portfolio compared to the prior three month period.
Despite its deteriorating financial condition, the two defendants were reviewing strategic alternatives which could include a sale of the bank. In August 2007 the two officers met with representatives of RBC Capital Markets. They were told that the institution needed to demonstrate positive earnings momentum to facilitate such alternatives.
Subsequently, Messrs. Nocella and McCann crafted three plans to improve the appearance of the loan portfolio and thus the operating results of the bank: Fresh Start, Strathmore Modifications and Great News. The first focused on bringing certain residential mortgages which were severely delinquent current by notifying the borrowers that if they made one payment, and agreed to certain other modifications, their loans would be considered current. Ultimately millions of dollars in loans were modified through this program to classify them current.
The second centered on the Strathmore Modifications. ThIS involved about $13.5 million involving four troubled loans to Strathmore Finance Company and its subsidiaries for construction projects in the Detroit area. By the summer of 2007 Strathmore could not repay the loans and requested a modification. The two defendants secured credit committee approval for a modification of the loans. In October 2007 the FDIC concluded after an examination that the loans should have been classified as "nonaccrual and evaluation for impairment" under the applicable GAAP provisions.
The third was the Great New program. It also involved the modification of residential real estate loans. This program involved 28 borrows who were severely delinquent, that is between 119 and 545 days past due. Under the program the borrowers only had to make the next payment to become current. Overall the loan modifications were not in accord with disclosed bank policies and GAAP.
The defendants' schemes concealed from shareholders over $11 million in delinquent and non-performing single family residential loans and $13.5 million in non-performing residential construction loans, according to the complaint. Indeed, investors were falsely lead to believe that Franklin was outperforming other banks when in fact its financial condition was deteriorating. The programs did not save the institution. The bank ended in receivership and the holding company in bankruptcy in 2008.
The complaint alleges violations of Exchange Act Sections 10(b), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). It seeks a permanent injunction, disgorgement, prejudgment interest, civil penalties, officer and director bars and repayment under SOX 304. The case is in litigation.
April 10, 2012
Litigation Funding: A U.S. Growth Industry?
by Kevin LaCroix
Litigation funding has long been a significant part of commercial litigation landscape outside the U.S. For example, in Australia, observers have attributed the growth in securities litigation to the availability of litigation funding. Litigation funding arrangements have also recently been approved in connection with securities class action litigation in Canada. Litigation funding has been available in the United States for some time, as well, at least to a limited extent. But recent developments suggest that we can expect increased involvement of increasingly sophisticated litigation funding investors in the U.S., with increasing involvement in commercial litigation.
The latest sign of the sophisticated parties increasing interest in U.S. litigation funding is the April 9, 2012 announcement of litigation finance company BlackRobe Capital Partners LLC that retired Simpson Thacher partner Michael Chepiga has joined BlackRobe as managing partner. BlackRobe was launched last year by Sean Coffey, formerly a partner at the plaintiffs' securities class action firm, Bernstein LItowitz, along with Timothy Scrantom, who co-founded Juridica Investments, Ltd. (about which more below). In 2010, Coffey also ran unsuccessfully to become the democratic candidate in the New York Attorney General election. Many readers will remember Coffey from his days at Bernstein Litowitz when he acted as lead counsel for investors in the WorldCom securities litigation. An April 9, 2012 Am Law Daily article detailing Chepiga's move to BlackRobe can be found here.
According the firm's press release, BlackRobe aims to invest in lawsuits in exchange for a share of the recovery. The firm "targets investments between $2 million and $8 million in complex commercial litigation cases, including intellectual property, antitrust and breach of contract disputes, that have a potential for damages in excess of $50 million."
The BlackRobe firm is only one of several litigation funding firms now concentrating on the commercial litigation in the U.S. Juridica Investments Ltd. and Burford Capital Ltd, both investment funds that are publicly traded in the U.K., have U.S. operations engaged in litigation funding in the U.S. IMF Australia Ltd, another litigation funder that is listed in Australia, is the corporate parent of Bentham Capital LLC, which is also in the business of funding U.S. litigation.
Most of these firms, as well as several others, have only gotten involved in U.S. litigation funding within the last year. Obviously, this diverse group of firms acting independently seems to have decided that there is an investment opportunity in U.S. litigation funding. There is no doubt that litigation in the United States is a very expensive proposition. Looked at in its most favorable light, litigation funding may provide a financial means to allow meritorious cases to go forward. As a October 3, 2011 Wall Street Journal article about litigation funding noted, litigation funding can provide a way for smaller companies to level the playing field against bigger opponents.
Just the same, the litigation funding phenomenon has its critics. The most common concern is that the spreading availability of litigation funding will encourage non-meritorious or even frivolous litigation, by removing litigants' financial constraints. The litigation funders themselves argue in response that they are in this to make money, and that rather than encouraging frivolous litigation, the funders' financial incentives will act as a screening mechanism through which only cases likely to provide an appropriate return on investment (i.e., meritorious) will be funded. The involvement of highly sophisticated attorneys like Coffey and Chepiga would seem to support this point, as their presence suggests an elevated level of scrutiny.
Though the financial incentives and level of sophistication arguably might militate against frivolous lawsuits getting funding, there is still the risk that the presence of investors looking for lawsuits in which to invest might nevertheless increase litigation levels. Indeed, in its 2010 study of securities class action litigation (refer here), NERA Economic Consulting identified the emergence of litigation funding as the most significant development behind the increase in securities class action litigation in Australia. Setting to one side the question of whether or not the cases involved would be meritorious, it is worth asking the question whether or not it would be a good thing if increased litigation funding availability were to lead to a similar increase in litigation in the United States.
There are a number of other questions that also quickly come to mind. For example, will the involvement of sophisticated investors lead to potential or even actual conflicts of interest between the funders and the litigants then are funding? It is not difficult to imagine situations in which the funders' desire to realize their investment return might conflict with the litigant's goals and objectives. Indeed, the possibility of this type of conflict was one of the specific concerns that an Ontario court raised while considering a litigation funding arrangement in Manulife Financial Corporation securities class action lawsuit pending in the court (about which refer here). Though the court ultimately approved the arrangement in that case, the possibility of conflicts remains a concern.
Similarly, there is the question whether litigation funding is appropriate in the class action context. While the litigation funding unquestionably may help facilitate a recovery for the class, the amount to be paid to the litigation funder, in the form of commission or other payment, will reduce the amount of the recovery for the class. The absent class members cannot all be consulted in advance about such arrangements, which may or may not look fair after the fact.
A related question has to do with overall fairness. As things currently stand, there do not seem to be barriers to entry in the litigation funding field. While the involvement of highly respected attorneys such as Coffey and Chepiga provide some reassurance about the integrity of the process and the legitimacy of the arrangements, there are increasingly large numbers of firms getting involved in this space and there are no guarantees that all of the participants will be equally respectable. Ought there to be standards protecting the prospective litigants?
As noted in a recent post about class action litigation in Australia, there are now calls there to require litigation funding firms to be registered and to require that the litigation funding firms have appropriate procedures in place to manage potential conflicts of interest. Australia has a longer experience with litigation funding; it might not be a bad idea to heed the calls in that country to regulate the litigation funding industry and look at whether it might be a good idea to have some regulatory controls in this country as well.
In any event, for better or worse, the number of litigation funding firms in this country is increasing and as a result it seems likely that the litigation funding is likely to become an increasingly important factor in sophisticated commercial litigation. Because many of these firms have only just started their U.S. operations, it is too early to tell what the ultimate impact will be. Notwithstanding the involvement of highly respected attorneys such as Coffey and Chepiga, I find it hard to view these developments without serious concerns. In any event, I suspect that we will be hearing a lot more on this topic in the months ahead.
A May 2010 American Lawyer article detailing the development of third-party litigation funding in the U.S. can be found here.
April 10, 2012
Foley & Lardner with the March Investment Management Update
by Kara OBrien
The following is our monthly featured post from Terry Nelson, Peter Fetzer and Michael Primo of Foley & Lardner filling you in on the latest developments in the world of investment management.
JOBS Act Expected to Be Signed Into Law by President, Promising Relief for Start-Ups and Early-Stage Companies
On March 27, 2012, the U.S. House of Representatives passed the version of the Jumpstart Our Business Startups (JOBS) Act approved last week by the U.S. Senate, ensuring President Obama will soon sign into law a measure he supports that promises to help smaller businesses and early-stage companies.
By a 380- 41 vote, the House approved HR 3606, which supporters say will encourage businesses to create jobs by lowering hurdles to going public and complying with the laws governing public companies, such as the Sarbanes-Oxley Act.
Among its provisions, the JOBS Act exempts companies from the full reporting requirements of Sarbanes-Oxley Section 404(b) for their first five years after going public, or until they reach $1 billion in revenue a provision nicknamed the "on ramp" for initial public offerings. That provision alone should save such companies up to $2 million a year. The JOBS Act is expected to help revitalize an IPO market that has suffered in recent years under the weight of market volatility and one-size-fits-all regulation.
The measure also will increase the limit that requires private companies to register with the SEC, from the current 500 shareholders to 2,000 shareholders.
The JOBS Act will expand the eligibility requirements of the securities registration exemption found under Regulation A of the Securities Act of 1933 by raising the limit on how much companies conducting direct public offerings can raise, from the current $5 million to $50 million under this exemption. Importantly, Regulation A offerings would be exempt from state securities laws, provided that the securities sold are offered or sold through a broker-dealer, offered or sold on a national securities exchange, or sold to a "qualified purchaser" as defined by the SEC.
Another component of the JOBS Act requires the SEC to revise the securities registration exemption under Rule 506 of SEC Regulation D under the Securities Act of 1933, by removing the current ban on general solicitation or advertisements, including social media, in private placements of securities, provided that all purchasers in the private placement are "accredited investors." The revision is designed to allow greater exposure to investments for a wider range of potential investors.
The JOBS Act is intended to encourage "crowdfunding" by creating a new exemption from securities registration for any transactions to offer or sell crowdfunded securities by businesses raising up to $1 million within a 12-month period.
The crowdfunding provision includes an amendment added to the bill in the Senate (S. Amdt. 1884) by Sens. Jeff Merkley (D-OR) and Scot Brown (R-MA) on a 64- 35 vote. The amendment requires operators of crowdfunding portals to register with the SEC and promise to deliver information on investments they offer without promoting them, while limiting through scalable investment caps how much investors can invest based on their income a maximum of $2,000 or five percent of an investor's annual income or net worth, if either of the annual income or net worth of the investor is less than $100,000; up to 10 percent of the annual income or net worth of such investor, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or greater than $100,000.
The Merkley-Brown amendment also:
- Requires publicly audited financials for companies seeking more than $500,000
- Establishes a three-week waiting period after funding closes but before funds are received, giving authorities time to uncover potential fraud
- Requires disclosure of capital-raising fees
The changes under the JOBS Act will not be effective until the SEC completes the preparation of regulations to accommodate the various mandates given it under the Act. When fully implemented, the provisions should provide issuers with much-needed flexibility in seeking capital from investors.
DOL Fee Disclosure Requirements Looming
Regulations issued by the Department of Labor (DOL) will soon take effect and impact the information that service providers such as investment advisers must provide to covered retirement plan clients and the information that the plans must provide to participants, eligible employees, and beneficiaries.
Accordingly, investment advisers should now be determining the extent to which they will be subject to the DOL rule. If the adviser is a covered service provider as defined below, it should now be preparing its disclosures in order to meet the deadlines as described below for providing such disclosures.
On July 16, 2010, the DOL issued an interim final regulation that requires service providers to disclose specific information to sponsors of retirement plans covered by the Employee Retirement Income Security Act of 1974, as amended (ERISA). The intent of the regulation is to make it easier for plan fiduciaries to understand the compensation paid to their providers and to highlight potential conflicts of interest that may affect plan performance.
On February 2, 2012, the DOL issued the final regulation under Section 408(b)(2) of ERISA specifying information that sponsors of covered plans must provide to employees eligible to participate in participant-directed, individual account plans. This article provides a quick overview of the regulations for both the service providers and the sponsors of the covered plans.
Overview of the Service Provider Regulation
The final ERISA regulation Section 408(b)(2) requires covered service providers to disclose specific information to the responsible fiduciary for each covered retirement plan for which they provide services. The information to be disclosed relates to the services to be performed for the plan and the compensation to be received for those services.
- Covered Plans: Generally, this term includes contribution and defined benefit retirement plans covered by ERISA. It does not apply to non-ERISA plans such as governmental or non-electing church plans and it does not apply to IRAs or non-qualified annuities.
- Covered Service Providers: This term applies to persons and entities who reasonably expect to receive $1,000 or more in compensation, directly or indirectly, in connection with providing services to a covered plan. There are generally three categories of providers: fiduciaries or investment advisers, record keepers and brokers, and service providers receiving indirect compensation.
- Format and Content of Required Disclosures: There is no specified format, but the disclosures must be in writing. Required content includes descriptions of the services to be provided; a statement as to whether the service provider will provide the services as an ERISA fiduciary, a registered investment adviser, or both; the compensation to be received; and how it is to be received.
- Timing of Disclosure: The disclosure of current service arrangements must be made by July 1, 2012. Disclosures for new service arrangements or contracts must be made reasonably in advance of start date. Changes in previously disclosed information must be communicated no later than 60 days after the provider is informed of the changes. Finally, new arrangements after July 1, 2012 must be disclosed prior to the effective date of the new arrangement.
- Requirements for Plan Fiduciaries: Fiduciaries must ensure that disclosures are provided by service providers, review them, and request any missing information. If the information is not provided, fiduciaries must notify DOL.
- "Compensation": This term is broadly defined to include money or anything else of monetary value (gifts and so forth), but does not include non-monetary compensation valued at $250 or less in the aggregate during the term of the contract or arrangement. Compensation paid directly by the plan sponsor is not covered by the final regulation and requires no disclosures.
- "Direct compensation": This term is defined as compensation received directly from the plan.
- "Indirect compensation": This term is defined as compensation received from any source other than the plan, the plan sponsor, or an affiliate or subcontractor of the plan sponsor in connection with the service arrangement.
The disclosure requirements of the final regulation are generally a service provider obligation. The responsible plan fiduciary is generally responsible only for ensuring that the service provider supplies the required disclosures, for checking them, and for requesting any missing information from the provider in writing. If the provider fails to supply the missing information in a timely manner, the fiduciary must then notify DOL to avoid violating ERISA's prohibited transaction rules.
The regulations are intended to establish a new level of fee and expense transparency that will help plan participants better manage and invest the money they contribute to their retirement plans. The regulations seek to ensure that plan participants have access to the information they need to make informed decisions, and that the information is delivered in a format that enables them to meaningfully compare the investment options contained within their plans. The disclosures apply to all employees eligible to participate in the plan regardless of whether these employees actually elect to participate in the plan.
Overview of Participant Regulations
Final ERISA Section 404(a) regulations issued by DOL are designed to ensure that employees and beneficiaries eligible to participate in participant-directed individual account plans are provided with enough information regarding the plan, designated investment options, fees, and expenses to effectively manage their individual plan accounts.
Each employee or beneficiary eligible for the plan must be provided with specific investment-related and plan-related information, including:
- General information about the structure of the plan, administrative fees, and expenses that plan service providers charge, and specific information concerning the actual charges to plan participant individual accounts (provided on a quarterly basis)
- Comprehensive data about each of the plan's investment options, including historical performance, comparable benchmark performance, expense charges, and investment restrictions all in a way that allows participants to make "meaningful" comparisons, in the form of a comparative chart, of their investment alternatives
Initial disclosures to participants, eligible employees, and beneficiaries must be made within 60 days of the later of the 408(b)(2) effective date (July 1, 2012) or the plan-year-beginning date (by August 30, 2012 for calendar-year plans). Quarterly statements specifying amounts charged in the prior quarter must be provided following the initial disclosure. Information on changes in fees and expenses must generally be provided between 30 and 90 days prior to the effective date of the change. Disclosures must be provided to newly eligible employees and beneficiaries prior to the date on which they become eligible to direct their own plan assets. The comparative chart must be updated annually.
Click here for the complete Foley & Lardner publication.
April 10, 2012
White House to Monitor JOBS Act: Sort Of
by Broc Romanek
White House to Monitor JOBS Act: Sort Of
When President Obama signed the JOBS Act last week, he issued this statement that includes this excerpt:
The President is directing the Treasury Department, Small Business Administration and Department of Justice to closely monitor the implementation of this legislation to ensure that it is achieving its goals of enhancing access capital while maintaining appropriate investor protections. These agencies, consulting closely with the SEC and key non-governmental stakeholders, will report their findings to the President on a biannual basis, and will include recommendations for additional necessary steps to ensure that the legislation achieves its goals.
No doubt this is a reaction to the many Democrats who railed against the JOBS Act over the past month (and the response of some in Congress to reporter's questions of whether they would monitor its consequences- the answer which was 'no'- at least they are honest about that!). But it's just so strange- and unfortunately predictable these days- that the leaders in our government don't even seem to know who should be minding the store. The Treasury, SBA and DOJ monitoring the securities laws? So I guess the SEC should be monitoring food and drugs...
Will the JOBS Act Rulemaking Impact the SEC's Dodd-Frank Rulemaking Schedule?
Many members have emailed asking whether the slew of JOBS Act rulemaking ahead of Corp Fin will impact the timing of its Dodd-Frank rulemaking projects. Although I haven't heard anyone from Corp Fin address this yet- and the SEC's Dodd-Frank Implementation Schedule hasn't changed- I can't see how it won't given the incredibly tight timeframe in which the Staff has to work.
How tight? Keith Bishop notes how the timeframe is so tight for the JOBS Act rulemaking- in his blog entitled "The SEC's Rule Making Rule Doesn't Follow The Rules"- that it might be nearly impossible to do under the President's recent rulemaking directive...
Dodd-Frank: The SEC Finally Establishes the New "Investor Advisory Committee"
However, the SEC continues to plug away at its Dodd-Frank obligations- yesterday, it announced the formation of the new "Investor Advisory Committee" that was mandated by Section 911 of Dodd-Frank. Among the 21 members of the new committee is Steve Wallman- the tech guru that doubled as a SEC Commissioner in the '90s who hasn't been heard from much during the past decade...
- Broc Romanek
April 10, 2012
The Investor Advisory Committee Announced
by J Robert Brown Jr.
The Commission just announced the formation of the Investor Advisory Committee. The Committee was mandated in Dodd Frank. Section 911 of the Law provides that the Committee shall:
- advise and consult with the Commission on-(i) regulatory priorities of the Commission; (ii) issues relating to the regulation of securities products, trading strategies, and fee structures, and the effectiveness of disclosure; (iii) initiatives to protect investor interest; and (iv) initiatives to promote investor confidence and the integrity of the securities marketplace; and (B) submit to the Commission such findings and recommendations as the Committee determines are appropriate, including recommendations for proposed legislative changes.
The Committee is to have no less than 10 and no more than 20 members, each appointed to a four year term.
In addition to representing the interests of senior citizens, the Act requires that there be representatives of State securities commissions. Members must include those who represent individual equity and debt holders (including mutual funds) and institutional investors (including pension funds and registered investment companies). Members must be "knowledgeable about investment issues and decisions" and "have reputations of integrity."
The members to the Committee include:
- Darcy Bradbury, Managing Director and Director of External Affairs, D.E. Shaw & Co., L.P.
- J. Robert Brown, Jr., Law Professor, University of Denver
- Joseph Dear, Chief Investment Officer, California Public Employees' Retirement System
- Eugene Duffy, Senior Executive Vice President, Paradigm Asset Management Co. LLC
- Roger Ganser, Chairman of the Board of Directors of BetterInvesting
- James Glassman, Executive Director, George W. Bush Institute
- Craig Goettsch, Director of Investor Education and Consumer Outreach, Iowa Insurance Division
- Joseph Grundfest, William A. Franke Professor of Law and Business, Stanford Law School
- Mellody Hobson, President and Director of Ariel Investments, LLC
- Stephen Holmes, General Partner and Chief Operating Officer, InterWest Partners
- Adam Kanzer, Managing Director and General Counsel of Domini Social Investments and Chief Legal Officer of the Domini Funds
- Roy Katzovicz, Partner, Investment Team Member and Chief Legal Officer, Pershing Square Capital Management, L.P.
- Barbara Roper, Director of Investor Protection, Consumer Federation of America
- Kurt Schacht, Managing Director, CFA Institute
- Alan Schnitzer, Vice Chairman and Chief Legal Officer, The Travelers Companies, Inc.
- Jean Setzfand, Director of Financial Security for the AARP
- Anne Sheehan, Director of Corporate Governance, California State Teachers' Retirement System
- Damon Silvers, Associate General Counsel for the AFL-CIO
- Mark Tresnowski, Managing Director and General Counsel, Madison Dearborn Partners, LLC
- Steven Wallman, Founder and Chief Executive Officer, Foliofn, Inc.
- Ann Yerger, Executive Director, Council of Institutional Investors
April 10, 2012
The JOBS Act: Implications for Private Company Acquisitions and M&A Professionals
by Broc Romanek
The JOBS Act: Implications for Private Company Acquisitions and M&A Professionals
I've been blogging daily for weeks on the JOBS Act on TheCorporateCounsel.net- and that's where we are posting oodles of resources including two upcoming webcasts- but here's M&A-related info from Davis Polk, repeated below:
On April 5, President Obama signed into law the Jumpstart Our Business Startups Act (the "JOBS Act"), which as we've previously noted represents a very significant loosening of restrictions around the IPO process and post-IPO reporting obligations. While most of the commentary on this legislation has thus far focused on its impact on capital markets matters, there are implications for private company mergers and acquisitions as well.
Late-stage private companies contemplating an M&A or IPO exit often undertake so-called "dual-track" processes in which they simultaneously file an IPO registration statement with the SEC and hold discussions with prospective acquirors. The IPO side of the process effectively becomes a stalking horse for M&A discussions and tends to force the hand of prospective acquirors that might otherwise not move as quickly as the target would like. The publicly filed registration statement both attracts attention and provides prospective acquirors with a sort of first-stage diligence that theoretically helps encourage bids.
Under the JOBS Act, emerging growth companies or "EGCs" will now have the ability to file their registration statements confidentially, so long as the confidential filings are ultimately released at least 21 days before the road show. Whether confidential filings will become the norm remains to be seen; there are a number of reasons why an IPO candidate might want to continue to use the traditional public filing process, including the publicity, customer and employee-related benefits of having a highly visible registration statement. For many companies, however, these benefits will be outweighed by the competitive advantages of keeping early filings confidential. The optionality that confidential filings create may be hard to resist: A confidential filer can now pull its deal without the stigma associated with withdrawing a publicly filed registration statement.
The ability to file confidentially creates another sort of optionality for a company undertaking a dual-track process, in that it can now conduct both sides of the process outside the public eye. The ability to tell a prospective buyer that the IPO process is already reasonably far along is a powerful tool, and being able to surprise a buyer with a registration statement that has already been through multiple rounds of SEC review will give targets a greater degree of control in dual-track negotiations. Companies pursuing a dual-track process will need to balance these advantages against the alternative approach of making their IPO filings fully visible to prospective acquirors, which could theoretically attract additional bidders or facilitate the process by making their diligence easier. If confidential registration statements become the norm, a non-confidential filing may come to suggest something other than an ordinary IPO process. But a company that files confidentially may also be sending a signal to buyers if it ostensibly starts the 21-day clock by publicly releasing its filings and then fails to begin its road show within a reasonable period of time.
Lastly, the relaxation of restrictions on "test the waters" pre-marketing has implications for private targets regardless of whether they undertake a dual-track process or a standalone M&A process. As we noted in our March 26 memorandum, there is a potential inconsistency in the JOBS Act regarding whether an EGC can engage in such pre-marketing more than 21 days before a public filing. Regardless of how the inconsistency is resolved, however, the EGC's advisers can engage in pre-marketing to qualified institutional buyers and accredited investors, which provides an additional way to conduct a market check for a company that has an acquisition offer in hand- or for that matter, even one in the midst of price negotiations.
April 10, 2012
U.S. v. Motz: Second Circuit Upholds Eight Year Sentence for Cherry Picking
by Michael Burleigh
In United States v. Motz., 2012 WL 147884 (2d Cir. Jan. 19, 2012), the Second Circuit Court of Appeals affirmed an eight year prison sentence for George Motz ("Motz") but vacated a district court order requiring him to pay restitution of approximately $865,000 in connection with a fraudulent "cherry picking" scheme. The court remanded the restitution issue back to the district court.
Motz was the mayor of Quogue, a small Long Island village, and President and CEO of Melhado, Flynn & Associates, Inc. ("MFA"), a Manhattan based broker-dealer and investment advisor firm. Motz and MFA were indicted on August 27, 2008 and accused of operating a cherry picking scheme in violation of 18 U.S.C. § 1348(1), as enacted by § 807 of Sarbanes-Oxley ("SOX"). According to the indictment, Motz engaged in cherry picking by placing trades in the morning, waiting until later in the day to determine the profitability of the trades and then allocating them to different accounts depending on their profitability. In order to prove a § 1348 violation, the government must show "(1) fraudulent intent, (2) a scheme or artifice to defraud, and (3) a nexus with a security."
On October 13, 2009, Motz pled guilty to one count of securities fraud under 18 U.S.C. § 1348 in connection to the cherry picking scheme. His guilty plea was not part of any plea bargain. He was subsequently sentenced to eight years in prison and ordered to pay approximately $865,000 in restitution to his victims. Motz appealed both the length of the sentence and the restitution order.
Motz attacked two sentencing enhancements applied by the district court under federal sentencing guidelines. The first enhancement called for additional prison time when the aggregate loss is between $1 million and $2.5 million. Motz argued that there was no loss sustained by his clients because although his clients overpaid for the securities that Motz allocated to them, most still realized a profit in the long term. The Second Circuit disagreed and adopted the government's method of calculating loss based on the difference between the price clients were charged for the security and its value at the time of allocation.
The second enhancement called for additional prison time when the criminal activity harmed at least 50 victims. Motz argued that the victim list was too broad because it contained individuals who were not harmed by the scheme and individuals harmed before the passage of SOX. The court dismissed Motz's arguments by noting that on several occasions after the passage of SOX, Motz had allocated losses to sixty or seventy distinct accounts.
Motz also appealed the order to pay approximately $865,000 in restitution because it failed to specifically identify the amount of each victim's loss. The Second Circuit agreed, vacated the order, and directed the district court to determine the amount of each victim's loss.
The primary materials for this case may be found on the DU Corporate Governance website.
|View today's posts
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Securities Law Practice Center: Foley & Lardner with the March Investment Management Update
CorporateCounsel.net Blog: White House to Monitor JOBS Act: Sort Of
Race to the Bottom: The Investor Advisory Committee Announced
DealLawyers.com Blog: The JOBS Act: Implications for Private Company Acquisitions and M&A Professionals
Race to the Bottom: U.S. v. Motz: Second Circuit Upholds Eight Year Sentence for Cherry Picking