Securities Law

On December 4, 2015, President Obama signed into law the Fixing America’s Surface Transportation Act (“FAST Act”), which includes several securities law related provisions.  Among the most notable of these provisions is the addition of new Section 4(a)(7) to the Securities Act of 1933, which essentially codifies the so-called “Section 4(a)(1-1/2)” exemption for private resales of restricted securities.  With certain exceptions, the new Section 4(a)(7) exempts from registration any resale transaction that meets the following requirements:

• Each purchaser is an accredited investor;
• No general solicitation occurs; and
• In the case of an issuer that is not a reporting company, the issuer makes available (at the request of the seller) to the seller and the prospective purchaser certain information about the issuer and the securities.

The SEC today adopted Regulation Crowdfunding, permitting individuals to invest in securities-based crowdfunding transactions.  The new crowdfunding rules will be effective in May 2016.  The SEC also proposed amendments to Rule 504 to increase the aggregate amount of money that may be offered and sold pursuant to the rule from $1 million to $5 million and to apply bad actor disqualifications to Rule 504 offerings.  The SEC’s press release, with links to the final and proposed rules, can be found here: http://www.sec.gov/news/pressrelease/2015-249.html.

The SEC last week issued a 21(a) Report concerning auditor independence in the context of loaned staff arrangements.  The report arose out of an investigation into KPMG’s practice of loaning non-manager level professionals to certain audit clients to perform junior level tasks related to tax compliance.  A typical task performed by the loaned staff was inputting data into federal or state tax returns using an audit client-issued computer while being supervised by a member of the client’s tax department.  KPMG’s internal guidance specifically allowed these types of arrangements.

The issue was whether KPMG’s practice of loaning staff to audit clients to perform tax work violated Rule 2-01 of Regulation S-X, which prohibits, among other things, an independent auditor from “acting as an employee” of an audit client.  In its Report, the SEC, suggesting strongly that KPMG’s practice did violate Rule 2-01, reiterated its statement from a 2000 release that “an auditor who provides services in a way that is tantamount to accepting an appointment as an … employee of the audit client cannot be expected to be independent in auditing the financial consequences of management’s decisions.”  The SEC went on to make the following additional points:

• An auditor may not provide otherwise permissible non-audit services (such as tax services) to an audit client in a manner that is inconsistent with other provisions of the independence rules (such as the prohibition against acting as an employee of the audit client).
• An accountant acting as an employee of the audit client need not perform any decision-making, supervisory, or ongoing monitoring functions for the audit client for Rule 2-01 to be implicated.
• In assessing whether an accountant is “acting” as an employee, a key factor is the degree of control that the audit client […]
  

The SEC today temporarily stayed Exchange Act Rules 15Ba1-1 through 15Ba1-8 and Rule 15Bc4-1 and Forms MA, MA-I, MA-W, and MA-NR until July 1, 2014.  The effective date for the Rules and Forms was January 13, 2014.  Additional details can be found here: http://www.sec.gov/rules/final/2014/34-71288.pdf

The SEC yesterday announced its enforcement results for FY 2013, which ended in September.  The amount of disgorgement and penalties the SEC obtained increased from $3.1 billion in FY 2012 to $3.4 billion in FY 2013–an approximately 10% increase.  The number of enforcement actions the SEC brought, however, declined from 734 in FY 2012 to 686 in FY 2013–an approximately 7% decline.  Notably, the SEC does not collect all disgorgement and penalties for which it obtains orders.