How the Dodd-Frank Act Affects Practice in Idaho

How the Dodd-Frank Act Affects Practice in Idaho

Wendy CoutureAssociate Professor

University of Idaho College of Law

Presented to the Idaho State Bar Business & Corporate Section

January 11, 2012

The Dodd-Frank Act

Registration Exemptions

Financial Professionals

Public Companies

The Dodd-Frank Act


Definition of

“Accredited Investor”

“Bad Actor” Disqualification

State Regulation

of “Mid-Sized”

Investment Advisers

Broker-Dealer Standard of Care

When Making Recommendations

Mine Safety

Disclosures

SOX 404(b) Exemption

Say on Pay


Public Companies

The Dodd-Frank Act


Definition of



Public Companies

Relevance of “Accredited Investor” Status

Rule 505 and Rule 506 Exemptions

• Limited to 35 non-accredited investors

• Must furnish Rule 502(b)(2) disclosures to non-accredited investors

• Non-accredited investors must qualify as knowledgeable and sophisticated investors






§ 4(5) [formerly § 4(6)] Exemption

• Limited to accredited investors






§ 4(5) [formerly § 4(6)] Exemption

• Limited to accredited investors

Rule 504 Exemption

• Prohibition on general solicitation and general advertising lifted under certain circumstances if sold only to accredited investors

• Restrictions on resale lifted under certain circumstances if sold only to accredited investors

Old Definition of “Accredited Investor”

Included:

“Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000.”

Rule 501(a)(5); Rule 215(e).

Fiserv Case-Shiller Home Price Data – April 8, 2010

Old Definition of “Accredited Investor”

Included:

“Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000.”

Rule 501(a)(5); Rule 215(e).

New Definition of “Accredited Investor”

Dodd-Frank § 413:

“[A]ny net worth standard shall be $1,000,000, excluding the value of the primary residence of such natural person.”


Dodd-Frank § 413:


What if the mortgage is underwater?

SEC Final Rule, Effective Feb. 27, 2012, Release No. 33-9287.


Dodd-Frank § 413:


What if the mortgage is underwater?The amount by which the mortgage is underwater is included as a liability.



Dodd-Frank § 413:




Is there any grandfathering available for investors with pre-existing rights who, because of this change, are no longer accredited?


Dodd-Frank § 413:




Is there any grandfathering available for investors with pre-existing rights who, because of this change, are no longer accredited?Yes, if the investor held the right and other securities of the same issuer on July 20, 2010.


Dodd-Frank § 413:





Can’t an investor just obtain a mortgage to convert home equity into assets that will count in the net worth calculation?


Dodd-Frank § 413:





Can’t an investor just obtain a mortgage to convert home equity into assets that will count in the net worth calculation?Yes, but a 60-day lookback will capture any incremental indebtedness that isn’t used to acquire the primary residence.

The Dodd-Frank Act


Definition of




Public Companies


Reg. ARule 262

Rule 505Rule 505(b)(iii)


Reg. ARule 262


Rule 506Dodd-Frank § 926 – “[SEC] shall issue rules . . . substantially similar to the provisions of [Rule 262.”


Reg. ARule 262



SEC Proposed Rule; Release No. 33-9211


Reg. ARule 262




Possibly apply a uniform “bad actor” rule to Reg. A, Rule 505, and Rule 506


Reg. ARule 262





Possibly adopt a uniform 10-year look-back period


Reg. ARule 262






Explicitly include “managing member” of issuer as a “covered person”


Reg. ARule 262






Explicitly include “managing member” of issuer as a “covered person”

“Reasonable care” exception – would require the issuer to conduct a “factual inquiry”

The Dodd-Frank Act


Definition of


“Bad Boy” Disqualification

State Regulation

of “Mid-Sized”

Investment Advisers


Public Companies

Investment Adviser Registration Pre-Dodd-Frank

SMALL < $25,000,000 Assets Under ManagementState Registration IF• “regulated or required to be regulated as an investment adviser in the State in which it maintains its principal office”(all states except Wyoming)Otherwise, SEC Registration.

LARGE ≥ $25,000,000 Assets Under ManagementSEC Registration

Investment Advisers Act § 203A (until July 1, 2011).




MULTI-STATE EXCEPTION But, if a small investment adviser would be required to register in 30+ states, it can elect to register with SEC instead.

Investment Advisers Act § 203A (until July 1, 2011); SEC Rule203A-2(e) (until Sept. 19, 2011).




BUFFERBut, if an investment adviser has assets under management of $25,000,000-$30,000,000, it may elect to remain state-regulated.

MULTI-STATE EXCEPTION But, if a small investment adviser would be required to register in 30+ states, it can elect to register with SEC instead.

Investment Advisers Act § 203A (until July 1, 2011); SEC Rule203A-1(a) (until Sept. 19, 2011).

Investment Adviser Registration Post-Dodd-FrankSMALL < $25,000,000 Assets Under ManagementState Registration IF• “regulated or required to be regulated as an investment adviser in the State in which it maintains its principal office”(all states except Wyoming)Otherwise, SEC Registration.


MID-SIZED $25,000,000-$100,000,000 Assets Under ManagementState Registration IF• “required to be registered as an investment adviser” in the state where it maintains its principal officeAND• “would be subject to examination as an investment adviser by [the State]”(all states except Wyoming and New York)Otherwise, SEC Registration.

Investment Advisers Act § 203A; SEC Release No. IA-3221.



MID-SIZED $25,000,000-$100,000,000 Assets Under ManagementState Registration IF• “required to be registered as an investment adviser” in the state where it maintains its principal officeAND• “would be subject to examination as an investment adviser by [the State]”(all states except Wyoming and New York)Otherwise, SEC Registration.

MULTI-STATE EXCEPTION But, if an investment adviser would be required to register in 15+ states, it can elect to register with SEC instead.

Investment Advisers Act § 203A; Rule 203A-2(d).



MID-SIZED $25,000,000-$100,000,000Assets Under ManagementState Registration IF• “required to be registered as an investment adviser” in the state where it maintains its principal officeAND• “would be subject to examination as an investment adviser by [the State]”(all states except Wyoming and New York)Otherwise, SEC Registration.

MULTI-STATE EXCEPTION But, if an investment adviser would be required to register in 15+ states, it can elect to register with SEC instead.

BUFFERS• But, if an investment adviser has assets under management of $90,000,000-$100,000,000, it may elect to remain SEC-regulated. • But, if an investment adviser has assets under management of $100,000,000-$110,000,000, it may elect to remain state-regulated. Investment Advisers Act § 203A; Rule 203A-1(a).

Investment Adviser Registration Post- Dodd-FrankDEADLINES FOR TRANSITION FROM SEC- TO STATE-REGULATION

March 30, 2012

ALL investment advisers currently registered with the SEC must file an amendment to Form ADV, which will identify mid-sized advisers that are no longer eligible for SEC registration.

SEC Release No. IA-3221; SEC Rule 203A-5(b).

Investment Adviser Registration Post- Dodd-FrankDEADLINES FOR TRANSITION FROM SEC- TO STATE-REGULATION

March 30, 2012

ALL investment advisers currently registered with the SEC must file an amendment to Form ADV, which will identify mid-sized advisers that are no longer eligible for SEC registration.

June 28, 2012

Mid-sized advisers no longer eligible to register with the SEC must withdraw by filing Form ADV-W and registering with the applicable state(s).

North American Securities Administrators Association (“NASAA”) – Investment Adviser Coordinated Review Program for SEC-registered advisers switching their registration to between 4 & 14 states

SEC Release No. IA-3221; SEC Rule 203A-5(c).

The Dodd-Frank Act


Definition of



State Regulation

of “Mid-Sized”

Investment Advisers




Public Companies

Investment Advisers Broker-Dealers

Standard of Care When Making Recommendations

Investment Advisers

Definition - “‘Investment adviser’ means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities…” Investment Advisers Act of 1940 § 202(a)(11).

Investment Advisers

Fraud/Deceit - “It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly-- … to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client…” Investment Advisers Act of 1940 § 206(2).


Investment Advisers



Fiduciary Duty - “The [] Act [] thus reflect a congressional recognition of the delicate fiduciary nature of an investment advisory relationship . . .” SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963).

Investment Advisers



Fiduciary Duty - “The [] Act [] thus reflect a congressional recognition of the delicate fiduciary nature of an investment advisory relationship . . .” SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963).

Investment advisers have a fiduciary duty to act in the best interests of their clients.

Broker-Dealers

Definition - “The term ‘broker’ means any person engaged in the business of effecting transactions in securities for the account of others.” Exchange Act § 3(a)(4).

Definition - The term “dealer” means any person engaged in the business of buying and selling securities for such person's own account through a broker or otherwise. Exchange Act § 3(a)(5).

Broker-Dealers

Exclusion from Definition of “Investment Adviser” – “any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor.” Investment Advisers Act of 1940 § 202(a)(11).



Broker-Dealers

Exclusion from Definition of “Investment Adviser” – “any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor.” Investment Advisers Act of 1940 § 202(a)(11).



Not subject to Investment Advisers Act fiduciary duty to act in the best

interests of their clients.

Broker-Dealers



NASD Rule 2310 Recommendations to Customers (Suitability) - (a) In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs. . . . (to become FINRA Rule 2111 on July 9, 2012)

http://www.youtube.com/watch?v=X42k4ikIBKg

Fabrice TourreGoldman, Sachs & Co.

Employee

http://www.youtube.com/watch?v=X42k4ikIBKg

Broker-Dealers

Dodd-Frank Act § 913

• SEC Report Directs the SEC to conduct a study and issue a report re: the obligations of brokers, dealers, and investment advisers when providing personalized investment advice and recommendations to retail customers

• Rules Authorizes the SEC to commence rulemaking to address the legal or regulatory standards of care for brokers, dealers, and investment advisers

Broker-Dealers




January 2011 SEC ReportRecommends that the SEC establish a uniform fiduciary standard for investment advisers and broker-dealers when providing investment advice to retail customers that is consistent with the standard that currently applies to investment advisers.

Broker-Dealers




January 2011 SEC ReportRecommends that the SEC establish a uniform fiduciary standard for investment advisers and broker-dealers when providing investment advice to retail customers that is consistent with the standard that currently applies to investment advisers.

Future?

The Dodd-Frank Act


Definition of



State Regulation

of “Mid-Sized”

Investment Advisers





Public Companies

Sarbanes-Oxley Act § 404

(a) All companies required to file annual reports must include a management assessment of internal control over financial reporting.

(b) Each registered public accounting firm that prepares or issues the audit report for the issuer shall attest to, and report on, the assessment made by the management of the issuer.




$$$ - High Compliance Costs


(a) All companies required to file annual reports must include a management assessment of internal controls over financial reporting.



• SEC had permitted “non-accelerated filers” to postpone their compliance. The deferrals were set to expire for annual reports for fiscal years ending on or after June 15, 2010.





• SEC had permitted “non-accelerated filers” to postpone their compliance. The deferrals were set to expire for annual reports for fiscal years ending on or after June 15, 2010.

• Dodd-Frank § 989G(a) adds § 404(c) to the Sarbanes-Oxley Act. The auditor attestation requirement now applies only to accelerated filers and large accelerated filers.

The Dodd-Frank Act


Definition of



State Regulation

of “Mid-Sized”

Investment Advisers




Say on Pay


Public Companies

Citigroup’s Stock Price 2007-2010

Dodd-Frank Act § 951 – Shareholder Vote on Executive

Compensation Disclosures

Public companies subject to the federal proxy rules must:

• not less frequently than once every 3 years, must include a separate, non-binding resolution subject to shareholder vote to approve the compensation of executives

• not less frequently than once every 6 years, must include a separate, non-binding resolution subject to shareholder vote to determine whether the above votes will occur every 1, 2, or 3 years

Dodd-Frank Act § 951 – Shareholder Vote on Executive

Compensation Disclosures

Public companies subject to the federal proxy rules must:

• not less frequently than once every 3 years, must include a separate, non-binding resolution subject to shareholder vote to approve the compensation of executives

• not less frequently than once every 6 years, must include a separate, non-binding resolution subject to shareholder vote to determine whether the above votes will occur every 1, 2, or 3 years

SEC Final Rule, Release No. 34-63768.

•Effective at first annual or other meeting on or after January 21, 2011.

• But, for “smaller reporting companies,” effective at first annual or other meeting occurring on or after January 21, 2013.

PROPOSAL 4

This proposal, which is commonly referred to as a "say-on-pay" vote, provides stockholders with the opportunity to advise our Board of Directors and Compensation Committee regarding their approval of the compensation of our named executive officers as described in the Compensation Discussion and Analysis section, accompanying compensation tables and narrative disclosure set forth in this proxy statement. This vote is not intended to address any specific item of compensation or the compensation of any particular named executive officer, but rather the overall compensation of our named executive officers as well as the philosophy and objectives of our executive compensation programs.

Our executive compensation programs are designed to attract, retain, motivate and reward talented executives who can contribute to our long-term success and thereby build value for our stockholders. We believe that our compensation program, with its balance of base salary, cash incentive awards and equity compensation, rewards sustained performance that is aligned with long-term stockholder interests. Our Compensation Committee, which is comprised of independent directors and seeks the input of an outside compensation consultant, oversees our executive compensation and benefits programs. The Compensation Committee approves the performance measurements and targets for our executive officers' incentive pay, and also reviews and approves their compensation packages annually. The say-on-pay vote is not binding on the Company, our Compensation Committee or our Board of Directors. We value the opinions of our stockholders and the Compensation Committee will take into account the result of the vote when determining future executive compensation. The Board of Directors recommends that stockholders vote FOR the approval of the compensation of our named executive officers.

Coldwater Creek, Inc. Proxy Statement, Filed with the SEC on 4-29-11

PROPOSAL 4

This proposal, which is commonly referred to as a "say-on-pay" vote, provides stockholders with the opportunity to advise our Board of Directors and Compensation Committee regarding their approval of the compensation of our named executive officers as described in the Compensation Discussion and Analysis section, accompanying compensation tables and narrative disclosure set forth in this proxy statement. This vote is not intended to address any specific item of compensation or the compensation of any particular named executive officer, but rather the overall compensation of our named executive officers as well as the philosophy and objectives of our executive compensation programs.

Our executive compensation programs are designed to attract, retain, motivate and reward talented executives who can contribute to our long-term success and thereby build value for our stockholders. We believe that our compensation program, with its balance of base salary, cash incentive awards and equity compensation, rewards sustained performance that is aligned with long-term stockholder interests. Our Compensation Committee, which is comprised of independent directors and seeks the input of an outside compensation consultant, oversees our executive compensation and benefits programs. The Compensation Committee approves the performance measurements and targets for our executive officers' incentive pay, and also reviews and approves their compensation packages annually. The say-on-pay vote is not binding on the Company, our Compensation Committee or our Board of Directors. We value the opinions of our stockholders and the Compensation Committee will take into account the result of the vote when determining future executive compensation. The Board of Directors recommends that stockholders vote FOR the approval of the compensation of our named executive officers.


For Against Abstain Broker non-

votes

45,163,605 512,501 3,823,918 8,744,864


PROPOSAL 5ADVISORY VOTE ON THE FREQUENCY OF "SAY-ON-PAY" VOTE

This proposal provides our stockholders an advisory vote on whether the frequency with which we should hold a say-on-pay vote should be once every one, two, or three years. Alternatively, stockholders may choose to abstain. Our Board of Directors and Compensation Committee believe that having a say-on-pay vote every year is the best approach for the Company. The Board believes that an annual advisory vote will give our stockholders the opportunity to provide us with direct and timely input on our compensation philosophy, policies and practices as disclosed in the proxy statement. You are not voting to approve or disapprove of the Board's recommendation. This advisory vote on the frequency of future advisory votes on named executive officer compensation is non-binding on the Company, our Compensation Committee or our Board of Directors. Notwithstanding the Board's recommendation and the outcome of the stockholder vote, the Board may in the future decide to conduct advisory votes on a more or less frequent basis and may vary its practice based on factors such as discussions with stockholders and the adoption of material changes to compensation programs. The Board of Directors recommends a vote for the frequency of EVERY YEAR


PROPOSAL 5ADVISORY VOTE ON THE FREQUENCY OF "SAY-ON-PAY" VOTE

This proposal provides our stockholders an advisory vote on whether the frequency with which we should hold a say-on-pay vote should be once every one, two, or three years. Alternatively, stockholders may choose to abstain. Our Board of Directors and Compensation Committee believe that having a say-on-pay vote every year is the best approach for the Company. The Board believes that an annual advisory vote will give our stockholders the opportunity to provide us with direct and timely input on our compensation philosophy, policies and practices as disclosed in the proxy statement. You are not voting to approve or disapprove of the Board's recommendation. This advisory vote on the frequency of future advisory votes on named executive officer compensation is non-binding on the Company, our Compensation Committee or our Board of Directors. Notwithstanding the Board's recommendation and the outcome of the stockholder vote, the Board may in the future decide to conduct advisory votes on a more or less frequent basis and may vary its practice based on factors such as discussions with stockholders and the adoption of material changes to compensation programs. The Board of Directors recommends a vote for the frequency of EVERY YEAR

One Year

Two Year Three Year Abstain Broker non-

votes

41,129,987

81,457 4,429,403 3,859,177 8,744,864

The Dodd-Frank Act


Definition of



State Regulation

of “Mid-Sized”

Investment Advisers



Mine Safety

Disclosures


Say on Pay


Public Companies

Dodd-Frank Act § 1503 – Reporting Requirements Regarding Coal or Other Mine Safety

Each issuer that is required to file periodic reports and that is an operator of a mine (or that has a subsidiary that is) shall include in each periodic report the following information for the time period covered by the report:

• total # of violations of health or safety standards that could “significantly and substantially” contribute to a health or safety hazard under § 104 of the Mine Safety and Health Act for which operator received a citation from Mine Safety and Health Administration

• total # of orders, citations, violations issued under other specified sections of the Mine Act


SEC Final Rule, Dec. 21, 2011, Release No. 34-66019

• applies only to mines located in the U.S.

• requires mine-by-mine disclosure

• no special treatment for smaller reporting companies

• no exclusion of orders or citations that issuer is contesting

• no exclusion of orders or citations that were received but subsequently dismissed, reduced, or vacated

Each issuer that is required to file periodic reports and that is an operator of a mine (or that has a subsidiary that is) shall include in each periodic report the following information for the time period covered by the report:

• total # of violations of health or safety standards that could “significantly and substantially” contribute to a health or safety hazard under § 104 of the Mine Safety and Health Act for which operator received a citation from Mine Safety and Health Administration

• total # of orders, citations, violations issued under other specified sections of the Mine Act


SEC Final Rule, Dec. 21, 2011, Release No. 34-66019

Example of Tabular Presentation


File Form 8-K within 4 business days after receipt by issuer (or subsidiary) of:

• imminent danger order under § 107(a) of the Mine Act

• written notice from the MSHA of a pattern of violations of mandatory health or safety standards as could significantly and substantially contribute to the cause and effect of health or safety hazards under § 104(e) of the Mine Act

• written notice from the MSHA of the potential to have a pattern of such violations

New Item 1.04 Mine Safety – Reporting of Shutdowns and Patterns of Violations

The Dodd-Frank Act


Definition of



State Regulation

of “Mid-Sized”

Investment Advisers



Mine Safety

Disclosures


Say on Pay


Public Companies

http://www.sec.gov/spotlight/dodd-frank.shtml

How the Dodd-Frank Act Affects Practice in Idaho

Wendy CoutureAssociate Professor

University of Idaho College of [email protected]

Thank you!

Documents

How the Dodd-Frank Act Affects Practice in Idaho