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© 2013
SCCE UTILITIES & ENERGY COMPLIANCE AND ETHICS CONFERENCE
Elaine M. Walsh, PartnerBaker Botts L.L.P.1299 Pennsylvania Ave., NWWashington, DC [email protected]
Beyond Core Compliance: What Your Board Should Know
Houston, February 27, 2013
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Dodd Frank Regulations
Title VII
Exec Comp/Hedging Disclosures
Conflict Minerals
Resource Extraction Issuer Disclosures
Whistleblower & Privilege Issues
FCPA Update
Embargoes, Economic Sanctions & Disclosures
CFIUS & JV/Investment Considerations
Retail & Marketing Issues
Overview – It’s Been a Busy Year
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– As of January 2013, approximately 63% rulemaking deadlines have been missed and approximately 37% have been met.
– 148 of the 398 total required rulemakings have been finalized, and at least 129 rules have not even been proposed.
– In 2012, we saw final rules for:• Definition of “swap,” “swap dealer,” and “major swap participant”• End user exception to mandatory clearing• Swap data reporting and recordkeeping rules• Commodity options• Dealer Business Conduct Rules• Conflict Minerals• Resource Extractors• Exchange Listing Standards and Comp Committee Independence
Dodd Frank – Are We There Yet?
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• Important rules yet to be finalized– CFTC extraterritoriality/cross border rules
– CFTC interaffiliate rules
– Most CFTC clearing orders
– SEC comp clawback rules, exec/worker comp ratio disclosures, and Sec. 955 director and employee hedging rules
Dodd Frank – Are We There Yet?
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Recordkeeping
Reporting Real-Time Reporting
Trade & Life-cycle Reporting
Trade Option Reporting
End User Reports
End User Board Resolutions
Dealer Business Conduct Rules and Documentation
Dodd Frank: Title VII
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Determine Whether transaction reportable. Is it a “swap”? Does it involve a “US
person”?
Does it involve an end-user?
Which party will report? With trade options, both parties report.
How will validate reported information?
For end-users Will you or counterparty make your end-user report to SDR/CFTC?
If counterparty does, how do you validate reported information?
If SEC filer, need board resolution to approve not clearing trades. Due date based on CFTC clearing orders. Board resolution for interest rate and credit default swaps needs to be completed by (or swaps need to be cleared on) Sept. 9.
Reporting
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New reps and waivers for counterparties under the ISDA DF Protocol
IECA Amendment provides some relief for customers
Watch for dealer/MSP disclaimers in emails, website links
Watch for disclaimers, classification of transactions (e.g., are/are not swaps, trade options), reporting responsibilities, etc., in emails, confirmations, trader tapes
Special issues for borrowers securing trades under credit facilities
Business Conduct Rules & Dealer Documentation
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Say on pay
Executive comp clawback
Disclosures on exec/worker comp ratio
Director and employee hedging transactions
Conflict minerals disclosures
Resource extraction issuer disclosures
Other Dodd Frank Requirements
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Say on Pay Requires a vote at least once every three years
Shareholders must be allowed to vote at least once every six years on how often they should be presented with the say-on-pay vote
Rules became effective on January 21, 2011
Requirements kicked in for small reporting companies (public float < $75 MM) Jan. 21, 2013
Clawback and Exec/Worker Comp Pay Ratio Still waiting for SEC rules
Consider policies to message potentially controversial compensation issues internally and externally
Executive Comp Issues
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Sec. 955 requires disclosure in proxy statements whether any employee or director is permitted to purchase financial instruments for hedging the value of the company’s equity securities held by such employee or director.
Prepaid variable forward contracts, equity swaps, collars, and exchange funds are all included.
Senate Report 111-176 states that purpose is to “allow shareholders to know if executives are allowed to purchase financial instruments to effectively avoid compensation restrictions that they hold stock long-term, so that they will receive their compensation even in the case that their firm does not perform.”
Some companies have extended restrictions to other types of short-term or speculative transactions.
Challenge will be to adopt a policy that can be monitored and implemented with respect to all employees.
Director & Employee Hedging Restrictions
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Rules require a resource extraction issuer to disclose payments made to governments if: the issuer is required to file an annual report with the SEC; and
the issuer engages in the commercial development of oil, natural gas, or minerals.
Applies to domestic and foreign issuers.
Issuer is required to disclose payments made by a sub or entity controlled by the issuer.
Dodd Frank – Resource Extraction Issuer Rules
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What Must Be Disclosed: certain payments made to a foreign government (including subnational governments) or the U.S. government that are: made to further the commercial development of oil, natural gas, or
minerals;
“not de minimis” (individually or in aggregate ≥$100K in most recent FY);
within the types of payments specified in the rules.
Includes: taxes
royalties
fees (including license fees)
production entitlements
bonuses
dividends
infrastructure improvements
Resource Extraction Issuer Rules (cont’d)
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What information is reported: Type and total amount of payments made for each project;
Type and total amount of payments made to each government;
Total amounts of the payments, by category;
Currency used to make the payments;
Financial period in which the payments were made;
Business segment of the resource extraction issuer that made the payments;
The government that received the payments, and the country in which the government is located; and
The project of the resource extraction issuer to which the payments relate.
Resource Extraction Issuer Rules (cont’d)
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How It Must Be Disclosed: New SEC form (Form SD)
Data in an exhibit and electronically tagged using the eXtensible Business Reporting Language (XBRL) format
When It Must Be Disclosed: No later than 150 days after the end of its FY
Beginning with FYE after Sept. 30, 2013
For the first report, most issuers may provide a report disclosing only those payments made after Sept. 30, 2013
Resource Extraction Issuer Rules (cont’d)
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Court challenge filed Oct. 12, 2012
Asserts First Amendment, APA, and misinterpretation grounds
May be a while before have clarity
Challenges of several Dodd Frank regulations have been made under the APA for failure to assess the economic impact and conduct a cost benefit analysis. In July 2011 DC Circuit struck down direct proxy access rule
State Dept. in January filed in support of SEC
Resource Extraction Issuer Rules (cont’d)
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SEC’s 3-step process for compliance Determine whether company is subject to Rule
If so, conduct reasonable country of origin inquiry
Conduct diligence and prepare conflict minerals report
Conflict Minerals Rule applies to: every filer under Sections 13(a) or 15(d) of the Exchange Act;
that uses conflict minerals that are necessary to the functionality or production of a product manufactured or contracted by that registrant to be manufactured
Conflict minerals generally include gold, tantalum, tin, and tungsten
Originating in the Democratic Republic of Congo or an adjoining country, including Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia
Conflict Minerals
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Conducting a reasonable country of origin inquiry “that is reasonably designed to determine whether any of the conflict
minerals originated in [the covered countries], . . . or are from recycled or scrap sources”
obtaining reasonably reliable representations from ultimate or immediate suppliers indicating conflict minerals did not originate in the covered countries or came from recycled or scrap sources
issuer must have reason to believe those representations are true given the facts and circumstances
certainty is not required, but an issuer may not ignore red flags
An issuer must nevertheless report its diligence efforts even if it determines its conflict minerals (i) did not originate in the covered countries or (ii) did come from recycled or scrap sources
Conflict Minerals (cont’d)
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Diligence in tracing supply chain required where company knows conflict minerals are from a covered country and are not from recycled or scrap sources, or where there is some ambiguity as to the source
Report must include, among other things: a description of the due diligence undertaken to identify the source and
chain of custody of the conflict minerals, which shall include independent private sector audit
For 2/4 years (depending on company size), companies may report that product is “DRC conflict undeterminable;” such companies are not required to obtain independent private sector audit, but must provide description of products, facilities used to process conflict minerals in products, if known, country of origin of conflict minerals, if known, and efforts to determine mine or location of origin with greatest possible specificity
Diligence for CY 2013, with first report (Form SD) due May 31, 2014 Will be necessary to develop a thorough supply chain review, diligence
protocols, and reporting mechanisms
Conflict Minerals (cont’d)
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SEC and CFTC Whistleblower Rules SEC received approximately 3,000 tips for FY 2012
Disclosures & Financials 18.2%, Offering Fraud 15.5%, Manipulation 15.2%, Insider Trading 6.3%, Trading 4.8%, FCPA 3.8%.
CFTC received approximately 100 tips for FY 2012
Under SEC and CFTC rules, they will not reward information obtained in privileged communication
Court interpretations of waiver often depend on level of rigor companies use to protect information. Consider the labeling, handling, and distribution of privileged communications; number and extent of disclosures; and reaction time to inadvertent disclosures.
Who has authority to waive privilege?
Whistleblowers and Privilege
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Tips To Reduce Risk Take reasonable precautions to prevent disclosure Label as "privileged"
Distribute on "need to know" basis
Document policies for privileged documents - including who can waive
Follow document retention and destruction policies
Verbal vs. written communications
Take immediate action if privileged information is disclosed
Whistleblowers and Privilege (cont'd)
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On November 14, 2012, the SEC and DOJ issued FCPA guidance on, among other things: definitions of foreign officials, improper gifts, travel and entertainment
expenses
successor liability
Important cases in 2012 Morgan Stanley
Pfizer
Eli Lilly
Directors should be aware of the restrictions and regulations that prohibit U.S. companies and citizens from making improper payments to foreign government officials
Companies should review their compliance and deterrence programs and other processes to ensure adherence and bolster a defense in case of bad actors
FCPA Update
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On August 10, 2012, President Obama signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”).
Sec. 219 of the ITRA amends Section 13 of the Exchange Act, by adding new Section 13(r) to require public reporting companies to provide disclosure of certain Iran-related activities in annual and quarterly reports filed after Feb. 6, 2013.
A company’s annual report for FYE Dec. 31, 2012 must disclose activities with Iran that occurred between Jan. 1, 2012 and Dec. 31, 2012, even though ITRA was not enacted until Aug. 10, 2012.
Activities with “Government of Iran” includes entities directly or indirectly controlled by the Government of Iran.
Covers reporting entity and its affiliates. “Affiliates” is intended to follow definition in Rule 12b-2.
Iran Threat Reduction and Syria Human Rights Act of 2012
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Disclosure triggered if issuer is or its affiliates are knowingly engaged in: activity related to Iran’s energy sector described in Sec. 5(a) of the Iran
Sanctions Act of 1996 (the “ISA”): development of petroleum resources in Iran export of refined petroleum products to Iran JVs relating to developing petroleum resources outside of Iran in
which the Gov't of Iran is a substantial partner support for development or production of petroleum resources or
refined petroleum or petrochem products in Iran transportation of crude oil from Iran concealment of the Iranian origin of crude oil and refined petroleum
products activity described in Sec. 5(b) of the ISA, including JV with the
Government of Iran and other persons involving the mining, production or transportation of uranium;
activity described in Sec. 104(c)(2) of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (the “CISADA”);
unauthorized transaction or dealing with certain blocked persons (SDNs), including Government of Iran.
ITRA (cont’d)
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Required disclosure If reporting activity described above occurs during the period covered by
the company’s annual or quarterly report to be filed after February 6, 2013, the reporting company must provide a detailed description of each such activity, including: the nature and extent of the activity;
the gross revenues and any net profits, if any, attributable to the activity; and
whether the reporting company or its affiliate intends to continue the activity.
No materiality threshold; although $ threshold for certain petroleum sector activities
Along with disclosure, company must concurrently file with the SEC notice that disclosure has been included in relevant report
ITRA (cont’d)
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Disclosure will be subject to liability under Sec. 18 of the Exchange Act and covered by the CEO and CFO certifications. Therefore, all reporting companies should consider: Reviewing activities to determine whether they or their affiliates are
engaged in any of the triggering activities
Review data gathering systems to track and collect information about triggering activities
Update disclosure controls and procedures for quarterly and annual reports in order to record, process, summarize and report triggering activities
Review and update regulatory and compliance programs to ensure compliance with other aspects of ITRA
ITRA (cont’d)
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Sudanese Sanctions Regulations (SSR) issued by Treasury on July 1, 1998 to implement financial and trade sanctions imposed in 1997
Applies to “U.S. persons”
Generally prohibits all direct or indirect imports/exports of goods, technology or services (or facilitation of same) and dealings with Government of Sudan (including agencies and instrumentalities)
Sanctions do not apply to South Sudan (Juba)
Activities relating to petroleum and petrochem industries in South Sudan are authorized
Transshipment of goods, technology, and services through Sudan to and from Republic of South Sudan are also authorized
Sudanese Sanctions Regulations
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On August 17, 2011 President Obama issued an executive order that blocks property of Syrian government and prohibits export or re-export of most U.S. goods and services to Syria
License is required (but not generally granted) for export or re-export to Syria of all items subject to Export Administration Regulations, except certain food and medicine
License needed for export or re-export of services to Syria
Prohibited funds transfers will be blocked
Syrian Sanctions and Regulations
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Exon-Florio, as amended by the Foreign Investment and National Security Act of 2007 (“FINSA”), provides the President authority to prohibit any acquisition, merger or takeover by a non-U.S. entity of an entity or business engaged in US interstate commerce, where the transaction threatens national security.
Exon-Florio focuses on transactions that result in non-U.S. person acquiring “control” of “U.S. business.”
“Control” is defined in Regs as the power to determine, direct or decide matters affecting an entity including, but not limited to: sale, lease, pledge or other transfer of the company’s assets,
dissolution of the company, or
closing or relocating of research and development facilities.
Review is voluntary, but CFIUS can review under its own authority and recommend that transaction be unwound.
CFIUS & JVs and Strategic Investments
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Term “national security” is not defined. Factors that have been relevant in connection with other transactions include: ownership of the non-U.S. acquirer;
whether U.S. business develops or produces sensitive products or technologies;
whether U.S. business has access to classified data;
whether U.S. business has contracts with U.S. government agencies with national security responsibilities;
whether the transaction involves critical infrastructure; and
whether the transaction will have an effect on “the long-term projection of U.S. requirements for sources of energy and other critical resources and material.”
CFIUS (cont’d)
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In December 2008, CFIUS issued guidance on “national security considerations,” which includes: acquisitions involving U.S. energy sector at various stages of the value
chain, including: exploitation of natural resources;
transportation of natural resources (e.g., by pipeline);
conversion of natural resources to power; and
provision of power to U.S. Government and civilian customers.
Developments from Dubai Ports World to Ralls Corp. wind farm
CFIUS (cont’d)
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Federal and State Consumer Protection Laws Telephone Consumer Fraud and Abuse Prevention Act (Do Not Call
Registry)
Telemarketing Sales Rule
FTC Policy Statements on Deception and Unfairness
Fair Debt Collection Practices Act
Multilevel Marketing Regulation
State Utility Commission Regulations
National Energy Marketers Assn’s National Marketing Standards of Conduct
Retail Marketing Issues
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Elaine M. Walsh
Elaine counsels clients regarding energy company mergers, energy asset acquisitions, divestitures and investments, as well as, the development of electric generation and fuel transportation and storage projects. She advises independent power producer, renewable energy, oil and gas companies, utility, coal company and power marketer clients in electricity and fuel trading and marketing activities. She negotiates physical and financial power, fuel, cross-commodity and retail supply contracts. She represents generators, utilities and wholesale and retail marketers before FERC, regional transmission organizations, independent system operators, the CFTC and state utilities commissions on mergers, market development, resource adequacy, market power, interconnection and other transmission matters.
Elaine has been recognized by Chambers USA, which noted that she “impresses clients and peers with her grasp of energy trading, hedging, credit sleeves and M&A, which she combines with expertise in FERC regulatory matters,” and is “esteemed for her M&A and regulatory work” and quotes clients as saying she is “exceptionally good at dealing with particularly complex transactional and regulatory problems.” In 2010, Elaine was selected by Law360, as a “Rising Star,” a listing of ten energy lawyers under 40 to watch.
Partner
The Warner1299 Pennsylvania Ave., NWWashington, D.C. 20004-2400 United States
Tel: +1.202.639.1141Fax: +1.202.585.1042
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Ginger Faulk
Ginger Faulk’s practice focuses on international transactions and U.S. government regulation of foreign trade and investment. Her areas of experience include Export Administration Regulations (EAR), International Traffic in Arms Regulations (ITAR), U.S. antiboycott laws, sanctions administered by the Treasury Department’s Office of Foreign Assets Control (OFAC) and the Foreign Corrupt Practices Act (FCPA).
With a focus on the defense, petroleum, petrochemicals, telecommunications and high technology industries, her work involves representation in government investigations and enforcement actions by U.S. government agencies responsible for administering U.S. export controls; securing U.S. government licensing and other approvals; regulatory due diligence reviews in mergers and acquisitions; development and review of compliance programs; and compliance training.
Ms. Faulk has represented companies in securing government authorization to export or re-export highly regulated products and technology to the Middle East and China. She has also represented companies under investigation in connection with foreign trade and investment activities and has conducted large internal investigations of potential violations of U.S. export controls and economic sanctions. Ms. Faulk has conducted export control and sanctions compliance audits for several large, multinational corporations. She has performed numerous regulatory due diligence reviews in connection with large stock and asset acquisitions involving export-sensitive goods, software and technology. Ms. Faulk has also represented both buyers and sellers in U.S. government reviews of foreign acquisitions through the Committee on Foreign Investment in the United States (CFIUS).
Ms. Faulk is conversant in French and Spanish.
Partner
The Warner1299 Pennsylvania Ave., NWWashington, D.C. 20004-2400 United States
Tel: +1.202.639.7756Fax:+1.202.585.4072
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