LIBOR Consultation Document Opened

By Flore Poughon, LL.M. Candidate 2013 | November 14, 2012 at 06:49 am

In response to the recent LIBOR scandal, Michel Barnier, the European Commissioner for Internal Market and Services, has opened a consultation document on the continuing viability of the benchmark rate. The move is unsurprising to many observers of European financial markets, where multi-state collaboration is essential to the outcome’s perceived legitimacy. As mentioned in a previous post, U.S. CFTC Chairman Gary Gensler recently commented on the LIBOR’s future. The issue is undisputedly important, as rate manipulations may seriously impact market integrity, result in significant losses to consumers and investors, and distort the real economy. The consultation document, which will be open through November 15, follows an initial legislative proposal period, and sets the stage for the EU’s final response to widespread concerns regarding LIBOR. This post will discuss the now-completed proposal process, newly adopted amendments, and the European Commission’s response to persistent criticisms and concerns.

On July 25, 2012, the European Commission adopted amendments to the proposal for a Regulation and a Directive on insider dealing and market manipulation. The long-awaited initial legislative proposal to revise the Markets in Financial Instruments Directive (“MiFID”) was made on October 20, 2011. The original MiFID came into force in November 2007—intended to enhance investor protection, improve cross-border market access, and promote competition in the financial markets across the EU. Although MiFID has arguably achieved some of these aims, many commentators have suggested that the system ought to better reflect the lessons learned from the financial crisis and developments in the markets.

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Dr. Joachim Rosengarten Presents the Challenges of Acquiring a German Company

By Will Schildnecht, J.D. Candidate 2015 | November 13, 2012 at 12:45 pm

Thinking about buying a Volkswagen car? What about buying Volkswagen the company? On November 1^st, BCLBE hosted a talk by Dr. Joachim Rosengarten of Hengeler Mueller, who guided listeners though the process by which a U.S. corporation acquires a German company. Dr. Rosengarten, who had attended Boalt Hall as an LL.M. student, shed light on the patchwork of laws governing international mergers and acquisitions by proposing and then analyzing a hypothetical acquisition of a German company by a U.S. operation.

Dr. Rosengarten’s lesson can be broken down into three rules: know the laws, get the stocks, and get the price right. The first challenge in acquiring a German corporation is to understand the applicable laws that will govern the purchase. German shareholders want the best deal if their company is to be purchased by a foreigner. German law applies to the acquisition, which is overseen by BaFin, the German equivalent of the Securities and Exchange Commission. Moreover, once an investor or corporation owns just a two percent share of a German company, it must disclose its stake to regulators and the public. (more…)

A Further Step in the Implementation of the European Union Financial Transactions Tax

By Constance Descout, LLM Candidate 2013 | November 9, 2012 at 02:22 pm

On October 23, 2012, the European Commission (the executive body of the European Union) proposed a Council Decision to enhance cooperation throughout the EU with a European Financial Transactions Tax (“FTT”). The Council Decision follows a litany of previously failed attempts to enact an EU-wide FTT.

The harmonized European Financial Transactions Tax could have significant advantages for the economies of participating Member States. Lithuanian Commissioner for Taxation Algirdas Šemeta explains:

“There are EU wide benefits to a common FTT, even if it is not applied EU wide. It will create a stronger, more cohesive Single Market and contribute to a more stable financial sector. Meanwhile, those Member States that have signed up for this tax will have the added bonus of new revenues and fairer tax systems that respond to citizens’ demands.”

The legal bases for the FTT are the enhanced cooperation provisions laid out in Article 20 TEU and Articles 326 to 334 TFEU. These provisions create a special decision-making procedure whereby a minimum of nine Member States is needed to reach a binding decision. The resulting legislation is binding only on those Member States that are parties to the decision. The October 23^rd initiative is the most significant instance of a small group of nations moving forward without the rest of the EU. The only other times the enhanced cooperation provision has been used is in simplifying cross-border divorces and cross-border patents.

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Firm Advice: Your Weekly Update

By Joseph Santiesteban, J.D. Candidate 2014 | November 8, 2012 at 09:15 am

The Dodd-Frank Act provides for unlimited FDIC insurance for noninterest-bearing transaction accounts until December 31, 2012. If Congress does not act to extend the unlimited insurance, coverage will revert to $250,000 on January 1, 2012. The FDIC recently issued a Financial Institution Letter advising banks on procedures for winding down the program should Congress not extend it. In a recent Financial Services Alert, Goodwin Proctor explains what institutions must do and should do by the end of the year, according to the Financial Institution Letter.

The recent decision in In re Zappos.com Inc., Customer Data Security Breach Litigation considers the enforceability of “browsewrap” agreements, those in which users are bound to a website’s terms and conditions by accessing a website with posted terms. Zappos.com sought to invoke the arbitration provision of its terms of use when users sued for an alleged security breach in which sensitive user data was revealed. The court held that the Zappos.com terms were unenforceable because the link to the terms was at the bottom of the page, requiring users to scroll to the bottom of the page, and were in the same size, font, and color as other non-significant links. Thus, users never actually assented to the terms. The court also found that the terms were illusory, and thus unenforceable, because Zappos.com retained the unilateral right to modify the terms without notice. In a recent client alert, Wilson Sonsini Goodrich & Rosati explains the implications of the decision, as well as advice for making “browsewrap” agreements enforceable.

The Dodd-Frank Act contains 398 total rule-making requirements spread across various regulatory agencies. 133 rules have been finalized, and another 133 rules have been proposed, but not yet finalized. That leaves 132 rules outstanding. In its recent Dodd-Frank Progress Report, Davis Polk breaks down the regulatory implementation of the Act across time, agency, and regulated activity. The Report also provides an overview of recently proposed and approved rules.

Funding Portals Caught In Transition

By Ian Peck, LL.M. Candidate, 2013 | November 7, 2012 at 10:01 am

One of the most heavily covered and debated-about sections of the JOBS Act is the crowdfunding exemption. The Act creates a new exemption under Section 4 of the Securities Act of 1933 through which certain crowdfunded securities issuances need not be fully registered with the Securities and Exchange Commission. Much has been written about the potential benefits that small issuers (and the American economy) will reap as well as about concerns that fraudulent internet securities offerings will reach a wide range of retail investors. Part of the success or failure of the exemption, however, depends on the strength of crowdfunding intermediaries known as “funding portals,” not just the underlying issuers.

New Section 3(a) of the Securities Exchange Act of 1934 defines the term “funding portal” as a “person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others, solely pursuant to [the crowdfunding exemption].” Importantly, the definition includes a list of five activities that a funding portal is prohibited from engaging in. The first one is “offer[ing] investment advice or recommendations.”

This prohibition is ostensibly attempting to distinguish, on the one hand, investment advisers and broker-dealers from funding portals on the other. The tension with this practical attempt at fencing off various intermediaries appears when you look at crowdfunding platforms not engaged in the offer or sale of securities. Kickstarter, one of the major crowdfunding websites, helps potential lenders link up with, among others, video game makers, authors, and fashion designers. One of the creative ways in which Kickstarter (and others) helps make these connections is to highlight certain projects; any visitor to the website can browse “Staff Picks” where they can find out, for example, how to buy into a San Francisco retail store’s plan to construct a “parklet” outside of its shop.

Would a funding portal that uses the same crowdfunding technology of its non-securities counterparts, be allowed to provide “staff picks” or “recommended companies” on its website? The success or failure of the crowdfunding model will depend heavily on funding portals being able to connect investors with companies who could use their capital. Those connections will be made far stronger if funding portals attain clear guidance on what is and is not “investment advice or recommendations.” The Securities and Exchange Commission should provide greater clarity on this issue through rulemaking so that funding portals know in advance (to the extent possible) how best to manage their communications with investors. While crowdfunding has been a darling in the world of e-commerce, the platform must fit itself into the constraints of US securities law. While the recommendation issue is but one factor that will play into the success of the crowdfunding exemption, it will be an important one to follow as crowdfunding makes the transition to securities.

SEC and CFTC Establish Capital and Margin Requirements for Security-Based Swap Market Participants

By Luke Burton, J.D. Candidate 2015 | November 5, 2012 at 09:31 am

The Dodd-Frank Wall Street Reform Act tasked the Commodity Futures Trading Commission and the Securities and Exchange Commission with creating a regulatory structure to better maintain the $600 trillion derivatives market. As part of this effort, on October 17^th, the SEC released for comment proposed rules on margin and capital requirements for securities-based swap dealers designed “to help ensure the safety and soundness of security-based swap dealers and major security-based swap participants.”

The rule includes minimum capital, margin, and segregation requirements for security-based swap dealers and major security-based swap participants. (more…)

Are Emerging Growth Companies Using the JOBS Act’s Reduced IPO Filing Requirements?

By Jared Mayberry, J.D. Candidate 2015 | November 2, 2012 at 07:25 am

President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”) into law on April 5, 2012. We presented an update on the regulatory implementation of the act here and here, as well as a discussion of the Act’s internal contradictions here. While much of the Act left to the SEC the responsibility of designing regulations to implement the Act, it specifically set out provisions designed to ease IPO filing requirements for “emerging growth companies.” This week we have an update on how many companies are utilizing these already implemented provisions.

The JOBS Act defines an “emerging growth company” as a business with less than $1 billion dollars in revenue during the previous fiscal year. The JOBS Act has seven provisions designed to make IPO filing easier for an emerging growth company. These include the requirement to present only two years (rather than five years) of financial statements and an exemption from complying with new or revised accounting standards. The law also allows emerging growth companies to provide reduced disclosure about its executive compensation system, and provides an exemption from certain auditing requirements.

Last month, Morningstar published a study on the effects of this legislation on companies that have filed publicly since the Act’s enactment. According to Morningstar, 56 companies have publicly filed since the President signed the legislation into law. Thirty-Eight of those companies have qualified as “emerging growth companies,” and all but one of those qualifying companies have taken advantage of at least one provision of the Act.

Companies that are filing have adopted most of the provisions, with majority of companies taking advantage of or plan to take advantage of five of the seven provisions. Two of the provisions, however, have not been as widely utilized. Only fifty percent of the qualifying companies provided less than five years of financial data, and only six of the qualifying companies opted out of the new or revised financial accounting standards.

Berkeley Law Adjunct Professor Donna Petkanics, a Partner at Wilson, Sonsini, Goodrich & Rosati in Silicon Valley, believes these results are driven by a combination of factors. She believes that many of the companies were preparing to go public before the Act was signed. Thus, they likely were prepared to provide five years of financial data and comply with previous accounting standard.

Petkanics also thinks use will vary by industry. For instance, in industries where it “is important for the company to show strong growth for investors, they will show the full five years required by the previous regulation,” says Petkanics. “However, if the company is in biotech or cleantech, which are primarily R&D companies, the full five years will be less important to investors.” Thus, in these industries, companies more likely will take advantage of the reduced filing requirements.

Underwriter preference also could be driving these results, says Petkanics. “The company underwriting the IPO may prefer the old standard and may suggest the old standard to their clients,” she says. We will have to wait for a larger sample size, but Professor Petkanics believes that what happens in the next twelve months will be telling.

Firm Advice: Your Weekly Update

By Joseph Santiesteban, J.D. Candidate 2014 | November 1, 2012 at 08:22 am

Last Year, Wilson Sonsini Goodrich & Rosati surveyed the 45 venture-backed companies involved in the largest IPOs regarding their corporate governance and disclosure practices. The firm recently published the results. The survey covers director selection, composition, and independence, as well as law firm and underwriter choice. Wilson Sonsini represented the most issuers, while Davis Polk represented the most underwriters. Morgan Stanley and J.P. Morgan were the most frequently chosen lead underwriters.

On October 11, the CFTC issued two interpretive letters offering guidance on which securitization vehicles and real estate investment trusts may enter swaps and still not register as a “commodity pool” subject to regulation and registration requirements of the CFTC. In general, the CFTC is “less likely to find that an entity is a commodity pool” if 1) the entity enters swaps only to hedge or mitigate risks from its primary business, and 2)the swaps are not expected to contribute materially to the profits of the entity. In a recent News Bulletin, Morrison & Foerster explains the requirements and places them in the context of the Dodd-Frank Act.

Manhattan U.S. Attorney Files Billion Dollar Lawsuit Against Bank of America, Citing “Brazen” Mortgage Fraud

By Mark Rutter, J.D. Candidate 2015 | October 31, 2012 at 07:48 am

On October 24^th, the United States Attorney for the Southern District of New York, Preet Bharara, along with the Inspector General of the Federal Housing Finance Agency and the Special Inspector General for the Troubled Asset Relief Program (TARP), announced a civil mortgage fraud lawsuit against Bank of America Corporation and Countrywide Home Loans, Inc., seeking punitive and treble damages under the False Claims Act, 31 U.S.C. §3729.

The complaint alleges a systematic lack of oversight in the loan origination process, known as the High Speed Swim Lane, which led to defaults and foreclosures resulting in over a billion dollars in losses for the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. The High Speed Swim Lane (“the Hustle”) process originated at Countrywide in 2007 in the face of tightening loan purchase requirements by the GSEs, and was continued under Bank of America after its acquisition of Countrywide a year later. (more…)

New Berkeley Law Skills Course Opens Portal to the ‘Human Dimension’ of Lawyering

By Michael S. Young, J.D. Berkeley Law 2012, Associate, Perkins Coie LLP | October 30, 2012 at 08:51 am

Since even before Dale Carnegie’s day, it has been common knowledge among climbers in the business world that aptitude will only get you so far — the key to success is in managing relationships. For a long time, the self-help industry appeared to have the market cornered on offering tools for cultivating better interpersonal relations. But modern neuroscience indicates that mastery of interpersonal dynamics (sometimes called ‘emotional’ or ‘social’ intelligence’) is actually a teachable skill set. “Skills of Exceptional Lawyers–Social Intelligence and the Human Dimension” a relatively new addition to Berkeley Law’s course catalog, seeks to help law students harness these powerful skills.

The course, now in its third year at Boalt, covers a wide range of interpersonal skills including body language and facial expression recognition, the art of “difficult conversations,” rapport-building, conflict resolution, decision-making, and cultivating meaningful self-awareness. (more…)