Firm Advice: Your Weekly Update

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

Federal Reserve Governor, Daniel Tarullo, recently discussed an upcoming proposal to alter the regulation of foreign banks in the U.S. The proposal would require large foreign banks to establish “a separately capitalized top-tier U.S. intermediate holding company.” The holding company would be “required independently to meet all U.S. capital and liquidity requirements as well as other enhanced prudential standards required by the Dodd-Frank Act.” In a recent Client Memorandum, Davis Polk suggests that the proposal “could have profound negative consequences” for both foreign banks in the U.S. and U.S. banks abroad by adding “fuel to the growing trend toward regionalization of global banking.” The proposal is still under consideration and more details are anticipated “in the coming weeks.”

The Dodd-Frank Act amended the Commodities Exchange Act to require clearing of certain swaps through a derivatives clearing organization. This includes fixed-to-floating swaps, basis swaps, forward rate agreements, and overnight index swaps. The CFTC recently issued final rules to implement this requirement and issued two no-action letters “that provide time-limited relief from the clearing requirement for certain swaps.” In a recent Legal Alert, Bingham McCutchen details the requirements, the timing of their implementation, and safe harbors provided by the no-action letters.

In a recent Corporate Finance Alert, Skadden provides guidance on how to avoid prohibited communications when contemplating a securities offering. Section 5 of the Securities Act prohibits “activities intended to stimulate interest in a securities offering prior to the filing of registration statement.” Violations of this prohibition are commonly referred to as “gun jumping.” The Alert outlines the types and timing of permitted and prohibited communications, as well as suggestions for a company policy on relevant social media communications.

Saudi Arabia’s Real-Estate Finance Laws

By Maha Al-fozan, LL.M. Candidate 2013 | Posted on

In July 2012, Saudi Arabia witnessed the official launch of the real-estate finance industry as part of the country’s economic financial development plans.  To promote the local competition between banking and other financial sectors, and the economy’s overall global competitiveness, non-banking corporations may now finance real estate in Saudi Arabia.

The Real Estate Development Fund (“REDF”) is the country’s main provider of housing finance.  REDF was unable to meet the rapidly increasing demand, while other real estate financing was limited due to absence of a well-structured regulatory framework.  For example, the industry lacked effective land registries and foreclosure regulations for properties in default.  Individual real estate financing was done against the transfer of title deeds rather than as an official mortgage.  In addition, lenders have been conservative with their loan standards, resulting in a low mortgage penetration rates.

Making mortgages available to public will address the imbalances occurring in the market with supply twisted to the high end.  The new Saudi laws tackle the chronic shortage of home ownership, particularly in the affordable middle- and lower-end markets.  More financing opportunities are needed, even though additional time may be required for the market to safely adopt such laws.

These laws are tools to open safe and continuous investment channels.  They encourage national economy leaders to diversify income sources and create job opportunities and investments in the country.  They also satisfy growing demands for appropriate and safe housing offers.  These steps aim to develop mechanisms that preserve homeownership rights, while stimulating financial institutions to lend more frequently, reduce the cost of mortgage financing and provide differentiated products for multiple segments of society.

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Firm Advice: Your Weekly Update

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

Recently, the DOJ and SEC issued A Resource Guide to the U.S. Foreign Corrupt Practices Act. The FCPA prohibits U.S. persons and businesses and all companies listed on U.S. stock exchanges from making corrupt payments to foreign official to obtain or retain business. The FCPA also mandates that these companies maintain accurate books and a system of internal accounting controls. The goal of the Resource Guide is to help companies “abide by the law, detect and prevent FCPA violations, and implement effective compliance programs.” The Resource Guide explains the intricacies of which companies are subject to the law and the types of transactions are likely to violate the law. In a recent Client Alert, Latham & Watkins provides a summary of the Resource Guide and the nine most relevant and important areas. The Client Alert is available for download here.

The Fiscal Cliff is looming in 2013, and with it is the specter of increased taxes. Both the cliff itself and any potential compromise are likely to include increased marginal tax rates and capital gains taxes.  While some people may wish to accelerate income into 2012 to avoid the increased taxes, Section 409A of the Internal Revenue Code severely limits the “ability of employers and employees to change the time of payment for most types of compensation.” In a recent Client Alert, Skadden presents “Strategies for Accelerating Incoming into 2012,” focusing on methods of accelerating income that avoid the limitations of 409A.

The U.S. Secretary of the Treasury recently exempted foreign exchange swaps from certain regulations under the Commodity Exchange Act. These swaps will not be subject to central clearing, margin or exchange trading requirements.  In a recent Client Alert, Mayer Brown explains the qualifications for foreign exchange swaps and the consequences of their exemption.

Some Claims in DOJ Lawsuit Against Wells Fargo Potentially Precluded by Mortgage Settlement

By Mark Rutter, J.D. Candidate 2015 | Posted on

Prior to filing its recent lawsuit against Bank of America, as discussed here, the United States Attorney for the Southern District of New York announced last month it had filed suit against another major U.S. bank for alleged reckless underwriting and false representations made during the sub-prime mortgage crisis—this time, against the largest American home lender, San Francisco-based Wells Fargo, N.A.

Filed in conjunction with the U.S. Department of Housing and Urban Development (“HUD”), the suit seeks treble damages and civil penalties for violations of the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”). Wells Fargo faces a range of charges including a breach of fiduciary duty, unjust enrichment, and false certifications to HUD, as well as charges under the False Claims Act of knowingly or recklessly making false claims regarding its FHA loans and making false statements in support of those claims.

Wells Fargo insists that the current lawsuit is barred by its five billion dollar settlement over its foreclosure practices in April, arguing that the new claims fall into the categories of claims released per the settlement—servicing, foreclosure, and origination liability claims. The settlement does allow the government and borrowers to preserve claims that include criminal prosecutions, claims relating to securitization of mortgage loans, claims of discrimination in lending practices, and individual or class action claims brought by homeowners and investors.

Most pertinently, the settlement did not preclude the new charges if the prosecution can prove the bank knowingly lied to the FHA about specific loans meeting the program’s eligibility requirements. However, Wells Fargo firmly maintains that the government can only prosecute individual loans under this exception, meaning many of the new charges would nonetheless be prevented.

The defense has submitted a filing to U.S. District Judge Rosemary Collyer, who presided over the settlement, in an effort to block the government from pursuing the new charges. It remains to be seen whether Judge Collyer will take any action to block the new suit.

This lawsuit comes amid several other suits against the nation’s largest lenders, including Bank of America, as the government seeks damages for the banks’ roles in the subprime mortgage crisis.

A New Method of Disclosing Executive Compensation

By Bali Kumar, J.D. Candidate 2013 | Posted on

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) has changed the landscape of executive compensation in the United States in favor of greater disclosure.  Dodd-Frank requires publicly traded companies to disclose “information that shows the relationship between executive compensation actually paid and the financial performance of the [company].”  15 U.S.C. § 78n(i).  Investors can discern what was actually paid to executives and the financial performance of the company in the proxy statement by looking to their company’s “Compensation Discussion and Analysis” and “Summary Compensation Table.”

The requirement for disclosure of pay and performance, coupled with the new ability for shareholders to have a “say on pay” has resulted in increased scrutiny from shareholders.  The new “say on pay” regime has allowed shareholders to have a non-binding vote on executive compensation.  Even though this vote is non-binding, Boards of Directors are paying attention to potential negative feedback from shareholders.

Because of “say on pay” voting, proxy advisory firms such as Glass Lewis and Institutional Shareholder Services have become more relevant.  These firms advise investors whether to vote yes or no on a company’s executive compensation provisions.  Because of this new scrutiny, companies are more likely to take actions to ensure they receive a recommended vote of “yes” from these proxy advisory firms.  If executive compensation payments appear excessive, the likelihood of a shareholders being advised to vote against executive compensation plans increases.

Therefore, many companies have begun to precede the Summary Compensation table in the proxy report with a “Realized Pay” or “Realized Compensation” table.  This additional disclosure reveals the compensation actually realized in the years shown by the named executives according to their W-2 forms.  The rationale often given for the additional disclosure is that the numbers in the Summary Compensation table do not show exact figures, but instead show figures for the “fair value” of shares/options awarded.  These fair values are based on accounting principles and models that estimate the potential worth of awards, instead of exact earned amounts.  For example, the most recent proxy statement for Hewlett-Packard Company states that in 2011, Catherine Lesjak, R. Todd Bradley, and Vyomesh Joshi realized $2.8 million, $3.0 million, and $2.7 million, respectively.  The Summary Compensation table states their 2011 compensation as $11.0 million, $10.7 million, and $9.8 million.  These numbers are strikingly different.  The realized pay table and the summary compensation table present different data; they are not perfect substitutes for one another.  The Realized Pay table shows the money the executive took home in a given year.  The Summary Compensation Table shows the salary, bonus, and the equity awards the company granted in a given year (not the equity awards that vested or were cashed-in in a given year).

We are still waiting for guidance from the Securities Exchange Commission on the definition of executive compensation “actually paid.”  In the meantime, it is reasonable to expect companies to continue to move in the direction of disclosing realized pay.

CME Files Lawsuit Against the Commodities Futures Trading Commission

By Youna Kim, J.D. Class of 2015 | Posted on

On November 8th, U.S. exchange operator CME Group filed a lawsuit against the Commodities Futures Trading Commission (CFTC) in the United States District Court for the District of Columbia, asking for an injunction to prevent the CFTC from requiring CME Group to report private data to a third party. In the lawsuit, CME Group alleged that the regulator overstepped its authority under the Dodd-Frank Act by requiring CME Group to report non-public swaps transactions data to CFTC-certified Swap Data Repositories (SDRs), which is in turn released to federal regulators to be used to monitor the market.  (more…)

Netflix, Good Governance and Poison Pills

By Amanda Berloni, LL.M. Candidate 2013 | Posted on

In response to Carl Icahn’s recent trading activities, the board of directors of Netflix, Inc. has approved a shareholder rights plan (the “Plan”), commonly referred to as a “poison pill.”  The Plan allows Netflix shareholders to buy newly issued shares at a discount, diluting the Company’s shares and making a potential takeover more expensive and less attractive for potential buyers.

The Board approved the Plan in response to a takeover threat by Carl Icahn, an activist shareholder who currently owns 9.98% of the Common Shares.  Icahn is not attempting to purchase the Company outright; rather, it appears he is attempting to attract other buyers who would buy Netflix at a premium.  Instituting a shareholder rights plan is a common defensive tactic taken by boards of directors to thwart corporate takeovers.

Pursuant to the terms of the Plan, the Company has declared a dividend distribution of one right (each a “Right”) for each issued and outstanding common share of the Company.  Each Right entitles the holder thereof to purchase one one-thousandth of a series A preferred share.  The Plan is “flip-in,” whereby Netflix shareholders can exercise the Rights following the public announcement that a shareholder has acquired beneficial ownership of 10% or more of the Company’s common shares.

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Firm Advice: Your Weekly Update

By James Kollar and Joseph Santiesteban | Posted on

The False Claims Act historically has been used to prosecute procurement and healthcare fraud that result in losses to the government.  Over the past four years, however, plaintiffs have expanded their use of the statute to include cases of complex financial fraud in which the government is in indirectly involved. In a recent client alert, Latham & Watkins explains how New York is now using its state version of the False Claims Act to prosecute tax fraud. In the first such action, New York targeted Sprint-Nextel alleging a $100 million underpayment of state taxes. The Client Alert is available for download here.

The Financial Services Oversight Council has proposed for public comment three alternatives for structural reform of money market mutual funds (MMFs).  Alternative one would require MMFs to have a floating net asset value per share. Share prices would not be fixed at $1, but rather would reflect the actual market value of the underlying portfolio holdings. Alternative two would continue to fix the net asset value at $1, but would require MMFs to maintain a buffer of 1% to absorb day-to-day fluctuations.  Alternative three would also continue to fix the net asset value at $1, but would have a 3% buffer requirement in combination with other risk reducing measures such as diversity requirements or minimum liquidity levels. In a recent Financial Services Alert, Goodwin Proctor has a more in depth summary of the alternatives.

California Attorney General Kamala Harris has begun sending warning letters to approximately 100 mobile app developers notifying them that their privacy policies do not comply with California law. The California Online Privacy Protection Act requires developers to post easily identifiable and reasonably accessible privacy policies. Penalties include up to $2500 per download of each app by California consumers. Major app companies Amazon, Apple, Google, Hewlett-Packard, Microsoft, and Research in Motion have already agreed to ensure their mobile app privacy policies are in accordance with California law. As Wilson Sonini explains in a recent Client Alert, letter recipients have 30 days respond with how they intend to comply.

LIBOR Consultation Document Opened

By Flore Poughon, LL.M. Candidate 2013 | Posted on

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 | Posted on

Thinking about buying a Volkswagen car? What about buying Volkswagen the company? On November 1st , 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…)