May 2014

Foreign Account Tax Compliance ActThe Foreign Account Tax Compliance Act (“FATCA”) is a US law designed to counter offshore tax avoidance by US persons. Controversial because of its wide-ranging breadth and application to non-US financial institutions, in the most general sense, FATCA imposes a 30% withholding tax on payments of US source income made to foreign financial institutions (“FFIs”) unless they enter into an agreement with the US Internal Revenue Service (“IRS”) and disclose information about their US account holders.

After having revised the timelines for FATCA’s implementation on several occasions (culminating in an implementation delay of over three years from the date of its adoption in March of 2010), FATCA’s official July 1, 2014 implementation date is on the horizon. As a result, FFIs worldwide have made a mad dash in the race toward FATCA compliance over the last few months.

So why does this matter to non-banking/non-financial institutions? Well, as an initial matter, FATCA’s definition of an FFI is broad, including more types of entities than one might expect. As a result, US entities must make sure they have evaluated their corporate structure to determine whether its network includes an FFI. Under FATCA rules, the following types of entities may qualify as FFIs, subject to certain exceptions:

  • Non-US retirement funds and foundations
  • Special purpose entities and banking-type subsidiaries
  • Captive insurance companies
  • Treasury centers, holding companies, and captive finance companies

Additionally, even if an organization’s affiliate network does not include an FFI, US-based entities could be Continue Reading FATCA: What it is, and why it may apply to your business

Golden leashes
Photo by Don Urban

The compensation disclosure rules contained in Regulation S-K are intended to provide meaningful disclosure regarding an issuer’s executive and director compensation practices such that the investing public is provided with full and fair disclosure of material information on which to base informed investment and voting decisions. However, as we pointed out in a blog from last year, not all compensation is covered by these rules, including compensation paid to directors by third parties (e.g., by a private fund or activist investors). These arrangements are commonly known as “golden leashes.”  The two examples I discussed previously related to proxy fights involving Hess Corporation and Agrium, Inc. In each case, hedge funds had proposed to pay bonuses to the director nominees if they were ultimately elected to the board of directors in their respective proxy contests. Additionally, in the Agrium, Inc. case, the director nominees would have received 2.6% of the hedge fund’s net profit based on the increase in the issuer’s stock price from a prior measurement date. The amounts at issue could have been significant considering this particular hedge fund’s investment in Agrium, Inc. exceeded $1 billion, but none of the nominees were ultimately elected to the Agrium, Inc. board.

Considering the large personal gains these director nominees could potentially realize under these types of arrangements, it could pose a problem from a corporate governance standpoint as it is a long-standing principal of corporate law that directors are not permitted to use their position of trust and confidence to further their private interests. Recognizing this potential problem, the Council of Institutional Investors (“CII”), a nonprofit association of pension funds, other employee benefit funds, endowments and foundations with combined assets that exceed $3 trillion, recently wrote the SEC asking for a review of existing proxy rules “for ways to ensure complete information is provided to investors about such arrangements.”

In its letter, the CII points out that existing disclosure rules do not “specifically require disclosure of compensatory arrangements between a board nominee and the group that nominated such nominee.” The CII believes that disclosure related to these types of third party director compensation arrangements are material to investors due to the potential Continue Reading Institutional investor organization asks the SEC to require disclosure of “golden leashes”

Golden leashes
Photo by Don Urban

The compensation disclosure rules contained in Regulation S-K are intended to provide meaningful disclosure regarding an issuer’s executive and director compensation practices such that the investing public is provided with full and fair disclosure of material information on which to base informed investment and voting decisions. However, as we pointed out in a blog from last year, not all compensation is covered by these rules, including compensation paid to directors by third parties (e.g., by a private fund or activist investors). These arrangements are commonly known as “golden leashes.”  The two examples I discussed previously related to proxy fights involving Hess Corporation and Agrium, Inc. In each case, hedge funds had proposed to pay bonuses to the director nominees if they were ultimately elected to the board of directors in their respective proxy contests. Additionally, in the Agrium, Inc. case, the director nominees would have received 2.6% of the hedge fund’s net profit based on the increase in the issuer’s stock price from a prior measurement date. The amounts at issue could have been significant considering this particular hedge fund’s investment in Agrium, Inc. exceeded $1 billion, but none of the nominees were ultimately elected to the Agrium, Inc. board.

Considering the large personal gains these director nominees could potentially realize under these types of arrangements, it could pose a problem from a corporate governance standpoint as it is a long-standing principal of corporate law that directors are not permitted to use their position of trust and confidence to further their private interests. Recognizing this potential problem, the Council of Institutional Investors (“CII”), a nonprofit association of pension funds, other employee benefit funds, endowments and foundations with combined assets that exceed $3 trillion, recently wrote the SEC asking for a review of existing proxy rules “for ways to ensure complete information is provided to investors about such arrangements.”

In its letter, the CII points out that existing disclosure rules do not “specifically require disclosure of compensatory arrangements between a board nominee and the group that nominated such nominee.” The CII believes that disclosure related to these types of third party director compensation arrangements are material to investors due to the potential Continue Reading Institutional investor organization asks the SEC to require disclosure of "golden leashes"

Golden leashes
Photo by Don Urban

The compensation disclosure rules contained in Regulation S-K are intended to provide meaningful disclosure regarding an issuer’s executive and director compensation practices such that the investing public is provided with full and fair disclosure of material information on which to base informed investment and voting decisions. However, as we pointed out in a blog from last year, not all compensation is covered by these rules, including compensation paid to directors by third parties (e.g., by a private fund or activist investors). These arrangements are commonly known as “golden leashes.”  The two examples I discussed previously related to proxy fights involving Hess Corporation and Agrium, Inc. In each case, hedge funds had proposed to pay bonuses to the director nominees if they were ultimately elected to the board of directors in their respective proxy contests. Additionally, in the Agrium, Inc. case, the director nominees would have received 2.6% of the hedge fund’s net profit based on the increase in the issuer’s stock price from a prior measurement date. The amounts at issue could have been significant considering this particular hedge fund’s investment in Agrium, Inc. exceeded $1 billion, but none of the nominees were ultimately elected to the Agrium, Inc. board.

Considering the large personal gains these director nominees could potentially realize under these types of arrangements, it could pose a problem from a corporate governance standpoint as it is a long-standing principal of corporate law that directors are not permitted to use their position of trust and confidence to further their private interests. Recognizing this potential problem, the Council of Institutional Investors (“CII”), a nonprofit association of pension funds, other employee benefit funds, endowments and foundations with combined assets that exceed $3 trillion, recently wrote the SEC asking for a review of existing proxy rules “for ways to ensure complete information is provided to investors about such arrangements.”

In its letter, the CII points out that existing disclosure rules do not “specifically require disclosure of compensatory arrangements between a board nominee and the group that nominated such nominee.” The CII believes that disclosure related to these types of third party director compensation arrangements are material to investors due to the potential Continue Reading Institutional investor organization asks the SEC to require disclosure of "golden leashes"

Cybersecurity in the cross hairs of the SEC
Photo by Marina Noordegraaf

The SEC continues to increase its focus on cybersecurity preparedness. As we have reported in prior blogs here and here, we believe that cybersecurity will become an increasingly important element of the SEC’s disclosure and enforcement efforts. Recent events show that the SEC is ramping up its efforts in the cybersecurity area, and we believe that all companies who are potentially affected by these SEC activities should pay special attention to their cybersecurity preparedness and should anticipate possible SEC action in this area.

The SEC’s most recent activity in the cybersecurity area involves registered broker-dealers and registered investment advisers. These entities are logical choices for a cybersecurity focus because of the large volume of confidential and very sensitive customer information that they hold. The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) announced this cybersecurity focus in an April 15, 2014 Risk Alert which stated that the SEC plans to mount an initiative to assess cybersecurity preparedness in the securities industry. The SEC had previously laid the groundwork for this initiative during a March 26, 2014 Cybersecurity Roundtable when Chair White stressed the vital importance of cybersecurity to our market system and consumer data protection. She also called for more public/private cooperation in strengthening cybersecurity preparedness. Other SEC participants at this Roundtable stressed the importance of gathering data and information regarding cybersecurity preparedness so that the SEC could determine what additional steps it should take in this area.

The OCIE’s cybersecurity initiative will assess cybersecurity preparedness in the securities industry and obtain data and information about the securities industry’s recent experiences with cyber threats and cybersecurity breaches. As part of this initiative, the OCIE announced that it will conduct examinations of more than 50 registered broker-dealers and registered investment advisers to obtain cybersecurity data and information and to assess the preparedness of these entities to defend against cyber threats. According to the Risk Alert, this investigation will focus on such things as Continue Reading SEC increases focus on cybersecurity

BSA ComplianceGenerally speaking, the Bank Secrecy Act (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. But while anyone can imagine that the BSA and its implementing regulations apply to those entities we typically classify as “financial institutions” such as banks and other depository institutions, it is important to note that the BSA Rules also apply to other entities that we may not traditionally think of as “financial institutions” including securities broker-dealers.

The BSA rules require brokers-dealers to, among other things, develop and implement BSA compliance programs. In accordance with the BSA rules, FINRA Rule 3310 sets forth minimum standards for broker-dealers’ BSA compliance programs. First, the rule requires firms to develop and implement a written BSA compliance program. The program has to be approved in writing by a member of senior management and be reasonably designed to achieve and monitor the firm’s ongoing compliance with the requirements of the BSA Rules. Additionally, and consistent with the BSA Rules, the rule also requires firms, at a minimum, to:

  • establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of suspicious transactions;
  • establish and implement policies, procedures, and internal controls reasonably designed to achieve compliance with the BSA and implementing regulations;
  • provide for annual (on a calendar-year basis) independent testing for compliance to be conducted by member personnel or by a qualified outside party. If the firm does not execute transactions with customers or otherwise hold customer accounts or act as an introducing broker with respect to customer accounts (e.g. engages solely in proprietary trading or conducts business only with other broker-dealers), the independent testing is required every two years (on a calendar-year basis);
  • designate and identify to FINRA (by name, title, mailing address, e-mail address, telephone number, and facsimile number) an individual or individuals responsible for implementing and monitoring the day-to-day operations and internal controls of the program.  Such individual or individuals are associated persons of the firm with respect to functions undertaken on behalf of the firm.  Each member must review and, if necessary, update the information regarding a change to its BSA compliance person within 30 days following the change and verify such information within 17 business days after the end of each calendar year.

Compliance with the BSA Rules is no easy task. To effectively address these rules, Continue Reading Bank Secrecy Act: Broker-Dealers Must Also Comply