Global regulation 2011: a review of policies that shaped the business world
Jan. 10 (Business Law Currents) — Global regulators have been anything but idle in 2011. Predictably, the U.S. regulatory landscape was dominated by the 800-lb. statutory gorilla, the Dodd-Frank Act. Canada busied itself trying to accommodate Basel III’s coming capital requirements. Anti-bribery regulation managed to elbow its way into UK headlines in spite of a phone hacking scandal and a royal wedding. China cracked down on loopholes for variable interest entities, while Australia’s new tax regime found few friends in the mining sector down under.
Covering everything from incentive-based compensation to credit ratings to the Volcker Rule, Dodd-Frank’s fingerprints touched a seemingly endless string of new regulations in the financial sector.
Passed in 2010, the Act’s operative provisions — or at least those able to be completed within the statute’s own 360-day mandate — became operative this year. Domestically, perhaps no one topic dominated regulatory discussions more than the Volcker Rule. Named for one-time Fed Chairman and current economic consigliere, Paul Volcker, the eponymous rule rolled back the calendar to the days of Glass-Stegall when proprietary trading by banks had worn out its Main Street welcome. (See Banking on Volcker: Big crisis, big rule.) The rule, a 298-page slab, represented the collective efforts of the SEC, the Fed, the FDIC and the Treasury department to implement §619 of the Dodd-Frank Act, which itself added a new §13 to the Bank Holding Company Act of 1956 (the BHC Act). The rule attempts to harmonize a proscription against prop trading with exceptions for underwriting, market making, and other activities.
Dodd-Frank also signaled the likely decline of credit ratings agencies’ role on Wall Street. Amending the Investment Company Act of 1940, Rules 2a-7, 3a-7, 5b-3 and 10f-3 will no longer require money market funds to operate using Nationally Recognized Statistical Ratings Organization (NRSRO) ratings. (See Dodd-Frank and SEC Blaze New Trail for Credit Ratings.)
Dodd-Frank’s §922 amended the Securities Exchange Act of 1934 to include a new section, 21F, entitled “Securities Whistleblower Incentives and Protection.” (See Whistling Past the Graveyard: SEC Offers Final Rule on Dodd-Frank Whistleblower Program.) The rule’s complexities, however, may be making foreign companies extremely wary of the program’s reach. (See Dodd-Frank’s whistleblowing rule presents new compliance concerns for foreign firms.)
A controversial Dodd-Frank provision featured prominently in the SEC’s insider trading case against former Goldman Sachs and Procter & Gamble board member, Rajat Gupta. Among the many sections of Dodd-Frank’s hundreds of pages, the Act allows the SEC to bring civil actions in an administrative tribunal, rather than United States District Court. Gupta, who sued to enjoin the action (see Gupta Counter-Swings Against SEC’s Dodd-Frank Squeeze Play), alleged he’d been unfairly singled out for prosecution. The Commission ultimately dropped the administrative action in favor of both civil and criminal actions in district court.
Another Dodd-Frank provision, §413, titled “Adjusting the Accredited Investor Standard,” removed an individual’s primary residence from an investor’s net worth calculus for purposes of determining eligibility for certain investments. (See Caught in the Worth Net: Dodd-Frank, SEC Make Qualified Investors ‘Homeless’.) In an effort to rein in systemic risk, §941 of Dodd-Frank (amending the Securities Exchange Act of 1934 to include a new §15G), compelled securitizers of asset-backed securities to retain not less than five percent of the assets’ credit risk. (See Feds rein in credit risk retention: Closing the barn door after the horse has gone.).) The CFTC also attempted to reduce the impact of systemic risk by tightening margin requirements within the Dodd-Frank scheme. (See Last Call: Dodd-Frank, CFTC tighten margin requirements for swaps.)
Dodd-Frank spawned a wide range of new types of disclosures, from golden parachutes to credit ratings. The Act’s 2011 disclosures provided a peek inside some high-profile board rooms, including those of executives at Apple, Polo Ralph Lauren and Yahoo. (See Corner office in the age of Dodd-Frank: Parachutes and paydays.) Dodd-Frank further required that listed companies have independent compensation committees; a measure that gave the otherwise cosmetic ploy of say-on-pay some actual substance.
The SEC also asserted its authority on disclosures, calling for firms to provide disclosures as to the likelihood and intensity of cyber-threats. (See Cybersecurity Disclosures: The SEC wants them and wants them now.) In October, the Commission staff published non-binding guidelines to help disclose prior cyber incidents, their severity, their “quantitative and qualitative magnitude,” and the possible costs and consequences as factors underlying proper evaluation.
The SEC also called on companies to amplify disclosures on a wide range of topics. For example, the Commission staff sought more disclosure from Amgen as to its litigation exposure. (See SEC Comment Watch: staff presses Amgen for litigation disclosures.) Staff members sought clarification from UPS on possible dealings with Cuba, Iran, Sudan and Syria. (See SEC Comment Watch: Feds Want to Know What Brown Can Do for Syria.) Not content to rely on disclosures alone, staff members surfed the web to corroborateHypercom’s filings. (See SEC Comment Watch: Hypercom Answers a Web-Surfing SEC.) Not even the father of Spiderman, Stan Lee, could escape the SEC’s web of disclosure sleuths. (See SEC Comment Watch: Commission’s Max Webb Spins Questions for Spiderman Creator.)
Not all regulatory developments flowed from Dodd-Frank. The FTC and DOJ’s Antitrust Division promulgated new horizontal merger guidelines. (See Merger Review: FTC, DOJ ponder Who’s On First?) In addition, Hart-Scott-Rodino got a makeover as the FTC lifted thresholds for transaction disclosures to $66 million, as well as set a new schedule of filing fees. (See Regulatory Watch: FTC releases new Hart-Scott-Rodino thresholds.) The DOJ dropped the hammer on AT&T’s proposed merger with T-Mobile, sending the former home empty-handed and the latter $4 billion richer. (See High-profile mergers feeling the regulatory squeeze.)
State regulators also made headlines in 2011 on several fronts. In August, Reuters reported that Massachusetts would become the first state in the Union to regulate the use of controversial “expert networks” that found themselves in the cross-hairs of high-profile litigation this year. Indeed, an unrelated investigative piece by Reuters that exposed a single residence as the “corporate headquarters” of more than 2,000 companies, was credited with Wyoming’s decision to clamp down on that state’s discomfiting emergence as a corporate shell haven. A number of states, including California, Virginia, Florida and Massachusetts, went after prominent banks alleging fraud in the execution of foreign exchange trades on behalf of state pension funds. (See The New Point Shaving: State AGs Go After Custodial FX Traders.)
Nevada has long been the favored U.S. state by Chinese companies have looked for a back door onto American exchanges, but corporations’ use of reverse mergers to take advantage of that state’s liberal incorporation standards drew the attention of regulators in 2011.
The SEC came out with new rules prohibiting a reverse merger company from applying for listing on Nasdaq, NYSE, and NYSE Amex until after trading in the U.S. OTC market or another regulated foreign exchange for a one-year “seasoning period.” Applicant companies must also maintain a minimum share price for a “sustained period” (at least 30 of the 60 trading days) immediately prior to its listing application and the exchange’s decision to list. (See New SEC reverse merger rules prompt Sino retreat.) At the time of the new standards’ announcement, the Commission noted it “and U.S. exchanges ha[d] in recent months suspended or halted trading in more than 35 companies based overseas citing a lack of current and accurate information about the firms and their finances.” (emphasis added)
Canada’s regulatory agencies had a busy year on several fronts. Not surprisingly, much of the activity involved financial institutions.
In February, Canada’s Office of the Superintendant of Financial Institutions (OSFI) detailed its proposed action plan for the implementation of Basel III. OSFI subsequently issued an advisory on non-viability contingent capital, outlining its expectations regarding the issuance of non-common capital instruments by banks, bank holding companies, and federal trust and loan companies, and the inclusion of same in regulatory capital. It also issued a guideline setting out expectations for the setting of internal target capital ratios by federally regulated life, property and casualty insurance companies. (See OSFI Looks to Insurers to Establish Their Own Target Capital Ratios.)
In addition to the regulation of financial institutions, Canadian regulators took a number of important steps on the securities enforcement front. Several MOUs were entered into by provincial securities commissions to facilitate the sharing of information regarding compliance and enforcement matters. The Ontario Securities Commission agreed to work with the Financial Industry Regulatory Authority (FINRA), while several commissions committed to cooperating with the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA).
Another significant development on the securities regulatory front was the issuance by the Ontario Securities Commission (OSC) of a proposal to enhance the Commission’s enforcement regime. The most significant aspect of this initiative is the recommendation that the OSC adopt “no-enforcement action” agreements and a “no-contest settlement” program, similar to that utilized by the Securities and Exchange Commission (SEC).
The year also proved notable due to one of the few prosecutions to date under Canada’s foreign bribery legislation – the Corruption of Foreign Public Officials Act. Calgary’s Niko Resources entered a guilty plea in connection with allegations of improper payments to the former Energy Minister of Bangladesh, and was fined $9.5 million. The company was also placed under a probation order which imposes court supervised compliance audits for the next three years. (See Canada’s Anti-Bribery Cops Reel One In.)
2011 saw a decisive uptick in regulations in the UK with the arrival of major UK legislation in the form of the Bribery Act and new Takeover Code provisions as well as more international changes such as MiFID II and Basel III. Breaking break fees and shedding new light on the financing of M&A deals, UK Takeover Code changes made a pronounced move to change the M&A regulatory landscape even if those changes might make takeovers more difficult to get off the ground. Motivated by the fallout from Cadbury’s hostile takeover by Kraft, it was a strong move to rebalance the public M&A in favour of target companies.
The Bribery Act also made waves, partly due to its extra-territorial effect and its denial of facilitation payments –something that remains to be possible under U.S. regulations. By far the greatest discussion though was over uncertainty concerning hospitality payments and free tickets to leading sporting events. Concerned that business might be prevented from attending Six Nation rugby matches, the Grand Prix or Wimbledon, guidance was significantly softened to permit all but the most lavish events. Also unclear was whether a UK listing did or did not mean that a company was caught by the Bribery Act provisions. Initially excluded in guidance, the government appeared to flip flop between taking a tough stance on international companies to suggesting that UK remained an attractive place to list. (See UK Bribery Act Guidance: Freeing Foreign Companies.)
Many within the financial services were also miffed at MiFID (II) and its potential impact on high frequency trading and over-the-counter derivatives. It also marked the renewed vigour with which the EU threatened to regulate UK markets with a Tobin Tax and regulations of ratings agencies also hotly debated. Sadly for reformists, the changes fell with the category of proposed but yet to be implemented alongside Basel III and a ring fencing of UK banks. (See Financial Services Miffed at EU’s Markets in Financial Instruments Directive II.)
2011 was a year of interactive lawmaking for mainland China. Regulators in the PRC have been more active on the international stage this year, becoming more involved with watchdogs in other jurisdictions such as the United States on matters of accounting and disclosure of financial information of listed companies.
Most notable has been discussions of cooperative enforcement efforts between the China Securities Regulatory Commission (CSRS) and the United States Securities Exchange Commission and the Public Companies Accounting Oversight Board. A string of fraud allegations involving U.S.-listed Chinese companies, many of which entered U.S. exchanges through reverse mergers, has unearthed numerous regulatory loopholes in the cross-border enforcement of securities law against U.S. issuers that carry on business in the PRC using variable interest entities (VIEs). (See China Variable Interest Entities: questionable illegality not so questionable anymore.)
This past year, the CSRC also signaled its intentions to crack down on the VIE structure, a move that could prove fatal for foreign businesses. At the start of the year, Buddha Steelwithdrew its application for a U.S. initial public offering, after Chinese regulators had determined that the company’s VIE structure violated PRC foreign investment rules and had asked it to restructure, essentially removing the subsidiary that held all of the company’s assets, licenses and operations, its VIE. The CSRC has indicated that it may continue examining VIE-related regulatory issues into 2012, following the publication of an informal report calling for formal regulation of VIEs in September.
2011 saw regulators in the PRC embarking on multiple legislative initiatives that potentially have far-reaching implications for foreign investment, mainly in the fields of M&A and antitrust laws. Following the establishment of a new foreign investment M&A review committee, China’s Ministry of Commerce (MOFCOM) finalized legislative guidelines for the national security review process for foreign acquisitions of domestic Chinese enterprises in September. (See M&A: China lays down law on foreign investment.)
MOFCOM has continued to demonstrate an interest in the competitive effects of international M&A activity on the domestic Chinese market this year. In June, the regulator granted conditional approval to the Uralkali/Silvinit potash merger, imposing detailed specifications on the merged entity’s supply and pricing practices for Chinese customers. Other deals that were recently approved include PepsiCo’s sale of its soft drink bottles to Tingyi Holdings, a bottled tea beverage company in Hong Kong.
In August, Chinese regulators imposed a requirement on online service providers to obtain a Payment Service Permit in order to operate legally in China. The new regulation raised concerns that foreign-invested entities may not be able to obtain a permit, allegedly prompting Alibaba, an e-commerce company partially owned by Yahoo Inc, to transfer its subsidiary Alipay to Chinese ownership. (For more information on the “Measures for the Administration of Payment Services of Non-Financial Institutions,” see Yahoo-Alibaba: financial regulation drives Alipay away.)
On other fronts, watchdogs have remained active in fine-tuning regulation governing intellectual property and internet commerce, amongst other sectors. In November, the State Council commenced a public consultation study for the third revision of the Trademark Law of the People’s Republic of China. Focal points include efforts to combat intellectual property theft, such as improving IP owners’ rights against bad faith registrations.
Over the course of this year, Hong Kong has further strengthened its status as an offshore renminbi hub. Following a visit by China’s Vice Premier, Li Keqiang, 36 regulatory measures were formed to amend the existing legal framework governing yuan-denominated trade and financial transactions between Hong Kong and mainland China. (See RMB Internationalization takes off in Hong Kong.)
Also on financial regulation, the Hong Kong government announced the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance in early July and will be enacted in April 2012. Building on Hong Kong’s current anti-money laundering regime, the new regulation imposes record-keeping and customer due diligence requirements on financial institutions.
In June, Hong Kong enacted a new Arbitration Ordinance. The new legislation follows a similar structure as the Model Law, aligning Hong Kong more closely with UNCITRAL procedures. The new Arbitration Ordinance aims to promote speedier resolution of disputes and provides for minimal court intervention.
Part of an ongoing effort to strengthen national regulation of financial markets, the Australian Securities and Investments Commission published a series of guidelines and regulations this year pertaining to the disclosure of material information in prospectuses of listed companies.
In early December, the Australian parliament passed the proposed Minerals Resource Rent Tax (MRRT), which is expected to pass through the Senate in early 2012, paving the way to a subsequent enactment. The MRRT, which will be levied on 30 percent of the profits made by iron ore and coal mining companies in Australia which generate annual profits of more than A$75 million (US$76.3 million) has been extremely unpopular with domestic as well as international mining companies of all sizes. (See Anger over Australian “super-tax” echoes through mines and beyond.)
Written with contributions from Helen Chan, Chris Elias and John Mackie.
(This article was first published by Thomson Reuters’ Business Law Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Business Law Currents online at http://currents.westlawbusiness.com. )