May 27, 2008

The Rise of the Small Entity Compliance Guide

It is now obvious that the Staff has been very busy drafting “Small Entity Compliance Guides” under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996. While the requirement to prepare these guides has been in place since SBREFA was originally enacted 12 years ago, the Staff’s efforts on this front seem to have gotten a boost from the enactment of the Fair Minimum Wage Act of 2007, which requires that: (1) the guides be posted on agency websites; (2) they be made available at the same time a rule becomes effective; and (3) they include an explanation of actions a small business must take to comply with the rule. The Fair Minimum Wage Act also requires each federal agency head to report to Congress annually on the status of their agency’s compliance with revised requirements for making the compliance guides available to small businesses. The requirement to prepare a small entity compliance guide is triggered whenever the SEC prepares a Final Regulatory Flexibility Analysis under SBREFA as part of its rulemaking, which is usually found in the “back-end” of the adopting release that folks often skip over.

Each guide makes clear that it is intended to summarize and explain the rules, but should not be looked at as a substitute for the rule itself. Interestingly, SBREFA gave the small entity compliance guide a special status from a litigation perspective. The Act provides that “[a]n agency’s small entity compliance guide shall not be subject to judicial review, except that in any civil or administrative action against a small entity for a violation occurring after the effective date of this section, the content of the small entity compliance guide may be considered as evidence of the reasonableness or appropriateness of any proposed fines, penalties or damages.” For this reason alone, it is probably a good idea to know what these guides say.

Last week, Corp Fin posted a new compliance guide regarding e-proxy, which includes a handy chart comparing key differences between the notice only and full set delivery options. The compliance guide phenomenon is not just limited to Corp Fin, however – the Division of Trading and Markets also recently posted a new page collecting some of its compliance guides that meet the SBREFA requirements.

While these guides don’t include any new interpretive guidance, as I noted in the blog earlier this year, they can serve as a useful resource if you are looking for a quick overview of the rules, or something written in plain English that you can refer to in order to easily explain the rules to clients or others. One guide that I have always found particularly useful (although I don’t think it started out life as a small entity compliance guide) is the Division of Trading and Markets’ Guide to Broker-Dealer Registration, which was last updated in April 2008.

Controlling Person Liability: Joint and Several, Proportional or Both?

Recently, the Eleventh Circuit decided a case of first impression on the issue of whether – following enactment of the Private Securities Litigation Reform Act of 1995 – a controlling person is jointly and severally liable as specified in Exchange Act Section 20(a), or rather is subject to the proportionate liability scheme of Exchange Act Section 21(D)(f) (which was added by the PSLRA). In LaPerriere v. Vesta Insurance Group, Inc. (11th Cir.; Apr. 30, 2008), the Eleventh Circuit reversed the District Court’s conclusion that the proportionate liability regime set out in Section 21(D)(f) “trumps” Section 20(a). Instead, the Eleventh Circuit stated “[r]ecognizing that implicit repeals of statutory provisions are disfavored, we hold that section 21(D)(f) and section 20(a) should be read in harmony to preserve both the PSLRA’s proportionate liability scheme and a controlling person’s derivative liability under section 20(a).”

The court essentially set forth a two-part test in seeking to reconcile the two statutory provisions. In this regard, the court stated:

“Section 21(D)(f) is not superfluous, however. It does have a role to play. As the Conference Committee Report also explained, while the PSLRA did not modify ‘in any manner’ the standard of liability under the securities laws, including section 20(a), it did change the rules for allocating damages among the parties once liability has been established by the fact finder. Before the PSLRA was enacted, if one of those parties was found liable as a controlling person of violating section 20(a), it would have been responsible jointly and severally for the damages to the same extent as the primary violator. Under the proportionate liability provisions of the PSLRA, if a party is found liable as a controlling person under section 20(a), there is a new standard for allocating damages. What has changed is not the standard of liability that applies to controlling persons – the ‘Applicability’ provision states that has not been modified ‘in any manner’ – but their responsibility as liable persons for the damages. The proportionate liability provisions of section 21(D)(f) are applicable only after liability is determined, and liability is governed by the standard set out in section 20(a).”

For more on this decision, check out our “Securities Litigation” Practice Area.

May-June Issue: Deal Lawyers Print Newsletter

This May-June issue includes articles on:

– M&A Targets Today: Seeking Deal Certainty in an Uncertain Environment
– How to Negotiate an M&A Engagement Letter with Your Investment Banker
– Structuring Portfolio Companies: Director Independence
– Ten Practice Tips for Negotiating the Letter of Intent
– How to Do a Deal Without Shareholder Approval: The “Financial Viability Exception”
– A Moment of Clarity: How to Avoid Ambiguities in Your Advance Notice Bylaws

Try a no-risk trial to get a non-blurred version of this issue for free.

– Dave Lynn