I attended the ABA Annual Meeting earlier this month, and at the Federal Regulation of Securities Committee’s “Dialogue with the Director” session, new Corp Fin Director Meredith Cross, along with Deputy Director Brian Breheny, outlined Corp Fin’s agenda. In addition to reviewing comment letters and coming up with recommendations on already proposed rules, the Staff is working on rulemaking initiatives that include:
- Expanding Schedule 13D/G reporting to cover short positions. The Staff is also considering changes to the beneficial ownership rules for purposes of 13D/G reporting;
- Liberalizing shareholder communications to permit distribution of educational materials to shareholders regarding the proxy voting process, without the materials being deemed a proxy solicitation. The Staff is proposing to conduct a study regarding shareholder communications and will announce the results;
- Amending credit rating agency rules to address conflicts of interest;
- Improving asset-backed securities registration and disclosure; and
- Amending Rule 163 (communications by WKSIs).
The Staff is also:
- Keeping track of legislation in Congress to enable them to gear up to quickly to propose any rulemaking mandated by legislation;
- Continuing its review of the proposed Regulation D amendments;
- Discussing Section 5/short selling issues with General Counsel David Becker to determine how to move forward; and
- Conducting a “Core Disclosure” review project for the purpose of reviewing all disclosure rules to ensure that the disclosure is “right” rather than just “more.”
The Staff is in the process of reviewing how the work of Corp Fin is being done and whether any improvements can be made, including in the area of maintaining and expanding transparency. The Staff has been improving the efficiency of such things as responding to no-action and waiver requests. Further, it was announced that a new products team has been established, headed up by Tom Kim and Paul Belvin. This team will coordinate the review of new financial products in the Division, including reviewing new products on a pre-filing basis.
FINRA Announces Amendments to Conflicts of Interest Rules
A few months ago, I noted in the blog that the SEC had approved changes to NASD Rule 2720, which deals with underwriter conflicts of interest. Last week, FINRA issued Regulatory Notice 09-49, so the rules will now go into effect on September 14, 2009. The FINRA Regulatory Notice includes some clarifications of the rule. It should be noted for upcoming offerings that, in addition to the procedural safeguards contemplated in the amended rule, more prominent disclosure of conflicts of interest will be required in offering documents. In the Regulatory Notice, FINRA notes that, with respect to a takedown from a shelf registration statement that became effective prior to September 14, the disclosure requirements of the amended rule will apply to any post-effective amendment or prospectus supplement filed on or after September 14.
SEC and FINRA Issue Alert Regarding Leveraged and Inverse ETFs
It is certainly not surprising, given the increased focus on the risks arising from financial products, that the SEC and FINRA are now singling out particular products and highlighting their risks for investors. With the prospect of something along the lines of a financial product safety commission hanging out there to potentially infringe on its authority, I suspect that the SEC in particular wants to be proactive in addressing what could be the next big blow-up.
Earlier this week, the SEC and FINRA issued an Alert highlighting the perils of investing in leveraged and inverse exchange traded funds. In the Alert, the agencies note “[i]nvestors should be aware that performance of these ETFs over a period longer than one day can differ significantly from their stated daily performance objectives.” According to the Alert, inverse ETFs (also called “short” funds) are designed to provide the opposite of the performance of the index or benchmark that they track, which may be a broad market or sector specific index. Leveraged inverse ETFs (also known as “ultra short” funds) seek to achieve a return that is a multiple of the inverse performance of the underlying index.
These are clearly instruments which have a very specific purpose that is probably inconsistent with the type of investing strategy pursued by anyone who needs an SEC/FINRA reminder on the potential dangers of the product. Whether warnings like this one do any good in discouraging people from getting in over their heads – under what is essentially a “caveat emptor” system – is a big question that will be considered as the debate over the regulatory reform landscape continues.
– Dave Lynn