August 7, 2009

The SEC’s “Holy Cow” Moment: Judge May Overturn BofA’s Settlement over Merrill Lynch Bonuses

As I head out for a two-week email-free vacation (got some blogs tee’d up for next week and Dave will be manning the ship), I have to admit surprise by Judge Jed Rakoff’s decision to not approve this week’s settlement between the SEC and Bank of America over allegations of misleading proxy materials because the bonus obligations due to Merrill Lynch employees were not fully disclosed.

BofA had agreed to pay a $33 million fine, which I suggested recently was on the high side for a non-scienter violation. Personally, I thought the SEC was trying a new approach and acting fast – as bringing charges against individuals will take considerably longer. Take my poll below to express what you think.

According to this Reuters article, the Judge’s order states: “Despite the public importance of this case, the proposed consent judgment would leave uncertain the truth of the very serious allegations made in the complaint.” The order is linked from this “WSJ Law Blog.” Judge Rakoff will hold a hearing on the case on Monday in his US District Court, Southern District of New York.

FINRA Proposes New Fixed Priced Offering Rule

On Tuesday, FINRA proposed new Rule 5141 “Sale of Securities in a Fixed Price Offering,” which would eliminate NASD Rules 2730, 2740 and 2750. Under the proposal, the definition of “fixed price offering” would build on the existing definition with minor changes and would continue to make clear that an offering can have more than one stated fixed price (e.g., volume discounts and sales net of commissions to the issuer’s employees).The comment period expires on September 18th.

Proposed Rule 5141 would:

1. Incorporate the standards of Rule 2740 by prohibiting a broker-dealer that participates in a fixed price offering selling syndicate from offering securities to any person that is not a member of such selling syndicate at a price below the stated public offering price (known as the “reduced price”), with an exception to permit sales to a person to which the broker has or will provide research (provided that the purchaser pays the stated public offering price and the research falls within Section 28(e)3)(A) of the ’34 Act;

2. Incorporate the standards of Rule 2730 by defining a “reduced price” to include any purchase of – or arrangement to – purchase securities from a person at more than the fair market price in exchange for securities in the offering; and

3. Modify the prohibition in Rule 2750 on sales to “related persons,” by permitting a member of the selling syndicate to sell securities to an affiliate, subject to compliance with FINRA Rule 5130 (ie. IPOs) and that any other transactions between the broker and the affiliate unrelated to the sale or purchase of securities in a fixed price offering are part of the normal and ordinary course of business (i.e., thereby avoiding the recapture of the selling concession through the affiliate as intended to be prevented by the existing rule).

On Wednesday, FINRA withdrew its ’04 proposal that would have clarified the application of then-Rule 2710 to shelf offerings. Note that the ‘04 proposal remains useful as a resource regarding the standards for the current Form S-3/F-3 shelf offering exemptions and the views of the FINRA Staff on the calculation of underwriting compensation for such offerings.

FINRA Officially Creates the “Limited Representative – Investment Banking”

Back in April, I blogged about the SEC approving FINRA’s rule change that creates a new limited representative category – Limited Representative-Investment Banking – for persons whose activities are limited to investment banking, including those who work on the equity and debt capital markets and syndicate desks. On Wednesday, FINRA issued this regulatory notice creating the mandatory registration regime – effective November 2nd – and the SEC issued this order.

Poll: The SEC and Bank of America Settlement

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– Broc Romanek