April 26, 2010

FINRA Provides Due Diligence Guidance for Regulation D Offerings

Last week, FINRA issued Regulatory Notice 10-22 to provide guidance to broker-dealers regarding the conduct of due diligence in Regulation D private placements. As noted in this press release, the Notice reminds broker-dealers of their obligation to conduct a reasonable investigation of the issuer and the securities they recommend in offerings – and the Notice highlights three recent enforcement actions involving private placements. In fact, this guidance may very well have been issued as a result of those actions, particularly SEC v. Tambone (1st Cir.; 3/10/10).

In 12 pages, the Notice describes specific issues that relate to a broker-dealer’s due diligence investigation responsibilities (e.g., b-d’s affiliation with the issuer) and describes practices that have been adopted by some broker-dealers to discharge their due diligence obligations. The Notice includes a recommendation that a broker-dealer should retain records documenting the diligence process – and provides a detailed list of recommended diligence practices while pointing out that “reliance upon a single checklist may result in an inadequate investigation.”

Banks Getting Grilled: California and Credit Default Swaps

Here is news from Keith Bishop of Allen Matkins:

A few weeks ago – before the SEC’s action against Goldman Sachs – the California Treasurer sent letters to six major underwriters of California’s state bonds asking a series of questions about credit default swap trading related to California bonds. The key question was: “Describe, in your view, how State of California CDS trading, in recent years, has affected the State, its bond sales and the borrowing costs paid by taxpayers.” Last week, the Treasurer posted the responses of all six banks.

I think that Goldman Sach’s response concerning the impact of CDS trading is typical: “We believe that CDS trading has had little or no effect on California’s borrowing costs. The State’s credit, budget and debt management (and not CDS prices) are the primary drivers of the State’s borrowing costs.”

Smaller Company M&A: The Latest Developments

Tune in tomorrow for the webcast – “Smaller Company M&A: The Latest Developments” – to hear Diane Holt Frankle of DLA Piper, Mark Filippell of Western Reserve Partners, John Jenkins of Calfee, Halter & Griswold and Bob Kuhns of Dorsey & Whitney discuss all you need to know about doing private and public deals when smaller companies are either the acquirer or the acquiree.

– Broc Romanek