Below are some interesting thoughts from Vince Pisano of Troutman Sanders:
The combination of economic pressures and the competitive environment among law firms in the capital markets arena may be creating an atmosphere which is going to cause problems for firms in the near future. Item 509 of Regulation S-K requires disclosure in a registration statement of the interest in the issuer of issuer’s counsel or underwriters’ counsel who are identified in the prospectus as having given an opinion in connection with the offering. It also requires disclosure if such counsel were retained for that purpose on a contingent basis. The reason is obvious – if counsel is to be paid only if the offering is successful, it could influence the judgment of the lawyers on matters which may have a negative impact on the offering.
Law firms have always been good about identifying stock ownership of lawyers in the firm who hold securities in the registrant, but I believe that market pressures on fees have resulted in situations where disclosure should arguably be made as to those fee arrangements, as they may be deemed to be contingent interests. Stories abound in certain markets, particularly in Asia, that major law firms in pitching for new business are agreeing that no fee will be paid unless an offering closes. Fee pressures have also caused many firms to agree to major busted-fee write offs – and, in fact, those agreements have long been the norm for underwriters’ counsel.
I have never seen a prospectus that discloses these agreements – and in fact, I have never even participated in a conversation about whether that kind of disclosure is required or appropriate. In an age when law firms’ exposure to litigation are greater than ever, it may be time to give more thought to and discussion of this problem. The pressure on individual partners to avoid large write-offs has not been greater at any time in the last 30 years and very significant amounts may be at stake.
FINRA Re-Proposes to Require Filing of Private Placements
From Suzanne Rothwell: As part of FINRA’s continuing focus on sales by FINRA members of private placements, FINRA recently filed a proposal with the SEC to adopt new Rule 5123 that would require the filing of any private placement – in which a FINRA member or associated person participates – subject to certain exemptions, and require disclosure of the use of proceeds, offering expenses and offering compensation. Currently, FINRA Rule 5122 imposes similar requirements on FINRA members for private placements by the member of its own securities or those of a control entity. That rule would remain unchanged.
In comparison to the original proposal published by FINRA in Regulatory Notice 11-04, proposed Rule 5123 would:
1. Be in a rule separate from Rule 5122;
2. Not require that at least 85% of the offering proceeds be used for the disclosed business purposes;
3. Not require disclosure of any affiliation between the issuer and any participating FINRA member;
4. Narrow the application of the rule to only apply if a FINRA member offers or sells the security or participates in the preparation of any offering or disclosure document (thereby excluding offerings where members solely provide consulting services to the issuer, among other activities);
5. Require filing of the private placement disclosure document with FINRA consistent with the timing for SEC Form D of Regulation D instead of being required at the time the document is first provided to any prospective investor; and
6. Impose the filing requirement on each participating FINRA member instead of allowing members to rely on a filing by a managing member.
The new Rule – Rule 5123 – will prohibit member firms and their associated persons from being involved in a private placement unless certain written information about the deal is provided to investors and filed with FINRA. Each member firm or person associated the firm will be required to deliver a private placement memo, term sheet or other disclosure document to each investor prior to any sale, and file the document, together with any exhibits, with FINRA within 15 days after the first sale. The document must describe “the anticipated use of offering proceeds, the amount and type of offering expenses, and the amount and type of compensation provided or to be provided to sponsors, finders, consultants, and members and their associated persons in connection with the offering.” FINRA expects each firm involved in a private placement to make its own filing; thus, there will be multiple filings for any offering where more than one FINRA member firm is involved.
The proposal no longer has certain of the problematic aspects contained in FINRA’s earlier proposal, such as a prohibition on participating in private placements where less than 85% of the offering proceeds are used for the business purposes described in the disclosure document, and an implied requirement to monitor the post-offering use of proceeds. Nevertheless, FINRA intends to reconsider numerical limitations on the use of proceeds depending on the substantive terms of private placements described in the initial filings under Rule 5123.
SEC Proposes Volcker Rule and Swap Dealer Registration
Yesterday, at an open Commission meeting, the SEC proposed rules regarding proprietary trading and swap dealer registration. The SEC’s action on the Volcker Rule follows proposals made by the banking regulators on Tuesday, as covered nicely in this Davis Polk 82-page presentation – also see this 32-page presentation from Davis Polk regarding how the Volcker Rule proposal impacts hedge funds and private equity firms. Here’s the swap registration proposal – and the proprietary trading proposal.
– Broc Romanek