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December 6, 2016

IPOs: No Action Blessing for “Conditional Offers to Buy”

Corp Fin recently issued a no-action letter to Morgan Stanley regarding the use of “conditional offers to buy” – or “COBs” – in connection with IPOs. COBs are intended to facilitate sales to retail investors by providing a way for them to commit to a deal without having to be available to their financial advisors during the period between pricing and the commencement of trading. This Cydney Posner blog reviews the mechanics of the COB process laid out in Morgan Stanley’s request.

COBs are not a new idea – and have been sanctioned in concept by Corp Fin since at least 1999’s Wit Capital no-action letter. What’s interesting about Morgan Stanley’s letter is that it lays out detailed procedures that are to be followed in using COBs as part of the offering process. The desire to obtain some comfort on those procedures may reflect Morgan Stanley’s past regulatory issues in this area – the bank was fined $5 million by FINRA in 2013 for shortcomings in its IPO procedures applicable to conditional offers & indications of interest.

Whistleblowers: SEC’s 2016 Annual Report

In the wake of its latest 8 figure whistleblower award, the SEC published its 2016 Annual Report to Congress addressing the whistleblower program. Kevin LaCroix at The D&O Diary recently blogged the highlights. These include:

65% of the award recipients were insiders of the entity on which they reported information of wrongdoing to the SEC. Of these insiders, approximately 80% raise their concerns internally or understood that their supervisor or compliance personnel were aware of the violations, before reporting the information to the SEC.

From FY 2012, the first full fiscal year the program was in operation, to FY 2016, the number of whistleblower tips has increased by more than 40 percent. Since the program incepted in August 2011, the agency has received a total of 18, 334 whistleblower tips. In FY 2016, the agency received 4,218, representing an increase of 295 over FY 2015, an increase of 7.5%.

What are the most common categories of whistleblower complaints? During fiscal 2016, corporate disclosures & financials led the pack (22%), followed by offering fraud (15%) and manipulation (11%). The type of violation reported has remained generally consistent over the past five years.

This blog from Keith Bishop directs some pointed criticism at the secretive nature of the whistleblower program.

Whistleblowing: What Does the Future Hold?

This blog from Dorsey & Whitney’s Brynn Vaaler speculates about the future of the SEC’s whistleblower program under the Trump Administration. While it’s too early to know what changes may be in store, some form of the program will likely survive:

Although the current whistleblower program has been criticized by conservative groups such as the U.S. Chamber of Commerce (in part because it does not require whistleblowers to give notice to their employer at the same time they give it to authorities), the program has relatively broad bi-partisan support and has given rise to a cottage industry of law firms specializing in representing whistleblowers.

Whistleblowing supporters include Rep. Jeb Hensarling (R-Texas), chair of the House Financial Services Committee and chief proponent of legislation that would unwind most of Dodd-Frank. Hensarling’s Financial Choice Act – which as Broc recently noted, could profoundly affect the SEC’s ability to adopt regulations – does not touch the existing legislative structure for SEC whistleblower awards. Similarly, although the Trump transition website calls for dismantling Dodd-Frank, it is silent on whistleblowing. As a result, the speculation is that whatever happens to Dodd-Frank, the SEC’s whistleblower program will survive in some form.

John Jenkins