Q3 & Q2 2018 U.S. Legal and Regulatory Developments

Q3 2018 U.S. Legal & Regulatory Developments

1. President Trump Signs CFIUS Reform Legislation

President Trump signed the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (“FY 2019 NDAA”) (H.R. 5515) into law on August 13, 2018.  One subtitle of the FY 2019 NDAA, entitled the “Foreign Investment Risk Review Modernization Act of 2018” (“FIRRMA”), reforms the current interagency process for reviewing foreign investments that raise national security issues. After a lengthy House-Senate conference to resolve differences between the versions of the legislation that had passed the House of Representatives in May and the Senate in June, the House passed the compromise version of the FY 2019 NDAA on July 26 and the Senate did likewise on August 1. While many of the provisions of FIRRMA will not take effect until the earlier of 30 days following the publication of final regulations in the Federal Register or February 13, 2020, the legislation authorizes the creation of pilot programs to implement provisions of FIRRMA that did not become effective immediately upon enactment.  On October 10, 2018, the Treasury Department issued interim regulations creating the first of such pilot programs, which will take effect on November 10, 2018, along with a second set of regulations making technical amendments to the existing Committee on Foreign Investment in the United States (“CFIUS”) regulations to reflect both the pilot program and the changes brought about by FIRRMA (which went into effect on October 11, 2018).  The pilot program will end on the earlier of (i) the day on which the Treasury Department issues regulations fully implementing FIRRMA or (ii) March 5, 2020.

When fully implemented, FIRRMA will cause fundamental changes in the foreign investment review process overseen by CFIUS, including the broadest expansion in CFIUS jurisdiction since this interagency committee was reconstituted in 1988. In particular, FIRRMA will expand the range of transactions subject to CFIUS jurisdiction to include certain investments in areas related to critical infrastructure, critical technologies and national security-sensitive data collection. Further, FIRMMA will require mandatory filings with CFIUS for any transaction where a U.S. business (dealing in the areas listed above) is acquired by a foreign person in which a foreign government has, directly or indirectly, a “substantial interest.”  Under the initial pilot program, CFIUS will (i) exercise jurisdiction over certain non-controlling, non-passive foreign investments in U.S. businesses that involve critical technology and certain industry sectors and (ii) introduce the mandatory CFIUS filing requirement with respect to foreign acquisitions of control over, as well as certain non-controlling, non-passive foreign investments in, U.S. businesses that involve critical technology in certain industry sectors.

For the full text of our memorandum regarding FIRRMA, please see:
https://www.paulweiss.com/media/3977953/13aug18-cfius-reform.pdf

For the full text of our memorandum regarding the initial pilot program, please see:
https://www.paulweiss.com/media/3978244/26oct18-cfius-pilot.pdf

2. SEC Proposes Simplified Disclosure Requirements for Guaranteed and Secured Notes in Registered Offerings

On July 24, 2018, the Securities and Exchange Commission (“SEC”) proposed rules amending and simplifying the financial disclosure requirements of Rule 3-10 of Regulation S-X for guarantors and issuers of guaranteed securities registered with the SEC and of Rule 3-16 of Regulation S-X for affiliates whose securities collateralize registered securities. The proposed rules are intended to focus disclosures in the context of registered debt offerings on material information, make the disclosures easier to understand, reduce the cost of compliance and encourage potential issuers to offer guaranteed or collateralized securities on a registered basis or on a private basis with registration rights, thereby affording investors protections they may not be provided in “Rule 144A-for-life” offerings.

If adopted, the proposed rules would amend a portion of Rule 3-10, and relocate part of Rule 3-10 and all of Rule 3-16 to new Article 13 of Regulation S-X.

For the full text of our memorandum, please see:
https://www.paulweiss.com/media/3977950/6aug18-sec.pdf

For the SEC’s announcement of the proposed rule, please see:
https://www.sec.gov/rules/proposed/2018/33-10526.pdf 

3. CFTC Issues Largest Ever Whistleblower Award and First Award to a Foreign Whistleblower

On July 12 and 16, 2018, respectively, the Commodity Futures Trading Commission (“CFTC”) announced two landmark awards to whistleblowers. The first was an award of approximately $30 million, by far the CFTC’s largest award to a whistleblower since its Whistleblower Program was created in 2010. The second, of approximately $70,000, was the CFTC’s first award to a whistleblower living in a foreign country.  As underscored by recent statements by senior CFTC officials, these awards highlight the CFTC’s continued emphasis on the role of the Whistleblower Program in fulfilling its regulatory mission.

For the full text of our memorandum, please see:
https://www.paulweiss.com/media/3977946/30jul18-cftc.pdf

For the CFTC press release, please see:
https://www.cftc.gov/PressRoom/PressReleases/7767-18

4. SEC Adopts Updates to Rationalize Disclosure Requirements

On August 17, 2018, the SEC adopted amendments to certain of its disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded, in light of other SEC disclosure requirements, U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), International Financial Reporting Standards (“IFRS”) and changes in the information environment. The SEC also adopted amendments to certain disclosure requirements that overlap with, but require information incremental to, U.S. GAAP, and referred other disclosure requirements to the Financial Accounting Standards Board for potential incorporation into U.S. GAAP.

The amendments are an effort to streamline the SEC’s disclosure requirements and do not significantly alter the total mix of information currently provided to investors or otherwise implement the substantive revisions to Regulation S-K discussed in the SEC’s April 2016 concept release, “Report on Review of Disclosure Requirements in Regulation S-K.” The amendments are a result of the SEC’s Disclosure Effectiveness Initiative, a comprehensive evaluation of the SEC’s disclosure requirements with the objective of improving the disclosure regime for both investors and companies, and also implement a requirement under the Fixing America’s Surface Transportation Act that the SEC eliminate provisions of Regulation S-K that are duplicative, overlapping, outdated or unnecessary.

In several cases, the amendments will result in the relocation of disclosures within a filing—often from the non-financial portion of the filing to the financial statements—potentially changing the prominence or context of both the relocated disclosures and the remaining disclosures. Certain amendments will replace existing rules that have bright line disclosure thresholds with rules that do not, potentially changing the disclosure provided to investors.

Disclosure moved into the financial statements as a result of the amendments will be subject to an annual audit or interim review by the issuer’s auditors and to internal control over financial reporting, together with eXtensible Business Reporting Language (“XBRL”) tagging requirements. Consequently, such disclosure will no longer benefit from the safe harbor protections of the Private Securities Litigation Reform Act (“PSLRA”) for forward-looking statements, which may cause companies to be less likely to voluntarily supplement those disclosures with forward-looking information. The converse is also true, and information moved from the financial statements to the text of a registration statement or report will not be subject to annual audit or interim review by the issuer’s auditors and to internal control over financial reporting, together with XBRL tagging requirements, and will benefit from the PSLRA safe harbor. 

The amended disclosure requirements are generally technical in nature and will be effective 30 days after publication in the Federal Register. Companies, together with their outside auditors, should carefully consider the new disclosure requirements in connection with the preparation of periodic reports and registration statements anticipated to be filed on or after that date.

For the full text of our memorandum, please see:
https://www.paulweiss.com/media/3977986/4sept18-sec.pdf

For the full text of the adopted final rules, please see:
https://www.sec.gov/rules/final/2018/33-10532.pdf

5. SEC Requires Inline XBRL in Certain Filings

On June 28, 2018, the SEC voted to adopt amendments, initially proposed in March 2017, to XBRL requirements for operating companies and funds. The amendments require the use of the Inline XBRL format for the submission of operating company financial statement information and fund risk/return summary information. Inline XBRL, currently used voluntarily by a number of operating company filers, involves embedding XBRL data directly into a filing so that the disclosure document is both human-readable and machine-readable, eliminating the need to tag a copy of the information in a separate XBRL exhibit.  While the amendments modify existing XBRL requirements, they do not change the categories of filers or scope of disclosures subject to XBRL requirements.

The new Inline XBRL requirements apply to all operating companies, including emerging growth companies, smaller reporting companies and foreign private issuers that provide their financial statements in accordance with U.S. GAAP or IFRS as issued by the International Accounting Standards Board. Issuers using U.S. GAAP will be required to comply with the new Inline XBRL requirements beginning with fiscal periods ending on or after June 15, 2019 for large accelerated filers, and for fiscal periods ending on or after June 15, 2020 for accelerated filers. All other issuers, including foreign private issuers, must comply with the new Inline XBRL requirements beginning with fiscal periods ending on or after June 15, 2021.

Concurrently with the adoption of the new Inline XBRL requirements, the SEC also adopted several other final rules and rule proposals, including the adoption of final rules that broaden the definition of “smaller reporting company.”

For the full text of our memorandum, please see:
https://www.paulweiss.com/media/3977908/05july18-sec.pdf

For the SEC’s new Inline XBRL Requirements, please see:
https://www.sec.gov/rules/final/2018/33-10514.pdf

For the SEC’s new definition of “Smaller Reporting Company,” please see:
https://www.sec.gov/rules/final/2018/33-10513.pdf

Q2 2018 U.S. Legal & Regulatory Developments

1. Second Circuit Confirms that Statements of Opinion Need Not Be Accompanied by Disclosure of All Underlying Conflicting Information

On May 1, 2018, in Martin v. Quartermain, No. 17-2135 (2d Cir. May 1, 2018), the Second Circuit reiterated that plaintiffs must overcome a high bar to plead an actionable misstatement of opinion under Section 10(b) of the Securities Exchange Act of 1934. When an issuer’s opinion is honestly held and the issuer has a reasonable basis for its belief, disclosure of underlying conflicting information is not required—“even when the ‘fact’ cutting the other way is the contrary opinion of an expert or authority.” The decision is the second time that the Second Circuit has meaningfully discussed the Supreme Court’s 2015 decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund.  The Second Circuit’s decision in Martin reaffirmed its prior holding in Tongue v. Sanofi that Omnicare provides broad protections for speakers with a good-faith basis underlying their estimates, projections, or opinions.

For the full text of our memorandum, please see:
https://www.paulweiss.com/media/3977757/3may18-pretium.pdf

2. President Signs Dodd-Frank Reform Legislation

On May 24, 2018, following passage in both the House and Senate earlier this year, President Trump signed into law a financial services reform bill relaxing certain elements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”). The bill, titled the “Economic Growth, Regulatory Relief, and Consumer Protection Act” (the “Act”), limits the application of various provisions of Dodd-Frank with respect to small and mid-sized banks and raises asset thresholds above which larger banks are subject to increased oversight and regulation. The Act also amends certain other provisions of the federal securities laws.  Unlike earlier proposed legislation seeking a comprehensive re-working of Dodd-Frank, such as the Financial CHOICE Act (see our memorandum on the proposed legislation linked below), the Act preserves the basic structure of Dodd-Frank while making various targeted adjustments.

For the full text of our memorandum, please see:
https://www.paulweiss.com/media/3977813/31may18sec.pdf

For our memorandum on the proposed CHOICE Act, please see:
https://www.paulweiss.com/media/3977148/12june17-choice.pdf

3. Yahoo! Agrees to $35 Million SEC Penalty for Failure to Disclose Cyber Incident

On April 24, 2018, the SEC announced that Altaba, the company formerly known as Yahoo! Inc., agreed to pay a $35 million penalty as part of a cease-and-desist order to settle charges that it misled investors by failing to disclose a significant data breach in which hackers stole personal data relating to hundreds of millions of Yahoo! accounts in 2014. This was the first fine issued by the SEC based on allegations that investors were misled by a company’s failure to disclose a cyberattack and it highlights the SEC’s increasing focus on cybersecurity issues and related disclosure obligations for public companies.

The settlement comes two months after the SEC’s release of guidance to assist public companies in preparing disclosures concerning cybersecurity risks and incidents. The guidance, discussed in a prior client alert (hyperlinked below), noted that cybersecurity risk management policies and procedures are key elements of enterprise-wide risk management, including as it relates to compliance with the federal securities laws. Registrants were reminded to assess whether they have sufficient disclosure controls and procedures in place to ensure that relevant information about cybersecurity risks and incidents is processed and reported to the appropriate personnel, including up the corporate ladder, to enable senior management to make disclosure decisions and certifications.

For the full text of our memorandum, please see:
https://www.paulweiss.com/media/3977759/3may18-yahoo.pdf

For the cease-and-desist order, please see:
https://www.sec.gov/litigation/admin/2018/33-10485.pdf

For the SEC guidance, please see:
https://www.sec.gov/rules/interp/2018/33-10459.pdf

For our prior client alert, please see:
https://www.paulweiss.com/media/3977641/27feb18-cybersecurity.pdf

4. SEC Proposes New Standard of Conduct for Broker-Dealers

On April 18, 2018, by a vote of 4-1, the SEC proposed a package of rulemaking and interpretations addressing investors’ relationships with broker-dealers and investment advisers. Under the proposed Regulation Best Interest, a broker-dealer and a natural person who is an associated person of a broker-dealer would be required, when making a recommendation regarding any securities transaction or any investment strategy involving securities, to act in the best interest of a retail customer without placing their respective financial interests ahead of the customer. The SEC also proposed a rule establishing a new short-form disclosure document that would provide retail investors with information about the nature of their relationship with their investment professionals, and issued an interpretation to reaffirm and, in some cases, clarify the SEC’s views of the fiduciary duty that investment advisers owe to their clients.

For the full text of our memorandum, please see:
https://www.paulweiss.com/media/3977764/7may18sec.pdf

For the SEC’s proposed rule, please see:
https://www.sec.gov/rules/proposed/2018/34-83062.pdf

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For a discussion of certain other developments not highlighted above, please see our memoranda available at: http://www.paulweiss.com/practices/region/canada.aspx