A Compilation of Enforcement and Non-Enforcement Actions

30 March 2012 Publication
Author(s): Terry D. Nelson Peter D. Fetzer

Legal News: Investment Management Update

Non-Enforcement Matters

JOBS Act Expected to Be Signed Into Law by President, Promising Relief for Start-Ups and Early-Stage Companies

On March 27, 2012, the U.S. House of Representatives passed the version of the Jumpstart Our Business Startups (JOBS) Act approved last week by the U.S. Senate, ensuring President Obama will soon sign into law a measure he supports that promises to help smaller businesses and early-stage companies.

By a 380 – 41 vote, the House approved HR 3606, which supporters say will encourage businesses to create jobs by lowering hurdles to going public and complying with the laws governing public companies, such as the Sarbanes-Oxley Act.

Among its provisions, the JOBS Act exempts companies from the full reporting requirements of Sarbanes-Oxley Section 404(b) for their first five years after going public, or until they reach $1 billion in revenue — a provision nicknamed the “on ramp” for initial public offerings. That provision alone should save such companies up to $2 million a year. The JOBS Act is expected to help revitalize an IPO market that has suffered in recent years under the weight of market volatility and one-size-fits-all regulation.

The measure also will increase the limit that requires private companies to register with the SEC, from the current 500 shareholders to 2,000 shareholders.

The JOBS Act will expand the eligibility requirements of the securities registration exemption found under Regulation A of the Securities Act of 1933 by raising the limit on how much companies conducting direct public offerings can raise, from the current $5 million to $50 million under this exemption. Importantly, Regulation A offerings would be exempt from state securities laws, provided that the securities sold are offered or sold through a broker-dealer, offered or sold on a national securities exchange, or sold to a “qualified purchaser” as defined by the SEC.

Another component of the JOBS Act requires the SEC to revise the securities registration exemption under Rule 506 of SEC Regulation D under the Securities Act of 1933, by removing the current ban on general solicitation or advertisements, including social media, in private placements of securities, provided that all purchasers in the private placement are “accredited investors.” The revision is designed to allow greater exposure to investments for a wider range of potential investors.

The JOBS Act is intended to encourage “crowdfunding” by creating a new exemption from securities registration for any transactions to offer or sell crowdfunded securities by businesses raising up to $1 million within a 12-month period.

The crowdfunding provision includes an amendment added to the bill in the Senate (S. Amdt. 1884) by Sens. Jeff Merkley (D-OR) and Scot Brown (R-MA) on a 64 – 35 vote. The amendment requires operators of crowdfunding portals to register with the SEC and promise to deliver information on investments they offer without promoting them, while limiting through scalable investment caps how much investors can invest based on their income — a maximum of $2,000 or five percent of an investor’s annual income or net worth, if either of the annual income or net worth of the investor is less than $100,000; up to 10 percent of the annual income or net worth of such investor, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or greater than $100,000.

The Merkley-Brown amendment also:

  • Requires publicly audited financials for companies seeking more than $500,000
  • Establishes a three-week waiting period after funding closes but before funds are received, giving authorities time to uncover potential fraud
  • Requires disclosure of capital-raising fees

The changes under the JOBS Act will not be effective until the SEC completes the preparation of regulations to accommodate the various mandates given it under the Act. When fully implemented, the provisions should provide issuers with much-needed flexibility in seeking capital from investors.

DOL Fee Disclosure Requirements Looming

Regulations issued by the Department of Labor (DOL) will soon take effect and impact the information that service providers such as investment advisers must provide to covered retirement plan clients and the information that the plans must provide to participants, eligible employees, and beneficiaries.

Accordingly, investment advisers should now be determining the extent to which they will be subject to the DOL rule. If the adviser is a covered service provider as defined below, it should now be preparing its disclosures in order to meet the deadlines as described below for providing such disclosures.

On July 16, 2010, the DOL issued an interim final regulation that requires service providers to disclose specific information to sponsors of retirement plans covered by the Employee Retirement Income Security Act of 1974, as amended (ERISA). The intent of the regulation is to make it easier for plan fiduciaries to understand the compensation paid to their providers and to highlight potential conflicts of interest that may affect plan performance.

On February 2, 2012, the DOL issued the final regulation under Section 408(b)(2) of ERISA specifying information that sponsors of covered plans must provide to employees eligible to participate in participant-directed, individual account plans. This article provides a quick overview of the regulations for both the service providers and the sponsors of the covered plans.

Overview of the Service Provider Regulation
The final ERISA regulation Section 408(b)(2) requires covered service providers to disclose specific information to the responsible fiduciary for each covered retirement plan for which they provide services. The information to be disclosed relates to the services to be performed for the plan and the compensation to be received for those services.

  • Covered Plans: Generally, this term includes contribution and defined benefit retirement plans covered by ERISA. It does not apply to non-ERISA plans such as governmental or non-electing church plans and it does not apply to IRAs or non-qualified annuities.
  • Covered Service Providers: This term applies to persons and entities who reasonably expect to receive $1,000 or more in compensation, directly or indirectly, in connection with providing services to a covered plan. There are generally three categories of providers: fiduciaries or investment advisers, record keepers and brokers, and service providers receiving indirect compensation.
  • Format and Content of Required Disclosures: There is no specified format, but the disclosures must be in writing. Required content includes descriptions of the services to be provided; a statement as to whether the service provider will provide the services as an ERISA fiduciary, a registered investment adviser, or both; the compensation to be received; and how it is to be received.
  • Timing of Disclosure: The disclosure of current service arrangements must be made by July 1, 2012. Disclosures for new service arrangements or contracts must be made reasonably in advance of start date. Changes in previously disclosed information must be communicated no later than 60 days after the provider is informed of the changes. Finally, new arrangements after July 1, 2012 must be disclosed prior to the effective date of the new arrangement.
  • Requirements for Plan Fiduciaries: Fiduciaries must ensure that disclosures are provided by service providers, review them, and request any missing information. If the information is not provided, fiduciaries must notify DOL.
  • “Compensation”: This term is broadly defined to include money or anything else of monetary value (gifts and so forth), but does not include non-monetary compensation valued at $250 or less in the aggregate during the term of the contract or arrangement. Compensation paid directly by the plan sponsor is not covered by the final regulation and requires no disclosures.
  • “Direct compensation”: This term is defined as compensation received directly from the plan.
  • “Indirect compensation”: This term is defined as compensation received from any source other than the plan, the plan sponsor, or an affiliate or subcontractor of the plan sponsor in connection with the service arrangement.

The disclosure requirements of the final regulation are generally a service provider obligation. The responsible plan fiduciary is generally responsible only for ensuring that the service provider supplies the required disclosures, for checking them, and for requesting any missing information from the provider in writing. If the provider fails to supply the missing information in a timely manner, the fiduciary must then notify DOL to avoid violating ERISA’s prohibited transaction rules.

The regulations are intended to establish a new level of fee and expense transparency that will help plan participants better manage and invest the money they contribute to their retirement plans. The regulations seek to ensure that plan participants have access to the information they need to make informed decisions, and that the information is delivered in a format that enables them to meaningfully compare the investment options contained within their plans. The disclosures apply to all employees eligible to participate in the plan regardless of whether these employees actually elect to participate in the plan.

Overview of Participant Regulations
Final ERISA Section 404(a) regulations issued by DOL are designed to ensure that employees and beneficiaries eligible to participate in participant-directed individual account plans are provided with enough information regarding the plan, designated investment options, fees, and expenses to effectively manage their individual plan accounts.

Each employee or beneficiary eligible for the plan must be provided with specific investment-related and plan-related information, including:

  • General information about the structure of the plan, administrative fees, and expenses that plan service providers charge, and specific information concerning the actual charges to plan participant individual accounts (provided on a quarterly basis)
  • Comprehensive data about each of the plan’s investment options, including historical performance, comparable benchmark performance, expense charges, and investment restrictions — all in a way that allows participants to make “meaningful” comparisons, in the form of a comparative chart, of their investment alternatives

Initial disclosures to participants, eligible employees, and beneficiaries must be made within 60 days of the later of the 408(b)(2) effective date (July 1, 2012) or the plan-year-beginning date (by August 30, 2012 for calendar-year plans). Quarterly statements specifying amounts charged in the prior quarter must be provided following the initial disclosure. Information on changes in fees and expenses must generally be provided between 30 and 90 days prior to the effective date of the change. Disclosures must be provided to newly eligible employees and beneficiaries prior to the date on which they become eligible to direct their own plan assets. The comparative chart must be updated annually.

Legal News is part of our ongoing commitment to providing legal insight to our clients and colleagues. If you have any questions about or would like to discuss these topics further, please contact your Foley attorney or any of the following individuals:

Terry D. Nelson
Madison, Wisconsin

Peter D. Fetzer
Milwaukee, Wisconsin

A. Michael Primo
Boston, Massachusetts