Scherzer Blog

SEC defines “compensated solicitor” and “participation” under bad actor Rule 506(d)

As we reported previously, on September 23, 2013, new Rules 506(d) and (e) of Regulation D under the Securities Act and changes to Form D (“Bad Actor Rules”) went into effect, making all Rule 506 offerings subject to certain disqualification, disclosure and certification requirements.

In this blog, we want to bring to your attention the SEC’s compliance and disclosure interpretations (“C&DIs”) issued December 4, 2013, which, among other provisions, define what constitutes a “compensated solicitor” and “participation” in an offering, in case the SEC’s expanded guidance warrants an assessment of your particular services, especially if you are a professional advisor.

The CD&Is define “compensated solicitors” as “all persons who have been or will be paid, directly or indirectly, remuneration for solicitation of purchasers, regardless of whether they are, or are required to be, registered under Exchange Act Section 15(a)(1) or are associated persons of registered broker-dealers.”

According to the CD&Is, “participation in an offering is not limited to the solicitation of investors, and includes involvement in due diligence activities or the preparation of offering materials (including analyst reports used to solicit investors), providing structuring or other advice to the issuer in connection with the offering, and communicating with the issuer, prospective investors or other participants about the offering. To constitute ‘participation,’ such activities must be more than transitory or incidental–administrative functions, such as opening brokerage accounts, wiring funds, and bookkeeping activities, would generally not be deemed to be deemed as ‘participating’ in the offering.”

|Dodd-Frank, Educational Series|

Proposed bill would establish standards for national data security

The bill, introduced in the Senate on January 15, 2014 and cited as the Data Security Act of 2014, would require entities such as financial institutions, retailers, and federal agencies to better safeguard sensitive information, investigate security breaches, and notify consumers when there is a substantial risk of identity theft or account fraud. The new requirements would apply to businesses that take credit or debit card information, data brokers that compile private information, and government agencies that possess nonpublic personal information.

|Legislation|

Justice Department collected more than $8 billion in civil and criminal cases in 2013

Attorney General Eric Holder announced on January 9, 2014 that the Justice Department collected at least $8 billion in civil and criminal actions in the fiscal year ending Sept. 30, 2013. The statistics indicate that in FY 2013, approximately $5.9 billion was collected by the department’s litigating divisions and the U.S. Attorneys’ offices in individually and jointly handled civil actions. The largest civil collections were from affirmative civil enforcement cases, in which the United States recovered money lost to fraud or other misconduct and collected fines imposed on individuals and/or corporations for violations of federal health, safety, civil rights or environmental laws.

|Judgment|

FFIEC finalizes guidance for social media risk management

The Federal Financial Institutions Examination Council (FFIEC) released on December 11, 2013 final guidance on the applicability of consumer protection and compliance laws, regulations, and policies to activities conducted via social media by banks, savings associations, and credit unions, as well as nonbank entities supervised by the Consumer Financial Protection Bureau. The guidance provides considerations that financial institutions may find useful in performing risk assessments and developing and evaluating policies and procedures regarding social media.

|Social Media|

Proposed Regulation A rules have bad actor disqualification similar to Rule 506(d)

On December 2, 2013, the U.S. District Court for the Western District of Pennsylvania ruled that a combined disclosure and authorization form that contained a liability waiver which the employer gave to a group of former job applicants violates the Fair Credit Reporting Act (the “FCRA.”) The court determined that a significant portion of the 1,800 individuals in this class action are entitled to willful damages under the FCRA and could each receive the greater of his/her actual damages or $1,000 plus attorneys’ fees.

This is a second published decision to hold that liability waivers invalidate the disclosure requirements under the FCRA. The first ruling rendered in January 2012 in the U.S. District Court in Maryland found that “both the statutory text and FTC advisory opinions indicate that an employer violates the FCRA by including a liability release in a disclosure document.” Thus far, only the U.S. District Court for the Western District of North Carolina disagreed, deciding in August 2012 that the liability waiver included in the defendant employer’s combined disclosure and authorization form was kept sufficiently distinct from the disclosure language so as not to render it ineffective.

|Dodd-Frank, Employment Decisions|

Proposed federal bill bans credit checks in employment decisions

Introduced by Senator Elizabeth Warren (D-Mass) on December 17, 2013, the “Equal Employment for All Act” (S. 1837), would amend the Fair Credit Reporting Act to prohibit employers from requiring or suggesting that applicants disclose their credit history, from procuring a consumer or investigative report, and from disqualifying employees based on a poor credit rating, or information on a consumer’s creditworthiness, standing or capacity. Positions that require a national security clearance or “when otherwise required by law” are exempt from the prohibition. Ten states (California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont and Washington) already have enacted legislation that limits the use of credit reports for employment purposes.

|Employment Decisions, Legislation|

New law bans California employers from asking about dismissed criminal records

Effective January 1, 2014, SB 530, will ban most California employers from asking employees or applicants about arrests that did not result in conviction (except for arrests for which the individual is still awaiting trial) or about participation in a pretrial or post trial diversion program. Generally, the new law prohibits most employers from asking applicants to disclose, or use as a factor in employment decisions, any information concerning a conviction that has been judicially dismissed or ordered sealed.

|Employment Decisions, Legislation|

Stricter Volcker Rule final; banking entities have until July 21, 2015 to conform

On December 10, 2013, five federal agencies approved the regulation known as the Volker Rule which introduces a variety of guidelines to limit risk-taking by banks with federally insured deposits. The Federal Reserve Board announced that banking entities covered by section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act will be required to fully conform their activities and investments by July 21, 2015. The compliance requirements will vary based on the size of the entity and the scope of activities conducted.

The rule prohibits insured depository institutions and any company affiliated with an insured depository institution from engaging in short-term proprietary trading of certain securities, derivatives, and other financial instruments for the firm’s own account, subject to certain exemptions, including market making and risk-mitigating hedging. It also imposes limits on banking entities’ investments in, and other relationships with, hedge funds and private equity funds.

|Educational Series, Legislation|

Scrutiny of predictive scoring products is on the FTC’s agenda in 2014

According to the Federal Trade Commission (‘the “FTC”) and media reports, companies are using predictive scoring for a variety of purposes, ranging from identity verification and fraud prevention to marketing and advertising. The scores, are touted to predict, for example, the likelihood that a person has committed identity fraud or that a certain transaction will result in fraud; the credit risk associated with mortgage loan applications; whether contacting a consumer by mail or phone will lead to successful debt collection; or whether sending a catalog to a certain address will result in an in-store or online purchase.

Consumers are largely unaware of these scores, and have little or no access to the underlying data. As a result, predictive scoring products raise a variety of privacy concerns and questions that the FTC intends to explore. Among the issues, are what consumer protections exist or should be provided, and whether certain scores are considered eligibility determinants that fall under the ambit of the Fair Credit Reporting Act.

|Educational Series, Fraud|

New York joins in efforts to root out misclassification of independent contractors

On November 18, 2013, New York’s attorney general and the state labor department entered into agreements with the U.S. Department of Labor’s Wage and Hour Division to coordinate investigations, make referrals, share data and take other actions to combat worker misclassification. Fourteen other states (California, Colorado, Connecticut, Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington) already participate in this national “misclassification initiative” that is a collaboration between the U.S. Department of Labor and the Internal Revenue Service.

An employer that misclassifies an employee as an independent contractor faces significant consequences that can include the payment of back taxes plus interest, overtime and state workers’ compensation, and the provision of health and welfare benefits.

|Educational Series|