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Lately, it seems that everywhere I go, people are talking about PIPEs (that doesn't happen to you? You need to get out more!) I was getting ready to post something about those private investments in public equity until I found a post on the Harvard Corporate Governance Blog that covers all the ground I was thinking of covering and then some.
For a more detailed discussion of PIPE terms, have a look at this Stroock Stroock and Levan memo from 2002.
The agreements mentioned in the HCGB post can be found:
Goldman Sachs / Berkshire Hathaway Securities Purchase Agreement, exhibit 10.1 to 10-Q filed by GS on 10/8/08
General Electric / Berkshire Hathaway Securities Purchase Agreement, exhibit 10(a) to an 8-K filed by GE on 10/20/08
The administration's new regulatory plan eliminates the Office of Thrift Supervision. Considering that whenever another agency was threatened with extinction a member of Congress made a stink, what, I wondered had the Office of Thrift Supervision done? How did the OTS end up without a single friend in Washington? There must be a story there! It turns out there is a story, and it appeared in the Washington Post. Like the SEC, OTS was the primary regulator of a number of the large financial institutions that failed (OTS regulated IndyMAc, Washington Mutual and Countrywide Financial). Unlike the SEC, OTS colluded with these institutions to make them look healthier than they actually were.
Countrywide Financial Corporation (CFC) migrated to the more lenient OTS regulatory regime to avoid scrutiny and possible FDIC resolution. CFC did most of its business (60% of pre-tax earnings in 2006), through a bank subsidiary called Countrywide Bank, NA (Bank). Bank was a national bank, regulated by the Office of the Comptroller of the Currency, and therefore, CFC was a bank holding company. In December of 2006, Bank applied to become an OTS-regulated savings and loan. When the application was granted in March of 2007 CFC became a savings and loan holding company.
CFC didn't file an 8-K in December when the application was made and it didn't file an 8-K in March when the application was granted. Investors first got word in the 2006 10-K. "On December 6, 2006 we applied to the OTS to convert Countrywide Bank to a federally chartered savings bank." Later in the filing readers are assured that "Countrywide will remain subject to capital requirements that are substantially similar to national banks." The kicker comes in the 10-Q for the second quarter of 2007. After announcing that the OTS had granted Bank's petition CFC allows that because it is no longer a bank holding company it is "no longer subject to specific statutory capital requirements." That doesn't sound like a big deal, does it?
A couple of weeks ago, I was attempting to help a librarian research the history of an NASD rule. I was attempting to help because I couldn't actually help. While some of this may be chalked up to my own research skills, some blame must be laid at the door of the NASD. Researching rules promulgated by self-regulatory organizations is monumentally unpleasant. While I'm not able to offer a research panacea, I offer the following information to either (a) make such research easier or (b) help manage the expectations of your customers.
The first US stock exchange was organized in Philadelphia in 1790. The early exchanges were organized as private associations and were not subject to government regulation. So, when Congress was debating the Securities Exchange Act of 1934, the exchanges lobbied hard to keep their self-regulatory status. A compromise was reached. The exchanges had to register with the SEC, but their self-regulatory powers were enshrined in law. They became quasi-governmental actors and custodians of the goals of the Exchange Act.
Section 19(b) of the Exchange Act also gave the SEC the power to abrogate SRO rules when necessary to further the Act's goals, but the SROs were not required to submit their rules for SEC approval. In the early days, the SEC took a "collaborative" approach to SRO regulation - they raised questions and conducted negotiations in secret. But, starting in the 1960's pressure began building to give the SEC more power to control exchange activities.
The Securities Act Amendments of 1975 required SROs to get SEC approval for any proposed rule change. It articulated the somewhat contradictory goals of "preserving" self-regulation while "the SEC ... play(ed) a much larger role ... to ensure there is no gap between self-regulatory preference and regulatory need."
What this means in practice is that any pre-1976 rule change is lost in the mists of time, but from 1976 forward, all SRO rules had to pass under the eyes of the SEC before taking effect.
There are two SRO rule approval processes - rules that articulate stated policies, fee changes, or SRO administrative procedures become effective immediately under section 19(b)(3)(A) of the Exchange Act. Other rules are reviewed by the SEC, usually by the Division of Trading and Markets, but in the case of "controversial" rules, by the full Commission. This second process, under section 19(b)(2) of the Exchange Act, requires publication, a comment period, and a notice of adoption in accordance with the Administrative Procedure Act.
That's the good news. The bad news is that the SEC often publishes a summary of the amendment in lieu of the full text. So, even though that rule change you're looking for is probably somewhere in the Federal Register there is no guarantee it uses any of the key words in your search.
The SRO's themselves have made no attempt to create an historical record of rulemaking. Their idea of an annotation often starts with "amended by." They also have a tendency to reformat their rules without warning. For instance, the NASD rule I was "helping" with began its life as a "policy statement." In my experience, the only source for the history of an SRO rule is often an out-dated copy of the SRO's manual. If you haven't held on to those, its too late to start.
I'm talking about the past, of course, these days, SRO rulemaking looks much more like other kinds of administrative rulemaking. Also, much SRO rulemaking is now done by a new, joint NYSE-NASD regulatory body called FINRA.
Today, all my energy has gone into writing an article for Westlaw Business Legal Currents about the Treasury's resolution authority proposal.
As you've probably heard, a piece of Manhattan real estate is changing hands for the second time since 1932. The building, at number 70 Pine Street, is owned by American International Realty and will be acquired by two Korean companies, Young Woo & Associates and Kumho Investment Bank. 70 Pine was the third-tallest building in the world when it was completed in 1932. From that time until 1974 it was the headquarters of Cities Service Corporation, an oil and gas company founded by the monumentally pugnacious Henry L. Doherty. Cities Service moved to Tulsa in 1974 and sold 70 Pine to AIG in 1976. According the the New York Times, the building cost about $15 million to build. I couldn't find any record of what AIG paid for it, but it was probably a pretty good investment. It was recently assessed at 97.2 million.
The Wall Street Journal reports that now that Treasury has given permission TARP money will soon start coming back. JP Morgan Chase, Morgan Stanley and American Express will pay off first.
My colleague Erika Beck is hosting a tax law roundtable at SLA.
Footnoted.org is live blogging the House Financial Service Committee hearing on systemic risk.
The lawyers for Monday's trial involving Maurice Greenberg's alleged misappropriation of a block of AIG shares are generating as much ink as the suit itself. (SDNY, 1:05CV06283, order re motion for summary judgment at 2009 WL 614752)
Reuters DealZone has a chart quickly outlining the numbers regarding Black Rock's acquisition of BGI, the investment arm of Barclay's Bank.
It has been widely reported that within the next few weeks the administration will unveil a new, comprehensive financial markets regulatory scheme. Speculation about the scope of the proposal has been intense. In last week's New York Times, Stephen Labaton reported that the administration probably wouldn’t recommend rolling all four bank regulators up into one agency, but that a new agency for credit card and mortgage regulation was still a possibility. In the background, administration officials have been meeting with a constellation of experts to hammer out details. In one recent meeting, a group of academics, policy analysts and researchers was asked questions that provide some insight into the administration’s general approach. The questions, combined with recent news reports also suggest that the regulatory agenda has been finalized, but they’re still fighting about money and political turf.
The Treasury Department has previously aired two pieces of the puzzle: resolution authority and regulation of the over-the-counter derivatives market. The resolution authority proposal was outlined in a March 26th press release (TG-72). The press release asked Congress for an FDIC-like power to seize and dismember institutions deemed a risk to the entire financial system. Left unresolved was which agency would be the resolver. Resolution authority appears still to be on the table: the experts were asked where the administration could obtain the money to carry out resolutions of institutions that aren’t banks. The FDIC’s resolution process is paid for out of a fund derived from payments made by FDIC-insured institutions.
Secretary Geithner has carefully avoided answering questions about who would swing the sword of resolution, but he has stressed, on several occasions, the need for a new regulatory entity that could police institutions that pose a risk to the financial system generally. He has not, however, been specific about this new agency’s power or role. A number of players have leaped into that void. In late March, a bipartisan bill was introduced in the House and Senate (HR 1754, S 664) that would create a council composed of the heads of all the financial regulatory agencies. This group (called the Financial Stability Council) would be in charge of assessing systemic risk. This bill framed the terms of the debate – should systemic risk be overseen by a loose collection of regulators, or should there be a new agency? Sheila Baer at the FDIC and Mary Schapiro at the SEC (who would be members of a financial risk council, but would lose turf if a new agency were created) have, unsurprisingly, expressed approval of the council idea. The experts were also asked to weigh in on this question. Is a systemic risk council an acceptable compromise, they were asked, or do we need a new regulatory agency?
Over-the-counter derivatives regulation, on the other hand, seems squared away. On May 13th, Secretary Geithner sent a letter to Senator Harry Reid outlining the administration’s proposal for OTC derivatives regulation. According to a source with knowledge of the meeting, the experts were not asked about OTC derivatives regulation.
The US financial regulatory system was constructed piecemeal in response to a variety of historical events. The result of this ad hoc approach is a patchwork of jurisdictions that overlap in some areas but don’t cover other areas at all in others – a problem is known as “regulatory fragmentation.” On the evidence of the last few questions, regulatory fragmentation is still on the agenda. The experts were asked how much they thought regulatory fragmentation contributed to the current crisis. They were also asked to describe how well the existing system protects consumers and investors. Last week, a report from the Associated Press (“Fed Would Serve as Risk Regulator under Obama Plan,” AP Datastream, 5/28/09) described a draft regulatory scheme that would create two major regulatory agencies – one protecting consumers and one protecting investors. The investor protection agency would be created by merging the SEC and the CFTC. Merging or eliminating regulatory agencies has proved to be a reasonably hot political potato. Every agency, it seems, has a champion in Congress. These champions stand to lose power if their pet agency is curtailed. The New York Times article spent several paragraphs addressing the “political cost” of correcting regulatory fragmentation.
If I said "section 10(b) of the '34 Act," you'd know what I was talking about, but if I mentioned section 78j you probably wouldn't be sure, right? They're the same section, of course, but when securities law professionals talk about the '34 Act's anti-fraud provision they say 10(b), a designation that comes from chapter 404 of the laws of 1934 (48 Stat 881), and not 15 USCA 78j. The reason no one uses the United States Code citations for the securities laws is because they are so damned convoluted (the Trust Indenture Act, for example, is 15 U.S.C. § 77aaa – 77bbbb). Unfortunately, 10(b) isn't good enough for the Blue Book so sometimes we need to find the full citation.
The "find a securities document" tool on the Westlaw Securities Practitioner page will translate for you, but this post isn't about how to find the right citation, its about how this mess happened in the first place.
The United States Code is maintained and updated by a House department called the Office of the Law Revision Counsel (OLRC). They are also responsible for enacting the Code into positive law. The OLRC originated during what I like to call the “codification wars” of the nineteen-twenties. In 1919 Colonel E. C. Little, Chairman of the House Committee on the Revision of Laws, embarked on a project to codify federal statutes and enact them into positive law. Col. Little’s completed codification, organized into 60 titles, was passed by the House in 1920. It went on to the Senate and was killed. Why, the Senators wondered, would Little want to repeat the disaster of 1873? In 1873 Congress repealed all existing federal statutes and replaced them with a codification. The Revised Statutes of 1873 contained so many errors and that it had to be amended immediately in 1875 and again in 1877. The House was undeterred by the Senate’s qualms. It re-proposed and passed Col. Little’s codification twice more. Upon its second presentation, the Senate Committee on the Revision of Laws reported that the bill had 600 errors, omissions, and inaccuracies. The Senate Committee proposed a compromise in the form of a joint commission to revise the laws.
In the period between the 1873 codification and the 1919 attempt, commercial publishers had filled the gap. Both West and Thomson produced useful and frequently-updated codifications. The Senate asked these publishers to assist in producing an official codification. The resulting document, shortened to 50 titles, passed the House in 1926. The Senate remained unconvinced and refused to enact the bill. In the end, the Senate couldn't be convinced to replace existing statutes with a potentially error-filled codification. Instead, the Senate amended the bill to provide that the codification was “prima facie” evidence of the law and that existing statutes remained in force.
According to Peter LeFevre, the present Law Revision Counsel, this situation was meant to be a temporary fix giving the House Committee on the Revision of Laws (now charged with upkeep of the codification) time to rectify errors and begin piecemeal enactment of the United States Code as positive law. This temporary fix slowly calcified. In 1946 the committee was demoted to subcommittee. In 1974 it became a government agency of sorts. A 1974 law elevated the Law Revision Counsel from an officer of the House Judiciary Committee to the head of a separate office reporting to, and appointed by, the Speaker of the House. Three men have held the post since 1974: Edward Willet, Jr. (1975 – 1996), John R. Miller (1997 – 2004), and Peter LeFevre (2004 – present).
When Congress enacts a new law, lawmakers don’t normally consider where the law will fit in the Code. In its role as the Code’s custodian, the OLRC decides where laws go. Organizing and maintaining the Code is an enormous job that occupies most of the OLRC staff. Charles Zinn, Law Revision Counsel in the 1950’s, described the process as “a matter of opinion and judgment” driven by “where we think the average user will look.” LeFevre agrees that although the OLRC follows policies and precedent, the driving force behind placing a law in the Code is where people “will expect to find it.”
I asked LeFevre why the securities laws have such difficult citations. He didn’t know, but he told me that laws are added to titles in chronological order, unless they are related to laws that have already been enacted. The securities laws are squeezed into Title 15 of the US Code between Chapter 2 and Chapter 3. Chapter 1 contains antitrust laws: the Sherman Act of 1890, followed by the Clayton Act of 1914. Chapter 2 contains the Federal Trade Commission Act of 1914 and Chapter 3 contains the Trade-Mark Act of 1905.
Why are the securities laws of 1933 – 1940 jammed in between the FTC Act and the Trade-Mark Act? The answer lies in the Securities Act of 1933. When Congress enacted the ’33 Act, the first of a series of planned securities laws, it charged the Federal Trade Commission with enforcing the Act. A year later Congress enacted the Securities Exchange Act of 1934, which created the Securities and Exchange Commission. The ’34 Act removed the securities laws, including the ’33 Act, from the jurisdiction of the FTC and placed them within the oversight of the SEC. Unfortunately, the ’33 Act had already been placed in the Code, right next to the FTC Act. Instead of moving the ’33 Act, the Law Revision Counsel decided to let things stand and proceeded to cram all of the securities laws in the space between the FTC Act and the Trade-Mark Act. To add insult to injury, in 1946 Congress enacted the Lanham Act and repealed Chapter 3.
To learn more about the Office of Law Revision Counsel, visit its website. The legislation governing the OLRC may be found at 2 U.S.C. 285 – 285g. Those interested in the positive codification process should read Charles Zinn’s address to the Law Librarians’ Society of Washington, D.C. at, 45 Law Libr. J. 2 (1952) and Richard J. McKinney’s excellent “United States Code: Historical Outline and Explanatory Notes."
Bruce Carton's all-too-brief notes on a speech by linguist William Lutz about the usefulness of SEC disclosure.
The Harvard Corporate Governance Blog has a post about PIPEs transactions that includes a discussion of what a PIPEs transaction is.
This almost never happens, but today Citibank reminded me of my grandfather. My grandfather had a silver ladle he claimed was made from silver once in the possession of General Santa Ana. Like my grandfather, Citibank (and a whole lot of other banks) have a bunch of mortgages-related securities that are worth a whole lot of money as long as no one asks too many questions. Thus, the New York Times reports that the FDIC has canceled the "legacy assets" part of the PPIP program because banks don't want a bunch of investors asking nosy questions about grandpa's silver.
Battle lines are being drawn and medieval siege works constructed for the Battle of OTC Derivatives. The New York Times reports that CFTC-big wig Gary Gensler has a plan, but as Jim Hamilton reports, so does the derivatives industry.
The National Association of State Securities Administrators joins the FDIC and the SEC in calling for a financial stability council.
Securities Prof Blog talks about Mary Schapiro's Senate testimony.
The Corporate Counsel Blog has good coverage of the SEC's revamped Compliance and Disclosure Interpretations.
