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Sec Proposed Rule Hedging A Bet

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SEC Proposes Ban on Magnetar-Like Deals

SEC Proposes Ban on Magnetar-Like Deals The SEC moves to ban the questionable Wall Street deals that, as we detailed, helped fuel the financial crisis.

Sept. 20, 2011, 11:42 a.m. EDT

The Wall Street Money Machine

As investors left the housing market in the run-up to the meltdown, Wall Street sliced up and repackaged troubled assets based on those shaky mortgages, often buying those new packages themselves. That created fake demand, hid the banks’ real exposure, increased their bonuses — and ultimately made the mortgage crisis worse.

The Securities and Exchange Commission yesterday unveiled proposed rules to ban hedge funds and banks from assembling risky securities, marketing them to investors and then immediately betting against their own creations, reaping profits when they fail. The rule would also ban firms from setting up risky securities for the benefit of an undisclosed third party.

As we detailed last year, exactly those kinds of questionable deals helped fuel the financial crisis and resulted in huge losses for investors.

Goldman Sachs and JPMorgan Chase have already paid millions of dollars—a relatively small sum for both banks—to settle SEC charges that they misled investors. Several other banks, including Citigroup and Mizuho of Japan, are being investigated by the SEC for similar deals.

“It was as if a car dealer sold a car with bad brakes, then bought insurance that paid off when the car crashed,” Sen. Carl Levin, chairman of a Senate committee that investigated such deals, said in a statement yesterday.

The SEC’s new rule is designed to target two potential conflicts of interest:

For instance, a firm might package an asset-backed security, sell that security to an investor and then short the security to potentially profit as the investor incurs a loss.

Or a firm might allow a third party to help assemble an asset-backed security in a way that creates an opportunity for the third party to short the security and reap a profit.

The rule would ban any party who participates in the creation of a security from betting against the security. The ban would remain in effect for one year and would also apply to the affiliates or subsidiaries of the participants.

As we reported last year, the hedge fund Magnetar often pushed for riskier assets to be included in deals and placed bets against many of the same investments. Its deals helped create more than $40 billion in the securities known as collateralized debt obligations, or CDOs, and pumped more hot air into the housing bubble. When the housing market finally collapsed, nearly all of those securities became worthless, but Magnetar’s bets against them reaped handsome profits.

Magnetar was involved in the Merrill Lynch and Mizuho deals that the SEC is now investigating, as well as the deal that cost JPMorgan Chase $154 million in a settlement with the SEC. (Magnetar has always maintained that it did not have a strategy to bet against the housing market. The hedge fund has not been accused of wrongdoing as part of the SEC probes.)

Anticipating criticism, including from one of its own commissioners, that its new rules could stifle the free flow of capital, the SEC noted in a press release that the rule “is not intended to prohibit traditional securitization practices.” SEC Chairman Mary Shapiro said the rule “would provide exceptions for risk-mitigating hedging activities, as well as activity consistent with liquidity commitments and bona fide market-making.”

The rule was created to fulfill the demands of the Dodd-Frank Reform Act and will be finalized after a 90-day period for public comment.

Lois Beckett

Lois Beckett is a ProPublica reporter covering politics, big data and information privacy issues.

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SEC Proposes New Rule Requiring Disclosure of Equity Hedging Policies

SEC Proposes New Rule Requiring Disclosure of Equity Hedging Policies

On February 9, 2015, the U.S. Securities and Exchange Commission (SEC) proposed a long-awaited rule under the Dodd-Frank Wall Street Reform and Consumer Protection Act that would require public companies to disclose certain information regarding whether their employees and directors are permitted to hedge or offset any decrease in the value of the company’s securities. This disclosure would be required in proxy and information statements relating to an election of directors.

The proposed rule is subject to a 60-day public comment period after publication in the Federal Register; therefore, the comment period will likely run until mid-April 2015. In the proposing release, the SEC requested comment on a number of aspects of the rule, including whether it should apply to smaller reporting and emerging growth companies (the proposed rule currently would apply to them); and whether it should apply to policies with respect to all employees, or just employees whose roles may influence the company’s stock price (the proposed rule currently applies to all employees, as well as directors).

These requirements of the proposed rule, among others, caused SEC Commissioners Daniel M. Gallagher and Michael S. Piwowar to make a joint statement regarding their concerns with the proposed rule, which may impact the comments received and the SEC’s ultimate determinations regarding the scope and application of the proposed rule.

Disclosure Requirements

Current Disclosure Requirements: Regulation S-K Item 402, the SEC rule that governs executive compensation disclosure, includes a list of nonexclusive examples of disclosures that may be (but are not necessarily) material to an understanding of the compensation paid to a public company’s named executive officers and thus may be required to be included in the company’s compensation discussion and analysis (CD&A). Included in this list is disclosure of any company policies regarding hedging the risk of equity ownership. Since the existing disclosure requirements for hedging policies are part of CD&A disclosure, they do not apply to companies classified as “smaller reporting companies” or “emerging growth companies” under SEC regulations.

Proposed Disclosure Requirements: The proposed rule is broader in both applicability and scope. The proposed rule would

  • apply to all public companies filing a proxy or information statement relating to the election of directors, including smaller reporting companies and emerging growth companies (though notably it would not apply to disclosure in any registration statements or Form 10-K filings); and
  • cover hedging policies with respect to the company’s directors and employees (including but not limited to executive officers), whereas the existing rule only applies to hedging policies with respect to named executive officers.

Since the proposed rule is founded on corporate governance concerns and not on executive compensation, the proposed rule will be contained in Regulation S-K Item 407 (as Item 407(j)), which addresses corporate governance requirements, instead of Regulation S-K Item 402, and would therefore apply to emerging growth companies and smaller reporting companies.

While existing hedging disclosure under the compensation rules is often focused on conduct that is prohibited, the proposed rule would require public companies to identify activities that are permitted. Specifically, the proposed rule would require public companies to disclose whether an employee, officer or director, or any of their designees, is permitted to

  • purchase financial instruments (including prepaid variable forward contracts, equity swaps, collars and exchange funds); or
  • otherwise engage in transactions that are designed to have the effect of hedging or offsetting any decrease in the market value of the public company’s equity securities that were either granted to the employee or director by the company as part of his or her compensation or are directly or indirectly held by the employee or director.

Proposed instructions would clarify that the public company must include in the disclosure the categories of transactions it permits and prohibits and the categories of persons who are permitted to hedge. Where a company only prohibits certain transactions, the rules would allow the company to disclose the prohibited categories of transactions and that it permitted all other hedging transactions. “Equity securities” would include not only the securities of the public company itself, but also to any parent or subsidiary that is registered under Section 12 of the Securities Exchange Act of 1934, as amended, such that securities issued to employees or directors in connection with a company reorganization to create a publicly traded subsidiary would be included.

To avoid potentially a duplicative disclosure, Regulation S-K Item 402 would be revised to include an instruction clarifying that any disclosure required, thereunder, could be satisfied by cross-reference to disclosure elsewhere in the proxy statement. Cross-referencing the disclosure, however, would render the more fulsome disclosure subject to say-on-pay votes on executive compensation.

Practical Considerations

Many public companies already have formal or informal anti-hedging policies that apply to directors, executive officers and other employees. These policies, which are often included as part of insider trading policies or codes of ethics, take various forms, including absolute prohibitions on hedging transactions, requiring preclearance for hedging transactions or restricting the types of permissible hedging transactions. In light of the continued focus by proxy advisory firms and investors on hedging and in light of the proposed new disclosure requirements, companies may want to consider adopting, or revisiting their previously adopted, policies concerning hedging activities with respect to their equity securities, including considering the scope and applicability of such policies. An important part of this process will be considering what disclosure might look like under the proposed rule. In addition, companies covered by Institutional Shareholder Services (ISS) and Glass Lewis may want to take into account the views of these proxy advisory firms on hedging. Both ISS and Glass Lewis have indicated that companies should prohibit hedging, and ISS has further stated that any amount of hedging will be considered a problematic practice warranting a negative voting recommendation.

In summary, therefore, a hedging policy that makes sense for one company may not make sense for another. Companies should therefore carefully consider their individual facts and circumstances before adopting or revising a hedging policy, and should not make changes simply in response to the perceived expectations of investors and proxy advisory firms.

If you have any questions about the proposed rule or adopting or revising hedging policies or if you would like to learn more about the issues covered in this alert, please contact your Smith Anderson Securities lawyer.

Smith Anderson publishes Alerts periodically as a service to clients and friends. The purpose of this Alert is to provide general information about significant legal developments and does not provide, and should not be relied upon as, legal advice. It does not convey an offer to represent you or an attorney-client relationship. Readers should be aware that the facts may vary from one situation to another, so the conclusions stated herein may not be applicable to the reader's particular circumstances. This communication may be considered a commercial electronic mail message under applicable legislation regarding unsolicited commercial email.

SEC - s Proposed Rule To Stop Banks From Profiting At Investors - Expense, HuffPost

SEC's Proposed Rule To Stop Banks From Profiting At Investors' Expense

(Sarah N. Lynch) - Underwriters or sponsors of asset-backed securities would be banned for one year from taking positions to profit from investors' losses under a plan released by U.S. securities regulators on Monday.

The proposal by the Securities and Exchange Commission would get at the very heart of issues raised by U.S. Senate investigators in a report earlier this year that accused Goldman Sachs of positioning itself to profit from clients' losses on complex securities that it packaged and sold.

The proposal would also prohibit the kinds of conflicts that were seen in the SEC's civil case against Goldman in 2010 by banning third parties from helping assemble an asset-backed pool that would let those parties profit from investors' losses.

In the Goldman case, the SEC accused the bank of creating and marketing a CDO known as ABACUS 2007-AC1 without telling investors that hedge fund Paulson & Co helped choose the underlying securities and was betting against them. Goldman later settled the case for $550 million.

The SEC's proposal, expected to be put out for public comment later on Monday, would implement a provision in the Dodd-Frank Wall Street overhaul law that sought to prevent big banks from betting against financial products that they package and sell to investors.

The one-year ban from taking an opposite market position from investors would not apply in certain key cases, such as when a firm is hedging its risk or acting as a market-maker.

It would prohibit underwriters, placement agents, initial purchasers, sponsors, or any of their affiliates or subsidiaries of an asset-backed security from shorting the assets in the pool and creating a material conflict for investors. The shorting ban would be in effect for one year after the first closing of the sale.

The securities industry will likely pay very close attention to how the SEC's proposal fleshes out the details of the exemptions. If the SEC is too restrictive in the kinds of permitted activities, some industry executives have warned it could impede the recovery of the securitization market.

(Reporting by Sarah N. Lynch; editing by John Wallace)

SEC Proposed Rule: Eliminating the Prohibition against General Solicitation and General Advertising in Rule 506 and Rule 144a Offerings

SEC Proposed Rule: Eliminating the Prohibition against General Solicitation and General Advertising in Rule 506 and Rule 144a Offerings

On August 29, 2012, the Securities and Exchange Commission issued a proposed rule that would eliminate the prohibition against general solicitation and general advertising in certain securities offerings, specifically those currently falling under Rule 506 and Rule 144a exemptions. The proposed rule changes were mandated by the Jumpstart our Business Startups Act ("JOBS Act"). The rule is intended to allow hedge funds and other private offerings greater flexibility in advertising and marketing.

The proposal entered the Federal Register on September 5, 2012. The deadline for public comment is October 5, 2012.


Under current rules, any entity wishing to raise capital by selling securities must register with the SEC unless the entity qualifies for one of several exemptions to the registration requirement. Private funds such as hedge funds generally rely on the Rule 506 exemption, which specifies that such entities may only market to accredited investors. Other entities use the exemption found in Rule 144a, which governs the resale of securities primarily by larger institutional investors known as qualified institutional buyers (QIBs).

The ban on solicitation was designed to protect retail investors from inappropriate risks. [1]

The change mandated by the JOBS Act is intended to allow such entities the ability to more freely communicate to attract capital.

Summary of the Rule Proposal

Companies issuing securities would be permitted to use general solicitation and general advertising to offer securities, provided that the issuer "takes reasonable steps to verify that the purchasers of the securities are accredited investors." [2] To determine the "reasonableness" of steps taken, certain facts must be considered:

  • The type of purchaser and the type of accredited investor that the purchaser claims to be.
  • The amount and type of information that the issuer has about the purchaser.
  • The nature of the offering, meaning the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering..

Securities sold pursuant to Rule 144A could be offered to persons other than QIBs, including by means of general solicitation, provided that the securities are sold only to persons whom the seller and any person acting on behalf of the seller reasonably believe is a QIB.

SEC Proposes Hedge Fund Reporting Rule

SEC Proposes Hedge Fund Reporting Rule Glen Shapiro,, New York 28 January, 2011

The United States Securities and Exchange Commission (SEC) has proposed a rule to require advisers to hedge funds and other private funds to report information for use by the Financial Stability Oversight Council (FSOC) in monitoring risk to the US financial system.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) established the FSOC for the purpose of monitoring risks to the stability of the US financial system. Working with other regulators, the FSOC will gather information from many sectors of the financial system for this purpose.

In order to assist the FSOC in this process, the Dodd-Frank Act directs the SEC to collect information from advisers to hedge funds and other private funds as necessary for the FSOC's assessment of systemic risk. The SEC’s present proposal therefore creates a new reporting form to be filed periodically by SEC-registered investment advisers who manage one or more private funds. Information reported on the form would remain confidential.

"The data collection we propose will play an important role in supporting the framework created by the Dodd-Frank Act and is designed to ensure that regulators have a view into any financial market activity of potential systemic importance," said SEC Chairman Mary L. Schapiro.

Under the proposal, larger private fund advisers managing hedge funds, unregistered money market funds ("liquidity funds") and private equity funds would be subject to heightened reporting requirements. Large private fund advisers would include any adviser with USD1bn or more in hedge fund, liquidity fund or private equity fund assets under management. All other private fund advisers would be regarded as smaller private fund advisers and would not be subject to the heightened reporting requirements.

Although this heightened reporting threshold would apply to only about 200 US-based hedge fund advisers, these advisers manage more than 80% of the assets under management.

The proposed form is the result of extensive consultation and collaboration between the staff of the SEC and other FSOC members. This collaboration followed on earlier work with international regulators, including the United Kingdom’s Financial Services Authority and other members of the International Organization of Securities Commissions, to conform hedge fund regulatory reporting standards.

Smaller private fund advisers would file the form only once a year and would report only basic information regarding the private funds they advise. This would include information regarding leverage, credit providers, investor concentration and fund performance. Smaller advisers managing hedge funds would also report information about fund strategy, counterparty credit risk and use of trading and clearing mechanisms.

Large private fund advisers would file the form on a quarterly basis and would provide more detailed information than smaller advisers. They would report on an aggregated basis information regarding exposures by asset class, geographical concentration and turnover. In addition, for each managed hedge fund having a net asset value of at least USD500m, these advisers would report certain information relating to that fund's investments, leverage, risk profile and liquidity.

Large private equity fund advisers would respond to questions focusing primarily on the extent of leverage incurred by their funds' portfolio companies, the use of bridge financing, and their funds' investments in financial institutions.

The US Commodity Futures Trading Commission (CFTC) will also approve similar reporting requirements for private fund advisers that are registered with the SEC and also with the CFTC as commodity pool operators or commodity trading advisors. Such advisers would also be required to file a similar form.

A comprehensive report in our Intelligence Report series giving a country-by-country analysis of offshore investment funds, stock exchanges and trusts, with an analysis of the US QI regime, is available in the Lowtax Library at and a description of the report can be seen at



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