Brexit’s Impact on the U.S. Capital Markets

You may have heard by now that the U.K. plans to leave the European Union at some point in the next few years. Since the British voted back on June 23, 2016, there has been no shortage of learned analysis/rank speculation about Brexit’s future impact on the U.K. and EU economies and financial markets. Opinions range from dire to blasé, with reality likely to fall (as it is wont) somewhere in the middle. One surprising consequence, however, may be Brexit’s impact on U.S. capital markets. In a recent Heard on the Street column in The Wall Street Journal, Paul J. Davies theorizes from London that post-Brexit EU companies may have no choice but to tap the U.S. capital markets to make up for less convenient access to U.K. investors. It’s an intriguing, and believable, hypothesis. Mr. Davies notes that much of the capital used to fund business expansion comes from savings, mostly in the form of pension funds, insurance companies and investment funds. He cites statistics provided by the Financial Stability Board, Investment Company Institute, European Central Bank and OECD showing that eurozone savings total less than 150% of its total GDP, as compared to more than 250% of GDP in the U.K. and 240% of GDP in the U.S. He notes further that there currently is no single set of capital markets laws and standards within the EU, making it hard to raise capital simultaneously in several eurozone countries. Therefore, frequent or large eurozone issuers often turn to the U.K.’s massive capital markets. Post-Brexit, that may not be feasible. As a result, Mr. Davies says, EU companies may...

Jay Clayton Confirmed as SEC Chairman

A new era at the SEC officially began last week when Jay Clayton was sworn in as the 32nd Chairman of the SEC. The Senate’s confirmation of Mr. Clayton on May 2nd by a 61 to 37 vote continued the Trump Administration’s practice of tapping well-known Wall Street professionals to serve in key government positions. In this case, Mr. Clayton was a partner in the New York office of Sullivan & Cromwell, where according to the SEC’s news release he advised companies on “securities offerings, mergers and acquisitions, corporate governance and regulatory and enforcement proceedings.” These companies notably included Goldman Sachs, which has been a recurring theme with President Trump’s appointees. While his former ties will, no doubt, prevent Mr. Clayton from participating in SEC matters directly related to Goldman Sachs, his Wall Street background could well influence his perspective regarding the SEC’s future regulatory agenda. That agenda is expected to shift toward re-analyzing the regulations implemented as a result of Dodd-Frank while Congress seeks to roll back many of that act’s statutory imperatives. For example, a bill currently making its way through the House, known as the Financial Choice Act, would among other things and according to its executive summary: Provide an “off-ramp” from the post-Dodd-Frank supervisory regime and Basel III capital and liquidity standards for banking organizations that maintain high levels of capital, including easing restrictions on their ability to pay dividends and the maintenance of leverage ratios, Repeal the designation of firms as “systematically important financial institutions” and modify the bankruptcy code to accommodate the failure of large, complex financial institutions, thereby eliminating Dodd-Frank’s “orderly liquidation...

T+2 is a Reality

Last September, the SEC proposed rules that would shorten the standard settlement period for securities transactions from three business days (T+3) to two business days (T+2). As predicted, the rules have now been finalized in short order and without controversy. Background This is the latest, though probably not the last, step in the evolution of trade settlements. Trades actually settled on a T+5 cycle until 1993, when the adoption of Rule 15c6-1 mandated T+3 in an effort to reduce credit risk (the risk that the credit quality of one party to the transaction will deteriorate) and market risk (risk that the value of traded securities will change between trade execution and settlement). Since then, the settlement cycle has been stuck on three business days despite dramatic advances in technology, multiple industry-driven recommendations to shorten the cycle and the adoption of a shorter settlement cycle in almost every other significant non-U.S. trading market. For example, T+2 (or less) already exists in most European markets, the U.K, Israel, Saudi Arabia and China, while others markets, like Australia, New Zealand, Japan and Canada, are expected to adopt T+2 in the near future. The SEC actually considered T+1 and T+0 settlement cycles in its deliberations, but rejected them as requiring more extensive changes to technology and post-trade processes that would delay the benefits of moving to a T+2 cycle. Nevertheless, it would be reasonable to expect movement toward shorter trade settlements in the U.S. in the future. The amended rule Exchange Act Rule 15c6-1(a) has been amended to prohibit a broker-dealer from entering into a contract for the purchase or sale of a...

T+2 is on the Way (Finally)

At long last, the SEC has proposed amendments to its rules that would shorten the standard settlement period for securities transactions from three business days (T+3) to two business days (T+2). The proposal… The change would be accomplished by amending Exchange Act Rule 15c6-1 to prohibit a broker-dealer from entering into a contract for the purchase or sale of a security (subject to certain exceptions) that provides for payment of funds and delivery of securities later than two business days after the trade date (known as “T”), unless otherwise expressly agreed to by the parties at the time of the transaction. You may recall that trades used to settle on a T+5 cycle until 1993, when the SEC adopted Rule 15c6-1, which mandated T+3 in order to reduce credit risk (the risk that the credit quality of one party to the transaction will deteriorate) and market risk (risk that the value of traded securities will change between trade execution and settlement). But since 1993, the settlement cycle has been stuck on three business days, despite dramatic advances in technology, multiple industry-driven recommendations to shorten the cycle and the adoption of a shorter settlement cycle in almost every other significant non-U.S. trading market. For example, according to the SEC’s release, T+2 (or less) already exists in most European markets, including Germany, France, Ireland, the Netherlands, Sweden and Switzerland, to name a few, as well as in the U.K., Israel, Saudi Arabia, China and many more. Others markets, like Australia, New Zealand, Japan and Canada, are expected to adopt T+2 in the near future. Impact on securities offerings… For public companies,...

Tandy Reps are No More

The SEC announced on October 5th that, effective immediately, “Tandy” representations are no longer required in company responses to SEC comment letters. Practically speaking, this requires only a simple template modification to a company’s letter responding to SEC comments. For those of us who have been around for a while, it also means the end of an era. What were Tandy reps? Since the 1970s, the SEC staff has required that companies provide the following acknowledgements in their responses to SEC comment letters related to Securities Act filings: Should the Commission or the staff, acting pursuant to delegated authority, declare the filing effective, it does not foreclose the Commission from taking any action with respect to the filing; The action of the Commission or the staff, acting pursuant to delegated authority, in declaring the filing effective, does not relieve the Company from its full responsibility for the adequacy and accuracy of the disclosure in the filing; and The Company may not assert this action as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. These were deemed “Tandy” representations or acknowledgements because Tandy Corporation was the first company required to provide them. When the staff began releasing company/staff correspondence to the public in 2004, it required that substantially similar Tandy reps be included in responses to Exchange Act comment letters, as well. What now? The SEC stated in its announcement that, even though the Tandy reps are no longer required, staff comment letters will include the following language: “We remind you that the company and its management...

Limits on 401(k) Plan Brokerage Windows

Many companies have recently modified their 401(k) plans to add a “brokerage window,” sometimes also known as a “self-directed account” or “self-directed brokerage account.” Rather than limiting participants to specified investment options (which may or may not include the employer’s own stock), plans with brokerage windows offer participants the ability to trade most of the listed stocks, mutual funds and exchange-traded funds within a brokerage’s offering. Leaving aside whether this level of investment freedom is advisable for many retirement plan participants, employers must consider the Securities Act implications of providing such an option. Companies that allow employees to purchase employer stock through their 401(k) plans are already well aware of the securities law requirements and restrictions related to that plan feature. However, what if a plan with no employer stock investment alternative is modified to include a brokerage window that does not prohibit employee contributions from being invested in employer stock? Could this constitute an offer of employer stock requiring Securities Act registration? While this might seem like a stretch, the SEC previously addressed analogous concerns in the context of employee stock purchase plans. A new CDI 139.33 from the Division of Corporation Finance now provides guidance on exactly this issue regarding 401(k) plans by referring back to its long-standing ESPP guidance. The answer, says the staff, depends on the extent of the employer company’s involvement in the brokerage window investment option. The concern is whether there is an “attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value” within the meaning of Securities Act Section 2(a)(3)...