Corporate And Financial Weekly Digest - February 3, 2012

Edited by Robert L. Kohl and David A. Pentlow

SEC/CORPORATE

NYSE Restricts Broker Discretionary Voting

On January 25, the New York Stock Exchange (NYSE) issued Information Memo 12-4, which announced significant limitations on the ability of member brokers to vote customer shares without specific instructions from their clients.

Previously, the NYSE permitted brokers to vote uninstructed shares with respect to certain corporate governance matters proposals when the proposal in question was supported by the issuer's management. Going forward, absent specific instructions from customers, brokers will no longer be allowed to vote customer shares with respect to various corporate governance proposals, including proposals to de-stagger the board of directors, regarding majority voting in the election of directors, eliminating supermajority voting requirements, providing for the use of consents, providing rights to call a special meeting, and certain types of anti-takeover provision overrides.

These limitations highlight an ongoing trend of curtailing broker discretionary voting. In 2010, the NYSE amended Rule 452 (which governs broker discretionary voting) to prohibit brokers from voting uninstructed shares in the election of directors. More recently, the Dodd-Frank Wall Street Reform and Consumer Protection Act, prohibited brokers from voting uninstructed shares on executive compensation matters.

As a result of these changes, absent placing a "routine" matter (such as ratification of auditors) on the agenda companies may face challenges establishing a quorum at stockholders' meetings or, even if a quorum is obtained, obtaining sufficient votes to approve corporate governance proposals once considered "routine". Since most brokers are NYSE member organizations, the changes will affect Nasdaq and NYSE listed issuers alike.

Click here to view the full text of Information Memo 12-4.

Delaware Chancery Court Provides Clarity on Default Fiduciary Duties Owed by a Manager of a Limited Liability Company

On January 27, the Court of Chancery of the State of Delaware found that a manager of a limited liability company owes traditional fiduciary duties of loyalty and care unless the limited liability company's operating agreement specifically modifies or eliminates such duties.

The case involved claims by the minority members of Peconic Bay, LLC that Peconic's manager breached its fiduciary duties in connection with the manager's purchase of Peconic and the process through which the manager established the price for such sale (which the court described as a "sham auction").

The court noted that the Delaware Limited Liability Company Act (the Act) does not explicitly provide that managers or members of a limited liability company owe fiduciary duties in such roles, but that Section 18-1104 of the Act specifically contemplated an overlay of equitable principles. Because of such application of equitable principles, together with the statutory authority given by Section 18-1101 of the Act to eliminate certain fiduciary duties in an operating agreement and the legislative history of the Act, the court held that traditional fiduciary duties apply to the manager of a limited liability company.

Because Peconic's operating agreement did not expressly modify or eliminate the duties of loyalty or care owed by Peconic's manager, the court held that the manager owed such duties to Peconic's minority members.

Auriga Capital Corporation v.Gatz Properties, LLC and William Gatz, No. 4390-CS (Del. Chanc. January 27, 3012).

Click here to read the Opinion.

CFTC

Joint Report to Congress on International Swap Regulation

On February 1, the Commodity Futures Trading Commission and the Securities and Exchange Commission (the Agencies) submitted to Congress a Joint Report of International Swap Regulations (Report). The Report, which Congress directed the Agencies to prepare under section 719(c) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, describes the regulation of swaps and security-based swaps in the United States, Asia and Europe and identifies areas of regulation that are similar and other areas of regulation that can be harmonized. As required by section 719(c), the Report also identifies major dealers, exchanges, clearinghouses, clearing members, and regulators in each geographic area and lists the major contracts (including trading volumes, clearing volumes, and notional values), the methods for clearing swaps, and the systems used for setting margin in each geographic area.

A copy of the Report can be found here.

BROKER DEALER

Approval of Proposed Rule Change to Increase the Trading Activity Fee Rate for Transactions

The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority's proposal to amend Section 1 of Schedule A to the FINRA By-Laws to adjust the rate of FINRA's Trading Activity Fee (TAF) for transactions in covered equity securities. Effective March 1, 2012, the TAF rate for sales of covered equity securities will increase from $0.000090 per share to $0.000095 per share. The per-transaction cap for covered equity securities will increase by $0.25, from $4.50 to $4.75. The new rate applies to any sale of a covered equity security subject to the TAF occurring on or after March 1, 2012. Please note that the rules governing the TAF also include a list of exempt transactions.

Click here to see Section 1 of Schedule A to the FINRA By-Laws.

Approval of Proposed Rule Change to Adopt FINRA Rule 3230 (Telemarketing) in the FINRA Consolidated Rulebook

On January 30, the Securities and Exchange Commission approved the Financial Industry Regulatory Authority's proposed rule change to adopt a telemarketing rule in the FINRA Consolidated Rulebook. The new rule adopts NASD Rule 2212 into the FINRA Consolidated Rulebook as FINRA Rule 3230 (Telemarketing). The new Telemarketing rule includes the following additional changes:

Adopts similar caller identification information provisions contained in NYSE Rule 440A(h). (The new Telemarketing rule does not incorporate additional provisions in NYSE Rule 440A regarding pre-recorded messages and the use of telephone facsimile or computer advertisements.) Adopts a provision that is similar to NYSE Rule Interpretation 440A/01 as Supplementary Material. The provision reminds firms that the rule does not affect the obligation of members that engage in telemarketing to comply with relevant state and federal laws and rules, including the rules of the Federal Communications Commission relating to telemarketing practices and the rights of telephone consumers. Adopts provisions that are substantially similar to Federal Trade Commission rules that prohibit deceptive and other abusive telemarketing acts or practices. FINRA will announce the implementation date of the proposed rule change in a Regulatory Notice to be published no later than 90 days following SEC approval. The implementation date will be no later than 180 days following SEC approval.

Click here to see SEC Order Approving a Proposed Rule Change to Adopt FINRA Rule 3230 (Telemarketing) in the FINRA Consolidated Rulebook.

PRIVATE INVESTMENT FUNDS

SEC Provides Guidance on Umbrella Registration of Investment Advisers

On January 18, the Securities and Exchange Commission issued a no-action letter (the 2012 Letter) in response to a number of questions relating to the registration requirements of certain entities that are affiliated with registered investment advisers.

First, the 2012 Letter reiterates the continued validity of the position taken in a 2005 no-action letter (the 2005 Letter) regarding the registration requirement of certain special purpose vehicles (SPVs) created by registered investment advisers to private funds. The 2005 Letter provided that an SPV need not separately register so long...