Monthly Archives: October 2012

FINRA Announces Plans to Open Arbitration Forum to Investment Advisers

This week the president of FINRA’s office of dispute resolution, Linda Feinberg, announced the SRO will open its arbitration forum to registered investment advisers. The statement was made at the annual meeting of the Public Investors Arbitration Bar Association where Feinberg indicated FINRA will formally announce the program in the near term. Currently, the forum is available for investor and industry disputes involving broker-dealers. While investment advisers may submit to FINRA arbitration if a claim is brought against them, they are not eligible to affirmatively bring claims in the forum. Unlike the mandatory FINRA arbitration required for broker-dealers, advisers’ use of the forum will be voluntary and require the agreement of all parties to a dispute.

For further information about FINRA arbitration or any other securities related concern, please contact the author at sarah.weber@jackolg.com or (619)298-2880.

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BD Corner: SEC Approves FINRA Rule 5123 Requiring Filing of Private Placement Offering Docs

Last month FINRA announced SEC approval of new FINRA Rule 5123. The Rule requires each FINRA member firm selling securities in a private placement to file a copy of any private placement memorandum, term sheet or other offering documents with FINRA within 15 calendar days from the date of sale (or indicate that it did not use any such offering document). The rule becomes effective on December 3, 2012 and applies prospectively to any private placement that begins selling efforts thereafter. The rule exempts certain limited offerings sold solely to institutional, qualified and other sophisticated purchasers.

The new rule follows on the heels of Rule 5122, which was adopted last year and generally requires member firms engaging in private placements of unregistered securities in which the member firm is the issuer to: disclose in the offering documents the intended use of the proceeds, offering expenses and the amount of selling compensation to be paid to the broker-dealer; submit the offering documents to FINRA’s Corporate Financing Department prior to the offering; and comply with the requirement that at least 85% of the offering proceeds raised not be used to pay for offering costs, discounts, commissions or any other cash or non-cash incentives, and that those proceeds be used for the business purpose disclosed in the offering documents. According to FINRA’s Regulatory Notice announcing Rule 5123, both rules “are part of a multi-pronged approach to enhance oversight and investor protection in private placements.”

FINRA also indicated it is developing a private placement filing system to receive the offering documents that must be filed under Rule 5123 that will be accessible through the Firm Gateway and that will allow firms to submit filings on behalf of others involved in the sale.

For further information about Rules 5122, 5123 or any other securities related concern, please contact the author at sarah.weber@jackolg.com or (619)298-2880.

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October 18, 2012 · 7:05 pm

NASAA President Calls on SEC to Withdraw Proposed Rule Lifting Ban on General Solicitation

In a news conference this week, North American Securities Administrators Association (“NASAA”) President and Arkansas Securities Commissioner Heath Abshure sharply criticized the SEC’s proposed rule allowing marketing of private offerings. Mr. Absure, who was joined in the conference by Cristina Martin Firvida of AARP, Heather Slavkin Corzo, AFL-CIO, and Barbara Roper of the Consumer Federation of America, called on the SEC to withdraw the proposal and craft new rules that promote capital formation but do not sacrifice investor protection. As Abshure stated: “Rule 506 offerings already are the most frequent financial product at the heart of state enforcement investigations and actions. Lifting the advertising ban on these highly risky, illiquid offerings, without requiring appropriate safeguards, will create chaos in the market and expose investors to an even greater risk of fraud and abuse. Without adequate investor protections to safeguard the integrity of the private placement marketplace, investors should and will flee from the market, leaving small businesses without an important source of capital.”

These statements follow NASAA’s highly critical October 3, 2012 comment letter to the SEC calling on the agency to abandon the proposed rule, which it stated “does nothing more than repeat what is already in the statute.”

The comment period for the proposed amendment to Rule 506 closed on October 5, 2012, though comments are still being accepted on the SEC’s website. For further information about SEC’s proposal or any other securities related concern, please contact the author at sarah.weber@jackolg.com or (619)298-2880.

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California Appeals Court Affirms Stringent Limits on Non-Compete Provisions

The California Court of Appeal recently struck a post-employment non-competition provision in an employment agreement which was part of a broader acquisition deal. The opinion, Fillpoint, LLC v. Mass (August 24, 2012), demonstrates California’s strong public policy in favor of competition and against overly restrictive covenants, including the limitations to the exception to the general policy against such covenants found in California Bus. & Prof. Code Section 16601. That Section specifically allows a non-competition provision in connection with the sale of a business. Quoting an earlier case, the Fillpoint court explained the rationale for this exception to the general rule: Section 16601 “serves an important commercial purpose by protecting the value of the business acquired by the buyer. In the case of the sale of the goodwill of a business it is ‘unfair’ for the seller to engage in competition which diminishes the value of the asset he sold.”

The plaintiff in the case, Fillpoint, LLC, purchased the company of the defendant, Maas. The purchase agreement contained a three-year covenant not to compete. In connection with the sale, Maas also became an employee of Fillpoint, signing a separate employment agreement containing an additional twelve month non-compete and non-solicitation provision that was triggered by Maas leaving Fillpoint. After three years Maas left Fillpoint and immediately joined a competitor as president and CEO. Fillpoint then sued to enforce the non-competition provision in the employment agreement.

Importantly, the opinion makes clear that the separate non-competition provision found in the employment agreement could be considered part of the purchase transaction, and therefore, subject to the exception found in Section 16601. The court, however, refused to enforce the specific provision at issue on the grounds that it was not meant to protect the goodwill purchased by Fillpoint, but rather was targeted at the “employee’s fundamental right to pursue his or her profession.” The opinion highlights both the importance of the exception to California’s general policy against provisions not to compete found in Section 16601, and the limitations of that section. This issue is an important one in any purchase agreement. Businesses should take care to tailor these provisions to protect their interests and establish their intent to fall within the exception found in Section 16601 from the outset.

For further information about these provisions, please contact the author at sarah.weber@jackolg.com or (619)298-2880.

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