The International Capital Markets Review: USA


Regulation of the capital markets in the United States is principally conducted by federal government agencies, particularly the Securities and Exchange Commission (SEC).

The Securities Act of 1933 (Securities Act) requires that all offers and sales of securities in the United States be made either pursuant to an effective registration statement or an explicit exemption from registration. Any class of securities listed on a US exchange must be registered under the Securities Exchange Act of 1934 (Exchange Act), and the issuer of the relevant class is required to file annual and other reports with the SEC. Exchange Act registration and reporting also apply to unlisted equity securities, including securities of companies traded and organised outside the United States, held by a sufficiently large population of US record-holders. Securities registered under the Exchange Act are also subject to the SEC's rules on ownership reporting and tender offers.

The perspective of the SEC statutes is that persons making investment decisions in securities transactions should have complete and reliable information. The detailed disclosure requirements that apply to such transactions are found in the rules promulgated by the SEC under the securities laws.

In addition to the SEC, other federal and state regulators and self-regulatory organisations, such as the Commodity Futures Trading Commission (CFTC) and the Financial Industry Regulatory Authority, have important roles in the oversight of the securities activities of banks, insurers and broker-dealers, in particular.

Although the SEC proposes and adopts rules under the federal securities laws every year, particularly wide-ranging rule changes were adopted in recent years as a result of the financial crisis, including those mandated by the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd–Frank Act). The Dodd–Frank Act increased investor protection through substantive market regulation, a policy somewhat at odds with the SEC's previous efforts to reduce the regulatory burden on issuers, and many industry advocates argue that the Dodd–Frank Act reforms have gone so far as to have had a chilling effect on the capital markets. Reflecting these concerns, the administration of President Donald Trump has rolled back or announced plans to further reduce SEC regulations. While the deregulatory policy of the Trump administration is clear, so far the changes relevant to the capital markets and the US financial system have been limited. This is perhaps understandable given the many other challenges which have arisen in 2020 in particular.

The year in review

Despite the significant impact on global markets of covid-19, debt and equity markets in the United States have continued to function surprisingly well through the first nine months of the year. Notwithstanding a more recent correction, the performance of the technology sector equity markets has been particularly noteworthy. Nonetheless, investors, rating agencies and regulators have been understandably focused on the financial condition, liquidity, results of operations and prospects of issuers through the 30 June reporting cycle and there remain obvious concerns about the strength and viability of many companies likely to be reliant on access to these markets in the months and year ahead. These concerns have resulted in a US$3 billion legislative response from Congress in the form of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, regulatory guidance and accommodations from the Treasury, the Federal Reserve Board (FRB), the SEC and other regulatory bodies, and a broad awareness that significant challenges lie ahead for our capital markets. While this has resulted in some of the previously announced regulatory priorities of these agencies having to give way to the more immediate need to deal with covid-19, there have nonetheless been more ordinary course regulatory and other developments over the past year worth noting. Other important themes in 2020 have included the Trump administration's focus on China and other emerging markets and the SEC's ongoing regulatory concerns in relation to cryptocurrencies. The threat of shareholder litigation and broader regulatory enforcement action in the United States remains as significant as ever.

i Developments affecting debt and equity offerings

During 2020, the SEC, the FRB and other regulators have prioritised the efficient functioning of the debt and equity markets in the United States. In addition to more routine rulemaking activities, this has included accommodations to SEC reporting companies in relation to filing content and deadlines and governmental funding support for eligible borrowers in US debt markets.

SEC guidance in relation to covid-19

In a statement on 30 January 2020, Chairman Jay Clayton noted that the SEC staff would monitor and, to the extent appropriate, provide guidance and other assistance to issuers and other market participants regarding disclosures related to the current and potential effects of covid-19.2 The statement noted that actual effects could be difficult to assess or predict with meaningful precision both generally and on an industry- and issuer-specific basis.

One issue that became immediately apparent was that a number of SEC reporting companies could face difficulties meeting their first quarter reporting obligations. On 4 March 2020, the SEC made an order under Section 36 of the Exchange Act to exempt affected companies from the upcoming deadlines for related periodic filings.3 The conditions to be satisfied included:

  1. that the registrant be unable to meet the filing deadline because of circumstances related to covid-19;
  2. that it furnish to the SEC on Form 8-K or 6-K (as applicable) by 16 March or the original filing deadline:
    • a statement that it was relying on the SEC order;
    • a brief description of the reasons it could not file the relevant report, schedule or form on a timely basis;
    • the estimated date by which the report, schedule or form was expected to be filed;
    • if appropriate, a risk factor explaining, if material, the impact of covid-19 on its business; and
    • if the reason for the inability to file was a third person (such as an auditor), a statement signed by that person stating the specific reasons why it was unable to furnish the required opinion, report or certification by the deadline in question;
  3. that it make the required filing no later than 45 days after the original due date; and
  4. that, in any related report, schedule or form, the registrant disclose that it is relying on the order and the reasons why it could not file on a timely basis.

On 25 March 2020, the SEC issued a further order to cover filings due on or before 1 July 2020.4 Related accommodations were provided to domestic registrants in relation to proxy and information statements.

Although the above orders indicate a measure of understanding for registrants, the SEC staff have remained vigilant in relation to the adequacy of the disclosures contained in filings made under the Securities Act and the Exchange Act. In recent months, the Division of Corporation Finance (Division) has published disclosure guidance and frequently asked questions (FAQs) to encourage registrants to meet their reporting obligations as comprehensively and in as timely a fashion as possible, notwithstanding the challenges posed by covid-19.

On 25 March 2020, the Division published CF Disclosure Guidance: Topic No. 9 in which it provided its views in relation to covid-19 disclosures generally.5 It noted that it may be difficult to assess or predict with precision the broad effects of covid-19 on industries or individual companies and acknowledged that the actual impact will depend on many factors beyond a company's control and knowledge. Nevertheless, it noted that the effects covid-19 on a company, what management expects its future impact will be, how management in responding to evolving events and how it is planning for covid-19 related uncertainties could be material to investment and voting decisions. Disclosure of covid-19 risks and effects may be necessary or appropriate in different parts of company filings, including management's discussion and analysis (MD&A), the business description, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements. The approach necessarily involves a facts-and-circumstances analysis specific to the company in question. The Division listed illustrative detailed questions to be considered. Questions focused on financial condition and liquidity, business operations and continuity, human capital resources, travel restrictions and border closures. Companies were encouraged to revise and update their disclosures as facts and circumstances changed, to make use of available relief for forward-looking statements that could be helpful to investors, and to proactively address financial reporting matters earlier than usual.

The 25 March disclosure guidance included updated and noteworthy commentary in relation to the use of non-GAAP6 measures. The Division stated that it would not object to reconciliation of a non-GAAP measure to preliminary GAAP results that either include provisional amounts based on a reasonable estimate or a range of reasonably estimable GAAP results. For example, if a company intends to disclose on an earnings call its earnings before interest, taxes, depreciation and amortisation, commonly called EBITDA, it could reconcile to either its GAAP earnings, a reasonable estimate of its GAAP earnings including a provisional amount, or its reasonable estimate of a range of GAAP earnings. Any provisional amount or range should reflect a reasonable estimate of covid-19 related charges not yet finalised, such as impairment charges. Issuers should limit such non-GAAP measures to those it is using to report financial results to its directors and, to the extent practicable, should explain why the line items or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting.

On 8 April 2020, Chairman Clayton and Division Director William Hinman made an important public statement in relation to the issues arising from covid-19.7 They encouraged companies to provide robust, high-quality, forward-looking disclosure to benefit themselves, investors and the broader economy, characterising such disclosures as a public good. They indicated that the SEC staff are 'laser-focused on identifying bad actors who would seek to use the current uncertainty to prey on our investors', but also emphasised that '[g]iven the uncertainty in our current business environment, we would not expect to second guess good faith attempts to provide investors and other market participants appropriately framed forward-looking information.'

On 23 June 2020, the Division published CF Disclosure Guidance Topic No. 9A.8 This guidance expanded on the Division's views regarding operations, liquidity and capital resources disclosures to be considered in relation to business and market disruptions related to covid-19.9 The Division encourages issuers to provide updated disclosures as relevant facts and circumstances change, noting that disclosures should enable an investor to understand how management and the board of directors are analysing the current and expected impact of covid-19 on the company's operations and financial condition, including liquidity and capital resources. The diverse range of operations adjustments being undertaken by many companies was described, including a transition to telework; supply chain and distribution adjustments; and suspending or modifying operations to comply with health and safety guidelines for the protection of employees, contractors and customers. The diverse and sometimes complex range of financing activities being undertaken was likewise discussed, whether in the bank or public or private markets. The importance of robust and transparent disclosures about measures dealing with short- and long-term liquidity and funding risks in the current economic environment was emphasised, particularly when new risks or uncertainties have arisen. While the Division had observed the inclusion of such disclosures in earnings releases, it encouraged companies to evaluate whether this information should also be disclosed in MD&A disclosures. Additional considerations may include items such as the provision of additional collateral, guarantees or equity to secure funding; any actual or potential rating change and its impact on the cost of capital; any material risk of breaching covenants in credit agreements or indentures; the use of payment deferrals, forbearance periods or other concessions; and questions related to the use of CARES Act and other government funding or tax credits and its ability to continue as a going concern.

As part of its continuing efforts to inform market participants about its expectations, the Division has also published FAQs in relation to covid-19 issues. These were updated most recently on 4 May 2020.10 Perhaps most relevantly, the Division has indicated that companies who have availed of the SEC's orders to delay the submission of required Exchange Act reports may nonetheless use effective Securities Act registration statements to access the public markets. This guidance was provided in relation to registration statements on Form S-3, the abbreviated registration form used by most domestic registrants, but is also likely to reflect Division views for filings by foreign private issuers on Form F-3.

The CARES Act and related FRB corporate funding programmes

On 27 March 2020, the CARES Act was passed by Congress and signed into law by President Trump. In a series of related measures, the US Treasury and the FRB announced a range of measures designed to ensure the continued functioning of the US capital markets. These include the Primary Market Corporate Credit Facility (PMCCF), the Secondary Market Corporate Credit Facility (SMCCF), the Commercial Paper Funding Facility (CPFF) and the Term Asset-Backed Securities Loan Facility (TALF), as well as a range of other support measures.11 The CPFF and TALF became operational on 14 April 2020 and 26 June 2020, respectively, whereas the PMCCF and SMCCF are still being refined and implemented.

The US Treasury made an initial US$10 billion equity investment in the CPFF. The CPFF is being used to purchase three-month US dollar-denominated unsecured (and asset-backed) commercial paper from issuers that meet its eligibility criteria. The Treasury has made a US$75 billion equity investment in the PMCCF and SMCCF, with an initial allocation of US$50 billion to the PMCCF and US$25 billion to the SMCCF. This represents a significant increase from the proposed capitalisation of these facilities when they were originally announced in March 2020. The PMCCF is to be used to purchase a mix of investment and non-investment grade corporate bonds and loans with maturities of four years or less, while the SMCCF is being used for the purchase of secondary market investment grade debt with a maturity of five years or less and exchange-traded funds whose investment objective is to provide broad exposure to the market for US corporate bonds. The US Treasury made an initial US$10 billion equity investment in the TALF. The TALF is being used to enable the issuance of asset-backed securities (ABSs) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration and certain other assets.

Although, consistent with administration policy more generally, the CARES Act and the above facilities are designed to primarily support US companies (including those in key industries) and to support the flow of credit to consumers and businesses, they are of potential relevance to non-US companies as well:

  1. The CPFF is available to US branches of foreign banks and US issuers with a foreign parent company.
  2. The TALF requires that borrowers be businesses that are created or organised in the United States or under the laws of the United States and have significant operations in and a majority of their employees based in the United States. In the case of a borrower that is an investment fund, its investment manager, which may be a US subsidiary or US branch or agency of a foreign bank, must have significant operations in and a majority of its employees based in the United States. All or substantially all the credit exposures underlying the eligible ABSs must (1) for newly issued ABSs, except for collateralised loan obligations (CLOs), be originated by US-organised entities (including US branches or agencies of foreign banks), (2) for CLOs, have a lead or a co-lead arranger that is a US-organised entity (including a US branch or agency of a foreign bank), and (3) for all ABSs (including CLOs and CMBS), be to US-domiciled obligors or with respect to real property located in the United States or one of its territories.
  3. The PMCCF and SMCCF require that the issuer be a US company with significant operations, and a majority of its employees, in the United States, which potentially includes many motor vehicle, drug and other manufacturers with non-US parents, but, in these cases, the proceeds must be used for the benefit of the US subsidiary and not for the benefit of any foreign affiliates. While not an exhaustive definition, an issuer with greater than 50 per cent of its consolidated assets, net income, revenues or operating expenses (excluding interest expense and any other expenses associated with debt service) generated in the United States is likely to be viewed as an eligible issuer for these purposes. The FRB has also clarified that an eligible issuer can be a newly established subsidiary, so long as the guarantor satisfies the relevant eligibility criteria. Where the issuer is a subsidiary whose sole purpose is to issue debt, 95 per cent or more of the proceeds must be used to support the company's US operations.

The PMCCF is still in the implementation phase. This facility will be a potentially critical backstop for issuers that are no longer able to access the mainstream debt markets on reasonable terms. The facility will purchase eligible bonds and loans either as the sole purchaser or as a participant in a syndicated offering or placement, with participation in syndicated offerings to be limited to 25 per cent of the deals in question. Revised terms for the facility, including detailed registration, certification and covenant requirements, were published on 29 June 2020.12 For the moment, the FRB is focused on bond purchases where it is to be the sole purchaser, but the facility is likely to be rolled out more broadly in the months ahead.

Other SEC rulemaking

Although the need to address covid-19 disclosure and market regulation issues has been an obvious and time-consuming challenge, the SEC has nonetheless sought to keep its planned rulemaking activities on course. This has included rule changes relating to key private placement definitions, risk factors and financial statement disclosures.

Broadening of 'accredited investor' and 'qualified institutional buyer' definitions

Private placements in the United States are made in reliance on the exemption from SEC registration set out in Section 4(a)(2) of the Securities Act. Rule 501(a) under the Securities Act includes a definition of an accredited investor to whom offer and sales may lawfully be made in transactions of this kind. Rule 144A under the Securities Act includes a definition of a qualified instructional buyer to which privately placed securities can be re-offered and resold without any such registration.

On 26 August 2020, the SEC adopted amendments13 to these definitions to bring additional categories of persons and entities within their scope as 'part of a broader effort to simplify, harmonise, and improve the exempt offering framework under the Securities Act to promote capital formation and expand investment opportunities while maintaining and enhancing appropriate investor protections'.14

The amendments to the accredited investor definition add the following categories of persons and entities:

  1. natural persons with certain professional certifications, designations, or credentials or other credentials issued by an accredited educational institution, which the SEC may designate from time to time by order (including holders of certain securities licences);
  2. natural persons who are 'knowledgeable employees' of private funds( e.g., certain hedge funds, venture capital funds and private equity funds);
  3. limited liability companies with US$5 million in assets;
  4. SEC- and state-registered investment advisers, exempt reporting advisers and rural business investment companies (RBICs);
  5. any entity, including American Indian tribes, governmental bodies, funds, and entities organised under the laws of foreign countries, that owns 'investments', as defined in SEC rules, in excess of US$5 million and not formed for the specific purpose of investing in the securities offered;
  6. 'family offices' with at least US$5 million in assets under management and their 'family clients', as each term is defined under the Investment Advisers Act of 1940, as long as the family office's investments are directed by someone with 'such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the prospective investment', and the office was not formed for the specific purpose of acquiring the securities offered; and
  7. 'spousal equivalents' – cohabitants occupying a relationship generally equivalent to that of a spouse – for the purposes of calculating joint income or determining net worth under Rules 501(a)(5) and (6).

The amendments also expand the definition of a qualified institutional buyer in Rule 144A to include:

  1. limited liability companies and RBICs; and
  2. any institutional investors included in the accredited investor definition that are not otherwise enumerated in the definition of a qualified institutional buyer.

The newly recognised legal forms must satisfy Rule 144A's investment test, which is ownership or management of at least US$100 million in securities of unaffiliated issuers.

Updated disclosure requirements for risk factors

On 26 August 2020, the SEC adopted amendments to 'modernise' its rules requiring disclosure about a company's business description, legal proceedings and risk factors in Items 101, 103 and 105 of Regulation S-K.15 Only the amendment to Item 105, covering disclosure of risk factors in Securities Act registration statements, will apply to foreign private issuers, except those that elect to use domestic reporting forms.

Item 105 currently calls for a concise and logically organised discussion of the most significant factors that make an investment in a company's securities speculative or risky. Under the current rule, companies are admonished not to disclose risks that could apply generically to any company and must set out each risk factor under a subcaption that describes the risk. In practice, the rule is largely observed in the breach.

The amendments seek to elicit material and concise risk factor disclosure that is tailored to the company's specific circumstances and organised in a way that gives greater prominence to the most salient risk and will require the following:

  1. summary risk factor disclosure if the risk factor section exceeds 15 pages (which the SEC estimates is true for approximately 40 per cent of current filers). The summary disclosure must consist of a bulleted or numbered list summarising the principal risk factors that is no longer than two pages and appears at the forepart of the filing. The summary disclosure need not contain all the risk factors identified in the full risk factor discussion. The SEC apparently hopes that the new rule may incentivise some companies to streamline their risk factor disclosure to avoid the summary disclosure requirement.
  2. disclosure of the 'material' rather than the 'most significant' risks facing the company, to encourage companies to disclose the risks to which reasonable investors would attach importance in making investment decisions;
  3. organisation by companies of their risk factors under subject headings, as is already common practice, and if a company discloses any generic risk factors that could apply to any company or offering, these must appear at the end of the risk factor section under the caption 'General Risk Factors'. The SEC encourages companies to tailor their risk factor disclosures to highlight the specific relationship of the risk to the company to avoid the need to include the risk under the general risk heading.
Updated requirements for financial information about guarantors, collateral, and acquisitions and dispositions

The requirements for the form and content of financial information provided under the securities laws are set out in Regulation S-X. The SEC finalised two sets of significant amendments to Regulation S-X in 2020.

Amendments finalised on 2 March 2020 revise the information for debt and debt-like securities supported by guarantees or collateralised securities of affiliates.16 The financial information required under the existing rules for guaranteed and secured securities can be onerous, leading many issuers to offer such securities in unregistered offerings. The amendments ease the requirements to encourage issuers to offer such securities in registered transactions.

The securities laws treat the guarantee of a debt or debt-like security as a separate security. Rule 3-10 of Regulation S-X requires each guarantor to file the same financial statements as an issuer, unless an exception allows the consolidated financial statements of a parent company to suffice, together with additional disclosures. Existing exceptions only apply for guarantees that are full and unconditional and if the relevant subsidiaries are 100 per cent-owned by the parent company. The alternative disclosures range from narrative disclosures to audited footnotes for up to three full fiscal years setting out condensed consolidating financial information for the issuer, guarantors, non-guarantors and consolidating adjustments in columns.

The March 2020 amendments broaden the exceptions and ease the disclosure requirements. The exceptions are available if the relevant subsidiaries are consolidated by the parent company rather than 100 per cent-owned. Further, only the parent guarantee must be full and unconditional; the exceptions are still available if a subsidiary's guarantee is limited. Non-financial information to be provided includes a description of the issuer and guarantors; the terms and conditions of the guarantees; and factors that may affect payments under the guarantee. Summarised financial information is to be provided about the issuer and guarantors, which is key line items and simpler than the condensed consolidated financial information required under the existing rules. If the issuer or certain guarantors are subject to factors that others are not, such as limitations on payment, then separate summarised financial information is required for these entities. Narrative disclosure may suffice in simple situations. Summary financial information is only required for the most recent full fiscal year plus the subsequent interim period.

The summarised financial information can be omitted if it is not material. While the amendments provide examples of where such disclosure would not be material, the SEC's intent is for materiality to be the guiding principle for omitting the summarised financial information rather than meeting conditions prescribed by the rules.

Existing Rule 3-16 of Regulation S-X requires any affiliate of an issuer whose securities constitute a 'substantial portion' of the collateral supporting the issuer's securities to file the same financial statements as an issuer of securities. An affiliate's securities constitute a substantial portion of the collateral of the secured securities if their principal amount, par value, book value or market value is 20 per cent or more of the secured securities.

The March 2020 amendments replace these rules with requirements for limited financial and non-financial information if, material. The non-financial information includes a description of the pledged securities and the pledgor, the terms and conditions of the collateral arrangement, and any trading market for the pledged securities. Summarised financial information is required for each affiliate whose securities are pledged as collateral for the most recently completed fiscal year and subsequent interim period but this information may be provided on a combined basis. The summarised financial information need not be audited.

The amendments relating to guarantors and collateral become effective on 4 January 2021.

Amendments finalised on 20 May 202017 revise the financial information required for acquired and disposed businesses.18 Existing Rule 3-05 of Regulation S-X requires an issuer to provide up to three years plus interim periods of separate audited and unaudited financial statements for acquired businesses. The number of years of financial statements required depends on the significance of the acquired business relative to the acquiring business. Article 11 of Regulation S-X requires an issuer to provide pro forma financial information based on historical financial statements of the issuer and the acquired business.

The May 2020 amendments revise the investments and income tests for determining the 'significance' of an acquired business. The revised investment test allows investments in and advances to the acquired business to be compared to the worldwide market value of the equity of the issuer, if available, rather than just to the issuer's total assets. The income test was amended to add a component that also compares the revenue of the issuer and acquired business, if material. These changes minimise anomalous results that occasionally occur under the existing investment and income tests. Pro forma principles will also be allowed in determining significance.

The May 2020 amendments also include an easing of the sliding scale of the number of years of separate financial statements that an issuer is required to provide for an acquired business, including reducing the maximum to two full fiscal years' financial statements; ending the requirement to provide acquired business financial statements after the acquired business has been reflected in the audited consolidated statements of the acquiring business for nine months or one year; allowing abbreviated financial statements for acquired businesses for which financial statements have not been historically prepared; allowing acquired foreign business financial statements in IFRS;19 and increasing the significance threshold for preparing pro forma financial statements for business dispositions. The SEC also amended and clarified related rules that specifically apply to acquisitions of significant real estate operations so they align with the usual rules where there are no specific industry considerations.

The May 2020 amendments also revise the preparation requirements for pro forma financial information to improve the content and relevance of such information. Pro forma financial information now must separately disclose in columnar format 'Transaction Accounting Adjustments', which adjust for the application of required accounting to the transaction; 'Autonomous Entity Adjustments', which adjust for the operations and financial position of the registrant as an autonomous entity if the registrant was previously part of another entity; and, at management's discretion, 'Management's Adjustments' setting out synergies and dis-synergies of the acquisitions and dispositions for which pro forma effect is being given. Management adjustments can be included if, in management's opinion, the adjustments would enhance an understanding of the pro forma effects of the transaction. There must be a reasonable basis for management adjustments, they must be limited to their effects on historical financial statements and they must reflect all adjustments necessary for a fair disclosure of the pro forma information. Additional information may be required on the basis, limitations, assumptions and uncertainties associated with management adjustments, the method of calculating management adjustments, and the estimated time period in which synergies and dis-synergies will be realised.

The revised amendments relating to acquired and disposed businesses and pro forma information become effective on 1 January 2021 but may be voluntarily complied with prior to becoming effective.

ii Developments affecting derivatives, securitisations and other structured products

In recent years, US regulatory changes in relation to derivatives, securitisations and other structured products have been focused on rule changes mandated by the Dodd-Frank Act, including Section 619, commonly known as the Volcker Rule. During 2020, the SEC and other regulatory authorities have continued to both implement and refine these rules, and have proposed additional rule changes for consideration.

Interagency amendment of the Volcker Rule

The Volcker Rule comprises statutory provisions and implementing regulations that restrict banks from engaging in proprietary trading and from acquiring ownership interests in, or sponsoring, hedge funds, private equity funds and certain other private issuing entities – defined as 'covered funds'. In June 2020, the SEC, along with the FRB and other US federal agencies, approved amendments to the Volcker Rule's covered fund provisions.20 Those amendments followed amendments, in 2019, to the Volcker Rule's proprietary trading and compliance programme provisions.21

The Volcker Rule's covered fund provisions were aimed primarily at hedge funds and private equity funds. However, its definition of the term 'covered fund' is much broader, encompassing a range of private issuing entities, including many securitisation issuers. Accordingly, the Volcker Rule's covered fund restrictions have been considered overbroad by many market participants. The recent amendments, although not changing those restrictions fundamentally, tailored them in ways that are meaningful.

The amendments narrowed the definition of ownership interest (and thus narrowed the Volcker Rule's restrictions on banks' ownership of covered funds). The amendments also provided additional exclusions from the definition of a covered fund for the following kinds of entities (which meet certain conditions set out in the amendments): credit funds, venture capital funds, family wealth management vehicles, and customer facilitation vehicles.

The amendments also broadened an existing exclusion, for loan securitisations, permitting them to own bonds and other debt instruments in an amount of up to 5 per cent of their investments. That change will permit collateralised loan obligations (CLOs) to have 'bond buckets' (to supplement their portfolios of loan assets), as they did before the Volcker Rule. The amendments also codify previous relief that the agencies had provided for certain 'foreign excluded funds', which are non-US issuing entities that are not covered funds but that may be deemed to be 'banking entities' (because they are owned or controlled by a non-US banking organisation) and directly subject to the Volcker Rule's various restrictions.

The amendments will be effective from 1 October 2020.

CFTC adopts rules that will govern the cross-border application of certain requirements that apply to swap dealers

On 23 July 2019, the CFTC finalised a rule (the Final Rule)22 that will determine the cross-border application of certain of the CFTC's swaps rules, including the CFTC's swap dealer registration requirements. As to the cross-border application of those rules, the Final Rule will supersede the cross-border guidance that the CFTC published in 2013 (the Cross-Border Guidance),23 which set out the CFTC's initial approach to cross-border swaps regulation. The Final Rule addresses only certain of the CFTC's swap rules, which impose obligations on swap dealers and major swap participants (MSPs) in their capacities as such. It does not address the application of the CFTC's uncleared swaps margin rules or requirements that apply regardless of the registration state of the counterparties.

The Final Rule operates through four basic mechanisms:

  1. It establishes defined terms, some of which are similar to defined terms in the Cross-Border Guidance and Cross-Border Margin Rule, and some of which are new.
  2. It provides rules with respect to how a non-US dealer must count swap dealing transactions when determining whether the non-US dealer exceeds the CFTC's de minimis threshold, thus triggering a requirement to register with the CFTC as a swap dealer. It similarly provides rules addressing the cross-border application of the CFTC's major swap participant registration thresholds.
  3. It creates exceptions from certain swap dealer requirements under the CFTC's swap rules. In doing so, it categorises those requirements into three groups:
    • Group A requirements (certain requirements that are applicable on a swap dealer-wide basis);
    • Group B requirements (certain requirements that are applicable on a transaction-by-transaction basis); and
    • Group C requirements (certain requirements that are related to business conduct standards).
  4. It sets out circumstances in which substituted compliance will be permitted for swap dealers that are also subject to non-US swap regulatory regimes that are the subject of favourable comparability determinations by the CFTC.

The Final Rule does not supersede the CFTC's separate cross-border margin rule, which will continue to govern the cross-border application of the CFTC's uncleared swaps margin requirements. It also does not supersede those portions of the Cross-Border Guidance that set out the CFTC's views on application of the 'Non-Registrant Requirements', namely those relating to required clearing, trade execution, real-time public reporting, large trader reporting, swap data reporting and swap data record-keeping, which are not tied to the registration status of the swap counterparties. Among other things, this may result in different 'US person' definitions for different contexts.

SEC adopts rules to address the cross-border application of security-based swap requirements

On 18 December 2019, the SEC amended its own rules, and provided related interpretive guidance, with respect to the cross-border application of rules governing security-based swap transactions, which are under its jurisdiction rather than that of CFTC (which covers swap transactions that are not security-based).24

The SEC's amendments and guidance are intended to improve the regulatory framework for security-based swaps by addressing implementation issues and efficiency concerns, and in some cases further harmonising the regulatory regime governing security-based swaps administered by the SEC with the regulatory regime governing swaps administered by the CFTC. The amendments and guidance address four key areas:

  1. The SEC provided guidance regarding the terms 'arrange' and 'negotiate', as those terms are used in certain rules addressing the cross-border application of its security-based swap rules (e.g., when individuals in the United States arrange or negotiate transactions on behalf of non-US security-based swap dealers).
  2. The SEC adopted a conditional exception to provisions of its rules that otherwise require non-US persons to count – against the thresholds associated with the de minimis exception to the 'security-based swap dealer' definition – security-based swap dealing transactions with non-US counterparties when US personnel arrange, negotiate or execute those transactions.
  3. The SEC adopted an amendment to its rules to allow conditional registration of a non-US resident security-based swap dealer despite its inability to provide a certification and opinion of counsel, which would otherwise be required for registration. That requirement relates to the SEC's access to the books and records of the security-based swap dealer and the SEC's ability to conduct on-site examinations and inspections. The SEC also provided related interpretive guidance regarding the requirement.
  4. The SEC adopted an amendment to rules that prohibit security-based swap dealers from allowing an associated person who is subject to a 'statutory disqualification' to be involved in effecting security-based swaps on its behalf. The amendment provides relief with respect to associated persons who are not involved in effecting security-based swap transactions with or for counterparties that are US persons (with limited exceptions). The SEC also adopted related rule amendments that address certain requirements to make and keep current questionnaires or applications for employment executed by certain associated persons.

The SEC issued a detailed statement regarding compliance with rules that address security-based swap data repositories and related reporting requirements. The statement is intended to provide relief, for a period, from certain requirements to promote harmonisation with the CFTC's reporting regime for non-security-based swaps and to reduce unnecessary burdens on market participants.

iii US federal cases of relevance to the capital markets

During 2020, US federal courts have rendered decisions of interest to capital markets practitioners, some of which are discussed below. An important issue continues to be the extraterritorial application of US laws and the jurisdictional reach of US courts.

Further developments in Stoyas v. Toshiba Corporation

After the Supreme Court's 2010 decision in Morrison v. National Australia Bank,25 US courts have typically held that foreign issuers whose securities are traded in the United States via American depositary receipts (ADRs) or American depositary shares (ADSs) cannot be sued under Section 10(b) of the Securities Exchange Act and Rule 10b-5 by purchasers or sellers of a company's stock traded abroad but can be sued by buyers or sellers of ADRs26 if the suit is based on a purchase or sale on a US exchange or that otherwise takes place in the United States (such as an over-the-counter (OTC) trade or private placement in which the parties commit to the trade within the United States). However, those cases have typically addressed sponsored ADR facilities, in which there could be no question of the issuer's involvement. In 2016, the decision of the US District Court in Stoyas was the first to expressly rule on how Morrison applies to unsponsored ADR facilities. The Stoyas court held that a foreign issuer's lack of involvement in the unsponsored facility means it cannot be sued for statements it made to the markets overseas.27 On appeal, in 2018, the Ninth Circuit reversed, holding that an issuer can be sued by purchasers of ADRs through an unsponsored facility, although it left open some questions.28 Toshiba petitioned the Supreme Court to hear the case, which it declined to do. On remand, the district court determined earlier this year that the facts supported the argument that even if Toshiba had not actually sponsored the ADR programme, Toshiba provided some consent to or participated in the establishment of the ADRs.

After Morrison held that Section 10(b) applies only to transactions in the United States, most of the decisions on the territorial application of Section 10(b) have focused on where off-exchange transactions take place. For example, the Southern District of New York, in Satyam Computer Services Ltd Securities Litigation, held that Section 10(b) did not cover the exercise of employee stock options to buy New York Stock Exchange-listed ADSs in an Indian corporation because the terms of the options (as written by the company) deemed them to be exercised only when notice was received in India.29 The fact that the company did not consent to options on its ADSs being transacted in the United States, regardless of the listing of the underlying security, was thus important in Satyam, but the court was still addressing securities with which the company was involved. By contrast, the Second Circuit's decision in ParkCentral Global Hub Ltd v. Porsche Automobile Holdings found that US trading alone was not sufficient if the company had no connection to the security – but ParkCentral involved swaps, not ADRs, and an unusual fact pattern in which the defendant was not the issuer but a potential acquirer.30

Stoyas presented the question squarely: the defendant, Toshiba, has only stock listed on the Tokyo and Nagoya exchanges and ADRs traded on US OTC markets – specifically, OTC Link – through an unsponsored ADR facility set up without the involvement of the company; it did not list or trade any securities in the United States.31 The plaintiffs in Stoyas argued that it was enough that the issuer had complied with Rule 12g3-2's disclosure requirements (an exemption from Exchange Act registration) 'and never objected to the sale of its securities in the United States'.32 The Ninth Circuit described the unsponsored ADR issuance as 'without Toshiba's “formal participation” and possibly without its acquiescence'.33

The District Court originally concluded that an OTC market is not a US exchange for the purposes of Morrison's rule that securities traded on US exchanges are covered, given that the Exchange Act treats national securities exchanges and OTC markets as distinct.34 The District Court further concluded that 'Plaintiffs have not argued or pled that Defendant was involved in the [ADS] transactions in any way . . . nowhere in Morrison did the Court state that US securities laws could be applied to a foreign company that only listed its securities on foreign exchanges but whose stocks are purchased by an American depositary bank on a foreign exchange and then resold as a different kind of security (an ADR) in the United States.'35

On appeal, the Ninth Circuit disagreed on both points. First, as to Morrison's reference to Section 10(b) covering domestic exchanges,36 the Ninth Circuit declined to decide whether OTC Link is a domestic exchange, but disagreed with the District Court that only national securities exchanges, as defined in the Exchange Act, qualify under Morrison. Second, the Ninth Circuit criticised the Second Circuit's reasoning in ParkCentral and concluded that the Exchange Act covers any ADR transaction in the United States regardless of whether the facility is sponsored.37 However, that was not the end, because the Ninth Circuit concluded that a claim could be stated only if there were sufficient facts pleaded to show a sufficient connection between the issuer and the transaction – a requirement that may in practice insulate some issuers who had no involvement in an unsponsored ADR facility.38 The Ninth Circuit sent the case back to let the plaintiffs plead more facts on this point.39 It did not, however, suggest that investors other than ADR purchasers could ever sue.

On 14 January 2019, the Supreme Court invited the Solicitor General to file an amicus brief in the Stoyas case to express the views of the United States.40 The Solicitor General submitted the amicus brief in May 2019, urging the Supreme Court to deny certiorari. In its brief, the Solicitor General argued that the Ninth Circuit's holding in Stoyas was correct because the Section 10(b) claim at issue originated from a domestic transaction under Morrison.41 Therefore, in the Solicitor General's opinion, Stoyas did not represent 'an impermissible extraterritorial application of Section 10(b)' because neither party disputed that the purchases of the unsponsored ADRs took place in the United States.42 The Solicitor General also agreed with the Ninth Circuit, however, that the case should be remanded to allow for factual development.

On 24 June 2019, the Supreme Court denied certiorari in the Stoyas case, allowing the Ninth Circuit's decision to stand and the case to be remanded for further development of the facts.43

On remand, the district court denied Toshiba's motion to dismiss.44 The court found that the complaint pled sufficiently that the ADRs were purchased in domestic transactions, meaning that 'the parties incurred irrevocable liability within the United States',45 based on the complaint's allegations 'regarding the location of the broker, the tasks carried out by the broker, the placement of the purchase order, the passing of title, and the payment made'.46

The district court also examined the Ninth Circuit's 'in connection with' language to address the nature of the non-US issuer's involvement or lack of involvement in the establishment of the unsponsored ADRs. The district court found that there were sufficient facts pled to support that Toshiba provided some consent to or participated in the establishment of the ADRs even if Toshiba had not actually sponsored the ADR programme.47

The appeals court's reversal in Stoyas and the district court's decision on remand increase the chances of lawsuits against non-US companies based on unsponsored ADRs. This is so even if detailed development of the facts later leads to dismissal in Stoyas. As additional courts interpret the various appellate courts' decisions following Morrison and as cases, such as Stoyas, proceed into discovery, more information will be available about the decisions' effects on non-US companies' liability risks from unsponsored ADRs, particularly as to what facts support the involvement of non-US companies in the establishment of unsponsored ADRs.

Prosecution of foreign nationals for FCPA violations48

In February 2020, a Connecticut federal judge acquitted former Alstom SA (Alstom) executive Lawrence Hoskins on Foreign Corrupt Practices Act (FCPA) charges, after determining that prosecutors failed to prove Hoskins was an agent of Alstom's US subsidiary, Alstom Power Inc (API).49 In November 2019, a federal jury had convicted Hoskins of FCPA and related money-laundering charges for bribing officials in Indonesia.50 Although in 2020 the court upheld Hoskins' money-laundering convictions, it overturned his FCPA convictions, striking a blow to the Department of Justice's (DOJ) expansive view of the extraterritorial reach of the FCPA under a novel agency theory.51

Hoskins, a British citizen who worked in France and never entered the United States during his tenure at Alstom, was charged in 2013 in relation to conduct that occurred from 2002 to 2004. Hoskins was charged in connection with the DOJ's prosecution of Alstom, a French power and transportation company, which resulted in a US$770 million corporate settlement in 2014.52 The DOJ argued that Hoskins approved the selection of, and authorised payments to, consultants in connection with a project in Indonesia, knowing that a portion of the money was intended to influence Indonesian officials. Because Hoskins' actions did not occur in the United States and Hoskins never worked for Alstom's American subsidiary, API, the DOJ initially charged Hoskins based on its long-standing theory that conspiracy and aiding and abetting allow it to prosecute foreign nationals for FCPA violations even if those individuals otherwise would not be subject to liability under the FCPA.

The US Court of Appeals for the Second Circuit rejected that expansive application of the FCPA in August 2018, holding that an individual cannot be found guilty as a co-conspirator or accomplice if he or she is incapable of committing the crime as a principal.53 The Second Circuit observed, however, that if prosecutors could show Hoskins acted as the agent of a domestic concern, the extraterritorial application of the FCPA to his conduct would be proper. Following that ruling, the DOJ relied on the theory, including at trial, that although Hoskins was employed by Alstom, he also acted as an agent of API for purposes of jurisdiction under the FCPA.

In November 2019, Hoskins was convicted of FCPA violations and money laundering after the DOJ persuaded a federal jury that Hoskins acted as an agent of API when he helped arrange bribes in Indonesia. Following his convictions, Hoskins moved for acquittal or a new trial in December 2019. In February 2020, a federal judge ruled on Hoskins' motions and acquitted Hoskins of all seven FCPA convictions, reasoning that prosecutors had not demonstrated that API exercised control over Hoskins' actions sufficient to demonstrate agency.54

The court's detailed factual analysis focused on the 'essential element of agency [which] is the principal's right to control the agent's actions'. The court concluded that API, the purported principal, exercised control over the broader project in Indonesia, but that this was insufficient to prove agency because API did not have control over Hoskins himself. The court concluded that 'absent any evidence that API had a right of interim control over Mr Hoskins's actions to procure consultants according to API's specifications, a rational jury could not determine beyond a reasonable doubt that Mr Hoskins was an agent of API'. Importantly, the court emphasised that API did not have the power to fire, reassign, demote or impact Hoskins' compensation, noting that the 'principal's right of control presupposes that the principal retains the capacity throughout the relationship to assess the agent's performance, provide instructions to the agent and terminate the agency relationship by revoking the agent's authority'.55

In March 2020, the DOJ filed a notice of appeal to the Second Circuit, following with a brief, submitted in July 2020, seeking a review of whether a rational jury could have found that Hoskins was an agent of API.56 For now, the Hoskins acquittal is a major challenge for prosecutors in a case involving the potential limitations of the FCPA extraterritorial application to non-US persons. The decision will affect how the DOJ investigates and prosecutes cases with respect to agency in the future. It will also impact defendants who now have an additional basis for rebutting the DOJ's expansive jurisdictional theories.

The impact of the Hoskins decisions may already be visible in cases that the DOJ is able to successfully pursue. For example, on 2 December 2019, a jury acquitted Privinvest Group executive Jean Boustani of all charges brought against him, including conspiracy to commit wire fraud, conspiracy to commit securities fraud and conspiracy to commit money laundering.57 Boustani admitted that he paid millions of dollars to Mozambique officials, which the DOJ argued was intended to secure lucrative maritime contracts for his employer, Privinvest Group. It appears that the DOJ did not seek to bring bribery charges against Boustani given the Second Circuit's holding in Hoskins that non-US citizens cannot be charged with violating the FCPA in a foreign country without a sufficient nexus between the individual and a US company. Even with this restraint, the jury in Boustani stated that the evidence failed to show why venue was proper in the United States, concluding that Boustani could not be held accountable for violations of US law. This case may be an early example of the challenges the DOJ will face in the wake of Hoskins.

iv Bankruptcy cases of relevance to the capital markets

Although the impact of covid-19 has yet to become fully apparent, it is inevitable that US bankruptcy lawyers will be extremely busy for the foreseeable future. The decisions of US bankruptcy courts in 2020 (which include legacy structured finance issues from the global financial crisis) show just how long these matters can continue to occupy the courts.

Second Circuit applies safe harbours to enforce priority waterfall in credit default swap transactions

In August 2020, the US Court of Appeals for the Second Circuit ruled in In re Lehman Bros Holdings Inc58 that a priority waterfall governing credit default swap transactions was enforceable under a safe harbour provision of the Bankruptcy Code, notwithstanding that the debtor's lower priority position was triggered by the commencement of the bankruptcy case. The decision affirmed the rulings of the lower courts finding that enforcement of the priority waterfall provisions was part of the liquidation of a swap agreement and therefore protected under the Bankruptcy Code, and resolved litigation that spanned a decade and involved hundreds of investors as defendants. The litigation focused on highly contentious disputes regarding the provisions of the transaction documents underlying the complex financial products and the application of the Bankruptcy Code's safe harbours to those products.

Section 365(e) of the Bankruptcy Code generally provides that a debtor's rights under an executory contract may not be terminated or modified because of the commencement of a bankruptcy case, notwithstanding any provisions of the contract that provide for such termination or modification.59 However, the Bankruptcy Code provides certain exceptions with respect to certain financial contracts, such as securities contracts, commodity contracts, repurchase agreements, swap agreements and master netting agreements. Specifically, the safe harbour at issue in Lehman Brothers provides that the exercise of any contractual right of a swap participant or financial participant to cause the liquidation, termination, or acceleration of a swap agreement because of the commencement of a bankruptcy case cannot be stayed, avoided or otherwise limited by the Bankruptcy Code or order of the bankruptcy court.60

Prior to 2008, Lehman Brothers Special Financing (LBSF) structured and entered into many synthetic collateralised default obligation (CDO) transactions pursuant to which special purpose vehicles (the Issuers) marketed and sold notes to qualified investors pursuant to indenture agreements. The Issuers used the proceeds of the notes to purchase collateral to be held by trustees. The Issuers then entered into a swap agreement with LBSF pursuant to an ISDA Master Agreement and related schedule and confirmations. If reference entities experienced certain credit events, LBSF could be entitled to payments from the collateral under the swap transaction, but if such credit events did not occur, the noteholders would be repaid the principal amount of their investment from the collateral under the indenture. The indentures included a priority waterfall (referred to as a 'flip clause') that detailed how proceeds of the collateral would be applied depending on the circumstances of the distribution. If the transactions were terminated because of a bankruptcy of LBSF or Lehman Brothers Holding Inc (LBHI), the priority provisions provided that noteholders would be paid ahead of LBSF, but if the transaction was terminated because of specific credit events or other defaults, LBSF would be paid first. The swap documentation did not include the priority waterfall but stated that payments to LBSF under the swap would be subject to the priority waterfall provisions set out in the indentures. Following the commencement of the LBHI and LBSF bankruptcy cases, the CDO transactions were terminated, the trustees liquidated the collateral and, in many cases, distributed the proceeds to noteholders in accordance with the terms of the priority waterfall. In 2010, LBSF commenced litigation against the issuers, trustees and noteholders of 44 of these CDO transactions seeking to recover over US$1 billion in payments made to the noteholders on the basis that the priority waterfall modified LBSF's rights to the collateral under the swap agreement because of the commencement of the bankruptcy case and was therefore unenforceable under Section 365 of the Bankruptcy Code.

The US Court of Appeals for the Second Circuit agreed with the bankruptcy court and district court that enforcement of the priority waterfall as set out in the indentures was part of the liquidation of a swap agreement and was therefore permitted under the safe harbours of the Bankruptcy Code. The Court made three key rulings: (1) the priority waterfall was part of a swap agreement; (2) the distribution of collateral proceeds to noteholders was part of the liquidation of the swap agreement; and (3) the trustees were exercising the rights of a swap participant in making the distributions. The Court rejected LBSF's argument that the priority waterfall was not part of a swap agreement because it was included within the indenture, holding that the reference to the priority waterfall in the swap documentation was sufficient to incorporate the waterfall as part of the swap agreement. The Court further rejected LBSF's argument that the term 'liquidation' under Section 560 was limited to determining the amounts due to parties under a swap agreement and did not encompass the distribution of collateral. Rather, the Court concluded that permitting the calculation of amounts owed to a party did not provide the intended protection under the safe harbour if the party could not recover proceeds of collateral pursuant to the contractual terms. The Court also rejected the argument that the swap participant – in this case, the Issuers – had to exercise the rights under the swap agreement. Under the terms of the indenture, the Issuers assigned their rights under the swap agreement to the collateral trustees, and therefore the trustees were exercising rights of a swap participant when they terminated the swap agreement and distributed collateral proceeds to the noteholders.

The Second Circuit's decision upheld the contractual expectations of the noteholders investing in the CDO transactions and resolved significant litigation arising from the Lehman bankruptcy case. The Court's analysis of the safe harbours and interpretation of the definitions of 'swap agreement' and 'liquidation' demonstrate that courts must consider the full context of a transaction and the contractual terms in determining the extent to which the Bankruptcy Code safe harbours may apply.

Second Circuit extends safe harbour protection to customers of financial institutions

In December 2019, the Second Circuit affirmed its 2016 decision that the Bankruptcy Code's safe harbour defence to the avoidance of securities and other financial transactions pre-empted creditors' state law claims seeking to avoid and recover payments made to Tribune Company's shareholders in connection with a leveraged buy-out transaction,61 ultimately shielding the former equity holders from disgorging proceeds received in 2007. The 2019 decision revised the Second Circuit's analysis with respect to the application of the safe harbour defence in light of the Supreme Court's 2018 ruling in Merit Management Group, LP v. FTI Consulting, Inc62 but ultimately reached the same conclusion that the safe harbour defence applied.

Section 546(e) of the Bankruptcy Code prohibits a debtor or bankruptcy trustee from avoiding (1) margin payments or settlement payments or (2) transfers in connection with a securities contract, commodity contract or forward contract, in each case 'made by or to (or for the benefit of)' a qualified entity.63 In 2007, Tribune Company (Tribune) executed a leveraged buy-out transaction and paid over US$8 billion to shareholders to purchase and redeem the shares as part of that transaction. Tribune filed for bankruptcy protection in 2008. When the estate did not commence fraudulent conveyance actions under the Bankruptcy Code to avoid and recover the shareholder payments, the bankruptcy court lifted the automatic stay to permit individual creditors to file state law fraudulent conveyance claims on their own behalf.64 In the 2016 decision, the Second Circuit determined that the creditors' claims were pre-empted by Section 546(e)'s safe harbour. The 2016 decision was premised upon the conclusion that, consistent with the Second Circuit's prior rulings on the issue,65 the payments to shareholders fell within scope of the safe harbour because the transfers involved a financial institution, even though the financial institution was acting as an intermediary between Tribune and the shareholders, and not as the transferor or transferee in the challenged transfer.

In Merit Management, the Supreme Court rejected the Second Circuit's interpretation of Section 546(e), concluding that the safe harbour defence only applied to transactions made by, to or for the benefit of a qualified entity, and the involvement of a qualified entity as an intermediary was not sufficient. In revisiting its 2016 decision following Merit Management, the Second Circuit concluded that the payments to shareholders were nevertheless covered by Section 546(e) because Tribune qualified as a 'financial institution' under the Bankruptcy Code. A financial institution is defined, in relevant part, as a bank or trust company 'and, when any such . . . entity is acting as agent or custodian for a customer . . . in connection with a securities contract . . . such customer'.66 Because Tribune utilised a bank and trust company to act as a depository and transfer agent in connection with the leveraged buy-out transaction, Tribune qualified as a financial institution as a customer of a financial institution acting as agent in connection with a securities contract (the purchase and redemption of the shares).

In reaching this decision, the Second Circuit rejected arguments that the definitions of 'customer' and 'agent' should be interpreted narrowly and concluded that both terms should be given their ordinary meaning. The Second Circuit further concluded that the Supreme Court's reasoning in Merit Management did not contradict or undermine the Second Circuit's conclusion that Section 546(e) pre-empted fraudulent conveyance claims brought by individual creditors under state law. The Supreme Court's narrow interpretation of Section 546(e) in Merit Management limited the safe harbour's application in transactions that did not directly involve qualified entities. The Tribune decision sets out an alternative analysis under which leveraged buy-out transactions, corporate buybacks, note repurchases and other securities-related transactions between non-qualified entities may still fall within the safe harbour provisions despite Merit Management.67

v US tax law changes of relevance to the capital markets

On 7 April 2020, the US Internal Revenue Service finalised regulations under Sections 245A and 267A of the US Internal Revenue Code. These final regulations largely adopt the structure and approach of regulations proposed in 2018 with respect to Sections 245A and 267A, which were originally enacted in 2017 as part of the US tax reform legislation. These provisions deny taxpayers deductions associated with dividends, transactions or entities that are treated differently under the tax laws of the United States and the tax laws of another country. Sections 245A and 267A make it more difficult for taxpayers to claim tax benefits, or avoid taxation entirely, in multiple countries.

Section 245A provides that US domestic corporations that are 10 per cent shareholders of a foreign corporation are allowed a 100 per cent dividends-received deduction for dividends received from the foreign corporation. However, no dividends-received deduction is allowed to the extent that the US corporate shareholder receives a hybrid dividend from the 10 per cent-owned foreign corporation. A hybrid dividend is generally defined for purposes of Section 245A as a dividend for US tax purposes for which the foreign corporation is permitted a deduction or other tax benefit in its home jurisdiction.

Section 267A disallows deductions for payments of interest or royalties to related parties that do not pay tax on such payments in their local countries where the payments are made in connection with a hybrid transaction (i.e., a transaction in relation to which one or more payments are treated as interest or royalties for US federal income tax purposes, but which are not so treated for purposes of the tax law of the recipient's jurisdiction) or to a hybrid entity (i.e., one that is fiscally transparent for US tax purposes but not foreign tax purposes, or vice versa).

The final regulations provide detailed rules relating to the classification of dividends, transactions and entities as hybrid dividends, hybrid transactions and hybrid entities, and also include related guidance generally on the disallowance of deductions under Sections 245A and 267A.

vi Other areas of regulatory focus

Emerging markets

In recent months, the SEC has repeatedly highlighted emerging market risks to issuers and investors, including specific risks applicable to investments in China, the world's second largest economy by gross domestic product and one of the leading emerging markets, including the risks arising from regulatory disclosure requirements that differ from those in the United States and business risks that are particular to another country or region.68

In addition, the Public Company Accounting Oversight Board (PCAOB) is currently unable to inspect audit work papers and practices in a number of countries, including China. As a result, investors do not have the benefit of the PCAOB's assessment and quality control of the auditor's compliance with US law and professional standards in connection with its audits of public companies. This risk arises when any portion of the audit work is performed by a China-based auditor, even if that auditor is not responsible for signing the audit report. Chinese laws also limit access by third parties, including non-Chinese regulators, to corporate books and records and audit work papers. The SEC has encouraged issuers to be transparent about these risks in their public filings.

While the SEC, DOJ, and other US regulators do not have in non-US jurisdictions the same authority or tools that they enjoy at home, and may not be able to secure the cooperation of local authorities to investigate or pursue legal actions against non-US companies or natural persons, including officers and directors of public companies, there should be no doubt about their focus on emerging market issues and willingness to assert jurisdiction whenever they feel it necessary to do so.


Issuers and regulators continued this year to determine when an initial coin offering (ICO) or offer or sale of tokens constitutes an offer or sale of securities for the purposes of the Securities Act, which the SEC has typically analysed69 under the test set out in SEC v. W J Howey Co.70 While there were some qualified offerings of tokens pursuant to Regulation A+ in 2019, most issuers seek to structure and develop the use of their tokens to avoid the designation as a security (these instruments are sometimes called 'utility tokens', although the label alone does not remove them from the jurisdiction of the Securities Act). However, the SEC has brought a number of recent enforcement actions against token issuers for conducting unregistered offerings, suggesting that a generally agreed-upon bright line test does not yet exist for determining when a token is a security.71 Even within the SEC, there is disagreement as to when the securities laws should apply. Notably, Commissioner Peirce publicly disagreed with the analytical framework applied by the SEC in its approach to the Telegram case discussed supra note 60.72 The future evolution of this market within the United States will depend in part on identifying clear and consistent criteria for determining when a digital asset is a security.

Outlook and conclusions

The US capital markets continue to attract existing and first-time issuers of debt and equity securities, notwithstanding the continued rapid evolution of markets in Europe, Asia and elsewhere and the challenges posed by covid-19. The prospect of SEC, Department of Justice and other US regulatory oversight, although certainly a concern for many foreign private issuers, remains outweighed by the depth and liquidity of US institutional and retail markets. This is perhaps particularly the case for initial public offerings of equity by sector-specific industries, such as life sciences and technology companies, and by issuers of non-investment grade debt securities, where US investor participation is often viewed as integral to the success of a proposed transaction, but it also remains a key for the generally larger SEC registrants of long standing for whom a diversified global investor base is important. The overall thrust of current US regulatory developments appears likely to remain focused for the moment on easing the burdens associated with accessing these markets.



1 Mark Walsh is a partner and Michael Hyatte is a senior counsel at Sidley Austin LLP. The authors would like to thank their colleague, Stefan Giudici, for his assistance with this chapter. They would also like to thank their colleagues Nick Brown, Jessica Fitzpatrick, Alan Grinceri, Michael Mann, Edward Petrosky, Erica Proctor, Bill Shirley, Allison Ross Stromberg, David Sylofski, Dennis Twomey and Sara von Althann.

2 See Chairman Jay Clayton, Proposed Amendments to Modernize and Enhance Financial Disclosures; Other Ongoing Disclosure Modernization Initiatives; Impact of the Coronavirus; Environmental and Climate-Related Disclosure (30 January 2020), available at

3 SEC Release No. 34-88318 (4 March 2020) available at

4 SEC Release No. 34-88465 (25 March 2020) available at

5 Coronavirus (COVID-19), Division of Corporation Finance of the Securities and Exchange Commission, CF Disclosure Guidance Topic No. 9 (25 March 2020), available at

6 Generally accepted accounting principles, commonly known as GAAP.

7 SEC Public Statement, The Importance of Disclosure – For Investors, Markets and Our Fight Against COVID-19, available at

8 Coronavirus (COVID-19) – Disclosure Considerations Regarding Operations, Liquidity, and Capital Reserves, Division of Corporation Finance of the Securities and Exchange Commission, CF Disclosure Guidance Topic No. 9A (23 June 2020), available at

9 See SEC Supplements COVID-19 Disclosure Guidance, Sidley Corporate Governance Update (25 June 2020), available at

10 COVID-19 Related FAQs, Division of Corporation Finance of the Securities and Exchange Commission (Modified: 4 May 2020), available at

11 See New York Fed Webpage Covid-19 materials. The terms of the PMCCF, SMCCF, CPFF and TALF (and related materials) are available at

12 See Federal Reserve Implements Primary Market Corporate Credit Facility, Sidley Capital Markets Update (6 July 2020), available at

13 See SEC Release Nos. 33-10824; 34-89669; Final Rule: Amending the 'Accredited Investor' Definition available at

14 See SEC Broadens Accredited Investor and Qualified Institutional Buyer Definitions, Sidley Corporate Governance Update (28 August 2020), available at

15 See SEC Release Nos. 33-10825; 34-89670, Final Rule: Modernization of Regulation S-K Items 101, 103, and 105 at

16 See SEC Release Nos. 33-10762; 34-88307, Final Rule: Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralise a Registrant's Securities, at

17 See SEC Release Nos. 33-10786; 34-88914, Final Rule: Amendments to Financial Disclosures about Acquired and Disposed Businesses, at

18 See SEC Substantially Improves Financial Disclosure Rules Relating to Business Acquisitions and Dispositions, Sidley Capital Markets Update (26 May 2020), available at

19 International Financial Reporting Standards.

20 'Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds', available at

21 'Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds', available at

22 'Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants', available at

23 'Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations', available at

24 'Cross-Border Application of Certain Security-Based Swap Requirements', available at

25 Morrison v. Nat'l Australia Bank Ltd, 561 U.S. 247 (2010).

26 ADR and ADS are used interchangeably here, despite the distinct role of the two instruments in trading.

27 Stoyas v. Toshiba Corp., 191 F. Supp. 3d 1080 (C.D. Cal. 2016) (Stoyas I).

28 Stoyas v. Toshiba Corp., 896 F.3d 933 (9th Cir. 2018) (Stoyas II).

29 Satyam Computer Servs Ltd Secs Litig, 915 F. Supp. 2d 450, 474-75 (S.D.N.Y. 2013).

30 ParkCentral Global Hub Ltd v. Porsche Automobile Holdings SE, 763 F.3d 198, 215-16 (2d Cir. 2014).

31 Stoyas I, 191 F. Supp.3d at 1084 n. 1, 1089, 1091 (noting that the depositary bank had to purchase the stock on a foreign exchange); Stoyas II, 896 F.3d at 939.

32 Stoyas I, 191 F. Supp.3d at 1093.

33 Stoyas II, 896 F.3d at 941.

34 Stoyas I, 191 F. Supp.3d at 1090-91.

35 Stoyas I, 191 F. Supp.3d at 1094.

36 Morrison, 561 U.S. at 267.

37 Stoyas II, 896 F.3d at 950.

38 Stoyas II, 896 F.3d at 951.

39 id.

40 Toshiba Corp v. Automotive Industries Pension Trust Fund, et al., 2019 U.S. LEXIS 680 (2019).

41 Brief for the United States as Amicus Curiae on Petition for a Writ of Certiorari to the United States Court of Appeals for the Ninth Circuit, Toshiba Corp v. Automotive Industries Pension Trust Fund, et al., 2019 U.S. LEXIS 680 (2019) (No. 18-496), 2019 U.S. S. Ct. Briefs LEXIS 1836, *15 (US Brief).

42 US Brief, 2019 U.S. S. Ct. Briefs LEXIS at *22.

43 Toshiba Corp v. Automotive Industries Pension Trust Fund, et al., 2019 U.S. LEXIS 4259 (2019).

44 Stoyas v. Toshiba Corp., 424 F. Supp. 3d 821 (C.D. Cal. 2020) (Stoyas III).

45 Citing Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 68 (2d Cir. 2012).

46 Stoyas III, 424 F. Supp. 3d at 827.

47 id. at 827-828.

48 United States v. Hoskins, 902 F.3d 69 (2d Cir. 2018) (Hoskins 2018).

49 United States v. Hoskins, No. 3:12-CR-238 (JBA) (D. Conn. 26 Feb. 2020) (Hoskins 2020).

50 United States v. Hoskins, No. 3:12-CR-238 (JBA) (D. Conn. 8 Nov. 2019).

51 Hoskins 2020, No. 3:12-CR-238 (JBA).

52 United States v. Alstom S.A., No. 3:14-CR-246 (JBA) (D. Conn. 22 Dec. 2014).

53 Hoskins 2018, 902 F.3d 69.

54 Hoskins 2020, No. 3:12-CR-238 (JBA).

55 id. at 3, citing Third Restatement § 1.01 cmt. f(1).

56 Notice of Appeal, United States v. Hoskins, No. 3:12-CR-238 (JBA) (D. Conn. 9 Mar. 2020), Brief for the United States on Appeal from the United States District Court for the District of Connecticut, United States v. Hoskins, No. 3:12-CR-238 (JBA) (D. Conn. 9 Mar. 2020).

57 United States v. Boustani et al., No. 1:18-CR-681 (E.D.N.Y., 2 Dec. 2019).

58 2020 WL 4590247, Case No. 18-1079 (2d Cir. 11 August 2020).

59 11 U.S.C. § 365(e); see also 11 U.S.C. §§ 363(l); 541(c)(1).

60 11 U.S.C. § 560. Similar safe harbour provisions are set out in 11 U.S.C. § 555 (securities contract); § 556 (commodities contracts and forward contracts); § 559 (repurchase agreements); § 561 (master netting agreements).

61 In re Tribune Fraudulent Conveyance Litigation, 946 F.3d 66 (2d Cir. 2019), amending 818 F.3d 98 (2d Cir. 2016).

62 Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018) ('Merit Management').

63 11 U.S.C. § 546(e). For purposes of Section 546(e), a 'qualified entity' may be a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency.

64 In lifting the automatic stay, the bankruptcy court expressly did not determine whether such creditors had standing to pursue the claims or whether the claims were pre-empted by the Bankruptcy Code's 546(e) safe harbour defence.

65 See In re Quebecor World (USA) Inc., 719 F.3d 94 (2d Cir 2013).

66 11 U.S.C. § 101(22). The definition further makes clear that 'customer' is not limited to the definition of a 'customer' in the specific provisions of the Bankruptcy Code addressing stockbroker bankruptcies.

67 The parties in Merit Management did not contend that either the transferor or transferee was a 'financial institution' by virtue of its status as customer, and as a result the Supreme Court specifically did not address the impact that argument would have had on its application of Section 546(e) in that case. See 138 S.Ct. at 890, n2.

68 For example, see Jay Clayton, William D. Duhnke III, Sagar Teotia, William Hinman, and Dalia Blass, Emerging Market Investments Entail Significant Disclosure, Financial Reporting and Other Risks; Remedies are Limited (21 Apr. 2020), available at

69 See William Hinman, Remarks at the Yahoo Finance All Markets Summit: Digital Asset Transactions: When Howey Met Gary (Plastic) (14 June 2018), available at

70 328 U.S. 293 (1946).

71 See, e.g., the SEC's complaint regarding Telegram Group Inc., available here:; and its announcement of a settlement with the same company, available here:

72 Hester M. Peirce, Not Braking and Breaking (21 July 2020), available at

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