How Foreign Banks Can Finance in the United States

Transcription

1 2013 Morrison & Foerster LLP All Rights Reserved mofo.com How Foreign Banks Can Finance in the United States March 8, 2013 NY

2 Topics for Presentation Rule 144A offerings Section 3(a)(2) offerings Covered bond offerings Registration process for registered offerings This is MoFo. 2

3 Foreign Bank Debt Financing Activities Types of bank debt issuances Senior unsecured debt Senior secured debt (including covered bonds) Subordinated debt Structured debt (e.g., equity-linked and commodity-linked notes) Hybrid debt / preferred stock Contingent capital ( coco ) debt Deposit liabilities Issuing entities Home offices US bank subsidiaries US branches Other affiliated entities (e.g., financing SPVs) This is MoFo. 3

4 Rule 144A Offerings This is MoFo. 4

5 Why Are Rule 144A Offerings Attractive to Non- U.S. Banks? Rule 144A provides a clear safe harbor for offerings to institutional investors. Does not require extensive ongoing registration or disclosure requirements. Index eligible issuances have good liquidity in the Rule 144A market. This is MoFo. 5

6 Rule 144A Overview Rule 144A provides a non-exclusive safe harbor from the registration requirements of Section 5 of the Securities Act for resales of restricted securities to qualified institutional buyers (QIBs). The rule recognizes that not all investors are in need of the protections of the prospectus requirements of the Securities Act. The rule applies to offers made by persons other than the issuer of the securities. (i.e., resales ). The rule applies to securities that are not listed on a U.S. securities exchange or quoted on an automated inter-dealer quotation system. A reseller may rely on any applicable exemption from the registration requirements of the Securities Act in connection with the resale of restricted securities (such as Regulation S or Rule 144). This is MoFo. 6

7 Types of Rule 144A Offerings Rule 144A offering for an issuer that is not registered in the U.S. usually a standalone Rule 144A continuous offering program Used for repeat offerings, often by financial institution and insurance company issuers, to institutional investors. Often used for structured products and for covered bonds sold to QIBs. This is MoFo. 7

8 How Are Rule 144A Offerings Structured? The issuer initially sells restricted securities to investment bank(s) as initial purchasers in a Section 4(a)(2) or Regulation D private placement. The investment bank reoffers and immediately resells the securities to QIBs under Rule 144A. Often combined with a Regulation S offering. This is MoFo. 8

9 Rule 144A Offering Memorandum May contain similar information to a full S-1/F-1 prospectus, or may be much shorter. If the issuer is a public company, it may incorporate by reference the issuer s filings from its home country. Scope of disclosure (whether included or incorporated by reference) may be comparable to a public offering, as the initial purchasers/underwriters expect 10b-5 representations from the issuer, and legal opinions from counsel. Due diligence by counsel will often be similar to that performed in a public offering. For a non-u.s. offering, with a Rule 144A tranche, there may be a U.S. Rule 144A wrapper attached to the non-u.s. offering document. This is MoFo. 9

10 Additional Documentation for a Rule 144A Offering A purchase agreement between the issuer and the initial purchasers/underwriter(s) Similar to an underwriting agreement in terms of representations, covenants, closing conditions and indemnities. Legal opinions 10b-5 negative assurance letters Comfort letters This is MoFo. 10

11 How Are Rule 144A Offerings Conducted? Often similar to a registered offering. Road show with a preliminary offering memorandum. Confirmation of orders with the final offering memorandum. The offering memorandum may be delivered electronically. The purchase agreement is executed at pricing, together with the delivery of a comfort letter. Closing on a T+3 basis, or as otherwise agreed with the investors. Publicity: generally limited to a Rule 135c compliant press release limited information about the offering. This is MoFo. 11

12 The JOBS Act and Marketing Rule 144A Offerings The JOBS Act requires the SEC to adopt rules to permit general solicitations in connection with Rule 144A offerings, provided that sales are made solely to QIBs. The SEC issued proposed rules on August 29, 2012 and the comment period ended on October 5, The SEC has not issued final rules at this time. Potential impact: Use of additional offering modalities to market transactions and disseminate information. For example, public websites that describe the offering and press releases. This is MoFo. 12

13 Conditions for Rule 144A Offering Reoffers or resales only to a QIB, or to an offeree or purchaser that the reseller reasonably believes is a QIB. Reseller must take steps to ensure that the buyer is aware that the reseller may rely on Rule 144A in connection with such resale. The securities reoffered or resold (a) when issued were not of the same class as securities listed on a U.S. national securities exchange or quoted on a U.S. automated inter-dealer quotation system and (b) are not securities of an open-end investment company, UIT, etc. For an issuer that is not an Exchange Act reporting company or exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, the holder and a prospective buyer designated by the holder must have the right to obtain from the issuer, upon the holder s request, certain reasonably current information. This is MoFo. 13

14 Rule 159: Time of Sale Information Although Rule 159 under the Securities Act is not expressly applicable to Rule 144A offerings, many investment banks apply the same treatment, in order to help reduce the risk of liability. Use of term sheets and offering memoranda supplements, to ensure that all material information is conveyed to investors at the time of pricing. Counsel is typically expected to opine as to the disclosure package, as in the case of a public offering. NY This is MoFo. 14

15 Section 3(a)(2) Offerings This is MoFo. 15

16 Section 3(a)(2) and Offerings by Banks Section 3(a)(2) of the Securities Act exempts from registration under the Securities Act any security issued or guaranteed by a bank. Basis: banks are highly regulated, and provide adequate disclosure to investors about their finances in the absence of federal securities registration requirements. Banks are also subject to various capital requirements that may increase the likelihood that holders of their debt securities will receive timely payments of principal and interest. This is MoFo. 16

17 What Is a Bank? Under Section 3(a)(2), the institution must meet both of the following requirements: it must be a national bank or any institution supervised by a state banking commission or similar authority; and its business must be substantially confined to banking. Examples of entities that do not qualify: Bank holding companies Finance companies Investment banks Foreign banks Regulated U.S. branches and agencies of foreign banks may qualify This is MoFo. 17

18 Guarantees Another basis for qualification as a bank: securities guaranteed by a bank. Not limited to a guaranty in a legal sense, but also includes arrangements in which the bank agrees to ensure the payment of a security. The guaranty or assurance of payment, however has to cover the entire obligation; it cannot be a partial guarantee or promise of payment. Again, guarantees by foreign banks (other than those of an eligible U.S. branch or agency) would not qualify for this exception. The guarantee is a legal requirement to qualify for the exemption; investors will not be looking to the US branch for payment/credit. Investors will look to the home office. This is MoFo. 18

19 Non-U.S. Banks/U.S. Offices U.S. branches/agencies of foreign banks are conditionally entitled to rely on the Section 3(a)(2) exemption. 1986: the SEC takes the position that a foreign branch/agency will be deemed to be a national bank or a banking institution organized under the laws of any state if the nature and extent of federal and/or state regulation and supervision of that particular branch or agency is substantially equivalent to that applicable to federal or state chartered domestic banks doing business in the same jurisdiction. As a result, U.S. branches/agencies of foreign banks are frequent issuers or guarantors of debt securities in the U.S. Most issuances or guarantees occur through the NY branches of these banks. This is MoFo. 19

20 Non-U.S. Banks/U.S. Offices (cont d) Examples of Issuing Entities: U.S. branch as direct issuer: UBS, CS, NAB, CBA and ANZ U.S. branch as guarantor, headquarters as issuer: BNP, Rabo, SocGen, Svenska U.S. branch as guarantor, SPV/Cayman branch as issuer: Fortis, BNP More banks are using a guarantee structure to allow greater flexibility for use of proceeds Which Regulator? Most U.S. branches have elected the N.Y. State Banking Commissioner as their primary regulator with their secondary regulator the Federal Reserve. Some U.S. branches have opted for the Office of the Comptroller of the Currency ( OCC ) as their primary regulator. This is MoFo. 20

21 OCC Registration/Disclosure National banks or federally licensed U.S. branches/agencies of foreign banks regulated by the Office of the Comptroller of the Currency (the OCC ) are subject to OCC securities offering (Part 16) regulations. Part 16 of OCC regulations provides that these banks or banking offices may not offer and sell their securities until a registration statement has been filed and declared effective with the OCC, unless an exemption applies. An OCC registration statement is generally comparable in scope and detail to an SEC registration statement; as a result, most bank issuers prefer to rely upon an exemption from the OCC s registration requirements. Section 16.5 provides a list of exemptions, which includes: Regulation D offerings Rule 144A offerings This is MoFo. 21

22 Part 16.6 of the OCC Regulations 12 CFR 16.6 provides a separate partial exemption for offerings of non-convertible debt to accredited investors in denominations of $250,000 or more. National banks with foreign parents that have shares traded in the US may be able to rely upon this exemption by furnishing the foreign private issuer reports (Forms 20-F, 6-K) filed by foreign issuers. Alternatively, Federal branches/agencies may rely on this exemption by furnishing to the OCC parent bank information which is required under Exchange Act Rule 12g3-2(b), and to purchasers the information required under Securities Act Rule 144A(d)(4)(i). This is MoFo. 22

23 Denominations The 3(a)(2) exemption does not require specific minimum denominations in order to obtain the exemption. State-chartered banks may issue in smaller denominations ($1000 denominations are common) However, for a variety of reasons, denominations may at times be significantly higher than in retail transactions: Offerings targeted to institutional investors. Complex securities. Relationship to 16.6 s requirement of $250,000 minimum denominations. This is MoFo. 23

24 Deposits Versus Other Liabilities Foreign banks may elect to issue debt instruments in the form of deposit liabilities as opposed to pure debt: Yankee CDs (US$-denominated deposit liabilities of a foreign bank or its US branch). Other types of deposits (e.g., structured deposits). What are the legal differences between deposit liabilities and other debt issuances? In the case of foreign banks, less than meets the eye. Foreign banking organization ( FBO ) deposit liabilities are not insured and generally are issued in large denominations (minimum $100,000 and usually higher). For capital equivalency/asset segregation purposes, deposits and non-deposit liabilities generally are treated in the same manner. This is MoFo. 24

25 FINRA Requirements Even though securities offerings under Section 3(a)(2) are exempt from registration under the Securities Act, public securities offerings conducted by banks must be filed with the Financial Industry Regulatory Authority ( FINRA ) for review under Rule 5110(b)(9), unless an exemption is available. Transactions under Section 3(a)(2) must also be reported through FINRA s Trade Reporting and Compliance Engine ( TRACE ). TRACE eligibility provides greater transparency for investors. Currently, Rule 144A securities are not TRACE reported. This is MoFo. 25

26 Blue Sky Regulation Securities issued under Section 3(a)(2) are considered covered securities under Section 18 of the Securities Act. As a result, blue sky filings are not needed in any state in which the securities are offered. This is MoFo. 26

27 Exchange Act Reporting Section 12(i) of the Exchange Act provides that the administration and enforcement of Exchange Act Sections 12, 13, 14(a), 14(c), 14(d), 14(f), and 16 is vested in the OCC with respect to national banks, the Federal Reserve Board as to member banks of the Federal Reserve System, the FDIC as to all other insured banks, and the OTS as to savings associations. As a result, a bank that otherwise would be subject to Exchange Act periodic reporting requirements would submit its reports to the appropriate banking agency, and not to the SEC. This is MoFo. 27

28 Exchange Act Reporting (cont d) Foreign banks are not Section 3(a)(2) banks and therefore are not subject to Exchange Act Section 12(i), but to the extent they otherwise are required to register under the Exchange Act as issuers, or submit reports as foreign private issuers, they would register and file their reports with the SEC. U.S. branches/agencies of foreign banks would not be subject to Exchange Act Section 12(i) requirements solely by virtue of their issuance of debt securities. This is MoFo. 28

29 Section 3(a)(2) Offering Documentation The offering documentation for bank notes is similar to that of a registered offering. Base offering document, which may be an offering memorandum or an offering circular (instead of a prospectus ). The base document is supplemented for a particular offering by one or more pricing supplements and/or product supplements. These offering documents may be supplemented by additional offering materials, including term sheets and brochures. This is MoFo. 29

30 Comparison of Section 3(a)(2) to Rule 144A Required issuer: Exemption from the Securities Act: FINRA Filing Requirement: Section 3(a)(2) Need a US state or federal licensed bank as issuer or as guarantor Section 3(a)(2) Subject to filing requirement and payment of filing fee Rule 144A No specific issuer or guarantor is required Section 4(a)(2) / Rule 144A Not subject to FINRA filing Blue Sky: Generally exempt from blue sky regulation Generally exempt from blue sky regulation Listing on an exchange: May be listed if issued in compliance with Part 16.6 No Restricted No; considered public and therefore eligible for bond indices, TRACE reporting Yes This is MoFo. 30

31 Comparison of Section 3(a)(2) to Rule 144A (cont d) Section 3(a)(2) Rule 144A Required governmental approvals: Permitted Offerees: Minimum denominations: Banks licensed by the OCC are subject to the Part 16.6 limitations, unless an exemption is available. All investors, which means that there is a broader market. However, banks licensed by the OCC are subject to the Part 16.6 limitations, unless an exemption is available. Generally, sales to accredited investors. All denominations. However, banks licensed by the OCC are subject to minimum denomination requirement. Generally none. Only to QIBs. No retail. No minimum denominations requirement. Role of Manager/Underwriter: Either agented or principal basis. Must purchase as principal. 40 Act: Banks not considered investment companies. Foreign banks will want to review 40 Act guidance. Non-bank issuer should consider whether there is a 40 Act issue. Settlement: Through DTC, Euroclear/Clearstream. Through DTC, Euroclear/Clearstream This is MoFo. 31

32 3(a)(2) Issuances ( ) Pricing Date Issuer Ratings (M/S) Coupon (%) Tranche Value (US$mm) Structure Maturity Date Deal Nationality 1/7/2013 1/7/ /8/2012 Intesa SanPaolo Spa (New York) Intesa SanPaolo Spa (New York) American Express Centurion Bank Baa2/BBB+ Baa2/BBB+ A2/A ,000 1, YR FXD 5YR FXD 3YR FXD 1/15/2016 1/16/ /13/2015 Italy Italy US 11/8/2012 American Express Centurion Bank A2/A- 3mL+45bp 550 3YR FRN 11/13/2015 US 11/2/2012 Rabobank Nederland Aa2/AA ,500 10YR FXD 11/9/2022 Netherlands 11/2/2012 National Bank of Canada Aa2/A YR FXD 11/7/2017 Canada 10/17/2012 PNC Bank NA A3/A ,000 10YR FXD 11/1/2022 US 9/4/2012 Australia & New Zealand Banking Group (New York) Aa2/AA YR FXD 10/6/2017 Australia 8/10/2012 UBS AG (Stamford) -/BBB ,000 10YR FXD 8/17/20222 Switzerland 8/8/2012 National Australia Bank Ltd Aa2/AA YR FXD 8/10/2017 Australia 7/26/2012 National Australia Bank (New York) Aa2/AA- 3mL+113bp 500 3YR FRN 8/7/2015 Australia 7/26/2012 National Australia Bank (New York) Aa2/AA ,250 3YR FXD 8/7/2015 Australia 7/10/2012 Sumitomo Mitsui Banking Corp Aa3/A ,000 3YR FXD 7/18/2015 Japan 7/10/2012 Sumitomo Mitsui Banking Corp Aa3/A ,250 5YR FXD 7/18/2017 Japan 7/10/2012 Sumitomo Mitsui Banking Corp Aa3/A YR FXD 7/18/2022 Japan 6/6/2012 TCF National Bank Baa1/BBB YR FXD 6/8/2022 US 3/28/2012 Svenska Handelsbanken AB Aa3/AA ,250 5YR FXD 4/4/2017 Sweden 3/16/2012 National Australia Bank Ltd Aa2/AA- 3mL+1bp 175 3YR FRN 3/20/2015 Australia 3/5/2012 Commonwealth Bank of Australia (New York) Aa2/AA ,000 3YR FXD 3/16/2015 Australia 3/1/2012 National Australia Bank (New York) Aa2/AA ,500 3YR FXD 3/9/2015 Australia 3/1/2012 National Australia Bank (New York) Aa2/AA ,000 5YR FXD 3/9/2017 Australia 2/1/2012 Rabobank Nederland Aa2/AA ,000 10YR FXD 2/8/2022 Netherlands 1/17/2012 First Republic Bank Baa3/BBB Perpetual Perpetual US 1/11/2012 Rabobank Nederland Aa2/AA ,500 5YR FXD 1/19/2017 Netherlands 7/20/2011 Rabobank Nederland Aa2/AA- 3mL+20bp 360 2YR FRN 7/25/2013 Netherlands 7/5/2011 Svenska Handelsbanken AB Aa3/AA ,250 5YR FXD 7/12/2016 Sweden 5/24/2011 BNP Paribas SA A2/A YR FXD 3/11/2015 France 4/20/211 BNP Paribas SA A2/A YR FXD 3/11/2015 France 4/14/2011 Rabobank Nederland Aa2/AA- 3mL+35bp 350 3YR FRN 4/14/2014 Netherlands 4/6/2011 BNP Paribas (New York) A2/A ,000 10YR FXD 1/15/2021 France 3/22/2011 UBS AG (Stamford) A2/A 3mL+40bp 300 2YR FRN 9/25/2012 Switzerland 2/17/2011 BNP Paribas SA A2/A YR FXD 3/11/2015 France 1/25/2011 UBS AG (Stamford) A2/A ,000 3YR FXD 1/28/2014 Switzerland 1/25/2011 UBS AG (Stamford) A2/A 3mL+100bp 750 3YR FRN 1/28/2014 Switzerland 1/12/2011 BNP Paribas (New York) A2/A ,000 10YR FXD 1/15/2021 France 1/4/2011 Rabobank Nederland Aa2/AA ,250 3YR FXD 1/10/2014 Netherlands 1/4/2011 Rabobank Nederland Aa2/AA ,500 10YR FXD 1/11/2021 Netherlands Note: Shading denotes Yankee issuance; list is comprehensive but may not capture every 3(a)(2) issuance in ; 3(a)(2) issuances are unsecured This is MoFo. 32

33 Industry Guide 3 Provides guidelines for statistical disclosures by foreign banks and bank holding companies in SEC filings. Market practice to also meet guidelines for unregistered offerings. Statistical disclosures can be included in the registration statement itself or incorporated by reference from the FPI s annual report or quarterly/period reports to shareholders. Generally, the data provided must be for each of the last three or five fiscal years, plus any interim period if necessary to keep the information from being misleading. Available at This is MoFo. 33

34 Industry Guide 3 (cont d) Guidelines require detailed disclosures regarding a foreign bank s: assets, liabilities and equity accounts, interest rates and interest spreads, investment portfolio, loan portfolio, loan maturities, loan sensitivity to changes in interest rates, problem loans, loan concentrations, loan loss experience, other earning assets, deposits and return on equity and assets. This is MoFo. 34

35 Industry Guide 3 (cont d) Disclosure requirements are applicable to the extent the requested information is available. Since an FPI is required to disclose in the registration statement all material information necessary to make what is disclosed not misleading, the disclosures may in certain circumstances go beyond the requirements of Industry Guide 3. However, the SEC has permitted deviations from the guidelines if more meaningful disclosure with respect to a particular issue would be provided as a result. If the required information is unavailable or cannot be gathered without undue burden or expense to the FPI, the situation should be brought to the attention of the SEC in the early stages of the registration process. This is MoFo. 35

36 Covered Bond Offerings This is MoFo. 36

37 What Are Covered Bonds? Senior debt of a regulated financial entity Secured by a pool of financial assets Mortgage loans residential and commercial Public sector obligations Ship loans Protected from acceleration in the event of issuer insolvency By statute or legal structure Collateral is isolated from insolvency estate of the issuer Collateral pays bonds as scheduled through maturity A dynamic collateral pool refreshed every month Typically bullet maturity, fixed rate bonds Repayment liabilities remain on the balance sheet of the originator Most countries have statutes enabling covered bond. Very strong implicit government support in many jurisdictions This is MoFo. 37

38 Foreign Bank Issuances Foreign banks issuing into the U.S. market have been relying on their domestic covered bond framework and have been using cover pool assets that are foreign (not in the U.S.). Issuances into the U.S. have been structured as program issuances (or syndicated takedowns) conducted on an exempt basis, that means that the foreign issuer is relying on exemptions from the U.S. securities laws requiring registration of public offerings of securities. To date, only one issuer (RBC) has registered a covered bond with the SEC. It is expected that other foreign issuers will follow suit. As a result, offerings have been targeted at U.S. institutional investors and generally conducted in reliance on Rule 144A. This is MoFo. 38

39 Registered Offerings: Non-U.S. Issuers Offer Securities as Foreign Private Issuers This is MoFo. 39

40 What Is a Foreign Private Issuer? An FPI is any issuer (other than a foreign government) incorporated or organized under the laws of a jurisdiction outside of the U.S., unless more than 50% of the issuer s outstanding voting securities are held directly or indirectly by residents of the U.S., and any of the following applies: the majority of the issuer s executive officers or directors are U.S. citizens or residents; the majority of the issuer s assets are located in the U.S.; or the issuer s business is principally administered in the U.S. An FPI will be subject to the reporting requirements under U.S. federal securities laws if it registers with the SEC the public offer and sale of its securities under the Securities Act. However, an FPI may also deregister more easily than a domestic issuer. This is MoFo

41 Benefits Available to FPIs An FPI may exit (or deregister) the U.S. reporting regime more easily than a U.S. issuer. Quarterly reports: An FPI is not required to file quarterly reports submits its non-u.s. reports under cover of Form 6-K. Proxies: An FPI is not required to file proxy statements. Ownership reporting: No Section 16 ( short-swing profits) reporting. Governance: An FPI may choose to rely on certain home-country practices. XBRL: Temporary XBRL relief was previously granted to FPIs. This is MoFo. 41

42 Benefits Available to FPIs (cont d) Internal controls: Annual internal control reporting Executive compensation: As an FPI, certain of the more onerous executive compensation disclosure requirements are not applicable. IFRS without GAAP reconciliation 12g3-2(b) exemption This is MoFo. 42

43 Registration Process This is MoFo. 43

44 Which Registration Form Should Be Used? Once an FPI has been subject to the U.S. reporting requirements for at least 12 calendar months, it may use Form F-3 to offer securities publicly in the United States. Form F-3 is a short-form registration statement (analogous to Form S-3 for U.S. domestic issuers) and may be used by an FPI if the FPI meets both the form s registrant requirements and the applicable transaction requirements. Form F-3 permits an FPI to disclose minimal information in the prospectus included in the Form F-3 by incorporating by reference the more extensive disclosures already filed with the SEC under the Exchange Act, primarily in the FPI s most recent Annual Report on Form 20-F and its Forms 6-K. Form F-3 s filed by WKSI s are automatically effective, without SEC review. Shelf registration statements on Form F-3 are typically not reviewed. This is MoFo. 44

45 What is a WKSI? A well-known seasoned issuer ( WKSI ) is an issuer that has at least $700 million of common equity held by non-affiliates or (b) issued $1 billion of non-convertible securities during the past three years. Can be a U.S. issuer or a non-u.s. issuer. Can be a subsidiary of a company that is a WKSI. Subject to certain disqualifications. This is MoFo. 45

46 Automatic Shelf Registration Statements Automatic, immediate effectiveness, without SEC review Registration of unspecified amounts of specified classes of securities Presumption of proper form Process and consequences of notification by Staff if SEC objects to use of form Impacts form of underwriting agreement, opinions and other offering documents. Omission of information from base prospectus Identification of primary or secondary offering Description of securities Names of selling security holders Plan of distribution Mechanics for including omitted information Limited requirements for post-effective amendments Pay-as-you-go registration fees as an option Unique to automatic shelf registrations In whole or in part Practical application in MTN programs and other special situations This is MoFo. 46

47 Ongoing Reporting Obligations and Governance This is MoFo. 47

48 Ongoing Reporting Obligations An FPI that has registered securities under Section 12(b) or 12(g) of the Exchange Act or is required to file under Section 15(d) of the Exchange Act (because it has recently completed a registered offering) is obligated to file the following Exchange Act reports with the SEC: Annual Report on Form 20-F Reports on Form 6-K This is MoFo. 48

49 Annual Report on Form 20-F The information required to be disclosed in an Annual Report on Form 20-F includes, but is not limited to, the following: operating results; liquidity and capital resources; trend information; off-balance sheet arrangements; consolidated financial statements and other financial information; significant business changes; selected financial data; risk factors; history and development of the FPI; business overview; and organizational structure. This is MoFo. 49

50 Reports on Form 6-K An FPI must also furnish reports on Form 6-K to the SEC from time to time. Generally, a Form 6-K contains information that is material to an investment decision in the securities of an FPI. May include press releases, securityholder reports and other materials that an FPI publishes in its home-country in accordance with home-market law or custom, as well as any other information that the FPI may want to make publicly available. Reports on Form 6-K generally take the place of Quarterly Reports on Form 10-Q (which include financial reports) and Current Reports on Form 8-K (which include disclosure on material events) that U.S. domestic issuers are required to file. For many of the larger FPIs, the Forms 6-K that are filed with the SEC generally include similar types of information and are filed with the same frequency as Forms 10-Q and 8-K that are filed by U.S. domestic issuers. The disclosures are prepared in accordance with home country practice. This is MoFo. 50

51 Sarbanes-Oxley Requirements Section 302 of Sarbanes-Oxley requires certifications by an FPI s CEO/CFO regarding the effectiveness of the FPI s disclosure controls and procedures, the completeness and accuracy of the FPI s reports filed under Section 13(a) and 15(d) of the Securities Act, and any deficiencies in, and material changes to, the FPI s internal control over financial reporting. Section 302 reporting begins once the FPI is an SEC registrant. These certifications must be included in the FPI s Form 20-F. Other reports filed or furnished by the FPI, such as reports on Form 6-K, are not subject to the certification requirements. Section 404 of Sarbanes-Oxley requires an annual report by both management and external auditors regarding the effectiveness of the company s internal controls over financial reporting. Section 404 reporting begins with the second annual filing with the SEC. FPIs that are non-accelerated filers do not have to provide the auditor s attestation. This is MoFo. 51

52 Disclosure Controls and Procedures Disclosure controls and procedures are controls and other procedures designed to ensure that the information required to be disclosed in the reports filed under the Exchange Act, on a timely basis, is recorded, processed, summarized and reported. Disclosure controls and procedures include, but are not limited to, controls and procedures designed to ensure that information required to be disclosed by a company in its Exchange Act reports is appropriately accumulated and communicated to the company s management, including its principal executive and financial officers, to allow timely decisions regarding required disclosure. Important to have an up the chain process of reporting from lower managers to CEO and CFO. This is MoFo. 52

53 Liability Concerns This is MoFo. 53

54 Securities Liability Rule 144A and Section 3(a)(2) Neither Rule 144A offerings or securities offerings of, or guaranteed by, a bank under Section 3(a)(2) are subject to the civil liability provisions under Section 11 and Section 12(a)(2) of the Securities Act. Rule 144A offerings and offerings under Section 3(a)(2) are subject to Section 10(b) of the Exchange Act and the anti-fraud provisions of Rule 10b-5 of the Exchange Act. Impact on offering documents, and use of offering circulars to convey material information and risk factors. This is MoFo. 54

55 Liability Under the Exchange Act Rule 10b-5 applies to registered and exempt offerings. Rule 10b-5 of the Exchange Act prohibits: the use of any device, scheme, or artifice to defraud; the making of any untrue statement of a material fact or the omission of a material fact necessary to make the statements made not misleading; or the engaging in any act, practice, or course of business that would operate to deceive any person in connection with the purchase or sale of any securities. To bring a successful cause of action under Rule 10b-5, the plaintiff must prove: that there was a misrepresentation or failure to disclose a material fact, that was made in connection with plaintiffs purchase or sale of a security, that defendants acted with scienter, or the intent or knowledge of the violation, that plaintiffs relied on defendants misrepresentation or omission, and that such misrepresentation or omission caused plaintiffs damages. This is MoFo. 55

56 Section 11 Liability Registered Offerings Directors and officers of an FPI who sign a registration statement filed in connection with a securities offering are subject to the liability provisions of Section 11 of the Securities Act. Section 11 of the Securities Act creates civil liability for misstatements or omissions in a registration statement at the time it became effective. Any person that acquired a security registered under a registration statement, and did not have knowledge of the misstatement or omission at the time of the acquisition of the security, can bring suit against: every person who signed the registration statement, including the FPI; every director of the FPI at the time of the filing of the registration statement, whether or not such director signed the registration statement; and experts who consent to such status, but only with respect to those sections of the registration statement (e.g., auditors). This is MoFo. 56

57 Section 12 Liability Registered Offerings Section 12 of the Securities Act assigns liability to any person who offers or sells a security in violation of Section 5 of the Securities Act (pursuant to Section 12(a)(1)), or by means of a prospectus or oral communication that includes a misstatement or omission of material fact (pursuant to Section 12(a)(2)). Plaintiffs bringing a claim under Section 12 are afforded rescissory relief, if they still have ownership of the securities, or damages, if they no longer own the security. No action under Section 12(a)(1) may be brought more than three years after the bona fide public offering of a security, or, in the case of Section 12(a)(2), more than three years after the actual sale of a security. This is MoFo. 57