All Things Newz
Law \ Legal

New Compliance And Disclosure Interpretation Regulates Forward Contracts On Restricted Securities – Securities



To print this article, all you need is to be registered or login on Mondaq.com.

On June 9, 2022, the staff (“Staff”) of the US
Securities and Exchange Commission (“SEC”) added Question
101.01 to its Compliance and Disclosure Interpretations
(“C&DI”), addressing forward contracts on restricted
securities. The new CD&I clarifies that forward contracts on
restricted securities would not be considered “intended to be
physically settled” under certain circumstances as discussed
below.

Typically, forward contracts benefit from an exclusion from the
definition of “swap” and “security-based swap;”
this is because the definitions of “swap” and
“security-based swap” exclude “any sale of a
nonfinancial commodity or security for deferred shipment or
delivery, so long as the transaction is intended to be
physically settled
.” Forward contracts are typically
“intended to be physically settled.” To the extent
forward contracts are excluded from the definition of
“swap” and “security-based swap,” they are not
subject to Title VII under the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (the “Dodd-Frank
Act”).

CD&I Question 101.01 clarifies that while a determination of
whether an instrument is a “swap” or a
“security-based swap” is based on facts and
circumstances, the SEC Staff would not consider a forward contract
as “intended to be physically settled” if, at the time
the parties enter into the contract, the underlying securities (i)
cannot be legally transferred, or (ii) are subject to contractual
restrictions on transfer. In order for the contract to be
considered “intended to be physically settled,” the
following conditions must both be met: (i) the offer and sale of
the underlying securities must be registered in compliance with
Section 5 of the Securities Act or otherwise exempt from
registration; and (ii) any contractual restrictions on the transfer
of the underlying securities must be satisfied or otherwise
waived.

This means that employees and stockholders of private companies
that are subject to employment or charter restrictions on transfers
may be prevented from using forward contracts to obtain liquidity
in the absence of the company’s express cooperation. Although
some private companies sponsor liquidity programs for employees and
stockholders, typically, these are sponsored through organized
platforms and are structured as outright sales.

If the contractual restrictions are not waived, the forward
contract would not be considered “intended to be physically
settled” and would be subject to regulation under Section 5 of
the Securities Act of 1933 (the “Securities Act”), which
was amended by the Dodd-Frank Act to make it unlawful for any
person to offer to sell, offer to buy, or purchase or sell a
security-based swap to any person or entity that is not an eligible
contract participant (“ECP”) without first registering
with the SEC. As a result, these transactions would no longer be
practically viable.

Visit us at
mayerbrown.com

Mayer Brown is a global legal services provider
comprising legal practices that are separate entities (the
“Mayer Brown Practices”). The Mayer Brown Practices are:
Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both
limited liability partnerships established in Illinois USA; Mayer
Brown International LLP, a limited liability partnership
incorporated in England and Wales (authorized and regulated by the
Solicitors Regulation Authority and registered in England and Wales
number OC 303359); Mayer Brown, a SELAS established in France;
Mayer Brown JSM, a Hong Kong partnership and its associated
entities in Asia; and Tauil & Chequer Advogados, a Brazilian
law partnership with which Mayer Brown is associated. “Mayer
Brown” and the Mayer Brown logo are the trademarks of the
Mayer Brown Practices in their respective
jurisdictions.

© Copyright 2020. The Mayer Brown Practices. All rights
reserved.

This
Mayer Brown
article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein.

POPULAR ARTICLES ON: Corporate/Commercial Law from United States

Is My Electronic Signature Valid?

McGlinchey Stafford

In this appeal, the Eighth Appellate District affirmed the trial court’s decision, agreeing that Ohio’s Uniform Trade Secret Act broadly preempts not only causes of action for misappropriation of trade secrets but also causes of…

ESG Weekly Update – June 1, 2022

Debevoise & Plimpton

Last week, the U.S. Securities and Exchange Commission (SEC) proposed additional disclosure requirements for ESG-focused funds in order to “promote consistent, comparable, and reliable information…

Top 5 SEC Enforcement Developments For May 2022

Morrison & Foerster LLP

In order to provide an overview for busy in-house counsel and compliance professionals, we summarize below some of the most important SEC enforcement developments…



Source link

Related posts

Life Sciences ESG Reporting Practices – Securities

Do Companies Need A Metaverse Voting Policy? – Fin Tech

Employer Alert: Employers Have Until 1 January 2023 To Comply With The Protected Disclosures (Amendment) Act 2022 – Employee Rights/ Labour Relations