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Private Equity - hedge funds that target public and private companies to take private, restructure and perhaps take public
Leveraged Buy-out - Private equity is new name for LBO, but instead of borrowing money from banks to buy out a company, they raise it by selling debt to accredited investors or using their internal hedge funds to purchase the company
SEC Rule 145 - Reorganizations - certain corporate reorganizations will require registration statement and others are exempt.
- Requires a registration statement:
- - a reorg that substitutes one security for another
- - merger or consolidation where securities of existing holders will be exchanged for securites in the new entity
- - transfer of assets from one person to another in consideration for the issuance of new securities
Proxy solicitations are used to get shareholder approval of these types of transactions.
The form used for registering these reorgs is an S-4. Prospectus sent 20 business days prior to vote
- Exempt reorgs (Rule 145):
- - stock split or reverse split
- - change in par value
- - stock dividend
- SEC Reg. M-A - covers the disclosures and rules for tender offers and takeover transactions
- The following info must be provided to teh shareholders of teh subject company
- - a bulletpoint summary of teh essential features and significance of the proposed transaction
- - the nature of teh solicitaion or recommendation being made by the maker of teh offer
- - ID of teh maker of teh offer, business back background and criminal record or judgements in last 5 years
- - ID about the company that is the subject of the offer - number of shares outstanding, high and low prices for 2 years, prior stock purchases made by teh maker of teh offer during the previous 2 years.
- - detailed terms of the tender offer or proposed merger
- - any past contacts or negotiations with the subject company and maker of the offer
- - purpose of the transaction and plans
- - source of funding for the transaction
- - existing share ownership of the subject company by the offer maker and affiliated persons
- - listing of all persons retained to make solicitations and recommendations regarding the proposed transaction
- - copy of the maker's audited financial statements for 2 years and if material teh effect of teh proposed transaction on teh company's financial statements shown pro forma
- - summary of any reports , opinions or appraisals about eh fairness of teh propsed transaction made by outside parties.
FINRA Rule 5150 - fairnes Opinion
- must disclose potential conflicts of interest when a "fairness opinion" is rendered or offered
- meant to address the conflict of interest when a member firm hires another member firm to provide an opinion of a merger or acquisition.
- Six required disclosures:
- - contingent compensation - whether it served as financial advisor to any of teh parties and whether it is compensated more if teh transaction is completed.
- - if there is any other compensation contingent on the trnasaction proceeding
- - material relationships with any of teh parties in teh last 2 years
- - verification of information - whether it has independently verified the statements of the parties or not, ONE BLANKET either no information has been verified or what statemetns have been verified.
- - Fairness Committee - member firm must disclose if the fairness opinion was approved or issued by a fairness committee of the member firm - there is no requirement for such a committee
- - Insider Compensation - member firm must disclose whether there is compensation to the insiders (officers, directors) that might influence their promotion of the transaction - i.e. are the shareholders being treated fairly via-a-vis the officers and directors
if the member firm has a Fairness Committee - it must have written selection and operation procedures
Hart-Scott-Rodino Act - maker of an offer must comply with this act and the possibility of it triggeirng federal anti-trust oversight and review.
Notices must be filed with the Federal Trade Commission and Dept of Justice
after filing, there must be a 30 day waiting period for federal review. Cannot close the deal until this period is complete. If not comment from the feds, then the deal is free to proceed.
- HSR Act - thresholds:
- You must file if:
- - > $200 Million adjusted for Inflation (base year 2001, now about $304E6), OR,
- - between $50E6 and $200E6 (inflation adjusted) only if the "10/100" test applies - only have to file if one company is over $100E6 and the other one is over $10E6
- - if under $50E6 (inflation adjusted, $75.9E6), do not have to file HSR
REsearch Report Rules - new rules from teh internet bubble - conflict of interest arose from research departments that were funded by the investment banking department
- Prohibitions -
- - research personal cannot report to investment banking, usually now they report to retail sales
- - research reports cannot be subject to review by inv banking
- - research analysts are prohibited from participating in road shows or customers with investment banking personel
- - research reports cannot be shared with the subject company prior to distirbution
- - research personnel and immediate household can't buy issues's securities prior to IPO of any company in teh same industry as teh analyst covers for research reports.
trading in recommended company's securites is prohibited 30 days prior to report publishment and for 5 days following for analysis and his immediate household
- research personnel are prohibited from trading contrary to their firms recommendations --- if hardship requires a sell, compliance can approve such a sell if approved of in advance of the trade.
research personnel can't be compensated on investment banking business with companies they cover.
No "booster shot" research reports. reports that came out right after an issue was effective or right about teh time the lockup period expired.
Underwriting manager can not issue a research report on an underwritten issue for:
-- IPO - 40 days
-- add on - 10 days
Syndicate member (not manager or co-manager) can not issue a research report for 25 days.
underwriting manager or co-manager is prohibited from issuing a "booster shot" report during teh period 15 days prior to and 15 days following the lock-up period expiration.
member firm cannot issue a favorable research report as consideration for the receipt of business from that issuer.
Member Firm Disclosures when recommending:
- - member or its affiliates own 1% or more of the teh common of the issuer
- - associated person or household member has a financial interst in the securities of the issuer; or any material conflict of interest
- - member firm disclosures:
- -- has managed or co-managed an equity securities offer for the issuer in the last 12 months
- -- has recieved compensation from the issuer for investment banking in the last 12 months
- -- expects to seek or receive investment banking compensation in the next 3 months
- -- is an investment banking services client of the member
- -- is a market maker in the issuer's stock
Associated Persons Disclosures:
- must be disclosed in research reports or public appearances - if associated person or household member that prepared the research report is
- - an officer, director or board member of the issuer
- - compensated based on the firms overall investment banking business
SEC Rule 15a-6:
- Foreign B/D's who only accept unsolicited trades and distribute research reports to institutional investors - are exempt from SEC regulation
- - only unsolicited trades
- - distributes research only to clients with at least $100 million of assets (non-retail, institutional only).
- Can't recommend foreign B/D to do trades in report and foreign B/D can't initiate follow up
Chaperoning Agreements - if a foreign B/D has such an agreement with a U.S. firm, the U.S. firm handles trades, confirmations, net capital. but foreign B/D can solicit trades, and distribute research directly to institutional U.S. investors.
Regulation AC - Analyst Certification
- a statement by teh analyst that the views expressed in the report accurately reflect his personal views
- statement by the analyst that his compensation isn't and won't be related to his recommendations or views expressed
B/D's that publish 3rd party research are exempt as long as the analyst is truely independent or if investment advisor is only registered at the state level, (less than $100E6 under management).
- If there is a public appearance, there has to be a record made within 30 days of teh end of each quarter that all the opinions and views are his view reflected accurately at teh time of the expression, AND
- - a statement that no part of compensation is related to their opinions
If no certification is made, FINRA has to be notified and teh B/D must for 120 days, disclose in any research report authored by that analyst the the certification was not provided.
- Other issues surrounding this Regulation AC:
- - research report includes written and electronically transmitted reports
- - if a report is based on a technical model, the firm can issue the certification
- - duringeach public appearance a certification is not required - only the quarterly one is required.
APPLIES TO BOTH EQUITY AND DEBT SECURITIES
- an accounting firm that is a firm's auditor cannot provide other non-audit services to the firm.
- - accoutning firm must report to an "independent" audit committee
- - the CEO and CFO of the issuer cannot have been employed by teh company's audit firm for 1 year proceeding the audit
- - the CEO and CFO must annually certify the "appropriateness of the financial statements and disclosures made" and violations are criminal
- - issuers cannot loan money to any officer or director
- - issuers must speed up disclosures (8K reports due within 4 days of event)
- - insiders are prohibited from trading issuer stock during "blackout periods"
- - insiders must report their trades within 2 business days of the event
Penalties were increased to prison term for each violation increasing from 5 to 10 years.
Statute of Limitations for violations of '33, '34 and '40 Acts are 2 years of discover and 5 years from event
- Section 15D - research analyst conflicts of interest
- Regulation FD
- Each firm must create rules to:
- - prohibit investment banking approving reports
- - compensation of analysts can't be done by investment banking
- - investment banking can't pressure an analyst to give favorable report
- Full Disclosure - like a recommendation made on Mad Money -
- - the extent to which the analyst has equity or debt investments in the subject issuer
- - whether any compensation has been received from the issuer by the B/D or analyst
- - whether the issuer has been an investment banking client of the B/D in the preceding 12 months
- - whether the analyst has received compensation from the investment banking revenues
- - any other material conflicts of interest