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Articles related to commercial transaction due diligence.

Tenant screening laws update: passing background check costs to the applicants

The states of Washington and Oregon recently enacted laws in connection with tenant screening. Among the provisions in both Washington’s RCW §59.18.257 and Oregon’s OAS §90.295, is that the entire cost of the background check can be charged to the applicant, if the screening is performed by a consumer reporting agency (“CRA”). However, if the landlord conducts the background check, it may not charge in excess of the customary fees of the CRAs in its geographical area.

Notably, California’s Civil Code §1950.6(b) provides that a landlord cannot charge (or pass-through) to the applicant more than $30 for a background check. This application screening fee may be adjusted annually by the landlord or its agent commensurate with an increase in the Consumer Price Index. (The current adjusted amount is $41.50.)

September 12th, 2013|Categories: Commercial Transactions Due Diligence|Tags: , , |

FINRA issues investor alert about calls from brokerage firm imposters

The Financial Industry Regulatory Authority (“FINRA”) issued a new alert on August 6, 2013 labeled as Cold Calls from Brokerage Firm Imposters—Beware of Old-Fashioned Phishing to warn investors of calls from scammers claiming to be representatives of at least one well-known brokerage firm. In this latest twist on phishing scams, the fraudsters are cold-calling investors claiming to offer information about certificates of deposit with yields well above the best rates in the market in an attempt to get potential victims to divulge their personal or financial account information.

FINRA is reminding investors who receive unsolicited calls to never provide personal information or authorize any transfer of funds to any unknown person, and encourages anyone who believes that he/she has been scammed to file a complaint using its online Complaint Center or send a tip to FINRA’s Office of the Whistleblower.

August 7th, 2013|Categories: Commercial Transactions Due Diligence|Tags: , , |

Disciplinary action serves as reminder of due diligence requirement in Reg. D offerings

A recent disciplinary action reaffirmed FINRA member firms’ obligations to conduct a reasonable investigation of the issuer and the securities it recommends in offerings made under the SEC’s Regulation D, commonly known as private placements. Regulation D provides exemptions from the registration requirements of Section 5 under the Securities & Exchange Act, but it does not exempt these transactions from the antifraud provisions of the federal securities laws. A broker-dealer thus has a duty—enforceable under federal securities laws and FINRA rules—to conduct a reasonable investigation of the securities it recommends. Moreover, any broker-dealer that recommends securities offered under Regulation D must meet the suitability requirements under NASD Rule 2310, and comply with the advertising and supervisory rules of FINRA and the SEC.

A broker-dealer’s reasonable investigation must be tailored to each Regulation D offering, as its scope will depend on factors such as the sophistication of the investors, the broker-dealer’s affiliation with the issuer, and other facts and circumstances of the offering. The investigation, at a minimum, should include background checks of the issuer and its management, the business prospects of the issuer, the assets held or to be acquired by the issuer, the claims being made, and the intended use of the proceeds.

A firm that engages in Regulation D offerings also must have supervisory procedures under NASD Rule 3010 that are designed to ensure that its personnel and representatives conduct an inquiry that is sufficient to comply with the legal and regulatory requirements; that they perform the suitability analysis required by NASD Rule 2310; that they qualify the investors’ eligibility to purchase the securities; and that they abide by the antifraud provisions of the federal securities laws and FINRA rules regarding the preparation and distribution of offering documents or sales literature. And a broker-dealer has a further duty to adequately investigate any information located during the investigation that may be considered a “red flag.”

August 7th, 2013|Categories: Commercial Transactions Due Diligence|Tags: , , |

SEC approves JOBS Act requirement to lift general solicitation ban and adopts final rule to disqualify bad actors from certain offerings

The Securities and Exchange Commission (the “SEC”) today adopted a new rule implementing a JOBS Act requirement to lift the ban on general solicitation or general advertising for certain private securities offerings. In connection with this new rule, the SEC issued an amendment proposal requiring issuers to provide additional information about these offerings to better monitor the market with that ban now lifted. The proposal provides for additional safeguards as the market changes and new practices develop.

Continuing the momentum, the SEC also adopted a long-awaited rule  that disqualifies felons and other bad actors from participating in certain securities offerings as required by the Dodd-Frank Act. Under this final rule, an issuer cannot rely on the Rule 506 exemption if the issuer or any other covered person had what the SEC considers a “disqualifying event,” briefly described as a securities-related criminal conviction, court injunction or restraining order, final bar order, SEC disciplinary, cease-and-desist or stop order, suspension or expulsion from membership in a self-regulatory organization, or U.S. Postal Service false representation order.

The final rule provides an exception from disqualification when the issuer can show that it did not know and, in the exercise of reasonable care, could not have known that a covered person with a disqualifying event participated in the offering. The disqualification applies only for events that occur after the effective date of this rule. However, matters that existed before the effective date and that otherwise would be disqualifying are subject to a mandatory disclosure requirement to investors.

July 11th, 2013|Categories: Commercial Transactions Due Diligence|Tags: , , |

SEC announces new enforcement initiatives to combat fraud

 

The Securities and Exchange Commission, (the “SEC”) announced today three new initiatives that will build on its Division of Enforcement’s ongoing efforts to concentrate resources on high-risk areas, as follows:

  • The Financial Reporting and Audit Task Force will concentrate on expanding and strengthening the Division’s efforts to identify securities law violations relating to the preparation of financial statements, issuer reporting and disclosure, and audit failures. Its principal goal will be fraud detection and increased prosecution of violations involving false or misleading financial statements and disclosures. 
  • The Microcap Fraud Task Force will investigate fraud in the issuance, marketing, and trading of microcap securities. These abuses frequently involve serial violators and organized syndicates that employ new media, especially websites and social media, to conduct fraudulent promotional campaigns and engage in manipulative trading strategies to amass ill-gotten gains, largely at the expense of less sophisticated investors. The task force’s principal goal will be to develop and implement long-term strategies for detecting and combating fraud especially by targeting “gatekeepers,” such as attorneys, auditors, broker-dealers, and transfer agents, and other significant participants, such as stock promoters and purveyors of shell companies.
  • The Center for Risk and Quantitative Analytics (CRQA) will support and coordinate the Division’s risk identification, risk assessment and data analytic activities by identifying risks and threats that could harm investors, and assist staff nationwide in conducting risk-based investigations and developing methods of monitoring for signs of possible wrongdoing. A central point of contact for risk-based initiatives nationwide, CRQA will serve as both an analytical hub and source of information about characteristics and patterns indicative of possible fraud or other illegality.
July 2nd, 2013|Categories: Commercial Transactions Due Diligence|Tags: |

CFPB issues long-awaited rule on supervising non-banks that pose risks to consumers

On June 26, 2013, the Consumer Financial Protection Bureau (the “CFPB”) issued a final rule that establishes procedures to bring under its supervisory authority certain nonbanks whose activities pose risks to consumers. Non-banks subject to the rule are companies that offer or provide consumer financial products or services but do not have a bank, thrift, or credit union charter, and include a nonbank’s affiliate service providers. The final rule will be effective 30 days after its publication in the Federal Register.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the CFPB is authorized to supervise any nonbank, regardless of its size, that the CFPB has reasonable cause to determine “is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services.”

The CFPB has already finalized “larger participant” rules for the credit reporting and debt collection markets and has proposed such a rule for the federal and private student loan servicing market.

July 2nd, 2013|Categories: Commercial Transactions Due Diligence|Tags: , , |

Updated guide from the FTC: fighting identity theft with Red Flags Rule for businesses

On June 12, 2013, the Federal Trade Commission (the “FTC”) issued revised guidance designed to help businesses comply with the requirements of the Red Flags Rule, which protects consumers by requiring businesses to watch for and respond to warning signs or “red flags” of identity theft. The guidance outlines which businesses – financial institutions and some creditors – are covered by the Rule and what is required to protect consumers from identity theft.

The FTC enforces the Red Flags Rule with several other agencies. Its guide has tips for organizations under FTC jurisdiction to determine whether they need to design an identity theft prevention program, and can help businesses spot suspicious patterns and prevent the costly consequences of identity theft.

June 27th, 2013|Categories: Commercial Transactions Due Diligence|Tags: , |

FTC says data brokers willing to sell consumer information and disregard FCRA

On May 7, 2013, the Federal Trade Commission (the “FTC”) announced the results of its testing operation, revealing that 10 companies out of the 45 that the FTC approached seemed to be willing to sell consumer information without complying with the Fair Credit Reporting Act (“FCRA.”) The FTC reported that its staffers asked the companies about buying the information for purposes such as determining creditworthiness, suitability for employment or eligibility for insurance.

Six of the 10 companies appeared willing to sell consumer information for employment purposes, two for insurance decisions and two for pre-screened lists of consumers to use in making firm offers of credit. The data brokers were contacted again by the FTC, but this time in the form of letters, warning that their practices may violate the FCRA. The warning letters are part of an ongoing international effort spearheaded by the Global Privacy Law Enforcement Network, an informal group of consumer protection and privacy agencies. 

May 9th, 2013|Categories: Commercial Transactions Due Diligence|Tags: , |

Most service providers are not subject to Red Flags Rule

The Federal Trade Commission (the “FTC”) interim final rule which became effective February 11, 2013 confirms that most service providers are not subject to the Red Flags Rule. The rule clarifies the meaning of “creditor” ensuring that its definition is consistent with the revised definition of that term in the amended Fair Credit Reporting Act (the “FCRA”). A “creditor” must develop and implement a written identity theft prevention program premised on identifying “red flags” of identity theft only if in the ordinary course of business, the “creditor” regularly: 1) obtains or uses consumer reports in connection with a credit transaction; 2) furnishes information to consumer reporting agencies in connection with a credit transaction; or 3) advances funds to or on behalf of a person, in certain cases.

However, any entity collecting consumer data must remain vigilant in how it collects, uses and safeguards that data. The FTC may pursue enforcement actions under the FTC Act when a company does not take reasonable privacy protection measures scaled to the risk level of their business practices.

March 29th, 2013|Categories: Commercial Transactions Due Diligence|Tags: , |
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