Summary of Dodd-Frank Wall Street Reform and Consumer Protection Act

OSWALD & YAP LLP

Lawyers

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MEMORANDUM

TO:               Clients and Colleagues

FROM:          Oswald & Yap LLP

RE:               Dodd-Frank Wall Street Reform and Consumer Protection Act

DATE:           August 12, 2010

___________________________________________________________________________________________

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) became law. The Act is largely a response to recent financial turmoil and is intended to address areas of the financial markets which are believed to have contributed to or exacerbated the economic collapse. The Act includes revised accredited investor standards, corporate governance and executive compensation reforms, new registration requirements for hedge fund and private equity fund advisers, and other regulatory enforcement provisions. Some of the provisions of the Act take effect immediately while other provisions will be implemented over time. This memorandum summarizes the provisions of the Act which we believe are the most significant for our clients.

Accredited Investor Standard

The Act revises one of the definitions of an “accredited investor” under the Securities Act of 1933 (“the “Securities Act”). Specifically, in determining if a natural person is an “accredited investor” who meets the $1 million net worth test, the value of such person’s primary residence must now be excluded from the $1 million net worth calculation. Previously, a person’s primary residence (net of any mortgage) was included in calculating a person’s net worth. The other definitions of “accredited investor” under the Securities Act are currently remaining the same. This change is effective immediately. As a result, all investors relying on the net worth test must now meet this new standard to qualify as an “accredited investor”.

Whether or not the revised accredited investor standard is retroactive to those investors who previously invested in a not-yet-closed Regulation D offering (or a continuous Regulation D offering) is unclear and we must await guidance from the Securities and Exchange Commission (“SEC”) to clarify the issue. In the meantime. companies which are conducting a not-yet-closed Regulation D offering (or a continuous Regulation D offering) that includes investors relying on the net worth test are encouraged to consider whether new accredited investor representations are required of those investors who invested prior to July 21, 2010, to ensure the availability of an exemption from the registration requirements of the Securities Act.

Bad Actor Disqualitication from Private Offerings

The Act requires that the SEC, no later than July 21, 2011, issue rules for the disqualification of offerings and sales of securities from the protections of Regulation D under the Securities Act if the offerings are made by certain “bad actors” defined as persons who (i) have been convicted of a felony or misdemeanor in connection with the purchase or sale of any security or a false filing with the SEC; (ii) are barred from association with regulated entities or from engaging in the business of securities, insurance, banking or in savings association or credit union activities for fraud, manipulation or deception; or (iii) are subject to a final order based on a violation of any law prohibiting fraud or manipulation or deceptive conduct. The precise scope of the disqualifications and the extent to which they will apply to officers, directors, control persons, or other employees who are or were bad actors will have to await SEC rulemaking.

Smaller Reporting Comuanies Exempt from Sarbanes-Oxley 404(b) Auditor Attestation as to Internal Control Requirements

The Act immediately and permanently exempts smaller reporting companies that are not accelerated filers or large accelerated filers from compliance with the internal control auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.

Executive Compensation

The Act provides for the following executive compensation reforms;

• Say on Pay: The Act requires that, not less frequently than once every three years, a proxy statement, consent, or authorization for an annual or other meeting of the shareholders for which the SEC rules require compensation disclosure, must also include a separate resolution subject to shareholder vote to approve the company’s executive compensation as disclosed in the proxy statement. The Act specifies that the shareholder vote will not be binding on the company’s board of directors and cannot be construed as overruling any company or board decision.

• The Act requires that the proxy, consent, or authorization for the first annual or other meeting of the shareholders occurring after January 21, 2011, shall include (i) the shareholders’ resolution concerning the company’s executive compensation and (ii) a separate shareholders resolution to determine whether shareholder votes concerning the company’s executive compensation shall occur every one, two, or three years. However, the Act does state that the SEC may by rule or order exempt certain companies if the requirements are found to “disproportionately burden small Companies.” Obviously this language creates the possibility that smaller reporting companies may ultimately be exempted from these requirements. Even so any such exemption will have to await SEC rulemaking.

• Say on Golden Parachutes The Act requires that any proxy statement, consent, or authorization for a meeting occurring after January 21, 2011 that seeks shareholder approval of an acquisition, merger, consolidation, or proposed sale of all or substantially all of a company’s assets must include (i) disclosure regarding agreements by the person soliciting proxies to make “golden parachute” payments to the named executive officers of the company or the acquirer, and (ii) a separate non-binding resolution subject to shareholder vote to approve such agreements. The Act specifies that the shareholder vote will not be binding on the company’s board of directors and cannot be construed as overruling any company or board decision. Again, as above, the Act states that the SEC may ultimately exempt smaller reporting companies from these requirements. However any such exemption for smaller reporting companies will have to await SEC rulemaking.

• Pay-for-Performance and Pay-Parity Disclosures: The Act requires that the SEC shall, by rule, require each reporting company to disclose in any proxy or consent solicitation material for an annual meeting of the shareholders the relationship between executive compensation actually paid and the company’s financial performance taking into account any change in the value of the company’s stock and dividends and other distributions. Companies will also be required to disclose: (i) the median annual total compensation of all employees, other than the Chief Executive Officer; (ii) the annual total compensation of the Chief Executive Officer, and (iii) the ratio of the median total annual employee compensation to that of the Chief Executive Officer. This disclosure requirement requires further action by the SEC before it is operative and the Act does not set an explicit deadline for the SEC to adopt such rules. This requirement will ultimately apply to large and small reporting companies alike as the SEC is given no authority to exempt any size companies from the requirement.

Registration of Investment Advisers

The Investment Advisers Act of 1940 (the “Advisers Act”) will also be amended to require many investment advisers that are currently exempt from registration with the SEC to register. Generally, the Act requires all investment advisers to hedge funds and/or private equity funds that manage $150 million or more in assets to register with the SEC. Importantly, the “private adviser” exemption which many hedge fund and private equity fund managers relied upon in the past is being eliminated. The “private adviser” exemption enabled an investment adviser to avoid SEC registration if it; (i) did not act as an investment adviser to a registered investment company or business development company; (ii) had fewer than 15 clients (counting each fund as one client); and (iii) did not hold itself out to the public as an investment adviser. Please note that the SEC will need to issue additional guidance on numerous aspects of the Act relating to investment adviser registration and coordinate their efforts with various state regulators. The new rules under the Advisers Act will become effective on July 21, 2011.

Regulatorv Enforcement and Remedies

The Act contains a number of provisions that are designed to assist enforcement of the securities laws and expand the scope of remedies available to regulators and injured private parties. Some of these provisions modify the securities laws in the following areas:

• Whistleblower Awards/Protection: The Act establishes monetary awards for whistleblowers in any SEC or Commodity Futures Trading Commission enforcement action which results in sanctions in excess of $1,000,000. Further, the Act also creates a private cause of action for whistleblowers against any employer that discharges, demotes, suspends, threatens, harasses, or in any other manner retaliates against, a whistleblower.

• Aiding Abetting Liabilitv: The Act extends the scope of liability for those who “knowingly or recklessly” aid or abet violations of federal securities laws by allowing government enforcement actions against such individuals.

• Strengthened SEC Enforcement: The Act strengthens the SEC’s enforcement powers by: (1) allowing the SEC to impose monetary penalties under certain circumstances against any person, rather than just regulated entities, in cease and desist proceedings; (2) allowing the SEC to bring enforcement actions against persons (i) taking “significant steps in furtherance” of securities violations, even where the securities transaction takes place outside the United States, and (ii) engaging in conduct outside the United States that has a foreseeable impact within the United States; and (3) clarifies that control person liability under Section 20(a) of the Securities Exchange Act of 1934 also applies in SEC enforcement actions and not solely in private actions.

You may contact Lynne Bolduc at (949) 788-8900 or info@oswald-yap.com with any questions.