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HSR Enforcement Continues Swiftly: $240K Settlement Announced with FTC for Failure to File

On the heels of the FTC's recent HSR passive investor exemption enforcement action comes another reminder that HSR compliance is not always clear, and that it is not always easy. The Federal Trade Commission has announced a settlement involving improper reliance on an exemption sometimes used by institutional investors to acquire up to 15% of a company without triggering the HSR filing and waiting period requirements.

The HSR Act requires parties to certain acquisitions to file notice with federal antitrust enforcers before completing transactions. A number of exemptions, though, permit parties to proceed without HSR filing and waiting period requirements. We reported in September 2015 how the passive investor exemption is applied, which allows certain investors to acquire up to 10% of a company without triggering a filing obligation, and how parties have been subject to enforcement for over-application of the exemption (see here).

An enforcement action on a related exemption available only to certain "Institutional Investors" has now been announced. The rule, 802.64, allows certain Institutional Investors to acquire up to 15% of a company without having to file if made solely for the purpose of investment, but, only if the company acquired is not also an Institutional Investor "of the same type" as the buyer.

In its complaint, the agency alleged that Leucadia National Corporation, through its subsidiary Jeffries, LLC, acquired, through a conversion transaction, voting securities of KCG Holdings valued in excess of the $76.3 million HSR reporting threshold. The agency alleged that the company improperly relied on the institutional investor exemption because although the holding did not exceed the 15% threshold, both companies were broker-dealers within the meaning of the HSR rules. The complaint alleges that the company improperly relied on the exemption upon the view that KCG was not a broker-dealer within the meaning of the HSR rules. The rules point to 15 U.S.C. 78c(a)(4) and (a)(5), which, broadly, define a broker as "any person engaged in the business of effecting transactions in securities for the account of others", and a dealer as  "any person engaged in the business of buying and selling securities . . . for such person's own account through a broker or otherwise".

Though the company appears to have relied on the exemption in good faith, made a corrective filing with the agency upon discovery of the violation, and the agency did not allege that the failure to file was an intentional, a civil penalty was nonetheless imposed based on the fact that the company previously failed to file for an acquisition in 2007. The agency did not impose a penalty for the 2007 failure to file, in part, because it was inadvertent and represented the company's first failure to file.

It has been the unwritten policy of the agency for some time to exercise its prosecutorial discretion and not impose penalties for first time inadvertent failures to file, but to act more firmly in the case of repeat offenders, even where inadvertent. While the $240,000 penalty imposed represents only a small fraction of maximum penalty available under the statute for the 15 month period the company was in violation of the HSR Act prior to its corrective filing, it serves nevertheless as a stark reminder of the potential risk of failures to file under the HSR Act – up to a maximum of $16,000 per day for each day the violation remains in effect.

Application of the HSR Act's filing requirement and exemptions requires a thorough understanding not only of the rules, but of the agency's formal and informal interpretations on the application of the rules, and thus must be undertaken with the advice of experienced counsel in all cases.

© 2019 Proskauer Rose LLP.

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About this Author

Colin Kass, Antitrust LItigation Attorney, Proskauer Rose Law Firm
Partner

Colin Kass is a partner in the Litigation Department and vice-chair of the Antitrust Group. An experienced antitrust and commercial litigation lawyer, Colin has litigated cases before federal and state courts throughout the United States and before administrative agencies. His practice involves a wide range of industries and spans the full-range of antitrust and unfair competition-related litigation, including class actions, competitor suits, dealer/distributor termination suits, price discrimination cases, criminal price-fixing investigations, and merger injunctions.

202.416.6890
Christopher Ondeck, Antitrust Litigator, Proskauer Rose, law firm
Partner

Chris Ondeck is a partner in the Litigation Department and vice-chair of the Antitrust Group. He focuses his practice on representing clients in civil and criminal antitrust litigation, defending mergers and acquisitions before the U.S. antitrust agencies, defending companies involved in government investigations, and providing antitrust counseling.

Chris has handled antitrust matters for clients in a number of industries, including advertising, aerospace, alcoholic beverages, appliances, building materials, defense, medical devices, metals, mining, natural resources, oil and gas, packaging, pharmaceuticals, software, and telecommunications. He also has developed substantial experience advising clients regarding the application of the antitrust laws to the pharmaceutical industry, the agriculture industry, trade associations, and the energy industry.

202-416-5865
Alicia Batts, Litigation Attorney, Proskauer ROse Law Firm
Partner

Alicia Batts is a partner in the Antitrust Group and the firm’s Litigation Department. An experienced antitrust lawyer, she litigates cases before federal courts throughout the United States and represents clients before federal and state agencies. Her practice spans the full range of antitrust and unfair competition-related litigation, including class actions, competitor suits, dealer/distributor termination suits, price discrimination cases, criminal price-fixing investigations, and merger injunctions.

202.416.6812
John Ingrassia, Antitrust Attorney, Telecommunications, Proskauer Law firm
Special Counsel

John Ingrassia is a special counsel and advises clients on a wide range of antitrust matters in various industries, including chemicals, pharmaceutical, medical devices, telecommunications, financial services, health care, and others. His practice includes a significant focus on the analysis of Hart-Scott-Rodino pre-merger notification requirements, the coordination and submission of Hart-Scott-Rodino filings, and the analysis and resolution of antitrust issues related to mergers, acquisitions, and joint ventures. John has extensive experience with the legal, practical,...

202.416.6869