Will SCOTUS revive the nondelegation doctrine? Cert. granted in Consumers’ Research v. FCC

When SCOTUS granted cert. in SEC v. Jarkesy, the case challenging the constitutionality of the SEC’s administrative enforcement proceedings, one of the questions presented was whether the statute granting authority to the SEC to elect to use ALJs violated the nondelegation doctrine. Jarkesy had contended that, in adopting the provision in Dodd-Frank permitting the use of ALJs but providing no guidance on the issue, “Congress has delegated to the SEC what would be legislative power absent a guiding intelligible principle” in violation of that doctrine. Had SCOTUS gone that route, commentators suggested, the case had the potential to be enormously significant in limiting the power of the SEC and other federal agencies beyond the question of ALJs. A column in the NYT discussing  Jarkesy explained that, if “embraced in its entirety, the nondelegation doctrine could spell the end of agency power as we know it, turning the clock back to before the New Deal.” And in Bloomberg, Matt Levine wrote that, while the ”nondelegation doctrine has not had a lot of wins in the Supreme Court in the last 90 years….it’s back now: There is revived interest in it at the Supreme Court.”  Had Jarkesy won the nondelegation argument, that could have meant “that all of the SEC’s rulemaking (and every other regulatory agency’s rulemaking) is suspect, that every policy decision that the SEC makes is unconstitutional. Much of US securities law would need to be thrown out, or perhaps rewritten by Congress if they ever got around to it. Stuff like the SEC’s climate rules would be dead forever.”  In his view, “the Supreme Court does have several justices who would love to revive the nondelegation doctrine in a way that really would undermine most of securities regulation.”  That didn’t happen in Jarkesy; SCOTUS studiously avoided addressing the issue, its looming presence in the lower court decision notwithstanding. But the nondelegation doctrine has again reared its head, this time in Consumers’ Research v. FCC out of the Fifth Circuit.  In late November, SCOTUS granted cert. in that case (and consolidated it with another case, SHLB Coalition v. Consumers’ Research, that presented similar questions). All three of the questions presented in the cert. petition relate to the nondelegation doctrine (although another was added by SCOTUS itself). With this case now on the docket, will SCOTUS continue its shellacking of the administrative state? (See this PubCo post, this PubCo post, this PubCo post, this PubCo post and this PubCo post.) And add another big wrinkle: how will the new Administration approach this case and this question? While, historically, according to Bloomberg, the “solicitor general typically defends federal statutes and programs regardless of party affiliation,” there is no assurance that the new Administration will follow historical practice. Indeed, according to this article in Law.com, with a new administration, “[f]lipping positions at the Supreme Court has become a common trend of incoming U.S. solicitors general, even if it tends to irk the justices themselves.”

In appeal, NAM insists “solicitation” includes proxy voting advice

Back in February, in ISS v. SEC, the D.C. Federal District Court vacated the SEC’s 2020 rule that advice from proxy advisory firms was a “solicitation” under the proxy rules. Both the SEC and National Association of Manufacturers filed notices of appeal in that case, but then the SEC mysteriously dropped out of that contest: both the SEC and Gensler moved to voluntarily dismiss their appeal. Why? That remains a mystery: the SEC did not provide any reason. The SEC’s dismissal did not, however, impact NAM’s separate appeal as Intervenor-Appellant, except that NAM became the sole appellant in the case. In a statement to Bloomberg at the time, a NAM representative said that NAM was “surprised and extremely disappointed that the SEC has chosen not to exercise its authority to defend America’s world-leading capital markets from the outsized and completely unregulated authority of proxy advisory firms.” Now, NAM has filed its brief in the case.

Happy Thanksgiving!

Nasdaq proposes to amend deadline for notification of reverse split

In November 2023, the SEC approved new Nasdaq listing standards related to notification and disclosure of reverse stock splits. (See this PubCo post.) The rules were designed to “enhance the ability for market participants to accurately process these events, and thereby maintain fair and orderly markets.” Failure to comply could result in a trading halt.  Nasdaq is now proposing a change to one of those rules to conform the timing of the notification to a FINRA requirement. Although the rule became effective immediately, to allow sufficient time for market participants to adjust to the new time frame, the proposed rule change will become operative on January 30, 2025.

SEC charges UPS with failure to take goodwill impairment charge require by GAAP

Last week, the SEC announced settled charges against United Parcel Service Inc. for failing to take an appropriate goodwill impairment charge for a poorly performing business unit, thus materially misrepresenting its earnings. As alleged by the SEC, instead of calculating the write-down based on the price UPS expected to receive to sell its Freight business unit—as required under GAAP—UPS relied on a valuation prepared by an outside consultant, but “without giving the consultant information necessary to conduct a fair valuation of the business.” According to the Associate Director of Enforcement, “[g]oodwill balances provide investors with valuable insight into whether companies are successfully operating the businesses they own….Therefore, it is essential for companies to prepare reliable fair value estimates and impair goodwill when required. UPS fell short of these obligations, repeatedly ignoring its own well-founded sale price estimates for Freight in favor of unreliable third-party valuations.”  UPS was charged with making material representations in its reporting, as well as violations of the book and records, internal accounting controls, and disclosure controls provisions of the Exchange Act and related rules. UPS agreed to adopt training requirements for certain officers, directors and employees, retain an independent compliance consultant and pay a $45 million civil penalty.

Happy Thanksgiving!

Commissioner Jaime Lizárraga to depart SEC

On the heels of Chair Gary Gensler’s announcement of his departure on January 20, SEC Commissioner Jaime Lizárraga has issued a statement  announcing his departure, effective January 17, 2025. The statement indicates that he is leaving as a result of his wife’s serious illness.  I’m sure everyone wishes her well. 

Gensler announces departure from SEC—what’s next?

In a statement, the SEC has announced that Chair Gary Gensler will step down from his position at noon on January 20, 2025. That’s of course the time when the new president is sworn in, so it’s not exactly a surprise. According to the WSJ, “Gensler’s decision to remain until the very end of the Biden administration probably disappoints some Republicans who wanted to see him leave sooner. It means he could try to push through some additional measures since Democrats will retain a majority on the five-member SEC as long as he stays.” In the statement, Gensler said that the SEC “is a remarkable agency….The staff and the Commission are deeply mission-driven, focused on protecting investors, facilitating capital formation, and ensuring that the markets work for investors and issuers alike. The staff comprises true public servants. It has been an honor of a lifetime to serve with them on behalf of everyday Americans and ensure that our capital markets remain the best in the world.”

Just in time for Thanksgiving, SEC charges Elanco with undisclosed stuffing—channel stuffing, that is

In this settled action,  In the Matter of Elanco Animal Health, Inc., Elanco, a manufacturer and seller of animal health products, such as flea and tick medications, was charged with “failure to disclose material information concerning its sales practices that rendered statements it made about its revenue growth misleading.” As alleged by the SEC, “Elanco would entice distributors to make end-of-quarter purchases in excess of then-existing customer demand by offering them incentives such as rebates and extended payment terms. These incentives allowed Elanco to improve its revenue each quarter, but caused distributors to purchase products ahead of end-user demand. Without these Incentivized Sales, Elanco would have missed its internal revenue and core growth targets in each quarter in 2019.” Essentially, we’re talking here about channel stuffing. As the practice continued, it contributed over the period to “channel inventory increasing by over $100 million in gross value…during 2019, creating a build-up of excess inventory at distributors and a reasonably likely risk of a decrease in revenue and revenue growth in future periods. But, for each quarter during the Relevant Period, Elanco failed to disclose the significant impact of its Quarter-End Incentivized Sales and the reasonably likely risk that these sales practices could have a negative impact on revenue in future quarters.” The SEC charged that these disclosure failures rendered the positive statements that Elanco made about revenue materially misleading. And let’s not forget the disclosure controls violations. In settling the action, Elanco agreed to pay a civil money penalty of $15 million.

PLI panel offers hot tips on accounting and auditing issues

At the PLI Securities Regulation Institute last week, the accounting and auditing update panel provided some useful insights—especially for non-accountants. The panel covered the new requirements for segment reporting, the intensified focus on controls, PCAOB activities (including NOCLAR) and errors and materiality.  Below are some takeaways. 

Fifth Circuit dismisses NCPPR appeal of Corp Fin’s Rule 14a-8 no-action relief

You might recall that, in 2023, the National Center for Public Policy Research submitted a shareholder proposal to The Kroger Co., which operates supermarkets, regarding the omission of consideration of “viewpoint” and “ideology” from its equal employment opportunity policy. Kroger sought to exclude the proposal as “ordinary business” under Rule 14a-8(i)(7), and Corp Fin concurred. After Corp Fin and the SEC refused reconsideration of the decision, NCPPR petitioned the Fifth Circuit for review. The SEC moved to dismiss the appeal. But after the NCPPR filed its appeal, Kroger filed its proxy materials with the SEC and included the NCPPR proposal in the proxy materials to be submitted for a shareholder vote. The proposal received less than two percent of the vote.  Now, a three-judge panel of the Fifth Circuit has issued its opinion, dismissing the case for lack of jurisdiction; Judge Edith Jones dissented.   

The return of Jay Clayton?

But not to the SEC. Reuters is reporting that former SEC Chair Jay Clayton “is in talks for several potential roles” in the new Administration, according to “several sources familiar with the matter.”  Clayton, a political independent, is reportedly “seen as a contender for jobs including attorney general and treasury secretary, according to five sources. Two of the sources said Clayton has also expressed an interest in running the CIA.” According to Reuters, Clayton has advised the transition team that he would be ‘delighted to serve’ in any senior position where he could be effective.”