At a meeting of the SEC’s Investor Advisory Committee last week, the Committee voted to make recommendations to the SEC on three topics: accounting and financial disclosure; ESG (environmental, social and governance) disclosure; and disclosure effectiveness. The ESG recommendation concluded that “the time has come for the SEC to address this issue,” and it should be no surprise that there was some controversy—including some dissenting votes—surrounding that recommendation. While recommendations from SEC advisory committees often hold some sway with the commissioners, given the long-held views of the current commissioners, it seems highly unlikely that the ESG recommendation will have much traction—at least not in the near term. The recommendations come as the membership of the committee undergoes a substantial shift as many members time out on their appointments. The recommendations are discussed below.
Yesterday, once again without an open meeting, the SEC voted (with a dissent from Commissioner Allison Lee) to adopt amendments to the requirements for financial statements relating to acquisitions and dispositions of businesses. According to the press release, the amendments are intended to improve disclosure of financial information, facilitate more timely access to capital and reduce the complexity and costs to prepare the disclosure. The final amendments were adopted largely as proposed, but with some modifications to virtually every component of the proposal. Notably, as adopted, the final amendments modify the rules for determining whether an acquisition or disposition is significant and require companies to file the financial statements of acquired businesses for only up to the two most recent fiscal years, instead of the current three. In addition, the existing adjustment criteria for pro forma financial statements will be replaced with simplified requirements to depict the accounting for the transaction and, in response to some controversy over the proposal, provide the option to “depict synergies and dis-synergies of the acquisitions and dispositions for which pro forma effect is being given.” The final amendments will become effective on January 1, 2021. Companies may early adopt the final amendments, but only in their entirety.
Nasdaq proposes new rules to address emerging market listings; Holding Foreign Companies Accountable Act
Yesterday, the SEC formally announced its July 9 roundtable on emerging markets. In the announcement, the SEC observed that, “while the U.S. securities laws and regulations applicable to emerging market companies listed on U.S. exchanges are the same as (or comparable to) the laws and regulations applicable to U.S. public companies, the practical effects often are substantially different, based on the inability of U.S. regulators to inspect for compliance and enforce these rules and regulations.” In the meantime, Nasdaq appears to have taken the matter to the next level. Nasdaq’s three new proposals haven’t been posted by the SEC yet—so there may still be a lot of behind-the-scenes negotiation before they see the light of day on the SEC’s website—but they are clearly designed to address these concerns about emerging market issuers, especially lack of accounting controls and transparency. Not to be outdone, the Senate yesterday passed a bill that could bar from listing on U.S. exchanges companies audited by firms that the PCAOB is prohibited by foreign authorities from inspecting.
It’s not just the Justice Department that’s looking into PPP loans—although there appears to be plenty of that going on—the SEC’s Division of Enforcement is also conducting an investigation into “Certain Paycheck Protection Program Loan Recipients” to determine whether there have been violations of the federal securities laws. To that end, Enforcement is conducting a “fact-finding inquiry,” requesting that certain PPP loan recipients produce a variety of documents. While the primary focus of DOJ prosecutors appears to be whether representations made in certifications to the SBA to obtain the PPP loans were fraudulent, the SEC is apparently looking at PPP loans and related company disclosures from a different angle.
At the end of last week, SEC Chair Jay Clayton addressed the Financial Stability Oversight Council, focusing on three areas: market function, market monitoring and corporate and other issuer disclosure. Early in his remarks, Clayton praised the efforts of FSOC “to preserve the flows of credit and capital in our economy[, which] have substantially mitigated the economic consequences of COVID-19.” He noted in particular that “the rapid fiscal, monetary and financial regulatory response to market and economic effects of COVID-19 has been both remarkable and appropriate.” However, it was the data he provided on market functioning and volatility that was most revealing.
The SEC has declared immediately effective (yet another) proposed change to the rules of an exchange—this one from the NYSE. The NYSE has adopted new Section 312.03T of the NYSE Listed Company Manual, which will provide a temporary exception, through June 30, 2020, from the application of the shareholder approval requirements for specified issuances of 20% or more of the outstanding shares (Section 312.03) and, in certain narrow circumstances, by a limited exception for issuances to related parties or other capital-raising issuances that could be considered equity compensation (Sections 312.03 and 303A.08). Although not entirely congruent, the exception appears to be modeled closely on the comparable Nasdaq exception that was approved just over a week ago. (See this PubCo post.) In light of the unprecedented disruption in the economy as a result of COVID-19, many listed companies “are experiencing urgent liquidity needs during this period of crisis due to lost revenues and maturing debt obligations.” The temporary exception is designed to respond to this unprecedented emergency and to help companies access necessary capital quickly.
In April, the SEC approved a Nasdaq rule change to expedite delisting (1) for securities with a closing bid price at or below $0.10 for ten consecutive trading days during any bid price compliance period and (2) for securities that have had one or more reverse stock splits with a cumulative ratio of one for 250 or more shares over the prior two-year period. (See this PubCo post.) The rule change modified the Nasdaq listing rules to shorten compliance periods and permit earlier delisting and enhanced review procedures for securities in these two categories. As approved, the rule change would have been applicable for companies that first received notification of non-compliance after the date of the approval order, April 21. But, in the midst of a pandemic, was that rule change really the way to go? Apparently, Nasdaq has had some regrets. Now, the SEC has declared immediately effective another proposed rule change to delay the implementation date to September 1, 2020.
New FAQ 46 from the SBA provides a “safe harbor” for borrowers of less than $2 million under the Paycheck Protection Program provisions of the CARES Act. Under the safe harbor, for borrowers of amounts below the $2 million threshold, the SBA will deem their certifications regarding the “necessity” of the loans to have been made in good faith. What’s more, while loans over the $2 million threshold will be subject to SBA review (as has been widely publicized), if the SBA determines that the borrower “lacked an adequate basis” for the required “necessity” certification, but the borrower then repays the loan, the SBA “will not pursue administrative enforcement or referrals to other agencies” with respect to the “necessity” certification.
In his keynote address to Securities Enforcement Forum West 2020, SEC Enforcement Co-Director Steven Peikin discussed some of the efforts of the Division of Enforcement to detect misconduct arising out of the COVID-19 pandemic and related market disruption, including the formation of a steering committee to proactively identify and monitor areas of potential misconduct. Of particular interest here are the focus on insider trading and financial and disclosure-related fraud.
Are the allegations in Hughes v. Hu an example of the SEC/PCAOB’s recent cautionary Statement on emerging market risks come to life? (See this PubCo post.) The case involves a Caremark claim against the audit committee and various executives of Kandi Technologies, a publicly traded Delaware company listed on the Nasdaq Global Select Market and based in an emerging market country. The complaint alleged that they consciously failed “to establish a board-level system of oversight for the Company’s financial statements and related-party transactions, choosing instead to rely blindly on management while devoting patently inadequate time to the necessary tasks.” You might recall that, in Marchand v. Barnhill (June 18, 2019), then-Chief Justice Strine, writing for the Delaware Supreme Court, started out his analysis with the recognition that “Caremark claims are difficult to plead and ultimately to prove out,” and constitute “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” (See this PubCo post.) Although Caremark presented a high hurdle, the complaint in Marchand was able to clear that bar and survive a motion to dismiss. In the view of the Delaware Chancery Court, Hughes proved to be comparable—the Court denied two motions to dismiss, holding that the allegations in the complaint were sufficient to support “a reasonable pleading-stage inference of a bad faith failure of oversight by the named director defendants.” Is clearing the Caremark bar becoming a thing?