Month: July 2024
Would “reframing” ESG restore its appeal?
In this Comment from a Reuters magazine, the author attempts to rescue the underlying environmental, social and governance principles from the often disparaged term, “ESG.” ESG, he observes, was “[o]riginally conceived as a financial tool to frame how corporations disclose their impact and investment,” but has now become a term that is “fraught with debate, lacks a clear definition and is often misunderstood.” However, he contends, people actually associate many of the values and concepts underlying ESG with business success. Perhaps the term should be retired, he suggests, in favor of something less freighted. “Responsible business” might do the trick—especially “responsible business” that correlates with positive corporate performance.
SEC’s Spring 2024 agenda delays most actions until 2025
As reported by Bloomberglaw.com, during an interview in February on “Balance of Power” on Bloomberg Television, SEC Chair Gary Gensler said that he does not intend to “rush” the SEC’s agenda “to get ahead of possible political changes in Washington,” that is, in anticipation of the November elections. According to Bloomberg, Gensler insisted that he’s “‘not doing this against the clock….It’s about getting it right and allowing staff to work their part.’” The SEC has just posted the new Spring 2024 Agenda and, looking at the target dates indicated on the agenda, it appears that Gensler is a man true to his word. The only new item (relevant to our interests here) slated for possible adoption this year is a distinctly apolitical proposal about EDGAR Filer Access and Account Management. And, while a few proposals are targeted for launch (or relaunch) this year—two related to financial institutions and, notably, a proposal for human capital disclosure—most are also put off until April next year—post-election, that is, when the agenda might look entirely different. (Of course, the SEC sometimes acts well in advance of the target.) According to the SEC’s preamble, the items listed in the Regulatory Flexibility Agenda for Spring 2024 “reflect only the priorities of the Chair.” In addition, information on the agenda was accurate as of May 1, 2024, the date on which the SEC staff completed compilation of the data. In his statement on the agenda, Gensler said that “[i]n every generation since the SEC’s founding 90 years ago, our Commission has updated rules to meet the markets and technologies of the times. We work to promote the efficiency, integrity, and resiliency of the markets. We do so to ensure the markets work for investors and issuers alike, not the other way around. We benefit in all of our work from robust public input regarding proposed rule changes.”
In SEC v. Jarkesy, SCOTUS puts kibosh on administrative enforcement proceedings for civil penalties
Near the end of its term, SCOTUS decided SEC v. Jarkesy, the case challenging the constitutionality of the SEC’s administrative enforcement proceedings. There were three questions presented, and Jarkesy had been successful in the appellate court on all three:
“Whether statutory provisions that empower the Securities and Exchange Commission (SEC) to initiate and adjudicate administrative enforcement proceedings seeking civil penalties violate the Seventh Amendment.
Whether statutory provisions that authorize the SEC to choose to enforce the securities laws through an agency adjudication instead of filing a district court action violate the nondelegation doctrine.
Whether Congress violated Article II by granting for-cause removal protection to administrative law judges in agencies whose heads enjoy for-cause removal protection.”
Had SCOTUS broadly decided that the statute granting authority to the SEC to elect to use ALJs violated the nondelegation doctrine, 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. After all, Jarkesy had contended that, in adopting the provision in Dodd-Frank permitting the use of ALJs but by 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. 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 “a total victory on the nondelegation argument…could mean 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 U.S. 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.” (For a discussion of the nondelegation doctrine, see the SideBar in this PubCo post.) But that didn’t happen. During oral argument, the Justices did not even give lip service to the nondelegation question—the discussion was instead focused almost entirely on the question of whether the SEC’s use of an ALJ deprived Jarkesy of his Seventh Amendment right to a jury trial (see this PubCo post). In its decision, the majority held that, in the SEC’s action seeking civil penalties against Jarkesy for securities fraud, Jarkesy was entitled to a jury trial under the Seventh Amendment. And, “[s]ince the answer to the jury trial question resolve[d] this case,” SCOTUS did “not reach the nondelegation or removal issues.” Nevertheless, it was yet another strike against the administrative state.
Reverse split to regain bid price compliance? It may be more complicated than you think
Nasdaq has filed with the SEC a proposed rule change to “modify the application of the bid price compliance periods where a company takes action that causes non-compliance with another listing requirement.” Hmmm, how’s that again? This proposed rule change is designed to address instances where, to regain compliance with the minimum bid price required by Exchange listing rules, a listed company implements a reverse stock split; however, while the reverse split may bring the company into compliance with the minimum bid price requirement, it may also, at the same time, lead to non-compliance with another listing rule—particularly, the requirements for the number of public holders and number of publicly held shares (depending on treatment of fractional shares), triggering a new deficiency process with a new time period within which the company is permitted to seek to regain compliance. That’s excessive, Nasdaq says, and too confusing for investors, possibly adversely affecting investor confidence in the market. Because Nasdaq believes it is inappropriate for a company to receive additional time to cure non-compliance with the newly violated listing standard, it is seeking, with this proposed amendment, to eliminate the additional compliance period that would otherwise result from the newly created deficiency. Under the proposal, in the event a reverse split to achieve bid-price compliance leads to other non-compliance, the company would be deemed non-compliant with the bid price requirement until both the new deficiency (e.g., number of holders or number of publicly held shares) is cured and the company thereafter maintains a $1.00 bid price for a minimum of 10 consecutive business days. If the proposal is adopted, companies will need to carefully calculate the potential impact of a reverse split on other listing requirements to avoid these consequences where possible.
SEC charges RR Donnelley with control failures related to cybersecurity incident
In this June Order, SEC Enforcement brought settled charges against R.R. Donnelley & Sons, a “global provider of business communications services and marketing solutions,” for control failures: more specifically, a failure to maintain adequate disclosure controls and procedures related to cybersecurity incidents and alerts and a failure to devise and maintain adequate internal accounting controls—more specifically, “a system of cybersecurity-related internal accounting controls sufficient to provide reasonable assurances that access to RRD’s assets—its information technology systems and networks, which contained sensitive business and client data—was permitted only with management’s authorization.” RRD agreed to pay over $2.1 million to settle the charges. Interestingly, in a Statement, SEC Commissioners Hester Peirce and Mark Uyeda decried the SEC’s use of “Section 13(b)(2)(B)’s internal accounting controls provision as a Swiss Army Statute to compel issuers to adopt policies and procedures the Commission believes prudent,” not to mention its “decision to stretch the law to punish a company that was the victim of a cyberattack.”
Corp Fin updates FAQs regarding draft registration statements
The 2012 JOBS Act permitted Emerging Growth Companies to initiate the IPO process by submitting their IPO registration statements confidentially to the SEC for nonpublic review by the SEC staff. The confidential process was intended to allow an EGC to defer the public disclosure of sensitive or competitive information until it was almost ready to market the offering—and potentially to avoid the public disclosure altogether if it ultimately decided not to proceed with the offering. In 2017, Corp Fin extended that benefit to companies that were not EGCs, allowing them, for the first time, to submit confidential draft registration statements for IPOs, as well as for most offerings made in the first year after going public. (See this PubCo post and this PubCo post.) Yesterday, Corp Fin posted newly updated FAQs regarding voluntary submissions of DRS for nonpublic review under the expanded procedures. The FAQs are summarized below. One notable addition is an FAQ regarding de-SPACs.
SCOTUS overrules Chevron—a gut punch to the administrative state?
On Friday, SCOTUS issued its decision in two very important cases, Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Dept of Commerce, about whether the National Marine Fisheries Service (NMFS) has the authority to require Atlantic herring fishing vessels to pay some of the costs for onboard federal observers who are required to monitor regulatory compliance. To be sure, the transcendent significance of these cases has little to do with fishing and everything to do with the authority of administrative agencies to regulate: the question presented to SCOTUS was whether the Court should continue the decades-long deference of courts, under Chevron U.S.A., Inc. v. Nat. Res. Def. Council, to the reasonable interpretations of statutes by agencies. The doctrine of Chevron deference mandates that, if a statute does not directly address the “precise question at issue” or if there is ambiguity in how to interpret the statute, courts must accept an agency’s “permissible” (think, “reasonable”) interpretation of a law unless it is arbitrary or manifestly contrary to the statute. In a majority opinion by Chief Justice John Roberts, the Court rejected the doctrine: the “deference that Chevron requires of courts reviewing agency action cannot be squared with the [Administrative Procedure Act].” In case you scoff at the significance of the decision, consider the seminal nature of the doctrine as described in this 2006 article by Cass Sunstein: Chevron “has become foundational, even a quasi-constitutional text—the undisputed starting point for any assessment of the allocation of authority between federal courts and administrative agencies. Ironically, Justice Stevens, the author of Chevron, had no broad ambitions for the decision; the Court did not mean to do anything dramatic. But shortly after it appeared, Chevron was quickly taken to establish a new approach to judicial review of agency interpretations of law, going so far as to create a kind of counter-Marbury for the administrative state.” Alluding to language from Marbury, Sunstein proclaimed that “Chevron seemed to declare that in the face of ambiguity, it is emphatically the province and duty of the administrative department to say what the law is.” Not anymore. A six-justice majority of the Court has just overruled Chevron, with concurrences by each of Justices Clarence Thomas and Neil Gorsuch and a dissent by Justice Elena Kagan, joined by Justices Sonia Sotomayor and Ketanji Brown Jackson (only on Relentless). The implications of the decision are almost boundless—every current and future federal regulatory regime could be affected. As Kagan wrote in her dissent, this decision “puts courts at the apex of the administrative process as to every conceivable subject—because there are always gaps and ambiguities in regulatory statutes, and often of great import. What actions can be taken to address climate change or other environmental challenges? What will the Nation’s health-care system look like in the coming decades? Or the financial or transportation systems? What rules are going to constrain the development of A.I.? In every sphere of current or future federal regulation, expect courts from now on to play a commanding role.”
You must be logged in to post a comment.