This morning, without the benefit of an open meeting, the SEC announced that it had voted to adopt a new rule, Rule 163B, and other amendments that will level the playing field by expanding the JOBS Act’s “test-the-waters” reform beyond emerging growth companies to apply to all issuers. The new rule will allow a company (and its authorized representatives, including underwriters) to engage in oral or written communications, either prior to or following the filing of a registration statement, with potential investors that are, or are reasonably believed to be, qualified institutional buyers (QIBs) or institutional accredited investors (IAIs) to determine whether they might be interested in the contemplated registered securities offering. The new rule is designed to allow the company to gauge market interest in the deal before committing to the time-consuming prospectus drafting and SEC review process or incurring many of the costs associated with an offering. SEC Chair Jay Clayton remarked that the “final rule benefits from the staff’s experience with the test-the-waters accommodation that has been available to EGCs since the Jumpstart Our Business Startups Act (JOBS Act)….Investors and companies alike will benefit from test-the-waters communications, including increasing the likelihood of successful public securities offerings.” The amendments were adopted largely as proposed, with some tweaks designed to address aspects of the proposal that commenters suggested could raise uncertainty for issuers seeking to rely on the rule. The new rule will become effective 60 days after publication in the Federal Register.
All five SEC Commissioners testified yesterday at an oversight hearing held by the House Financial Services Committee, the first time all five have appeared since 2007, according to Chair Maxine Waters. (Here is their formal testimony.) These hearings are, of course, broken up into bite-size five-minute Q&A sessions, so there is not much opportunity for in-depth questioning. And most often, it seemed that the Representatives directed their questions to the Commissioners that were most likely to provide gratifying answers—meaning a Commissioner of the Representative’s own party. There were, however, some notable exceptions, such as Representative Katie Porter’s pointed questioning of Commissioner Hester Peirce with regard to her views on ESG disclosure. In the end, the hearing did provide some insight into the current thinking and expectations of many of these legislators and regulators.
Yesterday, the SEC announced settled fraud charges under Rule 10b-5 against Nissan, its former CEO Carlos Ghosn, and Gregory Kelly, a former director, related to the failure to disclose over $140 million to be paid to Ghosn in retirement. (Here is the SEC’s Order and the complaint against Ghosn and Kelly filed in the SDNY.) Of course, you may be aware that Ghosn and the former director have been arrested by Japanese authorities and are awaiting trial, so these SEC charges were probably not the biggest glitch in their career paths. Nevertheless, the SEC’s action does stand as a warning that the SEC remains on the lookout for efforts to hide or disguise compensation from required public disclosure, especially where CEO discretion regarding compensation is largely unconstrained.
Yes, it can be, according to the Executive Director of the Council of Institutional Investors, in announcing CII’s new policy on executive comp. Among other ideas, the new policy calls for plans with less complexity (who can’t get behind that?), longer performance periods for incentive pay, hold-beyond-departure requirements for shares held by executives, more discretion to invoke clawbacks, rank-and-file pay as a valid reference marker for executive pay, heightened scrutiny of pay-for-performance plans and perhaps greater reliance on—of all things—fixed pay. It’s back to the future for compensation!
In this Enforcement Order, the SEC described a “revenue management scheme” orchestrated by the respondent, Marvell Technology Group, and the imposition on Marvell of a $5.5 million penalty and cease-and-desist order—not because of the scheme itself, but rather because the company failed to publicly disclose the scheme in its MD&A or to discuss its likely impact on future performance. The Order demonstrates that, even if a scheme involving unusual sales practices may not amount to chargeable accounting fraud, failure to disclose its distortive effects can be misleading and result in violations of the Securities Act and Exchange Act.
You may recall that, for a while now, the SEC has been actively warning about risks associated with the LIBOR phase-out, which is expected to occur in 2021. LIBOR, the London Interbank Offered Rate, is a widely used reference rate calculated based on estimates submitted by banks of their own borrowing costs. In 2012, the revelation of LIBOR rigging scandals made clear that the benchmark was susceptible to manipulation, and British regulators decided to phase it out. SEC Chair Jay Clayton has advised that, according to the Fed, “in the cash and derivatives markets, there are approximately $200 trillion in notional transactions referencing U.S. Dollar LIBOR and… more than $35 trillion will not mature by the end of 2021.” In July, the SEC staff published a Statement that “encourages market participants to proactively manage their transition away from LIBOR.” (See this PubCo post.) However, the substantial uncertainties and challenges associated with implementing the transition have led to delays and triggered a high level of anxiety among companies faced with addressing the issue. (See this PubCo post.) As reported in Bloomberg BNA, to ease the strain of the transition, FASB has jumped in with some proposed temporary financial reporting relief.
ISS recently released the results of its 2019 Global Policy Survey. In this year’s integrated survey, the topics included board gender diversity, overboarding, sunsetting of multi-class capital structures, combined chair and CEO roles and climate change risk. The respondents included 128 investors (including 88 asset managers, 24 asset owners, four advisors and 12 other investors), and 268 non-investors (including 227 corporate issuers, 19 advisors, six corporate directors and 16 other non-investors). Highlights of the survey are summarized below.