Category: Securities
Executive Order deletes “independent” from “independent regulatory agencies”
On Tuesday, the President signed a new Executive Order claiming that “independent” federal regulatory agencies, such as the SEC, shouldn’t really be so independent after all. Rather, the Order contends, they all should be operating under the President’s authority and supervision. According to the Administration’s fact sheet, these independent agencies need to be “reined in”: These “so-called independent agencies…have exercised enormous power over the American people without Presidential oversight.” They issue rules and regulations, the fact sheet contends, “that cost billions of dollars and implicate some of the most controversial policy matters, and they do so without the review of the democratically elected President. They also spend American tax dollars and set priorities without consulting the President, while setting their own performance standards. Now they will no longer impose rules on the American people without oversight or accountability.”
Corp Fin does a one-eighty on shareholder proposals under Rule 14a-8
In June 2023, then-Commissioner Mark Uyeda (currently, Acting Chair) spoke to the Society for Corporate Governance 2023 National Conference on the topic of shareholder proposals under Rule 14a-8. Alluding to the frequent reversals in interpretations of Rule 14a-8, he said that “[r]elying on the Commission’s rules, or its staff’s positions in this area is akin to building a sand castle on the beach. Any rule or interpretation, no matter how recently adopted, is at risk of being erased by the next wave.” No matter that Uyeda is now at the helm, that “next wave” tradition is continuing with the issuance by Corp Fin last week of new Staff Legal Bulletin 14M, which rescinds the prior Administration’s interpretation in SLB 14L and does an about-face on interpretations of two Rule 14a-8 shareholder proposal exclusions. Turnabout is fair play? (See this Pubco post.) The new SLB revises Corp Fin’s views on the scope and application of Rule 14a-8(i)(5), the economic relevance exception, and Rule 14a-8(i)(7), the ordinary business exception. The effect of new SLB 14M is to reverse some of the interpretations of “economic relevance,” “micromanagement” and “significant social policy” imposed under now rescinded SLB 14L, which had reversed interpretations of those same issues by rescinding Clayton-era SLBs 14I, 14J and 14K. Got it? Grounding its revised approach in the historical antecedents of 1998 and earlier SEC releases—as did now rescinded SLB 14L—Corp Fin takes the position that, under new SLB 14M, “where relevant to the arguments raised to the staff by companies and proponents, the staff will consider whether a proposal is otherwise significantly related to a particular company’s business, in the case of Rule 14a-8(i)(5), or focuses on a significant policy issue that has a sufficient nexus to a particular company, in the case of Rule 14a-8(i)(7).” Moreover, the new approach will involve, as a “key factor in the analysis of shareholder proposals that raise significant policy issues,” a “‘case-by-case’ consideration of a particular company’s facts and circumstances.” Where SLB 14L made exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies, new SLB 14M is expected to provide a framework for exclusion of proposals that will likely be more accommodating for companies. Companies will certainly welcome the revamp.
Corp fin posts two new CDIs on Schedules 13D and 13G
Corp Fin has posted two new CDIs regarding filing of Schedules 13D and 13G under Exchange Act Sections 13(d) and 13(g) and related Rule 13d-1. The new CDIs address issues related to determining, for purposes of eligibility to file a Schedule 13G, whether the shareholder acquired the securities with the purpose or effect of changing or influencing control of the issuer. One of the CDIs suggests that, in the context of Schedule 13G eligibility, the process of shareholder engagement with management might be trickier to navigate than perhaps originally contemplated.
Acting SEC Chair seeks a pause in SEC climate disclosure rule litigation
Yesterday, Acting SEC Chair Mark Uyeda issued a statement advising that he is requesting that the Court presiding over the SEC’s climate disclosure rule litigation not “schedule the case for argument” in order to allow time for the SEC to rethink its position. As you may know, a number of challenges to the climate disclosure rule were consolidated as State of Iowa v. SEC in the Eighth Circuit, where briefs in the case have been filed. However, for reasons explained in the Statement, Uyeda believes that the “rule is deeply flawed and could inflict significant harm on the capital markets and our economy.” As such, he said, the positions taken in the SEC’s briefs defending the SEC’s adoption of the rule are not reflective of his views. He believes that these views, particularly his concern that the SEC had no authority to adopt the rule, together with “the recent change in the composition of the Commission, and the recent Presidential Memorandum regarding a Regulatory Freeze, bear on the conduct of this litigation.” As a result, he maintains that “the Court and the parties should be notified of these changes.” Accordingly, he has directed the SEC staff to “notify the Court of the changed circumstances and request that the Court not schedule the case for argument to provide time for the Commission to deliberate and determine the appropriate next steps in these cases. The Commission will promptly notify the Court of its determination about its positions in the litigation.” Commissioner Caroline Crenshaw voiced her dissent, contending that what has really changed here has been “politics and not substance.” Does Uyeda’s move sound the death knell for the SEC’s climate disclosure rule?
Under the new Administration, will Enforcement have a lighter touch?
Reuters is reporting exclusively that, according to its sources, under the new Administration, some Enforcement staff at the SEC “have been told they need to seek permission from the politically appointed leadership before formally launching probes,” marking a “change in procedure that could slow down investigations.” According to Reuters, some Enforcement staff have recently “been told that they will need to seek the Commission’s approval for all formal orders of investigation, which are required to issue subpoenas for testimony or documents.” Previously, Reuters reported, authority to formally launch investigations had been delegated to Enforcement directors or other senior staff, including even supervising attorneys; during the first term of the current Administration, the “SEC required approval by its two enforcement [co-]directors to formally launch probes.” However, the article indicates, Enforcement staff may still conduct informal investigations, including requesting information. The article indicates that Reuters was unable to determine whether these new instructions were the result of a formal SEC vote to “revoke the delegation of that authority, or who ordered the change.” Reuters suggested that “the change does not necessarily mean fewer investigations will be launched, but it means the Commissioners are taking more control over enforcement earlier in the process.” Reuters speculates that the move might reflect an effort to end the “weaponization” of government. Or, perhaps this move might also presage a “lighter touch” by SEC Enforcement under the new Administration?
SEC charges “AI-washing” at Presto Automation
Is “-washing” the securities fraud equivalent of “-gate” for political scandals? First we had greenwashing, then diversity-washing, and now we have AI-washing—a topic that, as discussed in the SideBar below, SEC officials made a lot of noise about last year. And this recent action by the SEC certainly seems to allege just that—even though the SEC doesn’t actually use the term. In mid-January, the SEC announced “settled charges against Presto Automation Inc., a restaurant-technology company that was listed on the Nasdaq until September 2024, for making materially false and misleading statements about critical aspects of its flagship artificial intelligence (AI) product, Presto Voice. Presto Voice employs AI-assisted speech recognition technology to automate aspects of drive-thru order taking at quick-service restaurants.” However, as alleged in the Order, the AI technology used in the product was not developed by Presto—at least not until September 2022; rather, the company deployed speech recognition technology owned and operated by a third party. But, the SEC charged, Presto failed to disclose in its SEC filings that it used the third party’s AI technology, rather than its own, to power all of the Presto Voice units it deployed commercially during that time period. What’s more, once Presto did begin to use its own proprietary technology in the Presto Voice units, the SEC alleged, the company “misrepresented the capabilities of the product by claiming that it eliminated the need for human order taking.” Not the case, the SEC alleged; “substantial human involvement” was actually required. The SEC charged that Presto made materially misleading statements in violation of the Securities and Exchange Acts and failed to maintain adequate disclosure controls; however, in light of its financial condition and remedial actions, the SEC imposed only a cease-and-desist order and no civil money penalty.
Commissioner Peirce offers her prescription for a “path back to normal”
This week, SEC Commissioner Hester Peirce delivered the keynote address at the Northwestern Securities Regulation Institute in San Diego. Her theme: that public companies are “confronting a symptom of a larger societal malady—importing politics and contentious social issues into everything we do.” According to Peirce, the “SEC, so-called stakeholders, and the burgeoning industry of advisers, consultants, accountants, and attorneys peddling their costly wares to public companies, sometimes with the agreement of corporate executives, drag companies into social and political melees. Their efforts, an insidious form of rent-seeking, are often quite convincingly disguised in a cloak of ethics and morality.” In her remarks, she proposed seven steps toward regaining what, in her view, was the “path back to normal.” A harbinger of what is to come in the next four years?
Corp Fin posts new and revised CDIs regarding notices of exempt solicitation
Corp Fin has posted several new or revised CDIs that address exempt solicitations under the proxy rules. With certain exceptions, Rule 14a-2(b)(1) exempts “any solicitation by or on behalf of any person who does not, at any time during such solicitation, seek directly or indirectly, either on its own or another’s behalf, the power to act as proxy for a security holder and does not furnish or otherwise request, or act on behalf of person who furnishes or requests, a form of revocation, abstention, consent or authorization.” Under Rule 14a-6(g), a person who engages in an exempt solicitation under Rule 14a-2(b)(1) and beneficially owns over $5 million of securities of the class that is the subject of the solicitation is required to mail or furnish to the SEC, not later than three days after the date the written solicitation is first sent or given to any security holder, five copies of the Notice of Exempt Solicitation (Rule 14a-103). The Notice (Form PX14A6G) must attach as an exhibit all written soliciting materials “required to be submitted.” The new CDIs are summarized below. Something new and helpful: for revised CDIs, the SEC has provided a mark-up of the CDI showing the revisions.
In case there was any doubt, SEC approves Nasdaq proposal to remove Board diversity rules
In August 2021, the SEC approved a Nasdaq proposal for new listing rules regarding board diversity and disclosure. The new listing rules adopted a “comply or explain” mandate for board diversity for most listed companies and required companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. (See this PubCo post.) A court challenge to these rules quickly materialized: the Alliance for Fair Board Recruitment and, later, the National Center for Public Policy Research petitioned the Fifth Circuit Court of Appeals for review of the SEC’s final order approving the Nasdaq rule. (See this PubCo post and this PubCo post.) In December last year, the en banc Fifth Circuit issued its opinion in Alliance for Fair Board Recruitment v. SEC vacating the SEC’s order approving Nasdaq’s board diversity proposal by a vote of nine to eight. According to an article in Bloomberg Law, following the decision, a “Nasdaq representative said the exchange disagreed with the court’s decision, but doesn’t plan to appeal the ruling. An SEC spokesperson said the agency is ‘reviewing the decision and will determine next steps as appropriate.’” (That, of course, was prior to the last election.) That question is now moot: Nasdaq filed a proposal with the SEC seeking to remove from the Nasdaq rules the relevant board diversity provisions to reflect “a Federal court’s vacatur of the Commission’s order of August 6, 2021, approving rules related to Board diversity disclosures. Nasdaq has requested that the Commission waive the operative delay to allow the proposed rule change to become effective on February 4, 2025.” And, this past Friday, the SEC declared the proposal to be immediately effective. Just in case anyone was unsure about the status of the board diversity rules, the effect of the proposal will be to “clarify Nasdaq’s rules by aligning them with the court’s decision.”
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