Category: Securities
Corp Fin announcement regarding acceleration requests—TODAY
Corp Fin has announced that, presumably in light of the imminent government shutdown, if you want Corp Fin to “consider a request for acceleration of the effective date of a pending registration statement or qualification of a pending offering statement to today, December 20, 2024,” you should “contact a staff member identified in the letter you received. Alternatively, you may contact the Disclosure Review Program’s main number at (202) 551-2076.” After 5:30 p.m. today, the Corp Fin “will not be in a position to act upon any such requests until the SEC receives appropriations to fund its operations.”
Nasdaq proposes to modify initial listing requirements for liquidity
Nasdaq is proposing a rule change to modify the initial listing requirements related to liquidity. More specifically, Nasdaq is proposing to change Listing Rules 5405 and 5505 to require that a company seeking to list on the Nasdaq Global Market or Nasdaq Capital Market in connection with an IPO or uplist to Nasdaq from the OTC in connection with a public offering “satisfy the applicable minimum Market Value of Unrestricted Publicly Held Shares (“MVUPHS”) requirement solely from the proceeds of the offering.” That would mean that previously issued shares registered for resale would no longer be counted as unrestricted publicly held shares in the calculation of MVUPHS. Comments on the proposal are being solicited.
Happy Holidays!
SEC charges Becton Dickinson with misleading investors about regulatory risks and product sales
The SEC has announced settled charges against Becton, Dickinson and Company, a medical device manufacturer known as BD listed on the NYSE, for “repeatedly misleading investors about risks associated with its continued sales of its Alaris infusion pump and for overstating its income by failing to record the costs of fixing multiple software flaws with the pump.” In essence, the company failed to disclose that it needed, but did not have, FDA clearance for certain changes to the software for its Alaris product, sales of which contributed about 10% of BD’s profits. Without those changes, the product was potentially harmful to patients. “Rather than inform investors that these issues heightened the risk that the FDA would limit BD’s ability to continue selling Alaris,” the SEC charged, “BD made misleading statements in its periodic reports about its regulatory risks.” BD agreed to pay a $175 million civil penalty. Companies in the life sciences should take note that this is yet another recent Enforcement action aimed at a life science company’s alleged misleading statements, including hypothetical or generic risks, regarding regulatory (FDA) status; in charges announced earlier this month against Kiromic BioPharma, the SEC alleged that Kiromic had failed to disclose that the FDA had placed both of its INDs on clinical hold. (See this PubCo post.) According to Sanjay Wadhwa, Acting Director of SEC Enforcement, “BD repeatedly painted a misleading picture of its Alaris infusion pump for investors and then doubled down by keeping them in the dark when the device’s issues came to a head with the FDA in late 2019….Public companies have a fundamental duty to accurately disclose material business risks and should expect to be held accountable when they fall short in that regard.”
Happy Holidays!
SEC Enforcement charges Express for failure to disclose CEO perks
The SEC has announced settled charges against Express, Inc., a multi-brand American fashion retailer formerly listed on the NYSE, for failing to disclose over a three-year period almost $1 million in perks provided to its now former CEO. What were those perks? About a half of that amount was attributable to the perk that seems to trip up so many companies (and flashing favorite target of SEC Enforcement): use of company-owned or -leased aircraft and other travel expenses for personal purposes. The SEC also charged that the company “did not have adequate controls, policies, or procedures in place to effectively identify and analyze potential compensation for disclosure.” However, the SEC did not impose civil penalties on the company, which filed for bankruptcy, in light of its cooperation. According to Sanjay Wadhwa, the Acting Director of Enforcement, “[p]ublic companies have a duty to comply with their disclosure obligations regarding executive compensation, including perks and personal benefits, so that investors can make educated investment decisions….Here, although Express fell short in carrying out its obligation, the Commission declined to impose a civil penalty based, in part, on the company’s self-report, cooperation with the staff’s investigation, and remedial efforts.”
What I want for Christmas is…another Government shutdown? Not!
But apparently there’s one looming—serious enough to cause Corp Fin to issue its now-standard shutdown announcement. The shutdown deadline is Friday night, and apparently there’s currently an impasse over farm aid. Corp Fin’s announcement indicates that, in the event of a shutdown, its activities would be “extremely limited.” According to the announcement, although EDGAR will continue to operate and accept filings, Corp Fin “will not be able to accelerate the effectiveness of registration statements.” (Fortunately, there are typically fewer offerings over the holidays.) In light of the uncertainty related to acceleration, Corp Fin suggests that “registrants with pending registration or offering statements that are substantially complete, and that have met all statutory requirements to request acceleration of the effective date (including the dissemination of any draft registration statement for the required periods under Securities Act Section 6(e) or the related Division accommodations) or qualification, may want to consider requesting effectiveness or qualification while the Division continues its normal operations.”
UPDATED—en banc Fifth Circuit puts the kibosh on the Nasdaq board diversity rules
(This post updates my post of December 12 to add further discussion of the decision.)
In August 2021, the SEC approved a Nasdaq proposal for new listing rules regarding board diversity and disclosure, accompanied by a proposal to provide free access to a board recruiting service. 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.) It didn’t take long for a court challenge to these rules to materialize: the Alliance for Fair Board Recruitment and, later, the National Center for Public Policy Research petitioned the Fifth Circuit Court of Appeals—the Alliance has its principal place of business in Texas—for review of the SEC’s final order approving the Nasdaq rule. (See this PubCo post and this PubCo post.) (Reuters points out that the same pair of challengers “led the successful U.S. Supreme Court challenge against race-conscious college admissions policies.” In October 2023, a three-judge panel of the Fifth Circuit denied those petitions, in effect upholding Nasdaq’s board diversity listing rules. Given that, by repute, the Fifth Circuit is the circuit of choice for advocates of conservative causes, the decision to deny the petition may have taken some by surprise—unless, that is, they were aware, as discussed in the WSJ and Reuters, that the three judges on that panel happened to all be appointed by Democrats. Petitioners then filed a petition requesting a rehearing en banc by the Fifth Circuit, where Republican presidents have appointed 12 of the 16 active judges. (See this PubCo post.) Not that politics has anything to do with it, of course. That petition for rehearing en banc was granted, vacating the opinion of the lower court. In May, the en banc court heard oral argument, with a discussion dominated by rule skeptics. (See this PubCo post.) Last week, the Fifth Circuit, sitting en banc, issued its opinion in Alliance for Fair Board Recruitment v. SEC, vacating the SEC’s order approving Nasdaq’s board diversity proposal. No surprise there—the surprise was that the vote by the Fifth Circuit was nine to eight. The majority of the Court applied a strict interpretation—some might call it pinched—of the purposes of the Exchange Act to hold that the Nasdaq board diversity rules “cannot be squared with the Securities Exchange Act of 1934,” and, therefore, the SEC had no business approving them. Ironically, the dissent also contended that the SEC’s authority was limited—that its statutory authority to disapprove a rule proposed by Nasdaq, cast by the dissent as a “private entity” engaged in private ordering, was constrained by the Exchange Act. In effect, the dissent contended, the majority was advocating that the agency intrude more on this exercise in private ordering. According to Bloomberg Law, 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.’” But if Nasdaq doesn’t appeal, how likely is it that the new Administration would do so?
Departure of Corp Fin Director
The SEC has just announced the departure of Corp Fin Director Erik Gerding at the end of this year. On his departure, Cicely LaMothe, the current Corp Fin Deputy Director, Disclosure Operations, will serve as Acting Director. Gerding has served as Corp Fin Director since February 2023, and recommended rules and amendments on climate disclosure, cybersecurity, SPACs, beneficial ownership reporting, universal proxy, clawbacks, sales under 10b5-1 plans and “pay versus performance.”
En banc Fifth Circuit puts the kibosh on the Nasdaq board diversity rules
In August 2021, the SEC approved a Nasdaq proposal for new listing rules regarding board diversity and disclosure, accompanied by a proposal to provide free access to a board recruiting service. 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.) It didn’t take long for a court challenge to these rules to materialize: the Alliance for Fair Board Recruitment and, later, the National Center for Public Policy Research petitioned the Fifth Circuit Court of Appeals—the Alliance has its principal place of business in Texas—for review of the SEC’s final order approving the Nasdaq rule. (See this PubCo post and this PubCo post) In October 2023, a three-judge panel of the Fifth Circuit denied those petitions, in effect upholding Nasdaq’s board diversity listing rules. Given that, by repute, the Fifth Circuit is the circuit of choice for advocates of conservative causes, the decision to deny the petition may have taken some by surprise—unless, that is, they were aware, as discussed in the WSJ and Reuters, that the three judges on this panel happened to all be appointed by Democrats. Petitioners then filed a petition requesting a rehearing en banc by the Fifth Circuit, where Republican presidents have appointed 12 of the 16 active judges. (See this PubCo post.) Not that politics has anything to do with it, of course. That petition for rehearing en banc was granted, vacating the opinion of the lower court. In May, the en banc court heard oral argument, with a discussion was dominated by rule skeptics. (See this PubCo post.) Yesterday, the Court issued its opinion in Alliance for Fair Board Recruitment v. SEC. No surprise there—the majority of the Court held that the Nasdaq diversity rules “cannot be squared with the Securities Exchange Act of 1934.” The surprise was that the vote on the Fifth Circuit was nine to eight. According to Bloomberg Law, 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.’” But if Nasdaq doesn’t appeal, how likely is that the new Administration would do so?
Below is a very quick paragraph to alert you to the decision. I plan to write a much longer post on the case (including the dissent) in the next day or so. Stay tuned for the update.
Profs share predictions for securities regulation under next Administration—and their response
In this post on the CLS Blue Sky Blog, two leading authorities on securities law, Professors John C. Coffee, Jr. and Joel Seligman, take a crack at prognosticating about SEC regulation—and even the SEC itself—under the next Administration. They contend that, with a new Republican majority on the Commission, including the new Chair, together with Republican majorities in Congress, the SEC will be in a position to “revise a broad range of statutory, rule, and enforcement policies of the Commission.” What’s more, the new Department of Government Efficiency—which they suggest, may not be entirely, um, open-minded when it comes to the SEC—could certainly put a major crimp in the resources available for the SEC’s budget. (They note the irony “that the SEC makes a large profit for the U.S. government, and in fiscal 2024, it obtained a record-high level of fines and sanctions (approximately $8.2 billion). Shrink its budget and you likely shrink that recovery.”) In their view, the SEC is “probably the most successful and effective of the New Deal administrative agencies, one that has helped preserve the integrity of our capitalist system,” but they fear that it may be handicapped in continuing to do so under the next Administration. With that in mind, they pre-announce their intent to “encourage a more informed debate by forming a ‘Shadow SEC,’ composed of acknowledged experts in securities regulation.” Let’s look at some of the potential legislation and rulemaking changes that they speculate might be in store for the SEC and public company disclosure.
“Outspoken critic” and former SEC Commissioner Paul Atkins to be nominated as SEC Chair
As widely reported, former SEC Commissioner Paul Atkins (2002-2008) is to be nominated to serve as SEC Chair. This WSJ op-ed describes him as the “anti-Gensler”—the “opposite of Mr. Gensler in temperament and regulatory ambition.” According to Politico, “Atkins has been an outspoken critic of everything from the financial reform measures enacted after the 2008 credit crisis to climate-related disclosures.” Further, Politico reports, “Atkins has sharply criticized what he considers heavy-handed policymaking for the last two decades. And he is seen by many in Washington as a well-connected regulator whose understanding of the SEC could allow him to move quickly as he enacts his vision for the regulator.” If he is confirmed, Politico continues, he “would be tasked with steering the SEC as it embarks on what is expected to be a new deregulatory age for Wall Street after nearly four years of aggressive rulemaking by the current chair, Gary Gensler. He would also be thrust into a series of policy fights over the $3 trillion cryptocurrency market, artificial intelligence and the cost of raising capital in the U.S.”
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