Category: Securities

SEC charges company for failure to disclose material trends

The SEC has just settled an action against Diageo PLC, a producer of liquor, wine and beer, for failure to disclose known trends and uncertainties.  Diageo’s omission resulted in materially misleading disclosures regarding its financial results and material inflation of key performance indicators—organic net sales growth and organic operating profit growth.  It’s worth noting that the SEC has not been reluctant to take enforcement action against companies that have misled investors by inflating KPIs, such as subscriber counts, revenue-per-subscriber, number of vehicles sold monthly, net new customers added, backlog and now organic net sales growth and organic operating profit growth. These types of metrics—typically outside of the financial statements—are metrics on which investors and analysts often rely to assess performance, and companies have been held to account if their presentations are materially inaccurate or misleading or the related controls are inadequate.

Commissioner Roisman defends proxy proposals

The SEC’s recent proxy proposals—both the proposal related to proxy advisory firms (see this PubCo post) and the proposal related to Rule 14a-8 shareholder proposals (see this PubCo post)—have been hit hard by the critics. Even the SEC’s own Investor Advisory Committee piled on, ultimately recommending that the SEC consider a do-over. (See this PubCo post.)  To the defense comes SEC Commissioner Elad Roisman, who has been honchoing these proposals at the SEC.

SEC issues public statement on impact of coronavirus on financial reporting and audit quality

In a public statement issued today, SEC Chair Jay Clayton, Corp Fin Director Bill Hinman, SEC Chief Accountant Sagar Teotia and PCAOB Chairman William D. Duhnke III provided guidance regarding the impact of the coronavirus on financial reporting and audit quality, as well as the potential availability of regulatory relief.  The statement arose out of the recent continuing dialogue between these officials and the senior leaders of the largest U.S. audit firms regarding difficulties in connection with conducting audits in emerging markets.

SSGA offers roadmap for board oversight of ESG; may vote against directors of ESG “laggards”

It’s not just BlackRock’s CEO that has words for companies.  Cyrus Taraporevala, the CEO of State Street Global Advisers, another large asset manager, has recently sent his own letter to company boards cautioning that SSGA’s engagement on sustainability this year will also include the possibility of a proxy vote against directors “to press companies that are falling behind and failing to engage.” While directors can play a vital role in catalyzing action on ESG matters, SSGA recognizes that, in many ways, our understanding of ESG is still in its early stages, making board oversight of ESG something of a challenge. To help demystify sustainability for directors, SSGA has developed a framework intended to provide a roadmap for boards—where to begin—in conducting oversight of sustainability as a strategic and operational issue.

SEC approves Nasdaq changes to definition of “family member”

The SEC has granted accelerated approval of Nasdaq’s amended proposal, originally filed in May 2019, to modify the definition of a “family member” for purposes of determining director independence under Listing Rule 5605(a)(2).  As part of the new definition, Nasdaq excludes stepchildren from the definition of “family member,” but will ultimately leave to the board the determination of whether stepchildren who do not live at home with the director nevertheless have a relationship with the director that could interfere with the director’s exercise of independent judgment.  Calling Dr. Phil….

Task Force recommends insider trading legislation

As reported on Columbia Law School’s Blog on Corporations and the Capital Markets, the Bharara Task Force on Insider Trading, chaired by former U.S. Attorney for the SDNY, Preet Bharara, and comprising former U.S. Attorneys and staff, academics and judges, has now issued its report and recommendations.  The objective of the Task Force was to address the problem that insider trading law “has suffered—and continues to suffer—from uncertainty and ambiguity to a degree not seen in other areas of law, with elements of the offense defined by—and at times, evolving with—court opinions applying particular fact patterns.” Why is that? Because insider trading law is not defined by statute and has instead “developed through a series of fact-specific court decisions applying the general anti-fraud provisions of our securities laws across a broadening set of conduct.”  The result has been a lack of clarity that “has left market participants without sufficient  guidance” on how to avoid, or defend against, insider trading, made it more difficult for prosecutors to establish their cases and given the public “reason to question the fairness and integrity of our securities markets.” 

Nasdaq to propose new tier for thinly traded securities

It’s well recognized that the equity markets work pretty well for companies that trade in high volumes, but companies with low trading volumes? Not so much. Thinly traded securities often face liquidity challenges, including wider spreads, higher transaction costs, fewer market makers and potential difficulties for investors that seek to unwind their positions. These issues can discourage small- and medium-sized enterprises from  accessing the public markets, a problem that the SEC has been anxious to address. To find potential solutions for these problems, in October 2019, the SEC solicited proposals for changes in equity market structure designed to improve the secondary trading markets for thinly traded securities. Nasdaq has just announced that it has submitted to the SEC an application for exemptive relief that would facilitate its proposal “to establish a tier nestled [sounds very cozy!] within the U.S. public equity markets that is better tailored and far more hospitable to thinly-traded securities than is the all-purpose, undifferentiated market environment in which they suffer today.”