Category: Securities
In new GAO report, some distressing news about SEC’s conflict minerals rules and violence in DRC
“Conflict Minerals—Peace and Security in Democratic Republic of the Congo Have Not Improved with SEC Disclosure Rule.” That is the title of the final required report of the U.S. Government Accountability Office, the last of 17 reports provided in response to the statutory mandate of the 2010 Dodd-Frank Act. As you probably know, the SEC’s conflict minerals rules were originally mandated by Congress in Section 1502 of Dodd-Frank in an attempt to limit the use of revenue from the trade in conflict minerals to fund the operations of armed groups that have wreaked violence in the DRC and adjoining countries. Under Dodd-Frank, the GAO is required to assess periodically the effectiveness of the SEC’s conflict minerals rules in promoting peace and security in the DRC region. While the blunt conclusions of this year’s report are, to say the least, very discouraging—even devastating—on so many levels, they should not come as a complete surprise: in 2022, the GAO also reported that the violence in the DRC had not abated: “overall peace and security in the region has not improved since 2014 because of persistent, interdependent factors that fuel violence by non-state armed groups.” (See this PubCo post.) But that assessment was not showcased in the title as it is this year. This time, as Liz Dunshee so aptly phrased it on thecorporatecounsel.net, the report “did not bury the lede.” This year, the GAO found that, not only had the rule not curtailed the level of violence in the DRC, in some areas, the rule was actually associated with a spread of violence. That is, if the report’s findings are accurate, not only are we not helping the problem; in some contexts, such as gold mining, we’re actually exacerbating it. It’s worth noting that, as the GAO reports, the “SEC disagreed with some of GAO’s findings and raised concerns about some of its methodology and analyses. In response, GAO made certain adjustments that did not materially affect its findings.” Will the disturbing conclusions of the report propel Congress to reexamine Section 1502?
Out of compliance with NYSE listing standards? Better fork over your unpaid fees
The NYSE has proposed a new rule change: if a company is out of compliance with a continued listing standard and it owes the NYSE any unpaid fees, the NYSE will not review a compliance plan submitted by that company and, instead, will “immediately commence suspension and delisting procedures if such fees are not paid in full by the plan submission deadline or at the time of any required periodic review of such plan.”
SEC approves Nasdaq proposal related to bid price compliance periods and reverse splits
In July, the SEC posted a Nasdaq rule change proposal to “modify the application of the bid price compliance periods where a listed company takes an action to achieve compliance with the bid price requirement and that action causes noncompliance with another listing requirement.” (See this PubCo post.) The proposed rule change was designed to address instances where, to regain compliance with the minimum bid price required by Nasdaq 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 publicly held shares and number of public holders, triggering a new deficiency process with a new time period for the company to seek to regain compliance. That’s excessive, Nasdaq said, and too confusing for investors, possibly adversely affecting investor confidence in the market. Because Nasdaq believed it was inappropriate for a company to receive additional time to cure non-compliance with the newly violated listing standard, it sought, with the proposal, to eliminate the additional compliance period that would otherwise result from the newly created deficiency. But by August, the SEC hadn’t yet approved the proposal and extended the deadline for approval. Now, Nasdaq has filed Amendment No. 2 to the proposal—primarily clarifications—and the SEC has just given its approval to the proposal as amended. As a result, 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 director with proxy violation for failing to disclose personal relationship bearing on independence
Last week, the SEC announced settled charges against James R. Craigie, a former CEO, Chair and board member of Church & Dwight Co. Inc., an NYSE-listed “manufacturer of consumer-packaged goods,” for “violating proxy disclosure rules by standing for election as an independent director” without advising the board that maybe he really wasn’t quite so independent after all. This omission, the SEC alleged, caused the company’s proxy statements “to contain materially misleading statements.” Maybe you guessed that we’re not talking here about any of the NYSE-enumerated relationships that vitiate independence? No, we’re talking about something closer to the concept of “social independence”—something more amorphous than conventional, stock-exchange-defined independence—that some suggest can be even more compromising at times than the conventional variety. Craigie was alleged to have a “close personal friendship with a high-ranking Church & Dwight executive,” including paying more than $100,000 for the executive and his spouse to join Craigie and his spouse on “six trips that spanned eight countries on five continents.” Because Craigie never disclosed the relationship to the board and encouraged the executive to do the same, the SEC charged, the board was not aware of the relationship and the company’s proxy statements characterized Craigie incorrectly as an independent director. According to the Associate Director of the SEC’s Division of Enforcement, “[s]hareholders expect independent directors to exercise autonomous judgment in their decision making, free from undisclosed conflicts….By concealing his relationship with a company executive, Mr. Craigie undermined the board’s director independence process and compromised the company’s disclosures.” Craigie agreed to a five-year officer-and-director bar and to pay a civil penalty of $175,000. The case raises the thorny question of where to draw the line on personal relationships. Is an occasional dinner acceptable? If so, what about a weekend trip? A vacation trip? How many trips is too many? Just how thick do the personal connections have to be to taint independence? Caution seems to be the prescription here.
SEC brings securities fraud charges against Cassava Sciences
The SEC announced last week that it had filed a complaint against Cassava Sciences, Inc., a “pharmaceutical company with one primary drug candidate, PTI-125, a potential therapeutic for the treatment of Alzheimer’s disease,” for misleading statements about the results of a Phase 2 clinical trial for the potential therapeutic. Also charged in the complaint were the company’s founder and former CEO and its former Senior Vice President of Neuroscience. The complaint highlights and analyzes a number of misleading statements and omissions—an analysis that could be instructive for companies reporting on clinical trial results. In a related Order, the SEC also charged an associate medical professor at the CUNY, who was a consultant and the co-developer of the therapeutic, with manipulating the reported clinical trial results. The company agreed to pay a civil penalty of $40 million. The former CEO and former Senior VP agreed to pay civil penalties of $175,000 and $85,000, respectively, and to officer-and-director bars of three and five years. The consultant agreed to pay a civil penalty of $50,000. They were all charged with violating the antifraud provisions of the federal securities laws; the company was also charged with violating the reporting provisions. It’s been widely reported that, after the announcement of the settlement, the stock price fell by almost 11%. PTI-125 is now reported to be in Phase 3 clinical trials.
SEC Enforcement sweep picks up multiple companies and insiders with late filings under Section 16 and 13(d), (g) and (f) [RESEND]
[We are resending this post from Friday because, for reasons well beyond my technical capacity, it was apparently not distributed to all subscribers. Hopefully, everyone that is supposed to receive it will receive it this time.]
Can we call it a year-end tradition yet? It’s almost the end of the SEC’s fiscal year, and, as it did last year around this time, the SEC has just announced a big Enforcement sweep of multiple companies and some individuals—23 in total—for failing to timely file Section 16(a) short-swing trading reports (Forms 3, 4 and 5) and Schedules 13D and G (reports by beneficial owners of more than 5%) on a timely basis. Two public companies were charged with failing to make filings on behalf of insiders after having volunteered to do so, and then failing to report the delinquencies in their own filings, as required by Reg S-K Item 405. Surprisingly, the sweep also captured a public company that was charged with failure to timely file Forms 13F—reports that institutional investment managers are required to file regarding certain large securities holdings. The SEC used data analytics to identify those charged in the sweep. The penalties aggregated over $3.8 million and ranged from $10,000 to $750,000. According to the Associate Regional Director of the SEC’s Division of Enforcement, “[t]o make informed investment decisions, shareholders rely on, among other things, timely reports about insider holdings and transactions and changes in potential controlling interests….Today’s actions are a reminder to large investors that they must commit necessary resources to ensure these reports are filed on time.” It appears that the SEC is continuing to send messages that late filings are not ok…and lots of late filings are really not ok. It’s also clear that the SEC views companies that do volunteer to make filings on behalf of their insiders—a common practice—and that don’t follow through to be potentially contributing to their insiders’ filing failures; the SEC will hold the companies responsible if the insiders’ filings are not timely.
SEC adopts EDGAR Next
In September last year, the SEC proposed changes to the EDGAR system designed primarily to enhance EDGAR security, specifically related to EDGAR filer access and account management. (See this PubCo post.) While the SEC has updated EDGAR several times, it’s been over ten years since the SEC updated EDGAR login, password and other account access protocols in any significant way. On Friday, the SEC adopted the proposal with some changes. As summarized in the press release, “[t]he amendments require EDGAR filers to authorize identified individuals who will be responsible for managing their accounts, and individuals acting on behalf of EDGAR filers will need to present individual account credentials obtained from Login.gov to access those EDGAR accounts and make filings. Form ID, the application for access to EDGAR, will be modernized to make the form more user-friendly.” Filers will also be able to use optional Application Programming Interfaces (APIs), described as “a machine-to-machine method of making submissions, retrieving information, and performing account management tasks that will improve the efficiency and accuracy of filers’ interactions with EDGAR.” According to SEC Chair Gary Gensler, “[t]he public and the SEC long have benefited from the EDGAR electronic filing system….Today’s amendments are an important next step for EDGAR account access protocols.” In his statement, he added that, “[u]nder previous requirements, registrants had one login per company. This is like having a family passing around one shared login and password for a movie streaming app. You know where that can lead. That’s simply not the most secure system—for filers and the Commission alike—when it comes to information relating to financial disclosure. By contrast, today’s amendments further secure login protocols by requiring every person filing something into EDGAR to login with individual credentials and to use multi-factor authentication.” The rule and form amendments will become effective March 24, 2025. On the same date, the new dashboard will go live, and compliance with the amended Form ID requirements will be required. The compliance date for all other rule and form amendments is September 15, 2025. I know you’ll be excited to study the new EDGAR filer manual and here’s a blackline copy to help with that undertaking. Will the new system put the kibosh on fake SEC Form 4s, fake Forms 8-K, fake Schedules 13D, fake SEC correspondence and other fake SEC filings?
SEC Enforcement sweep picks up multiple companies and insiders with late filings under Section 16 and 13(d), (g) and (f)
Can we call it a year-end tradition yet? It’s almost the end of the SEC’s fiscal year, and, as it did last year around this time, the SEC has just announced a big Enforcement sweep of multiple companies and some individuals—23 in total—for failing to timely file Section 16(a) short-swing trading reports (Forms 3, 4 and 5) and Schedules 13D and G (reports by beneficial owners of more than 5%) on a timely basis. Two public companies were charged with failing to make filings on behalf of insiders after having volunteered to do so, and then failing to report the delinquencies in their own filings, as required by Reg S-K Item 405. Surprisingly, the sweep also captured a public company that was charged with failure to timely file Forms 13F—reports that institutional investment managers are required to file regarding certain large securities holdings. The SEC used data analytics to identify those charged in the sweep. The penalties aggregated over $3.8 million and ranged from $10,000 to $750,000. According to the Associate Regional Director of the SEC’s Division of Enforcement, “[t]o make informed investment decisions, shareholders rely on, among other things, timely reports about insider holdings and transactions and changes in potential controlling interests….Today’s actions are a reminder to large investors that they must commit necessary resources to ensure these reports are filed on time.” It appears that the SEC is continuing to send messages that late filings are not ok…and lots of late filings are really not ok. It’s also clear that the SEC views companies that do volunteer to make filings on behalf of their insiders—a common practice—and that don’t follow through to be potentially contributing to their insiders’ filing failures; the SEC will hold the companies responsible if the insiders’ filings are not timely.
NYSE withdraws proposal to extend time period for completion of de-SPAC transaction
In April, the NYSE proposed a rule change that would have amended Section 102.06 of the Listed Company Manual to allow a SPAC to “remain listed until forty-two months from its original listing date if it has entered into a definitive agreement with respect to a business combination within three years of listing.” (See this PubCo post.) The current rule imposes a three-year deadline for a SPAC to complete its de-SPAC merger. At the end of last week, the SEC posted a notice that the NYSE had withdrawn the proposal to extend the period that the SPAC can remain listed if it has signed a definitive de-SPAC merger agreement. Why?
SEC’s Investor Advisory Committee discusses tracing in §11 litigation and shareholder proposals—will they recommend SEC action?
Last week, at the SEC’s Investor Advisory Committee meeting, the Committee discussed two topics described as “pain points” for investors: tracing in §11 litigation and shareholder proposals. In the discussion of §11 and tracing issues, the presenting panel made a strong pitch for SEC intervention to facilitate tracing and restore §11 liability following Slack Technologies v. Pirani. The panel advocated that the Committee make recommendations to the SEC to solve this problem. With regard to shareholder proposals, the Committee considered whether the current regulatory framework appropriately protected investors’ ability to submit shareholder proposals or did it result in an overload of shareholder proposals? Was Exxon v. Arjuna a reflection of exasperation experienced by many companies? No clear consensus view emerged other than the desire for a balanced approach and a stable set of rules. Recommendations from SEC advisory committees often hold some sway with the staff and the commissioners, so it’s worth paying attention to the outcome here.
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