Category: Securities
What’s happening with anti-ESG legislation?
Reams of anti-ESG legislation have been proposed recently at both the state and federal levels. This article from Institutional Investor updates us on the status of state anti-ESG legislative efforts in 2024. And, following “ESG month” in the U.S. House (see this PubCo post) and the advancement of seven pieces of anti-ESG legislation to the House floor, Public Citizen engaged pollsters Lake Research Partners to conduct a survey of voters’ views of anti-ESG bills and the policies underlying them, as discussed in this article on the Harvard Law School Forum on Corporate Governance.
Corp Fin issues new CDIs on cybersecurity incident disclosure
Corp Fin has just issued a new set of CDIs under Form 8-K, Item 1.05, Material Cybersecurity Incidents. The SEC adopted final rules regarding cybersecurity disclosure in 2023, requiring companies “to disclose material cybersecurity incidents they experience and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and governance.” Under the final rules, if a public company experiences a cybersecurity incident that the company determines to be material, the company is required to file a Form 8-K under new Item 1.05, describing the “material aspects of the nature, scope, and timing of the incident, and the material impact or reasonably likely material impact on the registrant, including its financial condition and results of operations.” The materiality determination regarding a cybersecurity incident must be made “without unreasonable delay” after discovery of the incident. To the extent that the required information has not been determined or is unavailable at the time of the required filing, the company is required to include a statement to that effect in the filing and then file an amendment to its Form 8-K containing that information within four business days after the company, without unreasonable delay, determines the information or the information becomes available. (See this PubCo post.) Generally, the new CDIs address Form 8-K Item 1.05 filings in the context of cybersecurity incidents that involve ransomware attacks that result in a disruption in operations or the exfiltration of data. Summaries are below, but each CDI number below is linked to the CDI on the SEC website, so you can easily read the version in full.
Jury convicts former executive for insider trading and fraudulent use of Rule 10b5-1 plan
Back in March 2023, the DOJ unsealed an indictment against Terren Peizer, formerly the executive chair of Ontrak, Inc., representing the first time, according to the press release, that the DOJ brought “criminal insider trading charges based exclusively on an executive’s use of 10b5-1 trading plans.” The DOJ charged that Peizer entered into a fraudulent scheme using 10b5-1 plans and engaged in insider trading, both of which charges carry stiff criminal penalties. Peizer, the DOJ alleged, “avoided more than $12.5 million in losses by entering into two Rule 10b5-1 trading plans while in possession of material, nonpublic information concerning the serious risk that Ontrak’s then-largest customer would terminate its contract.” According to the WSJ, the trial continued for nine days. On Friday, Bloomberg reports, a jury in the U.S. District Court for the Central District of California found Peizer “guilty of one count of securities fraud and two counts of insider trading.” In a statement, Peizer’s counsel, as reported by Law360, said that the “testimony from all the witnesses at trial showed that Mr. Peizer did not operate the company, and relied on his management team for updates….That same management team told Mr. Peizer that there was no material nonpublic public information at the time he entered in his trading plans, and those plans were supposed to protect him. Mr. Peizer was entitled to rely on that advice. In our view, this result is a travesty of justice, as Terren Peizer is innocent of these charges. We will not rest until it is overturned.” The head of the DOJ’s criminal division observed, in the DOJ press release, that when Peizer “learned significant negative news about Ontrak, he set up Rule 10b5-1 trading plans to sell shares before the news became public and to conceal that he was trading on inside information….With today’s verdict, the jury convicted Peizer of insider trading. This is the Justice Department’s first insider trading prosecution based exclusively on the use of a trading plan, but it will not be our last. We will not let corporate executives who trade on inside information hide behind trading plans they established in bad faith.” Notably, Peizer wasn’t just convicted despite his use of 10b5-1 plans, he was convicted because of his use—a use that the jury found to be fraudulent.
Corp Fin Director issues statement regarding sharing information about cybersecurity incidents
Yesterday, Corp Fin Director Erik Gerding issued a new statement, Selective Disclosure of Information Regarding Cybersecurity Incidents. As you know, last year the SEC adopted new rules regarding cybersecurity disclosure, including requirements for both material incident reporting on Item 1.05 of Form 8-K and periodic disclosure of material information regarding cybersecurity risk management, strategy and governance. (See this PubCo post.) Gerding’s new statement is designed to disabuse companies of the idea that the new rules preclude them from discussing information about a material cybersecurity incident with others, including their commercial counterparties, beyond the information included in the Form 8-K. Gerding assures us that “[t]hat is not the case.” But while the new rules may not prohibit disclosure, what about Reg FD?
The Chamber and NCPPR file brief challenging SEC climate disclosure rule
As you probably recall, on March 6, the SEC adopted final rules “to enhance and standardize climate-related disclosures by public companies and in public offerings.” (See this PubCo post, this PubCo post, this PubCo post, and this PubCo post.) Even though, in the final rules, the SEC scaled back significantly on the proposal—including putting the kibosh on the controversial mandate for Scope 3 GHG emissions reporting and requiring disclosure of Scope 1 and/or Scope 2 GHG emissions on a phased-in basis only by accelerated and large accelerated filers and only when those emissions are material—all kinds of litigation immediately ensued. Those cases were then consolidated in the Eighth Circuit (see this PubCo post) and, in April, the SEC determined to exercise its discretion to stay the final climate disclosure rules “pending the completion of judicial review of the consolidated Eighth Circuit petitions.” There are currently nine consolidated cases—with two petitioners, the Sierra Club and the Natural Resources Defense Council, having voluntarily exited the litigation (see this PubCo post), and a new petition having just been filed by the National Center for Public Policy Research, a familiar presence in various cases, such as the legal challenges to the Nasdaq board diversity rules (see this PubCo post), state and corporate DEI initiatives (see this PubCo post and this PubCo post), and litigation over shareholder proposals (see this PubCo post). Petitioners have recently begun to submit briefing. One that has been made available is the brief that was filed on behalf of the U.S. Chamber of Commerce, Texas Association of Business, Longview Chamber of Commerce and the National Center for Public Policy Research.
Court calls a halt to Exxon case against Arjuna
In January, ExxonMobil filed a lawsuit against Arjuna Capital, LLC and Follow This, the two proponents of a climate-related shareholder proposal submitted to Exxon, seeking a declaratory judgment that it may exclude their proposal from its 2024 annual meeting proxy statement. Then, the two proponents notified Exxon that they had withdrawn their proposal and promised not to refile; therefore, they said, the case was moot. But Exxon refused to withdraw its complaint because it believed that there was still a critical live controversy for the Court to resolve. And the Federal District Court for the Northern District of Texas agreed—at least as to Arjuna. While the Court dismissed the case against Follow This, an association organized in the Netherlands, for lack of personal jurisdiction, it allowed the case against Arjuna to proceed on the basis of both subject matter and personal jurisdiction, citing precedent that “a defendant’s voluntary cessation of a challenged practice does not deprive a federal court of its power to determine the legality of the practice.” (For background on this case, see this PubCo post.) According to the Court, the “voluntary-cessation doctrine requires more than platitudes to render a case moot;…to moot Exxon’s claim, Defendants must show that it is ‘absolutely clear’ the relevant conduct ‘could not reasonably be expected to recur.’” But the argument continued, even after the decision was rendered, as Arjuna continued to submit letters to Exxon in which Arjuna “unconditionally and irrevocably covenant[ed] to refrain henceforth from submitting any proposal for consideration by Exxon shareholders relating to GHG or climate change,” and Exxon continued to contend that the letters were not enough. (See this PubCo post.) Finally, yesterday, after a hearing on the matter, the Court called a halt, issuing an Order that Exxon’s claim was moot and dismissing the action without prejudice. But not before the Court got in a few digs at Arjuna, activism and even at the SEC.
What does the Nasdaq board diversity data tell us?
As you know, the Nasdaq board diversity disclosure requirements might be in jeopardy at the moment, as we await the decision of the en banc Fifth Circuit following oral argument in Alliance for Fair Board Recruitment and National Center for Public Policy Research v. SEC. As noted in this PubCo post, the discussion at oral argument seemed to be dominated by rule skeptics. Notwithstanding the possibility that the rules might be overturned—or perhaps because they might be—the folks at Bloomberg Law have used the opportunity to analyze some of the data from those disclosures, offering a glimpse into the current state of corporate board diversity among the over 4,000 Nasdaq-listed companies. What is the bottom line? The authors found that “companies have diversified their boards in part by predominantly hiring white women—meeting the rule’s gender-based requirements—but falling short when it comes to other demographics.”
Commissioner Uyeda calls for development of guiding principles for foreign company disclosure requirements
Are the regulations applicable to foreign companies in for a reassessment? You might draw that conclusion from reading the remarks from SEC Commissioner Mark Uyeda at the Harvard Law School Program on International Financial Systems, 2024 U.S.-China Symposium last week. Uyeda observes that, from its earliest days, the SEC has “recognized the unique nature of foreign companies accessing the U.S. capital markets, and its rules have afforded different treatment to foreign companies,” such as different forms for registration and reporting. But more recently, the SEC has applied several of its rules equally to domestic and foreign companies, an approach that, in Uyeda’s view, is inconsistent and suffers from the absence of a “clearly articulated regulatory philosophy.” He advises that the SEC should step back and undertake a more comprehensive review with a view toward the development of guiding principles—a “philosophy for when disclosure by foreign companies should be equivalent to disclosure by U.S. companies.” In particular, he advocates that the SEC reexamine the definition of “foreign private issuer”: while a test based on ownership and management may have made sense in 1983, does it still “reflect the realities of today’s global capital markets, corporate structures, and business practices”?
What happened with no-action requests this proxy season?
According to “SEC No Action Statistics to May 1, 2024” from the Shareholder Rights Group, this proxy season, the SEC staff “has nearly doubled the number of exclusions” of shareholder proposals compared with 2023; that is, relative to the prior year, the staff has issued almost twice the number of letters indicating that it would not recommend enforcement action if the company excluded the proposal from its proxy statement. While that surge reflects primarily a “sharp increase” in the number of requests for no-action filed by companies, importantly, the article indicates that it also reflects an increase in the relative proportion of no-action requests granted. From November 1, 2023 to May 1, 2024, the article reports, the SEC has granted company requests for no-action regarding shareholder proposals about 68% of the time (excluding requests withdrawn), compared with 56% at the same point last year. Notably, the article reports, that percentage (68%) is fairly comparable to the average exclusion rate (69%) during the prior administration (2017 to 2020). Since the issuance of SLB 14L in 2021, the staff has come in for criticism for applying a revised approach to evaluating no-action requests that some market participants considered perhaps a bit too generous to proponents of proposals, leading to an excess of overly prescriptive proposals presented at shareholder meetings. As the article suggests, has this criticism led to a moderation of that approach?
NRDC and Sierra Club seek exit from SEC climate disclosure litigation
You might recall that the litigation over the SEC’s climate disclosure rules (see, e.g., this PubCo post) was not limited to those, like the Chamber of Commerce, Liberty Energy and the State of Iowa, challenging the SEC’s authority to adopt the rules, but also included some environmental groups—the Sierra Club and the Natural Resources Defense Council—which affirmed the SEC’s authority, but contended that, in rolling back the proposal, the SEC had “fallen short of its statutory mandate to protect investors.” In particular, they were disturbed by the removal in the final rules of requirements to disclose Scope 3 emissions. (See this PubCo post.) Now, both the NRDC and the Sierra Club have moved to voluntarily dismiss their petitions for review..
You must be logged in to post a comment.