Category: Securities
Guidance under the gun
Once again, guidance is under the gun. In this recent speech, SEC Commissioner Hester Peirce expressed her concern for SEC staff guidance and interpretation that she seems to view as sometimes runaway or out-of-control and, sometimes, too much under the radar. A few days later, the Acting Director of the Office of Management and Budget joined in, distributing a memo designed to limit rules and guidance that federal agencies issue, particularly outside of the notice-and-comment process. But potentially the most significant impact could result from an important case that SCOTUS is now considering (to be discussed in a separate post), which could undo the historic deference that courts have generally given to agency interpretations of their own regulations, often referred to as Auer deference. In this highly politicized environment, what will be the impact on staff guidance?
Corp Fin devises new short-form process for extensions of confidential treatment orders
No sooner had Corp Fin advised us that there was no easy way to do an extension for a confidential treatment order then, lo and behold, they create one. Today, Corp Fin posted a new streamlined procedure for confidential treatment extensions.
CII defends quarterly reporting
In December 2018, the SEC posted a “request for comment soliciting input on the nature, content, and timing of earnings releases and quarterly reports made by reporting companies.” According to the press release, the request for comment solicits “public input on how the Commission can reduce burdens on reporting companies associated with quarterly reporting while maintaining, and in some cases enhancing, disclosure effectiveness and investor protections. In addition, the Commission is seeking comment on how the existing periodic reporting system, earnings releases, and earnings guidance, alone or in combination with other factors, may foster an overly short-term focus by managers and other market participants.” (See this PubCo post.) At the end of March, the influential Council of Institutional Investors submitted its comments in response to the SEC request.
What is the SEC’s current end game on proxy advisory firms—guidance or regulation?
The newest SEC Commissioner, Elad Roisman, who has reportedly gotten the nod to head up the SEC’s efforts regarding proxy advisory firms, told the U.S. Chamber of Commerce in late March that he expects the SEC to issue new guidance, sometime after proxy season this year, regarding the use by institutional investors of proxy advisory firm recommendations, as reported in The Deal. And, according to the WSJ, Roisman has “also questioned whether it was appropriate for the SEC to exempt proxy advisers from some regulations on investment advice, including whether they can both advise a company and make recommendations to its shareholders at the same time.” However, as discussed in this PubCo post, the question of whether proxy advisory firms, such as ISS and Glass Lewis, have undue influence over the voting process and should be reined in has long been something of a political donnybrook. With the issue of proxy advisory firm regulation so politically freighted, will the SEC limit the scope of its effort to guidance to institutional investors or, more controversially, go further and impose regulation on proxy advisors, as many companies have advocated?
Corp Fin provides guidance on new confidential treatment process, which is effective today
The SEC’s new rules related to confidential treatment (part of FAST Act Modernization and Simplification of Regulation S-K) became effective today, April 2, when the adopting release was published in the Federal Register. With that in mind, Corp Fin has posted some guidance under the very descriptive title, New Rules and Procedures for Exhibits Containing Immaterial, Competitively Harmful Information, to help companies comply with the new confidential treatment process, discussed below. The remainder of the release (other than provisions related to data-tagging, which will be phased in) will become effective on May 2. (For a summary of the new rules, see this PubCo post, which, since the initial posting, has been revised and updated.)
SCOTUS finds primary securities fraud liability for disseminating statements made by others with intent to defraud
Last week, SCOTUS decided Lorenzo v. SEC, a case involving a claim that an investment banker was liable for securities fraud when, at the direction of his boss, he cut, pasted and disseminated to potential investors information that his boss had provided, even though the banker knew the information was false. In a 2011 case, Janus Capital Group, Inc. v. First Derivative Traders, SCOTUS had held that, an “investment adviser who had merely ‘participat[ed] in the drafting of a false statement’ ‘made’ by another could not be held liable in a private action under subsection (b) of Rule10b–5.” (Rule 10b–5(b) prohibits the “mak[ing]” of “any untrue statement of a material fact.”) In Lorenzo, the question before the Court was whether a person who did not “make” statements (that is, who did not have “ultimate authority” over the statements), but who knowingly disseminated false statements to potential investors with intent to defraud, could be found to have violated subsections (a) and (c) of Rule 10b–5. The answer, in an opinion written by Justice Breyer, was yes. Will this case embolden plaintiff’s counsel to push the envelope and assert claims against people who are only peripherally involved in the dissemination of allegedly false information? Time will tell what the ultimate impact of this case may be.
SEC Investor Advisory Committee wants SEC to consider human capital management disclosure — will it happen?
At a meeting today of the SEC’s Investor Advisory Committee, the Committee voted—14 to 6—to recommend that the SEC consider imposing human capital management disclosure requirements as a part of its Disclosure Effectiveness Review and disclosure modernization project. As the vote count suggests, with a significant bloc of votes against, the debate about the recommendation was quite contentious. Now that the recommendation moves to the SEC, the question is: whose views will prevail?
Mandatory arbitration shareholder proposal goes to court—as Chair Clayton suggested
You might remember this no-action letter to Johnson & Johnson granting relief to the company if it relied on Rule 14a-8(i)(2) (violation of law) to exclude a shareholder proposal requesting adoption of mandatory shareholder arbitration bylaws. (See this PubCo post.) In that letter, the staff relied on an opinion from the Attorney General of the State of New Jersey, the state’s chief legal officer, which advised the SEC that the proposal was excludable under Rule 14a-8(i)(2) because “adoption of the proposed bylaw would cause Johnson & Johnson to violate applicable state law.” The issue was so fraught that SEC Chair Jay Clayton felt the need to issue a statement supporting the staff’s hands-off position: “The issue of mandatory arbitration provisions in the bylaws of U.S. publicly-listed companies has garnered a great deal of attention. As I have previously stated, the ability of domestic, publicly-listed companies to require shareholders to arbitrate claims against them arising under the federal securities laws is a complex matter that requires careful consideration,” consideration that would be more appropriate at the Commissioner level than at the staff level. However, mandatory arbitration was not an issue that he was anxious to have the SEC wade into at that time. To be sure, if the parties really wanted a binding answer on the merits, he suggested, they might be well advised to seek a judicial determination. And, you guessed it—Clayton’s words to the proponent’s ears—the proponent filed this complaint on March 21.
SEC approves changes to NYSE shareholder approval rule
On March 20, the SEC approved the 2018 NYSE proposal to amend Sections 312.03 and 312.04 of the NYSE Listed Company Manual, modifying the price requirements for purposes of determining whether shareholder approval is required for certain issuances. As previously noted in this PubCo post, this proposal is remarkably similar to the one that the SEC approved for Nasdaq in 2018 (see this PubCo post), so its approval here was not unexpected. Just like the Nasdaq rule, the NYSE modification:
changes the definition of market value for purposes of the shareholder approval rule to the lower of the closing price and five-day average closing price; and
eliminates the requirement for shareholder approval of issuances at a price less than book value but at least as great as market value.
SEC adopts amendments for FAST Act Modernization and Simplification of Regulation S-K (revised and updated)
Yesterday, once again without an open meeting, the SEC adopted changes to its rules and forms designed to modernize and simplify disclosure requirements. The final amendments, FAST Act Modernization and Simplification of Regulation S-K, which were adopted largely as originally proposed in October 2017 (see this PubCo post), are part of the SEC’s ambitious housekeeping effort, the Disclosure Effectiveness Initiative. (See this PubCo post and this PubCo post.) The amendments are intended to eliminate outdated, repetitive and unnecessary disclosure, lower costs and burdens on companies and improve readability and navigability for investors and other readers. Here is the SEC’s press release.
The final amendments make a number of useful changes, such as eliminating the need to include discussion in MD&A about the earliest of three years of financial statements, permit omission of schedules and attachments from most exhibits, limiting the two-year lookback for material contracts, and streamlining the rules regarding incorporation by reference and other matters. The final amendments also impose some new obligations, such as a requirement to file as an exhibit to Form 10-K a description of the securities registered under Section 12 of the Exchange Act and a requirement to data-tag cover page information and hyperlink to information incorporated by reference. .
Certainly one of the most welcome changes is the SEC’s innovative new approach to confidential treatment, which will allow companies to redact confidential information from exhibits without the need to submit in advance formal confidential treatment requests. This new approach will become effective immediately upon publication of the final amendments in the Federal Register. The remainder of the final amendments will become effective 30 days after publication in the Federal Register, with the exception of new cover page data-tagging requirements, which are subject to a three-year phase-in.
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