Category: Securities
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.
Micromanagement? Significant policy issue? Staff no-action letters address Rule 14a-8(i)(7) exclusion
What seems to be the Rule 14a-8 exclusion du jour? My vote goes to Rule 14a-8(i)(7), the “ordinary business” exclusion—sort of a perpetual home renovation project for the staff. As you may recall, in Staff Legal Bulletins 14H, 14I and 14J issued over the last few years, the staff has addressed the scope and application of the exclusion—specifically the “significant policy exception,” the need for a board analysis, “micromanagement” as a basis for exclusion and the availability of the exclusion in the context of executive comp. (See this PubCo post, this PubCo post and this PubCo post. Some recent no-action letters related to use of the exclusion in connection with executive comp are discussed in this PubCo post.) Some of the staff’s most recent guidance has been viewed to expand the potential for companies to rely on the exclusion, and a slew of letters addressing requests for no-action relief under Rule14a-8(i)(7) has recently been posted. Not surprisingly, many of the proposals address current topics in the news: climate change, sexual harassment and mandatory employee arbitration, allocation of corporate tax savings, and even immigrant detention. As BlackRock CEO Laurence Fink has previously observed, in the face of political dysfunction “and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues.” (See this PubCo post.) To provide a flavor of current trends, this post discusses several of these letters below.
Corp Fin Director discusses Brexit and sustainability disclosure
In remarks today in London at the 18th Annual Institute on Securities Regulation in Europe, Corp Fin Director William Hinman discussed the application of a “Principles-Based Approach to Disclosing Complex, Uncertain and Evolving Risks,” specifically addressing Brexit and sustainability. With regard to Brexit disclosure, Hinman offers a very useful cheat sheet of good questions to consider in crafting appropriately tailored disclosure.
SEC Commissioner Peirce “airs her grievances” with CII
Happy International Women’s Day! To celebrate, let’s hear from Hester Peirce, the only woman SEC Commissioner. (Irony intended.)
In a speech delivered a few days ago to the Council of Institutional Investors, after expressing her gratitude for those contributions by CII to the public debate that Peirce views favorably (regarding proxy voting, stock buybacks and disclosure reform), she takes the opportunity to “air her grievances,” citing as a model Seinfeld’s 1997 Festivus episode. (“I got a lot of problems with you people, and now you’re gonna hear about it.”) What’s her complaint? It’s the focus of CII and other investors on what she views to be “non-investment matters at the expense of concentration on a sound allocation of resources to their highest and best use. Real dollars are being poured into adhering to an amorphous and shifting set of virtue markers.” And the pressure on the SEC “to get on the bandwagon and drag others with us is pretty intense. We are being asked more and more to shift securities disclosure to focus more on matters that do not go to an assessment of how effectively companies are putting investor money to work.”
Companies begin to air LIBOR phase-out risks/SOFR volatility
As previously discussed in this PubCo post, one of the risk areas that SEC staff have advised they will be monitoring and have urged companies to address—and soon—is the effect of the LIBOR phase-out. LIBOR, the London Interbank Offered Rate, is calculated based on estimates submitted by banks of their own borrowing costs. In 2012, the revelation of LIBOR rigging scandals made clear that the benchmark was susceptible to manipulation, and British regulators decided to phase it out by 2021. LIBOR has been used extensively as a benchmark reference for short-term interest rates for various commercial and financial contracts—including interest rate swaps and other derivatives, as well as floating rate mortgages and corporate debt. As cited by SEC Chair Jay Clayton, according to the Fed, “in the cash and derivatives markets, there are approximately $200 trillion in notional transactions referencing U.S Dollar LIBOR and…more than $35 trillion will not mature by the end of 2021.” (See also this PubCo post.)
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