Departure of Corp Fin Director
The SEC has just announced the departure of Corp Fin Director Erik Gerding at the end of this year. On his departure, Cicely LaMothe, the current Corp Fin Deputy Director, Disclosure Operations, will serve as Acting Director. Gerding has served as Corp Fin Director since February 2023, and recommended rules and amendments on climate disclosure, cybersecurity, SPACs, beneficial ownership reporting, universal proxy, clawbacks, sales under 10b5-1 plans and “pay versus performance.”
En banc Fifth Circuit puts the kibosh on the Nasdaq board diversity rules
In August 2021, the SEC approved a Nasdaq proposal for new listing rules regarding board diversity and disclosure, accompanied by a proposal to provide free access to a board recruiting service. The new listing rules adopted a “comply or explain” mandate for board diversity for most listed companies and required companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. (See this PubCo post.) It didn’t take long for a court challenge to these rules to materialize: the Alliance for Fair Board Recruitment and, later, the National Center for Public Policy Research petitioned the Fifth Circuit Court of Appeals—the Alliance has its principal place of business in Texas—for review of the SEC’s final order approving the Nasdaq rule. (See this PubCo post and this PubCo post) In October 2023, a three-judge panel of the Fifth Circuit denied those petitions, in effect upholding Nasdaq’s board diversity listing rules. Given that, by repute, the Fifth Circuit is the circuit of choice for advocates of conservative causes, the decision to deny the petition may have taken some by surprise—unless, that is, they were aware, as discussed in the WSJ and Reuters, that the three judges on this panel happened to all be appointed by Democrats. Petitioners then filed a petition requesting a rehearing en banc by the Fifth Circuit, where Republican presidents have appointed 12 of the 16 active judges. (See this PubCo post.) Not that politics has anything to do with it, of course. That petition for rehearing en banc was granted, vacating the opinion of the lower court. In May, the en banc court heard oral argument, with a discussion was dominated by rule skeptics. (See this PubCo post.) Yesterday, the Court issued its opinion in Alliance for Fair Board Recruitment v. SEC. No surprise there—the majority of the Court held that the Nasdaq diversity rules “cannot be squared with the Securities Exchange Act of 1934.” The surprise was that the vote on the Fifth Circuit was nine to eight. According to Bloomberg Law, a “Nasdaq representative said the exchange disagreed with the court’s decision, but doesn’t plan to appeal the ruling. An SEC spokesperson said the agency is ‘reviewing the decision and will determine next steps as appropriate.’” But if Nasdaq doesn’t appeal, how likely is that the new Administration would do so?
Below is a very quick paragraph to alert you to the decision. I plan to write a much longer post on the case (including the dissent) in the next day or so. Stay tuned for the update.
How should the board consider security concerns for executives?
After the alarming murder of an insurance company CEO last week, questions about protection and security for CEOs and other executives are suddenly high on the agenda for boards of directors. A big concern: will there be copycat attempts? According to a security officer for a threat management software company, quoted on CNBC.com, “Everyone’s scrambling to say, ‘Are we safe?’….This is an inflection point where the idea of executive protection is now raised to the board level. Everyone I know in the industry is feeling this.” This anxiety is only compounded by the volume of information available online disclosing executives’ addresses and itineraries. As discussed in this new article from the Harvard Business Review, while incidents of workplace violence are “unfortunately too common” in the U.S., CEO targeting is “relatively rare.” But that risk level may have changed: in “today’s world of grievance and anger, easy access to weapons and information, and high-profile attacks on public figures, companies must take seriously their duty of care for executives and employees alike.” The article presents a framework for C-suites and boards “to balance competing interests of need, efficacy, and cost to ensure executive protection….How does a company strike the right approach in preventing the low likelihood, but very high consequence of an attack on a CEO?”
CEO succession: Is it a good idea to appoint a board member to be CEO?
In this article from the Harvard Business Review, the authors, from global leadership advisory firm ghSMART, discuss the growing number of instances in which companies appoint CEOs from the board. According to the article, from 2018 to 2023, 10% (213) of the total number of new CEOs in the S&P 500 and Russell 3000 were appointments from the board, reflecting a threefold increase over the period, and “making board director the fourth-most-common pre-CEO role,” after various executive roles. The authors note that the majority of those 213 CEOs were permanent hires. Interestingly, however, the authors observe that when a company appoints one of its own board members as CEO, the frequent assumption is that there must have been a problem with succession planning: “Maybe the company is desperately trying to get itself out of a protracted period of tumult. Maybe the previous CEO’s departure was unexpected or forced, and only a tried-and-true board member can keep the ship sailing steadily until a permanent replacement can be found. Maybe the CEO’s departure was routine and expected, but somehow the succession-planning process just came up short.” But sometimes, they suggest, the reality is that the board member was actually “the best option” to serve in that role. Why might it be a good idea? What can go wrong? How can the company increase its chances of success? In their article, the authors address these questions.
Profs share predictions for securities regulation under next Administration—and their response
In this post on the CLS Blue Sky Blog, two leading authorities on securities law, Professors John C. Coffee, Jr. and Joel Seligman, take a crack at prognosticating about SEC regulation—and even the SEC itself—under the next Administration. They contend that, with a new Republican majority on the Commission, including the new Chair, together with Republican majorities in Congress, the SEC will be in a position to “revise a broad range of statutory, rule, and enforcement policies of the Commission.” What’s more, the new Department of Government Efficiency—which they suggest, may not be entirely, um, open-minded when it comes to the SEC—could certainly put a major crimp in the resources available for the SEC’s budget. (They note the irony “that the SEC makes a large profit for the U.S. government, and in fiscal 2024, it obtained a record-high level of fines and sanctions (approximately $8.2 billion). Shrink its budget and you likely shrink that recovery.”) In their view, the SEC is “probably the most successful and effective of the New Deal administrative agencies, one that has helped preserve the integrity of our capitalist system,” but they fear that it may be handicapped in continuing to do so under the next Administration. With that in mind, they pre-announce their intent to “encourage a more informed debate by forming a ‘Shadow SEC,’ composed of acknowledged experts in securities regulation.” Let’s look at some of the potential legislation and rulemaking changes that they speculate might be in store for the SEC and public company disclosure.
“Outspoken critic” and former SEC Commissioner Paul Atkins to be nominated as SEC Chair
As widely reported, former SEC Commissioner Paul Atkins (2002-2008) is to be nominated to serve as SEC Chair. This WSJ op-ed describes him as the “anti-Gensler”—the “opposite of Mr. Gensler in temperament and regulatory ambition.” According to Politico, “Atkins has been an outspoken critic of everything from the financial reform measures enacted after the 2008 credit crisis to climate-related disclosures.” Further, Politico reports, “Atkins has sharply criticized what he considers heavy-handed policymaking for the last two decades. And he is seen by many in Washington as a well-connected regulator whose understanding of the SEC could allow him to move quickly as he enacts his vision for the regulator.” If he is confirmed, Politico continues, he “would be tasked with steering the SEC as it embarks on what is expected to be a new deregulatory age for Wall Street after nearly four years of aggressive rulemaking by the current chair, Gary Gensler. He would also be thrust into a series of policy fights over the $3 trillion cryptocurrency market, artificial intelligence and the cost of raising capital in the U.S.”
SEC charges biopharma with misleading investors about status of INDs
The SEC has announced that it filed settled charges against Kiromic BioPharma and two of its executives for alleged failure to disclose in its public statements and filings, including in its public offering prospectus, material information about its investigational new drug applications filed with the FDA for two of its drug candidates—the only two product candidates in the company’s pipeline. What was that omitted information? That the FDA had placed both of its INDs on clinical hold, meaning that the proposed clinical investigations could not proceed until the company first corrected the deficiencies cited by the FDA. Instead of disclosing in its prospectus that the INDs had actually been placed on clinical hold, the company included a risk factor describing the “hypothetical risk of a clinical hold and the potential negative consequences” on the company’s business. In light of the company’s voluntary self-reporting, remediation and other proactive cooperation, there was no civil penalty for the company, but two executives, the then-CEO and then-CFO, agreed to pay civil penalties of $125,000 and $20,000. According to the Director of the SEC’s Fort Worth Regional Office, the resolution of these cases strikes “the right balance between holding Kiromic’s then-two most senior officers responsible for Kiromic’s disclosure failures while also crediting Kiromic for its voluntary self-report, remediation, proactively instituting remedial measures, and providing meaningful cooperation to the staff.”
Will SCOTUS revive the nondelegation doctrine? Cert. granted in Consumers’ Research v. FCC
When SCOTUS granted cert. in SEC v. Jarkesy, the case challenging the constitutionality of the SEC’s administrative enforcement proceedings, one of the questions presented was whether the statute granting authority to the SEC to elect to use ALJs violated the nondelegation doctrine. Jarkesy had contended that, in adopting the provision in Dodd-Frank permitting the use of ALJs but providing no guidance on the issue, “Congress has delegated to the SEC what would be legislative power absent a guiding intelligible principle” in violation of that doctrine. Had SCOTUS gone that route, commentators suggested, the case had the potential to be enormously significant in limiting the power of the SEC and other federal agencies beyond the question of ALJs. A column in the NYT discussing Jarkesy explained that, if “embraced in its entirety, the nondelegation doctrine could spell the end of agency power as we know it, turning the clock back to before the New Deal.” And in Bloomberg, Matt Levine wrote that, while the ”nondelegation doctrine has not had a lot of wins in the Supreme Court in the last 90 years….it’s back now: There is revived interest in it at the Supreme Court.” Had Jarkesy won the nondelegation argument, that could have meant “that all of the SEC’s rulemaking (and every other regulatory agency’s rulemaking) is suspect, that every policy decision that the SEC makes is unconstitutional. Much of US securities law would need to be thrown out, or perhaps rewritten by Congress if they ever got around to it. Stuff like the SEC’s climate rules would be dead forever.” In his view, “the Supreme Court does have several justices who would love to revive the nondelegation doctrine in a way that really would undermine most of securities regulation.” That didn’t happen in Jarkesy; SCOTUS studiously avoided addressing the issue, its looming presence in the lower court decision notwithstanding. But the nondelegation doctrine has again reared its head, this time in Consumers’ Research v. FCC out of the Fifth Circuit. In late November, SCOTUS granted cert. in that case (and consolidated it with another case, SHLB Coalition v. Consumers’ Research, that presented similar questions). All three of the questions presented in the cert. petition relate to the nondelegation doctrine (although another was added by SCOTUS itself). With this case now on the docket, will SCOTUS continue its shellacking of the administrative state? (See this PubCo post, this PubCo post, this PubCo post, this PubCo post and this PubCo post.) And add another big wrinkle: how will the new Administration approach this case and this question? While, historically, according to Bloomberg, the “solicitor general typically defends federal statutes and programs regardless of party affiliation,” there is no assurance that the new Administration will follow historical practice. Indeed, according to this article in Law.com, with a new administration, “[f]lipping positions at the Supreme Court has become a common trend of incoming U.S. solicitors general, even if it tends to irk the justices themselves.”
In appeal, NAM insists “solicitation” includes proxy voting advice
Back in February, in ISS v. SEC, the D.C. Federal District Court vacated the SEC’s 2020 rule that advice from proxy advisory firms was a “solicitation” under the proxy rules. Both the SEC and National Association of Manufacturers filed notices of appeal in that case, but then the SEC mysteriously dropped out of that contest: both the SEC and Gensler moved to voluntarily dismiss their appeal. Why? That remains a mystery: the SEC did not provide any reason. The SEC’s dismissal did not, however, impact NAM’s separate appeal as Intervenor-Appellant, except that NAM became the sole appellant in the case. In a statement to Bloomberg at the time, a NAM representative said that NAM was “surprised and extremely disappointed that the SEC has chosen not to exercise its authority to defend America’s world-leading capital markets from the outsized and completely unregulated authority of proxy advisory firms.” Now, NAM has filed its brief in the case.
Happy Thanksgiving!
Nasdaq proposes to amend deadline for notification of reverse split
In November 2023, the SEC approved new Nasdaq listing standards related to notification and disclosure of reverse stock splits. (See this PubCo post.) The rules were designed to “enhance the ability for market participants to accurately process these events, and thereby maintain fair and orderly markets.” Failure to comply could result in a trading halt. Nasdaq is now proposing a change to one of those rules to conform the timing of the notification to a FINRA requirement. Although the rule became effective immediately, to allow sufficient time for market participants to adjust to the new time frame, the proposed rule change will become operative on January 30, 2025.
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