Is the SEC process for SPAC registration statements Kafkaesque?

“Statement Regarding SPAC Matter,” is the latest from SEC Commissioner Hester Peirce.  Seems completely anodyne, doesn’t it? But, as they say, looks can be deceiving. Instead, it’s a withering criticism of the SEC’s failure to declare a SPAC registration statement effective in time to allow a de-SPAC merger to go forward, implicitly suggesting at the end that the SEC may have displayed a lack of good faith in its Kafkaesque process (her metaphor, not mine), which had the effect of stringing the registrant along for many months until it was too late to go forward and liquidation was the only possible result.  Peirce presumes the failure to declare effectiveness was based on the SEC’s “newfound hostility to SPAC capital formation.”  Of course, as none of the correspondence with the SEC has been posted, we really have no independent information about what happened or precisely why the registration statement was not declared effective; it’s certainly possible that the deal was more thorny than the norm.  Peirce calls SEC “inaction on a request for acceleration of the effective date of a registration statement…highly unusual.” But then, so is her statement.

Raiding the cookie jar—“part of the art of the close”?

In this Order, the SEC brought settled charges against Rollins, Inc., a termite and pest control company—think “Orkin”—and its former CFO for earnings management.  In essence, the SEC alleged that the company adjusted the amounts in several of its corporate reserves, without support or documentation, to bump up its EPS so that its EPS would meet analysts’ consensus EPS estimates for two quarters.  The company would otherwise have missed those consensus estimates by a penny in each quarter. The SEC charged the company with securities fraud under the Securities Act, financial reporting violations under the Exchange Act and failure to maintain adequate internal accounting controls and imposed a civil penalty of $8 million. The CFO was also charged with similar violations and ordered to pay a civil penalty of $100,000.  According to Gurbir Grewal, Director of Enforcement, “[t]his is the fourth action and the highest penalty to date against an issuer in connection with the Division of Enforcement’s highly successful and continuing EPS Initiative, which uses data analytics to uncover hard-to-detect accounting and disclosure violations by public companies….The SEC staff’s ever-increasing sophistication with data made today’s action possible and underscores that we will continue to pursue public companies that lack adequate accounting controls and engage in improper earnings management practices.”

PCAOB talks to audit committee chairs about auditor oversight in 2021

Since 2019, as part of its strategy of enhancing transparency and accessibility through proactive stakeholder engagement, the PCAOB has been engaging with audit committee chairs at U.S. public companies that have had audits inspected by the PCAOB during the year.  The PCAOB staff continued this outreach to audit committee chairs during 2021, engaging in conversations with over 240 audit committee chairs. The results are discussed in this new report.  The discussions involved required communications between the auditor with the audit committee and discussions outside of required communications, auditor strengths and weaknesses, PCAOB inspection reports, quality control, use of technology and matters outside of the financial statements. The PCAOB believes that the audit committee’s oversight of the auditor and the audit process is a critical job. Accordingly, “engaged and informed audit committees can be a force for elevating audit quality to the benefit of investors and our capital markets broadly.”

Is the SEC’s new climate proposal within the traditions of the SEC disclosure regime?

Earlier this week, SEC Chair Gary Gensler gave the keynote address for an investor briefing on the SEC Climate Disclosure Rule presented by nonprofit Ceres.  In his remarks, entitled “Building Upon a Long Tradition,” Gensler vigorously pressed his case that the SEC’s new climate disclosure proposal (see this PubCo post, this PubCo post and this PubCo post) was comfortably part of the conventional tapestry of SEC rulemaking. Growing out of the core bargain of the 1930s that let investors “decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures,” Gensler observed, the SEC’s disclosure regime has continually expanded—adding disclosure requirements about financial performance, MD&A, management, executive comp and risk factors. Over the generations, the SEC has “stepped in when there’s significant need for the disclosure of information relevant to investors’ decisions.”  As has been the case historically, the SEC, he insisted, “has a role to play in terms of bringing some standardization to the conversation happening between issuers and investors, particularly when it comes to disclosures that are material to investors.” The proposed rules, he said, “would build on that long tradition.” But has everyone bought into that view?

Audit Analytics reports on cybersecurity disclosure

These days, with our government warning regularly about the likelihood of breaches in cybersecurity, concerns about cyber threats have only multiplied.  Introducing the SEC’s new proposal for cybersecurity disclosure in March (see this PubCo post), SEC Corp Fin Director Renee Jones said that, in today’s digitally connected world, cyber threats and incidents pose an ongoing and escalating threat to public companies and their shareholders. In light of the pandemic-driven trend to work from home and, even more seriously, the potential impact of horrific global events, cybersecurity risk is affecting just about all reporting companies, she continued. While threats have increased in number and complexity, Jones said, currently, company disclosure about cybersecurity is not always decision-useful and is often inconsistent, not timely and sometimes hard for investors to locate. What’s more, some material incidents may not be reported at all.  Audit Analytics has just posted a new report regarding trends in cybersecurity incident disclosures. The report indicates that, in 2021, there was a 44% increase in the number of breaches disclosed, from 131 in 2020 to 188 in 2021, the most breaches disclosed in a single year since 2011. And, since 2011, the number of cybersecurity incidents disclosed annually has increased nearly 600%. Interestingly, however, in 2021, only 43% of cybersecurity incidents were disclosed in SEC filings, the report said.

Biden to nominate two new SEC Commissioners

According to a statement from the White House, President Biden is planning to nominate two new SEC commissioners, Democrat Jaime Lizárraga to fill the seat of departing Commissioner Allison Herren Lee (see this PubCo post), and Republican Mark Uyeda to fill the seat recently vacated by former Commissioner Elad Roisman (see this PubCo post). The statement indicates that Lizárraga serves as a Senior Advisor to House Speaker Nancy Pelosi, where he “oversees issues relating to financial markets, housing, international financial institutions, immigration, and small business policy.” Mark Uyeda has been a career attorney at the SEC for 15 years, but is currently detailed to the Senate Committee on Banking, Housing, and Urban Affairs, where he serves as Securities Counsel on the Committee’s Minority Staff.  Both nominations are subject to Senate confirmation.

Board diversity statute for “underrepresented communities” held unconstitutional under California’s equal protection provisions

On April 1, the L.A. County Superior Court granted the plaintiffs’ motion for summary judgment in Crest v. Padilla, the taxpayer litigation challenging AB 979, California’s board diversity statute for “underrepresented communities.”  (See this PubCo post.)   Unfortunately, at the time, only a minute order was released, which did not offer any explanation of the Court’s reasoning.  Now, a new 24-page Court Order, which provides the Court’s reasoning, has been made available, and, in it, the Court concludes that the statute, Corporations Code § 301.4, violates the equal protection clause of the California Constitution on its face. Why? Because, in the Court’s view, § 301.4 treats similarly situated individuals differently based on suspect racial and other categories that are not justified by a compelling interest, nor is the statute narrowly tailored to address the interests identified. Will this case have a spillover effect on the decision currently pending of plaintiffs’ taxpayer challenge to California’s board gender diversity statute, SB 826? According to Reuters, the California State Senator who authored SB 826 said that “the case involved a ‘very different set of facts and distinctly different legal issues.’”

What’s happening with corporate political spending disclosure?

I have to admit I was surprised to read that, in the new $1.5 trillion budget bill, Congress has once again prohibited the SEC from using any funds for political spending disclosure regulation.  But there it is—Section 633—in black and white: “None of the funds made available by this Act shall be used by the Securities and Exchange Commission to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.”  That means that, for now anyway, private ordering—through shareholder proposals at individual companies and other forms of stakeholder pressure, including humiliation—will continue to be the pressure point for disclosure of corporate political contributions.  Those proposals have grown increasingly successful in the last couple of years. And, notably, it appears that the focus of many proposals has shifted recently, with more emphasis on apparent conflicts between stated company policies and values and the beneficiaries of those political contributions.

Court grants summary judgment to plaintiffs challenging California’s board diversity statute for “underrepresented communities”

As you may recall, SB 826, the California board gender diversity statute, is not the only California board diversity statute facing legal challenges.  In 2020, AB 979, California’s board diversity statute for “underrepresented communities,” patterned after the board gender diversity statute, was signed into law, and it too has been facing legal challenges—in fact litigation brought by the same plaintiffs on the same legal basis. (See this PubCo post.) Framed as a “taxpayer suit” much like Crest v. Padilla I, the sequel, Crest v. Padilla II, sought to enjoin Alex Padilla, the then-California Secretary of State, from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law and a judgment declaring the diversity mandate to be unlawful in violation of the California constitution.  As Crest v. Padilla I is awaiting a court decision following a bench trial (see this PubCo post), what’s happening in the sequel? After a hearing on motions by both parties for summary judgment in March, the Los Angeles Superior Court took the matter under submission and, on April Fool’s Day, the Court issued its order.  But it was no joke—the Court granted plaintiff’s motion for summary judgment.  The state has not yet indicated whether it will appeal the decision. In a statement, the president of Judicial Watch, which represented the plaintiffs, said that “[t]his historic California court decision declared unconstitutional one of the most blatant and significant attacks in the modern era on constitutional prohibitions against discrimination.”

New SEC proposal takes on SPACs

Yesterday, the SEC voted, three to one, to propose new rules and amendments regarding SPACs, shell companies, the use of projections in SEC filings and a rule addressing the status of SPACs under the Investment Company Act of 1940. The proposal arrives in the context of calls from various corners, including from SEC Chair Gary Gensler and former Acting Corp Fin Director John Coates, to treat SPACs as an alternative method of conducting an IPO under the SEC’s policy framework.  (See this PubCo post, this PubCo post and this PubCo post.)  And let’s not forget the extensive recommendations from the SEC’s Investor Advisory Committee addressing SPAC regulatory and investor protection issues that have been under scrutiny. (See this PubCo post.)  These investor protection concerns were exacerbated as a result of the proliferation of SPACs in 2020 and 2021—raising $83 billion in 2020 and $160 billion in 2021 and, in those same two years, constituting more than half of all IPOs, according to the proposing release.  (Note, however, that this volume has not been sustained this year; according to Bloomberg, only $8.9 billion has been raised in 2022, “a fraction of the 279 deals raking in $93 billion during the same period last year.”) These concerns made SPACs an alluring target for SEC rulemaking, and the SEC has approached it with another enormous effort—literally—issuing a proposal of almost 400 pages. It must be a record—a second proposal in just over a week that would add an entirely new subpart to Reg S-K!