Ninth Circuit allows challenge to California board gender diversity statute to go forward
In Meland v. Padilla, a shareholder of a publicly traded company filed suit in federal district court seeking a declaratory judgment that SB 826, California’s board gender diversity statute, was unconstitutional under the equal protection provisions of the 14th Amendment. In April 2020, a federal judge dismissed that legal challenge on the basis of lack of standing. On Monday, a three-judge panel of the 9th Circuit reversed that decision, allowing the case, now called Meland v. Weber, to go forward. The Court held that, because the plaintiff “plausibly alleged that SB 826 requires or encourages him to discriminate on the basis of sex, he has adequately alleged that he has standing to challenge SB 826’s constitutionality.”
Shareholder proposals for political spending disclosure make headway this proxy season
The January 6 attack on the Capitol and the subsequent efforts to rewrite voting and vote-counting laws led many companies and CEOs to speak out, sign public statements and pause or discontinue some or all of their political donations. However, as companies and executives increasingly take positions and express views on important social issues such as voting and democracy, climate change and racial injustice, there are many who want to hold them to it. As an MIT Sloan lecturer suggested in this article in the NYT, a signed statement from a CEO expressing commitment to an issue “gives people who want to hold corporations accountable an I.O.U.” One way the public has tried to call companies to account is to examine any dissonance or contradiction between those public statements and the company’s political contributions—to the extent those contributions are publicly available. A piece published recently in the NYT’s DealBook, On Voting Rights, It Can Cost Companies to Take Both Sides, explores how that concept has played out dramatically this year, particularly as investors have sought accountability by submitting more shareholder proposals than ever seeking political spending and lobbying disclosure—and actually winning. As the executive director of the Black Economic Alliance contended in the article, “[b]eyond C.E.O. statements[,] businesses demonstrate their values by how they allocate their resources.” And investors are increasingly compelling companies to disclose their allocation of resources on political spending.
The Deal Professor speaks up for SPACs
SPACs have certainly presented a well-lighted pathway for hundreds of companies to reach the public markets this past year or so. In testimony before a House subcommittee in May, SEC Chair Gary Gensler observed that we are “witnessing an unprecedented surge” in SPACs: so far in 2021, the SEC has received 700 S-1 SPAC filings, and 300 of these “blank-check IPOs” have been completed so far this year, compared to just 13 in all of 2016. Most recently, SPACs have been the target of extensive criticism, both from the SEC and outside commentators. However, in this DealBook column in the NYT, In Defense of SPACs, the Deal Professor suggests that the animus underlying much of this criticism is misguided; these “complex takeover vehicles serve an important purpose that’s worth protecting,” he contends. What is that purpose? As has long been lamented, the lane for smaller, earlier-stage companies to go public has substantially narrowed over a number of years. SPACs, he contends, have not just offered an alternative pathway to public company status—they have “single-handedly revived” the IPO market for these smaller, younger—and yes, sometimes riskier—companies to go public.
EDGAR closed to commemorate Juneteenth
The SEC has announced that EDGAR will be closed on Friday, June 18, 2021, in observance of Juneteenth National Independence Day. That means that, on June 18, 2021, EDGAR will not be operational, filings will not be accepted on EDGAR and EDGAR Filer Support will be closed. Reuters is also reporting that the SEC will close its offices on Friday in observance of Juneteenth.
WSJ reports that SEC is investigating potential violations by former PCAOB Chair Duhnke
On June 4, the SEC announced that it had “removed” William D. Duhnke III from the PCAOB and designated Duane M. DesParte to serve as Acting Chair. Duhnke had been serving as Chair since January 2018. In the press release, SEC Chair Gary Gensler said that the “PCAOB has an opportunity to live up to Congress’s vision in the Sarbanes-Oxley Act….I look forward to working with my fellow commissioners, Acting Chair DesParte, and the staff of the PCAOB to set it on a path to better protect investors by ensuring that public company audits are informative, accurate, and independent.” (See this PubCo post.) In response to a question about Duhnke’s removal at the WSJ’s CFO Network Summit earlier this month, Gensler said only that the PCAOB plays an integral role in the audit process and that he didn’t think that it was living up to its potential as a standard-setter or in its enforcement role. (See this PubCo post.) According to Bloomberg, Representative Patrick McHenry, the top Republican on the House Financial Services Committee, has said he’s opening an investigation into the firing of Duhnke. The WSJ is now reporting exclusively that the SEC is conducting an investigation into whether Duhnke “violated any rules in his handling of internal complaints” at the PCAOB.
SEC charges company with disclosure controls violation as a result of cybersecurity failure
Once again, a “control failure” is a lever used by SEC Enforcement to bring charges against a company, this time for failure to timely disclose a cybersecurity vulnerability. Yesterday, the SEC announced settled charges against a real estate settlement services company, First American Financial Corporation, for violation of the requirement to maintain adequate disclosure controls and procedures “related to a cybersecurity vulnerability that exposed sensitive customer information.” This action follows charges regarding control violations against GE (see this PubCo post), HP, Inc. (see this PubCo post) and Andeavor (see this PubCo post) where, instead of attempting to make a case about funny accounting or, in Andeavor, a defective 10b5-1 plan, the SEC opted to make its point by, among other things, charging failure to maintain and comply with internal accounting controls or disclosure controls and procedures. Companies may want to take note that charges related to violations of the rules regarding internal controls and disclosure controls seem to be increasingly part of the SEC’s Enforcement playbook, making it worthwhile for companies to make sure that their controls are in good working order. Perhaps we should pirate the Matt Levine mantra, “everything is securities fraud” (see this PubCo post): how ’bout “everything is also a control failure”?
Peirce and Roisman object to SEC’s new agenda
Even the SEC’s new Reg Flex Agenda (which reflect the priorities of the SEC Chair) has now elicited a “dissent” from the two SEC Commissioners on the other side of the political aisle. In this statement, posted yesterday, Commissioners Hester Peirce and Elad Roisman lambast the new Spring 2021 Agenda for “the regrettable decision to spend our scarce resources to undo a number of rules the Commission just adopted.” While the Agenda contains several “important and timely items”—which they identify as rules related to transfer agents and government securities alternative trading systems—the absence of other items was notable, including important rulemakings that would “provide clarity for digital assets, allow companies to compensate gig workers with equity, and revisit proxy plumbing.” (Of course, two of those rulemakings were not entirely absent, but have instead been moved to the long-term agenda. See this PubCo post.) Perhaps, they suggest, too much attention to undoing existing rules rather than creating new ones?
SEC appoints new Director of Corp Fin
Today, the SEC announced that Renee Jones has been appointed as the new Director of Corp Fin, replacing Acting Corp Fin Director John Coates, who will become SEC General Counsel. Both appointments are effective June 21, 2021.
Lots to see on the SEC’s Spring 2021 Reg Flex Agenda
Late Friday, the SEC announced that its Spring 2021 Regulatory Flexibility Agenda—both short-term and long-term—has now been posted. And it’s a doozy. According to SEC Chair Gary Gensler, to meet the SEC’s “mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, the SEC has a lot of regulatory work ahead of us.” That’s certainly an understatement. While former SEC Chair Jay Clayton considered the short-term agenda to signify rulemakings that the SEC actually planned to pursue in the following 12 months, Gensler may be operating under a different clock. What stands out here are plans for disclosure on climate and human capital (including diversity), cybersecurity risk disclosure, Rule 10b5-1, universal proxy and SPACs. In addition, with a new sheriff in town, some of the SEC’s more recent controversial rulemakings of the last year or so may be revisited, such as Rule 14a-8. The agenda also identifies a few topics that are still just at the pre-rule stage—i.e., just a twinkle in someone’s eye—such as gamification (behavioral prompts, predictive analytics and differential marketing) and exempt offerings (updating the financial thresholds in the accredited investor definition and amendments to the integration framework). Notably, political spending disclosure is not expressly identified on the agenda, nor is there a reference to a comprehensive ESG disclosure framework (see this PubCo post). Below is a selection from the agenda.
Lee agrees on easing cost of ESG compliance
How often does this happen? SEC Commissioners Allison Lee (D) and Elad Roisman (R) on the same page? Ok, well, maybe they’re just on the same fragment of a sentence, but still…. Bloomberg is reporting that, at the WSJ’s CFO Network Summit, Lee expressed her view that companies’ compliance with any new SEC disclosure requirements on ESG should not be subject to “gotcha” enforcement, instead indicating that companies will be cut plenty of slack in experimenting with any new ESG rules that the SEC may adopt. She also offered several suggestions that, interestingly, were quite consistent with suggestions made last week by Roisman to mitigate the cost of compliance.
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