On Friday, the SEC announced that it had “removed” William D. Duhnke III from the PCAOB and designated Duane M. DesParte to serve as Acting Chair, effective Friday. Duhnke has been serving as Chair since January 2018. The SEC also announced that it intends to seek candidates to fill all five board positions on the PCAOB. 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.” What’s it all about?
Today, the Senate, by a vote of 53 to 45, confirmed Gary Gensler as SEC Chair—for a little while anyway. Presumably, he will be sworn in in the next several days. The current SEC Commissioners offered their congratulations here. The pivot from the approach taken by former SEC Chair Jay Clayton on issues such as adoption of standardized mandatory climate disclosure and other ESG disclosure issues could be head-spinning, so stay tuned.
Democrats and Republicans are busy “lobbying” the SEC these days. Republicans want the SEC to nix Nasdaq’s proposal for new listing rules regarding board diversity and disclosure. Democrats want the SEC to beef up its insider trading rules in connection with Rule 10b5-1 plans. Will either find a receptive audience?
[This post has been updated to reflect the joint statement of Commissioners Allison Lee and Caroline Crenshaw, posted today.]
On August 26, the SEC’s Division of Trading and Markets took action, pursuant to delegated authority, to approve a proposed NYSE rule change that would allow companies going public to raise capital through a primary direct listing. (See this PubCo post.) Five days later, that rule change hit a “snag,” as the WSJ put it—the SEC notified the NYSE that the approval order had been stayed because the SEC had received a notice of intention to petition for review of the approval order. The petition, submitted by the Council of Institutional Investors, was granted in September. Yesterday, after cancelling the open meeting scheduled to address the NYSE rule, the SEC approved, by a vote of three to two, the NYSE’s proposed rule change, as amended. According to the NYSE President, the approval “is a game changer for our capital markets, leveling the playing field for everyday investors and providing companies with another path to go public.” Will primary direct listings now replace SPACs as the favored alternative offering format? Some have even suggested that the approval “will ‘unquestionably’ usher in the end of traditional initial public offerings.” That remains to be seen.
Happy holidays! Happy new year!
On August 26, the SEC’s Division of Trading and Markets took action, pursuant to delegated authority, to approve a proposed NYSE rule change that would allow companies going public to raise capital through a primary direct listing. (See this PubCo post.) Five days later, that rule change hit a “snag,” as the WSJ put it—the SEC notified the NYSE that the approval order had been stayed because the SEC had received a notice of intention to petition for review of the approval order. The petition, submitted by the Council of Institutional Investors, was granted in September. Yesterday, after cancelling the open meeting scheduled to address the NYSE rule, the SEC approved the NYSE’s proposed rule change, as amended. According to the NYSE President, the approval “is a game changer for our capital markets, leveling the playing field for everyday investors and providing companies with another path to go public.” Will primary direct listings now replace SPACs as the favored alternative offering format? Some have even suggested that the approval “will ‘unquestionably’ usher in the end of traditional initial public offerings.” That remains to be seen.
Happy holidays! Happy new year!
Yesterday, the SEC adopted, by a vote of three to two, amendments designed to harmonize and simplify the patchwork universe of private offering exemptions. The final amendments were informed by feedback received from the March 2020 proposal, the SEC’s advisory committees and the SEC’s Government-Business Forum on Small Business Capital Formation, as well as engagement with investors and companies. According to Chair Jay Clayton, the amendments “reflect a comprehensive, retrospective review of a framework that has, over time, unfortunately become difficult to navigate, for both investors and businesses, particularly smaller and medium-sized businesses…. Today’s amendments would rationalize that framework, increase efficiency and facilitate capital formation, while preserving or enhancing important investor protections.” Here is the almost 400-page adopting release. The final amendments will become effective 60 days after publication in the Federal Register.
Today’s the day—if you haven’t already—Vote! Vote! Vote!
On Friday, the SEC announced adoption of final amendments to the auditor independence rules, largely as proposed at the end of 2019 (see this PubCo post). The changes to the rules make adjustments to address certain recurring fact patterns that came to light in the course of myriad staff consultations in which “certain relationships and services triggered technical independence rule violations without necessarily impairing an auditor’s objectivity and impartiality. These relationships either triggered non-substantive rule breaches or required potentially time-consuming audit committee review of non-substantive matters, thereby diverting time, attention, and other resources of audit clients, auditors, and audit committees from other investor protection efforts.” According to SEC Chair Jay Clayton, although “far-reaching and restrictive” auditor independence rules are necessary to maintain market confidence—as “even the appearance of inappropriate influence can undermine confidence”—they can still have “unintended, negative consequences” as markets evolve. The changes are designed to address these issues by “more effectively focus[ing] the analysis on relationships and services that may pose threats to an auditor’s objectivity and impartiality.” As noted in the adopting release, both auditors and audit clients “have a shared responsibility to monitor independence,” and it is important to keep in mind that violations of the auditor independence rules can have serious consequences not only for the audit firm, but also for the audit client. For example, an independence violation may cause the auditor to withdraw the firm’s audit report, requiring the audit client to have a re-audit by another audit firm. As a result, in most cases, inquiry into the topic of auditor independence should be a menu item on the audit committee’s plate. The amendments will be effective 180 days after publication in the Federal Register.
On Wednesday, the SEC voted (by a vote of three to two) to adopt amendments to the rules related to its whistleblower program. The program provides for awards in an amount between 10% and 30% of the monetary sanctions collected in the SEC action based on the whistleblower’s original information. It is widely acknowledged that the program, which has been in place for about ten years, has been a resounding success. According to the press release, since inception, the SEC has obtained over $2.5 billion in financial remedies based on whistleblower tips. Most of those funds have been, or are scheduled to be, returned to affected investors. In addition, since inception, the SEC has awarded approximately $523 million to 97 individuals in whistleblower awards, with the five largest awards—two at $50 million, and one each at $39 million, $37 million and $33 million—made in the past three and a half years. So why mess with success? The press release indicates that the amendments “are intended to provide greater transparency, efficiency and clarity, and to strengthen and bolster the program in several ways. The rule amendments increase efficiencies around the review and processing of whistleblower award claims, and provide the Commission with additional tools to appropriately reward meritorious whistleblowers for their efforts and contributions to a successful matter.” The SEC also adopted interpretive guidance regarding the meaning of “independent analysis” as used in the definition of “original information,” and the SEC’s whistleblower office released guidance for award determinations. Although the final amendments may sound anodyne, the discussion at the SEC’s open meeting was quite contentious. The amendments to the whistleblower rules become effective 30 days after publication in the Federal Register.
For over a decade, the PCAOB has been unable to fulfill its SOX mandate to inspect audit firms in “Non-Cooperating Jurisdictions,” or “NCJs,” including China. To address this issue, in May, the Senate passed the Holding Foreign Companies Accountable Act, which would amend SOX to impose certain requirements on public companies that are audited by a registered public accounting firm that the PCAOB is unable to inspect, and a version was subsequently passed by the House as an amendment to a defense funding bill. Around the same time, Nasdaq also proposed rule changes aimed at addressing similar issues in restricted markets, including new initial and continued listing standards. (See this PubCo post.) Now, the President’s Working Group on Financial Markets, which includes Treasury Secretary Steven T. Mnuchin, Fed Chair Jerome H. Powell, SEC Chair Jay Clayton and CFTC Chair Heath P. Tarbert, has issued a Report on Protecting United States Investors from Significant Risks from Chinese Companies. The Report makes five recommendations “designed to address risks to investors in U.S. financial markets posed by the Chinese government’s failure to allow audit firms that are registered with the Public Company Accounting Oversight Board (PCAOB) to comply with U.S. securities laws and investor protection requirements.” In this Statement, the SEC Chair Jay Clayton, Chief Accountant Sagar Teotia and the Directors of various SEC Divisions responded to the Report, indicating that Clayton had already “directed the SEC staff to prepare proposals in response to the report’s recommendations for consideration by the Commission and to provide assistance and guidance to investors and other market participants as may be necessary or appropriate. The SEC staff also stands ready to assist Congress with technical assistance in connection with any potential legislation regarding these matters.”
You might think Congress would be too busy these days—what with a pandemic raging across the U.S., looming economic catastrophe and spiraling unemployment—to worry about the resubmission thresholds for shareholder proposals, but nope, they’re all over it. In the latest version of the appropriations bill passed in the House, known as the ‘‘Defense, Commerce, Justice, Science, Energy and Water Development, Financial Services and General Government, Homeland Security, Labor, Health and Human Services, Education, Transportation, Housing, and Urban Development Appropriations Act, 2021’’ for short, the bill authorizes funding for the SEC, while at the same time, putting the kibosh on various items on the SEC’s Spring RegFlex agenda (see this PubCo post)—and even on regulations that have already been adopted. But whether these provisions survive or are jettisoned in the Senate is another question.