When new SEC Chairman Paul Atkins showed up for his first day of work, he had a letter on his desk from half a dozen Democratic senators asking about whether the SEC would investigate “actions by President Trump, donors, and other potential insiders that may constitute market manipulation, insider trading, or other violations of federal securities laws in connection with President Trump’s tariff actions and announcements.” The letter also asked for information about how recent SEC staff cuts have affected the agency’s ability to “monitor and respond to large-scale market events, such as the crash following President Trump’s tariff actions?”
Chairman Atkins is extremely unlikely to seek my advice on a response, but if he asked for my thoughts about the insider trading question, I’d probably tell him something like “Forget it Jake, it’s Chinatown.” On the other hand, I’d tell him that I think the question about the impact of the agency’s staff cuts is one that a lot of people are asking, albeit not in such an overtly politicized way.
For example, the folks at the Shadow SEC recently issued “Shadow SEC Statement No. 2,” in which they warned – in all caps no less – THE CRISIS DEEPENS AS SEC STAFF AND BUDGET CUTS ARE DIRECTED. Here’s what they had to say about the impact of SEC staff cuts on capital formation:
All registration statements must be reviewed and implicitly approved by the SEC’s staff. The difference between an experienced and able staff of reviewers and others with less experience and/or ability can be significant, and the registration process goes much more smoothly when the reviewer is the former. We do not suggest that all registration statements will simply come to a halt after large staff cuts, but the process can be greatly extended and delayed depending on the size of the cuts. This implies that public corporations will be less able to rely on the registration process and may turn to other sources of capital, including bank debt.
Similarly, because of the broad wording of the federal securities laws, and the rapid rate of innovation in financial products, counsel may often need to seek a “no action” letter from the staff. But if the staff is significantly depleted, it may not be able to respond in a reasonable period (in part, because staffers with experience in the area may have departed). One cannot assume that the staff will have the same level of expertise if its size is substantially reduced. Indeed, the sad truth is that ability and mobility go together, and those most likely to leave will be those whom private firms most want to attract.
Pontificating about the review process while apparently failing to appreciate that not all registration statements are reviewed isn’t a great credibility enhancer, and the final sentence of the last quoted paragraph strikes me as a gratuitous shot at the staff. Putting that stuff aside though, the potential impact of staff cuts on the review process and the SEC’s ability to provide guidance are fair points to raise – particularly since these are areas where current commissioners have promised improvement.
The AI boom has resulted in efforts by many companies to promote their use of AI tools in their businesses. However, overenthusiastic promotional efforts can cross the line into outright misrepresentations and have led to a rise in “AI washing” claims by private plaintiffs. A recent Hunton Andrews Kurth blog reviews two securities class action lawsuits targeting corporate directors and officers and raising allegations of AI washing and discusses the importance of comprehensive D&O coverage to protect corporate fiduciaries against these claims. The memo recommends the following actions to maximize the level of protection under D&O policies:
Policy Review: Ensuring that AI-related losses are covered and not excluded under exclusions like cyber or technology exclusions.
Regulatory Coverage: Confirming that policies provide coverage not only for shareholder claims but also regulator claims and government investigations.
Coordinating Coverages: Evaluating liability coverages, especially D&O and cyber insurance, holistically to avoid or eliminate gaps in coverage.
AI-Specific Policies: Considering the purchase of AI-focused endorsements or standalone policies for additional protection.
Executive Protection: Verifying adequate coverage and limits, including “Side A” only or difference-in-condition coverage, to protect individual officers and directors, particularly if corporate indemnification is unavailable.
New “Chief AI Officer” Positions: Chief information security officers (CISOs) remain critical in monitoring cyber-related risks but are not the only emerging positions to fit into existing insurance programs. Although not a traditional C-suite position, more and more companies are creating “chief AI officer” positions to manage the multi-faceted and evolving use of AI technologies. Ensuring that these positions are included within the scope of D&O and management liability coverage is essential to affording protection against AI-related claims.
We’ve blogged a lot lately about the disclosure, governance, and commercial implications of President Trump’s tariff-related decisions. We’ve also accumulated quite a few law firm memos and other resources addressing a wide range of issues arising from this dramatic change in the United States’ approach to global trade. We expect that there will be many more shoes to drop and plenty of additional resources to add to our collection, so we’ve decided to consolidate our tariff-related resources into a new “Trump Administration Tariffs” Practice Area. We hope you’ll find it helpful.
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Most corporate lawyers know that the False Claims Act is a formidable weapon for asserting claims against contractors who allegedly overcharge the federal government, but what many may not appreciate is that it also applies to efforts to evade customs duties and tariffs. This Nixon Peabody memo discusses this aspect of the FCA and other federal statutes that companies need to pay close attention to in light of the Trump administration’s dramatic changes to U.S. tariff policy. This excerpt addresses the application of the FCA to duties and tariffs:
The FCA both imposes liability for knowingly submitting false claims for payment to the government and knowingly avoiding obligations to pay money to the government (known as “reverse false claims”). In recent decades, DOJ and qui tam relators have leveraged the FCA primarily to pursue recoveries for noncompliance with federal healthcare program requirements. That enforcement trend, however, should not obscure the fact that the FCA is a multipurpose enforcement mechanism that is regularly employed by both DOJ and whistleblowers to target conduct across every economic sector. This includes defense, government procurement, and customs noncompliance, which triggers the FCA’s “reverse false claims” provision.
US importers must declare, among other things, their goods’ country of origin and value, whether the goods are covered by antidumping duties (i.e., tariffs on imported goods priced below their fair market value in the exporting country) or countervailing duties (i.e., tariffs that offset the effects of foreign government subsidies on exports), and the amount of duties owed. CBP relies on these representations to determine the correct amount of any duties.
Thus, importers bear an affirmative duty to use “reasonable care” to ensure that such information is accurate. Importers who fall short and knowingly provide false information to CBP risk FCA liability. Critically, because the FCA’s knowledge standard embraces not just actual knowledge but also deliberate ignorance or reckless disregard, taking affirmative measures to ensure reporting accuracy when goods cross US borders is essential to minimizing potential FCA exposure.
The memo notes that there have recently been significant financial settlements involving FCA actions based on avoidance of customs duties. Like the more familiar provisions of the FCA, these “reverse false claims” actions may be brought through qui tam lawsuits filed by third party plaintiffs as well as by the federal government.
Karl Marx famously said that history repeats itself – the first time as tragedy, and the second time as farce. That thought popped into my head when I read this BakerMcKenzie blog and realized that our self-inflicted tariff trauma requires us to revisit a topic that we last blogged about (see 2nd blog) at the onset of the pandemic. I’m talking about the possibility that force majeure clauses may be triggered allowing contracting parties to avoid performing their obligations. This excerpt addresses how the new tariffs may implicate these contract clauses:
The specific language of the force majeure clause will dictate its scope, applicability and effects. States’ approaches to force majeure clauses vary. Some (e.g., New York) interpret force majeure clauses narrowly, excusing non-performance only if the clause explicitly refers to the event in question, while some (e.g., California) uphold force majeure clauses even if the clause does not refer to the event at issue, as long as the event was unforeseeable when the contract was made.
If the clause expressly refers to new “tariffs” or “import duties” as force majeure events, the clause squarely applies to the White House’s recent trade measures. If the clause refers to “emergencies”, the clause may also apply because the White House declared a national emergency and relied on emergency powers to impose its latest tariffs in Executive Order 14257.
Given how frequently the media refers to the current situation as a “trade war”, companies might also argue that certain tariffs constitute “acts of war”, although the likelihood that this argument gains purchase is uncertain. The more clearly the language of the force majeure clause demonstrates that the parties intended to grant a party relief in a particular situation, the more likely a court will be to excuse a party’s non-performance if that situation arises.
That last argument about the trade war being an act of war seems pretty implausible, but then again, finding ourselves in a farcical situation like this one seemed pretty implausible less than a month ago too.
Tariffs are certain to be a hot topic for boards and audit committees, and this GrantThornton memo has some thoughts about the kind of tariff-related issues that boards and audit committees will want management to address:
Boards and audit committees will likely demand risk assessments related to tariffs – including scenario analyses and contingency plans. They may also want assurance that management is monitoring early warning signals of policy change (e.g. following Treasury announcements, engaging trade counsel). Strategic partnerships or joint ventures create new risks and monitoring requirements that should be of interest to audit committees. Finally, some companies are looking into trade disruption insurance, including policies that cover losses due to supply chain disruption. Legal and risk advisors should review contract clauses, and new contracts might explicitly include or exclude tariffs as force majeure events.
In addition to audit committee oversight, the memo observes that internal and outside auditors will look closely at how tariffs impact corporate balance sheets and income statements. For instance, the need to reflect duties paid in the value of inventory on the balance sheet could squeeze margins to the point where inventory write-downs are necessary. On the income statement side, determining the transaction price for revenue recognition purposes could be affected if surcharges or passthrough charges are implemented.
Paul Atkins was officially sworn in as SEC Chairman yesterday. The SEC’s announcement quotes Chairman Atkins as saying that he would join with his fellow commissioners & other SEC professionals to “advance [the agency’s] mission to facilitate capital formation; maintain fair, orderly, and efficient markets; and protect investors.” What does that mean in terms of his regulatory priorities? Chairman Atkins’ testimony during his confirmation hearing provides some clues. This excerpt from a recent Meridien Compensation Partners memo summarizes the key themes that he raised during his testimony:
Reaffirmation of the SEC’s Foundational Mission. Reiterating the agency’s statutory objectives, Chair Atkins called for a “reset of priorities” to restore “common sense and effectiveness” in regulation, reinforcing that the SEC’s primary function is to support well-functioning markets that foster economic opportunity and protect investors.
Emphasis on Practical, Investor-Focused Regulation. SEC regulations must be “smart, effective, and appropriately tailored,” with a focus on implementation that achieves intended outcomes without creating undue burdens. Chair Atkins acknowledged the gap that often exists between legal drafting and business application, underscoring the importance of translating complex regulatory requirements into actionable practices.
Investor Disclosures and Transparency Reform. Current disclosure requirements overwhelm rather than inform investors. Chair Atkins expressed his intent to simplify disclosures to better serve investor understanding and decision-making, which may signal future reforms to corporate reporting obligations.
Commitment to Capital Formation and Market Competitiveness. The current regulatory environment is overly complex, politicized and discouraging to investment. Chair Atkins pledged to advance policies that encourage innovation and capital access, particularly for U.S. businesses seeking to grow and compete globally.
Digital Asset Regulation as a Priority. The development of a “firm regulatory foundation” for digital assets is a top Commission priority to remove the current regulatory uncertainty which has become a barrier to innovation.
Depoliticization of Securities Regulation. SEC rulemaking and enforcement must be free from political influence, with the SEC’s work squarely on investor protection and market integrity, rather than on politically driven priorities.
Not surprisingly, these themes echo comments made by Acting Chair Uyeda and Commissioner Peirce prior to Chairman Atkins’ confirmation and are also reflected in the SEC’s actions in recent months. Of course, how much the need to address the fallout from a potentially extended period of tariff-related market volatility and the adequacy of the agency’s staffing will impact the SEC’s ability to execute this regulatory agenda remains to be seen.
While we’re on the topic of SEC staffing, Democratic senators Elizabeth Warren and Mark Warner have asked the GAO to investigate the impact of staffing cuts and related actions on the SEC’s ability to protect investors and comply with its statutory mandates. According to USA Today, the GAO is on the case:
The U.S. Government Accountability Office plans to scrutinize changes at the U.S. Securities and Exchange Commission, including any led by the White House or Elon Musk’s Department of Government Efficiency, according to a letter sent to Democratic lawmakers on Capitol Hill.
The GAO, Congress’ nonpartisan research arm, told Sens. Elizabeth Warren and Mark Warner it will review the SEC’s recent efforts to cut staff, end leases and consolidate its work, according to a copy of the April 8 letter seen by Reuters.
The lawmakers last month pressed the watchdog to investigate after Reuters and other media reported DOGE’s arrival and other major changes at the regulator, which oversees U.S. capital markets.
The report says that the GAO would begin its work within the next three months.
The senators’ letter also asked the GAO to conduct a detailed review of actions taken by SEC leadership, including acting leadership, to pause or halt enforcement and supervisory actions that were ongoing at the agency as of January 20, 2025, and to look into the involvement of the White House and DOGE in any of those decisions.
I don’t think there’s a more intimidating moment in a corporate lawyer’s career than the first time they’re asked to make a presentation to a board of directors. Heck, even experienced lawyers get a little nervous when they’re presenting to a board they haven’t worked with in the past or addressing a particularly complex topic. In this month’s issue ofThe Boardroom Insider, Ralph Ward offers some tips from personal development coach T.J. Walker on making more effective board presentations. I think this one is particularly relevant for lawyers:
You are the expert on the topic you’re addressing to directors, so the temptation is to stuff in every factoid and data bit you’ve accumulated. “The biggest problem I see is trying to cover too many facts. You don’t want them to think you’re stupid or unprepared, so you tell them everything you know.” This overwhelms the directors, and sets them to checking their cell phones. Write up your board talking points. Condense them. Then condense them some more.
Walker also cautions against being too formal in your approach – writing out and memorizing your comments will put the board to sleep. It’s okay to make a verbal slip every now and again, because trying to perfectly script yourself will cause any stumble to throw you off and will make you less flexible in responding to questions from directors.
In prior blogs, Liz and Dave touched on risk factor and MD&A disclosure issues arising out of President Trump’s tariff-related actions. However, I wanted to address those issues again, because if you’re preparing your first quarter Form 10-Q, the timing of the President’s actions and the potential for another shoe to drop in less than 90 days create almost perfect conditions for companies to stumble into traps for the unwary when addressing these line-item disclosure requirements.
“Liberation Day” occurred on April 2nd, shortly after calendar year companies completed their first fiscal quarter. As a result, the financial statements for the first quarter that will appear in Form 10-Q filings typically won’t reflect the impact of the current tariff regime or the one that may be in place in 90 days. However, it’s pretty clear that most companies are already experiencing the impact of the change in tariff policy on their business – and that’s where the potential traps for the unwary start to unfold.
Under Item 105 of Regulation S-K, the fact that tariffs only began to impact a company’s business after the end of the quarter means that drafters should be particularly conscious of the “hypothetical” risk factor issue when updating risk factor disclosure. With events unfolding so rapidly, today’s risk may be tomorrow’s reality, and those responsible for drafting the 10-Q need to pay even closer attention to developments in the business than they have for previous filings.
There’s reason to think that in its current configuration, the SEC may be less enthusiastic about hypothetical risk factors as a basis for enforcement actions, but the same probably can’t be said for the plaintiffs’ bar. Since that’s the case, in updating risk factor disclosure companies should remember the Fifth Circuit’s admonition that “[t]o warn that the untoward may occur when the event is contingent is prudent; to caution that it is only possible for the unfavorable events to happen when they have already occurred is deceit.” Huddleston v. Herman & MacLean, 640 F. 2d 534, 544 (5th Cir. 1981). If you make disclosure in a risk factor, you need to be very clear about events that have occurred and those that may occur – otherwise you’re likely only digging a deeper hole.
Second, events that are currently impacting a company’s business but that are not reflected in the financial statements included in a periodic report are precisely what Item 303’s “known trends” disclosure requirement is intended to capture. What’s more, companies aren’t just dealing with the current tariff regime, but the more draconian one that may be in place a few months from now. That future tariff regime is a contingency, and when it comes to contingencies, the SEC’s position is that known trends disclosure under Item 303 is triggered by any contingent event that is “reasonably likely” to occur and would be material if it did. Here’s how the SEC characterized its standard in its 2020 MD&A Release:
[W]hen applying the “reasonably likely” threshold, registrants should consider whether a known trend, demand, commitment, event, or uncertainty is likely to come to fruition. If such known trend, demand, commitment, event or uncertainty would reasonably be likely to have a material effect on the registrant’s future results or financial condition, disclosure is required.
Known trends, demands, commitments, events, or uncertainties that are not remote or where management cannot make an assessment as to the likelihood that they will come to fruition, and that would be reasonably likely to have a material effect on the registrant’s future results or financial condition, were they to come to fruition, should be disclosed if a reasonable investor would consider omission of the information as significantly altering the mix of information made available in the registrant’s disclosures.
The TL;DR version of this standard is that if a contingent event likely would be material if it occurred and management can’t conclude that it isn’t reasonably likely to occur, then the MD&A discussion must address the consequences of that event assuming that it occurred. So, when assessing their MD&A disclosure obligations, companies should consider the implications of the current tariff regime and, unless they conclude that it’s not reasonably likely to be implemented, the more draconian one that may come into effect in a few months.