TheCorporateCounsel.net

Recently, I blogged about how SEC Commissioner Dan Gallagher and former SEC Commissioner Joe Grundfest wrote a paper attacking Harvard’s “Shareholder Rights Project” (also see this Davis Polk blog). As a rebuttal, Professor Macey wrote this blog that analyzes errors in the paper. Then Grundfest responded – and Macey responded to that. And then another blog from Grundfest (endorsed by Gallagher) – and a last response from Macey. All interesting stuff.

Even more interesting is this DealBook piece which really gets into the nitty gritty of the personalities involved and whether a sitting Commissioner should be writing about potential securities law violations in a law review piece.

But I want to get to more of a procedural issue – prejudgement by an administrative agency. Does Commissioner Gallagher’s comments in his co-authored paper now preclude him from participating in deliberations on related issues? In other words, must he be recused? For starters, at the end of his blog about this issue, Keith Bishop wonders:

Daniel Gallagher is a sitting Commissioner and his co-authorship of this paper could lead arguments that he must disqualify himself should the issue actually come before the Securities and Exchange Commission. It is unlikely that it would because SEC enforcement would take form of a civil enforcement action before an Article III judge. The most famous case dealing with claims of prejudgment in administrative proceedings is Cinderella Career & Finishing Schools, Inc. v. FTC, 425 F.2d 583, 591 (D.C. Cir. 1970) which enunciated the following test:

“The test for disqualification has been succinctly stated as being whether “a disinterested observer may conclude that [the agency] has in some measure adjudged the facts as well as the law of a particular case in advance of hearing it.” Gilligan, Will & Co. v. SEC, 267 F.2d 461, 469 (2d Cir.), cert. denied, 361 U.S. 896, 4 L. Ed. 2d 152, 80 S. Ct. 200 (1959).”

Then Professor Tamar Frankel wrote this blog entitled “Did Commissioner Gallagher Violate SEC Rules?,” which includes this excerpt:

I am unaware of any case in which a sitting SEC Commissioner released a paper accusing particular individuals or organizations of legal violations, and urging enforcement action and/or private suits against them, or used such public accusations as an instrument for urging other Commissioners or the SEC staff to change their policy. In a recent comment to the New York Times, Harvey Pitt brought up as a possible precedent a 1974 speech by then-Commissioner A.A. Sommer who expressed concerns about “going-private” transactions. However, Sommer’s speech (available on the SEC website here) did not mention (let alone accuse) any particular individuals or organizations (the only mention of any names in the Speech is in footnote citations to past court cases). There is a big difference between discussing general policy problems, which SEC Commissioners should be doing, and attacking or urging actions against particular individuals and organizations, which SEC Commissioners should not be doing.

I want to emphasize that this isn’t my area of expertise. But as I understand it, the standard for recusals is a bit vague. It’s closely intertwined with the factual question of whether a comment or remark constitutes prejudgement or bias. And it’s also fundamentally different for matters of general regulatory policy (e.g. rules) and “specific matters” (e.g. enforcement action).

Jack Katz, longtime former Secretary of the Commission, notes:

It seems to me that the recusal question is a very tricky one that in large measure could depend on how the issue is submitted to the Commission. The central issue may concern the application of the “prejudgement” doctrine. Prejudgement arises on specific matters/adjudications where the Commission must act on the basis of the record in the proceeding (“on the record” proceedings). Typically, this is an enforcement administrative proceeding, although it can also be hearings on registrations/licensings, revocations or exemptive actions. It is not limited to formal hearings before an ALJ. If a Commissioner has reached a decision on a “specific” matter before the record has been submitted, then he or she is said to have pre-judged the case and may not participate.

This doctrine is fundamentally different if the matter is not a “specific” question or issue, but rather a matter of general applicability, such as a rule-making. In these areas, it is accepted that Commissioners may have pre-existing opinions or views on the correct interpretation of the law that may influence how they vote. So ultimately, the issue may turn on how this is presented to the Commission.

For some SEC-related precedent, consider the 1988 Eighth Circuit case – Antoniu v. SEC – concerning SEC Commissioner Charles Cox. This was a prominent insider trading case at the time and Commissioner Cox gave a speech discussing the need for different levels of sanctions for inadvertent violators and indifferent violators. Cox referred to this insider trader, who had been enjoined, as an indifferent violator. Unfortunately, Cox had forgotten that there was a pending “follow-on” administrative proceeding to bar the guy that was on appeal to the Commission. Shortly after the speech, the SEC became aware of the problem and Cox had to recuse himself. The court was concerned that the SEC never formally recorded a date when he was recused – and so the SEC couldn’t demonstrate that he had never participated in the pending appeal. This law review article by Prof. Douglas Michael – who was Cox’s counsel at the time and who wrote that speech for Cox – does a nice job of explaining this case…

Meanwhile, in this blog, Keith Bishop delves into the issue of whether the Shareholder Rights Project was providing “legal advice” to its institutional investor clients (also see this follow-up blog by Keith about how the SRP website was changed in the wake of his initial blog)…

Webcast: “Governance Roadshows: In-House & Investor Perspectives”

Tune in tomorrow for the webcast – “Governance Roadshows: In-House & Investor Perspectives” – during which Vanguard’s Sarah Goller, BlackRock’s Michelle Edkins, Morrow & Co’s Bill Ultan and Global Governance Consulting’s Susan Wolf will explain governance roadshows – including provide practice pointers about what works – and what doesn’t.

Corp Fin Updates Financial Reporting Manual (Been a While)

Yesterday, Corp Fin indicated that it recently updated its Financial Reporting Manual to conform it to the issuance of Accounting Standards Update No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting, a consensus of the FASB Emerging Issues Task Force and rescission of SAB Topic 5.J. Think it’s been nearly a year since the last change…

– Broc Romanek