Today’s first blog mentioned the DOJ’s use of the False Claims Act to target tariff evasion. With its draconian penalties and the ability of private plaintiffs to assert qui tam claims on the government’s behalf, the False Claims Act has long been a formidable weapon in the DOJ’s arsenal. However, recent federal court decisions have called into question the constitutionality of the statute’s qui tam provisions.
Last year, in Zafirov v. Florida Medical Associates (MD. Fla. 10/24), Judge Kathryn Mizelle held that the FCA’s qui tam mechanism allowing violated the Appointments Clause because it allowed private plaintiffs to exercise executive power on behalf of the United States without being properly appointed. This recent Polsinelli memo says that a concurring opinion in a recent 5th Cir. decision endorsed Judge Mizelle’s conclusion:
Notably, in a concurring opinion, Judge James C. Ho. . . urged the court to revisit “serious constitutional problems” with the qui tam provisions. The Fifth Circuit previously affirmed the constitutionality of the FCA’s qui tam structure in Riley v. St. Luke’s Episcopal Hosp. Nonetheless, Judge Ho called on the Fifth Circuit to reconsider Riley. Judge Ho reiterated Judge Mizelle’s reasoning in Zafirov and emphasized that relators exercise executive authority on behalf of the U.S. without appointment or accountability to the President, raising separation-of-powers concerns under Article II.
Judge Ho’s opinion echoed Justice Thomas’s dissent and Justice Kavanaugh’s concurrence (joined by Justice Barrett) in United States ex rel. Polansky v. Executive Health Res., Inc., which questioned whether allowing private relators to litigate on behalf of the country is consistent with the Constitution’s separation of powers.
The memo notes that if these views continue to gain traction among federal courts, the implications for government contractors would be significant, because the vast majority of FCA recoveries arise from qui tam actions. That outcome would be music to the ears of the US Chamber of Commerce, which has filed amicus briefs challenging the constitutionality of qui tam actions under the US and state constitutions in several recent cases.
– John Jenkins
Wilson Sonsini recently published a memo highlighting five key things you need to keep in mind when preparing your Form 10-K. Here’s an excerpt from the memo’s discussion of the need to refresh risk factor disclosures:
Risk factor updates should align with changes in other sections of the Form 10-K, including the Business section, MD&A, cybersecurity disclosures, and financial statement notes. If the company experienced an extraordinary event during the year, such as a merger, acquisition, significant divestiture, or other change in the business, it should consider whether updates to risk factors are needed to reflect the current state of the business. Hypothetical language in risk factors should be reviewed and updated to reflect actual developments and events, where applicable.
Other topics addressed in the memo include the need to refresh your MD&A disclosures, consider the implications of Staff comment letters, confirm your filer status, review your exhibit index, and carefully review your CEO and CFO certifications.
– John Jenkins
Yesterday, the White House finally issued the Executive Order that we had all been expecting which specifically targets the proxy advisory firms ISS and Glass Lewis. The Executive Order states:
Section 1. Purpose. Unbeknownst to many Americans, two foreign-owned proxy advisors, Institutional Shareholder Services Inc. and Glass, Lewis & Co., LLC, play a significant role in shaping the policies and priorities of America’s largest companies through the shareholder voting process. These firms, which control more than 90 percent of the proxy advisor market, advise their clients about how to vote the enormous numbers of shares their clients hold and manage on behalf of millions of Americans in mutual funds and exchange traded funds. Their clients’ holdings often constitute a significant ownership stake in the United States’ largest publicly traded companies, and their clients often follow the proxy advisors’ advice.
As a result, these proxy advisors wield enormous influence over corporate governance matters, including shareholder proposals, board composition, and executive compensation, as well as capital markets and the value of Americans’ investments more generally, including 401(k)s, IRAs, and other retirement investment vehicles. These proxy advisors regularly use their substantial power to advance and prioritize radical politically-motivated agendas — like “diversity, equity, and inclusion” and “environmental, social, and governance” — even though investor returns should be the only priority. For example, these proxy advisors have supported shareholder proposals requiring American companies to conduct racial equity audits and significantly reduce greenhouse gas emissions, and one continues to provide guidance based on the racial or ethnic diversity of corporate boards. Their practices also raise significant concerns about conflicts of interest and the quality of their recommendations, among other concerns. The United States must therefore increase oversight of and take action to restore public confidence in the proxy advisor industry, including by promoting accountability, transparency, and competition.
The Executive Order goes on to direct the Chairman of the SEC, the Chairman of the FTC and the Secretary of Labor to take a number of rulemaking and investigative actions.
The Executive Order specifically directs the SEC Chairman to:
– Consistent with the APA, “consider revising or rescinding those rules, regulations, guidance, bulletins, and memoranda that are inconsistent with the purpose of this order, especially to the extent that they implicate ‘diversity, equity, and inclusion’ and ‘environmental, social, and governance’ policies;”
– Consistent with the APA, “consider revising or rescinding all rules, regulations, guidance, bulletins, and memoranda relating to shareholder proposals, including Rule 14a-8 (17 CFR 240.14a-8), that are inconsistent with the purpose of this order;”
– Enforce the antifraud provisions of the federal securities laws with respect to material misstatements or omissions contained in proxy advisors’ proxy voting recommendations;
– Assess whether to require proxy advisors whose activities fall within the scope of the Investment Advisers Act of 1940 to register as registered investment advisers;
– Consider requiring proxy advisors to provide increased transparency on their recommendations, methodology, and conflicts of interest, “especially regarding ‘diversity, equity, and inclusion’ and ‘environmental, social, and governance’ factors;”
– Analyze whether, and under what circumstances, a proxy advisor serves as a vehicle for investment advisers to coordinate and augment their voting decisions with respect to a company’s securities and, through such coordination and augmentation, form a group for purposes of sections 13(d)(3) and 13(g)(3) of the Securities Exchange Act of 1934; and
– Direct the SEC staff to examine whether the practice of registered investment advisers engaging proxy advisors to advise on (and following the recommendations of such proxy advisors with respect to) non-pecuniary factors in investing, including, as appropriate, “diversity, equity, and inclusion” and “environmental, social, and governance” factors, is inconsistent with their fiduciary duties.
The Executive Order directs the FTC Chairman to “review ongoing State antitrust investigations into proxy advisors and determine if there is a probable link between conduct underlying those investigations and violations of Federal antitrust law,” as well as to “investigate whether proxy advisors engage in unfair methods of competition or unfair or deceptive acts or practices that harm United States consumers.”
The Executive Order also directs the Secretary of Labor to “take steps to revise all regulations and guidance regarding the fiduciary status of individuals who manage, or, like proxy advisors, advise those who manage, the rights appurtenant to shares held by plans covered under the Employee Retirement Income Security Act of 1974 (ERISA) (29 U.S.C. 1001 et seq.), including proxy votes and corporate engagement, consistent with the policy of this order.” Further, the Secretary of Labor is directed to “take all appropriate action to enhance transparency concerning the use of proxy advisors, particularly regarding “diversity, equity, and inclusion” and “environmental, social, and governance” investment practices.”
The White House also issued a Fact Sheet regarding the Executive Order. Clearly, the SEC now has a lot to do on the topic of proxy advisory firms!
– Dave Lynn
Yesterday, the Staff of the SEC’s Division of Trading and Markets issued a no-action letter to the Depositary Trust Company (DTC) to provide relief under various provisions of the Exchange Act for DTC’s a pilot version of the DTCC Tokenization Services, which would allow DTC Participants to elect to have their security entitlements to DTC-held securities recorded using distributed ledger technology, rather than exclusively through DTC’s current centralized ledger.
In a statement regarding the no-action letter, Commissioner Hester Peirce noted:
Although this program is a pilot subject to various operational limitations, it marks a significant incremental step in moving markets onchain. DTC plays a central role in our securities markets. I am looking forward to seeing how DTC’s participants benefit from this program and the extent to which DTC’s tokenization model can enhance the functioning of our securities markets.
DTC’s tokenized entitlement model is a promising step along the tokenization journey, but other market participants are exploring alternate experimental avenues. As I have said repeatedly, the Commission’s crypto work is iterative. We welcome and expect other market participants’ continuing efforts to innovate and experiment. Their experiments may involve other securities tokenization models. Investor choice is critical, particularly at this early stage when the market is testing what works. For example, some issuers have begun tokenizing their own securities, which may make it easier for investors to hold and transact in securities directly, rather than through an intermediary. As I previously cautioned, market participants should be aware that different tokenization structures may raise distinct regulatory considerations.
– Dave Lynn
The latest issue of The Corporate Counsel newsletter has been sent to the printer. It is also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format. The issue includes the following articles:
– Celebrating 50 Years of The Corporate Counsel!
– Going Back to Where It All Began: Your Year-End Gift Guide
– ExxonMobil’s Retail Voting Program: A Game Changer?
Now is the time to renew your subscription to The Corporate Counsel! Please email info@ccrcorp.com to or call 1.800.737.1271 to renew or to subscribe to this essential resource.
– Dave Lynn
Last night, the House passed the National Defense Authorization Act (NDAA), sending this sweeping, “must-pass” defense spending legislation on to the Senate. Buried in the bill is legislation that has been rattling around Congress for some time seeking to eliminate the exemption from Section 16 reporting that is available to insiders of foreign private issuers. John blogged about a similar effort to pass this legislation two years ago, but at that time the provision did not advance. Alan Dye’s Section16.net blog noted at that time the background of this legislation:
The proposal was originally introduced in the Senate in 2022, as a standalone bill entitled the Holding Foreign Insiders Accountable Act. The bill was intended to address trading abuses identified by former Commissioner Robert Jackson (now at NYU law school) and Wharton professors Bradford Levy and Daniel Taylor in an April 2022 paper entitled “Holding Foreign Insiders Accountable.” The authors examined trading by insiders of certain foreign private issuers, particularly Russian and Chinese issuers, and concluded that insiders of many of those companies avoided trading losses by selling their company stock shortly before significant declines in its price. In an opinion piece they wrote for the Wall Street Journal, Senators Kennedy and van Hollen said that American investors absorb most of the losses avoided by foreign insiders and that subjecting those insiders to Section 16 would alert investors to insider sell-offs and give American law enforcement agencies better ability to identify insider trading.
If enacted, the legislation would give the SEC 90 days to amend its rules to implement the statutory directive. I tip my hat to Reid Hooper and Vince Sampson of Cooley for their insights on the bill.
Look for more coverage of these developments over on Section16.net. If you are not a member with access to all of the practical information available on Section16.net, please email us at info@ccrcorp.com or call us at 800-737-1271 today.
– Dave Lynn
On Tuesday, the California Air Resources Board (CARB) announced that it will hold a public hearing on February 26, 2026 to consider adoption of a proposed California Corporate Greenhouse Gas Reporting and Climate-Related Financial Risk Disclosure Initial Regulation. At the same time, CARB made the Staff Report (Initial Statement of Reasons) and Proposed Regulatory Text available on its website for public comment during a 45-day comment period that begins on December 26, 2025 and ends on February 9, 2026.
Among the matters addressed in the proposed regulatory text are: (i) the applicability of the disclosure requirements; (ii) definitions; (iii) the calculation, payment and enforcement of fees; and (iv) an August 10, 2026 deadline for providing the GHG emissions disclosures required by SB 253.
As Meredith noted last week, on December 1, 2025, CARB posted an enforcement advisory indicating that it would not enforce the disclosure requirements in SB 261 while an injunction is in effect.
– Dave Lynn
Last week, Corp Fin announced updates to the Financial Reporting Manual, reflecting changes arising from Release No. 33-11265, Special Purpose Acquisition Companies, Shell Companies, and Projections, which was effective July 1, 2024. The Staff notes that the following Topics/Sections of the Financial Reporting Manual have been updated:
– 1140.5 Audit Requirement for Non-Reporting Target
– 1140.7 Reverse Acquisitions
– 1170.2 Financial Statement Dates and Periods
– 5130 Shell Company
– 8310 Presentation of Net Tangible Book Value per Share
– 8340 Net Tangible Book Value per Share, As Adjusted [S-K 1602(a)(4), 1602(c), 1604(c)]
– 10110 Eligibility as an EGC
– 10120 Other Eligibility Issues
– 10220.6 Financial Statements of a Target Company in a Form S-4 or Proxy Statement When Registrant Is a Shell Company
– 10220.7 Financial Statements of a Target Company in a Form S-4 or Proxy Statement When Registrant Is Not a Shell Company
– 12220.1 Form 8-K – Reverse Recapitalization with a Shell Company
– 12250 Auditor Issues
– 12260 Registration and Proxy Statements for Mergers, Acquisitions, De-SPAC Transactions, and Similar Transactions
– 12300 Additional Considerations for Acquisitions of Businesses by a Shell Company, Including De-SPAC Transactions
The Staff updates the Financial Reporting Manual on an ad hoc basis to reflect new regulatory developments and interpretations.
– Dave Lynn
Last summer, the SEC launched Project Crypto in what amounts to an all-out sprint to the finish to address to what extent and how crypto assets are to be regulated under the federal securities laws. The efforts are being undertaken by the SEC’s Crypto Task Force, which has throughout the course of 2025 engaged in a massive information gathering campaign geared toward identifying areas of potential regulation (or deregulation) and unique considerations for the SEC that are raised by the world crypto assets.
Next up on the Crypto Task Force’s agenda is the topic of financial surveillance and privacy, but the SEC’s initial efforts to hold a roundtable on the topic were stymied by the government shutdown. Last Friday, the SEC announced that the agenda and panelists had been set for the Crypto Task Force’s rescheduled Roundtable on Financial Surveillance and Privacy, which will take place on December 15, 2025 from 1:00 – 5:00 pm at the SEC’s DC headquarters and via live webcast.
– Dave Lynn
Last week, the Center for Audit Quality announced the publication of its 12th annual “Audit Committee Transparency Barometer Report.” The report is compiled by the CAQ and Audit Analytics to measure disclosures about financial oversight and other audit committee responsibilities. The CAQ’s announcement notes:
As audit committees navigate emerging risks including economic disruption and the rapid integration of artificial intelligence, investors need insights into board composition, expertise, and oversight processes. This year’s Barometer shows that while skills matrix disclosure continues at high rates and disclosure of cybersecurity expertise on boards has grown, most disclosure areas have stagnated or declined, providing audit committees with an opportunity to enhance transparency about their evolving oversight responsibilities.
Key findings of the report include:
– 90% of S&P 500 companies disclosed the board of directors’ skills matrix, an increase from 85% in 2024. S&P MidCap companies (80%) and S&P SmallCap companies (70%) also showed slight increases.
– 65% of S&P 500 boards disclosed they have a cybersecurity expert—representing a 5-percentage point increase from 2024.
– Stagnation and decline of audit committee disclosures were observed across several measures, including (for S&P 500 companies): disclosure of the annual evaluation of the external auditor (decreased from 39% to 38%); considerations in appointing or (re)appointing the external auditor (remained flat at 50%); and factors contributing to the selection of the audit partner (decreased from 17% to 16%).
The report concludes:
As the role of the audit committee continues to evolve, it is essential to maintain robust disclosures. Audit committees have an opportunity to re-evaluate their disclosures in light of the period of disruption that we are facing, to provide greater transparency to investors and other stakeholders about how the audit committee is fulfilling its oversight responsibilities. These disclosures ultimately enhance trust and instill confidence in the audit committee’s leadership.
– Dave Lynn
