On Monday, the SEC announced release of the report to Congress from the 45th Annual Small Business Forum, which was held back in March. A transcript from the Forum is also available.
The report is especially interesting in light of all of the SEC’s anticipated rulemaking proposals on the 2026 Regulatory Agenda of Federal Regulatory and Deregulatory Actions. The Commission will consider Forum recommendations alongside other public comments on relevant policy initiatives – and this year, they may actually get traction. Not only do certain suggestions seem to align nicely with Chair Atkins’ overall initiative to “Make IPOs Great Again,” but we’ve already seen threads from some of them appear in the SEC’s May 2026 proposals on filer status and registered offering reform.
In addition to a summary of the day’s events and information about the Forum, the report includes the top five policy recommendations from each lifecycle segment that was addressed during the Forum – early-stage, growth-stage (including smaller funds), and small cap companies and the public markets – alongside the SEC’s response. Here are the recommendations on small cap companies and public markets:
1. Recommendation: Improve public trading for companies traded over-the-counter by requiring more disclosures about short selling, institutional holdings, insider and affiliate holdings and transactions, paid stock promotion, and information about the security from transfer agents.
– COMMISSION RESPONSE: In connection with short-sale disclosure, self-regulatory organizations, including NYSE, Nasdaq, and FINRA, currently provide short selling information on their websites, and the Commission currently provides information on failures to deliver securities that may result from sales, including short sales. On October 13, 2023, the Commission adopted a new rule and related form designed to provide greater transparency through the publication of short sale-related data to investors and other market participants.
Under the rule, institutional investment managers that meet or exceed a specified reporting threshold would be required to report, on a monthly basis using the form, specified short position data and short activity data for equity securities. The Commission is evaluating the rule, including potential changes to the rule and form, and has extended the compliance date for the rule until January 2, 2028. The Commission will consider this Forum recommendation in connection with this initiative.
The Commission currently has rules regarding the disclosure of insider and affiliate holdings and transactions, and the federal securities laws require persons who promote a security to fully disclose the receipt and amount of consideration from an issuer, underwriter, or dealer. In October 2023, the Commission adopted amendments that shortened the deadline for investors who beneficially own more than 5 percent of public company securities to file applicable forms to improve transparency and provide more timely information for shareholders and the market. The Commission will consider this Forum recommendation in connection with future regulatory initiatives.
In 2015, the Commission published an Advance Notice of Proposed Rulemaking and Concept Release outlining various issues related to the transfer agent regulatory regime and potential rulemaking to address those issues. The 2026 Regulatory Agenda indicates that the SEC’s Division of Trading and Markets is considering recommending that the Commission propose updates and refinements to the Commission’s existing regulatory regime for transfer agents. The Commission will consider this Forum recommendation in connection with this initiative.
2. Recommendation: Allow at-the-market offerings for all small public companies and Regulation A Tier 2 companies that are current in their filing requirements.
– COMMISSION RESPONSE: In the June 18, 2019, concept release that requested comment on ways to simplify, harmonize, and improve the exempt offering framework to promote capital formation and expand investment opportunities while maintaining appropriate investor protections, the Commission solicited public comment on whether at-the-market offerings should be permitted in Regulation A. In addition, the 2026 Regulatory Agenda includes initiatives to consider updates to the Commission’s rules related to exempt offerings, which includes Regulation A. The Commission will consider this Forum recommendation when considering updates to the exempt offering pathways and in connection with other initiatives.
3. Recommendation: Expand Form S-3 to enable more issuers to conduct offerings on Form S-3, regardless of public float.
– COMMISSION RESPONSE: The 2026 Regulatory Agenda includes an initiative to consider the modernization of the Commission’s shelf registration process, including eligibility to conduct offerings on Form S-3. On May 19, 2026, the SEC proposed a Registered Offering Reform rule that would significantly enhance public companies’ ability to conduct registered offerings, including revising Form S-3’s eligibility criteria to enable a greater number of public companies to conduct shelf offerings, which allow quicker access to the public capital markets, and extend registration and offering communication flexibilities, many of which currently are reserved only for “well-known seasoned issuers,” to a broader set of issuers. The Commission will consider this Forum recommendation in connection with this initiative.
4. Recommendation: Revise Regulation A to simplify reporting requirements for small issuers and improve companies’ access to capital.
– COMMISSION RESPONSE: The 2026 Regulatory Agenda includes initiatives to consider updates to the Commission’s rules related to exempt offerings. The Commission will consider this Forum recommendation when considering updates to the exempt offering pathways and in connection with other initiatives.
5. Recommendation: Pursue regulatory reforms to reduce unnecessary cost and liability barriers associated with becoming and remaining a smaller public company.
– COMMISSION RESPONSE: The 2026 Regulatory Agenda includes initiatives to encourage more companies to become and remain a public company, including rule amendments to expand accommodations that are available for emerging growth companies (defined generally to include new issuers with total annual gross revenues of less than $1.235 billion) and to rationalize filer statuses to simplify the categorization of registrants and reduce their compliance burdens.
On May 19, 2026, the SEC proposed two rules that would reduce barriers associated with becoming and remaining a smaller public company. The proposed rule titled “Enhancement of EGC Accommodations and Simplification of Filer Status for Reporting Companies” would extend current disclosure scaling and other accommodations to most public companies, grant the smallest public companies extended deadlines to file their periodic reports, simplify the public reporting company filer status framework, and update the Commission’s Regulatory Flexibility Act issuer “small entity” definitions.
In addition, the proposed Registered Offering Reform rule mentioned above would significantly enhance public companies’ ability to conduct registered offerings, including revising Form S-3’s eligibility criteria to enable a greater number of public companies to conduct shelf offerings, which allow quicker access to the public capital markets, and extend registration and offering communication flexibilities, many of which currently are reserved only for “well known seasoned issuers,” to a broader set of issuers. The Commission will consider this Forum recommendation in connection with these initiatives.
The recommendations from the session on growth-stage companies and smaller funds discuss making previously restricted shares available for public trading under Rule 144 in order to streamline the path from private to public markets – which is a topic on the 2026 Reg Flex Agenda. That session also recommended preempting state blue sky laws for off-exchange secondary trading in companies that make available robust, publicly accessible, and timely information, such as information required by Regulation A Tier 2 – which the report notes has been the topic of a previous concept release and proposed amendments, and is also relevant to the current Reg Flex Agenda item to consider updates to the Commission’s rules for exempt offerings, which includes Regulation A.
The recommendations from the session on early-stage capital raising suggested expanding the accredited investor definition to include additional measures of sophistication – including an investor test and experience. Here’s the Commission response on that one:
The 2026 Regulatory Agenda of Federal Regulatory and Deregulatory Actions (2026 Regulatory Agenda) includes initiatives to consider further updates to the Commission’s rules related to exempt offerings to simplify the pathways for raising capital for, and investor access to, private businesses. In addition, in an effort to increase investor access to private markets while ensuring adequate investor protections, Chairman Atkins has directed the staff in the Commission’s Division of Corporation Finance to begin discussions with FINRA about the possibility of creating an accredited investor examination. The Commission will consider this Forum recommendation when considering updates to the exempt offering pathways and in connection with its other initiatives.
Other recommendations related to creating a new federal “friends and family” exemption to preempt state blue sky laws, modernizing the regulatory framework for crypto assets that are securities, creating a portal and resources for funding support to small businesses, and increasing the annual amount that a company can raise under Regulation Crowdfunding.
– Liz Dunshee
Late last week, the SEC approved changes to FINRA Rule 5110 that – among other things – are aimed at simplifying how underwriting compensation is calculated. Here’s an excerpt from the SEC order:
FINRA’s proposed rule change would, among other things, amend provisions of Rule 5110 to: (1) change the valuation method for securities acquisitions that are considered to be underwriting compensation; (2) add certain securities acquisitions to the existing exclusions from underwriting compensation; (3) treat nonconvertible preferred securities the same as nonconvertible debt securities; and (4) make other modifications for clarity and to improve the operation of the rule.
Here’s more detail on what the rule will do, based on the SEC’s order:
– Replace the “bona fide public market” valuation method with a more predictable valuation method, as the new method would be based on readily available market data (the closing market price of the security traded on a U.S. registered national securities exchange or a “designated offshore securities market”) instead of requiring a calculation that included average daily trading volume and public float.
– Expand the exclusions from underwriting compensation to include additional narrowly tailored exclusions, which are based on exemptive relief that FINRA has previously provided and would need to comply with specific conditions in the amended rule: (1) debt-for-equity exchanges; and (2) capital investments for direct participation programs (“DPPs”) and unlisted real estate investment trusts (“REITs”).
– Treat nonconvertible preferred securities the same as nonconvertible debt securities – i.e., they are considered to have no compensation value and excluded from underwriting compensation – as long as the nonconvertible preferred securities are acquired at a fair price. FINRA noted that both non-convertible debt and non-convertible preferred securities cannot be converted to common stock and provide predetermined payments to holders, resulting in fixed sources of income. In addition, FINRA will maintain the ability to oversee underwriting terms and arrangements because participating members would continue to be required to file documents and information in connection with certain public offerings.
– Amend Rule 5110(g)(5)(B) to add tail fees to the types of termination fees that are allowed as underwriting compensation, if specific requirements are met. Under the amended rule, the same requirements that apply to termination fees will also apply to tail fees. If these requirements are not met, tail fees would constitute unreasonable arrangements under Rule 5110.
– Make non-substantive, technical changes.
FINRA believes the amendments will result in fewer exemption requests and reduce situations where underwriters and companies have to negotiate different forms of compensation for compliance reasons – providing more predictability and certainty to members while also maintaining guardrails to protect investors.
In addition to the amendments to FINRA Rule 5110, the Commission also approved amendments to FINRA Rule 5123, which addresses private placements of securities. The amendments to Rule 5123 expand the available filing exemptions for sales to accredited investors to include offerings sold to investors meeting the accredited investor categories for certain family offices and for certain entities with assets under management in excess of $5,000,000, consistent with the Commission’s addition of those categories to the accredited investor definition in August 2020.
– Liz Dunshee
It’s been exciting to see a number of experienced practitioners take roles at the SEC over the past year or so – many of them returning for another “tour of duty” after serving on the staff years ago. It is also exciting to see that the Commission is hiring folks on at the other end of the seniority spectrum. Last week, Corp Fin posted this opening for a Disclosure Review Law Clerk.
This is an amazing opportunity for recent law school grads – providing excellent experience and training, all while working with smart and dedicated colleagues to further the SEC’s mission. If you’re a young lawyer, apply! If you’re not so young, you can still help: Tell your students, colleagues and friends!!
– Liz Dunshee
You really can’t go anywhere these days without talking about AI – and as you might expect, that’s especially true of earnings calls and SEC disclosures. But as the landscape changes, so do the questions and conversations. This season, as folks get more sophisticated about the use cases and implications of AI, analysts for some companies are asking about token expense – as well as ROI. This Bloomberg article flags the trend. Here’s an excerpt:
The cost associated with using artificial intelligence has gone up sharply for many businesses, with [big-name corporations] limiting access to AI tools to rein in spending. After pushing employees to make use of AI applications, companies are finding that additional productivity comes with rising expenses — and growing scrutiny from analysts and investors.
The article gives examples of how companies are addressing these questions, so it’s worth a read if you are preparing for an upcoming call. It also points out:
There’s no reporting requirement for companies to break out these costs. Still, chief financial officers face the challenge of deciding how much of that spending (and its returns) they want to disclose to the outside world.
Companies are taking different approaches to reporting token-spend – e.g., some are breaking it out into a separate category and implementing controls to track it while others are discussing the business impact of AI in a more holistic way, in light of the cost savings it may also bring. Likewise, some companies are discussing margin and ROI in general terms while others are not yet providing that information. And as this WSJ article shares, some companies are also getting more “tokenomical” – shifting budgets to low-cost and/or open-source models when available in order to tamp down expenses.
Like any emerging issue, AI-related spending is also triggering a conversation about quarterly risk factors. In addition to what you might find about cap-ex, pre-AI risk factors about access to service and availability of adequate tech infrastructure, network capacity and compute power could serve as a model for risks relating to power and compute. Of course, every company will need to think through whether there are material risks and – if so – describe them in a way that’s tailored to their particular business and circumstances. In the past, these types of risk factors were mainly found in tech companies’ filings, but now we might see them in other industries as well.
– Liz Dunshee
When we last checked in on the CLARITY Act – which would establish a Congressionally approved regulatory framework for blockchain-based digital assets and clarify the roles of the SEC and CFTC – SEC Chair Paul Atkins was testifying before the Senate Committee on Banking, Housing and Urban Affairs about his support for the legislation and the SEC’s role in implementing it. That was back in February. It’s now late July, with a month-long Senate recess approaching on August 7th.
The House passed the bill earlier this month, after a long delay over various provisions, including ethics concerns about crypto ventures of the President and other officials. In mid-July, Trump agreed to restrictions included in this version of the bill – but now lawmakers have to agree on who would enforce them and how long they would last. This 24/7 Wall St. article from last week gives more detail:
Under the draft released Wednesday, the language would bar the president, vice president, members of Congress, federal judges and other covered officials, along with their spouses, from issuing or sponsoring digital assets for compensation while in office. It addresses the conflict Democrats had demanded be fixed, but with two caveats they seized on immediately: the provision sunsets in 2029, and regulators get a full year after enactment to implement it. The market responded to the initial news, with the total crypto market gaining roughly $70 billion in a day . . .
Senate Republicans released an updated draft on Wednesday, but no floor vote has been scheduled, and Democrats had not reviewed the text when the first objections landed. Traders were already pricing what passage would be worth.
The article continues:
The agreed language hands that [enforcement] job to the Department of Justice (DOJ) alone and leaves state attorneys general out of it. Democrats object because the DOJ answers to the president those rules are written to restrict, and Trump’s former personal lawyer, Todd Blanche, has been running the department as acting attorney general since April while he awaits a Senate vote on his nomination to the permanent job. State attorneys general would stand outside that chain of command, and many of them are Democrats, which is precisely why Republicans want them kept out.
The article notes that the CLARITY Act needs 60 votes to clear the Senate. It also says that due to the approaching midterms, the legislation is likely to stall out if it doesn’t pass before the August recess. Former Chief of the SEC’s Office of Internet Enforcement and avid crypto critic John Reed Stark testified at a “public forum” yesterday and calls the CLARITY Act the “worst financial legislation in modern American history.” On the other side of the coin (no pun intended), proponents say the bill would bring much-needed clarity (hence the Act’s nickname) and help the US compete globally in the crypto industry.
– Liz Dunshee
Last week, SEC Commissioner Hester Peirce – lovingly nicknamed “crypto mom” by many in the space – published this statement on crypto vaults and lending strategies. Like any mom knows, “kids” sometimes need reminders and examples:
The Commission, the Crypto Task Force, and staff across the Divisions have done tremendous work in the past year and a half to provide clarity to crypto markets as to when a certain asset or activity is subject to the federal securities laws and, if so, how those laws apply. Much of this work has clarified that many crypto assets and activities are not subject to the federal securities laws. That the securities laws do not apply to all crypto assets and activities, however, does not mean that the securities laws do not apply to any crypto assets or activities. If you do headstands, backflips, and other gymnastics to read the law so that it does not apply to crypto assets and activities that are well within the scope of the federal securities laws, you will have a painful fall. If your activities are within the securities perimeter, a better approach is for you to work with us to find a compliant path forward so that you can use new technology to serve investors without running afoul of the federal securities laws.
Last summer, I issued a statement reminding market participants that “[t]okenized securities are still securities.” That statement addressed a particular example of a broader principle: Moving activities that fall within the scope of the federal securities laws onchain, as a general matter, does not take those activities outside the scope of the laws the Commission administers.
Before anyone gets offended, I’m not saying the folks in this industry are childish or that Commissioner Peirce is treating them that way. But when I read the statement, I couldn’t help but think of the family lore about my husband, who as a high schooler threw a huge rager while his parents were out of town and claimed ignorance of the rules when they found out, saying, “You never told me I couldn’t have a party!” (I sure hope our kids never hear that story or read this blog, because it sounds exactly like something at least one of them would do.)
Anyway, the statement continues:
Vaults and lending strategies may implicate the federal securities laws in several ways. A vault, for example, could be a common enterprise in which users invest money with a reasonable expectation of profits to be derived from the vault deployer’s and curator’s entrepreneurial or managerial efforts.2 A vault that holds securities or allocates assets to investments in securities could fall into investment company territory. Some vaults may function similarly to unit investment trusts that hold a fixed portfolio of assets with little or no active management; others may function similarly to management investment companies; and still others may more closely resemble separately managed accounts that offer individualized client treatment.
Lending strategies also can carry significant federal securities law implications that do not turn on the assets involved. For example, onchain loans, depending on the parties’ motivations, the plan of distribution, and other relevant factors, can bear the hallmarks of notes that are securities.3 Involvement in managing vaults and lending strategies also may implicate investment adviser issues. Whether a particular vault or lending strategy’s structure and activities are within the scope of the federal securities laws will come down to the specific facts and circumstances. Any SEC analysis of these issues requires respect for the limits Congress set on our jurisdiction and an unwavering commitment to protecting developers’ free speech rights.
We welcome inquiries from market participants involved in designing and operating vaults or facilitating onchain lending. You may not fall within our regulatory scope, but, if you do, we welcome the opportunity to talk with you about how to serve your customers in compliance with the federal securities laws. Those laws are flexible because Congress recognized that technologies would change. Sometimes, even with that flexibility, our regulations block innovation and entrench the status quo. We welcome your thoughts on whether we need to modify our rules to accommodate vaults, onchain lending, or other innovations and how we can do so while still ensuring that investors are protected, markets are fair, orderly, and efficient, and capital formation is facilitated.
Being a parent is rewarding, but it can also be exasperating. I imagine that being a crypto mom comes with a mix of victories and headaches too.
– Liz Dunshee
We had a lot of folks rushing to sign up last week for our “Proxy Disclosure & 23rd Annual Executive Compensation Conferences” – which are being held in Orlando October 12-13th in Orlando and virtually. Our “Early Bird” rate was set to expire on July 24th, but several members told us that they’ve been traveling and busy in July and they needed a few more days to get internal approval. I can empathize – I had 6 trips in 5 weeks over June and July – all very worthwhile, but I am still digging out! It was great to see many of you in Nashville!
Anyway, we want to do what we can to help, so we’re extending our “early bird” reduced rate by one week. Register by the end of this Friday, July 31st to save on your in-person or virtual registration! You can register online or by contacting us at info@CCRcorp.com or 1-800-737-1271.
These Conferences are in a league of their own in terms of the experienced speaker lineup and the focus on practical guidance. With so many significant changes expected from the SEC this fall, attending is the best thing you can do to arm yourself for the 2027 proxy season.
Here are the agendas for the Conferences – 14 sessions over two days – with a terrific speaker lineup, valuable course materials, and on-demand replay of all sessions for a year after the event:
– Christina Thomas: The Latest From Corp Fin
– The SEC All-Stars: Proxy Season Insights
– The Fate of Shareholder Proposals
– Fireside Chat with Top Activism Defense Lawyers
– Scary Stories to Tell in the (Securities Law Conference Spot)light
– Trends in Tokenization & Blockchain
– Shareholder Engagement & Proxy Voting: Turning Tides
– SRCs, EGCs & FPIs: What’s Next?
– Keeping Governance In Focus When the Future Is Hazy
– The SEC All-Stars: Executive Pay Nuggets
– Your Compensation Disclosures: New & Improved (We Hope)
– The Top Compensation Consultants Speak
– Bodyguards & Private Jets: Perks on the Radar
– Navigating ISS & Glass Lewis
As I mentioned above, our early bird rates apply to both in-person and virtual attendance, so register online or contact us at info@CCRcorp.com or 1-800-737-1271 before the reduced rates expire – this Friday, July 31st!
– Liz Dunshee
Russell Rebalance Day happened a little over a month ago – belated good tidings to all who celebrate every year on the fourth Friday in June. This year is actually the first year that the Index is moving to semi-annual rebalancing, in response to our modern era of volatile markets and heavy index investing, so we will all get another chance to celebrate in December.
For companies “on the bubble,” the reconstitution can have a big impact on stock holdings – and sometimes the legal team is involved with answering questions about what this all means. FTSE Russell’s summary of the June 2026 changes gives a sense of the trading volume that’s involved:
As of June 2025, approximately $12.2 trillion in assets were benchmarked to Russell US Indexes, and reconstitution day continues to rank among the highest trading volume days of the year, with $217.2 billion traded across US stock exchanges at the close of the June 2025 reconstitution.
A recent note from InvestorCom explains what happens when a small company gets big enough to be added to the Russell 2000 or 3000:
– Inundation of Passive Capital: The most immediate shift is a forced wave of buying from passive index funds, ETFs, and quantitative funds that mechanically mirror the Russell indexes. These rigid, “sticky” holders become a permanent fixture of the shareholder base.
– Hedge Fund and Event-Driven Inflows: Ahead of the actual rebalance date, active hedge funds and arbitrageurs “front-run” the inclusion, buying up shares to capture the expected price pop, introducing temporary short-term traders to the register before handing shares over to passive funds.
– Increased Active Institutional Access: Being part of a major benchmark puts the company on the radar of traditional, long-only mutual funds. Many institutional mandates forbid managers from buying unindexed “orphan” stocks. Inclusion unlocks a vast new tier of long-term fundamental investors.
These dynamics have ripple effects too – e.g., they may mean that proxy advisors and institutional stewardship teams will apply different elements of voting policies to the company. And of course, there is a flip side for companies leaving the index – some holders are liquidating, and day-traders may become a bigger part of the base. Weighting matters too – so if a company moves from the Russell 2000 to the Russell 1000, passives may have to sell shares because the company now carries lower weight in the overall index. This Nasdaq article from last year adds color:
– Large caps can have 21% of their float held by Russell 1000 and S&P 500 index tracking funds, up to 28% if it’s also in the Nasdaq-100®.
– Small caps could have 10% of their float held by Russell 2000 tracking funds, up to a total of 27% if they’re also in the S&P 600.
Nasdaq notes that index inclusion tends to create long-term improvements in demand and liquidity. That ultimately makes it easier for companies to raise capital.
– Liz Dunshee
Here’s a recent update on litigation surrounding contractual blockers (common tool in offerings of preferred stock and warrants to cap an investor’s beneficial ownership at 4.9% or 9.9%, which can effectively prevent the investor from becoming subject to Section 13(d) or Section 16 if they’re both binding and not illusory) from Alan Dye’s Section16.net Blog:
Resolving an issue of first impression in the Second Circuit, a panel has affirmed the SDNY’s holding that blocker provisions in the defendant’s derivative securities were valid and binding and not illusory, such that the defendants did not beneficially own shares in excess of the cap and therefore were not subject to Section 16(b) as ten percent owners. As discussed in my blog about the district court’s dismissal of the complaint, the plaintiff is the post-bankruptcy successor to Bed Bath & Beyond (BB&B), which sought to recover $310 million of short-swing profits from an investment manager and its client fund based on their conversions of derivative securities and immediate sale of the securities acquired, often executing multiple conversions/sales in a single day, each time acquiring up to 9.9%, selling, and then converting again.
The district court held that a valid blocker must be both contractually binding and not illusory and that the blockers in BB&B’s derivatives met both tests. On appeal, BB&B argued that the blockers were illusory and also constituted a “scheme to evade” the Section 13(d)/(g) reporting requirements within the meaning of Rule 13d-3(b).
Illusoriness. In determining that the blockers were not illusory, the Second Circuit applied the three factors suggested by the Second Circuit’s 2001 decision in Levy v. Southbrook (which are not the same factors suggested by the SEC in an amicus brief filed in Levy that the district court judge had applied, but which the court here did not consider binding):
- Whether the holder may waive the blocker in its sole discretion. The blockers did not allow the defendants to waive them unilaterally, but BB&B argued that the parties could have mutually agreed to waive or amend the blockers, and that BB&B would have happily agreed to a waiver to allow for additional cash infusions. The Second Circuit rejected the argument (which the SDNY said was “nonsensical”), saying that deeming a contractual provision to be illusory because the parties could waive or amend it “would render virtually every clause of every contract a sham.”
- Whether the blocker lacks a means of ensuring compliance. BB&B argued that it had no means of enforcing the blockers because it had no means of ascertaining the defendants’ total ownership. The court held that the defendants’ obligation to certify, in each notice of conversion, that conversion would not cause them to own more than 10% of the outstanding common was sufficient under Levy to ensure compliance. Here, in addition, the blockers provided that any shares acquired in excess of the cap would automatically be deemed null and void, which prevented the defendants from exceeding the cap.
- Whether as a practical reality the investor has ever exceeded the conversion cap. BB&B argued that multiple serial conversions and sales in a single day resulted in the defendants’ ownership of all shares held in the account pending settlement, which exceeded 10% of the class at the end of some trading days. The court held that shares were no longer beneficially owned at the moment of execution of sale, regardless of the technicalities of passing of title or moving shares out of the account. At the moment of execution, the defendants lost beneficial ownership because (i) they no longer had the power to dispose of the shares, since they’d already been sold, and (ii) they could not vote the shares because the governing documents rendered void any shares exceeding the cap.
BB&B argued that the district court’s holding promoted form over substance and gave “a free pass to essentially any competently drafted blocker.” In rejecting that argument, the Second Circuit said that “a comprehensive and legally binding blocker generally should insulate a defendant from Section 16(b) liability” and “it is only when the parties have ignored the terms of their contract and allowed the investor to exceed the conversion cap that we will look beyond the otherwise binding language of the blocker.”
Scheme to Evade. BB&B also argued that the blockers were invalid because they constituted a scheme to evade the reporting requirements of Section 13(d)/(g) (and, indirectly, Section 16). The Second Circuit forcefully rejected that argument, citing Judge Winter’s concurring opinion in the CSX case to say that BB&B confused arrangements “that conceal a defendant’s effective ownership with contractual provisions that prevent an investor from owning a security in the first place.” Judge Winter was expressing disagreement with the district court’s holding that cash-settled total return swaps represent a scheme to evade and said there that Rule 13d-3(b) applies only when “the transaction … [involves a] substantial equivalence of the rights of ownership relevant to control, or include[s] steps that stop short of, or conceal, the vesting of ownership, while nevertheless ensuring that such ownership will vest at the signal of the would-be owner.” The court seemed clearly to endorse Judge Winter’s articulation of what constitutes a scheme to evade for purposes of Rule 13d-3(b), which is consistent with the longstanding view of the SEC staff, as coincidentally restated in new CFIs published only last week.
– Liz Dunshee
Yesterday, the SEC announced that it will host a roundtable discussion on preparations for 24-hour trading in the U.S. equity markets. The roundtable will be held from 10 am to 4 pm ET on September 17 at the SEC’s headquarters and streamed live on SEC.gov. Discussions will address “preparations to support overnight trading, operations and resiliency in a 24-hour market and opportunities and challenges for expansion.” An agenda and list of speakers will be provided at a later date.
The SEC is also seeking public comments on 24-hour trading before the event. The announcement explains how to submit those:
Members of the public who wish to provide their views on 24-hour trading may submit their comments electronically or on paper. Please submit comments using one method only. Information that is submitted will become part of the public record of the roundtable and posted on the SEC’s website. All comments received will be posted without change. Persons submitting comments are cautioned that personal identifying information is not redacted or edited from comment submissions. You should submit only information that you wish to make publicly available. All submissions should refer to File Number 4-913, and the file number should be included on the subject line if email is used.
Electronic Comments:
Use the Commission’s internet comment form or send an email to rule-comments@sec.gov with “File Number 4-913” included in the subject line.
Paper Comments:
Send paper comments to Vanessa Countryman, Secretary, Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-1090.
– Meredith Ervine
