September 30, 2010

Business Roundtable and Chamber of Commerce File Proxy Access Lawsuit

Yesterday, the Business Roundtable and US Chamber of Commerce filed this petition for review in the US Court of Appeals for the DC Circuit against the SEC to invalidate the recently adopted proxy access rules. Among others, the plaintiffs allege that the rules are arbitrary and capricious; violate the Administrative Procedure Act; that they violate companies’ rights under the Constitution’s 1st and 5th Amendments; and that the SEC failed to properly assess the rule’s effects on “efficiency, competition and capital formation” as required by law. Note that I believe the plaintiffs are just challenging the SEC’s adoption of Rule 14a-11 – but not the changes to Rule 14a-8 (ie. the shareholder proposal rule) that the SEC recently adopted.

The Business Roundtable and Chamber of Commerce also filed a motion (see pg. 4 of the PDF) that the SEC stay implementation of the rules – including the November 15th effective date – until the DC Circuit has ruled on the challenge. The motion seeks a response from the SEC by next Tuesday, October 5th. If the SEC denies that request, then the plaintiffs plan to file a similar motion with the DC Circuit. Here’s the related press release.

In response, the SEC released this statement: “We believe that the Commission’s proxy access rules are both lawful and in the best interests of the public and shareholders. The Commission will, of course, carefully consider and timely respond to the motion for a stay.”

As an interesting sidenote, I have yet to see a single law firm push out any information about this lawsuit (other than this exception in the form of a blog). In contrast, every firm under the sun sent out an immediate notice when the SEC adopted the access rules. Not that it matters an iota, but I just thought this was an interesting factoid…

Dodd-Frank: SEC Removes Rating Agency Exemption from Reg FD

Here’s one of those “would be” mini-Dodd-Frank sleepers. Section 939B of Dodd-Frank directs the SEC to amend Regulation FD within 90 days of the law’s enactment to remove the exemption for rating agencies that is contained in FD (Rule 100(b)(2)(iii)). Yesterday, the SEC issued this adopting release taking that action. The SEC adopted a final rule change without proposing it first because the legislative mandate meant its action “does not involve the exercise of Commission discretion or policy judgments.” The amendment will become effective immediately upon its publication in the Federal Register.

Note the general exemption for confidentiality agreements remains in Reg FD (Rule 100(b)(2)(ii)), which would seem to negate the impact of the exemption removal because most agreements between rating agencies and rated companies contain confidentiality provisions (and if they don’t, a simple work-around is for a rating agency and a company to execute a stand-alone confidentiality agreement now).

But upon closer inspection, I’m not sure this change is that significant as Reg FD applies to communications to certain market participants, including investment advisers. Although at one point, most rating agencies were investment advisers registered with the SEC and subject to Reg FD, the major credit rating agencies more recently have terminated their registration as investment advisers and qualified instead as nationally recognized statistical rating organizations (NRSROs). As a result, they are no longer among the enumerated persons that trigger FD violations. That means that the exception for credit rating agencies no longer was necessary and that elimination of the exception has no real impact at this point. Hence, this likely is the purpose of this Dodd-Frank provision – we don’t know for sure as it has no discernible legislative history (note the purpose of the provision was not touched upon in the SEC’s adopting release).

Companies will still need to think about entering into confidentiality agreements with rating agencies since there could be a Rule 10b-5 issue when material nonpublic information is shared. Perhaps there is one argument that can be made regarding Reg FD – that a Regulation FD obligation may be triggered if a rating agency were deemed to be acting as an agent of the issuer. Perhaps that’s a stretch but under the right facts and circumstances, a possibility. Thanks to Nancy Wojtas of Cooley for her analysis of this subject!

SEC Dealt Setback by Second Circuit in Galleon Insider Trading Case

Here’s an excerpt from this NY Times article:

A federal appeals court on Wednesday ruled against the Securities and Exchange Commission in its effort to get wiretaps from the criminal prosecution of Raj Rajaratnam, the founder of the Galleon Group hedge fund. The United States Court of Appeals for the Second Circuit overturned an order from Judge Jed Rakoff, of Federal District Court in Manhattan, that would have compelled Mr. Rajaratnam and a co-defendant, Danielle Chiesi, to give the commission the wiretapped recordings of hundreds of their conversations. Prosecutors in the criminal case provided the recordings to Mr. Rajaratnam and Ms. Chiesi during discovery proceedings, and the SEC had wanted to use them as evidence in its civil insider-trading case.

Three judges on the appeals court sent the case back to Judge Rakoff, who is overseeing the civil case, saying he should have waited on a ruling in the criminal case on whether the government’s wiretaps were legal. The federal judge in the criminal case, Richard Holwell, has not yet ruled on whether the wiretaps were legally obtained. Judge Holwell plans to hold a hearing on Monday to consider whether prosecutors provided enough information about the need for the wiretaps.

– Broc Romanek