Monthly Archives: February 2017

February 28, 2017

“Accredited Investor” Definition: Getting the Oprah Treatment?

This speech from Friday by Acting SEC Chair Mike Piwowar reminds me of Oprah Winfrey’s famous free car giveaway: “You get a car! You get a car! You get a car! And you get a car! Everybody gets a car!” [Can you believe it’s been 13 years since Oprah did that!]

Here’s an excerpt from the speech (& here’s a related WSJ article):

In my view, there is a glaring need to move beyond the artificial distinction between “accredited” and “non-accredited” investors. I question the notion that non-accredited investors are truly protected by regulations that prevent them from investing in high-risk, high-return securities available only to the Davos jet-set.

Here, I appeal to two well-known concepts from the field of financial economics to show that, in maintaining an “accredited” status in our regulatory structure, we may have forgotten—and in fact disadvantaged—a set of investors. The first is the risk-return tradeoff. Because most investors are risk averse, riskier securities accordingly offer higher returns. Therefore, prohibiting non-accredited investors from investing in high-risk securities amounts to a blanket prohibition on their earning the very highest expected returns.

The second concept is modern portfolio theory. By holding a diversified portfolio of assets, investors reap the benefits of diversification. That is, the risk of the portfolio as a whole is lower than the risk of any individual asset. The correlation of returns is the mathematical key. When adding high-risk, high-return securities to an existing portfolio, so long as the returns from the new securities are not in perfect positive correlation with the existing portfolio, investors may reap higher returns with little to no change in overall portfolio risk. In fact, if the correlations are low enough, the overall portfolio risk can even decrease. As such, excluding certain investors from diversification options deprives them of important risk mitigation techniques.

These two basic concepts of economics demonstrate how even a well-intentioned policy of investor protection can do more harm than good, for instance, by exacerbating inequalities of wealth and opportunity.

Doubts Arise as Investors Flock to Crowdfunded Start-Ups

Meanwhile, as noted in this NY Times article, there are concerns that unsophisticated investors aren’t being protected in crowdfunding. Replete with fraud. Shocker…

Check out this white paper from the SEC’s DERA about investing in OTC companies…

Tomorrow’s Webcast: “Pay Ratio – The Top Compensation Consultants Speak”

Tune in tomorrow for the webcast – “Pay Ratio: The Top Compensation Consultants Speak” – to hear Mike Kesner of Deloitte Consulting, Blair Jones of Semler Brossy and Ira Kay of Pay Governance “tell it like it is. . . and like it should be” about the upcoming implementation of the pay ratio rules.

Broc Romanek

February 27, 2017

Coming Soon! Regulatory Reform Officers & Task Forces

Here’s a blog by Steve Quinlivan of Stinson Leonard Street:

President Trump has issued an Executive Order which requires the head of each agency to designate an agency official as its Regulatory Reform Officer, or RRO. Each RRO will oversee the implementation of regulatory reform initiatives and policies to ensure that agencies effectively carry out regulatory reforms, consistent with applicable law. Agencies which issue few or no regulations can apply for an exemption.

In addition, each agency must establish a Regulatory Reform Task Force composed of designated individuals. Each Regulatory Reform Task Force must evaluate existing regulations and make recommendations to the agency head regarding their repeal, replacement, or modification, consistent with applicable law. At a minimum, each Regulatory Reform Task Force shall attempt to identify regulations that:

– Eliminate jobs, or inhibit job creation;
– Are outdated, unnecessary, or ineffective;
– Impose costs that exceed benefits;
– Create a serious inconsistency or otherwise interfere with regulatory reform initiatives and policies;
– Are inconsistent with the requirements of section 515 of the Treasury and General Government Appropriations Act, 2001 (44 U.S.C. 3516 note), or the guidance issued pursuant to that provision, in particular those regulations that rely in whole or in part on data, information, or methods that are not publicly available or that are insufficiently transparent to meet the standard for reproducibility; or
– Derive from or implement Executive Orders or other Presidential directives that have been subsequently rescinded or substantially modified.

Each Regulatory Reform Task Force is to seek input and other assistance, as permitted by law, from entities significantly affected by Federal regulations, including State, local, and tribal governments, small businesses, consumers, non-governmental organizations, and trade associations.

Within 90 days of the date of the Executive Order, and on a schedule determined by the agency head thereafter, each Regulatory Reform Task Force shall provide a report to the agency head detailing the agency’s progress toward the following goals:

– Improving implementation of certain regulatory reform initiatives and policies; and
– Identifying regulations for repeal, replacement, or modification.

Proxy Access: Another Schedule 14 Sighting!

A few months ago, we saw the first Schedule 14N be filed by Gamco Asset Management – only to see it rejected soon afterwards by National Fuel Gas – followed by Gamco’s withdrawal of its nominee.

Now we have a second Schedule 14N filed by Brightleaf Advisory Group relating to Paragon Offshore – but it’s kinda weird, a UK incorporated penny stock? I’m not sure what is going on. Let me know if you figure it out…

Open Commission Meeting: “Links to Exhibits” Adoption & XBRL Proposals

The SEC is holding an open Commission meeting on Wednesday to consider a few XBRL proposals – including “Inline” XBRL reporting for banks. The Commission will also consider adopting rules requiring links to exhibits (here’s our podcast on that proposal from a few months back)…

Broc Romanek

February 24, 2017

“Bet-the-Company” Lawsuits Quadruple in 2 Years!

According to a recent BTI study, the number of businesses facing “bet-the-company” litigation has quadrupled since 2014.  BTI interviewed over 300 lawyers at US companies with more than $1 billion in annual revenues, & over 50% of those companies reported dealing with bet-the-company suits in 2016.  This compares to 37% in 2015 and just 12% in 2014.

Big-ticket litigation is widely perceived to be a uniquely American phenomenon, but Kevin LaCroix has been following developments on the international front – & there may be storm clouds gathering there as well, as this excerpt from a recent D&O Diary blog suggests:

A number of high-profile cases are now working their way through European courts. These cases are being closely watched and their progress could affect the likelihood of further future litigation. If the claims are successful, they could “pave the way” for similar shareholder actions in the future.

These cases include actions in the U.K. involving RBS and Tesco, as well as actions filed in Germany against Volkswagen.

D&O Liability: On the Rise Globally

Consistent with these litigation trends, this recent Allianz study says that D&O liability exposure is increasing across the globe. Here’s an excerpt from the study’s executive summary:

Tightening regulations, emerging technologies, increasing shareholder activism, intensifying class action litigation activity, escalating merger objections and IPO activity and the rise of regulator activism are among the many challenges facing corporate directors and officers. Executive liability is increasing yearly, particularly in areas such as employment and data protection.

The study flags the growing influence of third party litigation funders in the growth of collective actions & notes the impact of an increasingly aggressive regulatory environment on D&O liability:

There is a growing trend towards seeking punitive and personal legal action against officers for failure to follow regulations and standards. According to AGCS analysis, the number one cause of D&O claims by number and value is non-compliance with laws and regulations.

Take Shelter: The Securities Litigation Storm is Here!

I feel a bit like the prophet Jeremiah this morning – so here’s some more glum news from the D&O Diary, which provides this summary of Cornerstone Research’s annual class action review:

There were a record 270 securities class action lawsuits filed in 2016, which is 44 percent greater than the number in 2015 (188) as well as the average number of class action lawsuits filed during the period 1997-2015 (also 188). The filing activity increased as the year progressed; the number of filings in the second half of 2016 was 21 greater than in the year’s first half. The filing activity in the second half of 2016 was the highest for any semiannual period between 1996 and 2016.

What’s driving the increase?  Delaware’s hostility toward disclosure-only settlements is a big part of the story:

Much of the increase in 2016 filing activity is attributable to the increase in federal court merger objection filings; there were 80 federal court merger objection lawsuit filings during the year, more than four times greater than the number in 2015 (as plaintiffs’ lawyers shifted their filings from state court to federal court, as a result of Delaware state court rulings hostile to the kind of disclosure-only settlements that largely characterize the resolution of these cases). The 80 federal court merger objection lawsuit filings during 2016 was the highest number since Cornerstone Research first began separately tracking the M&A lawsuits in 2009.

The litigation exposure of US exchange-listed companies was the highest in 20 years. To put that more concretely, during 2016, approximately 1 in 25 listed companies was the subject of a “traditional” class action lawsuit – and that number doesn’t include merger objection suits!

Have a nice day, everybody.  If you need me, I’ll be hiding under my desk.

John Jenkins

February 23, 2017

Whistleblowers: Language for Severance Agreements

As we’ve noted in several prior blogs, in recent months, the SEC’s Division of Enforcement has made a cottage industry out of going after companies with provisions in their standard severance agreements that it believes may discourage whistleblowing.  In addition to these SEC actions, last year, Congress enacted legislation – the Defend Trade Secrets Act, or DTSA –  protecting whistleblowers who disclose trade secrets.

This Perkins Coie memo provides some suggested language for inclusion in severance agreements to address the issues identified by the SEC & to conform to the DTSA’s requirements.  Here’s an excerpt with the language:

Savings Clause for Confidentiality Provisions. The “savings clause” BlueLinx agreed to include in its severance agreements to resolve the SEC’s charges is broader in its application than Rule 21F-17 requires. We continue to recommend the shorter version:

“Nothing in this agreement is intended to or will be used in any way to limit employees’ rights to communicate with a government agency, as provided for, protected under or warranted by applicable law.”

Waiver for Severance Agreements. Severance agreements should also include waiver language designed not to violate Rule 21F-17’s prohibition on interference with SEC whistleblower activity:

“Employee agrees to waive the right to receive future monetary recovery directly from Employer, including Employer payments that result from any complaints or charges that Employee files with any governmental agency or that are filed on Employee’s behalf.”

Because this does not require an employee to waive the right to any future monetary recovery from the government in connection with any communication the employee may have with the SEC, there is no violation of Rule 21F-17.

DTSA Language. To comply with the DTSA, we suggest this language in governing the use of trade secrets:

“Employee may not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that: (a) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document that is filed under seal in a lawsuit or other proceeding.”

Non-GAAP: Corp Fin Focused on “Equal or Greater Prominence”

This Andrews Kurth memo reviews recent Corp Fin Staff comments & enforcement activity surrounding presentation of non-GAAP information – and notes the heavy focus on Item 10(e)’s “equal or greater prominence” requirement. Here’s an excerpt discussing recent comments:

Following the issuance of the May 2016 guidance, the Staff increased its focus on the prominence requirement by issuing comments related to issuers’ failure to comply with the requirement. These comments have included, among other things, a failure to:

– Describe or characterize the most comparable GAAP measure in equally prominent terms if a characterization was provided for the non-­GAAP measure (for example, “strong overall results” and “record EBIT”);
– Present the most comparable GAAP measure first in a tabular presentation, including in the required quantitative reconciliation (meaning that the reconciliation should begin with the GAAP measure instead of the non-­GAAP measure);
– Present the GAAP measure first in the body of an earnings release or in its headline;
– Provide similar percentages or prior period amounts for the GAAP measure when provided for the non­-GAAP measure; and
– Include the required disclosure if the issuer relies on the “unreasonable efforts” exception to exclude a quantitative reconciliation for forward­ looking non­-GAAP measures, specifically identifying the information that was unavailable and its probable significance.

Many comments issued during the second half of 2016 were “futures” comments, but the memo says that after an apparent grace period the Staff may increasingly require amendment of prior filings.

Broc & John: The OTC White Paper & The Absence of Snow

We were in the midst of our strategic planning meetings in Siesta Key when Broc suddenly leapt from his chair, smashed his glass on the floor & shouted – “I can whup any man in this bar!” A group of large gentlemen in motorcycle jackets seemed eager to take Broc up on his challenge. At this point, I suggested that we head to the beach for another podcast – and that’s how this 4-minute podcast on DERA’s OTC White Paper & the Absence of Snow came to be. Anyway, that’s my story & I’m stickin’ to it.

This podcast is also posted as part of our “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…

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John Jenkins

February 22, 2017

GCs as Whistleblowers? SOX Trumps Attorney-Client Privilege in Retaliation Case

This Baker Donelson memo discusses Wadler v. Bio-Rad Laboratories – a recent whistleblower retaliation case in which a jury awarded a former general counsel $8 million. This case is particularly interesting because the plaintiff was permitted to use attorney-client privileged information in support of his claims:

In a seminal trial court decision, the federal court in the Northern District of California ruled in a whistleblower retaliation case that a fired general counsel of Bio-Rad Laboratories could use as evidence otherwise privileged materials. The Sarbanes-Oxley Act’s protection of whistleblowers preempted the attorney-client privilege and provided key evidence leading to an $8 million jury verdict in plaintiff’s favor.

The former general counsel raised concerns about suspected illegal payments in violation of the Foreign Corrupt Practices Act that led to his termination. After he unsuccessfully reported to management, he went to the audit committee, whose internal investigation concluded no violation had happened.

General counsel-turned-whistleblowers previously have not been allowed to use attorney-client protected materials, and this case may signal a new approach. We’re posting memos about this case in our “Whistleblowers” Practice Area. And tune into our upcoming webcast: “Whistleblowers: What Companies Should Be Doing Now.”

IPOs: First Publicly Traded Benefit Corp Hits the Market

Rick Alexander at B Lab blogs that Laureate Education has just become first publicly traded “benefit corporation” – and he isn’t a shrinking violet when it comes to expressing his views on the importance of this milestone:

The most important event to take place in the financial world in 2017 has already happened. It was a simple stock offering. But one facet of that otherwise unremarkable transaction signals that the capital markets are open to a change that might just save the planet.

On January 31, Laureate Education completed an initial public offering, raising $490,000,000. Laureate was the first company to go public as a “benefit corporation,” a corporate form that did not even exist ten years ago. While 4,500 benefit corporations have now been created, each of them was privately held until last week’s IPO.

We’ve previously blogged about benefit corporations – which are organized under separate corporate statutes designed to permit boards to consider additional stakeholders alongside shareholders, & give the board discretion to determine the relative weight to place on shareholders’ and other stakeholders’ interests.  The “B Corp” concept has gotten a lot of traction in recent years – 30 states now have benefit corporation statutes – and it will be interesting to see how the concept fares among public investors.

There’s one point in Rick’s blog that I want to correct – although Laureate is the first benefit corporation to go public in the US, it isn’t the first publicly traded benefit corporation.  As Broc noted several years ago, that honor goes to Natura, which is Latin America’s largest cosmetics company & is publicly traded in Brazil.

Update: Cydney Posner points out that Laureate’s IPO took quite some time to cross the finish line – she first blogged about it in 2015!

Our “Q&A Forum”: The Big 9000!

In our “Q&A Forum,” we have blown by query #9000 (although the “real” number is much higher since many of the queries have others piggy-backed on them). I know this is patting ourselves on the back, but it’s over 15 years of sharing expert knowledge and is quite a resource. Combined with the Q&A Forums on our other sites, there have been well over 28,000 questions answered.

You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply (or a question). And of course, remember the disclaimer that you need to conduct your own analysis & that any answers don’t contain legal advice.

John Jenkins

February 21, 2017

Earnings Calls: Technical Difficulties – Please Stand By. . .

Last week, I blogged about problems retail investors have had with the use of company websites to distribute earnings releases.  Here’s a different type of problem – technical snafus on the earnings call itself. Hey, it happens – so what should you do if it does?  Sysco experienced technical problems that prevented some listeners from hearing its recent earnings webcast. Check out this 8-K filing to see how Sysco addressed that problem.  Other companies have dealt with technical problems too – these recent 8-K filings by Devon Energy and Premier addressed similar situations.

The short answer in these situations seems to be to furnish an 8-K under Items 2.02 (Results of Operations & Financial Condition) and 7.01 (Reg FD Disclosure), and attach a copy of your earnings call transcript and any other relevant communications to investors about the glitch.

Sysco’s 8-K also includes upfront references to the GAAP information that’s most comparable to the non-GAAP information that it used during its conference call.  Although this information is already included in the presentation slides, my guess is that the decision to put it in the body of the 8-K itself represents an effort to conform to Item 10(e) of S-K’s “equal or greater prominence” requirement – which wouldn’t have applied to the conference call, absent the decision to file the materials in response to the glitch.

Earnings Calls: The Trump Factor

This WSJ article notes that there’s a new “elephant in the room” during corporate earnings calls – the President of the United States:

Of the 242 companies in the S&P 500 index that held conference calls or other investor events in January, half mentioned Mr. Trump directly or indirectly, according to a Wall Street Journal analysis of transcripts.

When CEOs or analysts discussed Mr. Trump on conference calls, indirect references were more common. Mr. Trump’s name was used about a third of the times that participants mentioned him or his administration. Half the time, participants simply invoked the “new administration.”

The article says that most references to the new president were full of praise, and criticism was muted. That shouldn’t come as a surprise – after all, as this article points out, nobody wants their company to be on the receiving end of one of POTUS’s tweetstorms.

By the way, if your company does find itself in the cross-hairs of the leader of the free world’s Twitter account, don’t despair – this Cleary memo provides advice on how to deal with the situation.

Delaware: Decision on Supermajority Bylaw May Have Broad Implications

I recently blogged about the Delaware Chancery Court’s decision in Frechter v. Zier – where it invalidated a bylaw requiring a supermajority stockholder vote to remove a director.  This K&L Gates memo says that the Court’s decision may have an impact on other bylaws purporting to require a supermajority vote for shareholder action:

This decision also has broader implications for any bylaw provision requiring supermajority stockholder votes to take action for which the DGCL provides a specific voting threshold.  Post-Frechter, some examples of potentially problematic bylaw provisions include bylaws providing for a supermajority stockholder vote for the approval of mergers, significant asset sales and dissolutions, all of which explicitly require a simple majority vote of a corporation’s stockholders under the DGCL.  Corporations should consider moving any such supermajority voting requirements from bylaws to the certificate of incorporation.

However, the memo notes that bylaw provisions requiring a supermajority vote to amend the bylaws themselves are likely still valid following Frechter.

Update: This Weil blog points out that an earlier Delaware bench ruling suggests that similar provisions in the certificate of incorporation may also be unenforceable.

John Jenkins 

February 17, 2017

Enforcement: Acting SEC Chair Trims Subpoena Power

Mike Piwowar may only be “Acting” SEC Chair – but he’s never going to be accused of just keeping the seat warm for Jay Clayton.  This WSJ article reports that Piwowar has revoked subpoena authority from about 20 senior Enforcement staffers. That action leaves the Director as the sole member of the Division of Enforcement with the authority to approve a formal order of investigation & issue subpoenas.

Traditionally, the Staff had to obtain the full SEC’s sign-off on a formal order before issuing subpoenas. Former Chair Mary Shapiro gave the Staff temporary subpoena power in 2009, in the wake of the Bernie Madoff fiasco – & the SEC adopted a rule making that authority permanent a year later.  Interestingly, because that rule was deemed to relate solely to internal agency procedures, the SEC adopted it without notice & an opportunity to publicly comment.

Acting Chair Piwowar has long been a critic of both the delegation of this authority to the Staff & the manner by which the SEC accomplished it.  Here’s an excerpt from his 2013 remarks to the LA County Bar:

Finally, the delegation of authority for approval of formal orders was deemed by the Commission to relate solely to agency organization, procedure, and practice, and therefore not subject to the notice and comment process under the Administrative Procedure Act. The mere fact that we can institute certain rules without obtaining comment from the public does not necessarily mean that we should. Given the significant ramifications for persons who are on the receiving end of a subpoena issued pursuant to a formal order, we should make sure that public comment is allowed on any review of the formal order process.

This action – which ironically occurred without a public announcement – is consistent with Piwowar’s longstanding concerns that the Staff has had too much power & too little oversight when it comes to investigations.

Conflict Minerals Case: Is a Final Judgment Looming?

This blog from Steve Quinlivan reports that a final judgment from a DC federal district court in the long-running challenge to the SEC’s conflict minerals rule may be on the horizon.  Judge Jackson has ordered the parties in National Association of Manufacturers, et al, v. SEC to file a joint status report by March 10, 2017 “indicating whether any further proceedings are necessary, and whether the Court should enter an order of final judgment to effectuate the Circuit’s decision.”

As Broc blogged at the time, the DC Circuit previously rejected the SEC’s appeal of an earlier ruling holding that the rule’s requirement to disclose whether products were “not found to be DRC conflict free” violated the 1st Amendment.

Acting SEC Chair Mike Piwowar recently announced that Corp Fin’s 2014 guidance for compliance with the conflicts minerals rule was also under scrutiny by the agency.

Audit Committees: Top Concern Is Risk Management

According to KPMG’s Global Audit Committee Survey, risk management heads the list of concerns for audit committees:

The effectiveness of risk management programs generally, as well as legal/regulatory compliance, cyber security risk, and the company’s controls around risks, topped the list of issues that survey participants view as posing the greatest challenges to their companies. It’s hardly surprising that risk is top of mind for audit committees—and very likely, the full board—given the volatility, uncertainty, and rapid pace of change in the business and risk environment. More than 40 percent of audit committee members think their risk management program and processes “require substantial work,” and a similar percentage say that it is increasingly difficult to oversee those major risks.

“Tone at the top,” corporate culture & short-termism also feature prominently in audit committee concerns.

John Jenkins

February 16, 2017

Our New “Form S-3 Handbook”

Spanking brand new. By popular demand, this comprehensive “Form S-3 Handbook” covers the entire terrain, from “baby shelfs” to “automatic shelfs” and everything in between. This one is a real gem – 108 pages of practical guidance – and it’s posted in our “Form S-3” Practice Area.

T+2 Settlement Adopted – But Firm Commitments Stay Put

Bryan Pitko notes that the SEC approved the Nasdaq & NYSE’s proposal to move from a three-day (T+3) to a two-day (T+2) settlement cycle for securities transactions.  However, despite earlier concerns, it looks like firm commitment underwritings may continue to follow a T+4 settlement cycle.  Here’s an excerpt from the blog:

The SEC’s adopting release does not, however, address the shortening of the T+4 settlement standard currently in place for certain firm commitment offerings under the exemption in Rule 15c6-1(c), as previously discussed in our prior posting (available here). It appears that, for now, despite contemplating such a change and soliciting for comment in the proposing release, the SEC and SROs are content to retain T+4 settlement for firm commitment offerings.

You Can Go Home Again (If You’re Mary Jo White)

The NYT Dealbook reports that Mary Jo White has decided to return to Debevoise & Plimpton, the firm she left when President Obama appointed her to serve as the SEC Chair.  She joins former SEC Enforcement Director Andrew Ceresney, who also returned to Debevoise when he left the agency at the end of last year.

John Jenkins

February 15, 2017

Earnings Releases: Rethink Using Your Website to Get the Word Out

MarketWatch’s reporters have been reading your earnings releases – and this article says they’re not impressed. It surveys a number of major companies’ releases, concluding that they’re generally a “confusing mess.”

However, the article saves its most pointed criticism for the practice of using releases simply to point readers to corporate website pages for earnings information:

MarketWatch has written before about the delay caused when companies make investors, and the reporters who serve them, search for earnings on a website, which almost invariably crashes under the strain of so many attempting to access it at the same time. The worst offender, in our view, is the video-streaming giant Netflix. This season, Netflix shares had moved almost 10% by the time most news services had started reporting the numbers, suggesting a clear advantage for institutional investors with machine-readable trading services that can scrape websites for relevant information at high speed. Retail investors are losing out.

My guess is that this practice is intended to provide shareholders with access to a more robust earnings presentation than what could be provided within the confines of a press release – but it looks like it’s giving retail investors the short end of the stick, and needs to be rethought.

Update: One of our members pointed out to me that for microcap companies, the costs associated with using news services for extensive earnings releases are often a factor – and that issuing a brief release directing investors to the website for more information is much more cost-effective for them. I think that’s a point worth acknowledging.

Enforcement: SEC Targets Control Contest Disclosures

Yesterday, the SEC’s Division of Enforcement announced two new actions involving disclosure violations that took place in the heat of takeover & activist battles. Disclosure in this arena seems to be an area of emphasis for the SEC – it recently sanctioned Allergan for failing to disclose merger negotiations with third parties while it was the subject of a tender offer from Valeant.

The first proceeding involves allegedly inadequate disclosures about “success fees” payable by CVR Energy to two investment banks that it retained to help fight off a tender offer. The second targets failures by individuals and investment funds to comply with beneficial ownership reporting obligations under Section 13(d) and 16(a) of the Exchange Act in connection with their joint efforts in several activist campaigns.

It’s interesting to note that disclosure of banker success fees was addressed in one of the new tender offer CDIs (159.02) issued in late 2016. Last month, I flagged a Cooley blog that said market practice on success fee disclosure would need to change as a result of the new CDI. The SEC’s press release notes that CVR’s cooperation and remedial actions resulted in a decision not to impose any monetary sanctions on it – but I suspect the fact that the company’s disclosures may have been consistent with market practice might have played a role in it as well.

Public companies and their advisors can be excused for enjoying the predicament of the targets of the second enforcement action – they’ve long complained about activists playing fast and loose with beneficial ownership disclosure requirements, and undoubtedly are relishing their comeuppance in this instance.

Speaking of disclosure requirements, there’s now one less – the SEC’s resource extraction rules are no more. This Davis Polk memo has the details.

Transcript: Privilege Issues in M&A

We have posted the transcript for the recent webcast: “Privilege Issues in M&A.”

John Jenkins

February 14, 2017

GAAP: Settlements Reveal Enforcement Trends

Last month, the SEC settled no fewer than seven enforcement proceedings involving alleged GAAP violations. Drinker Biddle’s Steve Stroup reviews the results of these proceedings – and draws some conclusions about trends & priorities in accounting enforcement actions.  Here’s an excerpt on the SEC’s increasing reliance on non-fraud based allegations:

The SEC has pursued fraud-based claims in accounting matters with less regularity in recent years and, in turn, has increased its reliance on the less-imposing strict-liability provisions under Section 13 and negligence-based antifraud provisions under Section 17. January was no exception. None of the accounting settlements during the month included alleged fraudulent conduct, even though, in several instances, the tenor of the settlement language arguably signaled a more culpable state of mind than the violations required.

Until recently, fraud-based allegations were routinely raised in these proceedings. The ensuing legal battle often focused on whether the SEC could establish the scienter required under Rule 10b-5. Under the current enforcement landscape, the absence of non-fraud claims takes the scienter issue off the table, and often incentivizes cooperation and settlement.

Tomorrow’s Webcast: “Activist Profiles & Playbooks”

Tune in tomorrow for the webcast – “Activist Profiles & Playbooks” – to hear Bruce Goldfarb of Okapi Partners, Tom Johnson of Abernathy MacGregor, Renee Soto of Sotocomm and Damien Park of Hedge Fund Solutions identify who the activists are – and what makes them tick.

Broc & John:  Beach Podcasting is Now a Thing. . .

Because no sacrifice is too great for our members, Broc & I recently held an intensive, multi-day strategic planning retreat at’s winter headquarters in Siesta Key. We took a break when the saloon made us clear out our tab – and headed down to the beach to record this 5-minute podcast on the appointment of a deal lawyer as SEC Chair & “Weekend at Bernie’s.”

This podcast is also posted as part of our “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…

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John Jenkins