December 10, 2018

SEC Chair Lists Priorities: Includes Proxy Advisors & Shareholder Proposals

Last week, SEC Chair Jay Clayton delivered this speech, where he outlined where the SEC stands on its rulemaking agenda – as well as the priorities for 2019. See Exhibits A & B of the speech for handy charts (and this blog from Davis Polk’s Ning Chiu and WSJ article). Key initiatives include:

Reviewing ownership & resubmission thresholds for shareholder proposals – including whether there are factors in addition to the amount of money invested and length of holding period that would reasonably demonstrate the shareholders’ interests are aligned with those of long-term investors

Proxy advisor reforms – including transparency, conflicts, whether certain matters should be analyzed on a company-specific basis (rather than market-wide), and investor access to issuer responses to reports

Proxy plumbing – focusing on improvements to the current system, rather than a major overhaul

Cybersecurity – including disclosure controls & procedures, insider trading policies, risk factor disclosures, and the SEC’s own cyber-risk profile

Brexit & LIBOR disclosures – SEC is monitoring these risks and whether their impact is adequately disclosed

ICOs – continuing 2018 efforts to protect investors

Quarterly reporting & guidance – studying the current regime to determine whether it can be improved

Capital formation & access to investment opportunities (Jobs Act 3.0) – expanding testing-the-waters and making Regulation A available to public companies

Senate Banking Committee’s Hearing on Proxy Voting Process

Last week, the Senate Banking Committee held a hearing on the proxy voting process. Here’s a video of the hearing – and this Wachtell Lipton memo summarizes the proceedings. Don’t forget to tune in this Thursday to our webcast with Corp Fin’s Matt McNair: “Shareholder Proposals: Corp Fin Speaks.”

SCOTUS Oral Argument: Anti-Fraud Liability – Is Janus Dead-Letter Law?

Back in 2011, the Supreme Court rejected the idea that distribution of allegedly false statements by a broker-dealer was enough to create anti-fraud liability under Rule 10b-5(b) – explaining that because they didn’t have “ultimate responsibility” over the statement, they weren’t the “maker” described in the rule. Broc blogged about the case – Janus Capital Group v. First Derivative Traders – at the time. But he also later blogged that the SEC wasn’t giving up its expansive view of Rule 10b-5 – arguing that a different test applied to subsections (a) and (c).

Now, that theory has also made its way to the Supreme Court – which held its oral argument last week. In Lorenzo v. SEC, the SEC is pursuing a former broker who says that at the request of his boss, he copied & pasted a message and distributed it to potential investors – and come to find out, that message contained misleading information about a troubled company.

This Simpson Thacher memo provides notes about SCOTUS’ oral argument, as well as explains the circuit split – and its potential impact on SEC enforcement & private litigation. Here’s their prediction about what could happen:

The justices appear split on the issues of this case, with Justices Ginsberg, Breyer, Sotomayor and Kagan (the original dissenters in Janus) appearing sympathetic to the government and Chief Justice Roberts and Justices Thomas, Alito and Gorsuch seemingly skeptical of expanding SEC enforcement abilities. With Justice Kavanaugh recused, this could leave open the possibility of a split decision, which, while affirming the D.C. Circuit’s decision below as to Lorenzo, would fail to resolve the circuit split, potentially encouraging forum shopping by private plaintiffs.

If the Court does reach a majority in favor of the government’s position, however, this case stands to have broad implications for private securities litigants. If Rule 10b-5(a) and (c) can be used to circumvent the “maker” requirement of Rule 10b-5(b) under Janus, private plaintiffs could potentially bring securities fraud actions against individuals who are otherwise only minimally connected to the misstatement.

Liz Dunshee