May 10, 2019

SEC Proposes Amended “Accelerated Filer” & “Large Accelerated Filer” Definitions

Yesterday, the SEC voted 3-1 – with Commissioner Jackson dissenting – to propose changes to Exchange Act Rule 12b-2’s definitions of “accelerated filer” & “large accelerated filer.” Here’s the 150-page proposing release. This excerpt from the “fact sheet” in the SEC’s press release announcing the proposal summarizes the proposed changes (we’ll be posting memos in our “Accelerated Filers” Practice Area):

The proposed amendments would:

– Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be an SRC and had no revenues or annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available

– Increase the transition thresholds for accelerated and large accelerated filers becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million

– Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status

As Liz noted in her blog last week about the SEC’s decision to put these proposals on the agenda for yesterday’s meeting, the SEC didn’t change these definitions last year when it adopted rules increasing the size limit for companies to qualify as “smaller reporting companies” from $75 million to $250 million in public float – and that was a point of contention among some Commissioners.

The rule proposals would allow more companies to file periodic reports on a non-accelerated basis.  But seriously, who cares about that?  What’s likely to generate some fireworks during the comment period is the fact that the proposals would increase the number of companies that won’t have to obtain an auditor’s attestation on management’s report on ICFR.

The two sides of the argument didn’t waste any time lining up – here’s SEC Chair Jay Clayton’s statement in favor of the rule proposals, and here’s Commissioner Jackson’s statement on his dissent from the SEC’s decision to issue them.

Internal Investigations: The Consequences of Government “Outsourcing”

The SDNY attracted quite a bit of attention last week with Judge McMahon’s opinion in United States v. Connolly and Black – a decision indicating that government entanglement in an internal corporate investigation could raise the 5th Amendment concerns if the government tried to use testimony provided in the investigation in a subsequent criminal proceeding.

This Wachtell Lipton memo summarizes the implications of the case for companies using internal investigations as a tool for cooperating with governmental authorities:

The lesson for companies conducting internal investigations is not, of course, to stop cooperating with governmental inquiries. Indeed, the judicial admonitions of the Connolly and Black decision are directed principally at the government itself. The opinion is nonetheless important for companies and their counsel; it plainly suggests that, when designing an internal investigation, care must be taken from the outset to ensure that the company (or, in appropriate cases, the board) directs and supervises the investigation, selecting the witnesses to be interviewed, developing the questions to be asked, and assessing the record.

Yes, as the government has often signaled, companies should provide proactive, constructive cooperation in order to secure maximum credit for their efforts. When done properly, such efforts discharge the company’s fiduciary obligations to act in the best interests of its shareholders and other constituents to achieve the best possible resolution under the circumstances.

But the memo goes on to say that, thanks to the Connolly and Black decision, companies should not be afraid to push back if the government attempts to take control over its own internal investigation, and notes that such pushback is consistent with the DOJ’s own guidance to its prosecutors that the DOJ “will not take any steps to affirmatively direct a company’s internal investigation efforts.”

SEC Settlement Policy:  Another Former Enforcement Target Challenges “Gag Rule” 

Earlier this year, I blogged about The Cato Institute’s lawsuit seeking to have the SEC’s rule mandating that enforcement targets agree to “neither admit nor deny” the allegations against them declared unconstitutional on 1st Amendment grounds.  This recent blog from Steve Quinlivan reports that another individual who settled with the SEC on these terms – former Xerox CFO Barry Romeril – has filed a lawsuit seeking relief from the gag rule.  Here’s an excerpt:

The New Civil Liberties Alliance has filed a Motion for Relief from Judgment with the U.S. District Court for the Southern District of New York on behalf of Barry D. Romeril. Mr. Romeril served as the Chief Financial Officer of the Xerox Corporation from 1993-2001. NCLA has asked the court to remove a gag order placed on Mr. Romeril on June 5, 2003 as part of a Consent Order with the Securities and Exchange Commission (SEC) because it violates the First Amendment of the U.S. Constitution. Despite the passage of nearly 16 years, Mr. Romeril continues to be bound by the gag order provision. You can find the associated Memorandum of Law here.

Like The Cato Institute’s action, the motion in this case contends that the gag rule is a content-based restriction on speech, and an unlawful prior restraint under the 1st Amendment.

John Jenkins