Last week, the House passed the “Insider Trading Prohibition Act” by a vote of 410-13. John blogged about the bill back in June when it passed out of the House Financial Services Committee – it would broadly describe “wrongful” trading or communication of material non-public information by tying it to:
(A) theft, bribery, misrepresentation, or espionage (through electronic or other means);
(B) a violation of any Federal law protecting computer data or the intellectual property or privacy of computer users;
(C) conversion, misappropriation, or other unauthorized and deceptive taking of such information; or
(D) a breach of any fiduciary duty, a breach of a confidentiality agreement, a breach of contract, or a breach of any other personal or other relationship of trust and confidence.
The legislation would also require only that a defendant was aware or recklessly disregarded that the inside information was wrongfully obtained – rather than specific knowledge of how it was obtained or whether there was a “personal benefit” involved. It also leaves open the possibility that 10b5-1 transactions could be exempt from insider trading prosecution. Mostly, though, it pretty closely tracks current case law.
So what are the odds that this bill will become law? It appears to have “bipartisan” support – but it’s also been floating around in some form since 2015 and hasn’t made it to the finish line yet. The repetition certainly makes it easier to come up with headlines – I copied today’s from a 2017 write-up by John.
SEC Enforcement: “Cooperation” Becomes More Common
Last month, Broc blogged about the Enforcement Division’s annual report on its activities. This annual study from Cornerstone Research & NYU takes a closer look at the results for public companies & subsidiaries. Here’s some takeaways (also check out this Orrick blog saying that crypto & blockchain issues still appear to be enforcement priorities):
– While the number of enforcement actions rose more than 30% over the previous fiscal year, more than half of the new actions targeted investment advisers/investment companies or broker-dealers
– In FY 2019, the SEC noted cooperation by 76% of defendants, a record-high percentage and substantially higher than the FY 2010–FY 2018 average of 51%
– In the first half of FY 2019, the SEC brought 100% of enforcement actions as administrative proceedings; in the second half, this dropped to 84%
– Challenges to the constitutionality of protections preventing removal of the SEC’s administrative law judges (ALJs) continued in FY 2019 with a new defendant filing challenges following the August 2019 dismissal of Lucia v. SEC
– The average monetary settlement amount for public & subsidiary actions during the period was $16 million
When the SEC’s Enforcement Division released its annual stats last month, Broc blogged that some of the motivation behind the report might be for the SEC to show Congress that its money is going to good use. That hunch aligns with the recent recommendation by the Government Accountability Office that the SEC needs to do a better job of documenting its procedures for generating these reports – including procedures for compiling & verifying stats and documenting their implementation.
Since 2009, the Division of Enforcement (Enforcement) in the Securities and Exchange Commission (SEC) has made modifications to its reporting of enforcement statistics, including by releasing a stand-alone annual report beginning in fiscal year 2017. The Enforcement Annual Report included additional data on enforcement statistics not previously reported and narratives about enforcement priorities and cases. Enforcement staff told us the annual report was created to increase transparency and provide more information and deeper context than previous reporting had provided.
Enforcement has written procedures for recording and verifying enforcement-related data (including on investigations and enforcement actions) in its central database. However, Enforcement does not have written procedures for generating its public reports (currently, the annual report), including for compiling and verifying the enforcement statistics used in the report. To produce the report, Enforcement staff told GAO that staff and officials hold meetings in which they determine which areas and accomplishments to highlight (see figure). Enforcement was not able to provide documentation demonstrating that the process it currently uses to prepare and review the report was implemented as intended.
Developing written procedures for generating Enforcement’s public reports and documenting their implementation would provide greater assurance that reported information is reliable and accurate, which is important to maintaining the Division’s credibility and public confidence in its efforts.
That was fast. On Friday, Reuters and other sources reported that the SEC rejected the NYSE’s proposed rule change that would have permitted companies to sell newly issued primary shares via a direct listing – which had been submitted the week before.
Broc just blogged last week about the proposal being somewhat controversial. We aren’t sure what aspect of it prompted the rejection – but it’s not uncommon for these types of things to go through a few iterations and this Wilson Sonsini memo speculates that perhaps additional SEC rulemaking is necessary to make primary listings possible. The NYSE says it’s continuing to work with the SEC on a “direct listing product” – so it’s probably not the last we’ll hear of this path to going public.
Direct Listings: Nasdaq’s “Resale” Rule Extended to Its Global & Capital Markets
Last week, the SEC approved this recent Nasdaq proposal that will allow “resale” direct listings on the Nasdaq Global Market and the Nasdaq Capital Market – an extension of an already-existing rule that allows these types of direct listings on the Nasdaq Global Select Market.
This Wilson Sonsini memo summarizes the final rule – and explains how the valuation parameters for companies listing shares on Nasdaq’s Global and Capital Markets differ slightly from what applies to the Nasdaq Global Select Market.
Nasdaq Proposal: Excluding Restricted Shares from “Publicly Held” Calculation
The exchanges have been busy. A couple weeks ago, Nasdaq filed this rule proposal that would require listed companies to provide Nasdaq with info about the number of their non-affiliate shares that are subject to trading restrictions – e.g. due to lockups or standstills, private offering restrictions, etc. – if the exchange observes unusual trading activity that implies limited liquidity.
Under the proposed rule, Nasdaq could also halt trading in connection with the request and could require companies with inadequate “unrestricted public float” to adopt a plan to increase the number of unrestricted shares. Nasdaq already has a similar rule for initial listings, but this would extend the concept to continued listing rules.
The SEC posted the rule for comment last week, so we likely won’t know for at least a couple of months whether this rule will be approved in current form or at all.
Last week, the NYSE proposed a rule change to allow listed companies to sell newly issued primary shares on its own behalf directly into the opening trade. As noted in this Davis Polk memo, this change could make the direct listing route more attractive to companies that need to raise capital, although it is an open question whether companies will be able to achieve the desired pricing & distribution of shares in a way comparable to that done in a traditional underwritten IPO.
Some are worried about the investor protection issues raised when the traditional IPO process is not utilized – but others note that there are a number of misconceptions about direct listings, including that a direct listing is even a “capital-raising” activity (see more from this Fenwick & West piece). We’re posting memos in our “Direct Listings” Practice Area – and here are some media pieces:
These individuals worked for four of the most renowned names in the business world: EY, Deloitte,
KPMG and PwC. They are among 20 former employees from the Big Four accounting firms who
have spoken to the Financial Times about their experience of harassment, bullying and
discrimination in the workplace over the course of a year’s investigation into how these firms treat
whistleblowers within their ranks.
The FT identified a disturbingly common pattern in terms of how complainants were treated: most
initially felt ignored, then isolated and were eventually pushed out. Legal clauses aimed at silencing
them swiftly followed; nine of those interviewed said they were pressured into signing restrictive
non-disclosure agreements. Others were asked to sign but resisted.
Not too long after I blogged about how nothing much happens at open Commission meetings, an interesting thing happened – the SEC Chair cited “fishy” comment letters submitted by alleged retail investors ahead of the agency’s proxy advisor rulemaking. This Bloomberg article broke the story by contacting the purported authors of the comment letters. Here’s the intro of the article:
When Securities and Exchange Commission Chairman Jay Clayton handed a policy win to corporate executives this month, he pointed to a surprising source of support: a mailbag full of encouragement from ordinary Americans. To hear Clayton tell it, these folks are really focused on the intricacies of the corporate shareholder-voting process. “Some of the letters that struck me the most,” he said at a commission meeting in Washington, “came from long-term Main Street investors, including an Army veteran and a Marine veteran, a police officer, a retired teacher, a public servant, a single mom, a couple of retirees who saved for retirement.” Each bolstered Clayton’s case for limiting the power of dissenting shareholders.
But a close look at the seven letters Clayton highlighted, and about two dozen others submitted to the SEC by supposedly regular people, shows they are the product of a misleading — and laughably clumsy — public relations campaign by corporate interests.
The two Bloomberg reporters called up the folks listed as the authors of the letters – and the article details a number of responses indicating that the letters were not genuine. The submission of fake letters on rulemakings is more common than you would think (see this old WSJ article) – but it’s not typical that an agency head is touting them publicly (see this article)…
How Much Diligence Should the SEC Chair Conduct Before Touting a Comment Letter?
My answer is “at least some.” An inspection of these letters pretty quickly reveals clues that something is not right. Consider the excerpt from this Matt Levine column:
What is particularly bad here is that “at least 20” of the fake letters contain “an out-of-context phrase inserted into the SEC’s mailing address”: If you’re writing a letter to the SEC, you put the SEC’s address at the top just for old time’s sake (of course you don’t mail it, you just submit it online), and for some reason the person mass-writing these letters inserted the phrase “A Coalition of Growth Companies” into the address that he or she cut and pasted into all the fake letters. Oops!
Matt’s suggested solution to this issue is noted in his column:
The obvious solution here is to explicitly allow fictional comment letters. Of course the SEC already allows fictional comment letters, in the sense that it doesn’t seem to do any identity checking, and we have talked before about how lots of comment letters are blatantly fictitious. Many fictitious comment letters seem to be submitted for the sake of numbers: It is nice to say “a hundred ordinary investors wrote in to support this,” or whatever, but that’s rarely true and should not be taken seriously. But other fictitious letters are like these letters; they are submitted for the sake of their argument, and for a certain ordinary-investor flavor that comes from a talented writer of fiction trying to channel what he thinks an ordinary investor would actually feel and say. Why not let those fiction writers practice openly?
Why not submit a letter from like the Coalition of Giant Company CEOs saying “as CEOs, we like this rule, but we also think it’s in the interests of ordinary investors, and to give you a sense of that here’s what we imagine an 83-year-old Army veteran might hypothetically have to say about it.” And then you write the fake letter, and the SEC can say “we too can easily imagine that an elderly veteran might say ‘how disgusted I am that my financial investments are being used as a political pawn,’” etc. etc. etc., it loses almost none of its rhetorical effect for being fake. Just admit that it’s all fake!
For anyone out there who enjoys “creative writing,” maybe you could get into writing fictional comments to regulatory proposals. I doubt it’s a lucrative gig – but maybe it could be? Provide your anonymous input in this poll:
Recently, the SEC published its latest Reg Flex Agenda – both the “Active” agenda and the “Long-Term Actions” agenda (combined, they are also known as the “Unified Agenda”). When it comes to rulemaking that might be proposed over the next year, it was interesting to see that clawbacks made the list! But pay-for-performance did not. The near-term agenda includes:
1. Auditor independence (April ’20)
2. Clawbacks (September ’20; this would be a second proposal – the first one was back in ’15)
3. Earnings releases/quarterly reports (September ’20; the SEC “requested comments” in January – the next step would be an actual rule proposal)
4. Accredited investor definition (September ’20…though Bloomberg reported that a proposal could be coming soon).
Two years ago, the Reg Flex Agenda was changed so that it came in two flavors: “Existing Proposed & Final Rule Stages” (together known as “Active”) – and “Long-Term Actions.” That has now been slightly changed so that there are three categories – “Pre-Rule Stage” (only one item in this category); “Proposed Rule Stage”; and “Final Rule Stage” – in the “Active” bucket.
Note that there have been a number of proposals issued by the SEC in recent months and those are listed under the “Proposed Rule Stage” rather than the “Final Rule Stage” like other proposed rulemakings – perhaps because the comment periods for those more recent proposals are still open…
SEC’s OCA Issues SAB 119 on Credit Losses
Recently, the SEC’s Office of Chief Accountant issued Staff Accounting Bulletin #119 about credit losses to update existing Staff guidance regarding methodologies and supporting documentation for measuring credit losses, in light of the recent FASB standard on credit losses (ASU 2016-13, codified at ASC Topic 326). Hat tip to Maynard Cooper’s Bob Dow for alerting us to this development…
Cap’n Cashbags: Wage Cuts Across the Board (Except Me)
A member recently said this about my “Cap’n Cashbags” videos: “I will say this for you – you have a singular cinematic style. The Cap’n Cashbags films are a unique combination of post-World War I German Expressionism & mid-1970s “Superfriends” cartoons.”
In this 25-second video, Cap’n Cashbags is just hanging out with his fellow CEO pals who serve on his board’s compensation committee – talking about wage cuts for all workers (except himself):
We just posted the transcript for our recent webcast – “Shareholder Proposals: What Now” – that featured Corp Fin’s David Fredrickson, Davis Polk’s Ning Chiu, Morrison & Foerster’s Marty Dunn and Gibson Dunn’s Beth Ising. Check it out!
ISS Posts Preliminary Updates to Its Compensation Policies!
As noted in this Davis Polk blog, ISS recently released its “preliminary” updates to its compensation policies – which consists of 8 FAQs. Check out the Davis Polk blog for some analysis…
Our December Eminders is Posted!
We have posted the December issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
This is the hardest blog I’ve written in my 17 years of blogging. My love letter to you. After pouring my heart & soul into our community for 17 years, I’m heeding the many signs that it’s time for a change. My last day in this job will be the end of this month.
So as hard as it is to leave y’all, I know in my ‘heart of hearts’ that it’s time to go. And that change starts with a nice, long break before I decide where my journey takes me next. The next few months are what I’m calling my “Epic Time of Yes.”
What will I miss the most? You. I will miss the daily dialogue – mainly by email – with so many of you. I cherish our friendship, our kinship, our love for securities law & corporate governance. I’m hesitant to name any names because there are many hundreds I would mention specifically. I hope we stay in touch. Either via LinkedIn or my gmail account (broc.romanek@).
I want to thank Jesse Brill for believing in me (his family owns the company; not me). Back in 2002, he hired someone who didn’t realize he had the skill set he apparently had. Until a year ago, I was responsible for our marketing, led our strategic direction, engaged in quiet sales efforts & participated in many other behind-the-scenes functions that helped make this job so enjoyable. Of course, the “in-front-of-the scenes” stuff was fabulously rewarding too. In this job, I have worn so many hats – journalist, event planner, publisher and of course, corporate lawyer – that whenever I filled out a form that asked for my occupation, I always paused before deciding which label to assign to myself.
I particularly like to cultivate creativity. I’m proactive in the way that I accomplish that – and I’m happy to share if you’re ever curious about how you can do so too. I recently received what I consider the kindest compliment – that I have a knack for building community. That’s the motto upon which I built the websites for this company from the first day I arrived. I’m proud of the innovations that I have brought to our events – I employed novel ways to make conferences not only bearable, but enjoyable. I think my “Blue Justice League” – a business casual game – is still ahead of its time. And I have heard nothing but rave reviews about the practical way I’ve put together our treatises, handbooks, checklists & paperbacks. Not to mention the sheer number of pages I’ve drafted for those things. Throw in the crazy total of blogs, podcasts, webcasts. The statistics are staggering.
Of course, I couldn’t have done it without the assistance & inspiration of our wonderful team. Dave Lynn and Alan Dye have been invaluable, both as colleagues and friends. Randi Morrison, Julie Hoffman, Linda DeMelis and Susan O’Reilly before they left us. The founder of course, Jesse Brill (and his son Nathan) – and his cohort Mike Gettelman. Barbara Baksa, Mark Borges and Mike Melbinger.
And in our HQ, too many to name – but I will give props to the ones that have been around the longest: Karen, Adam, Mike, Serge, Jacob, Denise, Sun Mi, Raychelle, Ron, Brian and Albert. I have sent more emails to Anne Triola than anyone in the world, our terrific webmaster – I’ll be visiting her in Seattle soon enough. And I will sorely miss the delightful Nona who does our typesetting.
Knowing that I am leaving Liz and John has been the hardest part of this difficult decision. They say good managers hire people that are smarter than they are. I certainly got that right. Working with them the past few years has been truly special. You are in good hands.
Anyway, after my extended holiday, I’m sure I will be wide-eyed & primed for a new adventure. I’m not sure yet whether that will be something that falls within our community – it might, it might not. Luckily, my wife & I recently cut our last tuition check so I’m in no rush to figure that out. I know that I bring passion and a yeoman’s effort to whatever I put my mind to – so hopefully I’ll find a situation that can help bring out the best in me.
In every end, there is a new beginning. Namaste.
“If Not For You”
I’m into all sorts of music. I like to think that I live through “theme songs” that I hear in my head each day. Today’s theme song is George Harrison’s “If Not For You” (written by Bob Dylan). Here’s an excerpt:
If not for you
Babe, I couldn’t even find the door
I couldn’t even see the floor
I’d be sad and blue, if not for you
If not for you
Babe, the night would see me wide awake
The day would surely have to break
It would not be new, if not for you
If not for you, my sky would fall
Rain would gather, too
Without your love I’d be nowhere at all
I’d be lost, if not for you