August 21, 2020

SEC Open Meeting: S-K Modernization On the Agenda for Next Wednesday

Yesterday, the SEC scheduled an open meeting for August 26th. The meeting’s agenda features a couple of big potential rule amendments. This excerpt from the meeting’s Sunshine Act notice says that the first agenda item is:

Whether to adopt amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K. These disclosure items, which have not undergone significant revisions in over 30 years, would be updated to account for developments since the rules’ adoption or last revision, to improve disclosure for investors, and to simplify compliance for registrants. Specifically, the amendments are intended to improve the readability of disclosure documents, as well as discourage repetition and the disclosure of information that is not material.

There have been so many S-K-related proposals floating around that it’s sometimes hard to keep track, but this one relates to potential changes to Item 101, 103 & 105 that were proposed almost exactly a year ago. It’s worth noting that this is the proposal that raised the idea of requiring some kind of “human capital” disclosures – and it will be interesting to see what any final rule has to say about that topic.

SEC Open Meeting: “Accredited Investor” & “QIB” Definitions Also Up to Bat

The second item on next week’s agenda is also significant – and controversial. The Sunshine Act notice says that the SEC will consider:

whether to adopt amendments to the definition of “accredited investor” in Commission rules and the definition of “qualified institutional buyer” in Rule 144A under the Securities Act to update and improve the definition to identify more effectively investors that have sufficient financial sophistication to participate in certain private investment opportunities. The amendments are the product of years of efforts by the Commission and its staff to consider and analyze possible approaches to revising the accredited investor definition.

The SEC split 3-2 on the decision to issue these proposals last November, with Commissioner Allison Herron Lee & then-Commissioner Robert Jackson dissenting.  As proposed, the amendments to the “accredited investor” definition would expand the number of investors eligible for that status by allowing individuals to qualify based on their professional knowledge, experience or certifications. The proposed amendments also would expand the list of entities that may qualify as accredited investors.

Business Interruption Insurance: Covid-19 Plaintiffs Get a Win

We’ve previously blogged about the challenges facing companies trying to assert claims under business interruption policies for pandemic-related losses, and the early returns from court cases involving these claims weren’t encouraging. One of the biggest challenges that plaintiffs have faced is persuading insurers & courts that their claims involve “physical loss,” which is a necessity under most policies in order to trigger coverage.

However, Alison Frankel blogged about a recent decision by a federal judge in Kansas City involving claims against Cincinnati Insurance that gives plaintiffs some reason for hope – and may even provide a roadmap for these claims. Here’s an excerpt:

The Kansas City plaintiffs, unlike plaintiffs in some of the previous cases, argued that the coronavirus – as a widespread, airborne virus that was rampant in the community – had likely infected their properties. It was the presence of the virus, they argued, that had rendered their businesses unsafe and unusable, forcing the shutdowns that triggered their insurance coverage.

Cincinnati, represented by Litchfield Cavo and Wallace Saunders, argued that COVID-19 did not trigger business interruption insurance coverage because it did not cause tangible, physical damage like a fire or hurricane. The coronavirus, Cincinnati argued, can be cleaned from surfaces or will otherwise die naturally within days, leaving no physical trace. Moreover, the insurer argued, the salons and restaurants hadn’t even shown the virus was actually present within their properties.

Judge Bough, however, said that under the ordinary meaning of “physical loss,” the policyholders suffered a loss when the spread of coronavirus led to prohibitions or restrictions on their businesses.

In the Judge’s view, although the coronavirus may not have caused physical damage, the insurer’s business interruption policy also covered physical loss – and a business may suffer physical loss if its premises are rendered unusable. Here’s what Alison says is the key takeaway for potential plaintiffs:

Argue that your business was likely contaminated by the coronavirus as it spread across the country through unseen droplets – and that the presence of the virus led to a physical loss, even if the particles did not cause lasting physical damage.

John Jenkins