March 30, 2021

Congressional Review Act Invoked Against 14a-8 Amendments!

When the Rule 14a-8 amendments were approved in high-drama fashion last fall, they were the first revisions to the submission thresholds in over 20 years, and the first revisions to the resubmission threshold since 1954. Some viewed them as a “capstone” to former SEC Chair Jay Clayton’s tenure. Now it’s become more likely that could all be undone.

Late last week, Senator Sherrod Brown (D-OH) introduced a resolution calling for reversal of last year’s Rule 14a-8 amendments under the Congressional Review Act. As I blogged in January, that’s a complicated and rarely used law that allows Congress to overturn rules that have been recently finalized by federal agencies. This Medium post from Morningstar’s Global Head of Sustainable Investing Research explains how a rescission could happen – and what the impact would be:

The CRA allows Congress to pass a joint resolution disapproving of an agency’s final rule, which requires only a simple majority of both chambers to pass, along with the president’s signature. Congress must invoke the CRA within 60 days of a finalized rule. For rules that go final within 60 legislative days of the end of one Congress, the new Congress gets a new 60-day period to invoke the CRA.

Once the joint resolution is signed, the shareholder rule will not only be rescinded, the SEC will be prohibited from reissuing the same or a substantially similar regulation in the future, unless authorized by Congress to do so.

That means the SEC will revert back to the status quo ante, which required only that a shareholder needed to hold $2,000 worth of company’s stock for 12 months in order to propose a resolution. To be eligible for resubmission, a resolution must receive 3% of the vote the first time it appears on a ballot, 6% the second time, and 10% thereafter.

It would be very unusual to overturn an SEC rule using the Congressional Review Act. The only time that’s ever happened was when the 2016 “resource extraction rule” was killed the following year. This FAQ says that only a total of 17 rules have ever been overturned, 16 of which were “Obama-era” rules overturned by the Trump administration.

That said, plenty of people have been speculating that the shareholder proposal amendments would be vulnerable to this type of reversal, due to the fact that they were adopted via a 3-2 vote and the expected priorities of the incoming SEC Chair. That speculation intensified after Interim SEC Chair Allison Herren Lee gave a speech two weeks ago saying that reversal was on the table. Here’s an excerpt:

I have asked the staff to develop proposals for revising Commission or staff guidance on the no-action process, and potentially revising Rule 14a-8 itself. The goal is to bring greater clarity to the no-action relief process, increase the number of proposals on the ballot that are well-designed for shareholder deliberation and votes, and reduce the number that are not.

This could involve reversing last year’s mistaken decision to bar proponents from working together and restricting their ability to act through experienced agents. It could also involve reaffirming that proposals cannot be excluded if they concern socially significant issues, such as climate change, just because they may include components that could otherwise be viewed as “ordinary business.”

Many companies welcomed the modernization of Rule 14a-8, and a reversal now could be like snatching a gift back from a kid on Christmas. On the other hand, investors have been vocal in their criticism. The shareholder proponent speakers in our January webcast argued that the amendments could cause companies to suffer unintended consequences, as investors’ outlet for expressing dissatisfaction would shift from submitting precatory shareholder proposals to voting “against” directors or even conducting “vote no” campaigns or proxy contests. But, companies would probably prefer to assess that risk on a case-by-case basis and include proposals in their proxy statements at their discretion.

This Reuters article reports that the National Association of Manufacturers and the US Chamber have spoken out against the effort to overturn the amendments. The resolution has been referred to the Senate Committee on Banking, Housing & Urban Affairs – they haven’t scheduled a date for next steps – and it’s hard to predict with certainty whether the all Senate Democrats would approve the resolution, which is what it would need to pass (along with almost all Dems in the House). Nothing going on here will affect this year’s annual meetings, since the Rule 14a-8 amendments aren’t scheduled to go into effect until next year.

SPACs: Enforcement Actions Coming Soon?

SPAC deals have raised nearly $90 billion so far this year in the US alone! It’s making some folks nervous. The SEC’s Office of Investor Education & Advocacy warned people a few weeks ago that they might want to think twice before throwing money onto the pile. Yes, even if the SPAC is run by A-Rod – and even if it’s a Shaq de-SPAC doing what a traditional IPO couldn’t accomplish for WeWork (if, this time around, all goes according to plan, the coworking space company also will raise $800 million through a PIPE as part of the deal).

Last week, Reuters reported that the SPAC boom also might be attracting attention from the SEC’s Enforcement Division. Underwriters who’ve been involved in these deals have received letters asking about deal fees, volumes, compliance, reporting and internal controls. To be clear, there’s no formal investigation demand at this point. But, the SEC’s interest in this information shows that it’s continuing to closely monitor these IPOs – so you should make sure there are strong compliance procedures in place. The article gives some guesses about what the Commission could be watching:

The SEC has also scrutinized some companies that went public via SPAC deals, including electric vehicle-makers Lordstown Motors Corp, Nikola Corp and Clover Health Investments, the companies have disclosed.

Investors have sued eight companies that combined with SPACs in the first quarter of 2021, according to data compiled by Stanford University. Some of the lawsuits allege the SPACs and their sponsors, who reap huge pay-days once a SPAC combines with its target, hid weaknesses ahead of the transactions.

The SEC may be worried about the depth of due diligence SPACs perform before acquiring assets, and whether huge payouts are fully disclosed to investors, said a third source.

Another potential concern is the heightened risk of insider trading between when a SPAC goes public and when it announces its acquisition target, the second source added.

Whistleblowers: Record-Setting Year…And It’s Only March!

The SEC announced yet another whistleblower award yesterday. While the award itself was rather modest – a cool $500k – what caught my eye was that the Commission has now made 40 individual awards this year, surpassing last year’s record of 39. And it’s only March!

The SEC highlighted in its announcement & the related order that the whistleblower had first reported alleged securities violation internally to their employer, which prompted an internal investigation. The whistleblower was eligible for the SEC award because they also reported the info the SEC within 120 days of the internal report. Lynn blogged earlier this month about how the Commission has been applying recent amendments to its whistleblower program to recent awards…

Liz Dunshee