Liz has blogged a couple of times about some of the comments on the SEC’s Rule 10b5-1 proposal, and Dave recently hosted a podcast with Stan Keller, who helped draft the ABA comment letter on the proposal.  Now, just to make sure you’re completely up to date, here’s a recent Bryan Cave blog that reviews representative comments from the business and investor communities. I’m sure that it will come as no surprise that most investor groups were in favor of the proposal, while most business groups didn’t think much of it.

Among other things, most business groups commenting on the proposal called for shortening or eliminating the proposed 120-day cooling off period, clarifying or narrowing the proposed restrictions on multiple overlapping plans, and eliminate the certification and insider trading plan disclosure requirements.  As this excerpt indicates, commenters zeroed in on the SEC’s statements about the potential that gifts might be subject to insider trading liability:

As noted in our December 16 client alert, the SEC included in its proposals a cautionary warning about the timing of gifts of securities. Some commenters strongly objected to the SEC’s warning, noting the absence of any judicial or SEC precedent for its position, and its failure to explain the circumstances where a charitable gift would involve a fraudulent breach of trust and confidence. Instead, a donor should be able to avoid insider trading liability by obtaining the charitable donee’s commitment not to dispose of the securities until any MNPI known by the donor at the time of the donation has become public or stale.”

I’m not a big fan of a number of the proposed changes to Rule 10b5-1, and I’m glad to see that those who actually work with the rule on a regular basis appear to have weighed in during the comment period. We’ll see if they carry any weight with the commissioners.

– John Jenkins

Determining whether a company has a duty to disclose a governmental investigation is always a complicated process, and the outcome of cases alleging the existence of such a duty depends on the specific facts and circumstances.  That being said, you can add the 2nd Circuit’s recent decision in Noto v. 22nd Century Group, Inc. (2d. Cir. 5/22) to the list of cases finding that the plaintiffs sufficiently alleged that a company had a duty to disclose the existence of an SEC investigation.  This excerpt from a recent Proskauer blog summarizes the decision and its potential implications:

The Court of Appeals for the Second Circuit yesterday reversed the dismissal of a securities class action alleging fraud based on the defendants’ failure to disclose an SEC investigation into the company’s disclosed financial-control weaknesses. The May 24, 2022 ruling in Noto v. 22nd Century Group, Inc. (No. 21-0347) is fact-specific, requiring disclosure of the investigation because the defendants (i) had disclosed the accounting deficiencies that had led to the investigation, (ii) had said they were working on the problem, and (iii) eventually had said they had resolved it, even though the SEC investigation had been pending during that entire period.

The Noto decision could affect disclosure assessments where issuers disclose an underlying accounting problem or other deficiency but are debating whether they must also disclose a pending SEC or other governmental investigation related to that specific problem. Depending on the facts and circumstances of the particular situation, a court might hold that failure to disclose the governmental investigation makes the disclosure of the underlying problem materially misleading because nondisclosure of the investigation could cause reasonable investors to make “an overly optimistic assessment of the risk” posed by the underlying problem.

– John Jenkins

This Goodwin blog discusses the distinction between “non-GAAP financial measures” (NGFMs) subject to Reg G and Item 10(e) of S-K, and other disclosures that, while they aren’t GAAP numbers, aren’t subject to the requirements imposed by those rules. Here’s an excerpt:

In very general terms, a NGFM is a numerical financial measure that reflects adjustments not permitted or required by GAAP. Because the application of this definition may not always be clear, Regulation G specifically excludes operating and other financial measures and ratios and statistical measures calculated using financial measures calculated in accordance with GAAP and/or the somewhat circular and often less than helpful category of “operating measures or other measures that are not non-GAAP financial measures.” The Financial Reporting Manual, prepared by the Division of Corporation Finance, provides a series of examples, including among others the following:

– operating and statistical measures (such as unit sales, number of employees, number of subscribers), and

– ratios or statistical measures that are calculated using exclusively operating measures or other measures that are not non-GAAP measures (such as dollar revenues per square foot for hotels, same store sales, and revenues per slot machine for casinos, assuming that sales/revenues for each measure is based on GAAP numbers).

The blog provides a reminder that because metrics like these aren’t subject to the requirements that apply to NGFMs, adjustments to them that would be problematic if applied to a GAAP financial measure are not per se problematic in these cases. However, it also points out that Rule 10b-5 applies to these statements and the SEC’s guidance on disclosure of KPIs should also be kept in mind.

For helpful resources on Reg G and non-GAAP issues – including our 133-page handbook with common questions & answers – visit our “Non-GAAP” Practice Area.

– John Jenkins