Earlier this month, former securities analyst Ray Dirks passed away at the age of 89. Dirks was the petitioner in the famous case of Dirks v. SEC, in which the SCOTUS overturned a censure issued against him by the SEC for violating Rule 10b-5’s prohibition on insider trading. The SEC contended that Dirks, who uncovered & alerted the SEC and The Wall Street Journal to potential corporate wrongdoing, violated the prohibition on insider trading by “tipping” his firm’s clients to what he uncovered.
The SCOTUS rejected that argument, but in overturning Dirks’ censure, it established a standard for tipper/tippee liability that turned on whether or not the tipper violated a fiduciary duty by sharing the information in question. In a recent blog on the occasion of Dirks’ passing, Gunster’s Bob Lamm points out that this standard has created a lot of confusion and uncertainty about the boundaries of insider trading liability:
I don’t blame the Court for coming up with this rather convoluted route to Dirks’s exoneration; after all, one of my law school professors used to beat us over the head with the notion that courts will sometimes bend over backwards to fashion a remedy where the strict letter of the law leads to an unjust result. That seems to me to be a good thing. Also, I know that I’m in the minority – possibly a very small minority – that believes that the goal of insider trading law should be to create a level playing field rather than to punish breaches of fiduciary duty.
Still, the Dirks case has resulted in decades of confusion over what is – and what is not – insider trading, and I believe that we’d have all been better off if the SEC had not engaged in overzealousness where Dirks was concerned – particularly given the agency’s non-response to the allegations he’d brought to its attention.
– John Jenkins
The latest issue of The Corporate Counsel has been sent to the printer. It is also available now online to members of The CorporateCounsel.net who subscribe to the electronic format. The issue includes the following articles:
– SEC Amends Section 13(d) and Section 13(g) Beneficial Ownership Reporting Rules
– Related Person Transactions: Item 404’s Requirements
Please email sales@ccrcorp.com to subscribe to this essential resource if you are not already receiving the important updates we provide in The Corporate Counsel newsletter.
– John Jenkins
The Standard Industrial Classification Codes that appear in a company’s EDGAR filings indicate the type of business a company engages in and are used by Corp Fin to assign review responsibility for the company’s filings. Sometimes, a company’s business may change sufficiently over time to result in a change in its primary SIC code – which raises the question, “How does a company request the SEC to change in its SIC code?” One of our members recently did this for a client, and shared with us the following roadmap for requesting a change:
We had occasion to look into changing an SIC code for a client, and the info on the SEC’s website is outdated. Here is the updated information we received:
You need to send an e-mail requesting the SIC code change to: EDGARFilingCorrections@sec.gov. The email needs to include:
o Name of company
o CIK
o Current SIC
o Requested new SIC
o See sample e-mail below
The request will be reviewed by the committee that reviews these requests periodically. Note: There is dated information on the Internet indicating the SEC only reviews these requests in June of each year but that is no longer the case. These requests are reviewed on a rolling basis.
Once approved, the change in SIC code will not take effect until you make your next required filing with the SEC (e.g., 8-K, 10-Q, 10-K, etc.). Note: The new SIC code will not be approved unless it is representative of your primary source of revenue.
Sample e-mail:
Subject: SIC Code update for [INSERT COMPANY NAME] (CIK [INSERT CIK])
We are respectfully requesting an update to the following SIC code:
CIK [INSERT CIK]
Company Name [INSERT COMPANY NAME]
Current SIC [INSERT CURRENT SIC]
Requested SIC [INSERT NEW SIC]
Writing this blog brought to mind one of my favorite examples of a corporation completely changing its business – a company called Mary Carter Paint, which in the late 1960s opted to get out of the paint business and into something else. When it did that, it changed its name to one you’re probably much more familiar with – “Resorts International.”
– John Jenkins
Check out our latest “Timely Takes” Podcast featuring Orrick’s J.T. Ho & his monthly update on securities & governance developments. In this installment, J.T. reviews:
– The status of the SEC’s Share Repurchase Disclosure Rule
– Glass Lewis’s 2024 Voting Guidelines
– The SEC’s Solar Winds Enforcement Proceedings
– New CDIs from Corp Fin
– No-Action Letter Processes
As always, if you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share in a podcast, we’d love to hear from you. You can email us at john@thecorporatecounsel.net or mervine@ccrcorp.com.
– John Jenkins
Earlier this week, ISS Governance announced its 2024 Benchmark Policy Updates, which will be effective for meetings on or after February 1, 2024. In a miracle of miracles, no updates are contemplated for the US Benchmark Proxy Voting Guidelines. Instead, ISS Governance announced changes to its Canadian and Japan policies and Asia-Pacific regional markets policies. Appendix B to this summary shows there is just one clarification to the U.S. policy that codifies ISS’s case-by-case approach on shareholder proposals to require shareholder ratification of executive severance arrangements or payments. I cannot remember if there was ever another time when ISS did not make any changes to its US benchmark proxy voting guidelines. Honestly, it feels kind of weird.
Of course, this outcome was foreshadowed last month when ISS Governance announced the launch of its open comment period on proposed changes to its benchmark voting policies. Notably, ISS Governance did not solicit comments for any policy changes in the US market.
– Dave Lynn
The latest issue of The Corporate Counsel has been sent to the printer. It is also available now online to members of The CorporateCounsel.net who subscribe to the electronic format. The issue includes articles on:
– Wells Notices: An Overview of the Disclosure Landscape
– Capital Markets Alternatives: PIPEs and Variations on the PIPEs Theme
– The Limits of Exculpation: Personal Liability for Acts Taken on Behalf of a Corporation
Please email sales@ccrcorp.com to subscribe to this essential resource if you are not already receiving the important updates we provide in The Corporate Counsel newsletter.
– Dave Lynn
Did you realize that the last day of this year will be 123123? Consider my mind blown.
With the holidays just around the corner, we will not be blogging tomorrow, and you should expect only light blogging next week. We will be back in full force in January. Happy holidays, everyone!
– Dave Lynn
You might notice an extra spring in every securities lawyer’s step this holiday season now that they know for sure that they will not have to compile detailed tabular disclosure of daily repurchase data, because the SEC’s share repurchase disclosure modernization rulemaking has been vacated by the United States Court of Appeals for the Fifth Circuit. As a result, a rule that I have characterized as “written by economists for economists” and which prompted some probing questions from me as to why this disclosure approach was necessary did not survive to see its implementation (at least for now).
As you no doubt recall, shortly after the SEC adopted the final share repurchase disclosure rulemaking, the U.S. Chamber of Commerce, the Longview Chamber of Commerce and the Texas Association of Business filed a lawsuit challenging the SEC’s share repurchase disclosure rule changes, and at the end of October the Fifth Circuit held that the SEC had acted arbitrarily and capriciously, in violation of the Administrative Procedure Act, when it failed to respond to the petitioner’s comments and failed to conduct a proper cost-benefit analysis. The Court granted the petition for review and issued a limited remand, directing the SEC to correct the defects in the rule within 30 days. The SEC stayed the rule while it conducted its efforts to address the defects in the rulemaking. The SEC ultimately sought an extension of the thirty-day period, but was denied that extension, and when the SEC was not able to meet the Court’s deadline, the Chamber, et al. filed a motion to vacate the rule.
Yesterday, the Fifth Circuit issued an opinion and judgment vacating the rule. The opinion states (footnotes omitted):
On October 31, 2023, we issued an opinion on petitioners’ challenge to the rule of the Securities and Exchange Commission (“SEC”) requiring issuers to report day-to-day share repurchase data once a quarter and to disclose the reason why an issuer repurchased shares of its own stock. Chamber of Com. of the U.S. v. SEC, 85 F.4th 760 (5th Cir. 2023). We held that the SEC had acted arbitrarily and capriciously, in violation of the Administrative Procedure Act (“APA”), when it failed to respond to petitioners’ comments and failed to conduct a proper cost-benefit analysis. We therefore granted the petition for review, issued a “limited remand” directing the SEC “to correct the defects in the rule within 30 days,” and “retain[ed] jurisdiction to consider the decision . . . made on remand.” Id.
On November 22, 2023 — twenty-two days after the initial opinion issued—the SEC filed an opposed motion seeking to extend the thirty-day remand period for an indefinite time. In that motion, the agency explained it “ha[d] worked diligently to ascertain the steps necessary to comply with the Court’s remand order and ha[d] determined that doing so w[ould] require additional time.” We denied that motion on November 26, 2023.
The thirty-day remand period expired on November 30, 2023. One day later, at the request of the Clerk of this court, the SEC filed a letter stating that “the Commission was not able to ‘correct the defects in the rule’ within 30 days of the [c]ourt’s opinion.”
I.
Under the APA, this court must “set aside agency action[] found to be arbitrary [or] capricious, contrary to constitutional right, or without observance of procedure as required by law.” Id. at 767–68 (citations omitted) (cleaned up). Accordingly, “[t]he default rule is that vacatur is the appropriate remedy.” Data Mktg. P’ship v. Dep’t of Lab., 45 F.4th 846, 859 (5th Cir. 2022).
Departing from that default rule is justifiable only in “rare cases”1 satisfying two conditions: First, there must be a “serious possibility” that the agency will be able to correct the rule’s defects on remand. Texas v. United States, 50 F.4th 498, 529 (5th Cir. 2022) (citation omitted). Remand without vacatur is therefore inappropriate for agency action suffering from one or more serious procedural or substantive deficiencies.2 Second, vacating the challenged action would produce “disruptive consequences.” Id. (citation omitted).
In this panel’s earlier opinion, we “recognized that there was at least a serious probability that the SEC would be able to substantiate its decision if given an opportunity to do so.” 85 F.4th at 780 (citations omitted) (cleaned up). We therefore “afford[ed] the agency limited time to remedy the deficiencies in the rule” by remanding “with direction . . . to correct the defects in the rule.” Id.
That thirty-day period has come and gone. The SEC claims to have “worked diligently to ascertain the steps necessary to comply with the Court’s remand order.” Yet the agency has nothing to show for its efforts. It returns to this court empty-handed, admitting that it “was not able to ‘correct the defects in the rule’ within 30 days.” The rule remains no less flawed—and no less unlawful—than it was on October 31, 2023.
II.
The SEC acted arbitrarily and capriciously, in violation of the APA, when it failed to respond to petitioners’ comments and failed to conduct a proper cost-benefit analysis. The challenged rule is VACATED. The mandate shall issue forthwith.
In a separate judgment, the Court stated (footnotes omitted):
This cause was considered on the petition of Chamber of Commerce of the United States of America, Longview Chamber of Commerce, Texas Association of Business, for review of an order of the United States Securities and Exchange Commission and was argued by counsel.
IT IS ORDERED and ADJUDGED that the decision of the United States Securities and Exchange Commission is VACATED.
IT IS FURTHER ORDERED that Respondent pay to Petitioners the costs on appeal to be taxed by the Clerk of this Court.
And with that, we observe the end of the share repurchase disclosure rulemaking, at least for now.
– Dave Lynn
Of course, the Fifth Circuit decision vacating the share repurchase disclosure rule may not be the end of the story. It is possible (and perhaps likely) that the SEC will appeal the Fifth Circuit’s decision, which could drag this whole situation out for quite some time. For now at least, the rule changes have been vacated and were already subject to the SEC’s November 22, 2023 stay, so it does not look like we will have to comply with the new requirements in upcoming periodic reports as originally anticipated by the SEC. Instead, as this Weil alert notes, subject to further guidance from the SEC, we should continue complying with those pre-existing requirements in Item 703 of Regulation S-K that we have been working with for the past two decades. In case you are new to the game, this involves providing information about share repurchases every quarter on an aggregated, monthly basis.
– Dave Lynn
Where did 2023 go? As we stare down the prospect of a new year and the annual reporting and proxy season, Goodwin’s Year-End Toolkit is now available. The Year-End Toolkit includes updated director and officer questionnaires and detailed calendars covering reporting and compliance deadlines. Download it today!
– Dave Lynn