Last week, Nasdaq Regulation published Issuer Alert 2024-1, which is focused on the impending changes to the settlement cycle and the impact on certain distributions with a record date after May 28, 2024. Nasdaq recently adopted a rule addressing this topic. With respect to regular distributions, the Nasdaq alert notes:
Among the rules and processes that are impacted by this change is Nasdaq Rule 11140(b)(1), which establishes the “ex-dividend date” for most distributions of cash, stock or warrants. The ex-dividend date is the date on which a security is first traded without the right to receive that distribution. While previously the ex-dividend date was generally one business day before the record date, that will change for distributions with a record date after Tuesday, May 28, 2024, and the ex-dividend date after that will generally be the same date as the record date. In addition, Nasdaq and the other Self-Regulatory Organizations have agreed with the DTCC, which processes distributions for publicly traded securities, that no securities will be ex-divided on May 28, 2024, to avoid confusion about the proper settlement.
Issuers should be aware that the first RECORD DATE to which the new ex-dividend date ruling rationale will be applied will be Wednesday, May 29, 2024.
With respect to large distributions, the alert notes:
Nasdaq Rule 11140(b)(2) establishes the ex-dividend date for cash dividends or distributions, stock dividends and/or splits, and the distribution of warrants, which are 25% or greater of the value of the subject security. These distributions are declared ex dividend on the first business day following the payable date for the distribution. While Nasdaq did not amend Rule 11140(b)(2), in order to avoid an ex-dividend date of May 28, 2024 under this rule, issuers are advised to NOT set May 24, 2024 as the payment date for any dividend or distribution that may exceed 25% of the value of the subject security.
For more information regarding the SEC’s move to T+1 settlement, check out our “Settlement” Practice Area.
Before we can enjoy the summer season we need to get through the upcoming proxy season, and as you prepare of the onslaught, you will definitely want to join me, Mark Borges, Alan Dye and Ron Mueller next Tuesday at 2:00 pm Eastern time for our annual webcast “The Latest: Your Upcoming Proxy Disclosures.” We are planning to delve into a wide range of topics, including:
– Clawbacks
– Pay vs. Performance Disclosures
– CD&A Enhancements & Trends
– Shareholder Proposals
– Proxy Advisor & Investor Policy Updates
– Perquisites Disclosure
– ESG Metrics & Disclosures
– Say-on-Pay & Equity Plan Trends, Showing “Responsiveness” to Low Votes
– Status of Related Rulemaking
This is a webcast that you don’t want to miss! I know that I always learn a lot during our annual program.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE who require advance notice) for this 1-hour webcast. You must submit your state and license number prior to or during the program. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.
The SEC’s years-long effort to address its concerns with SPACs culminated in the adoption of final rules yesterday by a 3-to-2 vote. As summarized in this fact sheet, the final rules, among other things:
1. Require additional disclosures about SPAC sponsor compensation, conflicts of nterest, dilution, the target company, and other information that is important to investors in SPAC IPOs and de-SPAC transactions;
2. Require, in certain situations, the target company in a de-SPAC transaction to be a co-registrant with the SPAC (or another shell company) and thus assume responsibility for the disclosures in the registration statement filed in connection with the de-SPAC transaction;
3. Deem any business combination transaction involving a reporting shell company, including a SPAC, to be a sale of securities to the reporting shell company’s shareholders; and
4. Better align the regulatory treatment of projections in de-SPAC transactions with that in traditional IPOs under the Private Securities Litigation Reform Act of 1995 (PSLRA).
In addition, the Commission provided guidance for assessing when SPACs may meet the definition of an investment company under the Investment Company Act of 1940 and regarding statutory underwriter status under the Securities Act of 1933 in connection with de-SPAC transactions.
The final rules will become effective 125 days after publication in the Federal Register, and compliance with the Inline XBRL tagging requirements will be required 490 days after publication of the final rules in the Federal Register.
Commission Peirce noted in her dissenting statement: “[t]he Commission has failed to identify a problem in need of a regulatory solution. To the contrary, the rule will exacerbate a problem—the shrinking pool of public companies—by closing down one road into the public markets.” In his dissenting statement, Commissioner Mark Uyeda notes in his dissenting statement: “there may be a far simpler explanation behind what the Commission is doing for SPACs: we simply do not like them. In order to achieve this desired outcome, the Commission seeks to impose crushingly burdensome regulations on SPACs as a form of merit regulation in disguise.”
During the open meeting, Chair Gensler citing Aristotle, noted yet again a desire to treat “like as like” and, in that vein, to consider SPACs and the related de-SPAC transactions as alternative IPOs that should be subject to investor protections that are available to investors in traditional IPOs — including as it relates to disclosures and gatekeeper protections. This ignores that the business combination is subject to a state law process applicable to business combinations and that boards of directors have duties. And, of course, one wonders, is it truly “like as like” when companies that begin life as SPACs even once subject to the new, enhanced disclosure requirements will not be treated (once they cease being “shell companies” or former shell companies) like other filers? What would Aristotle have thought about this? A rhetorical question certainly since the great philosopher probably would not have known what to make of our securities laws.
As the blog notes, the final rules take into account only some of the concerns raised during the public comment period. The Commission determined not to adopt the controversial Rule 140a, which related to statutory underwriter status, and an Investment Company Act safe harbor. Instead, the Commission provided guidance on Investment Company Act and underwriter status.
Tune in today at 2 pm eastern for our “The ABCs of Schedule 13D and 13G” webcast to hear Scott Budlong of Barnes & Thornburg, David Korvin of Gibson, Dunn, Jennifer Nadborny of Simpson Thacher, and Andrew Thorpe of Gunderson Dettmer provide insights into the basics of beneficial ownership reporting, the changes to the reporting scheme resulting from the amendments, and the implications of the SEC’s new guidance on cash settled derivatives and Schedule 13D “group” formation.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE who require advance notice) for this 1-hour webcast. You must submit your state and license number prior to or during the program. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.
At the Northwestern Securities Regulation Institute yesterday, I moderated a panel discussion titled “Taking a Fresh Look at Your Company Policies.” I was fortunate to be joined by a great group of panelists: Courtney Kamlet, Vice President, Group General Counsel and Corporate Secretary at Vontier Corporation; Alex Lee, Professor of Law and Director, Center on Law, Business, and Economics at Northwestern Pritzker School of Law and Andy Thorpe, Partner at Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP. We delved into the impact of recent SEC rulemaking and enforcement activity on a number of key policies.
We kicked things off by focusing on the SEC’s recent initiatives on trading in a public company’s securities by the company’s employees, executives and directors (and related persons and entities), as well as the SEC’s recent enforcement actions that have advanced novel theories of insider trading liability. We noted how the SEC’s recent activity in this area has had a significant impact on the policies that companies implement to address these matters.
We addressed the need to step back and consider the purpose of the company’s insider trading policy to avoid a trend toward “mission creep” in those policies. We noted how the prospect of controlling person or agency liability prompts public companies to implement policies and procedures for the purposes of managing access to material nonpublic information and preventing insider trading by company employees, officers and directors. We also discussed how companies should revise their insider trading policies to reflect the SEC’s 2022 changes to Rule 10b5-1 to incorporate the new conditions and restrictions that the SEC imposed through those amendments.
On the topic of addressing gifts in the insider trading policy, we noted how companies should revisit their insider trading policy in light of the SEC’s controversial 2022 guidance by bringing gifts within the purview of the insider trading policy. In this regard, it is appropriate to eliminate exceptions from the insider trading policy’s provisions that are specified for gifts, and broaden the scope of the policy to contemplate “engaging in transactions” in company securities rather than just “buying” or “selling” company securities. As a result of the contemplated changes, gifts should generally be subject to the insider trading policy’s general prohibition on engaging in transactions in the company’s securities while in possession of material non-public information, the pre-clearance procedures and quarterly trading restrictions.
We also discussed the SEC’s novel insider trading theory that has been termed “shadow insider trading,” noting that it is appropriate to revisit language in the insider trading policy that addresses the trading of securities of other companies while aware of material nonpublic information, with the goal of being more specific as to the relationship with those companies and how the information is obtained by the individual in the course of their work for their employer, rather than generally prohibiting trading in other companies’ securities.
For more discussion of necessary changes to insider trading policies, check out our January-February 2023 issue of The Corporate Counsel.
During the “Taking a Fresh Look at Company Policies” panel that I moderated at the Northwestern Securities Regulation Institute yesterday, we discussed three compensation policies that companies should review in light of recent SEC action.
In light of the SEC’s recent focus on equity grant timing in Staff Accounting Bulletin No. 120 and new Item 402(x) of Regulation S-K, we discussed how companies should establish equity grant policies or revisit equity grant policies that have been adopted in the past. Equity grant policies have been an accepted corporate governance practice used to specify the timing of annual and off-cycle grants of equity awards, including both full-value awards and options. Equity grant policies will often contemplate annual grants of equity awards either at the same compensation committee meeting each year, or a specified number of days following the company’s release of earnings for the completed fiscal period following the meeting at which grants are approved by the compensation committee. With respect to off-cycle grants for new hires, individuals receiving promotions and retention awards, the equity award policy will typically specify monthly or quarterly dates for approval, particularly for grants to non-executive officer employees, subject to certain exceptions. In light of the SEC’s recent activity, companies should review their equity grant policy (or consider adopting such a policy) and should consider prohibiting the grant of awards within four days before or one day after filing of any Form 10-Q or 10-K or a Form 8-K with material nonpublic information, as well as limiting off-cycle grants to open window periods, or perhaps require consultation with the legal group to confirm there is no planned release of material nonpublic information that could impact the grant date value of an award.
On the topic of compensation clawback policies, we discussed the challenges of administering multiple clawback policies, and the impact that recent guidance from the DOJ’s Criminal Division regarding the importance of clawback policies to corporate compliance programs might have on the need to address a wider range of clawback triggering events or individuals than what is contemplated by the new exchange-compliant clawback policies adopted in 2023, which focus only on the company’s executive officers and the triggering event of financial statement restatements without regard to an executive officer’s misconduct. We also addressed the need to consider now how the board or the compensation committee will manage the timing of recovery in the event the clawback policy is triggered, as well as the method of recovery of compensation. We discussed the issues with enforcement of clawback policies generally, as well as the implementation of the restriction on indemnification for the recovery of incentive-based compensation in indemnification agreements and charter provisions.
Finally, in light of the SEC’s continued interest in pursuing enforcement actions against companies for disclosure and control violations related to perquisites, we discussed the need to adopt a perquisite policy addressing the following topics:
1. The underlying rationale for perquisites as an element of compensation and how perquisites fit within the company’s compensation approach;
2. The framework for identifying perquisites utilizing the SEC’s two-part;
3. The authorization for providing perquisites from the board or the compensation committee;
4. The methodology that the company uses for valuing perquisites for disclosure and tax purposes; and
5. The process for identifying, tracking, valuing and disclosing perquisites in accordance with the company’s disclosure controls and procedures.
We noted that, as with other company policies, such as the insider trading policy, the perquisites policy should be communicated to employees, and employees responsible for identifying, tracking, valuing and disclosing perquisites should receive training regarding the perquisites policy. Periodic follow-up training may also be appropriate, given that the perquisites that the company provides may change over time.
During the “Taking a Fresh Look at Company Policies” panel that I moderated at the Northwestern Securities Regulation Institute yesterday, we discussed how a focus on two key technology matters will require taking a fresh look at company policies.
We discussed how the SEC’s cybersecurity disclosure rules may require a number of adjustments to policies and procedures related to cybersecurity. Companies may need to establish or revisit a framework for assessing the materiality of cybersecurity incidents “without unreasonable delay” after discovery of such incidents in order to facilitate decisions about whether an incident must be disclosed under SEC rules. Companies also need to ensure that the disclosure process for material cybersecurity incidents is fully integrated with the company’s cybersecurity incident response policies and procedures, so there is a clear approach for escalate cybersecurity incidents to the appropriate personnel or the company’s disclosure committee for prompt disclosure decisions. Further, the company should ensure that robust disclosure controls and procedures are in place to identify and assess the actual or potential impact that cybersecurity incidents may have on the company.
A significant part of the response to the SEC’s new cybersecurity disclosure requirements involves revisiting disclosure controls and procedures to make sure that they address the current reporting of material cybersecurity incidents, including the nature, scope and timing of the incident and the impact or reasonably likely impact of the incident on the company, including on the company’s financial condition and results of operations, within the four business day deadline contemplated by new Item 1.05 of Form 8-K, as well as any information that was not determined or was unavailable at the time of the initial Form 8 K filing. Many companies had already adopted these types of disclosure controls and procedures in response to the SEC’s 2018 interpretive guidance, but now is a good time to review those controls and procedures in light of the specific requirements in Form 8-K.
In response to the SEC new requirements to disclose cybersecurity risk management, strategy and governance in a company’s annual report, companies should consider the overall approach to the management of cybersecurity risks and the company’s efforts to document that approach in applicable policies, procedures, board committee charters and governance guidelines. Companies may want to consider adopting new policies and procedures (or revise existing ones) to specifically address the roles and responsibilities of management and the board in the management and oversight of cybersecurity risks. Boards also may wish to revise committee charters and/or corporate governance guidelines to clearly articulate the delegation of responsibility for the oversight of cybersecurity matters and to document the interaction between management and the board (or the relevant board committees) on cybersecurity threats and incidents.
We also addressed the impact of developments with generative artificial intelligence (AI) on company policies. As public companies embrace generative AI capabilities, we discussed how they must carefully consider both the opportunities and the risks arising from new technologies and consider the overall governance approach that must be implemented to manage these opportunities and risks. For more on the potential risks associated with generative AI, check out our July-August 2023 issue of The Corporate Executive.
The Northwestern Securities Regulation Institute kicked off yesterday with the Alan B. Levenson Keynote Address, and for the second year in a row an SEC Commissioner addressed the topic of Regulation D reform. Commissioner Mark Uyeda delivered a speech addressing potential changes to Rule 506 of Regulation D and other offering exemptions, one year after Commissioner Crenshaw outlined controversial proposals for Rule 506 of Regulation D at the 2023 Securities Regulation Institute. In his speech, Commissioner Uyeda addressed the complexity of exempt offering alternatives that issuers face today, noting:
Our regulatory regime should have an offering exemption tailored to each of the common capital raising scenarios. The requirements to raise capital for a start-up company in the “friends and family” round should be different from the requirements to raise capital for a billion-dollar company shortly before its IPO. The conditions for an operating company seeking money for working capital should be different from the conditions for a pooled investment vehicle seeking subscriptions for the fund.
Addressing the definition of “accredited investor” in Regulation D, Commissioner Uyeda noted how any efforts to raise the net worth and annual income thresholds in the definition as it applies to individuals could have profound implications for racially and ethnically diverse investors and younger investors:
The first group is racially and ethnically diverse investors. Black and Hispanic investors qualify as accredited investors at a lower rate than White and Asian American investors. Increasing the net worth and annual income requirements would have a disproportionate impact on these groups and heighten the disparity. This may be particularly consequential because diverse investors are more likely to fund diverse founders. Entrepreneurs of color may not have adequate access to traditional financial systems, including bank loans, and they may not benefit from an existing network of accredited investors. Accordingly, any reduction in the pool of diverse accredited investors may also adversely affect the ability of persons of color to finance their start-ups.
The second group is younger investors. These investors may not have had the time or opportunities to build more than $1 million in net worth or exceed $200,000 in annual income. However, they may have less need for liquidity, longer investment horizons, and greater risk tolerance compared to a person nearing retirement. The profile of younger investors may make them better suited for investments in private companies, but more stringent net worth and annual income thresholds do not reflect those considerations. By making it more difficult for younger people to qualify as accredited investors, our rules may deny them opportunities to invest in private companies at an earlier age and build wealth through that investment as they age and the company grows.
As an alternative to revisiting net worth and annual income thresholds, Commissioner Uyeda suggested that the Commission should consider new approaches for defining the pool of eligible investors that can invest in private companies. He suggested a “sliding scale” approach, described as follows:
With a sliding scale approach, a person would be able to invest up to a certain percentage, based on a personal financial metric, in private companies during a rolling time period. The percentage would increase as the amount of the financial metric increases. The financial metric could be the dollar value of a person’s investments in securities. For example, if a person’s securities investments were less than $100,000, then the person could invest up to 5% of such amount in private companies during a rolling 12-month period. If securities investments were between $100,000 and $500,000, then the person could invest up to 10%. The percentage would increase until it reaches 100% when the person’s securities investments exceed a certain level.
This approach, as opposed to simply indexing the net worth and annual income tests to inflation, is rooted in the notion that investor protection cannot be achieved through paternalistic policies. Investments in private, growth-stage companies that are higher-risk, higher-reward may be beneficial as part of a person’s diversified portfolio. Our regulatory regime should allow an investor to include these investments in their portfolio to some degree if the investor believes that the risk is appropriate. Prohibiting individuals who fall below net worth and annual income thresholds from making such investments, under the guise of investor protection, may ultimately harm those individuals by depriving them a source of wealth accumulation and reducing their risk diversification. Such prohibition also harms entrepreneurs and start-up companies by denying them potential sources of capital.
On the topic of the growth and size of private markets that has been the subject of recent debate, Commission Uyeda noted the important point that the vast majority of capital raised under Rule 506 of Regulation D is raised by private funds as opposed to operating companies.
With potential amendments to Regulation D on the Commission’s agenda for 2024, we will likely see more debate on this topic in the months ahead.
Corp Fin Director Erik Gerding and Corp Fin Chief Counsel Michael Seaman discussed the latest developments in the Corp Fin yesterday at the Northwestern Securities Regulation Institute. Here are the top five highlights from their comments:
1. On the topic of cybersecurity, Gerding noted that when the Staff is reviewing the new cybersecurity disclosures, they will not be in the business of issuing “gotcha” comments. He noted that the Staff has provided guidance through Compliance and Disclosure Interpretations and Gerding’s statement on cybersecurity. He also noted that he continues to encounter misconceptions about the incident reporting aspect of the new cybersecurity rules, in that there seems to be a belief that the reporting obligation kicks in after the incident occurs, rather than after the issuer has determined that the incident is material. Gerding noted that the adopting release addresses how the materiality determination is nuanced and not anticipated to be a snap judgment, recognizing that assessing materiality is a deliberative process that can take some time.
2. On the topic of disclosure developments, Gerding noted that the Staff has been focused on disclosure in filings by financial institutions concerning interest rate and liquidity risk. The Staff has been seeking more particularized and meaningful disclosure concerning these risks in the current environment and the actions taken to address those risks. Gerding also reviewed the Staff’s guidance over the course of the past few years regarding China-based issuers and the Holding Foreign Companies Accountable Act.
3. Seaman noted that Corp Fin will be hiring a new Chief of the Office of Enforcement Liaison, and also addressed the current shareholder proposal season. He indicated that the submission of shareholder proposal no-action requests is up this year, with 167 requests coming into Corp Fin at this point as compared to 123 no-action requests last year. He indicated that the topics of the subject proposals is pretty consistent with recent years, including corporate governance, environmental and discrimination. Seaman noted that the new topic this season is artificial intelligence (AI), with a number of proposals addressing AI issues. He noted that there are a number of no-action requests pending that represent issues of first impression. Finally, he noted that the Staff is receiving shareholder proposal no-action requests through its new web-based form; however, if an one encounters technical difficulties with the SEC’s website, you can continue to email no-action requests to the Staff.
4. On the topic of AI, Gerding noted that the Staff is focused on what companies are saying in their SEC filings about AI. He noted that companies should have a basis for their claims and should address the impact on the company in terms of its results of operations and financial condition. Gerding indicated that boilerplate is showing up in AI disclosures, particularly in the context of risk factors. Gerding noted that there may be Staff guidance on this topic.
5. Addressing the first year of implementing the pay versus performance disclosure, Seaman pointed out the Staff’s approach to its review of filings and the Compliance and Disclosure Interpretations that the Staff issued in the Fall to address a number of interpretive issues. He highlighted the frequent comment topics, including omitting relationship disclosure, providing a description of how non-GAAP financial measures are calculated when they are listed as the Company Selected Measure, and using required headings and formatting for tables while following the Commission’s guidance from the adopting release when providing supplemental information.