Yesterday, the Council of Institutional Investors sent this letter to the SEC to request that the Commission initiate rulemaking to require a technological solution to the issue of “traceability.”

The rulemaking petition says that the 2023 decision in Slack Technologies, LLC v. Pirani has jeopardized investor protection. In the Slack case, the SCOTUS held that an investor plaintiff who is seeking a remedy under Section 11 of the Securities Act must prove that the shares that they hold are traceable to a registration statement. That is particularly difficult to do in the direct listing context because unregistered shares enter the market and begin trading alongside registered shares. If there are lockup waivers, traceability may also be an issue in a traditional IPO.

The letter acknowledges that a working group has already urged rulemaking to amend Rule 144 to address this issue (which CII also supported, but it hasn’t gone anywhere). CII says that alternatively, the Commission should consider a technological solution. Here’s an excerpt:

Two potential approaches have been recently identified by former SEC Chair Jay Clayton and former Commissioner Joseph A. Grundfest. In a brief filed as amici curiae in the Slack case they stated that the Commission could:

1. Require that registered and exempt shares offered in a direct listing trade with differentiated tickers, at least until expiration of the relevant Section 11 statute of limitations; or

2. Migrate the entire clearance and settlement system to a distributed ledger system or to
other mechanisms to allow the tracing of individual shares as individual shares, and not as fractional interests in larger commingled electronic book entry accounts.

We note that the second more ambitious approach is aligned with the recommendation CII submitted to the SEC in connection with its 2018 Roundtable on the Proxy Process.

The letter also notes a third alternative that was the subject of a recent study from Columbia Law Professor & Director of the Center on Corporate Governance John Coffee and his colleague Joshua Mitts: adapting the detailed trading records that broker-dealers already maintain as part of the consolidated audit trail – and requiring production of these records to private plaintiffs in Section 11 litigation.

I don’t know enough about broker-dealer record-keeping requirements to gauge whether this would be as minimal a lift as the cited study makes it out to be. I do know that broker-dealers generally aren’t clamoring for more recordkeeping requirements….

– Liz Dunshee

It’s a busy week for the Commissioners next week. On Thursday, March 7th, there will be a meeting of the SEC’s Investor Advisory Committee meeting, which was the subject of a Sunshine Notice because a majority of the Commissioners may attend. Here’s what’s on the agenda:

1. Panel: Discussing the U.S. Securities and Exchange Commission’s Proposals to Improve Equity Market Structure (this includes “payment for order flow”)

2. Panel: Examining the use of Materiality as a Disclosure Standard — Can the Definition be Improved to Better Serve Investors? (Dave’s panel for the SEC Historical Society could be a good “pre-read” for this one)

3. Recommendation on digital engagement practices (i.e., the “gamification” of trading)

The meeting will be in person as well as webcast on the SEC’s website.

– Liz Dunshee

In this 12-minute episode of the “Women Governance Trailblazers” podcast, Courtney Kamlet & I interviewed Locke Lord’s Allison O’Neil, who co-chairs the firm’s White-Collar Defense & Investigations Practice Group. We discussed:

1. Allison’s career path, and her favorite part of leading internal investigations and white-collar defense matters.

2. How Allison has seen internal investigations evolve over the past 5-10 years.

3. The top 3 things companies and advisors should do right now in light of current SEC enforcement trends.

4. Suggestions for those advising boards and making compliance and disclosure decisions, from a litigator’s perspective.

5. What Allison thinks women in the corporate governance field can add to the current conversation on the societal role of companies.

To listen to any of our prior episodes of Women Governance Trailblazers, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.

And if you want more info on SEC Enforcement’s priorities & trends (which are important to know in order to stay out of trouble), check out the transcript from our webcast a few months ago. Allison was part of our excellent panel of speakers!

– Liz Dunshee