Yesterday, the SEC announced that SEC Enforcement Director Gurbir Grewal will be leaving the SEC, effective October 11, 2024. Sanjay Wadhwa, the Division’s Deputy Director, will serve as Acting Director, and Sam Waldon, the Division’s Chief Counsel, will serve as Acting Deputy Director. Grewal’s tenure as Director of the Division of Enforcement will no doubt be remembered for being very active. The press release announcing the personnel changes notes:
“We have been incredibly fortunate that such an accomplished public servant, Gurbir Grewal, came to the SEC to lead the Division of Enforcement for the last three years,” Chair Gary Gensler said. “Every day, he has thought about how to best protect investors and help ensure market participants comply with our time-tested securities laws. He has led a Division that has acted without fear or favor, following the facts and the law wherever they may lead. I greatly enjoyed working with him and wish him well.”
Chair Gensler added, “I’m pleased that Sanjay Wadhwa has said yes to taking on the Acting Director role. He has served as part of a remarkable leadership team, along with Gurbir, as Deputy Director and has been with the agency for more than two decades. He has shown strong leadership, is widely respected among his colleagues, and has provided invaluable counsel to the Commission. I’m pleased that Sanjay will be joined by Sam Waldon, currently Enforcement’s Chief Counsel, who is becoming Acting Deputy Director. Sam has provided sound advice to the Division and the Commission on critical legal issues.”
Before joining the SEC as Director of the Division of Enforcement in June 2021, Grewal served as Attorney General of the State of New Jersey, and he had served as a prosecutor at the state and Federal levels. He spent time in private practice as well.
Over the next few months, we will likely be covering more departures of the SEC’s current leadership. It is rare these days that Directors and other senior leaders at the SEC serve for more than the few years that coincide with a Chair’s tenure. Particularly in a Presidential election year where no incumbent is running, it is foreseeable that changes to the SEC’s leadership and agenda will be coming soon, no matter what the outcome of the election. In my recollection, the reality of this inevitable turnover at the top at the SEC is always tough to navigate, because as a Staffer you are doing your thing and then someone new comes along and changes the priorities without necessarily understanding the situation. But then again, that is the job you sign up for!
Last week, the SEC posted a notice indicating that the NYSE had withdrawn a proposed rule change that would have extended the deadline for a de-SPAC transaction from 36 to 42 months in certain circumstances. This Cooley blog notes:
The proposal would have extended that deadline to 42 months under certain circumstances. As proposed to be amended, Section 102.06e would have provided that the SPAC “will be liquidated if it has not (i) entered into a definitive agreement with respect to its Business Combination within (A) the time period specified by its constitutive documents or by contract or (B) three years, whichever is shorter or (ii) consummated its Business Combination within the time period specified by its constitutive documents or by contract or forty-two months, whichever is shorter.” If the SPAC failed to comply, the NYSE would promptly commence delisting procedures.
The NYSE proposal was originally posted in April, and in May, the SEC posted a notice of designation of a longer period for SEC action. Then, in July, the SEC posted an Order instituting proceedings to determine whether to approve or disapprove the proposed rule.
The SEC’s Order Instituting Proceedings raised a number of concerns with the NYSE proposal, and the only comment letter that was submitted by the Council of Institutional Investors expressed concerns about the proposal that were consistent with the SEC’s concerns. With all of these headwinds, it is not too surprising that the NYSE ultimately withdrew the proposed rule change.
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The SEC recently announced the publication of its report to Congress summarizing policy recommendations made during the 43rd Annual Small Business Forum. The Forum, which took place on April 16-18, is hosted by the SEC’s Office of the Advocate for Small Business Capital Formation. As this Mayer Brown blog notes, the report highlights the following fifteen policy recommendations that emerged from the dialogue at the Forum:
– Support entrepreneurs, including underrepresented founders, with modernized educational resources to allow businesses to better understand how to access capital, including capital from investors
– Expand the accredited investor definition to include additional measures of sophistication, including through an investor course or test
– Establish a regulatory framework for finders that includes an exemption from broker-dealer registration and helps facilitate small business capital formation
– Expand regional, federal, and state options available for non-dilutive funding to support the earliest stages of entrepreneurship
– Ensure capital raising rules provide equitable access to capital for underrepresented founders and investors
– Bolster and expand tax incentives that promote equity ownership and drive investment in the startup and small business ecosystem
– Focus SEC rulemaking efforts on reducing administrative and regulatory burdens on small business and their investors to improve capital allocation efficiency
– Support underrepresented emerging fund managers—specifically diverse and women managers—who are building funds that diversify capital allocation, engage sophisticated investors, and challenge pattern matching trends
– Support companies that offer equity ownership to employees and gig workers, and support policies that would better enable employee-owners to realize the value of their equity through transparency, appropriate tax policy, and access to secondary liquidity
– Expand venture capital funds’ qualifying investments to include fund-of-funds investments in other venture capital funds and investments acquired through secondary transactions
– Increase the $75 million public float threshold in the accelerated filer definition so that only larger filers are required to provide an auditor attestation of management’s assessment of internal control over financial reporting over Section 404(b) of the Sarbanes-Oxley Act
– Revise the “small entity” definition under the Regulatory Flexibility Act to better assess the regulatory costs of compliance for small and growing businesses
– Improve public trading for small companies by requiring more disclosures about short selling, institutional holdings, insider and affiliate holdings and transactions, paid stock promotion and information about the security from transfer agents
– Revise the public float and revenue thresholds for smaller reporting companies and accelerated filers to be rolling averages instead of thresholds determined on a particular date
– Revise Section 12(g) of the Securities Exchange Act of 1934 to remove the threshold for non-accredited investor holders and increase the asset threshold to $20 million
In commenting on the views of participants with respect to the challenges facing smaller public companies, the report notes that participants identified the principal challenge confronting smaller public companies as the cost of compliance. This was followed, in turn, by the burden of reporting requirements, and by trading volume concerns. Participants noted that the top priority for smaller public companies when it comes to their investors and shareholders was attracting more institutional investors. The next most significant priorities were engaging with investors and generating return on investment. Generally, the Forum recommendations have been considered by the SEC in connection with rulemaking.
Whether Congress or the SEC will take up any of the report’s suggestions is hard to say. Improving access to capital for smaller businesses does remain on the radar in Congress. For example, earlier this year, the U.S. House of Representatives passed H.R. 2799, the Expanding Access to Capital Act, which sought to build on the success of the JOBS Act of 2012, but that legislation did not advance in the Senate.
Last week, the Criminal Division of the DOJ announced a number of updates to its Evaluation of Corporate Compliance Programs guidance, including updates addressing risks related to emerging technology such as artificial intelligence, whistleblowers and the DOJ’s use of data analytics. As this Alston & Bird alert notes, the most significant changes to the guidance relate to the following three areas:
Emerging technology
Recognizing the rapid development and deployment of new technologies such as artificial intelligence (AI) by companies in a wide variety of industries, the updated ECCP instructs prosecutors to consider what “new and emerging technology” companies are using in conducting their business, whether (and how) companies have assessed the risk of such technology (e.g., how it could impact a company’s ability to comply with the law), and what companies have done “to mitigate any risk associated with” such technology.
The ECCP then includes a litany of potential follow-up questions for prosecutors to ask, such as: What governance structures has the company put in place for the use of new technologies such as AI in its commercial business, and what controls exist to ensure the technologies are only used for their intended purpose? What other steps has the company taken to curb any unintended negative consequences from the use of AI? If a company’s compliance program uses AI, what controls are in place “to monitor and ensure its trustworthiness, reliability, and use in compliance with applicable law”? How is the company training its employees on the use of AI and other emerging technologies?
In her speech, Argentieri cited as an example of the risk posed by emerging technology “whether the company is vulnerable to criminal schemes enabled by new technology, such as false approvals and documentation generated by AI.” In these AI-related updates to the ECCP, as elsewhere, the DOJ signals that it will inquire about these topics but does not prescribe specific one-size-fits-all measures companies must take. Rather, companies are generally expected to monitor and test their technology “to evaluate if it is functioning as intended and consistent with the company’s code of conduct.”
Whistleblower incentives and protection
The updated ECCP instructs prosecutors to consider the extent to which companies “encourage and incentivize” reporting of misconduct (or conversely, the extent to which companies “use practices that tend to chill such reporting”) as well as companies’ “commitment to whistleblower protection and anti-retaliation,” as demonstrated by how they actually treat employees who report misconduct. These additions are unsurprising, given the raft of policies issued by various components of the DOJ in recent months that are designed to incentivize – through monetary rewards or immunity – reporting of corporate wrongdoing by individuals (analyzed in prior Alston & Bird advisories, including here and here).
Use of data
Senior DOJ personnel have for several years emphasized the importance of companies deploying data analytics as part of effective compliance programs, and this emphasis is echoed in the updated ECCP, which instructs prosecutors to consider whether compliance personnel have access to relevant sources of data and how effectively companies are using data analytics in assessing the effectiveness of their compliance programs, as well as in their management of third-party relationships.
This Debevoise alert also observes: “The updated ECCP’s greatest impact likely will be on how companies tailor their compliance programs to address new technologies, particularly the expectation that companies will have “conducted a risk assessment regarding the use of [AI] . . . and . . . taken appropriate steps to mitigate any risk associated with the use of that technology.”
Lawrence Heim notes over the PracticalESG.com blog that California Governor Gavin Newsom has signed the climate disclosure amendments that I mentioned at the beginning of last month. The blog notes:
Governor Newsom signed SB219, modifying the state’s recent climate disclosure laws (SB253 – the Climate Corporate Data Accountability Act – and SB261 – Climate-Related Financial Risk Reporting). These amendments are more administrative than substantive.
Major elements of the amendments include:
– The state board has until July 1, 2025 to adopt regulations implementing SB253. This is a mere 6 month extension from the original January 1, 2025 deadline and the original dates for company reporting remain intact (2026 or by a date to be determined by the state board, for Scopes 1 and 2, and 2027 for Scope 3) as did the dates for assurance (limited assurance for scopes 1 and 2 starting 2026). The annual disclosures can be made to either the emissions reporting organization or the state board, and scope 3 emissions are to be reported on a schedule specified by the state board, rather than no later than 180 days after its scope 1 emissions and scope 2 emissions are publicly disclosed.
– Climate-related financial risk reporting (SB261) is still required on or before January 1, 2026, and biennially thereafter.
– Reports under both laws may be consolidated at the parent company level and the annual fee is no longer required to be paid upon filing the disclosure.
– The amendments authorize, rather than require, the state board to contract with an emissions reporting organization under both SB253 and SB261 to develop a reporting program to receive and make required disclosures publicly available and carry out duties that the state board deems appropriate.
Of course, the original laws are still being challenged in court. These amendments are unlikely to alter the trajectory of the court challenges since they don’t address the issues at the heart of the case. Plaintiffs argue the laws compel non-commercial speech in violation of the First Amendment, are precluded by the Clean Air Act, and run afoul of the Dormant Commerce Clause. That litigation is ongoing and we will provide updates as it develops.
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A couple weeks ago, I was at an event and was reminiscing with a fellow attendee about the days of yore when SEC filings were submitted in paper. I recounted how the surly clerk would lock the door to the SEC filing desk at precisely 5:30 pm, much to the chagrin of the poor law firm associate who had just come running down 5th Street to submit a critical filing. While this daily drama was entertaining to a new SEC Staffer such as myself, it was certainly an inefficient way for important documents to be filed with the SEC, particularly when filings under the securities laws are often time sensitive.
Fortunately for all of the law firm associates of the world, EDGAR came along, and while we all have our own individual hangups about EDGAR’s quirks, it sure is better than the alternative. Now, the Commission is taking EDGAR to the Next level. Last Friday, over forty years after the SEC received its first electronic filing in the initial EDGAR pilot on September 24, 1984, the SEC announced the adoption of rule and form amendments intended to enhance the security of the EDGAR system and improve filers’ access and account management capabilities. The fact sheet for this rulemaking notes:
EDGAR is the system through which filings are submitted to the Commission under the federal securities laws. EDGAR historically has assigned each EDGAR filer a set of access codes that may be used by different individuals to make submissions on the filer’s behalf. The legacy EDGAR system does not employ multifactor authentication, a foundational security tool. The purpose of EDGAR Next is to enhance the security of EDGAR by requiring individual account credentials to log into EDGAR, allowing identification of the person making each submission, and to employ multifactor authentication. Filers will also be required to authorize individuals to manage their EDGAR accounts on a dashboard on the EDGAR system, which will further enhance account security, facilitate the filing process, and make account management easier and more efficient. Moreover, as part of the EDGAR Next changes, optional Application Programming Interfaces (APIs) will be added to allow filers to make submissions, retrieve information, and perform account management tasks on a machine-to-machine basis. The optional APIs will enhance the efficiency and speed of many filers’ interactions with EDGAR.
The rule and form amendments will become effective March 24, 2025. The compliance date for amended Form ID is March 24, 2025, and the compliance date for all other rule and form amendments is September 15, 2025.
For those who can’t wait to try out EDGAR Next, the press release announcing the rule changes notes:
On Sept. 30, 2024, the SEC will open for filer testing and feedback a beta software environment that will reflect the adopted rule and form amendments and the related technical changes. Information about signing up for beta testing and extensive additional information about the rule adoption and related technical changes can be found on the SEC website: EDGAR Next – Improving Filer Access and Account Management.
As with all things EDGAR, once the rulemaking is done, the hard work of implementing the changes begins, which will play out over a fifteen month-long process. Let’s hope we end up with a more secure, less hackable EDGAR on the other side.
Our hearts go out to all who have been impacted by Hurricane Helene. The devastation and loss of life has been heartbreaking to watch over the past five days. On the other hand, it is always uplifting to observe the response to such a terrible tragedy, as local, state and Federal resources work with individuals and private organizations to provide aid where it is needed most.
On Friday, the SEC announced that it is closely monitoring the impact of Hurricane Helene on investors and capital markets. The announcement notes:
The SEC divisions and offices that oversee companies, accountants, investment advisers, mutual funds, brokerage firms, transfer agents, and other regulated entities and investment professionals will continue to closely track developments. They will evaluate the possibility of granting relief from filing deadlines and other regulatory requirements for those affected by the storm. Entities and investment professionals affected by Hurricane Helene are encouraged to contact SEC staff with questions and concerns:
• Division of Examinations staff in the SEC’s Miami Regional Office can be reached by phone at 305-982-6300 or email at miami@sec.gov
• Division of Examinations staff in the SEC’s Atlanta Regional Office can be reached by phone at 404-842-7600 or email at atlanta@sec.gov
• Division of Corporation Finance staff can be reached by phone at 202-551-3500 or via online submission at www.sec.gov/forms/corp_fin_interpretive
• Division of Investment Management staff can be reached by phone at 202-551-6825 or email at imocc@sec.gov
• Division of Trading and Markets staff can be reached by phone at 202-551-5777 or email at tradingandmarkets@sec.gov
• Office of Municipal Securities staff can be reached by phone at 202-551-5680 or email at munis@sec.gov
Individuals experiencing problems accessing their securities accounts or with similar questions or concerns relating to the hurricane are encouraged to contact the SEC’s Office of Investor Education and Advocacy by phone at 1-800-SEC-0330 or email at help@sec.gov.
Investors should be vigilant for Hurricane Helene-related securities scams and check the background of anyone offering them an investment by using the free and simple search tool on Investor.gov. The SEC’s Division of Enforcement will vigorously prosecute those who attempt to defraud victims of the storm. The SEC is asking investors to report any suspicious solicitations at www.sec.gov/complaint/tipscomplaint.shtml.
I note that one of my proudest moments while serving at the SEC was working on the SEC’s response to Hurricane Katrina in August 2005. I fondly recall sitting in Marty Dunn’s office for hours coming up with ways in which Corp Fin could provide relief to public companies that were impacted by the storm. I can still hear Marty exclaiming “We just made this up!” as he looked at his legal pad where he had scratched out the proposed relief efforts. Our work culminated in a Commission exemptive order and Staff guidance for affected companies. That Hurricane Katrina relief effort served as model for future disasters, including the COVID-19 pandemic. It definitely felt good to help out in some way in the face of a such a historic weather-related event.
The SEC recently posted a notice & request for comment for a proposed NYSE rule change that would amend the listing standards in the NYSE Listed Company Manual to “provide additional emphasis of the existing relationship between the domestic and international listing standards as already articulated in Section 103.00.” The NYSE notes in its submission:
Notwithstanding the existence of separate listing standards for foreign private issuers, Section 103.00 of the Manual provides that foreign private issuers may list their common equity securities either under the quantitative standards for foreign private issuers set forth in Section 103.01 or the Exchange’s domestic listing criteria set forth in Section 102.01. As stated in Section 103.00, the foreign private issuer must meet all of the criteria within the standards under which it qualifies for listing, but is not required to meet the requirements of both of those sections in order for its common equity securities to qualify for listing. 4 Section 103.00 (“Foreign Private Issuers”) provides that, for purposes of the Manual, the terms “foreign private issuer” and “non-U.S. company” have the same meaning and are defined in accordance with the SEC’s definition of foreign private issuer set out in Rule 3b-4(c) of the Securities Exchange Act of 1934.
It has been the Exchange’s experience in recent years that almost all foreign private issuer applicants whose common equity securities qualify for listing on the Exchange do so by meeting the domestic listing requirements of Section 102.01. However, the Exchange has become aware that there is a certain level of confusion in the marketplace about how to understand the listing standards as they apply to foreign private issuer applicants. To provide greater clarity as to how the domestic and international listing standards relate to each other with regard to the listing of common equity securities, the Exchange proposes to adopt proposed new Section 101.01 (“Domestic and Foreign Private Issuer Quantitative Listing Standards”).
As proposed, Section 101.01 would read as follows:
“101.01 Domestic and Foreign Private Issuer Quantitative Listing Standards Section 102.01 (“Minimum Numerical Standards—Domestic Companies—Equity Listings”) sets forth the minimum quantitative standards for the listing of common equity securities of domestic companies. In addition, the Exchange also lists applicants that are foreign private issuers (as defined in Section 103.00 (“Foreign Private Issuers”)) under Section 102.01 where such applicants are qualified for listing thereunder. However, if a foreign private issuer applicant does not meet all of the requirements for the listing of common equity securities applicable to domestic issuers under Section 102.01, the Exchange will determine whether such foreign private issuer qualifies for listing under the quantitative standards for common equity securities set forth in Section 103.01 (“Minimum Numerical Standards Non-U.S. Companies Equity Listings”). It is important to note that a foreign private issuer applicant must meet all of the requirements for common equity securities of either Section 102.01 or Section 103.01 in their 4 entirety but is not required to meet the requirements of both of Section 102.01 and Section 103.01 in order to qualify for listing. Foreign private issuers that list under either Section 102.01 or Section 103.01 will be subject to Section 103.00 and all of the subsections thereunder (except that foreign private issuers that list under Section 102.01 are not required to comply with Section 103.01), including Sections 103.02 (“Securities Exchange Act of 1934”), 103.03 (“Sponsorship by an Exchange Member Firm”) and 103.04 (“Sponsored American Depository Receipts or Shares (‘ADRs’)”). All listed foreign private issuers must also comply with the applicable corporate governance requirements set forth in Section 303A hereof.”
The NYSE also proposes to amend Section 103.00 to include a cross-reference to proposed Section 101.01, to make certain non-substantive changes and to revise the language of Section 103.00 to conform to proposed Section 101.01. The NYSE notes that the proposed amendments would not make any substantive change to the initial listing standards, rather these changes are just emphasizing of the existing relationship between the domestic and international listing standards as specified in Section 103.00 of the listing standards.