Just earlier this month, John was recounting the recent oral argument before the Supreme Court in the case of Facebook, Inc. v. Amalgamated Bank, which addresses the potential liability in the hypothetical risk factor scenario that we have all been grappling with as securities lawyers for a number of years. As John noted, some of the conservative justices seemed skeptical of the arguments that hypothetical risk factor disclosure was misleading, with at least one justice noting that the SEC could write a rule to address this type of disclosure, rather than forcing the judiciary to “walk the plank.” Don’t even get us started…
While we all might have hoped for some clarity around this issue through an authoritative Supreme Court opinion, no such clarity is meant to be, because the Supreme Court pulled an Emily Litella last week and issued an order stating: “Nevermind!” This BCLP alert notes:
The Court on November 22 issued an order in Facebook, Inc. v. Amalgamated Bank, No. 23-980, stating that the “writ of certiorari is dismissed as improvidently granted.” That’s the language the Court uses when it accepts a case for consideration and then changes its mind about deciding the case.
As a result, the Supreme Court leaves standing the Ninth Circuit’s decision that allowed the plaintiffs to proceed with their complaint based on allegedly misleading hypothetical cybersecurity and data privacy risk factor disclosure that did not address the Cambridge Analytica scandal.
For now, in the absence of any further clarity, companies should continue to be vigilant about these disclosures, given the potential risks from an SEC enforcement and private securities litigation perspective.
SEC Rule 15c2-11 governs when dealers are permitted to publish quotations for securities. Way back in September 2020, the SEC amended the rule to prohibit dealers from publishing quotes when current information about the issuer is not publicly available. In 2021, the Staff clarified its position that Rule 15c2-11 applies to fixed income securities and provided some limited relief for privately issued fixed income securities, which was ultimately extended to January 4, 2025.
As the Mayer Brown Free Writings & Perspectivesblog notes, last Friday the Staff issued yet another no-action letter on the topic:
Broker-dealers had been preparing for the sunset of the prior time-based relief that the staff of the Securities and Exchange Commission provided in respect of compliance with Rule 15c2-11 as to certain fixed income securities, which expires on January 4, 2025. The SEC had separately provided exemptive relief with respect to Rule 144A securities; however, this still left broker-dealers with burdensome requirements to address for other fixed income securities. Now, the staff of the SEC has provided further relief in a no-action letter that was issued just yesterday for fixed income securities, which allows broker-dealers to continue to provide quotes to the extent that either the issuer or the fixed income securities meet one of seven specified criteria. Among others, relief is available for asset-backed securities, securities of an issuer that files call reports with a banking agency, and securities of an issuer that is an SEC-reporting company.
It should be noted that, back in October 2023, the SEC issued an order granting broker-dealers exemptive relief from Rule 15c2-11 for fixed-income securities sold in compliance with the Rule 144A.
For some reason, I always seem to be blogging around a holiday, so I can hardly resist the urge to write some sort of holiday-themed blog. While I must admit that I love Thanksgiving (or at least the concept of Thanksgiving, if not the actual execution), this year’s holiday will no doubt be bittersweet, as it is the first holiday that we celebrate as a family after my father passed away over the summer. But he would have wanted us to go on with the celebration, because he loved Thanksgiving too (or at least the concept of Thanksgiving), and I certainly have lots of fond memories of many enjoyable Thanksgivings with him over the years.
As I did at this time last year, I would like to reflect on some of the things that we all have to be thankful for tomorrow in the securities and governance world:
1. We made it through the election year. I don’t know about you, but I yearn for the days when elections were boring. Can someone please run for office on a platform of bringing back boring elections? I felt like the collective stress during this year’s election cycle was palpable – and who needs all of that added stress? In any event, in the finest of Thanksgiving traditions, I will keep my remarks largely apolitical so as not to stir up a “spirited” conversation or all-out food fight. By all accounts, the upcoming change in leadership at the SEC will mean an end to the avalanche of rulemaking that we have faced over the past few years, which has resulted in quite a few new requirements for public companies. While we may ultimately see an avalanche of SEC rulemaking going the other way and rolling back requirements, at least that scenario is generally easier to deal with than complying with new disclosure and governance requirements.
2. The SEC is (almost) done with Dodd-Frank. Sometimes I really feel like I worked at the SEC in a whole different era, because when I was on the Staff you were generally told that rulemakings mandated by Congress were a priority and needed to be addressed with all due speed. Nowadays, the agency seems to not feel any such urgency, as it took over a dozen years to implement that Dodd-Frank Act disclosure and governance provisions that apply to public companies. Admittedly, some of the delays were not always within the SEC’s control, but a dozen years is a long time! In 2024, we saw the first disclosures about the exchange-mandated clawback policies, as well as the first Form SD filings by resource extraction issuers. We endured yet another season of pay-versus-performance disclosure, which I can only hope will be ripe for revisiting by the SEC’s new leadership. Unbelievably, the SEC still has not adopted the incentive-based compensation rules for financial institutions contemplated by Section 956 of the Dodd-Frank Act, although the SEC joined some of the other financial institutions regulators in a re-proposal earlier this year.
3. You will not be working on SEC-mandated climate disclosure over the holidays.The SEC adopted its much-anticipated climate disclosure requirements in March of this year (why does that seem so long ago?) and the largest filers would have had to start working on disclosure controls to provide disclosures for the upcoming 2025 fiscal year. The rules remain mired in litigation and it certainly looks like the rules will have no future in the Trump Administration. So let’s go “pencils down” and enjoy the holiday – but don’t forget about CSRD.
4. We have one year of cybersecurity disclosure under our belt. At this time last year we were wringing our hands over what we were going to say in response to the SEC’s new cybersecurity disclosure rules, but we were able to get through the first Form 10-K cycle largely unscathed. I do think that we will see some iteration on the annual cybersecurity disclosure during this upcoming annual reporting season, as companies revisit their approach in light of what they have observed from their peers’ disclosures and broader disclosure trends. It is also important for companies to consider what changes may be necessary to the disclosure in light of rapidly evolving cybersecurity conditions and governance changes that can lead to different disclosures from year to year.
5. We Got Together In-Person at the October Conferences! I am particularly thankful for the opportunity to see so many members of our community in person at the October Conferences in San Francisco. It was so nice to be freed from the confines of the Zoom screen! Let’s keep it up.
I am planning to enjoy the next few days of holiday downtime and I hope you can too. I wish you a happy Thanksgiving!
The PCAOB recently announced the adoption of a set of new requirements regarding public reporting of standardized firm and engagement metrics, as well as a separate set of amendments regarding the PCAOB framework for collecting information from audit firms. In the press release announcing these actions, the PCAOB notes:
With the firm and engagement metrics requirements adopted by the Board today, PCAOB-registered public accounting firms that audit one or more issuers that qualify as an accelerated filer or large accelerated filer will be required to publicly report specified metrics relating to such audits and their audit practices. These metrics – which will further PCAOB oversight activities and which can be used by investors, audit committees, and other stakeholders – cover the following eight areas:
1. Partner and manager involvement
2. Workload
3. Training hours for audit personnel
4. Experience of audit personnel
5. Industry experience
6. Retention of audit personnel (firm-level only)
7. Allocation of audit hours
8. Restatement history (firm-level only)
Reporting of firm-level metrics will be required annually on a new Form FM, for firms that serve as the lead auditor for at least one accelerated filer or large accelerated filer. Reporting of engagement-level metrics for audits of accelerated filers and large accelerated filers will be required via a revised Form AP, which will be renamed “Audit Participants and Metrics.” Finally, limited narrative disclosures will be allowed (but not required) on both Form FM and Form AP to provide context and explanation for the required metrics.
With regard to the amendments to the PCAOB reporting framework, the PCAOB notes in its press release:
Regarding firm reporting, the amendments adopted today will modernize the PCAOB’s annual and special reporting requirements to facilitate the disclosure of more complete, standardized, and timely information by registered public accounting firms. Consistent with current practice, much of the information will be disclosed publicly, such as enhanced fee, governance, and network information. Other information that is potentially proprietary, sensitive, or developing will be available to the PCAOB only for oversight.
Today’s amendments enhance the required current reporting of information by registered firms on the PCAOB’s public Annual Report Form (“Form 2”), and the Special Reporting Form (“Form 3”) in several key areas:
– Financial information – On Form 2, all registered firms will report additional fee information. The largest firms will also be required to confidentially submit financial statements to the PCAOB.
– Governance information – On Form 2, all registered firms will be required to report additional information regarding their leadership, legal structure, ownership, and other governance information, including reporting on certain key quality control operational and oversight roles.
– Network relationships – Registered firms will be required to report a more detailed description of any network arrangement to which a registered firm is subject. This includes describing the network’s structure, the registered entity’s access to resources such as audit methodologies and training, and whether the firm shares information with the network regarding its audits (including whether the firm is subject to inspection by the network).
– Special reporting – For annually inspected firms, the amendments include a new confidential special reporting requirement for events material to a firm’s organization, operations, liquidity or financial resources, such that they affect the provision of audit services.
– Cybersecurity – On Form 3, confidentially, registered firms will be required to promptly report significant cybersecurity events to the PCAOB. On Form 2, registered firms will also be required to periodically and publicly report a brief description of any policies and procedures to identify and manage cybersecurity risks.
– Updated description of QC policies and procedures – A new form will require any firm that registered with the Board prior to the date that the PCAOB’s new quality control (QC) standard becomes effective (December 15, 2025) to submit an updated statement of the firm’s quality control policies and procedures pursuant to the QC standard.
These amendments are subject to approval by the SEC and, if approved by the SEC, will become effective pursuant to a phase-in schedule.
Yesterday, the SEC posted an order designating a longer period within which to take action on a proposed rule change by the NYSE to limit the ability of companies with a low stock price to achieve compliance with the continued listing standards by engaging in a reverse split. As Liz noted back in October, the NYSE proposal would, if approved, make it harder for penny stocks to linger around as listed companies. These proposed rule changes to the NYSE Listed Company Manual would provide that: (i) a listed company that falls below the price criteria set forth therein and effects a reverse stock split to regain compliance will not be eligible for a compliance period in certain circumstances; and (ii) a listed company may not effectuate a reverse stock split if it would result in the company falling below continued listing requirements.
In the order, the SEC designates January 15, 2025, as the date by which the Commission shall either approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change. As Meredith noted last week, the SEC posted an order instituting proceedings under Section 19(b)(2)(B) of the Exchange Act with respect to Nasdaq’s proposed changes addressing situations where listed companies utilize a reverse split to achieve compliance with the exchange’s bid price requirement, after the SEC had extended the time for considering those rule changes.
At this time last year, Liz noted that the SEC has issued an order to approve Nasdaq’s proposal to require a listed company conducting a reverse stock split to: (i) notify Nasdaq about certain details of the reverse stock split at least 5 business days (no later than noon ET) prior to the anticipated market effective date, and (ii) make public disclosure about the reverse stock split at least 2 business days (no later than noon ET) prior to the anticipated market effective date. In March 2024, an additional change to the rule and Company Event Notification Form was adopted to further clarify the requirements.
Last week, the SEC posted an order contemplating further changes to Nasdaq’s reverse stock split notice requirements. The order notes:
Nasdaq is now proposing to amend the deadline for a company to notify Nasdaq of a reverse stock split from 5 business days to 10 calendar days in order to conform to the requirements of SEC Rule 10b-17 of the Act.
Specifically, Rule 10b-17(a)(2) and (b) of the Act, require issuers to provide notice to FINRA (formerly the National Association of Securities Dealers, Inc.) no later than 10 calendar days prior to the date of record to participate in a stock split or reverse stock split, unless the impacted security is traded on a national securities exchange with a substantially comparable requirement to those set forth in Rule 10b-17(b)(1).
Currently, Rule 5250(e)(7) and IM-5250-3 require a company conducting a reverse stock split to notify Nasdaq about certain details of the reverse stock split by submitting a complete Company Event Notification Form and a draft of the disclosure required by Rule 5250(b)(4) at least 5 business days (no later than 12:00 p.m. ET) prior to the anticipated market effective date, which includes all the information required by Rule 10b-17 applicable to reverse stock splits.
It has come to Nasdaq’s attention that Nasdaq’s current rule may not be considered substantially comparable to the 10 calendar-day prior notice required in Rule 10b-17 of the Act. Accordingly, Nasdaq is proposing to amend the deadline for a company to notify Nasdaq of a reverse stock split from no later than 12:00 p.m. ET 5 business days to 10 calendar days prior to the anticipated market effective date of the reverse stock split to ensure that Rule 5250(e)(7) and IM-5250-3 are substantially comparable to Rule 10b-17 and, therefore, that companies are compliant with Rule 10b-17 when they give notice under those rules. Nasdaq is not amending the requirement to provide public disclosure under Rule 5250(b)(4) at least 2 business days (no later than 12:00 p.m. ET) prior to the anticipated market effective date. Nasdaq still believes that this timeframe provides sufficient notice to the public about reverse stock splits.
Got that? This proposed Nasdaq rule change is effective immediately pursuant to Section 19(b)(3)(A)(iii) of the Exchange Act and Exchange Act Rule 19b-4(f)(6). The order provides that the proposed rule change will become operative on January 30, 2025, in order to provide companies that have already planned action for a reverse stock split under the current rule’s timeframe with the ability to effect their reverse stock split under that schedule.
On Friday, Commissioner Lizárraga issued a statement indicating that he notified President Joe Biden of his intent to step down as SEC Commissioner, effective January 17, 2025. His statement notes:
For the better part of this year, my wife, Kelly, has confronted serious illness with admirable courage and a strong spirit. We are grateful for the support of colleagues, friends and family and are hopeful for her speedy and full recovery in the ensuing months.
In reflecting on the challenges that lie ahead, we have decided that it is in the best interests of our family to close this chapter in my 34-year public service journey.
Until my departure in January, I will remain fully engaged in the Commission’s ongoing work and activities.
I don’t yet know what comes next, but I do know that it has been a great honor to serve as SEC Commissioner.
Commissioner Lizárraga was sworn in on July 18, 2022. Prior to becoming SEC Commissioner, he served as Senior Adviser to House Speaker Nancy Pelosi, overseeing financial markets, small business, housing, international finance, and immigration. He also served as Speaker Pelosi’s Director of Member Services and liaison to the Congressional Hispanic Caucus and to the Latino community.
We certainly wish Commissioner Lizárraga and his family the best as they face his wife’s health challenges.
With news of Commissioner Lizárraga’s planned departure on January 17th and Chair Gensler’s planned departure at noon on January 20th, the SEC is set to look very different in less than two months, scaling back to just three Commissioners, assuming no further departures.
The SEC usually has five Commissioners who are appointed by the President with the advice and consent of the Senate. The terms for Commissioners last five years and are staggered so that one Commissioner’s term ends on June 5th of each year. The Chair and Commissioners may continue to serve up to approximately 18 months after their terms expire if they are not replaced before then. For example, Commissioner Crenshaw’s term expired in June 2024, but she continues to serve – while President Biden renominated Crenshaw for another five-year term, the vote has been delayed in the Senate Banking Committee. Commissioner Peirce’s term expires in June 2025, and in the past she has indicated that she does not intend to serve another term as an SEC Commissioner. Commissioner Uyeda’s terms expires in 2028.
Chair Gensler’s decision to exit the Commission effective at noon on Inauguration Day means that we are not likely to see the game of musical chairs that we saw at the Commission during the last change in Presidential Administration. Back then, former SEC Chair Jay Clayton departed the agency in late December, and on December 28, 2020, Elad Roisman was designated as Acting Chair. A few weeks later, on January 21, 2021, President Biden designated Allsion Herren Lee as Acting Chair, and she served until Gary Gensler was sworn in as Chair on April 17, 2021, after being nominated for the position on February 3, 2021.
In this go-round, we are likely to see President-elect Trump designate either Commissioner Peirce or Commissioner Uyeda as Acting Chair until the Senate can confirm a new SEC Chair, probably by sometime in the Spring. Over the course of the next eight weeks, we will see announcements from various members of the SEC’s Senior Staff (e.g., Directors and Office Heads) indicating their planned departures, and acting leaders will be put in place (in most cases drawing from the existing Staff) until the new Chair is sworn in.
For the most part, all of this churn means that policy initiatives will be on hold until the new Chair can set the regulatory direction for the agency. In the trenches, nothing really changes, as the Staff will continue reviewing registration statements and periodic reports and conducting Enforcement investigations, regardless of who is in charge.
Speaking from my own experience, this sort of inevitable leadership change roughly every three-and-half years is always a stressful time when serving at the SEC. Projects that you may have been working on for years go “pencils down” all of the sudden, and you may face a regulatory future that does not necessarily align with your own views and values, but you know that you have to follow the agenda set by the agency’s new leadership. I imagine that all of this uncertainty is compounded by the prospect of the DOGE, which will be led by a person that has no love lost for the SEC. As an SEC alum and longtime student of the SEC’s history, I am hoping that the agency can pull through!
On Friday, the SEC announced a sharp decline in the number of Enforcement actions during fiscal year 2024, which ended on September 30. The SEC notes:
The Securities and Exchange Commission today announced that it filed 583 total enforcement actions in fiscal year 2024 while obtaining orders for $8.2 billion in financial remedies, the highest amount in SEC history.
The 583 enforcement actions represent a 26 percent decline in total enforcement actions compared to fiscal year 2023. Of those cases, the Commission filed 431 “stand-alone” actions, which was 14 percent less than in the prior fiscal year; 93 “follow-on” administrative proceedings seeking to bar or suspend individuals from certain functions in the securities markets based on criminal convictions, civil injunctions, or other orders, which was 43 percent less than the prior fiscal year; and 59 actions against issuers who were allegedly delinquent in making required filings with the SEC, which represented a decrease of 51 percent.
The $8.2 billion in financial remedies consisted of $6.1 billion in disgorgement and prejudgment interest, also the highest amount on record, and $2.1 billion in civil penalties, the second-highest amount on record. Approximately 56 percent of the $8.2 billion financial remedies ordered is attributable to a monetary judgment obtained following the SEC’s jury trial win against Terraform Labs and Do Kwon, who were charged with one of the largest securities frauds in U.S. history.
The FY2024 results are surprising because we have been experiencing a very active Enforcement environment over the past four years. By comparison, last year the SEC announced a three percent increase in the number of actions brought in FY2023 as compared to FY2022, and in 2022 the agency announced a nine percent increase in actions over the prior fiscal year.
Yesterday, the SEC announced that Gary Gensler — the Commission’s 33rd Chair — will step down effective on Inauguration Day (January 20th). As noted in the SEC’s press release, Chair Gensler led the agency through a robust rulemaking agenda that was focused on enhancing efficiency, resiliency, and integrity in our capital markets. The press release reviews a number of the Commission’s most significant accomplishments during Chair Gensler’s tenure — many of which he highlighted during his remarks at PLI’s 56th Annual Institute on Securities Regulation.
I particularly loved Chair Gensler’s commentary on public service that I shared in the blog on Monday. He reiterated in his press release that “the staff comprises true public servants. It has been an honor of a lifetime to serve with them on behalf of everyday Americans and ensure that our capital markets remain the best in the world.”
His bio at the end of the press release reminded me that his comments on the value of public service are especially noteworthy given his significant and varied experience in public service. In addition to his tenure as SEC Chair, he also served as Chair of the U.S. Commodity Futures Trading Commission, senior advisor to U.S. Senator Paul Sarbanes in writing the Sarbanes-Oxley Act and undersecretary of the Treasury for Domestic Finance and assistant secretary of the Treasury from 1997-2001.