Yesterday’s WSJ featured an editorial with a suggestion for Elon Musk to consider as part of DOGE’s hunt for federal agencies to “wish into the cornfield”. Interestingly, it’s an idea with a bipartisan history and one that just might resonate with incoming SEC Chair designee Paul Atkins – but also one that the crypto industry might not be as enthused about. Here’s an excerpt from the opinion piece by Duke University’s Lee Reiners:
If DOGE is to avoid the fate of prior blue-ribbon commissions and panels with a similar goal, it should begin with the low-hanging fruit and encourage Congress to merge the SEC and CFTC before taking up a crypto market structure bill.
DOGE would have an ally in this effort in Paul Atkins, Mr. Trump’s nominee to lead the SEC. Testifying in 2015 on the effect of Dodd-Frank, Mr. Atkins told the House Financial Services Committee that the legislation’s authors “blew” a “once-in-a-lifetime opportunity to streamline our crazy quilt of financial services regulators,” most notably by failing to merge “the SEC and CFTC to create one markets regulator.” Working alongside DOGE as well as artificial-intelligence and crypto czar David Sacks, Mr. Atkins has an opportunity to right this wrong. Let’s hope they don’t blow it.
The editorial points out one potential fly in the ointment – the crypto industry, which poured huge sums of money into Trump’s campaign, wants to make passage of the FIT21 legislation a top priority. That bill, which passed the House last summer, essentially divides regulatory responsibility for crypto between the SEC and the CFTC.
This division of authority means that both agencies will need to spend money ramping up to regulate their piece of the action and makes inter-agency turf battles almost inevitable. That’s not exactly a recipe for enhanced governmental efficiency. Accordingly, the editorial calls for Congress to merge the SEC and CFTC prior to enacting legislation providing a regulatory scheme for the crypto industry. That kind of delay is unlikely to sit well with the crypto crowd.
Former President Jimmy Carter passed away over the weekend, and as I read some of the tributes to him, I thought it might be interesting to see if I could find some information about how he dealt with the SEC during his tenure. What I found was a reminder of just how differently policy makers approached securities regulation during that era. Here’s an excerpt from an SEC Historical Society article on the agency’s evolution during the period from 1973-1981:
President Carter’s view of the SEC and its role as a regulator of the markets stands in sharp contrast to his other initiatives to regulate the economy. Although willing to consider price and wage controls, President Carter took a hands-off approach to the SEC.
His archives provide clues as to why he took that approach. The public worries about inflation meant that that issue would remain the single most important of his Presidency. But nearly as important was Carter’s belief that the SEC was a non-partisan agency, and that once he made his appointments, he should refrain from attempts to influence its policies. He respected the SEC and its staff and believed that the SEC and the markets could manage without his political influence and interference. After appointing [Harold] Williams as SEC Chairman, Carter remained mostly neutral on SEC regulatory matters.
In light of the increasing politicization of the securities regulation process that we’ve witnessed over the past couple of decades, Carter’s non-partisan, technocratic approach seems rather quaint. Even so, it’s an approach that I think we should aspire to return to – and putting a stop to the practice of using the agency to accomplish political goals that the party in power can’t achieve through legislation would be a good first step in that direction.
As we say farewell to a turbulent 2024 and turn the corner into the start of a new year, I wanted to pause for a moment to say “thank you” on behalf of our entire editorial team to all our readers for following our blogs, sharing tips on newsworthy topics, and gently pointing us in the right direction when we go astray. We wish everyone a peaceful and prosperous 2025. Our blogs will be back in the new year, but to help close this one out in style, here’s the University College Dublin Choral Scholars’ rendition of “Auld Lang Syne.”
It’s been a little over a year since the SEC’s requirement to disclose material cybersecurity incidents on Form 8-K went into effect, and this Paul Hastings report provides some insight into how companies have responded. The report reviewed 75 disclosures from 48 public companies over the past year, and here are some of the key findings:
– Since the SEC rules became effective, there has been a 60% increase in the number of cyber incidents disclosed by public companies.
– Fewer than 10% of the disclosed incidents include a description of the material impact of the incident. 78% of disclosures were made within eight days of discovery of the incident, with 42% of companies providing an update by issuing an updated Form 8-K after the initial disclosure.
– Third-party breaches had the widest ranging impact for public companies, with one in four breaches stemming from a third-party incident.
This excerpt from the report notes that threat actors are apparently “blowing the whistle” on companies that have been the victims of a cyber attack, but haven’t reported it:
In an aggressive move to pressure victims into paying ransoms, some threat actors have filed whistleblower reports with the SEC, claiming that companies have failed to report active incidents on Form 8-K. The threat actor then makes its “whistleblower” report public, attempting to publicly shame victims and encourage payment. While such tactics have failed each time, they have generated significant media attention, with over 40 news articles published in publications such as The Wall Street Journal, Bloomberg, Security Week and others.
FinCEN has posted its response to the latest decision from the 5th Circuit vacating its earlier stay of the district court’s preliminary injunction against enforcement of the Corporate Transparency Act. Here’s the gist of it:
On December 23, 2024, a panel of the U.S. Court of Appeals for the Fifth Circuit granted a stay of the district court’s preliminary injunction entered in the case of Texas Top Cop Shop, Inc. v. Garland, pending the outcome of the Department of the Treasury’s ongoing appeal of the district court’s order. FinCEN immediately issued an alert notifying the public of this ruling, and recognizing that reporting companies may have needed additional time to comply with beneficial ownership reporting requirements, FinCEN extended reporting deadlines.
On December 26, 2024, however, a different panel of the U.S. Court of Appeals for the Fifth Circuit issued an order vacating the Court’s December 23, 2024 order granting a stay of the preliminary injunction. Accordingly, as of December 26, 2024, the injunction issued by the district court in Texas Top Cop Shop, Inc. v. Garland is in effect and reporting companies are not currently required to file beneficial ownership information with FinCEN.
FinCEN notes that reporting companies are not subject to liability if they fail to make a beneficial ownership filing while the order remains in force, but they may continue to voluntarily submit beneficial ownership information reports.
If you’re in a jurisdiction that requires you to report your CLE compliance on a calendar year basis, then you may be scurrying around this week trying desperately to find the hours you need to get into compliance. I’ve been in that boat myself, and it’s made for some pretty long and boring New Year’s Eves. To make matters worse, I often ended up with some pretty irrelevant CLE courses to choose from, including such gems as “Litigating Truck Accidents in Ohio.”
If you’re looking for a more relevant way to pick up your CLE credits, check out our inventory of “on -demand” webcasts. These are eligible for credit in most states, and come in bite-sized, one-hour portions. Be sure to follow the instructions on the webcast’s home page in order to obtain credit. If you have questions about CLE credit, please visit our CLE FAQ page or contact our CLE provider: CEU Institute, accreditation@ceuinstitute.net.
Members of this site can access this content without any additional charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. 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.
If you just clicked through your email about this morning’s blogs, this isn’t the blog you were expecting – and it’s not the one I originally wrote, because developments on the CTA front are breaking fast and furious. On Monday, the 5th Circuit granted the DOJ’s request for a stay of a district court decision preliminarily enjoining enforcement of the Corporate Transparency Act on constitutional grounds. But that stay has now been vacated by a new 5th Circuit merits panel. Here’s a Bloomberg Tax article on the latest decision.
In response to the original 5th Circuit ruling granting the stay, FinCEN announced a brief extension of the January 1, 2025 filing deadline to January 13, 2025. FinCEN hasn’t yet posted anything in response to the latest ruling vacating the stay. Isn’t this fun? We’re posting law firm memos on the evolving drama in our “Beneficial Ownership” Practice Area.
I recently came across a new study on classified boards, and I thought the results were a little surprising. Although these structures are more common among younger companies, it turns out that they remain fairly prevalent throughout corporate America. Here’s an excerpt from a CLS Blue Sky Blog post by the authors of the study:
The conventional belief suggests that classified boards are disappearing from corporate America, particularly among well-established firms in the S&P 1500 Index. However, more recent findings indicate that young firms are increasingly likely to go public with a classified board and that, while the costs of having a classified board become significantly higher as firms mature, firms rarely opt to declassify their boards. We expand on these findings by examining a more comprehensive sample of firms over an extended period, uncovering new evidence of how and why the use of classified boards has evolved and its implications for shareholder value.
The study found that the prevalence of classified boards among S&P 1500 companies declined from 58% in the early 1990s to 31% in 2020, while the prevalence of classified boards outside the S&P 1500 rose from 42% to 52% over the same period. The study also found that as companies mature, they increasingly discard the classified board structure.
That wasn’t always the case. In the 1990s, the use of classified boards declined only slightly as firms matured, but that began to change during the first decade of this century, with the usage of staggered boards declining from 65% of the youngest firms to 46% among the most mature. That trend accelerated between 2011-2020 – while 73% of newly public companies had classified boards, only 33% of mature firms retained them.
This recent Ideagen/Audit Analytics blog notes that although lengthy auditor tenure is an area of concern among governance advocates, two dozen public companies have had the same auditor for more than a century! So which audit firms have managed to hold on to their audit clients for more than 100 years? This excerpt provides the answer:
PricewaterhouseCoopers (PwC), Deloitte and Ernst & Young (EY) are the only members of the US centenarian club. PwC audited eight of these companies, Deloitte audited six and EY was the auditor of record for the remaining 10 companies. The longest audit tenure on record was BCE Inc.’s (formerly known as Bell Canada Enterprises, Inc.) relationship with Deloitte, which has spanned 144 years.
The blog lists each of the US public companies that has retained the same auditor for over 100 years and discloses the name of that auditor. It also points out that the number of public companies that have had the same auditor for more than a century has doubled since 2016.
It’s long been an open secret that many Reg D issuers opt not to file a Form D for their offerings. One reason may be that the SEC hasn’t made non-compliance with Form D filing requirements an enforcement priority. That changed on Friday, when the SEC announced settled enforcement proceedings against three issuers that failed to make required Form D filings. This excerpt from the SEC’s press release explains the agency’s rationale for the actions:
An issuer’s failure to follow the requirements to file a Form D (or amend its existing Form D filing) impedes the Commission’s ability to fully assess the scope of the Regulation D market, which is key to the Commission’s understanding of whether Regulation D is appropriately balancing the need for investor protection on one hand and the furtherance of capital formation on the other, particularly as it relates to small businesses.
It also harms the Commission’s ability to monitor and enforce compliance with the requirements of Regulation D and the ability of state securities regulators and self-regulatory organizations to monitor and enforce other securities laws and rules. In addition, it hampers the ability of investors and other market participants to understand whether companies are complying with federal securities laws in their offerings, to research and analyze the Regulation D market, and to report on capital-raising in industries that use Regulation D.
Each of the issuers agreed to cease and desist from failing to comply with Rule 503 of Regulation D and agreed to pay civil penalties ranging from $60,000 to $195,000. In addition, the order in each of these actions points out that the offerings at issue involved general solicitation, which made the statutory Section 4(a)(2) exemption unavailable. (Keith Bishop has posted some thoughts on this topic over on his blog).
If the SEC’s goal is improved compliance with Rule 503’s filing requirement, then I think that in addition to “message cases” like these, the SEC should take a hard look at the information that it asks issuers to provide in a Form D. There’s a lot of stuff in there only a bureaucrat could love, and most issuers regard Form D as the Securities Act’s version of a “TPS Report.” But the bottom line is that if you don’t file a Form D, you’re not complying with the law, and you aren’t going to get a lot of sympathy from the Division of Enforcement.
One thing I’m not sure about is whether the cease-and-desist orders in these cases are regarded as an “order, judgment, or decree of any court of competent jurisdiction. . . enjoining such person for failure to comply with Rule 503. . . ” If so, the issuers also would be prohibited under Rule 507 from relying on Reg D absent a waiver from the SEC. My gut tells me that they are, but I’d think that’s something the SEC might highlight in its press release, which it didn’t do. If any SEC enforcement lawyers out there can enlighten me, I’d appreciate it – and I’ll update the blog.