Over on Cooley’s “The Governance Beat” Blog, Broc recently offered some thoughts on how companies should approach their shareholder engagement programs. This excerpt has some advice for companies that are just getting started:
If you’re just starting your first off-season engagement program, during your initial engagement, you should ask the investor about their engagement preferences (e.g., what time of year, how frequent, what topics and who they like to attend calls).
Some companies start with a list of their top 50 – or maybe it’s only 25 – shareholders. Newly public companies may start with just a handful of institutional investors because founders and venture capitalists still have significant holdings and their investor base hasn’t matured yet. The number will vary at each company – and perhaps over time – depending on the issues that the company faces, as well as the current level of resources at the corporate secretary’s department. If there are important issues on the year’s meeting ballot, the company might hire a proxy solicitor to help bring in the vote.
They look at that group of top shareholders and try to reach out to all of them over the course of the year. Each company will have a smaller subset of important shareholders and prioritize those engagements.
Broc says that the investors are in that smaller subset might include shareholders with a smaller stake who are vocal on issues that are crucial to the company – whether those are issues that management cares deeply about or issues where others are likely to follow the lead of the vocal shareholders.
He also notes the importance of engaging with investors who have reached out to the company on governance or ESG issues, and reminds companies that engagement isn’t only phone calls or online or in-person meetings. Many investors reach out through letters, and smart companies make sure to have a process to direct these to the appropriate person for a response.
A recent White & Case memo reviews the SEC’s enforcement sweep targeting delinquent beneficial ownership reports and provides insight for public companies and their insiders on the lessons to be learned from those enforcement actions. Here’s an excerpt with a couple of pieces of specific advice :
For public companies and investors, confirm that the legal and/or compliance team responsible for filings understands the Section 13 and Section 16 reporting requirements. Section 13 and 16 reporting can be complex, and it is important that those responsible at public companies or investors are well educated on the nuances of these requirements, to avoid missing necessary filings. For example, in one case, the investments at issue were managed by a business unit of the investor that did not typically invest in public equities, and the unit’s internal processes did not timely identify the need to make the required filings.
Steps should be taken to ensure that all relevant personnel are educated regarding their obligations under, as applies depending on the public company or investor’s profile, Section 13(d), 13(g), 13(f), 13(h), and/or 16(a) filing obligations. This could include brokers, financial advisors and estate planning advisors who may assist the insiders in their transactions involving company securities, as these professionals may be unfamiliar with these requirements. In addition, make sure that anyone involved in these filings is aware of the new Schedule 13D and 13G filing deadlines.
For public companies specifically, ensure your Item 405 disclosures comply with the requirements. The SEC has turned its focus to correct Item 405 disclosures. As a reminder, Item 405 disclosure in Form 10-Ks or annual meeting proxy statements of any late filings or known failures to file must (i) identify by name each insider who failed to file on a timely basis any Forms 3, 4, or 5 during the most recent fiscal year or prior fiscal years and (ii) set forth the number of late reports, the number of late reported transactions, and any known failure to file. As highlighted in the recent enforcement actions, the disclosure must identify all of the late-reported transactions, not just the number of late reported filings.
Other lessons in the memo include the need to confirm and continue to track insiders’ beneficial ownership holdings through D&O questionnaires and by monitoring equity award grant and vesting dates, and to ensure robust internal controls around potential filing triggers.
Some SEC filings are required to be signed by a company’s “principal accounting officer” – but does that mean that every company must have a person designated as a PAO? Perkins Coie’s Benjamin Dale addressed that question in a recent blog:
The PAO is a designation that is often held by a company’s controller or chief financial officer (CFO). Sometimes the PAO designation is held by someone who is not the controller or CFO. But is a PAO technically required?
Rule 16a-1 of the Exchange Act is instructive and defines an officer as the “principal accounting officer (or, if there is no such accounting officer, the controller)” (emphasis added). Under Rule 16a-1, if a company does not have a PAO, then the controller is deemed to fill that role and is considered a Section 16 officer. It’s possible for the controller to be a Section 16 officer and not otherwise be treated as an “executive officer” under Rule 3b-7 of the Exchange Act if the controller doesn’t have a policy-making function.
Ben points out that Nasdaq and NYSE rules also don’t explicitly require companies to have a PAO and treat the controller as the PAO and an executive officer for purposes of the clawback listing standards. He also notes that companies should check their bylaws in order to determine whether those require it to appoint a person to serve in that capacity.
Both presidential candidates said warm & fuzzy things about crypto this year, but Donald Trump went all-in on courting the crypto vote, even pledging to launch a “national crypto reserve.” Anyway, with the end of the SEC’s unrelenting onslaught in sight, crypto industry backers believe that Trump’s return to power will make 2025 their “Year of Jubilee.”
Earlier this year, the crypto industry achieved a milestone when the House passed the Financial Innovation and Technology Act. However, prior to the election, that legislation faced dim prospects in the Senate. This excerpt from a recent Wired article suggests that the industry’s investment in the 2024 election may have fundamentally altered the legislative landscape:
During the 2024 cycle, crypto firms donated hundreds of millions of dollars to three crypto-friendly super political action committees (PACs)—Fairshake, Protect Progress, and Defend American Jobs—the aim of which was to support crypto-friendly congressional candidates and dislodge the industry’s most vociferous critics.
The fruits of that investment became clear on Wednesday. In Ohio, incumbent Democratic senator Sherrod Brown, who is depicted as an arch-villain in crypto circles, was unseated by Republican Bernie Moreno. Through Defend American Jobs, the crypto industry spent more than $40 million in support of Moreno. Meanwhile, according to Stand With Crypto, a nonprofit pushing for bespoke crypto regulation in the US, more than 250 pro-crypto representatives have been elected to Congress.
The end of the SEC’s crackdown on crypto would be a big deal, but the crypto industry has long sought federal legislation to establish a regulatory scheme for the industry. With Republicans likely to control both the House and the Senate, the industry’s backers may be poised to finally achieve that objective.
While the crypto industry’s ultimate path to becoming a “real boy” likely lies in legislation authorizing the creation of a comprehensive regulatory framework, this Davis Polk memo provides the next SEC Chair with a “to do” list of actions that the memo says will get the regulatory ball rolling. Here’s an excerpt with some specifics:
Withdraw SAB 121, the 2022 accounting policy that requires a public company with responsibility for safeguarding crypto assets to recognize liabilities for those assets on its balance sheet. While there may be some logic to this staff-promulgated directive, the SEC is not the nation’s accounting standard-setter. That task falls to the FASB, who approaches its remit thoughtfully and with due process and broad public input as opposed to simply announcing a full-blown major GAAP policy change via press release.
Withdraw the Framework for “Investment Contract” Analysis of Digital Assets. Although well-intentioned, this 2019 staff effort has created years of confusion over the securities status of individual crypto assets. Is the crypto asset itself a security, or is it instead only a thing sold as part of a broader securities transaction? The answer to this basic question has a profound impact on all parties active in the crypto markets. But with more than sixty suggested “considerations” that supposedly make a crypto asset more or less likely to be a security, the guidance has proven impossible to interpret and apply in a manner that yields consistent results. What could help replace this guidance? See #6 below.
Place a moratorium on enforcement threats against intermediaries based on activities involving tokens they did not issue. This goes hand-in-hand with withdrawing the staff’s Framework. If a trading platform, market maker or other intermediary did not itself issue a particular crypto asset, then the intermediary did not deploy the token in a primary capital-raising transaction and its activities do not implicate the fundamental policy concerns of the Securities Act of 1933. Until we have designed and implemented a thoughtful regulatory solution, the SEC should stop harassing businesses that are meeting this vast market’s daily liquidity needs.
Stop holding up crypto company IPOs. The chair should direct the Corporation Finance staff to treat companies in the crypto asset industry trying to go public just like companies in every other industry—and provide comments on a regular timetable that will facilitate the company’s ability to go public in 3 to 4 months, rather than 3 to 4 years (or never).
Other recommendations include exercising prosecutorial discretion for registration violations not involving fraud and publishing the Staff’s Howey analysis for bitcoin and ether.
Our colleague Meaghan Nelson has been blogging up a storm over on “The Mentor Blog”, which is available to TheCorporateCounsel.net members. Since she started in late September, Meaghan’s been sharing insights and advice to help you move forward in your career based on her own diverse experiences in the legal profession. For example, here’s Meaghan’s four-part series on how to network:
If you’re a member of TheCorporateCounsel.net you can subscribe to receive the latest from Meaghan by simply inputting your email address on the left side of that blog. Not a member? We can fix that – you can subscribe online, by emailing sales@ccrcorp.com – or by calling us at 800.737.1271.
With the election in the rear-view mirror, many people are speculating about the potential implications of Trump 2.0 for the SEC and securities regulation in general. Some of these are pretty obvious – Donald Trump promised that Gary Gensler would be a goner “on day one,” and he seems likely to depart even before Trump takes office. The SEC’s climate disclosure rules also are almost certainly on the chopping block, and its long-delayed proposals on human capital management and corporate board diversity disclosures will probably never see the light of day.
Those political footballs may garner most of the headlines during the next few months, but what about the Trump Administration’s approach to more “meat & potatoes” securities law issues? Even though Donald Trump claims to know nothing about Project 2025, plenty of others in his orbit do, and it seems likely that many of the policy objectives laid out in that document will be on the agenda when it comes to securities regulation. For example, in the area of capital formation, the Project 2025 document calls for the SEC to take, among others, the following actions:
– Simplify and streamline Regulation A (the small issues exemption) and Regulation CF (crowdfunding) and preempt blue sky registration and qualification requirements for all primary and secondary Regulation A offerings.
– Either democratize access to private offerings by broadening the definition of accredited investor for purposes of Regulation D or eliminate the accredited investor restriction altogether.
– Allow traditional self-certification of accredited investor status for all Regulation D Rule 506 offerings.
– Exempt small micro-offerings from registration requirements.
– Exempt small and intermittent finders from broker–dealer registration requirements and provide a simplified registration process for private placement brokers.
Project 2025 also makes several recommendations aimed at the way the SEC is administered, including ensuring that any three commissioners have the ability to place an item on the agency’s agenda, eliminating all SEC administrative proceedings other than stop orders, or allowing respondents to elect whether their cases will be adjudicated by an ALJ or an Article III federal court, and ending the practice of delegating authority to the Staff to initiate an enforcement proceeding.
These would all be significant changes, but Project 2025’s legislative agenda when it comes to the securities laws is even more ambitious. In addition to proposing a comprehensive overhaul of the federal securities laws, it calls for Congress to eliminate the PCAOB and FINRA and consolidate their functions within the SEC, eliminate Dodd-Frank’s conflict minerals, mine safety, resource extraction and pay ratio disclosure requirements, and ban the SEC from requiring a variety of ESG-related disclosures.
With Gary Gensler on the way out, speculation quickly turned to who would become the next SEC chair? This excerpt from a recent Bloomberg Law article identifies the leading candidates:
Richard Farley, a partner at Kramer Levin Naftalis & Frankel, and Kirkland & Ellis partner Norm Champare among contenders to replace Gary Gensler as chair of the US Securities and Exchange Commission, according to people with knowledge of the matter.
Robinhood Markets Inc. legal chief Dan Gallagher, current SEC Commissioner Mark Uyeda and Heath Tarbert, a former chairman of the Commodity Futures Trading Commission, are also among those being considered for the job, said other people with knowledge of the matter, who asked not to be identified because the information isn’t public.
Also in contention are former SEC Commissioner Paul Atkins and Robert Stebbins, a partner at Willkie Farr & Gallagher, some of the people said.
Commissioner Hester Peirce’s name has also surfaced, but she reportedly isn’t interested in the position and plans to leave the SEC when her current term expires.
Personally, I find it encouraging that the list of potential SEC chairs is composed mainly of people with significant private practice experience. One of the things that’s bothered me about the SEC’s willingness to put forward sweeping disclosure rule proposals in recent years is how few of the people deciding whether to adopt those rules have spent more than a token amount of time in their careers preparing or reviewing SEC filings.
Speaking of SEC Chairs, it looks like former SEC Chair Jay Clayton is on the short list to become Secretary of the Treasury.
Join us tomorrow for the webcast – “SEC Enforcement: Priorites & Trends” – to hear Hunton Andrews Kurth’s Scott Kimpel, Locke Lord’s Allison O’Neil, and Quinn Emanuel’s Kurt Wolfe provide insights into the lessons learned from recent enforcement activities and insights into what the new year might hold – including how the election may impact the SEC’s enforcement program.
Members of this site are able to attend this critical webcast at no 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.
We will apply for CLE credit in all applicable states (with the exception of SC and NE which require advance notice) for this 1-hour webcast. You must submit your state and license number prior to or during the program using this form. 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.
On Tuesday, the Supreme Court heard oral arguments in Facebook, Inc. v. Amalgamated Bank. The outcome of this case – as well as another biggie teed up for oral argument next week – could affect the way we draft risk factors and cautionary disclaimers.
Here, as Meredith previewed a few months ago, the company is facing allegations that the “cyber & data privacy” risk factor in its 2016 Form 10-K was misleading because it didn’t disclose that Cambridge Analytica had already improperly collected and harvested user data. “Hypothetical risk factors” are a type of disclosure that the SEC has been kvetching about since… at least 2019, when it settled an enforcement action with Facebook/Meta on this same issue, and as recently as last month when it settled an enforcement action with a SolarWinds victim under a similar theory of “half-truth” liability.
The more recent action was accompanied by a joint dissent from Commissioners Peirce and Uyeda that pointed out that updating risk factors for risks that have materialized is not always straightforward. Based on the tone of the oral argument in the Facebook case, it sounds like at least a few of the Justices share similar views. This WaPo article recaps:
In a lively argument, with hypotheticals involving the potential dangers posed by meteor strikes and space trash, at least three conservative justices seemed sympathetic to Facebook’s arguments that it had not misled investors and that its disclosures were forward looking. The court’s three liberal justices, in contrast, expressed support for the view of investors behind the lawsuit, who are backed in the case by the Biden administration.
Chief Justice John G. Roberts Jr. seemed concerned about the implications for public companies of adopting the position of the investors, calling it “a real expansion of the disclosure obligation.” Justices Neil M. Gorsuch and Brett M. Kavanaugh said the Securities and Exchange Commission could be more explicit if it wanted to require companies to report relevant past events.
I was a little surprised by one exchange from the oral argument. I am no Constitutional law expert, but after the Court’s very recent decision in Loper Bright that agencies should stay in their lane, I didn’t expect a Justice to suggest that the SEC should handle this issue through rulemaking. From WaPo:
“Why can’t the SEC just write a reg?” Kavanaugh asked. “Why does the judiciary have to walk the plank on this and answer the question when the SEC could do it?”
Maybe this was a trick question, in which case I’d like to submit a guess that this rule already exists, at least to some extent, by way of Item 101 and Item 303. Clearly, there are a lot of open questions here. The biggest one being, who would have predicted we’d still be talking about Cambridge Analytica during Election Week 2024? Lucky us.