The Roman poet Juvenal famously asked “quis custodiet ipsos custodies” – “Who watches the watchers?” When it comes to public company gatekeepers, SEC Enforcement’s answer is “we do.” That’s clearly the message sent by the insider trading complaint that the SEC filed yesterday against a former Apple lawyer who, among other things, was responsible for overseeing compliance with the company’s insider trading program! Yes, the person responsible for insider trading compliance is alleged to have engaged in illegal insider trading!
Here’s an excerpt from the SEC’s press release that lays out the agency’s allegations:
The SEC’s complaint alleges that Gene Daniel Levoff, an attorney who previously served as Apple’s global head of corporate law and corporate secretary, received confidential information about Apple’s quarterly earnings announcements in his role on a committee of senior executives who reviewed the company’s draft earnings materials prior to their public dissemination.
Using this confidential information, Levoff traded Apple securities ahead of three quarterly earnings announcements in 2015 and 2016 and made approximately $382,000 in combined profits and losses avoided. The SEC’s complaint alleges that Levoff was responsible for securities laws compliance at Apple, including compliance with insider trading laws. As part of his responsibilities, Levoff reviewed and approved the company’s insider trading policy and notified employees of their obligations under the insider trading policy around quarterly earnings announcements.
Parallel criminal charges were also filed. Obviously, it’s up to the SEC to prove the conduct it alleges here, but this seems as good a time as any to remind you of Broc’s recent advice to anyone thinking about dabbling in insider trading – don’t do it!
In the interest of full disclosure, I confess that I’m nowhere near as erudite as the first sentence of this blog would suggest. Truth be told, I remembered the English version of the “who watches the watchers” quote from the “Watchmen” movie – and then I just got all of that Juvenal stuff by Googling it.
SEC’s Peirce Says “Lighten Up” On Howey For The Crypto
The Howey test considers “investment contracts” to be securities if they involve an investment of money in a common enterprise with an expectation of profit to be derived “solely from the efforts of others.” The SEC’s position has been that many token deals fit squarely within the definition of an “investment contract.” But in a recent speech, SEC Commissioner Hester Peirce suggested that the agency should take more flexible approach when it comes to applying the Howey test to digital assets:
While the application of the Howey test seems generally to make sense in this space, we need to tread carefully. Token offerings do not always map perfectly onto traditional securities offerings. For example, as a recent report from Coin Center noted, the decentralized nature of token offerings can mean that the capital raised through token sales may not be truly owned or controlled by a company. Functions traditionally completed by people designated as “issuers” or “promoters” under securities laws—which, importantly, bestow those roles with certain responsibilities and potential liabilities—may be performed by a number of unaffiliated people, or by no one at all.
Commissioner Peirce pointed out that since some token environments aren’t centralized & contemplate important roles for individuals “through mining, providing development services, or other tasks,” the SEC must avoid casting “the Howey net so wide that it swallows the “efforts of others” prong entirely.”
She expressed concern that some apparently legitimate projects may be made untenable by the federal securities laws, and also observed that regulators “ought not to assume that absent the application of the securities laws to the world of tokens, there would never be any order.” Well folks, they don’t call her “Crypto Mom” for nothin’!
At-the-Market Offerings: Hot! Hot! Hot!
Given how volatile the stock market was last year, it probably shouldn’t come as a big surprise that “at-the-market” offerings had a gangbuster year. This Bloomberg Law blog has the details:
An impressive 202 ATM offerings announced in 2018 were projected to raise a total of $31.75 billion, the largest amount in the last ten years. The average deal size for an ATM offering announced in 2018 was $157 million. To put things in perspective, 274 IPOs were priced in 2018 and raised $64.74 billion. Looking at industry distribution for ATM offerings in 2018, 52 percent were announced by companies in the Consumer, Non-Cyclical sector and 27 percent came from the Financial sector.
The two largest ATM offerings announced in 2018 were by: MPLX LP (announced on March 13, in the Energy sector and projected to raise $1.74 billion) and Annaly Capital Management Inc. (announced on January 3, in the Financial sector and projected to raise $1.50 billion).
ATMs were pretty popular shortly after the financial crisis, but fell out of fashion. The blog says that over the last 5 years, use of this financing tool has rebounded – along with market jitters.
Everybody knows that with the SEC operating with a skeleton crew for over a month, Corp Fin has a pretty deep hole to dig itself out of. This ‘Audit Analytics’ blog gives you a sense of just how far behind the shutdown has put the Staff. For example, here’s what the blog has to say about comment letters:
According to their Plan of Operations during Lapse in Appropriations, the Commission had an extremely limited number of staff members available to respond to emergency situations. There were 4,436 employees on-board prior to the shutdown, with roughly 110 expected to be retained because they were engaged in law enforcement activities and about 175 employees to be retained to protect life or property.
Having such a limited staff meant an even more limited scope of operations. While most SEC filings – annual, quarterly, and 8-Ks – continued as usual, there were two places, in particular, that were affected by the shutdown; namely, comment letters and IPOs. During the shutdown, the SEC staff did not review corporate filings and did not issue any comment letters. To help gain a sense of how many letters are typically processed during this time, we looked at the same period of the shutdown last year (December 21, 2017 to January 25th, 2018); there were over 300 comment letters dated during this time.
What about IPOs? The blog cites a WSJ article for the proposition that there were no IPOs this January, compared with 17 during the first month of last year. According to this report from NBC News, the SEC had 40 IPOs in process at the time of the shutdown.
“Faster Than a Speeding Bullet”: 10b5-1 Legislation Flies Through House!
Remember last month, when Liz blogged about the introduction of bipartisan legislation that would require the SEC to study whether Rule 10b5-1 should be amended to add more procedural restrictions for trading plans? According to this article from the Center for Executive Compensation, the bill has flown through the House & may be on the fast track in the Senate as well:
At the end of last week, the House of Representatives approved, on a 413-3 vote, a bipartisan bill which would require the SEC to conduct an in-depth study of 10b5-1 executive stock trading plans. (A Rule 10b5-1 stock trading plan allows an individual with access to material, nonpublic information to execute sales or purchases of company stock in accordance with a pre-determined schedule, creating an affirmative defense to potential violations of company rules or federal securities laws regarding insider trading.)
The bill now moves to the Senate, where it appears Democrats are eager to move the bill and are working to create the same bipartisan atmosphere as in the House. In the past, the Senate has staunchly refused to take up any bill that does not exhibit a strong path to bipartisan adoption – especially those addressing governance and compensation issues.
The article says that the House’s overwhelming approval of the bill puts it on a path which could lead to Senate action. If the bill does pass, it won’t mean any changes in 10b5-1 right away, but the results of the study it would mandate could provide a blueprint for potential changes.
Transcript: “12 Tricks to Help You During Proxy Season”
We have posted the transcript for our recent webcast: “12 Tricks to Help You During Proxy Season.”
Last month, I blogged about Johnson & Johnson’s unusual request to exclude a shareholder proposal that would have required arbitration of all federal securities law claims brought against the company. Yesterday, Corp Fin granted the company’s no-action request & permitted it to exclude the proposal from its proxy materials. The company is a New Jersey corporation, and sought to exclude the proposal on the grounds that its implementation would violate applicable state law.
New Jersey’s AG submitted a letter supporting that position – and this excerpt from the Corp Fin’s response letter indicates that it was dispositive:
When parties in a rule 14a-8(i)(2) matter have differing views about the application of state law, we consider authoritative views expressed by state officials. Here, the Attorney General of the State of New Jersey, the state’s chief legal officer, wrote a letter to the Division stating that “the Proposal, if adopted, would cause Johnson & Johnson to violate New Jersey state law.” We view this submission as a legally authoritative statement that we are not in a position to question.
Since the permissibility of mandatory arbitration bylaws is a “hot potato” political issue, the issuance of the no-action letter was accompanied by a lengthy statement from SEC Chair Jay Clayton clarifying exactly what the Staff was – and wasn’t – saying. In particular, he noted that Corp Fin was not addressing the permissibility of the proposed bylaw under federal law:
The staff of the Division of Corporation Finance explicitly noted that it was not expressing a view as to whether the proposal, if implemented, would cause the company to violate federal law. Since 2012, when this issue was last presented to staff in the Division of Corporation Finance in the context of a shareholder proposal, federal case law regarding mandatory arbitration has continued to evolve. Further, I am not aware of any circumstances where the Commission has weighed in on the legality of mandatory shareholder arbitration in the context of federal securities law.
Jay Clayton went on to say that he agreed with the Staff’s approach & would expect it to take a similar approach if the issue arose again. He also reiterated his prior statements to the effect that any policy decision should be made by the SEC in a measured and deliberative manner. The Staff earns some style points for the way it finessed the mandatory arbitration issue here – but credit New Jersey’s AG with a big-time assist.
The Weed Beat: Banking on Cannabis
As of the end of 2018, medical marijuana has been legalized in 33 states and its recreational use has been legalized in 10 states – but if you’re in the legal cannabis business, just try & take your money to the bank. Perhaps because Canada experienced a communist revolution shortly after it legalized marijuana, the drug remains illegal under U.S. federal law. That makes banks very skittish about getting anywhere near these businesses.
This Davis Polk memo reviews the current uncertainties that banks face when dealing with the cannabis industry and reviews 2 pieces of proposed legislation – the SAFE Act and the STATES Act – that would clarify the regulatory framework & make it easier for these businesses to establish banking relationships. This excerpt from the intro summarizes what the proposed statutes are intended to accomplish:
Neither bill would federally legalize cannabis or deschedule cannabis from Schedule 1 of the Controlled Substances Act (CSA). Instead, the bills would permit depository institutions, in the case of the SAFE Act, or financial institutions, in the case of the STATES Act, to provide financial services to cannabis-related businesses (CRBs) that comply with state laws regulating legalized cannabis-related activity. Both bills would benefit from changes that would take into account a broader range of financial services or the realities of possible diligence in the financial sector.
The feds aren’t the only ones trying to make cannabis companies more bankable – check out this recent blog from Keith Bishop about proposed California legislation that would permit the state to charter limited purpose “cannabis banks.”
Tomorrow’s Webcast: “Earnouts – Nuts & Bolts”
Tune in tomorrow for the DealLawyers.com webcast – “Earnouts: Nuts & Bolts” – to hear Pepper Hamilton’s Michael Friedman, Cravath’s Aaron Gruber, Fredrikson & Byron’s Sean Kearney and K&L Gates’ Jessica Pearlman – discuss the nuts & bolts of earnouts, and how to prevent this popular tool for bridging valuation gaps from becoming a post-closing albatross for your deal.
Effective shareholder engagement is becoming more essential every year. So, it’s helpful to find examples of companies that do it well & can provide insights into what investors regard as “best practices.” This recent “Corporate Secretary” article spotlights Hewlett Packard Enterprise’s efforts – which earned the company the award for “best shareholder engagement” at the magazine’s 2018 Corporate Governance Awards. Here’s an excerpt on the role directors play in HPE’s engagement efforts:
Directors have traditionally been averse to taking part in meetings with shareholders, but best practice now requires their involvement at some level. HPE’s engagement includes a three-month off-season board outreach program comprising one-on-one, on-site meetings between shareholders and directors.
During fiscal 2018, the company broadened these efforts to holders of more than 60 percent of HPE’s stock. Combined with the participation of investor advisory firms, the program engaged directly with holders or advisers of more than 55 percent of its common stock.
HPE is keen on providing direct shareholder access to the board so investors can hear directors’ thinking, and vice versa, without a management filter. The company’s engagement program includes the board chair, committee chairs and other directors that shareholders have a specific interest in meeting.
Engagement efforts extend to semi-annual customer meetings, in which directors often participate in panel discussions. Directors also frequently attend the company’s annual investor day presentation.
Conference Calls: Anatomy of a “Non-Answer”
One of the more interesting – and awkward – aspects of an earnings conference call occurs when an executive declines to answer an analyst’s question. This recent study reviewed situations in which company officials expressly declined to answer a question, and reached some interesting conclusions about when corporate officials were more – and less – likely to be forthcoming. Here’s an excerpt from the abstract:
Using our measure, about 11% of questions elicit non-answers, a rate that is stable over time and similar across industries. Consistent with extant theory, we find firms are less willing to disclose when competition is more intense, but more willing to disclose prior to raising capital. An important feature of our measure is that it yields several observations for each firm-quarter, which allows us to examine disclosure choice within a call as a function of properties of the question.
We find product-related questions are associated with non-answers, and this association is stronger when competition is more intense, suggesting product-related information has higher proprietary cost. While firms are more forthcoming prior to raising capital, the within-call analyses for future-performance-related questions shows firms are less likely to answer future-performance-related questions shortly before equity or debt offerings when legal liability is higher.
These results probably don’t come as a big surprise – and may even provide some comfort to lawyers that their guidance about the hazards of hyping future results when raising capital have been taken to heart.
But the study’s results suggest that the Securities Act’s liability scheme is a double-edged sword when it comes to corporate communications. Companies thinking about a deal are more willing to share historical information with the market – but more reticent to comment about the future.
Tomorrow’s Webcast: “How to Use Cryptocurrency as Compensation”
Tune in tomorrow for the CompensationStandards.com webcast — “How to Use Cryptocurrency as Compensation” — to hear Perkins Coie’s Wendy Moore and Morrison & Forester’s Ali Nardali and Fredo Silva discuss the groundswell in the use of cryptocurrency as compensation among private companies — and the legal framework that applies.
Whether he’s slamming financially engineered deals that leave employees holding the bag, calling out activist hedge funds, or skewering litigants with his caustic wit, Delaware’s Chief Justice Leo Strine never hesitates to “call ’em as he sees ’em” – and his recent essay bashing corporate political spending is no exception.
Strine’s essay calls into question the legitimacy of corporate political spending and says that the “Big 4” asset managers – BlackRock, Vanguard, State Street & Fidelity – have dropped the ball when it comes to their oversight responsibilities. He points out that the Big 4 are responsible for the investments of millions of American workers who have become “forced capitalists” in order to fund their retirement & their children’s education, and says that a docile approach when it comes to corporate political spending isn’t consistent with their obligations to these “Worker Investors.”
The Chief Justice doesn’t mince words when it comes to expressing his displeasure with this state of affairs:
The Big 4 continue to have a fiduciary blind spot: they let corporate management spend the Worker Investors’ entrusted capital for political purposes without constraint. The Big 4 abdicate in the area of political spending because they know that they do not have Worker Investors’ capital for political reasons and because the funds do not have legitimacy to speak for them politically. But mutual funds do not invest in public companies for political reasons, and public company management has no legitimacy to use corporate funds for political expression either. Thus, a “double legitimacy” problem infects corporate political spending.
The Chief Justice says that the Big 4 should push companies to implement a requirement that any corporate political spending to be authorized by a supermajority vote of the shareholders. He notes that this idea came from Vanguard founder Jack Bogle in the wake of Citizens United, and contends that this action is necessary if the Big 4 are to adequately represent the interests of Worker Investors:
It is not asking too much of the Big 4 to make sure that Worker Investors’ trapped capital is not used to tilt the playing field even more against ordinary, human Americans, to subject them to the huge costs that come when corporations influence regulatory policies to take shortcuts that hurt workers, consumers and the environment, and to shift the focus of corporate management away from legitimate, productive ways to generate sustainable wealth and toward
rent-seeking. By abdicating their duty to police political spending, the Big 4 has, in effect, enabled corporations to use Worker Investors’ capital for these purposes.
Investigations: Lookout, Here Comes Congress!
Speaking of politics, I think I read somewhere that Congress has broad investigative authority – and when it comes to investigations, this Paul Weiss memo says that companies shouldn’t ask for whom the bell tolls – because this year, it’s tolling for them:
Given the pent-up demand for House Democrats to make robust use of their oversight and investigative authorities, the current relative lull in congressional investigations of corporations is expected to end. Corporations across sectors should anticipate an uptick in investigative activity.
In addition to holding the majority for the first time in nearly a decade, this will be the first time that Democrats control the House since a 2015 rule change that empowered a number of committe chairs to subpoena witnesses or documents unilaterally. The chairs of the following committees, among others, have this authority: Energy and Commerce; Financial Services; Intelligence; Judiciary; Natural Resources; and Oversight and Government Reform.
The memo cautions that companies with ties to the Trump Administration or that have benefitted significantly from its initiatives may find themselves caught up in Congressional investigations, and offers tips for preparing to deal with Congressional scrutiny.
Our February Eminders is Posted!
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I blogged last year about Spotify’s decision to forego a traditional IPO in favor of a direct listing. Now, according to this recent WSJ report, it appears that fellow unicorn Slack Technologies will follow the same path. Bloomberg’s Matt Levine thinks that may be a big deal:
We talked a bunch about the Spotify direct listing when it happened, but it is hard to overstate the importance of the second big high-profile direct listing. There’s a reason that people still talk about Google’s Dutch auction IPO, 15 years later: because it didn’t inspire imitators. It didn’t become a standard tool of corporate finance, an option that is on the table for every company. It’s just a weird thing that Google did once.
But if Slack follows Spotify’s lead in going public by direct listing, then it is much more likely to become a thing. Other tech companies considering going public won’t think “should we do that weird thing that Spotify did” but rather “what are the pros and cons of direct listings compared to initial public offerings?” Investment banks will—reluctantly!—put together pitchbook pages explaining direct listings and touting their own credentials at leading them. (“Haven’t only three banks ever led a big direct listing in the U.S.,” you might ask, but that just means that you don’t understand how pitchbook credentials work. Every bank is the market leader in everything, in the safety of their own pitchbooks.)
Matt says that the viability of the direct listing alternative may lead to a much more customized process of going public than the traditional IPO:
It used to be that, if you wanted to go public, there was one way to do it. Now there are two. But the choice creates the possibility of more choice, of unlimited customization, of tweaking each feature to get exactly the tradeoffs you want.
Wow. And to think that I haven’t even tried avocado toast yet! Also check out this Cydney Posner blog on Matt’s article.
Crisis Management: Benchmarking Your Response Plan
This recent Morrison & Forester/Ethisphere survey is intended to assist companies in benchmarking their crisis management planning efforts by providing insight into current trends in crisis management & highlighting best practices. Here’s an excerpt discussing the frequency with which specific topics are addressed in crisis management plans:
One of the areas our survey explored in depth involved the types of events companies included in their crisis management plans. The most common response was “cyber breach,” with 67% of respondents answering that they had plans that addressed such an event.
The next most commonly included crisis events were “workplace violence or harassment” (reflecting additional steps being taken by companies to address these issues in the #MeToo era) (56.5%), followed by events relating to a government investigation (44.2%) and environmental damage (44.8%).
Beyond those, tied at 5th and 6th, were preparations for an anti-corruption violation (40.9%) and an IP (Intellectual Property) theft event (40.9%), followed by terrorism (36.4%), high stakes litigation (31.8%), and product recall (26%).
Other topics addressed include methods to boost organizational confidence in a crisis management plan & the role of outside counsel.
Privacy: France Smacks Google for Alleged GDPR Violations
Last week, Google earned the unwanted distinction of being the first U.S.-based company to be sanctioned for alleged violations of the EU’s GDPR. Here’s the intro from this Dinsmore & Shohl memo:
On January 21, 2019, Google was fined nearly $57 million (approximately 50 million euros) by France’s Data Protection Authority, CNIL, for an alleged violation of the General Data Protection Regulation (GDPR). CNIL found Google violated the GDPR based on a lack of transparency, inadequate information, and lack of valid consent regarding ad personalization. This fine is the largest imposed under the GDPR since it went into effect in May 2018 and the first to be imposed on a U.S.-based company.
The memo lays out the specific areas with which French regulators found fault, and notes that the proceeding was likely intended to send a message to all U.S.-based organizations that collect data on EU citizens.
Yesterday, the SEC announced enforcement proceedings against four companies that were unable to get their acts together when it came to internal control over financial reporting. Lots of companies encounter ICFR issues & disclose material weaknesses every year, so should they all be worried about the Division of Enforcement knocking at their door?
My guess is probably not – because the targets of these proceedings were a pretty unique group. As this excerpt from the SEC’s press release explains, to say that they all had longstanding ICFR issues is a huge understatement:
The Securities and Exchange Commission today announced settled charges against four public companies for failing to maintain internal control over financial reporting (ICFR) for seven to 10 consecutive annual reporting periods. Two of the charged companies also failed to complete the required evaluation of the effectiveness of ICFR for two consecutive annual reporting periods.
According to the SEC’s orders, year after year, the four companies disclosed material weaknesses in ICFR involving certain high-risk areas of their financial statement presentation. As discussed in the SEC orders, each of the four companies took months, or years, to remediate their material weaknesses after being contacted by the SEC staff. One of the companies is still in the process of remediating its material weaknesses.
One of the big lessons here is that it’s not enough to disclose your internal controls problems – you’ve got to fix them. The press release quotes Associate Director of Enforcement Melissa Hodgman as saying that companies “cannot hide behind disclosures as a way to meet their ICFR obligations. Disclosure of material weaknesses is not enough without meaningful remediation.”
Each of the four companies agreed to a cease and desist order & the payment of civil penalties. In addition, the group’s medalist – which disclosed a material weakness in ICFR each year for an entire decade(!) – was required to retain an independent consultant to ensure remediation of material weaknesses, including those involving related party transactions.
SOX 404: Maybe You Hate It, But Investors Don’t
Okay, the example of the “Gang of 4” in today’s lead blog notwithstanding, I confess that I’m still not a big fan of Sarbanes-Oxley’s Section 404. I guess I’m one of those people who think that it’s led to a lot of unproductive corporate navel gazing, and that this outweighs its merits.
Based on my experience, there seem to be a lot of other “404 haters” out there among my fellow lawyers. But I’m afraid a constituency a lot more important than us may have a different opinion about Section 404’s internal controls reporting mandate. According to this CFO.com article, a new study claims that investors like internal controls reporting quite a bit. The study cites investor reaction to decisions to opt-out of internal control audits for newly-acquired companies in support of its claim:
Looking at the impact of a rule that enables companies for one year to opt out of IC audits for newly acquired firms, the paper reveals a significant drop in the acquirer’s stock on the day the opt-out becomes public with the issuance of the acquiring company’s annual report.
Depending on how this decline is calculated, one-day abnormal stock returns compared with opt-in companies can be as much as 44 basis points, according to the study authors, Robert Carnes of the University of Florida, Dane Christensen of the University of Oregon, and Phillip Lamoreaux of Arizona State University.
…[T]hey found the stock-price dip occasioned by opting out of internal controls audits becomes more pronounced the greater the size of the acquired entity relative to the size of the acquirer, as would be expected if investors value an auditor’s internal control assurance. The professors also found a more negative effect for acquisitions in the first half of a buyer’s fiscal year, suggesting that opting out becomes more suspect to investors the more time acquirers have to integrate the two companies’ finances.
A big reason for investors’ negative reaction to an opt-out decision is that – as I’ve previously blogged – it frequently proves to be a red flag portending future restatements.
Transcript: “The Latest – Your Upcoming Proxy Disclosures”
We’ve posted the transcript for our recent CompensationStandards.com webcast: “The Latest – Your Upcoming Proxy Disclosures.”
When you find a mistake in the financials, one of the first questions that must be answered – after you stop hyperventilating – is “how do we correct the error?” This Audit Analytics blog reviews how companies have answered that question in recent years. The blog says that there’s been a trend away from restatements & toward the more benign “out-of-period adjustments” – and suggests that better internal controls may be part of the reason for it.
This excerpt reviews the issues that most frequently resulted in out-of-period adjustments and restatements during the period from 2009-2016:
When it comes to which types of issues are being corrected via out-of-period adjustments, taxes topped the list for the last 8 years. In 2016, companies recorded 85 tax related out-of-period adjustments – 26% of all the out of period adjustments recorded during the year. Second and third of the top issues were liabilities (14%) and revenue recognition (12%).
The most common issues being corrected differ when looking at restatements. Securities (debt, quasi-debt, warrants & equity) issues ranked at the top, comprising 17.6% of restatements in 2016, whereas they account for only 5.8% of out-of-period adjustments during the same year. Classification issues was the next most common restatement issue (14.2% of all 2016 restatements).
Ultimately though, the deciding factor between a restatement and an out-of-period adjustment is materiality, and the blog notes that when it comes to materiality, size matters. For most of the periods surveyed, the largest restatement was bigger than the largest out of period adjustment.
SEC’s Shutdown: “Keep On Rockin’ In The Free World. . .”
The government shutdown caused a lot of financial hardship, so we tip our hats to the band “G.O.A.T. Rodeo” – which played a concert in DC last week to provide some free entertainment and raise a little money for displaced federal workers. It turns out that the membership of the band isn’t what you might expect. As this Bloomberg Business Week article notes, the SEC Staff is well represented in the band:
The U.S. Securities and Exchange Commission lawyers who took the stage at Washington’s Rock & Roll Hotel Thursday night have won accolades for suing Goldman Sachs Group Inc. and writing rules for Wall Street traders. This time, their greatest hits were more of the heavy metal variety.
Prompted by the government shutdown, the SEC workers — who moonlight in a band called G.O.A.T. Rodeo — played a concert for fellow furlough victims. The plan was to raise some money for a charitable fund that helps federal employees and blow off some pressure that’s been building over the past month.
“We’ve been going a little crazy around my house, stir crazy, not working,’’ said Stacy Puente, an SEC attorney, before she launched into Ozzy Osbourne’s hit “Crazy Train.” The crowd, many of whom were also missing paychecks and unable to go to their jobs at the SEC and other agencies, nodded their heads and pumped fists in the air.
Vocalist Stacy Puente was joined by SEC enforcement lawyer Reid Muoio on drums, while other SEC staffers played lead guitar & keyboards. By the way, I love the band’s name – and there’s nothing more appropriate than having a band named “G.O.A.T. Rodeo” play a fundraiser for people feeling the pain of our national “goat rodeo.”
Transcript: “Pat McGurn’s Forecast for 2019 Proxy Season”
We have posted the transcript for our recent webcast: “Pat McGurn’s Forecast for the 2019 Proxy Season.”
Over the weekend, SEC Chair Jay Clayton posted a statement saying that the SEC has “resumed normal staffing levels and is returning to normal operations.” But this excerpt seems to acknowledge that getting back to full speed is going to take some real effort:
The leaders of our Divisions and Offices, in consultation with various members of our staff, are continuing to assess how to most effectively transition to normal operations. Certain of these Divisions and Offices, including our Divisions of Corporation Finance, Trading and Markets, Investment Management and our Office of Compliance Inspections and Examinations, will be publishing statements in the coming days regarding their transition plans.
As promised, Corp Fin subsequently posted its own statement – and said that when it comes to tackling its backlog, the general approach is going to be “first come, first served. Here’s an excerpt:
The Division of Corporation Finance is returning to normal operations. In general, we anticipate addressing filings, submissions and requests for staff action based on when an item was submitted. In other words, absent compelling circumstances, we expect to address matters in the order in which they were received.
Corp Fin’s statement also notes that although the Staff will be available to respond to questions, “their response time may be longer than ordinary.” That shouldn’t surprise anyone. The shutdown has led to a big logjam in IPOs, and has thrown a monkey wrench into the 14a-8 no-action process. While those issues have gotten most of the attention, I can only guess at the backlog of ’34 Act comment letters and other ordinary course business that the Staff will have to work through.
In short, the Staff has a big mess that it’s going to have to clean up over the coming weeks. At the same time, private sector lawyers are going to be under a lot of pressure to get their client’s projects moving again. Both sides of the table should cut each other some slack as we work through this. We didn’t make the mess – but when it comes to the cleanup, we’re all in this together.
Check out this Skadden memo, this Cooley blog and this Weil blog for more information about Corp Fin’s grand reopening – including a discussion of IPO & shareholder proposal-related issues.
Registration Statements: What If You Pulled The Delaying Amendment?
As Broc blogged last month, during the shutdown, the SEC invited companies with pending registration statements to pull their delaying amendments. For companies that opted to do that, the question becomes, “now what do we do?” Here’s what Corp Fin’s statement says:
Consistent with the Division’s Questions and Answers in connection with its statement regarding Actions During a Government Shutdown, some registrants omitted or removed delaying amendments from their registration statements. We will consider requests to accelerate the effective date of those registration statements if they are amended to include a delaying amendment prior to the end of the 20 day period and acceleration is appropriate.
In cases where we believe it would be appropriate for a registrant to amend to include a delaying amendment, we will notify that registrant. We remind registrants that Rule 430A is only available with respect to registration statements that we declare effective and is not available to registration statements that go effective as a result of the passage of time.
So, the bottom line appears to be that if you’ve pulled a delaying amendment & the Staff has an issue with that (such as unresolved comments), they’ll let you know. Otherwise, they’ll leave you to your fate – unless you add the amendment back yourself.
Tomorrow’s Webcast: “Controlling Shareholders – The Latest Developments”
Tune in tomorrow for the DealLawyers.com webcast – “Controlling Shareholders: The Latest Developments” – to hear Potter Anderson’s Brad Davey, Cravath’s Keith Hallam, Greenberg Traurig’s Cliff Neimeth and Sullivan & Cromwell’s Melissa Sawyer discuss the latest developments surrounding transactions involving controlling shareholders.
This recent Bloomberg Law blog describes a shareholder proposal – and a company’s response – that you definitely don’t see every day. Here’s the intro:
The recent no-action request from Johnson & Johnson to exclude a shareholder proposal from its proxy materials creates a rather unique dynamic. It is indeed an unusual day when a shareholder submits a proposal that could curtail investor rights, and the company responds with a full-throated defense of the shareholders’ right to file suit against it.
That peculiar set of circumstances resulted from an investor request to have the Johnson & Johnson board adopt a bylaw requiring the arbitration of all claims brought by investors arising under the federal securities laws, and providing that any such claims may not be brought as a class and may not be consolidated or otherwise joined.
Geez, and I thought it was odd when Steelers fans were rooting for the Browns to beat Baltimore a few weeks back. . . Anyway, the shareholder proponent is Hal Scott, an emeritus Harvard Law School prof who’s a long-time opponent of shareholder class action litigation.
This situation has produced some very strange bedfellows – check out the signatories to this recent letter to SEC Chair Jay Clayton urging it to grant the no-action relief that J&J’s requested and to reaffirm the SEC’s position that arbitration clauses violate the securities laws.
ESG: Why Boards Should Care About the SASB’s Sustainability Standards
I recently blogged about the SASB’s adoption of he first-ever industry-specific sustainability accounting standards designed to facilitate communication of financially-material sustainability information to investors. This BDO memo reviews the new standards and provides an overview of both SEC-mandated sustainability disclosures & the information increasingly demanded by investors.
The memo acknowledges that sustainability has been a back-burner issue for many corporate boards, but says there are reasons that companies should embrace the new standards and the enhanced sustainability disclosure they contemplate. Potential benefits of this approach include:
– Realization:Tangible returns being realized in adoption of sustainable practices
– Competitive differentiator: Use of voluntary disclosure as opportunity to tell unique stories to the marketplace which can serve as competitive differentiators
– Capitalizing on investment trends: Cultivation and incorporation of evolving investing practices in companies that can demonstrate long term value creation initiatives
– Demonstration of connected corporate strategy: Strengthening corporate strategy with forward-thinking, sustainable practices
– Engagement of shareholders: Getting out in front of the threat of increasing shareholder proposals focused on ESG
– Protect reputation and improve public relations: Communicating fulfillment of a deemed duty by the market as a “good corporate citizen”
– Attraction and retention of talent: A potential further differentiator in war for attracting and retaining good talent
If these reasons aren’t enough, this Davis Polk blog offers another one – rating agencies are increasing their focus on ESG risks.
SEC Shutdown: ALJs Ordered to Stand Down
Yesterday, the SEC issued this updated statement on its operations during the shutdown. Among other things, that update says that the agency is still at work on “emergency enforcement matters,” including “investigations of ongoing fraud or conduct that poses a threat of imminent harm to investors, such as ongoing fraud or misconduct.”
But it’s far from business as usual on the enforcement front. In fact, pending SEC administrative proceedings are among the government shutdown’s latest casualties. On Tuesday, the SEC issued this order staying all pending administrative proceedings. This excerpt gives you the gist of it:
The Commission stays all pending administrative proceedings initiated by an order instituting proceedings that set the matter down for a hearing before either an administrative law judge or the Commission. The stay is effective immediately and shall remain operative pending further order of the Commission.
The order permits parties to ask that the stay be lifted, but only in very limited situations, such as in the case of “emergencies involving the safety of human life or the protection of property.”
