People seem to ponder, contemplate & generally ruminate over the annual letter from BlackRock’s CEO Larry Fink like it’s a pronouncement from the Oracle at Delphi. Since it gets so much attention, I guess we shouldn’t be all that surprised that somebody would decide to issue a fake version of this year’s letter. Here’s an excerpt from this Barron’s article:
Larry Fink’s annual letter to Corporate America is widely anticipated. But an email Wednesday purporting to be from the BlackRock CEO that was sent to media outlets, including Barron’s, wasn’t the real thing—even though it contained lofty rhetoric and finger-wagging about the risks of climate change, one of Fink’s favorite subjects. It also included a series of purported initiatives including an eyebrow-raising plan to divest from fossil fuel companies.
The hoaxters were certainly media-savvy, not to mention thorough: The fake letter was accompanied by a fake website, and followed by a separate, fake statement from one of BlackRock’s top public relations people. A (real) BlackRock spokesman said the company is investigating.
BlackRock posted the real version of Fink’s letter later in the day. A CNBC story says that the hoax is being pinned on environmental activists, and Barron’s characterized the perpetrator of the hoax as a “prankster,” but I guess I have my doubts. The hoax was elaborate, timed to coincide with BlackRock’s earnings release, and appears to have been designed to move markets. It seems at least possible that “fraudster” may turn out to be a more apt characterization than “prankster.”
Yesterday was a big day for elaborate media hoaxes. If you’re looking for “pranksters,” the activists responsible for the fake edition of yesterday’s Washington Post appear to fit the bill. Notorious Democratic prankster & Richard Nixon tormentor Dick Tuck would’ve been proud.
CEO Activism: Should CEOs Speak Out or “Shut Up & Sing”?
Larry Fink hasn’t been shy about speaking out on social issues, but historically, most corporate CEOs have been pretty averse to the idea of wading into the public debate on social or political topics. There’s a perception that this is changing – and a growing debate about whether CEOs should speak out or just “shut up and sing.” This Stanford study takes a look at the prevalence of CEO activism, the range of advocacy positions taken by CEOs, and the public’s reaction to it.
The study concludes that CEO activism in the media isn’t as widespread as it may be perceived, with only 28% of S&P 500 and 12% of S&P 1500 CEOs making public statements about social, environmental or political issues. Those statements generally were concentrated in a handful of areas – with diversity, environmental issues, and immigration and human rights being the most prevalent. When it comes to social media, only 11% of S&P 1500 CEOs have Twitter accounts, and less than half of them used Twitter as a platform for this type of advocacy.
The study found that the public’s reaction to CEO activism on these topics was mixed. Here’s an excerpt with the details:
In a survey of 3,544 individuals, the Rock Center for Corporate Governance at Stanford University found that two-thirds (65%) of the public believe that the CEOs of large companies should use their position and potential influence to advocate on behalf of social, environmental, or political issues they care about personally, while one-third (35%) do not.
Members of the public are most in favor of CEO activism about environmental issues, such as clean air or water (78%), renewable energy (68%), sustainability (65%), and climate change (65%). They are also generally positive about widespread social issues, such as healthcare (69%), income inequality (66%), poverty (65%) and taxes (58%).
The public reaction is much more mixed about issues of diversity and equality. Fifty-four percent of Americans support CEO activism about racial issues, while 29% do not; 43% support activism about LGBTQ rights, while 32% do not; and only 40% support activism about gender issues,while 37% do not. Contentious social issues—such as gun control and abortion—and politics and religion garner the least favorable reactions. Of these issues, CEOs speaking up about gun control is the only one with a net-favorable position (45% favorable versus 35% unfavorable). Abortion (37% versus 39%), politics (33% versus 43%), and religion (31% versus 45%) all elicit net-unfavorable reactions.
When it comes to consumer behavior, the study says that Americans are significantly more likely to recall products or services they used less of based on a CEO’s comments than to recall those they used more of in response to those comments. The study says that demonstrates that CEO activism is a double edged sword – while it can build customer loyalty, it can also alienate large segments of the customer base.
– Cross-Border Carve-Out Transactions
– The Odd Couple: Indemnification and R&W Insurance
– Fairness Opinions: How to Avoid Provider Conflicts
– Standards of Review: When the Controlling Shareholder Isn’t a Buyer
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In light of the government shutdown, I really wasn’t expecting any bombshell announcements from the SEC any time soon. Well, that shows you what I know, because yesterday the SEC announced that it had snagged the alleged perpetrators of the infamous 2016 hack of the Edgar system. Here’s an excerpt from the SEC’s press release:
The Securities and Exchange Commission today announced charges against nine defendants for participating in a previously disclosed scheme to hack into the SEC’s EDGAR system and extract nonpublic information to use for illegal trading. The SEC charged a Ukrainian hacker, six individual traders in California, Ukraine, and Russia, and two entities. The hacker and some of the traders were also involved in a similar scheme to hack into newswire services and trade on information that had not yet been released to the public. The SEC charged the hacker and other traders for that conduct in 2015.
The SEC’s complaint alleges that after hacking the newswire services, Ukrainian hacker Oleksandr Ieremenko turned his attention to EDGAR and, using deceptive hacking techniques, gained access in 2016. Ieremenko extracted EDGAR files containing nonpublic earnings results. The information was passed to individuals who used it to trade in the narrow window between when the files were extracted from SEC systems and when the companies released the information to the public. In total, the traders traded before at least 157 earnings releases from May to October 2016 and generated at least $4.1 million in illegal profits.
Here’s the SEC’s complaint – which lays out how the hackers allegedly exploited Edgar test filings for fun & profit. The SEC’s press release notes that this isn’t its first go-around with Oleksandr Ieremenko. This guy was allegedly one of the masterminds behind one of the largest securities frauds schemes of all time. As Broc blogged at the time, Iremenko and others hacked into 150,000 earnings releases over a 5-year period, & the info they obtained resulted in over $100 million in illicit profits. Check out this article for more details on Oleksandr Ieremenko & how that scam came to be.
Parallel criminal charges have been brought against the defendants by the New Jersey US Attorney’s office. Criminal charges also were brought in connection with the newswire hack – which raises the question of why Mr. Ieremenko isn’t making big rocks into little rocks as a guest of the US government? Well, it turns out that he’s in Kiev, and the Ukraine does not extradite its citizens.
Gun Jumping: “I’m Not Dead. . . I’m Getting Better”
I hope you aren’t getting tired of my Monty Python references – but after reading this blog from Bass Berry’s Jay Knight about some recent Staff comments on “gun jumping,” I couldn’t resist borrowing from The Holy Grail’s “Bring Out Your Dead” scene for this blog’s title. Jay says that, like the old man in the movie, gun jumping’s not dead yet:
Despite the trend toward a more relaxed approach on offering related communications, gun jumping in some form or another is still alive and well for most offerings conducted, and securities lawyers continue to provide counsel to management on how to navigate the potential minefield.
For example, in monitoring SEC comment letters I came across this SEC comment letter recently made public, which asks the issuer to explain why gun jumping laws were not violated when two of its shareholders issued press releases with respect to the issuer’s confidential IPO submissions and an article on the same matter was published in the Israeli business newspaper Globes.
Jay says that the company’s response appeared to satisfactorily address the Staff’s concerns (it appears no follow-up comments were issued). He also reviews the still hale & hearty ground rules for avoiding potential gun jumping issues in securities offerings.
ICOs: The Crypto’s Blowin’ Up on Reg D
Although at least one token sponsor has publicly filed an S-1 & a few others have made confidential draft S-1 filings in preparation for registered ICOs, MarketWatch’s Francine McKenna reports that Reg D remains the preferred path for coin offerings:
MarketWatch counted 287 ICO-related fundraisings accepted by the SEC with a total stated value of $8.7 billion in 2018, peaking at 99 in the second quarter. That’s a significant increase from 44 fundraisings filed with a total stated value of $2.1 billion in 2017.
As we blogged early last year, Francine previously reported that reliance on Reg D skyrocketed following the SEC’s issuance of guidance on coin offerings in 2017, and it looks like it that trend remained strong throughout 2018.
I probably should preface this blog by conceding that when it comes to constitutional law, I was never anybody’s idea of SCOTUS clerk material. In fact, about all I can remember from my Con Law class is the time that Prof. Howard called on me and began his questioning with “Mr. Jenkins, Justice Black dissents in this case. . .” To which I responded, “Yes he does, Professor – and I pass.”
Anyway, some lawyers for The Cato Institute who obviously paid more attention in Con Law than did I have filed a federal lawsuit on behalf of the libertarian think tank challenging the constitutionality of the SEC’s Rule 202.5(e). That rule reads as follows:
The Commission has adopted the policy that in any civil lawsuit brought by it or in any administrative proceeding of an accusatory nature pending before it, it is important to avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact, occur. Accordingly, it hereby announces its policy not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings. In this regard, the Commission believes that a refusal to admit the allegations is equivalent to a denial, unless the defendant or respondent states that he neither admits nor denies the allegations.
This rule is why every SEC settlement contains language providing that the defendant “neither admits nor denies” the SEC’s allegations. In its complaint, Cato says it wants to publish a book critical of the Division of Enforcement written by a former target of an SEC enforcement action, but alleges that the “neither admit nor deny” language in the author’s settlement effectively prevents it from doing so. Cato says that what it refers to as the SEC’s “gag rule” is a content-based restriction on speech that’s prohibited under the 1st Amendment.
Over the years, the SEC’s “neither admit nor deny” settlement policy has come in for plenty of criticism. After the financial crisis, critics complained about the SEC’s failure to require admissions of wrongdoing in its settlements with major financial institutions. That ultimately led the SEC to adopt a policy of requiring admissions in some instances.
This time, the SEC’s rule is facing challenges from the “Kill the Administrative State! Kill it with Fire!” side of the political spectrum – and this lawsuit is not the first time the rule has been questioned on 1st Amendment grounds. In October of last year, a rulemaking petition was filed with the SEC challenging the rule’s constitutionality & calling for its revision.
Now, this is where those caveats about my ineptitude as a constitutional scholar come into play. Despite my complete lack of qualifications, I’m going to play the pundit & speculate that this lawsuit just might get some traction. The federal courts are becoming less deferential to regulatory agencies – as evidenced by last summer’s SCOTUS decision invalidating the SEC’s ALJ appointment process. My guess is that this lawsuit may get a boost from the current “Death to the Administrative State!” zeitgeist – but recent experience also suggests that proponents should be careful what they wish for.
SEC Shutdown: “Rules? We Ain’t Publishin’ No Stinkin’ Rules!”
Meanwhile, as America nears the four week mark in its anarchy experiment, over on our ’Q&A Forum’ (#9717) people are starting to wonder what’s become of the rules the SEC adopted before the shutdown. Here’s one member’s question:
On December 19, 2018, the SEC adopted final rules regarding the amendment of Regulation A. I’ve yet to see them published in the Federal Register (or the Govinfo site). Any insight as to why not, and any idea when we can expect this?
In his answer, Broc pointed to the shutdown as the likely culprit for the delay in publication. That’s certainly part of it, but I imagine some of the delay also may be associated with the need to press the remaining essential employees at the Gov. Printing Office into service delivering 300 Big Macs & assorted other fast food delicacies to the White House.
I guess some expected fancier fare for the Clemson Tigers, but as someone who once ate 4 Sausage McMuffins with Egg at the Angola service area on the NYS Thruway & enjoyed a “Royale with Cheese” at the Louvre, it’s all good with me.
Transcript: “GDPR’s Impact on M&A”
We have posted the transcript for the recent DealLawyers.com webcast: “GDPR’s Impact on M&A.”
As we blogged when the government shutdown started a few weeks ago, Corp Fin issued a set of FAQs to help us since its down to a skeletal level of staffing. Corp Fin has now updated its FAQs to revise #4 and 5 – and to add #6 and 9.
New #6 deals with removing a delaying amendment when you have unresolved staff comments on your filing (the answer is “yes, but you’re still responsible for the completeness & accuracy of the disclosure”) – #9 deals with the Staff considering a request for emergency relief under Rule 3-13 of Reg S-X (the answer is “not likely unless there needs to be protection of property”). Kudos to the Staff for numbering the FAQs!
Removing the Delaying Amendment: Need “Magic Words” to Start the Clock
Broc blogged last week about some examples of companies that removed the delaying amendment – and noted the lack of uniformity in the language. If you’re thinking of doing this, be sure to check out the update to FAQ #5. As this excerpt notes, merely deleting the delaying amendment won’t get the 20 day clock running:
Simply omitting the delaying amendment from an amendment will not begin the 20 day period. A company that intends to remove the delaying amendment must amend its registration statement to include the following language provided by Rule 473(b) – “This registration statement shall hereafter become effective in accordance with the provisions of section 8(a) of the Securities Act of 1933.” It must also amend to include all information required by the form, including the price of the securities it will sell.
FAQ #5 also highlights the fact that Rule 430A isn’t available in the absence of a delaying amendment – it can only be used for registration statements that are declared effective by the Commission or the Staff.
Privacy: California’s Consumer Privacy Act is Coming – And So Are Class Actions
If you’re feeling lucky that your company has largely dodged the GDPR bullet, I’ve got some bad news for you – California’s recently enacted consumer privacy legislation goes into effect on January 1, 2020. The statute provides substantial new protections to California consumers, and according to this DLA Piper memo, its private right of action provisions ensure that class actions will be coming:
The statute provides a private right of action under certain circumstances to California consumers whose “nonencrypted and nonredacted” personal information is “subject to an unauthorized access and exfiltration, theft, or disclosure as a result of the business’s violation of the duty to implement and maintain reasonable security procedures and practices appropriate to the nature of the information to protect the information . . . .” Cal. Civ. Code § 1798.150.
Significantly, the Act provides such consumers with the ability to obtain relief in the form of either actual damages or statutory damages between $100 and $750 per violation, whichever is greater. In setting the statutory damages amount, courts are instructed to consider, among other factors, “the nature, seriousness . . . and persistence of the misconduct,” number of violations, “the length of time over which the misconduct occurred,” willfulness, and ability to pay. In addition to damages, the Act provides for injunctive or declaratory relief and “any other relief the court deems proper.”
The memo also notes the possibility of class actions under the state’s unfair competition statute as a result of violations of the CCPA. Because of the significant class action risks, companies should begin to prepare for the statute now – and the memo offers up some specific suggestions along those lines.
According to this recent study from IRRC & the Sustainability Investment Institute (Si2), sustainability reporting has come a long way, but only a few companies have taken the next step and started to issue “integrated reports.” Integrated reporting is intended to provide “a holistic look at material information that goes beyond corporate financial disclosures and gives investors insight on a company’s risk and value creation potential.”
Here are some of the study’s highlights (also see this Davis Polk blog):
– 78% of S&P 500 companies issue a sustainability report.
– 40% of S&P 500 companies include voluntary sustainability discussions in annual financial reports or other regulatory filings. This is a key signal that an increasing number of companies believe sustainability issues are financially material. The reporting, however, varies widely.
– Among companies that issue sustainability reports, 95% offer quantified, annually comparable environmental performance metrics; two-thirds set quantified and time-bound environmental goals. Some 86% offer social performance metrics, but only 40% set quantified social goals.
– Only 14 S&P 500 companies issue what Si2 considers to be fully integrated reports, though this is a 100 percent increase from five years ago.
So which companies are providing integrated reports? According to the study, they include GE, Intel, Pfizer, Allstate, Medtronic, Eli Lilly, Southwest Airlnes, AEP, Ingersoll Rand, Praxair, Entergy, Clorox, NiSource & Dentsply Sirona. While the concept has been slow to catch on, it has been endorsed by the Principles for Responsible Investment (PRI),whose signatories have $82 trillion in assets under management.
ESG: Unifying Non-Financial Reporting Standards
One of the reasons that companies may be slow to adopt integrated reporting is that there are a whole bunch of competing reporting standards. So it’s welcome news that a group of the standard-setters – including the Sustainability Accounting Standards Board (SASB), the Climate Disclosure Standards Board (CDSB), FASB (as an observer) and the Global Reporting Initiative (GRI) – has announced a project to unify their sustainability & integrated reporting frameworks. The FAQs elaborate:
Participants will work together to refine overlapping metrics with the same intent. Where their objectives do not require differences, we will look to achieve and maintain the highest possible alignment. Such alignment is subject to the due process considerations of each organization’s governance procedures.
The initial output, expected in Q3 2019, will be a publication available on www.corporatereportingdalogue.com – the document will show the linkages of the TCFD Recommendations with the respective reporting frameworks and the linkages between the frameworks. This work will include identifying how non-financial metrics relate to financial outcomes, explain how the TCFD recommendations should be integrated in mainstream reports and outline preparations for a next phase during which the framework providers will align their metrics where possible across all their reporting frameworks.
The new project is being led by the IIRC’s Corporate Reporting Dialogue. Note that the IIRC, which is leading this effort, is different than the IRRC, which co-issued the sustainability report discussed in today’s first blog. I want to be clear about that, first because the IRRC is dissolving at the end of this year (into the Weinberg Center), but also in case the two organizations have some sort of a “People’s Front of Judea” / “Judean People’s Front” thing going on.
ESG: Coming Soon to a Debt Deal Near You?
According to this “Institutional Investor” article, European institutions have a strong appetite for ESG debt investments – and that appetite may drive more product to market over the next several years. Here’s an excerpt:
Environmental, social, and governance investing is taking root in the debt markets, where demand for ESG offerings is outstripping supply, according to consulting firm Cerulli Associates. The inclusion of ESG factors in fixed income is becoming more widespread, but opportunities for socially responsible investing remain scarce, Cerulli said in a statement Monday on its European research. The firm expects strong demand from institutional investors in Europe will drive the creation of ESG offerings in fixed income over the next five years.
The SEC’s recent Cyber 21(a) Report highlighted cybersecurity internal control shortcomings at 9 different companies. This Audit Analytics blog looks at which companies have disclosed a “material weakness” following a data breach. This excerpt says that not many have:
The investigative report stopped short of recommending any enforcement action and did not name the companies that were investigated. Moreover, the report does not provide sufficient details to determine the identity of the companies. Although we are unable to identify the companies, we were curious whether we can find similar cases. Using Audit Analytics’ cyber breaches dataset, we looked at recent examples & disclosures of companies that fell victims to the attacks described in the report.
In total, we looked at nine companies that disclosed incidents of similar breaches. Six of these companies disclosed the breaches in filings furnished with the SEC, though only one made the disclosure in a current report (8-K). Of the six companies that disclosed their cyber breaches in SEC filings, just three disclosed that the breach rose to the level of a material weakness in the companies’ internal controls.
The blog also reviews the disclosures made by companies that determined a material weakness existed following a data breach.
Audit Committee Disclosures: More, More, More
The amount of information available to investors about audit committee oversight of the independent auditor continues to increase. That’s the conclusion of the 5th annual “Audit Committee Transparency Barometer,” jointly issued by the Center for Audit Quality & Audit Analytics. This excerpt from the CAQ’s blog lays out the highlights:
– 40% of S&P 500 companies disclose considerations in appointing the audit firm (up from 13% in 2014), compared to 27% of mid-cap companies (up from 10% in 2014) and 19% of small-cap companies (up from 8% in 2014).
– 46% of S&P 500 companies disclose criteria considered when evaluating the audit firm (up from 8% in 2014), compared to 36% of mid-cap companies (up from 7% in 2014) and 32% of small-cap companies (up from 15% in 2014).
– 26% of S&P 500 companies disclose that the evaluation of the external auditor is at least an annual event (up from 4% in 2014), compared to 17% of mid-cap companies (up from 3% in 2014) and 12% of small-cap companies (up from 4% in 2014).
The CAQ & Audit Analytics also provide disclosure examples to illustrate how audit committees are enhancing information for investors & other constituencies. Check out this recent blog from Cydney Posner for more details on the Transparency Barometer’s finding as well as commentary on how SEC & PCAOB actions (particularly the new audit report standard) may drive more audit committee disclosure.
Latest Stats: S&P 500 Political Spending Disclosure
The latest “CPA-Zicklin Index” reviews disclosure policies & practices on political spending by the S&P 500. Here’s a summary of its findings on election-related spending disclosure:
– 294 S&P 500 companies disclosed some or all of their election-related spending, or prohibited such spending in 2018, compared with 295 for 2017.
– When these numbers are broken down further, 231 companies disclosed some or all election-related spending in 2018, compared to 236 such companies in 2017. Turnover in the S&P 500 influenced this fluctuation significantly.
– In 2018, 176 companies prohibit at least one category of corporate election-related spending, a sizable increase from 158 companies in 2017, 143 companies in 2016 and 125 companies in 2015.
This WSJ article has more details on the survey’s findings regarding corporate political spending & disclosure.
The Commission’s Divisions of Corporation Finance, Investment Management, and Trading & Markets (the “Divisions”) encourage technological innovations that benefit investors and our capital markets, and we have been consulting with market participants regarding issues presented by new technologies. We wish to emphasize, however, that market participants must still adhere to our well-established and well-functioning federal securities law framework when dealing with technological innovations, regardless of whether the securities are issued in certificated form or using new technologies, such as blockchain.
The Commission’s recent enforcement actions involving AirFox, Paragon, Crypto Asset Management, TokenLot, and EtherDelta’s founder, discussed further below, illustrate the importance of complying with these requirements.
The Statement walks through each of these enforcement proceedings – which involve ICOs, digital asset investment vehicles & secondary market trading platforms – in some detail, but its message can be summarized briefly: “We don’t want to crush innovation, but the securities laws apply to a lot of what you’re doing. If you don’t comply with those laws, we’ve got a problem – and so do you.”
A “Dutch Uncle” is firm but benevolent – and despite the Statement’s firm tone, Corp Fin showed a little benevolence toward wayward ICO issuers. The 2 ICO settlements referenced in the Statement addressed failures to register offerings under the Securities Act – and the Statement notes that the settlement terms lay out a path to compliance, “even where issuers have conducted an illegal unregistered offering of digital asset securities.”
But the path to compliance isn’t easy – and includes registering the securities under the Exchange Act. This Steve Quinlivan blog blog points out that registration presents some unique challenges for coin issuers:
The second step is to register the coins on Form 10 under the Exchange Act. A daunting task maybe, given little is known how to register coins. You will probably need audited financial statements and all that stuff. Then there are those pesky 34 Act reporting obligations which will follow such as 10-Ks, 10-Qs and 8-Ks. I wonder how Section 16 applies and who has to report.
The better answer for ICO issuers is to get it right the first time, and not have to jump through all sorts of hoops to fix a screw-up. And there’s some indication that many are trying to do that – at the ABA’s Fall meeting, Corp Fin Director Bill Hinman remarked that roughly a half-dozen ICO S-1s & a dozen Reg A filings are currently being reviewed by Corp Fin on a confidential basis.
Meanwhile, SEC Enforcement’s Cyber Unit recently bagged a couple of celebrities. Boxer Floyd Mayweather & music impresario DJ Khaled recently settled SEC enforcement proceedings alleging that they unlawfully touted ICOs on social media without disclosing that that they were being paid.
Crypto: The SEC Takes an “L” in Token Injunction Bid
As the Digital Asset Statement suggests, the SEC has taken a strong position that token offerings generally involve securities in the form of an “investment contract.” As Liz recently blogged, at least one federal court has been sufficiently persuaded of the merits of that position to deny a defendant’s motion to dismiss criminal charges premised on tokens’ status as securities.
But you can’t win ’em all – and the SEC found that out last week when a federal court in California refused to grant a preliminary injunction against a company engaged in a token deal. This excerpt from a recent Fenwick & West memo says that when it came to the status of the token in this case as a security, the court wasn’t buying what the SEC was selling:
On Tuesday, November 27, Judge Gonzalo Curiel of the Southern District of California issued the first opinion rebuffing the SEC under the Howey test. In denying the SEC’s motion for a preliminary injunction — after initially granting a temporary restraining order — the court held that the commission had not provided enough information to deem Blockvest’s token a security.
The decision on this motion is just part of the lawsuit’s opening act, & the memo points out that it is based mainly on the parties’ differing factual accounts of what information the limited number of token purchasers relied upon. But it does suggest that courts aren’t necessarily going to roll over for the SEC’s Howey arguments in each new case.
Crypto: NASAA Tries Cartoons to Stop the Scams
Despite efforts to educate investors about the variety of crypto-scams, a lot of people are still getting ripped-off. This Keith Bishop blog says that NASAA has taken a new tack to educate investors about cryptocurrency investment risks – a series of cartoons:
For those still in the dark about cryptocurrency, the North American Securities Administrators Association (aka NASAA) has released an animated video on the subject. According to NASAA, the video “focuses on concerns individuals should consider before investing in any crypto-related offering, including the three “U’s” (untraceable, uninsured, unregulated), volatility and liquidity risks, and the very real potential for fraud.” This video is actually a sequel to the debut video “Get in the Know about ICOs”.
These aren’t exactly “Rick & Morty” or “BoJack Horseman” when it comes to entertainment value, but check them out – you might learn something.
Here is President Trump’s executive order declaring tomorrow a “national day of mourning” for former President George H.W. Bush, which means that the SEC will be closed. Here’s the SEC’s statement that Edgar is closed. So any filings otherwise required to be made tomorrow will be due instead on Thursday (December 6th) – as the SEC will treat tomorrow as a federal holiday for 8-K purposes, etc. (i.e. not a business day).
Skadden reports that Corp Fin’s Office of Mergers & Acquisitions has confirmed that for purposes of the tender offer rules, tomorrow won’t count as a “business day” (under Exchange Act Rule 14d-1) if such date (i) constitutes the launch date of a 20-business-day offer, or (ii) is the 20th business day of a 20-business-day offer. In each case, an extension of at least one business day would be required. However, Corp Fin will apply an exception for ongoing offers and not require an extension.
In addition, the open Commission meeting to discuss possible changes to quarterly reporting has been cancelled. No word on rescheduling yet. . .
Note the precedent: the SEC issued this press release several days in advance of the national day of mourning held for President Ford in 2007.
D&O: Are You Covered for All Possible #MeToo Claims?
Concerns about sexual harassment have exploded over the past year, and misconduct by corporate officials has proven to be a fertile source of employment law claims, shareholder derivative suits, & securities class actions. This Pepper Hamilton memo reviews the elements of each of these claims, and discusses the coverage issues that companies need to focus on. Here’s an excerpt on D&O coverage:
The prospect of personal liability in the wake of allegations of sexual harassment or failure to monitor workplace conduct, coupled with unassured corporate indemnification and advancement, makes D&O liability insurance an important risk transfer tool that can, at times, become the last line of defense for an individual director or officer.
D&O coverage arising out of the #MeToo movement comes in many forms. For example, some, but not all, public company D&O policies include limited EPL coverage for directors and officers. It is imperative that directors and officers are aware of whether their companies’ D&O policies include EPL coverage. If such coverage is present, it’s vital that directors and officers understand their reporting obligations.
The memo says that questions that companies should ask about #MeToo D&O coverage include:
– What triggers coverage under the D&O policy and what are the reporting obligations?
– What exclusions from the coverage may apply, and can those be narrowed?
– How broad is the coverage for investigations?
– Are the policy limits sufficient?
Mandatory Arbitration: “Thumbs Down” in Delaware?
Until recently, most of the debate over bylaw provisions compelling shareholders to arbitrate securities claims has focused on whether the SEC will remove its existing prohibition on them. But now, some scholars are saying that even if the SEC signs off, Delaware is unlikely to do the same.
According to the authors of this recent white paper, the problem is that Delaware’s relevant statutory provisions – Sections 102 & 109(b) of the DGCL – aren’t broad enough to authorize bylaw provisions establishing an exclusive forum for securities claims. Here’s an excerpt:
a bylaw purporting to regulate the litigation of claims under Rule 10b-5 “would not deal with the rights and powers of the plaintiff as a stockholder,” and would therefore not be within even the broad scope of Section 109(b). As the Delaware Court of Chancery has observed, “[a] Rule 10b-5 claim under the federal securities laws is a personal claim akin to a tort claim for fraud. The right to bring a Rule 10b-5 claim is not a property right associated with shares, nor can it be invoked by those who simply hold shares of stock.”
Accordingly, regulation of the venue for (or other aspects of) a claim under Rule 10b-5 is beyond the subject matter scope of the charters and bylaws of Delaware corporations.
Also check out Alison Frankel’s blog for a discussion of several Delaware cases that may test this position in the context of a bylaw requiring plaintiffs to litigate federal claims in federal court.
In a recent speech, Deputy AG Rod Rosenstein announced changes to the DOJ’s policy regarding individual accountability & cooperation credit in corporate investigations. The intro from this Morgan Lewis memo summarizes the revised policy (we’re posting memos in our “White Collar” Practice Area):
US Deputy Attorney General Rod J. Rosenstein recently announced that in every corporate investigation, the US Department of Justice will make it a top priority to pursue individuals responsible for corporate wrongdoing. This revised policy also modifies the expectations for corporate targets seeking cooperation credit in criminal and civil investigations. Cooperation credit for corporate targets of criminal investigations remains “all or nothing,” while cooperation credit will be available in degrees for corporate targets in civil investigations.
While cooperation credit is “all or none” in criminal investigations, the revised policy takes a less demanding view of what “all or none” means. The memo says that under the policy laid out in the Yates Memo, cooperation credit would not be given unless the company provided all relevant information about any individuals involved, regardless of culpability. In contrast, the new policy requires companies to undertake a good faith effort to identify “every individual who was substantially involved in or responsible for the criminal conduct.”
In civil investigations, all relevant information about any senior officials involved in the misconduct must be provided if the company wants any credit – and it must meet the same standard applicable to criminal investigations if it wants maximum credit. But if the company’s investigative efforts fall short, it can still receive some credit for cooperation if its actions “meaningfully assist the government’s civil investigation.”
Brexit: Speak-Up or Watch Out?
According to this recent WSJ article, SEC Chair Jay Clayton isn’t thrilled about the level of disclosure he’s seeing about the potential impact of Brexit:
The SEC is sharpening its focus on corporate disclosures about the risks associated with the U.K.’s exit from the European Union, Chairman Jay Clayton told company controllers and accountants during a conference on Monday. “My personal view is that the potential impact of Brexit has been understated,” Mr. Clayton said, speaking at the Current Financial Reporting Issues Conference, hosted by professional organization Financial Executives International in New York. “I would expect companies to be looking at this closely and sharing their views with the investment community,” Mr. Clayton added.
This recent blog from Cydney Posner flags a Brexit issue that could cause problems for some companies:
For some companies, one of the most significant issues will be whether they will need to relocate to EU-based banks financial arrangements, such as syndicated loans, swaps and other derivatives, that are currently located at banks in London. That could be a costly, time-consuming and paper-intensive process. As reported in this WSJ article, “regulations that currently cover the City of London, the heart of the U.K.’s and Europe’s financial industry, may stop applying as early as March 2019. That could make it necessary to relocate thousands of financial products used by corporates to an EU-based financial entity.”
Cydney notes that determining whether this is a live issue will depend on the final terms of a Brexit deal (or non-deal). At this point, it’s still anybody’s guess as to what those terms will be.
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This “Audit Analytics” blog discusses an intriguing new study that suggests the SEC’s decision to make Corp Fin comment letters publicly available may have resulted in improved disclosure by companies on the receiving end of those letters. Here’s an excerpt:
It was found that when comment letters are made public, company filings include longer narratives, have a lower chance of restatements, and there were less discretionary accruals in earnings announcements. Those factors provide a more complete picture of the company’s position, benefitting the company, the SEC, and investors or firms who are concerned with company performance.
Well, wadda ya know? They’re from the government, and they actually did help you. . .
GDPR Enforcement: More on “How Will It Work for US Companies?”
Europe’s GDPR has had an enormous impact on companies that do business in the EU, but as we blogged earlier this year, there’s a lot of uncertainty about potential consequences for non-compliance by US companies that don’t have a major European presence. This Dorsey & Whitney memo reviews the recent experience of an enforcement proceeding involving a Canadian company, and this excerpt speculates on how US authorities might deal with a similar situation:
It remains unclear how GDPR enforcement would play out in the United States. The U.S. currently has no federal law similar to the GDPR. The Trump administration is discussing a U.S. version of the GDPR that would have provisions similar to provisions in the GDPR, but the passage of such a law is not imminent.
To the extent the U.S. enacts such a law, the U.S. might be incentivized to assist with GDPR investigations or enforcement against U.S. entities at least to the extent consistent with the terms of the U.S. law for purposes of encouraging reciprocal comity with the EU. However, given the Trump administration’s foreign policy stance, it is highly unlikely that the U.S. would assist in enforcing violations of any GDPR provisions that go beyond the U.S. law.
If the feds won’t play ball with the EU, there’s another possibility – state regulators. The memo notes that California recently enacted the California Consumer Privacy Act of 2018, which is similar in some respects to the GDPR – and says that it remains to be seen whether the state would assist EU regulators in a GDPR investigation “to encourage reciprocal comity with the EU in connection with enforcement of their respective data privacy laws.”
D&O Insurance: The Outlook
It’s renewal season for a lot of D&O policies – and this Woodruff Sawyer deck reviews market conditions, claims trends and coverage issues. Here’s an excerpt on pricing expectations for the primary layer of coverage:
As we head into 2019 it is increasingly rare that a company will see a year-over-year decrease in the premium paid for the primary layer. Instead, single-digit increases in premium on the primary layer are more and more common (with larger rate increases for companies with less favorable risk profiles). Companies with SIRs below those of their peers face the prospect of larger retentions, though sometimes in exchange for a flat-to-smaller premium increase.
While the market for the primary layer continues to tighten, the market for excess layers – including Side A – remains highly competitive. That competition has generally held premium increases in check, although even these markets are beginning to experience pricing pressure.
