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.”
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.
