With the election in the rear-view mirror, many people are speculating about the potential implications of Trump 2.0 for the SEC and securities regulation in general. Some of these are pretty obvious – Donald Trump promised that Gary Gensler would be a goner “on day one,” and he seems likely to depart even before Trump takes office. The SEC’s climate disclosure rules also are almost certainly on the chopping block, and its long-delayed proposals on human capital management and corporate board diversity disclosures will probably never see the light of day.
Those political footballs may garner most of the headlines during the next few months, but what about the Trump Administration’s approach to more “meat & potatoes” securities law issues? Even though Donald Trump claims to know nothing about Project 2025, plenty of others in his orbit do, and it seems likely that many of the policy objectives laid out in that document will be on the agenda when it comes to securities regulation. For example, in the area of capital formation, the Project 2025 document calls for the SEC to take, among others, the following actions:
– Simplify and streamline Regulation A (the small issues exemption) and Regulation CF (crowdfunding) and preempt blue sky registration and qualification requirements for all primary and secondary Regulation A offerings.
– Either democratize access to private offerings by broadening the definition of accredited investor for purposes of Regulation D or eliminate the accredited investor restriction altogether.
– Allow traditional self-certification of accredited investor status for all Regulation D Rule 506 offerings.
– Exempt small micro-offerings from registration requirements.
– Exempt small and intermittent finders from broker–dealer registration requirements and provide a simplified registration process for private placement brokers.
Project 2025 also makes several recommendations aimed at the way the SEC is administered, including ensuring that any three commissioners have the ability to place an item on the agency’s agenda, eliminating all SEC administrative proceedings other than stop orders, or allowing respondents to elect whether their cases will be adjudicated by an ALJ or an Article III federal court, and ending the practice of delegating authority to the Staff to initiate an enforcement proceeding.
These would all be significant changes, but Project 2025’s legislative agenda when it comes to the securities laws is even more ambitious. In addition to proposing a comprehensive overhaul of the federal securities laws, it calls for Congress to eliminate the PCAOB and FINRA and consolidate their functions within the SEC, eliminate Dodd-Frank’s conflict minerals, mine safety, resource extraction and pay ratio disclosure requirements, and ban the SEC from requiring a variety of ESG-related disclosures.
With Gary Gensler on the way out, speculation quickly turned to who would become the next SEC chair? This excerpt from a recent Bloomberg Law article identifies the leading candidates:
Richard Farley, a partner at Kramer Levin Naftalis & Frankel, and Kirkland & Ellis partner Norm Champare among contenders to replace Gary Gensler as chair of the US Securities and Exchange Commission, according to people with knowledge of the matter.
Robinhood Markets Inc. legal chief Dan Gallagher, current SEC Commissioner Mark Uyeda and Heath Tarbert, a former chairman of the Commodity Futures Trading Commission, are also among those being considered for the job, said other people with knowledge of the matter, who asked not to be identified because the information isn’t public.
Also in contention are former SEC Commissioner Paul Atkins and Robert Stebbins, a partner at Willkie Farr & Gallagher, some of the people said.
Commissioner Hester Peirce’s name has also surfaced, but she reportedly isn’t interested in the position and plans to leave the SEC when her current term expires.
Personally, I find it encouraging that the list of potential SEC chairs is composed mainly of people with significant private practice experience. One of the things that’s bothered me about the SEC’s willingness to put forward sweeping disclosure rule proposals in recent years is how few of the people deciding whether to adopt those rules have spent more than a token amount of time in their careers preparing or reviewing SEC filings.
Speaking of SEC Chairs, it looks like former SEC Chair Jay Clayton is on the short list to become Secretary of the Treasury.
Join us tomorrow for the webcast – “SEC Enforcement: Priorites & Trends” – to hear Hunton Andrews Kurth’s Scott Kimpel, Locke Lord’s Allison O’Neil, and Quinn Emanuel’s Kurt Wolfe provide insights into the lessons learned from recent enforcement activities and insights into what the new year might hold – including how the election may impact the SEC’s enforcement program.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE which require advance notice) for this 1-hour webcast. You must submit your state and license number prior to or during the program using this form. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.
On Tuesday, the Supreme Court heard oral arguments in Facebook, Inc. v. Amalgamated Bank. The outcome of this case – as well as another biggie teed up for oral argument next week – could affect the way we draft risk factors and cautionary disclaimers.
Here, as Meredith previewed a few months ago, the company is facing allegations that the “cyber & data privacy” risk factor in its 2016 Form 10-K was misleading because it didn’t disclose that Cambridge Analytica had already improperly collected and harvested user data. “Hypothetical risk factors” are a type of disclosure that the SEC has been kvetching about since… at least 2019, when it settled an enforcement action with Facebook/Meta on this same issue, and as recently as last month when it settled an enforcement action with a SolarWinds victim under a similar theory of “half-truth” liability.
The more recent action was accompanied by a joint dissent from Commissioners Peirce and Uyeda that pointed out that updating risk factors for risks that have materialized is not always straightforward. Based on the tone of the oral argument in the Facebook case, it sounds like at least a few of the Justices share similar views. This WaPo article recaps:
In a lively argument, with hypotheticals involving the potential dangers posed by meteor strikes and space trash, at least three conservative justices seemed sympathetic to Facebook’s arguments that it had not misled investors and that its disclosures were forward looking. The court’s three liberal justices, in contrast, expressed support for the view of investors behind the lawsuit, who are backed in the case by the Biden administration.
Chief Justice John G. Roberts Jr. seemed concerned about the implications for public companies of adopting the position of the investors, calling it “a real expansion of the disclosure obligation.” Justices Neil M. Gorsuch and Brett M. Kavanaugh said the Securities and Exchange Commission could be more explicit if it wanted to require companies to report relevant past events.
I was a little surprised by one exchange from the oral argument. I am no Constitutional law expert, but after the Court’s very recent decision in Loper Bright that agencies should stay in their lane, I didn’t expect a Justice to suggest that the SEC should handle this issue through rulemaking. From WaPo:
“Why can’t the SEC just write a reg?” Kavanaugh asked. “Why does the judiciary have to walk the plank on this and answer the question when the SEC could do it?”
Maybe this was a trick question, in which case I’d like to submit a guess that this rule already exists, at least to some extent, by way of Item 101 and Item 303. Clearly, there are a lot of open questions here. The biggest one being, who would have predicted we’d still be talking about Cambridge Analytica during Election Week 2024? Lucky us.
The PCAOB recently added a “Fraud Risk Resources” page to its website. While the materials on this page are intended to assist auditors in complying with their obligations to consider fraud during the course of an audit, the information the PCAOB provides there is also likely to be of assistance to audit committees in understanding those obligations and their implications for the audit process. Here’s an excerpt from the discussion of the auditor’s obligations with respect to the risk assessment process:
PCAOB standards require auditors to perform risk assessment procedures that are sufficient to provide a reasonable basis for assessing the risks of material misstatement, whether due to error or fraud, and designing further audit procedures. The risk assessment procedures required by PCAOB standards are intended to direct the auditor to identify external and company-specific factors that affect risks due to error or fraud, such as, fraud risk factors, for example, factors that create pressures to manipulate the financial statements.
Some required risk assessment procedures and procedures performed when identifying and assessing risks are directed specifically at risks of material misstatement due to fraud (“fraud risks”), such as:
– Conducting a discussion among the engagement team members of the potential for material misstatement due to fraud;
– Inquiring of the audit committee, management, internal auditors, and others about fraud risks;
– Performing analytical procedures relating to revenue for the purpose of identifying unusual or unexpected relationships involving revenue accounts that might indicate a material misstatement, including material misstatement due to fraud;
– Considering factors relevant to identifying fraud risks, including in particular, fraud risks related to improper revenue recognition, management override of controls, and risk that fraud could be perpetrated or concealed through omission of disclosures or presentation of incomplete or inaccurate disclosures; and
– Evaluating the design of controls that address fraud risks.
A substantial number of the other required risk assessment procedures also can provide information that is relevant to the auditor’s consideration of fraud.
Other topics addressed by the PCAOB here include acceptance and retention of audit engagements, audit planning, responses to the risk of material misstatements, and fraud considerations in ICFR audits.
I’m still a little jet lagged after returning from our conferences in San Francisco, and it’s been a slow news week, so I was delighted to find a recent Florida federal district court decision addressing one of my favorite topics – celebrities who get themselves sideways with the federal securities laws. In Harper v. O’Neal, (SD Fla. 8/24), the plaintiffs alleged that NBA Hall of Famer Shaquille O’Neal was liable for losses suffered by investors in the Astrals Project, a business venture involving an investment in NFTs that could be used in a virtual world in which users could socialize, play, and interact with other users (sounds similar to Method Man’s NFT project).
Anyway, after FTX blew up, the Astrals Project apparently fell apart, and the plaintiffs sued Shaq, who they allege was the “driving force” behind the project and was actively involved in promoting it through various social media channels. Shaq and the other defendants argued that this wasn’t enough for him to be considered a “seller” for purposes of Section 12(a) of the Securities Act, but the Court disagreed:
Defendants argue that the Amended Complaint fails to allege that Defendant O’Neal “successfully solicited” Astrals and Galaxy tokens to Plaintiffs, 1et alone that he did so to further his or the Astrals Project’s financial interests. Further, Defendants argue that Defendant O’Neal did not directly sell or persuade Plaintiffs to buy Astrals products. However, as cited above, the Wildes panel specifically clarified that solicitation need not be “personal” or “targeted” to trigger liability. See Wildes, 25 F.4th at 1346.
The Complaint alleges that O’Neal, in a video, claimed that the Astrals team would not’ stop until the price of Astrals NFTS reached thirty $SOL and urged investors to “[h]op on the wave before it’s (sic) too late.” Defendant O’Neal acted like the Wildes promotors that urged people to people to buy BitConnect coins in online videos. Wildes, 25 F.4th at 1346.
O’Neal also personally invited fans to an Astrals Discord channel, where he interacted directly with them on a daily basis, reassuring investors that the project would grow. Lastly, Defendant O’Neal’s own financial interests were in mind. The Complaint states that Defendant O’Neal was one of the founders of the Astrals Project. Further, the Astrals Project was his brainchild that he personally developed, and his son was named head of “Investor Relations.” Therefore, Plaintiffs have met the definition of a seller and thus alleged enough to state a Section 12 claim against Defendant.
However, the news wasn’t all bad for Shaq. Despite his status as an alleged founder of the Astrals Project, the Court held that he should not be regarded as a control person under Section 15 of the Securities Act, because the plaintiffs failed to plead how or in what way he used that status to direct the management and policies of the Astrals Project.
Okay, I know this is supposed to be a blog devoted to securities law and corporate governance topics, but there’s a 0% chance that I’m not going to blog about last night’s ALCS game, also known as “The Greatest Baseball Game I’ve Ever Seen.” I can’t come up with adequate words to describe the Cleveland Guardians’ incredible extra innings victory over the New York Yankees, so I’ll just let the great Tom Hamilton do the talking for me:
Yes, Yankee fans (and your $300+ million payroll), I know they’re still down 2-1, and like every Cleveland fan, I know that Heywood Broun was right when he wrote that “the tragedy of life is not that man loses, but that he almost wins.” Still, whatever happens, we’ll always have Game 3.
A recent letter from Sen. Elizabeth Warren (D-Mass) and Sen. Sheldon Whitehouse (D-RI) indicates that those two senators believe that the PCAOB is “all hat and no cattle” when it comes to addressing the problem of audit deficiencies. In 2023, PCAOB Chair Erica Williams blasted the approximately 40% audit deficiency rate found in a PCAOB staff report as “completely unacceptable” and highlighted the PCAOB’s efforts to address the problem. Earlier this year, in response to a new report indicating that audit deficiencies among Big 4 firms had stabilized, Williams observed that while the inspection results were still unacceptable, they “point to some small signs of movement in the right direction.”
An excerpt from the senators’ letter indicates that this response – and comments from another PCAOB board member concerning the most recent inspection report – didn’t sit too well with them:
In a statement upon the release of the report, Chair Williams commented that: “These inspection results point to some small signs of movement in the right direction.” This is the wrong conclusion to draw from an embarrassing and intolerable set of findings. Even more troubling is the PCAOB’s attribution of these systemically high failure rates—which appears to affect virtually all auditors—to “more isolated incidents” and outliers.
And at least one other PCAOB board member appears to be focused on downplaying and misdirecting attention from these atrocious findings. Last month, Board Member Christina Ho denied that the inspection results were a problem, instead claiming that “there is another side to the story,” and that “PCAOB has become overzealous in its enforcement program,” falsely claiming that the inspection results “lump[] all deficiencies together without a qualitative assessment of their severity.”
The letter says that the most recent inspection results on audit deficiencies “raise fresh questions about the accuracy and utility of public company audits and about the PCAOB’s ability to carry out its statutory role as auditor of the auditors.” It goes on to allege that either the standards established by the PCAOB are inadequate or the PCAOB is “failing to establish accountability for firms that do not meet them.” The senators’ letter then poses a series of pointed questions concerning the PCAOB’s efforts to hold firms accountable and seeking specific information on its enforcement program by October 23rd.
It’s worth noting that the last time Sen. Warren and her colleagues looked under the hood at the PCAOB, they ended up persuading SEC Chair Gary Gensler to clean house, so stay tuned. As we blogged at the time of that shakeup, the PCAOB had already proven to be a durable political football, and it appears that little has changed since then.
Last week, Liz blogged about the SEC’s recent enforcement action targeting a former CEO & director who did not disclose a close personal friendship with a company executive that the SEC contended resulted in misleading proxy disclosures concerning his independence. In a recent blog, Gunster’s Bob Lamm raises some concerns about this proceeding:
Why does this case concern me? Of course, once the board learned of the actions taken by the director/former CEO, it had every right to determine that he was not independent. However, it’s not at all clear to me that the actions in question violated the proxy rules. There have been many cases over the years in which directors were alleged – often by investors and/or the media – to have lacked independence because they belonged to the same country club, served on the same boards (including boards of charitable organizations), or generally hung out in the same social circles. Some of these cases generated calls for SEC rulemaking that would require disclosure of these informal relationships and thereby disqualify directors in such cases from being described as independent. However, for whatever reason (and I can think of a few), the SEC never took such action.
Similar situations have also resulted in judicial decisions disqualifying such directors from serving on committees of independent directors. Perhaps the most famous of these cases is a Delaware Chancery Court opinion, written by Leo Strine, in which two directors of Oracle were disqualified from serving on an independent committee due to their ties to Stanford University, which had received substantial donations from Oracle and/or certain of its directors.
However, to my knowledge, none of the cases referred to above resulted in an SEC enforcement action. In fact, the two Oracle directors continued to be listed as “independent” in Oracle’s proxy statements, and, to my knowledge, the SEC never brought a case against them or objected to the characterization in the proxy statements.
In light of this background, Bob goes on to say that this proceeding looks a lot like regulation by enforcement. In the SEC’s defense, in this action it not only alleges a failure to disclose the relationship, but also alleges that the director actively encouraged the executive to conceal its existence. That seems to me to be a meaningful difference between this situation and the ones that Bob references in his blog.
So, I’m not sure I agree with Bob here, but I think he is right to raise this issue. Regulation by enforcement is an increasing concern in an environment where the courts are becoming ever less deferential to SEC rulemaking. If the SEC can’t make new rules to address conduct it concludes is problematic, it will be tempted to push the envelope when it comes to the kind conduct that it contends violates existing rules. At some point, those efforts may call into question whether the due process rights of enforcement targets are being adequately protected.
The latest issue of The Corporate Counsel newsletter has been sent to the printer. It is also available now online to members of The CorporateCounsel.net who subscribe to the electronic format. The issue includes the following articles:
– Time for an Insider Trading Policy Tune-Up: Public Disclosure Is Here!
– ATMs: More Certainty for Baby Shelf Filers
Here’s a snippet from Dave’s insider trading piece with his thoughts on the treatment of gifts under insider trading policies in light of the SEC’s recent interpretive guidance:
For those companies that have not yet revisited the treatment of gifts in their insider trading policies in light of the Commission’s interpretive guidance over the past few years, now is a good opportunity to review the approaches taken by the early filers and determine which approach is best suited for addressing these types of transactions going forward.
While there is no one “right” approach to dealing with this issue, it is one that the Commission has particularly highlighted as an area for concern. A company may take the more conservative approach that we suggest in the Model Policy, or a more moderate approach as demonstrated by some of the early filers. In any event, it is important to address the issue directly to help the company avoid controlling person liability should an insider trading issue with a gift transaction ever arise for a person covered by the policy.
Please email sales@ccrcorp.com to subscribe to this essential resource if you are not already receiving the important updates we provide in The Corporate Counsel newsletter.
