Last week, in New England Carpenters v. DeCarlo, (2d. Cir., 8/23), the Second Circuit held that CEO & CFO certifications in Exchange Act filings were statements of opinion, and that securities fraud claims premised on those statements had to satisfy the Omnicare pleading standard in order to be actionable. This Proskauer blog summarizes the Court’s reasoning on this aspect of the decision:
The court held that the certifications “signal that they are opinions by stating that they are ‘based on [the] knowledge’ of the officer,” and “there is no allegation that the opinion is actionable on the ground that it was not based on the officer’s knowledge.” The court rejected plaintiffs’ contention that the officers had known that the financial reports were false, misleading, or noncompliant with GAAP; it also held that plaintiffs had not pled facts establishing “a lack of meaningful inquiry, other than the fact that the certification turned out to be wrong.” Nor did AmTrust’s change of its accounting opinion (through the restatement) “mean that the original certified opinions were disingenuous.”
While the blog says that the decision is good news for signers of Sarbanes-Oxley certifications since it makes it clear that the Court views them as expressions of opinion, it cautions that the opinion defense will not be available if the signer knew that the certification was incorrect.
The July-August issue of “The Corporate Counsel” newsletter is in the mail. It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. This issue is devoted to a discussion of the SEC’s adoption of its long-anticipated cybersecurity disclosure requirements. If you’re not already a subscriber, you can subscribe online to this essential resource or email sales @ccrcorp.com.
Cybersecurity disclosures are also on the agenda for our upcoming Proxy Disclosure and 20th Annual Executive Compensation Conferences. WilmerHale’s Lily Brown, Cooley’s Brad Goldberg, Hogan Lovells’ Paul Otto and Wilson Sonsini’s Amanda Urquiza will address key action items for cybersecurity risk disclosures. With most companies facing a mid-December 2023 compliance date for these new disclosure requirements, you don’t want to miss out on the insights of our panel of experts! Register today for these conferences & our 2nd Annual Practical ESG Conference.
Last year’s Rule 10b5-1 amendments & new disclosure requirements have prompted a lot of interpretive issues. Corp Fin issued three CDIs back in May addressing some of those issues, and on Friday, Corp Fin issued five more CDIs covering amended Rule 10b5-1 and the insider trading plan disclosure requirements contained in Item 408(a) of Reg S-K. The text of each new CDI is set forth below.
Exchange Act Rules – The three new Exchange Act Rules CDIs address issues relating to the required cooling-off period for new 10b5-1 plans, the prohibition on multiple overlapping plans, and the Form 4 checkbox requirement.
Question 120.29: Under Rule 10b5-1(c)(1)(ii)(B)(1), the required cooling-off period for directors and officers subject to Exchange Act Section 16 reporting is the later of 90 days after the adoption of the contract, instruction, or plan or “[t]wo business days following the disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K for the completed fiscal quarter in which the plan was adopted.” Does the filing date count as the first business day for the purposes of the Rule 10b5-1(c)(1)(ii)(B)(1) required cooling-off period?
Answer: No. For purposes of the cooling-off period specified in Rule 10b5-1(c)(1)(ii)(B)(1), the date of disclosure of the issuer’s financial results is the filing date of the relevant Form 10-Q or Form 10-K, and the first business day would be the next business day that follows the filing date. To determine the filing date of the relevant form, refer to Rule 13(a)(2) of Regulation S-T. For example, if the relevant form is filed on a Monday, trading may commence under the contract, instruction, or plan on Thursday (assuming no intervening Federal holidays). In addition, whether a form is filed before or after trading opens on a given day has no bearing on the calculation. [August 25, 2023]
Question 120.30: Under a 401(k) plan, an issuer advances cash to the plan administrator who purchases stock in the open market to make matching grants of the issuer’s common stock to plan participants. If a participant relies on Rule 10b5-1 to participate in the 401(k) plan, would the Rule 10b5-1 affirmative defense be available to the participant for a concurrent plan for purchases or sales on the open market?
Answer: Yes. Even though participants elect how much to contribute to their individual 401(k) accounts, an open-market transaction conducted at the direction of the plan administrator, and not at the direction of the plan participant, to match a contribution by the participant with employer stock would not be an overlapping plan for purposes of Rule 10b5-1(c)(1)(ii)(D) that would disqualify a plan participant’s reliance on Rule 10b5-1 for a concurrent open market trading plan. [August 25, 2023]
Question 120.31: Does the Rule 10b5-1(c) check box on Form 4 for securities transactions made pursuant to a Rule 10b5-1 trading plan apply to trading plans that were adopted prior to the effective date of the amendments to Rule 10b5-1?
Answer: No. The Rule 10b5-1 check box on Form 4 applies to transactions that are made pursuant to a contract, instruction, or written plan for the purchase or sale of equity securities of the issuer that is intended to satisfy the affirmative defense conditions of amended Rule 10b5-1(c). See Release No. 33-11138 (Dec. 14, 2022). [August 25, 2023]
Question 120.31 of the Exchange Act Rules CDIs also appears as a new Question 135.04 in the Section 16 and Related Rules and Forms CDIs.
Regulation S-K – The two new Reg S-K CDIs address whether plan expirations are subject to disclosure under Item 408(a) and clarifies that any trading plan covering securities in which a director or officer has a pecuniary interest must be disclosed under Item 408(a).
Question 133A.01: Under Item 408(a)(1) of Regulation S-K, does the requirement to disclose plan terminations require disclosure of a plan that ends due to its expiration or completion (e.g., the plan ends by its terms and without any action by an individual)?
Answer: Disclosure regarding termination of a plan is not required for a plan that ends due to its expiration or completion. [August 25, 2023]
Question 133A.02: Item 408(a) of Regulation S-K requires disclosure of whether “any director or officer (as defined in § 240.16a–1(f) of this chapter)” adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the fiscal quarter. Does this disclosure requirement apply to any such trading arrangement covering securities in which a director or officer has a pecuniary interest?
Answer: Item 408(a) applies to any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement covering securities in which an officer or director has a direct or indirect pecuniary interest that is reportable under Section 16 that the officer or director has made the decision to adopt or terminate. [August 25, 2023]
Last month, Dave blogged about the uncertainty surrounding whether Item 408(a) disclosure is required in periodic reports when no director or officer has adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5–1 trading arrangement during the quarter. The problem is baked into the language of Item 408(a)(1) itself – the line item calls on registrants to disclose “whether, during the registrant’s last fiscal quarter” any director or officer adopted or terminated a trading plan. The use of the word “whether” has prompted some practitioners to conclude that the line item may impose an affirmative obligation to disclose that no such plan has been entered into.
Unfortunately, that interpretive issue wasn’t addressed in the CDIs, but over on our Q&A Forum (Topic # 11752), a member shared the Staff’s informal guidance in response to a question on how to address this disclosure requirement in Item 5 of Part II of Form 10-Q:
I spoke to the Staff yesterday. The staff told me that their current view is that negative disclosure is not required notwithstanding the “whether” language. However, they said the Staff is still reviewing this and may issue some more definitive guidance. Meanwhile I did a quick survey of how companies completed Item 5, and many responded “none” or even omitted Item 5.
I suppose the fact that Corp Fin didn’t address this topic in this batch of CDIs may mean that the Staff is still kicking it around, so stay tuned.
The SEC issued its first fee rate advisory for the 2024 fiscal year and if you’re registering securities or engaging in another transaction for which a filing fee is required, you may get a serious case of sticker shock. Fiscal 2023 filing fees increased by 19% over the prior year, reversing several years of significant declines in filing fees. For fiscal 2024, the SEC says that filing fees will rise again – and by an even greater percentage than they did in fiscal 2023. Effective October 1, 2023, the filing fee will increase by 34%, from $110.20 per million dollars to $147.60 per million dollars.
The fee rate advisory points out that the SEC doesn’t set filing fees arbitrarily:
The Commission must set rates for the fees paid under Section 6(b) to levels that the Commission projects will generate collections equal to annual statutory target amounts. The Commission’s projections are calculated using a methodology developed in consultation with the Congressional Budget Office and the Office of Management and Budget. The Commission determined the statutory target amount for fiscal year 2024 to be $839,771,535 by adjusting the fiscal year 2023 target collection amount of $815,557,629 for the rate of inflation.
A recent Wolters Kluwer/Above the Law survey of 275 legal professionals has some interesting conclusions about generative AI’s potential implications for the legal profession – including which lawyers and practice areas will be at the greatest risk of being rendered obsolete by AI in the coming years. Here are some of the key findings:
– 62% of respondents believe that effective use of generative AI will separate successful law firms from unsuccessful firms within the next five years.
– More than 80% of all respondents agree that generative AI will create transformative efficiencies for research and routine tasks.
– Respondents are less convinced that AI will transform high-level legal work: 31% agree that this will happen, while 50% disagree.
– More than two-thirds of respondents believe that document review lawyers and librarians or others involved in knowledge management and research are at risk of obsolescence because of generative AI.
When it comes to this final point, a Legal Dive article on the survey gets a little more specific on AI’s potential impact on law jobs:
Roughly 71% said generative AI could replace document review lawyers within the next decade, and 68% said they could see a similar impact on law librarians. Roughly 41% said paralegals could become obsolete in the next 10 years, with no other listed position cited by more than 26% of respondents.
Only 19% of survey respondents indicated that law firm associates were at risk of becoming obsolete, and only 2% said that law firm partners were likely to be replaced by generative AI. Some respondents weren’t as gloomy about AI’s impact on jobs as the overall numbers might suggest. The Legal Dive article cites one legal operations professional as saying that “[r]oles will evolve but not necessarily become obsolete” and quotes a law professor who said, in effect, that people who embrace the technology will do well, while those that can’t leverage AI will be at risk.
In terms of AI’s impact on specific practice areas, the survey found that corporate, trusts & estates, litigation, IP and tax are the areas most likely to be significantly affected by generative AI, while criminal/white collar law and environmental/energy law are expected to be affected the least.
The DOJ, Commerce (BIS) & Treasury (OFAC) recently issued guidance in the form of a “Compliance Note” regarding the voluntary self-disclosure to these agencies of violations of US sanctions and export control laws. A recent Hunton Andrews Kurth memo provides an overview of the Compliance Note, which lays out how timely, voluntary self-disclosure of potential violations can significantly mitigate civil or criminal liability.
For example, this excerpt from the memo discusses the position of the DOJ’s National Security Division on how voluntary self-disclosure can eliminate criminal penalties for violations:
The Compliance Note clarifies DOJ’s position that moving forward, where a company voluntarily self-discloses potentially criminal violations of US sanctions and export laws, fully cooperates, and timely and appropriately remediates the violations, NSD generally will not seek a guilty plea; rather, there will be a presumption that the company will receive a non-prosecution agreement and will not pay a criminal fine.
The memo notes that the presumption will not apply in cases with certain aggravating factors, such as pervasive criminal misconduct, concealment or involvement by upper management, repeated violations of national security laws, the export of particularly sensitive items or the export of material to end users who make the Nat Sec folks’ hair stand on end.
Reg A+ has become an increasingly popular way for small companies to access the public markets in recent years, but as Meredith blogged a few months ago, the growth in the number of Reg A offerings has been accompanied by compliance issues that have attracted the attention of the SEC’s Division of Enforcement. If you’d like to get up to speed on the SEC’s concerns about Reg A+ deals, check out this recent Goodwin memo, which highlights both recent enforcement actions and comment trends.
This excerpt addresses the Staff’s comments on potential “at-the-market offerings” which aren’t permitted under Reg A+ and which have also been the subject of enforcement proceedings:
Similar to the Enforcement Division proceedings noted above, a number of comments focused on whether Reg A+ issuers were conducting delayed offerings or offerings at other than a fixed price. As noted above, delayed offerings and at-the-market offerings are not permitted under Reg A+. One issuer argued that the offering was not an at-the-market offering because there was no existing trading market for the issuer’s securities. It is unclear if the Staff accepted this argument or one of the other arguments made by the issuer that the offering was not an at-the-market offering. We agree that an offering should not be considered an at-the-market offering if there is no “existing trading market.”
If you’ll permit me, I’d like to close this blog by noting sort of a personal milestone – this is my 1,000th blog on TheCorporateCounsel.net and it comes on the same week as I celebrated my 7th anniversary of joining the team here. I’d like to say thanks to each of you for reading these blogs over the years & for reaching out to share your own insights. I’ve had a lot of fun and hope to continue to hang around here for a few more years or until our generative AI overlords kick me out, whichever comes first.
Last Friday, Nasdaq filed a proposed rule with the SEC that would establish listing standards related to notification and disclosure of reverse stock splits. According to the filing, Nasdaq has seen a significant increase in reverse splits over the past two years, most of which involve small cap issuers trying to maintain the $1.00 minimum bid price required to keep their stock listed. These issuers typically don’t receive a lot of media or analyst coverage, and that seems to be driving Nasdaq’s push for notification & disclosure requirements. This excerpt from the rule proposal explains the reasons for it & provides a general overview of what would be required:
Nasdaq believes that the increase in companies effecting reverse stock splits warrants amendments to the listing rules to enhance the ability for market participants to accurately process these events, and thereby maintain fair and orderly markets. As such, Nasdaq is proposing amendments to its rules regarding notification and disclosure of reverse stock splits and regulatory halts.
Specifically, Nasdaq is proposing to adopt additional listing rules requiring a company conducting a reverse stock split to notify Nasdaq about certain details of the reverse stock split at least five (5) business days (no later than 12:00 p.m. ET) prior to the anticipated market effective date, and make public disclosure about the reverse stock split at least two (2) business days (no later than 12:00 p.m. ET) prior to the anticipated market effective date.
As part of the rule proposal, references to a reverse stock split currently contained in Listing Rule 5005(a)(44) would be deleted and new provisions added to set forth the timeframe and requirements for the new notification and disclosure requirements. The comment period for the proposal will expire 21 days after publication in the Federal Register, which hasn’t happened yet. Check out Cydney Posner’s blog for more details on the proposal.
What alternatives do companies have if they disagree with their auditors concerning an accounting issue? This recent blog from Perkins Coie’s Ben Dale – himself a recovering auditor – discusses some of the options. Here’s an excerpt:
AS 1301.22 states in relevant part: “The auditor should communicate to the audit committee any disagreements with management about matters, whether or not satisfactorily resolved, that … could be significant to the company’s financial statements or the auditor’s report.” Importantly, disagreements with management don’t include differences of opinion based on incomplete facts or preliminary information that are later resolved by the auditor after obtaining additional relevant facts or information prior to the issuance of the auditor’s report.
In the four years I worked as an auditor, I never saw a disagreement with management make it to the audit committee. Rather, they were kept within the management ranks for several days or weeks while the auditors and management performed additional procedures, reviewed all relevant information and sought resolution of their disagreement. Only if the disagreement persisted at the end of the audit after all efforts were made to resolve it, would it be elevated to the audit committee (assuming it was significant to the financials or audit report).
If a disagreement remains unresolved after escalation to the audit committee, the company or auditor could choose to seek advice directly from the SEC Staff. While the SEC Staff may provide interpretive guidance on issues arising under GAAP or certain securities regulations, they are highly unlikely to referee disputes between companies and auditors – and notably, communications with the SEC may not remain confidential.
The blog says that, ultimately, you could also go nuclear and fire the auditor, but that’s a “whole ‘nother bag of snakes.” As a practical matter, the big problem with a potential disagreement is that the issue typically arises when the clock is ticking on your next SEC filing. If the auditor won’t sign off on the financials in your 10-K or provide a consent for your registration statements, then you ultimately don’t have a lot of good alternatives except to see things their way – and that may be the biggest reason why these seldom even make it to the audit committee.
