Author Archives: John Jenkins

In December, I blogged about the SCOTUS’s decision to grant Slack Technologies cert petition in a case addressing the application of Section 11 of the Securities Act to direct listings. Slack is appealing the 9th Circuit’s ruling that investors who acquired their shares through the company’s direct listing satisfied Section 11’s tracing requirement. Former SEC Chair Jay Clayton and former Commissioner Joseph Grundfest recently filed this amicus brief in support of Slack’s position. The former SEC bigwigs are being represented by Freshfields, and this excerpt from the firm’s recent blog summarizes their argument:

The Ninth Circuit’s decision in Slack invented an entirely new definition of Section 11 standing that conflicts with all precedent on point. First, The Ninth Circuit’s proposed definition extended liability far beyond the distribution of securities the direct listing. If literally applied, the Ninth Circuit’s definition of standing would dramatically expand Section 11 liability across a vast array of situations that are entirely unrelated to direct listings. It would achieve those results by substituting a judicially implied remedy for the judgment of Congress, regulators, and sophisticated market participants.

Slack also conflicts with the Securities Act’s plain text. Its holding cannot be reconciled with the statute’s damages formula or its fundamental structure, including its exemptive provisions, or with governing SEC regulations. The Ninth Circuit failed to consider sixty other instances in which the phrase “such security” appears in Securities Act, and proposes a definition that is inconsistent with the same term’s meaning in those sixty instances. Legislative history offers no support for the Ninth Circuit’s divergence from established precedent. The Ninth Circuit’s purposive rationale conflicts with norms of statutory construction urged by the Supreme Court.

The amici argue that if tracing creates a problem that needs to be addressed, Congress and the SEC have the ability to address that problem through legislative or administrative action, and that what they contend is a “radical judicial rewrite” of Section 11 is unwarranted.

– John Jenkins

This recent Locke Lord blog provides a reminder that, effective April 13th, Form 144 filings will have to be made electronically. The blog highlights the fact that for some insiders, changes in traditional filing procedures are going to be necessary:

Currently, Form 144 is typically filed by mailing a paper form on or before the date a sale order is entered, often with the assistance of the seller’s broker. While some brokers are gearing up to assist with electronic Form 144 filings by soliciting consents and obtaining the necessary EDGAR filing codes from their public company officer and director clients, we understand that other brokers will no longer file on behalf of officers and directors.

For public companies that file their officers’ and directors’ Section 16 reports, the transition to electronic filing of Form 144 is likely to lead to officers and directors requesting that they file Form 144 or requesting they provide the individual EDGAR codes (CIK# and CCC#) necessary for brokers to make the electronic filing.

The blog says that for officers and directors who file their own Section 16 reports, the shift to electronic filing of Form 144 is likely to be fairly simple. The SEC has provided guidance and support and the EDGAR filing codes are the same ones that these insiders have used for their Section 16 reports.

– John Jenkins

The January-February issue of “The Corporate Counsel” newsletter is in the mail (email sales@ccrcorp.com to subscribe to this essential resource). 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 includes the following articles:

– Rule 10b5-1(c) Amendments: Get Ready for the New Rules of the Road
– It is That Time Again! Critical Updates to Your Insider Trading Policy
– Special Supplement: Model Insider Trading Policy

– John Jenkins

Yesterday, the SEC announced the adoption of rules implementing a T+1 settlement system.  Here’s the 314-page adopting release and here’s the 2-page fact sheet.  According to this excerpt from the fact sheet, the new rules:

– Shorten the standard settlement cycle for most securities transactions from two business days after trade date (T+2) to one (T+1);

– Shorten the separate standard settlement cycle for firm commitment offerings priced after 4:30 p.m. from four business days after trade date (T+4) to T+2;

– Improve the processing of institutional trades through new requirements for broker-dealers and registered investment advisers related to same-day affirmations; and

– Facilitate straight-through processing through new requirements applicable to clearing agencies that are central matching service providers (CMSPs).

The compliance date for the new rules was set for May 28, 2024. That date follows the Memorial Day holiday, on which both the securities markets and banks will be closed. The two dissenting commissioners – I’ll let you guess who they are – both expressed concern that the change was being implemented too quickly and argued that a post-Labor Day 2024 compliance date would be more appropriate.

Although the new rules provide for T+2 as the default settlement cycle for firm commitment offerings priced after 4:30 pm, they continue to permit issuers and underwriters to agree to alternative settlement dates. Personally, I can’t imagine trying to settle a firm commitment deal on a T+1 or even a T+2 basis. It just seems like there are too many moving pieces that can mess up the closing on a timeframe like that.

Maybe my lack of imagination stems from the fact that most of my experience in recent years has been on the debt side, where extended settlement cycles aren’t uncommon (the last deal I worked on before I left my law firm was a debt deal that settled on a T+10 basis). On the other hand, Meredith told me that she’s done some firm commitment equity deals that have settled on a T+2 basis, which may help explain why she decided to make the move away from private practice!

Meredith also pointed out another consequence of the implementation of a T+1 settlement cycle – the move to T+1 shortens the time lawyers have to decide whether a potentially problematic trade by an insider needs to be broken.

– John Jenkins

High-profile Caremark cases and SEC enforcement actions have focused attention on the ever-higher expectations placed on boards when it comes to risk oversight.  This article from Nasdaq’s Center for Board Excellence says that when it comes to risk oversight and crisis management, stakeholders expect directors to roll up their sleeves:

Given the rapidity at which information and news travel today, boards need to be prepared to act when setbacks happen, and crisis management cannot be delegated to executive teams. Shareholders expect the board to actively help navigate all phases of a crisis, from the initial “hair-on-fire” through the post-mortem. One of the most important things for boards to do is to engage, as shareholders and stakeholders expect the board to ensure that appropriate processes are in place to successfully manage a crisis.

The board’s role is to ensure the company has the right processes and people in place to effectively identify and evaluate risk, in addition to approving the risk appetite of the firm on behalf of stakeholders. Developing the risk appetite is critical as it frames how the board will react to any risk-related setback. Boards may consider collaborating with management to establish a risk appetite statement, approaching risk from a macro level. While identifying every single risk is unrealistic, this practice promotes discipline in setting a foundation for enterprise risk

The article says that boards need to understand how information flows through their organization in order to better anticipate unforeseen events. That review should incorporate an assessment of whether information from all viewpoints is welcome, or if the company’s culture is to disregard points of view that may potentially conflict with the general consensus of top management.

– John Jenkins

Earlier this week, the SEC announced that, effective February 12, 2023, Cicely LaMothe had been named Deputy Director of Disclosure Operations for the Division of Corporation Finance. She has served as the Acting Deputy Director for Disclosure Operations since August 2022, and is a 20-year SEC veteran who has held several senior leadership roles during her career with the agency.

– John Jenkins

Item 407(h) of Reg S-K requires companies to disclose “the extent of the board’s role in the risk oversight of the [company], such as how the board administers its oversight function, and the effect that this has on the board’s leadership structure.” This Orrick memo says that the Staff issued three dozen comment letters last year asking companies to beef up their Item 407(h) disclosure. Based upon a review of those comments, the memo says the Staff expects to see the following common elements addressed in the risk oversight discussion:

1. Whether and why a company’s board would choose to retain direct oversight responsibility for certain material risks (particularly cybersecurity, ESG and sustainability related risks) rather than assign oversight to a board committee;
2. The timeframe over which a company evaluates risks (e.g., short-term, intermediate-term, or long-term) and how a company applies different oversight standards based upon the immediacy of the risk assessed;
3. Whether a company consults with outside advisors and experts to anticipate future threats and trends, and how often it reassesses its risk environment;
4. How a company’s board interacts with management to address existing risks and identify significant emerging risks;
5. Whether a company has a Chief Compliance Officer, or person serving in a similar role, and to whom this position reports; and
6. How a company’s risk oversight process aligns with its disclosure controls and procedures.

Since these comments were so frequent last year, the memo recommends that companies review their board risk oversight disclosures and address any of the topics raised by the Staff in the comment process that aren’t already covered. In particular, the memo urges companies facing material cybersecurity risks or that have made public statements about climate-related risks to address the first element listed above.

– John Jenkins

Liz posted this blog on CompensationStandards.com on Monday. I was supposed to post it here yesterday, but I forgot because I’m bad at my job. Fortunately, she reminded me, so here it is – although I changed the title because Liz’s had an exclamation point in it & it’s hard to expect you to be excited when the news is nearly a week old:

On Friday – after much anticipation & nail-biting – Corp Fin issued 15 “Regulation S-K” CDIs to address common questions under new Item 402(v), which is the “pay versus performance” disclosure rule that was adopted in late August and for which disclosure will be required in proxy statements filed this spring. Dave Lynn is going to be covering these interpretations in-depth in the next issue of The Corporate Executive – if you aren’t already subscribed to that essential newsletter, email sales@ccrcorp.com and arm yourself with expert analysis to tackle these disclosures.

To help you see which CDIs are relevant to you, I’ve paraphrased each of them below – and thanks to the direct links that Corp Fin provided, you can also use this list to easily read your favorites in full:

1. Question 128D.01 – Item 402(v) information is not required in Form 10-K, and will not be deemed incorporated by reference, except to the extent that the registrant specifically does so.

2. Question 128D.02 – When calculating Compensation Actually Paid, companies need to include the change in value of a first-time NEO’s awards during the executive’s tenure as a NEO – even if the NEO received those awards as an employee, before being an NEO.

3. Question 128D.03 – Footnote disclosure of each of the amounts deducted and added pursuant to Item 402(v)(2)(iii) – for years other than the most recent fiscal year included in the Pay Versus Performance table – would be required only if it is material to an investor’s understanding of the information reported in the Pay Versus Performance table for the most recent fiscal year, or of the relationship disclosure provided under Item 402(v)(5). However, in the registrant’s first Pay Versus Performance table under the new rules, the registrant should provide footnote disclosure for each of the periods presented in the table.

4. Question 128D.04 – Aggregation of pension value adjustments and equity award adjustments isn’t permitted in the required footnotes.

5. Question 128D.05 – For purposes of pay versus performance disclosure, companies can use a “peer group” disclosed in CD&A, even if it is not used for “benchmarking” in the CD&A.

6. Question 128D.06 – If the class of securities was registered under Section 12 of the Exchange Act during the earliest year included in the “Pay Versus Performance” table, the “measurement point” for purposes of calculating TSR and peer group TSR should begin on such registration date.

7. Question 128D.07 – Companies need to present the peer group total shareholder return for each year in the table using the peer group disclosed in the CD&A for such year, including if the CD&A peer group changed from 2021 to 2022.

8. Question 128D.08 – GAAP “net income” is required in the Item 402(v) table.

9. Question 128D.09 – The Company-Selected Measure can be any financial performance measure that differs from the financial performance measures otherwise required to be disclosed in the Item 402(v) table, including a measure that is derived from, a component of, or similar to those required measures.

10. Question 128D.10 – It’s appropriate to use stock price as Company-Selected Measure only if it directly links compensation actually paid to company performance – e.g., as a market condition applicable to an incentive plan award – not if it just has a significant impact through affecting the fair value of a time-based share award.

11. Question 128D.11 – The Company-Selected Measure cannot be a multi-year measure – it must relate to the most recently completed fiscal year.

12. Question 128D.12 – In a “bonus pool” where payouts depend on achievement of a financial performance measure along with discretion, companies must identify that financial measure in the Tabular List and provide the required disclosure about the Company-Selected Measure and the related relationship disclosure.

13. Question 128D.13 – Companies can aggregate the compensation of multiple PEOs for purposes of the narrative, graphical or combined comparison between CAP & TSR, net income, and the Company-Selected Measure – to the extent the presentation will not be misleading to investors. Remember that separate columns for each PEO are required in the table.

14. Question 228D.01 – If a company changes its fiscal year during the time period covered by the Item 402(v) Pay Versus Performance table, provide the disclosure required by Item 402(v) for the “stub period,” and do not annualize or restate compensation.

15. Question 228D.02 – For purposes of the requirement in Item 402(v)(2)(iv), a company that has emerged from bankruptcy and issued a new class of stock under the bankruptcy plan may provide its cumulative total shareholder return and peer group cumulative total shareholder return using a measurement period that begins when the post-bankruptcy class of stock began trading.

– John Jenkins

Check out the inaugural edition of our “Timely Takes” Podcast featuring my interview with Covington’s Matthew Franker on the Non-GAAP CDIs that the Staff issued last December. These podcasts are intended to provide a forum through which experts can share their views on recent developments or emerging trends that we think our members would be interested in learning more about. In this 7-minute podcast, Matt addressed the following topics:

– What issues did the SEC address in its most recent round of Non-GAAP CDIs?
– Do the CDIs add new guidance or reinforce what the Staff of Corp Fin has been saying in the comment letter process?
– Should we expect a renewed enforcement focus on Non-GAAP compliance issues following the CDIs?
– What are the key takeaways for public companies from this latest round of CDIs and the Staff’s overall approach to Reg G compliance?

If you have insights on a securities law, capital markets or corporate governance trend or development that you’d like to share, I’m all ears – just shoot me an email at john@thecorporatecounsel.net.

– John Jenkins

Since we’re in the midst of earnings season, I thought Woodruff Sawyer’s recent two-part series on earnings management issues on its “D&O Notebook” blog was worth highlighting. The first installment reviews what “earnings management” means from the SEC’s perspective, and highlights some of the agency’s more high-profile earnings management enforcement proceedings, including its 2021 action against Under Armour. The second installment highlights several red flags for potential earnings management that boards and management should be on the lookout for, including the following:

Discussions regarding “meeting analysts’ expectations” and “making our numbers.” These are a hallmark of SEC cases related to earnings management and should be viewed as red flags since they can create an environment where improper earnings management practices can sprout—or at least give that impression when actions are reviewed after the fact by the SEC. For example, a CFO may emphasize to her direct reports that the company is feeling pressure to meet its numbers. Without intending it, that message may be misinterpreted by some direct reports to mean that they and their team need to find creative ways to help in the effort to meet the company’s numbers. The concern, of course, is that those efforts may cross the line into improper earnings management.

Consecutive periods of closely meeting or exceeding analysts’ expectations. This will undoubtedly garner congratulations during earnings call Q&As, as well as investor interest, but may also be a red flag in the eyes of the SEC. This is especially the case if these periods end with a sudden drop in earnings per share (EPS). I liken this to a track athlete who is breaking world records. As congratulations come in, so do questions as to whether that athlete is getting any extra help in the form of performance-enhancing drugs (PEDs). For companies that are meeting or exceeding analysts’ expectations, the analogous PEDs question is whether the company may be engaged in improper earnings management.

In addition to listing several other red flags, the blog offers some tips on how to avoid earnings management.  The blog highlights the need for a fulsome review of the MD&A section of the company’s SEC filings as part of this effort, and suggests that boards require “pre-read” materials highlighting accounting policy changes or new business strategies implemented during the period, as well as the MD&A disclosures about those matters.

– John Jenkins