Author Archives: Liz Dunshee

Yesterday, the SEC posted a settlement of an administrative action relating to a bribery scandal that has been the topic of shareholder derivative litigation and DOJ enforcement (with the politician who was involved now serving a 20-year prison sentence). In its bite at the apple, the Commission’s enforcement claims were based on:

– False & misleading statements – that the company acted properly and ethically with respect to its political contributions

– Failing to disclose related-party transactions – because the company made payments to a 501(c)(4) that, while appearing independent on paper, was controlled by company executives

– Inadequate disclosure controls & procedures – the company’s accounting records did not correctly describe the payments as illegal or reflect them as related party transactions

The company settled the SEC’s claims for $100 million. While this situation was egregious, it’s a reminder that if “crisis communications” aren’t accurate, they can end up deepening the crisis – a violation of “Dave’s First Law of Holes.” Check out my blog from last year about reducing risks associated with corporate political spending.

– Liz Dunshee

I shared a few trends last month about newly filed insider trading policies. This Gibson Dunn blog adds observations from the 49 S&P 500 companies that were required to comply with the new “Exhibit 19” requirement as of June 30th (remember that for calendar-year companies, the new exhibit is first required with the Form 10-K to be filed in spring 2025). Here are 12 key takeaways:

1. Who’s Subject to the Policy: In addition to covering all company directors & personnel, and their family members, 82% expressly state that they apply to legal entities whose transactions are controlled or influenced by company personnel.

2. Gifts: 61% prohibit gifts when an insider as MNPI and/or apply the blackout & pre-clearance restrictions to gifts, and 8% restrict gifts only if the donor has reason to believe the donee will sell while the donor has MNPI. Of the policies that do not apply gift restrictions to all employees, a majority restrict gifts only for certain covered persons that are subject to additional restrictions, such as blackout periods and/or pre-clearance procedures.

3. Options: 69% exempt exercises of options when there is no associated sale on the market; however, exercises of options where there is a sale of some or a portion of shares delivered upon exercise (e.g., cashless broker exercise) are typically treated like any other sale.

4. Other Equity Awards: 59% exempt vesting and settlement of equity awards, such as RSUs and restricted stock, and 51% of the policies specifically provide that withholding of shares for tax purposes (i.e., net share settlement) is exempt.

5. Shadow Trading: 82% prohibit trading in the securities of another company when the person is aware of MNPI about such company that was learned in the course of or as a result of the covered person’s employment or relationship with the company. The remainder of the policies apply the prohibition more broadly to trading in the securities of another company while aware of MNPI about that company, without specifically addressing how the information was learned.

6. Who’s Subject to Blackouts/Windows: 88% subject directors, executive officers and a designated subset of employees to regular quarterly blackout periods, with a few policies applying two different blackout periods to different groups of employees.

7. Blackout Dates: The start date of the quarterly blackout periods ranges from quarter end to four weeks or more prior to quarter end. Under almost half of the policies (45%), the quarterly blackout periods start approximately two weeks prior to quarter end, 14% start the blackout periods three to four weeks prior to quarter end, and 18% start four weeks or more prior to quarter end. A significant majority of the policies (76%) end the quarterly blackout periods one to two full trading days after the release of earnings, with more policies ending after one trading day (51%) than two trading days (24%).

8. Pre-Clearance: For 65% of the policies, the preclearance persons are a subset of the persons subject to blackout periods, while for a minority of the policies (29%), they are the same as the persons subject to the blackout periods.

9. Other Prohibited/Discouraged Transactions: All of the policies prohibit or otherwise restrict certain types of transactions regardless of whether they involve actual insider trading. The most common prohibitions addressed: hedging transactions (96%);[8] speculative transactions (96%); pledging securities as collateral for a loan (90%); and trading on margin or holding securities in margin accounts (82%). A significant majority of the policies do not specifically address standing or limit orders or short-term trading, but of the ones that do, a significant majority take the approach of discouraging such transactions rather than strictly prohibiting them. Even where standing or limit orders are not strictly prohibited, some policies require that such orders be cancelled if the person becomes aware of MNPI (or prior to the start of a blackout period, if applicable).

10. Rule 10b5-1 Plans: All of the policies address the availability of Rule 10b5-1 plans. 71% describe the specified conditions under the SEC rules for a plan to qualify as a Rule 10b5-1 plan, although some do so in a more streamlined manner than others. Of these policies, a majority include Rule 10b5-1 plan requirements within the body of the policy, a minority do so in an appendix and one company filed the plan guidelines as a separate exhibit. 29% do not describe the specified conditions under Rule 10b5-1, but provide a general statement regarding the affirmative defense and refer covered persons to the officer administering the policy.

11. Company Transactions: Item 408(b) of Regulation S-K requires a public company to disclose whether it has adopted insider trading policies and procedures governing transactions in company securities by the company itself, and, if so, to file the policies and procedures, or if not, to explain why. Of the 23 S&P 500 companies subject to Item 408(b) that filed a Form 10-K and proxy statement prior to June 30, 2024, 78% did not address insider trading policies or procedures governing companies’ transactions in their own securities. Of the ones that did, most included a brief sentence or two about the company’s policy of complying with applicable laws in trading in its own securities. Only one company in our surveyed group filed a company repurchase policy as a separate exhibit.

12. Exhibit Filing: 88% of the companies filed only a single insider trading policy and no other related policies or documents (even where they referenced other related policies in their insider trading policy).

The blog notes that it’s still appropriate for specific provisions to vary from company to company. But when it comes to key policy terms that your insiders might ask about, it helps to understand “what’s market.” Make sure to check out our “Insider Trading” Practice Area for additional practical guidance.

This topic is also on the agenda at our “2024 Proxy Disclosure & Executive Compensation Conferences” – which are less than a month away! We’ll be sharing reminders for your next Form 10-K as well as practice pointers & trends. If you can’t make it to the Conferences in person, we also offer a virtual option. Register today by visiting our online store or by calling us at 800-737-1271.

– Liz Dunshee

Earlier this year, the SEC prevailed on a “shadow trading” theory in SEC v. Panuwat. Although the outcome of that case was obviously fact-specific, many companies are considering the verdict as they continue to refine their insider trading policies & trainings.

Some folks were also holding out hope that the court would reconsider its verdict. Alas, it doesn’t appear that will happen, since the judge has now denied the defendant’s request for a new trial, which was premised in part on whether the jury should have been instructed that the SEC’s case was based on a new theory of liability. Bonnie Eslinger from Law360 recaps:

The relative rarity of the SEC enforcement action was not relevant to the jury’s determination, and framing it as such would have been prejudicial, Judge Orrick said. That’s why, he added, no one at trial was allowed to say the enforcement action as brought without fair notice, or characterize it as “unique,” “novel,” “highly unusual” or other such descriptors.

The SEC brought the case under a misappropriation theory of insider trading, not traditional insider trading, and the jury was told the difference, the judge said.

“That the jury found in the SEC’s favor is not a function of any prejudice arising from use of the term ‘insider trading’ throughout the trial, but rather a function of the jury finding that Panuwat misappropriated information for his own personal profit, in violation of the securities laws,” Judge Orrick wrote.

The former executive was fined $321k. The judge noted that the civil penalty would function as an appropriate deterrent to the defendant and others, and that the verdict wouldn’t “permanently damage his career” because it didn’t include a D&O bar.

– Liz Dunshee

The SEC Regulations Committee of the Center for Audit Quality recently posted these highlights from its June 2024 meeting with the SEC Staff. The discussion included this reminder about non-GAAP measures in earnings releases:

The Committee has observed recent staff comments on measures that are calculated in accordance with a company’s debt covenant indicating that a company should limit its discussion of these measures to the liquidity section of a filing (e.g., Form 10-K or Form 10-Q) and that these measures should not be discussed in a company’s earnings release.

The staff noted that it looks to Question 102.09 in the C&DIs on Non-GAAP Financial Measures which addresses the disclosures of material debt covenants. Disclosure of a covenant measure in an earnings release is not objectionable if it is clear that the information regarding the covenant is being presented only because it is material to the company’s financial condition or liquidity and is similar to the disclosure presented as part of the liquidity and capital resources section of the company’s MD&A.

However, if these disclosures appear to present the covenant measure as an indicator of performance rather than liquidity (e.g., highlighting it in the earnings release, comparing it to prior period results, and analyzing it like measures of the company’s performance), and that measure does not comply with the non-GAAP rules and regulations, the staff will comment and will likely object.

The meeting also covered:

– Staff feedback on cybersecurity annual disclosures (10-Ks) and incident reporting (8-Ks) since the new rules went into effect

– Regulation S-K C&DI 128D.18 – Stock and option awards subject to a dual vesting structure

– Applicability of S-X Rules 3-09, 4-08(g), 10-01(b)(1) and 8-03(b)(3) to investments accounted for under the Proportional Amortization Method

– Applicability of the non-GAAP rules to the presentation of more than one measure of a segment’s profit or loss

– Inventory Valuation Allowance

– Applicability of S-X Rule 3-01(c) [Rule 8-08, for SRCs] if the registrant has not been in existence for two full fiscal years preceding the most recently completed fiscal year

– Liz Dunshee

Don’t forget! Accelerated 13G reporting deadlines go into effect at the end of this month and will affect all categories of investors that use Schedule 13G to report their greater-than-5% beneficial ownership. Recent SEC comments show that the SEC is monitoring ownership filings. This Barnes & Thornburg memo summarizes how the rules are changing (also see this Skadden memo). Here are the key points:

1. Initial Filing Due Dates

– Qualified Institutional Investors (Rule 13d-1(b)(2)) – Within 45 calendar days after end of calendar quarter in which beneficial ownership exceeds 5% as of last day of such quarter; or within 5 business days after end of month in which beneficial ownership exceeds 10% as of last day of such month.

– Passive Investors (Rule 13d-1(c)) – Within 5 business days after acquiring more than 5% beneficial ownership.

– Exempt Investors (Rule 13d-1(d)) – Within 45 calendar days after end of calendar quarter in which beneficial ownership exceeds 5% as of last day of such quarter.

2. Interim Amendment Due Dates

– Qualified Institutional Investors (Rule 13d-2(c)) – Within 5 business days after end of month in which beneficial ownership exceeds 10% as of last day of such month; and thereafter, within 5 business days after end of month in which beneficial ownership increased or decreased by more than 5% of class as of last day of such month.

– Passive Investors (Rule 13d-2(d)) – Within 2 business days after acquiring more than 10% beneficial ownership; and thereafter, within 2 business days after increasing or decreasing beneficial ownership by more than 5% of class.

3. Quarterly Amendments for All Filers (Rule 13d-2(b)) – Due within 45 calendar days after end of calendar quarter if, as of the end of that calendar quarter, there are any material changes in the information reported in prior Schedule 13G.

For the quarterly amendments, the memo notes that if an investor that filed a Schedule 13G before September 30, 2024 concludes that a “material” change to its existing disclosure has occurred as of September 30, 2024, the investor will have to file a Schedule 13G amendment not later than November 14, 2024. While the SEC hasn’t expressly defined what will constitute a “material” change, it has pointed towards the “reasonable investor” test and Rule 13d-2(a) as instructive. Rule 13d-2(a) deems the acquisition or disposition of beneficial ownership of 1% or more of a covered class as a material change in the Schedule 13D amendment context.

Check out the transcript from our January webcast – and our “Schedule 13D & 13G” Practice Area – for additional practical guidance on the new rules and how to comply.

– Liz Dunshee

The SEC’s Investor Advisory Committee is meeting a week from today – September 19th. According to the Sunshine Act notice, the agenda includes a panel discussion regarding key topics from securities litigation – including shareholder proposals & “tracing” in section 11 litigation. The meeting will be webcast on www.sec.gov and begins at 10 a.m. ET.

In addition, the SEC has announced 6 new members of the Investor Advisory Committee:

– George Georgiev, Associate Professor of Law, Emory Law School

– R. Craig Knocke, Principal, Turtle Creek Management

– Amy C. McGarrity, Chief Investment Officer/Chief Operating Officer, Colorado Public Employees’ Retirement Association

– Jennifer J. Schulp, Director of Financial Regulation Studies, Cato Institute’s Center for Monetary and Financial Alternatives

– Andrea Seidt, Ohio Securities Commissioner

– Alvin Velazquez, Associate Professor of Law, Indiana University Maurer School of Law

These new members are filling vacancies on the Committee and will join 17 current Committee members to serve a 4-year term. For those who threw their hat in the ring and didn’t make the team, the SEC says there’ll be another opportunity to apply in 2025.

– Liz Dunshee

Earlier this week, as part of an ongoing investigation that resulted in several settlements last year, the SEC announced settlements with 7 public companies that allegedly used employment, separation and other agreements that impeded whistleblowers from reporting potential misconduct to the SEC – in violation of Exchange Act Rule 21F-17(a). The companies agreed to pay penalties rainging from $19,500 to $1.4 million – and agreed to take steps to remediate the violations.

At 5-6 pages each, these latest orders are a pretty easy read and add to the body of knowledge that we have from prior enforcement actions. Here are a few things I noticed (also see this Cooley blog):

1. The Commission wasn’t aware of any instances in which the companies took action to enforce the provisions or in which the affected employees declined to speak with the SEC.

2. The SEC took issue with provisions where the employee waived their right to possible whistleblower awards – even though the provision didn’t prohibit the employee from communicating with the SEC and despite wording that the provision would apply only “to the maximum extent permitted by law.”

3. The SEC took issue with provisions that said individuals were free to disclose confidential information to government agencies, but with the caveats that the disclosure could not exceed the disclosure required by law, regulation or order, and that the individual provided written notice of any such order to a company officer in advance of making disclosure.

4. Some of the agreements were with contractors/consultants rather than employees.

5. The companies cooperated with the SEC after being contacted, by revising agreement templates and using reasonable efforts to notify affected employees that they were not limited from contacting the SEC or obtaining awards.

6. The Commission considered one company’s ability to continue as a going concern in determining the amount of the financial penalty.

For companies, there are also a couple of high-level takeaways from the SEC’s announcement:

1. Check your agreements & releases (again) – It’s time to revisit Meredith’s podcast about getting your existing & future agreements and policies in order (and this blog) – make sure to consult your in-house and/or outside employment law experts.

2. Consider your overall compliance & internal reporting environment – Remember that both the DOJ and the SEC are actively encouraging whistleblowers to contact government agencies and that once a whistleblower comes to light, you have to be very careful in taking any employment-related actions (in other words, make sure to talk to your employment counsel here too).

– Liz Dunshee

Important information if you’ve registered for our “Proxy Disclosure & 21st Annual Executive Compensation Conferences” – Be on the lookout for an email from “no-reply@events.ringcentral.com (our event platform). This email confirms your registration and contains your unique link to access the Conferences virtually, whether you are using that in real-time as a virtual attendee, or as an onsite resource for in-person attendance.

This link will also give you instant access to our Conferences platform once you have downloaded the RingCentral Events app (available for both iOS devices or Android devices). The conference app will include the live sessions, schedule, course materials, hotel maps and more! The app is also the best place to submit questions for speakers during sessions.

Note, if you’ve never attended a RingCentral event before, you will also receive a second email confirming that a RingCentral account has been created for you.

If you haven’t registered, now is the time: the Conferences are only a month away! John, Dave, Meredith and I are very excited to see everyone “in 3D” in San Francisco on October 14th & 15th! Don’t miss out on the fun…or the critical guidance that you’ll need for proxy season. Here is the agenda and speaker list. Remember that you can also sign up to attend virtually if traveling isn’t in the cards. And either way, you’ll get access to on-demand replays for a year after the Conferences. You can register by visiting our online store or by calling us at 800-737-1271.

– Liz Dunshee

A couple of weeks ago, Meredith shared thoughts on IPO readiness. An important part of the planning process for IPOs and other capital markets transactions is understanding when your financials will go stale. Luckily, Latham and KPMG have just released their handy “Desktop Staleness Calendar” for companies with December 31st FYEs. Issuers that have a different fiscal year end can use this calculator to find their dates. A couple of notes:

1. Remember that the staleness deadline is the close of business on the applicable date. That means your filing has to be accepted on EDGAR before 5:30 p.m. ET.

2. The cutoff date under PCAOB rules for comfort letter purposes may be earlier than the SEC’s cutoff date. PCAOB AS 6101 (paragraph 47) (which comes from SAS 74/PCAOB AU 634) permits accountants to give traditional negative assurance only up to 134 days after the end of the most recent period for which the accountant has performed an audit or review, although “pass through” comfort (procedures and findings comfort under PCAOB AS 6101) may still be an option. For a complete discussion of the “135-Day Rule” and the interplay with staleness of financial statements, see this Latham memo.

Check out our “Disclosure Deadlines” Practice Area for more guidance on getting your filings in on time.

– Liz Dunshee

By a divided vote at its open meeting yesterday, the SEC approved the PCAOB’s new quality control standard, QC 1000 – A Firm’s System of Quality Control – and related amendments. Here’s the 85-page adopting release – and here’s an overview of what the new standard will require, from the SEC’s press release:

QC 1000, A Firm’s System of Quality Control, establishes an integrated, risk-based quality control standard that will require all registered public accounting firms to identify specific risks to their practice and design a quality control system that includes appropriate responses to guard against those risks. Registered firms that perform engagements under PCAOB standards will be required to implement and operate the QC system. The new quality control standard focuses on an audit firm’s accountability and continuous improvement of its audit practice and will require an annual evaluation of the firm’s QC system and related reporting to the PCAOB, certified by key firm personnel.

In addition, firms that annually issue audit reports for more than 100 issuers will be required to establish an external quality control function (EQCF) composed of one or more persons who can exercise independent judgment related to the firm’s QC system.

These new requirements will go into effect in December 2025. As Dave noted last week, QC 1000 replaces the existing AICPA standard that pre-dated the creation of the PCAOB.

The U.S. Chamber of Commerce had urged the SEC to reject QC 100, saying that the proposed requirement for an External Quality Control Function was “fundamentally flawed” and that the Standard would face “legal peril” in the absence of a full cost-benefit analysis. So, even though the adopting release does provide an economic analysis, we may see this standard challenged in court.

In his dissenting statement, Commissioner Uyeda took issue with the SEC’s process for approving the new standard, noting that the PCAOB had elaborated on the EQCF aspect of the standard in mid-August, which led to the SEC receiving new feedback within the past month. Meanwhile, the adopting release – and Commissioner Crenshaw’s supporting statement – position the rule as the culmination of a years-long initiative, which included a 2019 concept release and 2022 proposal. Whichever view you share, public companies are likely to experience both costs & benefits from the enhanced quality procedures that the standard will require.

The SEC has been busy with audit rules – in late August, it approved 3 important rule changes about auditors’ responsibilities, use of technology assisted data analysis in audits, and auditor liability.

– Liz Dunshee