When stocks are delisted from (or never achieve listing on) a national securities exchange – because they fail to meet the minimum bid price requirement or some other listing standard – limited trading might continue on the over-the-counter market, or the “pink sheets.” Yesterday, the SEC signaled that it is keeping an eye on OTC trading – by announcing these charges against OTC Link for alleged failure to monitor, investigate and file Suspicious Activity Reports for transactions on its platforms. Here’s an excerpt:
In particular, during the Relevant Period, OTC Link failed to surveil for, recognize and investigate red flags of: (a) sell orders from subscribers representing a large volume of trading relative to the average daily trading volume in thinly-traded microcap issuers; (b) consistent one-sided trading by a subscriber in a particular thinly-traded microcap issuer accompanied by a significant increase in stock price; (c) trading activity by subscribers involving apparent pre-arranged securities trading, including wash or cross trades, in thinly-traded microcap securities; or (d) transactions involving subscribers who were publicly known to be the subject of criminal, civil or regulatory actions for crime, corruption, or misuse of public funds.
OTC Link is a subsidiary of OTC Markets Group, Inc. and is a registered broker-dealer and an “interdealer quotation system.” Dave blogged a few years ago about the rules that apply to quotation of OTC securities – and why we call the OTC platforms the “pink sheets.” He had also noted at that time a suggestion by OTC Link about a so-called “expert market” to increase liquidity for these stocks, which was denied by the SEC.
In the order announced yesterday, without admitting or denying the SEC’s findings, OTC Link agreed to a censure and a cease-and-desist order in addition to the $1.19 million penalty. The SEC’s order also directs OTC Link to continue its engagement of a compliance consultant to review and recommend changes to the firm’s anti-money laundering policies and procedures.
Last month, Dave and Meredith shared perspectives on the SEC’s loss in front of SCOTUS in SEC v. Jarkesy, which affects the use of administrative enforcement actions by the SEC and other agencies. A recent challenge to the disciplinary authority of the PCAOB underscores the potentially broad-reaching implications of this decision. Although the PCAOB is “government created,” it operates as an independent regulator rather than as a government agency.
The “New Civil Liberties Alliance” first challenged the PCAOB’s authority in a complaint filed last March in the U.S. District Court for the Middle District of Tennessee. That complaint – John Doe v. PCAOB – was amended last week to add citations to SCOTUS’s Jarkesy opinion and add points stemming from that opinion, such as:
To the extent Congress purported to vest such judicial [disciplinary] power in the Board through Sarbanes-Oxley, that vesting was impermissible under Article III of the Constitution.
The NCLA argues that when it comes to enforcement proceedings alleging a violation of PCAOB rules or federal securities laws, accountants are entitled to a jury trial on the merits in an Article III court. And regardless of whether or not you agree with that argument, the complaint offers a colorful look at how these disciplinary proceedings play out behind the scenes, from the perspective of the suspected wrongdoer. More information about the case is on the NCLA’s website.
As Dave observed last week, there has traditionally been a rhythm to capital markets deals that reflects the “human element” – bankers and investors enjoying time off in August. This pattern has not completely faded into oblivion, which means that August remains a good time to take a breather and assess where you stand on your compliance policies and other “corporate housekeeping” issues. This year in particular, many companies are taking the opportunity to review their insider trading policies. It’s a good time to add elements from the SEC’s 2022 rules that haven’t already been addressed, consider the impact of recent litigation, and refine provisions that were added or changed last year, to reflect any “lessons learned” in how those provisions have actually worked in practice.
For calendar-year companies, insider trading policies will first need to be attached as “Exhibit 19” to the Form 10-K next spring. But with the way the compliance date fell, companies with fiscal years ending in the spring or summer are already having to comply with the exhibit requirement and related disclosures. This Orrick memo looks at trends from early filers – with a specific focus on the software & life sciences industries. Here are some key takeaways:
– When “broadly disseminated” information is deemed public – Companies are largely aligned when considering broadly disseminated information to be “public” within one to two full trading days after release. So far, the data indicates that software companies tend to require one full trading day after release while life sciences companies are fairly evenly split between one or two full trading days.
– When the quarterly blackout period begins & ends – Across sectors, most companies’ quarterly blackout periods commence between two to three weeks prior to quarter end, and end one to two full trading days after earnings release. To a lesser extent, some trading windows commence with longer or shorter than the two-to-three-week window before quarter end, roughly in line with our collective experience. With the new compliance deadlines approaching, companies should reconsider their quarterly blackout period start and end dates, taking into account the trends and other factors such as how widely stock price-moving information is made available within the company.
– Treatment of gifts – While there is some modest variation, so far the data shows that insider trading policies expressly deal with gifts, and a majority of companies across sectors both prohibit gifts when in possession of MNPI and subject gifts to pre-clearance requirements, like other trades. Companies should re-evaluate their policies if they do not address the treatment of gifts.
The memo also notes that some companies are missing the Item 408 disclosure and/or iXBRL tagging requirements – so make sure you don’t let this happen to you or your clients. It also observes there is some variation at this point in whether companies are filing documents beyond the insider trading policy itself, despite the fairly broad language in the rule.
Another recent development that may affect insider trading policies is the SEC’s win earlier this year under the novel theory of “shadow trading.” In SEC v. Panuwat, a jury decided that an employee was guilty of insider trading for using information about his company to trade in the stock of another company in the industry. Although this case was highly fact-specific, it has spotlighted the notion of “shadow trading” – which gives companies a reason to take another look at how this concept is addressed in their own policies. The Orrick memo that I mentioned in our first blog today says that it’s common to have some sort of language in the policy on this point – but practice varies on how precise it is:
A significant majority of companies in both the software and life sciences sectors restrict at least some trading in the securities of another company, with a minority in each sector limiting the restriction to companies with which the issuer has a business or similar relationship. Considering the data, recent case law and other developments, companies should review their insider trading policies.
This BCLP memo takes a closer look at the case – and suggests points to consider in tailoring your policy (as well as codes of conduct, confidentiality & non-disclosure agreements, and employment agreements):
▪ Is confidential information limited to that obtained in the course of employment?
▪ Do the company’s policies limit or restrict trading in securities of other companies only to such other companies with which the company directly conducts business or has incurred
confidentiality obligations? Should the policies cover all companies that are in the same sector or industry, or in particular competitors?
▪ Should the company consider special blackout periods related to the other economically linked companies?
▪ Should other adjustments be made in the Company’s approach to non-disclosure agreements?
The memo cautions that at the same time, addressing “shadow trading” in your policy requires careful thinking. It recommends that companies consider these issues:
▪ The SEC’s theory that agency law can give rise to a duty of trust, confidence or confidentiality that triggers the misappropriation doctrine, regardless of language in an insider trading policy or confidentiality agreement. While including broader duty language in the policy language might serve to put insiders on notice of the risks related to potential liability, such language could also help demonstrate the existence of a duty where it was less clear under agency law principles.
▪ Whether to avoid creating differences in restrictions on use of confidential information in various documents, such as business codes of conduct, employee confidentiality
agreements, and employment agreements.
▪ Second-order effects from relaxing restrictions in one or more policies while maintaining tighter restrictions in other documents, or vice versa, which may result in disparate treatment of employees or officers.
▪ Whether preclearance of trading or other company policy enforcement should be revisited and enhanced.
Yet another recent development affecting insider trading policies – and related compliance procedures – is the recent jury verdict in U.S. vs. Peizer. As Meredith noted last month, the DOJ is calling this case the “first insider trading prosecution based exclusively on the use of a trading plan.”
The case was based on the “old” version of Rule 10b5-1 – which had less stringent criteria to qualify for the affirmative defense – but we can still glean some insights. This Jenner & Block memo gives 3 ways to de-risk Rule 10b5-1 plans through compliance procedures, in order to protect your insiders from stepping into potential headaches & liabilities. Here are key takeaways:
1. Be aware of the perils of liquidations before bad news – In-house teams should be especially vigilant when the company has hit potential setbacks that have not been disclosed, appropriately scrutinize requests to implement or change Rule 10b5-1 plans, and highlight these risks to insiders.
2. Prepare to have determinations concerning material nonpublic information second-guessed – In-house teams should document their analysis on why a certain piece of information constitutes or does not constitute inside information. Taking the time to memorialize counsels’ view on why there was no material nonpublic information preventing implementing a plan should help a company demonstrate its good faith in the event of an investigation, and avoid a perception that a company is enabling insider trading or otherwise has a weak compliance function.
3. Use training and the required certifications to highlight the importance of good faith – This is an important fact to communicate to insiders, because there are instances where the executives themselves have more information than in-house teams concerning the corporate issue at the heart of material nonpublic information analysis. To communicate the importance of the issue, in-house teams can conduct periodic trainings on insider trading. This training could also highlight to executives the rationale for the SEC’s new explicit requirement of good faith.
A few years ago, I shared observations as I was heading out on parental leaves for my son and my daughter. Now, I’m gearing up for a different reason – thoracic surgery. Medical leaves are a reality for many, yet they’re rarely discussed openly. Here are my learnings in case they’re helpful to anyone else out there:
1. There is no perfect time. I know my career will endure a 6-week pause. That said, it’s tempting to try to wait for the “perfect time.” Right now is inconvenient because my practice has momentum, everything is going well, there are lots of events I want to attend and people I want to see. When it comes to things like this, there is never an ideal moment. But when it comes to your quality of life, you’ve got to play to win. Which brings me to…
2. Don’t neglect your health. Although this is a condition I’ve had my entire life, years of running and yoga helped me mask (but not eliminate) my symptoms. I had planned to just make do. But earlier this year, a friend’s health scare prompted me to revisit medical results that I’d brushed off, and to get a second opinion. Things were more severe than I realized. I’m facing surgery now on my own terms, ensuring a healthier future.
3. Medical issues are not a sign of weakness. I worried people would think less of me – or maybe not want to work with me? – if I wasn’t the picture of perfect health. This was the case even though I know I’ve never felt that way about others. In fact, some of the strongest and most admirable people I know are the ones who have been dealt a difficult hand in life with their physical circumstances. Strength does not mean having everything go your way. That’s just luck. Luck eventually runs out for everyone – and that’s a good thing! Because it gives us all empathy. Which is a reminder that…
4. My colleagues and clients are wonderful (and yours are too). I hate imposing on people and for various reasons, I was nervous about sharing my need to take leave. Come to find out, my colleagues at Fredrikson and CCRcorp have given me nothing but authentic support and resounding well-wishes. They are selflessly jumping in to ensure that the trains keep running and that clients will be well-supported during my absence. John even offered to take my parents to a baseball game when they are there with me in Cleveland for the procedure! (my dad loves the Guardians.) My clients also have been incredibly understanding and do not seem to be writing me off. If you are facing a similar situation, I think you will find this to be true as well.
5. Redefine “balance” and “success.” A lot of us have a hard time stepping away from work when deadlines are looming or when we’re working on something interesting. When I returned to private practice last year, many folks in our community shared thoughtful advice about how to find a better balance, which I very much appreciated, and which I’ve been using to plan my days and my overall approach. I used to operate on the assumption that things would shake out, on balance, if I worked overtime whenever the work was there and focused on “life” when there was a break in the action. That strategy served me very well early in my career and has helped me learn and grow, so I’m not saying it’s wrong. But “balance” looks different in these middle years, and “success” currently means building up a team to deliver great results. That’s all fine for now, and maybe in 10 years there will be another round of new meanings.
I (still) know I’m not alone on this journey of balancing life & lawyering. I’d welcome more emails to liz@thecorporatecounsel.net with any experiences & “lessons learned” that you want to share. I’m extremely grateful to John, Dave, Meredith, all of our CCRcorp HQ folks, and all of my Fredrikson colleagues, for being very good at what they do, and willing to handle some “extras” for the next month or two. Thank you also to my clients and friends for their patience with me! See you all soon.
In this 21-minute episode of the “Women Governance Trailblazers” podcast, Courtney Kamlet & I interviewed Maryrose Sylvester, who is an Independent Director at Vontier Corporation, Flex, Waste Management, and Harley-Davidson and previously served in executive and leadership roles at General Electric for over 30 years. We discussed:
1. Maryrose’s transition from the corporate world to the public company board world, and how she evaluates board service opportunities.
2. What traits are essential to bring to the boardroom.
3. Methods for staying informed as a director on the latest industry trends and the broader business environment.
4. The most valuable lessons Maryrose has learned from board service.
Advice for women who aspire to become directors.
5. Effective approaches to communicating and collaborating with fellow board members and with management teams.
6. How directors can measure and evaluate their own performance and impact as a board member.
7. What Maryrose thinks women in the corporate governance field can add to the current conversation on the societal role of companies.
To listen to any of our prior episodes of Women Governance Trailblazers, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.
Normally I spread out these podcast blogs, but since AI is moving at the speed of light and I am going out on a brief medical leave, I don’t want this episode to become obsolete before you see it. Check out this 17-minute episode of “Women Governance Trailblazers” – Courtney Kamlet & I interviewed Cassidy Donohue, who is Product Manager at Troop. Previously, Cassidy served as a Research Analyst for Engine No. 1 and as Lead Researcher for Accountable: The Rise of Citizen Capitalism. We discussed:
1. Cassidy’s background and career path – and what drew her to the field of corporate governance.
2. How Troop is setting out to change proxy voting through technology, including how the tools differ from traditional proxy voting recommendations and voting reports.
3. How Troop ensures that recommendations are correct.
4. Communication suggestions for companies and their advisors as investment stewardship teams enhance their use of AI to analyze proxy statements and make voting decisions.
5. Cassidy’s predictions for the fields of corporate governance and asset stewardship.
6. What Cassidy thinks women in the corporate governance field can add to the current conversation on the societal role of companies.
To listen to any of our prior episodes of Women Governance Trailblazers, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.
John blogged earlier this month about the governance implications of the DOJ’s fraud enforcement initiatives. A report issued last week by the U.S. Government Accountability Office signals that federal agencies’ focus on fraud is not going to diminish anytime soon. Here’s why:
No area of the federal government is immune to fraud. We estimated that the federal government could lose between $233 billion and $521 billion annually to fraud.
Given the scope of this problem, a government-wide approach is required to address it. The Office of Management and Budget, working with agencies and the oversight community, should develop guidance to improve fraud-related data—providing a more uniform approach to what data is collected and how.
Also, Treasury should identify methods to expand government-wide estimates of fraud—prioritizing higher-risk program areas.
When it comes to Artificial Intelligence, the report notes:
Artificial Intelligence Creates Opportunities for Improved Fraud Detection but Also for Fraud. We have previously reported that artificial intelligence has created opportunities for improved oversight and fraud detection. Artificial intelligence can use algorithms and models to reveal anomalous patterns, behaviors, and relationships—with speed, at scale, and in depth—that was not possible previously. Despite these opportunities, artificial intelligence can also pose new risks to agencies and others, such as by creating fake images to assist with developing falsified documentation or to create fake audio to assist in impersonation schemes.
Here’s important news that Meredith blogged yesterday on CompensationStandards.com (also see John’s blog on DealLawyers.com about the M&A aspects): Yesterday at an open meeting, the FTC voted 3-2 to approve an expansive ban on the use of non-competes. The WSJ reported that this was particularly historic rulemaking.
[It] marks the first time in over 50 years that FTC officials have issued a regulation to mandate an economywide change in how companies compete. The commission has historically operated like a law enforcement agency, investigating and suing individual companies over practices or deals deemed to violate the law.
Proposed in January 2023, this rulemaking received upwards of 26,000 comments. Here are the 570-page final rule and fact sheet. This excerpt from the fact sheet summarizes the basics:
– The final rule bans new noncompetes with all workers, including senior executives after the effective date.
Specifically, the final rule provides that it is an unfair method of competition—and therefore a violation of Section 5 of the FTC Act—for employers to enter into noncompetes with workers after the effective date.
– For existing noncompetes, the final rule adopts a different approach for senior executives than for other workers. For senior executives, existing noncompetes can remain in force. Existing noncompetes with workers other than senior executives are not enforceable after the effective date of the final rule.
Fewer than 1% of workers are estimated to be senior executives under the final rule.
Specifically, the final rule defines the term “senior executive” to refer to workers earning more than $151,164 annually who are in a “policy-making position.”
While not addressed in the fact sheet, the final rule contains an exception (expanded from the rule’s proposed form) for non-competes entered into in connection with a bona fide sale of a business entity. John described this exception in today’s blog on DealLawyers.com.
