I’ve blogged before about the “infodemic” of misinformation and widespread mistrust. For a while, companies were able to stay out of the fray. But this op-ed, published in World Finance by activism defense expert Kai Liekefett of Sidley, argues that the epidemic of lying has unfortunately now made its way into proxy contests, damaging the notion of fair director elections. Kai calls for Congress to step in to solve the problem.
Kai shares his view that in recent years, the Corp Fin Staff has been spread thin and has not issued as many comments under Rule 14a-9 as he would expect to see based on questionable statements being made in proxies. Part (a) of that rule says:
No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication, written or oral, containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.
Rule 14a-9 applies not only to companies, but also to dissidents, who Kai says feel more leeway to take liberty with facts. Companies have limited options when faced with what they believe are materially misleading dissident statements. Here’s Kai’s “call for action”:
It is time to protect the integrity of corporate elections and the shareholder vote. Misleading statements, half-truths and outright lies undercut corporate democracy. We believe it is time for Congress to level the playing field. The SEC should receive more resources to monitor proxy contests. In addition, the proxy rules should be tightened and provide the SEC with more authority to sanction violations. For instance, the SEC should have the right to require proxy rule violators to publicly withdraw false statements. The SEC should also be authorised to enjoin proxy contests and impose severe sanctions on repeat violators (freeze-out periods, for example). Lastly, it should be clarified that the mere filing of a complaint with the SEC is insufficient to ‘moot’ a lawsuit over misstatements in a proxy contest.
These changes would correct a fundamental imbalance in our current system between companies and activist shareholders. Simply put, both companies and investors should be held to the same standard. Some may argue that in our free market system, investors should engage in their own research before voting, rather than relying on a government regulatory agency to police proxy contests.
However, in fast-moving proxy fights, even institutional investors do not have the time, resources, or manpower to fact check all statements. Proxy advisory firms like ISS and Glass Lewis, who influence significant portions of the vote, are similarly ill positioned to combat misinformation. Retail shareholders, a major focus of the SEC’s mandate, are even more vulnerable to disinformation in proxy fights. For these reasons, the investor community cannot solve this issue on its own.
Given current trends, it’s already past time for Congress to step in. The SEC takes a leading role to combat misleading or untruthful statements in other contexts – and Congress should enable it to do the same in proxy contests. Lying with impunity should not become a norm in our corporate elections.
Yesterday, the SEC posted a Sunshine Act Notice for an open meeting next Tuesday, August 20th. The agenda includes 3 PCAOB-related matters:
1. The Commission will consider whether to approve the Amendments to PCAOB Rule 3502 Governing Contributory Liability, as adopted by the Public Company Accounting Oversight Board. (For background, see Meredith’s June blog from when the PCAOB adopted this standard.)
2. The Commission will consider whether to approve the new auditing standard, AS 1000, General Responsibilities of the Auditor in Conducting an Audit and related amendments, as adopted by the Public Company Accounting Oversight Board. (For background, see Dave’s May blog from when the PCAOB adopted this standard.)
3. The Commission will consider whether to approve the Amendments Related to Aspects of Designing and Performing Audit Procedures that Involve Technology-Assisted Analysis of Information in Electronic Form, as adopted by the Public Company Accounting Oversight Board. (For background, see Dave’s June blog on this topic.)
Along with announcing the open meeting, the Commission posted an extension of the date by which it must act to approve or disapprove the above proposals. The open meeting date falls within the extended date for action.
The SEC’s open meeting agenda reflects that the PCAOB has been very active this year with updating standards, including in ways that affect auditor liability. I blogged yesterday about a lawsuit that alleges that PCAOB disciplinary actions are unconstitutional – which shows that Newton’s third law of motion also applies in the regulatory context.
Hopefully, nobody reading this is currently dealing with a “late filer” situation. But most securities lawyers are faced with this issue at one point or another during their career. This 13-page Winston & Strawn memo is a good, up-to-date resource that covers the multitude of consequences & considerations that a late SEC filing can trigger:
– Notice to the SEC
– Exchange Act enforcement consequences
– Disclosure issues and insider trading concerns
– NYSE and Nasdaq issues
– Form S-3, Form F-3, and WKSI eligibility (including waivers of eligibility requirements and alternative approaches to registration statements during ineligibility)
– Requests for filing date adjustments
– Form S-8
– Form S-4 and Form F-4
– Resales of restricted or control securities
– Indentures and credit agreement covenants
The memo points out that when there’s a late filing, there is often some other big issue happening at the company that demands attention. So, understanding the late filing consequences and preparing in advance for those can alleviate some brain damage during a stressful time. Check out more resources in our “Late SEC Filings” Practice Area.
Even though this is supposedly a lighter time of year for proxy-related matters, we are on alert for issues affecting off-season companies & activities – and we are already looking ahead to 2025. To that end, we continue to post new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net members. Following that blog an easy way to stay in-the-know on shareholder proposals, engagement trends and more.
Members can sign up to get that blog pushed out to them via email whenever there is a new post. Here are some of the latest entries:
– More Congressional Backlash for Climate Action 100+
Last week, Nasdaq posted a proposed rule change to modify the delisting process for certain stocks that fail to regain compliance with the exchange’s bid price requirement – so-called “penny stocks.” Specifically:
Nasdaq is proposing to amend Listing Rules 5810 and 5815 to provide that a company will be suspended from trading on Nasdaq if the company has been non-compliant with the $1.00 bid price requirement for more than 360 days. In addition, Nasdaq is proposing to modify the listing standards such that Nasdaq will immediately send a Delisting Determination, as defined in Rule 5805(h), without any compliance period, to any company that becomes non-compliant with the $1.00 minimum bid price requirement if the company effected a reverse stock split within the prior one-year period.
Nasdaq’s proposal states that the cumulative impact of the proposed rule change and a previous 2020 rule would be as follows:
• A company that effected a reverse stock split of any ratio will be subject to delisting if it falls out of compliance with the Bid Price Requirement within one year of the previous reverse stock split.
• A company that effected one or more reverse stock split with a cumulative ratio of 1-for-250 or higher will be subject to delisting if it falls out of compliance with the Bid Price Requirement within two years of the reverse stock split(s).
The rule comes on the heels of another Nasdaq proposal just last month that would apply to companies that use reverse stock splits to regain compliance with bid price requirements – and a new rule from last year about notice and disclosure requirements for reverse splits. (With all of these complexities, members should make sure to check out our “Stock Splits” Practice Area when navigating any splits or reverse splits.)
This blog from Cooley’s Cydney Posner says that Nasdaq’s latest proposal is at least partially responsive to a rulemaking petition that took issue with penny stocks trading on national exchanges. And this WSJ article explains why Nasdaq in particular is taking heat – with 421 penny stocks listed on Nasdaq as of last Thursday, out of the 509 total exchange-listed stocks that were trading below $1 per share. The article also says that exchange-listed companies carried out a record 495 reverse splits last year – and added another 249 in the first half of this year.
Nasdaq’s rule proposal has not yet been posted for notice on the SEC website and will need to be approved before going into effect.
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.
