Dave blogged last month that the SEC has been posting a lot of job openings lately. I have great respect for everyone who currently works (or has previously worked) at the Commission, and I know I’m not alone in our community in feeling that way. Plus, it’s a great place to work. This week, the agency has posted about an OASB opening and a Corp Fin informational session:
– The Office of the Advocate for Small Business Capital Formation (OASB) is hiring an Attorney-Adviser to support small business capital formation policy evaluation and analysis. This position will help advance the interests of small businesses, small business investors, and work to address the particular challenges that women-owned and minority-owned small businesses & their investors face. The posting closes on June 20th, so apply today!
– Corp Fin is seeking new-hires in DC and its 11 regional offices – both accountants and attorneys. The Division is hosting a Virtual Information Session on Wednesday, June 14, 2023 from 1pm-3pm ET. To attend this session and learn more about what it’s like to work in Corp Fin and how to apply, you can register here.
– Liz Dunshee
Your next IPO may be a direct listing, thanks in part to a unanimous opinion issued by the US Supreme Court last week in Slack Technologies v. Pirani. In the ruling, which we’ve been anticipating for a long time (here’s Meredith blog from last month about the case’s insurance implications), the Court determined that a plaintiff pursuing a liability claim under Section 11 of the Securities Act for alleged misstatements in an offering must be able to trace their shares to issuance under a registration statement in order to move forward with the claim.
That may be difficult in the context of the “direct listing” process that Slack used to go public back in 2019. When Slack began trading, a portion of the newly listed shares were registered for resale (restricted securities held by affiliates and others) – but an even larger portion of the newly listed shares were not registered and simply became available for secondary transactions. This Morrison Foerster memo gives a refresher on the implications of this case for IPO-related liability:
The federal securities laws impose strict liability for misleading statements made in connection with initial public offering documents. As a result, if a newly public company’s stock price falls below its IPO price, for whatever reason, the company is likely to face a securities class action. In recent years, direct listings have become more popular, in part as a way to avoid litigation and potential liability under Section 11 of the Securities Act of 1933. That is because, under long-standing precedent, only shareholders who purchased securities registered under the challenged registration statement had standing to sue. In a direct listing, registered and unregistered shares are issued simultaneously, making it difficult, if not impossible, for investors to show that the securities they purchased were registered.
This isn’t the end of the road for this particular case or the broader issue of liability in direct listings. For one thing, the Court noted that Congress could change the language of the statute if it wanted to allow claims to proceed – potentially, the SEC could even adopt interpretive rules to clarify the issue. (And of course, even if that didn’t happen, plaintiffs can sue companies for securities fraud at any time under Section 10 of the Exchange Act without the tracing requirement – but those claims are more difficult because they require a showing of scienter).
Here, SCOTUS remanded the case to the 9th Circuit to decide whether the plaintiff’s pleadings can satisfy Section 11(a) as construed by the Court, as well as whether the plaintiff’s Section 12 claim can move forward. As Cooley’s Cydney Posner blogged, the plaintiff may be able to plead that some of his purchased shares can be traced to the registration statement:
Can Pirani trace his shares? During oral argument, Slack counsel contended that it was not really possible for Pirani to trace his shares to the registration statement. He noted, however, that there was a pending state case in which plaintiffs claim they can trace, and that was being litigated. In addition, Slack counsel referred to an amicus brief submitted by law and business professors that suggested “that a recent regulatory change after this case, the creation of the consolidated audit trail, may facilitate tracing in the future.” Counsel for Pirani pointed out that they had indicated in the pleadings that the shares were traceable—meaning not every share, but a percentage of them, a question that he thought should be left to the lower courts. Justice Gorsuch agreed that all they would “need to do is plead facts suggesting that you can trace consistent with the Twiqbal standard [Iqbal and Twombly], as my friends like to call it. (Laughter.)… And—and then you’re off to the races and it really just becomes a matter of damages, as I think you also alluded to.” As a result, he continued “if we were to rule against you on what §11 means, it still would enable you to plead…that there are traceable shares.”
On the Section 12 claim, which looks at false or misleading statements in a prospectus or oral communication rather than a registration statement, the Court said:
The Ninth Circuit said that its decision to permit Mr. Pirani’s §12 claim to proceed “follow[ed] from” its analysis of his §11 claim. 13 F. 4th 940, 949 (2021). And because we find that court’s §11 analysis flawed, we think the best course is to vacate its judgment with respect to Mr. Pirani’s §12 claim as well for reconsideration in the light of our holding today about the meaning of §11. In doing so, we express no views about the proper interpretation of §12 or its application to this case. Nor do we endorse the Ninth Circuit’s apparent belief that §11 and §12 necessarily travel together, but instead caution that the two provisions contain distinct language that warrants careful consideration.
If you need to get up to speed on the mechanics of direct listings, we’ve got a “Direct Listings” Practice Area for that. Or, as Bloomberg’s Matt Levine pointed out, some companies might also take this holding as a reason to loosen lockups for traditional IPOs:
One possible conclusion here is that, if you are a company considering an IPO, a direct listing reduces your potential liability (and that of your underwriters): If you do a direct listing, no one can sue you under section 11 for misstatements in your prospectus; they have to meet the higher bar of proving fraud.
Another possible conclusion here is that, if you are a company considering an IPO, and you don’t want to do a direct listing, you can maybe get these benefits anyway? Just don’t sign a lockup! Let some of your employees or other existing shareholders sell stock immediately, as soon as the IPO prices. Then anyone who buys stock after the IPO can’t prove that they bought stock from the IPO, instead of from your employees.
– Liz Dunshee
Cboe Global Markets – which, as the “rebranded” Chicago Board Options Exchange, continues to be one of the world’s largest option exchanges – announced last week that it is going to begin listing corporate stocks in the US. All Cboe-listed stocks in the US and Canada can also be made available for trading in the Netherlands and the UK, with Australia to follow.
Cboe has been around for 50 years as an options exchange, but when it comes to listing company stocks, it is a new player. It joins upstart national securities exchanges like the Long-Term Stock Exchange (all 24 national securities exchanges are listed on the SEC’s “Self-Regulatory Organizations” page). It says it is not aiming to compete with the existing large exchanges – rather, it wants to focus on the “purpose-driven innovation economy.” Here’s more detail:
Uniquely focused on powering the purpose-driven Innovation Economy, Cboe Global Listings aims to serve growth companies – particularly those with novel business models operating in nascent, high-growth industries – and innovative investment products that are addressing world challenges and shaping the economies of tomorrow.
Abaxx Technologies, a fintech company, will be the first issuer listed on Cboe’s global platform. Abaxx went public on Cboe Canada in December 2020.
– Liz Dunshee
Hang on to your hats! In advance of the more detailed disclosure requirements that will apply to share repurchases conducted later this year and in the future, a 6-page order posted last week shows that the SEC’s Enforcement Division is already on the lookout for shortcomings under the disclosure rules as they currently exist. The Commission instituted cease-and-desist proceedings and reached a $600k settlement with a regional bank based on its purported findings that:
1. FGBI failed to disclose repurchases of its common stock on the open market in its Forms 10-Q and 10-K in connection with an employee stock grant program (“Stock Grant Program” or “Program”) for employees of its wholly-owned subsidiary, First Guaranty Bank (“FGB”), and for annual stock bonus awards made to FGB executives, including FGB’s Chief Executive Officer (“CEO”) and Chief Financial Officer, (“CFO”).
2. From September 2016 through February 2021, FGB used an outside third party, who was not an employee of either FGB or FGBI, to purchase shares of FGBI common stock each quarter on the open market using his own brokerage account. Once the shares were purchased, the third party worked with FGB’s administrative personnel to effectuate the sale of shares to FGB. FGB never took possession of the shares, instead distributing them directly from the third party’s account held at FGB to select employees for that quarter and to its senior executives at year-end. In total, the third party purchased 119,020 shares of FGBI common stock for approximately $2.5 million under these programs.
3. Pursuant to Item 703 of Regulation S-K, 17 C.F.R. § 229.703, FGBI was required to disclose these quarterly and annual purchases made by the third party in FGBI’s Forms 10-Q and 10-K filed with the Commission between March 30, 2017 and May 10, 2021. However, FGBI never disclosed this required information in its quarterly and annual filings. Moreover, FGBI failed to implement controls, policies, or procedures designed to ensure compliance with the disclosure requirements under Item 703.
4. As a result of the conduct described above, FGBI violated Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 13a-15(a) thereunder.
Although this order involves a corner of the market that’s been under significant scrutiny this year, there’s no reason to think that the Enforcement Division isn’t also watching for compliance issues at companies from other industries. In addition to the specific repurchase disclosures that resulted in the alleged violation, the order also says that the company lacked appropriate disclosure controls – which has been an enforcement theme as of late. Here’s an excerpt:
Although FGBI maintained written procedures and checklists pertaining to disclosures required by the federal securities laws, FGBI had no controls or procedures in place for FGBI’s annual filings designed to ensure FGBI disclosed the quarterly share purchases in its Forms 10-K under Item 703. With respect to FGBI’s quarterly filings on Forms 10-Q, FGBI maintained a Form 10-Q checklist that had only the one question pertaining to Item 703. However, FGBI’s controls and procedures were not designed to ensure that the quarterly purchases made by the third party, an affiliated purchaser of FGBI, would be disclosed under Item 703.
Since the share repurchase disclosure requirements are only going to get more detailed & complex from here, now is the time to revisit disclosure controls and ensure that all checklists and form checks are broad enough to capture all repurchases covered by the rules. Check out the memos – and our recent webcast – about the new rules that we’ve posted in our “Buybacks” Practice Area, to make sure that you and your clients are prepared.
– Liz Dunshee
Speaking of control deficiencies, Dave blogged in April about the Commission’s improved transparency around its own issues. At that time, the SEC announced that they had determined that Staff in the Division of Enforcement had been able to access a database that contained certain memos prepared by the Adjudication Group. That access is not supposed to be possible, and the SEC has been conducting a review and implementing remedial measures.
On Friday, continuing its communication on this matter, the SEC released a lengthy statement from the review team, as well as 5 exhibits detailing 28 affected matters. Here’s an excerpt that summarizes findings so far:
In all instances, the review team found that the Enforcement administrative staff accessed the Adjudication memoranda as part of an effort to track and upload to the Enforcement Centralized Database all Enforcement memoranda recommending Commission action in enforcement proceedings. Consistent with this effort, the overwhelming majority of the memoranda accessed by the Enforcement administrative staff were memoranda to the Commission submitted by Enforcement staff. But because the OS databases were not configured to prevent Enforcement staff from accessing Adjudication memoranda—and the Enforcement administrative staff did not distinguish between Enforcement and Adjudication memoranda—those administrative staff included some Adjudication memoranda in their effort to continually upload relevant materials into the Enforcement Centralized Database.
As part of the review, the SEC’s investigative staff from the Division of Examinations, under the supervision of the Commission’s General Counsel and with support from a consulting firm, interviewed more than 250 current & former staff members and considered over 500,000 pages of emails and attachments, as well as hundreds of case files and 25 million rows of data from access logs of various systems. The Commission says that it will release additional findings from the review team as appropriate.
– Liz Dunshee
The S&P Dow Jones recently announced its latest quarterly rebalance, which becomes effective in about two weeks – at market open on Tuesday, June 20th. The rebalance includes changes to the S&P 500 as well as the S&P MidCap 400, and the S&P SmallCap 600 indices.
While only a handful of companies are affected by these rebalancings each quarter, it’s a reminder that index inclusion (or exclusion) can impact the voting & investment policies that apply to a company. So, if your company is on the cusp of any index, there are many reasons to monitor that and keep your team apprised of whether you are now subject to different policies. This blog has more detail on what drives turnover.
– Liz Dunshee
It’s still too early to tell whether universal proxy is significantly changing the activism game, but it may at least be influencing smaller activists to move forward with campaigns. Here’s something that Meredith blogged yesterday on DealLawyers.com:
Michael Levin recently shared another UPC development – the second activist success story:
An individual investor, Daniel Mangless, owns 2.3% of Zevra Therapeutics (ZVRA), since 2019. Other than a few Form 13Gs for ZVRA and one other holding, the preliminary proxy statement for ZVRA was his first-ever SEC filing and, it appears, activist project.
He rather quietly nominated three candidates for three available seats on the seven-person classified BoD. ZVRA nominated the three incumbents, including the CEO and a director first appointed in November 2022. He also proposed reversing any bylaw amendments from 2023, which the ZVRA BoD could have approved but not disclosed to shareholders.
At the ASM last week, all three challengers won by a significant margin over the three incumbents. The bylaw amendment reversal also prevailed by a similar margin.
What’s a significant margin? All three activists won 80% of the votes cast, with the bylaw proposal passing with 84% of the vote. So, while UPC may have helped encourage the activist, it doesn’t appear to have impacted the outcome:
Shareholders didn’t see the need to split votes among incumbent and activist candidates, one of the features of UPC. All three challengers each received approximately the same votes, as did the three incumbents.
The other notable feature of this campaign was the activist’s particularly low expenses, estimated at $250,000.
– Liz Dunshee
I blogged earlier this week about a record-setting whistleblower award. A case that’s on the SCOTUS docket may affect the ability of future whistleblowers to establish claims. Here’s Kevin LaCroix at D&O Diary:
The U.S. Supreme Court has agreed to take up a case that will address the question of whether or not a claimant alleging that his employer fired him in retaliation for whistleblowing must prove that the employer acted with retaliatory intent. The court’s consideration of the case has important implications for claimants under the Sarbanes-Oxley Act’s anti-retaliation provisions, because claimants could face significantly greater difficulty in establishing their claims if they must prove that the employer acted with subjective intent to retaliate. The case could also have important implications for retaliation claims under other federal whistleblower protection laws. The Court’s May 1, 2023, order agreeing to take up the case can be found here.
Kevin gives background on the case & the cert petition, and discusses the potential impact:
The Second Circuit’s requirement of a showing of retaliatory intent “significantly raised the threshold for Sarbanes-Oxley whistleblower plaintiffs,” as the Seyfarth Shaw law firm put it in a memo published just after the Second Circuit issued its opinion. As the memo also noted, “a potentially significant number of cases will not meet the requirement” for the claimant to show retaliatory intent.
Moreover, this case not only has important implications for SOX whistleblowers; a number of other federal statutory provisions have anti-retaliation provisions that operate similarly to the provisions in SOX. As Senators Grassley and Widen put it in their amicus brief, at least 17 other federal statutes have “virtually identical whistleblower protection” provision, and so the Second Circuit’s holding, if not addressed, could significantly affect the level of protection available under a variety of whistleblower statutes.
The Supreme Court will hear argument on the case in the fall and it will likely issue its ruling in the case in early 2024. The case will be interesting to watch as it could significantly affect the difficulty for whistleblower plaintiffs to establish claims that they were retaliated against for the whistleblower activities.
When it comes to the big award that the SEC announced last week, the Financial Times Alphaville has a “low-confidence bet” that it was tied to the WhatsApp probe, which also happened to be the subject of an SEC announcement yesterday, and Bloomberg reported that the SEC is continuing to investigate “off-channel communications” at other brokers.
– Liz Dunshee
Last week, State Street Corporation announced three new publicly available data sets that will show portfolio allocation trends among large institutional investors. Here’s more detail:
– The Institutional Investor Holdings Indicator tracks the aggregate holdings of institutional investors across three asset classes: stocks, bonds and cash. Shifts in asset allocations convey information about how investors view the economy and their outlook for markets. When investors are bullish on markets, they tend to hold more stocks; when they are bearish, they tend to hold more cash and bonds. The Holdings Indicator is calculated daily and will be released monthly.
– Institutional Investor Risk Appetite Indicator is based on flows—buying and selling activity—rather than portfolio positions. It reveals whether investors, in aggregate, are buying or selling risky assets. For example, selling less risky bond or stock investments to buy riskier ones would drive up this score. While the Holdings Indicator tells us about current positioning, the Risk Appetite Indicator tells us about the direction of travel. The Risk Appetite Indicator is calculated daily and will be released monthly.
– The State Street S&P Global Institutional Investor Carbon Indicator tracks the overall exposure of institutional investor portfolio holdings to carbon emissions. Leveraging aggregated and anonymized custody and accounting data from State Street, together carbon emissions data from S&P Global powered by S&P Global Sustainble1, the indicator will show how institutional investors are managing their exposure to carbon risk, and what is driving shifts in these exposures. The Carbon Indicator will be released annually.
The tracker for carbon emissions is useful for anyone attempting to understand & predict investor behaviors on that topic, because it is a data-based alternative to the various polls & surveys that float around from time to time. In fact, State Street has already used the data for a new report – which shows that from March 2022 – March 2023, investors’ emissions exposures increased, while intensity exposures fell.
I don’t know whether that outcome was something investors were intentionally striving for, but it shows how complex and nuanced asset allocation is during this time of the energy transition – versus just “woke” or “not woke.” Here are the highlights from the study (also see this ESG Today article):
• The carbon emission exposures of institutional portfolios rose in between March 2022 and March 2023, returning to levels higher than any seen since 2019: portfolio companies emitted more carbon overall with emissions exposure rising over 8% from 3.93 to 4.27 million metric tonnes year over year.
• The efficiency with which portfolios leverage carbon emissions to generate revenues, however, increased, with carbon intensity exposure falling over 10% from 152 to 137 tonnes emitted per $1 million of revenue. These contrasting moves represent, respectively a sharp reversal in the trend of declining exposures and a continuation of the trend in efficiency gains that we observed between March 2018 and March 2021. The low emissions exposures of 2020 and 2021 were driven in part by global declines in emissions due to COVID restrictions, and these have reversed as the economy has recovered.
• From March 2022 to March 2023, high-carbon sectors, such as Energy, outperformed the overall market as oil prices remained elevated. These companies performed well even as the regulatory price of emissions rose in Europe.1 As a result of these higher valuations, Energy holdings represented a larger share of many institutional portfolios; this repricing was the main driver of increased weighted-average carbon emissions exposure at the portfolio level, while the general post-COVID renewal of economic activity accompanied increased emissions by Energy, Materials, and Utilities firms. The decrease in intensity exposure was driven by Energy and Materials companies – in this case by their reductions in company carbon intensity as firms grew revenues faster than emissions.
• Despite the fact that carbon-intensive sectors like Energy outperformed the market in 2022, many sophisticated decarbonization strategies also outperformed. This seeming paradox is due to the fact that sophisticated decarbonization strategies hold sector weights neutral and tilt toward more carbon efficient firms within each sector. For example, they might hold overall exposure to the Energy sector constant, but tilt toward more efficient emitters within that sector. As a result, they can benefit when energy prices rise since they are tilted toward companies that use energy more efficiently.
– Liz Dunshee
