One of the many claims brought by the plaintiffs in the In re Plug Power Inc. Stockholder Derivative Litigationchallenged the adequacy of board reporting and monitoring systems for responding to SEC comment letters — alleging inadequate oversight under Caremark. Here’s the factual background from this Stinson blog:
The Company received five comment letters from the SEC between mid-2018 and early 2021 . . . The allegations reflect that the Audit Committee discussed SEC letters during that period, although there was scant mention of those letters in the minutes.
As the memorandum opinion notes, to state a Caremark claim, alleged facts must show either (1) “the directors utterly failed to implement any reporting or information system or controls” or (2) “having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.”
To support their information systems claim the Plaintiffs argued:
SEC comment letters generally present a distinct risk that requires its own monitoring system beyond the ambit of the Audit Committee; and
The Audit Committee discussions were not sufficiently robust.
The court ultimately found that the plaintiffs didn’t plead facts sufficient to meet the “high bar” to hold directors personally liable for a failure of oversight and dismissed the Caremark claims.
The Court noted that Delaware law does not dictate what structure a reporting system must take. Rather, under Delaware law, “how directors choose to craft a monitoring system in the context of their company and industry is a discretionary matter.” That is, the law requires courts to exercise good faith oversight, “not to employ a system to the plaintiffs’ liking.”
Turning toward the allegation that the Audit Committee discussions were not sufficiently robust, the Court noted the “absence of regular board-level discussions on the relevant topic” “alone is not enough for the [c]ourt to conclude a board of directors acted in bad faith.” Plaintiffs’ disagreement with the adequacy of the Audit Committee’s or Board’s consideration of the SEC comment letters did not mean that the Board failed to make a good-faith effort to establish a system.
As to the Plaintiff’s red flag allegations, the Court doubted receipt of an SEC comment letter alone was a red flag. Even if the comment letters constituted a red flag, it was not reasonable to conclude based on the facts alleged that the Board ignored them in bad faith. Plug Power’s system in place worked to some degree—Plug Power responded promptly to each of them and the Audit Committee received reports about them.
That said, the opinion doesn’t rule out the possibility that similar allegations could be successful under different circumstances.
It bears noting that Plaintiffs’ Caremark allegations were particularly underdeveloped. One can imagine a situation where the absence of any discussion on a central compliance risk in Board or committee minutes is sufficient to supply the inferences that Plaintiffs seek, at least where the risks are more severe and the absence of discussion far more glaring. But this case was an afterthought to the Securities Action. And the Caremark claim was an afterthought to the Brophy claims. And the Amended Complaint reflects all of this—facts shoved into the boxes of belatedly raised theories. The inferences just were not there.
Earlier this week, Chairman Atkins, Commissioner Peirce, Commissioner Uyeda and Commissioner Crenshaw all addressed the Crypto Task Force Roundtable on Tokenization. Chairman Atkins analogized the movement of securities from off-chain to on-chain systems to the transition of audio recordings from vinyl to cassette to digital — noting that regulation needs to keep up with innovation.
Commissioner Crenshaw channelled Dr. Malcolm in her remarks and focused less on how the Commission could support the push toward tokenization and more on whether it should. While proponents argue that tokenization can facilitate a move to “T+0,” she says that may not be a good thing (and not just to avoid burnout of us lowly securities lawyers). Here’s an interesting snippet from her remarks — especially for folks looking to better understand the mechanics of our markets.
But the settlement cycle, while shorter than it used to be, is a design feature, not a bug. The intentional delay built in between trade execution and settlement provides for core market functionalities and protection mechanisms.
– For example, the settlement cycle facilitates netting. Roughly speaking, netting allows counterparties to settle a day’s worth of trades on a net basis rather than trade-by-trade. The sophisticated, multilateral netting that occurs in our national clearance and settlement system drastically reduces the volume of trades requiring final settlement. On average, 98% of trade obligations are eliminated through netting. This allows the current system to handle tremendous volume. It’s a key reason why our markets withstood sustained, record-breaking trade volume in recent weeks without major failures.
– Netting also facilitates liquidity. Because the vast majority of trades are “netted” and don’t require settlement, they don’t require an exchange of money. If A sells to B, B sells to C, and C sells to A, these trades are paired off and eliminated. A, B, and C can each retain their capital, as compared to a bilateral instant settlement over a blockchain, where each would have given up its cash for at least some period of time.
– Another important consideration is that instant settlement would generally disfavor retail investors, many of whom currently rely on the ability to submit payment after placing orders.
– We must also remember that critical compliance activities take place during the settlement cycle. These include checks designed to identify and prevent fraud and cybercrime. When red flags go up, the ability to pause a transaction and investigate is essential for investor protection and broader concerns like national security and counterterrorism.
For these and other reasons, it is not at all clear that shortening the existing settlement cycle is desirable or feasible. Regulators and major market participants, here and abroad, have persuasively argued otherwise.
Issues with same-day settlement have been debated before. The SEC sought comment on the path toward same-day settlement during the proposal phase of the shift to T+1, and Commissioner Peirce had laid out a few similar issues for specific comment, including whether the move would unnecessarily increase trading costs or affect market structure in ways that decrease liquidity.
It’s time again for the five-year benchmark survey run by the Commerce Department’s Bureau of Economic Analysis (BEA). This can sneak up on you because you may be required to respond even if you don’t routinely file BEA survey responses and regardless of whether the BEA contacts you. Here are some “quick facts” on the survey from this Fried Frank alert:
– The BE-10 responses are due by May 30, 2025, or by June 30, 2025 for filers with 50 or more foreign affiliates. The reporting period for the BE-10 is the company’s 2024 fiscal year.
– Reporting firms include any U.S. person that held, directly or indirectly, at least 10% of the voting interest in a foreign affiliate at the end of the U.S. company’s 2024 fiscal year.
– Requested information includes details on each of the U.S. person’s foreign affiliate’s ownership, industry classification, total sales, employment figures, exports, imports, and certain financial information
On Friday, the Trump Administration released a new Executive Order targeting “overcriminalization” in Federal regulations. Here’s more from the fact sheet.
– The Order discourages criminal enforcement of regulatory offenses, prioritizing prosecutions only for those who knowingly violate regulations and cause significant harm.
– Strict liability offenses, which don’t require proof of bad intent, are generally disfavored.
– The Order requires each agency, in consultation with the Attorney General, to provide to the Office of Management and Budget (OMB) a list of all enforceable criminal regulatory offenses, the range of potential criminal penalties, and applicable state of mind required for liability. Agencies must post these reports publicly and update them annually.
– Criminal enforcement of offenses not publicly posted is strongly discouraged, and the Attorney General must consider the amount of public notice provided regarding an offense before pursuing investigations or charges.
– The Order instructs agencies to explore adopting a guilty-intent standard for criminal regulatory offenses and cite the authorizing statute.
– Agencies must publish guidance on referring violations for criminal enforcement, factoring in harm, defendant’s gain, and awareness of unlawfulness.
– The Order does not apply to immigration law enforcement or national security functions.
This memo from litigation boutique, Dynamis, says this policy shift might benefit individuals and businesses in heavily regulated industries like crypto and securities.
– Cryptocurrency and Financial Technology: Companies dealing in cryptocurrency often find themselves navigating unclear or rapidly evolving regulations issued by agencies like the Treasury Department (Financial Crimes Enforcement Network), the Securities and Exchange Commission (SEC), and others. For example, there are regulations on money transmission (18 USC 1960), anti-money-laundering (AML) requirements, and securities registration that may apply to crypto transactions – violation of some of these rules can lead to criminal charges if deemed “willful.”
A crypto startup may unknowingly violate a financial regulation (perhaps by failing to implement an AML program), and regulators could refer the case for criminal prosecution. The new Executive Order signals that if a company in the crypto/fintech space unintentionally falls afoul of a vague rule, it should not be reflexively treated as criminal. Only serious, knowing violations (for example, a company deliberately flouting known rules concerning anti-money laundering) would merit criminal prosecution under the order’s policy.
– Securities and Corporate Regulation: The securities industry has long been subject to dual enforcement: regulatory agencies (like the SEC) handle most violations civilly, but the Justice Department can prosecute egregious securities law violations criminally (such as willful fraud, insider trading, etc.). There are numerous SEC regulations governing filings, disclosures, broker-dealer practices, and more. Many of these regulations carry potential criminal penalties if someone “willfully” violates them (often under statutes like the Securities Exchange Act) . . . The line between a civil enforcement action and a criminal case in securities is murky, and often comes down to intent and magnitude of harm.
The Executive Order reinforces that line by instructing that criminal prosecution is “most appropriate” for those who knew what the rules forbade and deliberately chose to violate them, causing substantial harm. Minor or technical violations, such as violations of disclosure rules that often arise in criminal microcap cases, would be less likely to be referred as criminal matters under the new policy. This doesn’t decriminalize securities laws, but it does aim to reserve the “criminal” label for the clearest bad actors, not every compliance violation.
So we might see fewer SEC referrals to the DOJ for potential criminal prosecutions, but that doesn’t mean individuals will be off the hook. As Liz noted back in February, during his previous tenure as a Commissioner, now Chairman Atkins focused on individual accountability over corporate penalties.
Health and wellness news has been abuzz about centenarians, but another kind of centenarian is of particular interest to this audience — auditors that have been retained by one public company for over 100 years. This Ideagen blog says the number of 100+ tenured auditors has nearly doubled since 2016 — even as some notable companies have switched long-tenured auditors due to EU regulations. That’s right — the percentage of long-tenured auditors also depends on geography — with the US (and, as John previously pointed out, particularly Ohio for some reason) being a “blue zone” for this purpose. Here’s a reminder from the blog:
Europe and the United States have differed on their approach towards the prospect of mandatory auditor rotations. During the early 2010’s the PCAOB investigated requiring mandatory auditor rotations for public companies in an attempt to improve auditor independence. This proposal was debated and ultimately nixed in 2014 after hundreds of comment letters were received from corporate board members addressing concerns about the potential for inexperienced auditors, especially in specialized sectors, and lower audit quality.
The European Union has taken a vastly different approach to the United States. In 2016, new regulations were introduced in the EU requiring companies to rotate their auditor every 10-24 years and conduct an audit tender process every 10 years.
The blog cites independence concerns and a desire to increase competition among auditors as reasons to mandate firm rotation, but it also notes that the data confirms notably larger average audit fees as a result of mandatory rotation due to significant ramp-up costs.
In the US, audit firm tenure continues to correlate with company size:
– Large accelerated filers have the longest average audit tenure of 19.4 years
– Accelerated filers have an average audit tenure of 9.5 years
– Non-accelerated filers have the lowest average audit tenure of 6 years
For folks new to this space, keep in mind that while there’s no mandatory audit firm rotation in the US, SEC rules require the lead and concurring partners to rotate off of their public company client engagements after five years and—upon rotation—to be subject to a five-year “time out” period before being permitted to return to that engagement in those roles. Other audit partners on the engagement are subject to a seven-year rotation requirement and a two-year “time out” period. Check out our “Auditor Engagement” Handbook for more!
I really enjoyed listening to the latest episode of Women Governance Trailblazers. Courtney and Liz were joined by Eun Ah Choi, Senior Vice President, Global Head of Regulatory Operations at Nasdaq, and the episode is chock-full of helpful career development and substantive tidbits that you’ll want to know — and apply — now. Tune in to hear them discuss:
– How Eun Ah’s corporate governance, M&A and securities regulatory skillset has contributed to her success in roles that span Wall Street, private practice, public service at the SEC and her current senior leadership role at Nasdaq
– Eun Ah’s insights on adapting to new organizations and roles
– How companies can set themselves up for success in complying with Nasdaq’s listing standards, and recommendations for making public markets more attractive
– Emerging policies and initiatives that boards, counsel, and investors should be watching worldwide
– The role of mentorship in Eun Ah’s career
To listen to any of the prior episodes of Women Governance Trailblazers, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If you enjoy hearing Liz and Courtney chat with trailblazing women in the corporate governance field, you can support the podcast by subscribing to and rating it while you’re there! And, if there are governance trailblazers whose career paths and perspectives you’d like to hear more about, Courtney and Liz always appreciate recommendations! Drop Liz an email at liz@thecorporatecounsel.net.
On Friday, Liz pulled together a highlight reel of SEC actions on crypto since January — showing the agency’s concerted effort to act quickly on this topic. Commissioner Peirce also spoke on crypto at least twice last week — in a speech and on Bloomberg’s Trillions Podcast. But Congress has plans of its own and has also been making moves. The latest is the release by members of the House Financial Services Committee and Agriculture Committee of a discussion draft of a bill that would generally shift oversight of digital assets from the SEC to the CFTC — a long-standing wish of the industry. This Eversheds Sutherland alert explains how:
Specifically, the draft bill would amend the definition of “security” in the Securities Act of 1933 and the Securities Exchange Act of 1934 to expressly exclude “digital commodities.” To fall within the digital commodity definition, digital assets must come from “mature blockchain systems” – open-source, decentralized, fully automated networks – with no single entity owning more than 20% of the token supply.
The draft bill further proposes that secondary market trading of digital commodities, under specific conditions, would not be subject to SEC oversight. These exemptions for secondary transactions would not apply if the transactions involved purchasing an interest in the revenues, profits or assets of the issuer – more akin to equity or institutional offerings.
As written, the draft bill appears to exempt from SEC regulation the issuance and secondary trading of many of crypto’s most popular tokens, such as Ethereum, Solana, BNB, and Cardano, all seemingly meeting the definition of “digital commodity.” The draft bill sets forth procedures for how digital commodity exchanges would register with and be regulated by the CFTC.
Suffice it to say, the regulatory landscape for digital assets is rapidly shifting and changes are coming from all sides — keeping up with the developments is a full-time job. Latham recently released a “US Crypto Policy Tracker” – check it out for the current state of executive order, legislative, regulatory and industry group developments!
In addition to the welcome new Liz shared last week about NYSE reducing fees that apply during the first five years of an initial listing, the SEC also recently approved an amendment to the NYSE Listed Company Manual (Section 102.01) that makes it easier for companies organized outside North America to meet the exchange’s minimum stockholder distribution standards.
Section 102.01A sets forth distribution criteria for the initial listing of domestic companies based on number of stockholders, number of publicly held shares, and/or average monthly trading volume, as applicable. Section 102.01B currently provides that, when considering a listing application from a company organized under the laws of Canada, Mexico, or the United States (“North America”), the Exchange will include all North American holders and North American trading volume in applying the minimum stockholder and trading volume requirements of Section 102.01A.11 Section 102.01B further provides that when listing a company from outside North America, the Exchange may, in its discretion, include holders and trading volume in the company’s home country or primary trading market outside the United States in applying the applicable listing standards, provided that such market is a regulated stock exchange.
Under the revised version, when a company from outside North America not listed on any other regulated stock exchange is seeking initial listing in connection with its IPO, NYSE will include all holders on a global basis. NYSE posited that the old rule did not reflect the “speed and reliability of links that enable investors who hold securities in brokerage accounts in countries outside North America to trade in the U.S. listing markets.”
Given the ease of transfer of securities between different countries in the contemporary securities markets, there is no reason why the holders of a listed company’s securities outside of North America cannot be active real time participants in the U.S. trading market . . . [T]his is particularly relevant to the listing of a foreign company listed on the Exchange when it does not have an exchange listing in its home market because the Exchange will be the only exchange trading market for such company and any investor wishing to trade in such company’s securities on a regulated exchange market will have to do so on the Exchange.
This Ropes & Gray blog notes, “The new rule is intended to enhance the NYSE’s competitiveness in attracting non-U.S. company listings, particularly relative to Nasdaq, which already permits worldwide stockholder counts.”
We’ve recently posted another episode of our “Understanding Activism with John & J.T.” podcast. This time, John and J.T. Ho were joined by FGS Global’s John Christiansen. They spoke with John about a variety of topics, including how investor relations and shareholder engagement are being shaped by the need to prepare for shareholder activism. Topics covered during this 24-minute podcast include:
– How the recent 13D/13G CDIs have changed investor engagement practices.
– The increasing importance of retail investor engagement.
– The challenging M&A market’s impact on activism.
– How current economic uncertainty is affecting operational activism.
– “Break the glass” plans and how to use them effectively
– Using earnings calls and investor days to defend against activism
– Tips on better communicating the company’s story to investors
This podcast series is intended to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. John and J.T. continue to record new podcasts, and they’re full of practical and engaging insights from true experts – so stay tuned!
In fact, they’ll be hosting a LIVE version of the podcast at our October Conferences! They’ll be speaking with The Activist Investor’s Michael Levin to discuss how activists approach projects and how companies can benefit from an activist perspective. Following that discussion, Elizabeth Gonzalez-Sussman of Skadden and Dan Scorpio of H/Advisors Abernathy will share their top takeaways for public companies. Check out the full agenda and speakers — and register now to get the early bird rate!
Yesterday, the SEC announced that it had settled the civil enforcement action that it filed against Ripple Labs and two of its executives back in December 2020, which had resulted in an injunction and penalty last summer. Here’s an excerpt from the SEC’s announcement:
The settlement agreement provides, among other things, that the Commission and Ripple would jointly request the district court to issue an indicative ruling as to whether it would dissolve the injunction against Ripple in the district court’s August 7, 2024 final judgment and order the escrow account holding the $125,035,150 civil penalty imposed by the final judgment be released, with $50 million paid to the Commission in full satisfaction of that penalty and the remainder paid to Ripple.
The Settlement Agreement further provides that, following an indication from the district court that it would dissolve the injunction and release the escrowed penalty amounts as requested, the Commission and Ripple will seek a limited remand to the district court for that relief, after which they would move to dismiss their respective appeals from the final judgment, which are currently pending in the United States Court of Appeals for the Second Circuit. The Commission and the defendants filed the settlement agreement with the district court as part of their joint request for an indictive ruling.
The Commission’s decision to exercise its discretion and seek a resolution of this pending enforcement action rests on its judgment that such resolution will facilitate the Commission’s ongoing efforts to reform and renew its regulatory approach to the crypto industry, not on any assessment of the merits of the claims alleged in the action. Furthermore, the Commission’s decision to resolve this enforcement action does not necessarily reflect the Commission’s position on any other case.
The 2020 case alleged that Ripple’s digital token was a “security” and that the company had conducted an unregistered public offering. The 2024 court decision awarded the Commission a fraction of the nearly $2 billion in penalties that the SEC had pursued, but it is still significant that the SEC is relinquishing its limited win. Commissioner Crenshaw issued this dissenting statement arguing that the settlement undermines the court’s order and the SEC’s credibility and is not in the interest of investors. Here’s an excerpt:
This settlement is part of a broader, programmatic shift to dismiss our registration cases in the crypto context.[5] In remodeling our legal stance in this area, we have pointed to a new “regulatory path,” that the agency will purportedly pursue based on the work of the SEC’s Crypto Task Force.[6] But, even if the Crypto Task Force re-writes registration rules for crypto securities in the future, that does not somehow alter the rules that were in place at the time that Ripple violated them. Further, we have no hint of what those future rules might look like or how long it will take to put them in place—if ever. So, we are today accepting a diluted settlement, that erases the investor protections we already won, based on a non-existent framework that may or may not come to fruition potentially years from now, on the basis that the current framework in place—of applying the facts to the law—was not industry or innovation-friendly.
It’s true that the SEC has done a 180 on crypto over the past few months – taking several steps to provide support and guidance to the fintech industry, which aligns with January’s Executive Order on digital assets. From the highlight reel:
I’ve probably even missed a few! This settlement shows that the SEC is not only making a concerted effort to act quickly on this topic – it is also putting its money where its mouth is.
