The SEC has announced that the SEC Investor Advisory Committee will meet on Thursday, June 6 at 10:00 am Eastern, and one of the topics to be discussed will be the regulation of artificial intelligence. The agenda for the meeting notes:
The rapid advancements in AI technologies have brought about significant benefits and challenges for companies, investment managers and other market participants. As AI becomes increasingly integrated into various sectors, it is crucial to address key issues related to disclosures, and other important aspects of AI such as data controls, bias, and education to ensure ethical and responsible AI practices within the existing regulatory framework and within any new guidance or rules. This panel aims to discuss and provide insights on how the SEC may promote the advancement of AI by helping practitioners navigate these critical aspects.
As anyone who has confronted the discovery of SEC violations at a client knows, one of the hardest things to tackle is whether to self-report the matter to the SEC and what level of cooperation with the SEC Enforcement staff is appropriate if an investigation commences. Much has been said over the years about the topic of cooperation, but that certainly does not mean the topic is not ripe for further discussion. Recently, at the Securities Enforcement Forum West 2024 program, SEC Enforcement Director Gurbir Grewal addressed the topic again in a speech titled “The Five Principles of Effective Cooperation with the SEC.” Grewal began his speech with this explanation of how cooperation in an Enforcement investigation is taken into account:
As numerous recent enforcement matters have shown, there are real benefits to parties that cooperate with Commission investigations. These benefits can affect both the charges and the remedies the Division may recommend, and that the Commission may ultimately impose.
On the charging side, we may recommend bringing reduced charges or we may decline to recommend charges altogether. On the remedies side, we may recommend reduced or even zero civil penalties. And where there’s been real remediation that addresses the misconduct, that may impact whether we recommend undertakings and, if we do, their scope.
Orders in a number of recent settled actions also highlight another benefit: a finding by the Commission that a party provided meaningful cooperation. This lets parties publicly demonstrate their positive conduct in what may otherwise be an unfavorable context.
A key reason we recommend that the Commission reward cooperation is because it helps us move investigations more efficiently. That benefits all parties to an enforcement investigation. For one, timely investigations and resolutions address misconduct, protect investors, and promote accountability. As I’ve spoken about before, all of that helps to enhance public trust and confidence in our markets. And timely investigations that don’t result in enforcement recommendations also mean that the cloud of investigation doesn’t hang over an entity or an individual for longer than necessary.
Now, this doesn’t mean that if you do all of the things highlighted in recent orders discussing cooperation or what I discuss today, you’ll always get to a no penalty resolution or a declination. That’s because, as you know, all of this is highly fact dependent and there’ll always be situations where some charges and remedies are necessary no matter the level of cooperation. But the bottom line is this: you’re likely to experience better outcomes with cooperation than without it.
I’m sure there are those lawyers and clients, perhaps not in this room, that say, “hey, we’ll just take our chances that the SEC doesn’t learn of a violation or, if they do, we’ll cooperate then.” While you may have run the probabilities in your heads, I think that’s a very risky gamble, with the odds increasing in our favor every day. That’s because, given the success of the Commission’s whistleblower program, our improved use of data analytics, and our increased use of risk-based initiatives, it’s really no longer a question of if we’ll find out about a violation, but often when.
The speech goes on to highlight the five principles for effective cooperation, which are as follows:
– Principle one: the best cooperation starts early and well before the SEC gets involved, with self-policing.
– Principle two: once you discover a possible violation, self-report without delay.
– Principle three: don’t stop with the self-report. Remediate.
– Principle four: the type of cooperation that earns credit requires going above and beyond what’s legally required — more than simply complying with subpoenas without undue delay or gamesmanship.
– Principle five: collaborate with Enforcement Staff early, often, and substantively.
In wrapping up, Grewal notes: “while an enforcement investigation has the potential to feel like an adversarial process, it doesn’t have to be.”
The SEC Historical Society has announced a virtual program taking place on June 14 at 4:00 pm Eastern to recognize the inaugural awardees for its Isaac C. Hunt Jr. Hall of Honor. The announcement notes:
In 1962, “Ike” became one of the first African American attorneys at the SEC’s Division of Investment Management, then called Corporate Regulation and served as an SEC Commissioner from 1996 to 2002. To learn more about Ike Hunt, visit the special museum exhibit.
The Hall of Honor in his name recognizes African Americans who have made outstanding contributions to the financial regulatory community both while at the SEC and elsewhere. Recognizing the awardees in conjunction with the federal Juneteenth holiday helps raise public awareness of African Americans’ meaningful efforts in financial services while cementing the SEC Historical Society’s vital role as a guardian and promoter of the full history of the SEC.
The 2024 awardees are:
– Richard M. Humes, who served as Associate General Counsel for the Litigation and Administration Practice;
– Aulana L. Peters, who served as an SEC Commissioner from 1984 to 1988;
– Paul F. Roye, who served as Director of the Division of lnvestment Management; and
– Erica Y. Williams, who served as Deputy Chief of Staff for three chairs.
This virtual program will be hosted by Keir Gumbs, Principal, General Counsel at Edward Jones and SEC Historical Society Trustee. The SEC Historical Society’s announcement notes “[t]he program is part of a larger annual initiative to recognize, honor and preserve the historical contributions of people from diverse racial and ethnic backgrounds in the financial regulatory community.”
The Exchange Act celebrates its 90th birthday on June 6th. Among other things, that statute created the SEC (the FTC was the original regulator under the Securities Act). The SEC is commemorating that milestone with a webcast event featuring two panels, one comprised of former SEC chairs, and another featuring historian Michael Beschloss, legal scholar Joel Seligman, and former Maryland lieutenant governor Kathleen Kennedy Townsend. Lt. Gov. Townsend is also the granddaughter of the SEC’s first chair, Joseph Kennedy.
The SEC has a rich history that you can learn quite a bit about by visiting the SEC Historical Society’s website. For example, this excerpt from the website’s discussion of the early days of the SEC provides a reminder that strong policy disagreements among commissioners are nothing new:
The Securities Exchange Act required a bipartisan Commission. The two Republicans appointed by Roosevelt were highly experienced: George C. Mathews had directed the Wisconsin Public Utilities Commission before joining the FTC; and Robert E. Healy sat on the Vermont Supreme Court and ran an FTC investigation of public utility holding companies before joining the Commission.
Not surprisingly, some conflict arose during the sessions that the Commission held nearly every day during its first three months. Pecora continually pushed for a more adversarial approach, hoping that further revelations would lead to greater reform. Owing to his public utilities knowledge, Healy sympathized, but sided with Kennedy in the end. Landis and Mathews both agreed with the Chairman that the SEC could best establish its legitimacy and further constructive reform by easing regulations and accommodating business.
Although he respected the Chairman’s abilities, Pecora tired of being in the minority and resigned after six months. For the remainder of Kennedy’s tenure, the four Commissioners handled the heavy load alone.
The Library of Congress also has resources devoted to the Exchange Act and the SEC, including this blog on how the agency’s activities have made public company information more transparent and broadly available, and this group photo of the first commissioners.
Seated, left to right: Ferdinand Pecora, Joseph P. Kennedy, James M. Landis. Standing, left to right: George C. Matthews, Robert F. Healy.
The last time we checked in on the PPP loan program we found that the SBA had concluded that the level of fraud was apparently massive & that the loan forgiveness process was snarled in red tape. Now, bankrupt small business lender Kabbage, which was one of that program’s largest lenders, has agreed to pay up to $120 million to the federal government in order to resolve fraud allegations raised by the US Attorney for the District of Massachusetts. Here’s an excerpt from the US Attorney’s press release announcing the settlement:
The first settlement, which provides the United States with a claim for recovery of up to $63.2 million, resolves allegations that Kabbage systemically inflated tens of thousands of PPP loans, causing the SBA to guarantee and forgive loans in amounts that exceeded what borrowers were eligible to receive under program rules. As part of the settlement, KServicing Wind Down Corp. admitted and acknowledged that Kabbage double-counted state and local taxes paid by employees in the calculation of gross wages; failed to exclude annual compensation in excess of $100,000 per employee; and improperly calculated payments made by employers for leave and severance.
The United States alleged that Kabbage was aware of its errors as early as April 2020, yet Kabbage failed to remedy all incorrect loans that had already been disbursed and continued to approve additional loans with miscalculations. The resolution also provides for Kabbage to receive a $12.5 million credit for payments it previously returned to the SBA during the Department’s investigation of this alleged misconduct.
The second settlement, which provides the United States with a claim for recovery of up to $56.7 million, resolves allegations that Kabbage knowingly failed to implement appropriate fraud controls to comply with its PPP and BSA/AML obligations. In particular, the United States allege that Kabbage removed underwriting steps from its pre-PPP procedures in order to process a greater number of PPP loan applications and maximize processing fees.
The government further alleged that Kabbage knowingly set substandard fraud check thresholds despite knowledge of SBA’s concerns that fraudulent borrowers might seek to benefit from the PPP; relied on automated tools that were inadequate in identifying fraud; devoted insufficient personnel to conduct fraud reviews; discouraged its fraud reviewers from requesting information from borrowers to substantiate their loan requests; and submitted to the SBA thousands of PPP loan applications that were fraudulent or highly suspicious for fraud.
During the pandemic, we blogged about Kabbage’s problematic PPP loans to purported agricultural businesses located on Long Beach Island, NJ. In addition to being my summer vacation destination of choice, LBI has recently achieved notoriety for another summer resident’s regrettable outdoor decoration choices. Anyway, I can assure you that LBI has miles of beaches, and plenty of ice cream shops, seafood markets, restaurants and delis – but like most beach communities, it’s pretty devoid of agricultural businesses, unless the Wawa in Ship Bottom somehow counts.
As many of you know, we hold our conferences in conjunction with our friends at the National Association of Stock Plan Professionals (NASPP), which is hosting its own annual conference in San Francisco that week. NASPP has set July 26th as the early bird registration deadline for its conference. We thought it would make sense to have a consistent deadline, so we’ve decided to extend our early bird deal to that date as well.
Our early bird in-person Single Attendee Price is $1,750, which is discounted from the regular $2,195 rate! If you can’t make it in person, we also offer a virtual option so you won’t miss out on the practical takeaways our speaker lineup will share, and we offer discounted rate options for groups of virtual attendees. You can register now by visiting our online store or by calling us at 800-737-1271.
Weil recently issued “The Big Three & ESG,” a report that provides guidance on BlackRock, State Street & Vanguard’s voting policies on key ESG issues. The report also addresses important policy changes announced by the Big Three in 2024, summarizes the expectations of these asset managers concerning company practices and disclosures around selected ESG topics, and highlights areas where failing to meet expectations may result in votes against directors. Here’s an excerpt with some practice pointers for public companies:
Refine Approach to Shareholder Engagement. Companies should review agendas and goals for engagement meetings with the Big Three, to ensure they reflect shareholder engagement priorities and can address as appropriate areas where the company may not be currently meeting expectations. Companies should ensure that directors and senior management participating in engagement meetings are well-briefed on material ESG-related risks and opportunities, current disclosures and practices relating to ESG topics, and do’s and don’ts of shareholder engagement.
Identify Vulnerabilities. Companies should review their disclosures and practices in light of the Big Three’s policies and guidance, to help identify where one or more of the Big Three may vote against directors and/or support shareholder proposals. Companies may work with proxy solicitors to determine the expected support of the Big Three and other major shareholders on ballot items, as well as the expected recommendations of proxy advisory firms. To reduce the risk of significant votes against directors, companies should assess director vulnerabilities and may wish to conduct additional shareholder outreach.
Refresh Materiality Analysis as to ESG-Related Risks and Board Oversight. Given significant recent ESG developments, companies should refresh their materiality analysis relating to ESG-related risks, and how ESG-related risks are integrated into the company’s enterprise risk management framework that facilitates risk identification, assessment, mitigation and monitoring. Companies should also review how the board provides oversight of material ESG-related risks and opportunities, and how this is reflected in board committee charters and related disclosure.
The report also recommends that companies confirm that their ESG narrative is cohesive across SEC filings, sustainability reports, company websites and other materials. In planning ESG disclosures for the year ahead, the report suggests that companies consider refining their ESG disclosures on certain ESG topics to better address the Big Three’s expectations.
A recent survey of 600 C-Suite executives by PwC and The Conference Board found that although they felt that boards did a pretty good job in traditional areas of responsibility, executives felt that they fell short when it came to emerging areas of oversight responsibility. This excerpt from the survey’s introduction suggests that executives also perceive overboarding as a significant concern:
Executives continue to express confidence in their boards in traditional areas such as strategy and knowledge of key business risks but are less confident about areas such as digital transformation and ESG. We’re seeing a significant increase in executives who think directors are unprepared, perhaps in large part because executives see an issue with overboarding — their top complaint. This may be one of the reasons a record-high 92% of executives advocate replacing at least one director on their board.
At least 70% of executives surveyed said that their boards were proficient in providing oversight in traditional areas such as corporate strategy, key business risks and opportunities, and executive comp. However, only a little more than 50% of those executives said that their boards were proficient in addressing the impact of digital transformation/emerging technologies and non-climate ESG risks and strategy. Finally, only 48% felt that their boards had a good grasp on US and international ESG reporting requirements.
As most of our readers know, our friend and colleague Liz Dunshee is on medical leave and has spent the last few weeks here in Cleveland recuperating from thoracic surgery at the Cleveland Clinic. Liz has asked me to thank everyone for their good wishes and to let you know that she’s doing well and is heading home to Minneapolis today. We know that you join us in continuing to wish her a speedy recovery and look forward to having her back with us soon!
Last month, Meredith blogged about the ongoing kerfuffle over whether Delaware corporations should consider reincorporating in another jurisdiction. In that blog, she cited a Wilson Sonsini memo pointing out that one of the big factors that might prompt a corporation to remain in Delaware is the ability to access the Delaware judiciary’s corporate law expertise. According to a recent blog from Keith Bishop, one newly converted Nevada corporation appears to want to keep that access:
I was doubly surprised to come across the following provision in the articles of incorporation of a corporation that had recently converted from a Delaware corporation to a Nevada corporation:
Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery in the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer, other employee or stockholder of the Corporation to the Corporation or the Corporation’s stockholders . . . (iv) any action to interpret, apply, enforce or determine the validity of these Articles of Incorporation or the Bylaws . . .
The corporation’s preference to have a Delaware court interpret and apply Nevada law is one reason that Keith was “doubly surprised” by this provision. More importantly for companies that might be interested in this kind of “Nevada-ware” alternative, the other reason for his surprise was the failure of the articles to include at least one Nevada court as a forum for internal actions, which is required by Nevada’s statute.
By the way, I’m very pleased with myself for the “Nevada-ware” moniker, which I think I’ve coined. It will be interesting to see if other companies that opt to move away from Delaware try to figure out ways to take the parts of Delaware they like with them as they move to their new homes. Anyway, if Nevada-ware corporations become a thing, just remember you heard it here first.
