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.
Last week, the SEC joined several other financial regulators to propose joint data standards under the Financial Data Transparency Act of 2022. In its announcement of the rulemaking, the SEC notes that eight other financial regulators have proposed or are expected to propose the joint standards: the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Consumer Financial Protection Bureau, the Department of the Treasury, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the National Credit Union Administration, and the Office of the Comptroller of the Currency. The announcement goes on to note:
The proposed joint standards would promote interoperability of financial regulatory data across the agencies by establishing common identifiers for entities, geographic locations, dates, and certain products and currencies.
“This proposal will make financial data more accessible, uniform, and useful to the public,” said SEC Chair Gary Gensler. “Consistent data standards will make it easier for financial institutions to file reports across multiple agencies. They also will help regulators be more effective and efficient in carrying out our oversight functions.”
In addition, the proposal would establish a principles-based joint standard with respect to data transmission and schema and taxonomy formats, which would enable financial institutions to submit high-quality, machine-readable data to the agencies.
Comments on this rulemaking are due 60 days following publication of the proposing release in the Federal Register.
I am really looking forward to hosting the “Game Show Lightning Round: All Star Feud” segment at the 2024 Proxy Disclosure Conference, it will be fun! In order to make this game show a success, we need your participation! I won’t be able to say “Survey Says!” unless you actually participate in our survey. Please take a moment to respond to the latest anonymous poll. We’ll gather and rank responses by popularity. Responses will be hidden, so you will have to join day 1 of our Conferences to hear whether your response made the “most popular” list.
If you have not done so already, today is a great day to sign up for our “2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences,” which are taking place on October 14th & 15th in San Francisco. There is also a virtual option if you are unable to attend in person. You can register by visiting our online store or by calling us at 800-737-1271.
John noted back in March that the Deputy Attorney General Lisa Monaco had announced a new pilot whistleblower program that provides corporate whistleblowers with financial awards. The pilot program has now been launched by the DOJ’s Criminal Division. The announcement of the launch of the pilot program notes:
The Department of Justice’s Criminal Division has launched a Corporate Whistleblower Awards Pilot Program to uncover and prosecute corporate crime. Under this pilot program, a whistleblower who provides the Criminal Division with original and truthful information about corporate misconduct that results in a successful forfeiture may be eligible for an award.
As described in more detail in the program guidance, the information must relate to one of the following areas: (1) certain crimes involving financial institutions, from traditional banks to cryptocurrency businesses; (2) foreign corruption involving misconduct by companies; (3) domestic corruption involving misconduct by companies; or (4) health care fraud schemes involving private insurance plans.
If the information a whistleblower submits results in a successful prosecution that includes criminal or civil forfeiture, the whistleblower may be eligible to receive an award of a percentage of the forfeited assets, depending on considerations set out in the program guidance. If you have information to report, please fill out the intake form below and submit your information via CorporateWhistleblower@usdoj.gov. Submissions are confidential to the fullest extent of the law.
Companies that voluntarily self-report within 120 days of receiving an internal whistleblower report may be eligible for a presumption of a declination under the Criminal Division’s Corporate Enforcement and Voluntary Self-Disclosure Policy if the company reports to the Department before the Department contacts the company.
The DOJ provides detailed guidance about the program, a fact sheet and an intake form. The announcement notes that a claim form will be available soon.
The announcement of a new DOJ pilot program for whistleblower awards, combined with the continued effectiveness of the SEC’s whistleblower program (a few weeks ago the SEC announced a $37 million award to a whistleblower) leads one to the inevitable question, what should companies do now in light of these developments?
I think it is a good time to take a close look at your company’s whistleblower program and processes to carefully assess whether it provides potential whistleblowers with a fair and effective process for receiving and acting on complaints, so that whistleblowers feel comfortable raising their issues internally rather than running straight to the government. While it should always be clear that an employee can go to the government with their concerns, one would hope that employees only see that option as a last resort. By having an effective internal process that ensures anonymity and prompt and appropriate follow-up (combined with an appropriate tone-at-the-top), a company can create a reporting culture that encourages an internal dialogue.
I encourage you to check out all of the great resources that we have posted in our “Whistleblowers” Practice Area. If you do not have access to all of the useful resources that we have in our Practice Areas, become a member of TheCorporateCounsel.net today by visiting our online store.
The latest issue of The Corporate Counsel has been sent to the printer. It is also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format. The issue includes the following article:
– Time Is Up for Resource Extraction Issuers: Our Last-Minute FAQs
As I mentioned a few weeks ago, the SEC’s resource extraction issuer disclosure requirements require Form SD filings by September 26 for calendar year-end companies that are subject to these new requirements. Here are a few of the FAQs from the latest issue of The Corporate Counsel:
Will the SEC revisit the latest resource extraction issuer payment disclosure requirements?
In the time since the SEC adopted the latest rule and form amendments requiring the disclosure of payments by resource extraction issuers, an item has been included in the Regulatory Flexibility Act Agenda which references the resource extraction issuer disclosure rules. The more detailed description of the line-item states: “The Division is considering recommending that the Commission review the rules under section 1504 of the Dodd-Frank Act to determine if additional amendments might be appropriate.” In the Spring 2024 Reg Flex Agenda, the action is categorized in the proposed rule stage and projects a date for the proposal of April 2025, well after the date when Form SD filings are first required. At this point, all hope is lost that any changes will be made or a delay in the deadline will be adopted prior to the September 2024 Form SD filing deadline for calendar year-end companies.
When is the first Form SD required to be filed?
In the 2020 rulemaking, the SEC adopted a two-year transition period which specified that a resource extraction issuer will be required to comply with Rule 13q-1 and Form SD for fiscal years ending no earlier than two years after the effective date of the final rules. The final rules became effective on March 16, 2021, with initial Form SD filings due no later than 270 calendar days after the end of an issuer’s next completed fiscal year. Therefore, the deadline for companies with a fiscal year ended December 31, 2023 is September 26, 2024. While the example provided in the Adopting Release specifically referred to September 30, 2024 as the initial due date for a company with a fiscal year-end of December 31, 2023, the September 26, 2024 date is the actual due date for the Form SD under the transition provisions.
There is nothing in the rule that would facilitate combining the Form SD for conflict minerals disclosure with the Form SD for payments made by resource extraction issuers, given that they have different filing deadlines (the Form SD for conflict minerals disclosure is due on May 31 for the prior calendar year).
What happens if the Form SD is not timely filed?
The failure to timely file a Form SD pursuant to Exchange Act Section 13(q) does not cause a company to lose its eligibility to utilize Form S-3. As noted in Question 115.04 of the Securities Act Forms CDIs, in determining eligibility for use of Form S-3, the requirement that the company has filed in a timely manner all reports and materials required to be filed during the prior 12 calendar months refers only to Exchange Act Section 13(a) or 15(d) reports and Exchange Act Section 14(a) and 14(c) materials. Further, a report that is deemed to be “furnished” and not “filed” does not impact a company’s Form S-3 eligibility, as noted in Securities Act Forms CDI Question 115.07. As noted above, a Form SD disclosing payments made by resource extraction issuers is required to be furnished under Exchange Act Section 13(q), therefore the failure to timely file does not impact a company’s Form S-3 eligibility. It is conceivable, although perhaps unlikely, that the SEC could bring an enforcement action against a company for a failure to file a Form SD under Section 13(q). It is also possible that the Staff of the Division of Corporation Finance could utilize the comment process to ask a company why it has not filed a Form SD to disclose payments by resource extraction issuers.
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The extraordinary developments with generative AI over the past year and a half have created challenges for all types of companies, as they seek to have their public disclosures keep up with the pace of change and avoid regulatory scrutiny. This recent Alston & Bird alert does a nice job of surveying those disclosure challenges and describing the SEC filing, SEC Enforcement and shareholder litigation trends. The alert notes:
While the SEC’s focus on AI disclosures will likely encourage an increasing number of companies to disclose AI-related risks, issuers have already started incorporating relevant risk disclosures into their annual Form 10-K filings, with over 40% of S&P 500 companies including such disclosures in their 2023 Forms 10-K and mentions of AI during earnings calls rising by 77% (subscription req’d) in the fourth quarter of 2023.
Additionally, our qualitative analysis of AI-related risk disclosures in fiscal year 2023 Forms 10-K issued by Fortune 100 companies reveals several notable emerging trends. For example, we found that 46% of Fortune 100 companies included AI-related risk disclosures in their Forms 10-K and that such disclosures fall broadly into five buckets: (1) cybersecurity risk; (2) regulatory risk; (3) ethical and reputational risk; (4) operational risk; and (5) competition risk. These risk disclosures were not limited to a certain industry or sector, with a broad range of public companies making risk disclosures that fall into one or more of these buckets.
The SEC’s two recent enforcement actions involving AI are summarized, and the alert notes that, in recent years, private securities litigation has targeted issuers with AI-related claims. The alert ends with these key takeaways for public companies:
Although AI-related disclosures have become a new target in securities enforcement and litigation, companies and their counsel can take proactive steps to protect against future liability.
– Companies should ensure that disclosure counsel understands how the business uses and plans to use AI, and that the business understands the importance of consulting with legal counsel before making public representations about the company’s use of AI.
– Companies should also be aware that even general “puffery” remarks about the company’s use of AI may be scrutinized by the SEC or private plaintiffs, particularly in the context of “AI washing.”
– Public companies should remain aware of continuing SEC guidance, even in the form of SEC remarks, about crafting AI-related disclosures and should consider those remarks when determining how to approach such disclosures.
– Companies should consider whether and how to educate their boards of directors regarding the company’s use of AI (as well as AI use by competitors, significant vendors, and large customers, as applicable) and the related risks and benefits of such use, including with respect to the company’s disclosure obligations.
– Companies should take a broad and deep view of the potential risks posed by AI technologies and consider whether and how to best disclose such risks.
– Financial firms in particular should ensure that their policies and procedures and record-keeping requirements comply with the latest SEC guidance.
As the SEC Staff noted earlier this year, this topic will continue to be a focus at the SEC, and companies should continue to monitor their disclosure obligations in this rapidly changing space.
