As I read The Shadow SEC’s defense of the SEC’s status as an independent agency, it occurred to me that in today’s politically fraught environment, it’s hard for the SEC or any agency to be truly independent, whether the President can replace its leadership at will or not. For example, just look at what’s transpired at the SEC over the past month or so.
On his way out the door, former SEC Chair Gary Gensler gave a steroid shot to his crypto enforcement team in an effort to ensure that the crypto crackdown continued after his departure. Then, during the final week of Biden’s presidency, the SEC decided to file an enforcement action against Elon Musk for alleged Section 13(d) violations.
I’m firmly in the camp of those who believe that Elon Musk thinks he’s above the law and should be held to account, but the optics of an 11th hour decision like this couldn’t be worse. In fact, Bloomberg Law is reporting that this decision looked so bad that it prompted Commissioner Uyeda to take the extraordinary step of asking Enforcement staffers if they were willing to sign off on a statement that their recommendation to pursue an action against Musk was not politically motivated. (That’s not a great look either.)
After Trump’s inauguration, the SEC immediately put the kibosh on the climate change rules and responded to Gary Gensler’s efforts to install a “dead hand pill” for his crypto crackdown by replacing the agency’s existing crypto & cyber unit and, more notably, exiling its top crypto litigator to Siberia. Of course, all of this came on the heels of years of Commission actions in which we’ve usually been able to count on important policy issues being decided by a 3-2 party line vote.
After an extended period of this kind of partisan tug of war at the SEC, it’s a little hard not to raise an eyebrow when members of The Shadow SEC say things like if the SEC wasn’t independent, “[c]oncentrated interest groups can be expected to pressure each new administration to change regulation in ways that might not be in the interest of investors and the public and that might not enhance capital formation.” C’mon – seriously? I mean, have these folks been paying attention to anything that’s happened at the SEC over the past decade or so?
I think the basic problem isn’t the leadership at the SEC or other independent agencies, it’s that Congress’s sclerotic legislative process has put these people in an untenable position. As I’ve previously blogged, the simple truth is that Congress can’t get its legislative act together, so whatever party controls the White House will continue to push the people running federal agencies to accomplish what really should be legislative objectives. Until that’s addressed, a lot of agency actions are going to look highly partisan and pretty far from anyone’s idea of “independent.”
The January-February issue of the Deal Lawyers newsletter was just sent to the printer. It is also available online to members of DealLawyers.com who subscribe to the electronic format. This issue includes the following articles:
– M&A Buyers Beware: Who Bears the Cost of Defense of a Third-Party Claim?
– Practice Points Arising from Albertsons’ Claims Against Kroger for Breach of their Merger Agreement
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
I frequently whine to my colleagues about how whenever it’s my week to blog, substantive topics seem to dry up and I’m reduced to blogging about things like the mortal dangers posed by pickleball. This week, however, I’ve got nothing to whine about, and a big reason for that is that Acting SEC Chair Mark Uyeda is making news this week every time he opens his mouth.
The latest example of this occurred yesterday, in opening remarks that Commissioner Uyeda delivered at a meeting of the SEC’s Small Business Advisory Committee. If you work with small, unlisted companies, this excerpt from those remarks suggests that a really big and helpful change might be in the works:
This afternoon, the Committee will discuss the challenges faced by small public companies that are not listed on a national securities exchange. I believe that scaled disclosure requirements is important for smaller companies, as the costs for preparing disclosure can disproportionately burden smaller companies. Small public companies that are not listed on an exchange may face even more unique challenges. For example, unlisted companies with a public float of less than $75 million are ineligible to use shelf registration statements.
There may also be investor protection concerns associated with small companies whose stock have relatively low liquidity and may be more prone to manipulation. However, do these concerns justify not permitting small companies – that may be in greater need for capital than larger, listed companies – to use shelf registration statements and quickly access the capital markets when timing and other conditions are ideal?
Unlisted companies face a lot of challenges when trying to raise capital in public offerings, and while the ability to streamline the offering process by using shelf registration statements for primary deals won’t address them all, it will definitely make it easier for those companies to give the public capital markets a shot.
Despite recent criticisms of some of its decisions and the high-profile moves out of the state by a handful of public companies in response to them, Delaware’s Chancery Court has long been regarded as part of the “secret sauce” that makes the state the preferred jurisdiction of incorporation for most public companies. Texas is attempting to replicate that through the creation of its own business court, and now it appears that Nevada is laying the groundwork to do the same. This excerpt from a recent Business Law Prof Blog explains what Nevada’s up to:
The Nevada Legislature will consider a constitutional amendment this session to create an appointed business court. This is the language of the resolution as it was introduced by Assembly Members Joe Dalia and Shea Backus. Full disclosure, I strongly support Nevada creating this legal infrastructure and have helped on this issue.
The amendment would authorize the Legislature, at some future date, to create an appointed business court with “exclusive original jurisdiction to hear disputes involving shareholder rights, mergers and acquisitions, fiduciary duties, receiverships involving business entities and other commercial or business disputes in which equitable or declaratory relief is sought.”
It envisions creating a court comprised of at least three judges to be appointed by Nevada’s Governor off of a list of nominations to be provided by an existing Commission on Judicial Selection. In contrast to the short terms for the Texas business court, these appointed judges would serve six year terms.
The blog notes that this effort has plenty of hurdles to clear. The amendment will need to be approved by the Legislature twice and then face a public referendum. Since Nevada’s Legislature only meets once every two years, if the bill passes, it will need to pass again in 2027 before it can be presented to voters. Only after that happens could the Legislature enact legislation creating a business court.
Over on LinkedIn, Prof. Ann Lipton has a post in which she cites a Reuters’ article on how recent moves by the SEC’s Acting Chair Mark Uyeda have shifted power from investors to the board. She says that the newly proposed DGCL amendments would amplify this shift:
The proposed changes to Delaware law represent a hard swing allocating power away from shareholders (as litigants and information seekers) to corporate insiders. In the past, Delaware has justified changes of this sort by pointing out that, unlike 40 years ago, today’s shareholder base is largely institutional and sophisticated.
But the incoming SEC has already made some opening dramatic moves to undercut the power of institutional investors (the changes to 13D reporting take my breath away), and I expect many more on the horizon, from jawboning about ESG votes to limiting proxy advisors.
So we’re seeing the same moves at the federal and state levels, namely, a recalibration to put relatively unlimited discretion back in the hands of corporate insiders.
The proposed DGCL amendments have prompted a flood of commentary from academics & practitioners, but if you’re looking to understand the background and implications of the amendments, you need to spend some time with this 21-page deep dive from Morris Nichols. (Also check out the materials I referenced in my DealLawyers.com blog this morning.)
Last month, Commissioner Peirce offered a preview of coming attractions that we might see from the SEC over the next few years. Her remarks focused more on general policy approaches than on specific regulatory initiatives. In contrast, Acting SEC Chair Mark Uyeda got down to “brass tacks” yesterday in a speech delivered at the Florida Bar’s Annual Federal Securities Institute. Commissioner Uyeda discussed potential regulatory changes affecting both private and public companies. Here are some of the highlights from his remarks:
– Enhance Retail Investors’ Ability to Invest in Exempt Offerings. Commissioner Uyeda said that he has directed the Staff to explore ways to “explore regulatory changes that enable greater retail investor participation in the private markets, whether through modifications to the accredited investor definition or otherwise, while continuing to ensure that those investors are protected against fraud and bad actors.” In addition to discussing the need to review the accredited investor definition, Commissioner Uyeda also signaled that efforts to simplify some of the regulations governing exempt offerings may also be on the table.
– Revise EGC Definition & Duration to Increase IPO Attractiveness. Commissioner Uyeda praised the JOBS Act’s creation of an on-ramp to compliance with Exchange Act reporting requirements for emerging growth companies. However, he observed that in recent years, the SEC has not provided any relief for EGCs in several new rules, including cybersecurity disclosure, the Rule 10b5-1 amendments, and the clawback rules, and has provided only limited relief to EGCs for its climate disclosure rules. Accordingly, he said that he has directed the Staff to “review the EGC definition and recommend potential changes, including how a company qualifies and the duration for which it retains the status. As part of its review, I have also requested the Commission staff to consider how EGCs could benefit from having an on-ramp to comply with certain existing disclosure obligations.”
– Review & Update Filer Status Thresholds. Commissioner Uyeda observed that the SEC’s rules on filer categories are needlessly complex and do not provide sufficient scaled disclosure benefits. As an example, he notes that a company with a $250 million public float is subject to the same disclosure requirements as a company with a $250 billion public float. That’s because the SEC hasn’t changed its “accelerated filer” and “large accelerated filer” thresholds since they were established in 2005. To make matters worse, because the smaller reporting company definition has been updated, there’s a lot of overlap, which in turn has resulted in increased complexity and compliance costs. Commissioner Uyeda says that the SEC “should be considering whether to re-align the Commission’s filer categories to reflect the size and makeup of public companies today. Following any potential re-alignment, the Commission should also review its disclosure requirements and identify rules that should apply only to the largest companies.”
It’s important to keep in mind that Commissioner Uyeda is serving as Acting Chair, so the final say on the SEC’s priorities for the upcoming year will rest with Paul Atkins after he’s confirmed. Still, as we’ve previously said, both Commissioner Uyeda and Commissioner Peirce worked closely with Atkins during his prior tenure at the SEC, so I’d wager this is a pretty good preview of the SEC’s regulatory priorities when it comes to promoting capital formation.
On Friday, a Maryland federal court entered a preliminary injunction enjoining enforcement of certain provisions of the two anti-DEI executive orders that President Trump issued in January. This excerpt from Gibson Dunn’s memo on the decision summarizes the scope of the Court’s ruling:
The court enjoined the government defendants from freezing or terminating existing “equity related” contracts and grants (pursuant to EO 14151). With respect to EO 14173, the court enjoined the government defendants from (1) requiring federal contractors and grant recipients to certify that they do not “operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws,” (2) requiring federal contractors and grant recipients “to agree that [their] compliance in all respects with all applicable Federal anti-discrimination laws is material” for purposes of the False Claims Act, and (3) bringing any enforcement action targeting “DEI programs or principles.” However, the court declined to “enjoin the Attorney General from. . . engaging in investigation” of DEI programs.
The memo also points out that although the injunction is nationwide in scope, it is directed to the “Defendants” in the case, which means that the government is likely to take the position that non-defendant agencies, which include, among others, the Defense Department, the State Department and the Treasury Department, aren’t subject to the injunction unless they are acting in concert with the defendants.
Meredith recently hosted a Pay & Proxy Podcast on “DEI Disclosures and Metrics Following the January 2025 Executive Orders.” She was joined by Maj Vaseghi and Betty Huber, both of whom are Latham partners, and Mark Borges, who is a principal at Compensia and an editor at CompensationStandards.com. This 27-minute podcast addressed a wide range of disclosure and compensation-related issues associated with DEI programs and metrics, including:
– Students for Fair Admissions v. Harvard and private sector cases involving Section 1981 and Title VII of the Civil Rights Act
– The recent Executive Orders including the directive to federal agencies to identify potential “compliance investigations” aimed at deterring DEI programs constituting “illegal” discrimination
– How companies are considering legal risk, political risk, talent risk and business risk in preparing disclosures
– Companies, especially government contractors, weighing changes to the use of DEI metrics in compensation programs
– Disclosures regarding DEI metrics in compensation programs
– Human capital management disclosures in Form 10-Ks
– Required and voluntary board diversity disclosures in proxy statements after vacatur of Nasdaq’s “disclose or comply” board diversity rule
– ISS’s announcement that it will indefinitely halt consideration of certain diversity factors in making vote recommendations on director elections
– Voluntary proxy disclosures on DEI policies and practices
– Looking at committee charters and corporate governance guidelines
– Weighing whether to maintain the timing or delay publishing voluntary ESG reports
– Setting metrics for 2025 compensation program
These podcasts are ordinarily available exclusively to members of CompensationStandards.com, but we know many of our members are struggling with issues arising out of the recent anti-DEI executive orders, so we decided to make this podcast available to members of TheCorporateCounsel.net as well. If you’re looking for more high-quality, practical insights into executive compensation issues, you need a subscription to CompensationStandards.com. If you’re not yet a subscriber, you can sign up for a membership today online or by emailing sales@ccrcorp.com or by calling us at 800-737-1271.
Last week, Acting Solicitor General Sarah Harris sent a letter to Senator Charles Grassley informing the Senate that the DOJ had determined that statutory removal restrictions on administrative law judges were unconstitutional and that it would no longer defend them in court:
In Free Enterprise Fund v. PCAOB, 561 U.S.477(2010), the Supreme Court determined that granting “multilayer protection from removal” to executive officers “is contrary to Article II’s vesting of the executive power in the President.” Id. at 484. The President may not “be restricted in his ability to remove a principal [executive]officer, who is in turn restricted in his ability to remove an inferior [executive] officer.” Ibid.
A federal statute provides that a federal agency may remove an ALJ “only for good cause established and determined by the Merit Systems Protection Board on the record after opportunity for hearing before the Board.” 5 U.S.C. 7521(a). Another statute provides that a member of the Board” may be removed by the President only for inefficiency, neglect of duty, or malfeasance in office.” 5 U.S.C. 1202(d). Consistent with the Supreme Court’s decision in Free Enterprise Fund, the Department has determined that those statutory provisions violate Article II by restricting the President’s ability to remove principal executive officers, who are in turn restricted in their ability to remove inferior executive officers.
What does this mean for the SEC’s ALJs? Well, here’s what Project 2025 has to say about what should be done with the SEC’s administrative proceedings:
Eliminate all administrative proceedings (APs) within the SEC except for stop orders related to defective registration statements. The SEC enforcement system does not need to have both district court cases and APs. Alternatively, respondents should be allowed to elect whether an adjudication occurs in the SEC’s administrative law court or an ordinary Article III federal court.
I guess that last sentence leaves a little wiggle room, but if I were an SEC ALJ, I think I’d be updating my resume. Other commenters are more emphatic in their assessment of the impact of the DOJ’s move. For example, former SEC staff member John Reed Stark headlines his LinkedIn post on the DOJ’s action as follows: “Expect All SEC Administrative Law Judges to be Fired Forthwith.”
Warren Buffett issued his always highly anticipated annual letter to Berkshire Hathaway stockholders over the weekend. While the media has focused primarily on his advice to Donald Trump, his aversion to foreign stocks & his defense of Berkshire’s cash hoard, it’s his continuing distaste for what compliance with GAAP does to Berkshire’s operating income that caught my eye.
As we’ve pointed out in blogs about his 2023 and 2020 letters, railing against GAAP’s impact on Berkshire’s operating income has become a bit of a hobby horse for Warren Buffett. His problem is ASC 321, which requires Berkshire Hathaway to run fluctuations in the value of its public company equity investments through its income statement. Buffett thinks that results in a misleading presentation, and this excerpt from this year’s letter explains why:
Our measure excludes capital gains or losses on the stocks and bonds we own, whether realized or unrealized. Over time, we think it highly likely that gains will prevail – why else would we buy these securities? – though the year-by-year numbers will swing wildly and unpredictably. Our horizon for such commitments is almost always far longer than a single year. In many, our thinking involves decades. These long-termers are the purchases that sometimes make the cash register ring like church bells.
Fair enough, but here’s the thing – Berkshire made a business decision to take multi-billion-dollar minority stakes in enormous companies. What if it had to sell one or more of those positions? That’s what ASC 321 is getting at – it shows users of the financial statements the market risk to which Berkshire is exposed. Interestingly, despite his preference for reporting Berkshire’s non-GAAP operating earnings, he acknowledges the magnitude of this risk a few pages later:
With marketable equities, it is easier to change course when I make a mistake. Berkshire’s present size, it should be underscored, diminishes this valuable option. We can’t come and go on a dime. Sometimes a year or more is required to establish or divest an investment. Additionally, with ownership of minority positions we can’t change management if that action is needed or control what is done with capital flows if we are unhappy with the decisions being made.
As I said in my blog about Buffett’s 2020 letter, GAAP does have a conservative bias, but the disclosures it requires usually provide insights into a business that shouldn’t be ignored, and when people complain that GAAP’s distorting their company’s financial statements, it’s usually a sign that the GAAP requirements are highlighting something that makes them uncomfortable. To Warren Buffett’s credit, he acknowledges what that something is in this year’s letter.