If you were following Dave’s dispatches last week from the Northwestern Securities Regulation Institute, you know that the week was both informative & eventful. I always find it energizing to catch up with friends & fellow practitioners who come from across the country to geek out together over securities law. When you throw in a flash flood and a SPAC release, there is definitely a lot of bonding.
One thing that made this year extra special was that our editorial team for TheCorporateCounsel.net was there in force! If we didn’t catch you at this conference, let’s connect at the next one – the Proxy Disclosure & Executive Compensation Conferences will be here before we know it!
Traveling from a very snowy mid-Atlantic to a warmer (but very wet) Southern California this week reminded me of how much I miss summer at this time of year. Memorial Day weekend is always the unofficial start of the summer season, and this year it will serve to usher in the T+1 settlement cycle for U.S. securities markets. While I wouldn’t expect a ticker-tape parade to celebrate this momentous occasion, there will certainly be a lot of work in back offices around the country to facilitate the shorter settlement cycle.
Yesterday, SEC Chair Gary Gensler addressed the European Commission on the topic of a shortened settlement cycle, noting in the title of his speech that “Time is Money. Time is Risk.” Citing the meme stock insanity that was unfolding as President Biden took office, Gensler outlined how the market plumbing of clearing and settling transactions matters to the markets and investors, similar to how the plumbing in your house is so important, as demonstrated when your plumbing backs up. Gensler noted:
Shortening the clearance part of the market plumbing (the time to ensure that all parties agree to the trade details) also lowers risk. The sooner the parties have allocated, confirmed, and affirmed the trade information for their transaction, the lower the likelihood of a settlement failing since the parties will have more time to identify and resolve any potential errors. The Bank of International Settlements first recommended T+0 affirmations 22 years ago. A decade later, CPMI-IOSCO reaffirmed this in their Principles for Financial Market Infrastructures.
Shortening the cycle also means reducing the credit, market, and liquidity risks of the clearinghouse.
Lowering risks for market participants and clearinghouses, alike, reduces the likelihood that any one entity’s failure spreads risk to the financial system, making the system safer for everyone.
After providing a history of settlement developments over the years and around the world, Gensler noted the while many Americans will be celebrating the unofficial start of summer over Memorial Day weekend, the U.S. will transition to securities settlements of T+1 on May 28, 2024, returning us to “the settlement cycle that we had in the United States most of the first 50 years of Memorial Days.” Further, starting May 28, 2024, trades relating to initial public offerings will be shortened from T+4 to T+2. Gensler noted that both Canada and Mexico are joining the U.S. in moving to T+1 on Monday, May 27, 2024.
Gensler closed his speech by encouraging the European Union and the U.K. to shorten their settlement cycles to bring them in line with where North America will be when summer kicks off later this year.
Last week, Nasdaq Regulation published Issuer Alert 2024-1, which is focused on the impending changes to the settlement cycle and the impact on certain distributions with a record date after May 28, 2024. Nasdaq recently adopted a rule addressing this topic. With respect to regular distributions, the Nasdaq alert notes:
Among the rules and processes that are impacted by this change is Nasdaq Rule 11140(b)(1), which establishes the “ex-dividend date” for most distributions of cash, stock or warrants. The ex-dividend date is the date on which a security is first traded without the right to receive that distribution. While previously the ex-dividend date was generally one business day before the record date, that will change for distributions with a record date after Tuesday, May 28, 2024, and the ex-dividend date after that will generally be the same date as the record date. In addition, Nasdaq and the other Self-Regulatory Organizations have agreed with the DTCC, which processes distributions for publicly traded securities, that no securities will be ex-divided on May 28, 2024, to avoid confusion about the proper settlement.
Issuers should be aware that the first RECORD DATE to which the new ex-dividend date ruling rationale will be applied will be Wednesday, May 29, 2024.
With respect to large distributions, the alert notes:
Nasdaq Rule 11140(b)(2) establishes the ex-dividend date for cash dividends or distributions, stock dividends and/or splits, and the distribution of warrants, which are 25% or greater of the value of the subject security. These distributions are declared ex dividend on the first business day following the payable date for the distribution. While Nasdaq did not amend Rule 11140(b)(2), in order to avoid an ex-dividend date of May 28, 2024 under this rule, issuers are advised to NOT set May 24, 2024 as the payment date for any dividend or distribution that may exceed 25% of the value of the subject security.
For more information regarding the SEC’s move to T+1 settlement, check out our “Settlement” Practice Area.
Before we can enjoy the summer season we need to get through the upcoming proxy season, and as you prepare of the onslaught, you will definitely want to join me, Mark Borges, Alan Dye and Ron Mueller next Tuesday at 2:00 pm Eastern time for our annual webcast “The Latest: Your Upcoming Proxy Disclosures.” We are planning to delve into a wide range of topics, including:
– Clawbacks
– Pay vs. Performance Disclosures
– CD&A Enhancements & Trends
– Shareholder Proposals
– Proxy Advisor & Investor Policy Updates
– Perquisites Disclosure
– ESG Metrics & Disclosures
– Say-on-Pay & Equity Plan Trends, Showing “Responsiveness” to Low Votes
– Status of Related Rulemaking
This is a webcast that you don’t want to miss! I know that I always learn a lot during our annual program.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE who require advance notice) for this 1-hour webcast. You must submit your state and license number prior to or during the program. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.
The SEC’s years-long effort to address its concerns with SPACs culminated in the adoption of final rules yesterday by a 3-to-2 vote. As summarized in this fact sheet, the final rules, among other things:
1. Require additional disclosures about SPAC sponsor compensation, conflicts of nterest, dilution, the target company, and other information that is important to investors in SPAC IPOs and de-SPAC transactions;
2. Require, in certain situations, the target company in a de-SPAC transaction to be a co-registrant with the SPAC (or another shell company) and thus assume responsibility for the disclosures in the registration statement filed in connection with the de-SPAC transaction;
3. Deem any business combination transaction involving a reporting shell company, including a SPAC, to be a sale of securities to the reporting shell company’s shareholders; and
4. Better align the regulatory treatment of projections in de-SPAC transactions with that in traditional IPOs under the Private Securities Litigation Reform Act of 1995 (PSLRA).
In addition, the Commission provided guidance for assessing when SPACs may meet the definition of an investment company under the Investment Company Act of 1940 and regarding statutory underwriter status under the Securities Act of 1933 in connection with de-SPAC transactions.
The final rules will become effective 125 days after publication in the Federal Register, and compliance with the Inline XBRL tagging requirements will be required 490 days after publication of the final rules in the Federal Register.
Commission Peirce noted in her dissenting statement: “[t]he Commission has failed to identify a problem in need of a regulatory solution. To the contrary, the rule will exacerbate a problem—the shrinking pool of public companies—by closing down one road into the public markets.” In his dissenting statement, Commissioner Mark Uyeda notes in his dissenting statement: “there may be a far simpler explanation behind what the Commission is doing for SPACs: we simply do not like them. In order to achieve this desired outcome, the Commission seeks to impose crushingly burdensome regulations on SPACs as a form of merit regulation in disguise.”
During the open meeting, Chair Gensler citing Aristotle, noted yet again a desire to treat “like as like” and, in that vein, to consider SPACs and the related de-SPAC transactions as alternative IPOs that should be subject to investor protections that are available to investors in traditional IPOs — including as it relates to disclosures and gatekeeper protections. This ignores that the business combination is subject to a state law process applicable to business combinations and that boards of directors have duties. And, of course, one wonders, is it truly “like as like” when companies that begin life as SPACs even once subject to the new, enhanced disclosure requirements will not be treated (once they cease being “shell companies” or former shell companies) like other filers? What would Aristotle have thought about this? A rhetorical question certainly since the great philosopher probably would not have known what to make of our securities laws.
As the blog notes, the final rules take into account only some of the concerns raised during the public comment period. The Commission determined not to adopt the controversial Rule 140a, which related to statutory underwriter status, and an Investment Company Act safe harbor. Instead, the Commission provided guidance on Investment Company Act and underwriter status.
Tune in today at 2 pm eastern for our “The ABCs of Schedule 13D and 13G” webcast to hear Scott Budlong of Barnes & Thornburg, David Korvin of Gibson, Dunn, Jennifer Nadborny of Simpson Thacher, and Andrew Thorpe of Gunderson Dettmer provide insights into the basics of beneficial ownership reporting, the changes to the reporting scheme resulting from the amendments, and the implications of the SEC’s new guidance on cash settled derivatives and Schedule 13D “group” formation.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE who require advance notice) for this 1-hour webcast. You must submit your state and license number prior to or during the program. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.
At the Northwestern Securities Regulation Institute yesterday, I moderated a panel discussion titled “Taking a Fresh Look at Your Company Policies.” I was fortunate to be joined by a great group of panelists: Courtney Kamlet, Vice President, Group General Counsel and Corporate Secretary at Vontier Corporation; Alex Lee, Professor of Law and Director, Center on Law, Business, and Economics at Northwestern Pritzker School of Law and Andy Thorpe, Partner at Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP. We delved into the impact of recent SEC rulemaking and enforcement activity on a number of key policies.
We kicked things off by focusing on the SEC’s recent initiatives on trading in a public company’s securities by the company’s employees, executives and directors (and related persons and entities), as well as the SEC’s recent enforcement actions that have advanced novel theories of insider trading liability. We noted how the SEC’s recent activity in this area has had a significant impact on the policies that companies implement to address these matters.
We addressed the need to step back and consider the purpose of the company’s insider trading policy to avoid a trend toward “mission creep” in those policies. We noted how the prospect of controlling person or agency liability prompts public companies to implement policies and procedures for the purposes of managing access to material nonpublic information and preventing insider trading by company employees, officers and directors. We also discussed how companies should revise their insider trading policies to reflect the SEC’s 2022 changes to Rule 10b5-1 to incorporate the new conditions and restrictions that the SEC imposed through those amendments.
On the topic of addressing gifts in the insider trading policy, we noted how companies should revisit their insider trading policy in light of the SEC’s controversial 2022 guidance by bringing gifts within the purview of the insider trading policy. In this regard, it is appropriate to eliminate exceptions from the insider trading policy’s provisions that are specified for gifts, and broaden the scope of the policy to contemplate “engaging in transactions” in company securities rather than just “buying” or “selling” company securities. As a result of the contemplated changes, gifts should generally be subject to the insider trading policy’s general prohibition on engaging in transactions in the company’s securities while in possession of material non-public information, the pre-clearance procedures and quarterly trading restrictions.
We also discussed the SEC’s novel insider trading theory that has been termed “shadow insider trading,” noting that it is appropriate to revisit language in the insider trading policy that addresses the trading of securities of other companies while aware of material nonpublic information, with the goal of being more specific as to the relationship with those companies and how the information is obtained by the individual in the course of their work for their employer, rather than generally prohibiting trading in other companies’ securities.
For more discussion of necessary changes to insider trading policies, check out our January-February 2023 issue of The Corporate Counsel.
During the “Taking a Fresh Look at Company Policies” panel that I moderated at the Northwestern Securities Regulation Institute yesterday, we discussed three compensation policies that companies should review in light of recent SEC action.
In light of the SEC’s recent focus on equity grant timing in Staff Accounting Bulletin No. 120 and new Item 402(x) of Regulation S-K, we discussed how companies should establish equity grant policies or revisit equity grant policies that have been adopted in the past. Equity grant policies have been an accepted corporate governance practice used to specify the timing of annual and off-cycle grants of equity awards, including both full-value awards and options. Equity grant policies will often contemplate annual grants of equity awards either at the same compensation committee meeting each year, or a specified number of days following the company’s release of earnings for the completed fiscal period following the meeting at which grants are approved by the compensation committee. With respect to off-cycle grants for new hires, individuals receiving promotions and retention awards, the equity award policy will typically specify monthly or quarterly dates for approval, particularly for grants to non-executive officer employees, subject to certain exceptions. In light of the SEC’s recent activity, companies should review their equity grant policy (or consider adopting such a policy) and should consider prohibiting the grant of awards within four days before or one day after filing of any Form 10-Q or 10-K or a Form 8-K with material nonpublic information, as well as limiting off-cycle grants to open window periods, or perhaps require consultation with the legal group to confirm there is no planned release of material nonpublic information that could impact the grant date value of an award.
On the topic of compensation clawback policies, we discussed the challenges of administering multiple clawback policies, and the impact that recent guidance from the DOJ’s Criminal Division regarding the importance of clawback policies to corporate compliance programs might have on the need to address a wider range of clawback triggering events or individuals than what is contemplated by the new exchange-compliant clawback policies adopted in 2023, which focus only on the company’s executive officers and the triggering event of financial statement restatements without regard to an executive officer’s misconduct. We also addressed the need to consider now how the board or the compensation committee will manage the timing of recovery in the event the clawback policy is triggered, as well as the method of recovery of compensation. We discussed the issues with enforcement of clawback policies generally, as well as the implementation of the restriction on indemnification for the recovery of incentive-based compensation in indemnification agreements and charter provisions.
Finally, in light of the SEC’s continued interest in pursuing enforcement actions against companies for disclosure and control violations related to perquisites, we discussed the need to adopt a perquisite policy addressing the following topics:
1. The underlying rationale for perquisites as an element of compensation and how perquisites fit within the company’s compensation approach;
2. The framework for identifying perquisites utilizing the SEC’s two-part;
3. The authorization for providing perquisites from the board or the compensation committee;
4. The methodology that the company uses for valuing perquisites for disclosure and tax purposes; and
5. The process for identifying, tracking, valuing and disclosing perquisites in accordance with the company’s disclosure controls and procedures.
We noted that, as with other company policies, such as the insider trading policy, the perquisites policy should be communicated to employees, and employees responsible for identifying, tracking, valuing and disclosing perquisites should receive training regarding the perquisites policy. Periodic follow-up training may also be appropriate, given that the perquisites that the company provides may change over time.
During the “Taking a Fresh Look at Company Policies” panel that I moderated at the Northwestern Securities Regulation Institute yesterday, we discussed how a focus on two key technology matters will require taking a fresh look at company policies.
We discussed how the SEC’s cybersecurity disclosure rules may require a number of adjustments to policies and procedures related to cybersecurity. Companies may need to establish or revisit a framework for assessing the materiality of cybersecurity incidents “without unreasonable delay” after discovery of such incidents in order to facilitate decisions about whether an incident must be disclosed under SEC rules. Companies also need to ensure that the disclosure process for material cybersecurity incidents is fully integrated with the company’s cybersecurity incident response policies and procedures, so there is a clear approach for escalate cybersecurity incidents to the appropriate personnel or the company’s disclosure committee for prompt disclosure decisions. Further, the company should ensure that robust disclosure controls and procedures are in place to identify and assess the actual or potential impact that cybersecurity incidents may have on the company.
A significant part of the response to the SEC’s new cybersecurity disclosure requirements involves revisiting disclosure controls and procedures to make sure that they address the current reporting of material cybersecurity incidents, including the nature, scope and timing of the incident and the impact or reasonably likely impact of the incident on the company, including on the company’s financial condition and results of operations, within the four business day deadline contemplated by new Item 1.05 of Form 8-K, as well as any information that was not determined or was unavailable at the time of the initial Form 8 K filing. Many companies had already adopted these types of disclosure controls and procedures in response to the SEC’s 2018 interpretive guidance, but now is a good time to review those controls and procedures in light of the specific requirements in Form 8-K.
In response to the SEC new requirements to disclose cybersecurity risk management, strategy and governance in a company’s annual report, companies should consider the overall approach to the management of cybersecurity risks and the company’s efforts to document that approach in applicable policies, procedures, board committee charters and governance guidelines. Companies may want to consider adopting new policies and procedures (or revise existing ones) to specifically address the roles and responsibilities of management and the board in the management and oversight of cybersecurity risks. Boards also may wish to revise committee charters and/or corporate governance guidelines to clearly articulate the delegation of responsibility for the oversight of cybersecurity matters and to document the interaction between management and the board (or the relevant board committees) on cybersecurity threats and incidents.
We also addressed the impact of developments with generative artificial intelligence (AI) on company policies. As public companies embrace generative AI capabilities, we discussed how they must carefully consider both the opportunities and the risks arising from new technologies and consider the overall governance approach that must be implemented to manage these opportunities and risks. For more on the potential risks associated with generative AI, check out our July-August 2023 issue of The Corporate Executive.
