Dave blogged last week about the SEC’s surprising FY24 Enforcement results. The SEC’s lengthy press release is organized by topic and is worth a read for whichever category (or categories) of Enforcement priorities might be most likely to affect your company.
This report from Cornerstone Research and the NYU Pollack Center for Law & Business also spotlights some interesting trends. As noted in their press release, some key Enforcement sweeps contributed to the results:
The SEC’s FY 2024 enforcement priorities were evident in the 38 actions that were part of five sweeps. Most prominent was the sweep of recordkeeping failures stemming from companies’ use of off-channel communications (22 actions). This led to an increase in actions with Broker Dealer allegations, with such actions jumping to 29% of all FY 2024 actions compared with 19% during the previous fiscal year. The SEC also brought seven actions for violations of the whistleblower protection rule in FY 2024, up from three in FY 2023.
Here are some other key takeaways from the report:
– While the average monetary settlement was higher than in FY 2023, the median monetary settlement was lower at $3.2 million in FY 2024 compared to $4.0 million in FY 2023.
– The percentage of public company and subsidiary defendants for which the SEC noted cooperation was at its highest level (75%) since FY 2019 (77%) and the second highest in SEED. The average from FY 2015 through FY 2023 was 64%.
– The SEC imposed $784 million in civil penalties in administrative proceedings in FY 2024, accounting for 54% of total monetary settlements. The $784 million was higher than the FY 2023 total of $694 million in civil penalties imposed.
– In FY 2024, the percentage of total monetary settlements from disgorgement and prejudgment interest in civil actions was 15%, the highest percentage since FY 2020.
– Public company and subsidiary defendants with admissions of guilt under the current Gensler administration totaled 66, more than double the number under Chair White (29) and more than seven times those under Chair Clayton (9).
Even though SEC Enforcement Director Gurbir Grewal left the SEC in early October, shortly after the agency’s fiscal year end, we are continuing to see activity. Cooley’s Cydney Posner has covered a few newer Enforcement actions that were announced in recent weeks. The allegations related to:
We’ve posted the transcript for our recent webcast – “SEC Enforcement: Priorities & Trends.” Our panelists – Hunton Andrews Kurth’s Scott Kimpel, Locke Lord’s Allison O’Neil, and Quinn Emanuel Urquhart & Sullivan’s Kurt Wolfe – provided their lessons learned from recent enforcement activities and insights into what the new year might hold. Topics addressed included:
– SEC Enforcement Activities in 2024 and Priorities for 2025
– Implications of Jarkesy for SEC’s Enforcement Program
– Monetary and Non-Monetary Penalties
– Accounting and Disclosure Actions
– Actions Targeting “Internal Controls”
– Self-Reporting and Cooperation Credit
– Coordination with DOJ Investigations
Members of this site can access the transcript of this program. If you are not a member of TheCorporateCounsel.net, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
Yesterday, with a little less than one month to go before the compliance date for the Corporate Transparency Act, a federal district court in Texas has issued a preliminary injunction that blocks the Department of Treasury from enforcing the reporting requirements under that statute. The court also stayed the compliance deadline. (Hat tip to my Fredrikson colleagues for alerting me! Here’s our memo.)
This holding – Texas Top Cop Shop v. Garland (E.D. Tex.; 12/24) – follows an Alabama decision from earlier this year that also found the CTA unconstitutional. In the Alabama case, FinCEN followed up with a notice that clarified the court’s order applied only to the specific plaintiffs in that litigation. Here, though, the court was very clear that its order applies to all entities – on a nationwide basis. Here’s an excerpt from the opinion:
Having determined that Plaintiffs have carried their burden, the Court GRANTS Plaintiff’s Motion for a Preliminary Injunction. Therefore, the CTA, 31 U.S.C. § 5336 is hereby enjoined. Enforcement of the Reporting Rule, 31 C.F.R. 1010.380 is also hereby enjoined, and the compliance deadline is stayed under § 705 of the APA. Neither may be enforced, and reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.
The court found that the statute is likely unconstitutional as outside of Congress’s power, and that the final rule implementing the CTA is likely unconstitutional for the same reason. With these CTA cases, all that time studying the commerce clause in law school has finally become relevant to what we do!
The U.S. Chamber of Commerce applauded the ruling. Here’s an excerpt from their release:
The preliminary relief will remain in effect until the conclusion of legal proceedings, at which point the court may enter a permanent injunction. In the meantime, the government will likely appeal the preliminary injunction.
Unless and until an appellate court overrules or narrows the injunction, no businesses are obligated to comply with the reporting requirements.
This Bloomberg article says that the DOJ hasn’t indicated yet whether it will appeal this holding. In the Alabama case from earlier this year, the DOJ appealed to the 11th Circuit. We’ll stay tuned for any updates or guidance from FinCEN, as well.
Recently, A&O Shearman announced the release of its Annual Corporate Governance & Executive Compensation Survey – its first as a combined firm. The survey covers trends in shareholder proposals, Delaware case law, executive compensation, and more. One article – on pg. 45 – provides a governance framework for generative AI that is particularly helpful. Here are a few high points:
– The need for and shape of corporate governance is driven by a number of features (and consequences) of generative AI. Broadly, these can be categorized into a few key factors: legal and regulatory risk, market dynamics and people. The article then delves into each of these.
– Companies fundamentally want to do 3 things: deploy AI quickly and effectively, deploy AI safely with demonstrated risk management to key stakeholders, and maintain effective corporate governance without expending significant cost and time. A solid governance framework can help with achieving these objectives.
– While some may consider a complete overhaul of corporate governance frameworks, we do not believe that a lengthy and expensive overhaul is necessary. Instead, organizations can leverage existing policies and governance processes. A central AI governance structure acts as the central hub of a wheel with existing policies acting as the spokes. We structure this central framework as a 3-part hierarchy: Responsible/Ethical AI Principles, Policy on Use and Use Case Deployment Policy. The article takes a close look at each part of this framework.
Download the survey for more tips on using a centralized governance structure to apply existing policies to AI issues.
In this 24-minute episode of the ““Women Governance Trailblazers” podcast, Courtney Kamlet & I interviewed Lily Yan Hughes, who is Chair of DirectWomen and Assistant Dean at Syracuse University College of Law. We discussed:
1. Lily’s career path, including her leadership of legal teams at Arrow Electronics, Public Storage and Ingram Micro, and her current roles with DirectWomen and NAPABA.
2. DirectWomen’s mission to increase the representation of women lawyers on corporate boards, and the criteria and steps for being involved.
3. The importance of adapting to different subject areas and demands.
Significant geopolitical issue that companies need to be monitoring right now, and how to help boards and businesses navigate them.
4. What law schools and industry organizations can do to prepare lawyers to advise on business risks and opportunities.
5. What Lily thinks women in the corporate governance field can add to the current conversation on the societal role of companies.
To listen to any of our prior episodes of Women Governance Trailblazers, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.
Here’s a scary stat from a Bain CFO survey that I shared last week on the Proxy Season Blog:
There are now about 1,000 activist campaigns per year, and 25% of CFOs expect their company to be a target in the next 2 years.
This Skadden memo says that lengthy director tenures are an increasingly important factor in activists’ decisions to target a company – and they aren’t doing companies any favors when a contested election goes to a vote, either. Here are the key takeaways:
– Proxy advisory firms and institutional investors increasingly view tenures over nine years as too long, questioning the independence of directors who have served longer than that.
– Board refreshment is a frequent demand of activists, so companies may find themselves vulnerable to activist campaigns if they have very long-serving directors.
– As boards review their own composition for skills and other attributes, they should explain to investors the value that long-serving directors bring to the board.
– While few U.S. companies have formal tenure limits, age limits are more common but less favored by proxy advisory firms.
The memo says that 67% of activist campaigns since 2021 have targeted companies with three or more directors who have served 10 years or more, according to Evercore’s Third Quarter 2024 Quarterly Review. As that last point above alludes to, recent survey results indicate that mandatory retirement is still a widely used tool for board refreshment – but companies are also amping up their evaluation practices.
The National Association of Manufacturers has filed its brief to appeal a February decision from the D.C. Federal District Court that would vacate the SEC’s 2020 rule to regulate proxy advisors. The rule was premised on the notion that proxy advisor services are a “solicitation” under Rule 14a-1 – and are exempt from information & filing requirements only if they comply with certain conditions, including giving companies an opportunity to review & respond to voting recommendations.
This blog from Cooley’s Cydney Posner reports details from NAM’s brief. Here’s an excerpt:
NAM professed that, in its statutory analysis, the district court made “three fatal errors.” First, NAM claimed, the district court failed to take into account “Congress’s express delegation of authority to the SEC to define statutory terms like ‘solicit.’” Citing Loper Bright (see this PubCo post), NAM contended, “when Congress expressly gives an agency definitional authority, the court must ‘independently identify and respect such delegations of authority, police the outer statutory boundaries of those delegations, and ensure that agencies exercise their discretion consistent with the APA.’”
In adopting its definition of “solicit”—a definition that “falls within the word’s acknowledged range of meanings”—the SEC was acting pursuant to Congress’s delegation, NAM asserted. As a result, NAM argued, the district court “should have ‘respect[ed]’ Congress’s explicit delegation, not overridden it in favor of a narrower interpretation.” This case, NAM argued, “presents a question of statutory construction: whether the SEC’s definitional amendment regarding ‘solicit‘ is consistent with the Exchange Act. That is the Court’s domain, not the SEC’s.”
Second, NAM looked to the “ordinary tools of statutory interpretation” to find a broad meaning for the term “solicit”: according to NAM, this broad scope is supported by contemporaneous authorities, the structure of Section 14(a), the “historical circumstances and remedial purpose of the Exchange Act,” and the “near-century worth of enforcement.”
Third, NAM contended that “the district court rewrote the statute by concluding that the SEC may only regulate proxy solicitors who have an interest in the underlying corporate ballot measure. The Exchange Act contains no such requirement.” Nothing about the term “solicit,” NAM argued, necessarily implies that the solicitor has an underlying interest in the matter submitted for a vote. “If a person asks a shareholder for their proxy—soliciting it in the most literal sense—and then votes based on a coinflip, that person would surely be subject to SEC regulation, despite lacking an interest in the measure’s outcome.
The district court’s conclusion to the contrary yields disastrous and absurd results. The Court should reverse.”
It’s not clear where we’ll go from here with this case and with proxy advisor regulation in general. The 2020 rule was adopted when Jay Clayton chaired the SEC – it was welcomed by companies and resulted from years of advocacy. Unsurprisingly, ISS promptly challenged the rule (and guidance that had preceded it), but the litigation has inched along and been confusing to follow, in part because the SEC partially repealed the rules in 2022. The rollback generated its own wave of lawsuits in the 5th Circuit – with the most recent decision on that front being that the SEC’s 2022 repeal was arbitrary & capricious and the 2020 rule should stay in place. So, that 5th Circuit decision was somewhat at odds with the one that NAM is challenging here, from the D.C. District Court.
Cydney notes that for this case, ISS’s brief is due in mid-January. The SEC had been aligned with NAM in this litigation, but it dropped out of the appeal last spring. This Bloomberg Law article says that the U.S. Chamber of Commerce has filed an amicus brief in support of NAM’s positions.
In their latest “Understanding Activism with John & J.T.” podcast, John and J.T. Ho were joined by Sean Donahue. Sean is Chair of the Public Company Advisory practice and Co-Chair of the Shareholder Activism & Takeover Defense practice at Paul Hastings, and his practice focuses on counseling public companies and their boards of directors on shareholder activism and takeover defense, mergers and acquisitions, capital markets transactions, securities regulation, and corporate governance matters.
Topics covered during this 35-minute podcast include:
How exempt solicitations differ from conventional proxy solicitations
Common exempt solicitation scenarios and when and how companies should respond
Will the trend toward use of exempt solicitations by pro- and anti-ESG proponents continue?
The goals of a typical “vote no” campaign and how these campaigns typically unfold
Impact of majority voting standards on the effectiveness of vote no campaigns
Defense strategies for vote no campaigns and how they differ from those used in a traditional proxy contest
What “zero slate” campaigns are and how they work
Potential advantages and disadvantages of a zero slate campaign for an activist
How companies should adjust defense strategies to address the threat of of a zero slate campaign
Are zero vote campaigns activism’s next big trend?
John and J.T.’s objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. They’re continuing to record new podcasts, which are filled with practical and engaging insights. I’ve really been enjoying them. Stay tuned for more!
We’re back from the holiday weekend and somehow heading into the final month of 2024. I don’t know about you, but I’ve come down with a case of the Mondays. So, it seems fitting to cover a topic that can sour even the best of days: delistings. The good news is, we’ve also got some tips for righting the ship.
This Honigman memo reports that more companies have been receiving notices of noncompliance with the Nasdaq Capital Market’s minimum stockholders’ equity requirement as the exchange reviews listed companies’ latest quarterly filings. Here’s an excerpt:
Nasdaq evaluates companies’ stockholders’ equity for purposes of compliance with the equity standard on a quarterly basis by reviewing the balance sheet data included in a company’s most recently filed Annual Report on Form 10-K or Quarterly Report on Form 10-Q. If the disclosed amount of stockholders’ equity is less than $2.5 million and the company also fails to meet the Nasdaq Listing Rule 5550(b)’s market value standard and net income standard, then Nasdaq will deliver a notice of deficiency to the company. Typically, such notice of deficiency is delivered within one business day to one calendar week following the company’s most recent Form 10-K or Form 10-Q filing. After receiving the notice of deficiency, the company has four business days to file a Current Report on Form 8-K announcing the receipt of the notice (as required both by Nasdaq rules, and Item 3.01 of Form 8-K). The Form 8-K deadline is based on the date that Nasdaq’s notice is delivered, and not on the date of filing of the Form 10-K or Form 10-Q.
With respect to the deficiency itself, the company has 45 calendar days from the date the notice is delivered from Nasdaq to provide to Nasdaq a compliance plan with the $2.5 million stockholders’ equity threshold. Acceptance of the plan is at Nasdaq’s discretion.
If the company’s plan is accepted, Nasdaq will grant the company an extension of up to 180 calendar days from the date the Company received the notice of deficiency. However, if the company does not regain compliance within the allotted timeframe, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that company’s securities listed on Nasdaq will be subject to delisting. The company would then be entitled to request review of that determination by a Nasdaq hearings panel.
The memo explains that while the stockholders’ equity standard is only one of three alternatives for complying with Rule 5550(b), pre-revenue and newly commercialized life sciences companies have had a harder time relying on the market value standard as of late, and the net income standard is typically also unavailable. So, the stockholders’ equity standard has become more important.
The memo goes on to provide a template for a successful compliance plan. Make sure to check that out, along with the other resources in our “Delistings” Practice Area.
Now that we’ve gotten the scary prospect of delisting out of the way, let’s turn to what you need to do to get (and stay) in compliance with the governance standards of your exchange.
One of my “go to” resources for quickly referencing independence and other requirements applicable to public company directors has long been Weil’s chart on those requirements. I was pleased to learn that the firm recently issued an updated version of that chart, which we’ve posted in our “IPOs” Practice Area. Check it out – it covers NYSE & Nasdaq listing standards for boards and committees, as well as SEC disclosure requirements relating to directors.
