The enduring regulatory drama over digital assets has focused much attention these past few years on the definition of “security” in the Securities Act and the Exchange Act and the largely judge-made interpretive gloss which outlines the boundaries of that definition. But whether something is a security continues to come up in other contexts, and one recent case being considered by the Second Circuit Court of Appeals revisits the almost sacrosanct conclusion that syndicated loans are not securities. If such loans were deemed to be securities, that could up-end the $2.5 trillion syndicated loan market.
In this Troutman Pepper piece, they note that last Thursday the Second Circuit heard oral arguments in the appeal of Kirschner v. JPMorgan Chase Bank, N.A. The lower court had determined that the syndicated loans in question were not securities, analyzing the question by applying the four-factor “family resemblance” test first articulated by the Supreme Court in Reves v. Ernst & Young. That test presumes that every note is a security other than certain enumerated categories of notes and notes bearing a strong family resemblance to one of those categories. After providing key takeaways from the oral arguments, the Troutman Pepper piece notes:
Regulations, like those applicable to high-yield bonds, entail extra risk. Regulations also carry administrative burdens and costs arising from compliance issues. If loans were securities, investors would pass on these risks and costs to borrowers in the form of higher pricing, stricter terms, and narrower access to capital. These changes would upset the reasonable, settled expectation of market participants that loans as an asset class are not regulated securities, and would lead to inefficiencies in the market.
The Second Circuit panel seemed resistant to interfere with the syndicated loan market where the SEC and federal regulators had to date been unwilling to do so. Although the panel questioned whether the size of the market called for greater scrutiny, the panel implied that regulators could step in if they wanted to do so, and in their absence, sophisticated investors have participated in the market on the basis of this lack of regulation, without the need for Securities Act protections.
The Second Circuit is expected to issue an opinion soon.
The early observations about pay versus performance disclosure have been rolling in, which are providing a useful overview of the trends for those filers who are still working on their disclosures. In this blog post from equitymethods, the observations are based on 36 companies that have provided the disclosure as of March 3, 2023. These tended to be larger filers with a majority having over $1 billion in market capitalization. The blog post notes the top five areas of risk gleaned from the sample:
1. Failing to provide Item 402(v)(5) relationship disclosures altogether
2. Omitting one of the required Item 402(v)(5) relationship disclosures (such as the company TSR to peer TSR comparison)
3. Adding supplemental disclosure that violates the requirement that any supplemental disclosure be clearly labeled as supplemental, not be made more prominent than the required disclosure, and not be misleading
4. Including a non-financial measure in the Tabular List prior to providing three financial measures (e.g., there are two financial measures and one non-financial measure)
5. Using an Item 201(e) peer group that is a broad market index and therefore falls within Item 201(e)(1)(i) but not the requirement that it fall within Item 201(e)(1)(ii), which excludes any broad market index
The blog post also notes that some filers omitted the granular equity calculations required and many filers did not provide much disclosure about assumptions.
Last week, John noted my comments on what appears to be a hiring spree in the Corp Fin, with Corp Fin’s Office of Chief Counsel seeking candidates for a general position and one with a focus on compensation and benefits. It looks like the Corp Fin hiring spree is continuing in full force, with Corp Fin now seeking candidates for the Office of Mergers and Acquisitions and the Office of International Corporate Finance.
The posting for the position in the Office of Mergers and Acquisitions notes that the Division is seeking someone with three years of post-JD experience with at least two years of dealing with securities matters and M&A, while the posting for the position in Office of International Corporate Finance notes that the Division is also seeking someone with three years of post-JD experience, with at least two years of dealing with securities matters, particularly those involving foreign private issuers and global capital markets.
As I noted for the Office of Chief Counsel positions, these are great opportunities for someone who is a few years into a career in private practice or in-house and would like to expand their horizons while enhancing their credentials. Working in these offices (I still call them “Support” offices but no doubt the nomenclature has changed in the past 15 years) gives you access to so many great opportunities to work on interesting matters, as well as the chance to work with some great colleagues. It is not that often that we see these position posted externally, so it is rare opportunity for which you will need to act fast – the postings close on March 23!
With all of the focus these past few days on upheaval in the banking industry, including discussion of the compensation paid to executives of troubled financial institutions, I was reminded of the rulemaking initiatives that remain undone on the Dodd-Frank Act To-Do List, over a dozen years after that landmark legislation sought to right the wrongs after the financial crisis. As we grapple with the pay versus performance disclosure and clawback requirements that were just adopted last year, it is easy to forget one remaining compensation and governance rulemaking on the agenda for the SEC and other financial regulators.
Section 956 of the Dodd-Frank Act directs the financial institutions regulators to jointly prescribe regulations or guidelines with respect to incentive-based compensation practices at certain covered financial institutions. Specifically, Section 956 requires that the regulators prohibit any types of incentive-based compensation arrangements, or any feature of any such arrangements, that the regulators determine encourage inappropriate risks by a covered financial institution: (1) by providing an executive officer, employee, director, or principal shareholder of the covered financial institution with excessive compensation, fees, or benefits; or (2) that could lead to material financial loss to the covered financial institution. Under the Section 956, a covered financial institution also must disclose to its appropriate regulator the structure of its incentive-based compensation arrangements sufficient to determine whether the structure provides excessive compensation, fees, or benefits or could lead to material financial loss to the institution. The Dodd-Frank Act defines “covered financial institution” to include specific types of financial institutions that have $1 billion or more in assets.
The SEC and the other financial regulators were quick out of the gate with a proposal to implement Section 956. In March 2011, the SEC and six other regulators that included the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the National Credit Union Administration, the Office of the Comptroller of the Currency and the Office of Thrift Supervision jointly published proposed rules with a 45-day comment period. A little over five years later, in May 2016, the regulators tried again, publishing new joint proposed rules to implement Section 956. In the proposing release, the regulators noted:
Since the 2011 Proposed Rule was published, incentive-based compensation practices have evolved in the financial services industry. The Board, the OCC, and the FDIC have gained experience in applying guidance on incentive-based compensation, FHFA has gained supervisory experience in applying compensation-related rules adopted under the authority of the Safety and Soundness Act, and foreign jurisdictions have adopted incentive-based compensation remuneration codes, regulations, and guidance. In light of these developments and the comments received on the 2011 Proposed Rule, the Agencies are publishing a new proposed rule to implement section 956.
After the 2016 re-proposal, we haven’t heard anything more from the regulators about implementing Section 956. As this Thomson Reuters article from last summer notes, the proposed rules faced some considerable opposition from the financial services industry, and while various attempts have been made to move the rulemaking forward, it remains in a sort of regulatory limbo. The fact that this provision of the Dodd-Frank Act requires joint agency action may account for some of the delay, but it is curious that the rulemaking has been stalled for so long. Perhaps the recent reminder of what it is like to have major bank failures will renew the focus on this piece of unfinished business.
Where have all the public companies gone? Ever since we hit the high water mark for public companies in the 1990s, this question has been asked throughout much of my career, as practitioners, academics, legislators and regulators have tried to figure out where all of the public companies have gone and why the number of IPOs has dropped precipitously over the years. The answers are complex, and it is often hard to see how much of a difference policymakers can make in trying to turn things around, when so much is driven by market dynamics.
In recent remarks at the “Going Public in the 2020s” Conference at Columbia University, Commissioner Mark Uyeda tackled this question again, contributing to a discussion that informs The New Special Study of the Securities Markets, which is intended to re-think how the securities markets should be regulated in the 21st century. One of the suggestions from Commissioner Uyeda is to revisit the test for “smaller reporting company” status. He notes:
Public float measures the value of the public’s investment in a company. It does not measure a company’s ability or resources to pay the attorneys, accountants, consultants, and internal staff to prepare Form 10-Ks, proxy statements, and other filings or to otherwise comply with the Commission’s disclosure rules. Instead, a test based on revenue or gross profit, either in addition to, or in lieu of, public float is better suited to determine whether a company can qualify for the ability to provide scaled disclosure. Gross profit may be more appropriate than revenue because it somewhat neutralizes the impact of the company’s industry and better reflects the company’s ability to pay its “below the line” compliance costs from a financial statements perspective. The Commission should further consider how companies can qualify as a smaller reporting company. Additionally, the starting point for any disclosure rule should be to allow for some degree of scaled disclosure for smaller reporting companies.
Commissioner Uyeda also suggests that smaller reporting companies should, by default, have delayed compliance dates of at least one year on any new disclosure rule.
I poured my heart and soul into the latest issue of The Corporate Executive, which has been sent to the printer. The latest issue is also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in our “new normal” of remote work. The issue includes articles on:
– Pay Versus Performance: What Have We Learned?
– The Spotlight on Option Grant Practices Intensifies
– NYSE and Nasdaq Propose Clawback Listing Standards
Don’t miss out on the practical guidance that The Corporate Executive has to offer. Email sales@ccrcorp.com to subscribe to this essential resource.
In a recent OpEd piece published in The Hill, SEC Chair Gensler calls on crypto firms to do their work within the bounds of the law, or they shouldn’t do it at all. Chair Gensler takes on arguments that crypto firms have advanced for avoiding regulation by the SEC and notes the importance of regulations to crypto markets. He notes:
First, intermediaries and tokens should properly come into compliance on their own. Crypto intermediaries should structure their businesses to comply with our laws governing securities exchanges, broker-dealers, and clearinghouses; they could put into place rulebooks that protect against fraud and manipulation. Crypto security issuers should file registration statements and make the required disclosures.
These are the same rules that everyone else in the securities markets has played by for decades.
I find the talking point that there’s a lack of clarity in the securities laws unpersuasive. Some crypto companies might message that the laws are unclear rather than admitting that their platforms don’t have sufficient investor protection.
We’ve been clear that most crypto tokens that are backed by entrepreneurs, among other features, are likely to be securities. We’ve been clear how lending and staking platforms come under the securities laws. We’ve been clear that platforms listing crypto securities must register with the SEC. Further, the securities laws are clear that these platforms are not to combine functions under a single umbrella that creates conflicts and risks for investors.
Chair Gensler goes on to defend the SEC’s enforcement activity in the crypto space, noting: “Enforcement is a tool, not the destination. The goal is to get market participants into compliance with laws and rules and to protect our ‘clients’: U.S. investors.”
In a post on the Advisor’s Blog on CompensationStandards.com, Liz highlights the early trends in pay versus performance disclosure courtesy of Compensation Advisory Partners. Their new memo summarizes early trends for S&P 500 disclosures. As we had expected based on our experience with preparing model disclosure, the pay versus performance disclosure is long, ranging from three to seven pages in the proxy statement, with an average of 4.3 pages. Most of the early filers included the disclosure near their CEO pay ratio disclosure, outside of the CD&A. Further, most of the companies used an industry index for their peer group TSR comparison, rather than a self-selected peer group.
Be sure to check out the webcast today at 2:00 pm Eastern tomorrow over on CompensationStandards.com – “The Top Compensation Consultants Speak” – to hear Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Jan Koors of Pearl Meyer discuss the latest areas of focus for compensation committees, including early trends in pay versus performance disclosures and say-on-pay.
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program.
Members of CompensationStandards.com are able to attend this critical webcast at no charge. The webcast cost for non-members is $595.
If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. If you have any questions, email sales@ccrcorp.com – or call us at 800.737.1271.
Over the weekend, we marked three years since COVID-19 was officially declared a pandemic by the World Health Organization. Despite the passage of time, my memories of the weeks leading up to that announcement are very clear, as we all grappled with how best to protect ourselves and our families in the face of a distinct lack of information and what was then very little government support. What is perhaps most striking looking back now on those events three years ago is our complete lack of recognition at the time of how the pandemic would go on to change our lives forever. Most importantly, we should take this moment to grieve for the lives lost (and yet to be lost) because of COVID-19. Finally, we wonder when this pandemic will ever end.
As we navigate yet another period of market volatility that, at least in part, traces its roots to the wide-ranging impacts of the pandemic, the measures taken to prevent the spread of COVID-19 and the government’s efforts to avert economic calamity, there are some important lessons to consider for our daily practice:
1. Markets Worked. In the darkest days of 2020, when markets were swooning, companies were still able to raise capital and, in quite a few cases, set themselves up for extraordinary business success as the pandemic raged on. For some, that success proved to be short-lived as the pandemic conditions waned, but at least they got their day in the sun. In short, markets worked in the face of crisis, which is a comforting reminder as we face yet another financial crisis this morning.
2. Disclosure Worked. One of the highlights for me in the early days of the pandemic was how companies stepped up and sought to provide effective disclosure to investors, even in the face of extraordinary uncertainty. While it may not have been possible to provide guidance at a time when economic activity had ground to a halt, companies tried to provide whatever current and forward-looking information that they could to keep investors informed about developments, and the SEC and its staff did a good job of providing guidance on how that level of transparency could best be accomplished.
3. We Worked. While it is easy to characterize the last three years of the pandemic as a very fractured time in our government and society, there was a lot of collective effort that sustained us through those tough times. Teachers and students rapidly pivoted to a remote learning environment, officer workers shifted quickly to work from home mode and our frontline workers, first responders, soldiers and healthcare workers put their lives on the line everyday to not let the pandemic defeat us. Incredibly, a vaccine was developed and deployed very quickly to avert total calamity. While, for a variety of reasons, the country did not seem to come together in the same sort of patriotic unity that we saw during World War II or after 9/11, we still somehow managed to get it done. And for that, we should all be very grateful.
