In one of its more recent rounds of corporate criminal enforcement guidance, the DOJ noted that in assessing the effectiveness of corporate compliance programs, “prosecutors should consider whether the corporation has implemented effective policies and procedures governing the use of personal devices and third-party messaging platforms to ensure that business-related electronic data and communications are preserved.”
This Perkins Coie memo follows up on the DOJ’s guidance and suggests some practice pointers when it comes to personal device policies for corporate directors. This excerpt addresses some key points to consider in implementing such a policy:
1. A plain English policy on devices. First, a policy is a must. The DOJ’s guidance specifically tells prosecutors that a company should be examined to see if it had—and was effectively implementing—policies and procedures about the use of personal devices.
If I am a director, I want to see a policy written in plain English so I can tell my chief compliance officer and general counsel that I could understand it. And as a GC, I want to make sure that the author has drafted it in truly plain English.
2. Data access, not ownership. The company probably doesn’t want to own my device and all the data on it. However, it does want to have reasonable access to my device for appropriate purposes, including assistance with any future investigations.
In some instances, I’m fine owning my own cellphone. Some companies will want to give me a phone with a request that I use it only for corporate business. This is normal; I will respect any requested limits of use on that company phone. In either case, I want to make sure that I’m maintaining the data in a way that follows the policy.
For example, if I’m using a messaging program, my company may tell me to limit my communications to business matters and send messages solely on an approved platform that enables retention of the messages. I won’t be permitted to use non-approved messaging channels to send business-related messages.
The memo also emphasizes the importance of appropriate training, board oversight and the need to keep an eye on how state privacy laws continue to evolve. In particular, the memo points out that the California Privacy Act will soon require companies to identify personal or personally identifiable information and be able to separate such information from business records.
Check out the latest edition of our “Timely Takes” Podcast featuring my interview with Orrick’s J.T. Ho on the Staff’s comments on board risk oversight disclosure. These podcasts are intended to provide a forum through which experts can share their views on recent developments or emerging trends that we think our members would be interested in learning more about. In this 20-minute podcast, J.T. addressed the following topics:
– Background of Item 407(h)’s board risk oversight disclosure requirement
– Reasons for the Staff’s focus on board risk oversight disclosures
– Do the Staff’s comments reflect its view that there’s a “right way” to do board risk oversight?
– Key takeaways for boards and their advisors
While we’re on the topic of risk oversight, be sure to check out our March 21st webcast – “Managing Enterprise-Wide Risks: The Intersection of ERM & Legal” – where our expert panelists (including J.T.) will address how companies are dealing with the increasing demands for enhanced oversight.
If you have insights on a securities law, capital markets or corporate governance trend or development that you’d like to share, I’m all ears – just shoot me an email at john@thecorporatecounsel.net.
Many Delaware companies are considering asking stockholders to approve officer exculpation charter amendments this proxy season. If you’re working with one of them, be sure to check out this Freshfields blog, which reviews how these amendment proposals have fared with stockholders and proxy advisors and addresses several other matters that should be considered by boards thinking about officer exculpation amendments.
Overall, these proposals have been well received by stockholders. Of the 14 submitted to stockholders so far for which results were disclosed, only three failed – and two of those involved companies that required supermajorities to adopt charter amendments. This excerpt indicates that one reason for this success may be how proxy advisors, and ISS in particular, have responded to these proposals.
Of the 15 companies, ISS recommended FOR the proposals at all companies except for two companies. Both of the AGAINST recommendations involved unusual facts. The first of these two companies did not release a proxy statement (or disclose results) and ISS recommended against all proposals on the ballot. The other was holding a meeting to vote on its de-SPAC transaction, which ISS opposed along with every other proposal on the agenda for the meeting.
For the remaining 13 companies, ISS recommended FOR the exculpation amendment proposal each time. This group that garnered ISS endorsements for their exculpation amendment proposals included companies with less than perfect records on governance and even some where ISS was recommending against the company’s director nominees and/or say-on-pay proposals.
The blog notes that while ISS’s voting guidelines provide that its recommendations on exculpation proposals will be made on a case-by-case basis, taking into account the stated rationale for the vote, in practice, it has generally been supportive of officer exculpation proposals. Glass-Lewis’s voting guidelines appear less accommodating toward officer exculpation that ISS’s. However, the blog says that the high level of support for these proposals suggests that if Glass-Lewis is recommending against them, those recommendations aren’t having much influence on the outcome of the vote.
I think Broc – who is the biggest basketball fan I know – would be annoyed with me if I let the SEC’s recent anti-touting enforcement action against former Celtics star Paul Pierce pass without a mention on this blog. The SEC’s order in this settled proceeding alleges that Pierce’s promotional activities for EMAX tokens ran afoul of Section 17(b) of the Securities Act’s prohibition on touting. Here’s an excerpt from the SEC’s press release:
The SEC’s order finds that Pierce failed to disclose that he was paid more than $244,000 worth of EMAX tokens to promote the tokens on Twitter. The SEC’s order also finds that Pierce tweeted misleading statements related to EMAX, including tweeting a screenshot of an account showing large holdings and profits without disclosing that his own personal holdings were in fact much lower than those in the screenshot. In addition, one of Pierce’s tweets contained a link to the EthereumMax website, which provided instructions for potential investors to purchase EMAX tokens.
Without admitting or denying the SEC’s allegations, Pierce agreed to pay a $1,115,000 penalty and approximately $240,000 in disgorgement. He also agreed to not promote any crypto securities for three years.
This Holland & Knight blog reviews the SEC’s action against Pierce and discusses other celebrities who’ve found themselves targeted by the SEC for alleged touting violations. It also offers up some guidance on avoiding similar situations, and says that crypto’s uncertain status makes it particularly important to watch your step when it comes to promotional activities:
The lack of specific guidance on the issue of “crypto as security” leaves any paid promotional activity of coins or tokens by celebrities, athletes and other influencers vulnerable to an SEC investigation, enforcement action or class-action lawsuit. The risk has only increased as the SEC’s Division of Enforcement has expanded its focus beyond coins and tokens to paid promotional activity in connection with certain NFT (non-fungible token) promotions.
A recent ruling by the U.S. District Court for the Southern District of New York denying a motion to dismiss in connection with a complaint alleging certain NFTs are securities will only add fuel to the flames of this growing fire.14 When in doubt, parties should give careful consideration to proactively disclosing any and all compensation received in connection with any promotional activity involving digital assets.
Great advice, but while it would be wise for our nation’s celebrities to show a little caution here, I still bet it won’t be long until more find themselves in the SEC’s crosshairs for touting. After all, a lot of these folks seem to believe that “Fortune favors the brave.”
The January-February Issue of the Deal Lawyers newsletter was just posted and sent to the printer. This month’s issue includes the following articles:
– Delaware Court Addresses Freeze-Out Merger Confronted with Topping Bid
– Tortious Interference Claims in M&A: Deal Jumping
– Bandera Master Fund: Delaware Supreme Court Defers to General Partner’s Contractual Authority
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without in order to keep up with the rapid-fire developments in the world of M&A. If you’re not a subscriber to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
It sounds like such a simple thing, doesn’t it? You include a bunch of proposals in your proxy statement, and for each proposal, Item 21 of Schedule 14A requires you to disclose the vote required for approval, the method by which votes will be counted, including the treatment and effect of abstentions, broker non-votes, and, to the extent applicable, a “withhold” vote for a nominee in an election of directors. Unfortunately, as generations of lawyers have learned, getting this disclosure right is often far from an easy process.
That’s the bad news. The good news is that this recent Goodwin memo is a very helpful resource for navigating the intricacies of determining and disclosing required votes in your proxy statement. This excerpt addresses the sometimes murky question of whether a particular proposal is “routine” or “non-routine” under NYSE rules:
Although not required by Item 21 of Schedule 14A, as a result of litigation in Delaware, we believe it is appropriate for proxy statements to identify, to the extent possible, which matters up for vote are considered routine (and therefore eligible for broker discretionary voting) and which are considered non-routine.
This is a straightforward exercise for many matters: NYSE Rule 452 explicitly provides that election of directors, say-on-pay, say-on-frequency, adoption or amendments of an equity plan, and shareholder proposals opposed by management are non-routine. In addition, the NYSE has expressed the view that ratification of the selection of independent auditors is routine.
Other matters may be less clear, and the determination is ultimately made by the NYSE. In this regard, companies should check with the NYSE to determine whether a particular matter is routine or non-routine prior to filing the proxy statement with the SEC.
The memo also addresses the need for companies to review state law and their charter documents in order to determine the vote required to approve a particular proposal, quorum requirements and the impact of broker non-votes and abstentions under various voting standards.
With the SEC’s adoption of cybersecurity and climate change disclosure rules looming and intensifying investor scrutiny of disclosure in these areas, this Perkins Coie blog recommends that companies take a hard look at their disclosure controls and procedures to ensure that cyber & ESG matters are appropriately captured. The blog identifies things that companies should keep in mind as they assess their disclosure controls & procedures in these areas. This excerpt addresses key issues in the data collection and verification process:
Determine what data to collect. Companies must determine what data to capture, and until the exact parameters of the final rules are known, should focus on the data most material to their business and industry. Companies can consider industrywide standards or metrics and whether key investors have preferred reporting frameworks. For example, BlackRock asks companies to report using the framework developed by the TCFD, supported by industry-specific metrics, such as those identified by SASB.
Establish data-gathering procedures and systems. Companies need to establish procedures for how data will be collected, where it is sourced, and how it is stored. Company personnel will need to be assigned responsibility over newly implemented procedures and data collection. Depending on the size and complexity of the data to be gathered, automated data management systems offer advantages over manual collection and storage methods. If companies intend to seek third-party assurance over their data, the procedures and systems need to be of sufficient quality and formality to enable testing by third parties.
Determine how data and resulting disclosures will be reviewed and verified. Companies must put in place procedures to vet the completeness and accuracy of the data collected and resulting disclosures. For example, internal controls and segregation of duties should be implemented to prevent and detect data fraud; also, certification and/or sub-certification procedures can be established whereby company personnel review and certify disclosures pertaining to their respective areas of responsibility. At the end of the day, the data and disclosures should be comparable across time, across communication channels (e.g., Form 10-K vs CSR Report), and amongst peers.
The blog says that companies should consider involving outside advisors such as audit firms and consultants in order to help them design internal controls and procedures or to provide assurance services, and should also assess whether any current disclosure committee needs to be reorganized in order to manage the increased challenges of these expanding disclosure obligations.
The SEC appears to be on a hiring spree these days. I recently noted on the DealLawyers.com Blog that the SEC was seeking to hire someone to serve as the Chief of Corp Fin’s Office of Mergers & Acquisitions. Now, the SEC is seeking to fill open spots in Corp Fin’s Office of Chief Counsel, where Dave used to lead the Division’s interpretive function. Dave notes:
The SEC has posted two announcements on the USAJobs website for open positions in Corp Fin’s Office of Chief Counsel. One of the announcements describes the general responsibilities for someone serving in the Office of Chief Counsel, while the second announcement seeks a candidate who has experience with compensation and employee benefit plan issues that arise under the securities laws.
I always say that the time I spent in OCC was the highlight of my career – no where else can you encounter so many questions about every aspect of the laws regulating capital raising and public disclosure. In the old days, getting a position in OCC was usually only possible by rising through the ranks in Corp Fin, so it is great that the Division is now posting these positions for candidates from the outside. For any securities lawyers out there who are considering a new challenge, I encourage you to consider these rare opportunities quickly – the postings close on March 14th.
Big news on the “insider trading” front. Earlier this week, the SEC announced that it had filed a civil complaint against the CEO & Chair of a healthcare company for his allegedly improper use of a Rule 10b5-1 trading plan. The SEC is seeking a jury trial in California. In addition, the DOJ announced parallel criminal charges and unsealed a grand jury’s indictment. Whoa! From the DOJ’s press release:
According to court documents, between May and August 2021, Peizer, 63, a resident of Puerto Rico and Santa Monica, California, allegedly avoided more than $12.5 million in losses by entering into two Rule 10b5-1 trading plans while in possession of material, nonpublic information concerning the serious risk that Ontrak’s then-largest customer would terminate its contract.
In May 2021, Peizer allegedly entered into his first 10b5-1 trading plan shortly after learning that the relationship between Ontrak and the customer was deteriorating and that the customer had expressed serious reservations about continuing its contract with Ontrak. The indictment alleges that Peizer later learned that the customer informed Ontrak of its intent to terminate the contract. Then, in August 2021, Peizer allegedly entered into his second 10b5-1 trading plan approximately one hour after Ontrak’s chief negotiator for the contract confirmed to Peizer that the contract likely would be terminated.
In establishing his 10b5-1 plans, Peizer allegedly refused to engage in any “cooling-off” period – the time between when he entered into the plan and when he sold stock – despite warnings from two brokers. Instead, Peizer allegedly began selling shares of Ontrak on the next trading day after establishing each plan. On Aug. 19, 2021, just six days after Peizer adopted his August 10b5-1 plan, Ontrak announced that the customer had terminated its contract and Ontrak’s stock price declined by more than 44%.
If convicted, the CEO faces a maximum penalty of 25 years in prison on the securities fraud scheme charge and 20 years in prison on each of the insider trading charges.
These are the first-ever criminal allegations that relate exclusively to the use of a Rule 10b5-1 plan – and only the second SEC enforcement action. Hold on to your hats, though, because there are likely more to come. As I blogged a few months ago, the SEC’s Enforcement Division has been on the lookout for problematic Rule 10b5-1 plans, after notching its first settlement last September. Like the SEC, the DOJ also says that it has a “data-driven initiative” to identify executive abuses of 10b5-1 trading plans.
While this case – on its face – seems to afford some pretty useful facts for the regulators, it also serves as a giant red flag for any insiders who want to throw caution to the wind and quickly sell shares outside of the as-amended Rule 10b5-1 plan requirements. In this article, the defendant’s lawyer complains that the SEC & DOJ filed their cases without notice, following some “good faith” discussions. So, this initiative appears to be a “full steam ahead” endeavor – which is not a promising environment for anyone whose trades fall in a grey area.
Because trading under a plan that complies with the new requirements of Rule 10b5-1 is not an exclusive affirmative defense, the SEC’s newly effective rules on this topic also require quarterly disclosures of “non-Rule 10b5-1 trading plans” adopted by insiders. This Nelson Mullins blog from Gary Brown & Charles Vaughn asks, “what does that even mean?”
The blog offers a side-by-side comparison of a “real” Rule 10b5-1 plan & a “non-Rule 10b5-1 trading plan” – and closely analyzes whether any distinction actually exists. Here’s the conclusion:
The side-by-side comparison and analysis of a “non-Rule 10b5-1 trading arrangement” and a “Rule 10b5-1 plan” reveals that the only real differences are the cooling off periods and the certification requirements for issuer officers and directors under a “Rule 10b5-1 plan.” No one would realistically dispute that they may not enter into a trading arrangement with a lack of good faith or with the intent to circumvent the securities laws. The prohibition on multiple or overlapping plans is somewhat of a “throwaway”; courts had already ruled that those arrangements were indicators of a lack of good faith in entering into such plans, which resulted in those plans failing to provide an affirmative defense.
Does that mean that a “non-Rule 10b5-1 trading arrangement” is simply one that either:
– does not contain the required “cooling off” period; or
– if adopted by a director or officer, did not contain the required certification?
Take the examples of the limit orders referenced above – if you added a cooling off period and a certification to either order, would that convert it into a “real” Rule 10b5-1 plan? If that indeed is the case, the only difference is that one provides an affirmative defense while the other simply negates proof of “scienter” – an element of a Rule 10b-5 case.
Gary & Charles say that the confusing definition & its related disclosure requirement is going to result in a lot of extra work. Here’s why:
Absent additional SEC guidance, companies must approach these new requirements with extreme care and, in our judgment, err on the side of providing more disclosure than may be necessary regarding “non-Rule 10b5-1 trading arrangements.” That path will require quarterly inquiries to corporate officers and directors about those arrangements. Section 16 reports generally report only trades; therefore, a review of those filings might not reflect the adoption, modification or termination of either “non-Rule 10b5-1 trading arrangements” or “real” Rule 10b5-1 plans.
For companies to meet their new quarterly disclosure obligations, their insider trading policies – which must be filed with the SEC as exhibits – must now require pre-clearance and approval of not only “real” Rule 10b5-1 plans but the host of transactions that might constitute “non-Rule 10b5-1 trading arrangements.”
The blog concludes with language that could’ve made the rule more clear. Unfortunately, that’s not the world we’re living in.
