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The SEC announced that it will highlight the importance of long-term planning and investor resilience during World Investor Week 2022, which takes place October 3-9.
World Investor Week is a global effort promoted by the International Organization of Securities Commissions (IOSCO) that brings together regulators on six continents to raise awareness about the importance of investor education and protection. During the event, SEC staff will host outreach events highlighting the importance of establishing an emergency fund, avoiding high-interest debt, conducting research on investment opportunities, understanding the risks of investing, portfolio diversification, and fraud prevention.
Last Thursday, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a final rule implementing the beneficial ownership information reporting provisions of Corporate Transparency Act. FinCEN adopted the final rule largely as proposed in December 2021. As John noted when the rule was proposed, the regulations create a new federal filing requirements applicable to a wide range of entities (including operating companies, holding companies, LLCs and others). The goal of the new rule is to enhance FinCEN’s ability to protect national security and the financial system, by providing information that can be used by national security, intelligence, and law enforcement agencies. The effective date for the rule is January 1, 2024.
As this KPMG Regulatory Alert notes, the final rule outlines who is required to submit a beneficial ownership information report, as well as when and what information is required. Subject to certain exemptions, corporations, limited liability companies, and entities formed with (or registered to do business with) any secretary of state or similar office of a state or Native American tribe will be required to report specific information about their beneficial owners and individuals who filed the application to form the entity or registered it to do business.
Reporting companies created or registered before January 1, 2024 will have one year (until January 1, 2025) to file their initial reports, while reporting companies created or registered after January 1, 2024 will have 30 days after receiving notice of their creation or registration to file their initial reports. FinCEN indicates that it will publish for comment the reporting forms that will be used to comply with the reporting obligations under the new rule.
At the Fall conference of the Council of Institutional Investors (which took place in Boston last month), U.S. Asset Owner members approved an amendment to CII’s corporate governance policies that redefines what CII considers to be “over-boarding.” The new policy recommends that directors serve on no more than two for-profit corporate boards if they are employed full-time and a maximum of four for-profit corporate boards if they are not employed full-time. Previously, CII’s policy on board service recommended that a director who is not employed full time could serve on a maximum of five boards, and that a director who is employed full-time be limited to three boards.
CII’s amendment also requests that companies disclose all for-profit board memberships for each director, and that nominating and governance committees develop and publicly disclose their policies on board service.
Last week, CII submitted a comment letter on the SEC’s draft 2022-2026 strategic plan and offered suggestions on the Commission’s proposals to update its disclosure framework. The letter generally supports the Commission’s overall plans to modernize the design, delivery and content of corporate disclosure. Specifically with respect to sustainability disclosure, CII recommends that the SEC work with other regulators and standard setters, including the International Sustainability Standards Board, to limit “disclosure fragmentation in the global markets.”
CII also advises the SEC to evaluate the following factors when adopting rules to update its disclosure framework:
– Materiality to investment and voting decisions;
– Depth, consistency and reliability of empirical evidence supporting the connection between the disclosure and long-term shareowner value;
– Anticipated benefits to investors, net of the cost of collection and reporting; and
– Prospect of substantially improving transparency, comparability, reliability and accuracy.
CII’s letter also supports the SEC’s plans to require companies to use iXBRL format and reiterates CII’s request that SEC correspondence with public companies be made available in a structured, machine-readable format.
Yesterday, the SEC announced a $361 million settlement with Barclays for an unprecedented over-issue that is every security lawyer’s nightmare:
The SEC’s order states that, following a settled Commission action against a BBPLC affiliate in May 2017, BBPLC lost its status as a well-known seasoned issuer (WKSI). As a result, BBPLC had to quantify the total number of securities that it anticipated offering and selling and pay registration fees for those offerings upon the filing of a new registration statement.
The SEC’s order notes that, given this requirement, BBPLC personnel understood that the firm needed to track actual offers and sales of securities against the amount of registered offers and sales on a real-time basis; yet, no internal control was established for this purpose. According to the SEC’s order, as a result of this failure, BBPLC offered and sold approximately $17.7 billion of securities in unregistered transactions.
As the SEC’s order states, BBPLC self-reported its over-issuances to regulators, provided meaningful cooperation during the SEC staff’s investigation, and subsequently commenced a rescission offer.
This all relates to notes and corporate debt offerings that the bank attempted to conduct via a shelf registration statement. Barclays announced the over-issue back in March. Since the securities weren’t registered, they had to offer to buy them back at the price they were sold for – which the bank estimated would lead to a $600 million loss. The rescission offer expired earlier this month. With this settlement, Barclays is paying another $200 million in civil penalties on top of the money it lost (plus disgorgement and prejudgment interest that are deemed satisfied by the rescission).
The order says that Barclays established a multi-person working group when it lost WKSI status. That group talked about calculating the total amount of securities that the business expected to offer and sell, in order to pay registration fees in advance. They also talked about the need to track actual offers & sales. But they didn’t create any process or assign responsibility for that task. The SEC’s order describes what must have been a rough week:
On March 8, 2022, a member of Group Treasury reached out to the member of the legal department who had been part of the Working Group, inquiring as to how many securities remained available to be offered and sold off of the 2019 Shelf because Group Treasury was planning on doing a sale of corporate debt securities.
Over the course of that day and the next, various BBPLC personnel attempted to calculate the cumulative amount of securities offered and sold from the 2019 Shelf in order to determine the amount of securities that remained available for sale. Over the course of these efforts, it became clear to all involved that there was no internal control in place to track in real time the amount of securities offered and sold against the amount of securities registered.
On or around March 9, 2022, BBPLC personnel concluded that securities had been offered and sold in excess of what had been registered on the 2019 Shelf. Shortly thereafter, BBPLC halted new offers and sales of securities from the 2019 Shelf and, on March 14, 2022, alerted regulators about the over-issuance and disclosed to the market that BBPLC did not have sufficient issuance capacity to support further sales from inventory and any further issuances of certain ETNs.
Here are the new controls that Barclays is adopting as part of this settlement – which are a good benchmarking reference for other companies. Barclays has to internally audit these processes in a few months and submit a report to its audit committee and the SEC Staff:
1. The centralization of oversight of BBPLC’s SEC-registered shelves in Group Treasury;
2. The maintenance of clear minimum control requirements for BBPLC’s SEC-registered shelves, including, but not limited to, a process for reviewing any change in WKSI status for BBPLC and the tracking of offers and sales off of BBPLC’s SEC-registered shelves as appropriate; and
3. The maintenance of a data repository, with appropriate controls and governance designed to ensure reliability of the data, for the purpose of tracking offers and sales, as appropriate, off of BBPLC’s SEC-registered shelves.
In the press release, the SEC cautions non-WKSIs to make sure to have internal controls to track registration statement capacity after each takedown. That’s good advice! Check out our “Form S-3 Handbook” for how exactly to do it. I do wonder, will the Staff be tracking this more? That would be a lot of work. The release here urges self-reporting if you discover unregistered sales. Hopefully you catch it before getting to $18 billion.
Our thoughts go out to everyone in our community who has been affected this week by severe weather. Yesterday, the SEC announced that the Staff invites questions from anyone with securities law obligations that may be affected by Hurricanes Ian & Fiona. The Staff will evaluate the appropriateness of providing regulatory relief for those as applicable. Here is the applicable contact info:
– Division of Examinations staff in the SEC’s Miami Regional Office (covers Florida, Mississippi, Louisiana, U.S. Virgin Islands, and Puerto Rico) can be reached at 305-982-6300 or miami@sec.gov.
– Division of Corporation Finance staff can be reached at 202-551-3500 or via online submission at http://www.sec.gov/forms/corp_fin_interpretive.
– Division of Investment Management staff can be reached at 202-551-6825 or imocc@sec.gov.
– Division of Trading and Markets staff can be reached at 202-551-5777 or tradingandmarkets@sec.gov.
– Office of Municipal Securities staff can be reached at 202-551-5680 or munis@sec.gov.
Individuals experiencing problems accessing their securities accounts or with similar questions or concerns relating to the hurricanes are encouraged to contact the SEC’s Office of Investor Education and Advocacy by phone at 1-800-SEC-0330 or email at help@sec.gov. The SEC also urged investors to be vigilant of hurricane-related securities scams.
Whistleblower Network News and the National Whistleblower Center issued a response this week to critiques of the SEC whistleblower program that were published by Bloomberg Law and a professor earlier this year, which I blogged about at the time. WNN investigated the FOIA documents that formed the basis for those reports – and posted these findings to demonstrate that the program is “well-run, honest, and fair”:
– The Argument presented by Bloomberg and Platt that a small group of former SEC employees dominates the program is inaccurate. The FOIA documents revealed that 64 different law firms represented whistleblowers who obtained rewards and that over 80% of these firms never employed a former SEC attorney.
– The articles stated or implied that the program was prejudicial to whistleblowers not represented by attorneys. The FOIA documents revealed that 54 award recipients were pro se and not represented by counsel. This number is an incredibly high percentage of positive reward decisions, given that courts almost always dismiss pro se claims.
– The FOIA documents produced no direct evidence of any misconduct.
– No evidence that the SEC program was illegally “shrouded in secrecy.” Indeed, the FOIA requests identifying the law firms that represented whistleblowers were responded to in full, except in three cases where identifying the firm could have resulted in identifying the whistleblower. Regarding those cases, the SEC advised Platt of his right to appeal the withholding in court.
– The SEC FOIA office fully cooperated with Platt’s FOIA requests over two years. The FOIA documents identify attorneys and law firms representing successful applicants in all but three cases. They also identify the cases involved, copies of the decisions involved, and the amounts awarded (or the percentage of an award) in each case. Likewise, every award given to a pro se litigate was identified, along with the amount of each award and the underlying award decision.
Here we go again. In 2019, John wrote about Elon Musk’s revised agreement with the SEC to run a laundry list of certain types of tweets by an “experienced securities lawyer,” which arose out of the “funding secured” debacle and has been an enforcement headache ever since. John asked at that time, “Who will bell the cat?” And 82% of you predicted that we would just keep running through variations of the dispute for the foreseeable future.
You were right!* Bloomberg reported that Musk has filed a new brief asking a federal appeals court to throw out his “Twitter Sitter” agreement, making a “free speech” argument. Here’s more detail from the article:
Musk, Tesla’s chief executive officer, has claimed without success that the SEC is harassing him and that the agreement violates his free-speech rights. US District Judge Lewis Liman in April refused to release him from the deal and end the requirement for a “Twitter Sitter.” Liman said Musk was “simply bemoaning that he felt like he had to agree to it at the time” and now “wishes that he had not.”
In his April decision, Liman ruled that Musk waived his 1st Amendment Constitutional Right to free speech, a finding Musk denied in his appeal brief.
This appeal follows another SEC-jab from Musk back in June, when he supported a cert petition seeking SCOTUS review of the SEC’s use of “gag orders” in connection with the settlement of enforcement proceedings.
The case is Musk v SEC, 2nd U.S. Circuit Court of Appeals, No. 22-1291 – and this will probably not be the last we’ll hear of it.
*You were right…so far. There is still time for Musk to become dictator of the world for life.
Small-cap investor & adviser Adam Epstein recently shared these candid & succinct thoughts about buybacks:
– If your micro- or small-cap company is unprofitable, don’t buy back your stock.
– If your micro-or small-cap company has raised outside capital in the last 18 months, or will need to in the next 18 months, don’t buy back your stock.
– If you consider your micro- or small-cap company to be a “growth” company, use any/all extra capital to…grow.
– If your micro- or small-cap company feels it has no additive use for excess capital, then perhaps you’re not actually a growth company.
– If your micro- or small-cap company feels it has no additive use for excess capital, then just give it back to shareholders directly.
