August 3, 2022

Our Upcoming Conferences: The Time is Right For You to Sign Up

I look forward to joining many colleagues and friends at our rapidly approaching Conferences, which will occur virtually this year on October 11–14.

I am particularly looking forward to our 1st Annual PracticalESG Conference, which will kick things off on October 11 with an action-packed agenda full of practical guidance on the most important ESG issues that companies are facing. I will be speaking with Corp Fin Director Renee Jones at our two-day 2022 Proxy Disclosure Conference, and participating in panels that you do not want to miss – “The SEC All-Stars: Proxy Season Insights” and “ESG Disclosures: Staying Out of Hot Water.”

I also look forward to our 19th Annual Executive Compensation Conference, where I will be joined by the SEC All-Stars to discuss your favorite executive compensation nuggets. With all that is going on today at the SEC and in the world, you do not want to miss the valuable and timely guidance that we will provide at this year’s Conferences.

The time is right for you to sign up for the Conferences today!

– Dave Lynn

August 2, 2022

SEC Re-Proposes Amendments to Proprietary Trading Rule

Last week the SEC re-proposed rule amendments originally proposed in 2015 to narrow an exemption from the requirement to be a FINRA member that is applicable to certain proprietary trading firms.

Exchange Act Rule 15b9-1 provides an exemption under which certain SEC-registered dealers can engage in unlimited proprietary trading of securities on any national securities exchange of which they are not a member or in the over-the-counter market without triggering the requirement to be a FINRA member. The SEC adopted this exemption over forty years ago to facilitate limited proprietary trading by regional specialists and floor brokers conducted off their home exchange. The trading world has changed quite a bit in the ensuing four decades, moving from floor-based to mostly electronic. During that time, SEC-registered dealers have emerged which engage in significant, proprietary trading of off-member-exchange securities, including in the U.S. Treasury securities market, and these dealers are not FINRA members in reliance on Rule 15b9-1.

Under the re-proposal, an SEC-registered broker or dealer would be required to join FINRA if it effects securities transactions other than on an exchange of which it is a member unless:

  • It is a member of a national securities exchange;
  • It carries no customer accounts; and
  • Such transactions (i) result solely from orders that are routed by a national securities exchange of which the broker or dealer is a member to comply with Rule 611 of Regulation NMS or the Options Order Protection and Locked/Crossed Market Plan; or (ii) are solely for the purpose of executing the stock leg of a stock-option order.

– Dave Lynn

August 2, 2022

SOX Reflections: PCAOB Chair Discusses Unfinished Business

Over the past few weeks, we have seen a number of reflections on the impact of the Sarbanes-Oxley Act on its twentieth anniversary. Last week, Liz noted the remarks of Chair Gensler at a program hosted by the Center for Audit Quality, and I noted a program that I had the honor of moderating for the SEC Historical Society. Last week, the Council of Institutional Investors hosted PCAOB Chair Erica Williams for remarks on the twentieth anniversary of SOX and the establishment of the PCAOB.

After recounting the events that led up to the enactment of SOX, Chair Williams noted the many accomplishments of the PCAOB and the overall impact of the auditing regulator on the quality of audits. Going forward, Chair Williams outlined the three key areas that the PCAOB is addressing: (i) modernizing standards; (ii) enhancing inspections, and (iii) strengthening enforcement. On the standard-setting front, Chair Williams noted:

When the PCAOB was first getting off the ground in 2003, it adopted existing standards that had been set by the auditing profession on what was intended to be an interim basis.

Twenty years later, far too many of those interim standards remain unchanged.

The world has changed since 2003. And our standards must adapt to keep up with developments in auditing and the capital markets.

Our current short-term and mid-term projects will address more than half of the remaining interim standards from 2003.

And we don’t intend to stop there.

Chair Williams went on to discuss the PCAOB’s ambitious standard-setting agenda, as well as efforts to enhance inspections. Chair Williams also addressed an aggressive enforcement approach, noting “[w]e intend to use every tool in our enforcement toolbox and impose significant sanctions, including substantial penalties, to ensure there will be consequences for putting investors at risk.”

– Dave Lynn

August 2, 2022

More SOX: How Corp Fin Changed Forever

When participating in the SEC Historical Society’s SOX anniversary program a few weeks ago, I was struck by one topic in particular – the changes to the SEC review process that SOX brought about. Section 408 of the Sarbanes-Oxley Act required that the SEC review every public company no less frequently than once of every three years, and that directive resulted in a significant expansion of Corp Fin and reinvention of the work of the Division in a way that lives with us to this day.

The events that led up to the enactment of the Sarbanes-Oxley Act principally involved accounting fraud, so Corp Fin inevitably became a very accounting-focused Division, with the review of public company filings becoming particularly focused on the financial statements and related disclosure. It was very interesting to hear Shelley Parratt and Alan Beller recount the Herculean efforts that were necessary to actually hire the right people to build out a reconstituted Corp Fin and to quickly stand up a review program that could meet the SOX directive.

Looking back, the ramped up SEC reviews of periodic reports really changed the relationship between public companies and the SEC, as the prospect for a comment letter significantly increased. At the same time, the enhanced review program and the enhanced disclosures in SOX’s wake meant that the SEC could adopt the Securities Offering Reform changes just a few years later, which I think everyone can agree has made things much easier when larger companies want to raise capital. It is all an important legacy that is useful to remember today now that SOX has turned 20 years old.

– Dave Lynn

August 1, 2022

SEC Releases Small Business Forum Report to Congress

Last week, the SEC released a report to Congress that outlined the policy recommendations from the 41st Annual Government-Business Forum on Small Business Capital Formation that took place virtually on April 4-7. The SEC’s report provides a summary of the proceedings, as well as a series of recommendations for changes needed to the capital raising framework that were developed by the Forum participants and recommend by the Commission.

The wide-ranging policy recommendations highlighted in the report include the following:

  • Ensure capital-raising rules provide equitable access to capital for underrepresented founders and investors.
    Support entrepreneurs who lack the technical assistance to understand how to access traditional capital.
  • Utilize technology and educational resources to help facilitate small business capital markets and decentralize and democratize capital markets.
  • In considering any changes to the private capital markets, ensure companies have viable pathways to access capital to allow growth and innovation.
  • Revise Regulation Crowdfunding to permit investment companies to conduct a Regulation Crowdfunding offering.
  • Expand the accredited investor definition to achieve greater diversity among startup investors and entrepreneurs.
  • Expand the accredited investor definition to include additional measures of sophistication.
  • Expand the accredited investor definition to include any person who invests not more than 10% of the greater of his/her annual income or net assets.
  • In considering changes that raise the wealth thresholds in the accredited investor definition, consider the unintended consequences on access to capital in under-resourced and underrepresented communities.
  • Finalize the Commission’s finders order.
  • Create a new private fund exemption to allow states to foster intrastate and regional funds focused on community-based investing that is open to non-accredited investors.
  • Increase the thresholds (number of investors and cap on fund size) allowed in 3(c)(1) funds to achieve greater diversity among startup investors and entrepreneurs.
  • Support underrepresented emerging fund managers—specifically minorities and women—building funds that diversify capital allocators, engage sophisticated investors, and challenge pattern-matching trends.
  • Increase the number of investors allowed in 3(c)(1) funds above 99 investors.
  • Support underrepresented and emerging fund managers and their investors through targeted resources, in collaboration with other federal agencies.
  • Modernize Section 17(b) of the Securities Act to warn against pump-and-dump schemes by requiring additional disclosure about paid stock promotion.
  • Consider the impact of the proposed environmental, social, or governance (ESG) regulations on small and medium-sized companies, including whether such requirements will discourage companies from going public.
  • Modernize regulation of transfer agents in response to technological and market advancements to increase disclosures made available to broker-dealers to facilitate liquidity for smaller public companies while continuing to protect investors.
    Increase transparency around short selling activities and improve short sale data.
  • Collaborate with NSCC, DTCC, clearing firms, and broker-dealers to improve the clearing and settlement process for small public companies.

– Dave Lynn

August 1, 2022

SEC Small Business Advisory Committee to Discuss Liquidity Challenges

Tomorrow, the SEC’s Small Business Advisory Committee will hold a virtual meeting to discuss liquidity challenges for smaller companies.

In the morning session, the Committee plans to discuss challenges and opportunities for small business capital formation as a result of current economic conditions. In the afternoon session the Committee will address secondary market liquidity issues faced by investors in companies that have raised money using Regulation A and Regulation Crowdfunding and whether there are changes that could facilitate increased secondary market liquidity for these investors. The Committee will also discuss secondary market liquidity challenges affecting smaller publicly-traded companies.

– Dave Lynn

August 1, 2022

Securities Class Actions Hold Steady in First Half of 2022

Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse recently published their latest report, Securities Class Action Filings—2022 Midyear Assessment. The report finds that the number of securities class-action filings remains steady in the first half of 2022, with plaintiffs filing 110 new securities class-action lawsuits in federal and state courts in the first half of 2022, which is on par with the 107 cases filed in the second half of 2021.

The report notes that new SPAC cases continue to be a dominant trend, with the 18 SPAC filings in the first half of 2022 indicating a pace that could exceed 2021’s all-time high of 33 filings. Cryptocurrency-related filings are also on pace to reach an all-time high.

– Dave Lynn

July 29, 2022

Proxy Advisors: Chamber & BRT Sue SEC to Stop Reversal of 2020 Rule

Earlier this month, the SEC delighted proxy advisors and many investors by adopting amendments that – among other things – reversed two of the “new” conditions governing proxy voting advice that were adopted just two years ago and never made it into effect. The new 2022 amendments and the rescission of related guidance are slated to become effective this September 19th and apply during the upcoming proxy season.

Yesterday, the US Chamber of Commerce, the Business Roundtable and the Tennessee Chamber of Commerce & Industry announced that they had joined together as plaintiffs to file this complaint (in Tennessee district court) that accuses the SEC of not following proper procedures or providing adequate justification for the rollback under the Administrative Procedure Act. Here’s the relief they’re seeking:

– A declaratory judgment that the Amended Rule at issue in this lawsuit is arbitrary, capricious, or otherwise contrary to law within the meaning of the Administrative Procedure Act, see 5 U.S.C. § 706(A);

– An order vacating and setting aside the Amended Rule in its entirety pursuant to the Administrative Procedure Act, see 5 U.S.C. § 706(2);

– An order issuing all process necessary and appropriate to delay the effective date and implementation of the Amended Rule pending the conclusion of this case;

– An order setting aside Defendants’ suspension of the compliance date for the 2020 Rule;

– An order awarding Plaintiffs their reasonable costs, including attorneys’ fees, incurred in bringing this action; and

– Any other relief as the Court deems just and equitable.

The 2020 rules were the result of a long effort on the corporate side to bring more lead-time, transparency and accuracy to proxy advisor recommendations. The newly adopted amendments – while not a total surprise – confirm that predicting votes & correcting inaccuracies will remain very difficult for many corporate secretaries. Maybe even more difficult than when this rulemaking saga began, since ISS stopped providing draft reports to the S&P 500 in the wake of the 2020 rules.

For those keeping track at home, this is at least the third lawsuit relating to the rules – and boy has there been a lot of drama along the way. ISS sued the SEC in 2019 over guidance that foreshadowed the 2020 proposal – which was then stayed and then back on. Then, NAM sued the SEC when the SEC suspended the compliance date. The CII also jumped in along the way.

Update: An eagle-eyed member alerted me that NAM also filed another complaint last week, in Texas. So, this Chamber/BRT complaint is at least the FOURTH lawsuit these rules have drawn.

Liz Dunshee

July 29, 2022

Direct Listings: SEC Appears Lukewarm on NYSE’s Proposed Pricing Flexibility

Last week, the SEC posted this order instituting proceedings on a proposed NYSE rule change to modify pricing limitations for securities listed on the Exchange via a primary direct listing. The proposal was filed back in April and the Commission had only received one comment when it instituted these proceedings, despite an extension of the consideration period. Here’s more detail:

The Exchange has proposed to modify the Price Range Limitation to provide that a Direct Listing Auction for a Primary Direct Floor Listing may be conducted if the Auction Price is outside of the price range established by the company in its effective registration statement (the Issuer Price Range) but is either (i) at or above the price that is 20% below the lowest price or at or below the price that is 20% above the highest price of the Issuer Price Range or (ii) above the price that is 20% above the highest price of the Issuer Price Range.

The NYSE believes that this pricing flexibility would make direct listings more attractive, and that investors would continue to be adequately protected. Companies would have to make certain public disclosures & certifications to the Exchange to be able to take advantage of the flexibility.

Although last week’s order doesn’t indicate that the Commission has reached any conclusions on the proposal, it starts the process for additional analysis & input and gives notice of the grounds of disapproval under consideration. Yesterday, the CII submitted this comment letter in response to the order and the specific questions raised therein. The CII opposes the rule change. In February, the SEC rejected a Nasdaq proposal on the same topic.

We’re continuing to post guidance on this approach to capital raising in our “Direct Listings” Practice Area. So far, they haven’t taken off as a popular path to going public.

Liz Dunshee

July 29, 2022

Farewell to Emily Sacks-Wilner

We’re sad to bid farewell this week to our friend & colleague Emily Sacks-Wilner, who is rejoining the Big Law ranks as a leader in securities practice management. During her tenure here, Emily has enhanced our team in every way and has kept our members front-of-mind every single day. She created our “cheat sheet” to keep everyone grounded during the SEC’s rulemaking deluge, spearheaded our virtual Women’s 100, diligently updated all of our handbooks (thousands of pages), and opened my eyes to what it’s like to be a “cat person” (in a good way!). Emily, we wish you continued success – we have been lucky to have you on our team!

Liz Dunshee