Earlier this week, I blogged about the Supreme Court granting cert to review whether the SEC’s Administrative Law Judges are unconstitutionally protected from removal. Now comes word that on Wednesday a three judge panel of the U.S. Court of Appeals for the 5th Circuit, in a 2-1 decision, ruled that the SEC’s ALJ system violated a person’s right to a jury trial in federal court and relied on unconstitutionally delegated legislative power. The opinion also said that statutory restrictions on the removal of the SEC’s ALJs are also unconstitutional.
As this Bloomberg article notes, the decision stems from an action that the SEC first brought in 2013 against a hedge fund manager and his fund.
For some reason, 2022 turns out to have a lot of big anniversaries. I have mentioned in the blog several times that my 15-year anniversary of writing for TheCorporateCounsel.net and our other publications is fast approaching. My 30-year wedding anniversary is coming up in June. But I did not want to let one big anniversary pass by unacknowledged — the 10-year anniversary of the JOBS Act!
On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law by then-President Barack Obama. The JOBS Act required the SEC to write rules and issue studies on capital formation, disclosure, and registration requirements. It was a rare piece of bipartisan legislation that was made up of various measures that had been circulating in Congress. Recall that in 2012, we had just made it to the other side of the Financial Crisis and the Great Recession, and there was a great deal of interest in stoking the economy by encouraging capital formation, particularly for smaller companies. On top of that, the number of public companies in the U.S. had been consistently shrinking following the pop of the late 1990s Internet bubble, the early 2000s corporate scandals and the enactment and implementation of the Sarbanes-Oxley Act.
One of the most striking things about the JOBS Act to me was the way that it reshaped the exempt offering framework. In the Fall semester when I co-teach a course on exempt offerings at Georgetown Law Center, I think about how short the class would be if we did not have all of the JOBS Act exemptions to talk about. While over the years I have sometimes been critical of some of the “new” JOBS Act exemptions, they were enacted and faithfully implemented by the SEC with the noble goal of trying to improve access to capital for smaller companies. Pre-JOBS Act, smaller companies seeking capital pretty much just had Regulation D and a few other relatively narrow exemptions to utilize, while now they have a much broader menu of options, such as Regulation A+, Regulation Crowdfunding and Rule 506(c) (unbound from the chains of general solicitation). Further, the reforms to the mandatory registration thresholds in Exchange Act Section 12(g) gave private companies more runway to raise capital and compensate employees without being forced to go public. Finally, with the SEC’s 2020 exempt offering harmonization rulemaking, these offering alternatives became more useful and the overall exempt offering framework was substantially improved.
So while the exempt offering legacy of the JOBS Act isn’t perfect, the availability of more exemptions for small business capital raising is certainly something we have all benefited from, and will continue to benefit from in the future.
One of the more jarring aspects of the JOBS Act for me was the “IPO On-ramp” portion of the legislation, which established a new class of registrant – the “emerging growth company.” Emerging growth companies are afforded an easier path to going public, with a reduced disclosure burden and the benefit of some significant accommodations in the offering process. As you may recall, the IPO On-ramp provisions of the legislation were immediately effective, so we in the private bar and the SEC Staff had to really scramble to figure out how it would all work.
I recall the thing that upset me the most as a securities lawyer was the enactment of Section 5(d) of the Securities Act, which gives emerging growth companies the ability to “test the waters” for a proposed registered securities offering. Prior to the JOBS Act, pre-filing testing-the-waters was only permitted in Regulation A offerings, which were rarely conducted. Having spent the first fifteen years of my career worrying about “gun jumping” in the registered offering context, the notion of testing-the-waters before an IPO seemed like heresy! But, as with so many things, it has become accepted practice, so much so that the SEC decided to expand the accommodation to all issuers, not just emerging growth companies. For an in-depth discussion of the development of testing-the-waters, take a look at the September-October 2021 issue of The Corporate Counsel.
Another big accommodation that the JOBS Act provided to emerging growth companies was the option for confidential submission of the registration statement to the SEC. This accommodation has had a significant impact on the way that offerings are done today, and as with testing-the-waters, the SEC decided to extend the confidential submission accommodation to other issuers beyond emerging growth companies. From today’s perspective it makes perfect sense to permit confidential submission, but a decade ago it definitely seemed like a radical notion for IPOs to be reviewed confidentially.
The interesting legacy of the registered offering portions of the JOBS Act is that the emerging growth company “experiment” was a success, and it helped get the SEC and the market very comfortable with extending the emerging growth company accommodations to a much broader range of issuers. I don’t know that we would have seen that sort of innovation in the regulation of the registered offering process had it not been for the JOBS Act.
In the latest Deep Dive with Dave podcast, I am joined by Anna Pinedo of Mayer Brown to discuss the 10-year anniversary of the JOBS Act. Topics include:
Where the JOBS Act came from
JOBS Act offering exemptions – what worked and didn’t work?
How the IPO on-ramp changed the way we do public offerings
The need for further legislative of regulatory action today
Last week, Judge Maureen Duffy-Lewis of the Superior Court of California, County of Los Angeles, found that SB 826, the California law requiring that California-headquartered companies have a minimum number of women directors, violates the Equal Protection Clause of the California Constitution. The decision states:
As to the claimed interest that S.B. 826 was passed to remedy discrimination, defendant has not met its burden to show that this is necessary nor narrowly tailored. Therefore, for all the above stated reasons and analysis the Court determines that S.B. 826 violates the Equal Protection Clause of the California Constitution and is thus enjoined.
As noted in this L.A. Times coverage, in her decision, Judge Duffy-Lewis found the state could not prove that the “use of a gender-based classification was necessary to boost California’s economy, improve opportunities for women in the workplace, and protect California taxpayers, public employees, pensions and retirees.” Further, she found that the state could not provide any evidence of a specific corporation that discriminated against any woman and would have been subject to the law.
Last month, Judge Terry A. Green of the Superior Court of California, County of Los Angeles, granted plaintiffs’ motion for summary judgment in a case challenging the legality of AB 979, which required California-headquartered companies to have a specified minimum number of members on their boards of directors that were from specified underrepresented communities.
Yesterday, the U.S. Supreme Court agreed to review whether the SEC’s Administrative Law Judges are unconstitutionally protected from removal. The case is Securities and Exchange Commission v. Michelle Cochran. The question in the case is:
whether a federal district court has jurisdiction to hear a suit in which the respondent in an ongoing [SEC] administrative proceeding seeks to enjoin that proceeding, based on an alleged constitutional defect in the statutory provisions that govern the removal of the administrative law judge who will conduct the proceeding.
The Supreme Court is expected to hear arguments in these this case and a related FTC case in the Fall. You may recall that, in its June 21, 2018 opinion in Lucia v. Securities and Exchange Commission, the Supreme Court held that SEC ALJs are “Officers of the United States” under the Appointments Clause of the U.S. Constitution, and are not mere employees. I have been very interested in these SEC ALJ cases because I started out my career at the SEC as a clerk in the Office of Administrative Law Judges.
With proxy season in full swing, it can be difficult to keep up with all of the developments. I encourage you to check out the Proxy Season Blog, where we cover the latest proxy season and corporate governance developments. Some of the recent topics include:
Rounding Up Shareholder Support Through Climate Action Flagging Tool
Preparing for Surprises in Your Annual Meeting’s Q&A Session
Shareholder Proposals: BlackRock Draws a Line on Climate
Human Rights Diligence: Proposals Shine Spotlight on ESG Oversight
ESG Proposals: Knocked Out By a “One-Two Punch”?
You definitely do not want to fall behind at this critical time – check out the Proxy Season Blog today. If you do not have a subscription to the TheCorporateCounsel.net, be sure to email our sales team at sales@ccrcorp.com.
In a speech at the Securities Enforcement Forum West 2022 Conference, SEC Enforcement Director Gurbir Grewal discussed the factors that can contribute to delays in SEC investigations, and he laid the blame on the tactics used by defense counsel, including Division of Enforcement alums. His remarks echoed warnings about defense counsel delaying tactics that Robert Khuzami had made when he was the Director of Enforcement a decade ago – apparently not much has changed during that time in the Staff’s view.
The tactics that Director Grewal finds troubling include: (i) blowing through document production deadlines, document dumps or trickling in the document production; (ii) overly coaching witnesses and lodging in objections or otherwise interrupting testimony; (iii) making questionable privilege claims; and (iv) representing multiple clients when conflicts are inevitable. Grewal encourages defense counsel to act in a manner that facilitates cooperation, stating:
Now, I’m often asked to further explain what I mean by cooperation. To me, cooperation is more than the absence of obstruction; it’s an affirmative behavior.
If you’re delaying our investigation by slow-walking document productions, trying to put off witness testimony for an excessive time, or being obstructive during testimony, you’re not cooperating, no matter what your client’s 8-K may say.
There’s no exhaustive checklist of what constitutes cooperation, though as described in the Seaboard report, behaviors such as self-reporting and remediation fall within the cooperation rubric.
But here are some more examples of good cooperation: when your clients are involved in an investigation, you can make documents or witnesses available to us on an expedited basis, highlighting “hot” documents or providing translations of key documents where applicable.
You can flag documents that you know we’re interested in, even if they might arguably, under a certain reading, fall outside the scope of a subpoena.
You can make presentations to the staff during an investigation that are not simply advocacy pieces, but that meaningfully illuminate events.
And, where your client may have violated the law, you can counsel them to own that violation and work in good faith to remedy it.
In short, you can take steps that enable us to efficiently conduct our investigations, protect investors, and rebuild trust in our markets and the law.
We shall see how this message is received this time around.
Notwithstanding the SEC’s extension of the comment period for its climate change disclosure rule proposal, comment letters continue to stream in, but most at this point are coming from individuals. I am really not sure what happened to the SEC comment process, but some individuals appear to be confusing commenting on an SEC rule proposal with commenting on a Facebook post about the latest conspiracy theory. For example, one commenter wrote:
As an Alaskan resident I want you to know that I OPPOSE your “Woke Climate Disclosure Scheme”! Alaska’s bit to bring to the table to build back this disastrous Biden induced economy is energy. And Alaskans want energy independence, not more shaming of our oil and gas companies!
Another commenter was more to the point, simply stating:
Please stop this madness
I tend to feel that way about a lot of things these days, not just SEC rule proposals. Finally, many commenters understood the assignment, but just ran into trouble with the execution, giving insight into the instructions these commenters must have received from somewhere:
Please use this section to write your comment to the SEC telling them Americans want energy independence, not more shaming of our oil and gas companies! We have oil and gas here!!!!!
I do feel bad for the SEC staffer who has to painstakingly go through each and every one of these comments from individuals and try to categorize them based on the “form” that the individuals purportedly used. My guess is that these letters won’t do much to convince the SEC to change course on the climate change disclosure rulemaking, but they can certainly be entertaining!
In my view, one of the more interesting letters submitted to date on the climate change rulemaking is a very thoughtful piece from a group of professors who examine the SEC’s authority to adopt the climate change disclosure rules. As John mentioned in this blog, the SEC’s authority will no doubt be one of the areas that future litigants may seek to challenge if and when the proposed rules are adopted. The letter notes:
The enthusiasm of many Commissioners and Staff of the Securities and Exchange Commission (the “SEC”) to participate in the global debate about climate change is understandable. After all, protecting the earth’s sustainability is perhaps the most compelling issue of our time. It’s an issue all must take seriously and everyone must do their part. But each of us, and particularly governmental authorities, must always act in accordance with law and fairness.
The undersigned, a group of professors of law and finance, are concerned that the SEC’s recent proposal to impose extensive mandatory climate-related disclosure rules on public companies (the “Proposal”) exceeds the SEC’s authority. In addition, rather than provide “investor protection,” the Proposal seems to be heavily influenced by a small but powerful cohort of environmental activists and institutional investors, mostly index funds and asset managers, promoting climate consciousness as part of their business models.
The letter goes on to discuss the concept of “investor demand” versus “investor protection,” the authority of the EPA and state corporate law, the risk of unconstitutional compelled political speech, and other statutory considerations, such as the high costs versus speculative benefits, the impact on competition and the extent to which added burdens may discourage companies from going public.
It is hard to say whether this letter will have any more impact on the SEC than the “please stop this madness” comment, but it certainly provides food for thought for those who may seek to challenge the rules down the line.
