As anticipated, yesterday the SEC voted to propose amendments to the definition of “accredited investors.” The proposed amendment, issued upon a 3-2 vote, will allow more investors to participate in private offerings by adding more natural persons that will qualify based on their professional knowledge, experience or certifications. Interestingly, the proposal contemplates that these categories could be established by the SEC by order, rather than the rule itself – which would allow the SEC to establish the criteria in the future without notice & comment. Also, the proposed amendments expand the list of entities that may qualify as accredited investors.
During the summer, Liz blogged about the SEC’s concept release that included discussion of the accredited investor definition. As the concept release generated a flurry of comment letters, it’s hard to say whether this proposal will please everyone. As this Cooley blog notes, the statements of dissent from Commissioners Rob Jackson and Allison Lee – compared to the statements of support from Commissioners Hester Peirce and Elad Roisman – highlight the differences in views that exist about the fundamental purposes of the securities laws.
The proposal doesn’t raise the income and wealth thresholds that have existed since 1982 or suggest adjustments for inflation in the future. This WSJ article says that the lack of an inflation adjustment has contributed to the current number of qualifying households rising over time – from 1.3 million in 1983 to 16 million this year. And among the 69 questions that the SEC specifically requests people to comment on is whether the standards should be tied to geographic reasons to account for potentially lower costs of living.
We’ll be posting memos in our “Accredited Investor” Practice Area to help everyone stay up to date with the latest on the proposed changes.
SEC Proposes Expanding QIB Def’n
As mentioned in the press release about the proposed expansion of the “accredited investor” definition, the SEC also proposed expanding the definition of “qualified institutional buyers” under Rule 144A. The expanded definition would add LLCs and RBICs (Rural Business Investment Companies) to the types of entities eligible for QIB status if they meet the securities owned and investment threshold in the definition. There’s also a new ‘catch-all’ category that would permit institutional accredited investors under Rule 501(a), of an entity type not already included in the QIB definition, to qualify as QIBs when they satisfy the $100 million threshold.
Keeping step with the fast-approaching year-end rush, yesterday the SEC also voted to propose rules requiring mining companies to disclose payments made to foreign governments or the U.S. government for the commercial development of oil, natural gas or minerals.
The Commission is statutorily obligated to issue a rule in this area. And, as outlined in the SEC press release about the proposed rules and in Broc’s blog back a couple of years ago, the path to these new proposed rules has been anything but smooth. Here’s an excerpt from the SEC press release:
The Commission first adopted rules in this area in 2012, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The 2012 rules were vacated by the U.S. District Court for the District of Columbia. The Commission then adopted new rules in 2016, which were disapproved by a joint resolution of Congress pursuant to the Congressional Review Act.
As Liz blogged last week, the NYSE proposal to allow “direct listings” for primary offerings has been revised and is back on the table, and it’s led to a lot of chatter and head-scratching about how exactly this path would work. This 12-page memo from Gibson Dunn is a good up-to-date resource that outlines benefits, issues to consider and current rules that apply. The memo has a nice tabular overview of the various listing standards so that you can compare different alternatives (as Liz also blogged last week, Nasdaq now has a rule that allows secondary direct listings on its Global Select, Global and Capital Markets).
At this point, we still don’t know why the SEC rejected the first NYSE proposal – was it something that the NYSE adequately addressed in its revised proposal, or does the SEC think there’s a fundamental problem with primary direct listings, for investor protection or other reasons? Stay tuned, we’ll be blogging more on this topic as it develops.
Improving Board Oversight of Risk
The board’s role in risk oversight continues to be top of mind – not only for directors, but also for shareholders, legislatures & proxy advisors. If you’re looking for a pretty comprehensive resource, Wachtell recently issued a 24-page memo on the topic. It includes these recommendations:
– Assess whether the company’s strategy is consistent with agreed-upon risk appetite and tolerance for the company
– Review with management whether adequate procedures are in place to ensure that new or materially changed risks are properly and promptly identified, understood and accounted for in the actions of the company
– Review the risk policies and procedures adopted by management, including procedures for reporting matters to the board and appropriate committees and providing updates, to assess whether they are appropriate and comprehensive
– Review with management the quality, type and format of risk-related information provided to directors
– Review with management the primary elements comprising the company’s risk culture, including establishing “a tone from the top” that reflects the company’s core values and the expectation that employees act with integrity and promptly escalate non-compliance in and outside of the organization
Over Confidence about Risk Management?
As reported in a recent Navex blog, a survey from the Institute of Internal Auditors found that boards are over confident about the effectiveness of an organization’s risk management program. According to the survey results, the board “has more faith in the company’s ability to manage risks than the company’s executives do.”
As the blog high-lights, this can present problems when the board believes the company is effectively managing a risk, such as third-party risk, and the board then voices approval for growing the business in an area that relies heavily on effective third-party risk management. As the business expands or grows, a breakdown can occur and then questions will arise about an apparent weakness in risk management, and perhaps whether management was transparent with the board prior to the breakdown.
Navex offers tips for aligning management’s and the board’s views on risk management. Tips for starting a conversation with the board include:
– Discuss whether the board has the right structure and right people
– Evaluate whether the company has good escalation procedures so that the right information gets delivered to the board
– Does management speak in a unified way about risk to help ensure transparency?
– Does the company have a single, trusted source of risk information – starting with the same data set of information is key
Always a high-interest topic, check out Equilar’s blog on GC compensation trends – including a list of the top 10 highest paid general counsel. The info is based on the “Equilar 500” – 500 largest US-headquarter companies by reported revenue that trade on one of the 3 major US stock exchanges. Here are several tidbits from the findings:
– Median general counsel pay was $2.6 million in 2018, a 3.7% increase from 2017
– Although general counsel pay has risen through the years, it lags the rise in CEO compensation, which increased 8% from 2017
– Among the top 10 highest paid general counsel, the technology sector had the highest representation
– Since 2015, male general counsel have earned 11% more on average than female general counsel, and in 2018, this figure grew to over 18%
When the SEC raised the “smaller reporting company” threshold to $250 million last year, one point of contention was that it didn’t make an analogous change to the “accelerated filer” definition. So as confirmed in a set of CDIs from Corp Fin, a company can now be both a “smaller reporting company” and an “accelerated filer.” And although the SEC proposed amendments to both the “accelerated filer” and “large accelerated filer” definitions earlier this year, the proposed rules haven’t been adopted and there would still be some overlap between the filer categories.
Our members have asked a lot of questions about this over the last year. It’s hard to parse through all the rules! I was happy to see that this Ackerman memo lays out a chart for those companies that find themselves navigating this dual status.
For each Item of Reg S-K that applies to periodic reports, the chart compares general disclosure requirements to the rules that apply to smaller reporting companies – and shows whether or not “dual status” companies can take advantage of scaled disclosure accommodations. The memo also highlights that companies holding “dual status” need to comply with accelerated filer filing deadlines – i.e. 75 days after year end for their Form 10-K and 40 days after quarter end for their Form 10-Qs. Don’t forget about our “Disclosure Deadlines” Handbook if you’re looking for more in-depth info.
Audit Fees Keep Rising Due to “New” Standards
Last year, Liz blogged that audit fees had increased due to implementing new revenue recognition and lease standards. Those efforts have continued, so it’s not too surprising that companies are seeing higher fees again this year – according to a recent survey that’s summarized in this “Accounting Today” article. Unfortunately, the article also says that finance teams don’t feel like they’re seeing much in the way of benefits from the extra work & fees:
Over half of finance teams saw substantial audit cost increases over the past two years, primarily due to new accounting rules. The vast majority of companies that have adopted the new revenue recognition standard said that it has had a negative impact on their audit, audit costs increased and the audit required more time to complete – all leading to increased stress and frustration.
Last week, the PCAOB released this Staff report with observations about how the CAMs are looking so far. Here’s an excerpt from this blog by Stinson’s Steve Quilivan:
As a starting matter, the PCAOB’s report seems to implicitly and perhaps explicitly assume that its audit standard requiring the reporting of CAMs provides “more useful and timely information.” That assumption is not backed up with any empirical data or observations.
The PCAOB apparently reviewed 12 of 189 audit reports through November 30, 2019 containing CAMs and there is no information about whether this observation set is statistically significant. The report promises that fuller analysis will follow. The observations reported by the PCAOB are general in nature and far from startling or, perhaps to many, useful.
Open Commission Meeting: Resource Extraction & Accredited Investors/QIBs
According to this notice, the SEC will hold an open Commission meeting this Wednesday to propose resource extraction rule changes and also to propose changes to the “accredited investor” and “QIB” definitions.
State of the SEC: A Few Nuggets from the Chair’s Testimony
Recently, SEC Chair Jay Clayton delivered this 33-page testimony to the Senate Banking Committee in a hearing about SEC oversight. Here are a few nuggets:
1. The SEC has 4400 employees. I’m always intrigued by keeping track of that stat for some reason. 140 positions were filled over the agency’s last fiscal year.
2. 34 rulemakings were advanced – quite a big number considering the government was closed for a month.
3. Proxy plumbing rulemakings took place. Been a lot of talk about proxy plumbing for over a decade. But this year saw a lot of concrete action.
4. Facilitating capital formation – a lot of action also took place here over the past year. “Testing the waters,” Fast Act, etc.
5. Human capital disclosure – on page 9, the Chair offers his own personal observation on this topic. Clearly, he believes in modernizing this area of disclosure.
Contingency Disclosures: Corp Fin’s Comments on Boeing
In this blog, Bass Berry’s Jay Knight analyzes how Corp Fin recently commented upon Boeing’s contingency disclosures. It serves as a nice reminder about the Fast Act rule changes…
Our own Susan Reilly notes: Before she gave birth to her second son, Liz blogged about her experience balancing pregnancy, parenthood & lawyering. In that vein, I thought I’d share a little about my life as a part-time, work-from-home securities lawyer and mom of three boisterous little boys. I’ve had this job for nearly 6 years now – and here are 5 things I’ve learned:
1. Set deadlines for yourself – The work I do now is dangerously flexible – most of my writing projects don’t have concrete deadlines, which is both a blessing (not having partners or clients breathing down my neck is amazingly liberating!) and a curse (it’s easy to let something that should take just a few hours drag on in drips and drabs for weeks).
While I’m grateful for the flexibility, I need a little structure in order to flourish, and setting deadlines for myself helps. Sometimes going a step further and communicating those expectations to your boss or client will really light a fire – that nagging law firm associate in me still cowers in fear of missing a deadline.
2. Establish office hours – A flexible job schedule has a sneaky way of making you think you can get your work done anytime. But there are always other tasks that jump to the top of the list if you let them – errands to run, appointments to schedule, laundry to fold – the list is endless. Scheduling specific working hours during the day, and being disciplined in keeping them, can keep that other non-urgent “life” stuff from chipping away at your productivity.
3. Enlist help – When my older two children made it to school age, I convinced myself that I didn’t need help with the baby – because I would just get my work done while he napped or after everyone was in bed (ha! – see #2). But I was completely at the mercy of this tiny human who demanded my full attention during his waking hours, whose sleeping hours were far too few.
Eventually I realized that I needed help, and my little guy now spends some time with a sitter a few days a week. When he’s there, I’m able to fully focus on the task at hand without constant interruptions. And when he’s home, I’m able to be a more attentive and less distracted parent.
4. It’s normal to feel disconnected – Because I only work part-time and from home, I can sometimes feel disconnected from my peers. It’s hard to fully relate to the stay-at-home moms or the full-time working moms – because I don’t fit neatly into either category. It’s a weird feeling, having one foot in each camp, but it’s one I’m slowly getting used to.
5. Never take it for granted – When Broc suggested I write a blog post about working part-time, I was both really excited to share my experience – but also a little nervous. I realize that I’m in a somewhat rare position of being able to continue pursuing my legal career while also having the flexibility to be home with my young children.
It’s not lost on me that the challenges I’ve faced with working part-time are ones I would have given my right arm for when I was working brutal hours at a firm – always on call, all the while learning how to be a new parent. Every once in a while, it’s important to take a step back and appreciate that meaningful and rewarding part-time work isn’t easy to come by – and to know a good thing when it comes your way.
Direct Listings: NYSE Files Revised Proposal!
That was fast. Earlier this week, I blogged that the SEC had rejected the NYSE’s proposed rule change to permit companies to sell newly issued primary shares via a direct listing – only 10 days after the exchange had submitted it. The SEC hasn’t made any public statements about why it rejected the proposal, so we still don’t know for sure whether it was because the Commission is fundamentally opposed to direct listings, believes that rulemaking is required, or if there was just something it wanted the NYSE to tweak. But the NYSE signaled that it would continue working on this initiative, and it’s now submitted this revised proposal. As this Davis Polk memo explains, it’s pretty similar to the original:
The new rule change proposal is substantially similar to the proposal the NYSE filed in November, except that issuers can meet the NYSE’s market value requirement by selling $100 million of shares (rather than $250 million under the initial proposal). Consistent with the initial proposal, the revised rule change proposal would provide the same flexibility for an issuer to sell newly issued primary shares into the opening auction in a direct listing, and would also delay the requirement that an issuer have 400 round lot holders at the time of listing until 90 trading days after the direct listing (subject to meeting certain conditions).
Stay tuned as to whether this revision addresses the SEC’s concerns. As Broc blogged when the original proposal was submitted, some are worried about investor protection issues for listings that occur outside of the traditional IPO process – but others note that there are a number of misconceptions about direct listings, including that a direct listing is even a “capital-raising” activity (see more from this Fenwick & West piece). We’re continuing to post memos in our “Direct Listings” Practice Area.
How to Attract & Retain New Lawyers
Law firms lose about $1 billion annually because of attrition, according to Thomson West. Being a young lawyer is marginally better than being a young investment banker (I have only landed in the hospital 2 or 3 times for overworking – I assume it’s a much more regular occurrence with bankers). But practicing law is still a tough gig.
And while my eyes usually glaze over whenever I see anything with “Millennial” in the title, this article connects some dots for scenarios that I’ve seen play out repeatedly. In the span of a couple years, our firm lost a cadre of young lawyers – not to other firms or companies – but to become distillery owners, grant-writers, ultimate Frisbee managers, MFA students… the list goes on.
Here are some pointers worth thinking about:
– A Millennial lawyer will leave a job, not just when he or she is unhappy, but when he or she is not happy enough.
– Give associates time & space to integrate their personal & professional lives (“work-life balance” is so Gen-X).
– Figure out a real way to mentor new lawyers.
– Empower associates to contribute immediately.
– Focus on “doing well by doing good.” The days of asking an associate, “If you can use the hours, I could really use your help on a new deal,” are over. Instead, try this approach: “If you’re interested in helping an interesting client, I’ve got a great deal for us.”
That last one made me laugh because that quote is specifically mentioned in Broc & John’s “101 Pro Tips – Career Advice for the Ages” (but not quite in the way that you’d think). One of the most empowering things you can do for these new lawyers is to help them take control of their own careers – and recognize the benefits of sticking with it. “Pro Tips” delves into the topics above and is a great resource for young lawyers – order it today. Here’s the “Table of Contents” so you can see what’s covered.
Programming Note: Lynn Jokela’s Blogging Debut!
Last month, I announced that Lynn Jokela has joined us as an Associate Editor for our sites. She brings a wealth of experience – here’s her bio. I’m now excited to share that Lynn will be making her blogging debut next week. Lynn’s email uses the domain from our parent company – it’s ljokela@ccrcorp.com – so keep an eye out for that in your inbox!
You likely saw this WSJ article last month, detailing an SEC investigation into one company’s end-of-quarter “earnings management” practices – e.g. leaning on customers to take early deliveries and rerouting products to book sales. The company says “everyone’s doing it” – and according to a McKinsey survey described in this Cleary blog, that’s not too much of an exaggeration:
Lest anyone think the SEC’s focus on “pulling in” revenues is an issue of limited relevance, note that approximately 27% of US public companies provide quarterly guidance, and evidence of widespread earnings management is not merely anecdotal. A broad survey by McKinsey reveals that, when facing a quarterly earnings miss, 61% of companies without a self-identified “long-term culture” would take some action to close the gap between guided and actual earnings, with 47% opting to “pull-in” sales. 71% of those companies would decrease discretionary spending (e.g., spending on R&D or advertising), 55% would delay starting a new project, even if some value would be sacrificed, and 34% would delay taking an accounting charge.
But the widespread nature of these practices doesn’t make the SEC more amenable to them – e.g. they imposed a $5.5 million fine and a cease-and-desist order in a recent enforcement action involving similar maneuvers. The blog notes:
The use of any of these techniques, if resulting in the obfuscation of a “known trend or uncertainty . . . that may have an unfavorable impact on net sales or revenues or income from continuing operations,” would presumably be equally objectionable to the SEC.
Accordingly, for those companies that are still providing earnings guidance, it would be prudent to make sure that your disclosure committee is having frank and frequent discussions with management about exactly what, if any, earnings management tools are being used, whether these tools fit squarely within the company’s revenue recognition policies, whether the company’s auditors are aware of the scope and persistence of these practices, and, most importantly, whether the use of the tools is, intentionally or not, masking a trend of declining sales, a declining market share, declining margins, or other significant uncertainties.
“Climate Accounting”: Exxon Prevails in Martin Act Suit
A couple months back, I blogged that Exxon Mobil was defending itself in New York state court against allegations that it had misled investors by saying publicly that it estimated higher future costs of climate change regulations when it evaluated potential oil & gas projects – when it was actually basing those decisions on current costs, and assumptions that the regulatory environment wouldn’t change.
Among other things, the complaint by the New York Attorney General alleged violations of the state’s Martin Act, which turns on whether there’s a misrepresentation or omission of material facts. The alleged misrepresentations were made by Exxon in reports that were published back in 2014 in exchange for the withdrawal of two shareholder proposals – and were then repeated in other reports such as the company’s “Corporate Citizenship Report.”
Earlier this week, the judge on the case issued this 55-page opinion in Exxon’s favor. Basically, the decision came down to a finding that investors didn’t care about the info – there was no market impact and the info wasn’t “material” when considered with the total mix available in the company’s 10-K and other disclosures. The judge also accepted Exxon’s argument that the company’s internal practices didn’t impact its financials.
This was a big victory, but it’s pretty fact-specific (as detailed in this “D&O Diary” blog) – and you’ve gotta wonder whether the outcome would be the same if the allegations were based on more recent disclosures, since current-day investors keep claiming they care about this stuff. Exxon continues to face other “climate change” lawsuits – including a consumer protection case in Massachusetts. And they aren’t alone. This Davis Polk blog notes that at least one D&O insurer is observing a growing number of climate-related claims – and that it will consider that risk during underwriting. Here’s an excerpt:
Among 28 countries, 75% of climate-related cases brought to date were in the United States alone. The firm anticipates that the failure to disclose climate change risks may drive claims in upcoming years. Moreover, a company’s lack of responsiveness to overall environmental, social and governance (ESG) issues, including ethical topics, can cause brand values to plummet. The insurer warns that, when gauging a company’s reputation, underwriters of D&O insurance will consider the nature and tone of comments made on social media relating to the company.
November-December Issue of “The Corporate Counsel”
We recently mailed the November-December issue of “The Corporate Counsel” print newsletter (try a no-risk trial). The topics include:
1. Hedging Disclosure Is Here—Are You Ready?
– Background of Hedging Disclosure Requirement
– What Item 407(i) of Regulation S-K Requires
– Applicability & Effective Dates
– Interpreting the New Hedging Disclosure Requirement
– Rule Applies to Broad Categories of Transactions
– Elaborate Policy Not Required
– Drafting Proxy Disclosure
– Evolution of the Staff’s Non-GAAP Comments
– What is “Tailored Accounting?”
– Where is the Staff Raising “Tailored Accounting” Comments?
– Comments On Acquisition-Related Adjustments
– Five Key Takeaways on Tailored Accounting
In response to investor pressure to issue an earnings release within the same time frame as prior years, the company announced its 2017 year-end financial results on March 8th and furnished its earnings release on Form 8-K. The company issued the earnings release despite the departure of senior finance and accounting managers, pervasive ERP implementation and internal control issues, and a seven-week delay in the filing of its third quarter 2017 Form 10-Q.
According to the SEC, the earnings release materially misstated, among other things, the company’s earnings for 2017.
On March 19th, the company filed a Form 8-K with the Commission disclosing that it expected its 2017 Financial Results to differ from what had been reported in the March 8th earnings release. The company’s shares declined over eight percent that day.
The company settled with the SEC for $250,000. The pain of dealing with an Enforcement action – and the loss of credibility – was likely an even greater punishment…
FCPA: DOJ Revises Policy to Encourage Self-Disclosures
A couple weeks ago, the DOJ revised its FCPA “Corporate Enforcement Policy” to encourage more self-disclosures to the Department. Here’s an excerpt from an O’Melveny memo that describes the change:
The DOJ eliminated language that appeared to require companies, in disclosing conduct, to characterize that conduct as a violation of criminal law. The DOJ also clarified that companies, when identifying information not in their possession, need only identify evidence actually known to the companies at the time. The changes respond to concerns raised by companies and the defense bar about language in the CEP, and reflect the current Administration’s push to make DOJ policy towards corporate enforcement more reasonable.
While the policy doesn’t apply to SEC Enforcement, the memo does note that the the DOJ’s Criminal Division has expanded the CEP beyond FCPA cases, and stated that it will act as non-binding guidance in Criminal Division cases involving healthcare, financial fraud, and other violations.
This Nixon Peabody memo blacklines the revisions – and explains they could be interpreted to encourage companies to share more information at an earlier stage of internal investigations in order to get full cooperation credit. We’re posting memos in our “FCPA” Practice Area as they come in…
California Consumer Privacy Act: FAQs
Ready or not, the CCPA takes effect January 1st. This memo from Womble Bond Dickinson lays out some “frequently asked questions” for companies that are trying to navigate compliance issues. Here’s one that could require some effort:
Question: Does the CCPA require changes to existing contracts?
Answer: If you are a business subject to the CCPA and do not want to be a data seller under the CCPA, then yes, you will need to amend contracts to add appropriate “service provider” language to the contract. If you are a service provider serving businesses subject to the CCPA, you can expect to receive requests from your customers described under the immediately preceding sentence. Also, where you yourself wear both hats, you may find you need to make both downstream and upstream changes to your agreements to comply with the CCPA.
Last week, the House passed the “Insider Trading Prohibition Act” by a vote of 410-13. John blogged about the bill back in June when it passed out of the House Financial Services Committee – it would broadly describe “wrongful” trading or communication of material non-public information by tying it to:
(A) theft, bribery, misrepresentation, or espionage (through electronic or other means);
(B) a violation of any Federal law protecting computer data or the intellectual property or privacy of computer users;
(C) conversion, misappropriation, or other unauthorized and deceptive taking of such information; or
(D) a breach of any fiduciary duty, a breach of a confidentiality agreement, a breach of contract, or a breach of any other personal or other relationship of trust and confidence.
The legislation would also require only that a defendant was aware or recklessly disregarded that the inside information was wrongfully obtained – rather than specific knowledge of how it was obtained or whether there was a “personal benefit” involved. It also leaves open the possibility that 10b5-1 transactions could be exempt from insider trading prosecution. Mostly, though, it pretty closely tracks current case law.
So what are the odds that this bill will become law? It appears to have “bipartisan” support – but it’s also been floating around in some form since 2015 and hasn’t made it to the finish line yet. The repetition certainly makes it easier to come up with headlines – I copied today’s from a 2017 write-up by John.
SEC Enforcement: “Cooperation” Becomes More Common
Last month, Broc blogged about the Enforcement Division’s annual report on its activities. This annual study from Cornerstone Research & NYU takes a closer look at the results for public companies & subsidiaries. Here’s some takeaways (also check out this Orrick blog saying that crypto & blockchain issues still appear to be enforcement priorities):
– While the number of enforcement actions rose more than 30% over the previous fiscal year, more than half of the new actions targeted investment advisers/investment companies or broker-dealers
– In FY 2019, the SEC noted cooperation by 76% of defendants, a record-high percentage and substantially higher than the FY 2010–FY 2018 average of 51%
– In the first half of FY 2019, the SEC brought 100% of enforcement actions as administrative proceedings; in the second half, this dropped to 84%
– Challenges to the constitutionality of protections preventing removal of the SEC’s administrative law judges (ALJs) continued in FY 2019 with a new defendant filing challenges following the August 2019 dismissal of Lucia v. SEC
– The average monetary settlement amount for public & subsidiary actions during the period was $16 million
When the SEC’s Enforcement Division released its annual stats last month, Broc blogged that some of the motivation behind the report might be for the SEC to show Congress that its money is going to good use. That hunch aligns with the recent recommendation by the Government Accountability Office that the SEC needs to do a better job of documenting its procedures for generating these reports – including procedures for compiling & verifying stats and documenting their implementation.
Since 2009, the Division of Enforcement (Enforcement) in the Securities and Exchange Commission (SEC) has made modifications to its reporting of enforcement statistics, including by releasing a stand-alone annual report beginning in fiscal year 2017. The Enforcement Annual Report included additional data on enforcement statistics not previously reported and narratives about enforcement priorities and cases. Enforcement staff told us the annual report was created to increase transparency and provide more information and deeper context than previous reporting had provided.
Enforcement has written procedures for recording and verifying enforcement-related data (including on investigations and enforcement actions) in its central database. However, Enforcement does not have written procedures for generating its public reports (currently, the annual report), including for compiling and verifying the enforcement statistics used in the report. To produce the report, Enforcement staff told GAO that staff and officials hold meetings in which they determine which areas and accomplishments to highlight (see figure). Enforcement was not able to provide documentation demonstrating that the process it currently uses to prepare and review the report was implemented as intended.
Developing written procedures for generating Enforcement’s public reports and documenting their implementation would provide greater assurance that reported information is reliable and accurate, which is important to maintaining the Division’s credibility and public confidence in its efforts.
That was fast. On Friday, Reuters and other sources reported that the SEC rejected the NYSE’s proposed rule change that would have permitted companies to sell newly issued primary shares via a direct listing – which had been submitted the week before.
Broc just blogged last week about the proposal being somewhat controversial. We aren’t sure what aspect of it prompted the rejection – but it’s not uncommon for these types of things to go through a few iterations and this Wilson Sonsini memo speculates that perhaps additional SEC rulemaking is necessary to make primary listings possible. The NYSE says it’s continuing to work with the SEC on a “direct listing product” – so it’s probably not the last we’ll hear of this path to going public.
Direct Listings: Nasdaq’s “Resale” Rule Extended to Its Global & Capital Markets
Last week, the SEC approved this recent Nasdaq proposal that will allow “resale” direct listings on the Nasdaq Global Market and the Nasdaq Capital Market – an extension of an already-existing rule that allows these types of direct listings on the Nasdaq Global Select Market.
This Wilson Sonsini memo summarizes the final rule – and explains how the valuation parameters for companies listing shares on Nasdaq’s Global and Capital Markets differ slightly from what applies to the Nasdaq Global Select Market.
Nasdaq Proposal: Excluding Restricted Shares from “Publicly Held” Calculation
The exchanges have been busy. A couple weeks ago, Nasdaq filed this rule proposal that would require listed companies to provide Nasdaq with info about the number of their non-affiliate shares that are subject to trading restrictions – e.g. due to lockups or standstills, private offering restrictions, etc. – if the exchange observes unusual trading activity that implies limited liquidity.
Under the proposed rule, Nasdaq could also halt trading in connection with the request and could require companies with inadequate “unrestricted public float” to adopt a plan to increase the number of unrestricted shares. Nasdaq already has a similar rule for initial listings, but this would extend the concept to continued listing rules.
The SEC posted the rule for comment last week, so we likely won’t know for at least a couple of months whether this rule will be approved in current form or at all.
Last week, the NYSE proposed a rule change to allow listed companies to sell newly issued primary shares on its own behalf directly into the opening trade. As noted in this Davis Polk memo, this change could make the direct listing route more attractive to companies that need to raise capital, although it is an open question whether companies will be able to achieve the desired pricing & distribution of shares in a way comparable to that done in a traditional underwritten IPO.
Some are worried about the investor protection issues raised when the traditional IPO process is not utilized – but others note that there are a number of misconceptions about direct listings, including that a direct listing is even a “capital-raising” activity (see more from this Fenwick & West piece). We’re posting memos in our “Direct Listings” Practice Area – and here are some media pieces:
This “Financial Times” article reveals how being a whistleblower can ruin your career. Here’s an excerpt:
These individuals worked for four of the most renowned names in the business world: EY, Deloitte,
KPMG and PwC. They are among 20 former employees from the Big Four accounting firms who
have spoken to the Financial Times about their experience of harassment, bullying and
discrimination in the workplace over the course of a year’s investigation into how these firms treat
whistleblowers within their ranks.
The FT identified a disturbingly common pattern in terms of how complainants were treated: most
initially felt ignored, then isolated and were eventually pushed out. Legal clauses aimed at silencing
them swiftly followed; nine of those interviewed said they were pressured into signing restrictive
non-disclosure agreements. Others were asked to sign but resisted.
