Speculation’s been mounting about whether Nasdaq will approve listing applications from companies that want to raise capital during the shutdown – I blogged yesterday that they might be warming up to IPOs under limited circumstances. In response, the exchange has now issued five FAQs to explain how they’ll handle new listings – as well as the shutdown’s impact on currently-listed companies.

For IPOs and OTC-traded ’33 Act registrations, Nasdaq is more open to listing companies that substantially completed the comment process before the shutdown began – and suggests that companies in that position call the Listing Qualifications Staff to discuss the situation. At this time, Nasdaq remains reluctant to list companies that are just starting the IPO process…but they don’t entirely close the door on that possibility.

Here’s a video from Dave & Marty about the shutdown…

Delaware’s Sustainability Certification: First Filer

Last summer, John blogged about Delaware’s new “Transparency and Sustainability Standards Act” – a voluntary certification program (or as John calls it, “the corporate equivalent of buying a Subaru”). Now, the first company is trying it out – a Euronext-traded company called “DSM” (also known as “Royal DSM”). Here’s the integrated annual report that’s posted to the state’s certification page.

The NYSE’s Annual Compliance Letter

The NYSE has sent its “annual compliance letter” to remind listed companies of their obligations. There aren’t any new rules this year – but the letter highlights that the NYSE’s “Timely Alert/Material News Policy” now requires companies to provide notice to the Exchange at least 10 minutes before making any public announcement about a dividend or stock distribution, even outside of trading hours.

Transcript: “How Boards Should Handle Politics as a Governance Risk”

We have posted the transcript for our recent webcast: “How Boards Should Handle Politics as a Governance Risk.”

– Liz Dunshee

It’s hard to imagine the government shutdown continuing for another 19 days – but this amended Form S-1 filed yesterday by Gossamer Bio does just that. Just like Corp Fin’s shutdown FAQ #5 instructs, the cover page sets the proposed offering price and says:

This registration statement shall hereafter become effective in accordance with the provisions of Section 8(a) of the Securities Act of 1933.

For those playing along at home, that means the effective date is scheduled for February 12th. The registration statement also includes this risk factor:

As a result of the shutdown of the federal government, we have determined to rely on Section 8(a) of the Securities Act to cause the registration statement of which this prospectus forms a part to become effective automatically. Our reliance on Section 8(a) could result in a number of adverse consequences, including the potential for a need for us to file a post-effective amendment and distribute an updated prospectus to investors, or a stop order issued preventing use of the registration statement, and a corresponding substantial stock price decline, litigation, reputational harm or other negative results.

The registration statement of which this prospectus forms a part is expected to become automatically effective by operation of Section 8(a) of the Securities Act on the 20th calendar day after the most recent amendment of the registration statement filed with the SEC, in lieu of the SEC declaring the registration statement effective following the completion of its review. Although our reliance on Section 8(a) does not relieve us and other parties from the responsibility for the adequacy and accuracy of the disclosure set forth in the registration statement and for ensuring that the registration statement complies with applicable requirements, use of Section 8(a) poses a risk that, after the date of this prospectus, we may be required to file a post-effective amendment to the registration statement and distribute an updated prospectus to investors, or otherwise abandon this offering, if changes to the information in this prospectus are required, or if a stop order under Section 8(d) of the Securities Act prevents continued use of the registration statement. These or similar events could cause the trading price of our common stock to decline substantially, result in securities class action or other litigation, and subject us to significant monetary damages, reputational harm and other negative results.

I blogged yesterday that Nasdaq wasn’t eager to allow listings for companies whose registration statements haven’t gone through full SEC review, and that was a barrier to going public right now even though the SEC is allowing companies to file registration statements without the delaying amendment. And while I continue to think that “eager” would be an overstatement, the WSJ later reported that the exchange is warming up to the workaround – especially for the handful of companies that have worked through pre-shutdown SEC comments. So, Gossamer and the other trailblazers are (cautiously) moving forward. No doubt they’re also considering how to pivot if the SEC returns to its full strength within the next couple weeks.

BlackRock’s Annual Letter: Linking Purpose & Profits

Last week, two of the world’s largest asset managers gave their annual “heads up” to companies about this year’s engagement priorities. This NYT write-up describes how BlackRock CEO Larry Fink exhorts CEOs to be “leaders in a divided world” – while Bloomberg’s Matt Levine wonders if Larry Fink is now the late-capitalist version of “president of the world.” But a takeaway for us governance people is that the leadership suggestions have a human capital tone – helping workers prepare for jobs of the future, as well as retirement.

The letter also refines last year’s directive to pursue the greater good by emphasizing the compatibility and co-dependence of purpose & profits. When it comes to preparing for this year’s engagements, here’s what BlackRock’s new annual letter identifies as priorities (also see this Cooley blog and this Weil blog):

BlackRock’s Investment Stewardship engagement priorities for 2019 are: governance, including your company’s approach to board diversity; corporate strategy and capital allocation; compensation that promotes long-termism; environmental risks and opportunities; and human capital management. These priorities reflect our commitment to engaging around issues that influence a company’s prospects not over the next quarter, but over the long horizons that our clients are planning for.

In these engagements, we do not focus on your day-to-day operations, but instead seek to understand your strategy for achieving long-term growth. … [W]e seek to understand how a company’s purpose informs its strategy and culture to underpin sustainable financial performance. Details on our approach to engaging on these issues can be found at BlackRock.com/purpose.

State Street’s Letter: “Culture Eats Strategy for Breakfast”

Not inconsistent with BlackRock’s asks, last week on our “Proxy Season Blog” I wrote that pension funds want to know about your culture. According to their annual letter, that topic is also pretty important to State Street. SSGA has created a framework to help boards align culture & strategy (see page 6) – and they’ll be asking these questions during engagements:

– Can the director(s) articulate the current corporate culture?

– What does the board value about the current culture? What does it see as strengths? How can the corporate culture improve?

– How is senior management influencing or effecting change in the corporate culture?

– How is the board monitoring the progress?

– Liz Dunshee

A few weeks ago, Broc blogged about how a government shutdown was gonna really disrupt the processing of no-action requests related to shareholder proposals if the shutdown went much longer. Now that the conjecture has become reality, we just fielded this question in our “Q&A Forum” (#9722):

We submitted a no-action request to the Staff to exclude a shareholder proposal made under Rule 14a-8 during the shutdown but obviously haven’t heard anything. Seems like we will be forced to include it as our date for providing the proponent our Statement in Opposition and eventual filing are coming up in a week or two. Any other thoughts, reasons we can exclude the proposal even if we don’t hear from the SEC?

My response was:

You might have seen this recent Reuters article – and this WSJ article. Here’s a quote from Ron Mueller in the WSJ article: “If the shutdown continues even after a company needs to send out its proxy statement to shareholders, the company could include proposals in the statements but not make them subject to a vote, saying it is awaiting a determination from the SEC, Mr. Mueller said. A company also can negotiate with shareholders who made a proposal, striking a deal that results in it withdrawing the SEC application and removing the proposal from the proxy in exchange for concessions.”

And Broc added:

This sure is interesting stuff since it’s novel. On page 41 of our “Shareholder Proposals Handbook,” there’s a section about exclusion without Staff relief. I talk about the risk of an SEC enforcement action – but I don’t know how high that risk would really be in these circumstances. Of course, it will depend on how strong your argument is that a proposal is excludable under one – or more – of the exclusion bases in Rule 14a-8. So I imagine companies might do some hard thinking and see how comfortable they are about exclusion without the no-action relief…

Removing the Delaying Amendment: Nasdaq Gets Nervous

As the shutdown drags on, we’ve blogged several times that removing the delaying amendment is really the only way to go effective with a registration statement right now. But that’s a big deviation from standard practice – and this WSJ article reports that (not surprisingly) it’s making banks & exchanges nervous. Here’s an excerpt:

But the Nasdaq Stock Market, where both companies are aiming to list, has balked at firms using the method over worries that such deals could be vulnerable to regulatory or legal challenge later on, according to people familiar with the matter. Still, the exchange hasn’t ruled it out in certain cases, one of the people said. Some bankers have also been wary of such deals.

Proceeding without Corp Fin’s signoff could carry substantive risk, some bankers and lawyers say. If the IPO disclosures given to investors are later shown to have shortcomings, plaintiffs’ lawyers could pounce and point to the unusual way the deals were done.

Another downside to the automatic route is companies would need to price their stock at least 20 days in advance of trading, whereas in a traditional IPO the price is set the day before trading begins. Bankers worry the price might become stale as economic crosswinds or other factors could affect demand for the offering.

Against my better judgment, I read some of the comments on that WSJ article. Here’s a taste:

Capitalists do not need government bureaucrats to raise capital. Abolish the SEC and let markets work.

Point taken that companies have been moving away from traditional IPOs – and this Matt Levine blog imagines a functioning world in which the SEC is accidentally no longer involved in that process…

How the Shutdown Impacts the SEC’s Enforcement Program

Check out this piece from John Reed Stark about how the government shutdown impacts the SEC’s enforcement program…

– Liz Dunshee

Tune in today for the webcast — “12 Tricks to Help You During Proxy Season” — to hear Aon’s Karla Bos, Intel’s Irving Gomez, Gibson Dunn’s Beth Ising and Microsoft’s Peter Kraus share practical advice on how to enhance your proxy season efforts without sacrificing your sanity. The agenda includes:

1. Organize & Draft Your Proxy In the Way That Makes Sense This Year
2. When Developing Your Engagement Strategy, Consider the SEC’s “Rules of Engagement”
3. Keep a Hard Copy of Your Proxy on Your Desk for Note-Taking
4. “Tell It Like It Is” – And Don’t Save “Board Responsiveness” for Low Vote Results
5. Negotiating PR Aspects of Shareholder Proposal Withdrawals
6. Three “Forget-Me-Nots” When Presenting Shareholder Proposals (And Your Response) in the Proxy
7. Capitalize on Your 10-K
8. Get Outside Help, But Don’t Outsource to Excess
9. Use Graphics & Formatting in a Productive Way
10. Proxy Review: Use Fresh Eyes, Particularly for Quality Assurance
11. Watch Those Shareholder Proposal & Nomination Deadlines
12. Call the Experts to Assist with Shareholder Proposals
13. Engage, But Don’t Count on It to “Carry the Day”
14. Shareholder Engagement: Develop Relationships Before You Need Them

Insider Trading: House Bill Targets 10b5-1 Plans

Last week, the House Committee on Financial Services re-introduced a bill on a bipartisan basis – the “Promoting Transparent Standards for Corporate Insiders Act” – which would require the SEC to study whether Rule 10b5-1 should be amended to add more procedural restrictions for trading plans. The potential amendments would:

– Limit the ability of companies & insiders to adopt a trading plan to a time when the company or insider is permitted to buy or sell securities during issuer-adopted trading windows

– Limit the ability of companies and insiders to adopt multiple trading plans

– Establish a mandatory delay between the adoption of a trading plan and the execution of the first trade under the plan (and if so, whether the delay should be the same for plans adopted during versus outside a trading window, and whether any exceptions to a delay are appropriate)

– Limit the frequency with which companies and insiders may modify or cancel trading plans

– Require companies and insiders to file trading plan adoptions, amendments, terminations and transactions with the SEC

– Require boards of companies to adopt policies covering trading plans, periodically monitor trading plan transactions and ensure that company policies discuss trading plan use in the context of hedging policies and stock ownership guidelines

SEC Commissioner Nominee: Stalled Due to Shutdown

Since Kara Stein’s holdover term expired last month, we’re once again down to four Commissioners. Broc’s blogged about nomination delays becoming more common – and it looks like this go-round will follow suit. As this WSJ article reports, the government shutdown is taking the blame this year. Here’s an excerpt:

Mr. Schumer recommended [several months ago] the White House nominate former SEC staffer Allison Lee to fill a vacancy on the commission left by the recent departure of Kara Stein, the people familiar with the matter said. Ms. Lee, who formerly served as an aide to Ms. Stein, also worked as an attorney in the SEC’s enforcement division for over a decade before retiring from the commission last January, according to her profile on LinkedIn.

Some Democrats also are worried the White House is purposely slow-walking liberal nominees to the positions, particularly Ms. Lee, whose name has been pending with the Trump administration for several months. Republican policy makers maintain the shutdown has stretched staff thin within the executive branch [straining its ability to do background checks and other necessary paperwork].

– Liz Dunshee

This recent Bloomberg Law blog describes a shareholder proposal – and a company’s response – that you definitely don’t see every day. Here’s the intro:

The recent no-action request from Johnson & Johnson to exclude a shareholder proposal from its proxy materials creates a rather unique dynamic. It is indeed an unusual day when a shareholder submits a proposal that could curtail investor rights, and the company responds with a full-throated defense of the shareholders’ right to file suit against it.

That peculiar set of circumstances resulted from an investor request to have the Johnson & Johnson board adopt a bylaw requiring the arbitration of all claims brought by investors arising under the federal securities laws, and providing that any such claims may not be brought as a class and may not be consolidated or otherwise joined.

Geez, and I thought it was odd when Steelers fans were rooting for the Browns to beat Baltimore a few weeks back. . . Anyway, the shareholder proponent is Hal Scott, an emeritus Harvard Law School prof who’s a long-time opponent of shareholder class action litigation.

This situation has produced some very strange bedfellows – check out the signatories to this recent letter to SEC Chair Jay Clayton urging it to grant the no-action relief that J&J’s requested and to reaffirm the SEC’s position that arbitration clauses violate the securities laws.

ESG: Why Boards Should Care About the SASB’s Sustainability Standards

I recently blogged about the SASB’s adoption of he first-ever industry-specific sustainability accounting standards designed to facilitate communication of financially-material sustainability information to investors. This BDO memo reviews the new standards and provides an overview of both SEC-mandated sustainability disclosures & the information increasingly demanded by investors.

The memo acknowledges that sustainability has been a back-burner issue for many corporate boards, but says there are reasons that companies should embrace the new standards and the enhanced sustainability disclosure they contemplate. Potential benefits of this approach include:

– Realization:Tangible returns being realized in adoption of sustainable practices
– Competitive differentiator: Use of voluntary disclosure as opportunity to tell unique stories to the marketplace which can serve as competitive differentiators
– Capitalizing on investment trends: Cultivation and incorporation of evolving investing practices in companies that can demonstrate long term value creation initiatives
– Demonstration of connected corporate strategy: Strengthening corporate strategy with forward-thinking, sustainable practices
– Engagement of shareholders: Getting out in front of the threat of increasing shareholder proposals focused on ESG
– Protect reputation and improve public relations: Communicating fulfillment of a deemed duty by the market as a “good corporate citizen”
– Attraction and retention of talent: A potential further differentiator in war for attracting and retaining good talent

If these reasons aren’t enough, this Davis Polk blog offers another one – rating agencies are increasing their focus on ESG risks.

SEC Shutdown: ALJs Ordered to Stand Down

Yesterday, the SEC issued this updated statement on its operations during the shutdown. Among other things, that update says that the agency is still at work on “emergency enforcement matters,” including “investigations of ongoing fraud or conduct that poses a threat of imminent harm to investors, such as ongoing fraud or misconduct.”

But it’s far from business as usual on the enforcement front. In fact, pending SEC administrative proceedings are among the government shutdown’s latest casualties.  On Tuesday, the SEC issued this order staying all pending administrative proceedings.  This excerpt gives you the gist of it:

The Commission stays all pending administrative proceedings initiated by an order instituting proceedings that set the matter down for a hearing before either an administrative law judge or the Commission. The stay is effective immediately and shall remain operative pending further order of the Commission.

The order permits parties to ask that the stay be lifted, but only in very limited situations, such as in the case of “emergencies involving the safety of human life or the protection of property.”

– John Jenkins

People seem to ponder, contemplate & generally ruminate over the annual letter from BlackRock’s CEO Larry Fink like it’s a pronouncement from the Oracle at Delphi.  Since it gets so much attention, I guess we shouldn’t be all that surprised that somebody would decide to issue a fake version of this year’s letter. Here’s an excerpt from this Barron’s article:

Larry Fink’s annual letter to Corporate America is widely anticipated. But an email Wednesday purporting to be from the BlackRock CEO that was sent to media outlets, including Barron’s, wasn’t the real thing—even though it contained lofty rhetoric and finger-wagging about the risks of climate change, one of Fink’s favorite subjects. It also included a series of purported initiatives including an eyebrow-raising plan to divest from fossil fuel companies.

The hoaxters were certainly media-savvy, not to mention thorough: The fake letter was accompanied by a fake website, and followed by a separate, fake statement from one of BlackRock’s top public relations people. A (real) BlackRock spokesman said the company is investigating.

BlackRock posted the real version of Fink’s letter later in the day. A CNBC story says that the hoax is being pinned on environmental activists, and Barron’s characterized the perpetrator of the hoax as a “prankster,” but I guess I have my doubts. The hoax was elaborate, timed to coincide with BlackRock’s earnings release, and appears to have been designed to move markets. It seems at least possible that “fraudster” may turn out to be a more apt characterization than “prankster.”

Yesterday was a big day for elaborate media hoaxes. If you’re looking for “pranksters,” the activists responsible for the fake edition of yesterday’s Washington Post appear to fit the bill. Notorious Democratic prankster & Richard Nixon tormentor Dick Tuck would’ve been proud.

CEO Activism: Should CEOs Speak Out or “Shut Up & Sing”?

Larry Fink hasn’t been shy about speaking out on social issues, but historically, most corporate CEOs have been pretty averse to the idea of wading into the public debate on social or political topics. There’s a perception that this is changing – and a growing debate about whether CEOs should speak out or just “shut up and sing.” This Stanford study takes a look at the prevalence of CEO activism, the range of advocacy positions taken by CEOs, and the public’s reaction to it.

The study concludes that CEO activism in the media isn’t as widespread as it may be perceived, with only 28% of S&P 500 and 12% of S&P 1500 CEOs making public statements about social, environmental or political issues. Those statements generally were concentrated in a handful of areas – with diversity, environmental issues, and immigration and human rights being the most prevalent. When it comes to social media, only 11% of S&P 1500 CEOs have Twitter accounts, and less than half of them used Twitter as a platform for this type of advocacy.

The study found that the public’s reaction to CEO activism on these topics was mixed. Here’s an excerpt with the details:

In a survey of 3,544 individuals, the Rock Center for Corporate Governance at Stanford University found that two-thirds (65%) of the public believe that the CEOs of large companies should use their position and potential influence to advocate on behalf of social, environmental, or political issues they care about personally, while one-third (35%) do not.

Members of the public are most in favor of CEO activism about environmental issues, such as clean air or water (78%), renewable energy (68%), sustainability (65%), and climate change (65%). They are also generally positive about widespread social issues, such as healthcare (69%), income inequality (66%), poverty (65%) and taxes (58%).

The public reaction is much more mixed about issues of diversity and equality. Fifty-four percent of Americans support CEO activism about racial issues, while 29% do not; 43% support activism about LGBTQ rights, while 32% do not; and only 40% support activism about gender issues,while 37% do not. Contentious social issues—such as gun control and abortion—and politics and religion garner the least favorable reactions. Of these issues, CEOs speaking up about gun control is the only one with a net-favorable position (45% favorable versus 35% unfavorable). Abortion (37% versus 39%), politics (33% versus 43%), and religion (31% versus 45%) all elicit net-unfavorable reactions.

When it comes to consumer behavior, the study says that Americans are significantly more likely to recall products or services they used less of based on a CEO’s comments than to recall those they used more of in response to those comments. The study says that demonstrates that CEO activism is a double edged sword – while it can build customer loyalty, it can also alienate large segments of the customer base.

January-February Issue: Deal Lawyers Print Newsletter

This January-February issue of the Deal Lawyers print newsletter was just posted – & also mailed – and includes articles on (try a 2019 no-risk trial):

– Cross-Border Carve-Out Transactions
– The Odd Couple: Indemnification and R&W Insurance
– Fairness Opinions: How to Avoid Provider Conflicts
– Standards of Review: When the Controlling Shareholder Isn’t a Buyer

Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.

And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.

– John Jenkins

In light of the government shutdown, I really wasn’t expecting any bombshell announcements from the SEC any time soon. Well, that shows you what I know, because yesterday the SEC announced that it had snagged the alleged perpetrators of the infamous 2016 hack of the Edgar system. Here’s an excerpt from the SEC’s press release:

The Securities and Exchange Commission today announced charges against nine defendants for participating in a previously disclosed scheme to hack into the SEC’s EDGAR system and extract nonpublic information to use for illegal trading. The SEC charged a Ukrainian hacker, six individual traders in California, Ukraine, and Russia, and two entities. The hacker and some of the traders were also involved in a similar scheme to hack into newswire services and trade on information that had not yet been released to the public. The SEC charged the hacker and other traders for that conduct in 2015.

The SEC’s complaint alleges that after hacking the newswire services, Ukrainian hacker Oleksandr Ieremenko turned his attention to EDGAR and, using deceptive hacking techniques, gained access in 2016. Ieremenko extracted EDGAR files containing nonpublic earnings results. The information was passed to individuals who used it to trade in the narrow window between when the files were extracted from SEC systems and when the companies released the information to the public. In total, the traders traded before at least 157 earnings releases from May to October 2016 and generated at least $4.1 million in illegal profits.

Here’s the SEC’s complaint – which lays out how the hackers allegedly exploited Edgar test filings for fun & profit. The SEC’s press release notes that this isn’t its first go-around with Oleksandr Ieremenko. This guy was allegedly one of the masterminds behind one of the largest securities frauds schemes of all time. As Broc blogged at the time, Iremenko and others hacked into 150,000 earnings releases over a 5-year period, & the info they obtained resulted in over $100 million in illicit profits. Check out this article for more details on Oleksandr Ieremenko & how that scam came to be.

Parallel criminal charges have been brought against the defendants by the New Jersey US Attorney’s office. Criminal charges also were brought in connection with the newswire hack – which raises the question of why Mr. Ieremenko isn’t making big rocks into little rocks as a guest of the US government? Well, it turns out that he’s in Kiev, and the Ukraine does not extradite its citizens.

Gun Jumping: “I’m Not Dead. . . I’m Getting Better”

I hope you aren’t getting tired of my Monty Python references – but after reading this blog from Bass Berry’s Jay Knight about some recent Staff comments on “gun jumping,” I couldn’t resist borrowing from  The Holy Grail’s “Bring Out Your Dead” scene for this blog’s title. Jay says that, like the old man in the movie, gun jumping’s not dead yet:

Despite the trend toward a more relaxed approach on offering related  communications, gun jumping in some form or another is still alive and well for most offerings conducted, and securities lawyers continue to provide counsel to management on how to navigate the potential minefield.

For example, in monitoring SEC comment letters I came across this SEC comment letter recently made public, which asks the issuer to explain why gun jumping laws were not violated when two of its shareholders issued press releases with respect to the issuer’s confidential IPO submissions and an article on the same matter was published in the Israeli business newspaper Globes.

Jay says that the company’s response appeared to satisfactorily address the Staff’s concerns (it appears no follow-up comments were issued).  He also reviews the still hale & hearty ground rules for avoiding potential gun jumping issues in securities offerings.

ICOs: The Crypto’s Blowin’ Up on Reg D

Although at least one token sponsor has publicly filed an S-1 & a few others have made confidential draft S-1 filings in preparation for registered ICOs, MarketWatch’s Francine McKenna reports that Reg D remains the preferred path for coin offerings:

MarketWatch counted 287 ICO-related fundraisings accepted by the SEC with a total stated value of $8.7 billion in 2018, peaking at 99 in the second quarter. That’s a significant increase from 44 fundraisings filed with a total stated value of $2.1 billion in 2017.

As we blogged early last year, Francine previously reported that reliance on Reg D skyrocketed following the SEC’s issuance of guidance on coin offerings in 2017, and it looks like it that trend remained strong throughout 2018.

– John Jenkins

I probably should preface this blog by conceding that when it comes to constitutional law, I was never anybody’s idea of SCOTUS clerk material.  In fact, about all I can remember from my Con Law class is the time that Prof. Howard called on me and began his questioning with “Mr. Jenkins, Justice Black dissents in this case. . .”  To which I responded, “Yes he does, Professor – and I pass.”

Anyway, some lawyers for The Cato Institute who obviously paid more attention in Con Law than did I have filed a federal lawsuit on behalf of the libertarian think tank challenging the constitutionality of the SEC’s Rule 202.5(e). That rule reads as follows:

The Commission has adopted the policy that in any civil lawsuit brought by it or in any administrative proceeding of an accusatory nature pending before it, it is important to avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact, occur. Accordingly, it hereby announces its policy not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings. In this regard, the Commission believes that a refusal to admit the allegations is equivalent to a denial, unless the defendant or respondent states that he neither admits nor denies the allegations.

This rule is why every SEC settlement contains language providing that the defendant “neither admits nor denies” the SEC’s allegations. In its complaint, Cato says it wants to publish a book critical of the Division of Enforcement written by a former target of an SEC enforcement action, but alleges that the “neither admit nor deny” language in the author’s settlement effectively prevents it from doing so. Cato says that what it refers to as the SEC’s “gag rule” is a content-based restriction on speech that’s prohibited under the 1st Amendment.

Over the years, the SEC’s “neither admit nor deny” settlement policy has come in for plenty of criticism.  After the financial crisis, critics complained about the SEC’s failure to require admissions of wrongdoing in its settlements with major financial institutions.  That ultimately led the SEC to adopt a policy of requiring admissions in some instances.

This time, the SEC’s rule is facing challenges from the “Kill the Administrative State! Kill it with Fire!” side of the political spectrum – and this lawsuit is not the first time the rule has been questioned on 1st Amendment grounds. In October of last year, a rulemaking petition was filed with the SEC challenging the rule’s constitutionality & calling for its revision.

Now, this is where those caveats about my ineptitude as a constitutional scholar come into play.  Despite my complete lack of qualifications, I’m going to play the pundit & speculate that this lawsuit just might get some traction.  The federal courts are becoming less deferential to regulatory agencies – as evidenced by last summer’s SCOTUS decision invalidating the SEC’s ALJ appointment process.  My guess is that this lawsuit may get a boost from the current “Death to the Administrative State!” zeitgeist – but recent experience also suggests that proponents should be careful what they wish for.

SEC Shutdown:  “Rules? We Ain’t Publishin’ No Stinkin’ Rules!”

Meanwhile, as America nears the four week mark in its anarchy experiment, over on our ’Q&A Forum’ (#9717) people are starting to wonder what’s become of the rules the SEC adopted before the shutdown.  Here’s one member’s question:

On December 19, 2018, the SEC adopted final rules regarding the amendment of Regulation A. I’ve yet to see them published in the Federal Register (or the Govinfo site). Any insight as to why not, and any idea when we can expect this?

In his answer, Broc pointed to the shutdown as the likely culprit for the delay in publication. That’s certainly part of it, but I imagine some of the delay also may be associated with the need to press the remaining essential employees at the Gov. Printing Office into service delivering 300 Big Macs & assorted other fast food delicacies to the White House.

I guess some expected fancier fare for the Clemson Tigers, but as someone who once ate 4 Sausage McMuffins with Egg at the Angola service area on the NYS Thruway & enjoyed a “Royale with Cheese” at the Louvre, it’s all good with me.

Transcript: “GDPR’s Impact on M&A”

We have posted the transcript for the recent DealLawyers.com webcast: “GDPR’s Impact on M&A.”

– John Jenkins

As we blogged when the government shutdown started a few weeks ago, Corp Fin issued a set of FAQs to help us since its down to a skeletal level of staffing. Corp Fin has now updated its FAQs to revise #4 and 5 – and to add #6 and 9.

New #6 deals with removing a delaying amendment when you have unresolved staff comments on your filing (the answer is “yes, but you’re still responsible for the completeness & accuracy of the disclosure”) – #9 deals with the Staff considering a request for emergency relief under Rule 3-13 of Reg S-X (the answer is “not likely unless there needs to be protection of property”). Kudos to the Staff for numbering the FAQs!

Removing the Delaying Amendment: Need “Magic Words” to Start the Clock

Broc blogged last week about some examples of companies that removed the delaying amendment – and noted the lack of uniformity in the language.  If you’re thinking of doing this, be sure to check out the update to FAQ #5. As this excerpt notes, merely deleting the delaying amendment won’t get the 20 day clock running:

Simply omitting the delaying amendment from an amendment will not begin the 20 day period. A company that intends to remove the delaying amendment must amend its registration statement to include the following language provided by Rule 473(b) – “This registration statement shall hereafter become effective in accordance with the provisions of section 8(a) of the Securities Act of 1933.” It must also amend to include all information required by the form, including the price of the securities it will sell.

FAQ #5 also highlights the fact that Rule 430A isn’t available in the absence of a delaying amendment – it can only be used for registration statements that are declared effective by the Commission or the Staff.

Privacy: California’s Consumer Privacy Act is Coming – And So Are Class Actions

If you’re feeling lucky that your company has largely dodged the GDPR bullet, I’ve got some bad news for you – California’s recently enacted consumer privacy legislation goes into effect on January 1, 2020. The statute provides substantial new protections to California consumers, and according to this DLA Piper memo, its private right of action provisions ensure that class actions will be coming:

The statute provides a private right of action under certain circumstances to California consumers whose “nonencrypted and nonredacted” personal information is “subject to an unauthorized access and exfiltration, theft, or disclosure as a result of the business’s violation of the duty to implement and maintain reasonable security procedures and practices appropriate to the nature of the information to protect the information . . . .” Cal. Civ. Code § 1798.150.

Significantly, the Act provides such consumers with the ability to obtain relief in the form of either actual damages or statutory damages between $100 and $750 per violation, whichever is greater. In setting the statutory damages amount, courts are instructed to consider, among other factors, “the nature, seriousness . . . and persistence of the misconduct,” number of violations, “the length of time over which the misconduct occurred,” willfulness, and ability to pay. In addition to damages, the Act provides for injunctive or declaratory relief and “any other relief the court deems proper.”

The memo also notes the possibility of class actions under the state’s unfair competition statute as a result of violations of the CCPA. Because of the significant class action risks, companies should begin to prepare for the statute now – and the memo offers up some specific suggestions along those lines.

– John Jenkins

Is there a difference between a “concept release” and a “request for comment”? That’s what I pondered when I wrote my blog about the SEC’s open meeting on quarterly reports a few weeks ago. I think the distinction is that a “concept release” includes within it a request for comment – and a “request for comment” standing on its own is distinguished by not having all of the background information & identification of various alternatives or concepts as you see in a concept release. What’s your ten cents?

Poll: The SEC’s Concept Releases

Please take a moment to participate in this anonymous poll:

Anti-Activism: US Chamber Announces “Aggressive & Comprehensive” Campaign

Yesterday, US Chamber President Tom Donohue delivered this speech that announced a new aggressive offensive to stop attacks on companies. Here’s an excerpt from page 7:

So today we’re announcing that the Chamber is launching an aggressive and comprehensive new campaign to meet these coordinated attacks head on. We are pursuing regulatory and legislative changes that make it easier for businesses to go and stay public … and that allow companies to focus on long-term growth. We’re working with the SEC and Congress to bring real transparency and oversight to proxy advisory firms and to reform the shareholder voting process. We’re educating directors so they are better armed to deal with public policy battles that are waged in the boardroom.

We’re vigorously opposing proposed legislation to federalize large public and private companies through the requirement of a federal charter. That’s one of the worst ideas I’ve heard in a town that knows no shortage of bad ideas. And we will work for meaningful ESG reporting that is grounded in reality and reflects the diversity of American business, across sectors and all over the country.

– Broc Romanek