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Next Up for the SEC: DEPs, Rule 10b5-1 Plans and SPACs

Chairman Gensler Addresses Key Elements of his Agenda

Yesterday, SEC Chairman Gensler addressed key elements of his agenda in a speech before the SEC’s Investment Advisory Committee, which subsequently approved two non-binding recommendations.  Gensler focused on:

  • Digital engagement practices (DEPs) used by online trading platforms. The SEC recently announced requests for information and comment in light of potential conflicts of interest between the platform and investors when DEPs are designed to optimize platform revenues, data collection or investment behavior.  The SEC is also focusing on effects on investment advice and fairness of access and pricing, including for protected characteristics such as race and gender.
  • Rule 10b5-1 plans. As we’ve previously blogged, Gensler believes the Rule 10b5-1(c) affirmative trading defense has potential gaps and has asked the Staff to focus on (1) mandatory cooling off periods before the first trade; (2) prohibitions against having multiple plans at the same time; and (3) enhanced public disclosure of such plans. The committee’s recommendations address those topics, including:
    • Cooling off period of at least four months
    • Prohibition on overlapping plans
    • Require electronic submission of Form 144
    • Proxy statement disclosure of number of shares covered by NEO or issuer plans
    • Form 8-K disclosure of adoptions, modification or cancellation of plans and the number of shares covered
    • Enhanced disclosure of 10b5-1 trades, including adding modifying Form 4 to indicate plan trades and the date of plan adoption or modification
    • Require all companies listed on U.S. exchanges (including foreign private issuers)

SEC Brings First Case Charging Shadow Insider Trading

September 1, 2021


The SEC’s filing of its first shadow trading case earlier this month signals the agency’s willingness to pursue actions based on expanded theories of insider trading liability.

In a federal court complaint, the SEC on August 17 brought insider trading charges against Matthew Panuwat, a former business development executive at Medivation, Inc. based on trades he made after learning that the company was going to be acquired by a major biotechnology firm. The case is striking because it alleges not that Panuwat traded in his employer’s stock, or in the stock of its anticipated acquirer, but rather that he purchased stock in a company “similarly situated” to Medivation.

The economic reasoning underlying the SEC’s action is that Panuwat figured the acquisition of Medivation would also enhance the market value of similar or “shadow” companies. The legal theory of the case is that Panuwat had a duty to Medivation not to use information acquired in his role as a Medivation executive to benefit himself by securities trading, and that he misappropriated that information by using it to trade.

This misappropriation theory is not new, but its application to a shadow trade has widely been described as a first by the SEC’s Enforcement Division.

The scope of insider trading liability beyond the classical paradigm of employees trading in their employer’s stock has long been a subject of litigation and debate.  A crucial issue in this  litigation was resolved in 1997, when the U.S. Supreme Court adopted the misappropriation theory in United States

Privacy, Vulnerabilities, and Breaches, Oh My

August 24, 2021


A recent SEC settlement shed light on data security and privacy concerns that public companies should keep in mind when drafting and filing periodic reports.  The SEC settlement concerned a 2018 data breach at Pearson Plc that resulted in theft of user data, including sensitive personal data.  The Pearson settlement resulted in entry of a Cease and Desist order prohibiting violations of the antifraud provisions of Securities Act Section 17(a), and Exchange Act Section 13(a)’s requirement that foreign issuers file accurate periodic reports and maintain controls to assure this.  Pearson will pay a $1 million penalty as part of the resolution.      

The charged conduct in Pearson’s case focused on language from its SEC filings concerning protection of users’ personal data, and the content of the company’s disclosures after learning in March 2019 that this data had both been publicly exposed and stolen by bad actors. Pearson’s failings represented the latest illustration of a favorite SEC principle underscored in countless enforcement actions, namely, that it is misleading to disclose a potential occurrence as a risk after it has already occurred. In the SEC’s telling, Pearson’s periodic filings continued to make the same standard disclosures of data privacy incident risks, including a statement that it was aware of no such events, even after Pearson learned that its user data had been exposed and stolen. 

Beyond Pearson’s failing to disclose the fact of the data theft, the SEC also charged it with making inaccurate media statements that minimized the nature of the incident. 

Disclosure Controls and Procedures – Not Just a Quarterly Certification

On June 15, 2021, the SEC announced that it had settled charges against First American Financial Corporation for failures in First American’s disclosure controls and procedures.  Rule 13a-15(a) under the Exchange Act requires issuers to maintain disclosure controls and procedures designed to ensure that information required to be disclosed by an issuer in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. 

According to the SEC’s order, in May 2019, company management learned from a journalist that the company was experiencing a cybersecurity vulnerability that had resulted in the inadvertent public availability of customers’ personal data.  First American responded by issuing a statement to the press explaining that the company had learned of a design defect that had resulted in “possible unauthorized access to customer data” and had taken “immediate action to address the situation and shut down external access” to the data.  A few days later, First American issued a press release that was also furnished on Form 8-K.  In the release, the company reported that there was “[n]o preliminary indication of large-scale unauthorized access to customer information.”

Contrary to these disclosures, the SEC found that the vulnerability had exposed sensitive personal data, including social security numbers, in over 800 million images of customer documents for a period dating back to as early as 2003.  The SEC also found that the senior executives of the company who were

New SEC Chair directs staff to propose reforms for Rule 10b5-1 plans

Today SEC Chair Gensler announced that he has directed the staff to make recommendations on “how we might freshen up Rule 10b5-1” in order to address “real cracks in our insider trading regime.”   As discussed in our March 11, 2021 post, “Wait Continues for Any SEC Public Response to Senators’ Urgent Call for Rule 10b5-1 Reform,” earlier this year several Democratic members of the Senate Committee on Banking, Housing, and Urban Affairs submitted a letter urging the SEC to consider 10b5-1 plan reforms.   That wait ended with Gensler’s announcement.      

Gensler identified four key areas of concern:

  • No cooling off period before the first trade. Gensler supports consideration of proposals to mandate four- to six-month cooling off periods, citing research showing 14% of sales of restricted stock occur within 30 days of plan adoption and approximately 40% within the first two months.
  • No limits on termination of plans. Gensler believes that termination of plans while insiders are aware of material nonpublic information may be “as economically significant as carrying out an actual transaction” and “undermines investor confidence.”
    • Consistent with Exchange Act Rule CDI 120.18, Gensler noted that “cancelling or amending any 10b5-1 plans calls into question whether they were entered into in good faith. If insiders don’t act in good faith when using 10b5-1 plans, those plans will not offer them an affirmative defense.”
  • No mandatory disclosure requirements. Gensler believes “more disclosure regarding the adoption, modification, and terms of Rule 10b5‑1 plans

SEC announces re-examination of proxy advisor rules and interpretations

Newly installed Chairman Gary Gensler announced on June 1, 2021 that he is directing the SEC staff to consider whether to revisit its recent actions with respect to proxy voting advice businesses, including:

  • The SEC’s 2020 proxy rule amendments
    • As discussed in our July 24, 2020 blog, the amendments codified the SEC’s interpretation that the definition of solicitation encompassed proxy voting advice and established requirements for exemptions from the information and filing requirements.
  • The SEC’s 2019 interpretation and guidance regarding solicitation
    • As discussed in our October 2019 newsletter, the SEC stated its view that proxy voting advice generally constitutes a “solicitation” subject to the federal proxy rules and explained what proxy advisers should consider disclosing in order to avoid a potential violation of Rule 14a-9 where the failure to disclose such information would render the advice materially false or misleading.

As a result of the Chairman’s announcement, the SEC staff announced later on June 1 that it has decided that it will not recommend enforcement action based on the 2019 interpretation and guidance or the 2020 amendments during this period of staff review.

In addition, the SEC staff announced that if the 2020 amendments ultimately remain in place, it will not recommend enforcement action based on their conditions for a reasonable period after any resumption by ISS of its litigation challenging the 2020 amendments and 2019 interpretation and guidance.

Following these announcements, Commissioners Pierce and Roisman

Russia Now Focal Point of Additional Sanctions and Export Controls, With an Added Bonus for Public Companies (Oh my!)

In response to a variety of activities allegedly undertaken by Russia, the U.S. Government has imposed a series of additional sanctions and export control measures since early March.  Collectively, the March and April sanctions take a variety of forms, including the suspension of entry into the United States and the denial of visas to certain non-U.S. citizens, denial of government credit and financial assistance, cessation of all foreign military financing, export controls changes, expanded sanctions authority, and additional designations of blocked persons.  These sanctions may affect anyone doing business with or in Russia.  Public companies should be particularly mindful of the potential for more reporting pursuant to Section 13(r)(1)(D) of the Securities and Exchange Act of 1934 (“34 Act”) as a side effect of certain of the additional sanctions.

Additional Sanctions Introduced and More Designations Under Existing Authorities

Following the determination that the Government of the Russian Federation violated the Chemical Weapons Convention based on the Navalny attack, the U.S. Government designated multiple new parties under existing sanctions authorities.  Pursuant to Section 231 of the Countering America’s Adversaries Through Sanctions Act (“CAATSA”), the U.S. State Department added six parties to its list of persons that are part of or act for, or on behalf of, the Russian intelligence or defense sectors.  The newly added parties are:

  • 27th Scientific Center;
  • 48 Central Scientific Research Institute Sergiev Posad;
  • 48 Central Scientific Research Institute Kirov;
  • 48 Central Scientific Research Institute Yekaterinburg;
  • State Scientific Research Institute of Organic Chemistry and Technology; and
  • 33rd Scientific Research

As SPACs’ Popularity Explodes, Liability Risks Rise As Well

One driver of the popularity of SPACs is the perception that they have lower liability risks than a traditional IPO.  But a closer look at SPAC transactions suggests that the liability risks are not as low as some believe, and SPAC sponsors and directors and officers of SPAC companies should act to protect themselves against potential claims from both the private plaintiffs’ bar and the government.  Click here to read the alert in full.

SEC staff announces guidance for SPACs

Last week the Staff of the Division of Corporation Finance issued a statement addressing a variety of accounting, financial reporting and governance issues that a private operating company should consider before undertaking a business combination with a special purpose acquisition company (a “SPAC”), shortly followed by one by the Acting Chief Accountant addressing financial reporting and auditing considerations for companies considering merging with SPACs.

The Corporation Finance statement addressed:

  • Ineligibility for
    • The 71-day extension for target company financials, which must be filed on Form 8-K within four business days of closing the de-SPAC transaction
    • Incorporation of 1934 Act filings on Form S-1 until three years after closing 
    • Use of Form S-8 to register equity plans until 60 days after filing the “Super 8-K” containing required “Form 10 information” 
    • WKSI status, use of free writing prospectuses and certain other less strict requirements for public offerings 
  • Public company reporting requirements applicable to the SPAC before, and the combined company after, closing including
    • Books and records requirements
    • SEC reporting and disclosure requirements 
    • The Staff noted that in the limited circumstances described in S-K CDI 215.02, it would not object if the combined company were to exclude management’s assessment of internal control over financial reporting in the Form 10-K covering the fiscal year in which the transaction was consummated 
    • New accounting requirements
  • Stock exchange listing standards, including quantitative as well as corporate governance

Be Aware – SEC Implements Holding Foreign Companies Accountable Act (HFCA) Requirements

The SEC recently announced its adoption of interim final amendments to certain forms, including Form 10-K and Form 20-F, to implement the congressionally mandated document submission and disclosure requirements of the Holding Foreign Companies Accountable Act (the “HFCA Act”) that became effective in December 2020.  The amendments will become effective 30 days after publication in the Federal Register.  They apply to public companies (each, a “Commission-Identified Issuer”) that are identified by the SEC as having filed an annual report that includes an audit report issued by a registered public accounting firm that (1) has a branch or office located in a foreign jurisdiction and (2) the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction.  The SEC will be responsible for identifying such companies, and the PCAOB will be required to identify audit firms that have a location in such a foreign jurisdiction.

Annual Report Amendments.  The new requirements will be implemented (1) with respect to Form 10-K, by the addition of Part II, Item 9C, and (2) with respect to Form 20-F, by the addition of Part II, Item 161.  Each new item will be captioned “Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.”

New Submission Requirement – Commission-Identified Issuers.  The new rules refer to any year in which the SEC identifies a company as a Commission-Identified Issuer as a “non-inspection year.”  The interim final amendments will require that each Commission-Identified Issuer submit, on or

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