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Wait Continues for Any SEC Public Response to Senators’ Urgent Call for Rule 10b5-1 Plan Reform

The wait continues for any public response from the SEC to a recent letter from three Democratic members of the Senate Committee on Banking, Housing, and Urban Affairs, including Senator Elizabeth Warren, urging the SEC to (1) consider reforms to prevent what the senators identified as abusive 10b5-1 plan practices and (2) improve disclosure of and enforcement relating to such plans.

Senators’ SEC Requests for Information.  The senators asked the SEC to respond to the following questions by Monday, February 22, 2021:

  • What actions does the SEC currently take to ensure that 10b5-1 plans are compliant with the Commission’s current rules and requirements?
  • How many enforcement actions has the agency taken with regard to 10b5-1 plans in the past five years? Please provide a list and summary of all such actions.
  • Has the SEC taken action to require a “cooling off period” between the adoption or amendment of any 10b5-1 plan and any stock sales under that plan?
  • Does the agency intend to require that 10b5-1 plans are disclosed publicly and posted online in advance of any trades made under that plan?
  • Has the SEC considered or evaluated modifications of regulations to ensure that 10b5-1 adequately covers “short-swing” purchases?
  • What other actions has the SEC taken or are under consideration to prevent the abuse of 10b5-1 plans?
  • In the letter, the senators said they believe reforms are necessary in large part because “new evidence indicates that executives – especially those in the health care industry – are abusing these

    Climate-Related Disclosure in the Hot Seat

    SEC Commissioners: Are Recent Announcements Changes from Status Quo or New PR Twist?

    SEC Commissioners Hester M. Peirce and Elad L. Roisman today issued a statement providing their perspectives on the recent wave of climate-related announcements by the Divisions of Enforcement, Examinations and Corporation Finance.  Emphasizing that in their view the recent announcements raise more questions than they answer, the commissioners note their impact is not yet clear and query whether the announcements “represent a change from current Commission practices or a continuation of the status quo with a new public relations twist.”  Recent SEC ESG developments include:

    • On March 4, 2021, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement to, among other things, develop initiatives to proactively identify ESG-related misconduct.
    • On March 3, 2021, the SEC’s Division of Examinations announced its 2021 examination priorities, which include a greater focus on climate-related risks.
    • On March 2, 2021, Gary Gensler, President Biden’s nominee to serve as SEC Chair, noted in a Senate confirmation hearing that investors increasingly want to see climate risk disclosures. He indicated that, if confirmed, he would support the SEC’s focus on more climate-related disclosures.
    • On March 2, 2021, the House Committee on Energy & Commerce announced the Climate Leadership and Environmental Action for our Nation’s (CLEAN) Future Act which, if adopted as proposed, would direct the SEC to adopt climate risk disclosure rules within two years.
    • On February 24, 2021, Allison Herren Lee,

    Nasdaq amends its board diversity proposal

    On Friday, Nasdaq submitted a revised proposal that addresses board diversity membership for listed companies.  As discussed in our prior alert, Nasdaq had originally called for public companies – over a two-to-four year phase-in period — to include two diverse directors on their boards and to disclose in a “diversity matrix” certain anonymous aggregate data regarding gender identity, race, ethnicity and sexual orientation.

    Based on comments, including criticism as discussed here, Nasdaq has modified the proposal in a variety of areas:

    • Smaller boards. Companies with five or fewer directors would only need to include one diverse director, instead of two.
    • Grace period for vacancies. A one-year grace period would be provided for companies that no longer meet the diversity objective as a result of a vacancy on the board.
    • Timing of disclosure. Diversity information would need to be made publicly available before annual shareholder meetings, to align with disclosures for other proxy-related governance matters.
    • Extra time for newly-listed companies. Newly-listed companies that become listed after the phase-in period for the new rules ends would have an additional two-year period after the phase-in period to fully meet the diversity objective.
    • Trigger date. The operative date for disclosure would be the later of (1) one calendar year from the date of SEC approval of the revised proposal or (2) the date the proxy statement is filed for a company’s annual meeting during the calendar year of such SEC approval date.
    • Location of disclosure. Companies could choose to disclose

    SEC Division of Enforcement No Longer Recommending Settlement Offers Contingent on Waivers

    In a Statement released on February 11, 2021, Acting SEC Chair Allison Herren Lee announced that, in a return to the longstanding practice of the SEC Division of Enforcement (the “Division”), the Division will no longer recommend a settlement offer conditioned on the grant to the company of a waiver from automatic disqualifications triggered by certain securities law violations and sanctions.  Such automatic disqualifications can, for example, prevent a company from being considered a Well-Known Seasoned Issuer (WKSI), engaging in certain private securities offerings under Rule 506 of Regulation D, and serving in certain capacities for an investment company.

    In taking this action, Acting Chair Lee noted that while in many instances a waiver may be appropriate, the waiver determination should, as a policy matter, be made separately from considerations relating to the settlement of an enforcement case.  She further noted that waivers should not be used as a bargaining chip in settlement negotiations, and that reinforcing this critical separation ensures that both processes are fair and that consideration of requested waivers is “forward-looking and focused on protecting investors, the market, and market participants from those who fail to comply with the law.”  Going forward, waiver requests will be reviewed by the SEC’s Divisions of Corporation Finance and Investment Management under standards separate from the law enforcement mandate.

    SEC guidance targets disclosures during “meme stock” volatility

    February 9, 2021

    Categories

    Yesterday, the SEC’s Division of Corporation Finance issued guidance on securities offering disclosure during times of extreme price volatility, which it viewed as characterized by:

    • recent stock run-ups or recent divergences in valuation ratios relative to those seen during traditional markets,
    • high short interest or reported short squeezes, and
    • reports of strong and atypical retail investor interest (whether on social media or otherwise)

    The guidance was issued in the form of a sample comment letter to address topics such as:

    • On the prospectus cover page
      • recent price volatility and any known risks of investing under these circumstances
      • comparative market prices before and after the volatility
      • whether any recent changes in financial condition or results of operations are consistent with the stock price changes
    • Risk factors that address
      • recent extreme volatility
      • the effects of a potential short squeeze, including on purchasers in the offering
      • the effect of the number of shares being offered relative to the number outstanding, including on stock prices and investors
      • the potential dilutive effect of future offerings, if contemplated
    • Priorities for use of proceeds, insofar as the targeted proceeds are based on a current stock price that significantly exceeds the company’s historic average price per share, in the event the actual proceeds are less than expected

    The staff noted that the sample comments do not constitute an exhaustive list of the issues that companies should consider.

    Lessons from GameStop: Small Investors “100% Don’t Care” About Risk

    Like KC Chiefs quarterback Patrick Mahomes eating green beans in a recent commercial, even though he “100% [doesn’t] like them,” it appeared the Reddit r/WallStreetBets group that banded together to buy GameStop shares “100% don’t care” about market risk and potential investment losses.  

    Inspired by social media cheerleaders, thousands of small investors acted with irrational exuberance, driving the share price from less than $20 on January 15, 2021 to $483 on January 28, 2021 before it closed that day below $200, and plummeted more than 40% to $53 on February 4.  

    Average investors watched in disbelief as trading markets were turned upside down by investors who appeared to ignore financial and other disclosures, disregarding the risks of possible complete loss of their investments.

    Understandably, the executives of GameStop and some players on the social media investor radar screen have so far declined to comment.  The social media blitz was completely outside control of the issuer’s management and they likely don’t have sufficient information to attempt to explain it.  To wit, one of GameStop’s reactions to the inexplicable volatility was to restrict trading in its shares.

    Regardless of how this saga ultimately ends for GameStop, it has raised important questions like whether a company should keep its trading window closed even after earnings are announced and the company has disclosed all material nonpublic information.  Normally, there “ought not” be any liability concerns for an issuer in such a situation, but that could be risky when judged in hindsight.  Large

    Defense Bill Significantly Bolsters SEC’s Disgorgement Authority

    Introduction

    The National Defense Authorization Act (“NDAA”) became law on January 1, 2021 after Congress overrode a presidential veto of the legislation. While the NDAA appropriates funds for defense-related activities and the then-President objected to the legislation based primarily on collateral issues like liability for online content, the Act also will have a significant impact on securities law enforcement.  The legislation included language that significantly bolsters the power of the Securities and Exchange Commission (“SEC”) to obtain disgorgement of ill-gotten gains from securities law violators who are unjustly enriched. This is a reversal of fortune for the SEC, which has lost a string of recent notable court cases that curtailed its disgorgement authority.

    Summary

    The NDAA’s SEC-friendly provisions both solidify the agency’s authority to obtain disgorgement through its enforcement actions and provide a materially longer statute of limitations in which the SEC can file these actions. First, Section 6501 of the NDAA amends Section 21(d) of the Securities Exchange Act of 1934 (“Exchange Act”) to expressly authorize the SEC to obtain disgorgement as a remedy for violations of the securities laws. Prior to this amendment, the Exchange Act authorized the SEC to seek “any equitable relief that may be necessary or appropriate,”1 and courts routinely awarded the agency disgorgement as an equitable remedy. But this longstanding practice was hampered by two recent Supreme Court opinions, Kokesh v. SEC and Liu v. SEC.

    In Kokesh, the Supreme Court unanimously ruled that disgorgement constituted a “penalty” rather than “equitable relief” and was therefore subject to the five-year statute

    Key Takeaways and Reminders for 2021 Form 10-K and Proxy Season

    The new year is well underway, and calendar year filers are knee deep in Form 10-K and proxy planning and drafting.  Our client alert here discusses some of the key issues and recent changes that companies should consider as they continue working on Form 10-K and proxy statement matters. They include the following:

    • Changes to Form 10-K
    • Amendments to Regulation S-K Items 101 (description of business), 103 (legal proceedings) and 105 (risk factors)
    • COVID-19 related Form 10-K risk factor, MD&A and other disclosures
    • Proxy statement disclosure of 2020 COVID-19 related perquisites
    • ISS’ and Glass Lewis’ November 2020 policy updates for 2021
    • Virtual Annual Shareholder Meeting Trends

    SEC Rule 144 Proposals Target “Toxic” Convertible Securities and Paper Filings

    Last week the SEC proposed to amend Rule 144 in order to:

    • Eliminate tacking for shares underlying market-adjustable securities of unlisted companies
    • Update and simplify certain filing requirements, including mandating electronic filing of Form 144s

    Elimination of tacking for shares underlying market-adjustable securities of unlisted companies

    The proposals would amend Rule 144(d)(3)(ii) to eliminate “tacking” for securities acquired upon the conversion or exchange of the market-adjustable securities of an unlisted company – that is, a company without any securities listed, or approved for listing, on a national securities exchange. As a result, the holding period for the underlying securities — either six months for securities issued by a reporting company or one year for securities issued by a non-reporting company — would not begin until the conversion or exchange of the market-adjustable securities.

    In the SEC’s view, the change is needed because applying Rule 144 “tacking” provisions to market-adjustable securities undermines one of the key premises of Rule 144, which is that holding securities at risk for an appropriate period of time prior to resale can demonstrate that the seller did not purchase the securities with a view to distribution and as a result is not an underwriter for the purpose of Securities Act Section 4(a)(1).

    In transactions involving market-adjustable securities, the discounted conversion or exchange features in these securities typically provide holders with protection against investment losses that would occur due to declines in the market value of the underlying securities prior to conversion or exchange. Often,

    SEC affirms NYSE rule changes allowing primary capital raises by issuers in direct listings

    Yesterday, by another 3-2 vote, the SEC approved changes to NYSE listing rules relating to primary direct listings after conducting a “de novo” review following objections raised by certain investors and commentators.

    In August, using delegated authority, the SEC’s Division of Trading and Markets had approved changes to NYSE listing rules to allow companies to raise capital in connection with a direct listing on the NYSE without a firm commitment offering.  Shortly afterwards, the SEC notified the NYSE that the rule changes had been stayed following receipt of notice from the Council of Institutional Investors (CII) that the CII was submitting a petition for a full Commission review of the delegated approval by the Division.

    The Commission conducted a de novo review, considering the CII petition and comments submitted.  The majority decided to affirm the rule change – described in our earlier post – as consistent with applicable law.  The CII’s principal concerns, which were shared by Commissioners Lee and Crenshaw, related to:

    • The lack of an underwriter and corresponding due diligence, resulting in reduced investor protection
    • The reduced ability for shareholders to recover damages for false or misleading disclosures, due to the judicial doctrine of “traceability,” under which courts have held that plaintiffs lack standing to pursue claims if they cannot trace their purchased shares back to the offering covered by the registration statement

    In response to these concerns, the SEC majority concluded:

    • Primary direct listings will be registered under the Securities Act and subject
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