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

As we approach our 11th month of COVID-19 restrictions, the pandemic continues to evolve with new variants, while vaccination efforts move forward at a snail’s pace because of limited supplies in many states.  Many hoped for a return to normalcy in 2021, yet the prospects for in-person meetings in the spring seem unclear, if not dim.

Companies and boards grapple with whether it is still feasible to plan for an in-person only meeting or whether they should instead plan in advance for a hybrid or virtual-only meeting.  For many, the prudent course may be to plan in the ordinary course for a hybrid or virtual stockholder meeting, rather than making a last-minute change based on outdated SEC guidance issued during the 2020 proxy season.

While the SEC has not yet provided new guidance for the 2021 proxy season, Glass Lewis on January 14, 2021, issued updated guidance for hybrid/virtual stockholder meetings.  Glass Lewis stated that it would provide reasonable deference to companies that are incorporated in jurisdictions with current restrictions on in-person gatherings and where no established legal framework exists for a virtual-only meeting at this time.  However, Glass Lewis firmly stated its belief that completely “closed-door” meetings without any form of virtual transmission or the formal ability for stockholders to ask questions and receive transparent answers before, during, and/or after the meeting should be avoided at all costs.

Expectations Regarding Meeting Format

Glass Lewis highlighted two benefits for holding hybrid/virtual meetings – namely cost savings to the company

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

In its recently filed proxy statement, Apple Inc. announced that beginning in 2021, the Compensation Committee will incorporate an environmental, social and governance modifier into the annual cash incentive program.  The Compensation Committee will use the modifier to determine whether to increase or decrease bonus payouts by up to 10% based on the Compensation Committee’s evaluation of executives’ performance with respect to “Apple Values” and other key community initiatives during 2021.

“This change is intended to further motivate Apple’s executive team to meet exceptionally high standards of values-driven leadership in addition to delivering strong financial results,” according to the proxy statement disclosure.

The proxy statement did not include specific ESG targets or initiatives for the modifier, although the introduction to the proxy statement listed the Apple Values shown below, noting they “reflect our commitment to leave the world better than we found it and to create powerful tools for others to do the same.”

Education

apple.com/education

For more than 40 years, Apple has worked alongside educators to inspire the next generation of learners. From primary through post-secondary school, teachers and students are using Apple products to express their creativity and to teach and learn the skills needed to succeed in a rapidly changing world. Through our Community Education Initiatives, such as ConnectED, our products, services, and support have reached learners of all ages in underserved communities that need them the most.

Environment

apple.com/environment

Apple has dedicated our resources and best thinking to considering the environment in everything

As boards prepare for the post-2020 round of self-evaluations, they will need to make the usual decisions regarding timing, scope and construct (e.g., written questionnaires and/or interviews), among others. But this year, boards also should consider adding questions/discussion topics specifically addressing the board’s ability to govern effectively in the face of the COVID-19 pandemic, as well as emerging areas of investor focus, such as diversity and inclusion, disruption/innovation, crisis preparedness, geopolitics, cybersecurity and privacy, virtual board meetings and environmental, social and governance (ESG) initiatives.

A recent study by the EY Center for Board Matters found that 53% of 2020 Fortune 100 proxy filers disclosed the general topics covered in their board evaluation program, up from 49% in 2019 and 40% in 2018. The study also found that 32% of 2020 Fortune 100 filers disclosed, usually at a high level, changes that had been made in response to the results of those evaluations, which was up from 27% in 2019 and 22% in 2018.

Sample supplemental questions/discussion topics for 2020 board evaluations, as well as, where applicable, committee and individual director evaluations, may include:

• All board members have sufficient technology capabilities, IT infrastructure and cybersecurity protections to effectively access board materials, prepare for and participate in board meetings in the virtual environment.
• Board members pay sufficient attention to environmental and social consequences and potential risks resulting from the company’s activities.
• Board members are able to clearly and effectively communicate with each other and with management in the virtual environment,
  

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,

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
  

On December 14, 2020, the Securities and Exchange Commission announced an award of more than $300,000 to a whistleblower who uncovered potential securities law violations in connection with audit-related responsibilities.  The whistleblower met with the SEC more than a dozen times and provided “high quality information and continuing assistance,” including identifying additional witnesses.  This is only the fourth time that the SEC has issued an award to an audit or compliance professional.

In announcing the award, Jane Norberg, Chief of the SEC’s Office of the Whistleblower, stated: “This award is an example of the important role that audit and compliance professionals can play in assisting the Commission’s enforcement efforts, especially when the entity is attempting to thwart an investigation.”  Compliance and audit professionals often have access to information that may evidence legal violations, as well as responsibilities to prevent or mitigate such violations.  While compliance and internal audit professionals generally are not considered eligible for whistleblower awards under the Program, there are three exceptions in which such personnel may become eligible whistleblowers:

New York recently adopted new rules to, among other things, eliminate its cumbersome and confusing Form 99 blue sky notification filing requirement for many Regulation D offerings and instead require electronic notice filings on Form D for those offerings.  New York’s Martin Act previously required companies to manually file an originally-signed Form 99 before offering or selling private placement securities to New York investors. 

Effective December 2, 2020, New York’s new Regulation D filing procedures are now generally consistent with the 1996 National Securities Market Improvement Act and with procedures in other states, which allow companies selling “covered securities” under Rule 506 of Regulation D to provide notice to the state through the North American Association of Securities Administrators (“NASAA”) Electronic Filing Depository (“EFD”).  The Form D now is required to be filed with New York on the same schedule as federal and other state filings—within 15 days of the first sale of any securities to an investor in New York.

In a press release announcing the change, New York Attorney General Letitia James stated, “By moving to standardized electronic filings and payments, our systems will be more resilient to disruption in the future and will be better equipped to protect investors from frauds, especially critical as we have seen an exponential rise in these types of scams as a result of COVID-19.”  The press release also provides that the new rules are the “latest step in Attorney General James’ ongoing efforts to streamline and enhance the oversight

The SEC sued Sequential Brands on December 11 in Manhattan federal court, alleging that it failed to accurately calculate and disclose impairments to its goodwill in 2016 and early 2017.  According to the Complaint, this resulted in Sequential’s misleading investors by filing incomplete periodic reports, and failing to maintain both accurate books and records or a system of accounting controls to assure accurate transaction reporting.      

Goodwill is an intangible asset recorded when one company pays more than net fair value to purchase another company.  GAAP mandates that acquiring companies assess potential impairments to their goodwill at least once a year and after any “triggering events,” and that any impairments to goodwill be recorded.  As alleged in the SEC’s Complaint, Sequential‘s annual goodwill testing beginning in fall 2016 that identified no goodwill impairment.  But weeks later, the company performed two additional internal calculations in December 2016 using the same methodology employed in its annual testing (and described in public filings).  These calculations indicated that Sequential’s goodwill was likely impaired, but the company did not share these results with its auditor.  The SEC alleges that rather than recording this impairment, Sequential performed a third, qualitative assessment that concluded goodwill was not impaired, but failed to account for internal fair value calculations and significant negative developments in its business.  Sequential thus avoided recording any goodwill impairment in 2016, which the Complaint says preserved its operating income at an inflated level, conveyed a false impression of financial health, and led to its filing