How a “Comply or Explain” Rule Would Improve Nonfinancial Disclosure

In 2016, the Securities and Exchange Commission (SEC) issued a Concept Release on Regulation S-K as part of its comprehensive review of the effectiveness of federal disclosure rules. The release included for the first time a request for comment on whether and how sustainability information should be incorporated into periodic reporting under federal securities law.  The SEC previously issued guidance in 2010 showing how information on material climate-related risks should be disclosed in companies’ financial reports. Other studies have also shown that nonfinancial information (referred to generally as “environmental, social, and governance” (ESG) disclosure) is material to firms, depending on … Read more

Acting Chair Piwowar Talks Disclosure Before SEC Investor Advisory Committee

Good morning, and welcome to the first Investor Advisory Committee (IAC) meeting of 2017.

I see several familiar faces here today.  On behalf of all of us here at the Commission, I would like to extend our thanks to the members of the IAC for your continued service to our agency and our country.  I am also delighted to welcome the IAC’s newest member, Jerry Solomon.

During my tenure as a Commissioner, my thinking has benefited greatly from the IAC’s recommendations.  Your mandate touches on almost everything we do at the Commission, from setting regulatory priorities, to the regulation of

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Skadden Discusses Section 16 Settlements

The so-called “short-swing profit rule” under Securities Exchange Act Section 16(b) generally prohibits officers and directors as well as 10 percent shareholders of a U.S. public company from profiting from any purchase or sale (or sale and purchase) of the company’s equity securities within a period of less than six months. However, Rule 16b-3 permits a company’s board of directors and qualifying board committees to take actions that exempt from the short-swing profit rule most transactions under the company’s equity-based compensation programs.

For example, many companies take steps so that the common practice often referred to as “net settlement,” in … Read more

Paul Weiss Describes Recent SEC Disclosure Developments

On March 1, 2017, the Securities and Exchange Commission (“SEC”) issued a notice and request for comment, together with proposed and final rules intended to update certain disclosure requirements:

  • Hyperlinks to Exhibits in SEC Filings. The SEC adopted a final rule requiring issuers to include a hyperlink to each exhibit in the filing’s exhibit index. The rule, originally proposed in August 2016, becomes effective September 1, 2017, or September 1, 2018 for smaller reporting companies and companies that are neither large accelerated filers nor accelerated filers.
  • XBRL Reporting Requirements for IFRS Users. The SEC issued a notice that

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Making a Market for Corporate Disclosure

Mandatory disclosure sits at the foundation of modern securities regulation. Public companies must produce and share a wide variety of information about their condition and prospects, and they must do so on their own dime.

There can be little doubt that corporate information has great social value. Much has been written on the connection between more informative securities prices, on the one hand, and improved capital allocation and corporate governance, on the other. Nevertheless, it is equally as clear that having the government dictate the amount, format, and timing of corporate disclosure will leave society with less than the optimal … Read more

Regulation Crowdfunding: A Viable Capital-Raising Method for Tech Companies?

Crowdfunding is an exciting development that uses the power of the internet to allow entrepreneurs and startups to efficiently raise financing from a large number of people who each contribute a small amount of money. It breaks with the past by enabling companies to locate investors through a passive internet platform rather than through the active selling efforts of a traditional broker-dealer intermediary. Websites like Kickstarter, Indiegogo and GoFundMe helped popularize the concept and led Congress to legalize a variety of new ways for companies to raise capital through sales of stock and other securities.   Regulation Crowdfunding (“Reg CFRead more

Skadden Discusses How Trump’s Focus on Deregulation Could Shape SEC Priorities in 2017

In his statement announcing the appointment of Jay Clayton to run the Securities and Exchange Commission (SEC), President Donald Trump said that “we need to undo many regulations which have stifled investment in American businesses, and restore oversight of the financial industry in a way that does not harm American workers.” Taken together, President Trump’s emphasis on deregulation, his statement in connection with Clayton’s appointment and Clayton’s professional experiences indicate a clear intention to shift the SEC’s agenda in terms of both regulation and enforcement priorities.

Leadership changes throughout the SEC will position the agency to implement these changes this … Read more

Gibson Dunn Discusses M&A Disclosure-Only Settlements

On January 22, 2016, the Delaware Court of Chancery signaled the demise of “disclosure-only” settlements in M&A stockholder lawsuits with its decision in In re Trulia, Inc. Stockholder Litigation.[1] Arguing that the “optimal means by which disclosure claims in deal litigation” should be through adjudication rather than the settlement process, the Chancery Court cautioned that it would “continue to be increasingly vigilant in applying its independent judgment to its case-by-case assessment of the reasonableness of the ‘give’ and ‘get’” of disclosure-only settlements. The Chancery Court offered its “hope and trust that [its] sister courts will reach the same … Read more

How Not to Write a Class Action “Reform” Bill

It was predictable. Given a solidly Republican Congress and a Republican president, sooner or later, an effort would be made in the Trump administration to curb class actions. Not surprisingly, it has come sooner, with the “Fairness in Class Action Litigation Act of 2017” (H.R. 985). A motley assortment of procedural “reforms”—some good, many bad, and most overbroad—H.R. 985 has been introduced by Representative Bob Goodlatte (R-Va.), chairman of the House Judiciary Committee. Much of this bill is a reincarnation of a similar class action “reform” bill that passed the House in 2015, but died in the Senate (possibly because … Read more

Skadden Discusses Swaps Regulations

Swaps transactions, virtually unregulated before the 2008 financial crisis, are regulated in the U.S. under Title VII of the Dodd-Frank Act. Title VII empowers the Commodity Futures Trading Commission (CFTC), for most swaps, and the Securities and Exchange Commission, for the balance of swaps (securities-based swaps), to adopt a comprehensive regulatory framework. Many other G-20 countries have added similar responsibilities for financial regulators given the role swaps played in the financial crisis.

The CFTC now is being run by Acting Chairman J. Christopher Giancarlo. He is the lone Republican CFTC commissioner and recently criticized many, but not all, of the … Read more

The Role of State Blue Sky Laws After the JOBS Act and the National Securities Markets Improvement Act

State securities laws—generally referred to as “blue sky laws”— contain both registration provisions and antifraud provisions.  Registration provisions require that a company offering its securities to investors in a particular state register its securities with the state or meet the requirements for an exemption from the state’s registration provisions.  State antifraud provisions prohibit fraud in connection with the offer and sale of securities.

Blue sky laws – in particular, state registration provisions—have been a significant, unfair and inefficient impediment to small business capital formation.  A small business offering its securities as a way to raise capital is required to meet … Read more

Legal Insider Trading Profits Often Amount to Peanuts

How much do corporate insiders make on their trades? It has long been shown that insiders realize significant positive abnormal returns on their transactions, in percentage terms. Surprisingly, however, there has been little research examining insiders’ dollar profits, even though it is dollar profits, rather than percentage returns, that insiders themselves likely care about.

Why is it important to make this distinction? Even if insiders realize high percentage returns, they may trade small amounts or trade infrequently, so that overall profits are still small. Conversely, even small percentage returns may lead to high profits if an insider trades large … Read more

Counterarguments to SEC Statistical Analysis in Enforcement Actions and Inquiries

In recent years, the Securities and Exchange Commission has focused on using quantitative analysis to identify statistical outliers and anomalies through programs like the Aberrational Performance Inquiry, which evaluates hedge fund returns,[1] and the Accounting Quality Model (informally known as “RoboCop”), which scours public company filings to estimate “peer-level risk metrics.”[2]  Using enforcement actions involving the allocation of securities as an example, we explore issues raised by the use of statistics in SEC enforcement actions and inquiries.

Recent trade allocation actions by the SEC

In the last few years, the SEC has announced multiple enforcement actions against investment … Read more

Drinker Biddle Reports on Crowdfunding and FINRA’s First Enforcement Action

In the fall of 2016, UFP, LLC, d/b/a uFundingPortal (UFP), became the subject of FINRA’s first enforcement action against a registered funding portal. During the course of the investigation, UFP shut down its website and withdrew its registration as a funding portal with the Securities and Exchange Commission (SEC). Despite its withdrawal from registration, UFP remained subject to FINRA’s jurisdiction and submitted a Letter of Acceptance, Waiver and Consent (AWC) to settle the alleged rule violations without admitting or denying the findings. FINRA accepted the AWD, finding that UFP violated two Regulation Crowdfunding Rules and three FINRA Funding Portal Rules, … Read more

Cleary Gottlieb Reviews CFTC’s New Cooperation Guidelines for Enforcement Actions

On January 19, 2017, the U.S. Commodity Futures Trading Commission (the “CFTC”) Division of Enforcement (the “Division”) issued two Enforcement Advisories setting forth the factors that the Division may consider in assessing cooperation by companies and individuals in the context of CFTC enforcement proceedings.

The Enforcement Advisories provide greater guidance on the Division’s view as to what constitutes effective cooperation by a company and/or an individual in a CFTC investigation and enforcement action.  They also continue a broader trend of authorities, both in the U.S. and abroad, articulating demanding standards that a company must meet to … Read more

Proskauer Discusses Due-Process Issues in Shareholder Derivative Actions

The Delaware Supreme Court requested further consideration of the federal due-process issues that might arise where a court is asked to hold that a shareholder derivative action is precluded because a prior derivative action was dismissed based on the first plaintiff’s failure to make a demand on the company’s board before filing suit.  The Court’s January 18, 2017 decision in California State Teachers’ Retirement System v. Alvarez squarely focuses on an issue that has been raised several times in the Delaware Court of Chancery:  whether federal due-process principles prevent the actions of a named plaintiff in a derivative action from … Read more

Can Technology Solve Information Overload and Complexity in Securities Disclosure?

Securities disclosure is under fire, with professors and politicians launching two basic criticisms against it. The first is that it causes “information overload:” Investors cannot process all the disclosure that securities rules require. The idea can be traced back to a 2003 paper by then-professor, and now former SEC commissioner, Troy Paredes, and it is built on research in behavioral economics. Information overload has recently caught fire, being cited by former Securities and Exchange Commission Chair Mary Jo White, two other SEC Commissioners, SEC staff, and members of Congress as a rationale for the SEC’s Disclosure Read more

Do Investors Understand Quarterly Risk Factor Reports?

The observed prices of financial assets are a function of the information available to investors regarding the assets. The revelation of new information regarding the future prospects of a firm affects the price of the firm’s financial securities. The news of a corporate merger, the announcement of a CEO resignation, or the announcement of the development of a new product all provide investors with new information regarding the economic prospects of the firm, and thus affect the valuation of outstanding financial claims on the firm’s assets. In our study, we examine one such source of new information. Specifically, we examine … Read more

Cleary Explores Appeals Court Split Over SEC Administrative Cases

On December 27, the United States Court of Appeals for the Tenth Circuit in Bandimere v. S.E.C.[1] found that the Securities and Exchange Commission’s (“SEC”) use of administrative law judges (“ALJs”) violated the U.S. Constitution. While the court’s opinion relies on a somewhat arcane question of administrative law—whether the hiring of SEC ALJs must comply with the Appointments Clause of the Constitution—its decision to set aside an SEC order imposing sanctions for securities laws violations raises significant questions about future SEC claims brought before ALJs rather than in federal courts, as well as prior adjudications.  With the D.C. Circuit … Read more

Shearman & Sterling Discusses Derivatives Regulation Under Trump

How will derivatives regulation change in the Trump Administration? During the campaign and since the election, President-elect Trump and his advisors, as well as key Congressional Republicans and other market participants, have suggested that aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), should be rolled back, or even repealed outright. Derivatives regulation, however, has not been the focus of much of the discussion around financial regulation more generally, and some market participants have suggested that it would not necessarily be feasible or desirable to roll back the Dodd-Frank reforms completely. It will likely be some time … Read more