In 2022, public companies witnessed a new kind of corporate governance activism. New rules and regulations from the Securities and Exchange Commission (the SEC) use the lever of mandated disclosure to push for corporate governance actions, and in some cases what amounts to reforms. The SEC’s broad foray into governance represents an expansion of historically more limited SEC rules in the governance space, mostly focused on audit committee and auditor independence and more general disclosure of board structures and oversight. Many commentors note that investors were well able to push companies historically for disclosure on governance matters and that the … Read more
United States v. Blaszczak has long been a one-off case that did not fit the mold of the traditional insider trading prosecution, but now — following a 2-1 decision of the Second Circuit in December, reversing most of the convictions in the case — it may destabilize the law on insider trading for some time to come. Such reversals are rare, and Blaszczak has multiple implications, some ominous and some ironic.
At the outset, it must be understood that Blaszczak was distinctive in two important respects:
First, it involved the leaking of confidential information by gossipy government bureaucrats to … Read more
On December 14, 2022, the U.S. Securities and Exchange Commission (“SEC”) unanimously adopted final rules adding new conditions applicable to Rule 10b5-1 trading plans and requiring disclosure of the adoption, modification or termination of Rule 10b5-1 trading plans by directors and officers of public companies. In addition, the new rules require disclosure of option grant practices and insider trading policies and procedures of public companies and amend disclosure requirements for option grants to named executive officers close in time to an issuer’s disclosure of material nonpublic information. Finally, the new rules amend Forms 4 and 5 to require reporting persons … Read more
The SEC recently proposed a set of sweeping equity market structure reforms across four rule proposals that would make highly significant changes to how national market system (NMS) stock orders are priced, executed and reported. The proposals include:
- a new requirement for certain retail orders to be subject to order-by-order competition, rather than being routed directly to market makers (the Order Competition Rule);
- an SEC-level best execution rule (the Proposed Regulation Best Ex);
- an adjustment to the tick sizes at which NMS stocks can be quoted or traded (the Tick Sizes Proposal); and
- a proposal to expand the scope and
… Read more
We are constantly bombarded with warnings about dangers to our health or wellbeing. Sometimes, however, the warnings might facilitate the danger. In a new article, I show how the cautionary statements that commonly accompany predictions of corporate performance fall into this camp.
The judicially created “bespeaks caution doctrine” and a highly controversial provision in the Private Securities Litigation Reform Act (PSLRA) enable speakers to avoid liability for failed predictions regarding corporate performance through cautions that accompany the predictions. Unfortunately, the cautions in court decisions applying these defenses constitute misdirection which, if anything, facilitates securities fraud.
To understand why, … Read more
As U.S. financial institutions assess their ESG risks, opportunities, policies and procedures for 2023, key considerations include the numerous significant ESG developments in 2022—in particular, recent proposals and initiatives announced by financial regulators with respect to climate-related risk management and disclosures—and overarching regulatory, political, investor and litigation trends. This memorandum summarizes several ESG considerations that are expected to be particularly relevant.
SIGNIFICANT LEGAL AND REGULATORY DEVELOPMENTS IN 2022
SEC’s proposed climate-related disclosure rules: On March 21, 2022, the Securities and Exchange Commission proposed expansive climate-related disclosure requirements in a proposing release that, if adopted, would require U.S. public companies and … Read more
In a new article, I respond to an article by Professor Andrew Verstein concerning the awareness/use problem in insider-trading law. As many readers know, this problem arises because, although Rule 10b-5 prohibits persons bound by a duty of confidentiality from trading securities on the basis of material, non-public information (“MNPI”), it is unclear just what it means to trade on the basis of such information. Do you violate the rule if you trade merely while you are aware of MNPI, even though that MNPI played no causal role in your decision to trade (i.e., the awareness rule)? Or does a … Read more
On December 29, 2022, the Second Circuit issued its highly anticipated opinion on remand in United States v. Blaszczak (“Blaszczak II”), reconsidering the case following the Supreme Court’s January 2021 vacatur of the Second Circuit’s original decision upholding multi-count convictions of defendants for, at bottom, illegally trading on material non-public information misappropriated from the government. In two respects, the decision represents a challenge to the government’s ability to make use of a recent—though largely untested—fraud statute in order to avoid the elements of traditional insider trading in criminal cases. First, the decision makes it difficult in some cases … Read more
We are unable to support the charges against McDonald’s Corporation (“McDonald’s”) for failing to disclose sufficient information regarding the termination of its former CEO, Stephen Easterbrook, in its 2020 proxy statement. The Order casts McDonald’s, the victim of Mr. Easterbrook’s deception, as a securities law violator through a novel interpretation of the Commission’s expansive executive compensation disclosure requirements.
The Commission’s Order finds, among other things, that McDonald’s violated Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-3 thereunder because the company failed to provide the disclosure required by Item 402(b) and (j)(5) of Regulation S-K. Item … Read more
The Securities Exchange Act grants the SEC ample authority and discretion to investigate and seek sanctions related to violations of the securities laws, with the goal of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation (SEC, 2013). To be sure, this is the SEC’s stated objective. Like most regulatory agencies, though, the SEC is subject to resource constraints – as well as to pressures from both the political and business spheres, which might steer it away from the fulfillment of its mission.
We directly assess the SEC’s objectives, as revealed by the observed SEC regulatory policies, … Read more
The Securities and Exchange Commission’s (SEC’s) new universal proxy rules, which took effect for meetings after August 31, 2022, require the use of “universal” proxy cards in all director election contests, except for elections held by registered investment companies and business development companies. Previously in contested elections, the company and the dissident stockholder each distributed separate and different proxy cards. Stockholders not attending the meeting in person and voting by proxy could only vote on a single card, limiting their choices to either the nominees on the company card or the dissident card, with no option to “mix and match.” … Read more
The stock prices of takeover targets typically increase substantially prior to merger announcements This increase attracts considerable public attention because it is usually perceived to be associated with the leaking of inside information. Hence, the numerous Securities and Exchange Commission (SEC) cases against individuals and entities accused of trading on inside information about upcoming mergers and acquisitions.
These cases typically involve suspected leaks of confidential information through social connections. Senior executives or board members often initiate the leaks, which spread among the social networks that are either directly or indirectly linked to them. For example, in a case filed … Read more
On March 21, 2022, the Security and Exchange Committee (SEC) proposed that all public firms disclose climate-change risk and greenhouse-gas (GHG) emission information in their financial statements. According to SEC Chair Gary Gensler, the proposal “would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do.” Was he right? Would government-mandated GHG reporting meet investor demand and aid efficiency? After all, companies might not provide information voluntarily because the cost of producing and disseminating it, including the proprietary costs, exceeds the benefits to shareholders (Admati and Pfleiderer, 2000). In a … Read more
On November 22, 2022, the US Securities and Exchange Commission (SEC or Commission) filed an amended securities fraud complaint against Adam Rogas, the former Chief Executive Officer of NS8, Inc. (NS8), alleging that, among things, Rogas engaged in whistleblower impeding and retaliation against the NS8 employee who blew the whistle on Rogas’ fraudulent conduct. The case follows In re David Hansen, a whistleblower impeding action the SEC settled against the co-founder and Chief Information Officer of NS8. As Arnold & Porter partner Jane Norberg, who was the former Chief of the SEC’s Office of the Whistleblower, discussed in a … Read more
Investors are increasingly incorporating assessments of companies’ performance on environmental, social, and governance (ESG) issues in their portfolio decisions. The global assets under management of the signatories to the United Nations Principles for Responsible Investment (PRI) have grown from about $20 trillion in 2010 to about $121 trillion in 2021.
Figure 1 Assets under Management of PRI Signatories from 2010 to 2021
Just as traditional investors rely on sell-side analysts and credit rating agencies, socially responsible investors rely on ESG rating agencies as information intermediaries that gather and summarize information about a firm’s ESG performance. Prominent ESG rating agencies … Read more
The spectacle of a shambling billionaire with an adolescent personality, an inconsistent memory, a fondness for using his depositors’ funds for his own personal purposes, and an eagerness to talk in self-destructive ways to the press has fascinated everyone. This column will leave to psychiatrists and journalists the assessment of Samuel Bankman-Fried’s (“SBF”) character, but important legal issues lurk in his case that are central to the field of white collar crime and that have seldom been explored adequately by appellate courts.
Let’s begin by looking at what has happened so far. The Southern District of New York’s U.S. Attorney’s … Read more
Today [December 14], the Commission will consider whether to adopt amendments to Rule 10b5-1, as well as new required corporate disclosures related to executive officers’ and directors’ trading. I am pleased to support these new requirements because, if adopted, they will help close potential gaps in our insider trading regime.
The amendments address the means by which companies and company insiders — such as chief executive officers, chief financial officers, other executives, directors, and senior officers — trade in company shares.
The core issue is that company insiders regularly have material information that the public doesn’t have. Stock-based executive compensation
… Read more