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Securities Regulation

Fenwick & West Discusses Mitigating Class Action Litigation Risk for SPAC Transactions

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Special purpose acquisition companies (SPACs) are increasingly being used as an alternate vehicle to traditional initial public offerings. Companies that go public through a traditional IPO process are often subject to shareholder securities class actions. Inevitably, securities class actions will be filed against companies that become publicly traded and file public reports with the U.S. Securities and Exchange Commission as a result of a merger with a SPAC.

One often-referenced advantage of the SPAC process as compared to a traditional IPO is the ability to directly communicate financial projections to the market. Such projections may become a greater area of … Read more

The Deterrent Effect of Whistleblowing on Insider Trading

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One of the many significant reforms enacted in The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 was the creation of a whistleblower bounty program within the SEC. The program increased monetary rewards for whistleblowing and provided protections from retaliation with the goal of encouraging more whistleblowers to report their information to the SEC. While there is a growing literature investigating the effects of many facets of Dodd-Frank, an unanswered question is whether the whistleblower program affected illegal insider trading – an activity that is traditionally hard for the SEC to detect and prosecute. In my recent paper, … Read more

Davis Polk Discusses SEC Rebuke Over Stock Buybacks Under 10b5-1 Plan

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On October 15, the SEC announced a settlement stemming from a company’s series of stock buybacks undertaken pursuant to a Rule 10b5-1 plan. Although the SEC concluded that the company initiated the 10b5-1 plan at a time when it possessed material nonpublic information (MNPI), the SEC did not charge the company or its executives with fraud or insider trading. Instead, the SEC zeroed in on the company’s accounting controls, and found them inadequate to ensure compliance with the board of directors’ stock buyback authorization, which required the company to execute buybacks in accordance with its insider-trading policy.

The novel theory … Read more

How SEC Enforcement Affects Insider Leakage

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In 2012, Mary L. Schapiro, the chairwoman of the Securities and Exchange Commission,  argued that market participants had “short memories” and that the SEC as a result had to take regular enforcement actions “so that people don’t forget that they have [regulatory] obligations and that somebody is watching and […] willing to hold them accountable.”

Schapiro’s claim has intuitive appeal: If the capital markets regulator does not enforce its rules with some regularity, potential wrongdoers may interpret the resulting inactivity as a reduced risk of apprehension and commit more wrongdoing. In our recently published paper “Short Memories? The Impact of … Read more

Latham & Watkins Discusses SEC Proposal of Safe Harbor Framework for Unregistered Finders

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On October 7, 2020, the US Securities and Exchange Commission (SEC) issued a Notice of Proposed Exemptive Order Granting Conditional Exemption from the Broker Registration Requirements of Section 15(a) of the Securities Exchange Act of 1934 for Certain Activities of Finders (the Proposal). The Proposal was issued in response to a recommendation by the SEC’s Division of Trading and Markets. It aims to establish, for the first time, a framework for permissible non-registered finder activity, which until this point has been addressed by a “patchwork of staff guidance and no-action letters.”[1] If adopted, the Proposal would establish a non-exclusive … Read more

Short Sellers and Plaintiffs’ Firms: A Symbiotic Ecosystem

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On October 8, 2020, in In re BofI Securities Litigation, the United States Court of Appeals for the Ninth Circuit reversed the district court’s finding that the plaintiffs had not adequately alleged loss causation when claiming that BofI Holding portrayed its banking company as a safer investment than it actually was.[1]  These claims originated in two places: a whistleblower lawsuit and blog posts published by a pseudonymous short seller.  The court reversed the district court on the first, holding that a whistleblower lawsuit could serve as a corrective disclosure even though it merely alleged that fraud had occurred.

More … Read more

Cleary Gottlieb Discusses Why Second Circuit Should Abandon “Core Operations” Doctrine

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In the Private Securities Litigation Reform Act of 1995, Congress imposed heightened pleading standards on securities fraud claims in order to discourage the filing of unmeritorious litigation.[1]  Key among these standards are the dual requirements that a complaint “state with particularity”:  (i) “all facts” on which allegations based on information and belief are formed; and (ii) facts giving rise to a “strong inference that the defendant acted with the required state of mind.”[2]  Notwithstanding these heightened pleading standards, a small number of courts within the Second Circuit have continued to apply pre-PSLRA case law finding scienter to be … Read more

Cleary Gottlieb Discusses the Morrison Decision, 10 Years On

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Ten years ago, the U.S. Supreme Court issued its landmark decision in Morrison v. National Australia Bank Ltd., which limited the extraterritorial application of the federal securities laws in order to prevent the United States from becoming “the Shangri-La of class-action litigation for lawyers representing those allegedly cheated in foreign securities markets.”[1]  In Morrison, the Supreme Court threw out decades of lower court precedent that had applied Section 10(b) of the Securities Exchange Act[2] if the conduct at issue occurred in the United States or had effects felt within the United States, criticizing that test as “unpredictable,” … Read more

SEC Chair Speaks on FY 2020 Results

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Thank you, Stephanie [Avakian], for that kind introduction.  I am pleased that this annual event can continue in our new virtual environment.  Thank you all for taking the time to participate today and for your continued interest in the work of the Commission.  As always, these views are my own and do not necessarily reflect the views of the Commission, my fellow Commissioners, or the SEC staff.

At last year’s SEC Speaks, I spoke about our goals and accomplishments through the “eyes of management,” similar to what public companies do in the “Management’s Discussion and Analysis,” or “MD&A” section of

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Separating Owners from Control: The Proposed DOL Proxy Voting Rule and Other Actions on Shareholder Activism

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On October 3, The Shareholder Commons and B Lab submitted their comment on a recent new rule (the “Proxy Proposal”) proposed by the Department of Labor (the “DOL.”)  The Proxy Proposal would limit independent proxy voting by pension trustees. It is part of a series of rules recently proposed or adopted by the DOL and the SEC that tilt the scales against shareholders and in favor of management on disputes related to social and environmental issues. This post summarizes one of the critical arguments from our comment, which applies to this entire series of new rules meant to limit the … Read more

Jones Day Discusses Shareholder Lawsuits Concerning Diversity

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The Situation: A number of shareholder derivative lawsuits in federal court have been filed seeking to hold directors and officers of major companies accountable for alleged failures to uphold their commitment to diversity. To date, the lawsuits have been filed predominantly by the same plaintiffs’ law firm.

The Issue: Shareholders allege that directors and officers breached their fiduciary duties by failing to monitor compliance with anti-discrimination laws and nominate diverse candidates to their boards, and violated federal securities laws by misrepresenting their efforts to achieve satisfactory levels of diversity among board members and executives.

Looking Ahead: These novel shareholder claims … Read more

How to Talk When a Machine is Listening: Corporate Disclosure in the Age of AI

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The annual report, like other regulatory filings, is more than a legal requirement; it provides an opportunity for public companies to communicate their financial health, promote their culture and brand, and engage with a full spectrum of stakeholders.  How readers process all this information affects their perception of, and hence participation in, the business in significant ways.  More and more companies are realizing that the target audience for disclosures is no longer just human analysts and investors, but also robots and algorithms that recommend what shares to buy and sell after processing information with machine learning tools and natural language … Read more

Morrison & Foerster Discusses Recent SEC Digital-Asset Offering Enforcement Actions

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So far in 2020, the U.S. Securities and Exchange Commission (SEC) has brought fifteen enforcement actions in the offerings of digital assets space.[1] Three of these actions do not involve fraud; rather, they allege solely violations of the registration provisions found in Section 5 of the Securities Act of 1933 (“Securities Act”), which are strict liability provisions that do not require proof of scienter or mental state. Even so, the consequences of a registration violation can be severe.

This week, the SEC brought a settled action for Section 5 registration violations against Unikrn, Inc., a Seattle, Washington based operator … Read more

The Department of Labor Carpet Bombs Investor Protection

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The Department of Labor (DOL) has launched a major attack on investor protection and shareholder rights in the last three months. In three successive strikes against long-standing practices of ERISA fiduciaries, the DOL has created disorder and confusion.  Its actions have included threatening managers of Employee Retirement Income Security Act (ERISA) assets with sanctions if they try to advance the inclusion and factoring of ESG considerations into the investment process, blocking such fiduciaries from using proxy advisers or voting on proxy matters unless they are certain such votes would benefit the pecuniary interests of the underlying beneficiaries. Most alarming, DOL … Read more

The Dog that Didn’t Bark: Effects of Regulation on Cryptocurrency Trading

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Cryptocurrencies have the potential to operate as a new financial asset class; as a novel fund-raising tool for ventures; as a more efficient payment mechanism, especially across borders; and as the foundation for an innovative, new economy of distributed applications. They hold promise as competitors to entrenched incumbents in financial services and could generate substantial benefits for investors.

With the maturation of cryptocurrencies as a financial asset class, regulators face a crossroads. Some argue that governments should allow emerging technologies to develop unimpeded – and that attempts to regulate cryptocurrencies would simply push their exchanges, investment managers, and surrounding firms … Read more

Kohn, Kohn & Colapinto Discusses Changes to SEC Whistleblower Rules

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On September 23, 2020, the U.S. Securities and Exchange Commission approved changes to its highly successful Dodd-Frank Act whistleblower program in a 3-2 vote [1]. The program has resulted in over $2.5 billion in penalties against public companies, $750 million returned to investors, and $500 million paid in rewards.  Paying corporate whistleblowers mandatory monetary rewards of between 10-30 percent of all penalties obtained from commission enforcement proceedings triggered by their allegations has been a highly controversial law from the start.  These controversies all played out during the commission’s prolonged whistleblower rulemaking proceeding.

The whistleblower advocacy community strongly opposed the major … Read more

SEC Commissioner Lee on the Amendments to Rule 14a-8

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The final rules represent the capstone in a series of policies that will dial back shareholder oversight of management at the companies they own. Last year, the Commission adopted guidance on proxy advisors and proxy solicitation that made it more difficult and costly for investment advisers to vote shares on behalf of their clients in reliance on independent proxy voting advice.[1] Then, earlier this year, the Commission adopted new rules and additional guidance related to proxy advisors that injected further cost and complexity into the voting process and mandated greater issuer involvement in proxy voting decisions.[2] Having made

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SEC Commissioner Peirce on Shareholder Proposals under Exchange Act Rule 14a-8

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Thank you, Chairman Clayton. I support today’s amendments to certain procedural requirements and the resubmission thresholds under the shareholder proposal rule. While it can be difficult to discern the signal from the noise around today’s amendments, the reality of the situation is that we are making simple, sensible, and long over-due changes to the shareholder proposal rule.

Shareholder proposals are costly: they require the thoughtful attention of management and the board, procurement of legal advice, engagement with shareholder proponents and SEC staff, the printing and mailing of proposal materials, and vote tabulations. The shareholder-proponent does not bear these costs; the

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SEC Commissioner Roisman on Shareholder Proposals under Exchange Act Rule 14a-8

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Change is difficult.  Especially when something has been a certain way for as long as you can remember.  Twenty-two years have passed since the Commission last updated Rule 14a-8.  In particular, the submission threshold was last substantively reviewed and amended in 1998, and the resubmission thresholds have not been updated since 1954.  Yet, over the last several decades, not only has the composition of public company ownership changed drastically, but the ways in which shareholders communicate with companies, and with each other, have evolved with the times as well.  I believe that the only constant in our markets is the

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SEC Chairman Clayton on Modernizing the Shareholder Proposal Framework

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Over the past three years, we have engaged in a number of retrospective reviews of the rules that implement our securities law framework.  These reviews often, but not always, have yielded the unassailable conclusion that modernization is necessary and appropriate.  This should come as no surprise given how much has changed in the past 20, 30, 40 or more years since key rules were last comprehensively reviewed.  At a macro level, I note that interaction among market participants, including trading, disclosures and other information-based interactions, is now largely electronic, adding tremendous efficiencies but also new challenges.  Virtually all trading in

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