Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

SEC administrative proceedings have long been viewed as a one-sided rocket docket tilted toward giving the SEC every advantage possible.  In response, the SEC has proposed amendments to its rules regarding administrative proceedings.  The proposals seem to do little to address recent successful constitutional challenges to the administrative proceedings.

One set of proposals includes primary changes to the Commission’s Rules of Practice that:

  • Adjust the timing of administrative proceedings, including by extending the time before a hearing occurs in appropriate cases
  • Permit parties to take depositions of witnesses as part of discovery

This set of proposals also makes certain other clarifying and conforming changes.  For example, the proposals include procedures related to the mechanics of the proposed expanded deposition practice, such as location, methods of recording, forms of objections, and duties of the deposition officer.  The proposed amendments also would simplify the requirements for seeking Commission review of an initial decision and provide enhanced transparency into the timing of the Commission’s decisions in such appeals.

The second set of proposals will require parties in administrative proceedings to submit filings and serve each other electronically, and to redact certain sensitive personal information from those filings.  The proposed amendments are intended to enhance the accessibility of administrative proceedings by ensuring that filings and other information concerning administrative proceedings are more readily available to the public.  So those of you interested in this area will be able to watch the SEC and defendants throw rocks at one another in real time.  Sort of like EDGAR for litigators.  This may lead to increased disclosure by public companies ensnared in administrative proceedings as the rest of the world will be watching.
ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Shareholder proponent James McRitchie, who was successful in persuading the SEC to reconsider its no-action position with Whole Foods on proxy access, has hinted at his intentions for the upcoming proxy season, or at least some of them.

First, he notes that “several companies have adopted proxy access ‘lite’ with provisions that make implementation excessively difficult and less effective than anticipated by the SEC’s vacated Rule 14a-11. At the beginning of last season I announced that proxy access was temporarily ‘on sale.’  I was willing to accept some unfavorable provisions in order to establish a track record of ‘wins’ . . . As the next season gears up, it is time to reframe proposals, avoiding proxy access lite from the start.”  Mr. McRitchie then goes on to reproduce his new model in a shareholder proposal submitted to QUALCOMM.

In another blog, Mr. McRitchie notes that he has submitted another proposal to Whole Foods.  He says “As I have mentioned in other posts . . . several companies have adopted proxy access ‘lite’ with provisions that make implementation excessively difficult and less effective than they would have been under the SEC’s universal proxy access Rule 14a-11. Although I withdrew proposals at several companies, based on the fact that even adoption of proxy access lite represented real progress, I vowed to circle back and seek more robust provisions through subsequent amendments. I recently filed the first such proposal at Whole Foods Market.”

As we noted in our 2016 proxy season preliminary planning checklist, public companies should understand proxy access proposals and possibly make preliminary plans in the event a proxy access proposal is received.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The SEC recently commenced a settled enforcement action against an investment adviser, R.T. Jones Capital Equities Management, Inc., for cybersecurity matters.  Press reports indicate this is the first such case of its kind.  R.T. Jones did not admit or deny the SEC’s findings.

These proceedings arose out of R.T. Jones’s failure to adopt written policies and procedures reasonably designed to protect customer records and information, in violation of Rule 30(a) of Regulation S-P (17 C.F.R. § 248.30(a)), which is referred to as the Safeguards Rule. From at least September 2009 through July 2013, R.T. Jones stored sensitive personally identifiable information, or PII, of clients and other persons on its third party-hosted web server without adopting written policies and procedures regarding the security and confidentiality of that information and the protection of that information from anticipated threats or unauthorized access. In July 2013, the firm’s web server was attacked by an unauthorized, unknown intruder, who gained access rights and copy rights to the data on the server. As a result of the attack, the PII of more than 100,000 individuals, including thousands of R.T. Jones’s clients, was rendered vulnerable to theft.

In July 2013, R.T. Jones discovered a potential cybersecurity breach at its third party-hosted web server. R.T. Jones promptly retained more than one cybersecurity consulting firm to confirm the attack and assess the scope of the breach. One of the forensic cybersecurity firms reported that the cyberattack had been launched from multiple IP addresses, all of which traced back to mainland China, and that the intruder had gained full access rights and copy rights to the data stored on the server. However, the cybersecurity firms could not determine the full nature or extent of the breach because the intruder had destroyed the log files surrounding the period of the intruder’s activity.

Soon thereafter, R.T. Jones retained another cybersecurity firm to review the initial report and independently assess the scope of the breach. Ultimately, the cybersecurity firms could not determine whether the PII stored on the server had been accessed or compromised during the breach.

Shortly after the breach incident, R.T. Jones provided notice of the breach to all of the individuals whose PII may have been compromised and offered them free identity monitoring through a third-party provider. To date, the firm has not learned of any information indicating that a client has suffered any financial harm as a result of the cyber attack.

The SEC found that R.T. Jones failed to adopt any written policies and procedures reasonably designed to safeguard its clients’ PII as required by the Safeguards Rule. According to the SEC, R.T. Jones’s policies and procedures for protecting its clients’ information did not include, for example: conducting periodic risk assessments, employing a firewall to protect the web server containing client PII, encrypting client PII stored on that server, or establishing procedures for responding to a cybersecurity incident. The SEC Order states that taken as a whole, R.T. Jones’s policies and procedures for protecting customer records and information were not reasonable to safeguard customer information.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Defendants continue to pound nails into what may be to be the SEC’s coffin that its administrative proceedings are unconstitutional.  If the genie is out of the bottle it’s hard to tell what the far reaching implications might be.

Most recently the SEC stayed the administrative proceeding against well-known fund manager Lynn Tilton. It’s hard to tell why though, as the Second Circuit’s order is one sentence long. The docket reveals that Tilton argued that the Seventh Circuit precedent in the Bebo case was wrongly decided, and since the Commission recently issued an opinion in Lucia that its administrative proceedings are constitutional it is useless to have Tilton pursue her claims in an administrative forum.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Some will want to start preliminary planning for the 2016 proxy season.  It has been a bewildering year of developments, but most will be thankful that there are relatively few new rules that must be implemented at this time.  Nevertheless, it is helpful to catalog everything that is out there.

D&O Questionnaires:  The first question we get asked this time of year is “do we need to update D&O questionnaires?”  For most, the answer is no if you have kept up your form. There are no new independence rules and the like.

New ISS Policies:  ISS makes its move late in the year when announcing new policies so this is probably the biggest unknown.  If you want an idea on what ISS may have up its sleeve, review their recent policy survey, which usually drives their policy update.

Director Equity Grants: If you are putting a new equity plan on the ballot, consider including a sublimit for grants to directors.  The reason is to avoid the outcome in Valma v. Templeton et al, where the court refused to grant a motion to dismiss because the grants were subject to an entire fairness review.  Others may wish to amend their plans to provide for a sublimit and obtain shareholder approval.

SEC Rule 14a-8(i)(9) Review:  The SEC announced it would review its rule regarding exclusion of directly conflicting shareholder proposals after it reversed course and did not permit Whole Foods to exclude a proxy access proposal.  I wouldn’t be surprised if the SEC announces something before year end.  If they don’t, it’s likely that they will not grant no-action relief in the coming year under Rule 14a-8(i)(9) until they resolve the matter.

Proxy Access:  Yes, proxy access will be a hot topic again this year. Issuers may want to begin to consider options in the preliminary planning phase.

Pay Ratio Rules:  Final pay ratio rules have been adopted but have no impact on the 2016 proxy season.  The reason is public companies do not have to comply with the final rule until the first fiscal year beginning on or after January 1, 2017. For the most that means the pay ratio will first be presented in the 2018 proxy season.

Clawback Rules:  The clawback rules are still in the proposal stage and are not expected to be finalized before year end.

Pay Versus Performance Rules:  The pay versus performance rules are still in the proposal stage and are unlikely to be finalized before year end.

Hedging Disclosures:  While the SEC adopted proposed hedging disclosure rules early in 2015, the rules have still not yet been finalized.

Audit Committees:      There are no proposed rules on new audit committee disclosures and this is at the concept release stage.  Anything new here is a long way off.

Resource Extraction Disclosures:  Initially these rules were invalidated and the SEC was recently order to complete them, but nothing is on the horizon near term.

Conflict Mineral Rules:  While many would not consider this a proxy season item, the conflict minerals rules were again found unconstitutional after a rehearing.  No word from the SEC on next steps.

Say-When-On-Pay:  Issuers must hold a say-on-pay frequency vote every six years.  For most public companies that will be 2017.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

In Berman v. NEO@OGILVY LLC, the Second Circuit held that a whistleblower does not have to report to the SEC to be afforded the anti-retaliation protections of the Dodd-Frank Act. The court discussed that legislative history was scant, as conflicting provisions were added by the conference committee without explanation. As a result, the court found the statute was sufficiently ambiguous to warrant deference to the SEC interpretation under the Chevron analysis.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The Consumer Financial Protection Bureau, or CFPB, was created to enforce various consumer finance laws like the Equal Credit Opportunity Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, Home Mortgage Disclosure Act of 1975, and Truth in Lending Act. The CFPB has broad authority and it is getting broader. The Bureau says it can regulate any “covered person” that offers or provides a consumer financial product or service. This flow chart, created by Stinson’s Zane Gilmer, will help you determine whether you or your business is a “covered person” and can be regulated by the CFPB.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

MusclePharm Corporation, or MSLP, and certain related parties recently settled an SEC enforcement action which included charges related to non-disclosure of certain perks. The SEC alleged from 2010 through July 2014, MSLP significantly understated its disclosed perquisites by approximately $482,000 or 76% in Forms 10-K, Forms S-1, and proxy statements filed with the Commission. According to the SEC, MSLP understated its disclosed perquisites in:

  • 2010 by approximately $37,000 or 100%;
  • 2011 by approximately $160,000 or 100%;
  • 2012 by approximately $214,000 or 93%; and
  • 2013 by approximately $71,000 or 35%.

The SEC believes MSLP paid its chief executive officer approximately $244,000 of undisclosed perquisites during this time period. The perquisites included perquisites related to meals, autos, apparel, personal professional tax and legal services, and two golf club memberships. During this time, MSLP also paid for perquisites of other executives that were not disclosed, including items such as the medical costs of the birth of a child, eye surgery, and personal golf club memberships.

The SEC alleged even after the company began an internal review of undisclosed executive perks and the then-audit committee chair became directly involved in the process, MusclePharm continued filing financial statements that failed to disclose private jet use, vehicles, and golf club memberships for its executives.

Other accounting and disclosure violations alleged in the SEC’s orders instituting settled administrative proceedings against MusclePharm and related parties include:

  • MusclePharm failed to disclose related party transactions with a major customer and failed to implement sufficient policies to identify and disclose related party transactions.
  • MusclePharm failed to disclose bankruptcies related to two executive officers, and misstated that no members of the board of directors or other executives had been involved in any bankruptcy proceedings.
  • MusclePharm improperly accounted for advertising and promotional related costs and consequently overstated its revenue.
  • MusclePharm failed to disclose continuing sponsorship commitments for which the company eventually made payments totaling $6.9 million.
  • MusclePharm understated its rent expense by failing to disclose $100,000 related to an aircraft lease agreement.
  • MusclePharm failed to implement internal accounting controls for perks and other areas where it committed accounting and disclosure violations.

The SEC also alleged MSLP failed to maintain signed signature pages for most of its filings with the Commission from 2010 through 2013 as required under Rule 302 of Regulation S-T. MSLP failed to receive or maintain any manually signed signature pages prior to December 2012. After December 2012, while MSLP had made over 23 Commission filings, MSLP only received or maintained original signature pages for all signatories on eight filings.

MusclePharm and its related parties did not admit or deny the SEC’s findings.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The NYSE has filed a proposed rule change that is immediately effective. The NYSE proposes to amend Section 202.06 of the Listed Company Manual to:

  • expand the pre-market hours during which listed companies are required to notify the Exchange prior to disseminating material news, and
  • provide the Exchange with authority to halt trading
    • during pre-market hours at the request of a listed company,
    • when the Exchange believes it is necessary to request certain information from listed companies, and
    • when an Exchange-listed security is also listed on another national or foreign securities exchange and such other exchange halts trading in such security for regulatory reasons.

The Exchange also proposes to amend Section 202.06 of the Manual to provide guidance related to the release of material news after the close of trading on the Exchange.

Notification of Material News During Pre-Market Hours

The Exchange proposes to amend Section 202.06 to require companies to comply with the Material News Policy between 7:00 a.m. and 4:00 p.m. Eastern Time. In the Exchange’s experience, most companies release news related to corporate actions and other material events between 7:00 a.m. and 9:30 a.m. Although trading on the Exchange does not begin until 9:30 a.m., the Exchange believes that material news released between 7:00 a.m. and 9:30 a.m. has the potential to cause volatility in both price and volume during pre-market trading that occurs on other market centers as well as once trading opens on the Exchange. However, because there is a lower volume of trading in such pre-market hours, the Exchange believes that a listed company is most well positioned to determine whether a trading halt is appropriate given the news it intends to release. Therefore, to facilitate an orderly opening and ensure thorough dissemination of material news, the Exchange believes it is beneficial to require companies to comply with the Material News Policy and advise whether a trading halt is appropriate during pre-market hours.

Under the proposed rules, between 7:00 a.m. and the opening of trading on the Exchange, the Exchange may implement a regulatory halt in circumstances where:

  • the listed company has informed Exchange staff that it intends to make a public announcement of material news and
  • the listed company requests that trading in its listed securities be halted pending dissemination of the public announcement.

Trading Halt Pending Receipt of Requested Information

The Exchange also proposes to amend Section 202.06 of the Manual to set forth circumstances in which it may institute a regulatory halt while it awaits information requested from a listed company. Section 202.06 of the Manual currently limits the Exchange’s authority to halt trading to situations when a listed company intends to release material news during market hours. However, in the Exchange’s experience there are other scenarios when it may be advisable to halt trading for the protection of investors. For example, if there is uncertainty surrounding material news issued by a listed company or a company’s compliance with the Exchange’s continued listing standards, the Exchange believes it may be appropriate to halt trading while it gathers information to resolve such ambiguity. Accordingly, the Exchange proposes to amend Section 202.06 of the Manual to state that if it is necessary to request information from a listed company relating to:

  • material news,
  • the listed company’s compliance with Exchange continued listing requirements, or
  • any other information which is necessary to protect investors and the public interest,

then the Exchange may halt trading in such listed company’s security until it has received and evaluated the requested information. The proposed change in this regard mirrors Nasdaq Stock Market Rule 4120(a)(5).

Release of News After Market Close

The NYSE believes the release of material news immediately after 4:00 p.m. Eastern Time can interfere with the closing process. Although trading on the Exchange stops at 4:00 p.m. Eastern Time, the order book for each listed security is manually closed by the security’s Designated Market Maker, or DMM, a process that can take several minutes before the closing auction is completed. Because trading continues after 4:00 p.m. Eastern Time on other exchanges, if a listed company releases material news immediately after 4:00 p.m. Eastern Time there can be significant price movement on other markets when compared to the last sale price on the Exchange. The result, therefore, is that a DMM can be executing trades at the Exchange closing price while the same security is simultaneously trading on other exchanges at a very different price. As this discrepancy can cause confusion to investors, the Exchange proposes to include advisory text in Section 202.06 of the Manual requesting that listed companies intending to release material news after the close of trading on the Exchange wait until the earlier of the publication of their security’s official closing price on the Exchange or 15 minutes after the scheduled closing time on the Exchange. The Exchange proposes to specify that trading on the Exchange typically closes at 4:00 p.m. Eastern Time, except that on certain days trading closes early at 1:00 p.m. Eastern Time.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

To review: On July 2, 2013, the United States District Court for the District of Columbia vacated the SEC’s resource extraction rules which were mandated by the Dodd-Frank Act. Oxfam America then brought a suit against the SEC in Federal Court in Massachusetts seeking a court order to require the SEC to adopt the rules. See our prior blog here.

And the United States District Court for the District of Massachusetts has now ruled the SEC’s action violated the Administrative Procedures Act. The Court concluded that the SEC’s delay in promulgating the final extraction payments disclosure rule can be considered “unlawfully withheld” as the duty to promulgate a final extraction payments disclosure rule remains unfulfilled more than four years past Congress’s deadline.

The Court ordered the SEC to file with the Court in 30 days an expedited schedule for promulgating the final rule. The Court will make further orders as necessary. As such, the Court will retain jurisdiction to monitor the schedule and to ensure compliance.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.