On Friday, Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement, joined PLI’s 56th Annual Institute on Securities Regulation to deliver prepared remarks and answer questions. His speech echoed some themes from Chair Gensler’s speech, including that the “rules of the road” can’t just cover fraud. Acting Director Wadhwa remarked that failures to comply with the securities laws caused by negligence also erode trust in our financial markets.
WilmerHale’s Stephanie Avakian noted how difficult it can be to lead the Division through a time of transition, especially when there is a change of political party, and asked Acting Director Wadhwa what guidance he is giving Enforcement Staff and what they are trying to get done in this time.
Acting Director Wadhwa responded that the SEC’s mission remains the same and the Division’s focus on that mission is the same as it was prior to November 5. The vast majority of the Staff is long-tenured employees who have been through multiple administration changes, including political parties, and know what to do, since the Staff doesn’t change much administration over administration. But for newly hired Staff members who are going through this for the first time, the advice is to keep doing what they’re doing.
Acting Director Wadhwa noted that no one has asked the Division to put pencils down or take a breather until Inauguration Day — they remain focused on the mission and doing the work in their control and that the work continues with the same degree of urgency.
On that front, he noted that the Division was incredibly busy over the summer and that the base of work did not slow down in October as it sometimes does. He noted that October 2024 was the busiest first month of the fiscal year in over two decades.
When asked about the Division’s focus areas over the last four years, particularly concerning disclosure controls, cyber disclosures and ESG matters, Acting Director Wadhwa noted that the Division’s recent actions in these areas have relied on existing securities laws, rules and regulations applied to financial reporting and other public statements and the agency will continue to pursue similar securities law violations regardless of the subject matter of the statements.
Last week, the Supreme Court heard oral arguments in NVIDIA Corp. v. E. Ohman J:or Fonder AB. As a reminder, here’s the factual background from the SCOTUS Blog:
NVIDIA, the world’s most valuable company, sells computer graphics processing chips designed primarily for use in video games, which it sells to manufacturers of game devices. As it happens, NVIDIA’s chips also are useful for mining cryptocurrency, and in 2017 many crypto miners started to buy NVIDIA chips for that purpose. As that use increased, NVIDIA’s chip sales increased. But in 2018, when the price of bitcoin went through a period of sharp decline, reducing the incentive for crypto mining, NVIDIA’s sales declined.
Shareholders responded by filing the proposed class action here, alleging that NVIDIA executives (including CEO Jensen Huang) made false and misleading statements about the extent to which use in crypto mining was propping up NVIDIA’s chip sales. The U.S. Court of Appeals for the 9th Circuit allowed the action to proceed, and the Supreme Court agreed to review the matter.
As John previewed months ago when SCOTUS granted cert, the case involves the PSLRA’s pleading requirements for allegations of falsity and scienter.
If the case alleges a false or misleading statement, [under the PSLRA, the complaint] must not only specify the reasons why each statement is believed to be misleading but also “state with particularity all facts on which that belief is formed.” Moreover, the complaint also must “state with particularity facts” that “giv[e] rise to a strong inference that the defendant acted with the required state of mind.” That “strong inference” standard is notably higher than the normal standard for a complaint.
The company argues that when the theory of “scienter” (the securities law standard of intent – a Latin term that means something like “with knowledge”) is that internal company documents contradict public statements, the PSLRA’s requirements of particularity mean that the plaintiff has to allege the contents of those internal documents. … The shareholders do not have any documents or statements that directly show any reason to think Huang knew what share of sales were made to crypto miners … [r]ather, they rely on an expert report.
This follow-up SCOTUS Blog describes the Justices’ reactions during oral argument. Chief Justice Roberts and Justice Kavanaugh seem to be of the view that Congress intended the PSLRA to limit exactly this type of suit and worry that “the lower court’s decision would permit shareholders, ‘any time a stock price falls,’ to ‘get past a motion to dismiss’ by simply providing a vague expert report.” On the other hand, Justice Jackson addressed the substance of the dispute at this stage, noting, “‘plaintiffs … actually have the evidence in order to plead their case,’ while she opined that the standards in fact don’t ‘require that they have the documents,’ and indeed couldn’t ‘understand how they could have the documents when discovery hasn’t occurred yet.’” A number of the other Justices seemed to question why “such a fact-specific dispute warranted the court’s attention.” In fact, NVIDIA’s counsel “got the same line from justices spanning ‘both sides of the aisle,’ if you will: Elena Kagan, Amy Coney Barrett, and Neil Gorsuch.”
If the Supreme Court decides to rule on the two questions presented in NVIDIA’s petition, the decision could significantly impact future adjudication of motions to dismiss securities fraud claims. But oral argument revealed that the questions NVIDIA presented may, in fact, be more case-specific than observers, and the Court itself, anticipated. The Justices’ questioning suggests that many of them view the questions presented as seeking fact-intensive “error correction” of the Ninth Circuit’s analysis, which the Court is generally reluctant to perform. …
[T]he Court’s ruling in this case is unlikely to be the sea change that some commentators predicted, and that the Court may opt instead for a more limited ruling or an outright dismissal of the petition. If the Court does decide the case, its questioning suggests that the opinion could cast doubt on—or expressly disavow—the bright-line rules advanced by NVIDIA.
2024 has been a busy year for the PCAOB, with audit quality issues front and center. On the heels of the BF Borgers scandal, continuing high levels of audit quality issues identified in PCAOB inspection reports, and renewed Congressional scrutiny of the PCAOB’s performance of its oversight function, the SEC has approved several new PCAOB rules focusing on audit quality, auditors’ responsibilities and liabilities, and the use of AI and other tech tools in the audit process. Join us tomorrow for the webcast – “Audit Quality: Lessons from BF Borgers and Other Recent Developments” – to hear Deloitte’s William Calder, Maynard Nexsen’s Bob Dow, and Nonlinear Analytics’ Olga Usvyatsky discuss what corporate attorneys need to know about the latest audit-quality developments to advise their client(s) on financial reporting and corporate governance matters.
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Late last week, shortly after releasing the results from its second annual global policy survey, Glass Lewis announced the publication of its 2025 Voting Policy Guidelines that apply to shareholder meetings held after January 1. For the U.S., the guidelines include added or updated sections on oversight of artificial intelligence, responsiveness to shareholder proposals and change-in-control provisions for executive compensation. The updates also include clarifying amendments regarding reincorporation proposals and executive pay programs and include a policy on Glass Lewis’ approach to evaluating shareholder proposals pertaining to companies’ use of AI technologies, the latter of which is codified in the Shareholder Proposals & ESG-Related Issues Guidelines (global).
Here are excerpts from the summary of changes:
Oversight of AI. In the absence of material incidents related to a company’s use or management of AI-related issues, our benchmark policy will generally not make voting recommendations on the basis of a company’s oversight of, or disclosure concerning, AI-related issues. However, in instances where there is evidence that insufficient oversight and/or management of AI technologies has resulted in material harm to shareholders, Glass Lewis will review a company’s overall governance practices and identify which directors or board-level committees have been charged with oversight of AI-related risks. We will also closely evaluate the board’s response to, and management of, this issue as well as any associated disclosures and the benchmark policy may recommend against appropriate directors should we find the board’s oversight, response or disclosure concerning AI-related issues to be insufficient.
Responsiveness. We have revised our discussion of board responsiveness to shareholder proposal to reflect that when shareholder proposals receive significant shareholder support (generally more than 30% but less than majority of votes cast), the benchmark policy generally takes the view that boards should engage with shareholders on the issue and provide disclosure addressing shareholder concerns and outreach initiatives.
Reincorporation. We have revised our discussion on reincorporations to reflect that we review all proposals to reincorporate to a different state or country on a case-by-case basis. Our review includes the changes in corporate governance provisions, especially those relating to shareholder rights, material differences in corporate statutes and legal precedents, and relevant financial benefits, among other factors, resulting from the change in domicile.
AI-Related Shareholder Proposals. [C]ompanies should provide sufficient disclosure to allow shareholders to broadly understand how they are using AI in their operations and whether there have been any ethical considerations incorporated in their use of this technology. We will carefully evaluate all shareholder proposals dealing with companies’ use of AI technologies and will make recommendations on these proposals on a case-by-case basis. When evaluating these proposals, we will closely review the request of the proposal, and the disclosure provided by the company and its peers concerning their use of AI and the oversight afforded to AI-related issues. We will also evaluate any lawsuits, fines, or high-profile controversies concerning the company’s use of AI as well as any other indication that the company’s management of this issue presents a clear risk to shareholder value.
Change-In-Control Provisions. We have updated our discussion of change-in-control provisions in the section “The Link Between Compensation and Performance” to define our benchmark policy view that companies that allow for committee discretion over the treatment of unvested awards should commit to providing clear rationale for how such awards are treated in the event a change in control occurs.
Executive Pay. We have provided some clarifying statements to the discussion in the section titled “The Link Between Compensation and Performance” to emphasize Glass Lewis’ holistic approach to analyzing executive compensation programs.
Glass Lewis is planning a webinar on December 11 to share additional context. For more commentary and insight, we’ll be posting memos in our “Proxy Advisors” Practice Area.
Yesterday, ISS announced the launch of its open comment period on proposed changes to its benchmark voting policies. During this open comment period, ISS gathers views from stakeholders on its proposed voting policy changes for 2025 (and beyond). The comment period closes at 5:00 p.m. Eastern time on December 2.
It looks like 2025 will be another light year for benchmark policy changes. The summary highlights that ISS is soliciting comments for the following policy changes in the U.S. market:
Three policy changes proposed for the U.S. are included for comment. The upcoming and potential future policy changes for the U.S. are as follows:
– Policy clarification regarding poison pills in the U.S.;
– Policy update regarding extension proposals presented by Special Purpose Acquisition Corporations (SPACs); and
– Policy update to replace the reference to “General Environmental Proposals” by the updated reference of “Natural Capital-Related and/or Community Impact Assessment Proposals”, without material changes to the existing policy application.
In addition, we have also provided a summary of ongoing considerations related to U.S. executive compensation policy on the use of performance- vs. time-based equity awards, including a planned change in policy application for 2025 (under the current policy). Specific questions on this topic are also included that will contribute to future potential policy changes, and comments are invited.
As noted above, ISS has proposed benchmark policy updates for 2025 on limited topics. Here’s more detail on what’s changed for the assessment of poison pills and SPAC extensions:
For poison pills, ISS has proposed to increase transparency of factors considered during the case-by-case evaluation of whether a board’s actions in adopting a short-term poison pill were reasonable. The following are the expanded or newly listed factors, all of which were already considered by analysts under the category of “other factors as relevant”:
– The trigger threshold and other terms of the pill;
– The context in which the pill was adopted, (e.g., factors such as the company’s size and stage of development, sudden changes in its market capitalization, and extraordinary industry-wide or macroeconomic events); and
– The company’s overall track record on corporate governance and responsiveness to shareholders.
For SPAC extension proposals, ISS has changed its policy from voting on a case-by-case basis, taking into account the length of the extension, the status of any pending transaction, any added incentive for non-redeeming shareholders, and any prior extension requests, to generally supporting requests to extend the termination date by up to one year from the original termination date (inclusive of any built-in extension options, and accounting for prior extension requests), and may consider any added incentives, business combination status, other amendment terms, and use of money in the trust fund to pay excise taxes on redeemed shares (if applicable).
See today’s post on The Advisors’ Blog on CompensationStandards.com for more on ongoing considerations related to the use of performance- vs. time-based equity awards.
Last Wednesday, Chair Gensler was the keynote speaker at PLI’s 56th Annual Institute on Securities Regulation. His prepared remarks are available here, and the full session, including Q&A, are available for replay. On LinkedIn, SEC-alum and Edward Jones GC, Kier Gumbs, who introduced Chair Gensler, listed the 6 core topics Chair Gensler highlighted in his remarks:
Using comparisons to traffic laws and the rules of the NFL, Chair Gensler’s speech reads like a defense of securities regulation. With numerous historical references, he highlights the role regulation has played in the great success of the US capital markets — just like, he says, stop signs and traffic lights allowed American consumers to feel comfortable driving automobiles, which helped launch the American automotive industry a century ago, and rules and referees in football protect the players and build confidence in the integrity of the game for fans.
The securities laws—benefiting investors and issuers alike—help create trust in our capital markets. These laws help lower costs. They help lower risks.
The results are evident in the size, scale, and depth of our capital markets. At more than $120 trillion today, they are part of our comparative advantage as a nation, undergirding the dollar’s dominance and our role in the world. We are the capital markets of choice for issuers and investors around the globe. At more than 40 percent of the world’s capital markets, we punch above our weight class of just 24 percent of the world economy.
This didn’t just happen by chance.
Roosevelt and Congress understood in the 1930s that well-regulated markets build trust and create the environment for economic success.
Keir summed up this theme as “well-regulated markets improve economic outcomes.” But, Chair Gensler said, we can’t stop here. He went on to explain why the securities laws must continue to evolve.
As students of history and economics, we all know nothing stands still. Technology and business models constantly change. Other nations seek to challenge our place as the capital markets leader.
Thus, for those who have the privilege of service, our job is to continually update the rules of the road. That’s what we’ve been doing. We’ve worked to lower costs and risks in the capital markets, what economists would call promoting efficiency, resiliency, and integrity.
On crypto, Chair Gensler discussed similarities in the Commission’s approach under his leadership compared to the approach under Chair Jay Clayton. In his final Q&A, Chair Gensler noted that he would have liked to do more on AI, which is “rapidly changing the face of finance.” He said it will be for others in the future to figure out and there are going to be really interesting public policy issues and very important public policy debates that will play out in our courts and may play out ultimately in Congress as well.
Notwithstanding his AI goals, Chair Gensler’s pride in his public service is evident throughout the speech. On public service, he concludes by saying, “I would say it’s the greatest honor. To any of you who have not served, do it. Our nation benefits, but you will benefit personally.”
As Keir also noted in his LinkedIn summary, Chair Gensler’s comments acknowledged that many of the actions the SEC pursued in the last four years may be challenged or modified in the next administration. This Gibson Dunn alert discusses the process of transitioning administrations as well as several tools — plus their efficacy and limits — in facilitating the new administration’s agenda. On rulemaking, here’s what the alert says is likely to happen on day one:
[O]n January 20, 2025, President-elect Trump likely will direct executive branch agencies to freeze pending rulemakings and recommend that independent regulatory agencies do the same. He also may request that departments and agencies withdraw proposed rules that have been sent to the [OFR] but have not yet been published and postpone the effective dates of rules that have been published but have not yet taken effect, although these options may face immediate challenges under the [APA].
[A]t the start of the Biden Administration, Assistant to the President and Chief of Staff Ronald A. Klain sent a memorandum to the heads and acting heads of all executive departments and agencies asking them to take [certain] steps “to ensure that the President’s appointees or designees ha[d] the opportunity to review any new or pending regulations.” … This memorandum was generally understood not to apply to independent agencies, but a new administration might take a more aggressive approach and seek to exert more direct control over traditionally independent agencies such as the [SEC] and [FTC].
At the start of the first Trump Administration in 2017, Assistant to the President and Chief of Staff Reince Preibus issued a similar memorandum, although there were some differences from the Klain iteration. …
Although it is difficult to evaluate the effect of these memoranda on federal agencies, it appears that agencies generally comply with their instructions. For example, in February 2002, the Government Accountability Office determined that “federal agencies delayed the effective dates for 90 of the 371 final rules that were subject to” a similar memorandum published at the beginning of the Bush Administration … and that a majority of the rules that were not delayed were non-controversial rules that the White House had previously agreed should be issued as scheduled.
Independent regulatory agencies in some cases also abide by the regulatory moratoria, although they have not delayed the effective dates of previously published rules. An agency is an “independent regulatory agency” if it is “run by principal officers appointed by the President, whom the President may not remove at will but only for cause.” In contrast to non-independent agencies (sometimes referred to as executive agencies), the President’s control over independent agencies is limited by his inability to fire the commissioners, board members, and directors that make these agencies’ final decisions, unless he has “cause” to remove them from office.
For-cause removal protections are typically understood to preclude the President from removing an agency official simply because the President disagrees with the official’s policy decisions. At the SEC, for example, five commissioners decide whether to propose and adopt new regulations, and under current law the President is widely believed to lack the ability to prevent them from doing so if he disagrees (though an aggressive administration might argue that the President’s lack of control over independent agencies is unconstitutional). Likewise, if the President orders the commissioners to repeal regulations adopted during the Biden Administration, nothing clearly requires them to obey that order.
Speaking of delayed rulemaking, last Friday, Accounting Today reported that the PCAOB has put NOCLAR rulemaking — which was initially slated to be finalized by year-end — on hold following the election. Here’s more from the article:
One reason for the change of plans is that the PCAOB anticipates changes in the regulatory environment under the Trump administration, especially in the Securities and Exchange Commission, which would have to approve the final standard before it could be adopted. The Trump administration is likely to replace SEC chairman Gary Gensler, who has spearheaded many of the increased regulatory efforts at the Commission and encouraged the PCAOB to update its older standards and take a tougher stance on enforcement and inspections. …
According to a person familiar with the PCAOB process, no further action is expected until further consultation with the SEC under the incoming administration can take place. … The PCAOB expects it to remain on the docket for 2025 but doesn’t want to try to jam it through this year. …
[T]he PCAOB is mindful of the difficulty of having the SEC decide on whether to approve it, especially if the five-member commission becomes evenly split among two Republican members and the two Democrats if Gensler departs or is ousted. The PCAOB feels the SEC needs adequate time to review and educate itself on the proposed standard, rather than having to jam it through a two-two commission, especially with the amount of engagement that will need to take place given such an important standard, according to a person familiar with the matter.
A PCAOB spokesperson also pointed to the issuance of staff guidance last week outlining the existing responsibilities of auditors to detect, evaluate and communicate about illegal acts. But, in terms of next steps for NOCLAR, those are TBD pending review of all comment letters, the roundtable feedback and responses to targeted inquiries from firms regarding their existing approach. It’s unclear whether the PCAOB may repropose the standard with modifications or move forward another way.
NOCLAR is one of the agenda topics our panelists plan to cover during Thursday’s webcast “Audit Quality: Lessons from BF Borgers and Other Recent Developments” focused on what corporate attorneys need to know about the latest audit-quality developments to advise their client(s) on financial reporting and corporate governance matters. Tune in at 2 pm ET to hear from Deloitte’s William Calder, Maynard Nexsen’s Bob Dow, and Nonlinear Analytics’ Olga Usvyatsky.
The 5th Circuit hasn’t exactly been a friendly jurisdiction for the SEC in recent years, but yesterday, in National Center for Public Policy Research v. SEC, (5th Cir.; 11/24), the Court rejected a conservative advocacy group’s challenge to the legality of the SEC’s Rule 14a-8 no-action letter process. Here’s an excerpt from Bloomberg Law’s article on the decision:
A federal appeals court on Thursday left in place the SEC’s power to referee which shareholder proposals companies allow on their annual meeting ballots, tossing a case from business and right-leaning groups fighting the agency’s influence.
The Securities and Exchange Commission issued non-binding guidance that fell outside of judicial review when it advised supermarket chain Kroger Co. it could block a vote on a conservative organization’s antidiscrimination proposal in 2023, the US Court of Appeals for the Fifth Circuit ruled. Companies looking to keep shareholder proposals they consider repetitive or disruptive to their business off their ballots usually seek SEC guidance. The SEC can sue if companies bar votes without adequate justification.
The Fifth Circuit is the first court to formally weigh in on whether the SEC’s advice is a formal commission order as corporate attacks on the refereeing system have increased under SEC Chair Gary Gensler, who in 2021 made it easier for investors to file environmental, social, and governance proposals.
The Court’s ruling that the SEC’s no-action process under Rule 14a-8 did not involve a formal SEC order subject to judicial review under the Administrative Procedure Act was actually an alternative basis for dismissing the plaintiff’s claim. The Court also held that the claim was moot, since Kroger ultimately included the proposal in its 2023 proxy statement.