August 17, 2022 Webinar

1:00pm – 2:00pm ET

Register here.

This PLI briefing will provide an overview of a December 2021 SEC clarification that it would begin applying Rule 15c2-11 to broker-dealer quotations for fixed income securities, including securities traded under Rule 144A among QIBs. This “clarification” would require private “Rule 144A” issuers to make financial and other information publicly available before broker-dealers could provide quotations for their securities. 

Mayer Brown partner, Eddie Best, and Citigroup Global Markets Director, Adam D. Bordner, will cover the following topics:

  • The basics of Rule 15c2-11
  • The SEC’s new clarification applying the rule to fixed income securities
  • How this new clarification affects both primary and secondary markets for investment grade and high yield securities
  • How issuers can comply with Rule 15c2-11
  • Initiatives to lobby the SEC to reverse its clarification

On July 27, 2022, SEC Chair Gary Gensler gave remarks at the Center for Audit Quality entitled “Sarbanes-Oxley at 20: The Work Ahead.”

Chair Gensler highlighted, among other things, impacts on auditing standards, accounting standards, and auditor independence.  He noted that at the time of enactment of Sarbanes-Oxley in 2002, the new Public Company Accounting Oversight Board (PCAOB), tasked with setting enhanced auditing standards, was permitted to continue to use the old American Institute of Certified Public Accountants (AICPA) on an interim basis.  Sarbanes-Oxley was trying to solve a conflict-of-interest problem:  AICPA is a professional association, funded by auditing firms, which was writing rules for the firms funding it.  Unlike AICPA, PCAOB is independently funded and is subject to SEC oversight.  Sarbanes-Oxley similarly provided independent funding for the Financial Accounting Standards Board (FASB), the accounting standards-setter, which, prior to passage of the act, was also primarily industry-funded.  Twenty years later, the PCAOB is still using most of the AICPA interim standards.  Chair Gensler believes the PCAOB has been too slow in updating auditing standards.  The PCAOB provided an update in May 2022, announcing that it plans to update almost all of the remaining interim standards.

On auditor independence, Chair Gensler mentioned that, initially, Sarbanes-Oxley had the effect of causing a number of firms to spin out their consulting businesses.  He noted, however, that in the 20 years since, many firms have rebuilt their consulting businesses and PCAOB inspections continue to identify independence issues.  As a result, Chair Gensler has asked the PCAOB to consider adding updates for auditor independence standards to its agenda and suggested that the SEC may need to re-evaluate its auditor independence rules as well.

Chair Gensler also commented on the impact of Sarbanes-Oxley on foreign issuers.  He pointed out that more than 50 jurisdictions have complied with the requirement that PCAOB inspect audit firms of U.S.-listed companies based within their borders, with the exception of China.  Under the Holding Foreign Companies Accountable Act of 2020 (HFCAA), recently affirmed by Congress, if the PCAOB cannot inspect registered public accounting firms located in foreign jurisdictions, then issuers using those firms for three consecutive years will face prohibitions on their securities trading in the United States.  The SEC and PCAOB have been negotiating a Statement of Protocol with the Chinese authorities that would govern inspections of registered public accounting firms in China and Hong Kong, but an agreement on a Statement of Protocol has not yet been reached.  Chair Gensler noted that this Statement of Protocol will need to be signed very soon to allow any inspections to be completed by year’s end, which is especially important as Congress may accelerate the HFCAA’s timeline from three years to two years.  See the full text of Chair Gensler’s remarks here.

In this MB Microtalk video Mayer Brown Partner, Christina Thomas, discusses the US Securities and Exchange Commission’s proposed rules on cybersecurity risks and incident disclosures, which, if adopted, will require companies to report information relating to cybersecurity incidents and cybersecurity risk management strategy.

Visit our MB Microtalk page for more topics and talks.

Underwriting agreements and purchase agreements typically require the delivery of one or more comfort letters as a condition to pricing and closing a securities offering. In this brief Practical Guidance video, Mayer Brown partner, Ryan Castillo, discusses practices pointers that can help in reviewing and negotiating comfort letters. Watch the full video.

To learn more, also see the Practical Guidance piece, Top 10 Practice Tips: Comfort Letters.

Proposed Changes Would Require Reporting within One Minute of Execution

On August 2, 2022, FINRA proposed to amend FINRA Rule 6730(a)(1) to reduce the Trade Reporting and Compliance Engine (“TRACE”) reporting timeframe for transactions in “TRACE-Eligible Securities” currently subject to a 15-minute outer limit reporting timeframe to one minute. The one-minute outer limit reporting timeframe would apply to most transactions in corporate and agency debt securities, asset-backed securities and agency pass-through mortgage-backed securities traded to-be-announced for good delivery, but it would not apply to a list or fixed price transaction or takedown transaction, transactions in certain securitized products and US Treasury Securities transactions. FINRA would continue to make information on these reported transactions publicly available immediately upon receipt.

Read the complete Legal Update.

August 10, 2022 Webinar

1:00pm – 2:00pm EDT

Register here.

Any time of year, especially in uncertain and volatile markets, preparing for earnings calls, sharing earnings guidance and providing investor updates requires careful consideration. Among other factors, companies must consider guidance from the US Securities and Exchange Commission and SEC Staff.

Join Mayer Brown partners, Jennifer Carlson and David Freed, for a webinar hosted by Intelligize. During this session, they will address:

  • Communications safe harbors
  • Forward-looking and cautionary statements
  • Key Performance Indicators and non-GAAP financial measures
  • Trend information and earnings guidance
  • SEC guidance related to COVID-19
  • Undertaking securities offerings post-earnings announcements

On July 26, 2022, William Birdthistle, the Director of the Division of Investment Management of the US Securities & Exchange Commission (“SEC”), gave remarks at the Practising Law Institute’s annual Investment Management Program. In his speech, Director Birdthistle addressed areas of particular regulatory interest to the Division, specific developments confronting the investment management industry in the coming months, and money market funds.

The Division Director focused on the investment management industry’s preparedness to address the cessation of LIBOR, and the impact of MiFID II on the market for investment research.

Operational readiness is one main concern regarding advisors’ and funds’ preparation for the upcoming final transition away from LIBOR on June 30, 2023. Here, asset managers must ensure they are able to adequately understand and address any disclosure obligations and valuation risks resulting from the transition, such as identifying data sources for security-specific updates and planning how and when portfolio positions will convert from their use of LIBOR to an alternative reference rate.

In response to MiFID II, the SEC Staff issued three no-action letters, including one which took the temporary position that the Staff would not consider a broker-dealer that accepted compensation through certain arrangements required by MiFID II to be an investment adviser during a temporary period specified in such letter. The Division does not intend to extend the temporary position beyond July 3, 2023. However, statements or positions that are independent of the temporary adviser status position are not being rescinded.

In March 2020, the onset of COVID-19 led investors to reallocate their assets into cash and short-term government securities. Government money market funds enjoyed record flows of $838 billion in March 2020, and an additional $347 billion in April 2020. One of the primary sources of these inflows were publicly offered institutional prime funds, which experienced weekly redemption rates north of 20% during this period. In his remarks, the Division Director noted that the key question here is how to allow mutual funds to flourish, while still being able to operate in moments of great stress. Director Birdthistle also noted that using swing pricing as a mechanism could have some benefits, allowing investors in a fund to leave whenever they wish, and passing on the higher cost of an exit to departing shareholders. Nevertheless, challenges remain with respect to the regulatory appetite, and the technological network of the United States’ financial infrastructure.

See the full text of the Division Director’s remarks here.

The US Securities and Exchange Commission’s (“SEC”) Small Business Capital Formation Advisory Committee (the “Committee”) released the agenda for its virtual meeting, to be held on Tuesday, August 2, 2022, and which plans to address liquidity challenges for investors in exempt offerings. The agenda specifically plans to address exit opportunities for investors in Regulation A and Regulation Crowdfunding deals where the company continues to provide ongoing reports. The Committee plans to explore whether certain changes could help facilitate secondary liquidity for investors in exempt offerings. The meeting will begin at 10:00am EST and will be available to the public by web. See the press release.

In their study and accompanying paper, “The Jobs Act Did Not Raise IPO Underpricing” Omri Even-Tov, Panos N. Patatoukas and Young S. Yoon, review the effects of the JOBS Act on emerging growth company (EGCs) IPOs.  The JOBS Act was signed into law in 2012, now ten years ago, and, among other things, created the IPO on-ramp.  It introduced a number of de-risking measures, such as confidential filing of IPO draft registration statements and testing-the-waters communications.  The de-burdening measures consist of reduced financial disclosure requirements for EGCs, for example.  While prior research indicates that the JOBS Act increased IPO underpricing, the authors hypothesize that changes in the overall IPO market conditions contributed to the increase in IPO underpricing for EGC IPOs. They conducted a difference in differences (DID) research design, reviewing the pre-post JOBS Act change between a treatment group of EGC issuers, excluding smaller reporting companies (SRCs) and a control group of large issuers.

They examined IPO aftermarket first day, week and month returns and reported that EGC issuers had average pre-JOBS act first day returns of 13.5%, increasing to 20.2% following the JOBS Act. While these results are consistent with prior research, the authors state that this is not necessarily evidence of an increase in IPO underpricing due to the JOBS Act. In reviewing the control group of large issuers, they find in the pre-JOBS Act period, first day returns were 6.4%, jumping to 13.0% following the JOBS Act. This indicates a parallel trend in aftermarket returns, even though the control group did not benefit from the JOBS Act provisions. After controlling for issuer characteristics and sector effects for both returns and pre-valuation multiples, their portfolio and regression results indicate that changes in overall IPO market conditions concurrent with the JOBS Act explain the increase in EGC IPO underpricing. 

The authors also highlight and investigate the decision of some EGCs to present only two years of audited financial statements and financial data. Notably they find that EGCs that are more likely to adopt these provisions see more IPO overpricing, but they find that this is due to the characteristics of these companies as opposed to their decision to adopt these provisions. Their findings show a correlation between those EGCs that took advantage of the reduced financial statement requirements and higher individual investor ownership and lower sophistication.  These EGCs tend to be smaller, more R&D intensive and have higher reports of negative earning and book value compared to EGCs that did not take advantage of the accommodations.

Ultimately, their research deviates from previous research that implies that the JOBS Act increases EGC IPO underpricing.