On September 16, 2022, the Treasury Department issued three reports pursuant to President Joseph Biden’s March 9 Executive Order 14067 on “Ensuring Responsible Development of Digital Assets.” The issuance of the reports was followed by Treasury Under Secretary for Domestic Finance Nellie Liang giving remarks at the Brookings Institution on September 22 explaining the reports and their recommendations. This Legal Update provides further detail.

With the calendar turning to autumn, the proxy and annual reporting season may seem a long way off. However, in light of the amount of work and planning that goes into the proxy statement, annual report, and annual meeting of shareholders, this is the ideal time to begin preparations.

This Legal Update provides an overview of key issues that companies should consider as they get ready for the upcoming 2023 proxy and annual reporting season, including:

  • Pay Versus Performance
  • Compensation Agenda Items
  • Shareholder Proposals
  • Shareholder Engagement
  • Universal Proxy
  • Board Diversity
  • Director Expertise and Board Governance
  • Virtual Annual Shareholder Meetings
  • Proxy Voting Advice
  • SEC Clawback Regulation
  • Climate Change
  • Human Capital Management
  • Russia/Ukraine Disclosures
  • Risk Factors
  • Management’s Discussion and Analysis
  • Share Repurchase Disclosure
  • EDGAR Submission of “Glossy” Annual Reports
  • ITRA Compliance
  • Director and Officer Questionnaires

October 27, 2022 New York

8:00am – 5:30pm ET

Register here.

Our third Artificial Intelligence & Financial Services Symposium will resume on October 27, 2022. As in 2019, we will focus on the legal, contractual and regulatory aspects of using AI to deliver financial services. Topics will include:

  • How Financial Institutions and Insurance Companies are Using AI
  • Algorithmic Bias and “Unfair” Discrimination
  • Navigating Litigation Challenges in Explainable AI
  • Contracting for AI in Financial Services
  • BaaS and Open Banking
  • Insurtech
  • Use of Digital Engagement Practices by Broker-Dealers and Investment Advisers
  • Governance Issues for AI
  • Developing Your AI Mission

We plan to promote information sharing by having no recording and no broadcast. Space will be limited. We hope to see you in New York this October!

In the paper, “Unicorniphobia,” Alexander I. Platt counters the viewpoint held by many legal scholars and regulators, including the SEC, that unicorns pose regulatory, financial, and social risks.  Many recent articles argue that unicorns pose concerns because: they are not subject to SEC reporting and SEC scrutiny and oversight; unicorn CEOs/founders are usually innovative but inexperienced risk takers; and venture capital backers may encourage risky decisions and ignore bad behaviour in order to remain founder-friendly.  Platt, however, takes a different view.  He argues that forcing unicorns to become public companies earlier in their life may make them more prone to taking risky behavior, and he argues that unicorns provide benefits to society at large.

Platt addresses a number of potential reforms proposed by legal scholars but outlines why he believes these would not have their intended effects. These reforms include the following proposals:  forcing companies to go public either when they pass a specified valuation or when their “public float” crosses a certain threshold; adopting a “hybrid” disclosure regime for any private company within 90 days of closing a financing valued at $1 billion or more that would require periodic disclosure in plain English on some scaled basis; proposed new mandatory disclosures for companies with a market capitalization above $35 million or with more than 100 beneficial owners, unless the company either maintains strict restrictions on the transfer of shares or commits to an alternative public disclosure regime; and a new set of mandatory disclosures for all companies, public and private, that address social and financial information.

Platt argues that these reforms would not reduce the dangers associated with unicorns because they are characteristics of all public companies, which he asserts may not be less likely to engage in risky or socially harmful activities than unicorns.  He supports this claim by demonstrating public companies are often too focused on short term prices (short-termism) at the expense of long-term goals, face the pressure of meeting quarterly goals, face activist threats, may adopt harmful corporate governance practices, and may have a corporate culture that leads to excessive risk-taking. Unicorns are not subject to many of these harmful factors that affect public companies.

In the recent literature on the dangers of unicorns, Platt notes that that the authors often use the examples of “bad” unicorns to justify the need for reform. However, the advocates for reform do not provide explanations for, or provide faulty explanations for, how their reforms would have deterred the behaviour they criticize.  Platt presents Moderna as an example of how unicorn status can be beneficial to companies and society at large. He applies the proposed regulations on unicorns to Moderna to demonstrate how such reforms, had they been in place, would have been an impediment to the company and its efforts to develop its Covid-19 vaccine. For example, disclosure requirements may have forced Moderna to share its scientific failures that may have prevented investment and could have led to the company’s failure.  Platt presents a side of the debate against regulating unicorns that should be considered as regulators evaluate amendments to the Exchange Act Section 12(g) threshold and other changes. The full paper can be read here.

On September 6, 2022, the OCA released a statement regarding audit quality and investor protection under the Holding Foreign Companies Accountable Act (“HFCAA”).  The statement reiterates the importance of high quality audits in protecting investors, instilling shareholder confidence in the quality of the financial information, and enabling public companies to raise capital efficiently.  The OCA notes that in response to additional oversight requirements under the HFCAA, foreign issuers (particularly in China and Hong Kong) are structuring alternative engagements to change their lead auditor from a local registered public accounting firm to a registered public accounting firm located either in the United States or elsewhere, generally within the same network, to avoid the potential of consecutive PCAOB HFCAA determinations and potential trading violations. This poses special challenges that raise questions about whether the newly engaged registered public accounting firm will be able to satisfy its responsibilities to serve as lead auditor.

The OCA highlights two primary structures of engagement multinational issuers employ.  First, issuers with multiple locations or business units may choose to retain a lead auditor that the PCAOB is already able to inspect or investigate completely that uses, and assumes the responsibility for, the work of other independent auditors or uses the reports of other independent auditors. Second, issuers may choose to retain a lead auditor that the PCAOB is able to inspect or investigate completely that, in turn, directly engages another independent accounting firm or other individual accountants to participate under the direction and supervision of the lead auditor. These structures permit the accounting firm retained by the issuer to use the work of another auditor as long as the requirements for serving as the lead auditor can be met and the lead auditor is able to fulfill its responsibilities, including those for supervision and documentation.

To ensure that parties are compliant with the PCAOB’s standards, the issuer may need to authorize appropriate communications between the old and new auditors and avoid placing limitations on the responses of the predecessor accounting firm. Further, the predecessor accounting firm should avoid creating roadblocks in engagement with the successor accounting firm. If the lead auditor fails to meet its legal or professional obligations, or engages in any efficient breach of the HFCAA or PCAOB standards, it could result in significant liability for the auditor and the issuer.  See the full statement here.

On September 9, 2022, the Securities and Exchange Commission announced amendments to its rules in order to implement inflation adjustments mandated by the JOBS Act.  The SEC’s amendments increase the annual gross revenue threshold for emerging growth companies and raise certain dollar amounts contained in Regulation Crowdfunding.  Pursuant to the JOBS Act, the SEC is required to make inflation adjustments to various JOBS Act rules at least once every five years.

Title I of the JOBS Act added Securities Act Section 2(a)(19) and Exchange Act Section 3(a)(80) that define the term “emerging growth company.”  Pursuant to the statutory definition, the SEC is required to index to inflation the annual gross revenue amount used in determining EGC status.  The SEC therefore adopted amendments to Securities Act Rule 405 and Exchange Act Rule 12b-2 to adjust the EGC threshold from $1.07 billion to $1.235 billion.

Title III of the JOBS Act added Securities Act Section 4(a)(6), which provides an exemption from the registration requirements of Section 5 of the Securities Act for certain crowdfunding transactions.  Sections 4(a)(6) and 4A of the Securities Act set forth dollar amounts to be used in connection with the crowdfunding exemption.  The SEC implemented inflation adjustments for Rules 100 and 201(t) of Regulation Crowdfunding, which cover offering maximum and investment limits, and financial statement requirements, respectively. The SEC noted, due to increases it made in March 2021 to Regulation Crowdfunding’s offering limit contained in Rule 100(a)(1), it is declining to further increase the $5 million offering limit. Please see the Fact Sheet for the specific dollar amounts in Rules 100 and 201(t), as adjusted for inflation.

The new thresholds will become effective upon publication of the amendments in the Federal Register.  See Press Release here.  See Final Rule here.

October 6, 2022 Webinar

10:00am – 11:00am CDT

Register here.

Please join us for Mayer Brown’s Benefits & Compensation University. During this series of webinars, we are exploring ERISA, benefits and compensation issues in depth and hearing from leading Mayer Brown lawyers about the changing regulatory landscape. The Mayer Brown team will provide practical, business-focused guidance on dealing with these challenges.

This first session will cover hot topics in executive compensation, including:

  • SEC final rule on pay versus performance
  • SEC request for comment on clawback rules 
  • Key considerations for public companies following regulatory updates
  • Update on private company executive compensation issues

Recently, the Securities and Exchange Commission (the “SEC”) released its report to Congress summarizing the principal policy recommendations made at the 41st Annual Government-Business Forum on Small Business Capital Formation (the “Small Business Forum”).  The Small Business Forum was led by the SEC’s Office of the Advocate for Small Business Capital Formation in cooperation with other offices and divisions across the agency.  The Office of the Advocate for Small Business Capital Formation is an independent office of the agency established in order to identify and address the unique challenges and advance the interests of small businesses and their investors within the SEC.   

During the Small Business Forum, participants shared their views on a number of topics, which were organized around the following themes:  empowering entrepreneurs:  tools to navigate capital raising; hometown entrepreneurship:  how entrepreneurs can thrive outside of traditional capital raising hubs; new investor voices:  how emerging fund managers are diversifying capital; and small cap world: what to know and how to think ahead.

In turn, the SEC’s report on the Small Business Forum covered a variety of topics with respect to capital raising strategies and the SEC’s recommendations to improve upon the capital raising framework.  The report highlighted Chair Gensler’s remarks underscoring the SEC’s mission to promote capital formation.  Consistent with Chair Gensler’s remarks, a topic emphasized throughout the Small Business Forum and in turn, in the report, related to the importance of providing small business access to public markets.  Despite the availability of capital in the private markets, the report emphasizes that for smaller companies, public markets provide important benefits in the form of increased transparency and increased visibility through public disclosure, ensuring that all investors receive information at the same time, thereby increasing investor confidence for investors that may not have close connections to the company.  Similarly, the report emphasized the importance of standardized public market disclosure, which enables comparability for a company among its peers.  The SEC noted that the market advantages of public markets and increased access to more information enable smaller companies to reduce the cost of capital by allowing investors to price these companies more accurately, thereby balancing the costs and barriers to entry that may be encountered in an IPO.

Participants made a number of policy recommendations, including that the SEC: 

  • Revise Regulation Crowdfunding to permit investment companies to conduct a Regulation Crowdfunding offering;
  • Expand the accredited investor definition to achieve greater diversity among startup investors and entrepreneurs—including by adding other measures of sophistication, and to include any person who invests not more than 10% of the greater of his/her annual income or net assets;
  • Finalize the SEC’s proposed exemptive order that allows certain finders to function without registering as broker-dealers;
  • Create a new private fund exemption to allow states to foster intrastate and regional funds focused on community-based investing that is open to non-accredited investors; and
  • Increase the number of investors allowed in Section 3(c)(1) funds above 99 investors.

Read the complete Report on the 41st Annual Small Business Forum here.

September 28, 2022 Webinar

12:00pm – 1:30pm CST

Register here.

The SMU Rowling Center for Business Law & Leadership presents this panel based on Professor Marc I. Steinberg’s recent book Rethinking Securities Law (Oxford University Press), which was awarded Winner Best Law Book of 2021 by American Book Fest. In addition to Professor Steinberg, the panel includes some of the foremost experts in securities regulation:

  • The Honorable Harvey Pitt, former Chairman of the Securities and Exchange Commission;
  • Mr. Alan Dye, coauthor of the seminal treatise on Section 16 of the Securities Exchange Act;
  • Professor Joel Seligman, coauthor (with Loss and Paredes) of the premier securities regulation treatise; and
  • Professor Christina Sautter, a nationally-known expert who focuses on mergers and acquisitions.

Professor Steinberg will present an overview of several key positions taken in the book, including those focusing on capital raising, the disclosure framework, insider trading, the federalization of corporate governance, and the SEC itself. Thereafter, each of the panelists will provide his or her analysis and commentary. If time permits, the panelists will respond to questions from the audience.

The Acting Chief Accountant of the Securities and Exchange Commission, Paul Munter, recently released a statement regarding critical points to consider when contemplating an audit firm restructuring.  In recent years, audit firms have been increasingly involved in complex business arrangements, such as selling a portion of their business to a third party while retaining an equity interest in that business or divesting the accounting firm’s consulting practice, in whole or in part, to a third-party.  These business arrangements can increase the challenges associated with an audit firm’s maintenance of its independence, both in fact and appearance, with respect to its audit clients.  In particular, Munter points to the importance of considering the definition of “accounting firm” in Rule 2-01 of Regulation S-X when entering into these transactions.  An “accounting firm” includes “the organization’s departments, divisions, parents, subsidiaries and associated entities [emphasis added], including those outside of the United States.”  The SEC has not defined “associated entity” but when making a determination as to whether a third party investor or purchaser would be considered an associated entity, it is the view of the staff of the Office of the Chief Accountant (“OCA Staff”) that the following be considered: (i) the third party’s financial interest in the accounting firm; and (ii) the third party’s ability to influence the accounting firm’s operating or financial decisions.

These considerations are of particular importance in transactions involving private equity firms.  Private equity structures can be complex and include entities that have influence over portfolio companies.  Therefore, each entity within the contemplated structure should be evaluated to determine if the entity is an “associated entity” and if so, whether the entity would be considered a part of the accounting firm and be subject to auditor independence requirements.  In addition to determining which entities meet the definition of accounting firm, the accounting firms need to comply with Rule 2-01(b) Regulation S-X (the general standard of auditor independence).  It is the OCA Staff’s view that it would be a “high hurdle” for an accounting firm to comply with this rule if it provides any audit, review, or attestation services to any entities within the private equity structure.  Auditor independence may also be at risk due to private equity firms generally having a “continuously evolving universe of entities.”            

In addition to these private equity investment concerns, Munter notes the potential for auditor independence violations when an individual investor is involved in a transaction.  If an individual, other than an audit firm partner, directly invests in the accounting firm, then such investor’s interests would need to be evaluated to determine if they fall under the “covered person” definition of Rule 2-01.  If so, the investor must also comply with auditor independence rules.  Last, Munter notes the OCA Staff’s expectations regarding divestitures.  If an accounting firm divests all or part of its business and the divested entity is no longer part of the accounting firm post-transactions, the OCA Staff expects certain actions to be taken to maintain independence.  This includes, but is not limited to, adopting separate corporate and financial structures, terminating all interests between the accounting firm and the divested entity and not having any profit sharing between the accounting firm and the divested entity. 

See the full text of the Acting Chief Accountant’s remarks here.