As we previously blogged, a Trump tweet called on the Securities and Exchange Commission to undertake a study regarding the costs and benefits of quarterly versus semi-annual filings.  Though no particular connection was drawn in the tweet between semi-annual periodic reports and a focus on long-term investment, the Commission responded with a statement from Chair Clayton titled, “Statement on Investing in America for the Long Term,” that refocuses the discussion and is reprinted below in its entirety:

“The President has highlighted a key consideration for American companies and, importantly, American investors and their families — encouraging long-term investment in our country. Many investors and market participants share this perspective on the importance of long-term investing. Recently, the SEC has implemented — and continues to consider — a variety of regulatory changes that encourage long-term capital formation while preserving and, in many instances, enhancing key investor protections. In addition, the SEC’s Division of Corporation Finance continues to study public company reporting requirements, including the frequency of reporting. As always, the SEC welcomes input from companies, investors, and other market participants as our staff considers these important matters.”

Today, the Securities and Exchange Commission adopted amendments to certain disclosure requirements that have become duplicative, overlapping, or outdated. In July 2016, the Commission proposed amendments for this purpose and also solicited comments on disclosure requirements that overlap with, but require information incremental to, U.S. GAAP. The Commission also was required pursuant to title LXXII, section 72002(2) of the Fixing America’s Surface Transportation (FAST) Act to undertake a review and make certain recommendations to addressed outdated disclosure requirements. In its adopting release, the Commission notes that it is adopting most of the proposed amendments substantially as proposed in 2016. The adopting release notes that in certain instances the Commission is making modifications to the 2016 proposed amendments, and in other cases, the Commission is not adopting the proposed amendments. In a few instances, the Commission is adopting additional changes to make technical corrections. The amendments will be effective 30 days from publication in the Federal Register. The full text of the adopting release is available here. The fact sheet is available here.

The New York Stock Exchange LLC (“NYSE”) proposes to amend Rule 2 to remove the FINRA or other national securities exchange membership requirement for member organizations.  Rule 2 was previously amended in 2007 to require FINRA membership as part of the transition plan for the consolidation of NYSE Regulation, Inc. and the National Association of Securities Dealers (“NASD”).  During this transition period, FINRA provided regulatory surveillance and enforcement services to NYSE, including with respect to NYSE rules, while the harmonization of NYSE and NASD rules was completed.  The proposed rule change reflects the end of the transition period and related regulatory outsourcing as NYSE resumed direct performance of certain previously outsourced regulatory functions on January 1, 2016.  Going forward, common members will continue to be regulated pursuant to the current allocation plan between FINRA and NYSE, and FINRA will continue to perform certain regulatory services under the oversight of NYSE’s regulatory unit pursuant to the existing Regulatory Services Agreement.  The full notice may be found here and the full text of the proposed revisions may be found here.

Read our full REVERSEinquiries issue here.


In a very early morning tweet, the President chose to comment on the requirement to file quarterly reports on Form 10-Q. (See the tweet here.)  We noted in a prior post that the House JOBS Act 3.0 bill already included a requirement that the Securities and Exchange Commission conduct a study regarding the costs and benefits associated with quarterly filing requirements, especially for emerging growth companies. Not clear whether a tweet asking the Commission to study this will change the dynamic.

Last month’s announcement by FINRA marks the completion of the consolidation of FINRA’s enforcement functions under the leadership of Susan Schroeder.  One of the key outcomes of FINRA360,  the new structure is designed to ensure a more consistent enforcement program.  Schroeder noted, “The consolidation of our enforcement function enables us to better target developing issues that can harm investors and market integrity, and ensure a uniform approach to charging and sanctions.”  Under the new structure, the Department of Enforcement contains two new centralized units, Investigations and the Office of the Counsel to the Head of Enforcement, and three specialized teams, Main Enforcement, Sales Practice Enforcement and Market Regulation Enforcement.  The groups will be headed by Terrence Bohan, Lara Thyagarajan, Jessica Hopper, Christopher Kelly and Elizabeth Hogan, respectively.  See the full announcement here.

Read our full REVERSEinquiries issue here.

The Ninth Circuit recently decided a case, Automotive Industries Pension Trust Fund v. Toshiba Corp., in which the Circuit court considered the application of the Supreme Court’s territoriality standard in the Morrison v. National Australia Bank Ltd. case.  The court considered whether purchasers of Toshiba unsponsored ADRs on the over-the-counter market were precluded from bringing Section 10(b) and 10b-5 claims under the Securities Exchange Act of 1934.  The Ninth Circuit concluded that the Morrison standard did not preclude the claims.  Finding that the OTC market does not constitute an exchange, the Circuit court nonetheless concluded that under Morrison one would look to where purchasers incurred the liability to take and pay for the securities and where the sellers incurred the liability to deliver the securities to the purchasers.  To the extent that these elements took place in the United States, the transaction would be deemed to be a domestic transaction and Exchange Act claims arising in connection with the transaction can be brought in the United States.  Although, in this particular instance, the Ninth Circuit determined that plaintiffs failed to show that the relevant transactions were “domestic” and remanded to the district court on this matter, the Circuit court decision stands for the proposition that concluding that a transaction is “domestic” is enough to bring a securities claim in the United States.  For issuers that have unsponsored ADR programs and had no role in setting up the ADR program and derive no benefit from the unsponsored ADR program, the decision may raise serious concerns.  So, at least in the Ninth Circuit, there no longer seems to be a difference between a sponsored and an unsponsored ADR program for purposes of liability.

2018 has seen an increase in private companies accessing the private markets through private company liquidity programs.  Nasdaq Private Markets recently released a report showing an increase of 74% in total number of private liquidity programs between 1H2017 and 1H2018.  The 33 programs completed in the first half of 2018 have a total program volume of $10 billion.  This is a 37% increase in total program volume over the first half of 2017.  Twenty of these private liquidity programs were structured as third-party tender offers, while the remaining 13 were share buybacks.

Breaking down the programs by number of eligible shareholders shows that 33% of programs are completed by companies with less than 100 eligible shareholders, 33% by companies with 100-250 eligible shareholders, 24% by companies with 250-500 eligible shareholders, and 10% by companies with over 500 eligible shareholders.  Additionally, 50% of companies completing private liquidity programs are valued at over $1 billion.  Nasdaq’s report leads us to conclude that a broader range of companies have turned to private liquidity programs than in recent years.

Nasdaq’s report is available here.


Recently, in connection with the Securities and Exchange Commission’s consideration of proposed amendments to the definition of “smaller reporting company,” the Commission had an opportunity to consider including in the adopting release an exemption from the Section 404(b) auditor attestation.  The Commission deferred a decision on the Section 404(b) auditor attestation.  A number of the Commissioners noted that it would be helpful to have the benefit of statistical data regarding the costs associated with the Section 404(b) process and observed that the commenters on the SRC amendments proposed a few years ago included anecdotal commentary on the burdens imposed by Section 404(b) auditor attestation requirements.  Congress also has considered a number of legislative measures that would provide for exemptions for different issuers from the Section 404(b) auditor attestation requirement.  For example, one measure would provide an exemption for low revenue issuers.  A different legislative proposal would extend the period during which emerging growth issuers are exempt from the requirement from five years to ten years.  Against this backdrop, authors Weili Ge, Allison Koester, and Sarah McVay attempt to quantify the benefits and costs of exempting smaller firms from the auditor attestation requirements and under Section 404(b).  In a paper titled “Benefits and Costs of Sarbanes-Oxley Section 404(b) Exemption:  Evidence from Small Firms’ Internal Control Disclosures,” the authors compare the relative increase in audit fees of exempt firms and non-exempt firms from 2003 to 2014.  The authors quantify the benefit of the exemption as a savings of $388 million in Section 404(b)-related audit fee savings for the 5,302 exempt firms sampled.  The authors then consider internal control misreporting, which critics of the exemption point to as the principal concern.  The authors conclude approximately 9.3 percent of the exempt firms that disclose effective internal controls actually have ineffective internal controls.  These are, according the authors, evidence of misreporting.  Section 404(b) compliance lowers misreporting of internal controls from 9.3 percent to 5.8 percent.  The authors also assess the costs of internal control misreporting attributed to the Section 404(b) exemption, lower operating performance due to non-remediation and market values that fail to reflect a firm’s underlying internal control status by looking at changes in future earnings and future stock returns for suspected internal control misreporting.  The authors estimate that the costs of a Section 404(b) exemption for suspected internal control misreporting as $719 million in lower operating performance due to non-remediation and $935 million delay in aggregate market value decline due to the failure to disclose ineffective internal controls.