On January 18, 2019, Congresswoman Maxine Waters and Congressman Patrick McHenry introduced legislation that would require the Securities and Exchange Commission (the “Commission”) to carry out a study of Rule 10b5-1 trading plans. Rule 10b5-1 trading plans are passive investment agreements that provide an affirmative defense for companies and insiders (directors, officers and affiliated shareholders) transacting in the relevant company’s securities from claims brought under the Exchange Act. Currently, any person or entity can establish a Rule 10b5‐1 trading plan to sell or buy a company’s securities at a time when the person or entity is not aware of any material non-public information relating to the company. The study would review whether Rule 10b5-1 should be amended to:

  • limit the ability to adopt a trading plan to a time when the company or insider is permitted to buy or sell securities during issuer-adopted trading windows;
  • limit the ability of companies and insiders to adopt multiple trading plans;
  • establish a mandatory delay between the adoption of a trading plan and the execution of the first trade made pursuant to such plan;
  • limit the frequency with which companies and insiders may modify or cancel trading plans;
  • require companies and insiders to file adopted trading plans with the Commission; and
  • require boards of companies to adopt policies covering trading plans and monitor trading plan transactions

The Commission would be required to issue a report within one year of the adopted legislation and revise Rule 10b5-1 based on the study’s results. A copy of the legislation can be found using the below link: https://financialservices.house.gov/uploadedfiles/waters_007_xml_hr_624.pdf.


On January 10, 2019, the staff of NYSE Regulation released its annual memorandum detailing important rules and policies applicable to listed companies. The memorandum provides helpful reminders for issuers (noting important rule differences for domestic and foreign private issuers) with securities listed on the NYSE and also highlights new compliance items. In particular, as previously announced, the memorandum notes that NYSE-listed companies are now required to provide notice to the NYSE at least ten minutes before making any public announcement with respect to a dividend or stock distribution, including when the notice is outside of NYSE trading hours. Additionally, NYSE-listed companies are now no longer required to provide physical copies of proxy materials to the NYSE if such proxy materials are publicly filed with the Securities and Exchange Commission (“SEC”) on EDGAR. The memorandum also provides important reminders specific to foreign private issuers, including with respect to semi-annual reporting. NYSE-listed foreign private issuers are required to submit a Form 6-K to the SEC containing semi-annual unaudited financial information no later than six months following the end of the company’s second fiscal quarter. The memorandum also includes the latest NYSE staff contact information for purposes of complying with notification requirements and contacting the NYSE in the event material news is released. A copy of the full memorandum can be obtained by clicking here.

As detailed in our Legal Update, on December 18, 2018, the Securities and Exchange Commission (“SEC”) adopted a final rule requiring companies to disclose their hedging policies for employees, officers and directors. However, in a change from the proposed rule, the SEC decided not to apply the new disclosure requirement to listed closed-end funds following receipt of industry comments opposing application of the rule to such funds. However, the SEC decided to apply the final rule to BDCs (a category of closed-end investment companies) after not receiving any industry comments specifically suggesting that BDCs should be excluded from the rule’s application (no comments specifically addressing BDCs in any manner were submitted to the SEC). As part of its decision to exclude closed-end funds, the SEC noted that nearly all closed-end funds are externally managed and have few, if any, employees who are compensated by the fund (approximately 87.5% of BDCs are similarly externally-managed). Commenters noted that closed-end funds generally have compensation practices, a regulatory regime and disclosure obligations that differ in various aspects from operating companies. As a result, the SEC was persuaded that it was unnecessary to apply the hedging disclosure requirement to listed closed-end funds. The SEC estimates that approximately 80 BDCs will now be subject to the new rule with the economic impact likely to depend upon the BDC’s management structure (incremental effect is expected to be greater for internally managed BDCs). A copy of the final adopting release may be found using the below link: https://www.sec.gov/rules/final/2018/33-10593.pdf.

On December 19, 2018, the Securities and Exchange Commission (the “SEC”) proposed a new rule (Rule 12d1-4) intended to modernize and improve the regulatory framework for fund of funds arrangements (fund investing in shares of another fund). Currently, funds are required to rely on existing statutory exemptions or exemptive rules or seek exemptive relief prior to creating a fund of funds arrangement, resulting in unnecessary and avoidable costs and delays and an inconsistent regulatory framework. The proposed rule would permit registered investment companies (“RICs”) and business development companies (“BDCs”) to acquire the securities of any RIC or BDC in excess of the limits in Section 12(d)(1) of the Investment Company Act of 1940, as amended. RICs and BDCs relying on the proposed rule would need to comply with the following conditions:

  • RICs/BDCs holding more than 3% of a fund’s outstanding voting securities would be required to vote those securities in a prescribed manner and would be prohibited from redeeming more than 3% of the fund’s outstanding shares during any 30-day period.
  • RICs/BDCs would be required to evaluate the layering of duplicative or excessive fees associated with its investment in a fund and the complexity of the fund of funds arrangement (specific considerations would vary given the particular structure).
  • RICs/BDCs would be prohibited from creating three-tier fund of funds arrangements, except in certain limited circumstances.

Unfortunately, the proposed rule does not address industry concerns relating to “Acquired Fund Fees and Expenses” (“AFFE”) disclosure requirements, which require acquiring funds to aggregate and disclose in their prospectuses the amount of total annual acquired fund operating expenses and express the total amount as a percentage of an acquiring fund’s net assets. As a consequence, some index providers removed acquired funds from their indices, causing a significant reduction in institutional ownership of such funds.

The SEC has requested public comment on the proposed rule and industry suggestions to improve AFFE disclosure (see pages 74-77 of the proposed rule).

Given that the proposed rule would provide a holistic exemption for fund of funds to operate, the SEC also proposes to rescind Rule 12d1-2 and individual exemptive orders for certain fund of funds arrangements, with the idea of creating a consistent rules-based regime for fund of funds arrangements. In addition, in connection with the proposed rescission of Rule 12d1-2, the SEC also proposed amendments to Rule 12d1-1 to allow funds that rely on Section 12(d)(1)(G) to invest in money market funds that are not part of the same group of investment companies.

The proposed rule and related rule amendments can be found using the following link: https://www.sec.gov/rules/proposed/2018/33-10590.pdf.

In 2017, the Public Company Accounting Oversight Board (“PCAOB”) adopted a new standard for auditor’s reports that requires a description of critical audit matters (“CAMs”) designed to provide investors with information that relates to accounts or disclosures that are material to a company’s financial statements and involve especially challenging, subjective or complex auditor judgment. The CAM standard will be required for audits for fiscal years ending on or after June 30, 2019 for large accelerated filers.

On December 10, 2018, in anticipation of the implementation of the CAM standard, the Center for Audit Quality released a paper titled “Lessons Learned, Questions to Consider, and an Illustrative Example” highlighting observations made from practice dry runs of the CAM standard. The paper seeks to identify and provide clarity on the numerous factors that can influence an auditor’s CAM decision. The paper reminds audit committees that the determination of CAMs, and resulting disclosure, is not meant to be indistinguishable between companies but rather unique to each particular audit and company. Nonetheless, the following early themes noted in the paper from the practice dry runs should be valuable for audit committee members, auditors and financial executives as compliance becomes mandatory:

  • As the PCAOB standard requires a CAM to be material to a company’s financial statements, a relationship must exist between the CAM communicated in the auditor’s report and the accounts or disclosures in the financial statements to which the CAM relates.
  • An auditor may determine that certain critical accounting estimates or assumptions meet the definition of a CAM. The paper identifies legal contingencies as a critical accounting estimate that may be considered a CAM depending upon the facts and circumstances of the particular audit.
  • Not every significant risk will be subject of a CAM. The paper notes that fraud risks are considered significant but may not involve especially challenging, subjective or complex judgment and therefore may result in a CAM.
  • CAMs are most likely to relate to areas that involve a significant degree of estimation or assumptions that necessitate management judgment. The paper identifies auditing goodwill, impairment, intangible asset impairment, business combinations, aspects of revenue recognition, income taxes and fair valuation of financial instruments as areas that are likely to result in a CAM.
  • Most audits will identify at least one CAM, although the paper notes it is possible that an auditor may determine that no CAMs are present.

A copy of the full paper may be obtained using the below link: https://www.thecaq.org/critical-audit-matters-lessons-learned-questions-consider-and-illustrative-example


A pre-funded warrant allows its holder to purchase the issuer’s securities at a nominal exercise price (typically, $0.01 per share).  Instead of waiting to receive proceeds following a warrant’s exercise, the issuer receives substantially all of the warrant’s proceeds upfront (without any conditions) as part of the warrant’s purchase price.  In our recently published On point. we provide a comprehensive overview of pre-funded warrants, including certain advantages for issuers and holders, as well as structuring and other legal considerations.

On November 30, 2018, the Securities and Exchange Commission (the “Commission”) adopted a new rule establishing a non-exclusive research report safe harbor (“Rule 139b”) for unaffiliated brokers or dealers that publish or distribute research reports regarding qualifying investment funds.  The Commission took this action in furtherance of the mandate of the Fair Access to Investment Research Act of 2017 (the “FAIR Act”).  The FAIR Act required that the Commission expand the Rule 139 safe harbor for research reports in order to cover research reports on investment funds.

Continue reading our Legal Update.

On October 12, 2018, the Securities and Exchange Commission’s Division of Investment Management issued a no-action letter permitting a fund’s board of directors (“Board”) to rely upon quarterly compliance certifications from the fund’s chief compliance officer (“CCO”) that address the fund’s compliance when the fund is engaging in certain affiliate transactions under the Investment Company Act of 1940, as amended (the “1940 Act”), instead of requiring the Board to itself determine compliance.  Funds permitted to rely on the no-action relief include both registered investment companies and business development companies.  The no-action relief is limited to the CCO making a determination of whether a particular transaction that is exempt pursuant to Rule 10f-3 (exempts certain securities purchases by an affiliated underwriting syndicate), Rule 17a-7 (exempts certain cross trade transactions between affiliated entities) or Rule 17e-1 (exempts certain affiliated broker’s commissions) of the 1940 Act complied with the procedures previously adopted by the Board.  This relief allows the Board to avoid duplicating certain functions more appropriately performed by, or under the supervision of, the CCO and instead focus on an oversight role.

A copy of the no-action letter can be found using the below link:

An at-the-market (ATM) offering is an offering of an issuer’s securities into the existing trading market for such securities at publicly available bid prices. An issuer’s internal legal team and outside counsel play critical roles in properly documenting an ATM offering. In this Lexis Top 10 Practice Tips: At-The-Market Offerings, we provide 10 practice tips that can help attorneys effectively and efficiently assist with an ATM offering.