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 December 21, 2018, the Securities and Exchange Commission (the “SEC”) appointed Martha Legg Miller as the Advocate for Small Business Capital Formation. As the first individual appointed to the new role, Miller will assist small businesses in accessing and navigating capital markets and identify the challenges that they face in doing so. Additionally, Miller will suggest regulatory changes to better accommodate the interests of small businesses. The position was created along with the Office of the Advocate for Small Business Capital Formation under the SEC Small Business Advocate Act of 2016. The SEC created the new role and office to better represent the needs of small businesses in accessing capital, while continuing to ensure investor protection. The SEC press release covering the appointment can be found here.

Before the SEC shutdown, the Office of the Investor Advocate published the annual report on its activities during 2018. The report addresses non-GAAP financial measures and key performance indicators. The report notes that some investors find value in non-GAAP financial measures; however, others are troubled by inconsistent and changing disclosures and would like to see greater standardization that would permit comparisons to be more easily made. The report suggests continue attention be paid to the metrics used by public companies, and I how these are prepared and presented period to period. The report also addresses the Advocate’s focus during the year on problematic investment products, such as initial coin offerings, and increasing use of margin debt. The full report can be accessed here: https://www.sec.gov/advocate/reportspubs/annual-reports/sec-investor-advocate-report-on-activities-2018.pdf

 

In a recent cease and desist order accompanied by a $100,000 civil penalty, the US Securities and Exchange Commission (SEC) gave a strong reminder of the importance of providing equal or greater prominence to the most directly comparable financial measure calculated and presented in accordance with Generally Accepted Accounting Principles (GAAP) in disclosures containing non-GAAP financial measures, including earnings releases. This Legal Update discusses SEC rules and guidance applicable to this order.

To learn more, read our Legal Update.

In a recent cease and desist order accompanied by a $100,000 civil penalty, the US Securities and Exchange Commission (SEC) gave a strong reminder of the importance of providing equal or greater prominence to the most directly comparable financial measure calculated and presented in accordance with Generally Accepted Accounting Principles (GAAP) in disclosures containing non-GAAP financial measures, including earnings releases. This Legal Update discusses SEC rules and guidance applicable to this order.

To learn more, read our Legal Update.

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 US Securities and Exchange Commission (the Commission) amended Rule 251 and Rule 257 of the Securities Act of 1933, as amended (the Securities Act), which are part of Regulation A, in order to allow companies subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act) to make offerings in reliance on the Regulation A exemption.  The rule changes were mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the Economic Growth Act).

To read more, see our Legal Update.