In a recent case, the Second Circuit court decided that a Securities Exchange Act Section 10(b) action could be brought because the transaction at issue had sufficient connections to the United States to constitute a “domestic transaction.”   The action involved Bahamian and American plaintiffs bringing an action against a Bahamian company.  The company’s securities were not listed in the United States.  The Supreme Court standard established in the Morrison v. National Australia Bank Ltd. case held that Section 10(b) applies only to “transactions listed on domestic exchanges and domestic transactions in other securities.”  The Second Circuit based its conclusion on the fact that the plaintiffs became obligated to take and pay for the securities, and the securities were delivered in the United States.  Even though Bahamian regulatory approval was required for the issuance, the condition subsequent did not negate the fact that liability had been incurred in the United States.

Many recent press articles lamenting “short-termism” in corporate America blame research analysts for focusing on quarterly earnings.  In a recent paper titled, “Analyst Coverage and the Quality of Corporate Investment Decisions” authors Thomas To, Marco A. Navone and Eliza Wu demonstrate a causal connection between analyst coverage and good investment decisions.  The authors assess the impact of financial analyst coverage on corporate investments by evaluating corporate total factor productivity (or efficiency gains) for US listed companies from 1991 to 2013.  Their “information hypothesis” postulates that analyst coverage delivers information about companies to the market and may therefore provide those companies with access to funding that permits companies to make capital expenditures and other investments.  Also, as a result of analysts monitoring companies and revealing negative information and assessments to the market, it ensures that company management’s will undertake the most productive projects.  In this latter case, analysts effectively serve as monitors prompting companies to improve capital allocation efficiency.   The study also shows that a reduction in analyst coverage reduces capital expenditures and institutional monitoring.  In this light, perhaps the claims that analysts contribute to short-termism should be reevaluated.

On Thursday, August 23, 2018, the Senate Committee on Banking, Housing, and Urban Affairs approved by unanimous voice vote the nomination of Elad Roisman for Commissioner of the Securities and Exchange Commission.

Nominated on June 1, 2018, by President Trump, Mr. Roisman would fill the vacancy created by former Commissioner Michael Piwowar’s resignation and serve a term of five years. Mr. Roisman is President Trump’s fourth nomination to the SEC, following the nominations of SEC Chair Jay Clayton, Commissioner Hester Peirce, and Commissioner Robert Jackson.

A date for a full Senate confirmation has yet to be set.

As we previously blogged, Nasdaq Stock Market LLC filed a proposed rule change with the Securities and Exchange Commission to change their listing requirements under Nasdaq Rule 5635(d), which relates to shareholder approval.

On August 16, 2018, the SEC announced that it would further extend its deadline to approve or reject the rule change to October 18, 2018, or 240 days from the date the proposed rule change was published for notice and comment in the Federal Register. The SEC noted that it would use the action deadline extension to review the proposed change and the comment letters it has received.

Partner Anna Pinedo and associate Ali Perry examine some of the issues most commonly raised in initial Securities and Exchange Commission comment letters on registration statements filed for initial public offerings in a recently published Lexis Practice Advisor® Practice Note.

 

The Securities and Exchange Commission’s Investor Advisory Committee has released the agenda for its upcoming meeting on September 13, 2018.  The committee will begin with a discussion on U.S. proxy voting infrastructure.  The Committee will then address the SEC’s proposed transaction fee pilot in National Market System (NMS) stocks, which, as the agenda notes, may also include a recommendation from the Committee’s Market Structure Subcommittee.  Finally, the Committee will discuss the implications of passive investing.

The meeting will begin at 9am ET and will be held at the SEC’s headquarters.  The meeting is open to the public and will also be webcast on the SEC’s website.

Even before the Trump tweet, discussions regarding interim reporting requirements for U.S. public companies had been ongoing for several years.  In fact, going back to 2015, the Securities and Exchange Commission’s Advisory Committee on Small and Emerging Companies considered the advantages and disadvantages associated with discontinuing quarterly reporting.  In 2016, the Director of the Commission’s Division of Corporation Finance addressed the issue in a speech in Europe, noting that, “The United Kingdom has stopped mandating that companies provide quarterly financial reports to investors. Lately, some commentators have asked the Commission to re-think the need for quarterly reporting by U.S. issuers, which has been a staple of the U.S. regulatory system since 1970, advocating that this frequency leads to short-term thinking by investors and company management. These commentators note that financial reporting that focuses on short-term performance is not conducive to building sustainable businesses because it steers management to focus on short-term goals and performance.”  Flash forward a few years, and Title XXII Section 2201 of the JOBS Act 3.0 requires that the Securities and Exchange Commission conduct an analysis regarding the costs and benefits of quarterly reporting on Form 10-Q, especially for emerging growth companies.  This provision may have been influenced by a report published by various trade groups, including SIFMA, about which we recently blogged.  In that trade group report, a recommendation is made that emerging growth companies be given the option to issue a press release with their quarterly results rather than be required to file a quarterly report on Form 10-Q.  The trade group report states that quarterly reports have become longer and more detailed, and therefore producing such reports has become more expensive.  In the trade group report, the focus was on costs and reporting burdens.

At the same time, the debate relating to quarterly earnings guidance has been reinvigorated.  Some have argued that quarterly reporting distracts managers from focusing on long-term goals and observe that public companies are all too concerned with short-term gains at the expense of long-term investments. The same commentators have focused in particular on the potential detrimental effects of providing quarterly earnings guidance.  Perhaps these concerns are overstated.  It seems that over time, fewer and fewer companies continue to provide quarterly earnings guidance.  According to a recent study, approximately one-third of public companies issue quarterly earnings guidance.  Nonetheless, in a piece titled “Short-Termism is Harming the Economy,” Jamie Dimon and Warren Buffett joined the Business Roundtable in calling for companies to refrain from giving quarterly guidance. The National Association of Corporate Directors and the National Investor Relations Institute joined in the call to eliminate earnings guidance. However, the Business Roundtable report does not advocate terminating the filing of quarterly reports on Form 10-Q.  Regardless of whether quarterly reports on Form 10-Q are mandated or not, it would still be the case that companies would report quarterly results.  The two issues—quarterly filings and quarterly guidance—appear to have been conflated making it more difficult to parse the real issues.

Thursday, October 4, 2018
8:00 a.m. – 8:30 a.m. Registration & Breakfast
8:30 a.m. – 4:30 p.m. Program
4:30 p.m. – 5:30 p.m. Cocktail Reception

Location
Mayer Brown
71 South Wacker Drive
Chicago, IL 60606

Please join Mayer Brown in Chicago for our 1st Annual Executive Compensation University.

During this full-day program, we will explore tax and securities issues impacting executive compensation and hear from leading Mayer Brown lawyers about the changing regulatory landscape as they provide practical, business-focused guidance on dealing with these challenges. This program will cover such areas as the taxation of equity awards, disclosure issues and hot topics and current trends in executive compensation, including updates on issues related to say on pay, proxy disclosure, institutional shareholders and tax reform. The event will include an ethics program focused on issues relevant to in-house counsel dealing with executive compensation and securities issues. We plan to conclude the day with a cocktail reception.

We look forward to open dialogues with our guests.

A detailed program agenda can be found here.

Registration is available here.

CLE credit is pending.

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.