SEC charges executives with insider trading despite purported 10b5-1 plan
On September 21, 2022, the Securities and Exchange Commission announced insider trading charges against both the CEO and the former president of Cheetah Mobile for selling Cheetah’s securities while in possession of material nonpublic information (MNPI), despite doing so under a purported 10b5-1 trading plan. In its order, the SEC alleged that the executives established a 10b5-1 plan after discovering a significant decrease in advertising revenues, thereby avoiding losses by selling securities under the plan before disclosing the negative trend to stockholders. Establishing the 10b5-1 plan under these circumstances negated its affirmative defense against insider trading liability, as a 10b5-1 plan must be established when the insider is acting in good faith and is not aware of any MNPI for it to be a valid defense. “This case serves as yet another example of the SEC’s resolve to hold executives accountable when they try to skirt federal securities laws to illegally trade on nonpublic information,” said the chief of the SEC Enforcement Division’s Market Abuse Unit. Cheetah’s CEO also was charged for being involved in the company’s misleading disclosures, including on the company’s earnings call, surrounding a material negative revenue trend. For more information on the charges, see this September 26 PubCo blog post on the case.
SEC releases electronic Form 144, announces compliance date
On September 23, the SEC announced that the EDGAR system is ready to accept electronic Form 144 filings, and released a new page with resources for filing Form 144 electronically. On October 18, the SEC also announced that the compliance date for the electronic Form 144 filing requirements will be April 13, 2023. As covered in this PubCo blog post on SEC electronic submissions, in June the SEC adopted amendments to require certain forms that are currently permitted to be filed or submitted in paper format to be filed or submitted electronically through EDGAR, including Form 144. After the compliance date, it will generally be mandatory to file Form 144 electronically.
DOJ focuses on director interlocks
The Corporate Counsel recently blogged about the Department of Justice’s increasing focus on overlapping directorships that might violate Section 8 of the Clayton Act beyond just M&A activity, which generally prohibits competitors from having overlapping directors or managers. On October 19, the DOJ has announced that “seven directors have resigned from corporate board positions in response to concerns by the Antitrust Division that their roles violated the Clayton Act’s prohibition on interlocking directorates,” including directors from five different public companies. Given this focus, companies should evaluate whether any of their directors or officers also serve on the board or management of a competitor and ensure that there is a process by which to screen and monitor for director and officer interlocks.
Corp Fin issues new Section 16 and Section 13 CDIs related to ETFs
On August 25, the SEC Division of Corporation Finance (Corp Fin) posted new compliance and disclosure interpretations (CDIs) addressing issues regarding beneficial ownership under Section 16 and Rule 13d-3 related to exchange-traded funds (ETFs). These new CDIs address questions that have arisen with the use of “information barriers” to avoid attributing beneficial ownership of some ETF-traded securities. In summary:
- Question 109.02 asks whether an authorized participant (AP) in an ETF can “rely on informational barriers” to determine whether it is a beneficial owner of more than 10% of the ETF’s portfolio securities that are acquired on its behalf in a confidential account, on a disaggregated basis from other accounts of the AP. In this fact pattern, an ETF does not disclose the identities and quantities of its portfolio securities on each trading day, but allows an AP to complete creation and redemption transactions through a confidential brokerage account with an agent for the benefit of the AP.
According to the CDI, the AP can rely on informational barriers in this fact pattern “as long as the arrangement is consistent with the Commission’s guidance regarding the calculation and reporting of beneficial ownership status set forth in Release No. 34-39538 (January 12, 1998).”
- Question 209.06 covers a scenario where an ETF has APs (or the AP’s parent holding company) “whose directors or officers … serve as a director of an issuer of securities [that were] purchased or sold as part of the ETF’s in-kind creation or redemption baskets.” This can cause the AP or its parent company to be deemed a director of that issuer for Section 16 purposes based on implicitly “deputizing” that person to serve as a representative on the issuer’s board.
According to the CDI, an AP and its parent company can avoid “being deemed to have a pecuniary interest in a security in the creation or redemption basket” for Section 16 purposes if the ETF substitutes cash for the basket security, so that neither the AP nor anyone on its behalf would trade the security.
- Question 105.07 lays out the same facts as CDI 109.02 above but instead relates to Rule 13d-3.
According to the CDI, the AP can again rely on “informational barriers” in this fact pattern to calculate its beneficial ownership, as long as the arrangement is consistent with the SEC’s guidance in Release No. 34-39538.
For more information, refer to this October 11 PubCo blog post on the new CDIs.
ISS publishes global benchmark policy survey
On October 10, ISS published the results of its annual global benchmark policy survey, which is used every year to inform its policy development process. Key findings highlighted by ISS, among others, include:
- A majority of investor and non-investor respondents would consider it a material governance failure if companies that are considered significant greenhouse gas emitters had an absence of adequate disclosure with regard to climate-related oversight, strategy, risks and targets according to a framework such as the Task Force on Climate-Related Financial Disclosures (TCFD).
- Investors also selected a company not setting realistic medium-term targets (through 2035) for Scopes 1 and 2 emissions (50%), not declaring a net-zero ambition by 2050 (47%), and not setting realistic medium-term targets (through 2035) for Scopes 1, 2, and 3 emissions (45%) as the next most common governance failures among significant emitters.
- Investor respondents, when considering the top three priorities for determining if a company’s climate transition plan is adequate, replied with setting appropriate medium-term targets (42%), whether the company’s capital expenditure outlook aligns with its long-term strategy and if the company has disclosed assumptions underpinning its strategic plans (41%), and the extent to which the company’s disclosures are in line with TCFD or other framework recommendations (38%).
- 75% of investor respondents favored including commentary by auditors in the audit report on climate-related risks for significant emitters, while 64% supported climate-related risks being included by auditors in critical audit matters.
- Most investors agreed that there should be a de minimis exception to ISS’s recommendation (effective February 1, 2023) to vote against certain directors at US companies that maintain a multiclass capital structure with unequal voting rights – “no more than 5%” was the most popular threshold chosen.
- Respondents also favored the chair of the governance committee and any director with supermajority shares as the appropriate targets for an adverse vote recommendation due to a multiclass structure.
- Nearly two-thirds of non-investors replied that smaller companies should be exempted from negative recommendations for maintaining classified boards or a supermajority voting requirement, while most investors stated that they should not be exempt.
- While 42% of investors indicated that most companies would benefit from an independent racial equity or civil rights audit where permissible, 45% indicated that any benefit would depend on company-specific factors, including outcomes and programs. In addition, 56% of non-investors responded that company-specific criteria are the best determiners of which companies would benefit.
- Among those who believed these audits should depend on company-specific factors or who disagreed that most companies would benefit from such an audit, most investors and non-investors (83% and 77%, respectively) identified company involvement in significant diversity-related controversies as indicative that a company would benefit from such an audit.
For more information, refer to this October 19 PubCo blog post on results of the ISS survey.
SEC’s final climate rules delayed
On October 19, Bloomberg reported that the SEC is “months away from finalizing expansive new climate disclosure requirements as the agency juggles investor demands for more transparency, tech glitches and a tough Republican legal threat.” The article also noted that SEC “officials in private conversations have given no indication they’ll finish the rules this year, according to several people in contact with the agency.” Given the volume of comments received, the decision in West Virginia v. EPA curbing the power of administrative agencies, and a technical glitch that caused the SEC to reopen the comment period, the delay from the October timeline included in the SEC’s agenda is not too great a surprise. For more information, refer to this October 20 PubCo blog post on the final climate rules.