Blog Posts Tagged With SEC Enforcement

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SEC Charges Former CEO and Company with Fraud for Denying Reputational Impact on Business

SeaWorld and two of its former executives, including the CEO, agreed to pay more than $5 million to settle fraud charges.  The SEC alleged that the company failed to inform investors about the impact of the documentary film Blackfish on the company’s reputation, and ultimately its business.

Released in July 2013, the film criticized SeaWorld’s treatment of killer whales.  In the complaint, the SEC alleged that the CEO failed numerous times to tell investors about the “Blackfish effect” on the company’s reputation, which he “should have known” by the end of the year was having a negative impact on the company’s reputation, even though revenue grew and attendance declines were modest by that point.
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SEC Schedules November 15 for Proxy Process Roundtable

The SEC announced that the staff will host a roundtable on the proxy process on November 15.  The participants, time and the formal agenda has not yet been released.

The roundtable is expected to focus on the U.S. proxy system, including proxy voting mechanics and technology, the shareholder proposal process, and the role and regulation of proxy advisory firms.

Comments may be submitted electronically or on paper (one method only).  Comments will become public and posted on the SEC’s website without change.

Use the SEC’s Internet submission form or send an email to rule-comments@sec.gov.
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Commissioner Jackson Defends Proxy Advisory Firms

On the heels of the SEC staff rescinding the letters to proxy advisory firms, Commissioner Jackson decried the influence of “corporate lobbyists” on the issue in his statement.

It is corporate lobbyists who have made regulating proxy advisors a top priority, as they complain that those advisors have too much power, he said.  Commissioner Jackson does not believe there is proof to that effect, citing academic studies, he said.  In his view, “rigorous review” of the evidence shows that lobbyists are mistaking causation by observing the correlation between recommendations and vote outcomes.

He is concerned that the “corporate lobbyists’ priorities” will “sidetrack” the Commission’s work of “fixing the American system of corporate voting.”  He blames “entrenched interests” in the voting systems for the Commission’s failure to take any action, eight years after the proxy plumbing concept release.
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SEC Chairman Clarifies the Role of SEC Staff Views and Statements, Reinforced in Other Remarks and Statements on the Same Day

Yesterday, Chairman Clayton released a statement that while the SEC staff might express their views in myriad ways, ultimately those staff statements are “nonbinding and create no enforceable legal rights or obligations of the Commission or other parties.”

As he noted, the staff’s perspective may be provided in the form of written statements, compliance guides, letters, speeches, responses to frequently asked questions and responses to specific requests for assistance.  The staff may also provide companies and others with their interpretation about how Commission rules or regulations may apply in specific situations.

Chairman Clayton believes that it is important for the Commission to be mindful about the role of staff views and guidance, and he has instructed the directors in the Division of Enforcement and the Office of Compliance Inspections and Examinations to emphasize the distinction to their staff. 
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SEC Consider Capital Raising Enhancements, Including Concept Release on Exemptive Offerings

In a recent speech, SEC Chairman Jay Clayton said “To sum up my remarks in a sentence, we have taken a lot of steps intended to promote capital formation, and we have an ambitious capital formation agenda ahead of us.”  Here’s what may be next:

Thresholds for SOX 404 reporting.  The SEC has heard that the costs associated with providing auditor attestation reports on internal control over financial reporting can be a burden for smaller companies.  Currently, companies with a public float of less than $75 million or no public float have relief from these auditor attestation requirements.  Clayton has directed the Commission staff to formulate recommendations for possible amendments that would reduce the number of companies that need to provide the auditor attestation report.
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SEC Issues Sanctions for Inadequate Perk Disclosure

On July 2, 2018, the SEC issued an order criticizing an issuer’s disclosure of executive perquisites and requiring the issuer to take measures to ensure that its future disclosures comply with SEC standards. The SEC staff alleged that, over the course of 2013 to 2016, annual proxy statements issued by The Dow Chemical Company omitted disclosure of about $3 million worth of perquisites, including the use of the company aircraft and other expenses, which, according to the staff, should have been disclosed as “other compensation” to its named executive officers in the Compensation Discussion & Analysis (CD&A).

In a surprisingly strong response, the company was ordered by the SEC to retain an independent consultant for a period of one year to review the company’s policies, procedures, controls and training relating to the characterization and disclosure of expense reimbursements and other payments as perks, and to adopt recommendations made by the consultant to ensure compliance with the SEC’s rules governing perk disclosure.
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SEC Issues Updated Cybersecurity Guidance

On February 21, the Securities and Exchange Commission released updated interpretive guidance on cybersecurity disclosure, reaffirming staff guidance issued in 2011, providing more detailed guidance on disclosure of cybersecurity risks and incidents, advising companies to ensure that their disclosure controls and procedures take account of cybersecurity risks and noting the implications of cybersecurity incidents for insider trading prohibitions and Regulation FD compliance.

The interpretive guidance lends the Commission’s imprimatur to the previously issued staff guidance and underscores the importance for a company to be attuned to securities law obligations when responding to or managing for cyber risks and incidents.

Read Full Newsflash
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Mr. Clayton Goes to Washington

SEC Chair nominee Jay Clayton’s March 23rd hearing before the Senate Banking Committee covered much of the expected ground. In a series of responses designed to avoid controversy, Clayton repeatedly returned to the three core mandates of the SEC – capital formation, investor protection and efficient markets – as touchstones for his future leadership of the Commission, should he be confirmed. Beyond these general areas, Clayton offered few specifics or signals as to how he might steer the Commission during his term as Chair. He did, however, discuss concerns about growing companies finding the U.S. public markets unattractive due to the burdens of being a public company.
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SEC Continues Enforcement Actions Based on Nondisparagement Language in Severance Agreements

Late last year, the SEC issued two orders after finding companies violated its whistleblower rules due to certain language in their severance agreements, including clauses that prohibit employees from disparaging the companies in communications with regulators unless authorized in writing or otherwise required by law.  See our client memo >
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Report on SEC Whistleblower Office Discusses Focus on Restrictive Severance and Confidentiality Agreements

The SEC’s 2016 report to Congress on its whistleblower program announced that it paid out $57 million in fiscal 2016, more than the total amount awarded during the entire first five years of the program. Since its inception, 35 whistleblowers have received more than $130 million by helping originate or contribute to enforcement actions that resulted in $584 million in financial sanctions. The number of tips have increased yearly, with more than 4,000 in fiscal 2016.

One section of the report describes the four actions that the Commission took this year related to severance agreements, two of which we previously discussed here.
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Implications for Issuers from Recent Auditor Independence Enforcement Cases

The SEC recently found that EY violated the auditor independence rules in two cases based on the audit partners’ close personal relationships with members of the issuer finance teams.  In addition to a specific list of prohibitions, the SEC rules on auditor independence includes a catch-all that an accountant is not independent if a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not capable of exercising objective and impartial judgment.  We focus here on the consequences of those cases for issuers, including additional inquiries that audit firms may pose to management regarding their knowledge of any personal relationships between their employees and the engagement team. 
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Report Shows Activists Don’t Nominate Women, as Congress Pressures the SEC to Require More Board Diversity Disclosure for Public Companies

According to an analysis by Bloomberg, since 2011, 5 of the biggest U.S. activist funds have nominated women just 7 times in seeking 174 board seats.  Bloomberg examined Elliot Management, Icahn Associates, Pershing Square, Third Point and Value Act.

Not one of Icahn Associates’ 42 nominees to fill 94 board seats in the past five years was a woman.  Pershing Square nominated more women than any of the other funds, in recommending 3 women for 23 directorships.  At companies in the S&P 500 index, 26% of seats were filled by women over the same period.

Some members of Congress are urging the SEC to push companies to go further through public disclosure. 
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Enforcement Division May Investigate Failure to Disclose Cyber Breaches

At SEC Speaks 2016, the SEC Enforcement Division indicated that they are interested in investigating public companies’ failure to disclose cyber breaches.

No such case has been brought yet. The SEC’s enforcement actions on cyber incidents have been limited to the failure of registered firms to have policies and procedures to protect customer information accounts and hackers who steal material non-public information to gain market advantages.

The Staff recognizes that a company’s first response to a cyber intrusion is to assess the situation and minimize the damage. In their view, a critical part of this process is contacting law enforcement. They have heard anecdotally that companies may be reluctant to report cyber breaches to law enforcement because they do not want to be subject to possible government investigations.
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SEC Proposes Dodd-Frank Clawback Rule

On July 1, 2015, the SEC proposed a rule implementing Section 954 of the Dodd-Frank Act.  The proposed rule directs the stock exchanges to adopt listing standards that would require listed issuers to adopt and comply with a written clawback policy to recover any excess incentive-based compensation erroneously paid to any current or former executive officer because of material non-compliance with financial reporting requirements that resulted in a financial restatement.

Read the Davis Polk memo on this proposal »
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SEC Issues Rule Proposal on Clawback of Executive Compensation

At an open meeting yesterday, the Commission voted to propose broad rules directing the national exchanges and associations to establish listing standards requiring companies to develop and implement clawback policies.  We will issue a client memo on the proposal shortly.  The key provisions are complex and are set forth below, based on the fact sheet released by the SEC:

Companies covered:  all listed companies, including foreign private issuers, emerging growth companies and controlled companies

Applicable executives current and former executive officers modeled on Section 16 of the Exchange Act

Incentive-based compensation subject to recovery any incentive-based compensation that is granted, earned or vested, based wholly or in part on the attainment of any “financial reporting measure”

Financial reporting measure measures based on the accounting principles used in preparing a company’s financial statements, any measures derived wholly or in part from such financial information, and stock price and total shareholder return 

No-fault clawback trigger The trigger for a clawback is an accounting restatement to correct a material error. 
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SEC Announces Enforcement Action Against Restrictive Language in Confidentiality Agreements

The SEC, which has recently been investigating workplace agreements out of concern that they may impede whistleblowing activity protected by the Dodd-Frank Act, announced yesterday its first enforcement action against a company related to the use of restrictive language in confidentiality agreements. Companies should be mindful of this type of enforcement action and take the necessary steps to review and revise their own various agreements addressing confidentiality.

The Davis Polk memo on this action is here.
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SEC Commissioners Emphasize Focus on Individuals, Including Lawyers, in Enforcement Cases, and Brings an Auditor Independence Action Against an Audit Partner

According to a recent speech by Chair White, one of the key decision points in nearly every enforcement action is who will be charged as a defendant. She disputed the notion that the SEC fails to charge individuals enough, since a recent internal analysis by the SEC staff showed that individuals were charged in 83% of SEC actions since the 2011 fiscal year. 

She indicated that one new approach will be to start using Section 20(b) of the Exchange Act, which imposes primary liability on a person who does anything “by means of any other person” that would be unlawful for that person to do on his or her own.
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Environmental Activist Petitions the SEC Staff Alleging Material Omissions in an Issuer’s Registration Statement

The Chesapeake Climate Action Network (CCAN) has taken the novel approach of filing a letter with the SEC Directors at the Division of Enforcement and the Division of Corporation Finance, alleging that Dominion Midstream, a Dominion Resources affiliate, did not provide sufficient information about several environmental and related risks surrounding its Dominion Cove Point LNG Terminal export project in its registration statement filed with the SEC offering its limited partnership interests. The offering has not yet occurred. Betty Moy Huber, co-head of Davis Polk’s Environmental Group, guides us through these unique proceedings and the possible implications.

What does CCAN allege is missing from the registration statement in its letter to the SEC?
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SEC Staff Report of Disclosure Requirements Contains Few Specific Recommendations

The SEC staff recently issued a report, as mandated under the JOBS Act, on its review of the disclosure provisions under Regulation S-K.  Chair White and Commissioner Gallagher had previously referred to the report in their speeches criticizing the existing disclosure regime and alluding to possible changes.

While over 100 pages, the bulk of the report is a historical accounting of the evolution of the current requirements.  The staff recommendations do not begin until page 92 and comprise less than 12% of the entire document.  According to the report, the overarching issues to be addressed include the possibility of principle-based disclosure rather than increasing static imperatives, scaling disclosure in accordance with different categories of issuers, a framework that distinguishes between “core” disclosure vs.
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SEC Charges IR Professional with Regulation FD Violation

A former investor relations professional at First Solar agreed to pay $50,000 to settle the SEC’s charges that he violated Regulation FD.  According to the SEC order, the IR officer attended an investor conference on September 13, 2011 with the company’s then-CEO.  At that time, the CEO indicated publicly that the company would receive three loan guarantees of $4.5 billion from the U.S. Department of Energy, which would allow the company to obtain low-cost financing for key projects.  The guarantees were conditioned on the company’s meeting several requirements before the end of September, and analysts had been speculating about whether the company would be able to satisfy these requirements. 
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Looking Forward to September Governance Activities

The end of summer is being marked by expectations of a busy month. First, several rules come into effect. On September 9, swap clearing is required under the Dodd-Frank Act unless an exception is available. Public companies often use swaps to mitigate risks, such as interest rate or foreign currency fluctuations. A company would be eligible for an exception to the clearing and trade execution requirements if it is not a financial entity, uses the particular swap to hedge or mitigate commercial risk, and notifies the CFTC as to how it meets its financial obligations associated with entering into non-cleared swaps.
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SEC Makes Second Whistleblower Order with Staff Indicating More to Come

Three whistleblowers were awarded a total of 15% of the money that the SEC will ultimately collect from its enforcement action against Locust Offshore Management LLC and its CEO, according to an order issued by the SEC on June 12.  No immediate payments were forthcoming since the SEC has not yet collected on any of the $7.5 million judgment in disgorgement and penalties. The whistleblowers are entitled to seek a portion of the $800,000 Justice Department has managed to collect so far on a related action.

The award stems from a 2011 lawsuit against the hedge fund alleging fraud. Four claimants filed for whistleblower awards after a U.S.
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