As companies prepare for the second year of filings under the Securities and Exchange Commission’s (“SEC”) new conflict minerals rule, many companies are looking for guidance from the first annual filings, which were due June 2, 2014. As expected, the inaugural Form SD and conflict minerals report filings reflect diverse approaches to the new compliance and disclosure requirements. We offer below some observations based on the first round of conflict minerals filings for companies to consider as they address their compliance programs and disclosures for the 2014 calendar year. It is important to note, however, that the shape of future compliance and reporting obligations will be impacted by the outcome of the pending litigation challenging the conflict minerals rule, which also is discussed below, and any subsequent action by the SEC.
Posts Tagged ‘Reporting regulation’
Last month, the SEC announced that it brought enforcement actions primarily relating to Section 16(a) under the Securities Exchange Act against 34 defendants. The defendants were 13 individuals who were or had been officers or directors of public companies, five individual investors, ten investment funds/advisers and six public companies.
This post briefly discusses several noteworthy points regarding this development and also discusses practical steps that companies could consider taking in response.
On September 10, 2014, the Securities and Exchange Commission announced an unprecedented enforcement sweep against 34 companies and individuals for alleged failures to timely file with the SEC various Section 16(a) filings (Forms 3, 4 and 5) and Schedules 13D and 13G (the “September 10 actions”).  The September 10 actions named 13 corporate officers or directors, five individuals and 10 investment firms with beneficial ownership of publicly traded companies, and six public companies; all but one settled the claims without admitting or denying the allegations. The SEC emphasized that the filing requirements may be violated even inadvertently, without any showing of scienter. Notably, among the executives targeted by the SEC were some who had provided their employers with trading information and relied on the company to make the requisite SEC filings on their behalf.
In our paper, Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors, we investigate public companies’ disclosure of risk factors that are meant to inform investors about risks and uncertainties. We compare risk factor disclosures under the voluntary, incentive-based disclosure regime provided by the safe harbor provision of the Private Securities Litigation Reform Act, adopted in 1995, and the SEC’s subsequent disclosure mandate, adopted in 2005.
On April 14, 2014, in National Association of Manufacturers v. Securities and Exchange Commission, the United States Court of Appeals for the District of Columbia Circuit partially invalidated the final rule of the Securities and Exchange Commission (“SEC”) requiring public companies to investigate and disclose the origin of certain minerals found in the war-ridden Congo region (“conflict minerals”).  While upholding most aspects of the rule, the Court concluded that the rule and the statutory provisions on which it is based violate the First Amendment “to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have not been found to be ‘DRC conflict free.’”  On April 29, 2014, amid uncertainty regarding the impact of the Court’s decision on issuers’ obligations under the rule, the Director of the SEC’s Division of Corporation Finance announced that the SEC expects issuers to comply with those aspects of the rule that were upheld by the Court.
“Mandated disclosure may be the most common and least successful regulatory technique in American law.” Thus opens our book, More Than You Wanted to Know: The Failure of Mandated Disclosure (Princeton Press, 2014).
Of mandated disclosure’s triumph there is no doubt. This blog’s readers see it everywhere. Corporate scandals and financial crises ceaselessly spawn new disclosure laws: the Securities Act of 1933, the Truth-in-Lending laws of the 60s and 70s, Sarbanes-Oxley in 2002, and, recently, Dodd-Frank. Disclosure pervades tort law (“duty to warn”), consumer protection (“truth in lending”), bioethics and health care (“informed consent”), online contracting (“opportunity to read”), food law (“nutrition data”), campaign finance regulation, privacy protection, insurance regulation, and more.
This triumph is understandable. Mandated disclosure aspires to help people making complex decisions while dealing with specialists by requiring the latter (disclosers) to give the former (disclosees) information so that disclosees choose sensibly and disclosers do not abuse their position. It is seductively plausible. (Don’t people make poor decisions because they have poor information? Won’t they make good decisions with good information?) It alluringly fits all ideologies. (Thaler and Sunstein like it because it is “libertarian paternalistic”; corporations would “rather disclose than be regulated”). So mandates are enacted unopposed. Literally.
Schedule 13D Ten-Day Window and Other Issues: Will the Pershing Square/Valeant Accumulation of a 9.7% Stake in Allergan Lead to Regulatory Action?
As widely reported, a vehicle formed by Pershing Square and Valeant Pharmaceuticals acquired just under 5% of Allergan’s shares after Allergan apparently rebuffed confidential efforts by Valeant to get Allergan to negotiate a potential acquisition. The Pershing Square/Valeant vehicle then crossed the 5% threshold and nearly doubled its stake (to 9.7%) over the next ten days, at which point it made the required Schedule 13D disclosures regarding the accumulation and Valeant’s plans to publicly propose an acquisition of Allergan. The acquisition program has raised a number of questions.
This post is a summary of certain recent developments under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) that impact corporate end-users of over-the-counter foreign exchange (FX) derivative transactions and should be read in conjunction with the four prior WSGR Alerts on Dodd-Frank FX issues from October 2011, September 2012, February 2013, and July 2013.
Title VII of Dodd-Frank amended the Commodity Exchange Act (CEA) and other federal securities laws to provide a comprehensive new regulatory framework for the treatment of over-the-counter derivatives, which are generally defined as “swaps” under Section 1a(47) of the CEA. Among other things, Dodd-Frank provides for:
Three years ago we petitioned the SEC to modernize the beneficial ownership reporting rules under Section 13(d) of the Securities Exchange Act of 1934 (see our rulemaking petition, our memos of March 7, 2011, April 15, 2011, March 3, 2008 and our article in the Harvard Business Law Review). Since we filed our petition, activist hedge funds have grown more brazen in exploiting the existing reporting rules to the disadvantage of ordinary investors.
A recent decision of the Southern District of New York is noteworthy in its rejection of the plaintiffs’ argument that disclosure of a threatened suit in which the potential loss could have reached $10 billion was required under either the federal securities laws or Accounting Standards Codification 450. See In re Bank of America AIG Disclosure Sec. Litig., C.A. No. 11 Civ. 6678 (JGK) (S.D.N.Y. Nov. 1, 2013).
In January 2011, BofA and AIG entered into an agreement to toll the statute of limitations on fraud and securities claims arising out of BofA’s sale of mortgage-backed securities (“MBS”) to AIG. In February 2011, AIG provided BofA with a detailed analysis of its potential claims in which it claimed to have lost more than $10 billion. Later that month, BofA’s annual report disclosed that it faced “substantial potential legal liability” relating to sales of MBS, which “could have a material adverse effect on [its] cash flow, financial condition, and results of operations,” but cautioned that BofA “could not estimate a range of loss for all matters in which losses were probable or reasonably possible.” BofA did not disclose the tolling agreement with AIG or the magnitude of its potential exposure to AIG. On August 8, 2011, AIG had filed a complaint against BofA seeking damages of at least $10 billion. BofA’s stock price dropped 20% in a single day.