Corp Fin issues new CDIs on Rule 10b5-1
On May 25, 2023, the Division of Corporation Finance posted three new Compliance and Disclosure Interpretations (CDIs) regarding the affirmative defense to insider trading under Rule 10b5-1, after the Securities and Exchange Commission adopted related final rules in December 2022 imposing new conditions on the availability of the affirmative defense. As outlined below, the new CDIs provide more clarity with respect to compliance dates for the new disclosure requirements within the final rules and comment on the need for a cooling-off period for an individual with two Rule 10b5-1 plans who terminates the earlier-commencing plan.
Question 120.26 expressly lists the compliance dates for the disclosure requirements contained in new Item 408 and Item 402(x) of Regulation S-K for smaller reporting companies (SRCs) and non-SRCs with a December 31 or June 30 fiscal year-end, which are included in the table below for easy reference.
Question 120.27 addresses when companies are required to begin including the disclosures in proxy statements for transition purposes, clarifying that the disclosure must be provided in proxy statements for the first annual meeting for the election of directors (or information statements for consent solicitations) after completion of the first full fiscal year beginning on or after April 1, 2023, for non-SRCs or October 1, 2023, for SRCs.
Question 120.28 relates to a situation where a person maintains two separate Rule 10b5-1 plans at the same time, which is allowed under the final rules only if trading pursuant to the later-commencing plan is not authorized to begin until after all trades under the earlier-commencing plan are completed or have expired without execution. The CDI states that if the individual terminates the earlier-commencing plan instead of it ending by its terms, the later-commencing plan will be subject to an “effective cooling-off period” before trading can begin – starting on the termination date of the earlier-commencing plan – and will last for the time period specified in Rule 10b5-1(c)(1)(ii)(B). For officers and directors, that means the later of 90 days or two business days following the disclosure of the company’s financial results in a Form 10-K or Form 10-Q, as applicable, for the fiscal quarter in which the earlier-commencing plan was terminated (but not to exceed 120 days). For non-officers or directors, it’s 30 days.
By contrast, if the earlier-commencing plan ends by its terms without action by the individual, the cooling-off period for the later-commencing plan is not reset, and trading may begin as soon as the plan’s original cooling-off period is satisfied, which could be immediately after the earlier-commencing plan ends, depending on when the later-commencing plan was adopted.
For more information on the final rules, refer to this December 2022 client alert and this January 2023 Cooley PubCo blog post. To learn more about the new CDIs, refer to this May 2023 Cooley PubCo blog post.
Federal court invalidates California board diversity statute
Our June 2022 One-Minute Reads discussed the California state court decisions to enjoin implementation and enforcement of California’s board gender diversity law (Senate Bill 826) and California’s board racial and ethnic diversity law (Assembly Bill 979), holding that the statutes violate the equal protection provisions of the California constitution. These decisions are currently on appeal. At an earlier hearing on the same case, the court dismissed (without issuing an opinion) the plaintiff’s facial challenge to the constitutionality of SB 826, but it allowed the facial challenge to AB 979 to go forward. Now, a California federal court has granted summary judgment to a plaintiff challenging AB 979 on federal grounds, holding that the law violates the equal protection clause of the US Constitution and the Civil Rights Act. Notably, the same plaintiff is challenging the SEC’s approval of Nasdaq’s board diversity listing rule in a case pending in the US Court of Appeals for the Fifth Circuit. It remains to be seen how this federal court decision potentially influences the ongoing appeals, in addition to legislation regarding board diversity in other states. For more information, refer to this June 1 Cooley PubCo blog post.
Nasdaq, NYSE delay effectiveness of clawback listing standards
Our March 2023 One-Minute Reads discussed the Nasdaq and New York Stock Exchange proposed listing standards implementing the SEC’s Dodd-Frank clawback policy rule, which had an effectiveness deadline of June 11 and would have required listed companies to adopt compliant clawback policies by August. Despite this, Nasdaq and the NYSE published amendments to their proposed listing standards the week of June 5. These amendments were subsequently approved by the SEC, delaying the effectiveness of the listing standards by nearly four months to October 2. This means that companies subject to the clawback rules – which is nearly all of them, with few exceptions – will have until December 1, 2023 (60 days following the listing standard effective date) to adopt compliant clawback policies.
In addition to delaying the effectiveness of the listing standards and the deadline for policy adoption, the NYSE amendment:
- Provides for a cure period in the event of additional instances of noncompliance with the listing standard (beyond failure to adopt a clawback policy within the required time period), including when the listed company has not recovered erroneously awarded compensation reasonably promptly.
- Revises Section 303A.00 of the NYSE Listed Company Manual to make it clear that certain categories of listed companies, including foreign private issuers, are required to comply with the clawback listing standards. The Nasdaq amendment is more limited in scope and only provides for the delay in the effective date.
Both sets of proposed listing standards, as amended, are otherwise substantively unchanged from the original Nasdaq and NYSE proposals. For more information, refer to this June 8 client alert and this June 12 Cooley PubCo blog post.
SEC publishes agenda for spring 2023
On June 13, the SEC published its Spring 2023 Reg-Flex Agenda, which generally delays the most significant pending rulemakings previously targeted for April to October. The table below outlines some notable rules on the agenda.
SEC ratchets up crypto enforcement
A prominent issue under the current SEC administration has been its critical view of securities laws compliance within the crypto industry and its associated active enforcement agenda. In the first week of June, the SEC made its highest-profile moves yet, bringing civil enforcement actions against two of the world’s largest crypto exchanges, as outlined below.
First, on June 5, the SEC announced 13 charges against Binance – the largest crypto exchange in the world – and its US arm and founder for a variety of securities laws violations. Per the press release, in addition to alleged control issues and concealment of these from investors, the complaint alleges violations of critical registration-related provisions of the federal securities laws, including with operating unregistered national securities exchanges, broker-dealers and clearing agencies, and the unregistered offer and sale of Binance’s own crypto assets.
Then, on June 6, the SEC filed a civil enforcement action against Coinbase – the largest crypto exchange in the US. The SEC alleges that Coinbase has acted as an unregistered national securities exchange, broker and clearing agency, and also alleges that Coinbase has offered and sold securities without registering those offers and sales.
Many commentators – including The Associated Press, The Wall Street Journal and National Public Radio – have highlighted these developments as the most important crypto-related actions to date, the outcomes of which may have significant ramifications for the future of the crypto industry.
In a more positive development regarding the SEC’s stance toward crypto, on June 23, the SEC approved the first leveraged bitcoin futures exchange-traded fund (ETF), with several asset managers, including BlackRock, recently filing with the SEC for a spot bitcoin ETF.
US Supreme Court requires tracing in Slack direct listing case
On June 1, the Supreme Court issued a unanimous decision in Slack Technologies v. Pirani in favor of Slack, holding that, even in a direct listing registration, the Securities Act’s Section 11 liability extends only to shares that are traceable to an allegedly defective registration statement. This reverses the Ninth Circuit ruling and remands the case for reconsideration in light of the decision.
Section 11 provides standing to sue for misstatements in a registration statement to any person acquiring “such security.” While direct listings allow a company to simultaneously sell newly registered shares at the same time that existing shareholders sell their existing unregistered shares on the open market for the first time, this mix of registered and unregistered shares makes it nearly impossible for open market buyers to know whether the shares they acquired are registered or unregistered. The difficulty in tracing combined with Section 11 present the issue in this case: whether purchasers of shares in a direct listing have standing to sue under Section 11 liability.
The primary legal point in this case was whether to interpret the statutory language – “such security” – as only referring to a security issued pursuant to a misleading registration statement, or if it also can encompass a security that was not issued pursuant to a misleading registration statement. The court found the narrower interpretation more persuasive, stating that “every court of appeals to consider the issue has reached the same conclusion: To bring a claim under §11, the securities held by the plaintiff must be traceable to the particular registration statement alleged to be false or misleading.”
While it’s a monumental holding for determining Section 11 liability, the decision still leaves an uncertain path forward. For one, the court didn’t opine on the question of whether Section 12 liability must be interpreted the same way, stating that “the best course is to vacate its judgment with respect to Mr. Pirani’s §12 claim as well for reconsideration in the light of our holding today about the meaning of §11. In doing so, we express no views about the proper interpretation of §12 or its application to this case. Nor do we endorse the Ninth Circuit’s apparent belief that §11 and §12 necessarily travel together, but instead caution that the two provisions contain distinct language that warrants careful consideration.” Another key question arising out of the decision is whether Congress or the SEC will take steps to address the tracing issue, and the seeming loophole for companies to go public via a direct listing while being effectively immune from Section 11 liability. For more information on the decision, including the court’s reasoning and potential implications, refer to this June 5 Cooley PubCo blog post.
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