In Case You Missed It - Interesting Items for Corporate Counsel - May 2019

Stoel Rives LLP

Stoel Rives LLP

  1. President Trump signed an executive order last week, here, designed to impose sanctions on the iron, steel, aluminum and copper sectors of Iran. The operative section of the EO reads like a crazy person Googled “sanctions” and pasted sentence fragments together. Likely the best reading of the EO is that “all property . . . of . . . any person determined by the Secretary of the Treasury . . .” to have done specified business involving the “iron, steel, aluminum, or copper sector of Iran” is frozen “and may not be transferred, paid, exported, withdrawn, or otherwise dealt in.” The EO says all property of a violating company could be frozen, and the company could be prohibited from selling any products, not just those that contain the Iranian metals. Among other things, a company is subject to sanction if it “knowingly engaged . . . in a significant transaction for the purchase, acquisition, sale, transport, or marketing of” Iranian iron, steel, aluminum, or copper, or products made from them. “Knowingly” includes “should-have-known” and the Treasury Department’s Office of Foreign Assets Control has applied know-your-supplier principles in other contexts (see, e.g., here), essentially imposing de-facto obligations for companies to vet the ultimate sources of goods and raw materials. Commentary on the new sanctions is here. Just before the EO was published, OFAC published guidelines for an effective sanctions compliance program, here. Commentary on the OFAC guidance is here, here, here and here.
  2. Speedy guidance on the new EO may be stifled by a recent OMB Memo, here, which describes how, under the Congressional Review Act (CRA), administrative rules must be vetted by the OMB’s Office of Information and Regulatory Affairs to determine if they are “major rules” (those likely to have an annual effect on the economy of $100 million or more, cause a major increase in costs or prices for consumers, or have significant adverse effects on competition, employment, investment, productivity or innovation) that must be submitted to Congress along with a GAO report regarding compliance with the rule-making process and cannot be effective for at least 60 days after submission. The memo replaces earlier guidance (here) on complying with the CRA, and includes two important changes.
    • It emphasizes that “rules” include “guidance documents, general statements of policy, and interpretive rules.”
    • It draws independent agencies – those created by Congress, like the Consumer Financial Protection Bureau, the Federal Reserve, the FCC, the FDIC, the FTC, the OCC and the SEC – into the OMB vetting process, from which they previously were exempt.

    For traditional Republicans, the memo is an admirable effort to curb the administrative state and a useful reminder that Congress reigns supreme on matters of legislation; for Trump acolytes, it strikes back at the Deep State hell-bent on his destruction; for Trump foes, it’s another tool he’ll wield to cripple the Government’s ability to help people; for everyone else, it’s just another probably crazy thing Trump did that he’ll ignore or reverse if that serves his immediate purpose.

  3. The SEC and billionaire cartoon character Elon Musk settled their latest battle by amending the September 2018 court-approved order to specify the kind of information Musk must run by an experienced securities lawyer before including in a tweet. The revised order is here. Recall that the original order followed Musk’s 2018 tweet – “Am considering taking Tesla private at $420. Funding secured.” – which pumped Tesla stock up 7% on the day before Nasdaq halted trading. The amended order followed Musk’s misleading tweet that “Tesla made 0 cars in 2011, but will make around 500k in 2019,” followed four hours later by the correcting tweet “Meant to say annualized production rate at end of 2019 probably around 500k, ie 10k cars/week. Deliveries for year still estimated to be about 400k.” In contrast to the original order, which included $40 million in fines and removal of Musk as Chairman of the Board of Tesla, the revised order doesn’t do much at all, at least insofar as its list of topic areas that are no-no’s seems a lesson in obviousness. (But, sure, apparently not to Musk.) At least one SEC Commissioner’s (Jackson) dissatisfaction with the latest settlement is referenced here. Although reports are that the settlement resulted from the donning of “reasonableness pants” (see here), those pants seem ill-fitting on Musk, who has an interesting mix of hubris, disdain for the SEC and willingness to make public statements while smoking pot. We assume odd-makers are putting better than even money on Musk and the SEC winding up in court again soon.
  4. Commissioner Jackson also was the lone voice of dissent on the SEC vote to propose changes to the definitions of “large accelerated filers” and “accelerated filers,” here. The proposed amendments would exclude from the definitions any smaller reporting company (SRC) with annual revenues of less than $100 million in the last fiscal year, and would align SRC and accelerated filer public float and revenue tests for exiting accelerated filer status (raising the threshold to exit accelerated filer status to match SRC public float requirements and allowing exit if a filer meets the SRC $100 million revenue test). The rule is expected to reduce the number of accelerated filers, who then can avoid the auditor attestation requirement for the management report on internal controls over financial reporting, by 358. Some had hoped that the SEC would have gone further and re-aligned the accelerated filer thresholds with the SRC caps that the SEC raised in June 2018 (here), but the SEC took a middle road that still designates SRCs as accelerated filers if they have annual revenues of at least $100 million and a public float of at least $75 million. Still, the 358 reduces the number of current accelerated filers by nearly 10%, which isn’t nothing.

    In case you are a visual learner, the SEC provides some handy charts.

    The current state of the SRC/accelerated filer overlap:

    For the state of overlap under the proposed rule, if you change “Accelerated Filer” in the graphic above to “Accelerated Filer only if annual revenues are at least $100 million,” you’ve got it. But here’s another way of looking at it:

    Status Public Float Annual Revenues
    SRC and Non-Accelerated Filer Less than $75 million N/A
    $75 million to less than $700 million Less than $100 million
    SRC and Accelerated Filer $75 million to less than $250 million $100 million or more
    Accelerated Filer (not SRC) $250 million to less than $700 million $100 million or more
  5. The SEC proposed changes to disclosures about acquisitions and divestitures, here. The SEC’s own summary of the rule changes is here and a few other summaries are here, here and here. Generally (you guessed it), the rule change will result in less disclosure. (And, bless him, although he didn’t object to submitting the rule for public comment, Commissioner Jackson once again was the only voice suggesting this is a bad idea, here.)
  6. To round off what we suddenly have realized is a Commissioner Jackson-related focus, note the commentary piece he published in the Wall Street Journal last month, here, advocating for GAAP reconciliations if public company executives are compensated based on non-GAAP measures. Commentary is here. The Council of Institutional Investors filed a rule-making petition asking that the SEC make it so, here.
  7. Vanguard recently announced it will shift proxy voting determinations to outside fund managers, here, presumably to put voting more closely in touch with managers who picked the stock and, some might argue, also to restore some semblance of diversity to proxy voting (including the Vanguard founder, here). It may at least mean you’ll have to dig a bit deeper to unearth the voting predilections of your large shareholders. News coverage is here and here.
  8. The SEC recently re-jiggered the cover pages for Forms 8-K, 10-Q and 10-K to move the new requirement to list the class, trading symbol and national exchange for registered securities. The SEC also modified the Form 10-K cover page to eliminate redundant disclosure about the class and national exchange. The latest forms are on the SEC’s website, here. Word versions of the cover pages are here (8-K), here (10-Q) and here (10-K).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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