January 2013

Regulation FD EnforcementThis is the third part of our Securities Law 101 series.  Because capital raising is such a critical function for middle market companies, we designed this series to introduce their management teams to some of the fundamental concepts in securities law.  We hope that this series will prevent some of the most common mistakes management teams make.  We will periodically publish posts examining different aspects of securities law. 

In the wake of the SEC recommending an enforcement action against Netflix, Inc. and its CEO for social media postings that potentially violate Regulation FD, public companies must increasingly ensure that they understand, and comply with, their obligations under Regulation FD.

So what is Regulation FD?  Adopted by the SEC in 2000, Regulation FD (a/k/a Regulation Fair Disclosure) prohibits companies from selectively disclosing material nonpublic information to analysts, institutional investors, and others. Citing instances of selective disclosure to certain institutional investors and/or securities analysts and the resulting profits or avoidance of loss that come at the expense of those without knowledge of the disclosure, the SEC intended to promote full and fair disclosure of information by issuers.  

Under Regulation FD, when an issuer, or person acting on its behalf, discloses material nonpublic information to certain people (in general, securities market professionals and holders of the issuer’s securities who may well trade on the basis of the information), the issuer must publicly disclose that information.  Importantly, where a disclosure is intentional, the issuer must simultaneously make public disclosure of the nonpublic material information. However, where the disclosure is non-intentional, the issuer must “promptly” make public disclosure.  The required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public such as press releases disseminated by a wire service. 

Regulation FD does not define what is considered “material,” but Continue Reading Securities Law 101 (Part III): Watch your mouth! Regulation FD’s impact on (selective) disclosure


Stock Exchange
Panorama of Wall Street Historic District by Michael Daddino

An SEC advisory committee is likely to recommend that that the SEC support the formation of a new securities exchange designed especially for small cap and micro cap public companies. While this new exchange is a long way from approval and operation, strong SEC support could substantially increase its chances of successful implementation. This securities exchange could reduce costs and create new liquidity and capital raising opportunities for these companies.

It is too early to predict whether this new securities exchange will become a reality or how effective it may be. I believe, however, that this exchange concept is another potentially positive event for small companies and that it could produce significant benefits. This securities exchange, along with certain components of the JOBS Act, could provide significant opportunities for small companies to generate liquidity in their securities and raise additional capital for growth.

The SEC advisory committee that is making this recommendation is the Advisory Committee on Small and Emerging Companies. This Committee is made up of 20 individuals with connections to the small public company space, including business executives, state regulators and, angel investors. Christine Jacobs, co-chair of the Committee, is the CEO of a Theragenics Corp., a small cap medical device manufacturer. The Committee was formed in 2011 to focus on the special needs and dynamics of small businesses and small public companies (see September 13, 2011 formation announcement here). These Committee members are aware of the particular issues that these companies face in the capital raising, corporate governance and securities regulation arenas, and they make the SEC aware of issues and problems in the small company space. You can review information on current Committee members here.

The SEC is not bound by the recommendations of the Committee, but I believe that these recommendations will be taken seriously by the SEC and that some positive action could result. The SEC’s strong support here would substantially increase the chance of this new securities exchange being formed. I was not able to find any indication from the SEC on its possible reaction to the Committee’s recommendation.

The Committee has been reviewing this proposed new securities exchange and its possible positive effects on Continue Reading SEC advisory committee to recommend formation of small company securities exchange

Campaign diclosure rules to create administrative nighmareAs first reported by Professors  Lucian Bebchuk and Robert J. Jackson, Jr. in their recent posting on the Harvard Law School Forum on Corporate Governance and Financial Regulation, the SEC may take action to issue proposed rules on corporate political spending disclosures by public companies as early as the second quarter of this year. This is according to the most recently updated Current Unified Agenda and Regulatory Plan, where the SEC appears to have preliminarily scheduled a notice of proposed rulemaking on this subject for April. Realistically, the fact that these rules are scheduled on this regulatory agenda is probably not very significant and may have gotten there as a means to temporarily appease shareholder rights advocates that have recently been pressing for these disclosures. Additionally, considering that the current four-person commission is equally divided on the political front, it is not likely that anything significant will come out of the SEC in the near future until a replacement for Mary Schapiro is appointed and confirmed. 

If something does miraculously materialize, it would be an interesting move by the SEC considering that rules required to be adopted under the Dodd-Frank Act have yet to be fully implemented almost three years after the bill was signed into law in 2010. This fact was emphasized in Commissioner Gallagher’s recent comments to the U.S. Chamber Center for Capital Markets Competitiveness. In those comments, Commissioner Gallagher specifically noted that “the SEC, like other regulators, is now dealing with the problem of rushed, inadequate rule proposals that were pushed out in a bid to meet arbitrary congressional deadlines.”  With the backlog of Dodd-Frank and JOBS Act rules, why would the SEC even bat an eyelash at a rules proposal with no Congressional mandate? 

In any case, there’s no question that campaign contribution disclosure has been a hot topic, particularly in the wake Continue Reading Proposed campaign contribution disclosure rules may be coming as early as April (but not likely)

Resolutions by in-house counsel for 2013As we start 2013, I thought it would be fun to ask in-house counsel what their New Year’s resolutions were.  I wasn’t looking for the usual “go to the gym more/ lose weight/ get organized” type answers, but rather what corporate secretaries/ securities counsel would want to improve upon in 2013 in their professional lives.  I heard back from a variety of in-house counsel, some of whom wish to remain anonymous.  Many had similar types of goals for this year.  I want to thank Bob Lamm, Assistant General Counsel and Assistant Secretary at Pfizer Inc., and Stacey Geer, Senior Vice President and Associate General Counsel at Primerica, Inc., both of whom were especially helpful in coming up with this list.  Here are the top resolutions submitted by in-house counsel:

Refresh the board and committee self-evaluation process.  Now is a good time to refresh the board and committee self-evaluation process.  If your board and committees are like most, they may be “bored” with the process by now.  By asking the same questions every year, eventually the process becomes stale and the answers become predictable.  Rather than have the directors complete the same survey consider changing the questions, or better yet, having a third party facilitate the evaluation process.  Remember to set aside some time to discuss the evaluation because the discussion of the evaluation is the most important part of the process. 

Tweak your director orientation programA good director orientation program allows new board Continue Reading Starting the New Year off right: In-house counsel disclose their New Year’s resolutions

Proxy advisory firms' influence over proxy votingAs we say “goodbye” to 2012 we say “hello” to another proxy season full of angst caused by the self-appointed czars of corporate governance, the proxy advisory firms.  Although ISS and Glass Lewis have been making voting recommendations for more than a decade, over the past two years their power over voting outcomes has increased.  When the Dodd-Frank Act was enacted in 2010 Congress was very clear that the Say-on-Pay votes were merely advisory and that directors would not be subjected to increased liability over a company’s executive compensation practice; however, the unintended consequence of Dodd-Frank was to strengthen the unregulated proxy advisory firm industry by allowing these firms to be the near-final arbiters of whether executive compensation should be approved by shareholders.  Failure to comply with the arbitrary guidelines of ISS or the often unknowable guidelines of Glass Lewis can cause a company the potential embarrassment of a “failed” Say-on-Pay vote regardless of whether the independent directors at the company, who painstakingly analyzed various metrics in deciding what to pay the executive officers, determined the compensation to be in the best interests of the company and its shareholders.  In fact, Matteo Tonello of the Conference Board suggests there is substantial evidence demonstrating that the proxy advisory firms have significant influence over the design of executive compensation programs, but no evidence that they have contributed at all to improved governance quality or increased shareholder value.

The SEC clairvoyantly expected a growing conflict between issuers and the proxy advisory firms when it Continue Reading Are investors’ interests served by proxy advisory firms?