You may have noticed that the SEC has been very quiet on the rulemaking front in recent weeks.  It comes as no surprise, as action on a number of items on the SEC’s Regulatory Flexibility Agenda had been moved from late 2024 to early 2025.  (The cynic in me wonders whether the scheduling changes resulted from concerns that accusations of over-regulation would impact the 2024 election cycle, but – for now, at least – I’ll leave that to others.)

However, the SEC has definitely not been idle.  Quite the contrary.  In fact, recent weeks have seen what strikes me as an inordinate number of announcements of enforcement actions.  Some of these actions are relatively “standard” – insider trading, recordkeeping violations, securities fraud, whistleblower protection violations (discussed in our recent e-alert), and so on. But others are somewhat unusual. For example:

  • However, the case that intrigues – and concerns – me the most is one announced on September 30, in which the SEC charged an independent director and former CEO of a company with concealing a close relationship with a company executive, allegedly in violation of the proxy disclosure rules.  According to the SEC’s announcement, the director/former CEO “standing for election as an independent director” concealed from the board “his close personal relationship” with a senior executive.  The director/former CEO “frequently vacationed with the executive and the executive’s spouse,” paying more than $100,000 for them to join him and his spouse on several international vacations.  He never disclosed the relationship and “allegedly encouraged the executive to conceal the relationship”.  And, when the company began a CEO succession process, the director/former CEO “allegedly shared confidential details about the process with the executive and took steps to better position the executive for succession in the future.”  The company eventually learned of the relationship and determined that the director/former CEO was not independent.

Why does this case concern me?  Of course, once the board learned of the actions taken by the director/former CEO, it had every right to determine that he was not independent.  However, it’s not at all clear to me that the actions in question violated the proxy rules.  There have been many cases over the years in which directors were alleged – often by investors and/or the media – to have lacked independence because they belonged to the same country club, served on the same boards (including boards of charitable organizations), or generally hung out in the same social circles.  Some of these cases generated calls for SEC rulemaking that would require disclosure of these informal relationships and thereby disqualify directors in such cases from being described as independent.  However, for whatever reason (and I can think of a few), the SEC never took such action. 

Similar situations have also resulted in judicial decisions disqualifying such directors from serving on committees of independent directors.  Perhaps the most famous of these cases is a Delaware Chancery Court opinion, written by Leo Strine, in which two directors of Oracle were disqualified from serving on an independent committee due to their ties to Stanford University, which had received substantial donations from Oracle and/or certain of its directors. 

However, to my knowledge, none of the cases referred to above resulted in an SEC enforcement action.  In fact, the two Oracle directors continued to be listed as “independent” in Oracle’s proxy statements, and, to my knowledge, the SEC never brought a case against them or objected to the characterization in the proxy statements.

The bottom line is that while the SEC may not have engaged in much rulemaking in recent weeks, it may be creating new rules through the enforcement process, and that strikes me as disturbing.

By the way – for anyone who feels misled by the title of this post, I have two words for you: dun-dun.