Securities Regulation and Corporate Governance


NYSE Rule Change on Dividend-Related Announcements Made Outside Market Hours Now Effective
The New York Stock Exchange (“NYSE”) has amended its rules on companies’ notifications to the NYSE about upcoming dividends.  The rule changes were approved by the Securities and Exchange Commission on Monday, August 14 and took effect immediately.  The amended rules require companies that intend to make announcements outside market hours that involve dividends or stock distributions to notify the NYSE at least ten minutes before making the announcement.  The NYSE has not made any changes to the requirements for announcements made during market hours.  A blackline of the changes to the text of the Listed Company Manual is available here.  A chart prepared by the NYSE in anticipation of the rule change comparing the requirements that will apply during and outside of market hours is available here.

Under the NYSE’s policy on the immediate release of material news, found in Section 202.05 of the Listed Company Manual, NYSE companies must release quickly to the public any news or information that might reasonably be expected to materially affect trading in their securities.  Under Section 202.06, which details the procedures for public release of information under this policy, a listed company must alert the NYSE at least ten minutes in advance when its intends to release news between the hours of 7:00 a.m. (eastern) and the close of trading on the NYSE (generally 4:00 p.m. eastern).

Listed companies announcing dividend or stock distributions during these hours must comply with the immediate release policy.  Accordingly, companies that publicly announce a dividend or distribution during market hours must call the NYSE’s Market Watch team, and email Market Watch a copy of the proposed announcement, at least ten minutes in advance of issuing the announcement.  Companies must have NYSE approval before issuing a dividend or distribution announcement. 

As a result of the rule changes, companies will have to notify the NYSE at least ten minutes in advance of an announcement involving a dividend or stock distribution made at any time, rather than just during the hours when the immediate release policy is in effect.  Companies providing this advance notification to the NYSE outside of the immediate release policy timeframe will not have to wait for NYSE approval before making their announcements.  However, in filing the rule proposal, the NYSE stated that it intends to have staff avai...Read More
Major Indices Move to Curb Multiple Class Structures

Multiple class share structures have come under increasing scrutiny since Snap Inc. (“Snap”) offered exclusively non-voting shares in its March 1, 2017, initial public offering (“IPO”).  Companies employing the multiple-class structure argue that the structure contributes to corporate stability and long-term returns for shareholders, and aides in the revival of the sluggish IPO market by helping issuers overcome a reluctance to go public in the face of activist investors. However, citing corporate governance concerns and following considerable pressure and lobbying from institutional investors, both the FTSE Russell and Standard & Poor (“S&P”) Dow Jones have recently taken measures that may be seen as discouraging the practice.

On July 27, FTSE Russell said that it was “draw[ing] a principled line in the sand” by barring the inclusion of companies in its indices unless over 5% of their voting rights are in the hands of public­–“unrestricted”–shareholders.  The application of this rule with respect to Snap, whose public shareholders exclusively hold non-voting shares, is clear.  But many companies employ multiple class voting structures in which founders and other early-round investors hold higher vote shares and others, often public shareholders, hold lower vote shares, typically in a 10 to 1 ratio.  Prior to announcing its new rule, FTSE Russell conducted a study and found that 37 companies already listed in its indices fail to meet the new 5% threshold given these high/low vote share structures or other structures similarly reducing public shareholder voting power.  Those companies, which include Hyatt Hotels Corp. and Dell Technologies, will have until September 2022 to conform their capital structures or be removed from these indices.  The final rule will be published on August 25, 2017, though some are already speculating that the 5% threshold may increase when the FTSE Russell conducts its intended annual reviews of the rule.  Indeed, the Council of Institutional Investors (“CII”) initially recommended that the FTSE Russell set the threshold at 25% and CII and others are likely to continue pressing for an increase in the FTSE’s contemplated 5% threshold.

The S&P ...Read More

ISS Releases Surveys for 2018 Policy Updates

On August 3, 2017, the proxy advisory firm Institutional Shareholder Services (“ISS”) launched its annual policy survey.  Each year, ISS solicits comments in connection with the review of its proxy voting policies. ISS then uses the data to inform its voting policy review.  At the end of this process, ISS will announce its updated proxy voting policies applicable to 2018 shareholder meetings.

This year, ISS divided its survey into two parts: the Governance Principles Survey and the Policy Application Survey.  The Governance Principles Survey consists of a brief, high-level set of questions addressing what ISS views as the “fundamental and high-profile” issues this year: 

  • One-share, one-vote principle. Snap Inc.’s initial public offering was the first to issue only non-voting shares to the public in an IPO.  In addition, there has been recent investor criticism of dual class stock structures that concentrate voting control in the hands of founders and early-round investors.  The Governance Principles Survey asks when it is appropriate, if ever, for companies to issue multi-class capital structures with unequal voting rights and whether those structures should automatically expire or be subject to periodic reapproval by holders of the low-vote shares.
  • Gender diversity on boards.  The survey asks whether the absence of female directors on a public company’s board is problematic and, if so, what factors impact that analysis (e.g., company disclosure about efforts to increase gender diversity or industry practices).  The Governance Principles Survey then asks what actions are appropriate for shareholders to take at a company that has no gender diversity on the board and/or has not disclosed a policy on the issue. 
  • Virtual/hybrid meetings.  The Governance Principles Survey asks whether virtual-only and/or hybrid (physical and virtual) meetings—an increasing trend in the United States—are an acceptable practice.  Among the responses is the option to indicate that virtual-only meetings are acceptable “if they [provide] the same shareholder rights as a physical meeting.”
  • Pay ratio.  Beginning in 2018, U.S. public companies will be required to report in their proxy statements the ratio of their chief executive officer’s pay to that of its median company employee.  The Governance Principles Survey asks how respondents intend to evaluate this information (e.g., compare across industries or assess year-to-year changes in a company’s ratio) and seeks input as to how shareh...Read More
Delaware Approves Use of Blockchain in New DGCL Amendments

On July 21, 2017, Delaware Governor John C. Carney Jr. signed into law, effective August 1, 2017, Senate Bill 69 (“SB 69”), amending Delaware’s General Corporation Law (“DGCL”) to, among other things, allow corporations to utilize electronic databases and blockchain technology to maintain and distribute certain corporate records. The passage of SB 69 further solidifies Delaware’s position as the leader in corporate regulatory innovation by demonstrating the state’s readiness to embrace new and innovative technologies being utilized by the corporate market.

SB 69’s most notable changes involve how corporations may create and distribute corporate stock ledgers and stockholder communications. Where stock ledgers previously needed to be written or recorded by an officer of the corporation, the newly amended DGCL Sections 219 and 224 allow corporate stock ledgers, as well as books of accounts and minute books, to be “administered by or on behalf of the corporation” by means of “one or more electronic networks or databases (including one or more distributed electronic networks or databases).” Though this may give the impression that Delaware corporations can go completely digital with such records, any records kept in electronic form under DGCL Section 224 must still be convertible into clearly legible paper form within reasonable time. What’s more, electronic stock ledgers must also be able do the following:


  1. Prepare the corporation’s list of stockholders as required by DGCL Sections 219 and 220, which deal with stockholder demands to inspect books and records;
  2. Record certain information specified in DGCL Sections 156 (regarding consideration for partly paid for shares), 159 (regarding transfer of shares for collateral security), 217(a) (regarding pledged shares) and 218 (regarding voting trusts); and
  3. Record transfers of stock governed by Article 8 of the Delaware Uniform Commercial Code.

Additionally, SB 69 amended the definition of “electronic transmission” in DGCL Section 232 such that the many stockholder communications that a corporation makes pursuant to the DGCL, its certificate of incorporation and bylaws may also be made via electronic networks and databases, in addition to more traditional means of electronic transmission such as email.

SB 69 marks a historic move towards the recognition and adoption of blockchain and distributed ledger tech...Read More

SEC Requests Comments on New PCAOB Auditor Reporting Standard

On June 1, 2017, the PCAOB adopted a new auditor reporting standard—PCAOB Release No. 2017-001, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards (the “Standard”)—that will be significant for public companies.  A copy of our prior client alert on the Standard is here.

If approved by the Securities and Exchange Commission (SEC), the Standard would require auditors to identify in their audit reports any “critical audit matters” (CAMs)—certain matters related to the audit that the auditor determines involved especially challenging, subjective, or complex auditor judgment.  The Standard would further require that the audit report describe the principal considerations that led the auditor to determine that the matter is a critical audit matter, and explain how the critical audit matter was addressed in the audit.

Today, the SEC issued a request for public comments on the proposed Standard in order to determine whether the Commission should approve the Standard.  There is only a brief comment period, with comments due by August 18, 2017.

Because there remain serious issues for public companies if the Standard is approved by the SEC, management and audit committees should consider commenting to the SEC about the issues raised by the new PCAOB standard.  Issues presented include:

  • Complying with the Standard may require auditors to disclose information about public companies that those companies themselves are not otherwise required to disclose—which may be at odds with management’s traditional role in shaping a company’s disclosures.  The SEC lacks statutory authority to turn...Read More
SEC Warns that Securities Laws May Apply to Initial Coin Offerings and Other Digital Currency Sales

On Tuesday, July 25, 2017, the Securities and Exchange Commission (“SEC”) issued a Report of Investigation (the “Report”) finding for the first time that an offer and sale of virtual currency, often called an Initial Coin Offering (abbreviated “ICO”) or “Token Sale”, can be subject to U.S. federal securities laws. While the SEC decided not to pursue an enforcement action in this particular instance, the SEC did find that that the ICO that was the subject of the Report involved an offering of securities subject to U.S. federal securities laws.

ICOs and Token Sales are an innovative means by which many organizations use distributed ledger or blockchain technology to raise capital. Such sales have been subject to significant regulatory uncertainty. The Report serves as a warning to the industry and market participants that virtual tokens and coins can be considered securities “regardless of the terminology or technology used”, in which case issuers must register offers and sales unless an exemption to registration applies.  Similarly, platforms for trading tokens and coins may also be subject to federal securities laws regulating securities exchanges.

The Report arose as a result of the SEC’s inquiry into an ICO made by a virtually existing entity, called The DAO, for the sale of its virtual DAO Tokens, the proceeds of which would be used to fund “projects” in exchange for a return on investment. The SEC began its investigation after hackers stole approximately one-third of The DAO’s assets after the tokens were sold to investors.

In its Press Release announcing the Report, the SEC emphasized that the Report confirms “that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption [to registration] applies.” However, in the Report and in an Investor Bulletin released concurrently with the Report, the SEC noted that whether particular virtual coins or tokens are securities will depend on the facts and circumstances of each ICO, including underlying economic realities of a particular transaction. In the case of The DAO, the SEC found that the DAO Tokens were securities regardless of the fact that (a) the tokens were only purchasable with “Ether,” a virtual currency, (b) the DAO itself was not a traditional corporate entity, but rather a decentralized aut...Read More

SEC Chairman Jay Clayton Delivers First Public Remarks Since Confirmation

In his first public speech since being confirmed as Chairman of the U.S. Securities and Exchange Commission (“SEC” or “the Commission”), Jay Clayton addressed the Economic Club of New York on July 12, 2017.  In his remarks, available here, Chairman Clayton discussed his vision of the principles that should guide the Commission and opportunities to apply those principles in practice.

Guiding Principles

Chairman Clayton laid out eight principles to guide his tenure as SEC Chairman, including:

(1)   Analysis of Long-Term and Cumulative Effects of Small Regulatory Changes.  Incremental regulatory changes can have long lasting, dramatic impacts on markets and should be analyzed cumulatively, in addition to incrementally.  The increased attractiveness of private sources of funding and markets for certain companies may be linked to these requirements.

(2)   Evolution of the SEC Alongside Changing Markets.  The Commission must evolve with the market, including utilizing technology to find new ways of analyzing regulatory filings and detecting suspicious activity.  However, such advances should be balanced against the costs companies incur to comply with new regulatory changes.

(3)   Retrospective Review of Adopted Rules.  The SEC should regularly review its rules retrospectively to determine where rules are, or are not, functioning as intended.

(4)   Consideration of Costs of Compliance.  The Commission must write rules in a clear manner, with a vision in mind for how those rules will be implemented, recognizing implementation costs that are likely to arise. 

Principles in Practice

Chairman Clayton additionally explained how he expects to put these principles into practice, including:

(a)   Enforcement and Examinations; Cyber Risks.  In addition to emphasizing that the SEC “intend[s] to continue deploying significant resources to root out fraud and shady practices in the markets,” Chairman Clayton also noted that public companies have an obligation to disclose material information ...Read More

SEC Significantly Expands Confidential Review of Registration Statements

Will Allow Confidential Submission of All Registration Statements for IPOs, Spin-Offs and Most Offerings Within 12 Months of an IPO or Spin-Off

The Securities and Exchange Commission (“SEC”) announced[1] on Thursday that its the Staff of the Division of Corporation Finance (the “Staff”) will soon allow all companies to submit initial public offering (“IPO”) draft registration statements for confidential review. This change expands a benefit previously reserved for Emerging Growth Companies (“EGCs”), and is specifically aimed at encouraging more companies to enter the public market.  The SEC also announced that it will review draft registration statements submitted by non EGCs that omit financial statements that the issuer reasonably believes will not be required when the registration statement is filed publicly, and indicated a willingness to discuss expedited reviews with issuers and their advisors. 

Confidential Review. 

Under the new process, which will go into effect on July 10, 2017, all companies, regardless of their prior year revenue, will be allowed to submit a draft IPO registration statement and related revisions to the SEC for confidential Staff review.

This process is also being made available to initial registrations of a class of securities under Section 12(b) of the Securities Exchange Act of 1934. This will allow companies conducting spin-off transactions to submit draft registration statements for confidential review. 

The Staff will also confidentially review draft registration statements for most other offerings made during the first twelve months following a company’s IPO. The confidential review is limited to the initial submission, however, and responses to Staff comments must be made with a public filing and not a revised draft registration statement. Any further review by the Staff will be done following normal procedures, which require public filings of amendments to a registration statement.

Since the Jumpstart Our Business Startups Act (“JOBS Act”)[2] was signed into law in 2012, only EGCs, companies with less than $1.07 billion in gross revenues in their most recently completed fiscal year, have been permitted to submit registration statements for confidential review. Since the JOBS Act was enacted, approximately 88 percent of the EGCs that have filed IPO registration statements have taken advant...Read More

SEC Economist Comments on New Technologies Used by the Commission to Identify Risk, Detect Fraud and Enforce the Securities Laws

Last week Scott Bauguess, Acting Director and Acting Chief Economist of the Securities and Exchange Commission’s (SEC) Division of Economic Risk and Analysis, shared insights about how the SEC is leveraging artificial intelligence and machine learning to track, and perhaps predict, emerging risks in the marketplace.[1]  In the latest in a series of speeches,[2] Bauguess also described how the SEC is using big data, harnessed with the appropriate processing power and partnered with human intuition, to focus investigative and enforcement resources.  While Bauguess and others at the SEC see a bright future for data analytics at the SEC, particularly in identifying emerging trends, Bauguess stressed the human element is ever important in assessing risk, combatting fraud and bringing or recommending enforcement actions.

The SEC’s initial foray into machine learning was sparked by the financial crisis.  Using hindsight, coupled with simple word counts and regular expressions, the SEC searched issuer filings to test whether increased use of “credit default swap” in filing documents could have alerted SEC staff to the growing market risk.  While the frequency analysis was not particularly impressive, the study highlighted the power of applying text analytics and natural language processing to SEC filings, and the SEC has built on this simple text modelling approach.

The SEC has since moved to more sophisticated topic modelling approaches, like latent dirichlet allocation (LDA), to identify emerging trends in disclosure documents and identify potential risks.  Rather than analyzing documents based on user-supplied terms like “credit default swaps”, LDA synthesizes large sets of documents and compares the text to language probability distributions in order to organically determine which new topics or terms to track.  Thus, LDA not only reports on the frequency and use of new terms in filing documents, but it also determines which new terms warrant future monitoring. 

LDA can function without specialized expertise or programming, making it applicable across departments within the SEC (and of course, the private sector).  Generally referred to as unsupervised machine learning, this form of analytics al...Read More

Changes Coming to Governance Provisions of New York Nonprofit Law
Amendments to New York’s Not-For-Profit Corporation Law are set to take effect on May 27.  The amendments impact several provisions of The New York Nonprofit Revitalization Act (“NRA”), which imposed substantial governance requirements on nonprofits when it took effect in 2014.  The amendments build greater flexibility into aspects of the NRA that were viewed as overly broad or prescriptive.  Key elements of the amendments are summarized below.  A redline showing the changes to the statutory language is available here.

Nonprofits incorporated in New York, and other nonprofits that may be subject to the Not-For-Profit Corporation Law due to their activities, should take note of the amendments and consider whether changes to their governance practices and documents are appropriate.

1.      Related party transactions.  The NRA provides for enhanced board oversight of related party transactions.  The amendments explicitly permit an authorized committee of the board to review and approve related party transactions, as an alternative to full board approval.  They also codify exceptions to the definition of “related party transaction” that are based on guidance previously issued by the Charities Bureau of the New York Attorney General’s office (available here).  These exceptions mean that immaterial or ordinary course transactions are no longer subject to the board/committee approval procedures under the NRA.  Specifically, the exceptions cover: (a) transactions that are themselves “de minimis” or where the related party’s financial interest is de minimis, with the judgment of what is de minimis to be left to individual nonprofits based on factors such as size and budget; (b) transactions that “would not customarily be reviewed” by the board at “similar organizations in the ordinary course of business” and that are available to others on the same or similar terms; and (c) transactions where a related party receives a benefit as a result of being a member of a class that benefits from the nonprofit’s work, where the benefit is available to all similarly situated members of the class on the same terms.  The amendments also create a defense to actions brought by the New York Attorney General challenging related party transactions.  The defense allows nonprofits to take steps to ratify transactions that were not approved in accordance with the procedures ...Read More
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