While financial fraud has always been an important enforcement target for the SEC, the agency recently has shown increased attention to financial reporting cases. In the following guest post, Robert F. Carangelo, Paul A. Ferrillo and Andrew Cauchi of the Weil Gotshal law firm take a look at the SEC’s recent focus on financial reporting and the particular issues that have drawn the agency’s scrutiny. I would like to thank Rob, Paul and Andrew for their willingness to publish their article on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ guest post.
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Yes, But WHY Are There So Many Fewer Publicly Traded Companies?
As I have noted previously on this site, there are many fewer publicly traded companies in the United States now than there were within past decades. I have noted this phenomenon primarily within the context of observing that while the annual number of securities class action lawsuits has remained broadly stable within a range, the number of public companies has declined, suggesting that the average likelihood of any company getting hit with a securities suit has increased over time (as discussed here). This often-overlooked observation is important, but it doesn’t address the more fundamental question of why there are so many fewer publicly traded companies than there once were. A recent academic paper documents the decline in the number of publicly traded companies and suggests several possible reasons for the decline. I have my own thoughts, as well. As discussed further below, these decline in the number of listed companies has important implications for the economy generally and for the D&O insurance marketplace in particular.
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Theranos, the SEC, and the Enforcement of the Securities Laws Against Private Companies
In a speech last month, SEC Chair Mary Jo White signaled that the agency was going to be paying closer attention to private companies, particularly so-called “unicorns” – that is, the private venture-backed start-ups with valuations over $1 billion (as I discussed in a recent post). In her speech, White highlighted the concerns that can surround companies with these kinds of lofty valuations, noting that “the concern is whether the prestige associated with reaching a sky-high valuation fast drives companies to appear more valuable than they actually are.” It wasn’t clear at the time exactly what the agency’s scrutiny of these private companies might mean, but recent news involving the high-flying start-up company Theranos shows what White had in mind. The developments involving Theranos, in turn, raise the question of whether other high-flying privately held companies might also face scrutiny, as well.
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SEC Warning: It Is Watching Private Companies
The Securities and Exchange Commission is primarily concerned with public companies and the securities markets in which the shares of public companies trade. However, in a series of recent speeches and presentations as part of what the agency had called the “Silicon Valley Initiative,” the agency made it clear that it is increasingly concerned with private and pre-IPO companies as well, particularly so-called “unicorns” – that is, the private start-up firms with valuations greater than $1 billion. SEC Chairman Mary Jo White highlighted these concerns in a March 31, 2016 speech at the Rock Center for Corporate Governance at Stanford Law School, a copy of which can be found here.
As summarized in an April 4, 2016 memo from the Fenwick & West law firm about the SEC’s Silicon Valley Initiative, “the SEC is closely watching the conduct of private companies as well as emerging platforms that trade in private company securities, and will bring enforcement cases as needed to protect investors.” The agency’s recent presentations and SEC Chair White’s speech, the memo said, underscored that “the SEC expects even private companies to embrace and demonstrate sound corporate governance.”
As discussed below, these pronouncements from the SEC raise troublesome questions about what has in the past been viewed as a clear demarcation between the potential liability exposures for private and public companies.
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Report: SEC Filed a Record Number of Enforcement Actions in FY 2015, Aggregate Fines and Penalties Declined
The SEC filed a record number of enforcement actions during FY 2015, but the aggregate value of fines, penalties, and disgorgements the agency collected during the fiscal year was well below the prior year’s total and long term averages, according to a detailed January 12, 2016 report produced in cooperation between the NYU Pollack Center for Law Business and Cornerstone Research. The report, which can be found here, is entitled “SEC Enforcement Activity Against Public Company Defendants: Fiscal Years 2010-2015,” is based on date collected in the Securities Enforcement Empirical Database (SEED), which is an online resource the two organizations sponsor and that provides data on SEC actions filed against public companies traded on the U.S. exchanges. The January 12, 2016 press release that accompanied the report can be found here.
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Sharpening the Focus on Regulation A+ Offerings
Earlier this year, the SEC rules adopted rules amending Regulation A under the Securities Act to provide companies with an intermediate path between, on the one hand, exempt offerings to qualified investors only, and, on the other hand, a full-blown initial public offering of registered securities. Since the amended rules, known as Regulation A+, took effect, a number of companies have initiated offerings taking advantage of the new rules. Perhaps because of unfamiliarity, many D&O insurance underwriters have reacted very cautiously with regard to these new Reg. A+ offerings. The purpose of this post is to briefly review the background regarding these new offerings and to provide links to relevant resources, in the hope of addressing some of the D&O underwriters’ concerns.
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JOBS Act 2.0 Poised to Become Law
The five-year transportation bill known as the Fixing America’s Surface Transportation (FAST) Act that a House-Senate conference committee agreed on earlier this week is not something we ordinarily would comment on here. But in that inestimable way that Congress manages to do things, the transportation bill contains so many provisions affecting public company financing and reporting that Broc Romanek of TheCorporateCounsel.net blog described the provisions collectively as “JOBS Act 2.0.” The House and Senate passed the bill on Dec. 3, 2015, and President Obama is expected to sign it into law shortly.
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Guest Post: The Dos and Don’ts of an SEC Examination
The advent of an SEC investigation is a serious and difficult event in the life of any organization, particularly registered-investment advisors. As a result of recent changes at the agency, an SEC investigation may be more difficult than ever for registered-investment advisors. In the following guest post, Ildiko Duckor, Sarah A. Good and Corey Harris of the Pillsbury law firm take a look at the recent changes at the agency, and provide a list of dos and don’ts. A version of this article previously was published as a Pillsbury client alert.
I would like to thank Ildiko, Sarah and Corey for their willingness to publish their guest post on my site. I welcome guest post submissions from responsible authors on topics of interest to readers of this blog. Please contact me directly if you would like to submit a guest post. Here is Ildiko, Sarah and Corey’s guest post.
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The regulatory environment for SEC-registered advisers has become more complex as the result of a more aggressive and interconnected Securities and Exchange Commission (SEC). The connecting hub within the SEC is the Office of Compliance Inspection and Examination (OCIE), which serves as the “eyes and ears” of the SEC. The OCIE often is the first line of contact between an investment adviser and a potential referral to the SEC Enforcement Division’s Asset Management Unit (AMU), which is devoted exclusively to investigations involving investment advisers, investment companies, hedge funds and private equity funds.
The OCIE’s three main areas of focus for their 2015 exam priorities are (i) protecting retail investors, (ii) issues related to market-wide risks, and (iii) data analysis as a tool to identify registrants engaging in illegal activity.
Overlapping with the OCIE’s frontline examination role is the Compliance Program Initiative, which began in 2013 by sanctioning three investment advisers for ignoring problems within their compliance programs. The Compliance Program Initiative is designed to address repeated compliance failures that may lead to bigger problems. As such, any issues raised in a deficiency letter resulting from an examination are ripe for follow-up as the starting point of a subsequent examination. In the current regulatory environment—where violations of compliance policies and procedures can serve as the basis of enforcement actions—investment advisers and their compliance professionals need to pay close attention to the implementation, follow-through and updating of every aspect of their compliance program.
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SEC Whistleblower Reports Continue to Increase
The number of whistleblower reports to the SEC’s Office of the Whistleblower under the Dodd-Frank Act’s whistleblower provisions continues to increase, according to the agency’s latest annual report. The November 16, 2015 report, which is entitled “The 2015 Annual Report to Congress: Dodd-Frank Whistleblower Program,” and which can be found here, reports that the number of whistleblower reports to the agency has increased every year since the program was instituted in 2011. The agency has also made over $54 million in whistleblower awards since the program’s inception, including more than $37 million to eight whistleblowers in fiscal year 2015 alone.
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SEC Adopts Final Crowdfunding Rules
On October 30, 2015, by a 3-1 vote, the SEC adopted final rules to permitting small companies to raise funds by selling shares to the investing public through crowdfunding offerings conducted on Internet fundraising portals. In this long-awaited vote, which represented the last remaining significant rulemaking procedure required by the Jumpstart our Business Startups (JOBS) Act of 2012, the agency finally authorized, in slightly modified form, the rules it had first proposed in October 2013. The agency’s October 30, 2015 press release announcing its action and describing the final rules can be found here. The 686-page adopting release can be found here.
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