Month-In-Brief: Securities Law

CURRENT MONTH (August 2021)

Securities Regulation

SEC Approves Nasdaq’s Board Diversity Rule

By Alan J. Wilson, WilmerHale

On August 6, the Securities and Exchange Commission (“SEC”) approved Nasdaq listing rules related to board diversity.  The new Board Diversity Rule establishes diversity objectives for different classes of Nasdaq-listed companies and related disclosure requirements. 

Subject to some exceptions, the Board Diversity Rule establishes an objective for each Nasdaq-listed company to have two “Diverse” (as defined in the rule) Board members, including one who self-identifies as female and one who self-identifies as an underrepresented minority or LGBTQ+.  Foreign issuers and smaller reporting companies can satisfy the objective with two female directors or other combinations set forth in the Board Diversity Rule.  Companies with five or fewer directors can satisfy the objective with one “Diverse” director.  If a company does not meet its diversity objective, it must provide an explanation for not doing so. 

Each Nasdaq-listed company (subject to limited exceptions) is also required under the Board Diversity Rule to publicly disclose, in an aggregated form and on a standardized matrix template or a format substantially similar thereto, information on the voluntarily self-identified gender, racial and LGBTQ+ status of the company’s board of directors, to the extent permitted by applicable law.  Such information must be reported annually in the Nasdaq-listed company’s proxy or information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F), or on its website. 

The Board Diversity Rule goes effective in phases.  The requirement to provide diversity matrix disclosures will be effective first, and companies have until the later of August 8, 2022, or the date the company files its proxy statement or its information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for its annual shareholder meeting during 2022.  With respect to satisfying Nasdaq’s diversity objectives, the applicable phase-in period depends on the company’s listing tier, with the expectation that all such companies will have at least one “Diverse” director by August 7, 2023.

Among other resources to assist companies in complying with the Board Diversity Rule, Nasdaq has published a brief summary entitled “What Nasdaq-listed Companies Should Know,” FAQs, and examples of acceptable and unacceptable disclosure.  In addition, Nasdaq is offering access to several resources to assist in locating board candidates, including Equilar’s BoardEdge Platform and Equilar Diversity Network, Athena Alliance’s community of women leaders, and the Boardlist’s premium talent marketplace. 

For a more detailed summary, see this WilmerHale blog post.

SEC to Revisit Whistleblower Rule Amendments

By Thomas W. White, Retired Partner, WilmerHale

Last year, the SEC, with two Democratic members dissenting, adopted amendments to the rules governing the SEC’s whistleblower award program.  On August 2, Chair Gary Gensler announced that he had directed the staff to prepare potential revisions to two amended rules to address concerns that these amendments “would discourage whistleblowers from coming forward.”  On August 5, the SEC issued a statement setting forth “interim procedures” it would follow in applying the amended rules pending potential additional rulemaking. 

The amended rules in question, and the SEC’s interim procedures, are:

• Awards for Recoveries in “Related Actions”—Amended Rule 21F-3(b)(3) restricts the circumstances in which a whistleblower can receive an award from the SEC based on monetary recoveries in “related actions” by certain other governmental agencies. Basically, it provides that a whistleblower cannot recover under the SEC’s program where another agency maintains a whistleblower award program covering its action, unless the SEC finds “that its whistleblower program has the more direct or relevant connection to the action.”  The interim procedures permit the SEC to exercise its “exemptive authority” to permit an award in certain cases notwithstanding this limitation, or, in other cases, allow the whistleblower to hold his claim based on recoveries in related actions in abeyance pending the outcome of the rulemaking process.
• Consideration of Dollar Amount of Awards—Amended Rule 21F-6 provides that in all cases the SEC may consider the dollar amount of the award (as opposed to just the percentage of the monetary sanctions recovered), including, implicitly, adjusting the award downward based on its potential size. The interim procedures provide that the SEC will “continue its practice” of considering dollar amounts of awards only where the rules explicitly contemplate the use of discretion to raise awards or, if it is considering deviating from this practice, allow the whistleblower to hold the matter in abeyance pending the rulemaking.

Commissioners Hester Peirce and Elad Roisman issued a statement criticizing the SEC’s action.  In their view, the SEC’s interim procedures “effectively nullif[y] standing Commission rules under the guise of changes to ‘agency procedures.’”

SEC Investor Advisory Committee Releases SPAC Recommendations

By Dan S. Cohen, K&L Gates LLP

The SEC’s Investor Advisory Committee (“Committee”) has released a draft of its recommendations regarding Special Purpose Acquisition Companies (“SPACs”), to be discussed during the Committee’s September 9 meeting. The Committee has drafted 8 recommendations regarding disclosure:

1. SPACs should disclose the role of the SPAC sponsor and/or insiders and affiliates and the sponsor’s (and/or insiders’ and affiliates’) expertise, appropriateness, capital contributions, potential conflict of interest, and any divergence between the sponsor’s (and/or insiders’ and affiliates’) financial interest and the retail investors’ interest (including clear communications that the sponsor’s incentive is to make a deSPAC transaction, even if doing so will not benefit any investors who do not redeem their shares before the deal);
2. SPACs should provide “plain English” disclosures in their registration statement of the economic role and incentives of each SPAC participant, including the impact of founder’s shares on diluting retail investors’ shares. If such details are contingent on the terms of the deSPAC transaction, other disclosures should be made to provide at least a range of acceptable terms;
3. SPACs should include a clear description of the mechanics and timeline of the SPAC process, including the nature of the instrument purchased, the events required for value appreciation, and the shareholder approval process for the deSPAC transaction, in the registration statement (there is particular concern about procedures that allow shareholders to vote for a deSPAC transaction while redeeming their shares);
4. SPACs should disclose the opportunity set and target company areas of focus in the registration statement;
5. SPACs should disclose competitive pressures and risks in finding and executing a deal with appropriate target companies and how the SPAC sponsor will absorb expenses if there is not a successful deSPAC transaction within the specified time period;
6. SPACs should disclose acceptable ranges of terms for additional funding that may be sought at the time of the deSPAC transaction (specifically, disclosure of the identity and relationship of PIPE investors and any payments made to a shareholder to induce that shareholder to retain rather than redeem their shares);
7. SPACs should disclose how the sponsor will assess whether a target company can be a ’34 Act Company and what steps will be taken to ensure the target company can meet the standards necessary to operate as a public company; and
8. SPACs should disclose the minimum due diligence the sponsor will perform regarding the target company’s accounting practices (including audit history, use of GAAP and non-GAAP pro forma numbers, and audit committee).

The Committee also recommends that the SEC publish an analysis of “the players in the various SPAC stages, their compensation, and their incentives” to help inform potential additional recommendations and to promote the public interest.

Chair Gensler Speaks Regarding Cryptocurrency at Aspen Security Forum

By Melissa Sanders, Fox Rothschild LLP

On August 3, 2021, SEC Chair Gary Gensler spoke at the Aspen Security Forum on the topic of cryptocurrency.  Gensler noted that many, if not most, tokens are securities, making them subject to the securities laws and SEC jurisdiction.  He categorized cryptocurrency assets as “scarce vehicles for speculative investment.”  He further noted that he believes there are “significant gaps in investor protection” in the cryptocurrency area.  Gensler explained that many aspects of cryptocurrency operate outside of regulatory frameworks such that additional legislative action is needed to make sure that cryptocurrency is prevented from “falling between regulatory cracks.”  Gensler identified three areas for legislative priority:  trading of cryptocurrency, lending cryptocurrency and DeFi platforms.  He noted that the SEC is ready to work with other agencies along with Congress and the Administration to make sure some of these gaps are closed.