This newsletter discusses noteworthy updates, key regulatory decisions and upcoming compliance reminders. You are welcome to contact us to discuss any of the topics. You can view previous versions at this link.

SEC Changes Approach to Shareholder Proposal No-Action Requests

By William Cole

On September 6, 2019, the SEC announced that it was changing its policy on how it would respond to no-action requests by companies to exclude shareholder proposals under Rule 14a-8 under the Securities Exchange Act of 1934. Under the new policy, the SEC staff may not take a position or it may just respond orally to some no-action requests. The staff cited efficiency concerns as part of the impetus for the change.

The SEC staff will continue to actively monitor correspondence and provide informal guidance to companies and proponents. The staff’s response will now inform the company and the proponent whether it concurs, disagrees or declines to state a view with the company’s asserted basis for exclusion. So, in some cases, the staff will decline to take a position. In addition, under the new policy, the staff may respond orally instead of in writing in some cases. The staff intends to provide a written response where it believes that would provide value, such as more broadly applicable guidance about complying with Rule 14a-8.

The announcement pointed out that staff’s failure to state a view should not be interpreted as an indication that the proposal must be included. As always, the staff says that the parties are free to seek adjudication on the merits.

This development adds more uncertainty. Although no-action responses have never been fully “binding,” oral responses may provide less evidential weight to the decision. Moreover, a declination to take a position will put more pressure on companies’ decisions on whether to include shareholder proposals. In those cases, companies should consider a number of factors, such as the risks of litigation, including the costs and timing of litigation near the annual meeting, adverse publicity, negative reactions from proxy advisors and the impact on its negotiations with future proponents. Until there is more certainty, where the staff declines to take a position, some companies may be more likely to go ahead and include questionable shareholder proposals.

By Paul William

The LIBOR benchmark, commonly used for setting interest rates in commercial and financial contracts, will no longer be quoted after 2021 by the private-sector banks that are used to calculate the LIBOR rate. Because the expected discontinuation of LIBOR could have an impact on the financial markets and on public companies, investment advisers, investment companies and broker-dealers, the SEC released a joint statement with areas of concern and suggested considerations from the Division of Corporation Finance, Division of Investment Management, Division of Trading and Markets and the Office of the Chief Accountant.

The staff statement encourages companies to identify existing contracts that extend past 2021 to determine their exposure to LIBOR and to consider whether contracts entered into in the future should reference an alternative rate to LIBOR or include effective fallback language.

In particular, the SEC staff encourages market participants to consider questions along the lines of the following as they seek to understand and mitigate the risks related to the transition from LIBOR.

  • Do you have or are you or your customers exposed to any contracts extending past 2021 that reference LIBOR? Are these contracts, individually or in the aggregate, material?
  • For each contract identified, what effect will the discontinuation of LIBOR have on the operation of the contract?
  • Do you need to take actions to mitigate risk, such as proactive renegotiations with counterparties to address the contractual uncertainty?
  • Are there fundamental differences between LIBOR and an alternative reference rate that could impact the profitability or costs associated with the identified contracts?

The Division of Corporation Finance emphasized that companies should consider their risk factors, MD&A, board risk oversight and financial statements in light of the expected discontinuation of LIBOR. The Division also emphasized the importance of keeping investors informed about the company's progress toward risk identification and mitigation, and the anticipated impact, if material. In deciding what disclosures are relevant and appropriate, companies were encouraged to consider the following:

  • The evaluation and mitigation of risks related to the expected discontinuation of LIBOR may span several reporting periods. Consider disclosing the status of company efforts to date and the significant matters yet to be addressed.
  • When a company has identified a material exposure to LIBOR but does not yet know or cannot yet reasonably estimate the expected impact, consider disclosing that fact.
  • Disclosures that allow investors to see this issue through the eyes of management are likely to be the most useful for investors. This may entail sharing information used by management and the board in assessing and monitoring how transitioning from LIBOR to an alternative reference rate may affect the company.

By Paul William

In August the SEC published two interpretive releases relating to proxy voting matters as part of its ongoing proxy reform initiative.

In combination, these releases put pressure on proxy advisor services (e.g., Institutional Shareholder Services Inc.) to reveal the extent they indirectly provide consulting services (e.g., through ISS Corporate Solutions Inc.) to public companies regarding governance practices.

The first release clarifies the responsibilities of investment advisers with respect to proxy voting and the employment of proxy advisory firms. The release underscores that existing rules accommodate a variety of voting arrangements but that any voting by an investment adviser must be in its client’s best interest. In particular, the guidance discusses, among other things:

  • What steps an investment adviser could take to demonstrate it is making voting determinations in a client’s best interest and in accordance with the investment adviser’s proxy voting policies and procedures;
  • Considerations that an investment adviser should take into account if it retains a proxy advisory firm to assist it in discharging its proxy voting duties; and
  • Steps for an investment adviser to consider if it becomes aware of potential factual errors, potential incompleteness, or potential methodological weaknesses in the proxy advisory firm’s analysis that may materially affect one or more of the investment adviser’s voting determinations.

The second release addresses the application of the proxy rules to proxy voting advice given by proxy advisory firms. Under the interpretation, proxy voting advice generally constitutes a “solicitation” subject to the federal proxy rules. Specifically, Exchange Act Rule 14a-9 prohibits any solicitation from containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact. The SEC guidance explains what proxy advisers should consider disclosing in order to avoid a potential violation of Rule 14a-9 where the failure to disclose such information would render the advice materially false or misleading.

The SEC’s interpretation does not change the ability of proxy advisory firms to rely on an exemption from the information and filing requirements of the proxy rules set forth in Exchange Act Rule 14a-2(b) (such that their voting recommendations may remain non-public, as is required by their subscription based business model). We would not be surprised if the SEC revisited this rule in the future.

SEC Settles Charges Against Company for Misrepresenting Compliance with Loan Covenants

By R. Randall Wang

On August 29, 2019, the SEC announced the institution of settled cease-and-desist proceedings against Omega Protein Corporation, a Houston-based manufacturer and distributor of omega-3 fish oils. The company had obtained federal government loans as part of a program to support the fishing industry. To obtain these loans, it agreed to a number of covenants, including representations about its compliance with federal environmental laws.

In January 2013, the company pleaded guilty to violations of the Clean Water Act and entered into a 3-year probation period. In January 2017, the company again pleaded guilty to violations that occurred in 2014 and 2016. The SEC alleged those violations resulted in breaches of the loan covenants and thereby triggered a default under the loan agreements. However, the company stated in its Form 10-K and 10-Qs filings during 2015 that it “was in compliance with all of the covenants contained” in the loan agreements.

Further, the SEC found that the company had failed to enhance its quarterly procedures for testing compliance following its first guilty plea. And that by April 2015, company management was aware of an accusation of illegal dumping and had launched an internal investigation into the allegations. The SEC noted that by not disclosing the covenant violation to lenders, the company was able maintain access to its credit facility and avoid accelerated interest that might have accrued had lenders declared a default.

The order found that Omega violated the antifraud provisions of Section 17(a)(2) of the Securities Act of 1933 and the reporting provisions of Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-1 and 13a-13 thereunder. The SEC also ordered the company to cease and desist from future violations of those provisions and pay a civil penalty of $400,000. The company consented to the charges without admitting or denying the findings.

In light of the Omega case, companies should consider whether any enhancements of their quarterly diligence procedures relating to covenant compliance would be appropriate.

By R. Randall Wang

On August 20, 2019, the SEC charged TherapeuticsMD Inc. with violating Regulation FD when it shared material, nonpublic information about potential FDA approvals of a new drug application (NDA). The company contacted sell-side analysts twice during 2017 without concurrent disclosure to the public.

Since 2015, the company had been developing a hormone drug therapy for women. In late 2016, the FDA accepted the NDA for a particular product, which was one of only two drugs in its development pipeline and the only one to advance to the NDA stage. During the first half of 2017, the company disclosed several discussions with the FDA regarding potential deficiencies in its application, resulting in significant price declines on heavy volume. In May 2017, the company announced a planned meeting with the FDA to take place on June 14. The company indicated it expected it would either be allowed to submit a revised NDA, putting the drug back on the path to approval, or pursue formal dispute resolution with the FDA.

On June 15, 2017, one day after the meeting with the FDA, the company sent private messages to sell-side analysts describing the meeting as “very positive and productive” and that it would be “waiting on meeting minutes to decide on the path forward.” Its stock price closed up 19.4% on heavy trading volume the next day. The company did not issue a press release or make any public disclosure about the meeting.

The NYSE stock watch department contacted the company to ask whether it was aware of material information that could be affecting the stock. The executives who responded did not know of the emails sent to analysts and replied that they were not aware of any material information. They did not conduct any inquiry to determine the cause of the price movement, or to assess whether the magnitude of the price movement could be explained by the anticipated volume or possible market volatility that day.

Early in the morning of July 17, 2017, the company issued an 8-K and press release following receipt of the formal minutes of the June 14 meeting, announcing that it had submitted additional information to the FDA but did not yet have a clear path forward for its NDA. Its stock price declined approximately 16% in pre-market trading following the issuance of the press release. In a call and email to sell-side analysts after the press release was issued but before the market opened, the company selectively shared previously undisclosed details about the June FDA meeting and the information it had subsequently submitted to the FDA, with an explanation of why the company believed the information supported its position regarding the drug’s safety. All of the analysts published research notes containing these details, and the stock rebounded to close down only 6.6% for the day.

The SEC found that the company did not have policies or procedures regarding compliance with Regulation FD and that it violated the reporting provisions of Section 13(a) of the Securities Exchange Act of 1934 and Regulation FD. The SEC ordered the company to cease and desist from future violations of those provisions and pay a civil penalty of $200,000. The company consented to the charges without admitting or denying the findings.

The SEC order makes clear that Regulation FD remains an active enforcement interest. Accordingly, companies should review their disclosure policies and procedures, and take steps to ensure their management teams understand them.