WLF Brief Video Explains What’s at Stake as Supreme Court Hears Arguments in Halliburton v. Erica John Fund

Washington Legal Foundation filed an amicus brief supporting the petitioner in Halliburton v. Erica P. John Fund, on which we were represented by Lyle Roberts on a pro bono basis.  The brief is available here.

If you would like a copy of Mr. Robert’s comments, click here.

WLF Briefing Focuses on U.S. Supreme Court at its Mid-Term Point

One of our speakers, Troutman Sanders’ Peter Glaser, and his authoring of WLF’s amicus brief in Utility Air Group v. EPA, were referenced in a New York Times story on the case.

Attendees of the briefing received printouts of the following WLF Supreme Court-related resources:

Proxy Advisory Services: Making Glass (Lewis) Transparent—and ISS Too

nasdaqCross-posted at WLF’s Forbes.com contributor page

With 2014 and many corporations’ annual meetings just around the corner, more and more publicly-traded companies find themselves girding for costly proxy fights over corporate governance issues.  The small cadre of firms that provide proxy advisory services increasingly hamper management’s ability to prevent proxy battles, and to win those it can’t forestall.  Entities like Glass Lewis & Co. and Institutional Shareholder Services (ISS) provide advice to their institutional money manager and investment adviser clients that increase the percentage of shareholders voting against management’s recommendations.

But it is not at all clear that this proxy voting trend serves shareholder interests.  The Securities and Exchange Commission (SEC) has been studying these firms (which together control some 97% of the proxy services market )and their grip over proxies.  As Edward Knight, General Counsel of NASDAQ OMX (the public company that owns NASDAQ) points out: “[T]here is evidence that the Firms not only increase the costs of being a public company, but also create disincentives for companies to become public in the first place.”  Perhaps, as an October petition filed with SEC by NASDAQ OMX urges, it’s time the SEC stopped studying and started acting to make the methodology behind such influential proxy voting advice more transparent.

A Creature of Regulation.  The current problem began when, in an effort to curtail potential conflicts of interest, SEC imposed a new rule in 2003—the “Proxy Voting by Investment Advisers” rule—that required entities such as institutional investors and investment advisers to disclose “the policies and procedures that [they use] to determine how to vote proxies.”  To satisfy this new requirement, investment advisers began turning to third-party firms that offer advice on proxy voting.  When a 2004 SEC no-action letter clarified that relying on such firms creates a veritable safe harbor, the reliance on these firms grew and their impact blossomed.

Thanks to a second 2004 no-action letter, SEC has also instructed proxy advisory firms that they can provide advice to public companies on corporate governance issues—including how to win proxy votes—at the same time that they make proxy voting recommendations to investment advisers.  As James Glassman and J.W. Verret wrote in a Mercatus Center analysis last April, “Instead of eliminating conflicts of interest, the rule simply shifted their source.  Instead of encouraging funds to assume more responsibility for their proxy votes, the rule pushes them to assume less.”  Such concerns, voiced both by public companies and SEC Commissioners, led SEC to publish a “Concept Release on the U.S. Proxy System” that elicited over 300 comments. Continue reading

Annual Meeting Holdup: Securities Class Action Lawyers’ Latest Scheme

Cross-posted at Forbes.com WLF contributor site

You’re a publicly traded company, and it’s a week before your annual meeting.  The SEC had no objections to your proxy statement, and it’s been sent to shareholders. Your focus should be on final meeting details, but instead, you are working with your lawyers to fend off a class action lawsuit which threatens to forestall the meeting.

This is not a bad dream, but an awake nightmare that an increasing number of public companies are facing. It’s the latest securities class action lawsuit “innovation” — just before an annual meeting, allege that a company’s proxy statements omit “material” information and thus violate general state-law duties to disclose; demand trivial changes to the proxy and high-six-figure fees; and stalk your next victim.

As leading securities defense litigator Bruce Vanyo noted at D&O Diary, at least 20 companies have faced such suits this year, with most claims involving advisory “say on pay” votes and votes on other compensation issues such as stock purchases. The suits are a mutation of disclosure-oriented class actions that are routinely filed against companies going through mergers or acquisitions. These new proxy challenges are of the cookie-cutter ilk common in securities class actions, with the same law firm and often the same investor acting as the lead plaintiff. Continue reading

SEC Conflict Minerals & Resource Extraction Rules Are Legally Suspect

Guest Commentary

by Steven A. Engel and Katherine M. Wyman, Dechert LLP*

Of the various U.S. departments and agencies responsible for policing U.S. activities abroad, the Securities and Exchange Commission (SEC) does not readily come to mind.  Nonetheless, the Commission recently stepped into those waters by issuing two rules implementing provisions buried deep within the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  Those rules put the SEC’s “mission” to “maintain fair, orderly and efficient markets” in the United States in direct conflict with their supporters’ interests in policing the activities of U.S. corporations in international hotspots.  In all likelihood, litigation will soon follow.

Section 1502 of Dodd-Frank amended the Securities Exchange Act of 1934 (“Exchange Act”) by adding Section 13(p), which directs the Commission to issue rules requiring certain issuers to disclose their use of so-called “conflict minerals” (tantalum, tin, gold, and tungsten) that originated in the Democratic Republic of the Congo or in adjoining countries.  Section 1504 similarly adds Section 13(q) and directs the Commission to put out rules requiring “resource extraction” issuers (namely oil, gas, and mining companies) to disclose certain payments made to U.S. and foreign governments.  Continue reading

Under Congressional Mandate, SEC Slowly Moves Towards Recognition of First Amendment

Cross-posted at Forbes.com’s WLF contributor page

In a post last February, Supreme Court Cert Petition Spotlights Speech Limits on Securities Market, we urged the Justices to review a Massachusetts high court ruling which prevented communication about investment opportunities. The Court denied certiorari on May 14, but by that time, securities issuers like the petitioner in that case, Bulldog Investors, had a new, and improbable, champion for its speech rights—Congress.

The JOBS Act, which became law on April 5, includes a provision ordering the Securities and Exchange Commission (SEC) to eliminate a rule prohibiting “general solicitation” in situations where “accredited investors” are participating in the offering process. The prohibition takes the form of a condition for certain securities offerings. Under Rule 506 of SEC Regulation D, issuers who target accredited investors (i.e. rich and sophisticated persons and entities) and who refrain from solicitation (i.e. direct marketing, print or broadcast ads, websites, seminars) don’t have to register their offerings with the SEC. In other words, the issuers only get a benefit (no registration) if they surrender their speech rights.

As Bulldog Investors argued in its cert petition, such limitations tread on issuers’ commercial speech rights and are a significant impediment in the formation of capital, especially for startups. SEC’s own Advisory Company on Smaller Public Companies concurred with the latter point, as did Congress when it drafted the JOBS Act. The Act ordered SEC to eliminate the speech restraint within 90 days. Continue reading

Supreme Court Cert Petition Spotlights Speech Limits on Securities Market

Cross-posted by Forbes.com at WLF’s contributor site

Distinguished First Amendment scholar Frederick Schaeur once wrote in the Harvard Law Review, “It might be hyperbole to describe the Securities and Exchange Commission as the Content Regulation Commission, but such a description would not be wholly inaccurate.” SEC has yet to heed a suggestion from one of its own advisory committees to relax prohibitions on general solicitations and advertising, and has ignored a letter from the New York City Bar noting that New York and 30 other states take a more respectful approach to securities speech regulation.

The Commonwealth of Massachusetts is not one of those 31 states, as hedge fund Bulldog Investors learned in 2006. The enforcement action taken by the state against Bulldog, and Bulldog’s constitutional challenge of that action, has resulted in a cert petition filed with the U.S. Supreme Court that could shock SEC and securities speech-averse states into the 21st Century. Continue reading

SEC’s Strict Liability Claw Strikes Again

Oooo, the Claw

Cross-posted by Forbes.com at WLF’s contributor page

In a July 2011 Legal Pulse post, SEC to Join HHS in Effort to Drop the Claw of Strict Liability on Business Managers, we decried the federal punishment of business executives based solely on their status, rather than on whether they actually violated the law. Such status crimes, we argued, do nothing to deter law breaking and by punishing blameless people, cheapen the concept of punishment.

The Securities and Exchange Commission has once again dropped “the claw” on a business manager who broke no law. SEC deployed its authority under § 304 of the Sarbanes-Oxley Act to “claw back” a $450,000 bonus from a medical product company’s former CEO, Brian Moore. Mr. Moore received the bonus during a time when four company finance executives were fraudulently misstating revenues and assets. Mr. Moore played no part in the fraud, which the finance execs actively hid from him and other senior company leaders. He was an executive at the wrong place and the wrong time. As the SEC cavalierly said in a press release about a previous clawback target, Mr. Moore was “captain of the ship and [he]profited.” Continue reading

SEC: Businesses Need to Disclose More about Cybersecurity Practices

Just when you thought that federal agencies might finally get the message, the Securities and Exchange Commission has found a new area in which they may want to regulate, or at least require businesses to manage more paperwork.

On October 13, the SEC’s Division of Corporation Finance published a Disclosure Guidance relating to cyber security. The basic thesis of the guidance is that while current requirements do not explicitly refer to cybersecurity, it is the Division’s belief that the requirements “may impose an obligation on registrants to disclose such risks and incidents.” For example, businesses may need to disclose risk factors for investors, such as certain aspects of the business or operations that could create cybersecurity risks and the potential costs and consequences. Registrants with the SEC should avoid giving just boilerplate disclosures, though, which should be “tailored to their particular circumstances.” Good luck trying to figure out how particular it should be. Continue reading

SEC: Securities and ENVIRONMENT Commission?

Cross-posted by Forbes.com at On the Merits and WLF’s Forbes contributor page.

Regulators regulate. It’s a simple concept, but one which seems to escape even the highest of government officials. Some in the Obama Administration must be disappointed by the lukewarm reception business leaders and the public have given to recent regulatory red-tape cutting efforts. But when you read stories like “SEC Bears Down on Fracking“, which appeared in this morning’s Wall Street Journal (online subscription required), you cannot be surprised that serious doubts exist over the federal government’s wherewithal to rationalize regulation.

It must have been hard for securities regulators to see their counterparts at the EPA, the Department of Energy, and the Army Corps of Engineers, not to mention state, county, and city regulatory entities, getting a piece of the action on hydraulic fracturing, aka, “fracking.” Pursuit of reportedly 110 years’ worth of natural gas trapped in rock formations like the New York-to-Kentucky Marcellus Shale is now possible with new technology. Regulators are, as always, struggling to keep up with this new technology. Job-creating companies, aware that regulation is inevitable and, if done right, can lend credibility to their natural gas extraction, are working with many officials to craft disclosure and other rules. Continue reading