A Compliance Calendar Tip: Update for T+2

A few weeks ago, the SEC finalized rules to shorten the standard settlement period for securities transactions from three business days (T+3) to two business days (T+2). Amended Exchange Act Rule 15c6-1(a) will prohibit a broker-dealer from entering into a contract for the purchase or sale of a security (subject to certain exceptions) that provides for payment of funds and delivery of securities later than two business days after the trade date (known as “T”), unless otherwise expressly agreed to by the parties at the time of the transaction. (See this Doug’s Note.) The shift from T+3 to T+2 will be effective on September 5, 2017 to give everyone sufficient time to plan for, implement and test changes to the various systems, policies and procedures necessary for an orderly transition. Most of this preparation burden will, of course, fall on the direct participants in the securities trading industry. However, any company that pays regular cash dividends may need to adjust its annual compliance calendar to accommodate the new rule. Most companies that pay regular cash dividends include these relevant dates in their annual compliance calendars: The date on which the dividend is expected to be declared by the board of directors, The dividend payment date, and The ex-dividend date (the date set by the stock exchanges on which the security’s purchase price no longer reflects the dividend because the trade will settle after the record date). NYSE and NASDAQ rules currently state that shares will trade ex-dividend two business days prior to the dividend record date, which makes sense under the current T+3 timeline. However, the exchanges have now...

Whistleblower Retaliation Remains in the SEC’s Crosshairs

Whistleblower tips and awards for securities law violations have increased dramatically over the past year, according to the staff of the SEC Enforcement Division’s Office of the Whistleblower. Also during that time, the Whistleblower Office has stepped up its vigilance over retaliation by companies against whistleblowers, imposing penalties against companies more frequently and expanding the scope of what constitutes illegal retaliation. Furthermore, there is so far no reason to think the new Trump Administration will seek to reverse this trend. Direct retaliation can take many forms, most of which are recognizable by attentive management. Note, however, that certain less obvious behaviors may also be deemed retaliatory. For example, in one case an employee submitted a complaint about the company’s accounting practices through its internal procedures and to the SEC. When the SEC notified the company of its decision to investigate that complaint, the company was able to determine the whistleblower’s identity and revealed it in an internal email related to the investigation. The Fifth Circuit Court of Appeals in Halliburton, Inc. v. Administrative Review Board, United States Department of Labor concluded that illegal retaliation had occurred, stating that the “undesirable consequences” of being revealed to one’s colleagues as having accused them of fraud were “obvious.” (See this Doug’s Note.) The SEC has also focused recently on indirect forms of illegal retaliation embedded in company policies and agreements. Provisions in such documents may inadvertently violate Rule 21F-17(a) under the Securities Exchange Act, which provides that: “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing,...

Sustainability Reporting Continues to Mature

Several years ago, voluntary sustainability reporting in proxy statements, annual reports to shareholders, websites and special sustainability reports to various stakeholders began to take hold, even as the SEC continued to resist calls for mandatory sustainability reporting and even in the general absence of guidance regarding what to disclose and how. (See this Doug’s Note.) Around the same time, several non-profit organizations formed for the purpose of bringing order to these disclosures. Among them was the Sustainability Accounting Standards Board (SASB), which enjoys a board of directors made up of a particularly distinguished list of executives, investors, professionals and academics, and chaired by Michael Bloomberg. Since then, sustainability reporting has continued to increase in quantity and quality, and SASB has maintained its position as a well-known, respected standard-setter. In keeping with the maturation of these disclosures, SASB recently published an interesting and detailed “staff bulletin” describing its Approach to Materiality for the Purpose of Standards Development. The bulletin explains the SASB’s efforts to align its disclosure standards with existing federal securities law concepts of materiality (as set forth, for example, in TSC Industries v. Northway, Basic v. Levinson and the SEC’s MD&A rules and guidance). It caught my eye because the alignment of mandatory SEC reporting and voluntary sustainability reporting is essential not only to effective disclosure controls and procedures, but also to consistent and meaningful stakeholder communications. Because sustainability issues vary according to a particular industry’s business model, methods of competition, use of resources and impact on society, SASB provides disclosure standards for 79 industries divided into ten industry sectors: Healthcare Financials Technology & Communications Non-renewable Resources Transportation...

NYSE’s Annual Guidance Memo

Earlier this month, the staff of NYSE Regulation issued its annual guidance memorandum, which highlights recent NYSE developments and other points of emphasis for the coming year. This year’s guidance includes nearly twenty items that the staff deemed noteworthy. Borrowing the guidance memorandum’s main headings, I have summarized below those items that seem particularly worthy of attention. What’s New for 2017? In October 2016, NYSE began a multi-stage rollout of what it calls “Listing Manager,” which “allows listed companies to manage their entire lifecycle” via a login section at www.nyse.com. The various compliance modules currently available through egovdirect.com will transition to Listing Manager over time, beginning with cash and stock distribution notifications, which are already functional on Listing Manager. As of September 30, 2016, companies are no longer required to report their shares issued and outstanding, which will instead be reported to NYSE by company transfer agents. NYSE expects the transition from T+3 to T+2 (see this Doug’s Note) to be effective on September 5, 2017, though the actual date is contingent on various factors. Important Reminders. Companies must call NYSE’s Market Watch Group at least ten minutes before releasing, or becoming aware of, material information between 7:00 am Eastern Time and 4:00 pm Eastern Time. Companies must also provide NYSE with a copy of the related news release in advance of issuance. Between 7:00 am Eastern Time and 9:25 am Eastern Time, NYSE will implement a “news pending” trading halt only at the request of the company. Between 9:25 am Eastern Time and 4:00 pm Eastern Time, NYSE will implement a news pending trading halt in its discretion....

The FTC’s New Data Breach Response Guide (and a Reminder)

The two-pronged mission of the Federal Trade Commission is to protect consumers and promote competition. According to the FTC’s website, protecting consumers includes “stopping unfair, deceptive or fraudulent practices in the marketplace,” which these days necessarily includes data security. To that end, the FTC recently published a user-friendly response guide for organizations that have experienced a data breach, which seems to be just about everybody. The guide assumes that a hypothetical company has just learned that it has experienced a data breach, which might include hackers taking personal information, an insider stealing customer information, information being inadvertently exposed on the company’s website or any number of other breach events. The fifteen-page guide then walks through the basic steps to be taken by the company and the persons or agencies that it should contact. Here are the highlights: Secure your operations Assemble a team of experts, including data forensics and legal Secure physical areas Stop additional data loss Remove improperly posted information from the web Interview key personnel Do not destroy the evidence Fix vulnerabilities Think about service provider access privileges and remediation steps Check network segmentation effectiveness Work with forensics experts to analyze the nature and scope of the breach Have a clear, plain-English communication plan that reaches all affected audiences, including employees, customers, stockholders and business partners but does not further compromise privacy rights Notify appropriate parties Determine legal requirements Notify law enforcement Notify affected businesses Consider whether electronic health information was involved and whether the HIPAA Breach Notification Rule was triggered Notify affected individuals (the guide includes a model notification letter) The FTC’s guide is designed for...

Section 16 Reporting: The SEC is Watching

It is easy to become complacent about Section 16 reporting. Sometimes it seems that the only people paying any attention to Forms 3, 4 and 5 are plaintiffs’ attorneys looking for short-swing profit transactions. Does the SEC even notice, or care, if the reports themselves are filed or are late? Isn’t it enough to simply disclose the late filings in the Company’s next proxy statement (pursuant to Item 405)? And anyway, isn’t this the insider’s, rather than the company’s, responsibility? Recent enforcement actions against three directors for Section 16 violations serves as a reminder that the SEC is, in fact, watching. SEC enforcement actions. Last month, the SEC brought enforcement actions against three executives of Medient Studios, Inc. and later Moon River Studios, Inc., alleging that they schemed to make false and misleading statements in press releases and company filings regarding progress toward completing a “studioplex.” The SEC also alleged unjust enrichment and misappropriation of company funds. At the same time, the SEC charged three of the company’s directors with failing to timely report transactions in company stock in accordance with Section 16. According to the SEC, two of the directors were significantly late in filing Forms 3 and 4, and one of the directors never filed at all. The most interesting aspect of the actions against the directors is the SEC’s acknowledgement that they were not in any way involved in the alleged fraud by the executives. In other words, the SEC decided to bring administrative actions against the directors solely for violating Section 16. The two late-filing directors received cease and desist orders and civil penalties in...