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Business Law Today

June 2022

June 2022 in Brief: Securities Law

Alan J Wilson and Rani Doyle

June 2022 in Brief: Securities Law

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Securities Regulation

SEC Reopens Clawback Comment Period…Again

By Laura D. Richman & Christina M. Thomas, Mayer Brown LLP

On June 8, 2022, the US Securities and Exchange Commission (“SEC”) issued a release (“New Reopening Release”), reopening the comment period on the clawback listing standard rules that it proposed in 2015 (“2015 Proposal”). At the same time, the SEC made available a memorandum prepared by the staff of the SEC’s Division of Economic and Risk Analysis (“Staff Memorandum”) that discusses the increase in voluntary adoption of compensation recovery policies by issuers and provides estimates of the number of additional restatements that would trigger a compensation recovery analysis if the rules were extended to include all required restatements made to correct an error in previously issued financial statements, including “little r” restatements. The Staff Memorandum also addresses some potential costs and benefits of the proposed rules. The SEC reopened the comment period to allow interested persons to consider and comment on the analyses and data set forth in the Staff Memorandum.

The New Reopening Release represents the second time in less than a year that the SEC reopened the comment period on the 2015 Proposal. In October 2021, the SEC reopened the comment period on the 2015 Proposal (“Original Reopening Release”), which closed on November 22, 2021.

The 2015 Proposal requested comments on more than 100 specific questions. The Original Reopening Release raised additional requests for comment in ten multifacted areas. While the New Reopening Release is designed to allow comment on the Staff Memorandum, interested parties may also submit comments on any aspect of the 2015 Proposal, including on the additional requests for comments raised in the Original Reopening Release.

The new comment period closes thirty days after publication of the New Reopening Release in the Federal Register.


The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) added Section 10D to the Securities Exchange Act of 1934, requiring the SEC to direct national securities exchanges and associations to establish listing standards that prohibit the listing of any security of a company that does not adopt and implement a written policy requiring the recovery, or “clawback,” of certain incentive-based executive compensation payments. For additional information on the SEC’s 2015 Proposal, see our Legal Update, “US SEC Proposes Compensation Clawback Listing Standards Requirement,” dated July 16, 2015. For additional information on the SEC’s 2015 Proposal, see our Legal Update, “SEC Reopens Comment Period for Clawback Listing Standards,” dated October 18, 2021.

Practical Considerations

The New Reopening Release provides interested parties with another chance to provide input on, and perhaps influence, the SEC’s clawback listing standard rules before they are finalized. The Staff Memorandum provides data and analyses that the SEC will likely rely on as it develops its final clawback listing standard. Specifically, the Staff Memorandum is expected to inform the economic analysis that would serve as the justification for any final rule. Having this opportunity to review, consider, and respond to this presentation at this time can be very helpful to interested parties that may be impacted by the clawback listing standard rules.

Because the new comment period will close thirty days after publication in the Federal Register, interested persons should start reviewing the Staff Memorandum and thinking about possible comments right away. Previously submitted comments do not have to be re-submitted.

Because many investors and proxy advisory firms view clawback policies as an important corporate governance practice, many listed companies have already adopted corporate clawback policies, and others may adopt them before the listing standards envisioned by Dodd-Frank are effective. However, since this is an evolving regulatory area, listed companies need to monitor all clawback developments closely to determine whether amendments to their policies become necessary or advisable as this rulemaking proceeds.

PCAOB Adopts Revised Auditing Standards for Use of Other Auditors

By Thomas W. White, Retired Partner, WilmerHale

On June 21, 2022, the Public Company Accounting Oversight Board adopted revised auditing standards to govern the use by the principal auditor in an audit (“lead auditor”) of the work of auditors of accounting firms and individual accountants from outside the lead audit firm (“other auditors”). As explained by the Board, “[t]he roles of other auditors have increased as companies’ global operations have grown” and “[i]t is important for investor protection that the lead auditor adequately plan and supervise the work of other auditors so that the audit is performed in accordance with PCAOB standards and provides sufficient appropriate evidence to support the lead auditor’s opinion in the audit report.”

In general, the revised standards seek to beef up the lead auditor’s responsibilities when it uses the work of other auditors. The revised standards are intended to improve existing standards by

  • Applying a risk-based supervisory approach to the lead auditor’s oversight of other auditors for whose work the lead auditor assumes responsibility; and
  • Specifying procedures that the lead auditor should perform when planning and supervising an audit that involves other auditors.

The Board also adopted a new standard covering the lead auditor’s responsibilities in the relatively infrequent situation where the lead auditor divides responsibility for a portion of the audit with another audit firm that is separately referred to in the audit report.

Adoption of the revised standards, which were first proposed in 2016, represents the reconstituted Board’s first action to implement its standard-setting agendas. (See this item on the standard-setting agendas.) The revised standards will apply to all audits conducted under PCAOB standards, including audits of emerging growth companies. The standards will be subject to the approval of the Securities and Exchange Commission. If approved, they will take effect for audits for fiscal years ending on or after December 15, 2024.

Second Circuit Court Issues Ruling in Noto v. 22nd Century Group, Inc. re: Duty to Disclose an SEC Investigation

By Alan J. Wilson, WilmerHale, and Sydney Jordan, Stanford Law Student (’24)

This May, the Second Circuit issued a ruling in Noto v. 22nd Century Group, 35 F.4th 95 (2d Cir. 2022) that could intensify the pressure to err on earlier reporting of government investigations in SEC reports. Reversing a summary judgment dismissal in the Western District of New York, the Second Circuit concluded that plaintiffs had succeeded in stating a claim that failure to disclose an SEC investigation violated Rule 10b-5.

Amid an ongoing SEC investigation related to 22nd Century Group’s accounting practices, 22nd Century Group filed a series of periodic reports from 2016–2018 that discussed its weaknesses in accounting controls but without mentioning the SEC investigation. The omission was brought to light by an online commentator who had submitted a FOIA request to the SEC about other potential investment violations. The Second Circuit determined that “in light of the specific statements…made about the Company’s accounting weaknesses,” the omission of information about the SEC investigation into those very same accounting weaknesses would be inaccurate and incomplete. Moreover, the court reasoned that this information was material given “the fact of the SEC investigation would directly bear on the reasonable investor’s assessment of the severity of the reported accounting weaknesses” and thus could lead an investor to be more optimistic about the company than was warranted. The court separately noted the company made material misrepresentations when it denied knowledge of the investigations outright in subsequent public statements; it is possible that these explicit false denials influenced the ruling.

For perspective, the Second Circuit’s determination in Noto was based on a different principle than in Richman v. Goldman Sachs Group, Inc., 868 F. Supp. 2d 261 (S.D.N.Y. 2012), in which the Southern District of New York ruled that an investigation on its own is not a “pending legal proceeding” required to be disclosed under Regulation S-K Item 103 until it reaches a stage when the government agency makes known that it is contemplating filing suit or bringing charges.

SEC Acting Chief Accountant Cautions Against “Checklist Compliance” Approach to Auditor Independence

By Alan J. Wilson, WilmerHale

SEC Acting Chief Accountant Paul Munter re-emphasized the SEC’s focus on auditor independence in his June 8 statement on “The Critical Importance of the General Standard of Auditor Independence and an Ethical Culture for the Accounting Profession.” This latest statement follows a pair of statements issued in October 2021 and December 2021, both of which similarly highlighted auditor independence. This time, however, the statement goes further in describing both the application of the general independence standard and common recurring issues from auditor independence consultations with the Office of the Chief Accountant (“OCA”).

Similar to prior statements, the June 8 comments stress that high-quality audits are critical to investors and that independent audits are a key element of investor protection and a foundation of investor confidence in company financial statements. Mr. Munter’s latest statement, however, more directly focuses on the “general standard” of auditor independence set out in Regulation S-X 2-01(b) and states “compliance with the prohibitions enumerated in Rule 2-01(c) is necessary but not sufficient.”

Mr. Munter made clear “the general standard of Rule 2-01(b) is the heart of the Commission’s auditor independence rule, it always applies, and the Commission investigates and enforces against violations of the general standard.” To that end, he reminds audit committees, registrants, and audit firms that auditor independence determinations require more than a “checklist compliance” exercise, including (i) a holistic evaluation of auditor independence, including an assessment of independence both in fact and appearance from the perspective of a reasonable investor and (ii) an understanding of the applicability of the general standard to all relevant reporting periods. He cautions that “accountants, audit firms, registrants, and their audit committees should never make the mistake of assuming that just because a particular circumstance is not expressly prohibited in, or captured by, Rule 2-01(c), their independence analysis is over.” Of course, this raises the question as to the subjectivity that may be associated with independence determinations going forward and the degree of reliance that may be placed on the S-X 2-01(c) prohibitions framework in reaching conclusions regarding situations that are not squarely prohibited by the rules.

Perhaps prompting the issuance of this latest statement, Mr. Munter notes that the OCA has recently observed “loosening attitudes toward the Commission’s general standard of auditor independence in a few notable areas,” as described in the statement.

Turning to OCA’s approach to auditor independence consultations, Mr. Munter emphasizes that the effectiveness of the consultation process requires that any party seeking guidance must communicate all relevant facts and circumstances surrounding their question. He also explains that, while OCA may refer to prior consultations, it also always considers “(i) how recently such prior consultations occurred, (ii) risks presented to investors, and (iii) the impact of any rulemaking, judicial precedent, or legislation subsequent to any prior consultations.” Accordingly, OCA “strongly discourage[s] accountants from placing undue reliance on any historical OCA staff positions,” even in instances that may appear similar.

Mr. Munter’s statement primarily concludes with remarks directed to accounting firms, imploring that they “lead by example” and “prioritize auditor independence and a culture of ethical behavior in all professional activities.” These remarks highlight the essential gatekeeping role served by public accounting firms. Of course, as alluded to elsewhere in the statement and discussed in prior statements, compliance with auditor independence rules is a shared responsibility among companies, their audit committees, and their auditors. To that end, audit committees of companies across all spectrums, from pre-IPO companies to established public companies, would be well advised to keep these latest remarks in mind when engaging with auditors on matters of auditor independence.

SEC Adopts Rules to Require Electronic Filing for Investment Advisers and Institutional Investment Managers

By Rani Doyle

On June 23, 2022, the SEC unanimously approved final rules requiring the electronic filing of certain documents that previously were submitted on paper by investment advisers, institutional investment managers, and others. The rule also updates the substance of quarterly reports on Form 13F.

The new electronic filing requirements will affect three types of filings that previously were submitted on paper: confidential treatment requests for Form 13F; applications under the Investment Advisers Act of 1940 (Advisers Act); and Form ADV-NR. The first two of these will now be submitted to the SEC’s Electronic Data, Gathering, Analysis, and Retrieval (EDGAR) system. Form ADV-NR will now be submitted to the Investment Adviser Registration Depository (IARD) system.

This rule also will enhance the information reported on Form 13F. These changes include requiring filers to provide additional identifying information, allowing filers to provide an additional security identifier for securities reported on the form, and making other technical amendments to improve the quality of data reported on the form.

SEC Seeking Public Comments Regarding “Information Providers” Acting as “Investment Advisers”

By Rani Doyle

The SEC announced that it is requesting information and public comment on matters related to the activities of certain “information providers,” including whether, under particular facts and circumstances, information providers are acting as “investment advisers” under the Investment Advisers Act of 1940. The Request specifically focuses on index providers, model portfolio providers, and pricing services.

“In recent decades, the use of information providers has grown, changing the asset management industry,” said SEC Chair Gary Gensler. “The role of these information providers today raises important questions under the securities laws as to when they are providing investment advice rather than merely information. In order to help the Commission determine when—and under what facts and circumstances—these providers are giving investment advice, the Commission seeks information and public comment to help guide our approach.”

Investment adviser status has regulatory implications, including questions related to registration under the Advisers Act and questions under the Investment Company Act of 1940. The Request will facilitate consideration of whether regulatory action is necessary and appropriate to further the Commission’s mission.

The Request will be published on and in the Federal Register. The public comment period will remain open for sixty days following publication of the Request on the SEC’s website or thirty days following publication of the Request in the Federal Register, whichever period is longer.