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Business Law Today

November 2022

November 2022 in Brief: Securities Law

Alan J Wilson and Rani Doyle

November 2022 in Brief: Securities Law

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Securities Regulation

SEC Finalizes Whistleblower Rule Amendments

By Thomas W. White, Retired Partner, WilmerHale

The Securities and Exchange Commission has adopted two amendments to the rules governing its whistleblower award program that were proposed in February 2022. (As noted in a previous item, the amendments were proposed to modify provisions of the rules that were previously amended in 2020.) The latest amendments, which were adopted by a 3–2 vote in August, did the following:

  • Awards for Recoveries in “Related Actions”— Rule 21F-3(b)(3), as amended in 2020, restricted 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, the rule provided that a whistleblower could not recover under the SEC’s program where another agency maintains a whistleblower award program covering the action, unless the SEC finds “that its whistleblower program has the more direct or relevant connection to the action.” The SEC’s amendment will provide additional circumstances in which a non-SEC action may qualify as a related action without regard to whether the SEC’s program has a more direct or relevant connection to the action. These circumstances include:
    • when the non-SEC award program has an award range or fixed-dollar award cap that could yield an award that is meaningfully lower than what could be awarded under the SEC’s program;
    • when the decision to grant an award under the non-SEC program is discretionary, even when any specified award criteria and eligibility requirements have been satisfied, and
    • when the maximum award the SEC could pay on the action would not exceed $5 million.
  • Consideration of Dollar Amount of Awards—Rule 21F-6, as amended in 2020, provided 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 new amendment eliminates the SEC’s ability to consider the dollar amount of a potential award for the purpose of decreasing an award.

Commissioners Hester Peirce and Mark Uyeda voted against adoption of the rule amendments.

SEC Adopts Amendments to Form N-PX

By Nicholas Martini, J.D. Candidate, Class of 2023, George Mason University – Antonin Scalia Law School

On November 2, the Securities and Exchange Commission voted 3–2 to adopt amendments to Form N-PX that will require increased disclosures about the proxy votes of mutual funds, exchange-traded funds, and other registered funds. The amendments add to a string of initiatives undertaken by the SEC in recent months to increase shareholder participation and voting transparency, including proposed changes to the shareholder proposal rule and a reversal of the 2020 rules governing proxy voting advice.

The amendments will standardize Form N-PX to require more consistent reporting of proxy votes. This is accomplished by requiring that each matter be categorized by type in the Form N-PX using one of fourteen categories (e.g., “Director Elections,” “Shareholder Rights and Defenses,” and “Environment or Climate”) and that when a proxy card is used, the same language as the issuer’s proxy card be used in the Form N-PX when disclosing the matters on which the funds and managers voted, following the same order as the proxy card. In addition, fulfilling a mandate under the Dodd-Frank Act, the amendments require institutional investment managers to disclose in Form N-PX how they voted on “say-on-pay” matters, pursuant to new Rule 14Ad-1. To provide greater insight into how involved funds are in the governance activities of their investments and the impact of lending activities on voting practices, registered funds will be required to disclose the number of shares voted or instructed to be cast, and the number of shares loaned but not recalled and, as such, not voted by the fund.

The amendments will be effective for votes occurring on or after July 1, 2023, with the first filings subject to the amendments due in 2024. When effective, funds will be required to file their reports with these enhanced disclosures using an XML-structured data language.

SEC Announces FY22 Enforcement Results

By Alan J. Wilson, WilmerHale

On November 15, the Securities and Exchange Commission released the results of its enforcement activity during its 2022 fiscal year. Compared to 2021, the SEC Division of Enforcement saw a nine percent increase in total enforcement actions, covering a waterfront of issues from “first-of-their-kind” matters to more traditional securities law violations. The total amount of money ordered in these actions reached the highest on record in SEC history. Commenting on the results, Director of the Division of Enforcement Gurbir S. Grewal noted the aim to use “every tool in our toolkit” with an expectation not to break the records reached this year “because we expect behaviors to change. We expect compliance.”

Among the highlights in the announcement were discussions about pursuing issuers or their employees who make materially inaccurate disclosures, bringing enforcement actions against gatekeepers, focusing on the evolving crypto asset securities space, and applying traditional principles to address ESG concerns, among others.

PCAOB Proposes New Auditor Quality Control Standard

By Thomas W. White, Retired Partner, WilmerHale

As part of its goal to modernize its professional standards, on November 18 the Public Company Accounting Oversight Board proposed to prescribe a new quality control (QC) standard for accounting firms that audit US public companies. The new standard, designated QC 1000, would supersede the Board’s current QC standards. The current standards were promulgated years ago by the American Institute of Certified Public Accountants and adopted by the Board on an “interim” basis in 2003.

The Board believes that the proposed QC 1000 would “lead registered public accounting firms (‘firms’) to significantly improve their QC systems.” Under QC 1000, the objective of a QC system would be “to provide reasonable assurance as to compliance with the professional and legal requirements that apply to the firm’s engagements.” The proposed standard (and proposing release) is lengthy and detailed and also involves amendments to other PCAOB standards. QC 1000’s key aspects include:

  • The standard establishes a risk-based approach to the firm’s QC system, which includes establishing quality objectives, identifying and assessing quality risks to the achievement of the quality objectives, designing and implementing quality responses to address the quality risk, and monitoring the firm’s QC system.
  • The standard identifies eight components of a firm’s QC system, each of which sets forth extensive requirements. These consist of:
    • Two process components: Risk assessment and monitoring and remediation
    • Six components addressing firm organization and operations: governance and leadership, ethics and independence, acceptance and continuance of client relationships and specific engagements, engagement performance, resources, and information and communication
  • The standard requires a firm to conduct an annual evaluation of the effectiveness of its QC system based on the results of its monitoring and remediation activities. Firms would be required to report annually to the Board the outcome of the evaluation on a new Form QC. The Form QC reports would not be made public, but some high-level information about the evaluation would be provided to client audit committees.

The comment period on the QC proposal ends February 1, 2023.

PCAOB Approves Strategic Plan and Budget

By Thomas W. White, Retired Partner, WilmerHale

The Public Company Accounting Oversight Board finalized its Strategic Plan for the five years 2022–26 on November 18. Like the Board’s draft strategic plan released in August (see our note on the draft plan), the final Strategic Plan articulates four overarching goals:

  1. Modernize Standards,
  2. Enhance Inspections,
  3. Strengthen Enforcement, and
  4. Improve Organizational Effectiveness.

The Plan identifies specific objectives under each goal.

In announcing the approval of the Strategic Plan, the Board highlighted actions it has taken since January on the goals outlined in the Plan:

  • Standards: The Board is working actively to update more than thirty standards within ten standard-setting projects.
  • Enforcement: The Board has more than doubled the total dollar amount of penalties imposed on individuals in 2022 compared to each of the last five years. It has twice broken the record for largest money penalty imposed on an individual in a settled case. It has also increased penalties against firms. It has assessed penalties against individuals and firms 100% of the time in 2022, while in the past five years, it did so against individuals less than half the time and firms only about 86% of the time.
  • Organizational Effectiveness. The Board is “reimagining” its approach to stakeholder engagement and “giving investors a seat at the table.” It has established two new advisory groups and hired the Board’s first Investor Advocate.

Concurrently with approving the Strategic Plan, the Board approved its budget for fiscal year 2023.