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I’ve been thinking a lot about whistleblowers lately. I serve as a “management” representative to the Department of Labor Whistleblower Protection Advisory Committee and last week we presented the DOL with our recommendations for best practices for employers. We are charged with looking at almost two dozen whistleblower laws. I’ve previously blogged about whistleblower issues here.

Although we spend the bulk of our time on the WPAC discussing the very serious obstacles for those workers who want to report safety violations, at the last meeting we also discussed, among other things, the fact that I and others believed that there could be a rise in SOX claims from attorneys and auditors following the 2014 Lawson decision. In that case, the Supreme Court observed that: “Congress plainly recognized that outside professionals — accountants, law firms, contractors, agents, and the like — were complicit in, if not integral to, the shareholder fraud and subsequent cover-up [Enron] officers … perpetrated.” Thus, the Court ruled, those, including private contractors, who see the wrongdoing but may be too fearful of retaliation to report it should be entitled to SOX whistleblower protection.

We also discussed the SEC’s April KBR decision, which is causing hundreds…

The following guest blog post on my recent article,  Institutional Investing When Shareholders Are Not Supreme, is available at Columbia’s Blue Sky Blog discussing institutional investors’ attitudes towards alternative business forms and similar issues raised by Etsy’s IPO.

-Anne Tucker

Regular readers know that I have blogged repeatedly about my opposition to the US Dodd-Frank conflict minerals rule, which aims to stop the flow of funds to rebels in the Democratic Republic of Congo. Briefly, the US law does not prohibit the use of conflict minerals, but instead requires certain companies to obtain an independent private sector third-party audit of reports of the facilities used to process the conflict minerals; conduct a reasonable country of origin inquiry; and describe the steps the company used to mitigate the risk, in order to improve its due diligence process. The business world and SEC are awaiting a First Amendment ruling from the DC Circuit Court of Appeals on the “name and shame” portion of the law, which requires companies to indicate whether their products are DRC Conflict Free.” I have argued that it is a well-intentioned but likely ineffective corporate governance disclosure that depends on consumers to pressure corporations to change their behavior.

The proposed EU regulation establishes a voluntary process through which importers of certain minerals into the EU self-certify that they do not contribute to financing in “conflict-affected” or “high risk areas.” Unlike Dodd-Frank, it is not limited to Congo.

In an earlier BLPB post, I wrote about President Obama’s call for greater regulation of retirement investment brokers.  The proposed reforms focused on elevating the current standard that brokers’ investment advice must be “suitable” to something closer to an enforceable fiduciary duty to counter financial incentives for some brokers to channel investors into higher-fee investment options.  

Yesterday, the U.S. Department of Labor released new proposed rules (Proposed Rule), which would classify brokers as “fiduciaries” under ERISA but allow them to continue to receive brokerage commissions and fees (a practice that would otherwise violate ERISA conflict-of-interest rules) so long as the brokers and customers enter into a  “Best Interest Contract”.

The exemption proposed in this notice (“the Best Interest Contract Exemption”) was developed to promote the provision of investment advice that is in the best interest of retail investors such as plan participants and beneficiaries, IRA owners, and small plans.  Proposed Rule at 4.

In 1975, the DOL issued rules defining investment advice for purposes of triggering fiduciary status under ERISA and the attended duties and conflict-of-interest prohibitions.  That 1975 definition is still in use, is narrow, and excludes much of paid-for investment advice, particularly that…

It’s that time of year again where I have my business associations students pretend to be shareholders and draft proposals. I blogged about this topic last semester here. Most of this semester’s proposals related to environmental, social and governance factors. In the real world, a record 433 ESG proposals have been filed this year, and the breakdown as of mid-February was as follows according to As You Sow:

Environment/Climate Change- 27%

Political Activity- 26%

Human Rights/Labor-15%

Sustainability-12%

Diversity-9%

Animals-2%

Summaries of some of the student proposals are below (my apologies if my truncated descriptions make their proposals less clear): 

1) Netflix-follow the UN Guiding Principles on Business and Human Rights and the core standards of the International Labour Organization

2) Luxottica- separate Chair and CEO

3) DineEquity- issue quarterly reports on efforts to combat childhood obesity and the links to financial risks to the company

4) Starbucks- provide additional disclosure of risks related to declines in consumer spending and decreases in wages

5) Chipotle- issue executive compensation/pay disparity report

6) Citrix Systems-add board diversity

7) Dunkin Donuts- eliminate the use of Styrofoam cups

8) Campbell Soup- issue sustainability report

9) Shake Shack- issue sustainability report

10) Starbucks- separate…

For thirty years, I have had a pet peeve about the media’s routine reporting on mergers and acquisitions.  I have kept this to myself, for the most part, other than scattered comments to law practice colleagues and law students over the years.  Today, I go public with this veritable thorn in my side.

From many press reports (which commonly characterize business combinations as mergers), you would think that every business combination is structured as a merger.  I know I am being picky here (since there are both legal and non-legal common parlance definitions of the verb “merge”).  But a merger, to a business lawyer, is a particular form of business combination, to be distinguished from a stock purchase, asset purchase, consolidation, or statutory share exchange transaction.

The distinction is meaningful to business lawyers for whom the implications of deal type are well known.  However, imho, it also can be meaningful to others with an interest in the transaction, assuming the implications of the deal structure are understood by the journalist and conveyed accurately to readers.  For instance, the existence (or lack) of shareholder approval requirements and appraisal rights, the need for contractual consents, permit or license transfers or applications, or regulatory approvals, the tax treatment, etc. may differ based on the transaction structure.

In December, 2014 the Second Circuit in US v. Newman addressed liability of remote tippees.  In Newman, a lawyer told a friend who told a roommate information regarding the sale of SPSS Inc. to IBM that found its way into later trades by a cohort of analysts at hedge funds and investment firms. (Op. at 5-7).  The Second Circuit in  Newman  vacated insider trading convictions and narrowed the standard for “improper benefit”, reconsideration of which was denied last week, and thus stands pending review by the U.S. Supreme Court.  To qualify as an improper benefit under Newman, there must be proof of a meaningfully close relationship, where the “the personal benefit received in exchange for confidential information must be of some consequence.” (Op. at 22).  Newman also made clear that liability standards are the same whether the tippee’s liability arises under the classical or the misappropriate theories. (Op. at 11).

Judge Jed S. Rakoff, of Federal District Court in Manhattan, issued an order denying a motion to dismiss the SEC’s civil charges against Daryl Payton and Benjamin Durrant III, defendants in Newman who received their information from the roommate of the friend of the lawyer.

Yesterday was the third anniversary of the JOBS Act. President Obama signed it into law on April 5, 2012. The JOBS Act, as regular readers of this blog know, requires the SEC to adopt rules to enact an exemption for crowdfunded securities offerings. The statutory deadline for the SEC to do so was December 31, 2012. The SEC proposed the required rules on October 23, 2013, but it still has not adopted them.

It is now

  • 1096 days since Congress passed the JOBS Act
  • 826 days since the deadline for the SEC to adopt the required rules
  • 530 days since the SEC proposed the rules

. . . and still no crowdfunding exemption.

If I treated my tax returns like the SEC has treated the crowdfunding rules, I would be in jail.

SEC Chair Mary Jo White has recently said that the SEC hopes to finalize the rules by the end of the year. I certainly hope so.

Amanda Rose (Vanderbilt) was one of the many distinguished speakers at the law and business conference I attended last week. She spoke about her forthcoming article in the Northwestern University Law Review, which focuses on the SEC’s new whistleblower program in relation to Fraud- on-the-Market class action lawsuits. I have added her article to my reading list and the abstract is reproduced below for interested readers.

The SEC’s new whistleblower bounty program has provoked significant controversy. That controversy has centered on the failure of the implementing rules to make internal reporting through corporate compliance departments a prerequisite to recovery. This Article approaches the new program with a broader lens, examining its impact on the longstanding debate over fraud-on-the-market (FOTM) class actions. The Article demonstrates how the bounty program, if successful, will replicate the fraud deterrence benefits of FOTM class actions while simultaneously increasing the costs of such suits — rendering them a pointless yet expensive redundancy. If instead the SEC proves incapable of effectively administering the bounty program, the Article shows how amending it to include a qui tam provision for Rule 10b-5 violations would offer several advantages over retaining FOTM class actions. Either way, the bounty program has important

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On March 25, 2015, the SEC Commissioners unanimously adopted final rules amending Regulation A, effective in 60 days,  extending an existing exemptions for smaller issues as required under Title IV of the Jumpstart Our Business Startups (JOBS) Act.  SEC information on the new regulations are available here and commentary is available here.

The SEC Release states that:

The updated exemption will enable smaller companies to offer and sell up to $50 million of securities in a 12-month period, subject to eligibility, disclosure and reporting requirements. 

***

The final rules, often referred to as Regulation A+, provide for two tiers of offerings:  Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Both Tiers are subject to certain basic requirements while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements.

The final rules pre-empt states from reviewing and approving Tier 2…