In case you missed the in-depth coverage in the June issues of Securities Regulation Daily, we have provided a recap of the most notable stories.
June was a busy month for the SEC, as Chairman Gensler continued to roll out his plans for the agency under his leadership. His intention to clean house at the PCAOB came into sharp focus as he removed then-Chair William Duhnke III from his position and replaced him with Acting Chair Duane Desparte. In making the change, Gensler also indicated his intention to seek candidates to replace all five PCAOB Members.
Gensler did not stop there, as he also directed the Division of Corporation Finance to consider revisiting its 2019 interpretive guidance and 2020 rule amendments on proxy advisory firms. The rule amendments have been criticized by proxy advisory firms and shareholder advocates, but largely welcomed by public companies. Then, in separate speeches given in June, Gensler said that he is looking to Commission staff to make recommendations on equity market structure that could lead to rules changes on a range of issues, and to prepare recommendations on shoring up Rule 10b5-1 for trading plans by insiders. In Gensler’s view, Rule 10b5-1 has led to problems in the insider trading regime.
In the area of enforcement, it was FINRA and not the SEC that grabbed the headlines in June. On the last day of the month, it levied $70 million in sanctions on Robinhood Financial, the largest financial penalty ever imposed by FINRA. The penalties stemmed from FINRA’s determination that Robinhood violated FINRA Rules 2010, 2210, and 2220 by negligently communicating a wide array of false and misleading information to its customers during certain periods since September 2016.
June saw the Supreme Court issue its opinion in Goldman Sachs v. Arkansas Teacher Retirement System, in which it held that the generic nature of an alleged misrepresentation is important evidence of price impact. At issue was whether the Second Circuit properly considered the nature of Goldman Sachs's statements, and the Supreme Court vacated the judgment and remanded it for the Second Circuit to consider all record evidence relevant to price impact.
Lawmakers in the House also had a productive month, moving forward some securities-related proposals. Among them was an expanded environmental. social, and governance (ESG) disclosure bill that would require new disclosures regarding ESG metrics, climate change, political spending, executive pay, tax havens, workforce data, workplace harassment, cybersecurity, diversity and inclusion, and the conduct of businesses operating in China regarding alleged abuses by the Chinese government of the Uyghur minority. Also advancing was the CFTC whistleblower bill, which would give the agency the right to devote up to $10 million to fund the operation of parts of its whistleblower program related to customer education and non-awards expenses. Lawmakers hope the legislation will shore up the program in the event that awards paid to eligible whistleblowers deplete funds for related educational and administrative expenses.
1. ENFORCEMENT
Robinhood hit with $70M in sanctions in largest-ever FINRA penalty
FINRA has fined Robinhood Financial LLC $57 million and ordered the broker-dealer to pay almost $13 million in restitution for distributing false and misleading information to customers and failing to supervise critical technology, among other FINRA rule violations. In levying the largest financial penalty ever imposed by the SRO, FINRA stated that the sanctions reflect the scope and seriousness of Robinhood’s violations, which affected millions of customers. In executing a Letter of Acceptance, Waiver, and Consent, Robinhood neither admitted nor denied the charges but consented to the entry of FINRA’s findings. See our full coverage.
2. ACCOUNTING AND AUDITING
SEC to replace all five members of PCAOB
Following a call from Sens. Elizabeth Warren (D-Mass) and Bernie Sanders (I-Vt) to replace the five-member Public Company Accounting Oversight Board, SEC Chair Gary Gensler has begun this process by removing William Duhnke from the Board and designating current Board member Duane DesParte as Acting Chairperson. The SEC also announced that it intends to seek candidates to fill all five board positions. While Gensler said this will begin to set the PCAOB "on a path to better protect investors," Commissioners Hester Peirce and Elad Roisman called the decision "hasty and truncated." See our full coverage.
3. PROXIES
SEC to reexamine Clayton-era rules on proxy advisory firms
The SEC’s Division of Corporation Finance issued a statement advising that the staff, at the direction of Chair Gary Gensler, is considering revisiting its 2019 interpretive guidance and 2020 rule amendments on proxy advisory firms. The rule amendments, which codified the Commission’s view that proxy voting advice generally constitutes a "solicitation" and adopted new conditions to exemptions from the proxy rules’ information and filing requirements on proxy voting advice, have been criticized by proxy advisory firms and shareholder advocates but welcomed by issuers and the more market-friendly commissioners on the SEC. See our full coverage.
4. EXCHANGES AND MARKET REGULATION
Gensler presents case for review of equity markets regulations
In his second substantive remarks in four days, SEC Chair Gary Gensler turned to a topic with which he has lots of experience—market structure. As Chair of the CFTC, Gensler stood up for the agency’s derivatives and swaps reforms under the Dodd-Frank Act. Now, as SEC chair, Gensler said in a speech to the Global Exchange and FinTech Conference that he is looking to Commission staff to make recommendations on equity market structure that could lead to rules changes on a range of issues, including the competitiveness of equity markets, payment for order flow (PFOF), and the formulation of the national best bid and offer (NBBO). See our full coverage.
5. SEC NEWS AND SPEECHES
Gensler eyes new limits on Rule 10b5-1 trading plans
At the CFO Network Summit, SEC Chair Gary Gensler announced that the staff will be preparing recommendations on shoring up Rule 10b5-1 for trading plans by insiders. Gensler specified four aspects of the rules for such trading plans that may undermine investor confidence or allow a "loophole" for bad actors. He also stressed that even under the current rules, amending or canceling a plan may call into question whether it was entered into in good faith and thus provides a safe harbor. Gensler said that Rule 10b5-1, which provides an affirmative defense for corporate insiders who trade stock under plans entered into in good faith and before learning of material information, have "led to real cracks in our insider trading regime." See our full coverage.
6. SEC NEWS AND SPEECHES
SEC, CFTC publish Spring 2021 rulemaking agendas
The SEC and CFTC have released their Spring 2021 agendas, providing insight into the agencies’ rulemaking priorities in the months to come. "To meet our mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, the SEC has a lot of regulatory work ahead of us," said SEC Chair Gary Gensler. "I look forward collaborating with my fellow commissioners and the dedicated staff to propose and finalize rules that will strengthen our markets, increase transparency, and safeguard investors." See our full coverage.
7. SUPREME COURT DOCKET
Issue of generic nature of statements at class certification sent back to Second Circuit
The Supreme Court has issued an opinion in the Goldman Sachs case confirming that the generic nature of an alleged misrepresentation is important evidence of price impact. At issue was the rebuttal of the Basic presumption in class actions premised on the inflation-maintenance theory. Since the parties no longer disputed whether the generic nature of the alleged misrepresentations was relevant to price impact, the only disagreement was whether the Second Circuit properly considered the nature of Goldman Sachs's statements. It was unclear to the court whether the Second Circuit did so; as a result, the court vacated the judgment and remanded it for the Second Circuit to consider all record evidence relevant to price impact. Justice Barrett delivered the opinion, in which Justices Roberts, Breyer, Kagan and Kavanaugh joined in full. See our full coverage.
8.EXCHANGES AND MARKET REGULATION
Exchanges incur another setback in crusade against SEC’s market data plan
A panel of the Court of Appeals for the District of Columbia rejected arguments made by several national securities exchanges that the SEC’s equity data plans for the exchanges were actually "rules" and not "orders" as designated by the Commission. The exchanges had filed a challenge to the plans 65 days after the Commission’s action, falling outside of the Exchange Act’s deadline of 60 days for challenging Commission orders. The panel was unconvinced by the assertions made by the exchanges that the "order" was instead a "rule," which would be subject to different deadlines for filing challenges. In addition to giving weight to the SEC’s own designation that its actions did constitute an order, the panel disagreed with the exchanges’ protestations that the court should consider the substance of the Commission’s actions. See our full coverage.
9. PUBLIC COMPANY REPORTING AND DISCLOSURE
House passes expanded ESG bill with no room to spare
The narrow margin of victory in the House for Democrats pushing the most extensive ESG disclosure package yet proposed may signal big trouble in the Senate where the bill is almost surely to die, but individual pieces of the legislative package could remain viable, especially a component that would address diversity in the boardroom and the C-suite, which previously garnered bipartisan support in Congress and in the private sector. The final legislative package would require new public company disclosures regarding ESG metrics, climate change, political spending, executive pay, tax havens, workforce data, workplace harassment, cybersecurity, diversity and inclusion, and the conduct of businesses operating in China regarding alleged abuses by the Chinese government of the Uyghur minority. The final, amended legislative package contained in the retitled Corporate Governance Improvement and Investor Protection Act (H.R. 1187) passed by a vote of 215-214. See our full coverage.
10. WHISTLEBLOWER NEWS
House passes CFTC whistleblower bill, next stop the president’s desk
The House passed a bill that would allow the CFTC to devote up to $10 million to fund the operation of parts of its whistleblower program related to customer education and non-awards expenses. Lawmakers said the legislation was needed to shore up the CFTC’s whistleblower program in the event that awards paid to eligible whistleblowers deplete funds for related educational and administrative expenses. The bill (S. 409), sponsored by Sen. Chuck Grassley (R-Iowa), previously passed the Senate by unanimous consent in late May. The House passed the bill as part of a package of bills considered en bloc by a vote of 325-103 (due to the en bloc nature of the vote, the final vote tally may or may not represent the full support in the House for S. 409). The bill next heads to the president’s desk for his signature. See our full coverage.
June was a busy month for the SEC, as Chairman Gensler continued to roll out his plans for the agency under his leadership. His intention to clean house at the PCAOB came into sharp focus as he removed then-Chair William Duhnke III from his position and replaced him with Acting Chair Duane Desparte. In making the change, Gensler also indicated his intention to seek candidates to replace all five PCAOB Members.
Gensler did not stop there, as he also directed the Division of Corporation Finance to consider revisiting its 2019 interpretive guidance and 2020 rule amendments on proxy advisory firms. The rule amendments have been criticized by proxy advisory firms and shareholder advocates, but largely welcomed by public companies. Then, in separate speeches given in June, Gensler said that he is looking to Commission staff to make recommendations on equity market structure that could lead to rules changes on a range of issues, and to prepare recommendations on shoring up Rule 10b5-1 for trading plans by insiders. In Gensler’s view, Rule 10b5-1 has led to problems in the insider trading regime.
In the area of enforcement, it was FINRA and not the SEC that grabbed the headlines in June. On the last day of the month, it levied $70 million in sanctions on Robinhood Financial, the largest financial penalty ever imposed by FINRA. The penalties stemmed from FINRA’s determination that Robinhood violated FINRA Rules 2010, 2210, and 2220 by negligently communicating a wide array of false and misleading information to its customers during certain periods since September 2016.
June saw the Supreme Court issue its opinion in Goldman Sachs v. Arkansas Teacher Retirement System, in which it held that the generic nature of an alleged misrepresentation is important evidence of price impact. At issue was whether the Second Circuit properly considered the nature of Goldman Sachs's statements, and the Supreme Court vacated the judgment and remanded it for the Second Circuit to consider all record evidence relevant to price impact.
Lawmakers in the House also had a productive month, moving forward some securities-related proposals. Among them was an expanded environmental. social, and governance (ESG) disclosure bill that would require new disclosures regarding ESG metrics, climate change, political spending, executive pay, tax havens, workforce data, workplace harassment, cybersecurity, diversity and inclusion, and the conduct of businesses operating in China regarding alleged abuses by the Chinese government of the Uyghur minority. Also advancing was the CFTC whistleblower bill, which would give the agency the right to devote up to $10 million to fund the operation of parts of its whistleblower program related to customer education and non-awards expenses. Lawmakers hope the legislation will shore up the program in the event that awards paid to eligible whistleblowers deplete funds for related educational and administrative expenses.
1. ENFORCEMENT
Robinhood hit with $70M in sanctions in largest-ever FINRA penalty
FINRA has fined Robinhood Financial LLC $57 million and ordered the broker-dealer to pay almost $13 million in restitution for distributing false and misleading information to customers and failing to supervise critical technology, among other FINRA rule violations. In levying the largest financial penalty ever imposed by the SRO, FINRA stated that the sanctions reflect the scope and seriousness of Robinhood’s violations, which affected millions of customers. In executing a Letter of Acceptance, Waiver, and Consent, Robinhood neither admitted nor denied the charges but consented to the entry of FINRA’s findings. See our full coverage.
2. ACCOUNTING AND AUDITING
SEC to replace all five members of PCAOB
Following a call from Sens. Elizabeth Warren (D-Mass) and Bernie Sanders (I-Vt) to replace the five-member Public Company Accounting Oversight Board, SEC Chair Gary Gensler has begun this process by removing William Duhnke from the Board and designating current Board member Duane DesParte as Acting Chairperson. The SEC also announced that it intends to seek candidates to fill all five board positions. While Gensler said this will begin to set the PCAOB "on a path to better protect investors," Commissioners Hester Peirce and Elad Roisman called the decision "hasty and truncated." See our full coverage.
3. PROXIES
SEC to reexamine Clayton-era rules on proxy advisory firms
The SEC’s Division of Corporation Finance issued a statement advising that the staff, at the direction of Chair Gary Gensler, is considering revisiting its 2019 interpretive guidance and 2020 rule amendments on proxy advisory firms. The rule amendments, which codified the Commission’s view that proxy voting advice generally constitutes a "solicitation" and adopted new conditions to exemptions from the proxy rules’ information and filing requirements on proxy voting advice, have been criticized by proxy advisory firms and shareholder advocates but welcomed by issuers and the more market-friendly commissioners on the SEC. See our full coverage.
4. EXCHANGES AND MARKET REGULATION
Gensler presents case for review of equity markets regulations
In his second substantive remarks in four days, SEC Chair Gary Gensler turned to a topic with which he has lots of experience—market structure. As Chair of the CFTC, Gensler stood up for the agency’s derivatives and swaps reforms under the Dodd-Frank Act. Now, as SEC chair, Gensler said in a speech to the Global Exchange and FinTech Conference that he is looking to Commission staff to make recommendations on equity market structure that could lead to rules changes on a range of issues, including the competitiveness of equity markets, payment for order flow (PFOF), and the formulation of the national best bid and offer (NBBO). See our full coverage.
5. SEC NEWS AND SPEECHES
Gensler eyes new limits on Rule 10b5-1 trading plans
At the CFO Network Summit, SEC Chair Gary Gensler announced that the staff will be preparing recommendations on shoring up Rule 10b5-1 for trading plans by insiders. Gensler specified four aspects of the rules for such trading plans that may undermine investor confidence or allow a "loophole" for bad actors. He also stressed that even under the current rules, amending or canceling a plan may call into question whether it was entered into in good faith and thus provides a safe harbor. Gensler said that Rule 10b5-1, which provides an affirmative defense for corporate insiders who trade stock under plans entered into in good faith and before learning of material information, have "led to real cracks in our insider trading regime." See our full coverage.
6. SEC NEWS AND SPEECHES
SEC, CFTC publish Spring 2021 rulemaking agendas
The SEC and CFTC have released their Spring 2021 agendas, providing insight into the agencies’ rulemaking priorities in the months to come. "To meet our mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, the SEC has a lot of regulatory work ahead of us," said SEC Chair Gary Gensler. "I look forward collaborating with my fellow commissioners and the dedicated staff to propose and finalize rules that will strengthen our markets, increase transparency, and safeguard investors." See our full coverage.
7. SUPREME COURT DOCKET
Issue of generic nature of statements at class certification sent back to Second Circuit
The Supreme Court has issued an opinion in the Goldman Sachs case confirming that the generic nature of an alleged misrepresentation is important evidence of price impact. At issue was the rebuttal of the Basic presumption in class actions premised on the inflation-maintenance theory. Since the parties no longer disputed whether the generic nature of the alleged misrepresentations was relevant to price impact, the only disagreement was whether the Second Circuit properly considered the nature of Goldman Sachs's statements. It was unclear to the court whether the Second Circuit did so; as a result, the court vacated the judgment and remanded it for the Second Circuit to consider all record evidence relevant to price impact. Justice Barrett delivered the opinion, in which Justices Roberts, Breyer, Kagan and Kavanaugh joined in full. See our full coverage.
8.EXCHANGES AND MARKET REGULATION
Exchanges incur another setback in crusade against SEC’s market data plan
A panel of the Court of Appeals for the District of Columbia rejected arguments made by several national securities exchanges that the SEC’s equity data plans for the exchanges were actually "rules" and not "orders" as designated by the Commission. The exchanges had filed a challenge to the plans 65 days after the Commission’s action, falling outside of the Exchange Act’s deadline of 60 days for challenging Commission orders. The panel was unconvinced by the assertions made by the exchanges that the "order" was instead a "rule," which would be subject to different deadlines for filing challenges. In addition to giving weight to the SEC’s own designation that its actions did constitute an order, the panel disagreed with the exchanges’ protestations that the court should consider the substance of the Commission’s actions. See our full coverage.
9. PUBLIC COMPANY REPORTING AND DISCLOSURE
House passes expanded ESG bill with no room to spare
The narrow margin of victory in the House for Democrats pushing the most extensive ESG disclosure package yet proposed may signal big trouble in the Senate where the bill is almost surely to die, but individual pieces of the legislative package could remain viable, especially a component that would address diversity in the boardroom and the C-suite, which previously garnered bipartisan support in Congress and in the private sector. The final legislative package would require new public company disclosures regarding ESG metrics, climate change, political spending, executive pay, tax havens, workforce data, workplace harassment, cybersecurity, diversity and inclusion, and the conduct of businesses operating in China regarding alleged abuses by the Chinese government of the Uyghur minority. The final, amended legislative package contained in the retitled Corporate Governance Improvement and Investor Protection Act (H.R. 1187) passed by a vote of 215-214. See our full coverage.
10. WHISTLEBLOWER NEWS
House passes CFTC whistleblower bill, next stop the president’s desk
The House passed a bill that would allow the CFTC to devote up to $10 million to fund the operation of parts of its whistleblower program related to customer education and non-awards expenses. Lawmakers said the legislation was needed to shore up the CFTC’s whistleblower program in the event that awards paid to eligible whistleblowers deplete funds for related educational and administrative expenses. The bill (S. 409), sponsored by Sen. Chuck Grassley (R-Iowa), previously passed the Senate by unanimous consent in late May. The House passed the bill as part of a package of bills considered en bloc by a vote of 325-103 (due to the en bloc nature of the vote, the final vote tally may or may not represent the full support in the House for S. 409). The bill next heads to the president’s desk for his signature. See our full coverage.