Debevoise Digest: Securities Law Synopsis – August 2023

August 2023

SEC Declined to Opine on Kirschner v. JP Morgan Chase

On July 18, 2023, after several extensions, the SEC declined to file an amicus brief in the case of Kirschner v. JPMorgan Chase Bank, N.A., currently pending before the U.S. Court of Appeals for the Second Circuit. The plaintiff in the case, trustee of the Millenium Lender Claim Trust (the “Trust”), has brought claims on behalf of the Trust’s beneficiaries alleging the banks violated state securities laws by making misrepresentations and omissions of material facts in the offering materials provided in connection with the syndication of $1.775 billion of syndicated loans that closed on April 16, 2014. The defendants have argued that syndicated bank loans are not securities and that the plaintiff’s security law claims should be dismissed. The court solicited the SEC’s guidance on whether syndicated term loan notes are securities under the factors established in Reeves v. Ernst & Young, 494 U.S. 56 (1990). In declining to opine, the SEC noted that, “[d]espite diligent efforts to respond . . . the staff is unfortunately not in a position to file a brief . . . in this matter.” As of this date, a decision is still pending in this case, leaving the $2.5 trillion syndicated loan market in suspense.

For more information, see Debevoise Insights.

Final Cybersecurity Disclosure Rules for Issuers

On July 26, 2023, the SEC adopted the long-anticipated final rules on cybersecurity risk management, strategy, governance and incident disclosure for issuers. The rules establish three new types of disclosure requirements:

(1) current disclosure of material cybersecurity incidents (with certain carve-outs for national security and public safety) in new Item 1.05 of Form 8-K, which must be filed within four business days of the relevant registrant determining that it experienced a material cybersecurity event, and Form 6-K for foreign private issuers (“FPIs”);

(2) periodic disclosure of cybersecurity risk management processes, including whether and how the registrant assesses, identifies and manages material risks, in Forms 10-K and 10-Q or Form 20 F for FPIs; and

(3) periodic disclosure of cybersecurity management and governance, including the board’s oversight of and management’s role in assessing and managing cybersecurity risks, in Forms 10-K and 10-Q or Form 20-F for FPIs.

For registrants other than small reporting companies, the new 8-K and 6-K disclosure requirements go into effect December 18, 2023 (and June 15, 2024 for smaller reporting companies). For all registrants, the periodic disclosure requirements go into effect beginning with annual reports for fiscal years ending on or after December 15, 2023.

For more information, see Debevoise Insights here and here.

First Proxy Season under Universal Proxy Regime Complete

This past year marked the first full proxy season under the universal proxy card regime, established in Rule 14a-19, and the experience of our public company clients provides some early indications of how proxy contests will continue to evolve. Perhaps in anticipation of increased stockholder activism under the universal proxy card regime, some companies adopted extensive revisions to their bylaws requiring advance notice of stockholder nominations and proposals (e.g., requiring nominating stockholders to disclose arrangements with third parties that support their nominations). In some instances, such amendments have resulted in legal backlash from stockholders and proxy advisory firms; however, predictions that levels of shareholder activism would increase and that the cost of activism campaigns would decrease under the universal proxy card regime do not appear to have come to pass in the past year. Moreover, the universal proxy card does seem to have changed voting behavior—stockholders may now focus more on the features of individual director nominees (because stockholders can vote on individual nominees rather than choosing a full slate). Whether the universal proxy cards might ultimately lead to more activists’ nominees being elected (because stockholders can vote for a partial slate of activist nominees) is still to be determined, with the sample size from this past year being too small to be conclusive.

For more information, see Debevoise Insights.

Fourth Largest Whistleblower Award in History

On August 4, 2023, the SEC announced awards of more than $104 million to seven individuals. The combined award is the fourth largest announced since the SEC Whistleblower Program was established in 2011. The program has awarded more than $1 billion since its inception, with the largest-ever award ($279 million to a single whistleblower) just announced in May 2023. Whistleblower awards may range between 10% and 30% of the money collected when an enforcement action results in sanctions over $1 million. Notably, the SEC’s whistleblower awards are not restricted to recipients and reports on conduct in the United States; several of the award recipients in this latest enforcement action are foreign nationals who provided information related to misconduct outside of the United States.

SDNY Decisions on Cryptocurrency as Securities

In the past month, the U.S. District Court for the Southern District of New York has twice addressed the issue of whether cryptocurrency tokens are a security, reaching two different conclusions. On July 13, 2023, in the case of SEC v. Ripple Labs, Inc., Judge Analisa Torres held that the XRP tokens sold by Ripple Labs, Inc. are not inherently securities but qualified as securities when sold to institutional investors, which qualified as a sale of an investment contract (a security under foundational case SEC v. W.J. Howey Co., 328 U.S. 293 (1946); however, the opinion also held that when sold to retail investors, Ripple’s XRP tokens were not securities. On July 31, 2023, in the case of SEC v. Terraform Labs Pte. Ltd., Judge Jed Rakoff held that the cryptocurrency tokens sold by Terraform Labs Pte. Ltd. are inherently securities under Howey, explicitly declining to follow the approach in Ripple.

The UK Government Has Published a Near-Final Draft Update of the Prospectus Regime

On July 11, 2023, the UK Government published a near-final draft statutory instrument to update and in some parts replace the on-shored EU prospectus regime. “The Public Offers and Admissions to Trading Regulations 2023” would increase flexibility, facilitate wider participation in ownership of securities and delegate a greater degree of responsibility to the FCA.

Key proposed changes include that:

  • the proposed regulation provides for a general prohibition on the public offer of securities unless the offer falls within certain exceptions;
  • the FCA would be responsible for deciding when a prospectus is required for the admission of securities to UK-regulated markets (such as the Main Market of the London Stock Exchange), the minimum requirements regarding the contents of a prospectus and the manner and timing of approval and publication of a prospectus;
  • the FCA would be empowered to decide if certain multilateral trading facilities (such as the UK’s AIM) will be required to make issuers produce an “MTF admission prospectus” as a condition of listing;
  • forward-looking statements would be subject to a higher liability threshold: claimants would have to show that such statements were made either fraudulently or recklessly (previously, the threshold was negligently); and
  • certain offers to the public exceeding £5 million would no longer require a prospectus, but would need to be made through a public offer platform.

The proposed regulation retains many aspects of the existing regime, including the premise and contents of a prospectus. The standard of the prospectus remains subject to the “necessary information” test and many exemptions to the requirement to publish a prospectus are also retained.

Overall, the new proposed regulation represents the next step in the UK Government’s overhaul of the UK public offer regime, and it extends the move away from a rules-based prospectus regime to enabling the FCA to set policies that work for issuers.

The regulation is in near-final form, and the UK Government is accepting technical comments only. The deadline for comments is August 21, 2023.