Morris, Manning & Martin, LLP is excited to present the inaugural edition of our Securities & Corporate Governance Quarterly Newsletter. We have launched this newsletter to update public and private company clients on recent developments in federal securities laws and corporate governance matters. For further information, please contact any member of the Morris, Manning & Martin, LLP Securities & Corporate Governance practice group or any of the contributors to this newsletter.
This inaugural edition of the quarterly newsletter addresses the following topics:
- Upcoming Revised Schedule 13G Deadlines
- Implications of Pegasystems Inc. (Pega) Shareholder Lawsuit
- Status of Climate-Related Disclosure Rules
- Upcoming Compliance with Insider Trading Policy Rules
- Upcoming Corporate Transparency Act (CTA) Filing Deadline
- Vacating of Private Fund Rules by U.S. Court of Appeals for the Fifth Circuit
- Impact of Jarkesy U.S. Supreme Court Ruling
- Filing Fee Rate Increase
Upcoming Revised Schedule 13G Deadlines
On October 10, 2023, the Securities and Exchange Commission (SEC) adopted rule amendments governing beneficial ownership reporting of securities of public companies under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934, as amended (Exchange Act). Certain of these rule amendments have already taken effect; however, beginning on September 30, 2024, beneficial owners who are passive investors1 will be required to comply with the following revised Schedule 13G filing deadlines:
Beneficial owners should note that the filing cut-off time for Schedules 13D and 13G has been extended from 5:30 p.m. to 10:00 p.m. Eastern time to help ease the administrative burden imposed by the shortened filing deadlines.
Implications of Pega Shareholder Lawsuit
On May 9, 2022, a jury found that Pega, a developer of “low code” software solutions, had willfully and maliciously misappropriated the trade secrets of a primary competitor, Appian Corp. (Appian). The jury awarded Appian damages in excess of $2 billion, and over the next two days, Pega’s stock price decreased by approximately 28% from an opening price of $67.06 per share on May 9, 2022, to a closing price of $48.07 per share on May 11, 2022. Shortly thereafter, on May 19, 2022, certain Pega shareholders filed a class action complaint against Pega and certain of its executive officers, alleging that the defendants, despite knowingly having engaged in the conduct underlying the Appian litigation, had made materially false and/or misleading statements or omissions in violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.
Notably, between May 29, 2020, the date the Appian litigation commenced, and February 15, 2022, Pega filed five quarterly reports on Form 10-Q and one annual report on Form 10-K with the SEC, none of which expressly mentioned the Appian litigation. On February 16, 2022, Pega filed its annual report on Form 10-K for the fiscal year ended December 31, 2021. The report detailed the Appian litigation but stated that Appian’s claims were “without merit” and that the damages claimed by Appian were “not supported by the necessary legal standard.” Pega’s stock price decreased from a closing price of $97.52 per share on February 16, 20222, to an opening price of $85.87 per share on February 17, 2022, and ultimately closed at $82.28 per share on February 17, 2022. Pega’s motion to dismiss the shareholder lawsuit was denied because, according to the court, the defendants misled investors when they reassured them on February 16, 2022, that Appian’s claims were “without merit” and such misstatements were causally connected to the significant declines in the value of Pega’s stock on February 17, 2022, and May 10-11, 2022, the two days after the jury awarded Appian damages in excess of $2 billion. The shareholder lawsuit was settled in April 2024 for $35 million.
On July 30, 2024, the Court of Appeals of Virginia reversed the 2022 judgment against Pega in the Appian litigation and remanded for a new trial. Nevertheless, public companies should use caution when describing outstanding legal claims as “without merit” in Exchange Act filings.
Status of Climate-Related Disclosure Rules
On March 6, 2024, the SEC adopted long-awaited and potentially significant final rules requiring registrants to disclose certain climate-related information in their registration statements and annual reports. The final rules came under fire immediately after their adoption, with legal challenges brought by numerous parties and consolidated before the U.S. Court of Appeals for the Eighth Circuit. On April 4, 2024, the SEC agreed to pause the implementation of the rules while the legal challenges remained pending.
On August 6, 2024, the SEC filed its brief in support of the climate-related disclosure rules, arguing, among other things, that it has express statutory authority from Congress to adopt such rules, it acted reasonably in adopting such rules, and that such rules are consistent with the First Amendment. A series of amicus briefs were filed on August 15, 2024, by environmental groups, state attorneys general, former SEC officials, and legal scholars in support of the rules and the SEC’s authority to adopt them. The petitioners filed their reply to the SEC's brief on September 17, 2024. We will provide further updates on the status of this case when available.
For more on the SEC’s climate-related disclosure rules, see our legal updates published on March 14, 2024, and April 11, 2024, available here and here.
Upcoming Compliance with Insider Trading Policy Rules
On December 14, 2022, the SEC adopted amendments to Rule 10b5-1 under the Exchange Act, which include new disclosure requirements regarding registrants’ insider trading policies and procedures. New Regulation S-K Item 408(b) requires registrants to disclose whether they have adopted insider trading policies and procedures. If the registrant has not adopted such policies and procedures, it must explain why it has not done so. If the registrant has adopted such policies and procedures, it must file such policies and procedures as an exhibit to its annual report on Form 10-K or 20-F. These disclosure and filing obligations take effect with the registrant’s annual report covering the first full fiscal period that begins on or after April 1, 2023. For example, calendar-year registrants must include this disclosure and exhibit in their annual report for the fiscal year ending December 31, 2024, filed in 2025.
In preparation for the effectiveness of these new disclosure and filing obligations, registrants should consider adopting insider trading policies and procedures if they have not yet done so or refreshing current policies and procedures, as they will soon be required to file such policies and procedures publicly.
Upcoming Corporate Transparency Act Filing Deadline
On January 1, 2021, Congress enacted the CTA, and on January 1, 2024, all reporting requirements under the CTA became effective. Companies formed before January 1, 2024, and not exempt from the reporting requirements under the CTA have until January 1, 2025, to file their initial beneficial ownership reports with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). Each entity not exempt from the reporting requirements, referred to as a "reporting company" under the CTA, must disclose the following information in its beneficial ownership report: (i) its full legal name, (ii) any alternate or d/b/a names, (iii) its complete and current business address, (iv) its jurisdiction of formation, and (v) its employer identification number. Additionally, the following information must be disclosed for the reporting company’s beneficial owners (defined under the CTA as any individual who either exercises substantial control over a reporting company, such as senior officers of the company, or owns or controls at least 25% of the ownership interest in the reporting company): (i) full legal name, (ii) date of birth, (iii) current residential address, (iv) unique identifying number, such as a passport number or driver’s license number, and (v) an image of the identification document from which the unique identifying number in item (iv) was obtained.
Exchange Act reporting companies are exempt from beneficial ownership reporting under the CTA, as are any wholly-owned subsidiaries of Exchange Act reporting companies. However, we caution Exchange Act reporting real estate investment trusts (REITs) that their operating partnerships, if not wholly-owned, and any special purpose property-owning subsidiaries of such operating partnerships, cannot rely on such exemption from beneficial ownership reporting under the CTA, even if the REITs are the general partners and effectively control the operating partnerships and their subsidiaries. In such cases, the Exchange Act reporting REITs would be exempt from the beneficial ownership reporting requirements, but the operating partnerships and all of the operating partnerships' subsidiaries would be required to file beneficial ownership reports with FinCEN.
The latest information and updates on CTA compliance are available here.
Vacating of Private Fund Rules by U.S. Court of Appeals for the Fifth Circuit
On August 23, 2023, the SEC adopted new rules and amendments under the Investment Advisers Act of 1940 that would have imposed significant new requirements on advisers to private funds and, in some cases, by extension, to the private funds themselves. However, on June 5, 2024, the United States Court of Appeals for the Fifth Circuit determined that the SEC had exceeded its statutory authority in enacting such rules and, therefore, vacated all of the new rules and amendments enacted by the SEC in August 2023. The SEC did not request a hearing or petition the U.S. Supreme Court by the required deadline, and thus, the Fifth Circuit’s ruling will stand. Despite the Fifth Circuit vacating the rules, it is nevertheless likely that the rules will continue to have some influence through future SEC examination and enforcement activities and best practices for the adviser and private funds industries.
Impact of Jarkesy U.S. Supreme Court Ruling
In Securities and Exchange Commission v. Jarkesy, the U.S. Supreme Court held that when the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles that defendant to a jury trial, and the SEC cannot handle such matters exclusively through in-house administrative proceedings. The Seventh Amendment guarantees the right to a jury trial in suits at common law. According to the U.S. Supreme Court, such right is extended to claims that are "legal in nature." In its June 27, 2024, opinion, the Court concluded that a securities fraud action is legal in nature because the civil penalties sought by the SEC were designed to punish or deter the defendant, therefore implicating the Seventh Amendment. The Court further observed the "close relationship between federal securities fraud and common law fraud," which confirmed the applicability of the Seventh Amendment.
Moving forward, we can expect to see all SEC cases alleging fraud and seeking civil penalties brought in federal district court, where the defendant will have a right to a jury trial. While the Court’s holding only explicitly limits the SEC’s authority to pursue civil penalties for fraud-based claims through in-house administrative proceedings, it has created uncertainty for other federal agencies that routinely pursue civil remedies involving fraud-based claims through administrative proceedings. It is anticipated that other agencies will soon face legal challenges as to their ability to pursue these types of claims in-house.
The Jarkesy decision addresses only a subset of administrative enforcement actions authorized by the SEC and instituted by the Division of Enforcement. The SEC can still authorize administrative or cease and desist proceedings charging violations of the federal securities laws or the SEC’s Rules of Practice while seeking other remedies, such as censures, associational bars, officer and director bars, and disgorgement.
Filing Fee Rate Increase
Effective October 1, 2024, SEC registration fees will increase from $147.60 per $1 million offered to $153.10 per $1 million offered.
If you have any questions or would like additional information, please contact the authors or your MMM attorney.
1 Alternative deadlines apply to Qualified Institutional Investors and Exempt Investors.
2 Pega filed its annual report on Form 10-K for the fiscal year ended December 31, 2021, at 4:13 p.m. Eastern time on February 16, 2022, after trading had closed on the NASDAQ Global Select Market.
Legal disclaimer: This newsletter is intended to provide general information and should not be used or taken as legal advice. Readers should not act upon this information before seeking advice from counsel.
