Securities Snapshot: 2nd Quarter 2022

SEC Revisits Compensation Clawbacks, Expands Electronic Filing Requirements, and Fines Company for Confidentiality Agreement Outreach

After proposing an unprecedented volume of rules in the first quarter of 2022 related to ESG, cybersecurity risk management, insider trading, and issuer repurchases, among other rules, the Securities and Exchange Commission moderated its rulemaking proposal activities in the second quarter of 2022. During the quarter, the SEC Staff reopened the comment period on long-awaited executive compensation clawback rules, adopted amendments to electronic filing requirements, and fined a company for violation of whistleblower protections in confidentiality agreements.

SEC Reopens Comment Period for Proposed Clawback Rule

On June 8, 2022, the SEC reopened the comment period for proposed rules to implement the listing standards for erroneously awarded compensation. The current proposal, initially proposed in 2015, would require national securities exchanges to establish listing standards that would in turn require listed entities to adopt and comply with a clawback policy that meets the requirements of Section 10D of the Securities Exchange Act of 1934. Additionally, the proposed rule would require listed companies to file their clawback policies and to provide disclosure about recovery of incentive-based compensation.

The Division of Economic and Risk Analysis (DERA) released a memo containing helpful data and analysis for evaluating the proposal. The memo addresses: (1) the increasing number of issuers voluntarily adopting compensation recovery policies: (2) an estimate of the number of restatements that would trigger a compensation recovery analysis if the “rules were extended to include all required restatements made to correct an error in previously issued financial statements;” and (3) the cost and benefits of the proposed rules. The SEC reopened the comment period to allow interested parties to comment on the memo DERA released. The SEC’s comment submission deadline is July 14, 2022.

The SEC’s press release for reopening the comment period can be found here.

The full DERA Memo can be found here.

SEC Requires Additional Reports to be Filed Electronically

On June 3, 2022, the SEC adopted amendments expanding the requirement of EDGAR electronic filing to several reports that are currently permitted to be filed or submitted in paper form, including, among others: Forms 144; Forms 11-K; glossy annual reports; and Forms 6-K. The amendments will require the use of Inline eXtensible Business Reporting Language (XBRL) for the filing of financial statements and accompanying schedules to the financial statements required by Form 11-K. These amendments are scheduled to become effective on July 11, 2022.

The full proposal can be found here.

SEC Brings Enforcement Action Based on Confidentiality Agreement Provisions

On June 22, 2022, the SEC announced that it brought an enforcement action against The Brink's Company for its failure to have its confidentiality agreements comply with Rule 21F-17 under the Exchange Act. The SEC has imposed harsh penalties on other companies who violate this rule.

Rule 21F-17 prohibits any person/company from taking any action to impede an individual from communicating directly with the SEC, including by “enforcing, or threatening to enforce, a confidentiality agreement.” In April 2015, the SEC brought its first enforcement action for a violation of Rule 21F-17—based on a company’s use of a restrictive confidentiality agreement. Since 2015, the SEC has found eight companies in violation of Rule 21F-17.

Most recently, the SEC ordered Brink’s to pay a $400,000 fine for violations of Rule 21F-17. After receiving several notifications about its potential violations, Brink's modified its confidentiality agreement in 2015. Instead of including a provision that protected potential SEC whistleblowers or a provision that addressed the restrictive language in the agreement, Brink's added a provision imposing a $75,000 liquidated damages liability on employees who violated the agreement. So, in essence, Brink's made the agreement even more restrictive.

As a result of this violation, the SEC ordered Brink's to cease-and-desist from committing or causing any violations and any future violations of Rule 21F-17 and to amend its employment agreements to make clear that employees may report possible securities law violations to the SEC without prior company approval or forfeiting any resulting whistleblower award.

Quarterly Roundup

Below is a link to our second quarter 2022 corporate and securities law publications and blogs posted on kmklaw.com.

Should you have any questions or need assistance, please contact us.

James C. Kennedy
513.579.6599
jkennedy@kmklaw.com 

F. Mark Reuter
513.579.6469
freuter@kmklaw.com

Allison A. Westfall
513.579.6987
awestfall@kmklaw.com

Christopher S. Brinkman
513.579.6953
cbrinkman@kmklaw.com 

Michael W. Goldman
513.579.6961
mgoldman@kmklaw.com

KMK Law articles and blog posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. The laws/regulations and interpretations thereof are evolving and subject to change. Although we will attempt to update articles/blog posts for material changes, the article/post may not reflect changes in laws/regulations or guidance issued after the date the article/post was published. Please consult with counsel of your choice regarding any specific questions you may have.

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