New Jersey Extends EDA Loan Program to Minority or Women Owned Businesses

Governor Christie signed A1451 into law this week making EDA loans through the Urban Plus Program available to small, minority or women owned businesses located in designated New Jersey regional centers or metropolitan planning areas as if such businesses were located in urban centers.   Minority or woman owned business enterprises (MWBE) must be certified through the Department of Treasury.  As a qualification, MWBE applicants must demonstrate that the business is operated and controlled by a management team of women or minorities and such company is owned by a majority of minorities or women. The business must be involved with a commercially useful function and the minority or female ownership and management must be real, substantial, and continuing and not merely in name only.


© 2018 Giordano, Halleran & Ciesla, P.C. All Rights Reserved.
This post was written by Melissa V. Skrocki of Giordano, Halleran & Ciesla, P.C. 

Chicago City Council Committee Approves Hands Off-Pants On Ordinance to Protect Hotel Employees

On October 2, 2017, the Chicago City Council Committee on Workplace Development and Audit approved an amendment to the Municipal Code (the “Ordinance”) that, if approved by the full City Council, will require hotel employers to equip hotel employees assigned to work in guestrooms or restrooms with portable emergency contact devices and develop and implement new anti-sexual harassment policies and procedures. The Ordinance is in response to multiple reports of sexual assault and harassment targeted at hotel employees by hotel guests.

The Ordinance in its current form will require hotel employers to (1) equip employees who are assigned to work in a guest room or restroom, under circumstances where no other employee is present in the room, with a panic button (at no cost to the employee) which the employee may use to summon help from other hotel staff if s/he reasonably believes that an ongoing crime, sexual harassment, sexual assault or other emergency is occurring in the employee’s presence; (2) develop, maintain and comply with a written anti-sexual harassment policy to protect employees against sexual assault and sexual harassment by guests; and (3) provide all employees with a current copy of the hotel’s anti-sexual harassment policy, and post the policy in conspicuous places in areas of the hotel where employees can reasonably be expected to see it.

With respect to the anti-sexual harassment policy mandates, employers must develop a policy that:

  • Encourages employees to immediately report to the employer instances of alleged sexual assault and sexual harassment by guests;
  • Describes the procedures that the complaining employee and employer shall follow in such cases;
  • Affords the complaining employee the right to cease work and leave the immediate area where danger is perceived until such time that hotel security or the police arrive to provide assistance;
  • Affords the complaining employee the right, during the duration of the offending guest’s stay at the hotel, to be assigned to work on a different floor or at a different station or work area away from the offending guest;
  • Provides the complaining employee with sufficient paid time to (a) file a complaint with the police against the offending guest, and (b) testify as a witness at any legal proceeding that may ensue as a result of such complaint;
  • Informs the employee that the Illinois Human Rights Act and Chicago Human Rights Ordinance provide additional protections against sexual harassment in the workplace; and
  • Informs the employee that it is unlawful for an employer to retaliate against any employee who reasonably uses a panic button or exercises any right under the Ordinance.

Employers in violation of the Ordinance would be subject to a fine between $250-$500 for each offense, and each day that a violation continues constitutes a separate and distinct offense.

Consequently, it is critical that Chicago hotel employers monitor the status of this Ordinance, which is now pending before the full City Council. If passed and signed into law, the Ordinance will take effect within 90 days of signature. Employers should consider preparations for providing panic buttons to those employees protected by the Ordinance and training hotel employees on their use, and revisiting anti-sexual harassment policies, whether stand-alone or included in employee handbooks, to ensure compliance with the Ordinance’s mandates. Additionally, employers should consider providing updated anti-sexual harassment and anti-retaliation training to all employees, including those who are assigned to work in guest rooms or restrooms, to ensure that all employees fully understand their employer’s policies and procedures.

This post was written by Shawn D. Fabian & Michael J. Roth of Sheppard Mullin Richter & Hampton LLP., Copyright © 2017
For more legal analysis go to The National Law Review

The Corporate Transparency Act: A Proposal to Expand Beneficial Ownership Reporting for Legal Entities, Corporate Formation Agents and – Potentially – Attorneys

In late June, Representatives Carolyn Maloney and Peter King of New York introduced The Corporate Transparency Act of 2017 (the “Act”). In August, Senators Ron Wyden and Marco Rubio introduced companion legislation in the Senate. A Fact Sheet issued by Senator Wyden is here. Representative King previously has introduced several versions of this proposed bipartisan legislation; the most recent earlier version, entitled the Incorporation Transparency and Law Enforcement Assistance Act, was introduced in February 2016.  Although it is far from clear that this latest version will be passed, the Act is worthy of attention and discussion because it represents a potentially significant expansion of the Bank Secrecy Act (“BSA”) to a whole new category of businesses.

The Act is relatively complex.  In part, it would amend the BSA in order to compel the Secretary of the Treasury to issue regulations that would require corporations and limited liability companies (“LLCs”) formed in States which lack a formation system requiring robust identification of beneficial ownership (as defined in the Act) to themselves file reports to the Financial Crimes Enforcement Network (“FinCEN”) that provide the same information about beneficial ownership that the entities would have to provide, if they were in a State with a sufficiently robust formation system.  More colloquially, entities formed in States which don’t require much information about beneficial ownership now would have to report that information directly to FinCEN – scrutiny which presumably is designed to both motivate States to enact more demanding formation systems, and demotivate persons from forming entities in States which require little information about beneficial ownership.


However, there is another facet to the Act which to date has not seemed to garner much attention, but which potentially could have a significant impact. Under the Act, formation agents – i.e., those who assist in the creation of legal entities such as corporations or LLCs – would be swept up in the BSA’s definition of a “financial institution” and therefore subject to the BSA’s AML and reporting obligations.  This expanded definition potentially applies to a broad swath of businesses and individuals previously not regulated directly by the BSA, including certain attorneys.

Clearly attempting to gain steam from last year’s Panama Papers scandal – although the Act’s various predecessor bills were introduced before that scandal erupted – the “Findings” section of the Act lays out the case for its passage. According to that section, the Act is necessary because:

  • Few States obtain meaningful information about the beneficial owners of entities formed under their laws, and often require less information than is needed to obtain a bank account or driver’s license;
  • Many States have automated procedures which allow the formation of a new entity within 24 hours of the filing of an online application;
  • Some Internet Web sites highlight the anonymity provided by certain State incorporation practices as a reason to incorporate in those States, along with offshore jurisdictions;
  • Criminals have exploited these weaknesses to conceal their identities and use newly formed entities to promote terrorism, drug trafficking, money laundering, tax evasion, securities fraud, and foreign corruption;
  • The lack of beneficial ownership information has stymied law enforcement;
  • The Financial Action Task Force (“FATF”), described as “a leading international anti-money laundering organization,” has criticized the U.S. for failing to obtain timely access to adequate, accurate and current ownership information;
  • In contrast to the U.S., every country in the European Union requires formation agents to identify the beneficial owners of the corporations formed in those countries.

In the media, the backers of the Act have latched onto another argument to advocate for its passage: national security.  They say that the Act will assist in battling terrorist financing and unseemly conduct such as the alleged interference by Russia in the 2016 U.S. election for President. In the press releaseaccompanying the proposed House legislation, Representative King catalogued the various anti-corruption/transparency groups which are backing the bill, such as Global Witness. Although the support of such groups is not surprising, the press release also highlights the support of a prominent banking industry group, The Clearing House Association (whose President, Greg Baer, has appeared as a guest blogger here on the topic of reforming the current AML regulatory regime).

If passed, the Act would represent another chapter in the domestic and global campaign to increase transparency in financial transactions through information gathering by private parties and expanded requirements for AML-related reporting. As we have blogged, this ongoing campaign has included FinCEN creating reporting requirements for title insurance companies involved in cash purchases of high-end real estate; FinCEN issuing regulations which require covered financial institutions to identify the beneficial ownership of new accounts opened by legal entity customers; Congress recently introducing the Combatting Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017which in part seeks to expand cross-border reporting requirements under the BSA; and the FATF issuing in December 2016 its Mutual Evaluation Report on the Unites States’ Measures to Combat Money Laundering and Terrorist Financing, which (again) found that that a continued lack of timely access to adequate, accurate, and current information on the beneficial owners of entities represented a “fundamental gap” in the U.S. AML regulatory regime.  As suggested by its Findings section, the Act also would represent a partial response by the U.S. Congress to international critiques, such as those posed by the FATF and the European Parliament, that the United States has become a haven for suspected money launderers and tax evaders and is lagging behind other nations in AML compliance.

In our next post, we will describe the proposed Act’s details and its potential implications for a new category of defined “financial institution” – formation agents, which might include attorneys.

This post was written by Peter D. Hardy and Juliana Gerrick of Ballard Spahr LLP Copyright ©
For more legal analysis go to The National Law Review

Federal Laws Do Not Preempt Connecticut Law Providing Employment Protections to Medical Marijuana Users

Connecticut employees using medical marijuana for certain debilitating medical conditions as allowed under Connecticut law for “qualified users” are protected under state law from being fired or refused employment based solely on their marijuana use. Employers who violate those protections risk being sued for discrimination, according to a recent federal district court decision.


In Noffsinger v. SSC Niantic Operation Company (3:16-cv-01938; D. Conn. Aug. 8, 2017), the federal district court ruled that “qualified users” are protected from criminal prosecution and are not subject to penalty, sanction or being denied any right or privilege under federal laws, such as the Controlled Substances Act (CSA), the Americans with Disabilities Act (ADA) and the Food, Drug and Cosmetic Act (FDCA), because the federal laws do not preempt Connecticut’s Palliative Use of Marijuana Act (PUMA).

PUMA prohibits employers from refusing to hire, fire, penalize, or threaten applicants or employees solely on the basis of being “qualified users” of medical marijuana. PUMA exempts patients, their caregivers and prescribing doctors from state penalties against those who use or distribute marijuana, and it explicitly prohibits discrimination by employers, schools and landlords.

In Noffsinger, Plaintiff was employed as a recreational therapist at Touchpoints, a long term care and rehabilitation provider, and she was recruited for a position as a director of recreational therapy at Bride Brook, a nursing facility. After a phone interview, she was offered the position at Bride Brook and accepted the offer, and she was told to give notice to Touchpoints, which she did to begin working at Bride Brook within a week. Plaintiff scheduled a meeting to complete paperwork and routine pre-employment drug screening for Bride Brook, and at the meeting, she disclosed her being qualified to use marijuana for PTSD under PUMA. The job offer was later rescinded because she tested positive for cannabis; in the meantime, Plaintiff’s position at Touchpoints was filled, so she could not remain employed there.


Plaintiff sued for violation of PUMA’s anti-discrimination provisions, common law wrongful rescission of a job offer in violation of public policy and negligent infliction of emotional distress. Defendant filed a Rule 12(b)(6) pre-answer motion to dismiss based on preemption under CSA, ADA, and FDCA. The federal court denied the motion and ruled that PUMA did not conflict with the CSA, ADA or FDCA, because those federal laws are not intended to preempt or supersede state employment discrimination laws. The court concluded that CSA does not make it illegal to employ a marijuana user, and it does not regulate employment practices; the ADA does not regulate non-workplace activity or illegal use of drugs outside the workplace or drug use that does not affect job performance; and the FDCA does not regulate employment and does not apply to PUMA’s prohibitions.

The court’s decision is notable in that it is the first federal decision to determine that the CSA does not preempt a state medical marijuana law’s anti-discrimination provision, and reaches a different result than the District of New Mexico, which concluded that requiring accommodation of medical marijuana use conflicts with the CSA because it would mandate the very conduct the CSA proscribes. The Noffsinger decision supplements a growing number of state court decisions that have upheld employment protections for medical marijuana users contained in other state statutes. These decisions stand in stark contrast to prior state court decisions California, Colorado, Montana, Oregon, and Washington that held that decriminalization laws – i.e., statutes that do not contain express employment protections – do not confer a legal right to smoke marijuana and do not protect medical marijuana users from adverse employment actions based on positive drug tests.

Key Takeaways

Employers may continue to prohibit use of marijuana at the workplace; and qualified users who come to work under the influence, impaired and unable to perform essential job functions are subject to adverse employment decisions. Employers in Connecticut, however, may risk being sued for discrimination for enforcing a drug testing policy against lawful medical marijuana users.  In those cases, employers may have to accommodate off-duty marijuana use, and may take disciplinary action only if the employee is impaired by marijuana at work or while on duty.

It remains unclear how employers can determine whether an employee is under the influence of marijuana at work. Unlike with alcohol, current drug tests do not indicate whether and to what extent an employee is impaired by marijuana. Reliance on observations from employees may be problematic, as witnesses may have differing views as to the level of impairment, and, in any event, observation alone does not indicate the source of impairment. Employers following this “impairment standard” are advised to obtain as many data points as possible before making an adverse employment decision.

All employers – and particularly federal contractors required to comply with the Drug-Free Workplace Act and those who employ a zero-tolerance policy – should review their drug-testing policy to ensure that it: (a) sets clear expectations of employees; (b) provides justifications for the need for drug-testing; and (c) expressly allows for adverse action (including termination or refusal to hire) as a consequence of a positive drug test.

Additionally, employers enforcing zero-tolerance policies should be prepared for future challenges in those states prohibiting discrimination against and/or requiring accommodation of medical marijuana users. Eight other states besides Connecticut have passed similar medical marijuana laws that have express anti-discrimination protections for adverse employment actions: Arizona, Delaware, Illinois, Maine, Nevada, New York, Minnesota and Rhode Island. Those states may require the adjustment or relaxation of a hiring policy to accommodate a medical marijuana user. Additionally, courts in Massachusetts and Rhode Island have permitted employment discrimination lawsuits filed by medical marijuana users to proceed.

Finally, employers should be mindful of their drug policies’ applicability not only to current employees, but also to applicants.

This post was written by David S. Poppick & Nathaniel M. Glasser of Epstein Becker & Green, P.C.  ©2017. All rights reserved.
For more Health Care Law legal analysis go to The National Law Review

Using “Finders” to Find Capital: Avoiding Problems for Your Company

Raising money for your startup can be hard. Not every entrepreneur can walk into Silicon Valley with a business idea and walk out with multiple VC term sheets in hand. Sometimes the only path to financing your startup is through the hard work of pitching and cobbling together a group of angels and other individual investors. But that path takes time and can be frustrating. Potential investors may hesitate to commit or, even worse, give you the dreaded “you’re-too-early-for-us” response. The offer from a “finder” to introduce you to investors with cash sounds attractive. Why not, right? What’s the downside?

You can use a finder if their role is limited and their compensation is structured properly. But you can cause major problems for yourself and the finder if they’re too involved and paid commissions on the money raised. These are activities that only registered broker-dealers (persons or firms engaged in the business of buying and selling securities for themselves or others) can engage in. If your company uses a finder acting as a broker-dealer, you might find your fundraising round unraveling, and your finder might find themselves in trouble with the Securities and Exchange Commission (SEC).

A “true” finder

A “true” finder can be OK if they limit their role to making introductions, receive a flat or hourly consulting fee that is not contingent on the success of the offering, and avoid any active role in negotiating and completing the investment. Finders acting in this very limited capacity are not considered broker-dealers. As a result, true finders are largely unregulated under the securities laws and need not be registered with the state or federal government as broker-dealers. This area is murky, however, because there are not clear regulations and the rules of the road have been developed in court cases and case-by-case “no-action” letters from the SEC.

The real problem is that many finders do not limit their activities to mere introductions. These finders end up assisting in structuring and negotiating the offering, providing advice regarding the offering and investment, and even encouraging and inducing investors to invest. These activities make them a “broker” under the securities laws, and federal and state governments require that brokers be registered. Often the finder is not registered as a broker.

Finders also prefer success-based compensation, calculated as a percentage of the funds raised by the company, and companies prefer to pay finders only if and when they’re successful in helping to raise capital. Both courts and the SEC, however, take the position that such success-based compensation (also referred to as transaction-based compensation) is the telltale factor indicating whether a finder is acting as an unregistered broker-dealer.

So, what’s the risk?

For the company, using an unregistered broker-dealer to assist with an offering could create a rescission right in favor of the investors. If investors succeed in rescinding their investments, the company must return their money. For the finder acting as an unregistered broker-dealer, they could be subject to severe SEC sanctions and the company could void the finder’s engagement agreement, requiring return of the finder’s compensation. Moreover, even if a finder’s activities and compensation are perfectly legal, the relationship alone can still give rise to problems for the company. Any financial relationship with a finder must be disclosed to investors and listed on the company’s Form D filed with the SEC and state securities departments. Disclosure of such a relationship, again, even if perfectly legal, may nevertheless prompt some states to initiate an investigation.

The situation in Michigan, however, is even murkier. In the recent case Pransky v. Falcon Group, the Michigan Court of Appeals held that a “finder” as defined in the Michigan Uniform Securities Act, was not required to be registered with and regulated by the State of Michigan, even where the company agreed to pay success-based compensation. Michigan companies and finders, however, should not take the opinion as a green light to engage in a finder relationship, structured with success-based compensation, without fear of regulatory oversight. The trial court initially dismissed the case on summary judgment, and as a result there was no evidence in the record of whether or not the finder’s activities went beyond mere introductions. In addition, some commentators have criticized the court’s decision. Perhaps sensing such impending criticism, the Court of Appeals, in a footnote, cautioned that the “better course of action would be for finders acting pursuant to similar contracts to protect themselves by registering, at the very least, as broker-dealers; the line between a finder’s activities and that of a broker-dealer…is a thin one and persons acting under such contracts without being registered are inviting litigation.”

The bottom line

Using finders for raising capital is not the easy solution it appears to be at first glance. Worse yet, it can lead to significant problems. As the saying goes, nothing worth having is easy. If you don’t have a VC-backable business, you may have an even harder time raising capital than most. Regardless, when it comes to raising money for your startup, be your own “finder”. Network, hustle, and tell your story. No one is more effective than you at explaining your business and the investment opportunity.

For more legal analysis check out the National Law Review.

This post was written by Matthew W. Bower of  Varnum LLP.

Appeal in Home Depot Data Breach Derivative Action Results in Settlement of Corporate Governance Claims

Home Depot Data BreachSnatching victory of a sort from the jaws of defeat, shareholders who brought a derivative action alleging that the 2014 Home Depot data breach resulted from officers’ and directors’ breaches of fiduciary duties have reached a settlement of those claims. As previously reported, that derivative action was dismissed on November 30, 2016.  That dismissal followed on the heels of dismissals of derivative actions alleging management breaches of fiduciary duties in connection with the Wyndham and Target data breaches. Despite that discouraging precedent, the Home Depot shareholder plaintiffs noticed an appeal from the trial court’s order of dismissal.  The parties subsequently resumed settlement discussions that had broken off in the fall of 2016, on the eve of argument and decision of Home Depot’s motion to dismiss.  On April 28, 2017, the parties submitted a joint motion disclosing and seeking preliminary approval of the proposed settlement.  If approved, the proposed settlement would result in dismissal of the shareholders’ appeal and an exchange of mutual releases, thereby terminating the fiduciary claims arising from the Home Depot data breach.

The Stipulation of Settlement filed with the court specifies that Home Depot will agree to implement the following nine changes to its information governance practices (which are a checklist of best practices for any business):

  1. Document the duties and responsibilities of the Chief Information Security Officer (“CISO”);

  2. Periodically conduct Table Top “Cyber Exercises” to prepare for emergencies and train personnel to respond to data security threats;

  3. Monitor and periodically assess key indicators of compromise on computer network endpoints;

  4. Maintain and periodically assess the Company’s partnership with a dark web mining service to search for confidential Home Depot information;

  5. Maintain an executive-level committee focused on the Company’s data security;

  6. Receive periodic reports from management regarding the amount of the Company’s IT budget and what percentage of the IT budget is spent on cybersecurity measures;

  7. Maintain an Incident Response Team and an Incident Response Plan;

  8. Maintain membership in at least one Information Sharing and Analysis Center (ISAC) or Information Sharing and Analysis Organization (ISAO); and

  9. Retain their own IT, data and security experts and consultants as they deem necessary.

It is unknown whether Home Depot had independently contemplated implementing any of these practices in the aftermath of the breach.

The proposed settlement assigns credit for the changes to the derivative action and, by making them part of a court-approved settlement, does allow for judicial enforcement in the event that Home Depot fails to comply with the remediation program.  More significantly, wrapping these practices into the derivative action settlement provides a justification for the shareholders’ counsel to request a fee award of $1,125,000.  Significantly, Home Depot continues to deny any wrongdoing, and the Settlement Agreement expressly states that it may not be construed as evidence or admission of fault, liability or wrongdoing.

The amount of the requested fee award, which is relatively modest by the standards of large scale derivative litigation, suggests that this may have been a nuisance value settlement of an appeal with slim prospects for success.  Given the prior failures of derivative claims in data breach cases, it remains to be seen whether this settlement will encourage shareholders in future data breach cases to attempt to buck the odds by asserting derivative claims.

©1994-2017 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

Golden Leash Rule, Say-on-Pay, Form 10-K Summaries: Proxy Season Guide to 2017

SEC proxy seasonAs another year comes to a close, it is time for public companies to become acquainted with the securities law and business developments of the past year to position themselves for success in 2017. Below is a summary of current and anticipated changes that may impact reporting requirements and disclosure regulations for the upcoming 2017 proxy season, along with a review of the 2016 proxy season.

NEW FOR 2017

Frequency Votes for Say-on-Pay

After Jan. 21, 2011, public companies were required to hold an advisory vote regarding the frequency of which say-on-pay votes would occur, which could not be in excess of every six years. Therefore in 2017, many companies will need to include an agenda item for the frequency vote at their annual meeting. Following the vote, companies will need to include the results of the frequency for which say-on-pay votes will be held in their Form 8-K under Item 5.07(b).

SEC Approves NASDAQ’s “Golden Leash Rule”

In July 2016, the SEC approved NASDAQ’s “Golden Leash Rule.” This rule requires listed companies to disclose material terms of any agreement between a director or director nominee and any entity or person other than the company, regarding any amount of compensation or payment related to the director’s service on the board or the director nominee’s candidacy. The “Golden Leash Rule” requires annual disclosure in the companies’ proxy or on its website. The “Golden Leash Rule” became effective Aug. 1, 2016.

Form 10-K Summaries

In July 2016, the SEC issued an interim final amendment to the Fixing America’s Surface Transportation Act, creating Item 16 on Form 10-K allowing companies the option to include a summary of the information included in the Form 10-K. While no previous rule prohibited summaries, most issuers simply included a table of contents with hyperlinks to items in their reports. This rule provides issuers some flexibility when preparing the Form 10-K.

CEO Pay Ratio Disclosure Rule

For the first fiscal year beginning on or after Jan. 1, 2017, companies will need to comply with the SEC’s long-anticipated final rule implementing Section 953(b) of the Dodd-Frank Act, which requires all public companies to disclose the pay ratio between their CEO’s annual total compensation and the annual total compensation of the companies’ “median” employee. However, companies will not be required to include pay ratio disclosures in their proxy statements until 2018. With the exception of smaller reporting companies, emerging growth companies, foreign private issuers, and registered investment companies, all reporting companies will have to disclose their pay ratio. The pay ratio disclosure must be included in any filing that requires executive compensation disclosure under Item 402 of Regulation S-K, which includes registration statements, proxy and information statements, and annual reports on Form 10-K. Even though uncertainty may loom around the viability of Dodd-Frank with President-elect Donald Trump’s transition underway, companies should continue to prepare pay ratio disclosures in anticipation for the 2018 proxy season. The Final Pay Ratio Disclosure Rule is available here.


Glass Lewis Updates

Glass, Lewis & Co. (Glass Lewis) recently published its 2017 Proxy Season Guidelines. The guidelines include a number of changes, a summary of which is outlined below.

Director Overboarding. Beginning February 2017, Glass Lewis will implement its policy regarding director board commitments. Glass Lewis will issue negative recommendations for directors that serve on more than five public company boards and company executives that serve on a total of two public company boards, including his or her own.

Governance for Newly Public Companies. For newly public companies, Glass Lewis will recommend against directors and members of governance committees who adopt provisions causing shareholders’ rights to become “severely restricted indefinitely.” Provisions such as anti-takeover mechanisms, including poison pills or classified boards, along with exclusive forum and fee-shifting provisions will all be considered for such recommendations.

Board Self-Assessment. Glass Lewis has updated its views regarding board evaluations to account for director skills and how those skills align with company strategy, as opposed to merely relying on tenure and age. Glass Lewis has further taken the stance that shareholders are better equipped to measure the board’s composition and approach to corporate governance.

Gender Pay Disclosure. Glass Lewis issued a new policy for reviewing companies’ gender pay equity, on a case-by-case basis. Upon review, Glass Lewis will generally recommend proposals requesting greater disclosure where inattention and inadequate policies expose the company to risk.

In its update, Glass Lewis also noted its support for proxy access and the management of environmental and social risks.

A copy of the full Glass Lewis Proxy Season Guidelines is available here.

ISS Updates

Institutional Shareholder Services (ISS) also updated its proxy voting policy guidelines for 2017, which will affect shareholder meetings taking place after Feb. 1, 2017. The guidelines set forth a number of updates:

Director Overboarding. Similarly to Glass Lewis, ISS will also implement its policy regarding director overboarding, establishing the threshold for overboarding to five public boards for directors who are not company executives. The policy for overboarding of company executives threshold will remain at three total boards, including his or her own.

Undue Restrictions. A new ISS policy recognizes shareholders’ ability to amend bylaws as a fundamental right. Under the policy, ISS will vote against or withhold recommendation for members of the governance committee if the company’s charter imposes “undue restrictions” on shareholders’ rights to amend the bylaws. ISS also recognized complete prohibitions on binding shareholder proposals and share ownership requirements beyond the requirements of Rule 14a-8 as being undue restrictions on shareholders’ rights. ISS will generally recommend against governance committee members whose company has any of these provisions in its charter as well.

Unilateral Governance Changes. ISS updated its policy for governance of newly public companies to include consideration for any reasonable sunset provision when issuing recommendations against directors who have adopted charter or bylaw amendments that ISS views as materially adverse to shareholder rights or that implement a multi-class capital structure affording unequal voting rights prior to or in connection with an IPO.

Shareholder Ratification of Non-Employee Director Pay Program. As a result of recent highly publicized lawsuits involving excessive non-employee director compensation, ISS will consider qualitative factors such as the presence of problematic pay practices relating to director compensation and the quality of disclosures surrounding director compensation, when evaluating whether to recommend ratification programs regarding non-employee director compensation.

A copy of the full ISS 2017 Proxy Voting Guidelines is available here.


During the 2016 proxy season, proxy access remained the predominant topic for the second consecutive year. In fact, shareholders submitted over 200 proxy access resolutions during the 2016 proxy season. The SEC’s 2010 proxy access rule, Rule 14a-11, provided that a shareholder was eligible to nominate proxy access candidates if the shareholder held at least 3 percent of the voting power for at least three years and was not prohibited from proposing a candidate under law or the company’s governing documents. Although this rule was vacated by the U.S. Court of Appeals for the D.C. Circuit in 2011 for being arbitrary, many shareholder proposals are still based on both Rule 14a-11 and the SEC’s amendments to Rule 14a-8. At the end of June 2016, over 250 companies, with 190 S&P 500 firms, established proxy access rights through voluntary adoptions and negotiated withdrawals. As a result, proxy access proposals continue to drive change and mold standard market terms.

As companies grew in 2016, so did the need to properly assess, implement and maintain internal controls over financial reporting (ICFR) pursuant to Rule 13a-15. ICFR is the process by which public companies provide reasonable assurance to the public that its financial statements are prepared in accordance with GAAP and are ultimately reliable. To comply, the SEC requires an annual management report of the company’s ICFR effectiveness, including disclosure of any material weakness that may create a possibility for the company to be unable to promptly detect or prevent a material misstatement on its financial statements, in Form 10-K. Companies should implement accounting controls designed to mitigate financial reporting risk and regularly evaluate any deficiencies. This is particularly important in light of revenue reporting rules issued by the Financial Accounting Standards Board becoming effective for public companies in 2018 and as new accounting standards are issued.

The comment periods have expired for other proposed changes to incentive-based compensation arrangements, the securities transaction settlement cycle, disclosure of payments by resource extraction issuers, pay-for-performance, hedging disclosure, and clawbacks. These changes have not been finalized. At this time, there is no anticipated date for implementation of these policies, so there will be no effect on 2017 filings.


Exemptions to Facilitate Intrastate and Regional Securities Sales and Offerings

In October 2016, the SEC adopted its final rule modernizing the existing intrastate offering framework by implementing amendments to Rule 147 under the Securities Act of 1933. The SEC’s amended Rule 147 provides a safe harbor under Section 3(a)(11) for issuers organized and principally doing business within a single state to offer and make sales of securities to resident purchasers of the same state. The amendments allow companies to raise money from investors within their state without simultaneously registering the offer and sale at the federal level.

The SEC’s new Rule 147A will expand the safe harbor to issuers that maintain a principal place of business in a different state from where it is incorporated and permit issuers to offer and make sales to residents in the state where it operates. Under Rule 147A, issuers will also be able to make offers across state lines, but sales remain limited to residents of the state.

The final rule also repealed Rule 505 and expanded Rule 504 of Regulation D, by increasing the aggregate amount of securities that may be offered and sold in any 12-month period from $1 million to $5 million. Additionally, the final rule disqualifies certain bad actors from participation in offerings under Rule 504. Through these amendments, the SEC sought to facilitate issuers’ capital raising efforts and provide additional investor protections.

Rule 147 and new Rule 147A will be effective on April 20, 2017. The amendments to Rule 504 will be effective on January 20, 2017. The removal of Rule 505 will be effective on May 22, 2017. All other amendments will be effective on May 22, 2017. The final rules are available here.

Supreme Court Decides First Insider Trading Case in Decades: Salman v. United States

In December 2016, after 20 years without a decision regarding the scope of insider trading, the Supreme Court held that even when no financial or tangible benefit is received, insider trading may arise when a tipper makes a “gift” of confidential information to a friend or relative, in Salman v. United States, No. 15-628 (U.S. Dec. 6, 2016). Although the tipper received no physical benefit from providing the information to the tippee, the Supreme Court found that the personal benefit received from bestowing a “gift” of confidential information to a family member or friend was enough for conviction, thus paving a smoother path for prosecutors seeking conviction.

The Supreme Court relied on the “personal benefit test” established in the seminal 1983 case Dirks v. SEC, 463 U.S. 646 (1983) but declined to clarify the scope of the “personal benefit test.” Additionally, the Supreme Court expressly rejected the Second Circuit’s decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), which held that the government must prove that a tippee knew an insider received a personal benefit in exchange for disclosing confidential information, and any benefit received must be sufficiently consequential. While the Supreme Court only narrowly expanded the “personal benefit test” in Salman, it rejected the government’s argument that a gift to “anyone” satisfies the “personal benefit test” potentially providing for a distinction between disclosures to friends and family and those to market professionals. The Salman opinion can be found here.

Mutual Funds/Investment Companies: Rule 22e-4 and Swing Pricing

In October 2016, the SEC adopted its final Rule 22e-4. This new rule requires mutual funds and registered open-end management investment companies, including open-end exchange-traded funds (ETFs) to create a liquidity risk management program, in order to reduce the risks associated with fund redemption obligations. The liquidity risk management program must include periodic review of a fund’s liquidity risk, classification of the liquidity of fund portfolio investments, determination of a highly liquid investment minimum, a limitation on illiquid investments, and board oversight. The rule also permits open-end funds, excluding ETFs and money market funds to use swing pricing, which allows funds to adjust their net asset value per share in order to pass on the costs associated with trading activity to purchasing and redeeming shareholders. The rule requires board approval and periodic review of the funds’ swing factor upper limit and swing threshold. Companies will need to comply with the new Rule 22e-4 beginning on or after Jan. 17, 2017 and access to swing pricing will become available Nov. 19, 2018. The final rule is available here.

Investment Company Reporting Modernization

In October 2016, the SEC adopted new forms and amendments to modernize the reporting and disclosure requirements for registered investment companies. Form N-PORT, a new monthly reporting form requires registered funds other than money market funds to provide portfolio-wide and position-level holdings data. Reporting requirements include data related to the pricing of portfolio securities, information regarding repurchase agreements, securities lending activities, counterparty exposure, terms of derivatives contracts, and portfolio level and position level risk measures, to the SEC on a monthly basis. Form N-CEN will require registered investment companies to annually report certain census-type information as well. Finally, the SEC is adopting amendments to Forms N-1A, N-3 and N-CSR to require certain disclosures regarding securities lending activities. Collectively, these amendments will enhance investors’ ability to use and analyze data to ultimately make more informed investment decisions. The rule becomes effective Jan. 17, 2017, and most funds will be required to begin filing new Forms N-PORT and N-CEN after June 1, 2018. The final rule is available here.

Universal Proxy

In October 2016, the SEC proposed changes to the proxy rules requiring the use of universal proxy cards during a contested election. During a proxy contest, the proposal would require proxy contestants to provide shareholders a proxy card with the names of management and dissident director nominees listed. Similar to voting in person, the proposal would give shareholders the ability to vote for their preferred combination of board candidates through proxy. The proposal aims to remedy shareholders’ current inability to combine nominees to create their own slate during a contested election. The comment period for the proposal ends Jan. 9, 2017.

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