Regulatory hand on Corporate America – New England In-House


The proper function of a government is to make it easy for the people to do good and difficult for them to do bad.

– Gladstone

In writing this column, I have reviewed recent government actions and noticed a clear theme: The federal government is becoming more aggressive in regulating businesses. This is no surprise, given the political party in power.

To fully explore recent government action, one would need this whole newspaper; I focus on two key agencies as main examples.

Antitrust and FTC

On July 9, President Biden ordered, by executive order, stricter enforcement of antitrust laws. In mid-September, the Federal Trade Commission voted 3-2, according to the parties, to repeal the Trump-era guidelines for vertical mergers. Immediately afterwards, the DOJ division chief announced that he was conducting a “careful review” of the guidelines for vertical and horizontal business combinations.

Democratic FTC President Lina Khan explained that the 2020 guidelines “violate statutory text and incorrectly suggest that efficiency gains or pro-competitive effects can save an otherwise illegal transaction.” Democratic Commissioner Rebecca Slaughter complained that the overturned directives presumed vertical agreements were generally beneficial.

The two Republican commissioners opposed it because no indication was available. This point may be correct, but it also reflects the politicized situation at the FTC.

In the last days of September, the FTC said on its blog that it would need more information regarding the impact of the deal on labor markets and on businesses outside the immediate vertical, and l effect of the involvement of investment firms. Also, look for the FTC to review large companies that strengthen themselves through rounds of small business acquisitions or patents, transactions that escape the FTC’s review thresholds but which, if aggregated, would require review.

The current drift should not surprise anyone.

The FTC has also started asking for the names of key employees and requested disclosure of information between parties to the agreement, to help FTC staff identify key issues.

Lawyers at the antitrust bar have faced such questions before, as well as inquiries about the impact of transactions on the environment and corporate governance. The panoply of issues within the “ESG” universe seems on the table. A senior antitrust lawyer questioned the commissioners during the hearing on any relationship between ESG issues and restriction of competition; news reports indicate that FTC staff were unable to provide answers. Also ask if the staff have the expertise to assess the responses.

The new SEC

The SEC has an impact on capital formation, corporate communications, governance standards, the functioning of commercial markets and the actions of large public companies that dominate the business and are required to affirmatively disclose everything that goes. wrong. Below are four examples of recent aggressive regulatory action by the SEC.

Crowdfunding. As of 2016, SEC crowdfunding regulations allow small retail investors to invest in risky emerging companies, subject to controls on maximum transactions and investor limits. In 2020, the total annual amount that can be raised by any crowdfunding company has been increased to $ 5 million and investor limits have been significantly increased.

A key structural element of crowdfunding is that most transactions are carried out through a regulated portal set up by an independent company, which the portal controls by providing disclosure and mechanisms. Such offers are highly dependent on the practices of such a portal. On September 20, in the first lawsuit against a portal, the SEC alleged in Michigan federal court that a portal was a “gatekeeper,” a word the SEC uses when it wants to charge the breach. a quasi-fiduciary duty to uphold its law. .

The portal was involved in two apparently fraudulent cannabis transactions, which could attract the attention of the government anyway. But this case may be feared as the start of increased crowdfunding oversight; not to mention that attacks on crowdfunding portals could hamper capital formation for emerging entities of the type the government wishes to foster.

Proxy voting fund. Funds, including ETFs, own around 30% of U.S. public stocks. Almost half of American households hold shares in such funds. Funds vote for their portfolio shares, unless they lend those shares and do not recall them at the time of the shareholders’ meeting. Current SEC practice requires funds, in Form N-PX, to disclose proxy votes; however, these forms can be 1,000 pages long, opaque in providing information (especially when filed by the managers of many different funds), and often fail to disclose specific votes.

On September 29, the SEC proposed for a 60-day commentary a revised rule requiring: clear identification of substantive issues to be voted on; specific formats and labeling so that investors can compare votes between registrants; Disclosure of whether a fund has withdrawn shares from a loan in order to be able to vote on them.

Among the voting categories listed in the rule, there is one for “ESG”. There are also vague generalities: how to define “environmental justice”? The proposal raises the question of the SEC’s intentions; is it part of a program to influence the substance of fund voting? If so, is this over-regulation, given the current public debate about corporate accountability to ridings beyond the economic performance of shareholders? A commissioner questioned whether there was a built-in intention to achieve social policy goals.

Analysis shows that shortly after the SEC clarified that funds can legally lend stocks, an exercise that may add millions of dollars to income benefiting investors, institutional stock lending before shareholder meetings increased by 58%; there is clearly a market for acquiring votes through equity borrowing. Commentators and a commissioner have suggested that the proposed rule should require not only disclosure of the extent of the stock lending, but also of the economic profit that derives from it, so that investors in the funds can assess the pros and cons of trading. loan of shares.

DEI. The SEC also regulates business through the oversight of SROs such as the Nasdaq. Nasdaq’s rules for companies traded on its platform were recently changed, with SEC approval after a certain delay, to require companies, from 2022, to include at least one diverse director in its disclosure. the diversity of the board of directors; from 2023, two different directors or a public explanation of why; in 2025 or 2026 (depending on the nature of the company), two various directors are almost compulsory.

The issue is not the desirability of diversity (justice suggests it, and a strong commentary links economic performance to diversity), nor is it simply to make the disclosure. Since the likely effect of the Nasdaq rule is to stigmatize non-compliant companies, the real question is: does the government have the right to have a de facto impact on this private order of corporate governance? Should investors be free to ignore or laugh at diversity?

Will the New York Stock Exchange be forced to follow suit? Does the SEC? Note that two states already have mandatory board diversity policies, and others are considering doing so.

Crypto. Cryptocurrencies are poorly understood when it comes to social impact, regulatory impact, and business impact – and also if they are securities.

SEC Chairman Gensler has been presaging for months that the SEC is making rules to contain crypto abuses when they present securities law issues. And, there is a lot of regulatory history recognizing that something may or may not be a title, depending on the context. The simplest example is the promissory note: a security when a company sells several, but not when you sign one for your mortgage.

If only the SEC had a clear view of when crypto became a security. Meanwhile, it pursues transactions where crypto is clearly offered, or primarily used, as a means of investment, and puts pressure on crypto issuers to play it safe and record shows “just in case. “.

In September, Coinbase, reputed to be America’s largest cryptocurrency exchange, abandoned its proposed cryptocurrency lending program based on concerns reported by the SEC; the program would allow clients to lend their holdings of cryptos indexed to the U.S. dollar at an interest rate of 4%. I note that if you held US dollars and loaned them out at interest, you might run into laws on loans, banking, CFPB, usury, or fraud, but you will never hear about the SEC; and many other, non-public companies are already in the same lending business, or offer interest payments on crypto deposits (although state securities regulators are apparently suing BlockFi and Celsius).

Another push against crypto came from the Treasury Department, which in September blacklisted a cryptocurrency platform to allegedly help cybercriminals collect their ransomware winnings. The fact that the exchange is located in Russia probably did not detract from the United States’ desire to isolate it, but the fundamental regulatory question is whether the government is in the best position to attack criminals or the exchanges. commercial.

Some have condemned the Treasury, insisting that such an exchange, used for illegal purposes, protects companies that are victims of cyber attacks. In practice, business judgment as well as the protection of shareholder value may require a legal channel for victims to quickly reimburse scammers. Strange analysis, it flies in the face of the government’s logical position that, in the long run, society has much better things to do to stop crime than save a few current victims.


I don’t judge whether government activism is good or bad, liberal or conservative, republican or democratic, old fashioned or modern. I identify themes in current administrative actions. The current drift should not surprise anyone.

Stephen M. Honig practices at Duane Morris in Boston.


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