Securities Industry Commentator by Bill Singer Esq

November 6, 2019

featured in today's Securities Industry Commentator:

In recent weeks, we got prosecutors and regulators taking victory laps in response to what they are touting as the "shut down" of a Ponzi scheme. Frankly, it's not much of a victory and those folks who are running around the track shouldn't be taking those strides. Every Wall Street cop was on this beat: FINRA, SEC, and DOJ. Funny, isn't it, how folks who won't actually walk the beat are always ready to run the victory lap. Although the press releases regale us with the sordid details of a decade-long scam, what gets lost amid the back-slapping and self-promotion is the horrific financial and emotional devastation brought upon the victims.
Pursuant to Respondent Minghenelli's default, the OHO Decision barred Respondent from associating with any FINRA member in any capacity. As set forth in the "Introduction" section of the Decision:

The Department of Enforcement filed a Complaint against Respondent Michael Minghenelli, formerly a registered person, on February 15, 2019. The first cause of action alleges that in November 2016, Minghenelli converted $200 from his employer firm by taking an unauthorized cash advance using his corporate credit card, in violation of FINRA Rule 2010. The second cause of action alleges that in FINRA's investigation of the matter, Respondent failed to provide documents and information as requested, in violation of FINRA Rules 8210 and 2010. 

After Enforcement filed the Complaint, Minghenelli filed an Answer and participated in the proceeding for some time. But he failed to appear at a pre-hearing conference and a subsequent hearing to show cause why he should not be held in default based on that nonappearance. At my direction, Enforcement filed a motion for entry of default decision ("Default Motion"). Respondent did not file an opposition to the Default Motion. . . 

Dunmore Man Charged With Bank Fraud (DOJ Release)
Eric R. Colborn was charged in a criminal Information filed in the United States District Court for the Middle District of Pennsylvania with conspiracy to commit bank fraud. As alleged in part in the DOJ Release:

[C]olborn created a counterfeit Wells Fargo brokerage statement in his name showing that he had in excess of $14,000,000 in a brokerage account, and then fraudulently induced reliance on the counterfeit brokerage statement to secure property and other things of value.  It is also alleged that Colborn and his coconspirator entered into sales agreements to purchase property and vehicles by writing checks on accounts neither Colborn or his coconspirator owned or were authorized to use. The scheme to defraud started in or about November 2017 and continued through March 2019.  The total loss amount is approximately $404,293.
The SEC proposed amendments to modernize the rules under the Investment Advisers Act addressing investment adviser advertisements and payments to solicitors. As asserted in part in the SEC Release:

The proposed amendments to the advertising rule would replace the current rule's broadly drawn limitations with principles-based provisions. The proposed approach would also permit the use of testimonials, endorsements, and third-party ratings, subject to certain conditions, and would include tailored requirements for the presentation of performance results based on an advertisement's intended audience.

The proposed amendments to the solicitation rule would expand the current rule to cover solicitation arrangements involving all forms of compensation, rather than only cash, subject to a new de minimis threshold. They also would update other aspects of the rule, such as who is disqualified from acting as a solicitor under the rule.

SEC Proposes Amendments to Modernize Shareholder Proposal Rule (SEC Release)

The proposed amendments would update the criteria, including the ownership requirements, that a shareholder must satisfy to be eligible to require a company to include a proposal in its proxy statement. In the proposed amendments, the Commission has maintained the long-standing $2,000 minimum ownership threshold. However, the proposed amendments would require that, in order to take advantage of that ownership threshold, a proponent must have held the shares for at least three years in order to demonstrate long-term investment in the company. The proposed amendments would also update the "one proposal" rule to clarify that a single person may not submit multiple proposals at the same shareholder's meeting on behalf of different shareholders.

In addition, the proposed rule would update, for the first time since 1954, the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company's future shareholder meetings. Under the proposed amendments, for example, a proposal would need to achieve support by at least 5 percent of the voting shareholders in its first submission in order to be eligible for resubmission in the following three years. Proposals submitted two and three times in the prior five years would need to achieve 15 percent and 25 percent support, respectively, in order to be eligible for resubmission in the following three years.

SEC Proposes Rule Amendments to Improve Accuracy and Transparency of Proxy Voting Advice (SEC Release)
The SEC proposed amendments to its rules governing proxy solicitations to enhance the quality of the disclosure about material conflicts of interest that proxy voting advice businesses provide their clients. The Rule proposal would also provide an opportunity for a period of review and feedback through which companies and other soliciting parties would be able to identify errors in the proxy voting advice. As set forth in part in the SEC Release:

The Commission's proposal is intended to help ensure that proxy voting advice used by investors and others who vote on investors' behalf is accurate, transparent, and materially complete. If adopted, the proposal would amend Exchange Act Rule 14a-2(b), which provides exemptions from the proxy rules' filing and information requirements for certain kinds of solicitations, call for enhanced disclosure of material conflicts of interest, a standardized opportunity for registrants and other soliciting persons to review proxy voting advice, and an improved means for investors to be informed about differing views on the advice. In addition, the proposed changes would codify recent Commission guidance by amending the definition of "solicitation" in Exchange Act Rule 14a-1(l) to include proxy voting advice, with certain exceptions, and provide additional illustrative examples to Exchange Act Rule 14a-9, the proxy rules' antifraud provision.

Public Statement of SEC Chairman Jay Clayton on Proposals to Enhance the Accuracy, Transparency and Effectiveness of Our Proxy Voting System (SEC Release)
In part, SEC Chair Clayton stated that [Ed:footnotes omitted]:

Today's proposals also are rooted in two essential aspects of effective regulation-modernization and retrospective review.  In today's proposals, we have examples of why modernization of regulation, including to adjust for market developments and advances in technology, is critical.  Twenty years ago, the business of providing proxy voting advice was virtually non-existent.  Today, there are thousands of investment advisers managing trillions of dollars in assets for our retail investors, and many of these investment advisers contract with businesses to provide proxy voting advice, which is subject to our proxy rules.  Several of these proxy voting advice businesses are large and multi-faceted. Their services to investment advisers, and their effect on shareholder engagement and our capital markets more generally, are comparable to the services of other significant third-party market participants on whom shareholders rely, including auditors, rating agencies and research analysts. 
. . .
As I said earlier, the first item in our agenda is intended to enhance the accuracy and transparency in our proxy system.  The second item in our agenda is directed at modernizing and enhancing the efficiency of one key component of our proxy system. . . .

Public Statement on Proposals to Restrict Shareholder Voting by SEC Commissioner Robert J. Jackson (SEC Release)
In part SEC Commissioner Jackson states [Ed: footnotes omitted]:

Today the Commission proposes rule changes that would limit public-company investors' ability to hold corporate insiders accountable. We haven't examined our rules in this area for years, so updating them makes sense-and these issues have been thoughtfully debated for decades. But rather than engage carefully with the evidence produced by those debates, today's proposal simply shields CEOs from accountability to investors. Whatever problems plague corporate America today, too much accountability is not one of them, so I respectfully dissent.
. . .

Today's proposal ignores decades of debate about the role of the Commission in striking the right balance between corporate executives and the investors they serve. That debate, and the evidence it has produced, has a great deal to teach us about how to make sure shareholder democracy creates long-run value for ordinary American investors.

Fortunately, however, today's proposal is just that: a proposal. I look forward to working with my colleagues on the Commission, the Staff, and in the Division of Economic and Risk Analysis over the coming months to further engage with my Office's analysis. I am grateful to the Staff for their work on today's proposal. And I hope shareholders of all kinds will come forward to engage with the Commission on how to best help American investors hold corporate executives accountable.

Statement on Shareolder Rights by SEC Commissioner Allison Herren Lee (SEC Release)
In part SEC Commissioner Lee states [Ed; footnotes omitted]:

There is a common theme that unites the two proposals before us today: they both would operate to suppress the exercise of shareholder rights. 

The proposed changes to our current proxy regime would make it more costly and more difficult for shareholders to cast their votes or even to get their issues onto corporate ballots. There is a stark divide between issuers and shareholders on the policies reflected here. The bottom line is that these policy choices, if adopted, would shift power away from shareholders and toward management. 
. . .

[T]he eligibility changes would build structural advantages for wealthier investors into the rule, increasing the required one-year ownership amount to $25,000-an increase of more than 1000%. An investor who holds only $2000 worth of stock must now wait three years to submit a proposal. For context, an analysis of retail investor portfolios indicates that the median portfolio value is approximately $27,700. Thus, Main Street investors would generally have to invest virtually their entire portfolio into one company (something we strongly discourage) to enjoy the same rights as Wall Street investors, or they would have to wait three years to catch up to them.

Even more troubling is the lack of data to predict the effects of this proposed change. The proposal looks at limited subsets of shareholder proposal data from 2018. It then concludes that, had this rule been in effect last year, it would have blocked anywhere from zero to 56% of shareholder proposals. Thus we cannot say whether this proposal would do nothing or would block more than half of shareholder proposals. 

Statement at the Open Meeting: Modernizing SEC Rules Governing Proxy Voting Advice by SEC Commissioner Elad L. Roisman (SEC Release)
As stated in part by SEC Commissioner Roisman [Ed: footnotes omitted]:

The proposal reflects some common sense principles.  First, the same activity should be regulated consistently across our markets.  While the Commission has stated that voting advice from proxy voting advice businesses is generally a solicitation under our rules, we have allowed these firms to rely on a patchwork of exemptions to our solicitation requirements and largely ignored the effects of this inconsistency on investors.  Investors deserve a more consistent and purposeful approach.  The staff's recommendation clarifies that, regardless of which exemption to the solicitation rules a proxy voting advice business may rely upon in providing its voting advice to clients, its obligations are the same.

The next principle is unassailable.  Material conflicts of interest of a proxy voting advice business should be readily ascertainable to those utilizing their advice.  The staff's recommendation proposes a list of the types of conflicts that proxy voting advice businesses must disclose to their clients and requests comment on whether this list is complete.  I look forward to hearing from investors and clients of these businesses as to the types of conflicts they consider material and the type of disclosure they would find most useful in considering how to weigh the objectivity and reliability of the voting advice. 

The final principle is to learn from and improve upon current market practices.  The staff's recommendation that issuers have an opportunity to engage with proxy voting advice businesses and respond to their final voting advice is not new.  For several years, one proxy voting advice business, ISS, has granted such an opportunity to the largest companies in our markets. More recently, another proxy voting advice business, Glass Lewis, has instituted programs to obtain feedback from issuers on the data underlying their reports and the reports themselves. Drawing from the apparent success of these market practices, the staff's proposal aims to expand a consistent opportunity to engage and provide feedback to all U.S. public issuers and parties conducting solicitations.  I believe such a measure could substantially improve the mix of information available to the clients of proxy voting advice businesses.  In one place, they would have access to the voting advice and the issuer's or soliciting person's perspective for ready consideration.  To the extent an issuer or other soliciting party believes the firm's voting advice contains errors or methodological biases, it would have an opportunity to note that in a way that proxy voting advice business clients can more easily access than they can today.
As stated in part by SEC Commissioner Roisman:

The staff's recommendation would allow a company to exclude only those shareholder proposals that an overwhelming majority of shareholders have not supported, and that show no sign of gaining broader shareholder support.  Why should shareholders have to foot the bill to hold votes on matters they have overwhelmingly rejected in the recent past?  I commend the staff on their thoughtful approach to determining their recommended resubmission thresholds.  They are based on an analysis of historical data and the staff's finding that these recommended changes would have had a nearly zero percent impact on precluding any proposal that ultimately was approved by a majority of shareholders. 
. . .

In sum, I am proud to support proposing these amendments to Rule 14a-8.  They seek to strike a balance between maintaining an avenue of communication for shareholders, including long-term shareholders, while also recognizing the costs incurred by companies and their shareholders in addressing shareholder proposals.  I believe that these proposed changes will empower the voice of smaller, long-term shareholders, facilitate and encourage meaningful company-shareholder engagement, and make changes that, at least for now, can help prevent misuse of the process. 

As I have endeavored to make clear, developing this proposal was a thoughtful policy making exercise that involved much deliberation.  I ask those of you who are interested and knowledgeable about these issues: Recognize that any rule with threshold requirements necessitates that the Commission draw a line somewhere.  Please read the proposing release to provide thoughtful feedback on its content, not to formulate sound bites.  I look forward to receiving your tailored and well-reasoned responses to our questions and welcome any data you have that could help inform our decision-making.  Thank you.