The week in GRC: SEC strengthens insider trading rules and EU moves toward data deal with US

Dec 15, 2022
This week’s governance, compliance and risk-management stories from around the web

Reuters (paywall) reported that, according to a letter to shareholders, Hestia Capital Partners intends to overhaul the board of shipping and mailing company Pitney Bowes and replace its CEO and board chair. Hestia plans to nominate more than five candidates for election to the nine-person board of Pitney Bowes early next year. Hestia proposed candidate replacements as CEO including former chief executive Katie May and former CEO Ken McBride, according to people familiar with the matter.

Pitney Bowes said it engages regularly and openly with shareholders. ‘Although we remain open to engaging with Hestia, we also look forward to having the discussion about the best path forward with all our shareholders during the 2023 proxy season,’ a company spokesperson said.

– According to The Wall Street Journal (paywall), the EU took an important step toward finalizing a deal with the US government that would allow personal information about Europeans to be stored legally in the US, thereby lowering the threat of regulatory action against thousands of companies that routinely transmit such information.

The European Commission published a draft approval of the preliminary deal it reached in March with the US government. The agreement would re-establish a framework that makes it easy for companies to transfer such information again following the invalidation of a previous agreement by an EU court in 2020. As part of the new deal, the US is offering new safeguards on how its intelligence authorities can access that data.

Blocking data transfers could exclude billions of dollars of trade from cross-border data activities – such as cloud services, human resources, marketing and advertising – if they entail sending or storing information about Europeans on US soil, tech advocates say.

Reuters reported that the US Supreme Court agreed to hear a bid by Slack Technologies to avoid a lawsuit accusing the company of misstatements in its 2019 direct listing, an alternative to an IPO. The justices took up Slack’s appeal against a lower court’s ruling last year that an investor named Fiyyaz Pirani could pursue a class action lawsuit against the company and its executives without proving the shares he bought in Slack’s direct listing were registered, rather than unregistered.

The company, acquired by Salesforce last year, was among the first to offer shares in a direct listing after the SEC approved the process in 2018. In IPOs, insiders are often restricted initially from selling their shares. In direct listings, unregistered insider shares and registered shares issued pursuant to offering materials are available to investors at the same time. Brokers do not differentiate between them, meaning that it is almost impossible to know whether or not a share purchased in a direct listing was registered.

The 9th US Circuit Court of Appeals ruled that the case could go forward, rejecting Slack’s argument that Pirani could sue only if he could show that the shares he owned were registered under the allegedly misleading offering materials.

CNBC reported that, according to a new analysis, US workers and consumers are more likely to prefer brands that publicly align with LGBTQ+ causes. More than 51 percent of US employees who responded to a global survey conducted by Edelman from July to August said they were more likely to work for a pro-LGBTQ+ company, compared with 11 percent who said they were less likely. In a separate Edelman survey fielded in May, 34 percent of consumers said they were more likely to buy from a brand that expressed support for LGBTQ+ rights, versus 19 percent who said they were less likely.

– The WSJ reported that a top federal prosecutor said FTX founder Sam Bankman-Fried oversaw one of the biggest financial frauds in US history, charging that the former CEO stole billions of dollars from the crypto exchange’s customers while misleading investors and lenders.

An indictment by the US attorney’s office for the Southern District of New York charges Bankman-Fried with eight counts of fraud. Prosecutors allege that he took customers’ money to pay the expenses and debts of Alameda Research, an affiliated trading firm. Bankman-Fried is also charged with conspiring to defraud the US and violate campaign-finance rules by making illegal political contributions.

The SEC alleged in a civil lawsuit that Bankman-Fried diverted customer funds from the start of FTX to support Alameda and to make venture investments, real-estate purchases and political donations. The Commodity Futures Trading Commission (CFTC) filed a lawsuit linking his allegedly fraudulent conduct at Alameda and FTX to markets the CFTC regulates. 

Bankman-Fried has said he bore responsibility for FTX’s collapse but denied he committed any fraud. A lawyer acting for him on Tuesday said his client ‘is reviewing the charges with his legal team and considering all of his legal options.’

– Senator Elizabeth Warren, D-Massachusetts, is trying to push through Congress a bipartisan crackdown on money laundering in the crypto industry, CNN reported. Warren is working with Republican Senator Roger Marshall of Kansas to introduce new legislation that would seek to close loopholes in the financial system that pose national security risks by allowing digital assets to be used for money laundering, according to Warren’s office.

The new bill would tackle money laundering by attempting to bring the digital asset ecosystem into compliance with the existing system of anti-money laundering in the worldwide financial system.

– According to the WSJ, New York City is delaying enforcement of a law requiring bias audits of artificial intelligence systems used in hiring. The delay follows questions from industry over the specifics of how in practice the legislation would apply. The city will wait until April 15 to begin enforcing the statute. A spokesperson for the city’s department of consumer and worker protection didn’t provide a comment beyond the written notice.

– The Financial Times (paywall) reported that the SEC proposed the most sweeping overhaul of stock trading in almost two decades in an initiative designed to improve prices and transparency for small investors. SEC chair Gary Gensler said the reforms outlined in more than 1,500 pages of documents would improve ‘competition and benefit both everyday investors and institutional investors.’ His plans have met with resistance from market-making firms that dominate the system.

The agency’s focus on US stock market mechanics was revived after pandemic lockdowns prompted an explosion of retail trading. One of the proposed rules is a new auction mechanism that would force brokers to offer retail investor orders to a wider group of trading venues if they are less than $200,000. Another proposal, on best execution, would require brokers to document exactly how they had looked at venues to ensure they received the best price for their customers.

– The SEC also approved rule changes restricting when top executives can sell their company’s shares and forcing them to disclose more information about their planned stock sales as part of a renewed effort to combat insider trading, Bloomberg Law reported.

The SEC voted unanimously to adopt rules that will require directors and officers to wait at least 90 days between when they schedule a trade and sell their shares, about a month less than initially proposed. Companies will have to report their executives’ use of trading plans in quarterly reports. The rules, if complied with fully, give executives a defense against insider trading cases brought by the SEC.

– According to the WSJ, the US Department of the Treasury has proposed giving both banks and law-enforcement officials varying degrees of access to a huge new database of corporate-ownership information as part of an effort to prevent criminals and terrorists from using anonymous shell companies to hide money.

The proposal, issued by the Treasury’s Financial Crimes Enforcement Network (FinCEN), launches the second of three rulemakings officials have said are needed to implement the Corporate Transparency Act, an ownership-reporting law Congress approved in 2021. A previous rule covered which companies would be required to submit information about their owners to FinCEN, and what type of information they must supply. The latest proposal covers who will be able to use the information and how they can access its contents.

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