SCOTUS rules against SEC’s use of administrative law judges
In a 6 – 3 opinion issued June 27 in SEC v. Jarkesy, the US Supreme Court rejected the Securities and Exchange Commission’s use of in-house tribunals to enforce regulations and impose penalties, stating that the practice violates the Seventh Amendment right to a jury trial. The case involved a hedge fund manager that raised approximately $24 million from accredited investors between 2007 and 2010. The SEC charged George Jarkesy with securities fraud and claimed that he misled investors. The case was brought before the SEC’s administrative law judges, who found Jarkesy liable and ordered him to pay a civil penalty and disgorge profits. Jarkesy appealed to the US Court of Appeals for the Fifth Circuit, where the ruling was vacated. The Fifth Circuit held that the SEC’s proceedings were unconstitutional because they deprived Jarkesy of his constitutional right to a jury trial. The SEC appealed, and after review by SCOTUS, the Court agreed with the Fifth Circuit, holding that the Seventh Amendment applied to this type of case, and that the public rights exception – allowing Congress to assign certain matters to administrative agencies for adjudication – did not apply. The Supreme Court reasoned that because the SEC’s antifraud provisions are similar to common law fraud and cases involving common law fraud must be heard by a jury, then cases implicating the SEC’s antifraud provisions must similarly be heard by a jury. For further details on this case, see this July 26 Cooley alert and this July 9 Cooley PubCo blog post.
SCOTUS eliminates Chevron deference for regulatory agencies
In a 6 – 3 opinion issued June 28, SCOTUS eliminated the long-standing and long relied upon Chevron deference doctrine. Under Chevron, courts were required under certain circumstances to defer to federal agencies on matters of interpretation when laws were ambiguous. The case has been cited by federal courts more than 18,000 times. However, SCOTUS’s opinion, authored by Chief Justice John Roberts, provides that Chevron deference is inconsistent with the Administrative Procedure Act, and that it is up to courts to determine whether the law means what a federal agency interprets it to mean. The opinion also confirms that the ruling does not call into question any prior cases that relied on the Chevron doctrine. For further details on the case and its ramifications, see this SCOTUS blog post and this July 1 Cooley PubCo blog post.
SEC charges RR Donnelley with internal controls failure
On June 18, the SEC announced that RR Donnelley (RRD), a global provider of business communication and marketing services, agreed to pay more than $2.1 million to settle disclosure and internal controls failure charges relating to cybersecurity incidents and alerts from late 2021. According to the SEC, RRD had insufficient controls for elevating cybersecurity incidents to its management and for protecting company assets from cyberattacks.
The SEC’s press release highlights that while RRD’s security personnel and third-party service provider were responsible for monitoring network security, “RRD failed to design effective disclosure controls and procedures to report relevant cybersecurity information to management with the responsibility for making disclosure decisions, and failed to carefully assess and respond to alerts of unusual activity in a timely manner.” The SEC further found that RRD did not devise or maintain “a system of cybersecurity-related internal accounting controls sufficient to provide reasonable assurances that access to RRD’s assets – its information technology systems and networks – was permitted only with management’s authorization.” SEC Commissioners Hester Peirce and Mark Uyeda issued a joint statement disagreeing with the SEC’s expansion of the internal accounting controls rules to these types of cases. For more information about this case, see this July 17 alert from the Cooley cyber/data/privacy team.
SEC releases spring 2024 agenda priorities
The SEC released its spring 2024 agenda, and rules related to conflict minerals and proxy access remain on the SEC’s long-term agenda but have not been scheduled for specific rulemaking at this time. Below are the projected timelines for proposing and finalizing certain rules.
European Union’s Artificial Intelligence Act goes into effect
On July 12, after several years of debate, the European Union passed the Artificial Intelligence Act (AI Act), which became effective on August 1, 2024, with many of the AI Act’s rules having delayed effectiveness over the next two years. The first comprehensive set of rules broadly covering numerous aspects of AI, the AI Act covers companies developing, producing, selling or using AI, and it applies to companies both inside and outside the EU if those companies do business in the EU or with Europeans. Under the AI Act, there are different obligations for developers based on use cases and levels of risk, with higher-risk use cases (e.g., biometric uses or law enforcement uses) having more regulation. For more background on the AI Act and how companies can prepare, see this July 16 Cooley alert outlining the act and enforcement timeline, this Cooley video short on the Brussels effect, and this article from TechGC.
Delaware approves DGCL amendments
Delaware lawmakers approved – and Delaware Gov. John Carney signed into law – amendments to the Delaware General Corporation Law (DGCL) to allow corporations to enter into certain stockholder contracts, even if certain provisions are not set forth in a certificate of incorporation. The amendments are largely in response to the Delaware Court of Chancery’s opinion issued in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, which invalidated relatively commonplace terms in stockholder agreements that grant a stockholder influence over the company’s actions. The amendments became effective on August 1, 2024. For additional reading on these amendments and the controversy surrounding their adoption, see this June 25 Cooley PubCo blog post. For background on the Moelis case, see this April 8 post from our Securities Litigation + Enforcement blog.
Proxy season Rule 14a-8 wrap-up
As this year’s proxy season officially winds down, we’re starting to see statistics compiled on the outcomes of shareholder proposals. For the 2023 – 2024 season, challenges to shareholder proposals were up 50% (276 challenges compared to 184 last season), bringing the total number of challenges more in line with 2021 – 2022 numbers than 2022 – 2023. In addition, for this year’s proxy season, the SEC allowed exclusions more often than it did last season (144 this season compared to only 85 last season), and procedural exclusions made up only 29% of such exclusions this year, compared to 46% of such exclusions last season. In terms of other exclusions granted, the number of “ordinary business” exclusions increased (58 exclusions this season compared to 30 last season), and “violation of law” exclusions increased (22 exclusions this season versus one last season). Finally, the number of withdrawn proposals also increased to 21% this season, up from 15% last season.
