SEC Chairman Gensler Reveals Main Components of his Agenda: 10b5 Plans, SPACs and DEPS

On September 9, 2021, SEC Chairman Gary Gensler revealed the main components of his agenda in a speech before the SEC’s Investment Advisory Committee, which included:

1. Behavioral Design of Online Trading Platforms and use of DEPs

Chairman Gensler discussed the “proliferation” of online trading and management apps and robo-advisers, called digital engagement practices (DEPs). The SEC recently announced requests for information and comment in view of the potential conflicts of interest between the platform and investors when DEPs are designed to optimize platform revenues, data collection or investment behavior.  The SEC is also focusing on effects on investment advice and fairness of access and pricing, including for protected characteristics such as race and gender.

2. Recommendations Regarding Rule 10b5-1 Plans

On the topic of insider trading and 10b5-1 plans, Chairman Gensler expressed concern that plans under Exchange Act Rule 10b5-1(c) have exposed potential gaps in insider trading enforcement, which amounts to an affirmative trading defense.  He has requested the SEC Staff to focus on reform measures to Exchange Act Rule 10b5-1 to include:

• Cooling off period of at least four months
• Prohibition on overlapping plans
• Require electronic submission of Form 144
• Proxy statement disclosure of number of shares covered by NEO or issuer plans
• Form 8-K disclosure of adoptions, modification or cancellation of plans and the number of shares covered
• Enhanced disclosure of 10b5-1 trades, including adding modifying Form 4 to indicate plan trades and the date of plan adoption or modification
• Require all companies listed on U.S. exchanges (including foreign private issuers) be subject to Form 4 reporting requirements.

The Investment Advisory Committee’s meeting notes from August 6, 2021 can be found at https://www.sec.gov/spotlight/investor-advisory-committee-2012/draft-recommendation-of-the-iao-subcommittee-on-10b5-1-plans-082621.pdf.

3. Recommendations Regarding Special Purpose Acquisition Companies

In view of the recent rise in Special Purpose Acquisition Companies (SPACs), Chairman Gensler welcomed the Investment Advisory Committee’s recommendations for enhanced disclosure and stricter enforcement of existing SPAC disclosure rules.  The areas of SEC focus would include the adequacy of disclosure in the following areas

1. Disclosure of the Role of the Sponsor. Disclosure of the role of the SPAC sponsor (and/or insiders or affiliates such as celebrity sponsors/advisors), including disclosure of the sponsor’s appropriateness, expertise, and capital contributions, as well as an overview of any potential conflicts of interest on the part of the sponsor and other insiders or affiliates, and any divergence of the sponsor’s financial interest relative to that of the retail investors in the SPAC.
2. Plain English Disclosure of Economics of Founder Shares, Dilution, Etc. Plain English disclosure in the SPAC registration statement (beyond mere financial footnotes) around the economics of the various participants in a SPAC process, including the “promote” (e.g., “founder shares”) paid and their impact on dilution sufficient to enable a retail investor to make a meaningful comparison of the upside potential and downside risks of a SPAC transaction compared to other SPACs as well as other types of investment opportunities. To the extent particulars cannot be determined and disclosed because they are subject to future negotiation at the time of the “de-SPAC” transaction, the Commission should consider ways to encourage disclosure around “guardrails” or ranges of acceptable terms.
3. Clear Disclosure in the S-1 of the Timeline of the Process. Disclosure that includes a clear description (with diagrams or charts as appropriate) in the SPAC registration statement of the mechanics and timeline of the SPAC process, including the precise nature of the instrument being purchased, the events required in the next two years for value appreciation of that instrument, and the details of the shareholder approval process at the time of de-SPAC (e.g., whether shareholders are permitted to vote for a deal while simultaneously redeeming their shares).
4. Enhanced Disclosure of Asset Class and Geography of Potential Target Company. Disclosure in the SPAC registration statement regarding the opportunity set and target company areas of focus, including a clearer discussion of the boundaries of the search area and attributes of acceptable and unacceptable companies and the ground rules for any changes to the search area.
5. Enhanced Disclosure of Risks. Disclosure regarding the competitive pressure and risks involved in finding appropriate targets and reaching market acceptable prices for those companies (i.e., disclosure beyond mere risk factors in the risk factor section of the SPAC registration statement), as well as disclosure regarding the absorption of expenses by the sponsor in the event there is not a successful de-SPAC transaction.  The Committee believes it should be clear to investors that the sponsor has an interest in completing a transaction even if doing so might not benefit the remaining investors after the de-SPAC transaction.
6. Enhanced Disclosure Regarding PIPE Transaction. Disclosure of the acceptable range of terms under which any additional funding (e.g., public investment in private equity “PIPEs”) might be sought at the time of acquisition/redemption. The Committee suggests the Commission consider requiring disclosure of the identity and relationship of PIPE investors, and whether any side payments are to be made to certain shareholders as an inducement not to redeem their shares.
7. Enhanced Disclosure Regarding Potential Investment Company Treatment. Disclosure regarding the manner in which the sponsor plans to assess the capability of potential targets to be a “34 Act company” from a governance and internal control perspective, and whether the sponsor will take any steps to ensure the target company can meet minimum preparedness/quality standards for operating as public company.
8. Enhanced Disclosure About Pre-Acquisition Due Diligence. Disclosure about the minimum pre-de-SPAC diligence the sponsor will commit to regarding the accounting practices used by the target company, including audit history, use of GAAP and non-GAAP pro forma numbers, and audit committee (composition; communication between committee, auditor, and management).

The Investment Advisory Committee recommends that the SEC prepare and publish an analysis of the players in the various SPAC stages, their compensation, and their incentives.  Based on the information contained in that analysis, the Committee may follow-up with additional actions including hosting another panel discussion to re-examine the issues raised, or even crafting additional recommendations to the Commission regarding SPACs.  The Investment Advisory Committee’s meeting notes on SPACs from August 26, 2021 can be found at https://www.sec.gov/spotlight/investor-advisory-committee-2012/draft-recommendation-of-the-iap-and-iao-subcommittees-on-spacs-082621.pdf.

On the topic of SPACs, Chairman Gensler expressed particular interest in disclosure regarding dilution and costs for investors.  The Committee’s August 26, 2021 meeting notes reveal that one method of enhancing disclosure would be to require issuers to provide a table of the cash per share contingent on specified levels of redemption, paralleling the cash net of fees required on the cover of an IPO prospectus, so they understand the impact of de-SPAC dilution.