SECURITIES CORNER

In a recent order (the “Order”) issued by the SEC, several broker-dealers and investment advisers (the “Firms”) were charged with widespread failures to maintain and preserve electronic communications by the Firms and their employees. 

The investigation conducted by the SEC revealed continuous and longstanding uses of unapproved communication methods, known as off-channel communications. In the Order, the Firms admitted that their employees often sent and received off-channel communications related to recommendations, proposals, and advice related to business transactions. Additionally, employees communicated about business via personal text messages. Not only did the Firms violate federal securities laws by using unapproved communication methods, but the Firms also failed to maintain or preserve a substantial majority of these off-channel communications, furthering the violations of the federal securities laws. 

Following the investigation, the Firms admitted that their conduct violated the recordkeeping provisions of the federal securities laws and, as a result, agreed to pay a substantial combined civil penalty. In addition to paying the civil penalties, the Firms began implementing various improvements to their compliance policies and procedures to address these violations. Lastly, each Firm was also ordered to cease and desist from future violations of the relevant recordkeeping provisions.  

This action brought by the SEC signifies its continued efforts to ensure that “entities comply with the recordkeeping requirements, which are essential to [the SEC’s] ability to monitor and enforce compliance with the federal securities laws.” 

A pharmaceutical company (the “Company”) that developed a medical product (the “Product”) to treat a rare disorder was entitled to coverage under its Directors and Officers policy for a class action lawsuit. The court rejected the insurer’s argument that the class action was related to the earlier SEC subpoena, holding that there was only a “loose connection” between the class action and the subpoena, when a "meaningful linkage" was required for the insurers to bar coverage.

Earlier, the SEC investigated the Company, focusing on its inaccurate annual and quarterly reports, as well as the lack of an internal accounting system. Following its investigation, the SEC issued a subpoena seeking documents related to the Company’s foreign activities. According to the SEC, the Company's subsidiaries in Europe made improper payments to government officials in connection with the Product, while subsidiaries in Brazil did not maintain accurate payment records. 

After the SEC’s investigation, a group of stockholders brought a federal securities lawsuit against the Company and its directors and officers. The stockholders alleged that the directors and officers misled the investors about the Company's financial success, stating that they overpaid for stock that was propped up by illegal activity. After the current policy’s insurer issued a denial, the Company sued its insurers seeking coverage for the securities action under the current policy. The court stated that coverage depended on whether the securities action was related to the earlier subpoena, putting this claim outside of the current policy’s period.

The insurers relied on the language of the current policy which stated that claims arising out of the same wrongful act should be deemed a single claim, and, thus, the two actions were related and covered under the earlier policy. However, the Company argued that the securities action does not share the requisite “nexus” with the subpoena. Therefore, coverage for the securities action should fall under the current policy. The court agreed with the Company and applied the meaningful linkage standard concluding that the two actions were not related because they (1) involved different types of investigations; (2) occurred in different time periods; (3) involved different regulations; (4) sought different relief; and (5) perhaps, most significantly, the two differed in the type of wrongful conduct that was alleged. Ultimately, the court held that coverage for the securities class action was not related to the prior subpoena and, thus, was entitled to coverage under the current policy. 

• Disclosure statements concerning climate-related risks that have or are reasonably likely to have a material impact on the company, including on its strategy, results of operations or financial condition, and the actual and potential material impacts of such risks on the company’s strategy, business model, and outlook;
• If applicable, disclosures must be made about the company’s activities, to mitigate or adapt to a material climate-related risk, including a qualitative and quantitative description of material expenditures and material impacts on financial estimates and assumptions that directly result from the mitigation or adaption activities and the use;
• When submitting audited financial statements, companies must disclose quantitative and qualitative information regarding capitalized costs, expenditures expensed, charges and losses incurred “as a result of” severe weather events;
• Disclosures regarding climate-related governance and, if applicable, risk management processes; and
• Disclosures regarding any climate-related target set by a company if the target has or is reasonably likely to materially affect the company’s business, results of operations or financial condition.