On August 31, 2020, the Council of Institutional Investors (CII) filed a notice informing the SEC that it intends to challenge the SEC's approval of the NYSE rule change that would allow companies to raise capital in connection with a direct listing. As a result, the SEC has stayed the effectiveness of the NYSE rule change until the SEC orders otherwise. Companies that have anxiously awaited the SEC's approval of the new NYSE rules will therefore need a little longer, although how much longer is unclear. The SEC rules do not specify a time period for taking action on the petition for review.
Challenges to final rulemaking are relatively rare—perhaps because the rule making process itself gives interested parties ample opportunity to weigh in with concerns. The NYSE's latest direct listing rules were approved on behalf of the SEC by its Division of Trading and Markets on August 26, 2020 after nine months of discussion between the NYSE and the SEC. As is the case with any SEC rulemaking, the public was invited to comment on the proposals. The CII wrote three comment letters to the SEC as part of the rulemaking process, which were cited in the final release adopting the NYSE rule proposal.
The CII is required by the SEC's Rules of Practice to file a petition for review within five days of its notice (i.e., September 7, 2020). The petition needs to include a statement of issues it is seeking to have reviewed and the reasons why review is appropriate, as well as any findings of fact or conclusions of law being challenged by the ICC. The CII's objections are presumably the same as the ones raised by it in the comment letters submitted in connection with the SEC rulemaking process. In particular, the ICC raised concerns regarding the ability of purchasers in a direct listing to bring claims for material misstatements and omissions under Section 11 of the Securities Act of 1933. The ICC also raised concerns regarding whether the direct listing standards are sufficient to ensure adequate liquidity.
The CII is challenging the action taken by the Division of Trading and Markets on the basis that is "aggrieved" by the actions taken pursuant to the authority delegated to the Division of Trading and Markets by the SEC. The SEC's Rules of Practice provide that the SEC may decline to review the delegated action and, in determining whether to grant review, the SEC will consider whether the petition for review makes a reasonable showing that the original decision embodied a finding of material fact that is clearly erroneous or a conclusion of law that is erroneous, or an exercise of discretion or decision of law or policy that is important and that the SEC should review.
The CII is a nonprofit association whose members include US institutional investors that invest public assets, foundations and endowments. The CII frequently takes positions on issues that it considers important to investor protection and governance, including the issuance of dual class stock and matters related to the SEC's proxy process amendments.
Originally published by Arnold & Porter Kaye Scholer, September 2020
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