Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.
Persistence pays off. In June, the NYSE filed Amendment No. 2 to its application for a proposed rule change to allow companies going public to raise capital through a primary direct listing. Yesterday, the SEC approved that rule change. Prior to this new approval, under NYSE rules, only secondary sales were permitted in a direct listing, which meant that companies that had conducted direct listings looked more like well-heeled unicorns, where the company was not necessarily in need of additional capital. The new rule change is likely to be a game changer for the traditional underwritten IPO. So much so, in fact, that Nasdaq has now also submitted an application to permit companies to conduct direct listings with capital raises.
The path to SEC approval was a bit rocky. A little over a week after the NYSE’s initial application was filed, as reported by CNBC and Reuters, the SEC rejected the proposal, and it was removed from the NYSE website, causing a lot of speculation about the nature of the SEC’s objection and whether the proposal could be resurrected. At the time, an NYSE spokesperson confirmed to CNBC that the proposal had been rejected, but said that the NYSE remained “‘committed to evolving the direct listing product…This sort of action is not unusual in the filing process and we will continue to work with the SEC on this initiative.’” (See this PubCo post.) The NYSE did persevere, and the proposal was refiled in December with some clarifications and corrections. But then—silence. In January and February, the NYSE had four meetings with SEC staff, including folks in Chair Clayton’s office, presumably to make the case for the proposal. A number of public comment letters, of divided opinion, were submitted. Apparently, the SEC remained unconvinced, designating a longer period to decide, and then in late March, issued an Order instituting proceedings to determine whether to approve or disapprove the proposed rule change. Undaunted, the NYSE filed Amendment No. 2, which is discussed in more detail in this PubCo post. The NYSE appears to be rather pleased by the positive outcome—as described by NYSE Vice Chair John Tuttle, “Innovation, disruption, and problem-solving are part of the NYSE’s DNA.”
Comment on the Proposed DOL Rule
More from: Brian Tomlinson, CECP
Brian Tomlinson is Director of Research, CEO Investor Forum at Chief Executives for Corporate Purpose (CECP). This post is based on a CECP comment letter submitted to the Department of Labor. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here).
Summary: The proposed rule is unnecessary and represents a confused understanding of ESG and its role in mainstream investment analysis. The rule overlooks and fails to address the volume of institutional investors (across segments and strategies) that are incorporating analysis of ESG issues into mainstream investment analysis, including buy, sell and hold decisions, upgrade and downgrade recommendations, and portfolio construction. The rule does not address the imperative of long-term value creation and the key insights ESG provides for assessing long-term corporate resilience.
The proposed rule demonstrates little awareness of the scale and seriousness of corporate America’s response to the long-term, ESG imperative, both at the issuer and industry-association level. Leading CEOs of corporate America want the capital markets to understand a corporation’s financial prospects and operational performance and acknowledge that this cannot happen without a meaningful understanding of an issuer’s financially material ESG issues and how those relate to and interact with long-term business strategy.
The proposed rule will impose direct costs on American retirees. The suggested “benefits” identified in the rule are unsubstantiated in the text of the rule and seem to rest on assertion only. At the same time, the rule seems likely to impose huge indirect costs on our capital markets by undermining innovation, discouraging the development of market-based solutions and the informed use of fiduciary discretion.
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