Why Reporting Accounting Fraud Will Lead to Future SEC Whistleblower Awards
A recent CNN documentary about the Enron accounting scandal is a stark reminder of the devastation that results when corporate officers cook the books – thousands of employees lost their jobs, individual investors and pension funds lost billions, and the stock market plummeted as investors lost confidence in the accuracy of public company accounting. Most employees that knew about the fraud failed to speak up due to fear of retaliation and a corporate culture characterized by greed and deception. If Enron employees had been protected against retaliation and incentivized to report accounting fraud to the SEC, the SEC may have learned about the fraudulent practices early enough to combat and remedy those practices.
Under the SEC Whistleblower Program, whistleblowers can submit tips anonymously to the SEC through an attorney and be eligible for an award for exposing any material violation of the federal securities laws. Since 2011, the SEC has issued more than $2.2 billion in awards to whistleblowers. The largest SEC whistleblower awards to date are:
$279 million (May 5, 2023)
$114 million (Oct. 22, 2020)
$110 million (Sept. 15, 2021)
This article discusses: 1) how whistleblowers can earn awards for reporting accounting fraud to the SEC; 2) the pervasiveness of accounting fraud at U.S. publicly traded companies; and 3) the SEC’s focus on accounting fraud which, in turn, will lead to future SEC whistleblower awards.
SEC Whistleblower Program
In response to the 2008 financial crisis, Congress passed the Dodd-Frank Act, which created the SEC Whistleblower Program. Under the program, the SEC is required to issue monetary awards to whistleblowers when they provide original information about violations of the federal securities laws (e.g., accounting fraud) that leads to successful SEC enforcement actions with monetary sanctions in excess of $1 million. Whistleblowers are eligible to receive an award of between 10% and 30% of the total monetary sanctions collected in a successful enforcement action. In certain circumstances, even officers, directors, auditors, and accountants may be eligible for awards under the program.
Since the inception of the SEC Whistleblower Program, whistleblower tips have enabled the SEC to bring successful enforcement actions resulting in more than $6 billion in monetary sanctions. In Fiscal Year (FY) 2024 alone, the SEC Office of the Whistleblower awarded more than $255 million to whistleblowers, which included a $98 million award. Also in FY 2024, the SEC received nearly 25,000 whistleblower tips, of which 2,609 related to Corporate Disclosures and Financials. As detailed below, recent data suggest that whistleblower tips related to accounting frauds will likely increase in the coming years due to rampant accounting fraud, violations, and errors.
Whistleblowers Needed: Accounting Fraud is Widespread
In October 2023, a paper titled How Pervasive is Corporate Fraud? estimated that “on average 10% of large publicly traded firms are committing securities fraud every year.” According to the paper:
Accounting violations are widespread: in an average year, 41% of companies misrepresent their financial reports, even when we ignore simple clerical errors. Fortunately, securities fraud is less pervasive. In an average year, 10% of all large public corporations commit (alleged) securities fraud, with a 95% confidence interval between 7 and 14%.
The paper’s findings about the pervasiveness of accounting violations were echoed in a December 2024 Financial Times article titled Accounting errors force US companies to pull statements in record numbers. According to the article:
The number of US companies forced to withdraw financial statements because of accounting errors has surged to a nine-year high, raising questions about why mistakes are going unnoticed by auditors.
In the first 10 months of this year, 140 public companies told investors that previous financial statements were unreliable and had to reissue them with corrected figures, according to data from Ideagen Audit Analytics. That is up from 122 in the same period last year and more than double the figure four years ago. So-called reissuance restatements cover the most serious accounting errors, either because of the size of the mistake or because an issue is of particular concern to investors.
Fortunately for investors, officers, directors, auditors, and accountants can be eligible for awards under the SEC Whistleblower Program, and whistleblower tips – especially from individuals with actual knowledge of the fraud – enable the SEC to quickly detect and halt accounting schemes.
Accounting Fraud in SEC Crosshairs
SEC enforcement actions against accounting violations and improper disclosures often lead to significant penalties. Eligible whistleblowers may receive awards of between 10% and 30% of the monetary sanctions collected in successful enforcement actions. Since 2020, some of the SEC’s largest enforcement actions were brought against companies engaged in accounting violations:
In 2020, General Electric agreed to pay a $200 million penalty for misleading investors by understating losses in its power and insurance businesses.
In 2021, The Kraft Heinz Company agreed to a $62 million penalty to settle charges that it engaged in a long-running expense management scheme that resulted in the restatement of several years of financial reporting
In 2021, Luckin Coffee agreed to pay a $180 million penalty for defrauding investors by materially misstating the company’s revenue, expenses, and net operating loss in an effort to falsely appear to achieve rapid growth and increased profitability and to meet the company’s earnings estimates.
In 2022, accounting firm Ernst & Young agreed to pay a $100 million penalty due to some employees cheating on CPA ethics exams and for misleading SEC investigators.
In 2024, UPS agreed to pay a $45 million penalty for misrepresenting its earnings by improperly valuing its UPS Freight business unit.
Whistleblower tips concerning similar accounting violations have led to, and will continue to lead to, significant whistleblower awards. For more information about reporting accounting fraud to the SEC and earning a whistleblower award, see the following articles:
How to Report Accounting Fraud an Earn an SEC Whistleblower Award
5 Things Whistleblowers Should Know About Reporting Accounting Fraud to the SEC
Improper revenue recognition tops SEC fraud cases
Delaware Enacts Sweeping Changes to the Delaware General Corporation Law
On March 25, 2025, the governor of Delaware signed into law Senate Bill 21, over much opposition from the plaintiffs’ bar and some academics. The bill, which amends Sections 144 and Section 220 of the Delaware General Corporation Law, 8 Del. C. (the “DGCL”), seeks to provide clarity for transactional planners in conflicted and controller transactions, and seeks to limit the reach of Section 220 books and records demands. These amendments significantly alter the controller transaction and books and records landscape.
Background
Senate Bill 21 comes in the backdrop of heightened anxiety over whether Delaware will retain its dominance in the corporate law franchise. Businesses have cited a seemingly increased litigious environment in Delaware, and when coupled with a handful of high-profile companies redomesticating or considering redomesticating to other jurisdictions (see our blog article about the Tripadvisor redomestication here), other states such as Texas and Nevada making a strong push to accommodate for new incorporations and redomestications, and a series of opinions out of the Delaware Court of Chancery that were unpopular in certain circles, concern was growing of Delaware falling from its position as the leading jurisdiction for corporate law.
This is not the first time the Delaware legislature has acted to re-instill confidence in Delaware corporate law to the market. Senate Bill 21 also comes less than a year after Senate Bill 313 was signed into law. Senate Bill 313, coined the “market practice” amendments, sought to address the decisions in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, 311 A.3d 809 (Del. Ch. 2024), Sjunde AP-Fonden v. Activision Blizzard, 124 A.3d 1025 (Del. Ch. 2024), and Crispo v. Musk, 304 A.3d 567 (Del. Ch. 2023), which many found surprising. And perhaps most famously, Section 102(b)(7), the director exculpation clause (now the director and officer exculpation clause following an amendment in 2022), was enacted in the wake of the Delaware Supreme Court’s decision in Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985), which caused shockwaves throughout the corporate law community as well as the director and officer insurance market.
Senate Bill 21 Amendments
Section 144. Section 144 of the DGCL was revamped entirely from being a provision speaking on the voidability of conflicted transactions, into a statutory safe harbor for conflicted and controller transactions. The essence of the new Section 144 is defining what a controlling stockholder is, and providing different safe-harbor frameworks for conflicted transactions, controlling stockholder transactions, and controlling stockholder “go private” transactions for public companies.
Controllers are now statutorily designated as those persons (together with affiliates and associates) that (1) has majority control in voting power, (2) has the right to nominate and elect a majority of the board, or (3) possess the functional equivalent of majority control by having both control of at least one-third in voting power of the outstanding stock entitled to vote generally in the election of directors and the power to exercise managerial authority. The last category will likely be the subject of much litigation in the future, but the defined boundaries will limit a plaintiff’s ability to cast a person as a controller.
Under the new Section 144, controllers (and directors or officers of a controlled company) can shield themselves from a fiduciary claim in a conflicted transaction if (1) a committee of 2 or more disinterested directors that has been empowered to negotiate and reject the transaction, on a fully-informed basis, approve or recommend to approve (by majority approval) the transaction, or (2) it is approved by a fully-informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholder. And in a “go private” transaction, both (1) and (2) above need to be accomplished. Such actions will grant the transaction “business judgment rule” deference. This is a significant change from recent Delaware Supreme Court precedent under Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), and its progeny holding that a controller transaction providing a non-ratable benefit to the controller will be reviewed under the discerning “entire fairness” standard unless the transaction is conditioned “ab initio” (i.e., at the outset) on the approval of a majority of fully-informed disinterested director and fully-informed, disinterested and uncoerced stockholders. The legislature has spoken that the spirit and structure of MFW will only apply to “go private” transactions, whereas in a non-“go private” transaction the controller needs to meet just one of the MFW prongs, and a disinterested director cleansing does not have to be “ab initio.” Note also that Section 144 provides that controllers are not liable for monetary damages for breaches of the duty of care.
New Section 144 also creates a new presumption that directors of public corporations that are deemed independent to the company under exchange rules are disinterested directors under Delaware law (and, if the director meets such independence criteria with respect to a controller, the director is presumed disinterested from such controller). To overcome this presumption, there must be “substantial and particularized facts” of a material interest or a material relationship with a person with a material interest in the act or transaction. Note that NYSE and NASDAQ independence is a somewhat different inquiry from director disinterestedness under Delaware corporate law. To qualify as independent for exchange purposes, directors cannot hold management positions at the company, its parents or subsidiaries, and former executives are not considered independent for three years after their departures. See Nasdaq Rule 5605 and NYSE Listed Company Manual 303A.02. A director also does not qualify as independent if the director or their families received more than $120,000 in compensation from the company in any 12-month period in the prior three years. In contrast, disinterestedness of a director under Delaware law has been historically a much more fact-and-circumstances inquiry, where judges have looked to things like co-owning an airplane, personal friendships and other “soft” factors.
Section 220. Under Section 220, a stockholder is entitled to examine a corporation’s “books and records” in furtherance of a “proper purpose” reasonably related to the person’s status as a stockholder. The use of this potent tool has proliferated through the years, with stockholders of Delaware corporations becoming increasingly savvy, sophisticated and demanding with their books and records demands to investigate potential corporate wrongdoings before filing suit. Delaware courts have encouraged the use of Section 220, in many cases urging stockholders to use the “tools at hand” ahead of filing suit, presumably with the hope of curtailing bad claims clogging up the docket.
The amended Section 220 limits the universe of what a stockholder may demand under Section 220. Prior to the amendments, a stockholder could pursue materials, even if not “formal board materials,” if they make particularized allegations of the existence of such materials and a showing that an investigation of the suspected wrongdoing was “necessary and essential.” The statute, as amended, limits the ability for stockholders to pursue materials such as personal director or officer emails that may have relevant information, which could be allowed under the prior regime. Under the amended Section 220, if what the stockholder seeks is not part of the nine types of “books and records” spelled out in the statute, the stockholder cannot have access to it in a Section 220 books and records demand.
Questions Going Forward
The amendments to Sections 144 and 220 collide with or directly overturn several Delaware caselaw precedents. The landscape has changed, and we will see how Delaware corporations and its constituents respond. From a transactional planning perspective, the safe-harbors of Section 144 provide much-needed guidance, but with limited caselaw overlay interpreting the boundaries of the safe-harbors, the structuring is not without risk.
Turning back to the backdrop of Senate Bill 21: does this fix the “DExit” concern? Perhaps. But these amendments undoubtedly swing the pendulum to the corporation, controller and management. Whether it is swinging back toward the center is up for debate, but what is not debatable is that preserving the Delaware corporate law franchise depends upon balance. Through the legislative process there were some institutional investors that opposed Senate Bill 21. We will see what kinds of moves, if any, investors of Delaware corporations will make going forward.
Finally, is Section 144 an “opt out” provision? The DGCL is a regime of mandatory statutes, enabling statutes, and default statutes one can opt in or out of. Returning to Section 102(b)(7), this exculpation provision is a well-known example of an opt-in, where a corporation has the option to add that exculpation clause to the company’s certificate of incorporation. Section 203, on the other hand, is an “opt out” statute where a corporation can choose not to have certain restrictions on business combinations with interested stockholders. In the legislative process, several prominent corporate law professors sought to have Senate Bill 21 revised such that it would be a charter “opt-in,” meaning that the default is the status quo, and companies (with stockholder approval) can adopt the controller transaction safe-harbor and books and records limitations in the new Sections 144 and 220. This proposal was ultimately not accepted, but there has been some mention that the text of the new Section 144 suggests it is actually an “opt out” statute. If that is the case, and investors do feel strongly about the Senate Bill 21 amendments, we may see stockholder proposals in the coming years for amendments to the corporate charter to opt out of the new Sections 144 and 220. We will watch the SEC Rule 14a-8 proposals in upcoming proxy cycles to see if this is the case.
Thompson v. United States (No. 23-1095)
William Blake once observed that “a truth that’s told with bad intent, beats all the lies you can invent.” It turns out the Supreme Court agrees, at least for escaping liability under 18 U.S.C. § 1014. In Thompson v. United States (No. 23-1095), a unanimous court held that this statute criminalizes only false statements and not statements that are misleading but literally true.
Patrick Thompson took out three loans from the Washington Federal Bank for Savings at various times. He first borrowed $110,000 in 2011. Then in 2013, he borrowed an additional $20,000. The year after that, he borrowed $89,000 more. These three loans resulted in a total loan balance of $219,000. In 2017, however, the Washington Federal Bank for Savings failed, and the FDIC assumed responsibility for collecting the bank’s outstanding loans. As part of the FDIC’s collection attempts, Planet Home Lending, the FDIC’s loan servicer, sent Thompson an invoice for $269,120.58, reflecting his principal amount plus unpaid interest.
After receiving the invoice, Thompson called Planet Home Lending and professed confusion as to where the $269,120.58 figure came from. On the call (which, unfortunately for our supposedly befuddled borrower, was recorded) Thompson said “I borrowed the money, I owe the money—but I borrowed…I think it was $110,000.” Thompson later received a call from two FDIC contractors, whose notes of the call reflect that Thompson mentioned borrowing $110,000 for home improvement. He later settled his debt with the FDIC for $219,000—an amount that coincidentally reflected the exact principal amount of the loans he had taken out but apparently could not recall.
Any elation he felt over his $50,000 in interest savings was likely cut short, however, when he was indicted on two counts of violating 18 U.S.C. § 1014. That statute prohibits “knowingly mak[ing] any false statement or report . . . for the purpose of influencing in any way the action of . . . the Federal Deposit Insurance Corporation . . . upon any . . . loan.” One count related to his call to Planet Home Lending, and the second to his call with the FDIC contractors. Apparently secure in his belief in his own veracity, Thompson proceeded to trial. But the jury reached a different conclusion regarding his trustworthiness and convicted him of both counts.
He moved for acquittal or a new trial, arguing that a “conviction for false statements cannot be sustained where, as here, the alleged statements are literally true, even if misleading.” Thompson argued that his statements about borrowing $110,000 were literally true because he had in fact borrowed that amount of money from the Bank, even though he later borrowed more. Cf. Mitch Hedberg (“I used to do drugs. I still do, but I used to too.”). The district court denied the motion, finding that “literal falsity” was not required to violate section 1014 under Seventh Circuit precedent. The Seventh Circuit affirmed, holding that “misleading representations” were criminalized by that statute.
In a unanimous opinion by Chief Justice Roberts, the Supreme Court reversed and remanded. In their view, this was a simple case. The plain text of the statute criminalizes “knowingly mak[ing] any false statement or report.” But “false and misleading are two different things” because a “misleading statement can be true.” And because “a true statement is obviously not false,” misleading-but-true statements are outside the scope of the statute.
Much in the case ultimately turned on whether the natural reading of “false” includes a true but misleading statement. As one of many colorful examples of how even true statements can be misleading, Roberts discussed a hypothetical, which the Government conceded at oral argument, that “[i]f a doctor tells a patient, ‘I’ve done a hundred of these surgeries,’ when 99 of those patients died, the statement—even if true—would be misleading because it might lead people to think those surgeries were successful.” (The statement would be equally true—and equally misleading—if all 100 patients had died, but perhaps the Court thought that even its hapless hypothetical surgeon was unlikely to have botched all his operations). With that recognition in mind, Roberts quickly rejected the Government’s argument made with “dictionary in [one] hand” and “thesaurus in the other hand” that false can also simply mean “deceitful” and that “false and misleading have long been considered synonyms.” Unimpressed with the stack of books the Government brought to bear, the Court observed that this argument merely “point[ed] out the substantial overlap between the two terms.”
Finally, the Chief turned to context and precedent. Starting with the former, Roberts noted that many other criminal statutes do criminalize both false and misleading statements, including “[m]any other statutes enacted in the same period” as section 1014 (like such stalwarts of the federal code as the Perishable Agricultural Commodities Act). This gave rise to the presumption that Congress’s omission of the term “misleading” from section 1014 was deliberate. And as to precedent, Roberts found support in Williams v. United States (1982), where the Court stated that “a conviction under §1014 requires at least two things: (1) the defendant made a statement, and (2) that statement can be characterized as ‘false’ and not ‘true.’”
Justices Alito and Jackson each filed a brief concurrence. Justice Alito emphasized that “context” is key when assessing whether a misleading statement crosses the line into being false. Justice Jackson wrote separately to note that the jury instructions in Thompson’s case had actually been correct, referencing only false statements while making no mention of misleading statements. In her view, then, there was “little for the Seventh Circuit to do on remand but affirm the District Court’s judgment upholding the jury’s guilty verdict.”
Updated SEC Marketing Rule FAQ: Clarification Regarding Presentation of Net Extracted Performance
On March 19, 2025, the Securities and Exchange Commission (SEC) staff issued an update to its frequently asked questions (FAQ)[1] guidance with respect to registered investment advisers’ compliance with Rule 206(4)-1 (Marketing Rule) under the Investment Advisers Act of 1940 (Advisers Act). The FAQ provides new direction for advisers on the presentation of gross and net extracted performance data for a single investment or a group of investments (an “extract”) in marketing materials, as well as guidance as to whether certain portfolio or investment characteristics would constitute “performance” for purposes of the Marketing Rule.
The Marketing Rule originally required the presentation of gross extracted performance to be accompanied by a presentation of net extracted performance. This was made explicitly clear in a prior SEC FAQ published on January 11, 2023.[2] Under the updated FAQ, however, an adviser will now be permitted to present gross extracted performance and refer to certain portfolio or investment characteristics without also presenting corresponding net extracted performance, provided that certain additional requirements are met as described below.
Presentation of Gross and Net Performance of Extracts and Investment Characteristics
Following the release of the Marketing Rule, advisers to private investment funds struggled with the requirement to present net performance data for extracts, as it was unclear from the final rule how fund-level fees and expenses should be applied to specific investments. This led to many advisers taking various diverging approaches in an attempt to comply with the Marketing Rule and a perception among private fund industry participants that such additional disclosures were inherently flawed for resting upon simplistic, if not artificial, assumptions mandated by the Marketing Rule concerning the allocation of fund-level fees and expenses and provided little (if any) practical benefit for investors. Additionally, the Marketing Rule does not define the term “performance”, which led to uncertainty as to whether certain portfolio or investment characteristics (e.g., yield, coupon rate, contribution to return, Sharpe ratio, Sortino ratio and other similar metrics), for which calculating “net” performance may be impossible, misleading or confusing to investors, could actually be included in advisers’ marketing materials.
In the updated FAQ, the SEC staff stated that they would not recommend enforcement action under Rule 206(4)-1(d)(1) of the Advisers Act if an adviser either (i) presents the gross performance of an extract in an advertisement without including the corresponding net performance of the extract or (ii) presents one or more gross characteristics of a portfolio or investment without including the corresponding net characteristics, if each of the following are true:
The extract’s performance or the gross characteristic (as applicable) is clearly identified as being calculated on a gross basis, without the deduction of fees and expenses;
The extract’s performance or the characteristic (as applicable) is accompanied by a presentation of the total portfolio’s gross and net performance, consistent with the requirements of the Marketing Rule;
The total portfolio’s gross and net performance is presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the extract’s or the characteristic’s (as applicable) performance;[3] and
The gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the extract’s or characteristic’s (as applicable) performance is calculated.[4]
While the SEC staff has not provided a definition of “performance” under the Marketing Rule, the staff clarified that total return, time-weighted return, return on investment, internal rate of return, multiple on invested capital and total value to paid-in capital are each considered “performance” and are subject to the full requirements of the Marketing Rule. Additionally, the staff indicated that if a characteristic is not “performance”, then it does need to be shown on a gross basis.
Action Items
The updates to the FAQ represents a marked shift in the SEC’s interpretation and position on extracted performance, and may give advisers additional certainty on how to meet their obligations under the Marketing Rule. Private fund advisers should review their marketing materials that include gross and net performance of extracts or characteristics of a portfolio or investment to ensure the conditions set forth in the FAQ are satisfied.
Please contact your Foley Fund Formation and Investment Management client team for more information and assistance with navigating these Marketing Rule obligations.
[1] Available at: https://www.sec.gov/rules-regulations/staff-guidance/division-investment-management-frequently-asked-questions/marketing-compliance-frequently-asked-questions#_edn6
[2] The prior FAQ from January 11, 2023, which directly contradicts certain aspects of the new FAQ concerning presentation of net extracted performance, has been removed from the SEC’s FAQ webpage.
[3] The SEC clarified that the total portfolio’s gross and net performance do not need to be shown on the same page of an advertisement as the extract or characteristic, but having the total portfolio’s performance precede the extract or characteristic in an advertisement would help to facilitate a comparison between the two.
[4] Because time periods over which extracts and characteristics are calculated may not easily align with the one-, five- and ten-year periods required by Rule 206(4)-1(d)(2) for advertisements to clients other than private funds, the SEC staff further stated that they would not recommend enforcement action if the extract or characteristic is calculated over a single, clearly disclosed period.
FTC Alleges Fintech Cleo AI Deceived Consumers
On March 27, 2025, the Federal Trade Commission (FTC) filed a lawsuit and proposed settlement order resolving claims against Cleo AI, a fintech that operates a personal finance mobile banking application through which it offers consumers instant or same-day cash advances. The FTC alleges that Cleo deceived consumers about how much money they could get and how fast that money could be available, and that Cleo made it difficult for consumers to cancel its subscription service.
Pointing to those allegations, the FTC alleges Cleo (1) violated Section 5 of the Federal Trade Commission Act (FTC Act) by misrepresenting that consumers would receive—or would be likely to receive—a specific cash advance amount “today” or “instantly” and (2) violated the Restore Online Shoppers’ Confidence Act (ROSCA) by failing to conspicuously disclose all material transaction terms before obtaining consumers’ billing information and by failing to provide simple mechanisms to stop recurring charges.
“Cleo misled consumers with promises of fast money, but consumers found they received much less than the advertised hundreds of dollars promised, had to pay more for same day delivery, and then had difficulty canceling,” said Christopher Mufarrige, Director of the FTC’s Bureau of Consumer Protection.
The FTC cites to consumer complaints in support of its action against Cleo, including one stating: “There’s no other way for me to say it. I need my money right now to pay my rent. I have no other option I can’t wait 3 days. I can’t wait 1 day I need it now. I would never have used Cleo if I would have thought I would ever be in this situation.”
The FTC’s Allegations
In its complaint, filed in the U.S. District Court for the Southern District of New York, the FTC alleges that Cleo violated Section 5 of the FTC Act by:
“Up To” Claims. Advertising that its customers would receive “up to $250 in cash advances,” and then, only afterthe consumer subscribes to a plan and Cleo sets the payment date for the subscription, is the consumer informed of the cash advance amount they can actually receive. For “almost all consumers, that amount is much lower than the amount promised in Cleo’s ads.”
Undisclosed Fees. Advertising that its customers would obtain cash advances “today” or “instantly,” when Cleo actually charges an “express fee”—sometimes disclosed in a footnote—of $3.99 to get the cash same-day, and, even then, the cash may not arrive until the next day.
In addition, the FTC’s complaint alleges that Cleo violated Section 4 of ROSCA by:
Inadequate Disclosures. Failing to clearly and conspicuously disclose all material terms before obtaining customers’ billing information.
Inadequate Cancellation Mechanisms. Failing to permit consumers with an outstanding cash advance to cancel their subscriptions through the app.
Proposed Consent Agreement
The FTC’s proposed consent order would be in effect for 10 years and require that Cleo pay $17 million to provide refunds to consumers harmed by the company’s practices. The consent order would restrict Cleo from misleading consumers about material terms of its advances and require that it obtain consumers’ express, informed consent before imposing charges. More specifically, the consent order:
Prohibits Cleo from misrepresenting the amount of funds available to a consumer, when funds will be available, any applicable fees (including the nature, purpose, amount, or use of a fee), consumers’ ability to cancel charges, or the terms of any negative option feature.
Requires Cleo to clearly and conspicuously disclose, prior to obtaining the consumer’s billing information, all material terms, including any charges after a trial period ends, when a consumer must act to prevent charges, the amount the consumer will be charged unless steps are taken to prevent the charge, and information for consumers to find the simple cancellation mechanism.
Requires Cleo provide a simple mechanism for a consumer to cancel the negative option feature, avoid being charged, and immediately stop recurring charges. Such cancellation method must be through the same medium the consumer used to consent to the negative option feature.
The Commission voted 2-0 to issue the Cleo complaint and accept the proposed consent agreement.
Takeaways
The FTC has increased enforcement activities for negative options, such as last year’s enforcement action against Dave, Inc., another cash advance fintech company, which we wrote about previously. This attention on negative options, and consumers’ ability to easily cancel negative options, may provide insight into the FTC’s regulatory agenda, given that the remainder of its Click-to-Cancel Rule takes effect on May 14, 2025.
The FTC recently filed a brief in defense of its Click-to-Cancel Rule, vigorously defending the FTC’s rulemaking against trade association challenges consolidated in the Eighth Circuit. The FTC’s brief puts an end to speculation that the Commission may rethink or roll back the rule given the recent administration change and shifts in FTC leadership.
Businesses should be preparing to adopt changes to implement the Click-to-Cancel Rule, to the extent not already in process. The FTC’s complaint against Cleo should also serve as a reminder that businesses that employ “up to” claims, complex fee structures, or negative option offers should be careful to monitor their conduct in light of developments within the FTC and the other federal and state agencies that police advertising and marketing practices.
United States: House Committee on Financial Services Urges the SEC to Withdraw Final and Proposed Rules
On 31 March 2025, the House Committee on Financial Services (Committee), in a letter to Acting Chairman of the US Securities and Exchange Commission (SEC), Mark Uyeda, identified a series of proposed and adopted rules that the SEC should withdraw or rescind. The letter notes the Committee’s view that the SEC, under the prior Chair, had lost sight of its mission. The identified proposals and rules represent significant rulemaking efforts on the part of the SEC, many of which were controversial and subject to significant industry opposition. The specific proposals identified are the following:
Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure;
Short Position and Short Activity Reporting by Institutional Investment Managers;
Reporting of Securities Loans;
Pay Versus Performance;
Investment Company Names;
Form N-PORT and Form N-CEN Reporting; Guidance on Open-End Fund Liquidity Risk Management Programs;
Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker Dealers and Investment Advisers;
Open-End Fund Liquidity Risk Management Programs and Swing Pricing;
Regulation Best Execution;
Order Competition;
Position Reporting of Large Security-Based Swap Positions;
Regulation Systems Compliance and Integrity;
Outsourcing by Investment Advisers; and
Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices.
While the Committee does not have the authority to compel the SEC to take action on any if these final or proposed rules, the letter is a strong indication of support for an overall deregulatory environment and could provide a blueprint for SEC regulatory policy once Paul Atkins is confirmed.
Confirmation Hearing for SEC Chair Nominee Atkins — Takeaways for Fund Managers
The Senate Banking Committee convened on Thursday to consider the nomination of Paul Atkins, President Trump’s nominee for Chair of the Securities and Exchange Commission, along with the nominees for the Comptroller of the Currency, the Assistant Secretary of the Treasury and the Department of Transportation.
Atkins, a former SEC Commissioner, shared his views on the current regulatory landscape, contending that today’s environment stifles capital formation and indicating a pivot from the SEC’s recent emphasis on aggressive enforcement. Overall, nothing occurred at the hearing that would change the expectation that Atkins will be confirmed. Currently, the SEC only has three members, meaning the Democratic Commissioner in theory could effectively have veto power over actions requiring a vote of the SEC because she can deny a quorum for any action she strongly opposes; if Atkins is confirmed, the Republican majority would no longer need the Democratic Commissioner, so it will be able to begin with formal rulemaking steps.
Key takeaways for fund managers from Atkins’ testimony are below.
Position on Private Funds
Surprisingly, Atkins faced relatively few questions about private funds. Nonetheless, in responding to questions, he noted that investors in private funds are typically sophisticated and have sufficient resources to hire advisers. In response to a question from a Democratic member of the Committee, he conceded that retail investors in registered funds benefit from additional investor protections, such as diversification rules. Atkins confirmed that the SEC would continue to enforce penalties against firms that mislead investors, but he drew a distinction between accredited investors—who he said have the sophistication and means to fend for themselves—and registered fund investors, possibly indicating a less restrictive or more principles-based regulatory and enforcement framework for the private fund industry.
Focus on Disclosure Practices
Atkins expressed concerns about the inefficient disclosures that investors face, stating, “investors are flooded with disclosures that do the opposite of helping them understand the true risks of an investment.” At the same time, he stated that investors should be protected from incorrect or materially misleading private fund disclosures. While his testimony suggests that the SEC would continue scrutinizing firms’ marketing practices, this could signal a willingness to pare back rules that require voluminous disclosure that most investors do not read.
Digital Assets and Cryptocurrency
In his opening statement, Atkins signaled that digital assets and cryptocurrency will be a prominent focus if he is confirmed. He highlighted his experience developing best practices for the digital asset industry since 2017, pointing to what he views as ambiguous or outdated regulations that have led to market uncertainty and inhibited innovation. Atkins stated that a “firm regulatory foundation” for digital assets would be a top priority, emphasizing a “rational, coherent, and principled approach.” Consistent with the work that already has started under the Crypto Task Force, his comments suggest a more measured and predictable environment for market participants, which could foster greater institutional involvement and spur technological developments in the digital asset space. Consistent with his overarching views on regulation expressed throughout the hearing, Atkins stressed the importance of clear rules that encourage capital formation, which believes are critical as the SEC considers its role in overseeing rapidly evolving cryptocurrency markets.
Creating Efficiencies within the SEC
In response to questions regarding how he might work with the Department of Government Efficiency, Atkins indicated general support for seeking greater efficiency in the SEC’s operations. “If there are people who can help with creating efficiencies in the agency or otherwise, I would definitely work with them.” As has been reported elsewhere, more than 12% of the SEC has already taken a voluntary buyout; any further cuts as a result of involvement by DOGE could result in the SEC prioritizing certain types of investment adviser firms for focus from the Division of Examinations. While the SEC’s future staffing levels are not yet known, its future resource allocation is likely to be influenced by any priority given to protecting less sophisticated and less well-resourced investors.
Winding Back the Clock: CFTC Withdraws Controversial SEF Registration Staff Letter
The Division of Market Oversight (DMO) of the Commodity Futures Trading Commission (CFTC) has withdrawn its previous staff advisory letter on swap execution facility (SEF) registration requirements (Letter 21-19).
Published on March 13, CFTC’s staff letter 25-05 (Letter 25-05) withdrew Letter 21-19 due to DMO’s understanding that it “created regulatory uncertainty” regarding whether certain entities operating in the swaps markets were required to register as SEFs. Letter 21-19 was therefore withdrawn with immediate effect.
The withdrawal of Letter 21-19 has removed what was seen by many parts of the swaps industry as a problematic widening of the interpretation of SEF regulatory requirements, which was difficult to apply and raised more questions than it answered.
A Look Back at Letter 21-19 and SEF Registration Requirements
Letter 21-19 was published in September 2021 as a “reminder” for entities of the SEF registration requirements under the Commodity Exchange Act (CEA). The entities specifically in scope of the remainder were those: (1) facilitating trading or execution of swaps through one-to-many or bilateral communications; (2) facilitating trading or execution of swaps that are not subject to the trade execution requirement under the CEA; (3) providing non-electronic means for the execution of swaps; or (4) falling within the SEF definition and operated by an entity currently registered with the CFTC in some other capacity, such as a commodity trading advisor (CTA) or an introducing broker.
In relation to the first set of entities (i.e., facilities offering one-to-many or bilateral communications), the CEA defines a SEF as, in relevant part, “a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system.” Prior to Letter 21-19, the wider swaps industry had interpreted this as multiple-to-multiple trading; in other words, two or more market participants interacting with two or more other market participants to execute swaps. Letter 21-19 drastically increased the scope of such SEF requirement, however, by providing that the multiple-to-multiple trading requirement could be met even if (1) the platform only allows bilateral or one-to-one communications; and (2) multiple participants cannot simultaneously request, make, or accept bids and offers from multiple participants. DMO went on to express its view that a one-to-many system or request for quote (RFQ) system would satisfy the multiple-to-multiple requirement if more than one participant were able to submit an RFQ on the platform.
Letter 21-19 coincided with the CFTC’s settlement of an enforcement action with Symphony Communication Services, LLC (Symphony) for failure to register as a SEF. The CFTC found that Symphony had operated a multiple-to-multiple platform by operating a communications platform that allowed participants to send RFQ messages to multiple other market participants. Subsequently, the CFTC also relied on Letter 21-19 when it issued an order against Asset Risk Management, LLC, a registered CTA, for failing to register as a SEF.
What is the Cross-Border Impact
The potential relaxation of the SEF registration scope in the United States stands in contrast to similar regimes in the EU and the UK. The European Securities and Markets Authority (ESMA) and the UK’s Financial Conduct Authority (FCA) each published guidance in 2023, similar to Letter 21-19, which focused on the registration requirements for multilateral platforms. However, there are no signs that the EU or UK regulatory guidance will be amended. Technology service providers and trading venues may, therefore, wish to reconsider their cross-border service offerings in light of Letter 25-05 and the differing positions in the EU and UK.
Letter 21-19 is available here and Letter 25-05 is available here.
The Dealmaking Slowdown: A Time for Startups to Prepare
As the slowdown in dealmaking continues, both buyers and sellers are left to consider their options moving forward during this period of extreme uncertainty and market volatility. To put the current slowdown in perspective, EY had previously forecasted M&A activity to rise by 10% this year.[1] However, they recently adjusted that outlook, saying the M&A market entered a “watchful phase” in February of this year. Their data shows a downturn in the number and total value of deals of more than $100 million. The volume of those deals dropped by 5.9 percent YoY and 19.5 percent from just January of this year, and combined deal value also fell 53 percent YoY and 34 percent from January.
Whenever we see this kind of significant pause in dealmaking, buyers typically have the advantage, but not always. There are certain dynamics that can vary based on industry, the nature of the assets, and, of course, macroeconomic factors. Below, we look at the balance of power between buyers and sellers during a slowdown and how each side can best position themselves for success when conditions improve.
Who Has the Upper Hand?
Most of the time, the buyer is going to have the upper hand in this kind of situation. When there are fewer people willing to buy, those who are can often negotiate much more favorable terms. Buyers can also be highly selective, taking their time to conduct thorough due diligence on their targets and consider all options available. When the economy is in turmoil, it can also present an opportunity for buyers to target distressed or capital-constrained businesses.
While sellers are not usually in the driver’s seat when dealmaking is lagging, there are some opportunities for them to still have leverage. This is particularly true if they have an especially unique proposition or a high-performing and proven concept. There are also some areas that tend to be recession-proof or continue to grow despite contributing economic factors. Those startups who might have the best leverage are those who are not under pressure to sell as they can either wait until deal activity picks back up or negotiate more aggressively for more favorable terms.
What Can Sellers Do Now?
When it’s slow out there, sellers should make sure their fundamentals are solid. Focusing on cash flow and operational efficiencies can help to demonstrate a strong foundation to potential buyers, as well as looking at growth strategies that can move the business forward. It is also important for sellers to look at ways they can extend their runway. When mergers and acquisitions slow down, VC funding often follows suit. This means it is critical that startups ensure they have ample capital reserves to wait out the dealmaking doldrums until more favorable market conditions emerge.
Most importantly, sellers must remain consistently deal ready. The global economic and geopolitical factors that are contributing to this downturn are shifting rapidly, and that means that there could be an uptick in deal activity at any time as trade deals are struck, the markets stabilize, or conflicts and tensions are eased. While this will not happen overnight, founders should be ready to make a move when the timing and the buyer are right. Buyers will no doubt be using this time to do their diligence, so they are ready to move fast when conditions improve and look at the kinds of strategic investments that best fit their long-term goals. Founders would be wise to establish the kinds of connections today that will allow them to execute their exit plans once deals start flowing again.
[1] https://sgbonline.com/ey-ma-outlook-signals-cautious-us-deal-market/
Georgia Regulates Third Party Litigation Financing in Senate Bill 69
On February 27, 2025, by a vote of 52 to 0, the Georgia Senate passed Senate Bill 69, titled “Georgia Courts Access and Consumer Protection Act.”
If signed into law, the bill would regulate third-party litigation financing (“TPLF”) practices in Georgia where an individual or entity provides financing to a party to a lawsuit in exchange for a right to receive payment contingent on the lawsuit’s outcome. This bill represents another effort by states to restrain the influence of third-party litigation financiers and increase transparency in litigations.
Senate Bill 69 sets forth several key requirements. First, a person or entity engaging in litigation funding in Georgia must register as a litigation financier with the Department of Banking and Finance and provide specified information, including any affiliation with foreign persons or principals. Such filings are public records subject to disclosure.
Second, the bill restricts the influence of a litigation financier in actions or proceedings where the financier provided funding. For example, a litigation financier cannot direct or make decisions regarding legal representation, expert witnesses, litigation strategy, or settlement, which are reserved only for the parties and their counsel. A litigation financier also cannot pay commissions or referral fees in exchange for a referral of a consumer to the financier, or otherwise accept payment for providing goods or services to a consumer.
Third, the bill renders discoverable the existence, terms, and conditions of a litigation financing agreement in the underlying lawsuit. Although mere disclosure of information about a litigation financing agreement does not make such information automatically admissible as evidence at trial, it opens the door to that possibility.
Fourth, the bill delineates specific requirements for the form of a litigation financing agreement and mandates certain disclosures about the consumer’s rights and the financier’s obligations. A financier’s violation of the bill’s provisions voids and renders unenforceable the litigation financing agreement. Willful violations of the bill’s provisions may even lead to a felony conviction, imprisonment, and a fine of up to $10,000.
Fifth, the bill holds a litigation financier “jointly and severally liable for any award or order imposing or assessing costs or monetary sanctions against a consumer arising from or relating to” an action or proceeding funded by the financier.
According to a Senate press release, Senate President Pro Tempore John F. Kennedy, who sponsored the legislation, lauded the Senate’s passage of the bill as enhancing transparency and protection for consumers. He commented that “[Georgia’s] civil justice system should not be treated as a lottery where litigation financiers can bet on the outcome of a case to get a piece of a plaintiff’s award” and that “SB 69 establishes critical safeguards for an industry that continues to expand each year.” He further stressed the need to “level the playing field and ensure that [Georgia’s] legal system serves the people—not powerful financial interests.” Since passing the Senate, the bill has also proceeded through the House First and Second Readers.
Georgia’s proposed legislation is largely in line with recent proposed or enacted TPLF legislation in other states. In October 2024, the New Jersey Senate Commerce Committee advanced Senate Bill 1475, which similarly requires registration by a consumer legal funding company, restricts the actions and influence of a consumer legal funding company, and mandates certain disclosures in a consumer legal funding contract, among other things. Indiana and Louisiana also enacted TPLF legislation codified respectively at Ind. Code §§ 24-12-11-1 to -5 (2024), and La. Stat. Ann. §§ 9:3580.1 to -.7 and 9.3580.11 to .13 (2024). West Virginia expanded its TPLF laws by enacting legislation codified at W. Va. Code §§ 46A-6N-1, -4, -6, -7, and -9 (2024). But different from these legislations, Georgia’s proposed legislation explicitly provides for the possibility of felony consequences for willful violations of its provisions.
TPLF has also reverberated at the federal level. In October 2024, the United States Supreme Court’s Advisory Committee on Civil Rules reportedly proposed to create a subcommittee to examine TPLF. H.R. 9922, the Litigation Transparency Act of 2024, was also introduced in the United States House of Representatives that same month and would require disclosure of TPLF in civil actions.
But while some argue that TPLF regulation would bring greater transparency and reduce frivolous litigation, others protest that such regulation would harm litigants with less resources. Either way, litigants would be well-served to monitor important developments regarding TPLF at both the state and federal levels.
Momentum on Voting on the Omnibus Delay and Updating Corporate Sustainability Reporting Requirements
Vote to delay
On 1 April 2025, the European Parliament approved the “urgent procedure” with regards to the “Omnibus” package of proposals to streamline corporate sustainability requirements.
The next step to vote on the “stop-the-clock” proposal will take place on 3 April 2025.
The approval of the urgent procedure of the Omnibus passed with a comfortable majority, but the division among political groups remains evident. If the stop-the-clock proposal is approved on 3 April 2025, co-legislators, being the European Parliament and the Council of the European Union, will begin negotiations to finalize the legal text.
Movement on substantive requirements
On 28 March 2025, Maria Luís Albuquerque, the European Commissioner for Financial Services and the Savings and Investments Union, sent a letter to the EFRAG Sustainability Reporting Board (EFRAG SRB) outlining the European Commission’s mandate for simplifying the first set of European Sustainability Reporting Standards (ESRS), which are the standards followed for Corporate Sustainability Reporting (CSRD). Commissioner Albuquerque emphasized the urgency of implementing these simplifications, highlighting their significance in the current geopolitical and economic context.
In response to this mandate, EFRAG has committed to a fast-track process aimed at substantially reducing mandatory data points and easing the practical application of the ESRS. The key dates are:
15 April 2025: EFRAG will inform the European Commission of its internal timeline to simplify the ESRS; and
31 October 2025: EFRAG has been tasked by the European Commission to provide its technical advice by this date so that the European Commission has time to adopt legislation in time for “companies to apply the revised standards for reporting covering financial year 2027, potentially with an option to apply the revised standards for reporting covering financial year 2026 if companies wish so”.
On this basis, it appears that the European Commission plans to adopt the revised and streamlined ESRS before the end of 2026, and that companies in the first wave of reporting would have the option to utilise the new ESRS should they wish to do so.
Recent NYSE and Nasdaq Regulatory Updates Regarding Reverse Stock Splits
Reverse stock split is a common corporate action taken by public companies to improve market perception, maintain compliance with certain stock exchange listing requirements or help keep stock prices at levels where certain investors can buy shares. Indeed, Hunton has recently assisted a number of clients with reverse stock splits in light of the market turmoil. Companies that are contemplating reverse stock splits should be reminded of the recent regulatory updates involving the use of reverse stock splits by companies listed on NYSE or Nasdaq.
Limitations on the Use of Reverse Stock Splits
Nasdaq
In October 2024, the US Securities and Exchange Commission (“SEC”) approved the proposed amendment to Nasdaq Rule 5810(c)(3)(A), submitted by Nasdaq in July 2024, which modifies the compliance periods for companies seeking to regain compliance with Nasdaq listing requirements in connection with reverse stock splits. Nasdaq rules generally require that a listed security maintain a minimum bid price of $1.00 (the “Minimum Price Requirement”). Under the prior rules, if a Nasdaq-listed company’s stock price fails to meet the Minimum Price Requirement for 30 consecutive business days, the company would typically be granted an initial 180-day period to regain compliance (the “Initial Compliance Period”), often by doing a reverse stock split. However, a reverse stock split may cause the company to fall below the numeric threshold for another listing requirement (such as minimum number of publicly held shares) (a “Secondary Deficiency”). In the event of a Secondary Deficiency, under the prior rules, Nasdaq would notify the company about the new deficiency and the company could be granted an additional period of up to another 180 days to cure the deficiency and regain compliance (the “Additional Compliance Period”) if it satisfies certain conditions. Under the amended rules, however, companies will no longer be afforded the Additional Compliance Period. If a company effects a reverse stock split to regain compliance with the Minimum Price Requirement but the reverse stock split results in a Secondary Deficiency, the company will not be considered to have regained compliance with the Minimum Price Requirement. To avoid delisting, the company must, within the Initial Compliance Period, (i) cure the Secondary Deficiency and (ii) thereafter meet the Minimum Price Requirement for 10 consecutive business days.
In addition, the amended Nasdaq Rule 5810(3)(A) imposes limitations on how many times a company can effect reverse stock splits within a certain period of time. If a company’s stock fails to meet the Minimum Price Requirement but such company has (i) effected a reverse stock split over the prior one-year period or (ii) effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 250 shares or more to 1, then the company will not be eligible for any compliance period (including the Initial Compliance Period) to cure the price deficiency, but will be issued a listing determination instead.
NYSE
In January 2025, the SEC approved the proposed amendment to Section 802.01C of the NYSE Listed Company Manual, submitted by the NYSE in September 2024 with subsequent amendments, which, similar to the amended Nasdaq rules, limits the circumstances under which NYSE-listed companies could use reverse stock splits to regain compliance with the price requirements for continued listings. The NYSE requires listed companies to maintain an average closing price of at least $1.00 over any consecutive 30-trading-day period (the “Price Criteria”). Under the prior rules, if a company’s stock fails to meet the Price Criteria, the NYSE will notify the company of its noncompliance; the company must, within 10 business days of receipt of the notification, notify the NYSE of its intent to cure the deficiency or be subject to suspension and delisting procedures. The company will then have a six-month period (the “Cure Period”) to regain compliance with the Price Criteria, typically by effecting a reverse stock split; the company will be deemed to have regained compliance if on the last trading day of any calendar month during the Cure Period, the company has a closing share price of at least $1.00 and an average closing share price of at least $1.00 over the 30-trading-day period ending on the last trading day of that month. Under the amended rules, however, if a company’s stock has failed to meet the Price Criteria and the company has (i) effected a reverse stock split over the prior one-year period or (ii) effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 200 shares or more to 1, then the company will not be eligible for the Cure Period; instead, the NYSE will immediately commence suspension and delisting procedures.
In addition, under the amended Section 802.01C, an NYSE-listed company who fails to comply with the Price Criteria will be prohibited from effecting any reverse stock split if doing so would result in the company falling below the continued listing requirements set forth under Section 802.01A, such as the number of publicly-held shares. If a company effects a reverse stock split notwithstanding the prohibition, the NYSE could immediately commence suspension and delisting procedures.
Halt of Trading in Stock Undergoing Reverse Stock Splits
In November 2023 and May 2024, the SEC approved the proposed amendments to Nasdaq and NYSE rules, respectively, which set forth specific requirements for halting and resuming trading in a security that is subject to a reverse stock split. The amended NYSE Rule 123D provides that the NYSE will halt trading in a security before the end of post-market trading on other markets (generally at 7:50 pm) on the day immediately before the market effective date of a reverse stock split. Trading in the security will resume with a Trading Halt Auction (as defined in NYSE Rule 7.35(a)(1)(B)) starting at 9:30 am, on the effective date of the reverse stock split. The NYSE believes that this halt and delayed opening “would give sufficient time for investors to review their orders and the quotes for the security and allow market participants to ensure that their systems have properly adjusted for the reverse stock split.”[1] Similarly, under the amended Nasdaq Rule 4120(a), Nasdaq generally expects to initiate the halt of trading at 7:50 pm,[2] prior to the close of post-market trading at 8 pm on the day immediately before the split in the security becomes effective, and resume trading at 9 am on the day the split is effective.
Other Considerations
Companies contemplating reverse stock splits should also note the advance notice requirements of NYSE and Nasdaq, currently requiring notification at least 10 calendar days in advance of the reverse stock split effectiveness date. The NYSE or Nasdaq may also request to review other documents (press release, amendment to the articles of incorporation, etc.) and companies should keep the representatives at the NYSE or Nasdaq engaged throughout the process so that their requests and questions will be addressed in a timely manner. We encourage companies to work closely with legal counsel to coordinate each step of a reverse stock split and ensure compliance with all applicable rules and regulations, which may be constantly changing.
[1] SEC Release No. 34-99974, April 17, 2024.
[2] SEC Release No. 34-98878, November 14, 2023.