Broc Romanek reported yesterday that the staff of the Securities and Exchange Commission will no longer require “Tandy Letter” disclaimers in responses to staff comments. Among other things, the Tandy Letter policy required a company to state affirmatively that it would not raise the SEC review process and acceleration of effectiveness as a defense in any legal proceeding. I don’t claim any responsibility for the staff’s change in position, but attentive readers may recall that I questioned both the accuracy and the legality of “Tandy Letter” requests in this post several months ago:
More importantly, I question whether this forced speech is even legally accurate. Section 23 of the Securities Act and Section 26 of the Securities Exchange Act prohibit certain statements regarding registration and the acts of the SEC. Unless the “Tandy Letter” is entirely redundant, it covers more than what is statutorily proscribed. What court has actually held that a company may not assert staff comments as a defense? Indeed, staff comments or responses may be relevant to issues such as scienter or even falsity. While staff comments do not constitute official expressions of the SEC’s views, even the SEC acknowledges that:
[opinions expressed by the staff] represent the views of persons who are continuously working with the provisions of the statute involved. And any statement by the director, associate director, assistant director, chief accountant, chief counsel, or chief financial analyst of a division can be relied upon as representing the views of that division.
17 C.F.R. 202.1(d). As such, staff comments may be helpful or relevant.
At a minimum, the SEC’s decision to force speech is dubious from a policy perspective. More importantly, there appears to be no legal basis for the statement that staff comments may not be asserted, aside from the fact that the staff requires issuers to regurgitate the statement.
In another post, I observed that the staff’s Tandy Letter requirement imposed a regime of unilateral disarmament:
Disarmament is unilateral because class action plaintiffs’ attorneys are not required to disavow the use of comment letters in litigation. Indeed, one doesn’t have to search very far to find examples of the plaintiffs’ bar use of SEC comment letters:
Pa. Pub. Sch. Employees’ Ret. Sys. v. Bank of Am. Corp., 939 F. Supp. 2d 445 (S.D.N.Y. 2013) (“Specifically, Plaintiff argues that an SEC comment letter indicates that Cotty and Noski were knowingly responsible for the weakness in internal controls.”)
In re Bear Stearns Cos., Inc. Sec., Derivative, & ERISA Litig., 763 F. Supp. 2d 423, 522 (S.D.N.Y. 2011) (Complaint alleging that SEC comment letter stated that “material information” was not disclosed in 2006 10-K, including a comprehensive analysis of Bear Stearns ‘ exposure to subprime loans).
The SEC’s announcement provides no explanation for the change, other than to say “the staff does not believe that it is necessary for them to make the affirmative representations in their filing review correspondence”.