Comment letters on accounting and disclosure rules usually come from a familiar cast of reporting companies, auditors, and their trade associations. Individual investors, the people mandatory disclosure is meant to protect, rarely write in. On this issue, they wrote in by the tens of thousands. In a new paper, we examine every comment to answer four questions: Who wrote them, what positions did they take and why, how deeply did they engage with the proposal, and did they seem to understand it?

To answer these questions, we coded each of the more than 215,000 comments in our sample, dated from May 5 through October 7, 2026, using a state-of-the-art large language model guided by a codebook grounded in prior research on comment letters and lobbying. For every comment, the model recorded who the writer said they were, their stance and arguments, the depth of their reasoning and evidence, any alternatives they proposed, their tone, and how they described the proposal.

An Unusual Crowd of Commenters

Almost all of the commenters were individuals. Six in 10 (60.0%) said nothing about who they were. Among those who did say something, self-described retail investors were the largest group (22.5% of all comments), followed by writers who named another occupation or status (15.0%). Retirees stood out: 14.8% of all comments came from writers who said they were retired. Individual professionals in finance, accounting, law and academia wrote 2.4% of the comments. Trade associations, institutional investors, investor advocates and government bodies together wrote just 182, less than 0.1%.

This is in sharp contrast to what we see in standard-setting at the FASB and the IASB, where reporting companies, auditors, and their associations dominate, and users of financial reports are scarce. Individual investors’ stakes did not suddenly become higher. More plausible explanations are the ease of commenting online, the familiarity of a report many investors use directly, and the political prominence the issue gained after President Trump called for semiannual reporting in September 2025.

Most comments were short. The median comment had 27 words, roughly a statement of position and a reason or two for taking that position. The median letter from an institutional investor runs 280 words, and the median letter from a trade association runs 1,621.

Participation was also concentrated in time (Figure 1). The first month after the proposal was quiet. Then about four in five comments (79.4%) arrived in a five-week main wave, peaking at 11,427 on June 23. A lull followed the July 6 deadline, and then, from August 6, came a second wave of more than 42,000 letters, to which we return below.

Figure 1. Comments received per day, May 5 to October 7, 2026

Note: Daily count of all submissions, including a small number later excluded from the analysis sample because they have no usable text or do not address the proposal.

Near-Unanimous Opposition, With One Exception

These figures describe the views expressed in the SEC’s comment record, not a representative survey of investors or the broader public. Opposition to the proposal is close to unanimous. Of all comments, 97.8% oppose it, 0.3% support it fully or with conditions, and the rest take no clear position. Among individual writers, the share opposing ranges only from 97.3% for those who give no identity to 99.0% for retail investors. Institutional investors and investor advocates oppose as well, and none of the 35 institutional investors supports the proposal outright.

Trade associations are the one group that is not overwhelmingly opposed (Figure 2). Of the 48 that commented, 20 support the proposal fully or with conditions, 21 oppose it, and 7 take no clear position. Issuers and executives lean the same way, though far more weakly, with 16 of 274 in support. Because few organizations commented, we caution that these percentages describe only the organizations that wrote in and may not represent the views of trade associations or companies in general.

Figure 2. Share of comments supporting and opposing the proposal, by commenter type

Note: Number of comments in parentheses. Support includes conditional support.

Arguing From Principle, Not Consequences

Opponents defend quarterly reporting mainly on principle (Figure 3). The most common arguments for it are transparency and accountability (36.7% of comments), investors’ need for current information (24.2%), and the concern that, without quarterly reporting, fraud and other problems would stay hidden longer (22.2%). A second tier of arguments concerns fairness and investor protection, including the need to maintain a level playing field for retail investors (12.0%) and the risk that the proposal would serve insiders, Wall Street, or political interests (10.5%). Retail investors stand out for stressing timeliness: 55% of them say investors need current information, compared with 24.2% of all comments.

Figure 3. The most common arguments in the comments

Note: Conceptual arguments appeal to principles of financial reporting, economic-consequence arguments to effects on firms and markets, and legitimacy arguments to the rule’s process or motives.

Arguments for the proposal are almost absent from individual comments. Strikingly, the proposal’s own rationale, that quarterly reporting encourages short-termism, appears in less than 0.1% of comments. Among trade associations, though, the case for the proposal is made in full. All 20 supporting associations argue that reporting frequency should be left to companies, 19 cite reporting costs, and 19 argue that other disclosure methods, such as earnings releases and Forms 8-K, are sufficient. The 21 opposing associations make the users’ case in its most technical form, stressing comparability across firms, effects on markets, and the inadequacy of substitutes for the 10-Q.

The users’ arguments are not idiosyncratic. Most of them track strands of the academic literature: evidence that managers delay bad news, that more frequent reporting is associated with lower information asymmetry and a lower cost of equity, and that 10-Q filings convey information beyond earnings releases. Users also object to optionality itself, and that objection has an economic basis. Research finds that when more of a firm’s peers report quarterly, more firm-specific information is reflected in the firm’s own stock price. Because a firm choosing its own reporting frequency does not capture that benefit to others, it may report less often than is socially optimal.

Reasons, but Little Input on the Rule’s Design

Are mass comments like these reasoned contributions or simple expressions of preference? The answer lies in between. Most commenters give reasons: 81.7% offer at least one, and retail investors do so in 95.2% of their comments. But less than one comment in 10 (8.9%) offers evidence of any kind, and for individuals it is usually a reference to history or to a named case rather than data, research, or legal analysis. Most comments are measured or emphatic in tone. The 5.6% that use hostile language, such as profanity or personal insults, come mostly from writers who give no identity, and such language is nearly absent from organizational letters.

Giving reasons is also not the same as helping a regulator redesign a rule. About 95% of opposing comments simply say no, without proposing an alternative or attaching a condition. Of the 11,065 alternatives that commenters did propose, almost three-quarters (7,975) call for reporting more often than quarterly, often monthly. Only 174 ask for less frequent reporting. Alternatives that work within the proposal’s design, such as additional Form 8-K triggers, auditor review, a simplified Form 10-Q, limits on which companies may elect, shareholder approval of the election, or a pilot program, number fewer than one for every 100 comments.

That kind of design input came almost entirely from a few dozen organizational letters. Trade associations cite law in 75.0% of their letters and data in 58.3%, and 83.3% of them engage with specific content of the proposing release, as compared with 0.3% of all comments. Put simply, individuals stated their beliefs and rejected the proposal, while organizations supplied most of the material a rule writer can act on.

Did Commenters Misunderstand the Proposal?

After the comment period closed, SEC Chairman Paul Atkins said that a common strain in the letters was a misunderstanding of the proposal, which would make semiannual reporting optional rather than prevent quarterly reporting. The comments allow a direct test of that claim. The first thing to note is that most writers do not say what the proposal would do. Only 7.2% of comments (15,594) describe it. Of those, 63.4% describe it accurately, either as letting companies choose semiannual reporting or as ending the quarterly requirement. The remaining 36.6% say that quarterly reporting itself would be abolished, which overstates the proposal.

Abolition language therefore appears in just 2.6% of all comments. Even that figure probably overstates confusion, since a phrase like “end quarterly reporting” may be shorthand from writers who know the change is optional. The 93% of comments that do not describe the proposal provide no evidence either way.

More important, understanding the proposal does not change the verdict. Organizations, whose letters engage with the release in detail, almost always describe the proposal as optional (Figure 4), yet most of them still oppose it. Trade associations, which are divided, are the main exception. Among individual writers who describe the proposal as optional, 97.9% oppose it, about the same share as in the sample as a whole. Users object to leaving the reporting choice to management, not merely to a mandatory change.

Figure 4. How commenters described the proposal, by commenter type

Note: Number of comments that describe the proposal in parentheses. “Optional” and “requirement removed” are accurate; “abolition” overstates the proposal.

The Second Wave

The comment period closed on July 6, but the letters kept coming. After the chairman’s remark, reportedly made on July 30, an advocacy campaign urged investors to file a second comment stating that they understood the proposal. Beginning August 6, a second wave of 42,265 comments arrived, and it answered the charge directly (Figure 5). Nearly all of these comments (96.3%) insist that the writer understands the proposal, a claim almost absent before, although most make it only in the subject line of the submission. Among comments that describe the proposal, the share calling it optional rose from 41.4% in the main wave to 70.3%.

Yet the second wave was less deliberative than the first. Its comments were shorter (a median of 21 words, against 28), more than twice as likely to state a position without any reason, and less than half as likely to develop an argument. Hostile language nearly doubled, from 4.8% to 9.1%.

Figure 5. How comments changed between the main wave and the second wave

Note: Main wave: June 7 to July 10, 2026. Second wave: August 6 to October 7, 2026.

Many of these letters came from people who had already written. Of the second-wave comments signed with an identifiable name, 42.3% match a name from the main wave. When we compare the first and second letters under the same names, the same shifts appear: The share insisting they understood the proposal jumps from 0.1% to 96.6%, and the share stating a position without a reason roughly doubles. The timing cannot separate the effect of the chairman’s remark from that of the campaign. It does, however, show commenters contesting the regulator’s characterization of their competence, which then became part of the record itself.

Implications for Disclosure Rulemaking

First, mass comments can send a clear signal even when they offer little input on the rule’s design. Rulemaking is not a vote. The SEC must consider the comments it receives and respond to the significant ones, but comments are weighed by their substance, not their number. As a result, campaigns of brief letters often carry little weight.

This record, however, is more than a tally of preferences. Four in five commenters gave a reason, and those reasons consistently framed quarterly reports as a mechanism of accountability rather than a compliance burden. The SEC can meet its duty to consider the record by responding to the detailed organizational letters. But the users’ main message came through many short letters whose force lies in their number, and the formal process is not built to register that kind of signal.

Second, claims that commenters misunderstood a proposal are best tested against what they actually wrote. Here, few commenters described the proposal at all, most of those who did were accurate, and those who described it as optional opposed it just as firmly.

Third, how a regulator characterizes commenters can itself become part of the consultation. This suggests that the legitimacy of due process depends not only on openness and responsiveness, but also on how the rule-setter describes the people who participate. The second wave also shows the limits of a mobilized reply: It corrected the record on understanding while adding little new reasoning.

Finally, for the broader debate over reporting frequency, the comments show that users of periodic reports see them as part of the infrastructure of public capital markets. Their objection to letting each company choose its own frequency echoes evidence that frequent reporting benefits investors in other firms, a benefit that a company deciding for itself has little reason to weigh.

Conclusion

The SEC’s semiannual reporting proposal drew an extraordinary response for a disclosure rule, and its authors were overwhelmingly individuals, many of them the retail investors whom mandatory disclosure is meant to protect. They opposed the proposal almost unanimously and argued from principles of transparency, accountability, and timeliness. When their understanding was questioned, many wrote a second letter insisting that they did understand it.

Victor Xiaoqi Wang is an assistant professor of accounting at California State University, Long Beach, and Xiaoxiao Yu is a senior lecturer in accounting at Monash University. This post is based on their recent paper, “Who Speaks for Quarterly Reporting? Evidence from More Than 215,000 Public Comments on the SEC’s Semiannual Reporting Proposal,” available here.

From Assistance to Agency: The Next Phase of Consumer AI

• To date, most consumers have experienced AI as a reactive technology that responds to individual queries but with outcomes remaining dependent on action by the user. Agentic AI creates the potential to go further with systems that can operate continuously and adaptively and make context-dependent judgements about when to act, when to seek confirmation, and how to balance competing objectives. Consumers could move from using AI as a tool for single tasks, to delegating outcomes that constitute goal-oriented assistance such as documenting spending patterns to identify unnecessary discretionary expenditure, monitoring subscriptions and flagging unused services, and automatically searching for better deals on utilities, insurance and broadband.
• Anticipated deployments of agentic AI include monitoring prices and availability over time and executing transactions on a consumer’s behalf according to pre-set preferences. Looking further into the future, fully autonomous personal agents could manage longer-term consumer objectives, such as optimising household services or managing finances. As such, agentic AI has the potential to save consumers significant time, to reduce cognitive load and to identify better deals (e.g., cheaper prices, more personalised products or products with a lower environmental impact).
• These changes also represent a significant shift in how consumers could engage with businesses, with AI agents increasingly acting as intermediaries.

Key Messages from the CMA and the DRCF

• You are legally responsible for your agent. Existing legal and regulatory frameworks apply whether consumers deal with a person or an AI agent. Businesses answer for their agents as they do for their employees, even where a third party builds or supplies the AI agent. The DRCF confirms that all existing regimes apply, from competition, consumer and data protection law to financial services, payments, online safety and cyber security rules. In the United States, the FTC Chairman said in September 2026 that he would resist treating AI agents as independent actors. State attorneys general are taking the same approach, with Connecticut’s Attorney General advising in February 2026 that the AI industry is “no different” from any other regarding compliance with existing consumer protection and antitrust laws.
• Under U.K. competition and consumer law, fines of up to 10% of worldwide turnover can apply. The DRCF regulators say they “will not hesitate” to use their powers. Infringing companies can also be liable for compensation to affected consumers. The U.K. is considering the introduction of a consumer class actions regime, with the Law Commission currently working on a consultation proposal.
• The “faithful servant” test. The CMA’s principal concern is that AI agents may be optimised for commercial priorities such as audience engagement or sales conversion, with the result that consumers are steered or manipulated in ways that lead to worse personal outcomes. Building on its work on harmful Online Choice Architecture, the CMA anticipates that using these techniques in an AI agent’s choice architecture could make any steering less visible to consumers, weakening informed choice and increasing the risk of dark patterns being deployed at scale. It also flags other risks including errors and hallucinations, discriminatory outcomes, over-reliance / loss of agency, fraud and the unlawful use of personal data.
• “Agentic collusion” remains on the radar. As previously discussed in our client memo, the CMA has previously highlighted that algorithmic pricing can increase the risk of coordinated market outcomes, even in the absence of explicit communication between businesses, particularly where algorithms learn from and react to each other in concentrated markets. Agentic AI is expected to intensify these risks. If AI agents that are designed to optimise pricing or commercial strategies calculate that collusion is more profitable than competition, then competition may be dampened without any contact between competitors. As with direct consumer interactions, businesses remain responsible for the pricing outcomes that their AI agent produces. Algorithmic pricing remains an active area of enforcement in the United States, as well, with two appellate courts weighing in during 2026, and the DOJ continuing to reach settlements with landlords in its RealPage case, after it settled with RealPage itself in 2025 (discussed in our client memo).
• Closed ecosystems under scrutiny. The CMA sees data mobility, interoperability and open standards as key to competitive agentic markets. It warns that, where AI agents operate within closed ecosystems, this may lock consumers, their data, preferences or agent “memory” into incumbents. Indeed, on 9 June 2026, the European Commission took the unusual step of imposing interim measures on Meta to restore free access to the WhatsApp for Business API for rival general-purpose AI agents. The Commission concluded that “Meta’s policy change risks harming competition at a key moment in time for the development of that market, where smaller player and new entrants can challenge large incumbents”.
• Light touch, close watch. The CMA has said it rejects heavy-handed regulation due to the fast-paced and highly innovative nature of the market. All DRCF regulators are, however, tracking the market, working with the U.K. government to identify gaps in compliance and further regulatory challenges arising from the use of AI agents.

Practical Takeaways for Clients

For businesses using AI agents to interact with consumers (for example, to handle customer service queries, process refunds, recommend products or manage marketing campaigns):

• Disclose the use of AI. Tell customers they are dealing with an AI agent where this could affect their decisions. Do not overstate what an agent can do. Disclose its limitations and relevant information such as its methodology for ranking results and any commercial incentives behind its recommendations.
• Build compliance in from day one. Train and prompt AI agents to respect statutory rights (for example, to make sure cancellation rights are not being breached) and the terms of contracts, to avoid misleading consumers and to properly obtain any necessary consents required by consumer law. Test before launch.
• Cap the agent’s authority. Define what the AI agent may do and require customer confirmation before high-risk or irreversible actions (such as switching providers).
• Retain human oversight. Have experienced staff review decisions, complaints and feedback. Keep audit logs and risk assessments, and address problems immediately – especially where an AI agent reaches large numbers of people or vulnerable consumers.
• Push risk up the supply chain. Outcomes from vendor-supplied agents are the responsibility of the deployer. It is therefore essential to question suppliers on how they trained and tested the AI agent for compliance. Secure audit rights and indemnities in the vendor contract as well as comprehensive disclosures against the warranties.
• Allocate accountability. Contractually assign responsibility for each AI agent’s decisions, including liability if it acts outside customer instructions, between vendor and deployer, and give consumers a clear route to redress.
• Engage early. The DRCF invites firms to test products and raise questions with it early, which can offer a route to faster product launches with fewer regulatory surprises. The DRCF’s year-long pilot of a cross-disciplinary AI and digital sandbox has now closed but queries can still be addressed to the member regulators of the DRCF.

This post is based on a Paul, Weiss, Rifkind, Wharton & Garrison LLP memorandum, “Your Agent, Your Responsibility: UK Regulators’ Views on Competition and Consumer Law Liability for AI Agents,” dated November 3, 2026, and available here. 

As Chairman Atkins observed, nearly 10,000 offerings have been launched under Regulation Crowdfunding, and those that reported raising money took in an average of $364,000. This is a substantial accomplishment, but it tells only half the story. What about the investors? Most important, are they coming back for more?

There is reason to doubt it. A 2025 study by economists in the SEC’s Division of Economic and Risk Analysis found that use of Regulation Crowdfunding grew for several years but declined in 2023 and 2024, and industry data show that it has not recovered since. Anecdotal reports suggest some reasons why: There have been few exits, whether by IPO or acquisition, that have generated returns for crowd investors, and many companies have left their investors in the dark, so that they do not know where they stand. I know of one investor with hundreds of crowdfunded investments who has largely stopped investing as a result.

I have advocated a light regulatory touch for investment crowdfunding for more than a decade, from a 2013 essay, to a 2018 post on this blog, to my 2023 book, Investment Crowdfunding. But private ordering sometimes fails, and the American experience has revealed several such failures. The SEC can fix two of them at little cost by giving effect to protections Congress wrote into the JOBS Act.

Consider first the all-or-nothing rule. Under the statute, a company must announce a funding target, and the offering succeeds only if enough investors commit to meet it. Otherwise, the deal is canceled, and the investors get their money back. This is a sensible way to harness the wisdom of the crowd, while protecting investors from backing a company that can’t raise enough capital to accomplish its plans.

Unfortunately, the rule has been undermined by absurdly low targets. According to the SEC study, the median target through 2024 was $25,000, while the median maximum was $800,000. Take a company with exactly those numbers. Once its $25,000 target has been met, the offering is officially a “success,” even if the remaining $775,000 never materializes. Its investors could then be left holding a stake in a company with barely 3% of the capital it set out to raise. So much for separating the wheat from the chaff.

Why do platforms allow this? Part of the answer is that they believe in the companies they list, having chosen them from many applicants, and are happy to see them succeed. That confidence is understandable, but the premise of crowdfunding is that the crowd, not the platform, decides which companies deserve funding, and a token target takes that decision away from the crowd. The platforms also have a financial stake in the outcome: A platform earns its commission only when an offering succeeds, and a low target makes success nearly certain.

Some platforms even build low targets into their rules. One leading platform requires every company to set a target of $10,000, and another has a standard minimum of $50,000. And because platforms compete for issuers, any platform that insists on meaningful targets risks losing business to its less-demanding competitors. This is a classic collective action problem, and one the SEC is well placed to solve.

The solution I proposed in my book is to limit the ratio between a company’s maximum and its target. Under a four-to-one ratio, a company seeking up to $800,000 would need a target of at least $200,000, and a company that sets a $25,000 target could raise no more than $100,000. The exact multiple could be five-to-one or something else, but the ratios common today, often ten-to-one or higher, are bad for investors and issuers alike. This proposal would restore the all-or-nothing rule without imposing any additional disclosure costs.

A second problem is that companies routinely ghost their crowdfunding investors. In my research, I reported that only about 45% of crowdfunded companies ever filed even one annual report, although the statute requires them to report to investors “not less than annually.” More recent industry data tell the same story.

The main penalty under current rules, ineligibility for future crowdfunding, means little to the many companies that never use the process again. Worse, the harm spills over, since an investor ghosted by one company will be disinclined to invest in another. Again, the SEC could solve this collective action problem with a modest rule that I proposed in that article and on this blog: Require platforms to withhold the greater of $1,000 and 1% of the proceeds, in escrow or a segregated account, until the company files its first annual report.

In keeping with the SEC chairman’s stated aim, the Commission should also cut compliance costs, for example by raising the threshold for reviewed financial statements, as its Small Business Capital Formation Advisory Committee has recommended, and by modeling Form C on the EU’s much shorter Key Investment Information Sheet.

Some industry participants advocate raising the offering limit from $5 million to $20 million. I am open to raising the limit, but not before the serious problems in the current market have been addressed. Those include not only the two discussed here, but also the problem of ghosting upon exit and others that are beyond the scope of this post. Until the Commission has taken account of these problems, quadrupling the offering limit would simply expose more investors to greater harm.

Chairman Atkins has asked how Regulation Crowdfunding can be made more attractive. For issuers, much of the answer lies in lower compliance costs. For investors, it lies in offerings that raise enough money to give a company a real chance and in companies that keep their investors informed once the money is in.

The reforms proposed here would not solve every problem in the market, but they would give investors more reason to come back. And because Regulation Crowdfunding is the market Congress designed to let ordinary investors back startups, its experience should inform the Commission’s broader effort to expand retail access to private markets.

Andrew A. Schwartz is the Laurence W. DeMuth Chair of Business Law at the University of Colorado Law School.

Background

The case arose from a books-and-records demand served on a music-creation platform company that provides access to royalty-free samples and AI tools. In April 2025, the company acquired a significant stake in another business, issued additional equity, and obtained a venture debt facility. After reviewing summary financial statements the company had provided under an earlier demand, a stockholder questioned those transactions, pointing to the cost of the new debt and growing monthly losses.

The stockholder’s March 2026 demand asserted five purposes: valuation, investigating mismanagement, investigating related-party transactions, determining the dilutive effect of the equity issuance, and assessing the company’s financial condition. It also identified eight categories of records, ranging from current financial statements and board materials to loan documents, capitalization tables, valuations, and equity-issuance materials. The company refused to produce any additional documents, and the stockholder filed suit. While the case was pending, the company produced its stockholder list and 2025 financial statements, narrowing the dispute.

Section 220 was amended in March 2025 to define the “books and records” a stockholder may inspect. Under the amended statute, a stockholder who seeks more than the stock ledger and stockholder list must show that the demand was made under oath, in good faith, and for a proper purpose; that it describes the purpose and the records sought with reasonable particularity; and that the records are specifically related to that purpose. See 8 Del. C. § 220(b). If those requirements are met, the stockholder may be entitled to certain categories of books and records listed in the statute, which are primarily limited to formal board-level documents. Beyond that list, stockholders may obtain other specific records only if they show a compelling need and prove by clear and convincing evidence that the records are necessary and essential to their proper purpose. See 8 Del. C. § 220(g).

Proper Purpose

The magistrate found two of the five purposes proper – valuation and investigating related-party transactions – but determined that the stockholder had not supported the remaining purposes.

With respect to valuation, the company argued the stockholder lacked a proper purpose because there was no present need to value his shares. However, the court noted that the burden was on the company to show that the stated purpose was not the real one, and conclusory claims of harassment or lack of “need” for valuation were not enough.

With respect to investigating related-party transactions, the court concluded that stockholders may seek foundational information about whether insiders benefit from such transactions, without first suspecting wrongdoing.

However, the remaining purposes failed. The court determined that there was no credible basis to support investigating possible mismanagement merely because the company began sustaining ongoing losses after the acquisition. Poor financial performance is simply not sufficient to support an inference of wrongdoing, unless the losses are “protracted or extreme.” The court also determined that the remaining two purposes, dilution and financial condition, were subsidiary to either valuation or investigation of wrongdoing, and did not constitute independent proper purposes.

Scope of the Inspection

Measured against those two purposes, the court determined that most of the categories of documents requested were not necessary and essential because they did not “fill a material gap” in the stockholder’s information that he needed to value his shares or assess if the company engaged in related-party transactions.

As to valuation, the court determined that the only additional document needed was a current capitalization table, since the stockholder had already obtained financial statements. Notably, a capitalization table is not among the statutory categories of “books and records” that stockholders may obtain upon showing a proper purpose. However, the court determined that the stockholder had demonstrated by clear and convincing evidence that the table was necessary and essential to valuation, and that he had shown a compelling need for it. The already-produced financial statements show what the company is worth, but they did not show how that value is allocated among classes of shares – and liquidation preferences and conversion rights bear on the value of the stockholder’s interest. The court did not require production of any past capitalization tables because the stockholder did not meet his heightened burden to show a compelling need for that historical information.

For the related-party transactions purpose, the court determined that formal board materials addressing such transactions should be produced, but the remaining requests for financials and materials relating to the acquisition, venture debt facility, and equity issuance – including third-party fairness opinions and valuations – were neither necessary nor essential.

Conclusion

Mendoza confirms that the amended Section 220 requires that all records sought be necessary and essential to a properly stated purpose; a record that would merely assist the stockholder’s analysis is not enough. Companies should expect that formal board materials will likely need to be produced if the stockholder shows they are related to a proper purpose. However, courts closely evaluate requests for any materials beyond the statutorily-defined set of “books and records,” and will narrowly circumscribe production to only the documents for which the stockholder can show a compelling need.

This post is based on a Sidley Austin LLP memorandum, “Amended Section 220 Takes Shape: What Mendoza Adds to the Early Chancery Case Law,” dated November 5, 2026, and available here. 

Yet a useful truism is that something is worth what another person is willing to pay for it. To learn the value of a vote, we have to determine what shareholders are willing to  pay for it. In a new article, I argue that the market’s answer is: very little.

Investors now buy stock with less voting power, or none, as a matter of course. By Jay Ritter’s count, companies went public with two classes of common stock, one carrying weaker voting rights than the other, in 37 of 90 initial public offerings in 2025, or 41.1 percent, the highest rate in the 46 years he has tracked. Buyers pay little extra for the class with greater voting power. Masulis, Wang and Xie found that at American dual-class companies, the class with greater power trades at an average premium of 3.6 percent, with a median of 2.4 percent. Dyck and Zingales estimate that a controller of an American company can take for itself 3 percent of equity value or less. The two figures are about the same size, which suggests that buyers pay for the chance to sell their votes in a fight for control and pay almost nothing for a say on routine matters.

Here is the odd part: No rule requires an investment adviser to vote every proxy. The Commission said so in 2003, when it wrote that it did “not suggest that an adviser that fails to vote every proxy would necessarily violate its fiduciary obligations.” Yet in January, Brian Daly, the director of the Commission’s Division of Investment Management, observed that advisers’ voting policies “now almost universally reflect the coupled mantras of ‘votes have value’ and ‘we will vote all proxies.’” So fund managers vote on everything, and they have little reason to study any of it. An index fund manager keeps about 12 basis points of any gain its governance work produces, but it bears the whole cost of the work. Of course it buys a recommendation, and many managers simply follow it. Iliev and Lowry found that over a quarter of the mutual funds they studied voted with ISS every time it opposed management, at every company they held, in every year they examined. That isn’t a vote. It’s a subscription. And it moves outcomes: Malenko and Shen found that ISS alone dictates about a quarter of the votes.

So what does a count of those ballots measure? Mostly, it measures how proxy advisers set their policies. It does not measure what shareholders think. When shareholders study a proposal on their own, their mistakes tend to cancel out, and the count pools what each of them learned. When many funds follow one recommendation, the count repeats one analysis many times over, and the shareholders who did their homework become less likely to decide the outcome. Everyone pays for that. Only shareholders can vote, and every shareholder lives with the result. A fund that casts an unstudied ballot spends its clients’ money to make the decision worse for everyone else in the company. For that fund, the routine vote doesn’t just have little value. It has negative value.

If shareholders don’t value these voting rights, who does? Not takeover activists. They don’t need Rule 14a-8, because they nominate their own directors and pay for their own proxy fights. The people who value these ballots are the people who file the proposals. Kastiel and Nili have shown that individual “gadfly” proponents file many of the proposals that win majority support. Rule 14a-8 lets a proponent with a tiny stake put a question into the company’s own proxy statement and have it voted on by fund managers who will cast their ballots whether or not anyone studies the question. That is a good deal for the proponent. No evidence shows that it is a good deal for the shareholders who cast the ballots.

The scholars’ own statement shows where the valuable votes are. If Rule 14a-8 goes, they write, shareholders will turn to “proxy fights, coalitions with hedge fund activists, withhold-vote campaigns, negative votes on management proposals, shareholder-sponsored binding bylaw amendments, and lawsuits.” Nearly every item on that list is a contest or a binding act, which is exactly where an informed vote can change an outcome. And those votes are worth something. Cuñat, Giné and Guadalupe compared governance proposals that passed or failed by small margins and found that a proposal that narrowly passed produced an abnormal stock return of 1.3 percent on the day of the vote, compared with one that narrowly failed. Close votes carry information. A ballot cast by formula on a matter nobody contests does not.

So protect the contested vote, and let fund managers drop the rest openly. The Commission and the Labor Department should treat an adviser as having met its fiduciary duty on routine matters if it publishes a written policy naming the kinds of matters it will not vote on, such as uncontested director elections and precatory proposals that drew little support, and if it returns a proxy for every meeting but marks no vote on those items. The adviser’s shares would still count toward the quorum, but they would count neither for nor against the routine item. Contested and fundamental matters would remain subject to the duty, whatever the policy says. I would count a matter as contested if someone has nominated a rival slate or announced a campaign against a director, if the company’s last advisory vote on pay failed, or if a shareholder proposal drew more than a stated level of support, say 20 percent, at its last vote. A merger, a charter amendment, or a vote on a deal with a controlling shareholder is fundamental.

Why do regulators need to say this? Because no fund wants to be the first to stop voting and be accused of neglecting its clients. That is the lockstep problem again. If regulators bless the choice in advance, every fund can make it at once.

In addition, rescinding Rule 14a-8 would not silence anyone. Repeal ends a federal mandate, but it does not ban nonbinding proposals. A shareholder can still offer a proposal at an annual meeting, and states can still require companies to put proposals in their proxy statements. And no federal rule forbids a company from giving its shareholders more rights than Rule 14a-8 does. The Commission’s proposing release says companies may “expand, limit, or eliminate” procedures for shareholder action in their governing documents, and it asks how many would keep including proposals voluntarily. Delaware law already lets a company’s bylaws require it to put stockholders’ director nominees in its proxy materials. Companies just wouldn’t have to. Texas, for example, doesn’t require companies to take proposals at all. A 2025 Texas law instead lets certain listed companies opt in to thresholds a proponent must meet, such as holding $1 million in stock or 3 percent of the voting shares.

My proposal keeps every contested and fundamental vote in the hands of shareholders. What it takes away is the ballot cast by formula on a question nobody studied. A fund manager that declines that ballot, and says so in a published policy, has told its clients where its judgment ends. Whatever the Commission decides about Rule 14a-8, a lot of voting should stop passing for proof that voting is worth a lot.

Seth C. Oranburg is a professor at The Catholic University of America’s Columbus School of Law. This post is based on his recent article, “Silent Shares: What If Shareholder Democracy Has Negative Value?” available here.

Impactful Enforcement

Enforcement actions filed in fiscal year 2026 demonstrate the Division’s continued commitment to rigorous, effective enforcement that focuses on serious and consequential violations of the federal securities laws—including fraud, market manipulation, insider trading, failures and misconduct by gatekeepers, and violations that compromise the integrity of disclosures and financial reporting. The cases emphasize the nature and severity of misconduct, magnitude of investor harm, and pursuit of meaningful remedies. Two-thirds of all standalone enforcement actions filed in fiscal year 2026 included charges against at least one individual, reflecting the Division’s continued commitment to maximizing deterrence and holding wrongdoers accountable.

In fiscal year 2026, the Commission filed 348 enforcement actions, including 235 standalone actions and 113 “follow-on” administrative proceedings that sought to bar or suspend individuals from participating in certain securities markets activities based on criminal convictions, civil injunctions, or other qualifying orders. The Commission also instituted 13 trading suspensions in response to suspected manipulation involving the securities of Asia-based issuers.

In addition, the Commission obtained orders for monetary relief totaling $1.095 billion, comprised of $752 million in disgorgement and prejudgment interest and $343 million in civil penalties, with $235 million of the disgorgement ordered deemed satisfied by a court in a separate non-SEC action. The SEC also returned approximately $731 million to more than 250,000 harmed investors.

“The success of the SEC’s enforcement program is ultimately measured by how effectively it advances the SEC’s mission, protects investors, holds wrongdoers accountable, and strengthens confidence in our markets,” said SEC Chairman Paul S. Atkins. “Enforcement actions and financial remedies are important measures of activity, but they are not the only or most telling measures. Our responsibility is to apply the law fairly and consistently and ensure that our enforcement efforts advance the Commission’s mission. I commend the staff for their dedication to an effective, disciplined enforcement program that serves the investing public.”

“Our focus is on conducting rigorous investigations, pursuing consequential misconduct, and achieving meaningful outcomes for investors,” said David Woodcock, Director of the SEC’s Division of Enforcement. “During the fiscal year, we reviewed our investigative docket, strengthened our investigative capabilities, and launched several new initiatives that will position the Division even more strongly for the future. These efforts have resulted in an enforcement program that is more focused, effective, and prepared to address both longstanding and emerging threats to our markets.”

Positioning the Division of Enforcement for the Future

In fiscal year 2026, the Division worked to modernize its organization and processes to increase its investigative and litigation capacity, address evolving market risks, and deliver more timely, impactful outcomes to ensure the Division’s effectiveness in the years to come. The Division also invested in its leadership ranks with a new leadership training program for supervisors. And with targeted hiring across key skill areas, the Division hired attorneys, accountants, technologists, and data specialists to deepen the Division’s bench expertise and accelerate its critical investigative work.

Organizational Enhancements

In fiscal year 2026, the Division made significant organizational enhancements.

The Division formed the Retail Fraud Working Group (RFWG) to strengthen its ability to identify and address fraudulent schemes—including Ponzi schemes and offering frauds, impersonation scams, broker-dealer misconduct, false and fraudulent filings, and market manipulation schemes—and other misconduct that pose significant risks to everyday investors. Drawing on the expertise of attorneys across the Division, the RFWG employs targeted, data-driven strategies, including Super Intelligence (SI) and the analysis of information from multiple regulatory and law enforcement sources, to uncover potential violations and generate investigative leads for referral throughout the Division. In fiscal year 2026, the RFWG reviewed numerous tips and complaints, generated referrals involving suspected fraud and other violations affecting retail investors, and undertook extensive outreach involving other regulators, industry participants, and investors. Already, more than a dozen new investigations have resulted from the RFWG’s efforts.

In addition, the Division expanded its capacity to address complex accounting and financial reporting fraud schemes as well as other misconduct involving accountants and auditors with a new Financial Reporting and Accounting Unit (FRAU). FRAU combines the skills of attorneys and accountants with deep expertise in accounting standards, issuer disclosures, internal accounting controls, books and records requirements, and auditor responsibilities. This concentration of expertise strengthens the Division’s ability to detect patterns of financial misconduct, promotes a disciplined and consistent approach to evaluating potential violations, and ensures technically rigorous enforcement recommendations. Already, FRAU is improving the Division’s effectiveness by identifying problems earlier in the reporting cycle, building stronger and more analytically precise cases, and accelerating the timeline for delivering meaningful protections for investors. These early returns underscore FRAU’s role as a cornerstone of the Division’s efforts to modernize the enforcement program and an enhanced safeguard for the integrity of the financial reporting ecosystem.

Complementing these enhancements, the Division launched the Office of Super Intelligence and Analytics, a dedicated office designed to bring advanced analytical capability directly into investigative workflows, “force-multiply” resources, and strengthen the Division’s overall capacity to protect investors. The office uses data‑driven techniques and SI tools to identify patterns of misconduct earlier, improve investigative efficiency, and detect emerging threats across markets. Its work includes SI‑enabled anomaly detection, accelerated document and transcript review, and improved blockchain and financial‑flow analysis. The office better positions the Division to address rapidly evolving threats, especially in fraud, cyber, and SI-enabled manipulation schemes

The Division also reorganized its Trial Unit to enhance consistency across the Division’s litigation docket and expand the Division’s overall litigation capacity. Following the reorganization, the Chief Litigation Counsel supervises newly created Deputy Chief Litigation Counsels, who oversee the Division’s litigation attorneys across all the Commission’s offices. The Division also improved the Trial Unit’s case management processes to improve its ability to oversee cases filed across the country.

Investing in Division Leadership

During fiscal year 2026, the Division invested in its leadership ranks by launching a formal leadership training program for new and experienced supervisors. This program, which will continue beyond the fiscal year, is helping the Division build a deep and capable bench of leaders and preparing its next generation of leadership for success in the years to come.

The Division also instituted a new performance-management process in which Senior Officers participate in bi‑monthly meetings with senior leadership to discuss investigation timelines, milestones, and staffing levels. This process ensures that the Division identifies risks early and completes investigative milestones in a timely and efficient manner, thus achieving meaningful investor protection.

Strengthening Interagency Coordination

The Commission strengthened its reach over the past year through memoranda of understanding (MOU) with key partners. The Commission entered into an MOU with the Commodity Futures Trading Commission that deepens collaboration on enforcement matters involving market integrity and complex financial products, enabling more efficient information‑sharing and joint oversight of misconduct spanning across the securities and derivatives markets. Additionally, the Commission entered into an MOU with the Food and Drug Administration that enhances coordination in monitoring disclosures and compliance issues affecting life‑sciences companies, and reinforces safeguards where securities law intersects with product‑regulatory obligations. The Division also continued its historic close coordination with the PCAOB, ensuring auditor misconduct and audit failures are identified and addressed swiftly and efficiently.

The Division filed numerous enforcement actions in parallel with criminal authorities in fiscal year 2026, seeking complementary relief such as targeted injunctions, asset freezes, and associational bars. The Division also worked closely with overseas regulators and law enforcement in multi‑jurisdictional fraud matters, reflecting the global nature of emerging schemes.

Updated Enforcement Manual

The Division made significant updates to the Enforcement Manual for the first time since 2017. Notably, the updates standardize the Wells process, adding transparency, consistency, and clarity to this important part of the enforcement program; allow simultaneous Commission consideration of settlement recommendations and related waiver requests; and explain the Division’s framework for evaluating cooperation, including the impact of cooperation on civil penalties. As announced, the Division will review the Manual on an annual basis going forward to keep its processes current, fair, and effective.

Rescission of Rule 202.5(e)

The Commission rescinded Rule 202.5(e) of its informal rules of procedures, which provided that the Commission would not settle an enforcement action in which a sanction is imposed unless the defendant or respondent also agreed not to publicly deny the allegations in the complaint or administrative order. Among other things, rescinding Rule 202.5(e) aligned the Commission with the overwhelming majority of federal agencies that do not have a similar rule and provided the SEC more flexibility in settling enforcement actions, which conserves resources, provides certainty, and potentially expedites the return of money to injured investors.

Noteworthy Enforcement Actions

Vigorous Pursuit of Cross-Border Fraud

The Division took decisive action to disrupt foreign bad actors targeting U.S. markets and investors. This work built off the momentum of the Commission launching, in September 2025, the Cross‑Border Task Force, a dedicated enforcement group that protects U.S. investors from transnational bad actors.

In a host of enforcement actions brought in November 2025 and August 2026, the Commission charged a total of 42 entities in the District of Colorado, two entities in the Southern District of New York, and an entity in the Northern District of New York, for allegedly filing false Forms ADV to feign legitimacy as U.S. advisers and lure retail investors. Several of these entities appeared to be located overseas, as alleged.

The SEC brought charges against three purported crypto asset trading platforms and four investment clubs for allegedly defrauding retail investors of at least $14 million and funneling those funds overseas in an investment confidence scam that involved soliciting investors through social media using investment tips supposedly generated by SI. The SEC also charged multiple entities, likely operated by individuals overseas, for allegedly defrauding hundreds of retail investors through investment confidence scams on online platforms. The Commission instituted cease-and-desist proceedings against a foreign-based issuer that, according to the order, engaged in sham transactions concerning certain online advertising and marketing that materially overstated its net revenues.

The SEC also instituted 13 trading suspensions to protect U.S. investors from harm arising out of suspected manipulation in the securities of Asia-based issuers. The trading suspensions involved potential manipulation designed to artificially inflate the price and trading volume of the securities, mostly using social media.

Combating Harm to Retail Investors

Throughout the fiscal year, the Division concentrated resources on matters that cause real harm to retail investors, including offering frauds, Ponzi schemes, and emerging technology scams.

For example, in fiscal year 2026, the Commission charged:

• Goliath Ventures, Inc. and its founder and CEO for allegedly operating a multi-year Ponzi scheme that raised at least $425 million from over 1,300 investors;
• A founder and his two New Jersey-based companies for allegedly conducting a Ponzi scheme which raised approximately $16 million from more than 200 inexperienced investors, primarily targeting Christians of Ghanaian heritage in New York and New Jersey;
• AKL Transport LLC, Southern Truck Leasing LLC, and their founder in an alleged Ponzi scheme that raised at least $127 million from approximately 765 investors nationwide. Approximately $33 million of investor funds were allegedly misappropriated for personal use;
• The founder and CEO of a bitcoin mining business, for allegedly raising over $95.6 million from approximately 6,400 investors through a fraud scheme, and misappropriating $48.5 million of investor funds;
• Three individuals for their roles in an alleged affinity fraud that raised approximately $47 million from more than 87 investors, primarily members of Orthodox Jewish communities in New Jersey and New York.

Over the past year, the Division intensified its investor-protection efforts in the pre‑IPO secondary market. As investors obtain greater access to private markets, the risk of harm posed by fraudsters and other bad actors in those markets grows as well. In line with this focus, the Commission charged: private fund adviser, Adit Ventures Management, its CEO, and affiliated general partners for allegedly defrauding investors and client funds in connection with investments in pre-IPO shares, including by misappropriating advisory client assets and charging millions in undisclosed fees; private fund adviser, Meyer Global Management, and its CEO for allegedly defrauding investors and client funds in connection with investments in SpaceX and other pre-IPO securities; and boiler room operator, Andrew Spaventa, and three of his entities in an alleged fraud scheme that purportedly offered retail investors an opportunity to invest in shares of pre-IPO private companies while charging hidden fees. In a settled order, the Commission found that a California resident allegedly defrauded investors in a private fund that invested in pre-IPO shares of Palantir Technologies, Inc.

Reinforcing Critical Investor Protection Guardrails

The Commission also brought enforcement actions to reinforce critical investor-protection guardrails, which strengthen compliance by holding market participants accountable for failing to meet their obligations, increase the likelihood that fraud and other misconduct is detected early, and provide meaningful deterrence to would-be bad actors from violating the law. These actions involved the Custody Rule, Regulation Best Interest, privacy and identity‑protection breaches, Suspicious Activity Report (SAR) and Bank Secrecy Act obligations, and blue sheet compliance. These guardrails strengthen deterrence, enable early detection of misconduct, and support effective market oversight.

Among other enforcement actions, the Commission instituted settled orders against:

• Registered investment advisers Northeast Financial Group, Inc., and, in a separate action, FamilyWealth Advisers, LLC and FamilyWealth Asset Management, LLC, finding that each violated Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder (the Custody Rule);

• Hext Capital Partners, LLC, a registered broker-dealer, finding that it violated Section 15(c)(3) of the Exchange Act and Rule 15c3-1 thereunder (the Net Capital Rule), and its principal owner and managing member, finding that he caused Hext Capital’s violations;

• Simplify Asset Management, Inc., a registered investment adviser to ETFs, finding that it caused a trust, which had an ownership stake in Simplify, to engage in prohibited affiliate transactions with an ETF client and caused another ETF client to exceed leverage thresholds permitted by Investment Company Act Rule 18f-4.

• David Lerner Associates, Inc., a registered broker-dealer, finding that it violated Regulation Best Interest in connection with at least 253 recommendations to retail customers to sell Class A mutual fund shares held for less than one year and nearly simultaneously buy Class A mutual fund shares in a different fund family, which imposed new upfront sales charges paid to the firm and its registered representatives;

• MCB Acquisitions Manager LLC, finding that it failed to timely file a Schedule 13D after it acquired more than five percent of the common stock of a REIT that it planned to take private, and ACM-CPC LLC, finding that it filed an inaccurate Schedule 13D and an untimely amendment to its Schedule 13D in connection with its plan to change control of a company in which it invested;

• M Holdings Securities, Inc., a dually registered broker-dealer and investment adviser, finding that it failed to adopt or maintain reasonably designed policies and procedures concerning cybersecurity, the protection of customer information, and identity theft prevention in violation of Rule 30(a) of Regulation S-P (the Safeguards Rule) and Rule 201 of Regulation S-ID (the Identity Theft Red Flags Rule);

• The New York Stock Exchange LLC, finding that it violated Rule 1001(a)(2)(vii) of Regulation Systems Compliance and Integrity (Regulation SCI) and Exchange Act Section 19(g)(1) in connection with an event in which NYSE failed to conduct opening auctions for more than 2,800 securities;

• Foot Locker, Inc., finding that it violated Rule 21F-17(a) of the Exchange Act, which prohibits any person from taking any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, by using separation agreements that purported to waive employees’ rights to receive whistleblower awards from the Commission;

• Registered broker-dealers Merrill Lynch, Pierce, Fenner & Smith Incorporatedand Canaccord Genuity LLC, finding that they failed to file Suspicious Activity Reports in violation of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder; and

• Registered broker-dealer Wedbush Securities Inc., finding that it failed to provide complete and accurate securities trading information, known as blue sheet data, to the SEC, in violation of Section 17(a)(1) of the Exchange Act and Rules 17a-4(j) and 17a-25 thereunder.

Strengthening Market Integrity

The Division continued to pursue market manipulation and insider trading, conduct that undermines the fairness and efficiency of markets. Enforcement actions in fiscal year 2026 addressed spoofing, deceptive trading, and misuse of material nonpublic information by employees, gatekeepers, and professionals across industries. Consistent with its return to basics, the Division prioritized these matters so that investors can expect accountability for abusive practices.

In fiscal year 2026, the Commission charged:

• 21 individuals for their alleged involvement in a decade-long insider trading scheme involving information misappropriated from multiple global law firms and resulting in millions of dollars in illicit profits;
• In separate actions, a California day trader, a Las Vegas man, a resident of Tujunga, California, and a day trader operating from San Juan, Puerto Rico, for allegedly orchestrating fraudulent “spoofing” schemes to manipulate stock prices and generate ill-gotten gains;
• Three Pakistani and U.S. nationals for allegedly carrying out two market manipulation schemes and, with three associates, an approximately $41 million insider trading scheme involving nine potential corporate acquisitions;
• The former Chief Revenue Officer of Doximity, Inc., a digital platform provider for U.S. medical professionals, for allegedly trading Doximity stock ahead of a quarterly earnings call based on material nonpublic information concerning Doximity’s lower-than-expected sales;
• A nuclear engineer formerly employed by Constellation Energy Corporation, for allegedly trading in Constellation’s securities based on material nonpublic information relating to Constellation’s confidential project to potentially restart its nuclear power plant at Three Mile Island; and
• A biopharmaceutical company employee that allegedly traded in advance of an acquisition announcement based on material nonpublic information he learned while serving on a due diligence team for a potential transaction.

The Commission also instituted settled orders against:

• An attorney finding that he traded in the securities of his client based upon material nonpublic information regarding a pending acquisition that he learned in connection with representing the company in an unrelated legal matter;
• An employee in ImmunityBio Inc.’s Research and Development Department and a documentary filmmaker employed by ImmunityBio, finding that each illegally traded in advance of an announcement that the U.S. Food and Drug Administration had decided to delay approval of ImmunityBio’s drug candidate; and
• An employee of Jazz Pharmaceuticals plc, finding that he traded in Jazz securities in advance of an acquisition announcement based on material nonpublic information he learned while serving on the due diligence team.

Promoting Accurate Disclosure, Accounting, and Financial Reporting

In fiscal year 2026, the Commission filed settled charges against Archer-Daniels-Midland Company and two former executives, and a litigated action charging a third former executive, for materially inflating the performance of a key business segment that the company touted to investors as an important growth driver. The Commission also instituted a settled order against two former public company executives finding that they failed to disclose to the company’s auditor at least $290,000 in personal and/or unauthorized expenses paid by the company.

The Commission also charged:

• Financial technology company, RYVYL, Inc., and its two founders for allegedly making fraudulent disclosures in RYVYL’s public filings;

• Two former executives of now-defunct Near Intelligence, Inc. for allegedly inflating revenue in a financial accounting and disclosure fraud scheme, along with Near Intelligence’s largest customer and its former CEO with aiding and abetting the alleged fraud;

• Electric vehicle manufacturer Battle Motors, Inc., and its CEO for allegedly making materially misleading statements in connection with a convertible debt offering that raised $112.5 million from two outside investors; and

• Lottery.com, Inc., three former executives, and the CEO of a SPAC for allegedly conducting a fraudulent scheme and making false statements in connection with a SPAC merger.

The Division also reinforced accounting and auditing standards. For example, the Commission instituted a settled action against an audit engagement partner, finding that the partner’s negligent conduct during audits of the now-defunct crypto asset trading platform FTX resulted in a violation of Generally Accepted Accounting Principles; audit firm EisnerAmper LLP, finding that it failed to perform an audit of a mutual fund’s financial statements in accordance with PCAOB auditing standards; and a New Jersey-based CPA, finding that he failed to comply with the Commission’s and PCAOB’s auditor independence rules as well as several other PCAOB audit standards.

Addressing Misconduct by Investment Advisers and Safeguarding Investors in Private Funds

The Division remained focused on monitoring for and addressing misconduct by investment advisers, including misappropriated client assets, inadequate safeguarding of assets, misleading or inadequate disclosures, undisclosed fees and expenses, fraudulent valuations and mismarking, and undisclosed conflicts of interest.

Notable enforcement actions in fiscal year 2026 include settled actions instituted against:

• Three Florida investment advisory firms and their owner, Riadh Fakhoury, finding that they made false claims to investors in venture capital funds they managed that their investments were “low risk, high return,” including by touting co-investments by established institutional investors in the same private technology companies that had not occurred;
• New York-based investment adviser, Papamarkou Wellner Asset Management, Inc., finding that it failed to comply with the terms of its advisory agreements relating to advisory fee calculations, provided disclosures to clients that were materially inconsistent with the firm’s actual advisory fee offset practices, and failed to implement certain written compliance policies and procedures;
• A former Illinois-based registered investment adviser to private funds, Madison Capital Funding LLC, finding that it sold loans to private fund clients without reasonably determining whether those trades were at fair market value, contrary to its obligations under its advisory agreements and representations to investors;
• A former registered investment adviser representative from North Carolina, finding that he failed to adequately disclose conflicts of interest in connection with advising clients on the merits of investing in private real estate securities offerings while receiving nearly $1.5 million in compensation from certain sponsors of the offerings; and
• Arizona-based investment adviser Foundations Investment Advisors, LLC and its former CEO, Bryon E. Rice, finding that they failed to disclose conflicts of interest—including a profit-sharing interest that Rice held and an expense sharing agreement between Foundations and four ETFs—related to investments that it recommended to advisory clients.

The Commission also charged:

• Two San Francisco Bay Area private fund manager executives for allegedly orchestrating an offering fraud that raised more than $80 million from approximately 190 mostly retail investors, many of whom were retired senior citizens, and making misrepresentations to investors in two private funds; and
• A former Oregon investment adviser representative for allegedly misappropriating more than $800,000 in securities from his investment advisory and brokerage clients through a sham investment program he created.

Holding Individual Bad Actors Accountable

Holding individuals accountable remains one of the Commission’s most effective deterrents. Two-thirds of the standalone enforcement actions brought by the Commission this year included claims against at least one individual, including founders and CEOs in major Ponzi and offering fraud cases, senior executives in financialreporting cases, and gatekeepers such as accountants, auditors, and investment adviser personnel whose failures or misconduct contributed to investor harm. Most of the enforcement actions previously discussed in this release involved charges against individuals.

Additional examples include:

• Charges against the former CEO, CFO, and Senior Director of Finance of Texas-based Tricolor Holdings, LLC, for their roles in an alleged multi-year scheme to defraud investors by double pledging hundreds of millions of dollars of subprime auto loans to multiple asset-backed securities offerings and lenders;

• A settled order against the former CEO and CFO of biopharmaceutical company Spero Therapeutics Inc., finding that they made misleading statements and omissions regarding feedback received from the U.S. Food and Drug Administration on Spero’s lead drug candidate;

• A settled order against a former CFO of The Bancorp, Inc., finding that he directed the company to file its Form 10-K—which represented that the audit of the company’s financial statements was complete and included audit opinions and consents from the company’s auditors—despite knowing that the auditors had not provided final approval to include their audit opinions and consents; and

• Charges against three former executives of Ammo, Inc. n/k/a Outdoor Holding Co., for their roles in an alleged accounting and disclosure fraud in which they made repeated materially false and misleading statements in Ammo’s public SEC filings and financial statements that generally had the purpose of hiding or obfuscating unfavorable information about the management and operations of the company.

Encouraging Prompt Remediation and Cooperation

The Commission continued to emphasize that prompt remediation and meaningful cooperation can accelerate investigations and influence charging and penalty decisions. Recent enforcement matters emphasized the factors that the Commission considers when evaluating cooperation, such as prompt self-reporting, swift and thorough remediation, and early, proactive engagement with staff. Several enforcement actions in fiscal year 2026 reflect calibrated penalties and charging decisions that took remediation and cooperation into account.

For example, in a settled order, the Commission found that CBIZ Inc. had made unregistered offers and sales of securities but imposed no civil penalty in acknowledging the cooperation afforded to the Commission staff and remedial acts promptly undertaken by CBIZ. Likewise, the Commission described extensive remedial steps taken and imposed no civil penalties in an order against Ammo, Inc. n/k/a Outdoor Holding Company for misleadingly failing to disclose certain information on Forms 10-K and presenting materially misstated financial statements on Forms 10-K and Forms 8-K; and in an order against Key Tronic Corporation and two of its senior executives, for books and records and internal controls violations related to false entries in the company’s inventory system that improperly increased income. In a settled order against Nipun Kumar Jami, the Commission found that Jami traded in advance of an acquisition based on material nonpublic information obtained from his spouse and imposed a civil penalty equal to half of Jami’s illicit profits, acknowledging his voluntary self-report to the staff approximately one month after the acquisition was announced and cooperation in the Commission’s investigation.

The Commission also held firms that failed to promptly remediate known deficiencies accountable. For example, the Commission imposed a $20 million civil penalty in a settled order against dually registered UBS Financial Services Inc., finding that UBSFS failed to adequately monitor its customers’ FX wire transactions for possible suspicious transactions, as required by its own anti-money laundering policies and procedures, and—even after engaging a consulting firm to remediate deficiencies in its data for customer FX wire transactions and conduct a “lookback” to determine if it was required to file additional SARs—UBSFS failed to timely file “lookback” SARS concerning thousands of suspicious transactions.

Likewise, the Commission also imposed a $100 million civil penalty against Western Asset Management Company, LLC, finding that it failed to take reasonable steps to detect and prevent a cherry-picking scheme despite being aware that the trading and allocation practices of its former co-Chief Investment Officer diverged from those of other portfolio managers at the firm.

Office of the Whistleblower

Since its enactment in 2011, the SEC’s whistleblower program has become an integral part of the Division’s crucial work to detect and prosecute wrongdoing and protect investors.  Whistleblowers often provide significant information that either alerts the Commission to possible securities law violations or substantially contributes to an existing investigation.  Indeed, high-quality whistleblower tips have resulted in impactful SEC enforcement actions covering a broad range of misconduct and led to more than $11 billion in financial remedies ordered by the Commission since inception of the program.  Participation in the whistleblower program remains strong: In fiscal year 2026, the Commission received approximately 26,000 whistleblower tips and awarded more than $158 million to 65 individual whistleblowers, the highest number of individual whistleblowers since fiscal year 2023.

Litigation Highlights

The Division prevailed in several cases at trial, on summary judgment, and in the remedies phase in fiscal year 2026, including:

Trials 

SEC v. Robert Brian Watson (D. Colo.)

In January 2026, after a five-day trial, a jury found defendants R. Brian Watson and Northstar Commercial Partners, a real estate company Watson owned, liable for intentional securities fraud. The Commission charged Watson and Northstar in August 2022 for allegedly misrepresenting their own investments in securities offerings to fund various real estate projects across the country.

As demonstrated at trial, Watson and Northstar defrauded investors in 11 different offerings over the course of about 36 months. Defendants told investors that Watson “co-invested” in every real estate offering by investing his personal funds in Northstar-sponsored real estate projects alongside investors who were also investing in common equity. The statements were false and misleading because Watson did not co-invest his personal funds and have “skin in the game” as promised to investors.

SEC v. Ismael Zarco Sanchez (S.D. Tex.)

In February 2026, after a four-day trial, a jury found defendant Ismael Sanchez liable for securities fraud and registration violations. The Commission charged Sanchez and 16 other individuals in March 2024 for their alleged roles in a $300 million Ponzi scheme that involved Houston, Texas-based CryptoFX LLC and targeted more than 40,000 predominately Latino investors.

As demonstrated at trial, Sanchez was a lead salesperson for the CryptoFX Ponzi scheme that involved promises to trade investor funds in the crypto asset and foreign exchange markets, but in reality used investor money to make Ponzi payments, pay commissions to salespeople, and fund personal expenses. The office in Chicago that Sanchez led raised tens of millions of dollars from investors.

Summary Judgment

SEC v. Brian Hutchison (D.D.C)

In August 2026, the District Court for the District of Columbia granted the Commission’s motion for summary judgment and found that Brian K. Hutchison violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, among other charges. The Commission charged Hutchison, then-CEO of RTI Surgical Holdings, Inc., in August 2022 for allegedly masking RTI’s disappointing sales numbers by shipping future orders ahead of schedule to accelerate, or “pull forward,” revenue and then failing to disclose this practice to investors. In June 2020, RTI restated its public financial statements from 2014 through 2019 to correct errors caused by this practice.

Remedies 

SEC v. Robert Newell (C.D. Cal.)

In May 2026, following the entry of a bifurcated consent judgment enjoining Robert Newell from violating Section 17(a) of the Securities Act; Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and Sections 206(1), 206(2), and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder, the District Court for the Central District of California granted the Commission’s motion for the entry of a final judgment ordering Newell liable for disgorgement in the amount of $668,300, plus prejudgment interest thereon of $254,067, and a civil penalty of $668,300, and enjoining him for five years from directly or indirectly participating in the issuance, purchase, offer, or sale of any security, except for purchases or sales for his own personal accounts. The Commission charged Newell, a fund manager, and his prior firm, Black Hawk Funding, Inc., in July 2023 with engaging in undisclosed misuses of investor funds, making Ponzi-like payments, and distributing misleading disclosure documents to investors in connection with three cannabis-related private fund offerings. Newell allegedly misappropriated at least approximately $668,300 of investor money.

SEC v. Trevon Brown, et al. (S.D.N.Y.)

In July 2026, following the entry of a bifurcated consent judgment enjoining Michael Noble from violating Section 5 of the Securities Act and Section 15(a) of the Exchange Act, the District Court for the Southern District of New York granted the Commission’s motion for monetary relief in its entirety, ordering Noble to pay disgorgement in the amount of $731,281, prejudgment interest in the amount of $293,703.36, and a civil penalty in the amount of $50,000. The Commission charged Noble and other co-defendants in May 2021 for their involvement in the promoting and acting as unregistered brokers for the BitConnect digital asset platform “lending program.”

SEC v. Aron Govil (S.D.N.Y.)

In January 2026, following the entry of a bifurcated consent judgment against Aron Govil imposing certain injunctive and other relief in 2021, the entry of a final judgment in 2022, and the Second Circuit’s 2023 decision vacating the judgment and remanding the case for a determination of pecuniary harm, the District Court for the Southern District of New York granted the Commission’s renewed motion for imposing remedies in its entirety, including $6,670,977 in disgorgement and $3,037,615.59 in prejudgment interest. The Commission charged Govil, the founder and former CEO of Cemtrex, Inc., in July 2021 with misappropriating over $7 million in investor funds and misrepresenting how offering proceeds would be used. The court found that the SEC’s evidence established pecuniary harm, as was required under the Second Circuit’s standard at that time.

In a new paper, we study the optimal audit standard for firms that struggle to raise capital. The SEC’s argument seems strongest when capital is scarce. If a firm cannot raise more outside financing, every dollar it spends on audit fees is a dollar it cannot invest. Our analysis points the other way. Stricter standards do increase audit fees, but they can also expand a firm’s capacity to raise outside financing by more than the higher fees. The welfare-maximizing audit standard becomes stricter, not more lenient, as financing constraints tighten.

How Stricter Audits Can Expand Financing

We introduce audit regulation into the workhorse financing model of Holmström and Tirole. An entrepreneur with limited wealth seeks outside financing for a project whose scale she can choose. Once the project is funded, she decides how hard to work. Hard work makes it more likely that the business develops favorably, which in turn makes eventual success more likely. Shirking gives her private benefits, such as leisure or time for other ventures. Investors cannot observe her effort, so she must keep a large enough stake in the project to stay motivated. This stake limits the share of the project’s income that can be promised to investors (its “pledgeable income”) and therefore the amount she is able to raise.

The regulator sets the audit standard, which determines how diligent the audit must be. A stricter standard makes it more likely that the auditor catches a misstatement that hides a deterioration in the business. Once the problem comes to light, investors stop the project and redeploy its assets. Auditing thus improves efficiency by stopping projects that are no longer worth continuing. A stricter standard also raises the audit fee, which the firm must finance along with the investment itself.

For a financially unconstrained firm, whose founder—an entrepreneur—has enough wealth to raise all the financing she needs, the optimal standard balances better decisions about whether to continue the project against higher audit costs. That standard maximizes both investment and welfare, and it depends neither on the entrepreneur’s wealth nor on the severity of the incentive problem.

For a financially constrained firm, stricter auditing matters for a second reason: It strengthens the entrepreneur’s incentive to work, which expands financing. If the business deteriorates and the auditor misses the problem, the project continues, and the entrepreneur still has a chance at a payoff. A stricter audit makes it more likely that the deterioration is caught and the project stopped. The financing contract gives investors the liquidation proceeds, so stopping the project leaves the entrepreneur with nothing. Since deterioration is more likely when the entrepreneur shirks, stricter auditing reduces her expected payoff from shirking more than her payoff from working. She therefore stays motivated with a smaller stake, which increases the project’s pledgeable income and lets the firm raise more capital. Because of this incentive effect, a constrained firm’s investment peaks at a standard stricter than the one that is optimal for an unconstrained firm.

Why Tighter Constraints Call for Stricter Standards

For a financially constrained firm, the welfare-maximizing standard is stricter than the standard that is optimal without financing constraints, but less stringent than the standard that maximizes investment. The reason is that a higher fee applies to the entire project, not only to the additional investment it makes possible. As the standard approaches the investment-maximizing level, the value of the additional investment shrinks, and the higher audit costs come to outweigh the benefits of more investment and of stopping projects that have deteriorated. Between the welfare-maximizing and investment-maximizing standards, a stricter standard increases investment but reduces welfare. Stricter is not always better: Beyond a certain point, additional audit requirements reduce welfare.

Our main result is that the welfare-maximizing standard becomes stricter as financing constraints tighten, whether because the firm has less internal capital or because the incentive problem is more severe. This result builds on the previous one. Because the welfare-maximizing standard is less strict than the one that maximizes investment, a slightly stricter standard at the welfare optimum still generates enough additional financing to cover the higher fees and expand investment. This additional investment is worth more to a more constrained firm, which invests less, because with decreasing returns to scale the marginal return on investment rises as investment declines. The standard that is optimal for a less constrained firm is therefore too lenient for a more constrained one.

Implications for SOX 404(b)

Companies exempt from Section 404(b) still undergo a financial-statement audit, so an exemption reduces the scope of required audit work rather than eliminating auditing. We capture this as a lower required audit intensity. In our model, a lower standard reduces audit fees but can reduce external financing by even more, leaving less money for investment. If smaller firms are more financially constrained than otherwise comparable larger firms, the model implies stricter, not more lenient, optimal standards for them. Giving smaller firms relief because capital is scarce can then weaken the audit discipline that helps them obtain that capital.

The same reasoning applies to new standards of the Public Company Accounting Oversight Board (PCAOB). Under the JOBS Act, PCAOB rules adopted after April 5, 2012, do not apply to audits of emerging growth companies unless the SEC determines that applying them is “necessary or appropriate in the public interest,” after considering investor protection and whether the action will promote efficiency, competition, and capital formation. When the SEC made this determination for AS 1000, the PCAOB’s 2024 standard on auditors’ general responsibilities, it acknowledged that these audits could become more costly but noted that better audits can lower the cost of capital and enhance capital formation. If emerging growth companies face tighter financing constraints than comparable issuers, our analysis supports this reasoning. The capital-formation consideration can favor rules that increase audit diligence despite higher fees.

To the extent that economic downturns or less developed financial markets tighten financing constraints, our analysis likewise points to stricter optimal standards, holding other determinants of audit costs and benefits fixed.

What Empirical Studies Should Measure

For a financially constrained firm, welfare, investment, and outside financing do not peak at the same standard. As the standard becomes stricter, welfare peaks first, investment later, and outside financing can peak later still. Between the first two peaks, a stricter standard raises investment but lowers welfare. Beyond the investment peak, it can still raise outside financing even as investment falls, because more of the money raised goes to audit fees. An increase in investment or outside financing after a stricter standard is therefore not, by itself, evidence that welfare has improved. Studies that draw welfare conclusions should measure audit fees alongside outside financing and productive investment and, where possible, other benefits of auditing.

The case for audit relief usually rests on the fees that firms save. For financially constrained firms, our analysis suggests that this case is incomplete. The same audit work that generates the fees also determines how much outside capital the firm can raise.

Negin Attar-Niggemann is a post-doctoral researcher at WU Vienna University of Economics and Business, Volker Laux is a professor at the University of Texas at Austin, and Felix P. Niggemann is an assistant professor at the University of Vienna. This post is based on their recent paper, “Audit Regulation for Financially Constrained Firms,” available here.

As many readers of our posts know, California has required modern slavery disclosure by retailers and manufacturers for more than a decade. The California Transparency in Supply Chains Act was the first corporate modern slavery transparency law. It has since been followed by broadly similar requirements, in chronological order, in the United Kingdom, Australia and Canada, with New Zealand likely to soon be part of the club.

AB 2599 is different. It is not focused on modern slavery. Instead, it is focused on pre-Thirteenth Amendment slavery.

The Legislature’s findings in AB 2599 note that businesses from that period in the following industries, among others, profited from slavery: insurance, banking, tobacco, cotton, sugar, railroads and shipping. However, AB 2599 is not industry-specific.

Covered Entities

Entities are subject to AB 2599 if they (1) do business in California, (2) were in existence on or before December 31, 1964 (or had a predecessor in existence then) and (3) have annual worldwide gross receipts of more than $100 million. 

Doing business in California has the meaning in Section 23101 of the California Revenue and Taxation Code. 

Records Search

AB 2599 requires each covered entity to search through the records in its and its related entities’ possession, control and knowledge for records that the covered entity or its related entities:

• Bought or sold persons subjected to slavery;
• Used persons subjected to slavery as collateral;
• Provided loans to purchase persons subjected to slavery;
• Insured such transactions or the persons subjected to slavery; or
• Provided related or other services to aid or otherwise facilitate those transactions.

AB 2599 does not prescribe a particular search methodology. However, the California Civil Rights Department has the authority to adopt, promulgate and amend regulations implementing and interpreting this and other aspects of the law. 

“Related entity” is a defined term in AB 2599. It includes the covered entity’s parent entities or subsidiaries that do business in California, as well as any predecessor in interest, regardless of whether that predecessor did business in California.

Affidavit Requirement

Following its records search, the covered entity must complete an affidavit and submit it to the California Civil Rights Department. 

The affidavit must include the following information: 

• A statement from the covered entity verifying that it has exercised due diligence to search through any and all records in its and its related entities’ possession.
• The names of each slave and slaveholder described in the records.
• Evidence of transactions that benefited or otherwise profited from slavery in the United States financially or through the exchange of goods or services.
• To the extent applicable, records from 1849 forward indicating the following:

• Insurance policies related to slaveholding;

• Evidence of the purchase, sale or lease of enslaved persons;

• The use of enslaved persons as collateral for insurance policies, loans or other transactions;

• Evidence of the provision or receipt of loans to purchase enslaved persons;

• Insuring transactions for enslaved persons; and 

• Any other company or contractor records evidencing participation in slaveholding or participation in the slave trade.

• An index summarizing and describing the records provided, including the years referenced in the records, the industry and names of the companies referenced (if the predecessor or subsidiary company had a different name) and the types of documentation or records submitted.

There is a partial accommodation for insurance companies: an insurance company that submitted documentation to the California Department of Insurance pursuant to Chapter 5 of Division 3 of the Insurance Code (enacted by SB 2199) may include that documentation as part of the affidavit. SB 2199, which was adopted in 2000, required California insurers to provide information regarding records of slaveholder insurance policies. 

Affidavit Due Date; Public Availability of Data

There is a decent amount of runway before affidavits are due (although for some companies AB 2599 will be a big lift). 

Affidavits and related records ultimately will be included on a public digital platform. The timing of that platform will dictate when affidavits and supporting documentation are first due. After AB 2599 has been funded by the California Legislature, the Civil Rights Department has one year to create the platform. By its terms, the requirements of AB 2599 become operative upon appropriation by the California Legislature. 

At the earliest, affidavits will be due by January 15, 2029, for covered entities doing business in California as of January 1, 2028. However, if the digital platform is delayed, the deadline will be pushed back to the next applicable January 15 following the development of the platform. 

For covered entities that commence business in California after January 1, 2028, the affidavit is due by January 15 of the second year following the establishment of the business or one year after the Legislature’s implementing appropriation, whichever is later. 

Affidavits and records received by January 15 of the first reporting year are required to be made available on the platform within one year. Affidavits and records received thereafter are required to be made available within six months of receipt.

The platform is required to disaggregate data by, among other things, (1) company industry or focus, (2) multi-year review of data, (3) the estimated value and profit to the company for each year information has been submitted and (4) the estimated value or revenue gained in the time period of the slavery-related transaction or business.

All affidavits, reports, information and data are required to remain indefinitely on the digital platform.

The records search and affidavit submission generally are a one-time undertaking. However, a covered entity must submit an updated affidavit to the Civil Rights Department upon the discovery of new reportable information. 

Government Contractor Certification

Companies subject to AB 2599 submitting a bid or proposal, or otherwise proposing to enter into or renew a contract, with a California state agency for at least $100,000 will be required to certify that they have submitted an affidavit in compliance with AB 2599.  

This post is based on a Ropes & Gray LLP memorandum, “California Adopts New Corporate Slavery Disclosure Law,” dated October 30, 2026, and available here. 

The provision never led to broader board representation for U.S. workers, and its current reach is narrow. Its significance is to show that that employee voting rights need not entail employee ownership or a shift from shareholder value to stakeholder governance.

In a recent article, I develop this distinction through the European and American histories of worker participation. I separate the reasons for organizing corporate governance around shareholders from the additional argument needed to reserve director selection exclusively to them.

That distinction matters because worker participation is often invested with a political significance that exceeds its immediate legal effects. Its association with industrial democracy and struggles over economic power can make even limited board representation seem like a broader transformation of the corporation. The relevant question is what powers a particular arrangement actually gives employees.

A Different Route to the Same Office

The debate over stakeholder governance concerns whose interests directors should serve. Worker representation concerns who has a right to select them.

The workforce can acquire that right through employment while shareholders retain their equity and associated economic claims. An employee-selected director can also remain subject to the same duties as other directors, including a shareholder-value mandate. Conversely, a board elected entirely by shareholders can take employee interests seriously. Recognizing labor as a basis for director selection therefore need not turn ownership socialist or change corporate purpose.

Of course, a director’s connection to the workforce matters: It accounts for that director’s selection and the workforce perspective the arrangement is intended to introduce. Yet that connection need not make the director a worker delegate charged with maximizing employee welfare. The director enters an existing corporate office and exercises the powers attached to it.

American corporate law already manages constituency connections within traditional directorships. Preferred stockholders and venture investors can obtain distinct selection rights without creating a separate species of corporate authority. Labor-based selection has a different, nonproprietary foundation, but the distinction between selection and office remains useful. Constituency affiliation can create conflicts; it does not by itself establish incompatibility with the office.

This also puts the question of who the director answers to into perspective. The case for centralized board authority is substantial. Whether allowing different constituencies to select directors undermines it depends on the arrangement. One employee director subject to common duties presents a different question from a board organized around competing capital and labor blocs.

What the Historical Comparison Shows

Employee influence varies with the design of representation and with institutions outside the boardroom. Who selects the representatives, what information and committees they can access, and what authority the board exercises matter alongside the number of seats. Collective bargaining can give workers leverage that board membership alone does not supply. The comparative question is how representation interacts with the other institutions through which labor exercises power.

There is no single European model of board-level worker participation. German co-determination developed through contested settlements over industrial power, particularly during postwar reconstruction. In the coal and steel industries, labor gained supervisory participation and private ownership survived. Later legislation extended representation on different terms. Under the 1976 regime, shareholder representatives can elect the supervisory board’s chair if the full board cannot agree on one by a two-thirds majority. The chair has a second vote if a repeated vote remains tied, preserving a shareholder advantage despite equal numbers of shareholder and employee representatives. The political ambition behind participation did not determine a uniform allocation of corporate power.

Other histories reveal different choices. France moved from optional worker representation to mandatory representation in certain circumstances. Nordic systems brought employee representatives onto ordinary boards, with important differences in union involvement and workforce election. Britain’s abandoned Bullock proposal contemplated a substantial reconstitution of boards connected to British unions. Its failure does not portend failure for more limited arrangements.

The American record supplies a further qualification. At Chrysler, collective bargaining secured UAW President Douglas Fraser’s nomination, followed by election through the ordinary shareholder process in 1980. That arrangement differed from the independent employee franchise contemplated by Massachusetts. Both nevertheless accommodated labor-based access to a common corporate office.

These differences also explain why counting seats is insufficient. In France, empirical research finds that increased board representation co-existed with restricted access to important committees. Formal membership can thus provide less influence than the number of seats suggests. Effective participation depends on access to the information and preparatory deliberation through which board decisions take shape.

Institutional objections deserve the same precision. Employee representatives may resist risky investments or acquisitions that threaten employment. Differences in bargaining institutions, board structure, and bankruptcy law complicate borrowing the German model. Those concerns must be assessed against the authority the proposed representatives would actually possess. An objection to near-parity does not establish the costs of a single seat.

Who Controls Adoption

A harder question follows from legal compatibility: If worker directors can fit within ordinary corporate governance, why are they so uncommon in the United States?

Firms may obtain workforce information through management reporting or direct consultation with employees at less cost than board representation. Employees may prefer greater compensation or contractual protections to a board seat. Private ordering allows those differences to shape adoption. If worker directors routinely offered clear benefits to both firms and employees at little cost, one would expect more voluntary adoption. Their rarity therefore cautions against assuming such benefits. Negotiated American seats have also often accompanied distress and restructuring. Their subsequent performance alone cannot show what representation would do under ordinary adoption conditions.

But voluntary adoption also depends on who holds the right to authorize worker representation. Where creating employee selection rights requires shareholder approval, shareholders can decide whether to share their existing power to select the board. Employees have no equivalent option. A firm’s failure to adopt worker representation reflects decisions made within this unequal allocation of rights; it cannot alone show that both sides would reject participation if employees held an independent right to activate it.

Italy’s 2025 reform illustrates the difference. It permits worker representation through the corporate charter and collective bargaining, without giving employees an independent statutory right to require such representation. Under some Nordic arrangements, by contrast, employees can activate a statutory entitlement that shareholders cannot simply refuse. Participation is not automatic in either case, but the decision rests with different constituencies. Within an enabling regime such as Italy’s, participation can also become a governance tool in negotiations with unions during a crisis or restructuring: A board seat may support information-sharing and monitoring of commitments accompanying employee concessions.

Conclusion

These distinctions do not, by themselves, establish a case for compulsory representation. They make a more precise evaluation possible: Whether worker directors increase transparency, make corporate commitments to employees more credible, or support negotiated restructuring depends on the rights and responsibilities attached to their seats. Such benefits, where present, can be pursued within a shareholder-value regime; they require neither employee ownership nor a general stakeholder mandate.

The “drop of socialist oil” that the title of my article borrows from Otto von Gierke  captures the limited but significant change that board-level worker representation can make to the corporation’s constitution. Employment, independently of investment, can become a basis for membership in a corporate governing body without making ownership socialist or abandoning shareholder value as the governing objective. The case for shareholder predominance does not, by itself, establish a case for shareholder exclusivity in director selection.

Pierluigi Matera is a visiting professor of corporations at Boston University School of Law and a professor of comparative law at LCU in Rome. This post is based on his recent article, “Beyond Shareholder Exclusivity: Board-Level Worker Participation as a ‘Drop of Socialist Oil,’” forthcoming in the Review of Banking and Financial Law and available here.

In Bozorgi v. Cassava Sciences, Inc., 2026 WL 3160284 (5th Cir. Oct. 16, 2026), the Fifth Circuit overturned a class certification ruling for failing to consider whether defendant’s stock was actually a “meme stock” that was traded in an inefficient market. The plaintiffs alleged that defendant Cassava defrauded investors by misrepresenting the success of its Alzheimer’s drug simufilam. The district court declined to consider defendant’s argument and expert’s analysis that Cassava’s stock was a meme stock traded in an inefficient market, rather than an efficient market that accurately incorporated publicly available information into Cassava’s stock price.

The Fifth Circuit vacated the class certification ruling, finding that the district court abused its discretion “by declining to evaluate defendants’ evidence of market inefficiency.” As the Fifth Circuit explained, “courts must assess evidence of both market efficiency and market inefficiency” when assessing if the fraud-on-the-market theory applies. The Fifth Circuit therefore remanded the case back to the district court to make a “‘rigorous’ assessment of all the evidence required when assessing market efficiency,” including the evidence presented by both plaintiffs’ and defendant’s experts.

Bozorgi offers an important reminder that parties and courts should not simply tick through factors that courts often consider when evaluating if a given stock traded in an efficient market. Instead, the court must rigorously assess “factors both for and against market efficiency” before presuming classwide reliance on an alleged misrepresentation under the fraud-on-the-market theory. Further, given the rise in the phenomenon of meme stocks since 2020, one key argument for defendants in shareholder litigation regarding such stocks will likely be that a meme stock is not traded in an efficient market and plaintiffs therefore cannot presume that defendant’s stock price accurately reflected defendant’s alleged misstatements.

This post is based on a Covington & Burling LLP memorandum, “Know Your Meme: Fifth Circuit Overturns Class Certification in Securities Fraud Action for Failing to Determine if Stock Traded in Inefficient Market as a Meme Stock,” dated October 28, 2026, and available here.