July 5, 2022

The SEC Expects You To Read This…

John blogged a couple of weeks ago that the SEC pursued enforcement against The Brink’s Company for not including a “whistleblower” exemption in employee confidentiality agreements. We’re posting memos on this topic in our “Whistleblowers” Practice Area – and you’d better read them! Because as this Wiley memo points out, the SEC expects you to know what’s in there and act accordingly. Here’s an excerpt:

Remarkably, the SEC Order relies on Brinks’s receipt of widely distributed law firm client alerts to demonstrate that Brinks had knowledge that its Confidentiality Agreements were improperly restrictive. The SEC Order specifies that between 2015 and 2016, Brinks’s legal department received multiple legal updates from outside counsel highlighting new SEC enforcement actions for violations of Rule 21F-17(a).

As we described in our own client alert in 2016, at this time, the SEC had launched its campaign to enforce the whistleblower rules enacted in 2011. The emerging enforcement actions indicated that the SEC was targeting restrictive clauses – even those in legacy confidentiality agreements and other employment documents which pre-dated the enactment of the SEC’s 2011 whistleblower rules.

Specifically, the SEC order emphasized that company lawyers had received several “general client bulletins, legal alerts, and case summaries” about the Commission’s 21F-17 enforcement activity. In addition, the company’s regular outside employment counsel attached an alert as a “client memo” to an email they sent to the General Counsel and other lawyers involved with the employment agreements, which predicted more enforcement activity and recommended that public companies revise their employment agreements. While Rule 21F-17(a) doesn’t require intent to prove a violation, the SEC cast that as “specific advice” – and used it to add context to other findings that resulted in the settlement.

The SEC isn’t alone in expecting lawyers to read client alerts and apply the steps that the alerts recommend. A few years ago, John blogged about a federal court decision that found a “known trend” could exist for MD&A disclosure purposes because it was described in a client alert. John’s takeaway is doubly important now:

Aside from making a subscription to our sites even more of a necessity, this case shows both the resourcefulness of the plaintiffs’ bar and the potential need for companies to incorporate the “client alert” communications from their professional advisors into their disclosure controls & procedures.

Liz Dunshee

July 5, 2022

#MeToo: Scapegoats Won’t Solve the Problem (They Might Make It Worse)

In a record-setting order last week, a FINRA arbitration panel issued a $52 million defamation award to Dan Michalow – the former co-head of global hedge fund D.E. Shaw’s Macro Group who had been fired in 2018. D.E. Shaw said publicly at the time that the termination was prompted by a complaint that alleged “abusive and offensive conduct.” Here’s more info from one of the firms that represented Mr. Michalow in the binding proceedings:

The FINRA panel explicitly found that D.E. Shaw had defamed Michalow and that Michalow did not commit sexual misconduct. D.E. Shaw and four members of its executive committee were found jointly and severally liable.

According to FINRA databases, the damage award is the sixth-largest overall award handed down to an employee by FINRA, the largest ever awarded by FINRA for defamation, and the largest ever to an individual employee.

According to this Investment News write-up, Mr. Michalow issued a statement in connection with the order that says he believes he was a scapegoat to deflect scrutiny of the firm’s broader culture.

This outcome shows that there’s often no cut & dry way to respond to complaints like the one that started this whole mess. It may be appropriate to take swift action and make public statements that stand against alleged wrongdoing – yet it’s also important to avoid making pointed statements against individuals before they’re proven true. Even better, avoid the issue in the first place by monitoring & addressing cultural issues before they lead to a complaint. Last fall, D.E. Shaw appointed Maja Hazell, the former Global Head of Diversity & Inclusion at White & Case, as a Managing Director and first-ever Head of DEI.

Our checklist on “Board Risk Oversight – Sexual Harassment Policies” outlines steps to navigate these issues. On, we’re adding resources every day that provide practical guidance on enhancing Diversity, Equity & Inclusion programs. DEI effort & progress is essential in today’s environment where employees are empowered to publicly air grievances and the public is ready to pile on – and DEI officers need to be supported with adequate resources in order to solve the problems they’re hired to address. We have over a dozen subject area pages with curated, practical guidance on navigating diversity topics, on-demand replays of our 3-part event on DEI data and civil rights audits, DEI checklists on 20 key topics (and growing), and more.

If you aren’t a member with access to these resources, sign up online, email, or call 1-800-737-1271. Our “100-Day Promise” makes this a “no-risk” situation: during the first 100 days as an activated member, you may cancel for any reason and receive a full refund!

Liz Dunshee

July 5, 2022

More on Our “Proxy Season Blog”

We continue to post new items regularly on our “Proxy Season Blog” for members. “Proxy season” never really ends these days – but as we reach the end of the busiest part of the year for annual meetings, it’s time to reflect on how to prepare for “off-season” engagements and 2023.

Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Two Lobbying-Related Shareholder Proposals Garnered Majority Support

– JUST Capital’s Corporate Racial Equity Tracker

– More on: Advocate’s Proxy Voting Service Could Amplify Its Calls for ESG Action

– Georgeson’s Institutional Investor Survey: Look Out for More E&S Support

– CPA-Zicklin Expands “Political Spending” Index to Russell 1000

– Virtual Annual Meetings: “Shareholder Q&A” Floor Proposal Defeated, For Now

Liz Dunshee

July 1, 2022

Happy 4th of July

We wish everyone a safe and happy holiday weekend. We’re off on July 4th & our blogs will be back on Tuesday.

“Most of the big shore places were closed now and there were hardly any lights except the shadowy, moving glow of a ferryboat across the Sound. And as the moon rose higher the inessential houses began to melt away until gradually I became aware of the old island here that flowered once for Dutch sailors’ eyes—a fresh, green breast of the new world. Its vanished trees, the trees that had made way for Gatsby’s house, had once pandered in whispers to the last and greatest of all human dreams; for a transitory enchanted moment man must have held his breath in the presence of this continent, compelled into an aesthetic contemplation he neither understood nor desired, face to face for the last time in history with something commensurate to his capacity for wonder.

And as I sat there brooding on the old, unknown world, I thought of Gatsby’s wonder when he first picked out the green light at the end of Daisy’s dock. He had come a long way to this blue lawn, and his dream must have seemed so close that he could hardly fail to grasp it. He did not know that it was already behind him, somewhere back in that vast obscurity beyond the city, where the dark fields of the republic rolled on under the night.

Gatsby believed in the green light, the orgastic future that year by year recedes before us. It eluded us then, but that’s no matter—tomorrow we will run faster, stretch out our arms further… And one fine morning—

So we beat on, boats against the current, borne back ceaselessly into the past.” – F. Scott Fitzgerald, The Great Gatsby

John Jenkins

June 30, 2022

SEC’s Climate Disclosure Proposal: Avalanche of Comments at Deadline

The comment period for the SEC’s climate disclosure proposals expired on June 17th. Not surprisingly, the agency was the recipient of an avalanche of last-minute comments.  I waded through a bunch of these late arrivals and grabbed a handful that I thought were particularly interesting or significant. These include:

– A 94-page letter from the Society for Corporate Governance offering a critique of most of the specific rule proposals and calling into question the SEC’s authority to adopt the rules.  Of particular note are appendices criticizing the Public Citizen survey data on retail investors’ desire for climate change disclosure cited by the SEC in the adopting release & providing data on Society members’ estimates of compliance costs.

– A 35-page letter from the ABA’s Federal Regulation of Securities Committee addressing specific issues relating to proposed S-K line-item disclosures and calling into question the workability of the SEC’s proposed financial statement disclosure requirements.

– A 6-page letter opposing the proposed rules submitted by a group of former SEC Chairs & Commissioners led by Richard Breeden and Harvey Pitt.  Liz previously blogged about another group of former SEC bigshots who wrote in support of the SEC’s authority to adopt the proposal. These worthies disagree, characterizing the proposed rules as “an unprecedented and unjustified effort beyond financial materiality” that exceed the SEC’s statutory authority.

– A 21-page letter arguing that the proposed rules don’t violate the First Amendment from a group of 6 law professors led by Harvard Law School’s Rebecca Tushnet.

– A 30-page letter arguing that the SEC lacks the statutory authority to adopt the proposed rules submitted by Bernard Sharfman & James Copland. This letter responds to those commenters who argue that the SEC has almost limitless statutory authority to issue disclosure rules “in the public interest.” The authors argue that the SEC’s authority is somewhat more limited and contends that courts have construed this “in the public interest” language more narrowly & by reference to the objective of protecting investors.

In addition to this list, I’d like to highlight this 51-page letter submitted by a group of six commenters including former Corp Fin Director Alan Beller and former Delaware Chief Justice Leo Strine. This letter is probably the most constructive critique of the proposal that I’ve seen. Among other things, that letter recommends that the SEC make Scope 3 disclosure voluntary, delay implementation of the attestation requirement and consolidate proposed Items 1501-1503 of Reg S-K into one more concise MD&A-like item that is less prescriptive, less redundant and more focused on materiality. They even attach their proposed rewrite of those line items.

The Staff will wade through all of the submitted comments as part of finalizing the climate disclosure rule and crafting an adopting release for the Commissioners to approve. SEC Chair Gary Gensler wants to take action before year-end. If you expect to be involved in drafting your company’s climate disclosure – or will be helping gather and prepare emissions data for it – join on July 13th for a “Climate Disclosure Event” that will provide practical steps that you need to take now to be ready, and “lessons learned” from drafting our model disclosures.

To make this event an even bigger value, attendees are eligible for $100 off our 1st Annual Practical ESG Conference AND $200 towards an annual subscription to! Email or call 1-800-737-1271 to claim this offer.

Register today for this FREE event, and please share it with anyone on your team or in your network who may be interested. That includes ESG, Sustainability & Impact Officers, Environmental Health & Safety Officers, Investor Relations & Public Relations professionals, in-house and outside counsel who are advising boards or preparing disclosures, and anyone involved with ESG strategies and disclosures.

John Jenkins

June 30, 2022

Rule 10b5-1: WSJ Says Insiders Gain Outsized Profit for Sales Soon After Plan Adoption

Yesterday, the WSJ released an investigative report reviewing insider transactions under Rule 10b5-1 plans.  This excerpt says that one the Journal’s findings was that those insiders who trade shortly after adopting a plan do much better than those who wait:

A Wall Street Journal analysis of 75,000 prearranged stock sales by corporate insiders, using a comprehensive compilation of the data, shows that about a fifth of them occurred within 60 trading days of a plan’s adoption. The timing in aggregate made the trades more profitable: On average, those trades preceded a downturn in share price more often than when insiders waited longer to trade, the analysis found.

Collectively, insiders who sold within 60 days reaped $500 million more in profits than they would have if they sold three months later, according to the analysis, which examined trades from 2016 through 2021 and adjusted returns to remove the effect of sector-wide moves in the market.

What’s more interesting to me are that some of the report’s findings suggest that many companies are straying pretty far from best practices when it comes to allowing insiders to adopt & begin trading under Rule 10b5-1 plans. For example, the WSJ says that it found “scores of examples” where company insiders adopted a 10b5-1 plan near the end of a quarter and sold stock under the plan before results were announced.

Many companies impose a 30-day cooling off period for new plans, so it didn’t surprise me to learn that the WSJ found a “huge spike” in trades 30 days after adoption. However, the Journal report says that roughly 5% of the total trades it reviewed took place less than 30 days from plan adoption. Just under 2% of those trades took place less than 14 days after the plan was adopted, and some insiders traded the same day they adopted a plan. Yikes!

Adopting a plan near the end of the quarter & trading before that quarter’s earnings are released is asking for trouble, and while cooling off periods aren’t currently mandatory (although that will likely change soon), sales shortly after adopting a plan are a very bad look – as a bunch of executives and companies named in the WSJ report just discovered.

John Jenkins

June 30, 2022

Nasdaq Board Diversity Matrix Disclosure Deadline Looming

This Wilson Sonsini memo provides a reminder that Nasdaq-listed companies that haven’t included a board diversity matrix in their proxy statement filed with the SEC prior to August 8, 2022, will need to include a board diversity matrix on their company’s website no later than that date and inform Nasdaq that they have done so. Here’s an excerpt with some of the specifics:

If a company decides to make the disclosure on its website, Nasdaq provides a fillable PDF for U.S. companies and a fillable PDF for foreign issuers that companies may (but are not required) to use. A company must clearly label the disclosure on its website as the Board Diversity Matrix. Although Nasdaq does not mandate a particular place on the website, it recommends putting it on the company’s investor relations webpage or other webpage where governance documents are stored.

Following the initial 2022 compliance date, the company will be required to publish the matrix on its website concurrently with the filing of its proxy or information statement (or Form 10-K or 20-F, where applicable) and submit a URL link through the Nasdaq Listing Center within one business day after posting by completing Section 10 (Board Diversity Disclosure) of the Company Event Form. Nasdaq also offers Website Disclosure of Board Diversity Matrix: What Companies Need to Know, which provides further information.

For more analysis and instruction on the “comply or disclose” rule, visit our “Nasdaq” Practice Area.

John Jenkins

June 29, 2022

SEC Enforcement: EY Sanctioned for Role in CPA Exam Cheating Scandal

There’s a point at which I should no longer be shocked by scandals involving the Big 4. I guess I’m not there yet, because I was really taken aback by the enforcement proceeding against EY that the SEC announced yesterday.  This excerpt from the SEC’s press release describes the conduct that led to the proceeding:

EY admits that, over multiple years, a significant number of EY audit professionals cheated on the ethics component of CPA exams and various continuing professional education courses required to maintain CPA licenses, including ones designed to ensure that accountants can properly evaluate whether clients’ financial statements comply with Generally Accepted Accounting Principles.

EY further admits that during the Enforcement Division’s investigation of potential cheating at the firm, EY made a submission conveying to the Division that EY did not have current issues with cheating when, in fact, the firm had been informed of potential cheating on a CPA ethics exam. EY also admits that it did not correct its submission even after it launched an internal investigation into cheating on CPA ethics and other exams and confirmed there had been cheating, and even after its senior lawyers discussed the matter with members of the firm’s senior management. And as the Order finds, EY did not cooperate in the SEC’s investigation regarding its materially misleading submission.

That’s a really ugly set of admissions. Not surprisingly, the sanctions imposed on the firm are no bargain either.  In addition to a $100 million civil money penalty – the largest ever imposed by the SEC on an auditor – the SEC’s order imposes a set of sweeping undertakings on the firm.

The undertakings begin by requiring EY to investigate the “sufficiency and adequacy of its quality controls, policies, and procedures relevant to ethics and integrity” and to responding to SEC information requests.  It then must report the results of that investigation to the SEC. That report must set forth in writing how the policies and procedures are “designed and implemented in a manner that provides reasonable assurance of compliance with all professional standards” referenced in the order.

The SEC’s order goes on to require EY to retain two independent consultants.  The first consultant must conduct an independent review of the policies & procedures that EY is required to investigate and report on to the SEC.  The second will work in conjunction with a special review committee comprised of senior EY personnel to conduct a review of the firm’s conduct relating to its response to the SEC’s information request, “including whether any member of EY’s executive team, General Counsel’s Office, compliance staff, or other EY employees contributed to the firm’s failure to correct its misleading submission.”  Subject to certain limitations, the order requires EY to adopt the recommendations made by either of the two consultants.

The order also imposes various certification and training requirements and requires the firm to provide a copy of the SEC’s order to all of its public company and broker dealer audit clients. This last requirement seems to me to be the equivalent of requiring EY to lay the order on the table of the audit committees that have retained it. That should make for some interesting conversations.

Check out Commissioner Peirce’s dissenting statement, which provides a less damning perspective on EY’s conduct surrounding the firm’s response to the SEC’s information request, and this WSJ article, which provides additional details & background on the case.

John Jenkins

June 29, 2022

Capital Markets: Converts Hit the Skids

During the early days of the pandemic, many companies opted to meet their capital needs by issuing convertible debt.  Fueled by continuing low interest rates, convertible debt remained attractive to investors through 2021, but as this WSJ article indicates, higher interest rates & the pullback in tech stocks have resulted in the convert market cratering in 2022:

Few investments have delivered positive returns this year, as investors have struggled with the implications of stubbornly high inflation and rapidly rising interest rates. But the performance of convertible bonds, in some respects, “is still a little bit shocking,” said Michael Youngworth, convertible bonds strategist at BofA Global Research. The reason for the surprise isn’t just the magnitude of convertible bonds’ losses but how they have fallen short of their promise. A major selling point has long been that convertible bonds offer investors the potential gains from stocks, with bonds’ downside protection.

One issue is that stock declines this year have been particularly concentrated in the type of high-growth technology companies that make up a large portion of convertible bond issuers. But that is only part of the story.

This year, convertible bonds have captured 46% of their underlying stocks’ performance when the stocks have climbed but 49% of their performance when they have declined. That puts them on track for the worst upside-to-downside capture ratio in records going back to 1995 and only the second year when the ratio has been less than one, according to BofA Global Research data.

Nature abhors a vacuum, so just as the smart money rushes out of converts, it looks like a golden opportunity has emerged for the dumb money to rush in. Behold, the crypto folks have discovered convertible debt!

John Jenkins

June 29, 2022

Commissioner Lee Headed for NYU

Bloomberg Law reports that SEC Commissioner Allison Herren Lee, whose term expires at the end of the month, will join the faculty of NYU Law School after she leaves the SEC:

Lee will be appointed an adjunct professor and senior fellow at the law school’s Institute for Corporate Governance and Finance, teaching a seminar on law and business in the fall, a school official confirmed Thursday. She announced earlier this year she would leave the Securities and Exchange Commission, following the Senate confirmation of a successor. Jaime Lizarraga, the nominee for Lee’s seat, won Senate approval Thursday.

John Jenkins