December 1, 2022

Rule 15c2-11: SEC Extends Relief for Private Debt Issuers to 2025

John blogged a few weeks ago that private debt issuers would soon be finding themselves between a rock (significantly expanded disclosure requirements) & a hard place (reduced liquidity), due to expiring relief for broker-dealer quotation obligations under amended Rule 15c2-11. According to this Simpson Thacher memo, the SEC swooped in with a no-action letter yesterday to postpone doomsday to 2025. Here’s an excerpt:

The original compliance date for amended Rule 15c2-11 was September 28, 2021, which, pursuant to a series of no-action letters issued by the staff of the SEC’s Division of Trading and Markets, was extended to January 4, 2023 for issuers of fixed income securities. Following requests from market participants for additional relief, on November 30, 2022, the SEC issued a no-action letter temporarily extending the compliance date for issuers of fixed income securities to January 4, 2025.

In this memorandum, we briefly describe the scope of information typically provided by private issuers of fixed income securities under current practice and how amended Rule 15c2-11 will result in changes to that approach if permanent relief is not provided.

This blog from Bass Berry’s Jay Knight summarizes the comment letter submitted earlier this week by the ABA’s Fed Reg Committee – which requested an extension of the no-action relief that had been slated to expire this January, until the SEC can determine whether further exemptive relief and additional rulemaking would be useful.

Last week, the National Association of Manufacturers & the Kentucky Association of Manufacturers submitted a comment letter to request that Rule 15c2-11 be amended to permanently exempt Rule 144a fixed-income securities from the new requirements.

Liz Dunshee

December 1, 2022

Audit Committees: Avoiding the “Kitchen Sink” Phenomenon

Yesterday, the Center for Audit Quality released a new 34-page report in connection with researchers at the University of Tennessee Knoxville’s Neel Corporate Governance Center and the Pamplin College of Business at Virginia Tech. The title captures the audit committee’s eternal plight of being the dumping ground for new responsibilities: “Audit Committee: The Kitchen Sink of the Board.”

The report first notes the perils of the “kitchen sink” approach:

– Perpetually assigning emerging risks to the AC (i.e., the “kitchen sink” approach) can lead to suboptimal oversight due to overworked ACs and a “check the box” mentality.

– Traditional AC skill sets relate to financial reporting and internal controls. As AC responsibilities evolve, it is important that AC skill
sets evolve as well.

– Some AC members individually advocate for the AC to oversee these emerging risks because of their personal skills and interests. In these cases, AC members should be careful not to succumb to overconfidence bias and ensure that a clear succession plan is in place without them.

– To effectively allocate oversight responsibilities, ACs may need to consider situations when it makes sense to push back on their boards.

And it offers these tips to help audit committees balance the heavy workload:

– Develop skill sets that match oversight responsibilities

⸰ Actively assess the committee’s key risks when planning for continuing education opportunities and use specialists where needed.

⸰ Regularly evaluate whether AC refreshment is needed to keep up with the necessary skill sets to properly oversee evolving risks.

⸰ Carefully manage the AC agenda by mapping out risks to allow for deep dives on a rotation of topics throughout the year.

– Free up time for additional responsibilities by managing the agenda & relationships

⸰ Work with management to fine-tune the types of materials delivered in advance and hold AC members accountable for reading them.

⸰ Reflect on whether meetings allowed for sufficient time to evaluate management’s response to key risks, and schedule meetings so that they can go long or continue at an additional time when needed.

⸰ Maintain a collaborative relationship with management to foster transparency.

⸰ Adopt leading practices to manage shared governance across board committees.

This is all pretty common-sense stuff, but it’s helpful to see it gathered in one place. The recommendations are based on interviews with audit committee chairs, investors, and people involved with proxy disclosures – 2200 minutes of conversation!

Liz Dunshee

December 1, 2022

Board Diversity: Investor Coalition Wants Disclosure About Individual Directors

I blogged yesterday about a drop in board gender diversity at big US banks, the impact that big asset managers have had on US board demographics, and impending “comply or explain” board diversity targets for UK-listed companies. But there is even more to say on this topic!

A couple of weeks ago, the “Russell 3000 Board Diversity Disclosure Initiative” – an investor coalition that is co-led by the State Treasurers of Illinois and Connecticut – announced that it had sent its annual letter to Russell 3000 companies, requesting more detail on the racial, ethnic & gender composition of the board.

We blogged about this coalition a couple of years ago when it launched. This year, there are three versions of the letter, customized for:

Top performers: 386 companies provide “exemplary disclosure” of the demographics of individual directors, often via a matrix

Middle performers: 1,847 companies provide disclosure on an aggregate basis or only for certain directors

Bottom performers: 702 companies do not provide board race, ethnicity and gender in public filings

The letters highlight the benefits of disclosure on an individual director basis and call on the “middle” & “bottom” performers to up their game – based on self-identification from directors. This blog from Perkins Coie’s Allison Handy provides three considerations for companies that received the letter:

1. The letters are framed as a request for disclosure, not as a proposal, demand, or new voting policy. The letters refer to voting policies of organizations included in the initiative, such as versions of “vote against” policies for companies with no board diversity and/or no board diversity disclosures.

They note that some member organizations are considering strengthening board diversity voting policies and expanding engagement on this topic. We are not aware of any announced voting policies that would penalize a company that reports board diversity information on an aggregate, rather than individual, basis. In light of this framing, many companies may decide that no direct response is needed at this time.

2. The gap between the requested disclosure and the Nasdaq board diversity matrix is not clearly articulated. It is worth noting that the Nasdaq matrix is intended to provide decision-useful diversity disclosures that are comparable across companies. The Nasdaq matrix requires disclosure of specified racial and ethnic characteristics, disaggregated by gender. The press release and letters from the initiative call for individualized disclosure, but do not explain why investors need individual, rather than aggregate, diversity data.

Currently, large institutional investor and proxy advisor policies addressing board diversity disclosures generally accept either individual or aggregated diversity information. If a company does decide to engage with investors involved in this initiative, it might consider seeking clarity on why individualized disclosures are important.

3. Some directors may have privacy concerns about individualized disclosures. As acknowledged in Corp Fin’s Regulation S-K CDIs 116.11 and 133.13, as well as Nasdaq’s board diversity rules, companies need the consent of directors to disclose personal, self-identified diversity characteristics.

Not all directors are willing to have their diversity characteristics disclosed on an individualized basis, and companies may face more pushback on disclosure when disclosure is made on an individual, rather than aggregate, basis. Before committing to a new disclosure regime requested by investors, companies should consider these potential privacy concerns.

Check out our “D&O Questionnaire Handbook” for guidance on how to ask directors about their demographics, and our “D&O Biographical/Director Qualifications & Skills Disclosure” for more guidance about disclosures.

Liz Dunshee

November 30, 2022

Board Diversity: Women’s Gains Stall at Big Banks

Big banks have been leading the way in board gender diversity – but this Bloomberg article says that the percentage of women on boards at these institutions has recently dropped. Here’s an excerpt:

Gains have stalled as women reached a third of seats, which researchers have said is a key level for gaining influence in the boardroom. Groups such as 50/50 Women on Boards are now trying to nudge representation higher, to reflect women’s near parity in the workplace overall.

The average number of women directors was unchanged at 4.7, out of an average board size of 13.7. The percentage of female directorships fell to 34.6% from 35%. That compares with 32% for the S&P 500 Index.

The drop was caused by 3 banks each appointing a new male director last month – which shows just how precarious diverse representation can be. Of the 18 banks in the index, Citigroup has the highest percentage of women on its board – 58%!

It is disappointing that Citibank’s composition is still so exceptional, not to mention that it’s problematic to be stuck in the mud on the basics as we look ahead to more leaders & stakeholders identifying as non-binary. Imagine if there were headlines whenever male representation surpassed 50%…which is the case for every bank in the index besides Citi.

Liz Dunshee

November 30, 2022

Board Diversity: What’s Moved the Needle?

A recent working paper from the National Bureau of Economic Research poses this question:

There is a growing emphasis on diversity, equity, and inclusion (DEI) in American society. A majority of S&P 500 companies now employ a chief diversity officer (Green, 2021), and since 2017, nearly 2,000 CEOs have pledged to advance DEI within their firms (PwC, 2021). Yet, women continue to be underrepresented in the highest tiers of US leadership, including in business, where women account for only 5% of public company CEOs and 18% of top executives despite accounting for 48% of the labor force and 40% of managers (ILO, 2020).

To increase gender diversity in corporate leadership, governments around the world have enacted quotas requiring companies to appoint women to their board of directors. In the US, where as recently as 2016 only 13% of public companies’ directors were women, California adopted a board gender quota — which courts have since overturned — and similar regulations have been proposed in other states. That lawmakers are turning to controversial mandates begs the question: Why don’t firms appoint more female leaders on their own, and how might they be encouraged to do so without government intervention?

The researchers found that “private ordering” by shareholders has had the greatest impact on increasing board gender diversity – in particular, due to voting policies of the “Big 3” asset managers following State Street’s “Fearless Girl” campaign that was launched in March 2017. Here’s what they concluded, based on board composition data at companies where the Big 3 had an ownership stake:

We estimate that their campaigns led American corporations to add at least 2.5 times as many female directors in 2019 as they had in 2016. Firms increased diversity by identifying candidates beyond managers’ existing networks and by placing less emphasis on candidates’ executive experience. Firms also promoted more female directors to key board positions, indicating firms’ responses went beyond tokenism. Our results highlight index investors’ ability to effectuate broad-based governance changes and the important impact of investor buy-in in increasing corporate-leadership diversity.

The influence of the Big 3 has become much more politically charged since 2017, causing the institutions to look for ways to disseminate voting power and become slightly less vocal, but stating diversity expectations was definitely groundbreaking at the time. The voting policies of BlackRock & SSGA continue to articulate diversity aspirations, and leave the door open to “case-by-case” voting decisions for companies that don’t meet them. Vanguard’s voting policy is more disclosure-based.

Liz Dunshee

November 30, 2022

Board Diversity: More Progress Across the Pond

UK-listed companies are assembling more diverse boards & executive management teams than we are in the US, ahead of new rules from the UK Financial Conduct Authority that will require disclosure in annual reports beginning in April 2023.

In addition to numerical disclosure in a new table about the diversity of the board and executive management, the rules call for “comply or explain” disclosure against diversity targets set by the FCA. Those targets are: that corporate boards be comprised of at least 40% women directors and have at least one director from a non-white minority ethnic background, and that at least one “senior board position” (Chair, CEO, CFO, or Senior Independent Director) be held by a woman.

ISS ESG recently collected data from affected companies about their progress on these requirements. Here’s an excerpt from their blog that summarizes the findings:

ISS ESG Director & Executives Diversity Data collated at the end of April showed that 18 percent of FTSE AllShare constituents (excluding investment trusts) did not yet meet any of these targets and that only 14 percent had met all three.

Six months later and roughly five months ahead of implementation, ISS ESG finds a smaller proportion – 14 percent – of FTSE AllShare constituents were not yet meeting the targets while, conversely, those that met all three had grown by five percentage points to 19 percent.

Moreover, an analysis of data as of November 1 finds that 40 percent of FTSE AllShare constituents had met the target of at least 40 percent of women on the board, 53 percent have at least one senior board position held by a woman and 64 percent have at least one minority director, up eight, five and five percentage points respectively since late April.

Liz Dunshee

November 29, 2022

Caremark Liability: SolarWinds Dismissal Shows It’s Still a High Bar

John blogged a few months ago about lessons for boards from recent Delaware cases. A recent Fried Frank memo layers on the Court of Chancery’s recent dismissal of Caremark claims in a derivative suit against SolarWinds’ directors, relating to the massive cyber attack that occurred at that company two years ago and the 40% tumble in the company’s stock price that followed the incident. Here’s an excerpt with key takeaways:

This is the second Delaware decision in the past year to address a board’s oversight duties under Caremark with respect to cybersecurity risk. In both cases (the other being Sorenson, relating to the hacking of Marriott’s hotel reservation system), Caremark claims were asserted following a cybersecurity attack by third party hackers that exposed customers’ personal information. In both cases, the court dismissed the Caremark claims and reaffirmed that—notwithstanding a recent increase in Caremark claims following corporate traumas—it remains very difficult for a plaintiff to succeed on a Caremark claim. The court emphasized in both cases that a board’s failure to prevent a corporate trauma is not sufficient for liability under Caremark unless the failure was due to “bad faith” by a majority of the directors.

The court found that the board’s inattention to cybersecurity issues and “subpar” system for reporting and monitoring cybersecurity risk did not, without more, indicate “bad faith.” The board allegedly: did not receive relevant information from the committees with responsibility for cybersecurity; did not discuss cybersecurity even once in the two years leading up to the Sunburst attack; and ignored warnings about cybersecurity deficiencies. The court found no implication of bad faith, however, as the board: “did not allow the company itself to violate law”; “did ensure that the company had at least a minimal reporting system about corporate risk, including cybersecurity”; and did not “ignore[] sufficient ‘red flags’ of cyber threats to imply a conscious disregard of a known duty, indicative of scienter.”

Notwithstanding the dismissal of the case, the court’s opinion underscores the need for boards to implement appropriate systems to monitor and address cybersecurity risk. The court acknowledged the growing and consequential risks posed by cybersecurity threats. Indeed, the court characterized cybersecurity as a “mission-critical” risk for online providers, as they rely on customers sharing with them access to their personal information.

The memo takes a look at key facts that were relevant to the court’s decision to dismiss this case, and provides additional practice pointers specific to boards & to management.

Lest anyone get too carried away with celebrating this dismissal, it’s important to remember that derivative suits are only one flavor of liability. SolarWinds reported on a Form 8-K last month that it had settled a securities class action, also arising out of the December 2020 cyber incident, for $26 million. This blog from ISS Securities Class Action Services summarizes that complaint – and notes that the SEC may also be considering an enforcement action against the company.

Cybersecurity oversight continues to be a hot-button issue for the SEC’s disclosure initiatives as well – making an appearance in the Strategic Plan that I blogged about yesterday. All of this adds up to a topic that boards cannot ignore. For an additional resource, check out Dave’s 21-minute podcast about cybersecurity exposure preparedness for directors.

Liz Dunshee

November 29, 2022

SEC Takes Its Place In “Crypto Creditor” Line

It’s getting hard to keep up with all of the crypto collapses that have followed the FTX implosion, but apparently BlockFi filed for bankruptcy yesterday. The part of the petition that caught my eye is that the SEC is one of the largest creditors! As reported in this Bloomberg article, and shown on page 8 of the petition, the Commission has a $30 million unsecured claim relating to a $100 million settlement that BlockFi agreed to with the agency and state regulators earlier this year.

BlockFi’s attempt to discharge this debt may not do the industry any favors with SEC Chair Gary Gensler – who was profiled by the NYT last week as the “Crypto Nemesis” – but at this point, maybe there’s nothing to lose. Here’s an excerpt from that article:

Much of Mr. Gensler’s agenda may ultimately hinge on the ruling in the Ripple suit, which the S.E.C. filed in December 2020. Before the filing, Ripple’s signature token, XRP, was the third most valuable cryptocurrency; it has dropped down the rankings since the S.E.C. labeled it a security.

The outcome will also draw attention in Congress, where a slate of crypto-related bills was introduced this year. When Mr. Gensler testified in front of the Senate Banking Committee in September, he was grilled by Republican senators, who said the S.E.C. was offering insufficient legal guidance to crypto companies that wanted to comply with federal law.

“Not liking the answer from the S.E.C.,” he shot back, “doesn’t mean there isn’t guidance.”

Since we’re still in the middle of this meltdown, it’s hard to say whether the SEC’s regulatory stance and enforcement approach is having the desired outcome of protecting investors, or if the market will just take care of it by wiping out the industry. The fines lose some of their punch if they aren’t paid, and lots of crypto holders are losing everything anyway.

Liz Dunshee

November 29, 2022

Secondary Offerings: Time to Brush Up

If you’ve been busy with secondary offerings, you’re not alone. Over the weekend, Bloomberg reported:

While initial public offerings have largely vanished, share sales have been surging. Since the start of November there have been $24 billion in additional stock sales globally, on track for the biggest monthly haul since August when almost $25 billion was raised, data compiled by Bloomberg show. 

The article says not to take this as a signal that IPOs will return in force – and also notes that secondary-offering volumes are still down 65% from a year ago. But as my grandpa always said, “you’ve gotta make hay while the sun shines.” And right now, this is the hay to be made.

Make sure to keep our “Secondary Offerings Handbook” ready for any questions that arise when you work on these offerings. It covers the entire terrain, from the basics to how to deal with selling shareholders, and it’s posted along with other practical guidance in our “Secondary Offerings” Practice Area. If you’re not already a member with access to these resources (and our Q&A forum), email

Liz Dunshee

November 28, 2022

Corporate Scandals: The “Box Office” Effect

If your Thanksgiving break was anything like mine, turkey & football were followed by a heavy helping of cinema. One of my favorite genres, at least before today, was “corporate scandal.” But if you’re at a company that finds itself the subject of one of those films, your IR team best get their messaging in order.

A recent study says that when these movies hit the box office, the stock market impact can be very real – even though they simply resurface drama that everyone already knew about. If you’re into horror, here’s a finding from the study:

Our empirical results demonstrate that the release of scandal re-exposing movies, as a special form of stale information reiteration (regarding past corporate scandals), also triggers prominent stock market reactions. However, unlike the findings of Gilbert et al. (2012) and Tetlock (2011), both of which show that the changes in stock prices caused by stale information reverse over the course of a day to a week subsequently, our findings align more closely with Huberman and Regev (2001), showing that scandal re-exposing movies induce a permanent discount in stock valuation.

Permanent discounts! Yikes. My first instinct here was to blame “cancel culture,” but guess what? Many of the films in the sample date back to the ’90s and 2000s. You can see the full sample on page 35 of the study. At this point, there’s probably no additional harm in using it as a “watch list”…right?

Liz Dunshee