On Monday, the DOJ announced a “Civil Rights Fraud Initiative” that will use the False Claims Act to “investigate and, as appropriate, pursue claims against any recipient of federal funds that knowingly violates federal civil rights laws.” While the DOJ’s announcement focuses on educational institutions, this McGuire Woods blog notes that government contractors may also find themselves in the crosshairs:
Under this new initiative, implemented through a memorandum issued by the Deputy Attorney General, DOJ will utilize the FCA to investigate and pursue claims against federal contractors and funding recipients (e.g., grants, cooperative agreements, etc.) that “knowingly violate[] federal civil rights laws.” A central focus of the initiative appears to be pursuing claims against entities who certify compliance with civil rights laws while “knowingly” engaging in what the memorandum implementing the initiative calls “racist preferences, mandates, policies, programs, and activities, including thorough [DEI] programs” that provide benefits based on race, ethnicity, or national origin.
The blog says that the DOJ will coordinate with other federal agencies, and will establish partnerships with state attorney generals and local law enforcement to share information and coordinate enforcement actions. Traditionally, qui tam actions brought by private “whistleblowers” have featured prominently in FCA actions, and in the DOJ’s announcement of this new initiative, it said that it “strongly encourages anyone with knowledge of discrimination by federal funding recipients to consider filing a qui tam action under the False Claims Act.”
Texas has been getting most of the headlines in the DExit sweepstakes, but earlier this week, the Nevada legislature adopted amendments to the state’s corporate statute that provide a reminder that The Silver State is still a formidable competitor in the race to dethrone Delaware as the nation’s preferred jurisdiction of incorporation.
The most notable changes involve enabling Nevada corporations to adopt charter provisions waiving jury trials for stockholder lawsuits, and defining the fiduciary duties owed by controlling stockholders, establishing a procedure for cleansing transactions involving controlling stockholders, and limiting their liability. This excerpt from a Business Law Prof Blog on the amendments summarizes the changes affecting controlling stockholders:
Duties
The legislation also addresses controlling stockholder duties. The Nevada Business Law Section explains the change as providing:
that the only fiduciary duty owed by a controlling stockholder is to refrain from exerting undue influence over a director or officer with the purpose and proximate effect of inducing a breach of fiduciary duty by said director or officer that (a) results in liability under NRS 78.138 and (b) involves a contract or transaction where the controlling stockholder has a material and nonspeculative financial interest and results in a material, nonspeculative and nonratable financial benefit to the controlling stockholder.
Cleansing
The changes allow for disinterested directors to approve a transaction with a controlling stockholder, granting a presumption that there was no breach of fiduciary duty.
The proposed amendment further provides the presumption that there is no breach of fiduciary duty by a controlling stockholder if the underlying contract or transaction has been approved by either (1) a committee of only disinterested directors or (2) the board of directors in reliance upon the recommendation of a committee of only disinterested directors.
Liability
The legislation also gives controlling stockholders protection similar to the Nevada business judgment rule for officers and directors. It also notes that Nevada aims to “maintain Nevada’s competitive advantage as a leader in stable, predictable and common-sense corporate law.”
The amendments also address Delaware’s Activision-Blizzard decision by clarifying that Nevada directors do not need to approve “final” merger documents and allowing them to use their business judgment to decide when the documents are sufficiently “substantially final” for board approval.
On Tuesday, the SEC approved a proposed NYSE rule that will require companies facing delisting for noncompliance with a listing standard to be current in their fees before the Exchange will review their compliance plans. This excerpt from the SEC’s order approving the rule change provides more detail:
The Exchange proposes to require listed companies that have been identified to be below the Exchange’s continued listing standards and are submitting a plan to regain compliance under Sections 802.02 and 802.03 of the Manual to pay any unpaid listing or annual fees due to the Exchange prior to the Exchange expending resources to initially review a plan, periodically review a plan, or deem a company has demonstrated a return to compliance under a plan.
The Exchange will disclose to these listed companies the amount of all unpaid listing and annual fees in the Non-Compliance Letter and at the beginning of the quarterly or semi-annual review period, as applicable. The Exchange also proposes that it will commence suspension and delisting procedures if such companies fail to pay the disclosed fees in full within a certain time period following such disclosure.
The NYSE’s rationale for the rule change is the significant amount of resource-intensive and costly work its staff must undertake in initially and periodically reviewing and analyzing plans submitted by noncompliant companies.
Although the SEC’s order acknowledges that the NYSE already has the authority to delist companies for failing to pay required fees, it says that the new rule will provide greater transparency to listed companies about how the Exchange will handle unpaid fees in circumstances where companies seek to use or are using a compliance plan.
The defendant in the criminal case arising out of last year’s hack of the SEC’s X account, Eric Council, Jr., entered a guilty plea in the case and was sentenced last Friday. Prosecutors sought a two-year sentence, but Judge Amy Berman Jackson sentenced Council to only 14 months in federal prison. The U.S. Attorney’s announcement of the sentencing included the following comments from the DOJ, FBI and SEC:
“Council and his co-conspirators used sophisticated cyber means to compromise the SEC’s X account and posted a false announcement that distorted important financial markets,” said Matthew R. Galeotti, Head of the Justice Department’s Criminal Division. “Prosecuting those who seek to enrich themselves by threatening the integrity of digital assets through fraud is critical to protecting U.S. interests. The Department of Justice is committed to holding accountable individuals who commit cyber fraud and harm investors.”
“The deliberate takeover of a federal agency’s official communications platform was a calculated criminal act meant to deceive the public and manipulate financial markets,” said FBI Criminal Investigative Division Acting Assistant Director Darren Cox. “By spreading false information to influence the markets, Council attempted to erode public trust and exploit the financial system. Today’s sentencing makes clear that anyone who abuses public platforms for criminal gain will be held accountable.”
“Today’s sentencing exemplifies SEC OIG’s commitment to holding bad actors accountable and maintaining the integrity of SEC programs and operations through thorough investigative oversight,” said SEC OIG Special Agent in Charge Amanda James. “We are committed to working with the SEC and other law enforcement partners to help the SEC effectively and efficiently deliver on its critical mission.”
In addition to the prison time, Council was ordered to forfeit $50,000 and received an additional three years of supervised release with the condition that he not use computers to access the dark web or commit further identity fraud.
Here’s something Meredith posted on CompensationStandards.com earlier this week:
Last Friday, the SEC announced that it will host a roundtable discussion on executive compensation disclosure requirements on June 26. It will be held at the SEC’s headquarters and open to the public (plus streamed live on SEC.gov). More Information on the agenda & speakers will be posted before the event.
In the meantime, Chairman Atkins issued a statement saying, “While it is undisputed that [the executive compensation] requirements, and the resulting disclosure, have become increasingly complex and lengthy, it is less clear if the increased complexity and length have provided investors with additional information that is material to their investment and voting decisions. It is important for the Commission to engage in retrospective reviews of its rules to ensure that they continue to be cost-effective and result in disclosure of material information without an overload of immaterial information.” He then includes the following questions for the staff to consider — and for members of the public to provide views on (before or after the event). Comments can be provided by mail or electronically — see the announcement for details.
Executive compensation decisions: setting compensation and making investment and voting decisions
– What is the process by which companies develop their executive compensation packages? What drives the development and decisions of compensation packages? What roles do the company’s management, the company’s compensation committee (or board of directors), and external advisors play in this development?
– Current disclosure requirements seek to unpack these processes for investors. How can our rules be revised to better inform investors about the material aspects of how executive compensation decisions are made?
– What level of detail regarding executive compensation information is material to investors in making their investment and voting decisions? Is there any information currently required to be disclosed in response to Item 402 of Regulation S-K that is not material to investors or that could be streamlined to improve the disclosure for investors? How do companies’ engagement with investors drive compensation decisions and compensation disclosure?
Executive compensation disclosure: past, present, and future
– The Commission substantially revised its executive compensation disclosure requirements in 2006 with requirements to provide, among other things, enhanced tabular disclosure of compensation amounts and a compensation discussion and analysis of the company’s compensation practices. The rules were intended to provide investors with a clearer and more complete picture of the compensation earned by a company’s executive officers. Have these disclosure requirements met these objectives? Do the required disclosures help investors to make informed investment and voting decisions? Given the complexity and length of these disclosures, are investors able to easily parse through the disclosure to identify the material information they need? In what ways could disclosure rules be revised to return to a simpler presentation and focus?
– The Dodd-Frank Act added several executive compensation related requirements to the securities laws, including shareholder advisory voting on various aspects of executive compensation. What types of disclosure do investors find material in making these voting decisions? Are companies able to provide such disclosure in a cost-effective manner? Do the current rules strike the right balance between eliciting material information and the costs to provide such information?
– With the experience of almost 20 years of implementing the 2006 rule amendments, how can the Commission address challenges that either companies or investors have encountered with executive compensation rules and the resulting disclosures in a cost-effective and efficient manner while continuing to provide material compensation information for investors? For example, are there requirements that are difficult or costly to comply with and that do not elicit material information for investors? Are there ways that we can reduce the cost or otherwise streamline the compensation information required by the rules
Executive compensation hot topics: exploring the challenging issues
– The Commission recently adopted rules implementing the requirements of Dodd Frank related to pay-versus-performance and clawbacks. Now that companies have implemented the new rules, are there any lessons we can learn from their implementation? Can these rules be improved? If so, how? For example, which requirements of these rules are the most difficult to comply with and how could we reduce those burdens while continuing to provide investors with material information and satisfy these statutory mandates?
– Since adoption of the pay-versus performance rules, I have continued to hear concerns regarding the rule’s definition of “compensation actually paid” (CAP). What has been companies’ experience in calculating CAP and what has been investors’ experience in using the information to make investment and voting decisions?
– What has been companies’ experience in applying the two-part analysis articulated by the Commission in 2006 with respect to evaluating whether perquisites for executive officers must be disclosed? How do disclosure requirements resulting from the test, and whether a cost constitutes a perquisite, affect companies’ decisions on whether or not to provide a perquisite? For example, how has the application of the analysis affected evaluations relating to the costs of security for executive officers? Are there types of perquisites that have been particularly difficult to analyze? How do investors use information regarding perquisites in making investment and voting decisions?
It certainly seems that the SEC’s retrospective review of executive compensation disclosures will be very broad! I immediately noted that clawbacks, PvP (in particular, the CAP calculation) and perks (in particular, executive security) were all specifically noted — while CEO pay ratio was not. But Mark Borges said he suspects pay ratio is probably in the spotlight as well. He also noted that each of the cited rules is statutorily mandated — so the Commission is probably most interested in how it can streamline the compliance burden associated with these disclosures.
If you’re looking for reasons to join us in Las Vegas for our “2025 Proxy Disclosure & 22nd Annual Executive Compensation Conferences,” the SEC’s announcement of a roundtable where it appears every compensation-related disclosure requirement the Commission has adopted over the past 20 years is up for discussion just gave you a whole bunch of them! So, be sure to mark your calendars for Tuesday & Wednesday, October 21st & 22nd and register now to attend our PDEC conferences in person with the Early Bird price before it’s gone!
Here’s the full agenda and the list of our outstanding speakers. As usual, we’re bringing you two panels of former senior SEC staff members with decades of experience with the inner workings of the Commission — “The SEC All-Stars: Proxy Season Insights” panel on Tuesday & “The SEC All-Stars: Executive Pay Nuggets” panel on Wednesday.
Our speakers will also address topics like “E&S: Balancing Risk & Reward in Today’s Environment,” “Delaware Hot Topics: Navigating Case Law & Statutory Developments,” “The Proxy Process: Shareholder Proposals & Director Nominations” and “The Year of the Clawback.” We’ll also cover the regulatory (and deregulatory) developments happening between now and October that your clients will expect you to be up to speed on.
Aside from an airport layover or two, I’ve never visited Las Vegas. I’m not much of a gambler, and the only time I’ve been in a casino was when my wife and I were newlyweds. We were visiting family on the Jersey Shore for Thanksgiving, and took a field trip to Atlantic City, where my wife spent a few hours at the one-armed bandits and helped herself to a couple hundred bucks of the Taj Mahal’s money.
While I haven’t been to Vegas, I feel like I know the place, since I’ve seen Ocean’s 11 -13, The Godfather, Casino, Leaving Las Vegas, and – forgive me – Showgirls. I also went to a cocktail party at Frank Sinatra’s old house in Palm Springs a couple of years ago, which I think should count toward my Vegas card. Anyway, I’m looking forward to visiting to see if my perceptions of the city match its reality – and to see if my wife can pick up where she left off in Atlantic City 35 years ago. We all look forward to seeing you there!
If you’re looking for some guidance to help directors understand what their fiduciary responsibilities require of them when responding to curveballs like President Trump’s tariff policy, you should check out this DLA Piper memo. It highlights the various risks and uncertainties companies face as a result of the new tariff regime, reviews the board’s fiduciary duties and offers some specific recommendations to help the board carry out its responsibilities. Here’s an excerpt:
In the face of the potential business disruption, how can boards fulfill their fiduciary duties of care and loyalty and discharge their oversight responsibilities?
As with any other acute and emerging area of business risk, directors should understand the types and magnitude of the particular risks the Liberation Day tariffs pose for company operations and financial performance – and tailor their oversight role accordingly.
While it is management’s responsibility to identify and quantify the tariffs’ specific impacts on the company’s supply chain, manufacturing process, customer pricing, revenues, operating costs and profitability, liquidity, and financial position, directors can help ensure that the company’s existing risk management policies and procedures are commensurate to the tariff-related risks (or modified as appropriate) and remain consistent with the company’s long-term strategy and risk appetite.
Directors may consider delegating oversight responsibilities for tariff impact risks to a dedicated ad-hoc or standing committee (such as audit or risk).
As they assess the adequacy of the company’s risk management policies, boards may also consider retaining their own trade counsel to advise them on mitigating tariff-related risks.
Further, boards are encouraged to document their strategies for monitoring tariff-related risks. As with other areas of enterprise risk, documented control and monitoring functions tailored to the scope and scale of tariff-related risks could help directors avoid Caremark liability.
The memo goes on to recommend that directors consider asking senior management to regularly update the board on their approach to identifying and mitigating these risks, any material risk management lapses, and action plans for mitigation and response. It also suggests that since this is a fluid situation, the frequency of board meetings and calls may increase, and directors should remain available and engaged.
The PCAOB recently issued its annual report on conversations with audit committee chairs. According to the report, the topics that audit committees spent the most time discussing with their auditors include the following:
1. Factors affecting relationships with the audit firm, such as communication, coordination and technical expertise,
2. Firm inspection reports,
3. The economic environment affecting the audit,
4. Auditing and accounting, including critical audit matters (CAMs), and
5. The impact of emerging technology.
The PCAOB’s report says that the audit committee chairs of public companies audited by smaller firms spent more time discussing significant transactions, fraud risks & procedures to address those risks, and internal controls issues. In contrast, audit committee chairs of public companies audited by the Big 4 spent more time on independence and accounting issues.
One of the report’s more interesting findings is the ambivalent attitude audit committee chairs have toward the use of emerging technology in audits. While they acknowledged that emerging technologies, including AI tools, have the potential to enhance the performance of audit procedures, they also expressed concern that overreliance on technology in the audit process may cause complacency and result in auditors not exercising adequate professional judgment and skepticism.
Last month, the House Financial Services Committee voted to move forward with legislation that would abolish the PCAOB and assign its responsibilities to the SEC. That legislation is receiving pushback from Democrats on Capitol Hill and from PCAOB Chair Erica Williams. In a recent post on The Audit Blog, Dan Goelzer added his voice to those arguing that the PCAOB deserves to be saved:
The PCAOB, mainly through its inspection program, has been the catalyst for major improvements in public company auditing. The Sarbanes-Oxley Act created the PCAOB in 2002 to stem the crisis in investor confidence in financial reporting that followed the dramatic collapses of Enron, WorldCom, and other financial reporting failures.
Sarbanes-Oxley was a bipartisan effort that passed the Senate unanimously and with only three negative votes in the House. The PCAOB has done the job it was created to perform. During the 20-plus years that the Board has been operating, restatements have declined, accounting firms have become more focused on audit quality, and significant breakdowns in audited financial reporting have become far rarer.
Dan goes on to say that he doubts that the SEC could perform the PCAOB’s functions as effectively given how much else the agency has on its plate, and contends that audit quality and auditor oversight are important enough to be the responsibility of an organization that focuses exclusively on those issues. He argues that even if the SEC could eventually re-create inspections and standard-setting functions comparable to what the PCAOB is currently doing, it would take several years to do so and would result in considerable disruption and lack of continuity.
Following the issuance earlier this year of updated CDIs on the impact of engagement topics on 13G eligibility, many companies have found that large stockholders have become much more guarded in their discussions with management in an effort to avoid trigging a 13D filing. A recent Skadden memo offers some tips on how companies can engage more effectively with their investors in this environment. This excerpt provides some examples about on how investors have changed their approach and how companies may want to respond:
Change: Questions from investors at engagement meetings will likely be more open-ended and less targeted. For instance, questions are now likely to be more broadly worded. Such as: “We would appreciate if you could share your thoughts on….”
Response: Companies should be prepared to answer the questions and add gloss that they expect the investor will want/need to make informed investment decisions.
Change: Similarly, investors will likely not answer pointed questions, including and most specifically any questions about how the investor intends to vote.
Response: Companies should be prepared to ask investors more broad-based questions, such as: “Did you get enough information to make an informed voting and/or investment decision.”
On the other hand, in remarks delivered during yesterday’s “SEC Speaks” conference, Commissioner Mark Uyeda said that investors shouldn’t interpret the recent 13G CDIs as a reason to clam up:
In my view, the wording of the CDI in fact broadens the scope of permissible activities while still remaining eligible for Schedule 13G, which is premised on not “influencing” control of the company. “Influencing” is not defined under the Securities Exchange Act and a common dictionary definition is “the act or power of producing an effect without apparent exertion of force or direct exercise of command.” By requiring that a shareholder needs to “exert pressure on management,” the CDI indicates that there needs to be something more than the mere planting of an idea with management in order to lose Schedule 13G eligibility.
This result reflects a commonsense interpretation of longstanding rules: if you are pressuring the board to undertake certain actions relating to the management or policies of an issuer, whether ESG-related or otherwise—coupled with voting threats, such actions are covered by existing rules and should be treated as such.
As with the unfounded concerns that Regulation FD would cease all communications between companies and shareholders, I am confident that asset managers will be able to navigate the parameters of the applicable Exchange Act rules to have appropriate levels of engagement with boards and executives of public companies without losing eligibility to file on Schedule 13G—and if an asset manager chooses to exert pressure, then they can provide the disclosure and transparency surrounding such conversations as required by Schedule 13D.
If you’re interested in a more in-depth discussion of how companies and investors are responding to the challenges created by the CDIs, be sure to check out our recent “Timely Takes” podcast on these topics.