May 26, 2023

Rule 10b5-1 Amendments: Staff Issues 3 CDIs

Yesterday, Corp Fin issued three new Exchange Act Rules CDIs addressing the SEC’s recent Rule 10b5-1 amendments. The CDIs clarify the compliance dates for the new disclosure requirements & address the need for a cooling off period in situations involving an individual with two Rule 10b5-1 plans who terminates the earlier-commencing plan:

Question 120.26

Question: When are companies required to begin providing the quarterly Item 408(a) disclosures and the annual Item 402(x) and Item 408(b) disclosures (Item 16J of Form 20-F disclosures for foreign private issuers) in periodic reports?

Answer: Release No. 33-11138 states that companies other than smaller reporting companies will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F “in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.” Therefore, the following compliance dates apply:

– December 31 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-Q for the period ended June 30, 2023, and should continue to be provided in the Form 10-Q for the period ended September 30, 2023 and the Form 10-K for the fiscal year ended December 31, 2023.
– June 30 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-K for the fiscal year ended June 30, 2023.
– December 31 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended December 31, 2024.
– June 30 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended June 30, 2024.

Smaller reporting companies must comply with these new disclosure and tagging requirements in the first filing that covers the first full fiscal period that begins on or after October 1, 2023. Therefore, the following compliance dates apply:

– December 31 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-K for the fiscal year ended December 31, 2023.
– June 30 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-Q for the period ended December 31, 2023.
– December 31 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended December 31, 2024.
– June 30 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended June 30, 2025. [May 25, 2023]

Question 120.27

Question: When are companies required to begin providing the disclosures in proxy or information statements?

Answer: For transition purposes only, companies other than smaller reporting companies must first provide this information in proxy statements for the first annual meeting for the election of directors (or information statements for consent solicitations in lieu thereof) after completion of the first full fiscal year beginning on or after April 1, 2023. Smaller reporting companies must first provide this information in proxy statements for the first annual meeting for the election of directors (or information statements for consent solicitations in lieu thereof) after completion of the first full fiscal year beginning on or after October 1, 2023.[May 25, 2023]

Question 120.28

Question: The Rule 10b5-1(c) affirmative defense generally is not available if a person has multiple Rule 10b5-1 contracts, instructions, or plans in place. However, Rule 10b5-1(c)(1)(ii)(D)(2) permits a person (other than the issuer) to maintain two separate Rule 10b5-1 plans at the same time so long as trading pursuant to the later-commencing plan is not authorized to begin until after all trades under the earlier-commencing plan are completed or have expired without execution. If an individual terminates the earlier-commencing plan (i.e., the earlier-commencing plan does not end by its terms and without any action by the individual), when can trading begin under the later-commencing plan?

Answer: Pursuant to Rule 10b5-1(c)(1)(ii)(D)(2), if an individual terminates the earlier-commencing plan, the later-commencing plan will be subject to an “effective cooling-off period.” The effective cooling-off period will begin on the termination date of the earlier-commencing plan and will last for the time period specified in Rule 10b5-1(c)(1)(ii)(B). On the other hand, if the earlier-commencing plan ends by its terms without action by the individual, the cooling-off period for the later-commencing plan is not reset and trading may begin as soon as the plan’s original cooling-off period is satisfied. Depending on when the later-commencing plan was adopted, this could be as soon as immediately after the earlier-commencing plan ends. See Footnote 180 of Release No. 33-11138.[May 25, 2023]

John Jenkins

May 26, 2023

Memorial Day: Maj. Henry Courtney, Jr., USMC

Monday is Memorial Day. This year, I want to leave you with a story about a Marine Corps officer who was awarded the Congressional Medal of Honor posthumously for his heroism during the Battle of Okinawa. Less than 20% of Medals of Honor have been awarded posthumously – but one of those recipients was a young lawyer named Henry Courtney, Jr.  Here’s a link to his bio on the Defense Department’s website, and this is his Medal of Honor citation:

For conspicuous gallantry and intrepidity at the risk of his life above and beyond the call of duty as executive officer of the 2d Battalion, 22d Marines, 6th Marine Division, in action against enemy Japanese forces on Okinawa Shima, in the Ryukyu Islands, 14 and 15 May 1945. Ordered to hold for the night in static defense behind Sugar Loaf Hill after leading the forward elements of his command in a prolonged firefight, Maj. Courtney weighed the effect of a hostile night counterattack against the tactical value of an immediate marine assault, resolved to initiate the assault, and promptly obtained permission to advance and seize the forward slope of the hill. Quickly explaining the situation to his small remaining force, he declared his personal intention of moving forward and then proceeded on his way, boldly blasting nearby cave positions and neutralizing enemy guns as he went.

Inspired by his courage, every man followed him without hesitation, and together the intrepid marines braved a terrific concentration of Japanese gunfire to skirt the hill on the right and reach the reverse slope. Temporarily halting, Maj. Courtney sent guides to the rear for more ammunition and possible replacements. Subsequently reinforced by 26 men and an LVT load of grenades, he determined to storm the crest of the hill and crush any planned counterattack before it could gain sufficient momentum to effect a breakthrough. Leading his men by example rather than by command, he pushed ahead with unrelenting aggressiveness, hurling grenades into cave openings on the slope with devastating effect. Upon reaching the crest and observing large numbers of Japanese forming for action less than 100 yards away, he instantly attacked, waged a furious battle, and succeeded in killing many of the enemy and in forcing the remainder to take cover in the caves.

Determined to hold, he ordered his men to dig in and, coolly disregarding the continuous hail of flying enemy shrapnel, to rally his weary troops, tirelessly aided casualties and assigned his men to more advantageous positions. Although instantly killed by a hostile mortar burst while moving among his men, Maj. Courtney, by his astute military acumen, indomitable leadership, and decisive action in the face of overwhelming odds, had contributed essentially to the success of the Okinawa campaign. His great personal valor throughout sustained and enhanced the highest traditions of the U.S. Naval Service. He gallantly gave his life for his country.

If you visit the Congressional Medal of Honor Society’s website, you can read the citations for each recipient of our nation’s highest award for valor. This Memorial Day, I’d encourage you to take a few moments to read a few of the citations for posthumous awards, and if you do, maybe keep these words from Archibald MacLeish in mind:

Whether our lives and our deaths were for peace and a new hope
Or for nothing, we cannot say, it is you who must say this
They say we leave you our deaths, give them their meaning
We were young, they say, we have died, remember us.

Have a safe and enjoyable holiday weekend. Our blogs will be back on Tuesday.

 John Jenkins

May 25, 2023

Federal Court Invalidates California’s Board Diversity Statute

Earlier this month, in Alliance for Fair Board Recruitment v. Weber, a California federal court struck down the state’s board diversity statute, which required publicly traded companies based in California to have board members from underrepresented communities.  In a 7-page order, Judge John Mendez granted the plaintiff’s motion for summary judgment and held that the statute was unconstitutional on its face and also violated 42 U.S.C. Section 1981. This excerpt from Kevin LaCroix’s blog on the case summarizes Judge Mendez’s ruling:

The Alliance moved for summary judgment. In opposition to the motion, the state argued that the statute satisfied strict scrutiny, or in the alternative, should have its unconstitutional provisions severed from the rest of the bill. The state argued that the bill’s racial classification was permissible because it remedied past discrimination. The state also argued that the bill did not create preferred racial and ethnic classes because individual board candidates must still compete with others.

In a May 15, 2023, decision, Eastern District of California Judge John Mendez granted the Alliance’s motion for summary judgment, holding that while the state argued that the statute’s diversity requirements were flexible, the statute’s requirements represented a facially invalid racial quota.

In reaching his decision, Judge Mendez did not even reach the “strict scrutiny” arguments that the state had raised, instead finding that the statute was unconstitutional on its face. Citing the U.S. Supreme Court’s 2003 decision in Grutter v. Bollinger, Judge Mendez noted that a quota is “a program in which a certain fixed number or proportion of opportunities are reserved exclusively for certain minority groups.”

Judge Mendez found that AB 979 is a “racial quota” under this definition because it “requires a certain fixed number of board positions to be reserved exclusively for certain minority groups,” in violation of the U.S. Constitution’s Equal Protection Clause. Judge Mendez also ruled that the statute violated Section 1981, because, under Supreme Court precedent, “ a violation of the Equal Protection Clause of the Fourteenth Amendment also constitutes a violation of Section 1981.”

Kevin also notes that the plaintiff in this case is also the same entity that’s currently challenging Nasdaq’s board diversity listing standard in the 5th Circuit.

The decision is the latest in a series of rulings invalidating California’s statutory efforts to promote board diversity.  In April 2022, a state court judge invalidated the same statute at issue in the federal court case on the grounds that it violated California’s constitution. California’s board gender diversity statute hasn’t fared any better – another state court judge struck down that law on state constitutional grounds in May of last year.

John Jenkins

May 25, 2023

Earnings Releases: Earnings Date Announcements & 8-K Practices

In a recent blog, Wilson Sonsini reviewed the practices of a group of 30 companies in the Silicon Valley 150 in order to assess market practice when it comes to announcing upcoming earning release dates & the subsequent earnings release Form 8-Ks. This excerpt summarizes the key takeaways concerning the time between announcement of the release date and the earnings release itself:

– Most common duration between announcement date and earnings date: Three weeks, in each of the four quarters

– Minimum number of days: 6 or 7 days in the first three quarters, 10 days in the fourth quarter

– Maximum number of days: 28 to 33 days in the first three quarters, 41 days in the fourth quarter

– Average number of days: 19.4 to 20.3 days in the first three quarters, 21.9 days in the fourth quarter

The blog also says that all of the companies reviewed furnished their earnings release Form 8-K shortly following the close of trading hours, and then held their earnings call shortly thereafter (on the same day). Only four companies included other earnings-related information as a separate exhibit to their earnings release Form 8-K; however, an additional six companies included a statement in their Form 8-K that additional materials were available on their website.

John Jenkins

May 25, 2023

ESG: Are Investors Willing to Pay for Social Responsibility?

One of the big open questions about corporate ESG initiatives is whether investors are really willing to forego returns in order to achieve ESG objectives.  According to a recent study, the answer seems to be that some are – at least to a point. However, it also indicates that a large percentage of investors aren’t willing to forgo a dime of returns to achieve those objectives. Here’s an excerpt from a ProMarket blog by one of the study’s authors:

Our empirical analysis provides the following main results. First, we find that when making investment decisions, individuals are indeed willing to forgo some returns in order to promote social interests: The average willingness to pay in our experiment varies (depending on the particular social cause) between $176 and $253 out of returns of $1,000 on a $10,000 investment (corresponding to returns of between 1.76% and 2.53%, out of a potential total return of 10%).

More importantly, whereas most investors are willing to forgo gains to promote social interests, a substantial proportion of investors (about 32%) are unwilling to forgo even a trivial amount ($10 out of $1,000, or a 0.1% return out of the 10% potential return) to advance any of the four social goals we presented to them through their investment decisions. These individuals have a strong preference to maximize profits over social goals, even where the cost to them of furthering social goals is extremely small.

Not surprisingly, the study found that the divide between investors on this issue parallels the nation’s political divisions. Democrats, women and higher income investors are more willing to forego returns to promote social causes, while Republicans & independents, men and lower income investors are less willing to do so.

John Jenkins

May 24, 2023

Internal Controls: Audit Partners Punished for Negative Opinions?

Earlier this month, Meredith blogged about a surge in the number of material weaknesses disclosed in Form 10-K filings.  According to a new study, that may be bad news for the careers of the audit partners who called out those weaknesses.  Here’s the abstract:

We investigate how audit firms balance the tension between client service and professional responsibility by examining how engagement partners are treated after they issue adverse internal control opinions (ICOs). We find that among 404(b) clients, audit firms are significantly more likely to remove a partner from a continuing engagement when the partner issued an adverse ICO to any of their clients in the previous year. More importantly, we find that individual partners issuing adverse ICOs experience unfavorable changes in their client portfolios in the form of lower fees and less prestigious client assignments.

We also find that partner consequences are greatest when adverse ICOs are likely to be more subjective and when they are issued to more important clients. Our results are consistent with audit partners experiencing negative consequences when they issue opinions that strain auditor-client relations, even though these opinions provide valuable information to capital market participants and are not likely to reflect lower audit quality.

I guess I’m too cynical to be particularly shocked by this, but I think it’s a safe bet that the SEC’s accounting staff is likely to find the study’s conclusions very disturbing. Moreover, in an era where the SEC is stressing the shared responsibility of audit firms and audit committees for ensuring independence, the potential impact of a negative internal controls opinion on an audit partner’s career is a topic that audit committees should be prepared to ask their auditors some tough questions about when evaluating a firm’s independence.

John Jenkins

May 24, 2023

Say-on-Pay Frequency: Reporting Your Decision on Frequency

For many companies, this is a “say-on-pay frequency” year, and as Dave pointed out a few months ago, failing to timely file an Item 5.07(d) Form 8-K disclosing the company’s decision, in light of the results of that vote, about how frequently it will include a say on pay vote in its proxy materials can have significant negative consequences for public companies, including the loss of S-3 eligibility & WKSI status.

There are a number of ways to skin the cat when it comes to complying with the Item 5.07(d) disclosure requirement, and this excerpt from a recent Goodwin blog sets out a few common approaches:

Report Item 5.07(b) and Item 5.07(d) in a Single Form 8-K Report. The company can simultaneously report the results of the annual meeting shareholder votes under Item 5.07(b) and its decision on the frequency of say-on-pay votes under Item 5.07(d) in the same Form 8-K report. It is important to review the Form 8-K report to confirm that it complies not only with Items 5.07(a)-(c) but also with Item 5.07(d) before filing.

Report Item 5.07(b) in a Form 8-K Report followed by Item 5.07(d) in a Form 8-K/A Amendment. If the company reports its annual meeting voting results in an Item 5.07(b) Form 8-K report but does not, or cannot, include the information required by Item 5.07(d) in the same Form 8-K report, the company can report its frequency decision in a Form 8-K/A amendment to the original Item 5.07(b) Form 8-K report. In this case, the Item 5.07(d) report should not be filed as a new Form 8-K report.

Report Item 5.07(b) in a Periodic Report followed by Item 5.07(d) in a Subsequent Form 8-K Report. The company can report the annual meeting voting results in a Form 10-Q or Form 10-K report that is filed on or before the due date for the Item 5.07(b) Form 8-K, as permitted by General Instruction B.3 to Form 8-K. If the company does not, or cannot, report its decision on the say-on-pay frequency vote in the periodic report, it should file a new Item 5.07(d) Form 8-K to report its decision. In this case, the Item 5.07(d) report should not be filed as an amendment to the periodic report. If the filing of the Form 10-Q or Form 10-K report is delayed to a date more than four business days after the company’s annual meeting, the company should comply with Item 5.07 by filing a Form 8-K report before the filing deadline for the Item 5.07(b) report on the shareholder votes on other matters at the meeting.

It’s nice to have alternative ways to comply with this disclosure requirement, but I wish the SEC would consider eliminating it. It made sense when the say-on-pay requirement was introduced and there was uncertainty about how often votes would be held, but with an annual say-on-pay resolution now an almost ubiquitous practice among public companies, this requirement is little more than a trap for the unwary. It seems to me that a better approach would be to require this disclosure only if a company decided to hold its say-on-pay vote on something other than an annual basis.

John Jenkins

May 24, 2023

Changing Your Fiscal Year End: Key Considerations

Perkins Coie recently blogged about 6 things that companies should consider when changing their fiscal year end. This excerpt addresses the SEC filings associated a change in a fiscal year end:

Be prepared to file an Item 5.03 8-K with the SEC. Changing fiscal years triggers an Item 5.03 8-K filing for public companies in most cases. The reporting obligations under Form 8-K vary depending on the way in which a fiscal year is changed. Read the requirements of Item 5.03 of Form 8-K and be prepared to file within four business days of the change.

Think ahead to the “transition report” you’ll be filing with the SEC. SEC rules require public companies that change their fiscal years to file a “transition report” covering the “transition period.” The transition period is the period between the closing of the most recent fiscal year and the opening date of the newly selected fiscal year. A transition report covers the transition period and must include interim period financial statements.

Depending on the length of the transition period, a transition report may be required to be filed on Form 10-KT or Form 10-QT. If the transition period is less than one month, no transition report is required, but then transition period financial statements must be included in the next Form 10-Q.

The blog also highlights Sections 1360 and 1365 of the Financial Reporting Manual as a source of helpful guidance on changing fiscal year ends.  If you’re considering changing your fiscal year end, be sure to also check out our “Fiscal Year Changes” Checklist.

John Jenkins

May 23, 2023

Early Bird Registration for Our Conferences Ends May 31st!

I’m really excited about our “Proxy Disclosure & 20th Annual Executive Compensation” Conferences – and not just because I’ve finally got a speaking part & am no longer the Fredo Corleone of  We’ve got a terrific lineup of expert speakers on 19 different panels over a 3–day period, and with potential implications of the SEC’s ambitious regulatory agenda continuing to loom large in the minds of public companies & their advisors, you can’t afford to miss this year’s conferences! But if you want to take advantage of our “early bird” registration deal for these essential conferences, you need to act now, because early bird registration ends on May 31st.

The Conferences are virtual, September 20th – 22nd. You can bundle registration with the “2nd Annual Practical ESG Conference” that’s happening virtually on September 19th, for an additional discount. Register online by credit card – or by emailing Or, call 1.800.737.1271. Here’s a reminder of the benefits of attending:

– The Conferences are timed & organized to give you the very latest action items that you’ll need to prepare for the flurry of year-end and proxy season activity. Why spend time & money tracking down piecemeal updates to share with your higher-ups & board – all while you’re under a deadline and have other pressing obligations, increasing the risk of mistakes – when you can get all of the key pointers at once?

– Unlike some conferences, the on-demand archives (and transcripts!) will be available at no additional charge to attendees after the event, and you can continue to access them all the way till July 2024. That means you can continue to refer back to the sessions as issues arise. Again, saving time & money.

– Due to new SEC rules, the shareholder proposal environment, the increasing emphasis on risk oversight and pressures that companies are facing from both ends of the political spectrum, the performance of boards, individual directors and – thanks to Delaware’s latest spin on Caremark, individual officers – will be subject to greater & greater scrutiny in the coming proxy seasons. That could affect director elections, as well as your company’s ability to raise capital, and your directors’ and officers’ exposure to derivative claims. Our expert panelists will be sharing practical action items to protect your board & officers – and risks to watch out for. Facing a low vote for any director is a nightmare scenario, even if you’re not the target of a proxy contest. This event will empower you to avoid that situation.

John Jenkins

May 23, 2023

Compliance: Third Party Risk Management Tops List of Priorities

According to a recent survey by Compliance Week & FTI Consulting, third party risk management (TPRM) tops the list of priorities for corporate compliance officers this year:

Compliance Week and FTI Consulting polled 151 legal and compliance decision-makers as part of an online survey benchmarking the use of technology in compliance conducted between February and March. Respondents to the survey largely represented the technology (13%), banking (13%), healthcare (10%), and manufacturing (7%) sectors. The survey asked respondents to choose all that applied from a list of top-of-mind risk areas they expected to require additional focus this year. TPRM was indicated by 62% of overall respondents, far ahead of litigation/regulatory exposure (45%); anti-bribery, anti-corruption (ABAC), anti-money laundering (AML), and fraud (38%); and environmental, social, and governance (ESG) matters (38%).

Survey respondents noted that TPRM is always a compliance priority, because of the lack of control over third parties compared with other areas of compliance risk that companies face. In keeping with the overall emphasis on TPRM, the survey also says it’s the top priority for employing compliance technologies, with 55% identifying TPRM as an area where compliance-related technologies were utilized.

John Jenkins