April 23, 2024

Shareholder Proposals: ICCR Responds to Exxon’s “Airing of Grievances”

We’re exactly 8 months out from Festivus 2024 (for those who celebrate) – but it is never too early for the Airing of Grievances. Yesterday, the Interfaith Center on Corporate Responsibility filed a notice of exempt solicitation in response to the “scorching diatribe” (John’s words) against shareholder proposals & proponents that Exxon included in its proxy statement earlier this month. ICCR’s statement is also strongly worded. It concludes:

Shareholder proponents fully recognize the challenges an authentic commitment to decarbonization presents for the oil and gas sector, and are eager to work with companies like Exxon Mobil to help make the inevitable transition a smoother one for everyone involved. What is not helpful, however, is the company’s adoption of an aggressive stance towards its investors through litigation and disparaging remarks in its proxy statement to silence dissent. Given the existential stakes for both the business and its stakeholders, it is disappointing that leadership has chosen tactics of intimidation rather than embracing a more open and productive route forward.

As part owners, investors have the right, and indeed the obligation, to engage management and the board on corporate governance concerns or harmful societal impacts that may flow from a company’s operations or strategy. Investors are concerned with corporate impacts that may translate to systemic financial risks to their portfolios in the future and they utilize the proxy process to voice these concerns as is their right. Strong corporate leaders will not find this give-and-take “obstructive or abusive” but will recognize it for the important private ordering mechanism it is intended to be.

ICCR obviously has a dog in this fight – it exists as a coalition of 300+ active institutional investors who regularly submit shareholder proposals. ICCR’s membership ranks include Arjuna Capital, who is one of the proponents Exxon sued earlier this year when seeking a declaratory judgment to exclude a proposal from its proxy statement. Time will tell whether other coalitions and/or proponents join the fray.

Liz Dunshee

April 23, 2024

Shareholder Proposals: Can’t We All Just Get Along?

John observed that for Exxon’s lawyers, telling off shareholder proponents in the proxy statement may have been a cathartic exercise. Some people are wondering whether this “all guns blazing” approach also will work to reduce the number of shareholder proposals that the company receives. Please participate in this unscientific, anonymous poll to share your guess:

Liz Dunshee

April 23, 2024

EDGAR Next: A Looming Headache?

Last fall, the SEC proposed changes to Edgar with the laudable goal of improving security & reliability for filings. Given all of the other new SEC rules and other things on their plates, corporate secretaries probably haven’t had a lot of time to focus on this proposal. The comment file reflects fewer than 30 comments received to-date. The official comment period has closed, but since the proposal would affect the process for D&O and company codes, it might be worth your while to skim through and contact your filing agent if you see any problems. Or, you can watch this 58-minute demo.

Here’s one insightful observation (full disclosure, it is from our wonderful CCRcorp team):

Noting page 51 of the proposed rule where it is stated:

“A user API token would remain valid for up to one year provided that the user associated with the token logged into the dashboard or one of the EDGAR filing websites at least every 30 days. If the user did not log in at least every 30 days, the user API token would be deactivated”.

As a provider of Section 16 filing software, we believe this requirement will cause frustration and become a roadblock when users are already stressed and focused on the filing and deadline. Our users have no reason to regularly log into the EDGAR website. If implemented as proposed, they will at the very least be required to update the user token annually. Requiring monthly logins to in addition to resetting user tokens annually seems unnecessary and burdensome.

DFIN submitted this 8-page comment letter. Here are a few of the issues it flags:

– DFIN is concerned with the notion that only account administrators would be able to submit a Form ID, because the administrator(s) might be busy, unavailable, or decide it’s a menial task. DFIN notes that the person filling out the form and submitting doesn’t necessarily need to be the account administrator, as long as the two authorized account administrators are designated in the Form ID.

– It will be problematic to wipe an account of its authorized individuals if there is a failure to satisfy the proposed annual confirmation requirements. DFIN supports a two-week temporary suspension after a two-week grace period.

– Requiring filing agents to maintain client passphrases doesn’t align with current practices and would be time consuming.

– The rule has benefits; it also will create new costs relating to filing agents needing to update or create an application to manage delegations.

– DFIN suggests that the Form ID should be revised to indicate a rush service and provide guidance for what filing scenarios could prompt a rush.

– DFIN supports making the filer dashboard available even when Edgar is closed.

– DFIN supports a bulk delegation function, where account administrators can delegate filing authority to any Edgar filer.

– For bulk enrollment, DFIN cautions against resetting the CCC for filers, where there may be multiple filing agents. DFIN suggests that the filers must confirm which filing agent is managing their bulk enrolment to eliminate any conflict.

The proposal also includes changes to the Form ID that require information about any criminal convictions or administrative suspensions as a result of a securities law violation – not just for the applicant, but also for each authorized individual, account administrator, anyone signing the Form ID pursuant to a Power of Attorney, and billing contact. Individuals that disclose the existence of these “bad actor” issues may be contacted by the SEC Staff to determine their eligibility for Edgar access.

Liz Dunshee

April 22, 2024

Climate Disclosure: Joint “CRA” Resolution Introduced to Nullify Requirements

No huge surprise here, but if you’re the person at your company who is expected to be on top of the status of the SEC’s climate disclosure rules, it’s worth noting that last week, over 30 G.O.P. legislators (and one Democrat) from both chambers of Congress introduced a joint resolution under the Congressional Review Act to attempt to nullify the regulations. Dave had observed this maneuvering last month and John previewed a House Committee meeting on the topic a couple of weeks ago.

The CRA resolution is at a very early stage. This MSN article reiterates that it faces an uphill battle to become law:

To overturn the SEC’s rules, the resolution’s supporters would need to pass it with simple majority rules in both the House and the Senate. If they can manage that, the resolution would then go to President Biden to be signed. If President Biden vetoed the resolution, were it to pass, Congress could override his veto with a two-thirds majority vote in each chamber.

The Sustainable Investment Caucus released a statement saying that the Democrats on the House Financial Services Committee voted unanimously to sustain the SEC’s rule. But the CRA resolution is good political messaging for the folks who signed on. And if by some way it passed, the SEC would be prohibited from proposing a similar rule for 5 years.

Liz Dunshee

April 22, 2024

Climate Disclosure Limbo: Suggested Approaches Based on Filer Status

When the SEC voluntarily stayed its climate disclosure rules earlier this month, John blogged that in light of the compliance efforts that will be involved and the other disclosure regimes at play, a “go slower” approach may be safer than “pencils down.” This Covington memo gives more color on why it’s risky to become complacent:

– First, the SEC staff is likely to continue issuing comment letters on companies’ current climate-related disclosures, including comments based on the SEC’s 2010 guidance on climate change disclosures.

– Second, many public companies could become subject to separate climate disclosure requirements under laws and regulations adopted in other jurisdictions, such as the European Union and individual states in the United States, most notably in California.

– Third, even if the SEC’s rules are struck down, it is likely that investor pressure will drive continued private ordering resulting in increased and more comparable climate-related disclosures, particularly for larger public companies.

– Finally, the outcome of the challenge to the SEC’s climate rules is uncertain, including with respect to the content of any portion of the rules that is upheld and the ultimate timing of required compliance with such rules.

The memo goes on to outline next steps based on filer status – which is very helpful! There are a number of activities that large accelerated filers may want to consider while the climate disclosure litigation is pending. For companies that may be facing less pressure, the memo recommends:

Accelerated filers, smaller reporting companies and emerging growth companies may also want to consider the steps recommended above for large accelerated filers, to the extent such companies already produce or are considering producing climate-related disclosures. If these companies are not already generating or disclosing climate-related information, they could well use the time afforded by the rules’ challenge to:

– get up to speed on the climate-related reporting and the obligations it would impose on the company, and if material, educate their boards of directors to facilitate the company’s development of corporate governance and risk management policies and procedures related to climate risk;

– if climate-related risks are expected to be material, review climate-related disclosures that competitors, industry leaders, suppliers or end-users make; and

– strategize about the information systems, processes and controls that the company would need to implement if the rules come back into effect.

The Covington team points out that if all or part of the rule is upheld, the SEC is likely to provide some transition period before the clock starts ticking again, although any such transition period will likely depend on the duration and result of the litigation, including which parts of the rules remain intact. The SEC appears to be preparing for a long battle – which may go all the way to the SCOTUS. It is difficult to predict at this point when the final outcome will be determined and what it will be.

Liz Dunshee

April 22, 2024

NYSE May Make it Easier to Delist Companies that Change Primary Business

The NYSE has proposed an amendment to Section 802.01D of the Listed Company Manual to allow the Exchange to commence immediate suspension and delisting procedures if a company changes its primary business focus. Specifically, discretion will apply if:

The company has changed its primary business focus to a new area of business that is substantially different from the business it was engaged in at the time of its original listing or which was immaterial to its operations at the time of its original listing. If the Exchange becomes aware of such a change in the company’s primary business focus, the Exchange’s assessment of the company’s suitability for continued listing in light of such change will also, where appropriate, take into consideration other changes that may have occurred in connection with the change in the company’s primary business focus, including, but not limited to, changes in the management, board of directors, voting power, ownership, and financial structure of the company.

The Exchange will focus its analysis of the company’s suitability for continued listing on whether it would have accepted the listed company for initial listing if it had been engaged in its modified business at the time of original listing. Any company that the Exchange determines to be unsuitable for continued listing due to a change in its primary business focus will be subject to immediate suspension and delisting in accordance with the procedures set out in Section 804.00.

The amendment is intended to address the NYSE’s concern that:

Investors who acquired the company’s stock prior to this change in operations (including, in many cases, in connection with the company’s initial public offering) may have made their investment decision based on the company’s disclosure about its original business and might not have made their investment if they had been aware of how the company would change. In addition, a wholesale change in business operations may give rise to a concern about the suitability for listing of the company had it been in engaged in that line of business at the time of its application for listing. The Exchange notes that, in some circumstances, there has been significant downward price movement subsequent to such a change in business focus, which resulted in significant investor losses and an inability to meet exchange continued listing standards.

The NYSE acknowledges that seeking to suspend and delist a company’s trading under this revised rule would be an extraordinary action. It expects to seldom rely on the new discretionary authority, and only after thorough analysis of all relevant facts & circumstances. Interestingly, this NYSE proposal comes at about the same time as one that would give more breathing room to SPACs looking to complete a business combination – which Meredith blogged about earlier this month.

The SEC has posted notice of the rule change. You can submit comments here.

Liz Dunshee

April 19, 2024

PCAOB Proposes Disclosure and Reporting Changes

Earlier this month, the PCAOB announced that it had issued for public comment a proposal regarding public reporting of standardized firm and engagement metrics and a separate proposal regarding the PCAOB framework for collecting information from audit firms .

The firm and engagement metrics proposal would, if adopted, require PCAOB-registered public accounting firms that audit one or more issuers that qualify as an accelerated filer or large accelerated filer to publicly report specified metrics relating to such audits and their audit practice. The PCAOB describes the rationale for the firm and engagement metrics proposal as follows:

Reliable, consistent information can improve investors’ ability to make informed decisions about investing their capital, ratifying the selection of auditors, and voting for members of the board of directors (including audit committee members). At the same time, it can improve audit committees’ ability to choose among and monitor the performance of auditors.

While some firms publicly disclose certain firm-level metrics today, the PCAOB’s staff has observed that the number of firms doing so is small.

Furthermore, the disclosures are inconsistent across firms — there are no common definitions or calculations allowing for consistent comparisons — and most of the disclosures are voluntary, so firms are free to revise or discontinue such reporting anytime. At the same time, there is a lack of incentive for firms, acting on their own or collectively, to provide accurate, standardized, and decision-relevant information about their firms and the engagements they perform.

The firm reporting proposal would, if adopted, amend the PCAOB’s annual and special reporting requirements “to facilitate the disclosure of more complete, standardized, and timely information by registered public accounting firms.” Consistent with current practice, much of the information would be disclosed publicly, while some would be available to the PCAOB only for oversight purposes. The PCAOB describes the rationale for the firm reporting proposal as follows:

The basic framework for the PCAOB’s annual and special reporting requirements has not been substantively reevaluated since its adoption in 2008. The Board has considered the experience of PCAOB staff, investors, and others with the current reporting framework. Informed by these considerations, the proposal seeks to update and improve the reporting requirements to facilitate more public disclosure that would be informative and useful to investors, audit committees, and other stakeholders.

Enhanced reporting requirements also have the potential to facilitate the PCAOB’s oversight functions and its ability to protect investors.

The deadline for public comment on both proposals is June 7, 2024.

– Dave Lynn

April 19, 2024

Are the AI Robots Coming for Your Accountants? The CAQ Weighs In

I do not think that I am guilty of “AI washing” by stating that the generative AI revolution is most certainly going to change the landscape for the service providers who work with public companies, including lawyers and accountants.

The CAQ recently issued a report titled “Auditing in the Age of Generative AI“, which “explores some fundamental principles of genAI, new risks arising from its use in processes relevant to financial reporting (financial reporting processes) or internal control over financial reporting (ICFR), and related audit implications.” The report provides:

– An overview of generative AI technology;
– A description of the current regulatory environment;
– Audit considerations for companies deploying generative AI; and
– Example use cases

The CAQ report concludes:

The use of genAI in financial reporting processes or ICFR by companies introduces new risk considerations for auditors. It is important for auditors to be mindful of the risks and challenges that can arise from a company using genAI. Auditors are well-suited to apply and build on their expertise in identifying and assessing risks, exercising professional skepticism, and developing appropriate audit responses.

While generative AI offers significant benefits for the disclosure and financial reporting process, there is no doubt that lawyers and auditors will need to adapt their approach to address the unique risks and considerations presented by the use of generative AI.

– Dave Lynn

April 19, 2024

They Never Learn: PCAOB Announces Test Cheating Actions

As noted in this recent statement from PCAOB Chair Erica Williams, the PCAOB brought action against two accounting firms involving allegations of exam cheating. Since 2021, the PCAOB has sanctioned nine registered firms for exam cheating. Chair Williams stated:

I want to be very clear: The PCAOB will not tolerate exam cheating nor any other unethical behavior, period.

Impaired ethics erode trust and threaten the investor confidence our system relies on. The PCAOB will take action to hold firms accountable when they fail to enforce a culture of honesty and integrity.

This Board set a goal to strengthen PCAOB enforcement, and we are doing just that. As of today, the PCAOB has imposed $34 million in penalties this year alone, and it’s only April.

We set a record in 2022. We broke that record in 2023. And we are breaking it again today.

Let today’s news be a clear warning to those who break the rules – if you put investors at risk, there will be consequences.

These actions involved widespread answer sharing for internal training tests.

– Dave Lynn

April 18, 2024

SEC Enforcement Director Speaks on AI Washing

Last month, I blogged about the SEC’s recent focus on “AI Washing,” or the practice of making potentially false and misleading statements about artificial intelligence as the frenzy continues regarding the impact of the evolving technology. SEC Enforcement Director Gurbir Grewal has now weighed in on how companies can use “proactive compliance” to avoid AI washing problems, in a speech at the Program on Corporate Compliance and Enforcement Spring Conference 2024.

Building on the concepts from a speech last year that articulated his concept of “proactive compliance,” Director Grewal noted that the practice requires three things: education, engagement, and execution. He explained:

First, educate yourselves about emerging and heightened AI risk areas as they relate to your businesses. That means reading the AI-related enforcement actions I mentioned. It means reviewing any future enforcement actions that may follow in this space.

It also means reviewing speeches like Chair Gensler’s recent speech on AI, which highlighted multiple other ways in which a firm’s AI use may heighten risk or implicate the federal securities laws. He specifically discussed the conflicts of interests raised by AI for advisers, the problems presented by AI hallucinations, and the threat that AI could pose to the stability of our markets.

And it means staying abreast of how potential AI-related issues are actually impacting companies in the real world. Take for example, the recent reporting around an airline’s chatbot offering a customer incorrect information about its refund policy.

Second, take what you’ve learned from our orders and public pronouncements, and your own research, and engage with personnel inside your company’s different business units to learn how AI intersects with their activities, strategies, risks, financial incentives, and so on.

Ask: what public statements are we making about our incorporation of AI into our business operations? Are they accurate, or are they aspirational? Does AI present a material risk to our business operations in some way?

Now, is the time to engage.

And third, execute. Does your use of AI require updating policies and procedures and internal controls? If so, are those policies and procedures bespoke to your company? And here, let me be clear: it’s not enough to go to ChatGPT or a similar tool and ask it to produce an AI policy for you.

And then, have you taken the steps necessary to implement those policies and procedures? As we have seen time and again, adoption is only part of the battle; effective execution is equally important and that’s where many firms fall short.

With respect to potential personal liability in connection with AI greenwashing, Director Grewal noted:

Here, I would look to our approach to cybersecurity disclosure failures generally: we look at what a person actually knew or should have known; what the person actually did or did not do; and how that measures up to the standards of our statutes, rules, and regulations. And as I’ve said before in the context of CCO and CISO liability, and I will say it again in the context of AI-related risk disclosures: folks who operate in good faith and take reasonable steps are unlikely to hear from us.

Director Grewal’s speech provides some practical guidance that companies can follow in drafting their AI disclosures, which will no doubt continue to evolve as the technology develops and companies pursue a variety of ways in which to deploy the technology.

– Dave Lynn