Monthly Archives: June 2019

June 28, 2019

FOIA: SCOTUS Puts the Kibosh on “Substantial Competitive Harm”

FOIA Exemption 4 protects “trade secrets and commercial or financial information obtained from a person [that is] privileged or confidential.” However, most federal circuit courts have read in a “substantial competitive harm” test under which commercial information would be regarded as “confidential” only if its disclosure was likely to cause substantial harm to the competitive position of the person from whom it was obtained.

The substantial competitive harm requirement had its genesis in the D.C. Circuit’s 1974 decision in National Parks & Conservation Association v. Morton, and the standard had been widely adopted by other courts.  But earlier this week, by a 6-3 vote, the SCOTUS invalidated the requirement in Food Marketing Institute v. Argus Leader Media.  Here’s an excerpt from this Cleary Gottlieb memo that addresses the Court’s reasoning:

Notwithstanding that the lower courts have followed National Parks in one form or another for 45 years, the Supreme Court roundly rejected it. Writing for six members of the Court, Justice Gorsuch criticized the D.C. Circuit’s creation of the “substantial competitive harms test” based on its interpretation of legislative history as demonstrating a “casual disregard of the rules of statutory interpretation.”

Food Marketing Institute held that a court must begin its analysis of statutory terms by referencing the ordinary meaning and structure of the law itself, and when this leads to a clear answer, the court must not go further. The Court found that because there is “clear statutory language” in FOIA, legislative history should never have been allowed to “muddy the meaning” of this language.

The decision should substantially reduce the burden associated protecting confidential information submitted to the government, but the memo says that it also raises questions about how agencies and courts will apply existing regulations that incorporate the “substantial competitive harm” test, and whether they will need to revise such regulations or attempt to justify disclosure decisions on other grounds.

 What Does the SCOTUS’s Decision Mean for CTRs?

The SEC is one of the agencies that will need to sort out how the SCOTUS’s decision to eliminate the “substantial competitive harm” standard impacts existing rules. In that regard, here are some insights that Bass Berry’s Jay Knight shared with us on how the Court’s decision complicates the SEC’s recently simplified CTR process:

As everyone may recall, in March the SEC adopted amendments to disclosure requirements for reporting companies, as mandated by the 2015 Fixing America’s Surface Transportation Act (the “FAST Act”). Among the amendments was a simpler CTR process, which now allows registrants to omit immaterial confidential information from acquisition agreements filed pursuant to Item 601(b)(2) of Regulation S-K and material contracts filed pursuant to Item 601(b)(10) of Regulation S-K without having to file a concurrent confidential treatment request. In short, registrants are permitted to redact provisions in such exhibit filings “if those provisions are both not material and would likely cause competitive harm to the registrant if publicly disclosed.” (emphasis added)

In the SEC’s adopting release, the SEC notes that it slightly revised the language of the amendment in the final rule to refer to information that “would likely cause competitive harm” to “more closely track the standard under FOIA.” (see page 25 of the adopting release) With the Supreme Court holding that FOIA exemption 4 does not have a competitive harm condition, it calls into question whether the “competitive harm” standard in Item 601 continues to be appropriate. (Other potential rules impacted are Exchange Act Rule 24b-2 and Securities Act Rule 406, which require that applicants for confidential treatment justify their nondisclosure on the basis of the applicable exemption(s) from disclosure under Rule 80, as well as Staff Legal Bulletin No. 1 and 1A, and Rule 83.)

Since that competitive harm standard is embedded in the SEC’s rules, at this point the prudent path for companies appears to be to continue to adhere the requirements of those rules until the SEC provides further guidance.

The Staff has informally advised us that they are evaluating the potential implications of the Food Marketing Institute decision on Rule 24b-2, Rule 406 & other rules that involve confidential treatment requests under FOIA.  However, the Staff does not believe that Item 601(b) is implicated by the decision, since the new procedures relate to situations in which information need not to be filed with the SEC, rather than situations in which companies are seeking to use FOIA exemption 4 to protect information that has been filed.

Insider Trading: Lawyers Are Increasingly In the Cross-Hairs

Over the past year or so, we’ve blogged about a number of insider trading cases in which lawyers were involved directly or, sometimes, indirectly.  If it seems like lawyers are being implicated more in insider trading cases, this Arnold & Porter memo says there’s a reason for that – they are:

A recent series of insider trading actions charging senior lawyers in legal departments of prominent public companies suggests that insider trading by lawyers may be on the rise. Over the past several months, the U.S. Securities and Exchange Commission has brought enforcement actions charging insider trading in advance of earnings announcements by senior lawyers at Apple and SeaWorld. In a third action, filed in early May 2019, the general counsel of Cintas Corporation was an unwitting victim of a house guest, a lifelong friend, who, the SEC alleges, surreptitiously pilfered merger related information from a folder in the lawyer’s home office.

These actions are noteworthy not only for the brazenness of the conduct involved, but because they suggest that insider trading by lawyers remains a “profound problem.” And, as the case of the Cintas general counsel demonstrates, innocent lawyers may also fall prey to others, such as close friends and family, looking to exploit their access to material nonpublic information, or MNPI.

Here at, we’re on record that if you’re a corporate officer who engages in insider trading, then – as one of my high school football coaches used to say – “you’re stuck on stupid.” But if you need more convincing, read the memo’s review of the recent proceedings involving lawyers, and the actions that companies & law departments can take to mitigate their insider trading risks.

John Jenkins

June 27, 2019

Big 3 Index Funds On Course to Control 40% of S&P 500 Stock

Remember the classic scene in the movie “Network” in which Ned Beatty’s character, CEO Arthur Jensen, regales Howard Beale with his fire & brimstone “corporate cosmology” speech?  It’s his vision of a “perfect world” led by “one vast and ecumenical holding company, for whom all men will work to serve a common profit, in which all men will hold a share of stock, all necessities provided, all anxieties tranquilized, all boredom, amused. . .”

If that’s your cup of tea, then I’ve got great news for you – a recent study says that fulfillment of Arthur Jensen’s vision may be right around the corner.  Here’s an excerpt from an FT article on the study:

BlackRock, Vanguard and State Street Global Advisors are on course to control four votes out of every 10 cast at large US companies, as regulators and policymakers probe the wider consequences of their increasing dominance of the investment market. The influence of the Big Three, which have mopped up trillions of dollars of index investments in recent years, is being viewed by politicians as a possible antitrust issue. BlackRock, Vanguard and SSGA, which collectively manage more than $14tn, account for a quarter of votes cast at S&P 500 companies. This is set to grow to 34% over the next 10 years, and 41% in 20, according to academics at Harvard Law School.

The authors of this study are concerned that having the Big 3 control 40% of the S&P 500 will make them unduly deferential to management.  I sure hope so – because it seems to me that a far more likely scenario is some variation of them telling us to  “Kneel before Zod!”

I know I’ve mentioned this same scene from Network in at least one blog, but what can I say?  My cultural frame of reference consists almost entirely of 1970s movies & TV shows. Throw in the “Superman II” reference in the last line & I have no choice but to admit that I’m a walking Dad Joke.

“Bad Actors”: Proposed Legislation Would Tighten SEC Waiver Process

Companies that run afoul of the antifraud provisions of the securities laws can find themselves barred from, among other things, using Reg D, Reg A, Form S-3, or qualifying for the forward looking statements safe harbor.  In some instances, it isn’t necessarily equitable or in the best interests of investors or the market to impose these sanctions, and so the SEC has developed a waiver process.

Rep. Maxine Waters (D-Cal.), Chair of the House Financial Services Committee, recently introduced the “Bad Actor Disqualification Act of 2019,”  which would significantly clamp down on the SEC’s ability to grant bad actor waivers. This excerpt from a recent Sidley memo summarizes the bill’s impact on the waiver process:

The Disqualification Act would eliminate the Commission staff’s ability to grant waivers and instead would impose a three-step process to obtain a permanent waiver. First, a company would need to petition the Commission for a temporary waiver, which the Commission could grant “if the Commission determines that such person has demonstrated immediate irreparable injury.” The temporary waiver would be for a period of 180 days, and all temporary waiver requests (whether granted or not) would be published with an explanation from the Commission as to the rationale for granting or not granting the waiver.

Second, the Commission would publish notice in the Federal Register “of the pendency of the waiver determination and … afford the public and interested persons an opportunity to present their views [on the waiver application], including at a public hearing.” Third, the Commission would hold a public hearing during which it would consider granting a permanent waiver. The Commission would not be able to consider the “direct costs to the ineligible person associated with a denial” and would need to find that the waiver “(i) is in the public interest; (ii) is necessary for the protection of investors; and (iii) promotes market integrity” in order to grant the waiver.

Rep. Waters issued a statement saying that the legislation is intended to protect investors by implementing a “rigorous, fair, and public process for waiving automatic disqualification provisions in the law.” But the Sidley memo contends that, among other things, it would further politicize the waiver process & make settlements with the Commission less attractive to companies.

Earnings Estimates: What If Your Analyst Estimates Are From “Fantasy Island?”

Few things cause more consternation in the C-suite than an analyst whose earnings estimates for your company are wildly out of line with management’s. If that happens to you, this Westwicke Partners blog offers some advice about how to respond.

A member followed up with a very good point –  you need to keep Reg FD compliance in mind when you consider Westwick’s advice here!

Geez, I did it again – another 1970s pop culture reference in the title of this blog.  I swear, at this point I’m not even conscious that I’m doing it.

John Jenkins

June 26, 2019

MD&A: 12 Things You Need to Know

While the Staff hasn’t said much about MD&A requirements in recent years, I think most lawyers appreciate that it’s really one of the cornerstones of the entire disclosure system.  This recent blog from Bass Berry’s Kevin Douglas offers up 12 things that you need to know when you’re preparing your company’s MD&A.  Here’s an excerpt with some tips on Item 303 of S-K’s trend disclosure requirements:

A core disclosure component of Item 303 of Regulation S-K (which sets forth the SEC disclosure requirements applicable to MD&A) is the requirement to provide an analysis of known material trends, uncertainties and other events impacting a registrant’s results of operations, liquidity or capital resources. Practice varies widely among registrants regarding the extent to which the disclosure of forward-looking statements is included in the MD&A.

While there may be reticence among some registrants to include overly expansive forward-looking disclosure (for example, based on concerns about liability exposure if such forward-looking information is not ultimately accurate), countervailing considerations include the fact that such disclosure may result in more useful disclosure as well as the fact that the failure to disclose known trends can give rise to exposure from Rule 10b-5 allegations from private parties as well as SEC civil actions.

The blog also points out that when companies include trend disclosure in their MD&A, they need to keep in mind that this disclosure may need to continue to be included and updated in subsequent periodic reports. Other topics include presentation and readability of MD&A disclosure, the interaction between MD&A and risk factor disclosure, and the use of non-GAAP financial measures in the MD&A.

Del. Sup. Ct. Says Plaintiff Pled Viable “Caremark” Claim

Breach of fiduciary duty allegations premised on a board’s failure to fulfill its oversight obligations are notoriously difficult to establish. One reason that these Caremark claims are so tough to make is that a plaintiff needs to show “bad faith,” meaning that the directors knew that they were not discharging their fiduciary obligations. But last week, in Marchand v. Barnhill, (Del. Sup.; 6/19), the Delaware Supreme Court overruled the Chancery Court and held that – at least for purposes of a motion to dismiss – a shareholder plaintiff stated a viable Caremark claim.

The case arose from a 2015 listeria outbreak at Blue Bell Creameries. In addition to being implicated in the deaths of three people, the outbreak resulted in a recall of all of the company’s products, a complete production shutdown, and a lay-off involving 1/3rd of its workforce. Ultimately, the financial fallout from this incident prompted the company to seek additional financing through a dilutive stock offering.

As a result, the plaintiff brought a derivative action against the board & two of the company’s executives. The plaintiff alleged that the board failed in its oversight duties, but the Chancery Court rejected those allegations. The Supreme Court disagreed, holding that the plaintiff had alleged shortcomings in board level oversight sufficient to survive a motion to dismiss:

When a plaintiff can plead an inference that a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the company’s business operation, then that supports an inference that the board has not made the good faith effort that Caremark requires.

Since Marchand involved a motion to dismiss, it’s hard to tell whether the case suggests that Caremark may be a more viable path to imposing liability than it has been in the past – but it’s worth noting that this decision is the second case in the last two years in which a Delaware court has characterized a Caremark claim against directors as being “viable.”

I posted a more detailed version of this blog on this case on last week, and we’re posting memos in our “Director Duties & Liabilities” Practice Area.

Board Minutes: “Not Too Long, Not Too Short, But Just Right. . .”

Here’s a recent blog from Bob Lamm that has some terrific insights into preparing board minutes. This excerpt contains Bob’s take on the issue of whether to prepare “long-form” minutes or “short form” minutes:

I believe that the proper course is what I call “Goldilocks Minutes.” Not too long, not too short, but just right. Minutes can (and IMHO should) give an indication as to what was discussed. For example, if the board is considering an acquisition, it’s not only OK – it’s actually a good idea – to reflect that the board discussed the merits and risks of the transaction, along with some examples of the factors discussed.

If you’re looking for more of a deep dive into issues surrounding board minutes, check out the March issue of The Corporate Counsel.

John Jenkins

June 25, 2019

Earnings Calls: Zoom Shakes Things Up

Zoom Video Communications is one of the year’s better performing tech IPOs, & now the video conferencing software provider is earning kudos for its effective use of technology to liven up the typically lackluster quarterly earnings call ritual. Here’s an excerpt from this recent Quartz article:

Earlier this month, Zoom disclosed its first quarterly results as a public company. After its press release went out, founder and CEO Eric Yuan and other senior executives hopped onto a Zoom video call to discuss the earnings with analysts, press, and investors. The interactive webinar showed off the company’s technology—and reinvented notions of what a quarterly earnings call should be.

The format introduced a greater degree of transparency between the company and analysts. It wasn’t just the executives whose faces appeared on the screen; when asking questions, the analysts on the call could also be seen—both by the executives and by everyone else on the call.

“You’re not just sort of talking into a box or a handheld—you’re actually looking at each other in the eye and you’re actually talking to feel like we’re connecting with a lot more people,” says Tom McCallum, Zoom’s head of investor relations.

The dynamics transformed the call from a presentation to more of a conversation, with executives and analysts essentially chatting face-to-face via video screens (journalists on the call were in view-only mode). The ability to see each speaker’s face brought a distinctly human touch to something that, with other companies, often feels like an anonymous, formulaic encounter steered by barely-human-sounding teleconference operators reading from scripts and frequently betraying their lack of familiarity with either the presenters or the callers on the line.

Here’s the presentation, which – while not exactly Avengers: Endgame – is more interesting to look at than the standard call.  The Q&A is what you want to see, and that starts around the 20 minute mark. My one beef is that you have to rummage around the IR website a bit to find the presentation – while a link to the earnings release appears on the home page, the earnings presentation itself does not.  You have to click on the “events” link to find it.

Board Recruitment: Assessing First Time Director Candidates

Many companies are finding themselves moving beyond the traditional pool of current & former CEOs to identify new directors – and many of these non-traditional candidates have never served on a public company board. So, how do you assess their qualifications? This SpencerStuart article has some suggestions. Here’s an excerpt about questions that nominating committees should ask covering areas that are key to the success of a new director:

Interpersonal skills — Has the person demonstrated an ability to build relationships with all kinds of people? To influence and to gain trust and support from others? Can the candidate use diplomacy and tact? Listen and adjust appropriately to others’ input?
Intellectual approach — Can the candidate handle complexity, or simplify issues to the essence to make sound, logical decisions? What is their comfort level with ambiguity? Does he or she have the
ability to look ahead? To transfer knowledge and experience to different environments?
Integrity — Will the candidate adhere to an appropriate and effective set of core values and live by them? Is she or he honest and truthful? Is the person authentic, self-aware and confident enough to “be oneself”?
Independent mindedness — Can the candidate set out and defend a position, even when this means going it alone? What about the ability to maintain positive relationships amid conflicts about ideas?
Inclination to engage — Is the candidate motivated to invest time and effort in learning about the organization and staying up to date with it? Is she or he diligent enough to follow through with commitments?

A prospective director’s financial competence is also an important issue, and the article suggests that companies include the chair of the audit committee in interviews of a prospective candidate, in order to better assess the financial sophistication revealed by the questions the candidate asks.

D&O for Unicorns: Insurers Move to Public Company Model

High value private companies – i.e., “Unicorns” – are making insurers nervous. These are private companies, but their huge and volatile valuations, significant financing and resale transactions & other characteristics make them appear much riskier to insurers than the typical private company.

As a result, insurers are increasingly moving to public company-style policies for these companies. This Woodruff Sawyer blog reviews the implications of that trend. This excerpt says the biggest issue is the reduced scope of entity coverage found in the typical public company policy:

To be clear, both public and private company forms provide for entity coverage if the corporation is named in a securities claim. The definition of “securities claim” typically includes breach of fiduciary duty suits. As a practical matter, these are the types of claims for which D&O insurance is being purchased for high-value private companies (and public companies, too).

What you lose, however, when you move to the public company form is the expanded coverage for the corporation for other suits that name the corporate entity. For example, on the private company form, defense costs coverage may exist for the corporate entity if a regulator decides to take an enforcement interest in a corporation. Another example is corporate entity coverage for antitrust claims. These scenarios are almost entirely excluded from the public company form.

On the other hand, public company policies may provide greater coverage for D&Os, enhanced ability for the company to select its own counsel, broader coverage for regulatory investigations, and other more favorable policy terms.

John Jenkins

June 24, 2019

Staff Comments: Trend Toward Fewer Comment Letters Accelerates

According to this recent Audit Analytics blog, the trend toward fewer comment letters from the Staff not only continued last year, but accelerated:

The total amount of comment letters stemming from 10-K and 10-Q filings has once again decreased (as shown in the chart below). From 2017 to 2018, total comment letters decreased by roughly 26%, which is slightly steeper than the decline we’ve seen in the past (13% from 2016 to 2017 and 10% from 2015 to 2016). Similarly, the number of conversations largely followed the same declining pattern.

The blog says that the decline in 8-K comment letters was even sharper. Comment letters on 8-K filings plummeted 54.5% between 2017 and 2018, in comparison to 31.5% between 2016 and 2017 and an increase of 112.4% between 2015 and 2016. The 2016 spike in comment letters is attributable to the Staff’s focus on the use of non-GAAP financial data following Corp Fin’s issuance of updated guidance.

Audit Analytics suggests that the reasons for the decline in comments include a nearly 50% decline in the number of reporting companies since the early 2000s and the Staff’s principles-based approach to issuing comments. Last year’s government shutdown may also have contributed, since reviews weren’t performed during that time. But that probably didn’t move the needle much – since only the last 2 weeks of December were affected by the shutdown.

KPMG/PCAOB: Worse Than We Thought?

I consider myself pretty jaded, but if you read my blog when news broke about the scandal involving KPMG personnel’s misappropriation of PCAOB data, you know I was pretty shocked by the magnitude of what was alleged to have happened. The SEC thought this was pretty serious stuff too. Last week, the agency announced that it had reached a settlement with the firm under the terms of which KPMG admitted wrongdoing & agreed to a $50 million civil monetary penalty – which matches the largest fine ever imposed against an audit firm.

As bad as the KPMG situation appeared when it was first revealed, this recent article by’s Francine McKenna notes that the SEC’s announcement suggests that the scandal is even worse than originally reported:

The SEC revealed Monday a much larger scandal than was previously known: KPMG auditors, including some senior partners in charge of public company audits, cheated on internal tests related to mandatory ethics, integrity and compliance training, sharing answers with other partners and staff to help them also attain passing scores. In addition, for a period of time up to November 2015, some audit professionals, including one partner, manipulated the system for their exams to lower the scores required to pass.

Twenty-eight of these auditors did so on four or more occasions. Certain audit professionals lowered the required score to the point of passing exams while answering less than 25% of the questions correctly, the SEC says.

Egads. The SEC’s announcement of the settlement indicated that the agency’s investigation was ongoing. Yeah, I bet it is.

SEC Revises Procedure for Authenticating Form ID

Here’s something that Alan Dye recently posted on his “Section” Blog:

The SEC has announced enhancements to the EDGAR system, one of which affects the submission of Form ID. New filers will now complete an updated online version of Form ID, which is accessible via a hyperlink from Filers will print out the completed version, for manual signature and notarization, and then upload the signed version for submission with the Form ID. The old “courtesy pdf copy” of Form ID previously available for use as an authenticating document has been removed from the SEC’s website.

John Jenkins

June 21, 2019

‘Say’ Earnings Calls: Less Boring?

Earlier this year, Broc blogged about how Tesla was using the new “Say” platform to allow retail shareholders to submit questions during earnings calls. This memo from Say reports on how many shareholders are participating in this process – and says they’re more likely to ask about products & consumer experience than financial outlook (compare to these questions that one experienced buy-side advisor would ask). How’s that working out for analysts and Tesla’s IR folks? Here’s an excerpt:

Tesla led the Q&A portions of each call with questions from Say users, ahead of analysts. Like Russell’s questions on Tesla’s Q1 2018 call, Say users’ questions received follow up from traditional equity analysts. During Say’s Q1 2019 call with Tesla, Musk revealed the company would enter the auto insurance market while responding to a Say user question about insuring cars. A Morgan Stanley analyst later asked more about insurance, capturing the media’s attention and creating positive press for Tesla. The original retail shareholder question was submitted on our platform by an 18-year-old.

Our Q1 2019 call also included five questions from institutional Tesla investors, Ark Invest and Domini Impact Investments, who both issue ETFs holding Tesla in their portfolios. Together, they represented $185M in Tesla shares. Their questions, reflected in Figure 3, were largely ESG and product-focused and were not answered by the company. Having them filed on Say, however, captured institutional sentiment for Tesla’s IR department as well.

Allison Herren Lee Confirmed as SEC Commissioner

That was fast. Yesterday morning I blogged that the Senate Banking Committee had approved Allison Herren Lee’s nomination as SEC Commissioner. Yesterday afternoon, the SEC congratulated her on a successful Senate confirmation and welcomed her back to the SEC. Allison had previously served on the SEC staff from 2005 to 2018.

Director Compensation: Delaware Reiterates “Entire Fairness” Applies

Here’s something I blogged recently on This Bracewell memo notes that – in light of the Delaware Supreme Court’s 2017 Investors Bancorp decision – nearly 75% of surveyed LTIPs now include a director-specific limit on the size of annual grants, with many plans also capping total annual compensation for board members.

That trend isn’t likely to die out any time soon. Recently, the Delaware Court of Chancery reaffirmed that the entire fairness standard applies to most decisions that directors make about their own compensation. The opinion – Stein v. Blankfein – says that director pay decisions can be actionable even if the directors held a “good-faith, Stuart-Smalley-like belief” that they were “good enough, smart enough, and doggone it, they were worth twice—or twenty times—the salary of their peers” (bravo to the Vice Chancellor on the SNL reference – and in this case, it’s not much of a stretch to envision the Goldman Sachs directors holding that belief).

This Stinson blog has the details about the case & its implications – here’s an excerpt:

The following courses of action remain available to public company boards in approving director compensation:

– Have specific awards or self-executing guidelines approved by stockholders in advance; or

– Knowing that the entire fairness standard will apply, limit discretion with specific and meaningful limits on awards and approve director compensation with a fully developed record, including where appropriate, incorporating the advice of legal counsel and that of compensation consultants.

It may also be possible to obtain a waiver from stockholders of the right to challenge future self-interested awards made under a compensation plan using the entire fairness standard. To do so, stockholders would have to approve a plan that provides for a standard of review other than entire fairness, such as a good faith standard. In addition stockholders would have to be clearly informed in the proxy statement that director compensation is contemplated to be a self-interested transaction that is ordinarily subject to entire fairness, and that a vote in favor of the plan amounts to a waiver of the right to challenge such transactions, even if unfair, absent bad faith. Note that the Court did not conclude, because it was not required to do so, that such a waiver was even possible.

Culture & Human Capital Management: Buzz on the Board’s Role

In the past couple of months, my inbox has been even more inundated than usual with memos – and even media articles – about corporate culture and human capital management. Of course I’m dutifully posting in our “Corporate Culture” and “ESG” Practice Areas. But for your convenience, here’s a few that stood out:

PwC’s “Boards Need to Make Sure Culture is an Asset, Not a Liability”

PwC’s “The Board Imperative for Talent Management”

Davis Polk’s “Potential Legislation on HCM Reporting & Stock Buybacks”

Directors & Boards’ “Reputational Harm: Liability Risks for Companies & Boards”

Just Capital’s “Disclosure of Workforce Policies Correlates With ROE”

Mike Melbinger’s “Should Compensation Committees Take on the Responsibility of Human Capital Management?”

As You Sow’s “Workplace Equity Disclosure Statement”

CNBC’s “A Coalition of CEOs Wants to Get Boards to Commit to Diversity”

Liz Dunshee

June 20, 2019

What If the Post Office Was the SEC?!?

The SEC celebrated its 85th birthday a couple weeks ago. You probably know that the Securities Act was one of FDR’s reform initiatives way back in 1933. But did you know that one of the first suggestions he received was for the US Post Office to regulate the securities law? The Post Office! Eventually the SEC was created under a different version of the bill, which passed either because it was “so [darned] good or so [darned] incomprehensible.” Some things never change…

Find more interesting historical details in this book excerpt – which Jeffrey Rubin of Ellenoff Grossman was kind enough to share.

More Exchanges Are Beating the “Sustainability” Drum

Ninety percent of exchanges now have ESG initiatives, according to this survey from the World Federation of Exchanges. No wonder it’s so hard to keep track of who’s doing what. Luckily, most of the initiatives are converging around the UN Sustainable Development Goals. From the WFE’s announcement, here’s a few other findings:

– Although two-thirds of responding exchanges encourage or require ESG disclosure, there is still no consistent global standard for ESG reporting.

– While there appears to be growing investor demand for ESG disclosure, the level of this demand is still considered to be limited in many markets.

– Sustainability indices remain the most commonly offered products, but there has been considerable growth in ESG-related bond offerings, with 73% of exchanges with sustainability products offering green bonds in their markets.

ESG Disclosure Guides: So Many to Choose From

As a follow up to last week’s blogs on sustainability reporting, there’s no shortage of guidelines for disclosure. In fact, that’s part of the problem…and why some predict that companies & investors will end up coalescing around frameworks that are more principles-based, like what’s offered by the UN Sustainable Development Goals or the TCFD – see this Troutman Sanders memo.

Here are three relatively recent disclosure guides (also see this blog about moving sustainability reporting into SEC filings – and this new Nasdaq survey of large company disclosure trends):

1. The 65-page “TCFD Implementation Guide” – brought to you by the Sustainability Accounting Standards Board (SASB) and the Climate Disclosure Standards Board (CDSB) – focuses on annotated mock disclosures that align with the principles of the Task Force on Climate-Related Financial Disclosures. According to this announcement, the guide is a direct response to requests from companies that want to see what effective climate-related disclosure looks like. Bonus points if you can keep all the acronyms straight – there’s a glossary on page 24 if you need help.

2. The “World Business Council for Sustainable Development” recently published this 34-page disclosure handbook that walks through the “who/what/why/how” of ESG disclosure (see pg. 28 for a handy checklist of key points)

3. Nasdaq’s 34-page “ESG Reporting Guide” summarizes reporting frameworks from the TCFD and the UN’s Sustainable Development Goals – as well as guidance & best practices gleaned from the World Federation of Exchanges & Nasdaq’s own pilot program for ESG reporting

SEC Commissioner Nominee: Allison Lee Advances to Senate

Back in April, John blogged that Allison Lee had been nominated to fill the Commissioner vacancy created by the departure of Kara Stein. Bloomberg reported that the Senate Banking Committee has approved her nomination – so it now goes to the Senate. This blog says that the nomination hearing a few weeks ago was pretty short…

Liz Dunshee

June 19, 2019

Private Offerings: SEC’s “Concept Release” Looks to Harmonize Exemptions

Yesterday, the SEC announced that it’s seeking input – via this 211-page concept release – on ways to “simplify, harmonize & improve the exempt offering framework.” While this sounds like a pretty low bar given the complicated interplay of all the federal & state exemptions, I don’t envy the staffers who might be tasked with crafting further changes that please everyone…and don’t cause more confusion. Among the many topics discussed in the concept release, the Commission is considering whether:

– The SEC’s exempt offering framework, as a whole, is consistent, accessible & effective – or whether the SEC should consider simplifications

– There should be any changes to streamline capital raising exemptions – especially Rule 506 of Reg D, Reg A, Rule 504 of Reg D, the intrastate offering exemption, and Regulation Crowdfunding

– There may be gaps in the SEC’s framework that make it difficult for small companies to raise capital at critical stages of their business cycle

– The limitations on who can invest in exempt offerings, or the amount they can invest, provide an appropriate level of investor protection – versus making offerings unduly difficult for companies and/or restricting investors’ access to investment opportunities (this includes a discussion of the “accredited investor” definition)

– The SEC can & should do more to allow companies to transition from one exempt offering to another – and ultimately to a registered public offering – without undue friction or delay

– The SEC should take steps to facilitate capital formation in exempt offerings through pooled investment funds – and whether retail investors should be allowed greater exposure to growth-stage companies through these funds

– The SEC should change exemptions for resales to improve secondary market liquidity

This Cooley blog notes that SEC Chair Jay Clayton & Corp Fin Director Bill Hinman have been laying the groundwork for this release in several speeches during the last year. And many of these ideas have been discussed (passionately) for years in securities law circles and at the SEC’s annual Small Business Forum – so no doubt we’ll see some pretty thorough comments over the next few months. The comment period ends in late September.

Over on Twitter, Professor Ann Lipton pointed out that the concept release has a great table of existing exemptions on pages 10-11 – and intel on how much money was raised last year under each type of offering. We’ll be posting memos in our “Private Placements” Practice Area

“Regulation Crowdfunding”: Not Drawing Much of a Crowd

Yesterday’s concept release on private offering exemptions includes a mandated Staff report on the impact of Regulation Crowdfunding on capital formation & investor protection. Here’s the quotable stat:

From May 2016 (when the rule became effective) through the end of last year, there were only 519 completed offerings – mostly conducted by companies in California & New York – which raised a total of $108 million. During the same time period, 12,700 companies raised a total of $4.5 billion under Reg D.

The SEC does think the Regulation has been attracting new companies to the exempt offering market (rather than encouraging currently participating companies to switch exemptions). But that’s not too surprising given all the downsides of the current rule compared to a more traditional fundraising approach. The concept release includes 13 multi-part questions about ways to make crowdfunding more of a crowd-pleaser.

Auditor Independence: SEC Refines “Debtor-Creditor” Analysis

Yesterday, the SEC issued this 77-page adopting release to amend the auditor independence requirements in Rule 2-01 of Regulation S-X. The amendments impact the analysis of auditor independence when the auditor has a lending relationship with a client or its shareholders. Here’s what the revised rule will do:

– Focus the analysis on beneficial ownership rather than on both record and beneficial ownership

– Replace the existing 10 percent bright-line shareholder ownership test with a “significant influence” test

– Add a “known through reasonable inquiry” standard with respect to identifying beneficial owners of the audit client’s equity securities

– Exclude from the definition of “audit client,” for a fund under audit, any other funds, that otherwise would be considered affiliates of the audit client under the rules for certain lending relationships

According to the SEC, the amendments will more effectively identify debtor-creditor relationships that could impair an auditor’s objectivity and impartiality – as opposed to more attenuated relationships that don’t pose threats & aren’t important to investors.

Liz Dunshee

June 18, 2019

The “Nina Flax” Files: Ways We Make Work Fun

Here’s the latest “list” installment from Nina Flax of Mayer Brown (here’s the last one):

I’m currently the Office Practice Leader for our Northern California Corporate Group – but long before that I was a cheerleader (national champions in high school and, yes, even for a year in college – that surprises some and not at all others). So I think my “rah rah” focus on team work has been a contributing factor to some of these…

1. We Chide: Mostly about lunch. It is not okay to go to lunch by yourself. If the newer members of our team go to lunch without others, or without at least telling others, they get grief. I think deservingly so.

2. We Dance: Okay, maybe not the collective “we” so much as me. But randomly blasting music sometimes and dancing in the office is fun.

3. We Nickname: One of my close college friends was excellent at nicknaming people. He would “Mc” people. Like Sketchy McSpends-A-Lot (that was seriously one of them). I do not “Mc,” but I have come up with “Stealth” (sometimes referred to as “Sneaky,” when describing the way said colleague sometimes sneaks in or out of the office without saying hello or goodbye), “Stinky” (term of endearment, though said colleague sometimes doesn’t shower before 4am calls, which really we should all think is acceptable) and most recently “Bendit” (because said colleague had his hair cut at a barbershop co-owned by Beckham).

I am frequently referred to as “Stinky” (I promise there is no odor, it is a term of endearment, and has nothing to do with not showering before 4am calls) and “Lil’Bit.” I miss the days of “Bean” or “Neener.” I also miss being more creative – some of our nicknames are still just last names. We are working on that, but you can’t force it.

4. We Prank: There was recently a motion at an all-lawyer lunch (which we have each month) to move all of our snacks from the third floor kitchen to the second floor kitchen. Since we determined that the corporate folks present held proxies for all of the corporate colleagues not in attendance due to work travel and conflicting conference calls, the motion was vetoed. But later that night some elves in the office moved all of the snacks into the motioner’s office. In response, the motioner pretended to get said elves in trouble and spread a message through the office manager and others that snacks were being taken away.

5. We Hang: In the office, by having random conversations in our offices, in the kitchen or even in the hall. And importantly outside of the office, whether it is an impromptu dinner hosted at my house, a soccer game, a toddler’s birthday party or a random home drop-by. I have even helped the other Stinky clean and organize toys on a random Saturday – it was cathartic for both of us.

6. We Walk: Sometimes you just need a break – whether it’s from being indoors, or to vent about something that is on your mind. Me and my chief partner in crime have come up with a path around the office that we frequently walk and that we encourage others to walk with us when necessary – or just whenever!

7. We Conspire: Top of mind on this one is what funny artwork we will hang on Stealth’s wall – because it’s weird that they’ve never hung anything on office walls in years. By the time this is published, I will have brought in a print from my childhood bedroom (yes, that I still own). It is called “Shuffle Off to Buffalo,” by Harry Fonseca. My version of this print has buffalo in pink and white, WITH GLITTER, around the border. I am sure Stealth will love it. And even if they don’t, I suspect they won’t exert the energy to take it down, which is hilarious already. It will be a nice addition to the “farm” picture already pinned up courtesy of the other Stinky’s daughter. Stealth correctly identified the main blob as a chicken.

8. We Gift: Like bringing in an avocado with a “Happy Birthday!” post-it on it for a colleague who is on the keto diet. Or a sign from an event “The Future is Female” to put on a colleague’s door.

Transcript: “M&A Stories – Practical Guidance (Enjoyably Digested)”

We have posted the transcript for our recent webcast: “M&A Stories: Practical Guidance (Enjoyably Digested).”

Tomorrow’s Webcast: “Navigating Corp Fin’s Comment Process”

Tune in tomorrow for the webcast – “Navigating Corp Fin’s Comment Process” – to hear former Senior SEC Staffers Era Anagnosti of White & Case, Karen Garnett of Proskauer Rose and Jay Knight of Bass Berry explain the process by which the SEC Staff issues comments – step-by-step – as well as provide their practical guidance about how to respond. This program will cover both the basics, as well as advanced issues for practitioners to consider.

Liz Dunshee

June 17, 2019

Announcing… “CCRcorp”!

Although many of you know our work simply by the names of our “Essential Resources” – e.g.,,, and our related print newsletters – we’re actually part of a company called “EP Executive Press” that was founded by Jesse Brill over 40 years ago (here’s the last installment of Jesse’s “reminiscences” when the company celebrated its 35th anniversary).

Now, we’re entering another new chapter – with a parent-company rebranding to “CCRcorp.” Our new name stands for “Corporate Counsel Resources” – but I for one will forgive anyone who mixes us up with a certain ’60s rock band, especially since we’ll be “chooglin’ on down to New Orleans” for our “Proxy Disclosure Conference” this September.

You may notice some logo changes following our formal announcement later this week. But rest assured, we’ll be providing the same practical info…and when Broc & John are at the keyboard, it’ll even be entertaining.

Financial Reporting of Climate Issues: On the Rise

Despite this blog in which SASB comes around to website sustainability disclosure, two recent reports indicate that reporting about climate change risks – and opportunities – is moving from standalone reports into SEC filings. First, this big survey from CDP (formerly the “Carbon Disclosure Project”) identifies a number of physical, supply chain, compliance and other risks – as well as cost savings and strategic opportunities – that are financially impacting companies. Here’s an excerpt from this Cooley blog:

The vast majority of the potential financial opportunities were categorized as “likely, very likely or virtually certain.” Of these opportunities, companies reported that $471 billion could be recognizable now, but $1.34 trillion (62%) was expected to materialize in the short- to medium-term. Over $1.2 trillion of these opportunities were identified by companies in the financial services industry, followed by manufacturing ($338 billion), services ($149 billion), fossil fuels ($141 billion) and food, beverage and agriculture ($106 billion).

The Task Force on Climate-related Financial Disclosures also announced the takeaways from its new status report – which looked at disclosures from 1100 large companies in 142 countries. Here’s an excerpt from a Davis Polk blog about the findings (also see this Cooley blog, which emphasizes the report’s suggestions for improvement):

At the time the 2019 status report was written, approximately 800 organizations expressed support for the TCFD framework. This support marks a 50% uptick compared to the number reported in the 2018 version. According to the 2019 status report, the average number of TCFD recommended disclosures per company increased by 29% from 2.8 in 2016 to 3.6 in 2018. Moreover, the percentage of companies that disclosed information that aligns with at least one of the TCFD’s recommendations rose from 70% in 2016 to 78% in 2018.

While companies still disclose more climate-related information that aligns with the recommendations in sustainability reports, the TCFD found that between 2016 and 2018 there was a greater percentage increase in information reported in financial filings or annual reports (by 50%) than the increase in sustainability reports (by 30%).

Tomorrow’s Webcast: “Joint Ventures – Practice Pointers”

Tune in to tomorrow for the webcast – “Joint Ventures: Practice Pointers” – to hear Eversheds Sutherland’s Katie Blaszak, Hunton Andrews Kurth’s Roger Griesmeyer, Orrick’s Libby Lefever and Davis Polk’s Brian Wolfe share “lessons learned” that will help you master the art of joint ventures.

Liz Dunshee