Monthly Archives: February 2020

February 13, 2020

Insider Trading: Should Your Policy Cover More Than Legal Risks?

A recent paper from Stanford’s Rock Center notes that while most insider trading policies are designed to prevent violations of law, companies need to ask whether their existing insider trading policies need to cover more ground in order to be consistent with good governance practices. Here’s an excerpt:

Despite procedures designed to ensure compliance with applicable rules, news media and the public tend to be suspicious of large-scale executive stock sales.7 This is particularly the case when a sale occurs prior to significant negative news that drives down the stock price.

Public suspicion is exacerbated by inconsistent and nontransparent corporate practices—such as, lack of communication around why the sale was made, whether the general counsel approved the trade in advance, and whether the trade was the result of a 10b5-1 plan—and differing opinions about what constitutes “material” nonpublic information. Thus, an executive stock sale might pass the legal test but fail the “smell test” employed by the general public. A well-designed ITP lessens the likelihood of such a scenario.

The paper reviews 4 real-life vignettes involving insider transactions that, if not illegal, sure didn’t look very good. It raises a number of governance issues, like why companies don’t always make their insider trading policies public, mandate the use of 10b5-1 plans by senior execs or require pre-approval of all trades by the general counsel?

Shareholder Proposals: Be Careful What You Wish For?

Carl Hagberg, who has probably forgotten more about the proxy voting and annual meeting process than most of us will ever know, recently submitted a comment letter on the SEC’s proposed changes to Rule 14a-8. In addition to some colorful language about the release itself – which he calls “ponderously long, dense and maddeningly-meandering” – he contends that the current system is working reasonably well. He also claims that the proposals don’t address the ability of shareholders to use “proxies” to make proposals on their behalf, which he views as the biggest problem under the current regime.

Your mileage may vary when it comes to Carl’s arguments, but you should definitely read his letter because he knows a lot about this stuff & his letter’s kind of fun. But regardless of whether you agree with his arguments, he raises a good point about the potential unintended consequences of the proposed changes:

My most important takeaway, however, from a “common sense perspective,” is to note yet another tried and true old-saw: “Beware of what you wish for.” I guarantee that higher hurdles, if enacted, will result in institutional investors casting way more Yes-Votes for shareholder proposals than they otherwise would – simply to give proponents a decent shot at a three-year trial-run in the polls.

Quick Poll: Your Take on The 14a-8 Proposals

Carl recognizes that not everybody will agree with his take, so he suggested that we take a poll of our readers.  My response was “Why not?” And so, because polls are an easy third blog, here we go – please take part in this anonymous poll.

bike trails

John Jenkins

February 12, 2020

Proxy Advisor Regulation: The Sublime. . .

Well, we thought that the comment process for the SEC’s proposed proxy advisor regulations was going to be a free-for-all, and it hasn’t disappointed. Lynn blogged last week about some investor comments, but representatives of other constituencies also weighed in.

Insightful comments from advocates for the proposed rules include this letter from the Society for Corporate Governance, which, among other things, highlighted the reports of its members concerning the prevalence of errors in proxy advisor reports. Leading pro-regulation advocate Bernard Sharfman also submitted a comment letter analyzing the implications of the “collective action problem” in shareholder voting that he contends is central to understanding the need for proxy advisor regulation.

On the other side of the ledger, Glass Lewis weighed in with concerns about the paperwork burdens associated with both complying with the proposed rules & satisfying the conditions for exemptions from them.  This Olshan letter on the rule’s potential implications for proxy contests is also worth checking out.

And if you’re looking for “fair & balanced,” then check out this debate on proxy advisor regulation between U of Chicago B-School Prof. Steven Kaplan & ValueEdge Advisors’ Nell Minow.

And The Ridiculous . . .

On the other hand, there’s also been some commentary on the proposed rules that can most charitably be described as  propaganda. Take this video, for example. Among other things, it blames proxy advisory firms for submitting climate change, abortion, gun control & other shareholder proposals on their “ultra left wing political agenda.”

There are all sorts of agenda-driven shareholder proposals – and not just from the left. One of my beefs about the proxy advisor industry is that it’s set up to cater to the “shareholders good, management bad” worldview of the investors who subscribe to them. But dreaming up lefty shareholder proposals isn’t part of what proxy advisors do.

Proxy advisors are business to make money, and that means giving their customers what they want – and their customers want to have the last word at the companies in which they invest.

How Did Proxy Advisor Regulation Get to Be Left v. Right?

The fundamental sales pitch in the video is that proxy advisor regulation is a political, “liberals v. conservatives” issue. While the video gets a lot wrong, it appears to have that part right. With the exception of a few prominent Republicans associated with activist hedge funds, this really does seem to have devolved into a left v. right issue.

I guess the short answer to the question of why proxy advisor regulation became a political litmus test is that it’s America in 2020 and everything is polarized. But what’s kind of interesting to me is how the sides align in this particular debate. Think about it – how is it “conservative” to restrict how capital providers use their advisors? How is it “liberal” to champion an unfettered free market for capital providers who continue to insist that their interests trump those of other constituencies, like workers?

Maybe I’m just trying to justify my own idiosyncratic position on this issue. I consider myself slightly left-of-center on many issues, but I absolutely agree that proxy advisors should be regulated. I don’t know, but perhaps the cause of the odd “left v. right” split here is the governance paradigm that views corporations as analogous to nation-states, and the presumption among progressive types that since that’s the case, shareholder democracy is a moral imperative. From my perspective, that’s a highly debatable proposition.

My own view is that the separation of ownership from control that characterizes the Berle & Means corporation is a feature, not a bug. I think that control of the world’s largest business enterprises by corporate managers is fundamentally less dangerous to society than putting them in the hands of an ever smaller number of institutions holding an ever increasing share of the world’s wealth. Managers are just greedy, so their agenda is pretty transparent. I don’t feel the same way about the agenda of public pension funds & giant asset managers.

John Jenkins

February 11, 2020

Audit & Non-Audit Fees: The Song Remains the Same?

Audit Analytics recently took a look at the audit fees paid by S&P 500 companies – and to say that they vary widely is a huge understatement. The average audit fees paid by S&P 500 companies were $13.0 million in 2018. Median fees were $8.3 million, with the lower quartile cut-off at $4.6 million & the upper quartile cut-off at $14.7 million. But what’s really eye-popping is the fee range – audit fees paid by the S&P 500 ranged from $800,000 to $133.3 million.

That degree of variation in audit fees is interesting, but so is this nugget about non-audit fees:

Roughly 9.5% of S&P 500 companies had non-audit fees greater than 25% of total fees in 2018. While high non-audit fees exclusively are not a red flag, they can serve as an indicator for investors and other users of financial statements to review what factors are contributing to the fees in each disclosed fee category and potentially look closer at services that have been characterized as non-audit work.

As Audit Analytics notes, the size of non-audit fees that auditors receive may raise concerns. Here’s an excerpt from this NYT article on the topic:

Most recently, the Securities and Exchange Commission issued a statement cautioning accounting firms on the provision of consulting services to their auditing clients. The commission, which did not challenge any specific services in its June 15 “interpretive release,” said its purpose was “to reinforce the sensitivity of corporate‐audit committees and corporate managers as well as accounting firms to the need for preserving independent audits.” Apparently, the commission is concerned because it fears that an accounting firm’s interest in keeping — or obtaining — a company as a consulting client may erode the auditor’s independence.

I guess I probably should have mentioned that this NYT article was published in 1979.  The rules are tighter now – but after more than 40 years, it seems like the music may have changed but the song remains the same.

Proxy Access: Adopted Widely, Used Only Once

Sidley recently issued a 5-year review of proxy access developments.  In addition to tracking the adoption of proxy access bylaws, the review also addresses a variety of other topics, including management & shareholder proxy access proposals, typical proxy access provisions, and proxy advisor policies on proxy access.

While noting that proxy access bylaws have been adopted by 76% of the S&P 500 and a majority of the Russell 1000, the memo also notes that such bylaws have actually been used only once. Here’s an excerpt with the details:

In 2019, for the first and only time, a shareholder included a director nominee in the proxy materials of a U.S. company pursuant to a proxy access right. In December 2018, The Austin Trust dated January 1, 2006 (with Steven Colmar as trustee) with ownership of approximately 3.8% of the common stock of The Joint Corp. filed a Schedule 14N seeking to use proxy access to nominate a director at the company’s 2019 annual meeting.

The Joint Corp. had adopted proxy access in August 2018 on standard terms after a shareholder proposal to adopt proxy access submitted by Colmar was approved (with 96% support) at the company’s annual meeting in June 2018. (The board of directors had not made a recommendation for or against the proposal.)

Both the board of directors and ISS ultimately recommended that stockholders vote for the proxy access nominee, and he was elected at the company’s May 2019 annual meeting with more than 99% support.

Tomorrow’s Webcast: Tying ‘ESG’ to Executive Pay”

Join us tomorrow for the webcast – “Tying ‘ESG’ to Executive Pay” – to hear Aon’s Dave Eaton, Mercer’s Peter Schloth, Southern’s James Garvie, and Willis Towers Watson’s Steve Seelig discuss how to handle the growing demands – and challenges – to including ESG metrics in executive compensation plans.

John Jenkins

February 10, 2020

IPOs: A Fix for Section 11 Liability?

With D&O insurance premiums on the rise & more Section 11 suits being filed in plaintiff-friendly state courts, IPO companies and their directors & officers face an increasingly hostile environment.  This Wilson Sonsini memo points out that for some companies, a direct listing may provide a practical solution for avoiding Section 11 liability by making it impossible to satisfy the statutory requirement to trace the shares purchased to those sold in the offering. This excerpt explains why:

In a direct listing, no shares are sold by the company and therefore no capital is raised. Rather, a company files a registration statement solely to provide certain of its existing shareholders, such as early stage investors and employees, the ability to resell their shares directly to the public.

The existing shareholders include both those whose shares are registered pursuant to the company’s registration statement and those whose shares are exempt from the registration requirements of the securities laws. The shareholders have complete discretion about whether to sell their shares and all are equally able to sell shares upon the company’s direct listing – i.e., starting from the moment of the opening bell.

There are no initial allocations: any prospective purchaser can place orders with their broker of choice. Because both registered and unregistered shares are available for sale upon the company’s direct listing and the sales are conducted through anonymizing brokerage transactions, it is not possible for any purchaser to trace the particular shares she bought back to the registration statement covering the direct listing. Accordingly, no purchasers have standing to assert an offering claim under the ’33 Act.

Before we all get too carried away, the memo also points out that this is a fix that only works for those few cash-rich unicorns that don’t need to raise capital in an IPO. But the memo says there’s another potential fix that could work for the rest of the pack – with a little cooperation from their underwriters. How? Just tweak the shareholder lockups to allow some shares to be sold into the market in exempt transactions simultaneously with the IPO. That would also make tracing of shares to the IPO impossible. Well, at least until Blockchain ruins things for everybody. . .

Compliance Officers: NYC Bar Says It’s Time to Turn Down the Heat

As a former junior high school football coaching super-genius, I know I would’ve done things differently in the 4th quarter of the Super Bowl if I were coaching the 49ers instead of Kyle Shanahan. While “Monday Morning QBs” like me are merely obnoxious bores, Matt Kelly recently blogged about an NYC Bar Association report that says our regulatory counterparts cause big problems for corporate compliance officers:

The New York City Bar Association released a report on Tuesday warning that compliance officer liability continues to be a worrisome part of regulatory enforcement, and called for more guidance about when a compliance officer’s conduct can leave him or her in regulators’ crosshairs.

The report focused on compliance officers working in financial services firms, although compliance officers from any industry will appreciate the points raised. Its chief complaint is that compliance officers fear growing personal liability for failures of their firm’s compliance program, when those failures might be more due to insufficient budgets, weakly structured compliance roles, or management that just doesn’t care much about the importance of a strong compliance function.

The report also complained that enforcement actions against compliance officers suffer from hindsight bias. That is, compliance officers are supposed to implement programs “reasonably designed” to prevent violations, but you can’t really assess the quality of that effort until a violation has actually happened — which creates the risk that what seemed reasonable at the time will look unreasonable after something has gone wrong.

The report recommends that regulators take a number of actions designed to provide greater clarity to compliance officers concerning what’s expected of them, and Matt’s blog also notes that some heavy hitters in the financial services industry have endorsed the report’s recommendations.

ESG Investing: It’s a Woman’s World – And It May Stay That Way

This Fortune article says that while men dominate most areas of finance & investing, socially responsible investing is a field where women are clearly in command:

It was the usual setup for panelists at a finance conference talking about making smart investments. They were all the same gender. In this case, all women. That probably wasn’t surprising, considering the event was hosted by the United Nations-backed Principles for Responsible Investment. Still, Karine Hirn, founding partner at East Capital in Hong Kong, watched in admiration. She celebrated on Twitter: “Climate finance is at last opening up perspectives for great talent within the otherwise very unbalanced world of finance.”

Men rule that world, except for one key field: the fast-growing arena of what’s known by the shorthand ESG. There’s big money pouring in, and there are big names promoting the idea of applying environmental, social and governance standards to the business of making money.

As more money has been poured in to ESG investments, the field has attracted more men – but women may have a key advantage here: a substantial installed base of talent. Companies are fighting for ESG investing talent, and that battle favors those who’ve been involved for years – many of whom are women.

John Jenkins

February 7, 2020

The “Nina Flax” Files: Goals for 2020

I’m fresh off a high from attending Oprah’s “2020 Vision Tour” last month (yes, she visited Minnesota in January, maybe because as this video shows she’s a huge fan of Mary Tyler Moore).  So I’m extra excited to share the latest “list” installment from Nina Flax of Mayer Brown (here’s the last one):

Another new year, another time many of us are setting goals and making resolutions. As a quick recap, the main goal I shared last year was reading more books for pleasure. Of the 12 books on my list, I read 3 – Bad Blood, The Girl Who Smiled Beads and The Queen’s Poisoner (and the rest of the Kingfountain series). I also read the Crazy Rich Asians series and one other book – bringing me to a grand total of 14. Which I think is a good first step to prioritizing reading for pleasure, but certainly improvable. So for this new year, I decided to double down on reading, formalize watching less TV (because since it was a “soft” goal last year, I of course let it slip) as well as numericize other things (because I clearly do better with specifics and measurements). For accountability’s sake (and thank you for giving me that feeling around reading last year!), here is what I’ve landed on:

1. Read More Books For Pleasure. My goal for this year is 28. I am hoping I exceed this number, but we will see… I decided to not choose my books in advance this year, because doing so last year actually discouraged me a bit. I tried to force myself to read ones from my list that just were not clicking. Where in previous years I would quickly move on if I wasn’t absorbed in the first chapter or two, this past year I wasted time trying to force myself to read words I clearly was not interested in. Several books started and not finished despite more time spent = lesson learned!

2. Work Out At Least Once a Week. Working out at all was a goal for last year. I did work out – some. But now that I am at an age where I definitely do not feel like I’m 20 anymore, I want to take the fact that I only have one body and want it to be healthier for longer more seriously. Plus, framing this as something I’m doing also for the sake of the child motivates me. Plus, I have a friend who said she wants to do this as well, and we agreed we would hold each other accountable.

3. Watch Less TV. I am going to try to limit TV, and want to try to watch only as I am working out. So if I want to finish watching the remainder of The Originals series (I have seen like every other vampire thing out there, and had not yet seen this, so I started over the holiday season, which = bad news for my 2019 soft goal), I better get on a bike or treadmill!

4. Track What Matters Most. One of my funniest, most driven friend’s father is Marshall Goldsmith, who is a leading business educator and coach. I heard many moons ago about his daily questions spreadsheet. I have wanted to implement something like this, but have not previously prioritized it. This year, it is a priority. I don’t think I’m going to have all of the questions he does (I really do not want to track my weight every day), nor will I have someone calling me every day to track for me (how cool would that be though?!), but I have come up with a few things I would like to watch more closely. Some on my list: Was I there at bed time for my son? Did I speak to my parents? Did I say or do something nice for my husband? Did I exercise? Did I watch TV when I was not exercising? Did I spend time reading for pleasure? As you can see, some redundancy built in to encourage meeting my other goals!

As in 2019, I will end this post with a quote from someone I knew as a child – Each year you should take a long walk, make a new friend and read a good book. Here’s to 2020 being great.

Nasdaq Clarifies “Closing Price” for Transactions Other than Public Offerings

Last week, this Notice of Filing and Effectiveness says that Nasdaq filed a proposed rule change clarifying the term “closing price” in Rule 5635(d)(1)(A) relating to shareholder approval for transactions other than public offerings. The rule change clarifies that closing price means the Nasdaq Official Closing Price (as reflected on The Notice says there may have been some confusion and that Nasdaq believes this change will reflect Nasdaq’s original intent when adopting the amendment to Rule 5635(d) in September 2018.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members.  Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply entering their email address on the left side of that blog. Here are some of the latest entries:

– D&O: Common Law & Statutory Claims Aren’t Covered “Securities Claims”

– Shareholder Engagement Trends

– Auditor Independence: What Audit Committees Should Watch For

– 5 Tips For Creating a “Tech-Savvy” Board

– Executive Successions: Include Process for “SOX” Certifications

– Lynn Jokela

February 6, 2020

Dave & Marty: Revisiting Risk Factors & Musical Tastes

Don’t miss the latest episode of the “Dave & Marty Radio Show” – in which Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics in this 24-minute episode include:

– Recommendations for tuning up your risk factors

– Early trends in the shareholder proposal season

– Evolving musical tastes in a world of technological innovation

Newer Sustainability Reporting Frameworks are Picking up Global Endorsements

Here’s a note from Rhonda Brauer:

This year has already seen significant endorsements of the newer sustainability reporting frameworks:  the Sustainability Accounting Standards Board (SASB) and the Task Force for Climate-related Financial Disclosures (TCFD).

As Lynn blogged last month, Blackrock’s annual letters from CEO Larry Fink note that Blackrock is more strongly encouraging its portfolio companies to provide sustainability disclosure in accordance with SASB’s industry-specific standards and the TCFD’s recommendations, including a company plan for operating under a global warming scenario of 2 degrees Celsius or lower.  To back up its “encouragement”, Blackrock will increasingly vote against management and boards whose companies aren’t “making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”

A related endorsement came out of Davos last month, where the World Economic Forum’s International Business Council (IBC) – which includes 140 large global companies — supported the development of an ESG reporting framework that also relies on existing disclosure frameworks, including SASB and TCFD.  A draft framework has been proposed by the Big Four accounting firms, which have actively supported many of the sustainability reporting initiatives and are well placed to do third-party audits of the corporate ESG disclosures.

This growing support for SASB and TCFD is consistent with the report that Glenn Davis and I co-authored last September, “Sustainability Reporting Frameworks: A Guide for CIOs”, for the Council of Institutional Investors (CII).  The text of this Guide is intended to be a quick read for pension fund CIOs and other readers, who want to learn:

  1. The main differences between the primary reporting frameworks (summarized further in a brief Appendix)
  2. Related considerations for fund CIOs and their staffs
  3. Open issues for the future

For ESG reporting geeks who want more, the 50+ footnotes link to related research and articles, plus helpful disclosure examples.

Skipped Class the Day Insider Trading was Covered?

Insider trading stories really do make me shake my head in disbelief and I did that when reading a recent story.  In this case, the SEC caught up with a recent college grad for insider trading – within the grad’s first year on the job as a junior investment banker.  The action seems pretty cut and dry –  within the first year out of college and while working as a junior investment banker, the grad learned of a pending deal, bought call options and sold them for a profit shortly after the deal was announced.  Here’s an excerpt from the SEC’s press release:

The grad agreed to settle with the SEC and consented to the entry of a judgment permanently enjoining him from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and ordering him liable to pay disgorgement of his ill-gotten trading profits, with interest, which will be offset by the amount of any forfeiture ordered against the grad in a parallel criminal action. In a separate administrative proceeding instituted on December 23, 2019, the grad consented to be barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in any penny stock offering.

On the same day the SEC filed its action, the U.S. Attorney’s Office for the Southern District of New York announced parallel charges against him. The grad pleaded guilty in the criminal action, and in January 2020 he was sentenced to five years of probation and ordered to forfeit approximately $126,000.

According to this story, the grad is reportedly the former study body president at NYU’s Stern School of Business and at one time gave advice to first-year students to “hold on to your values”.  Not sure what values this person had in mind.  It’s hard to imagine that someone wouldn’t understand the concept of insider trading even if the person missed class the day the prof covered it.  But, it’s sad to think this could be another case where the person just thought they wouldn’t get caught…

Lynn Jokela

February 5, 2020

Shareholder Proponent Turns to Court

A shareholder proponent has filed a lawsuit against a Montana energy company in an attempt to ensure the proponent’s proposal is included on the company’s proxy ballot. The proposal asks the company to end using coal-fired generation of electricity from a power plant it operates no later than the end of 2025 and to replace the electricity with non-carbon emitting renewable energy.

The lawsuit follows the company’s no-action request to the SEC on grounds that the proposal relates to the company’s ordinary business operations and that the proposal contains materially false or misleading information about the company’s carbon emission rate.  As shown in the SEC’s chart detailing SEC responses to shareholder proposal no-action requests, the SEC has “no view” and indicates that litigation is pending.

Last year, Liz blogged about how the NYC Comptroller filed a lawsuit as it sought to ensure a proposal related to greenhouse gas emissions would be included on a company’s proxy ballot.  In that case, SEC correspondence shows the company withdrew its no-action request and included the proposal on its ballot.  Voting results for the company’s shareholder meeting show the proposal failed to receive majority support.

Time will tell how the proponent fares in federal court for the district of Montana and/or whether the company relents and includes the proposal on its ballot.  The company’s no-action request says that the company intends to file its proxy materials on or about March 6, 2020 – stay tuned.

IFRS: Proposed Changes Strike a “Reg G” Note

At the end of December, the International Accounting Standards Board proposed new rules that would impact companies audited under International Financial Reporting Standards. This Davis Polk memo summarizes the proposal – here’s an excerpt:

In an interesting departure from U.S. generally accepted accounting principles, IASB is proposing to require companies to disclose information about non-GAAP measures in a note to their financial statements when such measures (i) are used in public communications outside financial statements; (ii)complement totals or subtotals specified by IFRS standards; and (iii) communicate to users of financial statements management’s view of an aspect of the company’s financial performance. Companies would have to explain why such measures provide useful information, how they are calculated, and how they relate to the most comparable profit subtotal specified by IFRS, and would also have to provide a reconciliation to the IFRS-mandated measure. This requirement would be similar to Item 10(e) of Regulation S-K, which currently governs such measures, but would be substantially less prescriptive.

January-February Issue: Deal Lawyers Print Newsletter

The January-February Issue of the Deal Lawyers print newsletter is available now and focuses on Earnouts. Learn how to survive M&A’s “Siren Song.” This edition of the Deal Lawyers print newsletter covers:

– Overview of Earnouts
– Prevalence of Earnouts & Common Terms
– Tax & Financial Reporting Issues
– When Earnouts Are “Securities”
– The Risk of Post-Closing Disputes
– Earnout Litigation: Plenty to Fight About
– How Much Protection Does Good Documentation Provide?
– Key Issues in Structuring & Negotiating an Earnout
– Conclusion: The Sirens Still Sing

Here are FAQs about the Deal Lawyers print newsletter – including how members of who also subscribe to the print newsletter can access the issues online.

If you encounter a problem or if you would like help, please call us at 800.737.1271 or email

– Lynn Jokela 

February 4, 2020

CAMs vs. Critical Accounting Estimates: What’s the Difference?

This memo from the Journal of Accountancy gives me LSAT flashbacks. Based on remarks from an SEC Professional Accounting Fellow, it explains that while critical audit matters tend to be a subset of critical accounting estimates, some CAMs have not been reported as critical accounting estimates by management. Here’s an excerpt:

For example, one auditor reported that evaluation of the identification of related parties and related-party transactions was a critical audit matter, but there wasn’t a critical accounting estimate related to that topic.

Sometimes, Collins said, an auditor identifies a critical audit matter that is a component of a related critical accounting estimate. For example, one critical audit matter related to a goodwill impairment analysis for a specific reporting unit that was considered at risk for impairment. Management’s critical accounting estimate, meanwhile, related to goodwill impairment more broadly.

The memo also quotes SEC Deputy Chief Accountant Marc Panucci as urging auditors and companies to approach critical audit matters as a blank sheet of paper each year. Often, they might end up being the same from year to year, but auditors won’t know that until they’ve considered the facts & circumstances of each each individual audit.

Disclosure Reform: Are ESG Risks “Material”?

Over the past couple of years, the SEC has taken a few small steps toward “disclosure reform” – with its 2018 “Disclosure Update & Simplification” and 2019 “Fast Act Modernization” amendments – as well as with its more recent proposal to modernize Items 101, 103 and 105 of Reg S-K. Although the most recent proposal drew thousands of comments – including from Big Yoga! – none of the recent or anticipated rule changes would overhaul ESG risk disclosure in the way that some investors say they want.

One of the main objections to even considering rules on this topic is that the info wouldn’t be material. To get a sense of who shares that view, a recent study published in the Villanova Law Review takes a closer look at the comment letters submitted in response to the SEC’s 2016 Concept Release – apparently there were 25,000 comments but only 375 “unique” responses. Here’s an excerpt:

The findings here confirm that concerns about investors’ disclosure overload are overblown and indeed, outdated. While many investors support some streamlining of risk-related disclosure, most investor comments focus on the under-disclosure of material information, not the reverse.

The empirical results discussed in Part III below confirm that respondents’ support for, or opposition to, ESG disclosure reform has less to do with ESG and more to do with their underlying views on materiality, the value of prescriptive disclosure, and how satisfied they are with the current state of reporting.

At the same time, this study also finds a surprising level of agreement among respondents on a number of the SEC’s proposals to simplify risk-related disclosures, particularly with regard to market risk disclosures and MD&A.

What I found refreshing was that the study confirmed the SEC, investors and business community all agreed that risk disclosures are extensive but frequently generic and boilerplate – and there was general agreement for more principles-based disclosure. The study provides another entry point for conversations about ESG risk disclosure – e.g., consideration needs to be given to not only increased compliance costs that companies would incur with expanded disclosure but also costs to investors of under-disclosing material ESG information.

Tomorrow’s Webcast: “Conflict Minerals – Tackling Your Next Form SD”

Join us tomorrow for the webcast – “Conflict Minerals: Tackling Your Next Form SD” – to hear our own Dave Lynn of Morrison & Foerster, Ropes & Gray’s Michael Littenberg, Lawrence Heim of the Responsible Minerals Initiative and Deloitte’s Christine Robinson discuss what you should now be considering as you prepare this year’s Form SD.

Lynn Jokela

February 3, 2020

“Proxy Advisor” & “Shareholder Proposal” Regs: Comments Are In!

With the comment period for the SEC’s proposed rules on regulating proxy advisors and the shareholder proposal process closing today – February 3rd – let’s take a peek at some of the comment letters submitted so far on these topics – available here and here, respectively.

First, among other things, T. Rowe Price has asked the SEC to refocus on proxy infrastructure – e.g. end-to-end vote confirmation – and to go back to the drawing board.  That’s similar to recent recommendations from the SEC’s Investor Advisory Committee – I blogged last week on our “Proxy Season” Blog that the Committee wants the SEC to revisit its priorities and re-do the proposals.

Some letters focus primarily on the proposal dealing with regulation of proxy advisors (see this letter from Value Edge Advisors, Nell Minow), while others focus primarily on the proposal dealing with the Rule 14a-8 shareholder proposal process (like this one from First Affirmative) – and some address both (e.g., Neuberger Berman).

The Council of Institutional Investors issued a press release criticizing the proposals and then submitted two letters, one on the regulation of proxy advisors and another on the Rule 14a-8 shareholder proposal process, each is 65 pages long.  Here’s an excerpt from CII’s press release:

The two proposals are the most significant attempt by the SEC to limit the voice of shareholders since the Commission was created in 1934. They would tighten regulation of proxy advisory firms and shareholder proposals in ways that CII believes are fundamentally flawed and unnecessary. If adopted, both proposals would introduce complexity and micromanagement in proxy voting and in shareholder-company engagement processes that have worked well for decades. CII urges the SEC to withdraw both proposals and focus instead on festering problems in the proxy voting system.

Here are a few other letters worth noting:

Boston Trust Walden (signatories include, among others, As You Sow, Mercy Investment Services, NYC Comptroller, Trillium Asset Management)

Principles for Responsible Investment (sign-on letter – signatories include, among others, BMO Global Asset Management, ClearBridge Investments, Legal & General Investment Management, MFS Investment Management, New York State Comptroller, Wellington Management Company)


Washington State Investment Board

Aside from traditional comments to the SEC, at least one asset manager has criticized the proposed rules in a letter to clients – here’s a client letter from Daniel Loeb’s Third Point (comments on rule proposal on pg 4).

As reported in the NY Times and Reuters, in a speech last week, SEC Commissioner Roisman defended the proposals and said that some of the comments are based on misinformation but he is “open to changing his mind” on the direction of the proposals.

And, even though the comment period closes today, comments will continue to roll in…

CalPERS and CalSTRS Report on Climate-Related Financial Risk

CalPERS has issued its first report on climate-related financial risk of its public market portfolio, including the fund’s alignment with the Paris Agreement and California climate policy goals and the exposure of the fund to long-term risks.

Among information included in the report is a summary of public market exposures and anticipated climate-related financial risks in sectors noted by the TCFD as most exposed to climate risks and opportunities.  The report also provides an analysis of how CalPERs work on climate change is aligned with the Paris Agreement and California climate policy goals and it outlines some of CalPERS engagement activities.  Engagement activities have included meeting in person with company management and in some cases board members about climate risk.

CalSTRS also filed its first report on climate-related financial risk under California Senate Bill 964.  CalSTRS’ report, titled “Green Initiative Task Force“, includes additional content compared to prior reports in that it says the report analyzes CalSTRS climate risk exposure and describes how it supports California’s climate goals.  The report also is structured to align with the TCFD framework of recommended climate-related financial disclosures – governance, strategy, risk management, and metrics and targets.

The reports also summarize CalPERS and CalSTRS proxy voting on environmental proposals during the 2019 proxy season – each fund typically supports proposals asking for improved environmental risk reporting unless it believes that the company already provides adequate disclosure about these risks.  In 2019, CalPERS and CalSTRS each supported 54% of environmental proposals.

As noted in the reports, California Senate Bill 964 requires CalPERS and CalSTRS to publicly report this information every three years until January 31, 2035.  Because this was CalPERS first report, in the report CalPERS states that it welcomes the California legislature’s feedback.  So, let’s check back in three years and see how the report has evolved.  In the interim, CalSTRS report says that it will provide an annual update highlighting its low-carbon transition activities.

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Lynn Jokela