September 3, 2020

Whistleblower Rulemaking: Cancelled…For Now

Earlier this week, the SEC announced two pretty substantial whistleblower awards – a joint $2.5 million award and a $1.25 million award – which looked like a lead-up to yesterday’s highly anticipated open meeting, at which the Commission would consider adopting amendments to its whistleblower program. Late Tuesday, however, the SEC posted a cancellation notice for the open meeting, and while sometimes the Commission still moves forward with rule adoption in that scenario, it’s not the case this time around (at least so far).

While the rulemaking delay might be a function of holiday schedules, given the controversial nature of the proposed amendments, this WSJ article notes that it’s the second time rulemaking has been called off and speculates that the Commissioners may not have reached consensus quite yet. The article summarizes the history behind the proposed changes – here’s an excerpt:

The regulator unveiled the proposed changes in 2018. Under the whistleblower program, tipsters who provide information that leads to a successful enforcement action against a company can be eligible for an award of between 10% and 30% of the overall monetary sanction.

Whistleblower advocates have supported changes that the SEC says would make it more efficient in processing claims, including one that would allow it to ban tipsters who provide false information or make repeated, frivolous claims.

But they have mounted a vocal opposition to several other amendments, including one that would allow the SEC to downsize awards for information that leads to fines of $100 million or more, simply because of their size. The amendment would disincentivize the highest-paid Wall Street insiders from providing information, whistleblower lawyers have said.

Whistleblower advocates have also criticized new guidance that could restrict the type of information whistleblowers can be rewarded for providing, and a new rule that disqualifies tipsters who don’t submit a special form before contacting the SEC.

DOL Takes Another Crack at ESG

Earlier this week, the US Department of Labor issued this proposal – to clarify how ERISA fiduciaries should exercise their proxy voting and other shareholder rights under the statute’s “investment duties” section. In a defensive move against “ESG” voting, the proposal says that fiduciaries can’t vote any proxy unless they determine that the matter has an economic impact on the plan. And as a follow-up to the SEC’s proxy advisor rules, the proposal also outlines “permitted practices” that fiduciaries are able to follow when voting, such as applying proxy voting policies. This Stinson blog gives more background – here’s an excerpt:

The DOL is concerned that some fiduciaries and proxy advisory firms may be acting in ways that unwittingly allow plan assets to be used to support or pursue proxy proposals for environmental, social, or public policy agendas that have no connection to increasing the value of investments used for the payment of benefits or plan administrative expenses, and in fact may have unnecessarily increased plan expenses

The Department has issued sub-regulatory guidance and individual letters over the years affirming that, in voting proxies and in exercising other shareholder rights, plan fiduciaries must consider factors that may affect the value of the plan’s investment and not subordinate the interest of participants and beneficiaries in their retirement income to unrelated objectives. The Department believes, however, that aspects of the guidance and letters may have led to some confusion or misunderstandings. The proposal is designed to address those issues through a notice and comment rulemaking process that will build a public record to help the Department develop an improved investment duties regulation with the goal of ensuring plan fiduciaries execute their ERISA duties in an appropriate and cost-efficient manner when exercising shareholder rights.

According to a DOL official, the proposal would clarify Employee Retirement Income Security Act fiduciary duties for proxy voting and monitoring proxy advisory firms. In addition, the proposed rule would reduce plan expenses by giving fiduciaries clear directions to refrain from spending workers’ retirement savings to research and vote on matters that are not expected to have an economic impact on the plan.

This proposal is different than the proposed rule on “Financial Factors in Selecting Plan Investments” that the DOL issued in late June and has drawn over 1,000 comment letters – many in opposition. Both this proposal and the one from June are proposed amendments to 29 CFR 2550.404a-1. This week’s proposal states:

Both proposals include a proposed paragraph (g), but the Financial Factors in Selecting Plan Investments proposal proposes an effective date of 60 days after publication of a final rule. Depending on the publication date of the respective final rules, the Department may need to revise paragraph (g) to separately effectuate the final rules.

Reg S-K Modernization: Interplay with Form 10-K “Description of Business”

We’ve been posting a ton of memos about last week’s Reg S-K amendments – including this one from Gibson Dunn that includes perspectives on what the changes mean from a practical perspective and potential problems (as well as a summary table and blackline of the Reg S-K items). In addition, we’ve been fielding quite a few questions about the mechanics of last week’s Reg S-K amendments in our Q&A Forum – like this question about the interplay between the new rules and Item 1 of Form 10-K (#10,433):

The new rule amendments adopted by the SEC last week require disclosure of information material to an understanding of the general development of a company’s business and replace the 5-year (or 3-year for SRCs) time period specified in S-K 101(a) with a materiality standard. How is this rule change intended to apply to Form 10-Ks? There is no discussion in the proposing or the adopting release, but Form 10-K, Item 1. Business is very clear that “the discussion of the development of the registrant’s business need only include developments since the beginning of the fiscal year for which this report is filed.”

Does anyone have views on whether this was an oversight in the new rulemaking? The discussion in both the proposing and adopting releases appears to suggest that the new Item 101(a) amendments apply to all reports/registration statements subject to Item 101(a). But, there was no attempt in the rulemaking to amend the Form 10-K instruction quoted above. Therefore, based on a very plain and clear reading, the Form 10-K discussion is only required to include a discussion of the general development of the business since the beginning of the last fiscal year.

Do others agree / have other thoughts?

John responded:

That’s an interesting observation. I agree that there appears to be a disconnect between the new language of Item 101(a) and the current requirements of Item 1 of Form 10-K. In reading the adopting release, the intent of revised Item 101(a) appears to be that companies must either provide a full blown, principles based description of the development of the business that addresses the matters identified in Item 101(a)(1), to the extent material, or simply provide an update & incorporate the more complete disclosure by reference along with the link required by Item 101(a)(2). But the Form 10-K line item continues to require updating disclosure addressing only the fiscal year covered by the report, so some sort of clarification (or a revision to the 10-K line item) would be helpful.

For a fair number of companies, this issue probably isn’t going to matter very much. That’s because many companies have a practice of continuing to provide a discussion of the general development of their business over the previously required five year period in their 10-K filings, rather than just providing updating disclosure covering the most recent fiscal year. For example, check out GM’s comment letter on the rule proposal in which it objected to the proposal to permit only updating disclosure. GM’s letter noted that “this rule change would have a minimal impact on GM’s current disclosure,” and stated the company’s belief that “the entirety of this disclosure should be included in each filing.”

Liz Dunshee