Yesterday, in response to a directive from SEC Chair Gary Gensler, Corp Fin announced that:

1. It’s considering whether to recommend that the Commission revisit the proxy advisor rules that were adopted last summer – which would require proxy advisors to meet new conditions beginning December 1st of this year – and the Commission-level interpretive guidance that was issued the year before.

2. The Staff won’t recommend enforcement action to the Commission during the period in which the SEC is considering further regulatory action.

3. In the event that new regulatory action leaves the 2020 exemption conditions in place with the current December 1, 2021 compliance date, the staff will not recommend any enforcement action based on those conditions for a reasonable period of time after any resumption by Institutional Shareholder Services Inc. of its litigation challenging the 2020 amendments and the 2019 Interpretation and Guidance. (ISS v. SEC, 1:19-cv-3275 (D.D.C.)

This is the latest chapter in the long, ongoing saga over proxy advisors. The 2020 rules and 2019 guidance define proxy advice as a “solicitation” and would require proxy advisors to disclose conflicts of interest and adopt policies that allow for companies to review & respond to voting recommendations, in order to be exempt from the information & filing requirements that would otherwise apply to a solicitation. The amendments also specify what circumstances would cause proxy advice to be “misleading” within the meaning of anti-fraud rules.

The rules were celebrated by many companies, but proxy advisors and their investor clients criticized the proposal process, took issue with the Commission’s statutory authority, and felt that the substance of the rules would delay and impair the proxy voting process. This, in turn, made some companies worry that the proxy voting timeline would become even more compressed. As mentioned in yesterday’s Staff statement, ISS even sued the SEC over its efforts to regulate the industry, and appeared to be moving forward with that proceeding as recently as last August.

In light of those issues and the fact that the compliance date has not yet arrived, I’ve been wondering whether we’d see some steps to unwind (or not defend) the rules. Some are pondering whether this is the beginning of a trend of “back & forth” rulemaking, which would create uncertainty.

Commissioners Hester Peirce and Elad Roisman issued a response to Chair Gensler’s statement yesterday, saying that the 2020 rules were the result of an unassailable process and that there is no data yet to evaluate whether the rules work in practice. Meanwhile, CII called yesterday’s directive “Christmas in June for investors.”

– Liz Dunshee

The premise of one of my favorite parenting books is that standard negotiation techniques – logic, bribes, threats – aren’t going to deliver when it’s 8pm and my 3-year-old has been refusing to leave the playground for the last 45 minutes. In that situation, the only way out is to use a Jedi mind trick to reverse engineer and validate his deepest desires, and make the ride home even more magical and exciting than another trip down the 2-story slide.

It seems like that’s kind of the position that the SEC finds itself in with Elon Musk, especially after reading this WSJ article yesterday about the Enforcement Division’s attempts to follow up on tweets that the Commission believed went against its 2018 settlement with the Technoking. Here’s an excerpt:

From the start, the social-media policy was difficult for the SEC to enforce. The SEC accused Mr. Musk of violating the rules in February 2019 and asked a Manhattan federal court to consider holding him in contempt. The judge signaled she wanted the two sides to settle the dispute and they agreed to modify the policy by clarifying which topics required pre-approval. Those were identified as including communications about production figures, new business lines and the company’s financial condition.

Within months, the SEC was writing Tesla again, questioning a tweet Mr. Musk wrote on July 29, 2019, that stated: “Spooling up production line rapidly. Hoping to manufacture ~1000 solar roofs/week by end of this year.”

It’s not surprising that this notion of “pre-clearing” tweets isn’t playing out smoothly – the question all along has been, what can the SEC do about it? The WSJ says that the latest dispute, over a May 2020 tweet, appears to have ended in a stalemate. The Enforcement Division encouraged the company to apply its disclosure controls & procedures, Tesla said it hadn’t done anything wrong, the SEC threatened to go back to court, and nothing happened.

Yes, the SEC is still working through the permissible ways for companies to use social media. The board and Elon are also defendants in shareholder suits because of these tweets. Maybe for this high-profile CEO, someone also needs to find a way to make compliance as fun as public taunting.

– Liz Dunshee

The BlackRock Investment Institute has relaunched its “Geopolitical Risk Dashboard” (there’s also an interactive version) – adding 4 new risks to the “top 10”:

– COVID-19 resurgence: The fight against COVID-19 falters in the developed world.

– Climate policy gridlock: Developed economies fail to take policy actions consistent with their goals to reach net-zero emissions.

– Emerging markets political crisis: Failure to arrest the COVID-19 pandemic severely stresses EM political systems and institutions.

– Global technology decoupling:Technology decoupling between the U.S. and China significantly accelerates in scale and scope.

The unique thing about BlackRock’s dashboard is that it includes indicators that show whether the risks are on investor radar screens, and it analyzes how much markets have already priced in each risk. BlackRock finds that investors have been feeling pretty good since the change in the US administration, and attention to geopolitical risks is below the average of the past four years. Unfortunately that means that if some of these risks materialize, they could catch the markets off-guard.

– Liz Dunshee

This HLS blog from Nell Minow predicts that we’ll see more ESG-focused proxy fights in light of the results last week at ExxonMobil. Here’s her concluding recommendation:

Every board should have a committee that oversees investor communications and lead directors should be liaisons for shareholder concerns. They should expect a lot more interest from shareholders in the quality of the board, with emphasis on independence that goes beyond resume disclosures. Wise boards will solicit suggestions from investors and make sure that all directors know that their obligation as fiduciaries is to shareholders, not executives, and that their actions make that message clear to shareholders as well. Engine No. 1 is the first of a new kind of activists; its success makes it clear it will not be the last.

– Liz Dunshee

Internal audit oversight is typically part of the audit committee’s charter because of listing exchange rules. It’s also part of ensuring the directors are getting quality info about the company’s risk profile & financial results.

The Institute of Internal Auditors recently launched a tool to help audit committees make sure the internal audit function is working well. Here are the sample questions it proposes the committee consider with regard to risk management:

– Does the IA activity expand the board or AC’s knowledge about current and emerging risks to the organization?

– Are there clear links between the audit plan and the organization’s strategic objectives and risks?

– Does the CAE explain to the AC how the audit plan covers challenging and critical areas, including emerging or existing risk areas that will or could impede the organization’s objectives?

– Liz Dunshee

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– Liz Dunshee