If you’re interested in a deep dive into the comments on climate change disclosure received in response to Commissioner Lee’s invitation, be sure to check out this Davis Polk memo, which provides an overview of the type of commenters who weighed-in, summarizes the most salient topics raised in comments, and discusses the SEC’s potential next steps. This excerpt lists the topics covered by commenters that the memo summarizes:
– Does the SEC have authority to mandate climate disclosures, and would doing so survive the cost-benefit analysis required for rulemaking?
– Given a perceived desire for both meaningful and comparable climate disclosures, which types of disclosure standards (e.g., general or industry-specific standards, a single global standard or multiple standards around the world and a standard drawing on existing third-party frameworks or a novel framework) should the SEC use for any mandatory climate disclosure regime?
– If the SEC mandates climate disclosures, what information should the SEC require to be disclosed?
– Should the SEC provide protection from liability, whether through a safe harbor, having climate disclosures be furnished rather than filed or by requiring disclosures on a specialized form outside of 10‑Ks and 10-Qs?
– Should climate disclosures be subject to the same level of rigor as other types of SEC disclosures, such as financial disclosures, by imposing requirements for audit or assurance or internal controls?
– If the SEC creates a new disclosure mandate, should its scope include not only public companies but also private companies and not only climate disclosures but also ESG disclosures more broadly?
The memo also includes an appendix summarizing 30 letters submitted by high-profile academics, business and government representatives, standard setters and sustainability advocates.
One of the more provocative items contained in Commissioner Lee’s invitation to provide comments on potential climate change disclosure rules was this question:
What climate-related information is available with respect to private companies, and how should the Commission’s rules address private companies’ climate disclosures, such as through exempt offerings, or its oversight of certain investment advisers and funds?
Not surprisingly, this has attracted a lot of comments – pro and con. Ann Lipton recently blogged about the response to the possibility of private company disclosure, and included excerpts from comments submitted by some high-profile players, including representatives of private equity and major investors. Check the blog out – you may find some of their views to be a bit different than you might have expected.
According to a recent study, there is an epidemic of regulatory non-compliance in crowdfunding offerings so great that the author says it calls into question the continued viability of the crowdfunding experiment. Here’s an excerpt from the abstract:
The JOBS Act of 2012 launched a number of experiments in the regulation of securities offerings. The exemption it created that allows online equity crowdfunding offerings to retail investors garnered the most attention, in part due to widespread concerns regarding the potential for fraud and abuse. More than three years after the first crowdfunding offering, no empirical analysis of compliance has been conducted that would debunk or confirm critics’ concerns. This Article plugs that gap by analyzing a sample of 362 crowdfunding offerings and evaluating compliance with some of crowdfunding regulation’s simplest, most fundamental regulatory requirements.
During the first 13 months of crowdfunding, almost half of issuers failed to file complete financial statements that met the applicable standard of review, barely one-quarter of issuers that were required to file two annual reports did so, less than 15% of issuers timely filed the final amount raised in their offering, and the only data point on Form C that was reviewed was, far more often than not, substantially inaccurate. Finally, the third-largest crowdfunding funding portal may be violating the prohibition against a funding portal’s giving advice. In short, these findings reveal a deeply embedded culture of noncompliance.
In light of the SEC’s decision last year to raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million and to liberalize the rules on investments by both accredited & non-accredited investors, these allegations are pretty alarming. They become even more alarming after taking into account projections that the global crowdfunding market will grow by nearly $200 billion over the next four years.
We’ve previously blogged about Corp Fin’s push for more disclosure about supply chain finance arrangements & FASB’s decision to study a disclosure requirement. According to this WSJ article, FASB has decided to move forward with the goal of putting together a rule proposal by the end of this year. This excerpt describes supply chain finance arrangements and some of the reasons why formal disclosure requirements are under consideration:
As part of these programs, banks typically provide funding to pay a company’s supplier of goods and services. The supplier is paid earlier, but gets less than it would have without the agreement. The company pays the amount it owes the supplier to the bank, usually later than it would have paid its supplier. The bank then keeps the difference in exchange for its services. U.S. companies currently aren’t obliged to disclose supply-chain financing arrangements in their financial filings, which can make their liquidity position appear stronger than it actually is.
The tool has come under greater scrutiny from regulators and accounting rule-makers amid its growing popularity in recent years. Greensill Capital, a U.K.-based supply-chain finance provider, in March filed for insolvency after auditors of the company’s bank arm were unable to find evidence of collateral that one of its customers used for borrowing. Supply-chain financing was also a primary contributor to the 2018 implosion of U.K. firm Carillion PLC, according to Fitch Ratings.
The scope of the potential disclosure requirement was laid out at FASB’s June 30th meeting and summarized in FASB’s most recent project update. Companies would be required to describe the overall arrangements and would use certain contractual terms (such as the buyer confirmation) as indicators that an arrangement has been established. Disclosure would be required of the key terms of the arrangement as identified by management and the amount that the buyer has confirmed has been made available for suppliers to elect to be paid early for as of the end of reporting period. A description of where that amount appears on the balance sheet would also be required.
We’ve posted the transcript for the recent DealLawyers.com webcast: “The Leveraged ESOP as an Exit Alternative.” This program covered a lot of ground about an attractive alternative to a sale for many privately held companies. Shawn Ely of Lazear Capital Partners, Steve Goodman of Lynch, Cox, Gilman & Goodman, PSC & Steve Karzmer of Calfee, Halter & Griswold LLP addressed a number of topics, including
– Overview of a Leveraged ESOP
– Tax Aspects of Leveraged ESOPs for Sellers & the Company
– Structuring and Financing an ESOP Deal
– Corporate and ERISA Fiduciary Considerations
– Restrictions and Post-Closing Obligations
Liz blogged last December about companies potentially being caught in the middle of the vaccine debate. With increased attention on boards relating to human capital and worker safety matters, this likely pulls considerations about vaccines into the conversation. As companies – and law firms – make plans about possibly returning to the office, many companies are wondering whether they can or should mandate vaccines for employees that do return to the office. One aspect of mandatory vaccination programs that hasn’t received a lot of attention relates to the board and its oversight role. A well-timed memo (see pages 4-7) from Sidley Austin provides a discussion about considerations for boards relating to potential company Covid-vaccination programs.
As noted in the memo, boards will need to consider various risks such as litigation and reputational risk, and whether a company chooses to require employees be vaccinated will depend on, among other things, their specific circumstances and tolerance for risk. Here’s an excerpt with discussion about the board’s oversight role with respect to company Covid vaccination programs:
Oversight of the program may be undertaken by the full board or handled by a board committee—most logically the committee tasked with overseeing human capital management matters. The board (or committee) should assess whether management is taking appropriate action with respect to the vaccination program—but also office reopening plans and workforce strategy more broadly—and provide guidance and direction to the extent the board determines is prudent. The board should also ensure that there is a robust, confidential system in place for employees to raise concerns and a firm policy against retaliating against an employee who refuses to be vaccinated. To be most effective, the board must stay well-informed of developments within the corporation as well as the rapidly changing situation externally.
Liz blogged a couple of weeks ago about of Rule 10b5-1 plan “cooling off” periods – it’s one topic being evaluated as a potential reform to Rule 10b5-1. A recent King & Spalding memo discusses potential reforms that the SEC will most likely consider and one involves increased public disclosure of 10b5-1 trading plans. Today, company practice varies when it comes to public disclosure of trading plans, one reason being that disclosure requirements about such plans are minimal. The memo says it’s likely any Rule 10b5-1 reform proposal will include enhanced disclosure requirements and a challenge could be determining the level of detail for disclosure. Here’s an excerpt with thoughts on that:
The more difficult question for the SEC will be the level of detail required to be disclosed. While disclosure of basic plan details – such as the date of adoption, the date range of anticipated trading, and the anticipated number of shares to be traded – might garner broad support, excessive disclosure of granular plan details or of the plan’s specific mechanics, algorithms, and trading strategies could raise personal privacy concerns with little obvious benefit to ordinary investors. Furthermore, disclosure of plan details may invite trading designed to disrupt or front-run an executive’s planned trading. A requirement that Form 4 filings explicitly indicate whether a trade was made pursuant to a Rule 10b5-1 plan also seems likely, as does a requirement, as discussed further below, that Rule 144 filings (which already require the filer to at least disclose the date of adoption of any plan pursuant to which a sale is made) be filed electronically and made available to the public through the EDGAR system.
With potential Rule 10b5-1 reforms on the way, be sure to tune-in for our July 20th webcast – “Insider Trading Policies & Rule 10b5-1 Plans” for guidance and tips about revisiting your insider trading policy & trading plans. We’ve got an all-star panel lined up, don’t miss it!
Back in March, I blogged about Virginia being the second state in the US to enact a comprehensive data privacy law. Colorado became the third state to enact a comprehensive data privacy law as Colorado’s Governor signed the law this week. Laws in California, Virginia and now Colorado are scheduled to take effect in 2023 and those who work with compliance programs will want to ensure the programs address nuances of each of these laws.
To help understand what those nuances are, this Hogan Lovells memo outlines 10 key differences across the three privacy laws. Among differences outlined in the memo are provisions relating to exemptions for certain entities and certain types of data, consumer opt-out rights and signals, contracting requirements, sensitive data requirements, appeals for rights requests, regulator enforcement and cure periods. Here’s an excerpt about privacy law provisions relating to data protection assessments:
California (CPRA)
– Does not currently have any requirements for data protection assessments.
– However, there is a provision in the rulemaking section that calls for the issuance of regulations requiring risk assessments for processing activities that present significant risk to consumers’ privacy or security. Therefore, this requirement may be added before the law takes effect.
Virginia (VCDPA)
– Requires controllers to conduct data protection assessments for a range of activities, including: targeted advertising, sales of personal data, the processing of personal data for profiling that creates certain risks for consumers, the processing of sensitive data, and any other activities that present a heightened risk of harm to consumers.
Colorado (CPA)
– Requires controllers to conduct data protection assessments for a range of activities, including: targeted advertising, sales of personal data, the processing of personal data for profiling that creates certain risks for consumers, and the processing of sensitive data.
The memo provides a reminder that a thorough understanding of the similarities and differences between the three laws will be necessary to design an efficient and effective compliance program prior to 2023. Without any comprehensive federal privacy law, we’ll likely see additional states adopt privacy legislation this year. It’s hard to say which state may be next although this Cleary memo says to keep your eyes on Washington and New York, which may both pass privacy legislation sometime this year.
Last month, John blogged about the removal of the PCAOB Chair and the pending overhaul of the members of the PCAOB board. Some view these moves as political, but aside from that, a Troutman Pepper memo advises companies to prepare for potentially more rigorous auditing processes. The memo notes that a revamped PCAOB will likely place more emphasis on enforcement, which could lead auditors to engage in more intense audits. More than that, the memo also discusses a district court decision out of the D.C. Circuit relating to attorney-client privilege that could raise tension between auditors and companies.
The court’s decision required the company to provide information from an internal investigation to the SEC after the company’s outside counsel shared information with the company’s outside auditor. Between the PCAOB developments and this court decision, companies could feel the heat a little more than years past as they work through the annual audit process with outside auditors. Here’s more about the court decision:
The issue here started shortly after the company announced a False Claims Act settlement with the DOJ and from there, things began to unravel. The SEC then initiated a formal investigation into RPM’s public disclosures. Due to the SEC’s investigation, RPM’s outside auditor, E&Y, informed RPM that they could not sign off on RPM’s 10-K without RPM conducting an internal investigation. RPM hired outside counsel to conduct an internal investigation, who interviewed 19 current and former RPM employees.
To give E&Y comfort, RPM’s outside counsel made an oral presentation to E&Y, which included specific quotes from their interviews. RPM’s outside counsel then drafted 19 interview memoranda based on their interviews.
The SEC then sued RPM alleging that the company didn’t timely record accruals relating to the DOJ settlement. As part of discovery, the SEC requested documents including the interview memoranda. The court ordered the company to produce all of the interview memoranda to the SEC, holding that the interview memoranda wasn’t work product because it wasn’t prepared in anticipation of litigation, by sharing the substance of the information with E&Y (and subsequently allowing E&Y to share information with the SEC), the company waived its work product protection and while most of the interview memoranda reflected privileged communications between the company’s outside counsel and company employees, the company waived attorney-client privilege when it disclosed facts from the investigation to E&Y.
The court’s holding in this case really highlights the limitations companies could encounter when seeking to rely on attorney-client privilege and work product protection. For more on the court’s decision in this case, this Skadden memo provides a discussion of the court’s reasoning. Also, our “Attorney-Client Privilege” Practice Area has memos with tips and guidance about how to manage risks in protecting privileged information.
Over the last year, as many transitioned to remote work arrangements some, if not most, boards held remote board and committee meetings. Some have been wondering whether and when boards might return to in-person meetings, as whichever way boards decide to go with future meetings, no one wants to get flagged as an outlier – we recently received a question directly on point in our Q&A Forum (#10781). A recent PwC blog provides a look at what some boards are planning based on results from a poll of 160 governance professionals, executives and board members, here’s an excerpt:
– 43% of respondents said their board is already meeting in-person or planned to do so in Q2 and another 37% plan to do so in Q3
– More than half of respondents said they plan to keep at least some board/committee meetings virtual
– Over a third plan to give directors flexibility to choose their method of participation
– Only 8% of respondents said their boards plan to curtail social elements, such as dinners or outings, of board meetings
To help each other learn more about company plans for helping keep boards productive, cohesive & healthy, take a moment to participate in our anonymous “Quick Survey: Board Meeting Health Protocols”.