SEC Enforcement Director Gurbir Grewal delivered the Scott Friestad Memorial Keynote address at the “SEC Regulation Outside the United States – ThinkIn 2021” program yesterday, and he started off his speech by quoting from Lewis Carroll’s poem, The Hunting of the Snark. The quoted stanza ends with “Just the place for a Snark! I have said it thrice: What I tell you three times is true.” Grewal noted:
Repetition, after all, is a persuasive technique used regularly by effective orators and children alike to make convincing and, on occasion in my home, winning arguments. That’s because repeated information is often perceived as more truthful than new information. But as we all know, just because a statement is made repeatedly doesn’t necessarily make it true.
Grewal went on to rebut the often-repeated notion that the SEC is “regulating by enforcement,” particularly in the area of digital assets and ESG. Instead, he says that the SEC is “using all of our tools to pursue wrongdoers, protect investors, and fulfill our mission.” Grewal recounted a number of cases that the SEC has brought in the digital asset space, and commented on the progress of the Climate and ESG Task Force, as well as prior cases that the SEC has brought involving ESG issues.
At last week’s PLI Annual Institute on Securities Regulation, Corp Fin Director Renee Jones and Acting Deputy Director Lisa Kohl spoke about priorities in the Division, and it was mentioned that Corp Fin is in a hiring mode for lawyers. I am often asked about how to get a job in Corp Fin, and I always encourage people to go there when the can, because the Division provides opportunities for excellent training and experience and the chance to work with a very talented group of people. The window for job openings notoriously opens and closes over time, so often timing is the most important factor to consider when trying to land a job in the Division.
While the SEC does post more senior positions in Corp Fin from time to time, the best chance of getting in is by applying for positions in the Operations groups, where you would review filings. Once you have spent some time in Operations, it is often possible to move to other roles within the Division, or perhaps to other Offices or Divisions within the Commission. I believe that the hiring process in Corp Fin is relatively decentralized these days, so often you are interviewing with the people in Operations group that you would be working with if you were hired. If you have been thinking about working at the SEC, now might be a good time to dust off that resume!
Last week, ISS announced that it is seeking comments on its proposed voting policy changes for 2022. The comment period runs through November 16. As usual, ISS seeks input from all interested parties.
ISS solicits comment on 16 proposed voting policy changes across all markets, including the following key changes in the U.S.:
Gender Diversity – ISS proposes to extend its board gender diversity policy to companies that are not in the Russell 3000 and S&P1500 indices, effective for meetings on or after February 1, 2023.
Unequal Voting Rights – When ISS implemented its original unequal voting rights policy back in 2015, the attention was on addressing concerns with newly-public companies that adopted unequal voting rights without a sunset mechanism. As a result, companies with an unequal voting rights structure whose first shareholder meeting was prior to 2015 were exempted from the voting rights policy. ISS now proposes to remove the differential policy application that arose from that exemption and, after a grace period in 2022, begin in 2023 to recommend against responsible directors at all U.S. companies with unequal voting rights.
Climate – For the highest GHG emitting companies, ISS proposes a new climate-related board accountability policy. ISS proposes to recommend against the re-election of directors or any other appropriate items at companies that have not made appropriate climate-related disclosures, such as according to the TCFD framework, or that have not set quantitative GHG reduction targets.
Say-on-Climate – ISS proposes to codify the case-by-case analysis frameworks for management and shareholder say-on-climate proposals.
We can expect ISS to publish updated voting policies applicable for shareholder meetings occurring on or after February 1, 2022 in the coming weeks.
On Friday, the SEC announced that it approved the PCAOB’s Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act. Rule 6100 establishes a framework for the PCAOB’s determinations under the Holding Foreign Companies Accountable Act (HCFAA) that the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by an authority in that jurisdiction.
The HFCAA prohibits trading in a company’s stock if the company uses an audit firm for three consecutive years that a foreign jurisdiction prevents the PCAOB from inspecting completely, as determined by the PCAOB.
PCAOB Rule 6100 is effective immediately. In a statement issued on Friday, Chair Gensler noted that the Commission is on track to finalize by year-end the interim final rules that the Commission adopted earlier this year to implement the HFCAA.
The SEC recently announced that Nicole Creola Kelly has been appointed as Chief of the SEC’s Office of the Whistleblower. Kelly has more than 20 years of experience with the SEC, including as a Senior Special Counsel in the Office of the General Counsel, Counsel to former Chair Mary Jo White, Counsel to former Commissioner Kara M. Stein, and as an attorney in Enforcement and the Whistleblower Office.
Yesterday, the SEC announced a rule proposal that would update its electronic filing requirements to mandate the EDGAR submission of certain documents that filers still have the option to submit on paper. Here’s a copy of the 73-page proposing release and here’s a copy of the accompanying fact sheet. Want a statement from Gary Gensler? Okay, there’s one of those too.
The fact sheet says that the proposed rule changes are intended to promote more efficient storage, retrieval, and analysis of these filings, improve the SEC’s ability to track and process them, and modernize its records management process. According to the fact sheet, the rule would require the electronic submission of the following:
– Most of the documents that are currently permitted to be submitted electronically under Rule 101(b) of Regulation S-T, including filings on Form 6-K and filings made by multilateral development banks;
– The “glossy” annual report to security holders and certain foreign language documents, if submitted, in PDF format;
– Applications for orders under the Advisers Act;
– Confidential treatment requests for Form 13F filings; and
– Form ADV-NR (through the IARD system)
Form 11-K filers also would have to use iXBRL for financial statements included in those filings. Most of this stuff is a big yawn to corporate issuers, with the exception of the proposal to resurrect a filing requirement for the glossy annual report. As you may recall, the SEC effectively eliminated the longstanding requirement to furnish it with copies of glossy annual reports back in 2016. If this new proposal is adopted, companies will need to file a PDF of that document.
The most recent edition of the SEC’s Reg Flex agenda includes proposing rule amendments intended to “enhance issuer disclosures regarding cybersecurity risk governance, and in his September 2021 Senate Banking Committee testimony, SEC Chair Gary Gensler stated that he’d asked the Staff to “develop proposals for the Commission’s consideration on these potential disclosures.” So, it’s pretty clear that there’s cyber disclosure rulemaking on the horizon, but what form will the rule proposal take?
Last Friday, Commissioner Elad Roisman delivered a speech that suggests the debate may again be between those commissioners who favor principles-based rules and those who prefer a more prescriptive, line item-based approach. Not surprisingly, this excerpt from his speech indicates that Roisman’s squarely in the principles-based camp:
As some of you may have noticed, the Commission’s regulatory agenda includes possible regulatory action with regard to issuers, which could build on the Commission’s 2018 guidance. I have not seen any draft rule, so I cannot speak as to its nature or merits. But I will let you know some of the things that I would be looking for as I consider any additional rules in this area.
First, we need to define any new legal obligations clearly. Second, we need to make sure that these obligations do not create inconsistencies with requirements established by our sister government agencies. Third, we should recognize that some registrants have greater resources than others, and we should not try to set the resource requirements for an entity. And finally, because issuers’ businesses vary, the cybersecurity-related risks they face also will vary, and therefore a principles-based rule would likely work best.
My guess is that he’ll get buy-in from the other commissioners on the first three points, but given the reaction of the Democratic commissioners to prior principles-based proposals, I’m not very optimistic that Roisman will carry the day on his desire for a principles-based approach.
It sometimes can be a challenge for boards of private companies to determine the appropriate amount of D&O insurance coverage to purchase. If you find yourself advising one of those boards, this Woodruff Sawyer blog may be helpful. It sets forth five questions that private company boards should ask themselves when considering potential coverage limits. These questions are:
How Much D&O Insurance is Available for a Company at My Stage?
Who Are the Likely Plaintiffs in Potential D&O Litigation?
Are We in a Regulated Industry?
Are We Just Really Big?
Are We Going Public?
Woodruff Sawyer’s Priya Cherian Huskins offers up commentary on each of these questions. Here’s an excerpt with some of her thoughts on D&O insurance issues for sizeable private companies:
Difficult derivative suits with large settlements are a trend, making the purchase of at least substantial amounts of Side A D&O insurance an important purchase for large private companies. For more on this phenomenon, see my article on Five Types of Derivative Suits with Massive Settlements.
Finally, larger private companies are typically also companies that have (or are trying to recruit) independent directors, which is to say directors who have no financial sponsors like a private equity of venture capital firm.
Directors placed on boards to represent the interests of a PE or VC investor typically enjoy indemnification from that financial sponsor and can also receive insurance coverage through the financial sponsor’s insurance programs. The fact that independent directors do not have these backstops tends to drive an upgrade in a company’s own D&O insurance program, resulting in limits of at least $10 million to $20 million.
Yesterday, Corp Fin issued Staff Legal Bulletin 14L, which rescinds Staff Legal Bulletins 14I, 14J and 14K, and effectively takes a sledgehammer to four years of interpretive guidance on the exclusion of ESG-related shareholder proposals from proxy statements. In doing so, the new SLB may open the door for the inclusion of a wide range of previously excludable ESG proposals.
SLB 14I was issued in 2017 and addressed, among other things, the scope & application of Rule14a-8(i)(5) (the “economic relevance” exception) & Rule 14a-8(i)(7) (the “ordinary business” exception). In SLB 14I, Corp Fin observed that the key issue in evaluating both the economic relevance and ordinary business exceptions was whether a particular proposal focused on a policy issue that was sufficiently significant to the company’s business, and called for the board’s analysis of the significance issue to be contained in any no-action request. SLB 14J & 14K subsequently provided further interpretive guidance on these topics, and also addressed in some detail when proposals may be excluded under the ordinary business exception because they involve “micromanagement.”
Yesterday’s action effectively trashes the approach to the economic relevance & ordinary business exclusions outlined in these SLBs. Instead, SLB 14L says that Corp Fin will return to its traditional approach to social policy proposals:
Going forward, the staff will realign its approach for determining whether a proposal relates to “ordinary business” with the standard the Commission initially articulated in 1976, which provided an exception for certain proposals that raise significant social policy issues, and which the Commission subsequently reaffirmed in the 1998 Release. This exception is essential for preserving shareholders’ right to bring important issues before other shareholders by means of the company’s proxy statement, while also recognizing the board’s authority over most day-to-day business matters.
For these reasons, staff will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In making this determination, the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.
Under this realigned approach, proposals that the staff previously viewed as excludable because they did not appear to raise a policy issue of significance for the company may no longer be viewed as excludable under Rule 14a-8(i)(7). For example, proposals squarely raising human capital management issues with a broad societal impact would not be subject to exclusion solely because the proponent did not demonstrate that the human capital management issue was significant to the company.
In light of Corp Fin’s return to a non-company specific approach to the significance of a social policy issue, Corp Fin says that it will no longer expect a board analysis as described in the rescinded SLBs as part of demonstrating that the proposal is excludable under the ordinary business exclusion. SLB 14L adopts a similar approach to the economic relevance exclusion, and therefore will also no longer require a board analysis here either.
SLB 14L also addressed the micromanagement exclusion, and observed that the rescinded guidance may have been taken to mean that any limit on company or board discretion constitutes micromanagement. In doing so, Corp Fin noted that “specific methods, timelines, or detail do not necessarily amount to micromanagement and are not dispositive of excludability.”
It’s a certainty that there will be a lot of commentary in the coming weeks about how much of a departure SLB 14L represents from actual Staff practice versus what was laid out in the now rescinded SLBs. But in any event, Corp Fin seems to be sending a message that the proponents of ESG-related topics are likely to face a friendlier environment than they have in recent years. That’s a message that won’t be lost on those proponents, who still have plenty of time to submit proposals for next proxy season.
Corp Fin addressed several other topics in SLB 14L, including the use of images in shareholder proponents’ supporting statements, issues surrounding proof of ownership letters, and the use of emails to submit proposals and deficiency notices. Here are some excerpts from Corp Fin’s discussion of these topics:
Use of images in supporting statements – “Questions have arisen concerning the application of Rule 14a-8(d) to proposals that include graphs and/or images. The staff has expressed the view that the use of “500 words” and absence of express reference to graphics or images in Rule 14a-8(d) do not prohibit the inclusion of graphs and/or images in proposals. Just as companies include graphics that are not expressly permitted under the disclosure rules, the Division is of the view that Rule 14a-8(d) does not preclude shareholders from using graphics to convey information about their proposals.”
Proof of ownership letters – “Some companies apply an overly technical reading of proof of ownership letters as a means to exclude a proposal. We generally do not find arguments along these lines to be persuasive. For example, we did not concur with the excludability of a proposal based on Rule 14a-8(b) where the proof of ownership letter deviated from the format set forth in SLB No. 14F. In those cases, we concluded that the proponent nonetheless had supplied documentary support sufficiently evidencing the requisite minimum ownership requirements, as required by Rule 14a-8(b). We took a plain meaning approach to interpreting the text of the proof of ownership letter, and we expect companies to apply a similar approach in their review of such letters.”
Use of email – “Unlike the use of third-party mail delivery that provides the sender with a proof of delivery, parties should keep in mind that methods for the confirmation of email delivery may differ. Email delivery confirmations and company server logs may not be sufficient to prove receipt of emails as they only serve to prove that emails were sent. In addition, spam filters or incorrect email addresses can prevent an email from being delivered to the appropriate recipient. The staff therefore suggests that to prove delivery of an email for purposes of Rule 14a-8, the sender should seek a reply e-mail from the recipient in which the recipient acknowledges receipt of the e-mail. The staff also encourages both companies and shareholder proponents to acknowledge receipt of emails when requested.”
Several members have already pointed out another issue that SLB 14L raises regarding proof of ownership letters. At one point in the discussion, Corp Fin says that “we believe that companies should identify any specific defects in the proof of ownership letter, even if the company previously sent a deficiency notice prior to receiving the proponent’s proof of ownership if such deficiency notice did not identify the specific defect(s).” This kind of “double notice” is something that hasn’t been required before now.