Even before SEC Chair Gary Gensler was officially confirmed to his current office, people were predicting that Section 13(d) reform would be high on his list of priorities. Yesterday, the SEC announced that it is proposing amendments to Regulation 13D-G. If adopted, the primary impact of the amendments would be to accelerate the filing deadline for Schedule 13D and 13G reports – to address the concern over “information asymmetry” that John blogged about last month.
This is a welcome development for the contingent of folks who think the current rules are outdated – see this 2011 WLRK petition, for example. If this proposal is adopted, it’ll be the most significant amendment to Regulation 13D-G since the rules were adopted in 1968.
– Accelerate the filing deadlines for Schedules 13D and 13G beneficial ownership reports – generally, from 10 to 5 days for Schedule 13D and from 45 days from the end of the year to 5 business days from the end of the month for Schedule 13G;
– Expand the application of Regulation 13D-G to certain derivative securities;
– Clarify the circumstances under which two or more persons have formed a “group” that would be subject to beneficial ownership reporting obligations; and
– Require that Schedules 13D and 13G be filed using a structured, machine-readable data language.
Chair Gensler issued a statement in support of the proposal. But not everyone is celebrating. Commissioner Peirce, who doesn’t share the view that information asymmetry is a problem in this context, issued a dissenting statement. We’ll be posting memos about this proposal in our “Schedules 13D & 13G” Practice Area. Comments are due 30 days after publication in the Federal Register or April 11th, whichever is later.
Also yesterday (and on the heels of our excellent webcast from earlier this week about whistleblower policies & procedures), the SEC announced that it had issued proposed amendments to two whistleblower program rules. From the fact sheet:
The SEC is proposing two amendments to Exchange Act Rules 21F-3 and 6, the rules governing its whistleblower program:
– The first proposed amendment would allow the Commission to make an award for a related action that might otherwise be covered by an alternative whistleblower program even where the alternative whistleblower program has the more direct or relevant connection to the related action in certain circumstances.
– The second proposed amendment would affirm the Commission’s authority to consider the dollar amount of a potential award for the limited purpose of increasing the award amount, but would eliminate the Commission’s authority to consider the dollar amount of a potential award for the purpose of decreasing an award.
As expected (and previously criticized by Commissioner Peirce and former Commissioner Roisman), this proposal revisits whistleblower program rules that were most recently amended in late 2020. So, it’s not surprising that Commissioner Peirce dissented. Chair Gensler issued a supporting statement to say that the amendments will provide reassurance to prospective whistleblowers. We’ll be posting memos in our “Whistleblowers” Practice Area. Comments are due 30 days from the date of publication in the Federal Register or April 11th, whichever is later.
Dave blogged last month that the SEC has drawn criticism for proposing rules with comment periods that are shorter than the traditional 60 days, which typically runs from the date that the proposal is published in the Federal Register. On the flip side, it seems to be taking a very long time to get proposals published. As far as I can tell, the proposals on buybacks and Rule 10b5-1 reform still have not made it into the Federal Register – so the comment period clock has not yet started ticking.
For this week’s slew of rulemaking, the SEC seems to be taking a new approach. Comments are due 30 days after publication in the Federal Register OR 60 days after issuance of the proposal, whichever is later. At a minimum, that gives people until April 11th to submit comments on these proposals.
The SEC announced yesterday that the Commissioners voted to propose “market plumbing” rules that would shorten the settlement cycle for most broker-dealer transactions from T+2 to T+1 – i.e., trades would settle one business day after the trade date – aimed at addressing one of the areas identified by the Staff Report on 2021 market volatility. A shortened settlement cycle is something that industry groups have been recommending – I most recently blogged about that in December – and all 4 of the current Commissioners issued statements in support of the proposal (Gensler, Lee, Peirce, Crenshaw).
As explained in the 247-page proposing release – and the accompanying 2-page fact sheet – the proposal also goes beyond merely shortening the settlement cycle to T+1. Specifically, the proposed changes would:
– Shorten the standard settlement cycle for securities transactions from two business days after trade date (T+2) to one business day after trade date (T+1)(by March 31, 2024);
– Eliminate the separate T+4 settlement cycle for firm commitment offerings priced after 4:30 p.m.;
– Improve the processing of institutional trades by proposing new requirements for broker-dealers and registered investment advisers intended to improve the rate of same-day affirmations (T+0); and
– Facilitate straight-through processing by proposing new requirements applicable to clearing agencies that are central matching service providers (CMSPs) – i.e., fully automated transactions processing.
The proposal also seeks comment on the path toward same-day settlement (T+0). In her statement, Commissioner Peirce laid out specific issues for which she would like comments:
(1) Would a T+0 settlement cycle unnecessarily increase trading costs, including in some cases potentially requiring prefunding of transactions?
(2) Would it force other changes that may significantly affect market structure in ways that decrease liquidity?
(3) Would blockchain technology be useful in facilitating the transition to a T+0 timeframe?
(4) How could the Commission go about working with the market to make the transition to T+0 if it does in fact seem worthwhile?
In addition to proposing to shorten the settlement cycle, yesterday’s open meeting also resulted in a proposal on compliance issues for private fund advisers under the 1940 Act – which John blogged about today on DealLawyers.com – and a proposal on cybersecurity risk management for registered investment advisers and investment companies. This one was issued on a 3-1 vote, with Commissioner Peirce issuing this dissenting statement (she wants a rule that fosters more direct & transparent cooperation between regulators & financial firms) and Chair Gensler, Commissioner Lee and Commissioner Crenshaw issuing supporting statements.
The cybersecurity proposal is significant because it underscores the SEC’s (and Biden administration’s) focus on cyber threats and shows what the Commission might view as “best practices” that could be implemented even outside of the investment adviser space. The SEC’s fact sheet explains that the proposal would:
– Require advisers and funds to adopt and implement written policies and procedures that are reasonably designed to address cybersecurity risks;
– Require advisers to confidentially report significant cybersecurity incidents to the Commission on proposed Form ADV-C within 48 hours of discovery;
– Enhance adviser and fund disclosures related to cybersecurity risks and incidents; and
– Require advisers and funds to maintain, make, and retain certain cybersecurity-related books and records
A Skadden memo from earlier this week previews cyber rulemaking and suggests steps for companies and their service providers to consider. In regards to yesterday’s proposal, this Wachtell Lipton memo offers these takeaways:
We have long highlighted the critical importance for public companies of maintaining effective disclosure controls concerning cybersecurity breaches and risks, and that boards of directors maintain focus on oversight of cybersecurity risks, including cultivating an understanding of the idiosyncratic risks companies face based on the systems they use and data they collect. We have also repeatedly stressed the need to maintain robust written policies and procedures with respect to cybersecurity protective measures, incident detection and response, and disclosure protocols.
Apart from their direct applicability to RIAs and funds, the SEC’s new proposed rules constitute a significant step toward formalization of national standards and regulatory expectations for corporate approaches to cybersecurity risk management, public disclosure of cyber-related risks, and timely regulatory and public notification of significant cyber incidents. As cybersecurity threats proliferate and become ever more sophisticated, companies both within and without the investment industry should carefully consider the SEC’s prescriptions and consider whether any or all of these proposed components should be integrated into their existing cybersecurity risk management systems and procedures.
We’ve posted the transcript for our recent webcast for members, “ISS Forecast for 2022 Proxy Season.” Marc Goldstein, Head of US Research at ISS, was joined by Ning Chiu from Davis Polk and Bob Lamm from Gunster to review what happened in the 2021 proxy season, the changes that ISS is making to its policies in 2022, and a variety of hot topics for the upcoming proxy season. Here’s what Marc had to say about ISS’s new climate accountability policy:
The other aspect of climate I wanted to mention is a new climate accountability policy, which is a new approach for us. We’re rolling it out fairly slowly, by which I mean it’s baby steps for 2022. We are looking at high-emitting companies as identified by Climate Action 100+, which is 167 companies globally. However, the policy actually isn’t going to be applied in every single country for 2022. In the U.S., UK, continental Europe and Russia, we’re going to be applying the accountability policy at companies that are both significant carbon emitters and also have poor disclosure and no greenhouse gas reduction targets.
We are setting the bar low for 2022 and we don’t expect a lot of negative recommendations under this policy. It’s possible that we may raise the bar in future years, but we would be happy to be able to conclude that every company clears the bar, so that we don’t feel compelled to recommend votes against directors. Our clients have made it very clear to us that this is a risk oversight issue and Boards need to be on top of these risks, taking them seriously and taking steps to align the business with the reality of the need to reduce greenhouse gas emissions and transition to renewable energy.
It’s official: our PracticalESG.com membership site is now live! Similar to TheCorporateCounsel.net and other CCRcorp sites, a membership will allow you to take a giant step forward by connecting the dots on complicated issues.
Subscribers to our free PracticalESG.com blog can continue to read our take on what ESG developments mean to companies & their advisors on a daily basis – that will not go away! With a PracticalESG.com membership, though, you’ll gain the additional benefit of a filtered content library (a huge help for anyone trying to wade through the deluge of ESG info and make sense of it all) – as well as checklists, guidebooks, member-exclusive blogs, and benchmarking surveys. You’ll also be able to access regular programming and a community Q&A forum, which means you can learn from and trade ideas with other practitioners in the ESG trenches. And it’s all being led by folks with decades of experience with Environmental, Social & Governance issues.
Among other topics, we’ll provide practical guidance about establishing, tracking & communicating:
– Environmental commitments;
– Diversity, equity & inclusion initiatives;
– Supply chain issues;
– Corporate culture; and
– Management and board oversight processes for environmental & social risks and opportunities
To kick off this valuable new resource, we are offering early members 25% off of the regular subscription pricing. Email sales@ccrcorp.com today – or call 1-800-737-1271 – to take advantage of this promotional offer and get tools to make your ESG efforts easier & more successful.
Recently, Reuters reported that the SEC’s Dallas-Fort Worth office is investigating claims made by some companies who are walking a line between shareholder ESG demands and state regulatory restrictions. This Mintz blog explains:
Specifically, the SEC is “scrutinizing potential conflicts between what the underwriters have told investors versus Texas regulators about their policies on doing business with gunmakers and fossil fuel companies.” This investigation appears to stem from a recent Texas law that prohibits companies doing business with Texas state governmental entities from discriminating against firearms or fossil fuel companies. The SEC appears to be concerned about how companies may have acted in ways inconsistent with their ESG disclosures when complying with that Texas state law.
Although this enforcement activity is perhaps not the precise type that was anticipated when the SEC announced a focus on ESG issues — as both companies and the private bar thought that SEC enforcement actions would be directed against failures to comply with ESG disclosure standards articulated by the SEC — this type of enforcement activity, centering on potential inconsistencies between information disclosed to different types of recipients, is squarely within the SEC’s remit.
This clash has been many months in the making. Lynn blogged about a year ago that energy-producing states were preparing legislation to push back on banks’ net-zero commitments. Last fall, Bloomberg reported that some banks were withdrawing from doing business in Texas, after new laws there went into effect that barred state & local governments from working with banks that have taken a stance against the firearms and fossil fuels industries.
The Leiutenant Governor of the Lone Star State also urged the state comptroller to cut off BlackRock following Larry Fink’s 2022 letter to CEOs – even though the asset manager is pushing for a gradual transition versus boycotting or divesting from oil & gas companies. Similarly, the West Virginia State Treasurer recently announced that the state will no longer use BlackRock in its banking transactions, because of its stance on fossil fuels and its investments in Chinese companies.
It’s easy to think of robust ESG commitments as “good” and lagging advancement as “bad.” These conflicts are a reminder that it’s not always that simple. There will be trade-offs – even if investors & companies follow the “orderly transition” that BlackRock outlined in a 16-page report last week. An important part of making ESG commitments will be balancing environmental advancements with social impacts (and vice versa). That is part of why board oversight of E&S strategy is so important.
The average length of ethics codes increased from 6,054 words in 2008 to 7,821 words in 2019, an average increase of 29 percent. Although a handful of firms defied the trend and shortened their codes, most increased by a relatively large amount. Terms such as social media, slavery, sustainability, footprint, and trafficking appeared not at all or only infrequently in 2008 but appeared with significantly higher frequencies in 2019.
Consistent with codes of ethics playing an important part in building and maintaining corporate culture, we document a positive linkage between Trust and Moral Behavior words (e.g., ethics, respect, and trust) and being selected as a most ethical firm by the Ethisphere Institute. We also find that changes in Inappropriate Behavior words are positively linked with changes in ESG ratings
That’s part of the conclusion from Notre Dame professors Tim Loughran, Bill McDonald and James Otteson in a recent study (and next time you review your code, it’s worth checking out their detailed appendices about word count, companies studied, and specific words related to Environmental, Social & Governance issues).
Companies have leeway in deciding whether their code of ethics should meet the bare minimums required by Item 406 and NYSE and Nasdaq listing standards. When Item 406 was adopted nearly 20 years ago, there were a lot of folks in the “bare minimum” camp. Now, this study suggests that companies are using the code of ethics to hold their employees & executives to a higher standard.
In this “Money Stuff” column, Matt Levine points out the reasons that companies might have for going above & beyond: using the code as a management tool to minimize legal & reputational risk, using the code as an advertising tool to shareholders & other stakeholders – especially with ESG getting so much attention. Companies should exercise some caution in adding commitments, though. Matt explains the risk:
[T]he biggest problem with a strict and specific code of ethics is that everything is securities fraud. If someone at your company does something bad and the stock goes down, your shareholders will sue, claiming in essence that you didn’t tell them that you were doing the bad thing. Technically, though, securities law does not require companies to disclose every bad thing; for the most part it penalizes active lies, not passive omissions. So the shareholders will not say “you didn’t tell us about the bad thing”; rather, they will say “you actively lied to us, saying or implying that you were not doing the bad thing.”
Codes of ethics are very helpful to the shareholder plaintiffs here, meaning that they are dangerous for the company, and the more strict and detailed they are the more dangerous they are. If your code of ethics says “executives are expected to act ethically where appropriate,” and your chief executive officer is revealed to be a sexual harasser and the stock drops, you can say “well that vague statement couldn’t possibly have induced anyone to buy our stock” and maybe win the shareholder lawsuit. If your code of ethics says “we have zero tolerance for sexual harassment of any kind and we hold everyone accountable immediately,” then it will be easier for shareholders to argue that they were deceived.
Those takeaways come in big part from this 2020 Davis Polk memo and a $240 million securities class action settlement against Signet Jewelers. Not only could these shortfalls eventually be used in litigation, but you might find yourself in a disclosure and listing quandary early on, due to the requirements under Item 5.05 of Form 8-K and listing standards to promptly announce waivers from the code.
All that to say, it’s tempting to make sweeping ESG commitments – and shareholders, employees & communities are definitely pushing for them. But companies need to be able to back up those commitments, and it may fall to securities lawyers to ask the hard questions when the code gets reviewed.
Shareholder proposals that seek enhanced “political spending” disclosure garnered high levels of support last year, and I recently blogged on our “Proxy Season Blog” that proponents are continuing to pursue more transparency this year. Not only that, but Emily blogged that proposals are also taking aim at contributions that appear to conflict with companies’ publicly stated values. And as Dave wrote last week, the Principles for Responsible Investment further encourages investors to examine political engagement by portfolio companies.
When it comes to oversight of political spending activities, a recent survey from The Conference Board found that most people expect corporate political activity to be an even more challenging topic this year than last year, now that many corporate PACs have resumed political donations (and groups are tracking whether those funds go to politicians who objected to the 2020 presidential election results). The Conference Board suggests these “best practices” to manage this topic in the year ahead:
1. Prepare for backlash. Have a clear set of standards and guidelines that you can use in making and defending any positions you take – whether through a statement from your CEO, political contributions, or lobbying efforts.
2. Ramp up educational and engagement efforts with stakeholders. Corporate political activity is multifaceted, of growing importance to multiple stakeholders, and an ongoing source of controversy and risk. This reality places a premium on not just educating, but appropriately engaging, key audiences.
• Focus on employees. 69 percent of our recent survey respondents cited pressure and attention from employees as a significant driver in making corporate political activity challenging in 2021. Employees often expect companies to take stands on issues that may be politically divisive and may not be related to the firm’s business or align with its core corporate values. It’s vitally important to educate employees – and, indeed, the general public – about your company’s activities. 84 percent of survey respondents say they are going to increase their efforts to engage and educate employees in 2022.
• Clarify the role of PACs. Company-sponsored PACs are funded by voluntary contributions from employees, not by corporate funds. But the press, employees, and others conflate corporate giving and PAC giving. To some extent, that’s understandable given the legal authority companies have to create, administer and, if they wish, determine who receives funds from the PAC. Companies and their PACs should reinforce the message about the purpose and governance of PACs on an ongoing basis, not just in a crisis.
• Clarify the process for publicizing PAC decisions. A majority (51 percent) of corporate PACs surveyed changed their contribution criteria in light of January 6th. But 30 percent changed their standards last year in response to other social and environmental issues, and 24 percent have not yet resumed their contributions. This means that more changes to PAC programs are still to come. Companies need to have a clear process for deciding whether and how to get word out. Be mindful that the legal, communications, and government relations functions may have conflicting views on disclosing PAC decisions.
3. Augment board oversight. While boards have traditionally focused more on political contributions than on lobbying activities, companies should consider what kind of role boards should play with respect to lobbying (and other forms of political activity). Their role might include approving broad principles and processes for corporate political activity.
4. Align political activity with corporate values. Aligning politics and values is much easier said than done because companies or their PACs often support candidates whose positions do not fully align with their stated corporate values, and companies may advocate policy positions that are not evidently in the interests of their stakeholders, such as employees and customers. But there are ways to achieve greater alignment.
• Keep it simple – the more complex your political activity, the more difficult it can be to manage reputational or other risks. Consider, for example, giving to candidates only through PACs and not via direct corporate contributions, and limit contributions to third-party organizations.
• Thoroughly vet third-party organizations to which you donate money, including the governance process in place to control their activities. Our survey found that companies have become more vigilant about their affiliations with external organizations in 2021: For example, 38 percent increased vetting of/supporting for/membership in industry trade associations.
• Consider involving the corporate citizenship function or executives in reviewing political activity.
• Adopt (or have your PAC adopt) a policy for political contributions that incorporates your company’s and your employees’ values as part of the framework for managing political spending.
5. Increase coordination internally and with third parties. It’s important to ensure that the multiple ways your company can engage in political activity are coordinated. You don’t want your CEO to take a stand on an issue, only to discover that it’s at odds with your PAC’s political contributions or the work of one of your third-party lobbyists. Coordination is particularly important with respect to lobbying. New state and local regulations are forcing more and faster disclosures about lobbying activities, sometimes within 48 hours. There’s reputational exposure if a consultant discloses activity on a sensitive topic and the company’s government relations and communications team are caught off guard.
For more thoughts on how to navigate board oversight, shareholder proposals & disclosure, visit our “Political Contributions” Practice Area. Included there is the CPA-Wharton Zicklin “Model Code of Conduct for Corporate Political Spending” that I blogged about during the 2020 election season. This new Directors & Boards article from the CPA’s Bruce Freed & Karl Sandstrom advocates for companies to use the Model Code to guide decisions.