We recently passed a significant milestone, the two-year anniversary of when the World Health Organization first characterized COVID-19 as a pandemic. We all no doubt recall those early March 2020 days when we optimistically thought that things would be back to normal in a couple of weeks once we could successfully “bend the curve,” but shortly after that things were anything but normal for the next two years. Today, we are now stuck in the “new normal,” whatever that is. For public companies, there have been a few lessons from the pandemic worth reflecting on:
The benefits of current disclosure. I am always a staunch defender of our current and periodic reporting system in the United States, often noting that public companies do not have to disclose all material information all of the time – companies need only make disclosures when they have an affirmative disclosure obligation. However, in a crisis situation like the onset of the COVID-19 pandemic, there are benefits to utilizing current disclosure to keep the market informed about developments, even when the future outcome may be uncertain. Former SEC Chair Jay Clayton and former Director of Corp Fin Bill Hinman issued a statement in April 2020 calling for companies to provide detailed real-time disclosure about the impact of the pandemic, even when the future was very hard to predict.
A little help from the SEC. Over the years, the SEC has been pretty good about putting out guidance and making accommodations when a crisis hits. I can recall sitting in Marty Dunn’s office many years ago coming up with relief for public companies affected by Hurricane Katrina, which came to serve as a model for future crisis situations. In the case of COVID-19, the SEC was quick to act, putting out a series of statements and orders which recognized the challenges of dealing with a shift to a work-from-home environment, the ability to meet filing deadlines, the need to quickly pivot to virtual annual meetings, the need for more disclosure about the impact of the pandemic, etc. The SEC and the Staff were proactive, and that is always a positive thing for public companies and the markets.
The triumph of risk factors. It is hard to fathom that we still have COVID-19 risk factors in most public company filings. References to the impact of a global pandemic in risk factor disclosure prior to 2020 were often in the context of a vague laundry list of the “parade of horribles,” e.g., war, natural disasters, earthquakes. But very quickly in 2020, the COVID-19 risk factor became something of an art form, laying out what was generally known and unknown about the pandemic and providing some very important context to the COVID-19 disclosures included elsewhere in the filing. I think that the COVID-19 pandemic resulted in a greater appreciation for the value of risk factor disclosure as a means of dealing with significant uncertainty.
The triumph of technology. If you had told me in 2019 that my kids would soon be attending school virtually and that I would be working from home 100% of the time, I would have thought you were engaged in some sort of Jetsons-style futuristic fantasy. As it turned out, those things were entirely possible with the technology that we had readily at hand. Of course none of it was perfect and we all have our gripes about the setup to this day, but we should be grateful that we had the ability to “move on” quickly after the onset of the pandemic and continue the important functions of education and commerce. This certainly applies to public company annual meetings – thanks to the efforts of the industry and with a little help from the SEC, companies were able to pivot quickly to virtual annual meetings en masse, allowing directors to be elected and business to be conducted at a time when it would have been impossible to have traditional in-person annual meetings.
Above all else, today I am eternally grateful to all of the “front line” workers who have been out there during the pandemic keeping us alive and keeping the wheels of commerce moving. At the same time, I grieve for all of the lives lost from this disease. I sincerely hope that brighter days are ahead for all of us.
The SEC has announced the details for the 41st Annual Government-Business Forum on Small Business Capital Formation, which is hosted by the Office of the Advocate for Small Business Capital Formation. The event will take place virtually again this year, in four sessions taking place on April 4-7 from 1:00-2:30 pm ET.
Sessions will focus on the following topics:
• Mon., April 4 – Empowering Entrepreneurs: Tools to Navigate Capital Raising
• Tue., April 5 – Hometown Entrepreneurship: How Entrepreneurs Can Thrive Outside of Traditional Capital Raising Hubs
• Wed., April 6 – New Investor Voices: How Emerging Fund Managers Are Diversifying Capital
• Thur., April 7 – Small Cap World: What to Know and How to Think Ahead
The SEC notes that the website for the Annual Government-Business Forum will continue to be updated with details on the agenda, speakers, registration, and FAQs in the coming weeks.
We’ve posted the transcript for our recent webcast for members, “Audit Committees in Action: The Latest Developments.”
Deloitte’s Consuelo Hitchcock, Maynard Cooper & Gale’s Bob Dow, Tapestry Networks’ Eric Shor and Ernst & Young’s Josh Jones discussed the ever-expanding areas of oversight responsibility for the audit committee, accounting and auditing topics on the SEC’s radar and auditor independence. Here is a nugget from Josh Jones about the role of audit committees in ESG oversight and documentation:
If you’re the audit committee, you’ll need to think about, “How have we thought about some more of these ESG risks?” You’ll also need to consider how the company has thought through its own particular strategy and how that’s working its way into the financial reporting process, including all of these kinds of required kind of disclosure elements in the filing. Consider how the company’s controls are perhaps expanding beyond the normal financial reporting department to really capture those elements when thinking about things like impairment decisions.
It’s casting a wider net and adding more variables to some of those controls and decisions than we have in the past. And in some cases, those impacts may not be imminent and may not be easily discernible. But at the same time, at least asking the question, “How has the company thought about those in connection with the financial statements relative to public disclosures and elements of their public sustainability reports?” It’s all things that audit committees would be well versed to making sure they’re connecting all those dots as it relates to meeting their regulatory obligations.
If you are not a member of TheCorporateCounsel.net, email sales@ccrcorp.com to sign up today and get access to the full transcript.
Yesterday, Commissioner Allison Herren Lee announced that she had notified President Biden that she intends to step down from the Commission once her successor has been confirmed. Lee’s term as a Commissioner expires in June. As SEC Chair Gary Gensler pointed out in a statement, Commissioner Lee first joined the SEC’s Division of Enforcement in the Denver Regional Office in 2005, and served as Counselor to former Commissioner Kara Stein and Senior Counsel in the Complex Financial Instruments Unit. Commissioner Lee served as Acting Chair in early 2021, taking an unusually active role in jumpstarting the SEC’s efforts on climate change.
Earlier this month, Commissioner Lee spoke at the PLI program Corporate Governance – A Master Class 2022 and took on the topic of over-zealous representation of clients by corporate lawyers. In particular, she called for the SEC to take steps to address situations where bad legal advice can inflict harm on investors. Commissioner Lee noted:
The “bad advice” I refer to arises from a type of “can-do” approach to lawyering that is ill-suited to lawyers in a gatekeeping role. It is born from a desire to give management the answer that it wants. Or, as a Delaware court recently stated, it stems from a “contrived effort to generate the client’s desired result when real-world facts would not support it.”
Commissioner Lee went on to note that bad advice can extend to disclosure decisions that public companies make, and that principles-based rules adopted by the SEC result in lawyers being more involved. She also noted how the involvement of lawyers can make it difficult to charge individuals for disclosure violations in Enforcement cases.
Commissioner Lee argued in her speech that the existing framework for professional conduct is not adequate to address these issues, and she suggests that the SEC use its authority under Section 307 of the Sarbanes-Oxley Act, which directs the SEC to adopt “minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers.”
In January, I blogged about the NYSE’s new listing standard related to rights, which was adopted. Earlier this month, the NYSE filed a proposal with the SEC to adopt fees for listed rights.
The NYSE proposes to apply the same fee schedule to listed rights as it currently applies to warrants under Section 902.03 of the Listed Company Manual. In connection with the listing of a class of warrants, Section 902.03 provides for a fee of $0.004 per warrant. Section 902.03 provides that listed warrants are subject to annual fees at a rate of $0.0017 per warrant, subject to a minimum annual fee of $5,000 per series of warrants, with special provisions for SPACs and foreign issuers.
Yesterday on PracticalESG.com, we announced that we are holding a 3-part virtual workshop this Spring — an event that will deliver much-needed practical guidance on how to use data to drive DEI decisions and to measure impact. Not only do we have a fantastic lineup of content and speakers, this event is FREE to attend!
You can sign up for each of the 3 sessions, or whichever ones fit your schedule. After the live event, the sessions will also be available on-demand to members of PracticalESG.com. Here’s more detail about the series (each session will run from 2:00 – 3:30pm Eastern):
April 13 – “Collecting Diversity, Equity & Inclusion Data”: What to Measure & Why”: DEI work that is not data-driven likely won’t be made an organizational priority, have clear direction, or have an adequate process for measuring progress. Learn what data points to measure to provide business-relevant insights on diversity, equity and inclusion. Register here to secure your spot for session 1.
May 4 – “Understanding & Using Equity Audits & Civil Rights Audits”: Companies are facing growing calls from shareholders and other stakeholders to conduct equity & civil rights audits. As Emily blogged last week on the Proxy Season Blog, a high-profile shareholder proposal on this topic recently garnered majority approval, which may be a bellwether of things to come. Now is the time to understand and prepare for an audit, so that your board and your company are equipped to respond to this emerging trend. Register here to secure your spot for session 2.
May 25 – “Using Diversity, Equity & Inclusion Data: Goal-Setting & Reporting”: You have the data, how do you use it? This session will explore practical ways to use DEI data to set goals and report on progress. You will leave this session with steps you can take right away to set more targeted goals and report out on what your leaders need to know to buy-into and champion the DEI strategy. Register here to secure your spot for session 3.
The workshop guests include notable figures in the DEI space such as Deesha Dyer, Founder & CEO of Hook & Faster, Laura Murphy, thought leader for Civil Rights Audits, and Sheri Crosby Wheeler, the VP of D&I at Fossil Group, among many others. Each event will be moderated by Ruth Umoh, current Editor of Fortune and former Editor of Forbes, CNBC Reporter, and Producer for Rolling Stone Magazine.
Join other professionals from across industries and receive valuable guidance on tough DEI issues in these fast-paced 90-minute sessions, which each include a 1-1 fireside chat and a 30-minute panel. End each workshop by expanding your network during the optional 10-minute speed-friending event that allows you to quickly meet like-minded peers who are also championing DEI in their organizations. From valuable guidance to the opportunity to grow your network, this workshop series has you covered. Use the knowledge to move your organization to the next level in developing and moving the needle on your DEI goals. RSVP now to take part in this valuable series! This is an event you don’t want to miss.
We have entered a period of highly volatile markets, and it certainly appears that more volatility is in store given recent economic shocks, the war in Ukraine and economic sanctions that could affect the solvency of Russia. Yesterday, the Staff of the SEC’s Division of Trading and Markets issued a statement that “urges broker-dealers and other market participants to remain vigilant to market and counterparty risks that may surface during periods of heightened volatility and global uncertainties.”
In particular, the Staff noted that broker-dealers should be mindful of the following:
Broker-dealers should collect margin from counterparties to the fullest extent possible in accordance with any applicable regulatory and contractual requirements.
Concentrated positions of prime brokerage counterparties pose particular concerns. Staff urges broker-dealers to seek sufficient information to determine counterparties’ aggregate positions in any markets that may experience liquidity concerns and work with the counterparties to mitigate risk.
Staff urges broker-dealers to stress test positions with the proper severity in light of current events and potential market movements, and act to manage the risk of the positions, particularly those that are concentrated, appropriately.
Staff urges broker-dealers to monitor risk management limits, calibrated to the financial resources of the broker-dealer, closely intraday and escalate any breaches promptly to senior management.
Last week, the Council of Institutional Investors announced that it had approved revisions to CII’s recommended Corporate Governance Policies on shareowner meetings and poison pills.
The updated policy on shareowner meetings expresses a preference for in-person meetings but gives companies flexibility to choose the format that best reflects their shareowner base and current circumstances. The policy also encourages companies to disclose the circumstances under which virtual-only meetings would be held. It also recommends giving shareholders who are participating electronically rights and opportunities comparable to those participating in person. The revised policy on poison pills asks companies to hold a shareowner vote on a poison pill no later than a year after the pill’s adoption by the board. It also asks companies to refrain from adopting pills that contain certain provisions, such as extremely low triggers.
A few weeks ago, I blogged about the general disclosure considerations for public companies arising from the war in Ukraine, including considerations for companies that have recently completed their earnings cycles and annual report filings. Now, Deloitte has published an in-depth discussion of the key accounting and financial reporting challenges that companies are facing from the Russia-Ukraine war, including those related to SEC reporting and disclosures, forecasting, supply-chain disruptions, recoverability and impairment of assets, loss of control, the ability to exercise significant influence, cessation of operations, foreign currency matters, subsequent events, and going-concern considerations. Deloitte’s alert notes:
It is important that entities aggregate and consider their direct and indirect exposures to the impacts of the war and consider the financial accounting and reporting implications, which could be numerous, particularly those with material subsidiaries, operations, investments, contractual arrangements, or joint ventures in Ukraine and Russia.
Entities with significant suppliers, vendors, or customers in Ukraine or Russia, as well as organizations that lend to or borrow from entities in those countries, also may experience accounting challenges. Even entities that do not have direct exposure to Ukraine or Russia are likely to be affected by the overall economic uncertainty and negative impacts on the global economy and major financial markets arising from the war.
The alert highlights a wide range of impacts that are worth considering when preparing a company’s financial statements and related disclosures, including interruptions or stoppage of production in affected areas and neighboring countries; damage or loss of inventories and other assets; closure of roads and facilities in affected areas; supply-chain and travel disruptions in Eastern Europe; volatility in commodity prices and currencies; disruption in banking systems and capital markets; reductions in sales and earnings of business in affected areas; increased costs and expenditures; and cyberattacks.