The war in Ukraine has prompted the United States and other Western nations to impose unprecedented sanctions on Russia, Belarus and certain of their financial institutions, companies and individuals. The breadth of these sanctions is like nothing we have seen in our lifetimes, and the impact of these sanctions can be far-reaching given the integration of Russia into the global economy prior to the invasion of Ukraine.
I recently spoke with my colleague John Smith on MoFo’s Above Board podcast to better understand the sanctions landscape and to find out what issues companies and board of directors should be focused on when trying to understand how sanctions could impact their operations. Prior to joining MoFo as co-head of the firm’s National Security practice, John was the Director of the U.S. Treasury Department’s Office of Foreign Assets Control, often referred to as OFAC, which administers and enforces economic and trade sanctions based on U.S foreign policy and national security goals.
As noted in the podcast, the extraordinary sanctions should prompt companies and boards to assess their legal exposure to Russia and Belarus, as well as their reputational exposure arising from ongoing business with the sanctioned regimes, entities or individuals. Banking sanctions could have significant implications for ongoing and future financial transactions beginning this week, as some Russian banks are banned from participation in the SWIFT network, which is the backbone of the global payment network. Companies also need to be particularly cognizant of individuals or entities who are subject to “blocking” sanctions, which make those parties off-limits for any transactions, as well as “correspondent account” sanctions (which impact the ability of banks subject to sanctions to conduct transactions with U.S. banks) and debt and equity restrictions (which limit investment in and financing of sanctioned entities).
Last week, President Biden signed an Executive Order titled “Executive Order on Ensuring Responsible Development of Digital Assets.” The Executive Order outlines a whole-of-government approach to ensure responsible innovation in digital assets. As this Cleary alert notes:
The Order emphasizes the link between federal action and national security – both in terms of ensuring appropriate regulation and in staking out a U.S. leadership role in developing digital asset technology. Notably, in an area where some federal agencies have been criticized for moving slowly or failing to coordinate with each other, the Order mandates interagency cooperation on a series of reports, with most to be finished during 2022. The Order sets the stage for an active and potentially transformative year for U.S. regulation of digital assets.
The Order also sets out six principal policy objectives:
(i) protect U.S. consumers, investors, and businesses by ensuring safeguards are in place for digital asset exchanges and trading platforms to protect sensitive financial data and maintain privacy;
(ii) protect U.S. and global financial stability and mitigate systemic risk by ensuring compliance with regulatory and supervisory standards that govern traditional market infrastructures and financial firms, while adopting a regulatory evolution necessitated by the new and unique uses and functions of digital assets;
(iii) mitigate the illicit finance and national security risks posed by the illicit use of digital assets by ensuring appropriate controls and accountability to promote high standards for transparency, privacy, and security;
(iv) promote U.S. leadership in technology and economic competitiveness, including through the responsible development of payment innovations and digital assets;
(v) promote equitable access to safe and affordable financial services by promoting responsible innovation that expands equitable access to financial services, particularly for Americans who are underserved by the traditional banking system, including by making cross-border transfers cheaper, faster, and safer; and
(vi) support technological advances and ensure responsible development and use of digital assets in a manner that includes privacy and security in their architecture, integrates features and controls that defend against illicit exploitation, and reduces negative climate impacts and environmental pollution.
Yesterday, the SEC announced an open meeting for Monday, March 21st. According to the Sunshine Act Notice, there’s just one item on the agenda:
The Commission will consider whether to propose amendments that would enhance and standardize registrants’ climate-related disclosures for investors.
Climate change issues have soaked up a lot of oxygen at the SEC in recent years, and the open meeting comes on the heels of reports that there’s trouble in paradise among the Democratic commissioners concerning the scope of the rule proposals. Will the proposal track the expansive approach championed by Commissioner Lee, or will we end up with something more grounded in traditional conceptions of materiality? We’ll find out soon.
We continue to see a tremendously positive reception to our new membership site, PracticalESG.com. Thank you to everyone who’s signed up so far!
In the first few weeks of being live, we’ve continued to build out our organized content library with practical checklists and analysis – and we’ve held the following webcasts for members:
The SEC’s upcoming climate change disclosure proposals are yet another example of the increasing importance of ESG issues to public companies & their investors. Don’t miss out on our one-time promo event for this essential resource! Today is the final day of our offer for 25% off the regular subscription pricing. You can sign up online – or email sales@ccrcorp.com today or call 1-800-737-1271 – to take advantage of this one-time promo event and get tools to make your ESG efforts easier & more successful.
Last year, Liz blogged about the Alliance for Fair Board Recruitment’s lawsuit challenging Nasdaq’s board diversity disclosure rule. Late last month, the CII filed an amicus brief along with a group of institutional investors & other organizations in support of the rule. Here’s the CII’s statement on the filing of the brief, which appears on the homepage of its website:
On February 25, CII and seven other groups filed a joint amicus brief in support of the SEC in a lawsuit challenging the agency’s approval August 6 of Nasdaq rules that require companies listed on the exchange to disclose diversity statistics on their boards of directors. The brief, filed in the U.S. Court of Appeals for the Fifth Circuit, argues that many investors and investment advisors believe board diversity is a material benefit to companies and consider board diversity—or the lack of it—when casting votes for directors who serve on the nominating and governance committee. Other organizations co-signing the brief are: Ariel Investments; Boston Trust Walden; Gaingels; the Investment Adviser Association; Lord, Abbett; Northern Trust Investments; and the Robert F. Kennedy Center for Human Rights.
The CII’s action follows on the heels of the decision of 17 states to file an amicus brief opposing the rules in late January. This CFO Dive article has additional details on that filing.
Yesterday, the SEC announced that it was proposing a series of new rules focusing on enhanced disclosure of cybersecurity issues by public companies. Here’s the 129-page proposing release and here’s the 2-page fact sheet. The proposed rules would require current reporting & periodic updating about material cybersecurity incidents, and periodic disclosures about policies and procedures to address cybersecurity risks. In addition, companies would be required to disclose management’s role in implementing cybersecurity policies & the board’s cybersecurity expertise. This excerpt from the fact sheet spells out the specifics, and notes that the SEC proposes to:
– Amend Form 8-K to require registrants to disclose information about a material cybersecurity incident within four business days after the registrant determines that it has experienced a material cybersecurity incident;
– Add new Item 106(d) of Regulation S-K and Item 16J(d) of Form 20-F to require registrants to provide updated disclosure relating to previously disclosed cybersecurity incidents and to require disclosure, to the extent known to management, when a series of previously undisclosed individually immaterial cybersecurity incidents has become material in the aggregate and amend Form 6-K to add “cybersecurity incidents” as a reporting topic;
– Add Item 106 to Regulation S-K and Item 16J of Form 20-F to require a registrant to: Describe its policies and procedures, if any, for the identification and management of risks from cybersecurity threats, including whether the registrant considers cybersecurity as part of its business strategy, financial planning, and capital allocation; and require disclosure about the board’s oversight of cybersecurity risk and management’s role and expertise in assessing and managing cybersecurity risk and implementing the registrant’s cybersecurity policies, procedures, and strategies;
– Amend Item 407 of Regulation S-K and Form 20-F to require disclosure regarding board member cybersecurity expertise. Proposed Item 407(j) would require disclosure in annual reports and certain proxy filings if any member of the registrant’s board of directors has expertise in cybersecurity, including the name(s) of any such director(s) and any detail necessary to fully describe the nature of the expertise.
Commissioner Peirce dissented from the proposal. In her dissenting statement, she argues that “the governance disclosure requirements embody an unprecedented micromanagement by the Commission of the composition and functioning of both the boards of directors and management of public companies,” and that the granular nature of the proposed disclosure requirements makes them “look more like a list of expectations about what issuers’ cybersecurity programs should look like and how they should operate.”
The criticism of the rule as “micromanagement” of governance may be a fair comment, but if Commissioner Peirce thinks that kind of thing is unprecedented, she may want to take another look at what governance disclosures are already required by Item 407 of S-K. In any event, the comment period will end 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.
Yesterday, the SEC’s Acting Chief Accountant, Paul Munter, issued a statement addressing the assessment of materiality in the context of errors in financial statements. The statement reviews the applicable requirements and addresses some of the Staff’s concerns about how issuers approach correcting errors based on recent interactions.
In particular, the statement notes that the Staff has observed that “some materiality analyses appear to be biased toward supporting an outcome that an error is not material to previously-issued financial statements, resulting in “little r” revision restatements.” One of the areas that the statement specifically calls out is the need for greater objectivity in assessing qualitative materiality:
One area where the staff in OCA have observed an increased need for objectivity is in the assessment of qualitative factors. The interpretive guidance on materiality in SAB No. 99 speaks to circumstances where a quantitatively small error could, nevertheless, be material because of qualitative factors. However, we are often involved in discussions where the reverse is argued—that is, a quantitatively significant error is nevertheless immaterial because of qualitative considerations. We believe, however, that as the quantitative magnitude of the error increases, it becomes increasingly difficult for qualitative factors to overcome the quantitative significance of the error.
We also note that the qualitative factors that may be relevant in the assessment of materiality of a quantitatively significant error would not necessarily be the same qualitative factors noted in SAB No. 99 when considering whether a quantitatively small error is material. So it might be inappropriate for a registrant to simply assess those qualitative factors in reverse when evaluating the materiality of a quantitatively significant error. Such a scenario highlights the importance of a holistic and objective assessment from a reasonable investor’s perspective.
There’s a lot to digest in this statement, but one takeaway is that it’s yet another indication that the Staff has cast a gimlet eye on the growth in “little r” restatements over the past decade. Along those lines, the statement points out that while some attribute the trend toward little r restatements primarily to improvements in ICFR & audit quality, the Staff continues to monitor this trend in order to understand “the nature and prevalence of accounting errors and how they are corrected.” In other words, if you conclude that a little r restatement is sufficient to correct an error, you can expect a lot of questions from the Staff if your filings are pulled for review.
The January-February issue of The Corporate Executive has been sent to the printer (email sales@ccrcorp.com to subscribe to this essential resource). It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. The issue includes articles on:
– Key Trends in the Usage of Equity Awards
– SEC Reopens Comment Period for Pay Versus Performance Rules
– Proxy Plumbing Progress: A Look at Vote Confirmation this Proxy Season
According to this recent Cornerstone Research report, SEC & PCAOB accounting and auditing enforcement actions and monetary sanctions declined sharply in 2021. Here’s an excerpt with some of the specifics:
– The total number of accounting and auditing actions initiated by the SEC declined 32% from 50 in 2020 to 34 in 2021. This was a 41% decrease from the average number of 58 initiated actions during the 2016–2020 period and well below the number of actions initiated in each of the prior five years.
– The decline in the number of initiated accounting and auditing actions in the first year of the new administration (a decline of 16 actions, 32% lower than the number of actions in 2020) was smaller than the decline in the number of actions in 2017, the first year of the prior SEC administration (a decline of 31 actions, 42% lower than the number of actions in 2016).
– For the first time since 2016, the SEC initiated all accounting and auditing enforcement actions in 2021 as administrative proceedings.
– The two most common allegations in 2021 SEC actions related to a company’s revenue recognition and violations of internal accounting control over financial reporting. Each of these violations was alleged in about one-third of the total actions.
– In 2021, the SEC initiated two actions under the new Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606), which provides guidance for recognizing revenue for certain types of sales agreements.
While the number of accounting & auditing enforcement actions declined compared to the prior year, 2021 was a transitional year. SEC Chair Gary Gensler didn’t arrive until mid-April, and Enforcement Director Gurbir Greewal wasn’t appointed until June. The report says that enforcement activity ramped up significantly after their arrival and outpaced the enforcement activity during the early months of the prior administration under then-Chair Jay Clayton.
As someone who’s spent most of the past two weeks alternating between obsessively watching cable news coverage of the horror show in Ukraine, doomscrolling & hiding under my desk, the news that the IPO market has hit a bit of a slump didn’t come as a shock to me. However, I guess I wasn’t aware of exactly how bad current conditions were until I read this Bloomberg article, which says that IPOs have come to a screeching halt:
The U.S. market for new listings has shuddered to a halt and is now heading for its slowest period since the financial crisis over a decade ago. No company priced a traditional initial public offering last week amid the war in Ukraine, according to data compiled by Bloomberg, and the calendar is blank for this week as well. That means the market is on track for its first two-week period without an IPO — outside of a vacation period — since 2009.
The lack of listings coincides with the broader market extending its selloff on Russia’s invasion of Ukraine and the Cboe Volatility Index rising to the highest since January last year. What’s more, recent listings have underperformed other stocks, with U.S. IPOs conducted over the past year closing Monday an average of 30% below their offering prices, according to data compiled by Bloomberg.
Of course, the dearth of IPOs is only a part of a much bigger stock market sell-off that began well before Russia invaded Ukraine. But if there’s a silver lining here, it’s that – as the article points out – many companies that might be considering an IPO may be able to turn to the private equity markets, which are currently sitting on a boatload of cash.