In what is no doubt the biggest news of the week for our judicial branch (kidding), the “Courthouse Ethics & Transparency Act” has been presented to the President for signature. Congress approved the bill last week. Here’s a summary:
The Courthouse Ethics and Transparency Act would require that federal judges’ financial disclosure reports be made publicly available online and require federal judges to submit periodic transaction reports of securities transactions in line with other federal officials under the STOCK Act. The bill, which passed the Senate unanimously in February, would amend the Ethics in Government Act of 1978 to:
• Require the Administrative Office of the U.S. Courts to create a searchable online database of judicial financial disclosure forms and post those forms within 90 days of being filed, and
• Subject federal judges to the STOCK Act’s requirement of filing periodic transaction reports within 45 days of securities transactions over $1,000.
Importantly, the bill also preserves the existing ability of judges to request redactions of personal information on financial disclosure reports due to a security concern.
As we’ve noted in this blog before, the STOCK Act hasn’t exactly been known for its sweeping effectiveness. That did not deter the sponsors of the bill, who pointed to its importance in maintaining the independence of the judiciary. The WSJ reported last year that 131 judges had failed to recuse themselves from lawsuits involving companies in which they or their families held shares.
Here’s something that Lawrence just blogged about on PracticalESG.com:
Last week, the SEC’s Climate & ESG Task Force – which sits in the Commission’s Division of Enforcement and has a mandate to identify material gaps or misstatements in issuers’ ESG disclosures – announced that it had charged a Brazilian mining company with making false & misleading claims about dam safety that resulted in a collapse that killed 270 people, caused environmental & social harm, and allegedly led to a loss of more than $4 billion in the company’s market cap. The announcement explains:
According to the SEC’s complaint, beginning in 2016, Vale manipulated multiple dam safety audits; obtained numerous fraudulent stability certificates; and regularly misled local governments, communities, and investors about the safety of the Brumadinho dam through its environmental, social, and governance (ESG) disclosures.
The SEC’s complaint also alleges that, for years, Vale knew that the Brumadinho dam, which was built to contain potentially toxic byproducts from mining operations, did not meet internationally-recognized standards for dam safety. However, Vale’s public Sustainability Reports and other public filings fraudulently assured investors that the company adhered to the “strictest international practices” in evaluating dam safety and that 100 percent of its dams were certified to be in stable condition.
‘Many investors rely on ESG disclosures like those contained in Vale’s annual Sustainability Reports and other public filings to make informed investment decisions,’ said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. ‘By allegedly manipulating those disclosures, Vale compounded the social and environmental harm caused by the Brumadinho dam’s tragic collapse and undermined investors’ ability to evaluate the risks posed by Vale’s securities.
Although Vale is a Brazilian company, they have American Depositary Receipts (ADRs) and file reports with the US SEC, which gives the SEC jurisdiction to enforce US securities regulations/laws against the company. The 76 page complaint contains a number of allegations about third party auditor conflict of interest, bias and fraud in dam safety audit work conducted in conjunction with engineering assessments. There is also a significant element of corporate governance failures related to the audits. This Cooley blog has more details on the 76-page complaint.
The action is the first I know of that directly connects safety audits to “violating antifraud and reporting provisions of the federal securities laws,” potentially setting a precedent significantly increasing liability of ESG auditors. It appears to be the first action brought by the ESG Task Force since its formation in March of last year.
What This Means
The Climate and ESG Task Force was established specifically to enforce against material gaps or misstatements in issuers’ ESG disclosures. ESG data and the audits producing such data are now a securities law risk. Companies that use auditors to collect or validate environmental, safety, sustainability and similar data should ensure professional standards for audit practices and impairment identification/management are fully implemented.
Non-financial EHS auditors may see this as unfortunate timing given that the SEC climate proposal includes an attestation report for emissions inventory disclosures and certain related disclosures about the service provider. The proposal language states that the attestation service provider would not have to be a registered public accounting firm and the attestation report would not need to cover the effectiveness of internal control over GHG emissions disclosure (i.e., ICFR). However, questions 144 – 153 of the proposal request input on matters related to whether the use of non-financial auditors is appropriate. The Vale action may create doubt that doing so is a good idea.
We’re posting memos about this development in our “ESG” Practice Area on TheCorporateCounsel.net – and diving into even greater detail in the “Enforcement” Subject Area on PracticalESG.com.
Board advisors will need to stay on their toes as we greet the “Brave New World” of ESG litigation – and this is one of the timely topics that we’ll cover October 11th at our “1st Annual Practical ESG Conference.” Join us virtually to hear from litigators doing this work – Morrison & Foerster’s Jina Choi, Beveridge & Diamond’s John Cruden, and Baker McKenzie’s Peter Tomczak. This session – “ESG Litigation & Investigations – Are You at Risk?” – also features Doug Parker of environmental data firm Ecolumix, who previously served as a Special Agent & Director of the EPA’s Criminal Investigation Division, where he oversaw maters including the investigation into the Deepwater Horizon disaster and the Volkswagen emissions scandal. It’s sure to be a fascinating and practical conversation.
Here’s the full agenda for the event. Sign up online or email sales@ccrcorp.com to register – get in before June 10th to take advantage of the “Early Bird” discount.
Wachtell Lipton recently published an updated version of its longstanding “Audit Committee Guide.” The 2022 edition weighs in at 210 pages. This introductory note explains how the guide can be used:
To assist those who serve on the audit committee with their special role, this Guide provides an overview of the key rules applicable to audit committees of NYSE- and Nasdaq-listed companies and describes some of the best practices that audit committees should consider. In addition, attached as exhibits are a Model Audit Committee Charter for NYSE-listed companies, a Model Audit Committee Charter for Nasdaq-listed companies, a Model Audit Committee Responsibilities Checklist, a Model Audit Committee Member Financial Expertise and Independence Questionnaire, a Model Audit Committee Pre-approval Policy, Model Policies and Procedures with respect to Related Person Transactions, Model Whistleblower Procedures and a Model Audit Committee Self-Evaluation Checklist. These models are just that—models that can and should be adapted by a company to fit its own circumstances.
In today’s financial and enhanced regulatory enforcement climate, the audit committee must be vigilant not only in monitoring financial reporting and compliance, but also in following appropriate procedures in performing its duties. It is incumbent upon every audit committee to ensure that its policies and procedures are “state of the art.” We hope that this Guide will assist audit committees in doing so.
Members can access this guide along with heaps of other helpful resources in our “Audit Committees” Practice Area. If you aren’t already a member of TheCorporateCounsel.net, sign up now and take advantage of our “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund!
On the heels of its March proposal on enhanced cybersecurity disclosure, the SEC announced earlier this week that it is allocating 20 additional positions to its newly renamed “Crypto Assets & Cyber Unit” (formerly known as the “Cyber Unit”).
This group sits in the Division of Enforcement and will grow to 50 dedicated positions with the new allocation – nearly double its current size! In addition to its expanded role of protecting investors in crypto markets, the announcement suggests that the unit will continue to investigate companies for:
Failing to maintain adequate cybersecurity controls and for failing to appropriately disclose cyber-related risks and incidents. The Crypto Assets and Cyber Unit will continue to tackle the omnipresent cyber-related threats to the nation’s markets.
To the extent that your company hasn’t already gotten serious about cybersecurity oversight and disclosure, the SEC is sending strong signals that now is the time to do so. This 17-page memo from Tapestry Networks recaps recent discussions among sophisticated audit committee chairs and cyber experts about the steps companies are taking. Here are some takeaways:
– The role of the Chief Information Security Officer is continuing to evolve, and their reporting structure sends a signal. It’s critical for CISOs to feel like they can be candid with the board.
– Directors employ a range of tools to understand companies’ cyber capabilities – maintaining open lines of communication is extremely important in the current heightened risk environment. Dashboards, KPIs, executive sessions with the CISO, and third-party assessments are methods that some boards use to stay informed.
– Boards are assessing how to best provide & structure cyber oversight – many are searching for a unicorn “cyber expert” who also has well-rounded business expertise, and more companies are creating stand-alone technology committees (but it’s still a minority practice). In 2021, 68% of Fortune 100 companies continued to assign primary responsibility for cybersecurity oversight to the audit committee.
See the full write-up for more color on all these points, along with sample cyber-related questions for audit chairs to consider. We’ve posted a number of memos about the board’s role in cybersecurity oversight in our “Cybersecurity” Practice Area.
We continue to worry for the people of Ukraine and the various consequences of the Russian invasion. We know the Staff at the SEC is also considering the disclosure implications – John blogged a few weeks ago about a comment letter exchange, and he shared a prediction that other companies could receive similar comments. Yesterday, Corp Fin posted this sample letter to companies regarding the business impact of the invasion. The Staff identified several topics for which companies should provide detailed disclosure, to the extent material or otherwise required:
(1) direct or indirect exposure to Russia, Belarus, or Ukraine through their operations, employee base, investments in Russia, Belarus, or Ukraine, securities traded in Russia, sanctions against Russian or Belarusian individuals or entities, or legal or regulatory uncertainty associated with operating in or exiting Russia or Belarus,
(2) direct or indirect reliance on goods or services sourced in Russia or Ukraine or, in some cases, in countries supportive of Russia,
(3) actual or potential disruptions in the company’s supply chain, or
(4) business relationships, connections to, or assets in, Russia, Belarus, or Ukraine. The financial statements may also need to reflect and disclose the impairment of assets, changes in inventory valuation, deferred tax asset valuation allowance, disposal or exiting of a business, de-consolidation, changes in exchange rates, and changes in contracts with customers or the ability to collect contract considerations.
In addition, since Russia’s invasion of Ukraine, many companies have experienced heightened cybersecurity risks, increased or ongoing supply chain challenges, and volatility related to the trading prices of commodities regardless of whether they have operations in Russia, Belarus, or Ukraine that warrant disclosure.
Companies also should consider how these matters affect management’s evaluation of disclosure controls and procedures, management’s assessment of the effectiveness of internal control over financial reporting, and the role of the board of directors in risk oversight of any action or inaction related to Russia’s invasion of Ukraine, including consideration of whether to continue or to halt operations or investments in Russia and/or Belarus.
This is a rapidly evolving area. Corp Fin’s sample comment letter follows a rulemaking petition last week that asked the SEC to require disclosure about business dealings in and with Russia and Belarus. For guidance on the financial statement impacts that may warrant disclosure, check out Dave’s blog last week. In our “Ukraine Crisis” Practice Area, we’re posting lots of resources for members who are navigating these issues.
The shareholders rejected a shareholder proposal that Abbott’s Board of Directors adopt a policy on Rule 10b5-1 plans with certain restrictions and disclosure requirements, with 48.76 percent of the votes cast voting “For” the proposal.
The proposal was submitted by the NYC Comptroller and called for a policy for Rule 10b5-1 plans that would require:
1. A “Cooling Off Period” of at least 120 days between Plan adoption and initial trading under the Plan.
2. An “Overlapping Plan Prohibition” preventing an individual/entity from having multiple Plans simultaneously.
3. Named Executive Officers and Directors to disclose on the Company’s proxy statement the number of shares subject to a Plan.
4. Whenever a Section 16 corporate officer or director adopts, modifies, or cancels a Plan, a Form 8-K disclosure indicating the name of the affected individual, the number of shares covered, and the date of adoption, modification, or cancellation of the Plan.
5. Disclosure on Form 4 of whether a trade was made under a Plan, and the Plan’s adoption or modification date.
It’s a big deal when the first iteration of a shareholder proposal comes close to passing, even if it doesn’t make it quite all the way there. This one is particularly notable because it was based on the recommendations of the Commission’s Investor Advisory Committee and it includes several features that ended up being part of the SEC’s rule proposal – e.g., a 120-day cooling-off period, a prohibition on overlapping plans, and additional disclosure. ISS and Glass Lewis both recommended voting for the proposal.
Abbott’s board did not support the proposal, saying that they already have policies and limitations in place to guard against insider trading (30-day cooling off period, pre clearance, no trades during blackouts, Form 4 footnotes, etc.) and that the proposal would disadvantage the company by having it go well beyond current market practices for trading plans and, in some ways, beyond the SEC’s pending rule proposal.
Abbott’s statement of opposition doesn’t directly say whether the company supports the SEC’s proposal. But it cautions against over-burdening parameters for trading plans, and that is not out of step with general corporate sentiment – through comment letters on the rule proposal, dozens of other companies & corporate advisors have indicated that aspects of the proposal would be overly burdensome and actually make insiders less likely to adopt & use Rule 10b5-1 plans. The implied consequence to that is diminished predictability & transparency, compared to what we have today.
This Rule 14a-8 proposal shows that shareholders have more than one way to push for changes to insider trading policies & practices. The voting outcome might also reinforce messaging to the SEC that investors support adopting the Rule 10b5-1 amendments substantially as proposed. On the other hand, more than half of Abbott’s shareholders did not support this proposal! And it’s unclear whether adding cumbersome conditions to the affirmative defense will deliver the enhanced transparency & protections that shareholders say they want.
We’ve been posting tons of memos about the SEC’s proposal – along with other resources – in our “Rule 10b5-1″ Practice Area. Members should also make sure to visit the transcript from our webcast about the proposal – Skadden’s Brian Breheny, Davis Polk’s Ning Chiu, WilmerHale’s Meredith Cross, Broadridge’s Keir Gumbs and Morrison & Foerster’s Dave Lynn were kind enough to share their many practical insights about what it will mean if adopted. Also check out this blog contributed by Orrick’s JT Ho, Carolyn Frantz and Soo Hwang about steps companies should consider before the SEC adopts a final rule.
We’ve posted the transcript for our recent webcast for members, “The (Former) Corp Fin Staff Forum.” This was an action-packed discussion among “All-Stars” – Sidley’s Sonia Barros, WilmerHale’s Meredith Cross, Gibson Dunn’s Tom Kim, Broadridge’s Keir Gumbs and Morrison & Foerster’s Dave Lynn – and it was full of useful info. Here’s something Dave shared about sample comment letters, which is all the more relevant in light of the sample letter that Corp Fin published yesterday:
Another interesting area to pay attention to is one of the topics Sonia just mentioned: climate change disclosure. The Staff took the step that’s become a tried-and-true strategy of putting out a sample comment letter. The concept is, while we could all wait around and see what comments the SEC has issued on climate change after the reviews have been completed and correspondence is put up on EDGAR, but by that time you’ve lost the momentum.
For many years, the Staff has pursued this concept of putting up a sample comment letter that addresses the range of issues. As Sonia mentioned, these letters focused on the applicability of the 2010 interpretive guidance that came from the Commission, as well as the relationship between the type of information that companies put in their investor communications on their website, for example their sustainability reports, relative to what information they determine was “material” for the purposes of their SEC filings. One interpretive “shot across the bow” was putting out those comments so that people could see the positions the SEC was taking in real-time through those letters.
Similarly, we’ve seen a sample letter posted regarding China-based companies. That letter is focused on various risks that have been identified and have been a focus of Congress and the Commission over the last few years, including the applicability of the Holding Foreign Companies Accountable Act. The level of detail in the China-based companies’ letter was significant in terms of the disclosure that was expected in the filings regarding the structures employed by these entities and the involvement of authorities in China with respect to the company’s business and the like. There was specific guidance in there around SPACs, as well.
If you are not a member of TheCorporateCounsel.net, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online. With our “100-Day Promise,” during the first 100 days as an activated member, you may cancel for any reason and receive a full refund!
Join us tomorrow at 2pm Eastern for the second event in PracticalESG.com’s 3-part DEI workshop series. This 90-minute session is on the topic of “Understanding and Using Equity Audits and Civil Rights Audits.” Not only will this FREE workshop deliver info to help you understand what civil rights audits, racial equity audits, and pay equity audits are intended to accomplish – you will be hearing from the top leaders in this space. In a “fireside chat” format, you’ll hear from:
– Eric Holder – Senior Counsel at Covington, advising on civil rights audits and complex investigations, and 82nd US Attorney General – the third longest-serving Attorney General in U.S. history and the first African American to hold that office
– Laura Murphy – President of Laura Murphy & Associates, civil rights leader, and pioneer of civil rights audits with work at Airbnb and Facebook
Eric and Laura are not only civil rights trailblazers, they worked together on Airbnb’s audit and will have a lot to talk about. Then, stay for our informative panel discussion, featuring:
– Megan Cacace – Director of Anti-Discrimination & Equity Programs at Airbnb, which in 2016 was the first company to conduct a civil rights audit
– Aaron Lewis – Partner at Covington, leading clients through the process of conducting civil rights audits
– Tejal Patel – Corporate Governance Director at SEIU Affiliates’ Supplemental Savings Plan/SOC Investment Group – which is the proponent behind the McDonald’s proposal and successful racial equity audit initiatives at several big banks and other companies
The accomplished Ruth Umoh will moderate these discussions. Ruth is currently an Editor at Fortune and a former Editor of Forbes, CNBC Reporter, and Producer for Rolling Stone Magazine.
Every person who is doing DEI and ESG work, tasked with managing stakeholder outcomes, or advising boards on shareholder initiatives that could affect the proxy statement and director support, needs to understand this emerging practice. Ngozi blogged last week about the signs that suggest these audits will become more mainstream and inform more DEI and ESG work. Sign up today for this free workshop (it only takes a minute) and join us tomorrow at 2pm Eastern.
If you can’t make the live session, a replay will be available for members of PracticalESG.com. Here’s the replay of the first session, “Collecting Diversity, Equity & Inclusion Data: What to Measure & Why.” That event featured DiversityIQ’s Cheryl Cole, Fossil Group’s Sheri Crosby Wheeler, Aon’s Aria Glasgow, Pipeline Equity’s Katica Roy, Fortune’s Ruth Umoh, and Ngozi – and was full of practical guidance.
If you aren’t already a member, sign up online or by emailing sales@ccrcorp.com or calling 800-737-1271. Our “100 Day Promise” allows you to try a subscription at no risk for 100 days – within that time, you may cancel for any reason and receive a full refund!
It’s impossible to know the internal machinations of any sensitive board decision – but there sure is a lot of speculation about how Twitter’s board arrived at approving Elon Musk’s (initial & only) offer to buy that company. A lot of commentary stems from statements made at an all-hands meeting. In that meeting, the company’s CEO emphasized that the board had to act in the best interest of the shareholders, and determined this offer was the best they could do:
As I’ve said, the board decides based on two factors. We act in the interest of our shareholders and look for value for them in the long term. Our job is to think about the price, and consider any offer on the table. And we compare that against the intrinsic value of the company based on the future-looking outlooks we have financially.
We get a lot of advice from several lawyers and bankers in the process … And when we looked at all the information and all of the data, every one of us concluded that based on our fiduciary responsibility … this offer at the price it ended up at was in the best long-term interest of our shareholders.
So if Twitter’s board had said “Twitter is not worth $54.20 per share and never will be, but we declined Musk’s offer anyway because we think it is bad for users and the product,” that would have been at least a risky move. But if it had said “we declined Musk’s offer because we think it is bad for users and the product, and we think that if we continue to improve the product and user experience then in the long run this obviously important social network should be worth more than $54.20 per share,” that would have been a defensible position even if, like, three-year earnings projections did not really support a $54.20 price.
It would help, in making that case, if Twitter’s board and managers had a long-term plan. What is strange here is that the richest person on earth came in out of the blue with a not-particularly-preemptive offer to buy a service that he is obsessed with and that seems crucial to his success. Hearing that, you might think things like “huh this product must be pretty valuable.” You might sit down and try to think of ways to extract value from it, other than selling it to Musk at the first price he proposed. Twitter’s board had no ideas.
One view is to say that the Twitter deal shows that the BRT statement didn’t change anything. Another view is that it makes long-term strategy even more important.
In this 30-minute LinkedIn interview between Daniela Liscio and Bev Behan (who Courtney Kamlet and I also interviewed late last year for our “Women Governance Trailblazers” podcast), Bev says that the speed and surprise of the Musk/Twitter deal underscores the importance of staying alert to corporate governance practices, director skill sets, and vulnerabilities.
According to Bev, the bottom line is that no matter how safe your board might feel, unanticipated “black swan” events can and will happen. Whether you’re dealing with a small or large company, difficult discussions that the board thought would be private may come to light – and their decisions will be heavily scrutinized with 20/20 hindsight. The fallout of that can go beyond shareholder value and affect director reputations.
– “Protecting Your Board from the Next Maelstrom” – featuring Soundboard Governance’s Doug Chia, Gibson Dunn’s Beth Ising, Cozen O’Connor’s Kathy Jaffari, and Digimarc’s Board and Nom/Gov & Sustainability Committee Chair Alicia Syrett
– “ESG Disclosures – Staying Out of Hot Water” – with Prudential’s Peggy Foran, MoFo’s Dave Lynn, Skadden’s Brian Breheny and Wachtell’s Leo Strine, Jr.
In addition, join us for the “1st Annual Practical ESG Conference.” For both of these events (which can be bundled together for a discount), our seasoned and diverse speakers will be sharing practical guidance in a fast-moving format. Sign up online, email sales@ccrcorp.com, or call 1-800-737-1271.
Sign up today for the best rate, because our “Early Bird” pricing ends June 10th!