Monthly Archives: June 2022

June 30, 2022

SEC’s Climate Disclosure Proposal: Avalanche of Comments at Deadline

The comment period for the SEC’s climate disclosure proposals expired on June 17th. Not surprisingly, the agency was the recipient of an avalanche of last-minute comments.  I waded through a bunch of these late arrivals and grabbed a handful that I thought were particularly interesting or significant. These include:

– A 94-page letter from the Society for Corporate Governance offering a critique of most of the specific rule proposals and calling into question the SEC’s authority to adopt the rules.  Of particular note are appendices criticizing the Public Citizen survey data on retail investors’ desire for climate change disclosure cited by the SEC in the adopting release & providing data on Society members’ estimates of compliance costs.

– A 35-page letter from the ABA’s Federal Regulation of Securities Committee addressing specific issues relating to proposed S-K line-item disclosures and calling into question the workability of the SEC’s proposed financial statement disclosure requirements.

– A 6-page letter opposing the proposed rules submitted by a group of former SEC Chairs & Commissioners led by Richard Breeden and Harvey Pitt.  Liz previously blogged about another group of former SEC bigshots who wrote in support of the SEC’s authority to adopt the proposal. These worthies disagree, characterizing the proposed rules as “an unprecedented and unjustified effort beyond financial materiality” that exceed the SEC’s statutory authority.

– A 21-page letter arguing that the proposed rules don’t violate the First Amendment from a group of 6 law professors led by Harvard Law School’s Rebecca Tushnet.

– A 30-page letter arguing that the SEC lacks the statutory authority to adopt the proposed rules submitted by Bernard Sharfman & James Copland. This letter responds to those commenters who argue that the SEC has almost limitless statutory authority to issue disclosure rules “in the public interest.” The authors argue that the SEC’s authority is somewhat more limited and contends that courts have construed this “in the public interest” language more narrowly & by reference to the objective of protecting investors.

In addition to this list, I’d like to highlight this 51-page letter submitted by a group of six commenters including former Corp Fin Director Alan Beller and former Delaware Chief Justice Leo Strine. This letter is probably the most constructive critique of the proposal that I’ve seen. Among other things, that letter recommends that the SEC make Scope 3 disclosure voluntary, delay implementation of the attestation requirement and consolidate proposed Items 1501-1503 of Reg S-K into one more concise MD&A-like item that is less prescriptive, less redundant and more focused on materiality. They even attach their proposed rewrite of those line items.

The Staff will wade through all of the submitted comments as part of finalizing the climate disclosure rule and crafting an adopting release for the Commissioners to approve. SEC Chair Gary Gensler wants to take action before year-end. If you expect to be involved in drafting your company’s climate disclosure – or will be helping gather and prepare emissions data for it – join on July 13th for a “Climate Disclosure Event” that will provide practical steps that you need to take now to be ready, and “lessons learned” from drafting our model disclosures.

To make this event an even bigger value, attendees are eligible for $100 off our 1st Annual Practical ESG Conference AND $200 towards an annual subscription to! Email or call 1-800-737-1271 to claim this offer.

Register today for this FREE event, and please share it with anyone on your team or in your network who may be interested. That includes ESG, Sustainability & Impact Officers, Environmental Health & Safety Officers, Investor Relations & Public Relations professionals, in-house and outside counsel who are advising boards or preparing disclosures, and anyone involved with ESG strategies and disclosures.

John Jenkins

June 30, 2022

Rule 10b5-1: WSJ Says Insiders Gain Outsized Profit for Sales Soon After Plan Adoption

Yesterday, the WSJ released an investigative report reviewing insider transactions under Rule 10b5-1 plans.  This excerpt says that one the Journal’s findings was that those insiders who trade shortly after adopting a plan do much better than those who wait:

A Wall Street Journal analysis of 75,000 prearranged stock sales by corporate insiders, using a comprehensive compilation of the data, shows that about a fifth of them occurred within 60 trading days of a plan’s adoption. The timing in aggregate made the trades more profitable: On average, those trades preceded a downturn in share price more often than when insiders waited longer to trade, the analysis found.

Collectively, insiders who sold within 60 days reaped $500 million more in profits than they would have if they sold three months later, according to the analysis, which examined trades from 2016 through 2021 and adjusted returns to remove the effect of sector-wide moves in the market.

What’s more interesting to me are that some of the report’s findings suggest that many companies are straying pretty far from best practices when it comes to allowing insiders to adopt & begin trading under Rule 10b5-1 plans. For example, the WSJ says that it found “scores of examples” where company insiders adopted a 10b5-1 plan near the end of a quarter and sold stock under the plan before results were announced.

Many companies impose a 30-day cooling off period for new plans, so it didn’t surprise me to learn that the WSJ found a “huge spike” in trades 30 days after adoption. However, the Journal report says that roughly 5% of the total trades it reviewed took place less than 30 days from plan adoption. Just under 2% of those trades took place less than 14 days after the plan was adopted, and some insiders traded the same day they adopted a plan. Yikes!

Adopting a plan near the end of the quarter & trading before that quarter’s earnings are released is asking for trouble, and while cooling off periods aren’t currently mandatory (although that will likely change soon), sales shortly after adopting a plan are a very bad look – as a bunch of executives and companies named in the WSJ report just discovered.

John Jenkins

June 30, 2022

Nasdaq Board Diversity Matrix Disclosure Deadline Looming

This Wilson Sonsini memo provides a reminder that Nasdaq-listed companies that haven’t included a board diversity matrix in their proxy statement filed with the SEC prior to August 8, 2022, will need to include a board diversity matrix on their company’s website no later than that date and inform Nasdaq that they have done so. Here’s an excerpt with some of the specifics:

If a company decides to make the disclosure on its website, Nasdaq provides a fillable PDF for U.S. companies and a fillable PDF for foreign issuers that companies may (but are not required) to use. A company must clearly label the disclosure on its website as the Board Diversity Matrix. Although Nasdaq does not mandate a particular place on the website, it recommends putting it on the company’s investor relations webpage or other webpage where governance documents are stored.

Following the initial 2022 compliance date, the company will be required to publish the matrix on its website concurrently with the filing of its proxy or information statement (or Form 10-K or 20-F, where applicable) and submit a URL link through the Nasdaq Listing Center within one business day after posting by completing Section 10 (Board Diversity Disclosure) of the Company Event Form. Nasdaq also offers Website Disclosure of Board Diversity Matrix: What Companies Need to Know, which provides further information.

For more analysis and instruction on the “comply or disclose” rule, visit our “Nasdaq” Practice Area.

John Jenkins

June 29, 2022

SEC Enforcement: EY Sanctioned for Role in CPA Exam Cheating Scandal

There’s a point at which I should no longer be shocked by scandals involving the Big 4. I guess I’m not there yet, because I was really taken aback by the enforcement proceeding against EY that the SEC announced yesterday.  This excerpt from the SEC’s press release describes the conduct that led to the proceeding:

EY admits that, over multiple years, a significant number of EY audit professionals cheated on the ethics component of CPA exams and various continuing professional education courses required to maintain CPA licenses, including ones designed to ensure that accountants can properly evaluate whether clients’ financial statements comply with Generally Accepted Accounting Principles.

EY further admits that during the Enforcement Division’s investigation of potential cheating at the firm, EY made a submission conveying to the Division that EY did not have current issues with cheating when, in fact, the firm had been informed of potential cheating on a CPA ethics exam. EY also admits that it did not correct its submission even after it launched an internal investigation into cheating on CPA ethics and other exams and confirmed there had been cheating, and even after its senior lawyers discussed the matter with members of the firm’s senior management. And as the Order finds, EY did not cooperate in the SEC’s investigation regarding its materially misleading submission.

That’s a really ugly set of admissions. Not surprisingly, the sanctions imposed on the firm are no bargain either.  In addition to a $100 million civil money penalty – the largest ever imposed by the SEC on an auditor – the SEC’s order imposes a set of sweeping undertakings on the firm.

The undertakings begin by requiring EY to investigate the “sufficiency and adequacy of its quality controls, policies, and procedures relevant to ethics and integrity” and to responding to SEC information requests.  It then must report the results of that investigation to the SEC. That report must set forth in writing how the policies and procedures are “designed and implemented in a manner that provides reasonable assurance of compliance with all professional standards” referenced in the order.

The SEC’s order goes on to require EY to retain two independent consultants.  The first consultant must conduct an independent review of the policies & procedures that EY is required to investigate and report on to the SEC.  The second will work in conjunction with a special review committee comprised of senior EY personnel to conduct a review of the firm’s conduct relating to its response to the SEC’s information request, “including whether any member of EY’s executive team, General Counsel’s Office, compliance staff, or other EY employees contributed to the firm’s failure to correct its misleading submission.”  Subject to certain limitations, the order requires EY to adopt the recommendations made by either of the two consultants.

The order also imposes various certification and training requirements and requires the firm to provide a copy of the SEC’s order to all of its public company and broker dealer audit clients. This last requirement seems to me to be the equivalent of requiring EY to lay the order on the table of the audit committees that have retained it. That should make for some interesting conversations.

Check out Commissioner Peirce’s dissenting statement, which provides a less damning perspective on EY’s conduct surrounding the firm’s response to the SEC’s information request, and this WSJ article, which provides additional details & background on the case.

John Jenkins

June 29, 2022

Capital Markets: Converts Hit the Skids

During the early days of the pandemic, many companies opted to meet their capital needs by issuing convertible debt.  Fueled by continuing low interest rates, convertible debt remained attractive to investors through 2021, but as this WSJ article indicates, higher interest rates & the pullback in tech stocks have resulted in the convert market cratering in 2022:

Few investments have delivered positive returns this year, as investors have struggled with the implications of stubbornly high inflation and rapidly rising interest rates. But the performance of convertible bonds, in some respects, “is still a little bit shocking,” said Michael Youngworth, convertible bonds strategist at BofA Global Research. The reason for the surprise isn’t just the magnitude of convertible bonds’ losses but how they have fallen short of their promise. A major selling point has long been that convertible bonds offer investors the potential gains from stocks, with bonds’ downside protection.

One issue is that stock declines this year have been particularly concentrated in the type of high-growth technology companies that make up a large portion of convertible bond issuers. But that is only part of the story.

This year, convertible bonds have captured 46% of their underlying stocks’ performance when the stocks have climbed but 49% of their performance when they have declined. That puts them on track for the worst upside-to-downside capture ratio in records going back to 1995 and only the second year when the ratio has been less than one, according to BofA Global Research data.

Nature abhors a vacuum, so just as the smart money rushes out of converts, it looks like a golden opportunity has emerged for the dumb money to rush in. Behold, the crypto folks have discovered convertible debt!

John Jenkins

June 29, 2022

Commissioner Lee Headed for NYU

Bloomberg Law reports that SEC Commissioner Allison Herren Lee, whose term expires at the end of the month, will join the faculty of NYU Law School after she leaves the SEC:

Lee will be appointed an adjunct professor and senior fellow at the law school’s Institute for Corporate Governance and Finance, teaching a seminar on law and business in the fall, a school official confirmed Thursday. She announced earlier this year she would leave the Securities and Exchange Commission, following the Senate confirmation of a successor. Jaime Lizarraga, the nominee for Lee’s seat, won Senate approval Thursday.

John Jenkins

June 28, 2022

Clawbacks: SEC Ponders Expanding Proposed Rule to Cover “Little r” Restatements

In its October 2021 release reopening the comment period for its proposed clawback listing standard rules, the SEC floated the idea of including “little r” restatements as triggers for a compensation recovery analysis under the rules. Earlier this month, the SEC’s Department of Economic Research and Analysis issued a memorandum addressing the impact of including little r restatements with the scope of the rules. This excerpt says that while requiring little r restatements to be included would increase the total number of restatements that might trigger clawbacks, those restatements may be less likely to trigger a recovery of previously paid comp (also see Liz’s blog on

We estimate that “little r” restatements may account for roughly three times as many restatements as “Big R” restatements in 2021, after excluding restatements by SPACs. Accordingly, if the final rules were to encompass both types of restatements, it would increase the total number of restatements that could potentially trigger a compensation recovery analysis that may result in recovery.

However, “little r” restatements may be less likely than “Big R” restatements to trigger a potential recovery of compensation. For example, “little r” restatements may be less likely to be associated with a decline in previously reported net income, 19 and on average they are associated with smaller stock price reactions. As a result, if the final rules were to encompass both “Big R” and “little r” restatements, while there would be an increase in the number of restatements that would be included, the overall number of recoveries may not increase in proportion to the increase in the number of restatements that would be included. This, in turn, would mitigate the potential impact of including “little r” restatements on the expected benefits and costs associated with the proposed rules.

The DERA memo noted that one potential downside of including little r restatements is that by expanding the rule’s scope, it may “encourage managers to make suboptimal operational decisions rather than suboptimal accounting decisions to meet financial targets.” However, the memo also points out that such a decision would “mitigate the potential for the proposed rules to create an incentive for managers to report misstatements as “little r” restatements rather than “Big R” restatements.”  Given the agency’s jaundiced view about the abundance of little r restatements, my guess is that this latter point may carry a lot of weight when it comes to the final rule.

Speaking of things that might carry some weight, the CII recently submitted a comment letter reiterating its support for including little r restatements within the scope of the clawback rules.

With final rules expected as soon as this fall, We’ll be sharing the latest updates on clawbacks at our “Proxy Disclosure & 19th Annual Executive Compensation Conference” coming up in October. Our session on “Clawbacks: Where Things Stand” – with Davis Polk’s Kyoko Takahashi Lin,’s Mike Melbinger, Gibson Dunn’s Ron Mueller, and Hogan Lovells’ Martha Steinman – will give you practical action items to take in response to SEC rulemaking and recent enforcement activity, as well as investor expectations. Here’s the full agenda for the Conferences – 18 sessions over 3 days. Sign up online, email, or call 1-800-737-1271.

John Jenkins

June 28, 2022

Financial Reporting: Companies Using LIFO Face Investor Scrutiny

We’ve been operating in a low inflation environment for so long that I think the last time anybody cared about the impact of inflation on inventory accounting was when I was taking my undergrad Financial Accounting 101 class – and in case anybody from the Division of Enforcement is reading, I want to point out that this was my only accounting class. Unfortunately, inflation is back, and according to this WSJ article, so are investor concerns about its impact on companies that use the “Last In, First Out” (LIFO) method of accounting for inventories:

In 2021, approximately 15% of companies in the S&P 500 used LIFO as their primary inventory method and 50% used FIFO, according to Credit Suisse Group AG , citing annual reports. The remainder used an average-cost method, a combination of methods, or methods that couldn’t be determined, Credit Suisse said.

Investors are scrutinizing accounting methods like the use of LIFO amid recent declines in the stock market to ensure they fully understand business models in their portfolios, said Ron Graziano, a managing director at Credit Suisse. “It really matters when it matters, and it matters a lot right now,” he said.

The article cites examples of some LIFO companies that reported big reserve increases associated with LIFO for their most recent reporting period and providing forward-looking disclosure about the potential impact of LIFO accounting for their full fiscal years.

John Jenkins

June 28, 2022

Financial Reporting: Can Staff Scrutiny of LIFO Companies be Far Behind?

If investors are scrutinizing LIFO companies more carefully, it almost goes without saying that those companies need to be prepared for the Staff to take a close look at disclosure practices as well. In addition to addressing the potential impact of inflation on LIFO inventory valuations and their current and future results of operations in the Risk Factors & MD&A sections of their filings, companies should keep an eye out for potential comment trends on LIFO issues.

I did a quick search on EDGAR and haven’t found any 2022 comment letters referencing LIFO that have been released yet, but I did find a handful of comment letters from 2021 that raised issues that are likely to be relevant this year as well. These include:

– Comments directed at non-GAAP presentations that exclude changes in LIFO reserves, which the Staff has challenged as potentially involving “tailored accounting.” The company in question was able to successfully resolve this comment.

– Comments seeking clarification (see comment # 3) as to whether LIFO inventory was reported at the lower of cost or market or lower of cost or net realizable value in accordance with ASC330-10-35-1B through -7. Here’s the company’s response with the requested clarifying disclosure.

– The usual “equal prominence” comment on non-GAAP measures that exclude changes in LIFO reserves.

LIFO accounting may be an issue for only a relatively small percentage of public companies, but it’s a subpart of the much broader issue of how inflation is affecting all public companies’ results of operations and financial condition.  In that regard, although the SEC’s 2020 Regulation S-K modernization rules eliminated specific line-item disclosure requirements concerning the impact of inflation and changes in prices, discussion of these matters is still required if they are part of a known trend or if they have had or the company reasonably expects them to have a material impact on key income statement line-items.

John Jenkins

June 27, 2022

ESG Disclosure: Goals & Targets Disclosure on the Rise in SEC Filings

Good morning! I know everyone was expecting to see Dave Lynn at the helm of this week’s blogs, but “Dave’s not here” – so you’re stuck with me for another week. The good news is that Emily will handle “The Mentor Blog” this week.

White & Case recently published its annual survey of ESG disclosure practices in SEC filings. The survey reviewed annual meeting proxy statements and annual reports of 50 Fortune 100 companies and identified trends in ESG disclosures from 2020-2022. Given the SEC’s comment letters on climate disclosure & the fact that everyone knew a climate rule proposal was on the way when proxy season began, it’s not surprising that environmental topics were the fastest growing category of ESG disclosures. Trailing close behind were disclosures about human capital management – again, that’s not surprising in light of the SEC’s recent rulemaking in the area.

While the top two spots were claimed by the usual suspects, the third fastest growing category of ESG disclosure was one that made the list for the first time this year – E&S goals and targets. This excerpt provides some details on the survey’s findings concerning these disclosures:

For the first time in White & Case’s annual survey, E&S Goals and Targets made the top seven categories, rising to the third spot with the largest increase in disclosure. This reflects the heightened focus by investors on companies setting specific targets with respect to environmental and social priorities.

Seventy-six of the filings surveyed (or 76%) increased their disclosure related to E&S goals and targets. In total, all but one of the surveyed companies (49 out of 50) included some form of E&S goal or target. Of these, 32 companies included the disclosure in their Form 10-K and 48 companies included it in their proxy statement. Of the 49 companies that included E&S goals and targets, seven companies included them for the first time in their 2022 disclosures.

The survey says that it wasn’t just qualitative disclosures about ESG goals targets that grew this year. A total of 44 companies, or 88% of those surveyed, included quantitative metrics. Of this amount, 18 included such disclosure in their Form 10-K (compared to 11 in 2021) and 42 included it in their proxy statements (compared to 26 in 2021).

John Jenkins