The SEC’s Investor Advisory Committee is scheduled to meet virtually on Thursday, with an agenda that focuses on several hot topics for investors. The session will include a panel discussion regarding the accounting of non-traditional financial information, a panel discussion regarding climate disclosure, a discussion of a recommendation on protecting older investors and a discussion of a recommendation on funding investor advocacy clinics.
The SEC recently announced several new members of the Investor Advisory Committee:
One of the last vestiges of the paper filing world is (mostly) disappearing. On Friday, the SEC adopted several amendments to the rules governing electronic filing and the use of structured data that were proposed in December 2020 and November 2021. Among those changes is a requirement that Form 144 be filed electronically, eliminating the paper filing option, except in the case of non-reporting issuers.
Form 144 must be filed with the SEC by an affiliate of the issuer as a notice of the proposed sale of securities in reliance on Rule 144, when the amount to be sold under Rule 144 by the affiliate during any three-month period exceeds 5,000 shares or units or has an aggregate sales price in excess of $50,000. A person filing a Form 144 must have a bona fide intention to sell the securities referred to in the form within a reasonable time after the filing of the Form 144.
In practice, Form 144s are often filed by brokerage firms on behalf of their clients who are affiliates of a public company that are selling securities under Rule 144, so the shift to mandatory electronic filing will likely require some adjustments to their processes. As noted in Chair Gensler’s statement about the rule changes, there will be a relatively long lead time in implementing the changes:
Specifically, the requirement to file Form 144 electronically on EDGAR will commence six months from the date of publication in the Federal Register of the Commission release that adopts the version of the EDGAR Filer Manual addressing updates to Form 144. We currently expect that the Commission would consider adoption of the relevant version of the EDGAR Filer Manual addressing updates to Form 144 in September 2022, and publication in the Federal Register would occur thereafter. We believe this extended transition period will provide sufficient time for broker-dealers to transition clients for whom they prepare and submit Form 144 filings, including time for those clients who do not currently have access to EDGAR to apply for EDGAR access.
Based on past Form 144 filings, the SEC estimates that approximately 12,250 filers would be required to switch to electronic filings on EDGAR, so there are still those out there who opt to submit paper filings.
The SEC noted in the adopting release that it was not taking any action concerning the remaining proposals in the Rule 144 proposing release from December 2020, including the proposal to eliminate the Form 144 filing requirement for the sale of securities of non-reporting issuers and thus necessitating the paper filing carve-out for those situation where the non-reporting issuer does not have an EDGAR page. While the adopting release for the Form 144 amendments notes that the SEC will provide an online fillable form to facilitate filings, there is no discussion of whether this online fillable form will be integrated with the Form 4 online fillable form, as was discussed in the December 2020 proposing release and as we covered in detail in the March-April 2021 issue of The Corporate Counsel.
One interpretive issue that the mandated electronic filing of Form 144 raises is that the Staff has essentially applied a “mailbox rule” to Form 144 in determining whether the Form 144 has been filed “concurrently” with either the placing of a sale order with a broker or the execution of the sale directly with a market maker (see Securities Act Rules Compliance & Disclosure Interpretation Question 136.09). It is unclear how this concept would be applied in an EDGAR world, where most filings transmitted after 5:30 pm eastern time are deemed by the system to be “filed” on the next business day.
The same adopting release that brings us mandated electronic filing of Form 144 also will require the electronic filing of the “glossy” annual report required under Exchange Act Rules 14a-3 and 14c-3. The glossy annual report that is sent to shareholders is required “furnished” for the information of the SEC, which for many years required issuers to mail the glossy annual report to the Commission.
I can recall that when I started in Corp Fin in the mid-1990s, we were inundated with seven copies of each public company’s glossy annual report. There were stacks of the annual reports lining the halls and file rooms because nobody really knew what to do with them. Someone came up with the idea of turning the covers of some annual reports into art work, and I recall them being hung on the wall of the large Corp Fin conference room at 450 5th Street.
The glossy annual report always had a sort of “square peg, round hole” problem with EDGAR because, by its very nature, the report was full of graphic and image material that old-school EDGAR could not handle. The shift to mandatory HTML for EDGAR filings back in 2017 paved the way for EDGAR to now handle more complicated documents, like the glossy annual report.
Back in 2016, the Corp Fin Staff took the perfectly reasonable approach of indicating that it would not object if a company posts an electronic version of its glossy annual report to its corporate website by the due date in lieu of mailing paper copies or submitting it on EDGAR if the report remains accessible for at least one year after posting. This approach seemed to work perfectly fine from my perspective, because as we all know the Staff has computers and they can go to a company’s website and peruse the glossy annual report just as easily as they could access it using EDGAR.
Unfortunately, it seems that the Staff’s interpretive slight of hand was not good enough for the Commission, as it will now require submission of the glossy annual report via EDGAR, while rescinding the Staff’s 2016 guidance. The new requirement will be effective six months after the effective date of these amendments, so just in time for the 2023 proxy season.
Whether we like it or not, XBRL has become a part of our lives when dealing with SEC filings. Since 2009, the SEC has mandated XBRL for the financial statements of most SEC filings. Somehow, up until now, Form 11-K, which is the form used for annual reports of employee stock purchase, savings and similar plans that are filed with the Commission pursuant to Section 15(d) of the Exchange Act, was not subject to structured data reporting requirements. On Friday, the Commission adopted amendments ending that long run of flying under XBRL’s radar. The new requirements will be effective six months after the effective date of the amendments.
The board composition report from Heidrick & Struggles that I blogged about yesterday noted that companies are looking to add directors whose backgrounds combine a mix of traditional expertise with other skills, such as sustainability or cybersecurity expertise. That need for new expertise may increase the opportunities for non-CEO executives to join the board of another company and may prompt some companies to rethink policies on outside board service to accommodate key executives’ desire to serve on a board.
This Perkins Coie blog provides some thoughts on outside board service by non-CEOs and offers recommendations on best practices in evaluating those opportunities and policing the issues that may arise. This excerpt addresses two significant issues – potential conflicts and time commitments:
– Conflicts & Related Party Transactions: Before anything else, ask – does the company making the invitation somehow raise the prospect of a risk of a conflict of interest – or even the appearance of one? Or might there be material related party transactions involved? This requires some homework and careful thought: the invited officer will need to learn the strategic goals of the inviting company – and consider if these now (or may in the future) overlap with and conflict the current employer’s interests. Even if the two companies are not competitors, could they enter into a related party transaction down the road that may need to be disclosed in either company’s proxy? Even seemingly innocuous disclosure could be considered a negative from an ISS, Glass Lewis or investor point of view.
Also consider reputational issues of the company who is offering the board seat, and whether they could negatively impact the employer.
– Assess Committee Obligations & Expected Time Commitment: What will be the time commitment of a board seat? And is putting in that time practical from the standpoint of the amount of time the executive is expected to put in for her employer? Consider both the expected hours commitment – and the reality of periodic “crunch” times that pop up during the inevitable crises that arise. There may be some executive roles – a CFO for some companies – who would be hard-pressed to appropriately deal with an M&A transaction or serious investigation in their role as a director without interfering with that officer’s responsibilities during earnings season, for example.
Yet a Chief HR Officer, Chief Technology Officer, Chief Legal Officer or Chief Sustainability Officer, with the right staff support, may be able to juggle both.
Other recommendations include limiting on service to one outside board, establishing a formal pre-approval process, monitoring director compensation received by the executive, and including board service as part of the executive’s annual performance appraisal process.
According to a recent blog from Doug Greene, the SEC’s proposal to eliminate SPACs’ ability to rely on the safe harbor for forward looking statements in connection with deSPAC transactions may not turn out to have much impact in practice. Why? Because, as this excerpt explains, the PSLRA’s safe harbor for forward looking statements simply isn’t very protective to begin with:
Public companies understandably believe that the Reform Act’s safe harbor protects them from liability for their guidance and projections if they simply follow the statute’s requirements. But, as a practical matter, the safe harbor is not so safe; some judges think the Reform Act goes too far, so they go to great lengths to avoid the statute’s plain language. This is one significant reason why we always have advocated an approach to defending forward-looking statements that does not depend solely on the safe harbor, even when the statute’s plain language would indicate that it applies. Thus, while SPACs and de-SPACs are certainly better off with the safe harbor than without it, its loss should not be as consequential as some may think.
The blog reviews the erratic approach that courts have taken to the safe harbor, and argues that it may stem from judges’ disdain for the potential “license to lie” that the statutory language provides. It goes on to point out that in defending claims implicating forward looking statements, the parties should keep in mind that these also involve opinions, and therefore, regardless of the safe harbor, plaintiffs also must satisfy the Virginia Bankshares & Omnicare tests in order to bring securities fraud claims based on those statements.
With the stock market heading straight downhill, a major war in Europe & the SEC throwing a regulatory monkey wrench into SPAC offerings, it’s no surprise that the IPO market’s been in a bit of a funk lately. But the Jim Hamilton Blog reports that things reached a new low last week:
As the air continues to come out of the IPO market, it reached a level last week that has not been seen in more than two years—no completed offerings. April 2020 was the last time that a week passed without at least one company making its public market debut. The holiday may have played a role in the standstill, but with only one IPO in the prior week the market was already growing quieter as May progressed. The 14 new issues in May represented the lowest single-month IPO total since ten were completed in April 2020.
The calendar for next week looks pretty empty too, so don’t be surprised if you see a larger than usual number of investment bankers at your favorite beach this summer.
Heidrick & Struggles recently issued its report on 2021 board composition trends among Fortune 500 companies. The report says that boards have continued a trend that began in the second half of 2020 of reaching out to groups of people from increasingly more diverse backgrounds. It concludes that 2021 changes in board composition were mostly incremental but generally positive. Here are some of the highlights:
– A record share of seats (43%) was filled by first-time public company directors. On the whole, these directors bring more diversity of experience and background, and there was an increase in the share of seats that went to directors with sustainability and cybersecurity experience.
– A record share of seats (45%) went to women, but there was only mixed progress on racial and ethnic diversity. The share of seats filled by Black directors held relatively steady at 26%, after a sharp rise in 2020. However, both Asian or Asian American (9%) and and Hispanic or Latinx (6%) directors are still heavily underrepresented.
– There was little progress on age diversity. In 2021, as in recent years, two-thirds of seats were filled by people between ages 50 and 65. The average age of new appointees was 57.
The report provides more granular data concerning board composition and concludes with some thoughts on the actions being taken by “best in class” boards when it comes to board composition and succession. These include actively seeking new directors whose backgrounds combine a mix of traditional expertise with knowledge that is newer on boards’ skills matrix (such as sustainability or cybersecurity), bringing younger directors onto boards, staying tightly focused on racial, ethnic and gender diversity, and seeking new members who can assume a leadership role.
If you aren’t already a member with access to that guidance, 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! You can sign up online, by calling 800-737-1271, or by emailing sales@ccrcorp.com.
The SEC hasn’t acted on its recent cybersecurity rulemaking proposal, but it seems apparent that any rules the agency adopts will ratchet up the demands on companies to effectively manage cyber risks & promptly disclose material cybersecurity incidents. Since that’s the case, this Woodruff Sawyer blog offers up some suggestions on what issues boards should be thinking about now in order to position their companies to comply with these new demands.
The SEC’s proposal to require 8-K disclosure of material cybersecurity incidents within four business days “after the registrant determines that it has experienced a material cybersecurity incident” creates a couple of issues that will require board attention. This excerpt explains:
– Companies may need to bolster the efficiency of their disclosure committees. The proposed four-day rule may be unworkable; boards and management nevertheless have to make every effort to comply. Now is the time for companies to review who is on these committees, as well as what resources they have to be able to comply with the SEC’s proposed timeline for disclosure. Although the rule is four days from a materiality determination, the SEC has made it clear that it will have no patience for companies attempting to slow-walk a materiality determination.
– Companies will want to review how they think about the financial impact of a cyber breach. The four-day rule allows very little time for companies to assess the impact of a cyber incident after it has happened. As a result, the onus will be on companies to attempt to calibrate these costs ahead of time, or at least consider a methodology for doing so.
Other areas that the blog identifies as meriting board consideration include the advisability of adding a cybersecurity expert to the board and reassessing the limits of the company’s cyber insurance policy.
The SEC’s Office of Investor Education and Advocacy announced yesterday that it was launching a series of game show themed PSAs to help investors make informed decisions and avoid fraud. The SEC’s press release makes it crystal clear that this program is being launched with the best of intentions:
One of the goals of the Investomania campaign, which features a 30-second TV spot, 15-second informational videos on crypto assets, margin calls, and guaranteed returns, and interactive quizzes, is to reach existing, new, and future investors of all ages. The campaign encourages investors to research investments and get information from trustworthy sources to understand the risks before investing. The campaign also reminds investors to take advantage of the free financial planning tools and information on Investor.gov, the SEC’s resource for investor education.
That being said, I’m not sure how these PSAs are going to play with their target audience. I’m skeptical that the SEC is “reading the room” well when it comes to the tone of the ads. After all, this campaign comes on the heels of a massive two-year surge in the number of new stock market investors, many of whom have taken a pretty big hit to their wallets over the past several months.
Since that’s the case, I think there’s a risk that a fair number of those investors are going to feel belittled by some of the content – particularly the videos lampooning meme stock & crypto investors. The early returns from social media suggest that’s exactly what’s happening.