Monthly Archives: July 2022

July 29, 2022

Proxy Advisors: Chamber & BRT Sue SEC to Stop Reversal of 2020 Rule

Earlier this month, the SEC delighted proxy advisors and many investors by adopting amendments that – among other things – reversed two of the “new” conditions governing proxy voting advice that were adopted just two years ago and never made it into effect. The new 2022 amendments and the rescission of related guidance are slated to become effective this September 19th and apply during the upcoming proxy season.

Yesterday, the US Chamber of Commerce, the Business Roundtable and the Tennessee Chamber of Commerce & Industry announced that they had joined together as plaintiffs to file this complaint (in Tennessee district court) that accuses the SEC of not following proper procedures or providing adequate justification for the rollback under the Administrative Procedure Act. Here’s the relief they’re seeking:

– A declaratory judgment that the Amended Rule at issue in this lawsuit is arbitrary, capricious, or otherwise contrary to law within the meaning of the Administrative Procedure Act, see 5 U.S.C. § 706(A);

– An order vacating and setting aside the Amended Rule in its entirety pursuant to the Administrative Procedure Act, see 5 U.S.C. § 706(2);

– An order issuing all process necessary and appropriate to delay the effective date and implementation of the Amended Rule pending the conclusion of this case;

– An order setting aside Defendants’ suspension of the compliance date for the 2020 Rule;

– An order awarding Plaintiffs their reasonable costs, including attorneys’ fees, incurred in bringing this action; and

– Any other relief as the Court deems just and equitable.

The 2020 rules were the result of a long effort on the corporate side to bring more lead-time, transparency and accuracy to proxy advisor recommendations. The newly adopted amendments – while not a total surprise – confirm that predicting votes & correcting inaccuracies will remain very difficult for many corporate secretaries. Maybe even more difficult than when this rulemaking saga began, since ISS stopped providing draft reports to the S&P 500 in the wake of the 2020 rules.

For those keeping track at home, this is at least the third lawsuit relating to the rules – and boy has there been a lot of drama along the way. ISS sued the SEC in 2019 over guidance that foreshadowed the 2020 proposal – which was then stayed and then back on. Then, NAM sued the SEC when the SEC suspended the compliance date. The CII also jumped in along the way.

Update: An eagle-eyed member alerted me that NAM also filed another complaint last week, in Texas. So, this Chamber/BRT complaint is at least the FOURTH lawsuit these rules have drawn.

Liz Dunshee

July 29, 2022

Direct Listings: SEC Appears Lukewarm on NYSE’s Proposed Pricing Flexibility

Last week, the SEC posted this order instituting proceedings on a proposed NYSE rule change to modify pricing limitations for securities listed on the Exchange via a primary direct listing. The proposal was filed back in April and the Commission had only received one comment when it instituted these proceedings, despite an extension of the consideration period. Here’s more detail:

The Exchange has proposed to modify the Price Range Limitation to provide that a Direct Listing Auction for a Primary Direct Floor Listing may be conducted if the Auction Price is outside of the price range established by the company in its effective registration statement (the Issuer Price Range) but is either (i) at or above the price that is 20% below the lowest price or at or below the price that is 20% above the highest price of the Issuer Price Range or (ii) above the price that is 20% above the highest price of the Issuer Price Range.

The NYSE believes that this pricing flexibility would make direct listings more attractive, and that investors would continue to be adequately protected. Companies would have to make certain public disclosures & certifications to the Exchange to be able to take advantage of the flexibility.

Although last week’s order doesn’t indicate that the Commission has reached any conclusions on the proposal, it starts the process for additional analysis & input and gives notice of the grounds of disapproval under consideration. Yesterday, the CII submitted this comment letter in response to the order and the specific questions raised therein. The CII opposes the rule change. In February, the SEC rejected a Nasdaq proposal on the same topic.

We’re continuing to post guidance on this approach to capital raising in our “Direct Listings” Practice Area. So far, they haven’t taken off as a popular path to going public.

Liz Dunshee

July 29, 2022

Farewell to Emily Sacks-Wilner

We’re sad to bid farewell this week to our friend & colleague Emily Sacks-Wilner, who is rejoining the Big Law ranks as a leader in securities practice management. During her tenure here, Emily has enhanced our team in every way and has kept our members front-of-mind every single day. She created our “cheat sheet” to keep everyone grounded during the SEC’s rulemaking deluge, spearheaded our virtual Women’s 100, diligently updated all of our handbooks (thousands of pages), and opened my eyes to what it’s like to be a “cat person” (in a good way!). Emily, we wish you continued success – we have been lucky to have you on our team!

Liz Dunshee

July 28, 2022

SEC Whistleblower Program: Pulling Back the Curtain

Dave blogged last fall that the SEC paid out more whistleblower awards in fiscal 2021 than in all prior years combined since the whistleblower program began in 2011. While he noted that the trend in Europe was similar, what has continued to draw criticism here in the US is the lack of transparency around the circumstances of each award, and how the process even works. This new Bloomberg article shares findings from their 5-month pursuit & review of records obtained through a FOIA request and more than a dozen interviews. Here’s an excerpt that describes the screening process:

About 12,000 tips came in the last fiscal year. They first go through an internal screening process that is supposed to select only the best for full investigations, which can last five years.

A separate group of attorneys review the records once the investigation is completed and makes a decision on which whistleblowers get paid. The agency has 13 full-time and three temporary attorneys who determine how much each claimant should get. The SEC refused to provide more detailed information on how decisions are made.

It has rejected claims because applicants hadn’t followed program rules while approving claims under similar circumstances.

For example, the law says the program can only make awards to people who provide original information that leads directly to a sanctions of $1 million or more.

But in March the commission overruled staff and awarded about $14 million to someone who SEC lawyers ruled “was not a whistleblower within the meaning of the statute” and that the claimant’s information did not lead to the success of the investigation.

It disagreed with some staff conclusions, and wrote it was in the “public interest” to waive the 30-day requirement for filing. The whistleblower waited four years.

The program’s defenders argue that the screening process considers relevant facts & circumstances – which can lead to the appearance of inconsistencies. But the reporting leaves the overall impression that when it comes to winning a whistleblower award or having a successful whistleblower practice, the old adage applies: “it’s who you know, not what you know.”

This article underscores the need for companies to have robust whistleblower programs and procedures for handling whistleblower complaints. You don’t want an employee calling up one of the lawyers named in here! Visit the transcript from our February webcast – “Whistleblowers: Best Practices in the New Regime” – for practical guidance on effective programs, the board’s role, documentation, and more. It’s available along with lots of other resources in our “Whistleblowers” Practice Area.

Liz Dunshee

July 28, 2022

WorldCom: Lessons for Lawyers, 20 Years On

In remarks yesterday to the Center for Audit Quality, SEC Chair Gary Gensler marked the 20-year anniversary of the Sarbanes-Oxley Act, as well as the Enron and WorldCom debacles that preceded it. Among other SOX-related initiatives that are still a work in progress, Chair Gensler’s speech highlights current PCAOB initiatives – e.g., updating almost all of its remaining interim standards – the ongoing importance of auditor independence, the recently reopened comment file on proposed clawback rules, CEO & CFO certifications, and the commitment to the Holding Foreign Companies Accountable Act of 2020.

The SOX/Enron/WorldCom era yielded wide-ranging and enduring lessons for auditors – but there were also plenty of takeaways for legal counsel. This blog from Bryan Cave Leighton & Paisner pulls out findings by the Examiner in the WorldCom bankruptcy and explains why they’re still relevant today. It’s worth reading the blog in it’s entirety – here’s the high-level guidance:

1. Remember when advising clients that attorney-client privilege can be waived or lost

2. Avoid fragmented reporting lines in law department

3. Ensure appropriate advice to board on fiduciary duties for material transactions

4. Confirm receipt of proper corporate approvals before executing material agreements

5. Build an appropriate record when directors act by written consent, and limit its use to appropriate circumstances

6. Apply independent judgment and consider yellow flags when clearing stock trades instead of deferring to management

Liz Dunshee

July 28, 2022

Sarbanes-Oxley Compliance: Costs Still Haven’t Peaked

Protiviti recently released its annual “Sarbanes-Oxley Compliance Survey,” which benchmarks companies’ compliance efforts, associated costs & hours, and the impact of current business conditions. This year’s survey says that SOX compliance hasn’t been immune to the Pandora’s Box of market disruptions we’ve experienced over the past two years. Twenty years in, the costs for many companies are still on the upswing – and the hours commitment continues to grow.

Here’s an excerpt with some of the key takeaways:

Costs continue to climb due to a range of factors: A combination of internal and external factors creating volatility — technology-driven transformation and innovation, talent shortages, strategic pivots and more — is contributing to rising SOX compliance costs. More companies spend $2 million or more on compliance while fewer spend $500,000 or less. A surge in the number of smaller companies spending $2 million or more in SOX compliance costs likely reflects last year’s significant increase in initial public offerings (IPOs), driven by special
purpose acquisition companies (SPACs).

Hours on the rise as well: A majority of organizations increased the number of hours logged for SOX compliance during their most recent fiscal year. This growth is driven by the same factors contributing to rising compliance costs. SOX compliance teams are also spending more time responding to higher volumes of more detailed information requests from external auditors, whose scrutiny is intensifying in response to actions of and guidance from the Public Company Accounting Oversight Board (PCAOB).

A growing number of companies are deploying automation to support SOX work; more should follow suit: Automation platforms and applications bring greater efficiency to SOX compliance activities. The deployment of process mining, advanced analytics, robotic process automation (RPA) and continuous monitoring, along with other advanced technological tools, can significantly reduce the volume of manual compliance tasks as well as retention risks associated with subjecting internal full-time staff to heavy loads of repetitive, task-driven work.

A widespread desire for efficiency is kindling interest in centers of excellence and alternate sourcing strategies: The ongoing goal to moderate SOX compliance cost increases makes alternative delivery models for SOX compliance services more appealing. In addition to investing in supporting automation, efficiency-minded compliance and internal audit leaders are evaluating and adopting internal shared services models as well as partnerships with third parties that operate external centers of excellence for controls testing.

Protiviti remains optimistic that automation and technology will eventually bring down (or at least slow the increase in) compliance costs. I don’t doubt that there’s been more adoption since I wrote about that same optimism three years ago, but at this juncture it seems like the improvements from automation have been outweighed by new complexities and challenges.

If you’ve been able to rein in your compliance costs and have words of wisdom for others who are looking to do the same, shoot me an email at I would love to collect & share real-world pointers as we head into the even more demanding compliance environment that will accompany anticipated SEC rulemaking on climate & human capital disclosure.

Liz Dunshee

July 27, 2022

Proxy Voting: BlackRock Gave Companies a Passing Grade

Yesterday, BlackRock Investment Stewardship released a 27-page summary of the 72-page “Voting Spotlight” that it published last week. The reports detail the asset manager’s engagement & proxy voting stats, its rationale for voting decisions, and its ambitions for the BlackRock Voting Choice program. BlackRock makes sure to note that its core focus continues to be long-term, durable financial performance and that it highly values discussions that come from engagements. Based on the voting results this year, it seems that these conversations have been a valuable use of company & director time.

BIS doesn’t rely on the recommendations of proxy advisors – it follows its own policies. So, what voting outcomes did those policies & engagements yield this year? Here’s an excerpt from page 12 of the Spotlight:

Our voting in support of management was largely consistent with the prior proxy year: globally we voted in support of 90% of directors standing for election and for all items on the agenda at 57% of shareholder meetings (also 57% last year). This year, BIS was more supportive of management in the Americas and EMEA, where companies have made significant progress on the governance and sustainability matters that inform our voting.

In the Americas, we were more supportive of directors as companies made substantial improvements in board diversity; we did not support the election of 4% of directors (6% last year) for lack of board diversity.

In both the Americas and EMEA, we were also more supportive of companies with material climate risk in their business models as they improved their climate action plans and disclosures, voting to signal concern at 155 companies (264 last year).

BIS centers our stewardship work in corporate governance. In our experience, sound governance, in terms of both process and practice, is critical to the success of a company, the protection of shareholders’ interests, and long-term shareholder value creation. That is why board quality and effectiveness remain a top engagement priority, and a key factor in the majority votes cast on behalf of clients. Like last year, our leading reasons for not supporting director elections — and management proposals more broadly — were governance-related: 1) lack of board independence, 2) lack of board diversity, 3) directors having too many board commitments and 4) executive compensation that was not aligned with company strategy or long-term performance.

BlackRock goes on to note that – due to a combination of overly prescriptive resolutions and corporate progress on climate disclosure & action – it voted for fewer climate-related shareholder proposals this year. It also voted “against” only 176 directors for climate-related concerns this year, compared to 254 last year.

These stats aren’t too surprising: BlackRock emphasized the need for an “orderly transition” to net-zero in commentary early this year, which Lawrence wrote about on That was a sign that the asset manager would take a measured approach to new “asks.” In May, it published late-season commentary and guidance to signal its lower support for ‘22 shareholder climate resolutions, which I blogged about at the time on our “Proxy Season Blog.”

Overall, BlackRock supported 22% of the E&S shareholder proposals that it voted on. Unlike its declining support for aggressive climate proposals, it supported 54% of proposals for DEI audits. Here’s the breakdown of why the Investment Stewardship team voted the way it did:

– Supported because in the financial interests of long-term shareholders – 22%

– Not supported because too prescriptive/immaterial – 21%

– Not supported because not beneficial to shareholders – 8%

– Not supported because company implemented/company progress – 46%

– Not supported, rationale unspecified (voted by independent fiduciary) – 2%

While BlackRock’s acknowledgement of company progress is very reassuring, it doesn’t mean we can all rest on our laurels. BlackRock says it doesn’t anticipate significant changes in its global principles and voting guidelines or its engagement priorities – which include board quality & effectiveness; strategy, purpose & financial resilience; incentives aligned with value creation; climate & natural capital; and company impacts on people. All of these topics are complex, and practices continue to evolve. The write-up continues to emphasize an “orderly energy transition” towards eventual decarbonization – BlackRock just disfavors proposals that micro-manage how companies go about that process.

To hear from Michelle Edkins, Managing Director on BlackRock’s Investment Stewardship team, about her take on “ESG Hot Topics” and “Climate Disclosure – What to Do Now,” join us in October for our “1st Annual Practical ESG Conference” as well as our “Proxy Disclosure & 19th Annual Executive Compensation Conferences.” Sign up online, email, or call 1-800-737-1271. You can bundle the conferences together for a reduced price.

Liz Dunshee

July 27, 2022

Audit Committees: PCAOB Inspection Priorities Preview Challenging Audit Issues

Recently, the PCAOB published its anticipated focus areas for auditor inspections. Being familiar with the inspection priorities can help audit committees understand auditor work plans and areas of sensitivity – and can also give advance notice of which areas could present accounting or reporting challenges in the upcoming year. I blogged last October about the findings from the 2021 inspection cycle.

This blog from Dan Goelzer summarizes the 10 topics that the PCAOB plans to scrutinize. Here’s info from Dan (who is a SASB member, retired Baker McKenzie partner, former Acting Chair of the PCAOB, and former GC at the SEC):

The staff discusses ten areas on which 2022 inspections will focus:

Fraud and Other Risks. The inspection staff will emphasize audit procedures that address risks of material misstatement, including fraud. Some specific risk areas are IPOs or significant M&A activities, including SPAC transactions; the effects of supply chain disruption; and volatility due to fluctuations in interest rates and inflationary trends. Industries prone to supply chain disruption risks include electronic components and equipment, automobile, retail, and materials. Industries prone to COVID-19 related risks include airlines, hospitality, and entertainment. Inspectors will also review the auditor’s assessment of fraud risk, including whether the company’s controls sufficiently address identified risks, such as the risk of management override of controls.

The Spotlight lists five specific accounting and auditing risks:

o Unreasonable assumptions affecting revenue recognition due to the negative effects of the COVID-19 pandemic and supply chain disruptions.

o Unreasonable assumptions used in projections to account for business combinations or in testing goodwill or other intangibles for impairment.

o Earnings manipulation as a reaction to margin pressures driven by rising costs.

o Inventory existence and valuation (e.g., challenges in observing in-transit inventory and in valuation due to supply chain disruptions and rising costs).

o Financial, economic, and business uncertainties that impact the assessment of the company’s ability to continue as a going concern.

IPOs and M&A Activity. IPOs and M&A, including SPAC transactions, present reporting and audit risks due to transaction complexity and variations in company readiness to comply with public company financial reporting and internal control requirements. For SPAC and de-SPAC transactions, inspectors will focus on the auditor’s work in the areas of financial instrument valuation; determination of whether a business combination should be accounted for as a reverse merger; internal controls; financial statement presentation and disclosures; and restatements.

Audit Firms’ Execution Challenges. Inspectors will review firm policies and procedures for assigning professionals with appropriate qualifications to audit engagements and whether firms are modifying their supervision and review procedures appropriately. The Board also plans to select engagements for review where the lead engagement partner is new to the engagement, including those resulting from partner turnover.

Broker-Dealer-Specific Considerations. In inspections of securities broker-dealer audits, the staff will examine how auditors addressed the risk of misappropriation of customer assets at broker-dealers that hold customer funds.

Independence. Independence will remain a focus area in 2022. In particular, inspectors may:

o Analyze audit firm independence assessments, including relationships that present threats to objectivity and impartiality, and firm-identified violations of independence rules.

o Evaluate compliance with the independence rules related to permissible non-audit services and their preapproval.

o Review audit firm communications with audit committees concerning independence.

o Review audit firm responses to independence-related quality control concerns identified in past inspections (e.g., high rates of exceptions in independence compliance testing).

Use of Service Providers in the Confirmation Process. Inspectors will review procedures for maintaining control over confirmation requests and responses, particularly in cases where the auditor arranges for service providers to assist in the confirmation process by electronically sending and receiving confirmations.

Critical Audit Matters (CAMs). Inspection procedures will include: (1) engaging in discussions about CAMs with engagement teams and certain audit committees; (2) reviewing CAMs in the auditor’s report; (3) reviewing whether certain matters communicated to the audit committee were included in the audit firm’s procedures to determine CAMs; and (4) reviewing the engagement team’s determination of whether a matter was a CAM.

Audit Areas With Continued Deficiencies. Inspectors will focus on areas in which audit deficiencies commonly recur, including revenue recognition and related risk assessment; allowance for loan losses and other accounting estimates; and internal control over financial reporting, particularly controls with a review element.

Firms’ Quality Control Systems. Inspectors will assess audit firms’ compliance with the PCAOB’s quality control standards. Among other things, they will consider the impact of the COVID-19 pandemic and of the current economic environment in gaining an understanding of firm quality control systems.

Technology. Inspectors will focus on three technology-related areas:

o Auditing digital assets. Companies with material digital asset holdings and transactions will be selected for inspection, where appropriate, with an emphasis on assertions related to existence, valuation, rights and obligations, and financial statement disclosures.

o Responding to cyber threats. Inspection procedures will evaluate the auditor’s response to identified cybersecurity breaches and known security vulnerabilities.

o Use of data and technology in the audit. Inspectors may inquire about changes in the use of technology and seek to obtain an in-depth understanding of how auditors are using technology in identifying and responding to risks of material misstatement.

Visit our “Audit Committees” Practice Area for more PCAOB commentary, checklists, and other practical guidance for committee practices & emerging challenges.

Liz Dunshee

July 27, 2022

Annual Shareholder Meetings: Don’t Forget the Post-Meeting Housekeeping

It’s that time of year: take care of the housekeeping tasks that will put a bow on your successful annual shareholder meeting. A member recently posed this question in our “Q&A Forum” (#11,190):

Is it good governance practice to have the board of directors review and approve minutes of the annual stockholder meeting?

John responded:

Yes. The annual meeting of stockholders is a statutory requirement, and it is important to ensure that an accurate record of the event is prepared. Board review of the minutes and related materials in order to ensure that they demonstrate that the meeting has been duly called and noticed and that they accurately and completely reflect the matters addressed at the meeting is a good practice.

We have over 30 checklists that offer practical, step-by-step guidance on handling annual meeting issues. Find them in our “Annual Shareholders’ Meetings” Practice Area or under the “Checklists” tab in the blue navigation bar on our home page. If you aren’t already a member with access to those resources, sign up now and take advantage of our no-risk “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund.

Liz Dunshee

July 26, 2022

Insider Trading: SEC Brings First-Ever Crypto Case…And Says 9 Tokens Are “Securities”

My family & I recently visited the Smithsonian’s National Museum of American History, where we joined other sweaty tourists in marveling over the prehistoric (2014) copy of Bitcoin Magazine that has made its way into the “Value of Money” exhibit. The SEC has taken a big interest in crypto as well – and in some ways, from job postings to recent Congressional testimony, they’re making exactly zero attempts to hide it. On the other hand, the agency hasn’t come out and proposed rules.

To that end, late last week, the Commission made a big splash by announcing the first-ever insider trading case involving digital assets, which was predicted earlier this month in this Dechert memo. According to the SEC’s complaint, a former Coinbase product manager – who had access to confidential listing announcements – was allegedly passing tips to his brother and friend to trade in certain crypto assets before Coinbase announced that those tokens would be available for trading on their platform. The DOJ brought a parallel criminal action out of the Southern District of New York, based only on wire fraud allegations (i.e., theft of Coinbase’s information).

This Simpson Thacher memo outlines & elaborates on these key takeaways:

1. SEC takes the position that some of the tokens were securities

2. DOJ & SEC pursue different charges

3. Blockchain anonymity poses no obstacle

4. Crypto policing efforts ramping up

Much of the SEC’s case turns on whether certain tokens that were involved here are “securities” under the Howey test. Because the success (or failure) of those claims will have broader repercussions for the crypto industry – as explained in this Wachtell Lipton memo – lots of folks are up in arms about this case being a “back door” approach to rulemaking. People who want the market to remain unregulated have even gained an ally in another agency that is jockeying for position – with a CFTC Commissioner calling the case “regulation by enforcement.”

Georgetown Law prof Adam Levitin pushed back on that criticism in a Twitter thread that makes some good points. Here’s what the WLRK folks have to say:

While we have previously called for measures to enhance cryptoasset market integrity, the SEC’s allegation that the cryptoassets at issue are securities — against the backdrop of other recent enforcement actions — underscores the need for clarity about whether and how the securities laws apply to particular cryptoassets. While the SEC has promulgated a complex, fact-intensive framework for determining whether a particular cryptoasset is a security, and SEC officials have informally expressed the view that many cryptoasset platforms are trading securities, the agency has generally refrained from opining on the legal status of specific cryptoassets (with notable exceptions including Bitcoin and XRP) and even has avoided stating which cryptoassets constitute securities in a previous enforcement action against a cryptoasset promoter. For their part, a number of centralized U.S. cryptoasset exchanges have explicitly noted that they only list assets that they determine not to be securities.

We express no view here as to the legal status of any of the cryptoassets in question. But the SEC’s allegation that nine of the traded cryptoassets are securities poses important issues beyond this case. Most significantly, it spotlights the risk that cryptoassets may be presumed to be securities — with substantial legal and economic consequences — on the basis of civil enforcement actions in which cryptoasset developers, exchanges, and users are not litigants. That presumption raises a number of practical questions for market participants that typically would be addressed in a rulemaking process under the Administrative Procedure Act. Without such a process, market participants must confront the risks of continuing to develop, list, or transact with cryptoassets with limited transparency on how the SEC may apply the securities laws.

We’re posting memos in the “SEC Enforcement” subsection of our “Crypto” Practice Area. If you aren’t already a member with access to those resources, sign up now and take advantage of our no-risk “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund.

Liz Dunshee