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Monthly Archives: November 2022

November 17, 2022

What’s Keeping Audit Partners Up at Night?

Besides the jump in SEC enforcement activity, what is keeping audit partners up at night these days? The Center for Audit Quality (CAQ) recently released its 2022 Fall Audit Partner Pulse Survey, and the short answer is that the economic storm clouds are gathering. In the survey, audit partners are asked about “what they are observing in the industries they audit in terms of economic health indicators, challenges and risks facing businesses within their sectors, and how those businesses are adjusting their strategies in the current environment.”

With regard to the economic outlook, 57% of the partners surveyed hold a pessimistic or very pessimistic outlook on the US economy for the next twelve months, a thirteen-point increase since the spring of 2022. Most of the audit partners surveyed expect price increases and inflation to persist for the next twelve months. The audit partners surveyed categorized inflation, labor shortages, and supply chain impacts as the top three risks affecting US companies. The survey goes on to address efforts taken to mitigate risk and to address the challenges identified.

– Dave Lynn

November 17, 2022

The Midterms are (Almost) Over: What Now?

I don’t know about you, but I am exhausted from the midterm election cycle. Despite my best efforts to withdraw entirely from political discourse, I feel like I was bombarded with political ads for what seems like most of this year, and those ads (along with the endless news coverage) tended to be infuriating for even the most withdrawn individual.

After all of that suffering, we now find ourselves in largely the same place we were when the whole midterm election cycle kicked off. While the Democrats lost control of the House, that Republican majority does not appear to be large enough to make a huge legislative difference, while Democrats maintain a majority in the Senate. What will all of this mean for the SEC’s aggressive regulatory agenda?

First off, it is always important to keep in mind that the SEC is an independent agency, structured to be somewhat insulated from the shifting political winds, but we all know that is not really the case in practice, particularly in modern times when the agency has become much more politicized. With that said, the Republican majority in the House will undoubtedly try to make things difficult for the Commission, as new committee leadership will use the tools that they have available to try to influence or frustrate the SEC’s actions. On the Senate side of things, we can expect business as usual, with the minority continuing to express displeasure with the SEC’s agenda while the majority wants all of the rulemaking to be completed yesterday.

The midterm elections obviously did not leave us with any clear mandate one way or the other, so despite some efforts on the part of lawmakers to frustrate its agenda, the SEC would appear to be destined to continue full speed ahead along its current regulatory path. The agency will no doubt be encouraged in those efforts by the Biden Administration, which would probably like to see a significant number of the SEC’s more progressive regulatory initiatives (such as climate change disclosure, share repurchase disclosure, Rule 10b5-1 amendments and cybersecurity disclosure) brought to completion before the 2024 Presidential election campaign kicks into high gear sometime next year.

I can only hope that, at least for the next few months, I can get some relief from the onslaught of campaign ads and political news coverage. I am sure my television is tired of me screaming at it.

– Dave Lynn

November 16, 2022

SEC Announces Fiscal 2022 Enforcement Results

Yesterday, the SEC announced the results from the agency’s fiscal year 2022 enforcement activity, and it should come as no surprise that overall enforcement activity at the agency was up in the fiscal year that ended September 30, 2022. The SEC noted that it filed 760 total enforcement actions in fiscal year 2022, a 9 percent increase over the prior year. These included 462 new, or “stand alone,” enforcement actions, a 6.5 percent increase over fiscal year 2021; 129 actions against issuers who were allegedly delinquent in making required filings with the SEC; and 169 “follow-on” administrative proceedings seeking to bar or suspend individuals from certain functions in the securities markets based on criminal convictions, civil injunctions, or other orders.

The SEC also notes that money ordered in SEC actions, comprising civil penalties, disgorgement, and pre-judgment interest, totaled $6.439 billion, the most on record in SEC history and up from $3.852 billion in fiscal year 2021. Fiscal year 2022 was the SEC’s second highest year ever in whistleblower awards, in terms of both the number of individuals awarded and the total dollar amounts awarded.

The SEC’s announcement goes into considerable detail about the types of cases the agency brought in 2022, including cases involving financial fraud and issuer disclosure, gatekeepers such as auditors, lawyers and transfer agents, crypto, cybersecurity, ESG, private funds, regulated entities and associated individuals, market abuses, public finance abuse and FCPA.

– Dave Lynn

November 16, 2022

Rule 10b5-1 in the Crosshairs: The Latest SEC and DOJ Interest

The SEC’s announcement of is fiscal 2022 Enforcement results notes the agency’s continued activity in addressing market abuse, which includes insider trading, and the importance today of data analytics in making those cases. As my colleagues at Morrison Foerster note in this alert, within the insider trading world, the SEC and the DOJ have been focused in particular on the use of Rule 10b5-1 plans. The alert states:

The SEC and DOJ are using data analytics to investigate unusual trading activity and potential abuses of Rule 10b5-1 plans. According to one news report, federal authorities are preparing to bring multiple cases. In October, one company disclosed that it had received subpoenas from both the DOJ and SEC seeking materials concerning the trading activities of a former Chief Executive Officer in 2019 and 2020.

The alert notes that the use of data analytics on Rule 10b5-1 plans to initiate investigations evokes a similar pattern of parallel civil and criminal actions brought by the DOJ and CFTC to prosecute “spoofing,” which involves illegal trading practices used to manipulate the commodities market.

– Dave Lynn

November 16, 2022

ISS Launces “Vote Preference” Solution

ISS has announced the launch of Vote Preference, which is a suite of flexible solutions enabling asset managers to offer voting choices directly to their underlying clients. The announcement notes:

ISS Vote Preference allows asset managers to offer their clients multiple ISS policy choices including Benchmark, Sustainability, Taft Hartley, SRI, Public Fund, Board Aligned, Faith-Based, as well as custom voting policies, with ISS vote aggregation and split vote management execution capabilities, leveraging ISS ProxyExchange and API technology. ISS also offers asset managers additional collaboration tools through ISS Communicator which can be tailored to the individual needs of their Vote Preference programs. ISS’ Vote Preference holdings solution allows asset managers to easily automate the display and vote execution of their underlying clients’ respective share percentages and provides a full audit trail of communications and vote history, ensuring accurate and timely record-keeping and reporting.

ISS notes that the new solution is offered in response to the trend that a growing number of asset managers’ underlying clients are seeking greater control over their voting decisions.

– Dave Lynn

November 15, 2022

Pay Versus Performance Disclosure: Lessons Learned

In connection with last week’s Special Session: “Tackling Your Pay Vs. Performance Disclosures” over on CompensationStandards.com, I put together some model disclosure that we discussed during one of the three panels. During the program, I described the process of drafting the model disclosure as “psychologically painful,” because the new rule is very prescriptive and elicits quite a bit of disclosure – perhaps more than many had anticipated! As you put “pen to paper” in the coming weeks to draft your new pay versus performance disclosure, I thought I would share some of my five key takeaways from the drafting process.

1. It is a lot of disclosure! My initial thought was that maybe this new disclosure will be similar to the Summary Compensation Table – multiple columns with some footnotes, along with narrative describing the relationships. That was definitely not what the disclosure turned out to be once it was drafted – our model disclosure goes on for 7 pages, which is made up of the main table, an extensive series of footnotes to that table and narrative analyzing the information in the table, which includes a series of graphs comparing the data. For many companies, this would be about the same number of pages of the proxy statement that are dedicated to all of the executive compensation tables combined.

2. The footnotes have footnotes. Item 402(v) is very prescriptive and calls for a great deal of detail to support the figures that are presented in the Pay Versus Performance Table. As a result, our model disclosure has about two and a half pages of footnote disclosure associated with the table itself, with some of the footnotes including more detail in tables that themselves have more footnotes associated with them. There is certainly some opportunity for streamlining here with careful drafting, but the overall takeaway is that there is inevitably going to be a lot of dense footnote disclosure to navigate with the Pay Versus Performance table, no matter how you slice it.

3. “Compensation actually paid,” explained. One of the biggest challenges with the Pay Versus Performance table is trying to explain the complex “compensation actually paid” calculation and providing the supporting data in a manner that is understandable for investors. The “compensation actually paid” concept is something that is entirely new, so investors are going to need a pretty clear roadmap to understand why the numbers came out the way they did given your company’s particular circumstances.

4. Let the disclaimers begin. The concept of “compensation actually paid” is a new one as I mentioned, and it also does not really represent the actual amount of compensation that was earned by or paid to the principal executive officer and the other named executive officers as a group in the years presented. For that reason, our model disclosure included the following disclaimer language: “The dollar amounts reported in column (c) represent the amount of “compensation actually paid” to [the PEO], as computed in accordance with Item 402(v) of Regulation S-K. The dollar amounts do not reflect the actual amount of compensation earned by or paid to [the PEO] during the applicable year.” I believe that it is important to include some sort of disclaimer language along these lines to put the information in context and to convey that, despite the title, “compensation actually paid” is just another theoretical number like realized pay, realizable pay or even the total compensation column of the Summary Compensation Table.

5. Don’t forget the analysis! As Mark Borges pointed out during last week’s program, with so much focus on calculating “compensation actually paid” and preparing the Pay Versus Performance table, it is easy to overlook the importance of preparing “clear” descriptions of the relationships between the various measures of performance included in the table and the “compensation actually paid.” This is the part of the disclosure that will require some careful drafting and consideration of the information about pay versus performance that is discussed in the CD&A. In our model disclosure, we use a combination of narrative and graphics to provide the required “clear” descriptions of the relationships.

If you missed the live event last week, you can still purchase the recording by contacting a member of our Sales Team at Sales@CCRcorp.com or 800.737.1271. Archive sales end November 30, 2022.

– Dave Lynn

November 15, 2022

Pay Versus Performance Disclosure: What Will Investors Do?

In connection with last week’s Special Session: “Tackling Your Pay Vs. Performance Disclosures” over on CompensationStandards.com, we discussed the potential reaction to the new disclosures that could be expected from the proxy advisory firms and institutional investors. The main takeaway from that discussion is that it is still way too early to tell.

The proxy advisory firms and institutional investors have not commented on how they plan to use the new disclosure, and it is expected that many will likely take a wait-and-see approach during the upcoming proxy season. That said, it is still important to draft your new pay versus performance disclosure with an eye toward how the proxy advisory firms and institutional investors will perceive it, and the key watchword we settled on is “consistency.”

You should carefully evaluate whether the new pay versus performance disclosure is consistent with the story that you are telling in the CD&A about the relationship between compensation and performance, which companies will continue to provide and which will not be replaced by the new disclosures. You definitely do not want the new pay versus performance disclosure (which, for most companies, will likely not be presented as part of the CD&A, but rather somewhere further back in the tabular compensation disclosures) to present any “surprises,” because even if the institutional investors or proxy advisory firms are not really using the data as part of their evaluation in the 2023 proxy season, they certainly will not be ignoring the disclosure. Therefore, consistency – and clarity – is the key.

If you missed last week’s Special Session, you can still purchase the recording by contacting a member of our Sales Team at Sales@CCRcorp.com or 800.737.1271. Archive sales end November 30, 2022.

– Dave Lynn

November 15, 2022

Tomorrow’s Webcast: “Dissecting the Quarterly Earnings Process”

Join us tomorrow at 2:00 pm eastern time here on TheCorporateCounsel.net for our latest webcast, “Dissecting the Quarterly Earnings Process.” Hear from Goodwin’s Sean Donahue, O’Melveny’s Shelly Heyduk and Cooley’s Reid Hooper about the quarterly earnings process, including a refresher on some of the basics, technological advances that can improve the earnings call experience, and pointers on preparing for Q&A in the midst of shifting investor interests.

This webcast is free to members of TheCorporateCounsel.net and is available to non-members for $595. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund.

– Dave Lynn

November 14, 2022

Winter is Coming: Crypto Fallout

It has been a rough year for digital assets, and the last thing that the crypto market needed was a spectacular scandal of massive proportions. Well, perhaps not surprisingly, we just got one of those in the FTX debacle, which continues to unfold.

One of the more disturbing things I read about the situation over the weekend was this WSJ article, which raised the parallels of the failure of Long Term Capital Management in 1998 and the collapse of Lehman Brothers in 2008. In both of those situations, government intervention was necessary to try to mitigate broader financial and economic impacts. In the case of Lehman Brothers, I still do not think people generally understand how close we came to a “nuclear winter” economic scenario worse than the Great Depression.

While there is nothing to indicate so far that the FTX situation will be on par with those other major failures, it does not give one much comfort to realize that both LTCM and Lehman Brothers were operating within the regulated financial system (although LTCM was certainly on the fringes of that system at the time of its collapse as a hedge fund trading in derivatives), while crypto firms continue to operate in the still largely unregulated Wild West of the digital asset world. As a result, all of those post-Dodd Frank efforts to improve oversight, coordination and transparency in the financial markets for the purpose of preventing another Lehman Brothers collapse are completely ineffective in helping us avoid a more cataclysmic crypto failure that could impact the broader financial markets and the economy.

Be careful out there – winter is coming.

– Dave Lynn

November 14, 2022

Proposed Climate Disclosure for Contractors

As the SEC still considers final rules on climate change disclosure, the Biden Administration is pressing forward with proposals to require climate change disclosure from federal government contractors.

As this Morrison Foerster blog notes, last week the Biden Administration unveiled details regarding a forthcoming proposed Federal Acquisition Regulation (FAR) rule on greenhouse gas emissions disclosure for major federal suppliers. Titled the “Federal Supplier Climate Risks and Resilience Rule,” the proposed rule would impose emission disclosure requirements on contractors that received $7.5 million or more in federal contract obligations in the prior fiscal year as a mandatory element of a FAR Part 9 responsibility determination.

– Dave Lynn