As outlined in this Cozen O’Connor memo, the Fifth Circuit heard oral arguments in late August for the lawsuit that challenges the SEC’s approval of Nasdaq’s board diversity rule, which we’ve blogged about a few times. While we await the outcome of that case, Nasdaq has also filed notice that it is extending its program to provide eligible companies with complimentary board recruiting services – and the updated terms for this service are immediately effective. Here’s more detail:
Nasdaq is proposing to extend its program, described in IM-5900-9, providing Eligible Companies (as defined in IM-5900-9) with complimentary board recruiting services. The rule currently requires Eligible Companies to request services by December 1, 2022; as revised that deadline would be extended to December 1, 2023. Nasdaq also proposes to make clarifying changes to reflect the approval of Rule 5605(f).
Under Nasdaq Rule 5605(f)(7), the earliest that a Nasdaq listed company will need to explain why it does not have at least one Diverse director (as defined in Nasdaq Rule 5605(f)(1)) is August 6, 2023; and the earliest it will have to explain why it does not have at least two Diverse directors is August 6, 2025.
Earlier this fall, John blogged that the Division of Enforcement had gotten something it has coveted for quite some time – an insider trading case involving senior executives allegedly misusing a Rule 10b5-1 plan. Bloomberg reported last week that the SEC is looking to add to that tally, using data analytics. Here’s an excerpt:
The Justice Department and Securities and Exchange Commission are using computer algorithms in a sweeping examination of preplanned equity sales by C-suite officials, according to people familiar with the matter. Investigators are concerned that some people are manipulating the stock-sale programs, which are intended to shield executives from misconduct allegations by letting them schedule transactions in advance and on preset dates.
The article says that the agencies are preparing to bring “multiple cases,” following information requests that were made earlier this year, and that at least one company has disclosed that it received subpoenas about a former executive’s trading activity under a Rule 10b5-1 plan.
If the SEC successfully uncovers violations, it may use those findings to refine & support final rules that restrict the use of prearranged trading plans, as proposed last year. The securities law community has expressed concern that, as proposed, the rules would be a departure from insider trading law and should be targeted more closely to address demonstrable abuses. If the investigations come up empty, the Commission may still adopt the rules using data it has already relied on – and may also keep looking for violations.
Insider trading is just one of the many topics that the SEC’s Enforcement Division is focused on right now, according to a PLI speech last week from SEC Chair Gary Gensler. He noted that all of this activity has added up to massive fines & penalties:
In the fiscal year that just ended on September 30, 2022, we filed more than 700 actions. We obtained judgments and orders totaling $6.4 billion, including $4 billion in civil penalties.
This Reuters article says that’s a record level of collections for the agency. Gensler also had a message for securities lawyers:
You also have a role as gatekeepers in upholding the law.
For instance, today’s event takes place in the State of New York, where the state courts describe the role of attorney as a position of duty, trust, and authority, conferred by governmental authority for a public purpose.
We want you to succeed in meeting these standards of rectitude.
When lawyers—or other gatekeepers, like auditors and underwriters—breach their positions of trust and violate the securities laws, we will not hesitate to take action.
During the recent fiscal year, for example, we charged an attorney for his role in an unregistered, fraudulent securities offering, and we suspended him from practicing before the SEC as an attorney.
We also are litigating an action against an attorney for his alleged role in a would-be pump-and-dump scheme. In addition to other remedies, we seek an injunction to prohibit him from providing legal services regarding securities offers or sales.
These examples may be just a couple of bad apples, but they serve as a reminder to “Just Say No” to any sketchy propositions. Chair Gensler also noted that the SEC has been pursuing auditors and underwriters, in some of the largest and/or first actions of their kind.
Late last week – one day after Vanguard announced a pilot program for retail investors in certain index funds to have a greater say in proxy voting – BlackRock issued this update on its “Voting Choice” program that was launched last year and expanded this summer.
The update – which was accompanied by a letter to clients & corporate CEOs from BlackRock CEO Larry Fink – says that about 25% of eligible assets are participating. That’s consistent with the participation rate that I blogged about in June. Here’s what else is new:
1. Extension of the voting policies clients can choose from: Participating clients in global SMAs and eligible pooled vehicles can now select one of seven Glass Lewis proxy voting policies, including an upcoming global policy, the Glass Lewis Governance-Focused Policy. These options are in addition to seven Institutional Shareholder Services (ISS) policies that have been available since the launch of BlackRock Voting Choice on January 1, 2022. This broader array of policy choices enables clients to choose a policy that more closely aligns with their investment views and preferences.
2. An expansion of investment strategies eligible: In addition to certain institutional pooled funds tracking index equity strategies, certain institutional pooled funds that implement Systematic Active Equity (SAE) strategies are now also eligible for BlackRock Voting Choice. Rather than tracking an index, SAE investment strategies use a forecasting model and an optimization process to select stocks. The expansion of BlackRock Voting Choice to institutional pooled funds using these SAE investment strategies includes eligible clients representing $90 billion as of September 30, 2022, in assets under management in both pooled funds and previously eligible SMAs.
3. Aiming to enable investors in select UK mutual funds to exercise choice in the upcoming 2023 proxy voting season: BlackRock has agreed with Proxymity, a digital investor communications platform, to work together on building a solution that aims to offer pass-through technology to enable investors to exercise choice in how their portion of eligible shareholder votes are cast for the upcoming 2023 proxy voting season. BlackRock and Proxymity will share further details on the collaborative efforts in the coming months.
4. An update on continued client adoption; demonstrating desire for expanded proxy voting choices: Since May of this year, the number of index equity clients newly committed to BlackRock Voting Choice has more than doubled. Despite market volatility, newly committed index equity AUM has increased more than 30% in the past six months to $157 billion as of September 30, 2022, from $120 billion as of March 31, 2022. In total, including SAE, BlackRock equity clients have committed $472 billion as of September 30, 2022 – or a quarter of eligible assets ($1.8 trillion) – to voting their own preferences through BlackRock Voting Choice.
The jury is still out on what this shift in the direction of “pass-through voting” could mean for companies, other than making voting outcomes less predictable and investor influence more dispersed. Over time, we’ll get a better sense for whether this raises the importance of certain proxy advisor policies and whether it calms concerns that the world’s largest asset managers have too much sway.
Rule 15c2-11 governs when dealers are permitted to publish quotations for securities. In September 2020, the SEC amended the rule to prohibit them from publishing quotes when current information about the issuer isn’t publicly available. In 2021, the Staff clarified its position that Rule 15c2-11 applies to fixed income as well as equity securities but provided limited-time relief for fixed income securities that were offered pursuant to Rule 144A. This Ropes & Gray memo says that this relief will expire on January 3, 2023, and that means market practice for private Rule 144A issuers will need to change:
While Rule 144A only requires issuers to make financial information available upon request to holders or prospective purchasers of their securities, beginning on January 4th dealers will no longer be able to publish quotations for debt securities in quotation mediums unless financial statements for and certain other information about the issuer are publicly available (for example, on the issuer’s website). Accordingly, issuers may be required to agree to publish financial statements outside of password-protected datarooms currently available only to bondholders and prospective purchasers so that dealers can continue to facilitate a liquid 144A market.
The memo says that various trade groups are lobbying the SEC and Congress to rescind this requirement, but unless action is taken prior to January 3rd, the market will have to deal with this new reality – which may result in a lot more attention being paid to reporting covenants in Rule 144A deals.
Just a few years ago, the audit market for SPACs was dominated by two non-Big 4 firms, Withum & Marcum (see my 3rd blog here). Boy, have things changed. This Bloomberg Tax article says the Big 4 now rule the roost:
When SPACs became Wall Street’s favorite way to take companies public, the Big Four accounting firms steered clear, leaving audit work to smaller outfits churning out hundreds of fast, cheap audits of the blank-check vehicles.
For those freshly minted public companies that emerged from the boom, it’s been a different story. The largest firms — Deloitte & Touche LLP, PricewaterhouseCoopers LLP, KPMG LLP, Ernst & Young LLP and their affiliates— audit almost two-thirds of the approximately 330 companies that went public through special purpose acquisition companies since 2020 and are still trading today, according to Bloomberg data. EY and its affiliates lead the Big Four in the de-SPAC client market, with 65 companies that went public via SPAC on its roster.
The article explains why the Big 4 have jumped into the fray, but here’s my TL;DR version. Anyway, while the auditors found the streets paved with SPAC gold for a couple of years, the article notes that they now find themselves with a lot of problematic clients on their hands.
In light of the findings laid out in the Bloomberg Tax article, I thought this Audit Analytics blog on the 3rd Quarter IPO market was kind of interesting. In addition, to cataloguing the overall grim IPO environment, the blog says that many of the deals that did get done didn’t involve Big 4 auditors:
Auditor Market Share – All IPOs. Twenty different firms audited the 39 companies that completed IPOs during Q3 2022. Friedman led with seven IPO clients. BF Borgers and Marcum followed with four clients each. Friedman and Marcum merged as of September 1, 2022.
Auditor Market Share – Excluding SPACs. When excluding SPACs, there were 20 firms that audited 31 companies. Friedman led with five clients. BF Borgers, Deloitte, Ziv Haft, and Grassi & Co were the only other firms with multiple IPO clients.
If it’s any consolation to the Big 4, the only unicorn to go public during the quarter, Corebridge Financial, was audited by PwC.
Yesterday, the SEC announced the adoption of amendments to Form N-PX that are intended to enhance the transparency of proxy voting by mutual funds, ETFs and other registered funds. At the same time, the SEC also fulfilled one of Dodd Frank’s regulatory mandates by adopting rules requiring investment managers to disclose on Form N-PX how they voted on “say-on-pay” proposals. Here’s the 169-page adopting release and here’s the two-page fact sheet. This excerpt from the SEC’s press release summarizes the changes:
To enhance proxy vote reporting, the amendments will require funds and managers to categorize each matter by type and, where a form of proxy or “proxy card” subject to the Commission’s proxy rules is available, tie the description and order of voting matters to the issuer’s form of proxy to help investors identify votes of interest and compare voting records. The changes also prescribe how funds and managers must organize their reports and require them to use a structured data language to make the filings easier to analyze.
Funds and managers will also be required to disclose the number of shares that were voted or instructed to be voted, as well as the number of shares loaned and not recalled and thus not voted. This latter requirement is designed to provide shareholders with context to understand how securities lending activities could affect a fund’s or manager’s proxy voting practices.
The new rules are effective for votes occurring on or after July 1, 2023 and will be reflected in filings beginning in 2024. They were adopted by the now customary 3-2 vote along partisan lines, and I think it’s gotten to the point where when you read one of our blogs about rule adoptions you should just assume that was the vote unless we tell you otherwise.
Speaking of proxy voting, Vanguard announced yesterday that is adopting a pilot program to allow retail investors in certain of its index funds greater say in how their shares are voted. Here’s an excerpt from Bloomberg’s report on the program:
Vanguard Group is planning a trial to give retail clients more say over how their shares are voted at corporate meetings, as large money managers’ influence over hot-button issues faces mounting scrutiny. Instead of making decisions exclusively on its own, Vanguard will give individual investors in several equity index funds more options about how their shares are voted, the Valley Forge, Pennsylvania-based company said Wednesday in a statement. It will begin testing the strategy early next year.
Under the program, Vanguard will offer investors in selected equity index fund a menu of voting options. These include following the board’s recommendations, choosing to rely on third party guidance or opting not to vote. Vanguard’s action follows on BlackRock’s implementation of its “Voting Choice” program that allows institutional investors to vote the shares they own in BlackRock’s index funds. BlackRock announced that program in the fall of 2021 and began its rollout earlier this year, but as Liz blogged back in June, that program is expanding rapidly. Whether Vanguard will move as quickly on the retail side remains to be seen.
Bryan Cave has recently pulled together a fairly comprehensive checklist of things not to forget about as companies head into the annual reporting & proxy season. The list includes new disclosure and filing requirements, hot disclosure topics, annual governance updates and other matters. This excerpt reviews the new disclosure & filing requirements that companies will need to address this year:
– Universal proxy card requirements are now in effect for most election contests.
– For any director elections, proxy statements must disclose the effect of all voting options, including the effect of a “withhold” vote.
– Companies must also disclose in annual proxy statements the next year’s deadline for a shareholder to provide notice to the company of its director nominees and other information required under Rule 14a-19, the SEC’s election contest rule.
– The new pay-for-performance disclosure requirements will apply to annual proxy statements for companies with fiscal years ending on or after December 16, 2022 – in other words, starting with 2022 calendar year companies.
– Given the complexity of the tabular disclosure and related requirements, companies should begin planning now to address the new requirements for their 2023 annual meetings.
– Companies must now furnish glossy annual reports to the SEC via Edgar in PDF format, effective January 11, 2023.
The blog also reminds companies that if they had their last say-when-on-pay votes in 2017 (e.g., if it was part of the first wave of votes in 2011), then they would need to conduct another vote in 2023.