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Monthly Archives: December 2022

December 20, 2022

BlackRock’s Global Principles: Updates on “Natural Capital” & “Sustainability Reporting”

Blackrock Investment Stewardship made two modifications to its 2023 Global Principles, prompted by market-level developments:

Nature-related factors: We continue to encourage companies to consider reporting on material sustainability-related risks and opportunities in their business models. While guidance is still under development for a unified disclosure framework related to natural capital, given the growing materiality of these issues for many businesses, we believe enhanced reporting would help investors’ understanding, and we note that the emerging recommendations of the Taskforce on Nature-related Financial Disclosures (TNFD) may prove useful to some companies. We recognize that some companies may report using different standards, which may be required by regulation, or one of a number of other private sector standards.

Sustainability reporting: We recognize that companies may need time after fiscal year-end to collect, analyze and report accurate climate- and sustainability-related data. To give investors time to assess the data, we encourage companies to produce climate and other sustainability-related disclosure sufficiently in advance of their annual meeting.

The Global Principles are organized around 7 key themes:

– Boards & directors

– Auditors & audit-related issues

– Capital structure, mergers, asset sales, and other special transactions

– Compensation & benefits

– Material sustainability-related risks & opportunities

– Other corporate governance matters & shareholder protections

– Shareholder proposals

The Principles continue to urge companies to disclose strategies that they have in place to mitigate material risks to the long-term business model associated with a range of climate-related scenarios – noting that those strategies must be defined by each company, it is not the role of BlackRock or other investors. Here’s more detail on disclosure expectations:

Many companies are asking what their role should be in contributing to an orderly and equitable transition – in ensuring a reliable energy supply and energy security, and in protecting the most vulnerable from energy price shocks and economic dislocation. In this context, we encourage companies to include in their disclosure a business plan for how they intend to deliver long-term financial performance through a transition to global net zero carbon emissions, consistent with their business model and sector.

We look to companies to disclose short-, medium- and long-term targets, ideally science-based targets where these are available for their sector, for Scope 1 and 2 greenhouse gas emissions (GHG) reductions and to demonstrate how their targets are consistent with the long-term economic interests of their shareholders. Many companies have an opportunity to use and contribute to the development of low carbon energy sources and technologies that will be essential to decarbonizing the global economy over time. We also recognize that continued investment in traditional energy sources, including oil and gas, is required to maintain an orderly and equitable transition — and that divestiture of carbon-intensive assets is unlikely to contribute to global emissions reductions. We encourage companies to disclose how their capital allocation to various energy sources is consistent with their strategy.

Liz Dunshee

December 20, 2022

The Latest Issue of The Corporate Executive

The latest issue of The Corporate Executive has been sent to the printer (email sales@ccrcorp.com to subscribe to this essential resource). It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in our “new normal” of remote work. The issue includes articles on:

– Taking a Deep Dive into the SEC’s New Clawback Rules

– ISS and Glass Lewis Update Proxy Voting Guidelines

If you don’t already subscribe to this newsletter, put it on your holiday wish list! Dave always ensures that it is full of must-have, practical information.

Liz Dunshee

December 19, 2022

State Street to Offer More Investors “Voting Choice” in 2023

Last week, State Street Global Advisors announced a new program that will offer “proxy voting choice” to more institutional funds, as soon as this proxy season. The announcement follows an earlier memo that hinted this could be in the works. Here are the highlights:

State Street Global Advisors’ clients in separately managed accounts already have the ability to either vote their own shares directly or delegate proxy voting of their shares to the firm’s asset stewardship team.

With the addition of this new program, investors in more than 40% of the index equity assets managed by State Street Global Advisors will have the ability — by the start of the 2023 proxy season — to make choices regarding how shares held in the funds and separately managed accounts they own are voted. Over time, the firm intends to expand investor directed voting choice to as many of its index equity assets under management as possible.

As explained on SSGA’s website, the funds that participate in this voting option will do so using various ISS proxy voting policies – including the benchmark policy, sustainability policy, socially responsible investment policy, Catholic faith-based policy, public fund policy, Taft-Hartley policy, and board aligned policy (which generally votes in favor of management recommendations).

SSGA says that it will continue to engage with portfolio companies through conversations, proxy voting and thought leadership. Pass-through voting / voting choice is shaping up to be a hot topic for the upcoming proxy season, with all 3 of the biggest asset managers now offering it (here’s info on BlackRock and on Vanguard). I blogged a few weeks ago on the Proxy Season Blog about fintech platforms to watch – and last week, about potential consequences for companies.

Liz Dunshee

December 19, 2022

Audit Committee Disclosure: Areas for Improvement

The Center for Audit Quality & Audit Analytics are out with the 9th annual “Audit Committee Transparency Barometer.” The report gauges audit committee disclosure of external audit committee oversight activities in the S&P 1500 – broken down by trends in the S&P 500, S&P MidCap 400 and S&P SmallCap 600.

This year’s report shows an uptick in many key areas – including info about the audit committee’s role in cyber risk oversight and ESG oversight:

– 54% of the S&P 500 audit committees reported having responsibility for cyber risk oversight, an 8% increase since 2021

– For S&P 500 companies, 39% of audit committees disclosed having an ESG or sustainability expert on the board, while 18% of audit committees disclosed responsibility of oversight of ESG

That said, there are also opportunities for improvement when it comes to transparency – specifically, around the audit committee’s decision process for external auditor engagements. The CAQ’s press release highlights these stats:

– While 71% of audit committees of S&P 500 companies disclose auditor tenure in the proxy statement, only 9% of such audit committees disclose how the audit committee considers length of auditor tenure when re-appointing the external auditor

– While 51% of audit committees of S&P 500 companies disclose that they are involved in the selection of the audit engagement partner, few disclosed what their involvement in the selection of the audit engagement partner entails

Liz Dunshee

December 19, 2022

SEC & EDGAR Closed Next Two Mondays

Time to plan ahead: EDGAR will be closed next Monday, December 26th – as well as the following Monday, January 2nd. That means filing websites won’t be operational, filings won’t be accepted in EDGAR, and EDGAR Filer Support won’t be available. Here’s more detail from the SEC’s announcement:

Both days will be treated as federal holidays for filing purposes, and the federal government will be closed on both days.

Filings required to be made on Monday, December 26 will be considered timely if filed on December 27, 2022 or before December 26, 2022. December 27, 2022 is EDGAR’s next operational business day following the December 26, 2022 closure.

Filings required to be made on Monday, January 2, 2023 will be considered timely if filed on January 3, 2023 or before January 2, 2023. January 3, 2023 is EDGAR’s next operational business day after the January 2 closure.

Liz Dunshee

December 16, 2022

China-Based Companies: PCAOB Says “So Far, So Good”

In August, the PCAOB reached a tentative deal with China’s securities regulators to permit the PCAOB to fully inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong.  Although the PCAOB was willing to move forward on the basis of the deal, they didn’t exactly sound optimistic about its outcome. But because implementation of the Holding Foreign Companies Accountable Act could ultimately result in the wholesale delisting of China-based companies, Chinese authorities presumably had some incentive to play ball.

Yesterday, PCAOB Chair Erica Williams issued a statement about actions taken by the PCAOB based on its experience to date inspecting China-based firms under the accord. That statement took a slightly more optimistic tone. Here’s an excerpt:

For the first time in history, the PCAOB has secured complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. And this morning the Board voted to vacate the previous determinations to the contrary.

This historic and unprecedented access was only possible because of the leverage Congress created by passing the Holding Foreign Companies Accountable Act. Congress sent a clear message with that legislation that access to U.S. capital markets is a privilege and not a right, and China received that message loud and clear.

Investors are more protected today because of Congress’ leadership, and I want to thank Members of the House and the Senate for their ongoing work to hold China accountable.

I want to be clear: this is the beginning of our work to inspect and investigate firms in China, not the end. The PCAOB is continuing to demand complete access in mainland China and Hong Kong moving forward. Our teams are already making plans to resume regular inspections in early 2023 and beyond, as well as continuing to pursue investigations.

The Board does not have to wait another year to reassess its determinations. Should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access – in any way and at any point in the future – the Board will act immediately to consider the need to issue a new determination.

It is important to understand: today’s announcement is about one question and one question only – is the PCAOB able to inspect and investigate firms in mainland China and Hong Kong completely at this time? The answer, following thorough and systematic testing, is yes.

The statement goes on to say that the PCAOB found numerous potential deficiencies in its inspection, but that these results weren’t out of line with what would be expected for firms in other jurisdictions being subjected to inspection for the first time.

John Jenkins

December 16, 2022

Crypto: Is It a Security? The Answer Isn’t Always Easy

The SEC has brought enforcement actions against a number of companies offering digital assets in which it has alleged that the assets are a “security” within the meaning of Section 2(a)(1) of the Securities Act.  Much to the consternation of the crypto bros, the answer to that question is often a straightforward “yes”, based upon application of the Howey test.  But the answer isn’t so simple when it comes to other digital assets.

To get a sense for the complexity of this issue for some digital assets, check out the comment letter exchange that David Kitchin & Jay Knight recently flagged on Bass Berry’s Securities Law Exchange Blog.  The Staff issued a comment (see comment No. 2) on a Form 10 filing by Graystone Horizen Trust, which was organized to hold the ZEN cryptocurrency, requesting it to furnish the Staff with its analysis as to why ZEN wasn’t a security.  The company’s response letter included a 30-page analysis (featuring more than 130 footnotes) of the issue from its outside counsel that reached the following conclusion:

The SEC could claim that ZEN is a security on the basis that holders would rely on the efforts of the Foundation or the Company. Even so, while not free from doubt, the Sponsor could make arguments to the contrary that, in light of the full facts and circumstances, ZEN does not meet all the elements of Howey such that it would be an investment contract.

The Staff and the company engaged in several more rounds of comments in which it requested additional disclosure concerning ZEN’s potential classification as a security. But at the end of the process, the Staff decided to kick the can down the road and issued this final comment:

Refer to your responses to comment 2 in our June 13, 2022 letter and related comments. While we do not have any further comments at this time regarding your responses, please confirm your understanding that our decision not to issue additional comments should not be interpreted to mean that we either agree or disagree with your responses, including any conclusions you have made, positions you have taken and practices you have engaged in with respect to this matter.

The result of this exchange isn’t surprising – after all, the resolution of the status of a particular cryptocurrency under the Securities Act is likely an issue that will ultimately need to be decided by the courts or by more senior SEC officials.  But it does illustrate just how complicated the issues surrounding whether some digital assets are securities can be.

John Jenkins

December 16, 2022

Small Business: OASB Releases Annual Report to Congress

The SEC’s Office of the Advocate for Small Business Capital Formation just issued its 2022 Annual Report, which highlights the OASB’s activities during the year and discusses the overall state of capital formation, the capital needs of early stage and more mature businesses, and other matters. There’s a lot of interesting data in the report, but one thing in particular that I’d like to note is that on p. 6 of the Report, the OASB singles out Deputy Director Sebastian Gomez Abero’s appearance on our own Dave Lynn’s “Deep Dive with Dave” podcast as one of the year’s highlights. Check it out!

John Jenkins

December 15, 2022

Rule 10b5-1: SEC Adopts Amendments to Conditions & Disclosure Requirements

Yesterday, the SEC adopted amendments to Rule 10b5-1 imposing new conditions & disclosure requirements for 10b5-1 plans and securities transactions by companies and insiders. Here’s the 252-page adopting release, and here’s the two-page fact sheet. According to the fact sheet, the changes amend the Rule 10b5-1(c)(1) affirmative defense to include:

– A cooling-off period for directors and officers of the later of: (1) 90 days following plan adoption or modification; or (2) two business days following the disclosure in certain periodic reports of the issuer’s financial results for the fiscal quarter in which the plan was adopted or modified (but not to exceed 120 days following plan adoption or modification) before any trading can commence under the trading arrangement;

– A cooling-off period of 30 days for persons other than issuers or directors and officers before any trading can commence under the trading arrangement or modification;

– A condition for directors and officers to include a representation in their Rule 10b5-1 plan certifying, at the time of the adoption of a new or modified plan, that: (1) they are not aware of material nonpublic information about the issuer or its securities; and (2) they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5;

– A limitation on the ability of anyone other than issuers to use multiple overlapping Rule 10b5-1 plans;

– A limitation on the ability of anyone other than issuers to rely on the affirmative defense for a single-trade plan to one such plan during any consecutive 12-month period; and

– A condition that all persons entering into a Rule 10b5-1 plan must act in good faithwith respect to that plan.

In addition to the amendments to Rule 10b5-1, the SEC added new disclosure requirements, including annual disclosure relating to a company’s insider trading policies and procedures, quarterly disclosure concerning the use of Rule 10b5-1 plans by its directors & officers, and disclosure about awards of options in proximity to the release of MNPI and related policies and procedures.  The new rules will also require Form 4 and 5 filers to indicate by a checkbox that a reported transaction was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c)

The final rules contain a few tweaks to the SEC’s original proposal. These include modifying the duration of the mandatory cooling off period (and eliminating the proposed cooling off period for issuers), allowing officer & director certifications to be included in the plan itself rather than being separately delivered to the issuer, and permitting issuers (but not insiders) to use multiple overlapping 10b5-1 plans. Overall, however, the amendments largely track the original proposal.

I said last month that we’d let you know if the SEC adopted anything by other than a 3-2 partisan vote, so I want to note for the record that the commissioners voted unanimously to approve the amendments.  We’ll be posting memos in our “Rule 10b5-1” Practice Area.

The rules go into effect 60 days after publication in the Federal Register, and we’re scheduling a webcast for next month on the implications of the changes for companies & insiders. Stay tuned for more details.

John Jenkins

December 15, 2022

Reg FD: AT&T Pays Big Bucks to Settle a Textbook Case

I’ve been keeping an eye out for law firm memos explaining to me what’s particularly significant about the SEC’s settlement with AT&T over alleged Reg FD violations – other than the fact that it involved the largest financial penalty ever assessed in an FD enforcement action. It’s been a week since the settlement was announced, but I still haven’t seen anything along those lines. I can’t say I’m surprised. After all, from the outset, the SEC’s allegations appeared to involve textbook examples of the kind of practices that it had long cautioned companies against.

AT&T’s 1st Amendment challenge to Reg FD was probably the most interesting part of the case, but after the SDNY shot that down along with the other arguments the defendants submitted in their motion for summary judgment, so you can see why the company was interested in settling the case. On the other hand, the SEC had something to lose if a trial went forward as well. That’s because the Court found that a jury could reasonably find for either side when it came to the issue of whether the defendants acted with scienter. 

Reg FD requires companies to simultaneously make public disclosure of any MNPI that is intentionally selectively disclosed and defines the term “intentional” to include recklessness. The Court’s discussion of the scienter issue begins on p.120 of its opinion, and among the various things it pointed to in concluding that a jury might reasonably find that the defendants didn’t act recklessly was the complete absence of any inkling among AT&T personnel and the analysts who received the selective disclosure that those communications risked violating Reg FD.

What are the key takeaways from the AT&T enforcement action? This MoFo memo on the SDNY’s decision suggests the following:

Policies and procedures alone may not be enough: At AT&T, the relevant policies, procedures, and training expressly prohibited the disclosures at issue. Nevertheless, the IR defendants and executives involved apparently understood that their actions did not violate Reg FD. Companies should consider whether changes or updates are warranted in their compliance programs to help mitigate the risk of unintended Reg FD violations. Such changes could include additional targeted trainings for those employees who communicate directly with analysts.

Timing: One way that companies can reduce the risk of possible Reg FD violations is to impose a “quiet period” late in the quarter during which company employees to whom Reg FD applies are prohibited from speaking with investors and analysts.

Utilize scripts: Where IR professionals speak with analysts, they should consider using scripts to guide their conversations. Such scripts can be reviewed by counsel and senior leadership to help ensure compliance with Reg FD.

To this list, I’d add one more item. I think the Court’s comments that nobody involved had any idea that there was a Reg FD issue in their communications are important. The Court said that went to scienter, but it’s also relevant to materiality, because it indicates that none of the sophisticated market professionals involved thought they were dealing with MNPI. I think the lesson is that materiality is always a judgment call, and one that the SEC is very willing to second guess when it comes to selective disclosure. That might just be the most important thing to keep in mind when it comes to Reg FD.

John Jenkins