On Friday, the SEC announced that Renee Jones, who has been the Director of Corp Fin since June 2021, will be departing the agency February 3rd to return to her faculty position at Boston College Law School. Erik Gerding, who is currently Corp Fin’s Deputy Director, will be appointed Director.
Renee hit the ground running and had a very busy tenure as Director. The SEC’s press release highlights the rulemaking and other activities that have happened during the past 1.5 years:
While in the role, she oversaw the Division’s work that resulted in the proposal of 12 rules and the adoption of nine rules covering topics such as the disclosure of climate-related risks and cybersecurity risks, special purpose acquisition companies, executive compensation, and insider trading. She also oversaw the Division’s disclosure review program as it sought enhanced corporate disclosures on climate risks and crypto asset risks, and implemented the Holding Foreign Companies Accountable Act.
As many folks reading this know, in addition to many years as a law professor, Erik started his career as a lawyer at Cleary. Here’s more detail:
Mr. Gerding joined the SEC in October 2021 and leads Legal and Regulatory Policy in the Division of Corporation Finance. He has taught as Professor of Law and a Wolf-Nichol Fellow at the University of Colorado Law School, where he has focused in the areas of securities law, corporate law, and financial regulation. Mr. Gerding previously taught at the University of New Mexico School of Law. He also practiced in the New York and Washington, D.C., offices of Cleary Gottlieb Steen & Hamilton LLP, representing clients in the financial services and technology industries in an array of financial transactions and regulatory matters. He received an undergraduate degree from Duke University and a J.D. from Harvard Law School.
I look forward to seeing what Erik does as Director. As John and Dave recently blogged, Chair Gensler has put forth another ambitious Reg Flex Agenda for the upcoming year.
In the latest sign that the SEC’s Enforcement Division continues to investigate whether public companies are properly disclosing cyber attacks – and whether any insiders have made trades based on material non-public information about incidents – it’s come to light that the SEC has now asked at least one law firm to give it the names of clients that were affected by a breach. Understandably, the firm is not planning to voluntarily comply – so the Commission is taking the matter to court.
Last week, the SEC announced a subpoena enforcement action against Covington, looking to get the names of clients that were affected by a cyber attack against the firm in November 2020. Here’s the SEC’s court application to compel compliance with the subpoena, and supporting documents. Here’s more detail from the SEC’s press release:
Through its subpoena enforcement action, the SEC is seeking only the names of those clients whose files were viewed, copied, modified or exfiltrated by the threat actors. According to the filing, the SEC seeks this information to assist it in identifying any suspicious trading by the threat actors or others in those clients’ securities, and whether such trading was illegal based on material non-public information that the threat actors viewed or exfiltrated as part of the cyberattack.
In addition, the information will assist the SEC in determining whether the impacted clients made all required disclosures to the investing public about any material cybersecurity events in connection with the cyberattack. To date, Covington has refused to provide the names of all but two of the clients, and those two clients consented to providing their names to the SEC.
The SEC is seeking a court order from a DC District Court and is also continuing its fact-finding investigation. The Commission acknowledges that to-date, it has not found any violations of securities laws.
Covington’s counsel and other white collar lawyers are saying that if the SEC succeeds with its request, it could have implications for whether attorney-client privilege will hold up in the face of government investigations. This Law.com article reinforces why law firms will find this problematic – and says the SEC has a steep hill to climb:
In order to succeed, Rahman said the SEC would have to convince the judge that there’s no other way to get the information to conduct its investigation.
“The SEC has a ton of investigative tools at its disposal,” she said. “Asking a firm for a confidential information should be a last resort and they don’t say they used any other avenues.”
The SEC’s focus on cyber matters carries forward clear priorities from the past two years. In addition to the SEC aiming to adopt “cybersecurity risk governance” disclosure rules in April of this year, the Enforcement Division contacted companies affected by the December 2020 SolarWinds attack in a June 2021 enforcement sweep. The SEC also reorganized and created 20 new Enforcement positions dedicated to crypto & cyber last spring.
Here’s something John blogged on CompensationStandards.com last week:
The messy story of McDonald’s Corporation’s decision to terminate its former CEO Stephen Easterbrook added another chapter yesterday, when the SEC announced that it had initiated settled enforcement proceedings against the former CEO and the company arising out of his departure. This excerpt from the SEC’s press release explains its allegations:
According to the SEC’s order, McDonald’s terminated Easterbrook for exercising poor judgment and engaging in an inappropriate personal relationship with a McDonald’s employee in violation of company policy. However, McDonald’s and Easterbrook entered into a separation agreement that concluded his termination was without cause, which allowed him to retain substantial equity compensation that otherwise would have been forfeited. In making this conclusion, McDonald’s exercised discretion that was not disclosed to investors.
Subsequently, in July 2020, McDonald’s discovered through an internal investigation that Easterbrook had engaged in other undisclosed, improper relationships with additional McDonald’s employees. According to the SEC’s order, Easterbrook knew or was reckless in not knowing that his failure to disclose these additional violations of company policy prior to his termination would influence McDonald’s disclosures to investors related to his departure and compensation.
Without admitting or denying the SEC’s allegations, Easterbrook consented to a cease & desist order prohibiting future violations of the antifraud provisions of the federal securities laws, and imposing a $400,000 fine and a five-year officer and director bar. The company consented to a cease & desist order prohibiting future violations of Section 14(a) of the 1934 Act and Rule 14a-3 thereunder.
As Liz blogged last year, the company sued the former CEO and reached a settlement under which it “clawed back” over $100 million in equity awards and cash based on the company’s claims that the board wouldn’t have approved a separation agreement characterizing his termination as “without cause” if it had been aware of his dishonesty and additional misconduct. The company’s efforts to claw back that compensation, together with its other efforts to cooperate with the SEC’s investigation, resulted in the agency’s decision not to impose a financial penalty on the company.
Commissioners Peirce and Uyeda dissented from the SEC’s decision with respect to the company. In their dissenting statement, they expressed their view that the SEC was rewriting the disclosure requirements of Item 402 of Reg S-K through an enforcement proceeding. Here’s an excerpt:
We are unaware of prior Commission or staff actions or positions applying Item 402 in the way that the Order does. Additionally, the Order can be read to suggest that the underlying reasons for why the company decided to terminate a named executive officer “without cause” instead of “with cause,” and vice versa, need to be disclosed under Item 402. Such “hiring and firing discussion and analysis,” however, is beyond the rule’s scope.
The statement went on to note that industry practice for complying with Item 402 has developed over many years, and that an enforcement action is not “a reasonable regulatory approach” for announcing a novel interpretation.
It seems to me that the dissenters make a good point – executive termination disclosures tend to be terse, often for sound business and legal reasons. Imposing a requirement that companies must disclose the reasons why they opted to treat a particular termination as being “without cause” adds another layer of complexity to an already challenging process, without in most cases providing a significant benefit to investors.
Earlier this week, Corp Fin withdrew the guidance that the Staff 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.
As we noted in the November-December 2022 issue of The Corporate Counsel, the Staff’s action was prompted by the SEC’s adoption of a new electronic filing requirement for the glossy annual report that is required under Exchange Act Rules 14a-3 and 14c-3. As of Wednesday, January 11, 2023, it is now mandatory for glossy annual reports to be submitted to the SEC via EDGAR. Foreign private issuers that furnish their glossy annual report in response to the requirements of Form 6-K also have to submit those reports via EDGAR.
The annual report is filed under the EDGAR header submission type “ARS,” and, unlike your other EDGAR filings which must be filed in HTML format, the glossy annual report is submitted as a PDF file. Here are a few examples of submissions from this week:
I have to admit that I am kind of excited about seeing glossy annual reports on EDGAR. While it is unfortunate that clients now have to contend with yet another filing requirement, it is interesting to see these often highly stylized reports collected in one place that is relatively easily searchable.
My affinity for glossy annual reports traces back to my early days in Corp Fin at the SEC, when issuers were obligated to mail seven copies of the glossy annual report “for the information of the Commission.” One might ask, why were seven copies of the glossy annual report required, when just one would probably do the trick? I have no idea, I never went back to do the research, but in the old paper filing days, the filing rules typically called for the filing of multiple copies of the same document so that copies could be provided to various members of the filing review team. This glossy annual report submission requirement provided me with an early lesson in the unintended consequences of rulemaking.
As I reminisced in a blog back in June when this rule change was adopted, during the proxy season each year, glossy annual reports would come flooding in by the sevens, but there was basically no where to put them and no interest on the part of the Staff in reviewing them. Our administrative assistants would grumble loudly about the onslaught and would try in vain to cram the glossies into filing cabinets, but inevitably stacks of glossy annual reports would pile up in the file rooms, around desks and in various other corners of our office “pod.” Enterprising staffers would use the glossies to prop open doors, elevate their computer monitors and shim up wobbly desks. For some reason the concept of “keep one and throw away the other six” never seemed to cross anyone’s mind.
By far the best use of the glossy annual reports that flooded the Commission’s hallways each Spring was the effort undertaken by a group of Corp Fin Staffers who recognized the beauty in these documents and transformed them into works of art for the wall of the fourth floor Corp Fin conference room at the SEC’s old 450 5th Street building. One wall of the conference room was filled with the covers from glossy annual reports, and I have a lot of fond memories from that conference room that I associate with the glossy cover art on the wall. I don’t think that was what the Commission was thinking when it adopted the requirement to submit seven copies of the glossy annual report to the SEC, but at least there was one small positive unintended consequence from the SEC’s rulemaking!
Alas, the Information Age has robbed us of many of life’s little pleasures, including access to hard copies of glossy annual reports. Nonetheless, the glossy annual report remains a fixture of the proxy solicitation materials that are required to be delivered to shareholders during each annual meeting cycle. In an effort to save costs and in recognition of the fact that the glossy annual report likely serves much less of an investor relations purpose when it is available electronically to shareholders, some companies have transitioned to a “wrap” format, where the Annual Report on Form 10-K is wrapped with a few extra pages that include the extra glossy annual report information and some additional IR messages, such as a letter from the CEO and/or the Chairman. I always try to remind folks of a couple things about their glossy annual report:
– Make sure the glossy annual report satisfies all of the informational requirements of Rule 14a-3 (or Rule 14c-3 in the case of information statements).
– The glossy annual report is a public document, so it is subject to the non-GAAP financial measure disclosure requirements in Regulation G. It is not a “filed” document, so it is not subject to the more stringent non-GAAP financial measure disclosure requirements in Item 10 of Regulation S-K.
– The glossy annual report should be subjected to the same disclosure controls and procedures as your SEC filings, even though it is not a “filed” document.
– Treat the statements in the glossy annual report as you would any other public statements, and try to avoid any material misstatements or omissions in the glossy annual report that could subject the company to liability under the antifraud provisions of the federal securities laws.
Yesterday, the SEC announced that Paul Munter has been appointed as the agency’s Chief Accountant. He has previously served as the SEC’s Acting Chief Accountant since January 2021.
Paul Munter joined the SEC in 2019 as Deputy Chief Accountant, leading the international work of the Office of Chief Accountant. Before joining the agency, he was a senior instructor of accounting at the University of Colorado Boulder. He had previously retired from KPMG, where he served as the lead technical partner for the U.S. firm’s international accounting and IFRS activities and served on the firm’s panel responsible for establishing firm positions on the application of IFRS.
During Munter’s time as Acting Chief Accountant, he delivered a number of notable speeches, some of which we have covered in The Corporate Counsel, including:
I had the good fortune to curate an exhibit for the SEC Historical Society which reviews the history of the SEC’s regulation of financial disclosure by focusing on the important work of the SEC’s Office of Chief Accountant. In a featured program for that exhibit, I moderated a panel of current and former Staffers who worked in the Office of Chief Accountant that included: Paul Munter, SEC Chief Accountant; Joe Ucuzoglu, Chief Executive Officer, Deloitte US and former Senior Advisor to the SEC Chief Accountant; and Paul Beswick, EY Americas IFRS Leader and former SEC Chief Accountant. I encourage you to view that program and check out some of the interesting materials in the exhibit to get an in-depth perspective on the work of the Office of Chief Accountant and its importance in the SEC’s regulation of financial disclosure.
Back in December, FASB announced an Accounting Standards Update that extends the period of time preparers can utilize the guidance in Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. That ASU provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The guidance had a sunset date of December 31, 2022, but now FASB has extended that sunset date to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.
The new pay versus performance disclosure requirement is a big focus right now, as issuers begin preparing their proxy statements for 2023 annual meetings. As with any new rule, there are inevitably quite a few interpretive questions that come up when trying to apply the SEC’s disclosure requirements to real world situations.
Often (although not always) the Staff in Corp Fin will endeavor to provide guidance on new rules through Compliance and Disclosure Interpretations or some other form of Staff guidance. It is not too late for that to happen in the context of the pay versus performance rules, although many expected Staff guidance to be released some time last month. In the absence of formal Staff guidance, we fortunately still have the good old word-of-mouth method, where members of our community report on conversations that they have had with the Staff on interpretive issues.
One interpretive issue that came up pretty early on relates to the presentation of a peer group TSR in the pay versus performance table. The rule provides two options: (1) the same index or issuers used for purposes of the performance graph; or (2) the companies used as a peer group for purposes of the issuer’s disclosures under paragraph Item 402(b) of Regulation S-K, which presumably is referring to Item 402(b)(2)(xiv), which states “whether the registrant engaged in any benchmarking of total compensation, or any material element of compensation, identifying the benchmark and, if applicable, its components (including component companies).”
The logical conclusion that some drew from this regulatory text was that they could use the companies comprising the peer group discussed in their CD&A as the same peer group for which TSR is presented in the pay versus performance table. However, as we discussed during our November program on CompensationStandards.com “Special Session: “Tackling Your Pay Vs. Performance Disclosures,” the Staff’s initial reaction to that interpretive question was that the peer group disclosed in the CD&A could only be used for the pay versus performance table if that peer group was used for “benchmarking” purposes. For purposes of the CD&A, “benchmarking” refers to the tying of specific elements of compensation to a benchmark, as opposed to, for example, simply using comparable company data as a market check after arriving at compensation decisions based on some other method. Today, most companies avoid “benchmarking” as that term is contemplated in Item 402(b), and instead reference a peer group of companies in the CD&A for broader purposes. As a result, for most companies, this informal Staff interpretive guidance limits the peer group used for the pay versus performance table to the same peer group that is used for purposes of the performance graph.