While we have not yet seen a proposal from the SEC revisiting the human capital disclosure requirements, last week the SEC’s Investor Advisory Committee considered a draft recommendation on human capital disclosure that was recommended by the SEC Investor Advisory Committee’s Investor-as-Owner Subcommittee. As this Cooley PubCo blog notes, the Investor Advisory Committee voted to approve, with two abstentions, the subcommittee’s recommendation. The draft document that was voted on last week includes the following recommendations:

First, the IAC recommends that the Commission strengthen current Item 101(c) under Regulation S-K pertaining to human resources disclosures by requiring disclosure of the following:

1. The number of people employed by the issuer, broken down by whether those people are full-time, part-time, or contingent workers;

2. Turnover or comparable workforce stability metrics;

3. The total cost of the issuer’s workforce, broken down into major components of compensation; and

4. Workforce demographic data sufficient to allow investors to understand the company’s efforts to access and develop new sources of talent, and to evaluate the effectiveness of these efforts.

Second, the IAC recommends that the Commission consider narrative disclosure, in the Management Discussion & Analysis, of how the firm’s labor practices, compensation incentives, and staffing fit within the broader firm strategy. Such a discussion would address what portion of labor costs management views as an investment and why, including how labor is allocated across areas designed to promote firm growth (e.g., R&D) and those necessary to maintain current operations rather than increase sales revenue (e.g., compliance). Our recommendation here is consistent with the recommendation put forward in a June 2022 rulemaking petition submitted by former SEC commissioners and senior officials as well as professors of accounting and securities law.

Now that the Investor Advisory Committee has spoken, we will see what the Commission decides to do with human capital disclosure requirements.

– Dave Lynn

The fact that the government is on the verge of shutting down does not affect business-as-usual in Washington, so tomorrow SEC Chair Gensler will be testifying at an SEC oversight hearing convened by the House Financial Services Committee. Undoubtedly, the Chair will be questioned regarding the climate change rules and digital asset regulation, among other pressing issues.

– Dave Lynn

I hope you were able to join us last week for our 2023 Virtual Conferences – the “2023 Practical ESG Conference,” the “2023 Proxy Disclosure Conference,” and the “20th Annual Executive Compensation Conference.” I would like to send a big shoutout to everyone at CCRcorp who made these great Conferences happen, as well as to all of the fantastic speakers that we had participating in the Conferences – we covered so much ground during those four days! If you missed any parts of the Conferences, archives of the sessions are available, and be on the lookout for our continuing coverage of key takeaways in an upcoming issue of The Corporate Executive.

– Dave Lynn

With a looming government shutdown dominating the headlines, it is yet again time to go down that well-worn path of trying to plan for the worst in the event Congress is unable to get its act together.

This shutdown talk always brings up bad memories for me, because I can remember starting my career in Corp Fin in the Fall of 1995 when, shortly after I began working in the Division, I was attending all-hands meetings with the Chairman talking about what would happen when the government shut down in the ensuing weeks. The partial government shutdown that ultimately happened, pitting President Bill Clinton against Republican Speaker of the House Newt Gingrich, only lasted for a few weeks. Fortunately, the SEC remained operational during that time using some appropriations that were apparently saved up in its piggy bank. While the crisis was averted, it was a good lesson for me in how a dysfunctional government could have a real impact on my life, as I was trying to figure out how I was going to pay my bills if my paychecks stopped arriving during a prolonged government shutdown.

Here we are, 28 years later, and the dysfunction has only gotten worse as the shutdown card is being played again. While the SEC and the Staff have not yet provided any guidance on how things will be handled in the event of a shutdown, we do have the 2018-2019 shutdown experience to draw on. The shutdown that began on December 22, 2018 and ended on January 25, 2019 was markedly different from the 1995 version, because there was no piggy bank to bail out the SEC, so we actually experienced several weeks of substantially curtailed operations at the SEC.

In advance of the 2018-2019 shutdown, the SEC published its Operations Plan Under a Lapse in Appropriations and Government Shutdown (updated July 2023), and Corp Fin issued fourteen FAQs, which no longer appear to be on the SEC’s website but which are described in this White & Case memo. In the absence of any further updated guidance from the SEC or the Staff, these are good resources to review as we plan for a shutdown. If history is any guide, the SEC may be able to remain fully operational for a few days, but an extended lapse in appropriations will ultimately mean that SEC Staff will be prohibited from doing any work, so Corp Fin will be staffed with only a skeleton crew to handle emergencies during the course of the shutdown. Recall that, during the 2018-2019 shutdown, issuers had to pull their delaying amendments in order to have registration statements go effective so they could proceed with their capital-raising transactions and mergers. There was no impact on the ability to make EDGAR filings during the last shutdown, because EDGAR is operated by a third party.

With only one week to go until the end of the government’s fiscal year and the potential for a lapse in appropriations, now is a good time to speak with your Corp Fin examiner about any registration statements that you have pending with the SEC. It may be the case that the Staff will be willing to resolve any outstanding issues and consider an acceleration request this week, so as to avoid the prospect of a prolonged delay for the issuer in the event of a shutdown. I will continue the coverage this week as events unfold.

– Dave Lynn

John has been blogging about FinCEN’s rules for reporting of beneficial ownership information under the Corporate Transparency Act, which create new filing requirements applicable to a wide range of entities. FinCEN recently released a Small Entity Compliance Guide addressing these new requirements. In its announcement, FinCEN notes:

Among other things, the Guide:

– Describes each of the BOI reporting rule’s provisions in simple, easy-to-read language;
– Answers key questions; and
– Provides interactive checklists, infographics, and other tools to assist businesses in complying with the BOI reporting rule.

The requirements become effective on January 1, 2024, and companies will be able to begin reporting beneficial ownership information to FinCEN at that time. FinCEN will provide additional guidance on how to submit beneficial ownership information soon.

The new reporting requirement are quite far reaching – as John noted in this blog, FinCEN estimated that 25 million existing legal entities, plus an additional three million new legal entities each year, will meet the criteria to file the required beneficial ownership reports, so I imagine this Small Entity Compliance Guide will get a lot of use!

– Dave Lynn

Earlier this week on his Section16.net blog, Alan Dye pointed out that the Senate recently passed legislation that would create a lot of headaches for foreign private issuers:

The Senate-passed National Defense Authorization Act for Fiscal Year 2024 contains a provision (Section 6081) that would amend Section 16(a)(1) of the Exchange Act to subject insiders of foreign private issuers to Section 16 and render null and void any SEC rule exempting them from Section 16. If enacted, the amendment would partially nullify Rule 3a12-3, which provides that securities of FPIs are not subject to Section 16 and parts of Section 14. I don’t know who is behind the amendment, but I will try to find out.

Weil’s Howard Dicker subsequently provided us with the information that Alan was looking for. It turns out that a stand-alone bill removing the Section 16 exemption for FPIs was introduced in the Senate back in April 2023. That legislation was co-sponsored by Sen. John Kennedy (R-LA) and Sen. Chris Van Hollen (D-MD), both of whom co-sponsored an identically worded bill the prior year.  Then, in July 2023, those co-sponsors offered the same text as an amendment to the National Defense Authorization Act.

When they introduced the stand-alone bill, the co-sponsors issued a press release describing their reasons for the proposed legislation. Here’s an excerpt:

“Insiders at companies in Beijing and Moscow have been able to avoid billions in losses on the U.S. stock exchange by playing by a different set of rules than Americans do. This insider trading comes at a cost to American investors. The Holding Foreign Insiders Accountable Act will help stop opportunistic insider trading by requiring foreign executives to disclose trades immediately,” said Kennedy.

“All companies operating on U.S. markets should have to play by the same rules. And when corporate insiders sell their stocks, investors and the American public have a right to know. It’s time to require foreign executives to disclose these trades and provide this information to the public,” said Van Hollen.

I appreciate the rationale behind the proposed amendment, and the co-sponsors’ commentary on the bill suggests that their focus is on Section 16(a) reporting.  But as written, it looks like the amendment would also subject FPI insiders to the short-swing profit recovery provisions of Section 16(b) – and that’s something I think legislators ought to think long and hard about before they enshrine it into law.

It’s one thing to require companies that want to enjoy the privilege of a US listing to be required to publicly disclose insider trades on a timely basis, but it’s another to expose foreign company insiders to potential liability under a draconian statutory relic that’s a notorious trap for the unwary. Subjecting FPI insiders to Section 16(b) will create a pretty strong disincentive for the folks who call the shots at foreign companies to list their shares here. And we do still want them to do that, right?

– John Jenkins

Until recently, when a company ran into potential trouble with the SEC or another regulator, it usually made only the blandest of statements in its own defense if it commented at all. But these days, it’s becoming increasingly fashionable for companies to take their case to the court of public opinion and to bash their regulators as part of that strategy.  Here’s an excerpt from this Axios newsletter:

As Axios’ Crystal Kim recently pointed out in her crypto newsletter, most companies clam up when the Securities and Exchange Commission (SEC) comes knocking, but that’s not the approach Coinbase Global is taking.

Zoom in: Coinbase has been unusually vocal about run-ins with its primary regulator in blogs, tweets, podcasts and media interviews — offering up subpoenas, court filings (theirs and their adversaries) and legal analysis in near real time to the public.

Coinbase also started an advocacy campaign called Stand With Crypto seeking to mobilize public support for crypto rules. “In terms of how we thought about public messaging, we needed to start with first principles to basically reconsider anything and everything we had been taught about how to engage,” Paul Grewal, Coinbase’s chief legal officer, told Kim.

Zoom out: Coinbase isn’t alone. Activision Blizzard and Airbnb haven’t pulled punches in their battles with regulators, while DoorDash and Oatly have pushed back hard against misinformation or public critiques. “There are advantages in speaking out and creating a public issue, so others can be aware and support the defense,” Junaid Zubairi, an attorney at Vedder Price, told Axios.

I guess I can understand why companies dealing with a potentially existential regulatory issue might decide to take a scorched earth approach, but at the risk of provoking an “okay boomer” response from many of our readers, I don’t see the long-term upside of spewing vitriol at a regulator that a company is going to have to deal with on a regular basis for the foreseeable future.

– John Jenkins

Today is the second day of our “2023 Proxy Disclosure Conference” – tomorrow is our “20th Annual Executive Compensation Conference.” Here’s more info:

– How to Attend: We have emailed a direct access link for the Conference to all registered attendees, from info@ccrcorp.com. Use that link to go to the Conference platform. Once you log in to the Conference Platform, follow the “Proxy Disclosure/Exec Comp” tab to see the agendas for each day, enter sessions, and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone.

If you are experiencing a technical issue on our conference platform and need assistance, please use the Help Desk tab on the left side of the conference platform for support or email our Operations Manager, Victoria Newton at VNewton@CCRcorp.com. If you have any other questions about accessing the conference, please email our Operations Manager, Victoria Newton (vnewton@ccrcorp.com).

– How to View Archives & Transcripts: If you registered to attend the Conference through CCRcorp, you will be able to access the conference archives on the conference platform next week, and unedited transcripts will be available beginning about 1-2 weeks after the event. If you registered for the conferences through NASPP, you will receive access to the video archives from NASPP. Archives and transcripts will be available on-demand until September 20, 2024, so they’ll be available for you to reference as you navigate challenging proxy season issues well after the live Conferences have concluded.

– How to Earn CLE for Live Sessions: We are applying for up to 16 hours of CLE credit for the Proxy Disclosure & Executive Compensation Conferences in applicable states – approvals of actual credit vary based on each state. Please read these CLE FAQs carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts approximately every 20-30 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.

– New this Year! On-Demand CLE: We will be offering on-demand CLE credit for the session replays, in states where that is available. There are some nuances to receiving that credit, so make sure to check out the on-demand CLE FAQs that follow the general CLE FAQs in order to be able to take advantage of that.

– Thanks To Our Sponsors! Our sponsors have helped make this event possible, and we are proud and grateful to have their support. Our gold sponsors for the Proxy Disclosure & 20th Annual Executive Compensation Conference are Fredrikson and Morrison Foerster, our silver sponsor is Kirkland & Ellis, and our media partner is Newsfile. Please visit their pages in our virtual exhibit hall!

It is not too late to register for our Conferences today! You can sign up for today’s “2023 Proxy Disclosure Conference” and tomorrow’s “20th Annual Executive Compensation Disclosure Conference” by emailing sales@ccrcorp.com or by calling 1-800-737-1271. If you miss these conferences or our “2023 Practical ESG Conference,” you can still purchase access to the archives (and, for the “2023 Proxy Disclosure & 20th Annual Executive Compensation Conferences,” may be able to earn CLE credit for watching on-demand sessions as well). Just email sales@ccrcorp.com – and we’ll also have a link available soon on this page to do that.

– John Jenkins

In 2020, the SEC issued a 7-page interpretive release providing guidance on disclosure of key performance indicators in MD&A. Among other things, the guidance noted that disclosure of certain key metrics may be required under Item 303, but said that when companies disclose such metrics, they should also consider whether additional disclosures are necessary. The release also highlighted the obligation to maintain appropriate disclosure controls and procedures when disclosing KPI metrics. Since that time, KPI disclosures have proven to be a popular topic for Staff comments – and the occasional enforcement proceeding.

One of the big reasons that KPIs attract a lot of attention from the SEC is that companies love to use them and talk about them – but a recent FEI Daily blog says that they may be overdoing it:

Key Performance Indicators (KPIs) are present at nearly every level of the leading U.S. corporations—from their HR departments, to finance, to marketing, to sales. On paper, KPIs serve a very useful function: they quantify performance over a period of time, giving teams targets to hit, establishing milestones in a company’s journey toward its goals, and providing leaders with insights that can steer the ship toward greater efficiency and profitability.

However, in the age of advanced analytics, where organizations rush to incorporate the latest in analytics into aging infrastructures, companies keep building up their list of KPIs while losing sight of the big picture. Ironically, many companies that try to incorporate more data just end up with more reports that aren’t used and the data itself becomes less useful. Imagine someone intending to knit a sweater but instead starts tunnel visioning on making more and more loops, without connecting them back to the already-woven fabric. The loops become an end in themselves. This is what organizations are doing by over-indexing on KPIs—making the means the focus, not the end. Companies need to think beyond the “loops” to connect with the fabric of the bigger picture.

It strikes me that this is something that companies should keep in mind and consider whether there’s a need to cut through the KPI underbrush to determine what performance metrics should be disclosed in SEC filings & investor communications. That’s going to require sorting out the KPIs that really matter from the ones that are less relevant or even potentially misleading.

One of the SEC’s objectives in issuing its KPI release was to encourage companies to make their MD&A disclosure more transparent.  But if you’ve got a bunch of random, non-key KPIs working their way through the company, that’s a recipe for the opposite of transparency – muddy & potentially problematic disclosure in your SEC filings.

– John Jenkins