Yesterday afternoon, the Commission approved a series of rule changes that will allow for the listing and trading of the 11 bitcoin ETFs that were the subject of applications by national securities exchanges — specifically, NYSE Arca, Nasdaq, and Cboe BZX Exchange. Chair Gensler’s supporting statement reminds us of the history here:
We are now faced with a new set of filings similar to those we have disapproved in the past. Circumstances, however, have changed. The U.S. Court of Appeals for the District of Columbia held that the Commission failed to adequately explain its reasoning in disapproving the listing and trading of Grayscale’s proposed ETP (the Grayscale Order). The court therefore vacated the Grayscale Order and remanded the matter to the Commission. Based on these circumstances and those discussed more fully in the approval order, I feel the most sustainable path forward is to approve the listing and trading of these spot bitcoin ETP shares.
His statement also included words of warning and a reminder of the limited nature of this approval.
While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto […]
Importantly, today’s Commission action is cabined to ETPs holding one non-security commodity, bitcoin. It should in no way signal the Commission’s willingness to approve listing standards for crypto asset securities. Nor does the approval signal anything about the Commission’s views as to the status of other crypto assets under the federal securities laws or about the current state of non-compliance of certain crypto asset market participants with the federal securities laws. As I’ve said in the past, and without prejudging any one crypto asset, the vast majority of crypto assets are investment contracts and thus subject to the federal securities laws.
As usual, the SEC was divided, but, given the topic and Chair Gensler’s support, not in the usual way. Commissioner Crenshaw dissented, arguing that the Commission’s earlier decision to treat two registered bitcoin futures ETPs differently than the “spot” or “physical” bitcoin ETPs at issue here was reasonable. The WSJ reported that Commissioner Lizarraga also voted against the order.
Commissioner Uyeda supported while taking issue with the underlying analytical approach of the order, which he argued “effectively amounts to merit regulation.” Commissioner Peirce supported and largely used her statement to say ‘better late than never’ (not a quote!) and also briefly took issue with the order’s requirement not imposed on prior commodity-based ETPs, citing Uyeda’s statement for a full discussion.
Since the SEC’s proposed climate disclosure rules dropped in March 2022, there has been a flurry of foreign and state-level developments in climate change disclosure requirements. I don’t know about you, but I have trouble keeping up and keeping them straight. If you have felt that way as well, this recent Mayer Brown white paper on the global regulatory landscape for climate-related disclosure addresses key features of — and differences between — requirements in a dozen jurisdictions.
For those looking for additional detail on certain jurisdictions, the white paper includes more info in Appendix 1 and a handy table comparing the requirements in Appendix 2. It continues with a discussion of disclosure, governance and risk management considerations for boards and the C-suite. The white paper warns companies not to become complacent by thinking that any final SEC rules will “replace or supersede these other global climate initiatives.”
Yesterday afternoon, as reported by the WSJ, the SEC’s official X account @SECGov briefly stated bitcoin ETFs had been approved. Bitcoin prices shot up to nearly $48,000 before Chair Gensler clarified, also on X, that the post was unauthorized, the official account had been compromised and the SEC had not approved the listing and trading of spot bitcoin exchange-traded products. Here’s more from the article:
An SEC spokeswoman said that an unknown party had accessed the agency’s X account for a brief period after 4 p.m. The SEC will work with law enforcement to investigate the episode and pursue “next steps relating to both the unauthorized access and any related misconduct,” she added.
The article also explains that the tweet was well-timed:
Crypto investors have been eagerly anticipating an SEC green light for spot bitcoin ETFs from big asset managers such as BlackRock and Fidelity Investments, after a more-than-decadelong wait. Analysts say approval is highly likely after a flurry of activity in which SEC staff, ETF issuers and exchanges hashed out technical details for the funds’ operations in recent weeks.
Wednesday is the deadline for the SEC to approve or reject the listing of just one fund, a joint venture from Cathie Wood’s ARK Investment Management and crypto asset manager 21Shares. But several competing funds are also in the final stages of the process, and ETF executives expect multiple approvals to come at once, so one fund doesn’t gain a first-mover advantage. Fund managers have slashed their fees and launched advertising campaigns in anticipation that the ETFs will start trading.
Late last night, X, through the account @Safety, posted its explanation of how the SEC’s account was compromised.
– The proposed scope is overly broad. Investors and investor associations had inconsistent views. Some believe the proposed requirements are sufficiently clear while others expressed concerns about the scope of proposal and the potential negative impact on auditor effectiveness.
– The proposed requirements blur the roles of the auditor and a company’s management and legal functions creating auditor independence concerns. The investor community had mixed views on this topic as well. While some investor associations view the proposed requirements as a function of management, others do not view the proposed auditor responsibilities as a replacement or duplication of management’s functions.
– Auditors are not lawyers: The business community expressed strong and consistent views that auditors are not legal experts. Audit committee members, preparers, and business associations raised concerns the proposal will significantly increase risk to a company’s legal privilege. The investor community’s views continued to be mixed. Certain investors and investor associations do not believe that the proposal requires auditors to function as lawyers; whereas other investor associations believe that auditors are not trained in law nor qualified to make the legal judgments that would be required by the proposal.
– Costs and benefits: The business community believes that the anticipated benefits of the proposal do not justify the costs and that the economic analysis is inadequate. The investor community’s views varied. Some investor associations commented that the benefits would outweigh the costs, while others expressed the opposite view, that the risks of financial misstatements and NOCLAR far outweigh the costs of audits.
– Need for further study and evaluation: The broad consensus among the majority of stakeholder groups is that there is a need for multi-stakeholder engagement and further evaluation before acceptable alternatives to the proposal can be developed, and that the PCAOB needs to conduct more research and engage in an open standard-setting process involving roundtable discussions and public meetings with various stakeholder groups before issuing a revised proposal.
The concern expressed under “Auditors are not lawyers” was more fully fleshed out by Jay Knight of Barnes & Thornburg in a recent podcast with John. John asked Jay about the most significant concerns from a lawyer’s perspective. Jay replied:
[T]hat the proposed standards do not adequately take into account the importance of protecting confidential client information, attorney-client privilege and attorney work product. As your listeners know, the confidentiality of attorney-client communications is a bedrock principle of the legal system. […] To satisfy the expansive requirements under the proposed standards, however, auditors would likely need to seek information and analysis from their audit client regarding information protected as confidential under the rules of professional conduct, legal advice that has been communicated and is protected by the attorney-client privilege and protected attorney work product that has been prepared to enable them to assess compliance with any given set of regulations. […] The release fails to consider these important protections and the risk of eroding these protections if the proposed standards are adopted.
On the last point from the CAQ regarding the need for further engagement, it appears that the PCAOB is already moving in this direction. Liz blogged last week about PCAOB Chair Erica Williams’s defense of the NOCLAR proposal during testimony before the House Financial Services Committee’s Capital Markets Subcommittee. In that testimony, she suggested that the PCAOB would be holding a public roundtable for additional feedback on the proposal.
In the latest “Timely Takes” podcast, John discusses “pass-through voting” with Karla Bos of Aon. In this 15-minute podcast, Karla and John discuss:
What is “pass-through voting” and why has it been gaining traction?
What are the implications of the growth in pass-through voting for the influence of proxy advisors?
What are pass-through voting’s implications for levels of support for shareholder proposals?
How might the growth of pass-through voting influence the way companies engage with investors?
As an aside, I think of Karla as somewhat of a celebrity of efficiency and list-making — those of you who read this blog in 2018 may agree. I really appreciated her list of 18 things she accomplished before 8:30 am. Maybe even just her use of the word “accomplished” reframed things for me and made me feel differently about my mornings. It reminded me that all those things we do in the morning (or any time) that aren’t paid work deserve to be treated as productive and worthwhile — because they are — and we should give ourselves credit for them. For me, even, or maybe especially, when it feels like getting my kids to school took an entire day’s worth of energy.
Anyway, as always, if you have insights on a securities law, capital markets or corporate governance trend or development — whether in list form or otherwise — that you’d like to share in a podcast, please reach out to me or John at mervine@ccrcorp.com or john@thecorporatecounsel.net.
At Microsoft’s early December annual meeting, a shareholder proposal on AI “misinformation and disinformation” was supported by 21% of the votes cast. Per the proxy, Proposal 13 requested that “the Board issue a report, at reasonable cost, omitting proprietary or legally privileged information, to be published within one year of the Annual Meeting and updated annually thereafter, assessing the risks to the Company’s operations and finances as well as risks to public welfare presented by the company’s role in facilitating misinformation and disinformation disseminated or generated via artificial intelligence, and what steps, if any, the company plans to remediate those harms, and the effectiveness of such efforts.” The supporting statement by Arjuna Capital focuses on the threat that such misinformation may pose to democracy “by manipulating public opinion, undermining institutional trust, and swaying elections” particularly given that 2024 brings the “United States presidential election and significant Senate and House races.”
Multiple outlets, including Responsible Investor and this blog from Arjuna Capital, have cited that six late 2023 proposals on AI transparency are “pioneering” and the first of their kind. Apple and Disney were another two of the six companies that received such proposals — both were from AFL-CIO Equity Index Funds and the proponents’ supporting statements were less specifically focused on the threat to democracy. The proposal received by Disney is worded as follows:
Shareholders request that The Walt Disney Company (the “Company”) prepare and publicly disclose on the Company’s website a transparency report that explains the Company’s use of Artificial Intelligence (“AI”) in its business operations and the Board’s role in overseeing AI usage, and sets forth any ethical guidelines that the company has adopted regarding its use of AI. This report shall be prepared at a reasonable cost and omit information that is proprietary, privileged, or violative of contractual obligations.
Both Disney and Apple sought to exclude the AI transparency proposals under Rule 14a-8(i)(7) on the basis that they deal with ordinary business operations and seek to micromanage the companies. The Staff was unable to concur, so we’ll watch how things shake out with these and similar shareholder proposals during the 2024 proxy season.
We’ll be tracking this trending topic — including vote results at companies where AI-related proposals end up on the ballot — on our Proxy Season Blog where we continue to regularly post new items for TheCorporateCounsel.net members. Members can sign up to get that blog pushed via email whenever there is a new post. If you do not have access to the Proxy Season Blog or all the other great resources on TheCorporateCounsel.net, sign up today.
A recent research paper from CII examined 2023 proxy statements of S&P 100 companies to analyze CEO and management succession planning disclosures. The paper summarized the disclosures as follows:
More than 75% of these companies made disclosures about the role of the board and board committees in management succession planning, while less than 20% discussed their processes to identify and include diverse candidates, the capabilities in the next CEO that they believe would align with the company’s long-term strategy and the measures they have taken to identify external candidates. […]
All but four companies in the S&P 100 disclosed at least one of the nine elements of management succession planning in their 2023 proxy statements, and only one company did not mention management succession planning at all in its proxy statement. The 2023 proxy statements for S&P 100 companies included an average of 3.7 (median = 4.0) of the nine succession planning elements identified for this paper.
The “elements” CII looked for in the proxy statement disclosure are listed below. The report also gives sample disclosures in each category.
1. Role of the board as a whole
2. Involvement of board committee(s)
3. Role of the incumbent CEO
4. Board consideration of the capabilities in the next CEO that would align with the company’s
long-term strategy
5. Measures taken to identify internal candidates
6. Board’s assertion that it has taken steps to identify external candidates
7. Board’s assertion that it has processes to identify and include “diverse” candidates
8. Plans that address short-term succession scenarios
9. Plans that address long-term succession scenarios
This 2023 Skadden alert notes that “many companies have continued to conduct due diligence and file full conflict minerals reports with the SEC, given already implemented diligence processes, existing contractual obligations and the expectations of interested stakeholders” since the April 2017 Corp Fin no-action statement indicating the Division would not recommend enforcement against companies for not complying with the requirements of the conflict minerals rules to conduct due diligence and file a report. After all, companies remain obligated to file a Form SD. That being said, I suspect conflict minerals reports have gotten less attention than before the no-action relief and, for some companies, have become a check-the-box exercise.
This Ropes & Gray alert describes how other external pressures have put attention back on conflict minerals due diligence since the information gathered is now relevant to other compliance considerations and ESG-related supply chain concerns. Specifically:
Over the last ten years, information reported by suppliers has required companies to consider the applicability of North Korea, Venezuela, Myanmar and Russia sanctions. Companies also have had to consider reports alleging forced and/or child labor in the 3TG supply chain, among other potential concerns, that potentially implicate supply chain and human rights policies and import restrictions.
The alert goes on to describe additional developments relevant to 2024 conflict minerals reports “that may have compliance and disclosure ramifications beyond the Conflict Minerals Rule.” Those include a new NGO report that alleged linkages between certain Chinese gold refiners and the Xinjiang region of China, which has implications under the Uyghur Forced Labor Prevention Act, and Russia sanctions — including relating to Russian gold and tungsten — which have been strengthened in multiple jurisdictions. Here are the takeaways from the alert:
– Consider the broader context of 2023 3TG smelter and refiner and other information reported by supply chains. Is the information potentially relevant to a sanctions or forced labor compliance analysis? Does reported information potentially implicate human rights risk assessments and/or human rights and supply chain policies? Is the information being appropriately considered in the context of modern slavery transparency and mandatory human rights due diligence legislation and the EU’s new Corporate Sustainability Reporting Directive?
– Be mindful of data limitations. Most suppliers report 3TG sourcing information at the “company level,” i.e., for all their products rather than those supplied to the requesting downstream commercial customer. Therefore, smelters and refiners reported by a supplier may not be in the requesting downstream customer’s supply chain. Reported information also often presents other validation concerns.
– There isn’t a one-size-fits-all approach to address the watch-outs highlighted in this post. The analysis and appropriate compliance and risk mitigation steps (if any) will depend upon numerous company- and supply chain-specific factors, among other things. However, given the evolving regulatory landscape – both transparency and substantive compliance requirements – it is becoming increasingly important for companies to consider the broader implications of 3TG sourcing and compliance information received from suppliers.
This time last year, we were blogging about the SEC Staff’s first few rounds of climate change comment letters, which were preceded by Corp Fin posting a sample. This Bloomberg Law article reports that the SEC Staff has sent climate-related letters to more than 12 companies in the past three months.
The comments seem to be pretty consistent with earlier rounds — the letters focus on consistency between disclosures in sustainability reports and SEC filings and inquire about the impact of severe weather and how climate risk impacts customer demand and competition. And also, like the prior rounds of comments, the SEC Staff has gotten into the nitty-gritty with companies on the impact of climate change — insisting on details — and the article describes at least one company that has agreed to revise disclosures.
Here are some of the response letters available on EDGAR for those interested:
The TL;DR is this: For companies in annual reporting season, know that SEC comments on climate disclosures continue apace, and the Staff is not waiting on final rules. In terms of what to expect, the newest letters seem consistent with Corp Fin’s sample comment letter.
Last Friday, the SEC announced the appointment of University of Denver law prof Stacey Bowers as the new director of the SEC’s Office of the Advocate for Small Business Capital Formation (OASB). The announcement highlights her service on the SEC’s Small Business Capital Formation Advisory Committee this past year. As a reminder, the press release summarizes what the OASB is and what it does:
OASB is an independent office established in January 2019 to advance the interests of small businesses and their investors in the capital formation process. The office proactively works to identify and address unique capital formation challenges faced by small businesses, particularly those that are minority-owned or women-owned or located in rural or natural disaster areas.