One of the many challenges in a CEO transition is determining and defining the continuing role, if any, of an outgoing CEO. As this Semler Brossy article articulates, many factors are at play here — the new CEO’s experience, board dynamics, personal relationships and personalities and the reasons for the transition are all important to consider. Plus the length of time that the outgoing CEO will serve in any continuing role can be another point of contention, with these transition periods typically lasting less than two years.
The article addresses four common scenarios in CEO transitions and the prevalence of each among S&P 500 companies in 2022 and 2023. Here’s the data:
– Scenario 1: CEO Transitions to Executive Chair.
Prevalence: 48%
Typical Time Frame: 6-24 months (~65% < 12 months)
A slight variation on the executive chair role is the much less common vice chair role (used in only 5% of our studied S&P 500 CEO transitions).
– Scenario 2: CEO Transitions to Senior Advisor.
Prevalence: 28%
Typical Time Frame: 3-12 months (or longer)
– Scenario 3: CEO Transitions to Board Member.
Prevalence: 4%
Typical Time Frame: 6-18 months (anchored to annual meeting dates)
– Scenario 4: CEO Has No Affiliation with the Company.
Prevalence: 20%
This Spencer Stuart blog says boards in a CEO transition should prepare for the CEO’s “sophomore slump” (i.e., second-year downturn) since the firm’s CEO Life Cycle research indicates this phenomenon is “a very real thing.” The blog gives questions for consideration and stresses that any effective transition plan needs to include working towards strong year two performance as a key element. Since these outgoing CEO transitions typically last less than two years, it would be interesting to see data on whether and how the continued involvement of the outgoing CEO has any impact on this.
If you’ve perused the agenda for our Proxy Disclosure and Executive Compensation Conferences, you may have noticed that we’re planning a fun lightning-round game show with some SEC All-Stars — hosted by our own Dave Lynn! As the name suggests, the game show will be in the style of “Family Feud.”
Having never seen Family Feud before (I know, I live under a rock), I had to seek out a recent episode to understand the game. Most of you probably already know that the contestants compete to name the most popular answers to various survey questions. That’s where you come in! For our game show to be true to its namesake, we’re hoping our blog readers will help us generate the answers to various survey topics that are “securities law adjacent.”
From now until the Conferences, we’ll periodically share short quick polls. If you have 2 seconds to spare, please type in a response to each anonymous poll. We’ll gather and rank responses by popularity. Responses will be hidden, so you’ll have to join day 1 of our Conferences (in San Francisco or virtually) to hear whether your response made the list. As the first in this series, please participate in this anonymous poll on 2025 shareholder proposal hot topics.
Speaking of our Conferences, as John shared, we’re giving everyone more time to lock in our “early bird” deal for individual in-person registrations ($1,750, discounted from the regular $2,195 rate). This rate now ends July 26! We hope many of you decide to join us in San Francisco, but if traveling isn’t in the cards at that time, we also offer a virtual option (plus video replays & transcripts for both in-person and virtual attendees!) so you won’t miss out on the practical takeaways our speaker lineup will share. (Also check out our discounted rate options for groups of virtual attendees!)
You can register now by visiting our online store or by calling us at 800-737-1271.
While we do not cover developments with SEC fund rules that often here on TheCorporateCounsel.net, litigation over the SEC’s rules is on everyone’s mind these days, so the fate of the SEC’s controversial private funds rules in the courts is no doubt of interest. On Wednesday, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit vacated the private funds rules that the SEC adopted on August 23, 2023. This Goodwin alert notes:
Yesterday, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit vacated the “Private Funds Rules,” which the Securities and Exchange Commission (the “SEC”) adopted on August 23, 2023. The opinion of the Court (the “Opinion”) holds that the SEC lacked the rulemaking authority to issue these Rules under both Section 211(h) and Section 206(4) of the Investment Advisers Act of 1940 (the “Advisers Act”). As a result, the Opinion orders the Rules vacated. Once the Fifth Circuit decision formally takes effect—which should occur before the first compliance date, unless the SEC obtains some form of emergency relief or reconsideration—the Rules will be a nullity and all compliance dates will be moot. The SEC can seek further review of the Opinion, but review is not automatic: either the full Fifth Circuit or the Supreme Court would have to exercise discretion to hear the case.
As expected, the Fifth Circuit ruled that the SEC’s rulemaking authority under Section 211(h) of the Advisers Act is limited to “retail customers” and cannot be used in a rulemaking aimed at private funds and private fund investors. However, the Court also ruled that the SEC lacked rulemaking authority under Section 206(4) of the Advisers Act because (i) the SEC failed to define the “fraud” it was seeking to prevent and there were an insufficient number of enforcement actions to support the necessity of the rulemaking, (ii) Section 206(4) of the Advisers Act does not permit rulemaking concerning disclosures or reporting, (iii) Section 206(4) does not authorize the SEC to issue rulemakings that seeks to regulate the “internal corporate governance” of private funds (including with respect to investor reporting, fees and expenses, and redemption rights), and (iv) Section 206(4) only covers relationships with “clients” (e.g., the private funds) and not with the investors in private funds.
The SEC has a range of options in terms of next steps, none of which are likely to result in the Rules becoming effective in the near future. The SEC could theoretically propose new rules or re-open the existing rulemaking, which would likely be subject to a renewed challenge. The Opinion’s analysis, particularly with respect to Section 206(4), has potential ramifications beyond the Rules to a range of other current and future rulemaking. Thus, it appears more likely that the SEC would seek an “en banc” rehearing by the full Fifth Circuit (in a petition that would be due July 22, 2024) or skip that step and petition the Supreme Court to review the case.
The Fifth Circuit’s decision takes effect when the Fifth Circuit issues a formal order called a “mandate” to the SEC, which would ordinarily occur shortly after the time to seek rehearing expires (or shortly after rehearing is denied, if sought). Once that happens, the Private Fund Rules will be vacated, and all of the compliance dates from that point forward will no longer be effective. Although it is likely that the mandate will issue and the Rules will be vacated before the first compliance date, that is not guaranteed: for example, the SEC could seek emergency relief that delays the implementation of the Fifth Circuit’s decision and allows the Rules to take effect.
As you may recall, it was the Fifth Circuit that vacated the SEC’s share repurchase disclosure rules back in December 2023 on the grounds that the SEC acted arbitrarily and capriciously in adopting the final rules. And while the litigation over the climate disclosure rules has been consolidated in the U.S. Court of Appeals for the Eighth Circuit, that Court is notably comprised of conservative-leaning judges, similar to the Fifth Circuit.
One thing is for sure – the SEC’s recent rulemaking has been keeping the appellate group in the SEC General Counsel’s office very busy, and there are no signs of that slowing down.
The Committee of Sponsoring Organizations of the Treadway Commission (COSO), in collaboration with the National Association of Corporate Directors (NACD), has selected PwC US to assist with developing a Corporate Governance Framework. COSO’s recent announcement indicates that PwC was selected for the project pursuant to a competitive RFP process.
Originally announced back in February, COSO and NACD are collaborating to create “a principles-based governance framework that considers the interests of major stakeholders while maintaining an objective view of leading and desired practice.” This Corporate Governance Framework would be used by:
– public companies seeking to self-assess and enhance governance practices, and by start-up businesses desiring to build up their governance practices and processes;
– private organizations seeking best practices or as part of readiness activities related to initial public offering efforts; and
– external auditors, internal auditors, rating agencies, investors, listing agencies and/or regulators finding such a framework useful in assessing governance practices at related entities.
The announcement of the selection of PwC further explains:
“Good governance is a competitive advantage to every organization. Yet, boards and management may often struggle to effectively integrate good governance in how their organizations operate. For example, the design of incentives or the pursuit of major innovation might possibly create damaging blind spots,” said Peter Gleason, NACD President and CEO. “The CGF will help companies ensure that governance is cohesive in guiding behaviors from the boardroom to the frontlines. We look forward to working with COSO and the PwC team to help build trust in business and society on this important initiative.”
The project is expected to be completed in the fall of 2025.
How did Taylor Swift break all-time records with the Eras Tour?
Well, beyond her remarkable talent, there’s also a lot of value in sharing one’s story.
And here at the SEC there’s also lots of talent and history. So, as we celebrate the SEC’s 90th anniversary, let’s take an “eras tour” of our own.
Throughout the rest of the speech, Chair Gensler dropped in numerous Taylor Swift “Easter Eggs” for all of us Swifties, including “[t]he SEC’s mission is meant to last for evermore.” I would also note that, in his brief history of the SEC, Chair Gensler noted “[t]he 1980s brought us Wall Street the movie, and greedy villains like Gordon Gekko.” As I discussed in my reflections on the SEC’s 90th Anniversary yesterday, I became interested in working at the SEC after watching the movie Wall Street, so I feel like that Easter Egg was placed there just for me.
As John noted last week, the SEC turns 90 today, marking the anniversary of the enactment of the Securities Exchange Act of 1934. Prior to enactment of the Exchange Act, the Federal Trade Commission was tasked with implementing the Securities Act of 1933, so the creation of the SEC on June 6, 1934 no doubt came as welcome relief to the poor FTC staffers who were reportedly sleeping on cots in their office as they tried to deal with Securities Act registration statements that went effective within 20 days of filing per Securities Act Section 8(a). Over the years, the SEC came to be a much-admired agency, the protector of investors that also facilitated capital formation. On a personal note, the SEC became the center of my professional life for almost 30 years now.
The funny thing is that if Future Me went back in time to meet with Teenage Me as I was about to embark on my pursuit of higher education, and Future Me told Teenage Me that I would spend almost of all of my professional career working at the SEC, interacting with the SEC and writing and speaking about the SEC’s every move as it relates to the regulation of public disclosure, my reaction would have likely been: “What is the SEC?” In my blue collar upbringing, Wall Street, investing in public companies and the details of the administrative state were very distant concepts. Having grown up in Maryland and not being much of a college football fan at the time, Teenage Me would not have even assumed that Future Me was talking about the Southeastern Conference.
I believe that I first became interested in the SEC when I was in college, when the movie Wall Street came out in 1987. By the time of its premiere, I had been exposed to the broader world, and I had a cursory understanding of financial markets, accounting and financial reports. But the power of the SEC really caught my imagination when the SEC staffers were on hand to arrest Bud Fox for insider trading and to handle the wire when he had his fateful last meeting with Gordon Gekko. I thought then and there that, whatever it was that the SEC did, it seemed pretty exciting, and the seed was thus planted for me to ultimately go to law school for the express purpose of getting a job at the SEC.
As it turned out, I never got to tape a wire to anybody or to be present when an individual took a Bud Fox-style perp walk while I was working at the SEC. I got to sit at a gray metal desk and review Form 10 filings on an OS/2-powered computer. But that experience actually seemed very exciting to me, because I really wanted to be there to help carry out the SEC’s mission. And even though I am far removed from my SEC service today, I still believe in that mission, and I admire all of those who work at the agency to carry out that mission every day.
The SEC’s enduring esprit de corps and collegiality also gave me something for which I am forever grateful – a family. My kids were commenting just the other day about how so many of my friends and professional contacts are people that I know from the SEC community. I often refer to this group as my “SEC family,” and their friendship and kindness has been incredibly important to me on a professional and personal level. I think that says a lot about the SEC’s success, in that it is able to create such enduring bonds in a high pressure, professional environment that remains mission-focused.
So, on this 90th anniversary, I raise a toast to the SEC, its Commissioners and dedicated staff, past and present. Happy Birthday!
As John noted last week, the SEC will host a staff event this afternoon commemorating the 90-year anniversary of the Securities Exchange Act. The event will also be publicly webcast and include panel discussions featuring former SEC chairs and experts on the history of the SEC. The agenda is as follows:
1:00 – 1:15 p.m. | Opening Remarks by Chair Gary Gensler and Commissioners
1:15 – 2:15 p.m. | Panel 1: A Lookback from the Chair’s Seat
Moderator: Chair Gary Gensler
Panelists:
– The Hon. Richard C. Breeden (1989 –1993)
– The Hon. Mary Schapiro (2009 – 2012)
– The Hon. Mary Jo White (2013 – 2017)
2:15 – 3:15 p.m. | Panel 2: The Legacy of the SEC
Moderator: Chair Gary Gensler
Panelists:
– Michael Beschloss, American historian and bestselling author
– Joel Seligman, American legal scholar, author and leading expert of securities law
– Kathleen Kennedy Townsend, Advisor for Pensions and Retirement, U.S. Department of Labor, and former first female lieutenant governor of Maryland
These events are free to all – you don’t have to be a member of PracticalESG.com to attend. But if you are attending events like these, you need the resources that PracticalESG.com provides. Become a member today by clicking here, emailing sales@ccrcorp.com or by calling (800) 737-1271.
It is not that often that we see a government agency downsizing, so it was interesting to learn yesterday that the SEC has decided to close its Salt Lake City Regional Office. The SEC’s press release states:
The SLRO has long been the SEC’s smallest regional office and recently has experienced significant attrition. The agency considered its budget and organizational efficiency in deciding to close the office, and it has no plans to close any other regional offices. All current staff will be aligned to existing SEC organizational components based on their current functions and agency mission needs.
The SLRO’s enforcement jurisdiction over the state of Utah will be shifted to the SEC’s Denver Regional Office. The SEC’s National Exam Program previously shifted SLRO’s local jurisdiction to Denver many years ago; thus, regional examinations authority will be unaffected by the closure of the office.
The SEC’s regional offices perform important functions for the Commission and are principally comprised of enforcement and exam staff. Back when I started at the SEC in the mid-1990s, the regional offices also included staff who reviewed Regulation A filings, a practice which ended in 1996.
Regional offices were planned for shortly after the SEC opened for business, and Joseph Kennedy opened the first regional office in New York City in December 1934. There have been changes to the regional office network over the years. For example, the first major reorganization of the SEC’s regional offices took place back in 1993, when Arthur Levitt created several regional offices and designated smaller offices as district offices, while shuttering the Seattle regional office. The district offices subsequently regained their regional office status and each of the regional offices was named for the city in which it was located back in 2007.
Meredith recently noted Chair Gensler’s statement in opposition to legislation in the House of Representatives known as the Financial Innovation and Technology for the 21st Century Act, which would amend securities and commodities laws to address the regulation of digital assets. The House passed the legislation, by a vote of 279 to 136. As this Mayer Brown alert notes, the legislation would clarify the responsibilities of the SEC and CFTC with respect to digital assets:
The bill would create three categories of digital assets, which would determine whether a digital asset falls under SEC or CFTC jurisdiction; i.e., as a:
– “restricted digital asset” subject to SEC jurisdiction;
– “digital commodity” subject to CFTC jurisdiction; or
– ”permitted payment stablecoin” subject to either SEC or CFTC jurisdiction, depending on the nature of the intermediary involved in a transaction.
Under the bill, a digital asset would generally be considered a “restricted digital asset” unless it meets the definition of a “permitted payment stablecoin,” or is self-certified as a “digital commodity.” The bill would establish criteria for determining whether a digital asset can be considered a “digital commodity” or a “restricted digital asset” based on:
(1) the level of decentralization and functionality of the digital asset’s underlying blockchain system;
(2) the method of acquisition of the digital asset by an end user; and
(3) the party holding the digital asset (e.g., issuer or unaffiliated third party).
For illustration, it would be likely that a digital asset would meet the criteria for being a “digital commodity” if it (1) is issued through a distribution that is not used for fundraising (i.e., involves only an exchange of nominal value for the digital asset) and is open to all participants equally (i.e., a rewards program) or acquired through a digital commodity exchange; and (2) relates to a blockchain protocol that is functionally decentralized. On the other hand and in contrast, a digital asset would likely to be considered a “restricted digital asset” if it is not related to a functionally decentralized network and is obtained through an issuer distribution in exchange for meaningful value.
The bill would create a self-certification process for “digital commodities,” under which any person could file a certification with the SEC (not the CFTC) that the blockchain system to which a digital asset relates is a decentralized system (while the SEC oversees self-certification, both the SEC and CFTC are directed to engage in joint rulemaking on the self-certification criteria).
The SEC would have 60 days to reject the certification before the assets on such a system would be considered “digital commodities” subject to CFTC jurisdiction. Under this determination by the SEC, a “restricted digital asset” could initially be issued as a security—subject to SEC disclosure and offering requirements similar to those that apply to traditional securities, but specific to digital assets—and later become a “digital commodity” through self-certification. Importantly, a digital asset certified as a “digital commodity” may still be considered a “restricted digital asset” at the same time and is determined based on the holder (e.g., the units held by the issuer, an affiliate of the issuer, or who beneficially owns 5% or more of the outstanding units).
The bill would also address stablecoins and provide for the registration of digital asset intermediaries with the SEC and CFTC, while also establishing a CFTC-SEC Joint Advisory Committee on Digital Assets, which would be comprised of “a group of 20 nongovernmental stakeholders (10 appointed by each of the CFTC and SEC), which would provide advice on digital asset rules, regulations, and policies to the CFTC and SEC, including on how to the agencies should measure and quantify decentralization, functionality, information asymmetries, and transaction and network security of digital assets.” The legislation would direct the SEC and CFTC to engage in numerous rulemakings to implement the new regulatory framework.
As for where this legislation goes from here, the Mayer Brown alert notes:
Even with the strong support for FIT21 in the House, however, its future in the Senate is very uncertain. Most importantly, President Joe Biden does not support the legislation in its current form. Prior to the House vote, the White House released a Statement of Administrative Policy (SAP) stating that the Administration opposed passage of FIT21. The SAP stated that the “Administration is eager to work with Congress to ensure a comprehensive and balanced regulatory framework for digital assets, building on existing authorities,” but that FIT21 “lacks sufficient protections for consumers and investors.” As a result, it is highly unlikely that the Democratic-controlled Senate would bring up FIT21 for a vote unless the bill was amended to secure President Biden’s support. However, if FIT21 is considered by the Senate, the Senate’s recent 60 – 38 vote to pass the joint resolution of disapproval of the SEC’s Staff Accounting Bulletin No. 121 (which imposes high regulatory requirements on public companies, including publicly traded banks, to custody digital assets) under the Congressional Review Act suggests that the 60-vote majority needed to overcome a Senate filibuster may exist in the Senate.
In the meantime, the status quo at the SEC and CFTC will prevail when it comes to digital assets regulation.