The clock is loudly ticking for those issues who are required to disclose resource extraction payments on Form SD by the upcoming September 26, 2024 due date. You can find the latest guidance of the resource extraction disclosure requirements in the July-August 2024 issue of The Corporate Counsel and in our “Resource Extraction” Practice Area. In addition, a number of resource extraction issuers have filed their Form SD early, so there are examples on EDGAR of how issuers have approached the payments disclosure.
One element to not forget when preparing the Form SD filing is that the information presented in Item 2.01 to the Form SD must be tagged using standard XBRL, and not the Inline XBRL that we have all become used to in most other filings. If a resource extraction issuer is submitting an alternative report, that report will also need to be tagged using XBRL. To assist with this task, the SEC published a “Resource Extraction Payments (RXP) Taxonomy Guide” back in June 2023 to facilitate tagging the Item 2.01 exhibit. It includes a number of examples of resource extraction payments disclosure and how it should be tagged.
Given that this is the first go-round for these Form SD reports, filers should build in some extra time to get the XBRL tagging done prior to filing.
SEC Chair Gary Gensler addresses the topic of AI washing by public companies in his latest “Office Hours” video, picking up again on a topic that he discussed in a video back in March. He specifies the ways in which public companies should be addressing AI developments in a manner that provides full, fair and truthful disclosure. He notes:
Well, as we’ve seen an increase in the disclosures around artificial intelligence by SEC registrants, public companies as you know them, it’s important that companies making these disclosures remember that the basics of the securities laws still apply.
You see, any claims about prospects should have a reasonable basis and investors should be told that basis. And when disclosing material risk about artificial intelligence and a company may face multiple risks, including operational, legal, competitive, investors benefit from disclosures that are particular to the company, not just boilerplate language.
Companies should ask themselves some basic questions, such as if we’re discussing artificial intelligence in our earnings calls or having extensive discussions with our board of directors, maybe this information is potentially material to our business and to investors. If so, disclosure may be required under the securities laws.
Further, companies may be required to define for investors what they mean when referring to AI. How and where is it being used at the company? Is it being developed by the company or supplied by others?
Investment advisers, broker dealers also should not mislead the public by saying they’re using AI when they’re not, nor say that they’re using it in a particular way and not do so.
Such AI washing, whether it’s by companies raising money or by financial intermediaries like investment advisers and broker dealers, may violate the securities laws.
Chair Gensler and the SEC Staff have clearly been focused this year on how public companies are addressing AI developments in their public disclosures, and we do not foresee that focus shifting anytime soon.
Well, it is “back to school” time, and the inevitable question is sure to come up, “what did you do over the summer?” The answer, of course, is “be bombarded by artificial intelligence developments.” I think it goes without saying that generative AI developments have been in “fast and furious” mode of late, so I thought it might make sense to review the bidding for what we observed over the course of this summer:
– At its June meeting, the SEC Investor Advisory committee addressed the regulation of AI.
– We reviewed the evolving AI disclosures of S&P 500 companies (in part 1 and part 2), and a recent report noted how disclosure of AI risks has soared.
– The PCAOB reported on the integration of generative AI in audits and financial reporting and is considering further action.
– The Standing Committee on Ethics and Professional Responsibility of the ABA published an opinion providing guidance on the ethical use of generative AI tools by legal professionals.
– The Center for Audit Quality released its guide “Audit Committee Oversight in the Age of Generative AI.”
You can find details on all of the latest AI developments in our “Artificial Intelligence” Practice Area. AI developments will also be on the agenda for our “2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences.” For example, we have a panel titled “In-House Insights: Governing and Disclosing AI,” which will feature Kate Kelly of Meta, Erick Rivero of Intuit and Derek Windham of Tesla to discuss how AI is being utilized in the in-house legal functions at public companies. If you can’t make it to the Conferences in person, we also offer a virtual option. Register today by visiting our online store or by calling us at 800-737-1271.
We are just a little over a month away from the 2024 Proxy Disclosure Conference, and for our “Game Show Lightning Round: All Star Feud” segment, I still have not decided whether I will be channeling Richard Dawson or Steve Harvey as the host. In any event, I look forward to having some fun with the SEC All-Stars and hopefully entertaining the audience for a few minutes. In order to make this game show a success, we need your participation! Please take a moment to respond to the latest anonymous poll. We’ll gather and rank responses by popularity. Responses will be hidden, so you will have to join day 1 of our Conferences to hear whether your response made the “most popular” list.
If you have not done so already, today is a great day to sign up for our “2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences,” which are taking place on October 14th & 15th in San Francisco. There is also a virtual option if you are unable to attend in person. You can register by visiting our online store or by calling us at 800-737-1271.
One of the hottest topics in boardrooms these days is “what do we do about ESG?” Facing an ESG backlash movement that appears to be in full swing, boards are facing increasing pressure to reevaluate ESG programs and the overall approach to managing ESG risks.
As Zach Barlow notes in the PracticalESG.com blog, companies are still facing a variety of ESG risks, notwithstanding the accelerating ESG backlash. The blog notes:
Recently we’ve seen the appetite for ESG waning as investors back off of ESG proposals and some companies abandon or scale back ESG programs. However, choosing not to engage with ESG doesn’t make ESG risks disappear, it just reduces their visibility. A recent survey from Supplier .io looked at 214 publicly traded companies from across various industries. The findings indicate that most companies face ESG risks in various areas. The survey states that:
– “An overwhelming majority of companies, 73%, are exposed to material risks from greenhouse gas (GHG) emissions. This statistic underscores the pervasive and escalating threat climate change poses to businesses.
– Our analysis unveiled a range of social risks, with diversity, equity, and inclusion (DEI) standing out as the most critical. 71% of companies face material risks related to DEI issues; the risk extends beyond corporate boundaries, impacting supply chains and local communities.
– When examining governance risks, supply chain management emerged as a significant concern, with 45% of companies facing material exposure. Our members can find more information on climate commitments here.”
These results shine an interesting light on recent ESG walkbacks. Companies aren’t scaling back on ESG because the problems have been solved and there is no more need to manage them. ESG risks are just as present as they’ve always been, perhaps even more so. Companies slashing ESG may be blinding themselves to threats posed by ESG issues and are hampering their ability to identify and manage those issues. ESG risks aren’t likely to let up anytime soon. Taking climate change as an example, there is no end to extreme weather events in sight leading to persistent and increasing physical risk. Additionally, new emissions reporting regulations are creating substantial compliance risks globally. ESG practitioners are a company’s first line of defense against a rapidly changing world, those who bury their heads in the sand do so at their own risk.
This area of focus will no doubt continue to evolve, particularly as we go into the 2025 proxy season.
We all make mistakes. In fact, I can specifically recall for you many of the significant mistakes that I have made in my career, because I frequently dredge them up in my memory banks and mentally flog myself with those mistakes in an act of relentless self-flagellation. I am pretty sure that this practice does not do much to prevent me from making the same mistakes again, but it has just become of part of what it means for me to be a lawyer.
One of the areas where mistakes are often made is in the preparation of the proxy statement for the annual meeting of shareholders. Proxy statements are long and complicated documents with quite a few inputs, so it is foreseeable that mistakes can be made along the way. As Liz recently noted in the Proxy Season Blog here on TheCorporateCounsel.net, the most recent issue of “The Shareholder Service Optimizer” outlines frequent mistakes that they encounter in proxy statements and related annual meeting materials, including the following:
– One of the first things we noticed – as still avid readers of Proxy Statements – and mostly-faithful voters – and eager attendees at VSMs where we own shares and can squeeze in the time – was how difficult it was to find the correct date and time of the VSM – and how hard it was to find the link to the meeting in so many cases.
– Worse yet, we encountered several instances where the times and dates were at best incomplete, and in several cases, FLATLY WRONG!
– Another major observation this season was the unusually large number of instances we encountered where there were differences – sometimes quite substantial ones – in the number of “Votable Shares” reported in Proxy Statements vs. the numbers shown as “Shares Outstanding on the Record Date” as shown in the once “certified” lists of shareholders produced by transfer agents. And often, we encountered different numbers entirely in the reports from proxy tabulators. Our Inspector Team has a policy that requires our Inspectors to investigate here and to satisfy ourselves as to the correct number to use in the Final Report on the Voting – which is filed with the SEC. Most often, the differences are due to option exercises that took place shortly before or shortly after the official record date, But, we ask, “Who is in charge of the SEC-required “Control Book” at the Transfer Agent? And who is responsible for monitoring the numbers at the Company – and for making sure that the required entries are actually made on their “Cap Tables”… AND for assuring that differences are properly reconciled?
– The most disturbing thing we saw this season was the fact that many Transfer Agents are not officially certifying and signing the legally required list of registered shareholders. (Maybe because they themselves are ‘not in proof’?) And at least one TA is not including CEDE on the list of registered shareholders!
– One last thing we noted – the surprising number of times that issuers got totally wrong advice from newbies at their outside counsel. To cite just one example, we had a case where we presented our draft documents in advance, as usual, and were told re: the draft Ballot of Appointed Proxies [sometimes known as the “Master Ballot” whereby the proxy holders legally CAST their votes] that “our outside counsel says we do not need this.” “Don’t try telling that to a judge,” we said, citing the landmark case where the judge ruled, as most experts already knew, that “proxies are not votes” until the Proxy Committee votes them by BALLOT. (Bad as this was it still doesn’t top the case, a few years ago, when an attorney for one of the most famous law firms in California insisted that the votes that had been recorded for a Director who dropped out at the last minute should be simply “transferred” to the replacement – then – even stupider – he advised them to write and mail a new proxy statement – when the company could have appointed a new director with no fuss and muss – and without spending an extra dime – right after the AGM, where he or she could have served without a shareholder vote until the next AGM.)
Do yourself a favor and avoid providing fodder for the self-flagellation machine. Avail yourself of all of the resources that we have here on TheCorporateCounsel.net and CompensationStandards.com, take the time to learn and understand the proxy process and be very careful when reviewing and preparing the proxy statement and related annual meeting materials.
Another thing that you can do to get your proxy statement right in 2025 is attend our “2024 Proxy Disclosure Conference and our 21st Annual Executive Compensation Conference,” coming up in San Francisco on October 14-15. There is also a virtual option if you are unable to attend the conference in person. The agenda for the Conferences covers a wide range of topics, but here are a few that will be particularly relevant when preparing your upcoming proxy statement disclosures:
– Erik Gerding: The Latest From Corp Fin
– The SEC All-Stars: Proxy Season Insights
– Pithy Proxies: Getting to the Point Instead of the Courthouse
– 14a-8 & Shareholder Proposals: The Latest Development
– The SEC All-Stars: Executive Pay Nuggets
– Living with Clawbacks: What Are We Learning
– Perks: The Latest Developments
– The Top Compensation Consultants Speak
– Navigating ISS & Glass Lewis
I encourage you to sign up today by using our online store or by calling us at 800-737-1271. I look forward to seeing you in San Francisco.
Last week, the SEC announced that, at an open meeting on September 9, the Commission will consider whether to approve a new quality control standard, QC 1000, A Firm’s System of Quality Control, and related amendments, as adopted by the PCAOB.
As I noted back in May, the new audit quality control standard replaces the existing AICPA standard that pre-dated the creation of the PCAOB. The new standard will require all PCAOB registered firms to identify their specific risks and design a quality control system that includes policies and procedures to address those risks. The PCAOB’s announcement noted the following key provisions of the audit quality standard:
– The new standard strikes a balance between a risk-based approach to QC (which should drive firms to proactively identify and manage the specific risks associated with their practice) and a set of mandates (which should assure that the QC system is designed, implemented, and operated with an appropriate level of rigor).
– All PCAOB-registered firms would be required to design a QC system that complies with the new standard. Firms that perform audits of public companies or SEC-registered brokers and dealers would be required to implement and operate the QC system they design, monitor the system, and take remedial actions where policies and procedures are not operating effectively – creating a continuous feedback loop for improvement.
– Those firms would be required to annually evaluate their QC system and report the results of their evaluation to the PCAOB on new Form QC, which would be certified by key firm personnel to reinforce individual accountability.
– Firms that audit more than 100 issuers annually would be required to establish an external oversight function for the QC system, referred to as an External QC Function (EQCF), composed of one or more persons who can exercise independent judgment related to the firm’s QC system. In response to comments, the new standard clarifies that the EQCF’s responsibilities should include, at a minimum, evaluating the significant judgments made and the related conclusions reached by the firm when evaluating and reporting on the effectiveness of its QC system.
If approved by the Commission, the PCAOB audit quality standard and related amendments will apply to all PCAOB-registered firms and will take effect on December 15, 2025.
With Labor Day now behind us marking the unofficial end of summer and the beginning of a sprint to election day, one may inevitably ask: “What are the prospects for SEC rulemaking activity as we approach the election and a new Administration?” As I have mentioned before, the conventional wisdom has always been that the SEC, like other government agencies, slows down its rulemaking activity as the Presidential election grows nearer, on the theory that agencies do not want to have controversial proposals interfere with election year politics, and agencies generally want to avoid the potential for a new rule to be invalidated under the Congressional Review Act, depending of course on the outcome of the election.
Certainly, the dynamics have changed a bit since I last addressed this topic in May, given that we now have two candidates for President that are not incumbents. When President Biden was still in the race, you had the possibility that the SEC Chair could continue in the role post-election if Biden was reelected, but now it is foreseeable that a Harris Administration would be more likely to make government-wide changes to cabinet and agency leadership (as would be the case with a Trump Administration, obviously). This dynamic undoubtedly puts more pressure on agencies such as the SEC to hold off on proceeding with their rulemaking agenda, given the significant degree of uncertainty as to the policy direction going forward.
While it is always possible that we could see a burst of SEC rulemaking in the coming months as we saw at the end of the Trump Administration, the quiet open meeting schedule over the summer seems to indicate that outcome is unlikely. This all may mean that public companies will not be scrambling to comply with new disclosure requirements during the upcoming proxy and annual reporting season as had been the case over the past few years.
The latest issue of The Corporate Executive has been sent to the printer. It is also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format. This issue tackles two timely topics, revisiting sell-to-cover transactions in light of the SEC’s amendments to Rule 10b5-1 and potential revisions to equity award policies in light of the SEC’s renewed focus on the timing of equity awards. On the topic of sell-to-cover transactions, the issue notes:
The amendments to Rule 10b5-1 have added a whole new set of complications when a company is seeking to implement sell-to-cover transactions with respect to full value awards. A Rule 10b5-1 plan for sell-to-cover transactions now must comply with the more extensive requirements of Rule 10b5-1(c), including the applicable cooling off periods and, subject to the rule’s exception for certain sell-to-cover transactions, the multiple overlapping plan and single-trade limitations. Companies also must consider the disclosure requirements now applicable to Rule 10b5-1 trading plans when setting up a sell-to-cover approach for full value awards.
On the topic of equity award policies, the July-August 2024 issue of The Corporate Executive notes:
These new disclosure requirements create an opportunity for a company to revisit its equity award policy, or adopt a new equity award policy if it does not have one. As indicated above, companies will be required to disclose certain policies and practices related to the grant of certain equity awards. When revisiting its equity award policy, or adopting a new equity award policy, companies should keep these disclosure requirements in mind. The policy should address how the company grants annual awards as well as off-cycle awards, and whether the awards will occur on an established schedule. A typical approach for annual awards and off-cycle grants is to have a preestablished schedule that permits award grants a specific number of days following the company’s earnings release. This approach ensures that the grants are occurring in an open trading window and at a time when the company is less likely to possess material nonpublic information. We take this approach in our sample award policy.
Another consideration for equity award policies in light of the SEC’s recent rulemaking is whether to prohibit granting equity awards in close proximity to periodic reports on Form 10-Q or Form 10-K, or any Current Report on Form 8-K that includes material nonpublic information. To prevent triggering the new tabular disclosure regarding options grants, companies should take steps to ensure that options are not granted to named executive officers in the period beginning four business days before the filing of a periodic report on Form 10-Q or Form 10-K, or the filing or furnishing of a Current Report on Form 8-K that discloses material nonpublic information, and ending one business day after the filing or furnishing of such report. Our sample equity award policy addresses the granting of equity awards during this time period.
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