As noted above, ISS has proposed benchmark policy updates for 2025 on limited topics. Here’s more detail on what’s changed for the assessment of poison pills and SPAC extensions:
For poison pills, ISS has proposed to increase transparency of factors considered during the case-by-case evaluation of whether a board’s actions in adopting a short-term poison pill were reasonable. The following are the expanded or newly listed factors, all of which were already considered by analysts under the category of “other factors as relevant”:
– The trigger threshold and other terms of the pill;
– The context in which the pill was adopted, (e.g., factors such as the company’s size and stage of development, sudden changes in its market capitalization, and extraordinary industry-wide or macroeconomic events); and
– The company’s overall track record on corporate governance and responsiveness to shareholders.
For SPAC extension proposals, ISS has changed its policy from voting on a case-by-case basis, taking into account the length of the extension, the status of any pending transaction, any added incentive for non-redeeming shareholders, and any prior extension requests, to generally supporting requests to extend the termination date by up to one year from the original termination date (inclusive of any built-in extension options, and accounting for prior extension requests), and may consider any added incentives, business combination status, other amendment terms, and use of money in the trust fund to pay excise taxes on redeemed shares (if applicable).
See today’s post on The Advisors’ Blog on CompensationStandards.com for more on ongoing considerations related to the use of performance- vs. time-based equity awards.
Last Wednesday, Chair Gensler was the keynote speaker at PLI’s 56th Annual Institute on Securities Regulation. His prepared remarks are available here, and the full session, including Q&A, are available for replay. On LinkedIn, SEC-alum and Edward Jones GC, Kier Gumbs, who introduced Chair Gensler, listed the 6 core topics Chair Gensler highlighted in his remarks:
Using comparisons to traffic laws and the rules of the NFL, Chair Gensler’s speech reads like a defense of securities regulation. With numerous historical references, he highlights the role regulation has played in the great success of the US capital markets — just like, he says, stop signs and traffic lights allowed American consumers to feel comfortable driving automobiles, which helped launch the American automotive industry a century ago, and rules and referees in football protect the players and build confidence in the integrity of the game for fans.
The securities laws—benefiting investors and issuers alike—help create trust in our capital markets. These laws help lower costs. They help lower risks.
The results are evident in the size, scale, and depth of our capital markets. At more than $120 trillion today, they are part of our comparative advantage as a nation, undergirding the dollar’s dominance and our role in the world. We are the capital markets of choice for issuers and investors around the globe. At more than 40 percent of the world’s capital markets, we punch above our weight class of just 24 percent of the world economy.
This didn’t just happen by chance.
Roosevelt and Congress understood in the 1930s that well-regulated markets build trust and create the environment for economic success.
Keir summed up this theme as “well-regulated markets improve economic outcomes.” But, Chair Gensler said, we can’t stop here. He went on to explain why the securities laws must continue to evolve.
As students of history and economics, we all know nothing stands still. Technology and business models constantly change. Other nations seek to challenge our place as the capital markets leader.
Thus, for those who have the privilege of service, our job is to continually update the rules of the road. That’s what we’ve been doing. We’ve worked to lower costs and risks in the capital markets, what economists would call promoting efficiency, resiliency, and integrity.
On crypto, Chair Gensler discussed similarities in the Commission’s approach under his leadership compared to the approach under Chair Jay Clayton. In his final Q&A, Chair Gensler noted that he would have liked to do more on AI, which is “rapidly changing the face of finance.” He said it will be for others in the future to figure out and there are going to be really interesting public policy issues and very important public policy debates that will play out in our courts and may play out ultimately in Congress as well.
Notwithstanding his AI goals, Chair Gensler’s pride in his public service is evident throughout the speech. On public service, he concludes by saying, “I would say it’s the greatest honor. To any of you who have not served, do it. Our nation benefits, but you will benefit personally.”
As Keir also noted in his LinkedIn summary, Chair Gensler’s comments acknowledged that many of the actions the SEC pursued in the last four years may be challenged or modified in the next administration. This Gibson Dunn alert discusses the process of transitioning administrations as well as several tools — plus their efficacy and limits — in facilitating the new administration’s agenda. On rulemaking, here’s what the alert says is likely to happen on day one:
[O]n January 20, 2025, President-elect Trump likely will direct executive branch agencies to freeze pending rulemakings and recommend that independent regulatory agencies do the same. He also may request that departments and agencies withdraw proposed rules that have been sent to the [OFR] but have not yet been published and postpone the effective dates of rules that have been published but have not yet taken effect, although these options may face immediate challenges under the [APA].
[A]t the start of the Biden Administration, Assistant to the President and Chief of Staff Ronald A. Klain sent a memorandum to the heads and acting heads of all executive departments and agencies asking them to take [certain] steps “to ensure that the President’s appointees or designees ha[d] the opportunity to review any new or pending regulations.” … This memorandum was generally understood not to apply to independent agencies, but a new administration might take a more aggressive approach and seek to exert more direct control over traditionally independent agencies such as the [SEC] and [FTC].
At the start of the first Trump Administration in 2017, Assistant to the President and Chief of Staff Reince Preibus issued a similar memorandum, although there were some differences from the Klain iteration. …
Although it is difficult to evaluate the effect of these memoranda on federal agencies, it appears that agencies generally comply with their instructions. For example, in February 2002, the Government Accountability Office determined that “federal agencies delayed the effective dates for 90 of the 371 final rules that were subject to” a similar memorandum published at the beginning of the Bush Administration … and that a majority of the rules that were not delayed were non-controversial rules that the White House had previously agreed should be issued as scheduled.
Independent regulatory agencies in some cases also abide by the regulatory moratoria, although they have not delayed the effective dates of previously published rules. An agency is an “independent regulatory agency” if it is “run by principal officers appointed by the President, whom the President may not remove at will but only for cause.” In contrast to non-independent agencies (sometimes referred to as executive agencies), the President’s control over independent agencies is limited by his inability to fire the commissioners, board members, and directors that make these agencies’ final decisions, unless he has “cause” to remove them from office.
For-cause removal protections are typically understood to preclude the President from removing an agency official simply because the President disagrees with the official’s policy decisions. At the SEC, for example, five commissioners decide whether to propose and adopt new regulations, and under current law the President is widely believed to lack the ability to prevent them from doing so if he disagrees (though an aggressive administration might argue that the President’s lack of control over independent agencies is unconstitutional). Likewise, if the President orders the commissioners to repeal regulations adopted during the Biden Administration, nothing clearly requires them to obey that order.
Speaking of delayed rulemaking, last Friday, Accounting Today reported that the PCAOB has put NOCLAR rulemaking — which was initially slated to be finalized by year-end — on hold following the election. Here’s more from the article:
One reason for the change of plans is that the PCAOB anticipates changes in the regulatory environment under the Trump administration, especially in the Securities and Exchange Commission, which would have to approve the final standard before it could be adopted. The Trump administration is likely to replace SEC chairman Gary Gensler, who has spearheaded many of the increased regulatory efforts at the Commission and encouraged the PCAOB to update its older standards and take a tougher stance on enforcement and inspections. …
According to a person familiar with the PCAOB process, no further action is expected until further consultation with the SEC under the incoming administration can take place. … The PCAOB expects it to remain on the docket for 2025 but doesn’t want to try to jam it through this year. …
[T]he PCAOB is mindful of the difficulty of having the SEC decide on whether to approve it, especially if the five-member commission becomes evenly split among two Republican members and the two Democrats if Gensler departs or is ousted. The PCAOB feels the SEC needs adequate time to review and educate itself on the proposed standard, rather than having to jam it through a two-two commission, especially with the amount of engagement that will need to take place given such an important standard, according to a person familiar with the matter.
A PCAOB spokesperson also pointed to the issuance of staff guidance last week outlining the existing responsibilities of auditors to detect, evaluate and communicate about illegal acts. But, in terms of next steps for NOCLAR, those are TBD pending review of all comment letters, the roundtable feedback and responses to targeted inquiries from firms regarding their existing approach. It’s unclear whether the PCAOB may repropose the standard with modifications or move forward another way.
NOCLAR is one of the agenda topics our panelists plan to cover during Thursday’s webcast “Audit Quality: Lessons from BF Borgers and Other Recent Developments” focused on what corporate attorneys need to know about the latest audit-quality developments to advise their client(s) on financial reporting and corporate governance matters. Tune in at 2 pm ET to hear from Deloitte’s William Calder, Maynard Nexsen’s Bob Dow, and Nonlinear Analytics’ Olga Usvyatsky.
The 5th Circuit hasn’t exactly been a friendly jurisdiction for the SEC in recent years, but yesterday, in National Center for Public Policy Research v. SEC, (5th Cir.; 11/24), the Court rejected a conservative advocacy group’s challenge to the legality of the SEC’s Rule 14a-8 no-action letter process. Here’s an excerpt from Bloomberg Law’s article on the decision:
A federal appeals court on Thursday left in place the SEC’s power to referee which shareholder proposals companies allow on their annual meeting ballots, tossing a case from business and right-leaning groups fighting the agency’s influence.
The Securities and Exchange Commission issued non-binding guidance that fell outside of judicial review when it advised supermarket chain Kroger Co. it could block a vote on a conservative organization’s antidiscrimination proposal in 2023, the US Court of Appeals for the Fifth Circuit ruled. Companies looking to keep shareholder proposals they consider repetitive or disruptive to their business off their ballots usually seek SEC guidance. The SEC can sue if companies bar votes without adequate justification.
The Fifth Circuit is the first court to formally weigh in on whether the SEC’s advice is a formal commission order as corporate attacks on the refereeing system have increased under SEC Chair Gary Gensler, who in 2021 made it easier for investors to file environmental, social, and governance proposals.
The Court’s ruling that the SEC’s no-action process under Rule 14a-8 did not involve a formal SEC order subject to judicial review under the Administrative Procedure Act was actually an alternative basis for dismissing the plaintiff’s claim. The Court also held that the claim was moot, since Kroger ultimately included the proposal in its 2023 proxy statement.
Almost every PCAOB statement on auditor responsibilities is something that’s worth sharing with audit committees, and the PCAOB staff report issued earlier this week on auditors’ responsibilities for detecting, evaluating and communicating illegal acts is no exception. This excerpt from the intro summarizes those responsibilities:
Under federal securities laws, auditors have a longstanding responsibility to (1) detect illegal acts; (2) evaluate information indicating that an illegal act has or may have occurred; (3) determine whether it is likely that an illegal act has occurred, and, if so, to consider the possible effect of the illegal act on the financial statements of the company; and (4) make appropriate communications about illegal acts, unless “clearly inconsequential,” to management, the audit committee, and possibly the United States Securities and Exchange Commission (SEC). PCAOB standards include similar requirements. These responsibilities also inform the auditor’s obligation to plan and perform the audit to obtain reasonable assurance that the company’s financial statements are free of material misstatement, whether due to error or fraud.
The report goes on to provide detail concerning the kinds of procedures that auditors should perform in order to appropriately discharge each of these enumerated responsibilities. The report also addresses the circumstances in which an illegal act may require the auditor to issue an adverse opinion on the financial statements, disclaim an opinion altogether, or withdraw from the engagement.
The latest issue of The Corporate Executive newsletter has been sent to the printer. It is also available now online to members of The CorporateCounsel.net who subscribe to the electronic format. In this issue, Dave takes a deep dive into clawbacks with an article titled “Clawback 2.0: What’s Next for Compensation Recovery Policies?” Here’s an excerpt from Dave’s discussion of implementation considerations for Exchange-compliant clawback policies:
In most cases, companies have tasked the compensation committee with board level oversight of the clawback policy, and compensation committee charters should be revised to clearly identify this responsibility. Even though the terms of the clawback policy are fixed by Rule 10D-1 and the relevant exchange’s listing standards, it is advisable to review the clawback policy at least once a year to determine whether any regulatory or other developments would require any revisions to the policy.
A key consideration for companies and compensation committees going forward is the fact that many policies adopted in response to the exchange listing requirements left some matters for determination when a recovery analysis is required, and it may be appropriate to review those matters before a triggering event happens to determine how the company will respond in the event of a restatement.
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Over on Cooley’s “The Governance Beat” Blog, Broc recently offered some thoughts on how companies should approach their shareholder engagement programs. This excerpt has some advice for companies that are just getting started:
If you’re just starting your first off-season engagement program, during your initial engagement, you should ask the investor about their engagement preferences (e.g., what time of year, how frequent, what topics and who they like to attend calls).
Some companies start with a list of their top 50 – or maybe it’s only 25 – shareholders. Newly public companies may start with just a handful of institutional investors because founders and venture capitalists still have significant holdings and their investor base hasn’t matured yet. The number will vary at each company – and perhaps over time – depending on the issues that the company faces, as well as the current level of resources at the corporate secretary’s department. If there are important issues on the year’s meeting ballot, the company might hire a proxy solicitor to help bring in the vote.
They look at that group of top shareholders and try to reach out to all of them over the course of the year. Each company will have a smaller subset of important shareholders and prioritize those engagements.
Broc says that the investors are in that smaller subset might include shareholders with a smaller stake who are vocal on issues that are crucial to the company – whether those are issues that management cares deeply about or issues where others are likely to follow the lead of the vocal shareholders.
He also notes the importance of engaging with investors who have reached out to the company on governance or ESG issues, and reminds companies that engagement isn’t only phone calls or online or in-person meetings. Many investors reach out through letters, and smart companies make sure to have a process to direct these to the appropriate person for a response.
A recent White & Case memo reviews the SEC’s enforcement sweep targeting delinquent beneficial ownership reports and provides insight for public companies and their insiders on the lessons to be learned from those enforcement actions. Here’s an excerpt with a couple of pieces of specific advice :
For public companies and investors, confirm that the legal and/or compliance team responsible for filings understands the Section 13 and Section 16 reporting requirements. Section 13 and 16 reporting can be complex, and it is important that those responsible at public companies or investors are well educated on the nuances of these requirements, to avoid missing necessary filings. For example, in one case, the investments at issue were managed by a business unit of the investor that did not typically invest in public equities, and the unit’s internal processes did not timely identify the need to make the required filings.
Steps should be taken to ensure that all relevant personnel are educated regarding their obligations under, as applies depending on the public company or investor’s profile, Section 13(d), 13(g), 13(f), 13(h), and/or 16(a) filing obligations. This could include brokers, financial advisors and estate planning advisors who may assist the insiders in their transactions involving company securities, as these professionals may be unfamiliar with these requirements. In addition, make sure that anyone involved in these filings is aware of the new Schedule 13D and 13G filing deadlines.
For public companies specifically, ensure your Item 405 disclosures comply with the requirements. The SEC has turned its focus to correct Item 405 disclosures. As a reminder, Item 405 disclosure in Form 10-Ks or annual meeting proxy statements of any late filings or known failures to file must (i) identify by name each insider who failed to file on a timely basis any Forms 3, 4, or 5 during the most recent fiscal year or prior fiscal years and (ii) set forth the number of late reports, the number of late reported transactions, and any known failure to file. As highlighted in the recent enforcement actions, the disclosure must identify all of the late-reported transactions, not just the number of late reported filings.
Other lessons in the memo include the need to confirm and continue to track insiders’ beneficial ownership holdings through D&O questionnaires and by monitoring equity award grant and vesting dates, and to ensure robust internal controls around potential filing triggers.
Some SEC filings are required to be signed by a company’s “principal accounting officer” – but does that mean that every company must have a person designated as a PAO? Perkins Coie’s Benjamin Dale addressed that question in a recent blog:
The PAO is a designation that is often held by a company’s controller or chief financial officer (CFO). Sometimes the PAO designation is held by someone who is not the controller or CFO. But is a PAO technically required?
Rule 16a-1 of the Exchange Act is instructive and defines an officer as the “principal accounting officer (or, if there is no such accounting officer, the controller)” (emphasis added). Under Rule 16a-1, if a company does not have a PAO, then the controller is deemed to fill that role and is considered a Section 16 officer. It’s possible for the controller to be a Section 16 officer and not otherwise be treated as an “executive officer” under Rule 3b-7 of the Exchange Act if the controller doesn’t have a policy-making function.
Ben points out that Nasdaq and NYSE rules also don’t explicitly require companies to have a PAO and treat the controller as the PAO and an executive officer for purposes of the clawback listing standards. He also notes that companies should check their bylaws in order to determine whether those require it to appoint a person to serve in that capacity.