Last month, the House Financial Services Committee voted to move forward with legislation that would abolish the PCAOB and assign its responsibilities to the SEC. That legislation is receiving pushback from Democrats on Capitol Hill and from PCAOB Chair Erica Williams. In a recent post on The Audit Blog, Dan Goelzer added his voice to those arguing that the PCAOB deserves to be saved:
The PCAOB, mainly through its inspection program, has been the catalyst for major improvements in public company auditing. The Sarbanes-Oxley Act created the PCAOB in 2002 to stem the crisis in investor confidence in financial reporting that followed the dramatic collapses of Enron, WorldCom, and other financial reporting failures.
Sarbanes-Oxley was a bipartisan effort that passed the Senate unanimously and with only three negative votes in the House. The PCAOB has done the job it was created to perform. During the 20-plus years that the Board has been operating, restatements have declined, accounting firms have become more focused on audit quality, and significant breakdowns in audited financial reporting have become far rarer.
Dan goes on to say that he doubts that the SEC could perform the PCAOB’s functions as effectively given how much else the agency has on its plate, and contends that audit quality and auditor oversight are important enough to be the responsibility of an organization that focuses exclusively on those issues. He argues that even if the SEC could eventually re-create inspections and standard-setting functions comparable to what the PCAOB is currently doing, it would take several years to do so and would result in considerable disruption and lack of continuity.
Following the issuance earlier this year of updated CDIs on the impact of engagement topics on 13G eligibility, many companies have found that large stockholders have become much more guarded in their discussions with management in an effort to avoid trigging a 13D filing. A recent Skadden memo offers some tips on how companies can engage more effectively with their investors in this environment. This excerpt provides some examples about on how investors have changed their approach and how companies may want to respond:
Change: Questions from investors at engagement meetings will likely be more open-ended and less targeted. For instance, questions are now likely to be more broadly worded. Such as: “We would appreciate if you could share your thoughts on….”
Response: Companies should be prepared to answer the questions and add gloss that they expect the investor will want/need to make informed investment decisions.
Change: Similarly, investors will likely not answer pointed questions, including and most specifically any questions about how the investor intends to vote.
Response: Companies should be prepared to ask investors more broad-based questions, such as: “Did you get enough information to make an informed voting and/or investment decision.”
On the other hand, in remarks delivered during yesterday’s “SEC Speaks” conference, Commissioner Mark Uyeda said that investors shouldn’t interpret the recent 13G CDIs as a reason to clam up:
In my view, the wording of the CDI in fact broadens the scope of permissible activities while still remaining eligible for Schedule 13G, which is premised on not “influencing” control of the company. “Influencing” is not defined under the Securities Exchange Act and a common dictionary definition is “the act or power of producing an effect without apparent exertion of force or direct exercise of command.” By requiring that a shareholder needs to “exert pressure on management,” the CDI indicates that there needs to be something more than the mere planting of an idea with management in order to lose Schedule 13G eligibility.
This result reflects a commonsense interpretation of longstanding rules: if you are pressuring the board to undertake certain actions relating to the management or policies of an issuer, whether ESG-related or otherwise—coupled with voting threats, such actions are covered by existing rules and should be treated as such.
As with the unfounded concerns that Regulation FD would cease all communications between companies and shareholders, I am confident that asset managers will be able to navigate the parameters of the applicable Exchange Act rules to have appropriate levels of engagement with boards and executives of public companies without losing eligibility to file on Schedule 13G—and if an asset manager chooses to exert pressure, then they can provide the disclosure and transparency surrounding such conversations as required by Schedule 13D.
If you’re interested in a more in-depth discussion of how companies and investors are responding to the challenges created by the CDIs, be sure to check out our recent “Timely Takes” podcast on these topics.
Yesterday, Corp Fin issued a couple of new and revised CDIs relating to asset backed securities. Revised CDI 112.01 addresses the forms to be used for registration statements and periodic reports for issuers engaging in public utility securitizations. Here’s a marked copy of the changes. New CDI 112.02 updates guidance for public utility securitizations contained in a 2007 no-action letter and clarifies that the guidance in CDI 112.01 supersedes the guidance contained in that letter.
The new CDIs follow on the heels of a no-action letter issued to SIFMA last Friday which provides guidance to asset backed securitization participants on how to avoid running afoul of the prohibition on certain conflicted transactions set forth in Rule 192(a)(3)(iii) under the Securities Act.
Those of you who aren’t involved in securitizations are probably saying “so what?” at this point in the blog. However, Staff participants in yesterday’s “SEC Speaks” conference noted that this no-action letter illustrates a broader point about the Staff’s willingness to work with market participants after rulemaking. Apparently, the Office of Structured Finance engaged with SIFMA and discovered that market participants were working to comply with the relevant section of Rule 192, but there were ambiguities that needed to be addressed – and that’s what the no-action letter is intended to accomplish.
Tomorrow on CompensationStandards.com at 2:00 pm Eastern, join us for the webcast – “The Top Compensation Consultants Speak” – to hear Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Jan Koors of Pearl Meyer discuss the latest considerations for compensation committees. The panel will cover the following topics:
– DEI Programs, Disclosures & Metrics: The Compensation Committee’s Role
– Plan Design & Goal Setting Amid Uncertainty & Volatility
– Key Changes in Investor & Proxy Advisor Policies & their Impact in 2025
– Metrics & Perks: Notable Observations from the 2025 Proxy Season So Far
– Compensation-Related Shareholder Engagement
– Did Dodd-Frank Rules Reduce or Curb CEO Pay or Change Incentive Design?
Members of CompensationStandards.com are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE which require advance notice) for this 1-hour webcast. You must submit your state and license number prior to or during the live program. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval. This program will also be eligible for on-demand CLE credit when the archive is posted, typically within 48 hours of the original air date. Instructions on how to qualify for on-demand CLE credit will be posted on the archive page.
Earlier this month, SEC Chairman Paul Atkins held a town hall for agency staffers in which he addressed the magnitude of the cuts resulting from the SEC’s voluntary buyout program. Chairman Atkins said that headcount had decreased by 15% since the current fiscal year began last October. He also said that at its height last year, the SEC had a total of 5,000 employees and 2,000 contractors, and that today it is down to approximately 4,200 employees and 1,700 contractors.
Chairman Atkins didn’t specify the extent to which particular offices and divisions were impacted by staff departures, but a couple of Reuters reporters did a little digging via FOIA and came up with their own numbers. According to their reporting, the Office of the Chief Counsel took the biggest hit, with nearly one in five staffers (19.5%) departing! Investment Management (16.7%), Trading and Markets (14.7%), and Enforcement (13.0%) were also hit hard. Corp Fin did relatively better, with only 8.7% of its staff opting to head for the exit.
There may be more cuts to come, because Reuters points out that DOGE has not left the building:
The SEC has been continuing its belt-tightening efforts, with more than 20 employees taken off regular duties in recent days and reassigned to full-time contract reviews to identify further possible opportunities to cut costs, principally in IT services, according to two people with knowledge of the matter, who said this was part of the SEC’s cooperation with billionaire Elon Musk’s Department of Government Efficiency.
DOGE, which has been working to find cost cuts at various agencies including the SEC, has expanded its footprint at the agency’s Washington headquarters, moving from one to at least three dedicated rooms as activity ramps up, according to one of the people and a third person with knowledge of the matter.
How all of this is going to affect the SEC’s day-to-day operations remains to be seen. In his remarks at the town hall, Chairman Atkins indicated that at least some of the vacancies created by these departures will be filled, but even so, that’s a lot of staffing losses to absorb by one of the few agencies that actually makes taxpayers money.
In December 2023, FASB finalized ASU 2023-07, which made changes to segment disclosure requirements. Calendar year companies became required to follow the new guidance beginning with their Form 10-K filed in 2025. The CAQ’s summary of its SEC Review Committee’s March 2025 meeting with the Corp Fin staff indicates that compliance with ASU 2023-07 is high on the staff’s review agenda. It also offers some guidance to registrants on drafting these disclosures:
The staff also commented on the implementation of ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, noting that they are reviewing disclosures for compliance and will comment where appropriate. The staff reminds registrants that they are not precluded from disclosing additional measures of segment profitability used by Chief Operating Decision Maker (CODM) in assessing performance and allocating resources in accordance with ASC 280-10-50-28A through 28C. However, any additional reported measures of segment profit or loss that are not calculated using measurement principles consistent with the corresponding measure presented in a registrant’s consolidated financial statements prepared in accordance with U.S. GAAP should be identified as non-GAAP measures and must comply with the SEC’s non-GAAP regulations, rules and guidance.
Although Item 10(e) of Regulation S-K includes a general prohibition against the inclusion of non-GAAP measures in the financial statement footnotes, the staff will not object to additional measures of segment profitability disclosed in accordance with ASC 280-10-50-28A through 28C being included in the notes to the financial statements, provided they otherwise comply with the non-GAAP rules.
The staff also indicated that reviewers are keeping an eye on disclosures about generative AI activities and comparing those disclosures to what companies are saying outside of SEC filings.
Traditionally, accredited investor status for individuals has been based on wealth or income. Last week, a bipartisan group of lawmakers introduced legislation that would provide an alternative path to accredited investor status. The bill, which is titled “The Equal Opportunity for All Investors Act of 2025,” would allow individuals to become accredited investors by passing a test that the SEC would be required to come up with within a year of its passage. The legislation would require that test to be “designed with an appropriate level of difficulty such that an individual with financial sophistication would be unlikely to fail.”
If this sounds familiar, it may be because the same bill was introduced during the last session of Congress. The legislation was passed by the House but died in the Senate. However, with capital formation a priority for the Trump administration and the SEC signaling a desire to make it easier for retail investors to purchase securities in exempt offerings, it may have a better shot in the current session of Congress.
There’s a lot here, but here are a few high-level takeaways from the alert:
– DOJ Criminal Division will prioritize investigating and prosecuting corporate crime in ten “high-impact areas.”
1. Waste, fraud, and abuse, including healthcare fraud and federal program and procurement fraud
2. Trade and customs fraud, including tariff evasion
3. Fraud perpetrated through variable interest entities (VIEs), including, but not limited to, offering fraud, “ramp and dumps,” elder fraud, securities fraud, and other market manipulation schemes
4. Fraud that victimizes US investors, individuals, and markets including, but not limited to, Ponzi schemes, investment fraud, elder fraud, servicemember fraud, and fraud that threatens the health and safety of consumers
5. Conduct that threatens the country’s national security, including threats to the US financial system by gatekeepers, such as financial institutions and their insiders that commit sanctions violations or enable transactions by cartels, TCOs, hostile nation-states, and/or foreign terrorist organizations (FTOs)
6. Material support by corporations to FTOs, including recently designated cartels and TCOs
7. Complex money laundering
8. Violations of the Controlled Substances Act and the Federal Food, Drug, and Cosmetic Act (FDCA), including activities related to fentanyl production and unlawful distribution of opioids by medical professionals and companies
9. Bribery and associated money laundering that impact US national interests, undermine US national security, harm the competitiveness of US businesses, and enrich foreign corrupt officials; and
10. Digital asset-related crimes, including ones that (1) victimize investors and consumers; (2) use digital assets in furtherance of other criminal conduct; and (3) involve willful violations that facilitate significant criminal activity.
– The DOJ Criminal Division’s amended Corporate Enforcement Policy aims to provide more transparency and enhanced incentives to companies that self-disclose and cooperate.
– DOJ Criminal Division commits to streamlining corporate investigations.
The “Galeotti Memo” and the path to declination under the Corporate Enforcement and Voluntary Self-Disclosure Policy (CEP) were frequently cited developments during yesterday’s Securities Enforcement Forum West. Here are a few comments from the “Masterclass I: Managing a True Corporate Crisis, Major Internal Investigation and/or Whistleblower” panel that I found interesting:
– Priority number nine above looks surprisingly like an FCPA issue given the announced enforcement pause on that front.
– The updated approach to self-reporting seems encouraging, especially the suggestion that the DOJ might still give some cooperation credit for corporate self-reporting even if the DOJ was already aware of potential wrongdoing from another source.
This excellent LinkedIn Newsletter from Persefoni’s Kristina Wyatt reminds us that climate disclosures in SEC filings aren’t totally dead. Requirements live on in the form of Items 101 (Description of Business), 103 (Legal Proceedings), 105 (Risk Factors) and 303 (MD&A) of Regulation S-K — plus the 2010 interpretive release. (History buffs should check out the newsletter’s timeline for SEC environmental and climate disclosure developments!)
Even though the 2010 guidance is the SEC’s last official statement on climate before the 2024 rule, other developments are worth noting. First, Reg. S-K has been amended since, which just means that you have to “read the 2010 climate guidance in the context of the amended items,” which didn’t change “the essential proposition” of the 2010 guidance. Second, and more importantly, she notes that the “broader landscape for climate-related disclosures has changed” — with many new standards and requirements.
Particularly, she points to ISSB’s S1 and S2, which multinational companies may be complying with currently — or required to in the near future. She says companies facing material climate risks or events can look to these standards as they apply the 2010 guidance. To do that, Kristina provides this helpful roadmap linking S1 and S2 to required SEC disclosures.
Business Description – Item 101 of Regulation S-K. A company might adjust its business strategy to mitigate climate risks or take advantage of climate-related opportunities. If those changes reflect a material change to the company’s business, the company must consider disclosure of those changes in its business description and/or MD&A. Its assessment of its strategy under the guidance of the ISSB standards can help the company formulate its plan and, in turn, its disclosure.
Moreover, as the 2010 interpretive release provides, Item 101 of Regulation S-K requires companies to discuss “The material effects that compliance with government regulations, including environmental regulations, may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries, including the estimated capital expenditures for environmental control facilities.” The evaluation of a company’s legal compliance obligations as part of its ISSB assessment of transition risks and strategy can help shape the company’s disclosure under Item 101 of Regulation S-K.
Legal Proceedings – Item 103 of Regulation S-K. Item 103 requires disclosure of material legal proceedings, including “administrative or judicial proceedings arising under any Federal, State, or local provisions that have been enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment.” Ordinary, routine litigation incidental to the business need not be disclosed.
However, Item 103 presumes that proceedings are not ordinary or routine if they are brought by a government entity and involve potential penalties above specified thresholds as described in Item 103. Just as the company’s disclosures related to its business under Item 101 of Regulation S-K ties to is ISSB risk and strategy disclosures, so too should the Legal Proceedings disclosures under Item 103 be aligned with the company’s disclosure of its risks and strategy under ISSB S2.
Risk Factors – Item 105 of Regulation S-K. Many companies will consider whether climate risks represent material risks that they should disclose in their Risk Factor section. They can usefully draw on the ISSB standards in evaluating their acute and chronic physical and transition risks and their strategies to mitigate those risks. This can help inform their Risk Factor disclosures, including disclosure of how climate risk affects the company.
MD&A – Item 303 of Regulation S-K. Climate events and risks should be disclosed in a company’s MD&A if they represent material events and uncertainties that are reasonably likely to cause the company’s reported financial information to not necessarily be indicative of future operating results or financial condition. This includes matters that have had a material impact on reported operations as well as those reasonably likely to have a material impact on future operations. The company’s assessment of its physical and transition risks and strategies to address those risks, conducted pursuant to ISSB S2 can help to inform its MD&A disclosure.
My husband’s biggest hobby is something most people have never heard of. It’s called “24 Hours of Lemons.” It’s endurance racing (like Le Mans) but for cars that frankly don’t look roadworthy (hence Lemons). Most teams are amateur racers and engineers, and most of the cars are somewhat cobbled together. My husband’s team’s car is an extreme example. It’s truly Frankenstein’s monster — a 45-year-old Triumph Spitfire body with a Triumph GT6 roof and a Ford Ranger engine under the hood — and the judges seem to love them for it.
The race they compete in annually just happened, and even though, with two kids in tow, I usually only last about an hour watching (and the car is sometimes broken for all or part of that time), I always walk away amazed by the folks that participate in this (sort of scary) sport. I realized this time that the things that amaze me are so broadly applicable that Meaghan has actually written about all of them on The Mentor Blog. Here are a few that come to mind:
– Long-Term Thinking. My husband’s team added a massive wing on the back of the car for this race. Apparently, it had its intended effect of making the car feel actually responsive and less “squirrelly,” so they felt more comfortable driving the car harder. But this is an endurance race with unreliable cars. They tried to resist the temptation to up their lap speed. The upside of a few more laps in an hour was not worth the risk of a time-consuming repair that keeps them off the track (and not doing any laps) for many hours (that said, see below).
Meaghan concluded a Mentor Blog called “What I Wish Someone Told Me” with the reminder that billing an obscene amount of hours to the detriment of all else in life can be a recipe for burnout. Sometimes you may need to remind yourself that this is your career — not just your job today — and that the deal of the day can’t keep taking precedence over your health and relationships.
– A Growth Mindset. Of the six members of my husband’s team, not one of them has a degree or professional background in automotive engineering. They have learned hundreds of new skills they didn’t have before and they did it in front of people! In some cases, track side with other teams watching. (Ahh!) They might have been afraid of failure and embarrassment, but they didn’t show it and it didn’t stop them.
My inclination to learn and perfect something privately seemed like a strength to me when I was younger. Now I try to see when it is holding me back (it’s even the reason I didn’t like going bowling until my 20s) and recognize when I’ve developed skills that can translate to other roles and contexts. I was inspired my Meaghan’s “why not try it?” approach, and I’ve been trying to channel that energy myself!
– Optimism & Resourcefulness. This was the second race where his team won the award for “Heroic Fix.” It goes to the team that successfully tackles a repair (or, in their case, three repairs) and gets back on the track after everyone thought it wasn’t possible. Some teams with devastating damage “throw in the towel.” In fact, when we leave, we spectators often see a few broken lemons on trailers in town leaving the race early. But optimistic racers (like my husband!) set aside their disappointment about being towed off the track and realizing they didn’t pack the particular part they need. They walk the paddock looking for teams that have spare parts, tools or even skills that the team with the broken car doesn’t have . . . yet! (This is a collaborative more than competitive league — and most teams are willing to share!)
I was reminded of Meaghan’s blog about setting aside the things we can’t control and focusing on what we can change — sometimes we need to give ourselves the pep talk we need and get to it!
If you don’t already, go sign up to receive The Mentor Blog in your inbox to benefit from Meaghan’s valuable and entertaining career wisdom — without all these unnecessary automotive analogies. The blog is available to members of TheCorporateCounsel.net. If you’re not already a member, sign up to take advantage of the no-risk “100-Day Promise” — during the first 100 days as an activated member, you may cancel for any reason and receive a full refund.
Finally, unrelated to the law at all, but for your viewing pleasure, here is the aforementioned “lemon.” I hope you have a great weekend and make some lemonade!
