Broc Romanek is Editor of CorporateAffairs.tv, TheCorporateCounsel.net, CompensationStandards.com & DealLawyers.com. He also serves as Editor for these print newsletters: Deal Lawyers; Compensation Standards & the Corporate Governance Advisor. He is Commissioner of TheCorporateCounsel.net's "Blue Justice League" & curator of its "Deal Cube Museum."
Group of Investors Files “ESG Disclosure” Rulemaking Petition
Recently, as noted in this press release, a group of investors, state treasurers, public pension funds & unions – representing more than $5 trillion in assets under management – and securities law experts and foundations filed this rulemaking petition with the SEC seeking a standard set of rules requiring companies to disclose environmental, social and governance (ESG) risks.
There were many signatories to this petition. Does that matter? Personally, I don’t think so. Unless they happen to align with the SEC Chair’s rulemaking agenda anyway, rulemaking petitions rarely are acted upon. Remember the rulemaking petition about political contribution disclosures that received over 1 million signatures in support that has gone nowhere…
Certain ISS policies, procedures, and products rely on GICS classifications, including executive compensation peer group formation, equity compensation plan evaluation, and Environmental & Social QualityScore. ISS has issued FAQs designed to answer the most frequently asked questions regarding how the adjustment to GICS structure will impact ISS analyses, and when those changes will be effective.
The FAQs address the following questions:
– How will the new GICS code affect the evaluation of equity compensation plans under ISS’ U.S. Equity Plan Scorecard?
– How will the new GICS code affect the evaluation of equity plans under ISS’ burn rate policy for France?
– How will the new GICS code affect the evaluation of executive compensation?
– How will the new GICS code affect the evaluation of director compensation?
– How will the new GICS code affect Environmental & Social QualityScore?
– How will the new GICS code affect ISS policies, such as the director performance evaluation policy, that examine a company’s TSR performance relative to its industry?
– When will Question 130 in Governance QualityScore, which examines each covered company’s burn rate relative to its industry, be updated to reflect the new GICS structure?
Today is the “Say-on-Pay Workshop: 15th Annual Executive Compensation Conference”; yesterday was the “Proxy Disclosure Conference” (for which the video archive is already posted). Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5, Windows Media or Flash Player). Here are the “Course Materials.”
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Pacific.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see this “List: CLE Credit By State.”
Corp Fin Issues CDI on “Disclosure Simplification” Effectiveness
Last week, I blogged that it was unclear when the SEC’s new disclosure simplification rules become effective. Yesterday, Corp Fin resolved that issue with this new CDI:
Question 105.09: On August 17, 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. The amendments will become effective 30 days after publication in the Federal Register. Among the amendments is the requirement to presentthe changes in shareholders’ equity in the interim financial statements (either in a separate statement or footnote) in quarterly reports on Form 10-Q. Refer to Rules 8-03(a)(5) and 10-01(a)(7) of Regulation S-X. When are filers expected to comply with this new requirement?
Answer: The amendments are effective for all filings made 30 days after publication in the Federal Register. In light of the anticipated timing of effectiveness of the amendments and expected proximity of effectiveness to the filing date for most filers’ quarterly reports, the staff would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments. For example, assuming an effective date of October 25, a December 31 fiscal year-end filer could omit this disclosure from its September 30, 2018 Form 10-Q. Likewise, a June 30 fiscal year-end filer could omit this disclosure from its September 30, 2018 and December 31, 2018 Forms 10-Q; however, the staff would object if it did not provide the disclosures in its March 31, 2019 Form 10-Q. (Sept. 25, 2018)
So the Staff says that although the new rules apply to any filings after the effective date, companies can hold off one quarter on the “Statement on Stockholders Equity.” That’s good news, as this Gibson Dunn blog notes, companies with 12/31 fiscal year ends will be able to wait to make the new disclosure until after their 3rd quarter 10-Q. And no, the rules haven’t been published in the Federal Register yet…
SEC Charges 5 Companies With Foregoing 10-Q Auditor Review
Last week, the SEC charged five companies with failing to have their independent auditors review their 10-Q interim financials. This is the first time the SEC has brought enforcement actions for violations of the Regulation S-X interim review requirement – and resulted from a review of filings, Corp Fin comment letters and other metrics that indicated potential violations. Each company agreed to settle the SEC’s charges, with the agency collecting a total of $250k in penalties.
Corp Fin’s New Edgar Guidance for ABS
Recently, Corp Fin issued this set of 12 FAQs for Edgar filings by asset-backed issuers…
Today is the “Pay Ratio & Proxy Disclosure Conference”; tomorrow is the “Say-on-Pay Workshop: 15th Annual Executive Compensation Conference.” Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5, Windows Media or Flash Player). Here are the “Course Materials.”
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Pacific.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see this “List: CLE Credit By State.”
Airbnb’s IPO? Dependent on Rule 701 Changes?
According to this CNBC report and Fortune article, Airbnb’s IPO – which is rumored to be happening next year – could be partially dependent upon the SEC allowing the hosts of Airbnb properties to be allowed to “participate” in the IPO by obtaining equity before the IPO happens, which would require changes to how Rule 701 works.
Right now, only employees & investors can obtain options or equity directly from pre-IPO companies. Airbnb wants their “gig economy” hosts to join the ranks of those that can get into the ownership ranks early.
My initial guess was that Airbnb’s request was in the form of an interpretive letter request to the Corp Fin Staff. But after this article used the term “comment letter,” I realized that these media articles were motivated by Airbnb submitting a mere comment letter in response to the SEC’s recent 701/S-8 concept release – and that the company had distributed the letter to some media outlets because the letter wasn’t posted on the SEC’s site at the time of the articles (it now is; there are a total of five comment letters submitted so far).
In any case, there is little chance that the SEC gets to the “final rule” stage until late 2019 at the earliest since it typically takes quite a while for the SEC to issue a proposing release after a concept release – and then another chunk of time between proposal and adoption of a rule change…
Podcast: California’s Board Diversity Law
In this 18-minute podcast, Shelly Heyduk of O’Melveny & Myers discusses a new law that will require the boards of California-headquartered public companies to satisfy specific gender diversity requirements, including:
– What’s the status of this legislation?
– What will the law require, and what companies will it apply to?
– Do you think there will be legal challenges to the law?
– Given the length of time that it takes to recruit new directors, should California companies be searching now for new nominees?
Last month, John blogged about a President Trump announcement asking the SEC to study the possibility of companies moving from quarterly to semi-annual reporting. John blogged that this wasn’t a new idea – and he indicated that making this change likely wouldn’t promote a longer-term focus, nor perhaps even result in companies foregoing reporting quarterly results. I’m jumping in now with these additional thoughts:
1. With semi-annual reporting, there would be a higher risk of insider trading since blackout periods would be far longer.
2. Semi-annual reporting would create more 10b5-1 plan business because blackout periods would be longer.
3. Bigger investors would get an advantage over smaller ones because they would likely get access to more nonpublic information.
4. As noted in this blog, Cooley’s Cydney Posner summarizes this article that indicates that cost-savings from the elimination of two quarterly reports would be partly offset by higher fees for the semi-annual reports. It appears that any cost-savings would benefit smaller companies the most.
5. Funny how things can change with time. Long ago, it was Republicans pushing for more frequent reporting. For example, this SEC report was conducted under a Republican regime. See #10 in the summary in particular.
Foregoing Quarterly Reports: Some Opinions
Here’s a bunch of articles discussing the idea of foregoing quarterly reports:
On Friday, the SEC announced that its proxy process roundtable is set for Thursday, November 15th. We still don’t know the participants – nor specific agenda topics…
Wow! I just got my hands on this year’s annual report from United Therapeutics. It includes something unlike anything I have ever seen. So creative. The annual report includes a playful video player – uniquely entitled “Annual Rapport 2017” – which includes a USB cord so that you can charge the video device and play it again.
The video starts with an actor talking about victim-shaming in clinical responses to dinosaur aggression in paleozoic New Jersey. Then the video goes on to explain what an annual report is (nice “shout out” to US Steel for the first annual report in 1903) – and then through the “elements” of the annual report. All done with some nice play-acting by an actress from “Saturday Night Live.” Makes it more interesting for sure.
My favorite part is clicking on the “Shareholder Letter” button – which results in an arrow pointing to the letter in paper tucked under the opposite side of the video player.
Looks like United Therapeutics also has fun with their website – the IR page has a zombie theme (scroll to the bottom). The company’s CEO seems dynamic – see this WaPo article about her.
Cap’n Cashbags Loves UTHR’s “Annual Rapport”!
Here’s a 1-minute video from Cap’n Cashbags displaying the United Therapeutics annual rapport:
This September-October issue of the “Deal Lawyers print newsletter” was just posted – & also mailed – and includes articles on:
– #MeToo Clauses Being Added to Merger Agreements
– Shareholder Activism: Evolving Tactics
– Delaware Emphasizes Duty to Make Proper Disclosures to Stockholders
– Delaware Provides Insight on Minority Shareholders as Controllers
– Indemnification: Because We Have to Fight About Something
Right now, you can subscribe to the Deal Lawyers print newsletter with a “Free for Rest of ‘18” no-risk trial. And remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
Since the SEC adopted the “disclosure simplification” rules over a month ago, a number of members have asked when the rules take effect. For starters, the adopting release hasn’t been published in the Federal Register yet – which is unusual because the average period of time between the SEC adopting a rule & it being published in the FR is typically a week or so. And it’s been over a month now. So what gives?
Dave Lynn guesses that, due to the many technical rule & form changes in the release, there might be some errors in the regulatory text that Corp Fin is trying to work out or the release got kicked back to the Staff because it doesn’t pass the FR style guide (or they are waiting for space in the FR – but that is less likely given the length of time that has passed). Dave’s read is that because the adopting release doesn’t say anything about relating to periods beginning – or ending – on or after the effective date, then the changes will just apply to anything that gets filed after the effective date.
And the excerpt below from this Gibson Dunn blog explains why the effective date matters – because companies might need to make new disclosures for their first 10-Q after these rules changes become effective:
Ironically, the first effect of the Final Rules that companies may encounter is one that requires additional disclosure. The Final Rules require Form 10-Q to contain a statement of changes in stockholders’ equity and to disclose the amount of dividends per share for each class of shares with respect to the interim period, pursuant to revised Rule 3-04 of Regulation S-X. Previously, this information was only required in Form 10-K.
The adopting release for the Final Rules notes that “[t]he extension of the disclosure requirement in Rule 3-04 of Regulation S-X may create some additional burden for issuers . . . because it will require disclosure of dividends per share for each class of shares, rather than only for common stock, and disclosure of changes in stockholders’ equity in interim periods,” but the SEC staff “expect[s] this burden will be minimal, as the required information is already available from the preparation of other aspects of the interim financial information such as the balance sheet and earnings per share.” The required analysis of changes in stockholders’ equity for the “current and comparative year-to-date periods, with subtotals for each interim period,” can be presented in a note to the financial statements or in a separate financial statement.
The Final Rules become effective 30 days from publication in the Federal Register. As of the date of this blog post, the Final Rules have not been published in the Federal Register. Moreover, the adopting release does not indicate (1) whether the amendments should be applied only to periodic reports covering periods ending on or after the effective date, or (2) whether the amendments should be applied to all periodic reports filed after the effective date.
Accordingly, assuming the Final Rules are published in the Federal Register sometime this month, it is unclear whether companies with a September 30 quarter-end will be required to include the new disclosures in their upcoming 10-Qs. We understand that the SEC staff expects to issue guidance on the applicability of the Final Rules, but in the meantime, companies should be mindful of the new requirements and the procedures they will need to have in place to comply with them.
SEC Provides Hurricane Florence Relief
As has happened for other natural disasters, the SEC provided relief yesterday to victims of Hurricane Florence – including companies who need deadline extensions (including S-3 eligibility needs). There’s the SEC’s order – and these interim final temporary rules – so that you can see if you’re eligible. Of course, if you’re eligible, you likely don’t have power & can’t read this…
Senator Warren’s New “Climate Change Disclosure” Bill
Here’s the news from Davis Polk’s Ning Chiu in this blog:
The “Climate Risk Disclosure Act,” introduced by Senator Warren, would require the SEC to issue rules for every public company to disclose:
– Its direct and indirect greenhouse gas emissions
– The total amount of fossil-fuel related assets that it owns or manages
– How its valuation would be affected if climate change continues at its current pace or if policymakers successfully restrict greenhouse gas emissions to meet the Paris accord goal; and
– Its risk management strategies related to the physical risks and transition risks posed by climate change
The SEC can tailor the rules to different industries, and impose additional requirements on companies in the fossil fuel industry.
For the many of you that have registered for our Conferences coming up next Tuesday, September 25th, we have posted the “Course Materials” (attendees received a special ID/PW yesterday via email that will enable you to access them; note that copies will be available in San Diego). The Course Materials are better than ever before – with numerous sets of talking points. We don’t serve typical conference fare (ie. regurgitated memos and rule releases); our conference materials consist of originally crafted practical bullets & examples. Our expert speakers certainly have gone the extra mile this year!
Here is some other info:
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take a few hours to post the video archives after the panels are shown live). A prominent link called “Enter the Conference Here” – which will be visible on the home pages of those sites – will take you directly to the Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5, Windows Media or Flash Player).
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here are the conference agendas; times are Pacific.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if it’s possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see our “CLE Credit By State” list.
– Register Now to Watch Online: There is still time to register for our upcoming pair of executive pay conferences – which starts on Tuesday, September 25th – to hear Keith Higgins, Meredith Cross, etc. If you can’t make it to San Diego to catch the program in person, you can still watch it by video webcast, either live or by archive. Register now to watch it online.
– Register to Watch In-Person in San Diego: Starting this Saturday, you will no longer be able to register online to attend in San Diego – but you can still register to attend when you arrive in San Diego! You just need to bring payment with you to the conference and register in-person. Through the end of this Friday, you can still register online to attend in-person in San Diego. And you can always register online to watch the conference online…
E&S Proxy Disclosure: Good Examples
In our “Q&A Forum” (#9598), we were recently asked which companies did a good job providing proxy disclosure about their E&S situation. There are many to choose from – but we mentioned these:
– State Street
– Citigroup
– Prudential
– Jet Blue
– Entergy
Lead Audit Engagement Partners? Not Many Women
Here’s the lowlights from this new report from the CFA Institute based on the new “lead audit engagement partners” disclosure made by companies in their proxies this year (the report covers much more ground than gender of the lead partners):
– Only 15% of lead engagement partners of the S&P 500 were female
– Only 11% of lead engagement partners of the S&P 100 were female
– Percentages of female lead engagement partners by S&P 500 firms were Deloitte (20.8%), PwC (16.3%), EY (12.9%), and KPMG (10.6%)
– 30% of the S&P 500 were audited by PwC, 31% by EY, 20% by Deloitte, and 19% by KPMG
– We found no female partners among the 36 longest tenured engagements (those over 75 years) in the S&P 500
– We found only 6 female partners in the 107 companies with auditor relationships exceeding 40 years
On Friday, I blogged about how the SEC’s Division of Investment Management issued this statement that – ahead of the upcoming “proxy plumbing” roundtable – it was withdrawing two no-action letters granted in 2004 to ISS and Egan-Jones Proxy Services. In that blog, I gave some initial thoughts that related mainly to SEC Chair Clayton’s statement about informal Staff guidance in general. Here’s some of my thoughts about IM’s withdrawal in particular:
1. What Does This Mean for the “Proxy Plumbing” Roundtable? – I worry that this means that the upcoming “proxy plumbing” roundtable (date not set yet; likely in November) – and perhaps the SEC’s “proxy plumbing” project as a whole – will focus mainly on proxy advisors. There is so much more to tackle than just proxy advisor reform, as Commissioner Jackson articulated nicely in his statement last week.
2. Any “Real World” Impact? – I doubt IM’s withdrawal of the two no-action letters will cause investors to suddenly drop their use of proxy advisors. It’s standard practice for an adviser to avoid a conflict by delegating the responsibility to someone who doesn’t have the same conflict.
3. Withdrawal Didn’t Change the Law? – There is a solid argument that last week’s withdrawal of the ’04 letters hasn’t really changed the law. That “conflicts” law was on the books before the letters were issued – see this ’03 adopting release (in particular, see the section about resolving conflicts of interest). The letters didn’t create a safe harbor. In fact, the letters probably never should have been issued because the requests were motivated by a competitive spat between Egan-Jones and ISS.
The ’03 adopting release was a Commission action, not a Staff one. I should also note that last week’s withdrawal didn’t extend to Staff Legal Bulletin No. 20. That 2014 bulletin – issued by both IM and Corp Fin – provides guidance to advisers on voting client proxies and retaining proxy advisory firms, and makes reference to both of the withdrawn no-action letters. SLB #20 promises to be a big topic of conversation during the proxy plumbing roundtable.
4. How Much Do Companies Rely on Proxy Advisors? – As I’ve blogged several times over the years, be careful what you wish for if you’re hoping for the demise of proxy advisors (a different issue than conflicts). If proxy advisors disappear, that means there will be a need for more shareholder engagement as companies try to ascertain how their biggest shareholders intend to vote. And even if companies are willing & able to staff up their corporate secretary departments to facilitate that, that might not be the case for investors themselves. In other words, your phone calls may go unanswered – and you may get deep into the proxy season without a firm sense of knowing how your votes will turn out. I blogged about this initially way back when – and again a year later.
Do Courts Give Deference to SEC Staff Guidance?
As for the notion that SEC Staff guidance doesn’t carry the force of law, that may be true – but there are cases that indicate Staff guidance has some influence with the judiciary. For example, here’s an excerpt from Ganino v. Citizens Utilities (US Court of Appeals – 2nd Cir.; 9/00):
With respect to financial statements, the SEC has commented that various “[q]ualitative factors may cause misstatements of quantitatively small amounts to be material.” SEC Staff Accounting Bulletin (“SAB”) No. 99, 64 Fed.Reg. 45150, 45152 (1999) (to be codified at 17 C.F.R. pt. 211, subpt. B) (representing interpretations and practices followed by the SEC’s Division of Corporation Finance and the Office of the Chief Accountant in administering disclosure requirements of federal securities law).6 Of particular relevance to this action are the following:
- whether the misstatement masks a change in earnings or other trends
- whether the misstatement hides a failure to meet analysts’ consensus expectations for the enterprise[.]
Id. Unlike, for example, a rule promulgated by the SEC pursuant to its rulemaking authority, see 15 U.S.C. § 78w(a), SAB No. 99 does not carry with it the force of law. See, e.g., Christensen v. Harris County, 529 U.S. 576, 120 S.Ct. 1655, 1662-63, 146 L.Ed.2d 621 (2000) (explaining that interpretations contained in opinion letters, like those in policy statements, agency manuals, and enforcement guidelines, which are not, for example, the result of a formal adjudication or notice-and-comment process, lack the force of law); General Elec. Co. v. Gilbert, 429 U.S. 125, 141, 97 S.Ct. 401, 50 L.Ed.2d 343 (1976) (stating that courts may give less weight to guidelines than to administrative regulations which Congress has declared shall have the force of law or to regulations which, under the enabling statute, may themselves supply the basis for imposition of liability) (superseded by statute on other grounds).
Nonetheless, because SEC staff accounting bulletins “constitute a body of experience and informed judgment,” Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 89 L.Ed. 124 (1944), and SAB No. 99 is thoroughly reasoned and consistent with existing law-its non-exhaustive list of factors is simply an application of the well-established Basic analysis to misrepresentations of financial results-we find it persuasive guidance for evaluating the materiality of an alleged misrepresentation. See Christensen, 529 U.S. 576, 120 S.Ct. at 1663 (quoting Skidmore, 323 U.S. at 140, 65 S.Ct. 161); Gilbert, 429 U.S. at 125, 97 S.Ct. 401.
Another example is U.S. v Miller, 833 F.3d 274 (D.C. Cir., Mar. 15, 2016): “We defer to [The SEC staff Guidance in Release 1092] because of the SEC’s expertise and the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.” (internal cites and quotes omitted).
Tomorrow’s Webcast: “Blockchain in M&A”
Tune in tomorrow for the DealLawyers.com webcast – “Blockchain in M&A” – to hear Potter Anderson’s Chris Kelly, Matt O’Toole and Mike Reilly discuss the implications of blockchain technology for M&A transactions – as well as what it may mean for busted deals & the inevitable litigation that follows. Please print these “Course Materials” in advance.
Yesterday, the SEC came out with two salvos against “informal” staff guidance. First, there was this statement from SEC Chair Jay Clayton reminding us that all Staff guidance is non-binding (ie. creates no enforceable legal rights or obligations for the SEC or other parties) because it hasn’t been subject to notice & comment under the Administrative Procedures Act. That statement noted that the SEC “will continue to review whether prior staff statements and staff documents should be modified, rescinded or supplemented in light of market or other developments.”
A few moments later, the Division of Investment Management issued this statement that – ahead of the upcoming “proxy plumbing” roundtable – it was withdrawing two no-action letters granted in 2004 to ISS and Egan-Jones Proxy Services. This Cooley blog does a nice job of explaining what the letters were about – here’s an excerpt:
By way of background, as fiduciaries, investment advisers owe their clients duties of care and loyalty with respect to services provided, including proxy voting. Accordingly, in voting client securities, an investment adviser must adopt and implement policies and procedures reasonably designed to ensure that the adviser votes proxies in the best interest of its clients.
The two now-withdrawn no-action letters indicated that one way advisers could demonstrate that proxies were voted in their clients’ best interest was to vote client securities based on the recommendations of an independent third party—including a proxy advisory firm—which served to “cleanse” the vote of any conflict on the part of the investment adviser. Historically, investment advisers have frequently looked to proxy advisory firms to fill this role. As a result, the staff’s guidance was often criticized for having “institutionalized” the role of—and, arguably, the over-reliance of investment advisers on—proxy advisory firms, in effect transforming them into faux regulators.
IM’s statement noted that the withdrawal would “facilitate” discussion at the roundtable. Based on some of the reactions to the withdrawal (see Commissioner Jackson’s statement), it may do more than “facilitate” – it may lead to “fisticuffs”…
My Ten Cents: What to Do With “Informal” Staff Guidance?
The movement against “informal” Staff guidance has been growing over the past decade. And it’s not just at the SEC – the GOP-led attacks have focused on all of the federal agencies. Here’s a few quick thoughts:
1. Government-Wide Movement – The DOJ was the first to emphasize it wouldn’t conduct “rulemaking by guidance” late last year – see this blog. As noted in this Cooley blog, a bunch of the banking regulators issued something along these lines earlier this week.
2. Chamber’s Influence – Having these proxy advisor no-action positions overturned has been a plank in the US Chamber’s platform for some time (for example, see pages 10-11 of this Chamber letter for their arguments about why the Staff should have never granted those letters). It wasn’t that long ago that I blogged that the Chamber seemed to be losing influence. Spoke too soon?
3. Impact on You – In practice, we rely heavily on the guidance that Corp Fin provides us – CDIs, no-action letters, Staff Legal Bulletins, FAQs, speeches and even informal comments at conferences. What does our world look like if we need to rely on a small group of SEC Commissioners to perform that function? Remember that the Commissioners are not even allowed to meet as a group except in very limited circumstances due to the Sunshine Act.
4. Shorter Adopting Releases Too? – As noted in this blog, it wasn’t even that long ago that one SEC Commissioner wanted the guidance provided by the Commissioners in the SEC’s adopting releases to be shorter!
5. Collector’s Items – This one is completely an “aside.” It’s hard to find the Egan-Jones and ISS letters online – these letters were issued by the Division of Investment Management. And I believe by withdrawing them, IM might have pulled them from their list of posted letters. Which makes sense since they are withdrawn. So the letters are now officially a “collector’s item.”
Poll: What Will You Do Without “Informal” Staff Guidance?
Please take a moment for this anonymous poll about a lack of informal SEC Staff guidance:
As you probably know, the SEC maintains a library of blank forms on its website – including all three of the Section 16 forms. It has come to our attention that the SEC currently has an outdated Form 4 posted – one that harkens back to pre-Sarbanes-Oxley days. This form is outdated, even though it has the first-blush appearance of being current with an OMB approval date in the top right corner of September 2018!
For those too young to remember, before Sarbanes-Oxley was enacted in 2001, Form 4 had a due date tied to the end of each month. The outdated form contains Table II language (see Column 9) about “owned as of the end of the month” – rather than language that should read “owned after the reported transaction.” And the heading for Column 10 should actually say: “Ownership Form of Derivative Security: Direct (D) or Indirect (I)”. So make sure you’re not using this blank form as it doesn’t comport with the SEC’s rules. I imagine the SEC will correct this mistake soon…
Gibson Dunn’s Mike Titera notes that because the templates for Section 16 forms are actually controlled by the SEC’s website (unlike other forms that are filed by uploading the document via Edgar), it appears that no one can actually file the old Form 4 on the SEC’s “Forms” page.
With the traffic to the transcript for our recent webcast – “Insider Trading Policies & Rule 10b5-1 Plans” – bearing out that this is the most popular program of the year, I thought I would share some of the practical guidance I learned:
Alan Dye, Partner, Hogan Lovells LLP and Editor, Section16.net: It’s become increasingly clear in recent years that a company’s announcement of a cyber breach can have a material adverse effect on both the company and the company’s stock price, so the challenge in the cybersecurity context is twofold.
First, having a process that allows the technical people who understand when a hack has been attempted or has occurred, and who understand what its consequences might be, to be in a position to identify quickly (in light of the SEC’s release) whether there has been an attempted hack in the company’s data systems that could have resulted in a material breach.
Second, escalating those potential material breaches to a level where the general counsel and other senior managers who are in a position to assess potential materiality can make that assessment and decide whether either disclosure is required, or in this context, a trading blackout is appropriate.
In practice, neither of those steps is necessarily easy. For many companies, an attempted breach of the security systems is a daily occurrence. Most of those occurrences turn out to be insignificant. If every one of those incidents led to an immediate blackout or an escalation of the issue to senior executive levels to assess materiality, the window might never open and the process itself could consume inordinate amounts of time.
The balance that companies try to achieve is to make that process both efficient and effective, without overburdening the process. Companies should consider the development of an incident response plan. Many companies are already considering or implementing an incident response plan.
The incident response plan is separate from the insider trading policy. I don’t think the insider trading policy needs to be bogged down with processes for addressing cybersecurity breaches. What the incident response plan does is establish a process at the technical staff level, so the IT group can identify incidents that might constitute a material breach. The incident response plan also includes escalation protocols. Once a potential material breach has been identified, then the breach is escalated so that the general counsel, senior management, or whoever is going to make the assessment of materiality, and whether to open or close the window, can make that assessment.
That process is not unique to or isolated to the insider trading policy, but it generally is and should be integrated into the company’s disclosure controls & procedures, since a breach raises disclosure issues as well as insider trading policy issues.
That process is going to succeed only if the general counsel and senior management, once an incident has been escalated, understand IT systems and understand the tech-speak that tends to come from the people in the IT department, well enough to make a judgment about its materiality. Some companies go so far as to engage in tabletop exercises, where after they’ve developed and put in place an incident response plan, they simulate a breach and an escalation. That process can familiarize both the technical staff who escalate the issue, and the executives and the GC who must make the determination whether that breach might be material, with the appropriate terminology and the analysis that needs to be undertaken.
It’s a nascent area of insider trading policies, so I don’t pretend to know how it’s all going to play out. There hasn’t yet been any case, to my knowledge, where an incident response plan has been put in place and led to either closing or opening the window. I have seen some simulation exercises and they can be puzzling, initially, to those of us who don’t speak “tech” when it comes to cybersecurity exercises.
Howard Dicker, Partner, Weil, Gotshal & Manges LLP: A company should also consider specifically, by prohibiting or warning against, an employee’s participation in a so-called “expert network.” An expert network is not about artificial intelligence or machine-based learning. Rather, it typically involves a firm. There are companies or firms out there that connect hedge funds and other investors with subject matter experts or industry experts.
These experts speak directly to the hedge funds and receive an hourly consulting fee. Some company employees may be interested in earning extra money this way. Some of the largest SEC insider trading cases have involved expert networks, and the allegations were of company employees tipping information not only about their own company, but also about company customers.
The employees involved were not senior executives who were subject to blackout periods and pre-clearance policies, but rather non-executive employees with a high degree of responsibility within the company. The information shared might not have been obviously MNPI, but it was obviously confidential.
I find that employee and director education and training is particularly critical for avoiding inadvertent disclosures of confidential information, and the related potential liabilities, costs, and damages to the employee, director and the company.
