When you find a mistake in the financials, one of the first questions that must be answered – after you stop hyperventilating – is “how do we correct the error?” This Audit Analytics blog reviews how companies have answered that question in recent years. The blog says that there’s been a trend away from restatements & toward the more benign “out-of-period adjustments” – and suggests that better internal controls may be part of the reason for it.
This excerpt reviews the issues that most frequently resulted in out-of-period adjustments and restatements during the period from 2009-2016:
When it comes to which types of issues are being corrected via out-of-period adjustments, taxes topped the list for the last 8 years. In 2016, companies recorded 85 tax related out-of-period adjustments – 26% of all the out of period adjustments recorded during the year. Second and third of the top issues were liabilities (14%) and revenue recognition (12%).
The most common issues being corrected differ when looking at restatements. Securities (debt, quasi-debt, warrants & equity) issues ranked at the top, comprising 17.6% of restatements in 2016, whereas they account for only 5.8% of out-of-period adjustments during the same year. Classification issues was the next most common restatement issue (14.2% of all 2016 restatements).
Ultimately though, the deciding factor between a restatement and an out-of-period adjustment is materiality, and the blog notes that when it comes to materiality, size matters. For most of the periods surveyed, the largest restatement was bigger than the largest out of period adjustment.
SEC’s Shutdown: “Keep On Rockin’ In The Free World. . .”
The government shutdown caused a lot of financial hardship, so we tip our hats to the band “G.O.A.T. Rodeo” – which played a concert in DC last week to provide some free entertainment and raise a little money for displaced federal workers. It turns out that the membership of the band isn’t what you might expect. As this Bloomberg Business Week article notes, the SEC Staff is well represented in the band:
The U.S. Securities and Exchange Commission lawyers who took the stage at Washington’s Rock & Roll Hotel Thursday night have won accolades for suing Goldman Sachs Group Inc. and writing rules for Wall Street traders. This time, their greatest hits were more of the heavy metal variety.
Prompted by the government shutdown, the SEC workers — who moonlight in a band called G.O.A.T. Rodeo — played a concert for fellow furlough victims. The plan was to raise some money for a charitable fund that helps federal employees and blow off some pressure that’s been building over the past month.
“We’ve been going a little crazy around my house, stir crazy, not working,’’ said Stacy Puente, an SEC attorney, before she launched into Ozzy Osbourne’s hit “Crazy Train.” The crowd, many of whom were also missing paychecks and unable to go to their jobs at the SEC and other agencies, nodded their heads and pumped fists in the air.
Vocalist Stacy Puente was joined by SEC enforcement lawyer Reid Muoio on drums, while other SEC staffers played lead guitar & keyboards. By the way, I love the band’s name – and there’s nothing more appropriate than having a band named “G.O.A.T. Rodeo” play a fundraiser for people feeling the pain of our national “goat rodeo.”
Transcript: “Pat McGurn’s Forecast for 2019 Proxy Season”
We have posted the transcript for our recent webcast: “Pat McGurn’s Forecast for the 2019 Proxy Season.”
Over the weekend, SEC Chair Jay Clayton posted a statement saying that the SEC has “resumed normal staffing levels and is returning to normal operations.” But this excerpt seems to acknowledge that getting back to full speed is going to take some real effort:
The leaders of our Divisions and Offices, in consultation with various members of our staff, are continuing to assess how to most effectively transition to normal operations. Certain of these Divisions and Offices, including our Divisions of Corporation Finance, Trading and Markets, Investment Management and our Office of Compliance Inspections and Examinations, will be publishing statements in the coming days regarding their transition plans.
As promised, Corp Fin subsequently posted its own statement – and said that when it comes to tackling its backlog, the general approach is going to be “first come, first served. Here’s an excerpt:
The Division of Corporation Finance is returning to normal operations. In general, we anticipate addressing filings, submissions and requests for staff action based on when an item was submitted. In other words, absent compelling circumstances, we expect to address matters in the order in which they were received.
Corp Fin’s statement also notes that although the Staff will be available to respond to questions, “their response time may be longer than ordinary.” That shouldn’t surprise anyone. The shutdown has led to a big logjam in IPOs, and has thrown a monkey wrench into the 14a-8 no-action process. While those issues have gotten most of the attention, I can only guess at the backlog of ’34 Act comment letters and other ordinary course business that the Staff will have to work through.
In short, the Staff has a big mess that it’s going to have to clean up over the coming weeks. At the same time, private sector lawyers are going to be under a lot of pressure to get their client’s projects moving again. Both sides of the table should cut each other some slack as we work through this. We didn’t make the mess – but when it comes to the cleanup, we’re all in this together.
Check out this Skadden memo, this Cooley blog and this Weil blog for more information about Corp Fin’s grand reopening – including a discussion of IPO & shareholder proposal-related issues.
Registration Statements: What If You Pulled The Delaying Amendment?
As Broc blogged last month, during the shutdown, the SEC invited companies with pending registration statements to pull their delaying amendments. For companies that opted to do that, the question becomes, “now what do we do?” Here’s what Corp Fin’s statement says:
Consistent with the Division’s Questions and Answers in connection with its statement regarding Actions During a Government Shutdown, some registrants omitted or removed delaying amendments from their registration statements. We will consider requests to accelerate the effective date of those registration statements if they are amended to include a delaying amendment prior to the end of the 20 day period and acceleration is appropriate.
In cases where we believe it would be appropriate for a registrant to amend to include a delaying amendment, we will notify that registrant. We remind registrants that Rule 430A is only available with respect to registration statements that we declare effective and is not available to registration statements that go effective as a result of the passage of time.
So, the bottom line appears to be that if you’ve pulled a delaying amendment & the Staff has an issue with that (such as unresolved comments), they’ll let you know. Otherwise, they’ll leave you to your fate – unless you add the amendment back yourself.
Tomorrow’s Webcast: “Controlling Shareholders – The Latest Developments”
Tune in tomorrow for the DealLawyers.com webcast – “Controlling Shareholders: The Latest Developments” – to hear Potter Anderson’s Brad Davey, Cravath’s Keith Hallam, Greenberg Traurig’s Cliff Neimeth and Sullivan & Cromwell’s Melissa Sawyer discuss the latest developments surrounding transactions involving controlling shareholders.
This recent Bloomberg Law blog describes a shareholder proposal – and a company’s response – that you definitely don’t see every day. Here’s the intro:
The recent no-action request from Johnson & Johnson to exclude a shareholder proposal from its proxy materials creates a rather unique dynamic. It is indeed an unusual day when a shareholder submits a proposal that could curtail investor rights, and the company responds with a full-throated defense of the shareholders’ right to file suit against it.
That peculiar set of circumstances resulted from an investor request to have the Johnson & Johnson board adopt a bylaw requiring the arbitration of all claims brought by investors arising under the federal securities laws, and providing that any such claims may not be brought as a class and may not be consolidated or otherwise joined.
Geez, and I thought it was odd when Steelers fans were rooting for the Browns to beat Baltimore a few weeks back. . . Anyway, the shareholder proponent is Hal Scott, an emeritus Harvard Law School prof who’s a long-time opponent of shareholder class action litigation.
This situation has produced some very strange bedfellows – check out the signatories to this recent letter to SEC Chair Jay Clayton urging it to grant the no-action relief that J&J’s requested and to reaffirm the SEC’s position that arbitration clauses violate the securities laws.
ESG: Why Boards Should Care About the SASB’s Sustainability Standards
I recently blogged about the SASB’s adoption of he first-ever industry-specific sustainability accounting standards designed to facilitate communication of financially-material sustainability information to investors. This BDO memo reviews the new standards and provides an overview of both SEC-mandated sustainability disclosures & the information increasingly demanded by investors.
The memo acknowledges that sustainability has been a back-burner issue for many corporate boards, but says there are reasons that companies should embrace the new standards and the enhanced sustainability disclosure they contemplate. Potential benefits of this approach include:
– Realization:Tangible returns being realized in adoption of sustainable practices
– Competitive differentiator: Use of voluntary disclosure as opportunity to tell unique stories to the marketplace which can serve as competitive differentiators
– Capitalizing on investment trends: Cultivation and incorporation of evolving investing practices in companies that can demonstrate long term value creation initiatives
– Demonstration of connected corporate strategy: Strengthening corporate strategy with forward-thinking, sustainable practices
– Engagement of shareholders: Getting out in front of the threat of increasing shareholder proposals focused on ESG
– Protect reputation and improve public relations: Communicating fulfillment of a deemed duty by the market as a “good corporate citizen”
– Attraction and retention of talent: A potential further differentiator in war for attracting and retaining good talent
If these reasons aren’t enough, this Davis Polk blog offers another one – rating agencies are increasing their focus on ESG risks.
SEC Shutdown: ALJs Ordered to Stand Down
Yesterday, the SEC issued this updated statement on its operations during the shutdown. Among other things, that update says that the agency is still at work on “emergency enforcement matters,” including “investigations of ongoing fraud or conduct that poses a threat of imminent harm to investors, such as ongoing fraud or misconduct.”
But it’s far from business as usual on the enforcement front. In fact, pending SEC administrative proceedings are among the government shutdown’s latest casualties. On Tuesday, the SEC issued this order staying all pending administrative proceedings. This excerpt gives you the gist of it:
The Commission stays all pending administrative proceedings initiated by an order instituting proceedings that set the matter down for a hearing before either an administrative law judge or the Commission. The stay is effective immediately and shall remain operative pending further order of the Commission.
The order permits parties to ask that the stay be lifted, but only in very limited situations, such as in the case of “emergencies involving the safety of human life or the protection of property.”
People seem to ponder, contemplate & generally ruminate over the annual letter from BlackRock’s CEO Larry Fink like it’s a pronouncement from the Oracle at Delphi. Since it gets so much attention, I guess we shouldn’t be all that surprised that somebody would decide to issue a fake version of this year’s letter. Here’s an excerpt from this Barron’s article:
Larry Fink’s annual letter to Corporate America is widely anticipated. But an email Wednesday purporting to be from the BlackRock CEO that was sent to media outlets, including Barron’s, wasn’t the real thing—even though it contained lofty rhetoric and finger-wagging about the risks of climate change, one of Fink’s favorite subjects. It also included a series of purported initiatives including an eyebrow-raising plan to divest from fossil fuel companies.
The hoaxters were certainly media-savvy, not to mention thorough: The fake letter was accompanied by a fake website, and followed by a separate, fake statement from one of BlackRock’s top public relations people. A (real) BlackRock spokesman said the company is investigating.
BlackRock posted the real version of Fink’s letter later in the day. A CNBC story says that the hoax is being pinned on environmental activists, and Barron’s characterized the perpetrator of the hoax as a “prankster,” but I guess I have my doubts. The hoax was elaborate, timed to coincide with BlackRock’s earnings release, and appears to have been designed to move markets. It seems at least possible that “fraudster” may turn out to be a more apt characterization than “prankster.”
Yesterday was a big day for elaborate media hoaxes. If you’re looking for “pranksters,” the activists responsible for the fake edition of yesterday’s Washington Post appear to fit the bill. Notorious Democratic prankster & Richard Nixon tormentor Dick Tuck would’ve been proud.
CEO Activism: Should CEOs Speak Out or “Shut Up & Sing”?
Larry Fink hasn’t been shy about speaking out on social issues, but historically, most corporate CEOs have been pretty averse to the idea of wading into the public debate on social or political topics. There’s a perception that this is changing – and a growing debate about whether CEOs should speak out or just “shut up and sing.” This Stanford study takes a look at the prevalence of CEO activism, the range of advocacy positions taken by CEOs, and the public’s reaction to it.
The study concludes that CEO activism in the media isn’t as widespread as it may be perceived, with only 28% of S&P 500 and 12% of S&P 1500 CEOs making public statements about social, environmental or political issues. Those statements generally were concentrated in a handful of areas – with diversity, environmental issues, and immigration and human rights being the most prevalent. When it comes to social media, only 11% of S&P 1500 CEOs have Twitter accounts, and less than half of them used Twitter as a platform for this type of advocacy.
The study found that the public’s reaction to CEO activism on these topics was mixed. Here’s an excerpt with the details:
In a survey of 3,544 individuals, the Rock Center for Corporate Governance at Stanford University found that two-thirds (65%) of the public believe that the CEOs of large companies should use their position and potential influence to advocate on behalf of social, environmental, or political issues they care about personally, while one-third (35%) do not.
Members of the public are most in favor of CEO activism about environmental issues, such as clean air or water (78%), renewable energy (68%), sustainability (65%), and climate change (65%). They are also generally positive about widespread social issues, such as healthcare (69%), income inequality (66%), poverty (65%) and taxes (58%).
The public reaction is much more mixed about issues of diversity and equality. Fifty-four percent of Americans support CEO activism about racial issues, while 29% do not; 43% support activism about LGBTQ rights, while 32% do not; and only 40% support activism about gender issues,while 37% do not. Contentious social issues—such as gun control and abortion—and politics and religion garner the least favorable reactions. Of these issues, CEOs speaking up about gun control is the only one with a net-favorable position (45% favorable versus 35% unfavorable). Abortion (37% versus 39%), politics (33% versus 43%), and religion (31% versus 45%) all elicit net-unfavorable reactions.
When it comes to consumer behavior, the study says that Americans are significantly more likely to recall products or services they used less of based on a CEO’s comments than to recall those they used more of in response to those comments. The study says that demonstrates that CEO activism is a double edged sword – while it can build customer loyalty, it can also alienate large segments of the customer base.
– Cross-Border Carve-Out Transactions
– The Odd Couple: Indemnification and R&W Insurance
– Fairness Opinions: How to Avoid Provider Conflicts
– Standards of Review: When the Controlling Shareholder Isn’t a Buyer
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In light of the government shutdown, I really wasn’t expecting any bombshell announcements from the SEC any time soon. Well, that shows you what I know, because yesterday the SEC announced that it had snagged the alleged perpetrators of the infamous 2016 hack of the Edgar system. Here’s an excerpt from the SEC’s press release:
The Securities and Exchange Commission today announced charges against nine defendants for participating in a previously disclosed scheme to hack into the SEC’s EDGAR system and extract nonpublic information to use for illegal trading. The SEC charged a Ukrainian hacker, six individual traders in California, Ukraine, and Russia, and two entities. The hacker and some of the traders were also involved in a similar scheme to hack into newswire services and trade on information that had not yet been released to the public. The SEC charged the hacker and other traders for that conduct in 2015.
The SEC’s complaint alleges that after hacking the newswire services, Ukrainian hacker Oleksandr Ieremenko turned his attention to EDGAR and, using deceptive hacking techniques, gained access in 2016. Ieremenko extracted EDGAR files containing nonpublic earnings results. The information was passed to individuals who used it to trade in the narrow window between when the files were extracted from SEC systems and when the companies released the information to the public. In total, the traders traded before at least 157 earnings releases from May to October 2016 and generated at least $4.1 million in illegal profits.
Here’s the SEC’s complaint – which lays out how the hackers allegedly exploited Edgar test filings for fun & profit. The SEC’s press release notes that this isn’t its first go-around with Oleksandr Ieremenko. This guy was allegedly one of the masterminds behind one of the largest securities frauds schemes of all time. As Broc blogged at the time, Iremenko and others hacked into 150,000 earnings releases over a 5-year period, & the info they obtained resulted in over $100 million in illicit profits. Check out this article for more details on Oleksandr Ieremenko & how that scam came to be.
Parallel criminal charges have been brought against the defendants by the New Jersey US Attorney’s office. Criminal charges also were brought in connection with the newswire hack – which raises the question of why Mr. Ieremenko isn’t making big rocks into little rocks as a guest of the US government? Well, it turns out that he’s in Kiev, and the Ukraine does not extradite its citizens.
Gun Jumping: “I’m Not Dead. . . I’m Getting Better”
I hope you aren’t getting tired of my Monty Python references – but after reading this blog from Bass Berry’s Jay Knight about some recent Staff comments on “gun jumping,” I couldn’t resist borrowing from The Holy Grail’s “Bring Out Your Dead” scene for this blog’s title. Jay says that, like the old man in the movie, gun jumping’s not dead yet:
Despite the trend toward a more relaxed approach on offering related communications, gun jumping in some form or another is still alive and well for most offerings conducted, and securities lawyers continue to provide counsel to management on how to navigate the potential minefield.
For example, in monitoring SEC comment letters I came across this SEC comment letter recently made public, which asks the issuer to explain why gun jumping laws were not violated when two of its shareholders issued press releases with respect to the issuer’s confidential IPO submissions and an article on the same matter was published in the Israeli business newspaper Globes.
Jay says that the company’s response appeared to satisfactorily address the Staff’s concerns (it appears no follow-up comments were issued). He also reviews the still hale & hearty ground rules for avoiding potential gun jumping issues in securities offerings.
ICOs: The Crypto’s Blowin’ Up on Reg D
Although at least one token sponsor has publicly filed an S-1 & a few others have made confidential draft S-1 filings in preparation for registered ICOs, MarketWatch’s Francine McKenna reports that Reg D remains the preferred path for coin offerings:
MarketWatch counted 287 ICO-related fundraisings accepted by the SEC with a total stated value of $8.7 billion in 2018, peaking at 99 in the second quarter. That’s a significant increase from 44 fundraisings filed with a total stated value of $2.1 billion in 2017.
As we blogged early last year, Francine previously reported that reliance on Reg D skyrocketed following the SEC’s issuance of guidance on coin offerings in 2017, and it looks like it that trend remained strong throughout 2018.
I probably should preface this blog by conceding that when it comes to constitutional law, I was never anybody’s idea of SCOTUS clerk material. In fact, about all I can remember from my Con Law class is the time that Prof. Howard called on me and began his questioning with “Mr. Jenkins, Justice Black dissents in this case. . .” To which I responded, “Yes he does, Professor – and I pass.”
Anyway, some lawyers for The Cato Institute who obviously paid more attention in Con Law than did I have filed a federal lawsuit on behalf of the libertarian think tank challenging the constitutionality of the SEC’s Rule 202.5(e). That rule reads as follows:
The Commission has adopted the policy that in any civil lawsuit brought by it or in any administrative proceeding of an accusatory nature pending before it, it is important to avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact, occur. Accordingly, it hereby announces its policy not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings. In this regard, the Commission believes that a refusal to admit the allegations is equivalent to a denial, unless the defendant or respondent states that he neither admits nor denies the allegations.
This rule is why every SEC settlement contains language providing that the defendant “neither admits nor denies” the SEC’s allegations. In its complaint, Cato says it wants to publish a book critical of the Division of Enforcement written by a former target of an SEC enforcement action, but alleges that the “neither admit nor deny” language in the author’s settlement effectively prevents it from doing so. Cato says that what it refers to as the SEC’s “gag rule” is a content-based restriction on speech that’s prohibited under the 1st Amendment.
Over the years, the SEC’s “neither admit nor deny” settlement policy has come in for plenty of criticism. After the financial crisis, critics complained about the SEC’s failure to require admissions of wrongdoing in its settlements with major financial institutions. That ultimately led the SEC to adopt a policy of requiring admissions in some instances.
This time, the SEC’s rule is facing challenges from the “Kill the Administrative State! Kill it with Fire!” side of the political spectrum – and this lawsuit is not the first time the rule has been questioned on 1st Amendment grounds. In October of last year, a rulemaking petition was filed with the SEC challenging the rule’s constitutionality & calling for its revision.
Now, this is where those caveats about my ineptitude as a constitutional scholar come into play. Despite my complete lack of qualifications, I’m going to play the pundit & speculate that this lawsuit just might get some traction. The federal courts are becoming less deferential to regulatory agencies – as evidenced by last summer’s SCOTUS decision invalidating the SEC’s ALJ appointment process. My guess is that this lawsuit may get a boost from the current “Death to the Administrative State!” zeitgeist – but recent experience also suggests that proponents should be careful what they wish for.
SEC Shutdown: “Rules? We Ain’t Publishin’ No Stinkin’ Rules!”
Meanwhile, as America nears the four week mark in its anarchy experiment, over on our ’Q&A Forum’ (#9717) people are starting to wonder what’s become of the rules the SEC adopted before the shutdown. Here’s one member’s question:
On December 19, 2018, the SEC adopted final rules regarding the amendment of Regulation A. I’ve yet to see them published in the Federal Register (or the Govinfo site). Any insight as to why not, and any idea when we can expect this?
In his answer, Broc pointed to the shutdown as the likely culprit for the delay in publication. That’s certainly part of it, but I imagine some of the delay also may be associated with the need to press the remaining essential employees at the Gov. Printing Office into service delivering 300 Big Macs & assorted other fast food delicacies to the White House.
I guess some expected fancier fare for the Clemson Tigers, but as someone who once ate 4 Sausage McMuffins with Egg at the Angola service area on the NYS Thruway & enjoyed a “Royale with Cheese” at the Louvre, it’s all good with me.
Transcript: “GDPR’s Impact on M&A”
We have posted the transcript for the recent DealLawyers.com webcast: “GDPR’s Impact on M&A.”
As we blogged when the government shutdown started a few weeks ago, Corp Fin issued a set of FAQs to help us since its down to a skeletal level of staffing. Corp Fin has now updated its FAQs to revise #4 and 5 – and to add #6 and 9.
New #6 deals with removing a delaying amendment when you have unresolved staff comments on your filing (the answer is “yes, but you’re still responsible for the completeness & accuracy of the disclosure”) – #9 deals with the Staff considering a request for emergency relief under Rule 3-13 of Reg S-X (the answer is “not likely unless there needs to be protection of property”). Kudos to the Staff for numbering the FAQs!
Removing the Delaying Amendment: Need “Magic Words” to Start the Clock
Broc blogged last week about some examples of companies that removed the delaying amendment – and noted the lack of uniformity in the language. If you’re thinking of doing this, be sure to check out the update to FAQ #5. As this excerpt notes, merely deleting the delaying amendment won’t get the 20 day clock running:
Simply omitting the delaying amendment from an amendment will not begin the 20 day period. A company that intends to remove the delaying amendment must amend its registration statement to include the following language provided by Rule 473(b) – “This registration statement shall hereafter become effective in accordance with the provisions of section 8(a) of the Securities Act of 1933.” It must also amend to include all information required by the form, including the price of the securities it will sell.
FAQ #5 also highlights the fact that Rule 430A isn’t available in the absence of a delaying amendment – it can only be used for registration statements that are declared effective by the Commission or the Staff.
Privacy: California’s Consumer Privacy Act is Coming – And So Are Class Actions
If you’re feeling lucky that your company has largely dodged the GDPR bullet, I’ve got some bad news for you – California’s recently enacted consumer privacy legislation goes into effect on January 1, 2020. The statute provides substantial new protections to California consumers, and according to this DLA Piper memo, its private right of action provisions ensure that class actions will be coming:
The statute provides a private right of action under certain circumstances to California consumers whose “nonencrypted and nonredacted” personal information is “subject to an unauthorized access and exfiltration, theft, or disclosure as a result of the business’s violation of the duty to implement and maintain reasonable security procedures and practices appropriate to the nature of the information to protect the information . . . .” Cal. Civ. Code § 1798.150.
Significantly, the Act provides such consumers with the ability to obtain relief in the form of either actual damages or statutory damages between $100 and $750 per violation, whichever is greater. In setting the statutory damages amount, courts are instructed to consider, among other factors, “the nature, seriousness . . . and persistence of the misconduct,” number of violations, “the length of time over which the misconduct occurred,” willfulness, and ability to pay. In addition to damages, the Act provides for injunctive or declaratory relief and “any other relief the court deems proper.”
The memo also notes the possibility of class actions under the state’s unfair competition statute as a result of violations of the CCPA. Because of the significant class action risks, companies should begin to prepare for the statute now – and the memo offers up some specific suggestions along those lines.
According to this recent study from IRRC & the Sustainability Investment Institute (Si2), sustainability reporting has come a long way, but only a few companies have taken the next step and started to issue “integrated reports.” Integrated reporting is intended to provide “a holistic look at material information that goes beyond corporate financial disclosures and gives investors insight on a company’s risk and value creation potential.”
Here are some of the study’s highlights (also see this Davis Polk blog):
– 78% of S&P 500 companies issue a sustainability report.
– 40% of S&P 500 companies include voluntary sustainability discussions in annual financial reports or other regulatory filings. This is a key signal that an increasing number of companies believe sustainability issues are financially material. The reporting, however, varies widely.
– Among companies that issue sustainability reports, 95% offer quantified, annually comparable environmental performance metrics; two-thirds set quantified and time-bound environmental goals. Some 86% offer social performance metrics, but only 40% set quantified social goals.
– Only 14 S&P 500 companies issue what Si2 considers to be fully integrated reports, though this is a 100 percent increase from five years ago.
So which companies are providing integrated reports? According to the study, they include GE, Intel, Pfizer, Allstate, Medtronic, Eli Lilly, Southwest Airlnes, AEP, Ingersoll Rand, Praxair, Entergy, Clorox, NiSource & Dentsply Sirona. While the concept has been slow to catch on, it has been endorsed by the Principles for Responsible Investment (PRI),whose signatories have $82 trillion in assets under management.
ESG: Unifying Non-Financial Reporting Standards
One of the reasons that companies may be slow to adopt integrated reporting is that there are a whole bunch of competing reporting standards. So it’s welcome news that a group of the standard-setters – including the Sustainability Accounting Standards Board (SASB), the Climate Disclosure Standards Board (CDSB), FASB (as an observer) and the Global Reporting Initiative (GRI) – has announced a project to unify their sustainability & integrated reporting frameworks. The FAQs elaborate:
Participants will work together to refine overlapping metrics with the same intent. Where their objectives do not require differences, we will look to achieve and maintain the highest possible alignment. Such alignment is subject to the due process considerations of each organization’s governance procedures.
The initial output, expected in Q3 2019, will be a publication available on www.corporatereportingdalogue.com – the document will show the linkages of the TCFD Recommendations with the respective reporting frameworks and the linkages between the frameworks. This work will include identifying how non-financial metrics relate to financial outcomes, explain how the TCFD recommendations should be integrated in mainstream reports and outline preparations for a next phase during which the framework providers will align their metrics where possible across all their reporting frameworks.
The new project is being led by the IIRC’s Corporate Reporting Dialogue. Note that the IIRC, which is leading this effort, is different than the IRRC, which co-issued the sustainability report discussed in today’s first blog. I want to be clear about that, first because the IRRC is dissolving at the end of this year (into the Weinberg Center), but also in case the two organizations have some sort of a “People’s Front of Judea” / “Judean People’s Front” thing going on.
ESG: Coming Soon to a Debt Deal Near You?
According to this “Institutional Investor” article, European institutions have a strong appetite for ESG debt investments – and that appetite may drive more product to market over the next several years. Here’s an excerpt:
Environmental, social, and governance investing is taking root in the debt markets, where demand for ESG offerings is outstripping supply, according to consulting firm Cerulli Associates. The inclusion of ESG factors in fixed income is becoming more widespread, but opportunities for socially responsible investing remain scarce, Cerulli said in a statement Monday on its European research. The firm expects strong demand from institutional investors in Europe will drive the creation of ESG offerings in fixed income over the next five years.
The SEC’s recent Cyber 21(a) Report highlighted cybersecurity internal control shortcomings at 9 different companies. This Audit Analytics blog looks at which companies have disclosed a “material weakness” following a data breach. This excerpt says that not many have:
The investigative report stopped short of recommending any enforcement action and did not name the companies that were investigated. Moreover, the report does not provide sufficient details to determine the identity of the companies. Although we are unable to identify the companies, we were curious whether we can find similar cases. Using Audit Analytics’ cyber breaches dataset, we looked at recent examples & disclosures of companies that fell victims to the attacks described in the report.
In total, we looked at nine companies that disclosed incidents of similar breaches. Six of these companies disclosed the breaches in filings furnished with the SEC, though only one made the disclosure in a current report (8-K). Of the six companies that disclosed their cyber breaches in SEC filings, just three disclosed that the breach rose to the level of a material weakness in the companies’ internal controls.
The blog also reviews the disclosures made by companies that determined a material weakness existed following a data breach.
Audit Committee Disclosures: More, More, More
The amount of information available to investors about audit committee oversight of the independent auditor continues to increase. That’s the conclusion of the 5th annual “Audit Committee Transparency Barometer,” jointly issued by the Center for Audit Quality & Audit Analytics. This excerpt from the CAQ’s blog lays out the highlights:
– 40% of S&P 500 companies disclose considerations in appointing the audit firm (up from 13% in 2014), compared to 27% of mid-cap companies (up from 10% in 2014) and 19% of small-cap companies (up from 8% in 2014).
– 46% of S&P 500 companies disclose criteria considered when evaluating the audit firm (up from 8% in 2014), compared to 36% of mid-cap companies (up from 7% in 2014) and 32% of small-cap companies (up from 15% in 2014).
– 26% of S&P 500 companies disclose that the evaluation of the external auditor is at least an annual event (up from 4% in 2014), compared to 17% of mid-cap companies (up from 3% in 2014) and 12% of small-cap companies (up from 4% in 2014).
The CAQ & Audit Analytics also provide disclosure examples to illustrate how audit committees are enhancing information for investors & other constituencies. Check out this recent blog from Cydney Posner for more details on the Transparency Barometer’s finding as well as commentary on how SEC & PCAOB actions (particularly the new audit report standard) may drive more audit committee disclosure.
Latest Stats: S&P 500 Political Spending Disclosure
The latest “CPA-Zicklin Index” reviews disclosure policies & practices on political spending by the S&P 500. Here’s a summary of its findings on election-related spending disclosure:
– 294 S&P 500 companies disclosed some or all of their election-related spending, or prohibited such spending in 2018, compared with 295 for 2017.
– When these numbers are broken down further, 231 companies disclosed some or all election-related spending in 2018, compared to 236 such companies in 2017. Turnover in the S&P 500 influenced this fluctuation significantly.
– In 2018, 176 companies prohibit at least one category of corporate election-related spending, a sizable increase from 158 companies in 2017, 143 companies in 2016 and 125 companies in 2015.
This WSJ article has more details on the survey’s findings regarding corporate political spending & disclosure.
The Commission’s Divisions of Corporation Finance, Investment Management, and Trading & Markets (the “Divisions”) encourage technological innovations that benefit investors and our capital markets, and we have been consulting with market participants regarding issues presented by new technologies. We wish to emphasize, however, that market participants must still adhere to our well-established and well-functioning federal securities law framework when dealing with technological innovations, regardless of whether the securities are issued in certificated form or using new technologies, such as blockchain.
The Commission’s recent enforcement actions involving AirFox, Paragon, Crypto Asset Management, TokenLot, and EtherDelta’s founder, discussed further below, illustrate the importance of complying with these requirements.
The Statement walks through each of these enforcement proceedings – which involve ICOs, digital asset investment vehicles & secondary market trading platforms – in some detail, but its message can be summarized briefly: “We don’t want to crush innovation, but the securities laws apply to a lot of what you’re doing. If you don’t comply with those laws, we’ve got a problem – and so do you.”
A “Dutch Uncle” is firm but benevolent – and despite the Statement’s firm tone, Corp Fin showed a little benevolence toward wayward ICO issuers. The 2 ICO settlements referenced in the Statement addressed failures to register offerings under the Securities Act – and the Statement notes that the settlement terms lay out a path to compliance, “even where issuers have conducted an illegal unregistered offering of digital asset securities.”
But the path to compliance isn’t easy – and includes registering the securities under the Exchange Act. This Steve Quinlivan blog blog points out that registration presents some unique challenges for coin issuers:
The second step is to register the coins on Form 10 under the Exchange Act. A daunting task maybe, given little is known how to register coins. You will probably need audited financial statements and all that stuff. Then there are those pesky 34 Act reporting obligations which will follow such as 10-Ks, 10-Qs and 8-Ks. I wonder how Section 16 applies and who has to report.
The better answer for ICO issuers is to get it right the first time, and not have to jump through all sorts of hoops to fix a screw-up. And there’s some indication that many are trying to do that – at the ABA’s Fall meeting, Corp Fin Director Bill Hinman remarked that roughly a half-dozen ICO S-1s & a dozen Reg A filings are currently being reviewed by Corp Fin on a confidential basis.
Meanwhile, SEC Enforcement’s Cyber Unit recently bagged a couple of celebrities. Boxer Floyd Mayweather & music impresario DJ Khaled recently settled SEC enforcement proceedings alleging that they unlawfully touted ICOs on social media without disclosing that that they were being paid.
Crypto: The SEC Takes an “L” in Token Injunction Bid
As the Digital Asset Statement suggests, the SEC has taken a strong position that token offerings generally involve securities in the form of an “investment contract.” As Liz recently blogged, at least one federal court has been sufficiently persuaded of the merits of that position to deny a defendant’s motion to dismiss criminal charges premised on tokens’ status as securities.
But you can’t win ’em all – and the SEC found that out last week when a federal court in California refused to grant a preliminary injunction against a company engaged in a token deal. This excerpt from a recent Fenwick & West memo says that when it came to the status of the token in this case as a security, the court wasn’t buying what the SEC was selling:
On Tuesday, November 27, Judge Gonzalo Curiel of the Southern District of California issued the first opinion rebuffing the SEC under the Howey test. In denying the SEC’s motion for a preliminary injunction — after initially granting a temporary restraining order — the court held that the commission had not provided enough information to deem Blockvest’s token a security.
The decision on this motion is just part of the lawsuit’s opening act, & the memo points out that it is based mainly on the parties’ differing factual accounts of what information the limited number of token purchasers relied upon. But it does suggest that courts aren’t necessarily going to roll over for the SEC’s Howey arguments in each new case.
Crypto: NASAA Tries Cartoons to Stop the Scams
Despite efforts to educate investors about the variety of crypto-scams, a lot of people are still getting ripped-off. This Keith Bishop blog says that NASAA has taken a new tack to educate investors about cryptocurrency investment risks – a series of cartoons:
For those still in the dark about cryptocurrency, the North American Securities Administrators Association (aka NASAA) has released an animated video on the subject. According to NASAA, the video “focuses on concerns individuals should consider before investing in any crypto-related offering, including the three “U’s” (untraceable, uninsured, unregulated), volatility and liquidity risks, and the very real potential for fraud.” This video is actually a sequel to the debut video “Get in the Know about ICOs”.
These aren’t exactly “Rick & Morty” or “BoJack Horseman” when it comes to entertainment value, but check them out – you might learn something.
