As Liz blogged earlier this month, the 5th Cir. recently sent the SEC back to the drawing board on its buyback disclosure rules, and it now looks like something similar could happen to the SEC’s Staff Accounting Bulletin 121, which addresses accounting for safeguarded digital assets. That’s because, according to the GAO, the SEC failed to comply with procedures mandated by the Congressional Review Act (CRA) when its accounting staff issued the SAB. This excerpt from a recent Fenwick memo explains:
The CRA requires that, before an agency rule can take effect, the agency must submit a report on the rule to both the House of Representatives and the Senate as well as to the Comptroller General. The law allows Congress to review and disapprove any rule newly issued by federal agencies for a period of 60 days using special procedures. If a resolution of disapproval is enacted, then the new rule has no force or effect.
On August 2, 2022, Senator Cynthia M. Lummis requested the GAO—which is an independent, non-partisan agency within the legislative branch of the federal government—to determine whether SAB 121 was a “rule” subject to the CRA. The SEC maintained that the bulletin was not subject to the CRA because it was published by the SEC’s staff, rather than through the SEC. The GAO disagreed, however, finding that the statement was an “agency statement” within the applicable definition of a “rule” under the Administrative Procedures Act, and thus, was subject to the CRA’s requirements.
The GAO reasoned that, since the role of the SEC’s Division of Corporation Finance (Division) is to monitor companies’ compliance with accounting and disclosure requirements, and since the Division’s practice is to refer noncompliant companies to the SEC’s Division of Enforcement, it was “reasonable to believe that companies may change their behavior to comply with the staff interpretations found in [SAB 121].”
So what happens now? That’s a bit unclear. The memo says that there’s a window of time during which Congress can pass a joint resolution disapproving the issuance of SAB 121. It seems unlikely that the Congressional clown show could get its act together to do something like that, but even in the absence of such action, the memo says that the GAO’s decision strengthens the hand of any litigant seeking judicial review of SAB 121.
In a recent speech, SEC Commissioner Mark Uyeda criticized the process by which the SEC adopted its pay versus performance disclosure rule, and in particular called out some of the goofy proxy disclosure resulting from the SEC’s decision to change the definition of “compensation actually paid” and the treatment of equity awards in the final rule without seeking additional public comment. He says there’s a lesson there for the SEC that it should take into account before moving forward with a final climate change disclosure rule:
Hopefully, the Commission will consider learning from the lesson of the pay versus performance rulemaking as it moves forward with other rulemakings, including climate-related disclosure. This proposal has received over 16,000 comments. The volume of comments is not surprising given the proposal’s expansive nature and the hundreds of requests for feedback contained in it. Most commenters did not focus on, or address, every single issue or alternative raised in the proposal.
Before the Commission adopts any final rule that significantly deviates from the proposal, it should seriously consider re-proposing the rule with revised rule text and an updated economic analysis. Doing so would provide the public with an opportunity to focus on aspects of the proposal that they did not initially consider, and perhaps more importantly, submit feedback on any revised requirements.
Commissioner Uyeda argues that a re-proposal “may ultimately help the Commission craft a better rule for all market participants” and says that the SEC should do everything possible to avoid promulgating a “costly and ineffective” rule. Okay, but what if the SEC just moves forward with a final rule? Well, that’s where Commissioner Uyeda drops his mic – he says that adopting a rule without reproposing it “might be indicative of a flawed process that raises the question of whether the rule is arbitrary and capricious under the Administrative Procedure Act.”
Earlier this year, Meredith blogged about the Pegasystems case, which highlighted the potential perils of reflexively characterizing claims made by the plaintiff in a lawsuit as being “without merit.” This Goodwin blog highlights some things that companies should consider as they draft litigation disclosure post-Pegasystems, and this excerpt offers up some specific examples of alternative disclosure that might be appropriate:
In reviewing litigation disclosures in filings with the SEC, close attention needs to be paid to the language asserting that a litigation against the company is “without merit.” To mitigate risk, and after consultation with the company’s auditors, it may be best to avoid such language and rely on statements such as the following:
– We intend to vigorously pursue our claims against [defendant] in this matter.
– We intend to vigorously defend against the claims brought by [plaintiff] in this matter.
– We are unable to reasonably estimate possible damages or a range of possible damages in this matter given the uncertainty as to how a jury may rule if this ultimately proceeds to trial.
– We dispute these allegations and plan to vigorously defend ourselves.
– We have defenses to the claims raised in this lawsuit.
The blog points out the need to consult with auditors concerning this disclosure, because it may well have an impact on whether they believe that a reserve for the litigation should be established.
Yesterday, the SEC announced a settled enforcement action against Charter Communications arising out of what the agency alleges was an “unauthorized” stock buyback program. This excerpt from the SEC’s press release summarizes its allegations:
According to the SEC’s order, Charter’s board authorized company personnel to conduct certain buybacks using trading plans that conform to SEC Rule 10b5-1. Rule 10b5-1 offers protection to companies and individuals from insider trading liability as long as they meet the conditions of the rule, including a requirement that they not retain the ability to change the planned purchases or sales after they adopt the trading plan.
However, the SEC’s order finds that, from 2017 to 2021, Charter used plans that included “accordion” provisions, which company personnel described as giving Charter flexibility, that allowed Charter to change the total dollar amounts available to buy back stock and to change the timing of buybacks after the plans took effect. According to the SEC’s order, because Charter’s trading plans did not meet the conditions of Rule 10b5-1, the company’s buybacks did not comport with the board’s authorizations. The SEC’s order finds that Charter included accordion provisions in nine separate trading plans over the four-year period.
The SEC’s order found that the company’s violated the internal controls requirements of Section 13(b)(2)(B) of the Exchange Act. Without admitting or denying those findings, Charter agreed to cease-and-desist from further violations of Section 13(b)(2)(B) and pay a civil penalty of $25 million.
The SEC’s Charter Communications order prompted a dissenting statement from commissioners Peirce and Uyeda, which focused on what they contend is the SEC’s application of Section 13(b)(2)(B) to internal controls that aren’t covered by the statute:
The fundamental flaw in the Order is its failure to distinguish between internal accounting controls and other types of internal controls. Section 13(b)(2)(B)(i) requires Charter to “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorization.” (emphasis added).
The Order recites no facts suggesting that Charter’s management used more funds than the board authorized for share buybacks, that management purchased shares at a quantity or time inconsistent with the board’s authorization, or that management failed to properly record the expenditure of corporate funds and consequent purchase of shares on Charter’s books. Instead, the Order faults Charter because it lacked “reasonably designed controls to analyze” its trading plans for compliance with Rule 10b5-1. Controls designed to answer a legal question—compliance with the regulatory conditions necessary to qualify for an affirmative defense—are simply not internal accounting controls within Section 13(b)(2)(B)’s scope.
This isn’t the first time the SEC has interpreted this statutory provision to cover non-accounting related controls, and it isn’t the first time that commissioners Peirce & Uyeda issued a dissenting statement on the SEC’s use of the statute in this manner. Remember the Andeavor enforcement action in 2020? That also involved a buyback program, and the controls failure identified by the SEC in that proceeding related to compliance with the company’s insider trading program.
Commenters also flagged the Andeavor case as an unprecedented use of Section 13(b)(2)(B), and also highlighted its potential implications. As one commenter noted at the time, “if this precedent were followed, any deficiency or breach of internal corporate compliance policy could constitute a violation of internal accounting controls under [Section 13(b)(2)(B)].” It appears that this is exactly the message that the SEC wants to send with this latest enforcement action.
As if this wasn’t enough enforcement-related news for a single day, yesterday the SEC also announced its enforcement results for fiscal 2023. I don’t think we could’ve timed today’s “SEC Enforcement: Priorities and Trends” webcast better if we tried.
Join us tomorrow at 2 pm Eastern for our CompensationStandards.com webcast, “More on Clawbacks: Action Items and Implementation Considerations” – to hear Compensia’s Mark Borges, Ropes & Gray’s Renata Ferrari, Gibson Dunn’s Ron Mueller and Davis Polk’s Kyoko Takahashi Lin continue their excellent discussion from our 20th Annual Executive Compensation Conference on complex decisions and open interpretive issues that unlucky companies faced with a restatement will need to tackle.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. 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 program using this form. 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.
We’re making this webcast available to members of TheCorporateCounsel.net as a bonus, but if you want to stay up to date on the latest developments on clawbacks, you need to become a CompensationStandards.com member if you aren’t already. We offer a no-risk trial for that site as well on the same terms that we provide for TheCorporateCounsel.net – and you can take advantage of that offer in exactly the same way!
Last week, Glass Lewis released the results of its inaugural Client Policy Survey, which reflects input on corporate governance, ESG and stewardship matters from more than 500 institutional investors, corporate issuers, corporate advisors, shareholder advocates and other stakeholders. This excerpt from the accompanying press release highlights some of the survey’s findings:
– Investors view financial results, excluding total shareholder return (TSR), and incentive payouts relative to TSR as the most important factors when reviewing executive pay-for-performance alignment.
– Overwhelmingly, respondents indicated that companies should set greenhouse gas (GHG) emissions targets. However, there was a split on exactly which companies should set targets — and exactly which types of targets they should set.
– More than 40% of investors would vote against boards that use plurality voting for uncontested director elections, and over two-thirds view the practice as problematic.
– Most investors believe all board-level roles should be considered when assessing whether directors’ commitments are overstretched.
The survey covers a lot of ground and includes responses addressing a variety of issues relating to board governance, director commitments, capital structure & voting rights, ESG & shareholder proposals, and executive compensation.
UCLA’s Stephen Bainbridge recently blogged about the major challenges and issues he sees facing public company boards over the next year or two. In his assessment, these include cybersecurity, risk management, shareholder activism and political risks. This excerpt addresses risk management:
Cybersecurity is a sufficiently important risk to deserve its own category. But the general problem of risk management remains an important part of what boards must do. Board-level systems designed to monitor and oversee mission-critical functions play a crucial role in showcasing the board’s fulfillment of its Caremark duties.
This was evident last year when the Delaware Court of Chancery allowed a Caremarkduty-of-oversight claim to advance against Boeing Company directors. The court’s decision was based on allegations of insufficient board involvement in safety matters and the absence of a dedicated committee with direct oversight responsibilities. Nevertheless, it’s worth noting that two subsequent cases, Hamrockand SolarWinds, have underscored the necessity of establishing bad faith rather than merely proving gross negligence for a Caremark claim to succeed.
By the way, Prof. Bainbridge is no fan of Caremark, and another one of his recent blogs summarizes his objections to it:
First, Caremark was wrong from the outset. Caremark’s unique procedural posture, which precluded any appeal, gave Chancellor Allen an opportunity to write “an opinion filled almost entirely with dicta” that “drastically expanded directors’ oversight liability.” In doing so, Allen misinterpreted binding Delaware Supreme Court precedent and ignored the important policy justifications underlying that precedent.
Second, Caremark was further mangled by subsequent decisions. The underlying fiduciary duty was changed from care to loyalty, with multiple adverse effects. In recent years, moreover, there has been a steady expansion of Caremark liability. Even though the risk of actual liability probably remains low, there is substantial risk that changing perceptions of that risk induces directors to take excessive precautions.
Join us tomorrow for the webcast – “SEC Enforcement: Priorites & Trends” – to hear Hunton Andrews Kurth’s Scott Kimpel, Locke Lord’s Allison O’Neil, and Quinn Emanuel’s Kurt Wolfe provide insights into the lessons learned from recent enforcement activities and insights into what the new year might hold.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. 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 program using this form. 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.
Some law firms have announced their own proprietary tools in the AI and software space recently — for example, Gunderson Dettmer announced a homegrown generative AI chat app for the firm’s attorneys, Cooley announced Cooley D+O, a software platform for D&O questionnaires, and Orrick recently announced The Observatory, an online platform meant to help you select technology that’s right for your organization.
These are certainly some interesting developments by firms working to lead here, but we still don’t have a great sense for what law firms and in-house legal departments are doing generally to leverage efficiencies from AI or other emerging technologies for legal tasks to stay up to date in this rapidly changing environment. To get some answers, we’ve put together a short, anonymous survey on how in-house teams and law firms are using technologies right now and what policies and oversight of AI they currently have in place. This is different from the many surveys on AI we’ve seen elsewhere focused on who it’s going to put out of a job or what industries it’s going to revolutionize. We hope this will give you current, practical & actionable insight. Please take a moment to participate!
If you are leading your team’s efforts to efficiently, safely & legally leverage AI, that would make a great podcast topic, and we’d love to hear about it.
