For a long time, a lot of companies seem to have preferred buybacks to dividends as a way to return capital to stockholders. Among other things, buybacks offer companies an opportunity to boost ROE & EPS by reducing the number of shares outstanding, provide a non-dilutive source for equity awards and give each investor the ability to choose whether to participate. On the other hand, sharp criticism of the amount of money devoted to them has resulted in the imposition of a 1% excise tax and will likely soon result in significant new disclosure requirements.
With all the noise surrounding buybacks, it shouldn’t come as a surprise that the good ol’ fashioned dividend has been experiencing a bit of a renaissance. As this excerpt from a recent WSJ article explains, 2022 was a banner year for dividends – and 2023 is likely to be even bigger:
S&P 500 companies spent a record amount on dividends this year, a trend that is expected to continue in 2023 despite a slowing economy as more of the companies that had suspended or cut their dividends early in the pandemic resume payouts. Companies in the S&P 500 allocated an estimated $561 billion toward dividends in 2022, up from $511.2 billion in 2021 and the highest amount on record, according to S&P Dow Jones Indices, a unit of S&P Global Inc. Dividend spending is poised for another record in 2023 as companies are under pressure from investors to keep increasing returns, said Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.
Despite the headwinds they’re facing, buybacks aren’t likely to go away. While buybacks by S&P 500 companies, declined by 10% in the third quarter, the article says they’re expected to decline only slightly from the $963 billion that companies spent on them this year.
The adopting release for the SEC’s recent Rule 10b5-1 amendments provides that the new rules will go into effect 60 days after the release’s publication in the Federal Register. Well, the clock is officially running, because the release was published in the Federal Register on Thursday, December 29, 2022. That means the changes to Rule 10b5-1 will become effective on February 27, 2023.
In addition to the Rule 10b5-1 amendments, the SEC adopted new disclosure & tagging requirements as well as changes to Section 16 forms. The adopting release provides the following compliance dates for those changes:
– Section 16 reporting persons will be required to comply with the amendments to Forms 4 and 5 for beneficial ownership reports filed on or after April 1, 2023; and
– Issuers that are SRCs will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements that are required to include the Item 408, Item 402(x), and/or Item 16J disclosures in the first filing that covers the first full fiscal period that begins on or after October 1, 2023.
– All other issuers will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements that are required to include the Item 408, Item 402(x), and/or Item 16J disclosures in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.
A recent “Audit Analytics” blog highlights current market share leaders among transfer agents. This excerpt says that aside from one merger, the scene looks pretty much the same as last year:
One event significantly impacted the transfer agent market. In December 2021, Siris Capital Group completed the acquisition/combination of Equiniti and American Stock Transfer. As previously separate firms, these two transfer agents were each in the top 5 by market share annually.
The total market share for transfer agents among active SEC registrants remains mostly unchanged relative to 2021, besides the EQ/AST combination. The top 5 transfer agents for the total population market share include: Computershare, Equiniti Trust Co/American Stock Transfer & Trust, Continental Stock Transfer & Trust, BNY Mellon, and Broadridge.
Computershare maintains its lead with 25.7% market share in 2022 compared to 27.2% in 2021. Equiniti Trust Co/American Stock Transfer & Trust holds a 20.4% market share in 2022. Computershare and EQ/AST hold nearly half of the clients in the Audit Analytics database. Finally, Continental Stock Transfer & Trust hold a market share of 12.7% compared to 11.9% in 2021.
The blog says that three transfer agents dominate the large cap market, with Computershare serving as the transfer agent for 57% of the S&P 500. Equiniti Trust Co/American Stock Transfer & Trust follows with 35% of the large cap market share, while Broadridge Corporate Issuer solutions rounds out the top 3 with a market share of 7%.
Shortly before the holidays, the SEC announced that General Counsel Dan Berkovitz will leave the agency and that Principal Deputy General Counsel Megan Barbero will assume the GC position effective January 23, 2023. This excerpt from the SEC’s press release provides more details on Megan Barbero’s background:
Ms. Barbero joined the SEC in July 2021 and currently advises the Commission on complex legal issues relating to rulemaking initiatives and litigation strategy. Before joining the SEC, Ms. Barbero served as Deputy General Counsel for the U.S. House of Representatives, where she managed strategic litigation for the House.
Prior to her work at the House, Ms. Barbero served as an attorney for the U.S. Department of Justice Civil Appellate staff, where she represented the United States and its agencies as lead counsel in the federal courts of appeals. Ms. Barbero previously worked in the Supreme Court and appellate litigation practice at WilmerHale. Ms. Barbero clerked for Judge Rymer on the U.S. Court of Appeals for the Ninth Circuit. She is a graduate of Harvard University and Stanford Law School.
In August, the PCAOB reached a tentative deal with China’s securities regulators to permit the PCAOB to fully inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. Although the PCAOB was willing to move forward on the basis of the deal, they didn’t exactly sound optimistic about its outcome. But because implementation of the Holding Foreign Companies Accountable Act could ultimately result in the wholesale delisting of China-based companies, Chinese authorities presumably had some incentive to play ball.
Yesterday, PCAOB Chair Erica Williams issued a statement about actions taken by the PCAOB based on its experience to date inspecting China-based firms under the accord. That statement took a slightly more optimistic tone. Here’s an excerpt:
For the first time in history, the PCAOB has secured complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. And this morning the Board voted to vacate the previous determinations to the contrary.
This historic and unprecedented access was only possible because of the leverage Congress created by passing the Holding Foreign Companies Accountable Act. Congress sent a clear message with that legislation that access to U.S. capital markets is a privilege and not a right, and China received that message loud and clear.
Investors are more protected today because of Congress’ leadership, and I want to thank Members of the House and the Senate for their ongoing work to hold China accountable.
I want to be clear: this is the beginning of our work to inspect and investigate firms in China, not the end. The PCAOB is continuing to demand complete access in mainland China and Hong Kong moving forward. Our teams are already making plans to resume regular inspections in early 2023 and beyond, as well as continuing to pursue investigations.
The Board does not have to wait another year to reassess its determinations. Should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access – in any way and at any point in the future – the Board will act immediately to consider the need to issue a new determination.
It is important to understand: today’s announcement is about one question and one question only – is the PCAOB able to inspect and investigate firms in mainland China and Hong Kong completely at this time? The answer, following thorough and systematic testing, is yes.
The statement goes on to say that the PCAOB found numerous potential deficiencies in its inspection, but that these results weren’t out of line with what would be expected for firms in other jurisdictions being subjected to inspection for the first time.
The SEC has brought enforcement actions against a number of companies offering digital assets in which it has alleged that the assets are a “security” within the meaning of Section 2(a)(1) of the Securities Act. Much to the consternation of the crypto bros, the answer to that question is often a straightforward “yes”, based upon application of the Howey test. But the answer isn’t so simple when it comes to other digital assets.
To get a sense for the complexity of this issue for some digital assets, check out the comment letter exchange that David Kitchin & Jay Knight recently flagged on Bass Berry’s Securities Law Exchange Blog. The Staff issued a comment (see comment No. 2) on a Form 10 filing by Graystone Horizen Trust, which was organized to hold the ZEN cryptocurrency, requesting it to furnish the Staff with its analysis as to why ZEN wasn’t a security. The company’s response letter included a 30-page analysis (featuring more than 130 footnotes) of the issue from its outside counsel that reached the following conclusion:
The SEC could claim that ZEN is a security on the basis that holders would rely on the efforts of the Foundation or the Company. Even so, while not free from doubt, the Sponsor could make arguments to the contrary that, in light of the full facts and circumstances, ZEN does not meet all the elements of Howey such that it would be an investment contract.
The Staff and the company engaged in several more rounds of comments in which it requested additional disclosure concerning ZEN’s potential classification as a security. But at the end of the process, the Staff decided to kick the can down the road and issued this final comment:
Refer to your responses to comment 2 in our June 13, 2022 letter and related comments. While we do not have any further comments at this time regarding your responses, please confirm your understanding that our decision not to issue additional comments should not be interpreted to mean that we either agree or disagree with your responses, including any conclusions you have made, positions you have taken and practices you have engaged in with respect to this matter.
The result of this exchange isn’t surprising – after all, the resolution of the status of a particular cryptocurrency under the Securities Act is likely an issue that will ultimately need to be decided by the courts or by more senior SEC officials. But it does illustrate just how complicated the issues surrounding whether some digital assets are securities can be.
The SEC’s Office of the Advocate for Small Business Capital Formation just issued its 2022 Annual Report, which highlights the OASB’s activities during the year and discusses the overall state of capital formation, the capital needs of early stage and more mature businesses, and other matters. There’s a lot of interesting data in the report, but one thing in particular that I’d like to note is that on p. 6 of the Report, the OASB singles out Deputy Director Sebastian Gomez Abero’s appearance on our own Dave Lynn’s “Deep Dive with Dave” podcast as one of the year’s highlights. Check it out!
Yesterday, the SEC adopted amendments to Rule 10b5-1 imposing new conditions & disclosure requirements for 10b5-1 plans and securities transactions by companies and insiders. Here’s the 252-page adopting release, and here’s the two-page fact sheet. According to the fact sheet, the changes amend the Rule 10b5-1(c)(1) affirmative defense to include:
– A cooling-off period for directors and officers of the later of: (1) 90 days following plan adoption or modification; or (2) two business days following the disclosure in certain periodic reports of the issuer’s financial results for the fiscal quarter in which the plan was adopted or modified (but not to exceed 120 days following plan adoption or modification) before any trading can commence under the trading arrangement;
– A cooling-off period of 30 days for persons other than issuers or directors and officers before any trading can commence under the trading arrangement or modification;
– A condition for directors and officers to include a representation in their Rule 10b5-1 plan certifying, at the time of the adoption of a new or modified plan, that: (1) they are not aware of material nonpublic information about the issuer or its securities; and (2) they are adopting the plan in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5;
– A limitation on the ability of anyone other than issuers to use multiple overlapping Rule 10b5-1 plans;
– A limitation on the ability of anyone other than issuers to rely on the affirmative defense for a single-trade plan to one such plan during any consecutive 12-month period; and
– A condition that all persons entering into a Rule 10b5-1 plan must act in good faithwith respect to that plan.
In addition to the amendments to Rule 10b5-1, the SEC added new disclosure requirements, including annual disclosure relating to a company’s insider trading policies and procedures, quarterly disclosure concerning the use of Rule 10b5-1 plans by its directors & officers, and disclosure about awards of options in proximity to the release of MNPI and related policies and procedures. The new rules will also require Form 4 and 5 filers to indicate by a checkbox that a reported transaction was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c)
The final rules contain a few tweaks to the SEC’s original proposal. These include modifying the duration of the mandatory cooling off period (and eliminating the proposed cooling off period for issuers), allowing officer & director certifications to be included in the plan itself rather than being separately delivered to the issuer, and permitting issuers (but not insiders) to use multiple overlapping 10b5-1 plans. Overall, however, the amendments largely track the original proposal.
I said last month that we’d let you know if the SEC adopted anything by other than a 3-2 partisan vote, so I want to note for the record that the commissioners voted unanimously to approve the amendments. We’ll be posting memos in our “Rule 10b5-1” Practice Area.
The rules go into effect 60 days after publication in the Federal Register, and we’re scheduling a webcast for next month on the implications of the changes for companies & insiders. Stay tuned for more details.
I’ve been keeping an eye out for law firm memos explaining to me what’s particularly significant about the SEC’s settlement with AT&T over alleged Reg FD violations – other than the fact that it involved the largest financial penalty ever assessed in an FD enforcement action. It’s been a week since the settlement was announced, but I still haven’t seen anything along those lines. I can’t say I’m surprised. After all, from the outset, the SEC’s allegations appeared to involve textbook examples of the kind of practices that it had long cautioned companies against.
AT&T’s 1st Amendment challenge to Reg FD was probably the most interesting part of the case, but after the SDNY shot that down along with the other arguments the defendants submitted in their motion for summary judgment, so you can see why the company was interested in settling the case. On the other hand, the SEC had something to lose if a trial went forward as well. That’s because the Court found that a jury could reasonably find for either side when it came to the issue of whether the defendants acted with scienter.
Reg FD requires companies to simultaneously make public disclosure of any MNPI that is intentionally selectively disclosed and defines the term “intentional” to include recklessness. The Court’s discussion of the scienter issue begins on p.120 of its opinion, and among the various things it pointed to in concluding that a jury might reasonably find that the defendants didn’t act recklessly was the complete absence of any inkling among AT&T personnel and the analysts who received the selective disclosure that those communications risked violating Reg FD.
What are the key takeaways from the AT&T enforcement action? This MoFo memo on the SDNY’s decision suggests the following:
Policies and procedures alone may not be enough: At AT&T, the relevant policies, procedures, and training expressly prohibited the disclosures at issue. Nevertheless, the IR defendants and executives involved apparently understood that their actions did not violate Reg FD. Companies should consider whether changes or updates are warranted in their compliance programs to help mitigate the risk of unintended Reg FD violations. Such changes could include additional targeted trainings for those employees who communicate directly with analysts.
Timing: One way that companies can reduce the risk of possible Reg FD violations is to impose a “quiet period” late in the quarter during which company employees to whom Reg FD applies are prohibited from speaking with investors and analysts.
Utilize scripts: Where IR professionals speak with analysts, they should consider using scripts to guide their conversations. Such scripts can be reviewed by counsel and senior leadership to help ensure compliance with Reg FD.
To this list, I’d add one more item. I think the Court’s comments that nobody involved had any idea that there was a Reg FD issue in their communications are important. The Court said that went to scienter, but it’s also relevant to materiality, because it indicates that none of the sophisticated market professionals involved thought they were dealing with MNPI. I think the lesson is that materiality is always a judgment call, and one that the SEC is very willing to second guess when it comes to selective disclosure. That might just be the most important thing to keep in mind when it comes to Reg FD.
Join us today at 2pm Eastern for the webcast, “SEC Clawback Rules: What To Do Now.” We’ll be hearing practical guidance from Cooley’s Ariane Andrade, Hunton Andrews Kurth’s Tony Eppert, Orrick’s JT Ho, Pay Governance’s Mike Kesner, and Kirkland’s Abigail Lane about what to do to prepare for the SEC’s new Dodd-Frank clawback rules that go into effect next month. Among other topics, this program will cover:
– Overview of rules
– Differences from existing requirements & practices
– Specific action items
– Compliance timeframe
– State law issues
– Interplay between ISS guidelines, institutional investor expectations and DOJ enforcement policies
– Enforcement of clawbacks
– Disclosure implications
We’re also continuing to post memos on this topic in our “Clawbacks” Practice Area. As a member of CompensationStandards.com, you get access to the live webcast, plus the on-demand archive & transcript, and all of the other resources on this topic – which we’ll be continuing to update as the compliance date nears.
