Author Archives: John Jenkins

On Friday, the SEC announced that a “technological error” dating back to as early as June 2021 has prompted it to reopen the comment period on 11 rulemaking proposals and one request for comment.  Here’s an excerpt from the SEC’s announcement listing the affected releases:

1. Reporting of Securities Loans, Release No. 34-93613 (Dec. 8, 2021)

2. Prohibition Against Fraud, Manipulation, or Deception in Connection with Security-Based Swaps; Prohibition against Undue Influence over Chief Compliance Officers; Position Reporting of Large Security-Based Swap Positions, Release No. 34-93784 (Feb. 4, 2022)

3. Money Market Fund Reforms, Release No. IC-34441 (Feb. 8, 2022)

4. Share Repurchase Disclosure Modernization, Release Nos. 34-93783, IC-34440 (Feb. 15, 2022)

5. Short Position and Short Activity Reporting by Institutional Investment Managers, Release No. 34-94313 (Mar. 16, 2022); see also Notice of the Text of the Proposed Amendments to the National Market System Plan Governing the Consolidated Audit Trail for Purposes of Short Sale-Related Data Collection, Release No. 34-94314 (Mar. 16, 2022)

6. Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, Release Nos. 33-11038, 34-94382, IC-34529 (Mar. 23, 2022)

7. Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Release No. IA-5955 (Mar. 24, 2022)

8. The Enhancement and Standardization of Climate-Related Disclosures for Investors Release Nos. 33-11042, 34-94478 (Apr. 11, 2022)

9. Special Purpose Acquisition Companies, Shell Companies, and Projections, Release Nos. 33-11048, 34-94546, IC-34549 (May 13, 2022)

10. Investment Company Names, Release Nos. 33-11067, 34-94981, IC-34593 (June 17, 2022)

11. Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices, Release Nos. 33-11068, 34-94985, IA-6034, IC-34594 (June 17, 2022)

12. Request for Comment on Certain Information Providers Acting as Investment Advisers, Release Nos. IA-6050, IC-34618 (June 22, 2022)

Wow, that’s quite a list! It looks like this glitch has thrown a bit of a monkey-wrench into most of the SEC’s regulatory agenda. Off the top of my head, it appears that the only major proposals that aren’t affected by this are the SEC’s clawbacks proposal and its Rule 10b5-1 proposal.  According to the SEC’s order, the comment periods reopened beginning on October 7, 2022, and will close 14 days after the date of publication of the order in the Federal Register.

The SEC says that if you submitted comments on one of these proposals through the internet comment form between June 2021 and August 2022, you should check the relevant comment file on the SEC’s website to determine whether your comment was received and posted. If it hasn’t been posted, you should resubmit it.

– John Jenkins

Today’s the start of a big week!  We’re hosting our “1st Annual Practical ESG Conference.” That’s followed on Wednesday & Thursday by our “2022 Proxy Disclosure Conference,” and we cap off the week on Friday with our “19th Annual Executive Compensation Conference.”  Here’s the agenda for today’s conference – we have 7 substantive panels, including a recently added panel on “SEC Climate Rules: How to Jumpstart Your Disclosures.” Here’s more info:

– How to Attend: We have emailed a direct access link for the Conference to all registered attendees, from info@ccrcorp.com. Use that link to go to the Conference platform. Once you log in to the Conference Platform, follow the “Practical ESG Agenda” tab to enter sessions and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone.

If you are experiencing a technical issue on our conference platform and need assistance, please email Evan Blake (eblake@markeys.com) with our Event Manager Victoria Newton (vnewton@ccrcorp.com) on copy, and they will reply to you asap. If you have any other questions about accessing the conference, please email our Event Manager, Victoria Newton (vnewton@ccrcorp.com).

– How to View Archives & Transcripts: Conference attendees will be able to access the archives of the “1st Annual Practical ESG Conference” on PracticalESG.com via a special link that we will email to conference attendees about a week after the event. Unedited transcripts also will be available via that link, beginning about 2-3 weeks after the event.

– Thanks To Our Sponsors! Our sponsors have helped make this event possible, and we are proud and grateful to have their support. Our Platinum Sponsors for the 1st Annual Practical ESG Conference are Aon and Orrick. Our Silver Sponsors are Argyle, who is also sponsoring our Proxy Disclosure & Executive Compensation Conferences, and Ecolumix. Our Bronze Sponsor is Elm Consulting. Please check them all out!

It is not too late to register for our Conferences today. You can sign up for today’s “1st Annual Practical ESG Conference” by emailing sales@ccrcorp.com or by calling 1-800-737-1271, Option 1. You can still sign up online for our “2022 Proxy Disclosure Conference” & “19th Annual Executive Compensation Disclosure Conference” (with the “Conference” drop-down, and the “PDEC” options) – or you can register via email or phone. Remember, you can also still bundle the conferences together to get a discounted rate!

– John Jenkins

If you’re working on your Form 10-Q, be sure to check out this Goodwin blog with an updated 10-Q Form Check Table. In addition to providing a tabular check of required disclosures, the form check document also highlights some potential disclosure topics that companies should consider addressing in their next 10-Q filing. Here’s an excerpt:

In addition to topics that may be particularly relevant to a specific company, industry or market, the following topics (among others) may be generally relevant to many companies:

– Inflation and rising interest rates,
– Financial market volatility and declines in financial market prices of equity securities;
– Liquidity and/or capital resources changes and the impact of any changes or limitations, including, without limitation, ability to borrow funds and/or renew or roll over existing indebtedness;
– Ongoing or new supply chain and product distribution/logistics issues; and
– Ongoing impacts of the war in Ukraine and the Russian sanctions.

Less common topics may include:

– Expenses related to climate-related events and expenses related to preparation for expected climate risk disclosure;
– Material risks or uncertainties, or recent income statement impacts, related to health care developments; and
– European energy market issues that, in addition to inflation and rising interest rate impacts, may also affect some companies, especially those that have business operations or significant markets in Europe.

The blog notes that although the risk of a recession has received a lot of media attention, as of September 27, 2022, there aren’t a lot of SEC filings that contain risk factor disclosure that’s company specific. Instead, most risk factor disclosure on this topic is pretty generic. It cautions companies that changes in general domestic or international economic conditions or those that affect specific industries or companies could make more targeted disclosure appropriate.

– John Jenkins

Yesterday, the SEC announced settled enforcement proceedings against Boeing & former CEO Dennis Muilenburg arising out of alleged misstatements surrounding the catastrophic crashes of two of its 737 MAX aircraft.  This excerpt from the SEC’s press release summarizes the alleged misstatements:

According to the SEC’s order, one month after Lion Air Flight 610, a 737 MAX airplane, crashed in Indonesia in October 2018, Boeing issued a press release, edited and approved by Muilenburg, that selectively highlighted certain facts from an official report of the Indonesian government suggesting that pilot error and poor aircraft maintenance contributed to the crash. The press release also gave assurances of the airplane’s safety, failing to disclose that an internal safety review had determined that MCAS posed an ongoing “airplane safety issue” and that Boeing had already begun redesigning MCAS to address that issue, according to the SEC’s orders.

Approximately six weeks after the March 2019 crash of Ethiopian Airlines Flight 302, another 737 MAX, and the grounding by international regulators of the entire 737 MAX fleet, Muilenburg, though aware of information calling into question certain aspects of the certification process relating to MCAS, told analysts and reporters that “there was no surprise or gap . . . that somehow slipped through [the] certification process” for the 737 MAX and that Boeing had “gone back and confirmed again . . . that we followed exactly the steps in our design and certification processes that consistently produce safe airplanes.”

Without admitting or denying the SEC’s allegations, Boeing & its former CEO consented to separate orders (here’s Boeing’s order and here’s the CEO’s order) to cease and desist from future violations of Section 17(a)(2) and 17(a)(3) of the Securities Act. Boeing agreed to pay a $200 million civil penalty and its CEO agreed to a $1 million penalty.

I told everyone to prepare for a torrent of high-profile enforcement proceedings as the SEC’s fiscal year winds down. It will be interesting to see what next week brings. Stay tuned.

– John Jenkins

Following my recent blog on Jim McRitchie’s commentary about how little time many companies were giving shareholders to vote, Carl Hagberg reached out and pointed me toward his Shareholder Service Optimizer article on “How and When to Properly Open and Close the Polls. This kind of topic is right in Carl’s wheelhouse & he’s got some suggestions on best practices for voting procedures. Here’s an excerpt with some of his thoughts:

– Declare that “the polls are now open for voting” when the Meeting is called to order – or, at the very latest, when it is time to begin the introduction of all proposals on the ballot, i.e., “the official business of the meeting.”

– Our own view is that the “best practice” is to introduce proposals one-by-one – and to ask if there is any discussion, which most of the time these days is no – but if so, to hear it then and there. If there is any discussion, allow a brief pause (a few seconds should be fine here) for voters to amend their votes if they wish to, before moving to the next item.

– When all the proposals have been introduced, move to the General Discussion Period – and announce that the polls will be open for 10 more minutes “to allow voters who have not yet voted or who wish to change their votes online to do so.” Yes, a few holders may have to ‘multi-task’ but so be it, we say.

Carl also recommends providing a “fair warning” & another “last and final warning” during the few minutes prior to the time that the polls will close.

– John Jenkins

As a parent of three kids who straddle the Millennial – Gen Z divide, I know that one of the (many) ways that Boomers like me really make members of younger generations roll their eyes is by being clueless about the latest pop culture jargon. I admit that I’m not real up to speed on that stuff.  I mean, I know a little about hip-hop and have picked up some of the jargon over the years, but as I’ve said before, my kids think I’m dorkier than Ari Melber when I attempt to use it.

I’m not much of a crypto or Web 3.0 guy either, and I bet the same is true for many of you as well. But maybe Latham & Watkins’ latest “Book of Jargon” can help us out. It’s a glossary of jargon relating to blockchain technology, cryptocurrency, Web3, NFTs, and the metaverse & is likely indispensable if you find yourself having to fake your way through a meeting with folks in this, uh, “space.”

On the other hand, your facility with this jargon probably won’t impress your kids, unless of course they work in crypto – in which case why should you care if they’re impressed, since they’ve probably moved back into your house by now?

– John Jenkins

Yesterday, the SEC announced settled enforcement proceedings involving alleged insider trading by Cheetah Mobile’s CEO and its former president. Insider trading cases are a dime a dozen, but this one has given the Division of Enforcement something it has coveted for quite some time – an insider trading case involving senior executives allegedly misusing a Rule 10b5-1 plan.  Here’s an excerpt from the SEC’s press release:

The Securities and Exchange Commission today charged the CEO of Cheetah Mobile Inc. and the company’s former President with insider trading for selling Cheetah Mobile’s securities, pursuant to a purported 10b5-1 trading plan, while in possession of material nonpublic information. The SEC’s order finds that Sheng Fu, the company’s CEO, and Ming Xu, its then-President and Chief Technology Officer, jointly established a purported 10b5-1 trading plan after becoming aware of a significant drop-off in advertising revenues from the company’s largest advertising partner.

According to the SEC’s order, in 2016, Sheng Fu and Ming Xu sold 96,000 Cheetah Mobile American Depository Shares under the trading plan and avoided losses of approximately $203,290 and $100,127, respectively. Cheetah Mobile is based in China and offers various technology products, including mobile games and other applications.

“This case serves as yet another example of the SEC’s resolve to hold executives accountable when they try to skirt federal securities laws to illegally trade on nonpublic information,” said Joseph G. Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit. “While trading pursuant to 10b5-1 plans can shield employees from insider trading liability under certain circumstances, these executives’ plan did not comply with the securities laws because they were in possession of material nonpublic information when they entered into it.”

Under the terms of the SEC’s order, the defendants, without admitting or denying the agency’s allegations, agreed to cease and desist from future violations of the antifraud provisions of the federal securities laws & to provide advance notice of any transactions in Cheetah Mobile securities to the Director of the Market Abuse Unit in the Division of Enforcement. They also agreed to pay civil penalties.

As everyone reading this knows, the SEC has proposed changes to Rule 10b5-1 that will impose significant additional conditions and limitations on its use.  One of the criticisms of that proposal has been the absence of any enforcement proceedings directed at 10b5-1 plans.  Now the SEC has one.

– John Jenkins

Equilar & BarkerGilmore recently published their annual report on GC pay trends.  As always, the report has a lot of detail on compensation components, demographic information and commentary on the state of the market for GC positions.  But to me, the most interesting aspect of the report is its acknowledgement of the increasing number of GCs who are appearing as NEOs in public company comp tables:

One measure of the ascension of the role over the past half-decade is an increase in GC reported among the named executive officer (NEO) population. In 2021, 175 Equilar 500 companies included a General Counsel among their NEOs. This is up from a five-year low of 167 in 2018. The total of 175 is the same number as reported by the group in 2020, and at 4.8% growth in the last four years, the rate of increase is more modest than the 8.2% rise reported between 2016 and 2020 seen in the 2021 edition of General Counsel Pay Trends. Ongoing growth nevertheless serves to underline the continued evolution of the role.

The report says that GCs aren’t ascendant across all industries. The number of GCs identified as NEOs fell in prevalence among companies in both the consumer cyclical and consumer defensive sectors, and rose more modestly in some others, including healthcare and basic materials.

– John Jenkins

Woodruff Sawyer recently published their D&O Market Update, and like other commentators, Woodruff Sawyer expresses a pretty optimistic view on D&O insurance premium trends. This excerpt discusses the changes in the market that occurred during the first half of this year:

During 1H 2022, pricing trends flipped from where they were in 2H 2021. This shift is most dramatic for those business sectors where Woodruff Sawyer’s clients happen to be most heavily weighted: life science, technology, and IPOs. These industry segments were hit hardest by the hard market and consequently are gaining the most benefit from the current, more competitive market. More mature companies or those in less risky industries are also benefiting from the improving market, but the scale of the percentage decreases through the rest of this year and into 2023 will be somewhat more muted.

As always, clients beset by tricky litigation, or litigation precursors such as large stock drops after releasing bad news, may still see increases. Comparing data from 2H 2021 with 1H 2022 is telling. According to Woodruff Sawyer’s data, 70% of clients renewing between July and December of 2021 received an increase. Starting in January of 2022, the trend flipped: 16% of clients experienced an increase, 15% obtained a flat renewal, and 69% obtained a decrease.

The report says that another contributing factor to the improved premium environment is competition provided by new entrants to the public company D&O insurance market. These folks were enticed to jump into the market by the rising premium environment of 2020 & 2021. Now, they’re helping to hold the line on premium increases.

– John Jenkins

Last week, the SEC announced the settlement of an enforcement proceeding against VMWare in which it alleged that the company misled investors about its order backlog management practices, which allowed it to push revenue into future quarters by delaying customer deliveries to customers. Here’s an excerpt from the SEC’s press release announcing the settlement:

The SEC’s order finds that, beginning in fiscal year 2019, VMware began delaying the delivery of license keys on some sales orders until just after quarter-end so that it could recognize revenue from the corresponding license sales in the following quarter. According to the SEC’s order, VMware shifted tens of millions of dollars in revenue into future quarters, building a buffer in those periods and obscuring the company’s financial performance as its business slowed relative to projections in fiscal year 2020. Although VMware publicly disclosed that its backlog was “managed based upon multiple considerations,” it did not reveal to investors that it used the backlog to manage the timing of the company’s revenue recognition.

Under the terms of the SEC’s order, the company agreed, without admitting or denying the agency’s allegations, to refrain from future violations of Section 17(a)(2) and 17(a)(3) of the Securities Act & the books and records provisions of the Exchange Act. Over on Radical Compliance, Matt Kelly blogged some thoughts on some of the proceeding’s implications for internal controls:

The company did have a written policy about how to use discretionary holds; but that policy was so broadly worded — “backlog is managed based upon multiple considerations, including product and geography” — that executives could twist the policy to fit whatever aims they wanted. Like, say, manipulating the sales backlog to meet earnings expectations and hide weakness in revenue growth.

In theory, one could say that management should have had more disciplined documentation requirements, forcing executives to justify their discretionary holds according to more objective criteria. I’ve mentioned that concept before, in other posts about poor management judgment that gets the company into trouble. Your internal controls should require enough documentation that poor decisions stick out like a sore thumb, so that auditors or the board’s audit committee can see those bad choices from a mile away.

Then again, there’s a broader lapse in management judgment here, too. The SEC rapped VMWare on the knuckles for failing to disclose that it used discretionary holds to manage earnings; but even if the company had disclosed that, does anyone believe that would be a good idea?

By the way, the SEC’s fiscal year ends next Friday, so brace yourself for the customary torrent of year-end announcements relating to settled enforcement actions.

– John Jenkins