In April, I blogged about a cert petition seeking SCOTUS review of the SEC’s use of “gag orders” in connection with the settlement of enforcement proceedings. Despite divergent approaches taken by lower courts on the validity of those orders, the Court declined to grant cert in Romeril v. SEC yesterday. This Bloomberg Law article on the Court’s decision notes that the cert petition had the support of two of the SEC’s most vocal foes:
The US Supreme Court Tuesday rejected a challenge—backed by Elon Musk and Mark Cuban—of the SEC’s power to “gag” parties who settle with the agency. The case stems from a challenge by former Xerox Corp. chief financial officer Barry Romeril, who sued for the ability to deny the Securities and Exchange Commission’s fraud allegations after he signed a 2003 settlement with the agency.
Romeril asked the high court to weigh in on whether his SEC deal, including a “no-deny” provision he referred to as a “gag order,” violated First Amendment free speech protections or constitutional guarantees of due process.
Musk, who last week appealed a ruling upholding his own settlement with the agency, joined an April amicus brief in support of Romeril’s petition. Musk’s “Twitter sitter” SEC deal calls for a Tesla Inc. attorney to screen all of his tweets related to the automaker after his 2018 missive indicating he had secured funding to take the company private.
The SCOTUS may have taken a pass on this issue for now, but with lower courts taking different positions on the issue and the willingness of folks like Cuban & Musk to back a fight over it, I doubt we’ve heard the last on the enforceability of SEC gag orders.
I read the SEC’s climate disclosure proposals shortly after they were issued in order to prepare an article for The Corporate Counsel newsletter. As I worked my way through the 500+ page proposing release, it became clear to me that in light of the breathtaking scope of the proposals, companies simply can’t afford to wait to begin preparing for the new disclosure regime. If companies want to avoid the risk of stumbling out of the gate, they need to start to work on their compliance efforts immediately.
We’re eager to get the word out on this and share practical step-by-step guidance. As a follow-up to our April webcast about “first steps” in response to the SEC’s climate disclosure proposal – and as a precursor to PracticalESG.com’s “1st Annual Practical ESG Conference” on October 11th, join PracticalESG.com for a FREE video Climate Disclosure Event about these landmark rules on July 13th at 2:00 pm Eastern. Our experienced panelists – from a variety of industries & backgrounds – will discuss practical steps to take RIGHT NOW in anticipation of the disclosure mandate.
As a bonus, we’ll unveil model disclosure that Lawrence Heim, Dave Lynn and I prepared and discuss the drafting challenges we faced — providing meaningful lessons to anyone looking ahead and preparing.
This Event consists of two one-hour sessions. Our first session, beginning at 2:00 pm Eastern, will cover:
– How to convey to your bosses & colleagues the major differences between this proposal and traditional SEC reporting, and existing ESG disclosures;
– Tips for overcoming the new challenges that this disclosure will create;
– Key steps for companies to take right now to prepare for compliance;
– Former regulators’ perspectives; and
– Lessons learned from preparing our model disclosures.
Hear step-by-step action items from these experienced practitioners:
– Stephanie Bignon – Assistant General Counsel, Delta Airlines
– Meredith Cross – Partner, WilmerHale
– Karen J. Garnett – Managing Director, Head of ESG Policy and Reporting, Charles Schwab & Company
– Denis Jacob – Chief Audit Executive, GE
– Dave Lynn – Partner, Morrison Foerster
Our second session, beginning at 3:00 pm Eastern, will cover:
– ESG data that investors and others want, compared to what’s currently available;
– Types of questions and disclosure reviews companies can expect from regulators;
– How companies can prepare disclosure with an eye towards minimizing questions & risks;
– How asset managers, institutional investors and other external audiences use climate disclosure; and
– A look at our model disclosure and how it anticipates these issues.
This session features:
– Amy Borrus – Executive Director at the Council of Institutional Investors
– Devika Kaul – VP, Asset Stewardship, State Street Global Advisors
– Satyam Khanna – SIEPR Policy Fellow at the Stanford Institute for Economic Policy Research
– Dave Lynn – Partner, Morrison Foerster
– Kosmas Papadopoulos, Executive Director, Head of Sustainability Advisory Services – Americas, ISS Corporate Solutions
To make this event an even bigger value, attendees are eligible for $100 off our 1st Annual Practical ESG Conference AND $200 towards an annual subscription to PracticalESG.com! Email sales@ccrcorp.com or call 1-800-737-1271 to claim this offer.
Register today for this FREE event, and please share it with anyone on your team or in your network who may be interested. That includes ESG, Sustainability & Impact Officers, Environmental Health & Safety Officers, Investor Relations & Public Relations professionals, in-house and outside counsel who are advising boards or preparing disclosures, and anyone involved with ESG strategies and disclosures. To register for this event and learn about our model disclosure, click here.
You may have noticed that our upcoming PracticalESG.com event is a video webcast, so it’s not surprising that given my previously noted “radio face” issues, I’m not going to participate other than as a spectator. However, I did help draft the model disclosures that we’ll unveil there. Lawrence and Dave will share more details about the challenges we faced preparing them, but since I’m not going to be there, I thought I’d share a few of my own thoughts here:
– Shame is the Name of the Game. The disclosures required under the proposed rules are designed to promote a proactive approach to addressing climate change and to shame companies that don’t follow the script by compelling them to make awkward disclosures. For example, proposed Item 1501’s requirement to disclose “whether and how the board of directors sets climate-related targets or goals, and how it oversees progress against those targets or goals, including the establishment of any interim targets or goals” is going to result in uncomfortable disclosure for companies that haven’t established those targets or don’t provide board oversight of progress in attaining them.
– The Boilerplate Potential is High. When disclosure requirements lay out the path that regulators want companies to take and are designed to shame those that don’t, companies tend to follow that path. An unfortunate consequence of that approach is the potential for lemming-like behavior that will likely result in a lot of boilerplate disclosure. And yes, a lot of this stuff lends itself to boilerplate, even though that’s an outcome the Staff says it wants to avoid.
– Item 1502 of S-K may be a Comment Magnet. Companies aren’t the only ones who are going to need to ramp up their expertise on non-traditional topics. The Staff faces that challenge as well, which I think means that in the early years of implementation, new disclosure requirements that are similar to existing ones are likely to be a magnet for Staff comments. Proposed Item 1502, which calls for companies to provide what is essentially a climate-centric MD&A, seems to me to be a prime candidate for Staff comments.
– You Can’t Do This Yourself. The proposed rules will require compliance with extraordinarily granular disclosure requirements dealing with matters that are beyond the expertise of the lawyers and accountants who traditionally take the lead in preparing SEC filings. That means that many companies – even those that currently provide climate disclosure – will need to add capabilities, enhance disclosure controls and procedures, and expand the group responsible for SEC reporting to include people with experience in climate-related disclosures and metrics.
Finally, it’s worth noting that you don’t have to start with a blank piece of paper. In addition to our model disclosure, there are some other disclosure documents out there that can help you start the process. Perhaps the most useful of these are the standalone TCFD reports that many large cap companies put out. Since the proposed rules incorporate a lot of concepts from the TCFD framework, those reports are likely to be quite helpful – check out this example from Microsoft. We’ll be posting additional samples & checklists – along with our model disclosures – on PracticalESG.com.
The May-June issue of “The Corporate Counsel” newsletter is in the mail (email sales@ccrcorp.com to subscribe to this essential resource). It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. This issue includes the following articles:
– Considering the Disclosure Implications of the War in Ukraine
– The Trouble with Hyperlinks
– Mandatory Electronic Filing of Form 144 is Here
– EGC Status and Transitions: 10 Frequently Unanswered Questions
Dave & I also have been doing a series of “Deep Dive with Dave” podcasts addressing the topics we’ve covered in recent issues. We’ll be posting one for this issue soon. Be sure to check it out on our “Podcasts” page!
The board composition report from Heidrick & Struggles that I blogged about yesterday noted that companies are looking to add directors whose backgrounds combine a mix of traditional expertise with other skills, such as sustainability or cybersecurity expertise. That need for new expertise may increase the opportunities for non-CEO executives to join the board of another company and may prompt some companies to rethink policies on outside board service to accommodate key executives’ desire to serve on a board.
This Perkins Coie blog provides some thoughts on outside board service by non-CEOs and offers recommendations on best practices in evaluating those opportunities and policing the issues that may arise. This excerpt addresses two significant issues – potential conflicts and time commitments:
– Conflicts & Related Party Transactions: Before anything else, ask – does the company making the invitation somehow raise the prospect of a risk of a conflict of interest – or even the appearance of one? Or might there be material related party transactions involved? This requires some homework and careful thought: the invited officer will need to learn the strategic goals of the inviting company – and consider if these now (or may in the future) overlap with and conflict the current employer’s interests. Even if the two companies are not competitors, could they enter into a related party transaction down the road that may need to be disclosed in either company’s proxy? Even seemingly innocuous disclosure could be considered a negative from an ISS, Glass Lewis or investor point of view.
Also consider reputational issues of the company who is offering the board seat, and whether they could negatively impact the employer.
– Assess Committee Obligations & Expected Time Commitment: What will be the time commitment of a board seat? And is putting in that time practical from the standpoint of the amount of time the executive is expected to put in for her employer? Consider both the expected hours commitment – and the reality of periodic “crunch” times that pop up during the inevitable crises that arise. There may be some executive roles – a CFO for some companies – who would be hard-pressed to appropriately deal with an M&A transaction or serious investigation in their role as a director without interfering with that officer’s responsibilities during earnings season, for example.
Yet a Chief HR Officer, Chief Technology Officer, Chief Legal Officer or Chief Sustainability Officer, with the right staff support, may be able to juggle both.
Other recommendations include limiting on service to one outside board, establishing a formal pre-approval process, monitoring director compensation received by the executive, and including board service as part of the executive’s annual performance appraisal process.
According to a recent blog from Doug Greene, the SEC’s proposal to eliminate SPACs’ ability to rely on the safe harbor for forward looking statements in connection with deSPAC transactions may not turn out to have much impact in practice. Why? Because, as this excerpt explains, the PSLRA’s safe harbor for forward looking statements simply isn’t very protective to begin with:
Public companies understandably believe that the Reform Act’s safe harbor protects them from liability for their guidance and projections if they simply follow the statute’s requirements. But, as a practical matter, the safe harbor is not so safe; some judges think the Reform Act goes too far, so they go to great lengths to avoid the statute’s plain language. This is one significant reason why we always have advocated an approach to defending forward-looking statements that does not depend solely on the safe harbor, even when the statute’s plain language would indicate that it applies. Thus, while SPACs and de-SPACs are certainly better off with the safe harbor than without it, its loss should not be as consequential as some may think.
The blog reviews the erratic approach that courts have taken to the safe harbor, and argues that it may stem from judges’ disdain for the potential “license to lie” that the statutory language provides. It goes on to point out that in defending claims implicating forward looking statements, the parties should keep in mind that these also involve opinions, and therefore, regardless of the safe harbor, plaintiffs also must satisfy the Virginia Bankshares & Omnicare tests in order to bring securities fraud claims based on those statements.
With the stock market heading straight downhill, a major war in Europe & the SEC throwing a regulatory monkey wrench into SPAC offerings, it’s no surprise that the IPO market’s been in a bit of a funk lately. But the Jim Hamilton Blog reports that things reached a new low last week:
As the air continues to come out of the IPO market, it reached a level last week that has not been seen in more than two years—no completed offerings. April 2020 was the last time that a week passed without at least one company making its public market debut. The holiday may have played a role in the standstill, but with only one IPO in the prior week the market was already growing quieter as May progressed. The 14 new issues in May represented the lowest single-month IPO total since ten were completed in April 2020.
The calendar for next week looks pretty empty too, so don’t be surprised if you see a larger than usual number of investment bankers at your favorite beach this summer.
Heidrick & Struggles recently issued its report on 2021 board composition trends among Fortune 500 companies. The report says that boards have continued a trend that began in the second half of 2020 of reaching out to groups of people from increasingly more diverse backgrounds. It concludes that 2021 changes in board composition were mostly incremental but generally positive. Here are some of the highlights:
– A record share of seats (43%) was filled by first-time public company directors. On the whole, these directors bring more diversity of experience and background, and there was an increase in the share of seats that went to directors with sustainability and cybersecurity experience.
– A record share of seats (45%) went to women, but there was only mixed progress on racial and ethnic diversity. The share of seats filled by Black directors held relatively steady at 26%, after a sharp rise in 2020. However, both Asian or Asian American (9%) and and Hispanic or Latinx (6%) directors are still heavily underrepresented.
– There was little progress on age diversity. In 2021, as in recent years, two-thirds of seats were filled by people between ages 50 and 65. The average age of new appointees was 57.
The report provides more granular data concerning board composition and concludes with some thoughts on the actions being taken by “best in class” boards when it comes to board composition and succession. These include actively seeking new directors whose backgrounds combine a mix of traditional expertise with knowledge that is newer on boards’ skills matrix (such as sustainability or cybersecurity), bringing younger directors onto boards, staying tightly focused on racial, ethnic and gender diversity, and seeking new members who can assume a leadership role.
If you aren’t already a member with access to that guidance, sign up now and take advantage of our “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund! You can sign up online, by calling 800-737-1271, or by emailing sales@ccrcorp.com.
The SEC hasn’t acted on its recent cybersecurity rulemaking proposal, but it seems apparent that any rules the agency adopts will ratchet up the demands on companies to effectively manage cyber risks & promptly disclose material cybersecurity incidents. Since that’s the case, this Woodruff Sawyer blog offers up some suggestions on what issues boards should be thinking about now in order to position their companies to comply with these new demands.
The SEC’s proposal to require 8-K disclosure of material cybersecurity incidents within four business days “after the registrant determines that it has experienced a material cybersecurity incident” creates a couple of issues that will require board attention. This excerpt explains:
– Companies may need to bolster the efficiency of their disclosure committees. The proposed four-day rule may be unworkable; boards and management nevertheless have to make every effort to comply. Now is the time for companies to review who is on these committees, as well as what resources they have to be able to comply with the SEC’s proposed timeline for disclosure. Although the rule is four days from a materiality determination, the SEC has made it clear that it will have no patience for companies attempting to slow-walk a materiality determination.
– Companies will want to review how they think about the financial impact of a cyber breach. The four-day rule allows very little time for companies to assess the impact of a cyber incident after it has happened. As a result, the onus will be on companies to attempt to calibrate these costs ahead of time, or at least consider a methodology for doing so.
Other areas that the blog identifies as meriting board consideration include the advisability of adding a cybersecurity expert to the board and reassessing the limits of the company’s cyber insurance policy.
The SEC’s Office of Investor Education and Advocacy announced yesterday that it was launching a series of game show themed PSAs to help investors make informed decisions and avoid fraud. The SEC’s press release makes it crystal clear that this program is being launched with the best of intentions:
One of the goals of the Investomania campaign, which features a 30-second TV spot, 15-second informational videos on crypto assets, margin calls, and guaranteed returns, and interactive quizzes, is to reach existing, new, and future investors of all ages. The campaign encourages investors to research investments and get information from trustworthy sources to understand the risks before investing. The campaign also reminds investors to take advantage of the free financial planning tools and information on Investor.gov, the SEC’s resource for investor education.
That being said, I’m not sure how these PSAs are going to play with their target audience. I’m skeptical that the SEC is “reading the room” well when it comes to the tone of the ads. After all, this campaign comes on the heels of a massive two-year surge in the number of new stock market investors, many of whom have taken a pretty big hit to their wallets over the past several months.
Since that’s the case, I think there’s a risk that a fair number of those investors are going to feel belittled by some of the content – particularly the videos lampooning meme stock & crypto investors. The early returns from social media suggest that’s exactly what’s happening.
