Yesterday, the SEC announced that it had adopted rules designed to modernize the filing fee process. Those fees are required for registered offerings, tender offers, and M&A filings. Here’s the surprisingly lengthy 432-page adopting release, and here’s the SEC’s one-page fact sheet. (Guess which one I read.) This excerpt from the SEC’s press release summarizes the changes:
The amendments revise most fee-bearing forms, schedules, and related rules to require companies and funds to include all required information for filing fee calculation in a structured format. The amendments also add new options for Automated Clearing House (ACH) and debit and credit card payment of filing fees and eliminate infrequently used options for filing fee payment via paper checks and money orders. The amendments are intended to improve filing fee preparation and payment processing by facilitating both enhanced validation through filing fee structuring and lower-cost, easily routable payments through the ACH payment option.
That “structured format” for the filing fee calculation that the press release refers to will take the form of a separate IXBRL exhibit to be included with the filings. As SEC Chair Gary Gensler noted in his supporting statement, the transition to a structured data format will enable the SEC to automatically detect errors and calculate fee amounts.
It’s worth noting that this rule was adopted by a unanimous, 5-0 vote – which is something we haven’t seen in a long time. Anyway, the new rules become effective on January 31, 2022, and companies will no longer be permitted to pay filing fees via checks and money orders effective on May 31, 2022.
Today is the second day of our “Proxy Disclosure Conference” – tomorrow is our “18th Annual Executive Compensation Conference.” Here’s more info:
– How to Attend: Once you log in to the Conference Platform, follow the 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. Here’s today’s agenda. If you have any questions about accessing the conference, please contact Victoria Newton at VNewton@CCRcorp.com.
– How to View Archives & Transcripts: Members of TheCorporateCounsel.net or CompensationStandards.com who have registered for the Conferences will be able to access the conference archives on these sites using their existing login credentials beginning about a week after the event, and unedited transcripts will be available to these members on TheCorporateCounsel.net and CompensationStandards.com beginning about 2-3 weeks after the event. If you’ve registered for the conferences through CCRcorp but are not a member, we will send login information to access the conference footage and transcripts on TheCorporateCounsel.net or CompensationStandards.com.
If you registered for the conferences through NASPP, you will receive access to the video archives from NASPP.
– How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
Over on “Radical Compliance,” Matt Kelly recently blogged about Gurbir Grewal’s first speech as Director of the SEC’s Division of Enforcement, and he says Grewal signaled that the agency will take a harder line on penalties under his leadership:
The SEC’s new director of enforcement delivered his first speech this week, where he outlined a more aggressive use of monetary penalties to deter corporate misconduct and how the SEC will evaluate cooperation and other factors while deciding how large of a penalty to impose.
The speech came from Gurbir Grewal, who took over as head of the Enforcement Division at the end of June. He spoke Thursday at a forum hosted by the Practising Law Institute that nominally was about broker-dealer issues, but Grewal’s remarks on the SEC’s penalty policy are worth any compliance professional’s attention.
The bottom line: Grewal, like other senior officials at the agency, wants to see penalties actually deter corporate misconduct — which could well mean larger penalties than we’ve seen before. “As we evaluate relevant penalty factors, we will also be closely assessing whether prior penalties have been sufficient to generally deter the misconduct at issue,” Grewal said. “Where they have not been, you can expect to see us seek larger penalties, both in settlement negotiations and, if necessary, in litigation.”
The blog points out that Grewal’s comments echo those of Commissioner Caroline Crenshaw, who earlier this year called for the SEC to change its approach to monetary penalties in enforcement proceedings. Grewal also spoke at “The SEC Speaks” conference earlier this week, where he mostly said the same things that every newly appointed Director of Enforcement says. However, this part of his speech jumped out at me:
When it comes to accountability, few things rival the magnitude of wrongdoers admitting that they broke the law, and so, in an era of diminished trust, we will, in appropriate circumstances, be requiring admissions in cases where heightened accountability and acceptance of responsibility are in the public interest. Admissions, given their attention-getting nature, also serve as a clarion call to other market participants to stamp out and self-report the misconduct to the extent it is occurring in their firm.
That suggests that the SEC may seek admissions of misconduct as part of settlements more frequently than in the past. It will be interesting to see how that plays out, because I think that some companies who’d be willing to throw an officer or two under the bus as part of a “neither admit nor deny” settlement may be more inclined to force the SEC to litigate if admissions are going to be required.
Speaking of enforcement, we’ve blogged several times about the SEC’s EPS Initiative – here’s a recent one from Liz – and now, the WSJ has taken notice as well. Sometimes, it’s hard to believe this blog is free, isn’t it?
Today and tomorrow is our “Proxy Disclosure Conference” – Friday is our “18th Annual Executive Compensation Conference.” Here are the agendas: 17 substantive panels over 3 days – plus an interview with Renee Jones, the new Director of the SEC’s Division of Corporation Finance. Check out the speaker videos to see what has our speakers excited about this year’s conference. Here’s more info:
– How to Attend: Once you log in to the Conference Platform, follow the 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. Here’s today’s agenda. If you have any questions about accessing the conference, please contact Victoria Newton at VNewton@CCRcorp.com.
– How to View Archives & Transcripts: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives on these sites using their existing login credentials beginning about a week after the event, and unedited transcripts will be available to these members on TheCorporateCounsel.net and CompensationStandards.com beginning about 2-3 weeks after the event. If you’ve registered for the conferences through CCRcorp but are not a member, we will send login information to access the conference footage and transcripts on TheCorporateCounsel.net or CompensationStandards.com.
If you registered for the conferences through NASPP, you will receive access to the video archives from NASPP.
– How to Earn CLE Online: Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
You may have noticed a conspicuous absence in the list of speakers for this year’s Conference. Yes, you can look high and low, but you won’t find me anywhere. When I saw that I didn’t make the cut, my immediate reaction was that – like Fredo Corleone – I had been “stepped over.” However, when I approached our management team, they assured me that wasn’t the case, and suggested that I should think of myself as Michael Collins, not Fredo Corleone.
Management also assured me that I would have a prominent role in our upcoming webcasts and podcasts. I don’t want to brag, but they went out of their way to tell me that I have the perfect “face for radio.” You know, not everybody can say that! Anyway, everyone was very appreciative of my willingness to hold down the fort here this week while they were busy with the Conference. Liz even gave me her Netflix password so I could watch “Squid Game” while she was gone.
The September-October issue of “The Corporate Counsel” newsletter is in the mail. 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 (subscribe here to be “in the know”). The issue includes articles on:
– Test Driving Testing the Waters
– Staff Comments on Non-GAAP Financials: The 2021 Edition
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 Delaware Chancery Court’s decision in the Boeing case is the latest in a series of cases suggesting that, as Liz put it in a recent blog, we’re in an era of “easier” Caremark claims. Whatever else that may mean, in this environment, it’s pretty clear that directors need to keep their heads on a swivel when it comes to identifying potential sources of alleged breaches of their duties of oversight. This Directors & Boards article identifies one such area – compliance with COVID-19 mandates. Here’s an excerpt:
On Sept. 9, President Joe Biden announced his six-pronged COVID-19 Action Plan, which will have a significant impact on employers across the country by mandating vaccinations for many employees and requiring regular testing of certain others. Although key details are unknown at the time of this writing, the plan will have a significant impact on many private sector employers, particularly companies that contract with the federal government, those that receive Medicare or Medicaid reimbursement and, most sweepingly, companies with 100 or more employees.
The rule applicable to employers of more than 100 individuals is being developed by OSHA now and, once issued via temporary standard, will require these companies to ensure that their staff is fully vaccinated against or tested weekly for the COVID virus. Employees who are not vaccinated will have to show proof of a negative virus test before reporting to work. The White House estimates this requirement will impact over 80 million workers.
OSHA is seeking to issue its new rule initially pursuant to rarely used emergency authority that it may exercise only where there is evidence of “grave danger from exposure to … agents determined to be toxic or physically harmful or from new hazards.” This basis for the regulation will almost certainly be challenged in court, but in the meantime, it sets forth an unambiguous statement of the importance of a vaccine requirement for employee safety.
Although the COVID-19 Action Plan includes frequent testing as an alternative to vaccination, boards may justifiably be concerned that if the company fails to comply with the regulations, this response could be second-guessed in lawsuits brought alleging that the board’s response reflected inadequate oversight of the “grave danger” to employee (and possibly customer) safety posed by COVID-19. Even if the board requires compliance but relies primarily on testing and not by mandating employee vaccinations, this could possibly still be alleged to be an inadequate response to the risk.
Putting the vaccine mandate aside, the article notes that boards will have a tough time in the current environment arguing that addressing the employee safety risks posed by the pandemic isn’t the kind of essential and mission critical function that triggers a duty to actively oversee the company’s response. That means the company’s overall response to the pandemic, and not just to the COVID-19 Action Plan, needs to be carefully considered and appropriately documented.
Last week, the DOJ announced a new cyber-fraud initiative, and if your company is a government contractor, you’re on the front line. Here’s an excerpt from the DOJ’s announcement:
The Civil Cyber-Fraud Initiative will utilize the False Claims Act to pursue cybersecurity related fraud by government contractors and grant recipients. The False Claims Act is the government’s primary civil tool to redress false claims for federal funds and property involving government programs and operations. The act includes a unique whistleblower provision, which allows private parties to assist the government in identifying and pursing fraudulent conduct and to share in any recovery and protects whistleblowers who bring these violations and failures from retaliation.
The initiative will hold accountable entities or individuals that put U.S. information or systems at risk by knowingly providing deficient cybersecurity products or services, knowingly misrepresenting their cybersecurity practices or protocols, or knowingly violating obligations to monitor and report cybersecurity incidents and breaches.
The DOJ says that it will work closely with other federal agencies, subject matter experts and law enforcement partners throughout the government. This Miller & Chevalier memo on the Initiative notes that it follows on the heels of President Biden’s executive order on cybersecurity, and also discusses a number of recent cybersecurity cases where the government has used the formidable False Claims Act as the basis for its claims.
For me, the one unbending rule of corporate board and committee meetings has always been that the minutes should be the definitive record of the actions taken at them, so I have been dismayed to learn that some companies have opted to record video board meetings held during the pandemic. This Bryan Cave blog discusses the privilege, consent and privacy issues involved in recording board and other corporate meetings. This excerpt reviews the privilege issues that can arise when a company records its board meetings:
Recorded video conferences could be subject to discovery in the litigation context. Board discussions are not inherently privileged, and thus board members who become witnesses may, under some circumstances, be asked about what they discussed at a meeting. But a recording of the meeting is likely to provide a fuller account than participants’ memories or written minutes, and so may yield more powerful evidence. Further, to the extent all or part of a meeting is subject to the attorney-client privilege or other confidentiality provision, the existence of a recording that can be distributed raises the risk of waiver through sharing of the document with parties outside the scope of the privilege.
I don’t care how well-functioning your board is – I guarantee you that a plaintiff’s lawyer would consider an unedited recording of an entire board meeting to be an absolute gold mine. So, if you’re recording these meetings, expect those recordings to be included in a books & records request from a plaintiff’s lawyer on a fishing expedition for derivative claims.
Earlier this week, Activision Blizzard confirmed media reports that it was the subject of an SEC investigation concerning “the company’s disclosures regarding employment matters and related issues.” Regardless of its outcome, the SEC’s decision to pursue such an investigation has proven to be controversial. After all, when was the last time that allegations relating to employment practices caught the eye of the Division of Enforcement?
In defending the investigation, some have observed that the workplace misconduct allegations against the company may call into question the accuracy of the human capital disclosures that appeared in its Form 10-K. But UCLA’s Stephen Bainbridge suggests that the SEC’s investigation represents a revival of the agency’s long-ago abandoned efforts to persuade courts to compel disclosure of uncharged wrongdoing. Here’s an excerpt from his recent blog on the investigation:
Obviously, the SEC will claim that it is about Activision’s allegedly deficient disclosures relating to its Human Resources practices. But even if we accept that risible claim at face value, the SEC is still overstepping its bounds. It’s critical that Activision management has not been convicted of any civil or criminal violations. If they had been, it would be arguable that failing to disclose those convictions would be a material omission (obviously, I realize that one is not convicted of civil violations, but I’m using it as a shorthand).
Where plaintiff complains of noncriminal conduct allegedly constituting mismanagement, courts have been unwilling to require disclosure. In Amalgamated Clothing and Textile Workers Union, AFL―CIO v. J. P. Stevens & Co., 475 F. Supp. 328 (S.D.N.Y.1979), for example, plaintiffs argued that the board of directors had either knowingly violated the labor laws or, at least, failed to prevent management from doing so. According to plaintiffs, this alleged misconduct had harmed the corporation’s reputation and exposed it to liability. The failure to disclose these purported facts in connection with the election of the directors allegedly constituted an omission of material facts. In rejecting plaintiff’s argument, the court held that it would be “silly” to “require management to accuse itself of antisocial or illegal policies.”
Yet, that is precisely what the SEC investigation of Activision assumes management is required to do.
I’m inclined to sympathize with this argument, and I agree that efforts to expand the SEC’s authority beyond financial regulation involve the kind of “mission creep” that threatens its credibility. But I think there’s an important difference between the SEC’s 1970s “qualitative materiality” crusade and situations like this one. Instead of trying to pluck disclosure duties from the ether, this time the SEC has a line-item in its quiver.
Risible or not, that line-item creates a duty to disclose material human capital information, which puts the substance of the disclosure that Activision provided squarely within the SEC’s jurisdiction. The SEC isn’t investigating an omission in search of some amorphous duty to disclose, but whether there were potential misstatements or omissions in response to line-item disclosures that the company was obligated to make.
There’s some irony in the fact that this “principles based” disclosure requirement is being cited as a jumping-off point for a renewed foray by the SEC into the qualitative materiality morass. After all, it was conservatives who championed this “DIY” approach to human capital disclosure, while liberals called for detailed line-item requirements addressing specific metrics. The SEC’s reliance on the new disclosure requirement to investigate conduct that’s pretty far from the core focus of the securities laws suggests that, in the end, the flexibility provided by principles based disclosure requirements may give companies just enough rope to hang themselves.
