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Over the weekend, former Chief of the SEC’s Office of Internet Enforcement John Reed Stark posted an in-depth article on X in which he discussed some reforms he expects to see the SEC initiate in the early days of Paul Atkins’ leadership. Stark worked the SEC during Atkins’ last tour of duty and believes he’s an excellent choice to serve as SEC Chair. Based on his experience with Atkins and knowledge of his views, Stark said that he expects to see an “extraordinary, monumental, and urgently required transformation within the SEC, especially within the SEC Division of Enforcement.” Here are some of the specifics:
– “Open Jacket” Disclosure Policy in Enforcement Actions. Unlike federal prosecutors, the SEC doesn’t have a policy requiring it to lay its evidentiary cards on the table before instituting enforcement proceedings. During his time as a commissioner, Stark says that Atkins believed that “failing to share critical incriminating — and most importantly, exculpatory — evidence, violated the rights of U.S. citizens and also inhibited the ability of enforcement staff members to candidly explain an investigation to the SEC Commissioners.” He said he expects Atkins to order Enforcement to fully inform potential defendants about the allegations and the SEC’s evidence before entering into settlement discussions.
– Backing off Cyber Enforcement & Repealing the Cyber Disclosure Rule. Stark expects that Chair Atkins will put the brakes on the SEC’s cyber disclosure enforcement actions targeting companies that have experienced “good faith mishaps that had no real-world consequences” and to instead focus on cyber-related disclosure fraud. He also expects that Atkins will either ask his fellow commissioners to repeal the cyber disclosure rule or freeze its implementation pending further study.
– Deemphasizing Corporate Penalties & Emphasizing Individual Accountability. Stark believes that Chair Atkins is particularly concerned that the corporate managers might agree to a large corporate penalty in order to avoid or reduce sanctions against individual wrongdoers. Stark contends that Atkins thinks this creates a perverse incentive that results in shareholders footing the bill for individual misconduct. He also says that Atkins is concerned that the potential for significant corporate penalties may result in a misallocation of resources by incentivizing the Enforcement Division to chase potential headline grabbing corporate penalties.
The article addresses a number of other potential reforms, including cracking down on what Atkins considers to be the “tyranny of the minority” inherent in the shareholder proposal system, eliminating crypto enforcement, and reducing even further the SEC’s efforts to target ESG-related disclosure shortcomings.
Oh yeah, and one more thing – although Stark didn’t mention this one directly, other media reports continue to indicate that the climate disclosure rule is likely an “ex-parrot.”
In a recent blog, Gunster’s Bob Lamm argues that whatever concerns some of us may have about Donald Trump’s return to the White House, the changes at the SEC will likely make the agency easier to work with for public companies and their legal counsel:
Let’s face it – the SEC under Chair Gary Gensler has been difficult. I will try to take the high road by simply saying that under his leadership the SEC has been dismissive if not downright scornful of the issuer community when it comes to both rulemaking and enforcement.
There are many examples on the rulemaking side, but my favorite (so to speak) was the decision to require quarterly disclosure of corporate stock buybacks on each day during the preceding quarter. Perhaps we were supposed to be grateful that the original proposal – to file reports of each day’s buyback activity – was dropped in favor of the quarterly disclosure requirement. However, from my perspective there was no rational purpose to that disclosure, with the possible exception of giving academics the ability to conjure up correlations between buyback activity and other “nefarious” activities by corporations and their executives and directors. Fortunately, the final rules were thrown out by the federal courts.
Bob’s aside about academics being the only beneficiaries of the SEC’s buyback rules struck a chord with me. It seems to me that SEC rulemaking over the past several years has been unduly deferential to input from academics. To me, the best example of this is the Rule 10b5-1 amendments, which I’ve previously argued mostly represent a solution in search of a problem.
In contrast to the SEC’s deference to academics, Bob says that the agency has given public companies the cold shoulder. For example, he notes the SEC’s refusal to consider an “Issuer Advisory Committee” akin to its Investor Advisory Committee), as well as its reversal of the proxy adviser regulations adopted during the first Trump administration. He also points to the agency’s ham-fisted approach to the adoption of the climate disclosure rule, and its endless pursuit of disclosure controls & procedures enforcement cases against public companies.
Bob’s hope that Trump 2.0 will lead to better relations between public companies and their principal regulator is premised on his view that things weren’t so bad for public companies at the SEC the last time around. That’s probably true, but he acknowledges that the bottom line is that there are no guarantees, and like everything else about Trump 2.0, we’ll just have to wait and see what the next few years bring.
During his first tour of duty as an SEC commissioner, Paul Atkins was not known for his warm and fuzzy feelings toward the PCOAB. Now, as he prepares to assume the position of SEC Chair, it looks like critics of the agency are likely to have his ear, and the implications for the PCAOB could be significant. Here’s an excerpt from a recent Wall Street Journal article:
New leadership likely would scale back the PCAOB’s reach, leading to fewer penalties, slower rule making and a smaller budget, PCAOB observers say. A long-gestating debate over whether the SEC should absorb the PCAOB is poised to resurface, they say.
Atkins, while an SEC commissioner, criticized the PCAOB’s budget, saying salaries paid to board members were disproportionately high. In speeches, he spoke out against rules that limited audit firms’ ability to make professional judgments. “Overly prescriptive standards can rob you of the ability to apply your professional judgment,” Atkins said in 2005.
The board members’ annual salaries have been flat since 2009, with the chair receiving nearly $673,000 and the other members receiving almost $547,000.
Atkins as commissioner showed disdain for the PCAOB when meeting with officials from the audit regulator, said Martin Baumann, an adjunct accounting professor at Southern New Hampshire University and former PCAOB chief auditor. “I don’t expect this to be good for the PCAOB,” he said, referring to Trump’s Atkins pick.
The possibility that the PCAOB may ultimately be on the chopping block shouldn’t come as a surprise. Eliminating the PCAOB was one of the securities regulation reforms specifically called out in the Project 2025 document I blogged about last month. However, that kind of a move would require Congress to act, since the PCAOB was created by Sarbanes-Oxley.
On the other hand, despite her recent appointment to a second term, PCAOB Chair Erica Williams might want to dust off her resume. The WSJ article suggests that she may be replaced, and it wouldn’t be the first time that the SEC has cleaned house at the PCAOB after a change in administrations. Also, I’m guessing that it’s not a good sign that Google is already identifying her as the “former chairperson” of the PCAOB.
The CAQ and Ideagen Audit Analytics recently issued the 2024 edition of their “Audit Committee Transparency Barometer,” which assesses audit committee trends and disclosure practices. The report says that cybersecurity oversight will be a high priority issue for audit committees during the upcoming year, and that disclosures about cyber oversight are expected to become more robust. Here’s an excerpt:
The cybersecurity landscape has changed dramatically in recent years. Cybersecurity incidents are on the rise and the costs associated with a cybersecurity incident are also increasing. In the CAQ and Deloitte joint Audit Committee Practices Report, 69% of audit committee respondents indicated that cybersecurity will be in the top three priority areas for the audit committee in the next 12 months, and 30% ranked cybersecurity as the number one priority for the audit committee in that period.
Additionally, with the SEC Cybersecurity Disclosure Rule in full effect, certain cybersecurity information is required to be included in SEC filings. Further, per the CAQ 2024 Audit Partner Pulse Survey, 47% of audit partners expect to see companies in their primary industry sector voluntarily increasing or enhancing cybersecurity disclosures over the next 12 months.
The report says that consistent with this expectation, more boards are disclosing that they have a cybersecurity expert (60% of the S&P 500 in 2024, compared to 51% in 2023). It also says that in today’s complex & evolving threat environment, boards and audit committees need to stay current through education and training in order to effectively oversee corporate cyber risk management efforts.
The report also addresses disclosure practices with respect to director skills, auditor oversight and tenure, the relationship between audit fees and audit quality, and board oversight of ESG issues.
FEI’s Q4 “Activism Vulnerability Report” highlights recent activism trends and notable activist campaigns. Here are some of the key takeaways:
– Activist investor activity experienced a seasonal dip after a very active first half of 2024. This trend aligns with typical patterns. There were 56 campaigns initiated in 3Q24, closely mirroring previous years’ activity levels for the same period.
– Board seats gained by activists in U.S. companies through September 30, 2024, remained relatively steady compared to the same period in 2023. However, the pathways to these seats shifted, with fewer board seats achieved through settlements and a slight uptick in board seats won through proxy contests.
– Activists publicly sought one or more board seats 147 times during the first three quarters of 2024, up from 112 at the same point last year. However, their success rate declined, with only 53% of these demands resulting in board seats, down from 63% in the same period last year.
– Mid-cap companies, in particular, have seen a surge in activist interest, accounting for 25% of total campaigns in 3Q24, compared to just 10% a year earlier. This shift is not without reason: year-to-date through November 1, activists are achieving higher success rates in the mid-cap segment, with an impressive 74% of concluded mid-cap campaigns delivering favorable outcomes for activists in 2024, up from 51% during the same period last year.
– Through 3Q24, there have been 40 campaigns with explicit demands for M&A transactions, compared to 34 during the same period last year. This persistent and increased focus on M&A may reflect activists’ interest in capitalizing on improving conditions in the current economic environment, particularly as interest rates have begun to decline and future rate paths become more predictable.
The report says that the most frequently targeted sectors during the third quarter were TMT, with 14 campaigns, followed by Financial Institutions, with eight, and that these same sectors are continuing to face activist pressure in the current quarter, with nine new campaigns in TMT and six in Financial Institutions launched between October 1 and November 1, 2024.
Speaking of activism, we’ve posted our latest “Understanding Activism with John & J.T.” podcast. This time, J.T. Ho and I were joined by Kai Liekefett, who co-chairs Sidley’s Shareholder Activism and Corporate Defense practice. Kai’s practice focuses exclusively on shareholder activism campaigns, proxy fights and hostile takeovers, and over the past five years, he’s defended over 150 proxy contests globally and approximately 25% of all U.S. late-stage proxy fights, more than any other defense attorney in the world.
Topics covered during this 26-minute podcast include:
– Why many activists supported Donald Trump over Kamala Harris
– What changes to the SEC’s approach to proxy advisor regulation, UPC, and Rule 14a-8 might mean for activism
– Implications of potential changes in the antitrust merger review and enforcement environment
– Impact of disruptions resulting from tariffs and other unconventional economic policies
– Potential changes in companies targeted for activism and activist tactics
Note that during the podcast, Kai comments on the implications of a new SEC chair on the agency’s approach to activism. We recorded this podcast on November 22, 2024, prior to President-Elect Trump’s appointment of Paul Atkins to serve in that capacity.
Our objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We’re continuing to record new podcasts, and I think you’ll find them filled with practical and engaging insights from true experts – so stay tuned!
The 5th Circuit hasn’t exactly been a friendly jurisdiction for the SEC in recent years, but yesterday, in National Center for Public Policy Research v. SEC, (5th Cir.; 11/24), the Court rejected a conservative advocacy group’s challenge to the legality of the SEC’s Rule 14a-8 no-action letter process. Here’s an excerpt from Bloomberg Law’s article on the decision:
A federal appeals court on Thursday left in place the SEC’s power to referee which shareholder proposals companies allow on their annual meeting ballots, tossing a case from business and right-leaning groups fighting the agency’s influence.
The Securities and Exchange Commission issued non-binding guidance that fell outside of judicial review when it advised supermarket chain Kroger Co. it could block a vote on a conservative organization’s antidiscrimination proposal in 2023, the US Court of Appeals for the Fifth Circuit ruled. Companies looking to keep shareholder proposals they consider repetitive or disruptive to their business off their ballots usually seek SEC guidance. The SEC can sue if companies bar votes without adequate justification.
The Fifth Circuit is the first court to formally weigh in on whether the SEC’s advice is a formal commission order as corporate attacks on the refereeing system have increased under SEC Chair Gary Gensler, who in 2021 made it easier for investors to file environmental, social, and governance proposals.
The Court’s ruling that the SEC’s no-action process under Rule 14a-8 did not involve a formal SEC order subject to judicial review under the Administrative Procedure Act was actually an alternative basis for dismissing the plaintiff’s claim. The Court also held that the claim was moot, since Kroger ultimately included the proposal in its 2023 proxy statement.
Almost every PCAOB statement on auditor responsibilities is something that’s worth sharing with audit committees, and the PCAOB staff report issued earlier this week on auditors’ responsibilities for detecting, evaluating and communicating illegal acts is no exception. This excerpt from the intro summarizes those responsibilities:
Under federal securities laws, auditors have a longstanding responsibility to (1) detect illegal acts; (2) evaluate information indicating that an illegal act has or may have occurred; (3) determine whether it is likely that an illegal act has occurred, and, if so, to consider the possible effect of the illegal act on the financial statements of the company; and (4) make appropriate communications about illegal acts, unless “clearly inconsequential,” to management, the audit committee, and possibly the United States Securities and Exchange Commission (SEC). PCAOB standards include similar requirements. These responsibilities also inform the auditor’s obligation to plan and perform the audit to obtain reasonable assurance that the company’s financial statements are free of material misstatement, whether due to error or fraud.
The report goes on to provide detail concerning the kinds of procedures that auditors should perform in order to appropriately discharge each of these enumerated responsibilities. The report also addresses the circumstances in which an illegal act may require the auditor to issue an adverse opinion on the financial statements, disclaim an opinion altogether, or withdraw from the engagement.
The latest issue of The Corporate Executive newsletter has been sent to the printer. It is also available now online to members of The CorporateCounsel.net who subscribe to the electronic format. In this issue, Dave takes a deep dive into clawbacks with an article titled “Clawback 2.0: What’s Next for Compensation Recovery Policies?” Here’s an excerpt from Dave’s discussion of implementation considerations for Exchange-compliant clawback policies:
In most cases, companies have tasked the compensation committee with board level oversight of the clawback policy, and compensation committee charters should be revised to clearly identify this responsibility. Even though the terms of the clawback policy are fixed by Rule 10D-1 and the relevant exchange’s listing standards, it is advisable to review the clawback policy at least once a year to determine whether any regulatory or other developments would require any revisions to the policy.
A key consideration for companies and compensation committees going forward is the fact that many policies adopted in response to the exchange listing requirements left some matters for determination when a recovery analysis is required, and it may be appropriate to review those matters before a triggering event happens to determine how the company will respond in the event of a restatement.
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