Last month, the Business Roundtable issued a brief statement entitled, “Voting is the Bedrock of Our Democracy,” which says:
“Voting is a fundamental right of American citizens. The strength of our nation’s democracy and the stability of America’s economy depend on free and fair elections.
“As voting in the 2024 election continues, Business Roundtable strongly encourages all eligible citizens to vote. Our members are committed to helping by providing flexibility for workers to vote and volunteer at polling locations across the country.
“It can take time to finalize election results, and we urge all Americans to respect the processes set out in federal and state laws for electoral determinations and an orderly transition.”
The statement was issued after the Interfaith Center on Corporate Responsibility sent a letter to CEOs of the 200+ companies that are BRT members, calling for the business community to publicly support democratic norms. The BRT’s comments track with recommended steps in the Erb Institute guide, which makes this point:
Business has a common interest and a legitimate role in in upholding American constitutional democracy but needs to articulate this and act on it thoughtfully. Companies depend on institutions, including the rule of law, a predictable, stable and impartial regulatory environment, and the general prosperity enabled by the American economic and political system. However, any external-facing initiatives need to be explicit about business’ legitimate role and the specific risks to their industry when institutions are doubted, disputed or unreliable. For many companies this involves a fresh look at their decision frameworks and the principles that guide their political engagement.
The guide urges companies to take action – internally and externally – but to focus on rules that apply no matter who is running or governing. As noted above, one recommended action is to review and upgrade governance related to political spending and other activities, which is something Dave blogged about last week.
The good news about Election Night (and beyond) is that each of us is in control of our own sanity. Although we all need to stay informed to some extent in order to do our jobs, we probably do not need to inflict ourselves with thousands of metaphorical paper cuts, imposed one by one as we consume every opinion piece, prediction, and statement. I don’t want that for myself, and I don’t want that for you!
It’s hard to accept that we won’t have immediate certainty about the election outcome. But just like planning ahead for business risks, that “not knowing” is a foreseeable scenario, and you can prepare now to address it head-on rather than being surprised next week by the amount of time and energy you’ve wasted by following each breathless play-by-play update. This article from Temple University shares ideas to get you through the week:
– Establish boundaries.
– Limit social media. Social media accounts can also be set up to reduce and/or restrict political content.
– Schedule a midday walk, and keep your phone in your pocket.
– Set up a scheduled time to block apps and notifications.
If you’re a lawyer and you want to put energy towards something election-related, the ABA Task Force for American Democracy recently published ways that individuals and bar associations can help support a fair and peaceful election – and promote civics education for the long-term.
Personally, I’m making great use of my library card right now. I’ve queued up a few page-turners in Libby. When I want to doomscroll, I open one of those instead. I’ve also been revisiting the uplifting third entry in this 2020 blog from John.
The Ropes memo summarizes the complaints, which are premised on allegations of improper revenue recognition that affected financial statements used in an IPO and follow-on offering. Here’s an excerpt:
According to the complaint against the CFO and AC Chair, the CFO and AC Chair first learned that the beta tests had not been performed on the day Kubient launched the follow-on offering. The SEC alleges that on that day an employee who had discovered that KAI had not scanned the customers’ data informed the AC Chair of this discovery, while questioning whether it could be indicative of fraud and suggesting that, if the wrong data had been scanned for the beta test, the company might need to restate its earnings. The AC Chair then relayed this information to the CFO on the same day.
The complaint further alleges that, despite learning this, neither the CFO nor the AC Chair investigated the circumstances of the $1.3 million revenue recognition; instead they both furthered the CEO-initiated fraudulent scheme by failing to correct the statements in the follow-on offering documents, signing the company’s subsequent public filings including the same statements, and lying to the company’s independent auditor about the revenue and their knowledge of concerns raised internally about the transactions supporting the revenue.
The memo goes on to detail the allegations against the Audit Committee Chair specifically, which included:
– Failing to investigate the circumstances surrounding the $1.3 million revenue recognition after learning that the customers’ data were not scanned by KAI;
– Failing to inform the independent auditor of that discovery;
– Failing to correct the KAI testing and revenue statements in the follow-on offering documents;
– Excluding the independent auditor from the audit committee meeting where concerns about the KAI contract were discussed (the “KAI Audit Committee Meeting”);
– Further concealing the KAI Audit Committee Meeting from the independent auditor by signing minutes (prepared by the CFO) of the immediately following audit committee meeting that disclosed another meeting, instead of the KAI Audit Committee Meeting, as the last audit committee meeting;
– Falsely stating to the auditor, during the 2020 year-end audit interview, that she was unaware of any tips or complaints regarding the company’s financial reporting, any fraud or suspected fraud affecting the company, or any other matters relevant to the audit; and
– Signing the company’s 2020 Form 10-K that included the statements in question.
Charges against audit committee chairs are rare, but statementsfromSEC officials about the important role of gatekeepers are not. Although there appear to have been some “bad facts” here, the charges reinforce the message that gatekeepers must take their role seriously, promptly investigate red flags, and oversee steps to correct material errors.
Clean audit reports on financials that later prove inaccurate may serve as the basis for a Rule 10b5-1 securities fraud claim against a company’s independent auditor, according to an amended opinion issued last week by a Second Circuit panel. The amendment reversed course from the court’s 2023 decision to dismiss the claim. The WSJ reports:
After the [2023] ruling, a trio of former Securities and Exchange Commission officials filed a brief with the court asking it to reconsider the decision. The court then asked the SEC to submit a brief expressing its views on the subject. The SEC did so and it, too, asked the court to reconsider, writing in a brief last February that “audit certifications convey crucial information to the investing public” and “audit certifications are not too general to be material.”
The appeals court on Thursday reissued its decision with amendments and ruled the investors’ claims against BDO could proceed.
The investors had alleged that the audit report was uniquely problematic because the audit partners failed to complete the necessary checks and audit work papers before issuing the audit opinion; that they signed several audit work papers without reviewing them; and that they failed to verify that all the necessary audit work was performed before issuing the opinion. In addition, the plaintiffs alleged shortcomings under PCAOB standards that require appropriate supervision, testing of audit procedures, and quality review.
The court determined that the plaintiffs adequately alleged that the audit report contained potentially actionable misstatements, because it was plausible that the partner who signed the audit opinion disbelieved the statement that the audit was conducted in accordance with PCAOB standards. Moreover, the court found adequate allegations that the misstatements were material. Here’s an excerpt (citations omitted):
Although the challenged audit certification reflects standardized language, it is not “so general that a reasonable investor would not depend on it as a guarantee.” Instead, BDO’s certification that the audit was conducted in accordance with PCAOB standards succinctly conveyed to investors that AmTrust’s audited financial statements were reliable. The absence of BDO’s certification would have been significant, for without it, BDO could not 49 have issued an unqualified opinion, AU 508.07, which then would have alerted investors to potential problems in the company’s financial reports.
In other words, audit quality is important – and it’s been front & center in scandals & rules this year. We’ll be providing practical guidance on this topic in an upcoming webcast, “Audit Quality: Lessons from BF Borgers and Other Recent Developments.” Mark your calendars for Thursday, November 21st at 2:00 p.m. ET to hear Deloitte’s William Calder, Maynard Nexsen’s Bob Dow, and Nonlinear Analytics’ Olga Usvyatsky discuss what corporate attorneys need to know about the latest audit-quality developments to advise clients on financial reporting and corporate governance matters.
Earlier this fall, the SEC adopted a rule change that will (among other things) amend the minimum pricing increments for the quoting and trading of exchange-listed stocks. As Meredith wrote at the time, the rule is intended to address “tick-constrained stocks” – which have narrow bid-ask spreads. You may wonder, “How many stocks suffer from ‘tick constraints?'” A recent Sidley memo points out that the answer is “most of them.” Here’s an excerpt:
Once implemented, the changes to minimum tick size will cause a majority of stocks — approximately 74.3%, based on the SEC’s estimate using 2023 data — to be quoted in more granular half-penny (i.e., $0.005) increments, rather than the $0.01 minimum tick most prevalent today.
This will likely necessitate systems changes for a large number of market participants, including broker-dealers and exchanges, to allow for the submission, ranking and display of orders at more granular pricing increments.
Moreover, the applicable minimum tick sizes will vary by stock and may change for each stock on a biannual basis, which will require broker-dealer systems be able to accommodate such changes, and inform their customers.
The Sidley memo also notes that the amendments have been challenged by a retail investor advocacy group. This Bloomberg article reports that Nasdaq and Cboe have also filed a joint petition focused on challenging the “access fee” portions of the rule change.
We have many interesting topics on the agenda for our “Proxy Disclosure & 21st Annual Executive Compensation Conferences” next week – including color commentary about updated disclosure requirements that will apply for 2025, and what you need to do now to prepare. This Covington memo summarizes what will be new next year for calendar-year companies. At a very high level:
– File your insider trading policies and procedures as exhibits to Form 10-K
– Discuss your insider trading policies and procedures in your Form 10-K (or incorporated proxy)
– Provide narrative and tabular disclosure about the timing of stock options and option-like instruments in close proximity to disclosures of MNPI
The memo also recaps the many changes that became effective during 2024 – which of course we’ll need to continue to comply with going forward – as well as guidance on cyber incident reporting, universal proxy rules, pay-versus-performance, and XBRL tagging.
In case you forgot, the SEC’s climate disclosure rules were also adopted – and stayed – earlier this year. The memo recommends that companies keep thinking about how their disclosure controls and procedures may need to change if the rules do go into effect.
Yesterday, the SEC posted notice of an NYSE proposal that, if approved, would make it harder for penny stocks to linger around as listed companies. Here’s what the change would look like if adopted:
Notwithstanding the foregoing, if a company’s security fails to meet the Price Criteria and the company (i) has effected a reverse stock split over the prior one-year period or (ii) has effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 200 shares or more to one, then the company shall not be eligible for any compliance period specified in this Section 802.01C and the Exchange will immediately commence suspension and delisting procedures with respect to such security in accordance with Section 804.00.
Furthermore, a listed company may not effectuate a reverse stock split if the effectuation of such reverse stock split results in the company’s security falling below the continued listing requirements of Section 802.01A.
The proposed rule would apply to a company even if the company was in compliance with the Price Criteria at the time of its prior reverse stock split. The NYSE’s rationale for the proposal isn’t too surprising:
As described above, many companies seek to cure their noncompliance with the Price Criteria or seek to increase their stock price for other reasons by effectuating a reverse stock split. However, the Exchange has observed that some companies, typically those in financial distress or experiencing a prolonged operational downturn, engage in a pattern of repeated reverse stock splits. The Exchange believes that such behavior is often indicative of deep financial or operational distress within such companies rendering them inappropriate for trading on the Exchange for investor protection reasons. In these situations, the Exchange has observed that the challenges facing such companies, generally, are not temporary and may be so severe that the company is not likely to maintain or regain compliance on a sustained basis.
If this proposal looks familiar, it’s because Nasdaq has also been looking to rein in the use of reverse splits as a compliance strategy. As Meredith noted a few months ago, this type of rule change, if approved, would make it more important to strike the right balance in calculating a reverse split.
In addition to this proposal about reverse splits, the NYSE is shaking its fist at delinquents. The Exchange also proposed a rule change to say that it would not review a compliance plan submitted by a listed company that is below compliance with a continued listing standard if the company owes any unpaid fees to the Exchange. Under this proposal, the NYSE would immediately commence suspension & delisting procedures if the fees aren’t paid in full by the plan submission deadline or at the time of any required periodic review. Here’s the SEC notice for that one.
Earlier this week, the US Government Accountability Office released its annual report on the effectiveness of the SEC’s conflict mineral rule in promoting peace & security in the DRC and adjoining countries. This year, the GAO did not bury the lede, naming the report: “Peace and Security in Democratic Republic of the Congo Have Not Improved with SEC Disclosure Rule.” In fact, according to the GAO, the data shows that the rule has actually contributed to the spread of violence at some mines. Here’s an excerpt from the 1-page highlights:
GAO found no empirical evidence that the rule has decreased the occurrence or level of violence in the eastern DRC, where many mines and armed groups are located. GAO also found the rule was associated with a spread of violence, particularly around informal, small-scale gold mining sites. This may be partly because armed groups have increasingly fought for control of gold mines since gold is more portable and less traceable than the other three minerals. Further, GAO found that the number of violent events in the adjoining countries did not change in response to the SEC rule.
Page 13 of the report gives a good overview of the troubled journey of the conflicts mineral disclosure rule and the current Staff and Commission indications about enforcement.
The GAO did find that the rule has encouraged companies to take a closer look at supply chains, and it’s raised awareness about the risks that mineral purchases will benefit armed groups. But the GAO says that minerals are only one factor contributing to conflict in the DRC and adjoining countries, so “transparent sourcing” is both extremely challenging and inadequate on its own to meaningfully improve peace and security.
Many of our friends and readers are preparing for Yom Kippur today. We are sending wishes to everyone for a peaceful year.
In addition to comments from the Corp Fin Staff on cyber-related Form 8-K disclosures that Dave & Meredith previously shared, we’re beginning to see comment letters that the Staff has issued on Form 10-K cybersecurity disclosures. These disclosures were first required this year under Item 106 of Regulation S-K. Here’s a sampling of early comments (some of which I’ve paraphrased):
– We note that leaders from your information security, compliance and legal team oversee cybersecurity risk management. Please revise future filings to provide the relevant expertise of such persons or members in such detail as is necessary to fully describe the nature of the expertise as required by Item 106(c)(2)(i) of Regulation S-K.
– We note statements that you have not currently engaged any third-party service providers to support, manage, or supplement your cybersecurity processes, and that your Audit Committee receives updates from and discusses matters with your third-party IT support specialists. These statements appear inconsistent. Please revise future filings to clarify whether you engage assessors, consultants, auditors or other third parties in connection with your processes for assessing, identifying and managing material risks from cybersecurity threats as required by Item 106(b)(1)(ii) of Regulation S-K.
– We note you do not include Item 1C. Cybersecurity. Please revise or advise us why you do not provide disclosures as applicable under Item 106 of Regulation S-K.
Although comment letters are company-specific, these are the types of comments we’d expect to see out of the Disclosure Review Program as the Staff assesses “Year 1” compliance for this rule. The Corp Fin Staff isn’t looking to “play gotcha.” But if your disclosure has inconsistencies, or if you forgot to include Item 1C – or a specific element – you might be asked to correct that.
Yesterday, the SEC announced that it is monitoring the impact of Hurricane Milton on capital markets – and that it also continues to monitor the impact of Hurricane Helene. We continue to think of all those affected by these back-to-back catastrophic weather events.
The SEC will evaluate relief from filing deadlines as needed. Here’s more detail:
The SEC divisions and offices that oversee companies, accountants, investment advisers, mutual funds, brokerage firms, transfer agents, and other regulated entities and investment professionals will continue to closely track developments. They will evaluate the possibility of granting relief from filing deadlines and other regulatory requirements for those affected by the storms. Entities and investment professionals affected by Hurricane Milton or Hurricane Helene are encouraged to contact SEC staff with questions and concerns:
– Division of Examinations staff in the SEC’s Miami Regional Office can be reached by phone at 305-982-6300 or email at miami@sec.gov
– Division of Examinations staff in the SEC’s Atlanta Regional Office can be reached by phone at 404-842-7600 or email at atlanta@sec.gov
– Division of Corporation Finance staff can be reached by phone at 202-551-3500 or via online submission at www.sec.gov/forms/corp_fin_interpretive
– Division of Investment Management staff can be reached by phone at 202-551-6825 or email at imocc@sec.gov
– Division of Trading and Markets staff can be reached by phone at 202-551-5777 or email at tradingandmarkets@sec.gov
– Office of Municipal Securities staff can be reached by phone at 202-551-5680 or email at munis@sec.gov
