Earlier this month, SEC Enforcement continued its series of “related party transaction” cases, by announcing a settlement with a footwear & fashion company that defined my ’90s style. Here’s an excerpt:
According to the SEC’s order, from 2019 through 2022, Skechers did not comply with related person transaction disclosure requirements when it failed to disclose its employment of two relatives of its executives and did not disclose a consulting relationship involving a person who shared a household with one of its executives. Furthermore, according to the SEC’s order, for multiple years, Skechers failed to disclose that two of its executives owed more than $120,000 to the company for personal expenses that had been paid for by Skechers but not yet reimbursed by the executives.
The alleged violations resulted from omitting RPT disclosure from proxy statements, which were incorporated into the company’s reports on Form 10-K. The difficulty with RPT disclosures is that not only do you need to accurately describe the relationships you know about, but you also need to put controls in place to learn about the relationships in the first place. Sometimes it can come as a surprise to directors and officers that the compensation arrangements of their gainfully employed relatives must be disclosed. The disclosure consequences of expense reimbursement timing also may not be front-of-mind.
Reading between the lines of this 5-page order, which notes the company’s cooperation and remedial policies & procedures (including training), and the relatively light $1.25 million penalty, these items may have fallen between the cracks despite overall good policies and no other skeletons in the closet. The company agreed to the order and penalty without admitting or denying the findings.
Not every company is so “lucky” when Enforcement comes knocking. As you finalize your proxy statement, this case gives you the opportunity to revisit any nagging doubts about your RPT disclosures. You can get practical pointers about how to go about doing that from the transcript of our December webcast, “Related Party Transactions: Refresher & Lessons Learned from Enforcement Focus.”
Here’s something that my colleague Zach blogged today over on PracticalESG.com:
Wow – things are moving fast with the SEC’s Climate-related Disclosure Rules. Despite being less than a month old and not even effective, they are already being litigated by a variety of plaintiffs. That litigation has already jumped through several procedural hoops. First, the Fifth Circuit Court of Appeals stayed the Rule, then the SEC moved to consolidate the cases, landing the consolidated litigation in the Eighth Circuit. Now, the Fifth Circuit has lifted their stay as a procedural matter. A recent Cooley blog states:
“Today, the Fifth Circuit ordered the transfer of the petition to the Eighth Circuit and the dissolution of the administrative stay. It’s worth noting that one of the three judges, Judge Jones, indicated her belief that the docket should stay as is pending transfer. Whether the stay will be reinstituted by the Eighth Circuit remains to be seen.”
It is worth noting that lifting the stay was not an action of the Eighth Circuit Court of Appeals but of the Fifth Circuit in transferring the case, essentially giving the Eighth Circuit a blank slate to work from. This means that the stay could very well be reimplemented by the Eighth circuit once proceedings ramp up. Normally we would expect that to take some time, but litigation of this rule seems to have warp engines.
In this 17-minute episode of the “Women Governance Trailblazers” podcast, Courtney Kamlet & I interviewed former SEC Acting Chair and Commissioner Allison Herren Lee, who is now Of Counsel at Kohn, Kohn & Colapinto and a Senior Research Fellow at NYU Law. We discussed:
1. Allison’s career path – including what drew her to becoming a securities lawyer and what she’s doing now.
2. Surprises that Allison experienced when she transitioned from being an SEC Staffer to being a Commissioner.
3. Allison’s proudest moment as a Commissioner.
4. Allison’s thoughts on how the Commission can balance the goals of investor protection and consistent disclosure with the risk of pushing capital formation to private markets.
To listen to any of our prior episodes of Women Governance Trailblazers, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.
Yesterday, the Council of Institutional Investors sent this letter to the SEC to request that the Commission initiate rulemaking to require a technological solution to the issue of “traceability.”
The rulemaking petition says that the 2023 decision in Slack Technologies, LLC v. Pirani has jeopardized investor protection. In the Slack case, the SCOTUS held that an investor plaintiff who is seeking a remedy under Section 11 of the Securities Act must prove that the shares that they hold are traceable to a registration statement. That is particularly difficult to do in the direct listing context because unregistered shares enter the market and begin trading alongside registered shares. If there are lockup waivers, traceability may also be an issue in a traditional IPO.
The letter acknowledges that a working group has already urged rulemaking to amend Rule 144 to address this issue (which CII also supported, but it hasn’t gone anywhere). CII says that alternatively, the Commission should consider a technological solution. Here’s an excerpt:
Two potential approaches have been recently identified by former SEC Chair Jay Clayton and former Commissioner Joseph A. Grundfest. In a brief filed as amici curiae in the Slack case they stated that the Commission could:
1. Require that registered and exempt shares offered in a direct listing trade with differentiated tickers, at least until expiration of the relevant Section 11 statute of limitations; or
2. Migrate the entire clearance and settlement system to a distributed ledger system or to
other mechanisms to allow the tracing of individual shares as individual shares, and not as fractional interests in larger commingled electronic book entry accounts.
We note that the second more ambitious approach is aligned with the recommendation CII submitted to the SEC in connection with its 2018 Roundtable on the Proxy Process.
The letter also notes a third alternative that was the subject of a recent study from Columbia Law Professor & Director of the Center on Corporate Governance John Coffee and his colleague Joshua Mitts: adapting the detailed trading records that broker-dealers already maintain as part of the consolidated audit trail – and requiring production of these records to private plaintiffs in Section 11 litigation.
I don’t know enough about broker-dealer record-keeping requirements to gauge whether this would be as minimal a lift as the cited study makes it out to be. I do know that broker-dealers generally aren’t clamoring for more recordkeeping requirements….
It’s a busy week for the Commissioners next week. On Thursday, March 7th, there will be a meeting of the SEC’s Investor Advisory Committee meeting, which was the subject of a Sunshine Notice because a majority of the Commissioners may attend. Here’s what’s on the agenda:
1. Panel: Discussing the U.S. Securities and Exchange Commission’s Proposals to Improve Equity Market Structure (this includes “payment for order flow”)
2. Panel: Examining the use of Materiality as a Disclosure Standard — Can the Definition be Improved to Better Serve Investors? (Dave’s panel for the SEC Historical Society could be a good “pre-read” for this one)
In this 12-minute episode of the “Women Governance Trailblazers” podcast, Courtney Kamlet & I interviewed Locke Lord’s Allison O’Neil, who co-chairs the firm’s White-Collar Defense & Investigations Practice Group. We discussed:
1. Allison’s career path, and her favorite part of leading internal investigations and white-collar defense matters.
2. How Allison has seen internal investigations evolve over the past 5-10 years.
3. The top 3 things companies and advisors should do right now in light of current SEC enforcement trends.
4. Suggestions for those advising boards and making compliance and disclosure decisions, from a litigator’s perspective.
5. What Allison thinks women in the corporate governance field can add to the current conversation on the societal role of companies.
To listen to any of our prior episodes of Women Governance Trailblazers, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.
And if you want more info on SEC Enforcement’s priorities & trends (which are important to know in order to stay out of trouble), check out the transcript from our webcast a few months ago. Allison was part of our excellent panel of speakers!
The rumors panned out. Yesterday, the SEC posted the Sunshine Notice for an open meeting to be held next Wednesday, March 6th at 9:45am ET. Climate is one of the two agenda items:
The Commission will consider whether to adopt rules to require registrants to provide certain climate-related information in their registration statements and annual reports.
The timing of next week’s meeting allows the SEC to dodge the risk of a government shutdown (just in case the latest deal doesn’t go through). It likely also helps avoid the specter of a new Administration unraveling the rule under the Congressional Review Act. This blog from Hunton Andrews Kurth says that agency rules will be at risk if they are published in the Federal Register after May 22nd this year. Typically it takes about 30 days for rules to show up in the Federal Register, so that will probably not be an issue here. All that said, we will almost certainly see litigation that challenges the new requirements, assuming they are adopted.
I expect a final rule to be adopted in some form next week, although we may see 1 or 2 Commissioners dissent from the decision. What’s unknown is how exactly the record number of comments to the proposal have been considered and reflected in the final rule. The meeting will be webcast on the SEC’s website if you want to watch the drama unfold in real time.
Welcome to the 2024 Edition of Leap Day. It is always exciting to get a bonus day, and perhaps you’re marking the occasion with a time capsule or an energizing game of leapfrog. But it is also important to remember the impact that February 29th will have on your SEC filing calendar. Here’s a note from a member about the Leap Year deadline for forward incorporation by reference:
The deadline for forward incorporation by reference of information from a company’s definitive proxy or information statement into its previously-filed Form 10-K, which is 120 days after the end of the company’s fiscal year, falls one day earlier than usual in leap years, such as 2024. If the company isn’t going to be able to file its definitive proxy or information statement on or before the 120th day, it must amend its Form 10-K to include the Part III information omitted from the Form 10-K at the time the report was filed by filing a Form 10-K/A not later than the 120th day. The 120-day deadline cannot be extended by filing a Form 12b-25.
Because 2024 is a leap year, the 120th day after December 31, 2023 will be Monday, April 29, 2024, rather than April 30 (as it would be in other years). Failure to file the definitive proxy or information statement or a Form 10-K/A amendment to the Form 10-K within this period will result in the Form 10-K being untimely filed, which has a variety of consequences, including loss of eligibility to use Form S-3.
I’m beginning to think that Leap Day isn’t all fun & games. Not only do we need to consider its impact on forward incorporation by reference, this WSJ article reminds us that we also may need to give extra thought to the presentation of financial results for this quarter. The article calls out these things to watch:
Employee benefits: Companies need to make sure payroll benefits and certain employee pay reflect the extra day. Banking firm UMB Financial projects that its first-quarter salary and benefits expense will increase with the leap-year day, CFO Ram Shankar said on a Jan. 31 earnings call. Businesses with a large base of hourly workers could see a jump in expenses from the previous year.
Depreciation and amortization: Businesses will want to make sure they are booking the correct amount of depreciation and amortization for 29 days instead of 28, said Steve Hills, who heads up the accounting and reporting practice at Stout Risius Ross, an advisory firm. For some companies, that may be a manual adjustment, while at others it may be automated, he said.
Comparable metrics: If companies calculate key data such as same-store sales on a monthly basis and an extra day is material, investors could find it difficult to compare year-over-year sales and need to consider that day, said Olga Usvyatsky, an accounting consultant.
Interest rates: Certain industries will see greater effects from the added day. Banks and other lenders have to calculate interest rates on a daily basis for 366 days, not 365.
Or…just ignore it: Retailers have to examine the extra day of sales to see if it is material enough to warrant a footnote saying 2024 might not be comparable to the previous year. When calculating comparable metrics of a leap year versus a non-leap—a percentage change in sales, for instance—companies can omit the extra day in its comparisons and will generally explain it to investors separately if it is deemed material.
The article goes on to say that companies rarely mention the effect of Leap Day in their financial reports, but companies, auditors, and lawyers must analyze the impact regardless. Don’t begrudge Leap Day, though. This extra effort is worth it, since it means that our holidays stay in the seasons where they belong.
When a 5th Circuit panel upheld Nasdaq’s “comply or disclose” board diversity rule last fall, John wrote at the time:
While the decision is a resounding win for Nasdaq and the SEC, it’s unlikely that this will be the last word on the case. As this Reuters article points out, the defendants drew a very favorable panel comprised entirely of Democratic appointed judges. If the plaintiffs appeal to the full 5th Circuit, the SEC & Nasdaq may well face a more hostile reception, because 12 of the 16 judges there were appointed by Republican presidents.
That appeal happened, and the petition for rehearing en banc was granted last week – with oral argument tentatively scheduled for mid-May. The October decision that had upheld the Nasdaq rule has been vacated. Here’s more from Cooley’s Cydney Posner:
The two questions identified in the petition for the Court’s en banc review were:
“(1) whether approval of the Rule and its compulsion of discrimination and controversial disclosure requirements are unconstitutional state action; and
(2) whether the Rule is justified under the Exchange Act on the sole basis that select financial activists want to encourage board selection based on race and sex.”
The petition contended that the listing rule violated the Equal Protection clause and, by compelling controversial disclosure, the First Amendment, citing the conflict minerals decision, Nat’l Ass’n of Mfrs. v. SEC. (See this PubCo post.) The petition also challenged the panel’s conclusion that no state action was involved, arguing that “requiring private parties to encourage discrimination that otherwise would not have occurred” is in effect, state action by the SEC. And the “unique relationship between the SEC and national stock exchanges like Nasdaq means exchange rules are subject to constitutional requirements, as well.”
Bloomberg has reported that the SEC plans to keep defending its approval of the Nasdaq rule and that it believes the October decision was correct. With the unfortunate politicization of rulemaking and judicial decisions, a lot of folks will assume that the judges’ political party will dictate the outcome here, and that the rehearing is “the beginning of the end” for this rule.
