It’s podcast week! I am happy to share another “Timely Takes” podcast – which is indeed very timely as we enter the height of proxy season. In this 13-minute episode, John interviews Alexander McClean and Margaret Rhoda of Harter Secrest & Emery about:
1. Significant new SEC disclosure requirements
2. Recently adopted disclosure requirements that won’t apply in 2024
3. ISS & Glass Lewis 2024 policy updates
4. Advice for companies tackling their annual disclosure obligations
I’m finding that these episodes are perfect for the morning commute. If you’d like to join John or Meredith for a podcast to share insights on a securities law, capital markets or corporate governance topic, please reach out to them at john@thecorporatecounsel.net or mervine@ccrcorp.com.
Since 1972, the SEC has had a policy that defendants that settle civil claims with the Commission can’t go out afterwards and deny the allegations – which is not-so-affectionately known as the “gag rule.” Earlier this week, the Commission swatted down the latest attack on that rule – by denying a rulemaking petition from the “New Civil Liberties Alliance.” Those are the very same folks who are leading the charge against the Chevron defense in Relentless v. Dept. of Commerce – and who have engineered the SEC v. Cochran challenges to the SEC’s administrative law judge system.
SEC Chair Gary Gensler took the opportunity to make a statement about the benefits of the settlement policy. Here’s an excerpt:
Entering into a settlement is a consequential choice for both the SEC and the defendant. The Commission, in agreeing to settle a case, is relinquishing the opportunity to present the case in court. The defendant, on the other hand, relinquishes the right to defend the case in court, in the press, and in the eyes of the public. Both parties are agreeing to a set of terms based upon this 1972 policy.
More than 50 years on, I think this policy has served the public and the Commission well. I believe that amending this policy in the manner proposed by the Petitioner would alter the impact of enforcement settlements if defendants could deny any wrongdoing in the court of public opinion and dismiss sanctions as the cost of doing business without the Commission being able to revive its ability to have its day in court.
He also implies that the settlement orders are “required reading” for anyone else who wants to stay out of trouble:
Further, an essential component of settlements is the public recitation of the facts. It informs the market as to what conduct is violative of the securities laws. It alerts investors that the Commission seeks to deter that conduct, and it helps other market participants comply with the law. A settlement that allows the denial of wrongdoing undermines the value provided by the recitation of the facts, and it muddies the message to the public.
As you can imagine, the “neither admit nor deny” policy is not roundly supported by companies and other defendants. It’s also drawn harsh criticism – on 1st Amendment grounds – from a federal court. You know who else isn’t a fan? SEC Commissioner Hester Peirce. Here’s an excerpt from her lengthy dissent from this week’s decision to deny the NCLA rulemaking petition:
The demand by the government that a defendant waive a fundamental constitutional right as a condition of settlement ought to be supported by a compelling rationale. Yet, as discussed above, the Commission’s rationale of record—that the no-deny policy is necessary to “avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conduct alleged did not, in fact occur”—lacks firm footing. It would look bad if the SEC’s settlements were shown to be baseless, unfairly negotiated, or legally flawed. The most logical solution to that concern, however, is to make sure that settlements are rooted in fact, are fairly negotiated, and are legally sound. Employing superior bargaining power to extract an agreement that defendants agree not to denigrate the settlement is a suboptimal solution.
In the end, far from shoring up the Commission’s integrity, the reliance on these no-denial conditions undermines it. More than a decade ago, a court aptly explained the problematic perceptions that flow from the Commission’s practice of settling without admissions and prohibiting denials:
[H]ere an agency of the United States is saying, in effect, “Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it.”
Keep in mind that when it comes to the “neither admit nor deny” policy, things could be worse! I don’t know the extent to which this materialized, but a couple years ago, Enforcement Director Gurbir Grewal indicated that the Staff and Commission might get more aggressive in requiring admissions as a condition to settlement, meaning that defendants would end up with a one-sided condition of “no deny.” My guess is that this is little consolation to the NCLA. Given their recent track record in court, perhaps there will be more to come…
Meredith blogged last year that the requirement for auditors to identify “critical audit matters” has not been living up to the PCAOB’s hopes & dreams. But based on a 3-year review of CAM trends from Ideagen Audit Analytics, it’s not because the requirement has somehow been overlooked. According to the report, 65% of 2022 opinions identified at least one CAM. This blog from Cooley’s Cydney Posner covers which topics have been most prevalent:
But taking a deeper dive, IAA pooled the CAMs related to many business combinations—asset valuation, fair value and impairment—and the result was the most common CAM subject: according to IAA, 33% of all FY2022 opinions with CAMs included a CAM for fair value of assets, exceeding the single subject total percentage for revenue recognition in FY2022. IAA notes that fair-value-related CAMs hit their highest percentage in FY2020 at 30% of total CAMs, which IAA attributes to “the uncertain forecasts indicating potential impairment during the pandemic.”
Among industries, IAA reports, CAMs regarding revenue from customer contracts were disclosed most frequently by “companies in the manufacturing industry, at 1,049 CAMs, and the services industry, at 1,045, each representing 39% of all CAMs with that topic.” It was also the most common CAM topic for companies in the manufacturing, services and construction industries. IAA observes that different characteristics of each industry may lead auditors to focus on specific audit areas.
Overall, as Cydney notes, the study flags revenue recognition from customer contracts as the most common CAM, at 13% of CAMs over the three-year period.
If you’re a geek for corporate governance, make sure to check out this 15-minute episode of our “Women Governance Trailblazers” podcast. Abby Adlerman joined us to discuss what’s going on in boardrooms – and how to keep up. Abby is CEO and founder of Boardspan, which provides measurement & analytics tools to boards. We discussed:
1. Abby’s career journey in corporate governance & finance – as an accomplished investment banker, e-commerce startup founder, Managing Director at Russell Reynolds, and CEO and founder of Boardspan.
2. Abby’s approach to keeping up with the dynamic corporate governance landscape, the biggest pivots that she has seen in the past few years, and what boards should be doing about AI.
3. The nature of conversations Abby has with boards, and how that has changed over time.
4. A usable framework for measuring culture at the board level.
5. What Abby thinks women in the corporate governance field can add to the current conversation on the societal role of companies.
I co-host “Women Governance Trailblazers” with Vontier’s Courtney Kamlet. We’ve been doing monthly interviews for almost 5 years! To listen to any of our prior episodes, 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.
CalSTRS recently announced that its Investment Committee has approved changes to the pension fund’s Corporate Governance Principles and Stewardship Priorities – both of which will be in place for a three-year cycle. I blogged last week on CompensationStandards.com about the changes that affect executive compensation and compensation (and human capital) committees. In addition, the Corporate Governance Principles incorporate changes in these areas:
– Standardized global sustainability disclosure standards – CalSTRS endorses the International Sustainability Standards Board (ISSB) Standards.
– Boards of directors’ responsibilities – Including employee wellness factors, such as workforce diversity, pay, benefits, hiring, retention and business culture.
– ESG risks and opportunities – On this, CalSTRS says it believes responsible corporate governance, including the management of environmental, social, and governance factors, can benefit long-term investors like CalSTRS. It is important for companies to consider ESG issues to ensure they are long-term sustainable companies and have considered and addressed all risks and opportunities that could affect the livelihood of the business.
The Principles also explain why it makes sense for CalSTRS to look at whether portfolio companies are managing ESG issues – for engagements as well as investment decisions:
CalSTRS’ investment activities impact other facets of the economy and the globe. As a significant investor with a long-term investment horizon, the success of CalSTRS is linked to global economic growth and prosperity. Actions and activities that detract from the likelihood and potential of sustainable global growth are not in the long-term interests of the Fund. Consistent with its fiduciary responsibilities, CalSTRS adopted the Investment Policy for Mitigating Environmental, Social and Governance Risks to ensure that the corporations and entities in which CalSTRS invests strive for long-term sustainability in their operations.
The Investment Policy, in turn, says that to assist CalSTRS Staff and external investment managers in their investment analysis and decision-making, CalSTRS has developed a list of ESG risk factors that should be considered as part of the financial analysis of any active investment decision. For passive index strategies, CalSTRS uses the ESG risk factors to guide engagement activities. The topics that CalSTRS considers ESG risk factors are listed in an exhibit to the Investment Policy.
The 18-page Principles also address the pension fund’s expectations for risk oversight, political contribution policies, overboarding, evaluation & succession planning, auditor rotation, bylaw amendments, bundled proxy proposals, and more. If your company is one of the 9,000 in the CalSTRS’ portfolio – which you can check on this page – then you should know that these Principles will be used as a voting framework at your AGMs – and the Stewardship Priorities will guide engagements.
All that said, CalSTRS’ voting policies are pretty workable – at least on their face. Many of the policies – especially the ones on “ESG” – are phrased as expectations and do not expressly state that the fund will vote against directors if the company falls short. You’ll hear about it in engagements and may see escalation over time, but CalSTRS says it wants to work with portfolio companies to find reasonable outcomes that support long-term value.
Following up on this week’stheme of “why you need to pay attention to things you thought you could ignore,” this Locke Lord blog explains why the “public company” exemption for the Corporate Transparency Act isn’t enough to insulate public companies from having to conduct a compliance review and install new internal controls. Here’s an excerpt:
There is also an exemption from the filing requirement for subsidiaries of public companies (and other exempt companies), but that exemption only applies to wholly owned or controlled subsidiaries. Any subsidiaries or investment entities of public companies that do not meet the wholly owned or controlled test do not qualify for this subsidiary exemption although they may qualify for one of the other statutory exemptions.
The blog walks through detailed considerations and offers these compliance pointers as we move forward in this brave new world:
As public companies form new entities, enter into joint ventures, exit or dissolve joint ventures and make investments, they may find themselves, the joint venture or one of their affiliates subject to a reporting requirement under the CTA. Those could include M&A transactions, venture capital, vendor or supplier investments, and internal corporate restructurings (other than solely among wholly owned/controlled subsidiaries).
Also remember that, if you, as a lawyer, are overseeing entity formation filings, you are a “company applicant” who needs to register with FinCEN! And guess what, your paralegals and mailroom folks might be too. John wrote about that insanity earlier this month.
If you brush up against accounting issues as you’re reviewing disclosures (and most of us do), check out this 9-minute podcast where John interviews Olga Usvyatsky about recent comments from the Corp Fin Staff on impairment charges.
Olga is a former VP of Research of Audit Analytics where she led the development of new data sets used by investors, regulators, and academics. She also is the author of the “Deep Quarry” newsletter, and an article in the newsletter on recent Corp Fin staff comments on impairment charges provides the basis for this podcast. If you’re connected with Olga on social media or subscribe to her newsletter, you know she has a keen ability to notice accounting issues and explain what they mean to businesses. John & Olga discuss:
1. An overview of GAAP’s “Impairment” concept
2. The Staff’s recent impairment comment to Kraft Heinz & the company’s response
3. Issues typically raised in Staff comments on impairment charges and disclosure
4. Guidance on minimizing the risk of impairment comments and on responding to those comments
If you’d like to join John or Meredith for a podcast to share insights on a securities law, capital markets or corporate governance topic, please reach out to them at john@thecorporatecounsel.net or mervine@ccrcorp.com.
If you don’t work with SPACs, you may be thinking that you can ignore the SPAC rule changes that the SEC adopted last week. Sadly, that is not the case. In his dissenting statement, Commissioner Uyeda cautioned that the part of the adopting release that provides guidance on “investment company” determinations is broadly applicable. Here’s an excerpt:
All types of issuers – not just SPACs – should pay heed to this guidance because the framework for investment company status determinations could have implications for an operating company that temporarily derives income from investment securities. Would a pharmaceutical company that takes more than 12 or 18 months to bring a drug to market suddenly find itself primarily engaged in the business of investing in securities? While targeted at SPACs, the knock-on effects of this guidance could raise serious legal and compliance issues across a wide array of issuers. Part of the Commission’s obligation under the Administrative Procedure Act requires that an administrative agency provide due notice of what is being proposed. With respect to this guidance, that did not occur.
Commissioner Uyeda included an addendum to his statement that further criticizes the guidance. In particular, he takes issue with using an arbitrary 12- or 18-month timeframe as a factor in whether SPACs that have not completed a business combination need to register as investment companies. He makes this prediction, which doesn’t seem too far-fetched (especially for SPACs that hold “investment securities”):
As a practical matter, when faced with such strong language, issuers and their legal counsels will need to weigh the risk that the bright line duration limits set forth in the guidance will be used as a basis to bring enforcement actions.
Last week’s SPAC rules also enhance the disclosure requirements that apply to projections. In addition to new Item 1609 of Regulation S-K that applies specifically to de-SPAC disclosures, Item 10(b) of Regulation S-K has been expanded to address concerns about prominence and non-GAAP financial measures for all companies. This Latham blog summarizes the change:
Amendments to the SEC’s guidance in S-K Item 10(b) state that any projections that are not based on historical financial results or operational history must be “clearly distinguished” from projections that are based on historical financial results or operational history. Projections based on historical financial results or operational history must give equal or greater prominence to the historical measures or operational history. Presentation of projections that include a non-GAAP financial measure should include a clear definition or explanation of the measure, a description of the GAAP financial measure to which it is most closely related, and an explanation why the non-GAAP financial measure was used instead of a GAAP measure.
The amendments also clarify that the Item 10(b) guidelines also apply to projections of future economic performance of persons other than the registrant, such as the target company in a business combination transaction, that are included in the registrant’s filings.
Tune in today at 2pm Eastern for the webcast – “The Latest: Your Upcoming Proxy Disclosures” – to hear Mark Borges of Compensia and CompensationStandards.com, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of Goodwin Procter and TheCorporateCounsel.net, and Ron Mueller of Gibson Dunn discuss the latest guidance on how to improve your executive & director pay disclosure – including pay-versus-performance disclosure and clawbacks – to improve voting outcomes and protect your board. Understand what to expect for the upcoming proxy season, so that you can prepare your directors and C-suite – and handle the challenges that 2024 will throw your way.
We are making this CompensationStandards.com webcast available on TheCorporateCounsel.net as a bonus to members – it will air on both sites. And because there is so much to cover, we have allotted extra time for this program! It’s scheduled to run for 90 minutes.
If you attend the live version of this 90-minute program, CLE credit will be available in most states. You just need to fill out this form to submit your state and license number and complete the prompts during the program. All credits are pending state approval.
Members of TheCorporateCounsel.net and CompensationStandards.com are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. If you have any questions, email sales@ccrcorp.com – or call us at 800.737.1271.
