Last week was an incredibly active holiday week for Corp Fin, with several rounds of CDIs that Dave covered in this blog. But there’s more! Here’s something Meredith blogged yesterday on CompensationStandards.com:
Just before Thanksgiving, the SEC gave us even more to be thankful for — eight new and two revised CDIs on the pay-versus-performance disclosure requirements. I’ve paraphrased each new CDI and linked to the full text below.
1. New Question 128D.23 – Dividends or dividend equivalents paid that are not already reflected in the fair value of stock awards or included in another component of total compensation must be included in the calculation of executive compensation actually paid.
2. New Question 128D.24 – If a registrant uses more than one published industry or line-of-business index for purposes of Item 201(e)(1)(ii), the registrant may choose which index it uses for purposes of its PvP disclosure and should include a footnote disclosing the index chosen. If the registrant chooses to use a different published industry or line-of-business index from that used by it for the immediately preceding fiscal year, it is required to explain the reasons for the change in a footnote and provide a comparison against both the newly selected peer group and the peer group used in the immediately preceding fiscal year.
3. New Question 128D.25 – A registrant may not use the broad-based equity index it uses to determine the vesting of performance-based equity awards based on relative TSR as its peer group for purposes of Item 402(v)(2)(iv).
4. New Question 128D.26 – Market capitalization-based weighting is required for purposes of Item 402(v)(2)(iv) only if the registrant is not using a published industry or line-of-business index pursuant to Item 201(e)(1)(ii).
5. New Question 128D.27 – If a registrant uses a benchmarking peer group and adds or removes companies, is it required to footnote the changes and compare its cumulative total shareholder return with that of both the updated peer group and the peer group used in the immediately preceding fiscal year. However, if an entity is omitted solely because it is no longer in the business or industry or the changes were made pursuant to pre-established objective criteria, presenting both comparisons is not required, but a specific description of the change and the basis for the change must be disclosed, including the names of the companies removed. This is consistent with CDI 206.05 regarding disclosure under Item 201.
6. New Question 128D.28 – The staff will not object if a registrant that loses SRC status as of January 1, 2024 continues to include scaled disclosure under 402(v)(8) in its proxy filed not later than 120 days after its 2023 fiscal year end, forward incorporated into the 10-K. The PvP disclosure must cover fiscal years 2021, 2022, and 2023.
Unless the registrant subsequently regains SRC status, any other proxy filed after January 1, 2024 must include non-scaled PvP disclosure. However, a registrant generally is not required to revise disclosure for prior years to conform to non-SRC status, and the staff will not object if the registrant does not add disclosure for a year prior to those included in the first filing with PvP disclosure. But the registrant should include peer TSR — measured from the market close on the last trading day before the registrant’s earliest fiscal year in the table — and its numerically quantifiable performance under the Company-Selected Measure for each fiscal year in the table, and disclosure provided for all fiscal years must be XBRL tagged.
7. New Question 128D.29 – The registrant is required to include PvP disclosure in any proxy or information statement filed after it loses its EGC status, but may apply the transitional relief in Instruction 1 to Item 402(v) (that disclosure may be provided for three years instead of five in the first filing with PvP disclosure and an additional year in each of the two subsequent annual filings).
8. New Question 128D.30 – When multiple individuals served as PFO during one covered fiscal year, for purposes of calculating average compensation for the NEOs other than the PEO, the registrant may not treat the PFOs as the equivalent of one NEO. Each must be included individually in the calculation of the average, but additional disclosure regarding the impact on the calculation should be considered.
I’ve also included marked versions of the revised CDIs.
Question: In each of 2020 and 2021, a registrant provided the same list of companies as a peer group in its Compensation Discussion & Analysis (“CD&A”) under Item 402(b) but provided a different list of companies in its CD&A for 2022. With respect to a registrant providing initial Pay versus Performance disclosure in its 2023 proxy statement for three years (as permitted by Instruction 1 to Item 402(v) of Regulation S-K), may the registrant present the peer group total shareholder return for each of the three years using the 2022 peer group?
Answer: No. In this situation, the registrant should present the peer group total shareholder return for each year in the table using the peer group disclosed in its CD&A for such year. In the 2024 proxy statement, if the registrant uses the same peer group for 2023 as it used for 2022, the registrant should present its peer group total shareholder return for each of the years in the table using the 2023 peer group. If it changes the peer group in subsequent years, it must provide disclosure of the change in accordance with Regulation S-K Item 402(v)(2)(iv).
Question: Some stock and option awards allow for accelerated vesting if the holder of such awards becomes retirement eligible. If retirement eligibility was the onlysole vesting condition, would this condition be considered satisfied for purposes of the Item 402(v) of Regulation S-K disclosures and calculation of executive compensation actually paid in the year that the holder becomes retirement eligible?
Answer: Yes. However, for awards with additional substantive conditions, in addition to if retirement eligibility, such as a market is not the sole vesting condition as described in Question 128D.16, those, other substantive conditions must also be considered in determining when an award has vested. Such conditions would include, but not be limited to, a market condition as described in Question 128D.16 or a condition that results in vesting upon the earlier of the holder’s actual retirement or the satisfaction of the requisite service period.
During its 89 years of existence, the SEC has operated under a 3-part mission that many of us have committed to heart:
– Protect investors
– Maintain fair, orderly, and efficient markets
– Facilitate capital formation
A bill that’s in its early stages in Congress is looking to “modernize” that mission by expressly adding the word “innovation” to 15 USC 77b and 15 USC 77c (and the corresponding provisions under the Investment Company Act), so that they would read as follows:
Consideration of promotion of efficiency, innovation, competition, and capital formation
Whenever pursuant to this chapter the Commission is engaged in rulemaking, or in the review of a rule of a self-regulatory organization, and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, innovation, competition, and capital formation.
The primary focus of this bill is to provide for a system of regulation of digital assets by the CFTC and the SEC, so you might think that this wording change is simply encouraging special rules for digital assets, as those in the crypto space have been urging for quite some time. But the author of this op-ed in The Hill says the change would go further than that:
Such a small change might have a monumental impact, requiring the SEC to consider whether its actions promote or harm innovation.
Greater oversight or even an SEC overhaul might be needed, but better prioritization of innovation is a good place to begin. It could moderate the SEC’s noted perceptions of hostility towards novel sectors of the economy and move the agency’s focus away from social issues outside its intended domain.
Last Wednesday, holiday magic arrived early for securities lawyers, when the SEC officially stayed the repurchase disclosure rule that would call for detailed disclosures in upcoming Form 10-Ks. The Thanksgiving Eve announcement followed a court ruling last month in which the 5th Circuit held that the rulemaking was “arbitrary & capricious” and ordered the Commission to fix it by November 30th. The rule had been challenged by the US Chamber of Commerce and other business groups.
The Commission issued the stay on the same day that it filed a motion with the court. The motion states that since the remand, the SEC’s staff has worked diligently to ascertain the steps necessary to comply with the court’s remand order and has determined that doing so will require additional time. Accordingly, the motion is for the court to extend the period of the remand – without in the meantime the court vacating the rule. The SEC’s motion stated that if the court grants the requested extension, the SEC will provide an update to the court within 60 days on the status of the SEC’s efforts to remedy the rule’s defects.
The court hasn’t ruled on the motion, and the Chamber is opposed to the extension. While we await that ruling, it’s important to note that this order doesn’t vacate the rule – it merely stays the compliance date pending further SEC action. Stay tuned.
Update: Cooley’s Cydney Posner blogged this morning that the court denied the SEC’s order over the weekend. We may know the fate of the rule later this week…
Last week’s stay put a pause on the requirement to disclose Rule 10b5-1 plans that companies adopt to effect stock buybacks, but it doesn’t affect the requirements to disclose Rule 10b5-1 plans adopted by directors & officers. Those requirements stem from a separate rule that is already in effect (you can visit our “Rule 10b5-1 Plans” Practice Area for lots of practical guidance on what to do).
A recent Form 8-K and WSJ article underscore that plan disclosures get attention and should be handled with care. Here’s an excerpt:
Dimon, the chief executive, intends to sell one million of his current 8.6 million shares “for financial diversification and tax-planning purposes,” the bank said Friday in a filing.
After years of accumulating shares and using his buying as a signal of his belief in the bank, the shift to paring back is likely to raise questions about how much longer the 67-year-old Dimon intends to stay at the helm and whether he is beginning to contemplate the next steps.
This particular article is reporting on Jamie Dimon’s Rule 10b5-1 plan to sell 12% of his current holdings in JPMorgan Chase beginning in 2024. It notes that the company’s stock price dropped by 3.6% on the day the plan was announced. But it also is careful to point out:
But the bank said Friday that his planned stock sale wasn’t a change in his direction. And there are other signs that he isn’t dumping stock because of a change of heart.
He could sell all one million shares today, as it is currently an open window for JPMorgan executives. Instead, he set up a plan to sell them starting in the coming year at predetermined intervals or prices, showing he isn’t rushing for the exit. Such plans are common for executives. He will still own $1 billion in stock after the sales.
Obviously, not every plan adoption will be headline news like this one, which the company voluntarily reported on Form 8-K in advance of the required quarterly disclosure. But you also can’t count on every media outlet explaining the nuance of planned trading like an experienced WSJ reporter, or the market understanding those nuances.
So, keep in mind that as you prepare for the usual flurry of year-end transactions and look ahead to your Form 10-K, insider ownership reporting will be more sensitive than ever. Investors may read into the cumulative number of shares that an insider plans to sell, even if the shares are being “trickled out” over a long time period and may not have drawn as much attention if each trade was simply reported separately on a Form 4. And if you haven’t already done so, don’t forget to freshen up your internal controls to ensure that you properly report these plans in the first place.
If you haven’t renewed your Section16.net membership for 2024, now is the time! You don’t want to miss Alan Dye’s take on the latest developments, which he’ll be sharing in his annual webcast on that site on January 24th. Contact info@ccrcorp.com if you have questions about your renewal or sales@ccrcorp.com if you want to begin a new membership.
This is wild, and hopefully not a sign of things to come:
In a move that may set a record for hacking chutzpah, a cyber ransom gang has filed a complaint with the SEC reporting that a company they hacked had failed to report the incident to the SEC within the time required by the agency’s new cybersecurity disclosure guidelines. The gang apparently filed the complaint after the hacked company failed to respond to the hackers’ ransom demand. The hacking incident and the SEC report were first reported in a November 15, 2023 post on the DataBreaches.net site, and further detailed in a November 15, 2023 post on the BleepingComputer.com site.
That’s from this D&O Diary blog, and Kevin LaCroix goes on to detail why the new SEC rule isn’t the “golden ticket” that these hackers thought it was:
First, the hackers alleged that MeridianLink violated the cybersecurity disclosure guidelines by failing to make the requisite disclosure under Item 1.05 of Form 8-K within the stipulate four business days. However, the cybersecurity incident current report disclosure obligation of Item 1.05 does not go into effect until December 18, 2023, and the current reporting obligation does not go into effect for smaller reporting companies until June 15, 2024. (For further detail about the effective dates of the new cybersecurity disclosure rules, refer here.)
Second, even if the disclosure requirement were otherwise in effect, it may or may not have been triggered here. The new rules state that the cyber incident reporting is “due four business days after a registrant determines that a cybersecurity incident is material.” (Companies cannot “unreasonably delay” the determination that they need to disclose an incident.)
While the hackers in their SEC complaint described the incident as constituting a “significant breach,” MeridianLink’s description of the incident in its statement to DataBreaches.net stated that the company had “identified no evidence of unauthorized access to our production platforms, and the incident has cause minimal business interruption.” MeridianLink may well contend that it has made no determination that the incident was “material,” and therefor that the four-day reporting period was not even triggered.
Does it matter whether the hackers understand securities laws? Kevin points out that for companies that want to avoid public attention & regulatory scrutiny, the specter of enforcement & litigation could give hackers additional leverage for their extortion schemes. As the many resources in our “Cybersecurity” Practice Area explain, the SEC rules don’t require reporting immaterial incidents (or attempted incidents). Nevertheless, I guess we now have to worry about the bad guys beating us to the punch in reporting their crimes.
AI has been especially prevalent in the news this week, following the Executive Order that President Biden issued on Monday (here’s the fact sheet). Among other things, the order gives broad leeway to federal agencies to set standards for the use of AI (e.g., the NIST framework) and for the protection of individual privacy. It’s not a stretch to think that this developing issue is on the SEC’s radar.
With that, here’s a good recap of the recent Securities Enforcement Forum from Holly Carr, who spent a decade in the SEC’s Enforcement Division and is now at BDO. On top of Dave’s recent reminder about cyber risks, this jumped out at me on the topic of AI:
On AI, companies should be assessing how not just their use of AI but how the use of AI by others may expose their business to new or increased risks. For example, how are customers or vendors using AI that may impact your organizations’ risk profile.
As John noted a few weeks ago, we’re continuing to post practical governance & disclosure resources in our “Artificial Intelligence” Practice Area. And on the topic of SEC Enforcement, make sure to mark your calendars for our webcast – “SEC Enforcement: Priorities and Trends” – which is less than two weeks away, on November 15th at 2pm Eastern. We’ll hear from Hunton Andrews Kurth’s Scott Kimpel, Locke Lord’s Allison O’Neil, and Quinn Emanuel’s Kurt Wolfe about the Division’s priorities, the latest developments on “gatekeeper” scrutiny, the pros & cons of voluntary reporting & cooperation, and more. CLE credit is available!
I don’t know if you’ve heard, but FTX founder Sam Bankman-Fried has been on trial for the past month. Last night, the jury returned a guilty verdict on all counts, after deliberating for only a few hours. Sentencing is scheduled for March. Here’s more detail from CBS News:
The 31-year-old former cryptocurrency billionaire was convicted of two counts of wire fraud conspiracy, two counts of wire fraud, and one count of conspiracy to commit money laundering, each of which carries a maximum sentence of 20 years in prison. He was also convicted of conspiracy to commit commodities fraud and conspiracy to commit securities fraud, which each carry a five-year maximum sentence.
As my kindergartner would say: “Bruh, I can’t even.” The big verdict caps off a busy few weeks of crypto regulatory news. On the SEC front:
2. “Crypto Mom” Hester Peirce published a dissent on the Commission’s enforcement action against LBRY
3. The SEC decided not to appeal the Grayscale ruling, which may open the door to a Bitcoin ETF
Meanwhile, states are also getting in on the action:
4. New York AG Letita James is accusing the Winklevoss twins (sorry, the Winklevii) of perpetuating fraud through their crypto exchange & crypto “lending platform”
5. California Governor Gavin Newsom signed a law to create a regulatory framework for crypto (following NY’s lead)
This is not an exhaustive list of developments! I am not sure that there is a “big picture” takeaway other than that fraud is still illegal, and as someone mostly observing from the sidelines, I’m also not sure whether these items collectively show that we are moving closer to a world of acceptable digital assets or further away.
In the latest 22-minute episode of Women Governance Trailblazers, Courtney Kamlet & I were delighted to interview Cigdem Oktem, who leads EY’s Center for Board Matters in the US Central Region. She launched EY’s regional approach to help boards and C-suite executives benefit from the practices of their peers and CBM insights. Cigdem is a sought-after speaker and facilitator for board and CEO events around the country and is particularly skilled at using the power of storytelling to help leaders ask the right questions. Listen to hear:
1. Cigdem’s career journey in corporate governance & finance – including her roles as a CFO and as an advisor to boards and audit committees.
2. The biggest governance changes that are happening right now.
3. Tips on sharing information and influencing board behavior.
4. What’s next for the EY Center for Board Matters.
5. What Cigdem 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, 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’s blog betrayed that I had resigned myself to parsing through exhibits with daily share repurchase data and explaining the reasons for share repurchase programs, under rules adopted by the SEC in May. I stand by the notion of having the mechanics of a share repurchase be consistent with the authorizing board resolution (not a new concept and something you’re probably already doing), but in a stroke of luck, the Fifth Circuit has stepped in to say that we may not need to publicly disclose the details after all. A 3-judge panel issued this opinion – which holds that the SEC acted arbitrarily and capriciously in adopting the final rule, in violation of the Administrative Procedure Act.
The ruling was a partial win for the U.S. Chamber of Commerce, which – as discussed in our May webcast – had challenged the rule on multiple grounds. The court determined that the rule doesn’t violate the First Amendment by impermissibly compelling speech, and that the SEC’s 45-day comment period for this rule was adequate. The problem, in the court’s view, was that the SEC didn’t consider the Chamber’s comments on the rule, which suggested that the Commission quantify the costs & benefits of the proposed rule, even though the Chamber had provided the SEC with new data during the comment period that would have allowed it to do so. From the opinion:
The SEC — by continuing to insist that the rule’s economic effects are unquantifiable in spite of petitioners’ suggestions to the contrary — has failed to demonstrate that its conclusion that the proposed rule “promote[s] efficiency, competition, and capital formation” is “the product of reasoned decisionmaking.”
Additionally, the court went on to say that the supposed benefits of the new disclosure requirements don’t hold water, because the SEC hasn’t shown that opportunistic or improperly motivated buybacks are a genuine problem. According to the court, “That error permeates — and therefore infects — the entire rule.”
Hold off on deleting all your notes on the new requirements, though, because the SEC has 30 days to try to fix the defects in the rule and substantiate its decision to adopt it. My understanding is that the Commission could potentially ask for an extension – or appeal the ruling – but those avenues could be limited since the compliance date is quickly approaching. If the rule is actually vacated following expiration of this remand period, the SEC may be able to appeal that holding. The WSJ noted:
The ruling highlights the legal risks federal agencies face at a time of growing judicial scrutiny of their decisions. SEC Chair Gary Gensler is pushing an aggressive regulatory agenda that has angered American corporations and Wall Street, prompting groups such as the Chamber to challenge several rules in court.
This feels a little like when the SEC’s conflict minerals rule went on life support and nobody quite knew what would be required. The difference is that conflict minerals was struck down on First Amendment grounds, so it continued to exist, but on a much narrower basis. Whereas, if the SEC’s adoption of the share repurchase rule was faulty under the APA – and that’s not corrected – the entire rule would be vacated. We’ll see what the next 30 days bring.
In its opinion remanding the SEC’s share repurchase rule, the Fifth Circuit panel noted that the Chamber had submitted data for the Commission to consider. The Chamber did that by way of multiple comment letters that are available on the SEC’s website. One of the newer studies that the Chamber cited to was this one, from a quartet of European professors and part of the Finance Working Paper Series for the European Corporate Governance Institute, which was also summarized last year in this HLS blog. Here’s an excerpt:
The major insight of our paper is that both the timing of buyback programs and the timing of equity compensation, i.e., the granting, vesting, and selling of equity, are largely determined by the corporate calendar. We define the corporate calendar as the firm’s schedule of financial events and news releases throughout its fiscal year, such as blackout periods and earnings announcements. We argue that this calendar determines when firms implement decisions about buyback programs and equity compensation and when firms and CEOs can execute trades in the open market.
As a consequence, share repurchases and equity compensation are positively correlated. However, this correlation disappears once we account for the corporate calendar. Therefore, we conclude that the correlation between share repurchases and equity compensation is spurious and should not be interpreted causally.
Consistent with this insight, we do not find systematic evidence of price manipulation when the CEO’s equity vests or when the CEO sells her vested equity. In conclusion, we find no evidence to support the claim that CEOs systematically misuse share repurchases at the expense of shareholders.
I’m looking forward to people smarter than me describing how they’ve sorted through all of this information.
