Author Archives: Liz Dunshee

In our “Director Education/Orientation” Practice Area, we continue to post resources and guides on how to keep your directors in-the-know. We recently added this updated Gibson Dunn roundup of director education opportunities coming up in 2023. This Woodruff Sawyer guide is another good resource.

– Liz Dunshee

We continue to post new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net members. Following that blog an easy way to stay in-the-know on shareholder proposal & engagement trends – and key annual meeting issues – during this critical time of year.

Members can sign up to get that blog pushed out to them via email whenever there is a new post. Here are some of the latest entries:

– E&S Shareholder Proposals: “Quantity Over Quality”

– Institutional Investors: Roundup of Proxy Voting Policy Updates

– Diverging Investor Views: Know Your Base

– Say-on-Climate: Indifference Closely Bordering on Aversion

– No Action Requests: Another Tough Year for Exclusion Efforts

– Liz Dunshee

As Meredith recently flagged on our “Proxy Season Blog,” shareholder proposals on workforce diversity disclosures, civil rights audits and other diversity-related topics have continued to proliferate – and have been averaging 44% support over the past few years, according to Morningstar data. However, the additional disclosures that companies are making in response to stakeholder appetite for the information don’t come without risk: this recent report from David Hood at Bloomberg Law says that in the past three years, nearly 40 companies have faced lawsuits over allegedly misleading statements about diversity and equity commitments.

According to David, the plaintiffs’ allegations tend to fall into two main buckets:

– Failing to live up to stated DEI aspirations caused shares to lose value; and

– Disclosed DEI actions were outside the company’s mission to return value to shareholders

The fact that these allegations could in some cases be at odds with each other shows just how carefully you need to handle DEI initiatives and disclosures. The Bloomberg article also notes that this is an active area for employment litigation, with “reverse discrimination” lawsuits getting more attention – which is a topic we discussed last fall at our 1st Annual Practical ESG Conference. Here are a few “risk reduction” takeaways from the article and from Ngozi’s PracticalESG.com blog on “pitfalls to avoid” in DEI training:

1. Consider aspirational policies & statements, rather than strict quotas

2. Encourage DEI trainings – but make them voluntary, frequent, linked to the corporate strategy, expertly facilitated, and digestable

3. Implement initiatives with an eye towards your specific company’s needs. The goal should be to help your employees feel included and empowered to accomplish the company’s mission, not to solve all the problems in the world.

4. Recognize programs and efforts will continue to evolve

We’re continuing to share practical guidance about ESG implementation and disclosures – including DEI programs – on PracticalESG.com. And we’ve just posted the agenda for our “2nd Annual Practical ESG Conference“! This event is happening virtually on September 19th, which is the day before our 3-day “Proxy Disclosure & 20th Annual Executive Compensation Conference.” You can bundle the two events together for an additional discount. Our “Early Bird” rate ends soon, so register now for the best price.

– Liz Dunshee

When we last checked in on the drama of the Holding Foreign Companies Accountable Act, the PCAOB was striking an optimistic tone on its ability to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong that are auditing China-based companies listed on US exchanges. Last week, the Staff in the SEC’s Division of Corporation Finance and Division of Trading & Markets issued a statement that acknowledged the SEC isn’t currently identifying any more issuers under the HFCAA in light of this accord, and the risk of delisting is paused.

However, the Staff wants to remind everyone that the 174 companies previously conclusively identified under the HFCAA are still subject to additional disclosure requirements. Here are two disclosure-related excerpts from the Staff statement:

All CIIs are listed on the SEC website at www.sec.gov/HFCAA, and each CII must provide certain disclosures to investors and the Commission for each year it is identified as a CII. For foreign issuers that are CIIs, the required disclosures include the percentage of shares owned by foreign government entities, whether government entities in the foreign jurisdiction control the issuer, identification of all Chinese Communist Party (“CCP”) officials who are on the board of the issuer or the operating entity for the issuer, and whether the issuer’s articles of incorporation contain any “charter” of the CCP.

Other Disclosure Obligations for China-based Issuers

In July 2021, Chair Gensler issued a Statement on Investor Protection Related to Recent Developments in China. In that regard, we highlight that China-based issuers should consider their disclosure obligations as a whole, in addition to those disclosures required by the HFCAA and related Commission rules. To that end, we remind issuers that the Division of Corporation Finance has issued a Sample Letter to China-Based Companies, as well as earlier disclosure guidance to China-based issuers. The Division of Corporation Finance will monitor disclosures by China-based issuers and may provide additional guidance to assist these issuers in meeting their disclosure obligations under the federal securities laws.

In addition, the statement reminds companies that they would still be at risk of delisting if the PCAOB issues a new determination about its inspection abilities in a foreign jurisdiction. Moreover, under a Congressional amendment to the HFCAA last December, that delisting timeframe is now shortened to two consecutive years of being considered a “Commission-Identified Issuer” (rather than three). Here’s more detail on that aspect:

We note that the PCAOB could, in the future, make a new determination that it is unable to inspect or investigate completely registered public accounting firms in one or more jurisdictions because of positions taken by a foreign authority. At that time, Commission staff would continue to follow the procedures described in the December 2021 adopting release to identify issuers as CIIs. As noted above, should any issuers be identified as CIIs for two consecutive years in the future, an initial trading prohibition on the issuer’s securities would be imposed. Staff will continue to monitor developments related to the HFCAA, including any changes in PCAOB determinations related to inspections and investigations.

– Liz Dunshee

Check out the latest edition of John’s “Timely Takes” Podcast – featuring his interview with Sidley’s Andrea Reed about the hot topic of officer exculpation charter amendments. In this 10-minute episode, John & Andrea discuss:

– Overview of the Delaware statute’s officer exculpation provisions

– Considerations for boards of directors

– Proxy advisors’ response to officer exculpation proposals

– Stockholder support for officer exculpation proposals

These podcasts are built for “smart-phone attention spans” – I’ve been loving them during my commute and they’ve already prevented me from making at least one embarrassing mistake. Make sure to add them to your queue! And if you have insights on a securities law, capital markets or corporate governance trend or development that you’d like to share, John is always on the lookout for guests – just shoot him an email at john@thecorporatecounsel.net.

– Liz Dunshee

Thanks to Markel’s Karl Strait for noticing that the SEC’s “Small Entity Compliance Guide” for the new rules on insider trading arrangements and related disclosures confirms the compliance dates for the new exhibit requirement and other disclosures under Regulation S-K Items 408 and 402(x). I blogged earlier this year that Corp Fin Director Erik Gerding had shared thoughts on these dates – but it’s great to see it laid out:

Smaller reporting companies will be required to begin compliance with the:

– Item 408(a) quarterly disclosure and tagging requirements in an Exchange Act report on Form 10-Q that covers the first full fiscal quarter (or on Form 10-K if the first full fiscal quarter is the issuer’s fourth fiscal quarter) that begins on or after October 1, 2023; and

– Item 408(b), Item 402(x), and Item 16J (for foreign private issuers) disclosure and tagging requirements in the annual report on Form 10-K or Form 20-F that covers the first full fiscal year that begins on or after October 1, 2023.

Companies that are not smaller reporting companies will be required to begin compliance with the:

– Item 408(a) quarterly disclosure and tagging requirements in an Exchange Act report on Form 10-Q that covers the first full fiscal quarter (or on Form 10-K if the first full fiscal quarter is the issuer’s fourth fiscal quarter) that begins on or after April 1, 2023; and

– Item 408(b), Item 402(x), and Item 16J (for foreign private issuers) disclosure and tagging requirements in the annual report on Form 10-K or Form 20-F that covers the first full fiscal year that begins on or after April 1, 2023.

Remember that the changes to Section 16 are also now in effect – requiring insiders to report gifts within two business days and indicate on the Form 4 cover page whether the transaction is occurring pursuant to a Rule 10b5-1 plan.

The Guide notes that it was prepared by the Staff as a “small entity compliance guide” under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The Guide summarizes and explains rules and form amendments adopted by the Commission, but is not a substitute for any rule or form itself. The Staff wants readers to remember that only the rule or form itself can provide complete and definitive information regarding its requirements.

– Liz Dunshee

When it comes to the new disclosure requirements about insider trading, one provision that we keep reading again & again is Item 408(c). I blogged last month about confusion around the type of “non-Rule 10b5-1 trading arrangement” that is outlined in Item 408(c), which triggers the quarterly Item 408(a) disclosure.

The discussion beginning on page 78 of the adopting release says that basically, a non-Rule 10b5-1 plan is a plan that satisfies the old rules for a 10b5-1 plan, but not the new rules. For example, it may not have a cooling-off period. But still, this is an area where folks are continuing to hope for Staff clarification. Here are a few of the head-scratchers that people are grappling with:

– Purchases of issuer stock pursuant to payroll deduction elections (made when there’s not MNPI) under an employee stock purchase plan.

– Purchases of issuer stock pursuant to elections (made when there’s not MNPI) under a 401(k) plan.

– Default net share issuance provisions (in award agreements or equity plans) for vested restricted stock units (not sell-to-cover).

Do these and similar arrangements trigger Item 408(a) disclosure? With the new quarterly disclosure requirement quickly approaching, these are questions we’ll have to figure out very soon!

Check out the January-February issue of The Corporate Counsel newsletter for even more practical guidance on the ins & outs of these new rules. If you don’t already have access to that essential resource, email sales@ccrcorp.com.

– Liz Dunshee

Congrats to the SEC for taking home third place in the “Best Places to Work” survey for midsized federal agencies. Despite being extra busy with rulemaking, this scoring page says that the Staff is giving pretty high marks to engagement & satisfaction. It also shares detail on demographics.

This ranking reinforces what I’ve heard from every person I know who has spent time on the SEC Staff: it is a terrific place to work, full of smart and dedicated people. Lately, there’s been a hiring spree – so if you’re considering a career move, keep the SEC in mind!

– Liz Dunshee

A new Fenwick memo shows that many of Silicon Valley’s largest tech companies are making strides on ESG disclosures, even as providing the info remains voluntary at this point in time. Here are the key takeaways:

– The number of SV 150 companies disclosing ESG information and the comprehensiveness of such disclosures increased in 2022.

– Although ESG reporting has not been mandated, most companies have opted to provide some level of disclosure in response to stakeholder demands and in anticipation of likely mandated disclosures by the SEC.

– Areas most frequently disclosed include: environmental issues, human capital resources, diversity, supply chains, customers and products, community impact and governance.

– 76% of SV 150 companies disclosed bord or committee oversight of ESG. In particular, 85% of the companies providing such disclosure stated that the nominating and corporate governance committee (or its equivalent) had primary responsibility for ESG oversight (with other committees overseeing particular aspects of ESG, at many companies).

– The quality of ESG disclosure varied by size of company, with the larger SV 150 companies generally providing more comprehensive disclosure, including quantitative metrics.

– Technology and life sciences companies contemplating whether to voluntarily disclose ESG information or expand their disclosure should consider these trends and the types of information disclosed, to better assess their preparedness for ESG disclosure and meeting the demands of investors and other stakeholders.

These findings also build on data from earlier this year that said that nearly all S&P 500 companies now detail ESG-related issues in their Form 10-K risk factors.

Keep in mind that although many of us have been suffering from a case of “ESG fatigue” that feels like it’s been lingering for years, we are still at the front end of this. Reporting standards – at the SEC and elsewhere – will continue to evolve. Fenwick notes that approximately half of the SV 150 companies reported using a third-party standard or framework to guide their disclosure. Here’s more detail on which standards currently are getting the most traction:

The most prominent frameworks and standards included Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), Task Force on Climate-related Financial Disclosure (TCFD) and the United Nations Sustainable Development Goals (UNSDG).

SV 150 companies cited SASB most often as the standard to which they adhered, with 91% of the companies disclosing standards citing SASB compared to 87% in 2021. GRI was the second-most popular standard, with 63% of reporting companies favoring it. Finally, approximately 43% of companies that reported to a standard or framework (22% of all SV 150 companies) indicated that they used the TCFD framework.

We have lots more detail on ESG reporting and program implementation on PracticalESG.com. If you want a filtered and practical information source, subscribe to the free blog. To access the many checklists, podcasts, and other practical resources, sign up for a no-risk membership trial.

– Liz Dunshee

The “cost-benefit” analysis for federal regulatory reviews may be getting a makeover. Last week, the White House Office of Management & Budget announced two developments:

1. Executive Order on Modernizing Regulatory Review – which raises the threshold that defines “significant regulatory action” requiring additional steps for review, from $100 million to $200 million in annual effects, and makes other changes to how the review process is conducted.

2. Proposed changes to “Circular A-4” – which hasn’t been updated since it was first issued in 2003 and addresses how the government calculates costs & benefits.

These updates have the potential to impact securities disclosure rulemaking, particularly as we stare down significant changes that companies believe will vastly increase their SEC compliance costs. I blogged earlier this year that the “estimated compliance burden” under the Paperwork Reduction Act is an important part of the SEC comment process for proposed rulemaking, even though it often doesn’t generate a lot of responses from public commenters.

Circular A-4 touches on the Papwerwork Reduction Act – and bigger-picture, covers how to assess a regulation – including its impact on public health & safety, economic impact and non-monetized and non-quantified effects – when conducting a cost-benefit analysis. The White House Council of Economic Advisers summarized the context and a few of the changes – here’s an excerpt:

In the 20 years since Circular A-4 was issued, economic conditions and best practices for benefit-cost analysis have evolved, and updating the Circular will make it easier to promote regulations that most enhance wellbeing.

For example, the proposed update expands discussion of critical regulatory needs, addressing market power, behavioral biases, distributional fairness, civil rights, and more. Currently, Circular A-4 focuses on a limited set of market failures as potential reasons to regulate.

The benefits & costs of regs don’t always fall on the same groups & even when they do, research shows that a given gain or loss has larger impact on lower-income people than on higher-income people. Currently, Circular A-4 doesn’t discuss distributional effects in much detail. The proposed revision substantially expands guidance on assessing distributional effects. It helps empower agencies to use income-weighted estimates in their analyses by providing them with a weighting methodology if they choose to do so.

There’s a 60-day public comment period and review process for the proposed changes, with specific questions set forth in this preamble. If adopted, the impact of this update on rulemaking also will depend on how federal agencies – like the SEC – implement it. However, it does signal a potential shift towards a more holistic approach to cost-benefit analyses, which could have implications for future securities disclosure regulations.

– Liz Dunshee