Late last week – one day after Vanguard announced a pilot program for retail investors in certain index funds to have a greater say in proxy voting – BlackRock issued this update on its “Voting Choice” program that was launched last year and expanded this summer.
The update – which was accompanied by a letter to clients & corporate CEOs from BlackRock CEO Larry Fink – says that about 25% of eligible assets are participating. That’s consistent with the participation rate that I blogged about in June. Here’s what else is new:
1. Extension of the voting policies clients can choose from: Participating clients in global SMAs and eligible pooled vehicles can now select one of seven Glass Lewis proxy voting policies, including an upcoming global policy, the Glass Lewis Governance-Focused Policy. These options are in addition to seven Institutional Shareholder Services (ISS) policies that have been available since the launch of BlackRock Voting Choice on January 1, 2022. This broader array of policy choices enables clients to choose a policy that more closely aligns with their investment views and preferences.
2. An expansion of investment strategies eligible: In addition to certain institutional pooled funds tracking index equity strategies, certain institutional pooled funds that implement Systematic Active Equity (SAE) strategies are now also eligible for BlackRock Voting Choice. Rather than tracking an index, SAE investment strategies use a forecasting model and an optimization process to select stocks. The expansion of BlackRock Voting Choice to institutional pooled funds using these SAE investment strategies includes eligible clients representing $90 billion as of September 30, 2022, in assets under management in both pooled funds and previously eligible SMAs.
3. Aiming to enable investors in select UK mutual funds to exercise choice in the upcoming 2023 proxy voting season: BlackRock has agreed with Proxymity, a digital investor communications platform, to work together on building a solution that aims to offer pass-through technology to enable investors to exercise choice in how their portion of eligible shareholder votes are cast for the upcoming 2023 proxy voting season. BlackRock and Proxymity will share further details on the collaborative efforts in the coming months.
4. An update on continued client adoption; demonstrating desire for expanded proxy voting choices: Since May of this year, the number of index equity clients newly committed to BlackRock Voting Choice has more than doubled. Despite market volatility, newly committed index equity AUM has increased more than 30% in the past six months to $157 billion as of September 30, 2022, from $120 billion as of March 31, 2022. In total, including SAE, BlackRock equity clients have committed $472 billion as of September 30, 2022 – or a quarter of eligible assets ($1.8 trillion) – to voting their own preferences through BlackRock Voting Choice.
The jury is still out on what this shift in the direction of “pass-through voting” could mean for companies, other than making voting outcomes less predictable and investor influence more dispersed. Over time, we’ll get a better sense for whether this raises the importance of certain proxy advisor policies and whether it calms concerns that the world’s largest asset managers have too much sway.
I had been collecting various cryptocurrency-related updates for this blog, but then Bloomberg’s Matt Levine wrote a 40,000-word essay for the latest issue of Businessweek that says it all – and then some. This is only the second time in Businessweek’s 93-year history that a single author has written the entire issue, so kudos to Matt, who is one of my favorite opinion columnists and lunch valuation analysts.
Matt’s article pretty much nails why – even if you’re not a “crypto enthusiast” – you’ll still learn a lot by keeping up with the happenings. And for capital markets lawyers, much of it will even be useful! Here’s an excerpt that explains why:
I don’t have strong feelings either way about the value of crypto. I like finance. I think it’s interesting. And if you like finance—if you like understanding the structures that people build to organize economic reality—crypto is amazing. It’s a laboratory for financial intuitions. In the past 14 years, crypto has built a whole financial system from scratch. Crypto constantly reinvented or rediscovered things that finance had been doing for centuries. Sometimes it found new and better ways to do things.
Often it found worse ways, heading down dead ends that traditional finance tried decades ago, with hilarious results.
Often it hit on more or less the same solutions that traditional finance figured out, but with new names and new explanations. You can look at some crypto thing and figure out which traditional finance thing it replicates. If you do that, you can learn something about the crypto financial system—you can, for instance, make an informed guess about how the crypto thing might go wrong—but you can also learn something about the traditional financial system: The crypto replication gives you a new insight into the financial original.
Matt walks through how this asset class came about, the similarities & differences from traditional finance, and shares predictions about where it could be going. He shares an important reminder on DAOs that the members will be treated like general partners if the entity isn’t incorporated – i.e., liable for its debts.
The essay doesn’t delve too far into securities regulation issues – if you’re practicing in this area, that’s what our “Crypto Financings” & “Blockchain” Practice Areas are for. Another Bloomberg article reported this week that SEC enforcement activity is making both retail and professional investors feel more likely to “invest” in cryptocurrency, so there could be more work coming for securities lawyers on all sides of this:
Almost 60% of the 564 respondents to the latest MLIV Pulse survey indicated they viewed the recent spate of legal action in crypto as a positive sign for the asset class, whose trademark volatility has all but dissipated in recent months. Major interventions include the US regulatory investigations of bankrupt crypto firms Three Arrows Capital and Celsius Network, as well as an SEC probe into Yuga Labs, the creators of the Bored Ape collection of nonfungible tokens, or NFTs.
Like Matt, I don’t have strong feelings about the value of crypto. I find it puzzling in many ways, but also fascinating and informative from several angles: finance, securities regulation, and sociologically. And if people are going to be out there using this ecosystem, I do think there have to be some rules and guidance around it. Thankfully, there are very bright securities lawyers out there who are navigating this – a few of them just spoke on our recent webcast.
In full disclosure, I own a nominal amount of crypto. Because I’m writing about it, I wanted to see how it worked to get into the system and to buy a web3 domain name. I found it confusing and complicated, I don’t even know if I accomplished my goal, and I don’t expect to ever see that money in dollar form again. But if the target audience right now is gamers and people who enjoy internet hype, financial engineering and gambling, that’s…not me. I’m just a 40-something professional who needs a type of currency that can buy snacks for my kids.
Regardless of where you stand on cryptocurrency, we can probably all agree that companies that hold these digital assets need to be able to properly value them on their balance sheets, and that it is probably something more than “0” and maybe also different than the current trading value, which is difficult to predict.
Some companies have treated digital assets as indefinite-lived intangibles. At a meeting earlier this month, the FASB reached a different (tentative) conclusion on how to account for digital assets, which is part of its project on this topic. Here’s an excerpt from the notes on “tentative Board decisions”:
The Board decided to require an entity to:
1. Measure crypto assets at fair value, using the guidance in Topic 820, Fair Value Measurement.
2. Recognize increases and decreases in fair value in comprehensive income each reporting period.
3. Recognize certain costs incurred to acquire crypto assets, such as commissions, as an expense (unless the entity follows specialized industry measurement guidance that requires otherwise).
The Board also considered:
1. Various measurement alternatives for crypto assets with inactive markets and decided not to pursue those alternatives.
2. Whether to provide implementation guidance relative to the application of fair value measurement of crypto assets and decided not to provide additional measurement guidance as part of this project.
3. Whether there should be a difference for private companies for the measurement of crypto assets and decided that the measurement and recognition requirements should be the same for all entities.
The Board will consider presentation, disclosure, and transition at a future meeting.
Crypto folks have been saying that they want the SEC to regulate these assets and related transactions with tailored rules. That was a theme in our recent webcast, “Cryptocurrency: Making Sense of the State of Play” – with Ava Labs’ Lee Schneider, Liquid Advisors’ Annemarie Tierney, Cooley’s Nancy Wojtas, and Coinbase’s Jolie Yang.
The transcript for that program is now available, which will be a helpful guide to anyone looking to responsibly navigate the securities law complexities of this work. Lee, Annemarie, Nancy & Jolie covered:
1. Overview of Regulatory Issues & Risks
2. Structuring Deals, Resales & Products in the Current Regulatory Environment
3. How to Handle Cryptocurrency Use in Transactions
4. Learnings from Recent High-Profile Token Collapses
5. Will the Ethereum Merge Affect the SEC’s Analysis?
6. Predictions & How to Prepare
One recurring takeaway was that practicing in this space is best suited for people who like a challenge.
Loss contingency disclosures are never easy, but there are some “do’s & don’ts” that can keep you out of hot water. This Troutman Pepper memo shares takeaways from a recent SEC enforcement action that show “what not to do.” Here’s more detail:
Between January and May 2018, defendants — the former CEO, the former CFO, and a former director of the Company — allegedly violated federal securities laws when they made false and misleading statements to outside auditors about an ongoing SEC investigation into the Company’s investment in a biotechnology company (the Biotech Investment). Despite knowing of the investigation and the SEC’s intention to recommend charging the Company with violating federal securities laws, the defendants told the auditors that they were not aware of “any situations where the company may not be in compliance with any federal or state laws or government or other regulatory body regulations.”
The veracity of this assertion was rendered false once it was discovered that, between March 2015 and November 2018, the SEC’s Division of Enforcement sent multiple subpoenas to the Company, its officers, and directors, requesting documents and seeking testimony related to the SEC’s investigation into the Biotech Investment. Moreover, in April 2017, the SEC’s Division of Enforcement sent a Wells notice to the Company notifying it of the SEC staff’s intention to recommend charges.
The memo goes on to note that the former CEO & CFO were also in trouble under anti-fraud rules for signing a Form 10-K and Form 10-Q that the SEC says omitted required “loss contingency” disclosure under GAAP. The defendants paid civil penalties and agreed to temporary D&O bans. The memo concludes:
Situations like the above are not isolated events. In today’s ecosystem, companies are more likely than ever to be faced with the potential for investigation or other enforcement action by any number of regulatory bodies — whether it be the SEC, FINRA, NASDAQ, DOJ, FTC, OSHA, and so on. In the face of such investigations or enforcement actions, companies often struggle with assessing when events have escalated such that they are subject to disclosure requirements. This assessment can be difficult, therefore it is crucial that companies undertake a diligent review and engage appropriate assistance to ensure the accuracy and rigor of that review.
Indeed, as noted by the SEC in its order, ”…[the Company and its officers] never conducted a good faith assessment as to whether the possible pending enforcement action needed to be disclosed. Instead, the Company and its officers did the opposite — they mislead [the Company’s] auditors and failed to disclose the existence and status of the SEC’s [] investigation.” Casting a blind eye will not aid in the avoidance scrutiny, but rather will heighten the degree of attention focused on each and every deficiency.
I’ve blogged that AI is the next corporate governance frontier. Now, the White House Office of Science & Technology Policy has issued this “Blueprint for an AI Bill of Rights” – which can help boards & advisors spot issues that may develop into regulatory & reputational risks. This Eversheds Sutherland memo gives a helpful summary. Here’s an excerpt that describes the Blueprint’s key principles:
– Safe and effective systems – Automated systems should undergo extensive testing prior to deployment to determine potential risks and options for mitigating such risks. Businesses should consult experts and have diverse input to ensure the system is effectively designed for the intended goal. Systems should be redesigned when the design is harmful, or the AI system should not be deployed if it cannot be improved. Independent evaluators should be given access to automated systems to evaluate and document their safety and effectiveness to ensure the systems are operating as intended.
– Algorithmic discrimination protections – Automated systems should be designed in an equitable manner. The public should not face algorithmic discrimination based on any type of legally protected classification like race, ethnicity, sex, gender identity, or religion. AI systems should be proactively designed and assessed to protect against discrimination. AI systems should receive “algorithmic impact assessments” from independent evaluators on the potential disparate impacts.
– Data privacy – There should be built-in protections to shield the public from “abusive data practices” and people should have control over how their personal data is used by AI systems. Data collection should conform to reasonable expectations and only data that is strictly necessary for a specific context should be collected. The description of the intended use of the AI-derived data should be explained in non-technical language. Any consent request should be brief, be understandable in plain language. Enhanced protections and restrictions on data and inferences related to sensitive information collection and processing may be necessary. In addition, individuals should be free from unchecked AI-enabled surveillance and monitoring.
– Notice and explanation – People should be notified when AI is in use and told the extent of that use. The business should also explain how and why the particular outcome was reached and if any non-AI factors contributed to the outcome.
– Human alternatives, consideration, and fallback – The public should have the option to reject the use of AI and to choose a human alternative, where appropriate. Individuals also should have access to a person who can quickly consider and remedy any problems they encounter in relation to AI systems.
The memo points out that the Blueprint is non-binding and discretionary, and the White House says that future sector-specific guidance will likely be necessary. Some agencies (e.g., the DOL) and states are already looking for ways to compel disclosures on these topics. Eversheds predicts that organizations that engage in commercial surveillance or that use AI to profile customers (e.g., targeted ads) should be particularly attuned to whether their practices align with the Blueprint’s principles.
Companies and their advisors aren’t the only ones struggling to keep pace with SEC Chair Gary Gensler’s “front-loaded” rulemaking agenda – the Staff is also feeling the pressure, according to a recent report from the SEC’s inspector general and a related WSJ article.
This is not very surprising news given everything that is going on, but the report does provide some insight on “how the sausage is made.” And it shows that the Commission is facing challenges that are common across many organizations – for example, collaboration across departments, which is one of the most difficult things anywhere. Here’s an excerpt:
Despite management’s commitment to cross-functional collaboration and communication, personnel we met with (including those from the Division of Economic and Risk Analysis, the Division of Enforcement, and the Office of the General Counsel, among others) identified coordination and communication as a persistent challenge in the rulemaking process, particularly given potential overlaps in jurisdiction and differences in opinion.
We reported on such challenges in a management letter issued in September 2022. Specifically, we reported that, around December 2021, the Office of the Chair modified the process for coordinating internal reviews of draft agency rules, resulting in the Office of the Advocate for Small Business Capital Formation (OASB) and the Office of the Investor Advocate (OIAD) receiving only fatal flaw drafts of proposed rules for a brief period of time. This change was not formally documented or communicated, and the then-directors of OASB and OIAD were not aware of the change until after it took effect.
The report goes on to say that the OASB and OIAD were still able to carry out their responsibilities, but that these types of uncommunicated practices could hinder effective collaboration. You can certainly imagine people getting grumpy over this type of thing! The Staff is also worried that attrition and workload may lead to less time for research & analysis on rulemaking and may increase litigation risks, which are already circulating.
As a “consumer” of SEC rules, it is concerning that the Staff is experiencing these issues. A possible silver lining, as the Staff finalizes rules and thinks about the processes that will be necessary to comply, is that maybe these challenges will create even more empathy amongst the Staff for what companies are going through. I certainly hope that all of the hard-working folks at the SEC get the resources they need – and some appreciation for their efforts.
Yesterday, the DOJ announced that seven directors have resigned from corporate board positions in response to concerns by the Antitrust Division that their roles violated the Clayton Act’s prohibition on interlocking directorates. I blogged last month that inquiries were underway.
The DOJ’s press release identifies five companies – so far – that have lost directors as a result of the alleged interlocks (see this WSJ article for more color). In three instances, a director was serving simultaneously on the boards of two companies that could be deemed competitors. In two instances, investment firms were also implicated – because they had one or more representatives on the boards of potentially competing companies. John warned earlier this year that this Clayton Act issue could be a big problem for private equity, and that appears to be playing out.
The DOJ announcement offers these parting words:
Companies, officers, and board members should expect that enforcement of Section 8 will continue to be a priority for the Antitrust Division. Anyone with information about potential interlocking directorates or any other potential violations of the antitrust laws is encouraged to contact the Antitrust Division’s Citizen Complaint Center at 1-888-647-3258 or antitrust.complaints@usdoj.gov.
Be a hero, not a zero: remember the Clayton Act when you send out your D&O questionnaires, and get out in front of this issue with your directors. Our 95-page “D&O Questionnaire Handbook” includes a sample question to identify relationships that could be problematic, and you can use this enforcement sweep to explain why you’re adding it now.
If you’re already aware of potential interlocks, it would be prudent to address them sooner rather than later. For example, if your company identifies as a competitor in its disclosures a company where one of your directors sits on the board, that could put you in the DOJ’s cross-hairs. You may need to have some difficult conversations, and consider a succession plan if the director wants to stay on the other board.
Here’s a blog I shared this morning on CompensationStandards.com. I’m confident this is also of interest to readers here, because several esteemed members emailed me within minutes of the SEC posting its notice for next week’s open meeting (thanks, y’all)! Make sure to watch CompensationStandards.com for ongoing guidance on the new rules – and what you need to do:
Yesterday, the SEC posted a Sunshine Act Notice for an open meeting of the Commissioners to be held next Wednesday, October 26th. Corp Fin Staff will also be attending – Renee Jones, Erik Gerding, Elizabeth Murphy, Lindsay McCord, and others. After years of anticipation, the agenda includes:
The Commission will consider whether to adopt rules to implement of Section 10D of the Securities Exchange Act, as added by Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
We had a great session at our Executive Compensation Conference last week about what you need to think about when reviewing and updating your clawback policy in light of recent enforcement activity and these expected final rules. If you missed it, you can still get access to the on-demand archives of this session and all of the other practical guidance from our Conferences by emailing sales@ccrcorp.com. Stay tuned for more guidance as we receive and analyze the final rules.
In the meantime, here are some of my latest entries on this topic from our “Advisors’ Blog” on CompensationStandards.com – and more helpful info is available in our “Clawbacks” Practice Area on that site:
John blogged last week about a tech glitch that caused the SEC to reopen the comment period on 11 rulemaking proposals and one request for comment. On Tuesday, the SEC’s order was published in the Federal Register, which began the 14-day clock for the reopened comment periods. The window closes on November 1st.
What does that mean for the timeline for these proposals? We can’t know for sure whether or when they’ll be adopted, but here are the general next steps after November 1st:
– SEC Staff moves forward with making sure all submitted comments are received and reviewing any additional comments that were submitted during the reopened period.
– SEC Staff continues with its process of drafting the final rules & adopting releases for the affected proposals, considering all comments.
– The Commissioners can then consider whether to approve each proposed rule (what they consider will include proposal modifications that are drafted by the Staff in response to public comments).
