Author Archives: Liz Dunshee

May 27, 2022

China-Based Companies: Audit Inspections at “Critical Juncture”

Earlier this week, YJ Fischer, Director of the SEC’s Office of International Affairs, used this speech to sound alarm bells with respect to the continued listings of China and Hong Kong-based companies. Here’s an excerpt with the four main points:

– First, PCAOB-registered public accounting firms must provide the PCAOB with access to their audit work papers, and, any claim that audit work papers cannot be produced because they contain national security materials is questionable at best;

– Second, although there have been ongoing and productive discussions between US and Chinese authorities regarding audit inspections and investigations, significant issues remain and time is quickly running out;

– Third, even if US and Chinese authorities reach an agreement in the near future to commence PCAOB audit inspections and investigations in China and Hong Kong—and I want to emphasize this point—such an agreement will only be the start towards satisfying the PCAOB’s statutory mandate; and

– Finally, should the issuers or the relevant Chinese authorities wish, they can effectuate the voluntary delisting of China-based issuers that they deem “too sensitive to comply” with PCAOB requirements, but allow other companies and audit firms to comply fully with the PCAOB inspection and investigative processes, thereby allowing the remainder of China-based issuers to avoid potential trading prohibitions in the US.

The speech includes a good refresher on the Holding Foreign Companies Accountable Act, which was passed in 2020:

– First, the HFCAA directs the PCAOB to determine whether it is unable to inspect or investigate completely registered firms located in a foreign jurisdiction because of a position taken by an authority in that jurisdiction.

– Second, the HFCAA directs the SEC to identify issuers that file annual reports that include an audit report prepared by auditors covered by the PCAOB’s determination.

– Finally, after three consecutive years of an issuer being identified by the Commission under this process, the HFCAA requires the SEC to impose a trading prohibition on the securities of those issuers.

Since the HFCAA was signed into law, the PCAOB has determined that there are two jurisdictions — China and Hong Kong — where local authorities prevented the PCAOB from inspecting or investigating audit firms completely. And, in a largely administrative process, the SEC has commenced the process of identifying issuers that have filed annual reports with an audit report prepared by an audit firm in a jurisdiction subject to the PCAOB’s determination under the HFCAA. These issuers may face potential trading prohibitions and, ultimately, delisting as soon as 2024. As of May 20, 2022, the Commission had conclusively identified 40 such issuers.

It has been a very busy week for HFCAA determinations, because there are now 128 conclusively identified issuers and another 20 that have been provisionally identified. When I checked in on this two months ago, there were no conclusively identified issuers and only 6 “maybes”! The list already includes Baidu and Weibo. Eventually, it will likely include all China-based stocks that trade on US exchanges, including Alibaba.

This Bloomberg article says that some analysts think that the Chinese & US governments may be able to strike a deal that would avoid delistings – but it could take a year to work that out.

Liz Dunshee

May 26, 2022

SEC Takes Aim at Greenwashing

At an open meeting yesterday, the SEC issued a pair of proposals that would affect disclosure and portfolio policies of so-called “ESG” funds. Lawrence summarized both of these proposals on PracticalESG.com. Here’s an excerpt with thoughts on the “trickle-down” effect that this could have on companies:

Investment fund compliance can get very complex, very fast – so I’m not going to get into the weeds here. For companies that might be included in fund portfolios, these rules are yet another sign that the SEC is cracking down on perceived “greenwashing” in an industry that reached $2.78 trillion in assets during the first quarter of this year, up from less than $1 trillion only two years ago, according to this WSJ article and Morningstar data. These proposals follow an enforcement action against an ESG investment fund earlier this week.

With investors under pressure to prove their ESG credentials and provide enhanced disclosure, they’ll in turn be passing more information requirements along to portfolio companies. That means it’s more important than ever to be in regular conversation with your investors, so that you aren’t caught flat-footed by information requests – and to stay in line with peers and emerging best practices (because demands can accelerate quickly).

It also means there’s an opportunity for ESG-focused companies that are seeking capital. There may be a big rush to ESG assets if funds are faced with the choice between compliance or a name change. The ESG investment fund space may also shrink, which is what happened in the EU when regulators realized that so-called ESG funds were not actually performing screens. As I noted in my book, Killing Sustainability (available to PracticalESG.com members on our “Guidebooks” page):

The EU Commission passed the Sustainable Finance Disclosure Regulation (SFDR), which became effective March 2021. in anticipation of the effective date, however, ESG-tagged investments in Europe shrank by $2 trillion from $14 trillion in 2018 as funds deleted references to ESG, responsible or green in their names/descriptions.

Comments for both of the proposals are due 60 days after the date the proposal is published in the Federal Register. It is interesting that this proposal was given a 60-day comment period initially, in contrast to the climate disclosure rule.

Liz Dunshee

May 26, 2022

State Street’s Annual Stewardship Report

State Street Global Advisors recently issued its annual stewardship report. The 80-page recap details 2021 engagements, voting activity, and explains how SSGA’s ESG function is organized (and new headcount). It gives clues on what to expect in the off-season and next year. Here are some excerpts:

Climate Transition: We are planning a targeted engagement campaign in 2022 to encourage the most significant carbon emitters that we invest in to disclose climate transition plans. SSGA is concerned about “brown-spinning” and wants to see responsible transition planning. The report highlights case studies beginning on page 39. Interestingly, SSGA supported 84% of say-on-climate proposals worldwide, but continues to have reservations that it will insulate directors from accountability.

Board Gender Diversity: In 2022, we expect that all companies we invest in, across the globe, will have at least one woman on their board. If we do not see companies engaging on this topic, we are prepared to vote against the Chair of the board’s Nominating Committee or the board leader. Additionally, beginning in the 2023 proxy season, we will expect boards to comprise at least 30% women directors for companies in major indices in the US, Canada, UK, Europe, and Australia.

R-Factor: We currently vote against companies that fail to improve their R-Factor score and show no signs of taking action to improve their score. In 2022, we will continue to vote against companies where we do not see action to improve their score; we will now also vote against companies that show a downward trend in their R-Factor scoring as well as those that consistently underperform their peers in the same market sector.

2022 Engagement Priorities: We will continue to focus on our key stewardship priorities of climate change, diversity, equity and inclusion, human capital management, and effective board leadership. This commitment is clearly demonstrated through material changes to our voting policies. In 2022, we expect to ask companies to report against the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD), and we will publish our own TCFD report. This year we announced that in the upcoming 2022 proxy season we will take voting action against responsible directors if (1) companies in the S&P 500 and FTSE 100 do not have a person of colour on their board and (2) companies in the S&P 500 do not disclose their EEO-1 reports.

Liz Dunshee

May 26, 2022

The SEC’s (Possible) New Commissioners: Nomination Hearing

Last week, the Senate Banking Committee held a hearing to consider the nomination as SEC Commissioners of:

– Jaime Lizarraga – whose testimony included comments on facilitating capital formation for small businesses and keeping pace with rapid technological change, and

– Mark Uyeda – whose testimony emphasized his state-level securities regulation experience (in California) and the need for start-up financing and capital formation.

This Thomson Reuters article says that Jaime and Mark cruised through the hearing and skillfully dodged controversial Q&A – there are “no obvious roadblocks to confirmation in sight.”

Liz Dunshee

May 25, 2022

Human Capital: Lawmakers Push SEC to Require Expansive Standardized Data

Congresswoman Maxine Waters (D-CA), who chairs the House Financial Services Committee, and Senator Sherrod Brown (D-OH), who chairs the Senate Banking, Housing & Urban Affairs Committee, are calling for more prescriptive human capital disclosure rules. . . and more. Earlier this week, the lawmakers sent this letter to SEC Chair Gary Gensler, saying:

We write to urge the Securities and Exchange Commission (SEC) to require the disclosure of standardized data of race, ethnicity, gender, sexual orientation, and disability status. As the SEC continues to update its disclosure rules to ensure today’s investors have reliable data to make informed investment decisions, such data should be included in all future rulemaking related to human capital management and diversity.

The letter notes the increase in voluntary disclosure of EEO-1 data in response to investor initiatives and says that rulemaking would align with the SEC’s mission to protect investors, ensure fair, orderly, and efficient markets, and facilitate capital formation. But perhaps the most striking part of this letter is that it pushes for info not only at the board, executive, and workforce levels – but also when it comes to supplier diversity and procurement data.

That new & expansive aspect of “human capital” apparently stems from this 68-page report from last December that was focused on the practices of investment firms. The legislators then cite to the “ESG Disclosure Simplification Act” that was passed by the House Committee last year. Despite this letter being only 2 pages in length, there are a lot of “asks” to unpack here.

The SEC’s current Reg Flex Agenda, which reflects the priorities of the chair, shows that there may be a proposal in the works on human capital management disclosure. In light of the current murmurings about SEC rulemaking authority, I’d be surprised if any proposal went as far as this letter urges… but you never know.

We’ve been tracking human capital management oversight & disclosure since way back when the Human Capital Management Coalition first petitioned the SEC for rulemaking on this topic. Visit our Practice Area for lots of practical resources. If you don’t have member access, email sales@ccrcorp.com.

Liz Dunshee

May 25, 2022

California’s Board Gender Diversity Statute: Down, But Not Out?

Dave blogged last week that a California court struck down the state’s board gender diversity statute, finding that it violated the Equal Protection Clause of the California Constitution. The same plaintiffs also recently prevailed on a motion for summary judgment to challenge the statute that would require a certain number of directors from “underrepresented communities.”

According to this Cooley blog, the California Secretary of State has announced that the state will appeal the May 13th decision. As the blog details, the Secretary of State believes that the statute is narrowly tailored to serve a compelling interest.

If you’re advising a California-headquartered company on next steps, remember to check the voting policies of the company’s shareholders and consider that in your analysis. For example, State Street announced that beginning in 2023, it expects Russell 3000 companies to have boards composed of at least 30% women directors. It may vote against the chair of the nominating committee if the company fails to meet expectations – and against all members of the nominating committee if the failure continues for 3 consecutive years. For convenience, we’ve collected voting policies from major institutional investors and asset managers in our “Institutional Investors” Practice Area – along with interpretive analysis, info on voting outcomes, and more.

Liz Dunshee

May 25, 2022

Today’s DEI Workshop: Using DEI Data for Goal Setting & Reporting

Join us today at 2 pm Eastern Time for the third & final webinar of our 3-part DEI series – “Using DEI Data: Goal Setting & Reporting” – to hear Hook & Fasten’s Deesha Dyer, Jenner & Block’s Courtney Carter, Skadden’s Caroline Kim, and Vityl’s George Ho discuss practical ways to use DEI data to set goals and report on DEI progress. If you’ve not yet registered, you can still sign up here. This PracticalESG.com workshop is free, courtesy of our wonderful sponsors, Morrison & Foerster and Holmes Murphy.

If you can’t make it today, the replay of this session will be available on-demand to PracticalESG.com members. If you aren’t already a member, sign up now and take advantage of our “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund! You can sign up online, by calling 800-737-1271, or by emailing sales@ccrcorp.com.

Liz Dunshee

May 24, 2022

ALJ Drama Could Spell Trouble for SEC Rulemaking

Dave blogged last week about a Fifth Circuit decision that ruled against the SEC’s use of Administrative Law Judges to conduct civil trials without a jury. As he noted, the opinion went a step further and also said that the ALJ system relies on unconstitutionally delegated legislative power.

Some people are saying that’s a big deal, because it could lay the groundwork for challenges to actual SEC rulemaking. In this column, Bloomberg’s Matt Levine explains:

But the panel is making a broader point here. The broader point is Justice Gorsuch’s point about political accountability, an excess of lawmaking, etc.; the opinion talks about those principles at length and cites Justice Gorsuch’s Gundy dissent. The point is that the nondelegation doctrine is alive again, and the Fifth Circuit is making a bet that the next time it goes before the Supreme Court it will win. The point is that the SEC’s actual legislative actions — writing rules about stock buybacks or swaps disclosure or climate change — are now in danger. It used to be accepted as a routine matter that the SEC could make rules under a very broad grant of power from Congress to regulate securities markets in the public interest. I am not sure that is true anymore.

This may not be a particularly big deal. Two judges on one panel of one appeals court found that one small part of what the SEC does is an unconstitutional delegation of power. It is possible that this decision is fairly narrow: Congress did delegate this decision — about whether to bring cases in federal courts or its own forums — to the SEC, fairly recently, without any guidance at all, which is unusual. Perhaps the “intelligible principle” standard allows the SEC to do all of its other rulemaking (because Congress has mostly given it some broad guidance about protecting investors in the public interest, and because SEC rules do help to fill in a fairly detailed statutory system), but not to make this particular decision. Still. I think the Fifth Circuit went out of its way to find a nondelegation problem because the Supreme Court has changed and now there will be a lot more courts finding a lot more nondelegation problems. I think this might be a sign of where things are going.

John blogged a couple months ago that the non-delegation doctrine could be a key part of challenges to the Commission’s climate change disclosure rule. Now, there is precedent.

Liz Dunshee

May 24, 2022

Climate Change Comments: The CII’s 38-Page Letter

Earlier this month, the SEC extended the deadline for its controversial climate change disclosure proposal. Thousands of comments have been received so far. While most of the late-landing letters have come from individuals, there have also been thoughtful comments along the way that examine the SEC’s rulemaking authority and the impact on smaller companies.

Last week, the Council of Institutional Investors added its 38-page letter to the mix. Here’s a summary from CII’s LinkedIn post:

CII’s May 19 letter to the SEC, penned by General Counsel Jeff Mahoney generally supports the basic disclosure requirements in the commission’s March 21 proposed rule on “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” but also recommending changes to the proposed initial compliance dates and to the threshold for the proposed footnote disclosure on climate-related metrics and impacts. Overall, CII supports the SEC’s proposed disclosure requirements on climate-related risks, Scope 1 and Scope 2 emissions, and Scope 3 emissions with certain accommodations for companies.

Among other changes, CII is urging the SEC to extend the compliance date for climate disclosure by at least one year. It supports the proposal to include financial footnote disclosure about climate-related metrics – but not the “bright-line” 1% threshold. Rather, CII supports a more traditional “reasonable investor” materiality test.

CII supports the provisions of the proposal that would require disclosure about board oversight of climate-related risks, the potential & actual impact of material climate-related risks, scenario analysis, and emissions disclosure. For Scope 3 emissions, CII suggests a liability safe harbor, an exemption for smaller companies, and other accommodations to ease the corporate compliance burden. The comment letter also suggests extending the compliance date for the proposed attestation requirement.

We are closely monitoring the proposal – and we’re wading through the practical disclosure & process implications so that you aren’t caught flat-footed when your directors and investors ask about your plan. If you haven’t already bookmarked the transcript from our April webcast with Sidley’s Sonia Barros, Travelers’ Yafit Cohn, NuStar Energy’s Mike Dillinger, and our own Dave Lynn & Lawrence Heim, head over there now. This conversation wasn’t just a review of the proposal – we discussed what you need to do now to prepare for final rules as well as investor demands.

If you aren’t already a member with access to that guidance, sign up now and take advantage of our “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund! You can sign up online, by calling 800-737-1271, or by emailing sales@ccrcorp.com. Make sure to also check out our new membership resource, PracticalESG.com, for comprehensive & practical guidance to goal-set, measure & disclose progress on climate and other E&S issues.

Liz Dunshee

May 24, 2022

Quick Poll: Will We Reach 10k Climate Comments?

On its “submitted comments” page, the SEC has recorded more than 8100 form letters in response to its climate disclosure proposal – plus a hefty number of bespoke, thoughtful letters. Lawrence has predicted that we’ll hit 10k before the extended June 17th deadline. I’ll owe him five bucks if he’s right!

Who’s with me on this wager? Please participate in this anonymous poll to share your guess of where we’ll end up:

Liz Dunshee