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.
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.
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.
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:
The universal proxy rules go effective in only 3 short months – August 31st, 2022. A recent article from The Activist Investor explains how the rule could significantly decrease activists’ costs to conduct a proxy contest. That means that companies & boards will be facing more threats and more distractions, and navigating proxy contest responses in a dramatically altered landscape. Now is the time to prepare.
In our webcast earlier this year, Goodwin Proctor’s Sean Donohue, Gibson Dunn & Crutcher’s Eduardo Gallardo, Sidley Austin’s Kai Liekefett and Hogan Lovells’ Tiffany Posil suggested tactical steps that companies should take in advance of the compliance date. Make sure to take a spin through the transcript if you haven’t already. Kai also emphasized that:
“We have an entire business that is functioning as profession second guessers, and they will be coming for you once they see an opening. So, you need to get ready for it and the universal proxy is just another reason to get ready for shareholder activists.”
We’ve posted memos about the final rule in our “Proxy Cards” Practice Area, and we explained the steps that companies need to take to comply in the November-December ‘21 issue of The Corporate Counsel newsletter. More analysis is available in our “Proxy Fights” Practice Area on DealLawyers.com. John has also blogged about the difference between “proxy access” and “universal proxy” – a key point.
If you aren’t already a member of our sites, 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.
The universal proxy rule will change tactics for activists & companies. The investor resource The Activist Investor is exploring the ramifications with a collection of articles and other information. In this article, Michael points out that the SEC rule doesn’t directly address the situation of multiple activists – leaving companies & challengers to sort that out in the trenches. He notes:
The rule is silent on the critical elements of how the UPC will apply to proxy contests with more than one activist investor. Without further guidance from the SEC, companies and activists may handle these situations in dramatically different ways.
We see three such critical elements:
– The proxy card contents and format
– Notifications among the activists and the company
– Reference in proxy statements to information about director nominees.
The article goes on to outline ways this might play out, in the absence of SEC guidance:
We can easily envision situations in which a company wishes to comply strictly with the SEC rule. If the SEC doesn’t require something, then (conveniently!) it won’t do it.
It might notify each activist only of the company’s nominees, since that’s all the rule requires. Each activist would then have an incomplete proxy card.
Or, a company may list all activist candidates together, alphabetically as the rule prescribes. This will likely confuse shareholders, and perhaps prompt them to vote for company nominees.
We can also envision situations in which one activist wishes to avoid ceding any advantage to another activist. Then, one activist might want to not list director nominees from another. Or, one activist might refer shareholders to proxy materials only for the company, and not for other activists.
This is just a start. Resourceful companies (and activists) can no doubt think of other ways that creative interpretation of the new rule will confound multiple activists that nominate director candidates at a company.
The SEC hasn’t given indications that it will provide additional guidance on this rule before the August 31st effective date. It may wait to see what issues actually materialize and how companies & activists respond. Remember that if you encounter a sticky situation, you can use our “Q&A Forum” to get thoughts from the securities law community.
Here’s something Lawrence blogged last week on PracticalESG.com (if you’re not already subscribed to Lawrence’s updates, which are focused on cutting through all the ESG noise to provide practical takeaways to companies, sign up here):
Yesterday I recorded a podcast with Chris McClure, the National Head of ESG Services at Crowe, about fraud in ESG (that podcast will be available to members soon). Only after that did I see the New York Times article about Wells-Fargo allegedly conducting fake job interviews: “Black and female candidates are sometimes interviewed after the recipient of a job is identified, current and former employees say.”
The article discusses allegations made public by Joe Bruno, a former executive in the bank’s wealth management division.
… Mr. Bruno noticed that often, the so-called diverse candidate would be interviewed for a job that had already been promised to someone else.
He complained to his bosses. They dismissed his claims. Last August, Mr. Bruno, 58, was fired. In an interview, he said Wells Fargo retaliated against him for telling his superiors that the “fake interviews” were “inappropriate, morally wrong, ethically wrong.”
Wells Fargo said Mr. Bruno was dismissed for retaliating against a fellow employee.
Mr. Bruno is one of seven current and former Wells Fargo employees who said that they were instructed by their direct bosses or human resources managers in the bank’s wealth management unit to interview “diverse” candidates — even though the decision had already been made to give the job to another candidate. Five others said they were aware of the practice, or helped to arrange it.
These claims are similar to those levied in 2019 against the National Football League (NFL) and three of its teams by Former Miami coach Brian Flores, who is Black. From a Sports Illustrated piece on the matter:
It was clear from the substance of the interview that Mr. Flores was interviewed only because of the Rooney Rule [NFL teams must interview two minority candidates when looking for a team’s next head coach], and that the Broncos never had any intention to consider him as a legitimate candidate for the job. Shortly thereafter, Vic Fangio, a white man, was hired to be the Head Coach of the Broncos.
Fraud is making quite a splash in ESG as pressure to meet DEI and other ESG goals increases. I’ve written about fraud many times before and Chris echoed those thoughts and more. Keep a look out for my podcast with Chris, where he talks about the problem and offers ideas on solutions. I’ll announce its availability soon. Members can also refer to our checklist on Internal Controls for E&S Information and our E&S Data Validation Guidebook.
Even further, using DEI data to set goals and reporting on progress is the topic of the third & final PracticalESG.com DEI workshop – this Wednesday May 25th from 1:00pm – 2:30pm Central time. To attend this critical event for free, register here.
I blogged earlier this week about a shareholder proposal that urged a company to impose additional restrictions on Rule 10b5-1 plans, which largely mirror the conditions in the SEC’s proposed changes to Rule 10b5-1. The shareholder proposal didn’t pass, but nearly 49% of shareholders voted in favor of it.
A member emailed this note in response:
It occurred to me that not enough attention has been paid to the issue surrounding the legal framework for insider trading violations and the SEC’s proposal to restrict the 10b5-1 affirmative defenses. It is one thing for a company to adopt a policy limiting the use of the 10b5-1 safe harbor, even in response to a shareholder proposal, but it is another for the SEC to seek to limit defenses to insider trading violations that is inconsistent with the legal requirements for insider trading liability.
The member noted that the ABA comment letter to the SEC on the Rule 10b5-1 proposal raises this concern. The ABA comment letters always draw a strong team of participants, and this one includes heavy hitters Stan Keller and John Huber, among other very accomplished members of the securities law community (if you have been practicing in this space for more than a few years, you will probably recognize all of the names on this particular letter). Here’s an excerpt:
Moreover, we are concerned that adding the proposed conditions to the affirmative defenses in Rule 10b5-1 as it is now constructed would be inconsistent with insider trading law. In our letter dated May 8, 2000 commenting on the proposal to adopt Rule 10b5-1, we expressed our concern about whether the enumerated affirmative defenses fully reflected insider trading law and suggested that they be designated as non-exclusive safe harbors or that a catch-all affirmative defense be added. The Commission chose not to take our suggestions in adopting Rule 10b5-1.
However, that was not particularly problematic because the affirmative defenses in the rule as adopted were closely aligned with insider trading law. That would not be the case though if the Commission were to adopt the proposed amendments because of the substantial limitations that would be imposed on the affirmative defenses. Accordingly, we are concerned that the proposal, if adopted, would depart from established insider trading law. To illustrate: under current Rule 10b5-1 a person who does not have material non-public information could grant discretionary authority to sell shares to a third party; that third party can then sell at a time it does not have material nonpublic information even if the person granting the authority, who may not even know about the sale at the time it is made, then has material nonpublic information.
If the Rule 10b5-1 affirmative defenses are unavailable because one or more of the conditions that would be added by the proposal (such as a cooling-off period) have not been met, the person who granted the discretionary authority in the foregoing circumstances still may not be violating Rule 10b-5 even though it is not relying directly on Rule 10b5-1 as amended.
We therefore recommend that the Commission reconsider its approach in light of these concerns and either:
(i) If there are demonstrable abuses in how Rule 10b5-1 is currently being used, the Commission should address them directly. For example, if terminating a plan in order to take advantage of material nonpublic information is considered an abuse, the Commission could make clear that such a termination would violate the good faith requirement of Rule 10b5-1 and the plan would not be a defense to liability as provided in Rule 10b5-1(c)(1)(ii). This targeted approach would address an abuse but not interfere with other terminations for good reason that are not abusive; or
(ii) If additional requirements to the availability of the affirmative defenses along the lines of those proposed are adopted, the rule should expressly recognize that it provides non-exclusive safe harbors so that Rule 10b5-1 as amended is consistent with insider trading law. Recognition of safe harbors would encourage adoption of practices consistent with the safe harbors, but to be effective the safe harbors should reflect prevailing practices, such as those we describe below, adopted by companies designed to ensure compliance and prevent abuses.
On his D&O Diary blog, Kevin LaCroix has been tracking securities lawsuits and D&O claims that stemmed from sexual misconduct allegations. Last week, he analyzed the recent news that CBS had agreed to settle a securities class action lawsuit that was filed when news of inappropriate behavior by the company’s former CEO surfaced, and was followed by a 6% decline in company stock price. Kevin notes:
In their amended complaint (here), the plaintiffs alleged that the defendants had on numerous occasions stated that the company maintained the highest standards for ethics and appropriate business actions, and that the company had a zero tolerance policy for sexual harassment, while in fact the company had a pervasive culture of sexual misconduct; that the company’s culture created an undisclosed risk that Moonves would have to leave the company; and that after the #MeToo story first began to emerge the defendants – and Moonves in particular—made a number of reassuring statements about the company and its practices, which the plaintiffs allege were misleading. The complaint further alleges that a number of CBS executives, including Moonves, sold millions of dollars’ worth of their personal holding in company stock in advance of the revelations about Moonves.
As detailed here, on January 15, 2020, in a lengthy and detailed opinion, Southern District of New York Judge Valerie Caproni largely granted the defendants’ motion to dismiss the lawsuit. Although she largely rejected the plaintiffs’ claims, Judge Caproni did find one statement that Moonves himself had made at a November 29, 2017 industry event to be false and misleading. Moonves had said that the #MeToo movement was a “watershed event,” adding that “It’s important that a company’s culture will not allow for this. And that’s the thing that is far-reaching. There’s a lot we’re learning. There’s a lot we didn’t know.”
Judge Caproni found, taking the allegations in the light most favorable to the plaintiffs, that this statement was — “just barely” — false and misleading, as it implied that Moonves was just learning for the first time about these kinds of allegations when he was at the time actively seeking to conceal his own misconduct. The statement also falsely implied that he was not personally at risk himself.
Kevin explains that the plaintiffs ended up with a $14.75 million settlement payable by the company or its insurers – not record-breaking, but nothing to sneeze at. Meanwhile, Kevin also blogged that a court dismissed a securities fraud suit against Activision Blizzard.
Results here are decidedly mixed, as Kevin notes. But because lawsuits are distracting, attract negative attention and do sometimes result in significant payouts, boards will need to continue to pay attention to corporate culture risks and executive misbehavior. We have a checklist for members on this topic, which we recently updated to reflect legal restrictions on mandatory arbitration provisions. This checklist provides step-by-step considerations for risk assessments and more. If you aren’t already a member, sign up today to get access – you can become a member online, by calling 1-800-737-1271, or by emailing sales@ccrcorp.com. Our “100 Day Promise” means there’s no risk to signing up!
In what is no doubt the biggest news of the week for our judicial branch (kidding), the “Courthouse Ethics & Transparency Act” has been presented to the President for signature. Congress approved the bill last week. Here’s a summary:
The Courthouse Ethics and Transparency Act would require that federal judges’ financial disclosure reports be made publicly available online and require federal judges to submit periodic transaction reports of securities transactions in line with other federal officials under the STOCK Act. The bill, which passed the Senate unanimously in February, would amend the Ethics in Government Act of 1978 to:
• Require the Administrative Office of the U.S. Courts to create a searchable online database of judicial financial disclosure forms and post those forms within 90 days of being filed, and
• Subject federal judges to the STOCK Act’s requirement of filing periodic transaction reports within 45 days of securities transactions over $1,000.
Importantly, the bill also preserves the existing ability of judges to request redactions of personal information on financial disclosure reports due to a security concern.
As we’ve noted in this blog before, the STOCK Act hasn’t exactly been known for its sweeping effectiveness. That did not deter the sponsors of the bill, who pointed to its importance in maintaining the independence of the judiciary. The WSJ reported last year that 131 judges had failed to recuse themselves from lawsuits involving companies in which they or their families held shares.
Here’s something that Lawrence just blogged about on PracticalESG.com:
Last week, the SEC’s Climate & ESG Task Force – which sits in the Commission’s Division of Enforcement and has a mandate to identify material gaps or misstatements in issuers’ ESG disclosures – announced that it had charged a Brazilian mining company with making false & misleading claims about dam safety that resulted in a collapse that killed 270 people, caused environmental & social harm, and allegedly led to a loss of more than $4 billion in the company’s market cap. The announcement explains:
According to the SEC’s complaint, beginning in 2016, Vale manipulated multiple dam safety audits; obtained numerous fraudulent stability certificates; and regularly misled local governments, communities, and investors about the safety of the Brumadinho dam through its environmental, social, and governance (ESG) disclosures.
The SEC’s complaint also alleges that, for years, Vale knew that the Brumadinho dam, which was built to contain potentially toxic byproducts from mining operations, did not meet internationally-recognized standards for dam safety. However, Vale’s public Sustainability Reports and other public filings fraudulently assured investors that the company adhered to the “strictest international practices” in evaluating dam safety and that 100 percent of its dams were certified to be in stable condition.
‘Many investors rely on ESG disclosures like those contained in Vale’s annual Sustainability Reports and other public filings to make informed investment decisions,’ said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. ‘By allegedly manipulating those disclosures, Vale compounded the social and environmental harm caused by the Brumadinho dam’s tragic collapse and undermined investors’ ability to evaluate the risks posed by Vale’s securities.
Although Vale is a Brazilian company, they have American Depositary Receipts (ADRs) and file reports with the US SEC, which gives the SEC jurisdiction to enforce US securities regulations/laws against the company. The 76 page complaint contains a number of allegations about third party auditor conflict of interest, bias and fraud in dam safety audit work conducted in conjunction with engineering assessments. There is also a significant element of corporate governance failures related to the audits. This Cooley blog has more details on the 76-page complaint.
The action is the first I know of that directly connects safety audits to “violating antifraud and reporting provisions of the federal securities laws,” potentially setting a precedent significantly increasing liability of ESG auditors. It appears to be the first action brought by the ESG Task Force since its formation in March of last year.
What This Means
The Climate and ESG Task Force was established specifically to enforce against material gaps or misstatements in issuers’ ESG disclosures. ESG data and the audits producing such data are now a securities law risk. Companies that use auditors to collect or validate environmental, safety, sustainability and similar data should ensure professional standards for audit practices and impairment identification/management are fully implemented.
Non-financial EHS auditors may see this as unfortunate timing given that the SEC climate proposal includes an attestation report for emissions inventory disclosures and certain related disclosures about the service provider. The proposal language states that the attestation service provider would not have to be a registered public accounting firm and the attestation report would not need to cover the effectiveness of internal control over GHG emissions disclosure (i.e., ICFR). However, questions 144 – 153 of the proposal request input on matters related to whether the use of non-financial auditors is appropriate. The Vale action may create doubt that doing so is a good idea.
We’re posting memos about this development in our “ESG” Practice Area on TheCorporateCounsel.net – and diving into even greater detail in the “Enforcement” Subject Area on PracticalESG.com.
Board advisors will need to stay on their toes as we greet the “Brave New World” of ESG litigation – and this is one of the timely topics that we’ll cover October 11th at our “1st Annual Practical ESG Conference.” Join us virtually to hear from litigators doing this work – Morrison & Foerster’s Jina Choi, Beveridge & Diamond’s John Cruden, and Baker McKenzie’s Peter Tomczak. This session – “ESG Litigation & Investigations – Are You at Risk?” – also features Doug Parker of environmental data firm Ecolumix, who previously served as a Special Agent & Director of the EPA’s Criminal Investigation Division, where he oversaw maters including the investigation into the Deepwater Horizon disaster and the Volkswagen emissions scandal. It’s sure to be a fascinating and practical conversation.
Here’s the full agenda for the event. Sign up online or email sales@ccrcorp.com to register – get in before June 10th to take advantage of the “Early Bird” discount.
