Last week, ISS announced the results of its 2022 benchmark policy survey. ISS received responses to the survey from 205 investors – 29% more than last year – as well as 202 companies and corporate organizations.
The results will be used to formulate the proxy advisor’s voting policies, which will be released in draft form in November and finalized in December. Here are some key climate-related takeaways:
Board Accountability on Climate Risk: ISS asked what climate actions/non-actions from Climate Action 100+ “significant emitters” would constitute a “Material Governance Failure” that would call for an ISS recommendation against a director.
– A significant majority of both investor and non-investor categories of respondents expressed that they would consider there to be a material governance failure if a company that is considered to be a significant contributor to climate change is not providing adequate disclosure with regards to climate-related oversight, strategy, risks and targets according to a framework such the one developed by the Task Force on Climate-related Financial Disclosures (TCFD).
– Investor respondents generally agreed that the boards of companies that are large greenhouse gas (GHG) emitters are failing if they do not take steps to address emissions, but support for different actions that could be taken to address emissions varied. Besides a company failing to provide adequate disclosure according to a recognized framework, the three most common choices by investor respondents as demonstrating failures were targets-related, and were (i) a company not setting realistic medium-term targets (through 2035) for Scope 1 & 2 only (50% of investors), (ii) not declaring a net-zero by 2050 ambition (47% of investors), and (iii) not setting realistic medium-term targets (through 2035) for Scope 1, 2 & 3 if Scope 3 is relevant (45% of investors). A strong majority of investor respondents (69 percent) chose at least one of those “targets” responses, which was also the case for 43 percent of the non-investor respondents.
Management Say-on-Pay Proposals: When asked “What do you consider to be the top three priorities when determining if a company’s transition plan is adequate?”, the most popular responses among investor respondents were:
(i) whether the company has set adequately comprehensive and realistic medium-term targets for reducing operational and supply chain emissions (Scopes 1, 2 & 3) to net zero by 2050 (42 percent),
(ii) whether the company’s short- and medium-term capital expenditures align with long-term company strategy and the company has disclosed the technical and financial assumptions underpinning its strategic plans (41 percent),
(iii) and the extent to which the company’s climate-related disclosures are in line with TCFD recommendations and meet other market standards (38 percent).
The appropriateness of submitting management say-on-climate plans for shareholder approval was questioned by some investor respondents who believe these proposals improperly shift the responsibility for a company’s climate transition plan away from the board and management toward its shareholders.
Climate Risk as Critical Audit Matter: A substantial majority of investor respondents (75 percent) favored seeing commentary by auditors in the audit report on climate-related risks for significant emitters. A smaller majority (64 percent) of investor respondents supported climate-related risks being included by auditors in Critical Audit Matters / Key Audit Matters (CAMs).
– A majority of investor respondents (52 percent) would favor supporting a related shareholder proposal on this issue. Voting against the re-election of audit committee members and voting against the re-appointment of auditors got somewhat lower support (42 percent and 35 percent respectively).
– In comments, several respondents – including both those who favored and opposed the inclusion of climate risks – raised the question of whether auditors currently have the expertise to accurately gauge these risks. Others wrote that this issue is currently not a market norm but may develop quickly due to regulatory requirements that are being finalized in the U.S. and EU and as the International Sustainability Standards Board (ISSB) develops its sustainability standards. Non-investor respondents tended to not support seeing auditors comment on climate-related risk.
Financed Emissions: During the 2022 proxy season, a number of shareholder proposals were filed that asked companies to restrict their financing or underwriting for new oil and gas development in line with the assumptions in the International Energy Administration’s Net Zero 2050 Scenario, which prompted us to ask a question about expectations on climate-related disclosure and performance of financial institutions.
– Around half of investor respondents said that in 2023 large companies in the banking and insurance sectors should fully disclose their financed emissions (54 percent), have clear long-term and intermediary financed emissions reduction targets for high emitting sectors (51 percent), have a net-zero by 2050 ambition including financed portfolio emissions (49 percent), or should publicly commit to disclose financed emissions at some point in the future by joining a collaborative group such as the Partnership for Carbon Accounting Financials (PCAF) and/or the Glasgow Financial Alliance for Net Zero (GFANZ) (45 percent).
– Around 30 percent of investor respondents voiced support for these companies committing to cease financing for new fossil fuel projects.
Most survey respondents also predict that investors’ expectations for climate disclosure and performance will increase over time – with heightened focus on net-zero targets, comparable climate disclosures, greater Scope 3 disclosures and more interest in corporate investment in low-carbon products and strategies.
– Liz Dunshee
Yesterday, the SEC announced a $361 million settlement with Barclays for an unprecedented over-issue that is every security lawyer’s nightmare:
The SEC’s order states that, following a settled Commission action against a BBPLC affiliate in May 2017, BBPLC lost its status as a well-known seasoned issuer (WKSI). As a result, BBPLC had to quantify the total number of securities that it anticipated offering and selling and pay registration fees for those offerings upon the filing of a new registration statement.
The SEC’s order notes that, given this requirement, BBPLC personnel understood that the firm needed to track actual offers and sales of securities against the amount of registered offers and sales on a real-time basis; yet, no internal control was established for this purpose. According to the SEC’s order, as a result of this failure, BBPLC offered and sold approximately $17.7 billion of securities in unregistered transactions.
As the SEC’s order states, BBPLC self-reported its over-issuances to regulators, provided meaningful cooperation during the SEC staff’s investigation, and subsequently commenced a rescission offer.
This all relates to notes and corporate debt offerings that the bank attempted to conduct via a shelf registration statement. Barclays announced the over-issue back in March. Since the securities weren’t registered, they had to offer to buy them back at the price they were sold for – which the bank estimated would lead to a $600 million loss. The rescission offer expired earlier this month. With this settlement, Barclays is paying another $200 million in civil penalties on top of the money it lost (plus disgorgement and prejudgment interest that are deemed satisfied by the rescission).
The order says that Barclays established a multi-person working group when it lost WKSI status. That group talked about calculating the total amount of securities that the business expected to offer and sell, in order to pay registration fees in advance. They also talked about the need to track actual offers & sales. But they didn’t create any process or assign responsibility for that task. The SEC’s order describes what must have been a rough week:
On March 8, 2022, a member of Group Treasury reached out to the member of the legal department who had been part of the Working Group, inquiring as to how many securities remained available to be offered and sold off of the 2019 Shelf because Group Treasury was planning on doing a sale of corporate debt securities.
Over the course of that day and the next, various BBPLC personnel attempted to calculate the cumulative amount of securities offered and sold from the 2019 Shelf in order to determine the amount of securities that remained available for sale. Over the course of these efforts, it became clear to all involved that there was no internal control in place to track in real time the amount of securities offered and sold against the amount of securities registered.
On or around March 9, 2022, BBPLC personnel concluded that securities had been offered and sold in excess of what had been registered on the 2019 Shelf. Shortly thereafter, BBPLC halted new offers and sales of securities from the 2019 Shelf and, on March 14, 2022, alerted regulators about the over-issuance and disclosed to the market that BBPLC did not have sufficient issuance capacity to support further sales from inventory and any further issuances of certain ETNs.
Here are the new controls that Barclays is adopting as part of this settlement – which are a good benchmarking reference for other companies. Barclays has to internally audit these processes in a few months and submit a report to its audit committee and the SEC Staff:
1. The centralization of oversight of BBPLC’s SEC-registered shelves in Group Treasury;
2. The maintenance of clear minimum control requirements for BBPLC’s SEC-registered shelves, including, but not limited to, a process for reviewing any change in WKSI status for BBPLC and the tracking of offers and sales off of BBPLC’s SEC-registered shelves as appropriate; and
3. The maintenance of a data repository, with appropriate controls and governance designed to ensure reliability of the data, for the purpose of tracking offers and sales, as appropriate, off of BBPLC’s SEC-registered shelves.
In the press release, the SEC cautions non-WKSIs to make sure to have internal controls to track registration statement capacity after each takedown. That’s good advice! Check out our “Form S-3 Handbook” for how exactly to do it. I do wonder, will the Staff be tracking this more? That would be a lot of work. The release here urges self-reporting if you discover unregistered sales. Hopefully you catch it before getting to $18 billion.
– Liz Dunshee
Our thoughts go out to everyone in our community who has been affected this week by severe weather. Yesterday, the SEC announced that the Staff invites questions from anyone with securities law obligations that may be affected by Hurricanes Ian & Fiona. The Staff will evaluate the appropriateness of providing regulatory relief for those as applicable. Here is the applicable contact info:
– Division of Examinations staff in the SEC’s Miami Regional Office (covers Florida, Mississippi, Louisiana, U.S. Virgin Islands, and Puerto Rico) can be reached at 305-982-6300 or miami@sec.gov.
– Division of Corporation Finance staff can be reached at 202-551-3500 or via online submission at http://www.sec.gov/forms/corp_fin_interpretive.
– Division of Investment Management staff can be reached at 202-551-6825 or imocc@sec.gov.
– Division of Trading and Markets staff can be reached at 202-551-5777 or tradingandmarkets@sec.gov.
– Office of Municipal Securities staff can be reached at 202-551-5680 or munis@sec.gov.
Individuals experiencing problems accessing their securities accounts or with similar questions or concerns relating to the hurricanes are encouraged to contact the SEC’s Office of Investor Education and Advocacy by phone at 1-800-SEC-0330 or email at help@sec.gov. The SEC also urged investors to be vigilant of hurricane-related securities scams.
– Liz Dunshee
Whistleblower Network News and the National Whistleblower Center issued a response this week to critiques of the SEC whistleblower program that were published by Bloomberg Law and a professor earlier this year, which I blogged about at the time. WNN investigated the FOIA documents that formed the basis for those reports – and posted these findings to demonstrate that the program is “well-run, honest, and fair”:
– The Argument presented by Bloomberg and Platt that a small group of former SEC employees dominates the program is inaccurate. The FOIA documents revealed that 64 different law firms represented whistleblowers who obtained rewards and that over 80% of these firms never employed a former SEC attorney.
– The articles stated or implied that the program was prejudicial to whistleblowers not represented by attorneys. The FOIA documents revealed that 54 award recipients were pro se and not represented by counsel. This number is an incredibly high percentage of positive reward decisions, given that courts almost always dismiss pro se claims.
– The FOIA documents produced no direct evidence of any misconduct.
– No evidence that the SEC program was illegally “shrouded in secrecy.” Indeed, the FOIA requests identifying the law firms that represented whistleblowers were responded to in full, except in three cases where identifying the firm could have resulted in identifying the whistleblower. Regarding those cases, the SEC advised Platt of his right to appeal the withholding in court.
– The SEC FOIA office fully cooperated with Platt’s FOIA requests over two years. The FOIA documents identify attorneys and law firms representing successful applicants in all but three cases. They also identify the cases involved, copies of the decisions involved, and the amounts awarded (or the percentage of an award) in each case. Likewise, every award given to a pro se litigate was identified, along with the amount of each award and the underlying award decision.
– Liz Dunshee
Here we go again. In 2019, John wrote about Elon Musk’s revised agreement with the SEC to run a laundry list of certain types of tweets by an “experienced securities lawyer,” which arose out of the “funding secured” debacle and has been an enforcement headache ever since. John asked at that time, “Who will bell the cat?” And 82% of you predicted that we would just keep running through variations of the dispute for the foreseeable future.
You were right!* Bloomberg reported that Musk has filed a new brief asking a federal appeals court to throw out his “Twitter Sitter” agreement, making a “free speech” argument. Here’s more detail from the article:
Musk, Tesla’s chief executive officer, has claimed without success that the SEC is harassing him and that the agreement violates his free-speech rights. US District Judge Lewis Liman in April refused to release him from the deal and end the requirement for a “Twitter Sitter.” Liman said Musk was “simply bemoaning that he felt like he had to agree to it at the time” and now “wishes that he had not.”
In his April decision, Liman ruled that Musk waived his 1st Amendment Constitutional Right to free speech, a finding Musk denied in his appeal brief.
This appeal follows another SEC-jab from Musk back in June, when he supported a cert petition seeking SCOTUS review of the SEC’s use of “gag orders” in connection with the settlement of enforcement proceedings.
The case is Musk v SEC, 2nd U.S. Circuit Court of Appeals, No. 22-1291 – and this will probably not be the last we’ll hear of it.
*You were right…so far. There is still time for Musk to become dictator of the world for life.
– Liz Dunshee
Small-cap investor & adviser Adam Epstein recently shared these candid & succinct thoughts about buybacks:
– If your micro- or small-cap company is unprofitable, don’t buy back your stock.
– If your micro-or small-cap company has raised outside capital in the last 18 months, or will need to in the next 18 months, don’t buy back your stock.
– If you consider your micro- or small-cap company to be a “growth” company, use any/all extra capital to…grow.
– If your micro- or small-cap company feels it has no additive use for excess capital, then perhaps you’re not actually a growth company.
– If your micro- or small-cap company feels it has no additive use for excess capital, then just give it back to shareholders directly.
Remember that we’re posting memos about the new excise tax in our “Buybacks” Practice Area.
– Liz Dunshee
We’ve recently freshened up all 62 Handbooks here on TheCorporateCounsel.net – covering securities law topics from “Accountant Changes & Disagreements Disclosures” to “WKSIs”… and everything in between. These are essential resources, whether you are simply getting the “lay of the land” – or trying to quickly answer a complex question. We’ve gathered all of the guidance, practice tips, and common questions & answers into one place.
Our Handbooks are organized in an easy-to-navigate format, where you can either search or use the table of contents to find the specific issue you’re dealing with. In addition, pull up the “Detailed Table of Contents” for “Proxy Season Disclosure” and “In-House Essentials” to quickly find which Handbook is on-point.
We also maintain over 300 checklists that lay out practical step-by-step guidance on topics commonly encountered by corporate secretaries – and a “cheat sheet” that is a life-saver for staying on top of all of the SEC’s rulemaking activity.
There’s a reason why many of our members make these resources their first stop for daily issues that arise. If you aren’t already a member with access to these resources, sign up now and take advantage of our no-risk “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund.
– Liz Dunshee
When I was an elementary-aged kid, our guidance counselor would come in and sing a song about “warm fuzzies” – the nice things you say to lift up your classmates when they’re getting criticized by others or feeling down. If complaints against the SEC’s ambitious rulemaking agenda are getting to SEC Chair Gary Gensler, then last week’s Investor Advisory Committee must have been a nice pick-me-up.
The IAC met to cover its previously announced action-packed agenda – which in itself was a sticking point for Commissioner Peirce. Not surprisingly, the IAC mostly gave “warm fuzzies” on the SEC rulemaking initiatives that will require more disclosure from companies.
This blog from Cooley’s Cydney Posner recaps the discussion. Here are a few condensed takeaways:
1. Human Capital: Investors think the 2020 rules are a step in the right direction, but don’t provide enough comparable & actionable data. Some panelists suggested using SASB standards as a starting point for reporting.
A JUST Capital representative said that fewer than 20% of the largest 100 employers reported on 29 metrics that she identified as being important (wages, hours, training investments, turnover, DEI, etc.) – and with a lot of non-standardized info appearing in website sustainability reports rather than the Form 10-K, data collection is laborious.
2. Schedules 13D and 13G Beneficial Ownership Reports: Investors have mixed views on the SEC’s proposal to shorten the Schedule 13D filing deadline and amend the definition of “group.” Those who oppose the proposed amendments believe they would improperly insulate companies from activist shareholder challenges. Those who support the proposed amendments believe it would helpfully address “information asymmetry” and benefit shareholders as a whole.
3. Climate Disclosures: The Committee adopted a recommendation in favor of the SEC’s climate disclosure proposal – with suggestions for improvement, such as a safe harbor for disclosures of “Scope 3” emissions. The Committee also suggested adding a “Management’s Discussion of Climate-Related Risks & Opportunities” and dropping the disclosure requirement about climate-related board expertise.
4. Cybersecurity Disclosures: The Committee also adopted a recommendation in favor of the SEC’s cybersecurity disclosure proposal – again, with suggestions for improvement. Investors favor the notion of adding a Form 8-K trigger and disclosure of policies, procedures & board oversight of cyber risks. Investors suggested enhancing comparability among companies by requiring disclosure of key factors used to determine materiality of a cyber incident. The Committee doesn’t support “law enforcement” exceptions for incident reporting. The Committee also doesn’t support the requirement to disclose directors’ cyber expertise, because investors want it to be clear that the full board is responsible for cyber oversight.
– Liz Dunshee
Some people have all the “fun.” Earlier this year, a character named Theodore (“Ted”) Farnsworth attempted to take control of a meme stock company by allegedly swiping its EDGAR codes and declaring himself co-CEO. That drama has continued through the summer, with more “Incorrect Disclosures” – an actual defined term in this Form 8-K – and ensuing litigation to get the “Farnsworth Group” to acknowledge their terminations as executives.
Yet, this nonsense is not Mr. Farnsworth’s first tangle with controversy. As the former CEO of Helios & Matheson Analytics – which owned MoviePass from 2017 and played a large role in transforming that company from an operating business into bankrupt meme fodder – he is nothing if not a “disrupter.” Yesterday, the SEC announced that it had filed a complaint against Farnsworth and Mitchell Lowe, the former CEO of MoviePass, for – among other things – violating Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the Exchange Act. Here’s more detail from the press release:
According to the complaint, between August 2017 and at least March 2019, Farnsworth and Lowe intentionally and repeatedly made misstatements in HMNY Commission filings, press releases, and in the press that MoviePass could be profitable at its new, $9.95 per month subscription price; about HMNY’s purported data analytics capabilities; and concerning HMNY’s ability to fund MoviePass’s operations. As further alleged in the complaint, Farnsworth and Lowe also devised fraudulent tactics to prevent MoviePass’s subscribers from using the service. In addition, the complaint alleges that, between January and April 2018, Farnsworth and Lowe knowingly approved false invoices that Itum submitted to HMNY and MoviePass, disguising bonus payments as services purportedly provided by an entity Itum controlled.
This 2017 Bloomberg article details more of Farnsworth’s ventures & misadventures. And yes, I know it’s unlikely that the EDGAR codes were actually “burgled,” but I’m liking the sounds of that nickname for the movie that will be made about this. If only we could all get some sort of discounted pass to watch it in a theater.
– Liz Dunshee
The latest issue of The Corporate Executive has been sent to the printer (email sales@ccrcorp.com to subscribe to this essential resource). It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in our “new normal” of remote work. The issue includes articles on:
– SEC Adopts Pay Versus Performance Disclosure Requirements
– To the Moon and Back: A Reflection on “Moonshot” Awards
– Delaware Developments: A Focus on Exculpation and Equity Grants
Once you’ve read through the initial “pay versus performance” guidance that this issue provides, make sure to also sign up for our November 10th “special session” – which will take a deeper dive into interpretive questions, practice pointers, big picture impact, and sample disclosures. The special session is available at a reduced rate to members of CompensationStandards.com and attendees of our “Proxy Disclosure & Executive Compensation Conferences” – sign up for these resources now to get the guidance you need and to reserve your seat at this essential event.
– Liz Dunshee
