A year ago, there were signs that Congress might remove a funding roadblock that has prevented the SEC from regulating political spending disclosure. That generosity was fleeting, as Cydney Posner explains in the intro to a recent blog:
I have to admit I was surprised to read that, in the new $1.5 trillion budget bill, Congress has once again prohibited the SEC from using any funds for political spending disclosure regulation. But there it is—Section 633—in black and white: “None of the funds made available by this Act shall be used by the Securities and Exchange Commission to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.”
That means that, for now anyway, private ordering—through shareholder proposals at individual companies and other forms of stakeholder pressure, including humiliation—will continue to be the pressure point for disclosure of corporate political contributions. Those proposals have grown increasingly successful in the last couple of years. And, notably, it appears that the focus of many proposals has shifted recently, with more emphasis on apparent conflicts between stated company policies and values and the beneficiaries of those political contributions.
As late as December last year, it looked like political spending disclosure regulation could well be on the horizon. In questioning by the Senate Committee on Banking, Housing and Urban Affairs in connection with his nomination as SEC Chair, Gary Gensler was asked by both sides about political spending disclosure. Gensler replied that his position on the issue would be grounded in economic analysis and the courts’ views of materiality as the information reasonable investors wanted to see as part of the total mix of information. Gensler added that he considered the 80 shareholder proposals submitted last year on the topic and the 40% vote in favor as a strong indicator. In light of that level of investor interest, political spending disclosure was something he thought the SEC should consider.
Cydney goes on to detail recent shareholder proposal activity on this topic and predicts that private ordering will continue full steam ahead. We’ve been writing about these developments on our Proxy Season Blog – if you’re a member, subscribe to that blog to stay in-the-know.
Programming Note: Since tomorrow’s Good Friday and the first night of Passover, this blog will take the day off. Happy Easter and Happy Passover to those who celebrate the holidays, and Ramadan Mubarak to those observing the holy month. Enjoy the weekend and we’ll see you back here on Monday!
At a hearing about this legislation held last week by the Committee on Banking Housing & Urban Affairs, former SEC Commissioner Rob Jackson testified that:
– The Act would close a significant gap in the current common law, by clearly outlawing trading on info obtained through cybersecurity hacks. That’s because the Act’s definition of “wrongful” trading on MNPI would extend to information obtained through theft or unauthorized access, or violation of a Federal law protecting computer data or intellectual property or privacy of computer users.
– The SEC should reconsider foreign companies’ Section 16 exemptions – in order to crack down on apparent insider trading by executives at foreign firms listed in the US. That was the topic of a study released a couple weeks ago by Professor Jackson along with Bradford Lynch and Daniel Taylor, which was reported on by the WSJ.
As John blogged a couple of months ago, the comment period for the SEC’s proposal to modernize Rule 10b5-1 officially expired on April 1st – and 169 letters are now posted. Here are a few notable submissions:
– Shearman & Sterling – suggesting modifications to the proposal that would lessen the burden on companies
– Davis Polk – responding to a large number of the Commission’s specific requests for comment, including support in principle for a narrow and shorter D&O cooling-off period, but not supporting a cooling-off period for company plans
– Sullivan & Cromwell – identifying areas of concern for the proposal being too broad & burdensome, and urging a transition period of at least 12 months if the proposal is adopted
– Cravath – generally supportive of Commission efforts to prevent abuse of the affirmative defense and increase transparency around Rule 10b5-1 – e.g., supportive of a D&O cooling-off period – but unaware of empirical evidence suggesting abuse in the context of share repurchases that would justify the additional costs imposed by proposed restrictions on issuer trades
– Dorsey & Whitney – raising questions & potential resolutions with respect to the operation of open market employee stock purchase plans
The comment period for the SEC’s proposal to modernize repurchase disclosure also officially expired on April 1st – and just under 100 letters have rolled in so far. A number of prominent law firms & corporations have weighed in, as well as:
– The Society for Corporate Governance – raising concerns about the proposal’s requirements for daily disclosure and operational information about buyback programs and about the impact on investor returns, liquidity & capital formation
– Senators Marco Rubio (R-FL) & Tammy Baldwin (D-WI) – supporting the proposal & encouraging additional enhanced disclosures about alternative uses of capital and whether repurchases are financed by additional debt
– Oxfam – 8 pages on the supposed harms of share repurchases
– NYSE – supporting the proposal in principle, including enhanced periodic disclosure and XBRL data, but expressing concern over unduly burdensome disclosure requirements that would also erode information quality
– Business Roundtable – opposing the proposal due to adverse impacts on efficient capital allocation and undue costs & consequences for issuers, investors and the capital markets overall
– Better Markets – supporting the proposal, advocating for even more disclosure about financing of and motivations for repurchases, and suggesting that Form SR be “filed” rather than “furnished”
– US Chamber of Commerce & others – urging the SEC to reconsider the assumptions underpinning the proposal until it has conducted further economic analysis of the proposal’s potential impact, including in relation to the Rule 10b5-1 proposal (also see this 30-page addendum)
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The Canadian government unveiled its federal budget last week, with an entire chapter devoted to climate. As US companies assess the SEC’s climate disclosure proposal and shareholder demands, this requirement by our neighbor to the north is another sign that regulators and investors are losing patience with voluntary disclosures about emissions and climate risks to companies, and moving towards mandates for comparable info.
Among other things, Section 3.4 of the budget calls on the investment industry and federally regulated financial institutions to support the “transition economy” on the path to net-zero emissions. Here’s an excerpt:
Climate Disclosures for Federally Regulated Institutions
The federal government is committed to moving towards mandatory reporting of climate-related financial risks across a broad spectrum of the Canadian economy, based on the international Task Force on Climate-related Financial Disclosures (TCFD) framework.
The Office of the Superintendent of Financial Institutions (OSFI) will consult federally regulated financial institutions on climate disclosure guidelines in 2022 and will require financial institutions to publish climate disclosures—aligned with the TCFD framework — using a phased approach, starting in 2024.
OSFI will also expect financial institutions to collect and assess information on climate risks and emissions from their clients.
As federally regulated banks and insurers play a prominent role in shaping Canada’s economy, OSFI guidance will have a significant impact on how Canadian businesses manage and report on climate-related risks and exposures.
Separately, the government will move forward with requirements for disclosure of environmental, social, and governance (ESG) considerations, including climate-related risks, for federally regulated pension plans.
This move follows a proposal last fall by the Canadian Securities Administrators to require TCFD-aligned reporting by issuers. That particular proposal is still under consideration.
Tune in tomorrow from 1-2pm Eastern Time for our PracticalESG.com webcast – “Parsing the SEC’s New ‘Climate Disclosure’ Proposal.” We’ve gathered an excellent mix of perspectives – Morrison & Foerster’s Dave Lynn and Sidley’s Sonia Barros, who both previously served in high-level Staff roles at the Commission; Travelers’ Yafit Cohn and NuStar Energy’s Mike Dillinger, who have been assessing the proposal and overseeing ESG disclosures in-house; and our very own Lawrence Heim, Editor of PracticalESG.com with 35+ years of experience in the ESG field from a technical, auditing and management perspective. We will also be making this program available to members of TheCorporateCounsel.net.
This program will cover aspects of the proposal that are fundamentally different than the SEC’s current disclosure regime – and how to understand that. But we won’t stop there – we’ll also be discussing practical actions and realities companies need to know right now in preparing for climate disclosures aligned with SEC’s proposal. Not only will compliance require a long lead time, but investors may also push for the information regardless of the rule’s adoption and compliance date.
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We’ve posted the transcript for our recent webcast for members, “Shareholder Insights: 2022 Priorities.” This was a very informative discussion amongst Council of Institutional Investors’ Glenn Davis, Dimensional Fund Advisors’ Kristin Drake, Sustainable Governance Partners’ Rob Main, and Federated Hermes – International’s Tim Youmans. Here’s an interesting point raised by Rob & Tim:
Main: As we’ve entered into this 2022 season, it does feel like the burden of proof when it comes to shareholder proposals has shifted.
If I think back three, four, five years ago when there was a proposal, the clear burden of proof was on the shareholder proposal proponent. Now, it does feel like the notion of supporting shareholder proposals is becoming more mainstream. There is an inclination from the proxy advisors, but I think increasingly from the mainstream institutional investors as well, who start at a point of supporting the proposal and then must be convinced to walk it back if they’re not going to support that specific proposal at the company. I don’t know if there’s any reactions to that view from my fellow panelists.
Youmans: This is a good segue into a trend that’s happening, which is if you look at the leadership last year of IBM, Wendy’s, arguably Morgan Stanley, BlackRock, and then also on responses to racial equity audits and then on the board of GE regarding climate shareholder proposals, we are seeing more boards supporting shareholder proposals. That’s very interesting.
When that happens, the board can then seize the narrative, and pretty much control the entire discussion about this. It’s moving beyond the shift that you talked about, Rob. Boards are being self-active holders of their own narrative. This is a very interesting trend, and we hope to see more of this.
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