A little over a year ago, the US Supreme Court reaffirmed the SEC’s authority to seek disgorgement as a remedy in enforcement actions, in Liu v. SEC. However, the Court set some parameters on that authority: the disgorgement award can’t exceed the wrongdoer’s net profits and that the money must be returned to the victims. Now, the SEC appears to have established a way to comply with these parameters. This Troutman Pepper memo summarizes a recent holding from the 5th Circuit, which is the first federal appellate court to evaluate a disgorgement remedy post-Liu. Here’s an excerpt:
The order did not impose joint-and-several liability, but instead assessed each defendant’s gain and disgorgement amount. The SEC also identified victims and created a process to return disgorged funds to them. Under the district court’s supervision, any funds recovered will go to the SEC, acting as a de facto trustee. The SEC will disburse those funds to victims, but only after district court approval. The Fifth Circuit found that the process outlined by the SEC satisfied the standards articulated in Liu.
The Blackburn decision provides a roadmap for how the SEC may pursue disgorgement and comply with the new limitations. When the SEC seeks disgorgement in future matters, it will likely abide by a similar process and identify specific victims to whom disgorgement funds will be disbursed.
Yesterday, the SEC’s Acting Chief Accountant, Paul Munter, issued this statement to recap the 2021 activities of the Office of the Chief Accountant – and preview what could be coming. It’s not unusual for the head of the OCA to make a statement like this near year-end (here’s last year’s). This year’s version caught my eye because it’s a reminder of the many complexities that have cropped up during 2021 – like a BuzzFeed “Best of ’21” list, but for accounting. For example:
1.SPAC accounting – speaking of BuzzFeed and de-SPACs…the OCA has received a large number of consultations on accounting issues for IPO companies this year, including those going public via a SPAC. The statement reiterates the importance of ensuring that appropriate personnel and processes are in place to produce financial statements in accordance with U.S. GAAP applicable to public business entities, which would include the reversal of any previously-elected Private Company Council accounting alternatives available to private companies and, depending on the issuer’s status, earlier effective dates for most standards.
2.Revenue Recognition – Similar to observations the OCA has shared in the past, revenue consultations are numerous and often relate to the identification of the company’s performance obligations, including the principal versus agent analysis, identification of the company’s customer(s), and accounting for consideration payable to a customer.
3.Crypto – While the OCA welcomes constructive dialogue on whether accounting standards could be revised to better reflect the underlying economics of digital asset transactions or business models, this statement reminds stakeholders that there is an existing accounting framework that is robust and provides a basis to account for and report these assets and related transactions. Application of the existing accounting guidance often requires judgment and depends on the issuer’s specific facts and circumstances. The statement also emphasizes the FASB’s and IASB’s work to consider feedback from their respective agenda consultation processes will be important in this area.
4.Auditor Independence – This statement reiterates Munter’s October comments about the importance of auditor independence. It notes that the number of auditor independence consultations has increased. In applying the principles-based standard of Rule 2-01 of Regulation S-X, OCA staff has consistently provided the view that it would be a high hurdle to reach a conclusion that the accountant could be viewed as objective and impartial under the general standard when an auditor has provided services in any of the periods included in the filing that are contrary to one of the Rule’s four guiding principles.
5.PCAOB Oversight – The statement touches on the Commission’s authority to oversee the PCAOB, including by appointing board members, and notes that the OCA advises the Commission on its responsibilities. Last month, the SEC announced appointments of new PCAOB members (some Republican members of the House Financial Services Committee and the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets recently requested an inquiry into the removal of Bill Duhnke earlier this year, but the statement doesn’t dive into that drama).
6.OCA Role in Rulemaking – The OCA has been involved with the SEC’s rulemaking effort on climate risk disclosure. That includes involvement with international financial reporting standards, which have been a big topic of discussion when it comes to standardization of ESG disclosures. OCA has also been involved with rulemaking about risks of investments in companies with China-based operations, and the impact of different types of restatements on executive compensation clawbacks.
Paul Munter’s statement is also worth checking out because it gives tips for accounting standard setters, companies, auditors and audit committees. These are areas that the Office of the Chief Accountant (and the Commission) are focused on, so you should be too. Here are a few nuggets:
1.Estimates & Assumptions – Munter says that he cannot overstate the importance of preparers making well-reasoned and supported judgments that are grounded in their particular facts, relevant rules, and accounting principles and that consider the usefulness and transparency of the resulting information provided to investors. Companies should also ensure that significant judgments and estimates are disclosed in the financial statements in a clear and transparent manner that is understandable and useful to investors.
2.Internal Controls – Companies must continually assess and evaluate whether their ICFR environment is effective. In light of significant changes to many companies’ operations, for example, changes to their financial reporting processes in a remote work environment, the OCA reminds preparers that if any change materially affects, or is reasonably likely to materially affect, an entity’s ICFR, such change must be disclosed in quarterly filings in the fiscal quarter in which it occurred (or fiscal year in the case of a foreign private issuer).
3.Audit Committee Responsibilities – Audit committees are getting more involved with ESG, cybersecurity, tax risks, and more. It is important that audit committees assess whether the scope of their responsibilities is appropriate, achievable, and aligned with the experience of its members, and importantly, not lose sight of their core responsibility — oversight of financial reporting, including ICFR, engagement of the independent auditor, and oversight of the external audit process. Munter says that he cannot overstate the importance of independent and diverse thinking brought by independent directors in fulfilling this responsibility.
4.Audit Quality – Audit committees must consider the sufficiency of the auditor’s and the issuer’s monitoring processes, including those that address corporate changes or other events that could affect auditor independence. In addition to evaluating independence of the auditor, it is foundational to high quality audits that audit committees give careful consideration to audit quality, and not merely focus on price, when appointing and retaining auditors.
The WSJ recently reported that for the third year in a row, more money has been raised through IPOs on Nasdaq than on the NYSE – in part because of SPACs, but also partly because of a perception that Nasdaq is more focused on ESG criteria. According to the article, companies that emphasize ESG in their prospectus seem more inclined to want to reflect that in their exchange choice as well.
That focus on ESG is also one of the reasons that dual listings on the Long-Term Stock Exchange could become attractive – particularly now that a couple of issuers have blazed the trail for listings. Join us tomorrow for the webcast – “Understanding LTSE Listings” – when LTSE Services’ Martin Alvarez and Jane Storero, Asana’s Katie Colendich and Eleanor Lacey, and Twilio’s Mariam Sattar share practical tips about the listing process and what it means to be traded on the LTSE.
If you attend the live version of this 60-minute program, CLE credit will be available! You just need to submit your state and license number and complete the prompts during the program.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now! The webcast cost for non-members is $595. You can renew or sign up by emailing sales@ccrcorp.com – or call us at 800.737.1271.
Investors representing over $2 trillion in assets under management are urging ISS to take a stricter stance on climate progress in its upcoming policy updates, according to this LinkedIn write-up from Majority Action’s co-founder. Zevin Asset Management, Boston Common Asset Management, ICCR and the Nathan Cummings Foundation were among the signatories.
As Dave blogged last month, ISS has proposed policy updates that would recommend against the re-election of directors that aren’t meeting expectations around climate-related disclosures or that haven’t set quantitative GHG reduction targets. The investors are saying that those policy guidelines – if adopted – would give too much leeway for under-performance and that they are more focused on the quality of disclosure than on assessing decarbonization activities. Here are the changes that the investors want ISS to incorporate into its benchmark voting guidelines for the 2022 proxy season:
1. Expand and disclose the analysis on company climate performance to assess whether a company’s current and future business plans, capital allocation, and political activity are aligned with a 1.5°C scenario and/or science-based sectoral decarbonization plans (e.g., IEA Net-Zero Roadmaps, Science-Based Targets Initiative).
2. Incorporate company climate performance into vote recommendations, including:
– Recommend votes against directors for failure to adequately manage or mitigate ESG risks, including failure to align business plans, capital allocation, and policy influence (political spending and direct/indirect lobbying activities) with a 1.5°C scenario. Clarify that when information is unavailable to make that determination, ISS will recommend votes against directors.
– Recommend votes in favor of shareholder proposals that call for the reduction of greenhouse gas emissions, disclosure of lobbying and political activity, and/or reports on greenhouse gas emissions, instead of taking a case-by-case approach to proposals, unless the company has demonstrated meaningful alignment of its business activities with a 1.5°C scenario.
3. When recommending votes be cast against management’s recommendations for climate-related reasons, incorporate into the rationales for climate-related votes whether the company’s business strategy and operations align with a 1.5°C scenario.
Last year, ISS published its updated proxy voting guidelines in mid-November, so it’s likely that the 2022 updates will be coming soon. Mark your calendars now for our January 13th webcast with Marc Goldstein, Head of US Research at ISS, along with Davis Polk’s Ning Chiu and Gunster’s Bob Lamm. We’ll be discussing the 2022 policy updates – as well as what to prepare for when it comes for director elections, shareholder proposals, say-on-pay and sleeper issues. CLE credit is also available!
Last week, the SEC posted notice & immediate effectiveness of a Nasdaq proposal to increase annual listing fees. The new fee schedule takes effect January 1st.
For the Nasdaq Global Select & Global Markets, the all-inclusive annual fee for most equity securities will increase by $1-4k/year. For the Nasdaq Capital Market, the increase ranges from $1.5-4k/year. While the increases are modest, every dollar counts for budgeting!
Last week, an industry working group of 800+ brokerage firms, custodians, and clearinghouses released this 43-page report to recommend a transition to a “T+1” settlement cycle for market transactions. The Securities Industry & Financial Markets Association, working with the Investment Company Institute, The Depository Trusty & Clearing Corporation and Deloitte, led the working group.
Although the SEC’s Investor Advisory Committee had recommended a one business day settlement cycle way back in 2015, when the SEC adopted 2017 rules on the topic, it just moved incrementally from a T+3 requirement to T+2. But earlier this year, investors, SEC Chair Gary Gensler and DTCC blamed slow settlement times as one factor in the meme stock frenzy. The push for a shorter cycle now seems to be gaining more momentum. Here are a few of the new report’s recommendations and conclusions:
Corporate Actions:
• Coordinate with regulators and exchanges to align the ex-date with the record date for regular-way corporate actions
• Adopt SWIFT messaging, or other automated means, across the corporate actions lifecycle to increase efficient communication by industry participants related to corporate action events
• Industry to evaluate whether the cover/protect period should be eliminated
Equity & Debt Offerings
• Retain the exception in Rule 15c6-1(c) but shorten the applicable period to T+2
• Retain the exception in Rule 15c6-1(d) to allow debt and other offerings to have the ability to opt for extended settlement
Regulatory Impacts
• Continue to engage the regulatory community to ensure that rules and regulations that identify regular way settlement as greater than T+1 be changed, including the SEC’s capstone rule 15c6-1(a) of the Securities Exchange Act of 1934 and the associated rules derived from it, to create regulator certainty for market participants
Same-Day Settlement
• As the industry analyzed the migration to T+1 settlement, the IWG also considered the impacts and benefits of moving to T+0 settlement. The ISC and IWG concluded, by consensus, that T+0 is not achievable in the short term given the current state of the settlement ecosystem.
I blogged back in May that if T+1 is adopted, it would have the most impact on broker-dealer obligations. Particularly in debt transactions, issuers sometimes prefer longer settlement periods so that interest doesn’t start accruing. These recommendations suggest that the exception for extended settlement would continue to exist. The report walks through detailed considerations for how a shorter settlement cycle could affect equity and debt offerings, beginning on page 31.
Out of all the types of drama and “client emergencies” that can arise in a securities & corporate governance practice, the release of a short report about your client is one of the most alarming. It can set off a chain reaction in the market and behind closed doors, with everyone wanting quick but thorough answers to legions of questions.
One of the first things the executives and board want to know is, “When is this ordeal going to be behind us?” Unfortunately, the answer for a lot of companies is that it can take a long time – and for some, a full recovery may never arrive. This “ESG Investor” article discusses recent research from a German asset manager about the impact of short seller campaigns. Here’s an excerpt:
The research shows that the gross excess returns of all target companies dropped by about 10% one month after the publication of a negative report. However, small companies’ (those with market capitalisation of less than EUR 5 billion), share prices did not recover within two years of a short campaign, while their larger counterparts staged a comeback.
However, it is worth mentioning that large companies are far from immune from the short selling campaigns. Only those with the shortest memories could forget the Wirecard collapse was a direct result of Viceroy Research’s investigation into widespread fraud at the German payment service provider.
Cyclical companies were also found to be more vulnerable to short seller activism. While targets from defensive sectors recovered after just one month, the downturn in cyclical stocks continued for up to 18 months after publication of the respective reports. The most frequently affected sectors were technology (27% of cases), consumer discretionary (17%) and financials (12%).
The report’s author says that cyclical sectors were targeted in 75% of the cases he looked at. He suggests that because those companies are under more pressure to meet expectations at a particular time, they’re more vulnerable to accusations of fraud. He also predicts that short seller targeting could come to the “E&S” space over time, as claims on those topics become more linked to stock price and regulatory compliance.
I blogged last month that the SEC has been considering a big EDGAR upgrade. On Monday, they’re making some changes to technology that is probably related to this upgrade and could affect some filing software. Alan Dye blogged this about it yesterday on Section16.net:
The SEC announced last week that it is implementing security-enhancing changes to its three EDGAR filing websites (including the “Ownership Forms” website for filing Forms 3, 4 and 5) which may require changes to third-party filing software. In a nutshell, the SEC is changing the way EDGAR communicates with filing software. Here’s an excerpt:
Specifically, EDGAR will create a unique parameter that some third-party software products may need to include with every request that enters/updates information. EDGAR will verify the parameter and terminate the user session if the parameter is missing or mismatched.
The SEC plans to implement the new measures on Monday, November 22. While most current software should be compatible with the new update, you should check with your filing agent if you have any questions. All filers, regardless of the software they use, should also be prepared for potential submission delays or rejections – there are usually glitches that need to be ironed out any time the SEC makes a software change.
For those who use the Romeo & Dye Filer, the desktop version of the Filer may not be compatible with the new system, which means filings can be created but then will need to be manually filed through EDGAR on the SEC website. Those still using the desktop version should consider migrating to the online version as soon as possible to avoid any last-minute transition difficulties. The web-based filing platform is up to date. CCRcorp’s member services team can help with migration if you email them at info@ccrcorp.com.
We’ve posted the transcript for our recent webcast for members, “Investment Stewardship: Understanding the ‘New Era’ of Expectations and Engagement.” Davis Polk’s Ning Chiu led a great discussion amongst Donna Anderson of T. Rowe Price, Michelle Edkins of BlackRock and Caitlin McSherry of Neuberger Berman about how investment stewardship teams operate, engagement do’s & don’ts, and more.
