Allianz has issued its annual “risk barometer” – which identifies the top 10 risks for the upcoming year based on a survey of nearly 2800 brokers, underwriters, senior managers and claims experts in the corporate insurance sector. It’s always a helpful read for identifying macro trends and issue spotting for your risk factors, although of course you need to tailor those to explain how the macro factors specifically affect your business.
“Business interruption” has been the top risk for 5 of the last 6 years – last year was the exception, with people worrying that cybersecurity would be the thing that kept us up at night in 2020. For 2021, “business interruption” is back at the top – which seems prescient in light of this week’s power grid failure in Texas and the SEC’s informal reminders to companies that they should have contingency plans to be able to carry on operations during emergencies. The risk of a pandemic outbreak is #2. Cyber incidents are hanging in there at #3 and are considered a potential “Black Swan.”
Here’s an excerpt:
When asked which change caused by the pandemic will most impact businesses, Allianz Risk Barometer respondents cited the acceleration towards greater digitalization, followed by more remote working, growth in the number of insolvencies, restrictions on travel/less business travel and increasing cyber risk. All these consequences will influence business interruption risks in the coming months and years.
The knock-on effects of the pandemic can also be seen further down the rankings in this year’s Risk Barometer. A number of the climbers in 2021 – such as market developments, macroeconomic developments and political risks and violence – are in large part a consequence of the coronavirus outbreak. For example, the pandemic was accompanied by civil unrest in the US related to the Black Lives Matter movement, while anti-government protest movements simmer in parts of Latin America, Middle East and Asia, driven by inequality and a lack of democracy. Rising insolvency rates could also affect supply chains.
All that said, only 3% of survey participants were worried about a pandemic at this time last year. So, one of the main takeaways I gleaned this year was that it’s pretty difficult to predict the “next big thing.”
Transitioning to “Non-Accelerated” Filer Status: What Year Do You Use for the Revenue Test?
We’ve been fielding a ton of questions from members in our Q&A Forum these past few weeks. Here’s one that could affect your 10-K deadline (#10,573):
Company is currently an accelerated filer and a smaller reporting company. As of June 30, 2020, their public float was between 75 and 250 million (approx. 100 million). Its FY 2019 revenue was above 100 million; however, its FY 2020 revenue is below 100 million.
My question is for determining whether it transitions to non-accelerated status, should company use the FY 2019 or FY 2020 revenue for the SRC revenue test exception to accelerated filer status? The rule says it is the revenue as of the most recently completed fiscal year but do not know if that determination is made as of June 30 like with public float or now. If company uses FY 2019, then they would still be an accelerated filer but using FY 2020 I believe they would be a non-accelerated filer.
John responded:
Under Rule 12b-2, accelerated filer status is assessed at the end of the issuer’s fiscal year, and the applicable SRC revenue test is based on the most recently completed fiscal year for which financial statements are available. Since the 2020 financial statements won’t be available at the time when the assessment is made, I believe that you will continue to look at the 2019 financials in determining whether the issuer remains an accelerated filer during 2021.
I think that position is also consistent with footnote 149 of the adopting release, which indicates that a company will know of any change in its SRC or accelerated filer status for the upcoming year by the last day of its second fiscal quarter. Here’s an excerpt:
“Public float for both SRC status and accelerated and large accelerated filer status is measured on the last business day of the issuer’s most recently completed second fiscal quarter, and revenue for purposes of determining SRC status is measured based on annual revenues for the most recent fiscal year completed before the last business day of the second fiscal quarter. Therefore, an issuer will be aware of any change in SRC status or accelerated or large accelerated filer status as of that date.”
We’ve posted the transcript for our recent webcast – “Conflict Minerals & Resource Extraction: Latest Form SD Developments” – which covered these topics:
The SEC has redesigned Corp Fin’s Rule 14-8 no-action page – and the layout is very user-friendly for those of us who spend proxy season monitoring incoming requests & responses. The old page was more spread out in narrative form, whereas this new version organizes into easy-to-read boxes the no-action response chart, incoming requests and final materials for responses – as well as reference materials and info from prior seasons. Bravo!
Filing Relief for Texans: Case-By-Case, But Proceed With Caution
As a Minnesotan who relies heavily on heat & electricity during the winter months, I’ve been flabbergasted by this week’s dispatches from Texan friends & colleagues. We are keeping y’all in our thoughts and hoping your power is restored soon.
We’ve had some inquiries on whether the SEC is offering weather-related filing relief to companies located in the Lone Star State. A gracious member shared this info in our Q&A Forum (#10,619):
This is what I was told today by the SEC Staff (Office of Chief Counsel). By the way, I am in Austin and we have no water, over 48 hours no power and I am working from a phone hotspot/makeshift solar panel attached to batteries, so yes, it is truly a survivalist situation out here in Texas — I hope everyone is staying safe!
• The SEC is aware of the power grid failures/inclement weather and related challenges in Texas and wants to help issuers experiencing the effects of these challenges.
• If you are an issuer with a filing deadline that you cannot meet due to the situation in Texas, such as an 8-K or Section 16 filing, the SEC encourages you or your counsel to contact the SEC staff to make them aware of the situation (via edgarfilingcorrections@sec.gov and follow-up with a call to the staff) and you can request a date adjustment of the filing per Rule 13(b) of Regulation S-T: “If an electronic filer in good faith attempts to file a document with the Commission in a timely manner but the filing is delayed due to technical difficulties beyond the electronic filer’s control, the electronic filer may request an adjustment of the filing date of such document. The Commission, or the staff acting pursuant to delegated authority, may grant the request if it appears that such adjustment is appropriate and consistent with the public interest and the protection of investors.” The filing should be made as soon as it is practicable to file and the staff can assist the issuer in adjusting the filing date afterwards.
• For the upcoming 10-K filing deadline (March 1 for LAFs), the SEC is monitoring the situation and *may* issue more broad filing relief (as it did last year around this time at the beginning of the COVID pandemic), but they will not make that call unless there are still issues going into next week and it believes that broad relief is warranted by the situation.
• In short, they are monitoring the situation but in the time being, they are only working with issuers on a case-by-case basis.
That being said, issuers may want to be judicious about requesting relief, because it might suggest that the company does not have sufficient contingency plans to continue normal operations during emergencies such as prolonged power outages. But the SEC will work with issuers who are experiencing a hardship.
More on “Proxy Season Blog”
As we enter the height of proxy season, make sure to follow our daily posts on the “Proxy Season Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply entering their email address on the left side of that blog. Here are some of the latest entries:
– Norges Urges Greater Board Gender Diversity, Focus for Engagement Meetings
– “How To’s” for Engaging with Proxy Advisors
– Virtual Shareholder Meetings: Fix For “Beneficial Owner” Admission Issues
As this recent Cooley blog recounts, since the Rule 10b5-1 safe harbor was adopted 21 years ago, it’s been a magnet for controversy. In the wake of trading gains realized by pharma execs when positive vaccine news came to light last fall, which were followed by remarks from outgoing SEC Chair Jay Clayton about “good corporate hygiene” for trading plans (also see this Cohen & Gresser memo), the safe harbor has been back in the spotlight.
Earlier this month, John blogged about “best practices” suggested by Glass Lewis that would promote transparency around these arrangements. People are now also talking about the “red flags” identified by this Stanford research as signs of potentially opportunistic trades. The paper caught the attention of three Democratic US Senators – who used the research as a basis for this letter to Acting SEC Chair Allison Herren Lee. In it, the lawmakers urge the SEC to reexamine its policies on Rule 10b5-1 plans to improve “transparency, enforcement and incentives.”
Specifically, the Senators note these possible remedies for “abusive” Rule 10b5-1 practices:
1. Requiring a four-to-six month “cooling off period” between adoption or amendment of a plan before trading under the plan may begin or recommence
2. Requiring public disclosure of the content of 10b5-1 plans, as well as trades that are made pursuant to such plans
3. Enforcement of existing filing deadlines – and requiring that forms disclosing 10b5-1 adoption dates are posted on Edgar
4. Enforcement of penalties when executives “benefit from short-term windfalls that don’t translate into long-term gains” – by way of modifying Exchange Act Section 16(b) to apply to 10b5-1 profits that follow disclosure of material information, if the share price falls immediately after that disclosure
The letter asks the SEC to respond by next week to a series of questions about its actions on this topic. One recommendation that the Senators didn’t pull in from the Stanford research – for now – was a disqualification of single-trade plans. The professors contend that these plans are no different than traditional limit orders – and that Rule 10b5-1 should only apply to multiple transactions spread over a certain time period.
While that recommendation might seem reasonable to people who aren’t dealing with administration of these plans, people in the trenches view it as further evidence of the “great divide” on this topic. A member wrote in with this feedback:
One recommendation that caught my eye is to disqualify single-trade plans. They say that single-trade plans aren’t different from traditional limit orders (which wouldn’t qualify for the safe harbor). I disagree. A trading plan can just set a tranche of shares to sell at a future date without specifying a price – they can be sold at whatever the market price is, which of course differs from a limit order.
My understanding of why an insider might have a single-trade plan is to diversify holdings following vesting of a large award. They know the vesting is coming up, they already hold a bunch of shares, and they want to diversify. So, they set up a trade sometime down the road, which allows the sale to happen even if there’s an unscheduled blackout and also allows them to avoid dealing with executing the trade when they’re busy with other things six months from now.
Also, we have a process with our captive broker where any limit order is automatically terminated when the trading window closes, as we don’t want it to execute during a blackout period. So for our execs, a limit order wouldn’t solve the issue of being able to trade during a blackout period – but a trading plan would.
SOX Compliance in Pandemic Times
Does it seem like everything is taking longer and requiring more planning in pandemic times? Between masking up, thorough hand-washing and navigating crowds, I’m factoring in at least an extra 30 minutes for any encounter with the outside world. Good luck buying a car or “dropping in” to fitness classes or hair salons. And if you want to mail anything, you’d better plan for at least 6 weeks of delivery time.
Well, according to this Toppan Merrill memo (pg. 2), you’re probably also going to need to allot more time to compliance processes this year. It’s taking longer to test SOX controls in the remote environment, and many of the people involved are overworked and tired. External auditors also want to be brought into the tent earlier so that they can spend more time digging through any non-routine transactions.
To maintain the rigor of compliance programs, the memo recommends spending more time on quality employee training, and revisiting the basics of your controls and documentation, to make sure everything is working. Especially if your company is suffering a revenue downturn, “minor” transactions could end up having a bigger impact than you’d typically expect.
Tomorrow’s Webcast: “Activist Profiles and Playbooks”
Tune in tomorrow for the DealLawyers.com webcast – “Activist Profiles & Playbooks” – to hear Joele Frank’s Anne Chapman, Okapi Partners’ Bruce Goldfarb, Spotlight Advisors’ Damien Park and Abernathy MacGregor’s Patrick Tucker discuss lessons from 2020’s activist campaigns & expectations for what the 2021 proxy season may have in store.
Bonus: 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 DealLawyers.com are able to attend this critical webcast at no charge. If not yet a member, subscribe now to get access to this program and our other practical resources. The webcast cost for non-members is $595. You can renew or sign up online – or by fax or mail via this order form. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
Last week, Acting SEC Chair Allison Herren Lee announced that she’s restored to senior Enforcement Staff the power to approve the issuance of Formal Orders of Investigation, which designate who can issue subpoenas in an investigation. That means that Enforcement Staffers will be able to act more quickly to subpoena documents and take sworn testimony.
This is a reversal of the policy that then-Acting Chair Mike Piwowar implemented in the early days of the Trump administration – and departure from the traditional requirement for Enforcement Staff to obtain sign-off from the Commissioners on a Formal Order of Investigation before issuing subpoenas. Former Chair Mary Shapiro first expanded the subpoena power back in 2009, in the wake of the Bernie Madoff fiasco.
Decentralizing the power to pursue enforcement actions is a sign that the pendulum is currently swinging toward the “investor protection” aspect of the SEC’s mission. This job posting suggests that the Enforcement Division also might be staffing up. We don’t know for sure that these steps will lead to a higher number of investigations – see this Jenner & Block memo for key open questions that will determine how aggressive things could get. Nevertheless, companies are unlikely to view them as a positive development.
Also last week, Acting SEC Chair Allison Herren Lee issued this statement to reverse the Clayton-era policy of simultaneously considering enforcement settlements and requests for waivers from “bad actor” consequences – e.g., loss of WKSI status, Rule 506 eligibility and PSLRA safe harbors. Commissioners Hester Peirce and Elad Roisman followed with their own statement to object to the policy change.
The move means that waiver requests will revert to the domain of Corp Fin and the Division of Investment Management, rather than everything being negotiated by the Enforcement Division and companies being able to condition their settlement offers on the grant of a “bad actor” waiver. This Sullivan & Cromwell memo explains the three-fold impact of separating settlement & waiver conversations:
First, the change in policy signals greater skepticism on the part of the SEC with respect to granting waivers to settling entities. We expect that waivers will become more difficult to obtain and, when granted, may include additional, and potentially more burdensome, conditions.
Second, the change in policy creates increased uncertainty for entities settling with the SEC because they can no longer be guaranteed Commission review of the settlement of their enforcement matter simultaneously with their requested waivers. The impact of this change as a practical matter is unclear. If a settling party is denied a waiver and then seeks to withdraw its settlement offer, it remains to be seen whether the SEC will nevertheless proceed to seek judicial approval of the settlement in the face of such attempted withdrawal.
Third, the change in policy indicates the SEC’s intent to keep waiver discussions substantially separate from enforcement recommendations. Our understanding is that these discussions generally happen separately in any case, so we do not view this as a substantive change.
Tomorrow’s Webcast: “Private Offerings – Navigating the New Regime”
Tune in tomorrow for the webcast – “Private Offerings: Navigating the New Regime” – to hear Rob Evans of Locke Lord, Allison Handy of Perkins Coie and Richie Leisner of Trenam Law discuss the SEC’s rule amendments simplifying and harmonizing the rules governing private offerings – and how to prepare to take advantage of them.
Bonus: 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 online – or by fax or mail via this order form. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
With ESG gaining most of its momentum relatively recently, it’s not too surprising that the executive careers of many directors didn’t include a strong focus on sustainable operations metrics. Now, though, there’s a risk that investors could start to view that as a skill gap. Here’s an excerpt from a study published last week that’s making the rounds:
NYU Stern’s Center for Sustainable Business undertook a deeper dive and analyzed the individual credentials of the 1188 Fortune 100 board directors based on Bloomberg and company bios in 2019 (see box 1 on methodology),and found that 29% of (1188) directors had relevant ESG credentials. 29% seems like a decent showing, until we drill deeper and find that most of the experience is under the S; 21% of board members have relevant S experience, against 6% each for E and G (numbers are higher than 29% as some members had more than one credential).
The “S” credentials were clustered around workplace diversity (5%) and healthcare issues (generally through board memberships with medical facilities).
An issue of growing materiality, cyber/telecom security, had just eight board members with expertise. There were very few directors who had experience with ethics,transparency, corruption, and other material good governance issues. The third largest category across E, S & G and the largest in the G category was accounting oversight (G) at 2.6%. U.S. boards are required to have a least one board member with audit/finance background and most boards have at least two with that background. However, we only included board members with exhibited leadership in this area, such as being a trustee of the International Financial Reporting Standards Board or a member of the Federal Accounting Standards Advisory Board. The second largest area of expertise (1.0%) under the G was experience with regulatory bodies such the SEC or FCC.
Two areas of material importance to most companies and to investors, climate and water,had just five and two board members with relevant experience, respectively, across all1188 Fortune 100 board members. In general, there is very little director expertise for the “E,” with all nine categories at approximately 1%.
The study has shocking numbers but loses some credibility due to the way it’s measuring “relevant credentials” – as noted in this Cooley blog. But the fact that the data is out there – and investors’ growing interest in disclosure about the board’s role in ESG oversight – does suggest that there could be a benefit to examining and enhancing board sustainability credentials (through education and/or recruitment), and tying skills disclosure to “ESG” experience. For more thoughts on how expectations are evolving, see this Morrow Sodali memo on the future of the board.
NYSE: Annual Compliance Reminders
The NYSE has sent its “annual compliance letter” to remind listed companies of their obligations. The letter reminds listed companies that in response to market and economic effects of the pandemic, the NYSE has provided relief to listed companies from certain shareholder approval requirements. The NYSE is seeking to enact this relief as a permanent change to its shareholder approval rules – John blogged recently that the SEC is soliciting public comment on the proposed rule change.
The NYSE annual compliance letter is a good resource to have on hand – all the NYSE email and telephone number contact information is provided and the letter explains when and how listed companies should contact the exchange for various matters.
SEC Enforcement: Melissa Hodgman Named Acting Director
The SEC announced last week that Melissa Hodgman has been named as Acting Director of the agency’s Enforcement Division. Melissa was previously serving as Associate Director in the Enforcement Division and began working in the Division in 2008. Prior to joining the SEC, she was in private practice with Milbank, Tweed, Hadley and McCloy.
I was hoping to punt coverage of the amateur trading insanity to John’s blog rotation next week, but it seems notable that the SEC’s Acting Chair Allison Herren Lee – along with Pete Driscoll, Director of the Division of Examinations, and Christian Sabella, Acting Director of the Division of Trading and Markets – issued this joint statement yesterday to say they’re on the case. Of course, the statement doesn’t name names, but it’s hard to think it’s referring to anything other than the out-of-this-world trading of GameStop and a few other companies, which has been the subject of at least 10 WSJ articles, an Elon Musk tweet and a Vox explainer in the past 24-48 hours.
GameStop’s stock triggered at least nine trading halts on Monday, according to Bloomberg News. It closed yesterday at $347.51, down slightly from its opening price but still more than a 1740% increase over the high-teens closing price of earlier this month. And while the company isn’t in passive index funds that track to the S&P 500, it is included in some retail exchange traded funds, so the trading is impacting more than just the company itself. Don’t worry, “All is well!”
My favorite coverage so far has been from Matt Levine – here’s an excerpt from yesterday’s “Money Stuff” column:
You know who has a weird job right now? George Sherman. GameStop’s executives and board of directors don’t seem to have said much recently. What could they say? “Huh, nice that the stock’s up.” One important thing to remember is that while you and I and Reddit and Elon Musk can all treat GameStop’s stock as an absurd gambling token, a toy adrift on market sentiment far from any economic reality, it is still the stock of a company. The company’s executives still come to work each day and have to figure out what this all means. Does the price signal sent by the capital markets tell them something about how they should invest and what their hurdle rate for new projects should be? (Lol no.) Should they keep doing the stock buyback that they still have authorized? (Lol no.)
Should they sell a ton of stock to all these redditors who want it so badly? Yes, of course, absolutely, I said so on Monday, but it’s tricky. For one thing if they sell stock at the top they will surely get sued. For another thing, even at these prices, you want something sensible to do with the money; you can’t be like “we’re gonna sell a billion dollars of stock because we can, and use the money to pay ourselves bonuses and open some stores I guess?” Also, though, what is happening with their stock is a strange and for all anyone knows delicate piece of magic, and it’s very possible that filing to sell more stock would mess it up.[3] For technical reasons (more shares for short sellers to borrow), for fundamental reasons (dilution?), for anti-establishment resentment reasons (“ahh Wall Street is taking advantage of this rally for its own ends”) or for general emotional reasons (“man even GameStop is a seller at these prices”). I would not be especially surprised if GameStop announced a stock offering and the stock fell all the way back to, you know what I am not going to type a number here, but let’s just say a normal price.
GameStop actually does have a $100 million ATM offering going right now, under a Form S-3ASR that it filed in early December – or at least, it did have an ATM offering going at some point in the recent past, and it hasn’t reported whether all of that stock has been sold. If there’s still room under the program, theoretically it could hit the market at these wild valuations.
That could be a little more doable than, say, filing a pro supp right now and including disclosure that anyone who buys in the offering is nuts. Hertz tried that last summer when it was in bankruptcy and also trading at weirdly high values, and then quickly suspended the offering when the SEC Staff raised questions. Any other fast moves to capitalize on this could not only open the company up to potential shareholder litigation, but also leave it holding a big bag of cash that looks pretty attractive to activists if and when the stock falls back to Earth.
It’s hard to say which company will next catch the eye of the Reddit YOLO crowd – there are a few contenders already, which the SEC is probably watching. If these speculative frenzies continue, it can’t hurt to be prepared for the questions you’ll inevitably get as counsel. As a starting point, check out these MoFo FAQs on at-the-market offerings and Regulation M – and the other resources in our “Equity Offerings” Practice Area.
Avoid a “Semi-Hack”: Change Your URLs
Last week, as reported in the Financial Times, Intel released its earnings about 12 minutes earlier than planned due to some people getting early access to an infographic that described the quarterly results. Kudos to the company for acting quickly to address the issue – they were scheduled to put everything out right after market close, but instead reported at about 3:48 p.m.
As Byrne Hobart notes, what actually caused people to have early access to the infographic in this case was that they realized the URL for each quarter’s earnings followed a sequential pattern, and the infographic was posted live to that page before earnings were officially released:
Intel had an infographic for their Q3 earnings, in a file that ended with “Q3_2020_Infographic.pdf” and had a URL with a sequential numbering scheme. Q4’s earnings presentation had the same file naming scheme, so it was easy to guess.
This kind of thing happens from time to time, and it’s an interesting edge case in US securities law. Technically, the information wasn’t misappropriated; no one at Intel violated a duty to keep it confidential in exchange for some consideration from a trader. But in practice, the technicality matters less than appearances. Because it looks like insider trading, and fits the broad definition of hacking, trading based on the possession of this infographic is a poor risk-reward even if it turns out to be legal.
I personally love sequential URLs for their convenience. But I guess whatever technical securities law questions this type of scenario might raise, the practical takeaway is that the convenience isn’t worth it when it comes to posting material non-public information. Either keep your files gated until go-time, or change your URLs to gobbledygook.
– Innovations in Transactional Law: Finding the Next Opportunities for Efficiency
Remember that you can also subscribe to our newsletters electronically – an option that many people are taking advantage of in the “remote work” environment. Also – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we make all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
According to Edelman’s 2021 Trust Barometer, we are experiencing a “rampant infodemic” of misinformation and widespread mistrust of societal institutions around the world. Poor information hygiene has left us unable to agree on or accomplish much of anything – including fighting the pandemic. Business has emerged as the most ethical, competent and trusted institution – with 61% of people globally and 54% of US respondents trusting business, compared to lower numbers for governments, NGOs and the media.
Few people would’ve predicted that a majority of Americans would trust big business when we were emerging from the financial crisis a dozen years ago, but here we are. Maybe we can attribute some of these results to the increased focus on “stakeholders” during the last couple of years, or maybe people are just desperate for someone to step up. But with great power comes great responsibility. According to the survey (also see this WSJ article):
– 86% of people expect CEOs to publicly speak out on social challenges like the pandemic impact, job automation, societal issues and local community issues
– 68% think that CEOs should step in when the government doesn’t fix societal problems
– Only 31% of people think brands are living up to expectations of doing an excellent job in helping the country overcome challenges
I blogged a couple of weeks ago on our Mentor Blog about the CLO’s role in CEO “activism” – and it looks like that’s likely to grow in importance. We also have memos on corporate political activism in our “ESG” Practice Area to help you navigate these expectations.
An earlier report from Edelman also looked at the role that executive pay can play in building trust, especially among institutional investors. I blogged last month on CompensationStandards.com that having a CEO pay ratio in line with those of peers and linking executive pay to ESG performance now impact trust “a great deal.”
Paul Munter Named SEC’s Acting Chief Accountant
Last Friday, the SEC announced that Paul Munter will become the agency’s Acting Chief Accountant, effective upon Sagar Teotia’s previously-announced departure from the Commission in February. Sagar had served as Chief Accountant since 2019 – and Paul has served as the SEC’s Deputy Chief Accountant since 2019.
Tune in tomorrow for the webcast – Conflict Minerals & Resource Extraction: Latest Developments – to hear our own Dave Lynn of Morrison & Foerster, Lawrence Heim of Responsible Business Alliance/Responsible Minerals Initiatives, Michael Littenberg of Ropes & Gray and Christine Robinson of Deloitte discuss what you should be considering as you prepare this year’s Form SD, and if you’re a resource extraction issuer, hear how to plan for the payments disclosure required under the SEC’s new rules to implement Exchange Act Section 13(q).
Larry Fink is sending his annual letter to CEOs this morning. It’s a little later than usual and I’ve been feeling like I was waiting for Moses to come down from the mountain. Based on the signals that BlackRock sent with the Stewardship Expectations it released in December (which, as I blogged on our Proxy Season Blog, said the asset manager would put more companies “on watch” for climate risks), it’s not too surprising that the letter urges companies to disclose their “net zero” business plan and to explain how their board oversees that strategy. But if anyone had any doubts that BlackRock wants that information, this letter should lay those to rest. Here are the high points (also see this NYT DealBook article):
– We are asking companies to disclose a plan for how their business model will be compatible with a net zero economy – that is, one where global warming is limited to well below 2ºC, consistent with a global aspiration of net zero greenhouse gas emissions by 2050.
– We are asking you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.
– We strongly support moving to a single global standard, which will enable investors to make more informed decisions about how to achieve durable long-term returns.
– Because better sustainability disclosures are in companies’ as well as investors’ own interests, I urge companies to move quickly to issue them rather than waiting for regulators to impose them. (While the world moves towards a single standard, BlackRock continues to endorse TCFD- and SASB-aligned reporting.)
– In addition, TCFD should be embraced by large private companies and public debt issuers
– As you issue sustainability reports, we ask that your disclosures on talent strategy fully reflect your long-term plans to improve diversity, equity, and inclusion, as appropriate by region.
The letter says the lines are blurring between “E” & “S” issues – for example, climate change has a disproportionate impact on low-income communities. So improved data and disclosure are all the more important to understand the interdependence between these topics.
Mr. Fink is also bullish on sustainability investments. In his letter to clients that was also released today, he explained that they’ll be publishing a temperature alignment metric for their funds, implementing a “heightened-scrutiny model” in active portfolios (including potential divestments), launching more sustainability investment products, and “using stewardship to ensure that the companies our clients are invested in are both mitigating climate risk and considering the opportunities presented by the net zero transition.”
NYC Pension Funds to Divest $4 Billion From Fossil Fuels
BlackRock isn’t the only investor focused on climate change. We’ve been blogging about divestments over on the Proxy Season Blog (including pressure on BlackRock). Yesterday, NYC Comptroller Scott Stringer announced that two of the City’s pension funds had voted to divest their portfolios of $4 billion from fossil fuel companies. Here’s an excerpt:
The New York City Employees’ Retirement System (NYCERS) and New York City Teachers’ Retirement System (TRS) voted to approve divestments today and the New York City Board of Education Retirement System (BERS) is expected to move forward on a divestment vote imminently. Securities were identified based on demonstrated risk from fossil fuel reserves and business activity, and the trustees will continue to evaluate risk in their portfolios to determine additional actions as warranted. The names of companies and the final scope of the divestment will be released following the sale of all targeted securities, which will be completed in a prudent manner to achieve best execution. The divestment is expected to be complete within the original five year timeline. The announcement by the Mayor, Comptroller, and Trustees follows an extensive and thorough fiduciary process to prudently assess the portfolio’s exposure to fossil fuel stranded asset risk and industry decline and other financial risks stemming from climate change.
In January 2018, the trustees announced a goal to divest from fossil fuel reserve owners within five years, consistent with fiduciary duty. The Systems retained independent investment consultants who conducted investment analyses showing the risks posed by fossil fuel companies and the prudent nature of the divestment actions adopted by the Boards.
In September 2018, the Mayor and Comptroller also jointly announced a goal of doubling the pension funds’ investments in climate solutions from 1% to 2%, or about $4 billion within 3 years. Climate solutions include renewable energy, climate infrastructure, green real estate, and other investments that will help achieve the goals of the Paris Climate Agreement. The City is on track to achieve this goal.
Tomorrow’s Webcast: “Alan Dye on the Latest Section 16 Developments”
Tune in tomorrow for the Section16.net webcast – “Alan Dye on the Latest Section 16 Developments.” This is our annual co-hosted program with the NASPP, in which Barbara Baksa interviews Alan about practical tips for refining your Section 16 procedures and avoiding pitfalls. Section16.net members can submit questions in advance to adye@Section16.net.
Last week, President Biden’s Chief of Staff, Ronald Klain, issued a memo to heads of executive departments & agencies to freeze new & pending rules (and guidance) until the incoming administration’s appointees have a chance to review them. This is a separate thing from the ability that Congress has to overturn recent laws under the Congressional Review Act – which, as I blogged earlier this month and this Cooley blog tracks through in great detail, could apply to SEC rules that have been adopted since last summer.
Here are three “regulatory freeze” points worth noting:
1. The regulatory freeze imposed by the new administration is a pretty routine thing – see this Davis Polk blog explaining the impact of a similar memo issued by the Trump administration in 2017 – but these notices still tend to generate a lot of questions each time around.
2. Because Klain’s memo expansively defines the term “rule,” this Gibson Dunn memo suggests the SEC could have an opening to delay rules that have not yet become effective.
3. However, like freezes issued under prior administrations, this one is addressed just to executive departments & agencies and doesn’t appear to apply to independent agencies like the SEC – nor does it request that independent agencies voluntarily comply with the freeze, as some prior iterations have done.
Given that last point, it appears right now that the SEC’s recently adopted and not-yet-effective rules on streamlined MD&A and financial disclosures, private placements, etc. will still go effective as planned. If there are any announcements one way or the other, we’ll make sure to blog about them here.
GDPR: First US Tech Company Gets Dinged – More To Come?
In mid December, the Irish Data Protection Commission announced that it was assessing a $546,000 fine against Twitter for late notification of a data breach that occurred in late 2018. Companies are supposed to notify the regulator 72 hours after a breach – but Twitter waited about two weeks, saying it didn’t appreciate the severity of the issue. It’s not the first GDPR fine against an American company – but this WSJ article explains that it’s an important bellwether because it’s the first in a long pipeline of privacy cases involving US tech companies, including Facebook, Apple and Google – and privacy advocates want those fines to be assessed more quickly than the two years it took for Twitter.
If you enjoy tracking this type of thing, check out this list of “major” GDPR fines to-date. This D&O Diary blog emphasizes that US companies should be paying attention to EU regulations and that privacy-related issues are a growing area of corporate risk:
The regulatory risk is an important exposure, and could also result not just in regulatory enforcement actions, but also follow-on actions as investors and others allege that companies either failed to take steps to protect the company against regulatory action or misrepresented the level of its regulatory compliance. No matter how you slice it, privacy-related issues and concerns represent a significant potential future source of corporate liability exposures.
Edgar: Goodbye “Fake” Filings, Hello Reliability!
In August, Lynn blogged about amendments the SEC had proposed making to Reg S-T in order to promote the reliability and integrity of Edgar submission. The SEC recently announced that it had adopted those amendments – by adding new Rule 15 of Reg S-T, which will become effective if & when the final rule is published in the Federal Register. Although this might be the nail in the coffin for “fake” SEC filings that we enjoy blogging about so much, we’re celebrating that these improvements could help resolve Edgar outages and other administrative problems.
Another big part of Rule 15 is that it establishes a process for the SEC to notify filers and other “relevant persons” – vendors or suppliers who make the submission on behalf of the company – about actions that it takes under the rule. That will hopefully make it even easier to resolve submission issues, although the Commission will typically just continue to work with filers in advance of taking action, as it already does. Here are the steps that new Rule 15 will allow the SEC to take:
• Redact, remove, or prevent dissemination of sensitive personally identifiable information that if released may result in financial or personal harm;
• Prevent submissions that pose a cybersecurity threat;
• Correct system or Commission staff errors;
• Remove or prevent dissemination of submissions made under an incorrect EDGAR identifier;
• Prevent the ability to make submissions when there are disputes over the authority to use EDGAR access codes;
• Prevent acceptance or dissemination of an attempted submission that it has reason to believe may be misleading or manipulative while evaluating the circumstances surrounding the submission, and allow acceptance or dissemination if its concerns are satisfactorily addressed;
• Prevent an unauthorized submission or otherwise remove a filer’s access; and
• Remedy similar administrative issues relating to submissions
And in related news, the SEC announced that it has named Jed Hickman as the Director of the SEC’s Edgar Business Office. Jed’s been serving as Acting Director of that office since April 2019. The person holding this office has authority to take the actions under new Rule 15 – as well as under existing rules about filing date adjustments and the continuing hardship exemption.
If you’re looking for an easy way to connect the dots on disclosure and ESG issues, we’ve got you covered with podcasts! Sit in on a convo between Dave Lynn and his guests on our “Deep Dive With Dave” series, or get governance highlights from my interviews of members of our community. Check out our latest episodes below – and you can also visit our podcast page for new postings:
In this 23-minute episode, Dave and WilmerHale’s Lillian Brown discuss these shareholder proposal developments:
– Key takeaways from the 2020 proxy season
– Evaluating the SEC Staff’s approach to no-action requests in 2020
– Should I include a board analysis in my shareholder proposal no-action letter?
– New and revised proposal topics for 2021
In this 30-minute episode, Dave and our own John Jenkins give a “risk factor workshop” for companies preparing to comply with the SEC’s amendments to Item 105 of Reg S-K and to explain the impact of the pandemic. Dave and John built on the very practical “Best Practices for Drafting Your Risk Factors” in the January-February 2018 issue of The Corporate Counsel newsletter and covered these topics:
– Tackling the amendments to Item 105 of Regulation S-K
– Hypothetical risk factor language – where are we now?
– What should I do with my COVID-19 risk factor in the next Form 10-K?
– What are some other risk areas for 2021?
– John’s risk factor tips
In this 13-minute episode with EY Partner and former Corp Fin Chief Accountant Mark Kronforst, Dave and Mark examine the Reg S-X amendments for disclosure about acquisitions & dispositions, including:
– How significant are these changes to Regulation S-X for public companies?
– How do the new significance tests work?
– Will companies need to provide more pro forma financial information?
– Do the changes to the significance tests affect disclosures outside of Rule 3-05, such as Rule 3-09?
– What potential pitfalls should companies consider with this new approach?
– When do these changes go into effect and how does early compliance work?
In this 15-minute episode, I talked with Alan Smith, chair of Fenwick & West’s corporate group, about the phenomenon of virtual board meetings. We covered these topics:
– What special issues exist for boards of directors who are meeting in a virtual format
– What should board advisors be doing to ensure that the board meetings are secure from a technology perspective and that all document retention policies are being followed for notes or recordings
– What are some effective practices to encourage the type of dialogue and interaction that boards would have at an in-person meeting
– Beneficial “virtual” practices that could continue after the pandemic
– Recommended steps for companies who are bringing on one or more directors while we’re in this environment – either because they’re newly public or just because of regular refreshment practices
– Traps for the unwary that board advisors should be watching for
Lastly, I continue to team up with Courtney Kamlet of Vontier to interview “Women Governance Gurus” about their career paths – and what they see on the horizon. Feedspot recently ranked us as one of the “Top 15” corporate governance podcasts on the web. Check out our latest episodes:
– Kristina Fink, Vice President, Group Counsel, Deputy Corporate Secretary at American Express
– Tanuja Dehne, President & CEO of the Geraldine R. Dodge Foundation and a public company board member
SEC Rulemaking: Will 2020’s Efforts Be Undone?
Our colleague Mike Gettelman blogged earlier this week about the prospect of recent SEC rulemaking being undone by the Congressional Review Act – a complicated and rarely used law that allows Congress to overturn rules adopted by federal agencies like the Commission. Mike cited 11 rules adopted by a 3-2 vote since July, which could be vulnerable to this clawback.
In the year-end report on the activities of the Office of the Investor Advocate (which is required to be delivered to committees in the House and Senate), Rick Fleming also called for the SEC to reverse several of its own rules, including:
– Rule 14a-8 Amendments – arguing the rules diminish the ability of shareholders with smaller investments to submit proposals and disagreeing with the economic analysis in the rulemaking
– Proxy Advisor Rules – saying investors shouldn’t be forced to pay for feedback mechanisms for companies and that the rules may result in the suppression of dissenting views
– Private Offering Harmonization – expressing a concern with the continued shift of capital-raising from public to private markets
The report also urges the Commission to adopt rules about ESG disclosures, making companies’ SEC filings machine-readable and minimum listing standards for all stock exchanges. Time will tell whether the SEC under the new Administration will revisit – or refine – activities under former Chair Jay Clayton, or will prioritize other initiatives.
A Corner of Normality
What a week. I blogged on Wednesday about BlackRock’s new expectations for political spending disclosure and also on our Mentor Blog about the CLO’s role in CEO “activism.” By the end of that day, a major trade organization which counts 14,000 companies in its membership ranks called for the Vice President to invoke the 25th Amendment. The Business Roundtable, the US Chamber and several individual CEOs also issued statements condemning the assault on the Capitol and the threat to the peaceful transition of power.
On the one hand, it’s difficult to focus on “business as usual” in the midst of the events of this week and the past year. But I, for one, also appreciate having a corner of normality – some form of connection to each other, some info that can make work easier and maybe even some entertainment. We’ll do our best to continue to offer stability – and an alternative to doomscrolling.
