Despite 81% of boards saying that they want to add diverse directors, it could be a long process due to low turnover among existing directors. Lynn has blogged that many boards seem to be focusing on overboarding to move the needle, but that isn’t a solution for all companies. The latest Spencer Stuart Board Index highlights these stats from S&P 500 boards during the 2020 proxy season:
– 55% appointed a new independent director – translating to an overall turnover of 0.84 new directors per board – which is similar to rates during the past 5 years
– Of the 272 boards that appointed new independent directors, 28% increased the size of the board to add women – yet increasing board size for more diversity isn’t a sustainable option
– 25% had no change to board composition
– 16% of sitting independent directors on boards with retirement age caps are within 3 years of mandatory retirement
– 6% report having explicit term limits for non-executive directors – the most common limits are 12 or 15 years
– Female representation rose to 28% of all S&P 500 directors – but only 22% of new S&P directors are from underrepresented racial or ethnic groups
– 24% included a commitment in the proxy statement to consider diverse slates when adding a new director
The report goes on to note that the preferred method for board refreshment is a robust board assessment process that includes director self-assessments and peer evaluations. Although director surveys consistently indicate that there’s room for improvement with this process – here’s Lynn’s blog about this year’s PwC director survey, saying that 49% of directors think at least one of their fellow board members should be replaced – anecdotally, things might be improving. Some members are saying that they’ve seen an increase in board evaluations and peer reviews over the last few months.
Small-Cap Capital Formation: COVID’s “Roadshow” Impact
The SEC’s “Office of the Advocate for Small Business Capital Formation” – which covers emerging, privately-held companies up to small-cap public companies – recently released its second Annual Report, which as you might guess by the name of the office, provides data on the state of small business capital formation. There were several SEC rulemakings last year that impacted this set of companies – and page 7 of the report links to video summaries of these changes:
– Accredited investor amendments
– COVID-19 crowdfunding relief
– Accelerated filer amendments (SOX 404(b))
– Capital formation proposal
– Modernizing Rule 15c2-11 governing quotations for OTC securities
– Accredited investor proposal
Of course, the biggest stories in 2020 were the impact of the pandemic and the challenges faced by founders and investors from underrepresented groups. The report says that the number of small businesses decreased by 27% from January through September last year – and gives a state-by-state breakdown of those losses on page 18. The IPO process has also changed in ways that some think will become the “new normal” – at least for companies that are well-known enough to get noticed without needing an in-person meeting. Here are some highlights:
– While traditionally issuers and their underwriters traveled across the country and sometimes across continents to pitch the IPO, in the face of the pandemic, companies and investors have quickly adopted virtual roadshows – benefits to companies included saving time & money from travel and expanded geographical reach
– The average roadshow shortened from 8 days to 4 days
– The reduction in launch time from roadshow to IPO decreased companies’ exposure to market risk & volatility
– Test-the-waters meetings have lengthened
– Prospective investors are indicating interest earlier, giving greater visibility in pricing
– Companies are providing more sophisticated and detailed disclosures about new developments and the impact of the pandemic
Check out the full report for data on Reg D and Reg A offerings, IPOs, the “small size trap” and the state of the market for small public companies (spoiler: there’s been a 52% decline in the number of public companies since 1997, but only a 5% decline in the amount of corporate assets in the public market). On February 4th, the Office is hosting a “Capital Call” to cover the content of the report and allow the public to ask live questions.
Transcript: “Modernizing Your Form 10-K: Incorporating Reg S-K Amendments”
We’ve posted the transcript for our recent webcast, “Modernizing Your Form 10-K: Incorporating Reg S-K Amendments.” This program focused on the SEC’s amendments to Reg S-K Items 101, 103 and 105 – with tips on human capital disclosures, risk factors, and what you should be thinking about for your disclosure controls & procedures. On this upcoming Tuesday, January 12th, we’ll be having another program on the topic of “Streamlined MD&A and Financial Disclosures: Early Considerations.” Don’t miss it!
BlackRock’s Investment Stewardship team recently shared this commentary on corporate political activities – which urges companies to provide transparent disclosure so that investors and other stakeholders can understand how public messaging and strategy are aligned with contributions to lobbying efforts and trade associations. Where the stewardship team notes “material inconsistencies” with stated policy priorities and spending, BlackRock may support a shareholder proposal requesting additional disclosure or explanation.
The asset manager says that companies should provide easy-to-navigate info on their website – and should consider disclosing:
1. The purpose of the company’s political contributions and engagement in lobbying activities and trade associations,and how this activity aligns with the company’s strategy and/or goals of public participation, including the company’s legislative and regulatory priorities.
2. How the company engages in these activities (ex: Government Relations/Policy Team).
3. The company’s political contribution and lobbying policy, including management and board responsibilities.
4. The board’s oversight process for monitoring political contributions and lobbying activities.
5. If the company has established a PAC,and if so,how the PAC’s spending furthers the aims of the company’s political contributions.
6. Trade association memberships for which dues exceed a predetermined threshold that requires board approval or oversight.
7. An affirmation ofcompliance with federal and state laws governing political activities and lobbying.
Congress Expands SEC’s Disgorgement Powers
Lynn blogged last week about the proposed expansion of SEC’s disgorgement powers that was nestled in the 1480-page National Defense Authorization Act for Fiscal Year 2021. Although the President vetoed the bill, Congress overrode that and it became law on January 1st. As Lynn noted, the amendments double the statute of limitations for the SEC to seek disgorgement for fraud claims – from 5 to 10 years – as well as raise a number of interpretive questions. This WilmerHale memo discusses possible implications – here’s an excerpt (also see this commentary from Russ Ryan, former Assistant Director of the SEC’s Enforcement Division and Partner with King & Spalding):
The amendments are notable for the SEC’s enforcement program. Most prominently, the extended statute of limitations for scienter-based fraud may incentivize Division of Enforcement staff to investigate conduct that is much more dated than the familiar five-year statute and to expend additional efforts to find evidence supporting a scienter-based charge, which risks complicating responses to Commission requests and increasing defense costs. Moreover, in order to seek disgorgement from a broader period that is only available for scienter-based fraud, the Division of Enforcement may be less inclined to accept settled resolutions that charge non-scienter-based alternatives. This has the potential to complicate settlement negotiations, including because scienter-based resolutions can trigger more significant collateral consequences for some respondents.
The amendments also leave open several questions, including the extent to which the new statutory disgorgement framework supplants the requirements for disgorgement outlined in Liu. For example, the amendments do not expressly address Liu’s requirement that the Commission return disgorged funds to injured investors. They also are silent on Liu’s holding that the Commission must net a defendant’s legitimate expenses when calculating disgorgement awards and on whether and when the Commission may hold defendants jointly and severally liable for disgorgement awards. However, the statutory language’s focus on “unjust enrichment by the person who received such unjust enrichment” provides compelling arguments in favor of netting legitimate expenses and against expansive joint and several liability
Regulatory Risks: Global Chart
One lesson from the pandemic has been that boards need to find a way to identify and address emerging risks – and ideally have contingency plans in place to be able to quickly pivot. This is by no means a new concept, but it remains difficult to master. One resource that we recently posted in our “Risk Management” Practice Area could help – at least with legal risks. It’s an interactive database from Lex Mundi that allows you to select countries around the world to compare regulatory and legislative developments. Also check out this 52-page TCFD guidance on risk management integration and disclosure.
I blogged a few weeks ago about the need to double down on vendor management processes in light of the SolarWinds hack. We’re posting memos in our “Cybersecurity” Practice Area with more detailed advice on what to do right now. For example, most companies should be evaluating whether they’ve been compromised and whether any legal or contractual notices are triggered. This Quarles & Brady memo outlines how your incident response plan can be deployed for this particular event:
1. Work with your IT team to determine whether your organization uses the Orion product and, if so, if the tainted software was downloaded and whether any steps have been taken to mitigate.
2. If the malware was downloaded, investigate any potential malware risks, including whether the hacker accessed your networks and whether any data has been accessed or acquired.
3. Consider engaging a forensics firm for the investigation. Whether you use internal or external resources, we recommend conducting the investigation under legal privilege.
4. If data was accessed or acquired, determine whether notices are required under notification laws or contracts.
5. Consider putting your cyber insurance carrier on notice as the costs may be covered under your policy.
6. Bear in mind that the threat actor may still have visibility into your network when engaging in incident response activities and planning and implementing a remediation plan.
7. Even if you don’t use Orion or did not put the update into production,determine whether any third parties that connect to your network or handle your data were impacted.
8. Stay on top of advisories from your vendors, government, and trusted advisors.
For companies in or servicing the banking industry, things are even more urgent due to new legal requirements that are arising out of this incident. This Eversheds Sutherland memo explains that the NY Department of Financial Services is requiring all financial institutions to immediately report whether they’ve been affected in any way – and this Sullivan & Cromwell memo says that the FDIC and other agencies have also proposed rules that would require banks to notify federal regulators of cyber incidents within 36 hours, and would require bank service providers to notify affected banks immediately.
Skyrocketing Cyber Insurance Premiums: Not a Fait Accompli
With recent increases to the number and cost of cyber claims, it’s not too surprising that premiums are also on the rise – some are reporting increases of 50% of the expiring rate, according to this D&O Diary blog. It also says you might end up with lighter coverage even though you’re paying more – due to decreasing liability limits and tighter underwriting standards.
To keep your fees & coverage in check, the blog suggests 11 steps to take before your next renewal negotiation. Here’s #1 – and note that even if you’ve done this in the past, you likely need to do it again due to the current WFH environment and the increase in cyber crime:
1. Perform a vulnerability assessment as soon as possible: To assess your network versus the cyber threats to your network (which you previously identified in your risk assessment), where is your network vulnerable? Is it a staffing and resource issue, where you do not have the staff to monitor your network? Is it a patching problem (where you might be two or three or more “Patch Tuesdays” behind the eight ball)? Is it a structural problem (are you still running Windows 7)? Or, is it an employee training and education that rears up every time one of your employees “clicks on a link” or attachment from which he or she doesn’t know the sender?
Many of these issues are easily remediated for very little money. Some issues will need more TLC, and others will take some money to remediate. There is little doubt remediation will be easier, cheaper and better to swallow than a theoretical $200,000 premium increase and maybe an $8 million ransomware settlement that jeopardizes your credibility with your customers and investors.
Of course, these extra efforts also come at a cost – this Bloomberg article reports that 64% of bank executives are forecasting an increase in cybersecurity spending next year. That’s on top of the 15% jump this past year – equating to almost $1 billion for each of the largest US banks.
Carbon Markets: ESG’s Next Frontier?
Last fall, the BRT said that the US should adopt a “market-based approach” to reduce carbon emissions – such as a carbon tax or cap-and-trade scheme. That was followed a couple months later by the international Taskforce on Scaling Voluntary Carbon Markets releasing this consultation document – which includes a draft blueprint for a carbon market and a roadmap for implementation (a final version is expected this month). According to the Taskforce, if carbon trading is the key to reducing emissions, the market needs to grow by at least 15x over the next decade.
If investors end up viewing participation in these trading arrangements as “material,” we could also eventually see information about them trickle into sustainability reports and even SEC disclosures – which means we’ll all have to get somewhat familiar with how they work, so that we can make sure they’re accurately described. Right now, focus on climate risk management seems to be intensifying:
We’ve been blogging on our Proxy Season Blog about BlackRock’s updated Stewardship Expectations – which say that the asset manager expects companies to disclose a plan for how their business model will be compatible with a low-carbon economy and that the boards of companies that are “on watch” and don’t show significant progress on the management and reporting of climate-related risks could see themselves getting “against” votes. And the New York State Common Retirement Fund announced last month that it has a goal to transition its portfolio to net zero greenhouse gas emissions by 2040. This KPMG memo summarizes how large companies are reporting on their “net zero” transitions.
The concept of carbon markets is also getting some traction at the state level. This White & Case memo summarizes a proposed cap-and-invest system for the transportation sector in the Northeast and mid-Atlantic region (Massachusetts, Rhode Island, Connecticut and DC). And for general climate-related risks, financial institutions are also getting more state-level scrutiny, with the New York Department of Financial Services recently encouraging banks to set up governance and risk frameworks to manage climate change risks. We’re constantly posting new resources in our “ESG” Practice Area – including industry-specific developments.
Readers of The Corporate Counsel newsletter received updates on several important annual reporting items in the latest issue – including a reminder on changes to the Form 10-K cover page. Here’s more info:
The Form 10-K cover page is changing again. When the SEC adopted amendments to the “accelerated filer” and “large accelerated filer” definitions last spring, it added a check box to the cover pages of Annual Reports on Forms 10-K, 20-F and 40-F to indicate whether an internal control over financial reporting auditor attestation is included in the filing. The check box will need to be tagged using Inline XBRL, when applicable.
Last month, I blogged that companies conducting Rule 506 offerings in New York need to file a completed Form D through the NASAA Electronic Filing Depository in order to notify the state. Danielle Benderly of Perkins Coie member wrote in to share this additional point:
While under these amended regulations New York is streamlining its requirements for an issuer selling its own securities to New York residents by requiring the issuer to file Form D alone, instead of as an attachment to Form 99, an issuer that files Form D in New York under these amended regulations is still registering as a dealer under New York law for itself, and registering as salespersons the officers, directors, principals or partners identified on the Form D, for a 4-year period – not just making a notice filing and paying a fee.
This article recommends that issuers consider making the Form D filing in NY for Rule 506(c) offerings – but not necessarily for Rule 506(b) offerings.
Our January E-Minders is Posted
We have posted the January issue of our complimentary monthly email newsletter. Sign up today to receive it by simply entering your email address!
We have a new podcast available to members, in which our very own Dave Lynn interviews special guests about the latest developments in securities laws & corporate governance. Two episodes are already available for your holiday entertainment!
In this 26-minute episode, Dave talks with Karen Garnett – currently a partner at Proskauer and formerly an Associate Director of Corp Fin – about disclosure effectiveness & Reg S-K. Topics include:
– The SEC’s “Disclosure Effectiveness” initiative – why was it so successful?
– Considering changes to the description of business requirement
– Human capital disclosure – what should companies do now?
– Tackling the amended risk factor disclosure requirements
– Is the Disclosure Effectiveness initiative done?
And in this 14-minute episode, Dave talks with Jay Knight – currently a partner at Bass, Berry & Sims and previously Special Counsel in Corp Fin – about Staff comments on COVID-19 disclosures. Topics include:
– Has the SEC Staff been commenting on disclosures about COVID-19 in public filings?
– What areas of comment has the Staff raised regarding COVID-19?
– What approach has the Staff taken with respect to non-GAAP financial measures in the COVID-19 era?
– Do you think the Staff will focus on COVID-19 disclosures when it reviews 10-Ks filed in 2021?
– Are there lessons to take away from the Staff’s comments as we prepare disclosures for the upcoming reporting season?
SEC & Edgar Closed Next Thursday & Friday
This executive order announces that all federal agencies – including the SEC – will be closed this upcoming Thursday for Christmas Eve (Christmas Day was already designated as a federal holiday, so the SEC and Edgar are closed that day too).
The SEC announced that, just like the past couple of years, this means Edgar will be closed on both the 24th and 25th. No filings will be accepted on those days, Edgar filing websites won’t be operational, Edgar Filer Support will be closed, and you’ll have until Monday, December 28th to make filings that would have been due on Thursday or Friday. The announcement also says that both of those days will also be treated as federal holidays for filing purposes.
Transcript: “Pay Equity – What Compensation Committees Need to Know”
We’ve posted the transcript for our recent CompensationStandards.com webcast, “Pay Equity: What Compensation Committees Need to Know.” Mintz’s Anne Bruno, BlackRock’s Tanya Levy-Odom, Equity Methods’ Josh Schaeffer, and Impax Asset Management’s Heather Smith shared their insights on these topics:
1. Why Pay Equity Is in The Spotlight
2. Differences Between “Pay Equity,” “Pay Gap” & “Pay Ratio”
3. Shareholder Expectations
4. Disclosure Trends: Pay Gaps & Pay Equity
5. How to Collect & Interpret Data
6. Remediation Strategies
7. Mechanics of Board & Committee Oversight
8. Preparing for Shareholder Engagements & Proposals
At an open meeting yesterday, the SEC adopted final rules that will require public “resource extraction” issuers to disclose payments made to the US federal government or foreign governments, if the company engages in the commercial development of oil, natural gas, or minerals. After some drama in which Congress disapproved the SEC’s 2016 rulemaking on this topic, the current iteration is based on a 2019 proposal and implements Section 13(q) of Exchange Act, which was added by Dodd-Frank a decade ago. All of the SEC Commissioners, including Chair Jay Clayton, released their own statements about the final rules.
Although the final rules will be effective 60 days after publication in the Federal Register, there’s a two-year transition period before companies will be required to submit a Form SD with this info. And unlike the “conflict minerals” Form SD that is due by May 31st of each year for all companies, this one will be due within 270 days of each company’s fiscal year end. So for calendar-year companies, the first report will likely be due at the end of September 2024. The SEC also issued this order to recognize that a company that meets resource extraction payment disclosure requirements in the EU, UK, Norway or Canada would satisfy the Section 13(q) “alternative reporting” requirements.
– Require public disclosure of company-specific, project-level payment information;
– Define the term “project” to require disclosure at the national and major subnational political jurisdiction, as opposed to the contract, level, recognizing that more granular contract-level disclosure could be used to satisfy the rule;
– Add two new conditional exemptions for situations in which a foreign law or a pre-existing contract prohibits the required disclosure;
– Add a conditional exemption for smaller reporting companies and emerging growth companies;
– Define “control” to exclude entities or operations in which an issuer has a proportionate interest;
– Limit the liability for the required disclosure by deeming the payment information to be furnished to, but not filed with, the Commission;
– Add relief for issuers that have recently completed their US IPOs; and
– Extend the deadline for furnishing the payment disclosures.
Cyber Insurance: Claims Starting to Show “Covid-19” Impact
Over the past 5 years, companies’ average cost of cyber crime has increased 72% – to $13 million – and the average number of security breaches has increased by 67%. That’s according to this 14-page summary of cyber trends from Allianz – which, not surprisingly, explains that the work-from-home environment is heightening cyber risks. It also says hackers are selling high-end malware and tools to other attackers – so companies need to be on alert for sophisticated schemes.
That advice was underscored earlier this week when news broke about a cyberattack at SolarWinds and FireEye. This CNBC article says that SolarWinds’ stock dropped 23% after the hack was announced – not a position in which any company wishes to find itself – and a few people are also now questioning recent stock sales by some large investors of that company.
Our friend Melissa Krasnow of VLP Law Group noted that the incident highlights the need to double down on vendor management processes & agreements for privacy and data security provisions, to make sure that incident response plans and business continuity plans are in place and up-to-date, and to keep using tabletop exercises to spot weaknesses and craft responses.
Here’s more detail from the Allianz report:
Through 2020, malware and ransomware incidents have already increased by more than a third, at the same time as a 50%+ increase in phishing, scams, and fraud, according to international police body, INTERPOL. The rush to adopt new cloud systems and remote access solutions, has also driven up the number of data breaches. Over a four-month period, some 907,000 spam messages, 737 incidents related to malware and 48,000 malicious URLs – all of them in relation to coronavirus– were detected by one of INTERPOL’s private sector partners.
Business email compromise schemes (see page 7) are likely to increase further with the shift in the business landscape to remote working and the economic downturn, along with damage costs from phishing scams, ransomware attacks and insecure remote access to networks. Coronavirus-themed online scams and phishing campaigns which aim to take advantage of public concern about the pandemic are unlikely to dissipate anytime soon.
The pandemic will also have a long-term impact as companies increasingly digitalize, work remotely and rely more on online sales in response, meaning cyber risks will evolve in different shapes and forms.
Farewell to Paul Sarbanes
Paul Sarbanes, the 5-term U.S. Senator from Maryland who co-wrote the Sarbanes-Oxley statute, passed away last week at the age of 87. John, Broc and I reminisced about the landmark law a few years ago on the 15th anniversary. Here’s an excerpt from Mr. Sarbanes’ NYT obituary:
While other members of Congress pursued the Enron scandal with splashy televised hearings and spirited denunciations, Mr. Sarbanes approached it by holding 10 thorough hearings to get widespread expert advice on what corrective legislation should include.
Initially opposed by many Republicans and by the powerful lobbying of the accounting industry, the measure eventually passed 97 to 0 in the Senate after another accounting failure, at WorldCom, had sent the stock market plunging.
Mr. Sarbanes saw his career as having “bookends,” as he put it in an interview for this obituary in 2013: It began in 1974 with his role in the impeachment proceedings against President Richard M. Nixon and closed with the accounting law.
As we move closer to the finish line for 2020, our faithful correspondent Nina Flax of Mayer Brown is back with an uplifting “list” to focus on some of the positives she’s experienced (here’s our last list from Nina):
It has been a while since I have written a list. I have, as I am sure many of you have, struggled with COVID and WFH. Every day, there is something new, ridiculous, sad, frustrating, amazing to add to the items that elicit an “it’s 2020!” response. Despite having been stuck on I-80 with my son in the car exactly when the LNU Lightning Complex jumped the highway and shut down traffic (perhaps the subject of a future list), I am extremely grateful today that I have literally and figuratively found my way through the impending wall of smoke to find these things:
1. Dinner with my son. My son eats dinner at 5pm, if even that late some days. I cannot explain it other than that is when he is hungry, so that is when he eats because we prefer him to not be hangry. Before WFH, I very rarely made it home in time to actually eat dinner together. I have made it a point to try to do that almost every day – force myself to take the 30 minute break to have that time. Sometimes we talk about high/lows, sometimes we go around saying something we are grateful for, sometimes we take turns doing mad-lib style storytelling, mostly we just sit down and laugh about something. I have never been happier. (Except for one day I remember before child where I never got out of bed and slept for about 12 hours in between watching TV?)
2. More movement. Before WFH, my close colleague and I would take breaks from sitting at our desks and walk in circles around our office building to talk through legal issues – conceptual or drafting – it really helped. With WFH, air permitting, you will frequently find me walking up and down my driveway while on calls. Moving helps me focus. Moving helps me process. Moving helps me be creative – professionally and personally.
3. Appreciativeness. Not grand gratefulness in a trendy mindfulness way. Being away from people has made me appreciate people more. And miss them. Before, I would go out of my way to write a holiday time card to each colleague that I had worked with or collaborated with over the year that I valued. Very personalized, very intentional. Now, I go out of my way to say thank you for the small things. Thank you for responding so quickly. Thank you for taking my call. Thank you for the follow up. Thank you for taking the lead. Thank you for your collaboration. This of course also applies to my personal life. Thank you for always being there for me. Thank you for taking the time to answer my questions. Thank you for going to the grocery store. Thank you for getting the ridiculously howling dog to stop howling. Thank you for organizing this friends call. Thank you for passing along this interesting article. Thank you for the book suggestion. Thank you for checking in on my parents. Thank you for scheduling this outside, socially distanced playdate. Thank you for being you.
4. Knitting and Other Old Loves. This is more of a re-found. I picked up knitting in law school, but for whatever reason I stopped knitting before I met my husband. In the COVID-induced cleaning and house reorganizing, I re-discovered my needles. Then I found a great store, took my son and he picked out three colors. Side note: It was an amazing moment of pride that he picked colors that completely epitomize South Florida – citrus (bright yellow), tangerine (bright orange) and electric (a bright aqua). Second side note: I love the way that people name colors. My husband and I used to play a game where I would try to guess the name of a color (and often came pretty close). Back to the knitting point, my son now has a fantastic hat and matching cowl (if I do say so myself, but really, others have said so too). I am working on matching mittens and looking forward to giving knitted gifts to many in the coming months. For other old loves, I have picked up drawing and painting again in a way that I have not enjoyed since I first went to college intending to major in art and minor in chemistry (no, I have no idea what I was thinking back then; yes, I do know how I ended up here).
5. New Curiosities. There are many reasons that through this year I have felt more drawn to nature. I have been making fun informational cards about leaves, shells, flies and bees for my son. I have a list of nature books (of course, as an Amazon list) that I want to read. I have a nature journal. I have a stack of articles and studies from an amazingly supportive friend who has always been intensely focused on sustainability. I watched My Octopus Teacher as soon as I could and cried. I am feeling inspired.
I think I will pull that last sentence down to here – I am feeling inspired. In the face of all of the negative from 2020, my inspiration enables me to laugh that it snowed chocolate in Olten, to hug my husband, son and dogs enough to make up for all of the other hugs I am missing out on (I am a hugger), to deal with frustrations in different ways, to drive initiatives I feel strongly about, to focus on kindness and caring, to not compromise on expectations, to accept whatever may happen, to know that I can make a change, to know that I will survive. Maybe resiliency that I read so much about in the context of children is really about inspiration?
**End note: I promise that this time has not been all positive for me. There have been very hard negatives. Without those, I would not be here now. I am sure I will face negatives in the future. I am hoping this time helps me meet those challenges more adeptly, with stronger mental health. I hope the same for all of you.
Enforcement Director Stephanie Avakian to Leave SEC
Last week, the SEC announced that Enforcement Director Stephanie Avakian will depart from the Commission by the end of the year. Stephanie began her career at the SEC and began her latest tour in 2014. She’s led the Enforcement Division over the last four years as Co-Director and then Director. Deputy Director Marc P. Berger will serve as Acting Director upon her departure. The SEC’s press release includes a long list of the Enforcement Division’s accomplishments under Stephanie’s leadership – and here’s a statement from Commissioner Elad Roisman.
Last month, I blogged that former SEC Chief Accountant Wes Bricker is working on an initiative at PwC that would translate sustainability reporting standards into an XBRL taxonomy. He isn’t the only one who sees promise in that coupling. In recent remarks, SEC Commissioner Allison Herren Lee – who has made it clear she wants to work on standardized ESG disclosure – said she might also support expanding XBRL to ESG reporting and other non-financial data. Here’s an excerpt (also see this blog from shareholder proponent Jim McRitchie pronouncing his opinion that N-PX data tagging would be the most important SEC rulemaking for advancing corporate sustainability):
What kind of data are we talking about here? The most basic information that an investor might want: how their money is being voted in corporate elections, and whether their shares are being voted in their best interest or in accordance with their instructions. We could bring much greater clarity and transparency to investors regarding how their voting rights are being exercised with the simple expedient of finalizing this rule and adding a requirement, as discussed in the proposal, to tag the Form N-PX voting data.
N-PX filings are voluminous in nature but would likely require relatively few, straightforward data tags. Thus we could potentially take a large body of important information and dramatically increase its usability through a relatively simple taxonomy.
Another area that could benefit from structured data to support usability and comparability is in the area of climate change and other ESG risks and impacts. As you all know, climate and other ESG-related metrics are of ever-increasing importance to investors, surpassing even traditional financial statement metrics for many. Of course, there are currently little to no standardized climate or ESG disclosure requirements. Indeed much of that disclosure occurs voluntarily and outside of SEC filings altogether. As I have said elsewhere, developing standardized climate and ESG disclosure requirements should be a top priority for the Commission. As we consider this, we should also consider how to make the data disclosed under such requirements as usable as possible, including through tagging requirements.
Much of our structuring requirements so far have been backward looking – requiring us to consider how to structure information that is currently disclosed in a non-structured manner. As we consider new climate and other ESG requirements, we would have the opportunity to simultaneously consider how to make those requirements amenable to structuring. Instead of an ex post facto application of structuring requirements, the two could develop in tandem.
Finally, I’ll just mention briefly, MD&A and earnings releases. As commenters including XBRL have pointed out,[18] disclosures under MD&A may benefit from some simple block tagging that could greatly enhance comparability of certain relatively consistent types of information disclosed in MD&A. And earnings releases, particularly given their often market-moving nature, appear to be another well-suited candidate for tagging.
ESG CAMs: Coming Soon to an Audit Report Near You?
I blogged a little while back ago about the PCAOB’s analysis of the “critical audit matter” disclosure requirement. Although most CAMs related to goodwill, revenue recognition, other intangibles and business combinations, there have been 3 so far – all for foreign private issuers – that cover the impact of climate change on financial statements. In this recent speech, PCAOB Board member Robert Brown predicts that there will be more to come. Here’s an excerpt:
In one report on Form 20-F, the auditor discussed management’s estimates that were inconsistent with the 2050 “net zero” commitment.” The auditor also observed that deprecating the assets in line with net zero targets would result in additional reductions to net income that were not reflected in the financial statements. The report also discussed how the auditor challenged management’s assertion that carbon-emitting equipment could be used in alternative ways after a net-zero target date that supported management’s estimate of operation until 2070.
Another audit report discussed how climate change and the global energy transition impacted the capitalization of exploration and appraisal costs. The auditor also focused procedures on the risk that oil and gas price assumptions could lead to material misstatements of the financial statements. Another audit report described the effect that long-term price assumptions incorporating the potential impact of climate change could have on asset values and impairment estimates.
Considering the increasing frequency that environmental trends, events, and uncertainties, including the lower commodity prices and margins resulting from a COVID-19 economic environment, can affect material accounts or disclosures in a public company’s financial statements, I expected to see more auditor reports describing them in the future.
”Shares Outstanding” XBRL Tags: Watch Those Zeros!
The SEC recently announced that DERA Staff has observed that some periodic reports show significant differences between the number of “Entity Common Stock Shares Outstanding” that’s XBRL-tagged on the filing cover page and the number of “Common Stock Shares Outstanding” that’s XBRL-tagged on the balance sheet. While there could be some differences due to the cover page number being as of “the latest practicable date” and the balance sheet being as of quarter-end, some filers have been disclosing three additional zeros in one value compared to the other – without any explanation in the filing about a significant change to capital structure. Make sure to check your scaling before you submit your filing!
It’s official: companies conducting Rule 506 offerings in New York need to file a completed Form D through the NASAA Electronic Filing Depository in order to notify the state. That’s according to guidance issued earlier this month by the New York Attorney General – which brings NY in line with other states with respect to these notice filings and also says that no Form 99’s or Form 99 renewals will be accepted after February 1st. Also see this Mintz memo and these revised regulations for broker-dealers.
This is big news for anyone doing private placements in New York. For years, practitioners have relied on the New York State Bar Association’s interpretive opinion that said the provisions of the Martin Act requiring a Form 99 filing were preempted by NSMIA, and that no New York filing was required. The biggest practical takeaway from this new guidance is that if you’ve been doing that, you need to stop. The guidance also specifies that the Form D must be complete – including by listing all related persons and all persons receiving or expected to receive sales compensation.
House Passes “Holding Foreign Companies Accountable Act”
Members of Congress have found something to agree on: regulating China-based companies. The House has passed the “Holding Foreign Companies Accountable Act” – which would amend the Sarbanes-Oxley Act to prohibit listing on US exchanges of foreign companies for which the PCAOB has been unable to inspect audit work papers. The Senate previously approved this legislation – and the President is expected to sign the bill into law. This is separate from the SEC proposal on the same topic that is expected before year-end.
Under the bill, the SEC would be required to identify companies that have registered public accounting firms that are located in foreign jurisdictions and for which the PCAOB is unable to inspect work papers. If the Commission determines that a company has 3 consecutive non-inspection years, it must prohibit the securities from being traded on a national securities exchange or over-the-counter. Companies must also submit documentation to show they aren’t owned or controlled by a governmental entity and disclose information about relationships to the Chinese Communist Party.
This CNBC article notes that Americans might miss out on some pretty significant investment opportunities if this law comes to fruition – and that foreign countries like China might welcome the chance to build up their own exchanges. One of the bill’s Senate sponsors even notes in this press release that 224 U.S.-listed companies are located in countries where there are obstacles to PCAOB inspections, and these companies have a combined market capitalization of more than $1.8 trillion. Maybe that’s why the bill gives a three-year lead-time for compliance and opportunities for correction and relisting. In addition, the co-audit solution that is expected to be included in the SEC’s proposal might help the Commission find a way to balance investor protection with investment opportunities.
Bob Stebbins to Depart From SEC’s “OGC”
Last week, the SEC announced that Bob Stebbins will depart from the SEC in early January – after serving over three and a half years as the Commission’s General Counsel. The SEC’s Office of the General Counsel has a wide range of responsibilities – so Bob played a role in all of the rulemaking, enforcement and other activities that we cover in this blog. The press release says he advised on more than 85 rules, hundreds of interpretive releases and 2750 enforcement actions! He also advised on CARES Act implementation for the Treasury Department. SEC Chair Jay Clayton issued this statement to commend Bob on his service.
Yesterday, the SEC continued its active year by announcing proposed changes to Form S-8 and Rule 701. The amendments suggested by the 156-page proposing release are responsive to comments that the Commission received on its 2018 concept release. Here are the highlights from the SEC’s Fact Sheet (we’ll be posting memos in our “Form S-8” and “Rule 701” Practice Areas):
With respect to Rule 701, the proposed amendments would:
• Revise the additional disclosure requirements for Rule 701 exempt transactions exceeding $10 million;
• Revise the time at which such disclosure is required to be delivered for derivative securities that do not involve a decision by the recipient to exercise or convert in specified circumstances where such derivative securities are granted to new hires;
• Raise two of the three alternative regulatory ceilings that cap the overall amount of securities that a non-reporting issuer may sell pursuant to the exemption during any consecutive 12-month period; and
• Make the exemption available for offers and sales of securities under a written compensatory benefit plan established by the issuer’s subsidiaries, whether or not majority-owned.
With respect to Form S-8, the proposed amendments would:
• Implement improvements and clarifications to simplify registration on the form, including:
o Clarifying the ability to add multiple plans to a single Form S-8;
o Clarifying the ability to allocate securities among multiple incentive plans on a single Form S-8; and
o Permitting the addition of securities or classes of securities by automatically effective post-effective amendment.
• Implement improvements to simplify share counting and fee payments on the form, including:
o Requiring the registration of an aggregate offering amount of securities for defined contribution plans;
o Implementing a new fee payment method for registration of offers and sales pursuant to defined contribution plans; and
o Conforming Form S-8 instructions with current IRS plan review practices.
• Revise Item 1(f) of Form S-8 to eliminate the requirement to describe the tax effects of plan participation on the issuer.
With respect to both Rule 701 and Form S-8, the proposals would:
• Extend consultant and advisor eligibility to entities meeting specified ownership criteria designed to link the securities to the performance of services; and
• Expand eligibility for former employees to specified post-termination grants and former employees of acquired entities.
There’s More! SEC Proposes Temporary Expansion of Compensatory Offerings to Gig Workers
The SEC saved the more interesting – and controversial – part of its “compensatory offering” modernization for an entirely separate proposal – which would, for a temporary five-year period and subject to a number of conditions, permit companies to provide equity compensation to gig workers who provide services (not goods) to the company (or as the SEC calls them, “platform workers”). Commissioners Hester Peirce & Elad Roisman issued a statement in support of the proposal. Commissioners Allison Herren Lee & Caroline Crenshaw dissented – and they were careful to point out that they did support the other proposal.
Under the amendments, an issuer would be able to use the Rule 701 exemption to offer and sell its securities on a compensatory basis to platform workers who, pursuant to a written contract or agreement, provide bona fide services by means of an internet-based platform or other widespread, technology-based marketplace platform or system provided by the issuer if:
• the issuer operates and controls the platform;
• the issuance of securities to participating platform workers is pursuant to a compensatory arrangement, as evidenced by a written compensation plan, contract, or agreement;
• no more than 15% of the value of compensation received by a participating worker from the issuer for services provided by means of the platform during a 12-month period, and no more than $75,000 of such compensation received from the issuer during a 36-month period, shall consist of securities, with such value determined at the time the securities are granted;
• the amount and terms of any securities issued to a platform worker may not be subject to individual bargaining or the worker’s ability to elect between payment in securities or cash; and
• the issuer must take reasonable steps to prohibit the transfer of the securities issued to a platform worker pursuant to this exemption, other than a transfer to the issuer or by operation of law.
The proposed amendments would also permit an Exchange Act reporting company to make registered securities offerings to its platform workers using Form S-8. The same conditions proposed for Rule 701 issuances would apply to issuances to platform workers on Form S-8, except for the proposed transferability restriction.
The proposed amendments would not permit the issuance of securities for platform worker activities relating to the sale or transfer of permanent ownership of discrete, tangible goods. Depending on the results of the initial expanded use of Rule 701 and Form S-8, if adopted, the Commission could consider expanding eligibility to other activities, such as selling goods or other non-service providing activities in the future.
The proposed amendments would require companies that sell securities to gig workers to furnish information to the SEC at 6-month intervals, to help the Commission decide whether the rule changes should expire, be extended or be made permanent.
Both proposals will be subject to a 60-day comment period following their publication in the Federal Register. Time will tell whether the next SEC Chair will carry either of these proposals across the finish line.
Glass Lewis ’21 Voting Guidelines: Diversity and E&S Phase-Ins
Also yesterday, Glass Lewis announced the publication of its 2021 Voting Guidelines. The biggest changes are that Glass Lewis is expanding its board gender diversity policy to vote against nominating chairs if there are fewer than two female directors, beginning in 2022 (they already recommend against the nominating chairs of all-male boards) – and they’re phasing in additional scrutiny of the descriptions of board-level E&S oversight.
As always, the first few pages of the Guidelines summarize the policy changes. Here’s a few highlights:
– Board Gender Diversity: Beginning in 2021, we will note as a concern boards consisting of fewer than two female directors. Our voting recommendations in 2021 will be based on our current requirement of at least one female board member; but, beginning with shareholder meetings held after January 1, 2022, we will generally recommend voting against the nominating committee chair of a board with fewer than two female directors. For boards with six or fewer total members, our existing voting policy requiring a minimum of one female director will remain in place.
– Disclosure of Director Diversity & Skills: Beginning with the 2021 proxy season, our reports for companies in the S&P 500 index will include an assessment of company disclosure in the proxy statement relating to board diversity, skills and the director nomination process.
– Board Refreshment: Beginning in 2021, we will note as a potential concern instances where the average tenure of non-executive directors is 10 years or more and no new independent directors have joined the board in the past five years. We will not be making voting recommendations solely on this basis in 2021; however, insufficient board refreshment may be a contributing factor in our recommendations when additional board-related concerns have been identified.
– E&S Oversight: Beginning in 2021, Glass Lewis will note as a concern when boards of companies in the S&P 500 index do not provide clear disclosure concerning the board-level oversight afforded to environmental and/or social issues. Beginning with shareholder meetings held after January 1, 2022, we will generally recommend voting against the governance chair of a company in the aforementioned index who fails to provide explicit disclosure concerning the board’s role in overseeing these issues. While we believe that it is important that these issues are overseen at the board level and that shareholders are afforded meaningful disclosure of these oversight responsibilities, we believe that companies should determine the best structure for this oversight for themselves.
– SPACs: We have added a new section detailing our approach to common issues associated with special purpose acquisition companies (“SPACs”), including our generally favorable view of proposals seeking to extend business combination deadlines, as well as our approach to determining the independence of board members at a post-combination entity who previously served as executives of the SPAC. Absent any evidence of an employment relationship or continuing material financial interest in the combined entity, we will generally consider such directors to be independent.
Glass Lewis also made several clarifying amendments – including that their standard policy on virtual shareholder meetings is now in effect, and they expect robust disclosure about the ability of shareholders to participate in the meeting.
We’ll be posting memos in our “Proxy Advisors” Practice Area – and you should also mark your calendar for our January 14th webcast, which is a dialogue with Courteney Keatinge, Senior Director of ESG Research at Glass Lewis. Members of TheCorporateCounsel.net can access that webcast for free – if you’re not a member, you can try a no-risk trial.
