Yesterday, Corp Fin revised “Disclosure Guidance Topic No. 7” to be more specific about how to handle expiring orders. When this piece of the guidance was first added last September, it tied the analysis for the different alternatives to orders issued “less than 3 years ago” or “more than 3 years ago.” Now, Corp Fin has helpfully put a stake in the ground at October 15, 2017. So the alternatives upon expiration are are:
1. If the contract is still material, refile it in complete, unredacted form
2. Extend the confidential period – using the short-form application for orders initially issued after October 15, 2017, or filing a new and complete application for orders initially issued on or before October 15, 2017
3. Transition to the “redacted exhibit rules” in Reg S-K Item 601(b)(10), if the contract continues to be material and the initial confidential treatment order was issued on or before October 15, 2017
Corp Fin also reiterated that if a confidential treatment order was granted on or before October 15, 2017, you don’t need to wait for the order to expire to transition to compliance with the redacted exhibit rules. You can just start doing that in a new filing or by amending a previously filed document.
Mandatory Climate Disclosure: California Bill Sets Ambitious Tone
California has been a bellwether for board diversity & consumer privacy movements. Now, it could be setting the tone for mandatory climate disclosures. California Senate Bill 260 – which was introduced in late January and will be taken up by committees this month – would apply to publicly traded domestic and foreign corporations with annual revenues in excess of $1 billion that do business in California, and would require:
– Public disclosure of their greenhouse gas emissions, categorized as scope 1, 2, and 3 emissions, from the prior calendar year – beginning in January 2024
– Setting & disclosing “science-based emissions targets” based on the covered entity’s emissions that have been reported to the state board, which would be consistent with the Paris Agreement goal of limiting global warming to no more than 1.5 degrees Celsius – beginning in 2025
– Public disclosures to be independently verified by a third-party auditor, approved by the state board, with expertise in greenhouse gas emissions accounting
This Akin Gump blog explains why this bill would be a big deal if it passes:
While many large companies already issue climate disclosures on a voluntary basis, SB 260 would no longer give them—or their more reluctant peers—a choice. Importantly, the bill’s required scope 2 and 3 emissions reporting would force companies to disclose, for the first time, the indirect emissions that result from their purchase and use of electricity as well as their supply chains, business travel, procurement efforts, water use and wastes.
Covered entities also would have to engage certified third-party auditors to verify their disclosures and emissions targets, another noteworthy first that should lead to a greater degree of standardization over time in climate reporting. Given the bill’s capacious reach and the minimum contacts with California required to trigger its applicability, most large companies in virtually every sector would soon face climate disclosure requirements.
As the blog explains, the bill faces a long road before it could become law. But even if it doesn’t end up passing, the dialogue that comes out of this process could influence company practices and investor preferences – and maybe even other disclosure regimes.
Value Vs. Values: False Dichotomy?
When pressed on “social policy” positions, the talking point for index funds and long-term investors seems to be that they’re simply taking positions that promote long-term financial value for the company. This recent study points out that it’s not so much the financial value of each individual company that they’re trying to maximize – it’s the financial value of their overall portfolio. And because that overall financial value increases when society prospers, investors have strong incentives to promote “ESG” issues, which reduce systemic risk and lead to diversified gains. Here’s an excerpt:
The analysis also shows why it is generally unwise for such funds to pursue stewardship that consists of firm-specific performance-focused engagement: Gains (if any) will be substantially “idiosyncratic,” precisely the kind of risks that diversification minimizes. Instead asset managers should seek to mitigate systematic risk, which most notably would include climate change risk, financial stability risk, and social stability risk. This portfolio approach follows the already-established pattern of assets managers’ pursuit of corporate governance measures that may increase returns across the portfolio if even not maximizing for particular firms.
Systematic Stewardship does not raise the concerns of the “common ownership” critique, because the channel by which systematic risk reduction improves risk-adjusted portfolio returns is to avoid harm across the entire economy that would damage the interests of employees and consumers as well as shareholders.
These theories probably don’t mean much for boards as a whole – who will still need to focus on their specific shareholders, and the business judgment rule will protect most decisions. But when it comes to individual directors, the paper makes the case that rejecting “weak directors” is one company-by-company action investors can take that has portfolio-wide effects. That seems to be consistent with some of the investor policies that have been published lately, and means the focus on board composition & skills isn’t going away anytime soon.
We’ve just posted the registration information for our “Proxy Disclosure” & “Executive Compensation Conferences” – which will be held virtually October 13th – 15th. We’re excited to offer a format that can be either “live & interactive” or “on-demand” (your choice! or do both!) – to deliver candid & practical guidance, direct from the experts.
These Conferences will help you tackle ESG & executive pay issues that will be essential to your proxy disclosures and engagements. Check out the agendas – 17 panels over three days.
Early Bird Rates – Act Now! As a special “thank you” for early registration, we’re offering an “early bird” rate for a limited time to both members & non-members of our sites. In addition, anyone who subscribes to one of our sites will get a special “member discount” when they register for these Conferences (both of the Conferences are bundled together with a single price). Register online or by mail/e-mail today to get the best price and make sure that you’ll have access to all of the latest guidance.
ICOs: Investment Advisers Face Scrutiny
This Reuters article says that in his confirmation hearings last week, SEC Chair nominee Gary Gensler signaled openness to additional crypto regulations if his nomination is approved. Overall, the remarks seem pretty non-committal. But in the meantime, the SEC’s Examinations Division has issued a risk alert to explain its continued focus on digital assets – in particular, the Staff will be taking a closer look at the practices of investment advisers to make sure that digital assets are properly classified as “securities” when necessary, and at the disclosures those firms are making about the risks of crypto purchases.
The risk alert also casts a spotlight on transfer agents using distributed ledger technologies and says the Examinations Division will review whether those services comply with Exchange Act Rules 17Ad-1 to 17Ad-7. See this Mayer Brown memo for more details & practice implications.
“Machine Readable” SEC Filings: What Does It Mean?
I blogged recently about how the year-end report from the SEC’s Investor Advocate urged the Commission to adopt rules that would make companies’ SEC filings machine-readable. This paper points out that corporate disclosure has already been reshaped by machine processors, since those types of downloads have been steadily increasing over the past 15-20 years – and looks at how companies are adjusting their SEC disclosures when they know that machines are doing the reading.
“Machine readability” means that it’s easy for machines to separate and extract tables and numbers from text, it’s easy to identify tabular info because of clear headings, column separators and row separators, the filing contains all the needed info (without relying on external exhibits) and the characters are mostly standard ASCII. See page 31 for examples of high and low machine readability, pulled from actual reports. The researchers say that we humans are starting to make adjustments in our behavior to cater to our robot friends:
Our findings indicate that increasing AI readership motivates firms to prepare filings that are more friendly to machine parsing and processing, highlighting the growing roles of AI in the financial markets and their potential impact on corporate decisions. Firms manage sentiment and tone perception that is catered to AI readers by differentially avoiding words that are perceived as negative by algorithms, as compared to those by human readers.
Such a feedback effect can lead to unexpected outcomes, such as manipulation and collusion (Calvano, Calzolari, Denicolo, and Pastorello, 2019). The technology advancement calls for more studies to understand the impact of and induced behavior by AI in financial economics.
On Friday afternoon, the SEC announced that it had filed this complaint against AT&T and three of its IR execs for violations of Regulation Fair Disclosure. This is the first Reg FD enforcement action that we’ve seen in a couple of years – the Enforcement Division does indeed seem to be “powering up” and wasting no time in bringing litigation.
The charges show that the SEC views talking down analyst estimates as a problem under Reg FD. One of the most surprising points in the SEC’s announcement is that the IR execs allegedly disclosed info that the company’s internal policies specifically said could be “material.” Here’s an excerpt (also see this Stinson blog):
According to the SEC’s complaint, AT&T learned in March 2016 that a steeper-than-expected decline in its first quarter smartphone sales would cause AT&T’s revenue to fall short of analysts’ estimates for the quarter. The complaint alleges that to avoid falling short of the consensus revenue estimate for the third consecutive quarter, AT&T Investor Relations executives Christopher Womack, Michael Black, and Kent Evans made private, one-on-one phone calls to analysts at approximately 20 separate firms.
On these calls, the AT&T executives allegedly disclosed AT&T’s internal smartphone sales data and the impact of that data on internal revenue metrics, despite the fact that internal documents specifically informed Investor Relations personnel that AT&T’s revenue and sales of smartphones were types of information generally considered “material” to AT&T investors, and therefore prohibited from selective disclosure under Regulation FD. The complaint further alleges that as a result of what they were told on these calls, the analysts substantially reduced their revenue forecasts, leading to the overall consensus revenue estimate falling to just below the level that AT&T ultimately reported to the public on April 26, 2016.
While we don’t know yet whether this claim will end up being settled and what type of penalties (if any) AT&T will face (at this point, the SEC’s allegations are unproven), the fact that the company is charged in the complaint is a reminder that simply having a policy in place isn’t enough to avoid litigation. Check out our 135-page “Reg FD” Handbook if you need to jump-start your compliance efforts.
EDGAR Gets a Makeover!
Wow. The EDGAR filings page has been completely remade (here’s Apple’s page as an example). Our members are giving it mixed reviews so far, but that might be because it takes time to get accustomed to a new interface.
In addition to being able to revert to “classic version” via a button at the top right (h/t Lowenstein Sandler’s Daniel Porco), you can still use “form descriptions” to search for filings – click the “view filings” box in the top left box, and then use the “search table” box just like on the old page.
The updated version also has a new field to be able to search text in filed documents, which will be helpful. Perhaps the “company information” box at the top of the page will eventually be populated with more key info that’s pulled in from filings…
Tomorrow’s Webcast: “Conduct of the Annual Meeting”
Tune in tomorrow for our “Conduct of the Annual Meeting” webcast – to hear Crown Castle’s Masha Blankenship, AIG’s Rose Marie Glazer, Rocket Companies’ Tina V. John, American Election Services’ Christel Pauli and Oracle’s Kimberly Woolley discuss expected “virtual meeting” trends for the 2021 proxy season, annual meeting logistics, rules of conduct, handling shareholder questions, and voting & tabulation issues.
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.
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
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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).
