We’re 6 months in to the Biden regime – and even though Gurbir Grewal just officially joined the Commission as the Director of the Division of Enforcement yesterday, it’s been quite a year already. And, every indication is that more scrutiny is expected going forward. This 21-page Gibson Dunn memo recaps trends & significant cases in the first half of the year. Here are some of the biggies:
1. Climate & ESG Task Force – charged with developing initiatives to identify ESG-related misconduct and analyzing data to identify potential violations. Additionally, the task force aims to identify misstatements in issuers’ disclosure of climate risks and to analyze disclosure and compliance issues related to ESG stakeholders and investors.
2. SPACs – A string of pronouncements in the spring was followed by announcement of the first enforcement action earlier this month.
4. Shifting Approach to Corporate Penalties – In March, SEC Commissioner Caroline Crenshaw criticized the SEC’s 2006 guidance on its approach to penalties. Gibson Dunn notes that if the Commission is no longer following the 2006 guidance, then untethered from a consideration of corporate benefit or shareholder cost-benefit, the Commission’s posture on corporate penalties is vulnerable to subjective assessments of egregiousness and corporate cooperation. Moreover, unlike calculations under the US Sentencing Guidelines, there is no public disclosure of exactly how the SEC reaches a particular penalty, leaving companies and counsel unable to understand the basis for any negotiated penalty amount.
5. Discovery of Staff Positions – In recent litigation, defendants have been able to get internal Staff documents and even depose former Corp Fin Director Bill Hinman.
6. Whistleblower Awards – Coming in at a record pace.
As we look toward the Form 10-K deadline for June 30th companies, here’s a reminder of our benchmarking survey on “human capital” disclosures. The responses below are from companies with market cap exceeding $10 billion (check out the full results for responses from different market caps):
1. Which HCM topics will you discuss in your Form 10-K? (select all that apply)
– Description of company’s diversity and inclusion initiatives – 72%
– Workforce health & safety – 72%
– Information about company culture and/or employee engagement – 67%
– Company investment in continuing education/training opportunities – 44%
– Information about retention/turnover at your company – 28%
– Succession planning – 11%
– Legal or regulatory proceedings relating to employee management – 0%
2. Will you include quantitative HCM disclosures? (select only one)
– We’re considering doing so, but we haven’t decided yet – 52%
– Yes, we’re planning to include some quantitative disclosures – 32%
– No, we’re not planning to include any quantitative disclosures – 16%
3. What type of quantitative data is your company planning to disclose? (select all that apply)
– Employee turnover rates – 67%
– Workforce gender, racial/ethnic diversity composition data – 67%
– Breakdown of full-time versus part-time employees – 33%
– Scores from employee engagement surveys – 33%
– Workforce health & safety metrics – 33%
– Internal promotion rate – 17%
– Absenteeism rate as a percentage of total hours worked – 0%
– Dollar amount of company investment in continuing education/training opportunities, such as total spend on training per employee per year – 0%
– Geographic mix of employees – 0%
– Mental health well-being rate – 0%
– Pay equity metrics – 0%
– Volume of legal/regulatory proceedings related to employee management – 0%
Robinhood – the app that set retail stock trading on fire – is itself going public this week. Here’s the Form S-1, which says that the company plans to sell up to one-third of its IPO shares directly through its app. The deal is getting a lot of press – and this Nasdaq article says it’s just one of 17 IPOs on the ticket for this week. This week’s activity isn’t unusual, either. Including SPAC shells, there were 1,070 IPOs during the first half of this year. 1,070!
With the IPO market remaining hot for about a year now – and, as John blogged last week, the SPAC assembly line cranking back up – is it safe to say that the decades-long trend of declining public companies is reversing? As of the end of last year, the number of public companies had already climbed modestly – and this EY memo elaborates on encouraging stats from the first half of 2021:
– The first half of 2021 (1H 2021) saw 1,070 IPOs with total proceeds of US$222b. Globally, deal numbers increased 150% year-on-year (YOY), while proceeds rose by 215%. Strong performance between January and April plus June, pushed 1H IPO deal numbers and proceeds to their highest levels in 20 years. 1H 2021 deal numbers were 18% higher and proceeds were 71% higher compared with the former record of 1H 2007 (908 IPOs, raising US$129.8b).
– Equity markets, buoyant from positive corporate results and growth forecasts on gradual economic recovery, and market liquidity have hit new heights and provided favorable conditions for the IPO mark.
– Q2 2021 IPO deal numbers and proceeds were 597 IPOs and US$111.6b, respectively. Q2 2021 was the most active second quarter by deal numbers and proceeds in the last 20 years, and beat previous records in Q2 2007 (522 IPOs raising US$87.7b).
– Q2 2021 was 206% and 166% higher, respectively, by deal numbers and proceeds compared with Q2 2020.
– A healthy pipeline of unicorns, which are set to make their way to public markets in 2H 2021, should help to ensure a busy Q3 when the traditional holiday periods will still be affected by the travel restrictions in many countries. And despite the slowdown in SPAC IPOs in Q2 2021, companies can now realistically assess the different ways of coming to the capital market, adding SPAC mergers and direct listings into their traditional IPO considerations.
The memo says plenty of industries are “winners” in this frothy market – tech, healthcare & industrials, materials, companies that benefit from lockdowns…and also those expecting a payday when things open back up. The jury is out on whether it’s a bubble, but it’s worth enjoying the moment.
If you’re newly public – or advising IPO companies – don’t miss our August 25th webcast, “Newly Public: Building Reporting & Governance Functions.” Hear David Bell of Fenwick, Jared Brandman of National Vision, Courtney Kamlet of Vontier and Trâm Phi of DocuSign discuss lessons learned from their experience successfully managing the process of going through the IPO and creating processes from scratch.
The reason I get so excited about the rising number of public companies is because it means more & more interesting businesses – and more & more great people – are joining our community. Not to mention, we all get to do more of the securities & corporate governance work we like.
So, who are the newest issuers? This site names 644 companies that have gone public so far this year – and this “IPO tracker” sorts 47 tech IPOs by type of offering (traditional IPO, direct listing, de-SPAC).
John blogged last week about Robinhood’s “non-lockup” – allowing up to 15% of shares held by employees, officers & directors to be sold immediately upon commencement of trading. Tulane Law prof Ann Lipton has now taken a deeper dive into what this could mean for Section 11 liability. Here’s an excerpt:
Section 11, of course, permits purchasers of registered securities to sue when the security’s price drops below the offering price, if the registration statement contains false or omitted information. Section 11 claims don’t require a showing of scienter, but there’s a catch: the plaintiff must be able to show that his or her shares were, in fact, issued pursuant to the defective registration statement; unregistered shares, or shares issued pursuant to some other registration statement, won’t qualify. Which means, if there’s a “mixed” pool of shares trading – some of which were issued on the defective registration statement, and some of which were not – an open-market purchaser will have trouble establishing that his or her shares were part of the registered group, which could bar Section 11 claims no matter how deceptive the registration statement may turn out to have been.
As I previously posted, this requirement has already created some havoc in the context of direct listings – and the Slack case, described in my blog post, has been pending before the Ninth Circuit basically forever – but most traditional IPOs require that pre-IPO shares be locked up at least for 180 days after the offering. The lockup means that at least for the first 180 days, all shares available to trade are registered shares, and anyone who buys in that period will be able to show that their shares were traceable to the registration statement. If there’s a problem with that registration statement, those early purchasers will be able to advance Section 11 claims.
Currently, the law isn’t clear on whether – or to what extent – Section 11 claims will be barred by the mixing of unregistered shares along with registered shares in an offering, or at what stage of litigation plaintiffs have to prove “traceability.” One reason Robinhood’s IPO is interesting is because it may give courts a chance to weigh in.
I blogged 3 years ago that it was getting difficult for CEOs to stay silent on hot social and political issues. Fast forward to today, and open letters have taken off as a mainstay of corporate political activism. Research suggests that they’re viewed as a somewhat “safe” way to respond to consumer & employee expectations without sacrificing shareholder value. But signs are emerging that investors and other stakeholders are starting to pay closer attention to follow-through.
Last year in particular, hundreds of companies vowed to combat systemic racism against Black Americans in the wake of George Floyd’s murder. It’s difficult to keep track of which companies made a commitment, what the commitment was, and whether they’ve followed through. Various “pledge trackers” sprung up in the fall, but they haven’t been maintained with real-time data.
One economist says that in the aggregate, companies pledged to put somewhere between $50 – 65 billion toward DEI efforts over a multi-year time frame. Now, he’s submitted an SEC rulemaking petition to urge that companies be required to disclose progress on their commitments. So far, he says, only $500 million has been spent. He argues it doesn’t matter whether investors care about this info, because compelling disclosure would be in the public interest and is within the Commission’s authority. That’s a bold position to take, in light of recent Commissioner statements about the SEC’s role and materiality.
Some investors do seem to care about racial equity commitments, though. We’ve been blogging throughout this proxy season about shareholder proposals requesting EEO-1 reports and racial equity audits. These proposals have become more common this year – and have been getting solid support. Shareholders seem to be moving from requesting simple demographics data to requesting data that allows them to understand & evaluate company efforts to promote equity. The level of support for these proposals, while typically below a majority at this point, implies that a sizable portion are starting to view the info as relevant.
The Commission hasn’t given any indication that it would take up this rulemaking petition, but the letter raises awareness of what could be an emerging disclosure risk. This DealBook column predicts that “strongly worded letters” are only going to become more common. With reputational risks & investor materiality assessments constantly evolving – and expectations that “ESG”-type commitments will be accurate – securities & corporate governance counsel should have a seat at the table when companies are crafting these high-minded statements. You want to ensure anything that’s released aligns with the company’s stated values and what it is actually doing & planning to do.
You may also want to start tracking your company’s follow-through, if you’re not doing that already – see this PracticalESG blog for ways to do that – and be prepared for inquiries like this one from Majority Action.
Last month, Lynn blogged that the SEC was nearing the $1 billion mark for lifetime awards under its whistleblower program. This Arnold & Porter memo says that FY 2021 will also set a record of its own: with more than 3 months left, the Commission has awarded $370 million, compared to the $175 million record from last year. The memo was published prior to the SEC’s latest announcements this week of a $5.3 million award and a $1 million award.
The memo delves in to how the whistleblower program works – and says that recent orders may show a willingness to grant more awards. There has also been a huge increase in the number of tips lately, which may lead to more investigations. The memo says that companies can prepare for the possibility of whistleblower activity by considering:
– Risk Assessments. Consider conducting risk assessments related to internal reporting structures to make sure that all reports—not just those going to an internal hotline—are captured, triaged, and investigated if appropriate. Use internal whistleblower information to get ahead of a potential problem with the regulators or law enforcement. Companies that are able to conduct thorough internal investigations showing a clear, robust response to an internal tip will be better able to effectively self-correct and have a defensible position if regulators or law enforcement get involved.
– Annual Training. Consider if annual training is appropriately robust and targeted to middle management to ensure that tips received outside of the employee hotline or formal reporting mechanisms are identified, logged, and triaged. This is particularly important given that 81% of SEC whistleblower awardees reported their concerns internally, including in many instances to their direct supervisor, before or at the same time as reporting to the Commission. If all tips are not identified and centrally reviewed, it is a lost opportunity for a company to self-correct an issue.
– Internal Reporting Mechanisms in a Post-Covid World. As more companies are pivoting back to an in-person workforce, consider a refresh on internal reporting mechanisms as well as related training. Record-breaking numbers of tips were reported to the SEC during the pandemic. This may have been because of a breakdown in internal reporting mechanisms for a remote workforce. Consider a fresh internal reporting campaign to refocus a returning workforce, whether it be full-time in the office, continuing remote, or some hybrid. The statistics show that the current mechanisms for internal reporting may not be effective anymore.
– Anti-Retaliation Policies and Training. Ensure that whistleblower anti-retaliation polices and training are up-to-date. Now is the time for companies to review anti-retaliation policies to ensure they are clear and concise. Annual training should be conducted to ensure that everyone understands what retaliation is and knows the steps that can and cannot be taken once someone reports internally or to the government. Zero tolerance policies that are advertised to the workforce can help employees get comfortable reporting internally rather than straight to the governmental authorities.
– Domestic and International Policies. Review and update both domestic and international policies. In light of the purported award in the PAC case, companies should be aware that whistleblower tips may arise from and with respect to any part of their business, including activity overseas. In FY 2020, 11% of whistleblower submissions to the Commission were submitted from non-US countries. Since the inception of the program, the SEC has received tips from whistleblowers in 130 countries. Properly and consistently implemented robust internal reporting mechanisms and whistleblower policies provides an additional safeguard for compliance with US and international laws and regulations.
The merger between the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) has now closed – and the combined organization will now be known as the Value Reporting Foundation. The deal is an effort to simplify the ESG reporting landscape by aligning disclosure tools from two of the major players. From the press release:
The Value Reporting Foundation is a global nonprofit organization that offers a comprehensive suite of resources designed to help businesses and investors develop a shared understanding of enterprise value — how it is created, preserved or eroded over time. The resources — including Integrated Thinking Principles, the Integrated Reporting Framework and SASB Standards — can be used alone or in combination, depending on business needs. These tools, already adopted in over 70 countries, comprise the 21st century market infrastructure needed to develop, manage and communicate strategy that creates long-term value and drives improved performance.
As I blogged last fall when this merger was announced, the VRF also intends to support other organizations such as the IFRS Foundation. There seems to be an acknowledgement that there are too many players in the “reporting framework” space right now. That makes it difficult for companies to determine what’s important to disclose and difficult for investors to compare disclosures.
The Value Reporting Foundation may have more global reach & influence than the IIRC or SASB had on their own – with SASB gaining a lot of acceptance in the US but not oversees, and the inverse being true for IIRC. Michael Bloomberg, who is the chair of the TCFD and who has been a SASB supporter since its early days, is also a Chair Emeritus of the new organization. It remains to be seen whether or how any of these standards will get adopted by national regulators.
All of the existing resources from the IIRC and SASB remain available on their websites for now – but you can also visit the new VRF website for more tools.
We’re regularly posting new podcasts for members! In this 25-minute episode, Dave Lynn and McKesson’s Jim Brashear take a deep dive in to the SEC’s new requirements for electronic signatures for SEC filings. Topics include:
Insider trading is always a juicy topic in the financial media. Once the spotlight is focused on trades that appear well-timed, Rule 10b5-1 technicalities are of limited use to companies and execs who want to reclaim the narrative – which is especially true when the “safe harbor” trades occur only days after adopting a trading plan. This Bloomberg article shows that those types of details are now getting picked up and scrutinized. Here’s an excerpt:
Short-term plans for stock trades are surprisingly prevalent, hinting at a significant gap in the agency’s surveillance, according to research from Stanford University and the Wharton Business School. The academics there reviewed 20,000 plans filed on paper by corporate leaders. About 38% of the plans call for trades within the same quarter, before earnings results were announced. About 82% have cooling-off periods of fewer than six months. The transactions consistently avoid large losses and foreshadow future price declines, according to the study.
I first blogged back in February about the Stanford research that Bloomberg is citing – the study was getting quite a bit of buzz and was cited by a handful of US Senators who were urging the SEC to take action. Fast-forward to now, and reforms to Rule 10b5-1 are looking more likely in light of SEC Chair Gary Gensler’s remarks earlier this month and the appearance of the rule on the Reg Flex Agenda.
One of the biggest changes that’s being evaluated is whether to propose adding a “cooling off” requirement to the safe harbor. Another potential change would be proposing disclosure about a plan’s adoption date on the Form 4 that’s filed to report the transactions under the plan. Right now, that info is only required on Form 144s, which see very little daylight since they’re typically submitted in paper format to the SEC. That was another big point of contention in the Stanford study.
Although it’s currently not baked into the rule, many companies already require insiders to observe a “cooling off” period when they adopt Rule 10b5-1 trading plans. The pause between the time the plan is adopted and the execution of the first trade functions as a “belt & suspenders” to ensure the insider doesn’t possess any material non-public info at the time the plan is adopted, which is one of the requirements to get safe harbor treatment. As we note in our “Rule 10b5-1 Trading Plans Handbook,” practice varies in terms of the length of this period – typical time frames are anywhere from two weeks, to 30, 60 or 90 days. Chair Gensler floated the idea that there should be a much longer pause than is common right now – as long as 4-6 months.
We’ve been posting memos about these potential reforms in our “Rule 10b5-1″ Practice Area – and we have an all-star webcast lined up on the topic next month, on Tuesday, July 20th at 2pm ET.
